As negotiations begin for the renewal of the Churchill Falls contract, it is worth recalling that this contract is still fair, as it was when it was signed in 1969. It is not the product of a balance of power unduly favoring Hydro-Québec. It reflects the technological and financial constraints that prevailed when it was signed.
Brinco, the stubborn promoter
In 1953, the Newfoundland government ceded water, mining and forestry rights over much of Labrador to Brinco (British Newfoundland Corporation), a private British company formed for the purpose, in return for royalties. on its future profits.
The Churchill Falls appear as the diamond in the rough for these resources.
Brinco is looking for customers for this electricity. It approaches in turn Alcan, Alcoa, British Aluminium, Atomic Energy Authority of Great Britain, Hydro-Québec, Ontario and American distributors. In vain: too big, too far, too expensive.
In 1958, however, Brinco convinced Shawinigan Water and Power, the largest electricity producer and distributor in Quebec, to take a 20% stake in CFLCo, Brinco’s newly created subsidiary to develop and operate Churchill Falls.
During the first half of the 1960s, CFLCo approached Hydro-Québec on several occasions. Still in vain: Hydro-Québec has already undertaken the development of Manic-Outardes.
The nationalization of electricity in 1963 saw Hydro-Québec acquire Shawinigan and become, almost by accident, a minority shareholder in CFLCo. Despite this, Hydro-Québec still shows little enthusiasm for the CFLCo project:
• The annual 30 billion kilowatt-hours are equivalent to half of Hydro-Québec’s sales forecast for the early 1970s. Neither the Americans nor the Ontarians want to absorb part of the production, because they are convinced that nuclear or fuel oil are more economical options.
• Hydro-Quebec should delay its own equipment program — and therefore pay more to build Manic-Outardes and Baie-James later. It would also mean depriving Quebec of a good part of the associated economic benefits.
• The Churchill project presents an unusual risk for Hydro-Québec: the power station will be built on a watercourse whose rights have been ceded by a province other than Québec. The future will show that this risk is not theoretical since Newfoundland will try, as of 1980, to expropriate, without compensation, CFLCo of the ceded rights on the Churchill River.
Hydro-Québec, CFLCo and the financiers
The project became more interesting when Hydro-Québec, in 1965, perfected the transmission of electricity at 735 kilovolts, which made it possible to economically transport large quantities of electricity over long distances. After several adventures and hesitations, Hydro-Québec decides to buy, without conditions, almost all of the production of Churchill Falls.
The negotiation of the contract involves CFLCo, Hydro-Québec and American and Canadian financial institutions. Newfoundland participates through its 8.9% equity interest in CFLCo. Although not directly parties to the contract, Newfoundland and Quebec will give their approval.
CFLCo is poorly capitalized. The project of more than one billion will therefore have to be financed at more than 85% by loans. The financiers demand that the financial structure and the contract provide them with a belt, suspenders and a bulletproof vest.
The belt is a very firm and very long-term contract. The financiers are demanding that Hydro-Quebec agree, for at least 40 years, to buy 31.5 billion kilowatt hours per year, whether it needs it or not.
The suspenders are that Hydro-Québec assumes almost all of the risks associated with the project. They are not theoretical either:
• Hydro-Québec agrees to pay interest charges exceeding 5.5% and 6%, depending on the debt. The rates finally obtained will be 7.5%, 7.75% and 7.875%.
• Hydro-Québec buys, even before the signing of the final agreement in 1969, an entire issue of 100 million dollars of bonds subordinated to those of the first mortgage — invited to do so, Brinco and Terre-Neuve refuse to subscribe to this issue.
• Hydro-Québec subscribes 15 million to the capital stock of CFLCo, bringing its interest to 34.2%.
• Since the debt is mostly denominated in US dollars, Hydro-Québec assumes almost all of the exchange risk if the Canadian dollar falls below US$0.92. This will be the case for 30 years: from 1977 until 2007, Hydro-Québec will pay out hundreds of millions in this regard.
As a bulletproof vest, Hydro-Québec provides a work completion guarantee at its expense if CFLCo, for some reason, is unable to complete the work; it assumes any cost overruns; it undertakes to pay for any major repairs in the event of damage to the installations.
In short, the financiers demand that Hydro-Québec assume all the risks inherent in ownership, without owning the structure.
For Hydro-Quebec, such an arrangement is absurd. Unless it obtains in exchange the benefit associated with the ownership of a hydroelectric plant: cost stability, once construction is complete, for the life of the plant. For this reason, the contract is extended until 2041 — in fact, it would have even made sense to extend it until the water lease expires in 2060.
For this reason, the rates decrease by 0.3¢ to 0.2¢ per kilowatthour over the term of the contract. They reflect historical costs, as for any Hydro-Québec plant (hydroelectric plants built before Churchill Falls produce at a cost equal to or less than Churchill Falls). These rates will be enough for CFLCo to offer its shareholders an excellent return, while Hydro-Québec has assumed all the risks.
Quebec has no debt to Newfoundland, neither financial nor moral.