check top story on the island tides page for the article which i have posted below..
http://www.islandtides.com/#top [1]
Goodbye to
dividends from
BC Hydro
The people of BC will not get their usual
$300 million dividend from BC Hydro
this year. Or maybe any future year.
Hydro’s 2009 Annual Report,
released in midsummer, revealed that its
debt to equity ratio had risen to the point
that it could no longer pay a dividend to
its owners, the Government of BC.
Hydro’s second quarter report, released
at the end of November, illustrated many
of the factors that contribute to Hydro’s
ups and downs. And a number of critics
point to the long-term financial
commitments Hydro is making to
independent power producers (IPPs) for
future ‘green’ power. Much of this power
will be sold in the US, at prices yet to be
determined.
BC Hydro, in negotiating contracts for
up to forty years into the future to
purchase power from run-of-river, wind,
and biomass projects, is taking the
market risk for these private companies.
This enables the companies to finance
the capital costs of their projects using, in
effect, Hydro’s excellent credit rating and
asset base. The companies are then left
with the climate change and engineering
risks inherent in the location and design
of their project—risks that are easier to
quantify and have demonstrable limits.
The result is to change Hydro from a
corporation that has produced
predictable financial results and low
consumer rates for BC residents and
industries over many years, to a
marketing and financing structure for
private investment in ‘green’ power
projects to be built in BC.
From an industrial development
point of view, this may be a viable
strategy, but while the risk is taken by
Hydro and its BC owners, the profits
from these projects are guaranteed to
corporations largely based outside the
province, and the power goes to support
economic growth outside the province.
Considering the magnitude of the investments involved, few continuing jobs are created beyond the construction phase. This reinforces the province as a hewer
of wood and a drawer of water (literally) and does nothing for
the knowledge sector jobs which might ensure BC’s future as a
place for skilled people.
Dividends
First, the dividend provisions: BC Hydro is required to make a
dividend payment to the Province provided that its debt/equity
ratio does not exceed 80/20. In the 2009 Annual Report, page
63, this is explained: ‘Under a Special Directive from the
Province, BC Hydro is required to make an annual Payment
(the Payment) on or before June 30 of each year. The Payment
is equal to 85 per cent of BC Hydro's distributable surplus for
the most recently completed fiscal year assuming that the debt
to equity ratio, as defined by the Province, after deducting the
payment, is not greater than 80:20. If the Payment would result
in a debt to equity ratio exceeding 80:20, the Payment will be
based on the greatest amount that can be paid without causing
the debt to equity ratio to exceed 80:20. Due to the 80:20 cap,
no payment is payable for fiscal 2009.’
According to the Annual Report, the debt/equity ratio in
fiscal 2009 was 81:19, up from 70:30 in 2008. Therefore no
‘dividend’ is payable to the Province.
‘Net Income’ for 2007 was $407 million; for 2008, $369
million, and for 2009, $358 million. A $288 million dividend
was paid in 2008. BC’s Provincial budget appeared to anticipate
a $300 million dividend for $2009. It won’t be paid; just
another reason for the massive errors in the Provincial budget
this year.
Debt:Equity Ratio Factors
These factors include everything that affects profits, and
everything that affects capital spending. According to BC
Hydro’s second quarter results, domestic revenues from power
sales were $683 million, $60 million higher than the previous
year; they credit ‘higher average customer rates’ , but say these
were ‘partially offset by decreased revenue from the industrial
sector’.
‘Energy trading results were significantly lower than in the
previous year due to falling prices, lower price spreads between
the Northwest and California and between BC and Alberta and
weakening of the US Dollar.’ This is an excellent description of
the risks BC Hydro is taking on behalf of the IPPs.
It was a low water year; there was a 17% decrease in hydro
generation because of low winter snowpacks and low spring and
summer precipitation. BC Hydro had to buy energy, but prices
were lower, and industrial demand was lower, as previously
explained.
But capital expenditures were $55 million higher than the
previous year. The money was spent on the replacement and
expansion of generation facilities and expansion of the
distribution system.
The Future
It seems clear that BC Hydro will have to increase its profits if
the debt:equity ratio is to once more permit dividends to be
paid. This will require some combination of increased revenues
from BC customers (which probably means increased rates),
increased hydropower generation, more sales to the US at
higher prices, and lower investment. On the other hand, the
increasing cost of ‘take-or-pay’ contract commitments with
‘green’ IPPs will make it more difficult to make profits and build
equity.
This is the cost of a strategy that uses the historically sound
financial position of BC Hydro to cover the market risks for
IPPs. If there are to be dividends, the price of power to BC’s
consumers, domestic and industrial, must go up.
Links:
[1] http://www.islandtides.com/#top
[2] http://rabble.ca/user
[3] http://rabble.ca/user/register