Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Saturday, April 28, 2012

The Gift That Keeps On Giving - 1999 Shareholder's Agreement

March 9, 1998 the government of Newfoundland and Labrador, through its crown corporation Newfoundland and Labrador Hydro (NLH), entered into a Guaranteed Winter Availability Contract, and a Shareholder's Agreement with Hydro Quebec. The Premier of the day was Brian Tobin, and the Chair of NLH was Dean MacDonald. While both agreements remain confidential, the Tobin government described them as :

  • The 1969 Power Contract granted Hydro-Quebec the right to make good any cash deficiencies incurred by CF(L)Co by purchasing more shares in CF(L)Co. Hydro-Quebec could have gained voting control of CF(L)Co through this process. The Shareholders' Agreement gives NLH a similar right. Hydro-Quebec can never gain control of CF(L)Co as along as NLH is prepared to make additional investments in the company, in accordance with its 66 per cent share holding.
  • The CF(L)Co Shareholders' Agreement also ensures a power supply at reasonable rates for Western Labrador. Under the 1969 Power Contract, Hydro-Quebec had the right to acquire, at 1969 Power Contract prices, the 225 MW block of power dedicated to Labrador West when the current arrangement expires in 2014. With this new agreement, Hydro-Quebec no longer has that right. Instead, CF(L)Co will distribute the power in Labrador West at reasonable commercial rates. This means a secure power source for Labrador West and the profits will stay within CF(L)Co.

  • On its face the agreement seems to be a defensive move by NLH to protect CF(L)Co from a hostile takeover by Hydro Quebec, and at the same time garner more revenues from the terribly one-sided Upper Churchill Power Contract. However, as is always the case when dealing with Quebec, the medicine is almost always worse than the disease. It is also worth noting at this time that a new deal for the Lower Churchill development was being negotiated behind the scenes between Premiers Lucien Bouchard and Brian Tobin. Were these agreements a necessary first step in that process? The answer is yes. Hydro Quebec effectively said:If you build on the Lower Churchill we want our water rights protected. And so it was agreed to.

    The down side to the agreements is what Quebec received in return. We don't know that answer completely right now as the documents remain off limits to the public, but some interesting tidbits have been leaked out:

    Part of the Shareholders Agreement among NL Hydro, Hydro-Quebec, and CFLCo June 18th 1999

    Article 3 Board of Directors

    3.4 Special Majority Decisions of the Board of Directors

    The following decisions will require the approval of a majority of the directors on the Board of Directors, including at least one director nominated by NL Hydro and one director nominated by Hydro-Quebec on the Board of Directors:
    ...the entering into, amendment or termination of any Material Contract to which CFLCo or any Subsidiary of CFLCo is a party or to which CFLCo or any Subsidiary of CFLCo may become a party, unless such entering into, amendment or termination has been previously approved in a budget approved under Section 3.4.2 or 3.4.3;
    Material Contract defined: "Material Contract" means (i) any contract involving a monetary commitment of CFLCo or having a value to CFLCo of $10 million or more in the aggregate and (ii) any contract which restricts CFLCo from carrying on its Business, including the contracts listed on
    Schedule E;
    Business defined: "Business" means the business of CFLCo which shall be limited to the following purposes and objects:
    (a) to produce or otherwise acquire and to transmit and to sell electricity;
    (b) to harness or otherwise make use of water for the purpose of producing hydroelectric and hydraulic power and for any other purpose;

    In other words, Hydro Quebec and NLH both received vetos over moves by CF(L)Co that could impact the business.

    Fast forward to November 10, 2009, and Nalcor's application to the province's Public Utilities Board (PUB) for an order establishing the terms of a Water Management Agreement between Nalcor and CF(L)Co with respect to the Churchill River. Nalcor, at the direction of then Premier Danny Williams' government, had decided to proceed with the Lower Churchill unilaterally. To do so, however, Williams would have to overcome Hydro Quebec's veto on water rights established by the Shareholder's Agreement.

    Rather than renegotiate with Hydro Quebec, which would have likely resulted in failure, the Williams' government decided to try and do an "end run" around them. Thus Nalcor's application to the PUB. As part of the hearing process both Hydro Quebec and Nalcor requested and agreed not to make the Shareholder's Agreement public .

    Hydro Quebec's response came quickly on November 20, 2009:
    Hydro-Quebec wishes to express to the Board its position that any water management agreement
    to be established by the Board must recognize that the CF(L)Co/Hydro-Quebec Power
    Contracts have the benefit of Section 5.7 of the EPCA.
    We note that the Nalcor Application, as well as the Nalcor and CF(L)Co submissions of
    December 10, 2009, acknowledge that the CF(L)Co/Hydro-Quebec Power Contracts are
    protected by Section 5.7 of the EPCA, as does the water management agreement proposed by
    both Suppliers to the Board.
    In such circumstances, Hydro-Quebec has decided not to intervene in the Nalcor Application.

    Essentially, Hydro Quebec states that under the Electrical Power Control Act 1994 (EPCA) any decision of the PUB must not interfer with their right to operate the Upper Churchill facility at full efficiency - which would obviously include all the water they need to do so. They refer to:

    3(b) all sources and facilities for the production, transmission and distribution of power in the province should be managed and operated in a manner
    (i) that would result in the most efficient production, transmission and distribution of power,

    The problem with Williams strategy is two-fold. First CF(L)Co, whose executive and a majority of directors being appointees of the Newfoundland and Labrador government, essentially ignored Hydro Quebec's veto that was granted to them in the Shareholder's Agreement as evidenced in CF(L)Co's written submission to the PUB :

    10. The shareholders of CF(L)Co are subject to a Shareholders' Agreement which requires a
    12 Special Majority Decision of the Board of Directors in certain matters, including those in
    13 the nature of the proposed water management agreement.
    14 Reference: Nalcor Application, Vol. 11, Exhibit 9
    16 11, On October 27, 2009, CF(L)Co notified Nalcor that the required CF(L)Co Board approval
    17 to enter into a water management agreement with Nalcor had not been achieved.

    Subsequently, CF(L)Co had to pull out of the challenge. That left Nalcor on it's own. Secondly, Williams' ignored the legal protection that both the Shareholder's Agreement and the EPCA granted Hydro Quebec's interests in the Upper Churchill. A bull in the china shop, damn the torpedos, I'm getting my own way approach. The kind of approach that is fine until it hits reality.

    In the end the PUB approved the Nalcor/CF(L)Co Agreement .
    It dismissed a challenge put forward by the Quebec Innu - which has just recently been revived in a court challenge. It ignored the fact that essentially CF(L)Co was ignoring the terms of the Shareholder's Agreement by proceeding with an agreement against the formal statement.

    The end result is a new court challenge to the Muskrat Falls development by the Quebec Innu, which they will very likely win. The other, more quiet, perhaps more ominous result is Hydro Quebec's contractual rights being ignored. Will this result in a court challenge by Hydro Quebec? Surely that must be in the cards. Will Hydro Quebec allow the project to proceed and then use it's special veto to deny Nalcor/CF(L)Co the water it needs, especially for winter production, by asserting its special veto? Hard to say which way they will play it other than this - you can be sure they will play it. Would their aim be to stop Nalcor from becoming an exporter of power? No. Their goal will be to run the Upper Churchill the way they want it done - protected. They aren't worried that Nalcor's 800 MW from Muskrat will do anything in the marketplace against their 40,000 MW of production. There is no contest there. They just want to protect the asset they were given, and if the shoe were on the other foot could you blame them?

    Bottom line, Williams and those like him, who fancy themselves as Newfoundland and Labrador's savior, have done more damage to this province than any frenchman ever did. Quebecers didn't come in here and steal the resources - they were given them. The 1969 Power Contract, and then the 1999 Shareholder's Agreement.  If the Williams/MacDonald crowd get their way you can add Muskrat Falls to the list. Shortsighted agreements meant to benefit the few with devestating long term consequences. A group with a penchant for ignoring the obvious, and wrapping themselves in the tri-colour while they sell that so beloved place to the best bid.  


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