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External Factors Influencing Operations

In the process of developing forecasts and annual budgets, NB Power continually evaluates external factors that might have an impact on the Corporation's operations. The Business Plan incorporates a series of assumptions concerning key economic indicators and other factors based on the best available information. As with all economic forecasts, these assumptions are subject to change based on conditions beyond the Corporation's control.

Gross Domestic Product (GDP) and Industrial Growth

Foreign Exchange

Interest Rates

Inflation

Fuel

Interconnection Markets

Other


Gross Domestic Product (GDP) and Industrial Growth

Projected GDP growth has a direct impact on commercial and industrial revenues and the speed at which customer requirements grow.

Implicit in the GDP and electrical energy forecast figures is the assumption that major economic sectors such as pulp and paper and mining are adapting to the new global competitive environment. For some industrial customers in the province, this may require major capital investments in modernization. Such investment will depend, among other things, on the magnitude of rate increases in future years.

NB Power recognizes the impact that electrical energy requirements have on the future of many major industrial customers. Electricity is a significant component in the cost structure of many industries in New Brunswick. For industries such as pulp and paper and mining, the introduction and development of electro-technologies plays a key role in productivity growth. Productivity growth from electricity-intensive technologies is also available throughout the manufacturing sector. This Business Plan contains information on NB Power's future developments and rate trends which will assist enterprises in determining a key element of the costs associated with these investment decisions.

NB Power's financial results are very dependent on the level of in-province sales. A 1% change in projected energy sales (140 GWh) can affect the Corporation's net income by up to $5 million depending on the type of load affected.


Foreign Exchange

The Canada/U.S. exchange rate can have a major impact on NB Power's bottom line. The exchange rate affects NB Power's operations in three ways.

  • 29% of the Corporation's debt is currently denominated in US dollars; therefore interest and principal payments are directly affected by changes in the rate;
  • all oil, imported coal, Orimulsion® and some classes of purchased energy are paid for in U.S. dollars;
  • many major industrial customers are reliant on export markets for their products, and accordingly changes in the exchange rate affect their competitive position relative to other world producers; unlike NB Power, these customers benefit from a weak Canadian dollar.

The five year forecast for the Canada/U.S. exchange rate is based on a survey of the four lead underwriters of the Province of New Brunswick conducted by the Corporation in December 1995. The forecast is shown in Table 15. The overall sensitivity of a US 1› change in the exchange rate is approximately $4.5 million to the Corporations net income.

A strengthening of the Canadian dollar has a generally positive effect on the Corporation's financial results, but has a detrimental effect on the ability of NB Power's major industrial customers to compete in world markets.


Interest Rates

NB Power's recent capital program has resulted in a more heavily debt-weighted capital structure. Since most borrowings are at fixed rates of interest, financial costs do not vary directly on an annual basis when interest rates fluctuate.

The five year forecast for interest rates is based on a survey of the four lead underwriters of the Province of New Brunswick conducted by the Corporation in December 1995. The key results of that survey are summarized in Table 15.

A 1% fluctuation in interest rates has an approximate $4 million impact on NB Power's net income.


Inflation

Certain costs incurred by the Corporation are exempt from inflationary pressures in the short term as a result of long-term contractual commitments, for example, long-term debt. However, a number of OM&A expenditures are susceptible to inflationary pressure. Despite this factor, NB Power's total OM&A expenditures are declining in both nominal and real terms over the course of this Business Plan.

Based on a survey of leading financial institutions and internal analysis, inflation rates are forecast to be 2.0% over the time frame of this Business Plan. Given this forecast, OM&A spending reductions as high as $42 million will be required in the final year of this Business Plan to offset the effects of inflation and reduce expenditures to the $253.0 million forecast. Reductions will also be required in every other year of this Business Plan to meet the forecast numbers.


Fuel

Fuel costs are a significant component of NB Power's cost structure. In 1994/95, fuel and purchased power represented 25% of the Corporation's total costs. This is down from 29% just two years ago. Since most fuels are imported, price variations on international fuel markets have a significant impact on operations. Uranium fuel used at the Point Lepreau nuclear station is an exception due to the relatively small quantities required to produce power.

During 1995, oil prices were above projected levels. Prices are expected to remain relatively constant in the long term, however, several factors may influence actual fuel prices in the future. These factors include:

  • world economic growth and petroleum demand;
  • political tensions in oil-producing countries;
  • petroleum quotas set by exporting countries; and,
  • shifts in petroleum refining (e.g. movement toward higher grade oils).

NB Power is very dependent on fuel prices. The sensitivity of a US $1 per barrel change in the price of oil has approximately a $4 million impact on the Corporation's bottom line. The sensitivity of a US $1 per ton change in the price of imported coal is approximately $1 million.


Interconnection Markets

NB Power has traditionally used external purchases and sales to the benefit of in-province customers. Variations in the volume of purchases and sales on the interconnections will affect forecast costs as well as revenues and might have a significant impact on NB Power's financial results over the long-term.

The changing regulatory structure of electric utilities in Canada and the United States is expected to have an impact on how interconnections are used in the future. NB Power is keeping abreast of changes as they develop in Canada and the U.S.

Currently there is a surplus of generating capacity in the north-east part of the continent. While some of this surplus is caused by older less efficient units, a significant number of these units can produce competitively priced energy. While NB Power can typically produce energy which is competitive in export markets, benefits from these sales have diminished.

NB Power continues to forecast that significant benefits will accrue as a result of interconnections to neighbouring utilities. For example, in the next 15 years, the New England Power Pool projects that New England will become a summer peaking system. This projection could have positive implications for NB Power as it may provide an opportunity to increase sales during NB Power's off-peak season.


Other

A number of external factors unrelated to the economy can affect the Corporation's operations. Perhaps the most obvious of these is the weather. Changing patterns affect heating demands, cause power outages, and affect water flows for hydro generation. The effect of these changes, year over year, can be substantial, and can cause operating results to be skewed positively or negatively. As an example, a 10% variation from normal water flows can affect net income by between $6-8 million depending on the timing of water fluctuations and the price of replacement fuel at that time.

Other external factors such as government regulation, globalization, industry disruptions, natural disasters and major equipment failure on NB Power or neighbouring utilities' facilities are more difficult to quantify. They must, however, be identified as external factors that can influence the utility's financial results.



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