DBRS Confirms British Columbia Ferry Services amid Challenging Operating Conditions

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. Despite sustained focus on cost containment, sluggish traffic conditions continue to dampen operating results and financial metrics. The increasing scrutiny of the Province of British Columbia (the Province) over BC Ferries’ operating framework also adds some uncertainty to the outlook as a recently completed review of the Coastal Ferry Act calls for greater oversight by the Commissioner in various areas of BC Ferries’ business, which could reduce operating autonomy. The credit profile should benefit from the absence of material borrowing needs anticipated for the years to come, although the Company will remain heavily dependent on fare increases to prevent undue erosion in its credit metrics.

Beset by high fuel prices, a strong Canadian dollar and soft tourism numbers, passenger and vehicle volumes fell by 1.4% and 1.6% in 2010-11, with further declines of 2.9% and 3.5%, respectively, posted during the first nine months of the fiscal year 2011-12. Thanks to regulatory fare increases, revenues have been fairly stable while spending discipline remains strong. Nevertheless, the debt service coverage ratio (DSCR) fell in 2010-11 below the level recorded during the recession, with another modest decline likely to occur in the current fiscal year.

DBRS expects the headwinds encountered in recent years to persist well into 2012-13, keeping traffic depressed and EBITDA under pressure. Regulatory fare increases and compensation from the Province for the fare hikes lower than originally proposed by the Commissioner will remain the key drivers behind revenues and should be sufficient to offset operating cost pressure in 2012-13, although fuel prices will maintain volatility in results as measured by DBRS. With no major capital investments planned for several years, debt should remain stable for some time, allowing the DSCR to stabilize around a reasonable 2.0 times, provided traffic holds up and fare increases remain adequate. In that regard, the expected response of the Province to the recent recommendations of the Commissioner on how to better balance the interests of users with BC Ferries’ financial sustainability is likely to be particularly meaningful, given its potential implications for future fares and service levels. While it is too early to tell how the situation will unfold, DBRS notes that any changes that unduly erode operating autonomy and financial metrics could be detrimental to the rating.

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