OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the Pennsylvania Turnpike Commission's (PTC) \$207 million turnpike subordinate revenue bonds series 2015A-1 and 2015A-2. Fitch has also assigned an 'A-' rating to \$56 million turnpike subordinate revenue refunding bonds series 2015A-1.

In addition, Fitch has affirmed PTC's \$3.8 billion outstanding senior lien turnpike revenue bonds at 'A+' and \$4 billion outstanding subordinate lien turnpike revenue bonds at 'A-'. The Rating Outlook on all bonds is Stable.

KEY RATING DRIVERS

The ratings reflect PTC's strong commercial and passenger traffic profile and improving underlying economic trends, PTC's demonstrated willingness to raise tolls, relatively low elasticity observed through recent increases and history of prudent cost management. They also reflect PTC's sizable debt burden and Fitch's expectation that PTC will continue to generate sufficient revenues to maintain strong senior lien debt service coverage ratios (DSCR) of at least 2x and subordinate lien DSCRs of at least 1.3x into the medium term until its annual Act 44 \$450 million obligation is sunset in 2022.

Revenue Risk: Volume - Stronger
Essential Route With Some Commercial Exposure: PTC plays a vital role in serving the state's major population centers and benefits from a strategic location for commercial traffic, evidenced by its relatively stable historical traffic and revenue growth. Commercial traffic accounted for 13% of traffic in 2014 but generated 42% of net toll revenues.

Revenue Risk: Price - Midrange
Ratemaking Flexibility: PTC benefits from economic ratemaking flexibility, and traffic has demonstrated relatively low elasticity to the toll increases applied since 2005. 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.

Infrastructure Development/Renewal - Midrange
Sizable Capital Program: The need for an additional \$5.9 billion in senior lien debt to fund PTC's \$6.5 billion mainline capital improvement plan (CIP) for fiscal 2015 to 2024 puts pressure on the Pennsylvania Turnpike, particularly when viewed together with the expected \$3.6 billion in subordinate lien borrowing to subsidize transit capital and operations under Act 44/89 through 2022. However, Fitch views favorably the focus on mainline capital spending for reconstruction and renewal, somewhat mitigating deferred maintenance concerns.

Debt Structure Risk - Midrange (Senior Lien); Midrange (Sub Lien)
Reasonable Debt Structure: While PTC's turnpike debt is sizable at approximately \$8.7 billion, is back-ended, and is expected to increase, bondholders benefit from PTC's adequate covenant protections and limited variable rate exposure. Turnpike revenue bonds are 87% fixed, 5% synthetically fixed, and 8% variable or synthetically variable.

Financial Metrics:
Elevated Leverage But Strong Financial Performance: PTC's combined senior and subordinate leverage is currently approximately 12x net debt-to-cash flow available for debt service (CFADS) and is expected to remain at this high level for some time. Operating revenue is expected to cover all operating and current capital needs of the existing mainline facilities with senior DSCR 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). As leverage continues to increase over the next decade, management will need to balance expense management and rate increases to continue meeting these coverage targets. While pressure remains on coverage levels for the next several years, beyond 2022 PTC's capital structure will benefit from reduced leverage and increased flexibility as a result of Act 89's elimination of \$400 million of funding requirements, as previously legislated for under Act 44.

Peers:
Peers to PTC with similar toll and transaction profiles include New Jersey Turnpike Authority (rated 'A' by Fitch), and Maryland Transportation Authority (rated 'AA-'), with Maryland's rating level largely reflecting lower leverage and higher coverage metrics.

RATING SENSITIVITIES

Negative - Traffic Growth Profile: Should traffic growth stagnate after multiple years of toll increases, PTC may need to pursue toll increases greater than the forecasted 3%-6% in order to maintain coverage levels, which may face political opposition.

Negative - Higher Costs: Management's ability to control expenses and manage its sizable capital program may affect the rating.

Negative - Weaker Coverage Ratios: Should PTC be unable to meet its coverage policies (2.0x senior/1.3x subordinate/1.2x MLF bonds) the ratings may be pressured.

Negative - Debt Structure Risks: A rising interest rate environment could result in lower financial flexibility as PTC issues debt to fund its \$6.5 million capital plan over the next 10 years.

Positive: Given PTC's sizable and ongoing borrowing plans for the future, upward rating action is not likely at this time.

TRANSACTION SUMMARY
PTC expects to issue approximately \$207 million in series 2015A-1 and 2015A-2 new money subordinate lien revenue bonds. The bonds are being issued to provide funds, together with an equity contribution by PTC, to the Pennsylvania Department of Transportation (PennDOT) in accordance with Act 44 and Act 89 to fund certain grants to mass transit agencies and for multi-modal transportation projects. Proceeds will also cover the costs of issuance and funding of the debt service reserve account for series 2015A-1. Series 2015A-1 fixed-rate bonds and 2015A-2 variable-rate bonds will be on parity with existing subordinate lien bonds, amortizing through 2046. PTC intends to provide a \$15 million equity contribution to fund a portion of Act 44 payments directed to PennDOT.

Concurrent with the aforementioned issuance, PTC is also issuing approximately \$56 million in series 2015A-1 subordinate lien revenue refunding bonds to advance refund a portion of outstanding series A of 2011 maturing in December 2041. The fixed -rate series 2015A-1 refunding bonds are expected to mature in December 2041 and estimated to provide \$12.1 million in present value savings (or 24% of refunded principal).

PTC's traffic was up slightly for fiscal 2014 (year ended May 31), increasing 0.4% over a year prior. This compares to a 0.6% decline during fiscal 2013, flat growth in fiscal 2012, and 1.3% in fiscal 2011. Traffic is up 2.1% for the first nine months of fiscal 2015 based on year-to-date figures through February. Net toll revenues increased 6.2% for fiscal 2014, and have increased 8.3% for the first nine months of fiscal 2015 year to date, reflecting toll increases, reductions in commercial discounts and improving economic conditions. These increases build upon previous revenue increases of 3.9%, 5.6%, and 6.6% seen in fiscal 2013, 2012, and 2011, respectively.

Continued revenue growth coupled with stable traffic volume demonstrates PTC's resilience despite seven consecutive years of toll increases. As a result of the most recent toll changes in January 2015, the average cash toll equals 12.1 cents per mile, and the average E-ZPass toll is 8.7 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. Cash tolls are now 40% higher than E-ZPass tolls on a per-lane-mile basis as a result of growing discounts for E-ZPass trips compared to cash trips.

On Nov. 25, 2013, the Commonwealth of Pennsylvania enacted Act 89, a comprehensive transportation funding program which included substantial revisions to the Commission's transportation funding obligations under Act 44. The Amended Funding Agreement terminates on Oct. 14, 2057. While the Commission's aggregate annual payment obligation to PennDOT remains \$450 million annually under Act 89 through fiscal 2022, beginning in fiscal 2023 the Commission's annual obligation is reduced to \$50 million, which will be funded out of current revenues and dedicated to transit capital and operating needs through 2057.

As of July 1, 2014, none of the annual \$450 million payments will be dedicated to highways and bridges, instead supporting transit capital, operating, multi-modal and other non-highway programs. This means that while Act 89 provides long-term debt relief to PTC, in the short term it requires additional leverage on the subordinate lien, as PTC expects to finance most of this obligation with subordinate revenue bond proceeds.

PTC's 10-year capital program features capital initiatives to improve and maintain the turnpike in a state of good repair, ensure customer safety and convenience, and address capacity constraints. The 2015-2024 CIP totals \$6.5 billion with 58% designated for mainline reconstruction and bridge rehabilitation/reconstruction, while 14% will cover roadway expansion and safety. Beyond 2024, PTC's plan assumes capital expenses continue to increase by 4% per year to cover on-going capital needs to maintain the facility. PTC is projected to issue \$5.9 billion in senior revenue bonds for its capital program and \$3.6 billion for Act 44 (only subordinate revenue bonds as MLF bonds.

Despite increasing leverage in the medium term, PTC intends to maintain senior and subordinate DSCRs above 2.0x and 1.3x respectively, and 1.2x for MLF-enhanced debt. In order to maintain these coverage levels, PTC's traffic consultant forecasts that annual toll rate adjustments ranging from 3%-6% will be required through fiscal 2027, with 3% increases thereafter. This assumes average traffic growth of 1.3%, resulting in an average net revenue growth rate of 5.4% after discounts and adjustments. Fitch's sensitivity cases contemplate more modest traffic growth (average growth of 0.5%-0.7%), reflecting some reaction to continued toll increases. Under these scenarios, higher annual toll increases (average of about 6% over the next decade) are necessary to maintain senior and subordinate coverage at 1.3x. While the need for additional leverage over the next decade is a concern, Fitch takes comfort in the reduced overall leverage requirements under Act 89 from 2023 onwards, and views favorably PTC's proactive approach to focus on Turnpike maintenance needs.

SECURITY
The senior revenue bonds are secured by revenues consisting of tolls, charges, fines and other revenues and income derived from vehicular use of the turnpike, net of operating and maintenance expenses.

The subordinate revenue bonds are secured by commission payments consisting of turnpike revenues after all obligations under the senior lien indenture have been satisfied.