NEW YORK--(BUSINESS WIRE)--
Fitch Ratings assigns an 'AA-' rating to the $293.72 million State of Florida Department of Transportation (FDOT) turnpike revenue bonds, series 2012A. Additionally, Fitch affirms the 'AA-' rating on the approximately $2.8 billion outstanding turnpike revenue and refunding bonds.
The Rating Outlook is Stable.
KEY RATING DRIVERS
--Strategic Importance: The Florida Turnpike is a critical transportation system with a mature traffic profile and established demand.
--Strong Rate-Making Flexibility: Considerable economic flexibility exists to increase toll rates. Toll rates were increased effective June 24, 2012 for the first time since 2004 and, per statute, annual increases indexed to the Consumer Price Index (CPI) will be applied to electronic payers going forward. Cash rate increases, also linked to CPI, will be implemented every five years going forward.
--Low Leverage and Solid Financial Margins: Leverage is currently low at 5x. Debt service coverage (DSC) was solid at 1.84x in fiscal year (FY) 2012 (ended June 30) but down from over 2.0x in FYs 2009 and 2010. Fitch expects DSC to rise to historical levels in FY 2013 given the aforementioned toll increase.
--Manageable Work Program: The turnpike's 2013-2018 proposed Work Program totals $4.1 billion which assumes $984 million in additional borrowing beyond the current issue during this period. While larger than the last reviewed program, debt service coverage levels are projected to be consistent with those expected under the prior plan given revenue growth that has and is projected to exceed prior estimates.
WHAT COULD TRIGGER A RATING ACTION
--Erosion of DSC in the medium term below 2x for a sustained period due to lower-than-anticipated revenue yields from toll increases or higher-than-anticipated expense growth;
--Increases in debt to fund projects that significantly increase leverage beyond historical levels;
--Given the limited prospects for growth in the near term due to economic conditions in Florida, management's inability to actively control its operating expenses along with controlling costs related to its work program.
Turnpike revenue bonds are secured by a first lien on the net revenues of the turnpike.
After experiencing two consecutive years of declines, toll transactions increased 1.4% and 2.1% in FYs 2010 and 2011, respectively. Transactions saw continued growth of 1.7% above fiscal 2011 levels. Toll revenues totaled nearly $609 million for FY 2012, 1.5% above FY 2011 revenue performance and above prior expectations. Management is projecting 20% revenue growth for FY 2013 following implementation of the aforementioned toll increase and through the first quarter, revenues are 24% ahead of receipts from the same period last year. The turnpike has demonstrated higher levels of stability but the continued weak economic recovery in Florida remains a concern.
The turnpike's proposed work program covering fiscal years 2013 through 2018 totals $4.1 billion, which is somewhat larger than the prior work plan. Approximately one-third of that total is slated for widening projects while capital projects account for $2.8 billion of the total work plan. Planned debt under the program, following this issuance which has a $116 million new money component, is estimated at $984 million. Fitch expects the turnpike will delicately balance borrowing associated with the program while maintaining historically robust DSC ratios and strong financial flexibility. Historically, the turnpike has produced adequate net revenues after debt service to ensure that enough funding is directed towards construction projects.
Management has taken strong initiatives to reduce expenses. Operating expenses were reduced significantly in FY 2010 by 10% due to the elimination of approximately 25% of manual cash collectors and reducing some back-office staff. In FY 2011 operating expense grew approximately 5% to $180 million from $172 million in FY 2010. For FY 2012, operating expenses declined by 3.5% to $173.7 million, reflecting in large part the transition all-electronic tolling on the Homestead Extension. Operating expenses are projected to grow by a reasonable 2.9% in fiscal 2013. Fitch recognizes management's historically conservative forecast assumptions and the demonstrated track record of outperforming the budget. Additional conversions to all-electronic tolling are expected in the coming years, and as such projects move forward, careful oversight and management of costs associated with implementation and operation will be critical.
Fitch's Base Case assumes the indexing of tolls going forward, greater traffic diversion in FY 13 and slower traffic growth through the forecast period when compared to the sponsor case, and operating expense growth above the sponsor forecast but consistent with historical levels. Under this scenario, Fitch expects DSC ratios to be at least 2x in the medium term. Fitch's Rating Case assumes somewhat slower traffic and revenue growth and slightly higher growth in operating expenses when compared to the base case. Under this scenario, Fitch forecasts coverage levels to decline to just under 1.9x in the near to medium term with growth resuming thereafter. To the extent that revenues and operating expenses produce coverage levels below 2x for a sustained period, toll increases above inflationary levels would be necessary to maintain financial flexibility consistent with the rating level.
The turnpike system operates as an enterprise within FDOT. Its facilities include the Mainline, segments of which were operational in the 1950s, the Sawgrass, Seminole, and Veteran's expressways, the Southern Connector Extension, the Polk and Suncoast parkways, and Western Beltway, Part C. A connection linking I-4 with the Selmon Expressway in Tampa is expected to become part of the system in FY 2014.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 2, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges, and Tunnels
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