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Nalcor anticipates higher cost, later start for Muskrat Falls project

Nalcor EnergyCorp., a province-owned company of Newfoundland and Labrador, hasreported its Lower Churchill hydroelectric and transmission line project, knownas Muskrat Falls,will come in over its C$7.65 billion budget and miss its estimated start date.

Transmission lines connecting the giant hydroelectricproject in Labrador with population centers are also in danger of fallingbehind schedule, according to a response to a report compiled by accountingfirm Ernst & Young LLP. The information was contained in an April 12 letterto the provincial government. Ernst & Young reviewed the reasonableness ofschedules and cost updates given to the government by the Lower ChurchillManagement Corp., or LCMC, in September 2015.

No new cost estimates or completion timelines were offeredin the letter from LCMC to the provincial government. Nalcor bumped itsestimate of the cost of the project to its current level from just under C$7billion last year and estimated its completion date at 2018, an increase from ayear-earlier projection.

"Due to the passage of time, the availability of newinformation, and ongoing analysis which now makes the September 2015 costupdate outdated and thus no longer fully relevant, LCMC had taken action tocommence an update of the September 2015 capital cost and schedule estimates,"LCMC said in its response. "Specific actions underway include a riskassessment as well as a review of forecasted final cost and schedule for theprojects' major contracts."

LCMC said construction of the project's powerhouse andspillway were lagging after a slow start by contractor Astaldi SPA, the Italian infrastructure company selectedfor the job. Its performance has improved over the past two years, LCMC said.

"The delays to powerhouse construction are primarilyattributable to a poor start by the contractor in 2014," LCMC said. "LCMCnotes the performance of Astaldi throughout 2015 showed a marked improvementover 2014, with concrete placement volumes meeting industry norms. Thecontractor also successfully executed a winter construction program which focusedon removal of the Integrated Cover System, rebar installation and formworkconstruction. This has left Astaldi properly positioned to continue concreteplacement at acceptable rates in 2016."

Phase one of Muskrat Falls will have a generating capacity of824 MW from a dam and powerhouse on the lower Churchill River in Labrador.Emera Inc. and Nalcorwill build high-voltage, direct-current transmission facilities and subsealines to carry the power from Labrador to Newfoundland. Emera will build andoperate another subsea link between Newfoundland and Nova Scotia's power grid,which will eventually enable power exports to the U.S. Northeast. The cost ofthe link to Nova Scotia is not included in Nalcor's costs.

While construction of a 315-kV alternating-currenttransmission line that forms part of what is known as the Labrador TransmissionAsset is tracking ahead of schedule, the 350-kV HVDC project called theLabrador-Island Transmission Link is behind schedule, LCMC said.

"There have been a number of performance challengesfaced by the contractor which continue to pressure the HVDC transmission lineconstruction schedule, such as above-seasonal winter temperatures and otherunfavorable weather conditions," LCMC said. "LCMC will continue toassess the impact on schedule and would concur delays are possible withouteffective mitigation strategies. As part of its ongoing management of thisscope, LCMC will continue to examine options with its construction contractor forminimizing schedule slippage."

Separately, Nalcor said on April 10 the first transmissiontower on the island of Newfoundland that is part of the Labrador-Island linewas erected. The roughly 1,100-kilometer line will require 3,226 towers, 1,938on the island and 1,288 in Labrador. More than one-third of the towers inLabrador have already been erected, Nalcor said.

The Ernst & Young report recommended that LCMC adopt amore conservative approach to budget reporting and lower contingency allocationto higher contingency allocations. LCMC said that would lead to higher costsbecause its tight contingency amounts force project entities to better manageexpenses.

"In addition, through the provisions of the projectfinancing agreements and the FLG [federal loan guarantee], unconfirmedcontingent amounts would require equity pre-funding from the province,"LCMC said. "LCMC believes that these are key factors in determining thelevel of contingency that should be carried for this project. These commercialconsiderations need to be balanced with the need for transparency."