2010-2011 Revenue Requirements Terasen Gas (Vancouver Island) and - - PDF document

1 Terasen Gas. A Fortis company.

Terasen Gas (Vancouver Island) 2010-2011 Revenue Requirements and Rate Design Application

July 13, 2009

B-2 TGVI 2010 ‐ 2011 REVENUE REQUIREMENTS

EXHIBIT

2

Terasen Gas. A Fortis company.

Workshop Agenda

Introduction

Tom Loski

External Situation & Revenue Requirements

Tom Loski

Gas Sales and Transportation Demand

Lee Robson

Respected and Trusted Operator / Operational Excellence

O&M and Capital James Wong Cost of Gas Mike Hopkins

Rate Base

Michelle Carman

Rate Design

Tom Loski

Proposed Regulatory Timetable and Wrap-up

Tom Loski

3 Terasen Gas. A Fortis company.

External Situation

Tom Loski – Chief Regulatory Officer

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Terasen Gas. A Fortis company.

TGVI Must Respond To New Realities: Changes In External Operating Environment

Several external factors impact our operating environment and we must respond to:

Evolving energy and environmental policies Changing expectations of customers, regulators and other stakeholders Level of competitiveness as an energy provider Changing economic and demographic realities Changes in financial accounting standards

Reference- Section A, pages 30 & 31

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Terasen Gas. A Fortis company.

TGVI Must Be Competitive In The Marketplace: Continued Status As An Immature Utility

There are several key differences between TGVI and a Mature Utility:

Higher costs per customer

Operating and rate base

Lower revenue per customer Royalty Credit

Soft-cap pricing mechanism constructed to reflect the immature nature of the utility; supports competitive ability while meeting rate design needs, rate stability and cost recovery The final year of the Royalty Credit is 2011; this will cause a significant increase in revenue requirement for 2012 if left unmitigated

Reference- Section A, pages 30-55

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Terasen Gas. A Fortis company.

The Proposed RRA Meets Stakeholder Needs

Reference- Section B, Tab 3

We must make additional investments to:

Meet the evolving needs

• r our customers, the

communities we serve, and our shareholder Address the new realities that we are faced with Continued management focus on five key areas

Management Excellence Customer Service Operational Performance Employees Financial Results

7 Terasen Gas. A Fortis company.

Tom Loski – Chief Regulatory Officer

Revenue Requirements

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Terasen Gas. A Fortis company.

RDDA Repayment Ahead Of Schedule: Projected To End 2009 With Zero Balance

75.3 61.0 48.7 41.8 27.9 7.1 0.0

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 2003 2004 2005 2006 2007 2008 2009

RDDA Closing Balance ($millions)

Reference- Appendix F-5

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Terasen Gas. A Fortis company.

RDDA Repayment Ahead of Schedule: Approval of 2008 Ending Balance

2008 Ending RDDA balance of $7,149,120:

2007 Approved Ending Balance: $27,907,609 Opening Adjustment: ($218,508) 2008 Sub Debt Interest $2,481,026 2008 Annual Revenue Surplus ($20,539,961)

2009 Projected Revenue Surplus balance of ($2,962,000):

2009 Projected Annual Revenue Surplus ($10,112,000) less elimination of the RDDA balance TGVI proposes to amortize this balance to all customers (other than the VIGJV and Squamish) over the forecast period

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Terasen Gas. A Fortis company.

Delivery Costs Relatively Stable: Forecasts Are Reasonable And Prudent

2009P 2010F 2011F Operations & Maintenance 26.2 $ 31.4 $ 32.0 $ Depreciation & Amortization 23.0 21.6 28.4 Taxes 17.3 11.5 14.4 Other 3.9 3.3 (5.6) Earned Return 35.7 37.1 51.0 Delivery Margin 106.1 104.8 120.1 Royalty Adjusted Cost of Gas 81.2 58.8 67.2 Revenue Requirement 187.3 $ 163.5 $ 187.4 $

Reference- Section C, Schedules 2 - 4

Annual Revenue Requirement

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Terasen Gas. A Fortis company.

Gas Costs Increasing Over Time: Cost of Gas Detail 2009 – 2011

2009 2010 2011 Royalty Credit (28.1) $ (35.8) $ (40.1) $ GCVA Amortization 4.2 (4.0) GCVA Additions 5.8 Cost of Gas Sold 99.3 98.6 107.3 RACOG Including GCVA Impacts 81.2 $ 58.7 $ 67.2 $

Reference- Section C, Schedules 2 - 4

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Terasen Gas. A Fortis company.

TGVI Must Be Competitive In The Marketplace: Total Cost Of Service 2009 - 2011

TGVI is an immature utility

Less than 20 years in operation High rate base per customer Royalty Credit (20% of total costs) allows for competitive pricing against competitive alternative fuels

2011 is the final year of the Royalty Credit 2012 rates would need to increase significantly to recover the higher revenue requirement resulting from the loss of the Royalty Credit Phasing-in of this necessary increase over a two to three year period is desirable to prevent rate shock

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Terasen Gas. A Fortis company.

Rate Stability Is Best For Our Customers: 2012 Royalty Revenue Loss Creates Rate Shock

50 100 150 200 250 300 2009 2010 2011 2012

Delivery Margin Cost of Gas RDDA 2009 Surplus Deferral

• 18.7%

14.6% 29.3%

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Terasen Gas. A Fortis company.

Rate Stability is Best For Our Customers: Relative Stability Absent Royalty Revenue

$28.1 $35.8 $40.1

50 100 150 200 250 300 2009 2010 2011 2012

Delivery Margin Cost of Gas RDDA 2009 Surplus Deferral Royalty Revenue

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Terasen Gas. A Fortis company.

Rate Stability is Best For Our Customers: 2010/2011 Surplus Allows a Unique Opportunity

50 100 150 200 250 2009 2010 2011

Delivery Margin Cost of Gas RDDA 2009 Surplus Deferral RSDA

Relative Rate Stability Achieved

$38.8 million RSDA balance- Jan 1

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Terasen Gas. A Fortis company.

The Forecast Revenue Requirements And Revenue Surplus Are Reasonable And Prudent

TGVI must respond to evolving business realities TGVI must be competitive in the marketplace The proposed RRA meets the needs of stakeholders including customers, regulators, and our shareholder

We look forward to serving our customers now and into the future

17 Terasen Gas. A Fortis company.

Gas Sales and Transportation Demand

Lee Robson – Customer & Energy Forecasting Manager

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Terasen Gas. A Fortis company.

The Demand Forecast Is Both Reasonable And Appropriate For Use In This Application

2009 Approved

Methodology is consistent with that used in prior years The best available information has been incorporated at the time of the forecast Methodology has been reviewed and accepted both internally and by the BCUC Total Normalized Energy Demand Relatively Stable

• 5

10 15 20 25 30 35 2003 2004 2005 2006 2007 2008 2009P 2010F 2011F Energy (PJ)

Residential Commercial Transportation

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Terasen Gas. A Fortis company.

Process Is Thorough And Follows A Similar Approach To That Taken In Prior Years

Economic Indicators TGVI Forecast:

Customer Additions Average Use per Customer Transportation Volumes & Margins

Company Summary

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Terasen Gas. A Fortis company.

The Economic Downturn Impacts Overall Demand – Mainly Customer Additions

Economy contracting:

1st recession since 1982 2010 Winter Olympics to assist recovery

Unemployment rising:

35,100 jobs lost in January – largest one month decline Job losses concentrated in two sectors

Housing Market declining:

Significant decline in 2009 (34% lower than 2008) Further decline in 2010, before modest growth in 2011

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Terasen Gas. A Fortis company.

Despite Declining Customer Additions, Overall Energy Demand Still Growing

Customer Additions to decline through 2010: Reflects economic downturn, consistent with CMHC forecast Projecting: 2,500 net customer additions for 2009, 2,320 in 2010, and 2,430 in 2011 TGVI Net Customer Additions well below recent levels

1,000 2,000 3,000 4,000 5,000 6,000 2003 2004 2005 2006 2007 2008 2009P 2010F 2011F

Customer Additions

• 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Housing Starts

Net Customer Additions Housing Starts

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Terasen Gas. A Fortis company.

Stable Residential Average Use Lessens Impact Of Declining Customer Additions

Residential load profile relatively similar:

Leads to relative stable average use per customer Change since 2004 is 2.9%, or 0.7% annually Although recent trend downwards, potential for increases

RGS - Use Per Customer

20 25 30 35 40 45 50 55 60 65

2004 2005 2006 2007 2008 2009P 2010F 2011F

GJ/yr

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 0 to 5 16 to 20 31 to 35 46 to 50 61 to 65 76 to 80 91 to 95 106 to 110 121 to 125 136 to 140 151 to 155 166 to 170 181 to 185 196 to 200 211 to 215 226 to 230 241 to 245 256 to 260 271 to 275 286 to 290 301 to 305 316 to 320 331 to 335 346 to 350 361 to 365 376 to 380 391 to 395

Annual Consumption Range (GJ) Number of Customers 2006 2008

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Terasen Gas. A Fortis company.

Lower Potential for Efficiency Improvements Due To Relative Youth Of TGVI

Even within the same housing type, there are many variables that impact annual consumption

Victoria Home Constructed 1990-2005 New High Efficient Home in Victoria

• One storey building with basement
• One storey building with basement
• 2,500 square foot older home
• 2,500 square foot new home (code compliant)
• Typical constructed home from 1990-2005
• Constructed under current codes
• Average temperature 20 degrees Celsius
• Average temperature 20 degrees Celsius
• Thermally broken windows code minimum
• Energy Star windows code minimum
• Induced draft furnace, AFUE of 78%
• High efficiency condensing furnace, AFUE of 93%

Space Heating Energy = 55.4 GJ/yr Space Heating Energy = 45.6 GJ/yr

Source:Modelled through Natural Resources Canada's HOT 2000 software

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Terasen Gas. A Fortis company.

Commercial Average Use Per Customer Relatively Stable

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0 to 50 251 to 300 501 to 550 751 to 800 1001 to 1050 1251 to 1300 1501 to 1550 1751 to 1800 2001 to 2050 2251 to 2300 2501 to 2550 2751 to 2800 3001 to 3050 3251 to 3300 3501 to 3550 3751 to 3800 4001 to 4050 4251 to 4300 4501 to 4550 4751 to 4800 5001 to 5500 7501 to 8000 10001 to 10500 12501 to 13000 greater than 15000

Annual Consumption Range (GJ) Number of Customers

2006 2008

Normal 2006 Normal 2007 Normal 2008 AGS 1,387.0 1,367.0 1,297.0 SCS1 75 91 103 SCS2 314 310 313 LCS1 903 943 952 LCS2 2,295 2,406 2,359 LCS3 17,379 17,694 16,521 Normal 2006 Normal 2007 Normal 2008 Total Energy 7,341 7,491 7,345

Commercial load profile almost identical (in aggregate):

Some variability in individual customer classes Overall volumes have been relatively stable

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Terasen Gas. A Fortis company.

Commercial Customer Reclassification Impacts Use Per Customer - Overall Volumes Unaffected

~1,300 commercial customers to be reclassified (~14% of total)

Impacts use per customer for SCS1, SCS2, LCS1, LCS2, and LCS2 Analysis of volumes identifies adjustment to be made

Tariff Customers SCS1 86 SCS2 612 LCS1 422 LCS2 144 LCS3 47 Reclassified Out Tariff Customers SCS1 546 SCS2 279 LCS1 322 LCS2 142 LCS3 22 Reclassified In Tariff Customers SCS1 460 SCS2

• 333

LCS1

• 100

LCS2

• 2

LCS3

• 25

Net Change

Tariff Adjustment (GJ) SCS1

• 28

SCS2 9 LCS1 45 LCS2 202 LCS3 3,041 Change In Average Use

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Terasen Gas. A Fortis company.

Average Use Per Customer Forecast Is Reasonable And Appropriate For Use In This Application

Residential average use to remain relatively stable Commercial average impacted by reclassification, but also stable Methodology consistent with that for prior years:

Trending analysis of recent historical results Trends in the market Reviewed and accepted both internally and by BCUC

2005 2006 2007 2008 2009P 2010 2011 RGS 58.7 60.2 57.0 56.1 56.1 55.0 55.0 SCS1 75 75 91 103 94 74 74 SCS2 314 314 310 313 327 322 322 LCS1 943 903 943 952 968 997 997 LCS2 2,384 2,295 2,406 2,359 2,530 2,561 2,561 AGS 1,339 1,387 1,367 1,297 1,290 1,262 1,262 LCS3 16,521 17,379 17,694 16,521 18,471 19,562 19,562

Notes

• 1. First two months of 2009 are actuals.
• 2. Reclassification of approximately 1,300 commercial customers impacts the use per

customer projections for 2009. Reclassification is to be completed August 1, 2009.

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Terasen Gas. A Fortis company.

Transportation Volumes & Margins Relatively Stable Throughout Forecast Period

Developed based on existing contractual arrangements at the time of the forecast

BCH ICP – Contract demand 50 TJ/day (effective November 1, 2009 – October 31, 2011) VIGJV forecast at existing contract demand of 8.0 TJ/day

5 10 15 20 25 2004 2005 2006 2007 2008 2009P 2010F 2011F

Energy (PJ)

5 10 15 20 25 30

Revenue ($M) Energy Revenues

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Terasen Gas. A Fortis company.

The Demand Forecast Is Both Reasonable And Appropriate For Use In This Application

2009 Approved

Methodology is consistent with that used in prior years The best available information has been incorporated at the time of the forecast Methodology has been reviewed and accepted both internally and by the BCUC

Note: First two months of 2009P are actual results (non-weather normalized)

Total Normalized Energy Demand Relatively Stable

• 5

10 15 20 25 30 35 2003 2004 2005 2006 2007 2008 2009P 2010F 2011F Energy (PJ)

Residential Commercial Transportation

29 Terasen Gas. A Fortis company.

Respected & Trusted Operator / Operational Excellence O&M

James Wong – Director, Finance & Planning

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Terasen Gas. A Fortis company.

TGVI O&M Expenditures

Assumptions (1) Comparators (2) Highlights (3)

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Terasen Gas. A Fortis company.

Assumptions

Zero Based Budgeting O&M Management 2009 O&M as the Base O&M Incremental Funding:

2010 Additive to 2009 Projection 2011 Additive to 2010 Forecast

Categories of O&M Incremental Funding:

Labour inflation and benefits Code and regulations Accounting changes Mt Hayes LNG Service enhancements

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Terasen Gas. A Fortis company.

Improving Customer Satisfaction While Containing O&M Per Customer

$200 $220 $240 $260 $280 $300 $320 $340 $360 $380 $400 2006 2007 2008 2009 Gross O&M per Customer 60% 65% 70% 75% 80% 85% Customer Satisfaction % Gross O&M per customer ($ 2009) Customer Satisfaction (%)

33

Terasen Gas. A Fortis company.

O&M Incremental Funding To Meet Our Customers’ Needs – 2010 & 2011

Gross O&M Incremental Funding

(4) (2)

• 2

4 6 8 10

Labour Inflation and Benefits Code and Regulations Accounting Changes Mt Hayes LNG Service Enhancements

$ millions 2010 2011

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Terasen Gas. A Fortis company.

Incremental Funding Required To Operate The Mt Hayes LNG Facility To Serve Customers

200 400 600 800 1000 1200 1400 1600 1800 2000 2010 2011 2012 $000s Non-Labour Labour

O&M Funding

35

Terasen Gas. A Fortis company.

TGI To TGVI Shared Services Approach Provides For Reasonable Allocation Of Costs

Total TGI O&M cost pool Exclude costs not shared Apply applicable cost driver Allocate costs to TGVI

Shared Services Approach

Applicable Cost Driver includes:

Management estimate FTE count Customer count

$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $ millions 2010 2011 TGVI Shared Services

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Terasen Gas. A Fortis company.

Customers Benefiting From Efficiencies Realized

• O&M Per Customer Is Lower In 2010 & 2011 Than In 2006

* Restated number excludes incremental funding due to codes and regulations, accounting changes, Mt Hayes LNG

$- $100 $200 $300 $400 $500

2006 2009 2010 2011

O&M per Customer ($ 2009) Gross O&M per customer ($ 2009) Gross O&M per customer ($ 2009) - restated

37

Terasen Gas. A Fortis company.

O&M Summary

Required to meet the needs of customers and stakeholders and to maintain TGVI’s profile as an efficient and effective gas utility TGVI requests approval of the O&M funding as outlined

38 Terasen Gas. A Fortis company.

Respected & Trusted Operator / Operational Excellence Capital

James Wong – Director, Finance & Planning

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Terasen Gas. A Fortis company.

TGVI Capital Expenditures

Assumptions (1) Comparators (2) Highlights (3)

40

Terasen Gas. A Fortis company.

Assumptions

Categories of Capital Spending:

Category A - Mains, Services and Meters Category B - Transmission and Distribution Category C - IT and non IT

Category A: Mains, Services, Meters based on:

Forecast Customer Additions and Meter Exchanges

Category B: Transmission and Distribution:

Safety, Reliability and Growth 20 Year Transmission Plan, Five Year Distribution System Plan

Incorporates a proposed change to CPCN threshold limit:

$5.4 million (1% of rate base) to $20 million

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Terasen Gas. A Fortis company.

Improving Customer Satisfaction While Containing Capital per Customer

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 2006 2007 2008 2009 Capital Expenditure per Customer 60% 65% 70% 75% 80% 85% Customer Satisfaction Total Capital Expenditure per Customer ($ 2009) Customer Satisfaction (%)

42

Terasen Gas. A Fortis company.

2010 – 2011 Proposed Capital Expenditures

5 10 15 20 25 Category A Category B Category C $ millions 2010 2011

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Terasen Gas. A Fortis company.

Mains, Services and Meters Capital Expenditures to Service Customers

5 10 15 20 2009 2010 2011 $ millions Mains Services Meters

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Terasen Gas. A Fortis company.

Transmission And Distribution Plant Spending Trend To Continue

Systems Integrity and Reliability

$- $5.0 $10.0 $15.0 $20.0 $25.0 2006 2007 2008 2009 2010 2011 Capital Expenditures ($millions) Distribution Transmission

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Terasen Gas. A Fortis company.

All Other Plant – Category C Spending Trend to Continue

$- $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 2006 2007 2008 2009 2010 2011 Capital Expenditures ($millions) IT Non IT under $5 million Non IT over $5 million

46

Terasen Gas. A Fortis company.

Containing Capital Spend Per Customer

* Restated number excludes $5 m in 2010 and $3 m in 2011 for replacement of the Victoria Regional Office that otherwise would have been CPCN

$- $50 $100 $150 $200 $250 $300

2006 2009 2010 2011

Capital per Customer ($ 2009) Total Capital per customer ($ 2009) Total Capital per customer ($ 2009) - restated

47

Terasen Gas. A Fortis company.

Capital Summary

2010 and 2011 levels of capital expenditures are required to service new and existing customers and ensure the safety and reliability of the gas distribution system TGVI requests approval of the capital expenditures as

• utlined

48 Terasen Gas. A Fortis company.

Terasen Gas (Vancouver Island) Inc. TGVI Cost of Gas Mike Hopkins – Manager, Commodity

49

Terasen Gas. A Fortis company.

Presentation Agenda

Resource Portfolio Hedging Program Cost of Gas & Scenarios

50

Terasen Gas. A Fortis company.

ACP Reflects a Reliable and Cost Effective Resource Portfolio

Objective of the Annual Contracting Plan (ACP):

Contract for a cost effective supply portfolio to meet the design peak day and normal loads

Submitted to Commission for approval each year Contract details also submitted to Commission (prior to start

• f each winter and summer)

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Terasen Gas. A Fortis company.

Reliable and Cost Effective Resources To Meet Core Load

2009/10 TGVI Normal & Design Day Loads vs Supply Portfolio

20,000 40,000 60,000 80,000 100,000 120,000

1-Nov-09 16-Nov-09 1-Dec-09 16-Dec-09 31-Dec-09 15-Jan-10 30-Jan-10 14-Feb-10 1-Mar-10 16-Mar-10 31-Mar-10 15-Apr-10 30-Apr-10 15-May-10 30-May-10 14-Jun-10 29-Jun-10 14-Jul-10 29-Jul-10 13-Aug-10 28-Aug-10 12-Sep-10 27-Sep-10 12-Oct-10 27-Oct-10

GJ/d

Seasonal purchases Winter seasonal storage (Aitken Creek) MIST storage Peaking supply Spot purchases

• Mt. Hayes LNG (2011)
• Mt. Hayes LNG (2011)

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Terasen Gas. A Fortis company.

Hedging Program Provides Cost Stability

Objectives of the Hedging Program include:

Improving probability of rate competitiveness with other sources of energy (e.g. electricity and fuel oil) Moderating volatility of market gas prices and providing cost stability

Submitted to Commission for approval each year Transaction details also submitted to Commission (on a quarterly basis)

53

Terasen Gas. A Fortis company.

2009-2011 Forecast Gas Costs

• Commodity purchases represent the largest component of cost of gas

Base Case Cost of Gas - 2009-2011 Forecast Gas Costs ($ 000s) 2009 2010 2011

Projected Forecast Forecast

Commodity Supply 70,010 $ 78,596 $ 91,264 $ Company Use & UAF - Commodity Cost 2,791 3,489 4,051 Commodity 72,801 $ 82,084 $ 95,314 $ Transportation Demand Charges 7,025 6,732 6,534 Storage Demand Charges 3,463 3,408 3,109 Carbon Tax on Company Use Gas 277 355 466 Hedging Cost / (Gain) 15,283 5,445 1,268 Gas Supply Management Costs 465 605 620 Total Cost of Gas 99,314 $ 98,629 $ 107,311 $ Royalty Revenues (28,095) $ (35,832) $ (40,091) $ Royalty Adjusted Cost of Gas (RACOG) 71,219 $ 62,796 $ 67,220 $ Sales Volumes (TJ) 12,264 12,241 12,433 RACOG Unit Cost ($/GJ) 5.81 $ 5.13 $ 5.41 $ Approved 2009 RACOG Unit Cost ($/GJ) 6.40 $

54

Terasen Gas. A Fortis company.

Forecast Gas Costs - Four Scenarios

(#1) Base Case Cost of Gas:

February 24, 2009 forward prices

(#2) Cost of Gas with Volatility Factor:

35% volatility factor applied to Base Case Cost of Gas forecast

(#3) High Case Cost of Gas:

July 3, 2008 market high forward prices applied to Base Case Cost of Gas forecast

(#4) Q2 Update Cost of Gas:

June 1, 2009 forward prices and additional hedging in place

55

Terasen Gas. A Fortis company.

TGVI Forecast Royalty Adjusted Cost of Gas (RACOG)

$50 $70 $90 $110 $130 $150 2010 2011 2012 RACOG ($million) # 1 - Base Case Cost of Gas # 2 - Cost of Gas w ith Volatility Factor # 3 - High Case Cost of Gas # 4 - Q2 Update Cost of Gas

2010-2012 Forecast Gas Cost Scenarios

Loss of Royalty Credit in 2012 increases cost of gas significantly Market volatility significantly impacts cost of gas

56 Terasen Gas. A Fortis company.

Terasen Gas (Vancouver Island) Inc. Rate Base Michelle Carman – Cost of Service Manager

57

Terasen Gas. A Fortis company.

Rate Base Increases Are Required To Continue Serving Customers

Reflect Accounting Changes Add Value to Stakeholders through Deferrals Maintain System Reliability & Integrity Implement Energy Policy Initiatives Support Customer Growth Rate Base Increases

58

Terasen Gas. A Fortis company.

Change In Rate Base Largely Due To The Mt. Hayes Facility

Part III, Section C, Tab 8, Page 310

2009P 2010F 2011F Net Plant in Service 527.6 $ 545.0 $ 550.0 $ Mount Hayes LNG Addition

• 162.0

Deferred Charges 6.2 0.5 4.9 Cash Working Capital (2.1) 0.3 0.5 Gas-in-Storage 11.9 9.8 12.5 Other (3.4) (0.3) (0.3) Utility Rate Base 540.2 $ 555.4 $ 729.6 $ Rate Base Increase 15.2 $ 174.2 $

(amounts in $ millions)

59

Terasen Gas. A Fortis company.

Investment In Plant Required For Growing Customer Base and System Integrity

$7 $162 $29 $30 $(23) $(27) $5 $2

2010 2011 $ Millions Average CPCN Additions Average Regular Additions Average Depreciation Average Repayment of Government Loans & Other

$17 million $167 million

Part III, Section C, Tab 13, Schedules 9 and 10

60

Terasen Gas. A Fortis company.

Deferrals Provide Benefits To Our Customers And The Company

$0.2 $0.3 $2.8 $6.6 $(2.0) $0.2 $0.1 $(2.1) $(0.7)

2010 2011 Non-Controllable Items Energy Policy GCVA Cost of Current Applications Other Residual Part III, Section C, Tab 8, Page 315

Mid year balance $0.5 million Mid year balance $4.9 million

61

Terasen Gas. A Fortis company.

Working Capital And Gas-In-Storage Reflect Updated Requirements Cash Working Capital:

Updated Lead Lag Study produces 2010 and 2011 working capital forecasts Results validated by KPMG Reflects updated working capital requirements

Gas-in-Storage changes reflect changing commodity prices

62

Terasen Gas. A Fortis company.

Rate Base Increases are Required

Rate base changes reflect our responses to the requirements discussed today and in our Application Rate base changes are required to continue serving customers and provide safe and reliable service

63 Terasen Gas. A Fortis company.

Terasen Gas (Vancouver Island) Inc. Rate Design Tom Loski – Chief Regulatory Officer

64

Terasen Gas. A Fortis company.

Rate Design Supports Competitive, Stable And Fair Rates: Need To Meet Situational Challenges Deal with RDDA balance Whistler Pipeline cost allocation Mt Hayes cost allocation Address continuing challenges for an Immature Utility:

TGVI’s competitive position Need for stable predictable set of rates Loss of Royalty Revenues in 2012 Repayment obligations - repayable government contributions

65

Terasen Gas. A Fortis company.

Rate Design Principles are Consistent and Remain Pertinent for the Forecast Period

Competitiveness:

Continue with rates established under the soft-cap mechanism to effectively achieve rate stability with respect to cost of gas and alternative fuels

Stability:

Need for stable predictable rates to ensure company’s ability to attract and retain customers

Customer Impact:

Ensure that rate design does not unduly impact customers’ bills

Fairness:

Rate structures reflect cost of service and value for service

Ease of Understandability, Administration and Rate Continuity:

Ensure consistency and continuity to minimize customer confusion; promote fairness and equity

Recovering the Revenue Requirements:

Progress towards goal of financial sustainability

Maintain the safety and reliability of the utility system:

Ensure that the system is properly maintained and is operated in a safe reliable manner

66

Terasen Gas. A Fortis company.

Current Customer Segmentation Is Still Appropriate For TGVI As An Immature Utility

Load factors and average annual consumption for the Core Market as a whole have declined moderately since 2003:

Reflect residential customers’ continued focus on energy efficiency and use of newer, more efficient appliances Commercial classes have remained relatively stable since 2003 with some reclassification required

Maintaining Current Customer Segmentation:

Fits with an Immature Utility’s intention to expand its customer base and align its customer needs with different rate classes Premature to change segmentation since the company is assessing the possibility of amalgamation with TGI Ensures greater consistency and continuity of rates that are better understood by customers and more easily administered by the company

67

Terasen Gas. A Fortis company.

Cost Allocation Methodology Continues To Be Appropriate For Forecast Period

Cost of Service Study updated with current inputs for the 2010-2011 forecast period Yields appropriate results for the design and evaluation of rates for forecast period The Whistler Pipeline successfully implemented and the capital contribution determined according to the approved methodology; keeps TGVI customers neutral to pipeline cost impact The Mt Hayes LNG Storage Facility costs allocated to TGI, and among TGVI customers based on cost causation Proposed allocation of forecast 2009 revenue surplus is reasonable and prudent

68

Terasen Gas. A Fortis company.

Mt Hayes LNG Storage Facility Costs Allocated Using Current Methodology Where Appropriate Maintained approach from CPCN to determine value to both TGVI and TGI based on alternative storage resources

TGVI

Gas Supply Portfolio 0.5 BCF

TGVI LNG Storage Facility

1.5 BCF

TGI

Storage and Delivery Agreement 1.0 BCF

TGVI

Net LNG Storage Facility Costs

TGI Valuation Method: Revenue from Storage and Delivery Agreement based on market value TGVI Valuation Method: Debit to Cost of Gas based on market value Residual TGVI System Costs: Allocated on Average System Capacity

2011 - $19.4M 2012 - $24.1M 2011 - $9.0M 2012 - $12.0M 2011 - $4.5M 2012 - $6.0M 2011 - $5.9M 2012 - $6.1M

69

Terasen Gas. A Fortis company.

Net LNG Storage Facility Costs Allocated Based On Average System Capacity

Allocation of Net LNG Storage Facility together with the transmission system based on Average System Capacity Consistent with current methodology and reflects the underlying cost drivers

System Capacity TJ/Day Equivalent TJ Capacity LNG Storage Facility 51 TJ/d x 10 days 510 TJ Pipeline Capacity 151.5 TJ/d x 365 days 55,298 TJ Total TJ capacity 55,808 TJ Average System Capacity 152.9 TJ/d

70

Terasen Gas. A Fortis company.

Rate Freeze for Core Market Eliminates Volatility Resulting If Rates Set Equal To Cost Of Service Stable rates help the company continue to attract and retain customers Rate freeze is consistent with the rate design principles of competitiveness and stability

Proposed Rates Mitigate Volatility

70% 80% 90% 100% 110% 120% 2009 2010 2011 2012 % Difference from Year 2009

RGS - Rates Set Equal to Cost of Service RGS - Proposed Rates 2010/2011, Estimate 2012

Note: Rates shown in graph above for 2012 is just an estimate

71

Terasen Gas. A Fortis company.

Rate Freeze Proposed for Core Market Is Consistent With Rate Design Principles

Ensures rate stability and avoids rate volatility due to:

Loss of Royalty Revenues in 2012 Repayment of government loans (Obligations) Addition of Mt Hayes LNG Storage Facility impact

Allows for the use of the surplus to mitigate 2012 revenue requirement increase due to loss of Royalty Revenues Supports competitiveness objective by maintaining rates set under the soft-cap mechanism Aids in retaining and attracting customers essential for TGVI as an Immature Utility

72

Terasen Gas. A Fortis company.

Forecast Surplus Will Vary Significantly With The Cost Of Gas Commodity

Accumulated 2010 and 2011 surplus of $38.8 million available to offset the loss of the Royalty Revenues in 2012 Approximately $40 million annual increase in Revenue Requirement due to the loss of the Royalty Revenues in 2012 Surplus could change significantly due to the Cost of Gas:

High cost of gas yields 2010 and 2011 accumulated total surplus of only $1.1 million Q2 update Cost of Gas yields 2010 and 2011 accumulated total surplus of $50.7 million Cost of Gas with volatility yields 2010 and 2011 accumulated total surplus of $17.2 million

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Terasen Gas. A Fortis company.

Rate Reduction of 4.75% in 2010; No Further Change In 2011 Is Appropriate For BCH & TGW Fair and Reasonable when considered in context for Value for Service, Cost of Service and other Rate Design Objectives for an Immature Utility Brings the two year average 2010 and 2011 Revenue to Cost Ratio for transport customers BC Hydro and TGW into the traditional Range of Reasonableness, which needs to be flexible for an Immature Utility like TGVI Transportation rates based on the two year average Revenue to Cost Ratio eliminates volatility in rates for 2010 and 2011 Remaining transportation customer (VIGJV and TGI Squamish) rates are set per their respective transportation service agreements

74

Terasen Gas. A Fortis company.

Customer Segmentation, Cost Allocation & Rate Proposals Are Prudent, Fair & Reasonable

Current customer segmentation is still appropriate for TGVI as an Immature Utility Cost Allocation Methodology continues to be appropriate for the forecast period The proposed rates for residential and commercial customers maintain the 2009 rates set under the soft-cap; provides TGVI with the opportunity to recover its cost of service while maintaining competitive and stable rates over the near term Forecast surplus generated in 2010 and 2011 will help mitigate the revenue requirement increase in 2012 due to the loss of the Royalty Revenues and repayment of the remaining repayable contributions TGVI seeks a 4.75% reduction for 2010 in the firm transportation service rate for those customers with transportation rates not already specified in their transportation service agreements; no further change is proposed for 2011

75 Terasen Gas. A Fortis company.

Proposed Regulatory Timetable and Wrap-up

Tom Loski – Chief Regulatory Officer

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Terasen Gas. A Fortis company.

Proposed RR&RDA Meets Stakeholder Needs: Efficient Regulatory Process

Action Date (2009) File Application Monday, June 29, 2009 Procedural Order (up to Procedural Conference) Thursday, July 2, 2009 Intervenor Registration Friday, July 10, 2009 Workshop Monday, July 13, 2009 Procedural Conference Wednesday, July 15, 2009 Procedural Order (Timetable and Process) Friday, July 24, 2009 BCUC Information Request No. 1 Thursday, July 30, 2009 Intervenor Information Request No. 1 Thursday, August 6, 2009 TGVI Response to Information Requests No. 1 Friday, August 28, 2009 BCUC Information Request No. 2 Thursday, September 10, 2009 Intervenor Information Request No. 2 Thursday, September 10, 2009 TGVI Response to Information Requests No. 2 Friday, September 25, 2009 TGVI Final Argument Submissions Friday, October 9, 2009 Intervenor Final Argument Submissions Friday, November 20, 2009 TGVI Reply Argument Submissions Friday, November 27, 2009 Anticipated BCUC Decision Friday, January 15, 2010

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Terasen Gas. A Fortis company.

The Forecast Revenue Requirements, Revenue Surplus, and Proposed Rate Design Meet Stakeholder Needs TGVI must respond to evolving business realities TGVI must be competitive in the marketplace The proposed RRA is Reasonable and Prudent and meets the needs of stakeholders including customers, regulators, and our shareholder The Customer Segmentation, Cost Allocation and Rate Proposals are Prudent, Fair and Reasonable and meet the needs of stakeholders including customers, regulators, and

• ur shareholder