DBRS Confirms BFI Canada at BBB (low) with a Stable Trend

DBRS has today confirmed the rating on the Senior Secured Debentures of BFI Canada Holdings Inc. (BFI Holdings or, together with Ridge Landfill Trust, BFI or the Company) at BBB (low), with a Stable trend. The rating reflects BFI’s solid earnings profile, resulting from strong revenue growth from commercial, residential and industrial customers and steadily increasing operating margins. Over the past few years, BFI has achieved double-digit revenue increases (16.6% in 2007), driven mainly by organic growth (12.6% in 2007). Operating margins continue to strengthen due to strategic tuck-in acquisitions that improve route densities and internalization rates. As well, BFI is successful at passing on the bulk of fuel, environmental and other surcharges to its customers. For clarity, DBRS’s rating is on the debt at BFI, a subsidiary of BFI Canada Income Fund (BFI Fund). The financial results in this report are of BFI Fund as BFI does not publicly disclose its financial statements.

Ratings are further supported by the Company’s geographic diversification – it operates in 20 markets in five provinces – and its solid and stable financial profile. Earnings profile strength is provided by BFI’s low vulnerability to economic downturns, its size and number two position in the Canadian waste-management industry, and the vertical integration resulting from its operation of a waste-collection business and ownership of strategically located landfill sites.

The financial profile benefits from steadily improving operating cash flow in the Canadian business with only moderate increases in debt. BFI pays out a large portion of its cash flow to its parent, BFI Fund, which, in turn, distributes that cash to unitholders. As a result, the Company does not generate substantial excess free cash flow. However, pay-outs have consistently been at a level that allows BFI to fund maintenance capital expenditures as well as a portion of its growth capital expenditures.

The main risks to the outlook remain BFI’s acquisitive nature, as well as the potential curtailment of landfill operations servicing Montréal (Lachenaie site) and Calgary. BFI should continue to be acquisitive as the industry remains highly fragmented. DBRS believes that any acquisitions are likely to be financed with debt. The Company has recently received a one-year permit extention for the Lachenaie, Québec, landfill site. Although BFI was seeking a longer extension, this will allow for continued waste acceptance without disrupting the ongoing business. In Calgary, the existing landfill is nearing capacity and a variety of alternatives are being investigated. While BFI is expected to be successful in creating increased capacity in both locations, any prolonged interruption of service would have a negative impact on the business.

DBRS expects BFI’s earnings profile to remain strong over the near term due to solid revenue growth, stable operating margins and more certainty surrounding the Lachenaie landfill permit. Any large debt-financed acquisitions could result in ratings pressure. However, if the Company continues its current performance, leverage remains stable and the outcome of the Lachenaie landfill permit is favourable, ratings could improve over the medium term.