Quarterly report

For the 6 months ended September 30, 2015

Comments by the Chair of the Board and by the President and Chief Executive Officer

Financial overview

Manitoba Hydro’s consolidated net loss from electricity and natural gas operations was $43 million for the first 6 months of the 2015–16 fiscal year compared to a net loss of $13 million for the same period last year. The increase in the net loss is primarily attributable to higher expenses partially offset by higher extraprovincial and domestic revenues.

The consolidated net loss was comprised of a $19 million loss in the electricity sector and a $24 million loss in the natural gas sector. The loss in the natural gas sector is the result of seasonal variations in the demand for natural gas and is expected to be recouped over the winter heating season.

Manitoba Hydro is experiencing lower opportunity export market prices for electricity than projected as a result of low natural gas prices which are expected to result in downward pressure on net income in 2015–16. Manitoba Hydro is forecasting that financial results will improve somewhat over the balance of the fiscal year and net income should reach approximately $30 million by March 31, 2016. This forecast is based on the continuation of current water flow conditions and the assumption of normal winter weather. There may be additional financial reporting impacts of the recent Public Utilities Board (PUB) rate decision for 2015–16 but the financial statements have not been adjusted pending further clarification from the PUB.

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Electricity operations

Revenues from electricity sales within Manitoba totalled $620 million for the 6-month period, which was $8 million or 1% higher than the same period last year. The increase in domestic revenue was primarily attributable to the August 1, 2015 electric rate increase. Extraprovincial revenues of $244 million were $16 million or 7% higher than the same period last year reflecting favourable foreign exchange impacts on U.S. sales, partially offset by lower dependable sales volumes. Energy sold in the export market was 6.2 billion kilowatt-hours compared to 6.6 billion kilowatt-hours sold in the same period last year.

Expenses attributable to electricity operations, including the net movement in regulatory deferral balances, totalled $933 million for the 6-month period, an increase of $50 million or 6% higher than the same period last year. The increase was primarily the result of a $25 million increase in finance expense, an $18 million increase in other expenses and a $14 million increase in operating and administrative costs. These increases were partially offset by a $13 million change in the net movement in regulatory deferral account balances. The increase in finance expense was primarily due to higher volumes of long-term debt to finance capital expenditures and the impact of the weakening Canadian dollar partially offset by lower interest rates. The increase in other expenses, which is mainly offset by the change in the net movement in regulatory deferral accounts is primarily the result of higher spending on demand side management programs (DSM). The increase in operating and administrative costs is mainly due to higher benefit costs as a result of a lower market driven discount rate and higher costs of system maintenance.

The net loss before net movement in regulatory deferral balances is $30 million. After considering the net movement of $5 million in the regulatory deferral account balances, there is a net loss of $25 million of which $19 million is attributable to Manitoba Hydro and $6 million is attributable to non-controlling interest. The noncontrolling interest represents Taskinigahp Power Corporation’s 33% share of the Wuskwatim Power Limited Partnership’s operating results, for the first 6 months of the 2015–16 fiscal year.

Capital expenditures for the 6-month period amounted to $1,001 million compared to $943 million for the same period last year. Expenditures during the current period included $354 million related to future Keeyask generation, $336 million for the Bipole III project and $36 million for the Pointe du Bois spillway replacement project. The remaining capital expenditures were incurred for ongoing system additions and modifications necessary to meet the electrical service requirements of customers throughout the province. The corporation also incurred $22 million for electric DSM programs.

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Natural gas operations

In the natural gas sector, a net loss of $24 million was incurred for the 6-month period compared to a $20 million net loss for the same period last year. Revenue, net of cost of gas sold (net revenue), was $40 million which was $10 million higher than the same period last year. The increase in net revenue was largely the result of lower gas costs compared to the prior year partially offset by warmer weather than the previous period. Delivered gas volumes were 564 million cubic metres compared to 596 million cubic metres for the same period last year.

Expenses attributable to natural gas operations excluding cost of gas sold amounted to $70 million which is the same as last year.

The net loss before net movement in regulatory deferral balances is $30 million. The $14 million change in the regulatory deferral account balance over the prior year is primarily attributable to a greater differential in the prior year between the actual cost of gas compared to PUB approved rates. After considering the net movement of $6 million in the regulatory deferral account balances, there is a net loss of $24 million.

Capital expenditures in the natural gas sector were $18 million for the current 6-month period compared to $16 million for the same period last year. Capital expenditures are related to system improvements and other expenditures necessary to meet the natural gas service requirements of customers throughout the province. The corporation also incurred $4 million for gas DSM programs.

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Electricity Rate Increase

Electricity rates for all customer classes increased by approximately 3.95% effective August 1, 2015. The rate increase is necessary to fund the capital investment to meet the growing energy requirements of Manitoba, replace aging utility assets and address the increased capacity needs of the existing electricity system to ensure a safe and reliable energy supply for Manitobans.

The PUB directed that 1.8% of the increase be used to support Manitoba Hydro’s ongoing operations and the remaining 2.15% be added to the previously established deferral account to mitigate rate increases when the Bipole III project comes into service.

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100 MW sale to SaskPower announced

On September 13, 2015, Manitoba Hydro announced the signing of a Term Sheet for a 20-year agreement between Manitoba Hydro and SaskPower for the sale of a minimum of 100 megawatts (MW) of power starting in 2020. The sale requires 18% of the dependable energy output from the Keeyask Generating Station which is under construction on the Nelson River.

The sale requires the construction of an 80-kilometre, 230 kilovolt (kV) transmission line between Birtle, Manitoba and Tantallon, Saskatchewan with both utilities sharing the cost.

Manitoba Hydro has $9 billion worth of firm export sales with U.S. and Canadian utilities with more than $4 billion of those contracts directly dependent on the Keeyask project. Manitoba Hydro signed an earlier agreement with SaskPower to supply 25 MW beginning November 2015 until May 2022. In 2013, the 2 utilities signed a Memorandum of Understanding in which the utilities agreed to study sales of up to 500 MW of power to Saskatchewan beginning in about 2020.

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Final preferred route selected for Manitoba–Minnesota Transmission Project

On September 23, 2015, Manitoba Hydro announced the Final Preferred Route for the Manitoba-Minnesota Transmission Project. As part of the process of securing the license for the project under the Environment Act of Manitoba, the corporation filed an environmental impact statement with provincial regulators.

The project involves the construction of a 213-kilometre, 500 kV line from the Dorsey Converter Station near Rosser to the Manitoba border crossing near Piney where it will connect to the proposed Great Northern Transmission Line (GNTL) being built by Minnesota Power. The GNTL will run from the border to the Blackberry Substation near Grand Rapids, Minnesota, which is approximately 100 kilometres northwest of Duluth, Minnesota.

The line is required to increase the delivery of surplus power to markets in the U.S. and to enhance Manitoba Hydro’s import capability from the U.S. during droughts or other system emergencies, improving the reliability of the province’s power supply.

The estimated cost of the project is $350 million, with an anticipated in service date of 2020, subject to regulatory approval.

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Power Smart LED street light conversion update

More than 15,000 energy efficient street lights have been installed throughout the province under Manitoba Hydro’s Power Smart* LED Roadway Lighting Conversion Program. The program, launched in June 2014, will result in the replacement over the next 4 years of approximately 150,000 high pressure sodium (HPS) streetlights with new light emitting diode (LED) streetlights. By the end of the 4-year period, the program will result in the replacement of 90% of the older-style street lights throughout the province, making it one of the largest geographic replacement programs in North America.

The goal of the program is to save an estimated 5 megawatts and 35 gigawatt-hours of energy, which is the equivalent to the energy used by 2,200 average homes in Manitoba in 1 year. In addition to using 40% less electricity, LED lights have a longer life expectancy, better performance in cold weather and improved quality of light for pedestrians and drivers. Further, they provide municipalities and cities with significantly lower maintenance and replacement costs.

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Bill Fraser photo
Bill Fraser signature
Darren Rainkie photo
Darren Rainkie signature
William Fraser, FCA
Chair of the Board
Darren Rainkie, CA
Acting President and Chief Executive Officer
November 13, 2015

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Consolidated statement of income in millions of dollars (unaudited)
  6 months ended September 30 3 months ended September 30
2015 2014 2015 2014
Revenues
Domestic
– Electric 620 612 310 298
– Gas 96 109 36 40
Extraprovincial 244 228 133 126
Other 44 37 23 20
  1,004 986 502 484
Expenses
Cost of gas sold 56 79 23 27
Operating and administrative 298 284 148 145
Finance expense 285 260 142 136
Depreciation and amortization 195 195 97 105
Water rentals and assessments 61 62 30 33
Fuel and power purchased 57 54 31 27
Capital and other taxes 62 58 32 29
Other expenses 50 32 27 17
  1,064 1,024 530 519
Net income (loss) before net movement in regulatory deferral account balances (60) (38) (28) (35)
Net movement in regulatory deferral account balances 11 12 11 5
Net income (loss) (49) (26) (17) (30)
Net income (loss) attributable to:
Manitoba Hydro (43) (13) (14) (23)
Non-controlling interest (6) (13) (3) (7)
  (49) (26) (17) (30)

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Consolidated statement of financial position in millions of dollars (unaudited)
  As at September 30, 2015 As at September 30, 2014
Assets
Current assets 915 847
Capital assets 16,081 14,434
Non-current assets 832 742
Regulatory deferral account debit balances 361 383
  18,189 16,406
Liabilities and equity
Current liabilities 1,268 758
Long-term debt (net) 12,895 11,501
Other long-term liabilities 1,582 1,364
Deferred revenue 466 404
Non-controlling interest 131 111
Retained earnings 2,683 2,630
Accumulated other comprehensive income (836) (362)
  18,189 16,406

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Consolidated cash flow statement in millions of dollars (unaudited)
  6 months ended September 30 3 months ended September 30
2015 2014 2015 2014
Operating activities
Cash receipts from customers 1,115 1,119 516 503
Cash paid to suppliers and employees (608) (703) (326) (220)
Net interest (333) (304) (174) (158)
  174 112 16 125
Financing activities 743 885 351 513
Investing activities (1,030) (832) (526) (479)
Net increase (decrease) in cash (113) 165 (159) 159
Cash at beginning of period 494 142 540 148
Cash at end of period 381 307 381 307

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Consolidated statement of comprehensive income in millions of dollars (unaudited)
  6 months ended September 30 3 months ended September 30
2015 2014 2015 2014
Net income (loss) attributable to Manitoba Hydro (43) (13) (14) (23)
Other comprehensive income (loss)
Unrealized foreign exchange gains (losses) on debt in cash flow hedges (107) (25) (138) (87)
Realized foreign exchange (gains) losses on debt in cash flow hedges (9) (5)
  (116) (25) (143) (87)
Comprehensive income (loss) (159) (38) (157) (110)

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Segmented information in millions of dollars (unaudited)
6 months ended September 30 Electricity Gas Total
2015 2014 2015 2014 2015 2014
Revenue 908 877 96 109 1,004 986
Expenses 938 875 126 149 1,064 1,024
Net income (loss) before net movement in regulatory deferral account balances (30) 2 (30) (40) (60) (38)
Net movement in regulatory deferral account balances 5 (8) 6 20 11 12
Net income (loss) (25) (6) (24) (20) (49) (26)
Net income (loss) attributable to:
Manitoba Hydro (19) 7 (24) (20) (43) (13)
Non-controlling interest (6) (13) (6) (13)
  (25) (6) (24) (20) (49) (26)
3 months ended September 30 Electricity Gas Total
2015 2014 2015 2014 2015 2014
Revenue 466 444 36 40 502 484
Expenses 471 457 59 62 530 519
Net income (loss) before net movement in regulatory deferral account balances (5) (13) (23) (22) (28) (35)
Net movement in regulatory deferral account balances 4 (3) 7 8 11 5
Net income (loss) (1) (16) (16) (14) (17) (30)
Net income (loss) attributable to:
Manitoba Hydro 2 (9) (16) (14) (14) (23)
Non-controlling interest (3) (7) (3) (7)
  (1) (16) (16) (14) (17) (30)
Total assets 17,504 15,715 685 691 18,189 16,406

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Generation and delivery statistics
  6 months ended September 30 3 months ended September 30
2015 2014 2015 2014
Electricity in gigawatt-hours
Hydraulic generation 17,202 17,557 8,654 9,120
Thermal generation 16 16 16 11
Scheduled energy imports 22 42 13 12
Wind purchases (MB) 405 420 193 187
Total system supply 17,645 18,035 8,876 9,330
Gas in millions of cubic metres
Gas sales 248 283 79 87
Gas transportation 316 313 138 130
  564 596 217 217

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