March 9, 1998
CHURCHILL RIVER HYDRO DEVELOPMENTS
In early 1997, the Premier of Newfoundland
and Labrador and the Premier of Quebec directed officials to examine the
viability of hydro developments in Labrador and related projects in Quebec.
In the course of these discussions, three
projects have been selected for potential development. The preliminary
viability of the projects has been examined within the context of forecasted
markets, estimated capital costs and financing conditions.
On the basis of these exploratory discussions
and conclusions, the Government of Newfoundland and Labrador and the
Government of Quebec have asked Newfoundland and Labrador Hydro and Hydro
Quebec to pursue the opportunities identified, and to undertake formal
negotiations with a view to concluding by the end of 1998 a Memorandum of
Understanding establishing the parameters of agreements necessary for these
projects to proceed. Newfoundland and Labrador Hydro and Hydro Quebec have
also been asked to undertake the appropriate consultations with Aboriginal
groups concerning their participation in the projects.
In conjunction with these negotiations,
governments have authorized the corporations to conduct further engineering
and feasibility studies and estimates, as required. It is estimated that
between $15 million and $20 million will be spent in 1998. Preliminary work
and arrangements with respect to the required environmental and regulatory
review processes will also be initiated.
In the context of the recent Kyoto decisions,
the reduction of greenhouse gases has become an important global issue. In
agreeing with the Kyoto protocol, Canada accepted the target of reducing its
emission to an average of 6% below 1990 levels by the 2008-2012 time frame.
The contemplated projects will significantly reduce greenhouse gas emissions
and will make a substantial contribution towards meeting this target.
The negotiation of a Memorandum of
Understanding (MOU) will be conducted on the basis that the contemplated
projects constitute an integrated package, and will proceed along the
1. Gull Island
The Gull Island project will be developed
by a Limited Partnership created under the laws of Newfoundland and
Labrador. It will be owned 65.8% by Newfoundland and Labrador Hydro, and
34.2% by Hydro Quebec.
Power produced at Gull Island will be sold
to two entities as follows:
(i) Newfoundland and Labrador Hydro will
purchase under a long-term contract 1000 Megawatts (MW) and 7.5 Terawatt
Hours (Twh) for consumption in Newfoundland and Labrador. Newfoundland
and Labrador Hydro will purchase its electricity from the Partnership at
a price which reflects cost and includes a fair and reasonable return on
equity to the partners over a 30-year period; and,
(ii) Hydro Quebec will purchase the
balance of the electricity produced at Gull Island on a market netback
basis which will reflect market prices at the time of the sale. The
power purchased by Hydro Quebec will be subject to a floor price
guarantee. This floor price guarantee will facilitate financing of the
project without recourse to the partners. Hydro Quebec will, through
consultation and agreement with the Gull Island Limited Partnership,
determine markets and related parameters. Hydro Quebec will receive a
marketing fee of 2.8% of the wholesale market price.
Previous development expenses of $60
million on Gull Island will be reimbursed to Newfoundland and Labrador
Hydro by Gull Island Limited Partnership at the closing of the long-term
A progressive royalty regime will be
applied by Newfoundland and Labrador to the Gull Island project. The
details of the royalty regime will be negotiated as part of the MOU on the
(i) Royalty payments will increase as
project profitability increases above a specified level. That level will
provide the partners with a fair and reasonable return on equity; and,
(ii) The highest marginal royalty rate
will not exceed 50%, such that incentives will exist to maximize returns
from the project.
The revenues received by the Government of
Newfoundland and Labrador from the royalty will be in addition to the
distributions received by Newfoundland and Labrador Hydro from the
The value of greenhouse gas emission
credits associated with the Gull Island project will accrue 100% to
Newfoundland and Labrador Hydro.
2. Churchill Falls Phase II - New
Capacity (estimated to be 1000 MW) and Partial River Diversions in Quebec
Hydro Quebec and Newfoundland and Labrador
Hydro have also agreed to undertake the following developments:
The St. Jean and Romaine partial river
diversions in Quebec will be developed by Hydro Quebec in a partnership
with Quebec based local communities.
In conjunction with these diversions,
CF(L)Co. will add an estimated 1000 MW of generating capacity at a new
powerhouse at Churchill Falls. Hydro Quebec will pay CF(L)Co. a capacity
utilization charge which will provide CF(L)Co. shareholders with a fair
and reasonable return on equity.
The electricity produced at this
development will be sold by Hydro Quebec, at a fixed regulated price, to
the Churchill Falls Phase II Marketing Limited Partnership, created under
the laws of Newfoundland and Labrador. It will be owned 65.8% by
Newfoundland and Labrador Hydro and 34.2% by Hydro Quebec.
The Churchill Falls Phase II Marketing
Limited Partnership will, in turn, resell the electricity to Hydro Quebec
on a market netback basis which will reflect market prices at the time of
sale. This sale produces the value which is to be shared by the partners -
65.8% to Newfoundland and Labrador Hydro and 34.2% to Hydro Quebec.
Hydro Quebec, through consultation and
agreement with the Churchill Falls Phase II Marketing Limited Partnership,
will determine markets and related parameters. Hydro Quebec will receive a
marketing fee of 2.8% of wholesale market prices. As well, Hydro Quebec
will provide a floor price guarantee under its long-term electricity
The arrangements regarding water flows from
Quebec will be renewable at Hydro Quebec=s option at the end of the debt
amortization period of CF(L)Co.=s newly installed capacity.
In recognition that water flows are from
Quebec, the greenhouse gas emission credits from this project will be shared
50/50 by Newfoundland and Labrador Hydro and Hydro Quebec, and no
royalties will apply to this project.
3. Muskrat Falls
The feasibility of development at Muskrat
Falls has not been established to the same extent as Gull Island or the
partial river diversions. Accordingly, more work needs to be done.
To this end, Newfoundland and Labrador
Hydro and Hydro Quebec will form a Limited Partnership with ownership of
65.8% for Newfoundland and Labrador Hydro and 34.2% for Hydro Quebec. This
Limited Partnership will be created under the laws of Newfoundland and
The partners will invest up to a maximum of
$20 million for required feasibility studies to assess potential for
commercial development of the Muskrat Falls site in conjunction with the
development of Gull Island and Churchill Falls Phase II including the
partial river diversions.
The development of Muskrat Falls, if
undertaken, would proceed along the same lines as Gull Island for issues
such as royalties and emission credits.
New transmission facilities will be required
in Labrador and in Quebec. Hydro Quebec TransEnergie will include, in its
overall cost of service, the cost of service of those new transmission
facilities in Labrador and in Quebec, under a rolled-in tolling methodology,
subject to applicable filings and decisions.
1. Transmission in Labrador
In Labrador, the transmission facilities
will be built and owned by Labrador Transmission Limited Partnership which
in turn will be owned 50% by Newfoundland and Labrador Hydro and 50% by
Hydro Quebec. The Labrador Transmission Limited Partnership will be
created under the laws of Newfoundland and Labrador.
Labrador Transmission Limited Partnership
will build and own the following transmission facilities:
- A 735 kV line from Gull Island to the
- A 735 kV line from Gull Island to
- Any required transmission upgrade in
Labrador to accommodate the Churchill Falls Phase II project.
- High voltage AC line(s) from Muskrat
Falls to Gull Island to coincide with Muskrat development, if
The Labrador Transmission Limited
Partnership will contract its total capacity to Hydro Quebec TransEnergie.
The contracted price will cover the cost of service including the
amortization of the capital costs of the lines, plus operating and
maintenance, and provide a fair and reasonable return on equity to the
partners of Labrador Transmission Limited Partnership.
The MOU will contain a "Shotgun"
provision at the end of Labrador Transmission Limited Partnership's asset
amortization period. Such provision, as may be modified by the parties,
will provide an option to acquire, through the acquisition of partnership
interests, the assets of Labrador Transmission Limited Partnership at net
book value, thus allowing Newfoundland and Labrador Hydro to purchase the
assets at such value.
2. Transmission in Quebec
Hydro Quebec TransEnergie will build and
own the required transmission facilities in Quebec to interconnect with
Labrador Transmission Limited Partnership's grid, providing the requested
service based on a long-term service request from Hydro Quebec's
commercial arm - Services Energetiques. Hydro Quebec - Services
Energetiques will enter into long term agreements for the transmission
capacity required for Churchill Falls Phase II, Gull Island Generation
Limited Partnership and Muskrat Falls (if applicable).
The Provinces and the partners in these
projects, Newfoundland and Labrador Hydro and Hydro Quebec, are committed
to working cooperatively with Aboriginal groups to ensure that legitimate
Aboriginal interests are addressed in a fair and equitable manner.
The determination of specific processes and
mechanisms for addressing Aboriginal interests is a matter for discussion
between the Aboriginal parties and the partners in these projects. These
discussions will commence immediately and proceed concurrently with the
negotiation of the Memorandum of Understanding.
The framework allows Newfoundland and
Labrador Hydro, through CF(L)Co., to immediately recall 130 MW from
Churchill Falls production for the benefit of Newfoundland and Labrador as
provided for in the existing contract.
Hydro Quebec will enter into a Guaranteed
Winter Availability Contract with CF(L)Co. for extra peak season
generating capacity estimated to be 680 MW for each period from November 1
through March 31 starting November 1, 1998. The termination of the
Guaranteed Winter Availability Contract will coincide with the termination
of the Upper Churchill Power Contract. By way of example, in the first
season (1998/99), the additional revenues to CF(L)Co. will be $3.4
million. This will escalate to $34 million in 2008/09 and thereafter
escalating annually by 1%.
The parties will also negotiate a
Shareholders Agreement for CF(L) Co.
None of these arrangements will alter the
Upper Churchill Power Contract or affect the positions of the parties with
respect to the Upper Churchill Power Contract.
Subject to considerations of economic
efficiency for the projects, the parties will work together to maximize
the economic benefits of these projects for Newfoundland and Labrador and
Quebec and to achieve a proportional and equitable sharing of such
The partners are committed to undertaking
these projects in a manner that is sensitive to the environment and are
committed that all projects will be subject to a thorough environmental
assessment in compliance with all applicable environmental laws.
Additionally, all projects will be subject to all applicable regulatory
Within the context of this Framework,
Newfoundland and Labrador Hydro and Hydro Quebec intend to conduct further
engineering and feasibility studies and estimates, as required; initiate
preliminary work and arrangements with respect to the required
environmental and regulatory review processes; consult aboriginal groups
concerning their participation in the projects; and conclude a Memorandum
of Understanding by December 15, 1998.
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