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 Support methodology for further details). The Province also provides most of the Utility’s financing through provincial advances (approximately 99% of total debt as at March 31, 2016). DBRS considers Manitoba Hydro to be self-supporting, as it is able to fund its own operations and service debt obligations.

In early 2016, Manitoba Hydro engaged the Boston Consulting Group to conduct a review of its financial, operating and capital plans, with particular focus on the Bipole III Transmission Reliability Project (Bipole III), the Keeyask Infrastructure and Generating Station Project (the Keeyask Project) and the Manitoba-Minnesota Transmission Project. The results, issued in September 2016 (the BCG Report), concluded that although the decision to proceed with the Keeyask Project was imprudent as some major risks were not fully considered, the best path forward was to continue construction on all three projects. The BCG Report noted, however, that total cost overruns of $1 billion could occur along with possible delays to the in-service dates of 12 months for Bipole III and 21 months for the Keeyask Project. The BCG Report also noted the rising leverage at the Utility as a result of the substantial capex; debt-to-capital at Manitoba Hydro had risen to 83% at F2016 and had been expected to peak at 88%, significantly above the target capital structure of 75% debt. A new board appointed at Manitoba Hydro in 2016 intends to limit the deterioration in the Utility’s balance sheet. As a result, the Utility has begun reviewing initiatives to help alleviate pressure on its key financial ratios, such as improving operational efficiencies, requesting annual rate increases higher than the previously planned 3.95%, as well as a potential equity injection from the Province. DBRS sees these initiatives, if actualized, as positive to Manitoba Hydro’s financial profile, as they will provide some financial flexibility for the Utility, especially in the event of adverse drought conditions or further cost overruns on the projects.

DBRS continues to view Manitoba Hydro as self-supporting, as its earnings and cash flows continue to be sufficient to cover its operating expenses and to service its outstanding debt. However, DBRS could consider reclassifying a portion of the Utility’s debt to be tax-supported should the financial health of the Utility deteriorate to the point where its expenses cannot be recovered through rates. If this were to occur, it could potentially put downward pressure on the Province’s credit rating. Similarly, a large equity injection by the Province that materially increases tax-supported debt could also put downward pressure on the Province’s credit profile. At this time, however, DBRS expects the Province’s ratings to remain stable.

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 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

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.