09 August 2006

Churchill Falls background

It's hard to find a concise summary of the facts surrounding the Churchill Falls development.

One of the best ones is in the Supreme Court of Canada decision Re Upper Churchill Water Rights Reversion Act, [1984] 1 S.C.R. 297.

This is a famous case among the nationalists, pseudo-nationalists and a few other assorted types hanging off the end of the bar at the Ship.

There's a really brief summary of the whole affair on the Wikipedia site, but the SCC summary is also pretty short and it is factual. It stands as one of the sorry results of the windmill tilting Brian Peckford did on a number of issues only to lose badly in the courts.

The financial summary from the judgment is interesting especially in light of the number of times people like to run around claiming that Quebec owns Churchill Falls or Quebec has control of our natural resources and wants control of the Lower Churchill as well. These people conveniently forget that when it appeared CFLCo would fall into bankruptcy, Hydro Quebec entered into the ongoing recall/resale of power agreements beginning in 1998 designed solely to forestall CFLCo from becoming 100% owned by Hydro Quebec. The political fall-out from such a development would have been disasterous.

Hydro Quebec with its technical knowledge and financial support - most importantly in the form of performance guarantees - was crucial to the overall successful completion of the project.

In light of what is going on these days, it is always useful to get some background information that is reliable. In that same light, I am eagerly awaiting the revision of a paper recently completed by Memorial economics prof Dr. Jim Feehan on the negotiation of the 1969 contract.

The issue should be the subject of a book, but the paper - when the revised version is released - should be an important contribution to our understanding of a controversial, but often misrepresented episode. In any event, the information contained in the SCC decision is a tidy summary until someone writes the definitive book on the entire Churchill Falls affairs.


In order to finance the project CFLCo was required under the provisions of the Power Contract to raise $700 million out of an estimated total cost in excess of $900 million. In addition to bank loans of between $100 and $150 million, CFLCo borrowed $100 million by the issue of General Mortgage Bonds, pursuant to a Deed of Trust of which General Trust of Canada was Trustee, known as the General Mortgage Trust Deed, which was executed on September 1, 1968. It was amended by a supplemental Trust Deed dated May 15, 1969. Pursuant to the Trust Deeds CFLCo assigned and charged all its assets and rights under the Statutory Lease and the Crown leases to the Trustee. The Lieutenant Governor in Council for the Province of Newfoundland consented to this assignment on August 1, 1968.

The bulk of the financing came from the sale of First Mortgage Bonds. CFLCo borrowed $540 million on the security of Series A bonds and a further $50 million on the security of Series B bonds. These funds came from lenders outside the Province of Newfoundland and largely from the United States. The Royal Trust was constituted Trustee for the bondholders under a First Mortgage Trust Deed entered into by Royal Trust and CFLCo on May 15, 1969. As security, CFLCo assigned all its assets and rights under the Statutory Lease and Crown leases and all its rights under the Power Contract. General Trust intervened in the Trust Deed as Trustee under the General Mortgage Trust Deed, granting priority to

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the First Mortgage Bonds, Newfoundland also intervened in the Trust Deed confirming its consent to the assignment by CFLCo of its assets to the Royal Trust, which consent had been given on May 12, 1969 by an agreement, known as the Financial Agreement, between the Royal Trust, CFLCo, and the Province of Newfoundland. This agreement was made pursuant to and given the force and effect of law by The Churchill Falls (Labrador) Corporation Limited (Financing) Act, 1969 (Nfld.), c. 76, (the Financing Act).

At the time of the hearing of this appeal [early 1984], according to the statement of facts which forms part of the record, there remained owing by CFLCo in respect of the above-described borrowings $98 million in General Mortgage Bonds, $458,620,000 U.S. in Series A First Mortgage Bonds, and $45,804,000 Cdn. in Series B Bonds. It is against this background that the Power Contract between CFLCo and Hydro-Quebec was signed on May 15, 1969. It is a lengthy and detailed document. Under the contract CFLCo agreed to supply and Hydro-Quebec agreed to purchase virtually all of the power produced at Churchill Falls for a term of forty years, which was renewable at the option of Hydro-Quebec for a further term of twenty-five years. The price to be paid for the electricity was to be based on the final capital cost of the project. Provision was made for CFLCo to retain a fixed amount of power for use within Labrador by its subsidiary Twin Falls Power Corporation. In addition CFLCo could recall on three years' minimum notice up to 300 megawatts (MW) to meet the needs of the Province of Newfoundland.

The importance of the relationship between CFLCo and Hydro-Quebec to the success of the Churchill Falls development is made evident by a reading of the Power Contract. Each party was to be responsible for the construction of transmission lines on its side of the Quebec-Labrador boundary. To ensure compatibility of the two systems, the

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contract provided that transmission lines and related facilities were to be built according to Hydro-Quebec's specifications. Hydro-Quebec was given a supervisory role over CFLCo with respect to maintenance of the development and also acquired the right to operate the plant in the event of CFLCo's failure to do so. For its part Hydro-Quebec agreed to make funds available for the completion of the project over and above the $700 million to be raised by CFLCo in exchange for mortgage security. If CFLCo lacked the funds necessary to meet debt service payments, Hydro-Quebec agreed to advance the necessary monies in exchange for debentures and shares of CFLCo. The Quebec utility also agreed to pay the difference between six per cent and any greater rate of interest payable by CFLCo on its obligations. Although Hydro-Quebec owns only 34.2 per cent of the issued shares of CFLCo (the remaining 65.8 per cent owned by Newfoundland and Labrador Hydro, a Newfoundland Crown corporation), a voting trust arrangement provides that no substantial changes in the financial or other obligations of CFLCo can be made without the consent of 75 per cent of the shareholders. [Emphasis added]