Manitoba Hydro’s debt problem is overhanging the public utility’s future.
It’s no secret that Manitoba Hydro has a debt problem. The board knows it, the government knows it and even its president and CEO admits Hydro has set itself up for years of razor-thin margins that give the Crown corporation little room for error.
“I characterize it as walking along a road, then walking along a sidewalk and then for about 15 years, I have to walk on a tightrope — everything has to go very good,” Kelvin Shepherd told CBC News this week.
“Does it make me nervous? Yes, it makes me nervous.”
Manitoba Hydro and its thousands of employees constitute the province’s largest Crown corporation, holding billions of dollars in assets, but also $14 billion in long-term debt, with little equity to back it up. That debt has been projected to grow to $25 billion in the next three to four years, according to a government-ordered review of Hydro’s finances by the Boston Consulting Group.
Hydro is currently embarking on an aggressive capital expenditure campaign. Megaprojects including the $4.65-billion Bipole III transmission line and the $6.5-billion Keeyask Generating Station will be built primarily through debt financing and will significantly contribute to the corporation’s current long-term debt load.
Depending on who you ask, this is either par for the course for the public utility or a risky gamble that could put Hydro (and by extension the province) in a perilous financial position.
Is the jewel in Manitoba’s crown in as much distress as it would appear? In search of answers, CBC News interviewed economists, bond-rating agencies and analyzed the financial records of Hydro in hopes of getting a clearer picture.
One drought away from trouble
Sanford Riley, the chair of Hydro’s board, has looked at the current numbers and sounded the alarm, telling CBC News the corporation’s finances are a “ticking time bomb” that will require an equity injection from the province and multiple years of rate hikes to diffuse.
“We want to make people understand, this is a big problem. It’s not a small problem,” Riley said earlier this month. “We have absolutely no margin for error. No cushion.”
Utility expert Brady Yauch of the Consumer Policy Institute agrees with Riley, telling CBC News Hydro could be one drought away from serious financial trouble.
“Manitoba Hydro is in a lot of trouble and that is something I have known for a while,” said the Toronto-based economist, who is also the executive director of the Institute.
“It is not a new thing that suddenly hits now, it is something that has been building over time.”
Yauch argued recent developments have shown the side factors that once made investing in Bipole III and Keeyask financially viable haven’t materialized: export prices are on the decline, the price of both projects is expected to increase and demand for hydroelectricity has stagnated.
Delays in the projects could put a kink in Hydro’s 20-year capital expenditure forecast — submitted by Hydro to the Public Utilities Board as part of its 2015-16 rate increase application — changes in when these projects become operational can alter everything from their debt-to-equity ratio projections, rate increase necessities and revenue forecasts.
Shepherd said the biggest concern with delays will be the increased borrowing costs the utility will have to shoulder; it costs the public utility over half a billion dollars annually to finance their debt, an expense that is expected to double over the next 10 years, according to the Public Utilities Board.
Built into the plan is a razor-thin margin in 2021 forecasts Hydro’s debt-to-ratio margin falling to 12 per cent; that means 88 per cent of Hydro’s capital will be debt.
“When you have very tiny levels of equity, you have no room for errors,” Yauch said.
Forecasts show a five-year extended drought would cost Hydro $2 billion in lost revenue and with about $2 billion in equity in Hydro’s kitty, it’s a risk that hasn’t escaped Shepherd.
“If we are at the 10 per cent equity level and we suffer one of those five-year drought events, you could end up with Hydro essentially having all debt and no equity,” Shepherd said. “Is that a high probability? Well, those droughts have happened before, but they don’t happen very often.”
‘Being built in the traditional way’
University of Manitoba economist John Loxley argues Hydro’s 20-year plan is just par for the course for the public utility.
“The ratio recovers once the two are constructed,” said Loxley, who is also a former Hydro board member appointed under the NDP. “The idea that this is somehow new and dangerous defies logic, they have known about this for years … The reality is that Bipole and Keeyask, they are being built in the traditional way through debt financing.”
He called Riley’s comments reckless and scoffed at Riley’s calls for an equity injection from the province
Riley said there are as much as a $5-billion hole in Hydro’s books and wants the provincial government to step up with an injection of capital to help fill the gap, alongside rate hikes and staff cuts.
“The basic idea that the province should borrow money to invest in Manitoba Hydro, the idea this would somehow improve the total debt of Hydro and the province is beyond me,” Loxley said.
“They are making highly political statements that is damaging to hydro and its bond rating.”
What the credit raters are saying
The international credit agencies charged with deciding Hydro’s ability to repay its $13 billion debt have, for the most part, given Hydro a stable outlook. Its debt is guaranteed by the province and as long as Hydro is deemed to be self-supporting, its debt does not impact the Province of Manitoba’s credit rating.
Both Moody’s Investors Service and DBRS have issued stable outlooks for the Crown corporation in recent months, stating once massive capital projects such as the Keeyask dam and Bipole III transmission line become operational, the public utility’s debt burden will be eased.
“We view Manitoba Hydro as being capable of prudently managing its debt, benefiting from access to funding from the Province and seeking rate increases and curtailing capital spending to continue as a self-supporting corporation,” states Moody’s in its November outlook on the utility.
Both agencies say, given Hydro’s 20-year plan, it is fully capable of paying its own costs and debts through its operations.
In contrast, S&P Global Ratings, previously known as Standard and Poor’s downgraded the province’s credit rating to double-A-minus from double-A in July, it cited the province’s debt burden as its chief reason and grouped Hydro’s debt into the downgrade — something the DBRS and Moody’s have not done.
According to S&P, Hydro’s “high and rising leverage” has led them to combine the debt, it wrote in its July outlook on the province.
Riley told CBC News earlier this month a proper capital injection from the province could lower the rates “well below” the double-digit increases they currently believe are necessary to balance the books.
So far, Premier Brian Pallister has balked at Riley’s request for an equity injection, telling media this week he needs to hear more about the state of Hydro’s finances from the Public Utilities Board.
Shepherd admits the future looks bleak for the corporation, but said it not all doom and gloom. He said he isn’t ready to wade in on the possibility of an equity injection to stabilize Hydro.
“Whether people should be worried or not is up to them. What I can encourage them is not to get too mislaid by the misinformation and rhetoric. We are a solid company with great assets,” he said.
“I am not downplaying the financial concerns because $25 billion of debt is a concern, but I would encourage people not to forget about the strengths we have in this province and corporation.”