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School of Business | Department of Finance | Finance | 2016
Thesis number: 14339
Cost of capital for a natural gas transmission business operating under the Finnish regulation framework
Author: Jäntti, Henri
Title: Cost of capital for a natural gas transmission business operating under the Finnish regulation framework
Year: 2016  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; financing; kustannukset; costs; pääoma; capital; toimialat; business branches; energiatalous; energy economy; maakaasu; natural gas; kaasu; gas industry
Pages: 71
Key terms: Cost of capital, WACC, Natural Monopoly, Natural gas, Gas transmission
Abstract PURPOSE OF THE STUDY The purpose of this thesis is to study the required rate of return ie. WACC for Gasum's gas transmission business. All natural gas in Finland is imported from Russia and transmitted through pipelines operated and owned by Gasum. The company has a natu-ral monopoly in the natural gas transmission business. Because of the monopoly posi-tion in Finland, the Energy Authority (EA) regulates the gas transmission business in Finland. The regulator ensures reasonableness in the pricing of distribution and transmission network operations. The objective of regulation is on one hand to ensure that customers are not exploited by the monopoly and on the other hand guarantee a sufficient regulation model for the company, whereby it could profitably and efficiently operate.

DATA AND METHODOLOGY The cost of capital for the company, which operates in the natural gas market that is isolated and not linked to European gas markets is analysed by going through all the components of WACC. Analysis begins by introducing the case company and describing its business environment and will built to a general framework and a comparable peer group for a utility company operating in Europe and afterward adjusting it to peculiari-ties in the Finnish natural gas market. The majority of the data was collected from Datastream and Bloomberg Terminal. In addition, internal and publicly available sources were utilized in this study. In essence, all equity markets data is gathered from Datastream and the money market data from Bloomberg. Natural gas data was collect-ed from various sources.

FINDINGS The estimate of the WACC for Gasum's transmission business settles between the range 4.6 and 6.4 percent depending should we apply the additional risk premium or not. Gasum will of course seek to influence so that the premium should be as high as possible since it has a direct impact on how much the transmission business could earn during next four years.
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