Fitch Ratings assigns an 'AA-' rating to $199.915 million of the Harris County Toll Road Authority's (HCTRA, or the authority) senior lien toll road revenue refunding bonds, series 2012A and B. In addition, Fitch affirms approximately $2.1 billion of outstanding parity obligations at 'AA-' and approximately $199.915 million of outstanding series 2011A bonds at 'F1+'. The Rating Outlook is Stable for all bonds.
KEY RATING DRIVERS
RESILIENT TRAFFIC DEMAND: The essential nature and monopolistic position of HCTRA's transportation links in the Houston metropolitan area as well as the primarily commuter nature has resulted in a growing traffic demand profile. System traffic has increased almost every year since fiscal 1988 (ended February 28) and is comprised of approximately 97% passenger vehicles.
APPROVED TOLL POLICY AND RELATIVE INELASTICITY: After the authority's toll policy, which provides for annual increases at the greater of 2% or inflation, was established in June 2007, tolls have increased only twice, in fiscal years 2008 and 2010. Traffic grew in those years by approximately 4.4% and 4.9%, respectively. The average toll rate remains moderate at $1.18 in fiscal 2012 (or $0.19 per mile). HCTRA does retain unlimited legal authority to raise rates.
MODERATE DEBT STRUCTURE: Approximately 17% of the authority's debt is variable rate with several interest rate swaps outstanding. However, senior maximum annual debt service (MADS) occurs in fiscal 2022 and MADS coverage with 2012 net revenue is a strong 2.2 times (x).
STRONG FINANCIAL PERFORMANCE BUT HIGH EXPENSE PROFILE: Despite the gross revenue pledge, Fitch calculates senior and combined debt service coverage net of operating and capital expenses to be at least 2.6x and 1.6x, respectively through final maturity. Leverage is relatively low at under 4.0x on a total senior and subordinate basis. Significant financial flexibility is afforded by the authority's strong cash and reserve balances; however, the authority's historical operating expense growth has been high with an 11% 10-year CAGR due to additional segments coming online.
UNCERTAIN FUTURE DEBT PLANS: HCTRA's capital improvement plan (CIP) has fluctuated in size over the past 10 years but is centered on the development of demand-driven projects. The list of possible projects through 2020 totals nearly $2 billion; HCTRA will use financial guidelines to plan and fund the projects.
WHAT COULD TRIGGER A RATING ACTION
--Clarity regarding the scope and timing of the authority's extensive capital plan, including future debt plans without meaningful increases in leverage or dilution of debt service coverage.
--A significant increase in leverage or erosion of combined net debt service coverage in the medium term below 1.8x due to lower than anticipated revenue yields from toll increases or higher than expected expense growth.
The senior lien bonds are secured by a first lien on the revenues derived from the ownership and operation of the toll road system and certain funds under the revenue indenture, such as moneys and securities in the debt service fund and debt service reserve fund. The county has $537.9 million in outstanding toll road unlimited tax bonds that are secured by a pledge of property taxes but it is the county's practice and policy to fully support debt service with toll revenues, albeit on a subordinate lien, after payment of senior lien debt service.
The series 2012A and B bonds are scheduled for negotiated sale during the week of July 22, 2012, and the proceeds will be used to refund the authority's outstanding series 2011A put bonds that are subject to mandatory tender in August 2012. Fitch expects to withdraw the short-term 'F1+' rating on the series 2011A bonds once the series 2012A and B bonds have sold.
Traffic and toll revenue (T&R) have significantly outperformed the traffic consultant's 2009 projections. In fiscal 2012, traffic grew 7.3% to 408.3 million and revenues were up 6.3% to $481.7 million. These results include the full-year effect of the Sam Houston Northeast (SHNE) segment that opened in February 2011. The traffic growth in fiscal 2012 of 7.3% compares favorably to the consultant's 2.4% growth projection for fiscal 2012. Further, T&R on the SHNE exceeded the consultant's projections by 67% and 27%, respectively. The first two months of fiscal 2013 continue to show positive T&R trends, up 5.4% and 2.8%, respectively. The toll increase in September 2011 (fiscal 2012) of 12.3% was deferred by the court and is expected to be included in the next toll increase, scheduled for Sept. 10, 2012 (fiscal 2013). EZTag rates will increase to $1.40 from $1.30 (or 7.7%) and the cash rate will rise to $1.75 from $1.50 (or 16.7%). The authority's last toll increase was implemented in September 2009 (fiscal 2010), resulting in a 4.4% year-over-year increase in toll revenue, and includes the effect of the opening of the Katy Tollway in April 2009. Toll revenue has increased every year and traffic has only declined twice, in fiscal years 2004 (1.5%) and 2009 (5.8%), primarily as a result of weather-related road closures and the economic downturn. HCTRA has demonstrated high levels of stability and benefits from the strong Texas economy; Harris County is the third largest county in the country.
Management has recently made efforts to cut expenses, following significantly high growth of approximately 30% in each of fiscal years 2009 and 2010. In fiscal 2012, expenses declined by 6%, to approximately $136 million, which followed a decline in fiscal 2011 of 7.3%. This fluctuation has resulted in a five year CAGR from fiscal years 2007 - 2012 of 6.4%. However, management expects to maintain operating expenses at or below 22.7% of total operating revenue annually.
The authority's fiscal 2013 - 2020 CIP has not been approved by the court but is projected to be $1.9 billion. Ongoing projects include the remaining portion ($60 million) of the system wide toll collection hardware/software upgrade that will provide consistent financial reporting as well as improved auditing, customer service, and violation enforcement capabilities. Planned debt under the CIP has not been identified but various widening projects are currently underway. Fitch has assumed some borrowing occurs for forecasting and sensitivity scenarios.
While a number of possible changes could occur and the ultimate size and scope of the CIP are still uncertain, Fitch expects HCTRA will delicately balance borrowing associated with the plan while maintaining historically robust debt service coverage ratios and strong financial flexibility. Historically, the authority has produced adequate net revenues after debt service to ensure that a subordinate county transfer of approximately $120 million is made annually per the Commissioner Court's budget. Coverage of senior bond debt service is elevated in order to fund the annual transfer. While the amount can be changed at any time, any increases in the transfer could lead the authority to fund future projects with higher than expected additional debt.
Fitch's Base Case assumes declining rates of traffic growth over time as compared to historical performance and toll rate increases of 2.0% annually combined with operating expense growth consistent with historical levels. Under this scenario, Fitch expects senior lien net revenue coverage to be at least 2.6x and total net revenue coverage of at least 1.6x including depreciation as a proxy for capital spending. Fitch's Rating Case assumes slower traffic growth and the assumed indexing of toll rates at 2.0% annually combined with higher operating expenses. Under this scenario, Fitch forecasts coverage levels to decline slightly below the Base Case. To the extent that revenues and operating expenses produce coverage levels below 1.8x for a sustained period, toll increases above inflationary levels would be necessary to maintain financial flexibility.
The authority's toll revenues are derived from a diverse system of 15 assets that include approximately 128 miles of roadway in the Houston/Harris County area. The revenue-generating assets of the toll road system principally consist of the Hardy Toll Road, Sam Houston Tollway, Sam Houston Ship Channel Bridge, Westpark Tollway, the Katy Tollway, and the Fort Bend Parkway Extension (formerly Spur 90A). Harris County encompasses the city of Houston and is the largest county in Texas and the third largest in the nation.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 5, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges, and Tunnels
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