DBRS Updates Report on British Columbia Hydro & Power Authority

DBRS has today published an updated report on British Columbia Hydro & Power Authority (BC Hydro or the Utility). The credit quality of BC Hydro reflects the ratings of the Province of British Columbia (the Province; rated AA (high); see DBRS’s report Province of British Columbia dated April 3, 2012), 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 (see the methodology DBRS Criteria: Guarantees and Other Forms of Explicit Support, dated June 2012, for further detail) as, pursuant to the BC 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 capabilities to participate in energy trading with the United States and Alberta through Powerex Corp. BC Hydro’s earnings have benefited from steady domestic electricity consumption and trading volumes over the past two years. The earnings decline for the year-ended March 31, 2012 (FY2012), is mainly due to the impact of Direction 3. In addition, the current year realized higher domestic margins, which were offset by higher amortization expense. On May 22, 2012, the Province issued Direction No.3, which directed the British Columbia Utilities Commission to set rate increases at 8%, 3.91% and 1.44% for FY2012, FY2013 and FY2014, respectively.

BC Hydro is undergoing a substantial capital expenditure (capex) program that calls for an increase in debt levels. Capex has increased over the past five years, well above historical depreciation levels, as the Utility continues to spend on growth and sustaining projects. As a result, the Utility generated negative free cash flow of $1.15 billion for FY2012. Free cash flow deficits were funded through debt, and this trend is expected to continue over the next several years. DBRS expects free cash flow deficits to be manageable.

Notes:
All figures are in Canadian dollars unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

These obligations are based on the status of British Columbia Hydro & Power Authority as a Crown agent of the Province of British Columbia 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.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.