Woo hoo: the 2nd quarter MD&A report was released on SEDAR.com today. We're all wondering if there are some neat pictures in the report that we can critique......
Here are my non-picture highlight items, from this official document: remember that this is the best form of accountability offered under the current ferries legal structure, so read up the details...
www.sedar.com/CheckCode.do;jsessionid=00004fVwbE8U0XcQTRqkVWfsuGE:-1==========================
Management’s Discussion & Analysis
of Financial Condition and Results of Operations
For the three and six months ended September 30, 2008
Dated October 29, 2008
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Our quarterly results are affected by the seasonality of leisure travel patterns. The second quarter, covering the summer period, experiences the highest traffic levels and the highest earnings of the year. The third and fourth quarters reflect a seasonal downturn in traffic. We utilize these periods to perform upgrades and major maintenance and refit programs as well as to undertake mandatory inspections on the majority of our vessels.
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We have experienced a decrease in traffic in the first and second quarters of fiscal 2009 compared to the prior year and, because of the uncertainty of future traffic levels, we have revised our financial and operating plans to reduce overall operating costs from previously planned levels.
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Significant events during or subsequent to our second quarter of fiscal 2009:
• On July 22, 2008, the British Columbia Ferries Commissioner (the Commissioner) amended the automatic fuel surcharge / rebate mechanism to allow for the early implementation of a fuel surcharge as a result of the dramatic rise in fuel prices. Fuel surcharges of 10.3% on our major routes; 9.2% on our Horseshoe Bay-Langdale route and 17.6% on our other routes (excluding the northern routes) went into effect on August 1, 2008. Subsequently, approval was received to reduce these fuel surcharges by 50% in order to reflect the more recent drop in fuel prices. The reduction will be effective November 4, 2008. Fuel surcharges on our northern routes are not required at this time
as a result of an agreement with the Province
• On August 25, 2008, we reached an agreement for the sale of our existing head office building for approximately $11 million. We also signed a 15-year lease with renewal options for up to an additional 20 years. This will allow for the relocation of our corporate centre to a new building currently under development in downtown Victoria. This relocation will provide approximately the same space as we currently occupy in separate locations and
allow for efficiencies by combining all departments under one roof. The relocation is scheduled for July 2010. We have also entered into a letter of intent to advance up to $25 million to the developer of the new head office property, secured by a second mortgage of the property, and to obtain an option to purchase a one-half interest in the property.
• On September 10, 2008, a Purchase and Sale Agreement was completed for the sale of the fully amortized Queen of Tsawwassen for nominal proceeds. The agreement states that the buyer cannot sell or scrap the vessel for three years from the date of the agreement. Delivery took place on September 29, 2008. We also intend to retire the Queen of Vancouver and Queen of Saanich from service prior to the end of fiscal 2009 and have offered these vessels for sale.
• On September 25, 2008, the new Northern Expedition was launched at Flensburger Schiffbau-Gesellschaft (FSG) in Germany. The Northern Expedition will replace the 42-year-old Queen of Prince Rupert, operating on our northern routes. This 150-metre
vessel, which is expected to be in service in the spring of 2009, will have 55 staterooms and will accommodate 130 vehicles and 600 passengers. The total project budget for this vessel is $200 million. The project is currently on schedule and on budget.
• On October 22, 2008, the Province announced that it would provide funding to allow a 33 per cent reduction on fares for all routes during the months of December 2008 and January 2009. Additional funding will also be provided to reimburse the costs of
reinstating previously eliminated off-peak sailings.
• We have experienced a decrease in traffic in the first and Second quarters of fiscal 2009 compared to the same period in the prior year. Vehicle traffic was 6.1% lower in the second quarter (4.2% year to date) and passenger traffic was 5.3% lower in the second quarter (4.0% year to date).
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During the six months ended September 30, 2008, the greatest portion of our revenues, 61%, was earned on our three major routes connecting Vancouver Island to Vancouver and the Lower
Mainland. The revenue from the northern routes contributed 8% and other routes contributed 30%. General revenue, 1%, consists mainly of interest earned and retail commissions.
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Our largest revenue source is vehicle and passenger tariffs. The price cap increase authorized by the Commissioner was 7.3% on the major routes and 4.0% on all other routes effective April 1, 2008, starting from a level which included fuel surcharges in place at March 31, 2008.
On April 1, we implemented tariff increases in line with these price cap adjustments. On each subsequent April 1 of the four-year term, the price cap will increase by 2.7% plus 0.49 times the latest reported annual increase in the Consumer Price Index (British Columbia) on the major routes and 5.7% plus 0.73 times the Consumer Price Index (British Columbia) on all other routes.
From time to time, we utilize promotional fare incentives designed to stimulate growth in traffic or direct traffic towards our less busy sailings. In calculating the price cap, vehicle and passenger tariffs are combined. The utilization of promotional fare incentives and the effects of being over or under the price cap may cause the average vehicle and passenger tariff rate to be under or over the statutory increase in any one period.
As a result of the dramatic increase in fuel prices over the first part of this year, fuel surcharges were implemented on August 1, 2008. Subsequently, approval was received from the Commissioner to reduce these fuel surcharges by 50% in order to reflect the more recent drop in fuel prices. The reduction will be effective November 4, 2008. In the second quarter, we collected $10.6 million in fuel surcharges from customers and in the six months ending September 30, 2008, we invoiced the Province $2.4 million for fuel costs on the northern routes.
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Both vehicle traffic and passenger traffic decreased over the prior year. The reduction in total tariff revenue as a result of these volume decreases was more than offset by the increase in average tariff revenue. The increase in average tariff revenue per vehicle in the second quarter was $7.45 or 15.5% ($7.62 or 16.1% year-to-date) while the increase in average tariff revenue per passenger in the second quarter was $1.69 or 17.5% ($1.51 or 16.1% year-to-date).
A significant portion of these increases represents fuel surcharges previously paid by customers and credited to fuel cost deferral accounts, which are now included in tariff revenue by order of the Commissioner. During the second quarter of fiscal 2008, these surcharges paid by customers amounted to $10.0 million ($16.2 million for the six months ended September 30, 2007).
The April 1, 2008 price cap increase on the major routes was 7.3% starting from a level which included fuel surcharges in place at March 31, 2008. The higher average fares, partially offset by the decrease in traffic and significant use of promotional discount fares during the first quarter, resulted in a total increase of $8.6 million ($18.0 million year-to-date) in tariff revenue.
Social program fees are reimbursements from the Province of discounts provided on fares for BC seniors, students travelling to and from school, persons with disabilities and persons travelling under the Medical Travel Assistance Program. These fees have increased mainly as a result of higher fares.
All of our vessels that provide service on our major routes have a gift shop and options for food service. Although the spending per passenger on catering and on-board services increased 3.9% (increase of 3.5% in gross margin) for the six months ended September 30, 2008, this increase was more than offset by a decrease in overall sales as a result of the lower number of passengers carried.
The lower fees for reservations and assured loading revenue also reflect the lower traffic levels.
Parking revenue has increased significantly in the second quarter of fiscal 2009 and other revenue is higher as a result of retail commissions arising from the opening of the Departure Bay Quay.
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The $14.8 million ($28.8 million year-to-date) increase in operations expenses reflects:
• $12.3 million ($22.7 million year-to-date) increase in fuel expense reflecting the increase in the per litre cost of fuel, partially offset by $0.6 million due to a reduction in litres consumed in the six months ended September 30, 2008 as a result of our fuel reduction strategy.
For Performance Term 2, the Commissioner increased the price of
fuel to be included in the determination of price caps by 81.3% from the prior year in order to reflect higher fuel prices;
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• $2.2 million ($5.2 million year-to-date) increase in wages and benefits, including:
o Approximately $1.3 million ($2.4 million year-to-date) in bargaining unit wage rate increases averaging about 3%;
o $1.2 million ($2.3 million year-to-date) increase in benefit costs; and
o $0.1 million ($0.9 million year-to-date) in additional training costs.
These increases were partially offset by reductions resulting from the deferral of filling staff vacancies;
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• $0.1 million ($0.8 million year-to-date) increase in safety and security costs as we continue with our SailSafe program — a joint initiative with the BC Ferry & Marine Workers’ Union to identify areas and methods for enhancing current safety practices.
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Maintenance costs are $4.2 million ($7.3 million year-to-date) lower than the prior year. We plan to undertake 20 vessel refits in fiscal 2009, compared to 26 in the prior year.
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Administration expenses decreased $1.0 million ($0.3 million year-to-date) mainly as a result of the deferral of filling staff vacancies and deferring or reducing travel, consulting, marketing, advertising and other discretionary expenditures.
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Amortization increased a total of $5.9 million ($10.3 million year-to-date) mainly as a result of additional assets coming into service, including $4.0 million ($6.0 million year-to-date) reflecting the Coastal Renaissance entering service in March 2008 and the Coastal Inspiration entering service in June 2008;
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Interest expenses increased $4.3 million ($7.7 million year-to-date) primarily due to:
• $2.8 million ($5.6 million year-to-date) additional interest relating to our $200 million bond series issued in January 2008;
• $2.3 million ($4.1 million year-to-date) additional interest relating to the two $90 million KfW loans;
• $0.8 million ($1.6 million year-to-date) reduction in funds received from the Structured Financing Facility Program offered by the Government of Canada; and
• $0.3 million ($0.7 million year-to-date) reduction in interest on deferred fuel cost accounts.
These increases were partially offset by $2.2 million ($4.5 million year-to-date) of additional interest capitalized reflecting our investment in revitalizing our fleet and terminal facilities.
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We reported a $1.2 million gain from the sale of the Queen of Esquimalt in the three months ended June 30, 2008.
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Liquidity and Capital Resources:
We fund our operations and capital acquisitions with cash flow generated from operations, as well as bank financing and debt issues. We currently expect operating cash flows to fund more than one-half of the capital expenditures over the next five years, with the balance funded by borrowings.
In May 2008, we negotiated an extension of the $155 million credit facility by one year. The new maturity of this facility is May 12, 2013. At September 30, 2008 we had drawn $11 million on this credit facility.
In May 2008, to coincide with conditional acceptance of the Coastal Celebration, we received $90 million in proceeds under the loan agreement with KfW, a German export credit bank. This is a 12-year amortizing loan, at a fixed interest rate of 4.98%. The agreement defers the principal payments for the first three years to a second tranche on which interest only is payable at a floating rate. This principal is due June 2020.
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The Queen of New Westminster, which usually operates on our Duke Point–Tsawwassen route, is currently undergoing a project to extend the life of the 44-year-old vessel for a further thirteen years of service. This $55 million project will include significant upgrades for structural fire protection; a new marine evacuation system; major electrical upgrades; boiler, auxiliary generator and emergency generator renewal; and propulsion controls upgrade.
The Queen of New Westminster is expected to return to service in early 2009 and be redeployed on our Tsawwassen–Swartz Bay route.
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We expect to take delivery of the Island Sky, our new intermediate class ferry, before the end of 2008. The $46 million contract with Vancouver Shipyards constitutes the majority of the
total project budget of $57 million. The new intermediate vessel has allowed for the retirement and sale of the 48-year-old Queen of Tsawwassen. The new vessel measures 102 metres in length and has a capacity of approximately 600 passengers and 125 vehicles. It features a new state-of-the-art lifesaving system as well as a variety of amenities, including a lounge and snack bar for passengers.
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At nine terminals, mainly serving our major and northern routes, we continue our multiyear project to upgrade our security. This project primarily involves fencing, gating, lighting, access controls and closed circuit television as well as upgrades to foot passenger ticketing areas and baggage screening.
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OUTLOOK
Economic Outlook
The Canadian economy is not immune to the current turbulence in financial markets and the deepening recession in major economies around the world. This has had a negative impact
on our operations. For example, while our ridership has been stable over several years, we are experiencing a downturn in traffic which is at least in part due to the current economic
condition. The duration of this recession is uncertain and we believe it is unlikely that the impact on our operations will reverse until such time as world economies begin to recover.
Fuel Costs
Fuel is a major cost of our operations. It has increased significantly over the past few years and there is uncertainty of future pricing. We use deferred fuel cost accounts to mitigate the
effect of volatility in fuel oil prices on earnings.
For the northern routes, the per litre cost of fuel included in the determination of price caps (the set price) and one-half of the first 5 cents per litre of difference between the actual price paid per litre and the set price are recorded in expense. The remaining one-half of the first 5 cents per litre of difference is recorded in the deferred fuel cost accounts. Any difference beyond 5 cents per litre is recovered from or paid to the Province. The total to be recovered from the Province relating to fuel costs on the northern routes was $2.4 million for the six months ended September 30, 2008.
For all other routes, differences in fuel costs arising from our actual price paid per litre being higher or lower than the unit set price included in base tariffs less one-half of the first 5 cents per litre of difference are charged or credited to the deferred fuel cost accounts. The balances in our deferred fuel cost accounts totalled $14.0 million at September 30, 2008 ($11.9 million at March 31, 2008). Included in the September 30, 2008 balance is $3.4 million in unrealized fuel hedge losses on fuel forward contracts entered into to fix the price of future purchases.
In performance term one, to reduce the increasing balances of the deferred fuel cost accounts, the Commissioner approved extraordinary price cap increases to allow for fuel surcharges which were implemented from time to time, beginning in July 2005. In performance term two, there is an automatic mechanism in place to allow price cap increases to provide for implementation of fuel surcharges. As fuel costs continued a dramatic rise, we requested and received approval from the
Commissioner to allow for the early implementation of fuel surcharges, effective August 1, 2008 on all but the northern routes. Subsequently, approval was received to reduce these fuel surcharges by 50% in order to reflect the more recent drop in fuel prices. The reduction will be effective November 4, 2008. We anticipate further reductions may be made if fuel prices remain low.
Traffic
Ferry traffic levels are affected by a number of factors, including transportation costs, the value of the Canadian dollar, weather, global security, levels of tourism, disposable personal income, the local economy, demographics and population growth. We have experienced a decrease in traffic in the first and second quarters of fiscal 2009 compared to the prior year.
With the increase in transportation costs as a result of fuel prices, the tariff rate increase of April 1, 2008, fuel surcharges and the current economic uncertainties, we are uncertain as to the cumulative impact these events may have on our traffic.
As a result of this uncertainty and of the continued reduction in traffic in the second quarter, we have revised our financial and operating plans to reduce overall overhead and other operating costs from previously planned levels. One measure taken was an elimination of some off-peak sailings which historically have had low utilization. On October 22, 2008, the Province announced
that it would provide funding to allow a 33 per cent reduction on fares for all routes during the months of December 2008 and January 2009. Additional funding will also be provided by the Province to reimburse the costs of reinstating the previously eliminated off-peak sailings.
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over the five-year period ending June 2013, we will bring the following three vessels into service:
• a northern vessel, the Northern Expedition;
• an intermediate class ferry, the Island Sky; and
• a minor vessel to replace the Tenaka.
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During fiscal 2008, we realized a 12.5% increase in commercial traffic revenue compared to the previous year. To increase our capacity in the commercial sector, we have assigned one new Super C-class vessel to each major route between the Lower Mainland and Vancouver Island.
As a result, the Coastal Inspiration has joined the recently upgraded Queen of Alberni on our Duke Point–Tsawwassen route – the route most frequently used by commercial truckers.
In the six months ended September 30, 2008, we realized an 18.5% increase in commercial traffic revenue compared to the prior year, reflecting a marginal increase in traffic levels.
Our commercial sales team is continuing to actively pursue new business and is implementing new integrated sales solutions and enhanced services for our commercial customers.
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In September 2008, we established BCF Global Services Inc. (BCF Global) as a wholly owned subsidiary to provide consulting and management services both domestically and internationally. BCF Global will take advantage of our expertise and long history in the
marine transportation business to pursue new business opportunities relating to the development, operation and maintenance of ferry systems.
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In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The
AcSB strategic plan outlines the convergence of Canadian generally accepted accounting principles with International Financial Reporting Standards (IFRS) over an expected five
year transitional period.
During March 2008, the AcSB confirmed the transition dates for
conversion to IFRS. Our transition date for the conversion to IFRS is April 1, 2011 and will require the restatement for comparative purposes of amounts reported by us for the year ended March 31, 2011.
We are continuing to assess the financial reporting impacts of the
adoption of IFRS and, at this time, the impact on the future financial position and results of operations is not reasonably determinable or estimable.
We commenced our IFRS conversion project in 2007 and have established a formal project governance structure with regular reporting. We have also engaged a quality assurance advisor to assist in the project.
Our IFRS conversion project consists of three phases: scoping and diagnostic; analysis and development; and implementation and review. The first phase, which has been completed, involved project planning and resourcing, identification of differences between current Canadian GAAP and IFRS and priority setting.
The areas identified to have the highest potential to significantly impact us are rate regulated operations; property plant and
equipment, intangible assets and asset impairment; and initial adoption of IFRS under the provisions of IFRS 1 First-Time Adoption of IFRS.
The second phase, which involves detailed analysis and evaluation of options and alternative methodologies available under IFRS and the financial impact of these options, is currently in progress.
We anticipate that the adoption of IFRS will have an impact on our system requirements; however the degree of impact is not reasonably determinable at this stage of the project. We will continue to closely monitor the proposed and continuing projects of the International Accounting Standards Board and any International Financial Reporting Interpretations Committee initiatives that may potentially impact rate-regulated accounting
under IFRS.
(uggggh ;D)
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