BRITISH COLUMBIA UTILITIES COMMISSION Commission Information Request No. 2

Transcription

1 B-6 BCUC IR No. 2 Page 1 BRITISH COLUMBIA UTILITIES COMMISSION Commission Information Request No. 2 Pacific Northern Gas Ltd. (PNG West Division) and Pacific Northern Gas (N.E.) Ltd. (Fort St John/Dawson Creek and Tumbler Ridge Divisions), [collectively (PNG)] Application for Capital Structure and Equity Risk Premium (Application) 1.0 Reference: Response to BCUC IR No. 1 Exhibit B 2 BCUC IR 5.2; BCUC IR 27.2; BCUC IR 29.1 Attachment p. 6 Rate Impact and Competitiveness of Rates Declines in gas commodity prices payable by the Company during 2009 helped to make gas rates more competitive relative to electricity bp increase in risk premium and a 1 percent increase in equity thickness for a typical PNG West Residential customer would result in respective rate impact of 0.17 percent and 0.28 percent. In PNG s opinion, does the rate impact based on average bundled rate that includes declining gas supply charge in 2009, mask the impact of applied for cost of capital increase than if natural gas commodity prices has been on an upward trend in 2009? The rate impact of the applied for increases in the common equity thickness and equity risk premium has not been covered up or blurred by virtue of gas commodity rates remaining relatively low. PNG s submissions clearly show the rate impacts regardless of the level of gas supply commodity costs and the corresponding resulting bundled rates. 2.0 Reference: Response to BCUC IR No. 1 Exhibit B 2 BCUC IR 5.3 Residential Customer Annual Bill Comparison Confirmed Based on information from the last column in the table in Response to IR 5.3, the applied for rate (January 1, 2010) would result in an additional $212 per annum compared to the actual rate (October 1, 2009) for PNG West, $28.74 for FSJ/Dawson Creek, and $53.94 for Tumbler Ridge. 2.1 Please confirm that the above figures reflect the cumulative impact of Order G from the Terasen ROE Decision in December 2009, Order G from the PNG RRA, and the Application at hand.

2 Page 2 Notes: 2.2 If confirmed, please disaggregate to show the impact of each item listed above. If not, please reconcile the annual bill differences in the Table in Response to BCUC IR with the figures in BCUC IR 5.3. Residential Annual Bill Increase by Components Components PNG-West FSJ/DC Tumbler Ridge CAP/ROE Application (1) $31 $13 $6 Rate Applications (2) $181 $16 $48 Total $212 $29 $54 1. The figures in this row are taken from response to BCUC IR No. 1, question as these bill increases are just for the common equity thickness and equity risk premium increases applied for under the CAP/ROE Application. 2. The figures in this row represent the bill increases required to recover the 2010 cost of service increases under the 2010 revenue requirements applications other than the increases due to the thicker common equity and the higher equity risk premium applied for under the CAP/ROE Application. The revenue requirements increases include the impact of the Terasen ROE Decision where the benchmark utility ROE was increased to 9.50 percent. 2.3 Is the GJ/year for PNG W (72.9), FSJ/DC (114.5) and TR (87.0) based on normalized average sales in 2009? Please explain how the typical Residential use per account is derived? No. The 72.9 GJ/year figure for PNG-West is the same as was used to forecast 2009 residential gas deliveries. It was accepted by the parties who participated in the 2010 revenue requirements application settlement negotiations. The GJ/year figure is the average of the uses per account for Fort St. John and Dawson Creek residential customers as agreed to under the 2010 revenue requirements application negotiated settlement. The 87 GJ/year Tumbler Ridge use per account figure was also agreed to under the 2010 revenue requirements application settlement agreement.

3 Page Reference: Response to BCUC IR No. 1 Exhibit B 2, BCUC IR 23.1 pp ; BCUC IR 32.1 Amounts of Common Equity and Rates of Return In Response to BCUC IR 24.3, PNG states that the BBB (low) secured debt rating is directly a function of PNG maintaining less debt leverage than the Commission has imposed for the purpose of determining rates. 3.1 According to the table in BCUC IR 23.1 page 41, PNG West deemed and actual common equity were comparable in 1995 and then the actual common equity ratio began to increase substantially over the years, cumulating in a $ million differential by Please explain the decision that took place in 1997 that initiated this trend. What has been the Company s strategy? The statement made in the question is misleading in PNG s view. The trend of increasing actual common equity ratios did not occur until 1999 as the deemed and actual common equity ratios were comparable in 1995, 1996 and 1998 with 1997 being anomalous due to PNG s acquisition of the Fort St. John gas distribution system that year. The decision that took place in 1999 that initiated the trend of increasing actual common equity thickness had to do with the financial market s view of the risks faced by PNG in relation to the Methanex operation in Kitimat. By this time the viability of methanol production in Kitimat was in question and the financial markets, including PNG s operating lender at the time, were starting to require PNG to carry less debt. These concerns were confirmed in 2000 when Methanex announced a shutdown of its Kitimat facility and PNG was put under significant financial pressure, particularly by its operating lender in response to the perceived business and regulatory risks. To preserve cash and reduce its debt leverage as quickly as possible, PNG eliminated the payment of dividends on its common shares. Until PNG was able to significantly reduce its debt leverage and provide evidence to the market that regulatory risks, particularly the right to recover its costs of providing service, were not as dire as the market believed, it had to carefully manage its liquidity due to the lack of access to credit on reasonable terms and conditions.

4 Page In the table on page 41, for 2009, does the 7.20 percent actual return on actual equity compared to the 6.65 percent approved return on actual common equity indicate that PNG is earning a greater return than approved? The 7.20% rate of return on actual equity is a full 2.43% short of the approved rate of return on common equity. The 6.65% figure is simply a calculated figure and is not the allowed rate of return on common equity approved by the Commission for the purpose of setting rates. Therefore, it cannot be indicated that PNG is earning a greater return than approved. Further, the calculations of actual rate of return on deemed common equity and the approved rate of return on actual common equity are biased by the nature of the calculations. When PNG s revenue requirements are determined and the deemed capital structure set, if PNG s actual common equity is greater than its deemed common equity there is another form of capital in the regulated capital structure, either long-term or short-term debt, where the actual amount of this capital is less than the amount deemed in the utility capital structure. Given that this deemed capital earns a return, albeit at an after-tax interest rate, it provides a supplement to the actual return on common equity and therefore inflates the calculation of actual rate of return on deemed common equity relative to the approved rate of return on deemed common equity. It also results in the approved rates of return on actual common equity being biased downward relative to the expected return on actual common equity. The following example may be helpful in demonstrating these biases. Assume: 1) Approved return on common equity $5,060,000 2) Deemed common equity $52,541,000 3) Actual common equity $76,074,000 4) Deemed interest expense $5,100,000 5) Actual interest expense $4,247,000 6) Tax rate 30% Therefore: (i) the approved return on deemed common equity is ($5,060,000 / $52,541,000) = 9.63% while the expected actual return on deemed common equity would be (($5,060,000 + (($5,100,000 - $4,247,000) x (1 30%)) / $52,541,000) = 10.77%. (ii) the approved return on actual common equity is ($5,060,000 / $76,074,000) = 6.65% while the expected actual return on actual common equity would be (($5,060,000 + (($5,100,000 - $4,247,000) x (1 30%)) / $76,074,000) = 7.44%.

5 Page DBRS changed the PNG credit rating in the years 1998, 1999 and Please describe the circumstances/events that had led to the changes. PNG s debt rating was changed by DBRS in 1999 from BBB(high) to BBB, in 2000 from BBB to BB(high) and in 2003 from BB(high) to BBB(low). The press release from DBRS on July 14, 1999 provided three factors that led DBRS to downgrade PNG s debt: (1) Methanex and Skeena Cellulose, as PNG s two largest customers accounting for 65% of volumes shipped in 1998, being under substantial pressures due to depressed commodity prices in their respective markets. Further, with respect to Methanex, the planned sale of its Kitimat plant to Acetex Corporation which is a weaker credit than Methanex, the expiry of the Provincial Guarantee on October 2002 on the largest of the three take-or-pay transportation contracts between PNG and Methanex and the significant concerns around the methanol plant s long-term viability. With respect to Skeena Cellulose, the highly uncompetitive cost structure and its resultant dependency on Provincial Government support. (2) While PNG may be able to partially recover the potential margin loss by raising rates to other customers and those rates would likely remain below the cost of other energy alternatives, such a large increase would probably be amortized over time, would narrow the Company s competitive advantage and adversely affect earnings. (3) Over the shorter-term, PNG s earnings continue to be negatively affected by a weak, resource based provincial economy and a continuing decline in the approved ROE. With respect to the downgrade by DBRS in 2000, DBRS also noted three considerations: (1) The announcement by Methanex of a 12-month shutdown of its Kitimat methanol plant which was an indication that a permanent shutdown was a distinct possibility. While the take-or-pay contracts with Methanex should ensure the relative stability of PNG s earnings and cash flow until October 2002, PNG s longer term future is uncertain given that the Kitimat plant accounts for 58% of gas deliveries and 27% of gross revenues (both 1999) and is one of Methanex s highest cost plants. (2) Skeena Cellulose, PNG s second largest customer is a high cost producer whose viability should improve as a result of the recent $110 million modernization program but the facility s long-term outlook remains in doubt and the Province s long-term commitment to the facility is not assured given the upcoming Provincial election. (3) While PNG is regulated based on a cost-of-service/rate of return methodology, it is uncertain that the Company would be permitted to fully recover the margin loss in the event Methanex permanently shut down its Kitimat facility. Rate increases would adversely impact PNG s competitive position, earnings growth outlook and could impact profitability. In 2002, DBRS placed PNG s BB(high) rating on a Positive trend following the negotiation of a medium-term contract with Methanex, providing increased earnings and cash flow stability over the medium term. The 2003 upgrade of PNG s secured debt rating was based on the following two considerations: (1) a positive development in the regulatory framework governing PNG, that being the approval of PNG s RSAM mechanism; and (2) the negotiation of a new operating line of credit that provided a higher degree of financial flexibility to the Company.

6 Page The Response to BCUC IR states that a change occurred on August 3, 2010 (sic) where PNG s credit rating at BBB (low) has been changed from Negative to Stable. Please provide the press release issued on August 11, Attached is a copy of the August 11, 2009 DBRS press release announcing the change to Stable from Negative. PNG s response to BCUC IR No. 1, question incorrectly referenced the date August 3, The correct date is August 11, 2009.

7 Date of Release: August 11, 2009 DBRS Confirms Pacific Northern Gas, Trend Changed to Stable Industry: Utilities & Independent Power DBRS has today confirmed the Secured Debentures and Cumulative Redeemable Preferred Shares ratings of Pacific Northern Gas Ltd. (PNG or the Company) at BBB (low) and Pfd-3 (low), respectively, and changed the trends to Stable from Negative. DBRS noted in its February 2, 2009, report that resolution of the Negative trend could occur once the British Columbia Utilities Commission (BCUC) decision on 2009 rates was rendered, with a favourable decision likely to result in a change in trend to Stable. The trend has been changed based on our review of the BCUC decision and PNG s second quarter financial results, as well as our expectation that PNG will maintain a capital structure similar to its current profile. The recently negotiated settlement for PNG-West s 2009 rates (as approved by the BCUC) included a rate increase that incorporates the impact of the end of the Methanex termination payment amortization in October While the rate increase only reflects two months of the year (November and December), the trend change incorporates the assumption that 2010 rates will be increased to substantially account for the remaining impact of the end of the Methanex termination payment amortization. The Company s financial profile has remained reasonably stable over the past three years, with key metrics adequate for the ratings and currently at: debt-to-capitalization under 50%, cash flow-to-debt of 11%, and EBIT interest coverage of 2.4 times. While these levels are generally consistent with those seen among higher-rated utilities in Canada, PNG s rating remains low-investment grade due to its higher level of business risk, largely attributable to a challenging service territory. DBRS expects PNG to continue to manage its dividend policy and modest share repurchase program in a way that preserves its financial and credit profiles. While PNG s Western service area remains a challenge due largely to the struggling forestry sector weakness in the area has been somewhat offset by the Northeast service area, which has benefited from strong activity in the oil and gas sector. PNG continues to develop the Kitimat to Summit Lake project (KSL) to loop its mainline pipeline through its 50% interest in Pacific Trail Pipelines Limited Partnership (PTP). PTP would provide up to 1 bcf/day of gas transportation services, primarily for Kitimat LNG Inc. s proposed liquefied natural gas export terminal. If KSL proceeds, it would be a transformational transaction for PNG given its significant size and cost ($1.2 billion total based on 2006 estimates). As no commercial Copyright 2009, DBRS Limited and DBRS, Inc. (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources believed by DBRS to be accurate and reliable. DBRS does not perform any audit and does not independently verify the accuracy of the information provided to it. DBRS ratings, reports and any other information provided by DBRS are provided "as is" and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its

8 arrangements have been finalized and the project is not yet a certainty, the implications for PNG s credit rating of undertaking KSL would be evaluated when and if it were to proceed. Notes: All figures are in Canadian dollars unless otherwise noted. The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies. This is a Corporate rating. Issuer Debt Rated Rating Action Rating Trend Latest Event Pacific Northern Gas Ltd. Secured Debentures Trend Change BBB (low) Stb Aug 11, 2009 Pacific Northern Gas Ltd. Cumulative Redeemable Preferred Shares Trend Change Pfd-3 (low) Stb Aug 11, 2009 For more information on this credit or on this industry, visit or contact us at info@dbrs.com. Michael J. Caranci Managing Director - Energy mcaranci@dbrs.com Darryl Brown Senior Financial Analyst dbrown@dbrs.com website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS.

9 Page In PNG s February 2010 Presentation page 4 (attached to Response to BCUC IR 11.3), PNG referenced Regulated assets represent safe haven. Does this indicate a low business risk level? On a relative basis, PNG s regulated assets have a lower business risk than many alternatives for investors, particularly investments that are exposed, for example, to commodity risks or significant development risks. It is generally considered by the market that investments in utilities are defensive, meaning that they are not expected to face significant downside volatility and are expected to continue to pay dividends, but do not provide investors with large upside return potential. In PNG s particular circumstances, the representation that our regulated assets represent a safe haven is indicative of PNG s view that the returns from these assets are not heavily exposed to significant further downside risks. In other words, future consolidated returns on common equity should not, on average, be materially lower than the sub 7.5% experienced in recent years. The rationale for this perspective is explained in the referenced presentation and include: (1) absent material changes in business risk, PNG should not have to further reduce its debt leverage to enhance its financial profile; (2) the increase in PNG s rates to recover the last of lost margin from the Methanex contract termination will not make PNG uncompetitive with electricity for space heating, particularly if gas commodity rates do not materially increase from current levels. In other words, the existing regulated assets should not be faced with large downside risks and may, in fact, hold some upside if PNG s CAP/ROE Application is approved such that PNG s shareholders are provided an opportunity to earn a fair and reasonable return on PNG s investment and/or the option held by MLCI is exercised.

10 Page In PNG s February 2010 Presentation page 4 (attached to Response to BCUC IR 11.3), PNG referenced Positive EPS growth, 40 percent dividend growth, and 65 percent payout ratio. Does this indicate a high level of financial capacity that can support a higher debt percentage? In part, PNG believes that the higher benchmark ROE, which was a major component of the positive EPS growth in 2009, does indicate a higher level of financial capacity that could support a higher debt percentage. On the other hand, the dividend growth, while partially driven by higher EPS, is more directly related to the factors outlined in the response to question 3.5 above, that being PNG should no longer have to reduce its debt levels to enhance its financial profile. It is clear that PNG s CAP/ROE Application takes into account PNG s view that it will be able to support a higher debt percentage with its improved financial profile. As per the response to BCUC IR No. 1, question 36.1, PNG s requested approval is for debt leverage on a consolidated basis using DBRS s methodology of 51.6% while its actual debt leverage at December 31, 2009 was only 46.7%. In other words, PNG is of the view that it should be able to support a debt percentage almost 5% higher than its current actual level. 3.7 In PNG s February 2010 Presentation page 18 (attached to Response to BCUC IR 11.3), PNG discussed new business opportunities in clean energy generation in BC and mentioned a target of 70:30 debt to capital ratio. Is it PNG s position that this is a reasonable capital structure? Please explain your answer in the context of what PNG is applying for in this Application. The target capital structure of 70:30 was specific to operating hydropower generation projects. These projects typically have long-term off-take contracts with a highly rated counterparty (i.e. BC Hydro), relatively stable and predictable cash flows and a debt structure which allows for debt leverage in the range noted. It is unrelated to what PNG submits is the appropriate capital structure for each of PNG s regulated utility divisions as set forth in its CAP/ROE Application.

11 Page PNG describes the unattractiveness of raising debt for PNG relative to other more highly rated utilities. Please comment: (a) if PNG debt servicing cost is less costly than raising equity; and (b) the amount for dividends (common share and preferred share) per share and total, paid annually to shareholders between 1995 and (a) Whether it be PNG or other highly rated utilities, debt would be less costly than equity. The key consideration, however, is that if PNG s debt rating is downgraded below investment grade, both the cost of debt and the cost of equity will increase with the overall result being a higher cost of capital. In particular, increased leverage for PNG that leads to a debt rating downgrade will cause an increase in the cost of capital. (b) See the table below for annual dividends from 1995 through Annual Dividends Paid by PNG ($000s unless otherwise indicated) Common Share Dividend ($/share) Aggregate Common Share Dividends Paid Preferred Share Dividend ($/share) Aggregate Preferred Share Dividends Paid , , , , , , , , , , , , ,

12 Page Reference: Response to BCUC IR No. 1 Exhibit B 2 BCUC IR Attachment pp. 10, 15, 22 Capital Structure For many years the Company has maintained higher actual common equity than the Commission has allowed for rate making purposes in order to maintain a reasonable minimum level of financial integrity. 4.1 Given the data provided in the Actual Common Equity column on pages 42 and 43, does the statement in the Management Discussion and Analysis (MD&A) report apply to the FSJ/DC and TR divisions? The statement in the MD&A is a reference to PNG s consolidated common equity position relative to the consolidated common equity approved by the Commission for rate making purposes. This is the only measure that is relevant when addressing the financial integrity of the Company. While PNG has largely maintained common equity levels in Pacific Northern Gas (N.E.) Ltd. ( PNG(N.E.) ) to be about equal to the amounts approved by the Commission for FSJ/DC and TR, the debt and equity markets are only concerned with the financial integrity of the consolidated entity. All of PNG(N.E.) s debt is either provided by PNG or borrowed jointly with PNG and PNG(N.E.) guarantees for all of PNG s debt. If PNG had maintained much higher common equity in PNG(N.E.), which it could easily have done with book entries, it would have had no impact on the statement made in the MD&A. 4.2 On February 2, 2010 PNG has amended its revolving term facility to increase the amount of long term debt available under the facility to $35 million from $20 million and extend its maturity date to January 30, Please comment if this revolving term facility could change PNG s Response to BCUC IR 9.1. The response to BCUC IR No. 1 question 9.1 simply addresses how PNG maintains a higher common equity ratio than approved by the Commission. Having the revolving term facility available does not change the response to that question. As submitted by PNG in its CAP/ROE Application, PNG would have the debt available under its facilities that would allow it to increase its leverage to the level approved by the Commission. PNG has not taken this action to date as DBRS has strongly indicated that this would result in a downgrade of PNG s debt as a result of the significantly weakened financial position of the Company. PNG has provided evidence on many occasions explaining why a weakened financial position is not appropriate and is not consistent with the Utilities Commission Act.

13 Page Page 22 of the MD&A references facilities the short term operating line is subject to borrowing base requirements and a financial covenant requiring the Company s debt leverage not to exceed 65 percent, or approximately the same level currently approved by the Commission. Page 23 references the long term debt facility containing a financial covenant requiring the Company s debt leverage not to exceed 65 percent and, if the Company s secured debt rating is less than BBB (low) or the Company has no debt rating, the Company must maintain an interest coverage of 2.0 times or higher using earnings before interest, income taxes and expenditures on the KSL Project to a maximum of $10 million. What would the PNG financial metrics be if the short and/or long term debt were increased such that the total debt was 60 percent? In order to respond to this question, PNG utilized its 2010 financial model and assumed that it paid a special common dividend of $23.5 million, funded by draws on its revolving term facility and its operating line, in order to achieve the 60 percent debt leverage. Five sensitivities were considered in evaluating the impact on PNG s EBIT-to-interest coverage ratio, calculated per the terms of its 5-year revolving term facility covenant. In all cases, the benchmark ROE and current risk premiums for each of PNG s divisions were used and it was also assumed that interest rate changes were used to determine the delivery rates applicable to PNG s and PNG(N.E.) s customers. Sensitivity Scenarios: 1. (a) Interest rates at current 2010 forecast levels; Bankers Acceptances of just under 1% and prime at about 2.5% (b) No debt rating downgrade so no increase in borrowing margins on PNG s operating line or 5-year revolving term facility 2. (a) Interest rates at current 2010 forecast levels; Bankers Acceptances of just under 1% and prime at about 2.5% (b) A debt rating downgrade to BB(high) such that the borrowing margins on PNG s revolving term facility and operating line increase by 25 bp along with a 15 bp increase in stand-by fees 3. (a) Interest rates at current 2010 forecast levels; Bankers Acceptances of just under 1% and prime at about 2.5% (b) A debt rating downgrade to BB or lower such that the borrowing margins on PNG s revolving term facility and operating line increase by 75 bp along with a 25 bp increase in stand-by fees

14 Page (a) A debt rating of BB or lower with borrowing margin and stand-by fee impacts per sensitivity 3 above (b) Interest rates higher by 100 bp over current 2010 forecast levels; Bankers Acceptances of just under 2% and prime at about 3.5% 5. (a) A debt rating of BB or lower with borrowing margin and stand-by fee impacts per sensitivity 3 above (b) Interest rates higher by 200 bp over current 2010 forecast levels; Bankers Acceptances of just under 3% and prime at about 4.5% EBIT-to-interest coverage results for sensitivity scenarios 1 to 5: Sensitivity Scenarios EBIT-tointerest ratio PNG notes that with the increased debt leverage, a combination of a downgrade to BB or lower, which is likely, based on the feedback from DBRS, and a 2% increase in underlying short-term interest rates, would cause a default under PNG s 5-year revolving term facility even if the full extent of the interest rate and borrowing margin increases were passed along in rates.

15 Page Page 10 of the MD&A references an approved program under which the Company was permitted to purchase up to 300,000 of its own common shares through March 8, Please provide the total number of common shares purchased and cancelled, and comment on how this has changed the capitalization of PNG. What number of shares would need to be purchased to reduce the common equity to 40 percent, and what would the cost be? PNG purchased and cancelled 122,416 common shares under its Normal Course Issuer Bid ( NCIB ) at a cost of $1.806 million, with the purchases all occurring in This reduced the balance of PNG s common equity to $ million at the end of 2009 from what would have been approximately $87.26 million had the NCIB not been undertaken. As noted in response to BCUC IR No. 1, question 9.2, PNG s actual common equity capitalization at December 31, 2009 was 51.3%. Had the NCIB not been undertaken, PNG s common equity capitalization would have been approximately 52.3%. To reduce PNG s common equity capitalization to 40%, it would cost PNG approximately $18.75 million. Given that share purchases under an NCIB occur at market prices, PNG is unable to accurately estimate either the unit cost of such shares or the number of shares which would be required to be purchased. If it is assumed that the purchases could all be made at $23.00 or about the current share price, it would require the purchase of 815,000 shares which would take about three years to acquire based on the maximum number of shares the securities regulators would allow PNG to purchase in a one-year program. 5.0 Reference: Response to BCUC IR No. 1 Exhibit B 2 BCUC IR 8.3; BCUC IR 31.3 Effective Return for PNG West, FSJ/DC and TR The majority of US utilities rated BBB by S&P have 2008 common equity ratio averaging 43.2 percent. Moreover, the majority of US utilities rated by S&P fall into the BBB category. 5.1 Please add three supplementary rows to the table in Response to BCUC IR 8.3 to reflect the effective return for all three divisions of PNG should they receive the risk premiums and equity ratios applied for in this Application. The table from response to BCUC IR No. 1, Question 8.3 is reproduced below along with the requested supplementary rows.

16 Page 14 Table from response to BCUC IR No. 1, Question 8.3 with three rows added to show the return on equity, common equity thickness and effective returns as applied for under the CAP/ROE Application for all three divisions of PNG. Relative to: Currently Approved Allowed ROE Equity Component Effective Return PNG-West 10.15% 40.00% 4.06% PNG Tumbler Ridge 10.15% 36.00% 3.65% PNG Dawson Creek/Fort St. John 9.90% 36.00% 3.56% As Applied for PNG-West 10.25% 47.50% 4.87% PNG Tumbler Ridge 10.25% 42.50% 4.36% PNG Dawson Creek/Fort St. John 10.25% 42.50% 4.36% PNG-West Tumbler Ridge Fort St. John/ Dawson Crk Year Set ROE/CEQ AltaGas Utilities 9.00% 43.00% 3.87% -0.19% 0.22% 0.31% 2009/2009 ATCO Electric Dist. 9.00% 39.00% 3.51% -0.55% -0.14% -0.05% 2009/2009 ATCO Gas 9.00% 39.00% 3.51% -0.55% -0.14% -0.05% 2009/2009 Enbridge Gas 1/ 8.39% 36.00% 3.02% -1.04% -0.63% -0.54% 2007/2007 FortisAlberta 9.00% 41.00% 3.69% -0.37% 0.04% 0.13% 2009/2009 FortisBC 9.90% 40.00% 3.96% -0.10% 0.31% 0.40% 2009/2005 Maritime Electric 9.75% 40.50% 3.95% -0.11% 0.29% 0.38% 2009/2009 Newfoundland Power 9.00% 44.74% 4.03% -0.03% 0.37% 0.46% 2009/2009 Nova Scotia Power 9.35% 37.50% 3.51% -0.55% -0.15% -0.06% 2008/2006 Ontario Electricity Distributors 9.85% 40.00% 3.94% -0.12% 0.29% 0.38% 2010/2009 Terasen Gas 9.50% 40.00% 3.80% -0.26% 0.15% 0.24% 2009/2009 TGVI 10.00% 40.00% 4.00% -0.06% 0.35% 0.44% 2009/2006 2/ TGW 10.00% 40.00% 4.00% -0.06% 0.35% 0.44% 2009/2009 2/ Union Gas 1/ 8.54% 36.00% 3.07% -0.99% -0.58% -0.49% 2007/2006 1/ ROE underlying base rates unchanged during 5 year term of Incentive Rate Mechanism; ROE should be established according to revised Board cost of capital policy at end of IRM term. 2/ In G , TGVI and TGW were directed to file in their next revenue requirements application the equity ratio that best reflects the long-term business risks. Note: Based on last approved equity risk premiums (40bp PNG-DC/FSJ and 65bp PNG-West and PNG-TR) and capital structures for PNG and revised benchmark ROE effective July 1, 2009 (9.5%).

17 Page Please comment on the effective returns obtained above relative to the US utilities rated BBB by S&P and relative to the other regulated utilities in Canada. The indicated effective returns for the PNG utilities are higher than the effective returns for the Canadian utilities included in the table in response to question 5.1 above. The higher effective returns arise from various factors, including: (1) the higher business risk of the PNG utilities relative to utilities included in the table; (2) the higher benchmark ROE established by the BCUC relative to some other jurisdictions (e.g., Alberta) and (3) the fact that some utilities in the table are governed by decisions that pre-date recent cost of capital decisions by their regulators (e.g., Enbridge and Union). With respect to U.S. utilities, Ms. McShane has not compiled a data base specific to BBB rated utilities. The table below summarizes the effective returns for gas distributor and electric utilities generally adopted between 2008 and mid-march Gas distributors and pure wires electric distributors tend to be rated in the A category, while electric utilities with generating capacity tend to be rated in the BBB category. The effective returns on average for both the gas and electric utilities are higher than those which the PNG utilities are proposing. Relative to Allowed Return Equity Component Effective Return PNG- West Tumbler Ridge Fort St. John/ Dawson Crk PNG-West 10.25% 47.50% 4.87% PNG Tumbler Ridge 10.25% 42.50% 4.36% PNG Dawson Creek/Fort St. John 10.25% 42.50% 4.36% U.S. Gas Distributors % 50.47% 5.23% 0.36% 0.88% 0.88% U.S. Gas Distributors % 48.72% 4.96% 0.10% 0.61% 0.61% U.S. Gas Distributors % 53.17% 5.42% 0.55% 1.06% 1.06% U.S. Electrics % 48.41% 5.06% 0.19% 0.71% 0.71% U.S. Electrics % 48.61% 5.09% 0.23% 0.74% 0.74% U.S. Electrics % 48.49% 5.08% 0.21% 0.72% 0.72%

18 Page Reference: Response to BCUC IR No. 1 Exhibit B 2 BCUC IR 33.1 Regulated Utilities in Canada & US and Debt Credit Rating In its Response, PNG quoted the DBRS February 2010 report which says: Therefore, recent increases in approved ROE levels or equity thickness should not, in themselves, result in positive rating actions unless the improvement is significant enough to be viewed as a material reduction in financial risk. 6.1 Does PNG agree with DBRS that ROE levels and equity thickness, in themselves, do not secure changes to debt ratings? Yes. It is PNG s view that appropriate ROE levels and equity thickness are necessary conditions to positive rating actions, all else being equal, but may not be sufficient to achieve a positive rating action. 6.2 In Response to BCUC IR 26.1, PNG believes that because of its current relatively small size, it is likely that its rating would remain in the BBB category. Does PNG also believe that because it is a regulated utility, it will not have a rating lower the BBB, since according to Response to BCUC IR 12.1, no utility in the US or Canada is rated below BBB? The response to BCUC IR No. 1, question 12.1 notes that there are several regulated utilities in the U.S. whose unsecured senior debt is rated below BBB- and that PNG s senior secured debt was rated below BBB- for several years. Therefore, it is clear that being a regulated utility does not, de facto, guarantee a BBB- or higher debt rating.

19 Page Reference: Response to BCUC IR No. 1 Exhibit B 2 BCUC IR 17.4 Impact on Rates of Foregone Return on Deactivated Facilities 7.1 The table in the response on page 33 shows a credit of $1,151k or 14.1 percent of the deficiency, which reduced the ratepayer costs by 2.2 percent. What is the impact if there are zero dollars applied as foregone return and 100 percent of the funds in the Option Fees Deferral Account are credited to the cost of service? The table from response to BCUC IR No. 1, question 17.4 is reproduced below showing the figures that result if all of the option fees are amortized as a credit to the 2010 cost of service. Updated 2010 Rev. Req. Application All Option Fees Credited to Updated 2010 Rev. Req. App. Difference Rev. Deficiencies ($000's) $ 8,140 $ 5,852 $ (2,288) -28.1% Residential Rate ($/GJ) (0.87) -4.4% Annual Bill ($) $ 1,426 $ 1,363 $ (63) -4.4% Small Commercial Rate ($/GJ) (0.70) -4.1% Annual Bill ($) $ 5,420 $ 5,188 $ (232) -4.3%

20 Page Reference: PNG 2010 RR NSP Settlement Order G 33 10, Appendix A Impact on PNG 2009 CAP/ROE Application process Confirmed. Regulatory Process The parties agreed to negotiate an interim settlement of all the cost of service matters under the RR Application that can be addressed in the absence of having a final decision on the issues set forth in the CAP/ROE Application. [Ref: G 33 10, Appendix A, p. 2] 8.1 Please confirm the disposition of the Merrill Lynch option fees deferral account is one of the issues set forth to be decided in the CAP/ROE Application process. Assuming a settlement is negotiated in respect of the CAP/ROE Application, PNG would update its regulatory schedules to reflect both the terms set forth in the interim NSP 2010 revenue requirements settlement agreement and those agreed to under the CAP/ROE Application NSP process. The parties would then meet to ensure there is agreement on the resulting rates for 2010 having regard to the terms agreed to through both NSP processes. If required, the parties would discuss at this meeting the level of deferred income taxes draw down in 2010 and the disposition of the Merrill Lynch option fees deferral account. [Ref: Ibid, p. 3] 8.2 Assuming a settlement is negotiated in respect of the PNG 2009 CAP/ROE Application, what would be required for the parties to discuss in the second phase of the PNG 2010 RR NSP with respect to the disposition of the Merrill Lynch option fees deferral account? Assuming the PNG 2009 CAP/ROE Application is determined by other than a NSP, what would be required for the parties to discuss in the second phase of the PNG 2010 RR NSP with respect to the disposition of the Merrill Lynch option fees deferral account? Assuming a settlement of the CAP/ROE Application is reached, it is anticipated the settlement would also set out the parties agreement on the disposition of the Merrill Lynch option fees deferral account. In this event, this matter would not be addressed in the final rate setting phase of the negotiated settlement process since it will have already been agreed to under the CAP/ROE Application negotiated settlement process. With regard to the second question, if there is no negotiated settlement of the CAP/ROE Application, then a written argument process will apply and the Commission will render a decision on the disposition of the Merrill Lynch option fees deferral account following its review of the written arguments.

21 Page Merrill Lynch Commodities, Inc. ("MLCI") Option Fee Legal Fees The issue of the recovery by PNG of legal fees from the MLCI option fees deferral account will be dealt with under the CAP/ROE Application review process. [Ref: Ibid, p. 12] 8.3 As the issue of the Maverick MLCI related legal fees is not part of the PNG 2009 CAP/ROE Application or amendments thereto, please expand on PNG s view of what will occur during a potential NSP for the PNG 2009 CAP/ROE Application. The statement in this question that the issue of recovery of the Maverick-MLCI legal fees from the option fees deferral account is not part of the PNG 2009 CAP/ROE Application or amendments thereto is not correct. The issue of the disposition of the Merrill Lynch option fees deferral account is included in the CAP/ROE Application. The recovery of the legal fees is directly related to the disposition issue as it pertains to what balance in the option fees deferral account will be available for disposition. The parties specifically agreed under the 2010 revenue requirements application negotiated settlement agreement that The issue of the recovery by PNG of legal fees from the MLCI option fees deferral account will be dealt with under the CAP/ROE Application review process. This review process currently contemplates a negotiated settlement process being conducted on April 8/9, The parties will discuss at the CAP/ROE Application negotiated settlement meetings the issue of the recovery of the legal fees, accordingly. 8.4 In the response to IR 17.4, PNG references reducing the MLCI option fees deferral account by the $80,000. Please explain what assumptions PNG has made to allow this treatment of the option fees deferral account. PNG addressed this matter in a response provided to the BCUC s IR No. 1 under the 2010 PNG-West 2010 revenue requirements application. In particular, see PNG s response to BCUC IR No. 1, question For ease of reference the response is reproduced below. PNG considers it is appropriate and practical for the Commission to determine in the context of the 2010 revenue requirements application whether the unbudgeted legal fees related to the Merrill Lynch and Maverick/LNG Partners matter can be recovered by PNG from the option fee paid by Merrill Lynch to PNG. The issue to be addressed under the CAP/ROE Application is completely unrelated to the issue of recovering legal fees. The CAP/ROE Application is dealing with whether PNG can recover out of the option fee payment the foregone return due to the Methanex closure. This is a distinct issue that could not be settled by negotiation in the context of the 2009 revenue requirements application and therefore PNG included the matter in the CAP/ROE Application in which PNG also recommended that the Commission conduct a public hearing. Should the parties be unable to negotiate a settlement of the request made by PNG in the

22 Page revenue requirements application to recover its legal costs from the option fee it is likely PNG would suggest the matter be dealt with by the Commission in the context of its review of the CAP/ROE Application Merrill Lynch Commodities, Inc. ("MLCI") Option Fee Imputed interest The issue of applying the principal balance of the MLCI option fees as a credit to the 2010 cost of service will be addressed under the CAP/ROE Application review process. [Ref: Ibid, p. 13] 8.5 The PNG 2010 RR Negotiated Settlement Agreement appears to be clear on the issue of the MLCI option fees deferral account will be decided in the CAP/ROE Application review process. Please expand on PNG s view of what will occur with respect to this issue during a potential NSP for the PNG 2009 CAP/ROE Application. PNG expects the issue will be debated under the CAP/ROE Application negotiated settlement process in the ordinary course. It is premature and inappropriate to speculate on what view PNG will take at the negotiated settlement discussions with respect to this issue Level of Draw Down of Deferred Income Taxes The issue of the level of the deferred income taxes draw down in 2010 will be discussed in the context of the CAP/ROE Application process and as may be required following the Commission's disposition of the CAP/ROE Application. [Ref: Ibid, p. 15] 8.6 As the issue of the draw down of deferred income taxes is not part of the PNG 2009 CAP/ROE Application or amendments thereto, please expand on PNG s view of what will occur during a potential NSP for the PNG 2009 CAP/ROE Application. The issue of the level of deferred income taxes draw down is usually dealt with under the revenue requirements application. The parties agreed under the 2010 revenue requirements application negotiated settlement agreement to address this issue in the context of the CAP/ROE Application negotiated settlement process. As noted in response 8.5 above, it is premature and inappropriate to discuss the view PNG may take on this issue pending commencement of the CAP/ROE Application settlement process.