DBRS Upgrades British Columbia Ferry Services Inc. to A (high), Changes Trend to Stable

DBRS Limited (DBRS) upgraded the Issuer Rating and Senior Secured Bonds rating of British Columbia Ferry Services Inc. (BC Ferries or the Company) to A (high) from “A” and changed the trend on the ratings to Stable from Positive. The upgrades are supported by the strong performance in F2017, which exceeded expectations. The upgrades also acknowledge the proven operating resilience and reliable management demonstrated by the Company, having weathered challenging macroeconomic conditions while maintaining satisfactory financial metrics and successfully returning to growth.

Passenger traffic growth of 4.6% and 1.7% were posted in Q2 F2018 and F2017, respectively, accompanied by vehicle traffic growth of 4.9% and 2.9%, respectively, marking the fourth year of resumed traffic growth after several weak years following the financial crisis. The average system-wide tariff increase of 1.9% and the higher traffic drove a revenue increase of 2.9% in F2017. Operating expenses rose alongside growth, but to a somewhat lesser degree, up 2.4% in F2017. This led to a healthy increase in EBITDA of 4.0% in F2017, following the growth of 3.8% achieved in F2016. The rise in EBITDA fully offset the impact of higher debt levels and resulted in an increase in the debt service coverage ratio (DSCR) to 3.5 times (x) in F2017, from 3.3x the year before.

Total revenues continued to increase in Q2 F2018, up 3.5% compared with the same period in F2017, driven by both the traffic growth and a 1.9% average vehicle fare increase implemented on three major routes. Operating expenses rose 5.8% in Q2 F2018, mainly explained by additional round trips and the introduction of three new vessels, which led to an increase in fuel consumption, labour and training-related costs. A hydraulic issue with a propeller on the Spirit of Vancouver Island ferry also resulted in unexpected emergency drydocking costs. As a result, EBITDA only increased a modest 0.3% as at Q2 F2018, compared with the same period a year ago. For F2018, BC Ferries expects total revenues and operating expenses to grow approximately 4.4% and 6.4%, respectively, slightly improving EBITDA by 0.4%. With the level of total debts expected to be essentially unchanged, the Company forecasts a DSCR of 2.8x by the fiscal year-end, which DBRS views as plausible in light of the results to date and supporting the ratings.

BC Ferries is currently in discussions with the Province of British Columbia (rated AA (high) with Stable trends by DBRS) regarding potential fare reductions effective in April 2018, which the Company notes could reduce the DSCR to 2.6x in F2019 and F2020. Nonetheless, the fare reductions are not expected to contradict with the objective of the Coastal Ferry Act to maintain the sustainability of the Company, which should be taken into consideration by a new British Columbia Ferries Commissioner (the Commissioner) in setting the price caps for performance term five (PT5), as the current Commissioner’s term will end on March 31, 2018. DBRS is of the view that the outlook for the business remains favourable. However, while not expected, this view may change if the final decision by the new Commissioner regarding PT5 sets the target DSCR or the equity to total capitalization ratio that represent a material erosion from their current levels. Nonetheless, per the Commissioner’s mandate, he or she is required to balance the interests of ferry users and taxpayers with the financial sustainability of BC Ferries when establishing price caps. The Commissioner oversees all key matters related to ferry services and the application of the Coastal Ferry Act, limiting the possibility of political interference. The Coastal Ferry Act requires that price caps remain sufficient to cover debt obligations and maintain access to reasonable borrowing rates. A negative rating action may be possible if the Company becomes unable to reliably maintain its DSCR at least 2.5x. A further rating upgrade is considered unlikely at this time.

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

The principal methodology is Rating Public-Private Partnerships (March 2017), which can be found on dbrs.com under Methodologies.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.