Nalcor Exposed

What's the old saying...people lie, the evidence doesn't? Welcome to the world of Nalcor, our illustrious provincially-owned energy company. And, the truth, or the evidence if you will, isn't pretty. If you want to glimpse that evidence yourself you can see it here in Nalcor's Report.

Here's the bottom-line:

1.  Nalcor is in default of the Federal Loan Guarantee;
2.  Nalcor's corporate debt is now over $10 billion;
3.  Nalcor already owes Emera over $300 million in power sales;
4.  Nalcor can't be sold/privatized for at least 38 years; and
5.  Nalcor can't build Gull Island for at least 38 years.

All these things might come as a shock to you, but in this post I'll detail the evidence.

First, Nalcor is in default of the Federal Loan Guarantee (FLG), and in a big way. The FLG requires that Nalcor have established "at all times" a Debt Reserve Fund (commonly known as "sinking funds") to, at "a minimum" cover interest payments for six months on its borrowings for the Muskrat Falls dam and transmission system, the Labrador/Island sub-sea cable link and the Maritime Link. As of December 31, 2014, or a few months ago, Nalcor had zero dollars in any sinking fund for the money borrowed to fund any of these projects. In fact, Nalcor has borrowed the full maximum $5 billion authorized by the FLG to fund the projects, and did so in 2013. So, in fact, Nalcor has been in default of the FLG for almost two years.

 Nalcor's long term debt now stands at $6,248,900,000. That's up from $1,222,200,000 at the beginning of 2013. Nalcor's total liabilities, as of December 31, 2014 stood at a mind-numbing $10.6 billion. $1.5 billion of that is money the Government has directly invested in Nalcor from the general revenue of the Province. $6.2 billion is long term debt. The rest is deferred payments, power/money owed to Emera on account of the Maritime Link, and so on. To cover all these liabilities, especially the long-term debt, we have sinking funds totaling  $267 million. Now, picture this, Nalcor actually withdrew $126.5 million from its sinking funds in 2014. In other words, Nalcor took money from its own funds dedicated to repaying its debt...instead of adding to it. In a further note, Nalcor has decided to refinance, rather than pay off, $425 million of Hydro's long-term debt when it comes due shortly.

Adding to Nalcor's debt problems is the ongoing commitment to Emera for the Maritime Link. Contrary to what many people may think, that 20% of "free" power to Emera has already kicked in. Nalcor is showing that as of December 31, 2014, it owed Emera $330 million dollars for "deferred energy sales", which means Nalcor owes Emera $330 million worth of power from the date the Maritime Link began construction - which means Emera is collecting that 20% in advance - even during construction. At that pace, Nalcor will owe Emera somewhere near $1 billion in free power by the time the power is switched on at Muskrat Falls. Which, of course, means Nalcor will have to dedicate the Maritime Link to solely giving free power to Emera for several years just to pay off the "banked up" "deferred power sales" it owes Emera on completion of the project.

In another strange, and definitely not publicized twist, Nalcor will not be able to build Gull Island for at least 35 years. The FLG states:

"4.8A Additional Debt: No additional debt may be incurred by the Borrowers during the term of the FLG (other than a $10 million line of credit, and additional debt to finish Muskrat Falls, the Island link, and the Maritime Link)

The there is the stipulation that Nalcor can not be sold during the term of the FLG:

"4.11 Change of Control:   ...There shall be no sale or change of control of Nalcor."

In other words, the taxpayers will remain on the hook for all Nalcor's debt until at least the end of the FLG - which is 38 years from now. No option. Stuck.

Combine all these financial facts on Nalcor with the state of our provincial finances, and it's evident this Province is financially...doomed. The gross provincial debt is now over $13 billion, and the government is projecting $5 billion more in borrowing over the next five years. That $5 billion is on the low side unless the government chops about 20-25% of its annual expenses - which is almost impossible in the near term. Impossible because those kind of cuts would take the Province from its current recession into a depression. With 30% of pay cheques in Newfoundland and Labrador being issued by the government, well, it's kind of obvious the impact those cuts would have.

Unfortunately, if Muskrat Falls is allowed to continue and the government remains on its current spending levels (or even close to them) this place is doomed to financial collapse in the not too distant future. It's simple math. All of this is of course predicated on Muskrat Falls coming in on budget and time. Should those two come off the rails, and many knowledgeable people have argued that has already happened, then that collapse is coming even sooner. Either way, it's coming. Look to 2016, after the provincial election, and the first budget to see just how bad it will be. Nalcor, like its birth parent, has acted in such a way as to sacrifice the economic well being of the Province and its people. Irresponsible, unaccountable, gross negligence.