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Manitoba Hydro: Focus on asset renewal for growth [free access]

December 10, 2013

Replacement and refurbishment of ageing infrastructure is a key priority for transmission system operators in industrialised economies to maintain network reliability and provide for expected load growth. Asset renewal-based investments are increasingly driving the development plans of Canada’s Manitoba Hydro, through new high voltage transmission interconnections as well as upgradation of key network assets such as substations and transformers.

 

Manitoba Hydro is a government-owned integrated power utility in the Canadian province of Manitoba. The utility is governed by the Manitoba Hydro-Electric Board, while regulatory oversight is carried out by the Public Utilities Board (PUB) of Manitoba. About 96 per cent of Manitoba Hydro’s total power supply is based on hydroelectric power generated at 15 power stations. The company also owns and manages a transmission and distribution network of over 90,000 km. In addition to electricity, the utility also manages the natural gas transmission business in the province.

 

Manitoba’s existing transmission infrastructure comprises a total line length of 12,800 km, operating at voltage levels of 115 kV, 138 kV, 230 kV and 500 kV. The company’s power transmission operations include cross-border transactions, which are important to generate additional cash flows and keep overall tariffs competitive. Manitoba Hydro has been keen on building transmission interconnections with the US to tap into the latter’s rising demand for hydroelectric and other non-fossil fuel-based power as utilities are keen to diversify their portfolios by replacing coal-based power plants and minimising dependence on natural gas. In 2012-13, Manitoba’s export sales aggregated CAD353 million. As per the company, 88 per cent of this was from the US market, while the rest was from sales to Canadian markets.

 

Manitoba Hydro is faced with an ageing transmission infrastructure, which has to be upgraded and augmented to maintain network performance and reliability standards. The ageing infrastructure entails rising costs of maintenance. This is one of the reasons why the utility has applied to the regulator for tariff hikes. For instance, company estimates show that in the next 20 years, about 117,000 wood poles in its transmission and distribution network will have to be replaced, at an estimated cost of CAD400 million. Another example is that of substation replacement or refurbishment, which will cost CAD630 million over the next 12 years. As such, asset renewal is among the major factors driving capital expenditure for the next four to five years.

 

In May 2013, the regulator approved a 3.5 per cent across-the-board increase in tariffs for Manitoba Hydro’s consumers. Tariff revisions are important to cover costs of asset refurbishments and capacity augmentation undertaken by the utility. In its observations, the regulator has also pointed to the rising level of operations, maintenance and administration costs at Manitoba Hydro. Costs in this category are projected at CAD470.6 million in 2013-14 against CAD377.6 million in 2009-10.

 

In addition to infrastructural and operational issues, proposed changes in accounting standards are expected to entail higher costs for the company. As per PUB, Manitoba Hydro faces an additional CAD36 million in its overhead costs due to the adoption of International Financial Reporting Standards (IFRS) in 2015-16. This is because the new accounting standards do not allow the capitalisation of advertising and promotional activities, administrative and other general overhead expenditures, property and business taxes and interest on common assets. IFRS also does not recognise deferred expenditures of the utilities, which in the case of Manitoba Hydro refers to the expenses on demand side management in its power distribution business. Meanwhile, interim accounting standards have been issued to enable transition to IFRS. All the same, the implementation of IFRS is not expected till 2015-16.

 

Manitoba Hydro has also sought opportunities in the power transmission business beyond its provincial borders. Its subsidiary, Manitoba Hydro International, recently signed a contract with Transmission Company of Nigeria (TCN) for managing and overseeing the latter’s restructuring process and preparing for an eventual privatisation. This is essentially a consulting service, in which the company’s mandate is to enable a turnaround in TCN’s business without committing its own resources. The USD23 million contract, signed in July 2012, has a three year mandate for reviving TCN’s business performance. As per the contract, Manitoba had to be given full authority for running TCN from September 1, 2012. However, Manitoba was only given control of the company in March 2013.

 

Financials

In the first six months of the financial year 2013-14, Manitoba Hydro incurred a net loss of CAD2 million on consolidated electricity and gas operations as compared to the net loss of CAD43 million in the corresponding period of previous year. Improvement in financial results has been attributed to increased revenues in the electricity business. During the six months of 2013-14, revenue from electricity sales was CAD606 million, a 5 per cent increase over the previous year. Due to higher export prices and an increase in hydropower generation, revenues from cross border energy sales registered an 18 per cent increase.

 

In the financial year 2012-13, electricity revenues aggregated CAD1,733 million, registering a 9.5 per cent increase over the previous year. During the year, the company’s revenues from cross border sale of energy decreased due to lower exports to the US markets. The company also reported a capital expenditure of CAD1,003 million in 2012-13 compared to CAD1,093 million in the previous year. Expenditure on infrastructure upgrades was comparatively lower in 2012-13 as against the previous year.

 

With the implementation of major capital projects, Manitoba Hydro’s financing costs are expected to rise significantly over the next two decades. As per the PUB, the company’s long-term debt is expected to reach CAD29 billion by 2027, which will lead to a financing cost of over CAD1.6 billion in 2028. An escalation in financing cost is also projected due to possible upward revision in interest rates.

 

Projects and Investments

Manitoba’s ongoing projects are part of its development plan, which aims to augment existing capacity in both generation and transmission to cater to future growth in electricity demand. In the power generation segment, two major projects are the 695 MW Keeyask generating station, expected to be commissioned by 2019, and the 1,485 MW Conawapa generating station, due for commissioning by 2025.

 

In the power transmission segment, upcoming projects include the construction of transmission lines associated with the Keeyask and Conawapa power generating projects, and a new transmission interconnection between Manitoba and the US to enhance the capacity for exports and improve reliability. In addition, projects are underway to expand the transmission network and improve performance such as Bipole-III, Point du Bois, Tyndall, and St Vital transmission complex.

 

Following is a brief review of the key transmission projects under construction.

 

Manitoba Hydro’s recent tariff revisions as well as opportunities in cross border transactions are expected to help the company maintain revenue growth and at the same time raise sufficient capital for upcoming projects. It also helps that the company has government support to boost its creditworthiness for future debt requirements.

 

(CAD1=USD0.94)