DBRS Comments on New Brunswick’s Proposed Sale of NB Power to Hydro-Québec

DBRS notes that in a joint statement released on October 29, 2009, the Province of New Brunswick (the Province or New Brunswick; rated A (high)) and the Province of Québec (Québec; rated A (high)) announced that Hydro-Québec (rated A (high)) will acquire the majority of the electricity distribution, transmission and generation assets (roughly 2,000 megawatts (MW)) of New Brunswick Power Holding Corporation (NB Power). Should the transaction be completed as currently envisioned, DBRS views this as mildly positive for New Brunswick as it reduces downside risks related to activities that have historically been challenging to manage for the Province.

DBRS views the proposed transaction as not having a material impact on Hydro-Québec's financial profile, given the size of the proposed transaction in comparison with Hydro-Québec's overall balance sheet and current operations.

According to the Memorandum of Understanding (MOU), NB Power will transfer to Hydro-Québec substantially all distribution, transmission and generation assets, with the exception of NB Power’s thermal generation facilities. The transfer includes the Point Lepreau nuclear generating station, subject to the successful refurbishment and restart of the facility. In exchange, New Brunswick will receive proceeds totalling $4.75 billion, which is sufficient to retire all outstanding electricity-related debt (currently treated as self-supported by DBRS). The Province will also enter into a long-term contract with Hydro-Québec for the provision of 14 terawatt hours (TWh) of electricity annually. New Brunswick residential rates will be fixed for a five-year term at their current level, while industrial customers will benefit from Hydro-Québec’s lower rates. Following the five-year term, rate increases will be based on the rate of growth in New Brunswick’s consumer price index (CPI), subject to volume restrictions of 14 TWh per year. Any additional supply requirements will be subject to market rates as determined by the New Brunswick Energy & Utilities Board.

The facilities retained by New Brunswick will account for approximately 1,900 MW, or roughly 48% of current generating capacity. Of these facilities, three thermal stations are deemed “surplus facilities” and will be decommissioned on a schedule to be agreed upon by both parties, while the remaining facilities (approximately 1,400 MW) will be operated by NB Power subject to tolling agreements with Hydro-Québec.

As a result of the proposed transaction, New Brunswick will no longer be responsible for the risks and financing needs related to future growth requirements or for replacement and refurbishment costs for the divested generation facilities, which have proven costly for the Province in the past. Hydro-Québec will also assume future environmental and decommissioning costs associated with the acquired assets. DBRS believes that a transfer of the above-noted risks, combined with electricity rates that are expected to be more stable and predictable than when the system was under New Brunswick’s management, should be mildly positive for the provincial credit profile if the transaction is completed as described in the MOU.

As currently envisioned, the transaction is expected to be completed by March 31, 2010, with the exception of the transfer of the Point Lepreau station, which is to follow by January 1, 2011.

DBRS will review the final terms of proposed transaction as they become available and provide further comment if necessary.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.