DBRS Morningstar Confirms NorthwestConnect General Partnership at BBB (high), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed NorthwestConnect General Partnership’s (ProjectCo) Issuer Rating as well as the rating on the Senior Amortizing Bonds – Series 1 (the Bonds) at BBB (high) with Stable trends. ProjectCo is the special-purpose entity created to design, build, finance, operate, and maintain Northwest Anthony Henday Drive (the Project or the Highway) under a 33.25-year agreement with the Province of Alberta (the Province; rated AA (low) with a Negative trend by DBRS Morningstar).

The Project is in its ninth year of operations, having achieved Traffic Availability on November 1, 2011, with all remaining deficiencies completed by October 2016. The road has generally performed well with no material deductions or interruptions to Traffic Availability. The Project has not incurred any deductions in 2019 or the first nine months of 2020.

ProjectCo completed its review of lifecycle costs during 2019, which aimed to better align budget spending with the actual condition of the asset. ProjectCo appointed Ove Arup & Partners Ltd. to update the lifecycle plan and budget. The revised estimate includes adjustments to account for availability of greater design information than at financial close, the transfer of certain sections of the Highway from ProjectCo to the cities through change orders, and a delay in achieving final construction completion. Granherne, Inc., the Lender’s Technical Advisor, assessed the revised lifecycle plan and overall expenditures to be reasonable, including the revised costs for pavement, bridges, curbs, walkways, and roadside equipment. Overall, the rehabilitation costs are approximately 23% lower in real terms. The minimum O&M and lifecycle resiliencies are now at 19% and 20%, respectively, which is considered appropriate for the rating category.

Bridge inspections were conducted in May 2019 and ProjectCo expects to complete the identified deficiencies by Q1 2021 as part of planned regular maintenance, without requiring any additional expenditure. Pavement inspection scheduled for 2020 and the repairs of the localized deficiencies were completed during the summer of 2020. The next bridge and pavement inspections are scheduled for 2021.

On October 1, 2020, ProjectCo received official Lenders' approval to proceed with the termination of the current Asset Management Agreement (MSA). ProjectCo has entered into a new MSA that will come into effect in Q1 2021 and will focus on management services while ProjectCo will pay its suppliers directly, expecting savings of $130,000 from 2021 until the end of the concession. Additionally, ProjectCo and the Lenders have signed a third amendment to the Master Trust Indenture in order to correct certain ambiguities derived from this change of the MSA provider. DBRS Morningstar has reviewed the executed version of the documents and considers it in line with the previous one, with no effect on the rating.

The relationship between ProjectCo and the Province remains collaborative. Since October 2019, there have been two change orders that have been accepted and approved by the Province and have minimal impact on the operating or lifecycle expenses. For the 12 months ending April 30, 2020, the debt service coverage ratio was slightly higher than the minimum of 1.14x over the life of the Project. While DBRS Morningstar does not expect positive rating action over the near term, erosion of credit metrics or material deterioration in the credit profile of the swap counterparties could result in negative ratings pressure.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships (August 19, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

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