DBRS Morningstar Confirms Capital City Link GP at A (low), Stable Trends

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, and operate (DBFO) the 27-kilometre northeast leg of Anthony Henday Drive in Edmonton (the Project) under a 34.5-year DBFO agreement (the DBFO Agreement) with the Province of Alberta (Alberta or the Province; rated AA (low) with a Positive trend by DBRS Morningstar). The Project has been open to traffic since October 2016.

The Project's operating and financial performance continue to remain relatively stable without any significant increase in the level of deductions. During 2021, penalties of only approximately $21,000 were incurred, primarily due to lighting outages. The deductions were passed down to Volker (the Operator), who performs the Operation and Maintenance ()&M) responsibilities in the Project. For the first nine months of 2022, the penalties incurred were approximately $29,000, which were also passed down to the Operator.

According to ProjectCo, only minor construction-related warranty items remain, pertaining to reinforced fill and erosion repair, with an estimated cost of less than $60,000. ProjectCo has already received the amounts from Design-Build (DB) Contractors (a joint venture formed among Flatiron Constructors Canada Limited; Dragados Canada, Inc.; Aecon Construction Management Inc.; and Lafarge Canada Inc.).

Discussions are ongoing between ProjectCo and the Province regarding the rehabilitation responsibilities for certain parts of the previously existing infrastructure, which ProjectCo had considered the Province's responsibility. The risk is passed down to the Operator and DBRS Morningstar does not consider the risk to be material from ProjectCo's perspective. The Operator also considers the additional rehabilitation responsibilities as pertaining to only some small culverts, signs and other appurtenances.

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. While traffic volumes were higher than expected until 2020, the Covid-19 pandemic negatively affected traffic volumes in the last two years. Traffic volumes recovered partially in 2021 after declining in 2020, with the average traffic in 2021 still 6% lower than the 2019 levels. For the first eight months of 2022, average traffic was still 1% lower than the 2019 levels. DBRS Morningstar does not expect high traffic volumes or faster than expected deterioration of the infrastructure to affect the financial metrics of the Project in the near term.

ProjectCo indicated that the overall structure and pavement conditions remain in relatively good condition. The lifecycle spend was lower than budgeted, though the amounts remain in the rehabilitation account.

For the most recent reporting period, for the 12 months ending September 30, 2022, ProjectCo achieved an annual debt service coverage ratio (DSCR) of 1.29 times (x). 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 (O&M) 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17,2022)

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

The principal methodology is Rating Public-Private Partnerships (August 30, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions

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/did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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