Morningstar DBRS Upgrades Credit Ratings on TransEd Partners General Partnership to BBB; Changes Trends to Positive

DBRS Limited (Morningstar DBRS) upgraded its Issuer Rating on TransEd Partners General Partnership (ProjectCo) and its credit rating on the Series A $394.5 million Senior Long-Term Amortizing Bonds issued by ProjectCo to BBB from BBB (low). Morningstar DBRS also changed the trends on both credit ratings to Positive from Stable.

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 (Edmonton or the City). The Project features one above-grade and 11 street-level stops along 13 kilometres connecting downtown Edmonton to the Mill Woods area. In addition, there are 26 100% low-floor light-rail vehicles (LRVs) that operate on the new line.

KEY CREDIT RATING CONSIDERATIONS
The credit rating upgrades are underpinned by the Project's strong operating performance in the first year of operations, as indicated by an average final monthly entitlement (FME) of nearly 99%. The positive credit rating actions also reflect that the ramp-up risk, including operating at a much higher system capacity level than originally expected during the initial stage of operations, has reduced.

The trend changes stem from Morningstar DBRS' view that if the Service Provider can continue to demonstrate that it can operate at the current service level eight in its second year of operations, which is about a 43% increase in system capacity compared with what was originally planned (service level two) for at financial close in 2016, without encountering major operating issues, Morningstar DBRS could further upgrade the credit ratings.

According to the PA, the FME percentage is a service performance calculation that is derived from a weighted average of the four LRV service performance measures (trip completion, early departures, late departures, and punctual departures of the first and last trip). Based on the operating performance data over the past 12 months from November 2023 to October 2024, the FME percentage has been relatively stable and the Project continues to operate at a very high level, with a FME percentage of more than 99% at the end of October 2024.

Furthermore, the Project has not incurred any material nonperformance event (NPE) points and the accumulated NPE points were well below the daily contractual threshold. As a result, no deductions were applied for the NPE points as per the PA.

ProjectCo confirmed that the Design-Build (DB) Contractors are working towards completing all the minor deficiency work and warranty items by the end of the two-year warranty period in October 2025. Currently, the DB Contractors have completed over 75% of the total number of items on the minor deficiency list. The City withheld 1.5 times (x) of the total value of the minor deficiency work from the service commencement payment in November 2023 and a portion of that has already been released by the City for the work that the DB Contractors have completed. Furthermore, the DB Contractors' letter of credit of about $12.9 million remains available until the end of the warranty period.

For the year ended September 2024, the debt service coverage ratio (DSCR) was 1.22x. The deductions incurred over the past 12 months were relatively minor; even without the bedding-in period from November 2023 to October 2024, they were only about 3% of the combined operations and maintenance (O&M) and lifecycle payments. In addition, all the deductions have been fully passed down to the Service Provider and there is no financial impact on ProjectCo.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade the credit ratings if the Project maintains its solid operating performance at the current service level eight without experiencing material operating issues in the next 12 months. However, Morningstar DBRS could change the trends back to Stable if it appears that the Project requires more time to normalize its operations.

FINANCIAL OUTLOOK
According to ProjectCo's financial model dated October 2023, the DSCR is projected to be 1.23x for the year ended October 31, 2025.

CREDIT RATING RATIONALE
The credit rating strength of ProjectCo relates to a tight lifecycle inspection and reserving mechanism embedded in the contractual structure. For instance, the Service Provider is required to reimburse ProjectCo (or ProjectCo may withhold) for the value of any lifecycle deficiency work not performed if the aggregate of the deficiency amounts determined for the previous year exceeds 2% of the total rehabilitation budget in real dollars. In contrast, the relatively stringent operating performance requirements pose a challenge. The PA does not provide relief for train time performance when delays are caused by external factors such as vehicle or pedestrian collisions and/or other third-party interventions unless such an event lasts over eight hours. Therefore, the service performance measures could deteriorate if there were an increasing number of incidents that do not constitute a relief event and may lead to higher levels of deductions.

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) https://dbrs.morningstar.com/research/437781.

RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of Rating Drivers
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 Rating Drivers 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 methodology has also been applied:

Morningstar DBRS Criteria: Approach to ESG 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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