NEWGRADE ENERGY INC.
November 26, 2010
Question 1. Provide an overview of the case
NewGrade Energy Inc. (NewGrade) is located in Regina, Saskatchewan, and owned a 59,400 barrel-per-day heavy oil upgrader. An upgrader processes conventional heavy- to medium-grade crude oils into lighter crudes, which are then used in a refinery to manufacture refined petroleum products, such as gasoline and diesel fuel. NewGrade was jointly owned by Consumers’ Co-operative Refineries Limited (CCRL) and Crown Investments Corporation of Sask (CIC).
Investment and Financial Performance
The completion of NewGrade was done in 1988, with a capital cost of $770 million. CCRL contributed selected assets to the venture. The project was financed through $154 million in equity contributed by CIC and debt provided by third-party lenders and guaranteed by the Government of Saskatchewan and the Government of Canada. Operations began in late 1988, with the company experiencing operational difficulties combined with depressed heavy and light crude price differentials resulted in NewGrade incurring losses through 1996. Since then however, NewGrade had been consistently profitable, and all long-term debt had been repaid. The company had a cash balance of $150 million. Price Differentials
The price at which the upgrader sold synthetic light crude to the refinery was based on the quoted price of comparable crude in the market place. The financial performance of NewGrade was highly correlated with the differential between light and heavy crude oil prices. The graph below illustrates the actual and forecasted differential between light oil and heavy oil prices.
The price differential from heavy and light oil prices had widened recently for a number of reasons. 1. The supply of heavy oil increased, but only a limited refining and upgrading capacity was available to utilize the growing supply of heavy oil. 2. Demand for lighter crudes was...
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