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Item No.: 7a_supp_a Meeting Date: January 27, 2015 Aviation Division Update on Capital Budget, Plan of Finance and Allocation of Funding Sources January 27, 2015 1 Outline Changes to Capital Plan Financing of updated capital budget Analysis of allocation of financing tools to different cost centers for four scenarios Funding plan for IAF % change in Airline rates % change in CPE by cost center % change by representative airlines Next steps 2 CHANGES TO CAPITAL BUDGET AND FINANCING PLAN 3 Funding Plan Update: Process Establish cost for IAF October 7 Budget presentation - cost of IAF uncertain December/January cost of IAF = $608 December 2 briefing million Explain proposed changes to 2015 2019 Evaluate total capital and funding plan capital budget and airport-wide financial impacts January 27 Funding allocation scenarios permit evaluation of rate impacts by cost center Present rate and airline cost impacts of funding Use of PFCs to mitigate rate base allocation scenarios impacts Reviewed with airlines in mid-January January 27 4 Policy Issue In IAF Funding Plan Major policy issue: How does allocation of funding sources (e.g., PFCs, cash) affect various rates and charges and, thus, cost to airlines? Sea-Tac likely unique in USA: Airline agreement (2013 2017) requires all costs of IAF to be paid by users of FIS/IAF Other airports have far less rigid cost accounting and rate requirements and/or explicit rate subsidies 5 Funding Plan Update Process 1. Overall Capital Budget changes 2. Airport-wide plan of finance 3. Identify scenarios for allocation of funding sources to cost centers 4. Calculate changes in rates (e.g., landing fee, terminal rents, FIS) 5. Calculate CPE impact by cost center for representative airlines 6 Capital Budget Changes 2015 capital budget presentation (October 7): Cost estimate for IAF was preliminary design not yet underway Added 8 projects totaling $44 million Approval of 11 additional projects totaling $47 million put on hold pending IAF cost update ("contingent projects") Goal of recent analysis was to absorb as much as possible of adjusted cost estimate of IAF within existing capital budget through project cuts, project savings, deferrals and reduction of "Allowance" CIPs Airport has two Allowance CIPs within capital program that accommodate future capital spending for currently undesignated capital projects (either cost increases or new projects) 7 Projected Capital Increases Increased cost estimate New Capital Needs ($000s) for IAF to $608 million Internat'l Arrivals Facility - increase 264,000 Alaska Airlines' request to add capacity for NSAT NSAT Expansion - Bag System 14,400 baggage system B2 Expansion for Delta Club 13,200 Contingent projects (3 of 11): Central Terminal HVAC Upgrade 4,900 B2 building area is preferred location for Fire Dept. Truck 1,450 new Delta Club Total 297,950 "Inspansion" of terminal requires HVAC upgrade New Fire truck needed to replace older truck 8 Projected Capital Cost Reductions Do only modest short-term fixes Sources of Capital ($000s): to SSAT; will require major Cuts: "SouthSTAR" project in future SSAT HVAC, lights, ceiling 32,543 (2020+) Garage Vertical Conveyance 2,941 HVAC improvements will be Other (3) 2,507 done by other existing projects Total Cuts 37,990 Recognizing savings on RON Savings: hardstand project Main Terminal HVAC Upgrades 7,875 Fewer homes to be insulated Aircraft RON Parking - USPS 5,000 under old Part 150 program Single Family Home Insulation 3,000 Other (8) 6,400 Failure of Highline School Total savings 22,275 District bond issue will delay Deferred HSD Insulation 19,335 school noise mitigation projects Use of Allowance CIPs 154,350 Allocate Allowances to known Total 233,951 project increases 9 Summary of Proposed Changes Capital Spending 2014 - 2019 ($000s) Total spending up by 3.3% October 7, 2014 Presentation 1,926,206 Capital budget Allowances Savings, cuts, use of allowances (233,951) at 29% of previous level, New capital needs 297,950 still provides flexibility Net increase 63,999 Will replenish Allowances Revised spending 1,990,205 with future savings: Realized project savings Balance of Allowance CIPs Deferred spending Current balance 217,529 Proposed uses (154,350) Project cuts Revised balance 63,179 10 Breakout of Capital Budget Changes 2014 - 2019 Spending ($000s) As of 10/7/14 As of 1/13/15 Change IAF 343,873 608,627 264,754 NSTAR 447,596 464,868 17,272 Baggage Optimization 229,287 229,687 400 Runway 16C/34C 99,224 106,222 6,998 Other Projects 575,226 517,622 (57,604) Allowances 231,000 63,179 (167,821) Total 1,926,206 1,990,205 63,999 11 Financial Implications of Capital Budget Changes Financial Implications measured by comparison to peer airports for: CPE DPE 2013 $11.90 $141 Cost per enplanement (CPE) Peer rank 10 of 22 11 of 19 Debt per enplanement (DPE) 2015 $11.79 $130 Forecasted high for CPE and DPE Forecast high - Current $15.19 $151 in targeted middle third of peer Year of forecast high 2021 2018 ranking Peer rank 12 of 22 11 of 19 CPE and DPE have grown Forecast high - Oct. 2014 $14.85 $144 moderately compared to October % Change since Oct. 2014 2.3% 4.9% 2014 forecast Forecast high in 2015 $ $13.10 $141 2021 CPE in constant dollars is only 11.7% above 2015 (CAGR of 1.9%) 12 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 13 Summary of Capital Budget Adjustments/Financing The International Arrivals Facility (IAF) cost increase of $264 million, together with other changes to capital program, resulted in $64 million increase in spending Resulting financial impact is modest increase in airline Cost per Enplanement (CPE) and Debt per Enplanement (DPE) Future CPE and DPE remain within middle third of peer airports 14 ALLOCATION OF FUNDING SOURCES TO VARIOUS COST CENTERS 15 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 16 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. 17 Historical Use of PFCs Cost Center 1992 - 2013 Percent Airfield (including Noise) 558,726,500 57% Terminal 413,462,500 43% FIS - 0% Total 972,189,000 PFCs have been used to pay for 100% of revenue bond debt service for Third Runway, significantly reducing the rate impact on the landing fee. Major terminal projects benefiting from PFCs include Concourse A and Satellite Transit System 18 Funding Plan for IAF With separate FIS cost center, use of PFCs to mitigate rate impact has been key element of funding plan Cash fund construction costs: Port has been accumulating PFCs to provide ability to cash fund ("pay-go") significant portion of construction cost. Pay revenue bond debt service: Port can pay some, most or all of revenue bond debt service (DS) While many different funding plans could be evaluated, four scenarios highlight policy issue relating to use of PFCs by cost center 19 Scenarios Options for Allocation of PFCs 2015 Budget (and plan of finance) IAF cost estimate of $344 million, PFCs pay 100% of IAF debt service 1. Continue to use PFCs to pay 100% of IAF debt service For 2019 2021 only, shift $14.7 million of PFCs from paying airfield debt service to IAF debt service Sea-Tac FIS rate at high end of projected market rate 2. PFCs pay no debt service associated with $264 million IAF cost increase Same amount of PFCs allocated to IAF as with $344 million cost estimate Increased capital cost goes directly to FIS rate base FIS rate almost twice as high as highest market rate 20 Scenarios Options for Allocation of PFCs 3. All IAF capital costs excluded from rate base In addition to large PFC allocation, do not amortize cash investments in IAF only (offset with non-aero revenues per SLOA III section 8.4.4, or similar provision in "SLOA IV") FIS rate at low end of market range 4. Variation on Scenario 1 (pay all IAF debt service with PFCs): In addition, shift some PFCs used to pay airfield debt service to pay terminal debt service and, thus, balance rates throughout airport Landing fee stays constant after 2020 rather than decreases; terminal rent increase moderated 21 Funding Plans for IAF 2015 Bud Scenarios Plan of Fin. 1, 3, 4 Scenario 2 Funding Source $000s % $000s % $000s % Cash 68,800 20% 121,673 20% 121,673 20% PFC - pay go 137,709 40% 157,874 26% 137,709 23% Revenue Bonds 137,491 40% 328,818 54% 348,983 57% Total 344,000 608,365 608,365 All scenarios assume 20% of IAF costs are not eligible for PFCs and are funded with cash (Airport Development Fund) Cash investments are amortized in all scenarios except 3 so that rate impact is effectively the same as debt service PFC pay go contributions do not impact airline rates Revenue bonds are paid by either or both of PFCs (not included in rates) and airline rates and charges Scenario 2 matches amount of PFCs used when cost estimate was $344 million 22 Airline Rate Impacts FIS rate: Percent Change 2015 - 2022 Landing Average Increasing significantly under all scenarios FIS Fee Terminal #2 results in very high FIS Scenario Rate Rate Rents rate 2015 budget 58% -2% 52% Landing Fees: 1 83% 1% 46% #4 shows impact of 2 219% 1% 37% shifting PFCs from 3 34% 1% 46% Airfield to Terminal 4 80% 13% 41% Terminal rents: 2015 Budget: IAF cost = $344 million, PFCs pay Shift of PFCs from IAF to 100% of IAF debt service terminal (#2) softens rate Scenario 1: Use PFCs to pay 100% of IAF debt impact on terminal service Use of PFCs has greatest Scenario 2: PFCs pay no debt service associated impact on FIS rate 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 23 airport FIS Rates FIS Rate SLIDE Scenario 2015 2022 % Change SHOWING FIS RATES UNDER 2015 budget 7.40 11.70 58% VARIOUS SCENARIOS, 1 7.40 13.57 83% WITH 2 7.40 23.61 219% COMPARISON TO MARKET 3 7.40 9.92 34% OTHER AIRPORTS 4 7.40 13.32 80% INFLATED TO 2022 BY ~3% Note: Average FIS rate for peer airports in 2022 is AND MARKET AVERAGE estimated at $11.00 - $13.00. 2015 Budget: IAF cost = $344 million, PFCs pay 100% of IAF debt service 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 24 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 25 Terminal Rents Terminal Rents Terminal rents Scenario 2015 2022 % Change increasing under 2015 budget 109.60 166.59 52% all scenarios 1 109.60 160.03 46% reflecting major 2 109.60 149.99 37% 3 109.60 160.10 46% investments 4 109.60 155.03 41% Size of terminal rate base (cost 2015 Budget: IAF cost = $344 million, PFCs pay 100% of IAF debt service of assets) Scenario 1: Use PFCs to pay 100% of IAF debt reduces impact service Scenario 2: PFCs pay no debt service associated of PFCs on rate with $264 million IAF cost increase Scenario 3: All IAF capital costs excluded from changes rate base Scenario 4: Scenario 1 plus reduce PFCs allocated to airfield/landing fee to balance rates throughout airport 26 CPE By Cost Center CPE By Cost Center Airport CPE will increase from $11.79 Percent Change 2015 - 2022 Total in 2015 to between Scenario FIS Airfield Terminal CPE $15.00 and $15.20 in 2022, depending on 2015 Budget 78% 3% 34% 26% the scenario 1 108% 4% 36% 28% Terminal and Airfield 2 260% 3% 27% 29% are largest cost 3 54% 5% 38% 27% components of CPE, 4 104% 14% 31% 28% so change in use of PFCs has less impact 2015 Budget: IAF cost = $344 million, PFCs pay FIS, being a smaller 100% of IAF debt service cost component of Scenario 1: Use PFCs to pay 100% of IAF debt CPE is more sensitive service to changes in use of Scenario 2: PFCs pay no debt service associated PFCs 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 27 CPE by Cost Center for Representative Airlines CPE By Cost Center for Representative Domestic & Int'l Airline Percent Change 2015 - 2022 Terminal Cost Components of CPE FIS Airfield Terminal 2015 2022 Scenario Domest. Int'l Domest. Int'l Domest. Int'l Domest. Int'l Domest. Int'l 2015 budget 0% 81% 3% 3% 36% 45% 6.68 12.53 9.06 18.14 1 0% 111% 3% 3% 37% 50% 6.69 12.54 9.19 18.79 2 0% 264% 2% 3% 28% 40% 6.69 12.54 8.59 17.57 3 0% 56% 4% 4% 39% 51% 6.69 12.54 9.29 18.98 4 0% 106% 13% 14% 32% 44% 6.69 12.54 8.85 18.10 Assumed each airlines share of airport costs will be the same in 2022 as in 2013 Individual airlines can have different financial interests for the use of PFCs Domestic airlines don't pay FIS fees Airfield costs paid proportionately by both domestic and international airlines Terminal cost increases impact representative international carrier comparatively more than domestic airline due to volume efficiencies 28 Conclusion & Next Steps As long anticipated, major investments will cause airport costs (CPE) to increase from 2015 2022. Achieving a balanced approach to rate impacts requires strategic use of PFCs and consideration of not charging amortization fee for use of cash Staff recommends that Port develop funding allocation plan that is based on: FIS rate within market Airline input on allocation of PFCs between terminal and airfield cost centers Next steps: More detailed analysis will be undertaken and reviewed with airlines before returning to Commission for policy guidance (February 27) Seek airline approval for IAF through MII vote (March, 2015) Seek FAA approval to use PFCs for IAF, NSAT and Baggage Optimization projects (Q2, 2015) 29 APPENDIX 30 Peer Airport FIS Rates Current Airport 2013-2014 Comments Denver 6.65 Not cost recovery. Increase 2-3% per year Rate is a step function based on the number of Portland 6.00 passengers. The derived rate would be $4.00 - $8.00 per passenger Derived average cost per passenger. Part of San Francisco 8.96 Int'l facility joint use fee (80/20). Los Angeles 9.50 Signatory rate Terminal fee based on # of seats, with Vancouver 12.42 differential for domestic and int'l. Also a turn fee for int'l. FIS fee derived. SeaTac (2015) 7.40 Signatory rate, full cost recovery Difficult to forecast FIS rates for other airports. $12 - $14 likely at high end of "market" in 2019-2022 31 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 32 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 33 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 34 2018 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 35
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