An aerial shot taken of the Waneta Dam in 2015 near the end of the expansion project with the new powerhouse below the dam. Trail Times file photo

What’s the deal with the dam?

Teck will sell its two-thirds interest in Waneta Dam to Fortis Inc. for $1.2 billion

Cheap power from Waneta Dam has long been attributed to the sustainability of mining operations in Trail.

Following Teck’s big news on Friday – the company is selling its two-thirds share of the Waneta Dam to Fortis Inc. for $1.2 billion – locals are now questioning longevity and voicing concern about the future of Trail operations.

The Trail Times summarized what readers have been saying since the announcement, and forwarded three questions to Carol Vanelli Worosz, Teck’s community engagement leader.

Low cost hydroelectric power has been the lifeblood of Trail Operations. By selling its shares, what does this mean for the future of the company?

Vanelli Worosz: Teck has reached an agreement with Fortis for the sale of our two-thirds interest in the Waneta Dam. Under the terms of the agreement, Teck will enter a 20-year lease agreement for the Waneta Dam, to provide power to Trail Operations at competitive, below-market pricing, with an option to extend for a further 10 years.

The power cost under this lease has been established to achieve a balance between optimizing proceeds from the transaction to strengthen Teck’s overall financial position, while at the same time maintaining reasonable cost power for Trail Operations.

Nothing changes for Trail Operations or our employees. We will continue to draw power from the Waneta Dam as we do now, and regular operations at our facility will not be affected. We do not anticipate changes in employment levels as a result of this agreement. As we have done in the past, Trail Operations will continue to focus on safety, productivity and cost improvements.

The number one concern heard over the weekend, has been, “does this mean the company will close in 20 years?” What can we tell our readers concerned about the future of Teck?

Vanelli Worosz: This agreement ensures long-term power supply for Trail Operations at below-market pricing. Trail Operations is a high-quality asset and will remain an important and integrated part of Teck’s broader business as the primary refiner for zinc from our Red Dog mine in Alaska and our Pend Oreille mine in Washington State.

That is why we are continuing to make significant capital investments to further modernize Trail Operations. Over the last five years alone, we have invested $525 million in projects to improve performance and efficiency at the facility. And, in addition to regular ongoing sustaining capital, $174 million has been committed for the new No.2 Acid Plant and we’ve identified, and are evaluating, $150 million in new projects to further improve profitability, productivity and environmental performance over the next five years.

The agreement terms provide Trail Operations with flexibility around future supply options, specifically the opportunity to source elsewhere should there be a lower cost option.

With $1.2 billion coming Teck’s way for selling its shares, will any of that capital be re-invested locally? Where will the money be invested?

Vanelli Worosz: The sale will strengthen Teck’s overall financial position and provide significant new capital that can be reinvested to further grow the company’s overall business. This includes additional investment to further improve efficiency, productivity and environmental performance at Trail, as well as other capital priorities across Teck.

As noted above, in addition to regular sustaining capital, $174 million has been committed for the new No.2 Acid Plant and we’ve identified, and are evaluating, $150 million in new projects to further improve profitability, productivity and environmental performance over the next five years.

*****

Summary of Teck press release

The power cost under the 20-year lease will begin at $75 million per year – the sale itself will net gain the company about $800 million.

“Under the agreement, Teck Metals Ltd. will be granted a 20-year lease to use Fortis’ two thirds interest in Waneta to produce power for its industrial operations in Trail (“Trail Operations”),” the release states. “Annual payments will begin at approximately $75 million per year and escalate at 2 per cent per annum, equivalent to an initial power price of $40/MWh based on 1,880 GWh of energy per annum. Teck Metals will have an option to extend the lease for a further 10 years at comparable rates.”

“This agreement will further strengthen Teck’s balance sheet and provide significant new capital that can be reinvested to grow our overall business,” said Don Lindsay, President and CEO, Teck. “We have secured a long-term power supply for Trail Operations at competitive, below-market pricing and will invest in innovative projects to further enhance and modernize this facility.”

The Waneta Dam will operate as a non-regulated energy infrastructure subsidiary of Fortis Inc. Fortis will finance the transaction through a combination of cash on hand, debt and equity.

Closing of the transaction is subject to customary conditions, including receipt of certain approvals and consents. In addition, BC Hydro, which owns one-third of the Waneta Dam assets and currently receives one-third of the Waneta Dam generation, has a right of first offer with respect to the sale of Teck’s two-third interest under the 2010 co-ownership and operating agreement between Teck Metals and BC Hydro in relation to Waneta. In addition, certain consents and amendments from BC Hydro are required in connection with the transaction. Teck will pay a break fee to Fortis in the event BC Hydro exercises its right of first offer. Closing is expected to occur in the fourth quarter of 2017.

The release states the acquisition of the Waneta Dam, located in the centre of FortisBC’s territory, demonstrates Fortis’ commitment to and confidence in British Columbia. FortisBC has longstanding roots in the area that span more than a century with FortisBC employing approximately 350 workers in the Kootenay region. In addition to operating four of its own generating facilities on the Kootenay River, FortisBC currently operates and maintains Waneta and the Waneta Expansion.

“Waneta is a high-quality, renewable energy facility located in an area central to our BC operations, making this acquisition a natural fit with our strategy to increase our investment in sustainable energy,” said Barry Perry, President and CEO of Fortis. “Waneta will be a stable long-term asset that will generate strong cash flows secured by a 20-year lease with Teck. The transaction is expected to be immediately accretive to earnings per share.”

Located on the Pend d’Oreille River, the Waneta Dam has a total capacity of 496 megawatts (MW) of renewable power and generates an average of 2,750 gigawatt hours of energy per year. Teck’s Trail Operations utilizes approximately 1,880 gigawatt hours of energy per year from Waneta. BC Hydro has a one-third ownership interest in Waneta and receives approximately one-third of the Waneta Dam generation.

Fortis holds a 51 per cent interest in the Waneta Expansion, completed in 2015. This project added 335 MW of new clean power generation from a second powerhouse downstream of the dam. The Waneta Dam is governed by the Canal Plant Agreement (“CPA”), a contractual arrangement between BC Hydro, FortisBC and other plant owners along the Kootenay and Pend d’Oreille rivers. The CPA enables the parties, through the coordinated use of water flows and coordinated operation of storage reservoirs and generating plants, to generate more power collectively from their respective generating plants than if they were to operate independently.

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