UNDERSTANDING THE REALITY OF THE MOU

September 21, 2025

Editor’s Note: This is the unedited text of Mike Wilson’s press release of September 21, 2025 giving additional commentary and analysis regarding current public discussions regarding the Churchill Falls Memorandum of Understanding. – Des Sullivan

This commentary and analysis is limited by the content of public information and the facts and assumptions stated herein, it should be read with the appropriate caveat.                                                          

This document was prepared by Michael J. Wilson, CA, FCA. I resigned from the Independent Churchill River Oversight Panel (ICROP) on May 12, 2025, but I continue to work diligently in an attempt to: provide factual information to the public; stimulate an informed discussion; and attain a more balanced outcome. I hope this commentary and analysis is both helpful in identifying the root causes of confusion and beneficial to those who seek a better understanding of the MOU.

1. THE BOARD OF NEWFOUNDLAND AND LABRADOR HYDRO (NLH) HAS NOT FULFILLED A KEY FIDUCIARY RESPONSIBILITY
2. THE FUNDAMENTAL STRUCTURE OF THE MOU IS SERIOUSLY FLAWED
3. THE ANTICIPATED BENEFITS OF THE MOU ARE NEITHER BALANCED NOR FAIRLY STATED
4. INFLATION AND THE TIME VALUE OF MONEY HAVE NOT BEEN CONSIDERED
5. NOT ALL INFORMATION PROVIDED TO THE PUBLIC IS ACCURATE AND COMPLETE  

1. THE BOARD OF NLH HAS NOT FULFILLED A KEY FIDUCIARY RESPONSIBILITY

The Newfoundland and Labrador Transparency and Accountability Act is a law requiring crown corporations to ensure public understanding of its financial results, plans, actions and commitments. Transparency requires an openness in providing the public with access to information supporting decisions and sharing what can be shared openly and honestly. Accountability is the obligation of officials to justify their decisions and take responsibility for outcomes. These principles are fundamental to good governance and to ensure the corporation is answerable to the public. Fully informed citizens can better participate in discussions about the MOU and suggest changes where desired.

The Board has a fiduciary responsibility to ensure all information provided to the public, including all representations of the NLH President & CEO Ms.  Williams are accurate and complete. Given the volume of inaccurate and incomplete information provided to date, the public is confused and lacks a sufficient understanding of the MOU. In this regard, it is fairly obvious the Board has not fulfilled a key fiduciary responsibility to provide transparency and accountability.

2. THE FUNDAMENTAL STRUCTURE OF THE MOU IS SERIOUSLY FLAWED

In my previous commentary and analysis, I pointed out the unnecessary complications and confusion arising from bundling two very different types of negotiations in a single MOU. The resultant final agreements are inextricably linked as they will all be executed on the same day. Consequently, there is no opportunity for CF(L)Co to get a new Churchill Falls (CF) Power Purchase Agreement (PPA) without Hydro Quebec (HQ) obtaining a 40% interest in the proposed development of Gull Island (GI).

To avoid obvious conflict of interests, CF(L)Co, the owner of the CF facility, should have engaged independent negotiators with a mandate to maximize the price for power, from both the existing facility and the proposed upgrade and expansion, to be paid by its two customers NLH and HQ. Likewise, the province of Newfoundland and Labrador (NL), the owner of the Churchill River (CR), should have engaged independent negotiators with a mandate to review the development proposal from the proponents NLH and HQ, consider all alternatives and ensure the province obtains the maximum economic benefit from the development of GI. In this context the fundamental structure of the MOU is seriously flawed.

It has been recently stated in the media, the MOU is simply too complicated for the majority of people, including the media and our elected representatives, to understand. The frequent misuse and possible misunderstanding of simple terms such as cost, price and value are widespread. Please refer to my initial commentary and analysis in Appendix A.

In my initial commentary and analysis, I focused primarily on the pricing structures. However, due to the MOU’s complexity, the majority of people still do not understand there are two completely unrelated pricing structures in the MOU, both of which heavily favour HQ. One for the power from the existing CF plant and a second for the power from the new developments including GI. The MOU must be pulled apart to understand how each of these pricing structures work and the impact of the time value of money and inflation on forecasted benefits.

As a testimony to structural flaws and complexity of the MOU, I needed to attach four Appendices in an attempt to unravel the confusion. I hope this commentary and analysis provides sufficient clarity to those who truly seek to understand the impact of the MOU on the wellbeing of the people of our province now and in the future. The details are important, and there is no room for half-truths, inconsistencies and inaccuracies.

In this regard, the ICROP July report could have been of tremendous help to the public. It could have ensured all the information provided to the public was accurate and complete, explained the two pricing structures in detail, and determined if the forecast benefits are balanced, supportable and fairly stated. Please refer to Appendix B.

3. THE ANTICIPATED BENEFITS OF THE MOU ARE NEITHER BALANCED NOR FAIRLY STATED

1. The pricing structure for CF existing power gives rise to a 55% surplus for HQ, being the difference between the forecast price of 5.9 cents present value (pv) and the current HQ replacement cost of 13 cents. The magnitude of this surplus clearly indicates HQ dominated the negotiation and weighed the balance heavily in its favour.
2. It is questionable if the financial benefits accruing to the Government of Newfoundland and Labrador (GNL) arising from HQ payments payable to CF(L)Co after 2041 (underpinning to 90% of the projected benefits) can reasonably be attributed to the early termination of the 1969 CF PPA.
3. For the power from the new developments, HQ negotiated a cost-plus pricing structure with Gull Island Joint Venture (GIJV) unrelated to the current or future value of the power, which again heavily weighs the balance in favour of HQ. GIJV does not benefit from an increase in the future value of the power; just like 1969, it all goes to HQ.
4. The CEO of HQ, Mr. Sabia, has stated “the price paid for the power from the new developments is the lowest price possible for HQ and will provide over $200 billion of cost savings compared to existing alternatives”. Approximately $4 billion per year.
5. The total projected return for NLH related to the new developments will amount to an estimated $20.5 billion in nominal dollars or on average $410 million per year. Please refer to Appendix A.
6. The MOU proposes a lower rate of return for the GIJV than the province received from the 1969 contract. Please refer to Appendix A.
7. No attempt has been made by NLH to provide the present value, inflation adjusted equivalent for the “expected” $225 billion in benefits to the provincial treasury spanning a 60-year period. In addition, the full $68 billion, nominal dollars, forecast profit from the GIJV would not be available for distribution by way of dividends as a significant amount would be required to repay the principle portion of the GIJV financing of approximately $18.7 billion.
8. For industrial development in Labrador, there is no increase in power allocated until 2031 and the additional allocation is limited to 605 MW until 2050 -25 years hence. After 2041 NLH, being majority shareholder, should have the authority to increase its allocation of power to meet any and all anticipated demands at that time.
9. There is no provision in the MOU for the GIJV to pay a 15% special dividend to the province in lieu of provincial corporate tax as does CF(L)Co.
10. For the next 60 plus years, the bulk of economic development arising from the skyrocketing demand for power driven by Artificial Intelligence, electrification and other sources will take place on the Quebec side of the border, fueled by cheap power provided by its friendly neighbour, the province of Newfoundland and Labrador

4. INFLATION AND THE TIME VALUE OF MONEY HAVE NOT BEEN CONSIDERED

1. The monetary amounts stated in the MOU and supplementary information provided by NLH are often presented in either “nominal” amounts or “present value” equivalents, very few, if any, are adjusted for inflation.
2. When determining the present value (pv) of the forecast future payments set out in nominal amounts on Schedule G, one must consider the time value of money and the impact of inflation. Please refer to Appendix C
3. The $225 billion in “expected” benefits set out in the NLH Fact Sheet, has never been stated in present value equivalent, adjusted for inflation. This is very unfortunate, confusing to the public and to a certain extent misleading.
4. Table 1 in Appendix C demonstrates how the average 5.9 cents per kWh (pv) over the term of the agreement gets ground down to 2.5 cents per kWh (pv) after adjusting for the average annual inflation rate since 1969 of 3.83%.
5. Ms. Williams, President & CEO of NLH, stated, “the math to arrive at 2.5 cents does not make sense at all”. Appendix C sets out the mathematical formulas to demonstrate that the math makes sense and is fully supported.
6. The forecast payments set out on Schedule G totaling $194.7 billion has a present value in 2025 of $33.8 billion but when adjusted for inflation is reduced to $14.6 billion. Please refer to Table 1 in Appendix C.
7. Likewise, the $8.3 billion forecast payment in the year 2075 sounds like a huge amount of money however, when discounted and adjusted for inflation, the amount is ground down to $69 million (pv). Please refer to Table 1 in Appendix C.
8. The Schedule G payments totaling $19.835 billion made by HQ to CF(L)Co prior to 2041 have a present value of $11.022 billion and after adjusting for inflation $7.769 billion. Please refer to Table 1 in Appendix C.

5. NOT ALL INFORMATION PROVIDED TO THE PUBLIC IS ACCURATE AND COMPLETE

As set out in my previous commentary and analysis, some of the information provided in the NLH Fact Sheet is inaccurate or incomplete – please refer to Appendix A.

The September 9, 2025, document named “The Churchill Falls MOU: Just the Facts” posted on OurChapter.ca is the latest biased commentary from NLH claiming to provide “Facts” to the public. The “information provided” contains some glaring half-truths and omissions: an invalid claim to deliver “maximum” value; no attempt to “present value” the $225 billion in forecast benefits; no mention it will take “35 years” to quadruple the increase in power allocation to benefit Labrador; HQ will “not” pay for the two largest projects; the cost overruns will “not” be funded by HQ; the $3.5 billion (pv) is “not” a gift from HQ, it is taxpayer money arising from the acquisition by HQ of a 40% interest in the GIJV and certain other rights and privileges; HQ will “not” pay to develop GI, the GIJV will; the price for the power from the new developments is based on cost and “never escalates” with market value; Schedule G is not based upon forecast market value, it is simply a series of negotiated payments targeting the $33.8 billion agreed value.

Just like Nalcor in relation to Muskrat Falls, at some time in the future I suspect the Management and Board of NLH will be held accountable for the volumes of inaccurate and incomplete “information provided” to the people of this province.

In my first commentary (please refer to Appendix A), I posed three key questions about the pricing structures set out in the MOU. The response to these questions provided by Ms. Williams during recent TV and radio interviews was also inadequate and/or incomplete.

My understanding of the substance of Ms. Williams’ response is summarized below and set out in detail in Appendix D.

1. Gull Island valuation
   • Ms. Williams indirectly acknowledged there was no independent valuation of GI provided to the Board of NLH.
   • Apparently, the Board of NLH did not deem it necessary to obtain an independent valuation prior to approving management’s recommendation with respect to the price of the most valuable undeveloped resource in the province.
   • Ms. Williams’ assertion that the $4.8 billion payment from HQ is not taxpayer money is incorrect, it certainly is taxpayer money.

b. Price for existing power from Churchill Falls

• Ms. Williams stated she did not understand the relevance of a price of 2.6 cents per kWh in 2025 as HQ still pay 0.2 cents per kWh. Due to inflation, the purchasing power of money deceases over time. Therefore, to maintain the same purchasing power of the initial 1969 price of 0.3 cents, approximately 2.6 cents is required in 2025.
• Ms. Williams did not justify CF(L)Co selling the existing CF power at an average price of 5.9 cents (pv) which is slightly more than double the inflation adjusted 1969 price of 2.6 cents and 55% lower than HQ’s “current” replacement cost of 13 cents.
• It should be noted that 2.6 cents, the inflation adjusted 1969 price for CF power, is almost identical to the inflation adjusted 5.9 cents of 2.5 cents – please refer to Appendix C
• Mr. Sabia, CEO of HQ, is quoted as saying, “the Churchill Falls complex is strategic for Hydro Quebec allowing the utility to cover 15% of its energy needs and accounting for 1/3 of its profits”. Clearly HQ need CF power now and in the future.
• Ms. Williams indicated “$33.8 billion is the “value” we negotiated and we chose to take it sooner rather than later”.
• As it is, Schedule G does not reflect market based or “fair” pricing in 2025 and there was no explanation provided by Ms. Williams as to how and when that may change when the pricing formula is finally agreed. It begs the question, in the absence of the pricing formula, on what basis was Schedule G negotiated?
• As Schedule G, is not based upon forecast market price, it simply appears to serve no purpose other than to:
• Assist GNL with short term cash flow challenges by delivering part of the negotiated “value” prior to 2041 and the remainder thereafter; andEnable HQ to limit future price increases to its ratepayers of between 3-4%
• c. Price for power from the new developments
• Ms. Williams did not justify why the proposed commercial terms for the GIJV provide a lower rate of return than the 1969 contract.
• Ms. Williams failed to acknowledge the absence of a price escalation clause related to the future value of the power from the new developments.
• Ms. Williams failed to acknowledge the PPA’s for the new developments provide a fixed rate of return of between 8-9% on NLH equity for the duration of the contracts.
• In a January 2025 article in LA PRESSE, based upon an interview with HQ’s senior negotiator, SVP, Mr. Rhéaume, the author Francis Vailles states “The MOU bears a striking resemblance to the controversial 1969 contract, at least for the new electricity projects …. Hydro [Quebec] will pay cost not market and the cost, as expected, would be the lowest of any potential project in North America”.
• Ms. Williams did not justify why NLH have not prepared, or at least have not published, an estimated cost per kWh for the power from the new developments but nevertheless have agreed to sell the “new” power to HQ at “cost” as defined in the new PPA’s without a link to market value now or in the future.
• Mr. Sabia, CEO of HQ, is quoted as saying “prices for a similar Hydro project built in Quebec would cost 13 cents”. This is a key indicator of the value of the power.
• HQ have estimated the cost of power from the new developments to be on average 11 cents (pv) which according to HQ’s SVP Mr. Rhéaume, “includes the recovery of the $4.8 billion incentive”.
• It is reasonable to conclude: the HQ 11 cents estimate also includes the cost of transmission from GI to market; and if and when NLH provide an estimate of the cost to generate the GI power, it will be significantly less than 11 cents (pv).
• With respect to the new developments, Mr. Rhéaume is also quoted as saying “it’s the same deal as 1969 at the end of the day, except the cost price paid annually will start much lower and will increase at 2% per year until 2084. In today’s dollars, all the payments at cost price by HQ over 50 years, even indexed at 2%, will give the same overall sum as if HQ had chosen to make constant fixed payments as in 1969.” This gentleman is a skilled negotiator, not a politician.
• It should be noted that the 2% escalation referenced above relates to the forecast increase in revenue to offset future cost increases and will not change the 8-9% fixed return on NLH equity investment in the GIJV.

APPENDIX A – Previously released September 2, 2025

December 12, 2024, MOU – It’s All About the Price!                                     August 2025

INTRODUCTION

Michael J. Wilson, CA, FCA – prior to my retirement in 2013, I was an executive partner with a global professional services firm. I have significant experience in negotiating and/or reviewing complex multi-entity, multi-jurisdictional contracts and agreements. I also have significant experience in designing and deploying effective oversight mechanisms focused on critical corporate functions and initiatives.

I was appointed to the Independent Churchill River Oversight Panel (the Panel) because of my independence, orientation, skills and experience. I resigned on May 12, 2025 because, in my view, the independence of the Panel became impaired and I no longer believed the Panel’s reports would meet the public’s expectations and need for an independent analysis supported by a full and frank commentary.

My objectives in providing this commentary and analysis are: to provide a healthy challenge to published information; facilitate a more informed discussion; and encourage a more balanced outcome. This commentary and analysis is limited by the content of public information and the facts and assumptions stated herein, it should be read with the appropriate caveat. It was prepared after the release of the Panel’s second quarterly report. I was not involved with the preparation of the second report released in July 2025.

The July report does not provide any findings arising from a detailed review of the MOU; it does not provide any insight as to the reasonableness of projected costs, risks or if the projected benefits are fairly stated; it does not identify open items to be negotiated or key decisions to be made during ongoing negotiation process; and it provides little insight as to the specific oversight mechanisms deployed by the Panel to ensure public policy and commercial objectives will be achieved.

The MOU is long and it’s complicated therefore it is unlikely many would take the time to unravel its complex verbiage, identify information gaps and develop a perspective as to if the economic benefits are balanced or would materialize as projected. Consequently, the public at large is dependent upon those who have the time, interest and skills to review the MOU in detail and assess the fairness of the value sharing between the parties. My analysis, while limited in scope, indicates there may be significant opportunities to improve the anticipated outcomes for the province, in particular with respect to pricing.

Issues for discussion include but are not limited to:

1. What is the justification for selling 40% of the “value” of Gull Island (GI), the most valuable undeveloped resource in the province, without an independent valuation? The transaction “price” and other commercial terms require an enormous amount of scrutiny. 
2. What is the justification for selling existing Churchill Falls (CF) power to Hydro Quebec (HQ) at a “price” at least 50% lower than the current replacement “cost”? How does this represent fair “value”?
3. What is the justification for selling 100% of the power from all new developments to HQ for a “price” equal to the “cost” to generate, without a “price” escalation clause tied to the increase in the “value” of the power? The proposed pricing mechanism provides a lower rate of return than the 1969 contract.

The opportunity to renegotiate the 1969 CF contract and monetize the potential of the proposed new developments could be transformational if the full value is captured by the province.

CONFUSION AND FEAR

The MOU debate has resulted in much confusion and expressions of fear. The MOU is very confusing, to a large extent because it intertwines two distinctly different types of negotiations into one agreement.

• The first, a renegotiation of the existing CF power purchase agreement (PPA) is inherently a distributive negotiation in that CF(L)co generates the power needed by both HQ and Newfoundland and Labrador Hydro (NLH) and the primary issues to be agreed are “price” and volume allocations. All Parties have access to CF(L)co information, so it is difficult to accept the existence of commercially sensitive information in this situation.

• The second, is inherently an integrative negotiation in that NLH and HQ agreed to: cooperate and collaborate transparently to create the maximum value from the new developments and agree how that value is to be shared in a fair and equitable manner going forward (ie. 60/40) and then agree to “price” and volume allocations. Given the expressed and agreed need for transparency, it is difficult to accept the existence of commercially sensitive information at this stage of negotiations.

The industry, commercial and accounting terms used throughout the MOU are unfamiliar to many and may cause confusion. Many press releases, including direct quotes from politicians and both senior hydro officials, have also added to the confusion and highlight the frequent misuse and possible misunderstanding of terms such as cost, price and value. To clarify, “cost” is an accounting term, a calculated number that may be audited to ensure its accuracy and completeness. “Price” is the transactional amount agreed between a buyer and a seller paid to acquire a commodity. “Value” is an estimate of the monetary worth of the commodity to be acquired. “Value” may differ significantly from both “cost” and “price”.

Added to this confusion is the great fear expressed by many that:

• the lessons learned from previous mega projects may not be heeded;
• the posture and negotiating tactics of HQ may dominate the structure and flow of ongoing negotiations and balance the outcomes in favor of HQ;
• HQ will have 100% control over the design, construction, financing and timing of any new development on the Churchill River (CR) until 2041;
• entities with existing business relationships with HQ may have a significant competitive advantage in obtaining contracts;
• the NLH preliminary cost projections are dated therefore likely unreliable;
• HQ has not publicly agreed to NLH preliminary cost projections and significant differences may occur upon the completion of new and or updated studies;
• the NLH benefit projections are based upon a significant number of hypothetical assumptions long into the future and consequently may not materialize as projected;
• the potential for management and political bias is ever present in public representations (Fact Sheet, press releases etc.);
• effective oversight mechanisms have not been and may never be effectively deployed; and
• scheduled reports and updates may not meet the needs and expectations of the public.

KEY FINDINGS – it’s all about Price, Price and Price

Renegotiation of the 1969 CF PPA

A detailed review of the terms of the MOU and other publicly available information related to the 1969 CF PPA renegotiation result in the following key findings:

• The CEO of NLH stated “the worth of CF to HQ is between 11-13 cents” however the power will be sold to HQ for an agreed average price of 5.9 cents (pv).
• According to the MOU the “price” paid for CF power is intended to reflect the projected fair “value” of the power, however it is unclear how and when this objective will be accomplished.
• HQ will not pay 11 cents until 2050 – 25 years hence.
• The initial 1969 price of approximately .03 cents equates to approximately 2.6 cents today. HQ will continue to pay less than 2.7 cents until 2030 – 61 years later.
• The new CF PPA appears to be a firm price contract as the stream of payments set out on Schedule G have been predetermined to target $33.8 billion (pv).
• The MOU is unclear as to the relationship between the amounts paid by HQ to CF(L)co prior to 31/12/41 ($19.8B – 10%) and the amounts to be paid thereafter ($174.8B – 90%).
• It would appear that the payments prior to 2042 may simply be an advance (perhaps to help address the GNL short-term fiscal needs) of payments otherwise payable thereafter.
• In any event, it is questionable if the financial benefits accruing to the GNL arising from HQ payments payable after 2041 (amounting to 90% of the projected benefits) can reasonably be attributed to the early termination of the 1969 CF PPA.

The shared economic benefits from the renegotiation of the CF 1969 PPA may be summarized as follows:

• Depending upon the true nature of the relationship between the pre and post 2042 payments, CF(L)co may receive between zero and $19.8 billion in “additional” revenue from HQ throughout the term of the new CF PPA.
• The price of 5.9 cents (pv) is considered to be approximately half the cost of clean renewable energy alternatives available in North American thus saving HQ approximately $194.6 billion throughout the term of the new CF PPA.

The CR New Developments

A detailed review of the terms of the MOU and other publicly available information related to the proposed new developments on the CR result in the following key findings:

1. CF Upgrade and Expansion
   • Similar to the 1969 contract, there is no mechanism in the MOU to provide for an escalation in “price” should the fair “value” of power from the CF upgrade and CF expansion increase in future years.
   • Construction cost overruns for the CF upgrade and CF expansion will not be “funded by HQ”, rather they will be capitalized in the financial accounts of CF(L)co and funded by new CF(L)co debt.
   • At the end of the contract approximately 23% of the original capital cost including cost overruns for the CF expansion will remain on the books of CF(L)co to be recovered from future off-takers.
   • The projected return on investment (ROI) for NLH from the CF upgrade and CF expansion is approximately $90 million per year or approximately $4.5 billion over 50 years.

2. Gull Island Joint Venture (GIJV)

• The MOU provides that HQ will acquire certain rights and a 40% interest in the future value of GIJV, the most valuable undeveloped resource in the province. It would be helpful if a fairness opinion or discounted cash flow calculation was provided to support the transaction price, but such is not the case.
• Similar to the 1969 contract, there is no mechanism in the MOU to provide for an escalation in “price” for the GI power should the fair “value” of power increase in future years.
• The MOU sets out the agreed volume allocations and provides that the “price” shall equate to the “cost” (as set out in the new GI PPA’s) estimated by HQ to be 11 cents on average.
• It should be noted that the HQ 11 cents estimate appears to be a nominal dollar estimate not a present value (pv) estimate.
• NLH have not provided a nominal dollar or present value estimate.
• Using a discount rate of 5.822%, for 51 years, an 11-cent average equates to a present value average of approximately 3.5 cents – 2.4 cents less than the very low average price to be paid for the CF power.
• The present value of 11 cents in 2085, discounted at 5.822% is .037 cents.
• The MOU provides that HQ will have 100% control over the design, construction, financing and timing of the Gull Island (GI) development until 2041.
• The MOU provides the power block (2250 MW’s) generated by the GI development will be allocated 100% to HQ throughout the term of the contract.
• Cost overruns for GI project will not be “funded by HQ” rather they will be capitalized in the accounts of GIJV and funded by new GIJV debt.
• At the end of the contract approximately 23% of the original capital cost including cost overruns will remain in the accounts of GIJV to be recovered from future off-takers.
• For the GIJV investment NLH will receive a ROI of approximately $317 million per year or approximately $16 billion over 50 years.

The shared economic benefits from the new developments may be summarized as follows:

The CEO of HQ has stated “the price paid for the power from the new developments is the lowest price possible for HQ and will provide over $200 billion of cost savings compared to existing alternatives”. Approximately $4 billion per year.

The total projected ROI for NLH related to the new developments will amount to an estimated $20.5 billion or on average $410 million per year, with zero possibility of a “price” increase resulting from an increase in the fair “value” of the power.

Should one apply the commercial terms set out in the MOU for the proposed new GIJV to the 1969 CF(L)co project the following would result:

• Cost of approximately $1 billion
• 75/25 debt to equity ratio; and 65% ownership
• equity investment required = $1B x 25% x 65% = $163 million
• Annual return of 8.5% per year = $13.8 million for 56 years = $773 million total ROI.

The total return related to the ill-fated 1969 contract for GNL is estimated to be $2 billion while QC is estimated to have received an estimated $28 billion. The MOU proposes a lower rate of return for the GIJV than the province received from the 1969 contract.

CONCLUSION

As confusing as the MOU may be, in part resulting from there being two significantly different agreements rolled into one and the lack of information and/or explanation of many key issues, the actual outcomes of the MOU will have significant impact on the wellbeing of every Newfoundlander and Labradorian for many years to come.

The GNL has an overwhelming responsibility to ensure the definitive agreements maximize the benefits and capture the full value of the CR for future generations.

APPENDIX B

WHAT SHOULD YOU EXPECT FROM AN INDEPENDENT REVIEW?

This question was posed by Paddy Daly on a recent session of VOCM Open Line.

In performing an independent “review” of an agreement like the MOU,  at a minimum one would expect the review to ensure: the objectives of the parties and the commercial terms are aligned; any ambiguities and information gaps are identified; pricing structures are validated; the anticipated benefits are balanced, supportable and fairly stated; strategic and tactical risks are identified; and finally conclude to what extent the findings provide the stakeholders with the comfort and confidence the final agreements will meet their needs and expectations.

The MOU is primarily a non-binding agreement with many issues yet to be negotiated. This is a very important point because there are so many information gaps in the MOU and open items for negotiation that simply ensuring the terms of the MOU are accurately reflected in the definitive agreements is pointless. That said, the MOU is an extremely important base line document and the legal, commercial and technical terms must be reviewed in detail and with great care. 

What is often overlooked by many people is that in addition to the mandate to “review” the MOU, the terms of reference for the Independent Panel clearly set out two significant additional responsibilities: to assist Cabinet in assuring the accountability of the negotiators in meeting their mandates; and to review and analyze the “information provided” by the negotiators, Newfoundland and Labrador Hydro (NLH) and or their independent advisors and experts. Please refer to the ICROP.ca website for confirmation and review the July report.

It is important to note that in addition to reviewing the MOU itself “information provided” would include: the NLH Fact Sheet, benefit calculations, cost estimates, press releases, tv and radio interviews, videos, expert reports and financial models, testimony in the legislature, the full content of Our Chapter website etc., all of which must be reviewed and carefully analyzed. This is a significant time-consuming responsibility.

In the absence of the Independent Panel reporting on the accuracy and completeness of the “information provided to the public”, the responsibility seems to have fallen those who have taken it upon themselves to do so.

The pricing structures in the MOU are complicated and the fine details are critically important as they underpin all the benefit calculations. At a minimum the quarterly reports should clearly explain the two very different pricing structures (one for the “old” Churchill Falls power and one for the power from the “‘new” developments) and adjudicate if the forecast benefits are balanced, reasonably attainable and fairly stated. In the absence of effective independent reporting, the public has been inundated with “information provided” by all and sundry.

An effective independent report should meet the public’s need and expectation for clarity and, if supported by their findings, provide comfort and confidence the MOU is in the public’s long term best interests, not just short-term economic gain.

APPENDIX C

INFLATION AND THE TIME VALUE OF MONEY HAVE NOT BEEN CONSIDERED

When considering the forecast outcomes of long-term contracts, one must consider inflation and the time value of money.

The average annual inflation rate since 1969 is 3.83%.

Due to inflation, the purchasing power of money deceases over time. Therefore, to maintain the same purchasing power of the initial price of 0.3 cents in 1969, approximately 2.6 cents is required in 2025. In other words, to have the same purchasing power of $1 in 1969 you would need approximately $8.66 today.

The purchasing power erosion due to inflation is calculated using a formula for compound inflation. FV = PV x (1+r)ⁿ, where FV is the future value, PV is the present value, r is the annual inflation rate and n is the number of years.

For example, the purchasing power of $466 million(pv) in the year 2075 can be calculated by application of the compound inflation formula. First calculate the inflation factor with average annual inflation rate of 3.83% being r=.0383 and period from 2025 to 2075 being n=51 years. The calculation is  (1+.0383)⁵¹ = 6.799 inflation factor.

The purchasing power of $466 million (pv) in 2075 is found by dividing the PV amount of $466 million by the calculated inflation factor of 6.799. The calculation is $466/6.799 = $69 million.

Due to the time value of money, a dollar today is worth significantly more than a dollar in 50- or 60-years’ time. This is why the agreed payment stream set out on Schedule G of $194.7 billion when discounted at 5.822% (the discount rate agreed between the parties) results in a forecast present value (pv) amount of $33.8 billion. Table 1 below demonstrates when each annual payment is adjusted for the erosion of purchasing power due to inflation, the present value is reduced to $14.6 million. Table 1 sets out the data points at ten-year intervals.

The nominal 5.822% discount rate does not take into consideration the erosion of the purchasing power of money over time. This is overcome by calculating the “real rate of return” which is the nominal rate of 5.822% adjusted for the inflation rate of 3.83 %. The formula for calculating the “real rate of return” is [(1+nominal rate)/(1+inflation rate)]–1. In this case [(1.0582)/(1.0383)]–1 = 1.92%.

This approach indicates that to offset the erosion of purchasing power over time due to inflation, the payments set out in Schedule G would have to increase substantially so that when discounted at 5.822% it would result in a present value of $101.575 billion rather than $33.753 billion. A shortfall of $67.822 billion. Refer to Table 2 below.

The monetary amounts stated in the MOU and supplementary information provided by Newfoundland and Labrador Hydro (NLH) are often presented in either “nominal” amounts or “present value” equivalents; very few, if any, are adjusted for inflation. For example, the $225 billion in “expected” benefits has never been stated in present value equivalent, adjusted for inflation. This is very unfortunate, confusing to the public and to a certain extent misleading.

In preparing present value calculations, the selection of a discount rate is critical, and the impact of inflation must be considered.

A discount rate typically consists of two components, a time-value of money component and a risk premium. As the risk premium appears to be agreed at 5% this leaves the time value of money component at 0.822%. At the time of writing, the yield for 10-year Canada bonds is 3.6%. A discount rate of 8.6% would result in materially different outcomes compared to the forecasts provided by NLH in its Fact Sheet and other published information. For example, using a discount rate of 8.6%, the present value of the total of $194.7 billion set out on Schedule G would be $18.4 billion today versus $33.8 billion.

To avoid confusion in preparing Table 1, I used the agreed discount rate of 5.822% and the published average annual inflation rate since 1969 of 3.83%. It’s interesting to note, Hydro Quebec (HQ) has committed to limit the annual increase in price for its ratepayers to between 3-4%. This is hardly a coincidence.

As can be seen in Table 1, the $8.3 billion forecast payment in the year 2075, which sounds like a huge amount of money,discounted at a rate of 5.822% for 51 years and adjusted for the historic rate of inflation since 1969, equates to $69 million (pv). Likewise, the price of 5.9 cents per kWh (pv) also gets ground down to 2.5 cents per kWh (pv) after adjusting for the annual average inflation rate since 1969 of 3.83%.

Yes – it’s complicated, but these concepts are critically important in developing an understanding of the 2025 value of the forecast future payments set out on Schedule G and the inflation adjusted present value of the nominal $225 billion projected benefits to the provincial treasury.

It’s important to note the same concepts support the assertion that the replacement cost of generating power in the future will continue to rise both in nominal terms and present value equivalents.

The existing Churchill Falls plant was constructed for approximately $1 billion in 1969 dollars. I wonder what the replacement cost would be today.

APPENDIX D

NOT ALL INFORMATION PROVIDED TO THE PUBLIC IS ACCURATE AND COMPLETE

As set out in my previous commentary and analysis, some of the information provided in the Newfoundland and Labrador Hydro (NLH) Fact Sheet is inaccurate or incomplete – please refer to Appendix A.

The September 9, 2025, document named “The Churchill Falls MOU: Just the Facts” posted on OurChapter.ca is the latest biased commentary from NLH claiming to provide “Facts” to the public. The “information provided” contains some glaring half-truths and omissions: an invalid claim to deliver “maximum” value; no attempt to “present value” the $225 billion in forecast benefits; no mention it will take “35 years” to quadruple the increase in power allocation to benefit Labrador; HQ will “not” pay for the two largest projects; the cost overruns will “not” be funded by HQ; the $3.5 billion (pv) is “not” a gift from HQ, it is taxpayer money arising from the acquisition by HQ of a 40% interest in the GIJV and certain other rights and privileges; HQ will “not” pay to develop GI, the GIJV will; the price for the power from the new developments is based on cost and “never escalates” with market value; Schedule G is not based upon forecast market value, it is simply a series of negotiated payments targeting the $33.8 billion agreed value.

Just like Nalcor in relation to Muskrat Falls, at some time in the future I suspect the Management and Board of NLH will be held accountable for the volumes of inaccurate and incomplete “information provided” to the people of this province.

In my previous commentary and analysis released earlier this month, I asked three key questions with respect to the pricing structures set out in the MOU. Recently these questions were posed to Ms. Williams, President & CEO of NLH, on NTV Issues and Answers. She also addressed similar issues days earlier on VOCM Open Line. Ms. Williams’ response and related comments did not provide satisfactory answers and in some cases, side stepped the question.

Question one – What is the justification for selling 40% of the “value” of GI, the most valuable undeveloped resource in the province, without an independent valuation? The transaction “price” and other commercial terms require an enormous amount of scrutiny. 

My understanding of the substance of Ms. Williams’ response is as follows: HQ paid NLH $4.8 billion to fund our equity in the new developments. It’s an incentive, we did not invest our own money; it’s not “taxpayer money”. We had independent experts help us determine the value of GI.

To be clear, the commercial terms of the MOU provide that HQ will pay NLH the funds needed to inject its equity requirement in the new developments. The MOU refers to these payments as an incentive.

However, while the commercial terms are set out in seemingly unrelated paragraphs in the MOU, Ms. Williams acknowledged the $4.8 billion payment is directly linked is to HQ’s acquisition of a 40% interest in the GIJV and certain other rights and privileges.

Neither CF(L)Co nor NLH own the river; the province and ultimately the people of the province own the Churchill River. Water rights have only been leased to CF(L)Co. It is my understanding that all proceeds from the disposition, rent, lease, or granting of a right or thing related to property owned by the province are indeed “taxpayers’ money”. In this case HQ will acquire a perpetual 40% interest in the future value of GI plus other certain rights and privileges. In the alternative, NLH have negotiated away this valuable resource and related rights and privileges.

Ms. Williams indirectly acknowledged there was no independent valuation of GI.In the absence an independent valuation, at a minimum, management’s discounted future cash flow calculations supporting their valuation of GI should be shared with the public, the ultimate owners of the resource.

Apparently, the Board of NLH did not deem it necessary to obtain an independent valuation prior to approving management’s recommendation with respect to the price of the most valuable undeveloped resource in the province.

Question two– What is the justification for selling existing Churchill Falls (CF) power to HQ at a “price” at least 50% lower than the current replacement “cost”? How does this represent fair “value”?

To be more specific, what is the justification for selling the power from the existing CF plant (old power) to HQ at an average price of 5.9 cents present value (pv) when HQ’s “current” replacement cost is estimated to be 13 cents?

My understanding of the substance of Ms. Williams’ response: HQ gave up 17 years of free power. We negotiated a total “value” of $33.8 billion to be paid over time and we negotiated that amount to start sooner rather than later.

The calculated $33.8 billion (pv) underpins the calculation of the average price per kWh of 5.9 cents (pv). Ms. Williams made no attempt to justify selling the existing CF power at an average price of 5.9 cents (pv) which is slightly more than double the inflation adjusted 1969 price of 2.6 cents and 55% lower than HQ’s “current” replacement cost 13 cents, a key indicator of the value of the power.

HQ do not pay 2.6 cents, the inflation adjusted 1969 price, until 2030 – 61 years later. HQ do not pay 13 cents, the current replacement cost estimate, until 2051 -26 years hence. In both cases inflation will eat away at the value of a dollar.

When specifically asked by the moderator if the CF Power Purchase Agreement (PPA) was for a fixed price, Ms. Williams seemed to contradict her previous statement and indicated the $33.8 billion was not a fixed price negotiated to be paid over time, but rather an indicative forecast of where both NLH and HQ expect the market price to be in the future.

Ms. Williams asserted that it’s in black and white in the MOU that the formula is yet to be negotiated and those negotiations are ongoing.

However, the MOU also clearly states on Schedule F:

“…the pricing structure shall be established to target the AGREED upon annual schedule of forecasted payments …the total forecast payments to be made by HQ to CF(L)Co is $33.8 billion on a (pv) basis”.

This extract from the MOU aligns with Ms. Williams’ earlier comment “we negotiated a total ‘value’ of $33.8 billion to be paid over time and we negotiated that amount to start sooner rather than later”.

The MOU clearly provides that the $33.8 billion (pv) is an agreed predetermined “target” supported by Schedule G which sets out in nominal dollars forecast annual payments from 2025 through to 2075, in total $194.7 billion. Schedule G is extremely important because it underpins the calculation of the forecast benefits to the provincial treasury.

Ms. Williams did not provide any reasonable explanation as to the relationship between the targeted forecast payments set out on Schedule G, $33.8 billion (pv), and the forecast future value of power over the next 50 years.

As it is, Schedule G does not reflect market based or “fair” pricing and there was no explanation provided by Ms. Williams as to how and when that may change when the pricing formula is finally agreed. It begs the question, in the absence of the pricing formula, on what basis was Schedule G negotiated?

As Schedule G is not based upon forecast market price, it simply appears to serve no purpose other than to:

• Assist Government of Newfoundland and Labrador with short term cash flow challenges by delivering part of the negotiated “value” prior to 2041; and
• Enable HQ to limit future price increases to its ratepayers of between 3 and 4%.

The present value of the payments received by CF(L)Co prior to 2041 is $11.022 billion and after adjusting for inflation is $7.769 billion (see Table 1 in Appendix C).

Ms. Williams expressed her excitement that the power allocation to NLH will increase from 525 MW to 1990 MW to support industrial development in Labrador. She did not mention, however that the increased allocation from CF will occur in 3 blocks spanning a 35-year period and the allocation from GI will not be available until 2035.

Question three – What is the justification for selling 100% of the power from all new developments to HQ for a “price” equal to the “cost” to generate, without a “price” escalation clause tied to the increase in the “value” of the power? The proposed pricing mechanism provides a lower rate of return than the 1969 contract.

Ms. Williams dismissed this question as being factually incorrect. Nevertheless, the intent of the question was clear – what is the justification for selling the power from all new developments to HQ for a “price” equal to the “cost” to generate, without a “price” escalation clause tied to the increase in the “value” of the power? The proposed pricing structure provides a lower rate of return than the 1969 contract.

Ms. Williams did not acknowledge or justify why the proposed commercial terms for the GIJV provides a lower rate of return than the 1969 contract.

Ms. Williams failed to acknowledge the PPA’s for the new developments provide a fixed rate of return of between 8-9% on NLH equity for the duration of the contracts.

Ms. Williams failed to acknowledge the absence of a price escalation clause related to the future value of the power from the new developments.

NLH have not prepared, or at least have not published, an estimated cost per kWh for the power from the new developments but nevertheless have agreed to sell the “new” power to HQ at “cost” as defined in the new PPA’s without a link to market value now or in the future.

In a January 2025 article in LA PRESSE, based upon an interview with HQ’s senior negotiator, SVP, Mr. Rhéaume, the author Francis Vailles states “The MOU bears a striking resemblance to the controversial 1969 contract, at least for the new electricity projects …. Hydro [Quebec] will pay cost not market and the cost, as expected, would be the lowest of any potential project in North America”.

HQ have estimated the cost of power from the new developments to be on average 11 cents (pv) which according to HQ’s SVP Mr. Rhéaume, includes the recovery of the $4.8 billion “incentive”. In addition, it is reasonable to conclude the 11 cents estimate provided by HQ also includes the cost of transmission from GI to market. Consequently, it is reasonable to conclude that if and when NLH provide an estimate of the cost to generate the GI power it will be significantly less than 11 cents (pv).

Mr. Rhéaume is also quoted as saying “it the same deal as 1969 at the end of the day, except the cost price paid annually will start much lower and will increase at 2% per year until 2084. In today’s dollars, all the payments at cost price by HQ over 50 years, even indexed at 2%, will give the same overall sum as if HQ had chosen to make constant fixed payments as in 1969.” This gentleman is a skilled negotiator, not a politician.

It should be noted that the 2% escalation term referenced above relates to the forecast increase in revenue to offset future cost increases and will not change the 8-9% fixed return on NLH equity.