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Swedish expert ignores disaster in the making to give Manitoba Hydro a thumbs up


That chill down our collective spines had nothing to do with the coming winter.

We were reading the 160-page, Manitoba Hydro-commissioned Hydropower Sustainability Assessment Protocol, by a group you've never heard of, fronted by a Swedish "hydro-power expert", discussing Hydro's planned multi-billion-dollar Keeyask generating station.  It's really scary.

We first heard of this report from a story in the Winnipeg Free Press:

Expert applauds dam project
Team spent months assessing Keeyask
By: Bruce Owen
 
Last Modified: 10/26/2013 10:14 AM | Updates

A Swedish hydro-power expert has given a thumbs-up to Manitoba Hydro's next big dam in northern Manitoba.

Bernt Rydgren's report is far from the final say on the estimated $6.2-billion Keeyask generating station project, but Hydro maintains it goes a long way toward demonstrating the Crown utility has set a new globally recognized standard in how large hydroelectric projects are developed and built.

Undaunted by the length and subject matter, we dove right in, only to discover that reporter Owen had somehow overlooked the most important finding of the Swedish hydro-power expert, the part that read (under the heading Economic Viability):

"Analysis of significant gaps against proven best practice
 
There is not enough evidence at this stage to argue that benefits of the project outweigh costs under a wide range of circumstances."

And...
"This assessment was undertaken before the economic analyses of the Keeyask project have been finalised...There is one significant gap against proven best practice, in that positive outcomes of the economic viability analysis cannot at this stage be assured under a wide range of circumstances..."

It started to feel cold in the room.
And the deeper we read, the lower the temperature dropped.

The report was chock full of information that Manitoba Hydro would prefer you didn't know.
Starting with the fact that although Manitoba Hydro intends to spend an estimated $5.6 billion to build the Keeyask power station, IT WON'T OWN IT.
Keeyask will be OWNED by an entirely different company, a private company, Keeyask Hydropower Limited Partnership (KHLP), which will be a subsidiary of Hydro. The utility will own at least 75 percent of the equity in the private company and a group of four northern Indian reserves will own up to 25 percent.

Hydro will BUY power from the private company.  Yes, that's right.  Manitoba Hydro will pay all the costs to BUILD the Keeyask power station, then turn it over to this other company and BUY power from them.

Hint: when you buy something from someone else, the price you pay includes a profit for the other party.  Nobody is in business to lose money. So, we will build the dam to produce power, then pay another company to buy from it, the power we have paid to produce.

So the other company can make a profit from the power we paid to create in the first place.

New Democonomics at work.

Who will be "our" partners?  Fox Lake Cree Nation, population 1010; Tataskweyak Cree Nation (Split Lake), population 3000; War Lake First Nation, population 235; and York Factory First Nation, population 1060.  Of the 5300 members, only half live on reserve.

But they're about to co-own an asset worth amost six billion dollars.Their share alone is equity worth $1.4 billion.

How much will they contribute towards the project?  Nothing.

The province of Manitoba will borrow money which it will then lend to Manitoba Hydro, which will, in turn, lend to the Cree quartet, which will then put it into the private partnership.

The Indian reserves then get a number of options. "...the individual KCN can choose between two different investment option, the so called “preferred” (all loans from MH are forgiven) or the “common” (loans will be repaid from profits). The “common” approach has potential upsides while the “preferred is a more secure approach. With either option, the guaranteed minimum return on investment will be equal to MH’s cost of long-term borrowing less 1.5%, which is currently projected to be approximately 4.8%."

Oh, and they can "share" profits before their loans are paid off.

Not bad, eh. No money down (or at least none of their own), 4.8 percent return on "investment", and no need to repay Hydro for loaning the money to buy in.

Oh, and it gets better:

"Financial returns for the KCN include guaranteed annual payments under the Adverse Effects Agreements, and if they chose to invest in the project, probably some guaranteed minimum revenues and protections for the principal invested (resulting in a higher internal rate of return for the KCN than for MH). "
One thing eventually becomes very clear. This is more than a hydroelectric development.

This is a giant welfare entitlement---being paid for by a public utility to avoid scrutiny by the Legislature and to escape political accountability.

If you read deep enough into the "Swedish expert's report you'll find this admission:

"...one rationale for the project is as a vehicle for regional socio-economic development and a way to address legacy issues from past hydro developments with high social costs and few social benefits..."

But the impact of this deception will be disastrous. 

Hydro rates will be raised 3.8 percent a year for at least 18 years.  And that's not counting the additional 2.5 percent they'll be asking when the next drought hits, which is predicted to be between now and 2018, i.e. sometime in the next five years.

The Keeyask generating station is just part of Hydro's plans for $34 billion in spending to the coming years.  Swedish hydro expert Bernt Rydgren casually describes the impact of this scheme like this:

"MH will undertake several major capital projects in parallel, including Bipole III (CAD 3.3 billion) and Conawapa hydropower generating station (CAD 7.8 billion). Borrowing for these projects will push the equity/debt ratio below the target ratio of 25/75. It will drop to 12/88 by 2021 before recovering to 25/75 by 2030. The interest coverage ratio will remain below the target of 1.2 until 2024."

The Black Rod first raised the alarm over the interest coverage ratio one year ago,
staring with an explanation of what it is and why Manitobans should be scared stiff.

The interest coverage ratio is a measure of whether a company can cover its interest costs.  Here's how investopedia.com explains it:

http://www.investopedia.com/terms/i/interestcoverageratio.asp
Investopedia explains 'Interest Coverage Ratio'
"The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.
"

The Hydro report touted by the Winnipeg Free Press says Hydro's ratio will be BELOW 1.2 for the next ten years, at least.  That's well below the minimum cited by Investopedia.  But that's not even the worst of it.  Hydro's own forecasts say they expect the interest coverage ratio to drop below one percent within that time ! 
 
We found another website that discussed what that meant.
 
http://beginnersinvest.about.com/od/incomestatementanalysis/a/interest-coverage-ratio.htm
Investing for Beginners
General Guidelines for the Interest Coverage Ratio
As a general rule of thumb, investors should not own a stock that has an interest coverage ratio under 1.5.
An interest coverage ratio below 1.0 indicates the business is having difficulties generating the cash necessary to pay its interest obligations.

Let's spell it out.  Manitoba Hydro is flirting with losing its credit rating!  And with it will go the credit rating of the province of Manitoba, since the government backstops Hydro's debt. And Hydro intends to more than double Manitoba's total debt.

With no public debate, no mandate from Manitobans, the government is:

* privatizing Hydro resources by giving ownership of new dams to private companies
* building a massive, and secret, welfare entitlement program that will drain tens of millions of dollars from public coffers
* committing Manitobans to almost two decades of steadily rising rates to cover the welfare program
* guaranteeing payments to private "partners" of hydro projects even when there are no profits
* racing to the precipice where Hydro and Manitoba lose their credit ratings

Brrrr.

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