Fitch Affirms Alabama State Port Auth's Docks Facilities Revs at 'A-'; Outlook to Negative
KEY RATING DRIVERS
The Negative Outlook reflects concerns about negative pressures in commodity markets that drive the majority of port revenues, namely coal, and the impacts these trends may have upon the port's financial profile. The Outlook also reflects uncertainty regarding the outcome of the Walter Energy bankruptcy, and the impact this may have on port revenues.
The rating reflects the ASPA's position as a secondary port of call with exposure to volatile commodities, offset by the port's moderate ability to modify rates and contracts. Sufficient debt service coverage, declining leverage levels, and cost containment measures taken during fiscal 2015 in light of the downturn in coal and steel markets provide support to the rating. Fitch continues to view the ASPA's efforts to diversify its revenue sources favorably, providing opportunities for future revenue growth while lessening the port's reliance on more volatile commodity cargo products. The port's flexible capital plan includes no expected additional long-term borrowing, with funding coming largely from grants, co-investment from the private sector, and excess authority cash flow as available. 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. The rating is constrained by the uncertain impact of the depressed commodities market on the port's financial profile should current market conditions persist.
Revenue Risk: Volume - Midrange
Cargo Diversification Partly Mitigates Coal Dependence: Coal handling and storage comprises nearly half of the ASPA's revenue profile, exposing the authority to the volatile nature of the commodity. Short term, this exposure is exacerbated by the bankruptcy of Walter Energy, whose respective share of coal amounts to approximately 44% of total coal tonnage in the McDuffie terminal. Fitch views this exposure as partially mitigated by the recent efforts of the port to diversify its financial profile. The opening of the Pinto Island Steel Terminal in 2010 has shifted some of the cargo concentration away from coal to steel, and the Intermodal Container Transfer Facility (ICTF) opening in 2016 is anticipated to generate greater container business in the future, which will assist the port in diversifying further.
Revenue Risk: Price - Midrange
Limited Contractually Obligated Payments: The port is susceptible to fluctuations in cargo volume with less than 15% of the port's revenues being derived from contractually obligated user payments and exposure to cargos heavily influenced by commodity prices. However, Fitch takes comfort in the port's long operational history with many of its key coal customers and the performance of steel volumes well beyond the 2 million-ton minimum contracted floor. Additionally, the availability of tax revenues from the Oil and Gas Tax and the State Coal Severance Tax (the latter extended through October 2021) provides additional financial stability.
Infrastructure/Renewal - Midrange
Flexible Capital Plan: The authority currently has a \\$105 million capital plan which is expected to be mostly funded by state and federal grants, alongside public-private partnerships. Capital needs are projected to be mostly maintenance related over the near term, and are not expected to require additional long-term borrowing. Fitch views the flexibility and outside financial support of the port's capital plan as credit positives, as these factors permit the port to avoid the strain of large capital burdens during times of volatility caused by exposure to cyclical products.
Debt Structure - Stronger
Fitch views the port's debt structure, characterized by fully amortizing, senior lien debt, as conservative. Approximately 88% of the port's debt is fixed rate with the remainder synthetically fixed. Debt service is relatively flat at approximately \\$26.5 million through 2022, which subsequently steps down to the \\$22 million level through final maturity in 2040.
Stable Financials Amid Market Downturn: Operating revenues declined by 10.7% in fiscal 2015 as a result of softening coal and steel markets. Operating expenses also declined, by 4.4% largely due to management's effective cost containment strategies. Debt service coverage excluding state resources fell to 2.13x, while leverage was moderate at 5.14x and the port's liquidity position improved to 155 days cash on hand (DCOH). Despite the aforementioned declines, financial metrics remain consistent with the current rating category.
Peers: Virginia Port Authority (rated 'A+') and North Carolina State Ports Authority (rated 'BBB+') are two peers to Alabama State Port Authority due to their comparable status as state-owned port facilities. Virginia benefits from a higher percentage of contractually obligated revenues at 55%, compared to ASPA at 14% and North Carolina at 19%. North Carolina's market position is comparatively weaker than that of ASPA and Virginia.
RATING SENSITIVITIES
Negative:
-- A persistent decline in coal and steel tonnage which pressures debt service coverage ratios (DSCRs) below 1.6x without state support;
-- The Walter Energy bankruptcy resulting in materially negative impacts on coal volumes and related revenues;
--Significant leveraging of the asset resulting in a material deterioration of financial metrics.
Positive:
--Positive rating action is unlikely given the uncertain future impact of the depressed commodities industries on the port. However, Fitch views the ASPA's ability to continue to maintain strong coverage levels and diversify its revenue stream as essential to supporting the current rating.
SUMMARY OF CREDIT
The port has experienced significant declines in coal (16%) and steel tonnage (13%) during fiscal 2015 attributed to a global softening of commodities markets. Though management had predicted slower growth in 2015 following a record year in 2014, softening commodity markets led to greater declines than originally expected. One of the port's main coal customers, Walter Energy, filed for bankruptcy is 2015 and is currently being acquired by Warrior Met Coal LLC, an entity comprised of the company's first-lien lenders. The entity has agreed to pay up to \\$5.4 million for inventory, real estate, permits, intellectual property, accounts receivable and other assets in a deal that would also release Walter Energy from \\$1.25 billion of debt. The sale received U.S. bankruptcy court approval in January 2016, and is scheduled to close in late March. One major hurdle that could have impeded the acquisition was the settling of pension obligations between Walter Energy and the United Mine Workers of America (UMWA), though the disagreement was resolved on February 16 via a new collective bargaining agreement between the UMWA and Warrior Met Coal LLC. In Fitch's view, the sale seems to be moving in a positive trajectory which will likely leave the port unharmed. However, Fitch will be monitoring the sale closely, and may take rating action should circumstances develop that negatively affect the credit. Under a sensitivity which models a 45% coal revenue reduction, the ASPA is still able to meet debt obligations, though the port would likely have to draw upon state tax resources.
While operating revenues dropped by 10.7% in fiscal 2015 as a result of the market downturn, management was able to reduce operating expenses by 4.4% by lowering its headcount by 17% and temporarily shutting down its bulk material handling plant. Fitch views management's cost containment strategies favorably, as they enabled the port to maintain EBITDA at only 2.5% lower than what was originally budgeted. As a consequence, despite the decrease of DSCR (without state resources) from 2.73x in 2014 to 2.13x in 2015, metrics have remained consistent with the current rating category. As coal and steel markets are not anticipated to fully rebound until fiscal 2017 at the earliest, a 7% decline in revenues is expected in fiscal 2016. However, Fitch finds comfort in the minimum annual guarantee of 2 million steel tons which provides a level of stability to steel cargo; recent production levels of approximately 3 million, though declining, greatly exceed the 2 million ton threshold.
The authority is currently implementing a \\$105 million capital plan through fiscal 2021, funded with cash, state grants, and public-private partnerships with port tenants. No further debt is expected to be issued. The most notable capital improvements which are expected to be completed in fiscal 2016 include the ICTF, which will allow containers to be easily transferred between rail and ship, and APM Phase 2, which will provide for two ship-to-shore cranes and expand the container yard by 20 acres. Both improvements facilitate growth in the port's container business, potentially further diversifying the port's operating profile. Management has significantly scaled back capital improvements related to McDuffie terminal in light of the recent coal downturn, and maintains that nearly all capital improvements are flexible and maintenance related. The flexibility of the port's capital plan and high level of external financial support are viewed positively, as they allow the port to avoid financial strain during periods of cargo volatility.
Fitch's base case incorporates coal growth rates which reflect difficulties currently faced by coal markets in the thermal and metallurgical sectors. Thermal coal is expected to grow at a flat 0.5% from fiscal 2018 through 2021, reflecting low demand for the commodity in light of the trend towards renewable energy. Metallurgical coal is expected to gradually increase from 1.5% in 2017 to 4% by 2020, demonstrating anticipated recovery as global economic conditions improve and overcapacity balances. By weighting thermal and metallurgical coal to the port's respective exposure, coal growth rates for the port begin a modest recovery of 1.2% in fiscal 2017 which gradually escalates to 3.3% by fiscal 2021. Fiscal 2016 budgeted figures are assumed to be achieved, with the exception of cargo which has been modelled at 2% growth. Operating expenses were grown at an inflationary 2.3%. In the base case, DSCRs average 1.67x excluding state resources, while leverage averages 5.75x, falling to 4.58x by 2021.
In Fitch's rating case, fiscal 2016 is held consistent with the base case, though further declines are modelled for 2017. Coal revenues begin to recover in 2018 at the same rates modelled in the base case, with the remainder of revenue streams beginning recovery in 2019 at half of the growth forecast in the base case. Operating expenses are forecast to be flat during periods of negative or flat growth, and 3% thereafter. In the rating case, DSCRs without state resources average 1.51x, while leverage averages 6.43x, falling to 5.96x by 2021.
Fitch's base case metrics remain consistent with the 'A-' rating, and the robust coverage levels ASPA was experiencing prior to the downturn are considered to have well-positioned the port for the stress experienced in 2015 and expected in 2016. Additionally, Fitch finds comfort in the level of cushion provided by state tax resources which are available to the port in times of financial distress. However, DSCRs which persist at the rating case level would likely result in negative rating migration, though Fitch believes the port's cost efficiencies and revenue diversification efforts should prove effective in maintaining coverage above this level.
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.
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