Fitch Affirms Pennsylvania Turnpike's Registration Fee Rev Rfdg Bonds at 'A+'; Outlook Stable.

NEW YORK -- Fitch Ratings affirms its 'A+' underlying rating on approximately $447.7 million of Pennsylvania Turnpike Commission ('PTC' or the 'Commission') registration fee revenue refunding bonds, series 2005, which are comprised of four subseries; series A of 2005 (fixed-rate bonds), series B of 2005 (variable-rate bonds), series C of 2005 (variable-rate bonds) and series D of 2005 (variable-rate bonds). Fitch also withdraws its rating on the PTC's series 2001 registration fee revenue bonds. The series 2001 bonds were prerefunded in 2005 with the series 2005 bonds. The bonds are secured solely by an annual appropriation of the first $28 million of Act 3 revenues payable each fiscal year to the Commission. The Rating Outlook is Stable.

The bonds are insured by Financial Security Assurance, Inc. (FSA), whose financial strength is rated 'AA+', Rating Watch Negative by Fitch. Each series of variable rate bonds (i.e. series B - D) is further secured by separate liquidity facilities in the form of Standby Bond Purchase Agreements (SBPAs) with JPMorgan Chase Bank, N.A. (rated 'AA-/F1+') which expire on Aug. 16, 2015, unless terminated earlier or extended. Related to the issuance of series B, C, and D of the series 2005 bonds, the Commission has executed four separate floating-to-fixed rate swap agreements to hedge its interest rate risk on the full par value of its variable rate debt. Swap counterparties are: Citibank, N.A., New York (rated 'A+'), JPMorgan Chase Bank, N.A. (rated 'AA-'), Merrill Lynch Capital Services, Inc. (rated 'A+'), and Morgan Stanley Capital Group Inc. (rated 'A'). The PTC maintained a mark-to-market liability under the swaps of approximately $24 million as at Aug. 24, 2009.

Act 3, which was passed by the Pennsylvania legislature in 1997, amended several sections of Title 75 of the Pennsylvania Consolidated Statutes. Such amendments, among other things, increased fees and other charges generally related to the registration of various types of vehicles by approximately 50% (the 'Act 3 Revenues'). Registration fees were increased for various forms of automobiles, including passenger cars, motor homes, motorcycles, trucks, buses, etc. Registration fees were also increased for the issuance of certificates of title, dealer registration plates, miscellaneous motor vehicle business plates, replacement registration plates, duplicate registration cards and transfers of registration.

A key consideration of the 'A+' rating is the broad base of additional Act 3 Revenues which is the source of the annual appropriation from the Commonwealth's Motor License Fund to the Commission. The amount of Act 3 Revenues has exceeded $200 million since 2000. Based upon the fact that the $28 million annual appropriation to the Commission has a first call on Act 3 Revenues, there is an appropriate cushion to absorb potential registration fee volatility in the future (Act 3 Revenues covered debt service by approximately 8.0 times for fiscal 2009).

Based upon the legal inability of the PTC to unilaterally alter its allocation of Act 3 Revenues, the existence of variable rate debt represents a credit concern. SBPA renewal risk, as well as basis, tax and termination risks, along with higher future liquidity and remarketing fees, introduce the potential for unanticipated dilution in the Commission's $28 million of allocated Act 3 Revenues. Swap termination payments are subordinated to payments of principal and interest to senior bond holders, and swap counterparties are unable to cross default / accelerate ahead of senior bondholders under a swap termination event. In addition, as a structural mitigant, a reserve of up to $7 million was created outside of the indenture to address the potential for increased liquidity and remarketing costs on the Commission's variable rate debt exposure.

Legal protection is provided through an intercept agreement between the Commission and the State Treasurer, to which the Pennsylvania Department of Transportation (PennDOT) is also a party. PennDOT acknowledges and agrees that the Commission is entitled to the first $28 million of Act 3 Revenues and that the Treasurer is required to pay the first $2,333,333,33 of such revenues collected each month to the Commission. Toll and other revenues pledged to the Pennsylvania Turnpike revenue bonds are not pledged to the registration fee bonds, nor are they obligations of the state or the Motor License Fund.

Pursuant to Act 3, the $28 million annual appropriation may only be used for toll roads designated under Act 61, the Turnpike Organization, Extension and Toll Road Conversion Act. The series 2005 registration fee revenue refunding bonds were used to finance a portion of the costs of the PTC's Mon/Fayette and Southern Beltway projects. The total estimated capital cost of these projects is currently $5.2 billion. The 70-mile Mon/Fayette Expressway, portions of which are already operating, will improve mobility between Pittsburgh and the string of ailing communities along the Monongahela River. The 30-mile Southern Beltway arcs through a significant portion of Pittsburgh, connecting the airport and the Mon/Fayette Expressway. The state legislature recognized that these projects could not be constructed from toll revenues and diverted state funds (including registration fees and oil franchise taxes) to the Commission. Once completed, the current plan is for toll revenues to be used to maintain and operate these facilities.

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