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Projected Rates and Charges Analyses for Airline Negotiations Commonwealth Ports Authority Saipan International Airport, Rota International Airport, Tinian International Airport PREPARED BY: RICONDO & ASSOCIATES, INC. 105 East Fourth Street, Suite 1700 Cincinnati, OH 45202 (513) 651-4700 (phone) (513) 412-3570 (facsimile) Ricondo & Associates, Inc. (R&A) prepared this document for the stated purposes as expressly set forth herein and for the sole use of the Commonwealth Ports Authority and its intended recipients. The techniques and methodologies used in preparing this document are consistent with industry practices at the time of preparation. Ricondo & Associates, Inc. is not registered as a municipal advisor under Section 15B of the Securities Exchange Act of 1934 and R&A does not provide financial advisory services within the meaning of such Act. PRELIMINARY DRAFT Page 1 of 28 PREPARED ON 11/04/2015 1.1 Introduction This document has been created to expedite the process of negotiating a new Airline-Airport Use and Lease Agreement (New Agreement) between Commonwealth Ports Authority (the Authority) and the airlines serving Saipan International Airport, Rota International Airport, and Tinian International Airport (collectively known as “the Airport System”). This document is for discussion purposes only. Neither the Authority nor any of the airlines will be bound by any of the provisions of this document until a mutually acceptable, comprehensive written Agreement has been fully negotiated, executed and delivered. Airlines that execute the Agreement will be known as Signatory Airlines (Airlines). This document presents projected airlines rates and charges resulting from the operation of the Airports by the Authority. The projected airline rates and charges methodology presented herein is based on the provisions and articles in the Agreement and incorporates the estimated rates and charges impacts associated with both the day-to-day operations of the Airports, as well as undertaking capital projects during the time period covered in this document. Included in this document are revenues and expenses for Fiscal Year (FY) 2016 Budget and Projected FY 2017 through FY 2020 (the Projection Period). The Authority’s FY is the twelve-month period ending September 30th in each year. These projections are based on a review of historical financial operations, estimated future aviation activity levels, discussions with Authority staff and the impacts of the projected Capital Improvement Program (CIP). This report also includes estimated airlines rates and charges, airline cost per enplanement, Airport cash flow, and debt service coverage for the Series A 1998 bonds. The Authority is proposing, through the rates and charges formulas presented herein, a business agreement with the Airlines that is primarily “compensatory” in nature. It is recognized by the Authority that, with the current financial circumstances in which the Airlines are operating, along with transitioning to operating and maintaining a new airport facility, the business arrangement should reflect the fact that both the Airlines and the Authority are working together to provide adequate facilities at the Airports that do not create an unreasonable burden to the Airlines financially. The proposed business arrangement includes the following key elements. A “cost center residual” landing fee rate for the Airfield Cost Center using total landed weight as the divisor. A “cost center compensatory” average terminal rental rate for the Terminal Cost Center using total rentable square feet as the divisor. Cost centers have been developed that are consistent with industry practices. As a result of these assumptions and other described later in this report, the projected impacts to the Airlines for Budget FY 2016 and the Projection Period under the proposed Agreement are shown in Table 1. PRELIMINARY DRAFT Page 2 of 28 PREPARED ON 11/04/2015 Table 1 Rates and Charges Summary (Fiscal Year Ending September 30) Estimated Budget PROJECTED FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Old Methodology Rates: Facility Service Charges Saipan Main Terminal: Signatory - Per Enplaned Passenger $9.07 Nonsignatory - Per Enplaned Passenger (150%) $13.61 Signatory - Per Deplaned Passenger $2.20 Nonsignatory - Per Deplaned Passenger (150%) $3.30 Saipan Commuter Terminal: Signatory - Per Enplaned Passenger $3.35 Nonsignatory - Per Enplaned Passenger (125%) $4.19 Rota: Signatory - Per Enplaned Passenger $4.95 Nonsignatory - Per Enplaned Passenger (150%) $6.19 Tinian: Signatory - Per Enplaned Passenger $4.95 Nonsignatory - Per Enplaned Passenger (150%) $6.19 Landing Fee Saipan Main Terminal: Signatory $2.02 Nonsignatory (150%) $3.03 Saipan Commuter Terminal: Signatory $1.40 Nonsignatory (125%) $1.75 Rota: Signatory - Commuter $1.06 Nonsignatory (125%) - Commuter $1.33 Tinian: Signatory - Commuter $1.06 Nonsignatory (125%) - Commuter $1.33 Debt Service Coverage 2.26 Cost Per Enplanement $14.90 New Methodology Rates: Terminal Rental Rate Average Rental Rate (per square foot) $41.24 $42.89 $44.66 $46.44 $48.33 Saipan Main: Average Signatory Rental Rate (per square foot) $44.40 $46.18 $48.08 $50.00 $52.03 Average Nonsignatory Rental Rate - 125% (per square foot) $55.50 $57.72 $60.10 $62.50 $65.04 Saipan Commuter: 50% DISCOUNT Average Signatory Rental Rate (per square foot) $22.20 $23.09 $24.04 $25.00 $26.02 Average Nonsignatory Rental Rate - 125% (per square foot) $27.75 $28.86 $30.05 $31.25 $32.52 Rota: 50% DISCOUNT Average Signatory Rental Rate (per square foot) $22.20 $23.09 $24.04 $25.00 $26.02 Average Nonsignatory Rental Rate - 125% (per square foot) $27.75 $28.86 $30.05 $31.25 $32.52 Tinian: 50% DISCOUNT Average Signatory Rental Rate (per square foot) $22.20 $23.09 $24.04 $25.00 $26.02 Average Nonsignatory Rental Rate - 125% (per square foot) $27.75 $28.86 $30.05 $31.25 $32.52 Landing Fee Average Landing Fee $2.18 $2.25 $2.32 $2.39 $2.47 International Landing Fee $2.28 $2.35 $2.42 $2.50 $2.58 Commuter / Rota / Tinian Landing Fee $1.71 $1.76 $1.82 $1.88 $1.93 Nonsignatory Landing Fee (125%) $2.73 $2.81 $2.90 $2.99 $3.09 Per Use Fee Per Use Fee - Ticket Counters and Queuing $52.99 $55.10 $57.38 $59.67 $62.09 Per Use Fee - Holdrooms/Gates $185.80 $193.22 $201.19 $209.23 $217.72 Debt Service Coverage 1.92 1.84 1.81 1.79 1.75 Cost Per Enplanement $12.59 $12.95 $13.35 $13.74 $14.14 Source: Commonwealth Ports Authority and Ricondo & Associates, Inc. Prepared by: Ricondo & Associates, Inc. PRELIMINARY DRAFT Page 3 of 28 PREPARED ON 11/04/2015 The remainder of this document is presented under the following headings: Financial Structure Activity Projections Terminal Space Debt Service PFC Revenue Operating Expenses Non-Aviation Revenues Airline Rates and Charges 1.2 Financial Structure Expenses, Debt Service and Capital Expenditures of the Authority are categorized into Cost Centers. The Authority utilizes the cost center structure described below, which is consistent with industry standards. The Authority has identified the following Direct Cost Centers: Airfield. The Airfield cost center includes the portion of the Airports provided for the landing, taking off, and taxiing of aircraft, including runways, taxiways, approach and runway protection zones, safety areas, infield areas, landing and navigational aids, and land areas required by or related to aeronautical use of the Airports. Main Terminal. The Main Terminal cost center includes the Saipan International Airport main terminal passenger building and associated curbside entrance areas and adjoining landscaped areas. This cost center also includes the aircraft aprons at the Main Terminal. Commuter Terminal. The Commuter Terminal cost center includes the Commuter Terminal building and associated curbside entrance areas, and aircraft aprons at the Commuter Terminal. Rota Terminal. The Rota Terminal cost center includes the Rota Terminal building, associated curbside entrance areas, and aircraft aprons at the Rota Terminal. Tinian Terminal. The Tinian Terminal cost center includes the Tinian Terminal building, associated curbside entrance areas, and aircraft aprons at the Tinian Terminal. Indirect Cost Centers have expenditures that will be allocated to Direct Cost Centers: ARFF. The ARFF cost center includes all aircraft rescue and firefighting functions of the Airport System. Security. The Security cost center includes all functions of the Airport System related to security. Administrative. The Administrative cost center includes the administrative functions of the Airport System. PRELIMINARY DRAFT Page 4 of 28 PREPARED ON 11/04/2015 For 2016, Operating Expenses in indirect cost centers will be allocated on the following basis. Allocation of Indirect Operating Expenditures Budget PROJECTED FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Allocation % for Saipan ARFF Operating Expenses: Main Terminal 39% 39% 39% 39% 39% Commuter Terminal 5% 5% 5% 5% 5% Airfield 56% 56% 56% 56% 56% Total 100% 100% 100% 100% 100% Allocation % for Saipan Security Operating Expenses: Main Terminal 75% 75% 75% 75% 75% Commuter Terminal 5% 5% 5% 5% 5% Airfield 20% 20% 20% 20% 20% Total 100% 100% 100% 100% 100% Allocation % for Saipan Administrative Operating Expenses: 1/ Main Terminal 78% 78% 78% 78% 78% Commuter Terminal 4% 4% 4% 4% 4% Airfield 18% 18% 18% 18% 18% Total 100% 100% 100% 100% 100% 1/ The Administrative Cost Center is allocated to Direct Cost Centers based on each Direct Cost Center's proportionate share of expenses after allocation of ARFF and Security indirect operating expenses. Source: Commonwealth Ports Authority Prepared by: Ricondo & Associates, Inc. ARFF and Security Cost Centers are allocated at each airport based on an approximation of effort expended in each Direct Cost Center and are consistent with industry standards. It is the intent of the Authority to review these allocations periodically throughout the term of the Agreement to ensure that expenses are properly allocated to the appropriate Direct Cost Centers. The Administrative Cost Center is allocated to Direct Cost Centers based on each Direct Cost Center’s proportionate share of expenses after allocation of ARFF and security indirect operating expenses.