Morningstar DBRS Confirms Texas Transportation Commission - IH 35E Managed Lanes Project's TIFIA Loan at BBB (high) With a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed its credit rating on the 35.5-year $285 million revenue loan (the TIFIA Loan), which was issued under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program to fund part of the Texas Department of Transportation's (TxDOT) Interstate Highway 35 East Managed Lanes Project (the Project), at BBB (high) with a Stable trend. The Project corridor is approximately 28 miles, of which the managed lanes are approximately 17 miles.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation stems from the Project's solid financial performance in 2023 on the backdrop of a year-over-year traffic increase of more than 13% and a toll revenue increase of more than 21%. Total traffic (cars and trucks) in 2023 reached more than 32.5 million, an increase of more than 12% compared with the traffic level in 2019.

In 2023, car traffic exceeded the level in 2019. Additionally, the number of toll transactions associated with cars increased to 29.9 million in 2023, an increase of more than 13% compared with the level in 2022. From a traffic recovery perspective, it exceeded the 2019 level by more than 8%.

Over the past couple of years, truck traffic has become a larger proportion of total traffic than expected (at about 8% in 2023 compared with the expected 5%). Truck traffic increased materially in 2021-22, with an average annual growth rate of about 31%. It reached 2.6 million in 2023, an increase of 7% compared with the level in 2022. Despite slower growth in 2023, the number of trucks is still significantly higher than the 2019 level of about 1.4 million.

Correspondingly, the Project generated toll revenue of about $36.9 million in 2023, an increase of about 23% compared with 2019. The Project also received higher-than-expected interest income in 2023.

As a result, the Project's debt service coverage ratio (DSCR) of 3.9 times (x) for the 12 months ended November 30, 2023, was materially higher than Morningstar DBRS' base-case forecast of about 3.5x. Despite the better-than-expected financial performance in 2023, the Project's traffic and toll revenue projection will still be negatively affected by the Phase 2 project. Once the Phase 2 project is complete, it is expected to reduce traffic on the Project, resulting in a minimum DSCR of 2.4x in 2035.

The Phase 2 project is part of the Texas Clear Lanes initiative, which is a statewide strategic plan to provide congestion relief through nontolled roads that is focused on the five largest metropolitan areas in Texas. Because the Project is owned and operated by TxDOT, there are no provisions in the TIFIA Loan agreement that prohibit TxDOT from improving traffic congestion in the catchment area. Construction of Phase 2 began in 2022 and is currently still on track to be completed by the end of 2025 and open for traffic in 2026.

The Project continues to maintain robust liquidity with about $89.7 million in reserves and other funds (e.g., TIFIA Debt Reserve Fund, Operation and Maintenance (O&M) Fund, Major Maintenance Fund, General Fund, Rate Stabilization Fund, and Revenue Fund) as of May 31, 2024.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action if traffic and toll revenues increase significantly over time, leading to a substantial improvement in the projected credit metrics.

Morningstar DBRS could take a negative credit rating action if long-term traffic and toll revenue projections weaken more than anticipated, resulting in compressed financial metrics that are no longer commensurate with the current credit rating. Furthermore, a change in tolling policy, a material improvement to local road and highway networks, or other events that substantially depress traffic and revenues could result in a negative credit rating action.

FINANCIAL OUTLOOK
Barring any unexpected events that may dampen traffic volume considerably, Morningstar DBRS forecasts the Project's DSCR will remain above 3.0x for the next several years based on the current traffic projection and the TIFIA debt service schedule (mandatory and scheduled interest payments only from May 2022 to November 2026). TIFIA debt service is expected to increase after 2026 as the mandatory and scheduled principal payments start in May 2027.

Nonetheless, the Project's financial risk assessment is underpinned by a projected minimum DSCR of 2.4x in 2035. Furthermore, Morningstar DBRS also assesses the Project to have relatively strong revenue growth breakeven resiliency throughout the TIFIA Loan's term.

CREDIT RATING RATIONALE
The credit rating is supported by the following strengths: (1) TxDOT's ultimate retention of construction, O&M, and lifecycle risks; (2) flexible debt servicing schedule (the TIFIA Loan agreement allows a portion of the debt servicing obligations to be deferred if toll revenues are insufficient); (3) large and prosperous service region; and (4) fee-setting autonomy. Conversely, the credit rating is challenged by the following factors: (1) traffic forecasting errors; (2) exposure to economic conditions; (3) no covenant preventing competing highways; and (4) limited legislation enforcing toll collection.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Driver Factors
In the analysis of Texas Transportation Commission - IH 35E Managed Lanes Project, the Rating Driver factors listed in Part Two of the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of Texas Transportation Commission - IH 35E Managed Lanes Project, the following FRA factor listed in Part Two of the methodology was considered more important: DSCR.

(C) Weighting of the Rating Driver and the FRA
In the analysis of Texas Transportation Commission - IH 35E Managed Lanes Project, the FRA carries greater weight than the Rating Driver.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (April 15, 2024),
https://dbrs.morningstar.com/research/431193

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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