DBRS Comments on Proposed Amendments to the Coastal Ferry Act

DBRS notes that on May 10, 2012, the Coastal Ferry Amendment Act (2012) (Bill 47 or the Bill) was introduced in the legislature of the Province of British Columbia (the Province). The Bill incorporates many of the recommendations contained in the January 2012 BC Ferry Commissioner’s Review of the Coastal Ferry Act (the Act), the legislation that defines the operating environment of British Columbia Ferry Services Inc. (BC Ferries, rated “A” by DBRS).

Should it achieve royal assent in its current form, the Bill would make a number of changes to the Act. Some changes are supportive of the credit profile, such as further service curtailment measures and additional financial support from the Province. Other changes are viewed by DBRS as neutral, such as the definition and formalization of some elements of the Commissioner’s roles, and procedures for policy review and public consultation. While the Commissioner’s review had recommended that the interests of ferry users and taxpayers take precedence over the financial sustainability of BC Ferries, Bill 47 is not prescriptive. It would amend the Act to allow the Commissioner to balance, in the manner it considers appropriate, the interests of ferry users, taxpayers and the financial sustainability of ferry operations. While DBRS views this more positively than the subordination of financial concerns to those of the users and taxpayers that had been proposed in the Commissioner’s review, the new legislation still represents a degradation of the current legislation, which places a priority on financial sustainability.

Some changes are viewed as having the potential to negatively impact the rating. The Commissioner’s review had indicated that the “A” rating of BC Ferries was a reasonable rating level, although the new legislation does not specify a requirement or undertaking to maintain the current rating, but rather to maintain access to borrowing rates that are, in the opinion of the Commissioner, reasonable. Furthermore, the Ministry of Transportation of the Province has indicated that the Commissioner will set returns to enable BC Ferries to maintain an appropriate credit rating, but with no guidance as to what an appropriate level could be. Bill 47 removes the prohibition on cross subsidization of routes, which may act as a drag on profitability as some routes could be allowed to be run at a loss. As had been recommended in the Commissioner’s report, the Bill would also replace the targeted pre-tax return on equity as the basis for determining future fare increases with equity and cash flow targets deemed sufficient to meet debt servicing requirements. DBRS views these elements as having the potential to lead to lower returns and increased pressure on credit metrics.

Additional readings and royal assent are still required for Bill 47 to become law, and as yet no changes have been made to the Act. However, if adopted as presented, on balance the proposed changes are seen by DBRS as a slight erosion of the operating framework that would introduce an element of uncertainty to the credit profile of BC Ferries.

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