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 BBB on both 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). 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 the Colorado Taxpayer Bill of Rights 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 is continuing on overall toll road and express-lane traffic in the state of Colorado. According to CDM Smith, average weekday daily traffic (AWDT) during peak and shoulder periods was up by 4.0% for C-470 west of U.S. Route 85/Santa Fe Drive and 1.4% east of Quebec Street in Q4 2022 compared with Q4 2021. Generally, DBRS Morningstar expects gradual traffic volume recovery in Colorado as people return to offices and overall travel returns to pre-pandemic levels by 2024. The HPTE is now doing business as the Colorado Transportation Investment Office (CTIO). CTIO is how the enterprise refers to itself now, and in the future the CTIO name will be used for all legislative, legal, and contractual documents. The CTIO Board approved toll rate adjustments in June 2023 that will take effect on August 1, 2023. The new rate schedule is designed to align rates with exhibited demand patterns, resulting in marginal toll rate increases during peak periods.

The Project achieved toll commencement on August 18, 2020. C-470 traffic has been depressed since toll commencement was achieved, however, for the year to date (YTD) June 2023, transaction volumes and toll revenue are up by 18% and 30%, respectively, when compared with YTD June 2022 (actual transaction volumes up to April 2023 and toll revenue up to May 2023). As a result of delays in construction and toll revenue commencement having been achieved during the pandemic, operational and financial performance is depressed compared with the original forecast. Transaction volumes and revenue are below forecast by 25% and 38%, respectively, for YTD June 2023 (actual transaction volumes up to April 2023 and toll revenue up to May 2023). Additional liquidity is available in the form of the undrawn Ramp-Up Reserve Account (RURA) of $6.2 million, senior debt service reserve account (DSRA) of $4.0 million, TIFIA DSRA of $2.8 million, and the operations and maintenance (O&M) reserve account of $2.6 million. The Surplus Account is $1.2 million at the end of May 2023. Should cash flow after debt service be 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. As well, CDOT has approved a line of credit in the amount of $4.0 million 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 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.

The long-term forecast for the Project has not been revised pending additional performance data and the return to normalized demand following pandemic recovery. While the process of gathering data to recast the original Traffic and Revenue forecast continues, CDM Smith has provided periodic C-470 corridor trend analysis. The most recent C-470 Express Lanes Quarterly report indicates that, since revenue commencement in August 2022, traffic volume recovery continues; however, while transactions and toll revenues through December 2022 are higher than in the same period in 2021, they remain below the 2016 forecasts. Toll rate changes were implemented at the end of July 2022, with resulting increases in transactions and revenues for the remainder of the year. Furthermore, peak period traffic has generally increased in Q4 2022 when compared with the prior year and CDM Smith indicates the trajectory of increased levels of general-purpose lane congestion during peak periods will continue, thus encouraging more use of the C 470 Express Lanes. CDM Smith also notes that, because of the inelasticity of tolls, gains in traffic were observed after the rise in toll price in July 2022, which suggests there is some potential to increase toll rates during peak periods to capture additional revenue without significantly affecting existing transactions.

The total debt service coverage ratio (DSCR), per the CTIO Coverage Certificate as at December 31, 2022, was 2.03x, which includes the RURA of $6.1 million. Under CTIO revenue assumptions, the DSCRs are estimated at 1.47x and 1.98x for 2023 and 2024, respectively, when the RURA of $6.1 million in 2024 is considered. DBRS Morningstar notes that while the $6.1 million RURA is considered as being drawn in 2024 for comparative purposes under the CTIO case, CTIO does not expect to draw 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 2023 that result in a DSCR of 1.47x; however, DBRS Morningstar estimates a 15% reduction in the original T&R forecast toll revenues for 2024 and beyond, resulting in a minimum DSCR of 1.50x in 2024 with the assistance of drawing only $3 million under the RURA. DBRS Morningstar will continue to monitor traffic volumes; significantly lower-than-expected traffic volumes 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 factors 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology: Global Methodology for Rating Public-Private Partnerships (https://www.dbrsmorningstar.com/research/402155; August 30, 2022).

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

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 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. DBRS Morningstar 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. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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