Ottawa’s $5.2 billion Muskrat bailout includes more borrowing, restructuring as project nears completion
A complex financial arrangement to provide relief to electricity users on the island part of Newfoundland and Labrador in the days of Muskrat Falls is one step closer to reality, although concrete details of the amount that customers will pay for electricity remain unclear.
Meanwhile, Innu Nation leaders are expressing concern about their level of involvement in the tariff mitigation strategy and the possible financial impacts on the Indigenous group.
Federal and provincial officials announced on Monday that term sheets have now been signed for a $1 billion federal loan guarantee – the third loan guarantee by Ottawa for the troubled project – and capital restructuring for the 824 megawatt Muskrat Falls Power Plant and Labrador Transmission Assets.
Second, there will be a $1 billion investment by Ottawa in the provincial portion of the Labrador-Islands link.
Monday’s announcement builds on a $5.2 billion tentative deal announced by Prime Minister Justin Trudeau and Prime Minister Andrew Furey in late July.
In a briefing document distributed to the media on Monday, officials called it an “important step” towards finalizing a strategy to prevent electricity rates from nearly doubling once Lower Churchill projects are put in place. in service, and project costs must be included in customer rates.
A big break on payments
Under the deal, the province’s 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 is to be used to fund principal payments for the Muskrat Falls Generating Station and Muskrat to Churchill Falls Transmission Line through June 2029. The money is to be repaid between 2037 and 2057.
Essentially, the province will borrow more money, in order to repay previous borrowings.
Asked by reporters about it, Furey said this scenario would pay off debt at lower interest rates and help keep power rates from skyrocketing.
“We have to treat the contracts as they exist,” Furey said, noting that the agreement will see the province “emerge from the dark shadow of Muskrat Falls.”
In addition, $650 million in sinking fund payments to the federal government associated with the initial $5 billion federal loan guarantee, which was signed in 2013, will be forgiven.
Changes will be made to the financing agreements to reflect this latest loan guarantee, according to the documents.
A second loan guarantee of $2.9 billion was announced in late 2016 as the project spiraled out of control. According to Monday’s announcement, the so-called warranty fee of about $14 million per year, and declining in future years, will also be waived.
Federal Labor Minister Seamus O’Regan, also MP for St. John’s South-Mount Pearl, said the deal will stabilize the project and protect taxpayers from “increases in [power] Invoice.”
During his six years in Ottawa, O’Regan said addressing concerns about Muskrat Falls was his top priority, as the prospect of unprecedented rate hikes “haunted our province for more than a decade.”
Meanwhile, Ottawa will provide $1 billion in financing 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 transmission line 1,100 kilometers and nearly $4 billion that will bring electricity from Labrador to the Avalon Peninsula in Newfoundland.
This funding can be used up to a maximum of $150 million annually. The interest rate will be fixed at closing for a 50-year term, based on the 30-year federal government bond rate.
A new limited partnership will be created to manage the money, with Newfoundland and Labrador retaining control.
Officials say this restructuring will reduce cash flow from equity and debt and keep rates from skyrocketing in the early years of Muskrat Falls.
Thus, the tariff for domestic customers will not increase to 23 cents, as had been forecast by the Public Utilities Board.
Officials confirmed that the target rate for domestic customers remains at 14.7 cents per kilowatt-hour when the project goes live, with annual increases of just over 2% expected.
When pressed on the issue of electricity rates, Furey said the Public Utilities Commission will have the final say.
While acknowledging that tariffs will gradually increase, Furey said the goal was a “soft” increase, as opposed to a tariff shock scenario that would force people to seek alternative energy sources and compound the problem by leaving fewer customers to pay. for muskrat.
“It won’t stay at 14.7 [cents] always. It will increase. But it just won’t double,” Furey said.
NL to keep control
The arrangement means that Newfoundland and Labrador will retain 100% ownership of the Muskrat Falls station and Labrador transmission assets, and will retain a controlling interest in the Labrador-Island link.
This latest strategy is part of a $5.2 billion federal commitment to stabilize the Muskrat Falls project, which has ballooned by more than $6 billion since its approval in late 2012.
Hydro officials put the cost in service at $13.1 billion, but continued delays with the Labrador-Island link are expected to push the figure even higher.
Regarding the project, NL Hydro expects final commissioning to take place at the end of May, although repeated deadlines have been missed over the years.
In addition to the $2 billion in federal funding, Ottawa will also provide annual transfers to the province equal to Canada’s net annual participation in the profit from the Hibernia offshore oil project. Those transfers are estimated at $3.2 billion by the end of the Hibernia project lifespan, and the money is expected to start flowing this spring, Furey said.
The Innu could take legal action
Meanwhile, Innu Nation issued a press release on Monday expressing frustration that an agreement had not been reached to protect its financial interests.
Innu Nation had threatened legal action following the announcement in July of a framework agreement, but its case was dropped after an agreement was reached allowing all parties to begin discussions.
With this final step, however, the Innu Nation said it still felt left out of the process and could reactivate its legal challenge.
“These discussions did not resolve outstanding differences,” the statement said.
The Muskrat Falls project is located on traditional Innu lands and its approval was conditional on a financial benefits agreement.
Innu leaders fear that a tariff mitigation plan will lead to diminished financial returns for the group.
“The Innu also deserve fair treatment and any tariff mitigation agreement must also protect their interests under the Lower Churchill Impacts and Benefits Agreement,” the statement said.
In response, Furey said there had been “reasonable conversations” with Innu leaders over the past few weeks and more discussions were planned.
As such, he said, “we have agreed not to talk about what is specific in these discussions.”
Critics aren’t impressed with the deal
Opposition politicians, meanwhile, offered a lukewarm response to the plan.
PC leader David Brazil called the announcement a “good next step” in efforts to avoid unaffordable electricity tariffs, but said the government will need to offer more support to those with limited financial means. when prices start to rise.
Brazil said it would have liked to see even more money from the federal government to avoid the province needing to borrow more.
Jim Dinn, acting leader of the NDP, said he believed Monday’s announcement would 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 “Muskrat Falls mortgage renegotiation.”
Learn more about CBC Newfoundland and Labrador