01 May 2014

Muskrat costs at $7.4 billion … and climbing #nlpoli

After 13 days,  Nalcor boss Ed martin finally responded to a simple request from the Telegram’s James McLeod for an explanation of what impact a delay in construction might have on project interest costs.

Read McLeod’s original article from Wednesday Telly.  it’s a tidy summary of what Martin told him about that specific issue.

The problem for taxpayers is that Martin did his usual job of only talking about what he wanted to talk about. He didn’t try to explain the whole thing to McLeod in such a way that he could actually get the full impact of what was going on. 

Martin’s interview was highly political, in other words.  Unfortunately for Martin, McLeod posted back-up information consisting of the audio of the whole interview plus a couple of pages of background from Nalcor.  They reveal a lot more than the company has previously disclosed.

Revised Project Cost:  $7.4 billion

Start with the Nalcor two-page background.  The total cost of the Muskrat Falls project – dam, line to the island, and the tie to Churchill Falls – is now $7.4 billion.

In December, SRBP told you the revised cost looked like about $7.2 billion based on the loan guarantee documents.  Turns out there was a couple of hundred million extra in interest costs.  The extra billion dollars is from the interest cost of the $5.0 billion borrowed under the  federal loan guarantee. 

This new figure doesn’t include any increases in construction costs that Nalcor hasn’t told anyone about yet.

There’s $500 million as Emera’s contribution for their share of the Labrador-Island Link.

Big Question: If Nalcor’s had this information since December 2013, you have to wonder why they’ve refused to put this out there until now and why they – in effect – buried it under a discussion about something else.

Public portion:  $7.0 billion

Throughout the interview with McLeod,  Martin only speaks from Nalcor’s perspective and about Nalcor’s interest.  That’s really clear when he talks about debt.

In the two-pager,  the only borrowing Nalcor identifies is the $5.0 billion.  They call the $1.98 billion from the provincial government as “equity.”  We know from Tom Marshall, though, that the provincial government plans to borrow this.

That makes the public debt load $7.0 billion, comprising the $5.0 billion plus the borrowing for equity.

…and more

Martin doesn’t really explain the full cost the public will bear.

McLeod had it in the back end of his story and paraphrased Martin this way:

That’s not to say that there’ll be no extra costs of any type if the project gets delayed, Martin said. He said there are some costs related to staffing and contracts with the Lower Churchill project, and the equity financing from the provincial government and Emera will lead to added costs.

Those extra costs don’t just result from any construction delay, although Martin’s discussion with McLeod clearly makes it sound like that.  They actually are a part of the project as it is currently configured.  Any cost over-runs on the project aren’t covered by the $5.0 billion.  They are covered only by provincial government borrowing.  That $2.0 billion in borrowed “equity” could easily become higher than that. 

And all of it has to be paid back with interest, not just the $5.0 billion that Martin keeps talking about.  To get a better sense of how much interest we’d be talking about in total that taxpayers are on the hook for,  you have to add in the interest cost on the loans or bonds the provincial government will use to pay the “equity” portion. 

What part of $8.0 billion taxpayers won’t pay for this project wouldn’t be enough to worry about.

Buy now.  No payments for five years.

no_payNalcor structured the borrowing under the federal loan guarantee in a 35 year scheme that looks a lot like the way some people buy furniture.  The big difference is that while you can get a couch with no payments for five years and no interest free for the first five years,  Nalcor just opted for the “no payments” bit.

Nalcor borrowed the whole $5.0 billion up front.  Interest started accumulating from an agreed first date.  While he talked hypothetically about December 2017 as the start date,  Martin’s explanation makes it pretty clear that the real start date for the interest calculation was last December. We aren’t getting that much money for free for the first five years.

Under the deal, Nalcor doesn’t have to start making payments until Year 6 of the deal.  That is based on the idea that the first five years are construction and that Nalcor will be able to sell electricity in Year 6. 

Starting in Year 6 and extending to the end of the 35 year period – that is, December 2048 – Nalcor will pay back a combination of the principal and interest until the whole loan is discharged. 

There’s a whole bunch of talking about construction period and operating period like this, where Martin is talking about the impact of a delay in construction:

“Folks aren’t paying anything during the construction period for an extra year, so they save an extra year of paying back their (power purchase agreement),” he said.

That whole discussion is actually misleading.  The key thing is that the interest accumulates over the whole 35 years.

Some of you may have already noticed that the original project was supposed to be paid off over 50 years.  That was supposedly a way of keeping down the yearly cost to consumers.  Well, now taxpayers only have 30 years to pay off the debt under the federal loan guarantee.  The annual costs are going to be a lot higher if we jam the payments into 30 years instead of 50.

Interest isn’t the problem.  Income is.

Martin was keen to dispel the interest coming from delayed construction.  As McLeod quotes:

“No matter what the length of the operating period or the construction period, the same amount of interest is going to accumulate to be paid back to the bank, because that’s how it works,” he said. “The net effect is that you’re going to end up paying back the same thing. You’re going to end up paying back the $5 billion [plus interest – SRBP].”

McLeod hit on the problem with delayed operations at one point during the interview but it got lost in Martin’s discussion about construction and operating.

If the interest calculation is set, then you wind up paying back the same amount within 35 years.  But if you wind up having to delay construction into Year 6 or Year 7,  you still wind up having to start loan repayments in Year 6.  Martin is clear that the repayment scheme is fixed in the terms of the deal.  You just won’t have revenue from sales to meet the loan payment.  That cash has to come from somewhere.

There’s the problem.