The provincial “mid-year” financial update included a familiar claim about the Muskrat Falls project:
We estimate that the province will see revenues in excess of $20 billion over 50 years beginning in 2017, with average annual revenues of $450 million over this period.
But a new analysis of the project cash flows by JM shows that it will be 2031 before the provincial government will realise any genuine dividends from the project. What’s more, it will be sometime around 2048 before the dividends would reach as much as $200 million.
That’s not all. The provincial government will have to inject upwards of $100 million over and above any amounts described to date in order to maintain the debt-service coverage ratio (DSCR) of 1.4 during the first five years of the project as required by the federal loan guarantee.
When you consider the equity repayment, the required debt service ratio, and include the potential upside from power exports, Muskrat Falls will be in operation for nearly two decades before the net returns to the Government of Newfoundland will match that presently provided by the Upper Churchill. This statement is one which is not fully understood by even the most buoyant supporters or sharpest critics of the Muskrat Falls project. [page 2]
JM’s analysis includes all the known costs and takes into account repayment of both the direct Nalcor borrowing and the provincial government’s borrowing to provide the “equity” portion. The provincial government has been vague about repayment of the equity provided by the provincial government.
Figure 7 from the analysis, shown above, gives the cash flow including repayment of the equity portion by the province. According to JM, the project “will not have positive cash flows until 11-12 years after first electricity.”
The new analysis makes it clear that – contrary to what then natural resources minister Jerome Kennedy claimed last fall - “Muskrat Falls will not generate incomes of $120 million in 2020 unless we completely neglect the interest cost and equity repayment.”
To meet the requirements of the federal loan guarantee, the provincial government will likely have to inject about $100 million in additional equity to maintain the debt-service credit ratio of 1.4 in the early stages of the project. If the equity loan from the provincial government was repaid under similar terms, then liquidity infusions of an addition $30 million a year will also be required to maintain a DSCR of 1.4 in the first five years of the project.
According to JM’s analysis, it will be 2031 before the provincial government will realise any genuine dividends and it will be sometime around 2048 before the dividends would reach $200 million.