Annual and Special Meeting of Partners of Société en commandite Gaz Métro

March 18, 2009 - Speeches

March 18, 2009, 2 PM

Address given by Sophie Brochu the president and chief executive officer.

(Check against delivery)

Welcome, ladies and gentlemen, and good afternoon!

It is always a pleasure for me to address you and to be able to talk to you in person about our achievements, about the issues with which we are dealing, and about the projects for the future that we are working toward accomplishing.
Today, I want to talk about three things. First, I shall give an overview of our achievements in 2008 – achievements of which the whole organization can be proud.

I shall then talk about our results for the first quarter of the current fiscal year and the very special setting in which they were achieved – the very complex economic context through which we are manoeuvring very carefully.

Lastly, I also want to speak about our priorities for 2009 and the years to come.


Here’s a brief look back at fiscal 2008 which, in many respects, was a year for harvesting – for harvesting the fruits of the constant efforts made over several years to put Gaz Métro in the forefront in many areas.

Customer development
One example is the determination we have shown over the last 10 years to take our place in the residential market. We are pleased to note that a growing number of Quebecers are concerned about using the right energy in the right place and are questioning the systematic recourse to electricity for residential heating. It is better and better understood, by a more and more diversified range of players in Québec society, that that energy must be reserved for applications only it can serve, such as operating electronic appliances or mechanical equipment, or as an input in industrial processes.

For its part, natural gas is more and more known and valued by Québec residential customers, who appreciate the versatility of all the applications it can serve.
The result of our commercial efforts culminated in 2008 when we concluded a record number of new sales in the residential sector. Since 2001, our share of the new construction market has more than doubled, reaching 12.3% last year. In the greater Montréal area, we even exceeded the 20% mark for new houses that chose natural gas and life in blue – that’s one home in five!

We are extremely proud of this, but we still keep in mind that this is well below the market share that natural gas occupies in new construction elsewhere in Canada. This clearly shows that we have to continue our efforts and that we can raise the bar even higher.

In the industrial market, we have vowed to replace heavy oil everywhere where we can, for reasons both economic and environmental.

Fiscal year 2008 was extremely positive in this regard. The favourable prices supported a more than 25% increase in volumes delivered to our interruptible industrial customers, that is, those who can consume either natural gas or oil at will. These sales generated total revenues of over $90 million. They also helped avoid emitting almost 140,000 tonnes of carbon dioxide and an appreciable quantity of atmospheric contaminants, including those that pollute the air of Montréal and several regions of Québec.

Last fall, in the wake of the collapse of prices for petroleum products, several Québec industrials went back to heavy oil. Like many of them, we believe that this back-and-forth is untenable in the long term because of the increasingly severe regulations on carbon emissions and atmospheric contaminants. Hence we are working full out with our industrial customers to help them stay with natural gas.

What I have just said illustrates perfectly Gaz Métro’s determination to advance, at one and the same time, the interests of its investors, its customers, and the community. Our customers benefit from the advantages natural gas affords in reliability, efficiency and versatility. The community benefits from cleaner air and fewer greenhouse gas emissions. And our investors benefit from a broader commercial base.

Energy efficiency
We have adopted the same approach in another area where Gaz Métro has stood apart for many years – and that’s energy efficiency. Helping our customers consume better and consume less – that’s an idea that may seem counter-intuitive for an energy distributor. But we believe that it is our responsibility to help our customers be more efficient and more productive. This is even more true in today’s economic context. Over the last 8 years, more than 66,000 customers have taken advantage of our energy efficiency programs. Together, they have saved the equivalent of the annual heating load of 62,000 single-family homes.
That said, we have deployed these programs while ensuring that our investors also benefit. Your interests are, in fact, fully respected under the regulatory framework that we proposed to the Régie de l’énergie, supported by our stakeholders. In 2008, our investors thus received $4 million in specific remuneration, thanks to the achievement of our corporate energy efficiency objectives.

Sustainable development
Our investors can also take satisfaction in the fact that, last year, Gaz Métro was crowned Canadian champion for the disclosure of its carbon footprint by the Carbon Disclosure Project, a prestigious, independent, not-for-profit organization. The organization interrogates major public companies the world over about their greenhouse gas emissions and the means they use to contain them. This year, Gaz Métro came in first out of the 106 Canadian companies that responded to the invitation. It is a great honour for Gaz Métro to stand out among the major companies that aspire to show world-class environmental leadership.

Contributing to sustainable development means not only being concerned about our natural environment, but also about our human environment. Gaz Métro’s head office is located in the Centre-Sud-Hochelaga-Maisonneuve borough, one of the worst economic ghettos in Canada. More than two in five young people between the ages of 15 and 24 no longer go to school. Half the population lives below the poverty line. And people die younger there than anywhere else in Montréal.  
As responsible citizens, Gaz Métro and its employees want to do their part to help the children from this corner of the world – children from more than 70 cultural communities. 

Last year, Gaz Métro co-founded, with a community organization, a quite unique neighbourhood project, 80, ruelle de l’Avenir, a place of learning for several hundred children from local primary and secondary schools. To achieve this ambitious project, we mobilized many of our business partners – several of them here with us today – and I want to express my gratitude to them. We pooled our human and financial efforts to achieve, in just a few months, a project that gives renewed hope to young people in our neighbourhood and their parents and offers the children a better future and the tools they need to begin to build it.

Financial results and their economic context

For its part, Gaz Métro is also building its future every day. Our commercial progress and the success of our corporate strategy are reflected in our financial results.

In 2008, adjusted net income increased by $4.3 million to reach $253.3 million, or $1.27 per unit, an increase of 3 cents over the previous fiscal year.

The growth in income has been supported in particular by the contribution of $11.8 million, before financial expenses, from Green Mountain Power, which we acquired in 2007 and which is the second-largest electricity distributor in the State of Vermont.

Distributions to our partners, for their part, were maintained at $1.24 per unit in 2008, which represents almost all the revenues generated. We expect to maintain this level of distribution throughout the 2009 fiscal year: the third quarterly payment will be made on April 1 next.

In mid-November in the Report to Partners, which is part of the annual report, we said that the financial world was upside down. The situation has hardly improved since.

The first quarter of the current fiscal year has unfolded against a backdrop of great economic tumult. Nevertheless, the results we have achieved are good: adjusted net income increased by $3.8 million compared with the same quarter of the previous fiscal year.

The distribution of natural gas in Québec contributed to the growth in our income, but there is no doubt that the most notable fact is the significant contribution from our energy distribution subsidiaries in the United States, on the one hand, and from energy services on the other. 

Vermont Gas and Green Mountain Power have seen their net income, before financial expenses, increase by $2 million, thanks to the increase in the volume of natural gas distributed and to the appreciation of the U.S. dollar versus the Canadian dollar.

The subsidiaries in the energy services sector have also seen their net income before financial expenses grow by $1.4 million in the first quarter, compared with the same period a year earlier.

And we cannot stay silent about the confidence we have in financial markets. Last October, in a very difficult economic context, we succeeded in floating $150 million in bonded debt. The premium paid, called the credit spread, turned out to be three times higher than what we are used to, but since the underlying interest rates had begun to fall, the overall cost of the borrowing, at 5.24% for 5 years, remains very reasonable.

We learned later that there was only one debt transaction on account of a company in North America on October 8, that is, ours. That demonstrates the confidence we succeeded in inspiring in the worst of all possible financial environments.
But we take nothing for granted. Gaz Métro manages its financial resources with much rigour and vigilance. And, since no company can escape the repercussions of a severe economic downturn like the one we are currently experiencing, our investors can take comfort in Gaz Métro’s defensive characteristics. The fact that its principal activity, natural gas distribution, is closely linked to heating homes and businesses, gives it a certain financial stability.

The DBRS credit rating agency has also recognized the quality of Gaz Métro’s credit. Last January, DBRS renewed its A rating, with a stable perspective, of our first mortgage bonds. In the opinion of DBRS, this evaluation reflects the sound business profile and financial stability of our principal activity, natural gas distribution. DBRS also noted that the acquisition of Green Mountain Power offers Gaz Métro geographical and operational advantages, without changing its risk profile.
It is also interesting to point out that Gaz Métro is not a producer of natural gas. Our profitability is therefore not at all affected by the reduction in the prices of natural gas that is accompanying the slowdown in economic activity. This price reduction, which hit 18 % over the course of the last year, is passed on in its entirety to our customers. It contributes to strengthening our competitive position and to supporting the demand for natural gas. This is even more advantageous at a time when our customers are watching their expenses more closely than ever. 

We have no control over the cost of the price of natural gas or over the general state of the economy. On the other hand, we do control our operations and we are totally responsible for our company’s performance. Nothing is perfect, but I can confirm that Gaz Métro’s operational performance has reached remarkable levels that never cease to improve. Under the aegis of the Mouvement québécois de la qualité, last year we conducted an evaluation of all our business processes. The results obtained show remarkable progress compared with the preceding evaluation, conducted only two years ago. The results achieved place Gaz Métro in a select group of Québec leaders in quality. This is an extraordinary performance, which the whole Company is extremely proud of achieving.

All these factors contribute to making Gaz Métro a good investment in troubled economic times, like those we are currently experiencing. The stock market has reflected this. Between August 29, 2008, at the start of the financial crisis, and the close of the markets on March 11 last week, the price of a Gaz Métro unit had declined 13.4%, whereas the TSX composite index of major Canadian company shares lost more than 40 % of its value over the same period.
It is not because we are considered a relatively good security in a difficult economic context that we can refrain from being very vigilant. To better predict the impact of the economic showdown on our income, we are closely following three major indicators: our deliveries, our new sales, and late payments by our customers.

These three indicators are currently telling us that while the situation is not great, it is not alarming. Our deliveries have certainly shown a downward trend, but not a dramatic one. Since they are intimately linked to the construction cycle, our new sales have also been somewhat lower than those in the first quarter of last year. As for payments from customers, they are sometimes a little slower, but for the moment that lateness has not yet translated into seriously bad debts.
It would be an illusion to believe that we will come unscathed through the economic tempest that is assailing us. However, we are confident that we can come out of it quite well. By maintaining rigorous financial management and improving our ways of doing business, we will be in a good position when economic activities recover their vigour.

Our priorities for 2009

Let me now say a few words about three other priorities for our organization. These are managing talents, maintaining our assets and improving the return to our investors authorized by the Régie de l'énergie du Québec. 

Just as it is important to manage our financial resources, so is it important to manage talents – to develop those we have and to find the means to attract more.

At a time when the economic stranglehold is tightening, it may seem counter-intuitive to invest in strengthening our workforce. But we are convinced that this is an area where it is imperative to think long term. Putting off developing the talents of our workforce will sooner or later backfire. That is not going to happen at Gaz Métro.

This year, we are going to hire a new cohort of technicians to make up for the many retirements to come in this professional sector, which is closely tied not only to the Company’s commercial development, but also to public safety and the integrity of our assets.

Nor can our assets pay the price of a short-term vision. Our natural gas distribution infrastructures are among the most extensive and most complex in Québec, especially for a private-sector company.  

The business we are in means that we have to maintain a balance between public safety, operational performance and reasonable costs. Gaz Métro’s distribution network is one of the most secure and efficient in North America. That said, just like other major Québec infrastructures, it is getting older. That, however, is where the comparison ends: Gaz Métro will not put off until tomorrow what needs to be done today. This will require increased investments in improving and maintaining our network in the years to come, a trend that will also be exacerbated by the work that being done under government infrastructure programs. 

To finance these investments, we need to increase the equity injection at the same time as our level of borrowing, in order to maintain an adequate capital structure. To do so, we need to offer you a return equivalent to that of other investments you could make with a comparable risk. The financial situation we are experiencing has overturned historic benchmarks and it calls for rethinking the formula for setting the rate of return on capital authorized by the Régie de l’énergie. This is a very high priority for the management of Gaz Métro. We will be making a case to Régie in the coming months.

That completes the tour of our immediate priorities for the year to come. Before closing, I should like to give an update on three of our long-term projects. 

The first is Gas Métro’s targeted participation in the development of Québec’s wind potential through the Seigneurie de Beaupré project with our partners, Boralex and the Séminaire de Québec. Last May we were awarded a share of the tender call launched by Hydro-Québec. Together, we will install 272 MW of electricity generation capacity, which is slated to be operational for the end of 2013. To that end, we will be making investments in the order of $800 million, half of which will be assured by Gaz Métro, and of which the greatest share will be expended from 2012 on. The project will contribute to Gas Métro’s revenues immediately on its commissioning, at which time it will be the largest wind farm in Québec.
Rabaska is another long-range project which saw significant developments in 2008. Last spring, we signed preliminary agreements with the U.S. subsidiary of Gazprom Group, the largest producer and owner of natural gas reserves in the world, for a possible equity interest in the project and to supply LNG to the terminal. 

The uncertainty that has pervaded financial markets since then, plus the volatility in the prices of energy and in the costs of construction, has considerably slowed the pace of the discussions around finalizing the agreements with Gazprom. The schedule for the project has thus been deferred.

Here, Rabaska is subject to the same forces as most major industrial projects the world over. However, our interest and our determination to see this project through to completion are unchanged.

The third project that is on the horizon is what we’ll do to support natural gas production in Québec. Let me be more specific here: natural gas production is not part of Gaz Métro’s mission and we have no intention of taking the place of exploration and development companies. However, the construction and operation of new pipelines to link these potential gas pools to our network does fall well within our mandate.

Several companies have begun natural gas exploration in the rocky formation of the Utica shale. They are interested in the St. Lawrence valley, between Montréal and Québec City, which is right in the middle of the territory already served by our network. If the results are positive, natural gas extraction could begin quite soon. When that time comes, Gaz Métro will be able to support and to capitalize on the development these resources. 

That completes the tour I wanted to take with you of Gaz Métro’s achievements, results and projects. In particular, I wanted to emphasize the important role that you, our investors, play in realising our ambitions. And, before closing, I cannot overlook the crucial role played by another pillar of our company – our employees. If I have not mentioned them often in my address, it’s only because I would have had to do so over and over again. We could not attain such results were we not able to count on employees who are mobilized and totally dedicated to the success of Gaz Métro. And I thank them for that.

It has been a pleasure to address you today. Thank you for your support and your attention.

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