NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on approximately $10 billion of New Jersey Turnpike Authority's (NJTA or the authority) outstanding turnpike revenue bonds. The Rating Outlook for all bonds is Stable.
The 'A' rating reflects continued stable traffic and revenue performance of both the New Jersey Turnpike (the turnpike) and Garden State Parkway (the parkway), NJTA's continued prudent operating cost management and ability to deliver significant capital improvements as detailed in its current $7 billion plan running to 2018 ahead of time and on budget. Additional debt of $2.1 billion is expected to be raised over 2015 - 2018 and is not anticipated to be significantly detrimental to financial metrics, given toll increases implemented ahead of the capital plan. Fitch views the authority's sufficient economic rate making flexibility to bolster its financial position as key.
KEY RATING DRIVERS
Revenue Risk: Volume - Stronger
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 Risk: Price - Midrange
Economic Rate-Making Flexibility Constrained by Political Willingness: Fitch views toll rates on both the turnpike and parkway of $0.11 per mile and $0.04 per mile, respectively, as low, 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.
Infrastructure Development/Renewal - Midrange
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 included as a result of savings made in the original plan. However, it is largely debt funded, with an additional $2.1 billion of debt required over the remainder of 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.
Debt Structure Risk - Stronger
Swaps Hedge Variable Rate Risk But Create Basis Risk: NJTA maintains around 15% of its debt profile as variable rate debt, almost entirely hedged with interest rate swaps with counterparties of adequate financial strength. The use of SIFMA-indexed swaps to hedge LIBOR-linked debt creates a mismatch that can distort the authority's cash flows; however, NJTA has been reducing its exposure to basis risk through recent debt refundings, with currently about 52% of the variable rate debt bearing basis risk compared to close to 70% in prior years. NJTA has entirely removed reliance on sureties to support liquidity, with cash funding of the debt service reserve to covenant levels.
Financial Metrics
Moderate Leverage and Liquidity: Net debt to cash flow available for debt service (CFADS), reflecting the debt service reserve balance of $565 million and the required minimum balance of $75 million in the general reserve as cash deducted from gross debt, was relatively elevated at approximately 8.2x in 2014, expected to rise further over the next few years to around 8.5x in the Fitch base case. Despite this, coverage ratios (DSCR) should remain robust, averaging at around 1.5x through the end of the forecast period in 2021. Furthermore, Fitch believes the authority retains the economic ability to increase tolls in the medium term in order to support its financial profile should traffic levels not meet expectations.
Peers: Peers to NJTA with similar toll and transaction profiles include Pennsylvania Turnpike Commission (PTC, senior and subordinate liens rated 'A+' and 'A-', respectively, by Fitch), and Maryland Transportation Authority (rated 'AA-'). PTC's ratings reflect its sizable CIP and the expectation of relatively stronger senior lien DSCR levels of around 2x compared to NJTA 1.5x, yet lower subordinate lien DSCR managed at around 1.3x and higher all-in leverage of around 12x. Maryland's rating level largely reflects lower leverage and higher coverage metrics.
RATING SENSITIVITIES
Negative - Weaker Coverage Ratios: Erosion of the debt service coverage ratio (DSCR) in the medium term significantly below 1.5x for a sustained period would put pressure on the rating.
Negative - Higher Leverage: Increases in leverage materially beyond the authority's planned $2.1bn in debt to fund the balance of the 10-year, $7 billion CIP without corresponding toll increases.
Negative - Increased Transfers: Materially increased transfers from NJTA to the state in order to support state transportation projects without commensurate toll increases to ensure system preservation would pressure the rating.
Positive - Given NJTA's sizable and ongoing borrowing plans for near-to-medium term, upward rating action is not likely at this time.
SUMMARY OF CREDIT
In 2014, traffic on the system increased 1.5% year-over-year to 602.6 million, with the turnpike posting a 3.5% increase and the parkway a 0.4% increase attributable to declining gas prices and improving economic conditions. Previous years declines, as indicated in the 10-year transactions CAGR to 2014 of -3.5%, 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. Extreme weather conditions experienced during the last few years have had limited effects on NJTA's facilities. The long-term impact of Hurricane Sandy was immaterial and winter storms of 2013/14 had a short-term negative impact on authority's performance in the first three months of 2014, with improved weather conditions since April resulting in stronger transaction growth.
In 2014, toll revenue on the system increased 2.3% year-over-year to $1.45 billion, with the turnpike posting a 3.1% increase and the parkway a 0.2%, consistent with traffic growth for both. The 10-year revenue CAGR was +7.3%, indicating the effect of toll increases. Continued traffic and toll revenue 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 last year, and the completion of key CIP projects such as the extensive turnpike widening project completed in November 2014. Over the first four months of 2015, revenue was $449 million, or about 1.2% below projections due to winter weather and two state of emergency storms in the months between January and March. Still, toll revenues were 5% above last year's over the same time period as a result of a 3.4% increase in system traffic.
2014 operating costs were essentially flat, down 0.1% from the previous year to $473 million; the five-year CAGR to 2014 was 0.3%. Over the first four months of 2015, NJTA operating expenses were $23 million above the same period last year. The additional costs were largely attributed to higher maintenance expenses, with $20 million incurred for snow removal and $2 million due to budgeted increase in personnel costs for added headcount to cover the widened roadways. The remaining $1 million in higher costs resulted from budgeted increases for state police costs also associated with widened roadways. About $14 million in extraordinary snow-clearing costs were charged to the general fund (related to state of emergency events) on top of the $30 million of operating budget allocated to snow removal (related to storms not resulting in a state of emergency declaration), which was higher than last year due to the type of snow events that have occurred in the first three months of 2015. 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. For the full 2015 year, the authority expects costs to increase by about 2.7% from prior year.
The authority currently estimates its unfunded pension deficit to be relatively small at $150 million based upon its estimated share of the Actuarial Unfunded Accrued Liability for the municipalities and local groups portion of the New Jersey Public Employee Retirement System as of July 31, 2014. 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 2014, $33 million has been designated for future deposit in the trust. 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 $6 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 - reached completion in November 2014, with improved traffic conditions 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 $750 million in new money later this year, and expects to raise a further $1.3 billion over the remaining three years of the current CIP. Fitch has included new debt expectations in its projections.
Fitch's base case projection reflects the sponsor's toll revenue growth assumptions over the next seven years through 2021, as developed by CDM Smith: these include a modest 2.4% increase in 2015 reflecting Pulaski Skyway diversions, completion of key CIP projects, and the rebound from winter conditions. This is followed by a 1% growth assumption in 2016 as the Pulaski Skyway reopens, and 1.2%-1.4% annual growth thereafter. Operating expenditures rise at 3% per annum through the 10-year projection period. In such a scenario, 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 and $75 million of general reserve funds deducted from gross debt, falls from a peak of 8.5x to 7.2x over the period.
Fitch's rating case models lower traffic growth through 2017 compared to base case and a decline in traffic in 2018, followed by modest traffic recovery. Fitch also assumes a slightly higher expense growth of 3.5% per annum. In this scenario DSCR would fall 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 15%, or 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.
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.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 20 Aug 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=758708
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985840
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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