DBRS Updates Report on British Columbia Hydro & Power Authority

DBRS has today updated its report on British Columbia Hydro & Power Authority (BC Hydro or the Utility). The ratings assigned to the Long- and Short-Term Obligations of BC Hydro are a flow-through of the ratings of the Province of British Columbia (the Province; rated AA (high) and R-1 (high) with Stable trends; see DBRS’s report on the Province dated April 25, 2014). Pursuant to the BC Hydro and Power Authority Act, the Long- and Short-Term Obligations of BC Hydro are either direct obligations of, or are guaranteed by, the Province (see the methodology DBRS Criteria: Guarantees and Other Forms of Explicit Support).

BC Hydro’s business risk profile is supported by the Utility’s very large generation capacity, integrated operations and reasonable regulatory framework. BC Hydro’s installed capacity of 12,047 megawatts is predominantly in the form of low-cost hydroelectric generation, which provides the Utility with a competitive market position. Additionally, the regulatory framework for the Utility has remained reasonable, with the allowed return on equity (ROE) approved at 11.84% for FY2014 to FY2017. As per the Province’s ten-year plan for BC Hydro, the Utility’s allowed net income after FY2017 will be adjusted by the consumer price index. This development is expected to only have a modest impact on the Utility’s earnings and cash flow going forward as the Province’s ten-year plan for BC Hydro forecasts actual ROE to remain above 10% for the medium term.

BC Hydro’s financial risk profile is expected to remain weak as the Utility continues to undergo a period of substantial capital expenditure to refurbish and maintain the reliability of its systems, and to expand generation capacity to meet growing demand. This capital spending has resulted in substantial free cash flow deficits, which the Utility has largely funded through incremental debt. As per the Province’s ten-year plan for BC Hydro, the Province will recapitalize the Utility toward a debt-to-capital of 60% from its current regulatory capital structure of 80% in order to reduce the total debt outstanding. The Province plans to achieve this partly through a growing equity base and the reduction of dividend payments beginning in FY2018, with dividends forecasted to be reduced to $0 beginning in FY2022 and will remain $0 until the Utility’s debt-to-equity ratio reaches 60:40. Additionally, the elimination of the Tier 3 Water Rental Rate beginning FY2018 will result in cost savings of $50 million per year. These initiatives should help reduce outstanding debt and lead to a strengthening of the Utility’s key credit metrics in the medium term.

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.