Fitch Affirms New Jersey Turnpike Auth's Turnpike Revs 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on the approximately $9 billion of New Jersey Turnpike Authority's (NJTA or the authority) turnpike revenue bonds.

The Rating Outlook is Stable.

Fitch does not rate turnpike revenue bond series 2009A, 2009B, 2012G, 2013B or 2013G, which total $397 million in aggregate.

The affirmation reflects continued stable traffic and revenue performance on both the New Jersey Turnpike (the turnpike) and Garden State Parkway (the parkway), NJTA's continued prudent operating cost management, and its ability to deliver significant capital improvements as per its current $7 billion plan running to 2018 ahead of time and on budget. Additional debt of $1 billion expected to be raised during 2014 and a further $1.9 billion over 2015-2018 should be affordable without a significantly detrimental effect on metrics, given toll increases implemented ahead of the capital plan. Furthermore, Fitch views the authority as having sufficient economic flexibility to increase toll rates over the next few years if required to bolster its financial position.

KEY RATING DRIVERS

-- Mature Traffic Profile Serving Key Commuter and Interstate Routes: The turnpike forms a vital link in the key I-95 interstate route, providing important commercial links between New York City, Philadelphia, Baltimore and Washington DC. At the same time, the turnpike and parkway serve major, wealthy, established and stable commuter populations in New Jersey and suburbs of New York City, accounting for the bulk of toll revenue generated by the system. Revenue - Volume: Stronger.

-- Economic Rate-Making Flexibility Constrained by Political Authority: Fitch views toll rates on both the turnpike and parkway of $0.11 per mile and $0.04 per mile, respectively, as moderate, and considers future toll increases in the near- and medium-term as affordable if required. Nevertheless, some doubt remains as to the level of political support any such toll increases would have within the state. Revenue - Price: Mid-Range.

-- Well-Defined Capital Plan Largely Debt-Funded: NJTA's $7 billion 2009-2018 capital investment plan (CIP) is on schedule and on budget, with additional works having been included as a result of savings made in the original plan. However, it is largely debt-funded, with an additional $2.9 billion of debt required over the remainder of the CIP. State transfers made after debt service constrain the authority's ability to build up cash reserves to fund future infrastructure investment, implying future renewal works will require additional debt funding. Infrastructure and Renewal Risk: Mid-Range.

-- Swaps Hedge Variable Rate But Create Basis Risk: NJTA maintains around 15% of its debt profile as variable rate debt, almost entirely hedged with fixed-floating interest rate swaps with counterparties of adequate financial strength. However, the use of LIBOR-linked swaps to hedge SIFMA-indexed debt with respect to 60% of swaps creates a mismatch that can distort the authority's cash flows. Separately, NJTA should soon have removed reliance on sureties to support liquidity entirely, with cash funding of the debt service reserve to covenant levels expected following the upcoming $1 billion expected debt issuance. Debt Structure: Mid-Range.

-- Moderate Leverage and Liquidity: Net debt-to-cash flow available for debt service (CFADS), reflecting only the debt service reserve balance as cash deducted from gross debt, is relatively high at approximately 7.7x, expected to rise further over the next few years to around 8.5x in the Fitch base case. Despite this, debt service coverage ratios (DSCR) should remain robust, falling no lower than around 1.5x. Furthermore, Fitch views the authority as having the ability to increase tolls in the medium term in order to support its financial profile, although it understands that NJTA has no plans to do so for the moment.

RATING SENSITIVITIES

-- Erosion of DSCRs in the medium term below 1.5x for a sustained period would put pressure on the rating.

-- Additional debt materially beyond the planned $2.9 billion to fund the balance of the current CIP causing NJTA's leverage metrics to widen significantly would strain the authority's credit quality.

-- Increased transfers to support state transportation projects without commensurate toll increases to ensure system preservation would pressure the rating.

-- Conversely, a material reduction in leverage that results in a sustained improvement in NJTA's coverage profile could result in positive rating action.

SECURITY

Turnpike revenue bonds are secured by a first lien on pledged net revenues, which are defined as all tolls, revenues, fees, rents, charges, and other income derived from operating the turnpike (including Build America Bond subsidies), proceeds from business interruption insurance, amounts deposited in the revenue fund from the construction/special project reserve/or general reserve funds, and revenues from qualified swaps and investments.

CREDIT UPDATE

Traffic on the system bucked a nine-year declining trend in FY 2013, increasing 0.7% year-on-year, with the turnpike posting a 0.8% increase and the parkway a 0.6% increase. Previous year declines, as indicated in the 10-year transactions CAGR to 2013 of -3.7%, reflected the impact of several significant toll increases in recent years and the replacement of two-way toll plazas with one-way toll collection on the parkway as well as the effect of tight economic conditions and declining national driving trends. Over the same period, the revenue CAGR was +7.4%, indicating the effect of toll increases. Continued traffic improvements are expected over the next couple of years as a result of the expectations of improving economic conditions, diversions from the Pulaski Skyway during its two-year upgrade, started recently, and the completion of key CIP projects such as the extensive turnpike widening project.

Extreme weather conditions experienced during the last two years have had varying effects on NJTA's facilities. The long-term impact of Hurricane Sandy was limited, with summer 2013 traffic 97% of the five-year average and total traffic for 2013 in line with projections. The storm did not cause major damage to mainline roadways or toll plazas, and all NJTA facilities were fully operational within 12 hours of the storm hitting land, with toll collection fully in place within 24 hours. Furthermore, additional clean-up costs incurred were met from the general account as a state of emergency was declared in the storm's aftermath.

Although neither the turnpike nor the parkway closed during any of the winter 2013/14 storms, poor weather in the first three months of 2014 is expected to have a bigger impact on authority performance. First quarter 2014 (1Q'14) revenue was $18 million, or 4.9%, below projection and, at the same time, NJTA incurred $32.3 million in extraordinary snow-clearing costs charged to the general fund (related to state of emergency events) on top of the $9.8 million of operating budget allocated to snow removal (related to storms not resulting in a state of emergency declaration). This reflects $25.7 million more than its entire 2014 snow budget. Ordinary operating costs remain under control, with savings realized over the past five years with respect to toll collection having more than offset increases in maintenance and employee benefit spending. Although 2013 operating costs were up 0.2% above the previous year, the five-year CAGR to 2013 was -0.3%.

The authority currently estimates its unfunded pension deficit to be relatively small at $140 million. However, its OPEB funding liability arising from its commitment to provide healthcare benefits to eligible retirees and their eligible dependents was most recently assessed at $1.1 billion on Jan. 1, 2013. NJTA's board has recently approved a plan to establish an OPEB trust in order to ensure its funding obligations are met. Through 2013, $25 million has been designated for future deposit in the trust; however, while a similar amount was planned to be deposited during 2014, such funds have been redesignated to offset the effect of winter 2013/14 weather. Fitch has analyzed the impact of pension and OPEB related deficits and deficit reduction payments, and considers them to be manageable.

NJTA has continued to make good progress with respect to its 2009-2018 $7 billion CIP, with almost $5 billion now having been committed and the plan remaining on budget and on time. Furthermore, the authority has been able to include additional works in the plan as a result of savings achieved without impacting overall CIP budget or schedule. Notably, the authority's $2.3 billion turnpike widening project - the biggest single component of the CIP - should reach completion in November 2014, with traffic conditions expected to improve at key bottlenecks in the southern half of the facility as a result. Once the current CIP is complete, most major bridge structures will have been renewed and all expansion works deemed necessary in the foreseeable future will have been completed. As a result future CIPs should be focused on more straightforward renewal works and should, therefore, be significantly smaller in scope and cost.

NJTA plans to issue $1 billion in new money in the next few months, and expects to raise a further $1.9 billion over the remaining three years of the current CIP. Following this issuance, the authority will likely have removed dependence on sureties for liquidity support, with the cash-funded portion of the debt service reserve alone expected to meet covenant stipulation. Fitch has included new debt expectations in its projections.

Fitch's base case projection reflects the sponsor's revenue growth assumptions over the next 10 years, as developed by CDM Smith: these include a modest 3.3% increase in 2015 reflecting Pulaski Skyway diversions, completion of key CIP projects, and the rebound from winter 2013/14 conditions. This is followed by a 1% growth assumption in 2016 as the Pulaski Skyway reopens, and 1.3%-1.4% annual growth thereafter. Operating expenditures rise at 3% per annum through the 10-year projection period. In such a scenario, NJTA is able to manage its DSCR profile above its target level of 1.40x and Fitch notes that it would take only very small toll increases over the period to maintain DSCR above 1.5x. Leverage, defined as the ratio of net debt-to-CFADS where net debt reflects only the debt service reserve balance deducted from gross debt, falls from a peak of 8.6x to under 7.5x over the period.

Fitch's rating case models virtually no traffic growth over the period, as well as slightly higher expense growth of 3.5% per annum. In this scenario DSCR would fall slightly below NJTA's target level of 1.40x without any toll increases, although Fitch estimates the toll increases required to support DSCR above 1.50x would be moderate, equating to around an additional $0.02-$0.03, on average, per mile on the turnpike and around $0.01 per mile on average on the parkway. Fitch takes the view that the authority should have economic ratemaking flexibility to implement toll increases of this magnitude should it wish to do so.

The New Jersey Turnpike Authority is a body corporate and politic of the state of New Jersey. The authority achieved its current form in July 2003 when it absorbed the New Jersey Highway Authority, which operated the Garden State Parkway. The two roadways now operate as a consolidated system. Both roadways have been in continuous operation since the 1950s.

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=827798

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Saavan Gatfield, +1-212-908-0542
Senior Director
33 Whitehall Street
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
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Saavan Gatfield, +1-212-908-0542
Senior Director
33 Whitehall Street
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
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com