Pensacola (City of) FL Airport Enterprise

CREDIT OPINION Pensacola (City of) FL Airport Enterprise Moody s maintains the Baa1 rating on Pensacola Airport Enterprise's outstanding revenue bonds with a stable Update Summary Rating Rationale The rating is based on the stable and growing local economy that supports higher than average enplanement growth and strong financial margins and liquidity levels. The rating also takes into account the current lack of a long term airline agreement, the competitive environment in which Pensacola airport operates, and the high concentration of carriers. Contacts Victoria +1 212 553 4490 Shenderovich Associate Analyst 2 vika.shenderovich@moodys.com Kurt Krummenacker 212-553-7207 VP-Sr Credit Officer/ Manager kurt.krummenacker@moodys.com Chee Mee Hu MD-Project Finance cheemee.hu@moodys.com 212-553-3665 CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Credit Strengths Presence of Pensacola Naval Air Station provides stability to service area economy No short-term additional borrowing plans Lowest cost per enplaned passenger among Baa1 Moody s rated airports in FY2014, but costs are estimated to be higher in FY2015 Credit Challenges Lack of long term airline agreement Competitive environment with two competing airports within short driving distance Two largest carriers account for over 70% of enplanements, creating concentration risk Rating Outlook The stable is based on expectations of growth in enplanements from added service and the expectation for economic recovery in the region that outperforms the nation. Factors that Could Lead to an Upgrade Faster than expected enplanement recovery to previous high levels Debt service coverage that recovers and remains at the historic 2.0 times average An improvement in liquidity levels to more closely align with medians

Factors that Could Lead to a Downgrade Continuous decline or maintenance of low enplanement levels that results in declines in debt service coverage Continued decline in or maintenance of liquidity levels below 200 days cash on hand Exhibit 1 Key Indicators: Pensacola (City of) FL Airport Enterprise Source: Moody's Investors Service Municipal Financial Ratio Analysis Database Recent Developments Enplanements at the airport grew by 2.1% in FY2014, and by 3% in FY2015, beating management s expectations of 1.7% growth and reaching 797,854. The growth rate for the past two fiscal years is higher than the average growth at Moody s rated airports a sign of a healthy recovery. Enplanements grew for five out of the past six years showing a cumulative increase of 13.9% since the low of 2009, but enplanement levels still remain 4.7% lower than the peak reached in 2007. Management expects enplanements to grow by 2.5% in FY2016, by 2% in FY2017, and by about 1.7% thereafter. The projections show the airport reaching its 2007 enplanement peak in early FY2018. The major factors contributing to enplanement growth were the introduction of new non-stop service to Nashville, TN and Houston, TX by Southwest Airlines in November of 2013, and a new seasonal service to Chicago Midway also on Southwest Airlines introduced in 2015. In 2014, American Airlines replaced twice daily seasonal regional jet service between the airport and Dallas Fort Worth with narrow-body equipment, increasing seat capacity by 40%. Additionally, Silver Airways increased frequency of its service to and from Orlando. For 2016, new seasonal service to Dallas Love Field and to Kansas City on Southwest Airlines will help grow enplanements further. The airport continues to operate without long term service agreements with the airlines - a credit negative. However, the airport is currently in negotiations with the airlines and management expects that a long term agreement may be signed in approximately twelve months. Delta Airlines (Ba2, positive ) and its affiliates continue to maintain the largest market share of the airport's enplanements at 43.3% in FY 2014. American Airlines (Ba3, stable ) and its affiliates accounted for approximately 27.1% of enplanements in FY 2014, while Southwest Airlines (Baa1, positive ) including AirTran accounted for 14.0% of enplanements in the same period. Other airlines operating at the airport include United Airlines, Inc. (Ba3, no ) and Silver Airways (unrated), which flies to Tampa, Orlando and Miami. Delta and American Airlines together accounted for over 70% of the Pensacola airport s enplanements in FY2014, but the concentration risk is offset by the changed landscape of the US airline industry with a smaller number of major airlines and the importance of Pensacola as a service point to those airlines. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2

Detailed Rating Considerations REVENUE GENERATING BASE Pensacola airport passenger base consists of origin and destination passengers, thus the health of the local economy is very important for the airport performance. According to Moody s Economy.com, growth in the area is outpacing that of the Southern US and of the US in general. The service area is benefiting from the inflow of retirees from the Northeast and Midwest who prefer a warmer climate. Therefore, job gains are mostly concentrated in healthcare, hospitality, and to a lesser degree, in construction. The unemployment rate declined to 5.3%, on par with the nation s and just below the statewide average. The airport s primary service area covers Escambia (GO rating Aa2, no ) and Santa Rosa (GO not rated) counties in northwestern Florida and Baldwin (GO rating Aa1, no ) and Escambia (unrated) counties in southeastern Alabama. The Florida part of the service area, which includes the city of Pensacola, accounts for about 41% of the total service area population. The naval installations account for about 10% of the jobs in the airport s service area. The military bases avoided downsizing, as exhibited by the rise in local military payrolls. Local operations cannot be easily transferred elsewhere, as the bases are the primary training grounds for all Navy, Marine, and Coast Guard aviators, which provides stability to local economy. The area is also benefiting from lower gasoline prices, making vacation trips to its white sandy beaches more affordable. In FY2014, the top five non-stop destinations by the number of passengers were Washington DC area, South Florida, Dallas, Houston, and Chicago. With the exception of South Florida destinations, all other top destinations are also serviced by the two closest competitors: Fort Walton Beach and Mobile Regional airports, located 70 and 75 miles away, respectively. However, Pensacola is the only one to offer low cost carrier service which give it a competitive advantage. Additional sources of revenue include a percentage rent from the 127-room Hyatt Place hotel which opened in 2013 and leases of land parcels for construction of a maintenance, repair and overhaul facility by VT MAE and an office building. Additional available land parcels are being also marketed for sublease. The growth of non-airline derived revenue segment is a credit positive, as it provides greater stability to the airport s cash flows. The airport is collecting passenger facility charge (PFC) for each enplaned passenger. The current level of $4.50 is authorized through 2031. A portion of Series 2008 A and 2008 revenue bonds is repaid using PFC revenue. The airport is also collecting $3.60 customer facility charge from the users of the car rental facility which provides cash flow for the repayment of the CFC Revenue note. Capital Improvement Program In FY2014, the city completed the rehabilitation of the parking garage, built a walkway to the Hyatt Place hotel and carried out various other projects. Major projects planned for the next five years include security fence improvements, demolition of an old building on the property, taxiway and runway rehabilitation, construction of terminal building apron, and commerce park acquisitions. The five year $33 million capital improvement program is projected to be funded 53% with federal grants, 8% with grants from the Florida Department of Transportation, and the remaining 39% with the internal airport liquidity. The airport has no plans to issue additional debt at this point. The airport has been granted an FDOT infrastructure development grant of $11 million requiring a 50% local fund match. The city intends to use the grant funds as part of an incentive program in recruiting enterprises that perform aircraft maintenance, refurbishment and overhaul work on large commercial and military aircraft and for expanded air cargo facilities. The above mentioned efforts would contribute to the airport's non-airline revenue enhancement efforts through ground rents and additional fuel flowage fees. FINANCIAL OPERATIONS AND POSITION For the past two fiscal years, the airport s financial performance continued to improve, reflecting growth in enplanements and various measures to increase revenue and cut expenses. 3

During FY 2014 and FY2015, operating revenues increased by 1% and 12.1% respectively, reaching $21.2 million. The growth in revenue is attributable to increased enplanements, which also helped lift auto rental, parking, and concession revenue. Additionally, the restaurant and lounge concession was rebid in FY2014 brining in higher minimal annual guaranteed revenue. In FY 2015, the food and beverage sales increase by 30%, partly because of the improved product offering. Finally, the airport started recovering utility expenses by sub-metering various tenants. Operating expenses continued to reflect cost containment efforts decreasing by 3.7% and 1.6% in FY2014 and FY2015 respectively. During FY 2013, operating expenses decreased by 6.4% on account of cost containment as well as the prior year's completion of the terminal expansion project which had previously increased costs. In FY2012, a large portion of the long-term service contracts for the airport were revised as part of a cost reduction measure, which allowed expenses for the following years to come in lower, as noted above. FY2014 cost per enplanement (CPE) was $6.82, which is significantly lower than previously budgeted at $8.03 for the year due to improved financial performance. For FY2014, Pensacola s cost per enplanement was the lowest among Baa1 rated Moody s airports. The airport s CPE was lower than the FY 2014 Moody's median of $9.26 for residual airports and $7.87 for Baa1 rated airports. CPE is expected to increase to $8.68 in FY 2015 and is budged to be $8.29 in FY2016. The increase in CPE is mostly driven by the management s decision to recover from the airlines the funds what were previously provided from internal city resources. The debt service coverage ratio (DSCR) for FY 2014 was 1.80 times on a bond ordinance basis and 2.60 times on a Moody's calculated net revenue basis, representing an increase from the prior years' ratios as a result of stronger net revenues derived from revenue growth combined with decreased operating expenses. The DSCR for FY 2013 on a bond ordinance basis, which excludes CFC revenue, was 1.62 times and 2.45 times on a net revenues' basis. Although in the past the airport has been making use of transfers from its capital fund in order to meet its 1.25 times rate covenant, coverage before transfers was 1.42 times and 1.55 times in 2013 and 2014 respectively, pointing at the improving financial profile. Prior to such transfers, DSCR before transfers was less than 1.0 times during both FY 2010 and FY 2012. Management projections show DSCRs to be 2.25 times before transfer from the capital fund and 2.61 times after the transfer, significantly stronger than the earlier projected 1.8 times in FY 2015. Looking ahead, for the next four fiscal years, the management estimates the coverage ratios to be in the 1.75 to 2.0 times range prior to the capital fund transfers, and in the range of 1.8 to 2.0 times after the transfers. These coverages are based on the airport returning to peak level enplanement levels of 833,699 by FY 2017 at an average annual growth of 1.7% from FY2018 onwards. Debt per enplaned passenger has improved to $83.19 in FY 2014 from $88.14 in FY 2013 as the airport continues to amortize its revenue bonds while enplanements grow. At this level, Pensacola s debt per enplaned passenger is the median for Baa1 Moody s rated airports but is above the medians for O&D airports of $66.42. LIQUIDITY The airport's liquidity position has further strengthened to 508 days cash on hand thanks to the improved operating performance after a significant increase to 389 days in FY 2013 from 193 days in FY 2012. The recent levels of liquidity are notably above the airport s internal liquidity target of 90 days cash on hand. Currently, the management has no plans to draw on the existing liquidity to fund capital projects. Moody's notes that the liquidity level is above the median value for similarly rated airports (440 days cash on hand), and somewhat lower than the median for the residual rate making airports (541 days cash on hand). DEBT AND OTHER LIABILITIES DEBT STRUCTURE Moody s rated debt of the airport consists of Capital Improvement Revenue Bonds, Series 2008A: $27.07 million (Baa1, stable) and Capital Improvement Revenue Bonds, Series 2008B: $6.39 million (Baa1, stable). Amounts are as of the FYE 2014. About 81% of the Series 2008A and B bonds are eligible to be repaid using PFC revenues. In addition to the revenue bonds, the airport has four privately placed notes with $34.4 million of aggregate principal amount outstanding. All airport debt is parity debt. 4

In November of 2015, the airport called the Series 2005A Airport refunding revenue bonds, of which $13.345 million was outstanding at the time of the call. The bonds were refinanced with a $12.465 million twelve year fixed rate refunding revenue note which was privately placed. In September of 2015, the Taxable Customer Facility Charge Revenue Note, originally issued in 2008 and privately placed, was modified and $3 million was paid towards reducing its principal, leaving the amount outstanding at $8.8 million. The loan agreement contains debt acceleration provisions in the event of default. However, the only pledged revenue stream is CFC revenues, thus other airport revenues will be insulated from the claim in the event of default. The modified note matures in December of 2018 and bears variable rate interest equal to 30 day LIBOR plus 0.75% annually. The remaining two notes are the Refunding Revenue Note, Series 2010 with $6.86 million outstanding and Revenue Note Series 2012 with $6.3 million outstanding. Series 2010 note is variable rate, converted to fixed rate with a swap. DEBT-RELATED DERIVATIVES The privately placed variable rate note issued in 2010 is hedged with an interest rate swap. The notional amount of the swap is $12.31 million. Variable rate of 65% of 1-month LIBOR plus 98 bps is swapped to 2.39% fixed rate with termination date in 2018. As of the end of FY 2015, the swap had a marked-to-market value of negative $104,678. PENSIONS AND OPEB The financial impact of any unfunded pension and OPEB obligations of this issuer are minor and thus not currently a major factor in our assessment of its credit profile. MANAGEMENT AND GOVERNANCE The airport is owned by the City of Pensacola and is operated as an enterprise fund of the city. It is administered by the airport director with an oversight by the city mayor. Legal Security The bonds are secured by a pledge of the airport's net revenues. The rate covenant requires that net revenues provide 1.25 times coverage, including transfers from a capital improvement fund that are not restricted in application to a specific project or special purpose. The debt service reserve fund, which is fully cash funded, must equal maximum annual debt service. The two month Operations and Maintenance reserve and the $1.5 million Renewal and Replacement Reserve are also cash funded. Additional parity bonds may be issued if an airport consultant certifies that the following two requirements have been satisfied: for the 12 consecutive months out of the past 18 months, net revenues of the airport have been at least 125% of the annual debt service requirement; on the forward looking basis, net revenues for each of the next five fiscal years have to be at least 125% of MADS. Use of Proceeds Not Applicable Obligor Profile The airport is located in the Florida panhandle and primarily serves air service demand in the counties of Escambia and Santa Rosa. Secondary markets include neighboring counties in southern Alabama, primarily Baldwin county. The presence of the Pensacola Naval Air Station provides some stability to enplanements, accounting for approximately 20% of enplanements. The airport has two active runways, a passenger terminal building with twelve gates and ten loading bridges, public parking garage, and rental car facilities. 5

Exhibit 2 Publicly Managed Airports and Related Issuers Methodology Scorecard Factors Source: Moody's Investor Service Methodology The principal methodology used in this rating was Publicly Rated Airports and Related Issuers published in November 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. 6

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