Morningstar DBRS Confirms NorthwestConnect General Partnership at BBB (high), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of NorthwestConnect General Partnership (ProjectCo) as well as the rating on its Senior Amortizing Bonds - Series 1 (the Bonds) at BBB (high) with Stable trends. ProjectCo is the special-purpose entity created to design, build, finance, operate, and maintain Northwest Anthony Henday Drive (the Project or the Highway) under a 33.25-year agreement with the Province of Alberta (the Province; rated AA with Stable trend by DBRS Morningstar).

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations stem from the Project's stable operating and financial performance in 2023 and for the first six months of 2024. The Project has generally performed well with no material deductions or interruptions to Traffic Availability.

Pavement rehabilitation of selected sections of the mainline, ramps, bridges, and crossroads of the Highway was completed during summer 2024. This rehabilitation was performed earlier than originally planned because of the necessity to correct international roughness index issues and to address various pavement issues on ramps and crossroads. The lender's technical advisor reviewed these works during the site review and is of the opinion that ProjectCo is prudent in performing these works at this time. The next pavement inspection is scheduled for August 2026. The bridge inspections scheduled for July 2024 have been completed and the report showed three minor observations that will be addressed during preventive maintenance next year. ProjectCo also reported that the bridge repairs identified in the last bridge inspection in November 2022 have been completed and accepted as satisfactory by the Province. Bridge sealing was completed in 2024 on a four-year cycle.

Change Orders 12 and 13 are complete and executed, as reported by ProjectCo, which also noted that there are no new change orders at this time. However, the Province is planning to widen the Highway from Campbell Road to Manning Drive by adding one new lane in each direction. This project is at the concept and functional plan stage and will likely result in a change order enquiry in 2025-26.

ProjectCo received major rehabilitation payments from the Province, as stipulated in the Design, Build, Finance, and Operation Agreement, based on the initial budget from financial close. In October 2019, ProjectCo completed a reprofiling of the lifecycle budgets, by which the bulk of the work is now to be completed in years 18 to 20 (2029 to 2031), as opposed to years 14 to 16 (2025 to 2027) in the original schedule. This generates an imbalance that results in a higher debt service coverage ratio (DSCR).

CREDIT RATING DRIVERS
Morningstar DBRS notes the minimum DSCR of 1.15 times (x) in the financial model is at the low end of the current ratings, and the erosion of credit metrics on a sustained basis could result in negative ratings pressure. Morningstar DBRS does not believe a positive credit rating action is likely over the near term given the limited upside revenue potential for an availability-based public private partnership transaction.

FINANCIAL OUTLOOK
The minimum operations and maintenance (O&M) and lifecycle resiliencies are 19% and 17%, respectively (at 1.05x breakeven DSCR), which are supportive of the overall ratings. For the 12 months ended April 30, 2024, the DSCR was 1.25x, higher than the minimum DSCR of 1.15x expected in the financial model. The higher-than-expected DSCR was the result of the major rehabilitation payments received by the Province and higher interest income.

CREDIT RATING RATIONALE
The credit ratings reflect the Project's financial outlook, underpinned by strengths that include: (1) revenue protection from higher costs because of traffic volumes and (2) straightforward O&M requirements. The challenges relate to (1) lifecycle maintenance risk and (2) O&M contract re-tendering.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of ProjectCo the relative weighting of the Rating Driver factors listed in Part One - Rating Availability-Based PPP of the methodology was approximately equal

(B) Weighting of FRA Factors
In the analysis of ProjectCo, the following FRA factor listed in Part One - Rating Availability-Based PPP of the methodology was considered more important: O&M and lifecycle breakeven ratios

(C) Weighting of the BRA and the FRA
In the analysis of ProjectCo, the FRA carries greater weight than the Rating Drivers.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (August 13, 2024)
https://dbrs.morningstar.com/research/437820

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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