Fitch Affirms Oklahoma Turnpike Authority's Revs at 'AA-'; Outlook Stable

Fitch Ratings has affirmed the Oklahoma Turnpike Authority's (OTA) 'AA-' rating on approximately $986.2 million of outstanding second senior revenue bonds. The Rating Outlook is Stable.

The rating reflects the turnpike system's demonstrated mature and stable traffic profile, particularly through the most recent economic downturn, while retaining significant rate-making flexibility. The capital improvement plan, while moderately sized, will be funded with cash and has historically remained on time and on budget. Strong toll revenues against a flat-to-declining debt profile results in strong coverage of obligations over the forecast period. In addition, the availability of motor fuel excise tax (MFET) revenue provides adequate assurance that debt service coverage will be maintained at levels commensurate with the 'AA' rating category.

KEY RATING DRIVERS:

Revenue Risk- Volume: Stronger

RESILIENT TRAFFIC DEMAND: The Oklahoma Turnpike system consists of ten turnpikes, playing a critical role for in-state and interstate traffic and serves as a transportation crossroads, with U.S. Interstates 35, 40, and 44 intersecting within Oklahoma. The lack of competition in Oklahoma for long-distance travel and the system's essentiality contribute to an established and stable traffic demand base. The system's diverse mix of interstate and commuter traffic has grown at a favorable 3% compound annual growth rate (CAGR) over the last decade and a healthy 2.2% CAGR since 2009.

Revenue Risk- Price: Stronger

CONSIDERABLE RATE-MAKING FLEXIBILITY: Management has the ability to raise rates without legislative approval. The OTA has raised rates eight times, most recently in 2009 by 16%. Toll rates remain competitive compared to Fitch's rated portfolio with an average toll per transaction of $1.47, and demand has been observed to be relatively inelastic to past toll increases. Further, should revenues be insufficient to cover debt service, the OTA is entitled to MFET collected on the turnpikes.

Infrastructure Development and Renewal: Stronger

PROACTIVE CAPITAL IMPROVEMENT PLAN (CIP): The 2015-2019 capital plan totals $379 million and focuses mainly on rehabilitation of the turnpike system. The plan will be funded by the general and reserve maintenance funds. The OTA has annual system maintenance evaluations to determine minimum spending requirements and, as a result, the pavement condition index is generally very high.

Debt Structure: Stronger

VARIABLE-RATE DEBT SYNTHETICALLY FIXED: Approximately 30% of the bonds outstanding are synthetically fixed variable-rate debt. Although the swap counterparties, Goldman, Sachs & Co. ('A'/Stable Outlook) and JP Morgan Chase Bank, N.A. ('A+'/Stable Outlook), are rated lower than the OTA's debt, this is mitigated by downgrade provisions in the swap agreements requiring both counterparties to post collateral if their rating falls below 'A-'. In addition, the debt service schedule is flat to declining with no anticipated additional debt issuance to support the capital program in the near term.

FINANCIAL METRICS: The OTA's healthy financial performance has translated to annual debt service coverage ratios (DSCR), including MFET revenue, of at least 1.96x since 2003. The issuer's fiscal 2014 calculation of DSCR was 2.26x, and it is forecast to remain strong throughout the forecast period as debt service obligations decline following maximum annual debt service in 2014. The authority is moderately leveraged at 4.69x net debt-to-cash flow available for debt service. The authority also has $73 million of unrestricted cash equivalent to 350 days cash on hand and 817 days when including the turnpike trust fund and reserve maintenance fund.

PEERS: OTA's closest peers include Ohio Turnpike and Infrastructure Commission (OTIC, rated 'AA/A+', Stable Outlook) and Pennsylvania Turnpike Commission (PTC, rated 'A+/A-', Stable Outlook); each operating urban and rural segments with pricing flexibility. PTC has a higher debt burden with weaker financial metrics resulting in a lower rating than OTA while OTIC's senior lien is subject to relatively restrictive covenants and is minimally leveraged, supporting its high 'AA' rating. OTIC's junior lien is somewhat back-loaded and highly leveraged, resulting in a lower rating of 'A+'.

RATING SENSITIVITIES:

Negative: Unexpected decreases in commercial traffic or increased elasticity of demand to toll rate increases could pressure financial flexibility and negatively affect DSCR.

Negative: Increased debt-related risks due to either capital funding or additional variable-rate issuances, which are not currently anticipated, could pressure the rating.

Negative: Improvements to fuel standards, declines in traffic, and/or legislative acts which negatively impact MFET apportionments could lower the rating.

Positive: Sustained performance above Fitch's base case, with resulting improvement in the Fitch calculated DSCR to above 2.5x for a sustained period coupled with a material decline in leverage, could result in positive rating pressure.

CREDIT UPDATE:

The turnpike system has a mature and stable traffic base, exhibiting year-over-year increases with the exception of a decline in 1974 due to the oil embargo and a 2.3% decline in 2011. Fiscal 2014 transactions increased by 7.1% to 167.2 million from 156.2 million in fiscal 2013. Toll revenues also grew in 2014, by 5.7% to $246.1 million, as a result of completion of construction work on the John Kilpatrick and Creek Turnpikes. For the first two months of 2015, traffic and revenue was up 5.6% and 4.9%, respectively. The share of commercial traffic is modest and has remained relatively constant over the last five years at nearly 9% of system transactions, although its contribution to total toll revenue is more sizeable at 39%.

The OTA has the ability to raise rates without legislative approval and has demonstrated a historical willingness, raising rates eight times since opening. The current average toll of $1.47 is consistent with other turnpikes in Fitch's rated portfolio.

DSCRs remain strong, reaching 2.26x in fiscal 2014 and 1.82x excluding MFET. The authority's financial forecast is based on reasonable underlying assumptions including average annual traffic growth of 1.6% in the near- to medium-term with no additional toll increases and average annual expense growth of 4.5%. Under the authority's forecast, DSCRs are expected to average 2.38x and 1.87x when excluding MFET.

Fitch's sensitivity analysis assumed limited traffic growth of 0.9% and higher expense growth of 5.4% per annum. Under this scenario, DSCR is expected to remain above 2.2x through 2023 but the turnpike may have some difficulty complying with a second covenant requiring DSCR excluding MFET to exceed 1.05x and to exceed 1.0x taking into account deposits to the reserve maintenance fund. However, Fitch notes that the authority maintains significant economic rate-making flexibility and can raise rates if necessary.

Lane expansion projects for the Creek and John Kilpatrick turnpikes were completed in the fourth quarter of 2013 and were significantly below budget. The 2015-2019 CIP totals $379 million and will be funded by the reserve maintenance and general funds. Uses consist mostly of rehabilitation of the existing turnpike system. The program is focused on keeping the current turnpike system in good condition and extending its useful life, critical in the context of the age of the Turner and Will Rogers Turnpikes which have both been in operation for nearly 60 years. In Fitch's view, The authority has a responsible approach to maintaining the facility and planning for repairs.

SECURITY:

The authority's bonds are secured by revenues of the system after the payment of operating expenses. Also available is the MFET apportioned to the OTA for deposit to the credit of the Turnpike Trust Fund.

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' (Aug. 20, 2014).

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=758708

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983605

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