NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating for the San Diego Unified Port District's (the district) $36.3 million of outstanding revenue bonds. The Rating Outlook is Stable.
The rating reflects relatively strong post-recession performance at a secondary west coast port, with a majority of revenues from lease-supported real estate operations and a focus on serving medium sized vessels in its maritime operations. The district benefits from very strong coverage levels, and no additional borrowing is expected for its modest capital plan. The low leveraged profile of the district serves as a strong mitigant to potential future economic volatility.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Mix of Maritime and Real Estate Assets: The district's assets include real estate holdings in prime tourism/business areas of the city and two niche marine terminals primarily focused on break bulk and automotive cargo services. The port's multi-cargo facility is optimized to handle the growing market for refrigerated and roll-on/roll-off cargo.
Revenue Risk - Price: Midrange
Diverse Sources of Revenue: The real estate and maritime revenue base is supported by long-term fixed and percentage based rent revenues. In fiscal 2014, fixed rents totaled 26% of operating revenue while percentage based rents accounted for 40% of operating revenues. Minimum annual guarantees across all divisions accounted for $75 million, or half of operating revenues. Overall revenue performance declined considerably during the recent recession, but has rebounded since 2011 and moderate growth is forecast going forward.
Infrastructure Development and Renewal: Stronger
Limited Future Capital Needs: Capital needs in the near term are limited and expected to be funded through excess cash and capital reserves. Management indicates the district's 2014-2018 capital plan will require future cash flows of approximately $3 million through fiscal 2018.
Debt Structure - Stronger
Sound Debt Structure: The district's debt is entirely fixed rate with stable annual debt service requirements. Legal provisions include a 1.25x rate covenant and additional bonds require 1.25x coverage of projected maximum annual debt service. A cash funded debt service reserve fund is maintained.
Strong Balance Sheet and Financial Flexibility: Net debt to cash flow available for debt service (CFADS) is cash positive at -0.88 as a result of the strong cash position which also contributes to the issuer's strong liquidity position (328 days cash on hand as of June 2014). Senior debt service coverage ratios (DSCR) are extremely strong at 8.40x though all-in DSCR is narrower.
Peer Analysis: Port of San Francisco (CA), rated 'A' category, serves as a comparable peer to San Diego in terms of rating level, business focus, and secondary port function. State of Hawaii (Department of Transportation), rated 'A+', is also a peer from a geographic perspective, though its essentiality to the state economy makes it less comparable. SDUP has a significantly smaller capital plan than the two peers, and like Port of San Francisco it receives the majority of revenues from real estate operations.
--A sustained inability to grow the district's revenue base commensurate with operating cost growth, resulting in reduced debt service coverage levels.
--Significant deterioration in liquidity, as evidenced by an increasing net debt to CFADS.
--Given the district's operating profile, positive rating action is not likely at this time.
Fiscal 2014 operating revenues increased by 7.8% from fiscal 2013 levels, reflecting improvement in recent performance of both real estate and maritime related revenues. Cargo tons have seen an overall declining trend (5-year compound annual growth rate (CAGR) of -1.1% for all tonnage), but container volumes were up 3.7% in 2014 and the district expects the arrival of larger ships by existing tenants in the near future. The district's diversity of revenue sources (61% real estate, 24% maritime, 15% harbor police and other) and high proportion of revenues secured by leases mitigate the volatility of cargo traffic. Fiscal 2014 operating expenses decreased by approximately 2.6% from fiscal 2013 mainly due efforts taken by the North Embarcadero Port Master Plan and management vacancies, partially offset by a $2.1 million remediation cost increase related to maritime compliance.
Fiscal 2014 net revenues provided strong senior DSCR of 8.4x. Additionally, coverage of senior bonds and the subordinated promissory note with an outstanding balance of $39.9 million to the San Diego County Regional Airport Authority (the authority) totaled 4.19x. Although the promissory note is subordinated, the legal agreement allows the authority to offset debt service from authority lease payments due to the district in the event the district has missed a note payment. Debt service on the promissory note was about $3.7 million in fiscal year 2014. The district made its final support payment to the city of San Diego of $4.5 million in 2014.
Based on revenue and expense forecasts provided by the district's management, pledged revenues are expected to grow at a 1.3% CAGR and expenses at a 2.7% CAGR for the 2015 - 2019 period. As a result, senior DSCR is projected to be 4.9x or higher or 2.3x or higher when the subordinate airport note is included. Under Fitch's sensitivity case where maritime revenue is subject to stresses similar to the recent economic recession, senior DSCR remains above 4.1x and 2.0x when including the airport note. The district's net debt to cash flow available for debt services (CFADS) is cash positive at -0.9x due to the district's considerable liquidity position.
The district's most recent fiscal 2014-2018 capital improvement plan was approved in June 2012. As of Dec. 31, 2014, the remaining budget for the five-year plan was approximately $24.8 million (including capitalized labor). Funding will require future cash flows of approximately $3 million through 2018, and the district does not anticipate issuing additional debt for CIP at this time. The district has reserved and designated cash to fund non-grant related capital expenditures in the amount of $35.8 million at the end of June 2014 (vs. $44.9 million last review). Of this amount, approximately $15.2 million is associated with projects under contract; therefore the district has some flexibility in delaying certain projects.
The district was created in 1962 by the California State legislature pursuant to the San Diego Unified Port District Act to manage the San Diego Bay and surrounding waterfront land, operate the airport, and administer the public tidelands through property management. The district's jurisdiction covers the five member cities of San Diego, Chula Vista, Coronado, Imperial Beach and National City. In January 2003, Assembly Bill 93 and Senate Bill 1896 transferred the airport operations to the San Diego County Regional Airport Authority. The district is governed by a seven-member board of commissioners appointed by the city councils of the five member cities.
The bonds are secured by a pledge of net revenues.
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. 16, 2014).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Ports