Description and Background
The Province of New Brunswick will direct NB Power to implement a debtmanagement plan, allowing it to reduce its debt and create shareholders equity.
NB Power’s capital structure consists almost entirely of debt. Altering this capital structure so there is both debt and equity would be more in line with other Canadian government owned electric utilities and is desirable for a number of reasons. These include lowering future debt servicing costs, less volatility in rates and allowing meaningful performance benchmarking against other electric utilities.
Government owned utilities typically do not have equity invested by the government due to the fact that funds come from the same source: government either borrows on behalf of the utility and creates a corresponding debt, or borrows to make an equity injection.With 100 percent debt, financing costs are simply interest payments, and rates are set to recover against these costs. Alternatively, if a portion of the capital of the utility is private equity, then the costs would be higher by the difference between the return on equity (typically around 9 percent for regulated utilities) and the debt costs (approximately 5 percent for government backed debt). Rates would necessarily be higher to cover the financing costs of the capital structure of debt and equity.