Fitch Rates Pennsylvania Turnpike 2014A Sub Rev Bonds 'A-'; Affirms Outstanding Bonds

NEW YORK--()--Fitch Ratings assigns an 'A-' rating to the Pennsylvania Turnpike Commission's (PTC) $150 million turnpike subordinate revenue bonds, series 2014A-1, 2014A-2, and 2014A-3.

In addition, Fitch affirms PTC's $3.5 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.

The rating reflects PTC's strong profile in terms of both commercial and passenger traffic and PTC's ability to raise tolls, with relatively low elasticity observed through recent increases. While PTC has a large capital plan with a sizable debt burden that is expected to increase in the medium term, changes to funding requirements under Act 89 will ultimately result in reduced leverage and increased flexibility for PTC over the longer term.

KEY RATING DRIVERS

Essential Route 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 grew at an average annual 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

Sizable Capital Program: The need for an additional $6 billion in senior lien debt to fund 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.

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. Operating revenue 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 DSCR 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, as legislated for under Act 44.

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 expects to issue approximately $150 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 and Act 89 to fund certain grants to mass transit agencies. Proceeds will also fund required reserve deposits and cover costs of issuing the 2014A bonds. PTC also intends to contribute $25 million in equity to fund a portion of the Act 44 payments directed to grants to mass transit agencies. Obligations are fixed rate with a final maturity in 2045, and will be on parity with existing subordinate bonds.

Concurrent with the issuance of the 2014A turnpike subordinate revenue bonds, PTC is also issuing $59.8 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. Due to changes under Act 89, this is expected to be the last issuance of MLF enhanced bonds by PTC. Please refer to Fitch's press release 'Fitch Rates $59.8MM PA Turnpike Commission Motor License Fund-Enhanced Bonds 'AA'; Outlook Negative' dated April 11, 2014 for details of this issuance, available at www.fitchratings.com.

PTC's traffic was slightly down, by 0.6%, during fiscal 2013 (year ending May 31), as compared to flat growth in fiscal 2012 and 1.3% in fiscal 2011. Traffic is broadly flat in fiscal 2014, based on year-to-date figures through February, with volumes having increased 0.4%. Net toll revenues increased 3.9% in fiscal 2013 and have increased 6% in 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, respectively.

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, seasoned, domestic 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.

For more information on the Pennsylvania Turnpike Commission, including a summary of the implications of the passage of Act 89 for PCT and discussion of PTC's current capital program, please see Fitch press release 'Fitch Rates Pennsylvania Turnpike 2014A Rev Bonds 'A+'; Affirms Outstanding Bonds' dated March 18, 2014 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' (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=826781

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Contacts

Fitch Ratings
Primary Analyst
Emma W. Griffith, +1-212-908-9124
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Raymond Wu, +1-212-908-0845
Associate Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Emma W. Griffith, +1-212-908-9124
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Raymond Wu, +1-212-908-0845
Associate Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com