It’s official: Muskrat Falls is a millstone

Russell Wangersky rwanger@thetelegram.com
Published on February 8, 2016
Russell Wangersky

I guess they were just wrong.
That’s the very best face you can put on it.
For years, the former provincial government argued we could have our fiscal cake and eat it, too: a Crown corporation could borrow billions of dollars with the government as a backstop, and the red ink would never show up on our balance sheet.

The government’s position was definite: no one would consider the money borrowed to build Muskrat Falls to be part of the province’s debt, because the project would someday produce revenue.

The argument continued: while we might borrow billions for the project, its asset value was worth the same amount as the borrowings. So, presto! No one in their right minds would consider it debt.

(I’ve said before that this is convoluted logic: if you buy a house for $300,000 and mortgage the whole thing, you can’t simply say you’re debt-free because your $300,000 house is an asset. You still have to pay the mortgage and the interest. But apparently that’s not the way provincial math worked.)

“Muskrat Falls will not increase our net debt by one cent. ... We will have to borrow on one side (of the ledger) but we will have our asset on the other side,” then-finance minister Tom Marshall said on radio in 2012.

It’s a message repeated when the province brought down its mid-year financial statement in 2012: “Muskrat Falls is a project that will not impact net debt by a single dollar while providing us with an affordable, reliable, environmentally friendly source of electricity for generations to come,” Marshall said.

So is it on our balance sheet, or not?

Last week, the answer came in from bond rating agency Standard & Poors.

In this year of massive debts due to oil price declines, the rating agency — while lowering the province’s credit rating and potentially increasing the interest rates we’ll have to pay for future borrowing — still spent a fair bit of time discussing the “not-a-debt” fiscal liability that is Muskrat Falls.

“We view Newfoundland’s contingent liabilities as high. The province’s primary contingent risk relates to its wholly owned local energy provider, Nalcor Energy, a holding company that owns Newfoundland and Labrador Hydro (NLH). Newfoundland has guaranteed C$1.1 billion of NLH’s debt, which represented an estimated 17 per cent of the province's adjusted operating revenues in fiscal 2015.

“Nalcor (through two trusts) has issued C$5.0 billion of bonds that it used to finance the Muskrat Falls hydroelectric project and its associated transmission lines. The debt carries a guarantee from the Government of Canada. We believe the province has an incentive to provide extraordinary government support to Nalcor in the event of financial stress. This view primarily stems from the essential nature of NLH’s service responsibilities, as well as the high profile and economic importance of Nalcor’s other development projects like Muskrat Falls.”

So, it’s pretty clearly on the balance sheet after all.

When we’ve asked questions, we’ve been told a lot of things about Muskrat Falls. There have been a lot of definitive answers: methyl mercury won’t be a problem downstream of the reservoir, the marine quick clay of the North Spur is totally safe, the project won’t go overbudget (whoops — another definite that didn’t pan out), the project won’t go overbudget again (whoops again).

We were told that Muskrat Falls is the cheapest option for new electricity. When the project started, we were told that ever-increasing oil prices meant that by January 2017, our oil-driven power bills would inevitably increase by 37 per cent over 2011. In fact, at least so far, those rates have stayed relatively flat, thanks to the cheap oil we were told we wouldn’t have.

So what else might they be wrong about?

It’s a chilling thought.

Something wicked this way comes.

 

Russell Wangersky is TC Media’s Atlantic regional columnist. He can be reached at russell.wangersky@tc.tc — Twitter: @Wangersky.