DBRS Confirms Plenary Justice Okanagan LP at A (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the rating of A (low) with a Stable trend on the $114.5 million Series A Senior Notes (the Senior Notes) of Plenary Justice Okanagan LP (ProjectCo), the special-purpose entity created to design, build, finance and maintain the $185.5 million Okanagan Correctional Centre (the Project) under a 32.6-year Project Agreement signed between ProjectCo and the Province of British Columbia (the Province; rated AA (high) with a Stable trend). The rating confirmation reflects the achievement of substantial completion, the solid experience of PCL Construction Group Inc. and Honeywell Limited (Canada) (Honeywell or the Service Provider), the fairly straightforward service obligations and the sound operating resiliencies.

Substantial completion was achieved as planned on September 30, 2016. Most of the deficiencies have been dealt with since then except for two items related to power quality and network components, which are deemed to be typical in nature. These deficiencies are expected to be completed by March 2018, leading to Final Completion. Upon substantial completion, Honeywell began providing facility maintenance (FM) as well as lifecycle maintenance and utilities management services for the 30-year service phase of the Project. The Service Provider performs the majority of the facility’s maintenance and lifecycle work, while certain ancillary FM functions like waste management and grounds maintenance are subcontracted to other specialized parties. ProjectCo only retains responsibility for general management, performance monitoring and the maintenance of certain insurances. Overall, the service specifications are viewed as standard for a correctional centre, with payment deductions generally expected to be modest over the life of the Project. The break-even levels to achieve a debt service coverage ratio (DSCR) of 1.0 times (x) for re-pricing of FM expenses (44%) and lifecycle costs (46%) are viewed as adequate by DBRS and are supported by a high-quality Service Provider.

Operations were smooth and without material deductions during the first year. The actual DSCR for Year 1 of operations was 1.22x as per the Compliance Certificate, which is slightly higher than forecast as a result of variations and savings in operating costs. The projected financial metrics for the service phase remain unchanged and adequate for the rating. The relationship between ProjectCo, the Service Provider and the Province remains collaborative, with no material issues reported.

During the first full year, deductions were well below the default threshold levels. While they are neither currently an issue nor expected by DBRS, material deductions on account of performance-related failures during the Service Phase could lead to negative rating action. The potential for credit upside remains limited at the current rating given the Project’s resiliency levels and security package.

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

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

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.com.

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

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