Considering the financial pressure on Ohio-based NewPage Corp., provincial electricity customers have a right to wonder why Nova Scotia Power Inc. would want to become involved in a deal with the paper company.
During provincial Utility and Review Board hearings last week, it was revealed that NewPage, which owns the NewPage Port Hawkesbury plant in Point Tupper, is carrying a heavy debt load requiring huge service payments.
A New York debt analyst who asked not to be identified told me Monday that Nova Scotia Power’s participation in the $208-million deal to build a biomass power-generating plant in conjunction with NewPage Port Hawkesbury is most likely an attempt to protect its largest energy customer.
NewPage is expected to make $80 million from the deal by selling waste wood to the power utility to be burned in the biomass boiler. That money will go a long way toward helping NewPage to service its debt.
Whether the provincial regulator will allow Nova Scotia Power to become involved in the NewPage biomass project, despite its desire to help its customer, is still up in the air.
NewPage, controlled by Cerberus Capital Management, L.P., which bills itself as one of the world’s leading private investment firms, lost US$174 million in the second quarter on sales of US$890 million and it was only holding US$7 million in cash and US$113 million in available credit.
The lack of cash on the books causes a big problem because NewPage has a debt of US$3.3 billion and is facing debt-servicing charges of US$330 million annually.
In its filing with United States regulators in August, NewPage indicated that management expects earnings in the third quarter before interest, taxes, depreciation and amortization will be US$90 million to US$100 million, compared with US$10 million for the second quarter of 2010 and US$140 million for the third quarter of 2009.
NewPage management said in its filing it expects to record a third-quarter loss of US$75 million to US$85 million, compared with a loss of US$174 million in the second quarter of 2010 and a loss of US$138 million for the third quarter of 2009.
Documents tabled during the board hearings in Halifax last week showed that a debt-research firm issued two reports showing heightened concern about NewPage.
CreditSights Inc. reported that NewPage was looking "toxic" and investors should avoid NewPage securities. It suggested that the bond market was "starting to price in the risk of potential default on the company’s cash coupons," due in the fourth quarter.
The risk of default may explain the importance of closing the biomass deal by the end of September.
Utility experts John Antonouk and Richard Mazzini of Liberty Consulting in California, hired by the board, suggested the biomass proposal should be rejected because, in their opinion, NewPage’s financial condition was already "troubling" and the biomass project has too many "significant risks" to Nova Scotia Power customers.
Simply rejecting the biomass project is more complicated than anyone would care to think about.
If NewPage Port Hawkesbury is dependent on this biomass project going ahead, a rejection of the proposal by the regular will have a huge impact not only on Nova Scotia Power, but also on northeastern Nova Scotia, which is highly dependent on the paper plant generating employment.
On the one hand, Nova Scotia Power’s desire to keep its largest customer in operation and paying its bills seems obvious. But, on the other hand, what if the biomass project gets the go-ahead and NewPage is forced to restructure anyway?
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