NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A-' rating to the Pennsylvania Turnpike Commission's (PTC) $104 million turnpike subordinate revenue bonds, series 2013B-1 and series 2013B-2.
In addition, Fitch affirms PTC's $3.3 billion outstanding senior lien turnpike revenue bonds at 'A+' and $3.5 billion outstanding subordinate lien turnpike revenue bonds at 'A-'.
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 2013 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 5.9% from 1990-2013. 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 13x 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 $5.9 billion in senior lien debt to fund the PTC's mainline capital improvement plan (CIP) for fiscal 2014 to 2023, 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.
HIGHER COSTS: Management's ability to control expenses and manage its sizable capital program may affect the rating.
WEAKER COVERAGE RATIOS: Should PTC be unable to meet its coverage policies (2.0x senior/1.3x subordinate/1.2x MLF bonds) the ratings may be pressured.
DEBT STRUCTURE RISKS: A rising interest rate environment could result in lower financial flexibility as PTC issues debt to fund its $5.9 billion capital plan over the next 10 years.
CHANGES IN FUNDING REQUIREMENTS: Should Act 44 funding requirements be removed in the future, PTC's capital structure may benefit from reduced leverage and increased flexibility.
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 expects to issue approximately $104 million in subordinate revenue bonds to provide funds which 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 2013B bonds. Obligations are fixed rate with a final maturity in 2043, and will be on parity with existing subordinate bonds.
Concurrent with the issuance of the 2013B turnpike subordinate revenue bonds, PTC is also issuing $99.7 million in MLF enhanced turnpike subordinate special revenue bonds to make payments to PennDOT under Act 44 to fund various road, highway, bridge and capital projects. Please refer to Fitch's press release 'Fitch Rates $95MM PA Turnpike Commission Motor License Fund-Enhanced Bonds 'AA'; Outlook To Negative' dated Oct. 9, 2013 for details of this issuance.
PTC traffic was slightly down by 0.6% for fiscal 2013 (year ending May 31), as compared to flat growth for fiscal 2012 and 1.3% for fiscal 2011. Traffic has largely been flat in fiscal 2014 year to date, with volumes increasing 0.7% in the June-August period. Net toll revenues increased 3.9% for fiscal 2013 and 7.3% for fiscal 2014 year to date, reflecting toll increases and reductions in commercial discounts, and building on 5.6% and 6.6% revenue increases in fiscal 2012 and fiscal 2011. Continued revenue growth coupled with stable traffic volume demonstrates PTC's resilience despite five consecutive years of toll increases. As a result of the most recent toll changes, the average cash toll equals 10.3 cents per mile, and the average EZPass toll is 8.1 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.
PTC has updated its 10-year capital program and released its 2014 Act 44 Financial Plan. The plan is largely the same as the previous year's plan, featuring capital initiatives to improve and maintain the turnpike in a state of good repair, ensure customer safety and convenience, and address capacity constraints. The 2014-2023 plan includes $378 million to fund implementation of all electronic tolling (AET). This brings the total for the CIP to $6.56 billion over the 2014-2023 period (as compared to nearly $6.8 billion in last year's plan). Beyond 2023, PTC's plan assumes capital expenses continue to increase by 4% per year to cover on-going capital needs to maintain the facility. Under the capital plan, PTC is projected to issue a total of $10.2 billion in debt between 2014 and 2023, including $5.9 billion in senior revenue bonds and $4.3 billion for Act 44 (subordinate revenue bonds and MLF bonds). Despite increasing leverage, PTC intends to maintain debt service coverage above 2.0x for senior lien debt, 1.3x for subordinate lien debt, and 1.2x for MLF-enhanced debt. In addition, the plan anticipates maintaining annual liquidity levels of at least 10% of operating revenues. While the need for additional leverage is a concern, Fitch views favorably PTC's proactive approach to focus on Turnpike maintenance needs.
Fitch continues to monitor several potential legislative proposals in Pennsylvania relating to Act 44 and statewide transportation funding initiatives set forth by the Governor and other state representatives. Of recent note, the Governor's transportation proposal includes several changes that could materially impact the Commission including the termination of Act 44 obligations by 2023, re-purposing the distribution of Act 44 payments to PennDOT during 2014-2023, expanding the use of toll collection technology, and providing additional toll enforcement tools. Fitch notes that these potential changes are not currently part of any legislative bill, however, discussions continue with members of the Commission, General Assembly, the Governor's office and PennDOT.
Additionally, on April 16, 2013, Senator John Rafferty, Senate Transportation Committee Chairman, announced a comprehensive $2.5 billion transportation funding bill (Senate Bill 1). Senator Rafferty's proposal includes increased fees, lifting the oil franchise tax cap, imposing surcharges for moving violations and eliminating the Commission's Act 44 obligations by the end of fiscal 2020-2021. Senate Bill 1 was introduced in the Pennsylvania Senate on May 3, 2013 and was passed in the Senate on June 5, 2013 by a vote of 45-5. Senate Bill 1 was introduced to the House of Representatives and was referred to the House Transportation Committee on June 10, 2013, and to date the House Transportation Committee has held a series of hearings on Senate Bill 1. On June 27, 2013, the House Transportation Committee voted 15-10 to amend Senate Bill 1 and report the amended bill to the floor of the House of Representatives. Substantive changes to Senate Bill 1 were included in the House version of the bill. The Pennsylvania General Assembly adjourned in early July 2013 for its summer recess without further action on Senate Bill 1.
For more information on the Pennsylvania Turnpike Commission please see Fitch press release 'Fitch Assigns Penn Turnpike 2013A Sub Revenue Bonds 'A-'; Affirms Outstanding Bonds' dated April 9, 2013 available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
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