Regardless of how the provincial election in Newfoundland and Labrador plays out, there’s no question a job at the top of the list for any new government is addressing Muskrat Falls Project costs.

It’s well understood: the project is billions over budget and years behind schedule. The overruns are falling to ratepayers and the province (the relatively small pool of ratepayers can’t handle the overwhelming costs on their own).

The exact mechanisms for aid are still up in the air. Messaging in 2019 was a rough plan was coming from the provincial and federal governments, focused on restructuring of the project financing, but any certainty was blown out of the water in 2020 when Premier Andrew Furey and the province’s representative in the federal cabinet Natural Resources Minister Seamus O’Regan insisted recent provincial-federal negotiations involved “everything on the table.”

On Dec. 17, 2020, Prime Minister Justin Trudeau announced the federal government, “temporarily waived certain financial obligations” of Crown corporation and Muskrat Falls Project proponent Nalcor Energy. While the specific numbers were not part of the official statement, a total $844 million was tied to the deferrals – deferrals only.

There was a commitment from both sides, as expressed by O’Regan and Furey, to working toward a “draft term sheet,” setting out at least the parameters for the more significant solution on costs. The target for that piece of work was “by this spring,” but the drawn-out election timeline is now making that timeline a challenge at best.

And it remains unclear today if homeowners and business owners in Newfoundland and Labrador will have any certainty on Muskrat Falls before the release of the new “Clean Power Roadmap for Atlantic Canada,” also due this spring, and more detailed plans for direct federal spending on new, regional power infrastructure builds including the so-called Atlantic Loop.

Project is being paid

The Government of Canada has not made any direct investment in the Muskrat Falls Project to date.

As for the December announcement, descriptions have been incorrect at times, being blanket descriptions suggesting Nalcor Energy and the Government of Newfoundland and Labrador were – full stop – not required to pay for the project in late 2020.

The truth is payments were made, and are being made. Bonds issued to raise cash for Nalcor Energy for construction are now regularly coming due and related bond payments continue. On Dec. 1, 2020, for example, Nalcor Energy made $162.8 million in payments on the project.

The corporation paid $72.9 million in interest and $19.9 million on bond maturities specifically for the Muskrat Falls generating station and Labrador Transmission Assets (the latter being the infrastructure linking the Muskrat Falls and Churchill Falls power plant). And the Labrador-Island Link saw $59.5 million flow from Nalcor for interest and $10.5 million paid on bond maturities on the same date.

Nalcor Energy costs not recovered from ratepayers will be costs directly and indirectly to the provincial government. While Nalcor is paying now, agreements as they stand state the costs are still to be recovered over time from ratepayers, beginning once the construction edges to completion later this year and costs begin to hit local power rates.

Clear as mud?

If Muskrat Falls costs drew any real attention during the provincial election to date, it was during the televised leaders debate on Feb. 3.

Liberal leader Andrew Furey highlighted the “point of no return” for Muskrat Falls came and went under a Progressive Conservative government. “I didn’t create Muskrat Falls but I’m committed to fixing Muskrat Falls,” he said.

But further exchange with PC leader Ches Crosbie muddied the waters of public understanding on payments to cover Muskrat Falls costs, as Furey responded with a desire to “clear something up” about the late-2020 announcement. He referred to the Cost Overrun Escrow Account (COREA).

“There’s two debt instruments and one COREA deferral payment fund that we don’t have to pay back. So half of that ($844 million) we don’t have to pay back. The other debt instruments we are negotiating currently with the federal government,” he said.

The comment was similar to a statement made by Furey in a live interview with the CBC’s David Cochrane immediately following the December announcement. In that interview, Furey said there was money due into the COREA account, “that we’re not going to pay. Instead we’re going to use the money that’s already been put aside in the COREA account to further give Nalcor the flexibility to finish this project.”

During the debate, the idea came across as the Nalcor and the province not having to ever pay hundreds of millions of dollars.

Crosbie responded by saying, “if true,” it was a good place to start.

Atlantic Business Magazine sought to clarify and initially the response to questions was kicked back from departmental communications staff, saying the government is in caretaker mode during the election period and so unable to respond. After insistence on clarification of the past government announcement, the questions were redirected to the premier’s office.

The answer was, “$475 million of (the deferred payments into financing accounts) is not repayable, because we no longer have to pre-fund the COREA, which we were previously required to do.”

But for clarity: the agreement is the money would not have to be deposited into a specific account at a specific time – a very different thing from never being paid.

What is actually happening with the $475 million? “This amount will instead be injected by Nalcor into the projects over the course of 2021, in advance of project commissioning,” stated a response from staff with the federal Department of Natural Resources.

The 2020 announcement

What did the 2020 announcement do? The “relief” was by way deferral of the otherwise required movement of funds from Nalcor and the provincial treasury into certain project financing accounts, including the COREA, placing the money out of reach of Nalcor and the province.

Moving the money was going to challenge the province at the time. With the ordeal of COVID-19 and crash in oil prices early in the year, in addition to existing financial issues, the province was in a tight spot and needed to have cash to move around as needed.

The 2020 agreement involved $844 million in deposits that were due to financing accounts. Of that, $780 million was due in December and $64 million would have been due in June 2021.

The total included: $64 million due to be placed in a sinking fund in December and another $64 million due for the same fund in June, plus $241 million for a Debt Service Revenue Account (DSRA), and $475 million for the COREA. The DSRA is essentially an account designed as assurance for financiers in the case the province has a problem with cash flow while trying to pay down the project costs. In a similar vein, akin to the way an escrow account for real estate holds funds in trust for a specific purpose, the COREA was designed to hold funds to help repayments, but specifically for the overruns on construction.

The details of the accounts and movement of cash were not a part of the official statement at the time at least partially because they were still under discussion, linked to the talks around the higher-level, ultimate solution on final payments on project costs.

It’s important to note the 2020 announcement was not without merit. Not having to immediately place $844 million out of reach provided far greater flexibility for the Government of Newfoundland and Labrador in its budgeting. The agreement also included the essential but less-publicized step of changing the “in-service date” for the project, per the financing agreements. That move avoided outright defaults based on the project’s time delays.

Another piece was the announcement of Serge Dupont at the federal level to work on the file. But notably Dupont’s actual job is only in part to help address Muskrat Falls Project costs. He is formally hired to “advise on federal support for electrification in Atlantic Canada.”

Nalcor Energy says full power, with all four generators online at the power plant and able to feed the system, is still expected in 2021, despite recently reported ice damage on the new transmission line.

The schedule since August 2020 has been for the third generating unit to reach commercial power by May 31, 2021. The full power date is set at on or before Sept. 30, 2021, though comments from the utility generally refer to “in 2021.”

The total cost is estimated at $13.1 billion (including a capital cost of $10.1 billion).

And whether it’s immediate financing, long-term financing, customer power rates or federal electricity investment plans that are certain to affect the market, the province needs a government in place to deal with it.