The attached list of questions have been prepared to assist readers to make inquiries of the Government and to help inform regarding the Churchill Falls MOU. Additional questions can be found in recent posts, particularly those of Jason Muise. Other questions may be added from time to time.
- Questions on Pricing and Revenue
- Please explain the composition of the $225 billion to GNL and provide the information in nominal and real dollars.
- Please explain how Schedule G was prepared and what assumptions regarding future energy rates underly its construction. Are these numbers, from which the $33.8 billion in revenues are calculated, intended to be simply illustrative or definitively fixed? Is the $33.8 billion a fixed amount? What is the annual rate per Kwh and what is the estimate of power delivered for each year of Schedule G in the MOU?
- The NLH CEO has told the House of Assembly that the MOU is based on a rate of 5.9 c/kwh from 2025, escalating at 2% annually, giving the appearance that the old PPA is torn up and we are getting full value, starting in 2025. This is exactly the same as the NEISO price reference. Yet the CEO has talked about a basket of price indicators but there is only one apparent in the 5.9 c/kwh rate structure in the CEO’s comments. VP Parsons talked about replacement cost as a higher rate, more indicative of CF value but he did not present numbers.
- What is the basis to reconcile the apparent contradiction: is it that HQ is receiving the benefit of low prices under the existing PPA up to 2041 and they are paying higher replacement cost rates only after 2041?
- Isn’t the MOU rate structure a restructuring of that two-stage plan into something that phases rate escalation in more consistently over time?
- The NLH CEO has told the House of Assembly that the MOU is based on a rate of 5.9 c/kwh from 2025, escalating at 2% annually. The actual rate table in the Fact Sheet, related to Schedule G payments, is very different than that. Both have the same Net Present Value, but they are very different.
- Explain, other than NPV, why the actual rate table is so different.
- Explain the risk of backloading the bulk of NLH return to make it dependent on high market prices that may not be realized, leaving NLH at risk of much lower return than shown.
- 5.9% is only the NEISO number – is this the dominant market indicator in the matrix of market indicators intended to represent the fair price? Is this spot market a good index for firm dispatchable power and for the capacity which Churchill Falls offers.
- With reference to VP Walter Parsons’ comments about replacement cost, he did not include numbers, but HQ has discussed replacement projects as costing 16 c/kwh.
- To what extent is replacement cost a part of the formulated market value
- To what extent is the lower wholesale average price in Quebec a factor – is the low-price HQ Heritage Pool the other factor?
- Does the net present value of $33.8 billion in revenues from the existing plant, not including upgrades, include rate escalation “reflective of wholesale electricity market value in Québec; replacement costs in Québec; and wholesale electricity market value in northeast export markets” or is the net present value fixed?
- Supply annual data on the revenues from each of Schedule G and H in both nominal (i.e., dollars of the day and in present value terms?
- How can the MOU provide a “market-based” pricing structure if the payments are limited from the outset to $33.8 billion?
- What discount rate was used in calculating the $33.8 billion? If it was the 5.822% cited in s 5.9 of the MOU, please explain the rationale for its application.
- Please describe how the discount rate was calculated, how much is ascribed to anticipated inflation, how much for the time value of money, how much for risk and how much for other variables.
- The GNL indicates that NL is getting $17 billion of benefit from higher rates in the term to 2041, or on average about $ 1 Billion annually. Please provide the background to this estimate and what it comprises?
- What is the present-day value and nominal value of the $17 Billion in Schedule G and what discount rate does it reflect?
- What is the present-day value of the payments that HQ would pay at replacement cost in 2041 (assuming that replacement cost is an average of the estimated cost per Kwh from the combined new developments in Labrador) for the existing CF power at the estimated quantities of power transferred as per schedule G to the MOU from 2041 to 2075?
- Existing Plant
- What regulatory approvals for the MOU must Hydro Quebec secure?
- Why is there no option to terminate the new power contract during the 51-year term of the MOU?
- Will there be a force majeure clause in the final agreement?
- Of the $17B HQ is injecting into CFLCo in the MOU, prior to 2041, how much of it flows back to them as their entitlement to dividends?
- Will this dividend yield to HQ be used to advance the $3.5B NPV in equity to NLH?
- How much of the new revenues from the existing Churchill Falls plant will be reallocated to Development Projects and how much will remain for GNL to apply to debt reduction, lower taxes and new spending? Please provide a new Schedule to provide this information on a year-by-year basis.
- In Schedule E please provide the energy base for sales to HQ from the existing plant in 2025 and for each of the next 50 years, both including and excluding the energy impact of the upgrades.
- Does this base include all present sales from CFLCo to Hydro Quebec except for the 525 MW of recapture?
- How much revenue will be forfeited each year from sales under the 1969 power contract, under GWAC, and other agreements for sale of surplus power?
- Please supply data on the sales revenues and quantities from each existing power contract which will be displaced each year by the new power contract.
- Does the MOU anticipate different pricing structures for each of the Development projects?
- If so, why will CFLCo sell power from the existing plant at a lower rate than the rates at which power will be supplied to HQ from Gull Island?
- Various numbers have been cited by Michael Sabia (e.g., https://www.cbc.ca/listen/live-radio/1-89-the-signal/clip/16117038-hydro-president-ceo-jennifer-williams) and other commentators in Quebec as to the replacement cost of Churchill Falls project, some citing a cost for Gull Island of 16 cents/KWh. Please supply the cost per KWh hour for Gull Island and the assumptions built into the estimate, particularly its value in 2024 dollars and whether it includes allowances for contingency and cost escalation.
- Does the MOU contemplate sales to third parties by CFLCo through a bidding process whereby blocks of power are offered to major customers on an auction sales basis? If not, why not?
- While there are no “automatic renewal rights” at the end of the 50-year supply period will there be an option to renew?
- Please explain what are the conditions precedent to the $2.2 billion in payments cited in 2.4 (a) relative to the “achievement of certain milestones relating to the Gull Island Project and, as applicable, the CF Expansion Project” and must this amount be invested in the Develop Projects, rather than applied to other debt repayment and spending priorities of GNL?
- What additional revenues to NLH will be generated by the increased recapture provisions from the existing Churchill Falls plant in Schedule E?
- Will these sales be limited to Labrador, in light of transmission constraints for wheeling to the Island?
- What new transmission lines will be required in Labrador to supply new and existing customers of NL Hydro?
- What will be the fiscal impact on the MOU through loss of equalization payments from the federal government?
- Rights of the Province
- Why did NLH in 5.3 b agree to exclusive rights to develop Gull Island with immediate effect from December 12, 2024?
- Did GNL/NLH approach other potential buyers who might be prepared to bid on Churchill Falls Power? If not, why not and why continue to deal only with Hydro Quebec?
- Why does 2.1 d (i) restrict NLH expiring blocks “for use in in NL” and not allow exports? How can the expiring blocks be considered an exit ramp when our rights are so restricted?
- Has GNL asked the federal government to treat transmission corridors the same way oil and gas pipelines are treated on the basis of non-discriminatory open access and a regulated tariff common to all users?
- Does the MOU impact upon the province’s ability to amend the 1961 statutory lease in order to change the fiscal regime?
- Does the MOU limit access to power to supply future load growth, as assured by the statutory lease?
- Will there be a role for the PUB in the water management agreement?
- Will Muskrat Falls be protected by the water management agreement? How will Muskrat Falls be protected?
- Will the MOU rely on past Orders of the PUB to establish an agreement?
- Will the Electrical Power Control Act apply to the MOU and to the definitive agreements?
- What effect, if any, will the MOU have on the existing Shareholders’ Agreement?
- Will the minority shareholders for the various corporate entities have magnified rights on certain key decisions and if so on which decisions will the super-minority apply?”
- Will the “non-dilution” provisions of 2.5 c apply beyond the terms of the definitive agreements and the MOU.
- Development Projects
- Please explain the cost basis for the $33 billion in Development Projects, including $24.9 billion for Gull Island. Are these estimates in 2025 dollars and do they include financing costs as well as contingency and escalation? What percentage of engineering design has been completed for Gull Island?
- Please explain the “2% per annum escalation of revenues over the term of the CF Expansion PPAs” and whether this is intended both to escalate nominal rates and to keep real rates level over the terms of the agreements?
- If so, will revenue requirements rise over the terms of the agreements rather than follow the more normal pattern of decline? What is the basis for the 2% selected? Will it be raised if higher inflation occurs?
- Please provide projections of return on equity for each Development project along with revenue projections for power assigned to NLH, along with the assumptions as well as other direct cash flows for tax revenues and royalties.
- What will be the term for each power purchase agreement?
- Will the power purchase agreements be structured on a cost-of-service basis with declining revenue requirements, or back end loaded, with revenue requirements escalating over time?
- When the long-term capital structure is “deemed” to be 100% debt, in 2.1 (biii) D, does that mean no equity will be required from NL Hydro?
- Please clarify responsibility for cost overruns for each Development Project and confirm that NL Hydro will bear responsibility for cost overruns “on a pro rata basis based on their respective shareholdings” (2.1 b iii C) and (2.2 c ii F) which makes “off-takers” responsible for cost overruns.
- In 2.2 (cii) C and E what does the addition of the word “deem” add to the meaning of the statements?
- What is the “Committed NLH GI Equity Contribution” and is there an equity cap of $3.5 billion for all Development Projects combined?
- In 2.4 (a) there is provision for “additional equity needs for the NL Transmission Assets” which contemplates that “the amount and timing of the scheduled payments will remain unchanged”. Must NLH supply such equity, and will it be limited by the $3.5 billion cap?
- Please describe “unsecured subordinated non-convertible debt” in the context of GI. Does that mean that HQ will not have the option to convert the debt to equity and therefore alter the fixed 60/40 capital structure?
- Is HQ providing a full loan guarantee of all debt, including that of Gull Island? Wade Locke states that “It is important to recognize that the province will have additional borrowing in the range of $17 to $18 billion for the projects which is approximately equal to the net debt that the province has currently outstanding. As well, the province is not fully insulated from cost over runs, being exposed to cost over runs for the transmission lines and 65.8% of the cost overruns on the Churchill Falls upgrade.” Can the province absorb the additional debt? Is our fiscal capacity already at its limit? How will this additional debt impact on the province’s debt and how will it be reflected in our public accounts and other statements of the province’s obligations.
- In 2.3 (e) NLH has the “option” to contribute more equity. What incentive would NLH have so to do?
- What is the potential damage arising from “dilution” of NLH equity in the Development Projects?
- What indigenous and local preference provisions will obtain with respect to procurement and employment decisions taken on behalf of the GI project?
- What is the risk that global warming will reduce the amount of water available on the Churchill River?
- What will be the impact of building additional capacity on the Churchill River without an additional supply of water?
- Oversight
- Does the MOU rely upon the environmental approvals granted in 2011 and 2012 for the construction of the Gull Island generation project?
- Does the MOU rely upon new joint environmental oversight structures encompassing the federal government, along with GQ and GNL?
- Does the MOU provide a role for the Quebec Energy Regulator and/or for the NL PUB and what role will each play?
- Does the MOU contemplate the appointment of an Independent Engineer to provide independent oversight for the benefit of the Owners?
- Will the PUB be asked to review or to approve the definitive agreements and the new development projects?
- Will the authority of the PUB to make the final decision on the Development Projects be reinstated, recognizing that, while most of the energy will be exported, a significant volume will be sold to ratepayers for use within the province?
- Has GNL considered how the government of Nova Scotia protected ratepayers through special legislation which mandated the Utilities and Review Board to give final approval to the Maritime Link connecting Nova Scotia with the Muskrat Falls project?
