Gaz Métro reports 2007 fiscal year results

November 21, 2007 - Financial releases

Montreal, November 21, 2007 – Gaz Métro Limited Partnership (TSX: GZM.UN, Gaz Métro) reports adjusted net income of $149.0 million for the fiscal year ended September 30, 2007, which is $1.8 million higher than the previous year. Adjusted net income does not include the impact of a $26.2 million non-cash expense related to the recording of a future income tax liability as a result of amendments to the Income Tax Act implementing proposals in the Minister of Finance’s Tax Fairness Plan. Including this expense, net income for the 2007 fiscal year is $122.8 million, down $24.4 million from 2006.

The increase in adjusted net income during the fiscal year is attributable to, among other things, increased income from the Quebec distribution activity, consolidation of
Green Mountain Power Corporation’s (GMP) results since April 12, 2007, recognition of non-recurring items in the Energy Services and Other Sector and lower recorded expenditures in connection with the proposed Rabaska liquefied natural gas (LNG) terminal, partially offset by lower earnings in the Natural Gas Transportation Sector and an increase in interest expense.  

Adjusted net income per unit, which excludes the impact of the future income tax liability, is $1.24, down $0.01 from 2006. The average number of outstanding units is 2.9 million, or 2.5%, higher in 2007, following the October 2006 unit issue. Net income per unit is $1.02, which is $0.23 less than in 2006.

“In many respects, the 2007 fiscal year was a good one for Gaz Métro”, commented Sophie Brochu, President and Chief Executive Officer.

“Based on the recommendation of the Partnership and representatives of its customers, the Régie de l'énergie approved new terms and conditions for its performance incentive mechanism. The new mechanism, which provides our Partners the possibility of receiving an incentive return, brings the expectations of our investors more in line with those of our customers and of the general public in terms of energy efficiency”.

“Moreover, our efforts to grow the residential and commercial markets continue to bear fruit. In 2007, more than 7,000 new customers joined the customer ranks Gaz Métro has the privilege of serving”, added Sophie Brochu.

“The 2007 fiscal year was also marked last spring by the acquisition of
Green Mountain Power Corporation, the second largest electricity distributor in Vermont. As Gaz Métro has already been involved in the natural gas distribution business in Vermont for 20 years, this acquisition enables it to pursue the targeted prudent diversification strategy for its energy activities. This acquisition also creates wealth for our unitholders and allows us to join forces with an enterprise that adheres to the sustainable development values that Gaz Métro holds dear”, stated Sophie Brochu.

Consolidated Results
Consolidated revenues for the fiscal year ended September 30, 2007 are down
$46.3 million, or 2.3%, to $1,957.5 million from $2,003.8 million the previous year. This can be explained mainly by a reduction in the average selling price of natural gas, partially offset by the consolidation of GMP’s sales since April 12, 2007. In Quebec, and in Vermont since October 1, 2006, natural gas purchased by Gaz Métro is billed to customers at cost, which minimizes the impact on gross margin and net income. This also applies to electricity distributed by GMP.

Consolidated gross margin of $623.6 million is up 8.2%, or $47.3 million, compared to the previous year, mainly due to the share of GMP’s gross margin included in Gaz Métro’s results since April 12, 2007 and the increase in the gross margin generated by the Quebec distribution activity.

Consolidated cash flows from operating activities, before change in non-cash working capital items, are $347.6 million for the 2007 fiscal year, an increase of $50.3 million over the 2006 fiscal year. The increase is attributable, among other things, to greater energy consumption on account of colder average temperatures than during the previous year and increased distributions from companies subject to significant influence compared to the previous year.

Income Distribution
Gaz Métro distributed $0.31 per unit in each quarter of the 2007 fiscal year, for a total of $1.24 per unit, compared to $1.33 per unit in 2006.

Gaz Métro inc., in its capacity as General Partner of Gaz Métro, declared today a distribution of $0.31 per unit, payable on January 3, 2008, to Partners of record at the close of business on December 15, 2007. Gaz Métro expects to maintain this distribution level in each quarter of the 2008 fiscal year.

Energy Distribution Sector
In Quebec

Following the acquisition of GMP, the Energy Distribution Sector, formerly the “Natural Gas Distribution Sector”, is now broader and includes all of Gaz Métro’s energy distribution activities.

Normalized (for temperatures) deliveries of natural gas in Quebec are up 13.8% to
6,250 million cubic metres during the 2007 fiscal year, compared to 5,490 million cubic metres in 2006. This can be explained by higher volumes in the industrial market following the production start-up by a large electric cogeneration customer in September 2006 and by increased consumption in the metallurgy sector.

Net income from the Quebec distribution activity is $120.9 million, which is up $3.8 million from $117.1 million the previous year. The increase is mainly attributable to higher distribution rates in the residential and commercial markets as well as higher deliveries. For the 2007 fiscal year, the rate of return allowed by the Régie de l’énergie was 9.57%, including an incentive of 0.84%. The rate of return achieved in 2007 was 9.91%, which is 0.34% higher than projected at the beginning of the fiscal year and 0.25% higher than the 9.66% achieved in 2006.

In a decision rendered on October 15 2007, the Régie de l’énergie increased the risk premium allowed to the Partners by 14 basis points, thereby reflecting, in its view,
Gaz Métro’s increased business risk since 1999. The rate of return allowed on Partners’ equity is therefore 9.52% for the 2008 fiscal year, which represents 9.05% based on the formula for establishing the base rate of return, plus an incentive of 0.47% based on anticipated productivity gains under the performance incentive mechanism. This return could be increased by up to 0.39% and reach 9.91% for the 2008 fiscal year if Gaz Métro reaches the targeted consumption reductions set in the Global Energy Efficiency Plan (GEEP).

On November 2, 2007, the Régie de l’énergie approved the rates for the distribution of natural gas in Quebec for the fiscal year starting October 1, 2007. The rates were agreed on by Gaz Métro and the intervenors recognized by the Régie before it approved them. They represent an average increase of 1.9% in customers’ energy bills for distribution, transportation and load-balancing services. The price of natural gas supplied by Gaz Métro continues to vary each month to reflect the fluctuations in its cost, this element being billed to customers at its cost.

A large customer of Gaz Métro, TransCanada Energy Ltd. (TCE) in Bécancour, could potentially stop consuming natural gas distributed by the Partnership as of January 1, 2008, for an indefinite period of time. Following this news and in connection with the approval required by TCE and Hydro-Québec from the Régie de l’énergie, Gaz Métro made representations in order to minimize the impact thereof on its customers and Partners.

In Vermont

In Vermont, natural gas deliveries by Vermont Gas Systems (VGS) during the 2007 fiscal year are up 7.5% to 244 million cubic metres, compared to 227 million in 2006. However, as a result of warmer than normal average temperatures during the 2007 fiscal year, residential consumption, which generates the highest gross margin, was lower than what had been anticipated and used for establishing the rates. This reduced earnings and could not be completely offset by higher volumes in the industrial market.

Since April 12, 2007, GMP has distributed 1,009 gigawatt hours of electricity.

Net income from the energy distribution activities in Vermont is down $1.4 million to
$4.6 million, mainly on account of non-recurring revenues recorded in VGS in 2006, lower consumption in the residential market as a result of warmer temperatures than normal in 2007 and higher financing costs due to, among other things, the investment in GMP. GMP’s net earnings of $4.4 million since April 12, 2007 have however partially offset those elements.

Natural Gas Transportation Sector
Net income for the Transportation Sector is $14.0 million for the 2007 fiscal year, compared to $22.3 million in 2006. The decrease of $8.3 million is mainly attributable to the reduction in the rate of return allowed on the equity of Trans Québec & Maritimes Pipeline, and lower earnings of Portland Natural Gas Transmission System mainly attributable to the loss of two large customers, and to the recording in 2006 of a significant non-recurring revenue.

Natural Gas Storage Sector
Adjusted net income from the Storage Sector is $3.2 million in 2007, which is $2.4 million lower than in 2006. The main reason for this decrease is non-recurring revenues of
$1.8 million the previous year and the unfavourable $0.9 million impact in 2007 of the Régie de l’énergie’s decision with respect to the rate for the Pointe-du-Lac storage site.

Taking the unfavourable $26.2 million non-monetary expense from the recording of a future income tax liability arising from the amendments to the Income Tax Act implementing the proposals in the Minister of Finance’s Tax Fairness Plan, the Storage Sector has a net loss of $23.0 million for the 2007 fiscal year, compared to net income of $5.6 million in 2006, a decrease of $28.6 million.

Energy Services and Other Sector
Net income for the Sector is $8.0 million for the 2007 fiscal year, compared to $3.7 million in 2006. The $4.3 million increase is mainly on account of the recognition of one-third
($2.0 million) of the gain on the sale of 50% of the units of Climatisation et Chauffage Urbains de Montréal to Dalkia, the recording of a $1.4 million tax benefit relating to prior years in MTO Telecom Inc. and greater activity by certain companies in the Sector.

Development Expenditures
During the 2007 fiscal year, Gaz Métro incurred $1.7 million of development expenditures and   non-allocated net expenses, compared to $7.5 million the previous year. The decrease is largely due to development expenses of $0.2 million recorded in connection with the proposed Rabaska LNG terminal in 2007, compared to $6.6 million the previous year, a decrease of $6.4 million.

Business Development
On October 24, 2007, the government of Quebec approved Rabaska Limited Partnership’s proposal to construct an LNG terminal at Lévis. The project, in which Gaz Métro’s partners are Enbridge Inc. and Gaz de France, therefore received the government’s endorsement of the favourable recommendation issued last summer by the Commission d’examen formed by the Bureau d’audiences publiques sur l’environnement and the Canadian Environmental Assessment Agency. The federal government is pursuing its process for getting approval of the project. Gaz Métro continues to work with its partners to secure a long-term gas supply contract for the project.

On September 18, 2007, Gaz Métro and Boralex Inc. submitted three joint bids in response to Hydro Québec Distribution’s call for tenders for 2,000 megawatts of wind power energy to be produced by three wind farms having a total capacity of approximately 375 megawatts to be developed on the Seigneurie de Beaupré lands, in collaboration with the Séminaire de Québec. Gaz Métro and its partner firmly believe they have an exceptional site for such a project in Quebec. Hydro-Québec Distribution should announce the projects retained in the spring of 2008.

Taxation of Flow-through Entities
On June 22, 2007, the House of Commons adopted Bill C-52 enacting the Income Tax Act amendments implementing the proposals in the Minister of Finance’s Tax Fairness Plan tabled on October 31, 2006 with respect to income trusts and limited partnerships (flow-through entities). The amendments transfer to Gaz Métro the payment of income tax (presently paid by each Partner) on Gaz Métro’s income at the corporate tax rate, effective October 1, 2010, and treat the after-tax income distributions as dividends for tax purposes.

In its present form, the amendment would reduce distributable income by the related income taxes. The impact on Partners would depend on their individual tax status. For the 2007 fiscal year, approximately 85% of Gaz Métro’s net income comes from entities that have not been taxed to date at the Partnership’s level. Only that portion will be affected by the change in the law as of October 1, 2010. Gaz Métro is analyzing its various alternatives.

Impact of Fluctuations in Exchange Rate on Capital Structure
Gaz Métro, which owns investments in U.S. companies, is exposed to the risk of the devaluation of the U.S. dollar in relation to the Canadian dollar. At the end of each period, it has to revalue its investments and record any changes in Partners’ equity.

During the 2007 fiscal year, due to the appreciation of the Canadian dollar, Gaz Métro had to write down its U.S. dollar investments by $27.2 million, which had an impact on the debt/total capitalization ratio. If it had not been for this write-down, this ratio would have been 64.0% instead of 64.6% as presented. The value of the Partnership’s U.S. dollar investments as at September 30, 2007 is $199.8 million.

Conference Call
The Partnership will hold a telephone conference with financial analysts to discuss its results for the 2007 fiscal year on Wednesday, November 21, 2007 at 4:00 p.m. (Eastern time). Interested parties are invited to listen in. Sophie Brochu, President and Chief Executive Officer, and Pierre Despars, Executive Vice President and Chief Financial Officer, will be the main speakers.

The conference can be accessed live by dialling 416 644 3414 or 1 800 732 6179. It will also be webcast on Gaz Métro’s website (www.gazmetro.com/investors) in the “Webcasts” section.

Rebroadcasts can be accessed for 30 days by telephone at 416 640 1917 or 1 877 289 8525 (access code #21252626), and for 90 days on Gaz Métro’s website.

Gaz Métro Overview
With more than $3.1 billion of assets and approximately 1,300 employees in Quebec, Gaz Métro is a leading Quebec energy company and one of Canada’s largest natural gas distributors. Gaz Métro serves about 171,000 customers in Quebec through an underground pipeline network of almost 10,000 km.

Through its wholly-owned subsidiary, NNEEC, Gaz Métro has been active in New England’s energy industry since 1986 and has nearly 300 employees there. NNEEC includes Vermont Gas Systems, the sole gas distributor in Vermont, and Green Mountain Power Corporation, the second largest electricity distributor in that State.

Through subsidiaries or in partnership with other investors, Gaz Métro is active in natural gas transportation and storage as well as energy services and water and waste water systems and fibre optic networks. Gaz Métro also participates in various development projects in the energy sector.

FORWARD-LOOKING STATEMENTS

To enable investors to better understand the Partnership’s outlook for the future and make more informed decisions, the matters discussed in this report may contain forward looking information about Gaz Métro’s objectives, strategies, financial condition, operating results and activities. Such information expresses, as of the date hereof, the estimates, forecasts, projections, expectations or opinions of the Partnership concerning future events or results. Actual results may differ materially from the results anticipated herein and, consequently, we cannot guarantee that any forward-looking statement will materialize. Forward-looking information does not take account of the impact transactions or non-recurring matters, announced or arising after the statements have been made, might have on the Partnership’s activities.Significant risks and uncertainties could cause actual results and future events to differ materially from current expectations.

For additional information on these and other factors, see the reports filed by Gaz Métro with Canadian securities regulators. Gaz Métro therefore cautions readers not to place too much reliance on forward-looking information.

ADJUSTED INDICATORS NOT STANDARDIZED IN ACCORDANCE WITH GAAP

In the view of Gaz Métro’s management, certain “adjusted” indicators, such as adjusted net income, adjusted net income per unit and others provide readers with information they consider useful for analyzing its financial results. However, they are not standardized by generally accepted accounting principles (GAAP) and should not be considered in isolation or as substitutes for other performance measures that are in accordance with GAAP. The results obtained might not be comparable with similar indicators used by other issuers and should therefore only be considered as complementary information.

Sources: 

Investors and Analysts 
Caroline Warren
Investor Relations
514-598-3324

Media
Frédéric Krikorian
Public and Governmental Affairs
514-598-3656

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