Fitch Affirms Oklahoma Turnpike Authority's Revs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the Oklahoma Turnpike Authority's (OTA or the authority)'AA-' rating on approximately $1.035 billion of outstanding second senior revenue bonds. The Rating Outlook remains Stable.

KEY RATING DRIVERS:

RESILIENT TRAFFIC DEMAND: The Oklahoma Turnpike system consists of 10 turnpikes. The turnpike system plays a critical role for in-state traffic and serves as a transportation crossroads with U.S. Interstates 35, 40, and 44 intersecting within Oklahoma. The lack of competition in Oklahoma for long-distance travel and the system's essentiality contribute to an established and stable traffic demand base. The system's diverse mix of interstate and commuter traffic has grown at a combined favourable 2.8% compound annual growth rate (CAGR) since 2003.
Revenues Risk- Volume: Stronger

CONSIDERABLE RATE-MAKING FLEXIBILITY: Management has the authority to raise rates without legislative approval. The OTA has raised rates eight times, most recently in 2009 by 16%. Toll rates remain competitive compared to Fitch's rated portfolio with an average toll per transaction of $1.49 and demand has been observed to be relatively inelastic to past toll increases. Further, should revenues be insufficient to cover debt service, the OTA is entitled to a portion of motor fuel excise taxes (MFET) collected on the turnpikes.
Revenue Risk- Price: Stronger

VARIABLE-RATE DEBT SYNTHETICALLY FIXED: Approximately 30% of bonds outstanding are variable rate debt that is synthetically fixed through swap agreements with Goldman Sachs and JP Morgan. Debt service schedule is flat to declining. No additional debt issuance is anticipated to support the capital program in the near-to-medium term.
Debt Structure: Midrange

PROACTIVE CAPITAL IMPROVEMENT PLAN (CIP): The 2014-2018 CIP totals $341 million and focuses mainly on rehabilitation of the turnpike system. The plan will be funded by the general and reserve maintenance fund. The OTA has annual system maintenance evaluations to determine the minimum spending amounts. As a result, the pavement condition index for the entire OTA system is on the border of excellent condition (the highest).
Infrastructure Development and Renewal: Stronger

STRONG FINANCIAL METRICS: The OTA's healthy financial performance has translated to annual debt service coverage (including MFET) of at least 1.96 times (x) since 2003. Coverage per the Trust Agreement for fiscal 2013 is 2.13x and is forecast to remain strong throughout the forecast period as debt service obligations slightly decreases following maximum annual debt service (MADS) in 2013. The authority is moderately leveraged at 3.7x net debt to cash flow available for debt service. The authority also has $77.9 million of unrestricted cash equivalent to 379 days cash on hand and 822 days when including the Turnpike Trust Fund and Reserve Maintenance Fund.

RATING SENSITIVITY:

MATERIAL DECLINES IN TRAFFIC: Unexpected decreases in commercial traffic and/or failure to raise rates or increased elasticity of demand to toll rate increases could pressure financial flexibility and negatively affect debt service coverage.

CHANGES TO DEBT STRUCTURE: Increased debt-related risks due to either capital funding or additional variable-rate issuances, which are not currently anticipated, could pressure the rating. Fitch notes, however, that continued reductions to variable rate exposure could warrant positive rating action.

REDUCTION OR ELIMINATION OF MFET APPORTIONMENT: Improvements to fuel standards, declines in traffic, and/or legislative acts which negatively impact MFET apportionments could impact the rating.

SECURITY:

The authority's revenue bonds are secured by revenues of the system after the payment of operating expenses in addition to the MFET apportioned to the OTA for deposit to the credit of the Turnpike Trust Fund.

CREDIT UPDATE:

The turnpike system has a mature and stable traffic base. Traffic in the turnpike system has increased year over year since 1983 with the exception of 2011 which decreased by 2.3%. Fiscal 2013 transactions increased by 0.6% to 156.2 million following a 3.1% increase in fiscal 2012. However, revenues decreased slightly in fiscal 2013 by 0.3% as a result of on-going construction of the John Kilpatrick and Creek Turnpikes and severe winter conditions at year end. The share of commercial traffic is modest and has remained constant at 8.7% of system transactions and 38.9% of toll revenues.

The OTA has the ability to raise rates without legislative approval and has demonstrated a historical willingness, raising rates eight times since opening. The current average toll of $1.49 is consistent with other turnpikes in Fitch's rated portfolio. The authority has no further plans to raise rates at present.

Coverage ratios remain strong at 2.13x in fiscal 2013 and 1.70x when excluding MFET. The authority's financial forecast is based on reasonable underlying assumptions including average annual traffic growth of 1.3% in the near-to-medium term with no additional toll increases and average annual expense growth of 4.3%. Coverage ratios under the authority's forecast are expected to improve to 2.34x by 2022 and 1.81x when excluding MFET. Fitch also conducted sensitivity analysis conservatively assuming flat traffic growth in the near term followed by annual traffic growth of 0.5% and higher expense growth of 5% per annum. Under this scenario, coverage ratios are expected to remain above 1.91x through 2022 but the turnpike may have some difficulty complying the second covenant (which requires net revenues excluding MFET to cover 1.05x debt service obligations and 1x deposit to the reserve maintenance fund). However, Fitch notes that the authority has considerable economical rate making flexibility and can raise rates if necessary to comply with rate covenant or maintain healthy coverage ratios.

Lane expansion projects for the Creek and John Kilpatrick turnpikes have been completed in the fourth quarter of 2013 and significantly below budget. The 2014-2018 CIP totals $341 million and will be funded by the reserve maintenance and general fund. Uses comprise mostly of rehabilitation of the existing turnpike system, PIKEPASS refurbishment and purchases, improvement to headquarters facility and safety projects. The program is focused on keeping the existing turnpike system in good condition and extending the useful life of the turnpikes which is critical considering that the Turner Turnpike has been in operation for 60 years and the Will Rogers for 56 years. The authority has a responsible approach to maintaining the facility, planning for repairs before assets become too costly to maintain or replace.

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' (Oct. 16, 2013).

Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Toll Roads, Bridges and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720736

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822985
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Contacts

Fitch Ratings
Primary Analyst:
Raymond Wu, +1-212-908-0845
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Casey Cathcart, +1-312-368-3214
Associate Director
or
Committee Chairperson:
Seth Lehman, +1-212-908-0755
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Raymond Wu, +1-212-908-0845
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Casey Cathcart, +1-312-368-3214
Associate Director
or
Committee Chairperson:
Seth Lehman, +1-212-908-0755
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com