Société en commandite Gaz Métro
Cause tarifaire 2007, R-3596-2006
Date of Release: May 4, 2006
Industry : Energy
DBRS Confirms Gaz Metro inc. at R-1 (low) and "A"
___________________________________________________________________________
Gaz Metro inc.
Rating
Trend
Rating Action
Debt Rated
R-1 (low)
A
Stb
Stb
Confirmed
Confirmed
Commercial Paper
First Mortgage Bonds & Other Secured Debt
Dominion Bond Rating Service ("DBRS") has today confirmed the ratings of Gaz Metro inc. ("Gaz Metro" or the
"Company") at R-1 (low) and "A", both with Stable trends, following the release of Gaz Metro Limited
Partnership's ("GMLP") quarterly financial results yesterday. Gaz Metro owns 72.8% of the units of GMLP, with
the remainder owned by public unitholders. The ratings on Gaz Metro are based on the financial profile of
GMLP, which is the guarantor of all of Gaz Metro's debt.
In its discussion, GMLP cited the following factors that are expected to result in a decline in its earnings over the
near term:
(1) Lower forecast earnings at its gas distribution operations in Québec, resulting from: (a) falling base rates of
return due to a lower interest rate environment, and (b) lower distribution throughputs due to higher natural gas
prices, which has prompted customers (especially high-volume industrial and small commercial customers) to
reduce consumption or switch to other more cost-effective fuel sources; and
(2) The loss of a significant customer at Portland Natural Gas Transmission System, which is 38.3%-owned by
Gaz Metro.
DBRS notes that GMLP's gas distribution operations in Québec account for about 80% of GMLP's earnings. As
such, lower earnings from these operations in Québec will have a material negative impact on earnings and
cash flow at GMLP.
The expected decline in earnings has prompted GMLP to reduce its annual distributions to Cdn$1.24/unit per
from Cdn$1.36/unit, as its policy is to pay out substantially all of its net income. This distribution cut will reduce
the amount of cash paid out by Cdn$14.0 million annually. GMLP is cutting its distributions in order to preserve
its capital structure by not eroding its equity base and reducing the amount of debt it will require in the future.
DBRS notes that while GMLP's total debt-to-capital is expected to remain in the 60% to 62% range over the
medium term, lower earnings and cash flows will result in weaker cash flow-to-debt and interest coverage ratios.
However, these key financial ratios will remain within a range that is acceptable for a company that generates
the majority of its earnings from regulated natural gas distribution and transportation operations, and in line with
its peer group.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at: info@dbrs.com.
Original : 2006.05.31
SCGM - 8, Document 10
1
(11 pages en liasse)
Matthew Kolodzie, CFA, P.Eng.
416-593-5577 x2296
Senior Vice President
mkolodzie@dbrs.com
Nick Dinkha, CFA, MBA
416-593-5577 x2314
Assistant Vice President
ndinkha@dbrs.com
Copyright © 2006, Dominion Bond Rating Service Limited, Dominion Bond Rating Service, Inc., and DBRS (Europe) Limited (collectively, "DBRS"). All rights reserved. The information upon
which DBRS ratings and reports are based is obtained by DBRS from sources believed by DBRS to be accurate and reliable. DBRS does not perform any audit and does not independently
verify the accuracy of the information provided to it. DBRS ratings, reports and any other information provided by DBRS is provided "as is" and without warranty of any kind. DBRS hereby
disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such
information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents, and representatives (collectively, "DBRS Representatives") be liable for: (i) any
inaccuracy, delay, interruption in service, error, or omission, or for any resulting damages, or (ii) any direct, indirect, incidental, special, compensatory, or consequential damages with respect to
any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representatives in connection with, or related to, obtaining,
collecting, compiling, analyzing, interpreting, communicating, publishing, or delivering any information. Ratings and other opinions issued by DBRS are, and must be construed solely as,
statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell, or hold any securities. DBRS receives compensation, ranging from US$1,000 to
US$750,000 (or the applicable currency equivalent), from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings. This publication may not be reproduced,
retransmitted, or distributed in any form without the prior written consent of DBRS.
2
Credit Rating Report
Gaz Métro inc.
Report Date:
March 16, 2005
Press Released:
March 16, 2005
RATING
Previous Report: February 25, 2004
Rating
Trend
Rating Action
Debt Rated
Nick Dinkha, CFA/Geneviève Lavallée, CFA
R-1 (low)
Stable
Confirmed
Commercial Paper
416-593-5577 x2314/x2277
A
Stable
Confirmed
First Mortgage Bonds & Other Secured Debt
ndinkha@dbrs.com
Current
2004
2003
2002
2001
2000
1999
RATING HISTORY
Commercial Paper
R-1 (low)
R-1 (low)
R-1 (low)
R-1 (low)
R-1 (low)
R-1 (low)
R-1 (low)
First Mtg. Bonds/Sec. Debt A
A
A
A
A
A
A
RATING UPDATE
Gaz Métro inc. (“Gaz Met” or the “Company”) continues to
generate strong, sustained financial results from a primarily
regulated asset base, which has a relatively low business risk
profile. In addition, Gaz Met operates under a relatively
favourable regulatory regime for natural gas distribution
operations, which includes performance-based incentives, and the
Company has consistently exhibited an ability to achieve
productivity gains under this arrangement, generating additional
returns in excess of total allowed ROEs.
The Company continues to benefit from its increased ownership
interest in Portland Natural Gas Transmission System (“PNGTS”),
acquired during F2004, as well as from higher regulatory approved
rates of return over the past couple of years. Although the
Company generates the bulk of its cash flows from its regulated
gas distribution operations in Québec, the recent acquisition of a
50% ownership interest in Intragaz Inc. (“Intragaz”) should help
the Company further diversify a portion of its cash flows out of
Québec over time.
Over the medium to long term, Gaz Met’s regulated operations
will continue to provide significant support and stability to the
Company’s financial profile. Gaz Met should benefit from the
removal of the electricity rate freeze in Québec, which will
marginally improve the competitiveness of natural gas over time.
An additional development that will be accretive to Gaz Met’s
earnings and cash flows is the expansion of the Trans Québec &
Maritimes Pipeline Inc. (“TQM”) pipeline to supply TransCanada
Energy’s Bécancour 550 MW cogeneration plant (“Bécancour”).
The Company will continue to be challenged by under-utilized
capacity at PNGTS and higher-risk operations in their energy
services division, which has been the subject of restructuring and
downsizing over the past couple of years in an effort to become
profitable. However, these factors are not recent events and the
Company has continued to perform well in spite of them.
Finally, the claim against Gaz Met, by the primary contractor on
the TQM system extension to the U.S. border for reimbursement of
approximately $10.6 million in cost overruns, was ruled in favour
of the plaintiff by an arbitration panel. The plaintiff had until
December 21, 2004, to appeal the decision and did not. Gaz Met
expects to receive approval from the National Energy Board
(“NEB”) to include certain deferred costs related to the case in
their rate base. In any event, DBRS does not feel that this amount
would materially impact the Company’s financial profile.
RATING CONSIDERATIONS
Strengths:
• Regulation contributes to relative financial stability
• Operating cash flows more than sufficient to finance
capital expenditures
• Investments in pipelines and non-domestic operations
diversify earnings base
• Strong key financial ratios
FINANCIAL INFORMATION
Challenges:
• Under-utilized transportation capacity at PNGTS
• Competitive pressures from dual energy industrial users,
subsidized electricity rates
• Earnings sensitivity to economic cycle and interest rates
• Flow-through tax accounting adversely impacts coverage
ratios
12 mos. ended For the year ended September 30
2004
Dec. 31, 2004
Fixed-charges coverage (times)
2.91
2.88
% debt in the capital structure (1)
61.1%
59.1%
Cash flow/total debt (1)
20.8%
23.1%
Cash flow/capital expenditures (times)
2.21
2.37
Approved total ROE - domestic gas distribution
11.64%
10.96%
Net income (bef. extras.) ($ millions)
160.8
160.4
Cash flow from operations ($ millions)
298.0
295.2
Distribution throughputs (Bcf) (2)
204.4
204.4
Transportation throughputs (Bcf) (2)
236.9
236.9
(1) Debt adjusted to include receivable sales. (2) Weather normalized volumes.
2003
2.96
61.2%
21.4%
2.79
10.34%
153.3
295.3
201.8
223.1
2002
2.87
61.6%
22.1%
3.06
9.69%
154.6
290.9
209.0
227.3
2001
2.45
62.8%
19.6%
3.33
10.38%
141.2
269.5
231.5
212.6
THE COMPANY
Gaz Met is the general partner of Gaz Métro Limited Partnership (“GMLP”) and currently owns 72.8% of the partnership units. Gaz
Met is indirectly owned by Trencap, sec (50%), Enbridge Inc. (“Enbridge”) (32%), and Gaz de France (18%) and acts as a financing
vehicle for GMLP, raising funds as required and down-lending on a back-to-back basis. GMLP is actively involved in gas distribution,
transportation, and storage (Québec).
AUTHORIZED PAPER LIMIT
$400 million
GUARANTOR
Energy
Gaz Métro Limited Partnership
DOMINION BOND RATING SERVICE
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
Gaz Métro inc. – Page 2
BASIS OF ANALYSIS
•
•
The rating of Gaz Met is based on the guarantor,
GMLP.
GMLP’s primary investments include the following:
− 100% ownership of gas distribution operations in
Québec and in Vermont [Vermont Gas Systems,
Inc. (“VGS”)];
− 50% ownership interest in TQM;
− 100% ownership of a cross-border (OntarioQuébec) pipeline (Champion Pipe Line
Corporation Limited); and
− An indirect (held by Northern New England Gas
Corporation) 38.3% ownership interest in a U.S.
pipeline, PNGTS, which runs from the
Québec/U.S. border to Boston.
−
•
REGULATION
•
•
•
•
•
•
•
•
Domestic gas distribution operations are regulated by
the Régie de l’énergie (“Régie”).
The regulatory framework is a combination of cost of
service/rate of return methodology and performancebased regulation (revenue cap).
− Under the framework, Gaz Met is allowed to retain
a share of the productivity gains it generates as a
performance incentive.
− Gas costs continue to be flowed through to the
consumer, with price adjustments made on a
monthly basis.
The base approved ROE is determined according to a
formula and incorporates a 384 basis point risk
premium.
The formula consists of the following two components:
− The August Consensus Forecast yield for ten-year
bonds plus the market spread between Government
of Canada ten- and thirty-year bond yields; and
− 75% of the variance in the August forecast rate of
return on 30-year Government of Canada bonds.
The total approved ROE consists of the base ROE plus
the authorized incentive return determined according to
the following revenue cap formula:
− R = [r*(1+i-p)]*volumes ± z, where r = distribution
rates, i = inflation rate, p = productivity factor, and
z = exogenous factors.
For F2005, the base ROE is 9.69%, plus an incentive
return of 1.95%, for a total authorized return of 11.64%.
− The approved capital structure for regulatory
purposes is 38.5% common equity, 7.5% preferred
shares, and 54% debt.
The incentive mechanism agreement was approved by
the Régie in March 2004 and is in effect from October
1, 2004, to September 30, 2009.
Key elements of the agreement include the following:
− A productivity factor (“p”) of 0.5%;
− 50/50 sharing of authorized incentive return
embedded in the approved ROE;
− 25/75 sharing between Gaz Met and customers of
productivity gains earned in excess of authorized
incentive return; and
A 50% ownership interest in Intragaz, which
operates underground natural gas storage sites in
Québec and identifies and develops further such
sites in North America.
DBRS uses both consolidated and non-consolidated
numbers in its analysis.
− However, given that GMLP’s gas distribution
operations in Québec (not a separate subsidiary)
make up about 84% of GMLP’s net earnings, the
analysis focuses on the consolidated numbers.
−
•
•
•
•
A maximum upside potential of 375 basis points
over base ROE, with any excess over the 375 basis
points being returned to customers.
TQM is regulated by the NEB based on a cost of
service/rate of return methodology.
− TQM is also subject to incentive regulation that
allows for an equal sharing of cost savings.
− The current regulatory regime expires in 2006.
− TQM is currently operating with an ROE of 9.56%
and is expected to file its 2005 rate case with the
NEB by June 2005.
The gas distribution operations of VGS are regulated by
the Vermont Public Service Board (“VPSB”) on a
compliant basis based on a cost of service/rate of return
methodology.
− In an October 2003 rate decision, the VPSB
granted VGS a 9.6% rate increase. In addition, its
permitted ROE was lowered slightly from 11.25%
to 10.98% on a common equity ratio of 63.6%,
which is still significantly higher than approved
ROEs and allowed deemed equity for Canadian gas
distributors (typically in the 9.6% to 9.7% range
and 35% to 40% range, respectively).
− VGS has agreed not to apply for another rate
increase until October 2005 and, at such time, an
alternative rate plan with the VPSB will be
developed. This plan will also likely include some
form of incentive regulatory framework.
PNGTS is regulated by the U.S. Federal Energy
Regulatory Commission ("FERC"). In January 2003,
PNGTS received final approval of its general rate case,
with key terms retroactive to April 1, 2002. Key items
include the following:
− A new rate structure is in effect until March 31,
2008.
− Allowed ROE at 12.5%.
− Depreciation rates were reduced to 2% from 4% on
transportation and intangible plant assets.
The new approved rates should result in a return on
investment of about 10% at current volume
throughputs.
Gaz Métro inc. – Page 3
RATING CONSIDERATIONS
Strengths: (1) Regulated gas distribution and transportation
operations currently account for almost all of Gaz Met’s
earnings and provide the Company with a degree of longterm financial stability.
In addition, domestic gas
operations are permitted to utilize several deferral accounts
that smooth the earnings impact of: (a) weather-induced
revenue fluctuations, and (b) interest rate fluctuations on
floating rate debt, both of which are amortized and
recovered in future rates over a five-year period. Note that
while these deferral accounts smooth income, they do not
smooth cash flow from operations.
(2) Gaz Met continues to generate cash flows from
operations that are sufficient to internally finance both its
capital expenditures and distributions to partners. DBRS
expects that this will continue over the medium to long
term, absent any large capital projects. In this situation, the
Company is able to rely on external financing to fund such
expenditures.
(3) The Company continues to explore ways to diversify its
operations, such as the recently acquired 50% ownership
interest of Intragaz, adding underground natural gas storage
capability to the Company’s activities. Intragaz’s expertise
in identifying and developing new storage sites in North
America will reduce Gaz Met’s exposure to Québec-based
distribution operations over the medium to long term.
(4) Gaz Met’s key ratios remain strong and compare
favourably relative to its peer group. The strength of its
financial profile provides Gaz Met with a high degree of
financial flexibility.
Challenges: (1) PNGTS is currently operating at only 60%
capacity, and increasing volume is key to earnings growth
over the longer term. Mitigating this challenge somewhat
are forecasts by the North American Electric Reliability
Council (“NERC”), projecting electricity demand growth of
3,100 MW over the next four years. The resultant
additional gas-fired generating capacity required to support
this demand should increase PNGTS’s throughput volumes.
In addition, liquefied natural gas (LNG) arriving in St.
Lawrence River ports is another source of future volume
growth.
(2) The market penetration of natural gas in Québec is well
below the national Canadian average due to: (a) heavily
subsidized residential electricity rates (home heating is
largely electricity-based in Québec), (b) extensive use of
more cost-effective fuel oil and dual-fuel switching
capabilities in the industrial market segment, and (c) long
distances from sources of gas supplies. These factors
reduce the competitive price advantage of gas over
alternative sources of fuel. While the electricity rate
increases in 2004 by Hydro Québec (totalling approximately
4.5%) and the proposed 2.7% increase effective April 1,
2005, will marginally improve the competitiveness of
natural gas compared to electricity, natural gas typically
remains 7%-18% more expensive than electricity for
residential consumers (depending on the efficiency of the
gas furnace).
(3) Gaz Met’s earnings and cash flows are sensitive to the
economic cycle and to interest rates through approved
ROEs. Approximately 55% of gas volumes are delivered to
industrial customers, who are sensitive to economic
conditions. In terms of interest rates, a 25 basis point
change in approved ROEs would impact net earnings by
about $2.25 million. In addition, Gaz Met’s cash flows are
very sensitive to changes in weather from one year to the
next given that remaining volumes are delivered to
commercial and residential customers. These factors affect
earnings and cash flows over the medium term, but are less
of an issue over the long term, as the Company is able to
utilize the rate stabilization account to recover weatherinduced revenue fluctuations.
(4) The use of the flow-through method of accounting for
income taxes (standard practice in Canada for regulated
entities) adversely impacts coverage ratios and has resulted
in an unrecorded deferred income tax liability of
$113.2 million as at September 30, 2004. The recovery of
this liability in future rates is not assured. The flow-through
method results in lower revenue collections, thereby
reducing operating income, interest coverage ratios, and net
income as well.
Gaz Métro inc. – Page 4
EARNINGS AND OUTLOOK
Consolidated Results for GMLP
For the year ended September 30
Dec. 31, 2004
2004
2003
2002
Net revenues
547.2
550.1
562.7
546.2
EBITDA
366.9
366.7
378.6
369.5
EBIT
250.4
252.8
246.7
234.3
Gross interest expense
83.5
84.4
84.6
83.1
Net interest expense
83.3
84.8
83.8
79.7
Income taxes*
6.2
7.6
9.5
n/a
Net income
160.8
160.4
153.3
154.6
* Reflects income taxes of subsidiaries (on a consolidated basis) subject to signficant influence of Gaz Met (i.e. PNGTS).
Income taxes on PNGTS's net income are shown separately by Gaz Met as they are recorded at the PNGTS level.
12 mos. ended
($ millions)
Segmented Earnings
Operating income (EBIT) ($ millions)
Distribution
Transportation*
Energy services & other (incl. unallocated)
Operating income (EBIT)
% 12 mos. ended
Dec. 31, 2004
83%
206.8
43.3
17%
0.3
0%
100%
250.4
For the year ended September 30
2004
2003
2002
209.5
205.7
202.1
43.0
40.9
30.4
0.4
0.1
1.9
252.8
246.7
234.3
2001
531.0
363.5
236.4
97.7
95.2
n/a
141.2
2001
205.7
32.2
(1.5)
236.4
Net income
Distribution
Transportation*
Energy services & other (incl. allocated)
Net income
136.3
137.7
138.0
142.1
134.6
85%
24.1
22.5
16.6
12.8
10.3
15%
0%
0.4
0.2
(1.3)
(0.3)
(3.7)
100%
160.8
160.4
153.3
154.6
141.2
*The increased ownership in PNGTS on November 17, 2003, necessitated a change in accounting for the investment. Now, the share of PNGTS's
revenues and expenses are presented under "Share of income of companies subject to significant influence". To make
the segmented information representative with historical information, the contributions to Transportation's EBIT have been added back.
Summary:
• Both EBIT and net income were slightly higher for the
12 months ended December 31, 2004, versus F2003.
• Higher distribution EBIT is the combined result of
slightly greater throughput volumes and an increase in
the approved rate of return, from 10.34% during F2003
to 10.96% for F2004.
− Higher
contributions
from
transportation
operations, when compared with F2003, reflect the
Company’s increased ownership in PNGTS during
F2004 (from 26.9% to 38.3%) as well as somewhat
higher transportation volumes.
• The 2% decrease in the federal income tax rate reduced
F2004 revenues and income by approximately
$4.1 million.
However, DBRS considers this
manageable.
− Gaz Met is permitted to recover current income
taxes in the rates on its Canadian-based regulated
businesses but these businesses are not taxable;
therefore, any change in corporate tax rates directly
impacts net income.
Outlook:
• Over the medium term, the outlook for Gaz Met’s
earnings remains stable, with some modest growth
expected from both the gas distribution and
transportation segments.
• Earnings from the gas distribution segment, which
provides the bulk of Gaz Met’s cash flows, will benefit
from Gaz Met’s continuing penetration of the new
residential construction sector and the recently
approved total rate of return for F2005 of 11.69%.
− This will also be helped by Hydro-Québec’s tighter
electricity position.
• The gas transportation segment will also be a key
contributor to the Company’s overall earnings during
this period, with key drivers including the following:
− Expansion of the TQM pipeline to support the
550MW Bécancour cogeneration plant, expected to
begin operating in late 2006.
− The acquisition of a 50% ownership interest in
Intragaz on December 31, 2004.
− Gaz Met’s increased ownership of PNGTS.
• Over the longer term, DBRS expects continued
earnings stability, with potential earnings growth from
various projects currently being pursued, including the
following:
− Projects for the recovery of landfill gas in Québec;
− The Rabaska project, an LNG terminal in the
eastern part of Lévis; and
− Further development by Intragaz of underground
natural gas storage facilities throughout North
America.
Gaz Métro inc. – Page 5
FINANCIAL PROFILE AND SENSITIVITY ANALYSIS
12 mos ended
($ millions)
EBITDA
Net income
Depreciation + amortization of def. charges
Other (future income taxes; adj. of equity income)
Cash Flow From Operations
Capital expenditures
Free Cash Flow Before W/C Changes
Rate stabilization
Reduction in def. charges related to gas costs
Net changes in working capital
Free Cash Flow Before Distributions
Distributions to partners
Free Cash Flow After Distributions
Acquisitions/divestitures
Other (incl. deferred charges)
Cash flow before financing
Net debt financing
Net equity financing
Net Change in Cash
Cash flow/capital expenditures (times)
Cash flow/total debt (1)
% debt in the capital structure (1)
Fixed-charges coverage (times)
Dec. 31, 2004
366.9
160.8
131.3
5.9
298.0
(135.0)
163.0
7.7
54.8
(7.7)
217.8
(155.7)
62.1
(85.3)
(54.1)
(77.3)
98.9
0.3
21.9
2.21
20.8%
61.1%
2.91
For the year ended
September 30
2004
2003
366.7
378.6
160.4
153.3
130.9
134.8
4.0
7.1
295.2
295.3
(124.4)
(105.7)
170.9
189.6
2.3
11.7
53.1
49.3
(9.8)
(57.3)
216.5
193.3
(154.3)
(148.0)
62.2
45.2
(31.9)
(25.6)
(65.9)
(129.7)
(35.6)
(110.1)
22.0
42.5
10.6
66.7
(3.0)
(0.8)
2.37
23.1%
59.1%
2.88
2.79
21.4%
61.2%
2.96
Sensitivity Analysis
Year 1
Year 2
330.2
330.2
107.5
108.1
133.5
133.8
241.0
241.9
(140.0)
(140.0)
101.0
101.9
8.0
8.0
7.2
7.2
0.0
0.0
116.2
117.1
(102.1)
(102.7)
14.1
14.4
14.1
14.4
(14.1)
(14.4)
0.0
0.0
1.72
18.0%
60.8%
2.21
1.73
18.3%
60.4%
2.23
Year 3
330.2
108.7
134.1
242.8
(140.0)
102.8
8.0
7.2
0.0
118.0
(103.3)
14.7
14.7
(14.7)
(0.0)
1.73
18.5%
60.0%
2.25
(1) Receivable sales treated as short-term debt financings.
Summary:
• For the 12 months ended December 31, 2004, cash flow
from operations remained relatively flat compared with
F2003 but continued to be sufficient to internally fund
both capital expenditures and distributions.
− Slightly higher capital expenditures incurred
during the 12 months ended December 31, 2004,
were primarily to fund development of the gas
distribution system.
• The 50% interest in Intragaz (now jointly controlled
with Gaz de France) was acquired on December 31,
2004, and financed with a combination of debt and
equity, helping to maintain the Company’s capital
structure at around 60%.
• The predominance of Gaz Met’s regulated operations
ensures that the Company typically generates stable
cash flows, sufficient to maintain a stable financial
profile.
• However, free cash flows before distributions (and after
working capital changes) are sensitive to fluctuations in
weather.
Outlook:
• Over the medium term, cash flow from operations will
continue to remain relatively stable and exhibit some
growth, given the Company’s continuing business
operations.
− Some uplift in cash flows is expected from both the
higher authorized rate of return for F2005 and the
expansion of the TQM pipeline to supply
Bécancour.
• Cash flow from operations will remain sufficient to
fund Gaz Met’s capital expenditures and distributions
to partners.
− Capital expenditures over the medium term will
increase as a result of various projects under
development.
• The aforementioned fluctuations in weather and natural
gas costs will continue to add volatility to Gaz Met’s
cash flows before financing.
− While deferred charges are recoverable in future
rates, they often require external financing in the
interim.
• Over the longer term, key financial ratios should remain
in line with current levels given that the majority of
Gaz Met’s assets are regulated, and the Company’s
financial profile is expected to remain within the
acceptable range for the rating given its business risk
profile.
Gaz Métro inc. – Page 6
Sensitivity Analysis: (1)
Assumptions:
• EBITDA declines 10% in Year 1 and remains flat
thereafter.
• Capital expenditures are $140 million per year.
• Deferred charges (natural gas costs) are assumed to be
nil in that forecast gas costs are equal to actual gas
costs.
− Since there are no more changes to the deferred
charges related to natural gas costs, the reduction
in deferred charges is the amount at December 31,
2004, amortized over the three-year projection
period, or $7.2 million per annum.
• Remaining balance in the rate stabilization account at
December 31, 2004, is amortized over five years, or
$7.96 million per annum.
• The distributions payout is 95% of net income.
• Any free cash flow deficit is debt-financed.
Outcomes:
• Despite the decline in EBITDA, Gaz Met would
continue to record free cash flow surpluses, using the
excess cash to repay debt.
• Gaz Met’s key ratios would weaken somewhat but
remain relatively strong.
(1)
Note: DBRS stress tests the financial strength of companies analyzed to measure their sensitivity under various extreme scenarios. The assumptions used are
based neither upon any specific information provided by the Company, nor any expectations that DBRS has concerning the future performance of the Company.
LONG-TERM DEBT MATURITIES AND BANK LINES
Debt Maturities and Sinking Fund Requirements
As at September 30, 2004
($ millions)
First mortgage bonds/term loans
F2005
52.1
F2006
82.5
Summary:
• Gaz Met’s debt maturities are reasonably well spread
and should not present any liquidity problems.
− Interest rate risk shouldn’t pose a problem for the
Company given that interest rate expense is
recoverable in rates.
• Gaz Met recently negotiated a five-year committed
credit facility totalling $400 million (backing a $400
million commercial paper program), maturing
December 21, 2009. This replaced their $300 million
fully committed term bank facility that was to mature in
April 2005 (and which backed a $300 million
commercial paper program).
− As at December 31, 2004, Gaz Met had
$178 million outstanding under its commercial
paper program.
F2007
80.6
•
F2008
5.6
Other credit facilities include the following:
− Gaz Met’s $100 million, unsecured 364-day
renewable line of credit;
− Gaz Met’s share of TQM’s unsecured 364-day
renewable line of credit is $10 million; and
− VGS’s
unsecured
bank
lines
totalling
US$25.5 million.
Gaz Métro inc. – Page 7
DESCRIPTION OF OPERATIONS
CDPQ*
(General Partner)
Solidarity Fund
QFL
51.11%
16.67%
BC Investment
Management
Corporation
SNC-Lavalin
11.11%
Trencap sec
Regime des rentes
du Mouvement
Desjardins
11.11%
8.33%
Enbridge
50.38%
Regime de retraite
de l'Université du
Québec
1.67%
Gaz de France
32.06%
17.56%
Noverco Inc.
100%
General
Partner
Gaz Métro inc.
Limited
Partners
72.8%
Gaz Métro Limited
Partnership
Natural Gas
Transportation and
Storage
Natural Gas Distribution
27.2%
Public
Energy Services and
Other
50%
GMLP
100%
Cable VDN inc.
PNGTS
Aqua Data Inc.
Champion
Aqua-Rehab Inc.
38.3%
Vermont Gas
Systems
* Caisse de dépôt et
placement du Québec
Capital d'Amèrique as
General Partner
TQM
100%
Gaz Met’s key operating segments are:
Gas Distribution - Gaz Met’s core business and accounts
for 78% of GMLP’s assets and 83% of operating income.
− GMLP delivers approximately 97% of the natural
gas consumed in Québec, while VGS is the sole
gas distributor in Vermont.
Gas Transportation and Storage - includes a 50% interest
in the TQM pipeline and a 38.3% interest in PNGTS. This
segment currently holds about 18% of assets and contributes
17% of operating income.
− TQM operates a gas pipeline in Québec that
connects upstream with that of TransCanada
PipeLines Limited and downstream with those of
PNGTS and Gaz Met. Currently working on the
Bécancour expansion.
− PNGTS’s pipeline originates at the Québec border
and extends to the suburbs of Boston.
− On December 31, 2004, GMLP acquired an
ownership interest in Intragaz, adding underground
natural gas storage capability to GMLP’s activities.
Intragaz’ results will be reported with the Gas
Transportation sector.
− Over the medium to long term, throughput volumes
on the PNGTS pipeline may increase as a result of
increased demand for natural gas in the U.S.
northeast to support required capacity expansion in
that region.
− The Company is also pursuing further
development, by Intragaz, of underground natural
gas storage facilities throughout North America.
− The Rabaska project, a joint venture with Enbridge
and Gaz de France to pursue the development of a
liquefied natural gas terminal in the eastern part of
Lévis;
Energy Services and Other - which includes non-regulated
activities, is relatively small at 4% of assets.
− The Company sells goods and services in the
energy business and in water, waste-water, and
fibre optics networks. Energy related activities are
focused on the maintenance and repair of
residential, commercial and industrial equipment,
and on the heating and cooling of large buildings.
− Growth of water and waste-water projects may also
increase as integrated water distribution and wastewater collection systems become mandatory in
Québec.
Other projects that the Company is currently pursuing
include the following:
− Projects for the recovery of landfill gas in Québec.
Gaz Métro inc. – Page 8
Gaz Metro Limited Partnership
(Consolidated)
Balance Sheet
($ millions)
Assets
Cash
Accounts receivable
Inventories
Prepaid expenses
Current Assets
Net fixed assets
Rate stabilization acct
Deferred charges
Investments
Financial instruments
Goodwill
Total
As at Dec. 31
2004
15.1
250.9
180.4
5.8
452.2
1,792.4
39.8
156.6
117.1
40.2
35.0
2,633.3
Ratio Analysis
Liquidity Ratios (2)
Current ratio
Accumulated depreciation/gross fixed assets
Cash flow/total debt
Cash flow/capital expenditures
Cash flow-distributions/capital expenditures
% debt in capital structure
Average coupon on long-term debt
Deemed common equity (domestic gas distribution)
As at September 30
2004
6.8
57.9
235.4
5.3
305.4
1,656.8
44.6
82.4
136.9
112.0
23.0
2,361.0
2003
9.8
41.4
251.8
5.4
308.3
1,786.2
76.2
204.4
32.4
0.0
23.4
2,430.9
Liabilities & Equity
Bank debt
A/P + accr'ds.
L.t.d. due in one year
Current Liabilities
Future income taxes
Financial instruments
Long-term debt (1)
Minority interest
Partners' equity
Total
As at Dec. 31
2004
37.3
274.1
70.1
381.5
36.9
15.8
1,286.2
0.0
913.0
2004
28.5
203.7
46.2
278.4
32.9
2.0
1,162.7
0.0
884.9
2003
30.8
214.5
16.7
262.1
21.0
0.0
1,271.9
0.0
876.0
2,633.3
2,361.0
2,430.9
As at September 30
Non-consolidated basis
Consolidated basis
For the year ended September 30
For the year ended September 30
12 mos. ended
2004
2003
2002 Dec. 31, 2004
2004
2003
2002
1.33
1.22
1.00
1.17
1.08
1.14
0.87
35.6%
34.9%
33.6%
35.7%
37.0%
34.3%
33.3%
35.7%
30.5%
25.8%
20.8%
23.1%
21.4%
22.1%
3.59
3.84
3.31
2.21
2.37
2.79
3.06
2.11
2.05
1.47
1.05
1.13
1.39
1.57
54.3%
54.3%
54.6%
61.1%
59.1%
61.2%
61.6%
7.09%
8.39%
8.41%
6.95%
6.95%
7.96%
7.96%
38.50%
38.5%
38.5%
38.5%
38.5%
38.5%
38.5%
Deemed common equity (U.S. gas distribution)
Deemed common equity (TQM - pipeline)
Deemed common equity (PNGTS - U.S. pipeline)
Distribution payout (before extras.)
Coverage Ratios (3)
EBIT interest coverage
EBITDA interest coverage
Fixed charges coverage
Earnings Quality/Operating Efficiencies & Statistics
Operating margin
Net margin (before non-recurring)
Return on partners equity (before non-recurring)
Approved base ROE (domestic gas distribution)
Approved total ROE (domestic gas distribution)
Approved ROE (U.S. gas distribution)
Approved ROE (TQM - pipeline)
Approved ROE (PNGTS - U.S. pipeline)
Rate base - domestic gas distribution ($ millions)
Rate base growth - domestic gas distribution
Rate base (avg.) - TQM pipeline ($ millions)
Customer/employee (domestic gas distribution)
Customer growth (domestic gas distribution)
Degree day deficiency - % normal (domestic gas)
(1) Long-term debt includes commercial paper outstanding.
(2) Debt ratios adjusted to reflect receivable sales (i.e., debt equivalent).
(3) Before capitalized interest, AFUDC and debt amortizations. See note (1).
2001
0.97
31.5%
19.6%
3.33
1.60
62.8%
7.96%
38.5%
63.3%
30.0%
25.0%
96.2%
63.3%
30.0%
25.0%
96.5%
63.3%
30.0%
25.0%
91.5%
63.3%
30.0%
25.0%
96.8%
63.3%
30.0%
25.0%
96.2%
63.3%
30.0%
25.0%
96.5%
63.3%
30.0%
25.0%
91.5%
63.3%
30.0%
25.0%
99.4%
4.08
5.65
4.08
3.18
4.85
3.18
3.42
5.06
3.42
2.91
4.46
2.91
2.88
4.40
2.88
2.96
4.52
2.96
2.87
4.50
2.87
2.45
3.75
2.45
44.2%
35.4%
18.2%
-
43.6%
34.3%
18.1%
-
45.9%
34.9%
18.9%
-
43.5%
29.4%
17.9%
9.69%
11.64%
10.98%
9.56%
12.50%
43.3%
29.2%
18.2%
9.45%
10.96%
11.25%
9.79%
12.50%
1,666.27
6.4%
463.58
120.25
2.5%
99.5%
43.8%
27.3%
18.1%
9.89%
10.34%
11.25%
9.79%
12.50%
1,566.71
1.4%
484.51
122.36
0.7%
106.4%
42.9%
28.3%
18.9%
9.67%
9.69%
11.25%
9.53%
12.50%
1,545.60
0.0%
504.14
127.78
1.1%
81.7%
44.5%
26.6%
17.5%
9.60%
10.38%
11.25%
9.61%
14.00%
1,545.84
4.0%
524.17
127.68
0.1%
99.9%
Gaz Métro inc. – Page 9
Gaz Métro Limited Partnership
(Consolidated)
Income Statement
($ millions)
Distribution (1)
Transmission
Other energy services
Gross revenues
Direct costs
Net revenues
Expenses
Operating + maintenance
Development costs
Depreciation
Total operating costs
Operating income
Interest expense
Other financial charges
Interest/dividend income
Net interest expense
Equity income
Pre-tax income
Income taxes
Net income
12 mos. ended
Dec. 31, 2004
1,709.2
42.9
62.5
1,814.5
1,267.3
547.2
For the year ended September 30
2004
2003R
2002
1,671.9
1,633.6
1,487.1
45.8
63.0
62.1
60.2
53.8
48.8
1,778.0
1,750.4
1,598.0
1,228.0
1,187.7
1,051.8
550.1
562.7
546.2
180.2
0.0
129.2
309.4
237.8
83.5
4.8
(4.9)
83.3
12.6
167.1
6.2
160.8
183.4
0.0
128.6
312.0
238.1
84.4
5.4
(4.9)
84.8
14.7
168.0
7.6
160.4
184.1
0.0
131.9
316.0
246.7
84.6
2.9
(3.7)
83.8
0.0
163.0
9.5
153.3
Distribution Throughputs - Breakdown
Industrial
Commercial
Residential
Total (actual) - (bcf)
111.6
67.3
26.2
203.5
110.1
67.7
26.6
202.2
Weather normalized throughputs (Bcf)
204.4
204.4
0.7%
0.0%
Growth in volume throughputs (actual)
Growth in volume throughputs (normalized)
236.9
Transportation throughputs (Bcf) (2)
(1) Domestic distribution revenues are based on weather normalized throughputs.
(2) Volumes not adjusted for Gaz Met's ownership interest.
R=Restated.
0.8%
1.3%
236.9
2001R
1,962.6
60.0
41.3
2,063.9
1,532.9
531.0
176.7
0.0
135.2
311.9
234.3
83.1
1.1
(4.5)
79.7
167.5
0.0
127.1
294.6
236.4
97.7
0.4
(2.9)
95.2
154.6
141.2
154.6
141.2
108.4
67.2
26.2
200.5
115.2
61.9
23.4
199.1
106.7
66.5
25.9
224.1
201.8
209.0
231.5
0.7%
(3.4%)
(11.2%)
3.0%
223.1
227.3
3.7%
0.1%
212.6