Morningstar DBRS Confirms Translink at AA, R-1 (middle); Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of South Coast British Columbia Transportation Authority (TransLink or the Authority) at AA and the rating on its Commercial Paper at R-1 (middle). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings remain well supported by TransLink's strong legislative framework, its effective financial management framework and practices, diverse revenue base, and the strength of the underlying economy. The credit ratings remain constrained by the Authority's ongoing operating funding pressures and rising debt burden.

CREDIT RATING DRIVERS
Morningstar DBRS expects the credit ratings to remain stable through the medium term. While unlikely, Morningstar DBRS would upgrade TransLink's credit ratings if there were a material and sustained improvement in a combination of critical ratings factors and financial risk assessments. Morningstar DBRS could downgrade the Authority's ratings if operating results deteriorated significantly on a sustained basis and the debt burden rose materially above current projections.

CREDIT RATING RATIONALE
For the year ended December 31, 2023, TransLink reported a surplus of $472.9 million compared with a surplus of $129.6 million in the prior year. This reflects the senior government relief funding recognized in 2023 that was intended to partially offset net operating losses between 2024 and 2025. On a Morningstar DBRS-adjusted basis, this equates to a surplus of $73.3 million after removing the effect of senior government relief funding intended for future years and including funding intended for 2023.

For 2024, TransLink budgeted a surplus of $50.5 million, which largely reflects a combination of higher revenues related to senior government capital funding, transit and taxation revenues, and development cost charges along with modest growth in expenses. Ridership is expected to continue to grow in 2024 because of more traditional factors, such as employment levels and population growth, now that post-pandemic travel patterns have begun to crystallize. In Q2 2024, TransLink recorded a surplus of $40.7 million, which was below budget and can be attributed to lower revenue from senior government capital contributions, lower development cost charges as a result of project delays, and higher-than-budgeted interest expense.

The pandemic created permanent shifts in ridership behaviour given the resulting increase in remote and hybrid work, which affected transit-related revenues. Moreover, the increasing adoption of zero-emission and fuel-efficient vehicles has accelerated the decline of fuel-tax revenue. These two funding channels formed 48% of TransLink's adjusted revenue in 2023. Moreover, the inflationary environment has created additional cost pressures relating to labour, fuel, material, and construction costs. TransLink is working with its stakeholders to identify new revenue sources and cost containment strategies to mitigate these pressures.

In April 2024, TransLink's new 10-year Investment Plan, which included a revised long-term debt forecast, was approved. This iteration of the investment plan is meant to address near-term critical priorities in 2024 while the Authority works with its stakeholders on its 2025 Investment Plan, which will detail long-term solutions to TransLink's funding challenges and achieve financial stability. Given the slower pace of planned investment and upfront provincial contributions, debt growth is expected to be slower than under the previous investment plan. Morningstar DBRS' measure of net tax-supported debt is forecast to rise to $4.6 billion (+12.6%) in 2024 before gradually reaching $6.0 billion by 2026. This would equate to net tax-supported debt per capita of $1,904 or 0.34% of Metro Vancouver's taxable assessment. These levels remain consistent with the AA credit rating.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

CRITICAL RATING FACTORS (CRF) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of CRF Factors
In the analysis of TransLink, the CRF factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of TransLink, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the CRF and the FRA
In the analysis of TransLink, the CRF carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Rating Canadian Municipal Governments (April 15, 2024) https://dbrs.morningstar.com/research/431207

The following methodology has also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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