OREANDA-NEWS. March 25, 2016. Fitch Ratings has assigned an 'A-' rating to the Pennsylvania Turnpike Commission's (PTC) approximately \\$204.6 million turnpike subordinate revenue bonds, series 2016A. The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating reflects 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. The rating also reflects 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 (DSCRs) 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 significantly reduced to \\$50 million 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 14% of traffic in 2015 but generated 43% of net toll revenues. PTC benefits from economic ratemaking flexibility, and traffic has demonstrated relatively low elasticity to the toll increases applied since 2005.

Revenue Risk: Price - Midrange
Ratemaking Flexibility: 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 billion in subordinate lien borrowing to subsidize transit capital and operations under Act 44/89 through 2022. However, Fitch views the focus on mainline capital spending for reconstruction and renewal favorably, as it somewhat mitigates deferred maintenance concerns.

Debt Structure Risk - Midrange (Senior Lien); Midrange (Sub Lien)
Reasonable Debt Structure: While PTC's turnpike debt is sizable at approximately \\$9.2 billion, is back-ended, and is expected to increase, bondholders benefit from PTC's adequate covenant protections and limited variable rate exposure, with currently 6% of debt bearing a variable rate.

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 the majority of its \\$6.5 billion 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.

SUMMARY OF CREDIT

PTC expects to issue approximately \\$204.6 million in series 2016A subordinate revenue bonds. The bonds are being issued to provide funds, together with a cash 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. The bonds are expected to be fixed rate, maturing in 2047 and will be on parity with existing subordinate bonds.

PTC's traffic was up 1.9% in fiscal 2015 (year ended May 31) reaching 192.3 million. This compared favorably to essentially flat growth achieved in the last few years, with recent growth largely attributed to improved economic conditions and lower gasoline prices. Traffic is up 3.2% for the first nine months of fiscal 2016 based on year-to-date figures through February. Net toll revenues increased 8.2% for fiscal 2015, and have increased 10% for the first nine months of fiscal 2016, reflecting toll increases, reductions in commercial discounts and improving economic conditions. These increases build upon previous revenue increases of 6.2%, 3.9%, 5.6%, and 6.6% seen in fiscal 2014, 2013, 2012, and 2011, respectively.

Continued revenue growth coupled with stable traffic volume demonstrates PTC's resilience despite eight consecutive years of toll increases. As a result of the most recent toll changes in January 2016, the average cash toll equals 12.9 cents per mile, and the average E-ZPass toll is 9.2 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.

For more information on the Pennsylvania Turnpike Commission, including a summary of the implications of the passage of Act 89 for PTC, please see Fitch press release 'Fitch Rates Pennsylvania Turnpike 2015A Sub Rev Bonds 'A-'; Affirms Outstanding Bonds' dated April 14, 2015 available at www.fitchratings.com.

SECURITY

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