DBRS Updates Report on the Manitoba Hydro-Electric Board

DBRS Limited (DBRS) 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, 2017). DBRS considers Manitoba Hydro to be self-supporting, as it is currently able to fund its own operations and service debt obligations.

In May 2017, Manitoba Hydro filed its 2017/18 and 2018/19 General Rate Application with the Manitoba Public Utilities Board (PUB), requesting 7.9% rate increases effective August 1, 2017, and April 1, 2018. The application is in line with the Utility’s new 10-year plan to return to financial health through higher rate increases and a Voluntary Departure Program for 15% of total staff (825 employee departures) in order to strengthen the balance sheet back to the target capital structure of 75% debt (debt-to-capital was 84.9% as at September 30, 2017). DBRS finds the application and the 10-year plan to be encouraging as, if approved, the rate increases will help alleviate pressure on Manitoba Hydro’s financial profile during this period of significant capital expenditures (capex) for the Bipole III Transmission Reliability Project (total capex of $5.0 billion) and the Keeyask Infrastructure and Generating Station Project (total capex of $8.7 billion). However, DBRS notes that the PUB only approved an interim rate increase of 3.36% effective August 1, 2017. Should the PUB approve final rates for F2018 that are also significantly below the applied-for 7.9%, this will likely result in further deterioration in the Utility’s balance sheet.

DBRS views Manitoba Hydro as self-supporting, as its earnings and cash flows are currently sufficient to cover its operating expenses and 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; this could potentially arise if rate increases are insufficient to recover Manitoba Hydro’s costs. 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 principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.