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Rating Action:

Moody's affirms Aa3 on toll road revenue bonds of Harris County, TX and revises outlook to positive

02 Jul 2014

Affects $1.93 billion senior lien bonds

New York, July 02, 2014 -- Moody's Investors Service affirms Aa3 on senior toll road revenue bonds of Harris County (TX) and revises rating outlook to positive from stable.

RATING RATIONALE

Strong traffic and revenue growth supported by a growing service area economy and toll rate increases that provide strong debt service coverage ratios (DSCRs) for both revenue and tax-supported toll road debt. Liquidity remains strong despite annual transfers of approximately $120 million to the county's mobility fund for road projects that are not tolled. No additional borrowing is currently planned for at least one year and on-going capital program projects are expected to be funded primarily with sizeable excess cash flow, though bonds may be issued if larger projects are undertaken. We note as a credit positive management's stated goal of keeping leverage below five times gross operating revenues.

OUTLOOK

The outlook for the toll road senior lien revenue bonds is positive based on strong expected growth in traffic due to service area expansion combined with demonstrated and expected on-going toll rate adjustments and limited debt requirements for capital expansion and maintenance. Moody's expects that traffic growth and revenues will continue to produce strong DSCRs on a net basis while the toll road system generates and maintains ample cash margins. We also expect no increase in the current level of transfers to the county to support non-toll road projects. An updated traffic and revenue forecast is expected in October 2014 and this combined with the planned toll rate increase in September as well as another year of operations will help inform our decision to move up on the rating.

What Could Change the Rating Up

Increased traffic and revenues which further improve net DSCRs and operating reserves coupled with prudent implementation of project capital plan projects could have a positive rating impact.

What Could Change the Rating Down

Declines in traffic and revenues due either to a downturn in the economy or failure to implement toll increases that erode debt service coverage margins and reserves/ financial margins as well as borrowing above the management goal of five times debt to operating revenues could place downward pressure on the rating.

STRENGTHS

*History of strong and growing DSCRs and ample cash balances supported by steady traffic and revenue growth and bolstered by annually indexed toll rates

*County is the third largest county in the US and one of the fastest growing with a large and growing economic base and above average employment growth that has recovered to pre-recession levels

* Demonstrated rate-setting willingness and ability with a policy to increase tolls annually by greater of 2% or CPI, with annual increases implemented since policy was adopted except for 2011

*Strong recent traffic and revenue growth due to economic growth and additional road capacity. The system had no material decline in traffic during the recession and through toll increases, which shows a high inelasticity of demand and acceptance of tolls by Houston area commuters. The system serves primarily commuter traffic, with no seasonal fluctuations

*Availability of an authorized but untapped property tax levy for general obligation debt service and a separate levy to make up any operating deficits provide additional flexibility

*Annual independent engineer's report shows system assets to be in good to excellent condition. Future capital projects will be undertaken on an as-needed basis and funded with cash flow or reserve balances, with no debt currently planned or needed, though pro-forma model shows some manageable additional debt issues in 2016 and 2018

*Strong liquidity, despite annual transfers to county on a subordinate basis to debt service and operating expenses

CHALLENGES

*The ability to make external transfers of surplus revenue for purposes other than toll road related projects could further weaken liquidity. However, transfers have historically been used for mobility projects in the county and no increases in the annual transfer amount is expected

*Due to concentration in energy industry, system is susceptible to negative economic cycles affecting that industry that could stall traffic growth and negatively impact financial operations, though we note diversification provided by expansion in the IT services and local government sectors

*Significant amount of outstanding debt (debt per roadway mile is above the median for Aa-rated toll roads)

*Management deferred implementation of the CPI-based toll increase in 2011 due to the slowing economy, but has since implemented increases in 2012 and 2013, including a 12.3% increase in 2012 that included the deferred increase from 2011, and another is planned in September 2014

The principal methodology used in this rating was Government Owned Toll Roads published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Matesanz
Senior Vice President
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Aa3 on toll road revenue bonds of Harris County, TX and revises outlook to positive
No Related Data.
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