DBRS Confirms British Columbia Hydro & Power Authority at AA (high) and R-1 (high), Stable Trends

DBRS has confirmed the ratings of the Long-Term Obligations and Short-Term Obligations of British Columbia Hydro & Power Authority (BC Hydro or the Utility) at AA (high) and R-1 (high), respectively. The trends are Stable. The ratings for BC Hydro reflect the short-term and long-term ratings of the Province of British Columbia (the Province or the government, rated AA (high); see the separate rating report for the Province), which owns 100% of BC Hydro’s equity. Both the Short-Term Obligations and the Long-Term Obligations of BC Hydro are based on the implicit support of the Province as, pursuant to the B.C. Hydro and Power Authority Act, BC Hydro “is for all purposes an agent of the government.” BC Hydro’s operating performance is supported by low-cost hydroelectric generation and considerable storage capabilities as well as by interconnections with the United States and Alberta that enable BC Hydro to participate in energy trading by way of Powerex Corp. (Powerex). The Utility’s strengths are offset by its high debt and planned capital expenditure levels, a degree of hydrology risk, its reliance on purchased power to meet its energy commitments and modest exposure to foreign exchange rates.

As a vertically integrated utility located within a supportive regulatory environment, BC Hydro has historically generated stable cash flows and had a low business risk profile. The Utility’s regulated assets, which operate under a cost-of-service methodology, typically provide consistent earnings, with moderate growth coming from increases in its customer base. Any volatility in earnings and cash flows arise primarily from (1) variability in hydrology; (2) the extent to which Powerex, a wholly owned subsidiary of BC Hydro, participates in energy trading; and (3) fluctuations in purchased power and fuel expense. However, any volatility has been and continues to be largely mitigated over time through the use of regulatory deferral accounts approved by the British Columbia Utilities Commission (BCUC).

Since the late 1990s, BC Hydro and the Province have experienced a net energy supply deficit and consequently, the Utility has relied on higher-cost power purchases to meet this energy imbalance.

Although the Utility’s low-cost hydroelectric generation and active reservoir management provide ratepayers with some of the lowest-cost hydroelectric rates in North America in addition to competitively priced power that Powerex can sell in export markets, the growing supply-demand imbalance has nevertheless led to increased reliance on higher-cost power purchases.

In December 2010, the BCUC approved the Negotiated Settlement Agreement (NSA) for BC Hydro’s F2011 Revenue Requirements Application (RRA). The overall impact was an average rate increase of 7.29% for F2011 compared to the requested increase of 9.26%. BC Hydro’s F2012-F2014 RRA, which requested a general rate increase of roughly 9.7% in each year of F2012 to F2014, was filed in the spring of 2011, with the expectation that the BCUC would present its decision regarding the application in the winter of 2011. However, in response to concerns surrounding the impact of the proposed rate increases on ratepayers, the Province has appointed an independent panel of senior officials to review the increases and examine BC Hydro’s financial performance, rate structures, corporate structures and business planning, as well as examine any other matters that may arise over the course of the review. The panel will report back with its findings and recommendations by the end of June 2011. This report is also anticipated to aid in informed discussion of the Integrated Resource Plan (IRP) and amended BC Hydro rate application to the BCUC. Any amendments to the rate application will be assessed and approved by the BCUC through its public hearing process. BC Hydro’s regulatory approved return on equity (ROE) for F2011 is 14.37%, which is higher than the 13.05% approved rate in the prior fiscal year.

Over the medium term, these factors may translate into lower earnings and cash flows until these amounts are eventually recovered through deferral accounts. In the medium to long term, high capital expenditures and distributions to the Province may continue to result in gross free cash flow deficits, higher debt levels and weak coverage ratios. DBRS notes that as of December 31, 2010, $216 million of dividends to the Province had accrued; this is below 85% of the distributable surplus. Moreover, the Utility has not historically needed to seek external third-party financing as any funding requirements are obtained from the Province.

Notes:

The ratings of the Long-Term Obligations and Short-Term Obligations are based on the status of BC Hydro as a Crown agent of the Province and reflect the Province’s debt ratings. The rating assigned to the Long-Term Obligations is applicable to $10 million of debt issued by BC Hydro and guaranteed by the Province.

All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.