Ottawa's $5.2B Muskrat bailout includes more borrowing, restructuring as project nears completion
While rates will increase, N.L. premier says they won't double
A complex financial arrangement aimed at offering relief to electricity users on the island portion of Newfoundland and Labrador in the Muskrat Falls era is a step closer to reality, although concrete details on how much customers will pay for power remains unclear.
Meanwhile, Innu Nation leadership is expressing concern about its level of involvement in the rate mitigation strategy, and the possible financial impacts on the Indigenous group.
Federal and provincial officials announced Monday that terms sheets have now been signed for a $1-billion federal loan guarantee — the third guarantee of borrowing by Ottawa for the troubled project — and capital restructuring for the 824-megawatt Muskrat Falls power generating station and the Labrador Transmission Assets.
Secondly, there'll be a $1-billion investment by Ottawa in the province's portion of the Labrador-Island Link.
Monday's announcement builds on a $5.2-billion agreement-in-principle announced by Prime Minister Justin Trudeau and Premier Andrew Furey in late July.
In a briefing document distributed to media on Monday, officials called it a "significant step" toward finalizing a strategy to prevent power rates from nearly doubling once the Lower Churchill Projects are commissioned, and project costs are required to be included in customer rates.
A big break on payments
Under the deal, the province's public utility, Newfoundland and Labrador Hydro, will now borrow $1 billion. The debt will be guaranteed by the federal government, which means being able to optimize Ottawa's AAA credit rating, at a time when interest rates are already low.
This money must be used to fund principal payments on the Muskrat Falls power plant and the transmission line from Muskrat to Churchill Falls up to June 2029. The money must be repaid between 2037 and 2057.
In essence, the province will borrow more money, in order to make payments on previous borrowing.
When asked by reporters about this, Furey said this scenario will allow for debt to be paid at lower interest rates, and help prevent power rates from spiking sharply.
"We have to deal with the contracts as they exist," said Furey, noting that the agreement will allow the province to "emerge from out under the dark long shadow of Muskrat Falls."
What's more, $650 million in sinking fund payments to the federal government associated with the original $5 billion federal loan guarantee, which was signed in 2013, will be waived.
Amendments will be made to the financing agreements to reflect this latest loan guarantee, according to documents.
A second loan guarantee of $2.9 billion was announced in late 2016 as the project was spiraling out of control. According to Monday's announcement, the so-called guarantee fees of roughly $14 million annually, and declining in future years, will also be waived.
Federal Labour Minister Seamus O'Regan, also the MP for St. John's South-Mount Pearl, said the deal will stabilize the project, and protect ratepayers from "increases to the [power] bill."
In his six years in Ottawa, O'Regan said addressing concerns about Muskrat Falls has been his top priority because the prospect of unprecedented rate hikes have "haunted our province for over a decade."
Meanwhile, Ottawa will provide financing of $1 billion through a convertible debenture, or bond, on the condition that the money be used to offset financing costs related to the Labrador-Island Link, the 1,100 kilometre, nearly $4-billion transmission line that will bring Labrador power to Newfoundland's Avalon Peninsula.
This financing can be used at a maximum of $150 million annually. The interest rate will be fixed at closing for a 50-year term, based on the federal government's 30-year bond rate.
A new limited partnership will be created to manage the money, with Newfoundland and Labrador maintaining control.
Officials say this restructuring will reduce equity and debt-related cash flows, and prevent rates from spiking in the early years of Muskrat Falls.
As such, the rate for domestic customers will not increase to 23 cents, as was predicted by the Public Utilities Board.
Officials confirmed the target rate for domestic customers remains 14.7 cents per kilowatt hour when the project is commissioned, with annual increases of just over 2 per cent expected.
When pressed on the question of power rates, Furey said the Public Utilities Board will have the final say.
While he acknowledged that rates will gradually go up, Furey said the goal is for a "smooth" increase, as opposed to a rate shock scenario that will force people to seek out alternative energy sources, and compound the problem by leaving fewer customers to pay for Muskrat.
"It will not stay at 14.7 [cents] forever. It will increase. But it just won't double," said Furey.
N.L. to keep control
The arrangement means Newfoundland and Labrador will retain 100 per cent ownership of the Muskrat Falls station and the Labrador Transmission Assets, and keep a controlling interest in the Labrador-Island Link.
This latest strategy is part of a $5.2-billion commitment by the federal government to stabilize the Muskrat Falls project, which has ballooned by more than $6 billion since it was sanctioned in late 2012.
Hydro officials estimate the in-service cost at $13.1 billion, but ongoing delays with the Labrador-Island Link are expected to drive the figure even higher.
As for the project, N.L. Hydro expects final commissioning to occur at the end of May, though repeated deadlines have been missed over the years.
In addition to the $2 billion in federal financing, Ottawa will also provide annual transfers to the province equivalent to Canada's yearly net profit interest from the Hibernia offshore oil project. These transfers are estimated to total $3.2 billion between now and the end of Hibernia's project life, and the money is expected to begin flowing this spring, said Furey.
Innu could seek legal action
Meanwhile, Innu Nation issued a news release Monday, expressing frustration that an agreement has not been reached to protect its financial interests.
Innu Nation had threatened legal action following the July announcement of a framework agreement, but its case was parked after an agreement was reached to allow for all sides to enter into discussions.
With this latest step, however, the Innu Nation said it still feels left out of the process, and could reactivate its court challenge.
"Those discussions have not resolved outstanding differences," the statement reads.
The Muskrat Falls project is located on traditional Innu land, and its approval was conditional on a financial benefits agreement.
Innu leaders fear a rate mitigation plan might result in diminished financial returns for the group.
"The Innu also deserve fair treatment and any rate mitigation deal must also protect their interests under the Lower Churchill impacts and benefits agreement," the statement said.
In response, Furey said there have been "reasonable conversations" with Innu leaders in recent weeks, and further talks are planned.
As such, he said, "we have agreed not to talk about what's specific in those discussions."
Critics unimpressed with deal
Opposition politicians, meanwhile, offered a lukewarm response to the plan.
PC Leader David Brazil called the announcement a "good next step" in the effort to ward off unaffordable power rates, but said the government will have to offer more support to those with limited financial means when rates begin to creep up.
Brazil said he would have liked to see even more cash from the federal government in order to avoid the need for further borrowing by the province.
Jim Dinn, interim leader of the NDP, said he believes Monday's announcement will help ease some of the anxiety caused by Muskrat Falls.
But he chafed at all the hype and "backslapping" for what he said was a "renegotiating of the mortgage on Muskrat Falls."