Fitch Affirms New Hampshire Turnpike System Revs at 'A'.

NEW YORK -- Fitch Ratings affirms its underlying 'A' rating on approximately $256.9 million of outstanding New Hampshire Turnpike System revenue bonds. The Rating Outlook is Stable.

As of June 30, 2008, there were also $2.8 million of State of New Hampshire general obligation bonds outstanding, which are secured by the state's general obligation and by a subordinate pledge of excess toll revenue. These bonds are rated 'AA,' based on Fitch's 'AA' general obligation rating on the State of New Hampshire.

The underlying 'A' rating reflects the New Hampshire Turnpike System's mature service area and stable traffic and revenue base, coupled with competitive toll rates by national standards and continued economic ratemaking ability to maximize revenue through periodic toll increases. However, the rating also incorporates the system's pending acquisition of the remaining 1.6 miles of I-95 that it does not currently own and the incremental debt that will be incurred with its proposed capital plan, which will inevitably pressure future debt service coverage levels and necessitate additional, near-term toll increases. In addition, like all mature turnpike systems, the New Hampshire Turnpike is exposed to political risk. As a bureau within the Division of Operations of the State of New Hampshire Department of Transportation (NHDOT), the system historically benefited from Federal Highway Administration grants for capital funding needs, but it is also exposed to the politicization of major toll and capital budgeting decisions. In particular, the future approval of interstate aggregation legislation could undermine the New Hampshire Turnpike System's financial position by exacerbating capital expenditure requirements and placing a heavier reliance on future toll increases on the existing system.

The Stable Rating Outlook assumes that the New Hampshire Turnpike System's overall financial margins will remain adequate based upon the system's currently proposed toll increases, future operating projections and currently anticipated capital requirements. However, a more constrained financial profile that results from additional debt tied to state budgetary relief and/or more rapid growth in operating and maintenance expenses and capital expenditure requirements could result in a more highly leveraged system that is inconsistent with the current ratings level.

House Bill (HB) 391 was approved by the New Hampshire legislature in May 2009. The legislation authorized the New Hampshire Turnpike System to implement open road tolling through the middle of its Hampton Main Line toll plaza on I-95. The total cost of the project is approximately $20-$25 million and is scheduled to be completed by May 30, 2010. To address state budget pressures, HB 391 also provides that the system will purchase the remaining 1.6 miles of I-95 that it does not currently own (referred to as the 'eastern New Hampshire Turnpike') from NHDOT for a purchase price of $120 million. The New Hampshire Turnpike System will be required to make upfront installment payments to NHDOT of $30 million in fiscal year (FY) 2010 and $20 million in FY 2011 (which will be paid from existing reserves held by the system), with the remaining $70 million of the purchase price repaid over the residual 18 years (i.e. maximum 20-year repayment period) with interest. To finance the purchase, the New Hampshire Turnpike System implemented a $0.50 toll increase for cars and $1 toll increase for commercial vehicles on the Hampton Mainline Toll plaza commencing in FY 2010.

HB 2 had originally proposed aggregating the New Hampshire Turnpike System with New Hampshire's existing interstate roads. New Hampshire's existing interstate roads are approximately 191 miles long with 478 bridges, and they are currently untolled. Under the aggregation bill, the consolidated system would have grown to 310 miles long (from its current 93 miles) with 699 bridges. The original plan was to increase tolls by 22% on the existing system to mitigate the incremental renewal and replacement/capital expenditure requirements associated with the additional interstate roads/bridges. The HB 2 legislation was ultimately withdrawn, but it is possible that similar legislation (or a variant thereof) could be reintroduced in the future. Adding assets without the ability to toll them would likely result in weakened financial metrics and toll inequity for the system which would pressure the rating.

During FY 2008, passenger vehicles comprised 94% of the New Hampshire Turnpike System's total traffic, with commercial vehicles only comprising 6%. Between FY 2000 and FY 2007, toll transactions in the system grew at a compound annual growth rate (CAGR) of approximately 2.2%, reflecting its mature service area and stable traffic base. However, toll transactions declined by 2% during FY 2008, reflecting high gas prices and a worsening economy. This negative traffic trend has continued to worsen, with traffic for FY 2009 down 4.9% from FY 2008.

Effective Oct. 22, 2007, the New Hampshire Turnpike System implemented an increase in toll rates on the Hooksett, Bedford, Dover, and Rochester mainline plazas, and at the Hampton side plaza by $0.25 for single rear tire vehicles (Classes 1-4) and by $0.50 for dual rear tire vehicles. At the same time, toll rates were increased by $0.50 for single rear tire vehicles (Classes 1-4) and $1 for dual rear tire vehicles (Classes 5-12) at the Hampton Mainline Toll. The Hampton Mainline Toll has a larger share of non-resident traffic. The combination of the 2007 toll increase and the toll increase implemented in FY 2010 represent a greater reliance on out of state drivers. Tolls were previously raised in 1989. The effects of the system's FY 2008 traffic reductions on revenue were significantly mitigated by the implementation of the aforementioned toll increase in October 2007. As a result of the toll increase, the New Hampshire Turnpike System's overall operating revenue actually increased by 21.6% during FY 2008.

FY 2006 operating expenses (excluding renewal and replacement [R&R] and depreciation expenses) increased by 49% from FY 2005 primarily based upon increased expenses from the first full year of the E-Z Pass program (including associated E-Z Pass processing fees and transponder expenses). E-Z Pass expenses stabilized in FY 2007, with system operating expenses (excluding R&R and depreciation expenses) declining by 13%, and then increasing modestly (2.7%) in FY 2008. While operating expenses as percentage of operating revenue has stabilized over the past two fiscal years, the New Hampshire Turnpike System's absolute level of operating expenses increased significantly following the implementation of E-Z Pass in FY 2005 and continues to be a drag on future financial performance.

Senior debt service coverage ratios (DSCRs) have improved significantly over the past several fiscal years due to toll rate increases, going from 1.42 times (x) in FY 2005 to 2.71x in FY 2008. However, Senior DSCRs are anticipated to revert to the 1.50x-1.75x range over the medium term through the incurrence of an additional $340 million of senior lien revenue bonds over the next five years which will be used to finance a portion of the New Hampshire Turnpike System's $452.3 million capital improvement program.

Segments of the New Hampshire Turnpike System began operations in 1950. The system consists of the Central Turnpike and Eastern Turnpike. The Central Turnpike (also known as the F.E. Everett) is a 44.7-mile segment that extends from the Massachusetts state line to Nashua, NH through Manchester and up to Concord, the state capital. The Eastern Turnpike consists of the Blue Star Turnpike and Spaulding Turnpike segments. The Blue Star Turnpike is a 15-mile segment of U.S. Interstate 95 from the Massachusetts state line to Portsmouth, NH. The Spaulding Turnpike is a 33.2-mile segment extending from Portsmouth to Milton.

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