The Financial Annihilation of BC Hydro: 2009
by Erik Andersen
According to the 2009 annual report BC Hydro’s total earnings for the year was $4,269 million, with the net earnings of $366 million. Total assets were valued at $16,368 million, up by $1,921 million from 2008. 

 

By these new investments /replacements/ upgrades the debt to equity ratio increased to 81/19 which was large enough to negate a dividend payment to the only shareholder, Government of British Columbia.

 

 

It is public knowledge that BC Hydro has contracted with numerous Independent Power Producers (IPPs) to ramp up the production of electrical energy in BC that has yet to contaminate the financial statements of the corporation. A realization of the meaning of this development is only beginning to register with the public.

Some years ago a private developer came with the proposal to build a natural gas fired generation facility at Duke Point on Vancouver Island. This IPP had a proposed contract with BC Hydro. According to evidence presented by the IPP developer this project would cost about $300 million to commission. By contrast the present value of guaranteed net future earnings to the developer was $500 million. This would have given a $200 million premium to the developer as at the commissioning date which would have been monetized shortly thereafter. This is an example of private interests using contracts to “free-ride” on the credit rating and asset base of BC Hydro/Province of British Columbia (theft from the commons).

The interveners managed to defeat this proposal but that did not stop the program; it only re-emerged in a different guise which is what should be causing distress today. Those knowledgeable of the financial implications of these contemporary IPP contracts estimate that new costs to BC Hydro will mean an estimated annual operating loss (subsidy to the IPPs) for the Corporation of $300 million or all of its present net profits. In present value terms (20 years at 5%) this equates to $3,739 million. This amount is greater than the total equity base of BC Hydro.
 
There are two options of escape from this emerging financial predicament (potential insolvency). The most obvious is to significantly increase revenues by an increasing user rates. The second is possibly less unpalatable but more politically charged.

Because most if not all IPP projects are still in their pre-commissioning phase, the financial draw-downs are likely related only to the actual costs of construction (short-term project financing). It is only upon commissioning that contracted future earnings will attract related long-term financing. Should the Government of British Columbia give all IPP developers notice of intension to “nationalize” their production assets (before commissioning) will the “contract premiums” previously described be avoided. Long-term financing sources would be notified before committing and adjust accordingly.