Global Credit Research - 07 Nov ALBANY COUNTY AIRPORT AUTHORITY, NY Airports NY

Rating Update: Moody's maintains the A3 rating on Albany County Airport Authority's (NY) outstanding revenue and revenue refunding bonds; outlook is stable Global Credit Research - 07 Nov 2014 Airport has $113.1 million bonds outstanding ALBANY COUNTY AIRPORT AUTHORITY, NY Airports NY Opinion NEW YORK, November 07, 2014 --Moody's maintains the A3 rating on Albany County Airport Authority's (NY) outstanding $113.1 million of revenue and revenue refunding bonds. The outlook is stable. RATINGS RATIONALE The A3 rating is based on the fundamental strength of the capital region service area and the ongoing growth of the technology sector as well as the authority's continued focus on stabilizing its revenue base over the medium term. The rating also incorporates annual declining debt service payments with no additional planned indebtedness and the expectation that the airport will continue to meet its financial obligations despite anticipated flat to declining enplanement growth amid limited financial flexibility. Outlook The stable outlook is based on the expectation of flat enplanement growth, stable coverage ratios as well as ongoing improvement in the regional economy What could change the rating--up The rating could be pressured upward by significant expansion in the regional economy that produces substantial enplanement growth and sustainable higher net revenues and DSCRs at greater than 1.30x per Moody's net revenues' calculation and significantly improved liquidity in line with Moody's median. What could change the rating--down The rating could be pressured downward if enplanement levels continue to decline at higher than the airport's expectation of flat growth rates, if liquidity weakens, DSCR declines further, or if debt per enplanement levels do not continue to decrease. STRENGTHS * Debt service costs are on a declining trajectory, with no additional debt needed or planned in the medium term * Strong carrier service with Southwest as the dominant carrier, as well as three other major airlines that have served the airport since 1990 * Substantial non-airline related revenues including concession fees, fixed base operations, and parking comprise approximately 76% of total $32.6 million in for FY 2013 * Local economy continues to develop its position in nanotechnology and research, while transitioning away from declining manufacturing industries. Government employment provides stability * The authority is prohibited by state law from incurring more than $285 million in debt CHALLENGES

* Enplanements have been declining over the past six-year period at a CAGR of -2.5%, with a 2.4% decline for FY 2013, and nearly flat enplanements projected for FY 2014 * Higher average fares than most competing airports in the Northeast result in leakage to New York City airports * Airport invoked the capital charge mechanism allowed in the airline agreement for both 2008 and 2009, but has avoided accessing the capital charge since that time due to PFC hike and cost cutting measures * Significantly below median liquidity levels, but with some improvement over the last two-year period LEGAL SECURITY: Net revenues. Passenger facility charges (PFCs) are used as a direct off-set to debt service on the refunded Series 2008A Bonds and the airport has pledged approximately $4 million annually to be irrevocably deposited for the payment of the Series 2010 bonds through 2013. Additional amounts may be applied based upon PFC availability and approved eligibility. Debt Service Reserve Funds as lesser of (i) maximum annual debt service, (ii) 10% of IPO, or (iii) 125% of average annual debt service. INTEREST RATE DERIVATIVES: None. RECENT DEVELOPMENTS Enplanements at the airport declined by 2.4% in FY 2013 to 1.215 million. The decline is attributable to the withdrawal of regional service to Toronto by Air Canada in September 2013, and higher than average airline cancellation rates due to winter weather. Although the airport had a stable enplanement level over most of the first three quarters of 2014, the airport now estimates enplanements to decline to 1.214 million for the year due to significant cancellations related to the Chicago Control Tower fire in September 2014. For FY 2015, the airport has budgeted no enplanements growth despite announcements by JetBlue of a new twice daily service to Orlando and Fort Lauderdale starting in December 2015. The current airline agreement extends until December 2015 and the agreements in place with the rental car companies remain in force through December 31, 2018. The agreements provide for minimum annual guaranteed payments to the airport of $3.9 million in 2015, but revenues are expected to surpass this level, with FY 2014 projections having revenues from the car rental agreements at $5 million. In FY 2013, the airport extended for five years its agreement with FedEx and UPS for leases of the cargo facilities. CPE for FY 2013 was $7.60, similar to FY 2012 levels. CPE is projected to decline to $7.08 for FY 2014 versus a budgeted $8.33. This difference is primarily due to planned vacant positions for budgeting cushion. The airport has a declining debt service profile going forward and has no plans for additional debt issuance at this time. Parking expansion may lead to borrowing in 2018 or 2019 however it will only be pursued if needed due to growth. The debt service coverage ratio (DSCR) in FY 2013 was 1.26 times on a bond ordinance basis and 1.14 times on a net revenues basis per Moody's calculations. These figures are in-line with recent performance by the airport, as the average coverage over the past five years has been 1.29 times on a bond ordinance basis and 1.17 times on a net revenues basis. The preliminary 2015 budget projects coverage for FY 2014 to be 1.36 times, and budgets for coverage of 1.29 times in FY 2015. The estimated increases in DSCR stem from a continued built-in budget cushion from vacant positions still not allotted. Liquidity at the airport has improved to 185 days as of FY 2013 versus 154 in FY 2011 but is still below the median for A3 rated airports and the airport sector at 594 days and 551 days, respectively. This significantly lower level of liquidity is partially mitigated by the authority's ability to impose a Capital Charge of up to 25% of its required debt service on its signatory airlines, as well as the Extraordinary Coverage Protection enabling the authority to raise rates at any time during the year (never utilized). The outstanding revenue bonds benefit from a two-month O&M reserve and a standard three-pronged debt service reserve fund. The airport has a $120.5 million CIP currently in the process of approval by the County. The airport includes all projects that might be expected to be completed in the five-year term for approval, so it is likely that not all projects will be pursued. The plan includes runway and terminal improvements, parking development and purchases of major equipment and vehicles, with a large amount of flexibility built in, and could be easily scaled down pending enplanement levels. The plan also includes $20.5 million that is dependent on increases in passengers and tenant activities, including a $15 million parking garage expansion. These items of the program will require debt financing if the airport decides to pursue. The majority of the funding for the capital program will come from federal and state grants, which will account for more $67.27 million of the program. The airport will fund $18.75 million from cash. The remaining $14 million of the program, which includes utility improvements and other economic opportunities

may be eligible for cash funding, or may be funded by debt issuances. The airport does not expect to return to the market for new money issuances over the short-term, but may finance larger projects if enplanements increase significantly over the medium-term. DETAILED CREDIT DISCUSSION CONTINUED IMPROVEMENT IN REGIONAL ECONOMY The Albany Metropolitan area has a solid and stable economy with fairly steady employment numbers grounded in government jobs at the federal, state, and local levels. Government employment accounts for over 22% of the entire Albany-Schenectady-Troy workforce. The area also has a high concentration in technology and science based professional jobs. Centered at the State University of New York Albany, the Institute for Nanoelectronics Discovery and Exploration, is undergoing major expansion and is expected to spur continued investment and job growth in this industry. GlobalFoundries' semiconductor manufacturing has recently added 400 new jobs since the beginning of the year and is expected to hire another 400. The stable economy and nanotechnology growth have translated into lower unemployment rates in the capital region, of 5.5% in August 2014, versus the 6.1% national average and 6.5% for the state. Wealth and income levels exceed the national average, with per capita income at $48,502 versus $44,543 for the rest of the nation. Population growth remains below the national average for the area, but is expected to turn around as the area continues to increase job opportunities in high income positions. The Albany area is seeing a boom in construction, as developers are betting on the direction of the area's growing job base. Multi-family unit construction is one of the highest in the state and a major downtown convention center project is beginning, which will create construction jobs and increase tourism to the area. The growth in the service economy could help bolster the airport's customer base in the coming years, as more people move into the area and require air service. MARKET POSITION/COMPETITIVE STRATEGY: CONTINUED NEGATIVE ENPLANEMENT TREND, AND SLOWER GROWTH FORESEEN IN THE SERVICE AREA The airport has a history of dedicated service from the major airline carriers. Effective January 1, 2011, the airport extended its current airline agreement with Delta, Southwest, United, US Airways, Cape Air, their respective affiliates and two cargo airlines for five more years to December 2015. Southwest Airlines Co. (Senior Unsecured, Baa2, Stable), arrived in 2000 and has been the dominant carrier since 2002. Although Southwest enjoys a growing market share, currently at 41.5%, three other airlines hold shares between 14% and 20% in a market served by 22 carriers. In the current difficult airline industry environment, the carrier diversity makes the airport less susceptible to the failure of a single airline. Carrier interest in serving the airport remains strong despite the relatively high airline cost per enplanement of $7.60 as of FY 2013. During FY 2012, this airport lost all direct flights to New York City due to Delta Airlines and US Airways completing their slot divestiture at LaGuardia Airport and Delta terminating its one daily flight to JFK. Additional service changes will happen this winter with Southwest changing its direct Las Vegas flight to seasonal service in 2015. On the plus side, Southwest has entered the Atlanta market, bringing down fares to that route. The airport has experienced a steady decline in its enplanement levels in recent years, with a five-year compounded average decline rate of -2.5%. Enplanements are expected to somewhat stabilize with no large growth or decline in FY 2015. The sustained drop in enplanements has contributed to a decline in financial flexibility at the airport, however, the declining revenues have been manageable given declining debt service, no planned additional indebtedness in the medium term and cost containment efforts. FINANCIAL POSITION & PERFORMANCE: CONTINUED FLAT TO NO GROWTH ANTICIPATED, FOCUS ON MAINTAINING REVENUE BASE AND COST CONTAINMENT The airport has a diverse revenue base that includes substantial operating revenues from parking, terminal revenues, airfield operations and concessions. These high revenues support substantially higher than average operating revenue per passenger at $34.74 but are offset by high operating expenditures of $26.06 per passenger versus the $16.73 median. Although these flows balance to a net income on par with their peers, airlines are faced with CPEs that are considerably higher than peer airports'. Costs per enplanement have declined from the previous $8.91 in 2009, to $7.60 for FY 2013, and are expected to continue to decrease to $7.08 in 2014. This decrease will be somewhat offset in FY 2015, where CPE is budgeted to increase to $8.08. Moody's notes that cost per enplanement is higher at Albany because the airport provides airlines with all terminal services, including jet bridges. The airport captures 52.8% of the traffic generated in its service area, as higher fares increase leakeage to surrounding airports, and/or road travel for reasonably distanced destinations.

Albany's high debt position stems from the terminal modernization project of the late 1990s. Both the debt ratio of 34.7% and debt per enplanement of $83.17 for fiscal year 2013 are slightly higher than the median ratios for airports in the A3 category, however with declining debt levels these ratios should improve going forward. This debt position is aided greatly by passenger facility charges (PFCs) and by associated leases from the FAA and the State of New York. The airport collected $4.7 million of PFC revenues in FY 2013 and has shown some improvement in debt service coverage ratios (DSCR) for FY 2013 with 1.26 times, but still comparatively weaker than peers. The additional revenues from PFCs as well as cost containment measures undertaken by the airport, have enabled it to avoid using the capital charge since FY 2010. DSCR is projected at 1.36 times per bond ordinance for FY 2014. The authority has taken steps towards focusing on maintaining and growing its revenue base, as well as maintaining costs. On the revenue side, the airport has long-term contracts averaging over six years with its car rental and restaurant concessions, accounting for annual minimum revenue guarantees of almost $5 million. The authority also received a $750,000 Small Community Air Service Development Program grant to be applied as revenue guarantees to be offered as incentives to start-routes. The airport has not yet been successful in marketing the grant towards any new service routes with its major airlines. In spite of these actions, the DSCR will continue to be pressured and coverage levels will remain below the 1.40 times median for A3 rated airports. This is partially mitigated by debt service which should continuously decline going forward, under the assumption of no additional planned indebtedness. Days cash on hand metrics have averaged 166 days in the past few years, which is below the median of 551 days. As a result of the 2010 refunding, the authority will benefit from fairly level annual debt service requirements of approximately $9 to $10 million net of PFCs (approximately $5 million per year) through roughly 2026, excluding any additional indebtedness. KEY INDICATORS Type of Airport: O&D (small hub) Rate-making methodology: Hybrid FY 2013 Enplanements: 1,215,076 5-Year Enplanement CAGR 2009-2013: -2.5% FY 2013 vs FY 2012 Enplanement growth: -2.4% FY 2014 Projected Enplanement growth: -0.1% % O&D vs. Connecting, 2013 (5 YR AVG): 98% (98%) Largest Carrier by Enplanements, FY 2013 (share): Southwest (41.5%) Airline Cost per Enplaned Passenger, FY 2013 (5 YR AVG): $7.60 ($7.95) Debt per Enplaned/O&DPassenger, FY 2013 (5 YR AVG): $83.17/$84.87 ($89.82/$91.66) Net Revenues Debt Service Coverage, FY 2013 (5 YR AVG): 1.14x (1.17x) Bond Ordinance Debt Service Coverage, FY 2013 (5 YR AVG): 1.26x (1.29x) FY 2013 Days Cash on Hand (5 YR AVG): 185 (166) Utilization Factor, 2013 (5 YR Avg) : 1.36 (1.41) METHODOLOGY OUTPUT - FACTOR 1 - MARKET POSITION Enplanements - Ba (1,215,076) Size of Service Area - A (877,905) Economic Strength / Diversity of Service Area - A

Competition for Travel - A FACTOR 2 - SERVICE OFFERING Carrier Base (Primary) - Baa (41.5%) Enplanement 5-Year CAGR - B (-2.5%) O&D Passenger Mix - Aaa (95.0%) FACTOR 3 - CAPACITY AND CAPITAL PLAN Limitations to Growth / Operational Restrictions - Aa Construction Risk of Capital Program - Aa FACTOR 4 - FINANCIAL METRICS Average Airline Cost Per Enplanement - Aa ($7.60) Net Revenue Debt Service Coverage Ratio - Baa (1.14x) Debt Per O&D Enplanement - A ($84.87) Notching, 0 Scorecard Indicated Rating - Baa1 The rating differs from the scorecard indicated rating as it takes in consideration the declining indebtedness of the airport with no plans for additional borrowing in the medium term which are not demonstrated in the financial metrics. RATING METHODOLOGY The principal methodology used in this rating was Airports with Unregulated Rate Setting published in July 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. REGULATORY DISCLOSURES Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery. Please see Moody's Ratings Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the time horizon in which a credit rating action may be after a review or outlook action took place. Please see the ratings tab on the issuer page on www.moodys.com for the last action and the history of the rating. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com/disclosures for further information. Please see the ratings disclosure page on www.moodys.com/disclosures for disclosures on significant Moody's shareholders and on certain relationships between Moody's, its shareholders and/or rated issuers. Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Analysts Jennifer M. Chang Lead Analyst

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