Fitch Affirms Ohio Turnpike's Senior Lien Revs at 'AA' and Junior Lien Revs at 'A+'

CHICAGO--()--Fitch Ratings has affirmed the ratings on the following Ohio Turnpike and Infrastructure Commission (OTIC, formerly known as Ohio Turnpike Commission) turnpike revenue bonds: $526 million senior lien revenue bonds at 'AA' and $1.04 billion junior lien revenue bonds at 'A+'. The Rating Outlook on all bonds is Stable.

The 'AA' and 'A+' senior and junior ratings reflect the turnpike's long-term traffic stability and revenue growth, low toll rates relative to peers and essentiality to the national transportation network. The senior debt rating also reflects its conservative debt structure, with the lien expected to be drawn only to fund turnpike capital expenditures and subject to relatively restrictive covenants.

The junior lien is subject to more lenient covenants and is intended to be used for infrastructure projects that provide a nexus to the turnpike. However, it compares favorably to peers on debt service coverage metrics, supporting its rating at the top of the 'A' category. The primarily cash-funded capital plan and OTIC's intent to accelerate replacement of the roadway base provide further strength to the rating.

KEY RATING DRIVERS

Strategic Asset, Low Volatility - Revenue Risk-Volume: Stronger

The turnpike is a key east-west interstate connector that faces limited competition with a stable traffic base. This profile is offset to some degree by a commercial traffic component that comprises approximately a third of vehicle miles travelled and more than 55% of revenue. However, Fitch notes the relative stability of commercial traffic on the turnpike compared with other rated toll roads.

Strong Rate-Making Flexibility - Revenue Risk-Price: Stronger

OTIC has unlimited toll rate-setting authority and this, coupled with low passenger toll rates of $0.05 per mile, provides for robust economic rate-making ability. OTIC has raised rates several times in its history, most recently on Jan. 1, 2016 to further progress its pre-approved 10 years of 2.7% annual rate increases, ending 2023.

Cash Funded Capital Plan - Infrastructure Development and Renewal: Midrange

OTIC has revamped its capital investment plan (CIP) with detailed expenditures through 2062. The commission's primary focus for the next 25 years is on repaving approximately 965 miles of roadway, of which it has already completed 118 miles, to extend the useful life of the asset. Capital expenditures for the next 10 years aggregate to $1.2 billion, with an average of $123.7 million in capex per year. The 10-year CIP is nearly entirely cash funded, with some senior lien debt issuance for turnpike projects planned for 2018.

Conservative Capital Structure - Debt Structure: Stronger (senior lien); Midrange (junior lien)

All of OTIC's debt is fixed rate and total debt service is relatively flat. That said, junior lien debt is somewhat back-loaded and, by definition, is fully subordinated to the senior lien. Financial covenants are viewed as adequate and OTIC has adopted a policy to maintain a 2.0x debt service coverage ratio on the senior lien.

Modest Leverage and Robust Metrics - Financial Metrics:

OTIC leverage of 1.8x on the senior lien and 7.1x total in fiscal year (FY) 2015 reflects a well-managed debt profile. Coverage in fiscal 2015 was 3.25x on the senior lien and 2.12x on the junior lien. It is expected to maintain an average debt service coverage ratio (DSCR) profile of 3.5x and 1.9x on the senior and junior liens, respectively. Current liquidity is healthy, reflected in 590 days' cash on hand (DCOH).

Peer Group: Ohio Turnpike's peers include the Pennsylvania Turnpike Commission (Penn Turnpike, 'A+'/Outlook Stable; 'A-'/Outlook Stable) and the Florida Turnpike Enterprise (FDOT, 'AA-'/Outlook Stable). Ohio Turnpike's toll rates are more favorable than its peers, reflecting some pricing power; however, its lower annual volume reflects its size relative to peers. While the Ohio Turnpike's leverage is comparable to Penn Turnpike, its elevated DSCR level is more in line with FDOT.

RATING SENSITIVITIES

Negative - Additional Leverage: Senior debt raised for non-system purposes, or meaningful additional junior debt raised in excess of the aggregate $1.5 billion currently envisaged without corresponding revenue increases;

Negative - Expanded O&M Scope: Additional operation and maintenance (O&M) responsibilities relating to projects other than the turnpike itself;

Negative - Shift in Pay-Go Investment: A meaningful shift from the expectation that major maintenance and capital investment on the turnpike will be undertaken on a pay-as-you-go basis;

Negative - Declining Operating Performance: Cost growth, traffic declines or a policy shift that results in senior or junior DSCR below 2.5x or 1.7x, respectively, for a sustained period;

Positive - Due to OTIC's stable traffic profile, current capital plan and leverage characteristics, positive rating action is unlikely in the near term.

CREDIT UPDATE

The federal lawsuit challenging the state's use of Ohio Turnpike revenue to finance non-turnpike related transportation projects was dismissed and has been remanded back to state courts where a motion to dismiss is pending. In either case, debt service is secured by legal covenants that require OTIC to increase tolls in order to satisfy coverage of at least 1.2x DSCR. Moreover, OTIC retains rate-making authority, with tolls currently approved to increase 2.7% annually through 2023. Fitch will continue to monitor the developments of the state lawsuit.

Traffic and revenue performance continues a solid positive trend, following the third of 10 pre-approved years of 2.7% annual toll increases. Total traffic grew 4.1% in FY2015 while total revenue grew 5.9%, exceeding projections. Following minimal growth in FY2014 due to harsh winter conditions, FY2015 passenger vehicle traffic increased 4.4% and commercial traffic increased 3.3%, benefitting from favorable winter conditions and an increase in vehicle miles travelled (VMT) due to low gas prices and strengthening macroeconomic conditions. Total year-to-date (YTD) traffic through March 2016 is up an additional 6.7% while total toll revenue is up 7.3%, as a reflection of traffic growth and annual toll increases.

OTIC's 10-year CIP is $1.2 billion, or an average of $123.7 million per year, with the replacement of the original concrete base of the oldest sections of the turnpike comprising the largest portion at 46%. To date, OTIC has replaced approximately 12% of the 965 lane miles identified for replacement. At an accelerated pace of 35-40 lane miles replaced annually, forecasted completion date is 2041. Besides replacement, mainline resurfacing makes up 17% of the program, with bridges making up 19%. Capex is primarily cash funded, with some senior lien debt issuance for turnpike projects planned for 2018.

OTIC has historically produced consistently sound financial results. Operating expenses in FY2015 were flat at 0.3% over FY2014 in which expenses increased a moderate 1.9% due to winter maintenance costs. In FY2015, senior debt service coverage grew to 3.25x, while total coverage was 2.12x. Leverage on the senior lien is 1.8x; however, due to the accreting nature of a portion of the junior lien debt, total leverage is 7.1x. FY2015 net revenue coverage of maximum annual debt service was 1.24x.

Fitch's five-year base case forecast projects annual revenue growth of 2.5%, driven primarily by the programmed toll increases, and roughly 3% operations and maintenance expense growth. Under this scenario, average senior and total debt service coverage remains above 3.5x and 1.9x, respectively. Fitch's rating case incorporates a 4% traffic shock in 2016, followed by a partial recovery, with no additional operating expense stress due to historical expense containment. The result is average senior and total debt service coverage projected above 3.3x and 1.8x, respectively.

Fitch also undertook a total revenue growth break-even analysis, assessing the rate at which total revenue could grow from its current level and still service annual debt obligations through maturity, taking into account dedicated liquidity support and operating cost growth of 2.5%. In order for the senior lien to maintain at least 1.0x coverage after depleting all available debt service reserves, OTIC would only require a -0.53% total revenue growth rate. In order for both liens to avoid default while depleting reserves, a 0.31% total revenue growth rate would be required.

SUMMARY OF CREDIT

The Ohio Turnpike spans the entire northern portion of the state of Ohio and connects the cities of Toledo, Cleveland and Youngstown, encompassing a distance of 241 miles. It is the primary connection between the Indiana Toll Road (to the west) and the Pennsylvania Turnpike (to the east). The Ohio Turnpike also serves as a major interstate transportation corridor between the Northeast and the Midwest, linking toll roads between Boston, New York City and Chicago. Sections of the turnpike are designated interstate routes 76, 80 and 90, all of which are major highway routes across the country.

SECURITY

The bonds are secured by the net revenues collected on the turnpike operated by the OTIC.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 29 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870170

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Casey Cathcart, +1-312-368-3214
Associate Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jeffrey Lack, +1-312-368-3171
Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Casey Cathcart, +1-312-368-3214
Associate Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jeffrey Lack, +1-312-368-3171
Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com