CHICAGO--()--Fitch Ratings has affirmed the 'A-' rating on $105.5 million of outstanding Port of Seattle (Port) series 2003 special facility revenue bonds (SeaTAC Fuel Facilities LLC or SeaTAC Fuel). The Rating Outlook is Stable.
Rating Rationale:
The 'A-' rating reflects:
--The essentiality of jet fueling facilities to the operation of Seattle-Tacoma International Airport (the airport; long-term senior, intermediate, and subordinate airport revenue bonds rated 'AA'/'A+'/'A', with a Stable Outlook by Fitch) with nearly 422 million gallons consumed annually by more than 27 passenger and cargo carriers;
--The effective monopoly SeaTAC Fuel has on jet fueling services at the airport, primarily serving long-haul flights, since the closest comparable airport is approximately 150 miles away; adequate fuel storage assets to meet projected needs; the moderate level of net member costs at 2.7 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; and
--A cash funded debt service reserve equal to one year of debt service.
The credit strengths are offset by the narrowness of the revenue stream with no recourse to the airport's general revenues, Alaska Airlines' (Alaska) relatively high share of the passenger market and fuel consumption at the airport, 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.
Key Rating Drivers:
Fuel demand is determined by enplanements and aircraft operations; however, historical enplanement fluctuations have only led to minor changes in the average costs to members. Carrier bankruptcy risk or a lease termination before the bonds are paid in full could lead to an interruption in cashflow. If the lease terminates due to a permanent shutdown of the airport, repayment of the bonds is required.
Security:
The bonds are secured by facility rent payments derived from charges paid by airlines using the jet fueling facilities at the airport. The proceeds of the series 2003 bonds were used to pay all or a portion of the Port's costs of acquiring, designing, and constructing the jet aircraft fuel storage and delivery facilities. The bonds are backed solely by the facility payments made by SeaTAC Fuel, without recourse to the general revenues of the airport or the Port and without any claim on the physical assets of the fueling system. The facility lease payments are approximately $8 million per year.
Credit Summary:
Currently there are 23 airline members at SeaTAC Fuel, accounting for more than 95% of total fuel volume at the airport in 2009. There are an additional four non-contracting users which account for the small remaining usage. Fitch views positively the overall large number of member carriers utilizing the fueling system as well as the airport's geographic location and significant demand for long-haul domestic and international passenger service. As compared with peer fueling systems, SeaTAC fuel has less exposure to short-haul shuttle service that could result in lower gallonage and higher costs due to airlines fueling at alternative locations.
Aggregate fuel consumption was nearly 426 million gallons in 2009, a 6.6% reduction from 2008 due to fewer aircraft operations, landed weight, and enplanements. Consumption is expected to decline slightly in 2010 to 422 million (a 0.8% decline). Since 2003, the average fuel consumption has been approximately 442 million gallons. Fuel consumption at the airport is concentrated with Alaska as the largest user at 32.6% of total gallons pumped in 2009. Other than Alaska, fuel consumption is otherwise diversified among the other domestic and foreign-flag carriers. Other large users include Delta Airlines at 13%, United Airlines at 7.2%, and Southwest Airlines at 5.7%. In 2009, Alaska was the largest carrier at the airport in terms of enplaned passengers, representing 35% of the total which increases to 49% when combined with Horizon Air (owned by the same parent company but operate separately), followed by Delta at 12%, and United at 8% (increases to 12% when combined with Continental Airlines).
The high single airline concentration poses an increased degree of risk of interruption to cashflows resulting from either a bankruptcy filing or significant reduction in service levels. Historically, carrier bankruptcies have not affected the collection of revenues to sufficiently cover debt service payments and other costs. SeaTAC Fuel maintains solid billing practices and the key operating agreements provide adequate bondholder protection features. Carriers are pre-billed one month ahead of actual expenses incurred and member airlines are required under the interline agreement to provide security deposits equal to two months of payment based on the preceding 12-month average. For 2009, security deposits totaled approximately $2.04 million, or 25% 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 SeaTAC Fuel can impose step-up payments from non-defaulting users to cover carrier shortfalls. Another operational risk considered for this project includes demand elasticity due to economic conditions or volatility in fuel prices. Service competition from other airports in the area is minimal as the closest airport is located at least 150 miles away.
The Port has leased the fuel facility to SeaTAC Fuel until July 2033. The lease includes the exclusive concession on providing jet-fueling services at the airport. SeaTAC Fuel was established as a limited liability non-stock membership corporation in January 2000 to lease, finance, construct, develop, acquire, and operate a fuel distribution and storage facility at the airport. The fuel hydrant project was designed to provide the airport with a fuel storage and underground fuel delivery system to serve all passenger aircraft gates, essentially to substantially eliminate the use of fuel trucks that were transporting jet fuel to aircraft and reduce the number of trucks operating on the airfield. The project was completed in 2006, under budget. Fuel storage of 24.1 million gallons provides 15 days of volume needs. Since October 2001, SeaTAC Fuel has contracted out the operational and administrative functions to Swissport Fueling, Inc. (Swissport) and the agreement expires in May 2012. Based on 425 million gallons of usage in 2009, the average net member cost was just 2.7 cents per gallon, a level comparable to other airport fuel consortiums.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2010;
--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds', dated March 12, 2007.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=264948
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