DBRS Morningstar Upgrades TransEd Partners General Partnership to BBB (low) from BB

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and the credit rating on the Series A $394.5 million Senior Long-Term Amortizing Bonds of TransEd Partners General Partnership (ProjectCo) to BBB (low) from BB. At the same time, DBRS Morningstar removed the credit ratings from Under Review with Negative Implications, and the credit ratings have Stable trends.

ProjectCo is the special-purpose entity created to design, build, finance, operate, maintain, and perform the lifecycle obligations of the Valley Line light-rail transit Stage 1 project (the Project) under a 34.8-year project agreement (PA) with the City of Edmonton (the City). The Project features 11 street-level and one above-grade stops along 13 kilometres connecting downtown Edmonton to Mill Woods. In addition, there are 26 100% low-floor light-rail vehicles (LRVs) that operate the new line.

The upgrades stem from DBRS Morningstar’s view that the Project is no longer materially exposed to construction risks after the successful achievement of service commencement on October 16, 2023. Furthermore, the first month of operating performance indicates that the Project has performed well without any material issues. However, DBRS Morningstar believes the Project will need to establish a track record of good operating performance before contemplating any further positive credit rating actions. DBRS Morningstar believes the Project's operating performance during the bedding-in period (first year of operations) will provide vital information on how much of a learning curve the Project had needed to overcome during the initial stage of operations.

The Project successfully achieved service commencement on October 16, 2023, after a lengthy delay that reached nearly three years from its original forecast service commencement date of December 15, 2020. Following service commencement, the City paid ProjectCo a service commencement payment in November 2023, in which a majority of the proceeds have been used to fully repay the short-term bank debt. In addition, the six months debt-service reserve account is now fully funded and backed by letters of credit (LOCs).

DBRS Morningstar understands the equity sponsors made a final equity payment in December 2023, which, in combination with the availability payment from the City, will be sufficient to make the long-term bond debt service payment of about $12.2 million due in December 2023.

Similar to other public-private partnership projects, a complete list of deficiencies was prepared by the Design Builder Joint Venture (DBJV; comprising affiliates of EllisDon Inc., Alstom SA, and Bechtel Corp.) and ProjectCo in co-operation with the City and the Independent Certifier prior to service commencement. ProjectCo indicated that the schedule to complete the deficiencies was established by the DBJV, and the City did not provide any additional deadlines to correct any of the deficiencies. The City continues to have visibility of the schedule, and it has not requested any changes to the scheduled deficiency correction deadlines.

Moreover, all the safety deficiencies and any operation- or performance-related deficiencies were corrected prior to the opening of the line to passengers on November 4, 2023. Therefore, none of the remaining deficiencies affect the safety of the system and do not affect the performance of the Service Provider. Furthermore, DBRS Morningstar notes that any delay in achieving any of the deficiencies’ deadlines will not trigger any contractual termination.

The DBJV's LOC has been reduced to 1% of the Contract Price, or about $12.9 million, following the receipt of the service commencement payment from the City in November 2023. This amount of LOC is more than sufficient to cover the value of the deficiencies and will be available until the end of the general warranty period (two years after the service commencement date).

Despite the lengthy delay in the opening of passenger service, ProjectCo confirmed that there will not be any changes to the lifecycle cost profile at this time. As a result, DBRS Morningstar continues to use the financial model at financial close to calculate the debt service coverage ratio (DSCR), and the lifecycle and operations and maintenance breakeven resiliency metrics. Furthermore, these financial metrics are calculated based on Service Level 8 operating performance requirements at the start of operations.

For the year ended December 2024, the Project's DSCR is projected to be 1.23 times.

If the Project incurs significant nonperformance event (NPE) points and deductions during the bedding-in period, it may indicate that there is a much higher learning curve to overcome than anticipated at the initial stages of operations. However, if the Project exhibits low levels of NPE points and deductions on a sustained basis during the bedding-in period, DBRS Morningstar may consider taking a positive credit rating action.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this credit rating action. If you are interested in receiving this report, contact us at [email protected].

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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