Kansas Turnpike Authority€¦ · 3.7x, respectively. KTA's debt management policy includes a targeted debt service coverage of 3.0x and a floor of 2.0x. KTA's revenue forecast reflects

INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION6 March 2019

Contacts

Julie E Meyer [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

Kansas Turnpike AuthorityUpdate to credit analysis

SummaryKansas Turnpike Authority's (KTA; Aa2 stable) credit profile reflects a long history ofstrong financial performance including debt service coverage ratios (DSCR) above 3.0x,implementation of rate increases as needed to maintain system operations and assetsin good condition, and above average liquidity levels around three years cash on hand.Moreover, KTA has a history of conservative debt management (all outstanding debt matureswithin 20 years) and a capital program that we expect will be primarily funded by internallygenerated cash flow.

Credit strengths

» Established, state-wide toll road with a history of strong financial performance

» Stable traffic trends through the recession combined with a history of toll increases

» Rapidly amortizing debt profile

» Future capital plans to be cash funded by toll rate increases and very limited borrowing

Credit challenges

» A slowly growing state economy

» Limited population growth, indicating future toll revenue growth will depend primarily onrate increases

» Competition from I-35, a non-tolled alternative for the Emporia-Kansas City route,though the turnpike offers a more direct route to downtown Kansas City and supportsheavy-load commercial traffic

Rating outlookThe stable outlook is based on our expectation that traffic revenues will continue to providestrong financial margins and above average DSCRs and that the authority will retain strongliquidity levels around three years while undertaking pay-as-you-go capital projects.

Factors that could lead to an upgrade

» The Aa2 is the highest rating for the government owned toll road sector and is unlikely togo up

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

Factors that could lead to a downgrade

» Tightening of financial metrics, or a substantial increase in debt for projects that don't generate toll revenues and weaken DSCRsbelow 2.5x

» A substantial decrease in liquidity below one year of cash on hand

Key indicators

Exhibit 1

Kansas Turnpike Authority Key Indicators [1]

2014 2015 2016 2017 2018

Total Transaction Annual Growth (%) 0.9 4.9 5.9 0.1 -1.7

Debt Outstanding ('000s) 219,235 207,030 194,490 181,415 167,795

Debt to Operating Revenues (x) 4.4 1.9 1.7 1.5 1.3

Senior Lien Debt Service Coverage by Net Revenues (x) 5.73 3.07 3.3 3.6 3.7

Total Debt Service Coverage by Net Revenues (x) 5.73 3.07 3.3 3.6 3.7

[1] Fiscal year end changed during fiscal 2014 to June 30 from December 31Source: Kansas Turnpike Authority; Moody's Investors Service

ProfileThe Kansas Turnpike is a 236-mile-long highway standard toll road that lies entirely within the State of Kansas (Issuer rating Aa2,stable), and connects its four largest cities: Kansas City, Topeka, Wichita and Lawrence in the eastern part of the state. This turnpikealso connects the state with Interstate 70 and Interstate 35. KTA has been operating as a tolled road since 1956.

Detailed credit considerationsThe turnpike has a history of steady traffic growth with a five-year compound annual growth rate (CAGR) of 2% between 2013 and2018. Toll rates were raised twice (2013 and 2016) during this period. Another rate increase was implemented in October 2018 (fiscal2019). Transactions leveled off somewhat in fiscal 2017 and declined in 2018 and the first half of fiscal 2019. Toll revenues continue togrow in the mid-single digits due to the rate increases which helps demonstrate elasticity of demand and by extension resiliency.

Revenue Generating Base: Primarily passenger traffic composition; proactive rate setting drives revenue growthWe expect transaction growth will remain stable to modestly positive over the next few years. Despite growth from commercialvehicles, total traffic was down 1.7% in fiscal 2018 primarily due to changes in Wichita restricting westbound access to US54/400 andthe opening of K-10 between Lawrence and Kansas City. According to Moody's Analytics, the Kansas state economy is performing well,expanding at a faster pace than the Midwest and keeping up with the nation. The state's unemployment rate at the end of 2018 stoodat 3.3%, the lowest since 1990. Longer term growth will be constrained by tepid population growth and weak migration patterns.

Passenger traffic, which we generally consider to be more resilient to downturns when compared with commercial transactions,comprises about 90% of transactions totaling 39.5 million in fiscal 2018. Passenger vehicles only represent about 66% of grosstoll revenues. This is due in part to the distance tolling system used, with shorter distances representing a larger number of tolltransactions. The turnpike is primarily a commuter road that serves major population centers in the eastern half of the state.

Commercial traffic tends to be more volatile. The authority saw declines in both 2008 and 2009 with slow recovery, but the losseswere recouped and commercial transactions surpassed the pre-recession peak in fiscal 2017. Commercial traffic increased another 6%in fiscal 2018 after KTA increased vertical clearances on bridges and began providing other amenities to encourage usage.

KTA charges a cash toll rate and a lower electronic rate for travelers with K-TAG or another compatible transponder. Electronic tollcollection (ETC) represents approximately 62% of traffic compared with 36% from cash and 1.5% video enforcement. To promote

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 6 March 2019 Kansas Turnpike Authority: Update to credit analysis


ETC penetration, the authority offered a sticker version of the transponder to customers starting in 2014. By 2018, there were morethan 750,000 active transponders compared with 147,000 in 2012. The authority continues to work toward interoperability with otheragencies. To date, the multi-state NATIONALPASS, the Oklahoma PikePass, Bestpass, PrePass and the Texas tags (EZ TAG, TxTag,TollTag) work on the KTA system. Violations are relatively low at 1.5% of total traffic volume.

While the authority has independent rate setting ability, all rate changes must be approved by the board of the directors, three ofwhich are political appointees, and the remaining two are on the board by virtue of their status as elected officeholders in the StateHouse and Senate. The authority has a history of intermittent toll increases going back to 1961, with more regular increases in recentyears. The last two rate increases went into effect in 2016 and 2018. Under the current rate structure, cash rates for passengers andcommercial vehicles saw increases of 12.5% and 10%, respectively. A full-length 236-mile trip from the South Haven interchange nearthe Oklahoma border to the Eastern Terminal in Kansas City costs $15 for passenger cars and $38.25 for a five-axle tractor-trailer. ETCusers generally have a 25% discount. Management's current five-year forecast model does not incorporate additional rate increases.

There is some competition from the non-tolled I-35 for the Emporia-Kansas City route. The turnpike offers a more direct route todowntown Kansas City, and supports heavy-load commercial traffic. This toll-free, tax-supported section of I-35 provides access toOttawa before entering the Kansas City Metropolitan Area, where it serves Johnson County, and Kansas City, Kansas. Nevertheless,KTA's operating history is generally stable. Single year transaction declines have been 2% or less, including during the recession, whilerevenues remained stable or grew during these periods which indicates a good degree of resiliency.

Operational and Financial Performance: Coverage and liquidity expected to remain very strongWe expect debt service coverage ratios to remain comfortably above management's targeted 3.0x over the near term based on ourexpectation of stable traffic performance and a declining debt service structure. Management's forecast model for planning does notassume additional rate increases over the next five years. Fiscal 2017 and 2018 ended with debt service coverage ratios of 3.6x and3.7x, respectively. KTA's debt management policy includes a targeted debt service coverage of 3.0x and a floor of 2.0x.

KTA's revenue forecast reflects a 2% compound annual growth rate (CAGR) between fiscal 2018 and 2023, which is below the 5%CAGR from 2012-2017, and is based on about 1% annual growth and some rate increases for future projects. The forecast showscoverage exceeding 5.0x by fiscal 2022. Coverage could still meet management's target of 3.0x with a negative CAGR of -3% over theforecast period.

LIQUIDITYWe expect KTA will continue building its already strong liquidity profile. As of fiscal 2018, unrestricted and discretionary reservesstood at $144 million, having grown each year since 2012. This translates to a very strong 1,123 days in fiscal 2018. The cash balance isprojected to decline somewhat in fiscal 2019 due to use of reserves for projects but will remain above 1,000 days. KTA has a policy tomaintain at least 400 days cash.

Many of the projects contemplated in KTA's Long Term Needs Study developed in 2015 have been completed or are currentlyunderway. Current and future projects will be cash funded and include the conversion of the Southern Terminal Toll Plaza toOpen Road Tolling, truck parking improvements at the Topeka service area, interoperability and interchange and service area rampimprovements. Work continues on the East Kellogg Improvement project, which KTA is implementing in conjunction with KDOT andthe City of Wichita. The project will be the first all-electronic interchange on the KTA system and will not offer a cash option. Theauthority will spend approximately $43 million on projects in fiscal 2019. Thereafter, the annual cash spend on capital will hoveraround $22 million. We expect the authority will continue building liquidity over the five-year forecast period despite cash fundingcapital needs.

The indenture establishes a Replacement Reserve Fund, budgeted at $26.7 million in fiscal 2019, held by the Trustee for the paymentof major or extraordinary renewals, repairs, replacements, additions, betterments and improvements with respect to the Turnpike. Interms of flow of funds, the Replacement Reserve Fund is situated between the Debt Service Reserve Fund and the General Fund. Post-sale, the Debt Service Reserve Fund requirement of 100% of maximum annual debt service (MADS) will be limited by the standardthree-prong test (the maximum allowable by the IRS).



Debt and Other Liabilities: Low debt burden and no new debt plans over the near termPost-sale, KTA will have an estimated $141 million in outstanding revenue bonds, representing a low 1.13x fiscal 2018 operatingrevenues. The current capital improvement plan does not include additional new money debt issuance plans.

DEBT STRUCTUREAll of the authority's debt is fixed rate and amortizes rapidly. All outstanding debt post sale will mature within 20 years (2039) and58% of principal will be amortized over 10 years. We expect the refunding will result in flatter debt service requirements in the lateryears and pull final maturity forward by one year from 2040. Annual debt service requirements between fiscal 2019 and 2029 aredeclining and flat thereafter.

Exhibit 2

Debt service requirements will decline over the next ten years and are flat through maturity

0

2

4

6

8

10

12

14

16

18

20

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040

$ M

illio

ns

Series 2019 A Series 2013A Series 2012A Series 2010A Series 2009A Pre-Refunding FY Debt Service

Series 2019A reflects preliminary refunding estimatesSource: Kansas Turnpike Authority

DEBT-RELATED DERIVATIVESNone.

PENSIONS AND OPEBThe KTA's fiscal 2018 net pension liability (NPL) and Moody's adjusted net liability (ANPL) are $15.6 million and $48.9 million,respectively. Combined with the revenue bonds outstanding, KTA's total adjusted debt to operating revenues is 1.73 which is verymodest compared with the rest of the sector.

Management and GovernanceThe authority has unrestricted rate-setting ability. The board of the authority is comprised of five members: the Chairman of theKansas Senate Transportation Committee, a member of the house Transportation Committee appointed by the Speaker of the House,two members appointed by the Governor of the State of Kansas for four-year terms, and the Secretary of KDOT. The chairman of theauthority is elected by the other members.

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.

The assigned rating of Aa2 matches the grid indicated rating.



Exhibit 3

Moody's Government Owned Toll Roads Methodology Scorecard

Factor Subfactor Score Metric

a) Asset Type A

b) Operating History Aaa

c) Competition Aa

d) Service Area Characteristics A

a) Annual Traffic Transactions Baa 39.5 million

b) Traffic Profile Aa

c) Five Year Traffic CAGR Aa

d) Ability and Willingness to Increase Toll Rates Aa

a) Debt Service Coverage Ratio Aaa 3.7x

b) Debt to Operating Revenue Aaa 1.3x

a) Asset Condition/Capital Needs A

b) Limitations to Growth/Operational Restrictions A

Notching Considerations Notch

1 - Debt Service Reserve Fund level 0.0

2 - Open/Closed Flow of Funds 0

3 - Days Cash on Hand 1.0

4 - Other Financial, Operating and Debt Factors 0.0

Scorecard Indicated Rating: Aa2

1. Market Position

2. Performance Trends

3. Financial Metrics

4. Capacity, Capital Plan and Leverage

Source: Moody's Investors Service



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Contacts

Julie E Meyer [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


Documents

Kansas Turnpike Authority€¦ · 3.7x, respectively. KTA's debt management policy includes a targeted debt service coverage of 3.0x and a floor of 2.0x. KTA's revenue forecast reflects