Ottawa Macdonald-Cartier International Airport Authority (“the Authority”) was incorporated January 1, 1995 as a corporation without share capital under Part II of the Canada Corporations Act and continued under the Canada Not-for-profit Corporations Act on January 17, 2014. All earnings of the Authority are retained and reinvested in airport operations and development.
The objects of the Authority are:
a) to manage, operate and develop the Ottawa Macdonald-Cartier International Airport (the “Airport”), the premises of which are leased to the Authority by the Government of Canada (Transport Canada – see note 12), and any other airport in the National Capital Region for which the Authority becomes responsible, in a safe, secure, efficient, cost effective and financially viable manner with reasonable airport user charges and equitable access to all carriers;
b) to undertake and promote the development of the airport lands, for which it is responsible, for uses compatible with air transportation activities; and
c) to expand transportation facilities and generate economic activity in ways which are compatible with air transportation activities.
The Authority is governed by a 14-member Board of Directors, 10 of whom are nominated by the Minister of Transport for the Government of Canada, the Government of the Province of Ontario, the City of Ottawa, the City of Gatineau, the Ottawa Chamber of Commerce, the Ottawa Tourism and Convention Authority, Chambre de commerce de Gatineau, and Invest Ottawa. The remaining four members are appointed by the Board of Directors from the community at large.
On January 31, 1997, the Authority signed a 60-year ground lease (that was later extended to 80 years in 2013) with the Government of Canada and assumed responsibility for the management, operation and development of the Airport.
The Authority is exempt from federal and provincial income tax, and Ontario capital tax. The Authority is domiciled in Canada. The address of the Authority’s registered office and its principal place of business is Suite 2500, 1000 Airport Parkway Private, Ottawa, Ontario, Canada, K1V 9B4.
The financial statements were authorized for issue by the Board of Directors on February 22, 2017.
The financial statements and amounts included in the notes to the financial statements are presented in Canadian dollars, which is the Authority’s functional currency.
The accounting policies set out below have been applied consistently to all periods presented in these financial statements.
The Authority prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). These financial statements have been prepared on a historical cost basis, except, as required, for the revaluation of certain financial assets and financial liabilities to fair value.
Cash and cash equivalents are defined as cash and short-term investments with original terms to maturity of 90 days or less. Such short-term investments are recorded at fair value.
Inventories of consumable supplies are valued at the lower of cost, determined on a first-in, first-out basis, and net realizable value, based on estimated replacement cost.
Property, plant, and equipment are recorded at cost, net of government assistance, if any, and include only the amounts expended by the Authority. These assets will revert to the Government of Canada upon the expiration or termination of the Authority’s ground lease with the Government of Canada. Property, plant and equipment do not include the cost of facilities which were included in the original ground lease with the Government of Canada. Incremental borrowing costs incurred during the construction phase of qualifying assets are included in the cost. During the years ended December 31, 2016 and 2015, no incremental borrowing costs were capitalized.
Amounts initially recognized in respect of an item of property, plant, and equipment are allocated to its significant parts and depreciated separately when the cost of the component is significant in relation to the total cost of the item and when its useful life is different from the useful life of the item. Residual values, the method of depreciation and estimated useful lives of assets are reviewed annually and adjusted if appropriate. Depreciation is provided on a straight-line basis over the useful lives of individual assets and their component parts as follows:
Construction in progress is recorded at cost and is transferred to buildings and support facilities and other asset categories as appropriate when the project is complete and the asset is available for use, or is written off when, due to changed circumstances, management does not expect the project to be completed. Assets under construction are not subject to depreciation until they are available for use.
The carrying amount of an item of property, plant, and equipment is derecognized on disposal or when no future economic benefits are expected from its use. The gain or loss arising from derecognition (determined as the difference between net disposal proceeds and the carrying amount of the item) is included as an adjustment of depreciation expense when the item is derecognized.
Borrowing costs are capitalized during the construction phase of qualifying assets, which are assets that take a substantial period of time to get ready for their intended use. The capitalization rate is the weighted average cost of capital of outstanding loans during the period, other than the borrowings made especially for the purpose of obtaining the asset. All other borrowing costs are recognized in interest expense on a net basis in the statement of operations and comprehensive income in the period in which they are incurred. As noted above, no such amounts were capitalized during the years ended December 31, 2016 and 2015.
Property, plant, and equipment and other assets are tested for impairment at the cash-generating unit level when events or changes in circumstances indicate that their carrying amount may not be recoverable, and in the case of indefinite life assets, at least annually. A cash-generating unit is the smallest group of assets that generates cash flows from continuing use that are largely independent of the cash flows of other assets or groups of assets. An impairment loss is recognized when the carrying value of the assets in the cash-generating unit exceeds the recoverable amount of the cash-generating unit.
Because the Authority’s business model is to provide services to the traveling public, none of the assets of the Authority are considered to generate cash flows that are largely independent of the other assets and liabilities of the Authority. Instead, all of the assets are considered part of the same cash-generating unit. In addition, the Authority’s unregulated ability to raise its rates and charges as required to meet its obligations, mitigates its risk of impairment losses.
Transaction costs relating to the issuance of long-term debt, including underwriting fees, professional fees, termination of interest-rate swap agreements and bond discounts, are deferred and amortized using the effective-interest-rate method over the term of the related debt. Under the effective-interest-rate method, amortization is recognized over the life of the debt at a constant rate applied to the net carrying amount of the debt. Amortization is included in interest expense. Deferred financing costs are reflected as a reduction in the carrying amount of related long-term debt.
Leases or other arrangements entered into for the use of an asset are classified as either finance or operating leases.
The Authority as lessee – Except for the ground lease, the Authority typically only enters into operating leases for minor items such as photocopy machines and printers. As these leases are classified as operating leases, the payments are recognized as an expense on a straight-line basis over the lease term.
Rent imposed under the ground lease with the Government of Canada is calculated based on airport revenues for the year as defined in the lease and is considered contingent rent. Ground rent expense is accounted for as an operating lease in the statement of operations and comprehensive income.
The Authority as lessor – The Authority subleases land and space to other entities under operating leases. Lease income from these operating leases is recognized in income on a straight-line basis over the term of the lease.
Landing fees, terminal fees, and parking revenues are recognized as the airport facilities are utilized. The Authority offers a rebate incentive program which provides airlines with incentives, such as waived landing and terminal fees, to operate flights to new destinations and as appropriate to the circumstances. These rebate obligations are recognized as a reduction of revenues until the expiry of the obligation.
Concession revenues are recognized on the accrual basis and calculated using agreed percentages of reported concessionaire sales, with specified minimum annual guarantees.
Rental revenues are recognized over the lives of respective leases, licences and permits. Tenant inducements associated with leased premises, including the value of rent-free periods, are deferred and amortized on a straight-line basis over the term of the related lease and recognized as a reduction of rental revenues.
Airport Improvement Fees (AIF), net of airline administrative fees, are recognized upon the enplanement of passengers using information from air carriers obtained after enplanement has occurred, together with historical experience in percentages of connecting and exempt passengers. Under an agreement with the airlines, AIF are paid by the airlines to airport authorities on a basis of estimated enplaned passengers, net of airline administrative fees, on the first of the month following the month of enplanement. Final settlement based on actual passenger volumes occurs at the end of the month following the month of enplanement.
The Authority accrues its obligations under pension and other post-employment benefit plans as employees render the services necessary to earn these benefits. The costs of these plans are actuarially determined using the projected unit credit method based on length of service. This determination reflects management’s best estimates at the beginning of each fiscal year of the rate of salary increases and various other factors including mortality, termination, retirement rates, and expected future health care costs. For the purpose of calculating the net interest cost on the pension obligations net of pension plan assets those assets are valued at fair value.
The post-employment pension benefit asset recognized on the balance sheet is the present value of the defined pension benefit obligation at the balance sheet date less the fair value of plan assets. The accrued benefit obligation is discounted using the market interest rate on high-quality corporate debt instruments as at the measurement date, approximating the terms of the related pension liability.
The other post-employment benefit liability recognized on the balance sheet is the present value of the defined benefit obligation at the balance sheet date. The accrued benefit obligation is discounted using the market interest rate on high-quality corporate debt instruments as at the measurement date, approximating the terms of the related pension liability.
Pension expense for the defined benefit pension plan includes current service cost and the net interest cost on the pension obligations net of pension plan assets calculated using the market interest rate on high-quality corporate debt instruments as determined for the previous balance sheet date. Past service costs are recognized immediately in the statement of operations. Pension expense is included in salaries and benefits on the statement of operations and comprehensive income.
Actuarial gains and losses (experience gains and losses that arise because actual experience for each year will differ from the beginning-of-year assumptions used for purposes of determining the cost and liabilities of these plans) and the effect of the asset ceiling are recognized in full as re-measurements of defined benefit plans in the period in which they occur in other comprehensive income without recycling to the statement of operations and comprehensive income in subsequent periods.
Pension expense for the defined contribution pension plan is recorded as the benefits are earned by the employees covered by the plan.
The Authority recognizes the expense related to salaries, at risk pay, and compensated absences, such as sick leave and vacations, as short-term benefits in the period the employee renders the service. Costs related to employee health, dental and life insurance plans are recognized in the period that expenses are incurred. The liabilities related to these benefits are not discounted due to their short-term nature.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, commitments and contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accounting estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. These accounting estimates and assumptions are reviewed on an ongoing basis. Actual results could significantly differ from those estimates. Adjustments, if any, will be reflected in the statement of operations in the period of settlement or in the period of revision and future periods if the revision affects both current and future periods.
Key judgment areas, estimations and assumptions include the useful lives of property, plant and equipment, valuation adjustments including allowances for uncollectible accounts, the cost of employee future benefits, and provisions for contingencies.
Useful lives of property, plant and equipment – Critical judgments are used to determine depreciation rates, and useful lives and residual values of assets that impact depreciation amounts.
Collectability of trade receivables – The Authority establishes a general allowance for uncollectible accounts that involves management review of individual receivable balances based on individual customer credit worthiness, current economic trends and the condition of the industry as a whole, and analysis of historical bad debts.
The cost of employee future benefits – The Authority accounts for pension and other post-employment benefits based on actuarial valuation information provided by the Authority’s independent actuaries. These valuations rely on statistical and other factors in order to anticipate future events. These factors include discount rates, and key actuarial assumptions such as expected salary increases, expected retirement ages, and mortality rates.
Provisions for contingencies – Provisions are recognized when the Authority has a present legal or constructive obligation as a result of past events, when it is probable that an outflow of economic resources will be required to settle the obligation, and when the amount can be reliably estimated.
Financial assets and liabilities are recognized when the Authority becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial assets and all substantial risks and rewards are transferred. A financial liability is derecognized when it is extinguished, discharged, cancelled or expired.
All financial instruments measured at fair value are classified according to the following hierarchy:
Valuation based on quoted prices in active markets for identical assets or liabilities obtained from the investment custodian, investment managers or dealer markets.
Valuation techniques with significant observable market parameters including quoted prices for assets in markets that are considered less active.
Valuation techniques with significant unobservable market parameters.
All financial instruments are classified into one of the following five categories: held-for-trading, loans and receivables, held-to-maturity, available-for-sale, and other financial liabilities. Initial measurement of financial instruments is at fair value, subsequent measurement of financial instruments depends on their classification. Transaction costs are expensed as incurred for financial instruments classified as held-for-trading.
The Authority’s financial assets including cash and cash equivalents, accounts receivable, the Debt Service Reserve Fund and Sinking Fund are classified as loans and receivables. As such, they are recorded at amortized cost which approximates fair value.
The Authority’s financial liabilities including accounts payable and accrued liabilities, and long-term debt are classified as other financial liabilities and are accounted for at amortized cost.
Financing costs are included in the related long-term debt balances using the effective interest method.
An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount.
Comprehensive income is defined to include net income plus or minus other comprehensive income. Other comprehensive income includes actuarial gains and losses related to the Authority’s pension plan and other post-employment benefits. Other comprehensive income is accumulated in a separate component of equity called accumulated other comprehensive income.
Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after January 1, 2017 with earlier application permitted where applicable. The Authority is assessing currently the impact of these standards and amendments.
IFRS 9 – Financial Instruments, effective January 1, 2018 addresses classification, measurement and recognition of financial assets and financial liabilities. It introduces a model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially reformed approach to hedge accounting. The new single, principle-based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses.
IFRS 15 – Revenue from contracts with customers, effective years beginning on or after January 1, 2018. Its objective is to provide a single comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. It contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods and services to customers at an amount that the entity expects to be entitled to in exchange for those goods and services.
IFRS 16 – Leases, effective for years beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 at or before the date of initial application of IFRS 16. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the entity. This eliminates the dual accounting model for lessees such that all operating leases will be recorded on the balance sheet. This will impact the timing of recognition and nature of expenses associated with the lease agreements.
IAS 7 – Statement of Cash Flows – The IASB published final amendments to IAS 7 on January 29, 2016. The amendments are intended to clarify IAS 7 to improve information provided to users of financial statements about an entity’s financing activities. The amendments come with the objective that entities shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendments are effective for annual periods beginning on or after January 1, 2017. The Authority has made a preliminary assessment that changes to IAS 7 will not have a significant impact on the Authority’s financial statements beyond disclosure.
On June 9, 2015, the Authority completed the issuance of $300.0 million of Series E Amortizing Revenue Bonds under the Master Trust Indenture (see note 8). Of the net proceeds from this issuance, $200.0 million was placed in a segregated fund maintained by the trustee under the Master Trust Indenture and has been invested in accordance with the Board approved investment policy. These investments will be used to retire the Authority’s Series D Revenue Bonds maturing on May 2, 2017.
The Sinking Fund investments consist of the following:
|(in thousands of Canadian Dollars)||2016
|Interest bearing deposits in Schedule 1 bank investment accounts||137,300||52,500|
|Guaranteed investment certificates with various Schedule 1 banks||62,700||47,500|
|Canada Housing Trust mortgage bonds due December 15, 2016||–||100,000|