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Manitoba Hydro is on its deathbed. There, we said it.


Manitoba Hydro is on its deathbed.

Oh, you won't find anyone official to say it. Yet.

Like relatives trying to appear cheery and optimistic around a loved one that's been diagnosed with terminal cancer, the people in power are in the first stage of grief -- denial.

The prognosis for Hydro was delivered three weeks ago at hearings before the Public Utilities Board where the utility was seeking punishingly higher rates for customers in Manitoba.

It took us this long to read through the hundred-plus pages of transcript, to decipher the coded language of the witnesses, to interpret what they were getting at, and, finally, to understand the terrible conclusion.  We couldn't believe it, just as, we're sure, you can't--- so we did it all again, to get a second opinion, so to speak. 

Hydro conceded to the PUB that it undertook a massive expansion program--- involving three (it was once four) new dams and two new major powerlines (one in the United States)---which it could not afford.

Bipole III, the outrageously expensive power line ($5 billion and counting) that was built to bring electricity from the new dams south to customers in the United States, will be hooked up and operating in July, 2018. That's when Manitoba Hydro is supposed to start paying back the money it borrowed to build the line and the accumulated interest.

The problem is that Hydro doesn't have the money to pay for Bipole III !

We'll repeat that slowly in case you still don't understand:

Manitoba Hydro
doesn't have
the money
to pay
for
Bipole III.

Three years later, in 2021,  the even more expensive Keeyask dam ($8.7 billion and counting) will go into service.  You guessed it...

Manitoba Hydro
doesn't have
the money
to pay
for
Keeyask

either.

How much money are we talking about?

* Hydro CEO Kelvin Shepherd told CJOB just this month that the utility needed $300 million a year to pay for Bipole III.  
* The PUB stated back in 2012 that when Keeyask came into service it would create additional annual costs for Manitoba Hydro of $500 million.  
* As you will soon see, shortfalls of $100 million here and $100 million there are inevitable.
* Which means that within four years, Hydro will need at least one billion dollars more each year to keep operating.

And the only dependable source for that money, they told the PUB three weeks ago, is Manitoba ratepayers. In other words --- YOU.

The utility needs a rate increase of 15-20 percent just to cover Bipole. The bill for the Keeyask generating station will be almost double, meaning that Hydro would need another rate hike, of 30 percent or more, which they want to apply in annual increments rather than all at once.

 But it still means your hydro bill with go up more than 50 percent, and likely much more, within four years.

Hydro told the PUB that it would already be in a financial crisis if it wasn't for two factors--low interest rates and high water.  

"To date, a financial crisis for Manitoba Hydro has -- coupled with rate shock for its customers, has been deferred due to two (2) factors, and those two (2)factors are entirely outside of Manitoba Hydro and this Board's control," said Hydro lawyer Patti Ramage.
 
Interest rates are the lowest they've been in 80 years. That's right, not since the mid nineteen-thirties.  But rates have started up. The federal bank rate was raised a quarter point in July and another rise is expected in the fall. The effect on Hydro will be devastating. Said Ramage:

"The project's (Bipole III) mostly complete.Regardless of accounting conventions, Manitoba Hydro is today borrowing cash for interest annually on the debt being borrowed to build the project. It's a huge number. We're talking 150 million, 175 million."
 
"...to make clear the fundamental reality of Manitoba Hydro's current financial situation. That reality is that we are borrowing money to fund our core Basic operations. That is an unsustainable practice...".
 
.".. interest expense will soon consume 70 odd percent of every domestic dollar. 70 percent of every domestic dollar is going to go to interest expense."
 
"It doesn't take much of an error on the interest rate forecast for that to move up to a hundred percent or more."
 
 "And we still have a business to run. We have to pay our operating costs, power purchases, water rentals, capital taxes, and by no means least of all, we have to replenish aging infrastructure."
 
And as for its impact on the capital projects...

"... Manitoba Hydro has $12 billion to borrow over the next five (5) years. Extremely modest increases in borrowing costs against plan can quickly reduce Manitoba Hydro's income by fifty (50) to even a hundred million dollars per year."
 
The PUB was told that Manitoba Hydro would have lost money this year and the two years previous if it wasn't for unusually high water levels. Ramage again:
 
"Manitoba Hydro will, in 2017, enjoy its fourteenth(14th) consecutive year of above-average water flows which is a wet period almost three (3) times the duration of the next largest period -- next longest period in well over a century of recorded history."
 
"... by any measure, Manitoba Hydro is in a cash deficit position. Without the benefit of high water, this deficit is in the order of 250 to $300 million per year, meaning rates today are 15 to 20 percent too low if Manitoba Hydro's ratepayers are held to be responsible for the cost of its -- of operating the system."
 
"So those two (2) factors... are what have been saving Manitoba Hydro, and those factors are not factors that we can count on to continue. "
 
Manitoba Hydro has known for years that it wasn't going to be able to pay for the massive expansion it had undertaken unless there was a miraculous return to the good ol' days when hydro power was in demand and even spot prices were sky high.
 
They gambled on that, until they ran out of time, money and luck.
 
Spot prices for electricity are now anywhere from 30 to 35 percent lower than forecast even two years ago. Hydro has written off $850 million in anticipated export revenue over the next ten years as a result.
 
Domestic revenue isn't any better. Growth in Manitoba has been so slow that Hydro predicted domestic revenue would be $900 million less over 10 years unless they got the huge rate increases they want.
 
Sales of power outside of Manitoba are so uncertain that Hydro has scrapped the premiums it used to charge for dependable "green" energy and "capacity values"
 
"...it is not prudent to assume as a planning tool that Manitoba Hydro is able to enter into new long-term export contracts, particularly into markets like MISO (the midwest energy exchange that links 15 American states plus Manitoba...ed) that are awash in energy." Hydro told the PUB.

Manitoba Hydro plans to save $500 million over the long-run by a new debt management strategy.

" Manitoba Hydro changed its debt management strategy to target a twelve (12) year term to maturity on new issuances instead of twenty (20) years."
 
"This is a strategy that only makes sense if there is an expectation of having income and cash -- income and the cash flow necessary to permanently retire shorter- term debt as it becomes due."
 
"We have to able to retire that debt when it becomes due or that strategy doesn't make sense. And that strategy is a $500 million saving, but it doesn't work if we don't have the cash at the end of the day to retire it. And that cash can only come from higher rates." said Patti Ramage.

Manitoba Hydro's submission to the Public Utilities Board included a recognition that its debt rating was in danger.  The province of Manitoba has had its credit rating cut twice within a year and now stands two ranks above junk bond status.  Hydro's debt rivals the provincial debt.

Two years ago Hydro defiantly defended its plan to keep borrowing money for expansion even if its debt-to-equity ratio dropped to 90-10, with the risk that a drought would devour even that last 10 percent of equity, leaving the utility insolvent.

But Hydro was much more contrite before the PUB in 2017, stressing how it needed the large rate hikes to plump up the debt-to-equity ratio and satisfy skeptical credit rating agencies. The goal now is to keep the debt-to-equity ratio at 75-25.

Or else.

But, but, but... if the Public Utilities Board knows all this, why did they grant a small (3.36 percent)  interim rate increase, and put off dealing with the big problem until December's hearing?

The answer lies in Hydro's opening gambit in the July hearing.

Hydro lawyers came in telling the PUB it had no choice but to grant Hydro's application for a 7.9 percent interim rate hike.

 No choice.

They even had a higher court ruling to back them up.  Citing that court decision they declared that the financial health of Manitoba Hydro had to be preserved at all costs. And that meant that other considerations, such as the impact of the rate hike on the poor, the elderly, and those unfortunate enough to use electricity to heat their homes, had to be overridden.

Hydro's message was unmistakeable: If a 50 percent jump in hydro rates was going to make the poor and elderly suffer, then that's their tough luck. 

The provincial utility is playing chicken with the provincial government.  Remember, they asked the province to bail them out with an infusion of money, and got a negative answer. 

So they're gambling now that Brian Pallister will be forced to rescue the unfortunates who can't afford the hikes Hydro plans.

The members of the PUB must see the brinksmanship at play. They decided to pass the buck to December and give the province time to decide what to do.

In the meantime, the writing is on the wall.

Mene, mene, tekel, upharsin

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It's time to call the family to pay their last respects. Manitoba Hydro is done.

A perfect storm is hitting Manitoba Hydro. Insolvency is inevitable. 

Eight months ago we reported that Hydro was on its deathbed, based on the testimony of the utility's own witnesses at a hearing of the Manitoba Public Utilities Board.

http://blackrod.blogspot.ca/2017/08/manitoba-hydro-is-on-its-deathbed-there.html
Since then the patient's condition has deteriorated rapidly. It's time to call the family to pay their last respects. 

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