Pennsylvania Turnpike Commission (PTC)

Transcription

1 (PTC) Public Finance Toll Roads, Bridges & Tunnels Rating Report Assigned Rating Outlook Turnpike Revenue Refunding Bonds, First Series of 2019 AA- Stable Affirmed Ratings Outlook Turnpike Revenue Bonds AA- Stable Turnpike Subordinate Revenue Bonds Methodology: A+ Stable U.S. Public Toll Roads, Bridges & Tunnels Revenue Bond Rating Methodology Analytical Contacts: Andrew Clarke, Managing Director (646) Rating Summary: KBRA views the Pennsylvania Turnpike System as an essential intrastate and interstate roadway. The multi-asset system serves the southern portion of the Commonwealth and connects the Commonwealth s five major economic centers, which represent most of the Commonwealth s population (12.8 million), and are economically diverse with broad demographic characteristics. The Turnpike System is the fastest and most direct route between major metropolitan areas in the region with limited competing transportation alternatives. Its customer base mainly consists of regional commuters, long distance intrastate and interstate commercial truckers, and business and recreational travelers. As a result, PTC has been successful in generating significant increases in toll revenues over the last decade through consistent toll increases. Although only modest growth in traffic volume is projected, KBRA believes that the System will remain highly essential to the regional economy and continue to be well utilized. Peter Scherer, Associate (646) pscherer@kbra.com PTC has approximately $11.45 billion in outstanding senior, subordinate, and motor license fund (MLF)-enhanced subordinate special revenue bonds as of December 1, Across the $11.45 billion of Turnpike System revenue bonds, approximately 96% of debt is fixed, or swapped to fixed rate, and just 4% is unhedged floating rate debt. MADS for the three securities is scheduled to occur in FY FY 2018 net revenues are ample, already providing MADS coverage of 2.15x, 1.08x, and 0.96x, respectively, on the senior, subordinate, and MLF-enhanced subordinate special revenue bonds. It is KBRA s view that actions planned under the FY 2019 Act 44 financial plan, when executed, will enable PTC to comfortably achieve covenanted coverage across the senior, subordinate, and MFL-enhanced subordinate special revenue bonds at 1.30x, 1.15x, and 1.00x, respectively, while also meeting internal policy driven coverage minimums at 2.00x, 1.30x, and 1.20x, respectively, per PTC s debt management policy in each year except 2019 when coverage may decline slightly below internal policy minimums due to the early retirement of subordinate Floating Rate Notes. PTC and the Commonwealth are currently defendants in a class action lawsuit filed March 15, 2018 by the Owner Operator Independent Drivers Association seeking to end the use of toll revenues generated by the Turnpike System to support other Commonwealth transportation needs. PTC has subsequently delayed its quarterly Act 44 payments to PennDOT and suspended issuance under the subordinate indenture until greater clarity emerges concerning the outcome of the lawsuit. KBRA will continue to monitor the litigation and any impact it may have on the Commission or the Commonwealth. Key Rating Strengths Demonstrated history of strong system utilization and traffic demand. PTC is governed by a strong regulatory and management framework set forth by Act 44, as amended by Act 89, and the bond indentures. A strong set of security provisions that include a 1.30x rate covenant, restrictive ABT, and senior lien revenue bond debt service reserve fund that is funded at MADS. Although the rate covenant is set at 1.30x, PTC has an internal policy to maintain minimum senior lien DSC of at least 2.00x. Key Rating Concerns Mainline capital needs and large annual contributions to PennDOT mandated by Act 44, as amended by Act 89, require a combined total of $5.5 billion in additional senior and subordinate lien debt between 2019 and Future toll rate escalation could affect demand and reduce PTC s operating margins and financial flexibility. PTC may be strained to maintain coverage covenants in the absence of solid revenues growth or rate increases. January 18, 2019

2 Drivers for Rating Change Significant and sustained increase in system traffic levels. + A trend of structurally imbalanced financial operations with significant declines in system liquidity. Future legislative actions by the Commonwealth expanding the PTC s mandate without offsetting revenues. - Proceeds of the will refund outstanding Series C of 2017 Bonds. The Stable Outlook reflects KBRA s view that PTC will continue to successfully manage the challenges of operating, expanding, and improving turnpike facilities while adhering to the provisions of the Commission s bond indentures and the requirements set forth by Act 44, as amended by Act 89. It also reflects KBRA s expectation that the demand for turnpike service will remain in line with recent usage trends and that PTC s current obligations under Act 44, as amended by Act 89, are not expanded without additional funding by future legislation actions by the Commonwealth. Issuer Name Asset Type Asset Conditions Service Area Service Area (Commonwealth) Population (2 ) Toll Transaction Volume (FY 2018 ) Traffic Composition (FY 2018) Highlights of Important Financial Ratios (1) (dollars in thousands) 552 route miles 68 toll interchanges Fair to Good conditions Commonwealth of Pennsylvania Southern and Eastern Portions 12.8 million million 85.7% Cars / 14.2% Commercial Vehicles FY 2017 FY 2018 Net Toll Revenues $1,111,061 $1,196,606 yoy % chg 7.7% Total Revenues $1,150,622 $1,220,560 yoy % chg 6.1% Total Operating Expenditures $382,756 $373,848 yoy % chg -2.3% Revenues Less Operating Expenditures $767,866 $846,712 yoy % chg 10.3% Senior Lien DS $237,010 $379,042 Senior Lien DSCR 3.22x 2.22x (3 ) Subordinate Lien DS $233,804 $256,818 Subordinate Lien DSCR 1.63x 1.33x (3 ) MLF-Enhanced Subordinate Special Revenue DS $43,348 $37,938 MLF-Enhanced Subordinate Special Revenue DSCR 1.49x 1.26x (3 ) Total MADS Coverage Senior, Subordinate and MLF-Enhanced Subordinate Special Revenue MADS (4 ) $882,820 MADS Coverage (4 ) 0.96x MADS Year (4 ) 2036 General Reserve Fund Balance $376,427 $345,415 General Reserve Fund / Liquidity Balance as a % of Operating Expenditures 98.3% 92.4% Days Cash on Hand (1) Operating performance and coverage figures are presented in conformity with coverage tables provided in January 2019 Bond Appendix A. (2) U.S. Census Bureau data (3) The YOY decline in debt service coverage reflects the voluntary retirement of $100 million of Senior floating rate notes. Had PTC chosen to instead refund the notes, FY 2018 debt service coverage on Senior, Subordinate, and MLF-Enhanced Subordinate bonds would have been 3.04x, 1.58x, and 1.48x, respectively. (4) MADS figure presented is net of planned Floating Rate Note (FRN) remarketings. Page 2 January 18, 2019

3 Rating Determinants (RD) Senior Subordinate 1. Size and Scope of Operations AA+ AA+ 2. Demand Assessment AA- AA- 3. Management/Regulatory Framework AA- AA- 4. Financial Profile A+ A+ 5. Security Provisions AA A RD 1: Size and Scope of Operations KBRA views the Turnpike System as essential to the intrastate and interstate roadway transportation infrastructure. The multi-asset system serves the southern and eastern portions of the Commonwealth and connects its five primary population centers, which have economically diverse and broad demographic characteristics. Most importantly, the Turnpike System is often the fastest and most direct route between primary population centers and nearby states. Asset Type The Turnpike System consists of 552 route miles of roadway and 68 toll interchanges. The Turnpike System is comprised principally of the 359 mile east-west Mainline extending across the southern portion of the state (I-76), the 110 mile north-south Northeastern Extension located across the state s eastern region (I-476), and about 48 miles in completed segments of the north-south Mon/Fayette Expressway in the state s southwestern region (Route 43). The Turnpike System additionally includes the 16- mile Beaver Valley Expressway (I-376), 13-mile Amos K. Hutchinson Bypass (Route 66) and a six-mile segment of the Southern Beltway (Route 576). The route of each of these roadways and other major Commonwealth thoroughfares is depicted in Figure 1. FIGURE 1 The 359 mile east-west Mainline constitutes most of Interstate 76, which extends from the Youngstown, Ohio area to the Walt-Whitman Bridge in New Jersey, just south of Philadelphia. Predating the interstate highway system, the route first opened in October of 1940 as a 165-mile roadway spanning a portion of the distance between Pittsburgh and Harrisburg and has the distinction of being the first long-distance limited access highway in the United States. The mainline has 32 toll interchanges and passes within 10 miles of the three major Pennsylvanian cities including Philadelphia to the east and Pittsburgh to the west which are, respectively, the first and second largest cities in the state. The road additionally passes through Harrisburg, which is the capital of the Commonwealth. The 110 mile north-south Northeastern Extension makes up most of Interstate 476, an auxiliary interstate highway extending from I-95 outside of Philadelphia to Interstate 81 near Scranton. Constructed from 1954 to 1957 as a primarily two-lane thoroughfare, the route has been incrementally improved into a six-lane roadway through its southern third near Philadelphia and a four-lane roadway up through Scranton. The Northeastern Extension is interspersed with 11 toll interchanges and is the primary north-south artery in the eastern part of the state. The remaining roadways of the Turnpike System, including the Beaver Valley Expressway, Amos K. Hutchinson Bypass, Mon/Fayette Expressway (initially opened in 2002 with the completion of additional major segments in 2008 and 2012) and a portion of the Southern Beltway are located in the southwest portion of the state and are interspersed with 25 tollway interchanges. Asset Condition The senior bond indenture requires PTC to perform an asset condition assessment every three years. The most recent assessment was conducted by Michael Baker International for 2017 and released in February According to the report, the overall condition of the Turnpike System is satisfactory. Turnpike roadways, tunnels, and facilities are in fair Page 3 January 18, 2019

4 to good condition. The majority of the structures including bridges and culverts are in good condition with about 4.2% deemed structurally deficient. The age of 58% of these structures exceeds 50 years. The next asset condition assessment report is expected to be published in early KBRA notes positively that the Turnpike System assets are being monitored periodically, which allows PTC to identify potential issues, plan, and perform necessary maintenance. Service Area The roadways operated by PTC connect each of the Commonwealth s five primary population centers constituting an urban population of more than 8.3 million people (see Figure 2). In our analysis, KBRA considers the Turnpike System s service area to be the entire Commonwealth. Allentown- Bethlehem- Easton MSA 9% FIGURE 2 Service Area and Population Composition as of 2017 Harrisburg- Carlisle MSA 7% Pittsburgh MSA 28% Scranton- Wilkes- Barre- Hazleton MSA 7% Philadelphia- Camden- Wilmington MSA 49% These primary population centers are as follows: (i) (ii) (iii) (iv) (v) Philadelphia-Camden-Wilmington MSA, Pittsburgh MSA, Allentown-Bethlehem-Easton MSA, Harrisburg-Carlisle MSA, and Scranton-Wilkes-Barre-Hazleton MSA. KBRA notes that the Commonwealth is the sixth largest economy in the U.S. by both population and real GSP. As of 2017, the Commonwealth had a total population of 12.8 million, reflecting a 0.7% rate of growth from Despite the limited growth in population, the Commonwealth s productivity growth is the strongest amongst the Mideast region 1. In 2017, Pennsylvania s real gross state product (GSP) was $664 billion, having grown at an average annual rate of 1.7% since This rate of growth is faster than the region s average annual rate of 1.3% but slightly lower than the nation s average annual rate of 1.9%. Source: U.S. Census Bureau Note: Populations shown include only the portion of each MSA located within Pennsylvania. The Commonwealth s economy is also broadly developed with no single employment sector dominating the employment base. The largest employment sectors are education and healthcare services (21% of total non-farm employment), trade, transportation, and utilities (19% of total non-farm employment), and professional services (13% of total non-farm employment). Employment growth has been slow. Total employment declined by approximately 4.4% from 2008 to 2010 as a result of the great recession and only fully recovered to 100% of the prerecession employment level in Over the same period, the Mideast region and U.S. employment levels had recovered to 102% and 105%, respectively of their prior peaks. The unemployment rate in the Commonwealth generally mirrors that of the region and the nation (see Figure 3). KBRA views the moderate growth in population, GSP, and employment as positive credit factors that support slow but steady growth in traffic demand while requiring only gradual incremental improvements to satisfy capacity needs. 10% 9% 8% 7% 6% 5% 4% 3% 2% Source: U.S. Bureau of Labor Statistics FIGURE 3 Historical Unemployment Rate Pennsylvania Mideast Region United States Competition The Turnpike System s customer base mainly consists of regional commuters, long distance intrastate and interstate commercial truckers, and business and recreational travelers. There are limited competing routes or modes of transportation that serve as alternatives to the Turnpike System. The Turnpike System is the fastest route traversing 1 Mideast region is defined as New York, New Jersey, Pennsylvania, Delaware, Maryland, and the District of Columbia. Page 4 January 18, 2019

5 # of Toll Transactions (in milliond) % Change Y/Y between the primary population centers. KBRA views the lack of meaningful alternative modes of transportation between major population centers as positive credit factor. Based on the foregoing, KBRA views the Turnpike System s size and scope as consistent with a AA+ rating determinant rating. RD 2: Demand Assessment KBRA views the Turnpike System s demand profile as strong. Although projections for traffic growth are modest due to the region s mature economy and relatively flat demographic trends, the Turnpike System is well utilized and PTC has been successful in generating significant increases in toll revenues over the last decade through a program of consistent and, at times, substantial toll increases. These increases have had little effect on demand evidencing both the strong essentiality of the Turnpike System to the regional economy and the limited threat of substitutes posed by alternative routes, despite a trend of rising toll charges. Traffic Volume and Composition Turnpike System utilization, as measured by toll transactions, has increased 25.6% since FY 2000 to million transactions per year in FY While the region s mature economy provides for limited fundamental demand growth, the Turnpike System has nevertheless experienced positive growth in traffic reflecting, among other factors, the completion of new sections of the Mon-Fayette Expressway, incremental system improvements such as the addition of lanes in certain high congestion areas, and periodic improvement and reconstruction of bridges, tunnels and interchanges. Gradual adoption of electronic tolling has likely also contributed to growth by improving the customer experience with respect to both ease of use and reduced travel times. From FY 2000 to FY 2018, annual car and commercial vehicle transactions increased at average annual rates of 1.2% and 1.7%, respectively. As shown in Figure 4, notable declines in transactions in FY 2005 and FY 2009 correspond to large toll hikes of 42.5% and 25.0%, respectively, implemented in those years. FIGURE Annual Toll Transactions (5) 50 (10) (15) 0 (20) Cars (Left Axis) Cars % Change YOY (Right Axis) Commercial Vehicles (Left Axis) Commercial Vehicles % Change Y/Y (Right Axis) Cars Commercial Vehicles All Vehicles Growth 2000 to % 34.3% 25.6% CAGR 2000 to % 1.7% 1.3% Growth 2010 to % 24.9% 7.8% CAGR 2010 to % 2.8% 0.9% Source: 2018 Traffic and Revenue Study and January 2019 Bond Appendix A Toll transaction data by route from FY 2007 to FY indicates that while overall transaction count increased by 7.4% (14.9 million) to million, transactions across PTC s ticket system, which consists of most of the Mainline and 2 Transaction count by route data not available for FY Page 5 January 18, 2019

6 Northeast Extension, increased by less than 0.1% to million, likely reflecting tempered utilization caused by the programmatic toll increases. System-wide growth was driven primarily by increased volume on Mon/Fayette Expressway (Turnpike 43) which increased by about 48% (4.6 million) to 14.2 million from 2007 to The significant increase is due to the completion of the fourth and fifth phases of the now 48-mile project in October 2008 and July 2012, respectively. Figure 5 below shows traffic and revenue composition recorded in FY Toll Transactions FIGURE Toll Revenues Barrier Facilities (Remainder of System) 22% Barrier Facilities (Remainder of System) 10% Ticket System (Most of Mainline and Northeast Extension) 78% Ticket System (Most of Mainline and Northeast Extension) 90% Source: 2018 Traffic and Revenue Forecast Study Estimates of annual vehicle miles traveled across all tolled and non-tolled highways in the Commonwealth indicate a decline of 3.9% from 2010 to 2017 compared to growth in transactions of 7.4% across the Turnpike System over the same period. While the figure for the overall Turnpike System was affected by the opening of new sections of the Mon/Fayette Expressway, KBRA views the stable transaction trend across the overall system as evidencing both solid underlying demand and the essentiality of both the mainline and system overall. Of the million toll transactions estimated for FY 2018, 86% consisted of car traffic while 14% consisted of commercial vehicle traffic. This split has been stable since FY 2000, reflecting the stable demand dynamic supporting both categories of use. Looking forward, KBRA believes that there may be upward movement in commercial vehicle traffic due to the expansion of the Panama Canal in mid-2016 which is expected to improve the economics of sending large cargo ships from Asia to the east coast. While it remains too early to determine the impact of this development, the Philadelphia Regional Port Authority is currently making capital improvements needed to accommodate the larger ships. The projects, which include channel deepening and the installation of 5 cranes capable of unloading the larger ships, are expected to be completed in Toll Revenue Gross toll revenue has increased significantly from $367.3 million in FY 2000 to $1.20 billion in FY 2018, compared to the aforementioned increase in transactions of just 25.6% over the same period. This difference reflects regular toll increases across most of the Turnpike System as seen in Figure 6. PTC has implemented annual toll increases since Historically, tolls were increased approximately every ten years. Page 6 January 18, 2019

7 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 $0.17 $0.04 FIGURE 6 Cost of Average Toll Per Mile Traveled on Mainline and Northeastern Extension $0.62 $0.44 $0.16 $0.12 Passenger Cars ETC Commercial Vehicles ETC Passenger Cars Cash Commercial Vehicles cash Source: 2018 Traffic and Revenue Forecast Study and January 2019 Bond Appendix A As seen in Figure 7, annual car and commercial vehicle toll revenues have grown significantly as volume has continued to grow despite sizable toll increases. 1,400,000 FIGURE 7 Annual Gross Toll Revenues 50 Gross Toll Revenues (dollars in thousands) 1,200,000 1,000, , , , , (10) % Change Y/Y 0 (20) Cars (Left Axis) Commercial Vehicles (Left Axis) Cars % Change Y/Y (Right Axis) Commercial Vehicles % Change Y/Y Cars Commercial Vehicles All Vehicles Growth 2000 to % 204.8% 227.5% CAGR 2000 to % 6.4% 6.8% Growth 2010 to % 73.6% 67.6% CAGR 2010 to % 7.1% 6.7% Source: 2018 Traffic and Revenue Study and January 2019 Bond Appendix A FY 2018 and Partial Year FY 2019 Transaction and Toll Revenue Performance In FY 2018, system-wide transaction count and toll revenues increased by 0.4% and 7.7%, respectively, versus increases of 0.7% and 7.9% in the prior year. Both years reflect a mid-year toll increase of 6.0%. Slow growth in FY 2017 was partly attributable to the closure of the Delaware River Bridge for 48 days for urgent structural repairs, which is estimated to have caused the loss of 1.8 million transactions and $12.1 million in toll revenue. KBRA understands that PTC filed a claim under its all-risk insurance policy and that the insurer agreed to cover both the lost revenues and associated costs of bridge repair, less the policy deductible of $5.0 million. System-wide transaction and revenue growth slowed further in FY KBRA notes that relatively harsh winters in each of the last two years may have weighed negatively on transaction growth, particularly across PTC s smaller western routes, which tend to exhibit more traffic volatility with respect to weather related and other factors. The steady trend of escalating tolls however is also a material factor in recent transaction growth trends. Unaudited data for the first six months of FY 2019 (June 1, 2018 to November ) indicate a trend of improved performance. Vehicle transaction count for the period increased 1.7% YOY (versus +0.4% growth in full FY 2018) while fare revenue increased by 9.9% (versus 7.7% growth in full FY 2018). The improvements reflects a 6% toll rate increase implemented in January 2018 as well as a trend of continued strength in the domestic economy. Page 7 January 18, 2019

8 Toll Increases and Elasticity of Demand PTC does not produce a formal demand elasticity study. However, it did commission CDM Smith to produce a 2018 Traffic and Revenue Forecast Study. Based on this study, CDM Smith estimates that traffic would decline by 3.5% to 4.5% for every 100% increase in toll charges. KBRA considers this estimated elasticity factor to be low and generally supportive of PTC s capacity to further raise tolls in order to increase revenues as required under the Act 44 amended funding agreement with PennDOT. As discussed earlier, the Turnpike System s average toll charge per mile is currently in line with similar systems making this estimated demand elasticity appear reasonable. However, KBRA cautions that the schedule of rate increases called for by the current FY 2019 Act 44 plan will likely place the Turnpike System among the costlier systems in the region over time. Given modest expectations for economic growth in the Commonwealth, KBRA notes that there is no assurance that this demand elasticity factor will continue to be stationary or linear across price levels as PTC transitions to a relatively more expensive transportation option. Electronic Tolling PTC utilizes an electronic toll collection system known as E-ZPass for the majority of toll transactions. The system utilizes a transponder device affixed to vehicles to electronically process toll transactions. The E-ZPass system was implemented across the entirety of the Turnpike System by E-ZPass participation represents approximately 78% of total toll transactions. PTC is currently deploying a technology known as all electronic tolling (AET) which, through the use of video cameras, license plate reading software, and a billing system that ties into the Commonwealth s vehicle registration database, electronically charges tolls to vehicle owners who have not opted into the E-ZPass ETC system. While E-ZPass will continue to be utilized for ETC equipped vehicles, cashless tolling is anticipated to eventually replace manual cash-based plaza tolling for all other users of the Turnpike System, which should result in operational savings for the Turnpike System. PTC first implemented AET on the Delaware River Bridge at the eastern terminus of the Mainline system in January 2016 and expanded the Turnpike System to the Beaver Valley Expressway in April AET was additionally deployed at the Keyser Avenue/Clarks Summit location near Scranton in April 2018 and the Findley Connector near Pittsburgh commencing in June PennDOT entered into a reciprocity agreement with the State of Delaware Department of Transportation for the enforcement of tolls, which became effective September 11, Under the agreement, the two agencies will suspend or hold the registration of vehicles upon unpaid tolls following request from such state. This is the first toll enforcement reciprocity agreement obtained by PennDOT. Absent such agreements, PTC has limited ability to collect tolls for non- ETC equipped vehicles registered outside the Commonwealth. PTC conservatively estimates a non-payment or leakage rate of about 50% for non-etc AET transactions; however, KBRA notes that the magnitude of foregone revenues is relatively small because ETC makes up nearly 80% of total transactions. In KBRA s view, formalization of additional interstate agreements for the enforcement of non-etc billings will be an important milestone in the transition to AET. Based on the foregoing, KBRA views the demand assessment of the Turnpike System as being consistent with the AArating determinant rating. Although KBRA anticipates only modest organic traffic volume growth going forward, KBRA views the Turnpike System to be both very well utilized and essential to the regional economy. This assessment is additionally informed by the aforementioned very low price elasticity of demand coefficient, which is supportive of PTC s ability to support its growing financial obligations under the Act 44 plan, as amended by Act 89. RD 3: Regulatory/Management Framework PTC operates under a regulatory framework established pursuant to Commonwealth statutes. It also operates in accordance with the provisions of the bond indentures governing PTC s senior, subordinate and MLF-enhanced subordinate special revenue bonds and a lease and funding agreement between PTC and the Pennsylvania Department of Transportation (PennDOT). The Commonwealth statutes grant PTC a strong level of managerial autonomy, including the full authority to set toll rates, manage financial operations, and manage capital projects related to the Turnpike System. The bond indentures establish covenants related to financial performance and, among other things, set limits on leveraging system assets. The lease and funding agreement sets forth a public-public partnership between PTC and PennDOT which incorporated many of the provisions required by Act 44 of Page 8 January 18, 2019

9 The management team is experienced and effective. In KBRA s opinion, they have demonstrated the ability to consistently find balance in managing the challenges of operating, expanding and improving turnpike assets while adhering to the provisions of PTC s bond indentures and the requirements set forth by Act 44. Act 44 requires PTC to make significant annual financial contributions to PennDOT in support of mass transit, multimodal, and alternative energy transportation operating and capital projects throughout the Commonwealth. KBRA notes that the Act includes provisions that, in KBRA s view, enable PTC to better identify and potentially mitigate financial challenges. Examples include PTC s submission to the Commonwealth of an annual Act 44 financial plan and the mandate, set forth by Commonwealth statute, requiring PTC to raise toll rates to levels that are sufficient, with other available revenues, to cover all obligations under Act 44. KBRA notes that Act 44 obligations are subordinate to senior and subordinate lien bond obligations, which, in KBRA s view, creates an additional level of cushion for bondholders. KBRA also views the toll-setting requirement, as it is set forth in Commonwealth statutes, as mitigating political pressure that may limit future toll rate increases. KBRA also notes that PTC s obligations under Act 44, as amended by Act 89, have been significantly reduced and are now capped at $450 million per year through fiscal year 2022, and $50 million per year from fiscal year 2023 through the expiration of the funding agreement in Act 89 relieves PTC from over $15 billion in future transfers to PennDOT between FY 2023 and KBRA positively views the amendments of Act 89 and notes that while Act 44 obligations are now substantially lower, PTC will need to issue an additional $1.8 billion in subordinate lien revenue bonds between FY 2019 and FY 2022 to meet Act 44 obligations. PTC plans to issue an additional $1.5 billion in senior lien bonds over the same period for turnpike capital needs. This level of additional debt issuance will place downward pressure on debt service coverage over this period. It is KBRA s view that PTC will need to maintain heightened focus on controlling operating costs to offset revenue pressures from additional debt issuances through It is also KBRA s view that lower Act 44 payment obligations beginning in 2023 will provide some relief from future toll rate escalation and will likely enhance PTC s ability to better accommodate the Turnpike System s capital needs. Capital Improvement Plan PTC s approved ten-year capital improvement plan, as shown in Figure 8, totals approximately $5.8 billion between FY 2019 and FY 2028, net of federal reimbursement. Major plan initiatives include roadway reconstruction and resurfacing, rehabilitation or replacement of structural deficient bridges, stage 1 design and construction of the I-95 interchange project and implementation of cashless tolling. Additional senior lien bonds will fund $3.5 billion or 59% of the current $5.9 billion program. The remaining $2.6 billion will be funded on a pay-as-you go basis. Litigation KBRA is aware of the class action lawsuit filed on March 15, 2018 by the Owner Operator Independent Drivers Association, Inc. against the Commission, Governor and other Commission representatives. The plaintiffs allege that the increased tolls collected pursuant to the requirements of Act 44, as amended by Act 89, are unlawful because they impose tolls beyond what is necessary for the operation and maintenance of the Turnpike System. KBRA has discussed the litigation, captioned Owner Operator Independent Drivers Association, Inc. et al. v et al, with the Commission and understands the Commission, together with the Commonwealth Defendants have evaluated the lawsuit and responded to the claims. KBRA understands that the Commission has acted, together with the Commonwealth, to vigorously defend Acts 44/89 and the propriety of the Commission s use of the Turnpike toll revenues in court. As of this writing all relevant documents, including a defendant s filings to dismiss the complaint and an alternative motion of summary judgement, have been submitted to the United States District Court of Middle Pennsylvania. A decision was expected to be rendered as soon as October 2018 but remains pending. Any decision is expected to be appealed. Facilities and Energy Management, $390, 7% FIGURE 8 Fiscal Year 2019 Ten-Year Capital Plan (dollar in millions) Fleet, $191, 3% Highway, $5,082, 87% Technology, $189, 3% As a result of the litigation PTC has suspended issuance of subordinate Source: Bond Appendix A dated September lien bonds, which have been used since 2007 to finance PTC s quarterly $112.5 million payments to PennDOT, which are required by Act 44/89. Consequently, an amended Lease and Funding Page 9 January 18, 2019

10 Agreement between PTC and PennDOT was executed on July 31, 2018 allowing PTC to delay quarterly Act 44/89 payments to PennDOT until June 30, Per the amended agreement, PTC has delayed two such payments which were due at the end of July and October of 2018, respectively. The next scheduled payment coming due at the end of January 2019 may also be delayed if a ruling is not rendered in the near future. KBRA will continue to monitor the litigation and any impact it may have on the Commission or the Commonwealth. PTC has one outstanding subordinate FRN in the amount of $291.9 million that is subject to mandatory tender on December 1, PTC recently repaid the balance of a $50.0 million subordinate FRN upon its December 1, 2018 mandatory tender date from the accumulated balance of the General Reserve Fund. PTC had previously planned to reissue this subordinate FRN but opted instead for a redemption in light of the previously discussed litigation. PTC s General Reserve Fund balance exceeded $345 million as of May 31, 2018 and comfortably covered this unexpected expense; however, conservative revenue projections from PTC s FY 2019 Act 44 Financial Plan suggest that FY 2019 coverage of subordinate and MLF-enhanced subordinate bonds may decline to slightly below the internal policy coverage minimums of 1.30x and 1.20x, respectively, due to the unexpected early redemption of the $50 million obligation, with coverage on senior lien bonds continuing to exceed the 2.00x policy target. Coverage on all three types of bonds is anticipated to continue to exceed the rate coverage covenant requirements set forth in the bond indentures. Positively, less conservative projections based on both the trailing 4-year CAGR of toll revenue growth and year to date YOY toll revenue performance would suggest that no breach of the policy driven coverage targets will occur, despite the unplanned $50.0 million redemption. KBRA views PTC s regulatory/management framework as being consistent with a AA- rating determinant rating, based on PTC s ability to manage the challenges of operating, expanding and improving turnpike facilities while adhering to the provisions of PTC s bond indentures and the requirements set forth by Act 44. The rating also reflects the Commonwealth statutes that grant PTC a strong level of managerial autonomy, including the full authority to set toll rates, manage financial operations, and manage capital projects related to the Turnpike System. The rating further reflects the ongoing and upward pressure on toll rate sensitivity stemming from PTC issuance of additional subordinate lien debt, which in KBRA s view, will require heightened focus on controlling operating costs to offset revenue pressures through RD 4: Financial Profile KBRA views PTC s financial operations as stable and well managed. Increasingly large operating margins and declining but solid debt service coverage reflect management s implementation of actions needed to meet PTC s Act 44 obligations to PennDOT. Since 2010, available revenues have provided solid coverage at or above 2.22x on senior, 1.33x on subordinate, and 1.26x on the MLF-enhanced subordinate special revenue bonds. FY 2018 represented the lowest coverage for each category of debt over this period as leverage and annual debt service requirements have grown. PTC s financial operations have performed well under the recent regime of toll increases successfully producing the annual increases in revenues available for debt service contemplated by its annual Act 44 financial plans. Toll revenues have performed generally in line with expectations while PTC s efforts to meet its cost containment target at 4.0% annual growth have at times fallen somewhat short because of expenditure items outside the control of management including, namely, escalating pension contributions and expenditures related to the state police turnpike patrol. PTC maintains a liquidity policy requiring the maintenance of an uncommitted liquidity balance equal to at least the greater of 10% of annual budgeted revenues in the general reserve fund and MADS on all bonds not secured by a DSRF. KBRA notes that this balance was $345.4 million as of FYE 2018, or 28.3% of revenues. Based upon budgeted figures from the FY 2019 Act 44 Plan and PTC s previously unaccounted for need to repay rather than remarket $50 million in subordinate FRNs due December 1, 2018, KBRA estimates that the balance will decline to approximately $300 million at FYE Revenue Base PTC s operating revenues consist almost entirely of toll revenues with the balance (<3%) generated from concession plazas and other miscellaneous operating resources. Toll revenues were $1.20 billion in FY 2018 and have increased at an 8.6% CAGR from FY 2014 to FY The increase in FY 2018 was 7.9% reflecting the 6.0% toll increase implemented January 7, 2018 and transaction growth of 0.4%. Revenue generation is notably concentrated across the Mainline and Northeastern Expansion, which account for more than 90% of toll revenues. KBRA, however, views the Turnpike System s user base as very broad given the expansive nature of these primary assets and the multiple large metropolitan areas served by these thoroughfares. Page 10 January 18, 2019

11 Historic Operating Performance On an audited GAAP compliant reporting basis, PTC s operating budget was $874.1 million in FY 2018 including $484.7 million in cost of services and $379.4 million in depreciation. The cost of service portion has increased at a CAGR of 3.0% since FY 2014, which is below of PTC s cost containment growth target of 4.0% implemented as part of the longterm plan to meet PTC s Act 44 obligations. Cost of services declined 4.3% in FY 2018, marking the first reduction in this category of spending since at least FY KBRA anticipates that management will continue to focus on operational efficiencies and the 4.0% cost containment target going forward as part of a comprehensive effort to minimize toll increases necessary to meet its escalating financial obligations under Act 44. Figure 9 presents a summary of PTC s audited GAAP compliant statement of changes in revenues, expenditures, and net position taken from recent audited annual financial reports. FIGURE 9 Summary of Changes in Revenues, Expenses, and Net Position FYE May 31 (dollars in thousands) 2014 Y/Y (%) 2015 Y/Y (%) 2016 Y/Y (%) 2017 Y/Y (%) 2018 Operating Revenues Net Toll Revenues 861, % 932, % 1,030, % 1,111, % 1,196,606 Other Revenues 18, % 17, % 22, % 23, % 4,668 Total Operating Revenues 880, % 949, % 1,052, % 1,134, % 1,201,274 Operating Expenses Cost of Services 438, % 459, % 471, % 517, % 494,742 Depreciation 324, % 337, % 332, % 354, % 379,401 Total Operating Expenses 762, % 797, % 804, % 871, % 874,143 Operating Income (Loss) 117, % 152, % 248, % 262, % 327,131 1 Nonoperating Revenues (Expenses) Act 44 and 89 Payments to PennDOT (450,000) 0.0% (450,000) 0.0% (450,000) 0.0% (450,000) 0.0% (450,000) Interest and Bond Expense (427,047) 9.1% (465,869) 11.8% (521,021) 7.6% (560,660) 1.0% (566,137) Other 37, % 68, % 9, % (18,967) % 41,112 Nonoperating Expenses, Net (839,847) 0.8% (846,874) 13.5% (961,238) 7.1% (1,029,627) -5.3% (975,025) Loss Before Capital Contributions (722,083) (694,583) (712,620) (766,677) (647,894) Capital Contributions 110, , , , ,804 Increase (Decrease) in Net Position (612,047) -10.4% (548,111) -3.0% (531,714) 3.8% (552,013) -20.3% (440,090) Net Position at End of Year 2 (3,300,455) 24.7% (4,114,945) 12.9% (4,646,659) 11.9% (5,198,672) 8.5% (5,638,762) 1 The FY 2018 operating income figure of $327,131 can be closely reconciled with the $846,712 figure shown in the coverage table for FY 2018 "Revenue Less Operating Expenditures" on the following page through the following steps: (i) add back $379,401 in depreciation (non-cash item) (ii) add back $118,336 in expenses allocated to capital spending activity, which is considered to be subordinated to debt service for calculation of annual debt service coverage and (iii) add $19,286 in interest income that is characterized as an operating revenue for the purpose of debt service coverage calculations. 2 The ongoing trend of decline in net position primarily reflects the ongoing issuance of subordinate lien bonds to finance the annual $450 million contributions to PennDOT required through FY 2022 by Act 44/89. Per the requirements of Act 44/89, the liability of the subordinate lien bonds utilized to finance the annual payment remains on PTC's balance sheet, with no corresponding increase in assets due to the transfer of such funds to PennDOT. Source: Audited Financial Statements FY 2014 to FY Operating margins have increased since FY 2014 reflecting actions taken by PTC to increase toll revenues and contain operating costs in order to ensure the availability of adequate resources to support its Act 44 obligations. Evidencing this trend, operating income has increased from $117.8 million (15.4% of operating expenditures) in FY 2014 to $327.1 million (37.4% of operating expenditures) in FY KBRA anticipates that this margin will increase further going forward as contemplated in the most recent FY 2019 Act 44 financial plan, providing PTC with adequate resources to fulfill its escalating financial obligations. Figure 10 presents a summary of PTC s audited GAAP compliant statement of net position taken from recent audited annual financial reports. Page 11 January 18, 2019

12 FIGURE 10 Summary Statement of Net Position FYE May 31 (dollars in thousands) 2014 Y/Y (%) 2015 Y/Y (%) 2016 Y/Y (%) 2017 Y/Y (%) 2018 Current Assets: Cash, Cash Equivalents, and Short-Term Investments 179, % 154, % 210, % 283, % 302,798 Other 64, % 66, % 79, % 89, % 86,973 Restricted: Cash, Cash Equivalents, and Short-Term Investments 867, % 770, % 970, % 1,005, % 1,092,713 Other 11, % 20, % 14, % 20, % 20,390 Total Current Assets 1,123, % 1,012, % 1,273, % 1,398, % 1,502,874 Non-Current Assets Unrestricted Long-Term Investments 158, % 224, % 279, % 278, % 221,063 Restricted Long-Term Investments 585, % 598, % 655, % 565, % 487,241 Total Capital Assets Less Accumulated Depreciation 4,914, % 5,189, % 5,517, % 5,728, % 6,016,996 Other 123, % 149, % 155, % 159, % 168,267 Total Non-Current Assets 5,780, % 6,161, % 6,609, % 6,732, % 6,893,567 Plus Deferred Outflows 213, % 273, % 396, % 534, % 533,478 Total Assets and Deferred Outflows of Resources 7,117, % 7,447, % 8,279, % 8,665, % 8,929,919 Current Liabilities: Accounts Payable and Accrued Liabilities 330, % 397, % 409, % 449, % 491,114 Current Portion of Debt 184, % 238, % 262, % 391, % 356,030 Unearned Income 55, % 61, % 67, % 72, % 74,627 Totall Current Liabilities 569, % 697, % 740, % 913, % 921,771 Non-Current Liabilities Debt, Less Current Portion, Net of Unamortized Premium 9,523, % 10,197, % 11,431, % 12,177, % 12,956,241 Other 200, % 543, % 616, % 626, % 526,739 Total Non-Current Liabilities 9,723, % 10,740, % 12,048, % 12,803, % 13,482,980 Plus Deferred Inflows 124, % 124, % 137, % 146, % 163,930 Total Liabilities and Deferred Inflows of Resources 10,418, % 11,562, % 12,925, % 13,863, % 14,568,681 Net Position Net Investment in Capital Assets 372, % 271, % (24,520) 952.4% (258,038) -3.1% (250,112) Restricted for Construction Purposes 237, % 269, % 332, % 330, % 260,524 Restricted for Debt Service 36, % 42, % 28, % 44, % 43,954 Unrestricted 1 (3,947,048) 19.0% (4,698,056) 6.1% (4,983,937) 6.7% (5,315,409) 7.1% (5,693,128) Total Net Position (3,300,455) 24.7% (4,114,945) 12.9% (4,646,659) 11.9% (5,198,672) 8.5% (5,638,762) 1 The ongoing trend of decline in net position primarily reflects the ongoing issuance of subordinate lien bonds to finance the annual $450 million contributions to PennDOT required through FY 2022 by Act 44/89. Per the requirements of Act 44/89, the liability of the subordinate lien bonds utilized to finance the annual payment remains on PTC's balance sheet, with no corresponding increase in assets due to the transfer of such funds to PennDOT. Source: Audited Financial Statements FY 2014 to FY Reserves and Liquidity PTC s liquidity position included $302.8 million in unrestricted cash, cash equivalents, and short-term investments as of FYE 2018 on an audited, GAAP compliant basis. This balance represents an increase of 68.8% since FY 2014 and 6.7% YOY. This liquidity balance increased from 16.2% of operating revenues at FYE 2015 to 25.2% at FYE 2018 providing, in KBRA s view, solid support for PTC s liquidity needs. PTC additionally maintains a liquidity standard policy which requires the budgeting and maintenance of an FYE uncommitted minimum liquidity balance (including the cash balances of the general reserve fund and the reserve maintenance fund) equal to the greater of 10% of annual budgeted revenues in the general reserve fund or MADS on all bonds not secured by a DSRF. In KBRA s view, the liquidity standard policy provides a meaningful liquidity cushion with which to withstand unexpected cash flow challenges on a year to year basis. KBRA additionally views the subordination of subordinate lien debt service and PennDOT transfers to maintenance of both operating and maintenance reserves and debt service on the senior lien bonds as a key security feature serving to enhance the strength of the security package supporting the senior lien bonds. Seen in Figure 11, the General Reserve Fund (GFR) maintains an estimated liquidity balance of $345.4 million as of FYE 2018 equivalent to 28.3% of operating revenues. This balance exceeds PTC s policy based liquidity requirement at 10% of budgeted revenues ($118.7 million in FY 2018) in the GRF and Reserve Maintenance Fund (RMF). The FY 2019 Act 44 financial plan estimates that this balance will increase slightly to $350.3 million at FYE As previously noted, PTC executed the unplanned repayment of a $50 million FRN on December 1, 2018, which was paid from the GRF. Despite this unbudgeted expense, PTC does not anticipate that the GRF balance will decline below the budgeted $350 Page 12 January 18, 2019

13 million level at FYE 2019 due to stronger than anticipated revenue performance and slower than anticipated capital spending. KBRA views these historic and budgeted liquidity levels as providing adequate resources with which to meet PTC s cash needs. Figure 11 also presents historic debt service coverage of outstanding turnpike revenue bonds. FIGURE 11 FY 2019 Act 44 Plan Budgeted 2019 Revenues Net Toll Revenues $861,846 $932,146 $1,030,115 $1,111,061 $1,196,606 $1,250,929 Concession Revenues and Miscellaneous $18,909 $17,589 $22,576 $23,335 $4,668 Interest Income (Non bond Proceeds) $14,917 $13,008 $13,676 $16,226 $19,286 Total Revenues $895,672 $962,743 $1,066,367 $1,150,622 $1,220,560 $1,267,359 Operating Expenditures General & Administrative $39,983 $39,541 $40,725 $47,861 $42,547 Traffic Engineering and Operations $3,966 $3,986 $4,654 $3,813 $3,244 Service Centers $22,448 $24,128 $28,304 $32,304 $35,557 Employee Benefits $83,810 $98,475 $107,646 $113,986 $98,515 Toll Collection $59,139 $60,429 $59,387 $60,112 $59,669 Normal Maintenance $74,789 $73,792 $64,545 $66,191 $73,429 Facilities and Energy Mgmt. Operations $9,850 $10,957 $10,886 $11,266 $12,080 Turnpike Patrol $39,818 $41,234 $46,161 $47,223 $48,807 Total Operating Expenditures (2 ) $333,803 $352,542 $362,308 $382,756 $373,848 $415,553 Revenue Less Operating Expenditures $561,869 $610,201 $704,059 $767,866 $846,712 $851,806 General Reserve Fund Balance Debt Service Coverage as Presented in Offering Documents (1) and Liquidity Ratios FYE May 31 (dollars in thousands) Audited Financial Statements General Reserve Fund / Liquidity Balance $200,746 $235,603 $336,522 $376,427 $345,415 $350,314 General Reserve Fund / Liquidity Balance to Operating Revenues 22.4% 24.5% 31.6% 32.7% 28.3% 27.6% Days Cash on Hand (3 ) Senior Annual Debt Service Requirement $158,995 $170,155 $215,019 $237,010 $379,042 $311,067 Coverage Ratio 3.51x 3.57x 3.26x 3.22x 2.22x (4) 2.74x Subordinate Annual Debt Service Requirement $196,475 $205,627 $222,064 $233,804 $256,818 $316,163 Coverage Ratio 1.58x 1.62x 1.61x 1.63x 1.33x (5 ) 1.37x MLF-Enhanced Subordinate Special Revenue Annual Debt Service Requirement $29,632 $36,027 $36,525 $43,348 $37,938 $43,175 Coverage Ratio 1.46x 1.48x 1.49x 1.49x 1.26x (5 ) 1.28x Remaining Turnpike Cash $112,818 $124,086 $231,253 $261,299 $242,994 $224,887 Total Cash and General Reserve Fund Balance $313,564 $359,689 $567,775 $637,726 $588,409 $575,201 (1) All figures including debt service coverage ratios are presented in conformity with coverage tables provided in First Series 2019 Preliminary Official Statement, which includes interest income from DSRF earnings as interest income available for debt service. Coverage calculations provided from the FY 2019 Act 44 Plan excludes these additional amounts. (2) A breakdown of operating expenditures for Budgeted 2019 is not available. (3) Days Cash on Hand = [(General Reserve Fund Liquidity Balance) (Total Operating Expenditures)] x 365 (4) The YOY decline in debt service coverage reflects the voluntary retirement of $100 million of Senior floating rate notes. Had PTC chosen to instead refund the notes, FY 2018 debt service coverage on Senior, Subordinate, and MLF-Enhanced Subordinate bonds would have been 3.04x, 1.58x, and 1.48x, respectively. Source: Historic Operating data and coverage figures taken from Appendix A Table III of Preliminary Official Statement for the and FY 2018 Audited Basic Financial Statements. Budgeted figures as well as General Reserve Fund balances taken from Act 44 Financial Plans. Audited FY 2018 and Budgeted FY 2019 Operating Performance According to the FY 2019 Act 44 Financial Plan, operating revenues are budgeted to grow to $1.27 billion by FY 2019 versus expenditures of $415.6 million as PTC works to grow net income in order to satisfy its PennDOT payment commitments and rising debt service obligations. PTC has identified escalating annual pension commitments as well as growth in projected expenses for Pennsylvania state police highway patrol services as fixed obligations outside of management s control which are likely to grow at rates in excess of the 4.0% cost containment target. Pension contributions increased at a 21.6% average annual rate from FY 2014 to FY The FY 2019 plan budgets for a further escalation of $6.9 million. Expenditures for turnpike patrol similarly have increased at an average annual rate of 5.2% over the same period and were expected to grow by an additional 6.9% ($3.4 million) in FY Labor and Pensions Page 13 January 18, 2019

14 PTC has approximately 1,922 employees as of January 1, 2019, of which about 70% are full-time and temporary employees represented by three Teamsters Local Unions. Approximately 70% of the workforce is allocated to maintenance operations and fare collections. Contracts with two of the three unions were ratified January 27, 2016 and expire September 30, An agreement with a third union had been effective since November 19, 2013 and expires September 30, PTC is additionally party to an open-ended memorandum of understanding effective October 1, This level of employment headcount reflects a notable decline of 15% since FY 2008 as PTC management has honed its focus on expense management in order to meet Act 44 financial commitments. The decline also incorporates a reduction in toll collection headcount due to the gradual adoption of AET tolling. PTC provides defined benefit retirement, death, and disability benefits to eligible employees through its participation in the multiple-employer Pennsylvania State Employees Retirement System (SERS). The Commonwealth constitution assigns the authority to establish and amend the benefit provisions of SERS to the Commonwealth s General Assembly. PTC s pension contributions have been equivalent to the full, statutorily required and actuarially based amount in each of the last five years (see Figure 12). These amounts have increased from $17.4 million in FY 2014 to $38.1 million in FY Pension expenses as a portion of PTC s operating expenditures (excluding depreciation) increased from 5.2% in FY 2014 to an unaudited 10.8% in FY As of the December 31, 2017 measurement date, and per GASB 68, SERS maintained an asset sufficiency ratio of 63.0% implying a net pension liability (NPL) of $329.1 million. Pension Contribution Summary (dollars in thousands) FIGURE 12 OPEB Contribution Summary (dollars in thousands) FYE May 31 Employer Contributions Y/Y Change Required Contribution Portion of Required Contribution Paid FYE May 31 Employer Contributions Y/Y Change Required Contribution Portion of Required Contribution Paid 2014 $17, % $17, % 2014 $44, % $18, % 2015 $22, % $22, % 2015 $46, % $12, % 2016 $27, % $27, % 2016 $28, % $11, % 2017 $33, % $33, % 2017 $28, % $11, % 2018 $38, % $38, % 2018 $28, % $8, % Source: FY 2017 CAFR and August 2018 Bond Appendix A PTC additionally provides other post-employment benefits (OPEB) including medical, prescription drug, dental and vision benefits to qualifying employees through a single-employer defined benefit plan. Benefit provisions of the plan are established and may be amended by PTC. Per a Medical Trust Funding Policy effective September 17, 2008, PTC has contributed amounts toward the OPEB plan well in excess of the annual required contribution (see Figure 12). OPEB expenditures as a portion of PTC s operating expenditures (excluding depreciation) have declined from 13.3% in FY 2014 to 7.5% in FY As of January 1, 2016, the plan was funded at a level of 100.4%. KBRA views positively PTC s successful efforts to fully fund OPEB commitments and notes that it is among a very limited number of governmental entities to accomplish this. On a combined basis, PTC s annual pension and OPEB commitments have ranged from $56.0 million to $66.3 million through the last five years largely reflecting PTC s choice to accelerate OPEB contributions to fully fund the aforementioned OPEB Medical Trust. With the OPEB Trust fully funded, KBRA expects annual contributions to this commitment to make up a very small portion of operating expenditures going forward; however, pension contributions are projected to grow at a rate well in excess of the 4.0% cost containment target into the foreseeable future. Together, pension and OPEB contributions have declined from 18.5% of PTC operating expenditures in FY 2014 to 17.7% in FY Debt As of December 1, 2018 PTC has approximately $11.45 billion in Turnpike System revenue debt (see Figure 13). PTC additionally has approximately $1.1 billion oil franchise tax revenue bonds, payable solely from oil franchise tax receipts and registration fee revenue bonds paid solely from motor license fund receipts. Turnpike senior revenue bonds are used to finance maintenance and improvement projects for the existing Turnpike System. Turnpike subordinate revenue bonds are in turn used exclusively to finance PTC s Act 44 payment obligations to PennDOT and are secured by a subordinate priority payment obligation from turnpike operations. Oil franchise tax revenue bonds and registration fee revenue bonds are each used by policy decision of PTC to fund the construction of and improvements to the Mon/Fayette Expressway and Southern Beltway Projects. As these later two Page 14 January 18, 2019

15 categories of debt are not paid from PTC operating funds and are instead paid from special tax and fee revenues derived from the Commonwealth, KBRA s analysis in this report focuses only on the turnpike senior, subordinate, and MLFenhanced subordinate special revenue bonds. Turnpike Revenue Bonds Outstanding as of December 1, 2018 (dollars in millions) MLF Special Revenue, $980, 9% FIGURE 13 Turnpike Revenue Bonds Outstanding as of December 1, 2018 (dollars in millions) Unhedged Variable, $409, 4% Synthetically Fixed, $746, 6% Subordinate, $5,045, 44% Senior, $5,425, 47% Fixed Rate, $10,295, 90% Source: Figure 13 above also shows PTC s turnpike revenue bonds capital structure. Excluding derivatives tied to PTC s oil franchise tax revenue and vehicle registration fee revenue bonds, which are payable exclusively from discrete sources of funding outside KBRA s analysis of the Turnpike System revenue bonds, PTC maintains a portfolio of interest rate swaps in the notional amount of $1.23 billion as of December 31, This portfolio has a mark-to-market value of $125.4 million in favor of the counterparties as of this date. Under the respective swap agreements, KBRA understands that PTC is subject to collateral posting requirements in the event that credit ratings on the senior revenue bonds fall below specified thresholds, generally set below the single-a credit quality range. Debt Service Coverage PTC has historically maintained strong debt service coverage ratios as seen in Figure 14. The lower coverage of the MLF-enhanced subordinate special revenue bonds reflects a flow of funds directing available revenues first to the unenhanced subordinate bonds. Based on the FY 2019 Act 44 financial plan, coverage on the three tiers of bonds is budgeted to be 2.74x, 1.37x, and 1.28x, respectively, in FY Based on the revenues budgeted in the plan and updated debt service requirements that factor in the unplanned $50 million subordinate FRN repayment on December 1, 2018, KBRA projects that FY 2019 subordinate and MLF-enhanced subordinate coverage may decline to slightly below the internal policy coverage minimum of 1.30x and 1.20x, respectively. Page 15 January 18, 2019

16 Millions FIGURE 14 Debt Service Coverage (FYE May 31) * Estimated 2019** *The YOY decline in debt service coverage reflects the voluntary retirement of $100 million of Senior floating rate notes. Had PTC chosen to instead refund the notes, FY 2018 debt service coverage on Senior, Subordinate, and MLF-Enhanced Subordinate bonds would have been 3.04x, 1.58x, and 1.48x, respectively. **Estimated FY 2019 coverage is based on revenue estimates from PTC's FY 2019 Act 44 Financial Plan and the current debt service schedule, which incorporates an unplanned $50 million subordinate FRN repayment that took place December 1, Source: Bond Appendix A dated January 2019 Prospective debt service, inclusive of the present offering, is scheduled to increase from $673.8 million in FY 2018 to $714.1 million in FY 2019 before reaching MADS of $882.8 million in FY Shown in Figure 15, annual debt service requirements are generally scheduled to rise going forward. MADS coverage based upon FY 2018 operations in 2036 is 2.15x on senior, 1.08x on subordinate, and 0.96x on MLF-enhanced subordinated special revenue bonds. These projections indicate that PTC may be strained to maintain coverage covenants in the absence of solid revenue growth or rate increases. However, KBRA believes that actions planned under the FY 2019 Act 44 financial plan, when executed, will enable PTC to comfortably achieve covenanted coverage across the senior, subordinate, and MLF-enhanced subordinate special revenue bonds at 1.30x, 1.15x, and 1.00x, respectively, while also generally meeting internal policy driven coverage at 2.00x, 1.30x, and 1.20x, respectively, per PTC s debt management policy. As noted previously, however, conservative projections suggest that coverage may decline to slightly lower than the internal policy coverage targets in FY 2019 due to the unplanned repayment of $50 million in subordinate FRNs on December 1, $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Senior Subordiante MLF-Enhanced Subordinate Special Revenue FIGURE 15 Turnpike Revenue Bond Pro Forma Debt Service Schedule 1 as of December 1, 2018 (FYE May 31) Source: 1 Schedule incorporates estimated annual debt service impact of First Series of Senior Subordinate MLF-Enhanced Subordinate The most recent FY 2019 Act 44 financial plan and the 2018 CDM Smith Traffic and Revenue Study anticipate that PTC will be able to meet its financial obligations going forward by increasing toll revenues by 6.0% each year through FY 2020, 5.0% annually thereafter through FY 2025 and just 3.0% annually in FY 2028 to FY The updated Traffic and Revenue Study anticipates that this regime will produce revenue growth of 5.6% in FY 2019 and 6.3% in FY 2020 with revenue growth gradually slowing to slightly less than 4.0% annually from FY 2029 to FY PTC expects to issue $3.5 billion in turnpike revenue bonds between FY 2019 to FY 2022 including $1.5 billion in senior revenue bonds Page 16 January 18, 2019

17 and $1.8 billion in subordinate revenue bonds. The FY 2019 Act 44 financial plan projects that these additional borrowings will be manageable within the assumed schedule of toll rate increases while maintaining debt service coverage in excess of both internal policy and covenanted levels. KBRA has assigned an A+ rating determinant rating for PTC s financial profile reflecting a trend of stable increases in revenues and well managed operations in the context of mounting financial obligations under Act 44 that must be carefully managed over time to ensure sustainability. RD 5: Security Provisions The legal framework pursuant to which the Commission issues turnpike revenue bonds clearly identifies PTC s obligations and responsibilities to bondholders. It also sets forth a flow of funds, rate covenant, additional bonds test, and the reserve requirements that, in KBRA s view, provides satisfactory level of bondholder protection. Pledged Revenues The bond indenture sets forth a net revenue pledge on all tolls received by or on behalf of the Commission from the Turnpike System, which is defined in the master senior lien indenture as the Mainline, Northeast Extension, and any other roads for which the Commission has operational responsibility and is collecting tolls. Flow of Funds The Commission deposits all revenues into a revenue fund, which is held by the senior bond trustee, on a daily basis. On or before the last business day of the month, an amount equal to the following month s operating and maintenance expenses is transferred into the operating account. After meeting the operating account requirement, the Commission transfers an amount equal to that month s accrued interest and principal requirement into the senior revenue bonds debt service fund. Remaining amounts are paid into the reserve maintenance fund in the following order: Figure 15 Balances in the general reserve fund are available to pay subordinate lien debt, optionally redeem bonds, fund capital improvements or be applied for any other authorized Commission purposes. After meeting the deposit requirements of the senior indenture, as illustrated in the diagram above, one-sixth and one-twelfth deposits of 115% interest and principal, respectively, are set aside in the subordinate revenue bonds account on or before the first day of each month. Page 17 January 18, 2019