PRESENTATION TO THE
REGIE DE L'ÉNERGIE
FILE R-3492-2002
By: Dr. Lawrence Kryzanowski
Dr. Gordon Roberts
March 13, 2002
Part I
PRESENTATION OUTLINE
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Economic and financial market conditions
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Capital structure
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Rate of return on common equity
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Critique of Dr. Morin's evidence
ECONOMIC AND FINANCIAL
MARKET CONDITIONS
• 2 trends
- Derivatives growing – hedging
- Opportunities to reduce business and financial risks
- Equity risk premium lower going forward
ECONOMIC FORECAST
UPDATE
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Continued GDP growth in Canada
Negative factors more significant for US
• Weaker economic performance
• Iraq
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Québec – 2003 another good year
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Lower rates in the first half year
INTEREST RATE FORECAST
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First estimate for 20 years Canada
5.22% = 10 year Canada forecast = average
spread 30 year over
0.40% 10 year Canada
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5.62%
INTEREST RATE
FORECAST…
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Second estimate – average of 30 year
forecasts = 5.58%
FORECAST
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Average = 5.60%
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Retain original 6.00%
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Temporary decline
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Regulation is longer term
CAPITAL STRUCTURE
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Sample of 9 Canadian utilities
Bond ratings typically:
• A (low) DBRS and A- (S&P)
• BBB companies operate efficiently and
profitably and beat allowed ROEs
• Relevance for HQ DIST
BUSINESS RISK
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Uncertainty of operating income
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HQ DIST lower business risk vs average
Canadian electricity distributor
BUSINESS RISK…
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Business risk lower than average Canadian
gas distributor
No forecasting risk
FIVE CANADIAN BENCHMARK
FOR EQUITY RATIO AVERAGES
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Actual for 9 utilities
Allowed for 9 utilities
Allowed for 2 gas utilities in our sample
Allowed for 2 alternative gas companies
Actual for 2 alternative gas companies
Result: 36 – 37%
RECOMMENDATION FOR
EQUITY RATIO
• Lower than 36% due to lower risk
• Above 30% allowed for TransEnergie
Distribution more risky
• Recommend 33-35%