DBRS Morningstar Confirms Ratings on Plenary Justice Okanagan LP at A (low), Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating of the Series A Senior Notes (the Senior Notes) issued by Plenary Justice Okanagan LP (ProjectCo) at A (low) with Stable trends. ProjectCo is the special-purpose entity created to design, build, finance, and maintain the $185.5 million Okanagan Correctional Centre (the Project) under a 32.6-year Project Agreement (PA) signed between ProjectCo and the Province of British Columbia (the Province; rated AA (high) with a Stable trend by DBRS Morningstar). The rating confirmations reflect the achievement of substantial completion, the solid experience of PCL Construction Group Inc. and Honeywell Limited (Canada) (Honeywell or the Service Provider), the relatively low complexity of the work, the straightforward service obligations, and the supportive resiliencies.

The certificate of completion was received in September 2019, confirming that all outstanding deficiencies had been rectified. As a result, Project Co no longer retains any Deficiency Holdback Security against the Design Builder. The Service Provider, Honeywell, continues to provide facility maintenance, lifecycle maintenance, and utilities-management services for the 30-year service phase of the Project. Operations have continued smoothly during the third year without material deductions. However, while it has yet not resulted in deductions, the actual natural gas (NG) consumption was significantly above the target. This is because of a combination of factors, but mostly driven by the geothermal system underperformances and NG meter calibration issues. The energy consumption Test Period was completed in October 2019 and the results will be analyzed by an independent third party, yet to be nominated, who will provide a certificate at some point in 2020. This diagnosis might result in an adjustment to the Design and Construction Energy Target outlined in the PA. ProjectCo, the Province, and the Service Provider are working together to solve the situation. Once the energy model is adjusted, any excess of energy consumption beyond the new target rates would be part of the gainshare/painshare mechanism between the Service Provider and ProjectCo.

The actual debt service coverage ratio (DSCR) as of September 30, 2019, was 1.24 times (x) per the Compliance Certificate, driven by higher interest earned on debt service accounts and other cash balances and insurance fees paid upfront in 2017. The projected financial metrics remain unchanged and adequate for the rating, with a minimum and average DSCR of 1.21x, as well as operating and maintenance and lifecycle breakeven metrics of 44% and 46%, respectively. The relationship between ProjectCo, the Service Provider, and the Province remains collaborative, with no material issues reported.

While not currently included in DBRS Morningstar’s expectations, material deductions and/or Service Provider replacement could lead to a negative rating action. The potential for credit upside remains limited at the current rating given the fixed nature of the revenue stream.

DBRS Morningstar notes that the above press release was amended on June 22, 2020, to add notes regarding the National Instrument 25-101 and issuer participation. The amendments were minor and would not impact the understanding of the reader.

Notes:
All figures are in Canadian unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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