Gil Dalton, BA (Econ), B. Comm., CPA. Formerly Partner accounting firm EY. Worked in EY’s Toronto, Vancouver and St. John’s Offices. Executive Vice-President and Chief Financial Officer Baine Johnson group of Companies.
September 24, 2025
MOU Driving Force
I would like to add my views to the many Newfoundlanders who have concerns with the above mentioned MOU.
Summary
My comments in this regard can be summarized in point form as follows:
- This MOU, while a 2 party deal to work towards significant binding agreements, is driven primarily by the historical and current critical capacity problems of HQ. While the need for cash by Newfoundland is also important, it is not critical.
- While the MOU addresses 4 matters or projects, the most important one to focus in on is the Upper Churchill (cancellation of the old and entering into a new PPA).
- An analysis of the 3 other projects (CF Upgrade, CF Extension and Gull Island) are not exceptionally difficult and more routine from the perspective of Owners, Investors and Lenders including Pricing, Future Demand and Capital requirements.
- The Pricing formula in the MOU for all projects including the 3 new ones and the old Upper Churchill, post 2041 are not a reflection of Fair Market values, and thus should not be acceptable to the province or the government on behalf of the people of the province. What is needed is a Reset mechanism as more clearly set out below.
- There are 2 Fundamental and foundational issues not covered or not covered adequately in the MOU which should be pre-conditions of any agreements entered into under the MOU … neither of which would prevent the entering into proposed PPA’s as proposed, assuming the principle of alignment with fair market prices was appropriately adhered to. These foundational issues relate to (i) Equity and equity exit provisions and (ii) change in Provincial Water Rights regime. These are discussed in more detail below
I would hope that the proposed new agreements that are to flow from this MOU, are done correctly having regard to all the significant additional input that has come from around the province including the comments contained herein and if this is accomplished, it could result in a win-win deal with HQ that could certainly be transformative for this province. As I see it right now, further changes are needed, to reach that goal.
The projects Embedded in the MOU
The MOU essentially addresses 4 matters or projects as follows:
- Cancellation and Renewal of the old Upper Churchill Agreement (including ancillary agreements) (Original Deal)
- An upgrade of the existing Upper Churchill turbine – generation units (Update Project)
- Construction of a new power plant next to the existing Upper Churchill Power plant and the related interconnections (Expansion Project).
- Development and construction of a new Power plant and associated Reservoir including related dams and dykes … all down stream from the existing Churchill Falls facility (Gull Island Project).
MOU Driving Force
It is my Opinion that the major driving force for this MOU is the critical capacity constrains that HQ finds itself in in building new power generation in their province. In this regard, I understand that HQ itself feels that new power sources in Quebec would likely be in the range of $160 per Mwh or 16 cents per Kwh. More importantly, we need to have top of mind the fact that power from Labrador, constitutes approximately 12 to 13 % of all power used in Quebec. Just imagine if a new deal for Labrador power were not reached pursuant to this MOU, what an absolute mess HQ would find itself in regarding electrical services to the Quebec population and their business community. To not understand this situation, and the leverage it gives us, would be unforgivable.
In addition to those capacity constraints, the demand for electricity is sky rocketing. I discuss the Demand issue latter on in this memo. All things considered the urgency of this MOU is significantly more on the HQ side.
I have no problem in doing a deal with HQ, that is good for them and fair for NL. But right now, such a deal does not appear to be in this MOU as it currently stands and more importantly it seems to me that the NL government has failed to understand the strength of its hand in negotiating this deal.
I will simply say that, if you try to do a deal that is not at fair market value, then there will definitely be a winner and a loser and as I see it, the loser in this MOU is unfortunately us (the people of Newfoundland & Labrador).
All my comments that follow are trying to get the people of our province, who own this resource, to understand how critical this deal is and how, if followed, it will surely lead us down a road that substantially takes away what we should be entitled to as owners. If we don’t get it right now, we will have to wait another 50/60 years to get another crack at it. I hope the public gets the message here, because if they don’t, or even if they get it and just ignore it, because of all the other daily living issues that crowd into our every day lives, then we will have lost.
New Energy from this MOU
Essentially, the Gull Island Project is the only new energy creation on the Church River under this MOU (as it includes the only new reservoir being added for water storage). The current Upper Churchill Plant plus both the Upgrade and the Extension are all just converting energy stored in the existing Smallwood Reservoir to electricity. This means that all the Upgrade and the Extension projects are doing is increasing the rate of generation or the speed of generation from the stored water energy in the Smallwood reservoir. This is not necessarily a bad thing as it provides greater flexibility in handling peak load requirements as well as other emergency power allocations. The major beneficiary, by far, of these 2 projects is to help Quebec solve its capacity problem during peak load requirements. This is fine and I mention this only to highlight the particular leverage that we (NLH) have from a negotiating perspective in reaching a fair deal for the province. It also indicates the leverage regarding equity and equity exit provisions and water rights discussed later in this memo.
Pricing
Setting aside the Upper Churchill (Original Deal) for a moment, the other 3 projects are new and pricing on completion and commissioning, is based on cost which includes debt service costs plus a 8 to 9 percent return on equity.
While it is generally normal in large capital projects to have initial pricing based on cost plus escalation, it is not normal nor acceptable particularly to the resource owners (the people of Newfoundland & Labrador) to be locked into such a pricing formula over the long term.
My suggestion is that there be a RESET of the base to the then fair market value (independently determined) every 5 years. And that the escalation % be applied to this new base for the next 5 years. This reset would ensure that the resource owner is only exposed for 5 years to major changes in market rates reflecting significant changes in demand. The RESET could of course be positive or negative but on balance it would make sure that we are getting a fair market price since, on balance over time, demand for electricity is likely to increase substantially. Such a RESET would be compatible with the desired principle to use market prices as set out in the MOU.
Upper Churchill (Original Deal)
The most important and critical part of the MOU is how the existing Upper Churchill contract is handled.
The other 3 are new capital projects which will have a forecasted cost and forecasted revenue (based on a pricing formula of cost plus 2% escalation). All of this can be analysed and together with availability of capital and the assessment of the risks involved (technical, financial and others). Then, pursuant to such analysis an appropriate business decision can be made on a go … no go basis. Businessleaders, investors and lenders are used to making these types of decisions every day of the week.
However, the Upper Churchill … Original deal is a different quintal of fish which is why we have to be so careful with this part of the MOU and the resultant new PPA. The existing Upper Churchill Facility is at a completely different stage in its life, where all the original debt has been paid off and the only expenses going forward are the ongoing operating expenses and asset maintenance expenses. Yet the operating life and revenue generating capabilities of this asset remain substantial and it is capable of producing electricity for many many more years. This is the stage of a project or enterprise that in the financial and investment world is commonly referred to as a Cash Cow and in very short order (2041 – 17 short years from now) the current owner of this facility (CFLco) will get full ownership of this Cash Cow.
Why then, are we so willing to do a deal which appears to pass so much of the inherent value of this cash cow to Hydro Quebec as appears will happen, based on how I interpret the transactions laid out in the MOU. Again, I am not against getting a new deal with HQ but we must be totally sure we get the best deal for Newfoundland and Labrador.
I know, based on the MOU, that we get extra revenue in the next 17 years (up to 2041) over and above what we would get under the old contract price.
However, this suggests to me that NL is using this MOU and new PPAs as an opportunity to either
(a) arrange new financing and masking the cost (pay back) of financing in the new blended contracted price, or
(b) getting an advance on future revenue payments to be offset by discounts on future revenue (reduced pricing).
Both of these are just 2 sides of the same coin … they are essentially the same … they both represent a form of borrowing and pay back from future revenue streams. The principle is fine if the details of the calculation of payback is made clear.
We know what the extra amounts that are being paid to CFLco in the years 2025 to 2041 (in the form of loans or advances) … can be imputed from the MOU (Schedule G). The problem is in determining what the loan repayment or discounted price is.
If it is considered a loan, then the net present value (npv) of the loan repayments should equate to the npv of the loan advancement.
If it is an early advance on revenues, the npv of the future discounts should equate to the npv of the advances.
The issue for me is … a discount has to be applied against something in order to find out what it is … normally the original price. In this case, it should be fair market price at that time. What will the fair market price of electricity be in 2041? It is only a guess right now. To my way of thinking, the price in the new PPA for post 2041 Upper Churchill power should start out equal to the Gull Island price (Gull Island project, according to the MOU, is planned to be in full production at that time), and then follow the same RESET pricing methodology going forward. The discount referred to above should be applied to this fair market value price in order to determine payback.
The cost of the financing element or discount (whatever way you look at this) which is built into the MOU pricing structure for the new Upper Churchill PPA needs to be determined and clarified. Unless this break down is done and transparently explained to the public the whole exercise is a mystery. It is not fair to the people of the province to be enticed with big $ amounts and schedules of all the supposed new cash coming our way … and be told by their government that they are getting a good deal without back up or full explanation … it is just not acceptable. When will government or NLH clarify this matter? Without this, we are left hanging out there without having the proper details and facts needed to decide if it is a good deal or not.
As a neighbouring province, I feel most people would be OK with giving HQ a good deal (by that I mean better than their alternative options inside Quebec). I am sure that with all the details on the table, we can find a win – win deal. Why then, is the MOU making this part of the deal so cloudly? We need substantial additional info, in order to do the proper analysis to find out is this a good deal or not.
My concern is that this new financing or advance, as the case may be, over the next 17 years will be the most expensive debt ever. So far, the answer it is not clear and it continues to be masked in the financial renewal configuration of this MOU deal. The $33.5B which is the npv of the payments by HQ to CFLco over the entire contract life (2025 to 2075) is not explained sufficiently to determine how it is calculated and how fair market rates for post 2041 power is reflected in this number.
It seems to me that with the electrical and other resources we have in this province, we don’t have to give away the farm, to get financing equivalent to that built into this MOU at a reasonable cost.
Demand for Electricity
Demand for electricity is rising rapidly throughout North America and the world. This is driven, to a large extent, but not entirely, by the advent of Artificial Intelligence (AI) and the high consumption of power needed in these large Data Centres in order to run the AI computing needs.
These Data Centres love to locate close to large power generation sites and we are only at the starting gate of this new computing era and its associated demand escalation. Also, I understand that these large Data Centres in the US are currently paying approximately $95USD (roughly $128 Cdn) per Mwh and demand is rapidly growing. Where do you think it will be in 2041?
Quebec sees this, and if we provide them with mountains of cheap power to the detriment of our province (price wise) they will be the ones attracting those significant investments to their province. Quebec has over time played the electricity card to great advantage (more power to them … to use a Pun). But it should not be to the detriment of NL via the transfer of the strategic economic benefits, currently in our hands, to Quebec under this MOU, that in 2041 will be ours. Essentially, they would be using our power, generated in our province to attract all this future investment in competition with us.
It makes me wonder, why can’t we do this ourselves and get the significant investments in Labrador. Maybe we could develop a whole new city in Labrador all based on the attraction of cheap long term electrical power … just look at Aberdeen Scotland and Stavanger Norway to see how their proximity to energy (North Sea Oil) transformed those cities. We just have to remember, that this deal is strategic and electricity here is not just about selling at a fair price. It is such a strategic asset, owned by the people of Newfoundland and our negotiations with HQ in this regard should reflect this thinking and the substantial leverage we hold. Why are we so lacking in self confidence that we think we have to ask others to come in and do these big projects for us and in so doing, significantly transfer the strategic benefits, referred to earlier, to someone else. Maybe we should hire the best in the world to help us do this and in the process learn from the best … that’s how we can become the best.
I know that financing big projects can be difficult for a small province. But others have done it … just look at country of Norway (roughly 5,000,000 population in the whole country) with its oil and gas resources as well as electricity generation. They brought in the best and learned from the best so that they are now one of the best in the world at tackling these issues. Maybe an attitude change is needed.
However, we are now involved in trying to do a fair deal with Quebec, so we have to see this through. If a fair deal can result from these current negotiations, then great, let’s do it, but it has to be a fair deal.
Foundational Issues
(a) Equity Investment and Equity Exit Provisions
I would like to mention another matter, not covered in the MOU. In long term JV contracts, where one party is also the major off taker of the JV product (in this case electricity), it is normal for that party to take an equity position in the venture itself and the equity % is negotiated. I think the 40% in Gull Island is too high and I think a 25% would be more appropriate in this case. In fact, it should be a pre-condition that NLH hold not less than a 75% equity interest in all entities operating on the Churchill River. On the Gull Island Project, this would be easy to accomplish. With regard to the Upper Churchill, it would mean that HQ would have to convert 9.2% of its 34.2% equity in CFLco into redeemable debt. The conversion and redemption details together with a negotiated interest rate that reflects the risk profile of the debt, should all be negotiated and form part of the detailed legal agreements.
On the matter of taking an equity position, it would give that particular JV party a seat on the board because they would have significant interest in seeing and having input into how the enterprise operates. To such a JV partner, a project like this is important because the product flow (in this case electricity) undoutedly forms a significant part of their supply chain. However, when the contract ends those requirements generally fall away and there would normally be an exit provision where the majority partner would generally have an option, but not the obligation, to acquire the exiting party’s equity at FMV (negotiated or independently determined). The option would likely not be exercised if the contract is renewed (in this case there is no automatic renewal). Such an exit provision enables the exiting partner to move on and provides the majority and continuing partner with the ability to entice a new future partner/customer with an equity position. This equity and equity exit matter should be a high priority and pursued in the new contracts. Such a clause was not in the original Upper Churchill agreement but probably should have.
We have to keep in mind that … it is one thing to enter into PPAs at fair market prices, but Equity is forever without appropriate exit provisions.
We should not sign any go forward agreements without ensuring a minimum 75% equity for NLH on a go forward basis, together with, appropriate equity exit provisions and I refer to this as Pre-condition #1.
I also suggest that with the above noted equity changes, that the $3.5B on a npv basis paid to NLH should become $4.5B.
(b)Water Rights
The foundation for any hydro electricity project is water rights. It underpins everything else. I think NL needs an overall change in the methodology on how it handles water rights for hydro electric projects throughout the province.
My suggestion here is that all water rights for hydro generation in the province should be provided to NLH (100% owned crown corporation) on terms satisfactory to both parties and including rents and royalties as appropriate. NLH would then have the right to license these rights to the entities operating on the river and charge a negotiated license fee. This would greatly improve overall flexibility where there are 2 or more operating facilities on the river system.
More importantly, the licenses granted by NLH should expire on the date that the long term respective PPA, to which it applies, expires (a new license can always be put in place if there is a go forward new PPA entered into). If this is not done, the province could be left hanging out there with water rights that exist and are held in an entity and NLH may not be able use them for the purpose of attracting future new users and most likely would have to pay exorbitant consideration to get these rights back or worst to fight a court case in this regard with no guarantee of success. Such a change in Provincial Water Rights Regime for Hydro electric projects should be pre-condition #2.
Nothing in these 2 pre-conditions, prevents the entering into the new PPAs.
(a) Quebec gets the access to long term power capacity which is their fundamental objective in this MOU from their perspective.
(b) Quebec gets to enjoy all the benefits of their equity investment during the term of their long-term contract.
(c) Quebec will get a fair market price for their equity investment at the end of its long-term contract.
(d) All the entities operating on the river get access the to all water rights needed to ensure 100% full performance of the underlying long-term contract obligations.
To my way of thinking there is absolutely nothing unfair about this methodology.
Different Termination Dates
The PPA termination date for the renewal of Upper Churchill including the Upgrade and Extension is 2075 while the Gull Island termination date is 2085. My comments above on water rights, if followed would be able to handle this no problem. However, should the proposed Upper Churchill new PPA not be renewed (no auto renewal) in 2075, the water rights, if nothing is done, could become a significant issue depending on relationships at the time.
I seriously think the province and NLH, should consider the model suggested earlier, with NLH being the initial grantee of all water rights and they would license the specific portion thereof to the respective entities operating on the river.
In my humble opinion, as stated above, changing the provincial model on Water Rights should be a pre-condition (pre-condition # 2 – see above) to any deal signed under this MOU.
Conclusion
This deal as set out in the MOU, if it finds its way, as is, into the legal agreements yet to be completed will, long before it gets even 10% the way through, cause all Newfoundlanders to have the same feeling of regret and disillusionment that have consumed us for the last 56 Years about the old original Upper Churchill deal. I firmly believe that.
What the general public needs to know is:
- This MOU does not even attempt to address the foundational problems that flowed from the old deal (Equity and Equity Exit issues and particularly water rights). To proceed without fixing these fundamental problems, I feel will be almost like virtually taking the Churchill River and moving it across the border into Quebec.
- While using nice comforting language and principles about finally using fair market pricing … it just does not do that (to our detriment).
- The advanced payments (between 2025 and 2041), while it could in principle be OK, if properly explained and supported, it seems to me to be just an attempt to hide from you, the people, the real issue which is continuing to give to HQ, access to Upper Churchill power at cheap prices that are clearly not related to fair market prices).
Stepping back for a moment, this leads me to believe that they just show you large $ amounts and billions in extra cash in the hope that it blinds you into accepting the deal. We are smarter than that … please don’t be fooled into thinking that this is the best deal for Newfoundland!!!!