Winnipeg Free Press - PRINT EDITION

Peeling back the padding on Manitoba Hydro's 'profit'

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MANITOBA Hydro's recent annual report focuses on two myths -- that its reported profit of $92 million is more than adequate, and that the utility's financial position (portrayed as the best in its history) provides a base for it to confidently move ahead with expenditures unprecedented in the province's history without unduly raising rates.

Hydro's reported profits are due to accounting choices and rate increases, and its financial position is weak. As it moves ahead to implement its $20-billion gamble on dams and transmission development, Manitobans can anticipate a tripling of rates over the next two decades.

Hydro's $92-million net income -- including $23 million of deferred income of prior years -- is a return on equity of less than four per cent. Over the 10 years to March 31, 2013, Hydro reported a cumulative net income of $1.3 billion, averaging $130 million a year. On an average retained earnings base of $1.9 billion, the earnings represent an average return on "book" retained earnings of less than seven per cent -- hardly stellar.

And, excepting for the Public Utility Board's granting of rate increases from 2004 to 2013, accumulating to 35 per cent as compared to general inflation of 20 per cent over the period, Hydro would have barely broken even in that time.

This dismal result comes despite nine years of median or above-average water flows (2004 was the last drought year) and record-low interest rates (for every one per cent change in interest rates, Hydro's results are affected by $10 million per $1 billion of debt).

As it is, Hydro's net-income results have required massive deferrals of incurred expenses. Over the 10 years ending March 31, 2013, Hydro capitalized or deferred approximately $2 billion of its operating, maintenance and administrative expenses (some portion would have been expensed through normal amortization, the balance will pressure rates well into the future).

The utility is replete with intangible assets -- construction in progress, goodwill and deferred costs. Hydro still carries the income tax and premium price it paid when it bought Centra Gas on its books, and hasn't written down the incredible cost it paid to construct Wuskwatim, the undepreciated costs of its single-cycle, natural-gas turbines that are uneconomical to operate or the distressed assets bought from Winnipeg Hydro.

In Note 2 to its audited statements, Hydro reports that an "International Accounting Standards Board (IASB)... exemption eliminates the requirement to retrospectively adjust opening property, plant and equipment and/or intangible asset balances for costs that would otherwise not qualify for capitalization... Manitoba Hydro intends to apply this exemption."

If Hydro had not taken the "exemption," its asset base and retained earnings would have been significantly decreased.

Worse yet, the notes to the utility's financial statements disclose what appears to be not only a deficiency of approximately $400 million between the assets of its pension plans and the actuarial liability, but also an undetermined liability with respect to northern dam mitigation.

If Hydro's accounting choices were more conservative, the balance of its retained earnings would be much lower, if not negative.

While Hydro's operations from 2004 on have been far from stellar for ratepayers, it has been a good time for its sole "shareholder," the province.

Over the decade, the province has received more than $2 billion in cash from levies on Hydro's operations (capital tax, water-rental fees, debt-guarantee fees, payroll taxes and other miscellaneous fees), and it has garnered cash receipts from retail sales taxes applied to ratepayer bills and individual and corporate income tax receipts from employees and contractors to Hydro.

Furthermore, the province has reported in its books Hydro's $1.3-billion (on paper) net income over the period. (If this was not enough, Hydro continues to assist the province by undertaking projects and covering expenses that would better be met by the province.)

As for its "strong" financial position, while Hydro claims that, as at the end of its 2012-13 fiscal year, its debt-to-equity ratio was 75-25 (the accepted goal for years), it includes in arriving at its equity number deferred costs, a balance in accumulated other comprehensive income (which arises largely from the impact of a higher Canadian dollar on U.S.-dollar-dominated debt -- a "gain" that will be extinguished as exports to the U.S. continue in American currency), and contributions in aid of construction (better represented as a reduction from property, plant and equipment).

If the items had been excluded, the debt-to-equity ratio would be worse than 90-10. Privately owned utilities, meanwhile, require a debt-to-equity ratio of 60-40 to borrow on the debt markets.

As for claims of ratepayers gaining from its export sales, Hydro neglects to note the costs incurred to make those sales. Those costs include a reasonable attribution of the costs of capital assets employed to generate and transmit the electricity, finance charges and operating costs. With an appropriate attribution being made against export sales, the utility would report losses on its export-market transactions since 2008.

The reality is Hydro is dependent upon PUB approving its rate applications, continued good water-flow conditions, cold winters and old "accounting" for positive financial results.

Hydro, driven by a government weighed down by considerations beyond the interests of ratepayers, and helped by the PUB, is building a castle on a base of sand, with the prospects for ratepayers bleak, to say the least.


Graham Lane, a retired chartered accountant, was the chairman of the Public Utilities Board from 2004 to 2012.


Is the PUB getting cornered into granting annual 3.95 per cent rate increases to Hydro for the next 20 years? Join the conversation in the comments below.

Republished from the Winnipeg Free Press print edition October 23, 2013 A11


Updated on Wednesday, October 23, 2013 at 7:34 AM CDT: adds photo

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About Graham Lane

Graham Lane is a retired chartered accountant who worked in the public and private sectors for 50 years, concluding his career as chairman of the Manitoba Public Utilities Board.

He has also held key positions at Credit Union Central, Public Investments of Manitoba, the Manitoba Public Insurance Corp., the University of Winnipeg, and the Manitoba Worker's Compensation Board.

Before gaining his CA designation in Quebec, he was third in Canada in the then-national intermediate examination. He has a diploma in business administration from the University of Western Ontario and has served on numerous charitable and service boards.


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