DBRS Confirms Pearson International Fuel Facilities Corporation at A (low), Stable

DBRS has today confirmed the rating of A (low) and Stable trend on the Amortizing Bonds (the Bonds) of Pearson International Fuel Facilities Corporation (PIFFC or the Company). Fuel volumes for the fiscal year ended June 30, 2010, increased 4%, as opposed to declining the 5% forecast, driven by a slight increase in the number of flights served compared with the same period during the previous year and by increased fuel volumes from key airlines. The increased volumes, particularly higher itinerant volumes, coupled with higher rates, helped boost revenues by 28%, while operating expenses (excluding interest) declined by 17% as a result of lower legal fees and other cost savings. As of the date of this report, PIFFC counted 31 member airlines, the same as in F2009 since Skyservice left when it ceased operations and Olympic Air departed during F2010, but Eva Airways joined the consortium during F2010 and Hainan Airways joined in November 2010. Skyservice’s bankruptcy had no impact on the Company as the value of Skyservice’s fuel inventory and prepaid expenses more than offset the modest amount of accounts receivable attributable to Skyservice.

Higher revenues and lower expenses resulted in an EBITDA increase of 31% on a year-over-year basis. Despite higher interest costs, reflective of increased borrowings, the debt service coverage ratio (DCSR) improved to 1.25 times, a level DBRS considers more appropriate for the rating category. However, DBRS notes that the DSCR increase is attributable, in part, to the Company’s decision to increase cash balances prior to some fairly heavy capital expenditures in the coming years and that PIFFC may revert to managing its financial affairs closer to break-even levels at a future date.

Looking forward, PIFFC expects to accumulate cash balances in advance of the need to relocate the TF1 tank farm to Area 6C and remediate the TF1 site in support of the Pier G construction project at Pearson International Airport (Pearson). However, the Pier G project does not yet have a firm start date and the majority of amounts budgeted in F2010 for design, legal and other preliminary works have, for the most part, been pushed ahead to F2011. While it is expected that the Greater Toronto Airports Authority (GTAA) will pay for a portion of the capital expenditures associated with the TF1 relocation and site remediation, this amount has not yet been determined and as such, the ultimate cost to PIFFC is not yet known. For F2011, the Company budgeted for a decline in fuel volumes of approximately 0.8%, which DBRS views as relatively conservative, and latest indications are that fuel volumes will come in at higher levels. In 2011, the Company expects to develop an environmental remediation program for the TF1 site and commission a Phase II environmental site assessment and borehole program to determine the extent of soil and groundwater contamination. PIFFC expects that GTAA will pay for the majority of any remediation work should it be required.

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. DBRS has also considered the respective contractual frameworks, the strength of the airport served, the operating track record of the issuer and the affordability of its debt burden in the development of the rating.