2009-11-10 21:14:02 -

Fitch Ratings assigns an 'A' rating to approximately $150 million of the New Hampshire Turnpike System (the turnpike or the system) series 2009 A-1 and A-2 revenue bonds and $67.6 million of series 2009 B revenue refunding bonds to be issued by the State of New Hampshire.
Approximately $5.8 million of the proposed series 2009 revenue bonds will be issued on a tax-exempt basis and approximately $144.2 million will be issued as federally taxable Build America Bonds. In addition, Fitch affirms its 'A' rating on the turnpike's $246.8 million of parity revenue bonds that are currently outstanding. The Rating Outlook is Stable. The series 2009 bonds are scheduled for negotiated sale the week of Nov. 16. The revenue bonds are

secured by a net pledge of turnpike revenues.

As of June 30, 2009, there were also $1.2 million of State of New Hampshire general obligation (GO) 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' GO rating on the State of New Hampshire.

The underlying 'A' rating reflects the NH 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 subordinate obligations related to the turnpike's recent acquisition of the remaining 1.6 miles of I-95 that it did not previously own, the large amount of anticipated traffic diversion upon the opening of the Manchester Airport Access Road in fiscal 2013, and the incremental debt that will be incurred with its proposed capital plan, all of which will inevitably pressure future debt service coverage levels and necessitate additional, near-term toll increases. Further, 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, the turnpike 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 turnpike'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 turnpike'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, deferred toll increases, 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 NH Turnpike's project 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 $18.2 million and is scheduled to be complete by May 30, 2010. To address state budget pressures, HB 391 also required the NH Turnpike to purchase the remaining 1.6 miles of I-95 that it did not currently own (referred to as the 'Eastern Turnpike Expansion') from the New Hampshire Department of Transportation (NHDOT) for a purchase price of $120 million. The turnpike purchased the remaining portion of I-95 on Aug. 25, 2009 and will be required to make upfront installment payments to NHDOT of $30 million in fiscal 2010 and $20 million in fiscal 2011 (which will be paid from existing reserves held by the turnpike), with the remaining balance of the purchase price repaid over the residual 18 years (i.e.
maximum 20-year repayment period) with interest. To finance the purchase, the turnpike implemented a $0.50 toll increase for cars and $1.00 toll increase for commercial vehicles on the Hampton Mainline Toll plaza commencing on July 1, 2009.

During fiscal 2008, passenger vehicles comprised 94% of the turnpike's total traffic, with commercial vehicles only comprising 6%. Between fiscal 2000 and fiscal 2007, toll transactions on the NH Turnpike 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 fiscal 2008 reflecting high gas prices and a worsening economy. This trend has continued into fiscal 2009 with traffic down 4.9%. However, traffic data for first quarter (1Q) fiscal 2010 seems to indicate a bottoming of traffic declines, with the turnpike's year-on-year traffic volumes up slightly for the period at 0.79%.

Effective Oct. 22, 2007, the turnpike 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 $1.00 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 on July 1, 2009 represent a greater reliance on out of state drivers. Tolls were previously raised in 1989.
The effects of the turnpike's fiscal 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 turnpike's overall operating revenue actually increased by 21.6% during fiscal 2008 and 2.45% during fiscal 2009. The turnpike's toll revenue for 1Q fiscal 2010 is up 12.58% year-on-year primarily as a result of the aforementioned toll increase at the Hampton Mainline Toll.

The primary issue with turnpike traffic going forward relates to the development of the Manchester Airport Access Road. Once the toll-free interchange from the Central Turnpike to Route 3 via the Manchester Airport Access Road opens in fiscal 2013, it is anticipated that there will be traffic diversion from the turnpike's three Merrimack ramp toll plazas and the Bedford mainline toll plaza. Jacobs Engineering Group Inc. estimates that the turnpike's total toll transactions will decrease by 3.8% in fiscal 2013, with an additional 1.2% decline in fiscal 2014, as a result of traffic diversion from the opening of the Manchester Airport Access Road. The turnpike is currently proposing an additional 20% system-wide toll increase in fiscal 2012 to mitigate the effects of the anticipated traffic diversion on the system's revenue profile against a backdrop of growing debt service. Without this toll increase, projected debt service coverage levels would decline dramatically.

Fiscal 2006 operating expenses (excluding renewal and replacement - 'R&R' - and depreciation expenses) increased by 49% from fiscal 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 fiscal 2007 and fiscal 2008, but turnpike operating expenses increased by 7.4% in fiscal 2009. While fiscal 2009 operating expenses continue to remain below fiscal 2006 levels in absolute terms, they continue 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 in anticipation of the turnpike's future capital plan, going from 1.42 times (x) in fiscal 2005 to 2.71x in fiscal 2008. While the turnpike's Senior DSCR declined slightly to 2.62x in fiscal 2009, the absolute level of coverage still remains strong. However, Senior DSCRs are anticipated to revert to the 1.40x - 1.75x range over the medium term through the incurrence of an additional $371 million of senior lien revenue bonds (inclusive of the current $150 million issuance) over the next five years which will be used to finance a portion of the turnpike's $506 million capital improvement program.

Segments of the New Hampshire Turnpike system began operations in 1950.

The turnpike consists of the Central Turnpike and Eastern Turnpike. The Central Turnpike (also known as the F.E. Everett) is a 39.5-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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Fitch Ratings, New YorkRobert Botschka, 212-908-0520Chad
Lewis, 212-908-0886orMedia Relations:Cindy Stoller,
212-908-0526Email: cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com