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New Issue:

MOODY'S REVISES THE OUTLOOK ON THE STATE OF ALASKA AIRPORTS SYSTEM BONDS TO NEGATIVE; Aa3 RATING AFFIRMED

07 Sep 2010

THE SYSTEM HAS $561.1 MILLION IN OUTSTANDING DEBT

Alaska (State of) Airport Enterprise
Airport
AK

Moody's Rating

ISSUE

RATING

Airport System Refunding Bonds, Series 2010A

Aa3

  Sale Amount

$115,950,000

  Expected Sale Date

09/15/10

  Rating Description

Revenue

 

Airport System Refunding Bonds, Series 2010B

Aa3

  Sale Amount

$21,600,000

  Expected Sale Date

09/15/10

  Rating Description

Revenue

 

Airport System Revenue Bonds, Series 2010C

Aa3

  Sale Amount

$12,545,000

  Expected Sale Date

09/15/10

  Rating Description

Revenue

 

Airport System Revenue Bonds, Series 2010D

Aa3

  Sale Amount

$19,545,000

  Expected Sale Date

09/15/10

  Rating Description

Revenue

 

Opinion

NEW YORK, Sep 7, 2010 -- Moody's Investors Service has revised to negative from stable the outlook on the State of Alaska's Airports System Revenue Bonds. At this time we have assigned a Aa3 rating to $169.64 million of Airport System Revenue and Refunding Bonds Series 2010A, B, C & D. Moody's is also affirming the Aa3 rating on the system's outstanding parity debt totaling $561.1 million. The negative outlook is based on the airport's high leverage and volatile activity trends, which are both susceptible to continued weakening should poor economic conditions persist. The Alaska International Airport System (AIAS) includes the Ted Stevens Anchorage International Airport and the Fairbanks International Airport.

USE OF PROCEEDS: The 2010A and B bonds are being issued to refund a portion of the system's $165.3 million 1999A,B,C and 2002B Airport System Revenue Bonds for savings. As part of the refunding, the system is extending the maturities on the debt by 3 years. The 2010C and D bonds are being issued to fund certain portions of the system's capital program. The majority of the proceeds will be used for the rehabilitation and extension of Runway 7R. Seventy-five percent of this expense will be reimbursed by FAA Airport Improvement Program grants in the form of Letter of Intent (LOI) payments in the coming years. The system intends to use those grant receipts, in conjunction with excess cash, to reduce outstanding debt through a series of optional redemptions.

LEGAL SECURITY: Net revenues of the airport.

INTEREST RATE DERIVATIVES: None

STRENGTHS

* Role of air transportation in state economy gives system near-monopoly status of a highly essential transportation service

* Substantial cargo revenues limit exposure to passenger airlines; largest tenant, Alaska Airlines, accounts for only 13% of operating revenues with no other tenant accounting for more than 7%;

* Solid liquidity position provides for significant financial flexibility

*Future debt requirements are limited for at least the next five years

CHALLENGES

* Concentration in Alaska Airlines for passenger enplanements

* Above average debt level and airline cost per enplanement due to recent large capital expenditures

* Enplanement levels have declined for two consecutive years and cargo traffic has been more volatile than previously expected

* The system's debt service reserve fund is funded with $18.6 million in cash and $31.2 million in sureties from National Public Finance Guaranty ($29.2M) and AMBAC ($2.0M), but the system intends to contribute $2 million annually to fully cash fund the reserve

RECENT DEVELOPMENTS:

The airport system has seen substantial volatility in both passengers and cargo over the past two years. While passenger declines have not been as sharp as at some airports in the U.S., Anchorage has experienced declines of -3.8% and -4.8% in the past two fiscal years, respectively. Unlike most other rated airports, cargo revenues represent the bulk of aviation revenues at Anchorage, accounting for approximately two-thirds of airline derived revenues. Total cargo certified maximum gross take-off weight (CMGTW) at the airport declined -24.9% in FY 2009, but rebounded somewhat in FY2010 with 15.6% growth. Still Moody's believes the weaknesses in the global economy have the potential to restrict or reverse cargo volume growth at the airport in the near term.

The risk of lower activity levels at the airport is heightened by the airport's high leverage position relative to its peer airports. The system is among the most highly levered airports when measured by either debt to operating revenues (6.1) or debt per O&D enplaned passenger ($263). Compared to the U.S. airport sector medians of 3.6 and $77.84, respectively, these figures indicate that the airport is more susceptible to changes in activity levels. Through the expected LOI payments and excess cash generated from achieving an annual coverage factor, the airport expects to reduce its debt at an accelerated pace from 2013 through 2017; however, in the near term the debt levels remain a significant concern.

Cost per enplanement (CPE) has been kept low by use of excess construction funds and surplus cash in FY 2009, 2010 and FY 2011. This use of cash has made the common metrics of CPE and debt service coverage an inaccurate measure of the airport for this time period. Airline costs have remained reasonable and decreased from $9.89 in FY 2008 to $9.08 in FY 2009. Costs appear to have increased in FY 2010 with a preliminary CPE of $9.92 and the state expects them to increase modestly to the $10-11 range for the next few years. The airport system had $65 million of excess construction funds and surplus cash available and received approval to use them to reduce debt service costs in the three years mentioned above. As a result, debt service requirements were reduced by $25 million in 2009, $25 million in 2010, and will be reduced $15 million in 2011. This has kept CPE low while allowing debt service coverage to increase from 1.30 times in FY 2008 to 1.52 times and 1.80 times in FY 2009 and FY 2010, respectively. It has had the reverse effect on debt service coverage by net revenues, which fell to 0.70 times in FY 2009 from 1.24 times in FY 2008. If the airlines had to be charged for the debt service that was paid by the left over construction funds FY 2009 CPE would have been approximately $2.90 higher and debt service coverage by net revenues would have been approximately 1.26 times.

An additional concern remains the debt service reserve fund (DSRF) that is only partially cash funded. The reserve requirement is met through $18.6 million of cash, $29.2 million of National Public Finance Guarantee Corp (rated Baa1, developing) surety policies, and $2.0 million of Ambac (rated Caa2, ratings under review for possible upgrade). The extensive reliance on sureties from companies with weak credit strength materially weakens the protections afforded to bondholders. The airport has taken steps to address this weakness and will begin infusing $2 million of cash into the reserve fund in FY 2011. Previously the bond indenture did not allow additional cash contributions to the DSRF. This DSRF weakness is partially offset by the system's strong liquidity, which stood at 644 days cash on hand at the end of FY 2009. This strength has been eroded by the spending down of funds to reduce debt service requirements and will continue to decline to support some of the airport's capital projects. However, the state does not expect unrestricted cash balances to fall below one year of days cash on hand.

The majority of the airport system's current capital program was set at the completion of the airline use and lease agreement that began in 2008. The airlines approved $177 million of capital spending through 2013 in that agreement and have since approved an additional $23 million of projects, $19.1 which was increases in the cost of the runway 7 right upgrade and rehabilitation. That project and the planned rehabilitation of runway 7 left are by far the two largest projects in the program and both are almost entirely funded through FAA AIP grant funds. Phase I of the Runway 7 right project is expected to be complete September 30th. The runway will close again in May 2011 for Phase II of the upgrade and for the runway extension project. These projects have not yet been bid, so costs are only estimates. The rehabilitation of runway 7 left is not expected until 2012.

Only $13 million of the program anticipates bond funding and those proceeds will primarily fund land acquisition, periodic improvements at both airports, and provide matching funds for the FAA grants in conjunction with the runway projects and taxiway projects. Approximately, $29.5 million of the total capital program will be at Fairbanks Airport, the largest of this is also a runway rehabilitation project of $18.3 million also 95% funded with AIP grants.

Bond ratings were assigned by evaluating factors believed to be relevant to the credit profile of the issuer such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the nature of the dedicated revenue stream pledged to the bonds, vi) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and viii) and the issuer's management and governance structure related to payment.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Outlook

The negative outlook is based on the airport's high leverage and volatile activity trends, which are both susceptible to continued weakening if poor or stagnant economic conditions persist.

What Could Change the Rating - UP

Continued revenue diversification through enplanement growth by carriers other than Alaska Airlines or a strengthening in cargo operations that further reduces costs to all airlines could place positive pressure on the rating.

What Could Change the Rating - DOWN

Unexpected increases in the airport's costs to the airlines that reduces its strategic advantage for commercial and/or cargo operation or a continued decline in enplanement and cargo levels at the airport could have a negative impact on the rating.

KEY INDICATORS

Type of Airport:O&D

Rate-making methodology:Residual

FY 2010 System-wide Enplanements: 2.79 million

5-Year Enplanement CAGR 2005-2010:1.5%

FY 2010 vs. FY 2009 Enplanement growth:-4.8%

% O&D vs. Connecting, FY 2010:86%

Largest Carrier by Enplanements, FY 2010 (share):Alaska (62%)

FY 2010 vs. FY 2009 Cargo landed weight growth:19.8%

FY 2009 vs. FY 2008 Cargo landed weight growth: -24.5

Airline Cost per Enplaned Passenger, FY 2009:$9.08

Airline Cost per Enplaned Passenger, FY 2010 prelim:$9.92

Debt per Enplaned Passenger, FY 2009 :$226

Debt Service Coverage, FY 2009:1.52x

Utilization Factor, FY 2010:4.6

RATED DEBT

Series 1999A,B&C Airport System Revenue Bonds, $145.6 million, Aa3

Series 2002 B Airport System Revenue Bonds, $19.7 million, Aa3

Series 2003A&B Airport System Revenue Bonds, $71.9 million, Aa3

Series 2006A,B&D Airport System Revenue Bonds, $273.9 million, Aa3

Series 2009A Airport System VRD Revenue Refunding Bonds, $50.0 million, Aa3

All debt is fixed rate except Series 2009A.

CONTACTS

Keith Day

Controller

(907) 266-2404

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Kurt Krummenacker
Analyst
Public Finance Group
Moody's Investors Service

Maria Matesanz
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S REVISES THE OUTLOOK ON THE STATE OF ALASKA AIRPORTS SYSTEM BONDS TO NEGATIVE; Aa3 RATING AFFIRMED
No Related Data.
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