OREANDA-NEWS. June 17, 2015. Fitch Ratings has affirmed the 'AA-' rating on approximately \\$204.3 million in outstanding Orange County, CA airport revenue bonds issued on behalf of John Wayne Airport (JWA). The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating for the mid-sized JWA is supported by a strong origination/destination (O&D) base serving the wealthy population of Orange County, CA with strong coverage, robust liquidity, and continued enplanement growth. The airport's strong balance sheet and declining debt service mitigate the rise in expenses due to the recent completion of expansionary capital projects.

Revenue Risk - Volume: Midrange
Diversified O&D Airport: JWA is the only commercial airport in Orange County and the second largest commercial airport within the Greater Los Angeles Area resulting in a passenger mix which is 97% O&D. The carrier with the largest market share is Southwest at 41% which is significant and a factor in the midrange assessment.

Revenue Risk - Price: Stronger
Hybrid Use and Lease Agreement in Place Through 2015: JWA operates a hybrid use and lease agreement which is commercial compensatory in the terminal and residual on the airfield. The agreement expires in 2015 with renewal negations on-going. The combination of airline revenues derived from the agreement and performance non-airline revenues collectively generates significant sources of operating revenues to meet costs with a high degree of cushion. Further, cost per enplanement (CPE) remains competitive with other airports in the southern California region and is not under pressure to rise substantially if traffic stabilizes. There are no changes expected to the business terms in the airline agreement and the draft agreement is currently under development.

Infrastructure and Renewal Risk: Stronger
Limited Future Capital Needs: JWA has scheduled \\$17 million in projects for the coming year, with an additional \\$160 million through 2020. No new borrowing is anticipated in conjunction with the program as funding is anticipated from a combination of grants, and funds on hand. Once the program is complete JWA will have minimal capital needs for the foreseeable future which will be funded on a paygo basis.

Debt Structure: Stronger
Conservative Debt Structure: JWA's fixed-rate debt remains relatively flat at approximately \\$18 million through 2030 then declines to approximately \\$6.4 million. JWA currently has no new money borrowing plans.

Financial Metrics
Strong Balance Sheet: JWA maintains a strong balance sheet with 684 days cash on hand (DCOH) as of fiscal year (FY; ended June 30) 2014. Management's policy is to maintain a minimum of 500 DCOH. The strong balance sheet provides JWA with a low net debt to CFADS ratio of 0.97x. Coverage remained strong in FY 2014 at 5.44x using passenger facility charges (PFCs) as an offset and 2.63x with PFCs treated as revenue.

Peers: JWA's financial profile is consistent with other 'AA-' credits. JWA's CPE is on the higher end versus other 'AA-' credits (Raleigh Durham and Minneapolis both in mid-\\$6 range). DCOH is on the lower end of 'AA-' credits but higher end of 'A+' credits. JWA's rating is further supported by low net debt/CFADS (leverage) of 0.97x and strong debt service coverage of 2.63x compared to Raleigh Durham's leverage at 6.50x and coverage at 1.42x.

RATING SENSITIVITIES
Negative: Future changes to the maximum annual passenger limit that could modify airport traffic potential.

Negative: Additional leverage that results in a significant increase to JWA's net debt to CFADS ratio.

Negative: Management's inability to control costs or a prolonged decline in enplanements given a rising CPE and limited revenue growth.

Positive: No upward rating movement seen at this time.

CREDIT UPDATE

Enplanements were up 2.1% in FY 2014. Through the first nine months of FY 2015, enplanements are up 2.7% from the same period last year from increased flights and total passengers. The airport forecasts total enplanements to grow by 2.5% for FY 2015. The airport maintains a diversified carrier mix with no single airline accounting for more than 50% of market share. Southwest has maintained its position as the largest carrier by market share at JWA, currently representing about 41% of the market, and continues to show its commitment with their enplanements increasing 6% in FY 2014. Southwest is followed by United with 16%, American Airlines with 12%, Alaska Airlines (9%), Delta (8%), US Airways (5%) and several other carriers below 5% of the market.

Approximately 40% of JWA's revenues are from airlines, while 60% are from non-airline revenues that include parking, rental cars, concessions and others. Operating revenue increased 3.2%, to \\$118 million, in FY 2014 compared to \\$114 million in FY 2013. Aviation revenue increased \\$2.02 million due to higher terminal rents charged to the airlines. Concession revenues increased \\$1.67 million as a result of new rental car and specialty concession lease agreements. Total revenues are forecasted to increase by 3.8% in FY 2015 due to continued growth in passenger traffic.

Operating expense (excluding depreciation) increased 6.2% in FY 2014 compared to a 2.7% increase in FY 2013. The increase was primarily due to additional professional and specialized services for projects including the runway maintenance, central power plant maintenance and improvement, and preparation of Environmental Impact Report as mandated in the Memorandum of Understanding for the signatories of the Settlement Agreement. The agreement was finalized and approved in September 2014 extending the expiration date to Dec. 31, 2030 and increasing the airports maximum annual passenger limits. Operating expenses are forecasted to increase at a lower rate of 2% for FY 2015.

JWA's strong balance sheet is a credit strength as its unrestricted cash and investments and special investments with the treasurer were \\$159 million in FY 2014, increase from \\$144 million in 2013, representing approximately 684 DCOH in FY 2014. The strong balance sheet provides a relatively low net debt-to-CFADS ratio of 0.97x. The sizable cash balances provide JWA with a considerable amount of financial flexibility. Airport management has historically demonstrated its willingness to use surplus revenues to pay down debt balances as it did to defease the 2003 series bonds in full on July 1, 2013. Long-term debt per enplanement was \\$44 in FY 2014, which is acceptable at the current rating level.

JWA's debt service coverage ratio (DSCR) under the calculation set in the bond documents has been in excess of 2.00x since 2004, coming in at 3.23x and 5.44x in FY 2013 and FY 2014 respectively. Calculating FY 2013 and FY 2014 DSCR using PFC as a revenue instead of an offset results in coverage of 2.11x and 2.63x, respectively. The CPE remained flat at \\$9.95 in FY 2013 and FY 2014 due to growth in both airline revenues and enplanements. Fitch's rating case scenario forecasts enplanement growth of 2% for FY 2015 followed by a decline of 7.5% in FY 2016. Enplanements would then recover by 2% thereafter from FY 2017-2019. Revenues and expenses fluctuate with the enplanements resulting in revenue five-year CAGR of 0.8% and operating expense CAGR of 3.4%. DSCR never falls below 2.05x using PFCs as revenue and 3.94x using PFCs as offset. Total net debt/CFADS drops to below zero by 2019 and CPE grows to \\$11.18 by 2019. Actual performance falling below the rating case scenario for extended periods would lead to a negative rating action. Overall the airport continues to maintain a strong balance sheet and coverages consistent with the rating.

JWA is owned and operated by Orange County, CA under the direct control of the county board of supervisors. JWA operates under a settlement agreement between various groups within the county and the city of Newport Beach, CA. The settlement agreement limits the average daily departures and million annual passengers, which include both enplaned and deplaned passengers. An amended agreement was approved in October 2014 extending the expiration to Dec. 31, 2030. Current total passenger limits of 10.8 million annually will remain in effect through 2020, then increase to 11.8 million in 2021 and either 12.2 MAP or 12.5 MAP in 2026 depending upon performance.