Fitch Affirms San Francisco Airport (SFO Fuel Co.), CA Special Facil Revs at 'BBB+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on $101.5 million of City and County of San Francisco Airport Commission series 1997A and 2000A special facility lease revenue bonds (SFO Fuel Company LLC). The Outlook is Stable.

The bonds are secured principally by facility rent payments derived from charges paid by airlines using the jet fueling facilities at San Francisco International Airport (SFO, long-term general airport revenue bonds rated 'A+', with a Stable Outlook by Fitch). The bonds were issued to rehabilitate and enhance the airport's fueling storage and distribution system. The bonds are backed solely by the facility payments made by SFO Fuel Co., without recourse to the general revenues of the airport or the City and County of San Francisco and without any claim on the physical assets of the fueling system. The facility lease payments are approximately $9 million per year.

The 'BBB+' rating reflects

--The essentiality of jet fueling facilities to the operation of the airport with nearly 810 million gallons consumed annually from more than 50 passenger and cargo carriers;

--The effective monopoly SFO Fuel Co. has on jet fueling services at SFO over the life of the bonds;

--Adequate fuel storage assets to meet projected needs;

--The moderate level of net project costs at less than 2.5 cents per gallon;

--The strong structural framework between the airlines using the fuel system and the fuel system operator, including airline reserve deposits and full step-up payments by the member carriers in cases of defaults or delinquencies from non-performing carriers.

The credit strengths are offset by the narrowness of the revenue stream, United Airlines' (UAL; Fitch Issuer Default Rating (IDR) 'CCC') relatively high share of the passenger market and fuel consumption at SFO, uncertainties as to the demand for jet fuel services for the full life of the bonds, and the ability of members to leave the consortium.

Also factored into the current rating is the absence of liquid cash reserves or surety policies with providers with ratings solely in the highest rating category to fund the entire maximum annual debt service requirement for the debt service reserve fund (DSRF). SFO Fuel's reserve fund currently holds policies from Ambac ($7.5 million) and FSA ($1.5 million, now Assured Guaranty). In 2001, SFO Fuel substituted the $7.5 million of cash reserves in the DSRF for an Ambac surety policy in order to release funds to be used for fuel system capital projects. SFO Fuel indicates that it does not believe it is legally obligated to replace existing reserve surety policies with an alternate provider or bolster the policies with additional cash deposits.

From a rating perspective, Fitch holds the view that a fully funded and liquid DSRF is meaningful to the rating of airport fuel facilities revenue bonds in light of the structured 1.0 times coverage provided by a narrow revenue stream. However, in the case of SFO Fuel Fitch believes that the historical management of healthy cash reserves together with a billing methodology whereby all member carriers are billed two months in advance does adequately mitigate the risk of a DSRF with little to no value. SFO Fuel has consistently maintained over $7 million in aggregate liquid funds, a level well above the minimum reserve deposits from member carriers and $2 million shy of the DSRF requirement. A negative rating action would likely occur should there be adverse changes to management's current practices for member billing or overall project cash reserves.

Currently there are 37 airline members at SFO Fuel, accounting for over 95% of total fuel volume at the airport in 2009. There are an additional 16 non-contracting users which account for relatively small remaining usage. Fitch views positively the overall large number of member and contract carriers utilizing the fueling system as well as the airport's role and significant demand for long-haul domestic and international passenger service.

Aggregate fuel consumption was nearly 810 million gallons in 2009, a 5.5% reduction from the prior year due to fewer aircraft operations, landed weight, and enplanements. Since 2005, the average fuel consumption was nearly 820 million gallons. Fuel consumption at SFO is concentrated with United Airlines as the largest user at 34% of total gallons pumped in 2009. Other than United, fuel consumption is otherwise diversified among the other domestic and foreign-flag carriers. Other large users include American Airlines at 6.5%, Cathay Pacific at 4.4%, and Singapore Airlines at 3.2%. United Airlines is the largest carrier at the airport in fiscal 2009 in terms of enplaned passengers, representing 40.6% of the total, followed by American at 9.2% and Southwest at 6.6%.

The high degree of single airline concentration poses an increased degree of risk of interruption to project cashflow resulting from either a bankruptcy filing or significant reduction in service levels. Historically, carrier bankruptcies, including United and others serving at SFO, have not affected the collection of revenues to sufficiently cover debt service payments and other project costs. SFO Fuel maintains strong billing practices and the key operating agreements provide adequate bondholder protection features. Carriers are pre-billed two months ahead of actual expenses incurred and member airlines are required under the interline agreement to provide security deposits equal to two months of their pro-rata share of annual project expenses. For 2010, security deposits total $3.5 million, or nearly 40% of annual facility lease payments and debt service requirements. In the event a carrier defaults or is delinquent on its payment obligation, the security deposit reserves can be drawn upon and SFO Fuel can impose step-up payments from non-defaulting users to cover carrier shortfalls. Other operational risks considered for this project include demand elasticity due to economic conditions or volatility in fuel prices, potential for ongoing environmental remediation needs, and service competition from other airports in the San Francisco-Oakland-San Jose bay area, leading to a detrimental effect on the demand for jet fuel and fueling services at SFO.

The City and County of San Francisco Airport Commission has granted SFO Fuel (or the consortium) the right to build and operate the fueling system for 31 years. The lease includes the exclusive concession on providing jet-fueling services at SFO, which is one of the busiest airports in the U.S. and a major international gateway. SFO Fuel Co. was established as a limited liability non-stock membership corporation in May 1997 for the sole purpose of building and operating the fueling system. The fuel project at SFO includes a pipeline distribution system, various hydrants, and fuel storage tanks that are owned or leased by the consortium or airport. Fuel storage of 422,500 barrels provides over one week of volume needs. The consortium contracts out to Aircraft Services International Group (ASIG) to handle the operations and administrative functions. ASIG has been the fuel operator since project inception and is currently under contract through August 2011. To supplement owned fuel storage assets, SFO Fuel has entered into several fuel storage lease agreements with Shell Oil and NuStar. While such leases enhance operational capacity, these agreements have measurably increased the consortium's total operating budget from $11.2 million in 2005 to over $22 million in 2009. Still, based on 810 million gallons of usage in 2009, the average net member cost was just 2.4 cents per gallon, a level comparable to other airport fuel consortiums.

Applicable criteria available on Fitch's web site at www.fitchratings.com include:

--'Rating Criteria for Infrastructure and Project Finance' (Sept. 29, 2009);

--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds' (March 12, 2007.

Additional information is available at www.fitchratings.com.

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