Gaz Métro Limited Partnership. Performance Incentive Mechanism Analysts Presentation Toronto, May 22, 2007

Transcription

1 Gaz Métro Limited Partnership Performance Incentive Mechanism Analysts Presentation Toronto, May 22, 2007

2 Today s Agenda I. Introduction II. III. IV. Features Scenarios Analyses Conclusion and Q&A V. Lunch & Discussions 2

3 Introduction

4 Renegotiation Process October 2000 Implementation of the first version of the incentive mechanism October 2004 Slight amendement to the 2000 version of the incentive mechanism Essentially the sharing of productivity gains and the X factor March 2006 The Régie approved the initiation of an evaluation of the mechanism May & June 2006 Oct 2006 to Jan Feb. & March 2007 April 2007 Evaluation of the incentive mechanism presented to the Régie The Régie approved the renegociation between Gaz Métro and the intervenors Negociations were held between Gaz Métro and its intervenors Initial unanimous agreement submitted to the Régie on Jan 12 Hearing Amendements requested by the Régie Revised agreement submitted to the Régie On April 26, 2007, the Régie approved the revised incentive mechanism 4

5 Why Revisiting the Mechanism? 1 Gaz Metro s business reality has evolved since performance mechanism first introduced 2 Sales volumes are more volatile 3 Per customer volumes trend down Philosophy underlying a performance mechanism needed to be reinforced: Provide Gaz Métro with an incentive to do better 5

6 Quick Recap of Gaz Métro Incentive Mechanism PBR Mechanism Hybrid between Price Cap (P) P = Rates inflated by CPI less productivity factor of 0.5% Cost of Service (C) Base rate of return on partners' equity determined by automatic formula Revenue Cap (R) Traditional Cost of Service Productivity gains 6

7 Features

8 Revenue Cap Formula Previous Revenue Cap Formula R = ((r-g t-5 )* (1+i - 0.5%)) * forecasted volumes ± z r = gas distribution rates from the year before g t-5 = productivity gains from 5 years before i = inflation rate z = exclusions and exogenous factors New Revenue Cap Formula R = ((r-g) * (1+i - 0.3%)) * forecasted volumes ± z r = gas distribution rates from the year before g= moving average of previous 5 years prod. gains i = inflation rate z = exclusions and exogenous factors 8

9 Cost of Service Calculation Previous Cost of Service Calculation Cost of Service = Operating Expenses + Amortization of PP&E and Deferral Accounts + Property & Other Taxes + Deemed Income Taxes + T&LB Expenses + Other Income + Authorized Return on Rate Base Cost of Service = NO CHANGE Although the calculation hasn t changed, Gaz Métro filed, in its 2008 rate case, a revised ROE formula which has to be approved by the Régie for application on October 1 st,

10 Distribution Revenue Cap Features Application What is different? Productivity Gains Previous productivity gains Will be included in the revenue cap based on the moving average for the previous 5 years The difference between the productivity gain for year t-5 and the moving average will be amortized over 5 years see example on next page Productivity gains were to be included in the Revenue Cap after 5 years Will reduce the volatility of the results X Factor X Factor ensures that Revenue Cap will generate a fair and reasonable return Prebuilt savings. Assume Gaz Métro can do better than inflation by 0.3% on an annual basis Reduced to 0.3% from 0.5% The new exogenous factor introduced to neutralize the effect of variation in volumes is not applied to industrial customers 10

11 Simulation of Return of Productivity Gains Rate Years Gains realized $13.7M $0.4M $7.7M $26.5M $35.7M $7.4M $16.8M Gains to be incorporated --- ($13.3M) (1) $7.3M $18.8M $9.2M ($14.6M) ($3.8M) 5-year moving average $3.4M A To be returned Old Mechanism $7.3M B To be returned New Mechanism (A+(B-A)/5) $4.2M (1) Incorporated in 2007 rates 11

12 Distribution Revenue Cap (cont d) Features Impact of weather Application Included in a deferral account Remunerated at the WACC Amortized over 5 years What is different? Mechanism already built to include wind normalization Exogenous Factors Impact of interest rates on cost of capital Changes in income and capital taxes rates Volume changes in excess of threshold Included in a deferral account Remunerated at the WACC Amortized over 5 years Difference in rates compared to the previous year Relates only to Small and Medium Load customers Covers 90% of the variation of normalized volumes, less 0.86% see example on next page Nothing New New Will allow Gaz Métro to be partially neutralized from lower consumption due to efficiency measures and energy conservation Gaz Métro decided to postpone the inclusion of the wind factor to allow a more in-depth analysis of the cross-effect with weather 12

13 Calculation Scenarios of Volume Variation Exogenous Factor Scenarios % variation in volume Volume variation not neutralized Remaining Volume Variation Gaz Métro responsibility (10%) Volume decrease Volume flat Volume increase (5%) 0% +5% +0.86% +0.86% +0.86% (4.14%) 0.86% +5.86% (0.41%) +0.09% +0.59% Exogenous Factor (1) +3.73% (0.77%) (5.27%) (1) Exogenous factor will be converted into revenues (losses or gains) based on tariff levels 13

14 Other considerations The performance incentive mechanism includes 3 items related to energy effiency Adjustment Mechanism to GEEP GEEP Performance Incentive The Global Energy Efficiency Plan is an existing program Costs associated with the GEEP is excluded from the performance incentive mechanism The budget will be treated as an exclusion with any variance from budget approved by the Régie before inclusion in a deferral account Introduction of a GEEP performance incentive Target reward of $4M per year Intended to compensate the disincentives arising from the Exogenous factor for volume variations that does not fully neutralize them To receive full incentive, objective is 24 million cubic meters on an annualized basis Objective is cumulative over a 5-year period If the objective is only partially achieved, incentive is prorated Energy Efficiency Fund (EEF) Efficiency programs over and above the GEEP Funded by: $1.5M (fixed portion) starting in % of small & medium load customers share in productivity gains and overearnings No amount will be paid into the EEF if fund balance is more than 4 times last budget 14

15 Other considerations (cont d) Gaz Métro s participation in the sharing of the incentive return is subject to the attainment of an overall percentage level in service quality indicators Indicator Application Weight What s New Preventive maintenance % of annual program completed 10% Weight was 20% Emergency response time % of calls answered in 35 min or less 20% Telephone response time Weighted average of % achieved within the objective of each class 10% Meter reading frequency Weighted average of % achieved within the 10% objective of each class ISO Maintain ISO registration or equivalent 10% Greenhouse gas emissions % achievement of annual greenhouse gas emissions reduction objective 10% Indicator redefined Customer Satisfaction D 1, D 3, D m customer Customer Satisfaction D 4 and D 5 customer % of satisfied customers based on survey 15% % of satisfied customers based on survey 5% Were blended together at 15% Collection & service interruption procedure # of service interruptions for failure to pay which contervene service interruption procedure 10% Weight was 5% The total % attained on those service quality indicators will be applied to the overall incentive (productivity gains and overearnings) ) to be paid to Gaz Métro at year end 15

16 Other considerations (cont d) Application to 2008 Rates In 2008, an adjustment to the Revenue Cap was approved by the Régie for the 2007 fiscal year Agreed adjustment was established by applying the revised performance incentive mechanism restrospectively over the 2001 to 2007 years to take into consideration the decrease in volume due to energy efficiency The Revenue Cap will be increased by the lesser of: 3.133% (1) or $14.6M or The percentage that would result in the average distribution rate increase not exceeding 4.2% Adjustment will be incorporated in whole or in part in 2008 Any residual will be incorporated in 2009 (1) Calculated as: ((Implied 2008 Revenue Cap 2007 Revenue Cap) productivity gains corresponding to the incentive return) / 2007 Revenue Cap 16

17 Sharing of Productivity Gains / Shortfalls - Distribution 1 Gaz Metro s share of productivity gains depends on whether the sharing occurs at the rate application or the year-end end review Phase Rate Application Year-end Review (overearnings) Note Sharing of gains Gaz Métro s maximum share Customers minimum share 50% 25% Up to a max incentive of 375 bps annually 50% 75% Plus excess over 375 bps incentive 2 Gaz Métro s share of losses depends on whether they are observed at the rate application or the year-end end review Phase Gaz Métro s share Sharing of losses Customers share Rate Application 0% 100% Year-end Review 50% 50% At rate application, shortfalls are fully recovered in rates Sharing process is the same as it was before, except for the transmission and load balancing gains / shortfalls as shown on next page 17

18 Sharing of Transmission and Load Balancing Overearnings / Shortfalls Specific revenue calculations for transmission and load balancing Operating Transactions Definition Selling transmission and load balancing tools (mainly storage & transmission) not required to meet forecast demand in the plan approved by the Régie Overearnings/ / Shortfalls Sharing Mechanism At rate application, revenue likely to be earned is projected at an average price At year-end review, the difference between the actual price earned and projected price multiplied by the lesser of forecast or actual volume will be kept (absorbed) at 25% by Gaz Métro disregard of the attainement of base return, incentive or overearnings Remainder of the difference treated like any other revenue Financial Transactions Transactions involving transmission and load balancing tools with no net impact on total quantity available on an annual basis At rate application, revenue likely to be earned is projected If realized revenues are lower than projected, difference will be included in a deferral account and fully recovered from customers If realized revenues are higher than projected, difference will be shared 25% / 75% by Gaz Métro and customers disregard the attainement of base return, incentive or overearnings Previously, all operating revenues and costs were included in the overearnings / shortfalls 18

19 Term, Evaluation and Renewal Details surrounding the agreement Term 5 years October 1, 2007 to September 30, 2012 Overall evaluation of the mechanism could be undertaken with the intervenors after the application Evaluation Evaluation based on a grid prepared by Gaz Métro See details on page 39 and 40 of Performance Incentive Mechanism Agreement Renewal Renegotiation to be done by a Task Force similar to the one responsible for the current agreement, unless the Régie decides otherwise If no agreement to renew takes place before the end of the term, the present mechanism will terminate 19

20 Scenarios Analyses

21 Scenarios Analyses Scenarios (1) No Productivity Gains + Shortfall Productivity Gains partially achieved Productivity Gains + Overearnings Beginning of the year (Rate Case) Productivity Gains --- $10M $10M Customers Large (2) --- $0.75M $0.75M Small & Medium Rate (Inc.)/Dec. ($1.5M) $1.69M $1.69M EEF +$1.5M $2.56M $2.56M Gaz Métro --- $5M $5M End of year Achieved Incentive --- $7M $10M Overearnings / (Shortfall) ($10M) --- $10M Customers Large Small & Medium ($0.75M) $0.75M $1.88M Rate (Inc.)/Dec. ($4.25M) $1.69M $6.47M EEF --- $2.56M $4.16M Gaz Métro ($5M) $2M $7.5M Total Share Customers ($5M) $5M $12.5M Gaz Métro ($5M) $2M $7.5M (1) Scenarios are detailed on the next page (2) Split between large and Small & Medium is an assumption based on past experience 21

22 Scenarios Analyses (cont d) No Productivity Gains + Shortfalls at year-end end Gaz Métro shows no productivity gains or excess in the rate application and experiences a shortfall. In the rate application, $1.5M is paid into the EEF and the shortfall is shared 50% by customers and 50% by Gaz Métro. The customers share of $5M is included in a deferral account and incorporated into rates the following year. Gaz Métro then has a debt of $5M to be offset by future gains. If the offset has not been made when the mechanism expires, the debt is cancelled. Productivity Gains Partially achieved at year-end end Gaz Métro shows productivity gains in the rate application and partially achieves its authorised rate of return (including incentive). Productivity gains of $10M are shared 50% by customers and 50% by Gaz Métro. Of the customers share of $5M, $2.44M ($0.75M LL customers and $1.69M SML customers) is incorporated into rates in the year and $2.56M (including a fixed contribution of $1.5M) is used to fund the EEF. Gaz Métro only achieves an incentive of $2M out of a potential $5M authorised in the rate application. Gaz Métro shows productivity gains in the rate application and achieves overearnings. Productivity Gains + Overearnings at year-end end Productivity Gains of $10M are shared 50% by customers and 50% by Gaz Métro. Of the customers share of $5M, $2.44M ($0.75M LL customers and $1.69M SML customers) is incorporated into rates in the year and $2.56M (including a fixed contribution of $1.5M) is used to fund the EEF. At year-end, overearnings of $10M are shared 75% by customers and 25% by Gaz Métro. Of the customers share of $7.5M, $5.91M ($1.13M LL customers and $4.78M SML customers) is included in a deferral account and incorporated into rates the following year. $1.59M is paid into the EEF 22

23 Conclusion

24 ROE Formula Actual ROE formula is expiring in 2007 Actual formula is based on the Capital Asset Pricing Model (CAPM) largely used for forecasting ROE for regulated and non-regulated firms Actual automatic adjustment formula is based on 30-year long term Canada bonds, with a starting point in 1999 Main advantages of the current formula is its previsibility Disadvantage of the formula is the level of previsibility Steps taken to present the new formula: Hiring of an expert: Dr Stéphane Chrétien from Université Laval Review of risk premium Analyzes current formula with 5 portfolios (3 composed of canadian companies and 2 of US companies) 24

25 ROE Formula (cont d) Conclusion: the CAPM under estimates the ROE for firms with betas under 1 and for value firms (versus growth firms) Proposed formula: the Fama-French model, adding two components to the risk premium (size and value) Proposed automatic adjustment formula is the same as the current one ROE range proposed by Dr Chrétien: 9.93% to 11.44% Fair and reasonnable ROE presented in the 2008 rate case: 10.19% (ROE would have been 8.55% with the current formula) Position have been based on Gaz Métro s business, financial and regulatory risks compared to other firms in the same sector and incentive mechanism in force 25

26 Recap and Conclusion Better adapted to Gaz Métro s actual business environment Incorporated in 2008 Rate Case Expected to be filed at the end of June Hearings to take place end of August Decision expected end of September for application October 1 st,

27 Q&A Q&A Session 27