NEW YORK--()--Fitch Ratings assigns an 'A-' rating to the Pennsylvania Turnpike Commission's (PTC) turnpike subordinate revenue bonds, series 2012B.
In addition, Fitch affirms PTC's $2.9 billion outstanding senior lien turnpike revenue bonds at 'A+', $3.3 billion outstanding subordinate lien turnpike revenue bonds at 'A-', and $17 million outstanding 2011D bonds at 'F1+'.
The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
Route Essentiality With Some Commercial Exposure: PTC plays a vital role in serving the state's major population centers and benefits from a strategic location for commercial traffic, evidenced by its stable historical traffic and revenue growth. Commercial traffic accounted for 13% of traffic in 2012, but generated 42% of net toll revenues.
Ratemaking Flexibility: PTC benefits from economic ratemaking flexibility, and traffic has demonstrated relatively low elasticity through toll increases since 2005. Revenue has had an average annual growth rate of 6% from 1990-2012. However, there may be political risk associated with implementing toll rates above inflation in the event of lower traffic, higher costs, or increased debt service requirements.
Elevated Leverage But Strong Financial Performance: PTC's total leverage is currently approximately 13 times ([x] net debt to cash flow available for debt service [CFADS]) and is expected to remain at this elevated level for some time. Financial performance is expected to continue covering all operating and current capital needs of the existing mainline facilities with senior debt service coverage ratios (DSCR) at or above 2.0x and subordinate debt service coverage ratios at or above 1.3x. Fitch expects PTC to have sufficient excess cash flow to fund approximately 20% of annual mainline capital expenditure on a pay-go basis.
Prudent Management Policies: It is management's policy to maintain senior and subordinate DSCR at 2.0x and 1.3x, respectively, regardless of traffic levels, and PTC's policy to meet Motor License Fund (MLF) debt service obligations at 1.2x. As leverage continues to increase, management will need to balance expense management and rate increases to continue to achieve these coverage targets.
Sizable Capital Program: The need for an additional $6.2 billion in senior lien debt to fund the PTC's mainline capital improvement plan (CIP) for fiscal 2013 to 2022, and increasing leverage to subsidize highway and bridge projects across the commonwealth, as well as subsidize transit operations under Act 44, put pressure on the Pennsylvania Turnpike. However, Fitch views favorably the focus on mainline capital spending for reconstruction and renewal, somewhat mitigating deferred maintenance concerns.
WHAT COULD TRIGGER A RATING ACTION:
Management's inability to control expenses and manage its sizable capital program while meeting acceptable debt service coverage levels on senior and subordinate lien bonds and subordinate lien MLF bonds could pressure the ratings. Should PTC be unable to meet its coverage policies (2.0x senior/1.3x subordinate/1.2x MLF bonds), as a result of sub-par traffic performance or operating and capital cost growth, negative rating action is likely.
The senior revenue bonds are secured by revenues consisting of tolls, charges, fines and other revenues and income derived from vehicular use of the turnpike, net of operating and maintenance expenses. The subordinate revenue bonds are secured by commission payments consisting of turnpike revenues after all obligations under the senior lien indenture have been satisfied.
PTC is issuing approximately $123 million in turnpike subordinate revenue bonds, series 2012B. Proceeds from the issuance will be used to make payments to the Pennsylvania Department of Transportation (PennDOT) in accordance with Act 44 to fund certain grants to mass transit agencies. Proceeds will also fund required reserve deposits and cover costs of issuing the 2012B bonds. Obligations are fixed rate with a final maturity in 2042, and will be on parity with existing senior bonds.
Concurrent with the issuance of the 2012B turnpike subordinate revenue bonds, PTC is also issuing $93 million in MLF enhanced turnpike subordinate special revenue bonds. Please refer to Fitch's press release 'Fitch Rates $93MM PA Turnpike Commission Motor License Fund-Enhanced Bonds 'AA'; Outlook Stable' dated Oct.r 4, 2012 for details of this issuance.
2012 PTC traffic was flat for fiscal 2012 (year ending May 31), as compared to growth of 1.3% for fiscal 2011 and 0.2% for fiscal 2010. However, traffic has shown a return to growth in calendar 2012, with volumes increasing 1.7% in the January-August period. Net toll revenues increased 5.6% for fiscal 2012, reflecting toll increases and reductions in commercial discounts, and building on 6.6% and 12.7% revenue increases in fiscal 2011 and fiscal 2010. Continued revenue growth coupled with flat to growing volume demonstrates PTC's resilience despite four consecutive years of toll increases. As a result of the most recent toll changes, the average cash toll equals 9.4 cents per mile, and the average EZPass toll is 8.0 cents per mile (up from 7.4 cents per mile after the first increase in 2009). This reflects a full-length trip on the Turnpike Mainline, and is considered to be competitive with other major domestic, seasoned toll facilities.
For more information on PTC's most recent capital program and toll rate changes, please refer to the Fitch press release dated June 28, 2012.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 2, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges, and Tunnels