NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on the Massachusetts Department of Transportation's (MassDOT) Massachusetts Turnpike Authority Western Turnpike Toll revenue bonds consisting of approximately:
--$127 million series 1997.
The Rating Outlook is Stable.
RATING RATIONALE:
The 'A+' rating reflects:
--Highly monopolistic asset providing a key interstate connection for commercial and passenger traffic;
--Stable demand profile with a 53-year history;
--Extremely low toll rate of $0.022/mile provides significant economic ratemaking flexibility;
--Low financial leverage of approximately 3.0 times(x) and additional parity debt is statutorily prohibited;
--Highly politicized toll environment in the commonwealth acts as a practical limit on ratemaking ability;
--Reduced debt service coverage and capacity to fund major maintenance if expenses grow faster than revenues;
--Significant life cycle costs anticipated in the near future;
--Periodic proposals to divert a portion of Western Trunpike (WT) revenues to Metropolitan Highway System (MHS).
KEY RATING DRIVERS:
--Clarity on future toll policy, coupled with more detailed information on managing operating expenses and future capital needs could result in positive rating action.
--Downside risks include declining rates of traffic growth as a result of high fuel prices and/or limited economic growth and diversion of surplus cash to MassDOT given the backlog of deferred maintenance and limited resources with which to fund them.
Security:
The bonds are secured by a pledge of net revenues derived from the WT, including toll revenue and concession revenue associated with fuel stops and restaurants located in Turnpike service stations.
CREDIT SUMMARY
The WT was completed in 1957 and comprises a portion of the interstate highway system connecting Boston to Chicago. The 123-mile turnpike is designated as I-90 and extends from the New York State border in the west to Route 128 in the east. There are two travel lanes in each direction from Interchange 1 in West Stockbridge to Interchange 9 in Sturbridge, spanning approximately 79 miles. The remaining 44 miles consist of three lanes in each direction to Interchange 15, where the WT connects with the MHS. Routes 2, 9, and 20 are alternate routes but provide limited competition, with Route 2 serving the northern part of the Commonwealth and Routes 9 and 20 serving shorter distance trips along the southern end of the commonwealth, parallel to the WT.
Over its 54-year history the WT has operated under several governance structures as the Commonwealth has gone through cycles of separating, consolidating, and then separating WT operations from other highway responsibilities of the commonwealth. Pursuant to legislation enacted in the fall of 2009, the WT now resides within MassDOT. Despite these political changes, bondholder security is unchanged. The primary political risk faced by bondholders is the highly politicized nature of tolling in the commonwealth where urban vs. rural equity remains a key issue. Going forward the commonwealth faces some key policy choices, as under current statutes WT tolls will be removed when debt is repaid. Given that the WT has nearly $200 million in combined operating and capital expenditures annually, it is hard to envision tolls being removed, especially given the rehabilitation needs on an ageing system.
Traffic and revenue performance on the WT has been strong during the recession, which is consistent with the lower job losses and housing price declines experienced by the commonwealth in this downturn. Traffic has grown at a CAGR of 0.4% between 2005 and 2010. Fiscal year to date, traffic is up 1.1%, following on a 2.6% increase in 2010. As there have been no toll increases on the WT in recent history, revenue has followed a similar pattern, although the average toll dropped during the downturn given a lower percentage of commercial vehicles. In fiscal 2010, revenue grew by 2.1% but is up nearly 2.0% year to date, driven by the rebound in commercial vehicles.
A comparison of operating expenses across the previous three fiscal years is difficult as fiscal 2008 and fiscal 2010 were reported on a partial-year basis given the merger with MassDOT. Assuming expense growth of 5% from 2007, traffic and revenue performance since 2007 indicate that senior lien debt service coverage should be in excess of 2.5x. This does not reflect any of the administrative savings that MassDOT anticipates from the merger. Fitch does not expect MassDOT to increase tolls on the WT, and as a result, net revenue stability is tied to MassDOT's ability to keep expense growth in line with expected low single-digit revenue growth. Given the age of the WT and its capital needs, all surplus cash is needed for necessary rehabilitation. Debt matures in 2016, and since there is no plan for toll increases henceforth, MassDOT will need to manage expense growth to keep coverage at this level. Fitch is aware that the 2007 bonds may be refunded for savings, with no extension of maturity expected. The legislation that merged the WT into MassDOT precludes any additional debt under the existing indenture.
In Fitch's view, the biggest question remains future policy decisions by MassDOT. Annual operating and capital expenses of the WT are approximately $200 million. Unless the commonwealth establishes a new revenue stream, it will need to absorb these annual costs from its existing resource base. Fitch also notes that the WT is over 54 years old and could require approximately $40 million-$50 million in annual capital expenditures going forward, which is higher than what the WT has spent over the past few years.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', (Aug. 16,2010);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels', (Aug. 10,2010).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543265
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