Fitch: Comment on Recent Legislation Regarding Bay Area Toll Bridge System

NEW YORK--()--July 25, 2005--It is Fitch's opinion that the enactment of Assembly Bill (AB) 144 by the State of California on July 18, 2005 provides adequate flexibility to ensure little to no adverse consequence to credit quality for Bay Area Toll Authority (BATA) and California Infrastructure and Economic Development Bank (CIEDB) Bay Area toll bridges seismic retrofit program debtholders. The proposed solution, another step in the lengthy process to finish the Bay Area's troubled seismic retrofit program, may serve to finally put the necessary elements in place to see the program through to completion. Additional engineering and financial challenges cannot be ruled out, and may very well still be reasonably expected, but it appears as though the legislature has delegated the necessary authority for the selected entity, BATA, to finish the job without returning to the state for another solution.

Fitch currently rates the outstanding $1 billion Bay Area Toll Authority, CA (BATA) San Francisco Bay Area Toll Bridge revenue bonds 'AA-' with a Stable Rating Outlook. In addition, Fitch currently rates the outstanding $1 billion California Infrastructure and Economic Development Bank Bay Area Toll Bridges seismic retrofit first lien revenue bonds 'AA-' with a Stable Rating Outlook. Fitch also rates the outstanding $400 million California Infrastructure and Economic Development Bank, Bay Area Toll Bridges Seismic Retrofit Revenue Notes, Series 2005 Second Lien Commercial Paper Program 'F1+' based on the support of irrevocable letters of credit severally provided by a group of banks.

AB 144 is an important step toward the completion of the Bay Area toll bridge seismic retrofit program initiated by the state in 1997. The seismic retrofit of the seven Bay Area bridges (which excludes the Golden Gate Bridge seismic retrofit that is being separately managed) was originally expected to cost $2.6 billion and be completed by 2006. Cost estimates have now escalated to $8.7 billion with final program completion now slated for the 2011-12 window. The unprecedented nature of the retrofit, particularly the engineering complexities associated with the unique scale and scope of the replacement of the eastern span, and the very public stage on which it has unfolded have largely driven the delays and cost increases.

AB 144 essentially transfers financial management and project oversight of the Bay-Area bridge seismic retrofit program (excluding the Golden Gate Bridge) from the California Department of Transportation (Caltrans) to BATA, similar to the current arrangement with Regional Measure One. Caltrans will continue to be responsible for project management and delivery, subject to BATA approval and the review of a newly established oversight committee comprising the executive directors of the Metropolitan Transportation Commission (i.e. BATA) and the California Transportation Commission and the director of Caltrans.

This action consolidates the overall management of all aspects of the operation, maintenance and life-cycle asset management of the system largely with one entity. The action, in and of itself, is a positive one from a credit standpoint as it should foster a more uniform and coordinated approach to the management of the bridge system. The prior arrangement, where primary management responsibilities of the enterprise were split between two entities on programmatic lines with no single executive point of responsibility and accountability, was unusual and may have contributed to the delays and cost increases.

The legislation stipulates that an increase in the seismic retrofit surcharge may be implemented, but no earlier than Jan. 1, 2007. This increase combined with state resources appropriated as part of the transfer has been identified by the legislature as being adequate to generate the $3.6 billion in additional funds required to meet the current estimate of total project cost for the seismic retrofit effort. Given the urgency with which these projects need to be completed, it is very likely that the two-axle vehicle toll rate will rise to $4.00 in early 2007. The legislation also provides BATA the independent authority to raise tolls further to meet bond covenants.

The legislation provides for consolidation of the $1.00 legislatively-approved seismic surcharge and the $1.00 (each) voter-approved Regional Measure One and Two base dollars. However, until the CIEDB's seismic surcharge-backed revenue bonds are refunded, which is likely to occur over the next 6-12 months, it stipulates the continued segregation of the toll and seismic surcharge revenues. It is likely that the CIEDB bonds will be refunded with BATA bonds secured by consolidated toll and surcharge revenues. Until then, the outstanding BATA revenue bonds will remain separately secured by the current regional measure dollars. Provided no legal challenges present themselves and the CIEDB bonds are taken out, the toll and surcharge revenues may be consolidated for bond financing purposes and will be indistinguishable from the standpoint of bondholder security. However, the voter-approved nature of the regional measure dollars will likely require administrative segregation and tracking of each revenue stream to ensure that BATA can demonstrate that they continue to meet voter-prescribed purposes.

Under AB 144, overall financial management, including that of seismic surcharge revenues once the CIEDB bonds are refunded, is consolidated with BATA. Maintenance of roadway and bridge structures that resided with Caltrans is transferred to BATA once the CIEDB bonds are refunded and the retrofit of a bridge is complete. Therefore, it would appear that maintenance of five of the seven bridges will be transferred in short order and related maintenance expenses will enter the operating cost base of BATA. The bridges that will remain Caltrans maintenance responsibility for now will be the Richmond-San Rafael Bridge and San Francisco Oakland Bay Bridge. There may be some question associated with the Antioch and Dumbarton bridges, which were originally deemed not to have seismic retrofit needs, but are currently under further review. Ongoing lifecycle project renewal and rehabilitation and facility improvement costs for all bridges, which were only partially factored into BATA's financial plan in the past, will now need to be incorporated at the level necessary for maintenance of the facilities at adequate service levels over the long term.

The introduction of the outstanding and new seismic surcharge debt and additional asset management responsibilities will alter BATA's financial plan significantly. The elimination of current Caltrans operational overhead costs currently allocated to BATA and the ability to restructure the financial plan to incorporate the needed 2007 increase in the seismic surcharge and potential future rate increases could largely mitigate associated risk to existing BATA bondholders. Given the various changes made by the state legislature, Fitch believes that significant changes may need to be made to the BATA bond indenture requiring bond insurer and/or investor approval. While that may be accomplished without a refunding, for administrative ease a refunding of existing BATA bonds cannot be ruled out.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.

Contacts

Fitch Ratings, New York
Cherian George, 212-908-0519
Mike McDermott, 212-908-0605
Corey Modeste, 212-908-0399
Christine Pollak, 212-908-0526 (Media Relations)

Contacts

Fitch Ratings, New York
Cherian George, 212-908-0519
Mike McDermott, 212-908-0605
Corey Modeste, 212-908-0399
Christine Pollak, 212-908-0526 (Media Relations)