Premier Furey’s recent formation of an “Expert Panel on Churchill Falls 2041…to determine the best approach to ensure maximum benefits” for the province leads one to believe that the 65-year “egregious” “inequitable” and “unconscionable” Contract is coming to an end.
Unfortunately, the Premier is engaging in wishful thinking.
The contract will end but that does not mean the Province will have access to the 34 terawatt hours of electricity the Plant produces – or even one single kilowatt beyond the existing “Recall” provision.
In fact, the situation around contract expiry is so unclear that – more likely than not – NL could be forced into another “inequitable” contract after 2041.
This is big stuff!
To understand the issue, some history is required.
In 1999, CF(L)co – owner of the Churchill Falls Plant – was crippling towards insolvency; the Churchill Falls contract was so niggardly written that it failed to account for inflation, including the eventual requirement for costly capital maintenance. The 65-year contract contained no reopener clause.
The tenuous financial position of CF(L)co was known to all Premiers. By 1999 Premier Tobin – seemingly – was forced to deal with the potential default of CF(L)co and talks ensued with Hydro Quebec (HQ). Lucien Bouchard was Quebec Premier at the time.
The pair agreed on a plan whereby Hydro-Quebec helped CF(L)co to remain solvent. But the solution came at an enormous price to NL.
The parties conjured up an agreement called “Guaranteed Winter Availability Contract” (GWAC) under which CF(L)co sold power to HQ in excess of the amount specified in the Contract, on terms that allowed CF(L)co to establish a Reserve Fund from which it could draw and avoid default.
The GWAC deal was not the product of a benevolent Quebec. In earlier negotiations, on Lower Churchill development, it sought changes to the Quebec/Labrador border. This time it sought control of the Churchill Falls project after 2041.
Let’s look at what followed.
The 1999 Agreement allowed an amendment to the “Shareholders Agreement” governing CF(L)co, specifically Revised by-law 27 under Schedule C, that has the effect of binding both shareholders (NLH and HQ) to co-equal status on the Board of Directors, even though NL Hydro is and remains the majority shareholder.
Put a slightly different way, the changes transformed NL Hydro‘s majority shareholder’s control, after 2041, to a lesser status – one equal to the minority shareholder.
Why would NL agree to this?
Article 5.4 of the Contract gave Hydro Quebec huge clout to “cure” a potential CF(L)co default. The Article stated: “Any amounts paid or expended by Hydro-Quebec in effecting such cure shall be deemed to be advances to CFLCo…entitling Hydro-Quebec to receive 10 common shares of CFLCo with every $1000 principal amount of Debentures.”
Hydro-Quebec owns 34.2% of the shares of CFLco. At $100 per share the Quebec Utility may have gained control of CF(L)co with little difficulty.
Now, you might ask: What the heck does all this mean?
It is worth noting, first, that GNL’s 1999 Press Release acknowledges the GWAC Agreement and states that the revision gives NL Hydro “the same right as Quebec Hydro to inject cash into CF(L)co in return for shares if cash deficiencies exist”. The Clause is essentially meaningless, the GWAC deal having been done. The Release adds that the new deal “ensures Newfoundland and Labrador never loses control of CF(L)co.” BUT…it does not inform that GNL permitted its “majority” position on the Board to be reduced to “minority” status and that the two shareholders will have co-equal status after 2041. That is a rather critical omission. Whether it was unavoidable is moot. At minimum, the public ought to have been told, and they had a right to be reminded when Premier Furey established the 2041 “Expert Panel”.
So, what was actually lost?
In a nutshell, the 1999 deal means that after 2041, CF(L)Co’s assets, management structure, by-laws and share structure are frozen, except with the agreement of Hydro-Quebec.
“Frozen, like an insect in amber”, is how one person consulted by this writer, described the legal situation after 2041.
Put simply, CF(L)co can barely decide – without the agreement of Hydro-Quebec – if its CEO can use the company washroom after 2041. OK…maybe the washroom!
As to new power contracts and terms (including with H-Q), whether power can be sold to companies in Labrador as part of an economic development initiative, payment of dividends, etc. – all those decisions require approval of at least 75% of CF(L)co’s Board which will require approval from one or more Hydro Quebec Directors.
On this basis, it is not difficult to figure out that the recommendations of the “Expert Panel” are meaningless, unless approved by Quebec City.
Then there is the issue of transparency: Why would Premier Furey let the public think that the Expert Panel is able to propose ideas to obtain “maximum benefits” from Churchill Falls when the flexibility to make those decisions does not exist? On what basis can we now say that the “Expert Panel” is comprised of the right “experts”? What role can they perform except to carry out the only other one specified by the Premier which is to “educate the public and the government on the current contract’s implications…”
Seems to me that the Panel should inform the Government first!
A related story: I recall a Paper entitled “Can We Wait for 2041?” which Energy Minister Jerome Kennedy released in 2012. He did so as critics of the Muskrat Falls Project were trying to get the Dunderdale Administration to “wait for 2041” rather continue on a hair-brained course to replace the Holyrood Thermal Generating Station begun by Premier Danny Williams. Kennedy’s Paper read:
“I know at one point I laboured under the illusion that as we waited for 2041 we would get free power, we would have unlimited power, but when you look at the corporate structure of CFLco it’s not that simple…There is no doubt that Newfoundland and Labrador will benefit in 2041, but it’s very difficult to envision what exactly will take place”. It continues:
“Instead HQ’s minority shareholder position….and the legal rights that it confers, will have to be considered. This will have various consequences, one of which is that CFLco may not be subject to being operated at the instruction of NLH. Instead, there will be legal, financial and corporate obligations upon CFLco, including those of Directors of CFLco that may be appointed by NLH, as a result HQ continuing economic interests. These obligations may or may not align with the Province’s public interest or policy goals at any given time.”
I was not aware of Tobin’s deal at the time and wrote that that the Minister was wrong…that the contract ended in 2041…end of story. Except, he was right! There is no clarity around Churchill Falls post-2041, though that fact hardly constituted a reason to push on with Muskrat Falls when so many better, lower risk, and cheaper, alternatives were available.
Fortunately, someone ably directed me to read the amended Churchill Falls contract.
Fast forward to 2022.
Premier Furey has now chosen to follow the path of his predecessors. He also wants to hide the monumental, and potentially catastrophic, decision made more than twenty years ago. That is the case else membership on the Expert Panel would have been constituted quite differently.
If Premier Furey thinks that Hydro-Quebec won’t fight for every penny, every kWh for its own account, threatening and obstructing at every turn, disallowing third-party power transmission through its territory unless it is sold to Hydro-Quebec on advantageous terms – he understands little about Quebec/NL hydro negotiations.
HQ owns the transmission line bringing Churchill Falls power into Quebec and into export markets. Add this to co-equal control over CF(L)co, what is left except the Premier’s own capacity to deal with this additional complex issue?
The little weight that Premier Furey carried in support of rate mitigation and offshore oil issues recently, does not suggest he is ready for Hydro-Quebec.
The Province should be worried.
I certainly am.
References:
Province will receive increased benefits from Upper Churchill power
Expert Panel on Churchill Falls 2041 Announced
Upper Churchill: Can We Wait Until 2041?
(A copy of the revised Shareholder’s Agreement is available from the Centre for Newfoundland Studies at Memorial University. The relevant section is Article 12, Schedule C, CHURCHILL FALLS (LABRADOR) CORPORATION LIMITED, BY-LAW NO. 28 (Revised By-Law 27 is reproduced below.)
Article 12
The CF(L)Co Shareholders’ Agreement will continue in force until…August 31, 2041. For the avoidance of doubt, the covenant in section 2.2 that Revised By-law 27 will come into effect concurrently with the termination of this Agreement will survive the termination of this Agreement.
SCHEDULE C
CHURCHILL FALLS (LABRADOR) CORPORATION LIMITED
BY-LAW NO. 28 (Revised By-Law 27)
Being a by-law relating generally to the transaction of the business and affairs of the Corporation
BE IT ENACTED AND IT IS HEREBY ENACTED as a by-law of CHURCHILL FALLS (LABRADOR) CORPORATION LIMITED (hereinafter called the “Corporation”) that:
i. all of the existing By-Laws of the Corporation…are hereby repealed…; and
ii. this By-Law shall become effective on the date of its approval by the shareholders of the Corporation, provided that the effect of this By-Law shall be suspended until the termination of the Shareholders’ Agreement, at which time this By-Law shall be automatically in effect…
For the purposes of this By-Law, “Shareholders’ Agreement” means the agreement dated the 18th day of June 1999 among Newfoundland and Labrador Hydro (“N&LH”), Hydro-Quebec (“HQ”) and the Corporation…
RESTRICTION ON POWERS
20. …unless with the prior approval of the holders of at least seventy-five percent of the common shares of the capital stock of the Corporation from time to time outstanding, the Corporation shall not, nor shall any by-law or any resolution of the directors be effective to authorize the Corporation to:
(i) …engage in, directly or indirectly, or invest in, lend to or guarantee the obligation of, any undertaking other thanthat of the construction, bringing into operation, operation, maintenance and improvement of the hydro-electric plantconstructed by the Corporation at the site near Churchill Falls on the Upper Churchill River in Labrador plant and all incidental and related facilities and the sale of power and energy from the said plant;
(ii) Incur indebtedness for any purpose other than the financing and refinancing of the construction, bringing into operation, operation of, and maintenance (including any restoration which may become necessary) and improvement of, said hydro-electric plant and all incidental and related facilities;
(iii) Issue any further shares of its capital stock except…as part of units consisting of bonds and shares or consisting of debentures and shares in the manner and within the limits to be agreed by the Corporation and Hydro-Quebec as part of the arrangement for the sale by the Corporation to Hydro-Quebec of power and energy from the said plant…;
(iv) Reduce below an unlimited number of common shares or increase above one Class A, one Class B and One Class C share, or otherwise alter its authorized share capital except to the extent from time to time required to enable common shares to be issued as part of units comprising such shares and unsecured subordinated debentures to the extent and in the manner agreed as aforesaid between the Corporation and Hydro-Quebec…;
(viii) From and after the date of the enactment of the present by-law, enter into any
management contract with any person or company affecting the management of the
Corporation;
(x) Merge, amalgamate or transfer all or substantially all of the assets of the Corporation
to a successor corporation or any other corporation, and
(xi) Amend, repeal or suspend the operation of this section 20.
References: