Fitch Affirms Port of Oakland, CA Senior & Intermediate Lien Revs; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the ratings for the Port of Oakland, CA's (the port) outstanding revenue bonds as follows:

--$699 million senior lien revenue bonds at 'A+';

--$420 million intermediate lien revenue bonds at 'A-'.

The Rating Outlook on both liens is Stable.

RATING RATIONALE

The port's 'A+' ratings reflect diverse revenues from aviation, maritime, and commercial real estate operations. Residual airline agreements on the aviation side coupled with long term contracts generating 80% of maritime operating revenues provide stability for the port's revenue profile and for debt service coverage. The capital improvement plan is manageable, with approximately 20% of the program expected to be funded with debt, though aviation-related passenger facility charges are expected to provide support for debt service.

The port's 'A-' rating reflects the aforementioned qualitative factors, but also considers the lower coverage levels and weaker covenant protections seen on the intermediate lien.

KEY RATING DRIVERS

O&D Traffic Base with Exposure to Competition: The port enjoys a favorable geographic location for the maritime and aviation divisions that serve a large economic area. Concentration risk from Southwest's dominant presence is somewhat offset by Oakland International Airport's high origin and destination (O&D) traffic profile, at approximately 86% of 4.97 million enplaned passengers. Competitive pressure on the aviation front, particularly from San Francisco airport, and high dependence on the Pacific Rim for maritime trade, provides some concern. Revenue Risk-Volume: Mid-range.

Diverse Revenue Base: The port benefits from revenue diversity, with 48% of operating revenues derived from maritime operations and 48% from aviation activity. The airport's costs are supported by a largely residual rate-making methodology that resulted in competitive cost per enplaned passenger (CPE) of $10.28 in fiscal 2013 (fiscal year ends June 30). Long-term contracts with robust minimum annual guarantees accounting for 80% of maritime operating revenues at the Oakland seaport provide additional downside protection for revenues. Revenue Risk-Price: Stronger.

Conservative Debt Structure: Both senior and intermediate lien port revenue bonds are fixed rate with no refinancing risk; subordinate CP is variable rate and has some refinance risk. All bond reserves are cash funded, except for approximately $36 million funded with a surety policy. The senior lien benefits from more robust covenant protections than the intermediate lien. Debt Structure: Stronger (senior); Midrange (intermediate)

Elevated Leverage and Stable Revenue Trends: The port maintained adequate liquidity in fiscal 2013 of $179 million, or 432 days cash on hand, and moderately high leverage of 6.2x net debt to cash flow available for debt service on an all-in basis in fiscal 2013. Senior coverage was healthy at 2.49x, and all-in coverage improved slightly to 1.58x.

Manageable Capital Plan with Possible Future Borrowing: The port's $573 million capital plan through fiscal 2019 is manageable, with $434 million dedicated to aviation related projects and $127 million to maritime division projects. Approximately $116 million is currently expected to be funded in future years with PFC-backed debt, while the balance will be funded with a combination of grants, passenger facility charge revenues and internal liquidity. Infrastructure Development/Renewal: Mid-range.

RATING SENSITIVITIES

--A material change in the current traffic base or the ongoing commitment from the port's anchor airline carrier, Southwest Airlines, would likely lead to a downgrade;

--Additional leveraging absent commensurate growth in the port's revenue profile would weaken financial flexibility and the credit profile.

--Significant increases in the port's cost profile, or notable declines in annual port and aviation sector revenues, would pressure margins as well as the rating.

--Given the competitive nature of the service area and recent and expected metrics, positive migration of the ratings is not expected at this time.

SECURITY

The port's senior revenue bonds are secured by a gross revenue pledge of all port revenues, including the aviation (Oakland International Airport), maritime (Oakland Seaport), and commercial real estate divisions. The intermediate lien revenue bonds are secured by a gross revenue pledge subordinate to the senior lien.

CREDIT UPDATE

The port's main business segments, aviation and maritime activities, have largely recovered after experiencing steep activity declines during the recession. On the aviation side, concentration risk remains a concern, with Southwest accounting for 68.9% of enplanements in fiscal 2013, though this risk is partially offset by the high share of O&D traffic (approximately 86% in 2013) using the airport. The three-year airline use agreement expiring in 2016, is a largely residual agreement which supports airport costs. The terms of the agreement, which are largely similar to prior agreements, allows for cancellations with 30-days' notice, and do not require the port to obtain approval of the airlines to undertake capital projects or to incur debt.

Fiscal 2013 enplanements increased 3.1% over the previous year to 4.97 million. For the first 11 months of fiscal 2014 through May, enplanements are down 1.5%; this reflects drops in enplanements in the July-November period, with enplanements recovering strongly since December 2013. The airport has seen several new service additions in 2014, including Oslo and Stockholm (Norwegian Air), Chicago O'Hare (Spirit Airlines) and Baltimore (Southwest); the airport has also seen increased Hawaii service by Alaska and Hawaiian, and expanded service from Spirit Airlines, Delta, and Southwest. CPE remained competitive at $10.28 in fiscal 2013, slightly above the $9.57 level seen in fiscal 2012. Under Fitch's various forecast scenarios, the CPE is expected to remain below $12 for the next 5 years. In Fitch's view, though the recent additions of new service is encouraging, strong traffic growth remains unlikely at Oakland given the fierce competition for passengers in the San Francisco bay area.

In calendar year 2013, the seaport's cargo traffic, as measured in twenty foot equivalent units (TEUs), was essentially flat at 2.3 million (up 0.1%). For the first 10 months of fiscal 2014 through April, loaded TEUs are up 1.9% over the same period a year prior, and are also up 1.8% above budget. Fiscal year 2013 maritime revenues were down slightly by 0.7%, though the Port presently expects a 1.5% decline for fiscal 2014, reflecting shifts in cargo among terminals. Fitch views favorably the port's strong minimum annual guarantee agreements (MAGs) and other fixed lease payments which and are long-term in nature, which are expected to account for roughly 80% of total maritime revenue in 2014. Three agreements representing roughly 10% of MAGs are set to expire in 2014 (Ports America OHT B25-26, Oakland International Gateway/BNSF, and Shippers Transport Express) and are currently being renegotiated. Fitch will monitor developments with respect to those agreements.

Favorable financial performance has resulted in improved debt service coverage ratios in fiscal 2013 when compared to the prior year, with all-in coverage of 1.59x above fiscal 2012 levels of 1.50x. Senior lien coverage remained strong, increasing to 2.49x in 2014 from 2.33x. The port was able to achieve an increase in net revenue as a result of higher operating revenues (up 3.1% to $316 million) driven largely by increases in the aviation division and limited operating expense growth net depreciation and amortization (up 0.6% to $152 million) resulting from continued cost control efforts. The port presently estimates fiscal 2014 debt service coverage at 3.17x on the senior lien, 1.55x for senior and intermediate liens, and 1.54x on an all-in basis including CP.

The port anticipates eventually issuing PFC-backed debt for approximately $116 million of its $573 million capital program through 2019; however, no PFC debt is assumed in the current plan of finance, as management indicates the actual timing of a long-term financing secured by PFC revenues has not yet been determined and will be based upon actual capital expenditures and market conditions. In the interim, the plan assumes that approximately $116 million in additional CP is issued by 2019.

Even with additional CP borrowing that is assumed in the capital program leverage is moderate and coverage is stable, remaining consistent with the current rating levels under various forecast scenarios. Under Fitch's base case which assumes modest traffic and revenue growth along with conservative expense assumptions through 2019, coverage remains above 2.7x on the senior lien, above 1.3x for the intermediate lien, and at 1.3x on an all in basis. Leverage rises to 7x, but returns to below the 6x range by the end of the five-year forecast period. In the more conservative rating case, which assumes flat revenues and expense growth 50 basis points above the base case, coverage remains above 2.5x on the senior lien, at or above 1.2x for the intermediate lien, and at or above 1.1x on an all in basis. Leverage rises to 7x and stays at that level in the rating case. Fitch notes that coverage and leverage levels produced under the rating case are consistent with current rating levels.

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 Airports' (Dec. 13, 2013);

--'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 Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

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=838792

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Contacts

Fitch Ratings
Primary Analyst
Tanya Langman
Director
+1-212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emma W. Griffith
Director
+1-212-908-9124
or
Committee Chairperson
Chad Lewis
Senior Director
+1-212-908-0886
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Tanya Langman
Director
+1-212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emma W. Griffith
Director
+1-212-908-9124
or
Committee Chairperson
Chad Lewis
Senior Director
+1-212-908-0886
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com