Denver International Airport Case Study (Project Management)

1. According to the prospectus, the DIA bonds were rated as BBB by Standard & Poors Corporation. Yet, at the same time, the City of Denver was given a rating of AA. How can this be?

2. There are numerous scenarios that can occur once the airport opens. The following questions are what if exercises and may not have a right or wrong answer. The questions are used to stimulate discussion. You must use the prospectus excerpts in the exhibit at the end of the case study. For each situation, what will be the possible outcome and what impact is there upon the bondholders?

3. Assume the DIA finally opens and with a debt of $3 billion. Is the revenue stream sufficient to pay interest each year and pay the principal at maturity?

4. If the debt coverage were actually this good, why would the rating on the bond be BB?

Case 23 749 mote rental car facilities, the additional $3 tax per day for each rental car, and the fact that the nearest gas station was 15 miles away. How does one return a rental car with a full tank of gas? Departing passengers estimated it would take two hours to drive to the airport from down- town Denver, unload luggage, park their automobile, check in, and take the train to the concourse Faults in the concourse construction were becoming apparent. Tiles that were supposed to be 5/8 inches thick were found to be 1/2 inch thick. Tiles began to crack. During rainy weather, rain began seeping in through the ceiling EXHIBIT A Municipal Bond Prospectus $261,415,000 City and County Of Denver, Colorado 6.875% Special Facilities Airport Revenue Bonds (United Airlines Project) Series 1992A Date: October 1, 1992 Due: October 1, 2032 Rating: Standard & Poor's BBB- Moody's Baa2 Introduction This official statement is provided to furnish information in connection with the sale by the City and County of Denver, Colorado (the "City") of 6.875% Special Facilities Airport Revenue Bonds (United Airlines Project) series 1992A in the aggregate principle amount of $261,415,000 (the "Bonds"). The bonds will be dated, mature, bear interest, and be subject to redemption prior to maturity as described herein. The Bonds will be issued pursuant to an Ordinance of the City and County of Denver, Colorado (the "Ordinance") The proceeds received by the City from the sale of the Bonds will be used to acquire, con- struct, equip, or improve (or a reimbursement of payments for the acquisition, construction equipping, or improvement of) certain terminals, Concourse B, aircraft maintenance, ground equipment maintenance, flight kitchen, and air freight facilities (the "Facilities") at the new Denver International Airport (the "New Airport") The City will cause such proceeds to be deposited, distributed, and applied in accordance with the terms of a Special Facilities and Ground Lease, dated as of October 1, 1992 (the "Lease") be- tween United Airlines and the City. Under the Lease, United has agreed to make payments sufficient to pay the principal, premium, if any, and interest on the Bonds. Neither the Facilities nor the ground rental payments under the Lease are pledged as security for the payment of principal, premium, if any, and interest on the bonds. Agreement betweern United and the City On June 26, 1991, United and the City entered into an agreement followed by a second agree- ment on December 12, 1991, which, among other things, collectively provide for the use and lease by United of certain premises and facilities at the New Airport. In the United Agreement, United agrees among other things, to (1) support the construction of the New 2. Only excerpts from the prospectus are included here. Case 23 749 mote rental car facilities, the additional $3 tax per day for each rental car, and the fact that the nearest gas station was 15 miles away. How does one return a rental car with a full tank of gas? Departing passengers estimated it would take two hours to drive to the airport from down- town Denver, unload luggage, park their automobile, check in, and take the train to the concourse Faults in the concourse construction were becoming apparent. Tiles that were supposed to be 5/8 inches thick were found to be 1/2 inch thick. Tiles began to crack. During rainy weather, rain began seeping in through the ceiling EXHIBIT A Municipal Bond Prospectus $261,415,000 City and County Of Denver, Colorado 6.875% Special Facilities Airport Revenue Bonds (United Airlines Project) Series 1992A Date: October 1, 1992 Due: October 1, 2032 Rating: Standard & Poor's BBB- Moody's Baa2 Introduction This official statement is provided to furnish information in connection with the sale by the City and County of Denver, Colorado (the "City") of 6.875% Special Facilities Airport Revenue Bonds (United Airlines Project) series 1992A in the aggregate principle amount of $261,415,000 (the "Bonds"). The bonds will be dated, mature, bear interest, and be subject to redemption prior to maturity as described herein. The Bonds will be issued pursuant to an Ordinance of the City and County of Denver, Colorado (the "Ordinance") The proceeds received by the City from the sale of the Bonds will be used to acquire, con- struct, equip, or improve (or a reimbursement of payments for the acquisition, construction equipping, or improvement of) certain terminals, Concourse B, aircraft maintenance, ground equipment maintenance, flight kitchen, and air freight facilities (the "Facilities") at the new Denver International Airport (the "New Airport") The City will cause such proceeds to be deposited, distributed, and applied in accordance with the terms of a Special Facilities and Ground Lease, dated as of October 1, 1992 (the "Lease") be- tween United Airlines and the City. Under the Lease, United has agreed to make payments sufficient to pay the principal, premium, if any, and interest on the Bonds. Neither the Facilities nor the ground rental payments under the Lease are pledged as security for the payment of principal, premium, if any, and interest on the bonds. Agreement betweern United and the City On June 26, 1991, United and the City entered into an agreement followed by a second agree- ment on December 12, 1991, which, among other things, collectively provide for the use and lease by United of certain premises and facilities at the New Airport. In the United Agreement, United agrees among other things, to (1) support the construction of the New 2. Only excerpts from the prospectus are included here