DBRS Removes Under Review with Negative Implications on NorthwestConnect General Partnership, Confirms A (low) Rating

DBRS Limited (DBRS) has today removed the A (low) rating on NorthwestConnect General Partnership’s (ProjectCo) Senior Amortizing Bonds – Series 1 (the Bonds) from Under Review with Negative Implications and has confirmed the rating with a Stable trend. ProjectCo is the special-purpose entity created to design, build, finance, operate and maintain Northwest Anthony Henday Drive under a 33.25-year agreement with the Government of Alberta (rated AA (high) with a Stable trend by DBRS).

On March 3, 2016, DBRS downgraded the Bonds to A (low) as a result of the deterioration in creditworthiness of some long-term swap counterparties. Simultaneously, DBRS placed the rating Under Review with Negative Implications to analyze the deferral of a portion of lifecycle expenditures and the payout of unexpended amounts as they raised concerns about the erosion of financial metrics. DBRS has reviewed supporting documents provided by ProjectCo and is comfortable with the rationale behind the lower-than-expected lifecycle expenditures. During its review, DBRS has examined lifecycle budget revisions and has noted cost savings and deferred costs associated with the major rehabilitation of pavement settlement patches, road lamp replacement, structural rehabilitation and other lifecycle items scheduled between 2011 and 2016. A portion of the total lifecycle cost savings has been effectively completed by the design-build contractor under an extended warranty period per the terms of the construction contract as a result of previous construction delays. As such, the obligations to complete these lifecycle activities had been fulfilled at a reduced cost to ProjectCo. Savings in Long-Term Senior Bank Debt interest resulting from delays in construction and, hence, delayed draws were also distributed.

Granherne, Inc., the Technical Advisor, has reviewed the revised lifecycle plan and has confirmed that the scheduled lifecycle work was effectively completed. DBRS notes, however, that the lifecycle work completed by the construction contractor under the extended warranty period has been rolled forward by ProjectCo in the lifecycle profile to add a cushion in the budget. DBRS understands that ProjectCo will complete a formal internal review process to re-profile lifecycle in the upcoming year to reflect the realized savings which will be approved by the TA, and does not expect the debt service coverage ratio (DSCR) to be materially affected by this change.

To date, the road has performed well with no material deductions or interruptions to Traffic Availability. The dispute resolution list has been reduced to one relatively minor item related to storm water management from 38 items at the time of the last rating report; this outstanding item is offset by a letter of credit from the construction contractor. No other warranty items or latent defect items have been noted. Total completion will be achieved once this remaining minor issue is certified and approved, which is now projected for fall 2016. In 2015, the DSCR was 1.17 times (x), which is slightly higher than the pro forma DSCR of 1.15x because of cash flow timing.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Public-Private Partnerships (March 2016), which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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