A
Hydro-Québec
Requête R-3401-98
DOCUMENTS DE PRÉSENTATION À L’AGENCE DE NOTATION DE
CRÉDIT MOODY’S INVESTORS SERVICE – AVRIL 2000
RÉPONSE D'HYDRO-QUÉBEC À L'ENGAGEMENT NUMÉRO 23
Original : 2001-05-01
HQT-8, Document 3.10
(En liasse)
CONFIRMATION
RENCONTRE
AVEC L'AGENCE
D'ÉVALUATION
DE CRÉDIT
MOODY'S
DATE:
Jeudi, le 27 avril 2000
HEURE:
10 h 30 à 14 h 30
LIEU :
Salle du Conseil d'administration
PARTICIPANTS
-20e
étage
À LA RENCONTRE
HYDRO-QUÉBEC
MOODY'S
Emily Eisenlohr
Vice President I Senior Credit Officer
Daniel Leclair
Stephen Gutkowski
Vice President I Senior Credit Officer
Michelle Toulouse
Paul Robillard
Susan Abbott
Managing Director of the Electric Utilities
Lucie Beaudoin
Renée Arsenault
Li Iy Chan
Assistant Portfolio Manager
Jacques
Régis
13hOO
Ordre du jour
-
10h15
Accueil
10h30 à 12h30
Voir Agenda ci-joint
12h30 à 14h30
Déjeuner
et suite des présentations
Président
-20e
étage
à la salle à manger du
u
April 27th, 2000
Hydro-Québec, 20thFloor
SPEAKER
SUBJECTS
TlME
Hydro-Québec
Information
Package
Section
1999 -Financial
2.
3.
Results
Lucie Beaudoin
IOhJO
Financial Framework 2000-2002
Lucie Beaudoin
IOh40
2
lnvestment
Lucie Beaudoin
lOhSO
3
Program over the next few
years
4.
Borrowing Program 2000-2004
Paul Robillard
IlhOO
4
5.
Strategic Plan 2000-2004
Roger Lanoue
IlhlO
5
6.
International Affairs and Projects
PaulRobil!ard
Ilh25
6
7.
Energy Board Update
Michel Bastien
Ilh40
7
8,
Customer Services
Ghislaine Larocque
Ilh55
8
12hOS
x
-
END
of moming
session
Lunch will be served in the president's dining room at 11h30
9.
10.
Wholesale market (electricity and gas)
and portfolio of projects
Transmission Network Optimization
END
of
Daniel Garant
12h30
9
JacquesRégis
IhOO
10
presentations
Discussions
END
Aiso included
8
2h15
in the binder
Financial Framework 2000-2002
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1999 Results
campared ta budget
Notes (in $ millions)
-
(1) Electricity sales in Québec
84
u
~
Temperatures
~
Residential
.larger
~
and farm :
U
33
F
12
U
80
F
volume (31 F) at higher average prices (2 F).
General and institutional :
.larger
~
144
above normal.
volume (51 F) at Iower average prices (1 U).
Industrial :
.larger
volume (19 F).
.Exchange
rate (24 U). aluminium piice (1 U) and olher factors related
to prices (20 U).
~
Other :
.larger
(2) Electricity sales outside
Québec
32
u
~
Firm sales :
.Lower
.Impact
~
volume (2 F) at higher average prices (1 F).
sales volume (99 U).
of ex change rate (16 U) a~
Shor1-term sales :
.Larger
.Impact
93
(3) NaturaJ gas sales
F
sales volume (123 F).
of ex change rate (28 U) a~
(4)
Other
operating
income
160
u
olher factors related to prices ( 15 U).
-=> Revenue from Noverco and H.Q. Energy Marketing and from Hydro-Québec's
brokerage
"
other factors related to prices (3 F).
~
activities.
Income from operations of U1ecompany:
.Revenue
from energy storage and from fuel-oil tolling and sales Iower
130
U
than forecasted (107 U); other (23 U).
(5) Operating
expenses
7
F
~
Elimination
for intercompany accounts and consolidation.
=)
Gross expenses of Ihe company:
.Pension
.Labor
expenses(172
(6)
Electricity
and
fuel
78
U
33
U
40
F
19
U
59
U
F).
and bonuses (57 U).
.Capitalized
.Olher
U
conflicl (51 U).
.Over1ime
.Salary
30
expenses lower Ihan forecasled (76 U).
increases (19 U).
(2 U).
=)
Subsidiaries
and eliminalion for inlercompany accounls and consolidalion.
~
Purchases made by the company:
.Higher
volume of short-term purchases due 10favorable business
purchased
opportunities (57 U).
.Firm
purchases lower than forecasted (5 F).
.Purchase
of fuel (21 D). gas for resale (3 F) and fuel oil (48 F).
~
Subsidiaries
and elimination for intercompany accounls and consolidation.
8 ~
Q.~
P&RG
-DPCC
-Finance
00nd3-2000.xls
Printed 00-{)4-17
1999 Results campared
ta budget
Notes (in $ millions)
(7)
Depreciation,
and
amortlzatlon
19
F
~
Expenses
incurred
.Write-off,
decommissioning
.Lower
(8)
30
Taxes
F
amol1izing
~
Subsidiaries
~
Expenses
capital
.lower
Financial
expenses
126
F
of fixed assets
guarantee
for intercompany
~
projects
F
~
8
U
39
F
9
U
161
F
( 1 F)
coosoIidation.
:
and school
taxes
(5 F).
fee (4 F). tax on gross
~
Expenses
incurred
by subsidiaries
~
Expenses
incurred
by the company:
.Interest
(9 F) arxj of ma~eting
by Ihe company
27
( 17 F).
tax (25 F).
municipal
.Loan
and olhers
and elimination
incurred
.lower
(9)
by Ihe company:
decommisioning
revenue
unde(estimated
(5 F).
.
rates (12 F).
.Impact
of ex change
.Derivalive
rate (192 F).
instruments
.Capitalized
borrowind
.Capital
(3 F).
costs
( 17 U).
(29 U).
~
Subsidiaries
o)
Lower
and elimination
for intercompany
accounts
a 00 consolidation.
35
-40
(10) Dividend
(11) Grass investments
.422
investments
of assets
o)
Lower
and other
investments
developement
Hal
o)
( -112) for projets
types
of continuing
in development
of Québec's
that ensure
investments
: Eastrnain,
hydroelectric
the continued
-162
of the
-433
( -222).
the compietion
potential,
reliability
projects
planned
by
and others.
Investments
by subsidiaries
and impact
of consolidation.
.211
~,
Q.~
P&RG
-DPCC
-Finance
~-2{XX).xls
Printe!:~27
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1999 Results campared
Notes (in $ millions)
(1) Electricity
(2)
Electricity
sales in Québec
sales
outside
ta 1998
255
237
F
F
~
Growth
~
Temperatures
~
Consequences
above
of 1998 events
.Rate
of May 1, 1998 (39 F).
increase
price.
~
Ex change
rate.
~
Average
~
Finn sales :
80
F
ice storm
111
F
31
u
(72 F).
1
u
F
2
u
206
F
slonT1 (8 F).
.Volume
(2 U).
.Average
price effect (8 U).
Shor1-lenT1sales:
.Exchange
rate (1 F).
.Average
price effect (20 U).
.Higher
.lce
F
price effect.
.lce
~
:
ofthe
Aluminium
~
normal.
.Non-recurring
~
Québec
95
in demand.
volume (221 F).
slonT1 (4 F).
Intemational sales:
increase of activities of subsidiaries in Panama a~
33
Cosla Rica.
(3)
Natural
gas
sales
(4) Other operating
156
income
119
F
F
~
Increase
in revenues
from
Noverco
~
Elimination
~
Increase
~
Energy slorage ( 42 U). fuel-oillolling
for intercompany
and H.O.
accounts
in Hydro-Ouébec's
Energy
Ma~eting.
159
and consolidation.
activities.
and sales (22 F). renling ( 11 F)
F
9
U
6
F
2
u
and olhers (7 F).
~
Increase in olher revenue generaled by subsidiaries (159 F) aOO
eliminalion for inlercompany
(5)
Operating
expenses
231
u
c)
Expenses
incurred
.Pension
.Labor
conflict
.Extemal
.Salary
.Bonuses
(6)
Electricity
and
fuel
purchased
210
u
122
u
109
U
F).
(105 U).
expenses
increases
Subsidiaries
(110
F
(51 U).
services
.Capitalized
c)
by Ihe company:
expenses
121
accounls and consolidation (38 U).
Iower
lhan
forecasted
(26 U).
(18 U).
(20 U).
and elimination
for intercompany
accounts
and consolidation.
"f> Purchases made by the company:
7
u
203
U
.Electricity
(23 F).
.Fuel (20 U).
.Gas
for resale (2 F).
.Fuel
oil pour tolling and sales (12 U).
"f> Purchases made by subsidiaries and elimination of intercompany
accounts and consolidation.
~
Q.Hyd~
P&RG-DPCC-Finance
bond3-2000.xls
Printed OO.()4-17
1999 Results compared
to 1998
Notes (in $ millions)
8
(7)
Depreciation.
and
amortization
142
u
c!)
decommissioning
Increase
in expenses
of fixed
.Amortization
of majol'
.DecommissOOing
.Amortization
.Other$
(8) Taxes
10
F
expenses
35
F
projects
of markeling
Increase
in expenses
c)
E.xpense
incurred
.Lower
capital
canceled
generaling
programs
124
U
or IX>Stponed (19 F).
stalK>n (1 U).
( 15 F).
on gross
N"lCurred by su~iaries.
by the company:
revenue
guarantee
13
F
3
U
(5 F).
c)
Increase
in expenses
.)
Expenses incurred by the company:
.Impact
U
fee (8 U)
municipal,
.Interest
18
tax (15 F).
.Lower
school
taxes
incurred
arMj others
(1 F).
by subsidiaries.
54
rates ( 18 F).
of exd1ange rate (45 U).
.Derivative
.Capitalized
.)
:
(141 U).
(16 U).
.Loan
Financial
assets
of nuclear
c!)
.Tax
(9)
N"lCurred by the oompany
.Depreciation
instruments
(34 U).
borrowind costs (34 F).
.Capital
(81 F).
Subsidiaries (20 U) and elimination for intercompany accounts and
19
consolidation (1 F).
-,10)
Gross investments
-228
~
Decrease of investments
~
Increase of olt1er investments.
~
Increase of investments
in fixed assets.
-527
+ 272
by the subsidiaries arK! elimination for intercompany
+ 27
accounts and consolidation.
8
Q..~
P&RG-DPCC-Finance
bond3-2000.xls
Printed
()0.{)4-17
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-299
-674
-528
26
Maturities
2351
3345
2152
2246
1076
Sinking fund
17
14
18
22
24
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~
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2..1
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l.Q
2109
3095
1521
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1136
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15
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Net financing
Refinancing of Fallable debt
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the 2000 tinanfial
plan
lli2
~
~
~
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(in millions of dollars)
Issue
Market
1995
Forecast
I
~
~
~
I
44.3%
N
1996
27.8%
1997
6.4%
48.6%
45.0%
1998
3.0%
69.5%
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activities
o
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1999
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Promising, Innovative Projects
.In
Australia,
HQI has become, in partnership
with the Québec Federation
ofLabor
(QFL) Solidarity Fund and the Australian company North Power, co-owner in a project
for a 180-MW underground interconnection linking the power systems of the states of
Queensland and New South Wales. This initial project in Australia positions HQI in a
deregulated market with a number of interconnection projects to be carried out in the
near future.
.In
Panama, HQI holds a 49% stake in EGE Fortuna, a hydroelectric generating
company, in partnership with the QFL Solidarity Fund and Coastal Power. The
generating station' s installed capacity is 300 MW, and its output meets 40% of
Panama 's electricity requirements.
.These
investments bring HQI's portfolio to $279 million in some eight projects with a
total value of $2.8 billion.
A. General
:
AIl provisions
of the Act tespecting
the Régie de l'Énergie
du Québec (the Board) are now in force (dIe onJy exception
being section 167(3) whichideals with the possible opening of the retail market).
I
However two detennining ~Iementsprevent the Board to exercise fully its rote andjurisdiction.
First, the Québec Govemm~nt bas to determine by order in council, under section 167(2), a procedure for the detennination
and irnplementation Ofth ~ tes for the generation of electric power (commodity rate). This order in council will detennine
if the generation activity o Hydro-Québec will be regulated based on its cost of service or on the basis of a fixed price as
proposed by Hydro-Québ
Secondly, the following
a) Regulation
conceming
regplations have to be authorized by order in council of the Governrnent
the ~onn, contents and periodicity,
(section 72) ;
C) Regulation
Québec
detennining
(section
for the approval by the Board of Hydro-Québec's
t conditions and under which
l
the conditions
73) ;
and under
which
cases the Board will authorize Hydro-Québec's investrnents
cases the Board
applications
will
authorize
exports
of electric
outside
of
projects are still
being subject to the Government's
:
1) Rate for the 1!.eneration of electric DOwer (Comrnoditv
rate)
ln August 1998, the Board bas issued its opinion to the Govemment regarding Hydro-Québec's
procedure for the deterrnination and irnplementation of rates for the generation of electric power .
I
ln its opinion, the Board h~ rejected the proposaI of Hydro-Québec
price, preferring
power
"r
ln awaiting the second regulations mentioned above, investments
approval as prescribed in section 29 of Hydro-Québec's Act.
B. Specific
resource plan
I
b) Regulation detennining th
projects (section 73) ;
.
:
proposaI conceming
a
to regulate the generation activity by way of a fixed
instead a c~st of service regulation.
This opinion was sent to thelGovemment which will decide according to section 167 (2) of the Board's act on the method of
regulation that will apply to ~e generation activity ofHydro-Québec.
2) Regulatorv principles related to transmission rates :
In July, 1999, the Board adopted four regulatory principles
related to the setting of transmission rates: use ofprojected
test
year to set rates; establishment of the rate base and the capital structure using an average of 13 mon1h!y balances ; use of
Hydro-Québec's
fiscal year jts the rate period ; and determination of the main criteria to be used in identif):'ing and
segregating regulated versusl non-regulated activities.
~"
1
8
3) Transmission
rates :
The Board rendered a decision in November 1999 on the procedure to follow in setting b'ansmission rates. First, HydroQuébec bas conducted infomlation sessions on February and Marcb, 2000, for stake-bolders and for the regulator. An
arnended request win be submitted in July 2000 for the irnplementation of a new rate policy to be in operation starting
January I 51,2001. This arnended request will be prepared according to the prevailing regulatory rules establisbed by the
Board as explained on item 2.
Next, public hearings will be held during the fall of2000. The Board will then render a decision on transmission rates
effective January l, 2001.
4) Windrnill Qower :
At the request of the minister of Natural Resources, the Board bas issued an opinion in October 1998 conceming the place
windmill power should play in Québec's energy mix.
The Board recommends implementation of 450 MW of windwill power capacity over a period of nine years. The price paid
by Hydro-Québec would result from a calI to tender but the Board recommends that the price should not exceed 5,8~/kWh
(Can$).
..The
~
Board concludes that only the Governrnent, being the beneficiary of the economical impacts, should assume the
tinancial consequences resulting from the difference between the cost of generating windmill power and the cost of
generating hydraulic power .
The Board estimates this difference at 3 million dollars (Can$) the fust year and over 19 million dollars (Can$) per year for
the total projected installations.
The govemment of Québec bas now to render its decision in response to the Board's opinion.
5)
suQQlied
:
The Regroupement national des conseils régionaux de l'environnement du Québec (regional environmental councils) have
filed this application in November 1998 asking the Board to hold public hearings on the status of Hydro-Québec's hydraulic
reserves.
The Board decided to wait for the govemrnent's decision on electricity generation rates before ruling on this application
concerning the monitoring of Hydro-Québec operations aimed àt ensuring an adequate power supply for Québec consumers.
Following this decision by the Board, the Regroupement filed a petition witb Québec Superior Court. The Court decided to
refer the matter back to the Board for further study. Hydro-Québec bas appealed this decision.
It should be noted that since September 1998, several administrative meetings were held between Hydro-Québec and the
Board and several documents have been filed on a confidential basis, showing that hydraulic reservesare adequate.
""
.
2.
6) Small p.Qwerstations ness than 50 MM :
On June Il dl 1998, the minister of Natural Resources has asked the Board for an opinion regarding the details of
implementation on the contribution of smal1power stations to the resource plan of Hydro-Québec.
After holding public hearings, the Board submitted in December, 1999, its opinion on ways to establish the contribution of
small-scale hydropower production to Hydro-Québec's resources plan. The government of Québec has now to render its
decision in response to the Board's opinion.
After hearing the parties' statements,the Board suspended study of this case.
Régie de l'énergie
Commissioners
President : Mr Jean A. GUÉRIN
Vice-President
: Me Lise LAMBERT
Mr André DUMAIS
Mr
Mr
Me
Mr
Pierre DUPONT
Anthony FRA YNE
Catherine RUDEL- TESSIER
François TANGUA y
Supemumerary
Me Marc-Antoine
PATOINE
Mr Jean-No~1 V ALLIÈRE
-'"'"
3.
Bill no 116 (Proposed Legislation)
Amendments to the Loi sur la Régie de l'énergie (Energy Board Law)
and other legislative dispositions
Summary of a press release issued by the
NaturalResources Department, May II,2000
.Preservation
of the social compact
.protection
of electricity rates cross-subsidization
.competition
for new load
.new powers for the Régie de l'énergie
.compliance
with Québec's energy policy
through a patrimonial
contract
The legislation proposed today by Natural ResourcesMinister JacquesBrassard aims at
preserving the existing social compact and guaranteeingQuébec consumers,especially those in
the residential category, that they will continue enjoying low electricity rates. To that end, the
government enters into a patrimonial contract with Québec consumersrespecting Hydro-Québec's
hydroelectric generation and existing long-term purchasing contracts, for an annual 165 TWh of
energy, at a set price of2.79 cents/kWh. This price will not be allowed to increasein the future.
Hydro-Québec's transmission and distribution costs are in addition to this patrimonial generating
cost. Consumers' electricity rates which already cover these three elements will not be modified.
Indeed, the government confirmed the rate freeze in effect until at least 2002. New load projects
would be allocated through public calls for tenders.
The proposed bill confirms the Régie de l'énergie's role as economic regulator. The Régie will
still establish transmission and distribution rates. It is also gaining new powers, becoming
responsible for supervising the calI for tenders processfor new load projects and for approving
Hydro-Québec's code of conduct for this process.
Highlights
-New powers for the Régie de l'énergie
-Compliance with the 1996 energy policy
-Patrimonial contract average price of 2.79 cents/kWh and annual volume of 165 TWh
-Preservation of cross-subsidization of electricity rates to the advantageresidentiaI customers
-Competition for new load projects and supervision of calI for tender processby the Régie
-Government empowered to establish set-asideand maximal price of energy sourcesit wishes to
encourage (wind power, small hydraulic, etc.)
-MRCs (RegionaI County Municipalities) authorized to create partnerships for development of
under-50 MW hydroelectric sites
-Government of Québec to be sole responsible for lossesor benefits related,to existing special
contracts and export sales contracts.
The average patrimonial price set at 2.79 cents/kWh takes into account expensesrelated to alI
existing generating facilities used by Hydro-Québec as weIl as return on equity .This patrimonial
price for 165 TWh per year will not be allowed to increase.It could only be reduced and this
would have to be at the government's request. This price compares favorably with the
3.8 cents/kWh established by the government of Ontario and by Northeastem United States
distributors' prices, which are in excess of 5 cents/kWh.
The proposed legislation confinns the existing cross-subsidization of electricity rates which
benefits residential customers. Future rate modifications detennined by the Régie wil1 not be
allowed to modify interfinancing.
The proposed legislation also conf1rInSthe principle of rate uniformity acrossthe territory of
Québec.
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&~
BUSINESS
RISKS
The assessment of the sensitivity of net income to extemal risks in 2000 is based on an
analysis of the variations seen in the historic data available. Thus, the interval between :i:
1 standard deviation covered by this assessmentrepresentsa probability of 68 %. And the
probability of a value higher than + 1 standard deviation, or below -I standard deviation,
is 16 %.
Major financial risks are related to fluctuations in interest rates, exchange rates, and the
price of aluminum. They are covered by integrated risk management that takes into
account the interrelations that can be seen between movements in various financial
variables. For example, an increase in the short-term interest rate is usually followed by
an increase in the value of the Canadian dollar. Thus, the coverage strategy authorized for
2000 aims to limit the negative impact of any potential deterioration in financial
parameters to $65 million. The use of options as coverage instruments, preferably term
contracts, enables us to contain the negative risk within a prescribed limit, without
limiting the possibility of gains in the case of a favotable evolution of financial
parameters.
Temperature variances from the noml can represent about :i: 1 % of sales. While any
slackening of sales on Québec markets is usually compensatedfor by short-teml sales,the
impact remains negative since unit revenues on the short-teml market are generally lower
than unit revenues from salesassociatedwith heating.
Demand in Québec is usually sensitive to other factors such as the evolution of
economic activity , the rate of construction of new dwellings, competition from other
forms of energy, work conflicts, and the evolution of consumption habits. These factors
can cause sales to fluctuate by:i: 2% annually. However, the losses incurred on Québec
markets can be partially offset by sales on short-term markets.
Fluctuations in runoff are the extemal risk that has by far the most significant impact on
the utility's financial results. For example, one standard deviation corresponds to a
variance of:i: 20 TWh. The historic readings used for this assessmentgo back to 1943.
Page 1 de 2
Players and their roles
~
The Board of Directors supports the integrated risk managementapproach. It
determines the acceptable level of residual risk and monitors the overall balance
between the level ofrisk-hedging and return.
~
The President and Chief Executive Officer manages the corporation' s risk portfolio.
He reports to the Board on the results of integrated management.
~
The Deputy Chief Executive Officer and Chief Financial Officer implement the
approach, and reports on the integrated risk managementprocess.
~
The units managetheir own risks, supply the information neededfor an integrated
corporate assessment,and report on the managementof their risks and the related
impacts.
~
The Strategic Planning Division establishesthe strategiesand orientations for the
businessunits, and Integrated Business Risk Management group provides the Deputy
Chief Executive Officer with information strategic risks.
Business Risk Control and Integration Division -Mission
-
This division carries out three main forms of action :
~
conceives a risk managementmodel/framework and implements it in all units
)-
monitors the managementof derivative financial instruments to ensure adequate
coverage of the inherent risks
~
integrates the business risks of all units, and recommends arbitraging and other risk
mitigation or attenuation strategiesto upper managementand the Board of Directors,
Page 2 de 2
HUMAN RESOURCES
1- As of December 31, 1999, Hydro-Québec's work force totaled 19,135
employees, compared with our announced target of 19,500.
2-1n 1999, relations between Hydro-Québec and its employees underwent
significant developments during the past year .AlI our collective agreements,
except the one for researchers, were renegotiated or reviewed in order to involve
employees more c1osely in the company's efforts to achieve its objectives. The
employees now enjoy a profit-sharing plan that provides for lump-sum payrnents
tied to the attainment of the company's objectives. The amounts paid may be as
much as 3% ofannual base salary.
3-Labor costs, which account for most of our total expenses, have steadily declined
over the past several years. In 1999, payroll expense made up only 61% of total
expenses, compared with an average of 70% for the past five years.
-
-
,.
ln November 1999, Hydro-Québec
created a new business unit, the Natura1 Gas
Sector, in accordance with orientation # 6 of Hydro-Québec ' s Strategic Plan for
2000-2004
("Participate
by "Maintaining
natural
~
development
gas distribution"
investments
in the development
of the North American
gas industry"
focus on current sectors: energy transportation
and by
"Developing
a program
of
and
complementary
in the gag industry").
The mandate of this new unit is to allow Hydro-Québec to continue to participate
in the development of the North American gas industry .This
involvement
currently takes the form of Hydro-Québec's equity in the holding company
Noverco. Enbridge and Gaz Metropolitain, Noverco's operating companies, play a
prominent role in the large-scale transportation of energy as weil as gas
distribution. Hydro-Québec intends to maintain a focused and very active presence
in the se important growth industries, in order to be able to identify and capitalize
on interesting business opportunities.