Questions on BC Ferries Annual Report

On February 1, 2006, the Commission put the following six questions (in italics below) to BC Ferries following a detailed review of BC Ferries’ Annual Report to the Commission for the FY 2004/5. (You can download a more detailed version of the Commission’s questions, with supporting data tables and analysis by clicking here.)

BC Ferries responded to these questions on June 2, 2006 in a detailed memorandum dated May 24, 2006 including a table correcting the financial results for each route previously reported for the year ended March 31 2004 (this correction is referred to in BC Ferries’ answers copied below). Previous results were in error due to incorrect and inconsistent allocation of certain costs among routes, though the route-total figures were unaffected. (You can download BC Ferries’ detailed response with its supporting table by clicking here).

  1. Question 1. What are the reasons for re-classifying some revenues and expenses in the 2004/05 Route Report versus the Annual Audited financial statements?
    BC Ferries’ Answer. The Route Report presents the results of BC Ferries subsidiary companies differently than the annual report. On the Route Report, the amounts shown for Ancillary Revenue, Amortization, Interest Expense and Loss on Disposal of Capital Assets are the unconsolidated amounts. Items related to BC Ferries subsidiary companies are reported as Operating Expenses on the Route Report. The (Loss) Gain on Foreign Exchange is also reported as Operating Expense on the Route Report.
  2. Question 2. Why were the amounts for Operations, Maintenance and Administration expenses re-stated for the 2003/04 fiscal year in the 2004/05 Annual Audited financial statements?
    BC Ferries’ Answer.In fiscal year 2003/04, we began to classify our expenses into Operations, Maintenance and Administration (OM&A). However, it was noted that a complete review of the expenses classification was necessary. A detailed review of how operating expenses should be classified between the categories OM&A was done in fiscal year 2004/05. The amounts for Operations, Maintenance and Administration expenses for the 2003/04 fiscal year were restated in the 2004/05 Annual Audited financial statements to provide prior year comparative figures, conforming to the results of this review.In conducting the expense classification, we found guidance in another regulated industry, the natural gas industry. The British Columbia Utilities Commission (BCUC) regulates this industry in the Province of BC and has issued by Order a document entitled “Uniform System of Accounts Prescribed for Gas Utilities”. The primary purpose of this document is to ensure consistency of application and to provide comparability of results between gas utilities. The BCUC issued document provides definitions of each of “operations expense”, “maintenance expense” and “administrative expense”. We borrowed heavily from this guidance provided by the BCUC in classifying expenses.

    Total actual expenses, and therefore the individual route expenses, were not affected by this re-classification. Nor did it change any allocation factors. The only change was the category “classification” among operations, maintenance and administration expenses.

    It is expected that this method of classifying expenses will be consistent for the balance of the first term and beyond.

  3. Question 3. How were the reductions in service fees (dues to sailing cancellations) calculated on a route by route basis, and how do the reduced service fees relate to “Cancels Not Allowed for in Schedule A,2(a) of the Coastal Ferry Services Contract”?
    BC Ferries’ Answer.Attached as Appendix B is a reconciliation of the total service fees reported in fiscal year 2005. They consist of the calculated maximum ferry service fee less service fee reductions for the last quarter of the previous year and the first three quarters of fiscal 2005. The information for the final quarter of each year is not available in time to be recorded in the fiscal year when it occurred so is recorded at the beginning of the following fiscal year.The second part of this question is “How were the reduction in service fees calculated on a route by route basis and how do the reduced service fees relate to “Cancels Not Allowed for in Schedule A,2(a) of the Coastal Ferry Services Contract”. Not all “Cancels Not Allowed for” carry a service fee reduction. The determination of whether a service fee reduction is required is actually the “the smaller of” 2 individual calculations as per Schedule “B” of the Coastal Ferry Services Contract. Attachment 2 only considers the first calculation. The second calculation basically is an elimination of the service fee reduction if the total traffic carried in the current year was higher than the previous year and could also be a reduction of the amount in the first calculation if the traffic was somewhat lower. Detailed calculations are available upon request.
  4. Question 4. When individual route finances are compared to the vessel refit schedule, a large swing in expenses year-over-year can usually be explained by the timing or extent of the refits for vessels on a route. Please provide explanations for the large change in costs in 2004/05 for the following routes, which do not appear to be explained by the timing of vessel refits: Route 4, 20 and 24BC Ferries’ Answer. Answer Route 4: The revised increase in net earnings is $215,000. This is due to an increase of $238,000 in revenue, offset by an increase of $45,000 in the cost of capital.
    • Answer Route 20: The revised increase in operating costs of $417,000 is due to the allocation of refit costs for the Kahloke which did have a refit in 2005. The Kahloke is routinely used to provide winter service on route 20 as it can not be used on route 22 in the winter.
    • Answer Route 24: The revised decrease in operating costs of $437,000. This is driven by the Tenaka refit which occurred in fiscal 2004, the Tachek was not used on route 24 in either year so there is no allocation of costs from the refit.
  5. Question 5. The table on page 19 of the FY 2004/5 Report to the Commissioner indicates that Route 10 (Port Hardy – Prince Rupert) sailed 2 extra round trips. The Service Notices were examined for the 2004/05 fiscal year and no mention was found about extra unscheduled trips on Route 10. When were the 2 extra round trips performed, and how was the public informed of the trips so that they could reserve passage?
    BC Ferries’ Answer.BC Ferries provided an additional Route 11 trip in September 2005 on a lay over Wednesday to facilitate back log of commercial traffic during the shoulder season. Any time there are over 6 drop trailers in the parking lot for the QCI, BC Ferries generally looks to providing additional sailings to clear up back log.Also, an additional trip was added on route 10 during the All Native Basketball Tournament due to the vessel’s inability to cross Hecate straight because of heavy weather. During these times, BC Ferries notifies customers by direct phoning of reserved and known travelers/shippers.
  6. Question 6. Route 1 (Swartz Bay – Tsawwassen) experienced traffic growth (3.7% for vehicles and 4.9% for passengers) and 7.3% revenue growth in 2004/05 compared to 2003/04, but a 10.5% increase in expenses resulted in reduced net earnings for the route. Please explain why expenses grew more than revenues in 2004/05 compared to 2003/04.BC Ferries’ Answer.The revised increase in operating expenses of 9.5% ($9.7 million) is primarily due to the following:
    • $4.7 million increase in refit and maintenance
    • $2.2 million increase in property taxes
    • $1.7 million increase in information technology system support costs
    • $0.7 million write off of obsolete inventory
    • $0.4 million one time insurance credit received in 2003/04
    • $0.2 million re: Corporate Capital Tax (re)assessment

    The $4.7 million increase in refit and maintenance costs (from $9.4 million to $14.1 million) is mainly due to a $6.1 million increase in expenditures on the Spirit of British Columbia which underwent two refits (including one dry docking) in 2004/05, partially offset by reduced costs of refits on other vessels (including $1.5 million reduction on the Spirit of Vancouver Island).

    The $2.2 million increase in property taxes is due to 2005 being the first complete calendar year of the change from paying grants in lieu of taxes to property taxes.

    The $1.7 million increase in information technology system support costs is a result of major information system implementations including Crew Scheduling, Employee Self Service and Corporate Incident Management systems.