NEW YORK--()--Fitch Ratings upgrades to 'A' from 'A-' the rating on approximately $90 million of outstanding Canaveral Port Authority (the port, the authority) port revenue bonds. The Rating Outlook for all authority bonds is Stable.
The upgrade to 'A' reflects a return of the Port's financial profile to levels seen before the downturn, driven in large part by the successful completion of the new cruise terminal and the arrival, as expected, of the Disney Fantasy. It is Fitch's view that current financial margins are sustainable. Same day cruises have also picked up and most operating revenue components are up as well. Even assuming a reduction in net revenue going forward, the Port's financial ratios including debt service coverage and leverage, all remain consistent with an 'A' rating.
KEY RATING DRIVERS
MARKET PROXIMITY WITH INDUSTRY CONCENTRATION: The port benefits from its proximity to Orlando's tourist market, a driver for Disney and other cruise traffic. However, nearly 80% of operating revenue comes from the multi-day cruise business. Despite the exposure to discretionary spending, the cruise business has shown modest resilience during the recent economic downturn.
REVENUE SUPPORTED BY MEDIUM TO LONG-TERM CONTRACTS: For 2013, $41 million in operating revenue is contractually obligated, representing 63% of revenue. Cruise lease expirations are staggered at 2014, 2015 and 2027, providing some stability to net revenues. Other business lines are more volume dependent, leading to some fluctuation in net revenue as the larger economy experiences cycles.
FLEXIBLE CAPITAL PROGRAM: The port's capital program is modestly sized and flexible. The fiscal year (FY) 2012-FY2016 capital improvement plan (CIP) totals $185 million in project costs, with no additional leverage expected to fund the program.
STRONG FINANCIAL PROFILE: The port's healthy financial performance has generated strong financial margins and coverage levels in recent years, despite the economic downturn. Debt service coverage, currently at 3.25 times (x) has remained above 2.0 throughout the past decade, and days cash on hand has remained at or above 250 days. Net debt to CFADS is modest at 2.27x, and is expected to drop as the authority continues to pay down its debt. In addition, while not pledged to bondholders, the port's credit is further enhanced by the authority's ability to levy an ad valorem tax.
FIXED RATE DEBT WITH STRONG COVENANTS: All of the port's debt is fixed rate, and matures by 2023. The rate covenant and additional bonds test provide sound protection as they are tied to producing at least 1.25 times (x) coverage of maximum annual debt service (MADS).
--Substantial changes in cruise passenger traffic serviced by the cruise lines that weakens lease renewals; significant changes in cargo tonnage processed at the port.
--Marked increase in diversity and strength of contracted revenues outside of the cruise business.
--Negative divergence from current leverage and coverage ratios due to changes in the port's cost structure or scope of capital plan.
Parity bonds are secured by a first lien on gross revenues derived from port operations. Supplemental revenues, including federal or state grants, along with ad valorem taxes or revenues derived from the operation of special purpose facilities are not pledged for debt service.
Port Canaveral's proximity to Orlando and other popular tourist destinations, including Walt Disney World and Universal Studios theme parks, provides underlying support to Canaveral's cruise business. The port also benefits from its central geographic location, providing shippers with easy access to Central Florida and the surrounding region. The port's accessibility to the Orlando region and favorable sailing distance to popular Caribbean destinations prompted the Walt Disney Company to base the operations of the Disney Cruise Line at Canaveral beginning in 1998. Disney's 4,000-passenger ship, the Disney Dream, made its debut in January 2011 and was joined by its sister ship the Disney Fantasy in March of 2012. Under an agreement that runs through 2027, Disney guarantees 150 annual calls, translating to $15.6 million in revenues and growing, and maintains exclusive use of Canaveral's Terminal 8; Disney is reimbursing the port for $22 million in improvements made to the facility (completed in 2010) through a passenger facility charge of $3.50 charged to customers. In addition to its agreement with Disney, the port has an agreement through fiscal 2014 with Carnival under which Carnival agrees to maintain 2 ships at port and provide volume guarantees that translate to $15.4 million and growing. A similar agreement with Royal Caribbean guarantees home-porting of at least one ship at Canaveral (Royal Caribbean currently maintains two ships at port), and can provide between $4.6 million to $12.0 million, depending upon ship size.
The presence of Disney's newest ships as well as the addition of Carnival's Ecstasy in 2012 added significant passenger capacity at the port; passenger volume is expected to increase to about 3.7 million by 2013. To further develop its cruise business the authority recently completed an additional terminal, Cruise Terminal 6, in the summer of 2012. This terminal will provide residual capacity to accommodate current and future cruise liners at the port, as the port is currently operating at capacity.
The port is exposed to the discretionary nature of cruise spending; cargo's correlation to volatile economic cycles, particularly construction activity in Central Florida; and competition for both cruise and cargo volume from ports in Florida and throughout the south-eastern U.S. Nearby ports include Miami, Fort Lauderdale (Port Everglades), Jacksonville, and Tampa. Fiscal 2012 revenues are up 18%, reflecting the new ships and follows a 19% increase in 2011. Passenger drops in recent years have mainly been driven by the decline of one-day gaming cruises. Multiday cruise passengers increased 13.9% and 10.3% in fiscal 2011 and 2010 respectively; one day cruises decreased considerably during that time, though a new one day gaming ship began operations in late fiscal 2011. Fitch notes that the discretionary nature of such spending and the non-essentiality of such a service to the market expose the port to economic pressures which could stress the authority's financial performance and flexibility despite MAG structures in place.
Fiscal 2012 cargo tonnage dropped 14% following an increase of 41.3% in 2011, showing the volatility of volume in this business. Cargo growth is largely driven by petroleum tonnage processed at the port. Volume at Seaport Canaveral fuel storage, which began operations at the port in early 2010 did fall by 15% in FY 2012. However, the port's narrower and less diverse cargo operation relative to Florida peers limits tonnage growth to homebuilding and infrastructure activity in the surrounding area.
The authority's operating margin (excluding depreciation and amortization) improved to 59% in 2012 from 51% in 2011 and represents a banner year for the port. It also reflects a continued improvement of margins since the lows of 38% seen in 2008 and 2009. Fiscal 2012 operating revenue increased 18.3% in 2011, building on 19% in 2011. Operating expenses declined slightly by 3%. Management was able to contain operating costs through the recent downturn, thus maintaining strong coverage and margins. Current coverage levels are healthy at 3.25x for fiscal 2012 and a projected 3.15x for fiscal 2013. Fitch sensitivity scenarios contemplate low growth or declines in cruise passenger and cargo growth and escalating operating expense levels. Under such stress scenarios, coverage remains healthy at 2.5x or better over the next five years. Port leverage currently stands at 1.97x net debt to CFADS, comparing favorably to peers, and liquidity levels are consistently healthy at over 300 days cash on hand. No new borrowing is anticipated at this time.
The authority's proposed capital improvement program for the 2012 - 2016 timeframe is relatively modest at $185 million; management has indicated that these projects will not be debt funded. Many elements of the plan are discretionary in nature, and non-critical projects may be delayed or terminated should the port's financial performance be subject to economic or operating stresses.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);
--'Rating Criteria for Ports' (Sept. 29, 2011).
Applicable Criteria and Related Research
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Ports