Fitch Rates Penn Turnpike's Sub Rev Refunding Bonds, Third Series of 2016, 'A-'; Outlook Stable
The rating reflects PTC's strong traffic profile, improving underlying economic trends, ability and willingness to raise tolls and history of prudent cost management, all of which somewhat mitigate its sizeable debt burden. The rating also reflects PTC's dependence on sustained toll rate increases to meet its entire cost base. The rating further reflects expected improved financial flexibility following the partial sun-setting of PTC's $450 million Act 44 transfer obligations in 2022, The two-notch rating difference between the senior and subordinate liens (senior lien rated 'A+'/Outlook Stable) is supported by the wide differential in coverage between the two liens, with senior and subordinate coverage expected at 10-year averages in excess of 2x and 1.3x, respectively, in Fitch's rating case.
KEY RATING DRIVERS
Essential Route with Commercial Exposure (Revenue Risk: Volume - Stronger): PTC plays a vital role in serving the state's major population centers and as a key part of the country's interstate system, evidenced by its relatively stable historical traffic and revenue performance. Dependence on commercial traffic is relatively high, with 14% of commercial traffic contributing 43% of net toll revenues in fiscal 2016, reflecting its critical position in the interstate system. PTC benefits from economic ratemaking flexibility, and traffic has demonstrated relatively low elasticity to the toll increases applied since 2005.
Rate-making Flexibility (Revenue Risk: Price - Midrange): While the current toll rates are moderate, there may be political risk associated with implementing toll rates above inflation for multiple years, as is expected in PTC's financial plan.
Sizable Capital Program (Infrastructure Development/Renewal - Midrange): While PTC's capital plan is large at approximately $5.8 billion, the Commission's decision to adopt a prioritized capital plan, which focuses primarily on preservation of the asset, has decreased expected capital costs by roughly $900 million. Additionally, PTC's goal of increasing pay-go funding to approximately 32% of the capital plan has further relieved some of the need for senior lien debt issuances. Fitch considers the current capital plan adequate to accommodate majority of PTC's needs over the next several years while ensuring acceptable operating conditions. Nevertheless, additional debt issuances will continue to put pressure on the Pennsylvania Turnpike, particularly when viewed together with the expected $2.7 billion in subordinate lien borrowing to subsidize transit capital and operations under Act 44 through 2022.
Reasonable Debt Structure (Debt Structure: Senior/Sub - Stronger/Midrange): While PTC's turnpike total debt is sizable at approximately $10.0 billion and is expected to increase, bondholders benefit from PTC's solid covenant protections and limited variable rate exposure, with currently 6% of debt bearing an unhedged variable rate.
Elevated Leverage but Strong Financial Performance: PTC's total leverage is currently elevated at approximately 14x net debt-to-cash flow available for debt service (CFADS) and is expected to remain at a relatively high level for some time. Senior DSCRs are expected to remain at or above 2.0x, subordinate DSCR at or above 1.3x, and all-in coverage including Motor License Fund (MLF) enhanced bonds at or above 1.2x, per management's internal policy. While pressure remains, particularly on subordinate lien DSCR, for the next several years, PTC's capital structure beyond 2022 will benefit from reduced leverage and increased flexibility under Act 89's partial sunset of Act 44 payments, improving the longer term credit profile of the subordinate lien.
Peers Analysis: PTC's peers include New Jersey Turnpike Authority (rated 'A'/Outlook Stable) and Maryland Transportation Authority (rated 'AA-'/Outlook Positive). All three form essential components of the interstate highway network, serve sizeable local populations, and provide vital long distance and commuter links. Maryland's rating largely reflects its stronger debt metrics, while ratings for New Jersey and PTC reflect elevated debt profiles as a result of high capital needs and significant required cash transfers to support non-system projects.
Negative - Political opposition stemming from higher than forecasted annual toll increases of 3-6% as a result of traffic stagnation could decrease financial flexibility and consequently weaken credit quality.
Negative - Inability to manage operating, capital, or interest expenses which pressures coverage levels below PTC's current coverage policies (2x senior/1.3x subordinate/1.2x MLF bonds) may result in downward rating actions.
Positive - Given PTC's sizable and ongoing borrowing plans for the future, upward rating actions are not likely at this time.
SUMMARY OF CREDIT
PTC expects to issue approximately $460 million in subordinate revenue refunding bonds, third series of 2016, to refund certain maturities of outstanding subordinate bonds. The proposed bond issuance is expected to be all fixed-rated and will include $378 million in sub-series A and $83 million in sub-series B (Federally taxable) turnpike subordinate revenue refunding bonds that will be on parity with existing subordinate revenue bonds. Proceeds will also cover the costs of issuance. The sub-series A and B bonds are estimated to provide approximately $46 million in net present value savings (or 11.7% of refunded principal) and about $10 million in net present value savings (or 13% of refunded principal), respectively. The sub-series A bonds will amortize through 2041 while final maturity on the sub-series B bonds will be in 2025, without extending the maturities of the refunded bonds.
Concurrent with the issuance of the sub-series A and B turnpike subordinate revenue refunding bonds, PTC is also issuing approximately $193 million in MLF enhanced turnpike subordinate special revenue refunding bonds, first series of 2016, to partially refund MLF enhanced outstanding bonds. Please refer to Fitch's press release 'Fitch Rates $193MM PA Turnpike Commi Motor License Fund-Enhanced Bonds 'AA-'; Stable Outlook' dated September 13, 2016 for details of this issuance, available at www. fitchratings. com.
PTC's traffic was up 3.1% in fiscal 2016 (year ended May 31) reaching 198.3 million. Gross toll revenues increased 10.4% to $1.03 billion for fiscal 2016 reflecting toll increases, reductions in commercial discounts and improving economic conditions. As a result of the most recent toll changes in January 2016, the average cash toll equals 12.9 cents per mile, and the average E-ZPass toll is 9.2 cents per mile (up from 7.4 cents per mile for both cash and E-ZPass after the first increase in 2009). This reflects a full-length trip on the Turnpike Mainline, and is considered to be competitive with other major, seasoned, domestic toll facilities. The aforementioned increases build upon previous revenue increases of 4% to 6% seen over the 2011-2015 period. On July 19, 2016, the PTC has approved a 6% toll increase for both E-Z Pass and cash customers to go into effect in January 2017.
For more information on the Pennsylvania Turnpike Commission, please see Fitch's press release 'Fitch Rates Penn Turnpike's Senior Series 2016A-1 & A-2 Bonds 'A+'; Affirms Outstanding Bonds' dated May 31, 2016 available at www. fitchratings. com.
The subordinate revenue bonds are secured by commission payments consisting of turnpike revenues after all obligations under the senior lien indenture have been satisfied.