DBRS Updates Report on the Manitoba Hydro-Electric Board

DBRS Limited (DBRS) has today updated its report on the Manitoba Hydro-Electric Board (Manitoba Hydro or the Utility). The ratings assigned to the Utility’s Long-Term Obligations and Short-Term Obligations are a flow-through of the ratings of the Province of Manitoba (the Province; rated A (high) and R-1 (middle) with Stable trends by DBRS). Pursuant to The Manitoba Hydro Act, the Province unconditionally guarantees almost all of Manitoba Hydro’s outstanding third-party debt (please see the DBRS Criteria: Guarantees and Other Forms of Explicit Support methodology for further details). The Province also provides most of the Utility’s financing through provincial advances (approximately 98% of total debt as at March 31, 2015).

In July 2015, the Public Utilities Board of Manitoba (the PUB) issued its decision on the Utility’s 2015–16 and 2016–17 General Rate Application. The PUB finalized the previously approved interim rate increase of 2.75% effective May 1, 2014, and approved a 3.95% rate increase effective August 1, 2015. In its application, Manitoba Hydro noted that instead of applying for large rate increases when major projects, such as the Bipole III Transmission Reliability Project, the Keeyask Infrastructure and Generating Station Projects and the Manitoba-Minnesota Transmission Project, are brought in service, it currently plans to apply annually for gradual and more moderate increases. However, this rate lag will lead to significant timing differences between the actual capital expenditures (capex) spent and recognition into rates, and will likely result in weaker earnings and cash flows going forward.

As a result of the weaker earnings expected during this period of significant capex, the Utility has forecast substantial negative free cash flows for the medium term. As such, the Utility’s key financial ratios are expected to remain pressured, with leverage increasing from 81.0% at March 31, 2015, to a peak of around 88% in F2022, and above the target capital structure of 75% debt. DBRS notes that Manitoba Hydro’s key financial metrics could further weaken in the event of adverse drought conditions or potential cost overruns on major projects. DBRS expects the Utility to continue to finance any cash shortfalls through advances from the Province.

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

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.