DBRS Finalizes Provisional Ratings of A (low), Stable Trend, on the Senior Bonds of Alberta PowerLine Limited Partnership

DBRS Limited (DBRS) finalized its provisional ratings of A (low) with a Stable trend on each of the following tranches of senior bonds (collectively, the Senior Bonds):

-- $548.6 million Series A Bonds with a term of 36.2 years;
-- $548.6 million Series B Bonds with a term of 36.4 years;
-- $143.7 million Series C Bonds with a term of 14.9 years; and
-- $143.8 million Series D Bonds with a term of 14.7 years.

The Senior Bonds are issued by Alberta PowerLine Limited Partnership (ProjectCo), the special-purpose vehicle created to design, build, own, finance, operate and maintain the Fort McMurray West 500 kilovolt (kV) Transmission Project (the Project) under a 36.8-year Project Agreement (PA) with the Alberta Electric System Operator (the AESO).

The Project involves the design, construction, financing, ownership, maintenance and performance of lifecycle replacement for a new approximately 500-kilometre 500 kV AC single circuit transmission line that will run from a substation near Edmonton to a substation in Fort McMurray to meet a growing demand for energy in Fort McMurray and its surrounding areas. The AESO elected to procure the Project over two mutually exclusive contract periods that includes a Project Development Agreement (PDA) period and a PA period. The PDA period, which commenced on December 18, 2014, concurrent with the execution of the PDA, and was in effect up to the execution of the PA, involved the completion of approvals required for the route, right-of-way and land acquisitions and various permitting and approval activities. The 36.8-year PA period began on financial close dated October 2, 2017, and consists of a 21-month construction period to the Target Energization Date of June 27, 2019, followed by a 35-year operating term.

The rating is underpinned by the low complexity of the Project, the creditworthiness of the construction contractor formed by a Design Build Joint Venture (DBJV), comprising ATCO Electric Ltd. (ATCO Electric) and Valard Construction L.P., and a suitable construction security package. On a back-to-back basis, ProjectCo will drop down all design, construction and commissioning obligations under the PA to the DBJV through a fixed-price, date-certain Design-Build Agreement. The DBJV’s obligations are fully backed by parent company guarantees from each of Canadian Utilities Limited (CU; “A,” Stable trend) and Quanta Services, Inc., each guaranteeing all of the DBJV’s obligations under the Design-Build Agreement, subject to a liability cap of 40% of the construction price (the Contract Price or the Lump Sum Price) specified under the Design-Build Agreement, which covers the scope of the PDA period and the PA period. The construction security package also features a non-recourse letter of credit (LOC) of 5.6% of the construction price, which will reduce to 2% of the construction price at Energization. Similarly, the service risks and responsibilities are passed down on a back-to-back basis to the Operations, Maintenance and Lifecycle Contractor (O&M Contractor), ATCO Electric, over the entire operating phase through a fixed-price contract. The O&M contract security package features a parent company guarantee from CU up to a maximum aggregate liability cap of 24 times the average Monthly O&M fee (indexed), with the exception for claims stipulated under a threshold for materiality where a $30 million limit of liability is provided. LOCs/liquid security will also be provided by the O&M Contractor equal to six times the average Monthly O&M fee (indexed). The O&M Contract also features a dynamic lifecycle inspection and reserving mechanism for any deficiencies identified by a qualified third-party inspector during the operating phase.

While the PA shares several common elements with a traditional Canadian public-private partnership (PPP), there are certain notable differences, which include the concept of a Materiality Threshold above which the approval of the Alberta Utilities Commission must be sought for compensation provided by the AESO for supervening events, potentially even in cases where ProjectCo is directed by the AESO to undertake a change order. There are also lengthier time periods that must elapse before ProjectCo can terminate the PA. In general, these issues are viewed as material credit factors that affect the rating of the transaction as compared with a typical PPP project.

The Project will be funded by the proceeds of the long-term and medium-term Senior Bonds totalling $1.38 billion and equity contributions of $187.7 million, which represents 11.9% of the total capital at financial close. Each of the Senior Bonds will be repaid semi-annually during the operating phase, although the payments will be staggered between them such that debt repayments are being made quarterly. The Project has a minimum debt service coverage ratio of 1.25 times (x), in line with or exceeding availability-based PPP projects rated by DBRS in the A (low) category, while the equity lockup is at 1.15x. The operating and maintenance resilience of 61.9% and lifecycle resilience of 108.2% add strong support to the A (low) ratings assigned to the Senior Bonds.

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 principal methodology is Rating Public-Private Partnerships, which can be found on www.dbrs.com 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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com