Hydro-Quebec
Trans-Énergie
Application R-3605-2006
KEY ACCOUNTING POLICIES
Original: 2006-07-06
HQT-4, Document 2
Page 1 of 22
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Trans-Énergie
Application R-3605-2006
TABLE OF CONTENTS
A KEY ACCOUNTING POLICIES
6
A.1
Capital assets
6
A.2
Abandoned or delayed major projects
7
A.3
Deferral of development costs
7
A.4
Global program for the safety of the transmission network
8
A.5
Costs of switchyards owned by private producers
8
A.6
Government compensation related to 1998 ice storm
8
A.7
Materials, fuel and supplies
9
A.8
Long-term debt
9
A.9
Currency conversion and derivative instruments – currency swaps
9
A.10
Derivative instruments - interest rate swaps
9
A.11
Intangible assets
10
A.12
Long-term asset retirement and abandonment of activities
10
A.13
Asset retirement obligations
10
A.14
Long-term depreciation of assets
11
A.15
Hedging relationships
11
A.16
Re-classification of effect of hedged sales in American dollars
11
B CHANGES OR ADDITIONS TO KEY ACCOUNTING
POLICIES
13
B.1
Determining whether an arrangement contains a lease
13
B.2
Application of new accounting standards coming into force January 1, 2007
regarding the accounting of financial instruments
14
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Application R-3605-2006
The Transmission Provider’s consolidated financial statements are drawn up in
compliance with Canada’s generally accepted accounting principles (GAAP) as
established by the Canadian Institute of Chartered Accountants (CICA,) and take into
account certain accounting methods and accounting practices generally accepted by the
Régie de l’Énergie (the Régie.)
Where applicable in order to calculate revenue, the Transmission Provider takes into
account accounting policies in use by Hydro-Quebec on December 31, 2005, as
described in the supplementary notes of the consolidated financial statement presented
in its 2005 annual report.
Section A following summarizes those accounting policies pertinent to the current
application which have been accepted by the Régie as well as a re-classification for the
purposes of presentation of financial information. Section B outlines amendments or
additions for which the Transmission Provider seeks approval from the Régie, as well as
the Transmission Provider’s strategy regarding the application of new accounting norms
which will be in force January 1, 2007 regarding the accounting of financial instruments.
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A
Application R-3605-2006
KEY ACCOUNTING POLICIES
A.1 Capital assets
Tangible capital assets are recorded at cost. This cost includes materials, labor, other
costs directly related to construction activities, and financing costs capitalized at the
capital cost rate authorized by the Régie during the period the work is executed. It also
comprises the levelized value of asset retirement obligations. When necessary, the cost
takes into account contributions received from third parties other than those affected by
decisions D-2006-76 and D-2006-76R, and the net cost of dismantling assets which
have been replaced.
Since May 10, 2006, in compliance with decisions D-2006-76 and D-2006-76R,
contributions received from third parties for additions (déplacements) or modifications to
the transmission network are recorded in a deferred credit account for capital assets.
These contributions are amortized over the average life of the assets of each project
using the compound interest method at a rate of 3 per cent.
The cost of capital assets under construction is transferred to operational capital assets
when construction is complete and the installations enter service, with certain exceptions
to be determined by the Régie. The capital assets are then amortized for the duration of
their useful life mainly using the compound interest method at a rate of 3 per cent. The
Act respecting Hydro-Quebec defines the maximum amortization period as 50 years.
Capital assets used to transmit electricity are mainly amortized over periods of 30 to 50
years.
Upon retirement of capital assets, the cost of the assets and of dismantling the assets,
minus the cumulative amortization and the recuperation value, are recorded in a
separate account and amortized over a maximum period of 10 years using the
compound interest method at a rate of 3 per cent. When these capital assets are
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replaced, the cost of dismantling, minus the value of recuperation, is added to the cost of
the new capital assets and amortized according to the method and amortization period
applicable to the new asset.
A.2 Abandonment or delay of major projects
The costs involved in capital investment projects are periodically re-evaluated. During
the re-evaluations, Management uses estimates and formulates hypotheses regarding
the profitability of the projects as a function of expected prevailing market conditions
when the project becomes operational, compliance with the principles of sustainable
development and reception in local communities.
A capital project is generally considered to have been delayed or suspended when work
has been stopped for longer than 12 months. The capitalization of loan costs ceases as
soon as a decision is made to delay or suspend a project.
Costs are attributed to ongoing capital projects as long as they represent future value to
the company. When they no longer represent future value, they are transferred to
expenses except when a major project is abandoned. In this last case, costs identified
as unrecoverable are deferred and amortized over a period of 3 years using the straightline method, subject to a decision by the Régie in each case.
A.3 Deferral of development costs
Development costs incurred during research and development activities are recorded
against the balance sheet of the project, unless they conform to GAAP criteria and the
thresholds set by the Transmission Provider for capitalization.
Deferred development costs are amortized over a 5-year period using the straight-line
method. This period begins the year following the year in which the costs were recorded.
Development costs must be capitalized until they are concurrent with an amount which
there is a reasonable certainty of recuperating through additional revenues or reduction
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of future expenses. The surplus of the balance of development costs over net future
income is recorded against the expenses of the project underway.
A.4 Global program for the safety of the transmission network (GPSTN)
After the 1998 ice storm, the Transmission Provider developed a plan involving
numerous investment projects to secure the transmission network. For these projects,
the Régie authorized the use of a deferred costs account to record the costs of the
GPSTN, which, according to GAAP, could not be recorded as capital assets. The costs
attributed to the deferred costs account accumulate by project and are amortized using
the compound interest method at a rate of 3 per cent, over a period corresponding to the
remaining average useful life of total project assets which benefited from improvements.
A.5 Costs of switchyards owned by private producers
In compliance with Appendix J of the Rates and Conditions of Hydro-Quebec
Transmission Services, the Transmission Provider is obliged to reimburse, up to the
maximum projected amount, costs incurred by a private producer for the acquisition and
installation of equipment for the producer’s switchyard as well as an amount for
operating costs and maintenance of such equipment. These amounts are recorded in a
deferred costs account. The amounts contributed for the equipment are amortized over a
period representing the life of similar Hydro-Quebec equipment, using the compound
interest method at a rate of 3 per cent. The amounts disbursed for operating costs and
maintenance are amortized over a 20-year period, using the straight-line method.
A.6 Government compensation related to 1998 ice storm
Government compensation for the 1998 ice storm is amortized over the remaining useful
life of retired assets, except the portion equivalent to the non-amortized cost of these
assets which is amortized over a 10-year period. In both cases, the compound interest
method is applied at a rate of 3 per cent.
A.7 Materials, fuel, and supplies
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Stocks of materials, fuel and supplies are recorded at the lesser of cost or the net
realizable value, using the average cost method, and including a provision for regular
review and identification of obsolete material.
A.8 Long-term debt
Long-term debt is recorded at nominal value, except for zero-coupon or significantly
discounted bonds, which are recorded at their discounted value. The discounts,
premiums and issuance costs are deferred and amortized using the straight-line method
for the duration of the loan. Significant discounts and premiums are amortized using the
real interest method.
A.9 Currency conversion and derivative instruments – foreign currency swaps
The products and expenses of operations conducted in foreign currencies are converted
into Canadian dollars at the exchange rate effective during the operation. The monetary
elements of assets and liabilities are converted at the closing rate on the date of the
balance statement. The non-monetary elements are converted at the exchange rate
effective during the operations.
Short-term foreign exchange gains or losses resulting from the conversion of monetary
elements are included in results. Long-term foreign exchange gains or losses resulting
from the conversion of monetary elements, including currency swaps, are also included
in results, unless they are related to liability elements hedging sales in American dollars,
in which case they are deferred to the year the transaction is realized.
A.10 Derivative instruments - interest rate swaps
Interest exchanges, accounted as hedges and resulting from swaps used to modify longterm interest rate risk exposure, are recorded along with the interest expense recorded
for the loans to which they are tied.
A.11 Intangible assets
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Intangible assets are recorded at cost. Indefinite life intangible assets are not amortized.
These assets undergo a depreciation test at least annually and any amount by which the
carrying value exceeds the fair value is reported during the period during which the
depreciation occurred. Intangible assets with a limited useful life are amortized for the
duration of that period.
The methods and amortization periods used for these assets are:
•
Software, licenses and patents: Straight-line method and compound interest
method, 3 per cent, 3 to 20-year period.
•
Environmental studies: Composed interest method, 3 per cent, 5-year period.
A.12 Long-term asset retirement and abandonment of activities
Long-term assets destined for sale must be evaluated at the lesser of their carrying
value and fair value, minus the costs of retirement, and must cease to be amortized. All
losses must be recognized in the results. Long-term assets destined for retirement other
than through sale continue to be evaluated at their carrying value and to be amortized
until retirement.
A.13 Asset Retirement Obligations
The liability for an obligation associated with the retirement of a capital asset is initially
evaluated at fair value during the period in which the obligation emerges, when it is
possible to reasonably estimate the fair value. The resulting cost is capitalized into the
carrying value of the capital asset in question and is amortized for the life of the asset.
In subsequent periods, the liability is adjusted to reflect any change due to the passage
of time through a transfer to the operating costs. The liability is also adjusted to take into
account changes to the retirement time-line or non-discounted cash flow with respect to
the original estimate, through a re-assignment to the cost of the asset in question.
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A.14 Long-term depreciation of assets
The long-term depreciation of an asset must be recognized in the results when the
carrying value exceeds the total non-discounted cash flows which will result from the
operation and eventual retirement of the asset. The loss in value corresponds to the
surplus of the carrying value of the asset over its fair value, and this amount becomes
the new base cost of the asset.
A.15 Hedge Accounting
The Transmission Provider applies the recommendations of the CICA Manual’s
Accounting Guideline 13 (AcG-13) entitled Hedging Relationships, which establishes the
conditions under which hedge accounting can be applied. The guideline discusses the
identification, designation, documentation and effectiveness of hedge accounting as well
as the discontinuance of hedge accounting.
Derivative financial instruments which do not meet the hedge accounting admissibility
criteria outlined in AcG-13 are recognized at fair value in the balance sheet and
fluctuations in fair value are recognized in the results.
Hedging relationships which ceased to be admissible to hedge accounting with the
application of AcG-13 beginning January 1, 2004 were recorded in compliance with
planned transitional guidelines. The difference between the carrying value and fair value
of derivative instruments which had been the object of hedge relationships was deferred
and will be recognized in the income statement for the same period as the gains, losses,
revenues and expenses related to the initial hedged item.
A.16 Re-classification of the effect of hedged sales in American dollars
The company records the effect of hedges to compensate the hedged elements with one
significant exception, which is the presentation as financial costs of foreign exchange
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gains and losses associated with debts and swaps designated as hedges of sales in
American dollars.
More precisely, Hydro-Quebec holds debts and swaps in American dollars of which the
fluctuations due to the exchange rate compensate the company for the inverse effect on
its sales in American dollars. These debts and swaps are, from an economic and
accounting point of view, in a hedge relationship with the sales.
Historically, all foreign exchange gains and losses were recorded in the line-item
Exchange Losses in the category Financial Costs, regardless of the hedged item. In a
report submitted in March 2005, Hydro-Quebec’s external auditors noted this state of
affairs.
Hydro-Quebec’s management decided to delay implementing change until more
profound analyses could be conducted; on the one hand, of the accounting of all its
financial instruments, including derivative instruments, and on the other hand, of the
implications of this change for the matter of the regulatory approach to the risk of change
in the presumed cost of the debt.
Following work completed in 2005, Hydro-Quebec adopted in 2006 a method under
which the effect of the hedging of sales in American dollars with debts and swaps is reclassified under the Products line-item, therefore including the hedged item. This
hedging effect is therefore no longer included in financial costs. In this way, the
presentation is coherent with the economic objectives of the hedge and with the
accounting standards for hedging applicable to this relationship. Further, the cost of the
debt is largely protected against the volatility caused by the risk of change.
The impact of this re-classification is a transfer to the Products of Hydro-Quebec of a
gain of $130 M for 2006 and $200 M for 2007.
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B AMENDMENTS OR ADDITIONS TO THE KEY ACCOUNTING
POLICIES
B.1 How to determine if an arrangement contains a lease
As of January 1, 2005, for the purposes of the Transmission Provider, Abstract of
deliberations EIC-150, produced by the CICA’s Committee on New Problems, stipulates
that an arrangement regarding an operation or a series of related operations which does
not take the legal form of a rental agreement, but which confers the right to use a capital
asset in consideration of a payment or series of payments, falls under the scope of
Chapter 3065 of the CICA Manual, entitled Rental contracts. When a rental contract
transfers practically all the advantages and risks inherent in property to the lessee, it is
defined as a capital-leasing and the lessee must record an asset and an obligation for
the levelized value of the required payments, minus the part of those payments covering
costs related to use of the good. In other cases, it is defined as an operating lease where
the required rent must be recorded in the income statement using a linear formula
applied for the duration of the agreement, except if another formula can better respect
the curve along which the user of the good obtains an advantage.
For example, the application of this new accounting practice could produce a case in
which a connection contract with the private owner of a generating station would be
considered to contain a capital lease insofar as it involves contributions disbursed for the
switchyard. This modifies the nature of the transaction to be recorded on the
Transmission Provider’s books. In this case, the contribution to reimburse the cost of
acquisition and installation of the switchyard equipment is part of the rate base, but is
recorded under the line-item Operational Capital Assets instead of Non-amortized
Expenses and Other Assets, as Other Deferred Costs. This type of modification has no
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impact on the calculation of revenue required from the Transmission Provider because
the method and amortization period of this contribution remain the same. Further, the
nature of the contribution in terms of the operating costs and maintenance recorded by
the Transmission Provider remains the same.
B.2
Application of new accounting policies in use beginning January 1, 2007
concerning the accounting of financial instruments
Hedging relationships prior to January 1, 2007
As of January 1, 2004, The Transmission Provider has adopted the Accounting
Guideline entitled Hedging Relations (AcG-13) which sets out the conditions of
application of hedge accounting, and which can be summed up as requiring adequate
documentation and a demonstration of the effectiveness of the hedging relationships.
Since the majority of the company’s hedging relationships respect the criteria
established by AcG-13, hedge accounting may be applied in these cases. The derivative
financial instruments which do not meet the admissibility criteria for hedge accounting
set out in AcG-13 are recognized in the balance sheet at fair value, and variations in fair
value are recognized in the results. The impact of these guidelines on the cost of the
regulatory debt is therefore insignificant.
Financial instruments and hedge accounting after January 1, 2007
Beginning January 1, 2007, Hydro-Quebec will adopt new accounting norms for financial
instruments. These new norms are covered in the three new chapters of the CICA
Manual:
Chapter 3855, Financial Instruments – Accounting and evaluation
This chapter establishes the policies for accounting and evaluating financial
assets, financial liabilities and non-financial derivatives. It also covers recording
of
gains
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and
losses
on
financial
instruments.
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Application R-3605-2006
Chapter 3865, Hedges
This chapter reiterates the recommendations of AcG-13 regarding the application
of hedge accounting and gives specifics on the application of hedge accounting.
Chapter 1530, Comprehensive Income
This chapter introduces new rules concerning certain gains and losses which are
temporarily accumulated outside net income to be re-classified when appropriate.
The comprehensive income and the elements it comprises must be presented in
a financial statement of the same prominence as other statements included in a
complete financial statement.
Effects of the implementation of the new norms
a) Accounting of derivative instruments and application of hedge accounting
Beginning January 1, 2007, all derivative instruments will be evaluated at fair value. The
gains and losses associated with fluctuations in fair values will need to be recognized in
the results unless these items are designated as part of a hedging relationship. Under
such conditions, the new norms allow the application of special accounting rules which
allow gains, losses, products and expenses which compensate each other effectively to
be recorded in the results in the same period or periods. The effect of these special
rules, essentially, is to preserve the objective of hedge accounting as practiced under
existing policies. Therefore, the application of the new policies will ultimately have little
impact on the level of cost of the regulatory debt.
There are two types of hedges:
1.
Fair value hedge
This type of hedge generally applies to situations where the Transmission
Provider converts a fixed-rate debt to a floating-rate debt through a swap.
In the case of a fair value hedge, the fluctuations in fair value of a derivative
(where the swap receiver fixed and the payer floating) are recognized in the
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results. Simultaneously, the fluctuations in fair value of the hedged item (the
debt) attributable to hedged risk must be recorded as adjustments of the carrying
value of the hedged item and recorded in the income statement.
Analysis of the accounting of this type of hedging relationship shows that the effect of
recording a derivative at its fair value is compensated by the effect of having to record an
adjustment to the hedged item, except when the relationship is ineffective.
Ineffectiveness exists when the fluctuations in value of the hedging instrument and the
hedged item do not cancel each other out completely.
The presence of ineffectiveness is not systematic. Many existing relationships, as well
as most of the new relationships, are considered perfectly effective. Furthermore, if there
is inefficiency, the effect remains secondary because otherwise accounting norms would
not permit hedge accounting.
The new norms do not modify the criteria which must be met to benefit from hedge
accounting. But any imperfection in the hedge relationship must be recognized and
reported on an on-going basis rather than deferred. Compared to existing policies, there
is therefore a temporal difference in the recognition of imperfections in hedge
relationships. However, this difference obviously works out to zero over the duration of
the relationship.
2.
Cash flow hedge
This type of hedge applies, for example, when a company transforms a floating
Canadian debt into a fixed-rate debt or when it converts a fixed- or floating-rate
foreign currency debt into a fixed-rate debt in Canadian dollars.
In the case of a cash flow hedge, the fluctuations in fair value of the derivative
which constitute an effective hedge are reported in the comprehensive income
statement while, if necessary, the ineffective portion of these variations must be
recorded on the net income statement. The recording of the efficient element in
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the comprehensive income statement allows the deferral of recognition of gains
and losses in the income statement, in order to recognize them when
appropriate. In this way, gains and losses deferred in the comprehensive income
statement are re-classified in statements for the period or periods when the
hedged item affects the results.
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Here is an illustration of the application of the new standards for the accounting of
derivative instruments.
Table 1
Accounting of derivative instruments
Before
Balance
After
Statement
Balance
Long-term
results
Statement
Currency swap Fixed US-Var CAD: Fair Value Hedging Relationship
See Example
1
At cost
DEBT
SWAP
NET
+reevaluation at
current
exchange rate
At cost = 0
Fluctuation in
exchange rate
-fixed-rate
coupon $US
Re-evaluation
at fair value1
Fluctuation in
fair value
-fixed-rate
coupon $US
+reevaluation at
current
exchange rate
Fluctuation in
exchange rate
+ fixed-rate
coupon $US
– floating-rate
coupon $CAD
Re-evaluation
at fair value
Fluctuation in
fair value
+ fixed-rate
coupon $US
– floating-rate
coupon $CAD
Perfect
compensation
Perfect
compensation
– floating-rate
coupon $CAD
Perfect
compensation
if no
ineffectiveness
Perfect
compensation
if no
ineffectiveness
– floating-rate
coupon $CAD
Interest rate swap Floating CAD-Fixed CAD: Cash Flow Hedging Relationship
See Example
2
At cost
-floating-rate
coupon $CAD
DEBT
At cost = 0
SWAP
+ floating-rate
coupon $CAD
–fixed-rate
coupon $CAD
-fixed-rate
coupon $US
At cost
Fluctuation in
fair value
Re-evaluation
at fair value
Effective
portion of the
fluctuation in
fair value of
the swap
NET
– fixed-rate
coupon $CAD
Perfect compensation if no
ineffectiveness
+ floating-rate
coupon $CAD
– fixed-rate
coupon $CAD
Reclassification
of the
fluctuation in
fair value in the
comprehensive
income
statement2
Perfect
compensation
if no
ineffectiveness
– fixed-rate
coupon $CAD
1
: Adjustment due to the application of hedge accounting and corresponding to the fair value of the portion
attributable to hedged risk only.
2
: Reclassification due to the application of hedge accounting and corresponding to the effective portion of
the fluctuation in fair value of the swap.
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Example 1: Fair value hedge
Hedged item:
Fixed-rate debt 5,5 %, $100M US issued January 1, 2006
Hedging item:
SWAP
received $100M US at fixed-rate 5,5 %
disbursed $100M CAD at floating rate (first fixing
at 7,2 per cent)
transaction date January 1, 2006
Hedged risk:
Fluctuation in fair value of the debt associated with the risk
of the interest rate swap and the exchange rate
Date of designation:
January 1, 2006
Exchange rate:
Historic rate: 1,00
January 31 rate: 1,07
Note: The hedging relationship is assumed to be perfectly effective.
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After
Before
2006-01-01
(100)
-
(100)
-
-
-
-
-
(7)
7
(7)
7
7
(7)
7
(7)
Re-evaluation of the derivative
at fair value (excluding
conversion)
_
_
(5)
5
Re-evaluation of the derivative
at fair value3 (excluding
conversion)
_
_
5
(5)
(0,5)
0,5
(0,5)
0,5
Interest coupon for:
Swap- receipt
Swap – disbursed
0,5
(0,6)
(0,5)
0,6
0,5
(0,6)
(0,5)
0,6
Debt
Interest
(100)
(0,6)
0,6
(100)
(0,6)
0,6
Issuance of debt
($100m US * 1,00)
Conversion of debt at current
exchange rate
$100M US * (1,07-1,00)
Conversion of swap at current
exchange rate
Coupon for debt interest
Total
Results
Results
Cost of derivative
2006-01-31
Balance
sheet
Balance
sheet
Example 2: Cash flow hedge
Hedged item:
Floating-rate debt $100M US issued January 1, 2006
(first fixing at 6 %)
Hedging item:
SWAP
received $100M at floating-rate (first fixing at 6 %)
disbursed $100M at fixed rate 7,2 %
transaction date January 1, 2006
Hedged risk:
Variation in cash flow associated with interest rate swap
Date of designation:
January 1, 2006
Note: The hedging relationship is assumed to be perfectly effective.
3
Adjustment necessary due to application of hedge accounting and corresponding to the fair value only for
the portion attributable to hedged risk.
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Before
2006-01-01
2006-01-31
After
Balance
sheet
Results
Balance
sheet
(100)
-
(100)
Cost of derivative
-
-
-
Re-evaluation of swap at fair
value
-
-
(2)
Issuance of debt
Re-classification of fair value of
swap for comprehensive
income.
Coupon for interest on debt
Interest coupon for:
Swap- receipt
Swap – disbursed
2006-02-06
-
ResultS
-
2
2
(2)
(0,5)
0,5
(0,5)
0,5
0,5
(0,6)
-
(0,5)
0,6
-
0,5
(0,6)
(0,5)
0,6
2
(2)
Re-evaluation of swap at fair
value
Re-classification of fair value of
swap for comprehensive
income.
Total
Resultat
etendu
(2)
Coupon for interest on debt
(0,5)
0,5
Interest coupon for:
Swap- receipt
Swap – disbursed
0,5
(0,6)
(0,5)
0,6
Debt
Interest
(100)
(1,2)
1,2
2
(0,5)
0,5
0,5
(0,6)
(0,5)
0,6
(100)
(1,2)
-
1,2
Table 1 above illustrates clearly that the changes imposed by the new norms on financial
instruments will have little impact on the cost of the regulatory debt. First, in the absence
of ineffectiveness in the hedge relationships, there will be no impact because the net
effect on the results is the same as under the current policies. Second, if a relationship is
not perfectly efficient, the impact in terms of the current policies will essentially be the
recognition of the ineffectiveness in the period in which it occurs, which as indicated
above, represents a secondary impact which will ultimately sum to zero over the duration
of the hedge relationship.
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On the other hand, because the accounting of derivative instruments at fair value will
lead to the recording of a compensatory element and give rise to significant
modifications to the balance sheet and the presentation of financial information, the
formula for the cost of the regulatory debt will need to be reviewed in order to ensure it
corresponds to the fundamental definition.
However, the adaptation of the definition of the cost of the regulatory debt should not be
addressed before the projection of the regulatory debt cost for the next rate application
for the following reasons:
•
As previously indicated, once the definition of the regulatory debt is adapted to
the changes ensuing from the application of the new norms on accounting of
financial instruments, the Transmission Provider believes the changes will have
little impact on the cost of the regulatory debt. The impact, if any, will be in
temporal in terms of the recognition of certain minor effects in the results. As a
result, the projected cost of the 2007 regulatory debt as a function of the current
accounting policies is adequate and coherent with the fact that the real figures
used in the reference 2006 are a function of the existing policies. On the other
hand, for the next rate application, the real figures will reflect the effect of the new
norms, which will require an adjustment of the definition of the cost of the
regulatory debt and the model used to project it.
•
Before the end of the year 2006, the Transmission Provider intends to acquire
the software tools necessary to ensure that accounting practices comply with the
new norms. Once the new accounting procedures are in place, the company will
be able to make the necessary modifications to the definition of the cost of the
regulatory debt to reflect the new norms. Then, when presenting the projected
cost of the debt for the next rate application, Hydro-Quebec will propose
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HQT-4, Document 2
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Hydro-Quebec
Trans-Énergie
Application R-3605-2006
modifications to the definition of the cost of the regulatory debt and will be able to
confirm the marginal impact of the new norms, in the context of the proposed
adjustments.
b) Long-term debt
Beginning January 1, 2007, the long-term debt will be recorded at cost after amortization
using the effective rate method. Therefore, the discounts, premiums and issuing
expenses currently recorded under the line-item Deferred Costs Related to the Longterm Debt, or Deferred Discounts and other Credits Related to the Long-term Debt and
amortized using a straight-line method for the duration of the loan, will be recorded in the
balance of the long-term debt. The impact will be limited to the timing of the recognition
of discounts and issuing expenses, which will have a zero sum effect over duration of
the of the items.
The Transmission Provider will not be in a position to precisely evaluate these effects
before the installation of software to implement the new norms. Therefore, the projected
cost of the regulatory debt for 2007 is based on the norms currently in force. The new
method will be integrated in time for the evaluation of the cost of the debt for the next
rate application. The company will then identify the impact of this change in procedure
on the base year and the projected year.
c) Hedging of sales in American dollars
Currently, in cases where Hydro-Quebec hedges the debt with sales in American dollars,
only the principal of the debt is designated. Beginning January 1, 2007, Hydro-Quebec
will also have to designate the interest on the debt. Therefore, in view of the reclassification explained in section A.16, the exchange gains and losses on the interest of
these debts will henceforth be presented under the line-item Products while interest will
be recorded at historic rates under the Financial costs line-item. The impact of this
element will be identified along with the others for the next rate application.
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HQT-4, Document 2
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