Monday, 24 February 2014


There is not much about the Muskrat Falls Project that makes me laugh. But, the February 15th Letter to The Telegram "Wangersky Wrong about Muskrat Falls Business Case" written by Nalcor V-P Finance Derrick Sturge and Wangersky’s reply, "What I Actually Said",  actually did. 

For a few minutes, I permitted myself to dismiss the gale force winds outside having noted the care the paper carrier took to ensure the Saturday tome did not blow away.   As the winds howled I did, too.

I won’t recount all the details that placed Russell Wangersky and Derrick Sturge at loggerheads.  In a nutshell, Mr. Sturge was upset Wangersky had given Nalcor no credit for the $5 billion Bond/Loan issue for Muskrat Falls.  Wangersky quoted a Managing Director at TD Bank who told a Financial Post Columnist:  “(t)he benefit of the (federal loan) guarantee was that no one had to look at the merits of the underlying project…”
Sturge was worse than annoyed.  He was irate, furious, possibly apoplectic.  He wanted Wangersky to believe Nalcor's business case but he was not prepared to show him why.   
Said he: “I write to provide comprehensive information and context…regarding the level of external due diligence undertaken by the government of Canada …that gave them the confidence and satisfaction…to back the $5 billion financing for the Muskrat Falls project. Contrary to Mr. Wangersky’s opinion, this does say a lot about the confidence and strength of the Muskrat Falls project.”

Sturge had missed Wangersky’s point.  His issue was not Nalcor’s role in sating the Fed’s ‘due diligence’ but the fact that the Banks are “…so well-insulated…they admit they didn’t even look at the project.”

Sturge had elicited a verbal smack in the kisser and Wangersky did not disappoint. 

What seemed hilariously funny wasn’t that Sturge misunderstood the distinction Wangersky had made; it was that his indignation seemed borne out of a belief that Nalcor does not receive the respect it is due. 

Suddenly, it seems, the howls of Mother Nature are embellished with less wind than that contained in Sturge’s missive.

The Nalcor V-P reminded Wangersky that “Nalcor Energy obtained indicative credit ratings that demonstrated to Canada’s satisfaction that the Muskrat Falls project was a credit-worthy, investment grade project even without the backing of a federal loan guarantee.” 

Mr. Sturge’s reference to “investment grade” suggests one of the big ratings agencies, like Standard & Poors, had classed the Muskrat debt at least BBB- which is the lowest standard within that grade. The Government of Canada receives AAA rating; Newfoundland and Labrador A+. 

There are ten categories inclusive of the lowest and the highest “investment grade” ratings each of which indicates a risk level and the likelihood the debtor will repay the debt obligation.   

Mr. Sturge is not even generous enough to afford Mr. Wangersky or the public the courtesy of stating which credit rating Standard & Poors gave the Muskrat Falls financing.

Faced with risking $5 billion of capital, any Bank will begin immediately to de-constructing the underlying security. If it involves a risky mega-project, as in the case of Muskrat Falls, a whole new process of due diligence begins, one that takes into account myriad factors, from the competence of management to the risk of overruns.  The Lender will also consider that the borrower is a Province whose current debt, structural deficit and multi-billion pension fund deficit, are tied to revenues that reply upon volatile oil prices.

It would also have relied up on the Power Purchase Agreement (PPA) which states the cost per KWh to be imposed upon local ratepayers.

Other considerations might have included the legal challenge to the Water Management Agreement and the geological problems at the North Spur. (We would sure love to see the Report of the Independent Engineer, Mr. Sturge).

All of these issues influence the interest rate spread given Muskrat versus that given the Government of Canada.

The TD Bank Managing Director might have received a rap on the knuckles for his forthrightness, but there is little not to understand about his words: “(t)he benefit of the (federal loan) guarantee was that no one had to look at the merits of the underlying project…”  The Banker does not leave much to interpretation, does he!

But we lack not just knowledge of the Project's Rating or PPA, we don't even know if the financing is a Loan or a Bond, or the security offered in relation to the Muskrat Falls asset.  We don't even know if the coupon (interest rate) boasted by Nalcor is net of fees, commissions and any other costs associated with raising the Loan.  Mr. Sturge won't tell us; as if the public can't be trusted to know.  

And, this fellow is looking for respect?

A second item of interest in Mr. Sturge’s renderings is contained in the last paragraph: “Nalcor has a standing invitation to Mr. Wangersky and others to contact us at any time to obtain information so we can help inform a constructive dialogue on the Muskrat Falls project.”

Having corrected Sturge, Wangersky must have resisted the temptation to chastise him, too. He must be a fellow of infinite reserve.

Nalcor is an outfit that coached Kathy Dunderdale through the process of keeping the PUB out of public review of the Muskrat Falls Project.  Nalcor enjoys the protection of the Energy Corporation Act promulgated by the Williams’ Government and given more ‘blinds’ by the Dunderdale regime.  It never allowed the Project, as it is currently defined, or the DG-3 cost estimates to undergo the scrutiny of full disclosure or cross examination. 

If anyone asks a probing question of Nalcor it is refused under the guise of “commercial sensitivity”. David Vardy and Ron Penney detailed these matters in their excellent piece in the Saturday Telegram, as did “JM” in a recent Uncle Gnarley Blog Post entitled The Right Side of History.

Yet, Mr. Sturge says to Wangersky “…call us anytime”…let’s create a “constructive dialogue”.  

Who is he kidding?

Sturge wants Wangersky and the public to feign ignorance of the events of the past two years; with not as much as an update of Muskrat Falls’ expenditures and overruns in fifteen months, he has the audacity to seek respect as he continues to disrespect the same public that will pay back the $5 billion plus overruns.

He wants us to ignore the reality that the Federal Loan Guarantee is far less associated with any initiative of Nalcor than the intercession of a political strong-man and Federal Minister, decidedly in Nova Scotia’s camp, named Peter McKay. 

Sturge wants us to believe that Muskrat Falls and the engagement of the Feds is based upon sound economics. Any fool can see that is not so.  If it were a viable project, Nalcor would be proud to expose the numbers for all to scrutinize, including the PUB. 

It would have released, a long time ago, the Power Purchase Agreement (PPA) allowing Island ratepayers to know how much they will pay for Muskrat power. 

Sturge suffers from the same malady characteristic of those who function inside this Tory Government.  Life, for the senior people at Nalcor, too, is lived inside a ‘bowl’.  All are oblivious to simple democratic traditions, transparency and a not so old-fashioned idea that respect is mutual.

Outside, insistent winds sound a commanding howl as if to remind us who is boss.  Inside, a more patient public howls, too.  We howl with laughter, at Nalcor.

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