TEREASEN GAS (VANCOUVER ISLAND) INC. 2003 – 2005 REVENUE REQUIREMENT SETTLEMENT AGREEMENT
2004 ANNUAL REVIEW November 19, 2004
TGI & TGVI 2004 Annual Review – Nov. 19/04
AGENDA REVIEW
TGI & TGVI 2004 Annual Review – Nov. 19/04
AGENDA - TGVI
Agenda Review - TGVI Welcome / Introduction Terasen Gas Report
2004 Activities Challenges for 2005
-
Scott Thomson Bill Grant Randy Jespersen
Approval of 2003 RDDA & 2004 Review 2005 Revenue Requirements and Rate Outlook
Volume and Revenue Forecasts Capital Expenditures Rate Base and Plant Additions O&M Expenses Accounting and Tax Matters Revenue Requirement Results & RDDA Gas Commodity Cost & GCVA Outlook Overall Customer Rate Impacts
2004 TGI Annual Review
November 19, 2004
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AGENDA - TGVI
Supplemental Information to the TGVI 2003-2005 PBR Settlement
Sooke Project SAP Cost Recovery Joint Venture TSA Amending Agreement
Conclusions
2004 TGI Annual Review
November 19, 2004
4
Welcome/Introduction Bill Grant Executive Director, BCUC
TGI & TGVI 2004 Annual Review – Nov. 19/04
Terasen Gas Opening Remarks Randy Jespersen President
TGI & TGVI 2004 Annual Review – Nov. 19/04
Activities for 2004 - TGVI
Integration/Restructuring Implementing our plan & supporting the new organization Resource Planning Focused Business Development LNG Facility CPCN Improve on Customer Attachments Rate, time, cost, flexibility Operational Excellence
2004 TGI Annual Review
November 19, 2004
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Challenges for 2005 - TGVI
Extension of Revenue Requirement Settlement for 2006 & 2007 ROE Application BC Hydro Rate Design Customer Growth Strategy Whistler Rate Design
2004 TGI Annual Review
November 19, 2004
8
2004 Review & Approval of Final 2003 RDDA Balance Tom Loski
TGI & TGVI 2004 Annual Review – Nov. 19/04
2003 RDDA – APPROVAL NEEDED
Summary of Revenue Deficiency Deferral Account Actual vs. Test Year Results ($000’s) Revision Date November 17, 2004 Calculation of RDDA Opening Balance Current Year Def/(Surplus) Preferred Share Financing Subordinated Debt Financing Closing Balance Annual Net Surplus
2004 TGI Annual Review
$
2003 Test Year $90,785 (9,855) 5,343 $86,273 ($4,512)
November 19, 2004
2003 Actual $87,911 (18,344) 3,102 2,619 $75,288 ($12,623)
Variance ($2,874) (8,499) (2,241) 2,619 ($10,995)
10
2004 TOTAL PLANT ADDITIONS
Summary of Plant Additions
($000's)
2004 Projected Transmission - High Pressure Distribution General Plant TOTAL PLANT ADDITIONS $4,982 7,807 4,891 $17,680
2004 TGI Annual Review
November 19, 2004
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2004 UTILITY RATE BASE
Table 5.3 Summary of Mid-Year Rate Base Projected vs. Test Year Results ($000’s) 2004 Test Year $605,268 621,537 613,403 $(110,577) (121,935) (116,256) (104) (67,914) 13,361 $442,490
November 19, 2004
Rate Base GPIS – Opening GPIS – Closing GPIS – Mid-Year Adjusted Accumulated Depreciation – Opening Accumulated Depreciation – Closing Accumulated Depreciation - Mid-Year Allocated Common Plant – Mid-Year Contributions – Mid-Year Working Capital – Mid-Year Total Mid-Year Rate Base
2004 TGI Annual Review
2004 Projected $603,236 624,566 613,943 $(109,685) (122,619) (116,152) (170) (68,105) 14,830 $444,346
Variance $(2,032) 3,029 540 $892 (684) 104 (66) (191) 1,469 $1,856
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2004 SUMMARY OF REVENUE REQUIREMENT
Table 5.1 Summary of Revenue Requirements And Annual Revenue Deficiency/ (Surplus) Projected vs. Test Year Results ($000’s) 2004 Test Year $42,784 27,274 14,397 8,859 10,469 4,323 28,522 395 $137,023 2004 Projected $40,334 27,273 14,312 8,330 10,030 4,297 26,675 595 $131,846
Revenue Requirement Royalty Adjusted Cost of Gas Net OM&A (Adj. for Sooke) Depreciation Municipal and Other Taxes Income Tax Wheeling Charges Return on Rate Base Other Total Revenue Requirement Revenues Sales Revenue Transportation Revenue Other Revenue Total Revenue
2004 TGI Annual Review
Variance ($2,450) (1) (85) (529) (439) (26) (1,847) 200 ($5,177)
$129,036 26,623 343 $156,002
November 19, 2004
$124,070 29,231 355 $153,656
($4,966) 2,608 12 ($2,346)
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2004 RDDA
Summary of Revenue Deficiency Deferral Account Projected vs. Test Year Results ($000’s) Revision Date November 17, 2004 Calculation of RDDA Opening Balance Current Year Def/(Surplus) Subordinated Debt Financing Closing Balance Annual Net Surplus 2004 Test Year $77,901 (17,675) 6,217 $66,443 ($11,458) 2004 Projected $75,288 (21,810) 6,547 $60,025 ($15,263) Variance ($2,613) (4,135) 330 ($6,418)
$
2004 TGI Annual Review
November 19, 2004
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2005 REVENUE REQUIREMENTS & RATE OUTLOOK
TGI & TGVI 2004 Annual Review – Nov. 19/04
2005 Core Sales Volumes and Revenues Hans Mertins
TGI & TGVI 2004 Annual Review – Nov. 19/04
Forecast Summary
Housing starts continue into 2005 Economic recovery continues into 2005 Competitive position for natural gas remains a challenge Expect 2005 to be a continuation of 2004, but with a caution Additions in the residential & commercial sectors, but at a lower rate Use rates will not change significantly
2004 TGI Annual Review
November 19, 2004
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Market Review 2004
3500 customer additions projected for 2004 ~ 2300 new construction & 1200 conversions ~ 95% residential & 5% commercial The year-end projection represents a 24% increase over forecast What caused the increase? Strong increase in new residential construction As of September 30th, 2004, Vancouver Island new construction starts ~ 30% higher than the same period in 2003
2004 TGI Annual Review
November 19, 2004
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Market Review 2005
3100 customer additions forecast for 2005 ~ 1900 new construction & 1200 conversions ~ 95% residential & 5% commercial Represents a decrease of ~ 400 additions Why the decrease? Slight decrease in forecast new starts for CRD Lag in suitably zoned & serviced sites Increased portion of multiple family construction One dwelling unit does not equal one customer
2004 TGI Annual Review
November 19, 2004
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Forecast Risks
An increase in interest rates could begin to slow down new construction Price swings in oil could have a significant impact on the conversion market. Cost-benefit is more critical with commercial customers who are driven predominantly by cost. Stronger Canadian dollar & decreased competitiveness in export markets
2004 TGI Annual Review
November 19, 2004
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2005 Transportation Volumes Tom Loski
TGI & TGVI 2004 Annual Review – Nov. 19/04
2005 OUTLOOK Transportation Volumes
VIGJV Per the terms of the Amending Agreement Firm CD @ 20 TJ per day Peaking Gas @ 10 TJ per day Rates per Agreement – to be discussed later BC Hydro Assumed same as 2004 Firm CD @ 38 Tj per day Peaking Gas @ 28 TJ per day Rates to be discussed later
2004 TGI Annual Review
November 19, 2004
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2005 Capital Expenditures Dwain Bell
TGI & TGVI 2004 Annual Review – Nov. 19/04
Customer Driven Capital 2003 – 2009
:
Year Forecast Customer Additions Customer Driven Capital Dollars
Mains Services Meters
2003 2562
2004E 3,500
2005 3,103
2006 2,899
2007 2,878
2008 2,656
2009 2,507
2003 2.6 3.4 1.1 7.1
2004E 2.5 4.2 1.0 7.8
2005 2.3 3.9 1.1 7.2
2006 2.2 3.7 1.0 7.0
2007 2.3 3.8 1.1 7.1
2008 2.2 3.6 1.0 6.8
2009 2.1 3.5 1.0 6.6
2004 TGI Annual Review
November 19, 2004
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Other Regular Capital 2003 – 2009
Other Regular Capital
System Integrity & Reliability
Transmission Distribution
2003
2004E
2005
2006
2007
2008
2009
4.7 .3 .2 1.5 6.7 13.8
4.9 .2 .2 1.3 6.5 14.3
7.7 .2 .7 1.5 10.1 17.3
3.9 .4 .6 1.1 5.9 12.9
4.8 .4 .6 1.2 7.0 14.1
4.0 .2 .6 1.1 5.9 12.7
3.7 .2 .6 1.1 5.6 12.2
Other Capital
IT Non -IT
Other Regular Capital Total Customer Driven & Other Regular Capital
Stated in Millions of Dollars ($)
2004 TGI Annual Review
November 19, 2004
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Major Capital Projects 2005-2009
Scheduling and Cost Projections
Other Regular Capital
Transmission
Haslam River Drilling Relocate Coquitlam Dam Crossing Englishman River Directional Drilling Population Encroachment & Pipe Replacement Compressor Unit Upgrades/Purchases Secondary Containment
2005 1.0 1.0 1.0 2.8 1.0
2006
2007
2008
2009
1.1 1.0 1.8 1.8 2.1
1.1 1.7
Distribution
0.0 6.8 2.8 1.8 3.2 2.8
Total Major Capital Projects
Stated in millions of dollars ($)
2004 TGI Annual Review
November 19, 2004
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CPCN Applications
Year
LNG Plant – Mount Hayes Texada Island Compressor Stn Coquitlam Compressors Business Integration Banner to Energy CIS Conversion
2005 22.8 14.6 5.0 6.0 48.4
2006 26.6
2007 45.1 6.0
2008
2009
26.6
51.1
0.0
0.0
Stated in millions of dollars ($)
2004 TGI Annual Review
November 19, 2004
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Performance Measures – Service Quality
•
Specific Service Quality Indicators (SQIs) are not identified in the TGVI regulatory agreement for 2003-2005. TGVI Performance Measures (similiar to TGI SQIs) are currently being tracked as listed below: Post-Integration 2004 Actuals YTD
•
• • • •
Emergency Response Time: Number of Third Party Distribution Incidents: Speed of Answer- Emergency Calls (<36 sec): Transmission Reportable Incidents:
17.4 minutes 137 99% 0
2004 TGI Annual Review
November 19, 2004
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2005 Gas Cost Outlook Tania Specogna
TGI & TGVI 2004 Annual Review – Nov. 19/04
Relationship Between Oil & Gas Prices
Nymex Natural Gas vs Oil 2004 Prompt Month Prices
$12.00
$11.00
$10.00
Oil Prices in Blue
Cdn$/GJ
$9.00
$8.00
$7.00
Natural Gas Prices in Red
$6.00
$5.00
2004 TGI Annual Review
November 19, 2004
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Natural Gas Price Impact on TGVI Gas Costs
$11.50
2004 Approved Cost of Gas ($/GJ) $6.31 Royalty Adjusted Cost of Gas ($/GJ) $3.75
End Year Projected Dec 31 2004 $7.61 $4.24
Proposed 2005 $8.59 $4.78
April 2004 Forward Curve July 2004 Forward January 2004 Forward Curve Curve 26th 2004 Forward Curve Oct
$10.50
$9.50
$8.50
Cdn$/GJ
November 18th 2004 Forward Curve
$7.50
$6.50
$5.50
$4.50
2004 TGI Annual Review
November 19, 2004
31
2005 Outlook Rate Base, Revenue Requirements, RDDA, Customer Rates Tom Loski
TGI & TGVI 2004 Annual Review – Nov. 19/04
2005 TOTAL PLANT ADDITIONS
Summary of Plant Additions
($000's)
2005 Forecast Transmission - High Pressure Distribution General Plant TOTAL PLANT ADDITIONS $7,715 7,633 7,051 $22,399
2004 TGI Annual Review
November 19, 2004
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2005 UTILITY RATE BASE
1 2 3 4 Rate Base GPIS – Opening (Adj for Sooke) GPIS – Closing (Adj for Sooke) GPIS – Mid-Year (Adj for Sooke) Accumulated Depreciation – Opening Accumulated Depreciation – Closing Accumulated Depreciation - Mid-Year Allocated Common Plant – Mid-Year Contributions – Mid-Year Working Capital – Mid-Year Total Mid-Year Rate Base 5
2004 TGI Annual Review November 19, 2004 34
Table 6.3 Summary of Mid-Year Rate Base 2003/2005 Application vs. Forecast ($000’s) 2005 2003/2005 Application $622,876 639,864 631,370 $(123,397) (137,288) (130,343) (104) (66,964) 16,264 $450,223 2005 Forecast $624,566 650,641 637,646 $(122,619) (137,161) (129,890) (235) (67,378) 15,772 $455,915
Variance $1,690 10,777 6,276 778 127 453 (131) (414) (492) $5,692
2005 O&M EXPENSES Set our per Negotiated Settlement Agreement BCUC Order No. G-2-03, Appendix A, Item 4, Gross OM&A
2005 set at $32.6 million
2004 TGI Annual Review
November 19, 2004
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2005 SUMMARY OF REVENUE REQUIREMENT based on 9.53% ROE
Table 6.1 Summary of Revenue Requirements And Annual Revenue Deficiency/ (Surplus) 2003/2005 Application vs. Forecast ($000’s) 2005 2003/2005 Application $51,681 27,122 14,789 9,443 13,442 4,297 28,963 3,452 $153,189
November 19, 2004
Revenue Requirement Royalty Adjusted Cost of Gas Net OM&A (Adj for Sooke) Depreciation Municipal and Other Taxes Income Tax Wheeling Charges Return on Rate Base Amortization of GCVA Other Total Revenue Requirement
2004 TGI Annual Review
2005 Forecast $57,250 27,771 15,492 7,944 8,136 4,389 30,571 1976 3,641 $157,170
Variance $5,569 649 703 -1,499 -5,306 92 1,608 1976 189 $3,981
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2005 Outlook GAS COST VARIANCE ACCOUNT (GCVA)
Treatment of 2004 Year End GCVA Balance
Projected December 31, 2004 deficit balance of $2.0 Million (after tax)
GCVA collects difference between actual and forecast Royalty Adjusted Cost of Gas Projected 2004 Royalty Adjusted Cost of Gas $0.484/GJ higher than the approved $3.75/GJ
Proposed amortization of 2004 deficit into cost of service for 2005
Allocate GCVA balance to core sales customers
Amortize prior year’s deficit over following twelve months Treatment consistent with past practice – 2003 GCVA surplus amortized into cost of service for 2004
2004 TGI Annual Review
November 19, 2004
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2005 RDDA
Summary of Revenue Deficiency Deferral Account 2003/2005 Application vs. Forecast ($000’s) Revision Date November 17, 2004 Calculation of RDDA 2005 2003/2005 Application $81,878 (9,891) 4,780 $76,767 ($5,111)
November 19, 2004
$
2005 Forecast $60,025 (13,713) 5,946 $52,258 ($7,767)
Variance ($21,853) (3,822) (4,780) 5,946 ($24,509)
Opening Balance Current Year Def/(Surplus) Preferred Share Financing Subordinated Debt Financing Closing Balance Annual Net Surplus
2004 TGI Annual Review
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Rate Design Objectives
RDDA Recovery by 2011 Loss of Royalty Credit (~35-40MM) in 2012 Critical to long term stability of rates and viability of TGVI Relative Rate Stability With regard to Allocated Unit Costs R/C Ratios Year over year rate changes Competitive Rates Alternative fuel comparisons Fairness Economic Efficiency
2004 TGI Annual Review
November 19, 2004
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Effective Rate Changes
$20.00 $18.00 $16.00 $14.00
Effective Rate
$12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 RGS AGS SC1 SC2 LC1
Rate Class Jan/04 Effective Rates
2004 TGI Annual Review
LC2
LC3
HLF
ILF
Oct/04 Effective Rates
November 19, 2004
Jan/05 Effective Rates
40
Rate Comparison to Alternative Fuels and Allocated Unit Costs
25
20
15
10
5
0 RGS AGS SC1 SC2 LC1 LC2 LC3 Electricity HLF Fuel Oil ILF AUC
Jan/04 Effective Rates
Oct/04 Effective Rates
Jan/05 Effective Rates
2004 TGI Annual Review
November 19, 2004
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Revenue to Cost Ratios
R/C Ratios within industry norms given nature of cost allocation, subject to alternative fuel costs
2004 R/C
2005 R/C
RGS
AGS SCS-1 SCS-2
0.95
1.07 1.06 1.22
0.90
1.04 1.00 1.08
LCS-1
LCS-2 LCS-3
1.07
1.15 1.16
1.04
1.02 1.05
Average
HLF
1.03
1.60
0.97
1.25
ILF
Transport Sys Avg.
1.88
1.20 1.07
1.28
1.12 1.00
2004 TGI Annual Review
November 19, 2004
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2005 CUSTOMER RATE IMPACTS
Proposed 2005 Rates Revision Dated: November 17, 2005 2005 Rates Commodity Demand Charge Charge 13.220 10.170 15.459 13.192 10.844 9.798 9.809 6.601 7.386 1.122 1.122 1.626
November 19, 2004
Change Effective Unit Price 15.286 10.507 17.200 14.473 11.666 10.283 9.944 9.233 7.585 1.122 1.122 1.626 0.0% 10.5% 6.7% 0.0% 9.2% 1.6% 3.9% 0.0% 0.0% 10.3% 10.3% 17.0%
43
RGS AGS SCS-1 SCS-2 LCS-1 LCS-2 LCS-3 HLF ILF FT Summer IT Winter IT
FMC $10.50 $40.00 $9.45 $33.53 $61.00 $97.82 $201.51 $250.00 $250.00
47.18
2004 TGI Annual Review
2005 Outlook Customer Bill Impacts
Current Annual RGS AGS SCS-1 SCS-2 LCS-1 LCS-2 LCS-3 $927 $12,910 $1,065 $4,234 $9,441 $24,340 $167,922
Proposed Annual $927 $14,783 $1,120 $4,261 $10,330 $24,742 $174,592
Change $0 $1,872 $55 $27 $889 $402 $6,670
2004 TGI Annual Review
November 19, 2004
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OTHER INFORMATION PERTAINING TO THE 2003 – 2005 SETTLEMENT
TGI & TGVI 2004 Annual Review – Nov. 19/04
Sooke Pipeline Project
A natural gas service extension of the TGVI distribution system to the community of Sooke Included a 24.5km 3100kPa intermediate pressure pipeline, a distribution pressure “kiosk” style regulating station, 10km of smaller distribution main and customer service lines and meters Approval for the CPCN application from BCUC on December 30, 2002 Construction completed and in-service on September 2003
2004 TGI Annual Review
November 19, 2004
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Sooke Pipeline Project Capital Cost Summary ($000)
Approved Budget Actual Expenditures
Particulars
Intermediate Pressure Distribution Pressure Overheads and Administration Total Capital Cost for Sooke Project
$2,831 1,186 457 $4,474
$3,439 1,074 457 $4,970
Approximately 11% over budget Additional cost incurred due to installation of rock shielding on the intermediate pressure pipeline.
2004 TGI Annual Review
November 19, 2004
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Sooke Pipeline Project Customer and Load Additions (Year 1)
Number of Customers Forecast Variance Actual 147 15 4 2 1 169 (40) (15) 0 0 0 (55) 107 0 4 2 1 114 Volumes (GJ) Variance (10,388) (5,925) (1,029) (4,618) (4,446) (26,406)
Rate Class SCS-1 SCS-2 LCS-1 LCS-2 LCS-3 Total
Forecast 11,445 5,925 4,050 8,300 9,000 38,720
Actual 1,057 0 3,021 3,682 4,554 12,314
Actual customer and load additions were below forecast levels in Year 1. Variance explanations: delays in obtaining gas mains permits installation of new control systems which reduced the demand for energy warmer than normal temperatures experienced during the year
2004 TGI Annual Review
November 19, 2004
48
2005 Accounting & Tax Matters Cost Recovery of SAP Assets from TGVI
OPTIONS Considered 1. 2. TGI to charge TGVI a management fee equivalent to ownership of the $2.4 million in rate base as though TGVI had owned it. No notional transfer is required. TGVI to include in its annual revenue requirement calculation the cost equivalent to ownership of $2.4 million SAP asset, categorize as a lease expense. TGVI to reimburse TGI for the use of the asset via a lease expense fee. TGI to include the $2.4 million asset in rate base. TGI notionally transfer $2.4 million to TGVI and have TGVI include in its rate base. TGVI to reimburse TGI for the use of the asset via a non-utility management fee. TGI to exclude the $2.4 million asset from rate base.
3.
Note – all of the above options have TGI retaining legal ownership of the $2.4 million SAP asset
2004 TGI Annual Review
November 19, 2004
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2005 Accounting & Tax Matters SAP Cost Recovery - Recommendation
The optimal solution is Option #2 – for TGVI to include in its annual revenue requirement an operating lease expense equivalent to the revenue requirement associated with ownership of the assets had the asset transfer taken place. Most transparent and avoids potential perceived transfer pricing issues. Consistent with the common shared technology platform theme Preserves the nature of the costs associated with the rate base of the assets as they are utilized and allows for efficiency sharing with customers of TGI should any efficiencies exists Operating lease expense categorized similar to rent for the compressor lease equipment so TGVI will not be adversely impacted by the negotiated settlement O&M mechanism
Note – all three options require TGVI to reimburse TGI $451,000 in 2004 for the use of the SAP assets
2004 TGI Annual Review
November 19, 2004
50
Joint Venture Amending Agreement
VIGJV (JV) Transportation Service Agreement (TSA) set to expire December 31, 2004 with 5 year renewal option Average consumption in 2004 has been 23TJs per day against a firm CD of 37.6 JV attempted to assign its capacity and tolls to BC Hydro starting July 04 – TGVI opposed JV launched court action in September JV and TGVI entered into amending agreement October 27 TGVI filed information for comment to Ministry of Energy & Mines November 18 (copies available) Comments due November 24 Proposed Order in Council to go to Provincial Cabinet for approval December 10
2004 TGI Annual Review
November 19, 2004
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Next Steps
TGI & TGVI 2004 Annual Review – Nov. 19/04