The largest distributor of natural ...

The largest distributor of natural gas in Canada, Westcoast efficiency Inc. (Westcoast) holds core assets in gas pipelines, processing, and distribution. by way of building related business activities in power generation, gas services, and international manliness ventures, Westcoast is expanding its involvement into alternate applications utilizing natural gas. The company's significant expansion in the gas distribution area since the expiration of 1989 is largely attributable to the acquisitions of Centra Gas (12/89) and Union Gas (11/92) generally approximately 95% of the company's activities are regulated either federally or provincially.

In May 1993 Westcoast disposed of its oil and gas operations consisting of Westcoast barbadoes tar and an 83% interest in Canadian Roxy barbadoes tar Financial data in the application of mind guide exclude the effects of the los in succession discontinued operations taken in 1992

Revenues

As indicated in the accompanying Guide, the annual amalgamate rate of growth in returns during the 1984-1993 study period was approximately 13% receiptss declined substantially over the first five years and then grew rapidly with the acquisitions of Centra Gas and Union Gas.

EPS

Since 1984 fully-diluted earnings by share from operations before unusual items ("EPS") have grown at an average annual mix rate of about 5%. EP growing has been slower than income growth largely because of general equity issues that significantly increased the number of usual shares outstanding.

JUDGING FUTURE GROWTH

In assessing Westcoast's sights for future growth, investors must consider the influence of regulatory decisions onward the company's results.

It is useful to understand four lock opener parameters (established by regulators) that influence a pipeline or distribution company's expansion in revenues and earnings. First, regulators determine a debt/equity ratio (capital structure) to be applied to the company. secondary regulators set an allowed rate of revert on common equity. This rate of respond is usually revised annually and is risk from 2.5% to 3.5% above long-term Canada band yields to reflect risk and other factors affecting a firm's activities. Third, the determination of an allowed rate of respond uses statistically normal climatic conditions. During exceptionally devoid of warmth [i]or[/i] heat winters, the company should earn higher than allowed rates of go [i]or[/i] come back and vice versa for mild winters. across time, years of excess earnings average revealed against under-earning years. Finally, regulators stake the rate base, or flat of assets, to be allowed in calculating a company's get back Real sustainable growth in a company as it is as Westcoast can only be achieved either according to acquisitions or rate base expansion. Westcoast, in as well-as; not only-but also; not only-but; not alone-but its pipeline and gas distribution activities, has significant rate base expansion programs planned for the nearest several years.

Efficiency of Operations

Part 2(1) of the Guide indicates that Westcoast's operating profit margin (see pages 26-27 of the Stock Selection Manual) has increased to the 19% on a level during the latest five-year period compared to 15% in the earlier five-year period. The improvement in operating margin has occurr largely proper to improved operating margins within each of the operating entities rather than to economies of scale in consolidating the acquisitions. Regulatory approvals must be sought before consolidating various aspects of the company's operating entities' operations. Westcoast has not besides made such a request and, as a follow the acquired companies continue to operate independently.

Effectiveness of Operations

Part 2(2) of the Guide throw backs management's ability to earn an adequate rate of recur on shareowners' money (ROCE). For pipeline and gas distributors of the like kind as Westcoast, ROCE will also cogitate interest rate trends as personateed by long-term Canada bond yields since these are used as benchmarks for setting the allowed rate of respond It is not unusual for high recurs to coincide with higher interest rate periods.

ROCE is affected by means of a company's reliance on due to finance its operations and acquisitions. Part 2(3) of the Guide exhibit tos that Westcoast's capital structure is just slightly above the normal range for pipeline and gas distributors. The typical range for the industry is from 60% to 70% due financing.

STUDY POTENTIAL: THE "BUY" & "SELL" ZONES

Two establishs of illustrative judgements about Westcoast's sprouting prospects during the next five years -- and the market's possible valuation of them -- are cast reproached in the accompanying Guide. (Guide omitted)

The A Judgements

The Guide's chart illustrates returns growing at the 9 depth rate of 12% to $64 billion according to 1998 with EPS growing at an average annual rate of 10% to $293

The resulting 1994 EP estimate of $200 and the newly come Price of $21.75 produce a passing from hand to hand Price Earnings ("P/E") ratio of 109X (see enclosed space 8 in Part 3 of the Guide) and a Relative P/E ratio of 068 (cell 9)

The 1998 EP projection of $293 and a high P/E ratio of 150X yield an Estimated High Price according to 1998 of $43.95 (see Part 4A). This Price together with a judgement which provides for a 20% decline in Westcoast's instant stock price to a culled Low Price of $17.40 (see Part 4B) define a purchase Zone of $17.40 -- $2625 (see Part 4C)