Fitch Upgrades Harris County, Texas Toll Revs to 'AA-'; Outlook Stable

July 21, 2008

(BUSINESS WIRE)

NEW YORK,  -- Fitch Ratings assigns an 'AA-' rating to approximately $325 million of series 2008B Harris County Toll Road Authority's (HCTRA, or the authority) toll road senior lien revenue and refunding bonds. In addition, Fitch upgrades to 'AA-' from 'A+' the rating on approximately $1.4 billion in parity senior lien obligations. The Rating Outlook is Stable. The bonds are expected to sell via negotiation on Tuesday, July 22, and proceeds will be used to refund outstanding toll road senior lien revenue commercial paper notes and to fund deposits to HCTRA's construction fund. The senior lien bonds are secured by a gross lien on toll revenues. The authority also has approximately $677 million in outstanding subordinate lien unlimited tax revenue bonds which are secured by and payable from the receipts of an unlimited annual ad valorem tax levied on all taxable property in the county, a subordinate lien on net revenues of the toll system project, and certain funds identified from toll system revenues. The subordinate lien bonds are rated 'AA+' based on the tax pledge from the county.

The upgrade to 'AA-' reflects the authority's continued strong financial performance that has been supported by the growing Houston metropolitan area, demonstrated economic ratemaking flexibility, and increased clarity on the scope, priority, and pace of the authority's future capital projects. While traffic is down roughly 2.4% for the first quarter of fiscal 2009 over first quarter fiscal 2008, revenue increased more than 18% during the same period and is a reflection of HCTRA's economic rate making ability given the approximately 20% increase in tolls in September of 2007 and the significant increase in motor fuel prices. A more defined capital plan, significant use of system-generated cash flow and manageable increases in debt are key components of Fitch's upgrade. The upgrade also reflects an expectation that the capital plan will be managed to maintain 2.0 times (x) debt service coverage.

The 'AA-' rating reflects the long-term economic prospects for Harris county and the greater Houston metropolitan area, strong economic ratemaking flexibility, consistently demonstrated demand on HCTRA's assets that have resulted in well over 2.0x coverage of annual debt service, significant financial flexibility afforded by the authority's cash reserves, and a toll policy that will provide for increases going forward at the greater of 2.0% or inflation. In addition, the rating reflects HCTRA's conservative revenue assumptions, which exclude potential revenue from four of six expansion projects and the county's reliance on subordinate transfers for local road building, which can help support high debt service coverage levels.

The rating also incorporates HCTRA's sizeable $5.2 billion five-year capital plan to address the continued expansion of the Houston Metropolitan area, the potential for debt service coverage ratios in the medium term to fall below 2.0x, the issuance of 40-year debt, and the enactment of State legislation granting HCTRA the powers of a regional mobility authority (RMA), pursuant to which HCTRA could pursue other non-toll road transportation projects including rail. While HCTRA indicates no desire to pursue such projects at this point in time, rising levels of congestion may require such action in the future. Fitch expects that revenue generated from the development of capital projects and cost-conscience management of expenses will keep coverage ratios and other financial metrics consistent with the current rating.

Traffic for fiscal 2009 year to date is 2.4% down given the toll increase and fuel prices but revenue is up nearly 19%. Underlying traffic for fiscal 2008 continued to exhibit growth, increasing 4.4% from fiscal 2007. Strong net operating revenue growth of 10.4% in fiscal 2007 produced $334 million net revenues and generated a high 3.6x debt service coverage on senior bonds and 2.0x coverage on total debt service obligations. Fiscal 2008 senior and total coverage of debt is estimated to be 4.2x and 2.3x, respectively. Historically, debt service on subordinate lien toll road tax bonds has been paid from toll system revenues, and no taxes have been or are expected to be needed to service the outstanding and/or new bonds.

As expected, the county maintained its general policy to transfer a portion of excess authority funds to four county precincts for roadway connectivity construction purposes. The $31 million transferred in fiscal 2007 was somewhat higher than the $20 million transferred in both fiscal years 2005 and 2006. In fiscal 2008, the transfer was increased to $120 million, and the fiscal 2009 budget assumes a similar transfer. While these transfers are set by the County Commissioners annually and are not regulated by a structured arrangement, Fitch does not expect that such discretionary transfers would compromise bondholder security or toll road operations given their subordination.

HCTRA's five-year capital plan includes the construction of six major projects including the extension of the Hardy Toll Road into downtown Houston, the construction of the north east portion of the Sam Houston Tollway, which will complete the loop around Houston, the development of SH 290 and 288 which are radial feeders to downtown Houston, the Fairmont Parkway and South Post Oak Road extension. The authority expects to issue approximately $4.5 billion in additional debt over the next 10 years with $2.9 billion being issued before fiscal 2013 and the remaining $1.6 billion being issued between fiscal years 2014 and 2018. The five-year capital plan is estimated to be $5.2 billion, of which the majority (90%) is dedicated to the six projects described above. HCTRA could potentially be involved in the construction of the Grand Parkway, which would be an outer-ring facility but pursuant to State legislation this project requires HCTRA and TxDOT to work through a market valuation. If this is not ultimately agreed upon by 2011, HCTRA may move forward with the project. It has been represented to Fitch that HCTRA would only consider this project if it was viewed as self supporting. The authority's planed debt issuance for the six projects assumes a 40-year maturity, which is a departure from past practice. Importantly however, the profile assumes level debt service that results in maximum annual debt service likely being reached within the next 12 to 14 years.

HCTRA's toll revenues are derived from a diverse system of 13 mature assets that include approximately 103 miles of roadway in the Houston/Harris county area. The revenue-generating assets of the toll road system principally consist of the Hardy Toll Road, Sam Houston Tollway, Sam Houston Ship Channel Bridge, Westpark Tollway, and Spur 90A. Encompassing the city of Houston, Harris County is the largest county in Texas and the third largest in the nation. With a population totaling 3.9 million, the county experienced solid continued growth since the 2000 census with the majority occurring in the unincorporated parts of the county. The county's unemployment rate peaked in 2003 but has since trended down annually, totaling only 3.8% in May 2008, below state and national averages. However, some of its recent employment gains are attributable to the rising price of oil and low gas inventories, both subject to short-term market fluctuations.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.