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

DBRS Limited (DBRS Morningstar) confirmed the ratings of the Senior Revenue Bonds and the TIFIA Loan issued under the Transportation Infrastructure Finance and Innovation Act program (TIFIA) to partially fund the Colorado 470 (C-470) express lanes project (the Project or the Road) of the Colorado Department of Transportation (CDOT) at BBB. All trends remain Stable. The borrower is Colorado High-Performance Transportation Enterprise (HPTE), a government-owned business within, and a 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 Colorado Taxpayer Bill of Rights (TABOR) laws limiting public indebtedness. The rating is supported by CDOT’s direct involvement in the Project but bound by the uncertainty related to traffic volume levels on the managed lanes and the risk that traffic materially underperforms projections.

Recovery from the Coronavirus Disease (COVID-19) pandemic continues on overall toll road and express-lane traffic in the state of Colorado. While most of the neighboring routes of the C-470 corridor experienced recovery to volume demand traffic, the spread of the omicron variant saw some demand pressure toward the end of 2021. Overall recovery continued in early 2022; for example, toll transaction volumes and revenues for the E-470, a fully tolled corridor that connects the C-470 to the Denver International Airport, were roughly 8% lower from January 2022 to April 2022 compared with 2019 on a monthly basis. On the U.S. Route 36 corridor, which connects downtown Denver to Boulder, Colorado, volumes for January and February 2022 were roughly 60% of 2019 volumes. Toll transaction volumes on the I-25 Segment 2 managed lanes recovered to 2019 levels by April 2021 and traffic growth is roughly 10% from 2019 traffic volume levels. Generally, DBRS Morningstar expects gradual traffic volume recovery for Colorado as people return to offices and overall travel returns to pre-pandemic levels by 2024. Wilson & Company completed an Engineer’s Report in September 2021 as part of an annual inspection of the facility. The report roadway and roadside elements including pavement condition, guardrail and median barrier, delineators and shoulder drop-off condition and median infield inlets. All findings for the new facility, including cleaning inlets, sweeping, and some concrete slope paving, were relatively minor and no material deficiencies were noted. The Colorado Transportation Investment Office (CTIO) Board approved toll rate adjustments, which will take effect in July. The new rate schedule is designed to align rates with exhibited demand patterns, resulting in marginal toll rate increases and decreases during certain periods.

The Project achieved toll commencement on August 18, 2020. C-470 traffic has been depressed since toll commencement was achieved and was below forecast transaction volumes by 16% on average and below revenue forecasts by $1.3 million, or 38%, in calendar year 2021. Additional liquidity is available in the form of the Ramp-Up Reserve Account (RURA) of $6.0 million, senior debt service reserve account (DSRA) of $4.0 million, TIFIA DSRA of $2.7 million, and the operations and maintenance (O&M) reserve account of $2.0 million. CTIO also saw moderate savings on O&M costs relative to the budget, which was revised to reflect lower transaction processing expenses during the pandemic. In the event that cash flow after debt service is insufficient to fully cover O&M in any given year, liquidity could also be available, if needed, from a subordinate O&M backup loan. The O&M backup loan can be used to cover O&M and lifecycle expenses; draws from the loan to cover O&M cost overruns do not trigger an event of default (EOD).

The long-term forecast for the Project has not been revised pending additional performance data and a return to normalized demand following pandemic recovery. H1 2022 revenue was higher by 9% when compared with H2 2021 as corridor volume demand continues to recover. CTIO set a revenue budget based on a 10% increase to current fiscal year 2021–22 monthly collections. CTIO will track monthly actuals against this budget and adjust if needed as part of the budget amendment process. At this time, CTIO expects forecast volumes and revenue to return by the end of FY 2024 with sufficient liquidity expected to carry through to the originally forecast levels, which is consistent with DBRS Morningstar’s expectations.

Under CTIO revenue assumptions for calendar year 2022, the debt service coverage ratios (DSCRs) are estimated at 1.20 times (x) and 2.58x for 2022 and 2023, respectively, when the ramp-up reserve of $6.0 million in 2023 is considered. DBRS Morningstar notes that, while the $6.0 million Ramp-Up Reserve Account is considered to be drawn in 2023 for comparative purposes under both the CTIO case and the DBRS Morningstar base case, CTIO does not expect to draw on any amounts from the account during the ramp-up period.

The DBRS Morningstar base case assumes underlying traffic volume and CTIO revenue assumptions for the remainder of 2022 that result in a DSCR of 1.20x; however, DBRS Morningstar estimates a 15% reduction in forecast toll revenues in 2023 and beyond, from the original forecast, resulting in a DSCR of 2.31x in 2023, with the full amount of the ramp-up reserve assumed to be drawn in 2023. While the pandemic has placed more pressure than expected on traffic volumes and revenue since toll commencement in 2020, the availability of the ramp-up reserve liquidity over the ramp-up period, along with projected revenue resiliency, are still supportive of the current ratings. Note that the Master Trust Indenture excludes CDOT contributions in the calculation of DSCR but includes the ramp-up reserve balance of $6.0 million, which is available during the ramp-up period that ends in 2024. DBRS Morningstar notes that, as per the Master Trust Indenture, coverage ratios are tested starting from the first day of the first full fiscal year following the substantial completion date; therefore, the first reporting period is for the 12-month period ending June 30, 2022, to be released in August 2022. DBRS Morningstar will continue to monitor traffic volumes, and significantly lower-than-expected volumes in the near term or lower forecast volumes in the medium to long term could lead to a negative rating action. DBRS Morningstar currently views an upgrade as unlikely because of the managed-lanes nature of the asset and the forecast financial metrics.

ENVIRONMENTAL, SOCIAL, 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 DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2021; https://www.dbrsmorningstar.com/research/383244), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577