Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges
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Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges Primary Credit Analyst: Joseph J Pezzimenti, New York + 1 (212) 438 2038; joseph.pezzimenti@spglobal.com Secondary Contact: Oscar Padilla, Farmers Branch + 1 (214) 871 1405; oscar.padilla@spglobal.com Table Of Contents Rating Action Negative Outlook Credit Opinion Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 23, 2021 1
Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges Credit Profile US$73.105 mil dept of transp tpk rev rfdg bnds (Florida Tpk Enterprise) ser 2021A due 07/01/2041 Long Term Rating AA/Negative New State of Florida, Florida Florida Tpk Enterprise, Florida Florida (Florida Tpk Enterprise) tpk rev bnds (Florida Dept Of Transp) ser 2003C dtd 10/01/2003 due 07/01/2004-2026 2028 2030 2033 Long Term Rating AA/Negative Affirmed Florida (Florida Tpk Enterprise) tpk rev bnds (Florida Dept Of Transp) ser 2003C dtd 10/01/2003 due 07/01/2004-2026 2028 2030 2033 Unenhanced Rating AA(SPUR)/Negative Affirmed Rating Action S&P Global Ratings assigned its 'AA' long-term rating to Florida's proposed $73.105 million series 2021A turnpike revenue refunding bonds, issued for the Florida Turnpike Enterprise. At the same time, S&P Global Ratings affirmed its 'AA' long-term and underlying ratings on the turnpike system's revenue bonds outstanding, in accordance with its "Global Not-For-Profit Transportation Infrastructure Enterprises" criteria, published Nov. 2, 2020. The outlook is negative. The proposed series 2021A bond proceeds, along with other legally available money, will be used to refund the turnpike system's series 2011A turnpike revenue bonds, maturing between 2022-2041 for level debt service savings, and to pay costs of issuance. The tax-exempt series 2021A is replacing the taxable series 2020C, which were never issued. The turnpike system's next new money bond issues to fund its capital program are planned in fiscal 2022, with a total estimated aggregate par amount of $700 million, subject to legislative approval. A pledge of the system's net revenues after operation and maintenance (O&M) expenses secures the bonds. The Florida Department of Transportation (FDOT), however, has covenanted to pay the turnpike system's O&M expenses from the State Transportation Trust Fund (STTF), with the turnpike system reimbursing FDOT from funds in the general reserve fund after paying debt service. In the event of a shortfall, management must take actions (including deferring projects and increasing tolls) to increase available revenues. However, if such actions would impair the bonds' security or the system's integrity, the reimbursement obligation would become a debt of the turnpike system to the STTF, payable from the general reserve fund. In addition, statutory safeguards require both adherence to specific environmental and economic feasibility tests before building expansion projects, and compliance with an additional bonds test (ABT; 1.20x) and rate covenant (1.20x). A debt service reserve (DSR) funded with cash and U.S. Treasury investments equal to about 125% of average annual WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 23, 2021 2
Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges debt service provides additional liquidity to the series 2021A bondholders. However, steps to amend the DSR requirement definition are underway. The amended definition will allow the issuance of turnpike revenue bonds without a DSR account or reduce the DSR requirement to zero for certain existing bonds (series 2018A-2020B). The amended definition will become effective upon receipt of written bondholder consent of more than 50% of the principal amount of the bonds then outstanding. It is estimated that, following the sale of the proposed series 2021A bonds, together with the refunding of the series 2011A bonds, holders of approximately 41% of bonds outstanding will have consented to the amendment. We do not believe an eventual adoption of this amendment will have a substantial credit impact on the turnpike system if coverage and liquidity remain relatively high. However, to the extent that these metrics weaken, the lack of a DSR could cause downward rating pressure. Following the issuance of the series 2021A bonds and excluding the refunded bonds, we expect the turnpike system will have approximately $2.77 billion of turnpike revenue bonds outstanding. It also has approximately $23 million of subordinate state infrastructure bank loans outstanding. Credit overview The rating reflects the turnpike system's very strong financial position entering the pandemic, including relatively high debt service coverage (DSC; S&P Global Ratings-calculated) and cash reserves; and extremely strong debt capacity. The negative outlook, however, reflects our view that we could lower the rating in the next 12-24 months if we believe financial metrics cannot be maintained near historical levels as the result of lower traffic and toll revenues due to COVID-19 outbreaks and associated effects, a potentially slow economic recovery, and funding needs of the turnpike system's significant capital program. For additional information, see "Updated Activity Estimates For U.S Transportation Infrastructure Show Public Transit And Airport Operators Still Face A Long Recovery," published Jan. 13, 2021, on RatingsDirect. The rating further reflects our assessment of the combination of the turnpike system's very strong enterprise risk profile and very strong financial risk profile. The rating also reflects our opinion that the turnpike system serves one of the most-populous U.S. states with above-average population growth, which we believe will support generally favorable traffic trends and financial metrics. Our enterprise risk profile assessment incorporates the turnpike system's historically favorable traffic trends due to its important role, strategic location, and lack of significant competition from toll-free roads. Our financial risk profile assessment considers the turnpike system's historically good revenue growth from periodic toll rate increases and favorable traffic trends that we expect will trend negatively due to COVID-19 and a potentially slow economic recovery. Despite lower traffic levels, we believe the turnpike system can maintain strong financial performance and a potentially extremely strong capacity to manage rising debt levels from debt-financing its rolling, multibillion-dollar capital improvement program (CIP), while maintaining overall liquidity and financial flexibility that we consider strong, depending on how management adjusts capital spending as traffic levels recover and timing its toll rate increases. The turnpike system consists of several components. The principal one, the 320-mile Mainline (representing 69% of the turnpike system's total gross toll revenues for fiscal 2019), runs north-south from Interstate 75 at Wildwood in Sumter County to Florida City in southern Miami-Dade County, with an east-west segment intersecting at Orlando in Orange County. The Mainline consists of five different subcomponents: the Homestead Extension of Florida's Turnpike, the Southern Coin System, the Ticket System, the Northern Coin System, and the Beachline West WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 23, 2021 3
Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges Expressway. The system also includes: • The 18-mile Seminole Expressway in Seminole County; • The 15-mile Veterans Expressway in Hillsborough County; • The six-mile Southern Connector Extension in Orange and Osceola counties; • The 25-mile Polk Parkway in Polk County; • The 42-mile Suncoast Parkway in Hillsborough, Pasco, and Hernando counties; • The 23-mile Sawgrass Expressway in Broward County; • The 11-mile Western Beltway (Part C) in Orange and Osceola counties; • The one-mile Interstate 4 Connector in Hillsborough County; • The 22-mile Beachline East Expressway in Orange and Brevard counties; and • The 15-mile First Coast Expressway in Clay and Duval counties. The turnpike system is large and diverse, in our view, serving 19 of Florida's 67 counties, representing more than 60% of the state's population. Large portions of the system have historically functioned as congestion relievers. The Beachline West, Western Beltway (Part C), and Southern Connector Extension, however, serve more tourist and recreational areas, providing access to Disney World and other area attractions, which have been hard hit by pandemic-related restrictions. As a result of COVID-19 and associated effects, systemwide toll transactions and toll revenues for April 2020 (the worst month) were approximately 51% and 54% lower than April 2019, respectively, before gradually improving to December 2020 levels that were about 12.6% and 12.5% lower than those reported in December 2019, respectively. Systemwide traffic declined 7.6% for the fiscal year ending June 30, 2020, with the first eight months (June through March) increasing 5.0%, on average, followed by a 31.7% decline during the last four months (March through June) due to shelter-at-home orders issued by the state and local governments in response to COVID-19. Fiscal 2020 total operating revenues decreased 7.6% primarily due to a 9.1% decrease in systemwide toll revenues, partially offset by the resumption of toll administrative charges that were temporarily suspended during fiscal 2019 in connection with the transition to a new electronic toll collection processing system. Fiscal 2020 total operating expenses increased 7.9%, primarily due to an increase in renewal and replacement expenses. Despite the substantial drop in traffic from March through June, S&P Global Ratings-calculated fiscal 2020 metrics for the turnpike system remained favorable, with DSC over 2x, a debt to net revenue ratio below 5x, and more than 780 days' cash on hand as of June 30, 2020. As a result of COVID-19 outbreaks and associated effects, we believe systemwide traffic could remain substantially lower than pre-pandemic levels for an extended period. Traffic trends for 2021 will be shaped, in our opinion, by the duration and severity of outbreaks; local requirements for social distancing; shifting consumer preferences and behavior; economic fallout from material staff reductions at theme parks; and vaccine progress. A turnpike-commissioned traffic-and-revenue study, dated November 2020 and prepared in connection with the series 2020B bond issue, reasonably assumes fiscal 2021 systemwide toll transactions and toll revenues will be WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 23, 2021 4
Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges approximately 14% and 15% lower, respectively, than in fiscal 2019, before gradually recovering near pre-pandemic levels by about fiscal years 2023 and 2024. Fiscal 2020 system toll transactions and toll revenues were 7.6% and 9.1% lower, respectively, than those for fiscal 2019. The study anticipates fiscal 2022 systemwide toll transactions and toll revenues will be 8.0% and 9.5% lower, respectively, compared with fiscal 2019. However, these toll revenue projections do not include the statutorily required toll rate indexing that must occur by the end of calendar year 2022. Such toll rate increases, in our opinion, are important in terms of enabling the turnpike system to potentially maintain financial metrics consistent with the current rating, given the turnpike system's borrowing plans. SunPass and TOLL-BY-PLATE toll rate adjustments must occur no more frequently than annually and no less frequently than once every five years, while the cash toll rate is adjusted every five years by the change in CPI over the previous five years and adjusted to the next higher quarter. In fiscal 2018, SunPass and TOLL-BY-PLATE toll rates were increased 1.3% and rounded to the penny, while cash toll rates were increased 6.6% and rounded to the next higher quarter. All toll rates for fiscal years 2019 and 2020 were held constant (i.e., no application of CPI) until after satisfactory implementation of a new back office. Although the turnpike system has a track record of exceeding forecasts and using conservative forecasting assumptions, we believe traffic and toll revenues could be materially lower than forecast due to the unique challenges posed by the COVID-19 outbreak and associated effects. Key credit strengths, in our opinion, are the turnpike system's: • Historically resilient demand characteristics given its important role in facilitating intrastate and interstate commerce, strategic location, and lack of significant competition; • Historically strong total DSC (S&P Global Ratings-calculated) over 2.0x, extremely strong debt capacity (debt to net revenues below 5x), and relatively high unrestricted cash reserves ($896.8 million as of June 30, 2020 or 783 days' cash on hand per our calculations and $775.7 million as of Jan. 31, 2021); • Extremely strong service area economic fundamentals, which include historically favorable levels of economic activity as measured by GDP per capita and a large and growing population base; and • Conservative and comprehensive financial and capital planning, as evidenced by a history of meeting or exceeding most operational and financial goals, detailed financial forecasts that are updated frequently to address material variances, and a very capable staff that has considerable experience operating a statewide tolling agency. Key credit weaknesses, in our view, are the turnpike system's: • Potential to experience an extended period of materially lower traffic levels and toll revenues due to stay-at-home and social-distancing restrictions, and the potential for traffic levels for 2021 and beyond to be unpredictable due to changing work, commuting, and vacationing habits, repeated COVID-19 outbreaks, coronavirus variants, vaccine progress, elevated unemployment levels, and the pace of the economic recovery; and • Significant capital program ($8.5 billion current capital plan and a five-year work program for fiscal years 2021-2026) that requires approximately $2.49 billion of additional planned bond issuances through fiscal 2026 and use of cash reserves to fund, which could pressure financial metrics. Environmental, social, and governance factors We analyzed the turnpike system's environmental, social, and governance risks relative to its market position, management and governance, and financial performance, and determined that, with the exception of environmental WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 23, 2021 5
Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges and social risks, all are in line with our view of the standard for the toll-road sector. In our view, the turnpike system's environmental risks are above those of the sector because it is located in a peninsula state with a vast coastline, which exposes it to extreme weather events and long-term sea-level rise. The turnpike system is also exposed to health and safety social risks that could present financial pressures in the short term from the COVID-19 outbreak, particularly if traffic remains at lower levels and toll revenues materially underperform. We will continue to evaluate these risks as the situation evolves. Negative Outlook Downside scenario The negative outlook reflects our expectation that we could lower the rating within two years or possibly within 12 months, if traffic levels substantially underperform forecast and management advances the turnpike system's capital program at the current pace. Return to stable scenario We could revise the outlook to stable within 12 months if we believe recovery in traffic levels is sustainable and we believe the turnpike system can maintain financial metrics at levels near those achieved before the pandemic. Credit Opinion We consider the turnpike system's service area as broad and diverse, with a large and growing population base that we expect to stabilize activity levels following COVID-19. The evolution of the pandemic and its effect on the economy and general mobility, however, remains a fluid situation, causing ongoing uncertainty. With national virus transmission rates elevated and coronavirus variants emerging, we expect social distancing will continue to hamper economic activity for the duration of the virus. In response to the COVID-19 outbreak, the Governor of Florida issued numerous executive orders in March, April, May, June, and September to reduce community spread of the virus and protect the state's most vulnerable citizens. More specifically, measures included, among others, closing or restricting access to certain businesses and activities and limiting movement of all persons in Florida through April 30, 2020, followed by a multi-step, three-phased process of easing restrictions after considering medical data in consultation with state health officials. On May 14, 2020, all Florida counties were brought into Phase 1, allowing for limited reopening of businesses and activities statewide; on June 3, 2020, 64 of Florida's 67 counties (all except Broward, Miami-Dade, and Palm Beach counties) were brought into Phase 2, which further relaxed business capacity restrictions; on Sept. 15, 2020, Broward and Miami-Dade counties were the final two counties to enter Phase 2; and on Sept. 25, 2020, Phase 3 was initiated, reopening all 67 Florida counties. Florida's outsized leisure and hospitality sector and reliance on sales tax revenues have contributed to the state's pandemic-induced downturn. While the state forecasts employment will not recover to pre-pandemic levels until 2025, recovery in tourism to pre-pandemic levels could take several years. As of December 2020, Florida's unemployment rate was 6.1%, ranking 27th among states and slightly below the U.S. 6.7% rate (December 2020), and a marked WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 23, 2021 6
Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges improvement after peaking at 13.8% in April 2020. The state's leisure and hospitality sector continues to weigh on overall employment with the sector's employment approximately equal in size to what it was in January 2014, and down 15.5% relative to a year ago (December). The U.S. economic recovery remains fragile. S&P Global Economics believes additional federal stimulus will help lower recession risk. We now see the risk of recession over the next 12 months at 20%-25%, closer to the lower end of the range (and down from 25%-30% in December 2020). President Biden's proposed $1.9 trillion stimulus package will bring U.S. GDP back to pre-pandemic levels by the second quarter of 2021, providing short-term relief needed to provide the bridge to recovery. Although these short-term policy fixes will accelerate "filling the demand hole" they do not change the longer-run growth rate of the economy, which is a function of growth in productivity and the labor force. We expect the unemployment rate to be above full-employment levels until the fourth quarter of 2023. The economy barely added jobs in January. It remains 9.9 million jobs short of the pre-pandemic peak, and we estimate it is 11.5 million jobs below its pre-pandemic trend. The 6.3% national unemployment rate remains elevated--since June, it has fallen steadily but this was not accompanied by workers returning. When adjusted for participation rate and misclassification, we estimate the unemployment rate is closer to 9.4%. (For more information see "Within Reach: How Stimulus Proposals Lift U.S. GDP to Pre-Pandemic Levels," Feb. 1, 2021 and "Economic Research: U.S. Biweekly Economic Roundup: Jobs Are Off To A Bad Start," Feb. 5, 2021.) S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly. Related Research • Through The ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors, April 28, 2020 Ratings Detail (As Of February 23, 2021) State of Florida, Florida Florida Tpk Enterprise, Florida Florida tpk rev bnds (Florida Turnpike Enterprise) Long Term Rating AA/Negative Affirmed Florida (Florida Tpk Enterprise) dept of transp tpk rev bnds ser 2020B due 07/01/2021-2050 Unenhanced Rating AA(SPUR)/Negative Affirmed Florida (Florida Tpk Enterprise) tpk rev bnds (Florida Tpk Enterprise) ser 2004A dtd 12/01/2004 due 07/01/2005-2031 2034 Unenhanced Rating AA(SPUR)/Negative Affirmed Florida (Florida Tpk Enterprise) tpk rev rfdg bnds Long Term Rating AA/Negative Affirmed Florida (Florida Tpk Enterprise) tpk rev rfdg bnds (Florida Dept of Transp) ser 2003B dtd 07/01/2003 due 07/01/2004-2025 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 23, 2021 7
Florida Florida Turnpike Enterprise; Airport; Toll Roads Bridges Ratings Detail (As Of February 23, 2021) (cont.) Unenhanced Rating AA(SPUR)/Negative Affirmed Florida (Florida Tpk Enterprise) tpk ser 2000B dtd 11/01/2000 due 07/01/2001-2025 2030 Long Term Rating AA/Negative Affirmed Unenhanced Rating NR(SPUR) Florida (Florida Turnpike Enterprise) Long Term Rating AA/Negative Affirmed Florida (Florida Turnpike Enterprise) Long Term Rating AA/Negative Affirmed State of Florida (Florida Tpk Enterprise) dept of transp tpk rev bnds (Florida) ser 2020B due 07/01/2021-2050 Long Term Rating AA/Negative Affirmed Many issues are enhanced by bond insurance. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 23, 2021 8
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