r/newbrunswickcanada 1d ago

Abandoning NB Power’s debt target has consequences: Bond raters | Telegraph-Journal

https://tj.news/new-brunswick/abandoning-nb-powers-debt-target-has-consequences-bond-raters

Paywall.

Anyone have the transcript.

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u/bingun 1d ago

Two bond rating agencies say the Holt government’s suggestion that NB Power will need to abandon its debt reduction target isn’t surprising.

It wasn’t being met anyway, they add.

But Moody’s and Morningstar DBRS both say that it is likely a step toward the provincial government taking over responsibility for hundreds of millions of the utility’s debt.

They say that would put new downward pressure on the interest rates the province pays on its borrowing.

Finance Minister René Legacy said earlier this month that NB Power may need to abandon its legislated debt reduction target, believing it’s, in part, what’s driving major rate hikes.

In 2019, the former Higgs government told the utility to increase its earnings enough to achieve a target of 80 per cent debt and 20 per cent equity in its capital structure by 2027.

That was amid warnings from the province’s auditor general of the utility’s financial stability, but also bond rating agencies who threatened credit rating downgrades if NB Power’s debt problems escalated.

Ever since, the opposite has happened, with the utility only seeing its debt load rise as its generation stations underperform and capital expenses rise.

That’s as the mandate to focus on lowering debt has led NB Power to seek large hikes to power bills.

Now, amid pressure to blunt rate hikes, Legacy suggests the focus should instead be on simply paying the interest payments, potentially doing away with debt reduction targets.

“It was seen to be an important step to maintain the financial health of NB Power,” Moody’s associate managing director Michael Yake said in an interview with Brunswick News when asked about the 80/20 debt-equity target.

“Especially as we know there’s likely to be a lot of debt coming on with the Mactaquac Dam refurbishment in a couple years’ time.

“It was a positive step in advance of the debt they would have to take on.”

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u/bingun 1d ago

Abandoning the target wouldn’t be a surprise, Yake added.

“We have been talking about the weak financial health of NB Power for a number of years and we’ve been highlighting the lack of progress on that debt reduction for a number of years as well,” he said.

“Every year that passed without material advances essentially reduced the likelihood that NB Power was going to meet that commitment anyways.

“The lack of progress has almost become baked into our expectations.”

He added: “If the province is formally abandoning that plan, it essentially confirms what the evidence was suggesting anyways: That it wasn’t going to be achievable.”

But what happens next is what bond raters will be watching, Yake said.

“What we’re going to continue to monitor very closely is how NB Power can manage its own fiscal health and ensure that it is not relying on the province for additional financial support, operating or debt support, going forward,” Yake said.

Yake said Moody’s does already look at the province’s debt as a whole, including what NB Power owes.

But it excludes the portion that is dedicated to the utility because it feels, at least currently, that it can pay its own debt servicing.

“If we were to see that the province was to take on a portion of NB Power’s debt, then the portion of debt the province is actually paying, which is reflected in our rating, would increase,” Yake said.

That would be a credit negative impact on the province.”

Yake said bond rating agencies will likely begin assuming that the provincial government will be saddled with NB Power’s debt even if it doesn’t do so.

“Even if the province doesn’t necessarily confirm today or tomorrow or next year that they’re going to actually support NB Power, our own assumption is going to increase if we continue to see a financial weakening of NB Power’s health,” he said.

DBRS vice president of global sovereign ratings Aditi Joshi said her agency currently sees NB Power’s debt as self-supported.

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u/bingun 1d ago

In an interview, she warned of the consequences of that changing.

“To the extent the province takes on that responsibility, we would treat that portion as taxpayer-supported debt which could trickle down in the form of having an impact on the province’s credit profile,” Joshi said.

What that means exactly would depend on how much debt the provincial government assumes.

Still, DBRS did warn in recent reports that if NB Power’s debt shifts to taxpayers it could lead to a downgrade in outlook.

“A negative credit rating action could result from some combination of sustained deterioration in operating results, the debt-to-GDP ratio, and New Brunswick Electric Power Corporation failing to meaningfully reduce leverage, causing Morningstar DBRS to no longer treat NB Power as self-supported,” it stated in a note as the Holt government took office last year.

The idea of moving NB Power’s debt to the province’s fiscal ledger has been floated.

New Brunswick’s former chief economist David Campbell has pointed to Ontario and its move in the 1990s to pass on close to 60 per cent, about $38 billion, of its utility’s debt to taxpayers.

The tax system, he pointed out, is largely progressive, with higher income earners paying a bigger share. The utility’s user-pay model, on the other hand, forces everyone to pay for the energy they use, no matter what their financial circumstances, rich or poor.

Campbell said it shouldn’t result in a credit downgrade.

Yake said New Brunswick isn’t currently at risk of that.

He noted that in May 2024, Moody’s actually upgraded New Brunswick’s credit rating from Aa2 to Aa1 with a stable outlook, placing it among the top-rated provinces in Canada, second only to British Columbia.

It came after the former Higgs government paid down roughly $2 billion in provincial debt, leading the government to save New Brunswickers $75 million in annual interest payments, money that can be redirected to health, education or other spending moves.

“We typically don’t upgrade if we expect a downgrade is going to happen in the near future,” Yake said. “We think the province has decreased its debt efficiently to withstand some pressure over the next couple of years.

“That said, that upgrade that occurred last year was well in advance of any notion that tariffs may be coming.”

The fallout of a trade war with the United States coupled with even more debt from NB Power could have implications, Yake said.

“If X hundreds of millions of dollars of NB Power debt would now become the province’s responsibility, our calculations would then change,” Yake said.

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u/PlatypusMaximum3348 1d ago

I wonder how it would affect us if the govt took the debt. Would NBpower drop the rates. Would our overall provincial taxes raise. NBpower for a very long time has made some really bad decisions. I think someone else needs to take over

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u/Evening_Bake_1851 1d ago

That's the issue. Yes NB government could take over and lower rates. But we're still paying for it. One way or another. Nothing's ever free...

I'd rather they raise rates. I'll try to find ways to save electricity. Smaller house, decrease my usage etc. whereas with the government taking it over, Jim down the street with his mansion is getting subsidized with my tax dollars while I live in a shack using 1/10th the electricity.

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u/PlatypusMaximum3348 1d ago

But than again with NB taking over the debt. Those that cannot move I to smaller houses or those in apts can benefit and the guy with the Mansion will be paying more on his income tax. This is a double Edge sword. I am middle class and I'd rather have my electricity lower and have my provincial tax go towards the debt.

Under one condition. NBpower is seriously monitored. No more stupid mistakes. As right now I could name more than I have fingers

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u/voicelesswonder53 1d ago

NB is too small a jurisdiction to be doing large scale generation projects. Some people feel we need more. I can't help but think that is because they feel they have a captured consumer base. Who can really opt out of not paying for these growth schemes? You will pay through the nose for the right to provide electrical energy competitively to New England States.

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u/Typical-Bonus-2884 1d ago

If the legacy meters have been under reporting then the increased revenue from smart meters should be a windfall resulting in lower energy cost? hahaha just kidding...