D7

Dave Barnett

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Well, two weeks ago I wrote about the mess up at Point Lepreau and how a bunch of stupid decisions had been made at the power commission over the past few decades. As soon as the newspaper hit the streets we found out that our premier had already decided to sell the whole works to Quebec.

While many may feel a certain sense of provincial nationalism and pride about owning this power utility, I like to look at it from a strictly business point of view. Since my day-to-day business is the purchase and sale of companies, I think I have a few insights into this deal that I would certainly like to share with you.

First though, some accounting.

A balance sheet has two sides; assets on the left, liabilities and equity on the right. Assets are the stuff that a company owns. In NB Power's case it would be power plants and transmission lines. The liabilities are the debts. Usually the debts are incurred to buy or build assets. The equity portion is the part of the company that the shareholders own outright.

The fact that Hydro Quebec wants to buy NB Power for the value of its debt means that the Quebecers don't agree that we have any equity in the company. Maybe they're right, let's think about this . . .

The only time I, as a business broker, have had clients who wanted to sell their companies for just enough money to cover their debts was when the company was a real lemon. They couldn't make any money and had other obligations on the horizon. Is this the situation at NB Power?

The other interesting point about this deal is that it is a strategic acquisition. That means that the buyer has other plans for the target firm that would add to the profitability of both companies if they came together. Normally this would mean that the buying company would be willing to pay a premium for the target company. Does the price in this deal reflect a strategic premium?

I don't know the real answers to these two questions. But if we are getting a good deal, as Premier Graham keeps repeating, then that means that NB Power actually has negative equity; a rare situation where the debts of a company are actually greater than the value of its assets.

If this is the case, then there has been such poor management of the company that all of our built up wealth in power management within a protected monopoly have been squandered. That would be sad.

The other alternative is that we are not getting a good deal at all and we're selling our assets below their value and giving our equity away for free. If this is the case then the premier is handing away all that has been worked for.

But let's pretend that we are Hydro Quebec. How exactly are they going to make more money with NB Power than we can make? They have already said that they're going to shut down our expensive fossil fuel generating stations and use our transmission network to sell power to New England.

So how about this . . . why don't we shut down our own expensive fossil fuel generating stations and buy the required power from Hydro Quebec? They can produce it at a lower price because of their big hydro dams. Then we can rent them space on our transmission grid so they can sell their other excess power to New England. Why not just adopt their plan?

Of course I still think that selling the generating assets of NB Power off piecemeal is a better option. Let private firms take them over and bid for contracts to sell electricity to us or toll the transmission of this power to the U.S.

What this situation is demonstrating to all of us is that a centralized, government controlled monopoly will always end up costing everyone more and will be subject to gross mismanagement. If we have a competitive field for generation we will develop the opportunity to build a homegrown industry of innovation and creativity in power generation.

Witness the frustration of some New Brunswick organizations trying to get the government to adopt community-based renewable energy policy to let municipalities build their own generation capacity. In a competitive market they wouldn't need anyone's permission!

I believe that Shawn Graham is trying to dump a huge problem and sell it to us as a good thing by promising to freeze power rates. No doubt, if he can't sell it away, the truth will be revealed about just how bad things really are at NB Power.

I can't repeat myself enough when I say that this is clearly the worst government we've ever had. Be sure to tell Shawn this when you call to complain that you couldn't get your H1N1 shot.

* Dave Barnett is a Moncton area Real Estate Investor, Business Finance Consultant, Sunbelt Business Broker and a member of the Progressive Conservative Party of New Brunswick. His column appears in this space every second Friday.