Fitch Affirms Penn Turnpike Commission L-T Revs at 'A+'; Stable Outlook
Press Release
Source: Fitch Ratings
On Friday July 17, 2009, 5:09 pm EDT
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NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the rating on the outstanding $2 billion of Pennsylvania Turnpike Commission (PTC, or the Commission) turnpike revenue bonds (senior lien) at 'A+'. The Rating Outlook is Stable. Fitch has not been asked to rate PTC's 2009 series A Build America Bonds (senior lien). Fitch also 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 also incorporates the recent $275 million senior debt issuance by PTC, as well as additional senior lien debt needed to fund the PTC's proposed $4.6 billion 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. Furthermore, the 'A+' rating incorporates the 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 rating reflects the rate covenants, although they are weak, on the subordinate and proposed subordinate guaranteed bonds at 1.15x and 1.0x, respectively, as they provide another floor of protection.
Additionally, the 'A+' considers the higher overall leverage of the turnpike system which, on a combined basis could reach between $14 billion 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. The rating also reflects the PTC's mission change from a self-supporting entity to one subsidizing statewide functions and the associated lower levels of financial flexibility as excess toll revenues will now flow out to meet Act 44 payments. However, Fitch expects the high likelihood that senior lien revenue bond debt service coverage will be robust. In addition, the exposure to letter of credit renewal on approximately 35% of the total debt does pose some risk. However, Fitch's evaluation of the impact of terminating various swap agreements and converting the variable-rate debt to a fixed rate indicate that the PTC should be able to weather such an event, but that further toll increases may be likely. Given the significant increase in financial obligations and overall leverage, the Commission is now dependent upon regular toll increases for obligations outside of the preservation of the turnpike system. Prior to PTC's new obligations, 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.
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 in 2009. From January to May of 2009, traffic has decreased 3%, while revenues have increased 14% as compared to the same five-month period a year prior. Similarly, for fiscal 2009, traffic has decreased only 2%, highlighting the robust nature of passenger demand for the facility despite the economic climate and the 25% toll increase. Going forward, 3% annual toll increases will be instituted; a 3% toll increase for January 2010 has recently been approved by the Commission. However, without both debt 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. Fitch notes that while missing an Act 44 payment would not trigger an I-80 lease termination, the commonwealth is anticipating the availability of this revenue stream for its wider transportation program.
PTC and the Pennsylvania Department of Transportation (PennDOT) submitted an amended application to the Federal Highway Administration (FHWA) in July-August 2008 to toll I-80. However, in September 2008 FHWA denied the request due to the lease payments not meeting federal statutory requirements. Following this decision, the PTC has not yet determined its future course of action. 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. Fitch also notes PTC has solicited proposals for public-private partnerships complete unfinished portions of the Mons/Fayette and Southern Beltway projects. Three responses were received by January 2009, and are currently under review.
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, capital projects contained in its 10-year capital program, and the addition of new obligations under Act 44. 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, and safety and communication expenses. 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.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contact:
Fitch Ratings, New YorkEmma Walker, 212-908-9124Chad Lewis, 212-908-0886Mike McDermott, 212-908-0605orMedia Relations:Cindy Stoller, 212-908-0526Email: cindy.stoller@fitchratings.com
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