Fitch Affirms Virginia Port Authority's Port Facilities Rev Bonds at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed at 'A+' the Long-Term rating on the Virginia Port Authority's (VPA) outstanding $3.5 million in port facilities revenue refunding bonds, series 2007. The Rating Outlook is Stable.

Following the July 1, 2016 principal payment, the series 2007 bonds will no longer be outstanding. VPA also has $248.5 million in parity revenue and refunding bonds outstanding which are not rated by Fitch.

KEY RATING DRIVERS

The 'A+' rating reflects strong characteristics including a leading East Coast market position in the container trade, with no capital spending needed to accommodate the new generation of larger container vessels. Intermodal links into the port are also excellent. Resilient volume performance in recent years coupled with improving financial metrics support the 'A+' rating. The general volatility in the shipping trade remains a risk, as does the ability of market share to shift to other ports as various capacity enhancement projects at competing facilities come online in the coming years.

Third Largest Atlantic Port with Container Focus: VPA is the third largest East Coast port by TEUs volume, and benefits from a diverse mix of customers. Exposure to the extremely competitive Atlantic port environment remains a concern. However, volumes have shown significant recovery since their trough in 2009, and the port's diversity of trading partners and balanced import/export exposure are viewed positively. VPA also benefits from excellent intermodal connections, with Norfolk Southern's existing Heartland Corridor and the addition of CSX's upcoming National Gateway providing double-stack rail to the Midwest. Revenue Risk Volume: Stronger

Long Term Contracts with Largest Customers: VPA's has long-term contracts with its largest customers, and minimum annual guarantees (MAGs) account for 45.4% of 2015 container throughput, providing a degree of revenue and volume stability going forward. Contracts have built-in volume increases and rate increases. Revenue Risk Price: Stronger

Sizable Master Plan: VPA's long-term capital plan through 2065 is sizable at $3.14 billion (in present value figures), with 36% attributable to the Craney Island Marine Terminal project. The Authority plans to fund the majority of projects via pay-as-you-go dollars from terminal revenue and Commonwealth port fund revenues. Approximately 13% will be debt funded, with near term issuance of Commonwealth port fund revenue bonds in 2018 and 2021 for the Craney Island project. The port benefits from strong State support, as demonstrated through the Commonwealth Port Fund. State revenues are allocated to pay certain capital and maintenance costs and providing an additional vehicle for leverage. Infrastructure Development/Renewal: Midrange

Stable Debt Structure: VPA's debt is 100% fixed rate with a steady amortization profile. However, some additional leverage is expected in the context of the capital program. Debt service reserves of $19.3 million at FY 2015 close are fully funded with cash. Debt Structure: Stronger

Sound Financial Profile: VPA shows sound historic financial performance with demonstrated willingness on the part of management to control operating expenses in recent years, in the face of challenging economic conditions and increasing competition. Pledged net revenue coverage was strong at 2.29x in 2015 (the highest seen in the last five years). In upcoming years, coverage may be pressured if additional leverage is added to the debt profile, in which case performance would be somewhat dependent on growth in the forecast period. Leverage is somewhat high at 7.6x net debt to cash flow available for debt service (CFADS) (5.8x when CEMA deposits are included), but is expected to fall to 5x or better in the next five years.

Peers: On an operating basis, peers for VPA include primary container ports such as Port of Long Beach (rated 'AA' by Fitch) and Port of Los Angeles (rated 'AA'). VPA may also be compared to North Carolina State Ports Authority (rated 'BBB+') and Alabama State Port Authority (rated 'A-') due to their comparable status as state-owned port facilities. In terms of metrics, VPA has comparable coverage and higher leverage than these peers. While liquidity is relatively low compared to higher rated ports, Fitch notes the support VPA receives from the state by way of the Commonwealth Port Fund.

RATING SENSITIVITIES

Negative: Given the large scale of operations at the port relative to peers, metrics are sensitive to the ability to control operating expenses. Continued efforts to contain costs and improve net revenues are important to maintenance of the current rating.

Negative: VPA's capital program anticipates additional borrowing. Should the financing plan include senior parity borrowings, coverage levels and financial flexibility may be pressured over time.

Positive: Further positive rating action is unlikely at this time. However, Fitch views a continuation of positive volume trends that translate into senior coverage levels at or above 2x as supportive of the current rating.

SUMMARY OF CREDIT

The Port of Virginia benefits from a well-balanced volume profile both in terms of import/export mix (roughly equal) and in its diversity of shippers. VPA has a diverse mix of customers, most with contracts extending 10 years or longer from time of original execution. Management indicates that minimum annual guarantees cover 45.4% of 2015 container throughput, providing some insulation from volume volatility. The port of Virginia is competitively placed to benefit from the advent of bigger ships, both in the wake of the Panama Canal expansion (expected to open June 2016) and in light of increasing all-water service from Asia via the Suez Canal.

As other East Coast ports complete projects to raise bridges and dredge deeper in order to accommodate post-Panamax ships, Virginia already benefits from a main channel dredged to 50 feet. Additionally, Norfolk is the only port on the East Coast currently authorized to dredge to 55 feet. VPA also benefits from excellent rail connections via CSX and Norfolk Southern, whose Heartland Corridor offers double stack rail to the Midwest. The port benefits from multiple scheduled services utilizing the Port of Virginia as a 'first in' or 'last out' port of call.

After seeing declining container volumes (measured in TEUs) through the recession, VPA's operations have seen robust recovery. TEUs have grown at a compound annual average growth rate (CAGR) of 5.1% since the trough in 2009, and fiscal 2015 saw an increase of 8.9% to 2.5 million TEUs. Year to date through March (nine months of fiscal 2016), total TEUs are up a further 3.6% over a year prior. For revenues, VIT gross receipts grew 14.3% in 2015, an increase driven by throughput gains and consistent with performance trends coming out of the recession (five-year CAGR from 2010-2015 of 13.0%). For fiscal 2016 year to date through February, revenues (combined VPA and VIT) are up 2.1% over last year, offset by lower volume, demurrage and storage revenues.

Fiscal 2015 saw a senior DSCR of 2.29x on pledged revenues. Under Fitch's base case forecast (based on average annual TEU growth of 3%, revenue growth of 3.4% and expense growth of 2.9% through 2024), senior coverage will average 2.4x through 2024. Should additional revenue bonds be issued during the forecast period, this level will decrease. Under the base case scenario, all-in leverage, including subordinate obligations, falls to 2.0x net debt to CFADS by 2024. Under Fitch's rating case, which contemplates more modest growth rates for TEU throughput, revenues, and expenses (2.0%, 2.1% and 2.7% respectively), pledged senior coverage migrates to 1.3x by 2024. Coverages including subordinate equipment leases are thinner. Leverage under the rating case also migrates downwards, though more slowly, remaining near 5x net debt to CFADS in 2024.

VPA's $3.14 billion Master Plan through 2065 is focused on ensuring that VPA's facilities are sufficient to meet future demand for cargo handling capacity. Key projects include utilizing advanced equipment at NIT, expanding VIG, constructing the Craney Island Marine Terminal, investment at Richmond Marine Terminal to upgrade the equipment and facilities, and reinvesting in PMT and NNMT for non-containerized cargo services. The Authority plans to fund the majority of the projects in the 2065 Master Plan via pay-as-you-go dollars from both its terminal revenue and commonwealth port fund revenues. The plan assumes approximately 13% of project costs will be debt funded, either via revenue bonds or Commonwealth Port Fund bonds. The NIT expansion program will be funded from a $350 million contribution from the Commonwealth, while the estimated $320 million VIG expansion is expected to be funded from VIG and confidential negotiations continue between VPA and VIG regarding the details behind the expansion.

SECURITY

The port facilities revenue bonds are secured by the net revenues of VPA, primarily comprised of net revenue transfers from Virginia International Terminals, LLC (VIT), the operator of VPA's port facilities under a service agreement.

In addition, VPA has $266.3 million outstanding in commonwealth port fund revenue and refunding bonds which are payable from the commonwealth port fund. Pledged revenues consist of a portion of additional revenues derived from increases in motor vehicle fuel taxes, sales and use taxes, and annual motor vehicle registration fees. The commonwealth port fund revenue bonds are rated 'AA +' by Fitch.

VPA also currently has $23.8 million in instalment purchases and equipment leases through 2019; these obligations are subordinate to the revenue bonds and the commonwealth port fund bonds, and are not rated by Fitch.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Ports (pub. 20 Oct 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=872725

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Contacts

Fitch Ratings
Primary Analyst:
Emma Griffith, +1-212-908-9124
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson:
Greg Remec, +1-312-606-2339
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Emma Griffith, +1-212-908-9124
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson:
Greg Remec, +1-312-606-2339
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com