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.
Showing posts with label royalty trust. Show all posts
Showing posts with label royalty trust. Show all posts
Saturday, September 22, 2012
Saturday, February 4, 2012
The Real Muskrat Falls - Conclusion
"All that is necessary for the triumph of evil is that good men do nothing." Edmund Burke
The real truth about hydro power in Newfoundland and Labrador is it's not where it's needed. According to the Manitoba Hydro Report, just released, on the Muskrat Falls project fifty percent of the power consumed in Newfoundland and Labrador is residential in nature http://tinyurl.com/6q7hyns It is insightful, therefore, to know that this province is undergoing an aging tsunami like no other place in the western world has seen yet - but will.
During the period between 1985 to 1995 well over 150,000 Newfoundlanders under the age of 23 left the province. It created a massive hole in the demographics of the province, and it was inevitable that such a loss would reverberate in the future. The future is now. Using normal/average population loss/gain trends and a very optimistic birthrate of 1.3 Newfoundland and Labrador's population will decline to approximately 430,000 people within the next 19 years. If birthrates continue to decline, which is almost a certainty, the population could easily drop to 400,000 in the same period. Unfortunately, Nalcor has used population projections provided by the Newfoundland government that are nowhere near correct, and in fact show an ever growing population into the future.
Given the reality that the population will decline, as it must with such an exodus in the 1980's and 1990's, it is prudent to assume that residential power consumption will also decline - drastically. Also, given the fact that over 90% of the population lives on the island of Newfoundland, and not in mainland Labrador, that power consumption decline will be most radical in Newfoundland itself.
The strategic problem for Nalcor, and the provincial government, is that the island has a surplus of power generation capacity and declining consumption, while Labrador has a minor surplus but potentially exploding demand. In 2010 Nalcor negotiated an agreement with Hydro Quebec to "wheel" its recall power from the Upper Churchill to the US market place for five years, rather than use that power in Labrador where there is currently no overriding demand. In a possible rehearsal of the Muskrat Falls deal, Emera is receiving that power and selling it into the marketplace. The first quarter's results of this practice were large financial losses and Nalcor has not released any further numbers since.
The problem for the Newfoundland and Labrador government, like that of the Quebec government (ironically), is how to open up the northern areas of the province for key mining developments. Newfoundland has its Upper Churchill dam "captured" by Hydro Quebec until at least 2041, and will not negotiate with Hydro Quebec despite the fact Hydro Quebec had a surplus capacity of 5000MW of power in 2010. An obvious strategic alternative for the government of Newfoundland and Labrador would be to enter into a long term agreement, say to 2041, with Hydro Quebec to supply roughly 700-800 MW of power to future mining operations in Labrador. That would eliminate the need for the province to go into any further debt over hydro, and would establish the infrastructure for mining operations going into 2041 and the repatriation of the Upper Churchill to the province. Is it a case of cutting your nose off to spite your face?
Or is it a case of vested interest close to the government not making enough money personally off that kind of arrangement. As detailed, in previous parts to this series, political and business families interests have been interlinked between the development of Nalcor as a crown corporation, the development of the Lower Churchill, and development of the Labrador mining industry. In each and every case these individuals, regardless of political stripe (yet they are all very political), have become wealthy on this process. Whether it be through stock options, appointments to chairs of boards, or often secretive, but real non-competitive government contracts, these circles have managed to grossly enrich themselves. The kicker is it often, if not always, comes at the expense of the people of Newfoundland and Labrador.
The financing of the Muskrat Falls project will be no different. To be clear, I have requested Nalcor supply me with the proposed financing strategy for the project. They have refused. I requested the same information from Minister of Natural Resources Jerome Kennedy, and have been refused. So what I'm about to put together here is from the information known, the business practices of those involved, and the project itself.
In 2005, at the request of then Premier Danny Williams, and announced by his chosen Chair of Nalcor Dean MacDonald, the province requested Expressions of Interest (EOI) for development of the Lower Churchill. It accepted separate proposals for actual construction and financing of the project. Three proposals for financing were accepted for further scrutiny. Two were foreign based and one was Newfoundland based. That was the last we heard of it. There has been no further public release of information, despite the earlier releases. The internal Nalcor process for project decision making has past "Gateway 2", by which time a decision narrowing the project financing options was to have occurred - yet no public release of information.
Then in 2011/2012 we saw key players of Danny Williams, himself included, leave the government and Nalcor to become directly involved in Alderon's mining prospect Kami. The same Alderon that is 40% owned by Altius. The same Altius that had the one known funding proposal for the Lower Churchill that was based in Newfoundland. The same Alderon and Altius that accompanied Premier Dunderdale to China on a recent trade mission. The same Altius that required a bailout for its failed Newfoundland and Labrador Refining Corporation and then Premier Williams, and Natural Resources Minister Kathy Dunderdale, tried to get investors for in the Middle East - in person no less. You see the trend?
Some further political context can illustrate the self-interest, or perceived self-interest, that is rampant amongst Newfoundland's "ruling class". There is the case of Danny Williams' old law firm, which he was a founder and was, according to the Business Post, still listed as a creditor to, and at which he still has an office, being awarded an untendered contract to be a US law firm's Newfoundland representative in a multi-billion dollar lawsuit against tobacco corporations - potentially the largest by far legal action in Newfoundland's history. Then there was the case of Williams appointing John Ottenheimer as Nalcor's Chair despite the fact that Ottenheimer was related to the co-founder of the Ottenheimer and Baker law group - the same law group that is listed as having the Department of Natural Resources as a major client, and whose other co-founder is a principle of Altius. Yes, the same Altius that had a proposal to fund Muskrat Falls being scrutinized by Nalcor. Williams government also gave Dean MacDonald's company, Persona Communications, an untendered contract worth $15 million just prior to its sale. http://tinyurl.com/85j7x5w Yes, that's the same Dean MacDonald that Williams appointed to Nalcor, and the same one that left the job when former Premier Grimes tried to get an agreement with Hydro Quebec on the Lower Churchill. Now you can really start seeing the trend.
Williams and company are now officially a part of the team that likes to take its cut for expediting projects. Altius, The Exploration Group, Forbes and Manhattan all have a singular business practice in common: find the opportunity; provide initial seed capital; take it public; manage it to takeover; establish a percentage ongoing royalty; and leave. This is how I see the financing of Muskrat Falls happening.
Despite the fact that Altius, and the government of Newfoundland and Labrador, have kept the details of this financing proposal mostly secret, some particulars have been stated. Interestingly, in the official government press release and Nalcor's, no mention was made of the other two corporation's financing strategies http://tinyurl.com/7gm4wgb . Altius proposed, in their words, to create a Royalty Trust which would be non-competetive with those seeking to physically construct the project, and would guarantee them a 3% royalty on gross hydro sales of the Muskrat Falls project. One is left assuming, in the absence of disclosure by either Nalcor or the provincial government, that Altius' proposal is still on the table - the Royalty Trust.
A royalty trust is a type of corporation, mostly in the United States or Canada, usually involved in oil and gas production or mining. However, unlike most corporations, its profits are not taxed at the corporate level provided a certain high percentage (e.g. 90%) of profits are distributed to shareholders as dividends. The dividends are then taxed as personal income. This system, similar to real estate investment trusts, effectively avoids the double taxation of corporate income. http://en.wikipedia.org/wiki/Royalty_trust .
Judging from the high degree of self interest involved in this project, it is likely that a Royalty Trust would be established along the lines of the Pengrowth Energy Trust. Pengrowth had an unlimited number of trust units, essentially shares, that were divided into class A and B units. The difference between A and B shares was place of residency. While class A shares could be held by anyone residing in any part of the world, class B shares could only be owned by residents. There was a further stipulation that class A shares could never outnumber class B shares so that out of country interests could never control the trust fund. Another potential twist is the value of a trust solely based on revenue from Muskrat Falls. Given the amount of financing required to build Muskrat Falls it seems unlikely a trust formed for that purpose could raise the necessary cash. It would therefore not be surprising to see other assets added to the mix to boost such a trusts returns. Some definate candidates could be the equity positions the government of Newfoundland and Labrador has secured in the off shore.
This type of arrangement makes sense given the business practices of those pushing the project ahead. In each case that I have studied Altius, The Exploration Group, and Forbes and Manhattan's principles have taken a large share position personally, and in the interim corporately as well. Given that there is limited wealth in Newfoundland and Labrador amongst the general population, and a very small percentage of people that are informed on market economics, such an instrument is open for exploitation primarily by the few. As Danny Williams has said many times, with a grin: "It's such a good deal I would put my own money in if I could."
The real money to be made on a Royalty Trust though would be the 3% royalty on gross hydro sales. As an example, if the Muskrat Falls project were to produce, on average, $300 million per year over its 100 year lifetime the payout would be a staggering $900 million. That's $9 million per year of guaranteed revenue for a corporation like Altius to use elsewhere in leveraging further assets. That is more than they make on Voise's Bay - which will not last 50 years.
The bottom line is some people in Newfoundland stand to make a lot of money, and continue to effect the governance of the province. Those that will be paying the bill on the island of Newfoundland won't be so lucky. The real kicker is power prices in Labrador are a third of the prices in Newfoundland. That means that Muskrat Falls power will be subsidized heavily by people who will see no ongoing benefit from it - like the Upper Churchill. Quebec's Plan Nord appears to be shaping up in similar terms. The real tragedy of the real Muskrat Falls story isn't the insiders who are aiming to win, or even the massive debt that will be incurred for the project and the mines. No the tragedy of the real Muskrat Falls is that the people of Newfoundland and Labrador are being sold a bill of goods by insiders who could care less about their own, and being led down the garden path by the pied pipers of Newfoundland and Labrador. That is the real tragedy.
The real truth about hydro power in Newfoundland and Labrador is it's not where it's needed. According to the Manitoba Hydro Report, just released, on the Muskrat Falls project fifty percent of the power consumed in Newfoundland and Labrador is residential in nature http://tinyurl.com/6q7hyns It is insightful, therefore, to know that this province is undergoing an aging tsunami like no other place in the western world has seen yet - but will.
During the period between 1985 to 1995 well over 150,000 Newfoundlanders under the age of 23 left the province. It created a massive hole in the demographics of the province, and it was inevitable that such a loss would reverberate in the future. The future is now. Using normal/average population loss/gain trends and a very optimistic birthrate of 1.3 Newfoundland and Labrador's population will decline to approximately 430,000 people within the next 19 years. If birthrates continue to decline, which is almost a certainty, the population could easily drop to 400,000 in the same period. Unfortunately, Nalcor has used population projections provided by the Newfoundland government that are nowhere near correct, and in fact show an ever growing population into the future.
Given the reality that the population will decline, as it must with such an exodus in the 1980's and 1990's, it is prudent to assume that residential power consumption will also decline - drastically. Also, given the fact that over 90% of the population lives on the island of Newfoundland, and not in mainland Labrador, that power consumption decline will be most radical in Newfoundland itself.
The strategic problem for Nalcor, and the provincial government, is that the island has a surplus of power generation capacity and declining consumption, while Labrador has a minor surplus but potentially exploding demand. In 2010 Nalcor negotiated an agreement with Hydro Quebec to "wheel" its recall power from the Upper Churchill to the US market place for five years, rather than use that power in Labrador where there is currently no overriding demand. In a possible rehearsal of the Muskrat Falls deal, Emera is receiving that power and selling it into the marketplace. The first quarter's results of this practice were large financial losses and Nalcor has not released any further numbers since.
The problem for the Newfoundland and Labrador government, like that of the Quebec government (ironically), is how to open up the northern areas of the province for key mining developments. Newfoundland has its Upper Churchill dam "captured" by Hydro Quebec until at least 2041, and will not negotiate with Hydro Quebec despite the fact Hydro Quebec had a surplus capacity of 5000MW of power in 2010. An obvious strategic alternative for the government of Newfoundland and Labrador would be to enter into a long term agreement, say to 2041, with Hydro Quebec to supply roughly 700-800 MW of power to future mining operations in Labrador. That would eliminate the need for the province to go into any further debt over hydro, and would establish the infrastructure for mining operations going into 2041 and the repatriation of the Upper Churchill to the province. Is it a case of cutting your nose off to spite your face?
Or is it a case of vested interest close to the government not making enough money personally off that kind of arrangement. As detailed, in previous parts to this series, political and business families interests have been interlinked between the development of Nalcor as a crown corporation, the development of the Lower Churchill, and development of the Labrador mining industry. In each and every case these individuals, regardless of political stripe (yet they are all very political), have become wealthy on this process. Whether it be through stock options, appointments to chairs of boards, or often secretive, but real non-competitive government contracts, these circles have managed to grossly enrich themselves. The kicker is it often, if not always, comes at the expense of the people of Newfoundland and Labrador.
The financing of the Muskrat Falls project will be no different. To be clear, I have requested Nalcor supply me with the proposed financing strategy for the project. They have refused. I requested the same information from Minister of Natural Resources Jerome Kennedy, and have been refused. So what I'm about to put together here is from the information known, the business practices of those involved, and the project itself.
In 2005, at the request of then Premier Danny Williams, and announced by his chosen Chair of Nalcor Dean MacDonald, the province requested Expressions of Interest (EOI) for development of the Lower Churchill. It accepted separate proposals for actual construction and financing of the project. Three proposals for financing were accepted for further scrutiny. Two were foreign based and one was Newfoundland based. That was the last we heard of it. There has been no further public release of information, despite the earlier releases. The internal Nalcor process for project decision making has past "Gateway 2", by which time a decision narrowing the project financing options was to have occurred - yet no public release of information.
Then in 2011/2012 we saw key players of Danny Williams, himself included, leave the government and Nalcor to become directly involved in Alderon's mining prospect Kami. The same Alderon that is 40% owned by Altius. The same Altius that had the one known funding proposal for the Lower Churchill that was based in Newfoundland. The same Alderon and Altius that accompanied Premier Dunderdale to China on a recent trade mission. The same Altius that required a bailout for its failed Newfoundland and Labrador Refining Corporation and then Premier Williams, and Natural Resources Minister Kathy Dunderdale, tried to get investors for in the Middle East - in person no less. You see the trend?
Some further political context can illustrate the self-interest, or perceived self-interest, that is rampant amongst Newfoundland's "ruling class". There is the case of Danny Williams' old law firm, which he was a founder and was, according to the Business Post, still listed as a creditor to, and at which he still has an office, being awarded an untendered contract to be a US law firm's Newfoundland representative in a multi-billion dollar lawsuit against tobacco corporations - potentially the largest by far legal action in Newfoundland's history. Then there was the case of Williams appointing John Ottenheimer as Nalcor's Chair despite the fact that Ottenheimer was related to the co-founder of the Ottenheimer and Baker law group - the same law group that is listed as having the Department of Natural Resources as a major client, and whose other co-founder is a principle of Altius. Yes, the same Altius that had a proposal to fund Muskrat Falls being scrutinized by Nalcor. Williams government also gave Dean MacDonald's company, Persona Communications, an untendered contract worth $15 million just prior to its sale. http://tinyurl.com/85j7x5w Yes, that's the same Dean MacDonald that Williams appointed to Nalcor, and the same one that left the job when former Premier Grimes tried to get an agreement with Hydro Quebec on the Lower Churchill. Now you can really start seeing the trend.
Williams and company are now officially a part of the team that likes to take its cut for expediting projects. Altius, The Exploration Group, Forbes and Manhattan all have a singular business practice in common: find the opportunity; provide initial seed capital; take it public; manage it to takeover; establish a percentage ongoing royalty; and leave. This is how I see the financing of Muskrat Falls happening.
Despite the fact that Altius, and the government of Newfoundland and Labrador, have kept the details of this financing proposal mostly secret, some particulars have been stated. Interestingly, in the official government press release and Nalcor's, no mention was made of the other two corporation's financing strategies http://tinyurl.com/7gm4wgb . Altius proposed, in their words, to create a Royalty Trust which would be non-competetive with those seeking to physically construct the project, and would guarantee them a 3% royalty on gross hydro sales of the Muskrat Falls project. One is left assuming, in the absence of disclosure by either Nalcor or the provincial government, that Altius' proposal is still on the table - the Royalty Trust.
A royalty trust is a type of corporation, mostly in the United States or Canada, usually involved in oil and gas production or mining. However, unlike most corporations, its profits are not taxed at the corporate level provided a certain high percentage (e.g. 90%) of profits are distributed to shareholders as dividends. The dividends are then taxed as personal income. This system, similar to real estate investment trusts, effectively avoids the double taxation of corporate income. http://en.wikipedia.org/wiki/Royalty_trust .
Judging from the high degree of self interest involved in this project, it is likely that a Royalty Trust would be established along the lines of the Pengrowth Energy Trust. Pengrowth had an unlimited number of trust units, essentially shares, that were divided into class A and B units. The difference between A and B shares was place of residency. While class A shares could be held by anyone residing in any part of the world, class B shares could only be owned by residents. There was a further stipulation that class A shares could never outnumber class B shares so that out of country interests could never control the trust fund. Another potential twist is the value of a trust solely based on revenue from Muskrat Falls. Given the amount of financing required to build Muskrat Falls it seems unlikely a trust formed for that purpose could raise the necessary cash. It would therefore not be surprising to see other assets added to the mix to boost such a trusts returns. Some definate candidates could be the equity positions the government of Newfoundland and Labrador has secured in the off shore.
This type of arrangement makes sense given the business practices of those pushing the project ahead. In each case that I have studied Altius, The Exploration Group, and Forbes and Manhattan's principles have taken a large share position personally, and in the interim corporately as well. Given that there is limited wealth in Newfoundland and Labrador amongst the general population, and a very small percentage of people that are informed on market economics, such an instrument is open for exploitation primarily by the few. As Danny Williams has said many times, with a grin: "It's such a good deal I would put my own money in if I could."
The real money to be made on a Royalty Trust though would be the 3% royalty on gross hydro sales. As an example, if the Muskrat Falls project were to produce, on average, $300 million per year over its 100 year lifetime the payout would be a staggering $900 million. That's $9 million per year of guaranteed revenue for a corporation like Altius to use elsewhere in leveraging further assets. That is more than they make on Voise's Bay - which will not last 50 years.
The bottom line is some people in Newfoundland stand to make a lot of money, and continue to effect the governance of the province. Those that will be paying the bill on the island of Newfoundland won't be so lucky. The real kicker is power prices in Labrador are a third of the prices in Newfoundland. That means that Muskrat Falls power will be subsidized heavily by people who will see no ongoing benefit from it - like the Upper Churchill. Quebec's Plan Nord appears to be shaping up in similar terms. The real tragedy of the real Muskrat Falls story isn't the insiders who are aiming to win, or even the massive debt that will be incurred for the project and the mines. No the tragedy of the real Muskrat Falls is that the people of Newfoundland and Labrador are being sold a bill of goods by insiders who could care less about their own, and being led down the garden path by the pied pipers of Newfoundland and Labrador. That is the real tragedy.
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