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

NEW YORK--()--Fitch Ratings assigns an 'A-' rating to the Pennsylvania Turnpike Commission's (PTC) $210 million turnpike subordinate revenue bonds series 2014B.

In addition, Fitch affirms PTC's $3.5 billion outstanding senior lien turnpike revenue bonds at 'A+' and $3.8 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

Revenue Risk: Volume - Stronger

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 2014 but generated 42% of net toll revenues.

Revenue Risk: Price - Midrange

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 5.9% from 1990 - 2014. However, there may be political risk associated with implementing toll rates above inflation for multiple years, as is expected in PTC's financial plan.

Infrastructure Development/Renewal: Midrange

Sizable Capital Program: The need for an additional $5.9 billion in senior lien debt to fund PTC's $6.5 billion mainline capital improvement plan (CIP) for fiscal 2015 to 2024 puts pressure on the Pennsylvania Turnpike, particularly when viewed together with the expected $3.6 billion in subordinate lien borrowing to subsidize transit capital and 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.

Debt Structure Risk - Midrange (Senior Lien); Midrange (Sub Lien)

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 86% fixed, 6% synthetically fixed, and 8% variable or synthetically variable.

Financial Metrics:

Elevated Leverage But Strong Financial Performance: PTC's total leverage is currently approximately 12x 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 $400 million of funding requirements, as previously legislated for under Act 44.

Peers: Peers to PTC with similar toll and transaction profiles include New Jersey Turnpike Authority (rated 'A'), and Maryland Transportation Authority (rated 'AA-'), with Maryland's rating level reflecting lower leverage and higher coverage metrics.

RATING SENSITIVITIES

Negative - 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.

Negative - Higher Costs: Management's ability to control expenses and manage its sizable capital program may affect the rating.

Negative - 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.

Negative - Debt Structure Risks: A rising interest rate environment could result in lower financial flexibility as PTC issues debt to fund its $6.5 million capital plan over the next 10 years.

Positive: Given PTC's sizable and ongoing borrowing plans for the future, upward rating action is not likely at this time.

TRANSACTION SUMMARY

PTC expects to issue approximately $210 million in turnpike subordinate revenue bonds. The bonds are being issued to provide funds, together with an equity contribution by PTC, to finance payments to PennDOT for certain mass transit and multi-modal transportation projects under Act 44 and Act 89. Proceeds will also cover the costs of issuance and funding of the debt service reserve account. The bonds are fixed rate, and will be on parity with existing subordinate lien bonds, amortizing through 2044. PTC intends to provide a $15 million equity contribution to fund a portion of the Act 44 payments directed to grants to mass transit agencies.

PTC's traffic was slightly up for fiscal 2014 (year ending May 31), increasing 0.4% over a year prior. This compares to a 0.6% decline during fiscal 2013, flat growth in fiscal 2012, and 1.3% in fiscal 2011. Traffic is up 1.5% for the first quarter of fiscal 2015 based on year-to-date figures through August. Net toll revenues increased 6.2% for fiscal 2014, and have increased 7.6% for the first three months of fiscal 2015 year to date, reflecting toll increases and reductions in commercial discounts. These increases build upon previous revenue increases of 3.9%, 5.6%, and 6.6% seen in fiscal 2013, 2012, and fiscal 2011, respectively.

Continued revenue growth coupled with stable traffic volume demonstrates PTC's resilience despite six 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 PTC, 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.

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.

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' (Aug. 20, 2014).

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 -- Effective Aug. 5, 2011 to Aug. 2, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646421

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=892234

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Contacts

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

Contacts

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