ANNUAL REPORT BRITISH COLUMBIA FERRY SERVICES INC.

Transcription

1 ANNUAL REPORT BRITISH COLUMBIA FERRY SERVICES INC.

2 I have been with BC Ferries for 20 years and I am currently a Ticketing Supervisor, but I m versatile and work in numerous positions including Terminal Manager. I truly enjoy my jobs and the versatility, camaraderie, as it feels like a second family. c a l f r o s t, t i c k e t i n g s u p e r v i s o r

3 BRITISH COLUMBIA FERRY SERVICES INC. Corporate Profile 2 Message from the Chair 4 Message from the President & CEO 5 Key Accomplishments 6 Performance Measures 12 Key Cost Drivers 13 Management s Discussion and Analysis of Financial Condition and Results of Operations 15 Consolidated Financial Statements 81 Corporate Directory 113 This report contains certain forward looking statements. These statements relate to future events or future performance and reflect management s expectations regarding our growth, results of operations, performance, business prospects and opportunities and industry performance and trends. They reflect management s current internal projections, expectations or beliefs and are based on information currently available to management. Some of the market conditions and factors that have been considered in formulating the assumptions upon which forward looking statements are based include traffic, the Canadian Dollar relative to the US Dollar, fuel costs, construction costs, the state of the local economy, fluctuating financial markets, demographics, tax changes, and the requirements of the Coastal Ferry Services Contract. Forward looking statements included in this document include statements with respect to: our short-term and long-range business plans; our asset renewal programs for vessels and terminals; our customer service program, vessel replacement program for the Queen of Burnaby and the Queen of Nanaimo, cable ferry initiative, and liquefied natural gas plans; our fourth performance term submission; and service level reductions and a long-term vision for connecting coastal communities. In some cases, forward looking statements can be identified by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. A number of factors could cause actual events or results to differ materially from the results discussed in the forward looking statements. In evaluating these statements, prospective investors should specifically consider various factors including, but not limited to, the risks and uncertainties associated with traffic volume and tariff revenue risk, safety and security, asset risk, accident risk, tax risk, environmental risk, regulatory risk, labour disruption risk, risk of default under material contracts and aboriginal land claims. Actual results may differ materially from any forward looking statement. Although management believes that the forward looking statements contained in this report are based upon reasonable assumptions, investors cannot be assured that actual results will be consistent with these forward looking statements. These forward looking statements are made as of the date of this report, and British Columbia Ferry Services Inc. assumes no obligation to update or revise them to reflect new events or circumstances except as may be required by applicable law. In addition to providing measures prepared in accordance with IFRS, we present certain supplemental non-ifrs measures. These include, but are not limited to, vehicle and passenger traffic, on-time performance, fleet reliability scores, employee and passenger safety scores, and customer satisfaction ratings. These measures do not have any standardized meaning prescribed by IFRS and therefore are unlikely to be comparable to similar measures presented by other companies. These supplemental non-ifrs measures are provided to assist readers in determining our ability to generate cash from operations and improve the comparability of our results from one period to another. We believe these measures are useful in assessing operating performance of our ongoing business on an overall basis. BRITISH COLUMBIA FERRY SERVICES INC. 1

4 CORPORATE PROFILE BC Ferries is one of the largest ferry operators in the world, providing year-round vehicle and passenger service on 24 routes to 47 terminals, with a fleet of 35 vessels. We are an essential transportation link that connects coastal communities and facilitates the movement of people, goods and services. In fiscal 2014, we carried 19.7 million passengers and 7.6 million vehicles throughout coastal British Columbia. OUR VISION To provide a continuously improving west coast travel experience that consistently exceeds customer expectations and reflects the innovation and pride of our employees. OUR MISSION To provide safe, reliable and efficient marine transportation services which consistently exceed the expectations of our customers, employees and communities, while creating enterprise value. OUR VALUES Safety: Ensure that the safety and security of our customers and staff is a primary concern in all aspects of doing business. Quality: Be motivated by customer expectations in providing quality facilities and services. Integrity: Be accountable for all our actions and ensure we demonstrate integrity in our business relations, utilization of resources, treatment of our customers and staff, and in the general conduct of our business. Partnerships: Work openly and constructively with our various business and community stakeholders to exceed the expectations of our customers and advance each other s interests. Environment: Ensure that environmental standards are maintained. Employees: Always deal from a position of honesty, integrity and mutual respect, and ensure that our employees develop to their full potential. OUR GOALS In support of our vision, we are focused on five key goals, none more important than safety. 1. Safety: To protect our customers and employees by continuously improving the safety of our operations, inclusive of vessels, terminals and facilities. 2. Operational Reliability: To continuously improve the operational reliability of vessels, terminals and facilities. 3. Continuous Improvement: To be better at everything we do. 4. Value For Money: To continuously improve value to our customers at every point along the customer experience chain. 5. Financial Integrity: To achieve key financial targets, ensuring that sufficient capital and retained earnings are available to revitalize our fleet, facilities and infrastructure. 2 ANNUAL REPORT

5 A seagoing career is interesting when you have traffic, are close to land, and about to dock. At BC Ferries this is the normal work environment. The best part of any seagoing job is to have a good crew, a sound ship, and interesting scenery and I have that too. c a p t a i n d a v e w o o d m a n, m a s t e r BRITISH COLUMBIA FERRY SERVICES INC. 3

6 MESSAGE FROM THE CHAIR OF THE BOARD OF DIRECTORS On behalf of the Board of Directors of British Columbia Ferry Services Inc., I applaud the employees of BC Ferries for their continued dedication to safety and excellence in customer service. As I reflect on the previous year, there are many highlights that come to mind such as a customer satisfaction rating of 87.0 per cent, fleet reliability rating of 99.7 per cent and an on-time performance rating of 91.5 per cent. BC Ferries won the Lloyd s List North America Safety Award in the Training category for improvements in navigation safety as a result of the new Bridge Simulation Training program. In addition, the company won the Lattitude Productions UK International Safety Award for motivating and inspiring employees to reach for world-class safety performance. Our focus today is on the need to renew our terminals and vessels; address a challenging market with a largely fixed cost system; and provide a safe, reliable high quality customer experience delivered efficiently and effectively. Our focus on the future requires continual investment in both our people and our infrastructure. We need to replace some of the minor and intermediate size vessels that, in some instances, are over 40 years old and nearing the end of their lifecycle. Our investment in information technology to replace aging and outdated systems will improve the customer experience and provide fare flexibility. Together, these investments in our operations will ensure that customers will be well served for decades to come. We have four new ships on the horizon which will allow for the retirement of some older vessels while reducing our operating costs. The three new intermediate class ferries will be dual-fuel vessels, which will allow us to operate on liquefied natural gas with the potential to reduce our fuel costs by up to 50 per cent and reduce our environmental impact. The new cable ferry will also be very cost effective to build and operate, helping us reduce upward pressure on fares. BC Ferries has a responsibility as the steward of reliable, safe and sustainable marine transportation on the west coast and we are integral to the province s economic success and well-being. We focus on providing outstanding customer service to nearly 20 million passengers each year. We facilitate the delivery of a range of commercial goods critical to residents and local economies. The Board s continued focus is to make BC Ferries a world class transportation system with a bright future ahead. Donald p. Hayes Chair of the Board of Directors British Columbia Ferry Services Inc. 4 ANNUAL REPORT

7 MESSAGE FROM THE PRESIDENT & CEO At BC Ferries, our job is to provide a safe, efficient and reliable marine transportation system along coastal British Columbia under contract to the Province. We play a critical part in connecting communities, commerce and tourism, and we take great pride in delivering this important service. As I look back on the past year, I m proud of the many accomplishments we ve achieved. We provided over 183,000 sailings for almost 20 million passengers delivering them safely to their destinations while reducing employee injuries by 22 per cent and achieving WorkSafeBC s Certificate of Recognition. During fiscal 2014, we invested $108 million in our fleet. Of this amount, there were capital projects totalling $69 million, including the $20 million multi-year life-extension project on the MV Tachek and the $3.0 million three-quarter life upgrade on the MV Kwuna. In addition, we had one of our biggest years ever for refits and vessel maintenance, spending $39 million. All of this provided significant work at local shipyards and our own refit facility. On the shore side, we invested over $40 million in capital projects and $22 million in maintenance projects at our terminals to ensure the continuity of ship to shore interface with our 35 vessels. Two notable terminal projects were the complete rebuilds of the marine structures at Powell River and Comox, which resulted in a nearly $30 million investment into these communities to ensure reliable service for up to 40 more years. These projects required complex alternate service arrangements during the temporary dock closures and the many months of pre-planning and consulting with the communities was time well spent. In an effort to keep fares as low as possible, innovation and diversification of our operations has resulted in profitable initiatives such as the creation of a commercial services division, BC Ferries Vacations Centre, and the expansion of catering and retail services. These non-traditional revenue sources continue to show strong results and improve our bottom line. As the service provider, we work closely with the provincial government, which sets our service levels as a matter of public policy, and the BC Ferries Commissioner. The Commissioner, independent of both government and BC Ferries, regulates our fares by balancing the interests of customers and taxpayers, while protecting the long term sustainability of the company. Last year, the Province announced service level reductions on our northern and minor routes to ensure BC Ferries is a strong, viable company to serve residents and tourists for years to come. We worked with the affected communities to develop optimal schedules that still address the net savings outlined by the government. We thank the communities for their valuable and constructive input into this process. We understand the vital role we play in maintaining the quality of life of people who live, work and play in British Columbia, so we will stay focused on what we do best and what we can control: serving our customers, maintaining a safe, reliable and efficient fleet, and in the process, provide a high quality customer experience, be a place where employees can build a meaningful career and be a company worthy of the public s trust. MICHAEL J. CORRIGAN President & Chief Executive Officer British Columbia Ferry Services Inc. BRITISH COLUMBIA FERRY SERVICES INC. 5

8 KEY ACCOMPLISHMENTS IMPROVING THE TRAVEL EXPERIENCE Achieved a vessel reliability index of 99.7 per cent. Generated $79 million in ancillary revenue in food and retail sales. While we impress shoppers and diners with new products, these services contribute valuable non-tariff revenue to our bottom line, which helps reduce pressure on fares. Continued to invest in the future through our customer-facing information technology program, which is a multi-year integrated business solution to improve the end-to-end customer experience. This program will deliver enhanced value for our customers by enabling a greater selection of fare options, improve certainty of travel and consolidate customer information. In partnership with Parks Canada, implemented the 8 th season of our Coastal Naturalist program on the Tsawwassen Swartz Bay and Horseshoe Bay Departure Bay routes for the summer months. Released the results of our 2013 Customer Satisfaction Tracking surveys which indicated that 87 per cent of customers surveyed reported being satisfied with their overall trip experience. Generated $3.3 million in revenue from BC Ferries Vacations in fiscal 2014 and served over 35,000 customers since it opened in downtown Vancouver four years ago. Expanded the popular White Spot menu offerings on vessels servicing the Metro Vancouver Vancouver Island and Horseshoe Bay Langdale routes. Introduced menu refresh for food outlets on the northern vessels and implemented a new outdoor BBQ service on the Northern Expedition. Introduced recyclable paper hot beverage cups, in place of foam cups, throughout the fleet to improve the customer experience and reduce our environmental footprint. Developed and installed new terminal wayfinding signs at Swartz Bay terminal, allowing for clear and effective directional information for customers. Developed a customer service enhancement program based on customer feedback. 6 ANNUAL REPORT

9 KEY ACCOMPLISHMENTS INVESTING IN OUR VESSELS & TERMINALS Invested $129.9 million in capital expenditures for vessel upgrades and modifications, terminals and information technology. Conducted 13 drydockings and 24 refits on our fleet of 35 ships this year. Awarded a $15 million contract to Seaspan s Vancouver Shipyards to build a cable ferry for the Buckley Bay Denman Island route. Awarded two contracts totalling $15 million for the construction of the Buckley Bay and Denman West cable ferry berths. Completed a $9 million project at Little River terminal to replace the ramp, ramp abutment and towers with active life hydraulics and replaced the wingwalls and dolphin. This project will provide safe and reliable service for up to another 40 years. Completed an $18 million project at Westview terminal to replace the existing marine structures to provide safe and reliable service for up to another 40 years. Conducted a $3 million three-quarter life upgrade on the MV Kwuna at Allied Shipbuilders in North Vancouver. Completed a project to life-extend the upper transfer deck at Horseshoe Bay terminal for another seven years. Concluded a $20 million project at Point Hope Maritime in Victoria to extend the life of the MV Tachek by an additional 15 years until retirement in Issued a Request for Proposals to five pre-qualified shipyards, including one Canadian proponent, to build three intermediate class ferries to replace the 49-year-old Queen of Burnaby and the 50-year-old Queen of Nanaimo. Substantially completed an $8 million project at Alert Bay to upgrade wingwalls, towers and aprons and ramp. Replaced the double-sided floating lead at Village Bay terminal. Completed a $1 million project to improve the C-Class vessel propulsion systems by installing new controllable pitch propeller hub systems on the Queen of Coquitlam and the Queen of Cowichan. Credit rating agency Standard & Poors raised our long-term and senior unsecured debt ratings to AA- from A+ with a stable outlook. BRITISH COLUMBIA FERRY SERVICES INC. 7

10 I have been working at BC Ferries since What I like about my job is the challenge that comes when I come to work everyday. i s m a e l j a m e l a r i n, t h i r d e n g i n e e r 8 ANNUAL REPORT

11 KEY ACCOMPLISHMENTS BUILDING A BETTER BC FERRIES Completed Phase III of SailSafe, a joint safety initiative with the BC Ferry & Marine Workers Union and increased the size of the SailSafe ambassador group from 337 to 426 employees. Received WorkSafeBC s Certificate of Recognition (COR) for successfully implementing and maintaining an occupational health and safety management system that exceeds the regulatory requirements of the Workers Compensation Act and the Occupational Health & Safety Regulations by taking a best practices approach to implementing health, safety and return to work programs. Completed the redemption of all $140 million of the outstanding Series Bonds on July 24, 2013, formerly due on December 19, This debt management initiative to reduce interest costs in the short term was funded with $55 million from cash on hand and $88 million in draws on our credit facility. Due to this early redemption, BC Ferries saved approximately $0.3 million in interest costs. Completed a private placement of $200 million of 30-year senior secured bonds with accredited investors on October 25, These bonds bear interest at a rate of 4.702% per annum, payable semi-annually. This issuance was partially related to the early redemption of our $140 million Series 08-2 Bonds. The net proceeds of this new issue were used to repay indebtedness under our credit facility, fund the debt service reserve related to these bonds, and will partially fund capital expenditures, and provide funding for general corporate purposes. These bonds were rated A (DBRS) and A+ Standard & Poor s (S&P). Held 29 Town Hall sessions with over 400 employees to collaborate and brainstorm different avenues for improving workplace safety. Completed the safety management system (SMS) integration project including the creation of SMS dashboards offering all employees access to near real time safety data. Received the Lattitude Productions UK International Award for Inspiring Safety. Reduced employee time-loss injuries by 22 per cent and days lost to injuries by 19 per cent over the previous year. Won the Lloyd s list North America Safety Award in the Training category for improvements in navigation safety as a result of the new bridge simulation training program. Continued to develop and invest in our people through extensive technical training and orientation, succession planning and sponsored development for our officers and significant leadership training for our managers and supervisors. BRITISH COLUMBIA FERRY SERVICES INC. 9

12 KEY ACCOMPLISHMENTS BUILDING A BETTER BC FERRIES (cont d) Delivered over 15,500 personal training days to our employees. Expanded the new operational readiness exercise process to the Horseshoe Bay Departure Bay and Horseshoe Bay Langdale routes. Completed the roll out of the standardized education and assessment (SEA) program to over 70 per cent of operational positions identified for training. Increased the total number of qualified trainers in the company to over 300 and expect to grow the training team to 400 by the time SEA is fully implemented by March Marked a major milestone in our commercial services division by carrying our 100,000 th drop trailer this year. Completed a private placement of $200 million of 30-year senior secured bonds with accredited investors on April 28, These bonds bear interest at a rate of 4.289% per annum, payable semi-annually. The net proceeds of this new issue, together with additional cash on hand, were used to repay our $250 million bond Series 04-1, which matured on May 27, 2014, and to fund the debt service reserve related to these bonds. These bonds were rated A (DBRS) and AA- (S&P). The effective rate of this issue, net of hedging, is 4.50 per cent, the lowest effective bond interest rate in the 11-year history of the company. 10 ANNUAL REPORT

13 KEY ACCOMPLISHMENTS CONNECTING WITH THE COMMUNITIES WE SERVE Performed 18 marine rescues throughout coastal British Columbia including the May 20, 2013 rescue of two people from a capsized pleasure craft by the crew of the MV Klitsa. Raised $50,000 for Community Living Victoria, which supports people with developmental disabilities together with their families, through the BC Ferries Media Charity Golf Classic. Over the past eight years, these tournaments have raised over $500,000 to support various programs. Provided technical support for a government-led consultation and engagement process regarding the immediate challenges and long-term vision for the coastal ferry service. Followed up this process with BC Ferries-led schedule refinement meetings with the affected communities in order to mitigate the impact of service reductions through schedule adjustments. Pledged over $50,000 in employee contributions in the 2013 United Way Campaign. Consulted regularly with our 13 Ferry Advisory Committees. For the 10 th consecutive year, BC Ferries employees raised money to donate to a local food bank through the annual BC Ferries employees golf tournament. The 2013 tournament raised $3,060 which was divided amongst food banks on Salt Spring Island, Gabriola Island and Quadra Island. Conducted over 80 extra ambulance runs to transport people requiring urgent care from smaller island communities to emergency medical treatment. Sponsored the Powell River Kings Junior A Hockey Club, the BC Bike Race, ViaSport, and the Victoria Highlanders Football Club. Held community open houses in Powell River and Little River to work with communities on alternate service delivery during dock closures for construction. After the projects were complete, held customer appreciation events to thank customers for their patience while the multi-million dollar dock upgrades were underway. Completed the Langdale master plan after extensive public and employee stakeholder consultation. This master plan provides a long term development framework to guide the Langdale terminal development over the next 20 years. Held public information sessions in the Southern Gulf Islands and Northern Sunshine Coast regarding the new intermediate class ferry build program. BRITISH COLUMBIA FERRY SERVICES INC. 11

14 PERFORMANCE MEASURES In support of our vision, mission, and key business goals, the Board of Directors and management of BC Ferries have implemented comprehensive long-term operational performance measures to monitor the progress of the business and its ongoing commitment to continuous improvement. These and other measures are described more fully in the company s Business Plan, which is available at The safety of our passengers and employees is our primary focus: 1 Employee Safety (employee injury frequency rate X severity rate divided by 1000) 2 Passenger Safety (number of passenger injuries per one million passengers) Fiscal 2012 Fiscal 2013 Fiscal 2014 Fiscal 2015 Actual Target Actual Target Actual Target Target Employee Safety Passenger Safety Restated Other important areas of focus include: 3 Reliability (actual round trips divided by scheduled round trips, less weather, medical or rescue related cancellations) 4 Customer Satisfaction Rating Fiscal 2012 Fiscal 2013 Fiscal 2014 Fiscal 2015 Actual Target Actual Target Actual Target Target Reliability Index 99.76% % 99.75% % 99.71% % % Customer Satisfaction 88% 83% 88% 88% 87% 88% 88% 12 ANNUAL REPORT

15 KEY COST DRIVERS Over the past 11 years, since being established as an independent company in April 2003, we have maintained a strong focus on providing a safe, reliable and efficient marine transportation service. We have continuously sought to improve this service, as witnessed by our performance measures. A significant portion of this effort has been directed to the replacement of many aged assets, resulting in more than $2 billion worth of investments over the past 11 years. We have brought seven new vessels into service, upgraded 19 others, made numerous improvements to terminals and marine structures, upgraded security, and implemented sewage pump-ashore and waste water treatment systems. These significant and necessary capital expenditures have resulted in a significant increase in net financing and amortization costs. During fiscal 2014, we managed 169 active projects including the successful completion of 24 vessel refits, upgrades to the Tachek and Kwuna, and extensive upgrades at the Westview, Little River, and McLoughlin Bay terminals. With the global economic downturn in 2008, we began to experience significant erosion in our traffic. This erosion, combined with significant increases in the price of fuel (150% since 2004), insurance premiums, property taxes, environmental and security regulations, utilities, benefit program rates and labour agreements has placed considerable pressure on earnings. Without compromising safety, we have remained responsive to these challenges and maintained our focus on ensuring financial integrity. Since 2004 we have made significant improvements in our fuel consumption, which has resulted in an overall decrease in our annual consumption of 4.8%, a savings of 5.8 million litres from fiscal 2004 (a reduction of over 8.3 million litres from fiscal 2003). Over the same period, we have contained our administrative costs in absolute terms to the amount spent in When taking inflation into account, administration costs have been reduced by 17%. ($ millions) Fiscal 2004 Fiscal 2004 Fiscal 2014 Actual 2 Restated Actual in 2014 Dollars 3 Operations Costs Labour Fuel Materials, Supplies, Contracted Services and Other Insurance 5, Property Tax, Utilities and Credit Card Fees Maintenance Expenses Administration Expenses Net Financing and Amortization The fiscal 2004 figures for operations, maintenance and administration (OM&A) expenses have been adjusted from those figures previously reported to reflect classifications of expenses used in fiscal Total OM&A expenses for fiscal 2004 are identical to those previously reported. 3 Fiscal 2004 figures have been restated in 2014 dollars on the basis of BC CPI. 4 Fuel reflects the total cost of fuel net of fuel price hedging, gains or losses. 5 Insurance includes gains or losses from our subsidiary, BCF Captive Insurance Company Ltd. 6 Vessel major overhauls and inspections (MOI) were previously expensed as maintenance; under IFRS, they are capitalized and expensed over their expected life through amortization. For fiscal 2014, under previous GAAP, $39 million in MOI would have been expensed to maintenance increasing total maintenance to $102 million. 7 Net financing includes financing for the Kuper owned by our subsidiary Pacific Marine Leasing Inc. Looking forward, we will continue to pursue opportunities to minimize costs and work towards replacing or life-extending 11 of our aged vessels over the next 10 years. These replacements present us with the opportunity to build standardized vessels to provide interoperability and design optimization. Complementing these initiatives is the opportunity to incorporate new technologies, such as liquefied natural gas engines. Liquefied natural gas is not only currently over 50% cheaper than marine diesel, it is also better for the environment. During fiscal 2015, we will be providing the British Columbia Ferries Commissioner (the Commissioner) with our fourth performance term submission. This submission will inform the Commissioner of the operating and capital investments required to ensure ongoing safe and reliable service. This will include several efficiency strategies we anticipate implementing in the coming years. Pursuant to the Coastal Ferry Act, the Commissioner will be seeking public comment on our submission. We will also continue to work with the Province on service level adjustments and a long term vision for connecting coastal communities. This work will assist with us with decision making as we work towards replacement of our vessels and marine structures, terminal improvements and information system investments. BRITISH COLUMBIA FERRY SERVICES INC. 13

16 HIGHLIGHTS Overall Customer Satisfaction Rating of 87 per cent Carried almost 22 million passengers on 183,000 sailings Reduced employee injuries by 22 per cent Conducted 15,500 Personal Training Days 14 ANNUAL REPORT

17 Management s Discussion & Analysis of Financial Condition and Results of Operations 16 Consolidated Financial Statements 81 Corporate Directory 113 BRITISH COLUMBIA FERRY SERVICES INC. 15

18 Management s Discussion & Analysis of Financial Condition and Financial Performance for the fiscal year ended March 31, 2014 Dated June 20, 2014 The following is our discussion and analysis of the financial condition and financial performance for British Columbia Ferry Services Inc. (BC Ferries) as of June 20, This discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes for the years ended March 31, 2014 (fiscal 2014) and March 31, 2013 (fiscal 2013). These documents are available on SEDAR at and on our investor webpage at Except where indicated, all financial information herein is expressed in Canadian dollars and determined on the basis of International Financial Reporting Standards (IFRS). BUSINESS OVERVIEW British Columbia Ferry Services Inc. is an independent company providing passenger and vehicle ferry services on the west coast of British Columbia. We operate one of the largest and most complex ferry systems in the world. In fiscal 2014, we provided frequent year round transportation service with 35 vessels operating on 25 routes out of 47 terminals spread over 1,000 miles of coastline. We also manage ferry transportation services on other remote routes through contracts with independent operators. Our service is an integral part of British Columbia s coastal transportation system and has been designated by the Province of British Columbia (the Province) as an essential service for purposes of the provincial Labour Relations Code. This designation means our services are considered necessary for the protection of the health, safety and welfare of the residents of British Columbia. We provide a wide range of ferry services for our customers. During the year ended March 31, 2014, we provided over 183,000 sailings, carrying 19.7 million passengers and 7.6 million vehicles. We experienced a 1.3% decline in vehicle traffic and a 1.1% decline in passenger traffic in fiscal 2014 compared to the prior year. However, we believe that after adjusting for the timing of the Easter holiday, fiscal 2014 traffic levels were generally flat compared to fiscal For a discussion of our traffic levels see Financial and Operational Overview and Outlook Traffic Levels below. Significant events during or subsequent to fiscal 2014 include the following: On July 24, 2013, we completed the redemption of all $140 million of our outstanding Series 08-2 Bonds, formerly due December 19, This debt management initiative to reduce our interest costs in the short term was funded with $55 million from cash on hand and $88 million in draws on our credit facility. Due to this early redemption, we saved approximately $0.3 million in net interest costs in fiscal On October 25, 2013, we completed a private placement of $200 million of 30-year senior secured bonds with accredited investors. These bonds bear interest at a rate of 4.702% per annum, payable semi-annually. This issuance was partially related to the early redemption of our $140 million Series 08-2 Bonds. The net proceeds of this new issue were used to repay indebtedness under our credit facility, fund the debt service reserve related to these bonds, and will partially fund capital expenditures, and provide funding for general corporate purposes. These bonds were rated A (DBRS) and A+ Standard & Poor s (S&P). On January 17, 2014, due to the rising cost of fuel, we implemented a fuel surcharge of 3.5% on average on our Major Routes and our regulated Other Routes. No surcharges were put in place on our unregulated or Northern Routes. On February 20, 2014, in response to our December 20, 2013 application, we received a decision from the British Columbia Ferries Commissioner (the Commissioner) confirming that the proposed expenditures to implement the cable ferry system on the route connecting Buckley Bay and Denman Island are reasonable and prudent. This decision included reasonable conditions which we are confident we will be able to meet. (See Outlook Asset Renewal Program below for more detail.) 16 ANNUAL REPORT

19 On February 26, 2014, we awarded Seaspan s Vancouver Shipyards of North Vancouver a $15 million contract for the construction of a new cable ferry to service Buckley Bay Denman Island and on March 19, 2014, we announced the award of contracts totalling $15 million for construction of the Buckley Bay and Denman West cable ferry berths. These contracts include an award to Vancouver Pile Driving Ltd. for supply of two concrete floating pontoons and an award to Ruskin Construction Ltd. of Victoria for construction of two berths, expansion of Denman West holding compound and all associated upland development. (See Outlook - Asset Renewal Program below for more detail.) On April 1, 2014, we implemented average tariff increases in accordance with the Commissioner s Order dated September 30, Tariff increases were 4.2% on average on our Major and regulated Other Routes. On the Northern Routes, we increased fares by less than 2% on average and eliminated the incremental tariff for over-height vehicles. These increases are directly associated with increased operating costs, notably fuel, capital replacement and labour. On April 28, 2014, we completed a private placement of $200 million of 30-year senior secured bonds with accredited investors. These bonds bear interest at a rate of 4.289% per annum, payable semi-annually. The net proceeds of this new issue, together with additional cash on hand, were used to repay our $250 million bond Series 04-1, which matured on May 27, 2014, and to fund the debt service reserve related to these bonds. These bonds were rated A (DBRS) and AA- (S&P). We secured a favourable interest rate by entering into interest rate hedges. The effective rate of this issue, net of hedging, is 4.5%, the lowest effective bond interest rate in the 11-year history of our company. On April 28, 2014, after six weeks of community consultation, feedback and further analysis of schedule refinement options, we implemented new schedules for the Northern and Other Routes to achieve a net savings of $14 million over the remainder of performance term three (PT3), which ends March 31, These new schedules relate to the service reductions outlined by the Province to better align service levels to demand, and to ensure the coastal ferry system is affordable, efficient and sustainable. In accordance with the Province s decision, we also implemented a reduction of the 100% passenger fare discount for BC seniors travelling Monday to Thursday to 50% on the Major and Other Routes effective April 1, (See Corporate Structure Economic Regulatory Environment below for more detail.) CORPORATE STRUCTURE Coastal Ferry Services Contract We operate ferry services under a regulatory regime established by the Coastal Ferry Act (the Act), and under the terms set out in the Coastal Ferry Services Contract (CFSC) between BC Ferries and the Province. This 60-year services contract with the Province, which commenced April 1, 2003, stipulates, among other things, the number of round trips that must be provided for each regulated ferry service route in exchange for specified fees (ferry transportation fees). The CFSC has been amended from time to time. (See discussion below). Under the terms of the CFSC, we also receive an annual amount from the Province based on its agreement with the Government of Canada to fulfill the obligation of providing ferry services to coastal British Columbia. The amount of this payment is adjusted annually based on the Consumer Price Index (CPI) (Vancouver). Economic Regulatory Environment The office of the Commissioner was created under the Act, enacted by the Province on April 1, The Commissioner establishes price caps for designated ferry route groups for the purpose of regulating our tariffs. The Commissioner is also responsible for regulating the reduction of service, discontinuance of routes and certain other matters. BRITISH COLUMBIA FERRY SERVICES INC. 17

20 Bill 20 On June 24, 2010, the Province enacted Miscellaneous Statutes Amendment Act (No. 3), 2010 (Bill 20), amending several statutes including the Act. The amendments responded to the Comptroller General s Report on Review of Transportation Governance Models released November 6, 2009 and included changes to the governance and regulatory framework within which we operate. PT3 preliminary price cap increases In March 2011, the Commissioner set preliminary price cap increases for each of the four years of PT3 of 4.15% on the three Major Routes and 8.23% on all other regulated routes, effective April 1, In making these determinations, the Commissioner excluded certain forecasted costs and incorporated a productivity challenge effectively further reducing our allowed costs. Among other things, Bill 20 amendments to the Act changed the mandate of the B.C. Ferry Authority (the Authority) to include: responsibility for the compensation plans of our directors and certain executive officers, such compensation plans to be comparable to public sector organizations; a requirement that a director of the Authority cannot also be a director of BC Ferries; and the subjection of the records of the Authority and BC Ferries to the Freedom of Information and Protection of Privacy Act. The amendments also expanded the regulatory responsibilities of the Commissioner to include: consideration of the interests of ferry users; regulation of our reservation fees; approval and public disclosure of our process for handling customer complaints; and review and public disclosure of our ten year capital plan, our plan for improving efficiency in the next performance term, and our methodology for allocating costs among the regulated routes. These amendments also broadened the Commissioner s role in regulating ferry transportation services where the Commissioner determines that we have an unfair competitive advantage. The amendments have also modified the process by which the Commissioner regulates our activities in seeking additional or alternative service providers on our regulated routes and require the Commissioner to issue an opinion on our performance and that of the Authority in carrying out our respective legislated responsibilities, as well as our performance in relation to the CFSC. PT2 price cap increase On April 1, 2011, during the final year of PT2, the price cap authorized by the Commissioner increased by 2.7% plus 0.49 times the latest reported annual change in the CPI (British Columbia) on the three Major Routes connecting Metro Vancouver with mid and southern Vancouver Island and 5.7% plus 0.73 times the change in the CPI (British Columbia) on all other regulated routes. This translated into a price cap increase of 3.38% on those three Major Routes and 6.71% on all other regulated routes. These price cap increases reflected a change in the CPI (British Columbia) of 1.39% applied April 1, Bill 14 On June 2, 2011, the Coastal Ferry Amendment Act, 2011 (Bill 14) was enacted. Effective April 1, 2012, for the first year of PT3, Bill 14 established a price cap increase for each route group of 4.15% from the weighted average of the tariffs in place at March 31, 2012 as established by the Commissioner. The Province agreed to compensate us for the reduction in the price cap set forth in the Commissioner s preliminary price cap order. The value of this price cap change was $11.5 million, which the Province agreed to provide as part of the $21.5 million increase in transportation fees for fiscal 2013 detailed below. In response to the price cap increases, we implemented tariff increases up to the new levels authorized. Bill 14 also provided that the Commissioner establish price caps for the balance of PT3. Bill 14 also provided the Commissioner with the mandate to conduct a review of the Act before issuance of his final decision on price caps for the balance of PT3. Commissioner s review of the Act On January 24, 2012, the Commissioner issued a report to the Province as to how the Act could be amended to balance the interests of ferry users with the financial sustainability of our company. The report states: Amongst the publicly-owned [ferry] systems, BC Ferries appears to be relatively efficient based on the analysis. Indeed, many ferry operators appear to want to emulate some of BC Ferries practices. The company compares well with farebox recovery and ancillary revenue. Costs appear to be reasonable based on a number of independent reviews and on substantial improvement in several areas since The Commissioner s report made 24 substantive recommendations covering a wide range of ferry related issues and is available on the Commissioner s website at 18 ANNUAL REPORT

21 Bill 47 In May 2012 and in response to the Commissioner s report, the Province enacted Bill 47. The amendments to the Act set forth in Bill 47 were designed to move toward striking a balance among the interests of ferry users, the interests of taxpayers and the sustainability of the ferry operator. The changes cover a wide range of ferry related issues including: Allowing cross subsidization from the Major Routes to other routes; Changing the primary responsibility of the Commissioner from priority placed on the financial sustainability of the ferry operations to responsibility to protect the interests of ferry users, the interests of taxpayers, and the financial sustainability of the ferry operator; Expanding the Commissioner s authority and responsibilities, to include: The authority to permanently reduce service in a manner and to a level consistent with the CFSC; Ferry transportation fees Together with the introduction of amendments to the Act contained in Bill 47, the Province announced additional payments totalling $79.5 million in order to reduce the pressure for future fare and price cap increases. The first payment of $25.0 million, approved on March 30, 2012, was received on April 20, 2012 as a contribution to our equity, leaving a balance of $54.5 million to be received throughout PT3. In fiscal 2013, we received $21.5 million (which included $11.5 million as compensation for price cap adjustments as detailed above) and in fiscal 2014, we received $10.5 million. A further $11.0 million will be received in fiscal 2015 and $11.5 million in fiscal CFSC amendments Amendments to the CFSC, agreed to with the Province and effective April 1, 2012, included: Grouping our route connecting Horseshoe Bay and Langdale with the three Major Routes connecting Metro Vancouver with mid and southern Vancouver Island; The authority to order a temporary or permanent service reduction and/or deferral of a planned capital expenditure in response to an extraordinary situation, in addition to or instead of an approval of extraordinary price cap increases; The ability to require us to seek the Commissioner s approval in advance of making certain capital expenditures; A reduction of up to 400 round trips in the minimum service requirement on our Major Routes as well as principles and targets for further service level reductions system wide; Implementation of principle-based service adjustments to achieve $30 million in net savings over PT3. These are detailed below and included: The responsibility to set price caps sufficient to enable us to meet our debt obligations and maintain access to borrowing rates that in the opinion of the Commissioner are reasonable; Specific legislative authority to establish the deferred fuel cost accounts and the terms and conditions for their use, including fuel surcharges or rebates; and The authority to conduct routine performance reviews and to require us to review our policies and undertake public consultation. Reductions in round trips already identified on three of our Major Routes reflecting a net savings of $4 million; and Service adjustments to be determined on regulated routes to achieve an additional $26 million in net savings over PT3; and Ferry transportation fee enhancements of $54.5 million through PT3 as detailed above. BRITISH COLUMBIA FERRY SERVICES INC. 19

22 In response to the agreed reduction in the minimum service requirement on our Major Routes identified above, we implemented reductions in round trips on three of our Major Routes where the traffic levels no longer warranted extra service or where service was significantly under-utilized. Over PT3, these reductions are expected to result in $4 million in operating cost reductions from fuel savings and reduced requirements for casual employees during the off season. There will be no reduction in our regular workforce. These identified reductions equate to 1% of our annual round trips on these routes. Further adjustments to service levels, as identified above, were required in order to attain the total objective of $30 million in net savings and these adjustments have resulted from the Province s consultation process discussed below. Public consultation In May 2012, the Province announced that it would conduct public consultation with ferry dependent communities about adjustments to service levels and trade-offs between service adjustments, fare increases and potential community contributions. The Province also announced that it would seek public input to develop strategies to support a long-term vision for connecting coastal communities. This process concluded on December 21, 2012 and on March 5, 2013, the Province released its report summarizing the input it received during this consultation and engagement process. The report can be found at We provided technical assistance and subject matter support throughout this process. Further CFSC amendments On March 31, 2013, we reached an agreement with the Province to amend the CFSC to consolidate all regulated routes into a single group effective April 1, This revised grouping will be in effect until March 31, In the absence of any further amendments, on April 1, 2016, the route group structure in the CFSC will revert back to the structure at March 31, On April 3, 2013, an amendment to the CFSC extended the deadline for identifying service level adjustments for the remainder of PT3 in order to provide sufficient time to complete its consultation process discussed above. As compensation for the delay in identifying service level adjustments, the Province also agreed to pay us $7.1 million in ferry transportation fees in 9 equal monthly instalments commencing July The balance of the $26 million in service reductions required over the remainder of the performance term ($18.9 million) was to be determined by March 31, On March 31, 2014, an amendment to the CFSC removed the Northern Route that provided supplementary service to mid-coast destinations, resulting in a significant adjustment in how summer service is provided. The amendment also confirmed the net savings of $30 million over PT3 of which: $4.0 million were reductions in annual round trips on three of the Major Routes; On November 18, 2013, the Province announced its service level reduction plan to better align service levels with demand and on February 5, 2014, after further public consultation, the Province confirmed implementation of this plan, designed to achieve the remaining $18.9 million (see CFSC amendments below) in net savings over the remainder of PT3. The plan included the elimination of approximately 6,900 round trips over 15 routes, including a significant adjustment in how summer service is provided to mid-coast destinations. The Province also confirmed its intention to reduce the 100% passenger fare discount for BC seniors travelling Monday to Thursday to 50% on the Major and Other Routes as of April 1, 2014 and its proposal to proceed with a gaming pilot project on one of our Major Routes. $7.1 million received from the Province as a result of the extended deadline; $14.0 million in reductions in annual round trips on Northern and Other Routes; and $4.9 million in further reductions in annual round trips on three of the Major Routes. The amendment confirmed the 100% discount for BC seniors travelling Monday to Thursday is reduced to 50% on the Major and Other Routes effective April 1, In respect of the corresponding reduction in social program funding and to reduce the magnitude of future tariff increases, the amendment also confirmed a maximum increase in ferry transportation fees of $18.0 million in fiscal 2015 and $19.3 million in fiscal The discount for BC seniors on the Northern Routes remains unchanged at 33% every day. 20 ANNUAL REPORT