Hydro-Quebec said Thursday it entered an agreement to buy most of the assets of New Brunswick Power for C$4.75 billion (US$4.4 billion), a deal that would increase the size of North America's largest utility company and give it a transmission corridor into U.S. power markets.

Hydro-Quebec and New Brunswick Power are both province-owned and the deal has already drawn criticism from Quebec's provincial rivals. Newfoundland and Labrador Premier Danny Williams said he'll fight the deal, saying Hydro-Quebec's market dominance threatens the interests of all Canadians.

Merchant generators in New England could also be threatened by the combination, since it would give Hydro-Quebec an improved route to compete in U.S. markets through New Brunswick's transmission lines into Maine. Hydro-Quebec has been eyeing expansion into the Northeastern power markets for some time, recently discussing the possibility of new transmission lines into the U.S. with Northeast Utilities (NU) and NStar (NST).

The deal, which is expected to close by March 31, would eliminate New Brunswick Power's debt of C$4.75 billion. Hydro-Quebec will pay $750 million from its cash flow and issue C$4 billion in new bonds to finance the transaction. After the deal is complete, it will have about C$40 billion in debt and C$70 billion in assets, Hydro-Quebec spokesman Marc-Brian Chamberland said.

Hydro-Quebec would take over New Brunswick's hydroelectric power assets, peaking power plants, and its transmission and distribution system, as well as its single nuclear power plant at Point Lepreau after its repairs are complete in early 2011. New Brunswick Power would continue as a separate entity, operating an oil power plant at Coleson Cove and a coal power plant in Belledune, sell energy generated by those plants solely to Hydro-Quebec through tolling agreements.

Hydro-Quebec has about 41,000 megawatts of generating capacity, supplying power to 3.9 million customers in Quebec, including nearly all of its residents plus the energy-intensive industries attracted by the province's cheap power. Buying New Brunswick Power will add about 2,000 megawatts of capacity.

Hydro-Quebec is among the world's cheapest energy producers, generating about 95% of its energy from large-scale hydroelectric facilities. Power rates in Quebec are about six-and-a-half U.S. cents a kilowatt hour, compared with rates near 20 U.S. cents a kilowatt hour in New York, said Jean-Thomas Bernard, an economics professor and expert on Northeastern electricity markets at Universite Laval in Quebec City.

Bernard estimated Hydro-Quebec's net exports into the U.S. through arbitrage activity last year came in around 11 to 12 terawatt hours, or about 80% of its net exports out of Quebec. Hydro-Quebec exported 11% of the power it generated last year, generating C$1.5 billion net.

Bernard said the company typically sells into the U.S. at about 9 U.S. cents per kilowatt hour at a cost of 3 U.S. cents. The two countries' generating systems complement each other because Canada's peak electricity usage occurs during the winter, when the U.S. largely relies on natural gas for heating, while U.S. power usage peaks during the summer from air-conditioning demand.

Hydro-Quebec's ability to sell into U.S. markets is limited to some extent by the U.S. Federal Energy Regulatory Commission, which in a recent agreement requires Canadian governments to fully open their markets to competition from U.S. producers. Though Hydro-Quebec's cheap generation rates mostly ensure power follows from north to south under these agreements, Bernard said it wasn't clear whether Quebec and New Brunswick had completely satisfied FERC's competition requirements.

- By Edward Welsch, Dow Jones Newswires; 613-237-0669; edward.welsch@dowjones.com

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