expressway) client services north carolina turnpike ......74 in union county, north carolina. the...

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INFRASTRUCTURE AND PROJECT FINANCE CREDIT OPINION 27 November 2018 Contacts Kathrin Heitmann +1.212.553.4694 VP-Senior Analyst [email protected] Frieda Shalam +1.212.553.6836 Associate Analyst [email protected] Jennifer Chang +1.212.553.3842 VP-Senior Analyst [email protected] Kurt Krummenacker +1.212.553.7207 Senior Vice President/Manager [email protected] CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 North Carolina Turnpike Authority (Monroe Expressway) Update as project opens for traffic Summary The project's credit quality (Baa3 stable senior lien toll revenue bonds, TIFIA loan) benefits from strong support from the State of North Carolina (Aaa, stable) and its agency the North Carolina Department of Transportation (NCDOT). Support is evidenced by $24 million in annual state appropriation revenue for debt service on the state appropriation bonds and by NCDOT's guarantee to cover operating and maintenance costs. The project opened to traffic on November 27, 2018 and construction has remained within schedule and under budget. The economic characteristics of the service area remain robust which could support projected travel capture rates and assumed toll revenues. However, the service area is of modest size and demand for the new toll road will depend on its ability to offer increased travel speeds compared to the existing toll-free US 74. Bondholders will benefit from a $25 million ramp-up reserve to cover debt service in the first five years after project completion. Credit strengths » Construction was completed on time and under budget » Strong support from the State of North Carolina and NCDOT » Robust economic characteristics of the service area » A cash-funded $25 million ramp-up reserve Credit challenges » Demand for new toll road will depend on its ability to offer increased travel speed relative to free alternatives » Modest congestion on existing US 74 related to other rated toll roads in larger metropolitan areas may lead to greater revenue volatility » Limited track record of operating large scale toll roads » Weak debt service coverage ratio (DSCR) if traffic falls substantially below projections

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Page 1: Expressway) CLIENT SERVICES North Carolina Turnpike ......74 in Union County, North Carolina. The facility runs roughly parallel to US 74, creating a high-speed alternative to the

INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION27 November 2018

Contacts

Kathrin Heitmann +1.212.553.4694VP-Senior [email protected]

Frieda Shalam +1.212.553.6836Associate [email protected]

Jennifer Chang +1.212.553.3842VP-Senior [email protected]

Kurt Krummenacker +1.212.553.7207Senior Vice President/[email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

North Carolina Turnpike Authority (MonroeExpressway)Update as project opens for traffic

SummaryThe project's credit quality (Baa3 stable senior lien toll revenue bonds, TIFIA loan) benefitsfrom strong support from the State of North Carolina (Aaa, stable) and its agency the NorthCarolina Department of Transportation (NCDOT). Support is evidenced by $24 million inannual state appropriation revenue for debt service on the state appropriation bonds and byNCDOT's guarantee to cover operating and maintenance costs.

The project opened to traffic on November 27, 2018 and construction has remained withinschedule and under budget.

The economic characteristics of the service area remain robust which could supportprojected travel capture rates and assumed toll revenues. However, the service area is ofmodest size and demand for the new toll road will depend on its ability to offer increasedtravel speeds compared to the existing toll-free US 74.

Bondholders will benefit from a $25 million ramp-up reserve to cover debt service in the firstfive years after project completion.

Credit strengths

» Construction was completed on time and under budget

» Strong support from the State of North Carolina and NCDOT

» Robust economic characteristics of the service area

» A cash-funded $25 million ramp-up reserve

Credit challenges

» Demand for new toll road will depend on its ability to offer increased travel speed relativeto free alternatives

» Modest congestion on existing US 74 related to other rated toll roads in largermetropolitan areas may lead to greater revenue volatility

» Limited track record of operating large scale toll roads

» Weak debt service coverage ratio (DSCR) if traffic falls substantially below projections

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

Rating outlookThe stable rating outlook assumes that traffic on the toll road will ramp up in line with expectation over the next 12 to 18 months.

Factors that could lead to an upgrade

» Traffic and revenue growth exceeds Moody's current projections on a sustained basis

Factors that could lead to a downgrade

» Lower than projected revenues as a result of lower transaction volumes or lower toll rates

» Weaker financial or policy support by the state or the NCDOT

Key indicatorsThe project opened to traffic on November 27, 2018.

ProfileThe Monroe Expressway is a single asset, new 19.7 mile controlled-access toll road located southeast of Charlotte, running from US74 in Union County, North Carolina. The facility runs roughly parallel to US 74, creating a high-speed alternative to the non-tolledcommercial corridor along US 74. US 74 is the major east-west route connecting the Charlotte region, to the North Carolina coastand the port at Wilmington. The road is also the primary connection between Union County and Mecklenburg County (the City ofCharlotte). The Monroe Expressway's main purpose is to relieve congestion on US 74.

The project includes one mile of improvement to the existing US 74, including expansion to six lanes and addition of frontage roads.The new toll road includes four travel lanes, a depressed grass median, and eight interchanges (six along the new facility, and two alongexisting US 74). The Monroe Expressway uses electronic tolling.

Detailed credit considerations

Construction will be completed on time and on budgetThe project opened to traffic on November 27, 2018 and final completion is scheduled for May 28, 2019. The expected cost at financialclose was around $731 million including construction contingencies and the updated estimated capital costs was around $698 millionas of June 30, 2018. The project sustained no major damage from hurricane Florence.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 27 November 2018 North Carolina Turnpike Authority (Monroe Expressway): Update as project opens for traffic

Page 3: Expressway) CLIENT SERVICES North Carolina Turnpike ......74 in Union County, North Carolina. The facility runs roughly parallel to US 74, creating a high-speed alternative to the

MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

Exhibit 1

Overview of quarterly design-build expenditures by construction segment as of June 30, 2018

Source: NCTA Quartlery Construction progress report.

NCTA entered into a Roadside Toll Collection System (RTCS) contract with TransCore in March 2017. This contract includes capitalcosts for RTCS implementation, as well as maintenance of the system during the initial five-year period. In addition, NCTA selectedKapsch to supply Automatic Vehicle Identification (AVI) Readers and Transponders. For operating services, NCTA has selected AECOMwhich is also providing operating services for the authority's separately secured Triangle Expressway (Baa2 stable).

Revenue Generating BaseRobust economic characteristics of service area but of modest scaleThe Monroe Expressway will be the primary connection between Union County and Mecklenburg County and the City of Charlotte.

The greater Charlotte area has a robust economy which has experienced strong population growth and economic growth over aconsiderable period of time. The area benefits from a strong manufacturing and financial services industry base and low unemploymentrate. The near term outlook for economic growth and population growth remains favorable. However, the counties, excluding theCity of Charlotte, are of relatively modest size. 90% of traffic on the new toll road is expected to be passenger vehicles which is lessvulnerable to economic downturns than commercial vehicle traffic, a credit positive.

Uncertainty around future traffic profileTraffic forecasts for similar new roads have varied widely based on population, traffic conditions on existing roads and travel patterns,making toll revenue levels difficult to predict. Traffic capture rates and growth rates will be susceptible to economic cycles, changes inpopulation growth dynamics as well as consumer price elasticity for toll rate increases and perception of value of time. Toll revenuemight be volatile and below the authority’s expectations in particular during the first years of operation. The Monroe Expressway will bethe first toll road in the area and traveler capture rates might not ramp up as quickly as expected by the authority.

3 27 November 2018 North Carolina Turnpike Authority (Monroe Expressway): Update as project opens for traffic

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

The NCTA expects that about 45% to 55% of the traffic on the Monroe Expressway will come from the US 74. This represents acapture rate of about 20% to 25% of the existing traffic on the US 74. Other important roads include NC218, Lawyers Road, IdelwildRoad/ Secrest Short Cut Road, and Indian Trail, Fairview Road. The Monroe Expressway expects to capture around 10% to 20% oftraffic volumes on these roads as well as additional traffic volumes from other roads. US 74 suffers from congestion in particularduring peak hours and as a result of a significant number of at grade signalized intersections. However, overall congestion on US 74seems modest and consumer’s value of increased travel speed might significantly underperform the authority’s expectation, leadingpotentially to a substantial shortfall in toll revenues.

Strong support from the State of North Carolina and its agency the NCDOTThe Monroe Expressway benefits from the strong support by the state through legislative actions, $24 million in annual stateappropriation revenue support, and a contingent guarantee by the NCDOT to pay for construction completion, as well as any shortfallsin the operations and maintenance and renewal and replacement reserves. NCDOT’s responsibility allows for debt service on the seniorlien and the TIFIA note payable to be paid ahead of O&M costs and reserve deposits as well as R&R reserve deposits.

NCTA is a relatively nascent agency with only one operating toll road under its management and is outlaying significant funds for theconstruction the Monroe Expressway. Therefore, it still relies on NCDOT and funds from the State Highway Trust Fund to fund anyfunding gaps. In addition, NCTA’s strategy is closely aligned with that of NCDOT and of the state, evidenced by the fact that the NorthCarolina General Assembly and the governor select the vast majority of NCTA’s board members. NCTA has strong rate-setting powerswhich could support future toll rate increases when necessary.

Financial Operations and PositionSensitivity AnalysisWe have reviewed the basis of the traffic and revenue study and multiple related sensitivities to assess the impact of changes to keymodel inputs, including users' willingness to pay the assumed toll rate schedule relative to the perceived value of time and reliability ofthe Monroe Expressway. Toll rates will be based on the distance covered on each mainline section and there will be no minimum tollrate.

Management assumes an initial toll rate of $0.14/mile for electronic tolling collection (ETC) and $0.22/mile for video tolling.

Under the management case, the project is forecasted to achieve a Senior Lien DSCR of 4.9x on average, a senior lien and TIFIA loanDSCR of 2.6x, and an all-in-coverage ratio of 1.18x on average throughout the project period.

Assuming a 50% revenue reduction, Moody’s Senior Lien DSCR would be around 2.4x on average, Senior Lien and TIFIA loan DSCRaround 1.3x and the all in fixed charge coverage ratios would remain below 1.0x.

While the financing structure can withstand large haircuts and still achieve adequate DSCRs, the NCTA would need to rely on itsreserves and potentially support from NCDOT to cover the project's operating expenses if revenues fall materially short of expectationsfor a consistent period of time.

LIQUIDITYLiquidity profile benefits from $25 million ramp-up reserve and NCDOT's contingent guaranteeAt project completion any amounts remaining in the project fund will be transferred to the general fund (50% to the ramp-up reserveand 50% to the unpledged account).

During operations, NCTA's major liquidity sources will consist of (1) a Renewal and Replacement (R&R) Fund funded at approximately110% of the budgeted annual R&R expense (average of $12.6 million during 2017-2055); (2) O&M expense fund funded at one fourthof budgeted annual O&M expense (average around $4.2 million during 2017-2055); (3) an operating reserve account and (4) a generalreserve fund that will consist of three sub accounts: a $25 million ramp-up reserve account, the pledged account and the unpledgedaccount. The unpledged account currently amounts to $12.2 million.

During the operating phase of the project, senior lien bondholders will benefit from the availability of the $25 million ramp-up reservewhich will be available to pay senior lien debt service at least during the first five years of the project after project completion. After

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

the first five years, the ramp-up reserve can be used to fund deficiencies in any of the reserve accounts and upon satisfaction of therestricted payment test could be transferred to either the pledged account or the unpledged account of the general reserve fund.

The project's unpledged account is not anticipated to be used to pay debt service but would be available to fund deficiencies withrespect to the state appropriation bonds, to pay operating expenses, renewal and replacement expenses and repay NCDOT for anycontributions to the project (other than STIP funding) if certain conditions are met. The pledged account can be used to pay debtservice.

The liquidity profile also takes into account that if at any time the amounts in either the Operating Reserve Fund or the R&R fund arenot equal to the reserve requirement, then subject to the availability of funds, NCDOT will pay the amount necessary so that amountsin these reserve funds equal the requirement. The obligation to replenish the Operating Reserve Fund is to be funded from amounts inthe State Highway Fund and the obligations to replenish the Renewal and Replacement Fund or pay for unexpected construction costsare to be funded from the State Highway Fund or the State Highway Trust Fund. Each such payment is subject to appropriation by thestate and the availability of amounts in the respective Funds. All NCDOT funds would need to be reimbursed as NCTA receipts becomeavailable, but these reimbursements occur at the bottom of the flow of funds and there is no default provision if reimbursement doesnot occur.

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

Exhibit 2

Flow of Funds Monroe Expressway under Trust Agreement

Source: Offering Circular 2016 toll revenue bonds.

Debt and Other LiabilitiesDEBT STRUCTUREThe debt structure of the Monroe Expressway consists of:

» $448 million State Appropriation Revenue Bonds Series 2010 and 2011, rated Aa2

» $137 million of 2016 senior lien toll revenue bonds, rated Baa3

» $166.5 million of subordinated TIFIA loan, rated Baa3

» $10 million of 2011 senior lien toll revenue bonds (refunded in advance through an escrow account).

The authority’s state appropriation bonds are subject to appropriation of the funds from the state ($24 million in annual stateappropriation revenue), and federal subsidies under the Build America program which covers their debt service. Any residualappropriations or grants are eligible for debt service on the senior lien toll revenue bonds but these amounts are expected to beminimal.

6 27 November 2018 North Carolina Turnpike Authority (Monroe Expressway): Update as project opens for traffic

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

The debt service profile of the 2016 senior lien toll revenue bonds and the TIFIA loan is a back-loaded amortization profile which isbeneficial in the initial years of the toll road when traffic is still ramping up but increases pressure on financial performance in the outeryears of the Monroe Expressway.

The senior lien toll revenue bonds and the TIFIA note payable benefit effectively from a gross pledge as the NCDOT has provided acontingent guarantee to cover increased O&M and R&R reserve requirement. The O&M requirement represents one-fourth of the totalbudgeted operating expenses for the next fiscal year and the R&R reserve requirement is equal to approximately 110% of the totalbudgeted R&R expenses for the next fiscal year.

If at any time the amounts in either the Operating Reserve Fund or the R&R Fund are not equal to the reserve requirement, thensubject to the availability of funds, NCDOT will pay the amount necessary so that amounts in these reserve funds equal therequirement. The obligation to replenish Operating Reserve Fund is to be funded from amounts in the State Highway Fund and theobligations to replenish the Renewal and Replacement Fund or pay for unexpected construction costs are to be funded from the StateHighway Fund or the State Highway Trust Fund. Each such payment is subject to appropriation by the state and the availability ofamounts in the respective funds.

The flow of funds is an open loop, which allows receipts to flow out of the bottom bucket subject to meeting certain conditions such asall reserve funds need to be fully funded at their respective requirements as well as meeting a Senior DSCR test of 140%, a Total DSCRtest of 130% and a TIFIA Loan Life Coverage Ratio Test of 130% amongst others. If funds are released, an amount equal to the amounttransferred to the unpledged account will be used to repay TIFIA.

The system has a cash funded debt service reserve requirement for both the senior revenue bonds and the TIFIA loan which will be bothfunded at lesser of 10% of principal, maximum annual debt service or 125% of average annual debt service.

DEBT-RELATED DERIVATIVESThe Monroe Expressway does not have any debt-related derivatives.

NCTA has entered into a diesel fuel cap to hedge against unforeseen fuel price increases related to the construction of the MonroeExpressway. NCTA has paid a premium of $0.3 million to acquire the diesel fuel cap but no other costs arise unless the hedge isexercised by NCTA. The diesel hedge is not secured. The strike price of the cap is $2.00/gal. Savings from the hedge have freed up fundsestimated between $4.4-$5.3 million from the diesel fuel reserve fund.

PENSIONS AND OPEBEmployees of the authority are participants in the state's Teachers' and State Employees' Retirement System, and the authority isobligated to make yearly contributions. Based on a discount rate of 7.25% NCTA reported a net pension liability of $558,000 for fiscal2017, which is however, highly sensitive to the assumed discount rate. Moody's adjusted net pension liability is calculated based on alower discount rate and amounted to $1.9 million for fiscal 2017.

Management and GovernanceThe NCTA was created in 2002 by the North Carolina Legislature to look for alternative financing for key transportation projects, andbecame part of the NCDOT, a public agency of the State of North Carolina, in 2009. NCTA is allowed to manage up to eleven projectsand is currently operating one access-controlled toll road, the Triangle Expressway.

NCTA is operating at this stage only one toll road and therefore, still relies on support from NCDOT and the state to close fundinggaps.

NCTA's board consist of nine members which are mostly appointed by the North Carolina General Assembly (4) and the governor (4).The NCTA has strong toll rate setting powers, albeit this could be tested by the close relationship with the Legislature and a requiredreview of revisions to previously approved toll rates. The initial toll rate schedule will be set at least at the same level as outlined in theT&R study for the Monroe Expressway. NCTA can determine that a toll rate increase should not go into effect if in compliance withTIFIA loan and bond resolution requirements and by resolution of the board.

7 27 November 2018 North Carolina Turnpike Authority (Monroe Expressway): Update as project opens for traffic

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

Rating Methodology and Scorecard FactorsThe grid is a reference tool that can be used to approximate credit profiles in the toll road industry in most cases. However, the grid is asummary that does not include every rating consideration. Please see Government Owned Toll Roads for more information about thelimitations inherent to grid. The grid indicated rating of Baa3 is consistent with the assigned rating. The grid outcome is sensitive to theexpected DSCR which incorporates expected improvements in revenue collection and DSCRs over time.

MethodologyThe principal methodology used in this rating was Government Owned Toll Roads published in November 2016. Please see the RatingMethodologies page on www.moodys.com for a copy of this methodology.

Exhibit 3

Rating Factors - Government Owned Toll RoadsNorth Carolina Turnpike Authority

Factor Subfactor Score

1. Market Position a) Asset Type Ba

b) Operating History B

c) Competition Baa

d) Service Area Characteristics Baa

2. Performance Trends a) Annual Traffic Transactions Baa

b) Traffic Profile Aa

c) Five Year Traffic CAGR Baa

d) Ability and Willingness to Increase Toll Rates Baa

3. Financial Metrics a) Debt Service Coverage Ratio Baa

b) Debt to Operating Revenue Caa

4. Capacity, Capital Plan and Leverage a) Asset Condition/Capital Needs Aa

b) Limitations to Growth/Operational Restrictions Aa

Notching Considerations Notch

1 - Debt Service Reserve Fund level 0

2 - Open/Closed Flow of Funds -0.5

3 - Days Cash on Hand 0

4 - Other Financial, Operating and Debt Factors -0.5

Scorecard Indicated Rating: Baa3

Financial metrics are based on Moody's Base Case after the initial ramp-up period. Total debt includes state appropriation debt that funds the Monroe Expressway.Source: Moody's Investors Service

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

10 27 November 2018 North Carolina Turnpike Authority (Monroe Expressway): Update as project opens for traffic