Fitch Affirms Colorado Springs Muni Airport, CO's Rev at 'BBB+'; Outlook Remains Stable

NEW YORK--()--Fitch Ratings affirms City of Colorado Springs' outstanding $39.8 million in airport revenues bonds at 'BBB+'. The Rating Outlook is Stable.

KEY RATING DRIVERS

Small O&D Hub Within A Highly Competitive Market: Colorado Springs Municipal Airport (the airport) services a small origination and destination (O&D) enplanement base of 822 thousand. However, the airport faces strong competition from neighboring Denver International Airport which offers service to more destinations, usually at higher frequencies and lower fares. Traffic at the airport increased by .9% in 2012 after experiencing four consecutive years of traffic decreases that resulted in an aggregate decline of 20%. Frontier's recent decision to discontinue service is expected to reduce the enplanement base to approximately 669 thousand in 2013, 18.6% lower than 2012.

Revenue Risk- Volume: Weaker

Strong Cost Recovery Terms: The airline use and lease agreement extends through Dec. 31, 2013 and consists of a hybrid rate-setting structure that provides for strong cost recovery terms. The airport's cost per enplaned passenger (CPE) is elevated for a small-hub airport at $7.58. In response to Frontier's recent decision to terminate service, management plans to stabilize rates and charges to airlines through a combination of cost reductions and use of reserves to lower debt service payments.

Revenue Risk- Price: Midrange

Fixed Rate Debt Structure: Debt outstanding is all fixed rate debt maturing in 2023. Current debt service is flat at $5.2 million to $5.4 million through 2021, and then decreases to $1 million through 2023. Management currently anticipates paying down the series 2002A bonds which represent $30.4 million of $39.8 million bonds outstanding from $18 million of cash reserves and a $12.8 million loan from the state infrastructure bank (payments of the loan are expected to be on parity with existing bonds). Debt service payments are expected to be reduced by 25% to $3.9 million annually.

Debt structure: Stronger

Thin Coverage But Low Leverage: Debt service coverage was thin at 1.33 times (x) and 1.07x when excluding pre-paid revenue account in fiscal year (FY) 2012. Offsetting the low coverage is the airports very low net debt to cash flow available for debt service (CFADS) at .27x. Liquidity is also robust with $32.8 million of unrestricted cash equivalent to 837 days cash on hand. However, liquidity is expected to reduce to approximately $20 million as part of the aforementioned debt reduction program. The airport is expected to have over 500 days cash on hand following the repayment of series 2002A bonds.

Debt service and Counterparty Risk: Midrange

Modest Capital Program: The five year capital improvement program totals $72 million, funded largely by grants and PFC revenues. Majority of the program is focused on repair and rehabilitation. There are no plans for new money issuance in the near term.

Infrastructure Development and Renewal: Stronger

RATING SENSITIVITY

--Failure to execute the debt reduction plan lowering annual debt service and operating costs;

--Further service reductions from existing carriers leading to lower enplanements;

--Coverage levels excluding prepaid revenue account dipping below 1.0x could warrant a downgrade;

--Inability to negotiate a new use and lease agreement with similarly strong cost recovery terms;

--Significant erosion in the airport's strong liquidity balances.

SECURITY

The bonds are secured by net revenues of the airport.

CREDIT UPDATE

FY 2012 enplanements increased by .9% to 822 thousand after four consecutive years of traffic declines. However, in January 2013 Frontier announced that it will discontinue service to the airport, less than a year after they made Colorado Springs Airport a focus city. Frontier reduced service in the first quarter of 2013 and discontinued all service in April resulting in a 5.9% enplanement reduction for year to date 2013. Management expects an 18.6% decrease to 669 thousand enplanements for 2013. Some lost service could be restored in 2014 with two airlines finalizing plans to resume service to two previously served markets.

In anticipation of lower enplanements for 2013, the airport plans to reduce debt service and operating costs to stabilize rates and charges to air carriers. Management plans to pay down series 2002A bonds which represent $30.4 million of bonds outstanding by using $12.6 million of unrestricted cash, $5.3 million of bond reserves, and a $12.8 million loan from the state infrastructure bank. The payments of the state infrastructure bank are expected to be on parity with the existing bonds. The airport intends to lower annual debt service payments by 25%. Following the repayment of the series 2002A bonds, unrestricted cash is expected to decrease from $32.9 million (837 days cash on hand) to $20.3 million (516 days cash on hand). Timing in paying off the series 2002A bonds is currently scheduled for late summer or early fall 2013.

Adjustments were made to the operating budget following Frontier's announcement. Staff was reduced to 102 full time employees from 118 and the parking concessionaire was mandated to reduce their cost structure by 15% for 2013. Operating expenses in the revised budget are 8.1% lower than the original budget. However, budgeted expenses of $14.5 million are slightly higher than $14.3 million in 2012. Management is in the process of exploring further long term cost reductions. Operating revenues under the revised budget of $18.6 million is 11.7% lower than the original budget and 6.3% lower than 2012 revenues.

The airport has limited financial flexibility with debt service coverage excluding prepaid account of 1.07x. Although the airport's use and lease agreement provides strong cost recovery terms, CPE of $7.58 is high for a small hub airport and the competitive environment somewhat limits the ability to pass on more costs to airlines. The airport's revenue profile is also dependent on non-airline revenues (65% of operating revenues) which are largely driven by passenger volume. To the extent that traffic declines lead to coverage excluding prepaid revenue account dropping below 1.0x, a downgrade could be warranted. Key mitigating factors include the airport's low leverage and high liquidity at the current rating level.

Fitch's sensitivity analysis assumes traffic declines 18.6% in 2013 followed by flat to slight growth. Operating expenses are assumed to be similar to the revised budget while debt service payments are reduced by 25%. Under such scenario, CPE may rise to the $10 range from $7.58 in order to maintain coverage excluding prepaid revenue account above 1.0x, a level that is very high for an airport of its size. Fitch expects the airport to manage the CPE level through a combination of expense reductions, strategic structuring of the state infrastructure loan, and use of cash reserves. Fitch will continue to monitor the airport's plans to stabilize rates and maintain coverage levels going forward. Should this scenario come to fruition with no material remediation plan in place, negative rating action may be warranted.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Nov. 27, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794890

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Contacts

Fitch Ratings
Primary Analyst
Raymond Wu, +1-212-908-0845
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Tanya Langman, +1-212-908-0716
Associate Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Raymond Wu, +1-212-908-0845
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Tanya Langman, +1-212-908-0716
Associate Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com