Fitch Affirms Canaveral Port Authority Seaport (FL) Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on approximately $30 million of outstanding Canaveral Port Authority (the port, the authority) port revenue bonds, series 2005 and 2006 A&B. The Rating Outlook for all authority bonds is Stable.

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 Risk: Volume - Midrange

REVENUE SUPPORTED BY MEDIUM- TO LONG-TERM CONTRACTS: For 2014, $43.8 million in operating revenue is contractually obligated, representing 58% of budgeted revenue. Major cruise lease expirations are staggered at 2019, 2024 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. Revenue Risk: Price - Midrange

ELEVATED BUT FLEXIBLE CAPITAL PROGRAM: The port's 2014-2018 capital improvement program (CIP) is larger than in past years at approximately $503 million, with $104 million in project costs expected to come from additional borrowing. Much of the remainder is funded through grants and, as such, the issuer retains some flexibility in the event of port underperformance. The project funded through borrowing is nearly 50% funded by Royal Caribbean, International (RCI), over the course of a new agreement with the port running through 2024. Infrastructure Development / Renewal - Midrange

FIXED-RATE DEBT WITH STRONG COVENANTS: All of the port's rated debt is fixed rate, and matures by 2021, with other parity private placement debt extending out to 2028. The rate covenant and additional bonds test provide sound protection as they are tied to producing at least 1.25x coverage of maximum annual debt service (MADS). Debt Structure: Stronger

STRONG FINANCIAL PROFILE: The port's healthy financial performance has generated strong financial margins and coverage levels in recent years despite the economic downturn exhibited by a revenue compound annual growth rate (CAGR) since the pre-recession peak in 2006 of 4.7%. The net revenue debt service coverage ratio (DSCR), currently at 3.42x, has remained above 2.0x throughout the past decade, and days cash on hand has remained above 300 days over the same period. Net debt-to-cash flow available for debt service (CFADS) is modest at 2.29x, though is expected to rise in the short term as the authority takes on 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.

RATING SENSITIVITIES

--Substantial changes in cruise passenger traffic serviced by the cruise lines that weakens lease renewal trends; 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 the port's projected leverage and coverage ratios due to changes in the port's cost structure or scope of capital plan.

SECURITY

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.

CREDIT SUMMARY

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. The 2,700 passenger Disney Magic returned to the port in January of 2014 and currently plans to remain at Canaveral through May of this year. 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 (PFC) of $3.50 charged to customers.

In addition to its agreement with Disney, the port has an agreement through fiscal 2019 with Carnival under which Carnival agrees to maintain two ships at port and provide volume guarantees that translate to $15.4 million and growing ($19.6 million in fiscal 2013).

A new agreement recently announced by RCI runs through 2024 and increases minimum annual guaranteed (MAG) revenue to the port - primarily through parking, wharfage, and dockage fees - from $12.2 million in fiscal 2014 under the previous contract to $18.4 million by 2024. In addition, similar to the agreement with Disney, RCI is sharing in the cost of a new Cruise Terminal 1 in the amount of $48 million to be generated over the life of the contract through a PFC levied at between $4 and $5 per cruise passenger. RCI will retain preferential use of the new facility and will base a third ship in Canaveral starting in November of 2014 with 26 voyages scheduled for next year.

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; multi-day passenger volume has hovered around 3.7 million the last two full fiscal years, 34% above the pre-recession peak. Budgeted total cruise passengers of 4.2 million in 2014 are the result of the return of the Disney Magic in January offset to some degree by Carnival's replacement in April and May of two slightly larger-capacity ships with smaller, 5,976 capacity compared to 6,620. The budgeted 4.2 million passengers would be below the pre-recession total peak of 4.6 million by 9%; this level occurred in 2004 when the more volatile one-day cruise business was contributing 43% of passengers (now 7%). Following drastic declines in the one-day business after 2007, a new one-day gaming ship began operations in late fiscal 2011 and is contracted at the port through 2020. To further develop its cruise business the authority completed an additional terminal, Cruise Terminal 6, in the summer of 2012. This terminal and the new terminal 1 will provide residual capacity to accommodate current and future cruise liners, as the port was previously operating at capacity. Fitch notes that the discretionary nature of cruise 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.

In addition to the discretionary nature of cruise spending, the port is exposed to volatile economic cycles. In particular, it is exposed to petroleum tonnage and construction activity in Central Florida, as well as competition for both cruise and cargo volume from other Florida ports and others located in south-eastern U.S.

Fiscal 2012 cargo tonnage dropped 14% following an increase of 41.3% in 2011, showing the volatility of cargo volumes. In fiscal 2013, cargo tonnage decreased marginally, reflecting a 13% drop in petroleum tonnage offset by gains in construction-related shipping materials. Cargo growth is largely driven by petroleum tonnage processed at the port. 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. Two new cargo berths are scheduled to open this fiscal year and the port is exploring further partnerships with private terminal operators in hopes to expand this business in the medium- to long-term.

The authority's operating margin (excluding depreciation and amortization) fell slightly in 2013 to 57% from 59% the year before, the highest operating margin ever achieved at the port. These levels are considerable improvements since the lows of 38% seen in 2008 and 2009. Operating expenses grew nearly 11% in fiscal 2013 as new CIP projects came online and investments were made in staffing. The increase was slightly below budget and followed a decline of 3% the previous year. Management was able to contain operating costs through the recent downturn, thus maintaining strong coverage and margins. Current DSCR is healthy at 3.42x, exceeding last year's projection of 3.15x. Fitch's Rating Case scenario contemplates a double-dip decline in cruise passengers and cargo throughput and escalating operating expense levels. Under such a scenario, net revenue DSCRs including port-projected debt service requirements associated with the new Cruise Terminal 1 remain adequate, averaging 1.9x through 2018. Net revenue coverage drops in fiscal 2015 to 1.46x when the double-dip declines occur but exhibits solid recovery thereafter to 1.64x by 2018 as Fitch assumes a modest 3% recovery in revenues streams annually and one year of expense control as management reacts to the previous revenue decline. In addition to the new terminal debt service, Fitch cases also include $15 million in new private placement debt issued in November of 2014 associated with the new welcome center facility.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Ports' (Oct. 3, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Ports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719985

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823530

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Contacts

Fitch Ratings
Primary Analyst:
Tanya Langman, +1-212-908-0716
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
or
Tertiary Analyst:
Charles Askew, +1-212-908-0644
Associate Director
or
Committee Chairperson:
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Tanya Langman, +1-212-908-0716
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
or
Tertiary Analyst:
Charles Askew, +1-212-908-0644
Associate Director
or
Committee Chairperson:
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com