Strong, diverse, expansive air trade area supports O&D activity that forms the basis for hubbing.

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1 Public Finance Airport Surveillance Report City of Chicago, IL Executive Summary Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of A+ with a Stable Outlook on the City of Chicago, (ORD). This affirmation is based on KBRA s U.S. General Airport Revenue Bond Methodology. KBRA s rating evaluation of the long-term credit quality of general airport revenue bonds focuses on six key rating determinants: Management Economics/Demographics of Service Area Airport Utilization Airport Debt/Capital Needs Airport Finances Legal Mechanics and Security Provisions In the process of affirming the rating, KBRA reviewed multiple sources of information and corresponded with airport management. Further information may be found in the Chicago O'Hare International Airport Senior Lien Revenue Bonds, Series 2015 rating report. Security The Senior Lien Bonds are secured by a first lien pledge of Revenues - defined as all amounts received or receivable directly or indirectly by the City for any fiscal year for the use and operation of ORD (excluding the Land Support Area). Certain Senior Lien Bonds are additionally secured by a subordinate pledge of passenger facility charge (PFC) revenues, or Airport Improvement Fund (AIP) revenues received under a letter of intent. Key Rating Strengths Strong, diverse, expansive air trade area supports O&D activity that forms the basis for hubbing. Major connecting hub for both United Airlines and American Airlines, the only dual airline hub in the U.S. Demonstrated ability to undertake a massive, complex runway reconfiguration program in timely manner, while remaining within budget and meeting ongoing operational demands. Resumption of enplanement growth reflecting attraction of Airport to low cost carriers, and increased international enplanement activity. High airline costs are tempered by profitable airline operations, and O Hare Modernization Program (OMP), which has reduced delays and improved capacity. October 3, 2017

2 Key Rating Concerns High leverage levels for ORD s outstanding general airport revenue bond (GARB) debt. Debt service coverage is narrow reflecting an adequate rate covenant requirement and residual Airport Use Agreement. Significant near-term additional debt issuance expected. Rating Summary KBRA believes that ORD derives fundamental credit strength from its strong air service market, which features the third largest population in the U.S., a sizable and diverse economic base with major employers and Fortune 500 headquarters, and a location in the center of the U.S., at the nation s crossroads. These factors have led to significant origin and destination traffic (O&D), which in-turn forms the basis for extensive hubbing activity. American and United both operate significant hubs at ORD. KBRA views the ORD management team as very effective as underscored by its adopted policies and procedures that support well maintained operations, as well as effective oversight of the OMP, which is accomplishing a reconfiguration of ORD s airfield. Debt levels are currently high, and KBRA would expect further leverage as the final component of the OMP is financed over the next several years and a sizable capital improvement plan is embarked upon. Airline costs are also high, $15.16 per enplaned passenger in 2016, an estimated $18.84 in 2017, and are forecast to approximate $27.47 by KBRA s concerns regarding this elevated level are tempered by the lucrative nature of American and United routes at ORD, and the benefits of the OMP, which translate into reduced delays, increased national airspace capacity, and savings to the airlines. ORD s 15 county Air Trade Area (ATA) population of over 9.7 million, stretches into three states, and includes the City of Chicago with a population of approximately 2.7 million. The ATA s population is projected to grow at a compound annual growth rate (CAGR) of 0.6% between 2015 and 2025, which is below the comparable U.S. rate. However, per capita personal income, a key indicator of demand for air travel, is higher than that of the U.S. The region features an attractive business climate, and has been chosen as the top Metro for Corporate Expansions and Relocations by Site Selection Magazine in 2013 through Access to overseas markets gives business in the region the ability to operate internationally. Major employers represent a wide range of industries, including health care, higher education, financial services, pharmaceuticals, insurance and retail. The ATA has the second highest number of Fortune 500 company headquarters after the New York metropolitan area. Tourism has become an increasingly important industry with the number of domestic and international visitors increasing by more than 37% between 2010 and 2016, and now exceeding 54 million annually. The City and the surrounding region host a wide variety of cultural and educational institutions, and the City ranks third in the U.S. by the number of conventions held. There are two other commercial service airports in the area: Midway International Airport, a large-hub facility, owned by the City of Chicago, and located approximately 15 miles south of ORD, and General Mitchell International Airport, a medium-hub airport situated near Milwaukee, Wisconsin, about 70 miles north of ORD. In KBRA s opinion, ORD has no real competition for service from these airports. Midway serves a distinct market segment as a lower fare alternative, and is constrained as to further expansion, while General Mitchell has a much more limited frequency of non-stop service than ORD, and thus a portion of its potential traffic is diverted from its catchment area to ORD. Page 2 October 3, 2017

3 Domestic enplanements dropped significantly in 2008 and 2009 as a result of the Great Recession. In 2008, airlines reduced capacity through consolidation and aircraft retirements, and also in response to lower demand and rising oil prices. Airlines held capacity relatively flat, while the economy improved between 2010 and 2013, as United worked through its merger with Continental, and American restructured through bankruptcy. Low cost carrier (LCC) growth has been strong since late KBRA believes these airlines are increasingly seeing value in service at ORD. International enplanement activity has also rebounded well. In 2016, ORD set a record for passenger enplanements. Total enplanements grew by 1.2%, following increases of 9.9% and 5.0% in 2015 and 2014, respectively. Through July 2017, enplanements have increased 1.2% compared to the prior year period. KBRA views ORD as a large and complex facility, and as such, substantial amounts of debt have been issued to meet ongoing capital needs. As of July 1, 2017, ORD had $7.6 billion in GARB principal outstanding. That amount will rise with planned new money borrowing of $361.4 million to fund remaining OMP airfield projects and as the City embarks on a large capital improvement program, which includes $1.19 billion of GARB financed borrowing ($2.3 billion total cost). A sizable component of outstanding debt is accounted for by the OMP, one of the largest capital programs currently underway at a U.S. airport. The program is approaching completion. Agreement was reached with the airline parties in early 2016 for construction of a new runway, which leaves the still to be agreed upon extension of an existing runway as the only remaining large project. The OMP is expected to be completed by KBRA sees the need for this massive program, and believes the objectives of reduced delays and increased airspace capacity confer benefits not only to O Hare but to the entire North American aviation system. In that regard KBRA believes these quantifiable benefits act to offset the increased airline costs to fund the program. Therefore, while KBRA recognizes the currently high and increasing cost per enplanement, we believe there are mitigating factors. Senior lien bonds represent essentially all of the long-term debt under ORD s general airport credit. All of the ORD indebtedness, with the exception of a 2005 Series, is in the form of fixed rate obligations, and there are no swaps outstanding. Bond maturity is in 2052, and annual debt service is relatively level. However, annual requirements are likely to rise significantly, despite expected PFC and Federal grant support, as the City issues additional debt Separately secured is approximately $559 million of passenger facility charge (PFC) bonds, and $249 million of Consolidated Rental Car Facility bonds as well as a Transportation Infrastructure Finance Innovation Act (TIFIA) loan. These latter two sources were used to finance the consolidated rental car facility that is now under construction, and expected to open in Periodically, Commercial Paper (CP) Notes are issued to provide interim financing, which are retired by long-term bonds. ORD financial operations are satisfactory, although GARB coverage is narrow, reflecting the residual ratemaking methodology defined in the Airport Use Agreement and a 1.10x rate covenant that allows application of non-recurring sources of revenues. Airline payments are a substantial component of operating revenues, while concessions contribute a relatively minor portion (26.7% in fiscal year 2016), with parking representing the largest non-airline source. Concession revenues increased at a compound annual growth rate (CAGR) of 3.6% between 2011 and 2016, representing ongoing recovery from the economic recession, and enhanced concession offerings at ORD. Concession revenues per enplanement, at $6.52, are below the median for selected comparable airports. Nevertheless, KBRA believes there is potential for significant growth as higher-end dining and shopping concepts are introduced into the domestic terminals. In KBRA s view, the recent success of the International Terminal s new concession program provides a prototype for enhanced growth. Operation and maintenance (O&M) expenses increased at a CAGR of 4.3% between 2011 and Professional and engineering costs increased at a CAGR of 7.9%, wages and salaries 1.8%, and repairs Page 3 October 3, 2017

4 and maintenance 4.4%. Between 2013 and 2014, O&M expenses increased 16.2%, largely attributable to expenses related to snow removal and retroactive pay settlements. In KBRA s opinion, O&M expenses per enplaned passenger, although rising, remain in a comfortable range. O&M expenses are forecast to rise by a CAGR of 5.3% over the eight-year period through This forecast assumes a 3% inflation factor, but also factors in OMP-related operating expenses captured in the rate calculation related to the construction of a new runway and the extension of an existing one. Also assumed are additional operating costs associated with the extension of the International Terminal (Terminal 5), upon completion in Enplanements are forecast to grow at a 0.7% CAGR through 2025, which is conservative compared to the growth recorded at ORD in 2014 and 2015, but are at a level far in excess of ORD s more modest growth prior to ORD s projected CPE of $27.47 in 2025 is among the highest of any U.S. Airport. As already stated, KBRA derives comfort from the partially offsetting savings of the OMP. That being said, any significant negative deviation in enplanements is likely to further elevate this metric. Based on review of the six KBRA Rating Determinants included in the KBRA Methodology for rating U.S. General Airport Revenue Bonds, KBRA has assigned a rating to each Determinant, which is summarized as follows: Management: Favorable Economics/Demographics of the Service Area: AA Airport Utilization: AA- Airport / Debt Capital Needs: A Airport Finances: A- Legal Mechanics and Security Provisions: A- Outlook: Stable The stable outlook reflects KBRA s expectation that American and United Airlines will continue to maintain ORD as an important hub in their respective systems, borrowing will approximate what is currently anticipated, in-process and planned projects will come on-line in a timely manner, within budget, and debt service coverage will remain adequate. In KBRA s view, the following factors may contribute to a rating upgrade: More consistent pattern of enplanement growth. A higher proportion of total operating revenues from concession activity. In KBRA s view, the following factors may contribute to rating downgrade: Reduction/elimination of hubbing operations by American or United Airlines. Key Rating Determinants Rating Determinant 1: Governance and Management O Hare and Midway Airports are owned by the City of Chicago, operated by the Chicago Department of Aviation (CDA), and accounted for as self-supporting enterprise funds of the City on a fiscal year basis. O Hare s location was chosen in 1945 on the site of a former Douglas Aircraft Company (now merged into Boeing) assembly plant, as City officials even then recognized the footprint constraints of the established Midway Airport. Commercial aviation began at O Hare (renamed from the former Orchard Field in 1949) in Page 4 October 3, 2017

5 1955, and by 1962 O Hare claimed the title as the world s busiest airport, measured in terms of enplaned passengers. While the CDA has not adopted explicit mission and vision statements, the CDA views its purpose as allencompassing, and KBRA believes the following responsibilities are generally referenced in these statements. These include ensuring safe and efficient travel through O Hare and Midway Airports; successful implementation of the O Hare Modernization Program (OMP); promotion of economic activity and job creation; management of airport tenant and concession license agreements, ground transportation facilities, financial administration, research planning and development activities; integration of airport-specific, sustainable planning and practices in design, construction, operations, maintenance; and daily airport operations. The City s Strategic Plan is for O Hare to become a global super-hub, which will enhance economic activity in the Airport s ATA, and generate tax revenue and business and job growth. The City aspires to a high level of customer service, with world class facilities, best-in-class technology, and quality services and products. The City believes that global connectivity can be attained by encouraging growth among current airlines, and creating an environment for new entrants (domestic, international, cargo), and working to increase flight frequencies and up gauging of assets. The City is focused on improving yields for airlines, concessionaires, and other business partners, and strengthening concession revenues on a per passenger basis, and in total. City of Chicago Governmental Structure KBRA views the City s management structure and policies as providing a strong framework for managing debt, financial operations, and service delivery. The City s management team is highly experienced, and comes from a wide variety of disciplines, supplementing traditional management skills and adding new perspectives. Financial responsibilities are domiciled under the leadership of the Chief Financial Officer, Budget Director, and City Comptroller. City government is divided into executive and legislative branches. The Mayor is the chief executive and is responsible for administration of various city departments, while the City Council, elected from 50 wards (municipal districts), is the legislative body. Elections are held every four years, with no term limits. Official action is taken through the passage of ordinances and resolutions. In addition to the Mayor, Chicago s two other city-wide elected officials are the Clerk, and Treasurer, whose role is to invest City funds. CDA Organizational Structure The CDA operates under the direction of a Commissioner of Aviation, appointed by the Mayor and approved by the City Council. The Commissioner of CDA is the primary contact with the Mayor s office. Providing support to the Commissioner is a First Deputy Commissioner, Chief of Staff, General Counsel, Chief of Safety and Security, Chief Operating Officer, Chief Financial Officer, one Managing Deputy Commissioner, five Deputy Commissioners, Director of Media Relations, and Director of Marketing. The Deputy Commissioners have responsibilities in concessions, finance, information technology and communications. The Managing Deputy Commissioner and one of the Deputy Commissioners are focused on Midway Airport. The CDA oversees planning, operations, safety and security, and finance and administration at O Hare. As of August 31, 2017, O Hare had approximately 1,263 City employees. Total employment at O Hare is approximately 40,000. O Hare employees participate in one of four single-employer defined benefit pension plans for City employees. The City s contributions to these plans are funded by user fees and charges and other revenues assessed at O Hare. The City s General Fund is reimbursed for pension costs applicable to employees at O Hare, and those reimbursements are recorded as operating expenses. Federal regulations prevent airport revenues from being used to fund pension costs for any employees not working directly at or allocated to the Airport. Page 5 October 3, 2017

6 Management Experience Ginger S. Evans joined the CDA in June 2015 as Commissioner, Department of Aviation. She has more than 30 years of aviation experience, and joined after serving as Vice President of Engineering for the Metropolitan Washington Airports Authority (MWAA) in Washington, D.C. She has overseen major projects at Reagan National and Dulles Airports, as well as the Silver Line Metrorail extension. Prior to her role at MWAA, Evans worked in private consulting on major aviation projects in Europe, the Middle East, and Latin America, as well as rail projects in New York and Washington, and also served as Director of Aviation for Denver International Airport. Susan Warner Dooley, First Deputy Commissioner, oversees the business, financial and administrative functions of MDW and ORD, and has 25 years of airport-related experience. She previously served as a senior executive of the Port Authority of New York and New Jersey, Minneapolis-St. Paul Metropolitan Airports Commission, Miami-Dade Aviation Department, and Columbus Regional Airport Authority. Susan Kurland, former Assistant Secretary for Aviation and International Affairs for the U.S. Department of Transportation, joined CDA in May 2016 to direct strategic air service development efforts with a special focus on international air service and sister airport relations. Carole Brown was appointed Chief Financial Officer of the City of Chicago in May Prior to her appointment, she had a more than 25 year investment banking career. Most recently, she served as Managing Director at Barclays Capital, heading the firm s Midwest and Southeast municipal practices. Brown has also served as Chairman of the Chicago Housing Authority Board. She was a member of the Transition Team for Chicago Mayor Rahm Emanuel, served as Chairman of the TIF Reform Panel, and was an appointee to the Board of the Regional Transportation Authority. Kelly Flannery is Deputy Chief Financial Officer for the City of Chicago s debt management and investment banking relations. She has been with the City for 8 years and oversees a $20 billion debt portfolio, including general obligation, water, wastewater, MDW and ORD Airports, motor fuel tax, sales tax, housing and tax increment financing. Budget Process Adoption of an annual budget is required by the Senior Lien Master Indenture. The CDA submits an annual budget for ORD to the signatory airlines to the Airport Use Agreement for review. The budget includes airport rates and charges calculated using the residual rate-setting methodology set forth in the Airport Use Agreement, based on budgeted O&M expenses, revenues, required fund deposits, and debt service. CDA then submits its proposed budget for ORD to the City s Budget Director for inclusion in the proposed City budget. The Budget Director includes a proposed budget for CDA in the City s budget proposal for approval by the Mayor, who submits the budget to the City Council for approval. ORD s budget, as proposed by CDA, may be modified by the Budget Director, Mayor, or City Council. The final budget recommendation is submitted to the City Council for consideration by the Council s Committee on the Budget and Government Operations on or before October 15 th of each year. The proposed budget may be changed by the City Council through amendments made as part of the City Council hearing and review process. The Committee on the Budget and Government Operations and then the full City Council vote on the budget and any amendments. The Council-approved budget in the form of an annual appropriation ordinance is then forwarded to the Mayor for approval. If the Mayor vetoes the approved annual appropriation ordinance, the City Council may override the veto with a two-thirds vote. The budget must be adopted before the end of the calendar year, as the fiscal year begins on January 1 and ends December 31. The Budget Director requires departments to submit quarterly allotment budgets, which the Budget Director in turn monitors. In the event any department s expenditures exceed its receipt of revenues, the Budget Director through the quarterly budget allotment procedure is authorized to institute measures to ensure that the department s expenses do not exceed its revenue collection. The Airport Use Agreement Page 6 October 3, 2017

7 requires a mid-year projection of O&M expenses, which may require upward adjustments in O&M deposits, and a related increased deposit into the O&M Reserve Fund. Capital Improvement Program Development A Facilities Review and Inspection Report is annually prepared by an independent consultant in conjunction with airport management that evaluates airport facilities and operating systems. The report prioritizes any facility issues and prepares cost estimates. Every other year a pavement evaluation report is completed, as well as a bridge inspection report. In addition, the City works with the carriers, the FAA and the Transportation Security Administration (TSA) to coordinate projects that those groups require based on federal regulations, carrier demand, and customer service. These reports are evaluated by the Design and Construction division of the CDA, which prepares a list of projects, costs, and schedules that will be used to update the CIP each year. Individual departments must prepare multi-year capital plans. Plans are for five year periods, and must be updated annually. Airline-Airport Relations KBRA recognizes a high level of cooperation between the City and the airlines. The City and airlines work closely in the process of developing capital programs, including the OMP and the CIP. Representatives of both the City and the airlines participate in the Executive Working Group, which was established in the OMP majority-in-interest (MII) to create a structure for continued City/airline decision making. The City and airlines have regularly scheduled monthly meetings to review a variety of topics both financial and operational. In addition, the City and airlines meet twice a year to review the proposed airline rates and charges for the next six-month period. These meetings afford the airlines the opportunity to have input into the O&M expense budget for the Airport. Key Policies and Procedures The City has adopted various policies and procedures, which KBRA believes effectively maintain operations and account for attendant risks, and demonstrate foresight in dealing with critical issues. KBRA views management as highly effective, as demonstrated by its administration of the massive and highly complex O Hare Modernization Program, which since its inception in 2005 has achieved its milestones on-time and under budget. OMP has involved the acquisition of approximately 126 acres of land, the relocation of 2,800 residents and a cemetery with almost 1,500 graves, as well as significant associated litigation. Notably, the City was able to convince the airlines to buy into an extensive program that increases airline rates and charges significantly, but produces efficiencies that result in airline operational cost saving, that more than offset these incremental costs. Risk Management The City has a comprehensive program that focuses on a continuous and sustainable process for the identification, measurement, mitigation, and control of risk. Prevention and safety is an integral part of the program as well as mitigation through risk transfer mechanisms. Risks are either transferred contractually to the Airlines or contractors working at the airport or transferred through the procurement of insurance. Business Continuity In accordance with Federal Emergency Management Agency (FEMA) standards, the CDA has practices in place for business continuity in emergency situations. The CDA has developed the Disaster Preparedness Plan in conjunction with the Federal Aviation Administration (FAA) which prioritizes critical operations, staff, and procedures to remain in business, or recover from a disaster that may impact the aviation business. Page 7 October 3, 2017

8 Debt Management The City maintains general policies for debt, swaps, and investments. The Debt Policy s objectives include achieving the lowest cost of capital, preserving future financial flexibility, and maintaining a prudent level of financial risk. The debt policy is reviewed and updated at least annually. The final maturity of the debt is required to be less than the remaining useful life of the assets being financed, and the average life of the financing must not exceed 120%. Principal and interest requirements will generally be structured to have approximately level debt service requirements over the life of the bonds. Exceptions will occur for refunding bonds that have varying principal repayments structured to fill gaps created by refunding specific principal maturities. A present value analysis is required to be prepared for any refunding. The target savings is expected to be at least 3% of the refunded par amount, except in cases where refunding was not undertaken to achieve cost savings (i.e. restructure repayment, change the type of debt instruments used, eliminate undesirable covenants). Sustainability The City has been proactive in integrating environmental best practices into all aspects of airport operations. In 2003, the CDA created the Sustainable Airport Manual (SAM) to incorporate and monitor sustainability with regard to: (1) Administrative Procedures; (2) Planning; (3) Design and Construction; (4) Operations and Maintenance; and (5) Concessions and Tenants. The SAM has been the basis for keeping construction waste out of landfills, salvaging and reusing materials, adding green roofs, improving energy efficiency, reducing air emissions and conserving water. The CDA has also partnered with other stakeholders in wetlands restoration, has installed an apiary of as many as 75 beehives at O Hare, encouraged compressed natural gas (CNG) taxi cabs at O Hare and Midway, operates a fleet of alternatively-fueled and hybrid vehicles at O Hare, and established electric vehicle charging stations at O Hare and Midway. Since 2013, the CDA has employed a herd of goats, sheep, llamas and burros to clear dense scrub vegetation on O Hare property that was difficult to maintain with traditional landscaping equipment. Noise Management In 1996, the O Hare Noise Compatibility Commission (ONCC) was established. The creation of the Commission was a result of the City s invitation to establish a dialogue on aircraft noise issues. It is an inter-governmental agency dedicated to reducing aircraft noise that now includes 42 municipalities and 17 school districts near ORD. These members are represented by mayors, Chicago alderman, Cook County, and school superintendents at more than 20 public meetings that ONCC and its committees hold annually. The CDA maintains a toll-free hotline and Aircraft Noise Complaint Form for citizens to report concerns about particular aircraft events and aircraft noise levels in general. As of February 2016, 10,925 homes near ORD and numerous schools have been sound insulated. Sound insulation may include, but is not limited to, heating and air conditioning systems installation, replacement of existing windows and exterior doors with sound insulating windows and doors, addition of dry wall to interior walls, and the addition of baffling devices to exterior vents. Irregular Operations (IROPs) The CDA has prepared an Emergency Contingency Plan that describes how in the event of extensive tarmac delays ORD will provide for the deplanement of passengers, provide for the sharing of facilities and make gates available at the airport, and provide a sterile area for passengers that have not yet cleared customs. The Plan also sets up procedures and contact information for diverted flights that allow for prior coordination, except in the case of a declared in-flight emergency. Page 8 October 3, 2017

9 Marketing Efforts Since 2011, the CDA has been promoting new/additional ORD route opportunities to airlines through both bilateral discussions with airline network planning teams (including headquarters visits), and regular attendance at the Routes series of airline route development conferences. In September 2014, Chicago hosted the 20 th World Route Development Forum, the largest global aviation conference on air service, as a means of raising the profile of City s airports in the airline network planning and tourism community. Based on the foregoing, KBRA views the Governance and Management of O Hare International Airport as consistent with a Favorable Rating Determinant rating. Rating Determinant 2: Economics/ Demographics of the Service Area ORD is located in the City of Chicago. The Air Trade Area (ATA) is vast and supported by an economy that spans three states, Illinois, Indiana, and Wisconsin. The ATA includes 15 counties (Cook, DeKalb, DuPage, Grundy, Kane, Kankakee, Kendall, Lake, McHenry, and Will in Illinois; Jasper, Lake, Newton, and Porter in Indiana; and Kenosha in Wisconsin). Excluding Kankakee (1.1% of the ATA population) these counties constitute the Chicago-Naperville-Elgin Metropolitan Statistical Area (MSA). Demographic characteristics of the service area are generally favorable and lend support to air travel in the region. The City of Chicago is the largest city in the Midwest and the third largest city in the U.S. The population of the ATA continues its pattern of slow growth, with just over 9.6 million people in 2016, reflecting a 4.6% increase from The relatively low age dependency ratio and high cohort characterize a population likely to spend on air travel. The population in the ATA is highly educated, as reflected by 34.7% of the population having a bachelors or advanced degree. This is above comparable state and national levels and reflects the nature and quality of the employment base in the area. Page 9 October 3, 2017

10 KBRA views the ATA s income level and employment base as strong, driven by the extensive economy of the greater Chicago area. As of July 2017, the ATA unemployment rate was 4.7% versus the state and nation at 4.9% and 4.3%, respectively. This level of unemployment is markedly improved from a cyclical high of 10.6% in 2010; however, unemployment has been somewhat higher than the domestic average throughout the last decade. Income levels nevertheless are high with ATA per capita personal income of $53,796 in 2015, which was 1.07x that of the state and 1.12x the domestic average. The poverty level was also below average at 14.0% in 2015 versus the state and nation at 14.3% and 15.5%, respectively. Housing market values in the ATA declined precipitously during the Great Recession and recovery has been slow. Based on the Case-Shiller Home Price Index, as of June 2017, the City of Chicago s home prices have recovered to 84.4% of its pre-recession high. Over the same time period, the nationwide recovery rate was stronger at 106.1%. Deep and Diverse Business Environment Supports Air Travel A substantial portion of the ATA s economy is driven by the City of Chicago. The City is the second largest financial center in the U.S. and the home to largest options and futures contracts exchange in the world as measured by volume. The ATA is home to over 400 corporate headquarters, including 34 Fortune 500 companies, ten of which are located in the City as of Due to its attractive business climate, Chicago was chosen at the Top Metro for Corporate Expansions and Relocations by Site Selection Magazine in 2016 for the fourth consecutive year. According to Crain s Chicago Business, downtown vacancy rates hit a 15 year low in the second half of In 2017, the A.T. Kearney Global Cities Index rated Chicago among the top ten cities worldwide in attracting global capital and business. The ATA has 42 colleges and universities with an approximate enrollment of 292,000 students. The city is a significant convention and tourist destination, ranked third in the U.S. by number of conventions hosted, and tenth for visitors from overseas. Chicago is well known for its architecture, abundance of museums, and sporting events. Support for tourism and conventions is a high priority of the business community, civic organizations, and government officials. Tourism and convention activities in the ATA continue to thrive. Reflecting an improving economy, the City recorded 54.1 million visitors in 2016, which continues a record-setting trend. Tourism generated approximately $14.9 billion direct spending and $935 million in state and local tax revenues in KBRA recognizes the importance of the city s tourism and convention activities as a generator of air travel demand. Page 10 October 3, 2017

11 The employment base of the ATA is well diversified among industry sectors; with no one sector representing a disproportionate share of total employment. In 2015 the ATA had greater percentages of employment in services, finance/insurance/real estate and transportation/utilities compared to the Midwest and U.S. Top 25 employers in the ATA reflect this diverse mix of employment, as presented in the table below. KBRA views the diversified employment data as a stabilizing factor for the local economy. Top 25 Employers in the Air Trade Area 1 COMPANY INDUSTRY # OF FULL TIME LOCAL EMPLOYEES U.S. Government Government 42,887 Chicago Public Schools Government 37,406 City of Chicago Government 30,276 Cook County Government 21,795 Advocate Health Care Health Care 18,308 University of Chicago Higher Education 16,197 Northwestern Memorial Healthcare Health Care 15,317 State of Illinois Government 15,136 JPMorgan Chase & Co. Financial Services 14,158 United Continental Holdings Airline 14,000 Walgreen Co. Retail 13,006 Health Care Service Corp. Health Care 13,006 Presence Health Health Care 10,500 Abbott Laboratories Pharmaceuticals 10,000 Northwestern University Higher Education 9,708 Jewel-Osco Retail 9,660 Chicago Transit Authority Government 9,510 University of Illinois at Chicago Higher Education 9,212 American Airlines Group Inc. Health Care 8,900 Rush University Medical Center Health Care 8,273 AT&T Inc. Telecommunications 8,000 Allstate Corp. Insurance 7,800 Wal-Mart Stores Inc. Retail 7,700 Employco USA Inc. Payroll Services 7,409 Aon PLC Insurance 7,335 Sources: Crain's Chicago Business, "Chicago's Largest Employers," December 31, Employers with the most full-time employees in Cook, DuPage, Kane, Lake, McHenry, and Will counties. Geographically Competing Facilities There are two other commercial service airports located within ORD s ATA. Chicago Midway International Airport (Midway) is a large-hub airport located 15 miles south of ORD. General Mitchell International Airport (General Mitchell) is a medium-hub airport located 70 miles north of ORD near Milwaukee, Wisconsin. The City of Chicago owns both ORD and Midway. The airports are operated by Chicago Department of Aviation. ORD is a hub for both American and United. Midway is the largest hub for Southwest Airlines (Southwest) system-wide, by enplanements. As a result, three major airlines have hubbing operations located in the ATA. Although Midway is located within the ORD ATA, it is not a direct competitor of O Hare; it serves mainly as a lower fare alternative for discretionary travelers. International flight services at Midway are also limited due to the constrained length of its runways. Midway s total enplaned passengers were less than one third of ORD s in General Mitchell s service area overlaps three counties in ORD s ATA. General Mitchell s enplanements in 2016 were less than one-tenth of ORD s and the airport has lower frequency of non-stop services. As a result, a portion of potential air traffic demand is being diverted from General Mitchell s catchment area to ORD. Gary-Chicago International Airport (Gary) in Indiana is also located within the ATA, but there is no scheduled passenger airline service in this airport. Therefore, Gary is not a competing facility to ORD. Page 11 October 3, 2017

12 Based on the foregoing, KBRA continues to view the economics/demographics of ORD s Air Trade Area as being consistent with a AA Rating Determinant rating. Rating Determinant 3: Airport Utilization O Hare Features O Hare ranks sixth in the world and third in the U.S. by enplaned passengers, and second in both the world and U.S. by aircraft operations. The Airport is located 18 miles northwest of downtown Chicago. It encompasses over 7,200 acres, and is linked to downtown by Chicago Transit Authority rail, while several interstate highways provide access throughout the ATA. The Airport is serviced by a total of eight runways. The OMP reconfigures a converging runway layout to a safer, more efficient parallel runway configuration. The reconfigured airfield results in higher capacity and fewer delays. (Please refer to Rating Determinant 4 for O Hare s Capital Program.) The OMP includes the construction of the Airport s first runway to meet Airplane Design Group VI standards for Airbus A380 and Boeing 747-8, which opened in The Airport has four terminal buildings with a capacity of 189 gates, servicing 59 scheduled passenger carriers. O Hare Services and Destinations The Airport is centrally located in the continental U.S. with an ATA that has a large population and robust economy. ORD offers the most non-stop destinations in the U.S., and this high level of service and its central location make it a perfect fit for hubbing, in KBRA s estimation. ORD is the only U.S. domestic hub with two hubbing airlines: American and United. United and its affiliates offer non-stop service to 141 domestic and 42 international destinations. American and its affiliates offer non-stop service to 111 domestic and 19 international destinations. In March 2017, both airlines announced additional non-stop destinations. The Airport currently offers approximately 1,105 domestic departures daily to 161 non-stop (including seasonal) destinations and 128 international departures per day to 56 non-stop destinations in Europe, the Middle East, Asia, and Central and South America. There are 22 all-cargo operators with scheduled service at the Airport. The table below shows the top 20 domestic markets that O Hare serves. Each of these markets is served by at least three carriers, which KBRA believes underscores the value of these routes to the carriers. Page 12 October 3, 2017

13 Top Domestic Passenger Market CY 2015 Market Trip Length Weekly Nonstop Number of Airlines Total O&D Passengers Total O&D as % of Total Passengers 1 New York City MH ,340, % 2 Los Angeles MH ,930, % 3 San Francisco MH ,543, % 4 Washington, D.C. LH ,385, % 5 Boston MH ,170, % 6 Dallas MH ,134, % 7 Atlanta SH , % 8 Orlando SH , % 9 Las Vegas MH , % 10 Denver MH , % 11 Phoenix MH , % 12 Philadelphia MH , % 13 Minneapolis/St. Paul MH , % 14 Houston MH , % 15 Miami MH , % 16 Fort Lauderdale MH , % 17 Seattle MH , % 18 Tampa MH , % 19 San Diego MH , % 20 Fort Myers MH , % Subtotal 20,619, % Total O&D Markets 30,554,048 Short Haul: miles Mid Haul: 601-1,800 miles Long Haul: over 1,800 miles Source: U.S. DOT T100D Enplanement Trends The Airport served an average of 35.7 million enplaned passengers over the past five years, including 18.4 million O&D and 17.3 million connecting passengers. As of 2016, the Airport s ten-year compound annual growth rate for total enplanements was 0.3%. The modest growth rate is largely the result of the Great Recession, and self-imposed capacity reductions by the carriers. Enplanement declines totaled 15.7% from 2007 to Subsequent slow post-recession economic recovery, as well as United/Continental merger integration issues, and American s bankruptcy filing in 2011 contributed to largely static enplanement activity from 2010 to As the economy has improved, low cost carriers have established a presence, and international activity growth resumed in Enplanements grew by a strong 5.0% in 2014 and 9.9% in 2015, followed by a more modest 1.2% increase in Growth in O&D passengers was especially pronounced in 2015, as the increase was 17.4%, due in large part to declining fares driven by lower fuel prices. ORD is the nation s largest international mid-continent gateway. Domestic enplanements accounted for approximately 85% of the total enplanements in Of the aforementioned 15.7% decline in enplanements experienced from 2007 to 2009 domestic enplanements experienced the greatest volatility declining 17.1% versus a decline of 8.3% in international enplanements reflecting the severity of the Great Recession on the U.S. economy. Historically, O&D and connecting enplanements represent roughly a split of the Airport s total number of passengers served, as depicted in the chart below. Although connecting activities constitute a large portion of passenger enplanements, O Hare s O&D enplanements alone place it among the top 15 U.S. airports in 2016 by this measure. Page 13 October 3, 2017

14 In general, many airlines have scaled down the number of available seats in recent years reflecting a shift from a market share based operating model to a profitability based operating mode. This allowed airlines to allocate seat capacities to more a profitable segment of passengers and increase domestic load factors. During the Great Recession, the number of available seats at O Hare declined further and recovery has been slow. As of 2016, the total number of available seats at the Airport was down by 8.9% compared to 2004 whereas the number of available seats at the 200 largest U.S. airports increased by 3.0%. These numbers now appear to be rebounding, as low cost carriers, particularly Spirit and Frontier Airlines, have significantly increased flight frequency. Airline Market and Aircraft Operations There are 21 U.S. flag airlines with scheduled service, and 38 foreign-flag carriers with scheduled and non-scheduled passenger service. In addition, there are 4 non-scheduled charter airlines, and 25 all-cargo airlines currently serving the Airport. American and United are the two primary carriers of the Airport. As shown in the chart below, the two airlines, along with their affiliates, accounted for 80% of the ORD market in Both United and American have highly profitable operations at ORD, and have load factors and airline yields above their system-wide averages. In terms of seat capacity, ORD is first for United and third for American. In terms of profitability, ORD is second for United, and fourth for American. The relative importance of O Hare as a hub increased with the closure of hubs in Cincinnati, Cleveland, St. Louis and Pittsburgh. In recent years, low-cost airlines such as Spirit, JetBlue, Virgin America, and Frontier began to play a more important role in the airline market. The valuable passenger base at O Hare became increasingly attractive to low-cost airline operators. Beginning in 2009, demand for low-cost air travel at O Hare increased, which drove low-cost carriers to gradually increase available seats. Average daily low-cost carrier seat capacity at ORD has increased from 1,335 daily departing seats in 2009 to 9,369 daily departing seats in Page 14 October 3, 2017

15 In 2016, the Airport was ranked ninth in low cost carrier service among U.S. airports, with 56 daily departures. This compares with a ranking of 25th in 2009 when daily departures averaged 10. KBRA believes this trend underscores the value of ORD routes. While passenger airline operations make up about 98% of the Airport s operations, O Hare is also an important hub for cargo operations. The charts below show the Airport s aircraft operations and historic trend for freight weight handled. O Hare is ranked 17th in the world, and 6th largest in the U.S., as measured by tonnage. As of 2016 the Airport handled a total of 1.73 million metric tons of cargo. International freight activities have an increasing presence at O Hare, which accounted for over 74% of total freight volume in FedEx is the largest cargo operator with six scheduled daily departures, followed by UPS, with three daily departures. All-cargo operations experienced a 34% decline between 2007 and 2009 due to a combination of temporary discontinuation of services by Korean Air Cargo, the Great Recession, and high fuel prices. All-cargo operations quickly rebounded in 2010 and have remained relatively stable. As the global economic environment improved over time and fuel prices decreased, total freight activities increased by 10.0% in 2014 and 10.4% in Performance in 2016 was somewhat weaker as accelerated growth in domestic demand was more than offset by weakness in international shipping resulting in contraction of 0.8%. Based on the foregoing, KBRA continues to view the Airport Utilization of ORD as being consistent with a AA- Rating Determinant rating. Rating Determinant 4: Airport Debt/ Capital Needs The City has issued a substantial amount of GARB debt for O Hare over the past eleven years, which increased an existing high level of outstanding debt. The bulk of the more recent debt is in relation to the O Hare Modernization Program, but other capital development programs, also factor in. O Hare Modernization Program (OMP) O Hare is now in the latter stage of the OMP, one of the nation s largest airport construction projects, with an estimated cost of $6.47 billion. It was conceived in 2001 to address capacity and delay issues at O Hare, as well as the ripple effect on travel across North America. The OMP is reconfiguring the O Hare airfield from seven intersecting runways to six parallel east-west runways, and two parallel crosswind runways. Average annual system impact delays have been reduced by 57%, when comparing the Page 15 October 3, 2017

16 2008 period with the period. As of June 2017, three of the four planned runways have been completed, as well as one of the two runway extensions. The final components of the OMP are the construction of a runway and extension of an additional runway. The City has approval authority from the FAA to impose and use PFC revenues for all project costs anticipated to be funded with PFCs. OMP Funding Sources The OMP consists of three phases. The first phase was initiated in 2005 and completed in It had a total program cost of $3.21 billion. Major funding sources were General Airport Revenue Bonds (GARBs) $1.87 billion (59%); PFC-Backed GARBs $572 million (18%); Grant Receipts-Backed GARBs $193 million (6%); and PFC Stand-Alone Bonds $30.1 million (0.9%). These sources were supplemented by pay-asyou-go (PAYGO) PFCs $292.4 million (9%), FAA Letter of Intent (LOI) grant receipts $100 million (3%), AIP Entitlement / Discretionary Funds $91.9 million (2.9%), and AIP letter of intent PAYGO $40 million (1.3%). Major uses were construction of two runways, extension of a third runway, a new North Airport Traffic Control Tower, land acquisition, and noise mitigation. The second phase, with an estimated funding cost of $1.3 billion was expected to be completed by early 2017, and includes a new South Airport Traffic Control Tower, a new runway, the first phase of a new taxiway, North Airfield enabling projects, and noise mitigation. Phase 2A is being funded from GARBS $376.6 million (35%), PFC-Backed GARBs $365 million (34%), LOI Grant PAYGO $235 million (22%), Grant Receipts-Backed GARBS $45 million (4.2%), and FAA grants $52.1 million (4.9%). The final phase has an estimated program cost of $1.63 billion. This Phase includes the construction of the final new runway of the OMP (anticipated completion 2020), and was approved by the airlines in early The third phase also includes one runway extension (expected 2021), which remains to be approved by the airlines. Planned funding sources are GARBS $1.2 billion (75.1%), FAA LOI Grant $205 million (12.6%), PFC-backed GARBs $150 million (9.2%). Capital Improvement Program ( ) The CIP includes capital projects that address ongoing capital facility repair and replacement needs, and totals $2.27 billion. Areas addressed include terminal improvements ($744.1 million, 32.8% of total), including the Terminal 5 Expansion to accommodate increased traffic and larger aircraft; parking/roadway projects ($565.8 million, 24.9% of total), which includes the below discussed multimodal facility; and airfield improvements ($354.4 million, 15.6% of total) including runway and apron improvements. Additional major line items include heating and refrigeration systems ($301.3 million, 13.3% of total) for the replacement of the south cooling tower among other items and safety and security ($114.2 million, 5.0% of total) for the upgrade or replacement of baggage screening equipment in terminals 1, 3 and 5. GARBs (including $266.8 million Series 2017D Senior Lien Bond proceeds on June 8, 2017) provide $1.46 billion (64.3%) of the funding. Previously issued GARBs, PFC, and CFC bond proceeds account for $262.9 million (11.6%), and a Transportation Infrastructure Finance and Innovation Act (TIFIA) loan contributes $272.0 million (12.0%). FAA grants, TSA funds, customer facility charges (CFC), and other airport funds provide the balance of funding. Multimodal Facility (CIP Component) A six story, 4.5 million square foot building that will house a consolidated rental car facility (CRCF), with an associated quick turnaround area, and public parking is now under construction. The project includes an extension of O Hare s Airport Transit System (ATS) that will provide access between the airport terminals and the Multimodal Facility, as well as the acquisition of additional ATS vehicles. The Facility, which is fully funded, has an estimated cost of $786.4 million, and is expected to be completed in Funding sources include previously issued GARBs ($96 million), Airport Development Fund ($62 million) balances, PFC PAYGO ($3 million), CFC PAYGO ($170.4 million), a 2013 issue of CFC revenue bonds ($183 Page 16 October 3, 2017

17 million), and a U.S. DOT Transportation Infrastructure Finance and Innovation Act (TIFIA) loan ($272 million) secured by CFCs on a subordinate basis to the CFC bonds. O Hare Debt Obligations The City on behalf of O Hare has been a frequent and significant issuer of GARBs, both prior to, and during the OMP Program. The total amount outstanding is approximately $7.6 billion, as of July 1, Debt levels will continue to rise, as additional planned borrowing for OMP and CIP total $1.5 billion through All debt with the exception of 2005 Series C and Series D Bonds ($240.6 million outstanding) is in the form of fixed rate obligations. Bonds for the most part are structured with 30 to 35 year maturities. Debt service reserves are a combination of common and series specific and are entirely cash-funded. Approximately 31% of GARB principal is scheduled to amortize over the next decade with 73% set to amortize over the next 20 years. There are no swaps currently in effect, and there are no cross default provisions with other City debt. The City has approximately $558.6 million outstanding O Hare-related bonds solely secured by PFC revenues. These bonds enjoy a prior lien on PFC revenues to any outstanding and future PFC-backed GARBs. The City has previously authorized the issuance of Commercial Paper Notes (CP Notes) and Credit Agreement Notes (CA Notes) in the combined aggregate principal amount outstanding at any one time of note to exceed $600 million ($420 million CP Notes; $180 million CA Notes). The CP Notes are currently outstanding in the amount of $60 million, supported by letters of credit from Bank of America, Barclays and the Bank of Tokyo. CA Notes are outstanding in the principal amount of $12.1 million, with support from a revolving line of credit agreement provided by JP Morgan. The letter of credit agreements supporting the CP notes expire September 27, 2019 while the revolving line of credit agreement expires December 12, The CP Notes and CA Notes are junior lien obligations, which are subordinate to all senior lien obligations. Debt Service Requirements Increase Sharply Net GARB debt service, which is net of capitalized interest, PFCs and federal grant and LOI funds used to pay debt service, will increase from a budgeted $534.5 million in 2017 to approximately $565.3 million in KBRA also expects to see O&M rise as the airfield projects come on line. Debt ratios are already high. Debt per enplanement is $193, which is extremely high for large size hubs 1. Likewise, debt per O&D enplanement is at an elevated level among large size hubs. Maximum annual debt service (MADS) per enplanement, and MADS per O&D enplanement also reflect the significant amount of debt that has been issued both for the OMP and other capital improvements. Given the large amount of additional debt that will be issued through 2021, these metrics will likely rise further, but the magnitude of increase may be moderated if recent enplanement gains are sustained. Nevertheless, the prospect of future significant additional unquantified bond issuance under the proposed Terminal Area Plan (TAP) for gate capacity may further pressure debt metrics upward. Any discussion of a new terminal is beyond the current forecast period. Majority-In-Interest (MII) Provisions Procedures established under the Airport Use Agreement provide for airline review of proposed capital projects. An MII approval from the airlines is required for all GARB-funded capital projects and all refundings. The City is required to give at least 45 days notice in writing before making most capital expenditures or issuing debt obligations. A capital project and financing is considered approved if an MII approves it, or if the City is not notified in writing of MII disapproval with 30 days of the submission of the proposal. A MII is defined in any fiscal year as either (a) any five or more Airline Parties, which in the aggregate paid 60% or more of Airport fees and charges paid by all airline parties for the preceding fiscal 1 Based on KBRA s U.S. Airport Methodology Key Data Capital Planning Metrics and Ratios Page 17 October 3, 2017

18 year, or (b) any numerical majority of airline parties, which in the aggregate paid 50% or more of Airport fees and charges paid by all airline parties for the preceding fiscal year. Based on the foregoing, KBRA continues to view ORD s debt/capital planning metrics as being consistent with an A Rating Determinant rating. Rating Determinant 5: Airport Finances Airline Use Agreement and Master Trust Indenture Most aspects of the ORD s financial operations are governed by the Amended and Restated Airport Use Agreement and Terminal Facilities Lease ( Airport Use Agreement ) dated January 1, According to the report of the airport consultant dated November 18, 2016, signatory airlines that are party to this agreement represented 76.0% of the total landed weight at ORD in Non-signatory airlines operate pursuant to City ordinance. A fully residual rate-setting methodology is established by the Airport Use Agreement in which the net cost of operating, maintaining and developing the airport are allocated by cost-center. The net cost incorporates offsets for concessions, non-signatory airline and other non-airline revenues that are generated at the airport. It also includes debt service and other deposit requirements of the Senior Lien Master Trust Indenture. The named cost centers include the Airfield Area, the Terminal Area, the Terminal Support Area, the International Terminal Area, and the Fueling System. Each signatory airline is responsible for the net costs associated with its proportional use of the cost centers. The Airport Use Agreement establishes a set of accounts and flow of funds that governs how airport revenues are held and dispersed after they are collected by CDA. The agreement also requires the preparation of Airport financial statements that are in conformity with generally accepted accounting principles. The Airport Use Agreement works in conjunction with the Senior Lien Master Trust Indenture dated September 1, The indenture organizes the relationship between the ORD and Senior Lien bondholders whereas the Airport Use Agreement organizes the relationship between ORD and its signatory airlines. The Master Trust Indenture includes many of the same provisions originally set forth within the Airport Use Agreement and is the principal document governing the creation of accounts and dispersion of airport revenues. During the remaining term of the Airport Use Agreement, which expires on May 11, 2018, the structure of airport funds and accounts are maintained as they are currently set forth in the Airport Use Agreement. The Master Trust Indenture includes provisions that will become effective on the first business day in June of Upon this date, which is referred to as the Transition Date, CDA will no longer maintain airport funds in accordance with Airport Use Agreement. A new flow of funds will replace the one currently in effect. Other changes include the creation of a fund to be known as the Airport General Fund, the discontinuation of the Special Capital Projects and Airport Development Funds, and a stated ability to use funds for lawful corporate purposes, which under federal law is limited to airport uses. This revised waterfall provides flexibility in negotiating a new Airport Use Agreement. Importantly, the Operation and Maintenance Reserve Fund and the Maintenance Reserve Fund that were originally established by the Airport Use Agreement are included within the Master Trust Indenture and will be maintained and funded as they currently are. The Airport Use Agreement does not permit airport funds to be used for purposes that are not related to the airport. The Master Trust Indenture does not include this stated restriction. It sets forth an open loop system in which the balance of any remaining airport funds can be transferred from the Airport General Fund, which sits at the bottom of the flow of funds waterfall, to the City of Chicago and used for any lawful Page 18 October 3, 2017

19 corporate purpose of the City. It is KBRA s understanding that FAA restrictions on the use of airport funds, which the City is subject to as a recipient of Federal grants, prevents the City from diverting revenues generated at the Airport to non-airport purposes. CDA has informed KBRA that it believes that any such diversion of airport revenue would constitute a breach of certain covenant provisions within the Senior Lien Master Trust Indenture. It is KBRA s opinion that these reasons provide counterbalance to the risks and uncertainty as ORD approaches the expiration of its long-standing Airline Use Agreement. The CDA and the airlines parties have entered into negotiation regarding a new Airport Use Agreement. It is possible that the new agreement will incorporate some features that are generally associated with a compensatory/hybrid rate-setting methodology. The CDA may also operate without a use agreement. In this scenario, fees and charges would be levied pursuant to City ordinance. It is KBRA s view that uncertainty related to possible expiration of the current Airport Use Agreement is mitigated by the Master Trust Indenture and FAA revenue use restrictions. KBRA also notes the strong economic basis for airline service at ORD, which, in KBRA s opinion, further tempers uncertainly regarding the Airport Use Agreement expiration. Future Coverage of Growing Debt Service Burden Reflects Residual Use Agreement The debt service coverage requirement set forth within the Senior Lien Indenture is lenient in allowing the CDA to incorporate reserves and revenues that are not operating revenues when setting airport rates and charges. Generally, KBRA views rate covenants that require at least one-time coverage from pledged revenues as more favorable than those that do not. KBRA views this risk as being compounded by the residual nature of the use agreement that generally results in thin debt service coverage margins. With that said, KBRA notes the long history of timely debt service payment achieved under the current Airport Use Agreement and bond documents. KBRA also notes the CDA s success to date in managing the additional debt needed to fund its very sizable and complex OMP. Each year since 2011, and through the Airport s current debt service coverage projection period ( ), debt service coverage levels at ORD narrowly met or are projected to narrowly meet the 1.10x debt service coverage requirement. Although thin, KBRA views ORD s ability to meet growing debt service coverage requirements as adequate. KBRA also views the size and scope of airport operations, the above average airline yield levels generated at the airport by hub airlines, and the active involvement by signatory airlines in capital planning as measures counterbalancing the history of thin coverage and the lenient debt service coverage covenant. Liquidity Levels The Operation and Maintenance Reserve Fund contributes to ORD s favorable liquidity profile. The level of days cash on hand has remained over 180 days for FY 2012 through FY 2016, and as of July 31, 2017 approximated 270 days. ORD maintains a Commercial Paper (CP) program with three financial institutions for additional liquidity needs. The existing program expires September 27, 2019 and is supported by irrevocable letters of credit in an aggregate maximum principal amount of $420 million. ORD additionally maintains a $180 million bank-supported Line of Credit Facility that expires December 12, After the transition date, ORD will no longer maintain the Airport Development or Special Capital Projects Funds. KBRA does not expect there to be a material impact on ORD s liquidity profile caused by the discontinuation of these funds. Despite the significant decline in relative liquid reserve levels, KBRA continues to view ORD s liquidity as strong. Page 19 October 3, 2017

20 KBRA s favorable view of ORD s liquidity profile incorporates the residual nature of the Airline Use Agreement. In general, KBRA believes that airports employing residual cost recovery mechanisms are likely to maintain relatively lower available cash balances. Financing the Large Capital Programs KBRA believes that cost per enplanement measurements do not fully incorporate or reflect all factors considered by airlines when making decisions about the airports at which they operate. That said, growing costs from elevated leverage levels can pressure an Airport s financial position and constrain the ability to control expenses. ORD does have this constraint. The estimated 2016 cost per enplanement of $17.49 at ORD is high when compared to selected peer airports and it is projected to increase to $27.47 in There is some offset from the additional operating efficiencies and enhanced service levels expected to result from the OMP. KBRA also recognizes the geographic importance of ORD and the significance of operations at ORD for its large hub airlines. KBRA is of the opinion that although manageable, pressures from significant leverage will be an ongoing financial challenge at ORD. Exploring Revenue Diversification through Enhanced Concessions The landing fees, terminal rentals and other use charges paid by Airlines are a substantial component of annual airport operating revenues. CDA has identified strategic planning efforts designed to diversify operating revenues by increasing non-airline revenues. These efforts, which are focused on terminal space and vendor management, have included the introduction of higher-end dining and shopping establishments. KBRA notes that concessions per enplanement, at $6.52 in 2016, is below the median for selected comparable airports and that concession revenues consistently represent only one third to one quarter of annual operating revenues. KBRA believes there is potential for significant growth as higher-end dining and shopping concepts are introduced into the domestic terminals. In KBRA s view, the recent success of the International Terminal s new concession program provides a prototype for enhanced revenue growth. Historic Financial Performance Concession revenues increased at a compound annual growth rate (CAGR) of 3.6% between 2011 and 2016, representing ongoing recovery from the economic recession, and enhanced concession offerings at ORD. Parking revenues, which are consistently the largest non-airline revenue source, have shown a relatively flat CAGR of 1.6% between 2011 and The absence of parking revenue growth, in-part reflects the absence of recent rate adjustments. Rates were increased on January 10, 2017, but prior to then, the most recent adjustment had been in January Non-signatory airline revenues are projected to increase from a budgeted $90.7 million in 2016 to $140.8 million through the 2025 projection period. This represents a CAGR of 5.0% and reflects the projected rates and charges applied to non-signatory airlines. O&M expenses increased by a CAGR of 3.9% between 2011 and The increases in part reflect rising professional and engineering costs, as well as increases in salaries and wages and repair and maintenance Page 20 October 3, 2017