COST OF CAPITAL, COST OF EQUITY, DEBT FINANCING AND DIVIDEND POLICY

Transcription

1 Page of COST OF CAPITAL, COST OF EQUITY, DEBT FINANCING AND DIVIDEND POLICY Overview PowerStream has followed the Report of the Board on Cost of Capital for Ontario s Regulated Utilities, December, 009 in determining the cost of capital. In calculating the cost of capital, PowerStream has used the deemed capital structure of 56% long-term debt, 4% short-term debt, and 40% equity, and the Cost of Capital parameters in the OEB letter of March, 0, for the allowed return on equity and where appropriate for debt. PowerStream s cost of capital for 0 has been calculated as 6.5%, as shown in Table, below. Table : PowerStream - Weighted Average Cost of Capital 009 Board Approved 0 Test Year Deemed Capital Structure Rate Weighted Average Cost of Capital (WACC) Rate Weighted Average Cost of Capital (WACC) Long-term debt Short-term debt 56% 5.89%.0% 4.96%.78% 4%.% 0.05%.08% 0.08% Equity 40% 8.0%.% 9.%.65% Total 00% 6.56% 6.5% 4 5 The 0 Weighted Average Cost of Capital ( WACC ) of 6.5% is slightly lower than the PowerStream 009 Board Approved WACC of 6.56%. In calculating the weighted average cost of capital, the return on equity and portions of debt have been calculated using the Cost of Capital parameters from the OEB letter dated March,

2 Page of for rates effective May, 0. This calculation may require updating when the Board releases the Cost of Capital parameters for rates effective January, 0 later this year. Capital Structure PowerStream s actual capital structure since 009 is presented below in Table. Table : PowerStream Actual and Forecast Capitalization Structure, % 009 Actual 00 Actual 0 Actual 0 Estimate 0 Forecast Total debt Equity The actual debt to equity ratios vary from the deemed debt to equity ratios mainly due to borrowing patterns, for example, due to the lack of short-term debt in 009. PowerStream attempts to maintain its capital structure in line with the OEB deemed structure. As noted above, PowerStream has used the Board s deemed capital structure in calculating its cost of capital. As directed in Chapter of the Filing Requirements for Transmission and Distribution Applications, dated June, 0, PowerStream has completed the Board s Appendix -N, which is included at the end of this exhibit. Cost of Equity For the purposes of this 0 rate application, PowerStream used a Return on Equity ( ROE ) of 9.%, as per the OEB s letter of March, 0. This value is placeholder and will be updated as per the methodology specified in the Report of the Board on Cost of Capital for Ontario s Regulated Utilities, when the updated data becomes available. Cost of Table below compares PowerStream s actual and projected weighted average cost of long term debt with the Board s deemed Long Term ( LT ) debt rates.

3 Page of Table : PowerStream Cost of 008 Actual 009 Actual 00 Actual 0 Actual 0 Estimate 0 Forecast Long-term debt OEB Deemed LT rate Actual & Forecast Weighted Average LT debt rate 6.0% 7.6% 5.87% 5.% 4.4% 4.4% 5.89% 6.06% 6.0% 6.0% 5.0% 4.96% Note: Deemed LT debt rates for 0 are assumed to be the same as 0. For rate setting purposes, the total cost of debt is calculated based on a weighting of 56% longterm debt and 4% short-term debt. As per 009 Board Report on Cost of Capital, the deemed short-term debt rate is used for the weighted Cost of Capital calculations. The calculation of weighted average long-term debt rate for rate setting purposes is performed in compliance with the policies documented in 009 Board Report on the Cost of Capital. The detailed calculations are presented in the appendix at the end of this exhibit. The variances between the actual and forecast long-term debt rates and the deemed LT rates are attributable to the following: the lower than deemed interest rate in 008 and 009 on the term bank loan; the higher than deemed interest rate in 00 and 0 on the Electricity Distributors Finance Corporation ( EDFIN ) debentures issued in 00 at an effective rate of 7.0%; EDFIN debentures will be refinanced in August 0 at a rate lower than the current one; and The 0 to 0 deemed LT rate is lower than the actual rate on the shareholders promissory notes. The actual rate on the shareholder notes was lower than the deemed LT rates at the time of issuance.

4 Page 4 of The 0 forecast cost of long-term debt has decreased from the 009 Board-Approved level of 5.89% to 5.4%. This decrease is the result of new debt at lower rates, primarily the fixed rate bank loan of $50.0 million and new debt, which is forecast to also have a lower interest rate. PowerStream has been working with its financial advisors, Bank of Montreal Nesbitt Burns in preparation for refinancing the $5.0 million EDFIN debenture which comes due in August, 0. The interest rate in August 0 for the new debt is uncertain. The deemed LT rate of 4.4% has been used as the forecasted rate for this and other new debt in the calculation of weighted average long-term debt rate for 0 and 0. Financing Plan PowerStream has established a Financing Plan, which has been approved by its Board of Directors on January 5, 0, and updates this plan annually. There are two primary goals of the Financing Plan: to ensure that PowerStream has adequate funding available for Operating and Capital requirements; and to ensure that PowerStream maintains its debt equity structure in line with the Board s guidelines In order to ensure that these goals are achieved, Corporate Finance staff use annual financial forecasts combined with historical financial data to determine what (if any) level of borrowing is appropriate for PowerStream. Table 4 below summarizes PowerStream s debt position.

5 Page 5 of Table 4: PowerStream s Position holder Particulars As of Dec., 00 As of Dec., 0 City of Vaughan Shareholder Note $ 78,6,85 $ 78,6,85 City of Vaughan Deferred Interest $ 8,74,0 $ 8,74,0 Town of Markham Shareholder Note $ 67,866,0 $ 67,866,0 Town of Markham Deferred Interest $ 7,584,4 $ 7,584,4 City of Barrie Shareholder Note $ 0,000,000 $ 0,000,000 EDFIN Debenture (at face Debenture value) $5,000,000 $5,000,000 TD Commercial Debenture $ 50,000,000 $ 50,000,000 Total Long-term debt $57,49,860 $57,49,860 TD Commercial Short Term Bank $ 40,000,000 $ 40,000,000 Total $97,49,860 $97,49,860 PowerStream's long-term debt comprises the following: Senior unsecured debentures totalling $5.0 million issued through the EDFIN at an interest rate of 6.45% per annum, maturing August 5, 0; and Promissory notes issued to shareholders totalling $66. million, $78. million held by the Corporation of the City of Vaughan, $67.9 million held by the Corporation of the Town of Markham and $0.0 million held by the Corporation of the City of Barrie, at an interest rate of 5.58% per annum with a maturity date of May, 04. These promissory notes are repayable 90 days following demand by the City or the Town. However, these promissory notes are subordinate to both the EDFIN debentures and bank loan. The loan agreement specifies the shareholders postponement agreements as bank security. In PowerStream s financial statements these promissory notes are classified as long-term debt since the shareholders have provided letters confirming their intent to not demand repayment within the next year. The interest on these promissory notes (for Markham and Vaughan) was deferred for eight quarters commencing October, 006 for five years. 8 9 Deferred interest due to shareholders totalling $6. million, $8.7 million held by the Corporation of the City of Vaughan and $7.6 million held by the Corporation of the Town

6 Page 6 of 4 of Markham, at an interest rate of 5.58% per annum and a maturity date of October, 0. An unsecured $50 million bank loan at an interest rate of 5.08% per annum maturing February 6, 0. 5 PowerStream also has the following short-term facilities: The $75 million Line of Credit at TD Commercial Banking will renew automatically each year (subject to a brief review). $5 million of this line of credit has been used as short term loan, leaving $60 million available for future use. PowerStream has access to an unsecured $5 million revolving demand facility. This facility is renewable annually and has been used as short term loan PowerStream has a $5 million Letter of Guarantee facility, of which $.5 million has been used to provide the Independent Electricity System Operator ( IESO ) with a letter of credit for Prudential. Dividend Policy PowerStream established a dividend policy which was approved by its Board of Directors on December 4, 005, and updated on September 7, 008. The dividend policy is in place to provide shareholders with a steady income stream while providing the Corporation with an appropriate capital structure. The key criteria for the determination of dividends: 0 Cash position at the beginning of the year; Working capital requirements for the current year; and Net capital expenditures required for the current year. 4 PowerStream's dividend policy is to pay a minimum of 50% of net income, excluding the Permitted Generation Business income with consideration given to the following: 5 All financial covenants on any debt issued by the Corporation

7 Qualifications to meet external bond rating services to maintain an A rating EB 0-06 Page 7 of Cash requirements of the Corporation to meet working capital requirements and short- term (five year) plans of capital expenditures 4 The amounts to be paid to each Shareholder are based on their respective ownership.

8 Page 8 of Appendix -N Capitalization Ratios Line Cost of Capital / Capitalization Ratio Particulars Capitalization Ratio Cost Rate Return 009 Approved (PowerStream South) (%) ($) (%) ($) Long-term 56.0% $5, % $9,66 Short-term 4.0% () $,.% $09 Total 60.0% $48, % $9,475 Equity 4 Common Equity 40.0% $, 8.0% $8,609 5 Preferred Shares 0.0% $ - $ - 6 Total Equity 40.0% $, 8.0% $8,609 7 Total 00.0% $580, % $8,084 Line Particulars Capitalization Ratio Cost Rate Return 009 Actual (PowerStream Combined) (%) ($) (%) ($) Long-term 5.7% $57, % $,666 Short-term 6.0% () $40,000.% $5 Total 59.7% $97, % $,98 Equity 4 Common Equity 40.% $68,48 8.0% $,487 5 Preferred Shares 0.0% $ - $ - 6 Total Equity 40.% $68,48 8.0% $,487 7 Total 00.0% $665, % $4,685 -

9 Page 9 of Line Particulars Capitalization Ratio Cost Rate Return 00 Actual (PowerStream Combined) (%) ($) (%) ($) Long-term 5.% $57,40 6.0% $,48 Short-term 5.9% () $40,000.07% $88 Total 58.% $97,40 5.6% $,0 Equity 4 Common Equity 4.8% $85, % $8,5 5 Preferred Shares 0.0% $ - $ - 6 Total Equity 4.8% $85, % $8,5 7 Total 00.0% $68, % $50,45 - Line Particulars Capitalization Ratio Cost Rate Return 0 Actual (PowerStream Combined) (%) ($) (%) ($) Long-term 5.0% $57,40 6.0% $,48 Short-term 5.7% () $40,000.46% $984 Total 56.7% $97, % $,466 Equity 4 Common Equity 4.% $0, % $9,099 5 Preferred Shares 0.0% $ - $ - 6 Total Equity 4.% $0, % $9,099 7 Total 00.0% $70,76 7.5% $5,565 -

10 Page 0 of Line Particulars Capitalization Ratio Cost Rate Return 0 Bridge Year (PowerStream Combined) (%) ($) (%) ($) Long-term 54.8% $407,40 5.0% $0,47 Short-term.4% () $5,000.08% $50 Total 58.% $4, % $0,957 Equity 4 Common Equity 4.8% $0,55 9.% $8, 5 Preferred Shares 0.0% $ - $ - 6 Total Equity 4.8% $0,55 9.% $8, 7 Total 00.0% $74, % $49,78 - Line Particulars Capitalization Ratio Cost Rate Return 0 Test Year (PowerStream Combined) (%) ($) (%) ($) Long-term 56.0% $45, % $,4 Short-term.% () $5,000.08% $50 Total 59.% $477,40 4.8% $,94 Equity 4 Common Equity 40.9% $0,69 9.% $0,5 5 Preferred Shares 0.0% $ - $ - 6 Total Equity 40.9% $0,69 9.% $0,5 7 Total 00.0% $808, % $5,094 -

11 Page of Calculation of the long-term debt cost LONG -TERM DEBT WEIGHTED DEBT COST - 00 Actual Description Holder Is the Holder Affiliated with the LDC? (Y/N) Date of Issuance of (Date) Principal ($) Term (Years) Actual Rate (%) Used for Weighted Cost Promissory Note City of Vaughan Y -Jun-004 $ 78,6, % 5.58% Promissory Note Town of Markham Y -Jun-004 $ 67,866, % 5.58% EDFIN Debenture EDFIN N 5-Aug-00 $ 00,000, % 7.0% 4 Deferred interest Markham Y -Oct-006 $ 954, % 5.58% 5 Deferred interest Vaughan Y -Oct-006 $,00, % 5.58% 6 Deferred interest Markham Y -Jan-007 $,786, % 5.58% 7 Deferred interest Vaughan Y -Jan-007 $ 4,65, % 5.58% 8 Deferred interest Markham Y -Jan-008 $,84, % 5.58% 9 Deferred interest Vaughan Y -Jan-008 $,77, % 5.58% 0 New debt TD N 6-Feb-008 $ 50,000, % 5.08% Promissory Note City of Barrie Y -Jan-009 $ 0,000, % 5.58% EDFIN Debenture EDFIN N 5-Aug-00 $ 5,000, % 7.0% Total $ 57,49,860 Weighted Average Cost % 6.0% LONG -TERM DEBT WEIGHTED DEBT COST - 0 Actual Description Holder Is the Holder Affiliated with the LDC? (Y/N) Date of Issuance of (Date) Principal ($) Term (Years) Actual Rate (%) Used for Weighted Cost Promissory Note City of Vaughan Y -Jun-004 $ 78,6, % 5.58% Promissory Note Town of Markham Y -Jun-004 $ 67,866, % 5.58% EDFIN Debenture EDFIN N 5-Aug-00 $ 00,000, % 7.0% 4 Deferred interest Markham Y -Oct-006 $ 954, % 5.58% 5 Deferred interest Vaughan Y -Oct-006 $,00, % 5.58% 6 Deferred interest Markham Y -Jan-007 $,786, % 5.58% 7 Deferred interest Vaughan Y -Jan-007 $ 4,65, % 5.58% 8 Deferred interest Markham Y -Jan-008 $,84, % 5.58% 9 Deferred interest Vaughan Y -Jan-008 $,77, % 5.58% 0 Bank loan TD N 6-Feb-008 $ 50,000, % 5.08% Promissory Note City of Barrie Y -Jan-009 $ 0,000, % 5.58% EDFIN Debenture EDFIN N 5-Aug-00 $ 5,000, % 7.0% Total $ 57,49,860 Weighted Average Cost % 6.0%

12 Page of LONG -TERM DEBT WEIGHTED DEBT COST - Bridge Year 0 Description Holder Is the Holder Affiliated with the LDC? (Y/N) Date of Issuance of (Date) Principal ($) Term (Years) Actual /Forecasted Rate (%) Used for Weighted Cost Promissory Note City of Vaughan Y -Jun-004 $ 78,6, % 5.58% Promissory Note Town of Markham Y -Jun-004 $ 67,866, % 5.58% EDFIN Debenture/new debt EDFIN N 5-Aug-0 $ 00,000, % 4.4% 4 Deferred interest Markham Y -Oct-006 $ 954, % 5.58% 5 Deferred interest Vaughan Y -Oct-006 $,00, % 5.58% 6 Deferred interest Markham Y -Jan-007 $,786, % 5.58% 7 Deferred interest Vaughan Y -Jan-007 $ 4,65, % 5.58% 8 Deferred interest Markham Y -Jan-008 $,84, % 5.58% 9 Deferred interest Vaughan Y -Jan-008 $,77, % 5.58% 0 Bank loan TD N 6-Feb-008 $ 50,000, % 5.08% Promissory Note City of Barrie Y -Jan-009 $ 0,000, % 5.58% EDFIN Debenture/new debt EDFIN N 5-Aug-0 $ 5,000, % 4.4% New TBD N 5-Aug-0 $ 50,000, % 4.4% Total $ 407,49,860 Weighted Average Cost % 5.0% LONG -TERM DEBT WEIGHTED DEBT COST - Test Year 0 Description Holder Is the Holder Affiliated with the LDC? (Y/N) Date of Issuance of (Date) Principal ($) Term (Years) Actual /Forecasted Rate (%) Used for Weighted Cost Promissory Note City of Vaughan Y -Jun-004 $ 78,6, % 5.58% Promissory Note Town of Markham Y -Jun-004 $ 67,866, % 5.58% EDFIN Debenture/new debt EDFIN N 5-Aug-0 $ 00,000, % 4.4% 4 Deferred interest Markham Y -Oct-006 $ 954, % 5.58% 5 Deferred interest Vaughan Y -Oct-006 $,00, % 5.58% 6 Deferred interest Markham Y -Jan-007 $,786, % 5.58% 7 Deferred interest Vaughan Y -Jan-007 $ 4,65, % 5.58% 8 Deferred interest Markham Y -Jan-008 $,84, % 5.58% 9 Deferred interest Vaughan Y -Jan-008 $,77, % 5.58% 0 Bank loan TD N 6-Feb-008 $ 50,000, % 5.08% New debt TBD N -Aug-0 $ 50,000, % 4.4% Promissory Note City of Barrie Y -Jan-009 $ 0,000, % 5.58% EDFIN Debenture/new debt EDFIN N 5-Aug-0 $ 5,000, % 4.4% 4 New debt TBD N -Sep-0 $ 45,000, % 4.4% $ 45,49,860 Weighted Average Cost % 4.96%