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Monday, February 02, 2015

Manitoba Hydro Horror Show

Manitoba Hydro didn't ask for a rate increase last month--- they begged, they pleaded, and ... they threatened dire consequences if they didn't get their way.

And that was just for the best-case scenario.

Which is disastrous.
The reason for their desperation is in the supporting documents that were filed with their application which can be summed up in four words: Manitoba Hydro Horror Show.
Here's how the crisis shapes up:
* Manitoba Hydro won't be able to raise enough money to make its interest payments in eight of the next 13 years.
* Manitoba Hydro won't earn enough money to cover the cost of replacing aging infrastructure in nine of the next ten years, never mind paying the billions required for new dams and transmission lines.
* If the Province has to backstop Hydro, the utility will lose its credit rating and borrowing costs will go way up.
* If Hydro loses its credit rating, it will take the Province over the cliff with it. In short, Manitoba will lose its credit rating, too, and taxpayers will pay the price.
* Manitoba Hydro can't make up the difference by exporting more power. In fact, Hydro now predicts fixed export prices will be 7 percent lower on average over the next 20 years.  Why?  Fracking, which Hydro dismissed five years ago as a fad.
And that's the sunny scenario.
In the event of a drought, Manitoba Hydro would probably deplete its accumulated reserves depending on how severe it was and how many years it lasted.
"In this circumstance, there would not be sufficient reserves to mitigate the potential financial impacts of the considerable array of the risks the Corporation faces in fulfilling its mandate."
Oh, and a drought is almost inevitable. The last one was in 2004 which means we're entering the average drought cycle.
"Should a severe drought occur during the first 10-year period, net income and the equity ratio would be further challenged and higher rate increases would be necessary."
Already the debt-to-equity ration is projected "to deteriorate from the current 24% level to 11% equity by 2022/23" because of the huge borrowing that's necessary to build two new dams, Bipole III, and a new link to the United States, said Hydro.
"While Manitoba Hydro is prepared to accept deterioration of its financial ratios in order to mitigate rate increases for customers, the proposed 3.95% rate increases are the minimum that are required to maintain rate stability and manage the deterioration in the Corporation’s financial strength during the period of extensive investments."
"It is imperative for Manitoba Hydro to be granted the proposed rate increases..." declared Hydro.
The definition of "imperative":
adjective: imperative
1. of vital importance; crucial.
Here are the some of the more relevant portions of the Manitoba Hydro application:
"The 3.95% proposed and indicative rate increases are the minimum necessary to manage the significant deterioration in Manitoba Hydro’s projected financial results and ratios in the next 10 year period. Should the PUB defer the proposed rate increases, there is greater risk that future rate increases will be significantly higher than 3.95%."
"Manitoba Hydro is relaxing its adherence to financial targets over this period in order to alleviate rate increases in excess of 3.95% to the extent possible. Due to the deterioration in Manitoba Hydro’s financial ratios... any further increases to costs or reductions to revenues increases the risk of significantly higher rate increases to customers."
"The interest coverage ratio provides an indication of the ability of the Corporation to meet interest payment obligations."
"Manitoba Hydro’s interest coverage ratio is also forecast to be well below target for several years of the forecast. In eight years of the forecast, Manitoba Hydro’s interest coverage ratio is below 1.0, which indicates that the utility would experience elevated operational liquidity risk and may have difficulty generating sufficient revenues and cash flow from operations to pay its interest obligations."
"The capital coverage ratio measures the ability of current period internally generated funds to finance sustaining capital expenditures (excluding major new generation and related transmission)."
"Capital coverage is projected to be below target for nine years of the forecast, and below 1.00 for six of those nine years, due to the reduction in net income and increasing capital requirements to replace aging infrastructure..."
"Even with net extraprovincial revenues, Manitoba Hydro is projecting losses on electric operations in 2018/19 to 2023/24 totaling  approximately $0.9 billion..."  (That's $900 million, for the mathematically challenged.)
"The key financial risks associated with rate increases lower than 3.95% are:
 i. Increased risk to customers of rate instability and rate shock;
 ii. Increased borrowing requirements and associated financing costs which must be recovered from customers in the future;
 iii. Potential negative implications to the Provincial credit rating and Manitoba Hydro’s borrowing costs."
Composition of Province of Manitoba Debt
Province of Manitoba (excluding Manitoba Hydro) 65%
Manitoba Hydro (self-supporting debt) 35%
" The credit rating agencies view Manitoba Hydro to be financially self-supporting in that  the Corporation is able to meet its financial obligations based on its own revenues without being supported by the tax-base of the Province."
"Should the capital markets perceive Manitoba Hydro’s debt levels to be too high, there may be negative implications to the Province’s credit ratings, which could result in higher borrowing costs. As a result of  the significance of the size of Manitoba Hydro’s debt in relation to the Province of  Manitoba’s debt as a whole, the debt/equity ratio is a key indicator in the review of Manitoba Hydro for the Province’s credit rating."
"In Manitoba Hydro’s judgment, the projected deterioration in the equity ratio... is at the minimum acceptable financial operating level even with the proposed and indicative rate increases. Any further deterioration in the equity ratio significantly  increases the risk of large rate increases to customers in the longer term and any reduction to the rate increases proposed in this Application only intensifies this risk to customers."
Manitoba Hydro has clearly lost control of its finances. 

Even with proposed rate hikes at twice the rate of inflation, they can only promise the possibility of even greater increases at every turn.  Along with the likelihood of a loss of the utility's credit rating and the province's credit rating.
And we're still subsidizing the "sale" of power to Minnesota for the next nine years.

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