Fitch Ratings assigns an 'A+' rating to the Pennsylvania Turnpike Commission's (PTC) $525 million series 2009B turnpike revenue bonds (senior lien). Proceeds will serve to refund outstanding turnpike revenue bonds, series 2001U, 2002A, and 2002B, and to fund termination payments on certain interest rate swaps, related to the series 2001U, 2002A, and 2002B bonds. The bonds are expected to price the week of Nov. 18, 2009. Fitch also assigns an 'A+' rating to the PTC's $275 million series 2009A turnpike revenue bonds (senior lien), issued in July 2009. In addition, Fitch affirms its rating on $1.6 billion outstanding turnpike revenue bonds (senior lien) at 'A+'. The Rating Outlook on all turnpike revenue bonds (senior lien) is Stable. Fitch does not rate PTC's 2008 and 2009 subordinate revenue bonds.
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 $4.6 billion in senior lien debt needed to fund the PTC's mainline capital improvement plan (CIP) and increasing leverage to subsidize highway and bridge projects across the commonwealth as well as subsidize transit operations under Act 44. The rating also reflects the robust senior lien additional bonds test of 1.75 times (x) annual debt service or 1.30x maximum annual debt service and the expectation that the majority of bonds issued to meet Act 44 obligations will be issued on the subordinate lien. The rate covenants on the subordinate and proposed subordinate guaranteed bonds, while low at 1.15x and 1.0x, respectively, provide another floor of protection for the senior bonds.
Primary risks for PTC's 'A+' rating include the anticipated higher overall leverage of the turnpike system which, on a combined basis could reach between $14 and $15 billion (across all liens) over the next 12 years and the fact that senior lien revenue bondholders are not fully insulated from parity debt being issued to meet obligations under Act 44, which could result in deterioration of historically robust debt service coverage levels and impact mainline maintenance. 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. Prior to this change, 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.
Following the refunding, PTC will continue to face some letter of credit (LOC) renewal risk on its remaining variable-rate debt. However, the refunding does reduce this exposure (following the 2009B bond issuance, roughly 15% of PTC's pro-forma mainline debt will be variable rate with LOC exposure; this will drop to 13% following the upcoming 2009C bond issuance), and the termination of associated swap agreements results in a more stable financial profile for PTC. Furthermore, Fitch's evaluation of the impact of terminating various swap agreements and converting the variable-rate debt to a fixed-rate indicate that PTC should be able to weather such an event but further toll increases may be likely.
PTC will implement toll increases in order to meet its increased annual obligations in the near- to medium-term. In January 2009, a 25% toll increase went into effect on the mainline turnpike. From January to September of 2009, traffic has decreased less than 1%, while revenues have increased 17% as compared to the same nine-month period a year prior. Similarly, for fiscal 2009, traffic decreased 2%, highlighting the robust nature of passenger demand for the facility despite the economic climate and the 25% toll increase. Going forward, the PTC plans to implement 3% annual toll increases, with the January 2010 increase already approved. 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. 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 both significantly higher leveraging and toll increases above 3% annually may be needed earlier to meet debt service coverage and its obligations under Act 44. This could exacerbate political risks.
PTC and the Pennsylvania Department of Transportation (PennDOT) submitted an amended application to the Federal Highway Administration (FHWA) in July-August 2008. However, in September 2008 FHWA denied the request due to the lease payments not meeting federal statutory requirements. In late October 2009, PTC submitted another application, further amended to respond to concerns voiced by FHWA regarding the previous application, including further analysis of valuation, leasing, and funding needs. PTC expects to hear back on the Phase 1 application in December 2009. Furthermore, legislation has been introduced in Congress that could prohibit tolls on I-80. Fitch will continue to monitor developments related to the tolling of I-80. Fitch expects the PTC's financial exposure to be limited given its lower level of obligations in the event I-80 is not tolled. PTC has decided not to pursue private options to complete portions of the Mon/Fayette and Southern Beltway projects.
PTC has seen slightly lower debt service coverage levels in 2008 and 2009, with coverage of 2.8x and 2.5x, respectively. This compares to 3.9x and 3.4x in 2006 and 2007, respectively. This drop reflects PTC's need to manage existing obligations on the mainline facilities and capital projects contained in its 10-year capital program. Toll revenue growth for fiscal 2008 and 2009 was steady, increasing 1.9% and 1.2%, respectively, to $599 million and $616 million, with the last five months of fiscal 2009 reflecting the January toll increase. This reflects stable traffic levels, despite a toll increase and the current economic downturn. Operating and maintenance expenses grew by 14.6% and 3.6%, respectively, in fiscal 2008 and 2009, with the larger increase in 2008 owing largely to increases in employee benefits, traffic services, safety and communication expenses. PTC also maintains a sizable cash balance. Although PTC used nearly $100 million in cash balances in FY 2009 to fully meet its capital and Act 44 requirements, cash balances have since recovered to $582 million for mainline operations. Through 2009 management has made efforts to contain costs, with continuing efforts for fiscal 2010.
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.
The application of the following criteria was used to derive the rating of the above referenced bonds:
--'Rating Criteria for Infrastructure and Project Finance', dated Sept. 29, 2009;
--'Global Toll Road Rating Guidelines' dated March 6, 2007.
Both are available on the Fitch Ratings web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
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