Case Study:

Manitoba Hydro Financial Benchmarking

Manitoba Hydro | 2024

Atrium Economics was engaged by Manitoba Hydro, a Crown Corporation serving the province of Manitoba, to conduct a comprehensive financial benchmarking analysis. The project aimed to evaluate seven key issues for Manitoba Hydro:

 

  • In the absence of debt capitalization targets to guide rate authorization, how should the Manitoba PUB strike the correct balance between affordability for customers and financial integrity for Manitoba Hydro?
  • Which utilities are the most like Manitoba Hydro in terms of its operations, risk profile and ownership?
  • How does Manitoba Hydro compare with similar utilities in terms of financial metrics?
  • What financial metrics are currently being used by similar utilities in their rate-setting processes?
  • What is the range of financial metrics observed across similar utilities?
  • What financial metrics should Manitoba Hydro adopt and why?
  • What should be the suggested range of selected financial metrics for Manitoba Hydro?

Atrium benchmarked Manitoba Hydro’s financial metrics against a peer group of Canadian Crown utilities and U.S. public power entities, ensuring alignment with best practices and regulatory expectations. The findings resulted in recommended near-term and long-term financial thresholds to be used for rate-setting, strategic decision making and to promote long-term sustainability.

CHALLENGE

Manitoba Hydro faced increasing scrutiny over its financial health and rate-setting practices, particularly given the large low-income indigenous community that resides in its service territory. With the repeal of mandatory debt capitalization targets in 2025, the utility needed to establish credible financial targets that would support self-sufficiency, protect against business risks, maintain affordability, and maintain the province’s credit quality—especially given that its capital borrowing represented approximately 40% of Manitoba’s total provincial debt.

EXPERTISE

Atrium Economics applied its deep experience in utility financial analysis and industry practices to benchmark Manitoba Hydro against a curated set of peer utilities. Using a consistent methodology, Atrium calculated eighteen key financial metrics: operating margin, net profit margin, net income, return on assets, return on equity, debt capitalization, cash flow from operations / debt, free operating cash flow/debt, debt/EBITDA, EBIT coverage, EBITDA coverage, EBITDA less Capex coverage, cash flow from operations coverage, debt service coverage, current ratio, days cash on hand, cash flow/capex, and self-financing ratio —across the peer group. The team also conducted jurisdictional research and evaluated the role of financial targets in rate-setting processes. Atrium and Manitoba Hydro ran financial scenarios using the company’s production dispatch system interfaced with its financial forecast model to evaluate the financial outcomes of achieving a short list of key financial metrics under varying hydro-electric conditions (low water, average water, and high water).

OUTCOME

Atrium delivered a tailored set of financial targets for Manitoba Hydro, grounded in comparative analysis and regulatory context. The recommendations emphasized the integration of financial metrics into the rate-setting process to ensure long-term viability.

Key outcomes included:

• Identification of peer utilities with similar operational and risk profiles.

• Suggested ranges for financial metrics based on observed norms.

• Strategic guidance on incorporating financial targets into regulatory filings and internal planning and suggested time frames under which near-term and long-term financial metrics should be achievable.

• Additional recommendations, including the design of an Affordability program, the establishment of a low water reserve, and the implementation of a capital tracker for large infrastructure projects.

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