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 rating of Capital City Link General Partnership (ProjectCo) at A (low). All trends are Stable.

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

According to ProjectCo, some of the remaining construction-related warranty items (e.g., landscaping and vegetation) did not complete as planned due to inclement weather (i.e., heat wave). Therefore, Volker Stevin Highways Ltd. (the Operator) had to reseed in the fall of 2021 with the intention of full germination in the spring of 2022. The cost of the warranty items undertaking by the Operator 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.). Furthermore, ProjectCo indicated that the warranty work with respect to the crossroads was completed. As a result, the DB Contractors' letter of credit of about $1.7 million expired as scheduled in November 2020.

Traffic volume in 2020 fell on average by about 13% compared with 2019 traffic volume. Despite the unexpected drop in 2020, which was induced by various public health measures imposed by the government during the pandemic, traffic volume has been trending higher annually since the highway became open to traffic in 2016. For the first eight months of 2021, traffic volume has increased on average by about 6% compared with the same period in 2020. The monthly traffic volume at the end of August 2021 exceeded the 2019 level in most segments of the highway.

The Operator observed slightly more localized deficiencies on the pavement and started to perform crack sealing to prevent the infiltration of moisture into the pavement. As part of the preventative maintenance program, it also started spray patching to maintain the structural integrity of the pavement. Nevertheless, ProjectCo indicated that the overall structure and pavement conditions remain in relatively good condition. More importantly, it noted that the actual lifecycle and maintenance expenditures remain in line with projections.

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 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 (except 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.

ProjectCo also completed the LED lights installation program in September 2021 and it is expected to provide energy consumption savings in the range of 30% to 35% over the life of the Project.

In response to the pandemic, the Operator implemented various measures and protocols that are in line with the government's public health guidance. ProjectCo indicated that Alberta Transportation has been very cooperative and flexible in terms of the time frame to complete certain tasks. As a result, the Project has not incurred any deductions or failure points with respect to the pandemic's impact.

ProjectCo achieved an annual debt service coverage ratio (DSCR) of approximately 1.30 times (x) and 1.29x in December 2020 and September 2021, 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Public-Private Partnerships (August, 19, 2021; https://www.dbrsmorningstar.com/research/383244), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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