CREDIT OPINION CLIENT SERVICES Authority, DC - Dulles Toll ...€¦ · In October of 2015 and May...

INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION5 March 2018

Contacts

Maria Matesanz +1.212.553.7241Senior Vice [email protected]

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

VictoriaShenderovich

+1.212.553.4490

Associate [email protected]

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Metropolitan Washington AirportsAuthority, DC - Dulles Toll Road EnterpriseUpdate to credit analysis

SummaryThe Metropolitan Washington Airports Authority's (MWAA) Dulles Toll Road (DTR) continuesto exhibit stable performance, helped by slow, but steady growth in the well-diversifiedeconomy of the service area. The DTR's sluggish transaction and revenue growth in thepast two years necessitated a modest downward revision of the original 2014 traffic andrevenue study forecast to reflect the actual performance. The authority has independentrate setting ability and is financing the Metrorail project with toll revenues. The next tollincrease is scheduled for 2019. Despite the back-loaded debt service profile, bondholders areprotected by strong bond indenture covenants and ample liquidity. The maintenance capitalimprovement program for the DTR is moderate and well managed. Past legal challenges overthe use of toll revenues for the Metrorail project have been thus far successfully resolved infavor of MWAA and the remaining legal challenges are unlikely to result in significant adverseoutcomes.

Exhibit 1

Toll revenue and transactions remain relatively stable

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2012 2013 2014 2015 2016

Operating Revenue ($'000) Total Transactions ('000)

Source: Moody's Investors Service

This document has been prepared for the use of Maria Matesanz and is protected by law. It may not be copied, transferred or disseminated unlessauthorized under a contract with Moody's or otherwise authorized in writing by Moody's.

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

Credit strengths

» DTR is a mature commuter toll facility with an over 30-year history of traffic and toll revenue that is being leveraged to financeconstruction of the Metrorail extension project. The road connects affluent residential with major commercial areas (Tyson's Corner)in the Washington, DC metropolitan area

» MWAA has independent toll-setting ability, and has demonstrated willingness to raise rates, increasing them five times in the recentpast to support debt issued for the Metrorail project. Current rates are relatively low for the service area and leave room for futureexpected rate increases at five-year intervals

» Forecasted debt service coverage ratios (DSCRs) are expected to remain well above indenture requirements. The three publicallyrated liens are adequately protected by cash flow and covenants, and debt service is paid ahead of any Metrorail capital or operatingoutflows

» About 88% of toll revenues are collected through electronic toll collection (ETC), which enhances operating efficiency as well as theability to increase rates

» A favorable long-term economic outlook for service area MSA

» Strong federal, state and local support with committed funding for the Metrorail project from federal government as well as highlyrated MWAA, Virginia (Aaa), Fairfax County (Aaa) and Loudoun County (Aaa)

» Strong management oversight by a professional management team, which has managed over $6 billion in capital projects atMWAA, including the completion of Phase 1 of the Metrorail project

» Ten-year concession tail after final debt maturity allows further debt structuring flexibility, if needed

» No additional debt planned for toll road capital needs or the Metrorail project

Credit challenges

» Lower than forecasted traffic and revenue performance in 2016 and 2017

» Plan of finance for the Metrorail debt relies on toll increases in 2019 and then at five year intervals, which may result in higherelasticity and traffic diversion than foreseen

» Metrorail projects plan of finance relies on continued contributions from funding partners

» Construction cost risk in Phase 2 could lead to more debt supported by the DTR or higher or more frequent rate increases thancurrently forecast, though none are currently expected

» Open flow of funds allows transfers to Metrorail project and Virginia Department of Transportation (VDOT), but only after payingall DTR operating needs and all debt service, including all required reserves and discretionary reserves for all liens. No transfers areexpected to be needed

Rating outlookThe stable outlook reflects reasonable assumptions for traffic and revenue growth to support high leverage and achieve forecastedDSCRs despite back-loaded debt. Our expectation is that the DTR will maintain targeted DSCRs above 2.0x for first senior; 1.60x forsecond senior and 1.30x for subordinate lien bonds and above 1.25x for all debt including the fourth lien Transportation InfrastructureFinance and Innovation Act (TIFIA) bonds. The stable outlook also reflects MWAA's and DTR's ability to make reserve fund deposits;meet future DTR and Metrorail capital needs; maintain liquidity levels and deliver the Phase 2 Metrorail construction project onschedule and within the current overall budget.

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 5 March 2018 Metropolitan Washington Airports Authority, DC - Dulles Toll Road Enterprise: Update to credit analysis



Factors that could lead to an upgrade

» The A2 first senior lien rating is not likely to go up given the single asset nature and high total leverage

» Second and subordinate lien ratings at Baa1 and Baa2, respectively could go up if traffic and toll revenues increase more thanforecasted through organic growth and rate increases, and these produce higher DSCRs and financial margins than currentlyforecasted

» Completion of the Phase 2 Metrorail project under the current budget and schedule also would exert positive pressure

Factors that could lead to a downgrade

» Lower than forecasted traffic that reduces forecasted DSCRs and liquidity

» Escalation of construction cost for the Metrorail that would require a significant increase in DTR debt

Key indicators

Exhibit 2

METROPOLITAN WASHINGTON AIRPORTS AUTHORITY, DC DULLES TOLL ROAD ENTERPRISE

2012 2013 2014 2015 2016

Total Transactions Annual Growth (%) -1.0 -1.2 -2.2 1.8 -0.5

Debt Outstanding ($'000) 1,770,887 1,955,257 2,239,105 2,166,640 2,649,006

Debt to Operating Revenues (x) 17.4 15.4 15.1 14.3 17.5

Days Cash on Hand 1,092 2,905 2,839 2,959 2,857

Senior Lien Debt Service Coverage By Net Revenues

(x)

7.22 9.00 10.79 11.94 11.46

Total Debt Service Coverage By Net Revenues (x) 1.63 1.92 1.88 1.71 1.58

Source: Moody's Investors Service, as adjusted.

ProfileThe Virginia Department of Transportation (VDOT) transferred the operation of the toll road to MWAA, which has been the operator ofthe toll road since October 1, 2009. MWAA's has operated the toll road and led the financing of the construction of the Metrorail in itstoll road corridor using toll road revenue to secure revenue bonds, as well as federal, state and local funding for the project.

Detailed credit considerationsIn April of 2015, the authority announced an update to the Metrorail Phase 2 construction schedule. Modifications combined withweather and construction delays have extended the Phase 2 construction schedule by 13 months for a new substantial completion dateof August 2019. As of January 2018, the Phase 2 design was virtually completed, and construction was 74% completed.

In October of 2015 and May 2016, Northern Virginia Transportation Authority awarded a combined amount of $60 million in grantsto Fairfax County. This amount is being used to reduce the project costs of the participants according to the shares specified in thefunding agreement, resulting in $45 million cost reduction for DTR.

Of the total available Metrorail project contingency of $551.5 million allocated to Phase 2, $192.5 million was allocated as ofNovember 2017, and $359 million remains. The remaining contingency is expected to cover possible additional cost overruns and noadditional debt is anticipated for the project at this point. However, under the TIFIA agreement, the DTR may issue up to $150 millionin additional project debt without TIFIA approval.

DTR's repair and capital budget is well funded from excess cash flow and was on target with the consulting engineer's independent life-cycle capital cost estimates of $30.239 million budgeted for 2018. Capital projects are funded with funds on hand and annual excesstoll revenue and no additional bonds are required. No additional debt is expected to be needed for the DTR.




Since 2008, four law suits have been filed challenging various aspects of MWAA's ability to impose and use toll revenues, and the tollroad was brought to the federal district court to decide whether tolls established by the authority constitute taxes or user fees. Thelatest case was brought in July of 2016. The oral argument took place in April 2017 and the appeals court rejected all of the plaintiff'sissues. In June 2017, an appeal was filed in the Fourth Circuit Court. In November of 2017, the plaintiffs sought to exclude the federaldefendants from the appeal process. That effort was contested and is expected to delay the decision on the appeal into the thirdquarter of 2018. All prior lawsuits challenging the authority's use of tolls as taxes have been unsuccessful and no additional challengesare expected.

Revenue Generating Base: Stable, but slow growing revenue baseThe DTR is a 13.43 mile toll road completed in 1984 by VDOT to provide local access to interchanges between the Capital Beltway(I-495) and Washington Dulles International Airport (IAD). The DTR is located in the Dulles Corridor, which also carries the DullesAirport Access Highway and in its median is the location of the Metrorail project. The DTR has four lanes in each direction and providesaccess to well-established and growing employment and commercial centers in the Northern Virginia region, such as Tysons Corner,the Reston-Herndon area, IAD and eastern Loudoun County. The DTR has been operating as a toll road for over 30 years. It has onemainline and 19 exit ramp toll collection plazas. With the latest increase implemented Jan 1, 2014 toll rates for a full length trip areabout 26 cents per mile for two axle vehicles, which is high but significantly lower than the Dulles Greenway at about 34 cents permile.

DTR traffic consists of approximately 75% commuter vehicles on weekdays. Few non-congested free flow alternatives exist and nomajor significant improvements are currently planned, though non-tolled Route 7 as well as several parallel roads provide somecompetition (Interstate 66; US Route 29; US Route 50; State Route 236).

The service area economy is diverse and slowly growing. Population has been increasing slowly but steadily for the past four years.Personal income growth slowed down, but remained positive. The service area’s per capita income is 30% higher than the US average,contributing to lower sensitivity to changes in toll rates, gas prices and car affordability.

Employment in the government sector is also relatively stable, but it constitutes a large proportion of overall employment, thusmaking the service area employment sensitive to federal budget changes. A large military presence is also directly affected by cuts orexpansions of the federal budget. Larger defense allotments in the 2018 budget may have a positive effect on the military sector.

Federal tax reform may benefit the area in the short run, but in the long run may have a detrimental effect, as the larger federal deficitand higher interest rates may crowd out private investment and reduce growth. Additionally, the elimination of the mortgage interesttax deduction may have a negative effect on the housing prices, as the area has higher than average proportion of expensive residentialreal estate.

On the positive side, the number of data centers are growing and brick and mortar stores that are closing are being replaced by e-commerce fulfillment centers.

Operational and Financial Performance: Somewhat weaker than expected results tempered by expected rate increases andstrong liquidityTransactions for the toll road were down by 0.6% for 2017 compared to 2016, and 3.1% below forecast. However, toll revenues wasessentially flat at 0.2% above 2016, but 1.7% below forecast. Expenditures were 0.3% lower than in 2016. Revenue growth was alsolow at 0.2% in fiscal 2016 partially due to extreme weather events in January of 2016. Fiscal 2016 expenditures increased by or 1.5%compared to 2015.

The original 2014 forecast called for 2.8% growth in transactions and revenue for fiscal 2017. Based on a recent review of economictrends and conditions, recent performance data and updated assumptions, new estimates were developed for 2017 and 2018. Theupdated estimates indicated that 2017 transactions would fall by 0.3% compared to 2016, and 2017 revenue would increase by 0.16%.

For fiscal 2018, the revised forecast shows a 1.4% increase in transactions compared to the 1% forecasted in 2014 and a 1.4% increasein revenue compared to the 1.3% in the prior forecasted.




Fiscal 2016 total net DSCRs as calculated by Moody's dropped to 1.58x from 1.71x in 2015, while first and second senior lien DSCR wassolid at 1.78x, and first senior DSCR was very strong at 11.46x.

As of September 2017, ETC now accounts for 88% total toll revenue collections, up from 80.7% in 2013.

Toll rates were last increased 2014, with the next increase of approximately 25% planned for 2019. Prior to 2010 DTR had only onetoll increase in 2005 which was a 50% increase of $0.25. Between 2010 and 2014 toll rates increased annually in order to generaterevenues to support the Metrorail project debt. Meanwhile, the average annual drop in transactions was 2.4% from 2010-2013.

LIQUIDITYIn addition to fully funded debt service reserve funds (DSRFs) for all liens, DTR has unrestricted cash and investments of over $234million, which together with discretionary reserves and construction funds equals 2,857 days cash on hand. This is up from $220million in fiscal 2015. Cash and equivalents balances are expected to remain stable in 2017 and 2018.

Debt and Other Liabilities: High debt load is manageableDTR has four liens outstanding including $198 million of first senior bonds, $1,647 million of second senior bonds, $150 million ofsubordinate debt and $1,278 million of junior TIFIA loan for a total of $3.273 billion of debt outstanding. In addition, the authority hasa $300 million commercial paper (CP) program backed by a reimbursement agreement with JPMorgan Chase & Co. with $175 millionoutstanding as of February 1, 2018. The CP program is being used as interim financing for the project. Including the program, there is$3.4 billion of outstanding debt.

DEBT STRUCTUREThe DTR debt is back loaded. The authority is highly levered. No additional new money debt is expected, but the authority may issuerefunding bonds for interest savings in 2019.

The TIFIA loan is secured by a fourth lien on net revenues of the DTR. The Baa2 for the TIFIA is due to the large amount of debt at thislien; its deep subordination and back-loaded and escalating debt service profile. Credit strengths include a satisfactory rate covenant of1.20x and a debt service reserve fund (DSRF) at 10% of principal funded from net annual toll revenues prior to substantial completionof Phase 2. Though TIFIA may spring to first senior status under a bankruptcy related event (BRE), we believe this to be remote givenMWAA has no legal authority to file for bankruptcy. Also, there is no acceleration of debt upon a default and no cross-default betweenthe liens.

The first senior lien bonds are secured by a first lien on net system revenues; the second senior lien bonds by a second lien and thesubordinate lien by a third lien. The flow of funds is open and excess funds may flow to the VDOT after all required indenture depositsare made, however, MWAA expects all funds will be retained for the DTR, or the Metrorail Project. Per the funds flow, DTR revenuesare deposited to the Revenue Fund and applied in order of priority to the Operating and Maintenance (O&M) Funds (including O&M,Reserve and Emergency Operation and Maintenance Reserve Accounts); Extraordinary Maintenance and Repair Fund and then to payfirst senior lien debt service and DSRF deposits; second senior lien debt service and second senior lien DSRF deposits; subordinate liendebt service and subordinate lien DSRF deposits; junior lien (TIFIA) bonds; Arbitrage Rebate Fund; Renewal and Replacement ReserveFund; Dulles Corridor Enterprise Reserve and Toll Rate Stabilization Fund (DCE Reserve); Capital Improvements Fund; Metrorail ProjectFund, Latent Defects Reserve Fund (up to $20 million maximum for defects of Metrorail Project),Transit Operations Fund and finallyto the Remaining Toll Road Revenues Fund. After substantial completion of the project a portion of the DCE Reserve may be used topay current TIFIA interest if net toll revenue is not sufficient and 50% of any remaining amounts in the DCE Reserve must be used toprepay TIFIA with the balance available to the authority.

The rate covenant and additional bonds test (ABT) for the liens are:

First senior lien bonds: 2.00x Maximum Annual Debt Service (MADS)

First and second senior lien bonds: 1.35x Annual Debt Service (ADS)

First and second senior lien bonds and subordinate lien bonds: 1.20x ADS

All bonds: 1.20x ADS including all other obligations secured by toll road revenues




The DSRF requirement is cash funded at the lesser of 10% par; 125% average annual debt service (AADS) or 100% maximum annualdebt service (MADS) for first, second senior bonds and subordinate bonds and at 10% of the outstanding balances of the TIFIA loan.

TIFIA loan agreement has been authorized under DTR's existing bond indenture through the 10th supplemental indenture. The plan offinance assumes use of the authority's existing $300 million commercial paper program to provide interim project funding to be repaidfrom draws on the TIFIA loan as needed.

DEBT-RELATED DERIVATIVESNone.

Exhibit 3

Government Owned Toll Roads Methodology Scorecard

Factor Subfactor Score Metric

1. Market Position a) Asset Type Baa

b) Operating History Aaa

c) Competition Baa

d) Service Area Characteristics Aaa

2. Performance Trends a) Annual Traffic Transactions A

b) Traffic Profile Aaa

c) Five Year Traffic CAGR Baa -0.64%

d) Ability and Willingness to Increase Toll Rates Aa

3. Financial Metrics a) Debt Service Coverage Ratio A 1.58x

b) Debt to Operating Revenue Caa 17.46%

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

b) Limitations to Growth/Operational Restrictions Baa

Notching Considerations Notch

1 - Debt Service Reserve Fund level 0

2 - Open/Closed Flow of Funds -0.5

3 - Days Cash on Hand 1

4 - Other Financial, Operating and Debt Factors 0

Scorecard Indicated Rating: A2

Source: Moody's Investors Service

PENSIONS AND OPEBThe authority participates in two United States government pension plans: the Civil Service Retirement System and Federal Employees'Retirement System. Each is considered cost-sharing, multiple employer public employee retirement system.

Moody’s adjusted net pension liability (ANPL) in 2016 for the DTR is $8,498,000 compared to the authority's reported $406,000 NPL.Unfunded pension liabilities are not considered to have a material impact on the toll road's credit profile. Moody's adjusts the reportedpension liabilities of entities that report under governmental accounting standards, to enhance comparability across rated issuers.Under governmental pension accounting, liabilities are discounted using an assumed rate of investment return on plan assets. Underour adjustments, we value liabilities using a market discount rate for high quality taxable bonds, a proxy for the risk of pension benefits.




Management and GovernanceMWAA is a public body politic and corporate, established in 1986 with the consent of the US Congress by legislation adopted by theDistrict of Columbia and the Commonwealth of Virginia. The authority consists of a 17 member Board of Directors with 7 appointedby the Governor of Virginia subject to confirmation by the Virginia General Assembly, 4 are appointed by the Mayor of the District ofColumbia subject to confirmation by the Council of the District of Columbia, 3 are appointed by the Governor of Maryland, and 3 areappointed by the President of the US with the advice and consent of the US Senate. Members serve staggered six-year terms.




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CREDIT OPINION CLIENT SERVICES Authority, DC - Dulles Toll ...€¦ · In October of 2015 and May...

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