NB Power – Debt Management Plan

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.

As a result, options for NB Power debt reduction and equity creation are:

1. Allow NB Power to generate incremental cash flow by reducing expenses in the organization and other reasonable means, and using this cash flow to create equity while continuing to pay down debt.
2. Enter into joint ventures with partners where assets are shared and NB Power receives outside equity injection where economic and reasonable.
   

These options were also recommended by the New Brunswick Energy Commission. Government will direct NB Power to focus on the first option as the preferred method to work towards debt reduction and equity creation. The utility will also be directed, however, to fully explore opportunities for regional collaboration that may arise and that make sound financial sense for the utility and its customers.

NB Power has regulated cash flows that will enable the utility to retire existing debt as it matures and there is no current requirement to borrow significant amounts for capital expenditures over the next decade. As a result, NB Power will be mandated to continue cost reductions and use the cash flows generated from those savings to reduce debt and to build equity within the utility. Both NB Power and the EUB will use a 20 percent reduction in current debt levels and an equity level of 20 percent of the capital structure as the ten year goals for NB Power.

NB Power will also be directed to follow the capital investment path set out in the utility’s integrated resource plan in conjunction with corporate and operational cost reductions in order to ensure the lowest rates possible are achieved for ratepayers. The New Brunswick Energy and Utilities Board will ensure that NB Power’s annual income is limited to the amount necessary to achieve these objectives.

In addition to permitting a reasonable level of incremental cash flow, the Province will eliminate the payments in lieu of income taxes and Transco dividend payments that NB Power is currently required to pay to government. This will allow NB Power to further reduce its debt burden.
  

Key Objectives Served by this Action
Low and Stable Energy Prices – The cost of servicing NB Power’s debt is a major part of its operating expenditures. Altering the utility’s debt and equity levels to be more in line with other electric utilities would allow it to reduce its interest payments and build an equity cushion to help smooth over periods of reduced revenues or increased capital spending, mitigating the need for rate increases in direct response to these events.