The following information came to us from Erik Andersen, through the indefatigable Rafe Mair. This information is interesting in that it gives some insight into the direction that the Campbell administration is taking BC Hydro.
A “vector” gives information as to direction and the magnitude of a changing position. A series of financial statements can also provide vector information about the financial health or otherwise of corporations.
The first vector to consider is of the direction and speed of change for the operating net income at BC Hydro. As recently as fiscal 2007 (financial year ending March 31, 2007) BC Hydro’s net operating revenues, less financing expenses, produced earnings of $379 millions.
The 2008 report was the first time these earnings went negative (loss from operations after financing expenses) by $72 million.
The report for 2010 of the operating results, after financing expenses, indicates a loss of $249 million.
In the four year period there has been a $628 million reversal of net operating income after including provision for financing expenses. As a device to offset this deterioration in net operating earnings, the Board elected to greatly increase transfers from the “regulatory account.”
An amount of $28 million was used in 2007 but by 2010 the amount increased to $696 million.
Calling upon the “regulatory account” seems capricious and dependent upon how good or not so good are net earnings from operations. There is a sense that this is an accounting manoeuvre to compensate for the reality of revenue and operating earning reversals.
This opinion is supported by evidence of the growth of “other assets” which includes intangible assets like “goodwill.”As a proportion of total assets, “other assets” amounted to 13% in 2008 but by 2010 were 16%.
Another vector worth examining is the change in total liabilities versus total assets. In the fiscal year ending March 2008 total liabilities were $12,526 million. Three years later they now amount to $15,419 millions; up 23% or $2,893 million. In the asset category, totals increased from $14,447 million to $16,093 million; an increase of only 11% or $1,646 million.
The absence of symmetry between the two sides of the balance sheet is very worrying as there is certainty with liabilities but not so with asset values which in turn means a financial condition of increasing risk of insolvency.
An examination of the demand for electricity vector is also instructive. From page 30 of the 2010 Annual Report, BC Hydro presents the record of this dynamic.
“The growth rate is calculated as the year-over-year change in domestic load. However, despite higher customer numbers, overall load decreased due to the economic impact on BC Hydro’s industrial customers. Slower growth in residential and commercial sectors, and the negative growth rate in the industrial sector, added up to a decline in total BC Hydro firm sales in fiscal 2010 relative to 2009”.
This deteriorating demand condition was detectable as long ago as 2006. In 2006 the growth rate over 2005 was 2.7%; in 2007 it was 1.3% over 2006; in 2008 it was -0.3% over 2007; in 2009 it was -1.8% over 2008 and by 2010 it was -3.8% over the previous year.
Expressed in GWhs (what BC Hydro sells) total volume of sales went from 52,512 units in 2009 to 50,233 units in 2010.
Another vector is the ratio of debt-to-equity. A ratio of 0/100 is the extreme where the corporation or individual has zero debt and as a consequence, an almost perfect credit score. The other extreme is 100/0 where there is no equity. There can even be conditions where the debt is greater than 100. A ratio of 100/0 can be evidence of insolvency.
At BC Hydro this ratio had traditionally hovered around the 70/30 mark. The 2009 Annual report showed a remarkable change to 81/19 which meant no dividend could be paid to the Government. After calling upon the “Regulatory Account” for the 2010 year a small dividend was paid and the debt-to-equity ratio is now presented as 80/20.
If the “regulatory account” transfers were removed from the BC Hydro financial statements, the ratios for 2009 and 2010 respectively would be 87/13 and 89/11. This ratio is an accepted shortcut to demonstrate financial health or otherwise.
The final vector of note is the immediate prospect of new and expensive contractual obligations associated with the call for power from Independent Power Producers (IPPs). From page 10 of the 2010 Annual Report BC Hydro states that they presently have “89 Electricity Purchase Agreements (EPAs) with IPPs, including four EPAs in non-integrated areas, representing about 14,244 GWh/year of energy purchase.
During fiscal 2010, IPPs provided 8,893 of energy to the BC Hydro system, which accounted for about 16 per cent of total domestic electricity requirements.”
From page 40 of the same Report;
“In late November 2008, 68 proposals were received from 43 proponents representing over 17,000 GWh/year of firm energy. In March 2010, BC Hydro selected 23 proposals for the award of Electricity Purchase Agreements, amounting to almost 3,000 GWh per year of clean or renewable firm energy. In May, a further two proposals were selected — representing 287 GWh per year of firm energy.”
Given the timing and the certainty that these are high cost purchase contracts for BC Hydro, it is no surprise to see a financial deterioration at Hydro.
Now what to make of this all? First off it was clear as long ago as 2006 that the growth in domestic demand for electricity was slowing and reversing. With this evidence it is hard to understand what could motivate the management and Board at BC Hydro to embark on the massive spending, done and underway, and the aggressive contracting of energy from IPPs. From the 2010 Report it is manifestly clear that sales to outside of BC customers have collapsed. That leaves only the captive domestic residential and commercial/industrial customers to carry the much increased and certain to grow financial burden. Recent rate hikes have added about 10% to customer bills with an interim increase now in the works for another +6%. This is triple or more the alleged increase in “cost of living” in BC and Canada; a highly inflationary vector at a time of a weak BC economy.
As the evidence of need for more electricity in BC is not readily apparent, the aggressive borrowing/investing/contracting with IPPs appears ill-advised if not worse. It is improbable that the BC Hydro team are “financial illiterates” so there must be some other explanation for what is shown above; hence the description “sinister” because these vectors indicate intent.
Erik Andersen, Economist