Published: March 09, 2011
Fitch Rates Pennsylvania Turnpike Commission's 2011A&B Revs 'A+'; Affirms L-T Revs
NEW YORK - (BUSINESS WIRE) - Fitch Ratings assigns the following ratings to the Pennsylvania Turnpike
Commission's (PTC) bonds:
--$50 million turnpike revenue bonds, series 2011A 'A+';
--$92 million turnpike variable rate revenue bonds, series 2011B (senior
lien) 'A+/F1+' (short-term based on internal liquidity).
The bonds are being issued to current refund PTC's turnpike revenue
refunding bonds, series S of 2001; to partially advance refund turnpike
revenue refunding bonds, series R of 2001; and to cover costs of
issuance.
In addition, Fitch affirms its 'A+' rating on PTC's $2.8 billion
outstanding turnpike revenue bonds (senior lien).
The Rating Outlook on all turnpike revenue bonds (senior lien) is
Stable. While Fitch rates the PTC's subordinate Motor License Fund (MLF)
enhanced special revenue bonds (see press release dated Oct. 12, 2010),
Fitch does not rate PTC's 2008, 2009, and 2010 subordinate revenue bonds.
RATING RATIONALE:
The 'A+' long-tem rating reflects PTC's vital role in serving the
state's major population centers as well as its stable historical
traffic and revenue growth; its financial performance, which is expected
to continue covering all operating and current capital needs of the
existing mainline facilities; and its economic ratemaking flexibility.
The rating incorporates an additional $4.1 billion in senior lien debt
needed to fund the PTC's mainline capital improvement plan (CIP) for
fiscal 2011 to 2020, and increasing leverage to subsidize highway and
bridge projects across the commonwealth, as well as subsidize transit
operations under Act 44. Under these scenarios, Fitch expects PTC to
have sufficient excess cash flow to fund approximately 20% of annual
mainline capital expenditure on a pay-go basis.
Primary risks for PTC's 'A+' rating include:
--The anticipated higher overall leverage of the turnpike system, which
could reach between $14 and $15 billion (across all liens) over the next
12 years, including both currently outstanding and expected issuances;
--Political risk associated with the implementation of expected annual
toll increases above previously anticipated levels;
--Limited flexibility to defer mainline capital spending due to overall
turnpike maintenance requirements;
--Lack of full insulation for senior lien revenue bondholders from
parity debt being issued to meet obligations under Act 44, which even
with reduced funding requirements going forward could result in
deterioration of historically robust debt service coverage levels and
impact mainline maintenance.
An additional risk is the potential for the Pennsylvania Department of
Transportation to require PTC's Act 44 payments in excess of $450
million for fiscal 2011, although the new administration has not advised
the Commission on its position on the dispute. To the extent that the
PTC is required to meet annual obligations under Act 44 in excess of the
current $450 million, toll rate increases may need to be higher than the
anticipated 3% annual increases currently expected. Historically,
traffic diversions have been generally limited immediately following
toll increases given the strategic location of the road and limited
viable alternatives; however, consecutive multi-year toll rate increases
above 3% could lead to higher toll elasticity. Downward rating pressure
could come to fruition in the event that financial margins and
flexibility deteriorate from expanded Act 44 funding obligations,
deferral of capital mainline needs and/or increased leveraging above
current estimates.
KEY RATING DRIVERS:
--Resilience of traffic levels, particularly commercial traffic, in the
face of expanded obligations of the PTC and associated toll increases;
--Management's ability to control expenses and manage its sizable
capital program while meeting its debt service on senior and subordinate
lien bonds and subordinate lien MLF bonds.
SECURITY:
The senior revenue bonds are secured by tolls, charges, fines and other
revenues and income derived from vehicular use of the PTC, net of
operating and maintenance expenses.
CREDIT SUMMARY:
While the rating reflects the expectation that under any reasonable
scenario senior lien debt service coverage would be robust, PTC's
mission change from a self-supporting entity to one subsidizing
state-wide functions and the associated lower levels of financial
flexibility are heightened risks. Given the significant increase in
financial obligations and overall leverage, the PTC is now dependent
upon regular toll increases for obligations outside of the preservation
of the turnpike system; these increases are likely to be above
managements' original estimate of 3% per year if traffic growth falls
below 2% annually. PTC began implementing toll increases and revenue
enhancements in 2009 to meet its annual obligations. The revenue
increases aim to provide funds for payments under the Funding Agreement
and other Act 44 purposes, including funding of the PTC's mainline
capital expenditure program and normal operating expenditures. The PTC
will determine future toll increases, taking into account the amount
necessary to meet its then existing debt and operational obligations.
In January 2009, a 25% toll increase went into effect on the mainline
turnpike, followed by a further 3% increase in January 2010, with
minimal impact on traffic. Final figures indicate that traffic increased
0.2% for FY 2010 (ending May 31), compared to a decline of 1.8% in 2009.
This corresponds to revenue increases of 12.7% in 2010 and 2.8% in 2009.
Most recently the PTC adopted several revenue enhancement measures that
took effect in January 2011. Firstly, tolls increased 3% for EZPass
customers and 10% for cash customers, rounded to the nearest $0.05. This
is the first time the PTC has implemented a differentiation of rates for
EZPass users and cash customers. Second, the PTC increased annual fees
for use of EZPass transponders from $3 per transponder to $6. Finally,
the existing commercial discount program, which previously provided for
tiered discounts of 10%, 15% and 20% off published toll rates depending
on total monthly fares, was adjusted to have tiered discounts of 5%, 10%
and 15%.
As a result of these changes, the average cash toll equals 8.5 cents per
mile, and the average EZPass toll is 8.0 cents per mile (vs. 7.7 cents
per mile after the 2010 increase and 7.4 cents per mile after the 2009
increase). This reflects a full-length trip on the Turnpike Mainline and
is considered to be competitive with other major domestic, seasoned toll
facilities. On a last 12 months basis through January 2011, PTC has had
a 12-month total volume of 188.6 million total transactions,
representing a 1% increase versus the same period a year prior. Revenues
have grown 5% over the same period, showing resilience despite the 2009,
2010, and 2011 toll increases.
Going forward, the PTC plans to continue to implement annual toll
increases. Without both additional leverage and toll increases the PTC
will not be able to meet its Act 44 obligations for the next 10-15
years, even at the reduced funding level of $450 million.
PTC has seen slightly lower debt service coverage levels in 2009 and
2010, with coverage of 2.2 times (x) and 3.0x respectively for senior
lien obligations (senior and subordinate coverage is 2.0x and 2.1x for
2009 and 2010 respectively). This compares to 3.4x and 2.8x in 2007 and
2008 respectively. This change reflects PTC's need to manage existing
obligations on the mainline facilities and capital projects contained in
its 10-year capital program. Operating and maintenance expenses grew by
5% and 1% respectively, an improvement over 2008's 14.6% rise due to
employee benefits, traffic services, safety and communication expenses.
PTC also maintains a sizable cash balance of $350 million. Through 2009
and 2010 management has made efforts to contain costs, with continuing
efforts for fiscal 2011. Looking forward, after a thorough analysis of
the PTC's plan, using PTC assumptions, Fitch believes that there are
reasonable scenarios under which planned toll increases may be
insufficient to meet the annual obligations under Act 44 in the medium
term and additional leveraging and/or higher toll rates may be needed.
Furthermore, Fitch's base and stress case scenarios indicate that toll
increases above 3% annually may be needed to meet debt service coverage
and obligations under Act 44. This could exacerbate political risks.
Prior to the expanded mandate under Act 44, excess toll revenues were
maintained within the PTC, mitigating the lack of structured operating
and capital reserves. With no covenant requiring specific cash
set-asides for necessary rehabilitation efforts there is the potential
that capital projects can be deferred to meet Act 44 obligations,
resulting in delayed and more expensive capital projects in the medium
to long term. Given the age of the turnpike system and increasing
maintenance requirements, there is limited flexibility to defer capital
projects under the mainline capital improvement program. However, PTC's
policy to maintain a cumulative fund balance (including cash balances in
the Reserve Maintenance Fund and General Reserve Fund) equal to the
greater of either MADS on all bonds not secured by a debt service
reserve fund or 10% of annual budgeted revenues serves to provide some
internal liquidity flexibility for necessary capital projects. The
robust senior lien additional bonds test of 1.75x annual debt service or
1.30x maximum annual debt service provides additional comfort, as does
the expectation that bonds issued to meet Act 44 obligations will be
issued on the subordinate lien, either as subordinate revenue bonds or
as subordinate bonds with enhancement from the Commonwealth's Motor
License Fund. The rate covenants on the subordinate and subordinate MLF
backed bonds, while low at 1.15x and 1.0x, respectively, provide another
floor of protection for the senior bonds. The PTC has an internal policy
to maintain debt service coverage of at least 2.0x for the senior bonds
and 1.30x for the subordinate bonds, and to maintain uncommitted
reserves equal to 10% of annual revenues.
The Pennsylvania Turnpike is the nation's oldest turnpike. It serves
Pennsylvania's mature economy, including the cities of Philadelphia and
Pittsburgh, which anchor each end of the state. The turnpike also
provides a strategic link in the system of turnpikes that stretches from
Chicago to Boston. Not surprisingly, toll revenues benefit from a high
proportion of commercial traffic. While this introduces some
susceptibility of commercial revenues to economic cycles, the sizable
boost to revenues in up-cycles softens the negative financial impact in
down-cycles. Interstate 80 extends through northern Pennsylvania for
roughly 311 miles from the Delaware Water Gap Bridge over the Delaware
River on the Commonwealth's eastern boundary to the Ohio-Pennsylvania
state line on its western boundary.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', (Aug. 16,
2010);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels', (Aug. 10,
2010).
For information on Build America Bonds,visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543265
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE.
Fitch Ratings
Primary Analyst
Emma W. Griffith, +1-212-908-9124
Director
Fitch,
Inc.
1 State Street Plaza
New York, NY 10004
or
Secondary
Analyst
Chad Lewis, +1-212-908-0886
Director
or
Committee
Chairperson
Mike McDermott, +1-212-908-0605
Managing Director
or
Media
Relations:
Sandro Scenga, +1-212-908-0278
Email: sandro.scenga@fitchratings.com
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