Guest Post by PlanetNL 

PlanetNL35: Nalcor 2020 Annual Report Released

A Document in Search of Good News

It was a foul day outside so what is a dog to do but read the
Nalcor Financial Statements and catch up on the latest numbers as Stan Marshall
says farewell at the morning press conference. 
This short post delivers two notable items of public interest that went
unacknowledged by the executive team at the event.

Big Losses in Oil and Gas

Somehow the loss of $49M in 2020 on “settlement of commodity
swap contracts” did not get much attention. 
Nalcor did talk at length about oil prices tanking and recovering but
not this item.  To do so would be to
admit management error. 

The power of déjà vu says we have been here before.  Uncle Gnarley rightly chastised Nalcor for
the loss of $66.9M in 2017 on a pure financial gambit after receiving $1.8B in
funds through the second Federal Loan Guarantee to keep the Muskrat Falls
project going.  That was reckless and
ugly.  Parking the cash safely was not
good enough.

Participating in futures markets for offshore oil sales, along
with exposure to exchange rate risk is more obviously a part of the business that
cannot be wholly avoided but still: a $49M loss is a major error.  Nalcor’s 2020 oil sales of $182M could have
been 27% better.  A lot must have been
gambled on the wrong side of the market, time and time again.

It is only reasonable to expect these things to even out in
the long run.  The loss of $49M is a lot
of coin.  This year may be no better
though.  The Q1 2021 report shows a $22M
loss on cash flow hedges.  The
derivatives side of the business is not working well these and consistently so.

Deep in the notes are details showing that management has
committed 56% of all production 12 months forward from March 31 at an average
price of $52.72 USD per barrel.  The near
30% discount to the current market price suggests 2021 losses may exceed that
of 2020 and may bleed into 2022.

Besides that, two other matters of large financial impact have
occurred.  On March 1, 2021, the Nalcor
holding in the Hibernia South Extension was redetermined from 10% down to
8.7%.  This means Nalcor received revenue
from too many barrels of oil prior to that date and owes the other partners
$100M.  $38M was settled in Q1 2021 leading
to $98M in comprehensive losses on $55M in net revenue for the quarter.  Its probably going to be a rough year.

Q1 2020 was worse though. 
Comprehensive loss was $135M on $82M net revenue.  The 2020 Annual Report advises that an
impairment on fair market value of the White Rose Extension and Hibernia South
Extension assets was taken totalling a non-cash loss of $225M.  The notes indicate an assumption that
long-term oil price to 2024 would average $52 USD.  If oil prices continue at current levels, part
of the impairment could be reversed. 
However, if current pricing is mostly a post-covid rebound where supply
is lagging demand, oil prices will eventually settle considerably lower and the
impairment must stand.

It’s a wild ride in the oil business these days but that
sentiment is no excuse for the long-term habit of overvaluing assets and being
all over the place on hedges and swaps.  Expecting
a small Crown Corporation to compete and maximize returns in the oil business
may be an experiment that has run its course. 
One of the central pillars of the mighty energy warehouse concept is
crumbling and should probably be torn down.

 The Triple Threat of the Newfoundland Power Rate
of Return Increase

Well of course Nalcor did not talk about this during their own
Annual Report event!  Newfoundland Power
is a completely different and unrelated company with its own General Rate
Application now before the Public Utilities Board.  Why would Nalcor comment on this?

The reason is the threat to electricity rates and that Nalcor
is supposed to take rate mitigation seriously. 
In the Annual Report, Nalcor wants you to believe that they are really
trying to assist with rate mitigation. 
Despite that, Stan replied in direct response to a question that he
hasn’t gotten involved in it.  Well,
there is a CEO leading by example.

A CEO sensitive to the plight of regulated ratepayers who make
up the majority of Nalcor revenue, might have shone some light on this one.

The Newfoundland Power application was recently covered in the
mainstream media as requesting approval for an increase on rate of return on
equity from 8.5% to 9.8% that NP says will only affect billings by 0.8%
overall.   Framed like that it does not
sound like much.  Looking into the NP
GRA, reveals that their proposed revenue increase would be over $20M in 2022
and over $30M in 2023.

The issue being raised here for public awareness (and the
Consumer Advocate and whoever else may be interested) is that if the PUB increases
Newfoundland Power’s return, then two other utilities of interest are also
automatically going to get their rate of return on equity adjusted.

The first is NL Hydro. 
The regulator is compelled by legislation to give NL Hydro the same rate
of return on equity as whatever it decides for Newfoundland Power.  Total revenue increase from this adjustment
is likely to be over $30M.

The other utility is Emera whose investment in the Labrador
Island Link requires an interest return rate equal to the prevailing rate in
effect for NL Hydro.  This adjustment
will tack on another $10M in required revenue for Island ratepayers.

The potential rate impact from adding about $60M in revenue
requirement in the Newfoundland Power service area will be about 8% resulting
in a full 1 c/KWh rate increase.  As
rates for rural parts of the Island and the Labrador coast served by NL Hydro
are based on the NP rate, they too will see the same increase.  Rates in the Labrador Isolated System would
be assessed a much smaller increase, under 0.2 c/KWh.

All that would happen prior to the inclusion of any changes
due to Muskrat Falls.  If ratepayers have
any capacity to pay more for Muskrat Falls – like just 1 c/KWh – this move by
Newfoundland Power ensures they will get it. 
The rate mitigation negotiators had better be aware of that.

The PUB must review the evidence submitted and cannot choose
to simply cut ratepayers a break.  Last
time around, Newfoundland Power withdrew their proposed rate increase but chose
to bring it back this year.  If the PUB
finds that a fair case has been presented, then the other adjustments will
follow on automatically.

At about the time this issue is decided on by the PUB,
ratepayers may also learn their fate regarding rate mitigation.   Just like the strange June weather,
sometimes when you expect rain, it snows. 
Rate mitigation optimists may be best advised to think of something


Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.


This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?