Société en commandite Gaz Métro
Cause tarifaire 2006, R-3559-2005
Stability Ratings Report
Gaz Metro Limited Partnership
Current Report:
Press Released:
Previous Report:
March 16, 2005
March 16, 2005
February 25, 2004
416-593-5577
incomefunds@dbrs.com
RATING
Current
STA-1 (low)
2004
STA-1 (low)
2003
STA-1 (low)
Note: DBRS ratings are not a recommendation to buy, sell, or hold Fund units.
STABILITY RATING SUMMARY
Legend:
Superior
Operating
Characteristics
Asset Quality
Financial Profile
Moderate
Diversification
Weak
Size & Market
Position
Sponsorship &
Governance
Growth
STABILITY RATING RATIONALE
Gaz Métro Limited Partnership’s (“Gaz Métro” or the “Fund”)
stability rating is based on: (1) the continuation of stable per unit
cash distributions; (2) the maintenance of the fundamental business
characteristics of the Fund, which comprise regulated natural gas
distribution, transportation, and natural gas storage operations that
provide a high degree of long-term stability and sustainability to
cash distributions per unit; and (3) cash distributions per unit that
are significantly lower than cash available for distribution per unit,
which provide the Fund with a significant buffer to deal with cash
flow volatility from one year to the next. The Fund continues to
generate stable per unit cash distributions that have steadily
increased over the past few years. Contributing to this growth has
been a combination of increased investment in new and existing
business lines and, over the past few years, higher total regulated
rates of return.
The Fund continues to generate the bulk of its earnings from the
regulated gas distribution business, delivering approximately 97%
of the natural gas consumed in Québec, and 100% of the gas
distributed in Vermont. However, while the acquisition of a 50%
ownership interest in the Intragaz Inc. (“Intragaz”) in December
2004 adds natural gas storage to the Fund’s asset mix, the Fund’s
operations currently remain concentrated in Québec.
Strengths:
•
Majority of earnings from stable, regulated businesses
•
Reasonable balance sheet and financial ratios
•
Rate Stabilization Account enables the Fund to recover
weather-induced revenue fluctuations over five years
•
Performance-based regulation allows for earnings above
regulated returns
•
Strong sponsors: Trencap, s.e.c., Enbridge Inc., and Gaz de
France
The outlook for the Fund’s cash distributions remains stable, with
some uplift to be provided by the Intragaz acquisition and the
recent regulatory approval, in September 2004, of a total
authorized return for F2005 of 11.64%. Cash available for
distribution per unit will continue to be highly dependent on the
weather and be modestly negatively impacted in F2005 by a slight
reduction in the corporate income tax rate, which affects regulated
gas distribution income and cash flows.
Over the longer term, the Fund’s cash distributions per unit should
benefit from the removal of the electricity rate freeze in Québec,
which enhances the competitiveness of gas. In addition, the
Fund’s greater ownership interest in Portland Natural Gas
Transmission System (“PNGTS”), particularly when combined
with the potential increase in throughput volumes at PNGTS given
its currently low capacity utilization rate, the expansion of the
Trans Québec & Maritimes Pipeline Inc. (“TQM”) pipeline to
support TransCanada Energy Inc.’s Bécancour cogeneration plant,
and further gas storage developments by Intragaz Inc., should also
benefit unitholders over the longer term. The recently renegotiated
and approved incentive mechanism agreement for domestic gas
distribution operations, while less favourable than the previous
agreement, does not pose a material challenge to the Fund’s cash
distributions per unit.
Challenges:
•
Earnings sensitive to interest rates through base return on
equity
•
Competitive pressure from low electricity rates in Québec
•
PNGTS pipeline operates in the highly competitive gas
transportation market
•
The Fund is concentrated in one province (Québec) and in
one product line (gas distribution)
•
Corporate tax rate changes impact net earnings
FINANCIAL INFORMATION
12 mos. ended
Declared distributions per unit, diluted* ($)
Cash available for distribution per unit, diluted* ($)
Net income (before extras.) per unit, diluted* ($)
% debt in capital structure
Cash flow/total debt
EBITDA interest coverage (times)
Return on average equity (before extras.)
Declared distributions/cash avail. for distribution
Market capitalization ($ millions)
Dec. 31, 2004
1.36
2.30
1.40
61.1%
20.8%
4.46
17.9%
0.59
2,521
For the year ended September 30
2004
2003
2002
1.35
1.34
1.28
2.27
2.36
2.36
1.40
1.39
1.40
59.1%
61.2%
61.6%
23.1%
21.4%
22.1%
4.40
4.52
4.50
18.2%
18.1%
18.9%
0.59
0.57
0.54
2,409
2,310
1,999
2001
1.27
2.17
1.28
62.8%
19.6%
3.75
17.5%
0.59
1,806
*Diluted refers to trust units + exchangeable units.
THE FUND
Gaz Métro Limited Partnership is 72.8%-owned by Gaz Métro inc. The Partnership is involved mainly in natural gas distribution
in Québec, with the remainder in gas transportation. Gas transportation operations include a 50% interest in TQM and a 38.3%
interest in PNGTS. Gaz Métro inc. is indirectly owned by Trencap, s.e.c (“Trencap”) (50%), Enbridge Inc. (“Enbridge”) (32%),
and Gaz de France (18%).
Income Fund
Original : 2005.06.13
DOMINION BOND RATING SERVICE
SCGM - 7, Document 10
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate.
This Reporten
is notliasse
to be construed as an offering of any
9 pages
securities, and it may not be reproduced without our consent.
Gaz Métro Limited Partnership - Page 2
OPERATING CHARACTERISTICS
Superior
Strengths: (1) The majority of the Fund’s income is earned
from its highly stable regulated gas distribution operations
in Québec (approximately 83% of EBIT).
– For gas distribution operations, the commodity costs of
natural gas, as well as transportation, storage, and
compression costs are flowed through to the consumer,
with price adjustments made on a monthly basis.
– Gas transportation operations (approximately 17% of
EBIT) are also regulated by the relevant regulatory
authorities in their respective jurisdictions.
– These regulated operations provide stable earnings that
are enhanced by a weather-related stabilization fund for
the distribution operations (see below), and generate
EBITDA interest and cash flow-to-debt coverage ratios
that are very reasonable.
– The 50% interest in Intragaz, acquired on December 31,
2004, adds regulated underground natural gas storage
capability to the Fund’s activities.
(2) The Fund’s domestic gas distribution operations are
permitted to use a weather-related stabilization reserve
account that smooths income throughout the weather cycle.
Earnings are recorded based on a 30-year average
temperature, and any shortfalls/surpluses are amortized and
recovered/remitted in future rates over a five-year period.
(3) Colder temperatures in both F2004 and F2005 helped
reduce the balance in the Rate Stabilization Account to
$39.8 million as at December 31, 2004, and this amount is
being collected in customer rates over the next five years.
Performance-based regulation for the Fund’s domestic gas
distribution operations provides the Fund with an incentive
to achieve productivity gains in excess of the authorized
incentive return ($4.7 million in additional productivity
gains to Gaz Métro were earned in F2004).
(4) The Fund is indirectly owned by Trencap (50%),
Enbridge (32%), and Gaz de France (18%), which would be
potential sources of assistance (financial or operating) if it
was ever needed.
- These investors provide a solid, diverse support base
and have a long-term investment horizon.
Challenges: (1) Lower approved base return on equity
(ROE) than comparable utilities in the U.S., which limits
income levels and coverage ratios.
(2) For residential customers, natural gas is typically more
expensive than electricity for heating in Québec. This is
largely due to the subsidization of electricity rates by
Hydro-Québec.
- The electricity rate increases in 2004 (totalling
approximately 4.5%) and the 1.2% increase, approved
by the Régie de l’energie (the “Régie”) on February 25,
2005, effective April 1, 2005, will marginally improve
the competitiveness of gas compared to electricity,
although natural gas is typically 7%-18% more
expensive than electricity for residential consumers.
(3) PNGTS faces tough competition from Nova Scotia and
Texas gas, and is currently operating at low capacity
utilization (60%).
- The expected growth in electricity demand in the U.S.
northeast, which is dominated by gas-fired generation,
will require additional gas transportation capacity, that
PNGTS clearly has.
(4) The Fund’s primary operations comprise natural gas
distribution in Québec (83% of EBIT) and, consequently,
are highly dependent on both the regulatory regime in
Québec and the growth prospects in that province.
- The Fund actively seeks out diversification
opportunities through either acquisition, such as
Intragaz, or through development projects that should
enable the Fund to diversify out of primarily one
geographic segment and product line.
(5) The Fund is a non-taxable entity because of its limited
partnership structure; therefore, its regulated distribution
rates include a deemed income tax expense component.
- However, when corporate income tax rates are reduced,
the Fund’s net income declines accordingly.
ASSET QUALITY
•
•
Superior
The Fund’s asset quality ranks as superior, based on the
following characteristics:
- The Fund’s assets currently consist of 73% gas
distribution infrastructure in Québec, 18%
investments in gas transportation operations, 5% in
gas distribution in the U.S., and the remainder in
non-regulated activities.
- Natural gas distribution and transportation assets
typically have long operating lives, with very
manageable and predictable capital expenditures.
- The Fund’s low maintenance capital expenditures
are easily funded with depreciation allowance.
On December 31, 2004, the Fund acquired a 50%
ownership interest in Intragaz, adding underground
natural gas storage capability to the Fund’s activities.
- Intragaz operates the only two underground storage
facilities in Gaz Métro’s service area in Québec.
The Pointe-du-Lac storage facility is fully
developed while the St. Flavien storage facility can
be expanded by an additional 30%, providing
further development opportunities.
While total capital expenditures are relatively high
(about 38% of cash flow from operations when
growth-related capital expenditures are included) the
Fund, unlike many other income funds, does not
distribute its depreciation allowance to unitholders.
This depreciation typically covers capital expenditure
requirements.
- The Fund’s maintenance capital expenditures are
currently only around 10% of cash flow from
operations (or approximately $35 million per year).
Overall, asset quality will enable the Fund to continue
generating relatively stable and growing cash
distributions over the near-to-medium term.
-
•
•
Gaz Métro Limited Partnership - Page 3
FINANCIAL PROFILE
Moderate
12 mos. ended
Statement of Cash Flow ($ millions)
Net income (before extras.)
Depreciation & amortization
Other non-cash adjustments
Cash Flow From Operations
Maintenance capital expenditures
Cash Available For Distribution
Cash distributions
Cash Available After Distributions
Reduction in deferred charges related to natural gas costs
Rate stabilization account
Change in working capital
Free Cash Flow After Working Capital Changes
Growth/other capital expenditure
Acquisitions/divestitures
Other (incl. deferred charges)
Cash flows before financing
Debt financing (net)
Equity financing (net)
Net Change In Cash
Key Financial Ratios
Per cent debt in capital structure
Cash flow-to-debt
EBITDA interest coverage
EBITDA less maintenance capex/int. costs
•
•
•
The Fund’s financial profile ranks as moderate, which
is supported by the following factors:
- Although the Fund has a relatively high
debt-to-capital ratio at 60%, its gas distribution,
transportation, and storage operations are
regulated, providing a high level of earnings
stability that is enhanced further by a
weather-related stabilization fund.
- The Fund only distributes earnings and this
practice conserves sufficient internally generated
cash to fund both maintenance and growth capital
expenditures, pay down debt, or fund asset growth.
- EBITDA interest coverage and cash flow-to-debt
are very reasonable for the existing capital
structure.
The Fund generates sufficient cash flow from
operations to internally fund capital expenditures and
cash distributions.
- Large acquisitions such as the Intragaz transaction,
which cost approximately $90 million, typically
require outside sources of financing; however, the
capital structure of the Fund has remained
relatively constant at around 60%.
- On January 28, 2005, the Fund completed a units
issue totalling approximately $62 million to
partially fund the Intragaz issue.
The acquisition of an ownership interest in Intragaz is
expected to increase cash flow over the medium term,
given that company’s expertise in identifying and
developing new storage sites in North America.
For the year ended September 30
Dec. 31, 2004
160.8
131.3
5.9
298.0
(35.0)
263.0
(155.7)
107.3
54.8
7.7
(7.7)
162.1
(100.1)
(85.3)
(54)
(77)
98.9
0.3
21.9
2004
160.4
130.9
4.0
295.2
(35.0)
260.2
(154.3)
105.9
53.1
2.3
(9.8)
151.6
(89.4)
(31.9)
(66)
(36)
22.0
10.6
(3.0)
2003
153.4
134.8
7.1
295.4
(35.0)
260.4
(148.0)
112.4
49.3
11.7
(57.3)
116.0
(70.7)
(25.6)
(130)
(110)
42.5
66.7
(0.8)
2002
154.6
136.3
0.0
290.9
(30.0)
260.9
(141.4)
119.5
45.8
(50.5)
12.6
127.4
(65.0)
(4.4)
(12)
46
(39.2)
0.0
6.9
2001
141.2
128.3
0.0
269.5
(30.0)
239.5
(140.3)
99.2
33.3
(5.3)
25.6
152.7
(51.0)
(5.0)
(172)
(75)
73.9
0.9
(0.5)
61.1%
20.8%
4.46
4.04
59.1%
23.1%
4.40
3.99
61.2%
21.4%
4.52
4.10
61.6%
22.1%
4.50
4.14
62.8%
19.6%
3.75
3.44
Natural gas storage is a natural fit for the Fund’s
operations, as storage of natural gas is a part of its
supply chain.
TQM is also expected to provide cash flow growth due
to the expansion of the pipeline to supply TransCanada
Energy Inc.’s Bécancour plant, which will not only
increase throughput volumes at TQM but will also add
to the Fund’s rate base, providing additional earnings
uplift.
Over the medium-to-longer term, regulated distribution
operations will continue to provide the bulk of the
Fund’s cash flow stability with additional growth
provided by TQM, Intragaz, and PNGTS.
The Fund’s debt maturities are reasonably well spread
out and should not present any liquidity problems.
- Interest-rate risk is limited for Gaz Métro as its
interest rate costs are recoverable in its rates.
The Fund’s debt levels are understated by the amount
of its securitized receivables, which are not
consolidated in its financial statements.
- Securitized receivables for F2004 were
$43 million, versus $61 million during the previous
fiscal year.
Gaz Métro inc. has a solid “A”/R-1 (low) credit rating,
providing it with access to alternative sources of
capital, enhancing financial flexibility
On December 21, 2004, the Fund negotiated a five-year
committed credit facility totalling $400 million (and
backing a $400 million commercial paper program) and
maturing December 21, 2009. This replaced its
•
•
•
•
•
•
Gaz Métro Limited Partnership - Page 4
•
previous $300 million credit facility that was to expire
on April 30, 2005 (and that backed a $300 million
commercial paper program).
- This provides the Fund with a significant liquidity
cushion given that it generates sufficient cash from
operations to fund distributions and all capital
expenditures.
Other credit facilities include:
-
-
A $100 million, unsecured 364-day renewable line
of credit;
The Fund’s share of TQM’s unsecured 364-day
renewable line of credit amounting to $10 million;
and
Vermont Gas System’s (“VGS”) unsecured bank
lines totalling US$25.5 million.
DIVERSIFICATION
•
•
•
Moderate
The Fund’s diversification ranks as moderate based on
the following characteristics:
- The
Fund’s
gas
distribution
operations
(approximately 83% of EBIT) have a good balance
between economy-sensitive industrial customers
(55%
of
normalized
throughputs)
and
weather-sensitive residential and commercial
customers (45% of normalized throughputs).
Regulated gas transportation and higher-risk
non-regulated activities (currently at 17% of EBIT)
provide some upside earnings growth potential for the
Fund.
- The increased ownership in PNGTS and the
expected increased throughput volumes at both
TMQ and PNGTS will provide a boost to earnings.
- The Fund’s recent acquisition of Intragaz added
underground natural gas storage capabilities to its
asset base, increasing diversification.
Overall, however, the Fund has the following
concentrations:
- The bulk of the Fund’s operations are mainly in
natural gas distribution in Québec and,
consequently, are highly dependent on both the
•
regulatory regime in Québec and growth prospects
in that province.
- Intragaz adds further concentration in Québec as it
operates two underground storage facilities in Gaz
Métro’s service area in Québec.
The Fund is currently considering the following
projects, which will provide greater product line and
geographic diversification if they are undertaken:
- The Rabaska project, a joint venture with Enbridge
and Gaz de France to pursue the development of a
liquefied natural gas (LNG) terminal in the eastern
part of the city of Lévis, as a means of diversifying
the Fund’s gas supply;
- Continuing underground natural gas storage
development throughout North America, a
competitive strength of Intragaz, which will
diversify its asset base geographically;
- New cogeneration plants in Québec, where
electricity demand/supply conditions are beginning
to tighten; and
- The recovery of landfill gas in Québec.
12 mos. ended
Segmented information (EBIT)
Distribution
Transportation
Energy services and other (incl. unallocated)
% of total
83%
17%
0%
100%
SIZE AND MARKET POSITION
Superior
•
The Fund ranks as superior in terms of size of its asset
base and market capitalization:
- With a market capitalization of approximately
$2.6 billion, the Fund is one of the largest limited
partnerships in Canada.
Dec. 31, 2004
206.8
43.3
0.3
250.4
2004
209.5
43.0
0.4
252.8
2003
205.7
40.9
0.1
246.7
2002
202.1
30.4
1.9
234.3
2001
205.7
32.2
(1.5)
236.4
The Fund’s regulated gas distribution activities are
monopoly operations in its given service area.
The Fund’s large size results in economies of scale and
better operating efficiencies, as well as improves access
to additional capital sources and sufficient flexibility to
access the capital markets on favourable terms.
•
For years ended September 30
Gaz Métro Limited Partnership - Page 5
SPONSORSHIP/GOVERNANCE
Superior
The Fund’s sponsorship ranks as superior based on the
following characteristics:
Sponsorship:
• The Fund is 72.8%-owned by Gaz Métro inc., with the
remainder owned by the public.
• Gaz Métro inc. is indirectly owned by Trencap (50%),
Enbridge (32%), and Gaz de France (18%), and these
companies would be potential sources of assistance
(financial or operating) if it was ever needed.
- Trencap, a limited partnership comprising several
investors including the Caisse de dépôt et
placement du Québec (“Caisse”), SNC Lavalin
Group Inc., and BC Investment Management
Corporation, acquired Hydro-Quebec’s stake in
June 2004. The change of ownership will have
little impact on Gaz Métro’s corporate direction or
day-to-day operations.
- These investors provide a solid, diverse support
base and have a long-term investment horizon.
DBRS provides a counterparty rating on the Caisse
at AAA and rates Enbridge at “A”.
• Gaz Métro inc. acts as a financing vehicle for the Fund,
raising funds and lending down on a back-to-back
basis.
GROWTH
Management Agreement:
• Gaz Métro inc. has the exclusive right, power, and
authority to administer, manage, control, and operate
the business of the Fund and hold title to its assets.
• Gaz Métro inc. receives a management fee of $50,000
per fiscal year plus reimbursement of expenses.
• At under 0.02% of cash flow from operations, the
management fee paid by the Fund is extremely low,
leaving more cash available to be paid out to
unitholders.
Moderate
12 mos. ended
Total trust units outstanding, diluted* (thousands)
Total trust units outstanding, fully diluted* (thousands)
Weighted avg. units outstanding, diluted (thousands)
Net income (before extras.) per unit, diluted ($)
Cash flow from operations per unit, diluted ($)
Cash available for distribution per unit, diluted ($)
Declared distributions per unit, diluted ($)
Declared distributions/cash available for distributions
Dec. 31, 2004
114,482
114,517
114,477
1.40
2.60
2.30
1.36
0.59
For the year ended September 30
2004
114,482
114,517
114,477
1.40
2.58
2.27
1.35
0.59
2003
113,927
113,977
110,475
1.39
2.67
2.36
1.34
0.57
2002
110,469
110,502
110,469
1.40
2.63
2.36
1.28
0.54
2001
110,469
110,502
110,469
1.28
2.44
2.17
1.27
0.59
*Diluted refers to trust units + exchangeable units, fully diluted includes options exercisable at end of period.
Growth ranks as moderate based on the following
characteristics:
• Unlike many other income funds, the Fund does not
distribute its depreciation and amortization allowance
to unitholders and generates sufficient cash flow from
operations to internally fund capital expenditures, cash
distributions, and reduce debt.
- New equity is typically issued only to fund
acquisitions or large growth-related capital
expenditures and to maintain the Fund’s capital
structure at around 60% debt.
- On January 28, 2005, the Fund issued 2.83 million
units at $23.00 per unit for net proceeds of
approximately $62 million to assist in funding the
Intragaz transaction.
The unit issue did not have a dilution effect on the
Fund given that it only comprised approximately
2.5% of the existing weighted average units
outstanding and the Intragaz acquisition is
immediately accretive.
The Fund’s existing asset base, comprised primarily of
regulated gas distribution operations, provides for
stable cash flows from operation over the long term.
- Cash available for distribution per unit has been
increasing steadily, driven by a combination of
organic growth and increased investment in new
and existing business lines.
- Cash distributions per unit have also been highly
stable, exhibiting some growth over the past five
years.
-
•
Gaz Métro Limited Partnership - Page 6
•
BACKGROUND: THE FUND’S OPERATIONS
•
•
•
•
-
Future cash distributions per unit are expected to
remain relatively stable with modest growth. It is
expected that the growth will come from:
- The increased ownership interest in PNGTS;
- Expansion of the TQM pipeline to support the
Bécancour 550 megawatts (MW) cogeneration
plant, expected to begin operating in late F2006.
Approximately 30 billion cube feet (Bcf), or
roughly 15%, of the Fund’s current throughput
amounts, in additional natural gas capacity is
required annually for a typical 550 MW gas-fired
plant;
Gaz Métro is involved in gas distribution, gas
transportation, and energy services and other.
Gas distribution accounts for 78% of the Fund’s assets
and 83% of operating income.
- The Fund delivers approximately 97% of the
natural gas consumed in Québec, while VGS is the
sole gas distributor in Vermont.
Gas transportation includes a 50% interest in TQM and
a 38.3% interest in PNGTS. This segment currently
holds about 18% of assets and contributes 15% of
operating profit.
- On December 31, 2004, the Fund acquired a 50%
ownership interest in Intragaz, adding underground
natural gas storage capability to the Fund’s
activities. Intragaz’ results will be reported with
the gas transportation and storage sector.
“Energy services and other” includes non-regulated
activities, which is relatively small at 4% of assets.
Natural Gas Distribution in Québec
• Distribution of natural gas in Québec is regulated by
the Régie.
• The Régie allows monthly rate adjustments for natural
gas price fluctuations.
• Capital structure is reasonable, with a deemed 38.5%
common equity, 7.5% preferred share equivalent, and
54% debt.
• The Fund’s gas distribution operations are allowed to
recover prudently incurred operating costs plus earn a
reasonable ROE.
• The Rate Stabilization Account enables the Fund to
book revenue on the basis of normal weather.
- The mechanism creates a receivable when weather
is warmer than average, which is collected over a
five-year period.
- The mechanism creates a drawdown in the balance,
or a payable, when weather is colder than normal.
• Rate stabilization increases income stability, but not
cash flow stability.
- In F2004/F2005, the Fund recorded a net
$36.3 million decrease in the rate stabilization
account due to colder-than-normal weather to
$39.8 million at December 31, 2004 (an asset),
which will be collected in future rates.
-
•
•
•
•
•
Increased demand for natural gas in the U.S.
northeast per the North American Electric
Reliability Council’s (“NERC”) projections of
electricity demand growth of 3,100 MW over the
next four years, and the resultant additional
generating capacity required to support this
demand, should increase throughput volumes at
PNGTS; and
Growth of water and waste-water activities will
likely accelerate in the future as integrated water
distribution and wastewater collection systems
master plans become mandatory in Québec.
Customer penetration rates are high in industrial and
commercial markets and low in residential markets,
although potential growth exists with new residential
construction.
- The removal of the electricity rate freeze in Québec
during 2004 should increase the competitiveness of
gas, particularly in light of expected future
electricity rate increases.
The Fund over-earned $14 million in F2004 under
incentive mechanisms, of which $4.7 million accrues to
the Fund on approval by the Régie, and the balance is
refunded to customers through an adjustment to rates.
- The balance is a liability on the balance sheet, and
is shared with: (1) customers, and (2) the Energy
Efficiency Fund.
The Fund is allowed to earn a base ROE of 9.69% in
F2005 (plus an authorized incentive return at 1.95%)
for a total of 11.64%, compared to 9.45% during F2004
(plus an authorized incentive return of 1.51%) for a
total of 10.96%.
- The incentive mechanism agreement was renewed
by the Régie in March 2004 for a five-year period,
from October 1, 2004, to September 30, 2009, with
minor changes.
The changes in the new agreement include:
- A productivity factor of 0.5%, up from 0.3% under
previous agreement;
- A 50/50 sharing of authorized incentive return
embedded in the approved ROE compared to a
52.5/47.5 sharing between the Fund and customers
previously;
- A 25/75 sharing between the Fund and customers
of productivity gains earned in excess of
authorized incentive return, compared to 33.3/66.6
sharing between the Fund and customers
previously; and
- Maximum upside potential of 375 basis points over
base ROE with no off-ramp, compared to the
previous 400 basis points with an off-ramp if the
Fund earned 400 basis points or more over base
ROE for two consecutive years.
This agreement is less favourable than the previous
agreement, but it is not expected to have a material
impact on the Fund’s financial results.
Gaz Métro Limited Partnership - Page 7
Natural Gas Transportation Operations
• TQM operates a 572-kilometre pipeline composed of:
(1) a line from Saint-Lazare (west of Montréal) to Saint
Nicolas in the suburbs of Québec City; and (2) a line
from the main line in Lachenaie to East Hereford at the
Québec/New Hampshire border.
• The 489 kilometres PNGTS pipeline originates at East
Hereford and crosses parts of New Hampshire, Maine,
and Massachusetts to the suburbs of Boston.
•
Champion, a wholly owned subsidiary, distributes gas
in the Abitibi/Témiscamingue region in Québec, with
two pipelines totalling 98 kilometres.
12 mos. ended
Distribution throughputs
Industrial
Commercial
Residential
Total (actual) - billions of cubic feet (Bcf)
% of total Dec. 31, 2004
54.5%
112
32.9%
67
12.6%
26
100%
204.6
Weather normalized throughputs (Bcf)
Growth in volume throughputs (actual)
Growth in volume throughputs (normalized)
Transportation throughputs (Bcf) (1)
204.4
0.1%
0.0%
For the year ended September 30
2004
2003
2002
110
108.4
115.2
68
67.2
61.9
27
26.2
23.4
204.4
201.8
200.5
2001
106.7
66.5
25.9
199.1
204.4
1.3%
1.3%
236.9
236.9
201.8
209.0
231.5
0.6%
(3.4%)
0.7%
(9.7%)
(11.2%)
3.0%
223.1
227.3
212.6
(1) Volumes not adjusted for Gaz Metro's ownership interest.
•
•
•
Overall gas consumption has shown little growth over
the past several years, on both an actual and
weather-normalized basis.
Industrial demand (approximately 55%) volumes are
generally related to state of the economy, but also to the
competitiveness of gas versus oil.
- The main competitor of natural gas is fuel oil #6.
Commercial
(about
33%
of
demand)
is
weather-sensitive, providing a good balance with
industrial demand, but is also sensitive to economic
conditions.
The primary competitor for natural gas is
electricity; however, gas does have a competitive
advantage in that it is approximately 12% cheaper
than electricity.
Residential, at only 13% of total throughputs, is low as
subsidized electricity rates plus high gas transportation
fees from Alberta make gas less competitive in Québec
compared with other sources of energy.
- The removal of the domestic electricity rate freeze
should improve the competitiveness of natural gas
in the residential sector.
-
•
Gaz Métro Limited Partnership - Page 8
Caisse*
(general partner)
Solidarity Fund
QFL
SNC-Lavalin
Group Inc.
16.67%
11.11%
51.11%
Trencap s.e.c
BC Investment
Management
Corporation
Régime Des Rentes du
Mouvement des
Desjardins
11.11%
8.33%
Enbridge Inc.
50.38%
Régime de Retraite de
l'Université du
Québec
1.67%
Gaz de France
32.06%
17.56%
Noverco Inc.
100%
Gaz Métro Inc.
general partner
72.8%
limited
partners
Gaz Métro Limited
Partnership
27.2%
Public
Natural Gas
Transportation and
Storage
Natural Gas Distribution
Energy Services and Other
50%
GMLP
100%
TQM
Cable VDN
PNGTS
Aqua Data Inc.
Champion
Aqua-Rehab Inc.
38.3%
Vermont Gas
Systems
100%
* Caisse de dépôt et
placement du Québec Capital
d'Amèrique as general
partner.
Gaz Métro key operating segments are:
Gas Distribution - which is Gaz Métro’s core business and
accounts for 78% of the Fund’s assets and 83% of operating
income.
• The Fund delivers approximately 97% of the natural
gas consumed in Québec, while VGS is the sole gas
distributor in Vermont.
Gas Transportation and Storage - which 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 Métro.
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, the Fund acquired an
ownership interest in Intragaz, adding underground
natural gas storage capability to the Fund’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 LNG
terminal in the eastern part of the city 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
waste-water collection systems become mandatory in
Québec.
Other projects the Company is currently pursuing
include:
• Projects for the recovery of landfill gas in Québec.
Gaz Métro Limited Partnership - Page 9
Gaz Métro Limited Partnership
Balance Sheet
($ millions)
Assets
Cash + marketable securities
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
12 mos. ended
Balance Sheet & Liquidity Ratios
Current ratio
% debt in capital structure (1)
Cash flow/debt
Coverage Ratios
EBITDA interest coverage (times)
EBITDA-maint. capex/interest costs (times)
EBIT interest coverage (times)
Profitability Ratios
Operating margin
Return on average equity
Cash income return on average equity
Dec. 31, 2004
1.17
61.1%
20.8%
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
Short-term debt
A/P + accr'ds
Debt due in one year
Current Liabilities
Future income taxes
Financial instruments
Long-term debt (1)
Minority interest
Partners' equity
Total
For the year ended September 30
2004
2003
2002
1.08
1.14
0.87
59.1%
61.2%
61.6%
23.1%
21.4%
22.1%
As at Dec.31
2004
37.3
274.1
70.1
381.5
36.9
15.8
1,286.2
0.0
As at September 30
2004
28.5
203.7
46.2
278.4
32.9
2.0
1,162.7
0.0
2003
30.8
214.5
16.7
262.1
21.0
0.0
1,271.9
0.0
913.0
884.9
876.0
2,633.3
2,361.0
2,430.9
2001
0.97
62.8%
19.6%
2000
1.09
61.1%
21.0%
1999
0.80
59.7%
20.6%
1998
0.89
60.4%
21.5%
4.46
4.04
2.91
4.40
3.99
2.88
4.52
4.10
2.96
4.50
4.14
2.87
3.75
3.44
2.45
4.04
3.70
2.67
3.62
3.28
2.39
4.01
3.62
2.69
43.5%
17.9%
31.5%
43.3%
18.2%
32.0%
43.8%
18.1%
34.7%
42.9%
18.9%
35.5%
44.5%
17.5%
33.2%
43.6%
17.9%
33.0%
43.1%
17.7%
31.6%
43.5%
19.1%
32.8%
(1) Debt includes securitization of receivables.
Income Statement
($ millions)
Sales
Cost of gas
Net Revenues
Interest and dividend income
Total Revenues
Operating costs (excl. deprec.)
EBITDA
Interest expense & financing charges
Income Before Non-Cash Items
Future (non-cash) income taxes
Depreciation
Equity income
Net Income Before Extraordinary Items
Extraordinary items
Reported Income
Distributions declared
Net Remaining
12 mos. ended
Dec. 31, 2004
1,814.5
1,267.3
547.2
4.9
552.1
180.2
371.8
88.2
283.6
6.2
129.2
12.6
160.8
0.0
160.8
155.7
5.1
For the year ended September 30
2004
2003R
2002
1,778.0
1,750.4
1,598.0
1,228.0
1,187.7
1,051.8
550.1
562.7
546.2
4.9
3.7
4.5
555.0
566.4
550.7
183.4
184.1
176.7
371.6
382.3
374.0
89.7
87.5
84.3
281.8
294.9
289.8
7.6
9.5
0.0
128.6
131.9
135.2
14.7
0.0
0.0
160.4
153.4
154.6
0.0
0.0
0.0
160.4
153.4
154.6
154.3
148.0
141.4
6.1
5.4
13.2
2001
2,063.9
1,532.9
531.0
2.9
533.9
167.5
366.4
98.1
268.3
0.0
127.1
0.0
141.2
0.0
141.2
140.3
0.9