PUBLIC UTILITIES BOARD WRITTEN FINAL ARGUMENT OF MANITOBA HYDRO 2017/18 & 2018/19 GENERAL RATE APPLICATION February 5, 2018 Table of Contents 1. REQUESTED APPROVALS AND SUMMARY OF REASONS FOR THE RATE INCREASES .............. 1 1.1 Background and Overview of Approvals Sought .............................................................. 1 1.1 Organization of the Final Argument ................................................................................. 3 2 A 7.9% RATE INCREASE CANNOT BE WRONG ......................................................................... 5 2.1 Manitoba Hydro Needs the Rate Increases Requested in this Application ..................... 5 2.1.1 Bipole III Reliability Project Entering Service ................................................................ 5 2.1.2 Current Rates Not Covering Current Costs and Cash Needs ........................................ 7 2.1.3 Impact of Keeyask on future cost structure must be taken into consideration ........ 12 2.1.4 Electricity Rates will continue to be Competitive ...................................................... 14 3 MANITOBA HYDRO’S NEW FINANCIAL PLAN......................................................................... 17 3.1 Taking Action on Unsustainable Debt Levels ................................................................. 17 3.1.1 Greater flexibility ........................................................................................................ 18 3.1.2 Lessening interest rate risk ......................................................................................... 19 3.2 Interveners have a Lack of Comprehension with respect to Role and Ownership of Equity 24 3.3 Ratepayer Benefits ......................................................................................................... 28 3.4 A 20-Year Financial Plan does not work ......................................................................... 31 3.4.1 Prolonged and unmitigated exposure to interest rate increases .............................. 31 3.4.2 Cannot Forecast Breakeven or Negative Income ....................................................... 34 3.4.3 Prudent Financial Plans Do Not Depend on the Back-End of a Twenty Year Financial Forecast Proving Accurate ..................................................................................................... 38 3.4.4 Capital markets are growing more concerned ........................................................... 40 3.4.5 Intergenerational Equity argument is flawed and hypocritical .................................. 41 3.5 Changing assumptions in the Financial Model in order to defer the need for rate increases is not prudent ............................................................................................................ 43 3.5.1 Assumption of Capacity Values for Uncommitted Firm Energy. ................................ 43 3.5.2 Change regulatory accounting policy to increase income in the near term. ............. 44 3.5.3 Assume 12 Year WATM. ............................................................................................. 44 3.5.4 Curtail DSM spending assumptions. ........................................................................... 45 3.5.5 Curtail government payments. ................................................................................... 45 3.6 MH15 Rate Plan Fails ...................................................................................................... 46 4 THE FINANCIAL OUTLOOK HAS DETERIORATED SIGNIFICANTLY ........................................... 49 4.1 Export Revenues Are Materially Lower .......................................................................... 49 4.2 Domestic Load Growth and Revenues are Materially Lower ........................................ 50 4.3 Debt Has Gone Up .......................................................................................................... 51 5 WITHOUT HIGHER RATE INCREASES MANITOBA HYDRO CANNOT SUPPORT ITS DEBT ....... 56 5.1 Cost of Debt Financing is Manitoba Hydro’s Largest Expense ....................................... 56 5.2 No Precedent for Pending Level of Debt Burden on Domestic Customers ................... 57 5.3 Debt Management Can’t Mitigate Longer Term Risk .................................................... 61 5.4 Debt to EBITDA is a Troubling Metric ............................................................................. 62 5.5 Capital Markets Are Concerned with Rate Inadequacy ................................................. 65 5.6 Financial Targets Are Not Met Without Higher Rate Increases ..................................... 66 5.6.1 EBITDA to Interest ...................................................................................................... 68 5.6.2 EBIT to Interest ........................................................................................................... 73 5.6.3 Capital Coverage Ratio ............................................................................................... 74 5.6.4 EBITDA to Cash Burdens ............................................................................................. 75 5.7 Past Leverage Levels of No Current Relevance .............................................................. 76 6 FINANCIAL TARGETS AND THE ROLE OF RESERVES IN MANAGING FINANCIAL HEALTH ...... 78 6.1 Overview of Financial Targets ........................................................................................ 78 6.1.1 Equity Ratio: ................................................................................................................ 78 6.1.2 Interest Coverage Ratio: ............................................................................................. 78 6.1.3 Capital Coverage Ratio: .............................................................................................. 79 6.2 Financial Targets are a Measure of Financial Health ..................................................... 79 6.3 There is No Need to Adjust Targets for Purposes of Ratemaking ................................. 80 6.4 The Role of Reserves in Managing Manitoba Hydro’s Risks .......................................... 82 6.5 Debt Markets Care about Debt:Equity Ratio ................................................................. 91 6.6 The Importance of Manitoba Hydro Being Viewed as Self-Supporting ......................... 92 6.7 What a Supportive Regulatory Regime Really Means ................................................... 96 7 MYTH OF THE 3.95% RATE PROMISE ..................................................................................... 98 8 PROJECTED REVENUES ARE DOWN ..................................................................................... 102 8.1 Overview ...................................................................................................................... 102 8.2 Load Forecast ............................................................................................................... 102 8.2.1 Future Manitoba Load Forecast is Trending Down .................................................. 102 8.2.2 Load Forecast Methodology is Reasonable .............................................................. 104 8.2.3 Top Consumers and Potential Large Industrial Load (“PLIL”)................................... 106 8.2.4 Population Forecast .................................................................................................. 107 8.2.5 Price Elasticity well within Literature Review........................................................... 108 8.2.6 Evidence presented during public presentations ..................................................... 108 8.2.7 Demand Side Management and Efficiency Manitoba .............................................. 110 8.2.8 Forecast Conclusion .................................................................................................. 111 8.3 Export Revenue Projections are Reasonable ............................................................... 111 8.3.1 Consensus Price Forecast Process is Reasonable ..................................................... 111 8.3.2 Other Export Revenue Projections are Reasonable ................................................. 112 8.3.3 Manitoba Hydro Uses Multiple Sources in its Short-Term Export Price Forecast ... 113 8.3.4 Review of SaskPower Sale and Transmission Construction Deemed Beneficial ...... 114 8.3.5 No Additional Capacity Resources Required in MISO Until 2023 Time Frame ........ 114 8.3.6 Long Term Dependable Product Premium No Longer Exists ................................... 115 8.3.7 Value of Generation Capacity in the Future is Uncertain......................................... 116 8.3.8 Export Prices are Continuing to Fall ......................................................................... 117 8.3.9 Manitoba Hydro’s Unit Export Revenue has Historically Been Overestimated ....... 118 8.3.10 Impact of Potential Longer Term Premium and Generation Capacity Revenue Doesn’t Change Current Rate Needs ................................................................................... 120 8.3.11 Current Water Conditions Have Not Changed Significantly from IFF16 Forecast and Are Less Favourable Than IFF16 Update. ............................................................................ 122 8.4 Interest Rate Outlook ................................................................................................... 123 9 SUSTAINING CAPITAL ..........................................................................................................