Fitch Rates Port Authority of New York & New Jersey's Consolidated Bonds 'AA-'
The Rating Outlook for the authority's consolidated bonds is Stable.
Proceeds from the 188 series issuance are expected to refund the \\$124.8 million outstanding balance of the 139 series consolidated bonds with remaining new money issuance available for capital expenditure or to refund other obligations. Proceeds from the 189 series issuance are expected to refund the \\$400 million outstanding balance of the 140 series consolidated bonds and to provide approximately \\$250 million of additional funds for capital investment.
The ratings are supported by PANYNJ's mature, diverse and monopolistic asset base which notably includes certain very strong airport and bridge/tunnel assets and are further supported by the authority's conservative debt structure and moderate leverage, with debt service coverage ratio (DSCR) expected to be managed at or above 1.8x. Nevertheless, its extensive capital plan and guardianship of significantly loss-making assets constrain the rating.
KEY RATING DRIVERS
Revenue - Volume: Stronger
Resilient Cash Flows And Stable Revenue Base: PANYNJ has a monopolistic position over an expansive, diverse portfolio of transportation and commerce related assets, including four metropolitan New York/New Jersey airports, an interstate transportation network comprising tunnels, bridges, terminals, and ferries, as well as seaports. Strong demand characteristics are underpinned by the region's diverse and populous economy as well as its status as a global center for commerce.
Revenue - Price: Stronger
High Rate-Setting Flexibility: The authority has demonstrated an ability to produce consistently healthy financial performance, reinforced by strong cost recovery provisions in airline use agreements at airports and timely toll increases on its bridges and tunnels with minimal impact on traffic levels. However, this flexibility may come under pressure if World Trade Center rental revenues do not develop as expected or if operating losses on Port Authority Trans-Hudson (PATH) transit network widen significantly.
Infrastructure & Renewal: Midrange
Extensive Debt-Funded Capital Plan: PANYNJ's 2014-2023 capital plan totals approximately \\$27.6 billion. Cost and delay risk are meaningful for a plan of this scale and complexity. These risks would be further compounded if PANYNJ was mandated by either state to take on additional non-core, non-revenue generating assets that could reduce future funding capacity for these capital works.
Debt Structure: Stronger
Conservative Capital Structure: The authority maintains a nearly 100% fixed-rate, fully amortizing capital structure.
Financial Metrics
Moderate Leverage, Strong Coverage: Leverage is moderate with 2014 net debt to cash available for debt service (CFADS) of approximately 7.1x (excluding cash in the general fund). Significant balance sheet liquidity, reserving requirements, ability to control operating and maintenance costs, and a demonstrated history of generating DSCR over 2.0x all mitigate leverage and support the rating.
Peers
Although Fitch rates several other multi-sector issuers in the U.S. transportation infrastructure sphere, none have a similar level of asset diversity as, and few are of a similar scale to, PANYNJ. Furthermore, none of its closest peers face a similar multijurisdictional ownership or governance structure. The closest peers are Port of Seattle (senior lien rated 'AA'/Stable Outlook) and Massachusetts Port Authority (senior revenue bonds rated 'AA'/Stable Outlook), both of whose debt is secured primarily on airport and port revenue streams. PANYNJ's diverse and high profile asset base is a relative strength; however, significantly higher leverage and risk associated with its large capital plan coupled with its highly politicized operating environment place its ratings one notch below senior lien ratings for both peers.
RATING SENSITIVITIES
Negative - Weaker financial margins due to slow revenue growth and/or higher rates of growth in operating expenses;
Negative - Significant escalation in expected capital needs and additional leveraging not supported by commensurate revenue increases to maintain DSCRs at or above 1.8x-2.0x;
Negative - The generation of lower revenue than currently forecast from the World Trade Center site that puts increased pressure on airport and bridge and tunnel assets to meet the revenue shortfall;
Negative - Actions by either the State of New York or New Jersey to limit the authority's ability to raise tolls to cover growing debt service obligations;
Negative - Significant new non-core state-mandated investment that impacts future core-investment capability;
Positive - None at present given PANYNJ's substantial capital plan and associated additional debt requirements.
TRANSACTION SUMMARY
PANYNJ is issuing consolidated bonds series 188 and 189 to refund outstanding series 139 and 140 bonds and to provide additional funds for capital improvements or to refund other obligations.
Traffic performance across PANYNJ's business sectors was broadly steady in FY2014 as compared to the prior year:
--Bridge and tunnel traffic fell 1.4% in FY2014 at 114.0 million from 115.7 million the previous year, reflecting the effects of elasticity to continued toll increases that have been implemented each year since 2011, as well as bad winter weather in the region during Q1 2014;
--Passenger numbers at the authority's airports grew 3.3% to 117.3 million, up from 113.6 million in FY2013, driven primarily by an increase in international traffic of 5.9%, with domestic traffic growing a more moderate 1.9%;
--Passenger traffic on PATH also edged up 1.2%, reaching 73.7 million in FY2014, with average weekday traffic growth outstripping total growth at a more robust rate of 2.5%;
cargo passing through its seaport facilities in FY 2014 grew 2.7% on FY2013.
Net operating revenue for the year to Dec. 31, 2014 (FY 2014) was \\$1.58 billion, a fall of 1%, or \\$8 million, on the prior year. This comprised an increase in gross operating revenue of \\$291 million to \\$4.5 billion, combined with a bigger 12% increase in gross operating costs to \\$2.9 billion.
The increase in gross revenue was largely caused by higher cost recovery from airlines operating at LGA, JFK and EWR airports (\\$124 million); higher rental revenue generated from airport facilities as well as the World Trade Center (\\$67 million); and increased toll and fare revenue from PANYNJ's bridges and tunnels and PATH transit system (\\$91 million).
The larger increase in operating expenses was primarily driven by the incurrence of certain one-off costs, including the creation of dedicated resources for aircraft rescue and firefighting; additional snow removal costs relating to harsh winter conditions during Q1 2014; the transition of World Trade Center into an operational facility; increased liability and worker's compensation loss reserves; and recognition of \\$31 million of accelerated rental expense relating to vacated temporary office space. It also included an increase in operating costs on the PATH transit system.
The budget for FY2015 reflects broadly flat gross operating expenses of \\$2.9 billion. Estimated debt service in FY2015 of \\$1.1 billion is \\$182 higher than FY2014, reflecting increased principal and interest obligations on outstanding debt, as well increased debt service costs relating to the separate financing of World Trade Center Tower 4. Capital expenditure for FY2015 is budgeted at \\$3.6 billion, within the actual \\$4.1 billion invested during FY2014 and in line with prior expectation as outlined in the 2014 - 2023 capital investment plan published last year.
On May 6, 2014 the governors of the states of New York and New Jersey appointed a bi-state special panel to review and evaluate potential reforms of PANYNJ's mission, structure, management, operations and governance, and the special panel published a report on Dec. 26, 2014 that was endorsed by both governors one day later. The report made a number of recommendations to improve accountability and transparency of PANYNJ, and return the authority to its core transportation mission, and these recommendations were accepted in principle by the PANYNJ Board of Commissioners on Feb. 19, 2015. Fitch views these developments as positive for the authority, and will monitor how implementation of recommendations affects governance, management and operating performance of PANYNJ going forward.
For more information on the authority and its recent performance, please refer to Fitch's press release dated June 13, 2014 titled Fitch Rates Port Authority of New York & New Jersey's Consolidated Bonds 'AA-'.
SECURITY
Consolidated bonds and notes are secured by net revenues of the authority and a pledge of the general reserve and consolidated bond reserve funds.
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