Morningstar DBRS Confirms Credit Ratings on High-Performance Transportation Enterprise - C-470 Express Lanes Project at BBB, Stable Trends

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings at BBB on the Senior Revenue Bonds and the TIFIA Loan issued under the Transportation Infrastructure Finance and Innovation Act program (TIFIA) to partially fund the Colorado Department of Transportation's (CDOT) Colorado 470 (C-470) express lanes project (the Project). Both trends are Stable.

The borrower is Colorado High-Performance Transportation Enterprise (HPTE), a government-owned business within and division of CDOT, created by the Funding Advancements for Surface Transportation and Economic Recovery Act of 2009 (FASTER) and structured as an enterprise, pursuant to FASTER, to be exempt from the Colorado Taxpayer Bill of Rights laws limiting public indebtedness. The HPTE is now doing business as the Colorado Transportation Investment Office (CTIO). The enterprise refers to itself as CTIO now and, in the future, will use CTIO for all legislative, legal, and contractual documents.

KEY CREDIT RATING CONSIDERATIONS
CDOT's direct involvement supports the Project's credit ratings, but they are constrained by the uncertainty related to traffic volume levels on the managed lanes and the risk that traffic materially underperforms projections. Under the contractual structure of the Project, CDOT is responsible for the performance of operations and maintenance (O&M) and lifecycle work on the corridor and, in the event toll revenues are insufficient to support those works, CDOT would ultimately be responsible for any shortfall funding.

The Project achieved toll commencement on August 18, 2020, but traffic on C-470 has so far underperformed its initial forecast. Construction delays resulting in the roadway opening at the height of the COVID-19 pandemic, the overall shift in traffic patterns post pandemic because of hybrid work schedules, and the related reduction in commuter traffic are the key factors driving this underperformance.

Favorably, for calendar year 2023, transaction volumes and toll revenue were up by 33.0% and 39.4% year over year (YOY), respectively. However, even with improved performance, transaction volumes and collected toll revenue are below the original forecast by 15.0% and 30.0%, respectively, for 2023. The CTIO recently implemented the Express Lanes Safety Enforcement Program (the Program), which allows the CTIO to levy civil penalties for drivers that ingress/egress illegally into/out of the express lanes. Since its implementation in September 2023, the Program has resulted in increased pledged revenues and reduced leakage. Per the CTIO 2023 Coverage Certificate, pledged revenues, including civil penalty revenues, totaled $16.8 million in 2023, which is approximately 16.0% less than the original forecast but substantially greater than 2022 pledged revenues of $10.4 million.

Also driving the increase in pledged revenues are implemented toll rate adjustments. The CTIO's board approved toll rate adjustments in June 2023 that took effect on August 1, 2023. The new rate schedule results in an increase of 5.6% on average for automatic vehicle identification and license plate toll rates because of a combination of inflation, increased equipment maintenance costs, and increasing toll transaction processing costs.

Toll volume and transaction revenues continue to recover in 2024, with YTD 2024 transactions and toll revenue through April 30 increasing approximately 19.0% and 22.0%, respectively, as compared with the same period in 2023.

The Project has additional liquidity available from multiple sources that the CTIO can draw on in the event cash flow after debt service (CFADS) is insufficient to fully cover O&M in any given year. As of the end of June 2024, these sources included an undrawn ramp-up reserve account (RURA) of $6.5 million, a senior debt service reserve account (DSRA) of $4.4 million, a TIFIA DSRA of $3.0 million, an O&M reserve account of $5.8 million, and a surplus account of $3.0 million.

A subordinate O&M backup loan can also provide liquidity, if needed. This loan can be used to cover O&M and lifecycle expenses, and any draws from the loan to cover O&M cost overruns will not trigger an event of default. CDOT also approved a $4.0 million line of credit to fund O&M loan draws as needed. A $750,000 draw on the O&M backup loan was made on June 30, 2023, and deposited into the Project O&M account. It will be repaid from the surplus account in future periods in the amount of principal plus accrued interest. This was done to meet the all-obligations coverage test of 1.0 times (x) as part of the coverage metrics in the master trust indenture. Amounts in the surplus account are not included in the all-obligations coverage test; however, surplus amounts can be used to repay the O&M backup loan draw and the accrued interest. Any amounts drawn from the O&M backup loan have a maximum repayment period of 40 years.

CREDIT RATING DRIVERS
Morningstar DBRS could take a negative credit rating action with continued underperformance in transaction volume and revenues, which lead to financial metrics that no longer correspond with the current credit ratings, although this is unlikely. Morningstar DBRS is not likely to take a positive credit rating action in the near term because of the managed-lanes nature of the asset and the forecast financial metrics.

FINANCIAL OUTLOOK
Recovery from the COVID-19 pandemic is ongoing on overall toll road and express-lane traffic in the state of Colorado. According to CDM Smith, average weekday daily traffic (AWDT) for all C-470 lanes in 2023 was relatively stable and comparable with 2022. AWDT volumes in 2023 on C-470 west of U.S. Route 85/Santa Fe Drive and on C-470 east of Quebec Street slightly exceeded 2022 levels, which was the previous "high traffic" mark. For Q1 2024, AWDT volumes continued to grow and slightly exceeded Q1 2023 levels. Generally, Morningstar DBRS expects gradual traffic volume recovery in Colorado as people return to offices and overall travel returns to pre-pandemic levels by the end of 2024.

The Project's total debt service coverage ratio (DSCR) per the CTIO Coverage Certificate for the 12-month period ended December 31, 2023, was 2.86x, including the RURA of $6.3 million; excluding the RURA, the DSCR was 2.08x. Pledged revenues for the 12-month period were $16.8 million, exceeding Morningstar DBRS' forecasted CFADS of $11.2 million for the year, with the strong performance driven by a rate increase and revenues from civil penalties not previous forecasted.

CREDIT RATING RATIONALE
The credit ratings reflect the Project's financial outlook, underpinned by strengths that include (1) O&M and lifecycle risks ultimately retained by CDOT, (2) a government-owned business as the borrower, (3) a flexible TIFIA debt servicing schedule, (4) a large and prosperous service region, and (5) CTIO's fee-setting ability. The Project's challenges include (1) volume risk, (2) traffic forecasting error, (3) exposure to economic conditions, and (4) no covenant preventing competing highways.

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), https://dbrs.morningstar.com/research/427030.

RATING DRIVER ASSESSMENT AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Driver Factors
In the analysis of High-Performance Transportation Enterprise - C-470 Express Lanes Project, the Rating Driver factors listed in the volume-based section of the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of High-Performance Transportation Enterprise - C-470 Express Lanes Project, the following FRA factor listed in the volume-based section of the methodology was considered more important: minimum DSCR.

(C) Weighting of the Rating Driver Factors and the FRA
In the analysis of High-Performance Transportation Enterprise - C-470 Express Lanes Project, the FRA carries greater weight than the Rating Driver factors.

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 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 criteria has 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 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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