Manitoba Committee Hansard — 24 September 2003 (Crown Corporations Committee, Sitting 01, 38th Legislature, 1st Session)

38-1-cc01

Manitoba — Debates (Hansard)

First Session - Thirty-Eighth Legislature of the Legislative Assembly of Manitoba Standing Committee on Crown Corporations Chairperson Mr. Daryl Reid Constituency of Transcona Vol. LlV No. 1 – 6:30 p.m., Wednesday, September 24, 2003 ISSN 1708-6604

MANITOBA LEGISLATIVE ASSEMBLY First Session–Thirty-Eighth Legislature Member Constituency Political Affiliation AGLUGUB, Cris The Maples N.D.P. ALLAN, Nancy St. Vital N.D.P. ALTEMEYER, Rob Wolseley N.D.P. ASHTON, Steve, Hon. Thom pson N.D.P. BJORNSON, Peter Gimli N.D.P. BRICK, Marilyn St. Norbert N.D.P. CALDWELL, Drew, Hon. Brandon East N.D.P. CHOMIAK, Dave, Hon. Kildonan N.D.P. CUMMINGS, Glen Ste. Rose P.C. DERKACH, Leonard Russell P.C. DEWAR, Gregory Selkirk N.D.P. DOER, Gary, Hon. Concordia N.D.P. DRIEDGER, Myrna Charleswood P.C. DYCK, Peter Pembina P.C. EICHLER, Ralph Lakeside P.C.

FAURSCHOU, David Portage la Prairie P.C. GERRARD, Jon, Hon. River Heights Lib. GOERTZEN, Kelvin Steinbach P.C. HAWRANIK, Gerald Lac du Bonnet P.C. HICKES, George, Hon. Point Douglas N.D.P. IRVIN-ROSS, Kerri Fort Garry N.D.P. JENNISSEN, Gerard Flin Flon N.D.P. JHA, Bidhu Radisson N.D.P. KORZENIOWSKI, Bonnie St. James N.D.P. LAMOUREUX, Kevin Inkster Lib. LATHLIN, Oscar, Hon. The Pas N.D.P. LEMIEUX, Ron, Hon. La Verendrye N.D.P. LOEWEN, John Fort Whyte P.C. MACKINTOSH, Gord, Hon. St. Johns N.D.P. MAGUIRE, Larry Arthur-Virden P.C. MALOWAY, Jim Elmwood N.D.P. MARTINDALE, Doug Burrows N.D.P. McGIFFORD, Diane, Hon.

Lord Roberts N.D.P. MELNICK, Christine Riel N.D.P. MIHYCHUK, MaryAnn, Hon. Minto N.D.P. MITCHELSON, Bonnie River East P.C. MURRAY, Stuart Kirkfield Park P.C. NEVAKSHONOFF, Tom Interlake N.D.P. OSWALD, Theresa Seine River N.D.P. PENNER, Jack Emerson P.C. REID, Daryl Transcona N.D.P. REIMER, Jack Southdale P.C. ROBINSON, Eric, Hon. Rupertsland N.D.P. ROCAN, Denis Carman P.C. RONDEAU, Jim Assiniboia N.D.P. ROWAT, Leanne Minnedosa P.C. SALE, Tim, Hon. Fort Rouge N.D.P. SANTOS, Conrad Wellington N.D.P. SCHELLENBERG, Harry Rossmere N.D.P. SCHULER, Ron Springfield P.C. SELINGER, Greg, Hon. St. Boniface N.D.P.

SMITH, Scott, Hon. Brandon West N.D.P. STEFANSON, Heather Tuxedo P.C. STRUTHERS, Stan Dauphin-Roblin N.D.P. TAILLIEU, Mavis Morris P.C. TWEED, Mervin Turtle Mountain P.C. WOWCHUK, Rosann, Hon. Swan River N.D.P.

1 LEGISLATIVE ASSEMBLY OF MANITOBA THE STANDING COMMITTEE ON CROWN CORPORATIONS Wednesday, September 24, 2003 TIME – 6:30 p.m. LOCATION – Winnipeg, Manitoba CHAIRPERSON – Mr. Daryl Reid (Transcona) VICE-CHAIRPERSON – Ms. Christine Melnick (Riel) A TTENDANCE - 11 – QUORUM - 6 Members of the Committee present: Hon. Messrs. Sale, Smith Messrs. Bjornson, Cummings, Dewar, Jha, Loewen, Ms. Melnick, Mrs. Mitchelson, Messrs. Reid, Tweed APPEARING: Mr. Bob Brennan, President and Chief Executive Officer, Manitoba Hydro Mr. Vic Schroeder, Chairman, the Manitoba Hydro-Electric Board Hon.

Jon Gerrard, MLA for River Heights Mr. Ron Schuler, MLA for Springfield Mr. Jack Penner, MLA for Emerson MATTERS UNDER DISCUSSION: Annual Report of the Manitoba Hydro- Electric Board for the year ended March 31, 2002. Annual Report of the Manitoba Hydro- Electric Board for the year ended March 31, . 2003 * * * Clerk Assistant (Mr. Rick Yarish): Good evening. Will the Standing Committee on Crown Corporations please come to order. The first item of business for the committee is the election of a Chairperson. Are there any nominations for this position? Mr.

Gregory Dewar (Selkirk): I nominate the Member for Transcona, Mr. Reid. Clerk Assistant: Mr. Reid has been nominated. Are there any other nominations? Hearing no other nominations, Mr. Reid, will you please take the Chair. Mr. Chairperson (Mr. Daryl Reid): Our next item of business is the election of a Vice- Chairperson. Are there any nominations? Mr. Dewar: I nominate the Member for Riel, Ms. Melnick. Mr. Chairperson: Are there any other nom- inations? Ms. Melnick has been nominated. Ms.

Melnick will be the Vice-Chair of the com- ittee. m This meeting has been called to consider the following reports: the Annual Report of Man- itoba Hydro-Electric Board, for the year ended March 31, 2002; and the Annual Report for Manitoba Hydro-Electric Board, for the year ended March 31, 2003. Before we get started, are there any sug- gestions from the committee as to how long this committee should sit this evening? Mr. Mervin Tweed (Turtle Mountain): I think it was suggested that we set a time of ten o'clock, with a review at that time. Mr. Chairperson: Mr. Tweed has suggested ten 'clock.

Is the committee agreed? [Agreed] o To be reviewed, Mr. Tweed? Mr. Tweed: Sure. Mr. Chairperson: Thank you.

2 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 Are there any suggestions as to the order in which we should consider the annual reports? Mr. Tweed: We would like to review them just as global questions, and then we will make con- sideration on the '02 at the end of the evening. Mr. Chairperson: Is it the will of the committee to consider the reports together? [Agreed] Does the honourable minister responsible for Hydro wish to make an opening statement, and would he please introduce his officials as well? Hon.

Tim Sale (Minister responsible for The Manitoba Hydro Act): I am joined by Vic Schroeder, known to many of you as my first boss and as the Chair of Hydro; and CEO and President of Manitoba Hydro, Bob Brennan. An Honourable Member: Many years ago. Mr. Sale: It was many years ago. Vic taught me all that I know. An Honourable Member: That is encouraging. Mr. Sale: Or thereabouts. Mr. Chairperson, if I may make just a few opening remarks, and then, I think, Mr. Brennan has a presentation for the committee to give us some orientation to the issues that Hydro has faced and is facing.

They are always very helpful presentations. It is a great honour that I have shared with many ministers past on all sides of the House to be the minister responsible for Manitoba Hydro. Regardless of party persuasion, Manitoba Hydro is known throughout the province as a very well- run corporation, prudent, an excellent employer, a corporation whose staff in every community in Manitoba are seen as contributing, not just through their work to the community, but in many cases through tremendous volunteer en- gagement in all the communities in which they live. I think all of us know that history.

We are honoured by their work and by the tremendous contribution this Crown corporation has made over its many years of service to our province. I want to speak reasonably briefly about the particular opportunities that we have before us, which are only beginning to be grasped. The abundant hydro-electricity that we have avail- able to us in Manitoba exceeds what is now installed. In other words, we have about 5000 megawatts installed. There is about 5500 avail- able to us, not counting what we might save through aggressive demand-side management and what we might generate through increased wind power.

Put most briefly, this is sufficient power, when used in a future economy based on hydro- gen, to provide for all Manitobans' needs without any diminishing of our standard of living or our ability to be a competitive economy. That, quite frankly, is unique in the Western world. There is no other jurisdiction that could generate clean electricity, turn that electricity into hydrogen, and store the energy in the form of hydrogen for use as a motive fuel or as a fixed-point fuel for non-mobile uses.

This is quite clearly a precious capacity for not you and me sitting around this table today and perhaps not in 10 years, but undeniably that next decade from ten to twenty years from now. That is why we positioned ourselves as the clean energy province. That is why we endorsed K y o t o . T h a t i s w h y w e h a v e s i g n e d a n a g r e e - ment with Iceland most recently to capture the opportunities that will come both in Canada and in our neighbouring country to the south to build out the new economy.

In the meantime we are exceedingly well served by a corporation that has planned pru- dently and over all of its time as a corporation to be able to supply Manitobans with reliable, high- quality power without interruption, regardless of the season, regardless of the flow of water, and regardless of the conditions that we find our- selves in. There is no denying that in this past 12 months we have found ourselves in a drought that is extremely severe. We will be very pleased to talk about the drought and how we have planned to deal with it in the present, how we

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 3 prepared to deal with such contingencies in the past, so that when we arrived at that situation, we would have more than ample reserves with which to meet the situation that we are facing his year. t The corporation's plans for the future have always been based on an extremely prudent set of assumptions. I think that you will see that in Mr. Brennan's presentation to us. In the interest of giving the committee as much time to ask questions as possible, we should have that rea- sonably brief presentation and ask Mr.

Brennan to share the information that he has with us now. Mr. Chairperson: Does the Official Opposition ritic have a statement to make? c * (18:40) Mr. Tweed: Mr. Chairperson, we are here to ask some questions of the chairman and president of Manitoba Hydro. We agree that Hydro is a well- run company. I think that in recent years our concerns and our issues have been driven by the fact that we have a concern that Hydro is no longer basically serving the people of Manitoba as much as they are serving the Government of Manitoba. Many of our questions will revolve around that.

We are anxiously awaiting the pre- sentation and look forward to the questions that follow. Mr. Chairperson: Thank you, Mr. Tweed. I understand that the representatives of Man- itoba Hydro-Electric Board wish to include a PowerPoint presentation as a part of their state- ment to this committee this evening. Is their leave of the committee to allow the PowerPoint presentation to occur? [Agreed] Thank you. Please proceed. Mr. Tweed: I think history would suggest that I should ask here how long this process will take and ask for it to be shortened by a few minutes. Mr.

Bob Brennan (President and Chief Exec- utive Officer, Ma nitoba Hydro): Mr. Chair- man, about half an hour or so. I will try to go as fast as I can. Mr. John Loewen (Fort Whyte): Just for clari- fication. In previous years, we have asked ques- tions as we have gone along rather than hold them all to the end. Is that the process we are going to follow? Obviously, there is a lot of information here. It is kind of hard to keep it all until the end. Mr. Brennan: I have no trouble with that. Mr. Tweed: Could we ask, I presume, as in the past, there have been hard copies. Mr. Brennan: Yes, we have hard copies. Mr.

Chairperson: So hard copies will be pre- sented to members of the committee then. Thank you. Mr. Brennan, please proceed. Mr. Brennan: This is just an outline of the pre- sentation. I will not go through that. This is a corporate vision of Manitoba Hydro. It is a vision that was developed by management and approved by the Hydro board. It is to be recognized as the best utility in North America with respect to safety, rates, reliability, customer satisfaction and environmental man- agement and to be considerate of all people that we come in contact with. This is our corporate mission.

It is pretty well right out of the act. It does reflect the changes that were made to The Manitoba Hydro ct in 1997. A These are the corporate goals. I think I would like to go through them quite briefly. The first goal we have is to continuously improve safety in the work environment. The product we deal with is a very safe product if you use it properly. Every now and then we do have the odd electrical accident. Once we do have one, the impacts are pretty severe. So it is very important for us to continually keep safety in the forefront. We want to provide our customers with excellent value.

When we talk about value, we are talking about rates, service, public safety, safety to the public generally–and that is especially important in the farm environment– reliability and power quality. We want to be a leader in strengthening our working relationship with the Aboriginal people. We want to improve the corporate financial strength. We want to

4 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 maximize our export power net revenues. We want to have a highly skilled, effective, inno- vative and diverse workforce that reflects the demographics of the province. We want to be proactive in protecting the environment and be a recognized leader in doing so, and we want to be an outstanding corporate citizen. We want to proactively support agencies responsible for business development within the province, and we want to be a leader in imple- menting cost-effective energy conservation and alternate energy programs. This is a small profile of Manitoba Hydro.

As at the end of March of 2003, our total rev- enues were $1.869 billion, extra-provincial sales $463 million and a net income of $71 million. This was a year when our hydraulic generation was less than average, and we still had a pretty respectable year. With retained earnings at $1.2 billion, achievement of our financial targets were taking place, and we had gross capital assets in service of $10 billion. This is a graph that shows all our generating facilities. I will not go through it all. It also shows our interconnection capability outside the province.

You can see that the majority of our export capability is to the United States. Some industry comparisons: This is a graph that I have especially liked myself. It compares the reliability of our service to the cost of the product. It is always a balancing act to make sure that we have high reliability because it usually means increased cost to do that, and at the same time we compare that reliability to our rates. As you can see, we are the lowest in the country, both in terms of reliability as well as the cost.

This is a graph that was not made up by Manitoba Hydro but it was made up by Edison Electric institute. It compares the 10 lowest cost utilities in North America, and as you can see Manitoba Hydro is the lowest. This is one that Manitoba Hydro made up. It was made up as of May 1, 2003, and it compares the various utilities across the country for a residential customer with a usage of 2000 kilowatt hours in a month. This is a small commercial account and it compares the bill for 10 000 kilowatt hours in a month with a load of 40 kilowatts, and Manitoba Hydro is the lowest there.

This is an industrial customer and I am not sure the name should have been on there. We try to keep individual customers and not identify them. It is something I missed in reviewing the presentation, but you can see the size of the load, 20 megawatts is a pretty good-sized load. There are other customers about that size and it uses 12 million kilowatt hours in a month. But you can see if that same customer were in a different province how much the bill would be. In our service area that is $352,000. Mr. Tweed: I am just going through this and I guess I got stuck on the residential monthly bill.

You use your source–one-month bill in a city with a population of 70 000 or more. Is that relevant in Manitoba with the rates being equal- ized? Mr. Brennan: No, but it is in other provinces. Mr. Tweed: So they have zone rating. Mr. Chairperson: Sorry, gentlemen, but the process is, for the purposes of Hansard, we have to identify the speaker, so if you could give me the opportunity to introduce you and then allow you to place your comments on the record. Mr.

Tweed: Basically, then, the reason you have used Winnipeg is so that you can get into the same size of community because of the zones of costs in other provinces. Mr. Brennan: Yes, in Manitoba's case, the rate is the same for that consumption. Mr. Chairperson: Please proceed, Mr. Brennan. Mr. Brennan: Here are some current consider- ations that I would quickly like to go through with you. The first one is just that, and we have talked about it at previous meetings, the world is restructuring both in the United States and Canada. It is deregulating generally. Certainly

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 5 when we looked at The Manitoba Hydro Act in '97, at that point we looked at what extent Manitoba Hydro should deregulate, and it was at that point that we opened up our transmission facilities to any customer inside or outside the province that wanted to use our transmission lines. They just had to pay Manitoba Hydro a tariff. At that point we did not deregulate the retail market. We were generally of the view, and I guess the government of the day was of the view, that it would not be in the interests of all residents of the province to do that.

Other prov- inces have, and you have seen the impacts in some provinces. Certainly, Ontario has been having its difficulties, and Alberta at one point as going through some difficulties as well. w * (18:50) What it has done for Manitoba Hydro, though, is it has created a market that has been very, very good to us. We are now getting a lot of customers. People are able to use other transmission lines. We ha ve a single tech tariff within the area, a tran smission tariff for using transmission facilities for any of the areas marked in blue.

This has really helped our extra- provincial sales in the last few years and allowed us to take the surplus energy we have in our system to markets. It has given us pretty ttractive rates. a Water conditions. Water conditions right now are really quite diffi cult for us. It looked like last year we were going to have real dif- ficulty. We started the spring last year, in the last fiscal year, with a problem. It looked like it was going to be bad for us. Then, I think it was the weekend of June 11, we had a real downpour that lasted the whole weekend and it really helped us that year.

Since then it has not rained of any con- sequence at all and it has caused us a fair amount of concern. We always keep thinking we are going to have some more rain and it seemed to me that every time I went to the lake they were talking about rain, but it never seemed to rain. I do not think I ever was hoping for rain at the lake, but I was this year. Manitoba Hydro, in designing its system and planning its system, we design our system so we have adequate power in the event of low flows, so that in the event of low flows we always have power adequate for the needs of the province. We are in that position now.

We do not need any new generation for our own load and committed export sales till getting into the 2020 period, despite the current low flows. Reliability there- fore is not in question at all. We always have adequate power. We forecast ou r revenue, despite the fact we plan our system on low flows, we forecast all our revenue based on average flows, and in the long term we are going to get average flows. We are going to have high flows, low flows, and right now we are in a low-flow period. Last time we had a low-flow situation was in the '88 to '91 period and at that point we were just adding Limestone.

The first units of Lime- stone came in, the first unit was September, 1990 and the first units really helped us quite significantly. They were 100% load factor units and so every time you put on one unit you got 100% capacity capability out of that unit for the first six units. These are just some current conditions. Winter precipitation on Lake of the Woods basin was the second-lowest on record in 100 years over the winter of 2002-2003. The spring and summer water supply conditions have been below normal for most of Manitoba and North- western Ontario.

The Winnipeg River system and the res- ervoir supporting the Winnipeg River is very, very important to us. Water that comes down the Winnipeg River goes through all the Winnipeg River plants and it also then goes into Lake Winnipeg and then down the Nelson, so we get to use that same water more than once. Record dry conditions exist in other parts of the prov- nce. i Precipitation has been normal in Sas- katchewan and parts of Alberta, especially the southern part, but it is not enough to reverse the dry conditions we are experiencing in the East.

We have seen in the last week or so some pretty good rains in the Lake of the Woods and the eastern part of the province, but it is not going to help us as much as we would like unless we get a heck of a lot more. The overall reservoir

6 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 storage in the Nelson-Churchill River watershed is a record 27-year low. Up to seven billion kilowatt hours of energy we are going to have to purchase or use terminal power for the whole fiscal year that we are in now. That is an awful lot of power. Here is the historic energy by year from our inflows. As you can see, we have to go back all the way to 1940 to experience the one we are experiencing today. This is a distribution of historic annual ener- gy from inflows. If you compare a 12-month period, one shows the annual energy in kilowatt hours.

In this case it is a trillion kilowatt hours. It shows the percentage of time it can occur. Right now we are in the 5 percent area. You can see that it is about 5 percent that is all we are getting right now for the period of September 1 of last year to August 31 of this year. This is the energy and reservoir throughout the system. It is by month and it compares the 26 year average, which is th e top line going across, last year, which is lower than our average, and then where we are this year. This is Lake Winnipeg and the elevation of Lake Winnipeg with wind being eliminated.

This is the same graph for Lake of the Woods and compares once again, this one has 2002 on it, 2003, the average from '74 to 2002, and then the current year. You can see that 2002, we had pretty good water flows that particular year. The distribution to the Province, as everyone knows in 2002-03, the Government passed a bill whereby Manitoba Hydro was required to give the Government $150 million plus 75 percent of our net income, and that works out to about 202- point-some-odd million, rounded to 203. In the current year, we are projecting a loss, so the Government is not going to get any money. Mr.

Tweed: If I understood the legislation prop- erly, the money was presented to the Province at the start of the year, then at the end of the year the differences were work ed out give or take whatever amount that is. Are you saying this year you have not flowed any money to the Province? Mr. Sale: Mr. Chairman, I think this is a point on which we really have to be very clear that when we had earnings of about $220 million we took $150 million of the earnings in that year as a dividend. The next two years, in order to protect Hydro, we said we would take no more than 75 percent of the profit.

There was a profit of $71 million in the next year, so we took I think it is 52 or say 75 percent. There is no profit projected for this year, so we will have no draw, because that is the way the legislation reads. It is 75 percent of profit. There has not been any profit. We do not have any money and we do not expect to have any coming this year. That is the way the legislation was written quite deliberately because I think we understand that you cannot take a dividend where there is no profit to take it from. That is important for the members to understand that was how the legislation was crafted. Mr.

Tweed: I am not sure that the minister understood my question. I believe the legislation reads that Manitoba Hydro is to advance to the Province at the beginning of each fiscal year, in this case it would be the balance that would bring it up to the $288 million. If I understood the legislation properly it was advanced by Hydro at the start of the year, then at the end of the year it was worked out based on what that percentage ended up being, give or take what- ever the number is.

I guess the question is, clearly: Is the min- ister saying they have received no payment from Hydro for this fiscal year? * (19:00) Mr. Sale: That is correct. There has been no payment and we do not expect to receive a pay- ment. The member may recall that in anticipation of potential continuation of the drought, we reduced our estimate at the beginning of the budget period. The Budget was obviously finalized in the early winter of '03, when the member will recall we were already into low flows and low snow cover. We had, in spite of that situation in the

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 7 previous year, been pleasantly surprised that Hydro, in spite of a difficult year, had attained a $71-million profit, was projecting that level of profit. We reduced the anticipated draw from $69 million to, I believe, $52 million this year. We do not expect that that will happen, because subsequent to the Budget's preparation and presentation, the drought has unfortunately con- tinued. The previous minister responsible, who is still the current Finance Minister (Mr. Selinger), and I are extremely clear on this point: no profit, no dividend.

There is not going to be a profit this year unless something absolutely amazing happens. So there will be no dividend and no money has been taken for this year. Mr. Tweed: I thank the minister for those com- ments. The question that would follow, and I think he has opened the door: Does the pro- vincial government see that they will have a shortfall at the end of the year based on no revenue from Hydro this year. Mr.

Sale: I think that that most properly is the question to be put to the Finance Minister, but I can say in general terms that out of a budget of $7 billion, the member may recall that when his party was in power it was not at all unusual to have a little letter arrive from the federal government in the late fall. Certainly the member from Russell will recall this, maybe November 30 or December 15 or at the latest early January, you get a little letter from the feds saying, oops, your equalization revenue that you put in your Budget for last year has declined by $100 million, deal with it.

In a good year, you get a letter that said, good news, your equalization revenue has gone up $100 million, sort of like, collect, pass go, and everything is well. In each of the years in which our Govern- ment has been in power, Mr. Chairperson, we have had unexpected changes during the year, some good, some bad. It is the job of a govern- ment, any government, to retain the management of the Budget throughout the whole period. You do not just stick a budget in place and hope that at the end of the year that is what happens.

You put your best estimates in place, which is what we finished up this afternoon in Estimates process, and we recognize that in any fiscal period there is going to have to be adjustments, because the reality will very rarely turn out to be exactly what was forecast. We were very, very pleased last year that our expenditures turned out to be almost exactly what was forecast, but our revenues due to the fallout from 9-11, the subsequent decline in tourism, and all the other things that followed certainly changed our revenue picture. We did our very best to deal with that.

Since we have known for some time, we released the first quarter statement some time ago, and it was clear to all of us that with the continuing drought we would need to deal with this issue. We have been managing our resources accordingly. If you ask the Finance Minister in Concurrence, he will tell you that this is some- thing which is not unknown to previous Finance ministers or to the current one. A variance of less than one tenth of 1 percent up or down is not at all unusual during the year and even 1 percent is not unheard of. We are dealing with this problem.

I do not anticipate that we will be terribly off from our esti mates when the final word comes in a year from now. Mr. Loewen: Just for clarification, because I believe the minister said that there was some money taken out of the corporation by way of dividend in '01-02 and then he is saying another amount was taken out in '02-03, that is con- tradictory both to the presentation we are receiving as well as to the financial statement. I wonder if the minister could clarify that. Mr. Sale: The total of $203 million was actually removed, I believe, one day after the year-end.

There was an issue with the Auditor around the question of the timing of the actual payment. Those total dollars, however, have been removed and I think the member may recall that they were credited and debited through the Fiscal Sta- bilization Fund and that all those transactions are clear from our annual report. Maybe Mr. Brennan could also clarify that further. Mr. Chairperson: Mr. Brennan, did you have a comment to add? Mr. Brennan: Sorry again, Mr. Chairman. The legislation provided for 2002-03, and that is when we made the payments.

8 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 Mr. Loewen: Could I ask Mr. Brennan then, the money that was taken out in '02-03, that you are indicating here, the $203 million, what per- centage would that have been of your profit for '02-03? Mr. Brennan: Mr. Chairman, $150 million was the dividend, and the 75 percent of our profit of $71 million or some such number, which, as the minister said, was in the neighbourhood of 52 point somewhat million dollars. Mr.

Loewen: I guess I am looking for clarifi- cation because the intent of the Government and the minister, just reiterated, was never at one time to take more than 75 percent of the net income of the company in order to protect the company. Quick math in my head tells me that when you are taking $203 million, and I look at the financial statements and your profit is–sorry, just get the right page here; it is a little dark–net income of $71 million. It seems to me that 203 is a little higher than 75 percent of profit. Mr. Sale: Thank you, Mr. Chairman. Through you to Mr. Loewen.

The 2001-02 profit was about $220 million if my memory serves me. Bob, you might need to correct my number by a couple of million, but it is in that order. Of that profit, we took a dividend of $150 million. The actual transfer, for reasons related to provincial Auditor's oversight was made after the year end, but it was charged against the profit of 2001-2002. It had been discussed in the Legislature and the legislation had been prepared with that in mind.

Subsequent to the passage, the provincial Auditor, for reasons which I, frankly, would leave to an auditor to explain, expressed the view that the transfer should be following the year end, and so that is what in fact happened. The way the legislation was framed, and the discussion in the Legislative Assembly was that Hydro had made a profit, and we took 75 percent roughly of that profit. I think I actually have the number. The estimated profit was 209; 214 was the final, 214 consolidated. So, 75 percent of 214 is slightly more than $150 million.

We took the 150, and then in the subsequent year the profit was 71, and we took 75 percent of that. So, in both cases, Hydro had net profit remaining after the Province had taken the special dividend. I am sure I do not need to remind the member that the purpose of that dividend was to bridge over an utterly unforeseen accounting error, which began during the Filmon govern- ment.

It was undetected by either the federal or provincial Auditor and continued into the first couple of years of our Government and was finally brought to our attention on one very unhappy January day, 10 months into the fiscal year, when we were faced with a $165 million hole. Balanced budget legislation requires us to meet the tests of that act, and so obviously all the decisions that followed from that are the ones that the member knows about. His real question is: Did we take more than 75 percent? The answer is no; 2001-2002 profit consolidated basis 214.

Seventy-five percent of that is greater than 150, which is what we took. The same is true in the subsequent year, 71 million. We took 52, 75 percent. Mr. Loewen: I thank the minister for that answer. He indicated this all happened because of an oversight by the Auditor. Could he explain what type of mistake he feels the Auditor made? The Auditor General, sorry, his new title. * (19:10) Mr. Sale: To the best of our understanding, what happened was that in the corporate income tax assessment the corporate income tax– An Honourable Member: I am talking about something different.

If you want to go on, that is fine, but we are going to come back to it. Mr. Sale: I am explaining the error, Mr. Chair- person, that led to the shortfall in provincial revenue, which is what I thought the member was asking. You said what error did the Auditor make and that is what I was attempting to provide him with an answer to. Mr. Loewen: If you want to finish your answer, go ahead. Mr. Chairperson: Did you wish us to proceed with the presentation?

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 9 Mr. Sale: I would be glad to finish the answer. For the record, it had to do with the accounting for the profits of large mutual funds which had been treated by one part of Revenue Canada as credited entirely to the province in which they were accrued by virtue of the head office of that corporation being domiciled there,

whereas in fact what should have happened would be that the profits would have been appropriately attri- buted to each province in which the mutual fund holder lived. In effect, there was double-count- ing of the profits of big companies such as Investors.

The Province of Manitoba, the Province of Alberta and the Province of Québec were all beneficiaries of that mistake because they were credited with the full benefit of the mutual com- panies' earnings in those provinces and when that mistake was discovered and the proper attributions were made the impact was worst for Manitoba because we happened to be the home of Canada's largest mutual fund, Investors life, or Investors Syndicate. Yet of course we are a small province and so it had a tremendously disproportionate effect on our accounts.

The so- lution of that problem took several years to work through our accounts, but in the short run we had a shortfall which we bridged with the Hydro draw. Mr. Loewen: Just for clarification, I hope the minister understands the difference between Revenue Canada and the Auditor General. What he said in his statement was because of an oversight by the Auditor, which is the provincial Auditor, the Government was not allowed to take the $150 million out of '01-02. That was the statement you made. I am just asking you what mistake do you think the Auditor made?

I can assure the minister the Auditor General had nothing to do with Revenue Canada and the federal overpayment. Mr. Sale: The member may have misunderstood but certainly the words he has now put in my mouth I did not say. I did not indicate that the provincial Auditor made any mistake. The pro- vincial Auditor made a ruling that the funds should be transferred subsequent to the year-end. That I did not say was a mistake. I said it was a ruling of the provincial Auditor.

The mistake to which I referred was the fact the error in the federal accounting and transfer of revenues under the corporate income tax sharing arrangement was signed off by the federal Auditor General year afte r year in the public accounts and was undetected at all levels, in- cluding our provincial level who signed off on our accounts. So it was an undetected error. Yet it had been signed off in the accounts past without that error being detected. I am not blaming anybody for that. I am simply saying that it passed through subsequent governments and subsequent auditors general without being detected.

When it was detected it was not a trivial issue facing our Government 10 months into a fiscal year. Mr. Loewen: I thank the minister for that clari- fication. We will have to check Hansard, but I do believe he referred to it originally as an over- sight by the Auditor. Anyway I appreciate his clarification and I am certa inly glad to hear he thinks the Auditor is within his bounds to make a ruling.

Having said that, I am assuming he has abided, and obviously the Finance Minister at the time was willing to abide by the Auditor's ruling, which was that the dividend from an accounting and from a legal perspective could not be backdated, would have to come out of the current year. I guess I am trying to clarify again the minister's statement versus the annual finan- cial statement and the presentation we are now getting, because both the annual financial state- ment and the presentation that Mr.

Brennan is in the process of giving us indicates that the Government took over $200 million out of the corporation in 2003 when in fact the profits of the corporation were 71 percent, $71 million. I was simply asking Mr. Brennan what percentage of the profits the company made in 2002-2003 the Government withdrew in terms of a dividend. Obviously it is more than 75 percent. I am just looking for a number. I would assume the CEO of the organization probably knows it off the top of his head. Maybe he could answer. Mr.

Sale: It is very clear from when our Budget was introduced to the House and what the entire discussion during this debate was that the charge

10 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 for the $150 million was against the fiscal year in which we were then still engaged. The decision of the Auditor was because by the time the Budget was actually passed the fiscal year had ended. So, rather than having a back adjustment, the Auditor directed that it be taken out in the fiscal year following the year in which it was introduced as a measure that was part of the Government's Budget. So I think we are at risk of splitting hairs here in terms of what was done.

The corporation, over the period of time in question, earned approximately $470 million more than it forecast. Ou r total draw is $202 million to $203 million out of those earnings that were over and above forecasted earnings. The draw was clearly intro duced as a three-year measure, understood as a three-year measure against three fiscal years. The Auditor chose to direct us to make the transfer at the time we did. That is what we did.

If the member wishes to portray it in some other way, obviously he will do so, but it would not be a fair reflection of the history or of the debate or of the clear intent of the Budget that was intro- duced by our Government in that year. Mr. Loewen: Just for clarification, I realize the minister was not responsible at the time, but he took $150 million out of the rainy day fund and then in addition took $203 million out of Man- itoba Hydro. We are here to examine the finan- cial statements.

I am just looking for a simple answer, which I am sure that either the chairman or the president of the organization could answer quite quickly if the minister would let them. What the financial consolidated statement of income on page 77 indicates is that there was profit of $71 million and the distribution to the Province was $203 million. I am just curious to know if anybody can tell me what percentage of net income that distribution would account to. Mr.

Brennan: What we did was exactly what the legislation required, which was $150 million plus 75 percent of our profit for that year, which worked out to 52-point-some-odd million dol- lars. Ms. Christine Melnick, Vice-Chairperson, in the Chair Mr. Loewen: I thank the Chair for that answer. I have since done quick math and I guess we are not quite 300 percent of the profit in 2002-03 according to the financial statements, but it is probably 275 percent of profit that has come out of the corporation in that one year.

Realizing that the organization has been run on a very sound basis for a number of years and since '88, I think, was the last year that the corporation showed a loss on its books, certainly the profit picture has been good. But just for clarification, is that 275 percent roughly what the numbers look like for this year? Mr. Brennan: We had total reserves of $1.4 billion and we took off $203 million, which represents what the legislation said, of $150 million plus 75 percent of our profit. Mr. Loewen: Well, I thank Mr. Brennan for that answer, and your profit for the year was? Mr. Brennan: $71 million. Mr.

Loewen: So based on standard accounting principles and I assume that– Madam Vice-Chairperson: We are going to have to, just for Hansard, we are going to have to–yes, okay. Mr. Loewen: Sometimes we get a little ahead of ourselves and I apologize. Madam Vice-Chairperson: I will pull you back. I promise. * (19:20) Mr. Loewen: Just for clarification, your finan- cial statements are produced according to gener- ally accepted accounting principles.

In this year, what they show is that the Government took $203 million as a special distribution over and above their normal demand from the company in a year in which you made $71 million. Is that accurate?

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 11 Mr. Brennan: It is accurate that that is what went through retained earnings. Mr. Loewen: Thank you. Mr. Sale: I just want to point out that there are many ways of doing percentages. Hydro earned $470 million more than it projected to earn from 1999 to 2001-2002. One might equally say that the total draws of the Province were about 40 percent of the excess earnings unprojected by Hydro over that same period of time.

One can aggregate numbers in a myriad of ways, and I would simply restate for the record and hope we might go on with the presentation, that the $150 million was very clearly, in the legislation and in the Budget, being drawn from the '01-02 fiscal year. The intention was ex- tremely clear. The fact that the Budget flew over a year-end, the provincial Budget flew over a year-end caused a bookkeeping attribution. The CEO and president, Mr.

Brennan, is quite correct that having accumulated excess earnings from exports, the corporation was more than able and continues to be more than able to meet all of its obligations. When the Province decided to bridge a very difficult situation by taking some of those earnings from the wise decision of a previous government to build Limestone and to allow us to not have to close hospitals or foreclose services but to maintain the services Manitobans deserve and expect, the impact of that was to reduce the retained earn- ings by the cumulative amount of $203 million.

The question of the attribution we can portray in a variety of different ways. The mem- ber has chosen to portray it in one particular way, which I do not believe accurately reflects what the Budget said or what, in fact, was said in the Legislature at the time. But if he chooses to do that, obviously that is his right. I think it would be helpful, though, if we could move on through the rest of the information that is in this presentation. Mr.

Loewen: Well, is the minister somehow trying to lead us to believe that the consolidated statement of income as presented in the Mani- toba Hydro-Electric's annual report is not an accurate reflection of what happened? Mr. Sale: No, I am not attempting to do that at all. That is what happened. Mr. Loewen: So what happened was in a year that the net income of the corporation was $71 million, the Government of Manitoba took a $203-million special distribution from the corpo- ration, and that is over and above the $150 million that they took out of the rainy day fund to manage their shortfall in 2001. Mr.

Sale: It is equally true to say that in a year in which Hydro made $214 million, that money was added to their bottom line and was available to the Province to meet a situation that nobody had foreseen for 10 years that was creeping up on us, and we used that capacity to bridge over a very difficult situation for three years. When the previous government decided that they needed some money, they sold a Crown corporation, Manitoba Telephone. Unfortunate- ly, the result of that was that rates skyrocketed 41 percent in the city, 71 percent in the rural areas.

The result of our decision is that rates have not gone up. They have been flat for, depending on categories, 10 or 7 years, and we still have that Crown corporation. It still has $1.2 billion in retained earnings. It still continues to meet the needs of Manitobans in a wide variety of ways, not simply in terms of the bottom line which, unfortunately, is the situation with Manitoba Telecom. So I think we should recognize that when we were faced with a difficult decision, we kept the silverware.

When the previous government was faced with a situation and they decided it was important to make a decision, they sold the silverware. The consequences are that all Man- itobans are poorer as a result. Mr. Loewen: Not being here, I certainly ap- preciate the minister's view of history. I guess really what we are here to do is review the financial situation with regard to Hydro. I am just trying to clarify all of the com- ments that I am getting from the minister and trying to see how they tie into what is presented in front of me in terms of the audited financial statements.

So, I guess the minister is saying, or what I hear him saying is that the $150 million

12 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 that was taken out of Hydro was used to pay back the federal government? Mr. Sale: I think that the details of that are best asked of the Finance Minister (Mr. Selinger), but it was to deal with the contingency of the short- fall that was announced to us about 10 weeks before our year end and very seriously impacted our ability to meet the requirements of the balanced budget legislation, but I suggest he should probably spend some time tomorrow morning with my colleague, clarifying that issue with him. Mr. Chairperson in the Chair Mr.

Chairperson: Are we ready to proceed with the presentation? Mr. Brennan, please proceed. Mr. Brennan: We are now getting into the finances. Each year we go through the process of updating our financial forecast. We have a 10- year running financial forecast, and we update it every year, add a year, and revise all the num- bers accordingly. We are in that process right now. We present the forecast to our board in November. We have a model that incorporates all our financial activities, whether they are capital or operating, and the end result is the output of the financial statements.

We change our assumptions based on current conditions, what ever they are at the particular time. We make up the forecast and all our forecasts are based on those assumptions and the outputs as are forecasted, operating state- ment, balance sheets and sources, application of fund statement. This is a forecast of last year's IFF, adjusted for the current year's results in terms of net power sales, extra-provincial power sales, this is net of fuel, power purcha se and water rentals, and as you can see, in 2003-2004, the impact of low-flow conditions in the current year. Mr.

Loewen: Thank you, and again, I just want to clarify because the information we are getting this year has a lot less detail than the information that you provided for the last couple of years, so I just have some questions to clarify, if that is okay. What you gave us last year was a pro- jection of roughly, a profit I believe of over what looks like close to $75 million or $80 million, a little hard to tell from the chart. And what you are saying is that has been revised downward this year to $165 million loss? Mr.

Brennan: One thing, one thing I did, I should just point out that this year we did a little different. Last year when we did it, the last time we did it before the committee, we used the previous year's forecast. In this particular case, we updated it for the current year to indicate the impact of the low-flow conditions on our oper- ations. So, we would not have shown the profit for the current year. We updated it. But this is extra-provincial sales, net of any cost of getting that generation.

This is what we are forecasting for the current year, and we are indicating a loss in the neighbourhood of $200 million to $350 million, and the whole loss is created by low-flow conditions and the resultant lower hydraulic generation. Then the rest of the forecast is what we had in IFF02. Mr. Loewen: Just for clarification then, I am sorry, I got ahead of myself on the last line, but this is comparable in some regard to what we got last year, but then the '04-05, '05-06 and future forecasts, that is all based on a return to normal flow? Mr.

Brennan: It is taking the forecast of last November which was based on average flows, average in-flows. * (19:30) Mr. Loewen: I am assuming this comes off some fairly complex computerized models. Has a modelling been done of what it would look like if it was low flow? Mr. Brennan: Yes, we do for Manitoba Hydro's board in the fall. We have not done it this year. As I mentioned, we are in the process of updating our forecast, but we do show the board the impact of low-flow conditions on Manitoba Hydro's operations. Mr. Loewen: Is that something that you can share with the committee at this time?

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 13 Mr. Brennan: No, it is based on an output of the forecast we have once we change all our conditions, and then we run a run that shows what happens if we have low flows. Now, having said that, we are definitely in low-flow conditions this year. Mr.

Loewen: What I am trying to get a feel for is that often these cycles last more than one year and, in fact, your official stated before the Public Utilities Board that under a worst-case scenario, which they could predict, which would be a five- year drought, that the cost to Manitoba Hydro would be in the neighbourhood of a billion dollars, almost as much as the Province takes out of Manitoba Hydro over the course of five years. I am just trying to get a feel if that is still the magnitude of what could be facing you, given a possibility of a five-year drought.

You already are saying it could be $350 million in one year. If I take that over five years and just multiply it out, we could be in the neighbourhood of $1.5 million. I am just trying to get a bit of a feel between what we heard, the evidence that was given at the Public Utilities Board hearing versus what we are seeing here. Mr. Sale: I think what we have to recognize is that you can project worst-case scenarios of a drought that lasts for longer than five years, but the point is that the normal conditions generally return after a couple of years. We are now in the second year of this situation.

If it were not for that one very enormous June rain, where some communities in southern Manitoba and northern Minnesota got as much as 12 inches of rain at one time, we would essentially have had now two full years of that drought. I think most forecasters would not forecast that to continue for a great deal longer. Obviously, it could. In that kind of situation, then we would have to deal with that, but you do not start to deal with it in ways that would upset the equilibrium of the system until you are actually faced with it.

Hydro have always pro- jected lower flows than we experienced in the middle and late nineties and early 2000 where we had very high flows and were able to build up our retained earnings to a level of a total of $1.4 billion at that point. That was a deliberate, modest projection based on prudence. The corporation has historically been accurate in providing sufficient reserves built up. I think one of the things that the corporation is very proud of is that in 1990 or so, we had about $90 million in retained earnings. By 2002, we had $1.4 billion in retained earnings.

So we have built up the kind of cushion that will allow us to deal with a drought. If it lasts another year at this rate, then we have still room to do that without adjusting rates and without changing any of our contractual obligations. We certainly hope, and I would assume the member hopes, that that is not the case. Hon. Jon Gerrard (River Heights): I have a question for Mr. Brennan.

It has to do with the fact that a fair amount of water is stored in Lake Winnipeg and when you have a drop in Lake Winnipeg levels of, say, about two feet from what it is most years, it takes a while when you have rains to fill up the storage in Lake Win- nipeg again. One would expect that that would have two impacts. One is that you can have some sort of estimate of how long it will take to fill up Lake Winnipeg given the standard aver- age rain conditions, for example.

Second, I think that, when you have low levels on Lake Win- nipeg, your head on the dams is not as great and so that your ability to generate electricity is also reduced a little bit. Is that true? Mr. Brennan: If the head is lower, there is less capability to generate at the plant, but that is calculated in our calculations. Rains can turn things around pretty quickly. I do not know if anybody remembers the June rains of last year, where it rained that one weekend.

I mean, that was one weekend, and I am not even sure if you were at the lake this last weekend, but Lake of the Woods is up a fair amount just from the rains last week. So I am hoping it is going to rain between now and the freeze-up and we are going to be in high flows next year. We were not supposed to have low flows from this year until I retire. Mr. Loewen: Perhaps Mr. Brennan is re-eval- uating his decision not to take early retirement, I do not know, and, quite frankly, I will be interested to see, as it plays out, whether that might be sparked by drought or by the Province's demand for funds.

But, anyway, we will see that over time.

14 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 I want to just lay the groundwork for why I am asking these questions, and, as a matter a fact, I was at the Lake of the Woods Sunday. We do have a place down there and it did rain most of Sunday. The water did not come up much at my place, so hopefully it is coming up after that for both of our benefits but more so for the benefit of the people of Manitoba who rely on Manitoba Hydro, obviously, to not only provide power but to generate good financial results as well.

Just, again, to go back to 2002, I want to clarify sort of in my own mind what the risk is here to the Province and to Hydro, and I will quote from Harold Surminski, and this is a Public Utilities Board hearing, May 27, 2002: It is estimated that with the worst drought on record, if the worst drou ght on record were to occur, the cost to Manitoba Hydro would be in xcess of $1 billion over a five-year period. e In subsequent testimony, this was con- firmed, and, again, under questioning from Kathy Kalinowski, the question was, did you also agree that the five-year drought would have an impact to Manitoba Hydro of a billion dollars, and Vince Warden the CFO of the organization, I believe, indicated the answer was yes.

Later on he did indicate again under a question from Ms. Kalinowski and the question was: Then, in fact, these payments to the Province over the next five years have a net adverse effect to Manitoba Hydro that is more negative than a drought, and I am paraphrasing Mr. Warden's answer, but also quoting: Yes, a five-year total would exceed the risk of a rought, yes. d So, again, what I am seeing in this scenario is that based on a one-year drought, Manitoba Hydro could possibly face a loss of $350 mil- lion, and its own officials have admitted that droughts do come in cycles.

We could see low flow for up to five years, which I agree would be a worst-case scenario, but I am sure the president and CEO agrees and probably is presenting his board with worst-case scenarios. I am now wondering if the worst-case scenario that his officials could envision, a five-year drought, is now going to cost the organization $1 billion or $1.5 billion, a pretty significant difference if we just take the 350 and extrapolate it over five years. I am wondering if Mr. Brennan could give s a feel for that. u * (19:40) Mr.

Sale: Just briefly before Bob responds, I think it is probably important that we recognize that the last big rain was in June of '02. We now are in September of '03 and this forecast which the corporation is providing you with today takes you to the end of '03-04, that is March 31. So for all intents and purposes we are talking about two years now of where the corporation is after the last significant rain. The member is absolutely right. There is nothing wrong with the question, but I think when you look at and talk to any farm people about drought and moisture, we had one aberration in June of '02.

The rest of the time has been a serious problem in most of our watershed, the northern watersheds in the west as well as across the Prairies thro ugh Saskatchewan and Alberta in those years. Anyway, I do not want to detract from the question, but I think we have to bear in mind that we had one tremendous dump and please let us have another one and then we will all be happy. We have had some pretty abnormal weather for the best part of two years now. I did not mean to interrupt Mr. Brennan, but I just wanted to put that perspective in. Mr.

Brennan: There is no doubt the last two years we have had below-average generation. Last year it was the case and again this year. Having said that, it has been raining pretty good in the last little while. Last week during the week it rained pretty good and Lake of the Woods did go up. There is no doubt about that. If it continues to rain in the fall, we will be in good shape. Mr. Loewen: I appreciate that and I appreciate the answer. Hopefully, for Mr.

Brennan and his retirement plans and the people of Manitoba, the rainfall will continue except for those of us that are trying to get in a few last games of golf. Mr. Brennan, you indicated that you are doing some projections. My understanding from reading the PUB testimony is that this is a very sophisticated forecasting system. With all due respect, Mr. Minister, it takes us out to '07-08, not '03-04. That is what we are dealing with in front of us. What I am trying to get through in my own mind, which I am sure you are going to

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 15 have to explain to your board of directors, I would assume that one of them is going to ask, what is the worst-case scenario? The worst-case scenario that we can see, under oath, that your officials have seen, is a five-year drought. I am trying, on behalf of the people of Manitoba, to find out what the worst-case scenario is. Mr. Brennan: I think the number that you had, our people have run in the past to determine what the impact of the worst drought on record would cost us today.

I would think that the number, if that occurred, would be a number that would be close to that. That is the worst that has ever occurred. Point of Order Mr. Chairperson: Point of order, Mr. Jha. Mr. Bidhu Jha (Radisson): I would like to make this statement that what the member from Fort Whyte is stating is perhaps a negative impression of the future. If that happens, I would think that the member should be thinking that we should go to PUB and ask for a raise for the hydro rates.

If the disaster happens for the next five years, I think the people of Manitoba de- serve the need to protect the Hydro, the utility and the people. The question should be tailored to reality. If the disaster happens, what do the members think? PUB should be given the authority to rate increases. That is what my point was. Mr. Chairperson: That is not a point of order. It s a dispute over the facts. i * * * Mr. Loewen: Just by way of comment to the point of order, I certainly appreciate the comment from the Member for Radisson. I can assure him I think I am competent enough to ask my own questions.

In any event, I am pleased to hear that there is actually a member from the opposite side who has the same belief that I do that all these things should go to PUB. Maybe he could explain that to his caucus members around the caucus table a little bit. We would see more of these issues go before the PUB. So, again, I appreciate the input from the member. I appreciate your answer, Mr. Brennan, because that does indicate, again, that you still have confidence, confidence may not be the right word, but given the worst-case scenario, that we are looking at $1 billion in possible exposure as opposed to a $1.5 billion.

So that is, I guess, good to know that the situation has not changed from the testimony that was given to the PUB back in 2002. Again, I just have to stress that for the last two years or, you know, since I have been a member of the Legislature, we have a fair bit more detail in terms of projections, which in my view or I guess my understanding would have come directly from the financial forecast that your people run. I am curious to know why we did not get that information this year. Mr. Brennan: We could have done it. What would have happened, you would have got outdated information for the current year.

So we took last year's information and updated it for the current portion to make it more relevant for you. We are trying to help you. Mr. Sale: Just so the record reflects clearly that last year Manitoba Hydro spent an enormous amount of time in hearing days and dollars at the PUB because we requested that they, the PUB, review Hydro's situation. It was not a request for a rate change. It was simply a detailed review at great length and at significant cost.

I think if the member wishes information about the number of days that Hydro presented to the PUB or the depth of those presentations he need only refer, I am su re, to the printed record that he is often quoted from. I think it is also important to note that Hydro appears regularly several times a year at the PUB around gas rates because of the way in which the corporation is currently regulated and that we spend more per capita on regulation and regulatory hearings than most other jurisdictions, certainly in Canada and in much of North merica.

A I just think it is important the committee understand that, far from avoiding the PUB, we in fact have been before them for a rate review that encompassed an enormous amount of work, volumes and volumes of material, and had intervenors able to raise questions, and resulted in a

summary of findings by the PUB which ran

16 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 to some 80 pages, which I had the pleasure of reading in detail. So I think it is important that the record show that our corporation has been diligent in going to the regulator with extremely full information, particularly over the last year. Mr. Loewen: Well, I certainly give the corpo- ration credit for the information they have given to PUB, as I give the PUB credit for requesting that the review be undertaken.

It is very valuable information that comes out, not only for PUB but I am sure for the officials at Hydro who have to be put through this laborious process. I realize it is time-consuming, cumbersome and expen- sive, but I am sure the president would agree that it is also a value to Manitoba Hydro in terms of ensuring themselves that they are not making any miscalculations or mistakes.

I guess what I am really after here is, it has been very useful to the committee in the past to get the type of information in terms of the debt ratio, the interest coverage, the capital expend- iture coverage and other information that has been included in past presentations. While I appreciate the fact that we have an update for this year in terms of where the organization appears to be headed, I am just wondering if we can get some of the background information that we got in prior years that once again proved very helpful in terms of the longer term direction the organization is taking. Mr.

Brennan: I think IFF02 is already public but we will get a copy of it for you, which shows all that information. We are also coming to– [interjection] An Honourable Member: It is not the detail hat is here, though. t * (19:50) Mr. Brennan: We are coming to debt equity ratios. Mr. Loewen: Thank you and I appreciate it. We will look forward to getting that information. I just notice, sorry, I am still on the net income and loss slide. There is a statement that IFF02 assumes rate increases equal to the rate of inflation. Could we have an indication of what those projected rate increases are? Mr.

Brennan: I believe they were 2 percent. Mr. Loewen: S o i f I g o b a c k t o l a s t y e a r ' s presentation, were there 2% projections for rate increases in years 2004, '05, '06, '07, '08, and '09, that that is still applicable? Mr. Brennan: Yes. What we have been doing is just pushing those two percent back each year without actually asking the board to approve a rate recommendation for the two percent. In other words we did not have it but we kept leaving the two percent in there. Mr. Loewen: I thank Mr. Brennan for that.

I am going back to some previous projections we have received, projections that were done under different, I will assume that IFF is the vernacular that is used within Hydro, which I understand is for interim financial forecasts, but one was repared in June 2001. p According to the information I have, the projected rate increases of 1.5 percent in 2003, basically a 1.5% increase until 2006, which would have resulted in a 6% increase. In May 2002, there was another IFF produced which showed a 2% increase from 2004 to 2009, which is the one we just referre d to, for a total increase of 13.2 percent.

Then in November 2002, at the request I think of the Public Utilities Board, there was another IFF produced which showed a 2% increase from 2004 to 2012, which, cumulatively, basically added up to about a 20% increase. I would like to know from Mr. Brennan, is the November 2002 IFF, is that the latest rate projections the organization has done, or has something been done since 2002 to update those numbers? Mr. Brennan: What we do is once a year we make up the forecast. We are in the process of doing that now. We take it to our board in November.

The last one had 2 percent in it for every year, starting with the first year after the current year. What we have been doing, you are probably right in the numbers you quote, whether it is 1.5 or 2, what we have been doing is taking out the very next year because we were not asking for a rate increase and then leaving the rest in with a rate increase that would have been equal to or less than the rate of inflation.

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 17 Mr. Loewen: I thank Mr. Brennan for that clari- fication. Again, just for my own clarification, when we look at the projections we have in front of us that go through to '07-08, those projections would have incorporated the rate increases that were in the IFF, I would assume? That is part of the model? Mr. Brennan: Yes. An IFF stands for integrated financial forecast. Mr. Loewen: I appreciate the clarification.

Again, just to clarify, the IFF that we took this off showed a 2% increase in 2004, a 2% increase in 2005, 2 percent in 2006, 2 percent in 2007, 2 percent in 2008, basically 2 percent a year right up to 2012, which on a cumulative basis over eight years would amount to a 20% increase. Just for clarification, does that correspond with Mr. Brennan's understanding of the last rate pro- jections? Mr.

Sale: I think the math is inescapable that if you add those together then you would come to the number the member has spoken of, but I think it is also equally true that forecasts have always included a prudent factor based on con- servative, cautious, prudent assumptions and on those assumptions Hydro has outperformed in the past and has rapidly built up its retained earnings and has not required any of those rate increases. The projection for increases is not a new thing. What is new this year is the degree of the drought.

We would be foolish to suggest that Hydro could sustain that level of loss indef- initely without a rate adjustment. We would be equally foolish to rush in and say that a rate adjustment is justified until we actually know what happens with the precipitation this winter because at a return to normal flows, then we would expect a stable picture. If flows do not return to normal, then we will have to deal with that. I think it would be inappropriate to suggest that at this point any rate increases can be projected as real.

I think the corporation would be soundly and properly criticized if it provided a Pollyanna forecast that said we will never need another rate increase. That would assume that you could absorb wage increases, costs of capital equipment, all of the other normal increases that we all face and assume those costs and subsume them through either productivity or increased sales. We have done very well over the past decade by increasing the productivity of the corporation and in a very major way, largely thanks to Limestone, increasing the export sales.

We intend to continue that pattern of cap- italizing for Manitobans on our competitive ad- vantage in Hydro, but it would be foolish to suggest that if current conditions persist, we could continue to operate the corporation appro- priately and profitably without rate adjustments. As I said, it would be equally wrong to rush in and say that such adjustments are needed now until we know what the precipitation levels are over this winter, because that will determine the next year.

How the snow cover and the spring runoff is experienced at the March, April, May period will tell us the degree of either difficulty or the degree of surprising happiness that we are experiencing. Mr. Brennan: The other things I would like to point out, No. 1: If, in fact, we have a rate increase in the forecast and do not get it, it really has a pretty serious impact on the forecast. If you have a rate increase in the very first year and then do not implement it, that rate increases every year thereafter, a nd we now have taken it out. So that is a pretty significant item.

The second item is we give our board, as well as management, in looking at any rate recommendation, a series of forecasts with all kinds of different rate increase scenarios asso- ciated with it. That is just a forecast. There are all kinds of other forecasts management and the board look at. Mr. Loewen: I appreciate those responses. The reason I am asking the question is because I realize it is a very, very significant item, whether that rate increase goes through or not.

That, again, just for clarification for the minister, I am not making a political statement here saying there should or should not be a rate increase. I would hope he would have the good sense to take the advice of the Member for Radisson (Mr. Jha) and leave that decision between Hydro and the PUB, as opposed to indicating as he just has that somehow we will set the rates. We have the

18 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 PUB. Despite the fact that his own leader has indicated his disdain for the PUB publicly in the last few days, again I would urge him to take the recommendation of the Member for Radisson. As Mr. Brennan has indicated, these are very significant numbers. I guess the simple question is how much would a 2% rate increase translate into in terms of revenue to Manitoba Hydro? Mr. Brennan: Approximately $16 million to $17 million, something in that neighbourhood. Mr. Sale: I do not want to escalate debate, but I really have to ask you, Mr.

Chairman, to rec- ognize that I at no time suggested it was appropriate for a provincial government of any stripe to set the rates. You will not find that in y words. m * (20:00) What I said was we would be foolish to assume that if conditions continue to deteriorate or continue to be negative that Hydro could be appropriately managed, could be prudently man- aged without a rate increase. That is not some- thing that I am suggesting I would make that decision. Of course, the PUB would pass on Hydro's request. The mechanism, as the member probably well knows, is that Hydro proposes and the PUB disposes.

That is as it should be and it is as it will be. Mr. Gerrard: Just a clarification, did you say 16 to 17 or 60 to 70, and is that annual, and does that increase as you go down from year to year? Mr. Brennan: Domestic revenue is about 800- and-some-odd million dollars, so 1 percent is $8 million. That is all I did. It is a little over $800 million, I think. So it would be 16 to 17, in that neighbourhood. As low growth grew at th at rate, annually you would get more. Mr.

Loewen: I certainly appreciate the fact that the minister has made a very strong statement that he does believe in the PUB process and will follow it. That certainly should give some com- fort to people in Manitoba. Perhaps he could pass that on to his Leader. In any event, I just want to make absolutely sure that we have got this right. We are looking at a 2% increase which would translate into $16 million or $17 million to the top line of the corporation and that would flow directly to the bottom line. Mr. Brennan: If we had a 2% hypothetical rate increase, I think it would be about $17 million. Mr.

Loewen: I thank Mr. Brennan for clarifying that, and we can go on to our next chart. Mr. Chairperson: Please proceed, Mr. Brennan. Mr. Brennan: This shows the impact of our net ncome. i Mr. Ron Schuler (Springfield): My question was back to the last few slides, in that you project in the next four years after a fairly severe drop in income, $55 million, then you to $63 million, $79 million, but each one of those is based on a 2% increase which then if you flip to the next one, to the retained earnings, that is how you build up your retained earnings.

Yet what I find fairly confusing is that at no point in time is there any indication that we are looking at a rate increase, yet the assumptions are based on a rate increase. So how far do your retained earnings have to drop before you bring in an increase and thus live up to your assump- tions that you are making in your net income oss statement? l I mean, it is all based on a false assumption because from what I hear at this table there is no planned increase.

So, then, how can you say in '04-05 there is going to be $55 million in income when that is based on a 2% increase, and that, then, offsets your retained earnings, how you would like to see your retained earnings grow. Mr. Brennan: As I mentioned to Mr. Loewen, this is a forecast. It was presented to our board last November. We had no rate increase for the fiscal year '03-04, but we had a forecast with 2% ate increases in it thereafter. r If you took that forecast with 2% rate increases, those are the net income numbers you get.

If you wanted to use 1 percent, we would have another net income figure, and we gave that to the board.

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 19 So it is just a mathematical model that pops out the answers, so to speak. Mr. Schuler: Well, I would call it the rose- coloured glasses, the net income chart, because it is all based on a false assumption. My question to whomever, then, is: How far do your retained earnings have to drop before you start to get uncomfortable? How far does that go down before the corporation starts to discuss a rate increase? Mr.

Sale: Very briefly, that is why we have a board and why we retain very competent accountants to audit the corporation and why we have senior staff who would provide advice to the board. I think if you want to ask Mr. Schroeder to respond to that kind of question, there is no absolute answer. It depends on the ircumstances. c But as to how far, it is a question of pru- dence, management and advice in terms of what is going on. What you are seeing here is a projection of what the current reality will be, assuming the current assumptions. Obviously, those assumptions may need to change, but I think Mr.

Schroeder might provide some insight in terms of the governance of the corporation and how this sort of thing is dealt with. Mr. Vic Schroeder (Chairman, The Manitoba Hydro-Electric Board): Just going back to some earlier statements, there was a reference to the fact that back in about 1990 there were about $90 million in retained earnings. That has moved up to in excess of a billion dollars and in each year there has been a profit until this current year.

When I became chair of the board when the new board was appointed in 2000, the integrated financial forecast suggested, which was passed on from the previous board, rate increases for each year. My understanding is that that is what they had done in each of the previous years when they had not raised rates. So this is something that has not started in the last couple of years; it has been going on for some time and the issue is when we come up with a year like '03-04, when do we start looking at what we are going to do for the future? Mr.

Brennan has indicated that we are going to be reviewing the new integrated financial forecast sometime be- fore the end of the year 2003. Of course, we want to determine or get a better feeling for what happens with the winter. Let us hope we get a lot of rain, let us hope we get a lot of snow and maybe we can avoid increases into the future.

The other point I would like to make is that other than for this year there have been a number of years where we have had a vastly larger net income than we had projected beforehand, and of course that is a factor of the amount of water we get and a factor of what the price is that we make on the export of our power which is where the charts show that we make our income. Mr. Schuler: Clearly the board was presented, as per Mr. Brennan's comments, with several scenarios. I suspect one would have been a 0% increase. So my question then to Mr.

Brennan is why was the model of a 2% increase included instead of a 0% increase? Is it because it obviously makes the corporation look better? Clearly your income looks better and your re- tained earnings look better based on a 2% model, or is it because that is something that is seriously being looked at? Is a 2% increase now going to be looked at for '04-05 because of the severe drop in '03-04, or is it just because you want to make the numbers look better? Mr. Brennan: This is the same process we have used for years and years and years. We have used it now for about 10 years.

We usually have some rate increase in the forecast. It is always not more than the rate of inflation, something less, but we do give our board–one was zero and we show them what it is and they always have the recommendation from management and of course the board in their wisdom decides on what we should have. But it has been going on like that forever. We do give them a package with other rate-increase scenarios, and the board has the option of looking and changing any assumption, and we will give them what the results are.

So, no matter what assumption you want to change, we will change the forecast to reflect that. One of the biggest uses we have of the forecast is to compare alternate scenarios against that, and you need a constant base, and you want to be able to compare from one year to the other. So, for the most part, we try to keep it consistent and we also want to use it as a base to compare other alternate scenarios should we want to use it to evaluate a capital expenditure proposal.

20 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 Mr. Sale: I just ask the member to look at the chart on retained earnings for a minute because I think it would be helpful for him to realize that the yellow bars represent actual, the green bars represent forecast. The yellow bars, when they were forecast, were much lower than they actually are. In other words, Hydro has exceeded its forecast for the last number of years, sub- tantially. s * (20:10) I n s o m e w a y s t h i s c h a r t m ig h t b e c l e a r e r i f there was a line on the yellow bars showing what the forecast had been for those years.

The mem- ber would then see that the progression to the green bars was more or less a straight line. Basically, as I said in my introduction, Hydro always projects on the basis of average, or slightly less, conditions and then is pleased when things are great to build up the equity, and is prepared when things are not great to draw down that equity, without, in either case, necessarily, affecting its application for rates to the PUB.

I think it is important to recognize that the yellow and green bars are representing two different situations, and that the forecast, which underlies the yellow bars, is quite a bit lower than the top of those bars. Mr. Schuler: My question is through you to Mr. Schroeder. It is very straightforward, very simple. Clearly, we have seen the corporation eeing a substantial decline in income. s Is it the intention of the board of Manitoba Hydro to go in front of the Public Utilities Board and ask for a rate increase for the next year? Is it the intention of Manitoba Hydro to ask for a rate increase? Mr.

Schroeder: There has been no decision made on that, as I explained previously. We have yet to see the integrated financial forecast. That decision is never made until after that point in time in a year. Mr. Schuler: Then I would like to ask through you, Mr. Chairman, to Mr. Schroeder. Has there been discussion of a rate increase? Are there ongoing discussions about a rate increase and the final decision to be made in November? Mr. Schroeder: No, there has not been any dis- cussion about a rate increase.

The last discussion we have had, had to do with appealing the rate decrease which was ordered by the PUB this past year. So, certainly, we have not been in a mode of thinking in terms of rate increase until this point in time. There has been no discussion at the board about a rate increase. Mr. Loewen: Well, again, I am just trying to get some clarification here, because, once again we have a situation where testimony, given under oath, where someone has raised their right hand and sworn to tell the truth in terms of the officials of Manitoba Hydro, is a little bit con- tradictory to what we are hearing here.

Again, I go back to the evidence given at the Public Utility Board, June 3, 2002, and then a question from Mr. Byron Williams. The question is, and I quote: "Although personally speaking, you believe that there is more than a 50% chance that Hydro will be seeking one"–and by that he is talking about a rate increase–"Is that correct?" Ms. Carolyn Wray, who, I believe, is the– she may have a different title now, which is the business–and Mr. Brennan, maybe, can clarify that–she is business analyst or business manager, I am not sure.

Her response was: "Certainly, that as my belief, up until now, yes." w So we have officials at Manitoba Hydro indicating that it is their belief that there was more than a 50% chance, and I might add that this was before the drought hit, that they would be looking for a rate incr ease. I am just curious as to, if the board is not there, where the senior officials, the administrative officials of Manitoba Hydro are now. Maybe, Mr. Brennan, you could give us some indication. Mr. Schroeder: Yes, that testimony, certainly, is not, in my view, contradictory to what I have been saying.

What I have been saying is that the board has not discussed any increase in rates. No consideration will be given until we go through the integrated financial forecast for the following year. What happens within management is some- thing that clearly is outside of that issue. That is, certainly, if there is that kind of discussion, presumably that means that at some time it will come to the board with a recommendation by management, and the board would at that time give consideration to it, but it has not come to the board to this point in time.

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 21 Mr. Loewen: I appreciate that. I realize we have both the chairman of the board and the president of the organization as well. I am trying to get a feel for what is going on at the staff level, because it is quite likely that the staff level will raise the issue to the board, and the board, I realize, will make the ultimate decision in terms of where Manitoba Hydro wants to go, and the PUB, hopefully, will be allowed to make the ultimate decision as to whether what Hydro asked for is appropriate or not. But again, this is prior to the drought.

It is prior to the knowledge that the Government was going to take or attempt to take $288 million out of Manitoba Hydro by way of a special dividend. We have Ms. Wray, whose title at the time, and this is June 2002, was division manager of Business Analysis and Regulatory Affairs, saying under oath that it was her belief that there was over a 50% chance that the corporation would be looking for a rate increase.

What I am trying to figure, what I am trying to determine and understand is if it was more than a 50% chance before drought and before the special dividend of over $200 million was taken out of the corporation, maybe Mr. Brennan could indicate what that percentage is this day. Is it still over 50 percent? Is it an 80% chance that he would like to ask his board for a rate increase? Mr. Brennan: Let me answer the question. First of all, that was in June of 2002, correct?

In the fall, in November of 2002, management made a recommendation to the board of Manitoba Hydro through myself that we should not have a rate increase on April 1 of 2003. So whatever Ms. Wray, who is the tr easurer now, whatever her opinion was did not materialize, but that is fair. Mr. Schroeder reaffirmed to you or told you again what the process was. We take a look at the forecast in November. Management will make a recommendation to the board and the board, in its wisdom, will consider that recom- mendation. Mr. Loewen: Well, thank you, and I certainly appreciate that clarification. Ms.

Wray, later in her testimony, went on to say that there would not be a rate increase in fact, because gov- ernment had set a policy not to have a rate increase. That again kind of flies in the face of what the minister has told us, that they do not set rates at the Cabinet table. But I would ask the minister if he could clarify for us: At the time that the dividend was taken, was it the Government policy that Mani- toba Hydro would not have a rate increase? Mr. Sale: Mr. Chairperson, the PUB responds to Hydro's requests for rate reviews, rate increases, rate changes.

That is the policy of the Govern- ment and has always been the policy of this Government. I remind the member that the last increases to Hydro were during the Filmon government's time in 1992 and 1996 and that no application has been made by the corporation. The testimony to which he is referring was testimony that was during a hearing that did not have any rate-increase request attached to it.

We as a government welcome the fact that Hydro has built up substantial reserves, has exceeded its profit projections very substantially by some $470 million in the period since we formed government, and that in the light of the tremendous earnings of the corporation, way above its projections, it is pretty clear that there was no requirement for a rate increase at that time.

That was obviously the judgement of the board of the corporation and presumably must have been the finding of the PUB at the time, because they did not recommend a rate increase either in spite of the fact that no application had been made or has been made or at this point is contemplated, because, as the chairman has told you, the corporation has not yet received the annual integrated financial forecast and any recommendations of management that might accompany that forecast.

The policy of the Gov- ernment is and has been that rates are a matter that is determined between the corporation and the Public Utilities Board and that that is as it should be and as it will be. * (20:20) Mr. Loewen: I thank the minister for that clarification. I am just a little curious why, under oath, an individual who is now the treasurer of Manitoba Hydro–I think you would agree a very significant role; it is in senior management of the

22 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 organization–would indicate that, first of all, it was her belief prior to the dividend that there was a greater than 50% chance that Hydro would be going for a rate increase. Again, I will quote directly from the PUB testimony of June 3 and this is Ms. Carolyn Wray responding to a question from Byron Williams, and I quote, "I think if anything, my belief that we would be going for a rate increase might be slightly weakened by the fact that money has been taken by the Province just because of perceptions.

Nonetheless, I believe, prior to the payments being required by the Province, that there was more than a 50% chance that we would be coming forward for a rate increase simply because the rates are so low and there are a number of reasons why it might be better to have a rate increase of a small nature now than leave it off to the future." So again, we have a very senior official at Manitoba Hydro indicating under oath to the Public Utilities Board that it is her belief that there is a greater than 50% chance that Hydro would be seeking a rate increase and in fact indicating that, in her belief and again under oath, that because the Government had attempt- ed to take $288 million out of Hydro, the Gov- ernment was also indicating that, because of perceptions, her words not mine, Hydro would be told not to go for a rate increase.

At the same time that we are seeing pro- jections which indicate rate increases of 20 percent over the course of the next eight or nine years, I am just trying to get a feel for the balance of what might be in store for the people of Manitoba. That is why I am directing my questions to the CEO of the organization, because senior staff are indicating that it is their belief that it is in the best interest of the organ- ization to seek these small, incremental rate increases, and I would remind the minister once again, this was before there was any indication of drought.

This was before the Government tried to take $288 million out of Hydro and suc- ceeded in taking over $200 million out of Hydro. So I would like some input from the CEO on what the thinking of management is today. Mr. Brennan: I do not think it was any different than it was when Ms. Wray made her comments. We take a look at the forecast each year, all the way out. We make a judgment as to what we believe is in the best financial interest of Man- itoba Hydro, and it was management that made a recommendation to the board not to have a rate increase. That was me and my colleagues at Manitoba Hydro.

We made that recommendation and the board accepted it. We do have a guideline we use for rate increases and the guideline is basi- cally we like to manage our affairs such that we have rate increases that are below the rate of inflation. That is the only guideline we have. Mr. Sale: Mr. Chairman, I think that the mem- ber should probably recognize that until June of that year we were in a very low water situation. We had a deluge that lasted about a week, which e were all very glad about. w I think that it is also the job of staff, when they are asked questions, to give their best guess.

But it is the job of management, and it is the job of the corporate governance of the board to inform the major policy decisions of a board with a broadly based, well-thought-out situation. What I am hearing from the CEO is that five months later, in the light of a new forecast, there was a recommendation made by management, including presumably th e employee that you are speaking of. The Province had no role in that, no voice in that, nor should it have. Mr. Loewen: Does the minister expect us to believe that the fact that the Premier (Mr.

Doer) stood up in the House and said there would not be a rate increase, and the Finance Minister (Mr. Selinger), who was also in charge of Hydro at the time, stood up at the time and said there would be no rate increase. Does he not think that has any influence at all over at Hydro? Mr. Sale: Well, I think I have already more than adequately answered that question.

It is self- evident that when the corporation has exceeded its financial forecast by some $470 million in the previous four years that the corporation is in an incredibly strong position to deal with a whole lot of contingencies, which it obviously has.

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 23 I think that the Finance Minister, the Premier, myself, and many others were simply reflecting the reality that the corporation had had an incredible five years previous and was in the strongest position that it had ever been in his- tory, far stronger than when the previous gov- ernment was looking at the fact that it had retained earnings of under $100 million and was just at the beginning of the benefit of the Lime- stone dam.

Thank goodness for Limestone, because even in that first few years when the last drought was making its effect on that corporation, the earnings from that new dam allowed us to sur- vive that down period and then to prosper in a way that shows an incr edible earnings record and an incredible improvement in the debt to equity ratio directly as a result of Limestone. The reflection of that history, I think, would teach us that rate increases in the light of that history and those conditions would be difficult to understand.

That is simply all that has ever been said, that in those conditions with that incredible earning pattern, why in the world with our export earnings at record levels would one want to guess that there might be a rate increase? I will invite the CEO if he wishes or the chair of the board to el aborate on that. I do not think there is anything particularly related to rocket science in that observation. Mr. Loewen: Well, just for clarification, this is an important point, which obviously the Member for Radisson (Mr. Jha) realizes and perhaps the minister does not.

When someone goes before the Public Utility Board and raises their right hand and swears to tell the truth, I can assure you they do not give best guesses. They give the truth. Now, maybe when you are answering ques- tions in Question Period you give best guesses. They give the truth and there is a big difference between that. I hope the minister would rec- ognize that. All I am trying to get further clarification of and what I am trying to understand is what effect the fact that the Finance Minister (Mr.

Selinger) stood up in the House on more than one occasion and said there will not be a rate increase after they had put forward the proposal of $288 million to come out of Hydro and after the Premier had stood up in the House and said there will not be a rate increase, does the minister actually expect the people of Manitoba to believe that that would not have an effect on the thinking of senior management at Hydro in whether or not they would recommend to their board a wage increase. Is he that naive? Mr.

Sale: When we stood up in the House, we were in possession of the information which the member also has, and that is that Hydro's net income was 209. It was estimated. It turned out to be $214 million in that year, an incredibly good performance. It seems to me, as I have said before, it is hardly rocket science to suggest in the light of net income of $214 million that there would be any necessity for a rate increase. Indeed, as it turned out, management recom- mended and the board recommended that there would not be a need for such an increase some six months later, when they did their IFF in that fall.

When you are looking at a company that has had income, net income of $200 million on revenues of about $1.8 billion, you are looking at a pretty healthy return on equity and a very nice addition to your retained earnings. I think that we felt very good about that and very grateful to both the weather and the corpo- ration for the tremendous performance that year. Mr. Loewen: Well, I would simply like to ask the minister: If he is so confident that statements made by the Minister responsible for Hydro, the Finance Minister and by the Premier (Mr.

Doer) of this province did not have any effect on the officials at Hydro, then why under oath would Ms. Wray indicate that it was her belief that it was government policy not to have a rate in- rease? c * (20:30) Mr. Sale: I cannot answer for what may have been in her head, but I can assure the member that government policy is that the need for rate increases is determined by the management of the corporation recommending to the board and then either applying or not applying to the Public Utilities commission for an adjudication of the need for any rate increase or rate adjustment.

24 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 That is the policy of the Government, has been and will be. Mr. Brennan: Manitoba Hydro has built up its equity over the years, as indicated on the graph, and they have gone up pretty dramatically over the 10-year period or 12-year period. We built it up. We did not indicate at any- time that we should have a rate decrease. We allowed the equity to be there for situations such as low flows. We knew that at some point low flows were going to come. We did not know when they would come, but we knew for sure they were going to come.

We treated the withdrawal of funds the same way as a low-flow condition. We thought that over time we will take care of it again. We were not concerned with the type of equity we had in the company. That is my opinion as a chartered accountant. Mr. Loewen: Well, thank you, Mr. Brennan for that clarification. I hope you can appreciate that I am just trying to sort through this. Obviously, we are getting mixed messages at PUB versus what is said in the House versus what happens, and we are just trying to sort out what lies ahead for the people of Manitoba and, in fact, for Man- itoba Hydro. I presume Mr.

Brennan would like to pro- ceed with the–you are always ahead of me. I am still back on the retained earnings. Mr. Chairperson: Are we ready to proceed with the presentation? Mr. Loewen: If we are still on retained earn- ings, I have a couple of questions on retained earnings. I can assure Mr. Brennan, in my mind, he has lots of time. We always find his presen- tations very interesting.

With regard to the retained earnings, cer- tainly the minister has indicated that during the period in the early nineties, perhaps as early as 1989 from the numbers I have looked at, the organization has certainly had a very healthy run, as it would be, in terms of profit and build- ing equity. I see, though, that this year in the pro- jection–and I would just like clarification–the equity of the organization will fall to $970 mil- lion or $820 million? Mr. Brennan: It depends whether you take the $350-million figure as a loss or the $200-million loss, but it will be in between those, I would suggest, somewhere.

Mr. Loewen: I also noticed from the chart that in '02-03 which is the year we are examining, there was a drop in retained earnings, I think, for the first time since the eighties. Could Mr. Brennan explain what caused that drop in the retained earnings figure? Mr. Brennan: I thought I had on an earlier chart when we talked about the reduction of retained earnings as a result of the draw from the Prov- ince plus the addition of our net income for that year. Mr. Loewen: I thank Mr. Brennan for that clari- fication. On numerous occasions the Finance Minister (Mr.

Selinger) has stood up in the House and indicated the dividend that the Gov- ernment has requested, the $202 million that they have so far, maybe all they get, time will tell, I guess, the $202 million has come out of retained earnings. I am just a little curious as to how much cash is in retained earnings. Mr. Brennan: No cash in retained earnings. Mr. Loewen: Maybe Mr. Brennan could explain to me where the cash came from then. Mr. Brennan: The cash came from whatever cash we had on hand. It came from any invest- ments on hand.

It could have come from the sinking fund and it could have come from short- term borrowing, and of course it will come in from internally generated funds. Mr. Loewen: I just want to be clear on this because my understanding of the sinking fund that is at Manitoba Hydro is that sinking fund is strictly set aside to reduce debt. Are you indicat- ing that there are other uses for that sinking fund other than reducing the debt of the organization?

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 25 Mr. Brennan: Sinking fund assets have been sold at various times and the cash goes into the general cash of the corporation. That is just one of the examples. I am not sure if it happens or when it happens. It happens throughout the year. Mr. Loewen: Back on the consolidated state- ment of cash flows, there is an indication there that $200 million flowed to the Province of Manitoba by way of distribution.

I am just looking for clarification as to why that number would appear as $200 million on the audited financial statements and then show up in all the reports we have as $203 million. For clari- fication, I am on page 80, the consolidated state- ment of cash flows. Mr. Brennan: We will get you the answer. Mr. Loewen: Okay, I would appreciate that. It is a small amount in the grand scheme of things. It is just my curiosity sometimes gets the better of me. Mr. Brennan: Manitoba Hydro does not make mistakes. Mr. Loewen: Even if you do, I assume the auditors would pick up on it.

Sorry, I could not esist. r I did notice again on this statement that there were sinking fund withdrawals of $644 million. Could you indicate what those funds were used for? Mr. Brennan: They went into the general cash requirements of the Province, or the utility, so I will have to take a look at where it went. Some Honourable Members: Oops. An Honourable Member: You had Tim's ttention. a An Honourable Member: I was hoping. We would get a balanced budget, no problem. An Honourable Member: You will find a way o spend it. t Mr. Brennan: I get accused of trying to run everything. Mr.

Loewen: The same thing happens to me. In any event, I just want clarification again. For my own edification, my understanding was, according to reading the notes, and I went back a number of years, back to I think it was the mid- 1990s when the sinking fund was, the first time I noticed it on the books of the organization, it was quite clear in there that the sinking fund was to be used to match up to repay debts of the organization as they came due. Maybe you could just clarify if I am missing something there. Mr. Brennan: It goes back to the act started out in 1961. It was in there.

It told us how much we had to put aside annually for the sinking fund, which was 1 percent of the outstanding debt plus 4 percent. If you do that, it is designed to make enough money available that in 41 years you would be able to retire that specific debt, but we do make the sinking fund withdrawals. They are mainly related to debt retirements, but every now and then we will sell investments to take advantage of market conditions and the like, and that cash will go into general cash for the corpo- ration. Mr. Loewen: I appreciate that clarification.

Maybe, again, just to clarify, if the distribution had not been made to the Province, would it be the expectation of the CEO that the cash at the end of the year would have been $230 million? We will assume that the $200-million number that is in the audited statements is accurate. * (20:40) Mr. Brennan: No, we would not manage to have $200 million in cash at the end of the year. Mr. Loewen: Can you give us some indication of what you would have done with that cash? Mr. Brennan: We probably would have invested less or borrowed less or whatever. Mr.

Loewen: You are the FCA here, and my limited accounting knowledge would indicate to me that what you have just said is that if you did not give the $200 million to the Province of Manitoba, you would have borrowed less. Mr. Sale: I think that the thing that is important to keep before us is that the Province determined under specific circumstances to take up to three years of dividends from Manitoba Hydro

26 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 through an amendment to The Manitoba Hydro Act. The dividends were taken from earnings that were far in excess of what had been pro- jected and on which was based Hydro's needs, ability to finance its capital program, and so forth. In the first case, th e profits in the year that the $150 million was taken against were over $200 million, $214 million as it turns out. In the second year the profits were $71 million of which 75 percent was taken. The third year there do not appear to be any profits so there will not be any draw.

So, in all likelihood, as the member said a few minutes ago, the total take from Hydro will be $203 million rounded. The thing that I think all of us who have ever invested in the market understand or have ever benefited from somebody's investment on our behalf is that when a company pays out a dividend, it pays it out of the earnings that it made in that year. And clearly, when you pay out a dividend, then at the bottom of your financial statement your retained earnings will show the fact that you paid out a dividend. If you had not paid it out, retained earnings would be higher.

Whether Hydro th en chose to do capital projects on its 10-year rolling capital plan that were based on a reasonable return on the investment of the capital, whether it was im- proving the performance of a dam or a turbine or a transmission system, they would make the determination through their board with their management as to whether to invest specific sums of money or not, and they would forecast the cost of that investment to include a rate of return and include the repayment of the capital invested for that purpose.

So I think it is very important for the record and for the member to understand that when any corporation, whether it is public or private, pays a dividend, it normally pays it out of the earn- ings for the year in which the dividend was paid. There are a few exceptions to that. Some corpo- rations have chosen to continue to pay dividends even when they may not have positive earnings, may only have positive cash flow, and a very few of them might choose to increase their indebtedness when they had neither positive cash flow EBITDA nor net earnings.

In the case of this corporation, it had net earnings of $214 million in the year in which we indicated our requirement for $150 million, and it had net earnings of $71 million in the year in which we took 75 percent of that. So in both cases th e requirement for the dividend by the shareholder was, for all intents and purposes and very clearly in the legislation, came from the earnings of the corporation which were cumulatively far in excess of their fore- casts. The member is absolutely right.

If you pay a dividend, whether it is Bombardier, Bell or Man- itoba Hydro, the effect of that payment will be to lower the retained earnings of the corporation. That is not rocket science. It is not new. The consequences of having retained earn- ings that are higher than your forecast but lower than they would have been are obviously equally predictable.

But you would only choose to decide, choose to make a decision to invest in a capital project on the basis of the return for that investment and on the basis that the investment would fully cover the costs by virtue of its reward to the corporation either in terms of reliability or in terms of power output, et cetera. Let me just be very clear that the profit for the years involved totalled some $285 million. The draw for the years involved total some $203 million, and, obviously, then, the retained earn- ings would reflect that. Mr.

Loewen: Well, I thank the minister for that and I can assure him the reasons I was asking the questions of Mr. Brennan is that he has had years of training as a chartered accountant, in fact has performed so well that he received the designation of a fellow of the chartered account- ants, which is a substantial honour which I congratulate him for. Obviously, I do not have the same type of training. Neither does the minister but I can tell the minister from where he sits, the debits are closer to the window.

So I am asking the president of the organ- ization these questions because I think it is important for the people of Manitoba to under- stand, not the Government's spin on it but from the opinion of a FCA, where the cash came from. He has indicated that the organization, if they had not distributed the cash, would not have $230 million in the bank. They would have

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 27 borrowed less. No one is disputing the fact of whether or not the capital expenditures were, in fact, justified. If they were not justified, they would not have been made. So I just ask a simple question of Mr. Brennan. If the Government had not taken the $200 million as indicated in your consolidated statement of cash flows, would your debt be less? Mr. Brennan: I got an answer to the 202, so I will answer that after. I think all kinds of different things would have happened during the year.

I am not sure just what we would have done, whether we would have taken less out of the sinking fund or what would have happened. So I really cannot answer your question directly that way. We know that all kinds of activities based on the statement on page 80, some are different than others, and I am not sure where we would have ended up with debt. I really do not. Mr. Sale: Mr. Chairman, I wonder if the com- mittee would consider a short recess, maybe 10 minutes or even slightly less. Mr. Brennan: Can I just put on the record the 200?

This was the question of how come the consolidated statement of cash flows indicates only a distribution of $200 million to the Prov- ince. That is all we paid them. The $3 million was paid the next year. Mr. Chairperson: Is it the will of the committee to take a 10-minute recess? [Agreed] We will resume in 10 minutes then. The committee recessed at 8:46 p.m. ________ The committee resumed at 8:58 p.m. Mr. Chairperson: Would the committee please come to order. Mr. Loewen: I appreciate the answer, Mr.

Brennan, and again I am just trying reconcile in my mind because, under oath to the Public Utilities Board–the minister can put his political spin on it. I realize that that is his job, but what we are trying to get here is the facts the way they are for the people of Manitoba and for Manitoba Hydro. I will remind members opposite that this is under oath, and I see that the member from Radisson is not here anymore, but at his fa- vourite place, the Public Utilities Board, and I agree. Under oath–[interjection] Exactly. Ms.

Kalinowski is asking Carolyn Wray, now Treasurer of Manitoba Hydro, and again I will quote Ms. Kalinowski: "So, in other words, Manitoba Hydro has to make a payment of $288 million and to make that payment of $288 million, they not only have to pay $288 million but they have to borrow money, and the cost of borrowing that money is going to be $276 million." Answer from Ms. Carolyn Wray: " That is correct." That was on May 27 at the Public Utilities Board. June 3, Public Utilities Board, Mr.–I hope I got the pronunciation right–Jurgen Feldschmid, and I quote, "I understand as well, Mr.

Warden, that Manitoba Hydro will be fi- nancing the special payment and that the financing costs for the lif e of the current IFF is some 260 to 276 million dollars. Is that correct?" Mr. Vince Warden: "Yes." Mr. Feldschmid: "Is that the entire cost of the financing or just the cost of the financing through the life of the current IFF that is before the board?

It would be over the term of the IFF." So again we have two senior officials, both well versed in the financial situation of the corporation, indicating that the dividend will have to be borrowed which corresponds, I believe, to the information that we have been given by Mr. Brennan tonight. I just wanted to clarify that and appreciate that, and on the basis of that we are prepared to move on to the next slide. * (21:00)

28 LEGISLATIVE ASSEMBLY OF MANITOBA September 24, 2003 Mr. Sale: Mr. Chairperson, I just again need to remind the member that when the Bell Tele- phone Corporation or BCE, Bell Canada Enter- prises, has a profitable year and they pay out a dividend to their shareholders, nobody talks about them having to borrow money to pay out the dividend or to cover the fact they paid out the dividend. They reduced their profit in the year in which it was paid out.

The corporation then, like any other major corporation, decides what capital investments it needs to make, how it is going to deal with a variety of opportunities and challenges that it has, and it makes those decisions on a business case basis. I say again for the member, Manitoba Hydro paid out of its profit for '01-02 and '02-03 a total of 203 million, 200 having been transferred in the year under question and 3 in a subsequent period and thereby reduced its retained earnings over what they would have been.

I want to remind the member– and I hope the member is actually paying attention, and I am sure he is, out of his left ear, which is a good ear, Mr. Chair- man. I want to remind the member that had Manitoba Hydro not earned $470 million more than it forecast, then clearly it would also have been in a different position in terms of its ability either to pay out the dividend or to make deci- sions in regard to capital expenditures. The member can prognosticate one way or the other and run interest rates depending on varying assumptions and come up with fantas- tical sums.

The bottom line is that out of the earnings in a given year, the corporation paid a dividend to its shareholders. The option in regard to its shareholders' needs because of balanced budget legislation and because of our commitment to fiscal prudence would have been to close some hospitals or lay off a bunch of staff or shut down some schools or cut university grants or any other list of ors that added up to $150 million. I am sure that the member would not want to see every single small hospital in Manitoba closed, the total budgets of which would not have come up to $150 million.

So we were faced with a situation that was unprecedented, unforeseen, and we were faced with the fact that a corporation which thankfully is still and I deeply trust will always be the crown jewel of our Crowns had more than exceeded its most optimistic forecast, had earned an extra $470 million in the previous five years and was in a position to meet the needs of Manitobans in the situation in which we found ourselves and to enable the corporation to continue to meet those needs with retained earnings of over $1.2 billion.

When the previous government inherited the corporation, having decried the decision to build Limestone, they were immediately rewarded and very fortuitously rewa rded with earnings each year that exceeded the effects of the drought and ultimately built the corporation from having less than a hundred million dollars in equity to having, as the slide before us shows, equity well in excess of a billion dollars, which is what allows us to deal with unforeseen but clearly predictable weather chan ges when they happen. We do not know when a drought is going to happen but we sure know historically that it will happen.

It is happening now. We have equity to allow us to weather that drought. If it is of the same kind of extent and duration as previous droughts, we will emerge from it within this coming year or so and we will continue to enjoy the kind of growth that was seen in the late 1990s and early 2000s. Mr. Chairperson: Mr. Brennan, did you have a comment? Mr. Loewen? Mr.

Loewen: Well, two points that I think the minister needs to clearly understand and I guess if he had a little clearer understanding of PUB and maybe a little clearer understanding of how business works, he would understand and not make these kind of remarks. No third party goes to Bell Canada and demands that they pay them a dividend. Their board figures that out inde- pendently. That is what they are there for. For his second comment, I can assure him that I did not make up any wild interest costs.

Those were numbers given under oath, and I repeat for the minister's benefit, under oath, at the Public Utilities Board. So for him to some- how intimate that I am making up numbers here, I mean, it is totally ridiculous. I just asked the minister, I mean, obviously we are trying to get through this presentation. We do have questions. I can assure him that

September 24, 2003 LEGISLATIVE ASSEMBLY OF MANITOBA 29 what we are interested in are answers from Mr. Schroeder and Mr. Brennan, according to their presentation. We get enough of his political spin in the House, so on the basis of that we would like to move on to the next slide. Mr. Chairperson: Mr. Brennan, would you please proceed with the presentation. Mr. Brennan: There is one thing I would like to make about the comments about the calculation of that interest number you gave. I think we mentioned it at a previous discussion here.

That was just a mathematical number that would arise assuming no other assumption was changed, obviously knowing that that would occur, other assumptions would change. But I should make sure that is on the record. This is a comparison of our financial ratios that you were talking about earlier. We com- pared our capital coverage, interest coverage and equity with other Crown-owned utilities, and this is how we stacked up. You could add other ones as well, but we took some of the bigger ones. Ontario is now in a little different situation because of the changes they made. There are other ones.

You could put SaskPower on, and that sort of thing. Yes. * (21:10) Mr. Loewen: I appreciate those numbers. They do look very good compared to other utilities. Again, that is a sign of good management. I appreciate that. I guess what I would be more interested in, are the debt ratio numbers in terms of, you know, that we have been given in the past and, maybe, you could just give that number to us verbally. I believe the target, at one point, was a debt ratio of 0.75. Is there an update in terms of where the corporation is in terms of meeting that? Mr. Brennan: We can give you that right off the IFF02.

That will show, and it is available. So we will make that available to you. Mr. Loewen: Just off the top of your head, do you know when it is now projected? It has, certainly, been stretched out from where it was two years ago. I am just wondering when you might reach your goal for your debt– Mr. Brennan: I forget what year it is, but I will get that for you. Mr. Loewen: In terms of your interest coverage, do you have the same information? I mean, do you have information here with you that you could give us in terms of where the corporation sees itself going in terms of interest coverage? Mr. Brennan: Yes.

As a matter of fact, when we giv

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Collection	Manitoba — Debates (Hansard)
Citation	38-1-cc01
Type	hansard
Volume / chapter	38th 1st hansardpdf cc01.pdf
Language	en
Format	pdf
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