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 (I) 35 East (35E) Managed Lanes (MLs) Project (the Project), at BBB (high) with a Stable trend. The Project corridor is approximately 28 miles, of which the MLs are approximately 17 miles.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation stems from the Project's continued solid financial performance in 2024 on the backdrop of a year-over-year total traffic (cars and trucks) increase of more than 5% and a toll revenue increase of more than 10%. Car traffic in 2024 reached more than 31.3 million, an increase of nearly 5% compared with 2023. However, Morningstar DBRS notes that the annual car traffic growth rate has slowed considerably, compared with the annual average growth rate of about 19% in 2021-23. Morningstar DBRS believes the annual traffic growth rate has started to normalize after a period of significant traffic recovery and growth in 2021-23.

Over the past several years, truck traffic has become a larger proportion of total traffic than expected (at about 8% in 2024 compared with the expected 5%). Truck traffic was not negatively affected by the coronavirus pandemic and it grew modestly in 2020, followed by a material increase in truck traffic in 2021-22, with an annual average growth rate of about 31%. This positive growth momentum continued in 2023-24, albeit less significantly, with an annual average growth rate of about 8%. Truck traffic reached 2.8 million in 2024, an increase of 8% compared with 2023.

Correspondingly, the Project generated toll revenue of about $40.5 million in 2024, an increase of more than 10% compared with 2023. In addition, the Project also received higher-than-expected interest income in 2024. As a result, the Project's TIFIA debt service coverage ratio (DSCR) of about 4.2 times (x) for the 12 months ended November 30, 2024, was materially higher than Morningstar DBRS' base-case forecast of about 3.6x.

Total traffic in the first four months of 2025 declined by about -2% compared with the same period in 2024. Car and truck traffic declined by about -1% and -5%, respectively. Despite the decline in total traffic, toll revenue increased by more than 5% in the first four months of 2025 compared with the same period in 2024. In addition, total traffic and toll revenue during this period still exceeded Morningstar DBRS' base-case projection by about 3% and more than 8%, respectively.

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 reducing 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.

Morningstar DBRS' base-case scenario incorporates the Phase 2 project impact on the traffic and toll revenue of the Project. Coupled with a rising TIFIA debt service profile (until the final TIFIA scheduled principal payment is paid in 2042) and projected higher operation and maintenance (O&M) expense, Morningstar DBRS expects the Project's TIFIA DSCR to decline to a minimum level of about 2.4x in May 2035.

The Project continues to maintain robust liquidity with over $130 million in reserves and other funds (e.g., TIFIA Debt Reserve Fund, O&M Fund, Major Maintenance Fund, General Fund, Rate Stabilization Fund, and Revenue Fund) as of May 31, 2025.

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. However, 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 TIFIA DSCR will remain higher than 3.0x for the next several years based on the current traffic projection (incorporated the impact from the Phase 2 project) 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 TIFIA 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 factor(s) 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 Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196.

CREDIT RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Credit Rating Drivers
In the analysis of the Project, the Credit Rating Drivers listed in Part Two of the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Project, the following FRA factor listed in Part Two of the methodology was considered more important: DSCR.

(C) Weighting of the Credit Rating Drivers and the FRA
In the analysis of the Project, the FRA carries greater weight than the Credit Rating Drivers.

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 (August 13, 2024) https://dbrs.morningstar.com/research/437820

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196

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.

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