On June 28, Manitoba Hydro CEO Jay Grewal made a startling statement. In response to an order from the Public Utilities Board (PUB) to provide an integrated financial forecast, she replied that such a forecast did not exist. This claim was met with disbelief by the Consumer’s Association and the Manitoba Industrial Power Users Group, both of whom have accused Hydro of withholding relevant information.
The Progressive Conservatives do not seem worried by this. Indeed, the provincial government has had little to say about the fact Hydro has not released an integrated financial forecast in the last four years. They seem comfortable to rely on high-level financial metrics to determine if the utility is well managed. But many of the factors that determine Hydro’s overall health are hard to quantify on a balance sheet.
In fact, our ruling party is so focused on these metrics that its proposed Bill 35 enshrines one of them into law. Bill 35 obliges Hydro to meet certain debt-to-capitalization targets: 87 per cent in 2025, 84 per cent in 2030, 78 per cent in 2035, and 70 per cent in 2040. There has been little public discussion on the reasoning behind this debt repayment schedule.
The first target should be easily achievable: as per Hydro’s 2019/2020 annual report, the debt-to-capitalization ratio is 86 per cent, and Hydro has said it expects a profit this year. Subsequent targets will require increasingly aggressive debt payments.
If significant rate increases are required to meet these targets, they could depress the economy. Consumers only have a limited ability to reduce their electricity use, even if costs go up. This means less money in the hands of consumers and businesses. Increased electricity costs also make Manitoba less attractive to industry. This could cost jobs.
The benefit of meeting the ultimate target of 70 per cent in 2040 rather than in 2045 or 2050 is not clear. If sticking to the schedule creates a drag on economic growth, it may not be worth it.
Even with much higher rates, a few bad years could make it impossible for Hydro to keep up with the debt repayment schedule. In 2003, a prolonged drought reduced power generation to 60 per cent of normal levels. Hydro lost much of its expected export revenue and had to import electricity to meet our needs. It ended that year with a $436 million loss.
Enshrining a debt repayment schedule in law leaves little room for error, let alone for unfortunate surprises from our changing climate.
Bill 35 does not outline any consequences for failing to meet the financial targets. It’s hard to imagine what would be appropriate. Fining Hydro would only worsen the situation, and a breach of the act is not required to replace management. If Hydro were ordered to raise quick cash to satisfy its debt repayment schedule, it could attempt to sell off some of its non-core assets.
For example, Hydro could try to sell Manitoba Hydro Place to a third party and lease back the space it uses. But this would create a new expense (rent), which would likely prove more costly in the long run than simply chipping away at the debt.
Another option would be a cash infusion from the provincial government, but that wouldn’t come without strings attached. The province is already the sole owner, but Hydro could sell dividend-bearing preferred shares to the province. Preferred shares are accounted for as equity rather than debt, and are used in many industries in which there are legal or practical requirements to keep debt under a certain level. But this is just a bit of financial trickery that improves the capitalization ratio by creating a new class of liability.
It’s not even clear that debt-to-capitalization is the appropriate metric to look at. We expect it to be higher following construction of major infrastructure projects (Keeyask, Bipole III), but these are expected to generate profit in the future. High debt levels do increase interest-rate risk, but that risk is low in the short to medium term.
The federal government has taken on massive amounts of debt because of COVID-19. Even in an inflationary scenario, I suspect it will be very hesitant to raise the key interest rate.
Bill 35 also guts the PUB’s authority to approve or deny increases to electricity rates, which it bases on its own analysis of how much revenue Hydro needs from Manitobans to remain a going concern. Replacing a fulsome, independent analysis with a simple set of financial targets is a serious mistake.
Examining a company’s financial metrics is only the first step. An understanding of the broader market, the firm’s internal operations, potential for revenue growth and the risks faced by the company are essential. The fact Hydro is either not performing or keeping secret such an analysis speaks to a need for more oversight, not less.
The Progressive Conservatives are supposed to value transparency and accountability. By curtailing the PUB’s authority to provide an independent assessment, they are showing their true colours.
Alex Buchner is a technical writer, data analyst and a life-long Winnipegger