Société en commandite Gaz Métro
Cause tarifaire 2010, R-3690-2009
1
Company Comment
Thursday, November 20, 2008
(GZM.UN-T C$13.95)
Gaz Metro Limited Partnership
Tony Courtright, MBA, CA - 416-945-4536
Richard J. Lee, CA - 416-863-5915
David Noseworthy, MBA, P.Eng. - 416-945-6696
tony_courtright@scotiacapital.com
Rating: 3-Sector Underperform
Risk Ranking: Low
Target 1-Yr:
2-Yr:
C$14.50
C$14.50
ROR 1-Yr:
2-Yr:
12.8%
21.7%
Est. NTM CDPU
CDPU (Curr.)
C$1.24
C$1.24
Yield
Valuation: 8.5% Target Yield
8.9%
Q4/F08 Results; Disappointing Allowed ROE
Event
■ Gaz Metro reported Q4/F08 and F2008 adjusted EPU of ($0.035) and
$1.27, which were slightly above our ($0.39) and $1.24 estimates. This
is primarily due to higher GMP contributions and higher sales to
residential customers in F2008.
What It Means
■ We have downgraded our rating to 3-SU and lowered our one-year
target to $14.50.
■ Gaz Metro's core rate-regulated Quebec-based gas distribution business,
despite its recession-proof nature, has low growth potential because of
its competitive disadvantage to legacy-priced Quebec hydro prices.
■ Gaz Metro faces a 29 bp lower base allowed ROE on its Quebec
distribution activities in fiscal 2009, which GZM estimates will reduce
its net income by $3M (est. $0.03/unit) before productivity/incentive
gains.
■ Gaz Metro must also eventually issue equity to achieve a delayed
rebalancing of its current 65.9% consolidated debt/capitalization ratio
into one more in line with its historical 60% level. This will be dilutive
as it is intended to replace lower cost debt. Gaz Metro's challenge in the
current equity markets is reflected by its distribution yield exceeding its
F2009 allowed ROE on its core Quebec-based gas distribution business.
Qtly CDPU
2007A
2008A
2009E
2010E
Q1
$0.31 A
$0.31 A
$0.31
$0.31
(FY-Sep.)
Earnings/Unit
Distributable Cash/Unit
Price/Earnings
EV/EBITDA
EBITDA
Tot. Debt/(Tot.Dbt+Eq.)
Debt/EBITDA
EBITDA/Int. Exp
IBES Estimates
EPU 2009E: $1.23
EPU 2010E: N/A
BVPU09E
ROE09E
Next Reporting Date
Mar-09
Q2
$0.31 A
$0.31 A
$0.31
$0.31
Q3
$0.31 A
$0.31 A
$0.31
$0.31
Q4
$0.31 A
$0.31 A
$0.31
$0.31
Year
$1.24
$1.24
$1.24
$1.24
Yield
7.7%
8.9%
8.9%
8.9%
2006A
$1.25
$2.66
14.0
8.8
$369
0.58
3.2
3.9
2007A
$1.01
$2.04
15.9
8.9
$403
0.65
4.1
3.7
2008A
$1.28
$2.56
10.9
7.8
$426
0.66
4.6
3.7
2009E
$1.24
$2.21
11.2
7.9
$414
0.62
4.9
3.4
2010E
$1.22
$2.15
11.5
7.5
$410
0.62
4.5
3.7
$7.99
15.7%
Units O/S (M)
Float O/S (M)
Total Value ($M)
Float Value ($M)
TSX Weight
120.5
34.9
1,681
487
-
Pertinent Revisions
New
Rating:
3-SU
Target:
1-Yr
$14.50
2-Yr
$14.50
New Valuation:
8.5% Target Yield
Old Valuation:
8.25% Target Yield
Old
2-SP
$15.25
$15.25
Fixed Income Research Link
SC Online Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; Company reports; Scotia Capital estimates.
For important disclosure information see Appendix A of this report.
Original : 2009.05.04
Gaz Métro - 7, Document 11
Annexe 2 (8 pages)
2
Company Comment
Thursday, November 20, 2008
O ct-0 8
Ma y-08
Ju l-0 7
D e c-0 7
F e b -0 7
Ap r-0 6
S e p -0 6
Ju n -0 5
N o v-0 5
Ja n -0 5
Au g -0 4
O ct-0 3
Ma r-0 4
Ma y-03
Ju l-0 2
D e c-0 2
F e b -0 2
Ap r-0 1
S e p -0 1
Ju n -0 0
N o v-0 0
No v 19
Recommendation
■ We reduce our rating to 3-Sector
Underperform from 2-Sector Perform with a
projected ROR of 12%, compared with 45%
average of our universe of coverage.
Source: TSX Group; Scotia Capital estimates.
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Yield (%)
Ja n -0 0
Valuation
■ We reduce our target by $0.75 to $14.50,
which is based on a 8.50% (previously 8.25%) Exhibit 1 – GZM Yield Spread Over GCAN 10-YR
distribution yield.
7.00
(% )
■ Gaz Metro units are currently trading at about
6.00
540 bp yield spread to prevailing 3.5% 10-year
+3 S.D.
Canada bond yields (Exhibit 1). In our view, the
5.00
current near record wide yield spread is due to
+2 S.D.
higher threshold returns required from equity
4.00
investors coupled with a flight to risk-free
+1 S.D.
investments (such as Canada government bonds).
3.00
Mean
■ Comparable Yield to BBB Corporate Bond:
2.00
Gaz Metro's current yield of 8.9% is comparable
to that of an investor holding a long-term BBB-1 S.D
1.00
corporate bond (on pre-tax yield basis only). We
note, however, an investor faces less risk and
0.00
benefits from a higher priority income claim by
holding a corporate bond, compared to Gaz
Metro's distributions which are likely to be
G ZM Y ield S pread O ver G C AN 10-Y R
reduced by 30% following the imposition of
SIFT taxes in Jan 1, 2011. We believe the Source: Bloomberg; Scotia Capital estimates.
relative yield compression between Gaz Metro's
distribution and BBB corporate bond suggests
Gaz Metro's unit prices might face some
downward pressure, assuming the cost of Exhibit 2 – GZM Yield Spread Over Long BBB Corporate Bond
borrowing remains historically high due to the
10
credit crisis.
9.5
Long BBB Corporate Yield
Gaz Metro's Yield
■ Valuation Relative to Equities: Gaz Metro units
9
are currently trading at 16.4x EPU (2010E tax8.5
adjusted), which is at a premium relative to its
8
Canadian utility equities (weighted avg 14.6x
7.5
EPS 2010E - see Exhibit 3). We have assumed a
simplifying 30% combined federal and Quebec
7
tax rate. In our view, Gaz Metro's tax-adjusted
6.5
P/E should trade at a par or at a discount to its
6
utility peers due to its limited growth
5.5
opportunities and lower retention of internal cash
5
flows to fund growth (which implies Gaz Metro's
greater reliance on more costly equity markets).
3
Company Comment
Thursday, November 20, 2008
Exhibit 3 - Valuation Comparable: Gaz Metro LP versus Canadian Equity Utilities
Price/post-tax Earnings
Utility Equities
(1)
Canadian Utilities Limited
Emera Incorporated
Enbridge Inc.
Fortis Inc.
19-Nov-08
$
$
$
$
40.22
20.39
35.70
25.78
Shares Market
O/S
Cap
Yield
3.3%
4.7%
3.7%
3.9%
126
112
371
157
Weighted Average By Market Capitalization
3.7%
(1) Estimates are from Scotia Capital's Utilities Analyst Sam Kanes
Gaz Metro Lim ited Partnership
$
13.95
8.9%
121
(1) Assuming 30% combined federal and Quebec general corporate tax rate
EV/2009E
EBITDA
EV/2010E
EBITDA
5,048
2,281
13,259
4,051
7.7 x
7.4 x
9.9 x
8.5 x
7.5 x
7.2 x
9.4 x
8.2 x
24,639
9.0 x
8.6 x
1,681
7.7 x
7.8 x
EPS 2009E
$2.90
$1.39
$2.15
$1.63
EPS 2010E
$3.00
$1.46
$2.35
$1.74
Pre-tax Earnings
$1.24
$1.21
Pre-tax Earnings (1)
$0.87
$0.85
Source: Scotia Capital estimates.
Outlook/Developments
■ 8.76% F2009 ROE is second lowest authorized rate since 2004: On Nov 12/08, the Régie
authorized base ROE at 8.76% for F2009, which was 49 bp lower than Gaz Métro's request
for 9.25% and 29 bp lower than Gaz Metro's authorized ROE of 9.05% in F2008. We note
this ROE is the second lowest rate rendered by the Regie since 2004 - the lowest ROE
rendered since 2004 was 8.73% in 2007. We note, however, Gaz Metro's average yield
during F2007 (which implies its cost of equity) of 7.4% was still lower than the Regie's
authorized ROE of 8.73% for F2008. In contrast, Gaz Metro's current yield of 8.9% is 14 bp
higher than the Regie's authorized ROE of 8.76% for F2009. Although the overall impact of
the decision is not expected to be finalized before the end of Nov/08 (when Gaz Metro
updates its application and files with the Regie), Gaz Metro indicated the 29 bp decrease in
authorized ROE from prior year will otherwise cause F2009 annual net income to decrease
by about $3M (or about $0.03/unit) from F2008 levels.
■ Equity issuance: Gaz Metro still needs to raise equity (est. $95M) to refinance its $225M
acquisition of Green Mountain Power and $46M investment in Vermont Transco LLC. As at
Sept 30, 2008, GZM's debt/total capitalization ratio is 65.9% (up from 61.9% in June 30,
2008). Gaz Metro now guides to issuing equity units "at an appropriate" time to bring its
leverage ratio down to more historical levels (58%-61% range). For modelling purposes, we
have delayed the timing of Gaz Metro's equity issuance from early Q1/F09 to Q4/F09 (i.e.,
July-Sept/09). We continue to assume a $95M equity issuance (about 6.5M units at our
$14.50/unit target) which would bring down its debt/total capitalization ratio down to 60%.
■ Near-term debt refinancing: On Oct. 14/08, Gaz Metro raised $150M of Series L First
Mortgage Bonds which bear interest at 5.4% per annum and mature on April 15, 2013. We
expect Gaz Metro will need to refinance $100M in 2010 to replace GMI's Series H maturing
debt balance. See Exhibit 4.
■ TQM/PNGTS transportation toll application: The National Energy Board's decision on
TQM's application for 40% equity thickness and 11% ROE (retroactive to Jan 1/07) is
expected to be announced in early 2009. FERC's decision on PNGTS' rate application and
hearings are expected to start on March 10, 2009.
2009E
2010E
13.9 x
14.7 x
16.6 x
15.8 x
13.4 x
14.0 x
15.2 x
14.8 x
15.7 x
14.6 x
Price/pre-tax Earnings
11.2 x
11.5 x
Price/post-tax Earnings(1)
16.1 x
16.4 x
4
Company Comment
Thursday, November 20, 2008
Exhibit 4 - Gaz Metro's LT Debt Summary
Long-term Debt Maturity Schedule - Nov 1, 2008
Type
Amount
Interest Rates
Maturity
First Mortgage Bonds
Series "D"
$125
10.75%
2017
Series "E"
$100
9.00%
2025
Series "F"
$50
7.20%
2028
Series "H"
$100
6.95%
2010
Series "I"
$125
7.05%
2031
Series "I"
$125
6.30%
2034
Series "J"
$150
5.45%
2021
Series "J"
$150
5.70%
2036
Series "L" - New Issuance on Oct 13/08
$150
5.40%
2013
Term Loan (5.05% in 2006)
$238
3.57%
2010 to 2013
$1,313
NNEEC
Unsecured Notes Series A
US$50
5.93%
2017
Unsecured Notes Series B
US$50
6.12%
2022
US$20
7.03%
2028 and 2036
Series 6.04%
US$42
6.04%
2018
Series 6.70%
US$15
6.70%
2019
Series 9.64%
US$9
9.64%
2020
Series 8.65%
US$13
8.65%
2022
Series 6.53%
US$30
6.53%
2036
Series 6.17%
US$16
6.17%
2038
Unsecured term loan and others
US$21
3.00%
2011 and 2017
US$100
VSG
Unsecured preferred notes (US 20,000)
GMP
First Mortgage Bonds
US$43
TQM
Bonds
Series "H"
$50
6.50%
2009
Series "I"
$50
7.05%
2010
Series "J"
$38
3.91%
2010
$21
3.40%
2011
5.54%
2010 to 2017
Term loan (4.72% in 2007)
$159
Other
Term loan and other (5.77% in 2007)
$69
$1,704
Source: Company reports; Scotia Capital estimates.
(toal assuming parity)
5
Company Comment
Thursday, November 20, 2008
$120
$100
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Aug-08
Sep-08
Oct-08
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
$80
$70
$60
$50
$40
Nov-08
Dec-07
19
98
Quebec Residential Housing Starts
$90
40,000
30,000
20,000
10,000
E
20
09
20
08
E
0
Source: CMHC
.
SC Online Analyst Link
Heavy Fuel Oil (No. 6 NY Cargo)
$110
NG Prices (Empress)
■ Industrial Customers Conversion to Exhibit 5 - Natural Gas vs Heavy Fuel Oil
Natural Gas: We believe the pace of
industrial customers switching from heavy
$12.00
fuel oil to natural gas as their energy source
$11.00
may decline due to the recent crude oil price
decline. (See Exhibit 5). Longer-term, we
$10.00
expect many industrial customers to switch
gradually from heavy fuel oil to natural gas
$9.00
because of growing regulatory restrictions
on greenhouse gas emissions. As such, the
$8.00
general trend of switching from heavy fuel
$7.00
oil to natural gas remains favourable and
likely represents a long-term growth
$6.00
Heavy Fuel Oil
opportunity for Gaz Metro. Gaz Metro
Price Drop
estimates a potential for 15 Bcf (or about
$5.00
7.5% of Quebec's total gas consumption in
2007) could be added to Gaz Metro's QDA
$4.00
industrial customer base over the long-term.
■ New Home Construction to Moderate in
2009: New housing starts in Quebec are
Natural Gas (Empress)
Heavy Fuel Oil (No. 6 NY Cargo)
expected to moderate near-term, which will
likely reduce the growth of Gaz Metro's
QDA residential customer base. According Source: Bloomberg (using Empress Natural Gas and No. 6 Fuel Oil (NY Cargo)
to Canadian Mortgage and Housing .
Corporation
(CMHC),
new
home
construction is expected to decrease from Exhibit 6 - Quebec Housing Starts for 2008E and 2009E
48,553 units in 2007 to 47,938 (-1.3% YOY
70,000
decrease) in 2008 and to 42,000 (-12.4%
YOY decrease) in 2009 (Exhibit 6). We
60,000
expect relatively flat residential gas volume
deliveries by Gaz Metro over the next two
50,000
years.
6
Company Comment
Thursday, November 20, 2008
Appendix A: Important Disclosures
Company
Gaz Metro Limited Partnership
Ticker
GZM.UN
Disclosures*
U
I, Tony Courtright, certify that (1) the views expressed in this report in connection with securities or issuers that I analyze accurately reflect my
personal views and (2) no part of my compensation was, is, or will be directly or indirectly, related to the specific recommendations or views
expressed by me in this report.
The Fundamental Research Analysts' compensation is based on various performance and market criteria and is charged as an expense to
certain departments of Scotia Capital Inc., including investment banking.
Scotia Capital Inc. and/or its affiliates: expects to receive or intends to seek compensation for investment banking services from issuers
covered in this report within the next three months; and has or seeks a business relationship with the issuers referred to herein which
involves providing services, other than securities underwriting or advisory services, for which compensation is or may be received. These
may include services relating to lending, cash management, foreign exchange, securities trading, derivatives, structured finance or precious
metals.
This report may include articles or content prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital.
For Scotia Capital Research analyst standards and disclosure policies, please visit http://www.scotiacapital.com/disclosures
*
U
Legend
Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or debt
securities of, or have provided advice for a fee with respect to, this issuer.
7
Company Comment
Thursday, November 20, 2008
Definition of Scotia Capital Equity Research Ratings & Risk Rankings
We have a three-tiered rating system, with ratings of 1-Sector Outperform, 2-Sector Perform, and 3-Sector Underperform. Each analyst
assigns a rating that is relative to his or her coverage universe.
Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Statistical and
judgmental factors considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts,
consistency and predictability of earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of
Research and the Supervisory Analyst jointly make the final determination of all risk rankings.
Ratings
Risk Rankings
1-Sector Outperform
The stock is expected to outperform the average total return of the
analyst’s coverage universe by sector over the next 12 months.
Low
Low financial and operational risk, high predictability of financial
results, low stock volatility.
2-Sector Perform
The stock is expected to perform approximately in line with the
average total return of the analyst’s coverage universe by sector
over the next 12 months.
Medium
Moderate financial and operational risk, moderate predictability of
financial results, moderate stock volatility.
3-Sector Underperform
The stock is expected to underperform the average total return of
the analyst’s coverage universe by sector over the next 12 months.
Other Ratings
Tender – Investors are guided to tender to the terms of the
takeover offer.
Under Review – The rating has been temporarily placed under
review, until sufficient information has been received and
assessed by the analyst.
High
High financial and/or operational risk, low predictability of financial
results, high stock volatility.
Caution Warranted
Exceptionally high financial and/or operational risk, exceptionally low
predictability of financial results, exceptionally high stock volatility. For risktolerant investors only.
Venture
Risk and return consistent with Venture Capital. For risk-tolerant
investors only.
Scotia Capital Equity Research Ratings Distribution*
Distribution by Ratings and Equity and Equity-Related Financings*
Percentage of companies covered by Scotia Capital Equity
Research within each rating category.
Percentage of companies within each rating category for which
Scotia Capital has undertaken an underwriting liability or has
provided advice for a fee within the last 12 months.
Source: Scotia Capital.
For the purposes of the ratings distribution disclosure the NASD requires members who use a ratings system with terms different than “buy,”
“hold/neutral” and “sell,” to equate their own ratings into these categories. Our 1-Sector Outperform, 2-Sector Perform, and 3-Sector
Underperform ratings are based on the criteria above, but for this purpose could be equated to buy, neutral and sell ratings, respectively.
8
Company Comment
Thursday, November 20, 2008
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