Demande de modifier les tarifs de SCGM à compter du 1er octobre 2008
R-3662-2008
DR. BOOTH’S INFORMATION REQUESTS #1 ON GAZ MÉTRO’S EVIDENCE
May 28, 2008
Information requests of Gaz Métro
IR #1
a) Please provide the allowed and earned return on common equity (ROE) for Gaz
Metro for each year since 1990. The actual ROE should be before and after the
impact of performance based regulation and sharing mechanisms
b) Please discuss in detail the variation of actual from allowed noted in (a) above
particularly for any deviations greater than 1%.
c) Please discuss any trend noted in a) over time and Gaz Metro’s performance in 2007.
IR#2
a)
Please provide copies of all security analyst reports that discuss Gaz Metro since
January 2007.
b)
Please provide copies of all presentation materials provided to DBRS and S&P that
relate to Gaz Metro’s bond rating and all credit analyst reports that discuss Gaz
Metro’s bonds since January 2007
c)
Please provide copies of all material change reports or other filings that Gaz Metro
has filed with the securities regulators indicating that the business risk of Gaz Metro
has changed since January 2007.
IR#3
In its 2007 Annual Report Gaz Metro Inc states
a)
Please confirm that this statement indicates that Gaz Metro Inc’s
ability to earn its allowed ROE is indicative of its business risk. If not
why not?
Dr. Booth’s Information Requests #1
R-3662-2008
Page 2
b)
Please indicate all Canadian utilities that have a better bond rating than
Gaz Metro using either the DBRS or S&P rating.
c)
Please confirm that the “outlook” on Gaz Metro’s S&P credit rating
was changed from negative to stable on February 8, 2008.
d)
Please confirm that S&P had the Regie’s decision D2007-116 when it
changed its rating outlook for Gaz Metro.
e)
Please provide copies of any briefing materials that Gaz Metro
provided S&P between the Regie’s decision and S&P’s rating outlook
change.
IR #4
On Page 24 of its Annual Report Gaz Metro has the following discussion:
a) Why does Gaz Metro benchmark investor return requirements relative to the five year
Canada bond yield?
b) Why is there no substantive discussion in the Gaz Metro 2007 Annual Report of the
increasing credit concerns discussed on page 3 of the R3662-2008 evidence?
Dr. Booth’s Information Requests #1
R-3662-2008
Page 3
c) Please confirm that the average spread as indicated above in Gaz Metro’s annual report is
2.62% in a range 1.84-3.53%
d) Please discuss any reasons why the above spread is not constant; in particular in Gaz
Metro’s judgment are there any common economic features between 2001 and now?
IR #5
Gaz Metro discusses the yield spread between its long term bonds and long Canada bonds since
August 3, 2007 on page 6,
a) Please provide the yields and the spread history on a monthly basis since 1990 of the
Gaz Metro bond and the equivalent long Canada bond.
b) Please provide the monthly trading volume of the Gaz Metro bond and the equivalent
long Canada bond both in $ and as a % of the outstanding issue since January 1990.
c) Please provide the yields on A rated bonds and long Canada bond yields since
January 1990.
d) In the judgment of Gaz Metro is the spread in a) and b) constant and what factors
drive the spread?
e) Please discuss whether the Elton et al paper (discussed on page8) discusses
differences in liquidity between government and default risky bonds. Please discuss
in detail whether in the judgment of Gaz Metro its bonds have the same liquidity as
Government of Canada bonds and as a result the spread does not reflect a liquidity
factor as well as credit factors.
IR # 6
With reference to the statement on page 9 “Contrary to the return expected by shareholders, the
return expected by bondholders is clear: it is the expected interest rate.”
a) Please confirm that the yield on a corporate default risky bond, such as Gaz Metro’s is
commonly referred to as a promised yield and explain what promised means in this
context.
b) Please provide any references to the literature that describes the yield on a default risky
bond as an expected rate of return or interest rate as claimed by Gaz Metro.
Dr. Booth’s Information Requests #1
R-3662-2008
Page 4
IR #7
With respect to the discussion on page 10
a) Can Gaz Metro please provide references in the literature to any interest rate models used
to price interest rate swaps or other derivative securities that assumes there is a risk
premium embedded in corporate bonds;
b) Please confirm that the following graph came from Dr. Booth’s evidence last year
Appendix F Schedule 5.
c) Please confirm that the graph indicates a positive beta (systematic risk) for the long
Canada and US Treasury bond in the 1990’s, the period covered by the Simon study
referenced in footnote 10. Please confirm that this beta does not currently exist in the
d) long Canada or US Treasury bond. If not why not.
Bond Betas
0.8
0.6
0.4
0.2
-0.2
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
0
-0.4
US
Canada
R #8
In the graph on page 14 the price for Gaz Metro LP is shown falling since Summer 2007.
a) Please indicate what the book value of Gaz Metro LP was at this time.
b) Please indicate the price at which Gas Metro LP units have been sold to the public and
the book value at the time of issue for each such issue since 2000.
Dr. Booth’s Information Requests #1
R-3662-2008
Page 5
IR # 9
Gaz Metro discusses issue costs on pages 16-22
a) Please confirm that if a utility is awarded the investor’s required rate of return then the
stock should sell at close to book value, if not why not.
b) Please confirm that the issue cost adjustment is designed to get the stock “above” book
value so that the proceeds of a stock issue will exceed book value and not result in
dilution given that eh issue costs are not included in the revenue requirement.
c) Please provide Gaz Metro’s average book value per share and average market price for
each year since 1995 and discuss any instances when the price has been below book
value and discuss the reasons why this could have happened.
d) Please confirm that if the price is well above book value with no possibility of being
below it, then by definition no adjustment for issue costs is needed, if not why not.
IR # 10
Gaz Metro discusses issue costs on pages 16-22
a) Please provide the tax treatment of the issue costs included in the table on page 20.
Specifically are the legal and other direct costs tax deductible and if so by whom?
b) The discount is as of the day before the issue; please indicate what the book value was at
the time of issue and the price five, ten and fifteen days prior to issue.
c) If Gaz Metro times its equity issues so that the price is above its normal trading level,
does Gaz Metro still believe that it deserves an issue cost based on this discount from an
elevated price, if so why or why not?
d) Gaz Metro indicates that it currently pays out 100% of its earnings as dividends and that
issue costs should be based on this payout rate. Please confirm that the issue costs are
added to the investors’ required rate of return and are applied to all the equity whenever
raised, not just to the currently raised equity.
e) Please confirm that if any of the historic equity has resulted from retained earnings then
the issue cost adjustment should be based on less than 100% dividend payout, if not why
not.
f) Please indicate the development of the “shareholder’s equity” of Gaz Metro and
predecessor organizations, since its formation showing for each year how much equity
Dr. Booth’s Information Requests #1
R-3662-2008
Page 6
was raised as retained earnings, how much from new issues and how much from capital
gains and other adjustments to shareholder’s equity.
g) Please indicate the current breakdown of shareholder’s equity into: 1) capital raised from
new issues; capital raised by retained earnings; capital raised through other transactions.
h) Please confirm that in the 2007 MD &A Gaz Metro states
Please explain why there was a $216.7 million dilution gain in 2007.
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