Nov 8 - Fitch Ratings affirms the 'A+' rating of on the Hawaii Department of
Transportation's (HI) $380 million in outstanding harbor system revenue bonds.
The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
Stable Volume Supported by Natural Monopoly: Port volumes are stabilized 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.
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 2016. The increases include a
mechanism to increase cargo tariffs annually by 3% or CPI from 2016 onwards.
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 the 2014-2015 timeframe.
Conservative Debt Structure: Leverage was moderate at 4.0 times (x) net debt to
CFADS (cash flow available for debt service) in 2012, with all fixed-rate debt,
somewhat mitigating the limited protection provided by the 1.25x rate covenant
and additional bonds test (1.0x excluding contingency account and other
Strong Financial Profile: Stable operating margins with a sizable liquidity
cushion, with unrestricted liquidity providing more than 800 days cash on hand
in 2012. Coverage is relatively strong at over 2.0x historically and is expected
to remain at these levels through the forecast period.
WHAT COULD TRIGGER A RATING ACTION:
Should growth in throughput volumes stagnate, management's ability to manage
continued price increases as it progresses with the harbor system's capital
program may impact ratings.
Credit quality may be adversely affected should increasing debt service
requirements from the harbor system's capital program outpace revenue
generation, . Fitch gives credit to management's ability to moderate the
progression of the capital plan in a way that maintains the harbor division's
financial profile at or near historical levels.
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.
After remaining steady over the past decade and a half, overall cargo volume for
the harbor system (measured in short tons) declined in each of fiscal 2008,
2009, and 2010 (2.0%, 13.1%, and 3.5%, respectively) as the recession took hold.
Throughput recovery has been seen in fiscal 2011 and in preliminary figures for
2012 (0.1% and 6.7% respectively), rising to 18.9 million short tons from a low
of 17.7 million in 2010. This reflects a slight recovery in cargo levels as
tourism activity rebounds somewhat in Hawaii.
While operating revenues likewise declined over the 2008-2010 period (dropping
0.3%, 12.7%, and 1.7%, respectively), 2010's more moderate drop in revenue
relative to volume indicates the effect of the first of a series of multi-year
tariff increases, first implemented in 2010. 2011 revenues grew 17.2%, and
preliminary results for 2012 indicate a further increase of 17.4% to $100.8
million. This reflects the 20% cargo and pipeline tariff increase in July 2010
and the 15% increase in 2011. An additional increase of 10% was implemented July
2012, and will impact fiscal 2013 figures.
The scheduled tariff increases, developed with concurrence from primary harbor
system users, are the first increases to have been implemented since 1997. Cargo
rates are set to increase incrementally between 2010 and 2014 at rates starting
at 20% and stepping down on an annual basis to 5%. The plan also includes 3% or
CPI increases from 2015 onwards. Likewise, passenger fees increase $0.50 per
year from 2011 through 2016. These prescribed increases provide considerable
revenue flexibility to the harbor division going forward, and are intended to
support the division's sizable modernization plan.
Operating expenses excluding depreciation decreased 22.1% in fiscal 2010 as
management worked to contain spending through the downturn. Fiscal 2011 saw a
return to expense growth, with operating expenses up slightly to $39.5 million
(a 1.1% increase). Preliminary figures indicate 2012 will see an increase of
24%, in part due to write-offs associated with the Superferry project. However,
this estimate includes several conservative assumptions and management expects
expenses will be lower However, this estimate remains 2% below 2009 levels. In
the medium to long term, Fitch expects some increases in the system's operating
expense profile as harbor operations return to pre-recession levels, as deferred
maintenance is funded, and as labor costs under collective bargaining agreements
The harbor division has historically recorded strong cash levels and healthy
debt service coverage ratios. The division's unrestricted cash as of June 2012
is $115.9 million. This represents 862 days cash on hand based on preliminary
2012 expense results. Unrestricted cash balances have increased 40% since 2010,
and liquidity levels are above the indicative ranges for the 'A' rating
category. Fitch believes cash balances will remain adequate, although they may
decline some as management executes the harbor modernization plan over the next
Debt service coverage in fiscal 2010 and 2011 was largely in line with
historical levels at 2.1x and 2.7x, respectively. 2010 came in slightly lower
due to lower cargo throughput and the related drop in cargo-related revenues.
Preliminary fiscal 2012 figures show coverage at 2.4x. 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 2.3x. With the implementation of scheduled tariff
increases through 2016, the harbor division projects coverage of 1.9x or higher
with net revenue increases of on average 2% per year (1.8x including general
Under Fitch's stress scenario, including a double-dip in 2013, no revenue growth
above the scheduled tariff increases and a 100-basis point increase in annual
operating expense growth, coverage remains robust at 1.7x or higher (1.6x
including general obligation debt). Fitch anticipates additional borrowing of
$200 million in the context of the harbor system's CIP. This may increase
leverage levels from currently moderate levels (4.0x net debt to CFADS for
2012). 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 for the harbors division covers the period through
2015, with the main focus being the harbors modernization plan, currently known
as the New Day Work Projects (NDWP). 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 will extend until at least
2016. Funding is expected to come largely from revenue bond proceeds, though
American Recovery and Reinvestment Act funds (to the extent available) and port
funds are also being used.
Issuance of additional debt will be dependent upon the harbor system's revenues,
as timing and progression of NDWP projects is flexible. The next issue of $200
million is proposed for 2014-2015, provided the CIP is progressing and revenue
requirements are met. Fitch will continue to monitor the developments of the
system's capital planning and revenue profile as annual tariff increases go into
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.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Jul. 12, 2012);
--'Rating Criteria for Ports' (Sep. 27, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Ports