Fitch Affirms NC State Ports Auth's Port Facilities Revs at 'BBB+'; Outlook Revised to Positive
Fitch Ratings has affirmed North Carolina State Ports Authority's (NCSPA, or the authority) approximately $40.2 million senior lien port facilities revenue bonds, series 2010A&B at 'BBB+'. The Rating Outlook has been revised to Positive from Stable.
Fitch does not rate the authority's $10 million outstanding series 2013 revenue bonds, which are on parity with the rated debt, or $9.5 million in outstanding subordinate lien series 2014 port facilities revenue bonds. The port also has an unrated $27 million in capital equipment leases.
The Positive Outlook recognizes the authority's continued strong debt service coverage ratio (DSCR) and decreasing leverage position, with a capital plan largely funded by state appropriations, grants and free cash flow. While historically the commodity-heavy cargo mix has experienced volatility, the authority's port modernization plan and growth strategy provide potential for cargo diversification and the prospect of additional volumes over the near term. To the extent the authority can demonstrate a stable operational position and similarly strong financial metrics while advancing its capital plan, a rating upgrade may be warranted.
KEY RATING DRIVERS
Revenue Risk: Volume - Weaker
Regional Port Seeking Diversification: The port system primarily serves a limited regional base and has some volatility in throughput through economic cycles. From a product standpoint, there is reliance on bulk and breakbulk cargoes for the majority of volume throughput with concentration in wood/forest- and phosphate-based cargo. Exposure to the extremely competitive southern Atlantic port environment, of which the North Carolina ports have a relatively small market share, remains a concern. However, volumes have shown resilience in recent years, and the diversity of trading partners and import/export exposure is adequate. The authority has seen an increase in private investments and state appropriation investments, which have helped grow both breakbulk and container business at the port and may lead to further growth in the medium term.
Revenue Risk: Price - Midrange
Fluctuating Cash Flows, Some Protection: The port system remains exposed to cash flow volatility associated with economic cycles and fluctuations in commodity prices and global demand, given the port's status as an operating port with moderate levels of contractually obligated payments (20% of revenues in fiscal 2015). However, Fitch takes comfort in the authority's long operating history and strong operating margins and coverage levels, which are expected to be maintained over the medium term even with minimal growth.
Infrastructure/Renewal - Midrange
Modest Capital Plan: The current capital program is modest at $143.8 million and is funded with a mix of state appropriations, grants and port revenues. The ports leadership is now stable with a clear plan in place for future needs, with no new borrowing expected for the capital plan in the medium term.
Debt Structure - Midrange
Moderate Debt Structure: The authority has a stable amortizing debt structure, with some variable rate exposure. The rated series 2010A&B bonds are fixed rate with no refinancing risk and a level amortization profile. The debt service reserve fund is fully cash-funded. Covenants are adequate, with a senior rate covenant of 1.35x and an all-in covenant of 1.05x.
Financial Profile: The authority has a history of somewhat volatile but generally satisfactory operating and financial performance, with senior lien debt service coverage ratios of 3.1x or better in recent years, reaching 4.71x coverage in fiscal 2015. All-in coverage is also strong at 2.37x in fiscal 2015. Net debt levels are moderate relative to cash flow and are expected to trend further downward (4.48x net debt/cash flow available for debt service), and liquidity is moderate at 303 days cash on hand.
Peers: Virginia Port Authority (rated 'A+', Stable Outlook) and Alabama State Ports Authority (rated 'A-', Negative Outlook) are the two closest peers to NCSPA, in part due to their comparable status as state-owned port facilities located in the southeast section of the country. The ports also share low debt expectations for their capital plans. In terms of metrics, NCSPA has stronger coverage and lower leverage than both of its peers. However, NCSPA is much smaller in terms of tons moved through the port, which accounts for some of the rating differential.
-- Metrics maintained at or higher than the current level, with leverage decreasing to a level commensurate with the port's revenue profile, could result in upward rating movement
-- Fully realized funding for the five-year capital plan, with very limited or no use of debt, would be viewed positively
--Sustained lower coverage levels due to weaker operational trends or increased borrowings could signal rating pressure.
SUMMARY OF CREDIT
The authority saw an 11.7% increase in operating revenues in FY2015, after an 11.5% decline in 2014. The increase was partially driven by increased volume from west coast diversion tied to the labor strike, as well as strong metal volumes and growth in non-Asian services. With the exception of FY2014, operating revenues have been steadily growing since the recession, posting a five-year CAGR of 5.6%. An almost 3% decline in operating expenses, coupled with the aforementioned revenue growth, resulted in a very strong EBITDA margin of 35%, the strongest in the past decade. February 2016 year-to-date (YTD) financial results are generally in line with February 2015 YTD, showing a 33% EBITDA margin as compared to February 2015's 34%.
The authority's overall total cargo volumes (including both ports) have largely been trending up since the recession, with the exception of FY2014, which saw a 19% decline in total tonnage, largely attributed to the slowing global economy and commodities market. The west coast labor dispute resulted in cargo diversion to east coast ports, resulting in a 6.4% rebound in growth from the FY2014 decline. Total tonnage growth has continued in 2016, with YTD February 2016 growth of 6.9%, largely driven by Morehead, while Wilmington has remained relatively flat.
The authority's capital plan totals $143 million over the next five years and is primarily state- and grant-funded. The capital plan focuses on upgrading and modernizing the ports in order to accommodate post-panamax ships expected this summer. No additional bonding is included in the current capital plan and the authority has represented that it does not expect to enter the capital markets in the near term. Other projects currently in the works and privately funded include the port's new on-terminal Cold Storage Facility to serve refrigerated cargo, expected to be operational by summer 2016; wood pellet storage and loading facility at Port Wilmington will be operational in the fall of 2016; the opening of International Paper's new fluff pulp line at its nearby Riegelwood mill, which will drive additional cargo through the port; and development of regularly scheduled intermodal on-dock rail services, which will be supported by CSX's Carolina Connector Intermodal Rail Terminal in Johnston County (funded by CSX and the state of North Carolina, scheduled for completion in 2019).
Fitch conducted two sensitivity scenarios. The base case scenario assumes a 2.9% increase in revenue in fiscal 2016, based on the authority's budgeted financials, followed by steady 2.0% growth per annum from 2017 to 2020. Costs were assumed to increase at a rate of 0.7% in fiscal 2016, based on budgeted amounts, and then increase at 2.0% per annum through 2020. Base case DSCRs are maintained above 5.01x, averaging 5.23x (senior lien debt service). Fitch's rating case was similar to its base with a 2.9% increase in revenue in fiscal 2016 as per the budget; however, revenue is then held relatively flat, decreasing at 0.1% per annum in fiscal 2017 through 2020. Costs grow at a rate of 0.7% in fiscal 2016, then 2.5% per annum thereafter. Resulting coverages average 4.50x, with a minimum of 3.97x.
The North Carolina State Ports Authority owns and operates two deep-water ports, one in Morehead City and one in Wilmington. The authority also owns two intermodal terminal networks in Charlotte and Greensboro, NC, which provide inexpensive inland transportation to and from the ports.
The bonds are secured by net revenues after the payment of operating and maintenance expenses. The deep-water ports in Morehead City and Wilmington generate most of the cargo operations and operating revenues.
Additional information is available on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Ports (pub. 20 Oct 2015)
Dodd-Frank Rating Information Disclosure Form
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