Fitch Rates Metropolitan Washington Airports Authority Revs 'AA-'; Outlook Stable
The rating reflects the authority's very strong credit attributes, including the inherent resilience of its complementary dual-large hub airport system serving the strong and growing DC air service area, well-balanced system-wide carrier mix, largely complete 2001-2016 capital program with a new, smaller program that can serve current and projected demands, and stable financial profile. Some concerns remain given the large debt burden and rising airline cost profile, particularly at Dulles International airport, however this has been partially mitigated by the terms of MWAA's new airline use agreement with enhanced revenue sharing provisions between airports.
KEY RATING DRIVERS
Strong Market Position: Revenue Risk-Volume: Stronger
The authority's large overall traffic base is anchored by a strong underlying economic region and complementary service offerings at Dulles (IAD) and National (DCA) airports, which together provide a diverse offering of domestic and international services. Following the 2008-2009 system-wide recessionary losses, enplanement declines at IAD have been offset by solid growth at DCA and the system has recorded slight growth in each year since.
Favorable Rate Setting Approach: Revenue Risk-Price: Stronger
MWAA's new airline use and lease agreement (AUL) continues a hybrid compensatory model and also provides for an overall favorable cost recovery approach on an airport system basis, bridging some of the significant cost imbalances at MWAA's two airports. DCA's agreement runs for 10-years while IAD is set for a shorter three-year period. Revised terms will allow for a tiered level of surplus revenue sharing from DCA to subsidize IAD's costs derived from substantial debt-financed capital investments. Extraordinary coverage protection remains, yet bond holders now benefit from increased hard coverage as a result of the new agreements. Current forecasts indicate a stable CPE of around \$13-\$14 for DCA while IAD will see a modest reduction from the previously forecasted CPE of over \$30.
Major Capital Needs Addressed: Infrastructure Development/ Renewal: Stronger
The authority's 2001-2016 \$5 billion Capital Construction Program (CCP) is nearing completion and requires practically no additional borrowings. Major upgrades and renovations have been completed at both airports, resulting in modern facilities and an overall good condition of infrastructure. IAD is already benefitting by way of increased revenue generation, despite a reduction in enplanements, and the new \$1.4 billion CCP through 2024 predominantly for DCA should similarly enhance its revenue generating ability. The new CCP will be approximately 90% bond funded including both series 2015B and future issuances, however DCA should have the capacity to take on this additional debt to support these further capital improvements.
Largely Conservative Capital Structure: Debt Structure: Stronger
Approximately 81% of the authority's debt is in conventional fixed rate mode, with another 12% of its variable rate obligations synthetically fixed through swap agreements. As a result, only 6% of the authority's debt profile is unhedged variable rate debt and this variable rate exposure is partially mitigated by the authority's unrestricted cash position in excess of two times its outstanding variable rate debt obligations.
Stable Finances, Elevated Leverage: The authority's borrowing program results in an elevated leverage position as indicated by the debt to enplanement of \$230 (\$316 on an O&D basis) and 9.6x net debt/cash flow available for debt service (CFADS) metrics. Following the recession, the debt service coverage ratio (DSCR) dropped and has been largely stable in the 1.4x-1.5x range, with the expectation to remain at around this level over the medium term. That said, liquidity remains strong at 692 days cash on hand.
Peers: Closest rated peers include Los Angeles International Airport (LAX)(AA/Stable) and San Francisco International Airport (SFO)(A+/Stable). LAX benefits from a greater, more resilient enplanement base with lower carrier concentration, lower leverage, and higher coverage accounting for its higher rating. SFO has a similar operational and financial profile, but these metrics are tied to a single airport whereas MWAA benefits from a dual-airport system.
RATING SENSITIVITIES
Negative: Significant or unanticipated changes in the airport's current traffic base or shifts in commitments from leading carriers;
Negative: Additional leveraging for the new capital program that materially affects financial flexibility;
Negative: Inability of the authority to manage the airport system cost profile, putting pressure on debt coverage metrics.
Positive: Upward rating migration is not likely at this time given the authority's current leverage and cost profile coupled with its additional borrowing needs.
TRANSACTION SUMMARY
The series 2015BCD fixed-rate bonds are scheduled to price on June 30. Approximately \$84 million of the \$372 million bonds being issued are for new money purposes. Another \$267 million will refinance outstanding authority bonds for debt service savings expected to exceed \$20 million on a net present value basis without extending the current maturity profile. The remaining \$21 million will be used to redeem the outstanding commercial paper.
The authority's two airport system experienced system-wide enplanement growth of 0.4% in 2014, largely consistent with annual growth seen over the past three years. Enplanements now total 21.1 million, just 5% off of the 2005 peak level. Overall, enplanements have been fairly resilient supported by the economic strength of the airports' catchment area and the complementary nature of the dual-airport system structure.
The number of enplaned passengers at DCA increased by 2.6% in 2014 but was offset by a traffic reduction at IAD resulting from the net effect of lower domestic enplanements combined with a slightly higher level of international traffic. In first quarter-2015, system-wide passenger traffic was up 2.2% over the same period in 2014. This was largely driven by strong domestic growth at DCA as low cost carriers continue to add service to the slots gained from the American/US Airways divestiture in 2014. Further, management still expects to hit its forecast of 5.5% system-wide enplanement growth as United adds back seasonal service at IAD that was reduced during the first quarter.
The authority generated a 1.45x DSCR in 2014, which is slightly above its previous estimate of 1.39x and also its 2013 coverage of 1.40x. Fitch's calculation of DSCR, which treats passenger facility charges (PFC) as revenue rather than debt service offsets, was 1.39x. The 2014 financial results demonstrate a continuation of the recent trend of lower coverage levels when compared to historical levels.
The authority reported a \$26.55 CPE at IAD in 2014, nearly \$2 below forecast for the second consecutive year, and CPE is now expected remain at or below this level through 2020 as a result of MWAA's new AUL. CPE levels at DCA similarly outperformed forecast dropping to \$11.26, even falling below the 2012 level that was achieved prior to one-time charges in 2013 to build internal liquidity that caused a spike last year. DCA is still forecast to remain in the \$13-\$14 range through 2020 even under the new AUL. Fitch notes however that should enplanements fall short of forecast or management not be able to contain expenses, CPE could rise to levels inconsistent with the current rating, especially at Dulles International.
MWAA's 25-year hybrid AUL provided for relatively stable financial performance through 2014 and served as the cornerstone for negotiating its new AUL that took effect Jan. 1, 2015. The hybrid commercial compensatory structure was maintained, however several key terms were amended. Most notably, there was a revision to DCA's sharing of net remaining revenues (NRR) as well as the ability to use DCA's NRR to subsidize IAD's sizeable cost base (resulting from its recent capital program) according to a tiered structure. In return for DCA's sharing of NRR, a new \$1.3 billion capital program will be undertaken at Reagan through 2024. The extraordinary protection provision remains, yet there was an increase at both airports to the hard coverage charged to carriers affording bondholders additional protection. The term of DCA's agreement is 10 years, matching the length of its approved capital program, while the term of IAD's agreement is a lesser three years. Fitch views this new AUL as a positive development that addresses the needs of both airports, while simultaneous improving the financial profile of the system.
As detailed in current forecasts, the authority's management case DSCR will remain around 1.40x-1.50x. This forecast reflected assumptions of a 2.1% traffic compound annual growth rate (CAGR) between 2014 and 2020 and management of expense growth at a 3.7% CAGR over the same period. If PFCs are treated as revenues instead of being used to offset annual debt service, coverage ranges between 1.33x and 1.47x through 2020. Fitch felt that these assumptions were reasonable given past performance and its expectation for future performance taking into account its view of the local and national economies as well as future air service and adopted this case as its base case.
Fitch also developed a rating case scenario under which system-wide enplanements decline by 9% in 2016 (in line with the aggregate loss experienced between 2006 and 2009) followed by recovery in the form of 2%-3% annual growth rates through 2020. Revenues and expenses were adjusted to reflect weaker performance in terms of enplanements, such that the 2014-2020 CAGRs for operating revenues before transfers and operating expenses were 2.7% and 3.7%, respectively. As a result, DSCR levels in this scenario drop to 1.31x, indicating less financial flexibility; the impact on CPE is an increase over the management case of approximately \$3-\$4 at each airport by 2020.
The authority's 2001-2016 CCP is nearing completion. The total plan is estimated at approximately \$5 billion. Of that amount, 64% was funded with previously issued bonds, 24% with PFCs, 11% from state and federal grants. The final 1% will come from a combination of the series 2015B bonds and future new money bonds.
The majority of the current 15-year capital program was focused on IAD, therefore the new \$1.4 billion 10-year capital program is predominantly focused on development at DCA. The plan will be 90% bond-funded and key projects include a new north concourse and securing National Hall behind the TSA screening point. A new parking garage is also still in the planning stages. Similar to the developments at IAD, several of the projects at DCA should be revenue generating in nature.
As a result of the significant level of past borrowings applied to the capital program, Fitch views the current 9.6x net debt to CFADS to be somewhat elevated for an 'AA' category airport. However, Fitch notes that this metric is expected to evolve to a more moderate 8x level by 2020, even when factoring in the expected additional debt issuances for the new capital program. Still, additional leverage beyond that already anticipated or operational or financial conditions that prevent a downward trend of this leverage metric would be a cause for rating concern.
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