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, September 22, 2012

The New Dawn Agreement-Hidden in plain sight

On the 26th day of September, 2008, almost four years to the day, the New Dawn Agreement was signed between the government of Newfoundland and Labrador, Nalcor, and the Innu Nation. It was meant to satisfy the constitutional requirement of consultation with aboriginal people when their lands are affected by proposed developments. For good measure, this agreement included compensation for the Upper Churchill development, which they were not consulted on in the 1960s, and an Impacts and Benefit Agreement (IBA) to compensate for the proposed Lower Churchill Development. On the face of it, and certainly in the reporting of it, the New Dawn Agreement is a long bit of long overdue justice for the Innu people, but is that all it is?

I began studying the Agreement in an effort to find clues on the financing of Muskrat Falls. The question in my mind was:
Is there any place in the last 5 years that the government of this province would have to expose itself, throw some cards on the table as it were, with regard to its plans on financing Muskrat Falls. The New Dawn Agreement fell into that category. If the Agreement's purpose was to lay out compensation for the Lower Churchill Development, then surely it must also include factors restricting that compensation. Here is what I found:

" (v) After Debt Net Cashflow is to be determined as follows, with all elements of the calculation related to the generation comonent of the Project and determined using Canadian Generally Accepted Accounting Principles ("GAAP"):

(1) Gross revenues, less transmission costs for market access including any applicable open access
transmission tarrifs and related upgrades; minus
(2) all operational and maintenance expenses and related charges, excluding depreciation and
amoratization on capital assets; minus
(3) all debt service costs related to the Project with respect to financing in place at First Commercial
Power, both Project and equity related, including but not limited to principal repayments, interest
guarantee fees, issuance fees and all other financing fees tat may be charged from time to time; minus
(4) All debt service costs related to borrowings subsequent to that in place at First Commercial Power,
both Project and equity related, including but not limited to principle repayments, interest, guarantee
fees issuance fees, and other financing fees that may be charged from time to time; minus
(5) refinancing fees and related costs; miuns
(6) preferred dividends (related to financing) incurred during the year; minus
(7) income and other taxes paid and payable during the year; minus
(8) capital expenditures incurred during the year; minus
(9) an allowance for decommissioning costs.

The " (6) preferred dividends (related to financing)" caught my attention. Ed Martin, CEO of Nalcor, has stated publicly that, in regard to traditional financing for Muskrat Falls:
"No question about it, and as I mentioned before, we have the lead arranger in place and this is all bid stuff. So whoever comes forward with financing we're going to use the cheapest financing."

Fair enough. Sounds reasonable and prudent. Just one problem. Preferred dividends are paid out to investers based on the issuing of preferred shares by that corporation. In other words, its not bid stuff handled by a neutral third party arranger. Its a deliberate act by a corporation to give up some amount of ownership to other interests (almost always private) in exchange for raising money. Preferred dividends are normally fixed and entitle the holder of those shares first payment before common shareholders on dividends ( which is why preferred dividends are included in the New Dawn Agreement to be deducted before the Innu get their share) In the case of Nalcor that would constitute a form of privitization.

Which brings me to the other part of the New Dawn Agreement that directly ties into this strategy:

" (c) In the event the parent company of CFLCO sells any of its common shares the Innu Nation shall be entitled to receive three percent (3%) of the proceeds received from the sale of those shares...
(d) If CFLCO issues a new class of shares with the purpose of diluting the value of the the dividend on common shares referred to in section 2(b), above, the Innu Nation's share of dividends is to be calculated as if the new class of shares had not been issued."
This section deals with the effects of selling or issuing new shares in CFLCO for the purpose of outlining how that would effect the Innu's bottom line on the Upper Churchill portion of the deal. However, it still points to the fact Nalcor is envisioning a sale of shares that would dilute its control over CFLCO, which is a privitization.

I asked Nalcor for a comment on this story, and they sent me the following response:
" This provision allowed Nalcor or its subsidiaries flexibility to issue preferred shares should that way of financing prove feasible and appropriate... There are no specific plans to do so at present. This is not a privitization or a royalty trust."
When I followed up with a question asking who they would sell these shares to if it proved feasible and appropriate they would not answer.

It seems clear that Nalcor is contemplating a preferred share issuance in CFLCO to in part fund the Muskrat Falls project. Preferred shares can be utilized on their own, or as part of a Royalty Trust. Nalcor, as a crown corporation, has shown us a part of its hand. We haven't seen the whole hand as yet. We don't know what rules the government has placed on Nalcor and the lead arranger. Is there a required Newfoundland and Labrador component? Ed Martin has already said it must be the cheapest form of financing. Royalty Trusts and preferred shares are normally cheaper, especially in the long term, than traditional bank financing.

Will the government attempt to shield the details of financing Muskrat Falls with Bill 29? In regard to royalties it now states:
" Section 27 of the Act is repealed and the following substituted:
(2) The head of a public body shall refuse to disclose to an applicant information that was obtained on a tax return, gathered for the purpose of determining tax liability or collecting a tax, or royalty information submitted on royalty returns, except where the information is non-identifying aggregate royalty information."

In other words, Nalcor is a public body, and it is forbidden by law to disclose royalty information submitted on royalty returns. Thanks to the sudden and determined passing of Bill 29 by the provincial government.

We live in a time of secrecy in Newfoundland and Labrador. A secrecy designed to protect the interests of certain people and companies involved in the Muskrat Falls project. This little bit was hidden in plain sight.

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