Fitch Affirms Peace Bridge (NY) $26.6MM Rev Rfdg Bonds at 'A'
KEY RATING DRIVERS
The affirmation reflects the authority's strong financial performance despite sluggish traffic trends over the last decade. The authority's demonstrated ability to increase toll rates, manage operating costs and adhere to board policies are key rating factors, and their moderately large capital plan is expected to be funded from substantial liquidity balances and excess cash flows over the next five years. No toll increases are currently planned. The authority could issue more debt in the next few years depending on the bridge re-decking process, but retains sufficient financial flexibility at the 'A' level to meet bond requirements through maturity even with declining traffic and resulting net revenues.
REVENUE RISK - VOLUME: MIDRANGE
IMPORTANT AND COMMERCIALLY DEPENDENT CROSSING: The Peace Bridge (the Bridge) plays an important role in U.S. and Canada trade and leads regional passenger and truck traffic because the Bridge connects northern New York interstates to the Queen Elizabeth Way in Ontario through to Toronto. The traffic profile offers limited growth prospects and remains influenced by currency fluctuation, discretionary passenger trips, and economic activity given the importance of commercial volume, which accounts for 70% of toll revenues.
REVENUE RISK - PRICE: MIDRANGE
MODERATE PRICE FLEXIBILITY: Past toll rate increases have not had a material impact on the Bridge's traffic profile. Wait times are the main competitive driver at regional bridge crossings, and the Bridge currently maintains the highest inspection capacity in the Buffalo/Niagara Region. The authority plans to further enhance capacity with its capital improvement plan (CIP) and no toll increases are currently planned.
INFRASTRUCTURE RENEWAL & DEVELOPMENT: MIDRANGE
DEVELOPING CIP: Of the authority's five-year \\$171 million CIP, the majority (88%) is envisioned to be funded from current fund balances and future excess cash flows. The remainder is expected to be generated from a potential debt issuance, but timing and scope could change. Projects include replacing the aging bridge deck, expanding U.S. inspection capacity, and renovating the U.S. commercial warehouse. Fitch views the bond resolution requirement which requires the authority to employ a consulting engineer for rigorous annual bridge inspections favorably.
DEBT STRUCTURE: STRONGER
STRONG AND CONSERVATIVE DEBT STRUCTURE: The bonds are fixed rate and fully amortizing to a final maturity in 2025. Security features include a 1.25x backward- or forward-looking additional bonds test and a fully cash-funded debt service reserve at maximum annual debt service.
HEALTHY FINANCIAL PERFORMANCE: Fitch positively views the authority's history of conservative financial planning, the practice of maintaining high liquidity (2,448 days cash on hand at FYE2014), and strong track record of expense management. Current and expected debt service coverage remains above 2x and leverage is well below most toll bridge facilities.
PEER ANALYSIS: The most comparable peers in Fitch's portfolio are the two U.S.-Mexico bridge border crossings: Cameron County Toll Roads ('A', Stable Outlook), and McAllen Toll Roads ('A', Stable Outlook). Buffalo-Fort Erie exhibits a similar debt service coverage ratio (DSCR) profile to these peers of between 4x and 6x and provides a similarly important service supporting commercial and leisure traffic. However, it is not exposed to the same level of security concerns as some of the Texas crossings, but is exposed to the USD-CAD exchange rate as well as voluntary traffic decisions.
Negative: Capital projects resulting in significantly increased leverage beyond current expectations and/or materially lower coverage of debt service.
Negative: Significant declines in traffic and toll revenues for a sustained period.
Positive: The Bridge's narrow service area and vulnerability to trade restrictions limit the potential for positive rating action.
Most bridge auto trips are discretionary instead of commuter-based but increased security after the events of 9/11, the 2008 economic downturn, new security laws in 2009, as well as fluctuating Canadian-U.S. exchange rates have all contributed to auto traffic volatility over the past decade. Auto traffic declined 7% to 4.4 million cars over fiscal 2014 due to the harsh winter as well as NYS construction on bridge ramps. Auto traffic is also down an additional 6% 2015 fiscal year-to-date through June 30, 2015, in line with other regional crossings after the CAD drop in value to the USD made U.S. travel more expensive for Canadians. The bridge carried 40% of the region's auto traffic as of fiscal year-end 2014 in comparison to the Lewiston-Queenstown Bridge, Rainbow Bridge, and the Whirlpool Bridge, which are all owned and operated by the Niagara Falls Bridge Commission (NFBC).
The bridge continues to carry more autos (77% of fiscal 2014 total traffic) than trucks (23% of fiscal 2014 total traffic) but carries most (63%) of the region's truck traffic despite charging higher tolls because the bridge offers shorter wait-times and continues to upgrade its customs processing. Fiscal 2014 truck traffic increased 1.5% to 1.3 million trucks but is down 2.3% fiscal 2015 year-to-date because of ramp construction. The Canadian-side pilot program inspecting U.S.-bound trucks ended February 2015, and the authority is assessing various alternatives to continue to enhance customs commercial processing. 2015 fiscal year-to-date operating expenses are up \\$1.2 million in comparison to the same period last year but are \\$1.7 million below budget, mostly because of a one-time cost for radiation portal monitors for U.S. Customs Border Protection which are expected to reduce 'false positive' readings and further improve commercial processing times.
Tolls are only collected one-way, crossing from the U.S. into Canada, and tolls have not increased since 2007. Management does not currently plan to recommend any toll increases because the authority holds enough cash to cover capital and operating expenses. However, the authority may decide to issue additional debt in a few years to complete the bridge re-decking and enhancement of U.S. inspection capacity, depending on rehab progress. Fiscal 2014 toll revenues declined slightly (0.98%) to \\$22.2 million from decreased auto traffic, offset by the increase in truck traffic, and have grown at a 1.47% CAGR since fiscal 2004 even though total traffic has declined 2.1% over the same period, dropping most recently 5.2% over fiscal 2014 to 5.6 million vehicles. However, toll revenue for 2015 fiscal year-to-date is also down, 4.6% to \\$10.4 million because of decreased traffic.
Total bridge revenues, which include income from duty free stores and property rental, dropped 6% to \\$31.3 million over fiscal 2014 because of decreased traffic which reduced income from duty free stores in the authority's total revenues as well as less U.S. General Services Administration USGSA rental income as leasehold improvement costs (fully amortized over five years) ceased June 2014. Management expects rental income from USGSA to increase over fiscal 2016 as additional commercial warehouse space currently under construction comes on line.
All four regional crossings complement each other and serve regional needs. Toll rate differentials and past changes have not changed market share, which suggests moderate rate-making flexibility continues to be maintained and is important to the Bridge's dependence on higher yield commercial traffic. The U.S. Customs Inspection Plaza at the Lewiston-Queenstown Bridge may be significantly upgraded but the NFBC is searching for capital funding, and EZ-Pass is now active on all three NFBC bridges, similar to the Peace Bridge.
Complete re-decking will occur in fiscals 2016-2019, and management expects annual traffic to decrease around 3%, which Fitch tested alongside 3% annual operating expenses, and a potential \\$20 million issuance in the Fitch base case. However, sufficient bridge liquidity would still produce 1.89x minimum coverage, over 1,000 days cash on hand (DCOH), and below 1x leverage over the next five years.
Fitch's rating case tested 4% traffic declines during re-decking years, slightly higher annual operating expenses at 3.5% per year, as well as the potential debt issuance which would still keep DCOH around 963, minimum coverage at 1.6x, and maximum leverage below 1x over the next five years. Fitch notes that current traffic levels can generate sufficient cashflow to maintain high debt service coverage levels even with limited traffic growth and additional debt obligations.
The bonds are secured by Bridge pledged net revenues.