DBRS Updates 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, which consists mostly of bonds and medium-term notes (approximately 97% of total debt as at December 31, 2015). The remaining 3% of debt not guaranteed consists of non-market debt. Please see the “DBRS Criteria: Guarantees and Other Forms of Support” methodology for further detail.

Hydro-Québec’s business risk profile continues to be supported by the Company’s significant generating capacity (36.9 gigawatts as at December 31, 2015), of which 99% is relatively low-cost hydroelectric generation that provides a strong market position in the northeast region. DBRS notes, however, that the Romaine Complex will likely increase the average cost of generation for the Company. Hydro-Québec will, however, continue to benefit from its integrated operations, with the Distribution and Transmission segments fully regulated by the Régie de l’énergie under a cost of service methodology, allowing for the recovery of all prudently incurred expenses and an ability to earn a reasonable return on equity (8.2% for 2016). In 2015, the Company’s earnings decreased largely as a result of milder weather which reduced demand from the domestic market. This was, however, partially offset by higher exports and the stable performance of the regulated Distribution and Transmission segments.

In June 2016, Hydro-Québec released its 2016−2020 Strategic Plan. In the Strategic Plan, the Company projects average annual capital expenditures of $3.6 billion over the five-year period, largely to improve the reliability and long-term operability of its transmission system ($1.1 billion for 2016), expand the transmission network to connect new generation projects ($790 million for 2016), complete the Romaine Complex generation project ($565 million for 2016), and refurbish and refit its generating stations ($622 million for 2016). Combined with Hydro-Québec’s policy of distributing 75% of its reported net results as dividends (2015 dividend of $2.4 billion paid in 2016) and a lower target net result for 2016 ($2.5 billion), DBRS estimates the Company will generate a free cash flow deficit of approximately $1.0 billion for the year. DBRS anticipates that although the deficit will be financed through debt, it will remain manageable and is not expected to have a material impact on the Company’s 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 (October 2015) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

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