OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating on the City and County of San Francisco Airport Commission's (SFO Fuel Company LLC) approximately $73.2 million series 1997A and 2000A special facility lease revenue bonds. The Rating Outlook is Stable.

KEY RATING DRIVERS

Summary: The rating reflects the monopolistic and essential nature of the fueling operation to San Francisco International Airport (SFO, rated 'A+'/Stable Outlook), but also incorporates the narrow scope of the associated revenue stream despite carrier diversity. Fuel demand continues to increase, benefitting from SFO's strong enplanement growth, while operating expenses have been largely contained. The result has been a competitive and largely stable-to-decreasing member cost per gallon since 2009. The rating further reflects SFO Fuel Company LLC's history of managing its balance sheet even with lifecycle investment.

Essential Airport Assets: SFO Fuel has an effective monopoly on jet fuel storage and hydrant system distribution services at SFO and is viewed as an essential function to the airlines.

Proven Historical Demand for the Project: Annual fuel sales continue to grow, exceeding 980 million gallons for 2015. This represents 7.4% growth over 2014 and a five-year compound annual growth rate (CAGR) of 3.6%. Additionally, SFO benefits from a diverse mix of domestic and international carriers, and has experienced very strong passenger traffic growth over the past couple of years. Supporting the credit is the lack of significant airline market share of fuel consumption concentration, as the largest carrier marginally exceeds 34% of consumption.

Strong Structural Protections: The framework between the airlines using the fuel system and the operator includes airline reserve deposits and full step-up payments from the member carriers in cases of defaults or delinquencies of non-performing carriers. However, the special facility bonds do not have recourse to the airport's general revenues or fund balances. The surety-funded debt service reserve fund (DSRF) is partially mitigated by increased unrestricted cash and member reserve deposits.

Moderate Costs, Expansion Needed: Fuel storage and distribution assets are adequate to meet current needs; however, additional bonds may be needed in the near term to meet the rapidly growing demand. Net member costs of less than 2 cents per gallon in 2015 are competitive compared to peer fuel facilities and have consistently fallen since 2009. Fitch estimates leverage on a net debt-to-cash flow available for debt service (CFADS) to be 7.4x for 2015.

Peers: The closest Fitch-rated comparable peer is BOSFUEL (rated 'A-'/Stable Outlook); both facilities support strong, international gateway airports with substantial gallon usage. SFO Fuel benefits from a greater number of carrier members and gallons used and a lower member cost; however, it also has a greater single-carrier concentration and its DSRF is funded with sureties instead of cash.

RATING SENSITIVITIES

Negative: Significant shifts in airport operations and associated fuel demand;

Negative: Elevated carrier risks that could lead to defaults or delinquencies in payments to SFO Fuel;

Negative: Capital needs that increase project leverage and member costs without the corresponding growth in fuel utilization.

Positive: Given the narrow revenue pledge and cash flow-sufficient financial profile, upward rating migration is not likely at this time.

SUMMARY OF CREDIT

Currently there are 40 airline members of SFO Fuel (up from 37 in 2014), accounting for approximately 97% of total fuel volume at the airport in 2015. There are an additional 18 non-contracting users which account for the 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 983 million gallons in 2015, a 7.4% increase from the prior year due to improving aircraft operations, landed weight, and enplanements. Carrier fuel consumption has been largely resilient to the recession with a five-year CAGR of 3.6% and with 2015 representing a new peak for the fourth consecutive year.

Fuel consumption is moderately concentrated, with United Airlines ('BB-'/Positive Outlook) as the largest user at 34% of total gallons pumped in 2015. Consumption is largely tied to enplanements, and United Airlines was the market share leader at 44% of total enplanements at SFO in fiscal 2016. Other than United, fuel consumption is diversified among the remaining domestic and foreign-flag carriers with the next largest user of jet fuel accounting for about 6% of gallonage and 9% of enplanements.

The moderate degree of single-airline concentration poses an increased degree of risk of interruption to project cash flow resulting from either a bankruptcy filing or significant reduction in service levels. Historically, however, 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 2015, security deposits total over $4.1 million, or over 45% 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. SFO Fuel currently maintains $10.8 million in aggregate liquid funds, a level well above the minimum reserve deposits from member carriers.

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 that have a detrimental effect on the demand for jet fuel and fueling services at SFO. However, the largely stable and growing demand as well as the moderate rate and essentiality of service serve as mitigants to some of these risks.

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 2016. An extension through 2021 has been awarded to ASIG and the agreement should be finalized shortly. To supplement owned fuel storage assets, SFO Fuel has entered into several fuel-storage lease agreements with Shell Oil and KM. While such leases enhance operational capacity, these agreements have measurably increased the consortium's total operating budget from $11.2 million in 2005 to $20.6 million in 2015. Still, based on 983 million gallons of usage in 2015, the average net member cost was just under 2 cents per gallon, a level comparable to or below other airport fuel consortiums and down for the fourth straight year.

Given the continued strong growth in gallonage, SFO Fuel implemented a tankering initiative in the summer of 2016 to recover decreased fuel stores. While this strategy could be employed again should the need arise, SFO Fuel anticipates constructing approximately 150,000 additional barrels of on-airport storage capacity to provide increased security of fuel supply as well as to satisfy recent and projected potential fuel demand increases. Fitch will monitor the potential impact in terms of additional leverage and cost implications of future issuances, but recognizes the essentiality of this service and demand-based nature of the project as mitigants.

SECURITY

The bonds are secured principally by facility rent payments derived from charges paid by airlines using the jet fueling facilities at SFO. 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. The facility lease payments are approximately $9 million per year.