Fitch Ratings has affirmed Texas Transportation Commission (TTC)'s $1.6 billion first tier debt at 'A-' on behalf of the Central Texas Turnpike System (CTTS, the system). Fitch has also affirmed the 'BBB' rating on $1.2 billion of CTTS's second tier debt. The Rating Outlook has been revised to Positive from Stable. The Outlook revision to Positive reflects the system's continued traffic and revenue outperformance relative to Fitch's base case expectations, which has resulted in a significantly stronger financial profile. The Positive Outlook also reflects the expectation that additional capital-related debt will not be incurred, as State Highway 130's near-term lane expansion will be fully funded with reserves. Resolution of the Positive Outlook is predicated upon continued outperformance of traffic and revenue leading to preservation of first tier gross debt service coverage ratio (DSCR) levels at or above 2.0x and second tier gross DSCR levels at or above 1.6x. While the second-tier bonds' declining DSCR profile is a concern, Fitch expects continued strong growth to improve later-term DSCRs to be commensurate with a higher rating. KEY RATING DRIVERS Summary: The ratings reflect CTTS's predominantly commuter traffic base with limited competition, low demonstrated traffic volatility, and relatively low toll rates. The ratings further reflect CTTS's considerable rate-making flexibility, with full legal flexibility to raise rates beyond inflation, though not presently necessary given healthy traffic growth. CTTS's debt structure is back-loaded; however, only modest revenue growth is warranted to service debt on both liens. The current differential between the first tier's and second tier's ratings is explained by the large difference in DSCRs and net debt/cash flow available for debt service (CFADS). Under Fitch's rating case, the first tier averages 2.6x DSCR (2.0x net of operating costs) and 6.4x net debt/CFADS (8.3x net of operating costs) and the second tier averages 1.5x DSCR (1.2x net) and 11.3x net debt/CFADS (14.8x net of operating costs), respectively. Revenue Risk - Volume: Stronger Multiple Segments, Strong Service Area: The system's largely commuter traffic base is supported by the aggressively growing Austin region, which has provided robust growth for the system and essentially no traffic volatility. Fitch views traffic diversion risk as low, given heavy congestion in the area coupled with TxDOT's non-compete clause, which partially mitigates the risk of newly constructed facilities diverting CTTS's traffic. Passenger toll rates of $0.16 per mile are lower than the average for comparable facilities, which affords some flexibility to raise rates if needed. Revenue Risk - Price: Stronger Considerable Rate-Making Flexibility: The bonds benefit from unlimited legal flexibility to raise rates in excess of inflation to prevent financial instability. However, the current toll escalation policy solely provides for inflationary toll increases given robust traffic growth. Political interference thus far has been minimal, and CTTS has precedent of raising rates well beyond inflation prior to implementation of the current toll escalation policy. Infrastructure Development/Renewal: Stronger Gross Pledge Supports Maintenance Needs: TTC's pledge to support operating, maintenance and rehabilitation expenses, if necessary, provides certainty that necessary works will be undertaken regardless of CTTS's own performance. Future maintenance needs are anticipated to be minimal given the excellent condition of the roads as a result of their relative newness and low commercial exposure. Fitch expects capital needs for near-term maintenance or expansion projects to be fully met with reserves on hand. Debt Structure: First-Tier - Midrange, Second-Tier - Midrange Back-loaded Debt Service Profile: The system's first-tier and total annual debt service obligations escalate at rates of 5.3% and 3.5%, respectively. However, CTTS's back-loaded debt structure is expected to be sufficiently mitigated by the system's strong revenue profile, leaving only modest dependence on toll revenue growth going forward. The system's debt is all fixed-rate and fully amortizing with a strong security package and cash-funded debt service reserves. Low First-Tier Leverage, Moderate Total Leverage: CTTS's rating case average coverage levels are ample for the first-tier bonds at 2.6x DSCR, and solid for the second-tier bonds at 1.5x DSCR. Rating case 2021 leverage is low relative to criteria for the first tier, at 6.4x net debt/CFADS, though moderate on a total basis at 11.3x net debt/CFADS. The system is expected to have little reliance on future toll revenue growth, evidenced by a first tier revenue breakeven of -0.6% (1.7% net) and a total breakeven of roughly 1.4% (2.9% net of costs), partially mitigating volume risk. PEER GROUP CTTS's peers include Central Florida Expressway Authority (CFX, rated 'A'/'A-'/Stable Outlook) and Metropolitan Highway System (MHS, rated 'A+'/Stable Outlook). CTTS benefits from higher DSCRs than CFX, though CFX has higher maximum annual debt service (MADS) DSCRs and a larger traffic base than CTTS. MHS's higher MADS DSCR and lower toll rates than CFX and CTTS explain its higher rating. RATING SENSITIVITIES Positive: Continued traffic and revenue growth, which preserves gross first-tier rating case DSCRs above 2.0x and gross second-tier rating case DSCRs above 1.6x, will likely result in an upgrade. Negative: Material additional debt, sustained traffic underperformance, or inadequate toll increases which decreases DSCRs below 1.7x and 1.5x on a gross first-tier and total basis, respectively, for a prolonged period could weaken credit quality. Negative: Additional near to medium-term projects in the Austin area could prevent a future upgrade. Negative: Material changes in federal policy that would negatively affect trade with Mexico and the toll road's revenue growth prospects could negatively impact the ratings. CREDIT UPDATE Performance Update FY 2016 (ended Aug. 31) traffic growth has continued to exceed Fitch's base case forecasts, at 14.0% compared to expectations of 12.0%. FY 2017 traffic growth through February has continued on an upward trajectory at 9.0% over the same period in FY 2016. FY 2016 toll revenue growth was slightly lower than traffic growth at 12.1%, but has surpassed traffic growth thus far in FY 2017, growing at 11.1%. The system experienced a larger toll increase in 2017, at 1.1% in comparison to the negligible increase of 0.2% implemented in 2016; however, revenue growth likely experienced less growth than traffic in FY 2016 as a result of the suspension of the escalation of late fees for pay-by-mail users in February 2015, which was resumed in September 2016 and may have improved collections in FY 2017. Healthy traffic and revenue growth continues to display rapid population and economic growth in the Austin area that has surpassed that of other large Texan cities such as Houston, Dallas, and San Antonio. Segments SH 130 and SH 45 SE continue to experience the greatest amount of growth within the system, at 18.3% and 17%, respectively, likely attributable to increased development in the area leading to greater population density than was previously present. SH 45N's and Loop 1's traffic growth was slightly lower than that of SH 130 and SH 45 SE but still strong at 11.2% and 8.0%, reflecting their roles as the most mature segments of the system. The Central Texas Mobility Regional Authority's (CTRMA) MoPac Improvement Project (a managed lanes effort) was partially completed in late 2016, which may have driven additional traffic growth on Loop 1. The entire system is not yet open so the overall impact on Loop 1 remains unknown, though Fitch plans to monitor traffic levels of Loop 1 going forward for signs of traffic diversion should drivers wish to avoid the managed lane. Additionally, Fitch does not consider potential traffic diversion to be of material credit concern given Loop 1 is one of the smallest segments of the system with the remainder of components growing at an aggressive rate, which should result in minimal impact to CTTS's financial profile in the event slight traffic diversion occurs. The commission has elected to undertake a lane expansion on Segments 2 and 3 of SH 130 in order to improve mobility. Construction is expected to begin in 2018 with final completion expected in 2020, and should add approximately 40 lane miles to the highway. The project is expected to cost $195 million and will be fully funded with reserve balances on hand. Given the congestion in the area, Fitch expects that the system will see an increase in revenues once the lanes open to traffic in 2020. However, a full forecast of SH 130's expected future traffic growth is not yet available. Though TxDOT has the ability to transfer surplus revenues out of the system after all requirements for debt service and other fund deposits have been met (as is required under CTTS's master trust indenture), Fitch believes the DOT is incentivized to allow the system to maintain adequate liquidity to meet its future needs in order to avoid having to subsidize future shortfalls. Therefore, it is expected that future capital and major maintenance needs will continue to be met with available cash on hand, which the system should be able to grow over time. Furthermore, additional debt should not be necessary as the system is expected to generate ample excess cash flow (after satisfying all indenture requirements) to meet needs above those currently planned. The Texas House recently rejected a bill that would have allowed public-private partnerships (P3s) to participate in the financing of highway projects. While this failure puts additional pressure on public investment, Fitch expects CTRMA to be the primary authority to finance and operate additional projects in the Austin area. The risk of CTTS debt financing additional expansionary Austin projects remains present but is currently considered low. However, Fitch will continue to monitor developments going forward. Fitch Cases Fitch's base and rating cases assume inflationary average toll rate growth, in line with the current toll escalation policy. In Fitch's base case, traffic growth erodes from more than 3% to 2% through debt maturity in 2042, reflecting a growing but maturing system. Fitch's rating case assumes a near-term slowdown in traffic growth, which stabilizes by 2026 to be roughly 70 bps lower than base case growth. Base and rating case 10-year average DSCRs are 2.8x and 2.6x for the first tier, and 1.6x and 1.5x total, respectively. Assuming that unrestricted cash balances remain limited to the rate stabilization fund's requirement only, base and rating case 2021 leverage is 6.1x and 6.4x for the first tier, and 10.8x and 11.1x for the second tier, respectively. However, if unrestricted cash is able to compound, leverage on both liens could be up to 100 bps lower. Additionally, Fitch has not incorporated the positive impact of SH 130's lane widening as long term forecasts are currently unavailable, though it is likely that future coverage levels will be at least 5 bps higher and leverage levels will be at least 50 bps lower should expansion prove revenue accretive. In comparison to Fitch's toll road criteria for small networks, rating case metrics for the first tier indicates compatibility with a higher rating level while the second tier indicates compatibility with its current rating level. However, Fitch expects traffic and revenue growth to continue to outperform base case expectations, which should elevate second-tier rating case metrics to be compatible with a higher rating level, likely resulting in an upgrade of both liens within the next two years. Security The first-tier bonds are secured by a gross lien on revenues of the system, where the second-tier bonds are secured by a gross lien on revenues of the system, though subordinate to the first-tier bonds debt service. The covenant by the TTC, which governs the Texas Department of Transportation (TxDOT), to budget for operational costs that cannot be supported by toll revenues, and to pay for ordinary and capital maintenance on the project, provides significant support to both the bonds and the overall system.