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Fitch Affirms Augusta Regional Airport (GA) PFC General Revs

Dépèche transmise le 3 février 2011 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB-' rating on Augusta, Georgia's $13.4 million of outstanding passenger facility charge (PFC) and general revenue bonds (series 2005 A/B bonds). Fitch also affirmed its 'BBB-' $6.2 million of outstanding general revenue bonds (series 2005 C bonds). The aforementioned series 2005A/B and series 2005 C bonds were issued for projects related to the Augusta Regional Airport (the airport, or AGS).

The Rating Outlook remains Negative. The Negative Outlook is based on potential for credit pressures over the coming year with a particular emphasis on trends in airport traffic and fuel sale activities coupled with management's intention, as communicated to Fitch, to use certain grant funds to reduce airport leverage and mitigate the existing accreting nature of future debt service requirements. The airport's operating profile, characterized by a very small traffic base, limited carrier service, and a high dependence on general aviation fuel sales leads to greater volatility in demand and margins. Negative trends in margins due to enplanement or fuel sale performance, or use of certain grant funds for purposes other than reducing leverage may result in a lower rating.

RATING RATIONALE:

The 'BBB-' rating reflects the following:

--History of adequate debt service coverage even in times of economic downturns and high fuel prices.

--Strong liquidity position with a cash balance in excess of outstanding debt.

--AGS's uninterrupted history of scheduled commercial service and the origination and destination profile of its passenger traffic support a minimum level of demand.

--Recent improvement in traffic levels with enplanement growth of 24% and 13% in 2010 and 2009, respectively, with additional service to Dallas Fort Worth in 2010.

--Visibility accorded to the city as a major golf destination, which is home to the Augusta National Club, the host of the PGA's annual Master's Tournament.

--No future borrowing anticipated to finance $37.4 million capital program.

Offsetting credit concerns include the following:

--Very limited enplanement base and local market with approximately 250,000 enplanements in 2010.

--AGS's high dependence on fuel sales (68% of 2010 revenues) leaving the airport significantly exposed to fluctuations in demand for aviation fuel.

--Significant market share concentration in Regional Elite (56% in 2010) and U.S. Airways Express (36% in 2010).

--Management's inaction on plans to deposit $8.8 million in remaining federal and state grant proceeds into the principal/sinking accounts for the series 2005 A-C bonds after advising Fitch that such a transfer would take place in 2009.

--Limited future scope for the re-introduction of mainline commercial service at AGS based upon the airport's proximity to Hartsfield-Jackson Atlanta International Airport, which is the busiest airport in the world.

--A large portion of the airport's margins from its fueling business are linked to the annual Master's Tournament in April of each year, creating seasonality in the airport's cash flow profile while exposing it to a degree of event risk.

KEY RATING DRIVERS:

Future rating actions are likely to be influenced by the following:

--Ability to maintain strong cash position.

--Level of volatility in airport traffic and fuel sales.

--Use of remaining federal and state grant proceeds, currently held in the construction fund, for purposes other than reducing leverage.

SECURITY:

The series 2005 A/B bonds are secured by a first priority pledge of and lien on PFC revenues and net general revenues of AGS. The series 2005C bonds are secured by a first priority pledge of and lien on the airport's net general revenues only.

CREDIT SUMMARY:

Proceeds from the 2005 issuance were used to construct a new terminal at AGS which was completed in 2008.

The airport, located approximately seven miles south of downtown Augusta, is managed and operated by the Augusta Aviation Commission. With the majority of operating revenues coming from non-airline sources, in particular, fuel sales (68% of operating revenues in 2010), the stability of the airport's financial profile and its ability to service outstanding debt obligations are inextricably linked to the health of its wholly-owned fueling operation. When Fitch originally rated the bonds the airport's gross margin from fuel sales stood at 38%, but increasing fuel expenses and elasticity have compressed gross margins over the past several years, currently standing at 25%. However, the airport's policy of adjusting fuel prices on a weekly basis to reflect increased costs of supply and prevailing market rates provides a degree of protection against further material erosions in gross margins from the fueling business. Gallon fuel sales from the airport's general aviation segment declined by approximately 4% in 2010, with an 8.4% CAGR decline since 2005, reflecting lower demand as a result of the recessionary economic environment in the U.S. As the general aviation segment generates higher margins for the airport on a per-gallon basis, this decline has been a large factor in the margin compression for fuel sales seen in recent years.

Airline activity continues to represent a fairly minor piece of the airport's overall business and financial profile (airline revenues accounted for 7% of operating revenues in 2010). Nonetheless, PFC collections are an important source of revenue as the series 2005 A/B bonds are payable first from PFCs. Enplanements have grown significantly since Fitch's last review with increases of 24% and 13% in 2010 and 2009, respectively, and AGS has added service from American Eagle (6% of total enplanements in 2010). However, overall enplanement levels (250,000 in 2010) are low relative to other airports Fitch rates and Fitch believes AGS is susceptible to cuts in service should market conditions deteriorate for the airlines. It is worth noting that AGS has provided the airlines with annual subsidies ranging from $550,000-$839,000 from 2008-2010 to keep airline fees low, providing an incentive for airlines to use the airport. Based upon the airport's proximity to Hartsfield-Jackson Atlanta International Airport, the prospect for increased or new commercial carrier service at the airport is extremely limited.

Management's debt service coverage calculations show a decline in coverage since 2008 with coverage levels of 3.17 times (x), 2.78x, and 1.81x in 2008, 2009, and 2010, respectively. The aforementioned coverage figures incorporate PFC revenues as an offset to gross debt service requirements. When PFCs are treated as revenues coverage is lower at 1.71x, 1.59x, and 1.27x for 2008, 2009, and 2010, respectively. The trend reflects the increasing use of PFCs as offsets over this time period which may continue given the current travel levels. The decline in coverage is also attributable to increases in O&M expenses, which went to $6.54 million from $6.08 million over the time period.

AGS has operated under a rate ordinance for airline charges since 2004. The rate ordinance establishes a compensatory mechanism for the terminal and a residual cost recovery methodology for the airfield. The use and lease agreement under negotiation at the time of Fitch's last review in 2009 was not executed. Management did not give an indication as to if and when a use agreement will be executed.

Construction of the airport's new terminal was completed on time and on budget in July 2008 at a total cost of $32 million. The airport was able to secure federal and state grant funding for the terminal project significantly in excess of original projections. In 2009, airport management advised Fitch that $8.8 million in remaining construction fund proceeds would be deposited into the sinking fund accounts for the series 2005 bonds during fiscal 2009 ($7 million allocated to series 2005 A/B bonds and $1.8 million allocated to series 2005 C bonds). The transfer has not been made; however, it has been represented to Fitch that AGS continues to explore options on this front. Had the funds been transferred they would have provided strong additional levels of funded liquidity to the series 2005 bonds, while being backstopped by the existing cash reserves which comprise the bond security package. The airport's current capital program totals $37.4 million, and is expected to be funded with grants and internal funds. Should the remaining $8.8 million be used for the capital program or other purposes than funding for the bonds as represented, this may negatively impact credit quality.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance,' (Aug. 16, 2010);

--'Rating Criteria for Airports,' (Nov. 29, 2010).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745

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