Fitch Ratings-New York-06 April 2018: Fitch Ratings has affirmed the State of New Hampshire's $363.0 million of outstanding turnpike revenue bonds at 'A+'. The Rating Outlook is Stable.

KEY RATING DRIVERS

The 'A+' rating reflects New Hampshire Turnpike System's (NHTS) continued stable traffic and revenue performance generating solid financial metrics in fiscal 2017 evidenced by Fitch calculated debt service coverage ratio (DSCR) of 1.9x in fiscal 2017. Continued strong coverage is projected with a minimum coverage of 1.7x over the next 10 years in Fitch's rating case. In addition, leverage calculated as net debt to cash flow available for debt service (CFADS) decreases from 2.9x in 2017 to 1.7x by 2022 in the rating case. The metrics are consistent with an 'A' category large network with mostly midrange revenue risk attributes. The turnpike's 10-year capital improvement program is manageable at $426 million and is funded entirely within the current revenue structure without the need for toll increases or new debt issuances.

Important Transportation Link - Revenue Risk (Volume): Midrange

The turnpike system supports a stable traffic and revenue base for several major New Hampshire population centres. Traffic growth is indicative of a mature system, with a relatively flat CAGR of 0.40% since 2007. Revenues over the same period grew at a CAGR of 4.5% due to toll increases in 2007 and 2009, partially offset by the economic recession and the opening of the Manchester airport access road in 2011. The turnpike maintains considerable economic rate-making flexibility with an average toll of $1.07, which is comparable to other turnpike facilities in Fitch's rated portfolio. 

Moderate Rating Making Ability - Revenue Risk (Price): Midrange

The turnpike is fully owned by the State of New Hampshire Department of Transportation (DOT). Rate increases require approval from the DOT commissioner, the governor, and executive council and may be legally raised to comply with bond covenants. However, potential rate increases are subject to political challenges. Governor Sununu blocked a proposed increase in December 2017. The turnpike has previously demonstrated a history of raising rates to maintain financial flexibility. There are no plans for future toll increases.

Capital Improvement Plan Funded Primarily with Pay-Go Capital - Infrastructure Development and Renewal: Stronger

The capital improvement plan (CIP) through 2026 is manageable at $426 million and focuses mostly on rehabilitation and widening projects. The turnpike is in generally good condition based on the latest renewal and replacement assessment by the independent engineer. The CIP is fully funded on a pay-go basis.

Conservative Debt Structure - Debt Structure: Stronger

The debt structure is conservative with fixed rate, fully amortizing bonds maturing in 2043. The debt service schedule includes level payments of approximately $41.3 million through fiscal 2021 that step down to $34.5 million in fiscal 2022 as the 2015 series A bonds near maturity in fiscal 2023. Debt service continues ramping down, with annual payments between $6.5 million and $27.7 million throughout the life of the bonds to 2043.

Financial Profile 

The system's DSCR in fiscal 2017 remained strong at 1.9x per Fitch's calculation, which accounts for the Build America Bonds (BABs) subsidy as revenue instead of a deduction to debt service. On an all-in basis (includes renewal and replacement deposits, which the turnpike reviews in a secondary calculation) Fitch-calculated DSCR was 1.6x. Net debt/CFADS was 2.9x in fiscal 2017 and declines to 1.7x in 2022 in Fitch's rating case. As of fiscal year-end 2017, the system had $92 million on unrestricted cash, equivalent to 674 days cash on hand. 

PEER GROUP 

New Hampshire Turnpike System's closest peers are Maine Turnpike (AA-/Stable) and Ohio Turnpike & Infrastructure Commission (AA senior debt/A+ subordinate debt/Stable). All three are strong turnpike systems consisting of both urban and rural segments. Maine Turnpike has higher DSCRs than New Hampshire, and greater toll rate flexibility, reflective of its higher rating level. Ohio Turnpike has higher DSCRs than New Hampshire and Maine Turnpike, commensurate with its higher rating.

RATING SENSITIVITIES

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:

--Inability to raise toll rates if traffic does not materialize as forecast.

--Volatile traffic and/or revenue performance over a sustained period resulting in erosion of DSCR below 1.8x on a sustained basis. 

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:

--Steady improvement of traffic and revenue resulting in DSCR exceeding 2.5x on a sustained basis.

CREDIT UPDATE 

Performance Update

Traffic grew by 1.5% in fiscal 2017 (year ends June 30) to 120 million transactions, following more robust growth of 5.4% in fiscal 2016 when there was a mild winter. Traffic has increased by 1.2% year-over-year in the fiscal year to date through January. Harsh weather in December and January muted traffic growth. Toll revenues increased by 0.5% to $128 million in fiscal 2017. Growth in toll revenue is driven by traffic since there have not been any toll increases since 2009 and there are no current plans for toll increases. In December 2017 Governor Sununu blocked a proposed toll increase that would have provided funds to accelerate projects in the capital program. 

Fitch Cases

Fitch's base case assumes modest toll revenue growth at a CAGR of 1.3% from 2017 to 2027. The 10-year average DSCRs are 2.7x senior and 2.0x all-in. Leverage decreases from 2.9x in fiscal 2017 to 1.5x in year five. Fitch's breakeven analysis indicates that the system could withstand negative 1.8% annual growth to service its senior debt obligations.

The Fitch rating case scenario assumes a 4% decrease in traffic and revenue in 2019 and a modest 1% annual recovery in traffic and revenue thereafter. Operating and maintenance expenses increase by 3% in 2019 followed by 4% annual increases. Under this scenario, Fitch-calculated 10-year average DSCRs remain strong at 2.3x senior and 1.7x all-in. Minimum coverage is 1.7x senior and 1.3x all-in, well above the financial covenants of 1.2x and 1.0x minimum respectively. 

With no expected toll increases on the horizon, Fitch did not assume rate increases in its rating case. However, Fitch would expect NHTS to raise rates if coverage were to become strained. The turnpike has legal and economic flexibility to raise rates, partially offset by political challenges, and has historically raised rates when there was a decline in debt service coverage.

Asset Description 

The New Hampshire Turnpike System is comprised of three limited-access highways, the Blue Star Turnpike (I-95) and the Spaulding Turnpike, which are collectively referred to as the Eastern Turnpike, and the F.E. Everett Turnpike, which is referred to as the Central Turnpike. The system spans 89 miles, 36 of which are part of the US Interstate Highway System, and has a total of 658 lane miles. 

Security 

The senior lien bonds are secured by a pledge of all turnpike revenues, specifically all tolls, rates, rents, fees, charges, receipts, or other income derived by the ownership and operation of the turnpike.