DBRS Updates its Report on Hydro-Québec

DBRS Limited (DBRS) has today updated its report on Hydro-Québec (the Company). The ratings assigned to the Company’s Guaranteed Long-Term Debt and Commercial Paper 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, 2014). Please see the “DBRS Criteria: Guarantees and Other Forms of Explicit Support” methodology 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 99% of its installed capacity of 36,643 megawatts (MW). This provides Hydro-Québec with a very competitive market position in the northeast region. In 2014, Hydro-Québec posted its highest result from continuing operations in its history as the Company benefited from below-average temperatures in winter 2013–2014 and the increase of the approved return on equity to 8.20% for regulated operations. Although earnings from the distribution segment fell as a result of increased purchases from independent power producers and short-term market purchases, this was more than offset by the strong performance of the generation and transmission segments.

Hydro-Québec’s key financial metrics strengthened modestly in 2014 and in the last 12 months ending March 31, 2015, largely as a result of the higher earnings and cash flows during these periods. Going forward, with the current low interest rate environment and the equity base rising at a similar pace as debt, the Company’s key financial metrics are expected to remain relatively stable despite continued high capital expenditures (capex). For 2015, Hydro-Québec has planned capex of approximately $3.9 billion, including around $700 million for the 1,550 MW Romaine Complex power generation project (first two generating units totalling 640 MW commissioned in November and December 2014). Hydro-Québec’s dividend policy remains the same, and the Company continues to distribute 75% of its reported net result as dividends (2014 dividend of $2.5 billion paid in 2015). The Company is additionally targeting a net result of $2.7 billion for 2015. DBRS anticipates that free cash flow deficits going forward will be manageable and will have no material impact on the Company’s key financial ratios.

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

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

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.