DBRS Confirms NorthwestConnect General Partnership at “A”

DBRS has today confirmed its rating of “A” with a Stable trend on the Senior Amortizing Bonds – Series 1 of NorthwestConnect General Partnership (ProjectCo). ProjectCo is the special-purpose entity created to design, build, finance, operate and maintain the Northwest Anthony Henday Drive, the 21-kilometre northwest segment of the Edmonton Ring Road, under a 33.25-year agreement with the Government of Alberta (the Province; rated AAA by DBRS).

The rating confirmation is predicated on ProjectCo’s receipt of a waiver from the Province which established Traffic Availability on the target date of November 1, 2011, despite a number of outstanding works that were expected to have been completed by this date. Most of the outstanding work relates to the completion of paving work at adjoining ramps and cross-roads, which has been delayed to summer 2012. The waiver was granted at the recommendation of the Independent Safety Auditor confirming that the road can be safely opened for public use. According to ProjectCo’s preliminary plans, paving, curb and gutter and sidewalk work will recommence in May 2012, when weather conditions are more favourable. Construction Completion, which marks the full completion of the construction with the work free from deficiencies, is expected to be achieved by the end of summer 2012. Achievement of Traffic Availability marks a key milestone under the Project Agreement or the trust indenture as no default may arise from failure to address the remaining deficiencies. However, if the Province is not satisfied that ProjectCo is diligently pursuing Construction Completion, the Province is entitled to withhold up to two times the estimated cost to complete the remaining work from availability payments. If Construction Completion is not achieved within 365 days after Traffic Availability, the Province may elect to complete the remaining work and retain the balance of the holdback as liquidated damages.

Penalties related to lane closures and lighting outages at some sections will be imposed by the Province and are currently expected to total less than $3 million. Furthermore, the cost of the remaining works is currently expected be less than $18 million. ProjectCo has advised DBRS that any potential construction-related penalties and cost overruns to complete the remaining construction work will be passed down to the DB Contractors (Flatiron Constructors Canada Limited, Parsons Overseas Company of Canada Ltd. and Graham Infrastructure). However, ProjectCo’s financial metrics are unlikely to be affected by construction-related deficiencies as the estimated cost of the related penalties and deductions are within the DB Contractors’ liability cap of 90% of the construction contract price. ProjectCo will retain the estimated amount to cover the penalty payments to the Province from the payment due to the DB Contactor for work completed in October 2011. ProjectCo has also advised that $20 million of the letter of credit that was due for release at Traffic Availability will now be retained for an additional year.

The achievement of Traffic Availability triggers the start of the operations phase and receipt of availability payments from the Province. Financial projections for the operating phase remain in line with original expectations, with the debt-to-capital ratio forecasted at a high 92% at the start of operations, and a somewhat limited EBITDA debt service coverage ratio at around 1.15 times. However, the pass-down of operating and maintenance activities to a subcontractor, the relatively low complexity of responsibilities, as well as the use of long-life pavement and a three-year look-forward major maintenance reserve are expected to provide stability to results. Additionally, a six-month debt service reserve as well as a 50% performance bond and 50% labour and material bond posted by the Operator will provide a cushion against unforeseen events during this phase, especially for challenging life-cycle planning. Although the financial consequences that arise from construction deficiencies will be passed down to the DB Contractors, the potential impact of the remaining work on the operating phase remains of some concern to DBRS. Failure to address remaining deficiencies as required by the remedial work plan, to be submitted shortly to the Province, may have negative rating implications.

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

The applicable methodology is Rating Canadian Public-Private Partnerships, which can be found on our website under Methodologies.