Press Release

DBRS Updates Its Report on Hydro-Québec

Utilities & Independent Power
May 29, 2014

DBRS has today updated its report on Hydro-Québec (the Company). The ratings assigned to the Company’s Commercial Paper and Guaranteed Long-Term Debt are a flow-through of the ratings of the Province of Québec (the Province; rated A (high) and R-1 (middle) with Stable trends by DBRS). The Province unconditionally guarantees most of the Company’s outstanding debt (approximately 92% of total debt as at December 31, 2013). See the methodology DBRS Criteria: Guarantees and Other Forms of Explicit Support for further detail.

Hydro-Québec’s business risk profile is supported by the Company’s strong market position, integrated operations and low-cost production. The Company is one of the largest generators in the world, with low-cost hydroelectric generation accounting for over 98% of its installed capacity of 36,068 megawatts. This provides Hydro-Québec with a very competitive market position in the northeast region. Overall, the Company benefitted from a colder winter in 2013, resulting in a modest increase in earnings before non-recurring items to around $3.0 billion from $2.8 billion in 2012. Colder weather and growth in demand in Québec significantly increased earnings at the generation segment, which more than offset weaker results from the distribution and transmission segments. Decreases in distribution earnings were largely due to the higher price of electricity purchased from independent energy producers and from the market, which has not yet been passed through to customers.

With the current low interest rate environment and the equity base rising at a similar pace as debt, Hydro-Québec’s key financial metrics remained relatively stable in 2013. DBRS expects this trend to continue in the foreseeable future despite continued high capex. The Company has substantial capex requirements for development projects and asset maintenance and improvement, with $4 billion planned for 2014. A large portion of this planned capex is for hydroelectric generation projects, such as the $6.5 billion Romaine Complex, and for integrating the additional capacity to the transmission grid. Hydro-Québec’s dividend policy remains the same, and the Company is expected to distribute 75% of its reported net results as dividends ($2.2 billion for 2014). The Company is additionally targeting a net result of $2.9 billion for 2014. DBRS anticipates that free cash flow deficits going forward will be manageable and will have no material impact on key financial ratios.

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

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, Rating Companies in the Non-Regulated Electric Generation Industry, and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

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