DBRS Morningstar Confirms Credit Ratings on Capital City Link General Partnership at A (low) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Long-Term Senior Bonds of Capital City Link General Partnership (ProjectCo or the Issuer) at A (low). Both 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 or the Province; rated AA with a Stable trend by DBRS Morningstar). The Project has been open to traffic since October 2016.

The Project's operating and financial performance remain relatively stable. For the first nine months of 2023, the penalties incurred were reduced by approximately 80% compared with the same period in 2022 and these were related to lane closures for paving. In addition, the penalties incurred were fully paid by Volker Stevin Highways Ltd. (Volker or the Operator), which is responsible for operations and maintenance (O&M) of the Project.

ProjectCo indicated that 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 for ProjectCo. The Operator also considers the additional rehabilitation responsibilities as pertaining only to some small culverts, signs, and other appurtenances.

The lifecycle costs in the past couple of years were relatively minor and in line with the lifecycle budget. In addition, ProjectCo received funding from the Design-Build Contractors (a joint venture formed among Flatiron Constructors Canada Limited; Dragados Canada, Inc.; Aecon Construction Management Inc.; and Lafarge Canada Inc.) for a portion of the lifecycle work related to the pavement that was completed in 2023.

The first intervention deficit test will be conducted by the Technical Advisor in 2024 in preparation for the first intervention work related to the road surface, which is expected to be carried out between April 2026 and September 2030.

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 volumes 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 and Economic Corridors (TEC). If that were to occur, it could potentially affect the financial metrics significantly. DBRS Morningstar notes the pavement and structures remain in relatively good condition and it 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.

For the 12 months ended June 30, 2023, 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 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 were a significant increase in the projected lifecycle cost that could potentially lead to a material deterioration of the financial metrics. A positive rating action is unlikely because of the fixed revenue stream from TEC.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (October 11, 2023; https://www.dbrsmorningstar.com/research/421701/global-methodology-for-rating-public-private-partnerships)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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