DBRS Rates the Pearson International Fuel Facilities Corporation at A (low)

DBRS has today assigned a rating of A (low) with a Stable trend to the $110 million Amortizing Bonds of the Pearson International Fuel Facilities Corporation (PIFFC or the Company).

The rating reflects: (1) PIFFC’s exclusivity over the use of the fuelling system and provision of fuel distribution services at Pearson International Airport (Pearson) in Toronto, which is Canada’s busiest airport; (2) adequate diversification of airline credit risk through the residual cost recovery mechanism embedded in the Company’s operating structure and the sizable pool of member airlines in the fuel consortium; and (3) the strong incentive for airlines to join the fuel consortium, which is the body responsible for servicing the Company’s debt obligations.

PIFFC is a non-profit company that owns the fuel distribution system at Pearson and is exclusively responsible for the provision of fuel services at the airport until 2032. The Company leases its fuel system and subleases its exclusivity rights to the membership-based fuel consortium consisting of the main airlines serving Pearson. In return, the fuel consortium collectively assumes responsibility for the Company’s debt service obligations and pays all operating and maintenance expenditures related to the fuel system. While members are permitted to withdraw from the consortium at any time, airlines with meaningful service at the airport are unlikely to do so, given that members benefit from substantially lower fuel delivery costs, service priority over non-members and on-site storage capacity. Should an airline fail to pay fuel service fees, all members are obligated to make up for the loss, thus insulating the Company from non-payment by a single airline.

Although tight, PIFFC’s contractual structure is fairly complex compared to that of more traditional infrastructure credits, such as Canadian airport authorities. As such, the Company may be more susceptible to legal challenges in the event of disputes. PIFFC is also exposed to environmental liabilities resulting from potential fuel leaks, albeit significant precautions are taken in this regard through regular inspections of the fuel system, extensive employee training and ample insurance coverage.

PIFFC remains in a sound financial position as a result of its mandate to fully recover costs from airlines. The Company posted a healthy EBITDA of $5 million in FY2006, up notably from the prior year due in part to increased membership fees following the addition of Zoom Airlines and Pakistan Airlines to the fuel consortium. Currently at 30 members, the fuel consortium is the largest in Canada, although this benefit is mitigated by the fact that Air Canada (rated B (high)) and its Jazz affiliate together account for roughly 60% of all fuel dispensed at Pearson, notably higher compared to Montreal-Trudeau and Vancouver International Airports.

PIFFC intends to use the proceeds from the upcoming bond issue to refinance existing debt, pre-fund a six-month debt service reserve and finance its capital plan, which includes the construction of a new tank farm that will increase the somewhat limited fuel storage capacity at Pearson from about 1.5 days to 5.5 days. While expected to decline following the bond issue, the Company’s interest coverage ratio is projected to remain sound over the next few years, between 1.5 times to 2.0 times, which is generally in line with the ratios of other similarly-rated infrastructure credits.

Note:
All figures are in Canadian dollars unless otherwise noted.