$227 billion - Fact or Fiction?
by Mike Wilson
In the document Financial Benefit to Newfoundland and Labrador Treasury dated 09 Jan 25, posted on the Government of Newfoundland and Labrador (GNL) website ourchapter.ca it states that the “new MOU is expected to bring $227 Billion to the provincial treasury”.
Key points
Those using the $227 billion amount to promote the MOU are misleading the people of our province by exaggerating the benefits thus leading to inflated expectations.
By not stating this amount in 2024 dollars Newfoundland and Labrador Hydro (NLH) has enabled the public to be misled.
Of the $260 billion revenue in CF(L)Co, $65 billion (25%) will be paid by NLH. This amount will result in either a rate mitigation cost to be paid by NL taxpayers or will be passed on to Labrador rate payers.
From CF(L)Co, NLH will receive $132 billion in dividends and the GNL will receive $36 billion in preferred dividends for a total of $168 billion, however, only $126 billion (75%) of this comes from Hydro Quebec (HQ).
This $126 billion from HQ expressed in 2024 dollars is approximately $21.9 billion, an average of $429 million per year. The current GNL deficit is $600 million.
Detailed analysis
As set out in the above noted document, the $227 billion consists of two components: $179 billion from NLH ownership in CF(L)Co and $48 billion from NLH’s combined ownership of the new developments. These amounts include payments from both NLH and HQ, all stated in future dollars.
None of these funds will be available to meet the province’s fiscal needs until they are received. By that time, the value will have been eroded by inflation.
CF(L)Co: The $260 billion revenue forecast in CF(L)Co includes $65 billion to be paid by NLH. This amount will result in either a rate mitigation cost to be paid by NL taxpayers or will be passed on to Labrador rate payers. The total estimated water rental and royalties of $12 billion would likely be received in full by GNL in the absence of the MOU. NLH will receive $132 billion in dividends and the GNL will receive $36 billion in preferred dividends for a total of $168 billion. Of this amount, approximately $126 billon [75% ($195/$260)] in nominal dollars arises from Schedule G payments made by HQ.
This $126 billion is not money GNL can use to meet fiscal needs. Instead, it represents future payments over a 51-year period that, due to inflation, will have significantly less value than 2024 dollars. A reasonable estimate of the $126 billion expressed in 2024 dollars is $21.9 billion. This estimate is based on the relationship of payments set out on Schedule G of $194.7 billion nominal dollars and the present value of $33.8 billion ($33.8/$194.7=17.4%). A detailed cash flow analysis would be required to calculate a more refined estimate in 2024 dollars.
New developments: Of the $136 billion in revenue, approximately 10%, or $13.6 billion, will be paid by NLH; again, this amount will result in either a rate mitigation cost to be paid for by NL taxpayers or will be passed on to Labrador rate payers. The presentation of the $48 billion in benefits to the provincial treasury arising from NLH ownership share in the new developments is very confusing. NLH has not explained the origin of this amount. Regardless of how the $48 billion was calculated (no detailed support was provided by NLH), it must be stated in 2024 dollars to be meaningful.
However, all the new development Power Purchase Agreements are structured on a ‘cost of service’ model. The MOU stipulates that the payments to NLH on its ownership share will be limited to a fixed return 8-9% per year on the total of its cash equity requirement plus its deemed equity. Based upon my understanding of the time frame for these expected payments, the total return to NLH will amount to approximately $20.3 billion. In addition, the GNL will receive an additional $5 billion for water rental and royalties for a total of $25.3 billion in nominal dollars. The $25.3 billion nominal dollars is approximately $5.6 billion in 2024 dollars. A detailed cash flow analysis would be required to calculate a more refined estimate in 2024 dollars.
Summary
NLH should present the $227 billion in 2024 dollars in an open and transparent manner to avoid misunderstanding, confusion, and inflated expectations. The $227 billion and the 2024 present value equivalent should also be analyzed by payor (HQ or NLH) to clearly identify the source of the funds.
Related matter – Stated $17 billion benefit ($1 billion per year) prior to 2041:
NLH should provide an analysis to support the full $17 billion benefit to the provincial treasury for the years prior to 2041 and present the amount in 2024 dollars. The calculation for the first year is available and includes $0.4 billion from dividends, water rentals and royalties which will flow to the provincial treasury. However, it also includes $0.5 billion which is the first installment of the $4.8 billion proceeds from the sale of the 40% interest in the Gull Island Joint Venture (GIJV). Under the terms of the MOU, the full $4.8 billion will flow to NLH not to GNL even though it represents taxpayer money.
Most, if not all, of the $4.8 billion proceeds from the sale of the GIJV interest will be needed by NLH to fund its cash equity requirements in both the GIJV and the 100% owned NL transmission assets.
Since the first instalment of $0.5 billion was included in the $17 billion forecast, I assume the remaining balance was also included. Therefore the $17 billion estimated benefit to the provincial treasury must be reduced by the full $4.8 billion payable to NLH. The balance of $12.2 billion is equivalent to approximately $6.7 billion in 2024 dollars. This is an average of $394 million per year in 2024 dollars versus the $1 billion nominal forecasted benefit claimed by NLH. The MOU payments will not result in transformative change.
It is so sad to read this latest piece of analysis by Mike Wilson, on the day of the provincial election, now 10 months after the big announcement by Furey; saying, "Today everything changes".
Clearly that statement was not only misleading, but was intentionally so. My ability on these calculations is far from the standard of Mr Wilson, but sufficient to see the misrepresentation, and the clever use of multiple complex schemes used by HQ. What is worse is that it was endorsed by our NL Furey Team, to confuse and manipulate public opinion.
It is a shameful action of deceit, to imply that the billions of future inflated dollars is much less that claimed, in present day value. It was and is falsely promoted to change our fiscal situation, when it actually changes nothing.
Is is worse than the 1969 Churchill Falls deal. It will likely forever cripple the chance that our citizens, children and grandchildren would have a decent standard of living. It assures future benefits of both Churchill Falls and Gull Island will almost entirely go to Quebec. It will handcuff and strangle any future significant development of the Labrador and Nfld economy.
No doubt most all that supported this MOU, as a fair deal, knew there were many flaws and misrepresentations in that document. They seem still to have no sense of decency to continue to state this MOU is a fair deal. It is indeed fiction. A fairy tale, not even close to factual.
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