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

DBRS Limited (DBRS Morningstar) confirmed NorthwestConnect General Partnership’s (ProjectCo) Issuer Rating as well as the rating on the Senior Amortizing Bonds – Series 1 (the Bonds) at BBB (high) with Stable trends. ProjectCo is the special-purpose entity (SPE) 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 (low) with a Negative trend by DBRS Morningstar).

The Project is in its 10th year of operations, having achieved Traffic Availability on November 1, 2011, with all remaining deficiencies completed by October 2016. The road has generally performed well with no material deductions or interruptions to Traffic Availability. The Project has incurred relatively minor deductions of roughly $7,000 related to lane rental and bridge repairs in the period since the last rating report in October 2020.

Bridge inspections were conducted in February 2021. ProjectCo does not expect any material deficiencies outside of planned regular maintenance, nor any costs requiring additional expenditure. Pavement inspection occurred in June 2021 requiring approximately $200,000 in pavement rehabilitation within the planned lifecycle budget. The next bridge and pavement inspections are scheduled for 2022. On October 1, 2020, ProjectCo received official Lenders' approval to proceed with the termination of the then-current Management Services Agreement (MSA). ProjectCo entered into a new MSA with the Vercity Group (previously Apleona Inc.) that became effective in Q1 2021 and focusses on management services, expecting savings of $200,000 annually from 2021 until the end of the concession. The new MSA took effect on February 1, 2021, and the transition over the three-month transition period has been smooth.

ProjectCo completed its review of lifecycle costs during 2019, which aimed to better align budget spending with the actual condition of the asset. ProjectCo appointed Ove Arup & Partners Ltd. to update the lifecycle plan and budget. The revised estimate includes adjustments to account for the availability of greater design information than at financial close, the transfer of certain sections of the Highway from ProjectCo to the cities through change orders, and a delay in achieving final construction completion. Granherne, Inc., the Lender’s Technical Advisor (LTA), assessed the revised lifecycle plan and overall expenditures to be reasonable, including the revised costs for pavement, bridges, curbs, walkways, and roadside equipment. Overall, the rehabilitation costs are approximately 23% lower in real terms. The minimum Operations & Maintenance (O&M) and lifecycle resiliencies as a result of the lifecycle reprofiling were 19% and 20%, respectively. However, based on the latest financial model that has been shared with DBRS Morningstar, the latest lifecycle budget results in a lower lifecycle resiliency calculated at 17% (at 1.05 times (x) break-even debt service coverage ratio (DSCR)), which is still supportive of the overall rating. For the 12 months ended April 30, 2021, the DSCR was 1.23x. The minimum forecast DSCR has reduced to 1.12x from 1.15x at financial close, primarily because of the allocation of the lifecycle underspend to future years and updated indexation. DBRS Morningstar notes that the metrics are at the low end of the current rating and continued erosion of credit metrics could result in negative ratings pressure. DBRS Morningstar does not believe positive rating action is likely over the near term.

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/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships (August 19, 2020; https://www.dbrsmorningstar.com/research/365975), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577