Hawaii (State of ) Airport Enterprise

U.S. PUBLIC FINANCE

CREDIT OPINION30 June 2017

New Issue

Contacts

Maria Matesanz 212-553-7241Senior Vice [email protected]

Michael Mulvaney 212-553-3665MD-Project [email protected]

Hawaii (State of) Airport EnterpriseNew Issue: Moody's assigns A2 to Hawaii's Airport System2017A CFC Revenue Bonds; outlook stable

Summary Rating RationalMoody's Investors Service assigns initial A2 to the State of Hawaii's $250 million Series2017A Airport System Customer Facility Charge (CFC) Revenue Bonds (Taxable). The ratingoutlook is stable.

The rating is rooted in steady growth in rental car transaction days and pledged customerfacility charge (CFC) revenues that are expected to produce DSCRs above 2.0x. Otherconsiderations include the additional planned $226 million of debt for projects inconstruction, strong legal protections and rental car agreements that require the car rentalcompanies (RACs) to make contingent deficiency payments if needed and maintenance ofstrong liquidity balances equal to annual debt service through the 2023 forecast. The ratingis also supported by a moderate daily CFC rate of $4.50 and an unlimited ability to raise therate as needed. The rating is tempered by a dependence on sustained growth in tourism,on-going construction risk for two new facilities and possible additional debt to financeadditional facilities at other system airports.

Credit Strengths

» Stable and improving economic conditions and sustained growth of tourism have led toa history of growing rental car demand at the statewide airports system fueled by growthin Hawaii’s appeal as a domestic and international tourist destination

» The majority of rental car companies serving the Daniel K. Inouye International Airport(HNL) and Kapalui (OGG) airports have signed the rental car concession agreementthat requires them to pay CFCs and contingent fees if CFCs are insufficient to meet aminimum 1.15x DSCR without rolling coverage

» Ratio of rental car transaction days to O&D enplanements among one of the highest forUS airports

» Strong legal protections include 1.4x rate covenant and the Department ofTransportation's (DOT’s) ability to raise CFC rates at any time with no cap

» Projected DSCRs are forecasted to be strong at 2.0x without rolling coverage; FY 2016CFC collections provide 2.0x coverage of forecasted maximum annual debt service(MADs)

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Credit Challenges

» Debt is supported only by a single revenue stream of CFC collections as well as contingent rent from the RACs

» State assesses $3.00 daily rental motor vehicle surcharge tax on all car rental transactions that is not pledged to ConRAC bonds. Asignificant rate increase on this surcharge could negatively impact car rental demand

» Potential for cost overruns for two CONRAC facilities in construction could result in additional debt, though none currentlyexpected

» Potential for additional debt for construction of new facilities at other system airports

» Potential for some erosion of car rental demand at Honolulu due to the planned development of mass transit to the airport andthe possible introduction of ride-sharing services

Rating OutlookThe rating outlook is stable. We expect that the airport will achieve reasonable forecasted annual enplanement growth of 1.9% andcomparable rental transaction and revenue growth from FY 2017 to FY 2023 to achieve above 2.0x DSCR for the ConRAC bonds.

Factors that Could Lead to an Upgrade

» CFC collections that produce DSCRs, without the benefit of rolling coverage fund balances account balances, consistently over 2.0x

» Significantly higher than currently forecasted transaction days and CFC revenue collections that produce higher than 2.0x DSCRs

Factors that Could Lead to a Downgrade

» Additional debt above the planned $226 million 2019 bonds to complete facility construction

» Significant increases in planned future debt above current expectations for a maximum of $100 million for ConRAC facilities atother system airports

» Significant transaction day declines that reduce DSCRs, without the benefit of account balances, below 1.75 times.

Key Indicators

Exhibit 1

Column1 2013 2014 2015 2016 2020 Forecast

Change in Transact ion Days (%) N/A -3.0 19.9 5.2 1.8

Enplanement Annual Growth (%) 6.1 -1.1 2.0 3.2 1.5

CFC Debt/Outstanding ('000s) N/A 76,000 76,000 76,000 479,970

CFC Collect ions ('000) 55,390 54,083 64,992 68,250 74,287

DSCR by CFC Collect ions* 1.65 1.62 1.94 2.04 2.22

*Based on forecast 2020 debt service of $33,471,000Source: Moody's Investors Service

Detailed Rating ConsiderationsThe airport system has a virtual monopoly on all non-military passenger traffic in Hawaii with 97% of all visitors to the state arriving byair, and 88.3% of visitors traveling for tourism.

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 onwww.moodys.com for the most updated credit rating action information and rating history.

2 30 June 2017 Hawaii (State of) Airport Enterprise: New Issue: Moody's assigns A2 to Hawaii's Airport System 2017A CFC Revenue Bonds; outlook stable


The largest airport is HNL on Oahu with 58% of total enplanements, but which accounts for only 29.7% of rental car transaction dayscompared to OGG on Maui which accounts for one-fifth of total enplanements but over one-third of transaction days. This is dueto the high tour group visitor mix at HNL and more mass transit options for transportation to dominant tourist destinations such asWaikiki compared to the fewer options in Maui and the more dispersed nature of tourism there.

The five major RACs serving the airports have all signed onto the lease agreement that expires the later of 30 years from the date offacility occupancy, or final bond maturity in 2048. RAC agreements cover access to statewide rental car facilities, including the HNL,OGG and any future ConRACs that the department will construct. Off airport RACs began paying the CFC on July 1, 2014 (includingAlamo, Dollar, Thrifty at HNL and Advantage at OGG). All signatory RACs will be on airport after the HNL and OGG ConRACs arecompleted. Upon project completion dates, estimated to be April 2019 for the OGG ConRAC and December 2020 for the HNLConRAC, the signatory RACs are required to pay a minimum annual required deficiency payment should the CFC be insufficient tocover 115% of debt service on the bonds plus required reserve deposits.

The two ConRAC projects are being constructed under design-build contracts, with cost increases largely borne by the contractors, withthe exception of change orders requested by the airports division, which could add additional costs and require more debt financing.Given that CFCs have been collected since 2008 and that 50% of the construction costs are being paid by available cash collections,we believe that there is room to absorb some cost increases.

The HNL ConRAC’s construction includes interim and permanent phases and is projected to cost $438.2 million. The interim ConRACwas opened in November 2015 and consists of a consolidated customer service area on the ground level and ready-to-rent vehicleparking spaces on four levels of the eastern portion of the existing Overseas Terminal Parking Garage. The ConRAC is currently10% complete and scheduled to be completed in 2020. The facility will consist of a five-level reinforced concrete structure onapproximately eight acres of land. The construction of the permanent contract facility was awarded to Watts Constructors, Inc. Theproject is expected to cost $438.2 million. When the permanent ConRAC becomes operational, the Interim ConRAC will revert to useas a public parking facility.

The Kahului ConRAC will be a three-level facility and an electric tram located close to the terminal that will eliminate the need forrental car shuttle buses on airport roadways. Construction of the facility began in April 2016 and is expected to reach completion inMay 2019. It is currently 35% complete. The facility will consist of a consolidated customer service building, ready/return vehicle areas,a QTA facility, overflow vehicle storage area, service yard, airport employee parking, and the tram. Construction of the ConRAC wasawarded to Hawaiian Dredging Construction Company. The project is expected to cost $436.4 million.

Revenue Generating BaseThe revenue generating base includes all airport car rentals in the Hawaii airport system although only the five primary airports andMolokai currently collect CFCs. Economic conditions in the State of Hawaii (GO, Aa1) remain stable and support continued passengergrowth. The state’s low unemployment at 2.7% and robust tourism industry undergird its rating. The state’s economy benefits fromsubstantial revenues attributed to tourism and as noted by Moody’s Economy.com has seen continued expansion in the tourism sectorsince the prior calendar year. The defense industry is also noted as a critical anchor in Hawaii's economy, with military personal growing6% since 2010 and the increased strategic importance of the military bases in the current federal administration. Continued airline seatgrowth in FY 2017 (202,096) attests to an expanding tourism industry that will continue to serve as a basis of support the economyand revenue generation for the state.

Operational and Financial PerformanceCFC collections have grown to nearly $68.25 million in FY 2016 from $54.99 million in FY 2015, a 5.2% increase following a 20.2%increase in FY 2015. The 20.2% increase in FY 2015 reflected the collection of the CFC from off airport RACs following the executedRAC agreement. In FY 2014 CFCs dipped 2.4% due to two RACs moving off airport. The legislature suspended the $4.50 CFC in FY2012, but reinstated the fee in FY 2013. The contractual pledge created in the bond indenture would preclude this from occurring untilall the bonds are repaid.

Based on FY 2016 CFC collections we estimate that projected DSCR will be above 2.0x in FY 2020, including all debt expected to beissued to complete the projects. Under the base case proforma that includes annual growth in CFC collections, the DSCR is forecast at



2.47x excluding rolling coverage account balances. Under a stress scenario that layers on $150 million in additional debt the DSCR dipsto a low of 1.70x in FY 2021 excluding rollling coverage balances

LIQUIDITYThe strong performance of transactions days has resulted in a significant accumulation of CFCs. Total CFC balances, excluding debtservice reserves, reached $216 million in FY 2016. While much of this balance will be expended for the project construction, we expectthe discretionary balance to remain above annual debt service, including the planned $226 million bond issuance in 2019.

Debt and Other LiabilitiesDEBT STRUCTUREThe $250.18 million Series 2017 bonds are fixed rate and have level debt service through bond maturity in 2048. The system has $76million parity EB-5 bonds that were issued in 2014 to finance initial construction of the ConRAC facility. The planned $226 millionSeries 2019 will be applied to repay the 2014 EB-5 bonds and fund ConRAC project completion costs.

The debt service schedule remains flat even with the anticipated issuance of $226 million in 2019. Including the 2019 issue, debtservice is forecasted to be flat at about $34 million from 2020 through final maturity. Given annual collections of $68.25 million inFY 2016, combined with modest conservative forecast growth in enplanements and car rentals, absent significant additional debt weexpect CFCs to comfortably produce over 2.0x DSCRs.

DEBT-RELATED DERIVATIVESNone.

PENSIONS AND OPEBThe airport system participates in a defined benefit pension plan and reimburses the State’s Employees’ Retirement System. For FY2016, Hawaii Airport’s reported net pension liability was $115 million. Moody’s adjusted net pension liability (ANPL) calculation forthe airport for FY 2016 was $213.14 million. Its total pension liability was $305.27 million. Its FY 2016 issuer contribution was $14.74million, higher than its contractually required contribution of $11 million.

Management and GovernanceThe State of Hawaii's airport system is operated by the Hawaii Department of Transportation-Airports Division. The Department ofTransportation is one of 18 principal executive departments of the State of Hawaii and it is empowered to establish, maintain andoperate the transportation facilities of the state, including highways, airports, harbors and other transportation facilities. The airportsdivision operates all state airports and the ConRAC as a single integrated system for management and financial purposes.

The department is headed by the director, who is appointed by the governor and confirmed by the state senate. The governoralso appoints, without state senate confirmation, four deputy directors of transportation. The director and deputy directors oftransportation serve four-year terms conterminous with the governor's term.

Legal SecurityThe bonds are secured by pledged system wide CFC revenues now charged to rental car users at the 5 primary commercial systemairports and Molokai. The bonds are special limited obligations of the state payable solely from and secured solely by gross pledge ofreceipts from the CFCs collected by RACs at the five primary airports and Molokai as well as minimum annual requirement deficiencyfees paid by the RACs if CFCs are insufficient to cover 115% debt service, excluding rolling coverage account. The state has covenantedto impose CFCs and other user fees sufficient to pay debt service on the bonds, fulfill reserve requirements and meet all covenants inthe bond documents and is authorized to increase the CFC rate at any time.

The bonds additionally benefit from a strong rate covenant of 1.40x, an additional bonds test of 1.25x MADS as well as a cash fundeddebt service reserve fund (DSRF) equal to maximum annual debt service (MADS) and a debt service rolling coverage fund (cash fundedto 25% of MADS).

Use of ProceedsThe current issue along with CFC fund balances and future collections will finance project construction costs of facilities. Additionalbonds of approximately $226 million are expected to be issued in 2019 to complete the project and will also refund $76 million ofoutstanding EB-5 parity bonds.



Obligor ProfileThe department operates and maintains 15 airports at various locations within the state. Virtually all non-military passenger trafficthroughout Hawaii passes through the system, which includes five primary airports and 10 secondary airports. The primary airports areDaniel K. Inouye International Airport (on the Island of Oahu), Kahului (on the Island of Maui), Hilo International and Kona International(both on the Island of Hawaii), and Lihue (on the Island of Kauai).

MethodologyThe principal methodology used in this rating was Publicly Managed Airports and Related Issuers published in November 2015. Pleasesee the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Ratings

Exhibit 2

Hawaii (State of) Airport EnterpriseIssue RatingAirport System Customer Facility Charge RevenueBonds Series 2017A (Taxable)

A2

Rating Type Underlying LTSale Amount $250,175,000Expected Sale Date 07/12/2017Rating Description Revenue: Government

EnterpriseSource: Moody's Investors Service



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Contacts

Maria Matesanz 212-553-7241Senior Vice [email protected]

Michael Mulvaney 212-553-3665MD-Project [email protected]

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Hawaii (State of ) Airport Enterprise