NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on approximately $10.2 billion of New Jersey Turnpike Authority's (NJTA) outstanding turnpike revenue bonds. The Rating Outlook is Stable. Fitch does not rate approximately $540 million in parity turnpike revenue bonds.
KEY RATING DRIVERS
The 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 about $1.325 billion is expected to be raised over 2016 - 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.
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. Fitch views toll rates on both the turnpike and parkway of $0.11 per mile and $0.05 per mile, respectively, as low and considers future toll increases in the near- to medium-term as affordable if required.
Revenue Risk: Price - Midrange
Rate-Making Flexibility Constrained by Political Willingness: The authority benefits from unlimited legal authority to change toll rates as it needs. NJTA successfully implemented toll increases in the past; nevertheless, some uncertainty 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 $1.325 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 14% 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 44% 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.
Moderate Leverage and Liquidity: Net debt-to-cash flow available for debt service (CFADS), reflecting the debt service reserve balance of $589 million and the required minimum balance of $100 million in the general reserve as cash deducted from gross debt, was relatively elevated at approximately 8.3x in 2015, and is expected to rise further over the next few years to around 8.8x in the Fitch Rating case. Despite this, debt service coverage ratios (DSCR) should remain adequate, averaging at around 1.48x through the end of the forecast period in 2022. 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's 1.5x, yet lower subordinate lien DSCR managed at around 1.3x and higher all-in leverage of around 13x. Maryland TA's rating largely reflects lower leverage and higher coverage metrics.
Negative - Weaker Coverage Ratios: Erosion of DSCR in the medium term below 1.5x for a sustained period.
Negative - Higher Leverage: Increases in leverage materially beyond the authority's planned $1.325 billion in additional 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.
Positive - Stronger Coverage Ratios: DSCR in the medium term above 1.5x for a sustained period, although not currently expected considering NJTA's sizable and ongoing borrowing plans for the near to medium term.
SUMMARY OF CREDIT
In 2015, traffic on the system increased 3.9% year-over-year to 625.9 million, with the turnpike posting a 6.2% increase and the parkway a 2.4% increase attributable to a combination of factors, including added roadway capacity, declining gas prices, improved weather conditions since April and improving economic conditions. Aggregate system growth since March offset weaker performance in the first few of months of the year stemming from winter weather and two state-of-emergency storms during the first quarter. Capacity expansion on the turnpike as a result of the extensive widening completed in November 2014 between exits 6 contributed to strong traffic growth. In addition, traffic growth on the turnpike was partially driven by traffic diversion from Pulaski Skyway due lane closures related to the two-year upgrade.
Previous years declines, as indicated in the 10-year overall transactions CAGR to 2015 of -1.8%, 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.
In 2015, toll revenue on the system increased 5.4% year-over-year to $1.52 billion, with the turnpike posting a 6.6% increase and the parkway a 2.2%, consistent with traffic growth for both. The 10-year revenue CAGR was +7.9%, indicating the effect of toll increases (latest being in 2012). Continued, albeit moderate, traffic and toll revenue improvements are expected over the next couple of years as a result of the completion of key CIP projects and stable economic growth projections. Over the first four months of 2016, revenue was $477 million, or about 1.7% above projections mainly due to favorable winter weather and continuation of trends observed in 2015. Aggregate system toll revenues were 6.3% above last year's over the same time period as a result of an about 6.5% increase in system traffic.
2015 operating costs increased by 6.5% from the previous year to $503 million; the five-year CAGR to 2015 was 0.9%. The additional costs were largely attributed to higher maintenance expenses, with $38 million in snow removal and severe weather costs and budgeted increases in personnel costs for added headcount to cover the widened roadways. Over the first four months of 2016, NJTA operating expenses were 3.4% below budget. Given more favorable weather in the first three months of the year, snow-related expenses came in below budget. However, costs are expected to rise with additional increases in headcount that with savings elsewhere in the budget anticipated to partially mitigate personnel related increases. 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 2016 year and beyond, the authority expects costs to increase by about 1.9% annually.
The authority currently estimates its unfunded pension deficit to be relatively small at $160 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 based on statutory requirements. 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 $1.4 billion. NJTA's board has recently approved a plan to establish an OPEB trust in order to ensure its funding obligations are met. Through 2015, $61 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 $6.2 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. The reconstruction of interchange 14A on the parkway began in early 2015 to be completed in 2018. Renewals works for three of the four major bridges on the parkway as part of the current CIP were completed in 2015.
NJTA plans to issue $525 million in new money later this year, and expects to raise a further $800 million over the remaining two 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 2022, as developed by CDM Smith: these include a relatively modest 1.7% increase in 2016 followed by a 0.5% decline in aggregate toll revenue 2017 as the Pulaski Skyway reopens, and 1.2% - 1.4% annual growth thereafter. Operating expenditures rise at 3% per annum through the seven-year projection period. In such a scenario, it would take only very small toll increases over the period to maintain DSCR at around 1.5x. Leverage, defined as the ratio of net debt-to-CFADS where net debt reflects only the debt service reserve balance and $100 million of general reserve funds deducted from gross debt, falls from a peak of 8.7x to 7.1x over the period.
Fitch's rating case maintains base case assumptions for 2016 given year-to-date performance, and models higher decline in 2017 compared to base case, 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.
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.
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 29 Sep 2015)
Dodd-Frank Rating Information Disclosure Form