The Selling of NB Power - Part 3 - A Fist Full of Dollars (See below for Parts 1&2)

The proposed sale of NB Power will net a cool $4.75 billion – cash in hand. This money will be used to pay off “40% of New Brunswick’s debt”.

There’s a little problem with that last statement; well, more than one problem – actually quite a few.

Currently, NB Power’s debt is shuffled through three different entities: the NB government and two, separate Corporations. I’m sure it comes as no surprise that the Government and NB Power support some of the debt. What is likely a surprise to many is that there is also the “New Brunswick Electric Finance Corporation” or NBEFC, in the mix, which is responsible for the total amount NB Power has “borrowed” from the government. Anyway, all three carry their own debt, as follows:

As of 31 March 2009:
1) NB Government – $7.4b
2) NBEFC – $4.2b
3) NB Power – $3.5b (this number is consolidated into NBEFC’s debt)

“Holy Christmas,” you exclaim, “does this mean New Brunswick’s total funded debt is over $11b?” Indeed it does, fair reader -- actually it’s over $14b – but we’ll stick to discussing the numbers above.

The division of NB Power’s debt across separate entities thus begs the question: whose name will be on the $4.75b cheque?

“But Mac”, you say, “aren’t they one in the same? Why does it even matter?” Good question – the answer is sort of and no.

As noted, the current government trumpets that it will “pay off 40% of its debt” with the cash, people will rejoice and take a ceremonial dip in the healing waters of the Mactaquac head pond and/or a collection of Danny Williams’ tears, and so on – it’s a windfall.

This is more or less true. If you take NBEFC’s and the government’s total debt, it will be a significant reduction (Mac realizes with the 31 March numbers it’s more than 40%, but clearly the debt has grown since then). There’s a little problem, however.

Let’s step back and review a little more context. Currently, the New Brunswick government is running a massive deficit (the largest in NB history) and has added to the total provincial debt, bringing it to well over $7 billion, as noted above. Can they realistically afford to dump that entire amount into the debt? The magic “40%” is purely speculative – there’s no guarantee the government will follow through.

For a final nail in the context coffin, what about the closing date of the deal, 31 March 2009? Why that specific date? The government claims this is the date upon which NB Power would have to institute a 3% rate increase. Alright, that’s understandable.

A secondary (implicit) reason is that any delay beyond 31 March and a subsequent rise in rates can be easily blamed on political opponents – this has been obvious from day one and, quite frankly, is “just politics” (with our money, of course, but that doesn’t seem to phase ‘em).

But the real impetus is much more likely that 31 March marks the end of the Fiscal Year.

If the NB Government is issued the cheque, it will show up on the annual report as revenue – clever. The government will be able to manipulate the $4.75b into the books to make it appear that the province is in a much better financial position than it actually is.

That is, until April 1st (Fool’s Day, appropriately), when they have to start spending it. But who cares, that won’t show up on the books until 12-months later – 31 March 2011.

“Wait, wait –“, I hear you say, “what about the debt? The ‘Our Sovereignty Is 60% Off’ t-shirts have already been printed! We’ll have 40% less debt, right?” You’d think that given government PR, but there’s no guarantee – actually its highly unlikely they will be able to commit the entire amount, or any large share of it, to debt payment.

Stated correctly, the PR slogan reads: “The $4.75b could pay down the debt by approximately 40%, if the government can afford to commit the entire amount, which they can’t”. Think about it.

Given that the government is currently experiencing the largest deficit in New Brunswick history, HQ’s cash is far more likely to be spent to prevent the province from sinking further into deficit-spending quicksand. And what is going to be a major drain on the province’s financial resources after the Hydro Quebec deal is concluded? NB Power.

Setting aside the latter scenario, let’s assume the cheque goes to NB Power and they actually use the money to eliminate their debt (this is equally as unlikely). If you remember back to Part 1 and Part 2 of this blog, NB Power still remains in existence after the majority of its assets are sold. The company will be responsible for the “Retained” generating sites (Coleson and Belledune), which they must operate when HQ demands it.

A large plant like Coleson, once shutdown, takes significant effort (and money) to restart, meaning if Hydro Quebec doesn't want to buy power from the plants 4 days out of the week, NB Power is still bound by contract to keep them running idle and generating their minimum load.

While HQ purchases any fuel used for running the plants, NB Power still pays for the maintenance, employees (who will likely be HQ employees contracted by NB Power!), and other costs.

This is, of course, on top of all the costs associated with decommissioning the “Surplus Facilities”, refurbishing Lepreau, severance pay to employees of the surplus sites, maybe a few Board or other “golden parachutes” – essentially NB Power will be bleeding money with little to no actual income flowing in to offset the post-sale expenses.

Recent PR statement: “Under the proposed agreement, Hydro-Quebec would purchase the majority of NB Power's assets for $4.75 billion, a move that would wipe away the utility's debt.”

Yeah, for about 12 hours. More like a fist full of sand.