Those who criticize the potential sale of NB Power use words like loss of a natural resource, loss of a valued asset, loss of sovereignty. In my view, those terms are all code for anti-Quebec feelings. That view aside, let’s take a look at the realities.

The only natural resource involved in this deal is the St. John River which hosts a couple of hydro-electric dams, including Mactaquac. All the rest of New Brunswick’s electricity is generated by burning uranium and/or fossil fuels like coal, oil, Orimulsion (until June 2010) and natural gas. NB Power is almost totally dependent on foreign-sourced fuels for the generation of its electricity. They come from Saudi Arabia, Algeria, Venezuela and Columbia. The countries of origin are hardly bastions of dependability or price stability. We also import uranium from Ontario.

Now in terms of the financial viability of NB Power, let’s take a look at some facts. NB Power’s combined financial statements for 2008/09 list assets valued at $5.190 billion and liabilities (debt) of $4.885 billion. Shareholder equity is a paltry $305 million or .0587% of the total asset value. That’s just about enough to qualify for a sub-prime housing mortgage in the United States. If that doesn’t shake you, consider that NB Power’s revenue of $1.453 billion generates a measly $104 million return after expenses and before taxes or payments in lieu of taxes. That’s .0715% of revenues.

NB Power’s circumstance today does not take into consideration the fact that over the next 20-25 years much of its generating capacity will have to be replaced at an estimated cost of $10 billion. The corporation’s current earnings would not support that type of investment. Even if NB Power could borrow the $10 billion, it could not afford the $600 to $700 million a year in interest payments without major, major rate increases.

Critics of the NB Power deal have suggested that the purchase price offered by Hydro Quebec is too little. The offered price of $4.8 billion plus a rate reduction package worth another $5 billion seems like a lot of money to me for an asset whose net worth is recorded at $305 million.

So what is NB Power’s real value? A buyer’s valuation of a business is usually quite different from what a seller believes the business is worth. Sellers tend to be emotionally attached to their business. There are several ways to value a business including: (i) asset valuations that arrive at an appropriate price (ii) liquidation value i.e. the value of a company’s assets if it were forced to sell all of them in a short period of time, usually within twelve months and (iii) income multiples where the earnings of a business are subjected to a multiple to arrive at a sale price. If you accept the value of Hydro Quebec’s offer at $9.8 billion, the earnings multiple would be 94. That would be phenomenal but Barron’s the U.S. Financial Magazine says regulated utilities are only trading today at 12 times projected 2009 profits.

A major consideration when calculating the value of a business is the projected Return on Investment (ROI) that the buyer can expect to achieve. Most investors look at minimum returns of 25%. Some will go as high as 35% to 50%. In 2008/09, NB Power produced net earnings of $104 million. If Hydro Quebec multiplied that return by a factor of twelve, the purchase price would only be $1.248 billion. Unless they increased NB power’s earnings significantly, it would take about fifteen years to recover that type of investment and earn a minimum return of 25%. I think we have established that NB Power has no significant value based on assets or earnings so clearly the value must be in the projected ROI for Hydro Quebec.

Venture capitalists generally look for payback in five to seven years. To achieve that objective with the purchase of NB Power, Hydro Quebec would have to use the purchase to gain additional access to the $40 billion New England market. Herein lays the real value of NB Power – its transmission lines and its access to the United States. Assume $10 billion in new revenue for Hydro Quebec. That would increase the value of its exports by almost 50%, enable recovery of their investment in NB Power and produce a minimum 25% return in about five years.

To those who ride the emotion of opposition to Hydro Quebec, including David Alward, I ask what is an affordable cost for preserving the notion of ownership for NB Power? Remember, shareholder equity in the Provincially-owned Corporation is less than 6% of its $5.19 billion asset value. The company is highly vulnerable to increases in oil prices and the need to replace generating assets. Shareholder equity in Hydro Quebec is 54% of its $66.8 billion asset base. If you were depositing your life savings and these two utilities were banks, where would you put your money?

W.E. (Bill) Belliveau is a Shediac resident and Moncton business consultant. He can be contacted at bill.bellstrategic@nb.aibn.com