OREANDA-NEWS. Fitch Ratings has assigned the following ratings to upcoming Pennsylvania Turnpike Commission (PTC) oil franchise tax (OFT) revenue bonds:

--$198,125,000 OFT senior revenue refunding bonds, series A of 2016 'AA';

--$115,895,000 OFT subordinated revenue refunding bonds, series B of 2016 'A+'.

All par amounts are preliminary and subject to change.

In addition, Fitch has assigned the following ratings:

--$430,061,000 outstanding PTC OFT senior revenue and revenue refunding bonds 'AA';

--$305,080,000 outstanding PTC OFT subordinate revenue and revenue refunding bonds 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the PTC, payable from an allocation of a portion of the commonwealth's OFT. The commonwealth legislature made the allocation with Act 26 of 1991, designating 14% of 55 mills of the OFT to the PTC as a continuing appropriation. The statute includes the commonwealth's covenant not to limit or alter the PTC's rights to the allocation.

The monthly transfer of the commission allocation to the bond trustee is based on estimated OFT revenues as determined by the commonwealth's office of the budget prior to the start of each fiscal year. When actual collections differ from that estimate, the commonwealth reconciles any differences early in the next fiscal year so that the trustee receives the full 14% of 55 mills of the OFT for each year by early in the following fiscal year, pursuant to the statutory pledge.

KEY RATING DRIVERS

STRONG LEGAL PROVISIONS: The commonwealth collects the pledged revenues and deposits them with the trustee for the bonds. There is no legislative appropriation required. Senior lien bondholders have a first lien on the pledged revenues, with subordinate bondholders in a junior position. Pledged revenues derive from taxes levied specifically on liquid fuels and other fuels. Fitch believes this structure insulates the bonds from any commonwealth or PTC operating pressures.

SIGNIFICANT REVENUE VOLATILITY: The unique estimation and true-up process for the commission allocation (the pledged revenues) adds material year-to-year volatility. In addition, the allocation is fairly susceptible to year-to-year volatility throughout the economic cycle. The legal pledge is for a set annual percentage of the OFT, regardless of the actual cash distribution. Therefore, Fitch's assessment focuses on the economic sensitivity of the OFT itself which is notably more stable given the broad tax base. Assuming full leveraging up to the two times (2x) senior lien ABT, pledged revenues will provide exceptionally strong coverage. The much more lenient subordinate lien ABT of 1.15x provides less robust, but still solid coverage.

SLOW GROWTH REVENUE STREAM: The OFT, from which the commission allocation derives, is a statewide levy on various fuels. The OFT and commission allocation increased substantially in fiscal years 2014-2016 with the phase-in of statutory changes. Once those changes are fully implemented next January, Fitch anticipates growth in pledged revenues will slow due to the long-term trend of stable to declining fuel consumption.

RATING SENSITIVITIES

REVENUE GROWTH EXPECTATIONS: The rating is sensitive to Fitch's expectations for pledged revenues to be on a flat to declining trend. Improvement or weakening from that trend that materially alters debt service coverage could trigger rating movement.

CREDIT PROFILE

Fitch expects the commission allocation of the OFT to provide exceptionally strong coverage of debt service for the senior lien and still solid, though materially weaker, coverage for the subordinate lien. The OFT is levied across the entire commonwealth on the fuels used by most cars and trucks, establishing a broad tax base. Pennsylvania gradually but permanently shifted, in Act 89 of 2013, to a much higher price floor for the tax levy, and eliminated the price cap, significantly increasing the pledged revenues. Long-term trends of stable to declining vehicle fuel purchases limit the growth trajectory of pledged revenues, but Fitch anticipates coverage will remain robust. The debt service schedule is essentially level through final maturity of all outstanding OFT bonds.

The OFT is levied as a millage rate times the average wholesale price per gallon of all taxable fuels and liquid fuels (AWP, as defined in relevant statutes and inclusive of gasoline and diesel). The commonwealth's department of revenue (DOR) annually calculates the AWP and the resulting tax per gallon. Prior to Act 89, the AWP used for the OFT was capped at $1.25 with a floor of 90 cents. The calculated AWP was often substantially above the cap - for example for 2013, DOR calculated an AWP of $3.11. Act 89 eliminated the AWP cap and raised the floor to $1.87 for 2014, $2.49 for 2015 and 2016 and $2.99 for 2017 and thereafter. By 2017, the AWP will, at a minimum, be more than double the 2013 OFT cap.

The legislature is considering a bill this session to further revise the OFT by permanently freezing the AWP at the current price of $2.49. The current price is nearly twice the prior AWP cap. Therefore, Fitch does not view the proposed bill (HB 2248) as material to the ratings.

RESILIENCE OF SECURITY TIED TO OFT

On a year-to-year basis, the commission allocation exhibits significantly more volatility than actual OFT collections. For example, an underestimate in fiscal 2006 led to a correspondingly larger commission allocation in 2007 (a 20.3% increase), and then a decline (9.7%) in 2008. Over the same three year period, changes in OFT collections ranged from 3.9% to -3.3%.

Regardless of the year-to-year differences in estimates versus actuals, the legal pledge to OFT bondholders is the full 14% of 55 mills each year. Accordingly, Fitch views actual OFT collections of the 55 mills as a more accurate reflection of the sensitivity of pledged revenues to economic declines. The original indenture for the bonds requires the trustee to maintain a $10 million balance in the revenue fund which is available solely to bondholders (current maximum annual debt service [MADS] is $56 million). This balance mitigates volatility concerns and leads Fitch to focus on the OFT for its revenue volatility assessment, rather than the commission allocation.

To isolate the economic sensitivity of the underlying revenue stream, Fitch applies its Fitch Analytical Sensitivity Tool (FAST) to the OFT from which the allocation legally derives. The OFT is likely to experience notably less volatility and remain relatively resilient given its broad geographic scope and tax base. Pledged revenues provide exceptionally strong coverage of senior lien MADS (with a 2x ABT) in the event of a moderate economic decline. Because of a much more lenient ABT of 1.15x, the subordinate lien will exhibit less robust, but still solid coverage.

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both FAST 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, FAST generates a 2.2% scenario decline in the OFT. The largest actual cumulative decline in historical revenues is 3.3% in fiscal 2008 during the height of the Great Recession.

The senior lien could withstand a 50% decline in the OFT revenue assuming full leveraging to the ABT, or 22.7x the scenario output and 15.2x the largest historical decline.

Under the much more lenient 1.15x ABT for the subordinate lien, the OFT resilience is 5.9x the scenario output and 4x the largest historical decline. This is materially weaker than the senior lien but still reflective of a solid level of resilience.

Debt service is currently well below the maximum permitted under the ABT and the PTC anticipates no new money issuance for at least the next two to three years. Act 89 of 2013 materially increased the commission allocation and provides the PTC with more excess funds (after debt service) to pay for capital that otherwise may have been financed with new money OFT bonds. Fitch's rating assumes eventual full legal leveraging of the pledged revenues.

GROWTH PROSPECTS FOR REVENUE STREAM ARE LIMITED

The OFT is a statewide levy on various fuels, including gasoline and diesel. As noted above, the OFT and commission allocation increased substantially in fiscal 2014 and 2015 with statutory changes that phased in a permanent increase in the price floor on which the tax is levied. Once the expansion is fully implemented next January, Fitch anticipates growth in the Commission Allocation will be slow. Exposure to improving fuel economy and increases to federal corporate average fuel economy standards limit the growth potential. These limited growth prospects constrain the ratings despite relatively strong expected resilience through economic declines.

NO EXPOSURE TO PTC OR COMMONWEALTH OPERATIONS

The dedicated tax bond ratings for the senior and subordinate liens are not capped by the PTC's Issuer Default Rating (IDR). The PTC issues the bonds and is a municipality under Chapter 9 so Fitch assesses the exposure of the bondholders to PTC's operations under a local government framework. Fitch views the commission allocation pledged to OFT bondholders bonds as special revenues of the Commission, not subject to netting, under Chapter 9 of the U. S. Bankruptcy Code given the specific nature of the tax (an excise tax on motor fuel purchases) and the lack of any connection to PTC's operations. Therefore, the rating on the OFT bonds is not capped by the IDR of the PTC. The rating is also not capped by the commonwealth's IDR as the commission allocation is permanently appropriated with no annual legislative appropriation or approval required.