Fitch Upgrades Alabama State Port Auth's Docks Facilities Revs to 'A-'; Outlook Revised to Stable

Fitch Ratings has upgraded Alabama State Port Authority's (the authority) approximately $305 million docks facilities revenue bonds to 'A-' from . The Rating Outlook has been revised to Stable from Positive. Fitch does not rate Alabama State Port Authority's $48.9 million outstanding series 2008A dock facilities revenue bonds.

The upgrade to 'A-' recognizes the authority's strong debt service coverage and modest, declining leverage levels, as well as the focus on diversification of revenue sources in recent years. Volumes rose to historic levels for the authority in fiscal year (FY) 2014, with steel volumes posting a 40% increase, and iron, steel and forest products ending with a record of 7.3 million tons, highlighting robust growth in revenue streams besides coal. The five year capital improvement plan is not expected to require debt issuance, with funding coming from authority cash flow, grants and co-investment with the private sector. Fitch also recognizes state support of the port as a driver of economic development in Alabama, demonstrated by on-going state grant support and availability of certain state tax revenues for debt service.

KEY RATING DRIVERS

Revenue Risk: Volume - Midrange

Cargo Diversification Partly Mitigates Dependence on Coal: The Alabama State Port Authority earns most of its revenue from coal shipments to and from the Port of Mobile (the port). The port's coal operations serve a narrow group of customers and a regional extraction area with few prospects of long-term growth. The opening of the Pinto Island Steel Terminal in 2010 has helped diversify the port's revenue stream. In addition, the port benefits from excellent intermodal connections and limited service area overlap with other major ports. The authority plays an important role in the State of Alabama's industrial development policies.

Revenue Risk: Price - Midrange (From Weaker)

Limited Contractually Obligated Payments: The port is susceptible to fluctuations in cargo volume with less than 15% of the ports revenues being derived from contractually obligated user payments and exposure to cargos heavily influenced by commodity prices. However, a six-year contract which runs through 2021 guarantees minimum volumes of 2 million tons of steel per year through the port, and recent volumes have been well above this contractual floor, and Fitch takes comfort in the port's long operational history with many of its key customers. The availability of tax revenues from the Oil and Gas Tax and the State Coal Severance Tax (extended retroactively through October 2021) provides additional stability for revenues.

Infrastructure/Renewal - Midrange

Modest Capital Plan with Limited Future Borrowing: The authority currently has a $145 million capital plan which it expects to fund from a variety of sources including State and Federal grants. The authority is also pursuing public - private partnerships to fund its capital plan. The capital plan does not require any additional debt funding, and the authority does not expect to enter the capital markets for the foreseeable future.

Debt Structure - Stronger

Reasonable Debt Structure: Approximately 84% of the port's debt is fixed rate with the remainder synthetically fixed.

Stable Financial Performance: FY2014 saw operating revenues of $162 million, an increase of 10% from fiscal 2013. This marks the fifth consecutive year of operating revenue growth, following a steep decline in fiscal 2009. For fiscal 2014, debt service coverage excluding state resources has improved to 2.73 times (x). The authority's leverage is moderate with net debt/CFADS of 4.42x while liquidity has slightly declined at days cash on hand (DCOH) of 122 days.

Peers: Virginia Port Authority (rated 'A') and North Carolina State Ports Authority (rated 'BBB+') are two peers to Alabama State Port Authority, in part due to their comparable status as state-owned port facilities. The ports also share low debt expectations for their capital plans. In terms of metrics, Alabama has stronger coverage and lower leverage than both of its peers, as well as relatively stronger liquidity on a DCOH basis compared to Virginia Port Authority. The authority's metrics are consistent with the 'A' category.

RATING SENSITIVITIES

Negative:

--Dramatic shifts in throughput levels, including coal and steel tonnage, resulting in negative movement in metrics may pressure the rating.

--Significant leveraging of the asset resulting in a material deterioration of financial metrics could result in negative rating action.

Positive:

Further positive rating action is unlikely at this time. However, Fitch views the authority's ability to continue to diversify its revenue stream without adding incremental debt while maintaining solid liquidity levels as important to supporting the current rating.

CREDIT UPDATE

The Alabama State Port Authority realized record revenue and tonnage metrics in fiscal 2014, continuing a trend of strong performance. For some time the port has been focused on diversifying its revenue base away from coal (52% of operating revenues in 2014). The Pinto Island steel facility has played a large part in this diversification, with steel volumes showing a 40% increase in fiscal 2014 (the largest year-over-year growth for any one commodity). Record highs in cargo tonnage were realized in fiscal 2014, with total cargo handled reaching 29.1 million tons. Following this record year, management expects volumes may decrease in fiscal 2015 on a year-over-year basis; however, 2015 tonnage is budgeted to be higher than volume seen in fiscal 2013, and years prior.

Fiscal 2014 saw operating revenue increase from $147.5 million to a record high $162.3 million, a 10% increase over the year prior. This builds upon strong revenue growth seen in recent years, with the compound average annual growth for operating revenues since 2009 being 9.4%. The McDuffie Coal Terminal saw a revenue increase of nearly 10% due to a strong export market. Coal still accounts for just more than half of port revenue; however, attempts at diversifying the revenue stream have been made and are ongoing. Revenues from general cargo/intermodal realized an increase of more than 20% due to high demand for steel and iron, while real estate revenue, which includes the authority's grain elevator operation, increased just over 17% due to higher demand for grain. Operating costs also grew in fiscal 2014, though at a lower rate than revenues, coming in at $123.7 million, up 7.5% from the previous year (excludes depreciation). This increase is directly attributed to the increased volume and associated costs, such as power consumption and personnel costs. The authority has successfully managed costs in recent years, with the compound average annual growth for operating expenses since 2009 being 3.6%.

The authority is currently implementing a $145 million capital plan through 2020, and management has indicated that state, federal, and private sector funding are expected to cover development costs. No additional bonding is included in the current capital plan, and the authority has represented that it does not expect to enter the capital markets in the near term.

Fitch conducted two sensitivity scenarios. Fitch's base case scenario assumes steady growth in revenue from 2016-2020, with 2.5% increases in coal handling, 1% and 1.5% increases, respectively for terminal railway and liquid bulk revenue, and 4% increases for other revenues, which includes real estate revenue. Costs were assumed to increase at a rate of 4% for O&M expenses, and 1.5% for general & administrative. Fitch assumed management's budget figures would be achieved for 2015. Base case coverage's are maintained above 2.20x, averaging 2.29x (without state resources), while leverage decreases steadily, reaching a minimum of 2.60x. Fitch's rating case was similar to its base, reducing revenue growth assumptions by 100 basis points, and increasing costs by the same parameter. Resulting coverage's average 1.84x, while leverage remains low at around 5x. Fitch notes that these coverage and leverage levels are consistent with an 'A' category rating.

Alabama State Port Authority, formerly known as the Alabama State Docks, is a self-supporting state agency governed by a nine-member board of directors. The authority's revenues are not paid into the state treasury, and the authority has generally received no appropriations from the general fund of the state of Alabama other than for capital improvements. The governor appoints eight members of the board subject to legislative confirmation and the ninth member is an ex-officio member representing the city or county of Mobile.

SECURITY

The bonds are special, limited obligations of the port payable solely out of and secured by a pledge of and lien on (i) docks facilities revenues and (ii) any income from the investment thereof.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance,' (July 11, 2012);

--'Rating Criteria for Ports' (Oct. 16, 2014).

Applicable Criteria and Related Research:

Rating Criteria for Ports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=795788

Rating Criteria for Infrastructure and Project Finance

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980509

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