STARGAS APPLICATION TO ALTER RATES. Re: Stargas Utilities Ltd. Application to Alter Rates and Refinance

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1 ERICA HAMILTON COMMISSION SECRETARY web site: SIXTH FLOOR, 900 HOWE STREET, BOX 250 VANCOUVER, BC CANADA V6Z 2N3 TELEPHONE: (604) BC TOLL FREE: FACSIMILE: (604) Log No VIA info@stargas.ca October 4, 2012 STARGAS APPLICATION TO ALTER RATES AND REFINANCE EXHIBIT A 3 Mr. M.A. Blumes President Stargas Utilities Ltd Selkirk Drive Kelowna, BC V1V 2N6 Dear Mr. Blumes: Re: Stargas Utilities Ltd. Application to Alter Rates and Refinance Further to your August 17, 2012 filing of the above noted Application, enclosed please find British Columbia Utilities Commission Information Request No. 1. In accordance with the Regulatory Timetable, please file your responses electronically with the Commission by Friday, October 12, 2012 in accordance with the Commission s Document Filing Protocols, effective May 16, Yours truly, /yl Enclosure Erica Hamilton PF/Stargas_AlterRates/GC/A 3_BCUC IR No. 1

2 BRITISH COLUMBIA UTILITIES COMMISSION Commission Information Request No. 1 Stargas Utilities Ltd. Application to Vary Rates 1.0 Reference: Shareholders Equity The Application, p. 3 of 10 Accumulated Unpaid Preferred Share Dividends Cumulative dividends prior to the Company s fiscal year ending May 31, 2006 aggregating $135,887 remain unpaid as at May 31, [The Application, p. 3 of 10] When recapitalized in 2002, its then shareholders acknowledged that the Company would not be in a position to pay on a current basis appropriate returns on their $400,000 investment. Cumulative dividends would, it was determined, be an effective measure of foregone returns in that they would not compound (as would unpaid interest) nor did their accumulation result in taxes payable by their holders without a current return from which to pay those taxes. [The Application, p. 3 of 10] 1.1 Please confirm the years in which the unpaid dividends of $135,887 accrued and the amount accrued per year. The total should agree to $135, For each year that unpaid dividends of $135,887 accrued, please confirm if any return on equity amount was included in Stargas revenue requirement. If confirmed, please provide the amount per year. 1.2 Please discuss what is meant by the following sentence: Cumulative dividends would, it was determined, be an effective measure of foregone returns in that they would not compound (as would unpaid interest) 2.0 Reference: Shareholders Equity The Application, p. 3 and p. 7 of 10 Accumulated Unpaid Preferred Share Dividends At the direction of the Commission, from June 1, 2007, the Company has declared and paid the annual dividend on these shares and where necessary, pursuant to the terms of its financing arrangements, advanced equivalent funds to the company as subordinated shareholder advances. [The Application, p. 3 of 10] From June 1, 2006 to date, the current year s dividend was paid and included in the utilities revenue requirement. [The Application, p. 7 of 10] 2.1 Please confirm if the Company has declared and paid the annual preferred share dividend from June 1, 2006 or June 1, Please confirm the amount declared and paid per year. 2.2 Please discuss the tax treatment of the cumulative deferred share dividend declared and paid by Stargas each year, from the perspective of the shareholder. Stargas Alter Rates and Refinance 1 BCUC IR No. 1

3 3.0 Reference: Shareholders Equity The Application, p. 3 of 10 Accumulated Unpaid Preferred Share Dividends Unless [the dividend arrears are] included in the revenue requirement we would not ever be in the position to be able to pay the arrears and so propose that we be allowed to amortize the arrears into our revenue requirement over twenty years. By doing so, we will have positioned ourselves to, in years following, to replace higher cost preferred share dividends with interest on term debt and / or further shareholder advances. [The Application, p. 3 of 10] 3.1 If the dividend arrears are amortized over a twenty year period, as suggested in the Application, please provide a proposed schedule to declare and pay the dividends. 3.2 Would Stargas consider amortizing the accumulated unpaid dividends into the revenue requirement over a period of ten years? Please discuss why or why not. 3.3 If the dividend arrears are amortized over a ten year period, please provide a proposed schedule to declare and pay the dividends. 3.4 Would Stargas consider amortizing the accumulated unpaid dividends into the revenue requirement over a period of five years? Please discuss why or why not. 4.0 Reference: Shareholders Equity The Application, p. 3 of 10 Preferred Share Dividends As the [dividend] arrears are addressed, Stargas could, in a series of re financings, redeem preferred shares and replace those with lower cost bank debt. [The Application, p. 3 of 10] As the holder of the Class G preferred shares have waived their right, indefinitely, to redeem their Class G preferred shares, the outstanding Class G preferred shares have been presented as a component of shareholder equity. [Stargas F2012 Financial Statements, Note 8] 4.1 Please discuss if Stargas has considered replacing the preferred share dividends with common equity, as opposed to debt financing, and explain why or why not. 4.2 Please discuss why the holder of the Class G preferred shares has waived their right to redeem the preferred shares on an indefinite basis Are there any conditions that must be met in order for the holder of the Class G preferred shares to redeem the preferred shares, given that the right to redemption has been waived indefinitely? Please discuss. 5.0 Reference: Rate Base The Application, p. 1 of 10 The Application, p. 1 of 10 includes a calculation of Stargas F2013 and F2012 mid year rate base. Stargas Alter Rates and Refinance 2 BCUC IR No. 1

4 5.1 Please confirm if a British Columbia Utilities Commission (Commission) Order has approved the inclusion of each item listed below in rate base. If confirmed, please provide the Order number. Terasen Contribution, net; Deferred Finance Charges. 5.2 Please provide Stargas deferred income tax balance for each of May 31, 2011 (Actual), May 31, 2012 (Actual) and May 31, 2013 (Forecast). 5.3 An amount for accumulated unpaid dividends of $129,093 and $135,887 is included in the midyear rate base for Test Year F2013 and F2012, respectively. Please discuss the rationale for including this item in rate base, despite the fact that these dividends have not yet been declared or paid by Stargas. 6.0 Reference: Rate Base The Application, p. 1 of 10; The Application, Exhibit B 7 Working Capital, Methodology Exhibit B 7 includes Stargas lead lag schedule for the Test Year F2013 (The Lead Lag Schedule). 6.1 Please describe the methodology used in calculating the cash working capital of $56,477 per the Lead Lag Schedule Please confirm if the methodology used in the Lead Lag Schedule has been reviewed by a third party for appropriateness of components, completeness and the reasonableness of the calculation. 6.2 Please discuss why the calculation of the Days in receivable per the Lead Lag Schedule is based on the opening accounts receivable balance for each month, as opposed to the month end balance Please discuss why the calculation of the Days in receivable per the Lead Lag Schedule has not been separated into the following individual revenue components: large commercial service, small commercial service, residential service Was consideration given to incorporating service lag, billing lag and collection lag into the calculation of the revenue lag days per the Lead Lag Schedule? 6.3 Please confirm if all expense categories were used in determining the expense lead days per The Lead Lag Schedule. If not confirmed, please list what expense categories were excluded and explain why Please discuss how the lead days for each expense category were determined. 6.4 Please confirm the following information in relation to Lead Lag Schedule: The estimated total revenue lag days; The estimated total expense lead days; The estimated net lead lag days. Stargas Alter Rates and Refinance 3 BCUC IR No. 1

5 6.4.1 Please recalculate the working capital component of rate base for Test Year F2013 based on the net lead lag days, multiplied by the operating and maintenance expenses for the Test Year F Reference: Rate Base The Application, Exhibit B 7 Working Capital, Methodology The Panel recognizes that a formulaic approach to calculating cash working capital is acceptable for small utilities where the resources required for a detailed lead/lag study would be too costly and time consuming. The Panel accepts the formula method of calculating cash working capital as 1/8th of operating expenses. [Appendix A to Commission Order G 71 12, p. 2 of 5] 7.1 Please discuss if a formulaic approach to calculating cash working capital would be considered by Stargas for the Test Year F2013, and explain why or why not. 7.2 Please provide a calculation of the working capital component of rate base as 1/8 of Test Year F2013 operating expenses, excluding purchased gas costs. 8.0 Reference: Rate Base The Application, p. 1 of 10; The Application, Exhibit B 7 Working Capital The Application, p. 1 of 10 calculates the mid year rate base using the average of working capital from Test Year F2013 ($55,693) and F2012 ($67,687). Exhibit B 7 includes a Lead Lag Schedule that calculates the working capital component of rate base for Test Year F2013 based on forecast revenues and expenditures for Test Year F Please discuss why an average of the Test Year F2013 and F2012 working capital component is used in the determination of the Test Year F2013 mid year rate base, when the Test Year F2013 working capital amount of $55,693 is calculated using forecast revenues and expenditures for the entire twelve month period of the Test Year F Reference: Financing The Application, p. 2 and 4 of Please provide a working excel copy of the Section III table entitled Financing on p. 2 of For the Test Year F2013, please provide the detailed calculation for each of the following items on p. 2 of 10: Return on rate base $46,624 Rate of return on rate base 5.05% Return on equity $26,911 Return to equity % 11.83% Stargas Alter Rates and Refinance 4 BCUC IR No. 1

6 9.3 The Revenue Requirement calculation on p. 4 of 10 includes an amount of $41,000 for the current preferred dividend but excludes amounts for return on equity and debt return based on Stargas rate base. Considering this, please explain the purpose of including the table entitled Financing on p. 2 of 10 of the Application Reference: Shareholders Equity The Application, p. 4 of 10 Deficit The following reconciliation of the Deficit balance per Stargas financial statements and the Deficit balance for regulatory purposes is included on p. 4 of 10: 31 May May 12 Deficit per financial statements $190,732 $169,849 Disallowed management fees 5,125 5,125 Disallowed financing costs 1,824 1,583 Regulatory deficit $183,783 $163,141 The Revenue Requirement calculation on P. 4 of 10 includes an amount for Management fees of $77,466 in the Test Year F2013 and $76,600 in F For F2011, please provide a reconciliation between the ending Deficit per the Company s financial statements of $143,366 and the ending regulatory Deficit Please describe what the disallowed management fees of $5,125 in F2013 and $5,125 in F2012 relate to and how these amounts were calculated Are the management fees of $77,466 included in the revenue requirement calculation on p. 4 of 10 inclusive of the $5,125 of disallowed management fees? Please provide the management fees included in the Stargas revenue requirement, as opposed to actual management fees per the financial statements, for each of F2012, F2011, F2010 and F Please describe what the disallowed financing costs of $1,824 in Test Year F2013 and $1,583 in F2012 relate to and how these amounts were calculated Does the revenue requirement calculation on p. 4 of 10 include the disallowed financing costs of $1,824 and $1,583 for Test Year F2013 and F2012, respectively? Please confirm what line item of the F2012 Stargas financial statements includes the disallowed financing costs of $1,583. Stargas Alter Rates and Refinance 5 BCUC IR No. 1

7 11.0 Reference: Management Fees The Application, Attachment B 5 Attachment B 5 includes a Management Budget Submitted by Okanagan Funding Ltd., with the following total hours by category: Accounting 338 Administrative 559 Executive 187 Total 1,134 Commission Order G established the following approved hourly rates for management fees charged by Okanagan Funding Ltd.: Accounting $42.40 Administrative $63.60 Executive $ Please provide the actual hours for F2012 for each of the following categories: Accounting, Administration and Executive Please confirm the actual rate per hour used to determine the management fees of $76,600 per the F2012 financial statements, for each of the following categories: Accounting, Administrative and Executive Please provide the source from which the BC Consumer Price Index of and for April to March and April to March , respectively, were obtained and provide the hyperlink to the source Reference: Office and Sundry The Application, Attachment B 5; The Application, p. 4 and p. 5 of 10 P. 4 of 10 notes $15,768 and $13,341 in Office and Sundry expenses for the Test Year F2013 and Actual F2012, respectively. This represents an increase of $2,517, or 19%, from Actual F2012 to Test Year F2013. Included in the test year estimate our third party charges of $857 incurred in the development of a Company webpage added to improve the utilities profile at the resort. [The Application, p. 5 of 10] 12.1 The third party charges of $857 for the Company webpage explain a portion of the $2,517 increase in Office and Sundry Expenses. Please discuss what accounts for the remaining $1,630 increase in Office and Sundry Expenses. Stargas Alter Rates and Refinance 6 BCUC IR No. 1

8 13.0 Reference: Return on Rate Base The Application, p. 3 and 4 of Please discuss the rationale for including an amount of $41,000 for preferred share dividends in the revenue requirement calculation on p. 4 of 10, as opposed to debt return and return on equity amounts based on Stargas rate base In future rate applications, is it Stargas intention to continue to include an amount for current year preferred share dividends (i.e. $41,000 for Test Year 2013) in the revenue requirement calculation or does Stargas anticipate instead including amounts for return on equity and debt return based on rate base? Please discuss In the event that the preferred shares of $400,000 are redeemed for debt financing, as indicated on p. 3 of 10 of the Application, please discuss the methodology that Stargas would employ for including a return on equity or debt return in the revenue requirement Please discuss what Stargas considers to be the appropriate percentage debt and equity components of the company s capital structure Please discuss Stargas plans moving forward for maintaining an appropriate capital structure Reference: Competing Heat Resources The Application, p. 9 of 10 The requested $0.50 increase in our delivery rate (from $6.85 to $7.35) will increase the average homeowners cost by $40 ($from $548 to $588). [The Application, p. 9 of 10] 14.1 Please provide the breakdown of the forecast number of customers in Test Year F2013 in each of the following rate classes: residential service, small commercial service, large commercial service Please provide the average number of gigajoules consumed per year per small commercial service customer Please provide the average cost per small commercial service customer for a full year s supply of natural gas, based on the rate of $11.67 per gigajoule Please provide the average number of gigajoules consumed per year per large commercial service customer Please provide the average cost per large commercial service customer for a full year s supply of natural gas, based on the rate of $11.67 per gigajoule Please provide the source of information for the average cost per liter of propane of $ Please provide the source of information for the average cost per KwH of electricity of $ Stargas Alter Rates and Refinance 7 BCUC IR No. 1

9 15.0 Reference: Forecast Test Year Ended May 31, 2013 The Application, Exhibit B 2 Exhibit B 2 is a forecast balance sheet and income statement for the Test Year F Please discuss how the forecast income statement and balance sheet amounts per Exhibit B 2 for Test Year F2013 were determined For the period June July, 2012, please confirm if the amounts included in Exhibit B 2 are based on actual or forecast results. If amounts are based on forecast results, please discuss why actual results were not used Please provide an updated Exhibit B 2 (both income statement and balance sheet) with actual results for the period June August, Reference: Draft Order Please prepare a draft Commission order indicating the desired approvals sought by Stargas in this filing Reference: Commodity Recovery/Cost The Application, p. 8 of 10 Mindful of the recent position of the Commission on the costs involved in hedging supply, and holding the view that supply side pressures will continue to mitigate commodity prices, we propose to accept all of our fiscal 2013 deliveries at index and will not, therefore, be filing a price mitigation strategy with the BCUC as had we in the past several years. [The Application, p. 8 of 10] 17.1 Please describe the natural gas market pricing scenarios, if any, that would cause Stargas to revisit its decision to accept all fiscal 2013 deliveries at index In particular, describe the market place factors and the magnitude of the variance between forward prices and the estimated gas commodity prices utilized to set rates for the test year ending May 31, 2013 that might lead Stargas to consider revisiting its decision to accept all deliveries at index Did Stargas implement the price mitigation strategy approved for fiscal year 2012 in Commission Letter L 75 11? If so, please provide on a monthly basis the volumes purchased and the applicable prices If Stargas did not implement the price mitigation strategy, please explain why not Does Stargas intend to file a price mitigation strategy for fiscal 2014 gas purchases? When does Stargas propose it would file a price mitigation strategy for the Test Year ending May 31, 2014? Stargas Alter Rates and Refinance 8 BCUC IR No. 1

10 18.0 Reference: Estimated Commodity Prices The Application, Cover Letter, p.1; The Application, Exhibit B 3 In the cover letter to the Application, Stargas states that the proposed commodity price is based on estimated volumes through the test year and index prices provided by our marketer August 10, Please provide an updated version of the table set out in Exhibit B 3 reflecting current forward prices and extending the table to October 31, Reference: Updated Commodity Component of Rates The Application, Exhibit B 4 Fortis Gas rates are forecast to increase 1 % effective January 1 st, [The Application, Exhibit B 4] The Commission notes that FortisBC Energy Inc. permanent rates for 2012 and 2013 were approved in Commission Order G dated April 12, Using the approved charges for FortisBC Energy Inc. for 2012 and 2013 and the updated forward prices provided in response to IR 18.1, please provide an updated calculation of the commodity component of the rate for the Test Year ending May 31, Please also provide the update versions of the tables entitled Forecast GCVA and Forecast of Commodity Cost shown in Exhibit B 4 of the Application Based on current forward prices and Stargas proposed commodity component for the rate, estimate the outstanding GCVA balance will be effective October 31, Please describe any changes Stargas proposes to the commodity component of the rate as a result of the revised inputs to the calculation of the commodity component Reference: Updates to the Commodity Component of Rates The Application, Exhibit B Please confirm that Stargas will continue to file an annual application regarding the need to alter the commodity component of rates to be effective November 1, 2013 as has been the practice in the past If not confirmed, please describe Stargas proposed reporting and commodity component review process going forward. Stargas Alter Rates and Refinance 9 BCUC IR No. 1