Fitch Upgrades Virginia Port Authority's Port Facilities Revenue Bonds to 'A+'

Fitch Ratings has upgraded its long-term rating on the Virginia Port Authority's (VPA) outstanding $156 million in port facilities revenue and refunding bonds to 'A+' from 'A'. The Rating Outlook is Stable.

The upgrade reflects improving metrics that highlight the Authority's focus on streamlining operations, and a plan which is focused on optimizing facilities for capacity and operating efficiencies.

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.

KEY RATING DRIVERS

Volume Risk: Stronger (from Midrange)

Third Largest Atlantic Port with Focus on Containers: VPA is the third largest East Coast port by TEUs volume, and benefits from a diverse mix of customers, with no one customer representing more than 13.5% market share by volume. Export and import volumes are roughly equivalent. 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 Price: Stronger

Long Term Contracts with Largest Customers: VPA's long term contracts with its largest customers account for 84% of cargo volume. Minimum guarantees under current contracts equal to approximately 40% of 2014 operating revenues, providing a degree of revenue and throughput stability going forward. Contracts have built-in volume increases, rate increases, and financial penalties for not meeting volume guarantees.

Infrastructure Development/Renewal: Midrange

Long-Term Capital Plan with Modest Expected Additional Leverage: VPA's capital plan through 2024 is sizable at $1.5 billion, with 66% funding the buildout of the Craney Island Marine Terminal. 40% of this plan is expected to be debt financed, including 7.2% from terminal revenue bonds, 12.2% from Commonwealth port fund bonds, and 21% from equipment leases. 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.

Debt Structure: Stronger

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 $19.9 million at FY 2014 close are fully funded with cash.

Financial Metrics

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 adequate at 1.64x in 2014 (though lower than previous years). In upcoming years, coverage may be pressured as additional leverage is added to the debt profile. As a result, performance is somewhat dependent on growth in the forecast period. Leverage is relatively high at 13x net debt to cash flow available for debt service (CFADS) (8x when CEMA deposits are included), but is expected to fall to 5x or better x in the next five years (includes future debt).

Peer Group: 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. The port's metrics are consistent with the 'A' category.

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, though plans for senior borrowing are modest. Should the financing plan change to include a greater proportion of 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.

CREDIT SUMMARY

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 and accounting for 84% of VIT cargo volumes. The port of Virginia is competitively placed to benefit from the advent of bigger ships, both in the wake of the Panama Canal expansion (now slated for 2016 opening) and in light of increasing all-water service from Asia via the Suez Canal (42% of VPA's Asia business in 2014 came via the Suez, vs below 30% 3 years ago, driven by growing market for goods produced in India, SE Asia).

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. Currently, there are two scheduled services utilizing the Port of Virginia as a 'first in' port of call, and four scheduled services with a 'last out' 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 4.2% since 2009, and fiscal 2014 saw an increase of 6.5% to 2.3 million TEUs. Year to date through January (seven months of fiscal 2015), total TEUs are up 8.4% over a year prior, comparing favorably to 2015's budgeted increase of 3%. For revenues, VIT gross receipts fell 2.3% in 2014, a drop compared to performance trends coming out of the recession (five-year CAGR from 2009-2014 of 7.8%). For fiscal 2015 year to date through December, revenues (combined VPA and VIT) are up 25.1% over last year, and are performing 2.8% better than budget.

According to VPA's forecasts (based on average annual TEU growth of 4.3%, revenue growth of 7.4% and expense growth of 6.6% through 2024, and assuming $180 million in additional future revenue bonds), senior coverage will migrate to 3x by 2024. Under this scenario, all-in leverage, including expected subordinate equipment leases, falls to 2.3x net debt to CFADS by 2024. Under Fitch's rating sensitivity case, which contemplates more modest growth rates for TEU throughput, revenues, and expenses (3.4%, 4.8% and 4.5% respectively), pledged senior coverage migrates to 1.6x by 2024. However, coverages including equipment leases are thinner. Leverage under the sensitivity scenario also migrates downwards, though more slowly, reaching net debt to CFADS of 4.49x by 2024.

VPA's $1.5 billion capital improvement program through 2024 is focused on ensuring that VPA's facilities are sufficient to meet future demand for cargo handling capacity. Expansion plans include the construction of the Craney Island Marine Terminal, which is expected to be constructed in four phases through 2039, with phase one expected to be opened in 2030. The plan assumes a limited amount of future debt issued through VPA's two bonding programs, as well as financing through equipment leases.

Approximately 7% ($180 million) is expected to be funded using Port Facilities Revenue Bond proceeds and approximately 12% ($198 million) is funded using Commonwealth Port Fund Revenue Bond proceeds, with additional borrowing taking place via subordinate equipment leases ($ 322 million or 21%). The plan includes a potential Commonwealth Port Fund Revenue Bond issue in fiscal 2016, and new money terminal revenue bonds in fiscal 2017.

In July 2010, VPA entered into a 20 year operating lease for the AP Moeller Virginia Terminals. In August 2014, a partnership comprising affiliates of investment funds managed by Alinda Capital Partners and Universities Superannuation Scheme Limited purchased the APM Terminal. VPA continues to operate the terminal under the original 20-year lease agreement with AMPT, which has been renamed Virginia International Gateway (VIG). Fitch does not view these governance changes as having a material impact on the authority's rating.

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 $207.6 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 $29.2 million in installment 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 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

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=795788

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980544

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