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NB Power - Financial

Background

Credit Rating Agencies

Debt Management

Electricity Rates

Cost of Service by Customer Class

Expenditure Restraint

Decommissioning Facilities

Depreciation

Accounting Policies

Procurement

Net Income and Financial Targets


Background

NB Power is a Crown corporation owned solely by the Province of New Brunswick. The Corporation does not have any external shareholders to invest equity in the Corporation. Sources of funding are therefore limited to revenues from operations and external borrowings. The Corporation's equity is established from net earnings invested in the business. The Corporation used to borrow in its own name but, since 1988, has been borrowing through the Province of New Brunswick. NB Power combines its borrowing requirements with those of the Province, having the Province make one large debenture issue and then on-lend a portion of that issue to NB Power. NB Power pays a guarantee fee of 0.65% of outstanding debt for use of the Province's credit.

As with any business, funds are required on an ongoing basis to pay for operating expenses, investment in new facilities and to repay existing borrowings. In any one year, the cash received from customers is first used to meet operating requirements, and then to meet capital and repayment obligations. If net cash flow is insufficient, new borrowings must be made.


Credit Rating Agencies

Credit rating agencies play a significant role in NB Power's financial picture. These agencies exist to rate the quality of debt issued by corporate and government borrowers. A highly rated organization can generally borrow more readily and command lower interest rates. Although NB Power borrows through the province, its debt is also rated annually. If the Corporation were not a viable, self-sustaining business, the rating agencies would consider the utility's debt to be supported by taxpayers and more of an imposition on the province's own credit. Under these circumstances, the province's own ability to borrow on favourable terms could be impaired.

The rating agencies compare NB Power to other crown-owned utilities in terms of how the Corporation manages its finances. The rating process is becoming increasingly rigorous because of increasing debt loads among provincial governments generally and due to the onset of deregulation and competition in the electric utility industry.


Debt Management

With the completion of the Dalhousie Orimulsion_ conversion project and the Point Lepreau SLAR project in 1995, NB Power's debt level has now peaked and will decline by over $750 million over the course of this Business Plan. The Corporation's debt level has risen to 89% of total capital at the end of 1994/95. This compares to a level of 92% following the construction of Point Lepreau in 1982/83. Debt levels are forecast to decrease to 81% by the end of this Business Plan's timeframe.

The volatility of foreign exchange rates has posed a continuing cost risk to the Corporation due to foreign borrowings and imported fuel. Over the past few years, steps have been taken to reduce the amount of foreign debt. As an example, in 1987/88, 54% of the Corporation's debt was foreign: 10% Swiss Franc and 44% U.S. dollars. Since that time, all of the Swiss Franc issues have been redeemed and a number of the U.S. dollar issues refinanced. The foreign content of the overall debt load is currently 29%, all denominated in U.S. dollars.


Electricity Rates

NB Power has raised its rates only five times since 1986. The most recent rate increase was for an average of 2.0% effective December 1, 1995; the cumulative total of the five rate increases since 1986 amounts to 18%. During the same period, the Consumer Price Index increased by 27% and Canadian electric utilities raised their rates on average by 31%.

NB Power is committed to providing in-province customers with competitive rates. Figure 6 illustrates that the Corporation's residential rates remain lower than most other Canadian and Eastern USA utilities, and Figure 7 demonstrates the competitiveness of large industrial rates. Figure 8 compares the actual monthly cost of a residential power bill, based on NB Power's average monthly consumption per customer of 1,350 Kwh.

Changes to the Electric Power Act and the Public Utilities Act enacted in December 1993 have resulted in NB Power being regulated under a "price cap" regulatory model. Any average rate increase below 3% in any fiscal year or below the Consumer Price Index, whichever is the higher, will not require regulatory review and approval.


Cost of Service by Customer Class

In order to determine rates to be paid by particular classes of customers, it is necessary for NB Power to identify the cost of providing service to individual customer classes. For this purpose, costs are broken into three functions, the generation of power, its transmission around the province and its distribution to local areas, including the costs of dealing with the customers in terms of billings, collections and so on.

After the costs are allocated into these three categories, they are further divided into the costs of meeting the demand, the costs of actual energy consumption and the cost of maintaining consumers on the electrical system. The results for each class of customers are then compared to the revenue received from those customers and the revenue to cost ratio determined.

NB Power's revenue to cost ratio for its major customer classes is shown in Table 6 as projected in the most recent cost of service study, covering the 1995/96 fiscal year. This indicates that residential customers are paying less than the cost of providing their service while industrial and general service customers are collectively paying more.

The PUB directed NB Power to narrow the revenue to cost ratios to a range of 95% to 105%. The Standing Committee on Crown Corporations recommended that the current range in revenue to cost ratios be held constant at this time.


Expenditure Restraint

Operations, Maintenance, and Administration (OM&A) expenditures were increasing faster than inflation prior to 1991/92 when formal cost restraint measures were first introduced. Compounding this, new plants at Belledune and Millbank added over $20 million annually to NB Power's OM&A expenditures. This cost includes a small offset associated with the retiral of smaller plants at Moncton and Chatham. Cost restraint has therefore become a part of the corporate culture with managers at all levels taking an active role in reducing expenditures. Cost reduction initiatives include the reduction of over 500 regular positions through early retirement and voluntary separation programs. In the short-term, these programs have caused expenditures to increase, however the long-term impact indicates a declining expenditure trend.

All expenditures receive review during the time budgets are prepared as well as monthly cost control reviews throughout the year. Since NB Power published its first Business Plan just two years ago, significant cost reductions have been achieved, and are planned to continue throughout the forecast period, as indicated in Table 7.


Decommissioning Facilities

Nuclear

Since the nuclear station was brought into service in 1983, the Corporation has provided annually for the costs of decommissioning the plant and returning the site to a state of unrestricted use. Provision has also been made for the cost of disposal of spent nuclear fuel and for the replacement of the fuel channels at Point Lepreau. A total of over $232 million had been provided towards these activities as at March 31, 1995. The basis for the calculations of amounts to be provided for were reviewed in 1995. This review indicated that recent interest rates had been higher than projected, therefore the current annual charge could be reduced to cover the costs of future decommissioning activities. No significant change to the provision for irradiated fuel management costs resulted from the review.

The Corporation has implemented an alternative method, the SLAR process, for correcting problems experienced with fuel channels. This process was successfully completed in October 1995. As a result, the funds accumulated for the potential replacement of the fuel channels will not now be required for this purpose.

Thermal

Based on the 1994 study on the costs of decommissioning thermal generating stations, an annual amount is now being provided for decommissioning these stations following the end of their useful lives. The first provision occurred in the current fiscal year ending March 31, 1996, and amounts to $2.5 million for the year.


Depreciation

Depreciation is one of NB Power's largest individual annual costs and the Corporation continuously reviews its operating assets to ensure depreciation charges reflect a systematic and rational allocation of their costs to operations. NB Power has established a Depreciation Review Committee, which is responsible for overseeing an ongoing engineering and financial review of the service lives, salvage and disposal costs of all classes of fixed assets. The Committee comprises members having expertise and experience in financial matters, engineering and planning, and representatives involved in the design and operation of specific categories of fixed assets.

Recommendations made by the Depreciation Review Committee during the current year have reduced the service lives for depreciation purposes of various components of hydro and thermal generating stations as a result of a review of actual experience relating to these assets. In addition, the life for depreciation purposes of computer applications software has been increased from five years to ten years, and the life of street light brackets increased from twenty to thirty-two years. The Depreciation Review Committee also reviewed the updated studies on nuclear unit decommissioning and irradiated fuel management.


Accounting Policies

NB Power is continuing the initiative commenced in 1994/95 to eliminate its equalization accounts over a three year period, 50% in the year ended March 31, 1995, 30% in the year ending March 31, 1996 and 20% in the year ending March 31, 1997.


Procurement

An NB Power Purchasing By-law requires the Corporation to comply with the Public Purchasing Act and the Crown Construction Contracts Act. This By-law further requires NB Power to comply with strict guidelines concerning tendering and competitive bidding.

In 1991, a Procurement and Spares Committee was established among Atlantic Canadian Electric Utilities. The Committee is designed to develop standard material specifications and to jointly tender commonly used items. The Committee has promoted the development of new, and the expansion of existing, Atlantic Canadian manufacturing firms.

In addition to savings realized in bulk purchases, this cooperative effort allows:

  • common material specifications;
  • improved quality;
  • reduced delivery time;
  • emergency back-up capabilities; and,
  • increased opportunities for local manufacturing.

Net Income and Financial Targets

The Electric Power Act and the Public Utilities Act require that rates recover all operating costs plus sufficient net income to meet unexpected circumstances and should, over time, allow NB Power to "maintain such reserve and surplus accounts as are maintained by a properly managed corporation". Rates should also be sufficient to allow the Corporation to attract new capital to maintain and expand its facilities as required.

Adequate levels of net income must accordingly be earned in order to provide assurance that the Corporation will be able to meet its financial obligations under a range of likely operating scenarios. Net income also represents an alternative source of funds for investment in plant and equipment. For each dollar of net income earned, NB Power's external borrowing requirements can be reduced by a similar amount.

The PUB has approved NB Power's financial targets to be up to 1.25 times for interest coverage and 80% for the debt level. The new regulatory model described earlier will continue to allow NB Power to earn up to the 1.25 times interest coverage as its net income for the year.

The Corporation's net income, interest coverage and debt level for the past five years are shown in Table 8.

The rise in the debt level is a result of the major capital construction program which has now been completed.



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