DBRS Changes Trend on Edmonton Regional Airports Authority to Stable

DBRS has today confirmed the rating of the Revenue Bonds issued by the Edmonton Regional Airports Authority (the Authority) at A (high) and has changed the trend to Stable from Negative. The revision of the trend to Stable reflects the recent improvements in passenger traffic, the Authority’s significant progress in the implementation of its capital program in a timely and cost-effective manner and DBRS’s expectation that while peak debt levels will place stress on credit metrics, key ratios will remain appropriate for the rating category. The Authority’s low user rates and fees and its willingness and ability to raise them as needed to keep its debt affordable are also factored into the trend change.

To date, the current phase of the Authority’s capital program (Expansion 2012) has been well managed. DBRS sees construction risk as materially diminished as approximately two-thirds of the funding has been committed, with significant progress having been made on several key components. At inception, Expansion 2012 was estimated at $1 billion, although significant savings have been achieved and the Authority now expects that Expansion 2012 will cost roughly $680 million. Cost savings have been realized in the areas of contract tendering (due to the weakened construction market), design modifications and changes to the construction plan, as well as by the reduction of contingency budgets, which had previously factored in peak-level labour and materials prices. To date, interim elements have been completed on time and under budget. Tendering for materials is essentially complete and remaining materials to be purchased are expected to total a modest amount, between $10 million and $15 million.

Following a 5.4% decline in 2009, passenger traffic has improved during the first nine months of 2010. On a year-to-date basis, traffic was up 0.5%, although DBRS notes that monthly traffic results have been volatile, and have only swung to a year-to-date gain from June onwards.

The Authority’s financial projections incorporate no planned Airport Improvement Fee (AIF) increases until 2012 and no changes to aeronautical rates until 2012, although DBRS notes that its aeronautical rates and fees are very low, and the Authority may change both its AIF and rates and fees at any time, subject only to the provision of a notice period. Additionally, the Authority has access to low borrowing rates and flexible repayment terms through the Alberta Capital Finance Authority, a Crown Agent of the Alberta government, which significantly enhances debt affordability.

Despite the Authority’s projections for marginally lower total debt than had been originally expected and moderate traffic growth, credit metrics will continue to be stressed in the next two to three years but should remain appropriate for the rating category. The Authority’s base case incorporates passenger growth of 0.6% in 2010 and 3.0% in 2011, the latter of which could be somewhat optimistic at this stage. The projections test the minimum debt service coverage ratio (DSCR) of roughly 1.25 times and debt per enplaned passenger of close to $300 which are considered to be key thresholds at the A (high) level. However, the Authority keeps close watch on these metrics and has advised that in the event that it anticipates that the DSCR or the debt per enplaned passenger will breach these target levels, it would take prompt action, possibly including rate or fee increases sooner than planned. DBRS notes that the Authority’s potential failure to maintain a DSCR of 1.25 times or greater and a debt per enplaned passenger of $300 and below is likely to have rating consequences.

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

The applicable methodology is Rating Canadian Airport Authorities, which can be found on our website under Methodologies.