Fitch Affirms Rhode Island Turnpike & Bridge Auth's Revs at 'A'; Outlook to Negative from Stable

Fitch Ratings has affirmed the 'A' rating on approximately $61.7 million of outstanding Rhode Island Turnpike & Bridge Authority (the authority) revenue bonds. The outlook is revised to Negative from Stable.

The Negative Outlook reflects uncertainty surrounding the authority's capital program, with both the Claiborne Pell and Mount Hope bridges requiring considerable maintenance investment in the near and medium-term. The authority's plan to finance needed repairs through tolling the recently transferred Sakonnet River Bridge has been called into question while the state general assembly examines alternative funding methods. Barring external funding sources, issuance of toll revenue bonds will require additional toll revenues, driven by periodic toll rate increases, to maintain adequate financial flexibility to support a reliable state of good repair, which may be difficult given the politically challenging environment to implement toll adjustments. The authority will seek to transfer the Sakonnet and Jamestown bridges back to the Rhode Island Department of Transportation (state DOT) if it is not granted authorization to levy adequate tolls on the Sakonnet Bridge.

KEY RATING DRIVERS

Low Volatility But Limited Growth: The Pell Bridge primarily serves commuters between the City of Newport and Town of Jamestown and also benefits from seasonal traffic during the summer months. Traffic volatility is generally low, however growth prospects are limited. Traffic levels have been stable at approximately 10 million transactions since 2002.

Revenue Risk- Volume: Midrange

Limited History of Implementing Toll Increases: Current tolls on the Claiborne Pell bridge of $0.83 for Rhode Island residents with transponders and $4.00 for cash and out of state users are modest, particularly given the lack of viable alternative routes. Approximately 16% of travelers pay the full fare which represents 38% of toll revenues. The last toll increase in 2009 was the first time tolls were increased after 40 years of operations. The authority has recently voted for the next toll increase to $1.00 for Rhode Island residents with transponders and $5.00 for cash and out-of-state users effective May 16, 2014. However, there is uncertainty as to whether the authority will be able to implement future toll increases as needed given the political environment in which it operates.

Revenue Risk- Price: Midrange

Conservative Debt Structure: All bonds outstanding are fixed-rate and mature in 2040. The current debt service schedule is flat at $5.6 million per year through fiscal 2018, then dropping to $3.7 million in 2019.

Debt Structure: Stronger

Considerable Capital Investment Required: The 10-year capital plan calls for approximately $163.1 million for the Newport Pell Bridge and $44.7 million for the Mt. Hope Bridge, and additional bond issuance totalling $170.7 million is anticipated in the near-term to fund the rehabilitation needs of the two bridges. Infrastructure Development and Renewal: Weaker

Adequate Coverage and Moderate Leverage: Debt service coverage ratio (DSCR) in fiscal 2013 is adequate at 1.69x. The authority's board policy is to maintain DSCR above 1.5x, a level Fitch views as being commensurate with an 'A' category rating. Leverage is moderate with net debt to cash flow available for debt service (CFADS) at 5.2x, but expected to increase as additional debt is issued. The authority has $4.7 million of unrestricted cash and investments, equivalent to 179 days cash on hand.

RATING SENSITIVITY

While it is the authority's intention to return the Sakonnet and Jamestown bridges if tolling is not permitted, responsibility over the additional bridges without the ability to impose adequate tolls will result in a downgrade to below the 'A' category.

Dependence on significant toll increases to meet a DSCR of 1.5x under a politically challenging environment would put the current rating under increased pressure.

External support reducing or eliminating the need to leverage toll revenue bonds, or a four-bridge scenario in which the authority is able to implement necessary toll increases that result in a strong DSCR profile at or around current levels under existing and proposed new indenture could stabilize rating.

SECURITY

The bonds are secured by the net revenues derived by the authority from operating the Pell and Mount Hope bridges.

CREDIT UPDATE

The authority gained control of the Sakonnet and Jamestown bridges from the state DOT in April 2013. Tolling of the Sakonnet Bridge was set to begin in August 2013, but after experiencing opposition to tolling, a temporary toll of ten cents was implemented while alternative ways to fund the maintenance of the four bridge system were considered by the General Assembly. The deadline to finalize the decision has been extended to May 15, 2014 from April 1, 2014.

To avoid tolling of the Sakonnet Bridge, local legislators have proposed a bill that would raise an estimated $1 billion over the next 10 years through imposing a 5% surcharge on motor vehicle fees in the short-term then diverting a portion of gas tax revenues to an infrastructure fund. The proposed bill would also return the Sakonnet and Jamestown bridges to the state and merge the authority with the state DOT. Fitch will continue to monitor developments in Rhode Island legislation.

In order to progress with the rehabilitation work of the Pell and Mt. Hope bridges, the authority has recently voted to either raise rates of the Sakonnet Bridge to $0.50 for transponder users and $3.75 for cash users beginning May 16 or return the Sakonnet and Jamestown bridges to the state DOT and raise tolls on the Pell Bridge to $1.00 from $0.83 for users with Rhode Island residents with transponders and $5.00 from $4.00 for cash and out-of-state users. Should tolling of the Sakonnet Bridge be permitted, it is the authority's plan to issue additional bonds under a new indenture secured by the toll revenues of the Sakonnet Bridge.

Based on the traffic consultant's forecast, this will allow the authority to maintain coverage ratios above 1.7x for the existing bondholders with inflationary toll increases on the Pell Bridge. However Fitch notes that uncertainty regarding cost allocation between the Sakonnet/Jamestown and Pell/Mt. Hope bridge systems could potentially impact coverage ratios on the existing bonds.

Should tolling of the Sakonnet not be permitted, additional bonds will be issued on parity with existing bonds. The traffic consultant forecasts that toll increases of 25% will be needed in each of fiscal years 2015, 2018 and 2021 to maintain coverage ratios above 1.5x. Tolls for Rhode Island residents with transponders will increase from $0.83 in fiscal 2014 to $1.62 in fiscal 2023 while cash and out-state-users will increase from $4.00 in fiscal 2014 to $7.81 in fiscal 2023. While Fitch believes that the Pell Bridge has the economic rate-making flexibility to make such adjustments, it is unclear to Fitch that the authority will have the ability to do so in a timely matter given the political environment.

Traffic on the Pell Bridge remained stable in fiscal 2013, increasing by 2.7% to 10.4 million transactions, while revenues increased 2.4% to $18.7 million. Operating expenses increased 24.6% in fiscal 2013. The increase in operating expenses is due to increased headcount in anticipation for the transfer of the two bridges and maintenance work done on the Pell Bridge. While the bridges were transferred in April 2013, a few months before fiscal year, maintenance costs for the newly transferred bridges are currently being covered by the state while negotiation for tolling of the Sakonnet River Bridge is ongoing. The DSCR in fiscal 2013 remained strong at 1.69x.

Fitch analyzed several sensitivity scenarios based on the authority's debt issuance and toll adjustment plans. Fitch's base case scenario reflects its views of modest price elasticity to the authority's planned toll increases over the next ten years, assuming traffic decreases of 1% for commuter traffic and 7% for full-fare traffic (resulting in a total traffic decrease of approximately 2%) during year with toll increases. It also reflects moderate expense growth of 3% per annum. Coverage ratios remain above 1.5x through 2018, improving after the series 2003 bonds mature.

The rating case scenario assumes slightly greater sensitivity to planned toll increases and slightly higher expense growth. Commuter traffic decreases 2% while full-fare traffic decreases 9% (total traffic decrease of approximately 3%) during years with toll increases. Under such scenario, coverage is expected to be at 1.4x in the medium term. As aforementioned, while the proposed tolls are reasonable, Fitch remains unclear as to the authority's ability to execute the proposed tolling schedule.

The Pell and Mount Hope bridges have considerable maintenance needs. Fitch has been provided with a bridge inspection report which considers both the Pell and Mount Hope bridges to be in a structurally adequate condition. The authority's 10-year capital plan calls for $163.1 million for the Pell Bridge and $44.7 million for the Mount Hope Bridge. Capital projects for the Pell Bridge include steel repairs, painting, and continued patching of the roadway while projects for the Mount Hope Bridge include rehabilitation of the tower bases and maintenance of concrete deck and structural steel components.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Rating Criteria for Infrastructure and Project Finance (July 12, 2012);

--Rating Criteria for Toll Roads, Bridges, and Tunnels(Oct. 16, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Toll Roads, Bridges, and Tunnels --- Effective Aug. 2, 2012￢ﾈﾒOct. 15, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684146

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827690

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