Derrick Sturge says project team kept some details close to the chest
Nalcor Energy chief financial officer (CFO) Derrick Sturge was on the stand at the Muskrat Falls Inquiry Wednesday, speaking about the long road to sanctioning for the hydroelectric megaproject.
In response to questions and references to his own notes and emails, he acknowledged he didn’t know everything about the decisions of the project team early on, with one example being the risk in the schedule adopted.
“I hadn’t heard of ‘P1’ until you put it in front of me in my interview,” he said to inquiry co-counsel Kate O’Brien, in response to questions.
Auditors with Grant Thornton reported to the inquiry the schedule — setting a first power date for July 15, 2017 — was a “P1” in terms of probability factor, meaning “there was a 99 per cent chance that the schedule for first power would not be met.”
Not meeting a schedule means cost overruns.
The CFO was also asked about the frustrations he appeared to express in emails in 2012, about not being kept in the loop in some instances, intentional or not.
“There were times, it’s a big project, it’s a complicated organization. I’d say there were times we were out of the loop,” he said of he and his finance team.
He was being asked about emails between himself and Auburn Warren, reporting to him in finance, expressing surprise at not knowing sooner about a public announcement on the federal loan guarantee, when they had worked on it for so long.
He was also unfamiliar with a recommendation that something higher than a “P50” probability factor was recommended for use by Nalcor — a change that would have driven up the project’s total, public cost estimate.
O’Brien said more on that point will be presented when Jason Kean, formerly with the project management team, appears next week.
A consultant’s report identifying $500 million in “strategic risk,” suggesting a reserve be set aside, has come up more than once, and did again with Sturge on the stand. The amount was reported by Westney Consulting as something that needed to be considered, in addition to the existing $6.2-billion project cost estimate.
There has been related testimony that “strategic risk” can be dealt with as part of a “management reserve,” something sometimes kept private.
In this case, the management reserve would fall to the provincial government to cover.
Former members of the Nalcor Energy board of directors indicated the government had agreed to cover $300 million to $600 million leading into the project’s sanctioning, and that was likely related to the “strategic risk” amount being raised and asked about at the inquiry.
Sturge suggested there is confusion now around project risk and contingency.
He said he wasn’t aware of any set amount of “management reserve” for the Lower Churchill Project (Muskrat Falls).
He said the provincial government was asked for $300 million to $600 million in a general “contingency reserve” — in “contingent equity” — and that was something the officials within the provincial Department of Finance would have been familiar with.
O’Brien referred to an internal document, summarizing Nalcor’s pre-sanction work, that noted a March 2011 Nalcor executive briefing mentioning an allowance for “strategic risk” was removed from the total project cost estimate, “with the understanding it was covered by a $600 million contingent equity available from the shareholder.”
The bottom line was the province was expected to step in on significant cost overruns and, at that point, there was no indication of just how high they would go, with the project now expected to cost about $12.7 billion, including additional financing costs.
Sturge had yet to be questioned by Nalcor Energy lawyer Dan Simmons when the inquiry broke for the day. He continues on the stand Thursday morning, with a 9 a.m. NLT start time. The next witness scheduled, expected to also be called Thursday, is Paul LeMay for SNC-Lavalin.