LOAN GUARANTEE SELLS US DOWN THE RIVER

The only thing you can do with a Project as nonsensical as Muskrat Falls: follow the money.  Bankers understand that.  The public should, too. The “Federal Loan Guarantee” is really all about the money trail, especially the Fed's money. I have no problem with that issue.  I only wish Nalcor had been held to account, from day one, as it will under the FLG. But other problems abound under this Agreement.

The MF Project, given its financial structure, rationale and risk to the Province, is now at a point where you have to begin to question the rationality of the political leadership and ask why it is determined to jeopardize the Treasury of the Province to get this deal done.

The “Term Sheet”, for all its legalese, could not fail to hide the weak underpinnings of what Nalcor and the Province have proposed.

Not only is the Government of Canada not going to let a small cabal of engineers, at Nalcor, place billions of Federal dollars at risk, it has, compliments of Federal Minister Peter McKay, made sure that, on the front end for sanction and in the middle, as Muskrat comes off the rails, Nova Scotia and EMERA will always be in the driver’s seat. 

And when EMERA does not need to get involved, the Federal Government is there with an Overseer called the “Independent Engineer” (IE).  The IE is a “CZAR” for the Government of Canada, mandated to take control of the Muskrat Falls Project….but only when the “Guarantee kicks in”.

This person/office will perform a critical role.  The IE will “ensure compliance with the terms of the FLG Agreements and all Financial Documents required to effect Financial Close” (part 4.9). The IE will have to sign off “by way of an IE Certificate” to support any drawdown requested by a Borrower (the Province) and to ensure “the Projects are developed, maintained, and operated…consistent with Good Utility Practice…”.  In short, NOTHING WILL MOVE UNLESS THE “IE” ISSUES A CERTIFICATE allowing it to happen.

The IE, on the basis just outlined, will have an office and a staff for almost fifty (50) years, at our expense! Its job, for fifty years, is to make sure the Federal Government is protected.

In addition, any one reading the “Term Sheet” can see that all the essential legal agreements between the Governments of Canada, Nova Scotia and NL, as well as Emera and Nalcor, will require at least another year’s work for dozens if not hundreds of lawyers. There is better stuff.

The Feds are very concerned about the prospect of Cost Overruns.  The IE will have a fundamental role here, too; he is required to confirm “Expected Costs to Complete” and his role in this process is spelled out in great detail. He must ensure that the debt/equity ratios are maintained by the Province and that it does not let any cost Overruns be included under what is guaranteed. 

The Term Sheet cites 15 different ways (4.4 FLG Events of Default) the Federal Loan Guarantee can be defaulted upon and make clear that it is “a non-exhaustive list”.

PLEASE PAY ATTENTION TO THIS: Section 4.11 requires “no sale or change of control of any Borrower or subsidiaries, except as among the Parties…”).  This is the clause that permits EMERA exclusive access to the MF asset, when our money runs out.  Nalcor and the Provincial Government cannot run to a third party in an effort to bring in some additional equity into the Project, as is common when projects go awry.  Under this Term Sheet, it can only defer to EMERA.

You will recall that Nalcor structured the Project so that rates to you, in the early years of the Project, would be kept low (ostensibly to avoid sticker shock).  Part 3.3 of the FLG permits  amortization of 35 years for the MF site and 55years for the transmission line.  Plus, MF is only permitted 65% debt and the TL 75% debt.  The balance is “equity” which must be produced by the Province. Hence, you had better ask Mr. Kennedy how your rates will be affected, especially by the changes in amortization. 

 

Construction costs prior to “Financial Close” – that is when all the conditions have been met (some 20 of them) and the IE has signed off -  these funds have to come totally from Provincial coffers.  Any money spent prior to “Financial Close” is totally and completely at Newfoundland and Labrador’s risk.

AND, Cost Overruns are NOT covered by the FLG.

The notion of sanctioning this Project prior to completion of consideration of the Maritime Link (ML) by the Nova Scotia Public Utilities Board (UARB) is preposterous.  What Minister Kennedy is getting on with, in terms of his suggestion that Nalcor and Emera are considering early sanction, I am unable to reconcile.  It makes no sense. The UARB is tied into the sanctioning process, in several parts of the Term Sheet including under 3.5B (vii) where it states “all necessary permits, approvals….”, are “FLG Conditions Precedent”.

If anyone thinks they are doing an end run around Nova Scotia’s UARB, let me tell you something:  you can only get away with that in Newfoundland and Labrador. And, I have some doubts that Nova Scotia’s politicians are as arrogant as ours!

There is much more to be parsed in those 19 pages of the Federal Loan Guarantee.  Others, lawyers and financial people as well as politicians, will doubtlessly comment over the next few days. I will add this:

 

1. The Premier, who signed for this Province, on Friday, must have done so not knowing what she was doing. No politician, knowing the financial implications of what they were about to sign, would put their pen to an agreement that is so uneven, that the Province in such a corner. Frankly, in signing this Agreement on behalf of the Province, the Premier has sold us down the river!
2. The big winners are Emera and the Nova Scotia Government.
3. Sanctioning this Project, now, will ensure that at least $2 billion of our money will be spent without us knowing if all the conditions prescribed for ‘sanction’ by the Government of Canada, can ever be met.
4. The Government has to wrestle the Muskrat Falls Project away from Nalcor before it is too late.  I have no desire to alarm, but I believe, left to its own devices and using the taxpayers money to fund this Project, Nalcor, on the basis of this “LOAN GUARANTEE”, will harm the economy of this Province for a generation.

I have only scratched the surface of the many questions posed by this FLG.  Before anything else happens, we have a right to have them all answered by this Government.

Please, let’s call a TIME OUT!