DBRS Confirms Manitoba Hydro at A (high), R-1 (middle)

DBRS has today confirmed the ratings of the Long-Term Obligations and Short-Term Obligations of The Manitoba Hydro-Electric Board (Manitoba Hydro or the Utility) at A (high) and R-1 (middle), respectively. The trends are both Stable. Manitoba Hydro’s ratings reflect the short- and long-term ratings of the Province of Manitoba (the Province; see separate DBRS report). Manitoba Hydro’s ratings are a flow-through of the Province’s ratings based on (1) the implicit support of the Province as Manitoba Hydro is for all purposes an agent of the Province (see methodology Rating Canadian Provincial Governments for further detail) and (2) the unconditional guarantee provided by the Province on the majority of the Utility’s outstanding third-party obligations. The Province’s Short-Term Debt and Long-Term Debt ratings were confirmed by DBRS on August 22, 2011, at R-1 (middle) and A (high), respectively. The trends on both ratings are Stable.

The Province supports Manitoba Hydro by both advancing funds and guaranteeing its outstanding debt. As at March 31, 2011, the Province has provided approximately 97% of the Utility’s long-term debt in the form of provincial advances, with the same terms and conditions as the Province’s external debt. Manitoba Hydro has $241 million of long-term debt in its own name, with an unconditional guarantee provided by the Province, except for $75 million of Manitoba Hydro-Electric Board bonds issued for mitigation projects, which do not benefit from an explicit provincial guarantee.

The Utility’s credit profile is further supported by its low-cost hydro-based generation, a constructive regulatory environment and its vast interconnections (46% of installed capacity), which provide access to favourable export markets. Hydrology continues to be a risk factor affecting credit metrics, but this risk is somewhat mitigated by the geographic diversification of the Utility’s watersheds, reservoir storage capacity and import capabilities.

The Utility has stated that it has witnessed record-high water storage levels as of March 31, 2011. While the increased storage levels and anticipated hydraulic generation are expected to be above normal averages, credit metrics are at risk of constraint due largely to economic conditions. Export market prices are largely affected by economic conditions and other competitive sources of energy putting downward pressure on market prices. As a result of lower export revenues and reduced sales volumes for the fiscal year ending March 31, 2011, Manitoba Hydro reported net income of $150 million, a decrease of $13 million from the same period in 2010. While earnings are modestly lower from 2010, the Utility is anticipating relatively flat earnings for 2012.

The future of the Utility’s earnings growth will be contingent upon the forecast capital investment of approximately $18 billion over the next ten years. Approximately $13 billion of the total capital expenditures relates to a number of major projects such as the Keeyask and Conawapa generating stations and the Bipole III transmission line. The remaining $5 billion will be expended to replace and renew existing infrastructure. Manitoba Hydro has confirmed that construction of new generation projects will only proceed once firm export sales contracts are secured, extensive consultations with stakeholders and First Nations groups are concluded, and environmental and regulatory approvals are received.

Looking forward, DBRS believes that Manitoba Hydro will continue to generate reasonable levels of EBIT and operating cash flows, with the potential for significant volatility over the near to medium term resulting from hydrological and export market conditions. The ongoing heightened capital expenditure program is expected to continue to pressure the Utility’s balance sheet and credit metrics. In addition, completing the large hydro-generation and transmission projects on time and on budget is key to maintaining a stable financial profile.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, Rating Canadian Provincial Governments and Rating Agents of the Crown, which can be found on our website under Methodologies.