Alameda Corridor Transportation Authority, CA

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1 CREDIT OPINION Alameda Corridor Transportation Authority, CA Update to credit analysis Summary Contacts Moses Kopmar Analyst Maria Matesanz Senior Vice President Kurt Krummenacker Senior Vice President/ Manager CLIENT SERVICES Americas Asia Pacific Japan EMEA The Alameda Corridor Transportation Authority's (ACTA's A3 senior; Baa2 subordinate and second subordinate) credit profile reflects the essential role of ACTA's rail corridor in facilitating the movement of intermodal containers for the ports of Los Angeles (Aa2 stable) and Long Beach (Aa2 stable), the two largest container ports in the US and the 11th largest port complex globally. ACTA's rail corridor consolidated disparate and inefficient branch lines into a single 20-mile, multi-track corridor that is grade separated. It is the sole way for rail cargo to enter and exit the two ports, and is one of the most economic options, from the perspective of terminal fees and labor utilization, for transporting intact international containers between the ports and the railroad mainlines in downtown Los Angeles. In addition to ACTA's essentiality to the port complex, the two Aa2-rated ports are integral components of ACTA's financial structure, as each port has a several obligation to make shortfall advances to ACTA for up to 20% of annual debt service requirements, for a combined 40% of ACTA's annual debt service requirements in total. ACTA has also been willing to restructure debt opportunistically and as necessary, and it retains considerable flexibility to restructure debt further. ACTA recently restructured its debt to minimize expected shortfall advances between 2017 and 2026, and has an additional 1 billion of callable debt maturities between 2017 and 2026, as well as an additional 25 years on the term of the operating agreement (to 2062) beyond the current final bond maturity in Both of these factors provide flexibility to further restructure debt should the need arise. ACTA's limited revenue capacity, various insurer restrictions on additional indebtedness, and a requirement to recertify the environmental impact report likely preclude new debt. These credit strengths remain balanced against ACTA s very high leverage - ACTA has more debt than the two sponsor ports combined - along with ACTA's lack of independent rate setting authority, which limits its ability to adjust fees in response to changes in volume. ACTA is also particularly reliant on discretionary international/ocean intermodal containers for corridor volume, a cargo segment that is subject to competition from gateways in the Pacific Northwest and on the East Coast. Credit strengths» ACTA has a monopoly in serving intact intermodal rail containers transiting the two busiest container ports in the US

2 » The annual automatic increases to ACTA's fee schedule, along with significant restrictions on ACTA's ability to incur additional indebtedness, will require relatively manageable port shortfall advances even with low traffic growth and facilitate deleveraging over time» Bondholders benefit from non-traditional project finance features including annually recurring, 20% contingent support (40% in total) from two Aa2-rated ports at the top of the flow of funds, and fully funded debt service reserves for each series of bonds underlying the contingent support» The ports of Los Angeles and Long Beach represent a large and highly essential gateway for trans-pacific trade and the largest load center port complex in the US, together handling more than one-third of all US container cargo» Proximity to Asian exports, a large local market, deep water and extensive rail connectivity provide the port complex a competitive advantage in serving time-sensitive discretionary cargo destined for major inland freight hubs throughout the US Credit challenges» A significant share of import cargo continues to be transloaded before leaving Southern California, which has reduced intermodal rail cargo moving on the corridor» ACTA is highly levered with a cost structure that is largely fixed in relation to the volume-based revenues it receives, and it has no ability to unilaterally adjust fees/rates as necessary to compensate for changes in volumes» ACTA continues to employ an aggressive and growth-dependent amortization of its debt, as the current debt service schedule includes an 80% increase in debt service beginning in 2026, which has the potential to pressure standalone coverage and require large shortfall advances depending on the rate at which corridor traffic grows» The corridor is primarily used for the movement of discretionary cargo, which is susceptible to diversion and faces increased competition from Canadian and East Coast ports Rating outlook The stable outlook reflects our expectation for continued moderate growth in container volume at the port complex that provides associated volumes and revenues for ACTA, with additional stability provided by access to contingent port shortfall advances and future restructuring opportunities, if needed. The outlook also reflects our expectation of limited diversion of discretionary cargo to competing gateways, and no additional indebtedness for ACTA. Factors that could lead to an upgrade» Sustained period of corridor volume growing above projections and creating financial headroom to comfortably manage the 2026 increase in debt service» Evidenced willingness of both ports to make large, repeating shortfall advances to bridge the increased debt service requirements in 2027 and beyond Factors that could lead to a downgrade» Sustained underperformance of corridor volume relative to required breakeven levels, resulting in growing contingent obligations for the two ports and increasing reliance on market access for debt restructuring» Structurally weakened market position of San Pedro Bay ports resulting in diminished competitive standing and financial strength» Significant deterioration in credit quality of railroads - BNSF and Union Pacific (A3 stable) - party to the operating agreement This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Key indicators Exhibit 1 Key Indicators for Alameda Corridor Transportation Authority Data by fiscal year Ports Inbound 7,226,875 7,694,431 7,685,145 7,918,215 8,190,391 Outbound 3,526,385 3,692,128 3,276,342 3,215,970 3,426,507 Empties 3,471,564 3,634,542 4,053,965 4,427,181 4,530,268 14,224,824 15,021,101 15,015,452 15,561,366 16,147, % 5.6% 0.0% 3.6% 3.8% Inbound 2,679,466 2,887,833 2,916,201 2,834,495 2,678,274 Outbound 1,652,343 1,741,295 1,553,228 1,494,245 1,573,484 Total TEUs % change from prior year ACTA Empties Total TEUs % change from prior year 344, , , , ,831 4,676,568 5,025,055 5,113,064 4,923,383 4,683, % 7.5% 1.8% -3.7% -4.9% ACTA Container charge and use fee revenues 99,358, ,998, ,518, ,551, ,802,942 Contingent port obligations 44,863,928 39,860,138 45,863,458 45,215,768 34,650,182 Total dedicated revenues 144,222, ,859, ,382, ,767, ,453,124 Coverage of total annual debt service 1.29x 1.49x 1.32x 1.32x 1.59x Source: ACTA Profile The Alameda Corridor Transportation Authority (ACTA) is a joint powers authority formed by the cities of Long Beach and Los Angeles in The Alameda Rail Corridor was financed and built and is operated by ACTA. It is a multiple-track rail system located in southern Los Angeles County, California, running from the ports of Long Beach and Los Angeles 20 miles north, linking the ports' facilities with the transcontinental rail routes near downtown Los Angeles. The corridor consolidated freight rail traffic from approximately 90 miles of preexisting rail lines onto an integrated system separated from non-rail traffic. Operations began in April Detailed credit considerations Revenue Generating Base Project overview ACTA's rail corridor is owned by the two ports, as tenants in common, and leased to ACTA pursuant to a use permit that extends until 2048, but which can be extended at any time without limitation as to term or consultation with railroads. A separate operating agreement entered into between ACTA, the ports and the railroads governs the operation, maintenance and collection of revenues for the project. Pursuant to the operating agreement, the railroads are required to pay ACTA use fees and container charges on loaded and empty twenty-foot equivalent units (TEUs), in addition to other miscellaneous rail cargo, that originate or terminate at the ports and exit or enter the Southern California market, a defined 10-county area, by rail. 3

4 Volume-based cash flow balanced by port shortfall advances The predictability of volume-based cash flow is challenged because ACTA does not have the ability to unilaterally adjust fees and charges to compensate for changes in corridor volume. Use fees and container charges are subject to automatic annual increases indexed to inflation, with a minimum increase of 1.5% and a maximum increase of 4.5%. However, if ACTA's revenues are insufficient to pay annual debt service (and, if necessary, related deposits and fees), the operating agreement requires each port, severally but not jointly, to pay shortfall advances totaling up to 20% of (1) total annual debt service, (2) required debt service reserve fund deposits, and (3) fees and third-party charges associated with financings. The initial shortfall advances in fiscal 2012 resulted in the implementation of a 1.00 per TEU surcharge, which is also adjusted annually for inflation and remains in place until all shortfall advances are reimbursed to the two ports (and is reinstated should subsequent shortfall advances materialize). The surcharge has increased to 1.31 in fiscal 2018, and we do not view the retirement of the surcharge as a material risk because the shortfall obligation is shielded by a much larger obligation (to the two ports) ahead of it in the flow of funds, which would need to be amortized before cash flow reaches the shortfall liability. Market share decline has impacted corridor volume The overall predictability of cash flow is satisfactory. The majority of revenue is received from fees on loaded containers, which shippers must choose to route on the corridor, and corridor volume has proven to be volatile and subject to competition from alternate gateways and shippers' use of transloading. Since the corridor opened for revenue traffic in 2002, ACTA has served about 34% of annual container throughput at the two ports, on average. During this same period, the two ports have maintained a stable and significant share of total container throughput among US ports, accounting for approximately 37% of annual container throughput among US ports, on average. However, while the corridor is the sole way for rail cargo to directly enter and exit the port complex, ACTA's volumes continue to be negatively impacted by the practice of transloading, whereby containers exit the port complex by truck instead of rail in order for shippers to rearrange and/or transfer contents into new international or larger domestic containers at nearby warehouses, after which the new container then moves by rail from an off-dock ramp. ACTA's operating agreement does not require railroads to pay corridor fees on transloaded cargo. As a result, while a significant portion of cargo continues to move to and from the Southern California market by rail, the share of fee-eligible cargo transiting ACTA's corridor has declined from 35% to 29% over the last ten years. ACTA's share of import containers, the cargo segment in which the two ports are most dominant, has declined from 42% to 32% over the same period. Strength of port complex provides stability in volume The two ports have several important characteristics that combine to form a defensible, and dominant market position. These factors include the very large local and regional catchment areas of the two ports; waterways that allow them to serve the largest vessels in the global container fleet; integrated terminal operations through ocean carrier ownership stakes in the majority of terminals; and a significant 10-day (or more) time advantage to major inland markets due to the proximity to Asia combined with excellent rail infrastructure that allows shippers to efficiently route cargo via rail to major markets throughout the US, with a reach that extends into the Midwest and Southeast. The scale and resilience of the two ports is an important factor as it provides predictability as to the long term throughput prospects of the two ports, and by extension the cargo volume that will be available for ACTA to serve. Port volumes increased 3.8% in fiscal 2017 and have increased 7.6% through the first nine months of fiscal ACTA's corridor volume decreased 4.8% in fiscal 2017, impacted in part by disruption from the Hanjin bankruptcy, but corridor volume has since rebounded and has increased 11.4% through the first nine months of fiscal ACTA's revenues have increased 8.1% through the first nine months of fiscal Rail corridor remains essential to port complex One factor that is likely to buffer further market share decline is the persistent cargo congestion related to truck moves in the port complex. It remains essential to the port complex, and its multiple different users that shippers be able to receive and discharge containers at the marine terminals directly by rail. The port complex could not, practically, move 100% of current container volume by truck while maintaining acceptable levels of fluidity or cargo velocity. Volume at the port complex is such that terminal operators have imposed congestion pricing on truckers, currently charged at a flat fee of 63 per container transaction at all times of the day to 4

5 subsidize the cost of off-peak terminal operations. Marine terminals at the port complex currently operate 24 hours a day, seven days a week - the port complex is the only one in the US with a formal program of night and weekend shifts - which results in limited practical ability to further extend gate operations. Truck turn times, which presently average 80 minutes from arrival at the gate to exit of the terminal to complete a single transaction, have historically been problematic and have frequently resulted in additional congestion charges being levied on cargo owners by motor carriers. These congestion challenges have persisted while 30% of all container volume is cleared by rail on ACTA's corridor, and congestion would worsen markedly if a meaningful share of ACTA's volume were converted to truck moves. Today, with both ports handling record volumes and truck power in scarce supply due to new regulations over trucker hours of service, the ability to move freight by rail is more relevant than it has been at any time in the last 10 years, which is positive for ACTA. Rail is also at the center of the two ports efforts to meet clean air standards imposed by the state and regional air quality authorities. The two ports have incorporated targets into their long-term planning to increase the amount of freight moved from the terminal by rail, with Long Beach targeting an increase to 35% (with a long-term target of 50%) from the current 25%, and Los Angeles targeting an increase to 40% from the current 25%. Over the last decade, the two ports have made significant investments in upgrading and expanding rail infrastructure, and 13 of the 14 container terminals at the combined complex have on-dock rail facilities, which is a significant advantage. Through incentive pricing, the ports are also able to encourage greater use of rail, such as with the Incremental On-Dock Intermodal Incentive Program offered by Long Beach, or with the truck traffic mitigation fees imposed under the PierPass program. Financial Operations and Position We expect ACTA will support its debt structure through a combination of corridor revenues and modest financial support from the two ports, although traffic growth will be required to manage the 2026 increase in debt service while maintaining port shortfall advances at modest levels. In 2016, ACTA restructured its debt to essentially align debt service requirements with its fee schedule through 2025, which will require relatively minimal volume growth and contingent support over the next eight years. Long term, debt service continues to grow at a rate above the annual escalation in fees and charges. Through the life of the debt, incorporating the full 40% contingent obligation from the ports, we project a long-term average debt service coverage ratio (DSCR) of 2.7x for senior bonds, 2.15x for first subordinate bonds and 1.4x for second subordinate bonds. At the same time we recognize the large shortfall advances these ratios entail, and the potential that the debt structure may be managed in order to minimize the magnitude of required support. In the event volume underperforms the approximately 2.5% annual growth rate required to keep port shortfall advances at manageable levels post 2026, ACTA will undertake additional debt restructurings, and it retains considerable flexibility to do so. ACTA has 1 billion of callable debt maturities between 2017 and 2026, and an additional 25 years on the term of the operating agreement (to 2062) beyond the current final bond maturity in 2037, which would allow for debt to be aligned similarly. Both of these factors provide flexibility to further restructure debt should the need arise. Lack of revenue capacity, various insurer restrictions on additional indebtedness and a likelihood that ACTA would be required to recertify the environmental impact report, or to issue new project debt under a separate indenture, will likely preclude new debt. Assuming the minimum annual CPI adjustment, the DSCR on the senior lien bonds remains over 1.0x without the benefit of the shortfall advances, and the majority of volume risk is borne by the first and second subordinate lien bonds, which is reflected in the two-notch rating difference. The lack of distinction between the first and second subordinate lien bonds reflects the largely similar legal provisions and cash flow coverage when the first subordinate lien bond amortization increases in We view the current amortization schedule through 2037 as reflective of the tension between the value in retiring the corridor fee as early as practical and the value in minimizing the frequency and severity of port shortfall advances. LIQUIDITY ACTA has sufficient operating liquidity through a dedicated corridor maintenance fee that is assessed in addition to the use fees and container charges that secure the bonds. Balfour Beatty Rail provides day-to-day labor and professional services related to the maintenance, operation and repair of the corridor. 5

6 The railroads have financial responsibility for annual M&O, corridor operations and dispatching, maintenance of business interruption and property insurance, and capex (which is funded from use fees/container charges). The railroads pay Maintenance of Way fees, or M&O charges, funded monthly on a pro rata basis. Beyond the M&O revenue stream, any capital and replacement needs are funded through a reserve account for capital and replacement projects, funded annually in the flow of funds up to a target maximum of 15 million. Management indicates there are no extraordinary capital expenditures currently identified. Debt and Other Liabilities DEBT STRUCTURE ACTA s debt profile consists of current interest and capital appreciation bonds, with ascending annual debt service. The current final maturity is in DEBT-RELATED DERIVATIVES None. PENSIONS AND OPEB Pensions and OPEB are not major factors for this issuer. ACTA reported a net pension liability of 1.8 million at the end of fiscal Management and Governance ACTA's seven-member governing board includes two representatives from each port, a member of the city council of each Los Angeles and Long Beach, and a representative of the Los Angeles County Metropolitan Transportation Authority. Board approval requires 5 of 7 affirmative votes. ACTA's principal responsibility is the collection of fees from the railroads to pay debt service on the outstanding revenue bonds. In 1998, the authority entered into the Alameda Corridor Use and Operating Agreement with the Cities of Los Angeles and Long Beach through their respective Boards of Harbor Commissioners, Union Pacific Railroad Company and BNSF Railroad Company. Under the terms of the agreement, ACTA became responsible for the design, construction and maintenance of the rail corridor. The railroads are required to pay ACTA Use Fees and Container Charges for use of the corridor and the movement of waterborne containers through San Pedro Bay ports that are transported by rail into or out of Southern California and non-waterborne containers that originate or terminate at the ports. If there are corridor outages, the railroads may use other lines but still must pay fees for up to five days of blockage. The authority also has business interruption insurance in place. In the event the charges are insufficient to pay certain ACTA obligations including debt service, the agreement obligates each port, severally and not jointly, to pay Shortfall Advances to pay 20% of an Annual Amount, which includes debt service, required debt service reserves, and fees and third-party charges associated with financings. This obligation is subordinate to all of the ports' other obligations, including their own O&M and debt service. The agreement was amended in 2006 and is in effect until April 15,

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8 CLIENT SERVICES 8 Americas Asia Pacific Japan EMEA