OREANDA-NEWS. Fitch Ratings has affirmed the Port of Beaumont Navigation District of Jefferson County, Texas' approximately \$17.45 million outstanding revenue bonds series 2007 and 2008 at 'A'. The Rating Outlook is Stable.

Fitch also rates the district's general obligation (GO) bonds, last reviewed on June 24, 2013. The GO bonds are rated 'AA-' with a Stable Outlook. For more information on the GO bonds please see Fitch's press release dated June 24, 2013.

The rating affirmation reflects the cargo and military focused port with an established operating history, sustained revenue growth since the recession from cargo alongside strong cost management and a minimal capital program with no material borrowing anticipated. The conservative debt structure, modest leverage, and strong coverage metrics would likely remain resilient under more volatile conditions which Fitch views as credit strengths. While not pledged to revenue bonds, additional tax revenues provide overall revenue stability to the port.

KEY RATING DRIVERS

ESTABLISHED NICHE PORT IN COMPETITIVE REGION, Revenue Risk: Volume - Midrange
The Port of Beaumont (the 'port') provides one of the Gulf's only bulk and break bulk maritime services as well as hosts the U.S. Army's Military Surface Deployment and Distribution Command headquarters. The Port relies heavily reliance on volatile bulk commodity products, including grain, aggregates, and potash which can affect throughput levels and associated revenues.

DIVERSE REVENUE BASE WITH CONTRACTED TENANTS, Revenue Risk: Price - Midrange
A dual cash flow of district ad-valorem property taxes and diverse maritime revenues fund port operations. Property taxes, though unpledged, provide overall revenue stability to counteract maritime revenue volatility, and long-term contracts from established tenants anchor maritime revenues. The top five tenants accounted for approximately 55% of fiscal 2014 operating revenues.

MINIMAL CAPITAL DEVELOPMENT NEEDS, Infrastructure Development/Renewal - Midrange
Most projects have been completed, and only \$22.87 million worth of projects are currently progress. Those waiting to start are awaiting construction as funding has already been secured. New money bonds will not be needed as the remainder of funding will come from grants and internal capital. The district's 2014 Master Plan estimated \$531 million in short and long term projects to develop the new Orange and Jefferson County Facilities as well as maintain existing facilities.

CONSERVATIVE DEBT STRUCTURE, Debt Structure- Stronger
The district's debt is 100% fixed rate, and revenue bonds have level annual debt service payments of approximately \$1.8 million.

MODERATE LEVERAGE AND LOW LIQUIDITY

Net debt-to-cash flow available for revenue bond debt service (CFADS) dropped to 1.80x from 2.76x in fiscal 2013 and is in line with peer port credits. Debt service coverage ratio (DSCR) increased to 4.53x at fiscal year-end 2014 from 2.96x at fiscal year-end 2013 due to reduced debt service obligations. Fitch expects coverage to remain around 3.6x through its five-year forecast period. Liquidity remains relatively low with only \$5.1 million in unrestricted cash, equivalent to 166 days cash on hand (DCOH).

PEER ANALYSIS

The Port's metrics remain at the higher end of the 'A' rating category, and like peer Hillsborough County Port Authority, the Port of Beaumont benefits from tax revenues that support port activities along with port revenues. The Alabama State Port Authority has similar mixed bulk cargo to the POB but has handled more tonnage over the past five years.

RATING SENSITIVITIES
--Negative: Shift in maritime operations due to a loss of key port stakeholders and tenants;
--Negative: Material changes in the tax revenue support, or an increase in GO debt that has a higher ranking claim on tax revenues than the rated revenue bonds;
--Negative: Unforeseen capital spending that adds to the debt burden may affect credit quality.
--Positive: Positive rating actions are considered unlikely in the near term based on the Port's size and volume profile.

CREDIT UPDATE

Overall tonnage at the port remains volatile, with fiscal 2014 tonnage increasing 10.5% but still 15.2% below the peak level realized fiscal 2011. Tonnage growth has averaged 1.2% over the past 10 years, and is 26% higher through February fiscal 2015 year-to-date than the same months last year due to forest products and liquid bulk. The port's top five tenants and operators generated roughly 55% of operating revenues in fiscal 2014. The U.S. Army continues to provide diversity and stability as the largest tenant, accounting for 30% of operating revenues. Another four tenants account for 4% - 10% of operating revenues several with long term agreements and major Port investments. The Port benefits from good highway and rail access with service from three class 1 rail carriers.

Following increases in tonnage and the grain elevator, fiscal 2014 operating revenues increased 14.1% mostly from wharf and dockage. Operating revenues made up 57% of total revenues, with the balance largely made up of tax collection revenues. Through February, fiscal 2015 year-to-date operating revenues are 23% higher than last year and 15% ahead of projected, while total revenues are up 17%. Residual tax revenues are recorded as non-operating revenues and are not pledged to the revenue bonds but are available to offset O&M costs. Fiscal 2014 OpEx increased 4.4% due to maintenance and operating expenses but still maintained a -1.8% 5 year CAGR 2009 - 2014. Alongside increased revenues from tonnage, more revenues from ad-valorem property taxes helped to raise the Port's operating margin to 9.4% in fiscal 2014 which highlights their importance to the Port's credit profile. Through February, fiscal 2015 year-to-date total expenses are 5% ahead of projected and 6% ahead of the same months last year due to increased admin and operations expenses.

Using tax revenues for OpEx as well as general obligation debt service payments allows for stable coverage levels during downturns and supports the 'A' rating. Tax collections were around the same in fiscal 2014, but slightly more were eligible to be included in the DSCR calculation and resulted in higher coverage. Recent trends in the tax revenues have generally been positive, and the Port's tax rate remains well within its authorized tax levy authorization. Fitch notes that revenue bond coverage should increase further once GO bonds mature in fiscal 2018 if management does not issue additional GO bonds. Fitch will monitor the tax levy and collection trends as viewed as a key rating driver.

The port's continued use of pay-as-you-go funding for capital spending has resulted in moderate debt levels, being approximately \$25.6 million at time of review (reflecting both \$4.1 million GO debt and \$21.5 million revenue bond debt). Revenue bond net debt-to-CFADS has dropped to 1.80x fiscal 2014 from 2.76x fiscal 2013 and remains in line with peers as well as relatively strong for the rating category. Revenue bond debt service is relatively level through final maturity in 2034 at \$1.8 million per year, which Fitch views as manageable, with DSCR (including available tax revenues) expected to remain above 2.7x going forward even in its rating case.

Management was able to contain operating costs through the recent downturn, thus maintaining strong coverage and margins. DSCR in 2014 was 4.53x. Fitch's base case assumes 1.7% five year CAGR in total operating revenues combined with expenses growing at a 1.5% five year CAGR. Under this scenario and with tax revenues available for debt service held flat, DSCR is expected to remain above 3x, with leverage starting at 2.25x before dropping down to 1.45x as debt is paid off. Fitch's rating case assumes -0.9% five year CAGR in total operating revenues combined with expenses only growing at a 1.2% five year CAGR due to traffic shocks mid forecast. Under this scenario and with tax revenues available for debt service held flat, DSCR is expected to drop down below 3x to 2.76x, with leverage only dropping down to 1.95x as debt is paid off.

The Port released their 2014 Master Plan which calls for \$531 million short and long term projects. Short term projects (\$211 million) are guided for the next five years while long term projects (\$319 million) are aimed at the next 10 years. The Port's updated capital plan for 2014/2015 rests at \$27 million with most projects either completed, will begin this year, or privately funded and/or public private partnerships and all with funding aligned. Liquid and dry bulk terminals are being expanded, and the Orange County Terminal was completed in fiscal 2014 handling over 200,000 tons which should increase to over one million tons/year. New revenue or GO bonds are not anticipated as the Port is paying for projects as they go, seeking grants, and using private money, but credit quality could be impacted if the new plan calls for unforeseen additional debt issuances. The Port's federally funded channel deepening underway will increase depths to 48ft equal to the Panama Canal becoming the third largest in the US and will create new market opportunities for larger bulk ships from the Pacific Ocean.

SECURITY

The bonds are secured by and payable from an irrevocable first lien on the pledged revenues equal to gross revenues. Pledged revenues are further pledged irrevocably to establish and maintain interest as well as sinking and reserve funds. All revenue bonds are on parity with their claim on this pledge.