Fitch Upgrades Florida Turnpike Enterprise's Rev Bonds to 'AA'; Outlook Stable
The upgrade reflects the continued strengthening of Florida Turnpike Enterprise's (FTE), which manages Florida's turnpike system, financial profile with strong debt service coverage and moderate leverage for an asset of its nature as result of consistent toll increases and sustained transaction growth across its roadway system.
The rating is supported by the turnpike system's standing as an essential network used by a broad customer base in a strong service area, which provides considerable rate making flexibility. The rating also incorporates the turnpike's capital improvement program (CIP), which, while substantial, has remained on time and on budget. These strengths are somewhat tempered by the sizable debt issuance planned to support the CIP. However, leverage is expected to remain at a level commensurate with the rating category.
KEY RATING DRIVERS
Strategically Import Turnpike System (Revenue Risk - Volume: Stronger): FTE's toll roads comprise a critical transportation system with a mature traffic profile and established demand. Toll transactions have grown steadily since 1990, with the exception of marginal decreases in fiscal 2008 and 2009 due to the recession, as a result of increased demand as well as additional lanes and roadways. Transaction growth has been strong in recent years, as evidenced by a five-year compound annual growth rate (CAGR) of 3.7%, and is expected to continue in the future. The network benefits from a strong commuter base that accounts for approximately 95% of total transactions.
Strong Rate-Making Flexibility (Revenue Risk - Price: Stronger): Considerable economic flexibility exists to increase toll rates and legal framework exists in order to implement scheduled rate increases that track inflation. FTE is bound by statute to index toll rates to the Consumer Price Index (CPI). Per the statute, CPI increases will be applied to electronic payers no more than annually and no less than every five years, while cash rates will be increased every five years, rounded to the nearest quarter. Additional toll adjustments above the CPI index are permitted, as needed to comply with bond documents and covenants. The first CPI increase was implemented on June 24, 2012 and annual increases have followed on July 1 of 2013, 2014 and 2015.
Manageable Work Program (Infrastructure Development/Renewal: Stronger): The turnpike's fiscal 2016-2021 (June 30 yearend) proposed work program totals $6.1 billion, which assumes approximately $1.4 billion, or 23%, of the program will be supported by additional borrowings during this period. While the program is sizeable, FTE has a strong track record of delivering projects on time and on budget. Furthermore, its asset condition monitoring regime is considered robust.
Conservative Debt Portfolio (Debt Structure: Stronger): The turnpike's debt structure is fairly conservative, featuring all senior, fully amortizing fixed-rate debt. Outstanding debt is limited by a bond cap of $10 billion; however, currently outstanding bonded debt is only 29% of the limit and is expected to rise to approximately 39% by fiscal year-end 2026, still well within the limit.
Low Leverage and Solid Financial Margins: Leverage was a very low 2.5x at fiscal year-end 2015 (2.7x including amounts due from FTE to FDOT).While FTE anticipates sizable debt issuances to support its capital program in the coming years, leverage should remain manageable and satisfactory for the rating level. Debt service coverage ratio (DSCR) continues to strengthen, reaching 2.86x in fiscal 2015. Fitch expects DSCR to remain above 2.25x for the foreseeable future, while including additional debt issuances, supported by the system's indexing of electronic toll rates to increases in CPI.
Peer Group: Maryland Transportation Authority (MdTA) and Pennsylvania Turnpike Commission (PTC) are among FTE's closest peers, each operating strong turnpike systems comprising both urban and rural segments and having considerable pricing flexibility. While FTE and MdTA feature comparable DSCR and leverage profiles, MdTA faces some political uncertainty in regards to its toll rate structure and future capital needs, which supports the one notch differential. PTC's higher debt burden and resulting weaker metric profile is the primary cause of its lower rating of 'A+' and 'A-' on first and second liens respectively.
Negative - Erosion of DSCR below 2.25x for a sustained period due to lower than anticipated revenues from decreased transactions or minimal toll increases would put pressure on the rating.
Negative - A substantial increase in additional debt, bringing leverage above 5.0x, as well as an inability to actively control operating expenses along with costs related to its work program would reflect a weakened credit profile.
Upward Rating Action Unlikely - The rating is unlikely to rise due to future investment and political risks inherent to toll systems.
FTE's healthy financial profile continues to strengthen, supported by substantial transaction growth and multiple years of consistent toll rate increases, resulting in financial metrics that support the 'AA' rating. FTE's financial metrics in fiscal 2015 were very strong, with coverage increasing to 2.86x, while leverage decreased to 2.5x, both positive trends. Expected fiscal 2016 coverage is 2.9x.
Transaction growth continued in fiscal 2015 (June 30 yearend), with a substantial 11.2% increase in transactions, following a 4.1% increase in fiscal 2014. A notable increase in tourism around the Orlando area, general economic improvement across the state and the ramp up of the Western Beltway and I-4 Connector have all contributed to the robust growth in fiscal 2015. Transaction growth is expected to continue in fiscal 2016 with traffic up through year-to-date March 2016 by 9.5%. Management states that transactions will total 834 million in fiscal 2016, an increase of 8.6% over fiscal 2015.
The turnpike's CIP over the next five years (2017-2021) totals $5.0 and is funded primarily through cash flow (74%) and debt issuances (26%). The largest portion of the capital program is attributed to several major widening projects. Other notable projects include the expansion project on the First Coast Expressway and Suncoast Parkway 2, continued all electronic tolling improvements throughout the system.
Fitch's base case scenario uses year-to-date financial estimates for fiscal 2016 and budgeted 2017 financials, followed by toll revenue growth of 2% per annum, resulting a fiscal 2016 through 2026 total revenue CAGR of 1.5%. In addition, O&M expenses grow at a 3.3% CAGR for the same time period. Under this scenario, net coverage remains above 2.92x and generates sufficient cash flow to fund most projects identified in the five-year CIP. Including planned future debt issuances, net debt service coverage remains above 2.28x.
Fitch's rating case scenario assumes a 5% decrease in toll revenues in fiscal 2017, with 2% growth following this drop, while operating expenses grow at 3% per annum. Under this scenario, coverage remains above 2.82x with sufficient cash flow available to fund majority of the projects identified in the capital program. Including planned future debt issuances, net debt service coverage remains above 2.22x. Coverage levels produced under the rating case scenario are consistent with the current 'AA' rating. Breakeven analysis further supports this position, with FTE demonstrating the ability to tolerate significant sustained revenue declines without affecting its ability to service debt.
SUMMARY OF CREDIT
Florida's Turnpike Enterprise manages Florida's turnpike. The turnpike was originally created in 1953 as the Florida State Turnpike Authority. It was then reorganized into the Florida Department of Transportation in 1969 and subsequently created as a district of FDOT in 1994. In 2002, House Bill 261 of the legislature recreated it as Florida's Turnpike Enterprise. The turnpike system consists of several components, with the 320-mile Mainline as the core of the system. In addition, the system includes the 18-mile Seminole Expressway, the 15-mile Veterans Expressway, the 6-mile Southern Connector Extension, the 25-mile Polk Parkway, the 42-mile Suncoast Parkway, the 23-mile Sawgrass Expressway, the 11-mile Western Beltway, Part C, the 1-mile I-4 Connector and the 22-mile Beachline East Expressway.
Turnpike revenue bonds are secured by a first lien on the net revenues of the turnpike.