DBRS Confirms Montreal International Fuel Facility Corp. at A (low)

DBRS has today confirmed the rating of A (low) and Stable trend on the Amortizing Bonds (the Bonds) of Montreal International Fuel Facility Corporation (MIFFC or the Company). Fuel volumes for 2010 increased 7.4% year-over-year as both member and itinerant volumes increased. This was a marked improvement from the 1.8% decline budgeted, reflective of a 2.3% increase in aircraft movements at Trudeau International Airport (Trudeau) and Mirabel International Airport (Mirabel) and the 5.1% growth in international flights. Despite the volume increases, financial performance improved only slightly in 2010 as EBITDA increased by 0.6% to $4.8 million. MIFFC’s total membership at the end of 2010 totalled 23 airlines, as no new airlines joined during the year and Skyservice left the consortium after ceasing operations in April 2010, although MIFFC was unaffected as the two months’ pre-payment of operating costs and fuel in the system more than covered any of Skyservice’s accounts payable. Year to date, Purolator has joined the consortium, bringing the number of member airlines to 24.

MIFFC’s budget assumes that total fuel volumes will decrease by 1.1% in 2011, which DBRS views as a reasonable assumption and which should lead to financial results that are slightly above break-even levels. For 2011, capital needs are expected to increase, with approximately $7.5 million in approved projects. These will be funded by available cash balances and MIFFC anticipates no borrowing requirements or maturities in the short term.

The ability to increase fees without prior notice to users reduces the need to maintain a sizeable cushion in the debt service coverage ratio (DSCR) while tight collection practices and two months’ prepayment of user fees assist in mitigating airline credit risk. Nonetheless, the DSCR of 0.99 times as calculated by DBRS (excluding one-time gains on the sale of assets) is notably below other airline-related infrastructure credits, and the practice of intentionally managing to a 1.0 times DSCR is considered too aggressive for the rating. Under the master trust indenture, MIFFC is required to set rates to achieve a look-forward DSCR of 1.0 times, although it is not an event of default if the Company fails to meet this level on a historical basis. Nonetheless, such a low DSCR leaves the Company vulnerable to revenue shocks, such as decreases in fuel volumes, air carrier financial difficulties, or declining air traffic linked to economic or geopolitical instability. Therefore, if by the next rating review MIFFC has not built up flexibility in its coverage ratio, DBRS will reconsider whether the A (low) rating and Stable trend remain appropriate for the credit. For 2011, MIFFC predicts that the DSCR will stabilize at close to 1.2 times in accordance with its rate-setting practices, roughly in line with the steady state DSCR expected by DBRS.

During 2010, there were no new environmental incidents, and environmental remediation work at Mirabel focused on drilling contaminant monitoring wells, although the drill results were inconclusive and further contaminant monitoring wells are being drilled. Also during 2010, the contract with the into-plane operator, CAFAS Fueling, ULC, was renewed, with unanimous support from members of the Fuel Committee.

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.