CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on $19.6 million in outstanding airport revenue bonds issued on behalf of the Augusta Regional Airport. The Rating Outlook is Stable.
The rating reflects the airport's very small, albeit growing, enplanement base and volatile fuel business that makes up the majority of airport revenue. The airport's cost per enplanement (CPE) level, while comparable to its peers, may be of concern if not contained in the future. The rating is further limited by a delayed principal amortization.
KEY RATING DRIVERS
Revenue Risk - Volume: Weaker
High Dependency on Fuel Sales: The airport is served by Atlanta and Charlotte and is exposed to some concentration risk, with Delta representing 60% of enplanements. Fuel sales, which represent 53% of revenue, remain volatile.
Revenue Risk - Price: Weaker
Limited Cost Recovery: The airport's new five-year hybrid airline lease agreement provides subsidies to the carriers in order to maintain service while keeping CPE competitive. However, the airport has limited near-term ability to pass through additional costs via significant raises in rates. The margin on fuel sales improved materially with the end of the buy-back arrangement, significantly reigning in costs.
Infrastructure Development and Renewal: Midrange
No Future Borrowing: The $93 million capital plan is funded primarily through federal grants and sales taxes. No future borrowing is expected as the intended maintenance projects are not critical in nature and are deferrable, if necessary.
Debt Structure: Midrange
Delayed Amortization Profile: The airport's fixed-rate debt begins amortizing in 2025. The airport has been meeting its annual sinking fund deposit requirements.
Moderate Financial Profile: The airport's debt burden is manageable at $73 debt-to-enplanements. Liquidity, with 101 days cash on hand (DCOH), has seen some pressure in recent years but is not uncommon for an airport in this rating category.
Peers: Alongside its small enplanement base peer in the 'BBB-' rating category, Burlington (VT), Augusta exhibits comparable DCOH liquidity, lower leverage by nearly 5x net debt-to-cash flow available for debt service, and stronger enplanement trends with positive five-year growth compared to a declining trend.
--Management's ability to meet required sinking fund deposits;
--CPE increases due to either operational performance or traffic declines;
--Shifts in the airport's financial profile which lead to constrained coverage or liquidity levels, or higher leverage.
--Given the airport's traffic profile and fuel business dependency, a higher rating is unlikely at this time.
The majority of operating revenue is derived from non-airline sources, particularly fuel sales. Fitch views the stability of the airport's financial profile as inextricably linked to the health of its fueling operation. Gross margin from fuel sales increased in 2013 as a result of the airport ending buy-back arrangements, giving the airport the ability to contain fuel cost fluctuations. The airport's policy of adjusting fuel prices on a weekly basis, reflecting increased costs of supply and prevailing market rates, provides a degree of protection against any material erosion in fueling business margins. Nearly half of fuel sales are to the airlines while general aviation fueling represents a little over a third of the business. Due to the new fueling arrangement, in fiscal 2013, total operating revenue declined 19% but was offset by a decline in operating expense of 23%.
Airline activity continues to represent a fairly minor piece of the airport's overall business, representing 13% of operating revenue. Nonetheless, passenger facility charge (PFC) collections are an important source of revenue for the bonds. Enplanements for 2013 decreased 3%, to 270,805, following six years of growth. Consequently, CPE grew materially in 2013, to the $7 range. An increased airline cost profile may put pressure on the airport as Fitch believes the airport is susceptible to service cuts should market conditions, or incentives, deteriorate for the airlines. Partially mitigating this risk is the airport's new five-year airline lease agreement executed in September 2013. The new agreement allows the airport to annually set rates and charges in order to cover the net operating cost of the airport and 1.25x annual debt service as required by the Bond Resolution.
The airport's calculated debt service coverage improved to 3.11x in fiscal 2013 from 2.03x in fiscal 2012. These coverage figures treat PFC revenue as an offset to gross debt service requirements. When PFCs are treated as revenue, the alternative coverage ratio was 1.72x in fiscal 2013, up from 1.39x in fiscal 2012. In Fitch's Base and Rating Case scenarios, which model moderate traffic and expense growth or traffic stress and expense growth, respectively, alternative coverage is forecasted to improve to 2.26x in fiscal 2014 before migrating just below 2x over the next five years. In both cases, CPE moderately increases toward the high $7 range.
The bonds are secured by the net revenue of the airport. The series 2005 A/B bonds are additionally secured by passenger facility charges.
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 Airports
Rating Criteria for Infrastructure and Project Finance