Fitch Rates Maine Turnpike Auth Rev Bonds 'AA-'; Stable Outlook

NEW YORK--March 17, 2005--Fitch Ratings assigns an 'AA-' rating to approximately $58,500,000 Maine Turnpike Authority (the turnpike, or the authority) turnpike revenue bonds, series 2005. These bonds, which are expected to carry insurance, are scheduled to sell on or about March 23 via a syndicate led by UBS Financial Services, Inc. In addition, the underlying 'AA-' rating on the authority's outstanding $323.2 million turnpike revenue bonds is affirmed. The turnpike revenue bonds are primarily secured by the net toll revenues of the Maine Turnpike (i.e. after operating expenses). The series 2005 bonds mature each July 1 from 2006 through 2028. Bond proceeds will be used to refund a portion of the authority's outstanding debt for present value savings and pay costs of issuance. The Rating Outlook is Stable.

The 'AA-' rating reflects the turnpike's mature travel market, which exhibits continued growth. Additional strengths include the authority's sound financial profile, low debt burden, strategic reinvestment in facilities, and ability to cash fund a large portion of its capital plan. However, the rating recognizes the sensitivity to seasonal recreational travel and economic cycles. The rating also considers the need to reserve nearly all annual surplus revenues after revenue bond debt service for turnpike maintenance and debt service on subordinated special obligation bonds (not rated by Fitch), leaving little excess cash to build up unencumbered internal liquidity. The rating further recognizes continuing capital needs to maintain existing turnpike assets, enhance capacity, and improve connections to the turnpike.

Annual toll revenues continue to grow even in the face of weakened economic conditions. Between the most recent toll increase in 1999 and 2003, toll revenues increased an average of 3.2% per year, despite a fall off in commercial traffic in 2003 due to regional economic conditions. Although traffic grew by only 1.4% in 2004, revenues grew by 4.5%, due in part to a resurgence in commercial traffic. In February 2005, the turnpike implemented a toll increase for passenger and commercial vehicles, the first such toll increase since 1999. Unaudited revenues for February show an increase of approximately 34% while transactions decreased slightly by 3.2%. Toll revenues are projected to grow to $80.1 million in 2005, or 26%, primarily due to the toll increase. Projected revenue growth is reasonable and mirrors the recent trends for this mature intrastate turnpike. After the aforementioned toll increase, revenues are projected to grow by 3% on average each year thereafter through 2010, when a proposed toll increase is projected to raise revenues by an additional 12%.

The turnpike's $197 million 2004-2009 capital program includes the modernization and widening program along the 30-mile section between York and South Portland, which was completed in fiscal 2004, and the conversion of the Transpass electronic toll collection system to the E-ZPass system, which went into operation along with the toll increase on Feb. 1, 2005. Additional projects in the current program include interchange construction, bridge reconstruction, and continued rehabilitation and replacement of turnpike assets. Surplus revenues deposited into the reserve maintenance and general reserve funds provide 60% of funding to the capital program, while the series 2004 bond proceeds and a projected future debt issuance in 2007 are expected to provide the remaining balance. The additional toll revenues from the February 2005 toll increase combined with the increase in debt capacity in 2004 is expected to provide capacity and funds needed to finance construction of new capital initiatives such as widening the turnpike north of Exit 6A, new interchanges, and/or new connecting roads in partnership with the state. Additionally, the Authority has initiated planning for the $187.5 million 2010-2014 capital plan that is expected to be financed with surplus revenues including the planned 2010 toll increase and approximately $100 million of additional bonds.

Debt service coverage in 2003 and 2004 fell to 1.90 times (x) and 1.79x, respectively, below the authority's internal policy of 2x and below Fitch's targeted rating level for this credit. Prior to 2003, debt service coverage had been at least 2x since 1997. The drop in coverage is mainly attributable to lower tolls due to a decrease in commercial traffic and flat passenger traffic, and higher expenses due to unanticipated increases in health care costs, state police services, administrative costs, and overtime salaries. The lower coverage levels are expected to be temporary and are not a concern for bondholders. With the implementation of the toll increases, the turnpike is expected to maintain debt service coverage of at least 2x and generate additional cash to accelerate capital initiatives. Since coverage has dropped below 2x, the authority has funded the debt service reserve funds for all outstanding bonds at maximum annual debt service (MADS), as required by the resolution.

With growing roadway congestion and constrained state resources, the possibility exists that the authority will be asked to assume some new projects. An ongoing challenge will be to ensure any new endeavors do not over-leverage mainline turnpike revenues or result in significant cross-subsidization of non-self-supporting projects. Given the turnpike's track record of carefully pacing its capital program, its relatively low toll rate and inelasticity to toll increases, and the partnership framework with the state, Fitch expects the authority will continue to meet this challenge and maintain its financial operations consistent with current policies and practices.

The Maine Turnpike Authority is a body corporate and politic and is empowered under its enabling act to construct, maintain, reconstruct and operate the turnpike. The Maine Turnpike extends 109 miles from a point in Kittery, ME in the south to a point in Augusta, ME in the north.