News Column

Fitch Affirms Allegheny County (PA) Airport Auth's Rev Bonds at 'A-'; Outlook Stable

August 29, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms Allegheny County (PA) Airport Authority's (ACAA) outstanding $322.5 million of senior airport revenues bonds at 'A-' with a Stable Rating Outlook. The airport also has $5.4 million outstanding sub lien airport revenue bonds series 2001 A&B, which Fitch does not rate.

The rating affirmation reflects signs of improvement in the airport's traffic performance and stable cost per enplanement levels. Traffic increased 0.7% for the first seven months of 2014 following two years of slight decline. Cost per enplanement (CPE) remains around $14 and is expected to remain stable in the near term with the use of gaming tax and gas drilling revenues until debt service cost declines in 2019.

KEY RATING DRIVERS

O&D Airport with Limited Competition-Volume Risk: Midrange

The airport serves primarily an origination and destination (O&D) passenger base following the de-hubbing operations of US Airways. The stabilized enplanement base is up 0.7% year-to date (YTD) 2014 after dropping 1.8% Fiscal (FY) 2013 to 3.9 million enplanements. The airport faces limited competition with no major airports within 100 miles and also serviced by a diverse share of carriers. US Air/AA is the largest carrier with 34% market share.

Subsidized CPE-Price Risk: Midrange

The airport utilizes a cost center residual use and lease agreement that provides strong cost recovery terms through 2018. However, the current CPE of $14.57 is considered high for a medium hub airport and is subsidized by gaming tax revenues. Fitch expects the near-term CPE to remain at the current level through the use of external revenues and initial payment from the gas drilling lease agreement to reduce airline costs.

Manageable Capital Program-Infrastructure Development and Renewal Risk: Stronger

$302 million 2014-2020 capital improvement program (CIP) with slightly less than half coming from FAA grants. The 20year old terminal is in the process of being renovated, and most projects go towards repair and rehabilitation. No additional debt is anticipated to fund the CIP.

Rapid Debt Amortization-Debt Structure: Stronger

Debt service schedule is front loaded and amortizes quickly. $322.5 million of revenue bonds outstanding are all fixed rate and a majority of it will be amortized within the next five years. Debt service payments decreases from $65.3 million to $55.9 million by 2018 and then declines to $15.1 million in 2019. Final maturity is in 2031.

Low Leverage and Improved Liquidity

The airport has low leverage with net debt to CFADS of 3.29 times (x) in 2013. Coverage remains adequate at 1.41x, and Fitch expects coverage to remain in the 1.4x range going forward. In 2013, the airport had $64.4 million of unrestricted cash equivalent to 254 days cash on hand (DCOH) and 327 days when including the O&M and renewal and replacement (R&R) reserves.

RATING Sensitivities

Positive-Reduced cost to airlines on a sustained basis as a result of careful expense management, lower debt service cost, and gas drilling royalties will improve the airport's competitive position and may lead to further positive rating action.

Negative-Service reductions from airlines or unmanaged expense growth leading to a higher CPE would pressure the current rating level.

CREDIT UPDATE

Enplanements declined 1.8% in FY2013 partly due to JetBlue discontinuing service leading to higher fares to New York, but have remained stable around 4 million in recent years. Year-to-date enplanements are showing some improvement, up 0.71% through July 2014 due to Frontier resuming charter service in May 2014 and additional service from People's Express in June 2014. Service from Southwest added FY2013 includes daily seasonal flights to West Palm Beach (February 2013), year-round daily flights to Houston Hobby (April 2013), and Nashville (September 2013) which are all performing well. JetBlue started one more daily nonstop flight to Boston in May 2013, and American Airlines began 7-day nonstop service to LAX in August 2013. Fitch expects slight enplanement growth going forward fueled by continued economic developments and stability of the Pittsburgh region. The airport's residual airline use agreement expires in 2018 and will likely remain unchanged upon renewal.

The airport received an upfront bonus payment of $42.8 million for the gas drilling and $3.5 million was set aside by CNX Gas company in escrow to be released as mineral rights on deeds are cleared through legal assistance. The airport will also receive monthly royalty payments equal to 18% of gas proceeds from Consol Energy which will be allocated based on geographical cost center under the current use and lease agreement. While an additional revenue source, gas royalty payments are volatile, and Fitch will monitor the reliability as an ongoing source of revenue. The wells are outside the airport operations area, but the airport will avoid residential or environmental disturbance.

Operating revenues increased 0.2% to $139.2 million in FY2013 due to higher terminal area airline fees, concessions, and rental car revenues. YTD July operating revenues are up 16.2% or $12.4 million favorable from prior year due a bankruptcy settlement with American Airlines, higher parking and rental car revenues also contributed to the increase. The airport is in a position to enhance revenues going forward. The airport will receive greater concession revenues starting in 2018 due to an extended concession agreement increasing gross income to 77% from 59%. The airport also expects to receive royalties from gas drilling operations beginning early 2016 but will not include these payments in the budgeting process until revenues have a proven history.

Operating expenses grew 3.2% to $90.9 million in FY2013 mainly due to overtime required for snow removal, and 2014 YTD July operating expenses of $86.3 million are 5% higher than prior year for the same reason. The airport aims to contain expenses by focusing on customer service, and updating their energy management program with Honeywell for future utility savings. 2013 headcount was down three positions from 2012, and as of July 2014 is down 18 further. Operating expenses have only grown at a five-year CAGR of 4.7%, and CPE remains in the $14 range slightly increasing to $14.57 from $14.24 due to the slight enplanement decline.

Fitch conducted several sensitivity analyses. The base case scenario assumes annual traffic growth of 1% and inflationary expense growth of 3%. Under this scenario, CPE is expected to remain $14-$15 through 2018 by applying half of the $42 million initial payment from the gas drilling lease and decrease to $5-6 after debt service drops in 2019. Fitch's rating case sensitivity analysis assumes an eight percent traffic decrease in 2015 to 3.6 million and slightly higher inflationary expense growth of 3.5%. In this scenario, the airport will have to apply a majority of the initial lease payment to maintain CPE at current levels through 2018. Although current CPE of $14.57 is considered high, Fitch believes the airport has sufficient liquidity to maintain stable cost to airlines. The airport's low leverage and stable enplanement base is consistent with the 'A-' rating.

SECURITY

Bonds are secured by the net revenues generated from the operations of the airport.

PEER ANALYSIS

In comparison to peers in Fitch's portfolio, Pittsburgh International Airport has favorable or comparable leverage ratios amongst other airports with an 'A-' rating such as Cincinnati and Cleveland but has an elevated CPE. Liquidity is also comparable to peers providing almost a year's worth of cash on hand.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=861194

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings, Inc.

Primary Analyst

Raymond Wu, +1-212-908-0845

Associate Director

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Seth Lehman, +1-212-908-0755

Senior Director

or

Tertiary Analyst

Emma Chapman, +1-312-682-2063

Associate Director

or

Committee Chairperson

Chad Lewis, +1-212-908-0886

Senior Director

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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