Fitch Affirms Rhode Island Turnpike & Bridge Auth's Rev Bonds at 'A'; Outlook Revised to Stable
OREANDA-NEWS. Fitch Ratings has affirmed its 'A' rating on approximately $56 million of Rhode Island Turnpike and Bridge Authority's (RITBA, or the authority) revenue bonds. The Rating Outlook has been revised to Stable from Negative.
The reversion to a Stable Outlook reflects the increased certainty as to the authority's fiscal position provided by the sale of motor fuel tax-backed bonds earlier this year, which reduce funding dependence on toll revenues for operating and capital investment obligations going forward.
KEY RATING DRIVERS
The rating reflects the essential commuter and leisure connections provided by RITBA's Pell Bridge for commuters and tourists between Jamestown, RI and Newport, RI. Although facing some free competition, the use of other crossings would result in significantly longer travel times from Jamestown or the mainland to the west. Moderate toll rates further support the Pell Bridge's competitive position. Despite significant capital needs, the removal of responsibility for operating, maintenance and capital costs associated with the Jamestown and Sakonnet Bridges from RITBA's toll revenue security, the conservative toll revenue-backed bond structure and management's demonstrated ability to move forward on its capital plan all support the rating. An average rating case debt service coverage ratio (DSCR) of 1.78x, and limited dependence on revenue growth to break even are both in line with criteria for 'A'-category rated projects, and cause the rating to sit well with peers such as Richmond Metropolitan Authority (RMA) and Buffalo & Fort Erie Public Bridge Authority (PEACE Bridge).
Revenue Risk- Volume: Midrange
Stable Traffic, Limited Growth: The Pell Bridge primarily serves commuters travelling between Jamestown and Newport, and also serves significant volumes of leisure traffic during summer months. Traffic volatility has historically proven low, and toll transactions on the Pell Bridge have remained at or around 10 million per year since 2002. However, growth prospects are limited. Current tolls of $0.83 for Rhode Island residents with transponders and $4.00 for cash and out of state users are reasonable.
Revenue Risk- Price: Midrange
Uncertain Political Flexibility for Future Toll Increases: The last toll increase in 2009 was the first time tolls were increased after 40 years of operations. The next toll increase is expected to be considered for fiscal year (FY) 2018, and management has projected inflationary toll increases every few years thereafter to offset rising costs and to maintain a predictable schedule of toll increases. While a more proactive tolling approach is viewed positively, in Fitch's view, there remains some political uncertainty as to the authority's willingness to implement future toll increases.
Infrastructure Development and Renewal: Midrange
Significant Capital Plan Well Managed: The authority has made significant progress in the last few years in bringing the condition of its bridges up to an adequate standard, and in moving forward on its capital plan. The remaining nine years of the 2015 10-year capital plan totals $204 million for the four-bridge system, and is designed to maintain the system in current condition. The Pell Bridge requires the bulk of the work, with $135 million of the plan's total budget allocated to it.
Debt Structure: Stronger
Conservative Debt Structure: All toll revenue bonds outstanding are fixed-rate, with final maturity occurring in 2040. Current debt service schedule is flat at $5.6 million per year through fiscal 2018 then drops to $3.7 million in 2019. The $118 million 2016 series motor fuel tax bonds raised by the authority significantly reduces dependence on future toll revenue backed debt to support the capital plan.
Adequate Coverage and Moderate Leverage: Fiscal 2015 DSCR was strong at 4.15x according to the issuer, reflecting the benefit of the additional motor fuel tax revenue benefitting the authority. Given that this revenue stream has since been encumbered by the authority's 2016 series motor fuel revenue bonds, Fitch calculates future toll revenue bond DSCR excluding the benefit of any net motor fuel tax revenues, although it acknowledges the additional comfort such net motor fuel tax revenues, to the extent there are any, do provide to the toll revenue backed debt. Fitch rating case average DSCR of 1.78x and a toll revenue growth breakeven of 1.6% based on conservative future assumptions are reflective of a solid 'A' category toll road credit. This view is further supported by modest leverage, measured as net debt to cash flow available for debt service (ND/CFADS), peaking at around 6x approximately five years into the rating case projection.
Peer Analysis: Small network facilities in Fitch's portfolio rated in the 'A' category include Richmond Metropolitan Authority (RMA; 'A+'/Outlook Stable) and Buffalo & Fort Erie Public Bridge Authority (PEACE Bridge; 'A'/Outlook Stable). RMA benefits from a stabilized operating profile, limited additional capital needs and robust debt metrics, with average rating case DSCR of 2.19x, justifying its higher rating. Although PEACE Bridge also benefits from stronger debt metrics than RITBA with average rating case DSCR of 2.07x, exposure to more volatile international trade and leisure traffic and heightened political risk serve to constrain the rating.
Negative: Significant additional debt secured on toll revenues that leads to weaker debt metrics would put pressure on the rating.
Negative: Increased traffic volatility or high expense growth that leaves DSCR below 1.5x on a sustained basis could lead to negative rating action.
Positive: Demonstrated willingness and ability to implement future toll increases that serve to enhance toll revenue-backed debt metrics coupled with a stable or increasing traffic profile would be viewed positively.
SUMMARY OF CREDIT
On Feb. 2, 2016, RITBA issued $117.6 million of 2016 series motor fuel tax revenue bonds, rated 'A'/Outlook Stable by Fitch. Proceeds were used to refund $60 million of bond anticipation notes (BANs) and to provide approximately $73 million of capital investment funding. The bonds are specifically secured on a first interest in the pledged $0.035 motor fuel tax revenues granted to the authority under Article 21 of the FY 2015 state budget, passed in June 2014. Based on FY 2015 gas tax revenues generated, maximum annual debt service (MADS) coverage is approximately 1.68x and so, despite the expectation of declining revenue, it is expected that significant additional excess cash flow after debt service will be available for other purposes.
The gas tax pledge was granted in order to generate around $15 million per year to support the operations of the Sakonnet River Bridge and Jamestown Verrazano Bridge and other capital expenditures of the authority. This will reduce the RITBA's dependency on additional toll revenue bonds to fund its capital plan going forward.
FY 2015 saw a large increase in the authority's revenue base, with the $0.035 per gallon gas tax allocated to the authority in the State of Rhode Island's FY 2015 budget bringing in $15.36 million, broadly in line with expectation, on top of an increase in toll revenues of 0.6% from $19.3 million to $19.4 million, despite the removal of the $0.10 toll on the Sakonnet River Bridge.
Operating expenses (exc. depreciation) were broadly flat year-on-year, rising 0.2% from $11.13 million to $11.16 million. The maintenance portion of opex increased significantly, from $1.3 million to $2.0 million, reflecting the increased obligations of the authority with respect to the Sakonnet and Jamestown bridges. However, this increase was offset by decreases to personnel costs, electronic toll collection costs and other costs (including contracts).
With its enhanced revenue stream, unencumbered during FY 2015, DSCR for the period was robust, at 4.15x. Excluding the benefit of gas tax revenues, and considering only obligations that are covered in the toll revenue bond indenture, Fitch calculated DSCR during the year to be 1.51x. Fitch-calculated leverage was 4.5x excluding net gas tax revenue and adjusted to exclude cash held in the gas tax collections account, construction account and in interest and principal payment accounts).
In the year to March 31, 2016 (nine months of FY 2016), traffic on the Pell/Newport and Mount Hope bridges is up 4.6% on the same period 2015. Total revenue in this period was 15.8% year-on-year, mostly driven by a 28% increase in motor fuel tax collections but also reflecting an 8.3% increase in toll revenue including violation fees. At the same time, operating expenses were broadly flat on the corresponding period 2015 (-0.4%), leaving total authority net income up 15.3% year-on-year. This reflects the authority's total position, reflecting increased debt service costs and issuance fees associated with the gas tax backed debt issued during FY 2015.
RITBA is currently revising its capital plan, which it expects to be approved by the board during June 2016 - it is not expected to be dramatically different from the current 10-year plan, whose remaining nine years is approximately $204 million.
Significant progress has been made with respect to facility renewals, and all bridges are now classified as being in 'fair' or 'good' condition. The authority is current on all inspections, and all works have progressed on time and on budget over last 3-4 years. The current focus of the plan is on painting and steel repair works. Cable and under water inspections, expected to be included in the 2016 plan, are now not expected to be needed based on recent inspections.
The motor fuel tax backed bonds issued earlier this year should cover the authority's capital needs for the next 3-4 years and, as such, no additional debt is expected over this period. The decision to raise additional debt on the gas-tax backed lien or the toll revenue lien, when it needs to be made, will be made based on financial policies of the authority in the context of its operating and financial profile at that time. While motor fuel tax revenue, and debt proceeds supported by it, may be used for any authority purpose, toll revenue is prioritized to support the Pell and Mount Hope Bridges.