NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating for the City and County of San Francisco Airport Commission's (SFO Fuel Company LLC's) approximately $87.2 million series 1997A and 2000A special facility lease revenue bonds. The Rating Outlook is Stable.
KEY RATING DRIVERS
ESSENTIAL AIRPORT ASSETS: SFO Fuel has an effective monopoly on jet fuel storage and hydrant system distribution services at San Francisco International Airport (SFO or the airport) and is viewed as an essential function to the airlines.
PROVEN HISTORICAL DEMAND FOR THE PROJECT: Annual fuel sales continue to grow, exceeding 869 million gallons for 2012. This represents 3.4% growth over 2011 and a five-year compound annual growth rate (CAGR) of 0.5%. 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 35% 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 by the member carriers in cases of defaults or delinquencies from non-performing carriers. However, the special facility bonds do not have a recourse to the airport's general revenues or fund balances. Further, the surety-funded debt service reserve fund constrains the rating in the 'BBB' category.
ADEQUATE FACILITIES AND MODERATE COSTS: Fuel storage and distribution assets are adequate to meet projected needs. Net member costs of 2.2 cents per gallon in 2012 are moderate compared to peer fuel facilities and have remained mostly stable in recent years. Bond financed projects have been completed and there are only very modest near-term capital expenditure requirements.
RATING SENSITIVITIES
--Significant shifts in airport operations and fuel demand;
--Elevated carrier risks that could lead to defaults or delinquencies in payments to SFO Fuel;
--Capital needs that increase project leverage.
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.
CREDIT UPDATE
Currently, there are 35 airline members at SFO Fuel, accounting for nearly 99% of total fuel volume at the airport in 2012. 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 869 million gallons in 2012, a 3.4% increase from the prior year due to improving aircraft operations, landed weight, and enplanements. Fitch notes that carrier fuel consumption has been largely resilient to the recession and 2012 represents a new peak, surpassing the 2008 pre-recession high.
Fuel consumption at SFO is moderately concentrated with United Continental Airlines as the largest user at 36% of total gallons pumped in 2012. Consumption is largely tied to enplanements with United Continental Airlines being the market share leader at 45% of total enplanements in 2012. Other than United, fuel consumption is diversified among the remaining domestic and foreign-flag carriers with the next largest users of jet fuel at about 5% of gallonage and 8% of enplanements.
The moderate degree of single airline concentration poses an increased degree of risk of interruption to project cashflow 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 2012, security deposits total over $3.6 million, or 40% 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 $8.5 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, leading to a detrimental effect on the demand for jet fuel and fueling services at SFO.
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. To supplement owned fuel storage assets, SFO Fuel has entered into several fuel storage lease agreements with Shell Oil and NuStar. While such leases enhance operational capacity, these agreements have measurably increased the consortium's total operating budget from $11.2 million in 2005 to over $20 million in 2012. Still, based on 869 million gallons of usage in 2012, the average net member cost was just 2.2 cents per gallon, a level comparable to other airport fuel consortiums.
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', Nov. 27, 2012.
Applicable Criteria and Related Research
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789103
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