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Item Number: _____7b_____ Date of Meeting: April 14, 2015 Revised April 13, 2014 International Arrivals Facility (IAF) Funding Plan Update Port Commission April 14, 2015 Background/Context Sea-Tac's international "front-door" is unwelcoming and has inadequate capacity Port's responsibility is to encourage, not discourage, international service to serve region New IAF will match capacity with demand Commission authorized procurement of design- build contractor Key issue now is best, appropriately balanced funding plan 2 Purpose of Briefing Need commission direction regarding: Principles guiding IAF funding plan Funding plan assumptions Funding plan needed for: Bond issue financial forecast This bond issue funds 16C, NorthSTAR, etc., not IAF Majority-in-interest by airlines for IAF project Commission guidance will drive update to airport financial plan 3 January 27 Briefing Highlights Because airline rates are based on cost recovery, increased capital spending will increase airline costs Current IAF estimate is $608 million; through design-build process, will work with all stakeholders to deliver needed scope at lower cost Even with $608 million IAF, capital plan is affordable Sea-Tac will rank in middle third of peer airports for Cost per Enplanement and Debt per Enplanement Costs funded with Passenger Facility Charges (PFCs) are excluded from rate base, moderating airline rate impacts of those projects IAF/FIS costs treated uniquely in SLOA III IAF costs paid exclusively by FIS users All other terminal costs (like NSAT expansion) affect rates paid by all airlines Federal rules and SLOA provide tools to moderate future FIS (IAF) rates: PFCs Port can choose not to amortize (charge a fee for use of) cash investments (Section 8.4.4) 4 Funding Plan and Rates Final funding plan will affect FIS rate when facility opens (2019) Significant changes possible prior to 2019: Ultimate cost of IAF may be different from current estimate ($608 million based on zero percent design) International service growing faster than domestic Congress could increase PFC cap The "market" FIS rate at other airports could change Recommendation: Port should establish principles for funding and adjust as circumstances change: Maintain competitive CPE Maintain competitive rates: landing fee, terminal rents, FIS 5 Updates Since Last Briefing Contracted with consultant to project 2019 FIS rates at competitive airports Contracted with consultant to develop pro-forma for new entrant Modeled two new scenarios Calculated cumulative use of PFCs over long time horizon Presented new scenarios to airlines on 3/19 IAF airline liaison surveyed international airlines re perspectives on IAF need and fees 6 Airline Perspectives Airline Technical Representative for IAF surveyed airlines: FIS "needs to be replaced as soon as possible." An FIS rate in "low to mid-range of West Coast gateways is preferred." Request Port staff to begin planning "to upgrade South Satellite as soon as practical." Port should develop protocols for future IAF gate assignments Port should consider scope change to "maximize the eventual number of A Concourse international gates available to all." 7 FIS Rates Competing Airports Conclusion: SEA 2015 FIS rate is now in middle of market 8 Projected 2019 FIS Rates Implications: LAX rate is most comparable to SEA, but subsidized with revenue sharing PDX and DEN rates are directly subsidized SFO and YVR do not charge FIS fees. FIS rate is a derived equivalency Conclusion: High end of market range is $12.01 in 2019 9 Importance of FIS Rate for Potential New Entrant Annual results - Year 3 Revenues ($000s) 81,925 Operating profit ($000) 2,458 Operating Margin 3.0% FIS rate Scenarios: Current Future Rate Scenarios FIS Rate $7.40 $12.00 $24.00 $32.00 Annual FIS cost ($000) 648 1,051 2,102 2,803 FIS cost as % of revenues 0.8% 1.3% 2.6% 3.4% FIS cost as % operating profit 26.4% 42.8% 85.5% 114.0% Table shows projections for third year of service for new entrant New entrant would have tight operating margins until route is well established. Conclusion: FIS rate could have significant impact on route profitability, and thus decision to enter market 10 CPE as Indicator of Domestic Rates and Costs CPE Components - 2015 $000s % Landing fees 72,304 29% Apron fees 8,542 3% Terminal 155,858 63% FIS 10,360 4% Passenger airline costs 247,064 Overall CPE is within middle third of peer airports (see Appendix) Landing fee is within middle third of peer airports (see Appendix) FIS and apron fees represent very small percentage of total Airport terminal rent structures are highly individualized and hard to compare; however, because CPE and Landing Fee are in middle third, terminal costs must also be in middle of range Conclusion: Costs and rates for domestic carriers must be within "market" 11 Summary of what we have Learned Current and forecasted CPE at Sea-Tac are within middle third of peer airports Current rates for landing fee, terminal rents and FIS are within "market" range of peer airports Methodologies to set FIS rates vary significantly Best estimate of high end of FIS market rate in 2019 (year IAF will open) is $12 Airport costs matter for prospective new entrant for international route. FIS is one cost that stands out since it is uniquely paid by international carriers Conclusion: Maintaining market CPE and market rates is critical to retaining service and attracting new service. 12 Scenario Descriptions Previously Presented Scenarios 1. Use PFCs to pay 100% of revenue bond debt service $157 million PFCs used for IAF construction costs 2. PFCs pay no debt service related to IAF cost increase ($264M) $138 million PFCs used for IAF construction costs 3. All IAF capital costs excluded from FIS rate base $157 million PFCs used for IAF construction costs $122 million cash used for IAF construction costs, amortization excluded from rate base (paid by non-aero revenues per SLOA section 8.4.4) 4. Variation on #1 (not included going forward) Decisions on shifting PFCs between airfield and terminal cost centers to achieve market rates will be part of annual funding plan updates. New scenarios will be analyzed with scenarios 1, 2 and 3. 13 Scenario Descriptions New Scenarios 5. Alaska's proposal: PFCs allocated to IAF limited to 10% of annual PFC collections for construction costs and debt service $39 million PFCs used for IAF construction costs Generates high FIS rate 6. Increase use of cash: $100 million PFCs allocated to IAF construction costs. $200 million Port cash investment, with amortization excluded from rate base (paid by non-aero revenues, per SLOA section 8.4.4) 14 Scenario Funding Plans and FIS Rates Scenarios 1 2 3 5 6 Construction Funding Cash (ADF) 121,673 121,673 121,673 121,673 200,000 PFC Pay Go 157,874 137,709 157,874 39,156 100,000 Revenue bonds 328,818 348,983 328,818 447,536 308,365 Total 608,365 608,365 608,365 608,365 608,365 2020 FIS Rate Base Costs Baseline FIS costs 15,952 15,386 15,980 14,830 15,740 Amortization IAF 8,087 8,087 8,087 8,087 13,292 Debt service IAF 30,867 32,760 30,867 42,011 28,947 Rate base 54,906 56,233 54,934 64,928 57,979 DS paid with PFCs (30,867) (12,907) (30,867) (8,550) (23,513) Excluded amortization - - (8,087) - (13,292) Adjusted rate base 24,039 43,326 15,980 56,378 21,174 FIS Rate 13.62 24.55 9.06 31.95 12.00 FIS rate base reduced if use more PFCs for construction Adjusted rate base reduced by using PFCs and non-aeronautical revenues to offset annual debt service costs Scenario 6 achieves market FIS rate while freeing up PFCs for other projects. 15 Financial Implications of Scenarios Scenarios 1 2 3 5 6 Key Measures in 2020 CPE 14.89 14.98 14.70 15.05 14.62 Debt service coverage 1.32 1.33 1.30 1.34 1.29 Revenue sharing ($000) 15,848 17,533 11,805 19,207 8,856 Debt/Enplanement 146.6 146.5 146.8 146.5 147.1 Debt outstanding ($000) 3,289,098 3,287,356 3,293,950 3,258,600 3,300,962 Scenario 6, by excluding amortization on $200 million of Port cash, results in lowest CPE, but also lowest debt service coverage, revenue sharing and highest debt and debt per enplanement Represents significant commitment of Port resources Scenario 6 impacts Port's financial performance but achieves market rate objectives 16 Rate Changes: 2015 - 2022 Scenarios COST CENTER 1 2 3 5 6 Landing Fee 2015 3.48 3.48 3.48 3.48 3.48 2022 3.50 3.50 3.50 3.50 3.51 Percent Change 0.5% 0.5% 0.5% 0.5% 0.8% Terminal Rents 2015 109.60 109.60 109.60 109.60 109.60 2022 160.65 149.34 160.72 142.81 153.83 Percent Change 46.6% 36.3% 46.6% 30.3% 40.4% FIS 2015 7.40 7.40 7.40 7.40 7.40 2022 13.76 23.83 9.50 30.49 12.00 Percent Change 85.9% 221.9% 28.3% 311.9% 62.1% After Runway 16C reconstruction, no major airfield investments By 2022, full cost of NSTAR in terminal rate base FIS rate expected to increase significantly under all scenarios Scenario 6 achieves better balance of rate increases for Terminal and FIS Following slides show Scenario 6 funding plan in greater detail 17 Scenario 6: Uses of PFCs 2015 - 2022 2015 2016 2017 2018 2019 2020 2021 2022 SOURCES Beginning balance 76,927 93,715 22,780 9,136 0 - - - Collections & interest 74,359 77,370 78,585 80,728 83,009 85,499 87,636 89,827 USES - Debt Service PFC Backed Bonds Third Runway 5,695 5,695 18,915 20,129 20,128 18,768 18,766 18,770 Conc A & STS 13,076 13,073 - - - - - - Revenue Bonds Third Runway 25,262 26,394 28,741 28,742 28,931 28,931 28,586 22,699 Conc A, STS, Baggage 8,538 7,406 5,059 5,058 4,869 5,738 7,858 14,555 IAF - - - - - 23,513 23,663 23,749 NSAT - - - - - - - 1,072 USES - PAY GO IAF - 20,000 30,000 30,000 20,000 - - - NSAT - 70,738 4,515 - 4,080 1,410 - - Airfield/Noise - - - 935 - 2,140 2,140 - Other Terminal 5,000 5,000 5,000 5,000 5,000 5,000 6,624 8,983 Ending balance 93,715 22,780 9,136 0 - - - - Built up PFC balance to reduce debt on major upcoming projects: IAF and NSAT In 2020 and beyond, use 90% of PFCs to pay debt service PFCs used to benefit airfield, terminal and FIS cost centers 18 Percent of Eligible Debt Service Paid with PFCs Budget Forecast Forecast Forecast Forecast Forecast Forecast Forecast Total 2015 2016 2017 2018 2019 2020 2021 2022 2015-2022 1. PFC-Backed Bonds: Eligible Amount 18,770,100 18,767,100 18,914,600 20,128,600 20,128,375 18,767,500 18,765,500 18,770,000 153,011,775 Less: Usage (18,770,100) (18,767,100) (18,914,600) (20,128,600) (20,128,375) (18,767,500) (18,765,500) (18,770,000) (153,011,775) Remaining - - - - - - - - - % of DS Covered by PFCs 100% 100% 100% 100% 100% 100% 100% 100% 100% 2. Airfield (3rd Runway): Eligible Amount 25,261,628 26,393,649 28,741,445 28,741,573 28,930,995 28,930,638 28,586,392 22,699,057 218,285,377 Less: Usage (25,261,628) (26,393,649) (28,741,445) (28,741,573) (28,930,995) (28,930,638) (28,586,392) (22,699,057) (218,285,377) Remaining - - - - - - - - - % of DS Covered by PFCs 100% 100% 100% 100% 100% 100% 100% 100% 100% 3. Terminal (Existing + NSAT) Eligible Amount 13,547,453 14,582,052 13,269,843 13,135,298 32,877,884 32,879,387 32,877,018 34,298,942 187,467,878 Less: Usage (8,538,372) (7,406,351) (5,058,555) (5,058,427) (4,869,005) (5,737,558) (7,857,932) (15,626,497) (60,152,696) Remaining 5,009,081 7,175,702 8,211,288 8,076,870 28,008,880 27,141,830 25,019,086 18,672,446 127,315,181 % of DS Covered by PFCs 63% 51% 38% 39% 15% 17% 24% 46% 32% 4. FIS (IAF): Eligible Amount - - - - - 28,946,858 28,946,858 28,946,858 86,840,575 Less: Usage - - - - - (23,513,221) (23,662,817) (23,748,902) (70,924,939) Remaining - - - - - 5,433,637 5,284,042 5,197,956 15,915,636 % of DS Covered by PFCs 81% 82% 82% 82% Note: Figures in table based on Scenario 6 PFC backed bonds are first priority 100% of Third Runway debt paid with PFCs IAF debt service paid by PFCs as needed to achieve market FIS rate 19 PFCs by Cost Center 2015 - 2022 Uses - $000 2015 2016 2017 2018 2019 2020 2021 2022 2015-22 Airfield 30,956 32,088 47,656 49,805 49,059 49,838 49,492 41,469 350,364 Terminal 26,614 96,217 14,574 10,058 13,949 12,147 14,482 24,609 212,650 FIS - 20,000 30,000 30,000 20,000 23,513 23,663 23,749 170,925 57,570 148,305 92,230 89,864 83,009 85,499 87,636 89,827 733,939 Percent Airfield 54% 22% 52% 55% 59% 58% 56% 46% 48% Terminal 46% 65% 16% 11% 17% 14% 17% 27% 29% FIS 0% 13% 33% 33% 24% 28% 27% 26% 23% Note: figures in table based on Scenario 6 Uses include pay-go and debt service Highest use of PFCs will be for Airfield (Third Runway) Use for FIS (IAF) will range between 0% - 33% annually, total 23% during this period 20 Cumulative Uses of PFCs: 1992 - 2049 Uses $000 1992-2014 2015 - 2022 2023 - 2049 1992-2049 Cost Center Airfield 585,075 350,364 383,180 1,318,619 Terminal 443,839 212,650 2,535,898 3,192,387 FIS - 170,925 482,077 653,002 Total 1,028,913 733,939 3,401,155 5,164,007 Percent Airfield 57% 48% 11% 26% Terminal 43% 29% 75% 62% FIS 0% 23% 14% 13% Note: figures in table for 2015 2049 based on Scenario 6 Majority of PFCs through 2014 devoted to Airfield (Third Runway) Future PFCs will be focused on terminal development needs per master plan Strategic use of PFCs allows airport to moderate rate impacts Based on long-term view, use of PFCs by cost center is "balanced" 21 Funding Plan Recommendation Construct IAF funding plan based on principles: Maintain competitive CPE Maintain competitive rates throughout airport: landing fee, terminal rents, FIS Target FIS rate for new IAF at no more than the highest rate of competitor airports Use PFC funding and Port cash contribution to achieve targeted FIS rate Build IAF funding plan based on Scenario 6; be prepared to adjust to changing conditions (e.g., IAF cost, SLOA IV provisions, FIS market rates, PFC level) 22 Next Steps Adjust as needed based on commission feedback Use in preparation for airport bond issue Submit IAF project to airlines for MII (majority-in-interest) vote May 23 APPENDIX 24 Appendix Overview Other than the first slide, which provides background on FIS rate methodologies, the remaining slides in the Appendix were included in January 27 presentation to Commission Included again for background 25 Airports Use Different Methods to Develop FIS Rates 26 Background Concepts CPE is an industry metric measuring total passenger airline costs divided by total enplaned passengers. It is not a "rate" that any airline pays Airlines individually have very different CPEs at SEA because their facility use varies and they have greater or lesser economies of scale SLOA III established multiple aeronautical cost centers Airline rates are set to recover costs within a particular cost center The Federal Inspection Services area (FIS) established as separate cost center Capital costs (direct construction costs or debt service on revenue bonds) paid with Passenger Facility Charge revenues (PFCs) are excluded from cost center rate base Airlines pay amortization on cash (retained earnings) invested by Port (rate established at time of investment to have same financial impact as debt service) SLOA III has provision allowing Port to use non-airline revenues to reduce FIS rate requirements 27 Background Concepts Allocation of PFCs to cost centers directly impacts rate bases and, thus, rates airlines pay Can benefit airlines differently depending on differing use of facilities (e.g., only international carriers use FIS) Airport has discretion to deploy PFCs to FAA approved projects IAF, North Satellite Expansion and Baggage Optimization projects are all good candidates for use of future PFCs Port's goal has been to maintain competitive rates throughout the airport The Port's agreement in SLOA negotiations to make FIS a separate cost center was predicated on the assumption that the plan of finance (use of PFCs) could be used to achieve a competitive FIS rate. 28 Future CPE Comparison to Peer Airports $35.00 SEA Future CPE in 2021 $30.00 CPE Future CPE $25.00 Targeted Middle Third $20.00 $15.00 $10.00 $5.00 $0.00 29 IAD JFK EWR ORD LAX MIA SFO SMF BOS LGA SEA DFW PDX DEN PHL SJC SAN IAH DTW MSP SLC PHX Future Debt Per Enplanement Comparison to Peer Airports $400 Blue represents other airports in 2013 $350 343 340 Green represents SEA in 2018 (forecast high point) $300 293 249 $250 230 Targeted Middle Third 198 $200 170 166 151 $150 129 115 115 115 $100 93 89 88 84 69 $50 0 $0 SJC IAD MIA SMF ORD DFW DEN SFO SEA DTW LAX BOS SAN IAH PHL MSP PDX PHX SLC 30 2018 Debt Per Enplaned Passenger History and Forecast Projected Debt/Enplaned Passenger high point in $200 2018 ($151) 178 $180 175 173 172 173 well below 165 160 161 $160 155 153 151 151 previous high 148 144 141 143 $140 136 135 137 of $178 in 129 130 130 132 127 2005 $120 2018 high $100 95 2 point in 2015 $80 72 0 0 constant $60 5 dollars = $40 $141 $20 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 31 Debt Level History and Forecast $3,500 Figures in $millions Existing Debt New Debt $3,000 $2,500 $2,000 $1,500 2 2 2 2 0 0 0 0 0 1 1 2 $1,000 5 0 4 0 $500 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 32 Landing Fees SLIDE Landing Fee SHOWING Scenario 2015 2022 % Change LANDING 2015 budget 3.48 3.42 -2% FEES 1 3.48 3.50 1% UNDER 2 3.48 3.50 1% VARIOUS 3 3.48 3.50 1% 4 3.48 3.92 13% SCENARIOS, WITH COMPARISO 2015 Budget: IAF cost = $344 million, PFCs N TO pay 100% of IAF debt service MARKET Scenario 1: Use PFCs to pay 100% of IAF debt service Scenario 2: PFCs pay no debt service associated with $264 million IAF cost increase Scenario 3: All IAF capital costs excluded from rate base Scenario 4: Scenario 1 plus reduce PFCs allocated to airfield/landing fee to balance rates throughout airport 33 Peer Airport Landing Fees 2013 Landing Fees Rate For Peer Airports $8.00 $7.00 $6.00 $5.00 $4.00 $7.83 $6.64 $3.00 $6.05 $5.44 $4.37 $4.34 $4.23 $4.23 $2.00 $4.01 $3.38 $3.27 $3.14 $2.91 $2.85 $2.73 $2.59 $2.22 $1.00 $1.91 $1.83 $1.75 $0.00 LGA EWR ORD JFK LAX BOS DEN IAD SFO SEA PDX DTW PHL IAH DFW MSP SJC SLC SAN MIA 34
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