DBRS Morningstar Confirms Rating of BBB (low) with a Stable Trend on San Bernardino County Transportation Authority I-10 Express Lanes

DBRS Limited (DBRS Morningstar) confirmed its rating of BBB (low) with a Stable trend on the $225.0 million TIFIA Loan raised by San Bernardino County Transportation Authority (SBCTA) under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program to partially fund an expansion of approximately 10 miles of the Interstate 10 (I-10) highway in San Bernardino, California (the Project or Contract 1). SBCTA acts as the County Transportation Commission of San Bernardino County, providing transportation planning and programming. The Project introduces the first tolled lanes in San Bernardino County and will have two tolled lanes and four general-purpose lanes in each direction. The Project has a 4.3-year construction period, and the land for the express lanes is leased to SBCTA by the California Department of Transportation for a 50-year operating period.

The Project is different from typical public-private partnership (PPP) projects as it does not feature risk transfer to a special-purpose vehicle generally found in PPP transactions. DBRS Morningstar considered the construction phase, which involves the expansion of existing highway to accommodate express lanes, along with eight bridge replacements and the widening of 12 other structures, to be of low complexity. The construction obligations are being completed by The Lane-Security Paving Joint Venture, a joint venture including Lane Construction Corp. (60%) and Security Paving Company, Inc. (40%), each with joint and several liability.

The construction stage so far has progressed well in the last year, though most of the planned work was on design and right of way (RoW) acquisition. RoW agreements are 99% complete and utility agreements are 40% complete. As of April 30, 2020, 21.6% of the Project was complete (as measured by project cost spend). The design builder works are 14.7% complete. TransCore, LP is the Toll Services Provider responsible for the design, construction, and maintenance of the toll systems for the initial period, which comprises only approximately 2% of Project Costs.

The Coronavirus Disease (COVID-19) has not affected the construction stage so far, other than minor delays in the approval process, which DBRS Morningstar does not consider material. Construction activities have been deemed an essential function in California and have continued uninterrupted. Demolition work began at the end of May, starting with the Sultana Avenue bridge. During the next few months, design for all the segments of the highway are expected to be completed. Work on the reconstruction of certain bridges (Euclid Bridge, Monte Visa Bridge, and Sultana Avenue), associated utility relocation, and widening of certain ramps is planned for later in the year. Construction works are on schedule and are scheduled to reach substantial completion on July 3, 2023.

Coronavirus has affected traffic on the corridor, though the impact has been less than that in other regions, and there has been some recovery even though stay-at-home orders are still in place. While traffic volumes at two cross sections in the corridor were lower by 36% to 40% in April 2020 as compared to the previous year, the volumes were lower by only 18% to 24% in May 2020. As the I-10 corridor has a high share of warehousing and logistics business sites, truck volumes with growth in e-commerce, along with shifts in travel patterns from high density travel modes, is likely cushioning the negative impact of coronavirus.

DBRS Morningstar has not stressed the long-term traffic forecast made at the time of financial close in 2020 for the impact of the coronavirus pandemic and notes that the express lanes are expected to be opened only in 2023. CDM Smith, the traffic forecaster, has noted that telecommuting trends could increase, though Southern California already has history of telecommuting and reduced week programs, which may buffer such impacts.

The Measure I receipt expectation is now 20% lower than expected in F2021, though it is not expected to affect the Project as projects currently under construction take funding priority over planned future projects. Upon completion of construction, traffic volumes significantly lower than expected could lead to a downgrade in the rating. An upgrade is currently viewed as unlikely due to the managed-lanes nature of the asset and the forecast financial metrics.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Public-Private Partnerships (August 23, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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