Fitch Rates $96MM Hawaii Harbor System Revs 'A+'; Stable Outlook.

SAN FRANCISCO -- Fitch Ratings assigns an 'A+' rating to $96,085,000 million State of Hawaii, harbor system revenue bonds, series A of 2006. The Rating Outlook is Stable. The 2006 bonds are expected to be guaranteed by a bond insurer whose financial strength is rated 'AAA' by Fitch. The bonds are scheduled to sell via negotiation by A.G. Edwards and Sons, Inc. on or about June 26, 2006. Proceeds of the series 2006 bonds will finance the reconstruction and improvements to the system's container yards, pier extensions and other capital projects. Fitch also affirms the 'A+' rating on roughly $180.9 million in outstanding revenue bonds issued under the 1997 certificate. The Rating Outlook is Stable. All harbor system revenue bonds are secured by a pledge of net revenues of the Harbor Division.

The 'A+' rating reflects the strength of the state's underlying economy and its reliance on imported goods, the Harbor Division's natural monopoly position in providing essential maritime services for the movement of those goods to and throughout the state, and the strong financial position as a state harbor system. Offsetting the strengths of this credit is the economic sensitivity to the significant tourism industry, an unknown financial exposure related to payments to the Office of Hawaiian Affairs regarding the ceded lands on which the ports operate, and rising debt service levels that may lead to erosion in the debt service coverage ratio absent tariff increases.

The State of Hawaii Department of Transportation Harbors Division consists of 10 commercial harbors on six islands. The harbor system is a monopoly and benefits greatly 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 result in an inelastic demand for imported goods. Honolulu serves as the state's principal port and trans-shipment station for cargo that is bound for the other islands. The system operates as a landlord-tenant port, with shipping companies and terminal operators responsible for the maintenance of leased property and cargo handling equipment, while the system retains responsibility for maintaining the piers, wharves, and container yards.

The system boasts a diverse mix of cargo, including containers, petroleum products, cement, chemical products, molasses, livestock, produce, lumber, and scrap metal. Between fiscal 2001 and fiscal 2005 total cargo volume grew at an average annual rate of 3.7% resulting in total wharfage rising to 41.7 million in fiscal 2005 from 36.1 million in fiscal 2001. Additionally, cruise ship passengers boasted a healthy 23.4% average annual increase climbing to 1.5 million passengers in fiscal 2005 from 661,000 in fiscal 2001. The five top shipping agencies based on wharfage revenue to the system include Matson Navigation Company, Young Brothers, Horzion Lines LLC, NCL America, and Waldron Steamship company.

Despite turmoil in the Asian and U.S. economies, a downturn after the events of Sept 11, 2001, and the impact of SARS in Asia, the system has consistently posted healthy operating ratios, resulting in an operating ratio of 48% in fiscal 2005. Between fiscal 2001 and fiscal 2005, total operating revenues increased by 2.8% on an average annual basis whereas total operating expenses increased by 10.8%. The dramatic rise in operating expenses over this period is primarily attributed to 2005 increases in personnel expenses, various special maintenance projects, deferred harbor maintenance expenses and security measures. Going forward, Fitch expects possible adjustments in the system's operating expenses as harbor management may be required to make payments to the Office of Hawaiian Affairs for ceded lands.

The harbor division has historically posted healthy debt service coverage ratios. Fiscal 2005 resulted in 2.82 times (x) debt service coverage, up from 2.41x in fiscal 2001. According to harbor management's projections, tariff increases and forecasted operations should provide a debt service coverage ratio of 2.10x in fiscal 2008, the end of the forecast period. Management assumes operating revenues and operating expenses to increase on an average annual basis of 7% and 12%, respectively. Of some concern, will be the future issuance of general obligation bonds that will be subordinate to the harbor system revenue bonds, but will nonetheless, affect the division's balance sheet.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.