Fall GNL Financial Update

Dodging, dissembling, and shortchanging

The Government of Newfoundland and Labrador announced last week (08 Oct 24) that it had placed its first bond offering in euros.

The transaction dated 04 October 2024 was for €50 million (CDN$75 million), at a yield of 3.067 percent and with a maturity of 04 Dec 2034.

According to the official release, the “Provincial Government worked with RBC Capital Markets to swap the proceeds from euros to Canadian dollars. Doing so provided greater certainty from a cash flow and exchange rate perspective.” There was no explanation of that aspect of the deal or the cost involved.

A quote attributed to finance minister Siobhan Coady in the release said this offering cost the province $500,000 less than a similar Canadian offering would.

That’s odd, given that the yield on the euro offering is for the amount in euros. Once you factor in the exchange rate, the effective yield in Canadian dollars would be 4.61%, which is the same as the yield on the 7P offering in Canadian dollars floated in July 2024 and it’s - wait for it, wait for it - more than two thirds of a percentage point *higher* than the CDN$400 million dollar offering floated just two days before this euro transaction. That one was at 3.89%.

Assume the release is right and the rate is three and a bit. Then it makes no sense to borrow CDN$400 million in Canada and literally two days later get an even lower rate in Europe. Something’s very fishy.

That bond information is online at the provincial government’s investor relations page.

From the start, this euro venture never made sense given that it exposed the provincial treasury to higher costs and the risk of exchange rates/currency fluctuations (and higher costs) with no promise of a lower interest rate and lower costs. Plus there’s the impact on debt every year as the exchange rate changes.

On the very first offering that forecast is confirmed: the euro scheme is a bust. The effective yield is higher than a Canadian dollar offering for no apparent gain.

On top of that, you have an official statement that misleads the public by not disclosing the financial implications fully and plainly. Oh yeah and RBC is not in this for free.

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What rate mitigation plan?

As AllNewfoundlandLabrador reported on Tuesday, the Public Utilities Board wants NALCOR - currently masquerading as Newfoundland and Labrador Hydro - to explain how it will pay for Muskrat Falls from now until 2030 since it won’t be through electricity rates.

The letter - dated 19 September 2024 - asks for details in three categories. We’ve edited them here for clarity as questions, with the editorial changes noted in square brackets and crossed out words from the original, as needed:

General

• Are the capping of rate increases provided for in the rate mitigation plan attributable to all changes in Hydro’s costs or limited to cost recovery associated with the MFP only[?]

• [What is] The approach to capping annual rate increases to apply rate mitigation to Island Industrial customers, if applicable[?]

• [What are] The projected rate mitigation funding requirements for each year from 2024 to 2030[?]

• [What are] The sources and timing of annual rate mitigation funding for the period July 1, 2024 to the end of 2030[?]

Cost of Service Study Issues

• [What is] The treatment of rate mitigation in the GRA test year revenue requirement[?]

• [Will] Whether rate mitigation funding will be identified on customer bills [?]

• [What is] The allocation of rate mitigation funding within the test year cost of service study, if applicable[?}

• [Will] Whether the cost of service methodology needs to be updated to accommodate rate mitigation funding and, if so, [what is] the planned timing of any application?

Deferral Account Issues

• [What are the] Projected year-end balances in the Supply Cost Variance Deferral Account for the period 2024 to 2030[?]

• [What is] The timing of when the methodology will be proposed to allocate the balances in the Supply Cost Variance Deferral Account among customer classes [?]

• [What is] The treatment of the Rural Rate Adjustment balance in the Supply Cost Variance Deferral Account and what options are available for timely balance disposition to Newfoundland Power [?]

• [Are] Whether any further additions or revisions the Supply Cost Variance Deferral Account are required to reflect the rate mitigation plan [?]

Not small stuff at all and way more detailed than energy minister Andrew Parsons called it when he told AllNL it’s just about “ projected dollar values” and not whether not there is an actual plan. That’s because, according to Parsons, the government delivered on its commitment to mitigate the impact of Muskrat Falls on electricity rates.

Well, the government didn’t deliver on its plan. They’ve just covered costs somehow until 2030, potentially, which is not not what they promised at any point, repeatedly. And they diverted money for rate mitigation from Ottawa into annual spending just like - it seems - federal money for a new prison is already spent. No one told the justice minister, though. Plus, if you look at those questions from the Public Utilities Board, you can see pretty quickly it’s about way more than just “dollar values.” It’s about how the rate scheme will work down to the fine detail of whether or not it will show up as a line item on everyone’s electricity bills so folks can actually see what everything costs..

On top of all that, it’s really disappointing to see Parsons come off like a Monty Python character rather than speaking frankly about what’s going on. Had he just said it was the regulator doing the regulator’s job, he’d have been dancing on the edge of truthfulness but it would at least be a defensible position. As it is, Parsons sounded as unconvincing as Bernie Davis or John Hogan. Parsons gives Rule of Opposites denials in the style of Luigi Vercotti - “it’s not a cheap clip joint for picking up tarts, that was right out, I deny that completely” - when he says there’s nothing to see here because the government delivered on its promise.

The questions are just about dollar values and not whether or not there is an actual… you know… uhhh… workable plan like we promised. We delivered our plan but we knew the cops would have questions. NALCOR … errr… Hydro can answer the questions about their business, not me.

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No Future Future Fund

The provincial government’s Future Fund earned $11 million last year and was valued at a shade over $300 million at the end of March, 2024 according to AllNewfoundlandLabrador’s Tuesday edition. Better performance than the growth in net debt. Any time anyone uses net debt to talk about government finances, there's a scam on the go.

That earning is lower than so-called sovereign wealth funds or pension funds. As AllNL notes, they invest in real estate, infrastructure, equities, and bonds while the Future Fund’s got 10% of its value in equites, 30% in cash (!), 23% in provincial bonds, 20% in corporate bonds, nine percent in federal government bonds, and nine percent in municipal bonds.

That’s not surprising since the Future is not a sovereign wealth fund or a pension fund, the goal of which is to earn the most money possible out of assets like oil that you cannot get back once you’d pulled it out of the ground and sold it.

The Future Fund is really just another form of sinking fund, as Bond Papers explained when GNL unveiled it. That is, it’s a small amount of cash put aside to pay off debt as it comes due or to cover costs like the environmental close out of a site like Come by Chance when it finally folds.

Here’s what the law that set up the fund says are the things GNL can use the money for:

• to service the public debt,

• to pay expenses that arise as a result of the sale of Crown assets… that were not known or determinable at the time the net proceeds were deposited in the fund,

• to pay any amounts relating to abandonment and decommissioning activities under an oil lease or licence in accordance with the applicable regulations and agreements,

• to fund strategic priorities recommended by the minister, and

• to pay an amount required due to an extraordinary circumstance.

So yeah.

Not a sovereign wealth fund.

Not even close.

And it’s also not made up of any oil cash, as AllNL says. Never was. The cash going in is just any old cash based on a calculation using the previous year’s royalties from oil.

You can tell it’s got nothing to do with actual oil income because this year the government will only add $72 million to the pot for investment, according to AllNL.

Last year, offshore royalties were around $927 million. That $72 million isn’t even 10% of oil royalties on the face of it, and it’s way less than what you might expect if you looked at the amounts set out in the regulations under the Future Fund law.

It’s supposed to 15% of non-renewable resource royalties if the amount is between $1.0 billion and $1.5 billion. Oil and mining (both non-renewables) together last year pulled in a little over $1.0 billion in revenue according to the budget documents, which would means that the government should be adding $155 million to its Future Fund.

That’s double what the government said it is adding. GNL didn’t actually include mining revenue clearly in the pile, limiting the definition of non-renewables in the Future Fund Act to “quarry” royalties as distinct from oil royalties. Even if you played a word game like the budget does and describes mining revenue as taxation and not royalties, that $72 million is a lot less than the $92 million the regs say the government should be dropping into the Future Fund out of petroleum royalties.

No matter how you want to look at it, on top of all the government’s hype and misrepresentation about the Future Fund, the government is actually shortchanging it’s own signature project.

That always looks good.

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