OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on the Jacksonville Port Authority, Florida's (JaxPort or the port) approximately $87 million in outstanding series 2012 revenue and refunding bonds and $25 million in outstanding series 2008 revenue bonds. The Rating Outlook is Stable.

The authority also has $52 million in unrated parity senior loans and $38 million in subordinate loans outstanding.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange
Strategically Located Southeastern Port: The port benefits from a desirable location with improving intermodal connectivity and infrastructure which helps maintain its niche importance in the international automobile trade. Nevertheless, JaxPort operates in the highly competitive Southeast Atlantic region for cargo and cruise activities with moderate trade exposure to Latin America and Caribbean markets.

Revenue Risk - Price: Midrange
Diverse Revenue Base with Contracted Tenants: The port's increasingly diverse revenue base has grown at an average rate of 1.9% for the past five years. JaxPort serves as a landlord port with 61% of its operating revenues derived from long-term leases with minimum annual guaranty (MAGs) terms from a diverse group of tenants. New services and extended agreements with previous tenants provide revenue protection for the port.

Infrastructure Development/Renewal: Midrange
Adequate Infrastructure with Development Needs: The port's current capital plan includes $705 million for a deepwater project to dredge portions of the St. John's River to 47 feet. No additional leverage is envisaged to fund the project, though the majority of funding sources for it are still unspecified. Excluding the harbor-deepening project, the total capital improvement plan (CIP) is modestly sized at $117 million, a slight reduction over the prior year's plan.

Debt Structure: Stronger
Strong Debt Structure: Senior lien debt is 75% fixed rate, with the other 25% consisting of 2009 variable rate taxable and tax-exempt revenue notes. The variable rate portion is synthetically fixed, serving to mitigate interest rate and basis risks. The debt service reserve fund (DSRF) is 100% cash-funded. The debt service profile is flat to decreasing, and principal fully amortizes over the term.

Stable Financial Performance: The port has seen growing revenues despite the challenging economic climate following the last recession, leading to senior lien debt service coverage ratios (DSCRs) of 2.3x on average which are expected to remain above 2.0x for the foreseeable future. Liquidity has increased in recent years, reaching approximately 223 days cash on hand as of fiscal year-end 2015. Leverage is moderate at 5.5x, and is expected to drop to 3.0x by 2020. Leverage is mitigated somewhat by MAGs in excess of senior debt service requirements and pledged intergovernmental transfers from the city of Jacksonville.

Peers: JaxPort's peers include other 'A' rated Florida ports, including Broward County - Port Everglades ('A'/Outlook Stable) and Hillsborough County Port District - Tampa Port Authority ('A'/Outlook Positive). Tampa has diverse business operations with contracted revenues similar to JaxPort, while Port Everglades is more reliant on cruise revenues. While Port Everglades and Tampa have comparatively lower leverage and higher liquidity, JaxPort is supported by its strong franchise in automobiles and containers and high levels of minimum guaranteed revenues. Metrics fall comfortably within the range for an 'A' rated credit.

RATING SENSITIVITIES

Negative - Additional Borrowing: An increased leverage position and/or measurable reductions in cash balances that would result in less favorable coverage or leverage metrics could lead to a downgrade;

Negative - Increased Costs: A rising expense profile that would weaken coverage ratios could pressure the rating;

Negative - Trade Performance: Significant volatility in trade lanes with the Caribbean and Latin America that pressures historical financial stability could result in a lower rating;

Positive - Positive rating migration is unlikely in the near term given the port's potentially sizeable Capital Improvement Plan.

CREDIT UPDATE

Container and automobile import and export drive the port's cargo trade. The port currently ranks as the nation's 11th largest port in terms of container trade and as the second largest in the state of Florida behind Port Everglades. The port is also the nation's largest for the import of automobiles and among the largest for exports. Container trade represents approximately 45% of the port's annual revenue base, and fiscal 2015 throughput as measured in 20-foot equivalent units (TEUs) was down 2.3% over the prior year to 915,212. The drop in TEUs was mitigated by an 8.5% increase in vehicles handled at JaxPort in fiscal 2015 following the start of a Volkswagen agreement that is expected to import 100,000 units per year for the next five years.

JaxPort's status as a landlord port with long-term contracts and MAGs serves as downside protection to economically sensitive and potentially volatile cargo revenue streams. Fiscal 2015 MAG revenues from throughput guarantees and lease revenues together represented 61% of total operating revenues and covered senior debt service by 2.45x and total debt service by 1.72x on a gross basis. JaxPort has attracted new services and is also expected to renew a number of its contracts with long-term tenants, with terms expected to remain consistent with previous agreements. Cruise revenues accounted for 8% of operating revenues in fiscal 2015. The authority's existing operating agreement with Carnival is expected to be renewed for an additional two to three years going forward. While cruise revenues have shown steady growth in recent years, the lack of longer term agreements as well as physical limitations to attract larger classes of cruise vessels presents challenges for future growth.

The port's cargo segments provide a mostly stable revenue base supported by contractual agreements. Revenues have steadily increased in recent years with a five-year average growth rate of 1.9%, and the authority has maintained a stable cost profile over the past few years, as indicated by a historical five-year annual rate of -1.2% for operating costs. For fiscal 2015, revenues increased 3.8% and expenses remained flat from the prior year at $30 million. Stability in expenses has kept EBITDA healthy in recent years, and operating margins up. Management budgets an increase in expenses by 5.7% over the prior year; however, three-month year-to-date expenses through December 2015 are currently 4.9% below budget, while total operating revenues are 2.3% above management's budget.

JaxPort's overall CIP through 2020 is sized at $822 million, including $117 million for general port capital improvements, and $705 million for harbor deepening and related improvements. Despite the program size, management does not currently expect further leverage at the senior lien debt level, as the authority intends to proceed with large capital projects only once funding sources are identified, including external city, state or third-party grants, matching funds, or other contributions. Fitch notes that the port has received significant grant funding since 2011 and that the majority of the harbor to be deepened falls under the jurisdiction of the U.S. Army Corps of Engineers (USACE).

The authority's revenue profile is diverse and is aided by non-operating revenue sources including annual appropriation from the city's excise tax (telecommunications tax) after payment of debt service on city bonds issued for port projects and 1/4 mill from the Jacksonville Electric Authority (JEA). Funds received by the port are subordinate to and contingent on debt service payments due on the city's bonds. The authority received approximately $5.3 million in fiscal 2015, an amount expected to decrease through 2020 when the city's bonds are paid off, at which point this revenue source could increase to around $10 million per year. Fiscal 2015's net revenues generated 2.3x senior debt service coverage (1.6x all-in) and would cover maximum annual debt service (MADS) on the senior lien by 2.2x (1.9x all-in).

Fitch's base case assumes management's 2016 budget, followed by five-year historical revenue compound annual growth rates (CAGRs) from 2017 onward, with slightly less growth forecast for automobile revenues to reflect capacity constraints, while expenses grow at 3.5% per year. This scenario produces metrics consistent with the port's historical performance, with senior DSCRs averaging 2.17x (1.56x all-in) and a minimum of 2.02x (1.46x all-in). Leverage is expected to drop to from 5.5x to 3.0x by 2020.

Fitch's rating case contemplates modest declines in automobile and container revenues with flat cruise and minimal bulk growth over the forecast period, resulting in largely flat average growth in operating revenues as well as rising expense levels. Under such a scenario, senior coverage averages 1.98x (1.42x all-in) and reaches a minimum of 1.68x (1.26x all-in). Leverage is forecast to decline to 4.0x by 2020 in the rating case.

SECURITY

The senior revenue bonds are secured by a first lien pledge on net revenues generated from the Blount Island Marine Terminal; the Talleyrand Marine Terminal; and the Dames Point Marine Terminal. The bonds are further secured by external sources including excess revenues from the city of Jacksonville from an annual appropriation of $800,000, plus an amount equal to 1/4 mill from the JEA and a percentage of the raise in communications tax revenue over a base amount established, adjusted by an index.