The day Nova Scotia's Utility and Review Board (known as the URAB) handed down the best decision Emera could hope for on the Maritime Link, the Nova Scotia government handed them a grenade. Just as was the case when: Danny Williams announced the Muskrat Falls project, and on the same day North East Utilites of the US announced it was building a billion dollar power line from Quebec to the eastern US; and just like the day of the original URAB decision that granted conditional approval of the Maritime link, and on the same day Hydro-Quebec announced it was filing suit against CFLCo/Nalcor over illegally taking power from the Upper Churchill - the government of Nova Scotia rained on the Emera/Nalcor party.
The Nova Scotia government introduced a bill named "The Electrical Reform Act". What does "reform" mean? In this case it means deregulation for the electricity market in Nova Scotia, and that means an end to Emera's (through its subsidiary Nova Scotia Power) monopoly of power generation and distribution. That is a massive price to pay for a small amount of mega watts from this province.
To understand Emera's position you have to understand what Emera is and how it makes its money. Emera is the parent company of four primary businesses: Nova Scotia Power; Caribbean operations; Maine utility operations; and pipelines. In 2012, Emera made $2.058 billion in revenues before expenses. They break down like this:
NOVA SCOTIA POWER $1.237 billion
CARIBBEAN OPERATIONS $ 421 million
MAIN UTILITY OPERATIONS $ 205 million
PIPELINES $ 49 million
Basically, other some other odds and ends, that's it. Now revenue is revenue, but here is what they cleared from each in operations, before tax and other expenses:
NOVA SCOTIA POWER $ 703 million
CARIBBEAN OPERATIONS $ 151 million
MAIN UTILITY OPERATIONS $ 55 million
PIPELINES $ 35 million
Bottom line? Emera exists solely based on the monopoly it enjoyed in Nova Scotia. Consider that 60% of all Emera's revenue comes from Nova Scotia Power. Then consider a mind blowing 75% of its cash after operations money comes from Nova Scotia Power. The value of a utility monopoly starts to come into focus. Essentially, Emera should really be named Nova Scotia Power with a few subsidiaries.
Perhaps the biggest concern for Emera until now was its credit/debt situation. S&P downgraded both Emera and Nova Scotia Power's outlook from "stable" to "negative". The reason given in the media was the costs associated with moving away from coal generated power to "renewables". However, a look at the companies debt picture, in itself, should be a big clue. Emera's line of credit facilities have about a $600 million limit, of which about 50% is used up now. However, the big number is its contractual numbers. They include debt, and committed money to projects, suppliers, and the like. That number stands at a whopping $10.064 billion.
Then there are legal issues. It's operation in Maine is under attack for an excessively high "Return on Equity (ROE)" rate. For instance, Nalcor's ROE rate here is about 8.5. Nova Scotia Power's ROE is 9.2. Emera was just taken, by user watch dog groups, to FERC where there 11.14% ROE in Maine was ruled over the top, and had it reduced downward to an eventual 9.7%. Emera's operations in the Caribbean have been fraught with public protests over escalating rates. And now this.
Emera is going to lose its monopoly in the one place it can not afford to. The one place where it makes all its money to keep the whole operation afloat. That leaves the door wide open for Hydro-Quebec to move in with the 1000's of MW of power it can't even sell. If that happens, which you must consider a distinct possibility, then Emera is done for. It's likely future: takeover target (probably by Hydro-Quebec); and/or a takeover and break up of its assets for sale sale independently. Either way, Emera may have won the battle over the Maritime Link approval, but the cost of new regulation removing their monopoly is a real "poisoned chalice" indeed.
Showing posts with label Maritime Link. Show all posts
Showing posts with label Maritime Link. Show all posts
Monday, December 2, 2013
Saturday, November 9, 2013
Muskrat Falls Math - into the Abyss
I have yet to read an article that attempts to tackle the complete Muskrat Falls "integrated business case", including especially the costs and returns it is designed to provide. So it's time to tackle that head on.
This week VP Gilbert Bennett, Nalcor stated the average production for Muskrat Falls is estimated at 510 megawatts (MW). That should be a big wake up call for people. Up until now Nalcor and the government had been holding fast to the full production capacity of the planned dam - 824 MW. That represents a 38% decrease in expected production from the Muskrat Falls facility. Ordinarily that would kill a project immediately, but the government has other plans. I'll get to that in a bit, but first the actual production costs compared to the returns for our treasury.
Back a year ago our now departed Minister of Natural Resources, Jerome Kennedy, stated in the House of Assembly that the cost of power produced at Muskrat Falls would be $.25 a kilowatt hour (kwh). That was based on production of 824 MW. That was to break even, and before costs associated with transmitting to Nova Scotia were factored in, and without cost over runs. 824 MW of power equals 4.9 terawatt hours, or 4.9 million megawatt hours of energy per year, or 4.9 billion kilowatt hours - for the purposes of this article we will stick with kwh.
So, if Muskrat Falls could produce full power, full time, it would produce 4.9 billion kwh at an annual cost of $1.225 billion - to break even (remember that number). That is to Soldiers Pond. As the energy converts from DC lines to AC lines, travels under the Gulf, and does that process again, it loses about 5% (conservatively) of it's energy on each end. Then there are the transmission fees Nalcor has to pay to Emera to send power across the sub sea line, etc. I'm not even going to factor that in to keep things semi-clean.
So, the annual budget necessary to run Muskrat Falls at a break even point is $1.225 billion. That doesn't change now that the average production, according to Bennett would be 510 MW per year. What it does mean is the cost per kwh goes from $.25 per kwh to $.40 per kwh. That is bad. Very bad. Now that $.40 per kwh has to be blended into Nalcor's already existing energy production (Churchill Falls is not included - explanation later) of 1850 MW or 11 billion kwh. Right now rates differ depending on where you live in the province and whether or not you are business or residential. Based on stated gross electricity sales of $520.7 million for 2012, the average price per kwh for power is 4.7 cents per kwh ($100 million of that $520.7 million is heavily subsidized Labrador and Industrial customers).
Blending the current rate with the Muskrat Falls rate puts the new average rate at 13 cents per kwh or 300% higher than the current average rate. Of course that number includes industrial and Labrador clients.
Here is the hitch. All the numbers above are based on the Water Management Agreement being legal/constitutional. Without the Water Management Agreement, Nalcor stated in pre-filed evidence with the PUB, that Muskrat Falls could only run at 20% capacity. This issue is before the Court in Quebec - it will be heard on January 20, 2014. It is also before the Court here with yours truly. What happens if/when the obvious happens and the Water Management Agreement is thrown out?
Well, it changes the numbers radically. That takes the average production at Muskrat Falls down to a mind blowing 102 MW - or 607,142,857 kwh. To put that number into focus, the average price per kwh for Muskrat Falls energy would have to be $2.02 per kwh - by far the most expensive power on the planet by a landslide. In 2012 Nalcor generated that $520.7 million in revenue on 1850 MW. Now it's looking to generate an additional 102 - 510 MW for $1.225 billion a year. The math is pretty clear.
Of course Nalcor is, according to the Premier and Gilbert Bennett, planning on taking 1500 MW a year from the Upper Churchill starting in 2016. Seems they have been taking additional power from the Upper Churchill since June 2012 according to Hydro-Quebec (which is apparently why they filed suit). If that plan was actually legal the additional revenue, based on an average of 6 cents per kwh (the average spot price for 2012) would give Nalcor an extra $534,600,000.00. The Government and Nalcor have been spinning the line that Muskrat Falls will make $400 million in revenue. Seems they are depending on taking that "extra" power from Hydro-Quebec. Like I said, if it was legal then it would be great. It just isn't though. Even Nalcor own 2012 Financial Report states all the power, but recall, "generated at the Upper Churchill" belongs to Hydro-Quebec.
Just one last thing. If Muskrat Falls is projected to generate 510 MW Nova Scotia wants about 300 MW of that power at spot market prices, plus the 25% of generation it gets for free. My math has that total commitment to Emera being 427.5 MW for a blended price to them of 4 cents per kwh - about the same price they have promised to Labrador mining companies. Obviously, the government is not building a dam to give all but 82.5 MW to Nova Scotia. They need that Water Management Agreement to take that additional power from Hydro-Quebec or their deal with Emera is finished. All the economics, and therefore the project, rely on the Water Management Agreement. Bad as Muskrat Falls is for the taxpayer/ratepayers of Newfoundland and Labrador, the death of the Water Management Agreement is a step into the abyss if we continue to build...
Friday, July 13, 2012
Are We Being Used Here?
It is fairly obvious to the dedicated observer of Newfoundland and Labrador politics that all is not well behind the scenes with the Muskrat Falls project.
Since it's inception, the Muskrat Falls project has been an enigma. Born to bypass the "Quebec stranglehold" on this province's export of power, yet only able to transmit a measly 500 MW of power on the Maritime Link. Heralded for being a green power revolution in the province, yet causing the amount of thermal energy in the province to actually increase. Meant to supply the ever increasing consumption of electricity to the Island, but the demand has actually decreased to 1992 levels - and the population is aging faster than any other on the continent. Promised to provide cheap, stable rates for the next 100 years, but easily the most expensive power to be produced in North America.
My questions about Muskrat Falls began with the capacity of the sub sea cable to Nova Scotia - 500 MW. It became immediately obvious that such a small cable was not capable of exporting any serious power into other markets, particularly given that Emera was given about 170 MW of that capacity for no charge as partial compensation for financing the link. I am not alone on this thinking. The CEO of Emera, in conversation with the US Consulate, had this to say:
In a section subtitled, "Are we being used here?", the author wrote that Emera was worried about being manipulated by Williams.
"The unknown factor, as Spurr explained, is N-L Premier Danny Williams. Spurr explained that N-L had been the victim of bad resource deals in the past which have left Williams very cautious if not suspicious in his business negotiations," the cable says.
"Given that legacy, Spurr remarked that he and his senior colleagues are equally cautious in dealing with the premier, with knowledge it makes more financial sense for N-L to do a deal with Quebec than with them," the author wrote.
"In fact, Spurr indicated he wouldn't be surprised if William ended up doing just that, and leaving Spurr and colleagues to speculate that Williams might be using them to exert more pressure on Quebec to offer a better deal for N-L."
So here we are, nine months after the original dead line for the Emera/Nalcor term sheet to be signed, and no deal. The question is: why not? There is also no formal loan guarantee in place despite federal commitments to do so. There are no completed environmental assessments for either the Maritime Link or the Island link between Newfoundland and Labrador. There is no word what so ever on the status of the $375 million requested from the 3P Canada Fund to subsidize the cost of the Maritime Link. Nothing.
What we do have is shuttle meetings every now and then between the premiers of Nova Scotia and this province. We get assurances that everything is fine, not to panic, and the hope that the Emera/Nalcor deal with be inked by November, 2012 - "hopefully" in Dunderdale's words. So what is going on?
Well, going back to that conversation between the Emera CEO and the US Consulate - "Are we being used here?" Good question. In my opinion, the answer to that question is yes, but not for the reason the CEO believed. The key requirement for Muskrat Falls to proceed is a federal loan guarantee. Without it there is no Muskrat Falls dam. Former Premier Williams had pursued such a guarantee from Prime Minister Harper since 2006. Finally, during the last federal election, Harper agreed to it - conditionally. The primary, central piece to the guarantee is a deal between Emera and Nalcor. Unfortunately, that agreement makes no business sense, and can not possibly earn the provincial government anything but massive losses.
Danny Williams was and remains a businessman. It is hard to believe he would enter into an agreement to export power at such massive losses. He was also a tactician, and often belligerent opponent of the federal government. What ever it took to get his way - including taking down the Canadian flags on all provincial buildings. Given his business sense, and his mercurial relationship with the federal government, and given a loan guarantee is necessary to do the Muskrat Falls project, I am left with the belief that Mr Williams' strategy was to use the Maritime Link to get the loan guarantee and then kill the deal, but still retain the guarantee.
With Emera out of the equation, the Newfoundland and Labrador government would be able to cancel both the Maritime link and the Island Link (which Emera is also slated to be partner in). That would leave a Muskrat Falls dam to provide power solely in Labrador - where all those mines are being developed. Unfortunately, for the PC government, it appears that strategy is back firing.
The federal government is now insisting it will not give the guarantee without the project being officially sanctioned. In order for the project to be officially sanctioned the Emera/Nalcor deal must be signed. Either Dunderdale, or Nova Scotia Premier Dexter appears to be having cold feet. On the one hand Dexter, whose popularity right now at home is about 27%, must provide the cheapest alternative power to his province. Despite the fact Nova Scotia Power is a private company (Emera subsidiary) its rate increases have caused calls for it to be nationalized by many quarters in that province. He has to deliver the cheapest possible deal or face political oblivion and unrest. To underscore the point, it has been reported by Jim Morgan on the radio show, VOCM Backtalk, that Emera has been in negotiations with Hydro Quebec for the last three weeks. I had that report confirmed by an independent media source as well.
The fact is Hydro Quebec can dump all Nova Scotia's power needs for decades in one nice, cheap, multi decade contract - and it looks as though it's in the works. It may be that a political deal is no longer needed by Nova Scotia for power. That might suggest Nova Scotia's political minister Peter MacKay may no longer care to support the Muskrat Falls project. Without his support the Prime Minister may no longer have to supply a loan guarantee. After all, the loan guarantee was to Nalcor and Emera - not the respective provincial governments. That is an important difference. Suddenly, it looks as though Dunderdale is left in mid stream without a deal, and unable to use that deal to secure that necessary loan guarantee. What was her quote a month or so ago - "For me, at the moment, it’s a Minister MacKay problem.” That was on the face of it a rant against search and rescue, etc. However, attacking possibly the second most powerful person in the federal government seems to indicate the fracture is much deeper, and serious.
What we are left with is a game of chicken between the federal government and the province. On the one hand the feds are happy to sit back and watch Emera negotiate with Hydro Quebec. On the other hand Newfoundland and Labrador can't get a federal signature on that guarantee until Emera signs on with Nalcor. And somewhere in between, shuttling between the two provinces, Premier Dexter tries to avoid a political damned if you do, damned if you don't. Surely there are a few people right now asking themselves:
"Are we being used here?"
Since it's inception, the Muskrat Falls project has been an enigma. Born to bypass the "Quebec stranglehold" on this province's export of power, yet only able to transmit a measly 500 MW of power on the Maritime Link. Heralded for being a green power revolution in the province, yet causing the amount of thermal energy in the province to actually increase. Meant to supply the ever increasing consumption of electricity to the Island, but the demand has actually decreased to 1992 levels - and the population is aging faster than any other on the continent. Promised to provide cheap, stable rates for the next 100 years, but easily the most expensive power to be produced in North America.
My questions about Muskrat Falls began with the capacity of the sub sea cable to Nova Scotia - 500 MW. It became immediately obvious that such a small cable was not capable of exporting any serious power into other markets, particularly given that Emera was given about 170 MW of that capacity for no charge as partial compensation for financing the link. I am not alone on this thinking. The CEO of Emera, in conversation with the US Consulate, had this to say:
In a section subtitled, "Are we being used here?", the author wrote that Emera was worried about being manipulated by Williams.
"The unknown factor, as Spurr explained, is N-L Premier Danny Williams. Spurr explained that N-L had been the victim of bad resource deals in the past which have left Williams very cautious if not suspicious in his business negotiations," the cable says.
"Given that legacy, Spurr remarked that he and his senior colleagues are equally cautious in dealing with the premier, with knowledge it makes more financial sense for N-L to do a deal with Quebec than with them," the author wrote.
"In fact, Spurr indicated he wouldn't be surprised if William ended up doing just that, and leaving Spurr and colleagues to speculate that Williams might be using them to exert more pressure on Quebec to offer a better deal for N-L."
So here we are, nine months after the original dead line for the Emera/Nalcor term sheet to be signed, and no deal. The question is: why not? There is also no formal loan guarantee in place despite federal commitments to do so. There are no completed environmental assessments for either the Maritime Link or the Island link between Newfoundland and Labrador. There is no word what so ever on the status of the $375 million requested from the 3P Canada Fund to subsidize the cost of the Maritime Link. Nothing.
What we do have is shuttle meetings every now and then between the premiers of Nova Scotia and this province. We get assurances that everything is fine, not to panic, and the hope that the Emera/Nalcor deal with be inked by November, 2012 - "hopefully" in Dunderdale's words. So what is going on?
Well, going back to that conversation between the Emera CEO and the US Consulate - "Are we being used here?" Good question. In my opinion, the answer to that question is yes, but not for the reason the CEO believed. The key requirement for Muskrat Falls to proceed is a federal loan guarantee. Without it there is no Muskrat Falls dam. Former Premier Williams had pursued such a guarantee from Prime Minister Harper since 2006. Finally, during the last federal election, Harper agreed to it - conditionally. The primary, central piece to the guarantee is a deal between Emera and Nalcor. Unfortunately, that agreement makes no business sense, and can not possibly earn the provincial government anything but massive losses.
Danny Williams was and remains a businessman. It is hard to believe he would enter into an agreement to export power at such massive losses. He was also a tactician, and often belligerent opponent of the federal government. What ever it took to get his way - including taking down the Canadian flags on all provincial buildings. Given his business sense, and his mercurial relationship with the federal government, and given a loan guarantee is necessary to do the Muskrat Falls project, I am left with the belief that Mr Williams' strategy was to use the Maritime Link to get the loan guarantee and then kill the deal, but still retain the guarantee.
With Emera out of the equation, the Newfoundland and Labrador government would be able to cancel both the Maritime link and the Island Link (which Emera is also slated to be partner in). That would leave a Muskrat Falls dam to provide power solely in Labrador - where all those mines are being developed. Unfortunately, for the PC government, it appears that strategy is back firing.
The federal government is now insisting it will not give the guarantee without the project being officially sanctioned. In order for the project to be officially sanctioned the Emera/Nalcor deal must be signed. Either Dunderdale, or Nova Scotia Premier Dexter appears to be having cold feet. On the one hand Dexter, whose popularity right now at home is about 27%, must provide the cheapest alternative power to his province. Despite the fact Nova Scotia Power is a private company (Emera subsidiary) its rate increases have caused calls for it to be nationalized by many quarters in that province. He has to deliver the cheapest possible deal or face political oblivion and unrest. To underscore the point, it has been reported by Jim Morgan on the radio show, VOCM Backtalk, that Emera has been in negotiations with Hydro Quebec for the last three weeks. I had that report confirmed by an independent media source as well.
The fact is Hydro Quebec can dump all Nova Scotia's power needs for decades in one nice, cheap, multi decade contract - and it looks as though it's in the works. It may be that a political deal is no longer needed by Nova Scotia for power. That might suggest Nova Scotia's political minister Peter MacKay may no longer care to support the Muskrat Falls project. Without his support the Prime Minister may no longer have to supply a loan guarantee. After all, the loan guarantee was to Nalcor and Emera - not the respective provincial governments. That is an important difference. Suddenly, it looks as though Dunderdale is left in mid stream without a deal, and unable to use that deal to secure that necessary loan guarantee. What was her quote a month or so ago - "For me, at the moment, it’s a Minister MacKay problem.” That was on the face of it a rant against search and rescue, etc. However, attacking possibly the second most powerful person in the federal government seems to indicate the fracture is much deeper, and serious.
What we are left with is a game of chicken between the federal government and the province. On the one hand the feds are happy to sit back and watch Emera negotiate with Hydro Quebec. On the other hand Newfoundland and Labrador can't get a federal signature on that guarantee until Emera signs on with Nalcor. And somewhere in between, shuttling between the two provinces, Premier Dexter tries to avoid a political damned if you do, damned if you don't. Surely there are a few people right now asking themselves:
"Are we being used here?"
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