Fitch Rates Pennsylvania Turnpike Commission Bonds `AA-'.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 9, 2001

Fitch assigns an `AA-' rating to the $185,000,000 Pennsylvania Turnpike Commission turnpike revenue bonds, series R of 2001.

The new issue is selling through negotiation during the week of March 12th. Tucker Anthony heads the banking syndicate for the bonds, which have scheduled principal payments from May 31, 2021, through 2031. The current issue finances improvements to the existing turnpike system.

The Outlook for the turnpike revenue bonds is Stable. The medium term forecast shows that the commission has more than ample financial flexibility to meet the operating and capital needs of its existing toll road system. For the near term, dedicated state taxes will aggressively finance the capital costs of the Mon/Fayette Expressway and Southern Beltway projects, without support from toll revenues. Nevertheless, a significant funding gap remains in order to complete these expansion projects. If additional significant financing for these projects results in the continued insulation of the toll revenue base, this could result in an upgrade of the turnpike revenue bonds.

The recent history of the Pennsylvania Turnpike Commission (PTC) in many ways presents the picture of financial flexibility, relative to other U.S. toll road authorities. Indeed, by many financial measures, including annual operating surplus available for capital reinvestment, internal liquidity, and low debt burden, its operations exceed performance expected at the current rating level. Even as the PTC now accelerates reconstruction efforts on its mainline system, and implements electronic tolling, its current rate structure amply satisfies future operating and capital needs with little need for additional debt.

The Pennsylvania turnpike is the nation's oldest turnpike. It serves Pennsylvania's mature economy, including the cities of Philadelphia and Pittsburgh, which anchor each end of the state. Although the state's population grew by only 3.4% from 1990-2000, continuing suburbanization and the prolonged U.S. economic expansion of the 1990s benefited patronage on the turnpike. The turnpike also provides a strategic link in the system of turnpikes that stretches from Chicago to Boston. Not surprisingly, toll revenues benefit from a high proportion of commercial traffic. While this introduces some susceptibility of commercial revenues to economic cycles, this has not had a measurable impact on PTC's financial performance.

Strong finances are a major part of PTC's credit story. Net income (the operating surplus after paying for operating costs and debt service on the toll revenue bonds) grew steadily from 30% of gross income in 1994 to over 40% by 2000, which is high for a toll road. In recent years, PTC accelerated reinvestment into the aging mainline system, and amassed significant reserves, which puts it in a favorable financial position to further augment capital spending while incurring a minimum amount of additional debt. Its 10-year financial forecast shows continuation of strong debt service coverage levels, and significant cash contributions to capital, with no additional borrowing beyond the current issue for existing turnpike system improvements. Over the next few years, however, the turnpike plans to frequent the debt market in order to refinance its outstanding debt.

PTC's organizational and planning efforts are now well institutionalized, as evidenced by regular updates to long-term capital plans, and expanded roles for finance, administration and customer services. In some ways, these changes were stimulated by external pressure from the state's legislative budget and finance committee audits, last performed in 1997. Supplemental indentures in 1998 and again this year, further augment the commission's financial flexibility, without a significant dilution of bondholder protections, as seems increasingly common among large public sector authorities.

The commission's major capital expansion projects are the 30-mile Southern Beltway and the 70-mile Mon/Fayette Expressway. The Southern Beltway will arc through a significant portion of metropolitan Pittsburgh, connecting the international airport and the Mon/Fayette Expressway. The Mon/Fayette Expressway, portions of which are already operating, will improve mobility between Pittsburgh and a string of ailing communities along the Monongahela River.

So far, the toll revenue base has been insulated from the approximately $3 billion expected capital costs of these two expansion projects. The Pennsylvania legislature recognized that these projects could not be constructed from toll revenues and diverted state funds to the commission. Portions of state dedicated oil company franchise taxes (OCFT) and motor vehicle registration fees (MVRF), along with certain capital grants are sufficient to finance these projects through 2004-2005. After that, additional funds will be needed in order to complete the projects. While a portion of these non-operating sources are financing capital costs on a pay-as-you-go basis, the commission has over $500 million outstanding in OCFT secured debt, and plans to issue roughly $400 million in MVRF secured debt later this year. Nevertheless, the commission estimates that a roughly $2 billion funding gap remains in order to complete these two projects. The solution to this capital funding gap will be a major credit consideration for the turnpike revenue bonds. At the current rating, the PTC has financial flexibility to incur additional debt. If additional dedicated revenues are identified to complete the financing of these projects, this could result in an upgrade of the turnpike revenue bonds.