Fitch Affirms Port of San Francisco, CA's Revs at 'A', Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'A' rating on approximately $34.1 million of Port Commission of the City and County of San Francisco (the port) revenue bonds. In addition, the port has subordinate obligations outstanding for $35.4 million of certificate of participation (COPs) issued by the city, a $2.5 million California Department of Boating and Waterway loan, and $276 thousand advance from the San Francisco Public Utilities Commission that are not rated. The Rating Outlook is Stable.

The rating reflects the port's low debt level and strong debt service coverage ratios (DSCRs). The rating also takes into account concerns related to the port's ability to address the backlog of deferred maintenance and state of good repair needs going forward.

Key Rating Drivers:

Strategic Location with Stable Demand: The port's valuable real estate assets serve as a regional, national and international destination. Port properties have maintained strong occupancy rates even through the economic downturn. This unique positioning serves to partially mitigate the port's exposure to cyclical variations in both real estate and discretionary tourism spending, as well as to competition on the maritime side of the business.

Revenue Risk- Volume: Midrange

Diverse Revenue Streams: Diversity of revenue generated from real estate, parking, and maritime assets has led to a stable operating profile for the port, with non-cancellable operating leases and minimum annual guarantees providing a base level of revenue stability.

Revenue Risk- Price: Midrange

Long-Term Capital Improvement Needs Remain: The burden of the port's aging infrastructure and overdue maintenance requirements remain a concern. The port estimates that over the next 10 years its facilities require approximately $1.6 billion to maintain a state of good repair, and $464 million for conditional seismic work. The majority of plan financing remains currently unidentified. Fitch will continue to monitor the port's ability to prioritize state of good repair and capital enhancement work to best utilize identified funding.

Infrastructure Renewal and Development: Weaker

Stable Debt Structure: The port's debt is 100% fixed rate, with stable annual debt service requirements. The port plans to issue approximately $22.8 million of additional bonds (on parity with existing bonds) in the upcoming weeks to fund the new cruise terminal project, repairs to pier 29 1/2 and 31, and other various projects. The port also utilizes certificates of participation (COP) issued through the City of San Francisco for some of its capital needs.

Debt Structure: Stronger

Strong Financial Profile: The port has low leverage (unrestricted cash is greater than bonds outstanding) with strong debt service coverage of 6.5x. The port has an internal policy to maintain 1.75x coverage on debt going forward, and management intends to manage coverage to 2.0x or higher. Liquidity position is healthy with $80.4 million of unrestricted cash, equivalent to 461 days cash on hand.

Rating Sensitivities:

--Failure to find a sustainable solution to the capital program, including refurbishment of infrastructure and handling of overdue deferred maintenance, in addition to the port's ability to secure funding for unfunded portions of its capital program;

--Health of the San Francisco economy, including the real estate market and discretionary tourism spending.

Security:

The bonds are special, limited obligations of the Port Commission payable solely from net revenue and from amounts on deposit in certain funds and accounts held under the indenture.

Credit Summary:

The port is planning to issue $22.8 million of series 2014 revenue bonds in the upcoming weeks to fund the new cruise terminal project, make repairs to port 29 1/2 and 31, and other various projects. While the details are not final, the bonds are expected to be on parity with existing series 2010 bonds with final maturity in 2043. The port now also has subordinate obligations to the city for COPs issued in October 2013, used to finance the new cruise terminal, and repayment of commercial paper used for various port improvements.

Port operating revenues in 2013 increased 5.5% to $81.5 million and have grown steadily in the last five years at a compound annual growth rate (CAGR) of 4.8%. The port's diverse mix of real estate assets and long-term agreements provided revenue stability through the economic downturn. The port's recent revenue growth is attributable to higher parking, ship repair, and cruise revenues.

Operating expense growth (excluding non-cash adjustments) increased by 4.6% to $66.4 million in 2013. Increased staffing for the America's Cup yacht race has led to higher cost in the last two years. Higher pension and benefit cost have also driven operating expense growth in recent years. Operating expenses have grown at a five-year CAGR of 4.1%.

The DSCR in 2013 was strong at 6.5x. The port's five-year forecast projects average annual revenue growth of 3.8% as a result of the new cruise terminal and implementation of a $6 passenger facility charge, parking meter operations, and re-leasing of America's cup facilities. Operating expenses are projected to increase at an average annual rate of 3.6%. Under this scenario, DSCRs are expected to remain strong. Coverage is expected to decrease to 4.7x in 2015 then increase to 5.7x in 2018. Coverage including subordinate obligations decreases to 2.7x in 2014 then increases to 3.5x in 2018.

The port's 10-year capital plan includes $1.6 billion of needed state of good repair and $464 million of conditional seismic work. The port has identified $$669.5 million of funding for state of good repair needs and $78.5 million for conditional seismic repairs. Funding sources include additional port revenue bonds, GO bonds for parks related projects, infrastructure financing districts (IFD) bonds, port capital budget funds, and others. Fitch expects that the port will look to create partnerships and leverage various funding and financing options to address the significant backlog of deferred maintenance and the projected replacement costs in the plan. The port is focused on prioritizing refurbishment needs to best utilize funds available for capital development.

Fitch continues to note that the port's funding needs are considerable over the life of the plan. The port's ability to generate revenues through its real estate assets, many of which were constructed 100 years ago, is dependent upon maintenance of the facilities in order to keep them functional, market competitive, and code compliant. Failure to address deferred maintenance requirements may negatively impact the port's revenue base and underlying credit quality.

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

Applicable Criteria and Related Research:

--Rating Criteria for Infrastructure and Project Finance (Jul. 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=826155

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Zane Latham, +1 415-732-5612
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Tanya Langman, +1 212-908-0716
Associate Director
or
Tertiary Analyst
Raymond Wu, +1-212-908-0845
Associate Director
or
Committee Chairperson
Scott Zuchorski, +1 212-908-0695
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Zane Latham, +1 415-732-5612
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Tanya Langman, +1 212-908-0716
Associate Director
or
Tertiary Analyst
Raymond Wu, +1-212-908-0845
Associate Director
or
Committee Chairperson
Scott Zuchorski, +1 212-908-0695
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com