DBRS Confirms British Columbia Ferry Services Inc. at “A”, Stable Trend

DBRS has today confirmed the Issuer Rating and Senior Secured Bonds rating of British Columbia Ferry Services Inc. (BC Ferries or the Company) at “A”. Despite the continuation of soft traffic conditions and growing debt needs, the trends on the ratings remain Stable, as DBRS views the current debt outlook as affordable and remains satisfied with the prudent management style of the Company and the support provided by the Province and the Commissioner in recent years. However, the downward trend observed in traffic since 2010-11 is a concern. Although unlikely, its continuation has the potential to affect debt affordability going forward.

As expected at the time of the last rating review, passenger and vehicle traffic fell notably in 2011-12 and reached its lowest level in more than a decade on the combined effect of weakening tourism, high gas prices and rising fares. Nonetheless, fare increases as well as fuel surcharges helped push revenue up 2.8% while expenditures came slightly below budget as a result of sustained cost containment initiatives, keeping EBITDA stable year over year. Capital investments continued to be funded with operating cash flows during the fiscal year and debt fell modestly as a portion of the duty remission collected the prior year was used to repay short-term debt. This helped support the debt service coverage ratio (DSCR), which slightly exceeded expectations at 2.2 times.

Traffic continues to suffer from high fuel prices and sluggish tourism in 2012-13, with passenger and vehicle volumes down 1.9% and 1.6%, respectively, for the nine-month period ended December 31, 2013. However, higher fares, increased provincial contributions and spending prudence more than made up for weak traffic, pushing EBITDA up 12.8% year over year. This should provide support to the DSCR, as no new debt is anticipated this fiscal year or the next one.

DBRS notes that the last year saw amendments made to the Coastal Ferry Act, which are expected to subject BC Ferries more frequently to the Commissioner’s discretion. Despite the changes, the operating framework remains adequately responsive to the challenges faced by BC Ferries, as highlighted by the increased provincial contributions and the service level adjustments authorized, which have allowed the Commissioner to establish price cap increases for the third performance term notably lower than in the previous performance term.

Nevertheless, declining traffic maintains an element of uncertainty in the outlook, amid growing capital investments and debt needs. Current projections point to investments totalling $1.1 billion over the next five years and possibly $200 million to $300 million in new debt over the medium term. The debt outlook is up materially from the last rating review but is viewed as affordable if price cap increases remain adequate in the next performance term. However, DBRS understands that capital needs remain significant beyond the forecast horizon. Further material traffic losses could lead the Commissioner to revise its position on the financial metrics deemed adequate for the Company going forward in an effort to minimize fare increases, which could constrain BC Ferries’ ability to take on new debt.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Public-Private Partnerships, which can be found on our website under Methodologies.