DBRS Confirms BC Ferries at “A”

DBRS has today confirmed the long-term rating of British Columbia Ferry Services Inc. (BC Ferries or the Company) at “A”, with a Stable trend. Traffic conditions remain soft and the preliminary determination of price caps for the next performance term points to the continuation of a tight operating environment and softening financial metrics, although prudent management and the absence of borrowing needs foster stability in the credit profile.

Traffic seems to have lost its momentum in 2010-11 following the partial recovery posted the prior year due in part to soft tourism and commercial shipments. Nine months through the fiscal year (at December 31, 2010), passenger and vehicle traffic were down 0.5% and 1.5%, respectively, relative to the same period a year ago. Fare increases have generated much of the revenue gains while expenditures generally remained under control except for the impact of rising fuel prices. Traffic losses are expected to have continued into the last quarter of the fiscal year, resulting in notably lower EBITDA, though still sound on a historical basis. Debt remains unchanged, however, which has helped keep the full-year DSCR slightly above 2 times.

Faced with a soft traffic outlook, the Company anticipates a loss of approximately $20 million in 2011-12 – its first loss in nine years. Fare increases of 3.38% on major routes and 6.71% on all other routes effective April 1, 2011 will continue to drive revenues, although tight spending management will be essential to limit erosion in EBITDA. Furthermore, no new debt is planned over the years to come, as the funding requirements related to the moderate capital plan are expected to be addressed internally. Nonetheless, uncertainty remains with respect to the price cap increases that will be permitted in the next performance term. Due to recent changes, the Commissioner must now consider the interest of ferry users when setting future fare caps in addition to the emphasis already placed on financial viability, which has clouded the fare-setting process. The preliminary determination recently published calls for annual increases of 4.15% on major routes and route 3, and 8.23% on the other routes, starting April 1, 2012. The determination assumes, among other things, stable traffic and service levels as well as the continued generation of productivity gains, which may be optimistic given the significant efforts made in past years to boost efficiency. This leaves little hope for notable improvement in operating and financial metrics and will be exacerbated by the commencement in 2011 of amortization of certain loans, pushing the DSCR slightly below 2 times. While still viewed as reasonable for the rating given the resilience of the credit, such a DSCR is somewhat lower than originally foreseen by DBRS and will limit BC Ferries’ ability to absorb unforeseen shocks without having recourse to special fare increases

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

The most relevant methodology applicable for this rating is Rating Canadian Public-Private Partnerships, which can be found on our website under Methodologies.