Fitch Rates Milwaukee County, WI's Airport Revs 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Milwaukee County, WI's approximately $46.3 million series 2016A airport revenue refunding bonds. Fitch has also affirmed the 'A+' rating on $144.4 million outstanding airport revenue bonds. The Rating Outlook on all bonds is Stable.

The rating reflects General Mitchell International Airport's (GMIA) stabilized enplanement base which serves a primarily origin and destination (O&D) traffic base of roughly 3.3 million enplanements. The airport's strong airline use and lease agreement (AUL) provides sound financial protection in the event of additional airline service changes, particularly with regard to Southwest Airlines ('BBB+'/Stable Outlook), who accounts for approximately half of airport traffic. Some uncertainty remains surrounding Southwest's level of service at the airport given the proximity of Chicago Midway airport, which serves as a Midwest hub for Southwest's operations. The rating further reflects the airport's resilient financial performance, solid liquidity, competitive cost per enplanement (CPE) levels, and modest leverage with limited capital needs in the near term.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange

Stabilized Enplanement Base - GMIA now serves a 96% O&D passenger base following the loss of Frontier Airlines' hubbing service at the airport. Enplanements are expected to remain stable at around 3.3 million annually, consistent with historical performance prior to Frontier's expansion. Modest carrier concentration exists with Southwest now accounting for nearly half of the airport's enplanements; furthermore, the airport faces some competition from nearby Chicago O'Hare and Midway airports.

Revenue Risk - Price: Stronger

Strong Cost Recovery Framework - The airport operates under a fully residual AUL recently extended through 2020, providing for stable operating results despite historical enplanement volatility. Further, GMIA's strong non-airline revenue stream has historically allowed the airport to maintain a competitive CPE. CPE remained at $9 in 2015, but given additional operating expenses, and with marginal enplanement growth, is likely to stabilize in the $9-$12 range through 2021. The current AUL provides for 10% revenue sharing from concessions, providing a modest liquidity benefit to the airport.

Infrastructure Development and Renewal: Stronger

Manageable Capital Program - GMIA's 2016-2020 capital improvement program (CIP) is modest totaling an estimated $108.5 million, with non-essential projects removed and minimal dependence on additional borrowing. The largest project is the redevelopment of the airport's international terminal, estimated to total approximately $42 million with construction scheduled to begin in 2018. Given the airport's generally good condition, the remaining CIP focuses on maintenance of existing facilities and the creation of operational efficiencies. GMIA has capacity to accommodate traffic growth without expansion.

Debt Structure: Stronger

Conservative Debt Structure - GMIA maintains a fixed-rate, fully amortizing debt service (DS) structure with a decreasing DS profile beyond maximum annual debt service (MADS) in 2016, including the 2016 and 2018 issuances. Reserves are fully cash-funded and more than 50% of the total outstanding debt will amortize over the next decade. Further, management remains proactive in seeking out opportunities to lower the DS burden which should incrementally improve airline costs, further suggesting their focus on heightening the attractiveness of the airport to its carrier base.

Financial Metrics

Modest Leverage; Ample Coverage - The debt service coverage ratio (DSCR), including a 25% coverage account, is sound and has averaged more than 1.7x over the last five years. Coverage is forecasted to remain strong through the five-year forecast period under a scenario of marginal enplanement growth. The airport's balance sheet liquidity of $78 million, comprised of unrestricted cash and operating reserves, is considered strong, equating to 469 days cash on hand (DCOH). Leverage, on a net debt-to-cash flow available for debt service basis, decreased to approximately 3x in 2015, from 3.9x in 2014, and is expected to continue declining, remaining competitive relative to similarly rated peers.

Peer Analysis: Indianapolis (rated 'A'/Outlook Stable) and San Antonio (rated 'A+'/Outlook Stable) are among Milwaukee's closest peer airports. All serve an enplanement base in excess of 3 million with Southwest as the dominant carrier. Milwaukee has fewer enplanements and greater airline carrier concentration, but the strongest DSCR profile. Milwaukee also has the most liquidity and the lowest leverage. CPE levels remain comparable among the three airports. 'AA' category airports typically serve top tier markets, exhibiting very strong enplanement levels with minimal competition and a well-diversified carrier mix offering extensive service.

RATING SENSITIVITIES

Negative: A return to material traffic losses or continued volatility, especially from main carrier, Southwest, that causes CPE to rise materially above historic levels and coverage on a cash flow basis to fall below 1.4x for a sustained period.

Positive: Given the airport's modest and recently volatile traffic base, coupled with a slightly elevated CPE for its operating profile, positive rating action is not likely at this time.

TRANSACTION SUMMARY

The airport plans to issue $46.3 million of series 2016A (AMT) refunding bonds, to refund all of the callable maturities of currently outstanding series 2005A, series 2006A, and series 2007A airport revenue bonds. The bonds are being issued pursuant to the general bond resolution and 2016 supplemental resolution, which allows the authority to apply a portion of PFC revenues to debt service, as the refunded bonds were used to finance PFC eligible capital projects. The transaction is expected to reduce the average life of the refunded debt and will lower annual debt service requirements through maturity, currently estimated in 2032. Projected present value savings for the refunding totals $8.6 million, or 15.6% of refunded par.

Following three years of traffic volatility, GMIA's enplanement base has stabilized and now serves an approximately 96% O&D traffic profile. Enplanements were largely stable in 2015, remaining flat from the prior year at 3.3 million. Through July 2016, traffic has increased 2.9% over the prior year, stemming from additional airline service and capacity, and general economic growth. While additional economic growth could continue to spur traffic increases, uncertainty remains with regard to service decisions given the proximity of Chicago O'Hare and Midway airports.

The airport's cost-center residual AUL has been extended through 2020. The agreement provides for a continuation of the airport's stable financial position and moderate airline cost levels. Notable changes upon extension include the approval of the airport's 2016-2020 capital program by airlines, as well as the transfer of $4 million from the airport's development fund to the airport's development fund depreciation account. Fitch views the extension and update to the AUL as a credit positive.

Despite flat enplanement growth for 2015, operating revenue grew 1% to $79.8 million, with expenses increasing 3.3% to $60.8 million. Management expects operating expenses to increase an additional 9.3% in 2016 due to the discontinuation of a county pension credit, as well increased operations from traffic growth. Management has taken strides to reduce expense volatility, indicated by a five-year compound annual growth rate (CAGR) of 1%. Fitch expects further increases to be mitigated by parking rate increases and a declining debt service burden, as the airport plans to increase all parking rates by $1 beginning in 2017. Further, airline costs remain reasonable and can be recouped from airlines in the event of higher than expected growth.

DSCR, including fund balances of up to 25% of annual debt service, remained strong at 1.72x in 2015, with CPE increasing, yet remaining modest at $9. Fitch views airport leverage to be moderate at $65 debt per enplanement and 2.9x on a net debt-to-cash flow available for debt service basis. The airport maintains a robust cash position of 469 DCOH (including unrestricted cash and operating reserves). Fitch expects metrics to remain strong concurrent with the airport's declining principal amortization profile and modest capital plan.

The estimated five-year capital program totals $108.5 million from 2016-2020. It seeks to create operational efficiencies to reduce costs and to upgrade and improve the existing facility, with several of the projects to be undertaken on an as-needed basis and deferrable. Included in the CIP is the international terminal redevelopment plan, which includes a modest $9 million of additional borrowing in 2018. Remaining sources of funds include the airport's development fund (35%), airport improvement grants (31%), PFCs (20%), state grants (5%), and the capital improvement reserve fund (2%). The airport is in good condition, and any additional significant works would require majority approval by current signatory airlines.

Fitch's five-year base case assumes relatively modest enplanement growth, increasing at a CAGR of 1.6% from 2016-2021. The base case also incorporates escalating costs at a CAGR of 2.9% through the same time period. Under this scenario, CPE is estimated to rise to the $10 range in 2016, and remains in the $9 to low $10 range through 2021. Airline revenue is adjusted such that DSCRs total 1.7x, reflecting the adjustment of rates and charges to airlines to cover expense and debt service obligations.

Fitch's rating case considers an enplanement stress of 8% in 2017 with slight recovery thereafter, and a higher cost profile of 50 basis points above the base case. Similar to the base case, DSCRs are held constant at 1.7x. Under this scenario, CPE escalates from the $11 to the $12 range through 2021, which remains consistent with the current rating. Leverage in both cases declines below 2x by 2019, including the airport's modest additional borrowing expected in 2018.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 25 Feb 2016)

https://www.fitchratings.com/site/re/877676

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/site/re/882594

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Director
+1-312-368-3171
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com