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Focused Business Plans - Financial Management

Overview

Key Initiatives


Overview

NB Power has completed a major capital construction program and will now begin the process of reducing the associated borrowings over time. Debt, including decommissioning and related liabilities, has risen to 89% of total capitalization. Fixed charges associated with this debt will represent 50% of total costs in 1996/97, compared to 33% in 1989/90, as illustrated in Figure 21.

This increased fixed expense base is a major reason why the Corporation must continue its restructuring efforts to further improve productivity and to seek operating efficiencies wherever possible. Operations, maintenance and administration costs, as well as capital expenditures have been reduced since last year's Business Plan by a total of $204 million over five years.


Key Initiatives

Debt Management

As the level of capital expenditures declines, funds generated from operations will be used to reduce the overall debt load. Beginning in calendar year 1996, NB Power's debt will start to decline. From a peak level of $3.4 billion, debt should decrease by 20% to about $2.7 billion by the end of the current five-year plan. During the same period, nuclear and other deferred liabilities are projected to increase by $15 million to $256 million. Combined, the debt plus deferred liabilities would then be about 81% of total capital which is nearing the corporate target of 80%. Figure 22 illustrates NB Power's debt level compared to capital expenditures.

NB Power currently expects to maintain the present 29% of foreign content of its overall debt load over the period covered by this Business Plan. This target may change however, given developments in respect to deregulation and competition. In a fully deregulated market place, energy may be priced as a commodity in U.S. dollars, making it more appropriate to finance generating facilities in U.S. dollars.

The Corporation is committed to maintaining a sound financial condition to satisfy rating agencies that the utility's debt is self-supporting and therefore not a burden on the provincial credit rating. NB Power believes the actions and strategies documented throughout this Business Plan will achieve this objective.

Electricity Rates

This Business Plan demonstrates that, barring unforeseen economic events, rate increases can be contained to modest levels over the next five years.

For financial forecasting purposes, an average rate increase of 2.9% for each of the first three fiscal years, followed by two years with no rate increases have been assumed in this Business Plan. Factors such as economic growth, fuel prices, external sales, foreign exchange, interest rates and the impact of competition and deregulation will influence the timing and magnitude of future rate increases. If favourable changes were to occur in any of these factors, lower rate increases could be incorporated to achieve the forecast levels of net income. NB Power is committed to the lowest level of rate increases possible, consistent with maintaining the confidence of the financial community.

Figure 23 shows that NB Power's rate increases have been lower than inflation since the mid 1980s and are presently forecast to remain that way on a cumulative basis until the end of the decade.

The Standing Committee on Crown Corporations has recommended NB Power consider the establishment of a mechanism whereby net income or losses outside pre-set limits could be returned to or charged to customers on a systematic basis. NB Power intends to review the need for this type of mechanism annually during the preparation of its Business Plan. Given the net income targets contained in this Plan, this mechanism is not required at this time. The Committee also recommended NB Power review the impact of adjustments to the revenue to cost ratios before taking any further steps to narrow the range. NB Power and its Board of Directors review this issue periodically, as well as when rate increase decisions are made. The possibility of a deregulated, competitive operating environment could impact future rate adjustments.

Expenditure Restraint

NB Power is committed to continue restraint through reduced capital and operational expenditures over the next five years. Expenditures are constantly under review and reductions are targeted through improved productivity and cost effectiveness. With the regionalization of the operating divisions and other business improvement initiatives discussed in this Plan, OM&A expenses are projected to decrease in actual as well as real terms over the period covered by this Business Plan as shown in Figure 24.

The Standing Committee on Crown Corporations has recommended that NB Power's operation and maintenance expenses be given further examination and review. This recommendation has been implemented given the OM&A forecast contained in this Business Plan. In real terms, OM&A expenses are forecast to decline by over 19% during the next five years.

Figure 25 demonstrates the relationship between OM&A expenses and in-province sales. This figure demonstrates graphically that the restraint measures taken by the Corporation are paying off and the traditional relationship of OM&A expenses to in-province sales has been broken. While sales are expected to continue to grow, the trend line for OM&A expenses remains flat through the 1990s.

Capital Expenditures

Following the completion of the Dalhousie Orimulsion_ conversion project in 1994 and the SLAR project at Point Lepreau in 1995, NB Power's capital expenditures are projected to significantly decline. A detailed review of capital projects has occurred since the release of last year's Business Plan. Based on this review, capital projections in this Business Plan have decreased significantly from those published in last year's Plan.

Figure 26 illustrates how NB Power's capital expenditures decrease in actual and also real terms following construction programs required in the early 1990s.

Decommissioning

Nuclear

The Corporation will continue to provide for the costs of decommissioning the nuclear unit at Point Lepreau and for the disposal of spent nuclear fuel.

Amounts collected from customers to cover the future costs of decommissioning plants and permanently disposing of spent fuel from Point Lepreau are not currently being set aside in an investment trust fund. Rather, the monies are "borrowed" by the Corporation at a market-based rate of interest and used to help finance NB Power's capital expenditures. This approach is the least cost alternative because it avoids trustee fees and the commissions and expenses which would be incurred if market borrowings had to be used instead. For this reason, other Canadian utilities have followed a similar philosophy.

At a future date, NB Power will have to borrow money to establish a funded trust account or pay the decommissioning costs as they occur. This Business Plan reflects a positive cash flow to facilitate debt reduction of over $750 million. Recognizing a recommendation from the Standing Committee on Crown Corporations NB Power may consider using some of this money to establish a cash fund for decommissioning at a future date.

Funds accumulated for the removal of the nuclear fuel channels will not be required for this purpose as a result of the success of the SLAR process. The sum of $16 million, representing an amount previously transferred from Earnings Invested in the Business by order of the PUB, will be returned to Earnings Invested in the Business during the fiscal year ending March 31, 1996. The balance of $72 million will be returned to income through a credit to depreciation expense over a three year period commencing October 1, 1995.

Thermal

The Corporation will continue to provide for the costs of decommissioning thermal generating stations based on the annual revenue requirements identified in a decommissioning study completed in 1994.

Depreciation

During the course of this Business Plan, the Corporation's Depreciation Review Committee will continue engineering and financial reviews of service lives, salvage and disposal costs of all classes of fixed assets.

Net Income and Financial Targets

Detailed financial forecasts are contained in the final section of this document. Table 14 summarizes the forecast levels of net income, interest coverage and debt level for each year:



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