Plenary Infrastructure DC LLC -- Moody's assigns first-time A3 rating to Plenary Infrastructure DC LLC's $155 million senior secured bonds; outlook stable

Rating Action: Moody's assigns first-time A3 rating to Plenary Infrastructure DC LLC's $155 million senior secured bonds; outlook stableGlobal Credit Research - 24 Mar 2022New York, March 24, 2022 -- Moody's Investors Service ("Moody's") today assigned a first-time A3 rating to Plenary Infrastructure DC LLC's (Project Co or the Borrower) approximately $155 million of amortizing senior secured bonds. The outlook is stable. The bonds will be issued by the District of Columbia which will function as a conduit issuer and will on-lend the bond proceeds to Project Co as a back to back loan.Project Co will use the bond proceeds to finance a portion of its obligations under a long-term Public-Private Partnership Project Agreement (Project Agreement) with the District of Columbia (the District or offtaker, Aaa stable) to design, build, finance, and maintain upgrades of the existing street light network in the District of Columbia. Once the Project achieves final completion, Project Co will receive availability payments from the District over a 13-year period to cover asset management costs, debt service and equity returns. The availability payments are subject to deductions for unavailability and performance noncompliance.Plenary Infrastructure DC LLC is a special and single purpose entity that will enter into the Project Agreement to design, build, finance, and maintain the Project, which consists of the Improved Street Light Network and Smart City Improvements. Plenary Infrastructure DC LLC is indirectly owned by Plenary Americas US Holdings Inc. ("Plenary") (72%), Kiewit Development Company ("KDC") (18%), and Phoenix Infrastructure Group, LLC (10%) (collectively, the Sponsors).Assignments:..Issuer: District of Columbia....Senior Secured Revenue Bonds, Assigned A3..Issuer: Plenary Infrastructure DC LLC....Senior Secured Regular Bond/Debenture, Assigned A3Outlook Actions,..Issuer: Plenary Infrastructure DC LLC.....Outlook, Assigned StableRATINGS RATIONALEThe A3 rating reflects the essentiality of the Project to the Aaa-rated offtaker that has been working on the Project's development for several years. The importance of the Project to this strong offtaker, along with the standard risk allocation in the PA and contractual structure governing interactions among counterparpties, are key considerations. While the consortium members (Plenary, Kiewit and ENGIE) have extensive experience with North American availability-payment based PPPs in new jurisdictions, the consortiums' experience with streetlighting projects and working in the District is limited and may present a challenge in the current environment. However, the relative simplicity of the Project with a straightforward construction profile supported by limited to no site or substructure work, no critical path after the achievement of NTP3 and the relatively simple scope of the conversion work should ensure Project completion before the brief six-month long-stop date following a short two-year construction period. Maintaining adequate productivity rates of the individual crews and managing the sequencing of the work will be fundamental to ensure on-time completion. The construction schedule will require detailed project management to ensure timely completion. While there are limited critical path activities and an ability to accelerate, re-sequence and work concurrently on multiple sites, the work is performed in public areas requiring the contractor to manage any public interaction. The rating also considers the satisfactory liquid security with the developer funding a Construction Liquidity Reserve Account at financial close equal to 5% of the construction price, which can withstand a 10 month delay to the original scheduled substantial completion date or a 40% delay compared to the base schedule. This liquidity bridges the gap to the short-term bond's hard maturity date that is 10 months after the original scheduled substantial completion date. If there is a delay beyond this point, equity will ensure the maturity is refinanced until the final payments after completion are received. The rating also incorporates the payment and performance bonds sized at 100% of the contract price that is sufficient to provide additional funds should the contractor exit the Project before completion.During the operating phase, the Project's asset management (AM) responsibilities are straightforward in scope, are only provided for 13 years versus the typical 30 year operating period for most PPPs, and the obligations have been fully passed down to ENGIE Services Inc. (ESI) for whom the AM services should pose a limited challenge. Yet, if there are issues that lead to materially higher costs, ESI has little incentive to remain on the Project given its weaker security package and operating contract provisions. The lack of benchmarking in the PA and strong inflationary pressure in the current environment could eat into the operating contract's contingency and profit margin over time, although a portion of the availability payment is escalated annually by CPI and we understand the budget includes contingencies for higher costs and there are no material rehabilitation works, limiting future unknown costs. The performance regime is clearly laid out in the Project Agreement and the payment mechanism is standard versus comparable existing social and civil infrastructure PPP projects in North America.Once completed, the Project is forecast to generate a sound minimum annual debt service coverage ratio (DSCR) of 1.20x and an average annual DSCR of 1.22x (excluding the final and first partial years). Moody's calculated minimum all cost break-even ratio is sculpted to be at least 20% in all years over the 13 year operating period. We view these resiliency levels as adequate given the nature of the work being performed, the relatively benign performance regime and the minimal to no rehabilitation/lifecycle works. Finally, the rating reflects the standard debt structure with security over all material project contracts, a standard cash-funded six-month debt service reserve account and a better than usual 1.13x equity lock up. There is very little liquidity during operations available to Project Co as there is no operating or maintenance reserve fund, the 6-month DSRA is only drawn in times of severe distress, and the AM contractor is posting a letter of credit equal to only 35% of average annual operating and maintenance costs versus the market standard 50%. As a result, if ESI were to exit the Project for material cost overruns or other performance issues, the Sponsors will have limited security to support their replacement at a higher cost.OUTLOOKThe stable outlook reflects our expectation that the Project will be completed before the long-stop date and if any issues arise we expect the consortium to manage them to ensure Project completion is achieved. Once completed we expect the Project to operate with limited deductions to its availability payments, thus generating the sound forecast financial metrics.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWHAT COULD CHANGE THE RATING UP• Construction is completed on time and on budget.• Material track record of successful performance with a good control of maintenance and rehabilitation costs, while Project Co demonstrates a consistent ability to comfortably meet its forecast DSCRs.WHAT COULD CHANGE THE RATING DOWN• Given the short long-stop date, construction is delayed a few months beyond the original target date for substantial completion due to the contractor's fault.• Credit worthiness of the parent guarantors of the D&C Contractor and Asset Manager materially weakens.• Once in the operating phase, actual DSCRs are consistently below forecast expectations or operating performance is weaker than expected with high deductions.The methodologies used in these ratings were Construction Risk in Privately Financed Public Infrastructure (PFI/PPP/P3) Projects published in July 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1169983, and Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects Methodology published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1244911. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Moses Kopmar Vice President - Senior Analyst Project Finance Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco, CA 94111 U.S.A. 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