BACKGROUNDER
Deferred revenues

• In the 2001-2002 Budget, government will continue to invest in the priority areas of education and health care. To assist in the funding of these investments, and because it has the flexibility to do so, government has decided to defer to 2001-2002, revenues of $196.8 million which usually would have been received in 2000-2001. These include revenues from: Newfoundland and Labrador Hydro, Newfoundland and Labrador Housing Corporation, Sinking Funds and Newfoundland Liquor Corporation.
• Government is able to postpone receipt of these revenues because it has exceeded its financial objectives. These revenues will be used to ensure continued funding for important and necessary investments in the education, health and well-being of Newfoundlanders and Labradorians.

• As the sole shareholder of Newfoundland and Labrador Hydro, the province is able to exercise discretion with respect to the receipt of dividends. This gives government some flexibility in designing budgets.
• In 2001-2002, government will receive dividends of $112 million, comprised of regular dividends of $45 million and special dividends of $67 million. The regular dividends include revenues from the new recall arrangements and Guaranteed Winter Availability Contract related to the Upper Churchill.
• $68 million of the $112 million to be received in 2001-2002 represents dividends deferred from the 2000-2001 fiscal year.

• Government guarantees all of Newfoundland and Labrador Hydro�s long-term debt and short-term borrowings, and as such receives a guarantee fee. This fee is based upon the total debt of Hydro guaranteed by the province as of the preceding December 31 (i.e. Hydro�s fiscal year end) and is paid quarterly.
• In the 2001 Budget, government has requested that Hydro pay the regular guarantee fee of $11 million based upon its December 2000 year end, plus to accelerate payment of the fee for those three quarters of its current fiscal year which fall within government�s 2001-2002 fiscal year. This will result in $7.9 million in additional revenues.
• This "accelerated" guarantee fee had been proposed to occur in 2000-2001, but has been deferred to 2001-2002.

• Over the years, government�s capital contributions have resulted in a build up of equity in NLHC, currently amounting to approximately $63 million.
• Ordinarily, NLHC would use this equity to reduce its outstanding debt. For 2001-2002, the province has directed NLHC to pay a portion of this equity, $10 million, to government to supplement investment in the priority area of health care.
• This revenue had initially been included in the 2000 Budget, but has also been deferred to 2001-2002.

• The province established sinking funds for the retirement of all of its long term debt. These sinking funds comprise annual payments by government, plus interest earnings on investments purchased with sinking fund monies. The objective is to accumulate sufficient monies in the sinking fund to retire the related debt at maturity.
• Most of these sinking funds are mandatory pursuant to the terms of the related debt, but for certain borrowings, such as from the Canada Pension Plan, the province established voluntary sinking funds.
• The restructured Canada Pension Plan investment program now allows provinces to roll over maturing borrowings for one final 20 year term. As a result, the voluntary sinking funds which had been created to retire maturing CPP borrowings will not be needed for that purpose. Those sinking funds will be cancelled and the monies paid to the province. The sinking funds will be wound up in an orderly manner so as to minimize the bond market impact and maximize proceeds to the province.
• As a result, the 2001 Budget contains current revenues of $184.7 million, representing interest earnings, to be returned to the province upon the wind up of these sinking funds. This amount includes $89.3 million government is deferring from 2000-2001.
• The repayment of past contributions relating to sinking funds being wound up in 2001-2002, amounting to some $93 million, will be recorded as a non-budgetary receipt and will reduce budgeted borrowing requirements. This amount includes some $44 million being deferred from 2000-2001.
• This winding up process, which began in 2000-2001, may take as long as three years, such that further revenues will be available in the subsequent fiscal year.
• This decision to wind up voluntary sinking funds is consistent with recommendations by the Auditor General.

• In 2001-2002, the Newfoundland Liquor Corporation will pay to the province additional revenues of $10 million over and above projected profits of $90 million, for a total payment of $100 million. This will not require an increase in liquor prices. One-half of this additional revenue represents retained earnings that NLC has accumulated over recent years, which has not yet been remitted to the province.

• The other $5 million of additional revenues will be realized through a change in the way NLC finances its inventory. In the past, NLC has used its cash resources for inventory financing, but commencing in 2001, NLC will, like most commercial operations, arrange a line of credit for this purpose. NLC will finance approximately one-third of its inventory in this manner, and this will free up additional cash which will be paid to government.

This additional revenue of $10 million had been included in the 2000 Budget, but is being deferred to 2001-2002.

Media contact: Paula Dyke, Communications, (709) 729-0329.

2001 03 22                              3:50 p.m.