financial templates

Notes to Projected Consolidated Income Statement Overview The Debtors project operating margins of 8-11% and EBITDAR margins of 16-18% in 2007-2010. Operating Revenue Passenger Revenue: The Debtors project passenger revenue of $15.7 billion for 2006, an increase of 7% over 2005, due to fare increases that reflect strong passenger demand and capacity reductions in the airline industry, as well as the Debtors strategy of restructuring its network to rebalance the mix of domestic and international flying. Over the Projection Period, Passenger revenue is forecast to increase at an average annual rate of 6%, or a total of $4.1 billion. The increase is due to capacity growth combined with an increase in load factor and passenger mile yield, such that Passenger revenue in 2010 is projected to be $19.8 billion. This increase includes a $3.0 billion increase in Mainline Passenger revenue and a $1.1 billion increase in Regional Affiliates Passenger revenue (through Delta Connection), the two components that comprise Passenger revenue. The Debtors assume that they will achieve unit revenue parity among network peers by 2008. The Debtors forecast consolidated PRASM of 10.58 cents for 2006, an increase of 13.5% over 2005. In the Projection Period, consolidated PRASM is expected to increase 4% in 2007 and then at an average annual rate of 2% for 2008 to 2010, such that consolidated PRASM in 2010 is expected to be 11.74 cents. The Debtors project consolidated ASMs of 148 billion for 2006, a decrease of 5% over 2005. In the Projection Period, consolidated capacity is forecast to increase at an average annual rate of 3%, or a total of 21 billion ASMs, such that consolidated capacity in 2010 is projected to be 169 billion ASMs. During the Projection Period, mainline domestic capacity is forecast to decrease at an average annual rate of 3% and mainline international capacity is forecast to rise at an average annual rate of 13%, reflecting the Debtors strategy of shifting flying from domestic to international markets and the acquisition of more than 60 mainline aircraft by 2010. Regional capacity during the Projection Period is forecast to increase at an average annual rate of 3%. Cargo Revenue: The Debtors provide freight and mail transportation using cargo space on their passenger aircraft. Revenue forecasts are developed based on volume and yield assumptions for the freight and mail businesses. Growth of $161 million in cargo revenues, primarily due to capacity increases, is forecast over the Projection Period. Other Revenue: This includes Debtors lines of businesses related to their core scheduled passenger service operation, including SkyMiles®, Crown Room Clubs, in-flight sales (liquor, entertainment and duty-free), training services and charter operations. The Debtors anticipate total Other revenue of $1.2 billion for 2006, an increase of 11% over 2005. Over the Projection Period, Other revenue is projected to increase at an average annual rate of 2%, such that Other revenue in 2010 is projected to be $1.3 billion, a $118 million increase as compared to 9 2006. Growth forecasts for these various operations are driven by existing contractual agreements, management expectations for certain business lines and inflationary growth. Operating Expenses Aircraft Fuel: Aircraft fuel is projected to be the Debtors largest expense. The Financial Projections assume fuel price escalation consistent with recent experience, resulting in a cost for jet fuel of $2.00 per gallon for 2007, with 5% annual increases in the price of jet fuel for 2008-2010. To mitigate exposure to fuel price volatility, the Debtors intend to continue their fuel hedging program using derivative fuel contracts that qualify for hedge accounting. Salaries and related costs: Labor costs are projected to be the Debtors second largest expense, representing approximately 20% of annual operating expenses during the Projection Period. During the post-petition period, the Debtors lowered employment costs by headcount reductions and salary rate and benefit cost decreases for pilot and non-pilot employees. During the Projection Period, these expenses are forecast based on anticipated operating levels, the impact of ongoing initiatives to improve productivity, the terms of the renegotiated ALPA and PAFCA contracts, and the projected wages and benefits for ground, flight attendant and management employees. During the post-petition period, the Debtors also restructured their post-retirement benefits under section 1114 of the Bankruptcy Code, which is estimated to reduce retiree healthcare costs by approximately $50 million annually, beginning in 2007. Largely through the restructuring efforts, the Debtors reduced total labor cost from $5.1 billion in 2005 to $4.1 billion in 2006. In the Projection Period, labor costs, excluding profit sharing expense, are anticipated to decline in 2007 and then begin to grow in 2008, driven by rate increases and headcount growth, partially offset by full-year savings from Pilot Plan termination and additional productivity improvements. Contract Carrier Arrangements: Expenses incurred by the Debtors for their independent regional carriers3 include a base fee, a performance adjusted margin, and certain pass through expenses including fuel. The base fee is calculated based on contractual rates per various unit measures of capacity. The Debtors have competitively bid contractual agreements with certain regional carriers during the post-petition period, reducing the associated expenses, limiting expense growth, and improving operational performance. Contract Carrier expenses are expected to increase at an average annual rate of 8%, which incorporates the projected increases in jet fuel prices and regional capacity. 3 Financial Projections reflect operations under contract carrier arrangements with SkyWest Airlines, Inc., Atlantic Southeast Airlines, Inc., Chautauqua Airlines, Inc., Shuttle America Corporation, and Freedom Airlines, Inc. 10 Depreciation and Amortization: The Financial Projections include depreciation and amortization on a straight-line basis over the estimated useful life of the property and equipment, primarily flight equipment. Useful life generally ranges from 3 to 25 years depending on the fixed asset. The Financial Projections anticipate capital expenditures between $350 million and $1.9 billion per year in order to support the Debtors operations. Contracted Services: Contracted services expense is primarily comprised of charges for contracted airport services such as ramp and cargo handling, as well as temporary staffing. These expenses vary with the volume of the related activities and inflation, and are projected to decrease at an average annual rate of 1% through the Projection Period. Passenger Commissions and Other Selling Expenses: Passenger commissions and other selling expenses are comprised of charges for travel agency commissions and the costs of distributing Delta tickets through global distribution systems. These expenses generally tend to vary with total revenue and are projected to increase at an average annual rate of 6%. Landing Fees and Other Rent: The Debtors lease various airport and non-airport facilities for which they incur rent expense and municipal bond servicing costs. The Financial Projections reflect anticipated savings resulting from the planned restructuring of various municipal bond obligations and the Debtors ongoing efforts to optimize their use of real estate. Landing fees are incurred as a function of arrivals/departures, aircraft weight and rates established by the various airports. The Financial Projections anticipate a 1% average annual decrease in landing fees as a result of expected changes in rates charged by the various airports served by the Debtors. Aircraft Maintenance Materials and Outside Repairs: The Debtors outsourced all heavy airframe maintenance and certain engine maintenance activities in early 2006. Prior to outsourcing, labor costs were reported in Salaries and related costs. Beginning in 2006, outsourced labor costs are reflected in Aircraft maintenance materials and outside repairs. Beyond 2006, inflationary price increases and incremental maintenance requirements are expected to drive 3% average annual increases in aircraft maintenance materials and outside repairs over the Projection Period. Passenger Service: Passenger service is comprised of charges for catering and provisioning of supplies onboard the aircraft. These expenses tend to vary with the volume of flights and inflation, and are projected to increase at an average annual rate of 6%. Aircraft Rent: Aircraft rent reflects the operating expense associated with the Debtors aircraft financed under operating leases. In addition, the Debtors operate various aircraft under debt financing and capital lease structures. Expenses related to these aircraft are reflected in depreciation and interest expense, which includes debt discount amortization, where applicable. During the post-petition period, the Debtors significantly reduced their aircraft-related obligations by rejecting certain aircraft leases and certain mortgaged aircraft, and renegotiating aircraft obligations for certain retained aircraft. Many of these transactions are subject to definitive documentation and Bankruptcy Court approval. 11 Other: Other expenses are primarily comprised of communications, utilities, fuel taxes, professional fees and general supplies. In addition, expenses associated with providing services to third parties (i.e. maintenance, ground handling and training services) are included in Other expenses. These expenses tend to vary with the size of the related activities and inflation. However, as a result of the Debtors ongoing cost control efforts, aggregate Other expenses are forecast to decrease at an average annual rate of 4% during the Projection Period. Profit Sharing: The Financial Projections include profit-sharing for all employees, based on 15% of pre-tax profits up to $1.5 billion and 20% over $1.5 billion, ranging from $200 million to $450 million in 2007-2010. Income Taxes: The Debtors assume a statutory tax rate of approximately 38% throughout the Projection Period. The Debtors expect to utilize federal NOLs, subject to statutory limitations, to offset all of the Debtors anticipated federal taxable income during the Projection Period. The utilization of federal NOLs will significantly reduce the Debtors cash burden with respect to the payment of income taxes. Application of alternative minimum tax requirements results in minor cash tax payments during the Projection Period. Notes to Projected Consolidated Balance Sheet Assumptions Capital Structure: The Debtors capital structure is assumed to be as follows: (a) New Credit Facility: On or after the Effective Date, Reorganized Delta and certain of the Reorganized Subsidiary Debtors will enter into the New Credit Facility, which is expected to consist of revolving credit, letter of credit and term loan credit facilities. Reorganized Delta will use the New Credit Facility to repay the DIP Facility Claims and the Amex Post-Petition Facility Claims, to make other payments required under the Plan and to fund the post-reorganization operations of the Reorganized Debtors. The DIP Facility consists of a $600 million Term Loan A arranged by GECC, a $700 million Term Loan B arranged by GECC and a $600 million Term Loan C arranged jointly by GECC and Morgan Stanley. The estimated outstanding balance as of the Effective Date is $1.9 billion. The Amex Post-Petition Facility consists of substantially identical supplements to the two existing agreements under the SkyMiles Agreements for $350 million. The estimated outstanding balance as of the Effective Date is $94 million. The terms of the New Credit Facility will be set forth in a Plan Supplement. (b) Other Secured Debt: Secured notes payable to GECC that are secured by spare engines, spare parts and aircraft, respectively, will remain outstanding. An irrevocable, direct pay letter of credit issued by GECC backing outstanding principal amounts of certain municipal bonds will also remain in place. As a result, the Reorganized Debtor will continue to be obligated pursuant to a reimbursement agreement to reimburse GE for drawings under these letters of 12 credit, and these reimbursement obligations are also secured by aircraft and other collateral. (c) New Delta Debt Securities: Pursuant to the Plan, the Debtors anticipate issuing $875 million of new unsecured notes in satisfying claims negotiated with ALPA and the PBGC. Debt securities to be issued to ALPA are $650 million Senior Unsecured Notes ( ALPA Notes ), which will be issued no later than 120 days following the Effective Date. Upon issuance, an interest rate shall be determined to ensure that the ALPA Notes trade at par. The ALPA Notes are prepayable without penalty at any time with cash prior to their issuance. The terms provide for no amortization payments during the Projection Period. Debt securities to be issued pursuant to the PBGC Settlement Agreement are $225 million of Senior Unsecured Notes ( PBGC Notes ). The PBGC Notes are to be issued on the Effective Date or as soon as reasonably practical thereafter, but in no event more than seven business days after emergence. Upon issuance, an interest rate shall be determined to ensure that the PBGC Notes trade at par. The PBGC Notes are prepayable without penalty at any time with cash prior to their issuance and the Reorganized Debtor is required to do so on a pro rata basis to the extent that cash replaces all or a portion of the ALPA Notes. The terms provide for no amortization payments during the Projection Period. (d) New Delta Common Stock: For purposes of the Financial Projections, no value has been ascribed to the common equity of the Reorganized Debtors. To the extent the Debtors commence the New Equity Investment Rights Offering as discussed in the Plan, the proceeds would be incremental to any value ultimately ascribed to common equity. Notes to Projected Consolidated Cash Flow During the Projection Period, the Reorganized Debtors project their business operations to generate significant cash flow to support overall debt levels and reinvest in the business. During the Projection Period, the Reorganized Debtors business plan projects free cash flow in excess of $7 billion, provides for approximately $6 billion of required capital investment, and maintains unrestricted liquidity in excess of $2 billion at all times. Cash Flow From Operating Activities: The Reorganized Debtors project they will generate positive cash flow from operations throughout the Projection Period. Cash flow from operating activities is projected to increase from an estimated $1.6 billion cash inflow in 2006 to $3.4 billion cash inflow by 2010, for aggregate cash produced from operating activities during the Projection Period of $12.6 billion. Improved cash flow is a result of, among other things, the projected growth in revenue throughout the Projection Period, coupled with reductions in salaries and related costs, reductions in aircraft rents, concessions from vendors and various other cost reduction initiatives implemented during the Chapter 11 cases. 13 Cash Flow From Investing Activities: Net cash flow from investing activities is projected to use cash totaling $5.4 billion over the Projection Period. This reflects non-aircraft capital expenditures of between $600 million and $650 million per

https://templateshunter.com/financial.html