2022_JDC_Finance

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Finance Written by Philippe Grégoire, Ph.D., CFA, Department of Finance, Insurance and Real Estate, FSA ULaval In collaboration with Maude Gagné , Academic Vice-President Alexia Fillion Lauzon , Academic Vice-President Annie Lachance, MBA , Senior Director, Québec Planning and Support, IG Wealth Management David Roussin, CPA , Chief Accountant, Groupe Guilbault

1 An Electrifying Future About IG Wealth Management IG Wealth Management is part of IGM Financial and a member of the Power Financial Corporation group of companies, one of the largest and most respected companies in Canada. We have been providing complete financial plans to Canadians for more than 90 years. Our comprehensive financial planning approach extends beyond merely choosing investments to consider all aspects of your finances. Our goal is to help Canadians achieve true financial well-being. We are looking for talented and dedicated leaders to help us further our tradition of success stories, providing our clients with an enjoyable and consistent financial planning experience that inspires confidence in every one of them. Come meet our dynamic team to find out more about a career in financial planning and internship opportunities. As partners, we are proud to encourage students and to invest in this new generation of businesspeople! Good luck to all of the delegations. Context “We’ve got to make you look your best for the Christmas parade, my dear old Rugby !” Raymond Guilbault uttered these words as he entered the hangar where Rugby had been resting for many years, in Grondines, after a long and storied career. Rugby is the truck Paul Guilbault purchased back in 1929, with the help of his father Émile, to transport milk from producers in the Portneuf region to the city of Québec, and then bring various goods from Québec back to Portneuf. The Guilbault family had never gotten rid of it and had always provided it with the care it needed to keep it running. Over the years, Paul Guilbault’s truck named Rugby became a regular fixture at the Grondines Christmas parade on December 24. After a break due to COVID-19 in 2020, the parade was scheduled to resume in 2021. For the occasion, Raymond Guilbault, proud descendent of Paul, and his accomplices Mari-Pier Cloutier and Carl Gravel, had planned to dress Rugby up with garlands and Christmas lights in the spirit of the parade. Rugby’s

2 presence at this celebration brought back the memory of a visionary ancestor, which motivated this family of entrepreneurs to always keep moving forward with confidence. Figure 1. The Truck Named “Rugby.” Figure 2: Paul Guilbault Inc. truck, in 1958. Photo taken from the Journal de Québec dated Sunday, November 28, 2021, in the following article: https://www.journaldequebec.com/2021/11/28/en-images-decouvrez-5-entreprises- centenaires-ou-presque-qui-sont-encore-en-affaires-a-qgure 3. The transport company founded by the Guilbault family has evolved tremendously since its b irth in 2019. Upon witnessing the success of Paul’s initiative, the family acquired an additional truck in the same year. Paul’s father, Émile, was convinced that such a company could provide work for every one of his 17 children. In 1937, the company began serving Québec City, La Tuque and Montréal and acquired its first warehouse. The future looked bright for the Guilbault family. During the winter, the Guilbault company had to organize road clearing efforts on its own in order to be able to transport goods twelve months a year. In 1947, the company positioned itself as a transportation leader with a refrigerated and heated vehicle service. The well-organized company set up terminals in

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3 several cities and villages in order to serve a broad territory. The company officially became Transport Guilbault Inc. in 1971. As his company kept expanding, Paul Guilbault had to find places to park his trucks and perform the required maintenance here and there across his network. Paul chose Québec City as the place to set up his first garages. One of his terminals remains there today, on rue Faraday. Transport Guilbault may be the second oldest transport company in Québec, but it was the first to obtain a permit for this type of activity. This permit was received as a result of a contract the company secured with the government and, due to democratic bureaucracy, the legality of a transport company needed to be determined when the time came to issue the permit. Transport Guilbault is part of a select club of a few Québec companies that have managed to survive several economic crises. As is the case for all members of this select club, the secret to Transport Guilbault’s longevity is to tackle renewal head on and never fear change. Thus, at the turn of the millennium, Transport Guilbault did not hesitate to embrace the technological shift by computerizing its operations and travel solutions. The company now has 1,100 employees in 13 terminals and 3 warehouses across Eastern Canada. It generates 165 million dollars in annual sales. It owns 345 tractor trucks (the vehicle that hauls the trailer(s) – see Figure 3), 1,100 trailers (430 of which are heated and 180 of which are refrigerated) – see Figure 4), 800,000 square feet of warehousing space, and its vehicles travel 40 million kilometres per year in Québec, Ontario, the Maritimes and the United States. Transport Guilbault offers transport services in a variety of sectors from food products to the mining industry and pharmaceuticals to cosmetics. The company also offers warehousing and distribution services, as well as a logistics and supply chain consulting service. Figure 3. Tractor Truck

4 Figure 4. Trailer Renewal at Guilbault Times have certainly changed since the era of the truck named Rugby. As he laid out the Christmas lights on the truck for the parade, Raymond was thinking that, in a future that is closer than we think, electricity and trucks will be working together all the time, not only during the Christmas parade. Climate change is forcing governments to implement measures in connection with the use of fossil fuels, and a company the size of Transport Guilbault must be prepared to deal with the possibility that certain roads, bridges and tunnels may be reserved exclusively for electric vehicles. For example, The Québec Government is currently in discussions over a project to build a tunnel to connect the cities of Québec and Lévis. Whether one agrees with the need for such a tunnel or not, or whether one has any confidence that it will come to fruition, there is one aspect of this project on which public decision makers appear to agree: this tunnel would only be used by electric vehicles. This trend toward giving exclusive access to electric vehicles could extend to the downtown areas of larger cities such as Québec, Montréal and Toronto, as well as other heavily used infrastructures such as the Louis-Hippolyte-Lafontaine tunnel. Transport Guilbault was the first transport company to be issued a permit from the Government of Québec, it was the first to offer heated or refrigerated transport services, and it did not hesitate to join the technological shift. Every time it faced a major upheaval, it embraced it like the prodigal son who has chosen his way forward and will never deviate from it. That same son today wants to move away from petroleum and use electric power to move forward. Who can be against that? His idea appears clear and lucid. Paul started this company at the dawn of an unprecedented economic depression, and the family has survived several economic setbacks. How would Paul approach the move to electric vehicles?

5 Cost of a tractor Transport Guilbault currently owns 345 tractors that are 2.8 years old on average. At Guilbault, a tractor lasts 8 to 10 years and travels 130,000 km per year on average. In the first years, truck maintenance costs hover around $5,000 a year, and this expense increases by 20% every year. After 10 years of use, a tractor costs a little over $25,000 to maintain. Once this level of expenditure has been reached to keep a tractor on the road, it is sold and replaced by a new one. A new tractor costs $150,000, whereas most of the company’s old tractors are sold for around $20,000. An electric tractor costs between $380,000 and $430,000, based on model and options. There is no difference in terms of insurance, and electric tractors can easily be hitched to the trailers the company currently owns. For every tractor the company purchases, a 150 kWh charging station has to be added to one of its garages, at a cost of around $130,000. In addition, given the limited space in the company’s garages, the buildings may have to be expanded to install the charging stations. As for maintenance, the company from which Guilbault would purchase the electric tractors is offering a complete maintenance program (maintenance, repairs, batteries, etc.) for 6 years. The annual maintenance cost per tractor is estimated at $25,000 for year 7, which would subsequently grow at an annual rate of 2%. The useful life of an electric tractor is essentially the same as that of a conventional tractor, i.e. between 8 and 10 years. The travel range of an electric truck with a fully charged battery is estimated at around 400 kilometres, after which the battery must be recharged. This limitation increases travel time, and you will find information on page 7 on how to take this limitation into account in your simulations. A truck costs $2,000 a year to insure on average for one year, and vehicle registration costs $3,800 per vehicle per year. Travel costs A fuel-powered vehicle consumes around 0.50 litres per kilometre, the price of fuel is currently $1.50 per litre, and a conservative forecast estimates an annual fuel cost increase of 2% per year. An electric truck consumes 1.5 kWh per kilometre and the cost of electricity is currently $0.1093 per kWh. As with fuel, a conservative forecast would suggest an annual increase of 2%. An electric vehicle is believed to take longer to recharge than it does to refuel a fuel- powered truck, and the battery needs to be recharged every 400 kilometres. Thus, in the event that a fuel-powered vehicle is replaced with an electric vehicle, the company

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6 believes that this would decrease revenues by 10%, as well as the number of kilometres travelled annually by a vehicle. Whereas a fuel-powered vehicle generates $350,000 per year, an electric vehicle would generate 10% less, i.e. $315,000 per year. Similarly, where a fuel-powered truck can travel 130,000 kilometres per year, an electric truck can only travel 117,000 per year. Note that, as can be seen in the appendices at the end of this document, there is no shortage of charging stations along the main roadways. However, as we move further away from the large urban centres, distances have to be carefully calculated to avoid falling short . Other costs, such as the driver’s salary, insurance and vehicle registration are the same for both electric and fuel-powered vehicles. Vehicle revenues and variable expenses As was mentioned above, a truck that travels 130,000 per year is estimated to generate $350,000 in total revenue. Including allocations for meals and accommodations, a driver’s salary is in the neighborhood of $75,000 per year. A truck and all of its equipment must be depreciated at an annual rate of 30% in accordance with the rules set forth by the Canada Revenue Agency, which means that the first half starts to depreciate as of the first year, and the second half starts to depreciate as of the second year. Refer to the Excel spreadsheet provided on the flash drive you were given to deduct the depreciation correctly. A healthier work environment Recently, Transport Guilbault replaced its entire fleet of lift trucks with electric units. The first observatio n from this initiative was the improvement in air quality in the company’s warehouses and the increased cleanliness of the floors. The company’s executives were the first to be surprised by how much dirt fuel-powered lift trucks produced compared to the el ectric lift trucks. A change of that nature greatly improves the employees’ work environment, which increases the pleasure they experience at work and, in turn, their motivation to do good work. Would extending this electric shift to the fleet of tractors have the same effect? Would this increase the truck drivers’ attachment to the company? Although nobody actually made a direct comment to that effect, one could easily imagine that a trucker would feel a certain sense of pride at the wheel of an electric vehicle smack in the middle of rush hour in Montréal or Toronto. Passers-by would undoubtedly cast looks of approval. In a context of labour shortage, going electric head on could help attract talent. Similarly, continuing to run fuel-powered vehicles while competitors shift to electric vehicles could have a negative effect on the motivation of some truckers.

7 Carbon tax One can easily imagine a future in which fuel-powered vehicles would be prohibited from major centres or, at the very least, companies would have to pay a carbon tax in order to operate their vehicles there. Should governments implement such measures, owning electric vehicles would further decrease operation costs compared to fuel-powered vehicles. The Mandate In light of the information presented above, you must answer the following questions. You are provided with an Excel file on a flash drive to help guide you in preparing your answers. You must complete it to obtain values that will allow you to compare the two options. 1) What is the 10-year net present value of a fuel-powered tractor? Use a 10% discount rate for the freed-up cash flows and a 2% inflation rate for the revenues and costs. A freed-up cash flow is given by (1-t)×EBIT + Depreciation - ANWC - CAPEX, where t corresponds to the company's tax rate (use 35%), EBIT is earnings before interest and taxes, ANWC is the addition to working capital (= 0 in this case), and where CAPEX corresponds to capital expenditures. Use the Excel file provided for this purpose. The Excel file provides an example of how to calculate the depreciation. To simplify the analysis, depreciation is the same for any type of capital expenditure, including charging stations. 2) What is the 10-year net present value of an electric tractor? In this case, you will have to make assumptions about the decreases in annual revenue a tractor brings in and the number of kilometers travelled in one year. Assume that the annual revenue generated and the number of kilometres travelled per year by an electric tractor are 10% lower than for those of a fuel-powered tractor. 3) Is there a benefit to replacing a fuel-powered tractor with an electric tractor? 4) Draw up a graph comparing the two values in relation to the annual kilometrage of a tractor. At what annual kilometrage does a fuel-powered tractor win over an electric tractor? At what annual kilometrage does the electric tractor win? 5) How might your calculations be influenced by an increase in motivation, pride and a healthy work environment that can result from the switch to an electric fleet? You can model this productivity increase by using a lower rate of decrease in annual revenue and kilometrage for an electric tractor compared to a fuel- powered tractor. If, for example, you estimate that using an electric tractor

8 decreases a truck's annual revenue by 10%, then the increase in motivation could shrink that decrease to 5% rather than 10%. 6) How could your calculations be influenced by the possibility of a carbon tax imposed on fuel-powered vehicles on certain parts of the road network used by Transport Guilbault trucks? To answer this question, you can add a line titled "Carbon Tax" in your projections for a fuel-powered vehicle. You can model a carbon tax by adding a cost per kilometre driven by a vehicle in the calculation of the revenues of a fuel-powered tractor. Note that such a carbon tax does not currently exist. Assume that such a tax would only come into force in 5 years, with a growth rate in step with the projected 2% inflation rate. Clearly explain your answer and your assumptions about the application of such a tax. 7) When combining improved productivity (question 5) and carbon tax (question 6), which of the two options becomes more advantageous? Please specify for which values of improved productivity and/or carbon tax the electric option becomes more advantageous than the fuel-powered option, and vice versa. 8) What is your recommendation regarding the purchase of electric vehicles by Transport Guilbault? Are you suggesting they proceed gradually, or are you advocating shock therapy? An example of shock therapy would be to immediately replace all vehicles that are at least 5 years old with electric vehicles. In such a scenario, you have to consider the resale value of the fuel- powered vehicles being disposed of by the company. 9) (Bonus question) How would you incorporate hybrid tractors into your analysis? Imagine a tractor with a travel range of 600 kilometres, of which 160 kilometres are powered by electric charge and 440 kilometres are powered by fuel.

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