Fitch Ratings assigns an 'AA-' rating to the Port Authority of New York and New Jersey's (the authority) $350 million of consolidated bonds, 138th series. The bonds, which are expected to sell competitively on Dec. 8, 2004, will have a final maturity on Dec. 1, 2034. Interest on the bonds is payable Dec. 1 and June 1, beginning on June 1, 2005. Fitch also affirms the 'AA-' and 'A+/F1+' ratings on outstanding consolidated bonds ($8 billion) and versatile structure obligations (VSOs) ($544 million), respectively. VSOs are subordinate to the authority's consolidated bonds and are supported by both standby purchase agreements and the extensive internal liquidity of the authority. The Rating Outlook on the authority's consolidated bonds and VSOs is Stable.

The 'AA-' rating on the consolidated bonds reflects the authority's expansive, well managed, and diverse portfolio of transportation and commerce-related assets. These assets include the three metropolitan New York/New Jersey airports, an interstate transportation network (tunnels, bridges, terminals, and PATH), and area seaports.

The Stable Rating Outlook is supported by the authority's strong financial performance and liquidity, with $1.6 billion in net revenue generated during 2003, an increase of 17% from the prior year. Of that total, contributions from the Federal Emergency Management Agency (FEMA) and proceeds from the authority's insurance policies (net of expenditures) contributed $664 million. In the absence of these moneys, net revenue equaled approximately $935 million, for an operating margin of 32%, which is consistent with prior years. Financials for the quarter ended June 30, 2004 show a consistent margin (35%), with net operating income of $255 million generated on $738 million of total operating revenues.

Debt service coverage of authority obligations fell to 1.62 times (x) in 2003 from 2.94x in 2002. However, 2003 debt service included the retirement of $500 million in notes issued in 2003 to fund projects in anticipation of receiving FEMA funds and insurance proceeds. Fitch estimates that debt service coverage without the note retirement would have been closer to 1.90x, a figure consistent with the authority's historical level of coverage. The authority ended fiscal 2003 with impressive reserve balances of nearly $1.6 billion, representing approximately 19% of outstanding debt.

Using data though the ten months ending Oct. 31, 2004, the authority estimates that it will generate $2.9 billion in operating revenues against $2.1 billion in operating expenses, for approximately $794 million in net operating revenue. These figures are inline with the Authority's 2004 budget but lower than fiscal 2003 because the authority will not receive additional FEMA funds and insurance proceeds as it did the prior year. Though the authority may receive such revenues and grants in the future, these sources will not be included in the budget. Fitch estimates that 2004 debt service coverage will be approximately 1.40x. However, again, this figure includes accelerated debt retirement of $110 million of obligations which were paid for from available funds. Debt service coverage, net of this debt retirement, is expected to be 1.70x.

On Nov. 24, 2004, the authority renewed its lease with the city concerning operating control of the two New York City airports and with respect to Payment in Lieu Of Taxes (PILOT) for the World Trade Center (WTC) complex. The new airport lease, which runs through 2050, is very similar to the memorandum of understanding signed by the authority and the city in January 2004, and replaces the prior lease which was due to expire in 2015.

Under the principal provisions of the new lease, rent paid by the authority to the city for operations at JFK and LaGuardia (LGA) airports was increased to $93.5 million annually from $3.5 million, with a term dating back to fiscal 2002. The authority was therefore responsible for providing a $180 million in back rent for fiscal years 2002 and 2003, in addition to a lump-sum $500 million payment. This payment was rendered on lease signing, and was funded partially from bond proceeds and partially from authority funds. Future lease payments will be made monthly. The agreement also increases the annual minimum rent paid to the city as PILOT at the WTC complex to $14 million from $1.7 million. When developed, the future minimum PILOT for the WTC complex could increase to $55 million if the authority achieves specified occupancy and net rental revenue targets. The authority also renewed its leases on Dec. 1, 2004 with airlines operating at JFK and LGA airports. The authority and its tenant airlines had been operating under a short term standstill agreement to date for 2004, as the initial airline leases had expired on Dec. 31, 2003.

Despite the dramatic increase in annual operating rent for the New York City airports, and the uncertainties lingering as the authority continues to recover from the events of Sept. 11, 2001 and participates in the redevelopment of the WTC complex, Fitch believes that the sizeable revenue generating capacity of the authority's assets, will yield continued stability in financial margins and debt service coverage. The new airline agreements will retain the residual cost-recovery elements of the prior leases and will allow the authority to raise airline rates and charges to reflect the new rent structure.

Fitch will continue to monitor the potential financial impact on the authority stemming from the April 29 jury verdict that the insurance policy defines the Sept. 11 attacks as a single catastrophic incident instead of two. Should this ruling be upheld on appeal, WTC developer Silverstein Partners (Silverstein) would be entitled to significantly less than the hoped for $7 billion insurance payout and may subsequently attempt to restructure the leases with the authority. To date, Silverstein is current on lease payments due to the authority.