DBRS Confirms British Columbia Ferry Services Inc. at “A,” Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Secured Bonds rating of British Columbia Ferry Services Inc. (BC Ferries or the Company) at “A,” with Stable trends. After several weak years, traffic growth has resumed, while continued cost-containment efforts and fare increases have led to a solid improvement in financial metrics.

The trend of declining traffic reversed for the fiscal year ended March 31, 2015 (F2015), with passenger traffic and vehicle traffic rebounding modestly. The average system-wide tariff increase of 4.0% and the traffic uptick drove a revenue increase of 5.2%, while operating expenses increased by 0.4%, leading to a healthy 17.3% EBITDA increase. This contributed to an increase in the debt service coverage ratio (DSCR) to 3.0 times (x) for the period.

Traffic growth continued through the first quarter of F2016, with passenger and vehicle traffic increasing by 5.0% and 4.7%, respectively, compared to Q1 2015. Incremental traffic and tariff increases of 3.9% and 2.0% on Major and Other Regulated Routes and Northern Routes, respectively, led to higher revenues, although a 1% fuel rebate and a decrease in ferry transportation fees dampened revenue growth to 2.2% for the quarter. Operating expenses grew, but to a lesser degree, up 1.2%. This led to EBITDA growth of 3.7% during the quarter. Coupled with lower debt levels, the DSCR increased to 3.1x, well ahead of the comparable period in F2015.

For F2016, the Company expects revenue growth of 2.5%, with a 3.9% increase in tariff revenue, while operating expenses are forecast to grow by 5.9%, mainly attributable to wage and benefit increases in accordance with the collective agreement, higher fuel costs, an increase in IT licenses and initiatives and the provision of general contingencies. As such, EBITDA is expected to decline by 6.2%, which would reduce the DSCR to 2.9x at the end of the fiscal year, despite the expectation of a modest decrease in debt levels.

In March 2015, the Commissioner released his preliminary decision regarding performance term four (PT4), outlining annual price caps increases of 1.9%, and prices of $0.915 per litre of marine diesel and $0.464 per litre of liquefied natural gas in the first year of PT4, each inflated by 2% per year over the four-year term. The use of fuel deferral accounts remains unchanged. The preliminary decision outlines a target DSCR of 2.5x, with a minimum DSCR of at least 2.3x throughout PT4, which, while representing an erosion from current levels, remains supportive of the rating. The final decision regarding price caps is expected later this month.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.