Notes to financial statements

[tabular amounts in thousands, unless otherwise noted]

December 31, 2018

1. DESCRIPTION OF BUSINESS

Ottawa Macdonald-Cartier International Airport Authority [“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 [“Airport”], the premises of which are leased to the Authority by the Government of Canada [Transport Canada – see note 13], 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 that 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 Board of Trade, 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 taxes 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.

2. Basis of preparation and summary of significant accounting policies

The financial statements were authorized for issue by the Board of Directors on February 20, 2019. 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 Authority prepares its financial statements in accordance with International Financial Reporting Standards [“IFRS”]. These financial statements have been prepared on a going concern basis using the historical cost basis, except for the revaluation of certain financial assets and financial liabilities measured at fair value, which include the post-employment benefit liability.

Cash and cash equivalents

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.

Consumable supplies

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

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 that 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, 2018 and 2017, 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:

Buildings and support facilities 3–40 years
Runways, roadways and other paved surfaces 10–50 years
Information technology, furniture and equipment 2–25 years
Vehicles 3–20 years
Land improvements 10–25 years

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

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 gross 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, 2018 and 2017.

Impairment of non-financial assets

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 amounts of the cash-generating unit.

Because the Authority’s business model is to provide services to the travelling 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. Consequently, all of the assets are considered part of the same cash-generating unit. In addition, the Authority’s unfettered ability to raise its rates and charges as required to meet its obligations mitigates its risk of impairment losses.

Deferred financing costs

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 of deferred financing costs is included in interest expense. Deferred financing costs are reflected as a reduction in the carrying amount of related long-term debt.

Leases

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.

Revenue recognition

The Authority’s principal sources of revenue comprise from the rendering of services for landing fees, terminal fees, airport improvement fees [“AIF”], parking, concession, land and space rental and other income.

Revenue is measured by reference to the fair value of consideration received or receivable by the Authority for services rendered, net of rebates and discounts.

Revenue is recognized when the amount of revenue can be measured reliably, when it is probable that the economic benefits associated with the transaction will flow to the entity, when the costs incurred or to be incurred can be measured reliably, and when the criteria for each of the Authority’s different revenue activities have been met, as described below.

Landing fees, terminal fees and parking revenues are recognized as the Airport facilities are utilized.

AIF are recognized upon the enplanement of origination and destination passengers using information from air carriers obtained after enplanement has occurred. AIF revenue is remitted to the Authority based on air carriers self-assessing their passenger counts. An annual reconciliation is performed by the Authority with air carriers.

Concession revenues are recognized on the accrual basis and calculated using agreed percentages of reported concessionaire sales, with specified minimum annual guarantees.

Land and space rental revenues are recognized over the lives of respective leases, licenses 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.

Other income includes income from other operations and is recognized as earned.

Pension plan and other post-employment benefits

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 as 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 as 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 and comprehensive income. 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 remeasurements of defined benefit plans in the period in which they occur in other comprehensive income [“OCI”] 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.

Employee benefits other than post-employment benefits

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.

Financial instruments

Financial assets

Effective January 1, 2018, with the adoption of IFRS 9, Financial Instruments [“IFRS 9”], the Authority classifies its financial assets in the measurement categories outlined below, and the classification will depend on the type of financial assets and the contractual terms of the cash flows.

  1. Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Financial assets at amortized cost are initially recognized at fair value plus any transaction costs. They are subsequently measured at amortized cost using the effective interest rate, net of an allowance for expected credit loss [“ECL”]. The ECL is recognized in the statement of operations and comprehensive income for such instruments. Gains and losses arising on derecognition are recognized directly in the statement of operations and comprehensive income and presented in other gains.
  2. Fair value through other comprehensive income [“FVOCI”]: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the financial assets’ cash flows represent solely payments of principal and interest. Financial assets at FVOCI are initially recognized at fair value plus any transaction costs. They are subsequently measured at fair value. ECL are recognized on financial assets held at FVOCI. The cumulative ECL allowance is recorded in OCI and does not reduce the carrying amount of the financial asset on the balance sheet. The change in the ECL allowance is recognized in the statement of operations and comprehensive income. Unrealized gains and losses arising from changes in fair value are recorded in OCI until the financial asset is derecognized, at which point cumulative gains or losses previously recognized in OCI are reclassified from accumulated other comprehensive income [“AOCI”] to net gains (losses) on financial instruments.
  3. Fair value through profit or loss [“FVTPL”]: Assets that do not meet the criteria for classification as financial assets at amortized cost or financial assets at FVOCI are measured at FVTPL unless an irrevocable election has been made at initial recognition for certain equity investments to have their changes in fair value be presented in OCI. Financial assets at FVTPL are initially recognized and subsequently measured at fair value. Unrealized gains and losses arising from changes in fair value and gains and losses realized on disposition are recorded in net gains (losses) on financial instruments. Transaction costs are expensed as incurred.

The Authority’s financial assets including cash and cash equivalents, trade and other receivables and the Debt Service Reserve Fund are classified at amortized cost.

Financial liabilities

Financial liabilities are classified as either financial liabilities at FVTPL or loans and borrowings at amortized cost which is essentially unchanged from IAS 39, Financial Instruments: Recognition and Measurement [“IAS 39”]. All financial liabilities are initially recognized at fair value plus any transaction costs. They are subsequently measured depending on their classification at fair value with gains and losses through statement of operations and comprehensive income or at amortized cost using the effective interest rate method, respectively.

The Authority’s financial liabilities including accounts payable and accrued liabilities and long-term debt are classified at amortized cost.

Fair value hierarchy

When measuring the fair value of an asset or a liability, the Authority uses market observable data as much as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

  • Level 1:  Valuation based on quoted prices in active markets for identical assets or liabilities obtained from the investment custodian, investment managers or dealer markets.
  • Level 2:  Valuation techniques with significant observable market parameters including quoted prices for assets in markets that are considered less active.
  • Level 3:  Valuation techniques with significant unobservable market parameters.

The Authority recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

There have been no transfers between levels of the fair value hierarchy as at the end of the reporting period.

Measurement of expected credit losses

Expected credit loss is defined as the weighted average of credit losses determined by evaluating a range of possible outcomes using reasonable supportable information about past events and current and forecasted future economic conditions.

The Authority has developed an impairment model to determine the allowance for ECL on accounts receivable classified at amortized cost. The Authority determines an allowance for ECL at initial recognition of the financial instrument that is updated at each reporting period throughout the life of the instrument.

The ECL allowance is based on the ECL over the life of the financial instrument [“Lifetime ECL”], unless there has been no significant increase in credit risk since initial recognition, in which case the ECL allowance is measured at an amount equal to the portion of Lifetime ECL that results from default events possible within the next 12 months.  ECL is determined based on three main drivers: probability of default, loss given default and exposure at default.

The Authority assesses on a forward-looking basis the ECL associated with its financial instruments carried at amortized cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. The Authority uses judgment in making these assumptions and selecting the inputs to the impairment calculation based on the Authority’s past history, existing market conditions as well as forward-looking estimates at the end of each reporting period.

The Authority has adopted the simplified approach, and as such, the Authority does not track changes in its customers’ credit risk, but instead recognizes a loss allowance based on Lifetime ECLs at each reporting date. The Authority has established a provision that is based on its historical credit loss experience adjusted for forward-looking factors specific to the debtors and the economic environment.

Therefore, the Authority recognizes impairment and measures ECL as Lifetime ECL. The carrying amount of these assets in the balance sheet is stated net of any loss allowance. Impairment of trade and other receivables is presented within materials, supplies and service expenses in the statement of operations and comprehensive income.

The Authority will use a “three-stage” model for impairment, if any since initial recognition, on financial instruments other than trade and other receivables based on changes in credit quality as summarized below.

  • Stage 1 — A financial instrument that is not credit-impaired on initial recognition is classified in “Stage 1” and its credit risk is continuously monitored by the Authority. Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next 12 months.
  • Stage 2 — If a significant increase in credit risk since initial recognition is identified, the financial instrument is moved to “Stage 2” but is not yet deemed to be credit-impaired. The ECL is measured based on ECLs on a lifetime basis.
  • Stage 3 — The financial instrument is credit-impaired and the financial instrument is written off as a credit loss.

Estimation uncertainty and key judgments

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 and comprehensive income 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 expected credit losses, 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.

Loss allowance

The Authority establishes an ECL that involves management review of individual receivable balances based on individual customer creditworthiness, current economic trends and the condition of the industry as a whole, and analysis of historical bad debts. The Authority is not able to predict changes in the financial condition of its customers, and if circumstances related to its customers’ financial condition deteriorate, the estimates of the recoverability of trade accounts receivable could be materially affected and the Authority may be required to record additional allowances. Alternatively, if the Authority provides more allowances than needed, a reversal of a portion of such allowances in future periods may be required based on actual collection experience.

The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns [i.e., by geography, product type, customer type and rating and coverage by letters of credit and other forms of credit insurance], initially based on the Authority’s historical observed default rates.

The provision calculation will adjust the historical credit loss experience by also considering forward-looking information.  Accordingly, at every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates and their impact are analyzed.

The assessment of the correlation between historical observed default rates and forecast economic conditions will impact the ECL calculation. The Authority’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future.

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.

Payment in lieu of municipal taxes

In December 2000, the Province of Ontario amended the Assessment Act to change the methodology for determining payments in lieu of municipal taxes [“PILT”] for airports in Ontario. Under regulations signed in March 2001, PILT paid by airport authorities designated under the Airport Transfer (Miscellaneous Matters) Act are based on a fixed rate specific to each airport multiplied by the airport’s prior year passenger volumes. This legislation effectively removes airports in Ontario from the effects of market value assessment.

Comprehensive income (loss)

Comprehensive income (loss) is defined to include net earnings plus or minus other comprehensive income (loss). Other comprehensive income (loss) includes actuarial gains and losses related to the Authority’s pension plan and other post-employment benefits. Other comprehensive income (loss) is accumulated in a separate component of equity called accumulated other comprehensive loss.

Current accounting changes

We actively monitor new standards and amendments to existing standards that have been issued by the International Accounting Standards Board [“IASB”].

IAS 7, Statement of Cash Flows [“IAS 7”]

Amendments made to IAS 7 were part of a major initiative to improve presentation and disclosure in financial reports. The Authority has adopted the standard and has reflected the required disclosures in the financial statements.

IFRS 9, Financial instruments

The Authority adopted IFRS 9 in these financial statements effective January 1, 2018. This new standard introduces a revised approach for the classification of financial assets based on the characteristics of the cash flows of the financial assets and the business model in which financial assets are held. IFRS 9 also introduces a new hedge accounting model that is more closely aligned with risk-management activities and a new ECL model for calculating impairment on financial assets. Furthermore, additional disclosure is required with regards to an entity’s risk management strategy, its cash flows for hedging activities and the impact of hedge accounting on its financial statements. As the Authority currently does not have any active hedging activities, this new amendment related to hedging has no impact on the financial statements. Disclosures to reflect the differences between IAS 39 and IFRS 9 include transitional disclosures, which have been disclosed in these financial statements along with expanded quantitative and qualitative credit risk disclosures presented in note 11.

Reclassification of assets pursuant to IFRS 9 – On January 1, 2018, management has assessed which business models apply to the financial assets held by the Authority and has classified its financial instruments into the appropriate IFRS 9 categories. Cash and cash equivalents and trade and other receivables were reclassified from the loans and receivable category under IAS 39 to the amortized cost category under IFRS 9. There were no reclassifications of financial liabilities. The reclassification under IFRS 9 did not have an impact on the financial statements.

The new requirements are presented in note 2, Financial instruments and the following table summarizes the classification changes:

Liabilities

Financial instrument type IAS 39 IFRS 9
Classification Carrying amount
$
Classification Carrying amount
$
Assets
Cash and cash equivalent Loans and receivables 1 29,454 Amortized cost 29,454
Trade and other receivables Loans and receivables 1 9,462 Amortized cost 9,462
Debt Service Reserve Fund Loans and receivables 1 6,495 Amortized cost 6,495
Other assets N/A 449,547 N/A 449,547
Total assets 494,958 494,958
Accounts payable and accrued liabilities Other financial liabilities 1 14,967 Amortized cost 14,967
Current portion of long-term debt Other financial liabilities 1 4,152 Amortized cost 4,152
Long-term debt Other financial liabilities 1 420,377 Amortized cost 420,377
Other liabilities N/A 9,233 N/A 9,233
Total liabilities 448,729 448,729

1 Financial instruments reclassified to new categories under IFRS 9 with no changes to their measurement basis. Previous categories under IAS 39 were “retired”.

Impairment of financial assets – Effective January 1, 2018, the Authority assessed on a forward-looking basis the expected credit losses associated with its financial instruments carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. The Authority uses judgment in making these assumptions and selecting the inputs to the impairment calculation based on the Authority’s past history, existing market conditions as well as forward-looking estimates at the end of each reporting period. There was no material impact on the loss allowance recognized on the financial statements.

The Authority has not restated comparative figures for financial instruments for dates and periods before January 1, 2018 as permitted by IFRS 9, and therefore the comparative information for 2017 is reported in accordance with IAS 39. Any differences in classification of financial instruments were not material.

IFRS 15, Revenue from Contracts with Customers [“IFRS 15”]

The Authority adopted IFRS 15 for the year beginning on January 1, 2018. IFRS 15 replaces IAS 18, Revenue, IAS 11, Construction Contracts and related interpretations. IFRS 15 sets out the requirements for recognizing revenue that apply to all contracts with customers [except for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments].

The Authority has adopted IFRS 15 using the fully retrospective method. Therefore, comparative information for 2017 has been restated.

As a result of the adoption of the standard, the Authority is now reporting the air carrier administration fees charged on AIF collected on behalf of the Authority in the materials, supplies and services expense on the statement of operations and comprehensive income rather than an offsetting impact to gross AIF revenue [2018 – $3.3 million [2017 – $3.1 million]].

There were no other changes to the financial statements except for expanded disclosure requirements as a result of the adoption of IFRS 15.

Future changes in accounting policies

The following new standards and interpretations issued by the IASB are currently being assessed as having a possible impact on the Authority in the future. The Authority intends to adopt each of these standards and related interpretation guidance, if applicable, as at the required effective dates indicated below and is currently assessing the impact on its financial statements.

IFRS 16, Leases [“IFRS 16”], effective for annual periods beginning on or after January 1, 2019. This standard was issued in January 2016 and sets out the principles for the recognition, measurement, presentation and disclosure of leases. This standard will replace the current IAS 17, Leases. 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.

The accounting for lessors will not significantly change, and the Authority has evaluated the quantitative impact of this standard on the ground lease, and as such there will be no impact on the financial statements with respect to accounting for the ground lease under the new standard as lease payments are contingent based on revenue inflows and therefore the expense will continue to be recognized in the statement of operations and comprehensive income on an accrual basis. The Authority is currently assessing other leases and subleases for potential impact on the financial statements. The Authority intends to adopt IFRS 16 using the modified retrospective approach, whereby the cumulative effect of initially applying the standard would be recognized as an adjustment to the opening balance of equity at January 1, 2019, and comparative information, which will not be restated, will continue to be reported under IAS 17 and related interpretations. The Authority will also apply the transition relief whereby it is not required to reassess and reflect in the prior periods whether a contract is, or contains, a lease at the date of contract origination.

Amendments to IAS 19, Employee Benefits. This standard was amended to modify the guidance in connection with defined benefit plans and accounting for plan amendments, settlements or curtailments. The amendments are effective for annual periods beginning on or after January 1, 2019. The adoption of these amendments will not have an impact on the financial statements at this time.

3. Sinking Fund investments

On June 9, 2015, the Authority completed the issuance of $300.0 million of Series E Amortizing Revenue Bonds under the Master Trust Indenture [note 8]. Of the net proceeds from this issuance, $200.0 million was placed in a segregated fund [“Sinking Fund”] maintained by the trustee under the Master Trust Indenture [“Trustee”] and was invested in accordance with the Board-approved investment policy. These investments matured prior to the Authority’s Series D Revenue Bonds maturing on May 2, 2017.

4. Property, plant and equipment

2018 Buildings and support facilities
$
Runways, roadways and other paved surfaces
$
Information technology, furniture and equipment
$
Vehicles
$
Land improvements
$
Construction in progress
$
Total
$
Gross value
As at – January 1, 2018 491,577 109,165 40,325 32,274 11,155 14,741 699,237
Additions 896 10 36,121 37,027
Transfer 12,848 9,610 10,328 3,627 82 (36,495)
Disposals (3,198) (10) (465) (483) (149) (4,305)
As at December 31, 2018 502,123 118,765 50,198 35,418 11,088 14,367 731,959
Accumulated depreciation
As at – January 1, 2018 177,559 33,995 27,526 13,777 7,395 260,252
Depreciation 20,468 4,451 3,837 2,014 579 31,349
Disposals (3,198) (10) (465) (424) (149) (4,246)
As at December 31, 2018 194,829 38,436 30,898 15,367 7,825 287,355
Net book value
As at December 31, 2018 307,294 80,329 19,300 20,051 3,263 14,367 444,604

2017 Buildings and support facilities
$
Runways, roadways and other paved surfaces
$
Information technology, furniture and equipment
$
Vehicles
$
Land improvements
$
Construction in progress
$
Total
$
Gross value
As at – January 1, 2017 475,429 103,995 38,053 30,043 10,817 9,889 668,226
Additions 71 1,347 2,348 34 31,728 35,528
Transfer 17,402 5,170 3,573 427 304 (26,876)
Disposals (1,325) (2,648) (544) (4,517)
As at December 31, 2017 491,577 109,165 40,325 32,274 11,155 14,741 699,237
Accumulated depreciation
As at – January 1, 2017 160,159 29,668 26,619 12,431 6,906 235,783
Depreciation 18,725 4,327 3,555 1,890 489 28,986
Disposals (1,325) (2,648) (544) (4,517)
As at December 31, 2017 177,559 33,995 27,526 13,777 7,395 260,252
Net book value
As at December 31, 2017 314,018 75,170 12,799 18,497 3,760 14,741 438,985

5. Other assets

2018
$
2017
$
Interest in future proceeds from 4160 Riverside Drive, at cost 2,930 2,930
Tenant improvements and leasehold inducements, net of amortization 2,320 2,398
5,250 5,328

Interest in future proceeds from 4160 Riverside Drive

In an agreement signed on May 27, 1999, the Authority agreed to assist the Regional Municipality of Ottawa-Carleton [now the City of Ottawa, the “City”] in acquiring lands municipally known as 4160 Riverside Drive by contributing to the City 50% of the funds required for the acquisition. In return, the City agreed to place restrictions on the use of the lands to ensure the lands are used for purposes that are compatible with the operations of the Authority. In addition, the Authority will receive 50% of the net proceeds from any future sale, transfer, lease or other conveyance of the lands.

Tenant improvements and leasehold inducements

During 2011, the Authority entered into a long-term lease with a subtenant that included a three-year rent-free period and provided, as a tenant inducement, a payment of $1.5 million towards the cost of utilities infrastructure and other site improvements. 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. The value of these tenant inducements is being recognized as a reduction in rent during the first 20 years of the 47-year term of the lease.

6. Credit facilities

The Authority maintains access to an aggregate of $140.0 million [2017 – $140.0 million] in committed credit facilities [“Credit Facilities”] with two Canadian banks. The 364-day Credit Facilities that expired on October 13, 2018 have been extended for another 364-day term expiring on October 13, 2019. The Credit Facilities are secured under the Master Trust Indenture [note 8] and are available by way of overdraft, prime rate loans, or bankers’ acceptances. Indebtedness under the Credit Facilities bears interest at rates that vary with the lender’s prime rate and bankers’ acceptance rates, as appropriate.

The following table summarizes the amounts available under each of the Credit Facilities, along with their related expiry dates and intended purposes:

Type of facility Maturity Purpose 2018
(IN MILLIONS OF CANADIAN DOLLARS)
2017
(IN MILLIONS OF CANADIAN DOLLARS)
Revolver – 364-day October 13, 2019 General corporate and capital expenditures 40 40
USD contingency [USD10 million] October 13, 2019 Interest rate hedging 14 14
Letter of credit October 13, 2019 Letter of credit and letter of guarantee 6 6
Revolver – 5-year May 15, 2020 General corporate and capital expenditures 80 80
140 140

As at December 31, 2018, $15.8 million of the Credit Facilities has been designated to the Operating and Maintenance Reserve Fund [note 8(a)].

In order to satisfy the Debt Service Reserve Fund requirement for the Series E Bonds, $5.9 million of the Credit Facilities had been designated to an irrevocable standby letter of credit in favour of the Trustee.

7. Capital management

The Authority is continued without share capital under the Canada Not-for-profit Corporations Act and, as such, all earnings are retained and reinvested in airport operations and development. Accordingly, the Authority’s only sources of capital for investing in airport operations and development are bank debt, long-term debt and accumulated income included on the Authority’s balance sheet as retained earnings.

The Authority incurs debt, including bank debt and long-term debt, to finance development. It does so on the basis of the amount that it considers it can afford and manage based on revenue from AIF and to maintain appropriate debt service coverage and long-term debt per enplaned passenger ratios. This provides for a self-imposed limit on what the Authority can spend on major development of the Airport, such as the Authority’s major infrastructure construction programs.

The Authority manages its rates and charges for aeronautical and other fees to safeguard the Authority’s ability to continue as a going concern and to maintain a conservative capital structure. It makes adjustments to these rates in light of changes in economic conditions, operating expense profiles and regulatory environment to maintain sufficient net earnings to meet ongoing debt coverage requirements.

The Authority is not subject to capital requirements imposed by a regulator, but manages its capital to comply with the covenants of the Master Trust Indenture [note 8(a)] and to maintain its credit ratings in order to secure access to financing at a reasonable cost.

8. Long-term debt

2018
$
2017
$
6.973% Amortizing Revenue Bonds, Series B, due May 25, 2032, interest payable on May 25 and November 25 of each year until maturity commencing November 25, 2002, scheduled accelerating semi-annual instalments of principal payable on each interest payment date commencing November 25, 2004 through to May 25, 2032 123,311 127,462
3.933% Amortizing Revenue Bonds, Series E, due June 9, 2045, interest payable on June 9 and December 9 of each year commencing December 9, 2015 followed by scheduled fixed semi-annual instalments of $9,480 including principal and interest payable on each interest payment date commencing December 9, 2020 through to June 9, 2045 300,000 300,000
423,311 427,462
Less deferred financing costs 2,711 2,933
420,600 424,529
Less current portion 4,643 4,152
Long-term debt 415,957 420,377

(a) Bond issues

The Authority issues revenue bonds [collectively, “Bonds”] under a trust indenture dated May 24, 2002 [as amended or supplemented, the “Master Trust Indenture”]. In May 2002, the Authority completed its original $270.0 million revenue bond issue with two series, the $120.0 million Revenue Bonds, Series A at 5.64% due on May 25, 2007, and the $150.0 million Amortizing Revenue Bonds, Series B at 6.973% due on May 25, 2032. In May 2007, the Authority completed a $200.0 million Revenue Bond issue, in part to refinance the Series A  Revenue Bonds repaid on May 25, 2007. On May 2, 2017, $200 million of Series D Revenue Bonds at 4.733% matured and were repaid as planned. $200 million of funds raised as part of the Series E financing in June 2015 and set aside in a segregated Sinking Fund were used to redeem the Series D Bonds.

On June 9, 2015, the Authority completed a $300.0 million Amortizing Revenue Bonds, Series E issue, which bear interest at a rate of 3.933% due on June 9, 2045. Part of the net proceeds from this offering were used to prefund the repayment of the Series D Bonds by depositing $200.0 million into a segregated fund held by the Trustee under the Master Trust Indenture [note 3].

The Series B Revenue Bonds are redeemable, in whole or in part, at the option of the Authority at any time, and the Series E Bonds are redeemable until six months prior to the maturity date, upon payment of the greater of: [i] the aggregate principal amount remaining unpaid on the Bonds to be redeemed; and [ii] the value that would result in a yield to maturity equivalent to that of a Government of Canada bond of equivalent maturity plus a premium. The premium is 0.24% for the Series B Bonds and 0.42% for the Series E Bonds. If the Series E Bonds are redeemed within six months of the maturity date, the Series E Bonds will be redeemable at a price equal to 100% of the principal amount outstanding plus any accrued and unpaid interest.

The net proceeds from these offerings were used to finance the Authority’s infrastructure construction programs, and for general corporate purposes. These purposes included refinancing existing debt and bank indebtedness incurred by the Authority in connection with these construction programs and funding of the Debt Service Reserve Fund [see below].

Under the Master Trust Indenture, all of these bond issues are direct obligations of the Authority ranking pari passu with all other indebtedness issued. All indebtedness, including indebtedness under Credit Facilities, is secured under the Master Trust Indenture by an assignment of revenues and related book debts, a security interest on money in reserve funds and certain accounts of the Authority, a security interest in leases, concessions and other revenue contracts of the Authority, and an unregistered mortgage of the Authority’s leasehold interest in airport lands.

The Authority has the unfettered ability to raise its rates and charges as required to meet its obligations. Under the Master Trust Indenture, the Authority is required to take action, such as increasing its rates, should its projected debt service coverage ratio fall below 1.0. If this debt service covenant is not met in any year, the Authority is not in default of its obligations under the Master Trust Indenture as long as the test is met in the subsequent year.

Under the terms of the Master Trust Indenture, the Authority is required to maintain with the Trustee, a Debt Service Reserve Fund equal to six months’ debt service in the form of cash, qualified investments or letter of credit. As at December 31, 2018, the balance of cash and qualified investments held to satisfy the Series B Bonds in the Debt Service Reserve Fund requirement is $6.6 million. Furthermore, in order to satisfy the Debt Service Reserve Fund requirement for the Series E Bonds, $5.9 million of the Credit Facilities has been designated to an irrevocable standby letter of credit in favour of the Trustee. These trust funds are held for the benefit of the bondholders for use and application in accordance with the terms of the Master Trust Indenture. In addition, the Authority is required to maintain an Operating and Maintenance Reserve Fund equal to 25% of defined operating and maintenance expenses from the previous twelve months. As at December 31, 2018, $15.8 million [2017 – $14.4 million] of the Credit Facilities has been designated to the Operating and Maintenance Reserve Fund [note 6].

As at December 31, 2018, the Authority is in full compliance with the provisions of its debt facilities, including the Master Trust Indenture’s provisions related to reserve funds, the flow of funds and the rate covenant.

(b) Interest expense

2018
$
2017
$
Bond interest 20,589 24,044
Other interest and deferred financing expense 229 274
20,818 24,318

(c) Future annual principal payments for all long-term debt

$
2019 4,643
2020 8,753
2021 13,116
2022 14,023
2023 14,988
Thereafter 367,788

(d) Deferred financing costs

2018
$
2017
$
Deferred financing costs 4,751 4,751
Less accumulated amortization 2,040 1,818
2,711 2,933

9. Airport improvement fees

AIF is collected by the air carriers in the price of a ticket and is paid to the Authority on an estimated basis, net of air carrier administrative fees of 6%, on the basis of estimated enplaned passengers under an agreement between the Authority, the Air Transport Association of Canada and the air carriers serving the Airport. Under the agreement, AIF revenue may only be used to pay for the capital and related financing costs of airport infrastructure development. AIF revenue is recorded gross on the statement of operations and comprehensive income, and administrative fees paid to the air carriers were $3.3 million [2017 – $3.1 million].

AIF funding activities in the year are outlined below:

2018
$
2017
$
Earned revenue 54,215 52,244
Air carrier administrative fees (3,253) (3,134)
Net AIF revenue earned 50,962 49,110
Eligible capital asset purchases (35,557) (32,747)
Eligible interest expense (22,168) (24,755)
Eligible other expenses (220) (142)
(57,945) (57,644)
Deficiency of AIF revenue over AIF expenditures (6,983) (8,534)

AIF funding activities on a cumulative basis since inception of the AIF are outlined below:

2018
$
2017
$
Earned revenue 642,268 588,053
Air carrier administrative fees (38,536) (35,283)
Net AIF revenue earned 603,732 552,770
Eligible capital asset purchases (684,301) (648,744)
Eligible interest expense (358,991) (336,823)
Eligible other expenses (1,127) (907)
(1,044,419) (986,474)
Deficiency of AIF revenue over AIF expenditures (440,687) (433,704)

The AIF will continue to be collected until the cumulative excess of expenditures over AIF revenue is reduced to zero.

10. Pension plan and other post-employment benefits

The amounts recognized as the post-employment benefit assets and liabilities on the balance sheet as at December 31 are as follows:

2018
$
2017
$
Post-employment pension benefit asset 367
Other post-employment benefit liability 9,121 9,233

The Authority sponsors and funds a pension plan for its employees, which has defined benefit and defined contribution components.

Under the defined contribution plan, the Authority pays fixed contributions into an independent entity to match certain employee contributions. The Authority has no legal or constructive obligation to pay further contributions after its payment of the fixed contribution.

The defined benefit plan includes employees who were employees of the Authority on the date of transfer of the responsibility for the management, operation and development of the Airport from Transport Canada on January 31, 1997 [note 1], including former Transport Canada employees, the majority of whom transferred their vested benefits from the Public Service Superannuation Plan to the Authority’s pension plan. Pension benefits payable under the defined benefit component of the plan are based on members’ years of service and the average of the best six years’ consecutive earnings near retirement up to the maximums allowed by law. Benefits are indexed annually to reflect the increase in the consumer price index to a maximum of 8% in any one year.

Pension plan costs are charged to operations as services are rendered based on an actuarial valuation of the obligation.

In addition to pension plan benefits, the Authority provides other post-employment and retirement benefits to some of its employees including health care insurance and payments upon retirement or termination of employment. The Authority accrues the cost of these future benefits as employees render their services based on an actuarial valuation. This plan is not funded.

As at the date of the most recent actuarial valuation of the pension plan, which was as at December 31, 2017, that was completed and was filed in June 2018 as required by law, the plan had a surplus on a funding [going concern] basis of $7,449 assuming a discount rate of 3.85% [2016 – $5,166 surplus assuming a discount rate of 4.00%]. This amount differs from the amount reflected below primarily because the obligation is calculated using the discount rate that represents the expected long-term rate of return of assets. For accounting purposes, it is calculated using an interest rate determined with reference to market rates on high-quality debt instruments with cash flows that match the timing and amount of expected benefit payments.

The Pension Benefits Standards Act, 1985 [the “Act”] requires that a solvency analysis of the plan be performed to determine the financial position [on a “solvency basis”] of the plan as if it were fully terminated on the valuation date due to insolvency of the sponsor or a decision to terminate. As at December 31, 2017, the plan had a deficit on a solvency basis of $8,203 [2016 – $10,778] before considering the present value of additional solvency payments required under the Act. In 2018, the Authority made additional solvency payments of $1,641 [2017 – $2,156] to amortize this deficiency.

The next required actuarial valuation of the defined benefit pension plan, which will be as at December 31, 2018, is scheduled to be completed and filed by its June 2019 due date. The plan’s funded position and the amounts of solvency payments required under the Act are subject to fluctuations in interest rates. It is expected that, once the actuarial valuation is completed, the additional solvency payments that will be required for 2019 will be approximately $1,641 [2018 – $2,156]. In addition, the Authority expects to contribute approximately $661 [2018 – $778] on account of current service in 2019 to the defined benefit component of the pension plan for the year ending December 31, 2019.

Based on the most recent actuarial determination of pension plan benefits completed as at December 31, 2017 and extrapolated to December 31, 2018 by the Authority’s actuaries, the estimated status of the defined benefit pension plan is as follows:

2018
$
2017
$
Accrued benefit obligation – Defined benefit pensions
Balance, beginning of year 60,054 57,321
Employee contributions 108 131
Benefits paid (2,044) (1,830)
Current service cost 590 653
Interest cost on accrued benefit obligation 2,089 2,142
Actuarial loss (gain) – change in economic assumptions (4,441) 2,311
Actuarial loss (gain) – change in plan experience 208 (674)
Balance, end of year 56,564 60,054

2018
$
2017
$
Plan assets – Defined benefit pensions
Fair value, beginning of year 66,282 60,093
Employee contributions 108 131
Employer contributions 537 633
Employer contributions, special solvency payments 1,641 2,156
Benefits paid (2,044) (1,830)
Interest on plan assets [net of administrative expenses] 2,133 2,147
Actuarial gain (loss) on plan assets (10,094) 2,952
Fair value – Plan assets 58,563 66,282
Effect of limiting the net defined benefit asset to the asset ceiling (1,999) (5,861)
Fair value, end of year 56,564 60,421
Post-employment pension benefit asset, net 367

The net defined benefit pension plan expense for the year ended December 31 was as follows:

2018
$
2017
$
Current service cost 590 653
Interest cost on accrued benefit obligation 2,089 2,142
Interest on plan assets [net of administrative expenses] (1,928) (2,051)
Defined benefit pension plan expense recognized in salaries and benefits expense in net earnings 751 744

In addition to pension benefits, the Authority provides other post-employment benefits to its employees. The status of other post-employment benefit plans, based on the most recent actuarial reports, measured as of December 31 is as follows:

2018
$
2017
$
Accrued benefit obligation – other post-employment benefits
Balance, beginning of year 9,233 8,532
Benefits paid (243) (170)
Current service cost 480 643
Interest cost 332 343
Actuarial loss (gain) – change in economic assumptions (776) 85
Actuarial gain – change in plan experience (200)
Actuarial loss – change in demographic assumptions 95
Balance, end of year 9,121 9,233

The net expense for other post-employment benefit plans for the year ended December 31 was as follows:

2018
$
2017
$
Current service cost 480 643
Interest cost 332 343
Expense recognized in salaries and benefits expense in net earnings 812 986

The amount recognized in other comprehensive loss for pension plans and other post-employment benefit plans for the year ended December 31 was as follows:

2018
$
2017
$
Defined benefit pension plans
Actuarial loss (gain) – change in economic assumptions (4,441) 2,311
Actuarial loss (gain) – change in plan experience 208 (674)
Actuarial loss (gain) on plan assets 10,094 (2,952)
Effect of limiting the net defined benefit asset to the asset ceiling (4,067) 3,197
Other post-employment benefit plans
Actuarial loss (gain) – change in economic assumptions (776) 85
Actuarial gain – change in plan experience (200)
Actuarial loss – change in demographic assumptions 95
Total loss recognized in other comprehensive loss 1,113 1,767

The costs of the defined benefit component of the pension plan and of other post-employment benefits are actuarially determined using the projected benefit method prorated on services. This determination reflects management’s best estimates of the rate of return on plan assets, rate of salary increases and various other factors including mortality, termination and retirement rates.

The significant economic assumptions used by the Authority’s actuaries in measuring the Authority’s accrued benefit obligations as at December 31 are as follows:

2018
%
2017
%
Defined benefit pension plan
Discount rate to determine expense 3.50 3.75
Discount rate to determine year-end obligations 4.00 3.50
Interest rate on plan assets 3.50 3.75
Rate of average compensation increases 3.00 3.00
Rate of inflation indexation post-retirement [consumer price index] 2.00 2.00
Other post-employment benefit plans
Discount rate to determine expense
Health care 3.50 4.00
Severance program 3.25 3.25
Discount rate to determine year-end obligation
Health care 4.00 3.50
Severance program 3.75 3.25
Rate of average compensation increases 3.00 3.00
Rate of increases in health care costs
Trend rate for the next fiscal year 7.40 7.70
Ultimate trend rate 5.00 5.00
Fiscal year the ultimate trend rate is reached 2028 2028

The Authority’s defined benefit pension plans and post-retirement benefit plans face a number of risks, including inflation, but the most significant of these risks relates to changes in interest rates [discount rate]. The defined benefit pension plan’s liability is calculated for various purposes using discount rates set with reference to corporate bond yields. If plan assets underperform this yield, this will increase the deficit. A decrease in this discount rate will increase plan liabilities, although this will be partially offset by an increase in the value of the plan’s bond holdings. In addition to the risks of fluctuations in interest rates [discount rate] outlined above, the Authority’s pension plans are subject to a number of other risks. Relative to the actuarial assumptions noted above, the financial impact of changes in key assumptions is outlined below:

Change in assumption Impact on obligation after increase in assumption
$
Impact on obligation after decrease in assumption
$
Defined benefit pension plan
Discount rate 1% (7,194) 8,905
Inflation 1% 7,741 (6,622)
Compensation 1% 300 (371)
Life expectancy 1 year 1,565
Discount rate – solvency liability at December 31, 2017 1% (10,397) 13,262
Other post-employment benefit plans
Discount rate 1% (1,067) 1,416
Health care costs 1% 1,405 (1,077)
Life expectancy 1 year 289 (283)

The Authority’s pension and other post-employment benefit plans are designed to provide benefits for the life of the member. Increases in life expectancy will result in an increase in the plans’ liabilities. The obligations for these plans as at December 31, 2018 have been estimated by the Authority’s actuaries using the most recent mortality tables available [Canadian Pensioner Mortality 2014 Combined Sector Mortality Table].

The investment policy for the pension plan’s defined benefit funds was revised in late 2018 to a strategy based on plan maturity with segmentation based on retirees and all other members. This approach involved setting up a liability matching fund for retirees as at December 31, 2018 and a balanced growth fund for managing the assets related to the liabilities of all other members at that same date. Under the liability matching fund, the pension plan purchased, in late 2018, a fully indexed buy-in annuity contract for all retired members as at December 31, 2018. For future retirements of active members, additional buy-in annuities may be considered depending on market conditions. The defined benefit plan is a closed plan. As at the date of the most recent actuarial valuation at December 31, 2017, the average age of the 20 active members was 54 years of age. The average age of the 55 retired members was 68 years of age.

Responsibility for governance of the plans including overseeing aspects of the plans such as investment decisions lies with the Authority through a Pension Committee. The Pension Committee in turn has appointed experienced independent experts such as investment advisors, investment managers, actuaries and a custodian for assets.

The percentage distribution of total fair value of assets of the pension plans by major asset category as at December 31 is as follows:

2018
%
2017
%
Fixed income fund 25 62
Annuity buy-in contract 62
Equity funds – Canadian funds 3 8
Equity funds – US funds 1 4
Equity funds – International and global funds 4 13
Emerging market fund 2 5
Real estate fund 3 8

The Authority’s contribution to the defined contribution component of the pension plan is a maximum of 8% of the employee’s gross earnings to match employee contributions. Information on this component is as follows:

2018
$
2017
$
Employer contributions – defined contribution plan 1,093 1,053
Employee contributions – defined contribution plan 1,215 1,168
Net expense recognized in salaries and benefits expense 1,093 1,053

11. Fair value measurement

Fair values are measured and disclosed in relation to the fair value hierarchy [as discussed in note 2] that reflects the significance of inputs used in determining the estimates.

The Authority has assessed that the fair values of cash and cash equivalents, trade and other receivables, accounts payable and accrued liabilities and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.

The Authority’s long-term debt, including Revenue Bonds outstanding, is reflected in the financial statements at amortized cost [see note 8]. As at December 31, 2018, the estimated fair value of the long-term Series B and Series E Revenue Bonds is $155.3 million and $310.1 million, respectively [2017 – $165.4 million and $319.2 million for Series B and Series E, respectively]. The fair value of the bonds is estimated by calculating the present value of future cash flows based on year-end benchmark interest rates and credit spreads for similar instruments.

12. Risk management

The Authority is exposed to a number of risks as a result of the financial instruments on its balance sheet that can affect its operating performance. These risks include interest rate risk, liquidity risk, credit risk and concentration risk. The Authority’s financial instruments are not subject to foreign exchange risk or other price risk.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The following financial instruments are subject to interest rate risk as at December 31:

2018 2017
Carrying value
$
Effective year-end interest rate
%
Carrying value
$
Effective year-end interest rate
%
Debt Service Reserve Fund [floating rates] 6,604 2.03 6,495 0.99
Cash and cash equivalents [floating rates] 30,499 2.25 29,454 1.47
Long-term debt [at fixed cost] 415,957 See note 8 420,377 See note 8

The Authority has entered into fixed rate long-term debt, and accordingly, the impact of interest rate fluctuations has no effect on interest payments until such time as this debt is to be refinanced. Changes in prevailing benchmark interest rates and credit spreads, however, may impact the fair value of this debt. The Authority’s most significant exposure to interest rate risk relates to its future anticipated borrowings and refinancing, which are not expected to occur in the near-term.

In addition, the Authority’s cash and cash equivalents, and its Debt Service Reserve Fund are subject to floating interest rates. Management has oversight over interest rates that apply to its cash and cash equivalents and the Debt Service Reserve Fund. These funds are invested from time to time in short-term bankers’ acceptances permitted by the Master Trust Indenture, while maintaining liquidity for purposes of investing in the Authority’s capital programs. Management has oversight over interest rates that apply to its bank indebtedness and fixes these rates for short-term periods of up to 90 days based on bankers’ acceptance rates.

If interest rates had been 50 basis points [0.50%] higher/lower and all other variables were held constant, including timing of expenditures related to the Authority’s capital expenditure programs, the Authority’s earnings for the year would have increased/decreased by $0.2 million as a result of the Authority’s exposure to interest rates on its floating rate assets and liabilities. The Authority believes, however, that this exposure is not significant and that interest income is not essential to the Authority’s operations as these assets are intended for reinvestment in airport operations and development, and not for purposes of generating interest income.

Liquidity risk

The Authority manages its liquidity risks by maintaining adequate cash and credit facilities, by updating and reviewing multi-year cash flow projections on a regular and as-needed basis and by matching its long-term financing arrangements with its cash flow needs including pre-funding debt repayment through a segregated sinking fund. The Authority believes it has a strong credit rating that gives it access to sufficient long-term funds as well as committed lines of credit through Credit Facilities with two Canadian banks.

The Authority has unfettered ability to raise its rates and charges as required to meet its obligations. Under the Master Trust Indenture entered into by the Authority in connection with its debt offerings [note 8], the Authority is required to take action, such as increasing its rates, should its projected debt service coverage ratio fall below 1.0. If this debt service covenant is not met in any year, the Authority is not in default of its obligations under the Master Trust Indenture as long as the test is met in the subsequent year. Because of the Authority’s unfettered ability to increase rates and charges, it expects to continue to have sufficient liquidity to cover all of its obligations as they come due, including interest payments of approximately $20.6 million per year. The future annual principal payment requirements of the Authority’s obligations under its long-term debt are described in note 8 (c).

Credit risk and concentration risk

The Authority is subject to credit risk through its cash and cash equivalents, its Debt Service Reserve Fund, and its trade and other receivables. The counterparties of cash and cash equivalents and the Debt Service Reserve Fund are highly rated Canadian financial institutions. The trade and other receivables consist primarily of current aeronautical fees and AIF owing from air carriers. The majority of the Authority’s accounts receivable are paid within 27 days [2017 – 37 days] of the date that they are due. A significant portion of the Authority’s revenues, and resulting receivable balances, is derived from air carriers. The Authority performs ongoing credit valuations of receivable balances and maintains an allowance for potential credit losses. The Authority’s right under the Airport Transfer (Miscellaneous Matters) Act to seize and detain aircraft until outstanding aeronautical fees are paid mitigates the risk of credit losses. Expected credit losses are maintained, consistent with the credit risk, historical trends, general economic conditions and other information, as described below, and is taken into account in the financial statements.

Impairment analysis is performed at each reporting date using a credit loss provision model to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns [i.e. air carriers, concessionaires, land tenants, etc.]. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, trade receivables are written off if past due for more than one year and are not subject to enforcement activity.

The Authority has adopted the simplified method to evaluate the required expected credit losses provision for trade and other receivables. The calculation is illustrated in the following table:

Trade and other receivables expected credit loss model

as at December 31, 2018
Current 30 – 60 61 – 90 Over 90 Total
Expected credit loss rate 2.88% 3.28% 3.28% 3.28%
Expected total gross carrying amount at default 7,970 878 6 19 8,873
Expected credit loss 229 29 1 1 260

as at December 31, 2017
Current 30 – 60 61 – 90 Over 90 Total
Expected credit loss rate 2.63% 3.28% 3.28% 3.28%
Expected total gross carrying amount at default 9,075 545 59 43 9,722
Expected credit loss 239 18 2 1 260

The following is an analysis of trade and other receivables:

2018
$
2017
$
Current 7,970 9,075
30 – 60 days past due 878 545
61 – 90 days past due 6 59
Over 90 days past due 19 43
8,873 9,722
Expected credit losses (260) (260)
Balance, end of year 8,613 9,462

The Authority derives approximately 50% [2017 – 51%] of its landing fee and terminal fee revenue from Air Canada and its affiliates. Management believes, however, that the Authority’s long-term exposure to any single air carrier is mitigated by the fact that approximately 94% [2017 – 96%] of the passenger traffic through the Airport is origin and destination traffic, and therefore other carriers are likely to absorb the traffic of any carrier that ceases operations. In addition, the Authority’s unfettered ability to increase its rates and charges mitigates the impact of these risks.

13. Operating leases

The Authority as lessee

On January 31, 1997, the Authority signed a 60-year ground lease [as amended, the “Lease”] with the Government of Canada [Transport Canada] for the management, operation and development of the Airport. The Lease contains provisions for compliance with a number of requirements, including environmental standards, minimum insurance coverage, specific accounting and reporting requirements, and various other matters that have a significant effect on the day-to-day operation of the Airport. The Authority believes that it has complied with all requirements under the Lease.

On February 25, 2013, the Minister of Transport for the Government of Canada signed an amendment to the Lease to extend the term from 60 years to 80 years ending on January 31, 2077. At the end of the renewal term, unless otherwise extended, the Authority is obligated to return control of the Airport to the Government of Canada.

In 2005, the Government of Canada announced the adoption of a new rent policy that has resulted in reduced rent for Canadian airport authorities, including the Authority. Under this formula, rent is calculated as a royalty based on a percentage of gross annual revenues on a progressive scale.

Based on forecasts of future revenues [which are subject to change depending on economic conditions and changes in the Authority’s rates and fees], estimated rent payments for the next five years are approximately as follows:

$
2019 11,064
2020 11,528
2021 11,944
2022 12,306
2023 12,668

The Authority as lessor

The Authority leases out, under operating leases, land and certain assets that are included in property, plant and equipment. Many leases include renewal options, in which case they are subject to market price revision. The lessee does not have the possibility of acquiring the leased assets at the end of the lease.

The estimated lease revenue for the next five years is approximately as follows:

$
2019 6,703
2020 6,770
2021 6,837
2022 6,906
2023 6,975

14. Statement of cash flows

The net change in non-cash working capital balances related to operations consists of the following:

2018
$
2017
$
Trade and other receivables 208 4,016
Prepaid expenses, advances and consumable supplies 15 40
Accounts payable and accrued liabilities 2,748 179
Other (21) (21)
2,950 4,214

15. Related party transactions

Compensation paid, payable or provided by the Authority to key management personnel during the year ended December 31 was as follows:

2018
$
2017
$
Salaries and short-term benefits 2,379 2,321
Post-employment benefits 184 191
2,563 2,512

Key management includes the Authority’s Board of Directors and members of the executive team, including the President and CEO, and six Vice-Presidents.

The defined pension plan referred to in note 10 is a related party to the Authority. The Authority’s transactions with the pension plan include contributions paid to the plan, which are disclosed in note 10. The Authority has not entered into other transactions with the pension plan and has no outstanding balances with the pension plan as at the balance sheet date.

16. Commitments and contingencies

Ground lease commitments

The Lease requires the Authority to calculate rent payable to Transport Canada utilizing a formula reflecting annual airport revenues [note 13].

Operating commitments

The Authority has operating commitments in the ordinary course of business requiring payments of $14.2 million in 2019 and diminishing in each year over the next five years as contracts expire. As at December 31, 2018, the total of these operating commitments amounted to $30.7 million [2017 – $16.9 million]. These commitments are in addition to contracts for the purchase of property, plant and equipment of approximately $32.2 million.

Contingencies

The Authority may, from time to time, be involved in legal proceedings, claims and litigation that arise in the ordinary course of business. The Authority does not expect the outcome of any proceedings to have a material adverse effect on the financial position or results of operations of the Authority.

17. Post-reporting-date events

No adjusting or significant non-adjusting events have occurred between the reporting date and February 20, 2019, when the financial statements were authorized for issue.

18. Comparative figures

Certain comparative information in the balance sheet and statement of operations and comprehensive income has been reclassified to conform with this year’s presentation. The net impact did not result in any changes to retained earnings.