Manitoba Hydro has no plan for dealing with its looming $25 billion debt

Last night, under my questioning at the Committee on Crown Corporations at the Manitoba Legislature, Kelvin Shepherd, President and CEO of Manitoba Hydro admitted that the corporation currently has no plans to deal with its looming $25 billion debt.  During the committee meeting, Mr. Shepherd and Crown Services Minister the Hon. Cliff Cullen both made it clear that in a few years, with all the money being borrowed to build Keeyask Dam and Bipole III, Manitoba Hydro will have a debt of about $25 billion.  As an example, Minister of Crown Services the Hon Cliff Cullen, said during the committee meeting that "when Keeyask comes online, Manitoba Hydro is going to have a debt of   $25  billion. "  Uuit 1 of Keeyask is said to be  coming on line in 2021.   For a corporation the size of Manitoba Hydro this is a very large debt.  Indeed, the expected net debt for the Province of Manitoba at the end of the current fiscal year (2018/19) is $25 billion.   Thus Manitoba Hydro's debt will be similar to the debt of the Province so the total debt of the Province of Manitoba and Manitoba Hydro will be more than $50 billion by 2025.  There was evidence that Manitoba Hydro is trying to work on a plan to address its debt, but also that it does not currently have a plan.  My question and Kelvin Shepherd's comments are below.   

Mr. Gerrard: As a corporation, you've been approaching the PUB for increments or increases in the price of electricity of–on the order of close to 8 per cent a year. That would obviously have severe impacts on people of low incomes. It has been put forward that the only way that you might be able to avoid having those large increases would be to have the government of Manitoba take over several billion dollars of Manitoba Hydro debt and to put Manitoba Hydro on a more financially sustainable course. I wonder if you'd comment.

Mr. Shepherd: Certainly, I'd be pleased to comment on that.

      I think the corporation, in its application to the PUB, tried–I'm not sure we were successful in being heard, but we tried to explain some of the challenges, and there is no doubt that part of what we're concerned about is the risk associated with a very large amount of debt. And we talked previously about the drought risk. And I know people have said, well, you've got $3 billion of equity–I do know the number–and that's more than enough to cover a drought, and so what's the problem? What's the problem?

      And I would say the problem is that that equity is not cash, and when you–and while you–if you get into a drought, you are going to have to borrow more to fund your operations during the drought, and when you have $25 billion of debt and there's no plan to repay it back for 10 or 15 or 20 years, you're exposed to the substantial risks of leverage and interest rate increases.

      Now, I'm not saying that that requires a knee‑jerk reaction, but, obviously, the sooner you take rate action–which, I agree, 7.9 per cent was our request, that's a substantive increase and it would have had difficulties. The sooner you do something, the more beneficial it is. I think my concern, just from a risk point of view, is that a plan that has Hydro going along with a very large debt load for many, many years without really generating much in the way of positive net income and exposed to the risk of borrowing more to fund its operation during a drought and borrowing more to fund its interest costs. If it's exposed to that, that's a significant risk.

      Now, we're going to have a technical conference. The PUB has ordered a technical conference and I look forward to it, and they're going to–you know, one of the goals of that is to understand what should the appropriate financial targets be. For 25 years the PUB has accepted a 25 per cent debt‑equity ratio as a target, and we're nowhere near that ratio and won't be for many, many years. And all that that is saying is that you're overleveraged.

      So it's a different risk. I think at the end of the day we all have to be cognizant of the fact that, as I put it, the deal is not that the government should have to bail out Manitoba Hydro. The deal is the government provides us access to effective debt, but our customers, our ratepayers, are on the hook to pay the costs of electricity. And so, if we continue to run the business in a way that doesn't generate much net income and continues to pile up debt, customers are on the hook.

      And my view is that that's the deal. The deal is not that the government–and we should never let ourselves get in the position where the government has to step in and bail out Manitoba Hydro, but that's my own view. I've made that clear to the PUB and I'm happy; I'm looking forward to working with our new board as we work through strategy. I realize I'm going on a little bit longer here but I would tell you that the previous board spent six to nine months to go through these things. They had the benefit of very expert consultants and advisers in the form of BCG, and I think our new board is working through these things in a very expeditious way, and we would expect them to go through a review of strategy and finances. And I'm sure they'll come up with what they think is the best way to manage the company going forward and happy to work with them on it.