DBRS Updates Its Report on British Columbia Hydro & Power Authority

DBRS Limited (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 dated April 20, 2015). Pursuant to the B.C. 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 (please see the “DBRS Criteria: Guarantees and Other Forms of Explicit Support” methodology for further detail).

In F2015, BC Hydro continued to execute on the Province’s ten-year plan for the Utility. As per the ten-year plan, the British Columbia Utilities Commission (BCUC) approved a rate increase of 9.0% for April 2014 and 6.0% for April 2015. For F2017, F2018 and F2019, BC Hydro’s rate increases will be capped at 4.0%, 3.5% and 3.0%, respectively, and subject to a BCUC review. The Utility’s allowed return on equity (ROE) has also been approved at 11.84% for F2015, F2016 and F2017, after which net income will be adjusted annually by the B.C. consumer price index. As per the ten-year plan, actual ROE for the Utility is forecast to remain above 10% for the medium term. DBRS continues to view the regulatory framework as reasonable and notes that BC Hydro’s business risk profile is also supported by the Utility’s very large generation capacity (12,499 megawatts as at March 31, 2015) and its integrated operations.

In December 2014, the Province approved the approximately $8.3 billion Site C Clean Energy Project to proceed to construction beginning in summer 2015. Combined with the ongoing substantial capital expenditures (capex) to refurbish and maintain the reliability of the system as well as other generation projects to meet growing demand, average capex is forecast to be $2.4 billion per year during the ten-year plan which will lead to continued pressure on the Utility’s key financial metrics. As per the ten-year plan, however, the Province will recapitalize the Utility toward a debt-to-capital of 60% from its current regulatory capital structure of 80%. The Province plans to achieve this by reducing dividends over five years after F2017, then eliminating dividends until the debt-to-equity ratio reaches 60:40. Additionally, the elimination of the Tier 3 Water Rental Rate beginning in F2018 will result in cost savings of $50 million per year. These initiatives should lead to a strengthening of the Utility’s key financial 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 (October 2014) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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