DBRS Morningstar Confirms Capital City Link General Partnership at A (low) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Senior Bonds (the Senior Bonds) rating of Capital City Link General Partnership (ProjectCo or the Issuer) at A (low). All trends are Stable.

ProjectCo is a special-purpose entity (SPE) created to design, build, finance, operate, and maintain (DBFOM) the 27-kilometre northeast leg of Anthony Henday Drive in Edmonton (the Project) under a 34.5-year DBFOM agreement (the DBFOM Agreement) with the Province of Alberta (Alberta or the Province; rated AA (low) with a Negative trend by DBRS Morningstar). The Project has been open to traffic since October 2016.

The operating and financial performances of the Project remain relatively stable. According to ProjectCo, most of the remaining construction-related warranty items (e.g., landscaping) will be completed by Q2 2021. The majority of the warranty work will be performed by Volker Stevin Highways Ltd. (the Operator) and the cost of those activities has been fully paid by the Design-Build (DB) Contractors (a joint venture formed among Flatiron Constructors Canada Limited; Dragados Canada, Inc.; Aecon Construction Management Inc.; and Lafarge Canada Inc.). The warranty work with respect to the pavement remains under negotiation. Currently, the DB Contractors' letter of credit (LOC) of about $1.7 million is considerably more than the current estimate of the cost of pavement repair. Although the LOC will expire in November 2020, ProjectCo indicated that it will require the LOC to be extended until an agreement is in place.

Traffic volume in the first nine months of 2020 fell on average by about 13% compared with the same period in 2019. Traffic volume was reduced considerably as a result of the various measures implemented by the provincial government in the beginning of the Coronavirus Disease (COVID-19) pandemic. However, traffic volume started to recover in May 2020 and it exceeded its pre-pandemic level in most segments of the highway in September 2020. DBRS Morningstar notes that the lifecycle obligation is retained by ProjectCo and, as a result, it introduces an element of risk to the Project. Although the presence of a three-year look-forward lifecycle reserve mitigates some of the risk, persistently higher-than-expected traffic volume or faster-than-expected deterioration of the infrastructure could drive lifecycle costs up considerably (beyond the reserve amount) without any compensation coming from the Government of Alberta’s Ministry of Transportation (Alberta Transportation). If that were to occur, it could potentially affect the financial metrics significantly. DBRS Morningstar notes that despite the higher-than-expected traffic volume on the highway in the past several years (other than in the first nine months of 2020), the pavement and structures remain in relatively good condition and it does not expect the potential events mentioned above to affect the financial metrics of the Project in the near term.

In response to the pandemic, the Operator implemented various measures and protocols that are in line with the government's public health guidance. Some of the protocols have increased the time required to complete some of the operations and maintenance tasks, such as sign washing. ProjectCo indicated that Alberta Transportation has been very cooperative and flexible in terms of the timeframe to complete certain tasks. As a result, the Project has not incurred any deductions or failure points with respect to the pandemic’s impact. Furthermore, ProjectCo did not issue a Force Majeure notice to the Alberta Transportation despite the reduction in productivity because of the pandemic.

ProjectCo achieved an annual debt service coverage ratio (DSCR) of approximately 1.30 times (x) and 1.27x in December 2019 and September 2020, respectively. The forecast financial metrics remain unchanged from the time of the initial rating assignments, with a projected minimum DSCR of 1.27x over the term of the operating phase. The lifecycle (including the SPE budget because it includes specific asset management testing and intervention engineering) and operating and maintenance resiliencies of 28.6% and 41.6%, respectively, remain supportive of the ratings.

DBRS Morningstar could take a negative rating action if there is a significant increase in the projected lifecycle cost, which could potentially lead to a material deterioration of the financial metrics. A positive rating action is unlikely because of the fixed revenue stream from Alberta Transportation.

ESG CONSIDERATIONS
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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