OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating for the Port Commission of the City and County of San Francisco's (the port) \\$58 million revenue bonds. In addition, the port has subordinate obligations by way of \\$34.4 million of certificate of participation (COPs) issued by the city, \\$2.4 million California Department of Boating and Waterway loan, and \\$172 thousand advance from the San Francisco Public Utilities Commission, none of which are rated by Fitch. The Rating Outlook is Stable.

RATING RATIONALE

The rating reflects the port's low debt level and strong debt service coverage ratios, which given the asset base, including significant real estate related properties and revenues, is critical. The port's sizable capital plan which addresses its aging infrastructure remains largely unfunded, and is a risk to its operations. Given the strategic location and the relation to the City of San Francisco, the port and city are incentivised to collaboratively plan and fund necessary elements of the capital plan to maintain the asset and future revenue growth as well as tourist and real estate interest and safety.

KEY RATING DRIVERS

Revenue Risk- Volume: Midrange
Strategic Location with Stable Demand: The port's valuable real estate assets serve as a regional, national and international destination. Port properties have maintained strong occupancy rates even through the economic downturn. This unique positioning serves to partially mitigate the port's exposure to cyclical variations in both real estate and discretionary tourism spending, as well as to competition on the maritime side of the business.

Revenue Risk- Price: Midrange
Diverse Revenue Streams: Diversity of revenue generated from real estate, parking, and maritime assets has led to a stable operating profile for the port, with non-cancellable operating leases and minimum annual guarantees providing a base level of revenue stability.

Infrastructure Renewal and Development: Weaker
Long-Term Capital Improvement Needs Remain: The port's aging infrastructure and deferred maintenance requirements remain a concern. Fitch notes the nature of the capital plan addresses revenue generating assets that are expected to have adequate remaining life and non-revenue generating assets that could be shut down if needed, thereby reducing capital needs. The port estimates that over the next 10 years its facilities require approximately \\$1.6 billion to maintain a state of good repair, and \\$476 million for conditional seismic work. The majority of state of good repair financing remains currently unidentified but relates to parts of the asset base not critical from a revenue generating perspective, mitigating any immediate detrimental effects on revenue generation.

Debt Structure: Stronger
Stable Debt Structure: The port's debt is 100% fixed rate, with stable annual debt service requirements. The port also utilizes COP issued through the City of San Francisco for some of its capital needs.

Strong Financial Profile: Low leverage with strong debt service coverage ratios (DSCR) of 8.9x. The port has an internal policy to maintain 1.75x coverage on debt going forward, and management intends to manage coverage to 2.0x or higher. Liquidity position is healthy with \\$77.1 million of unrestricted cash, equivalent to 446 days cash on hand.

Peer Analysis: San Diego (CA), rated 'A+'/Outlook Stable, serves as a comparable peer in terms of west coast geography, secondary port function and focus on real estate operations. Port of San Francisco has a notably larger capital plan and low leverage similar to that of San Diego.

RATING SENSITIVITIES

Negative:
--Failure to find a sustainable solution to the capital program, including refurbishment of infrastructure and handling of overdue deferred maintenance, in addition to the port's ability to secure funding for unfunded portions of its capital program;
--Deterioration in the health of the San Francisco economy, including the real estate market and discretionary tourism spending.

Positive:
--Given the port's capital condition and operating profile, positive rating migration is not anticipated at present.

CREDIT UPDATE:

Port operating revenues in 2014 increased 5.2% to \\$85.7 million and have grown steadily over the last five-years at a compound annual growth rate (CAGR) of 5.3%. The port's diverse mix of real estate assets and long-term agreements provided revenue stability through the economic downturn. The port's recent revenue growth is attributable to higher parking, real estate rentals, and cruise revenues.

Operating expense growth (excluding non-cash adjustments) increased by 0.6% to \\$63.2 million in 2014. Higher pension and benefit cost have been a major driver of such operating expense growth in recent years, which has experienced a five-year CAGR of 1.9%.

DSCR in 2014 was strong at 8.9x. Fitch's base case projects average annual revenue growth of 2.4% as a result of the new cruise terminal and implementation of a \\$6 passenger facility charge, and re-leasing of America's cup facilities. Operating expenses are projected to increase at an average annual rate of 3%. Under this scenario, DSCR is expected to remain strong, never falling below 5.5x and, when including subordinate obligations, not falling below 3.1x while steadily increasing as net revenues grow.

The port's 10-year capital plan includes \\$1.6 billion of needed state of good repair and \\$476 million of conditional seismic work. The port has identified \\$487.9 million of funding for state of good repair needs and \\$365.8 million for capital enhancement projects (including conditional seismic repairs). Fitch views the port to be prudent in allocating the majority of internal funding (95%), which are revenues under its control, to the more essential state of good repair needs while funding from external partnerships usually go toward capital enhancements (69%). Funding sources include additional port revenue bonds, GO bonds for parks related projects, port capital budget funds, and others. Fitch expects that the port will look to create partnerships and leverage various funding and financing options to address the significant backlog of deferred maintenance and the projected replacement costs in the plan. The port is focused on prioritizing refurbishment needs to best utilize funds available for capital development.

A lack of funding and coordination from the port and the city may lead to a reduction in demand for port properties driving revenues. The port's desirable location is a key element driving the long-term essentiality demand. Fitch will continue to monitor the port's ability to prioritize state of good repair and capital enhancement work to best utilize identified funding.

Fitch continues to note that the port's funding needs are considerable over the life of the plan. The port's ability to generate revenues through its real estate assets, many of which were constructed 100 years ago, is dependent upon maintenance of the facilities in order to keep them functional, market competitive, and code compliant. Failure to address deferred maintenance requirements may negatively impact the port's revenue base and underlying credit quality.