1. Description of business

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 objectives 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 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 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 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 24, 2021. 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.

Government assistance

Government grants are not recognized until there is reasonable assurance that the Authority will comply with the conditions attaching to them and that the grants will be received.

Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Authority are recognized in the statement of operations and comprehensive income (loss) as net of operating expenses or as a reduction in purchases of property, plant and equipment in the period in which they become receivable.

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, 2020 and 2019, 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

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 (loss) in the period in which they are incurred. As noted above, no such amounts were capitalized during the years ended December 31, 2020 and 2019.

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. While the impact of the coronavirus disease [“COVID-19”] has been significant to the Authority in 2020, given the decline in usage of airport operations and facilities, management has assessed that there are no indicators of impairment affecting non-financial assets.

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

The Authority has applied IFRS 16, Leases [“IFRS 16”], using the modified retrospective approach.

At inception of a contract, the Authority assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Authority assesses whether:

• The contract involves the use of an identified asset. This may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified.
• The Authority has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use.
• The Authority has the right to direct the use of the asset. The Authority has the right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases, where the decision about how and for what purpose the asset is used is predetermined, the Authority has the right to direct the use of the asset if either:
  • The Authority has the right to operate the asset; or
  • The Authority designed the asset in a way that predetermines how and for what purpose it will be used.

This policy is applied to contracts entered into, or changed, on or after January 1, 2019.

At inception or on reassessment of a contract that contains a lease component, the Authority allocates the consideration in the contract to each lease component based on their relative stand-alone prices. However, for the leases of land and buildings, the Authority has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component.

The Authority as lessee

Except for the ground lease, the Authority elected not to recognize right-of-use assets and lease liabilities for short-term leases of machinery and equipment that have a lease term of 12 months or less and leases of low-values assets, including photocopy photocopiers equipment and printers. The Authority recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

Ground lease

The Authority recognizes its ground lease, as a short-term lease given the payments are variable in nature. 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 a short-term lease in the statement of operations and comprehensive income (loss).

COVID-19-related rent concessions

The Authority has applied COVID-19-Related rent concessions – Amendment to IFRS 16. The Authority has applied the practical expedient where rent concessions that are a direct consequence of the COVID-19 pandemic are not subject to further assessment as possible “lease modifications” as defined in IFRS 16. All other rent concessions are evaluated in accordance with IFRS 16 criteria.

The Authority as lessor

When the Authority acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease.

To classify each lease, the Authority makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Authority considers certain indicators such as whether the lease is for the major part of the economic life of the asset.

If an arrangement contains lease and non-lease components, the Authority applies Revenue from Contracts with Customers [“IFRS 15”] to allocate the consideration in the contract.

The Authority recognizes lease payments received under operating leases as income on a straight-line basis over the lease term as part of lease revenue.

The amount receivable from the lessee in accordance with a finance lease is recognized at an amount equal to the net investment of the Authority in the lease. Payments received from finance leases are recognized over the term of the lease in order to reflect a constant periodic return on the Authority’s net investment in the finance lease as part of “Other revenue.”

Revenue recognition

The Authority’s principal sources of revenue comprise revenue 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 are 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 airlines self-assessing their passenger counts. The Authority performs an annual reconciliation with air carriers.

Concession revenues is recognized on the accrual basis and calculated using agreed percentages of reported concessionaire sales, with specified minimum annual guarantees. In 2020, the minimum annual guarantees for concessionaires were temporarily waived by the Authority due to the significant decline in passenger volumes at the airport.

Operating land and space rental revenue 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 part of material, supplies and service expenses effective January 1, 2019 [prior to 2019 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 post-employment pension benefit asset (liability) recognized on the balance sheet is the fair value of plan assets less the present values of defined pension benefit obligations 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.

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, the pension plan assets are valued at fair value.

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 (loss). Pension expense is included in salaries and benefits on the statement of operations and comprehensive income (loss).

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 loss [“OCI”] without recycling to the statement of operations and comprehensive income (loss) 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 compensation 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.

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 revenue 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 (loss) 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 leases, the useful lives of property, plant and equipment, valuation adjustments including ECLs, the cost of employee future benefits and provisions for contingencies.

Leases

The Authority applies judgment in reviewing each of its contractual arrangements to determine whether the arrangement contains a lease within the scope of IFRS 16. Leases that are recognized are subject to further judgment and estimation in various areas specific to the arrangement.

When a lease contract contains an option to extend or terminate a lease, the Authority must use its best estimate to determine the appropriate lease term. The Authority will consider all facts and circumstances to determine if there is an economic benefit to exercise an extension option or to not exercise a termination option.

The lease term must be reassessed if a significant event or change in circumstance occurs. Lease liabilities will be estimated and recognized using a discount rate equal to the Authority’s estimated incremental borrowing rate. This rate represents the rate that the Authority would incur to obtain the funds necessary to purchase an asset of a similar value, with similar payment terms and security in a similar economic environment.

The Authority will evaluate all new lease agreements as a lessor and will determine whether these leases are classified as an operating or as a finance lease. This process will be reviewed on a quarterly basis with further analysis completed annually to ensure that leases are adequately recognized within the standard.

Useful lives of property, plant and equipment

Critical judgments are used to determine depreciation rates, 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 and other receivables 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.

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 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.

Total comprehensive income (loss)

Total comprehensive income (loss) is defined to include net earnings (loss) plus or minus OCI for the year. Other comprehensive loss includes actuarial gains and losses related to the Authority’s pension plan and other post-employment benefits. Other comprehensive loss is accumulated as 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”]. Except for the changes below, the Authority has consistently applied the accounting policies to all periods presented in these financial statements.

In the current year, the Authority has applied the below amendments to IFRS Standards and Interpretations issued by the IASB. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements.

Amendments to IAS 1, Presentation of Financial Statements [“IAS 1”] and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

These standards were amended to use a consistent definition of materiality throughout all accounting standards, clarify the explanation of the definition of materiality and incorporate some of the guidance in IAS 1 about immaterial information. The amendments are effective for annual periods beginning on or after January 1, 2020.

COVID-19-Related Rent Concessions-Amendments to IFRS 16

The amendment is effective for annual reporting periods beginning on or after June 1, 2020. This amendment introduces a practical expedient to IFRS 16 that provides practical relief to lessees in accounting for rent concessions occurring as a direct consequence of COVID-19. The practical expedient permits a lessee to elect not to assess whether a COVID-19-related rent concession is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the COVID-19-related rent concession the same way it would account for the change as if the change were not a lease modification.

The practical expedient applies only to rent concessions occurring as a direct consequence of COVID-19 and only if all of the following conditions are met:

(a) The change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
(b) Any reduction in lease payments affects only payments originally due on or before June 30, 2021 (a rent concession meets this condition if it results in reduced lease payments on or before June 30, 2021 and increased lease payments that extend beyond June 30, 2021); and
(c) There is no substantive change to other terms and conditions of the lease.

The Authority has adopted COVID-19-Related Rent Concessions – Amendment to IFRS 16 issued on June 1, 2020. The Authority has applied the amendment retrospectively. The amendment has no impact on retained earnings at January 1, 2020.

Future changes in accounting policies

The IASB has issued new amendments to existing standards. The Authority has reviewed these amendments and has concluded that they are minor in nature and will not be adopted early. Furthermore, management has determined that none of these amendments will have a material impact on the Authority’s accounting policies and impact on future periods.

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 part of materials, supplies and services expense effective January 1, 2019 [prior to 2019 as a reduction of land and space rental revenues].

The bank indebtedness under these facilities as at December 31, 2020 bears interest at an average rate of 0.49% [December 31, 2019 – nil].

As at December 31, 2020, $12.1 million [2019 – $16.3 million] of the Credit Facilities has been designated to the Operating and Maintenance Reserve Fund [note 7[a]].

In order to satisfy the Debt Service Reserve Fund requirement for the Series E Amortizing Revenue Bonds, an irrevocable standby letter of credit in favour of the Trustee has been drawn from the available Credit Facilities. The value of the letter of credit has been increased from $5.9M to $9.5M in order to satisfy the Debt Service Reserve Fund requirements for current and future debt service obligations on the Series E Amortizing Revenue Bonds.

6. 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 indebtedness, long-term debt and accumulated income included on the Authority’s balance sheet as retained earnings.

The Authority incurs debt, including bank indebtedness 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 7[a]] and to maintain its credit ratings in order to secure access to financing at a reasonable cost.

7. Long-term debt

(a) Bond issues

The Authority issues revenue bonds [collectively, “Bonds”] under 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 Bonds, Series D at 4.733%, in part to refinance the Series A Revenue Bonds repaid on May 25, 2007.

On June 9, 2015, the Authority completed a $300.0 million Amortizing Revenue Bonds, Series E, 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 $200.0 million Series D Bonds which matured and was repaid on May 2, 2017.

The Series B Amortizing Revenue Bonds are redeemable, in whole or in part, at the option of the Authority at any time, and the Series E Amortizing Revenue 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 Amortizing Revenue Bonds and 0.42% for the Series E Amortizing Revenue Bonds. If the Series E Amortizing Revenue Bonds are redeemed within six months of the maturity date, the Series E Amortizing Revenue 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.

As at December 31, 2020, due to the impact of COVID-19 pandemic on the Authority’s 2020 financial results, the Authority was not compliant with the debt service coverage ratio, however, the Authority remains in compliance with the gross debt service coverage ratio. Furthermore and as it relates to the Debt Service Reserve Fund on the Series E Amortizing Revenue Bonds, the Authority increased its standby letter of credit to $9.5 million on February 2, 2021 in order to return to compliance on current and future debt service obligations. Except for the items discussed above, the Authority is compliant with all other provisions of its debt facilities, including the Master Trust Indenture provisions related to reserve funds, the flow of funds and rate covenant requirements.

Pursuant to the Authority’s corporate documents, 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 all lawful measures to revise its schedule of rates and charges necessary to achieve the ratios and has already taken action to increase rates in 2020 and 2021. Notwithstanding the temporary non-compliance with the debt service coverage ratio, the Authority continues to meet its debt service obligations.

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, 2020, the balance of cash and qualified investments held to satisfy the Series B Amortizing Revenue Bonds Debt Service Reserve Fund requirement is $6.9 million [2019 – $6.7 million]. Furthermore, in order to satisfy the Debt Service Reserve Fund requirement for the Series E Amortizing Revenue Bonds, an irrevocable standby letter of credit in favour of the Trustee in the amount of $9.5 million has been drawn from the available Credit Facilities. 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 [12] months. As at December 31, 2020, $12.1 million [2019 – $16.3 million] of the Credit Facilities has been designated to the Operating and Maintenance Reserve Fund [note 5].

(b) Interest expense

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

(d) Deferred financing costs

8. 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 7% [2019 – 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 at its gross amount on the statement of operations and comprehensive income (loss). Administrative fees paid to the air carriers were $1.0 million [2019 – $3.2 million].

AIF funding activities in the year are outlined below:

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

9. 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:

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, 2019, that was completed and was filed in June 2020 as required by law, the plan had a surplus on a funding [going concern] basis of $5,528 assuming a discount rate of 4.00% [2018 – $3,503 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, 2019, the plan had a deficit on a solvency basis of $2,438 [2018 – $4,893] before considering the present value of additional solvency payments required under the Act. In 2020, the Authority made additional solvency payments of $488 [2019 – $979] to amortize this deficiency.

The next required actuarial valuation of the defined benefit pension plan, which will be as at December 31, 2020, is scheduled to be completed and filed by its June 2021 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 are required for 2021 will be $488 [2020 – $488]. In addition, the Authority expects to contribute approximately $337 [2020 actual – $443] on account of current service in 2021 to the defined benefit component of the pension plan for the year ending December 31, 2021.

Based on the most recent actuarial determination of pension plan benefits completed as at December 31, 2019 and extrapolated to December 31, 2020 by the Authority’s actuaries, the estimated status of the defined benefit pension plan is as follows:

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

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

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 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:

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, 2020 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 2018 to adopt 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 and a balanced growth fund for managing the assets related to the liabilities of all other members. Under this strategy, the proportion of liability matching assets [fixed income funds and indexed annuity arrangements] will be increased and the proportion of growth assets [equity and other funds] will be decreased over time as the average age of members rises. Under the liability matching fund, the pension plan purchased, in late 2020, a fully indexed buy-in annuity contract for five additional retired members as at December 31, 2020. 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 as at December 31, 2019, the average age of the 16 active members was 55 years of age. The average age of the 60 retired members was 69 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:

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:

10. 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, bank indebtedness, 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 Amortizing Revenue Bonds outstanding, is reflected in the financial statements at amortized cost [note 7]. As at December 31, 2020, the estimated fair value of the long-term Series B and Series E Amortizing Revenue Bonds is $148.3 million and $323.0 million, respectively [2019 – $151.2 million and $332.9 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.

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.

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 and guaranteed investment certificates as 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 (loss) for the year would have increased/decreased by $0.1 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, bank indebtedness 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 COVID-19 pandemic caused significant reductions in revenue-generating activities from mid-March 2020 to December 31, 2020. The Authority has taken and continues to take actions to mitigate the impact, including significant reductions in capital investments, eliminating all discretionary operating expenses and considerable focus on essential operational expenditures. In addition, the Authority announced employee lay-offs as further measures to reduce operating expenses. The Authority believes that the negative effects of the COVID-19 pandemic on its operations and financial condition will persist through the containment phase of the COVID-19 pandemic with recovery anticipated as air travel volumes recover in future periods. As a consequence, the Authority’s liquidity position has been negatively impacted and the Authority has leveraged its strong credit facility capacity to support the organization through this period.

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 7[a]], the Authority is required to take all lawful measures, to maintain its compliance with the gross debt service coverage ratio of 1.25 and the debt service coverage ratio of 1.0.If this debt service covenant ratio is not met in any year, the Authority is not in default of its obligations under the Master Trust Indenture. Due to the significant negative financial impact of the COVID-19 pandemic, the Authority did not comply with the debt service covenant ratio as at December 31, 2020 and will continue to monitor and put in place measures to return to compliance. The Authority is compliant with the gross debt service coverage ratio as at December 31, 2020. Because of the Authority’s strong Credit Facilities and together with the 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 $19.9 million per year. The future annual principal payment requirements of the Authority’s obligations under its long-term debt are described in note 7(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 trade and other receivables are paid within 46 days [2019 – 24 days] of the date that they are due. A significant portion of the Authority’s revenue, 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. ECLs 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 ECLs. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns [i.e., airlines, 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 impact of COVID-19 on the recoverability of receivables from contracts has been considered. While the methodologies and assumptions applied in the base ECL calculations remain unchanged from those applied in the prior financial year, the Authority has incorporated estimates, assumptions and judgments specific to the impact of the COVID-19 pandemic and the associated customer support packages provided. While there have been no material recoverability issues identified, there is a risk that the economic impacts of COVID-19 could be deeper or more prolonged than anticipated, which could result in higher credit losses than those modelled under the base case.

The Authority is focused on supporting tenants who are experiencing financial difficulties as a result of the COVID-19 pandemic and has offered financial assistance measures including temporary rent deferrals and participation in pandemic Federal Government tenant-focused programs where program qualification criteria was met by the tenant. The Authority has granted rent relief based on each tenant’s circumstances. As at December 31, 2020, the gross carrying value of rent deferrals included in trade and other receivables that are subject to a COVID-19 financial assistance package total $0.1 million and comprise of rent deferrals expiring at certain dates up to June 30, 2021.

The Authority has adopted the simplified method to evaluate the required ECLs provision for trade and other receivables. Approximately 96% of the Authority’s trade and other receivables are in the current category [less than 30 days overdue]. The Authority has recognized $50 in 2020 as an ECL provision [2019 – $260], which is largely represented by the 1.02% [2019 – 2.52%] of ECL rate in the less than 30 days overdue category.

The Authority derives approximately 47% [2019 – 52%] of its landing fee and terminal fee revenues 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 97% [2019 – 94%] 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.

12. 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.

The Authority recognizes its ground lease, as short-term lease given the payments are variable in nature. Rent imposed under the ground lease with the Government of Canada is calculated based on airport revenue for the year as defined in the lease and is considered contingent rent. Ground rent expense is accounted for as a lease in the statement of operations and comprehensive income (loss).

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

The Authority as lessor

Finance leases

The Authority has entered into two land lease arrangements as a lessor that are considered finance leases. This is the result of the Authority transferring substantially all of the risks and rewards of ownership of these assets to the lessee and Authority as the lessor recognizes these agreements as a receivable pursuant to the IFRS 16 standard.

Finance lease receivables are classified under non–current assets:

The maturity analysis of the finance lease receivables, including the undiscounted lease payments to be received are as follows:

Operating leases

In addition, the Authority also 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 under operating leases for the next five years is approximately as follows:

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:

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 9 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 9. 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 12].

Operating and capital commitments

As at December 31, 2020, the Authority has total operating commitments from the ordinary course of business in the amount of $18.0 million [2019 – $25.2 million]. For which payments of $10.5 million relate to 2021 and diminishing in each year over the next five years as contracts expire. In addition to these operating commitments, there are further capital investment commitments related to contracts for the purchase of property, plant and equipment of approximately $46.9 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 impact on the financial position or results of operations of the Authority.

17. Post-reporting-date events

No adjusting events have occurred between the reporting date and February 24, 2021, when the financial statements were authorized for issue. As disclosed in Note 7, the Authority increased the value of the standby letter of credit to $9.5 million on February 2, 2021 to return to compliance for payment obligations on the Series E Amortizing Revenue Bonds.

18. COVID-19 pandemic

In March 2020, the World Health Organization declared a global pandemic due to the widespread contagion of a coronavirus named “COVID-19”. This deadly contagious disease outbreak, which has continued to spread, has resulted in widespread public health concerns with governments worldwide enacting restrictions and measures to combat the spread of the virus. These measures include travel advisories/bans, border closures, quarantine periods, COVID-19 testing requirements and wide-ranging public health protection measures. These requirements have caused material disruption globally resulting in an economic slowdown. Some governments and central banks have provided significant monetary and fiscal interventions designed to stabilize economic conditions. The COVID-19 pandemic and resulting economic contraction had, and are expected to continue to have, a negative impact on demand for air travel globally. In reaction to the ongoing public health concerns and measures put in place globally, air carriers responded by cancelling routes, laying off staff and grounding aircraft. The Authority has experienced material declines in revenue, passengers and flight activity during the last nine months of 2020, as compared to the same periods in 2019.

As a result, the Authority has implemented significant reductions to operating and capital expenditures, including the $31.4 million reduction in planned 2020 capital investment from $48.2 million to $16.8 million, significant reductions in contracted and temporary resources and the temporary closure and suspension of activity in several areas of its terminal facilities. In addition, the elimination of 18 positions announced in June 2020 combined with the cancellation of 11 vacant roles, which represents a 15 per cent reduction of the Authority’s full time roles.

The Authority has access to strong liquidity through Credit Facilities with two Canadian banks [note 5].

The Government of Canada has waived ground rent for the period of March 2020 to December 2020 [note 13] and has extended the program for the 2021 calendar year. The Authority has also benefited from the CEWS program [note 13].

Given the rapidly evolving situation with the COVID-19 pandemic and the emerging economic contraction, management continues to analyze the extent of the financial impact, which is and continues to be material. The emergence of several highly effective vaccines provides some visibility to a path to recovery later in 2021. In the meantime, the Authority continues to evaluate numerous scenarios involving macro-economic factors, government regulation and support for the sector, consumer travel sentiment and air carrier forward-looking schedules.

While the full duration and scope of the pandemic is not yet known, the Authority believes in the long-term resilience of the air travel industry and is focused on the long term financial sustainability of the Airport.The Authority continues to review its operating expenditures, resource commitments and capital programs and will continue to review future requirements to better align itself with air travel activity and cash flow requirements.