Fitch Rates $63MM Wisconsin Petroleum Fee Bonds 'AA'; Notes Affirmed at 'F1+'
--$62.67 million petroleum inspection fee revenue refunding bonds, 2016 series 1.
The bonds are expected to sell via negotiation the week of September 19.
Fitch has also affirmed the following ratings:
--$13.61 million outstanding petroleum inspection fee revenue refunding bonds 2009 series 1 at 'AA';
--outstanding extendible municipal commercial paper (EMCP) at 'F1+' (to be refunded by the current offering).
The Rating Outlook on the long-term rating is Stable.
Senior bonds (including long-term bond principal and interest and EMCP interest) are payable from petroleum inspection fee revenues, which are paid by suppliers on all petroleum products received for sale in the state of Wisconsin.
EMCP principal is secured by a junior, subordinate lien on petroleum inspection fees, and ultimately, the state's pledge to sell senior refunding bonds already authorized, such as the current bonds, to the payment of principal on the EMCP.
KEY RATING DRIVERS
SLOW-GROWTH REVENUE STREAM: Fitch anticipates growth in petroleum inspection fee revenues will be relatively flat given the long-term trend of stable to declining fuel consumption.
STRONG RESILIENCE THROUGH ECONOMIC CYCLE: Debt service is paid from a revenue source that has shown some economic sensitivity but provides ample debt service coverage. No additional borrowing is authorized but pledged revenues are expected to provide strong coverage of debt service requirements even if fully leveraged to the additional bonds test (ABT), supporting solid resilience through a downturn scenario.
EMCP LINKED TO REVENUE BONDS: The 'F1+' rating assigned to the EMCPs corresponds to the long-term rating on the state's petroleum inspection fee bonds. The EMCP notes are expected to be fully redeemed with the current issuance of revenue bonds.
SOLID DEBT SERVICE COVERAGE: The rating is sensitive to Fitch's expectations for limited growth in pledged revenues. Weakening trend that materially alters debt service coverage could trigger rating movement.
The bonds and EMCP are secured by a per-gallon petroleum inspection fee paid by suppliers on all petroleum products received for sale in Wisconsin. The per-gallon fee is collected along with other motor fuel taxes by the department of revenue. They are distributed on a monthly basis to the bond trustee to pay debt service and residual revenues are used for program expenses.
The 'AA' rating reflects the strong resilience of the program structure in light of relatively flat growth prospects for fuel consumption-based revenues. The program supported by the bonds, remediation of contamination caused by underground fuel tanks, is winding down and no additional borrowing is authorized. The current offering will fully retire outstanding EMCP issued to fund program costs. Bonds will be fully amortized in three years.
RESILIENCE OF SECURITY
Pledged revenues provide solid coverage of debt service requirements both on an annual and maximum annual debt service (MADS) basis. Fiscal 2016 estimated revenues of $74.6 million provided 2.5x coverage of annual debt service and 2.3x coverage of MADS.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on a 15-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 4% scenario decline in pledged revenues. The largest actual decline in historical revenues is a 6.8% year-over-year decline in fiscal 2007. These scenario results are consistent with an 'aaa' assessment for the sensitivity and resilience of pledged revenues through economic declines pursuant to Fitch's criteria for dedicated tax bonds. Fully leveraged to the 2x ABT, pledged revenues can withstand a 50% decline and still provide sum sufficient coverage of MADS.
There is high concentration in the payers of the petroleum inspection fee, with the top 10 responsible for 94% of fees collected in fiscal 2016. The failure of a payer to make a timely payment can have a notable impact on collections, as was the case in fiscal 2014, when one payer delayed 10 months of payments in fiscal 2015. Ample coverage mitigates concern related to this concentration.
GROWTH PROSPECTS FOR REVENUE STREAM ARE LIMITED
Petroleum inspection fees are levied at a rate of $.02 per gallon, having been reduced from $.03 per gallon as of April 1, 2006. The state redeemed bonds at that time to avoid a reduction in debt service coverage. Revenues per cent collected peaked in 2006 at $40.45 million and have fluctuated since, reflecting in large part consumer behavior related to fuel consumption. Stronger revenue growth in the last two fiscal years, controlling for the impact of a delay in payment by one major taxpayer, noted above, reflects increased usage associated with lower gas prices. Fitch anticipates growth in gas tax revenues will be slow and in line with inflation. The long-term trend of stable to declining consumption limits growth potential.
RATING LIMITED BY STATE IDR
The rating on the petroleum inspection fee bonds can be no higher than the Issuer Default Rating of the State of Wisconsin ('AA'/Stable Outlook). The state legislature retains control over rate-setting and may reduce fees by legislation, as it has done in the past. There is a requirement for the state to make an appropriation to pay debt service, although the rating is not notched below the IDR, as petroleum inspection fees are retained within the petroleum inspection fund once the requirements of the indenture are met and cannot be diverted to other uses.
Underlying the 'F1+' rating on the EMCP is the credit quality of the senior petroleum inspection fee revenue bonds to be issued to ultimately fund the EMCP. Interest payments on the EMCP are paid on parity with the bonds' debt service, while principal payments are subordinate. The state intends, but is not obligated, to pay CP note principal on the original maturity date from proceeds of either rollover notes or bonds, as it is doing with the current offering. However, the state may extend the maturity to 270 days from the original issuance date in the event of a loss of market liquidity and accordingly, there is no liquidity provider.