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Risk Allegations Response

A message from Bob Brennan, President & CEO, Manitoba Hydro:

I want to assure all Manitobans that despite the highly-publicized allegations to the contrary, Manitoba Hydro's power system is secure, our finances are strong and the future is brighter than ever. I fully support the review into the allegations to be undertaken by the Auditor General of Manitoba or her designate. For added assurance, Manitoba Hydro has also engaged two highly-respected consulting firms, ICF International and KPMG, to provide independent assessments of Manitoba Hydro's risk management practices. In the meantime, I would like to provide you with my comments on some of the issues that have been raised over the past several weeks:

Energy Supply is Secure

Security of energy supply is fundamental to the mandate of Manitoba Hydro and has always been one of our top priorities. Our record of system reliability ranks among the very best of all energy utilities in Canada. It's a record we're proud of and we will never, under any circumstances, allow the safety and reliability of our system to be compromised.

To further enhance system reliability, a major new high voltage direct current transmission line, Bipole III, is planned for construction with a 2017 in service date. Bipole III will provide for a separation from the existing high voltage transmission line from northern Manitoba and will reduce the risk of power outages due to major storms or other uncontrollable events. Bipole III will also provide additional capacity to transmit power from planned new generation facilities in the north.

There has also been some suggestion that Manitoba Hydro has oversold future energy supplies in export markets which will lead to energy shortages in Manitoba. In fact, export contracts put Manitoba load first and Manitoba Hydro has the right to curtail exports in the event of unforeseen circumstances in Manitoba. Furthermore, our planned export contracts will result in additional interconnections with our neighbouring utilities and will result in enhanced security of supply for all Manitoba Hydro customers.

In a recent report on long-term contracts prepared for Manitoba Hydro, ICF International commented that, "Manitoba Hydro has the lowest domestic electricity rates in Canada and North America in part because of exports. Export prices greatly exceed Manitoba Hydro's embedded generation costs, and the revenues are used to decrease domestic rates and/or to provide the financial wherewithal to withstand droughts without rate shocks." ICF further stated that, "It is appropriate for Manitoba Hydro to enter into long-term firm contracts for 20 to 30 years into the future in the manner in which the Corporation is proposing."

Finances are Strong

Manitoba Hydro is currently in the strongest financial position in the history of the Corporation. This is evidenced by the achievement last year of the Corporation's long-time target for the debt/equity ratio. The debt/equity ratio is recognized by rating agencies and financial institutions as one of the primary indicators of a Corporation's financial strength. In 2002, the Board of Manitoba Hydro set a target to achieve a debt/equity ratio of 75:25 by 2011/12. That target was achieved last year – three full years ahead of schedule.

While Manitoba Hydro, like any other business, is not immune from the financial impacts of the world economic downturn, we are especially well-positioned to prosper in the years ahead. Our financial forecasts clearly indicate that Manitoba Hydro's financial position will continue to be strong and that investments made in new generation and transmission today will pay huge dividends to future generations of Manitobans.

Open and Caring Corporation

Suggestions have been made that Manitoba Hydro has somehow become a secretive organization. I can't think of any organization that comes under more scrutiny than does Manitoba Hydro. We hold three well-publicized Public Accountability meetings in different parts of the province each year, I personally appear before a Crown Corporations Committee of the Legislature each year, we are subject to regular mandate and performance reviews by the Crown Corporations Council, our financial records are scrutinized regularly by internal and external auditors, the Auditor General provides additional oversight on Manitoba Hydro's financial accountability, we review our financial status at least once annually with the three major credit rating agencies, we obtain Treasury Board approval on all capital and borrowing requirements, and our rates are subject to continuous review and approval by The Public Utilities Board (PUB).

With respect to PUB, there has been some suggestion that we are withholding information that the PUB needs to effectively do its job. Manitoba Hydro is more than willing to provide whatever information is necessary for the PUB to fulfill its important rates approval mandate. However, because Manitoba Hydro operates in a very competitive export power marketplace, it is necessary to provide the PUB with information in such a way that does not put Manitoba Hydro at a competitive disadvantage. Both Manitoba Hydro and the PUB are working hard to improve our currently cooperative relationship.

Drought was Well-Managed

In fiscal year 2003/04, Manitoba Hydro incurred the largest financial loss in its history – a total loss of $436 million. Was this loss avoidable? Absolutely not.

Because perfect foreknowledge is not possible (with respect to future precipitation and extreme weather), when low water conditions were experienced in 2003, Manitoba Hydro prepared for the worst drought on record and made certain that all Manitobans would be provided with sufficient power in a worst case scenario. Fortunately, the winter of 2003/04 ended up being warmer than normal and water supplies were slightly better than the worst case scenario (the drought ended up being the 3rd worst on record as opposed to being equal to the worst on record). Had Manitoba Hydro known this in advance, which was not possible, the cost of the drought could have been reduced to some extent. However, because reservoirs were not fully drained in 2003/04, incremental revenue was generated in the following years through the deferred sale of electricity out of these reservoirs.

Following the drought, the PUB reviewed Manitoba Hydro's drought management operations. In Order 143/04 the PUB stated, "The Board is satisfied that MH took reasonable steps to mitigate its loss during the drought, including its actions in the futures market to reduce its export delivery obligations".

Highly Skilled and Dedicated Employees

I am extremely proud of Manitoba Hydro's employees and their record of providing safe, reliable and low-cost energy to Manitobans. No matter how adverse the conditions or how difficult the task, Hydro employees have a reputation for rising to the occasion and overcoming whatever obstacles they may encounter. I am very confident in the abilities of all Hydro employees to meet our current and future challenges with the same enthusiasm, professionalism and innovative spirit that has made Manitoba Hydro the great company that it is today.

Investing in the Future

Manitoba Hydro is entering an exciting new decade of investment in the future of our province. Major projects such as Keeyask, Conawapa and Bipole III transmission will require large capital investments but the returns to Manitobans are many times greater and will endure for generations to come. It is essential that we approach this decade of investment with confidence and that Manitoba retains its rightful status as the province with the most environmentally sustainable, lowest-cost and most reliable supply of energy in the world.