Wednesday, 18 September 2013


Last time, I referred to BMO Capital Markets’ Report that the Maritime Link might have only a 50/50 chance of sanction.  You may well ask why only 50/50?  Given all the sweeteners Emera has been offered to become Nalcor’s partner, why are the odds so poor? Let’s take a look at Nalcor's deal with Emera:

a)      Emera’s investment, in the transmission line from Labrador, receives a “guaranteed” rate of return from Nalcor. 

b)     Emera receives 20% of the power from Muskrat at zero cost (but for the cost of the Maritime Link)

c)      Cost overruns on the Labrador/Island transmission line are paid for by Nalcor

d)      80% of Emera’s cost overruns on the Maritime Link are paid for by Nalcor

e)      Emera receives the benefits of the Federal Loan Guarantee; and

f)       Emera gets to broker any “surplus” power for which it will receive fees

Not a bad deal, by any measure, wouldn’t you think.    

But Emera is still holding out on sanctioning the Maritime Link. 
Why might such a Company pass up what others perceive to be exceedingly generous? Essentially, for four and possibly five reasons:

a)      Emera does not have the support of the Utility and Rates Board of Nova Scotia (UARB) to build the ML; it likely could not proceed without being guaranteed the return of its investment and an acceptable rate of return.  Even if Nalcor comes up with all the cheap “market-priced” power the UARB is demanding, other issues interfere.

b)      Most noteworthy is the filing, in the Superior Court of Quebec, of an action by Hydro Quebec (HQ) to quash the Water Management Agreement (which HQ refused to endorse). If HQ’s position is upheld, it would mean that Muskrat Falls could produce only 170 megawatts (or as little as 146 megawatts based upon Pre-File Evidence by Nalcor to the PUB on the WMA)  of firm power and not the full 824 Megawatt capacity of the facility. That will require the Upper Churchill operating at full capacity. The Federal Government could hold up the Federal Loan Guarantee on this serious legal issue, alone, (though it is more unlikely that the Feds would hang that hat on Emera’s refusal/inability to sanction the Link).  Nevertheless, the increased risk associated with HQ’s intervention inherently threatens the viability of its investment.

            c)   Emera's low-risk investment profile cannot be overlooked.  Equities, like Emera, are        
                  called  'granny' stocks for a reason.

d)      A study released last year by New England’s regional electricity transmission organization shows average demand growth essentially flat-lined to 2021, for that region, (scroll down to the graph on page 20 of that above link) as a result of energy efficiency initiatives. The Premier has ignored that reality but I doubt that Emera has.

According to a recent Report, which I will discuss in a future Post, the average wholesale price, per KWh, of electricity sold in New York in 2012 was 4.3 cents; lower even than the price in 2009.

The demand by the UARB for all the surplus, or “market-priced” power, from Muskrat is part of the same theme. Emera recognizes that the energy paradigm is shifting almost daily in the direction of cheaper prices.  Hence, it will not be caught without the protection of the UARB. Possibly, too, it will not risk being less popular, than it is already, if it ties Nova Scotians into a long term/high cost power arrangement. It may be shopping other options.

e)      It is unclear whether Emera Inc.’s agreement to acquire Capital Power Corp.'s three New England combined cycle, natural gas-fired power generation facilities for $541-million (U.S.) is part of this alternative strategy.  This investment, plus the share of the capital required for Labrador/Island transmission line and Maritime Link, would require significant borrowing by the Company, for the next few years, all of which may be dilutive for existing shareholders.

One lawyer, familiar with the file, described the UARB demand for more “market-priced” power as ‘extortionist’. Extortion is a strong word. Likely, what he meant was, that Nalcor placed itself in a position, by spending hundreds of millions of dollars prematurely, to be ‘screwed’ by both Emera and Hydro Quebec. If Emera proceeds with the Maritime Link it will place itself under HQ's thumb, too.

Simply put, the Hydro Quebec action is a ‘show stopper’.  Everyone familiar with the Project knows it; neither Nalcor or the Government wants wants to talk about it.
Who would invest billions of dollars in a project and risk it being largely redundant?  Emera boasts a solid history; the Company has a capable Board of Directors and the watchful eye of major shareholders to keep their senior executives from straying too far.  Some lawyers suggest it may be 2016 before the Quebec Superior Court hands down a ruling and appeals are heard.

Private enterprise is usually wise enough to avoid the perils such a prospect represents.

A 50/50 probably says BMO Capital markets? Consider this detail:

Among the top fifty "Holders" of Emera stock, BMO Dividend, Income and other Funds have at least 2.7 million Emera shares under management, according to latest public filings. That makes BMO the second largest holder of Emera shares held in wealth management, retirement and other funds (second only to Investors Group). 

Given all that is at stake for their clients and for the Bank, do you think its BMO Capital Markets division engages in idle chatter?

Finally, the meeting which the Premier held with Quebec Premier Marlene Marois underscores the level of desperation, over Muskrat’s mounting challenges, now felt by the Dunderdale/Nalcor camp.  
Remind me again…wasn’t the purpose of Muskrat Falls to circumvent Quebec’s stranglehold over NL electricity? More on this issue soon.

But, as to a 50/50 probability that Emera will sanction the Maritime Link, the BMO analyst may well be an optimist.