NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the Pennsylvania Turnpike Commission's (PTC) $250 million turnpike revenue bonds, series 2014A.
In addition, Fitch affirms PTC's $3.3 billion outstanding senior lien turnpike revenue bonds at 'A+' and $3.6 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 43% of net toll revenues. Revenue Risk: Volume - Stronger
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 6.3% from 1990-2013. However, there may be political risk associated with implementing toll rates above inflation for multiple years, as is expected in PTC's updated financial plan. Revenue Risk: Price - Midrange
Reasonable Debt Structure: While PTC's turnpike debt is sizable at nearly $8 billion and is expected to increase, bondholders benefit from PTC's adequate covenant protections and limited variable rate exposure. Turnpike revenue bonds are 85% fixed, 6% synthetically fixed, and 9% variable or synthetically variable. Debt Structure Risk - Midrange (Senior Lien); Midrange (Sub Lien)
Elevated Leverage But Strong Financial Performance: PTC's total leverage is currently approximately 11.5x 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, subordinate debt service coverage ratios at or above 1.3x, and all-in coverage including Motor License Fund (MLF) enhanced bonds at or above 1.2x (per management's internal policy). As leverage continues to increase over the next decade, management will need to balance expense management and rate increases to continue to achieve these coverage targets. While pressure remains on coverage levels for the next several years, beyond 2022, PTC's capital structure will benefit from reduced leverage and increased flexibility under Act 89's elimination of $450 million of funding requirements under Act 44.
Sizable Capital Program: The need for an additional $6 billion in senior lien debt to fund the PTC's $6.5 billion mainline capital improvement plan (CIP) for fiscal 2014 to 2023 puts pressure on the Pennsylvania Turnpike, particularly when viewed together with the expected $3.8 billion in subordinate lien borrowing to subsidize transit operations under Act 44/89 through 2023. However, Fitch views favorably the focus on mainline capital spending for reconstruction and renewal, somewhat mitigating deferred maintenance concerns. Infrastructure Development / Renewal: Midrange.
RATING SENSITIVITIES:
TRAFFIC GROWTH PROFILE: Should traffic growth stagnate after multiple years of toll increases, PTC may need to pursue toll increases higher than the forecasted 3%-5.5% in order to maintain coverage levels which may face political opposition.
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 $6.5 billion capital plan over the next 10 years.
SECURITY:
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.
TRANSACTION SUMMARY:
PTC is issuing $250 million in senior turnpike revenue bonds to finance various capital expenditures set forth in the Commission's current 10-year capital plan including, but not limited to, the reconstruction of roadbed and roadway, the widening, replacing and redecking of certain bridges and/or the rehabilitation of certain interchanges. Proceeds will also fund required reserve deposits, capitalized interest, and cover costs of issuing the 2014A bonds. Obligations are fixed rate with a final maturity in 2044, and will be on parity with existing senior bonds.
On Nov. 25, 2013, the Commonwealth of Pennsylvania enacted Act 89, a comprehensive transportation funding program which included substantial revisions to the Commission's transportation funding obligations under Act 44. The Amended Funding Agreement terminates on Oct. 14, 2057. While the Commission's aggregate annual payment obligation to PennDOT remains $450 million annually under Act 89 through fiscal 2022. Beginning in fiscal 2023 the Commission's annual obligation is reduced to $50 million, which will be funded out of current revenues and dedicated to transit capital and operating needs through 2057.
As of July 1, 2014, none of the annual $450 million payments will be dedicated to highways and bridges. Instead, all $450 million will be allocated to support transit capital, operating, multi-modal and other non-highway programs. As a result, the Commonwealth's Motor License Fund will no longer be available to cover the highway/bridge related portion of the payments. This means that while Act 89 provides long-term debt relief to PTC, in the short term it requires additional leverage on the subordinate lien, as PTC expects to finance most of this obligation with subordinate revenue bond proceeds ($30 million is required to come from current revenues annually, though PTC expects to cover $40 million to $50 million of the $450 requirement with current revenues).
PTC's 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 through February, with volumes increasing 0.4%. Net toll revenues increased 3.9% for fiscal 2013 and 6% 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 in January 2014, the average cash toll equals 11.6 cents per mile, and the average E-ZPass toll is 8.3 cents per mile (up from 7.4 cents per mile for both cash and E-ZPass 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. Cash tolls are now 39% higher than E-ZPass tolls on a per lane mile basis, and management has indicated that going forward, toll increases for E-ZPass and cash will likely be the same.
PTC has updated its 10-year capital program and released an Amended 2014 Act 44 Financial Plan, reflecting modifications resulting from changes to funding requirements under Act 89. The plan features 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 CIP totals $6.5 billion (compares to nearly $6.8 billion in last year's plan). 56% is designated for mainline reconstruction and bridge rehabilitation/reconstruction, while 15% will cover roadway expansion and safety. 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. PTC is projected to issue a total of $10 billion in debt between 2014 and 2023, including $6 billion in senior revenue bonds for its capital program and $4 billion for Act 44 (primarily subordinate revenue bonds as the MLF lien will not be used after this year).
Despite increasing leverage in the next 10 years, 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 order to maintain these levels of coverage, PTC's traffic consultant forecasts that annual toll rate adjustments ranging from 3%-5.5% will be required through fiscal 2027, with 3% increases thereafter. This assumes average traffic growth of 1.6%. Fitch's sensitivity cases contemplate more modest traffic growth (average growth of 0.5%-0.7%), reflecting some reaction to continued toll increases and including periods of decline. Under these scenarios, higher annual toll increases (average of 6% over the next decade) are necessary to maintain senior and subordinate coverage at 1.3x. While the need for additional leverage over the next decade is a concern, Fitch takes comfort in the reduced overall leverage requirements under Act 89 from 2023 onwards, and views favorably PTC's proactive approach to focus on Turnpike maintenance needs.
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=824194
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