Okanagan Correctional Centre Bond Rating

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Rating Report Report Date: March 21, 2014 1 Public Finance: Infrastructure Analysts Achraf Joumaa +1 416 597 7440 [email protected] Grant Headrick +1 416 597 7393 [email protected] Eric Beauchemin, CFA +1 416 597 7552 [email protected] The Company Plenary Justice Okanagan LP is the special-purpose vehicle created by Plenary Canadian Holdings Inc. and contracted by the Government of British Columbia to design, build, finance and maintain the Okanagan Correctional Centre (OCC). The 378-inmate 29,500 m 2 high security facility will be located near Penticton, B.C. Plenary Justice Okanagan LP Rating Debt Rating Rating Action Trend Series A Senior Notes A (low) Provisional Rating – Finalized Stable Rating Rationale DBRS has finalized its provisional rating of A (low) with a Stable trend on the proposed $114.5 million, Series A Senior Notes of Plenary Justice Okanagan LP (ProjectCo), the special-purpose entity created to design, build, finance and maintain the Okanagan Correctional Centre (OCC). The project is governed by a 32.6-year Project Agreement (PA) signed between ProjectCo and the Province of British Columbia (the Province; rated AA (high), Stable trend). The sizable construction enhancement package, combined with the credit profile of the Design-Build Contractor (the DB Contractor) and the relatively low complexity of work, results in a construction phase considered strong for the rating category. The project includes extensive requirements related to security equipment and provisions for higher levels of wear and tear, but the low payment risk related to ProjectCo revenues, the straightforward nature of overall service obligations and the sound operating resilience are supportive of the rating during the service phase. The project involves the construction of a three-storey high-security correctional facility located near Penticton, B.C. The construction phase extends for 31 months starting in March 2014 followed by a 30-year service phase commencing at the Service Commencement Date targeted for September 30, 2016. ProjectCo has passed down on a back-to-back basis all of its construction responsibilities to PCL Constructors Westcoast Inc. (the DB Contractor), which has agreed to complete the work on a fixed-price and date-certain basis. A subsidiary of Canada’s largest general contractor, the DB Contractor plans to subcontract about 85% of the development and will secure its performance with a 50% parent guarantee, a 50% performance bond and a 5% letter of credit (LC). DBRS considers the construction as being of low-to-moderate complexity while noting the more comprehensive requirements related to security systems customary for a facility of this nature. The Lenders’ Technical Advisor (LTA) has not identified any major issues that would potentially pose undue risk. Upon completion of construction, Honeywell Limited (Canada) (the Service Provider) will provide facility management as well as lifecycle maintenance and utilities management services over the 30-year service phase of the project. The Service Provider, a subsidiary of one of the largest facilities management providers globally, will perform the majority of the facilities maintenance and lifecycle work, while certain ancillary facility maintenance functions like waste management and ground maintenance will be 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. Typical of public-private partnerships (PPP), leverage will be relatively high with a gearing ratio of 90.5:9.5 at financial close. This is also reflected in the debt-to-cash flow available for debt servicing (CFADS) ratio of 13.1 times projected in the first year of operation and the debt service coverage ratio (DSCR) of 1.21 times foreseen over the project’s term. Nonetheless, the results of the breakeven analysis for facility management and lifecycle costs are viewed as adequate and are supported by a Service Provider of high quality. Rating Considerations Strengths Challenges (1) Strong design-build and service contractors (2) Minimal public sector counterparty credit risk (3) Construction enhancement package (4) Tight lifecycle inspection and reserving mechanism (5) Bondholders’ step-in rights (1) Customary construction risks (2) Complex contractual structure (3) Highly leveraged structure (4) Contractor replacement risk

description

Summary prepared by DBRS in which it gave an A rating to the Plenary Justice Okanagan offering

Transcript of Okanagan Correctional Centre Bond Rating

Page 1: Okanagan Correctional Centre Bond Rating

Rating Report

Report Date:

March 21, 2014

1 Public Finance: Infrastructure

Analysts

Achraf Joumaa

+1 416 597 7440

[email protected]

Grant Headrick

+1 416 597 7393

[email protected]

Eric Beauchemin, CFA

+1 416 597 7552

[email protected]

The Company

Plenary Justice

Okanagan LP is the

special-purpose vehicle

created by Plenary

Canadian Holdings Inc.

and contracted by the

Government of British

Columbia to design,

build, finance and

maintain the Okanagan

Correctional Centre

(OCC). The 378-inmate

29,500 m2 high security

facility will be located

near Penticton, B.C.

Plenary Justice Okanagan LP

Rating

Debt Rating Rating Action Trend

Series A Senior Notes A (low) Provisional Rating – Finalized Stable

Rating Rationale

DBRS has finalized its provisional rating of A (low) with a Stable trend on the proposed $114.5 million,

Series A Senior Notes of Plenary Justice Okanagan LP (ProjectCo), the special-purpose entity created to

design, build, finance and maintain the Okanagan Correctional Centre (OCC). The project is governed by a

32.6-year Project Agreement (PA) signed between ProjectCo and the Province of British Columbia (the

Province; rated AA (high), Stable trend). The sizable construction enhancement package, combined with the

credit profile of the Design-Build Contractor (the DB Contractor) and the relatively low complexity of work,

results in a construction phase considered strong for the rating category. The project includes extensive

requirements related to security equipment and provisions for higher levels of wear and tear, but the low

payment risk related to ProjectCo revenues, the straightforward nature of overall service obligations and the

sound operating resilience are supportive of the rating during the service phase.

The project involves the construction of a three-storey high-security correctional facility located near

Penticton, B.C. The construction phase extends for 31 months starting in March 2014 followed by a 30-year

service phase commencing at the Service Commencement Date targeted for September 30, 2016. ProjectCo

has passed down on a back-to-back basis all of its construction responsibilities to PCL Constructors

Westcoast Inc. (the DB Contractor), which has agreed to complete the work on a fixed-price and date-certain

basis. A subsidiary of Canada’s largest general contractor, the DB Contractor plans to subcontract about 85%

of the development and will secure its performance with a 50% parent guarantee, a 50% performance bond

and a 5% letter of credit (LC). DBRS considers the construction as being of low-to-moderate complexity

while noting the more comprehensive requirements related to security systems customary for a facility of this

nature. The Lenders’ Technical Advisor (LTA) has not identified any major issues that would potentially

pose undue risk.

Upon completion of construction, Honeywell Limited (Canada) (the Service Provider) will provide facility

management as well as lifecycle maintenance and utilities management services over the 30-year service

phase of the project. The Service Provider, a subsidiary of one of the largest facilities management providers

globally, will perform the majority of the facilities maintenance and lifecycle work, while certain ancillary

facility maintenance functions like waste management and ground maintenance will be 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.

Typical of public-private partnerships (PPP), leverage will be relatively high with a gearing ratio of 90.5:9.5

at financial close. This is also reflected in the debt-to-cash flow available for debt servicing (CFADS) ratio of

13.1 times projected in the first year of operation and the debt service coverage ratio (DSCR) of 1.21 times

foreseen over the project’s term. Nonetheless, the results of the breakeven analysis for facility management

and lifecycle costs are viewed as adequate and are supported by a Service Provider of high quality.

Rating Considerations

Strengths Challenges

(1) Strong design-build and service contractors

(2) Minimal public sector counterparty credit risk

(3) Construction enhancement package

(4) Tight lifecycle inspection and reserving mechanism

(5) Bondholders’ step-in rights

(1) Customary construction risks

(2) Complex contractual structure

(3) Highly leveraged structure

(4) Contractor replacement risk

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Rating Considerations Details

Strengths

(1) The DB Contractor retained to design and build the facility is a subsidiary of PCL Construction Group Inc.

(PCL), Canada’s largest general contractor. PCL has a sound financial profile, a very strong reputation,

considerable expertise with social accommodation projects, and is very familiar with the delivery model used

to implement PPP projects in Canada. Plenary and PCL have completed together five PPP projects in Canada

that are currently in operation. In addition, all core activities pertaining to the service phase have been passed

down to Honeywell Limited (Canada), which has substantial expertise in PPP and is the subsidiary of one of

the largest facility management companies globally.

(2) All payments made to ProjectCo under the Project Agreement (PA) will originate from the Province,

entailing minimal counterparty credit risk.

(3) The security package provided by the DB Contractor for the construction phase is sizable and provides

considerable protection against non-performance. This includes a parent guarantee for 50% of the contract

price, a 50% performance bond and a 5% LC, placing the project’s construction phase comfortably in line

with the rating.

(4) A fairly tight lifecycle monitoring process is embedded in the contractual structure. Every year, ProjectCo

and the Service Provider will review the quality of the maintenance and lifecycle work performed over the

previous period. ProjectCo will compare the costs of the lifecycle work performed over the previous years

with the aggregate payments made to the contractor, and potentially withhold future payments to the Service

Provider if excess lifecycle payments exceed $1.250 million. In addition, if in Years 15, 18, 21 or 24 the

independent inspector determines that a deficiency exceeding $1.978 million is identified in the lifecycle

budget, the Service Provider will be required to fund the excess deficiency with cash or an LC.

(5) The Lenders’ Remedies Agreement and Lenders’ Direct Agreements within the contractual structure give

bondholders the right and reasonable time to step in and cure a default under the PA, the Design-Build

Agreement and the Services Contract before these agreements can be terminated. Furthermore, the cushion of

nine months between the Target Service Commencement Date and the Creditors’ Longstop Date is three

months less than the Longstop Date in the PA and should provide flexibility to allow lenders to step-in should

the need arise.

Challenges

(1) The construction phase entails the customary uncertainties pertaining to weather conditions, material and

labour availability given the relatively remote location of the site, as well as subcontractor performance risk.

The DB Contractor will be required to reserve for, and ultimately pay, Liquidated Damages (LD) in the event

of late completion. However, ProjectCo could be at risk if significant delays were encountered or the DB

Contractor had to be replaced.

(2) The overall contractual structure is standard for a PPP but complex and cumbersome relative to other

traditional infrastructure credits. This exposes ProjectCo to potential uncertainty with respect to the

interpretation of the agreements should a dispute arise among the parties.

(3) While typical of PPPs involving availability-based payments, the heavy debt burden carried by ProjectCo

leaves limited room to weather very low-probability but high-severity scenarios such as the replacement of

the DB Contractor at a significant premium. This is reflected in the debt-to-CFADS ratio expected to be

13.1 times post-service commencement and the minimum senior DSCR of 1.21 times projected over the life

of the project.

(4) Although unlikely, a replacement of the Service Provider because of a failure to meet the service

standards or financial difficulties encountered by its parent would likely lead to a re-pricing of the Service

Contract, which could erode financial metrics materially. This risk is somewhat mitigated by the security

posted by the Service Provider, deemed appropriate for the rating category.

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Contractual Framework

The contractual structure of the project is fairly standard for a PPP but somewhat cumbersome relative to

other infrastructure credits. However, the structure is familiar to the sponsors, the DB Contractor and the

Service Provider, all of which have considerable experience with PPPs. DBRS has reviewed all key

agreements and views the contractual structure as tight, with all agreements adequately complementing each

other while allowing for timely resolution of breaches and potential disputes, and the pass-down of risk to be

generally appropriate. DBRS notes, however, that for certain very low probability Relief Events with delayed

compensation, notably ionizing radiation and fuel shortage, the requirement for debt servicing is not passed

down to the DB Contractor. While ProjectCo keeps this risk, the transaction has been structured so that

sufficient funds will be retained by ProjectCo to cover debt service until the Target Service Commencement

Date, with no debt service coming due for the six-month period beyond that date. If the delay caused by the

Event continues for six months or more, ProjectCo may terminate the PA, with compensation from the

Province sufficient for senior debt repayment. Furthermore, the response times and cure periods allowed for

subcontractors during the service phase are often stricter than those faced by ProjectCo under the PA,

providing some flexibility for ProjectCo to respond to unexpected developments.

Province of British Columbia: The Province is the public sector counterparty to the PA and is represented

by the Ministry of Technology, Innovation and Citizens’ Services. The Province is rated AA (high) with a

Stable trend, well above the rating of ProjectCo.

ProjectCo: A special-purpose vehicle created solely for the project and wholly owned by Plenary Canadian

Holdings Inc., ProjectCo is structured as a limited partnership and, as such, is not taxable. As is standard for

PPPs, ProjectCo’s line of business is restricted to project-related activities.

Sponsor: The owner of ProjectCo is Plenary Canadian Holdings Inc., which will provide ProjectCo’s equity.

Established in Australia in 2004, Plenary Group is an independent company focusing on the delivery of

public infrastructure projects, and it is involved in all aspects of new projects. Its key principals own Plenary

Canadian Holdings Inc., with a representative group forming the ProjectCo board of directors and overseeing

ProjectCo’s management team. Plenary Group and its principals have had considerable success since

inception, with a sizable portfolio of assets in Australia and 12 PPP mandates in Canada, including justice

Design-Build Contractor"PCL"

(50% guarantee from PCL Group )

Project Agreement

Design-Build Agreement

Lenders'Remedies

Agreement

ProjectCo

Province of BritishColumbia

Bondholders

NoteIndenture

Service Provider"Honeywell"

(guarantee from Honeywell International up to 300% of annual

service fee on termination)

Services Contract

Sponsors

EquityCommitment

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and corrections-type facilities like the Thunder Bay Consolidated Courthouse in Thunder Bay, Ontario, and

the Communications Security Establishment Canada Long-Term Accommodation in Ottawa, Ontario.

DB Contractor: PCL Constructors Westcoast Inc. is a subsidiary of PCL and the entity retained by

ProjectCo to design and build the project under the fixed-price and date-certain DB Contract, with a 50%

performance guarantee from its parent. As Canada’s largest general contractor, PCL has annual construction

volume in excess of $6 billion and extensive experience with social infrastructure and PPPs, having been

involved in several corrections/justice projects in recent years, including the North Fraser Pretrial Centre in

British Columbia. DBRS is of the view that PCL exhibits credit characteristics consistent with a rating at the

high end of the BBB range.

Service Provider: Honeywell Limited (Canada), a subsidiary of Honeywell International Inc. (rated “A” by

DBRS), assumes on a back-to-back basis substantially all Facility Maintenance (FM), lifecycle and security

obligations under a 30-year fixed-price contract. Honeywell is a diversified technology and manufacturing

company and a leader in the provision of FM services, with annual revenues of USD 37 billion and

considerable experience with high-security facilities. Its experience includes many Canadian PPPs, including

Surrey Pretrial Services Centre in British Columbia.

Key Agreements

Project Agreement (PA) This is the master agreement through which the Province transfers to ProjectCo all responsibilities for

designing, building, financing and maintaining the OCC and providing lifecycle services for a term of 30

years, plus a scheduled construction phase of 31 months. Accordingly, ProjectCo agrees to design and build

the new facility in accordance with the output requirements, and to procure and install all required security

systems by September 30, 2016 (Target Service Commencement Date), and no later than the Longstop Date,

which is set at 12 months later. The PA passes down to ProjectCo all risks pertaining to inferable site

conditions, permits and approvals, weather conditions and cost overruns. Other construction-related

obligations include the provision of all required IT software and security equipment for a correctional facility.

The PA also outlines extensive operating and maintenance requirements for the service phase, beginning at

Service Commencement. These include routine and lifecycle maintenance of OCC and some of its

components and equipment, as well as grounds maintenance, utilities management, pest control, help desk,

and comprehensive IT and security services. Typical of PPPs, clear processes are outlined in the event of

scope changes, disputes among parties, a step-in by the Province or the Trustee if ProjectCo or a

subcontractor fails to perform.

The Province grants non-exclusive access to the site and facilities to ProjectCo and its related parties for the

term of the PA, and will make progress payments during construction that do not exceed the lesser of a

prescribed amount or 40% of eligible costs incurred monthly. During the service phase, the Province will

make monthly payments for the provision of the services, which may be subject to adjustments for failure to

meet the service standards. Typical of PPPs, the risks retained by the government counterparty are limited

and mostly relate to site availability; existing ground contamination; discriminatory changes in law, except

for a Relevant Works Change in Law, which is a risk shared with ProjectCo; and damages incurred by

ProjectCo under a fairly standard range of Relief, Compensation, Excusing and Force Majeure events. The

ProjectCo and Province Events of Default that could potentially lead to a termination of the PA are customary

and often incorporate a modest cure period (generally 20 business days). Termination can also be triggered

upon an extended event of Force Majeure or Relief or at the full discretion of the Province, and in each case

would require some form of compensation to ProjectCo sufficient to cover senior debt repayment. DBRS

notes that the Province may assign this agreement without the consent of ProjectCo, but will remain liable for

all of its obligations.

Design-Build Agreement This is a fixed-price, date-certain contract between ProjectCo and the DB Contractor, through which virtually

all risks and responsibilities entrusted to ProjectCo under the PA for the design, construction and

commissioning of the facility and its equipment are transferred on a back-to-back basis to the DB Contractor.

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ProjectCo agrees to pass down to the DB Contractor its rights of access to the site and the facility and any

potential relief, compensation and penalties from the Province, and commits to exercising its rights and

claiming those defences under the PA that are for the benefit of the DB Contractor. The total cost of the DB

work is set at $166 million, payable through monthly progress payments to the DB Contractor in accordance

with pre-established drawdown schedules and is subject to customary conditions, including a more-

comprehensive-than-usual LTA certification process. Service Commencement of the facility is scheduled for

September 30, 2016 (Date for Financial Completion), but will be no later than the Sunset Date or nine months

after Service Commencement, which is three months before the Longstop Date under the PA.

Typical of PPPs, the DB Agreement mirrors most construction-related sections of the PA, including the

output specifications, which are directly copied from the PA, and the relevant Events of Default. However,

the response times and cure periods available to the DB Contractor are generally the same as under the PA.

This provides limited buffer to ProjectCo to address unexpected issues; however, the DB Contractor is most

often considered to be the best suitable entity to respond and cure these issues. The agreement automatically

terminates upon termination of the PA but allows for contractor and guarantor replacement in the event of the

bankruptcy of either the DB Contractor or PCL. In the event of a delay in reaching Service Commencement,

the DB Contractor will pay to ProjectCo LDs sufficient to cover all of ProjectCo’s operating and financial

obligations, including debt servicing, on a monthly basis. The DB Contractor will ensure that all subcontracts

entitle ProjectCo, the lenders or the Province to take an assignment of all rights under such contracts if the

DB Contractor is terminated. The liability of the DB Contractor under the contract is capped at 50% of the

contract price, including up to 12 months’ worth of LDs (six months of Completion LDs plus the 5% LC).

Services Contract The Services Contract transfers all day-to-day facility maintenance and lifecycle responsibilities set out under

the PA to the Service Provider on a fixed-price, back-to-back basis. Upon reaching Service Commencement,

all FM service requirements will commence, including routine and lifecycle maintenance of the facility and

its equipment and the IT/security infrastructure. Service responsibilities also include grounds maintenance

and landscaping services, utilities management, waste management and recycling services, pest control, help

desk and comprehensive IT and security services. ProjectCo only retains responsibility for general

management, performance monitoring and the maintenance of certain insurances.

ProjectCo will make monthly payments to the Service Provider, which will be subject to deductions for

failure to meet service standards unless caused by ProjectCo. The agreement incorporates the same payment

indexation factors and adjustments as under the PA and does not entitle the Service Provider to any

compensation if the facility is delayed, unless caused by ProjectCo. The agreement passes down customary

relief for Force Majeure, Compensation, Excusing or Relief events, and mirrors the various processes in place

under the PA to address scope changes and disputes among parties or to allow the Trustee to step in and cure

a breach of obligations. Events of Default are similar to the ProjectCo Events of Default relevant to the

service phase under the PA. The response times available to the Service Provider are often the same as those

defined in the PA, although the deduction thresholds for (i) increased monitoring, (ii) Province step-in and (iii)

default are set 20% lower than the thresholds specified in the PA, providing a buffer for ProjectCo.

The Service Provider is required to provide a performance security package to ProjectCo, which could be

used to cover a contractor replacement premium, and will ensure that all subcontracts entitle ProjectCo, the

lenders or the Province to take an assignment of its rights under such subcontracts if the Service Provider is

terminated. The liability of the Service Provider is capped at 300% of average annual FM and lifecycle

payments, and a LC in an amount equal to 50% of the average annual FM and lifecycle payments is required

in the agreement. DBRS notes that relief and compensation are only available to the Service Provider to the

extent that the same is received by ProjectCo under the PA, unless the issue is caused by ProjectCo.

Furthermore, if the PA is terminated, any compensation received by ProjectCo must first be used to repay

senior and junior bondholders before any payment is made to the contractor.

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Lenders’ Remedies Agreement Schedule 10 of the PA, the Lenders’ Remedies Agreement, is between the Province, ProjectCo and the

Trustee. It acknowledges the security interest granted to the Trustee and sets out the powers available to

bondholders in the event of a default of ProjectCo under the PA. Before terminating the PA, the Province

must inform the Trustee of any ProjectCo default and provide it with at least 90 days to initiate a step-in and

proceed to cure the default if the default is under the PA, or 60 days if the default is under the financing

documents. If a step-in is pursued, the Province will only be entitled to terminate the PA if any of the

following occurs: (1) Service Commencement is delayed beyond 180 days after the Longstop Date,

(2) the breach is not being diligently remedied, (3) certain amounts owed to the Province remain unpaid or (4)

the terms of the PA are not respected during the step-in period. As a result, a step-in could effectively extend

the construction phase by up to 180 days beyond the Longstop Date. The agreement also allows the Trustee

to replace ProjectCo at any time during the notice period or step-in period, or upon an Event of Default under

the financing documents. Similar agreements are in place under the Design-Build Agreement as well as the

Services Contract, providing the Trustee with 60 days under the DB Agreement and up to 180 days under

the Services Contract to step in and attempt to either cure a ProjectCo Event of Default or replace ProjectCo.

Dispute Resolution Procedure Schedule 13 to the PA, the Dispute Resolution Procedure, provides a framework for the Province and

ProjectCo to resolve disputes at the lowest possible level of escalation. Accordingly, any dispute related to

the design and construction work, scope change, service or unavailability failures, minor work or a renovation

shall be settled as follows: (1) Representatives of each party first attempt to amicably resolve the issue within

five business days of receiving a Dispute Notice (or longer, if mutually agreed). (2) If the discussions fail to

lead to a solution within this period, the issue is then referred to a Referee (Independent Certifier or another

person as agreed between parties), who has five business days (or longer, if mutually agreed) to render a brief

decision, which is not binding on the parties. (3) If the dispute remains unresolved or if either party wishes to

arbitrate a dispute decided by the Referee, the issue can then be referred (within ten days from Referee

decision or longer, if mutually agreed) to an arbitrator, who will deliver a decision 15 business days after

conclusion of hearings. If either party does not indicate its intention or objects to resolving the dispute

through arbitration, then either party may commence proceedings in respect of the dispute in the courts of

British Columbia.

It is worth noting that the decision of the Independent Certifier that Service Commencement has been

achieved is final and binding on the parties, and such decision will not be the subject of a Dispute and will not

be subject to the Dispute Resolution Procedure.

Very similar processes are provided under the Design-Build Agreement and Services Contract, with all

parties bound by any determination under the PA’s dispute resolution procedure.

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Project Overview

The project entails the design and construction of a three-storey correctional centre of approximately 29,500

square-metres on a 36-acre site near Penticton, British Columbia. The site is owned by the Osoyoos Indian Band

(OIB) who has leased the subject lands to the Province for the purposes of the project (the Lands). The Province

in turn will provide ProjectCo licence to these lands as a condition to reaching financial close. The facility will

consist of three pods with 12 living units containing the majority of the inmate cells and a separate central

administration and services building, which will accommodate support and ancillary functions as well as a small

number of special cells. The total number of cells is 465 with a maximum capacity of around 867 inmates. The

construction phase of 31 months is projected to start in March 2014, and reach Service Commencement on

September 30th, 2016, at which time the 30-year service phase will begin with the delivery of facility

management and lifecycle services.

Construction Phase

Customary to PPPs, virtually all of ProjectCo’s construction obligations and risks outlined under the PA are

passed down on a back-to-back basis to the DB Contractor under a fixed-price and date-certain contract valued

at $166 million. This includes standard design, construction and utility-related obligations, LEED Gold

certification, and procurement and installation of all IT and security system equipment. Honeywell (the Service

Provider) will be involved in the security system installation, commissioning and licensing as a subcontractor

during the construction phase, and will eventually assume the licences, maintenance and lifecycle services of

this system upon achievement of Service Commencement. The security component of this project represents

about 8% of total capital costs and is similar in complexity and functionality to those found at other correctional

facilities in B.C. The notable risks retained by ProjectCo during the construction phase relate to Relevant Works

Change in Law and certain types of Relief Events. For Relevant Works Change in Law that requires capital

expenditures, ProjectCo will establish a reserve account shortly after Service Commencement to cover 80% of

the exposure under the PA as a result of such events ($1 million), using tax rebates. The remaining 20% will be

accumulated through interest collected on this account; hence, the reserve will only become fully funded

approximately 13.5 years after Service Commencement. This approach is unusual and represents a potential risk

exposure to ProjectCo, although the size of the remaining unfunded balance of this reserve before first debt

service payment is relatively small and can easily be covered with free cashflows. As for entitlement upon

occurrence of a Relief Event, ProjectCo and senior debt payments are not protected under the PA for all types of

Relief Events resulting in delay to the original Service Commencement date. Nonetheless, the majority of those

Relief Events not protected by the Province have been passed down to the DB Contractor except the following

three: (i) ionizing radiation, which is considered very low risk in a correctional centre; (ii) accidental loss or

damage that will be covered by insurance; and (iii) failure or shortage of fuel, which is deemed to be a very low

risk despite the relatively remote location of the site.

The construction task is assessed to be of low-to-moderate complexity. The relatively straightforward

construction of the detention centre is overlaid with a number of requirements, including specialized security

systems and IT requirements. DBRS notes that the PA specifically contains provisions requiring ProjectCo to

acknowledge that it will be constructing a facility that will be subject to higher levels of wear and tear and

vandalism. This has been passed down to the DB Contractor. Another unique aspect of this PA relates to the

allocation of risks associated with participants in protest actions and trespassers. ProjectCo will be responsible

for the management of participants in protest actions and trespassers during the construction phase.

Compensation for pertinent direct losses (exceeding $100,000) is provided by the Province, but time extensions

are only granted after ProjectCo has demonstrated that the protest or trespass continues to occupy the site for

more than seven days after all legal remedies available to it have been exhausted. This risk is tempered by the

availability of an executed lease agreement with the OIB approving the construction of a correctional facility on

the Lands and has been dropped down to the DB Contractor, which has commensurately priced the risk in its

contract price. ProjectCo has already met with OIB, including the band chief, to discuss design principles related

to the character of the facility within the context of the overall Senkulmen Business Park. The 475-member band

appears to be entrepreneurial, running nine businesses and employing hundreds of people in various sectors with

considerable revenue growth over recent years. ProjectCo and OIB have also discussed the possibility for labour

and material supply by the band through a competitive tendering process.

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The DB Contractor plans to subcontract 85% of the work, and has obtained firm price commitments for about

50% of the project scope, including mechanical and electrical work. Responsibilities self-performed by the

DB Contractor include project management, maintaining insurance and commissioning of the facility. Similar

to other correctional centre projects, there is a requirement for workers to have enhanced security

classifications, the requirements of which consist mainly of law enforcement database and criminal record

checks.

The property is situated adjacent to Highway 97, seven kilometers north of Oliver, B.C. The project’s

location is somewhat remote from major metropolitan areas. However, Okanagan Valley where the site is

located has been witnessing the delivery of a few large scale construction projects such as the Kelowna-

Vernon Hospitals and the ongoing Interior Heart Surgical Centre, with no major labour or material issues.

The Project will be constructed in the Senkulmen Business Park, which is situated on land owned by the OIB,

for which a 60-year lease (extendible to 80 years) was recently negotiated between the OIB and the Province.

There are a few species at risk on or near the project site (Behr’s Hairstreak, Western Rattlesnake and Gopher

Snake) for which the necessary permits were provided by the Province. Archaeological assessments were

conducted on the site, and no resources of concern or further assessment needs were identified. An

environmental assessment has been performed, and appropriate mitigation measures should keep the

environmental risk at a low level. Geotechnical conditions on the site are generally suitable to the type of

construction envisioned (spread and strip footings), and the native granular soils are generally suitable for

structural fill. Site drainage is not considered to be an issue considering the draining granular soil types

present and the low water table in the area.

The construction task will span roughly 31 months and is based on five-day weeks and single work shifts.

Although schedule float was not disclosed, the LTA has noted that it considers the construction schedule to

be of a reasonable duration for a project of this size and type. There are no local ordinances in place that

would interfere with accelerating construction activities, and no residential properties are in the immediate

vicinity. The project will feature offsite precast construction of inmate cells typically providing schedule and

quality control efficiencies. Site work and construction activities are planned to start in August and

September 2014, respectively. Pods A, B and C are expected to take 11 months each to construct, running

relatively in parallel over a total period of 15 months. The central services building will also be concurrently

constructed but over a period of 19 months. A period of 11 months is provided for the installation of the

security systems, and five months have been allocated for commissioning, which is in line with the duration

typically seen for hospital projects. At present, the critical path runs through the Design Development, Site

Setup, Pod C Structure and Interiors, Pod B Foundations, Pod A Structure, Central Services Building

Structure and Interiors and final security and commissioning activities.

Under the Design-Build Agreement, PCL is in default if it fails to achieve Service Commencement within

nine months of the Target Service Commencement Date, which is concurrent with the Creditors’ Longstop

Date and three months prior to default under the Project Agreement. There will also be a DB Event of Default

if at any time after 12 months prior to the Sunset Date (nine months after Target Service Commencement), it

is determined that Service Commencement is not expected to be achieved prior to the PA Longstop Date.

This should provide bondholders a measure of protection, provided that this date is set at a suitable threshold.

DBRS notes that the agreement allows ProjectCo to provision for anticipated LD if, starting nine months

prior to the Service Commencement Date, the LTA determines that a construction delay is likely to occur.

The maximum completion LD held by ProjectCo plus the 5% LC provided by the DB Contractor would

provide adequate liquidity to reach the Longstop Date.

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During the construction phase,

the Province will make monthly

contribution payments not to

exceed 40% of the construction

costs to date at the end of each

month, subject to a cumulative

maximum of $72.3 million. The

DB Contractor will receive

monthly progress payments from

ProjectCo, which will be funded

with the proceeds of the senior

notes and the above-noted

provincial funding. The draw

curve is featured in the figure to

the left. Subject to the 10%

legislative holdback, the progress

payments will be made as per the

project cash flow schedule and,

subject to customary certifications by the LTA, include, amongst other requirements, that Service

Commencement is likely to occur on the targeted date or if not, by the Creditors Longstop Date; no funding

shortfall exists; all claimed project costs do not exceed the amounts prescribed in the draw curve; progress

does not vary from schedule; and payments made are to cover costs actually incurred.

Upon completion of construction, there is a one-year warranty against defects and a 15-year warranty against

latent defects (the latter stipulated by B.C. law, and somewhat longer than seen in other jurisdictions). As is

usual, the project is required to achieve LEED certification, although DBRS notes that for the OCC, LEED

Gold is required. However, a three-year window post-Service Commencement is provided, which is more

permissive than typical by one to two years. The inability to achieve LEED certification does not result in

default but rather in the requirement to pay liquidated damages, up to a maximum of $1 million, dependent

upon how many credits are missing. These requirements have been passed down to the DB Contractor.

Performance Security

The DB Contractor has provided a parent guarantee for up to 50% of the contract price from PCL along with

an LC from a Canadian Schedule 1 bank rated at least A (low) or ATB Financial, in an amount equal to 5%

of the contract price (about 5.5 months of LDs). The whole project also benefits from a 50% performance

bond provided by Chubb Insurance Company of Canada, Travelers Guarantee Company of Canada and

Zurich Insurance Company of Canada Ltd. on a joint and several basis. In contrast to the traditional bond, this

performance bond also covers LDs, providing an added incentive to the insurers to address any problem in a

timely fashion. Subcontractors with contract values worth less than $2.5 million are covered under PCL’s

Subguard policy, whereas larger subtrades such as mechanical and electrical (M&E) will be covered by

bonding. However, the subguard coverage and bonding on large subtrades (such as M&E subcontractor) are

not for the benefit of ProjectCo, and as per DBRS’s methodology, provide no uplift to the construction phase

rating. DBRS considers this package to be in excess of what is typically seen for this rating category and

provides substantial security for the construction phase of the project.

Lenders’ Technical Advisor Review

The LTA (BTY Consultancy Group Inc.) deems the design and construction obligations to be standard and

considers the construction phase to be of low-to-moderate complexity with no material concerns raised

relative to that portion of the project. The LTA notes that the project involves design and construction of a

facility subject to higher-than-average wear and tear in addition to the implementation of specific security

systems and components. However, these elements do not materially increase the overall complexity of the

construction phase, which is believed to be somewhat lower than for a hospital project, for example. The

LTA has opined that the project schedule follows a logical sequence of activities with reasonable free floats

per activity, and views the project budget presented by the DB Contractor as reasonable and sufficient to

complete the work, with total capital cost ($5,627/m2) being just above the average of the expected

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benchmark range for comparable projects ($4,921/m2 to $6,129/m

2). Based on the replacement scenarios

assessment, adequate liquid coverage is deemed to be available except in month ten of construction. However,

this does not take the performance bonding into consideration and assumes that the DB Contractor and the

parent company both become insolvent.

Service Phase The service phase spans a typical 30-year period and formally begins at Service Commencement scheduled

for September 30, 2016. Key responsibilities outlined under the PA comprise facility maintenance and

lifecycle services for the correctional centre, including secure areas. ProjectCo will also be responsible for the

provision of some soft facility management services, including cleaning of non-secure areas and the oversight

(but not direction) of the cleaning of secure areas by inmates. Nonetheless, ProjectCo and the Service

Provider will not incur deductions for any work performed by inmates. Other specific responsibilities during

the service phase include plant services, maintenance and support of all security systems and software,

videoconferencing capabilities, pest control, provision of help desk, utilities management, and roads and

grounds maintenance, including snow removal.

As noted in the construction phase analysis, there is a requirement for staff to have the proper security

clearance, and breaches of security-related matters (i.e., allowing non-cleared and non-escorted individuals

into particular areas, except in the case of an emergency) can lead to immediate termination. While this will

require ongoing diligence by the Service Provider, given the nature of the facility, it is not considered to be an

unduly challenging requirement. Also, during the life of the facility, blockades and embargos short of a

protest action are Relief Events that provide relief from termination by the Province and will, after 180 days,

give ProjectCo the right to unilaterally terminate the Project Agreement with full compensation to

bondholders.

ProjectCo only retains responsibility

for certain insurances, general

management and financial reporting

responsibilities. All FM and lifecycle

responsibilities pertaining to the

facilities and their equipment have

been passed down on a back-to-back

basis to the Service Provider (a

subsidiary of Honeywell International

Inc.), which will self-perform the

majority of the services scope (around

70%), under a fixed-price 30-year

contract. As expected, the Services

Contract mirrors the relevant sections

of the PA, including the output

specifications, and passes down, on a

back-to-back basis, deductions for

failure to meet service specifications,

unless they are caused by ProjectCo. It also flows through other payment adjustments, such as the Diesel Fuel

Services Payment and the Snow Ploughing Services Payment through a payment mechanism similar to the one

under the PA. The total FM and facility lifecycle budgets are $75.6 million and $48.2 million in nominal terms,

respectively, which are within the expected range on a per-square-metre basis for similar facilities. The security

equipment required to be provided and maintained is fairly standard for a correctional facility. The lifecycle profile

for the security system forms 14% of the total lifecycle costs of the project and is characterised by relatively

significant investment every six years approximately, comprising replacement of significant components like

cameras, controls and servers. Part of the reason for this is the constant improvement in technology and software

that necessitates ongoing investment in the system. Other major lifecycle expenditures are noted around Year 12

for interim repair work related to HVAC, then Years 18 to 20 for exterior finish and hard surface replacements, and

afterwards in Years 24 and 25 for mechanical / electrical services.

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Every year, ProjectCo and the Service Provider will review the quality of the maintenance and lifecycle work

performed during the previous period and update the maintenance and lifecycle plans for the next calendar year

accordingly. ProjectCo will compare the costs of the lifecycle work performed over the previous years with

the aggregate payments made to the contractor, and potentially withhold future payments to the Service

Provider if excess lifecycle payments exceed $1.250 Million. In addition, if in Years 15, 18, 21 or 24 the

independent inspector determines that a deficiency exceeding $1.978 million is identified in the remaining

lifecycle budget, the Service Provider will be required to fund the excess deficiency with cash or an LC or

have subsequent lifecycle payments withheld. The lifecycle look-forward inspections will be undertaken in

advance of the Year 27 inspection required under the PA, and should address any lifecycle deficiencies

before they are captured by the payment mechanism under the PA. As a proportion of the construction price,

the nominal lifecycle budget is approximately 29%, which is within the expected range. DBRS’s discussion of

the FM lifecycle strategy with Honeywell highlighted a thorough planning process based on an extensive review

of the project requirements, incorporating considerations for the special nature of the facility, market conditions

and historical data points from similar projects managed by Honeywell in Canada and in the United States.

Service Payment Mechanism

Full payments, including the lifecycle component, are set to begin at Service Commencement of the facility.

Payments will include (i) a non-indexed debt servicing component and indexed FM and lifecycle components on

the basis of the consumer price index (CPI) funded in advance of each payment period as well as (ii) diesel fuel

service payments and snow ploughing and removal services payments made in arrears. Unlike some of the other

B.C. PPPs, there is no benchmarking mechanism in this project agreement of certain facility maintenance

services.

Payments will be subject to penalties if energy consumption exceeds projected levels by more than 3% or if the

energy mix is materially different from the targeted mix. More importantly, deductions will apply if ProjectCo fails

to provide a service (Service Failure) or make a part of the facility safely available (Unavailability Event). The

deductions for a Service Failure range from $500 to $3,000 if not rectified within the allowed period (generally four

to 24 hours), depending on the severity of the failure. For facility Unavailability Events, deductions range from $25

to $300 per affected unit for each permitted rectification period during which the issue remains unresolved

(generally two to 48 hours). Monthly deductions are capped at the FM monthly service payment, and deductions

for FM failures during the first three months following the completion of the facility will be reduced on a declining

basis by 75%, 50% and 25%, respectively. Modest revenues are also expected to be generated from reserves and

cash balances, which are conservatively assumed to be invested at a rate of 1.7% per year.

ProjectCo is expected to retain about 65% of total payments from the Province to cover debt servicing,

overhead and return on equity. The balance will be passed down to the Service Provider through a payment

mechanism similar to the one under the PA, including energy gainshare or painshare and applicable payment

indexation and deductions, unless caused by ProjectCo. DBRS notes that ProjectCo is not required to

compensate the Service Provider if the start of the service phase is delayed and only has to pass down

compensation or relief when received from the Province unless the issue is caused by ProjectCo.

Similar to other British Columbia PPP structures, deductions are used as a way of monitoring performance.

Accordingly, the Province would be allowed to increase its monitoring of ProjectCo, to step in and rectify

deficiencies itself or to require the replacement of the Service Provider if certain deduction thresholds are

exceeded over a two-month or six-month period. In addition, deductions exceeding $1.0 million for facility

failures incurred over a 12-month period would give the Province the right to terminate the PA. The

thresholds for increased monitoring, Province step-in and default under the Services Contract are 20% lower

than under the PA, providing ProjectCo with a cushion to act before the PA becomes compromised.

Theoperating standards are considered commensurate to the nature of this correctional facility. Similar to

other PPPs, most events are preventable under proactive management. Furthermore, the framework provides

for reasonable rectification times for Unavailability Events. As a result, failures are unlikely to place

excessive stress on financial ratios.

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Performance Security

A parent performance guarantee for an amount equal to 300% of average annual FM and lifecycle payments,

and an LC in an amount equal to 50% of the average annual FM and lifecycle payments, which must be

replenished if drawn, will be provided by the Service Provider to secure its performance. This package is

somewhat larger than seen in recent “A”-range PPPs and, combined with the credit quality of the guarantor

(rated “A”) and the tight lifecycle inspection mechanism, is viewed as more than adequate for the rating.

Technical Advisor Review

Overall, the service phase is viewed by the LTA as standard for a correctional centre project, with the service

requirements being considered as reasonable for a correctional centre. The high-security aspect of the facility

will make the environment more challenging than the typical availability-based PPP as it increases operating

and staffing requirements, but the overall complexity of the tasks is not high and seems fairly mechanical.

The LTA does not view the deduction regime as onerous but rather consistent with other comparable projects in

B.C. Risk to ProjectCo related to the payment mechanism is considered to be low. The triggers for the Province

to have the right of step in and force a replacement are well short of the termination thresholds in the PA. In a

replacement scenario, the LTA estimates a three-month period to replace the Service Provider and deems the

5% LC, Honeywell’s parent guarantee and the liability cap to be sufficient for all potential default and

replacement scenarios.

The LTA considers the operating and maintenance (O&M) costs of $54.73/m2 per year to be slightly below the

benchmark range ($54.9/m2 to $71.4/m

2), although the differential is minimal relative to two of the three

comparable projects considered. It also views the lifecycle costs per square foot per annum of $31.94/m2/annum to

be within the benchmark range of $24.01/m2 and $39.99/m

2 per annum. The LTA views Honeywell’s facility

maintenance and performance monitoring to be well planned and representative of best management practices.

Similarly, the lifecycle plan is considered to be robust and handback requirements not unduly onerous for an

experienced service provider such as Honeywell.

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Project Risk Allocation

The table below summarizes the allocation of the key risks and responsibilities among the major project

participants, specific to the construction and service phases.

Financial Profile

The total budget to carry the project to Service Commencement is set at $198.2 million. This includes

$166 million for the fixed-price DB Agreement, $13.5 million for debt servicing and financing charges,

$3.7 million for ProjectCo expenses incurred during the construction phase, and $3.6 million to fund the six-

month debt service reserve account (DSRA) at Service Commencement.

Primary Risk & Responsibility Allocation Mattrix

Province PCo DB SP Remarks

* DB pays PCo for delay but PCo at risk if delay > 12 months

* Liability capped at 50% of contract price

DB to obtain permits for DB activities & comply w ith CEA

Report, SARA & Wildlife Act Permits obtained by Province

Licence to Lands is provided by Province

(Province leased Lands from First Nations for 60 years)

Compensation for Undisclosed Environmental Liabilities

Subsurface conditions considered not challenging by LTA

Relief Event for Extreme w eather

Relief Event

Compensation Event if PA not terminated

Compensation Event

* -

LTA deems DB credit enhancement package to be adequate

for replacement purposes

Authority covers cost inflation for lifecycle and maintenance

payment components

* LTA has opined that deduction thresholds are reasonable

Tight lifecycle inspection & reserving mechanism

Structural defects PCo responsible after expiry of 1-year DB w arranty

Policy premium is pass-through

Service payments continue if services delivered; event

persisting beyond 180 days becomes Compensation Event

Compensation for direct losses & a share of allow able CapEx

TA: w ould likely require about three months

= main responsibility for risk; * = partial exposure to risk.

PCo = Pro jectCo; DB = Design-Build Contractor; SP = Service Provider

C o mpensat io n Events : generally entitle Pro jectCo to compensation for losses so that it is no better or worse off.

F o rce M ajeure: if before substantial completion, entitles Pro jectCo to extension to key pro ject dates (except Expiry Date) and possibly to

compensation if persists or expected to persist for 180 days; if after substantial completion, deductions remain in force.

R elief Events : if before substantial completion, all key pro ject dates (except Expiry Date) are postponed and, for an industry strike, a blockade

or failure by a utility company or local authority to perform, the Crown covers senior debt servicing (DB Contractor covers

senior debt servicing for most o ther Relief Events). If after substantial completion, no termination of the PA; payments continue

if service delivery continues. No compensation provided although certain Relief Events may also constitute an Excusing Event.

Excusing Events (only during operating phase): entitle Pro jectCo to relief from payment deduction or breach under PA.

*

Maintenance of insurance

Cost inflation

Performance standards

Industry strike

Force Majeure

Construction Phase

Schedule overruns

Cost overruns

Permits & approvals

Land acquisition

Lifecycle & handback

Archaeological f inds

Insurance maintenance

*

Replacement of contractor

Force Majeure

Change in Law

Environmental issues

Geotechnical issues

Weather conditions

Design

Service Phase

Replacement of contractor

*

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A fully amortizing, 32.6-year, $114.5 million Series A Senior Notes will be issued at financial close

comprising 90.5% of the total capital structure (excluding the provincial funding). During construction, the

Province will make monthly contribution payments not to exceed 40% of the construction costs to date at the

end of each month, subject to a cumulative maximum of $72.3 million over the construction period. Other

sources of funding will include an equity contribution of $12.0 million that will be back-ended and supported

by a letter of credit that may be drawn if equity is not contributed as planned or upon a ProjectCo Event of

Default.

The Senior Notes will mature six months before the expiry of the PA, which is consistent with market standards,

and will be serviced quarterly. The Note Indenture will require, among other things, (1) a six-month DSRA, (2)

fully funded reserves and a minimum DSCR of 1.15 times for any dividend to be paid out, (3) that any additional

senior debt be subject to Trustees’ and Senior Noteholders’ consent and (4) a fully funded Lifecycle Account.

As is common for PPPs, payments received from the Province for ProjectCo costs, contract management,

administrative service, and rehabilitation costs will all be indexed to CPI while the capital component of the

service payments, covering debt service and equity return, will be fixed. The payment stream from the

Province will be “lumpy” but matches the timing of the life cycle requirements and should be fairly

predictable.

Further comfort is provided by the

tight lifecycle inspection and dynamic

reserving mechanism embedded in the

Services Contract that requires the

Service Provider to reserve for any

shortfall in excess of $1.978 million

identified in the lifecycle budget during

the inspections conducted in Years 15, 18, 21 or 24. These features should provide considerable protection

against shock to ProjectCo’s cash flow available for debt servicing (CFADS). The Senior Notes will carry a

fixed rate with softly sculpted principal repayments, providing for a stable DSCR of 1.21 times, which is

comparable with other “A”-range accommodation PPPs completed in recent years. Debt-to-CFADS will start

at a somewhat high level of 13.1 times in Year 1, but it should slowly decline in the years ahead as debt

amortizes. A six-month debt service reserve ($3.6 million) will be in place to cushion unexpected shocks.

DBRS’s break-even analysis also points to good financial resilience at the ProjectCo level during the service

phase and highlights the benefits of contractor diversification as ProjectCo will pass down risks to a high-

quality service provider. Accordingly, ProjectCo could sustain either of the shocks highlighted below while

maintaining a DSCR of at least 1.0 time.

Construction Cash Flow Table ($millions)

Uses of Funds ($millions) % of total Sources of Funds ($millions) % of total

Design and Construction Costs 166.0$ 83.5% Equity 12.0$ 6.0%

Interest & Financing Fees 13.5$ 6.8% Provincial Funding 72.3$ 36.4%

ProjectCo Operating Costs 3.7$ 1.9% Long Term Bonds 114.5$ 57.6%

Senior DSRA 3.6$ 1.8%

Other Fees & Expenese 12.0$ 6.1%

Total 198.9$ 100.0% Total 198.9$ 100.0%

Re-pricing of O&M services budget due to contractor replacement

Re-pricing of lifecycle budget due to contractor replacement

Re-pricing of DB Contract due to contractor replacement

Events Maximum Shock

44.0%

46.0%

14.0%

Year 1* Year 5 Year 10

Total debt (millions) $112.7 $104.2 $91.2

Debt-to-CFADS (times) 13.1 12.1 10.6

DSCR (times) 1.21 1.21 1.21

* First 12 months of normalized results (ended September 30th, 2017)

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Overall, the key financial metrics and break-even results point to good flexibility to absorb unexpected

shocks. While the service phase is marked by heavy security requirements, DBRS takes comfort in the

service standards, which are not viewed as unusually complex for a correctional centre, the mechanisms in

place to limit erosion in lifecycle performance and the allocation of FM obligations to a high-quality service

provider, which has considerable experience on similar projects.

Termination & Compensation

The Events of Default and the termination framework under the PA are customary, and a cure period is

provided for many breaches that can be remedied (often 20 business days), although some events, such as the

bankruptcy of ProjectCo or the inability to reach Service Commencement by the date that is six months after

the Longstop Date, have the potential to lead to immediate termination of the PA. However, the Lenders’

Remedies Agreement provides an opportunity for the Trustee to step in and cure any breach (which may

involve replacing ProjectCo) before the Province can terminate the PA. Upon termination, ProjectCo may be

entitled to compensation from the Province under the PA, which is a distinctive feature of PPPs. The size of

such payment depends on the party responsible for the event and the circumstances leading to the termination.

If ProjectCo is not the cause of the termination, compensation is generally expected to be sufficient to at least

repay senior debt and cover accrued interest, make-whole premiums and ProjectCo costs resulting from the

termination.

Termination can be requested in the following situations:

By the Province: For convenience; damage to either facility costing more than $5 million (index-linked)

and the Province elects not to reinstate; third-party liability risk becoming uninsurable; or upon an

unremedied ProjectCo Event of Default, which includes, among other scenarios, failure to pay any amount

due to the Province or to maintain insurance; insolvency of ProjectCo; abandonment of the project; failure

to achieve Service Commencement by the Longstop Date (365 days after the originally targeted date); a

final determination made pursuant to a dispute resolution within 12 months prior to Service

Commencement that Service Commencement is not reasonably expected before the Longstop Date;

prohibited assignment or change of control; breach of the refinancing rules; accumulation of deductions of

$1 Million (index linked) or more; or a breach related to security sensitive work.

By ProjectCo: For damage to either facility costing more than $5 million (index-linked), when such costs

are not covered by insurance proceeds and are expected to breach ProjectCo’s financial covenants; or for an

unremedied Province Event of Default, which includes failure to pay any amount due to ProjectCo within

ten business days; expropriation of ProjectCo by the Province or any Government Authority; a breach of

any term under the PA that has an adverse effect on the performance of the construction work of the

services; or a breach of limitations on assignment.

By Either Party for No-Fault: For a Force Majeure or Rrelief Event continuing for 180 days, for complete

or substantial destruction of the facility if the cost of repairs exceeds insurance coverage or for uncollectible

insurance receivables.

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In addition to the above-mentioned compensation, DBRS notes that upon a termination triggered by the DB

Contractor or the Service Provider, ProjectCo would be entitled to compensation from that contractor for

damages incurred, including the cost of replacing the contractor subject to the contract’s liability cap.

Key Features of the Trust Indenture

Series A Senior Notes: $114.5 million senior bond maturing on March 31, 2046, which is six months before

the expiry of the PA. The Bonds initially pay interest only, with quarterly principal and interest payments

beginning approximately three months after the target service commencement date .

Ranking: The Short-Term Senior Bonds, the Series A Long-Term Senior Bonds and the Series B Long-

Term Senior Bonds rank equally and pari passu.

Security: First-ranking security interest in all property of ProjectCo and project accounts. The security

also includes a first-ranking security interest in all of ProjectCo’s rights under all major agreements and

related performance security, licences and bank accounts, and in all property of the General Partner and in

the shares of ProjectCo and its General Partner.

Key Accounts

Senior Notes Proceeds Escrow Account: Account in the name of ProjectCo but controlled by the Trustee

under the Blocked Account Agreement and holding the senior notes proceeds. Funds will be released monthly

to the Funding Account in accordance to the pre-established drawdown schedule to pay for project costs.

Funding Account: Account in the name of ProjectCo but controlled by the Trustee under the Blocked Account

Agreement. The Funding Account will receive the senior bond proceeds, amounts transferred from the Equity

Commitment Accounts and the Construction Progress Payments from the Province. Funds will be used to

service the senior debt during construction and will be released monthly to the Construction Account to pay

for the work, provided that certain conditions are met, including the LTA certifying, among other things, that

progress does not vary materially from the construction schedule and Service Commencement is likely to

occur on or prior to the Creditor’s Longstop Date (three months before the PA’s Longstop Date), the costs

billed to date are for actual work performed and in aggregate are consistent with the financial model, and there

is no funding shortfall. The remaining balance in the Funding Account will be transferred to the Proceeds

Account.

Construction Account: Account in the name of ProjectCo but controlled by the Trustee under the Blocked

Account Agreement and holding draws from the Funding Account to pay the DB Contractor.

Proceeds Accounts: Account in the name of ProjectCo but controlled by the Trustee under the Blocked

Account Agreement and holding any releases from the Funding Account and all payment from the

Province and any other revenues received by ProjectCo. Following substantial completion, funds in the

Proceeds Accounts shall be distributed in accordance with the trust indenture waterfall provisions as

follows: (1) transaction and administrative expenses; (2) ProjectCo costs and payments under the

Cause of

Termination Senior Debt Equity Other Adjustments

- principal plus: staff termination costs, contractor breakage costs, etc.

- accrued interest less: bank balances, insurance proceeds and the market

- make w hole value of ProjectCo's net assets (if any).

- make w hole

- principal plus: staff termination costs and contractor breakage costs.

- accrued interest and any other amounts ow ed by the Province

- makew hole less: any BC Hydro set-offs.

** Two or more capable bidders.

* Damage to the facility in excess $5 million not covered by insurance and resulting in breach of ProjectCo's financial covenants; insufficient insurance upon complete or substantial

destruction, uncollectible insurance receivables, risks becoming uninsurable, termination for Relief Event or Force M ajeure. Resulting termination payment shall be at least equal to

senior debt plus staff termination costs and contractor losses.

Province Default

or

Convenience

ProjectCo Default

If liquid market** and the Crow n opts to re-tender: highest compliant bid price less re-tendering costs and set-offs.

Otherw ise: PV of all payments to be received from the Province during the term of the PA net of all costs necessary to complete the

facility and provide all services during the operating phase or replace the service provicer, and net of contingency for potential cost

overruns, costs to rectify the w orks or restore services .

No-Fault

Termination *

- amount w hich w hen added to all prior

dividends that provides an internal rate

of return equal to the f inancial model

equity IRR or Fair Market Value of the

then issued outstanding amounts

under Junior Debt

- capital net of distributions up to

termination

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Services Contract; (3) senior debt servicing; (4) any required reserve top-up (e.g,. DSRA); (5) payments

under the Project Parties Finance Services Agreement and the Project Parties Management Services

Agreement; (6) ProjectCo overhead; and, if the Restricted Payment Conditions have been satisfied, (7) any

scheduled payments on subordinated debt, the Service Commencement Management Fee and dividends to

equity sponsors. If the Restricted Payment Conditions are not satisfied, the remaining funds will be paid to

the Equity Lock-Up Account and shall be available to cover any shortfalls in the waterfall.

Senior Debt Service Reserve Account: Account in the name of ProjectCo but controlled by the Trustee

under the Blocked Account Agreement and funded at service commencement in an amount sufficient to

cover six months of scheduled senior debt servicing (principal and interest).

Additional Senior Indebtedness: Permitted subject to Senior Noteholders’ consent.

Restricted Payment Conditions: Dividends, subordinated debt servicing and other restricted payments are

permitted only if, among other things, no Default or Event of Default has occurred and is continuing, Service

Commencement has been achieved, the first principal repayment on the Senior Notes has occurred, the 12-

month historical and projected senior DSCRs are at least 1.15 times, and all reserves are fully funded as

required.

Key Negative Covenants: (1) No modification of material project agreements without consent of the

Trustee; (2) no new Encumbrances, other than Permitted Encumbrances; (3) no new debt except for

Permitted Indebtedness; (4) limitations on asset sales; (5) no new business without consent of the Trustee;

(6) no equity distribution if the relevant test is failed; (7) no amalgamation, merger or reorganization; and

(8) no accounts other than the Project Accounts.

Key Events of Default (grace period)

Failure to pay principal, interest or any other amount when due (three business days if not related to the

Senior Notes).

Failure to comply with any other (non-payment-related) covenant under the financing documents (15

business days or a longer period acceptable to the Senior Noteholders).

Abandonment of the project during construction for two continuous weeks except if caused by a

supervening event (nil).

Termination of any Financing Document unless, if related to the design-build guarantor or service

guarantor, the party causing the termination is replaced.

Termination of any major project agreement other than the PA (including the DB Agreement and the

Services Contract) unless it is replaced by a contract with a contractor acceptable to the Senior Noteholders.

Unremedied Event of Default under the PA or notice to terminate the PA from Province/nil.

Historical or projected senior DSCR below 1.0 time (nil).

Insolvency of ProjectCo, the DB Contractor or its guarantor, the Service Provider or its guarantor. However,

it will not be an Event of Default if in the event of the insolvency of the DB Contractor or its guarantor,

ProjectCo develops and implements a remedial plan acceptable to the Senior Noteholders within the

permitted timeframe. In addition, it will not be an Event of Default if, in the event of the insolvency of the

Service Provider or its guarantor, ProjectCo replaces the Service Provider with a contractor acceptable to

the Senior Noteholders and there is no interruption to the delivery of services.

Service Commencement not achieved by the Creditors’ Longstop Date, which is three months before the

Longstop Date under the PA (nil).

Any party defaults in its obligation under a major project agreement and the default is likely to have a

Material Adverse Effect on the project, unless such major project agreement (other than the PA) is replaced

within the permitted time period by a contract with a contractor and on such terms as are acceptable to the

Senior Noteholders.

Page 18: Okanagan Correctional Centre Bond Rating

18 Public Finance: Infrastructure

Plenary Justice

Okanagan LP

Report Date:

March 21, 2014

Rating

Debt Rating Rating Action Trend

Series A Senior Notes A (low) Provisional Rating – Finalized Stable

Related Research

Rating Public-Private Partnerships, February 28, 2014.

Note:

All figures are in Canadian dollars unless otherwise noted.

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