Mactaquac refurbishment could be cheaper with federal, not provincial, loan support: expert

With New Brunswick's credit rating on shaky ground, NB Power's multibillion-dollar refurbishment of the Mactaquac dam might be easier to finance and cheaper to build if Ottawa guaranteed loans for it rather than the province, the utility's rate hearing was told.

"It would likely have a positive impact," said Robert Knecht on Monday in response to a question from Energy and Utilities Board lawyer Ellen Desmond about the potential effect of federal loan support for the Mactaquac refurbishment.

"It would certainly reduce risk for the provincial debt if there were a federal guarantee."

Knecht is a Massachusetts based energy and regulatory expert hired to testify about NB Power's application for higher rates by public intervener Heather Black.

NB Power has not fully finalized plans for dealing with deterioration in the Mactaquac dam, the province's largest, except to say that it will begin a major nine-year renovation in 2027. Costs of the project are expected to run between $2.7 billion and $3.6 billion depending on which of two reconstruction options being considered by the utility is chosen.

The province currently guarantees all of NB Power's debt and there has been no hint of it seeking federal help for Mactaquac, but the issue has been raised a couple of times at the utility's rate hearing anyway.

The federal government has provided loan guarantees totalling $7.9 billion for the Muskrat Falls hydroelectric development being constructed in Newfoundland and Labrador, including a $2.9 billion top up in November 2016.

The guarantees have helped the project win significantly lower interest rates than it could have gotten with provincial government backing alone and that has led Desmond to ask if a similar arrangement might work for Mactaquac.

NB Power interest

Three weeks ago she raised the idea with NB Power's chief financial officer Darren Murphy, who appeared to like the idea.

"If NB Power was to be provided with a loan guarantee from the federal government, would that in any way reduce the financial risk to NB Power or to the Province of New Brunswick?" asked Desmond.

"I guess it would have the potential to," answered Murphy.

"It could impact the (interest) rates somewhat, and just looking at some of the experience from others who have been successful in securing those kinds of guarantees, it could...reduce some financial risk in terms of how the markets may look at the level of debt that the utility or the province may have at that time."

NB Power has $4.9 billion in net debt guaranteed by the New Brunswick government, which has been grappling with its own significant financial problems.

The province's debt, not including NB Power, is expected to surpass $14.4 billion this year, which is up 105 per cent in the past 11 years.

In February, following the Gallant government's latest budget that projected an increase in deficit spending, the Dominion Bond Rating Service downgraded the province's credit outlook to negative from stable calling the province's debt "high for New Brunswick's current credit rating."

It also warned a credit rating reduction for New Brunswick later this year is probable.

"Our view is that we will not likely see a significant enough improvement to alter the course and cause us to not downgrade the rating," said DBRS spokesman Travis Shaw.