August 29, British Columbia Utilities Commission 6 th Floor, 900 Howe Street Vancouver, B.C. V6Z 2N3. Mr. R.J. Pellatt, Commission Secretary

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1 B-14 Scott A. Thomson VP, Finance & Regulatory Affairs and Chief Financial Officer Fraser Highway Surrey, B.C. V4N 0E8 Tel: (604) Fax: (604) August 29, 2007 Regulatory Affairs Correspondence British Columbia Utilities Commission 6 th Floor, 900 Howe Street Vancouver, B.C. V6Z 2N3 Attention: Mr. R.J. Pellatt, Commission Secretary Dear Sir: Re: Terasen Gas (Vancouver Island) Inc. ( TGVI ) Application for a Certificate of Public Convenience and Necessity ("CPCN") for the Mt. Hayes Storage Project and TGVI and Terasen Gas Inc. ("TGI") (collectively the Companies ) Approval of a Storage and Delivery Services Agreement (collectively the Project ) Project No Evidentiary Update TGVI and TGI respectfully submit the attached Evidentiary Update to the Project. The Evidentiary Update is required due to two recent developments related to Pre-Construction Development Activities and the Vancouver Island Gas Joint Venture ( VIGJV ) Transportation Service Agreement. Revisions included in the Evidentiary Update 1. Update to Pre-Construction Development Activities As a result of recent consultations with the EPC contractor for the Storage Facility, it was necessary to make changes to the schedule for completing the pre-construction development activities and commencement of construction. These changes are not anticipated to impact the proposed target date of November 1, 2011 for a fully commissioned facility with 1.5 Bcf of stored liquefied natural gas. This is described more fully in Attachment VIGJV Transportation Service Agreement - Contract Demand Changes On August 16, 2007, TGVI acknowledged receipt of the VIGJV s notice of the same date to exercise its right to reduce its Contract Demand by 1,100 gigajoules per day, thereby reducing the VIGJV s Contract Demand from 9,100 gigajoules per day to 8,000 gigajoules per day effective as of August 16, 2008 for the remainder of the Renewal Period.

2 August 29, 2007 British Columbia Utilities Commission TGVI Mt. Hayes CPCN Application and TGI-TGVI Storage & Delivery Services Agreement Page 2 As a result of this reduction, TGVI felt it would be appropriate to review the impact of VIGJV reduction in Contract Demand on future capacity requirements to assess any impacts on the current Application. As a result of this assessment, TGVI has concluded that the reduction in Contract Demand has no impact on the justification of the Project. Details of the analysis are included in Attachment 2. If there are any questions regarding the attached, please contact Mr. Tom Loski, Director, Regulatory Affairs at (604) Yours very truly, TERASEN GAS (VANCOUVER ISLAND) INC. and TERASEN GAS INC. Original signed by: Tom Loski For: Scott A. Thomson cc ( only) Registered Parties Attachment

3 Attachment 1

4 UPDATE ON PRE-CONSTRUCTION DEVELOPMENT ACTIVITIES AUGUST 29, PURPOSE OF THIS FILING: Terasen Gas (Vancouver Island) Inc. ( TGVI ) has recently engaged HortonCBI (a subsidiary of Chicago Bridge and Iron) to perform the pre-construction development activities related to development of EPC Contract terms and cost. If the Mt. Hayes Project proceeds following completion of the pre-development construction activities, HortonCBI will also act as the EPC contractor for the Storage Facility. As a result of this recent development and further consultations with HortonCBI, there have been changes to the schedule for completing the pre-construction development activities and commencement of construction. These changes are not anticipated to impact the proposed target date of November 1, 2011 for a fully commissioned facility with 1.5 bcf of stored liquefied natural gas. The purpose of this filing is to provide an update on the timetable for completing the preconstruction activities and the revised dates for the submittal of the detailed cost and risk assessment report to the Commission prior to proceeding with construction. 2. BACKGROUND Section 3.4 of the Application (Exhibit B-1, pages 17-20) provides a description of the pre-construction development activities. As discussed in the Application, these activities will allow TGVI to obtain greater cost and schedule certainty for the Project prior to making a decision to proceed with construction. As described in TGVI s response to BCUC IR#109.1 (Exhibit B-8, page 102), TGVI believes that with CPCN approval prior to the completion of the reconstruction activities, conditional on certain cost and schedule hurdles, TGVI will be better positioned to negotiate the EPC price development and contract terms and reduce cost risk to the project. The engagement of a contractor to undertake the pre-construction activities and that contractor s development of the facility design, price and construction schedule are on the critical path of the project development work. As shown in the schedule provided in the Application (Exhibit B-1, pages 26 & 27), TGVI had planned to for completion of the development work such that the revised cost and risk assessment report would be provided to the Commission on December 11, This was based on the engagement of the EPC contractor and the commencement of the EPC scope of work during the development phase by early July At the time of the filing of the Application on June 5, 2007, TGVI had evaluated proposals from three qualified EPC contractor teams and had identified a preferred contractor with whom to further negotiate the arrangements for the pre-construction activities and to discuss the terms and conditions for the final EPC contract. Based on preliminary discussions with that EPC contractor, it was understood that once the project development agreement was in place, the EPC contractor s scope of work involving the Attachment 1 Evidentiary Update Page 1 of 3

5 UPDATE ON PRE-CONSTRUCTION DEVELOPMENT ACTIVITIES AUGUST 29, 2007 development of the facility design, price and construction schedule could be completed by early December 2007 to support a decision to proceed by year end. That understanding was reflected in the schedule provided in the Application. TGVI subsequently entered into discussions with the preferred EPC contractor regarding (1) the terms and conditions for the pre-construction activities and (2) the terms and conditions for the EPC contract should the project proceed. As discussed in Section of the Application (Exhibit B-1, pages 30-31), in order to reduce cost risks and schedule it is necessary for the contractor that TGVI selects for the pre-construction development work to be the same contractor TGVI uses for EPC execution. Therefore, after it became apparent following protracted discussions that TGVI would not be able to come to agreement with that EPC contractor on the EPC Contract conceptual terms and conditions in a timely fashion, TGVI elected to suspend further discussions with that contractor and to commence detailed discussions with HortonCBI. TGVI concluded arrangements with HortonCBI on August 22, UPDATED SCHEDULE These developments have resulted in a delay in commencement of the EPC scope of work for the pre-construction development work and an extended schedule as required by HortonCBI. A revised schedule for the development activities is provided in Figure 1 attached to this submission. This schedule replaces the previous schedule provided in the response to BCUC IR No. 1, Question 72.1 (Exhibit B-8, page 9). This change in the schedule is not expected to impact TGVI s estimated cost to complete the development activities. Based on this updated schedule TGVI is now planning that the pre-construction development activities will be completed in early March and that TGVI will make a submission to the Commission regarding the updated cost estimates, project schedule and risk assessment by March 18, If the revised cost estimates provided in the March 2008 submission result in a P90 cost estimate that it is equal or less than the P90 estimate provided in the Application, TGVI will request confirmation of approvals within two weeks. On this basis, TGVI then plans to issue contracts and commence project execution by April 4, The impact of this initial delay to the overall project schedule, and the impact on having the facility in service for the winter 2011/12, will be fully assessed during the preconstruction development work, and will be included in the project report submitted to the Commission. However based on discussions with HortonCBI, TGVI anticipates the EPC construction activities (the critical path element of the project construction schedule) will result in a project completion that allows the filling of the tank to be accomplished by November 1, This will allow the facility to be fully available for the winter 2011/12 as contemplated In the Application. Attachment 1 Page 2 of 3

6 UPDATE ON PRE-CONSTRUCTION DEVELOPMENT ACTIVITIES AUGUST 29, 2007 Figure 1 Updated Pre-Construction Development August 29, 2007 ID Task Name Duration Start Finish 1 BCUC CPCN APPLICATION 6.34 mons 02/04/07 12/10/07 2 Application Preparation 2 mons 02/04/07 31/05/07 3 Application Approval 4.25 mons 05/06/07 12/10/07 4 UPDATING PHASE 9.43 mons 01/06/07 18/03/08 5 Facility EPC 9.18 mons 01/06/07 10/03/08 6 Contract Negotiation 2.68 mons 01/06/07 22/08/07 7 Prelim Tank Design 1 mon 22/08/07 21/09/07 8 Facility Design 3 mons 22/08/07 22/11/07 9 Tank Design 2 mons 23/10/07 24/12/07 10 Cost Development 2.5 mons 23/10/07 08/01/08 11 Fixed Price 1.5 mons 08/01/08 22/02/08 12 Reimbursable Costs 1.5 mons 08/01/08 22/02/08 13 EPC Cost Risk Analysis 1 mon 07/02/08 10/03/08 14 EPC Contract Complete 0.25 mons 22/02/08 03/03/08 15 Owner's Project Work 5 mons 03/09/07 01/02/08 16 Power Line & Pipelines 3 mons 03/09/07 03/12/07 17 Geotechnical Evaluation 1 mon 21/09/07 23/10/07 18 ESR Update 2 mons 03/09/07 01/11/07 19 Site Prep Design/Contract 2.5 mons 23/10/07 08/01/08 20 Owners Cost Completion 2 mons 04/12/07 01/02/08 21 Project Cost Risk Analysis 0.25 mons 10/03/08 18/03/08 22 APPROVALS UPDATING 2 mons 03/09/07 01/11/07 23 OGC - Facility 2 mons 03/09/07 01/11/07 24 Prov Ministries - Permits 2 mons 03/09/07 01/11/07 25 COMMISSION REVIEW 0.59 mons 18/03/08 04/04/08 26 Report to Commission 0 mons 18/03/08 18/03/08 27 Commission Review 0.46 mons 18/03/08 01/04/08 28 DECISION TO PROCEED 0 mons 04/04/08 04/04/ Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Attachment 1 Page 3 of 3

7 Attachment 2

8 VANCOUVER ISLAND JOINT VENTURE ( VIGJV ) CONTRACT DEMAND CHANGES AUGUST 29, PURPOSE OF THIS FILING On August 16, 2007, the VIGJV gave notice to Terasen Gas (Vancouver Island) Inc. ( TGVI ) to reduce its firm Contract Demand from 9.1 TJ per day to 8.0 TJ per day under the Transportation Service Agreement dated December 14, 1995 between the VIGJV and TGVI, as amended by agreement dated October 27, 2004 (the JV TSA ). As provided in the VIGJV notice, this reduction is a direct result of the recent announcement by Pope & Talbot of a curtailment in its Harmac Pulp Operations. In accordance with the terms of the TSA, the reduction in firm Contract Demand will be effective August 16, 2008 and for the remaining term of the JV TSA. TGVI has reviewed the impact of VIGJV reduction in Contract Demand on future capacity requirements in order to assess any impacts on the current Application for the Mt. Hayes Storage Facility. As a result of this assessment, TGVI has concluded that the reduction in Contract Demand has no impact on the justification of the project. 2. VIGJV TRANSPORTATION SERVICE AGREEMENT The VIGJV is currently served through a long term contract. The initial term of the JV TSA expired at the end of In October 2004, TGVI and the VIGJV entered into an amending agreement that extended the JV TSA to December 31, 2012 and provided the VIGJV the opportunity reduce its firm Contract Demand to more closely match their expected long term requirements. Consequently, as a result of the amending agreement the VIGJV has been able to significantly reduce its costs associated with annual demand charges for firm transportation service on the TGVI System. Under the amended JV TSA, the VIGJV s firm contract demand decreased from 37.6 to 20 TJ/d in 2005 and then further to 12.5 TJ/d beginning in Thereafter the VIGJV retained the right to further reduce the contract demand to a minimum of 8 TJ/d. On March 30, 2006, the VIGJV gave notice to reduce its contract demand to 9.1 TJ/day effective March 31, 2007 following the closure of the Woodfibre mill. On August 16, 2007, the VIGJV gave further notice to reduce its contract demand to the minimum level of 8 TJ/d effective August 16, 2008 in response to the announcement of a curtailment of production at the Harmac Mill. TGVI s forecast of the long term demand associated with the mills represented by the VIGJV was based on consultations with representatives of the VIGJV when preparing the 2006 Resource Plan. Based on these discussions, TGVI understood that 9.1 TJ per day represented the minimum firm demand to meet the long term requirements of the member mills and that they would continue to require firm transportation capacity beyond the expiry of the amended JV TSA at the end of Nevertheless, TGVI Page 1 of 6

9 Evidentiary Update VIGJV Contract Demand August 29, 2007 recognizes that the forecast was based on the expectation that the six remaining mills would continue to remain financially viable throughout the planning period. TGVI also notes that under the terms of the JV TSA, as amended, the VIGJV can request re-instatement of firm contract demand to 12.5 TJ/d upon appropriate notice. In addition, as illustrated in the response to BCUC IR# (Exhibit B-4-1, page 72) since the reduction in its firm contract demand in 2005 the VIGJV has consistently relied on interruptible service in excess of its firm contract demand to meet its requirements. 3. IMPACT ON CAPACITY EXPANSION REQUIREMENTS As part of this assessment, TGVI has looked at the comparison of the Storage and the Pipe and Compression portfolios for two VIGJV demand sensitivities. In the first scenario it is assumed that the VIGJV s long term demand decreases from 9.1 to 8 TJ/and in the second it is assumed that the VIGJV mills no longer require firm service after the JV TSA expires in December The forecast of facility additions for these two scenarios are shown in Schedule 1 to this submission and can be compared to the forecast of facility additions provided in the Application (Exhibit B-1, page 80). In the scenarios where the VIGJV s contract demand is changed to 8 TJ/d from 9.1 TJ/d there is no change to the timing of any of the facility additions in the Baseline Demand Scenario. The Baseline Demand scenario also assumes that BC Hydro does not hold firm transportation service for ICP. In the Base + ICP scenario, where ICP continues to require firm transportation service, the only impact is a one year delay for the Squamish Compressor in both the (to 2020) and (to 2011) portfolios. Where the VIGJV s demand is reduced to zero, in the the only impact is deferral of the timing of the Squamish compressor. In the Pipe and Compression, facility additions after 2013 are deferred for 1 to 4 years as shown in Schedule 1 depending on whether or not there are firm transportation requirements for ICP. 4. PORTFOLIO COMPARISONS The Mt. Hayes Storage Facility is providing gas supply portfolio and capacity benefits that have been valued based on the avoided costs of third party storage resources and system expansion facilities. Since the VIGJV is a transport customer only, the value of the Mt. Hayes Storage Facility as a gas storage resource is not impacted by changes in the VIGJV demand. However the change in timing of the requirement expansion facilities in the alternate Pipe & Compression could impact the net capacity benefits. The financial comparison of and s for these VIGJV demand sensitivities are summarized in Tables 1 and 2 below for the 25 year evaluation period. Summary tables for each scenario and both evaluation periods are also provided in Appendix 2 of this submission. These results can be compared to the Sensitivities provided in Table 8-3 in the Application (Exhibit B-1, page 80). Page 2 of 6

10 Evidentiary Update VIGJV Contract Demand August 29, 2007 Table 1 Net Costs Sensitivities (VIGJV CD = 8 TJ/D) Net Cost ($ Millions) 6.2% 25-Year Evaluation Period VIGJV CD = 8 TJ/d Net Benefits Baseline Scenario Base + ICP Demand Scenario % Baseline Scenario Base + ICP Demand Scenario Table 2 Net Costs Sensitivities (VIGJV CD = 0 TJ/D) Net Cost ($ Millions) 6.2% 25-Year Evaluation Period VIGJV CD = 0 TJ/d Net Benefits Baseline Scenario Base + ICP Demand Scenario % Baseline Scenario Base + ICP Demand Scenario CONCLUSIONS The results summarized in the tables in section 4 above and in Appendix 2 show that changes in the VIGJV contract demand do not change the conclusion that the Storage is the preferred long term solution. In fact, the Storage offers TGVI much more flexibility to respond to changes in the VIGJV and reduces the potential for stranded capacity relative to the Pipe and Compression portfolio. In addition to being the most cost effective portfolio, the Mt. Hayes Facility will also provide significant benefits to all of TGVI s customers in terms of enhanced operational flexibility. Page 3 of 6

11 Evidentiary Update VIGJV Contract Demand August 29, 2007 Appendix 1 TGVI System Expansion Facilities Table A1-1 (Excerpt from Application (Exhibit B-1, page 80)) VIGJV = 9.1 TJ/d System Squamish Dunsmuir Coquitlam Sechelt Crofton Watershed Pipe & Compression Facilities V2 V5 V1-U4 V3b V6 25 km Loop Baseline Demand Scenario Base + ICP Scenario Storage Baseline Demand Scenario 2011 Base + ICP Scenario Table A1-2 VIGJV = 8.0 TJ/d System Squamish Dunsmuir Coquitlam Sechelt Crofton Watershed Pipe & Compression Facilities V2 V5 V1-U4 V3b V6 25 km Loop Baseline Demand Scenario Base + ICP Scenario Storage Baseline Demand Scenario Base + ICP Scenario Table A1-3 VIGJV = 0 TJ/d after 2012 System Squamish Dunsmuir Coquitlam Sechelt Crofton Watershed Pipe & Compression Facilities V2 V5 V1-U4 V3b V6 25 km Loop Baseline Demand Scenario Base + ICP Scenario Storage Baseline Demand Scenario 2011 Base + ICP Scenario Page 4 of 6

12 Evidentiary Update VIGJV Contract Demand August 29, 2007 Appendix 2 Comparisons Table A2-1 (Same as Table 8-1, page 103, Exhibit B-1) Scenario: Baseline Demand with VIGJV = 8 TJ/d (No ICP) ($ Millions) 25-Year Evaluation Period 6.20% 10% TGVI System Costs $115 $21 $72 $15 TGVI Costs (Table 1.2, Line 4) TGVI Gas Supply Benefit (Table 1.2, Line 5) (68) (48) Storage Revenues from TGI (Table 1.2, Line 6) (135) (97) Net Cost $115 $49 $72 $33 15-Year Evaluation Period TGVI System Costs TGVI Costs (Table 1.2, Line 4) TGVI Gas Supply Benefit (Table 1.2, Line 5) (45) (36) Storage Revenues from TGI (Table 1.2, Line 6) (90) (72) Net Cost Table A2-2 Scenario: Base + ICP, VIGJV CD= 8 TJ/d ($ Millions) 25-Year Evaluation Period 6.20% 10% TGVI System Costs TGVI Costs (Table 1.2, Line 4) TGVI Gas Supply Benefit (Table 1.2, Line 5) (68) (48) Storage Revenues from TGI (Table 1.2, Line 6) (135) (97) Net Cost Year Evaluation Period TGVI System Costs TGVI Costs (Table 1.2, Line 4) TGVI Gas Supply Benefit (Table 1.2, Line 5) (45) (36) Storage Revenues from TGI (Table 1.2, Line 6) (90) (72) Net Cost Page 5 of 6

13 Evidentiary Update VIGJV Contract Demand August 29, 2007 Table A2-3 Scenario: Baseline Demand with VIGJV = 0 TJ/d (No ICP) ($ Millions) 25-Year Evaluation Period 6.20% 10% TGVI System Costs TGVI Costs (Table 1.2, Line 4) TGVI Gas Supply Benefit (Table 1.2, Line 5) (68) (48) Storage Revenues from TGI (Table 1.2, Line 6) (135) (97) Net Cost Year Evaluation Period TGVI System Costs TGVI Costs (Table 1.2, Line 4) TGVI Gas Supply Benefit (Table 1.2, Line 5) (45) (36) Storage Revenues from TGI (Table 1.2, Line 6) (90) (72) Net Cost Table A2-4 Scenario: Base + ICP, VIGJV= 0 TJ/d ($ Millions) 25-Year Evaluation Period 6.20% 10% TGVI System Costs TGVI Costs (Table 1.2, Line 4) TGVI Gas Supply Benefit (Table 1.2, Line 5) (68) (48) Storage Revenues from TGI (Table 1.2, Line 6) (135) (97) Net Cost Year Evaluation Period TGVI System Costs TGVI Costs (Table 1.2, Line 4) TGVI Gas Supply Benefit (Table 1.2, Line 5) (45) (36) Storage Revenues from TGI (Table 1.2, Line 6) (90) (72) Net Cost Page 6 of 6