Fitch Ratings has affirmed the 'A+' rating of on the Hawaii
Department of Transportation's (HI) $351 million in outstanding
harbor system revenue bonds.
The Rating Outlook on all bonds is Stable.
The rating affirmation reflects the harbor system's natural
monopoly position serving the islands of Hawaii. The rating is also
supported by increased volume levels in fiscal 2014 along with
continued revenue growth due to the system's scheduled tariff
increases. Despite the harbor system's substantial $618 million
capital plan that calls for additional borrowing, the system is
expected to maintain its historically strong financial profile with
relatively strong coverage, moderate leverage, and high
liquidity.
KEY RATING DRIVERS
Revenue Risk: Volume - Stronger
Stable Volume Supported by Natural Monopoly: Port volumes are
rising and are also anchored by the essentiality of the port to the
State's economy. The port system provides essential maritime
services and serves a state without an efficient alternative means
of transporting goods to and throughout it. This partially
mitigates the system's exposure to fluctuations in the tourism
industry.
Revenue Risk: Price - Midrange
Approved Tariff Increases: The harbor system has adopted
scheduled tariff increases for cruise, cargo, and pipelines.
Escalations have been underway since 2010 and are scheduled to
continue through 2015. The increases include a mechanism to
increase cargo tariffs annually by the greater of 3% or CPI from
2015 onwards. No material elasticity to port demand has been seen
through these tariff adjustments.
Infrastructure Development & Renewal - Midrange
Considerable Capital Plan: The port system's sizable and
evolving capital improvement plan (CIP), currently sized at $618
million, is progressing on schedule. It is expected that the plan
will necessitate additional leverage, with $200 million in revenue
bonds expected in late fiscal 2015.
Debt Structure - Stronger
Conservative Debt Structure: The harbor system has relatively
low leverage consisting of all fixed rate bonds with a rapid
amortization schedule on existing debt, somewhat mitigating the
limited protection provided by the 1.25x rate covenant and
additional bonds test (1.0x excluding contingency account and other
allowable funds).
Strong Financial Profile: The harbor system benefits from stable
operating margins with a sizable liquidity cushion, with
unrestricted liquidity providing more than 1000 days cash on hand
in 2014. Coverage is relatively strong at over 2.0x historically
(2.8x in fiscal 2014) and is expected to remain at these levels
through the forecast period. Leverage is low at 2.0x for rated
debt, and is expected to remain in the 2x-4x range in the next five
years even with additional borrowing for the CIP.
Peers: The port system's peers include the Virginia Port
Authority (rated 'A+' by Fitch) and the San Diego Unified Port
District (rated 'A+'). The peers share solid demand and utilization
of their port systems, along with consistency of favorable metrics
on senior obligations. Like Virginia, the Hawaii Harbors Department
is a vital entity of the state.
RATING SENSITIVITIES
Negative: Stagnant growth or increased volatility in throughput
volumes may erode pricing flexibility. Limitations to the ability
to manage continued price increases may affect ratings.
Negative: Credit quality may be adversely affected to the extent
increasing debt service requirements from the harbor system's
capital program outpace revenue generation.
Positive: Positive rating action is considered unlikely in the
near term due to the system's sizable capital improvement plan that
calls for additional borrowing.
CREDIT UPDATE
Overall cargo volumes for the harbor system (measured in short
tons) have increased steadily in recent years, with 2014 volumes
rising to 20.4 million short tons. This represents a 3.6% increase
over a year prior and a 15.2% increase from a low of 17.7 million
in 2009. Historically, cargo volumes have been steady, but declined
in the 2008 to 2010 period as the recession took hold. The
throughput recovery that has been seen since 2011 reflects ongoing
recovery in cargo levels as tourism activity rebounds in
Hawaii.
Fiscal 2014 revenues for the harbor system increased 7.7% to
$121.3 million. Year to date for fiscal 2015, revenues are up a
further 4%. While the recession caused declines in operating
revenues in the 2008-2010 period, multi-year tariff increases
starting in 2010 have led to a healthy rebound in operating
revenues. The scheduled tariff increases, developed with
concurrence from primary harbor system users, were the first
increases to have been implemented since 1997. Cargo rates have
increased incrementally each year starting in 2010, initially
increasing 20% and stepping down on an annual basis to 5% in 2014.
The plan also includes 3% or CPI increases from 2015 onwards.
Likewise, passenger fees have increased $0.50 annually since 2011,
and will continue to do so through 2016. These prescribed increases
have provided considerable revenue flexibility to the harbor
division, and are intended to support the division's sizable
modernization plan.
Operating expenses were $47.6 million in 2014, growing 0.8% over
the year prior and reflecting increases in harbor operations costs,
personnel services costs, and costs of fireboat operations.
Management indicates that costs are in line with budget expectation
for 2015 year to date. Going forward, Fitch expects more normalized
increases in the system's operating expense profile as harbor
operations return to pre-recession levels. Deferred maintenance
funding and labor costs covered under collective bargaining
agreements will also drive future operating costs.
The harbor division has historically recorded strong cash levels
and healthy debt service coverage ratios. The division's
unrestricted cash as of fiscal 2014 is $165.4 million. This
represents 1,269 days cash on hand. Unrestricted cash balances have
increased 51% since 2011, and liquidity levels are supportive to
the current rating level. Fitch believes cash balances will remain
adequate, although they may decline some as management executes the
harbor modernization plan over the next several years.
Debt service coverage in fiscal 2014 was in line with historical
levels at 2.8x. When including the system's general obligation
payment requirements of roughly $3.3 million per year for
obligations taken on in the context of the Superferry project,
all-in coverage is slightly lower at 2.7x.
Under Fitch's base case forecast, with the implementation of
scheduled tariff increases through 2016 and modest growth
thereafter for a net revenue compound annual growth rate (CAGR) of
3.7%, the harbor division projects coverage of 2.0x or higher (1.9x
including general obligation [GO] debt). Under Fitch's rating case
scenario, including a combination of throughput reductions in 2016
resulting in a 10% revenue reduction and a 100-basis point increase
in annual operating expense growth, debt coverage would still
remain robust at 1.55x or higher (1.48x including GO debt).
Both scenarios include the anticipated additional borrowing of
$200 million in fiscal 2015 in the context of the harbor system's
CIP. Leverage levels are expected to initially increase from
currently moderate levels (2x net debt to CFADS for 2014) to around
8x in 2016, but should fall to the 3x-4x range by 2020. However,
Fitch anticipates that the harbor division will manage the timing
and sizing of borrowing for its capital program in order to
maintain sufficient levels of coverage and liquidity.
The current capital program focuses largely on the Harbors
Modernization Plan (formerly known as the New Day Work Projects).
The plan consists of various projects to enhance the system's
efficiency and capacity by addressing long-term capital needs. The
plan is expected to cost $618 million, and funding is expected to
come largely from revenue bond proceeds, though grant and port
funds could also be used.
The State of Hawaii Department of Transportation harbors
division consists of 10 commercial harbors on six islands, with
Honolulu serving as the state's principal port and trans-shipment
station for cargo that is bound for the other islands. As a
monopoly, the harbor system benefits from the lack of alternative
means of transporting cargo to and throughout the state, as well as
the state's limited commodity and manufacturing base, which results
in an inelastic demand for imported goods.
SECURITY
The revenue bonds are special limited obligations of the State
of Hawaii, payable from and secured solely by net revenue generated
by the harbor system.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Jul.
12, 2012);
--'Rating Criteria for Ports' (Oct. 16, 2014).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Ports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=795788
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980722
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Fitch RatingsPrimary AnalystEmma W.
GriffithDirector+1-212-908-9124Fitch Ratings, Inc.33 Whitehall
StreetNew York, NY 10004orSecondary AnalystChad LewisSenior
Director+1-212-908-0886orCommittee ChairpersonSeth LehmanSenior
Director+1-212-908-0755orMedia Relations:Elizabeth Fogerty, New
York, +1 212-908-0526Email: elizabeth.fogerty@fitchratings.com