DBRS Finalizes Provisional Ratings on High-Performance Transportation Enterprise – C-470 Express Lanes Project

DBRS Limited (DBRS) has today finalized its provisional ratings of BBB with Stable trends on the 40-year $161.8 million Senior Revenue Bonds and the 35-year $107.0 million TIFIA Loan issued under the Transportation Infrastructure Finance and Innovation Act program (TIFIA) to partially fund the C-470 express lanes project (the Project or the Road) of the Colorado Department of Transportation (CDOT). 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.

Project funding consists of the Senior Revenue Bonds, the TIFIA Loan and grant contributions from public sponsors. All public funds for the Project have been fully committed and allocated and CDOT will be responsible for performance of the roadway operating and maintenance (O&M) and lifecycle for the Express Lanes and will invoice HPTE for the related costs. In the event that revenues collected are insufficient, HPTE may request a subordinate O&M loan from CDOT to pay such costs. The holders of the Senior Revenue Bonds and TIFIA Loan only have recourse to the cash flows generated by the Project (as well as related Project bank accounts), not to CDOT or HPTE. Furthermore, the Project differs from a typical public-private partnership (PPP) in that it does not have the prescriptive legal/contractual structure, strict risk transfer to a special-purpose private vehicle or extensive performance requirements generally found in PPP transactions. Instead, the Project more closely resembles a U.S. market municipal financing closely linked to HPTE (a division of CDOT), which in DBRS’s view greatly limits the risk exposure of the holders of the senior obligations to completion delays, traffic uncertainty and toll collection that would otherwise be present. The C-470 is a commuter corridor serving a growing corporate base, including the Denver Technological Center, Centennial Airport and a catchment area with a growing corporate base. The C-470 southern corridor has seen regular annual increases in traffic over the past ten years, tempered by the 2007–2008 recession. Although travellers face considerable traffic during both the a.m. and p.m. peak hours both eastbound and westbound, the primary commuting pattern is eastbound during the a.m. peak and westbound during the p.m. peak. Material traffic volumes originate from residential areas near the corridor with travel to destinations along I-25, E-470 or the easternmost stretch of C-470.

The C-470 express lanes will operate as an open road, all-electronic corridor. The E-470 Public Highway Authority (the Toll Operator) will provide toll collection services for the Project under the Managed Lanes Tolling Services Agreement between HPTE and the Toll Operator. The Express Toll technology will feature interoperable transponders and license plate accounts with those of all other Colorado tolled facilities. Given the prevalence of tolling in the region, it is expected that a high proportion of users of the C-470 express lanes will already have transponders.

The construction phase is scheduled between May 1, 2016, and July 31, 2019, with design work having commenced in May 2016 and construction having begun in November 2016. The construction work generally consists of the following elements: the addition of two tolled express lanes westbound from I-25 to Colorado Boulevard; the addition of one tolled express lane westbound from Colorado Boulevard to Wadsworth Boulevard; the addition of one tolled express lane eastbound from just west of the Platte River to I-25; safety and operational improvements between I-25 and Quebec Street via adding direct-connect ramps from I-25 to the C-470 tolled express lanes; full reconstruction of a portion of the existing pavement; the addition of auxiliary lanes at select locations; improving portions of on-ramps and off-ramps to current standards (including ramp metering where appropriate); the widening of existing structures throughout the corridor; the replacement of bridges over the South Platte River; installation of water-quality features; installation of noise barriers; the addition of grade separations for the multi-use trail at Quebec Street and Colorado Boulevard; and the installation of tolling/Intelligent Transportation Systems elements. The length of the alignment is roughly 12 miles.

The Design-Build Contractor (the DB Contractor) is a joint venture consisting of Flatiron Constructors Inc. (Flatiron, 70%) and URS Energy & Construction Inc. (URS, 30%), the lead designer and a wholly owned subsidiary of AECOM Corporation, selected by CDOT to assume all design and construction obligations under a fixed-price, date-certain contract. Flatiron’s and URS’ obligations are guaranteed by their respective parent companies up to the limit of liability. DBRS assesses the construction task as being of low complexity with few challenging structures or elements.

The new toll express lanes are set to open to the public in August 2019, at which time toll revenues will be collected and deposited by the Toll Operator into the Transportation Special Fund held by the Treasurer and transferred to the Trustee on a monthly basis. CDOT will assume responsibility for the management, operation and maintenance of the Project once completed, with all related costs to be recovered from the Project’s toll revenues as per the cash flow waterfall prescribed in the Master Trust Indenture. Under the Toll Services Agreement with HPTE, the E-470 Public Highway Authority is responsible for toll revenue collection and enforcement processing. In accordance with the terms of the Interagency Agreement, HPTE is responsible to pay E-470 for toll-processing costs and State Patrol for enforcement-related costs from excess cash flow available after debt service, while CDOT is responsible for the payment of O&M-related costs. Should cash flow after debt service be insufficient to cover the payment of these costs, any unpaid balance will be funded by draws from a subordinate loan made available at the request of HPTE by CDOT (the Subordinated O&M Loan). The Subordinated O&M Loan will accrue interest and repayment will occur from future excess revenues after debt service and current O&M costs if and when available. The base case financing plan includes reserves to handle any potential shortfalls and does not contemplate the need for Subordinated O&M Loan draws. The maintenance standards for the Managed Lanes are fairly standard for a highway in this location and performance obligations are viewed as of low complexity and routine.

The total debt service coverage ratio (DSCR; gross toll revenues before O&M and lifecycle expenses/senior debt service and TIFIA service) is projected to start at 1.73x and escalate to 4.89x in 2044, when sculpted principal repayments on the Senior Revenue Bonds begin putting downward pressure on the DSCR to roughly 3.21x in 2045, assuming no future additional indebtedness. Thereafter, the ratio recovers over the remaining years of the term of the debt, supported by the expected growth and a growing share of total traffic captured by the Managed Lanes as congestion increases over time. DBRS’s standard break-even analysis indicates that the Project can absorb a 48% reduction in traffic revenue across the 2018–2058 forecast period before the DSCR reaches 1.0x, while O&M and lifecycle break-even is much stronger at 129% and 406%, respectively, viewed as relatively strong for the rating. DBRS views the break-evens as providing an adequate cushion to mitigate the considerable uncertainty pertaining to the traffic forecasts.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.