Fitch Rates Pennsylvania Turnpike's Sub Rev Bonds, Series B of 2016, 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to the Pennsylvania Turnpike Commission's (PTC) approximately $186.3 million turnpike subordinate revenue bonds, series B of 2016. The Rating Outlook is Stable.

The rating reflects PTC's strong traffic profile, improving underlying economic trends, ability and willingness to raise tolls and history of prudent cost management, all of which somewhat mitigate its sizeable debt burden. The rating also reflects PTC's dependence on sustained toll rate increases to meet its entire cost base. The rating further reflects expected improved financial flexibility following the partial sun-setting of PTC's $450 million Act 44 transfer obligations in 2022. The two-notch rating difference between the senior and subordinate liens (senior lien rated 'A+'/Outlook Stable) is supported by the wide differential in coverage between the two liens, with senior and subordinate coverage expected at 10-year averages in excess of 2x and 1.3x, respectively, in Fitch's rating case.

KEY RATING DRIVERS

Essential Route with Commercial Exposure (Revenue Risk: Volume - Stronger): PTC plays a vital role in serving the state's major population centers and as a key part of the country's interstate system, evidenced by its relatively stable historical traffic and revenue performance. Dependence on commercial traffic is relatively high, with 14% of commercial traffic contributing 43% of net toll revenues in fiscal 2016, reflecting its critical position in the interstate system. PTC benefits from economic ratemaking flexibility, and traffic has demonstrated relatively low elasticity to the toll increases applied since 2005.

Rate-making Flexibility (Revenue Risk: Price - Midrange): While the current toll rates are moderate, there may be political risk associated with implementing toll rates above inflation for multiple years, as is expected in PTC's financial plan.

Sizable Capital Program (Infrastructure Development/Renewal - Midrange): While PTC's capital plan is large at approximately $5.8 billion, the commission's decision to adopt a prioritized capital plan, which focuses primarily on preservation of the asset, has decreased expected capital costs by roughly $900 million. Additionally, PTC's goal of increasing pay-go funding to approximately 32% of the capital plan has further relieved some of the need for senior lien debt issuances. Fitch considers the current capital plan adequate to accommodate majority of PTC's needs over the next several years while ensuring acceptable operating conditions. Nevertheless, additional debt issuances will continue to put pressure on the Pennsylvania Turnpike, particularly when viewed together with the expected $2.5 billion in subordinate lien borrowing to subsidize transit capital and operations under Act 44 through 2022.

Reasonable Debt Structure (Debt Structure: Senior/Sub - Stronger/Midrange): While PTC's turnpike total debt is sizable at approximately $10.4 billion and is expected to increase, bondholders benefit from PTC's solid covenant protections and limited variable rate exposure, with currently 6% of debt bearing an unhedged variable rate.

Financial Metrics

Elevated Leverage but Strong Financial Performance: PTC's total leverage is currently elevated at approximately 14x net debt-to-cash flow available for debt service (CFADS) and is expected to remain at a relatively high level for some time. Senior DSCRs are expected to remain 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. While pressure remains, particularly on subordinate lien DSCR, for the next several years, PTC's capital structure beyond 2022 will benefit from reduced leverage and increased flexibility under Act 89's partial sunset of Act 44 payments, improving the longer term credit profile of the subordinate lien.

Peers Analysis: PTC's peers include New Jersey Turnpike Authority ('A'/Outlook Stable) and Maryland Transportation Authority ('AA-'/Outlook Positive). All three form essential components of the interstate highway network, serve sizeable local populations, and provide vital long distance and commuter links. Maryland's rating largely reflects its stronger debt metrics, while ratings for New Jersey and PTC reflect elevated debt profiles as a result of high capital needs and significant required cash transfers to support non-system projects.

RATING SENSITIVITIES

Negative - Political opposition stemming from higher than forecasted annual toll increases of 3% to 6% as a result of traffic stagnation could decrease financial flexibility and consequently weaken credit quality.

Negative - Inability to manage operating, capital, or interest expenses which pressures coverage levels below PTC's current coverage policies (2x senior/1.3x subordinate/1.2x MLF bonds) may result in downward rating actions.

Positive - Given PTC's sizable and ongoing borrowing plans for the future, upward rating actions are not likely at this time.

SUMMARY OF CREDIT

PTC expects to issue approximately $186.3million in subordinate revenue bonds, series B of 2016. The bond proceeds will provide funds, together with a cash contribution by PTC, to the Pennsylvania Department of Transportation (PennDOT) in accordance with Act 44 and Act 89 to fund certain grants to mass transit agencies and for multi-modal transportation projects. Proceeds also cover the costs of issuance and funding of the debt service reserve account. The bonds are fixed rate, maturing in fiscal 2047 (ending May 31) and on parity with existing subordinate bonds.

PTC's traffic was up 3.1% in fiscal 2016 (year ended May 31) reaching 198.3 million. Gross toll revenues increased 10.4% to $1.03 billion for fiscal 2016 reflecting toll increases, reductions in commercial discounts and improving economic conditions. As a result of the most recent toll changes in January 2016, the average cash toll equals 12.9 cents per mile, and the average E-ZPass toll is 9.2 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. The aforementioned increases build upon previous cash toll revenue increases of 4% to 6% and E-Z Pass revenue increases of 2% to 5% seen over the 2011-2015 period. On July 19, 2016, the PTC has approved a 6% toll increase for both E-Z Pass and cash customers to go into effect in January 2017.

Over the first three months in fiscal 2017, through August, traffic was up 1.8% and toll revenues increased by 11.4% over the same period last year demonstrating continued growth.

For more information on the Pennsylvania Turnpike Commission, please see Fitch's press release 'Fitch Rates Penn Turnpike's Senior Series 2016A-1 & A-2 Bonds 'A+'; Affirms Outstanding Bonds' dated May 31, 2016 and available at www.fitchratings.com.

SECURITY

The subordinate revenue bonds are secured by commission payments consisting of turnpike revenues after all obligations under the senior lien indenture have been satisfied.

Date of Relevant Rating Committee: May 27, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance - Effective from 28 September 2015 to 8 July 2016 (pub. 28 Sep 2015)
https://www.fitchratings.com/site/re/870967

Rating Criteria for Toll Roads, Bridges and Tunnels - Effective Sept. 29, 2015-Aug. 11, 2016 (pub. 29 Sep 2015)
https://www.fitchratings.com/site/re/870170

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012977

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Tanya Langman, +1-212-908-0716
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emma W. Griffith, +1-212-908-9124
Director
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com