Fitch Ratings has assigned 'A-' ratings to the Alabama State Port Authority's (ASPA) approximately $280.2 million in senior series 2017A, B, C, and D docks facilities revenue refunding bonds. In addition, Fitch has affirmed ASPA's outstanding $292.2 million in senior docks facilities revenue bonds at 'A-'. The Rating Outlook on all rated bonds is Negative. Fitch does not rate ASPA's $36.6 million outstanding series 2008A dock facilities revenue bonds, which are on parity with the rated debt. The maintenance of the Negative Outlook reflects continued weakness and volatility in the Port of Mobile's (the port) main business lines, namely coal and steel, which pose concerns in regards to the port's future financial performance and stability. Some improvement in metallurgical coal pricing and export cargo has been seen in recent months, though additional softness remains a possibility. A rating downgrade is likely to occur if the port's revenue profile continues to deteriorate or additional leverage is assumed that materially weakens financial metrics below current projections. A revision of the Outlook to Stable could occur should the port achieve stabilized operations and cash flow over the next two years, which allow maintenance of debt service coverage ratios (without state resources) in the 1.75x to 2.00x range. The 'A-'rating reflects the port's position as a secondary port of call with an elevated concentration of commodity cargo. The rating also reflects the port's volatile revenue profile as a result of limited fixed contractually obligated payments, which is mitigated by the availability of state tax revenues and the demonstrated ability of the port to substantially decrease operating expenses during periods of decline. The port may issue approximately $50 million in debt over the next year in order to fund expansion of its container terminal; however, the issuance will not occur unless revenues have been contracted to pay debt service. Average rating case debt service coverage ratios (DSCR) of approximately 1.46x (without state resources) are considered somewhat weak for a port with elevated commodity exposure, though leverage of approximately 6x is commensurate with the current rating. KEY RATING DRIVERS Revenue Risk: Volume - Weaker (revised from Midrange) Relatively High Commodity Exposure: The port has relatively high exposure to commodities, namely in coal and steel, which comprise over 50% of total revenues and over 60% of overall tonnage. Dependence on these more volatile business lines exposes ASPA's financial profile to elevated revenue volatility, evidenced by a 28% decline in operating revenues over the past two years due to softening coal markets. The port's efficient multimodal access and low degree of competition partially mitigate volume risk, though Fitch believes ASPA's market position results in relatively high levels of price elasticity and cargo diversification challenges. Revenue Risk: Price - Midrange Limited Contractually Obligated Payments: The port's revenue profile is susceptible to fluctuations in cargo volumes and commodity prices with only about 10% of the port's revenues being derived from fixed contractually obligated user payments. The port's long operational history with many of its key coal customers and the performance of steel volumes well beyond the minimum contracted floor are credit positives and provide moderate rate-making flexibility during stable periods. Additionally, the availability of tax revenues from the Oil and Gas Tax and the State Coal Severance Tax provide a level of financial stability to the extent severe commodity volatility causes revenue declines. Infrastructure/Renewal - Midrange Some Potential Debt-Funding of Capital Plan: The authority currently has a five-year, $180 million capital plan that is expected to be mostly funded by state and federal grants, alongside public-private partnerships. As the port is not currently experiencing capacity constraints, the capital plan mainly consists of maintenance related projects over the near term with the exception of the addition of an automotive terminal and further expansion of the container terminal. Expansionary projects could potentially lead to $50 million in long-term borrowing, though any additional debt is expected to be hedged via revenue-match contracts. Debt Structure - Stronger Conservative Debt Structure: The port's debt structure is conservative, characterized by fully amortizing, senior lien debt. The port has no material exposure to variable interest rates as all of its debt is either fixed rate or synthetically fixed rate. Structural features are considered adequate, with the current 12-month cash-funded debt service reserve fund (DSRF) planned to be replaced with a surety policy upon completion of the refunding transaction. Lower Expected Coverage, Reasonable Leverage: Average rating case DSCRs of roughly 1.46x (without state resources) are considered slightly low for a port with elevated commodity exposure, making a sustainable recovery imperative to maintaining the current rating. Estimated rating case liquidity levels of 150 days cash on hand (DCOH) are considered somewhat low in comparison to Fitch's ports criteria, albeit typical for an operator port. Leverage levels of 6x, rising to about 7x with additional potential debt, are considered commensurate with the current rating. Peers: Relevant regional peers include Jacksonville Port Authority (rated 'A'/Stable Outlook) and North Carolina State Ports Authority (rated 'BBB+'/Positive Outlook). Jacksonville benefits from a higher rating as a result of having a higher percentage of contractually obligated revenues at 61%, in comparison to ASPA (about 10%) and North Carolina (about 20%). North Carolina's market position is comparatively weaker than that of ASPA and Jacksonville, although this is somewhat offset by its stronger financial profile. RATING SENSITIVITIES Negative: Persistent volatility in coal and steel tonnage or significant leveraging of the asset that results in a material weakening of financial metrics below Fitch's rating case expectations on a sustained basis. 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. CREDIT UPDATE Transaction Summary ASPA expects to issue approximately $280 million in senior docks facilities revenue refunding bonds, series 2017A, B, C, and D, to refund outstanding series 2006A, B, and D and series 2010. The proposed bond issuance is expected to be all fixed-rated and will be on parity with existing senior revenue bonds. Bond proceeds and releases from the refunded bonds' sinking funds and DSRFs will also cover the costs of issuance, bond insurance premiums, and expenses for the new DSRF surety policy, which will replace the current cash-funded DSRFs. Fitch does not view the replacement of the cash-funded DSRF with a surety policy as a material credit concern, as leverage only increases by roughly 60 basis points (bps) when viewed in conjunction with the refunding. The refunding bonds are estimated to provide approximately $17.6 million in net present value savings (or 5.9% of refunded principal). The refunding bonds will reach final maturity in 2040, without extending the maturities of the refunded bonds. Performance Update ASPA's total tonnage continued to decline in fiscal 2016 (ended Sept. 30) by 18.5%, for a cumulative total decline exceeding 30% over the past two years. While other areas of the port saw some growth in fiscal 2016 as a result of increased exportation of steel and forestry products, overall performance was mainly hampered by depressed coal volumes. In fiscal 2016, the port's largest coal customer, Warrior Met Coal (formerly known as Walter Energy), was acquired by lenders after filing for bankruptcy in July 2015. The transition resulted in a significant operational decline at two of the company's main mines, which cut the port's coal exports from Warrior Met Coal in half. Given the revival in metallurgical coal prices as a result of scaled back production in China, both mines are expected to return to nearly full operations over the next year, so long as metallurgical coal prices remain relatively stable. Early fiscal 2017 coal revenue figures have not yet reflected recovery given the port's contracted rates are usually adjusted quarterly, but Fitch expects that some uplift in coal revenues will be seen by fiscal year end. Operating revenues underperformed Fitch's expectations in fiscal 2016 as a result of depressed coal tonnage. However, the port was able to significantly cut expenses by nearly 15%, which rendered overall DSCRs roughly in line with Fitch's expectations of about 1.7x (without state resources). The port also maintained higher unrestricted cash balances than expected, which resulted in outperformance in leverage and liquidity metrics. The port's $180 million five-year capital plan has nearly doubled from last year's estimates, mostly as a result of the addition of two key projects: the Three-Mile Creek automotive terminal and the expansion of the port's container terminal. The automotive terminal was contemplated during Fitch's last review, and is expected to be funded via public-private partnerships, grants, and operating cash flow. The expansion of the container terminal is a new project and could involve a $50 million new money debt issuance. However, no additional debt is expected to be issued without guaranteed contracts that provide sufficient funds to cover additional debt service. Fitch estimates that if the port is able to secure a contract that covers at least 115% of annual debt service for the container expansion, average DSCRs should not change by more than 3 bps and leverage should not increase by more than 70 bps. Though these results currently appear to be credit neutral, Fitch will not be able to reasonably determine the additional debt's true credit impact until the finalized contracts are reviewed, which will likely occur over the next year. Fitch has not assumed the potential additional debt within its financial analysis, as the port's decision to go forward with the container expansion is not yet definitive. Fitch Cases Fitch's base case assumes some uplift in revenues in fiscal 2017 with modest to flat growth thereafter, and inflationary operating expense growth. The rating case assumes a continued stagnation in operating revenues through fiscal 2018 with modest growth thereafter, and above inflationary expense growth beyond fiscal 2018. Both cases take into account the current refunding transaction including the removal of the cash-funded DSRF. The base and rating cases yield average DSCRs (without state resources) of 1.54x and 1.46x, respectively, while leverage remains in the 5x to 6x range in both cases. Overall, rating case financial metrics are still considered commensurate with the 'A' category in comparison to Fitch's Rating Criteria for Ports, although DSCRs are considered somewhat low for a port with elevated commodity exposure. Should conditions worsen and pressure financial performance below rating case levels, a downgrade is likely as metrics will have become insufficient to weather additional bouts of severe volatility without requiring state assistance, making the rating no longer commensurate with 'A' category. SECURITY The bonds are special, limited obligations of the port secured by docks facilities revenues and any investment income.