03 December 2012

The Risks Just Got Even Bigger #nlpoli #nspoli

While lots of people were busily cheering Friday’s announcement of a federal loan guarantee for Muskrat Falls, they probably noticed a small but very significant detail.

The loan guarantee doesn’t exist until Emera decides to sanction the Maritime Link.  Under the agreements announced earlier this year,  Emera has until July 2014 to opt in to the Maritime Link.  Until that happens, there is no loan guarantee for anyone.

That doesn’t mean that Newfoundland and Labrador will will put everything on hold until then.  Nosirreee.

 The Chronicle Herald’s Paul McLeod reported on Thursday evening:

One of the last remaining issues to be worked out was when the loan guarantee would be placed on the books. Newfoundland [sic] wanted to be able to start using the guarantee immediately, while Ottawa wanted a slower approach.

This issue did not affect Nova Scotia as much because construction on the subsea cable, being paid for by Emera, wouldn’t start until later.

Even as the deal seemed in jeopardy, observers seemed confident Nalcor CEO Ed Martin would not let the agreement fall through. In the end, Nalcor will use cash reserves to pay start-up costs, with the loan guarantee kicking in when borrowing starts.

In other words, Nalcor will start spending the $3.0 billion in oil windfalls that the provincial government has already committed to the project as the equity portion of the financing. They’ll start building even though they can’t say with certainty whether Emera will join the project in 2014 and trigger the loan guarantee as a result.

The current estimate for the Muskrat Falls dam and the Labrador-Island Link – both of which must be sanctioned before the maritime Link – is $6.2 billion with a possibility it will be 30% higher.  As it stands right now, the equity would cover roughly half the project.  The rest would have to come in the form of borrowing. 

Borrowing $3.2 billion is one thing.  But if the project costs escalate as they are likely to go up, then taxpayers would be on the hook for $5.0 billion or more in borrowing.  Without a loan guarantee, you’d have to add higher interest than with it and that’s if the provincial government and Nalcor could borrow more money at workable interest rates on top of the $12 billion provincial debt.

Potentially more significant would be the potential that Nalcor will be vulnerable to pressure from its partners in the meantime.  The threat of leaving Nalcor without a loan guarantee in 2014 gives Emera a powerful weapon,  just as BRINCO’s financial problems gave Hydro-Quebec a huge advantage in the negotiations for the 1969 power contract.  It also gives Hydro-Quebec a window in which to cut a deal with Emera that would be better than the one Emera has with Nalcor.

Odds are, as well, that Nova Scotia voters will go to the polls next year.  In the worst case scenario,  they may well vote before the July 2014 Emera option date.  Both opposition parties in Nova Scotia have been critical of the Muskrat Falls deal.