OREANDA-NEWS. Fitch Ratings has affirmed North Carolina State Port Authority's (the authority) approximately \$41 million port facilities revenue bonds at 'BBB+'. The Rating Outlook remains Stable.

Fitch does not rate the authority's \$10 million outstanding series 2013 revenue bonds, which are on parity with the rated debt, or \$9.75 million in outstanding subordinate lien series 2014 port facilities revenue bonds. The port also has an unrated \$28 million capital equipment lease.

The rating recognizes the authority's strong debt service coverage along with slightly elevated leverage. Volumes are somewhat volatile, though Fitch recognizes on-going private investments in the port, reflecting a potential for growth in the medium term. The modestly sized five-year capital improvement plan is not expected to require debt issuance, with funding coming from authority cash flow, grants and private investments. Fitch also recognizes state importance of the port as a driver of economic development in North Carolina.

KEY RATING DRIVERS

Revenue Risk: Volume - Weaker
Regional Port Service with Reliance on Bulk and Breakbulk: The port system primarily serves its regional base coupled with access to other economic growth corridors which provide some stability to operations. From a product standpoint, there is reliance on bulk and breakbulk cargoes for the majority of volume throughput with concentration in wood/forest- and phosphate-based cargo. Exposure to the extremely competitive southern Atlantic port environment, of which the North Carolina ports have a relatively small market share position, remains a concern. However, volumes have shown resilience in recent years, and the diversity of trading partners and import/export exposure is adequate. The authority has seen an increase in private investments, which have helped grow both breakbulk and container business at the port and may lead to further growth in the medium term.

Revenue Risk: Price - Midrange
Growth-Dependent Profile with Some Downside Protection: The authority's projections are somewhat dependent upon top-line revenue growth over the next decade in order to maintain strong margins and coverage levels. Given the port's status as an operating port with moderate levels of contractually obligated payments (19% of revenues in fiscal 2014), the port system remains exposed to cash flow volatility associated with economic cycles and fluctuations in commodity prices and global demand.

Infrastructure/Renewal - Midrange
Modest Capital Plan with Some Potential for Additional Leverage: The current capital program is modest at \$114 million and is funded with a mix of grants and port revenues. The ports leadership is now stable with a clear plan in place for future needs, with no new borrowing expected for the capital plan in the medium term.

Debt Structure - Midrange
Moderate Debt Structure: The port has a stable amortizing debt structure, with some variable rate exposure. The authority has an internal policy to maintain debt to equity levels to a maximum of 50% (currently 44%), and targets variable rate debt at a 15%-20% range of the total currently 20%. Covenants are adequate, with a senior rate covenant of 1.35x and an all-in covenant of 1.05x.

Financial Metrics: The authority has a history of somewhat volatile but generally satisfactory operating and financial performance, with debt service coverage ratios of 1.5 times (x) or better on an all-in basis in recent years, with 1.70x coverage in fiscal 2014. Net debt levels are moderate relative to cashflow (6.53x net debt/cash flow available for debt service), and liquidity is moderate at 223 days cash on hand.

Peers: Virginia Port Authority (rated 'A+', Stable Outlook) and Alabama State Ports Authority (rated 'A-', Stable Outlook) are the two closest peers to North Carolina State Ports Authority, in part due to their comparable status as state-owned port facilities located in the Southeast section of the country. North Carolina and Alabama share low debt expectations for their capital plans. In terms of metrics, North Carolina State Ports Authority has stronger coverage, but it is more highly levered. North Carolina State Port Authority also is much smaller in terms of tons moved through the port, which along with its metrics, are consistent with the high 'BBB' category.

RATING SENSITIVITIES

Negative:
--Ability to maintain 2.0x debt service coverage on senior lien obligations and 1.5x on an all-in basis;
--Sustained lower coverage levels could signal rating pressure;
--The authority's ability to realize forecasted growth rates for volumes and revenues would support rating stability;
--Continued prudence in timing of demand-driven expansion projects in the capital program and maintenance of leverage at levels are relevant to rating maintenance.

Positive:
--Should private initiatives generate additional revenues, leading to longer term improvements in metrics, upward rating movement is possible.

CREDIT UPDATE

North Carolina State Port Authority saw a decline in revenue and tonnage metrics in fiscal 2014, the first time this has happened in three years. Declines in tonnage and volume are directly correlated, and are largely attributed to the stagnating global economy, as well as low demand for commodities. Overall tonnage in 2014 declined by just over 19%. Bulk cargo makes up a majority of tonnage, and dropped 32%; however, the authority has taken necessary steps to expand their cargo and breakbulk tonnage. Through nine months of FY2015, breakbulk and cargo tonnage have increased 7.7% and 21%, respectively.

In fiscal 2014 operating revenue decreased to \$39.2 million from \$44.3 million, a 12% decrease over the year prior. Despite a large decline in revenue, the five-year compound annual growth rate remains positive at 2.6%. The authority is working to expand its revenue streams by working with private investors to expand the port. Over \$250 million of projects which had been on-going over several years were completed in 2014, with another \$650 million in planned projects beginning in the near future. Operating expenses fell in fiscal 2014, though at a lower rate than revenues, coming in at \$29.1 million, down 7.1% from the previous year. This decrease in costs can be attributed to lower volume and associated costs, as well as headcount and efficiency measures. The authority has successfully managed costs in recent years, with the compound average annual growth for operating expenses since 2009 being 1.1%. Following a poor performing FY2014, the port has seen a turnaround in fiscal year to date 2015, with revenue up just over 14% year over year.

The authority is currently implementing a \$114 million capital plan through 2020, and management has indicated that state, federal, and private sector funding, as well as internal cash flow 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 a 7% increase in revenue in 2016, followed by steady growth of 2% in revenue from 2017-2020. Costs were assumed to increase at a rate of 1.5%. Base case coverage's are maintained above 3.95x, averaging 4.32x (senior lien debt service). Fitch's rating case was similar to its base with a 7% revenue increase in 2015, however revenues fell 10% in 2016, with a 2% recovery in each year thereafter. Cost grew at a rate of 3% following flat growth in 2015 and 2016. Resulting coverage's average 2.77x, falling to 2.44x. Leverage progresses downward, averaging 5.51x from 2015-2020.

The North Carolina State Ports Authority owns and operates two deep water ports, one in Morehead City and one in Wilmington. The authority also owns and operates two intermodal terminal networks in Charlotte, NC and Greensboro, NC, which provide inexpensive inland transportation to and from the ports.

SECURITY

The bonds are secured by net revenues after the payment of operating and maintenance expenses. The deep-water ports in Morehead City and Wilmington generate most of the cargo operations and operating revenues.