NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the $208 million State of Florida Department of Transportation (FDOT) turnpike revenue bonds, series 2014A. Additionally, Fitch has affirmed the 'AA-' rating on the approximately $2.8 billion outstanding turnpike revenue and refunding bonds.
The Rating Outlook is Stable.
The 'AA-' rating reflects the essential nature of the system along with stable traffic and revenue performance. Although the turnpike has a large work program which includes the need for new money, consistently strong coverage is expected to persist with the addition of debt.
KEY RATING DRIVERS
STRATEGIC IMPORTANCE: Florida's Turnpike Enterprise's (FTE) toll roads make up a critical transportation system with a mature traffic profile and established demand. As a result, toll transactions have grown steadily since 1990; however, the five-year compound annual growth rate (CAGR) for the period 2008-2013 is -0.1% as a result of recessionary effects and modest elasticity to recent toll increases. Fiscal year (FY) 2014 (ended June 30) year-to-date performance for the first nine months has been strong, with transactions and toll revenues rising by 3.4% and 4.0%, respectively, compared to the same period in FY 2013. The network benefits from a strong commuter base that accounts for 95% of total transactions.
Revenue Risk - Volume: Stronger
STRONG RATE-MAKING FLEXIBILITY: Considerable economic flexibility exists to increase toll rates. Toll rates were increased effective June 24, 2012 for the first time since 2004. Per statute, annual increases indexed to the Consumer Price Index (CPI) will be applied to electronic payers going forward - increases were levied on July 1, 2013 and 2014. Cash rate increases, also linked to CPI, will be implemented every five years. However, additional toll adjustments would be permitted to meet rate covenant requirements and cover costs.
Revenue Risk - Price: Stronger
MANAGEABLE WORK PROGRAM: The turnpike's FY 2015-2019 proposed work program totals $3.6 billion which assumes approximately $840 million in additional borrowing during this period, $120 million of which is included in the series 2014A issuance. Debt service coverage ratios (DSCRs) are projected to remain consistent with those expected under the prior plan.
Infrastructure Development/Renewal: Stronger
CONSERVATIVE DEBT PORTFOLIO: The turnpike's debt portfolio consists of fully amortizing, fixed-rate debt with a flat to declining profile and a cash-funded debt service reserve.
Debt Structure: Stronger
MODERATE LEVERAGE and SOLID FINANCIAL MARGINS: Leverage is comparable to peers, currently being under 5x. DSCR increased to 2.50x in FY 2013 due to the indexed cash toll increase and associated increase to electronic toll rates. Fitch expects DSCR to remain above 2.0x for the foreseeable future, having declined to 1.88x and 1.93x in FY 2011 and FY 2012, respectively.
Declining Coverage: Erosion of DSCR below 2x for a sustained period due to lower-than-anticipated revenues derived from toll increases would put pressure on the rating.
Additional Leverage: Increases in leverage beyond historical levels could lead to negative rating action.
Cost Growth: Inability to actively control operating expenses along with costs related to its work program would reflect a weakened credit profile.
Turnpike revenue bonds are secured by a first lien on the gross revenues of the turnpike.
Proceeds from the series 2014A revenue bonds will be used to refinance approximately $115 million of the turnpike's outstanding series 2004A bonds for debt service savings as well as around $120 million in new money to support the capital program.
Toll revenues increased 24.1% in FY 2013, despite toll transactions declining 0.2%, reflecting modest toll elasticity from the five-year cash toll and one-year electronic toll CPI resets implemented at the start of the year. Toll transactions in the first nine months of FY 2014 were 3.4% up on the same period in FY 2013, supporting a 4.0% increase in toll revenue over the same period, implying negligible sensitivity to the annual indexation of electronic tolls implemented on July 1, 2013. The agency implemented its most recent annual electronic toll increase on July 1, 2014, and Fitch does not expect traffic to be significantly affected as a result.
Remaining work in FTE's five-year 2015-2019 capital works program is estimated at $3.6 billion, with $720 million of additional debt funding after the issuance of the series 2014A bonds planned. Series 2014A bond proceeds will cover costs associated with the canal barrier protection works on the mainline in Okeechobee County, and support for projects such as the Veterans Expressway widening in Hillsborough County, the First Coast Expressway widening in Clay and Duval Counties, and the Homestead Extension widening in Miami-Dade County.
Approximately 30% of that total works plan is slated for widening projects, while capital projects account for $2.4 billion, implying deferral is possible if traffic volumes are less than expected. Fitch expects the turnpike will be, as it has been historically, successful in balancing its borrowing needs associated with the program while maintaining a robust DSCR profile and strong financial flexibility. Historically, the turnpike has produced adequate net revenues after debt service to ensure that pay-as-you-go funding is available for construction projects.
FTE has, in recent years, maintained firm control on expenses, which fell by 3.5% in FY 2012 and a further 9.4% in FY 2013. These achievements were primarily due to the implementation of automatic ticket-issuing machines, reduced postage and mailing costs, fewer citations issued, and other operational efficiencies. For FY 2014, operating expenses are projected to grow by 9.7% due to a combination of increased headcount related to Florida Highway Patrol and customer service, standard escalation in toll contract costs, increased credit card fees due to growth in SunPass and Toll-By-Plate customers, and the opening of the I-4 Connector project in Tampa. Additional conversions to all-electronic tolling are expected in the coming years, and as such projects move forward, careful oversight and management of costs associated with implementation and operation will be important.
Fitch's base case forecast assumes a slower growth rate in toll transactions as compared to the sponsor case and also assumes indexation of toll rate increases and future planned debt issuances relating to the current work program. Operating expense growth is assumed to be above the sponsor forecast but consistent with historical levels. Under this scenario, Fitch expects DSCR to remain above 2.0x in the medium term. Fitch's rating case assumes more conservative assumptions with regard to traffic and revenue growth and slightly higher expense growth. DSCR under the rating case could fall to a low of 1.9x with growth resuming thereafter. To the extent that revenues and operating expenses produce coverage levels below 2x for a sustained period, above-inflationary toll increases would be necessary to maintain financial flexibility consistent with the rating level.
The turnpike system operates as an enterprise within FDOT. Its facilities include the mainline, segments of which have been operational since the 1950s, the Sawgrass, Seminole, and Veterans expressways, the Southern Connector Extension, the Polk and Suncoast parkways, and Western Beltway, Part C. A connection linking I-4 with the Selmon Expressway in Tampa became part of the system in January 2014 and the First Coast Expressway in Jacksonville is expected to open in FY 2016.
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
Rating Criteria for Toll Roads, Bridges and Tunnels