DBRS Updates Report on Hydro-Québec

DBRS Limited (DBRS) has today updated its report on Hydro-Québec (the Company). On June 9, 2017, DBRS confirmed the Guaranteed Long-Term Debt rating of Hydro-Québec at A (high) and the Commercial Paper rating at R-1 (middle), all with Stable trends. The ratings assigned to the Company 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 96% of total debt as at December 31, 2016). The remaining 4% of debt not guaranteed consists of non-market debt. Please see the “DBRS Criteria: Guarantees and Other Forms of Support” methodology for further detail.

In April 2017, the Régie de l’énergie issued its decision on Phase 1 of the implementation of an incentive rate mechanism for Hydro-Québec’s Distribution segment. For a three-year term beginning 2019, the Distribution segment’s revenue requirement will increase by inflation and growth factors less a productivity factor. DBRS does not expect this change in the regulatory framework to have a material impact on the Company’s business risk profile as the Distribution segment will continue to recover all prudent expenses and have the opportunity to earn a reasonable return on equity. DBRS additionally notes that Hydro-Québec’s business risk profile continues to benefit from its integrated operations, especially its significant generating capacity (36.9 gigawatts as at December 31, 2016), of which 99% is from relatively low-cost hydroelectric generation and provides the Company with a strong market position in the northeast region.

In 2016, Hydro-Québec’s earnings and cash flows decreased largely as a result of the more normal temperatures compared to the previous two years. Capital expenditures (capex) of around $3.5 billion, while lower than previous years, remained significantly higher than depreciation as the Company continued work on the Romaine Complex generation project ($750 million in 2016) and to reinforce the transmission network ($1.1 billion in 2016). Combined with 2015 dividends of approximately $2.4 billion paid in 2016 (in line with the Company’s policy of distributing 75% of its reported net results), Hydro-Québec generated a net free cash flow deficit of $316 million which it funded through cash on hand. In line with its 2016–2020 Strategic Plan, the Company has forecast net results and capex in 2017 to be $2.6 billion and $4.0 billion, respectively. DBRS estimates that, combined with dividends of around $2.1 billion paid in 2017, Hydro-Québec will generate a net free cash flow deficit of around $1.0 billion that will likely be funded through debt. DBRS expects the growing debt load to remain manageable though given the corresponding growth in the asset base and does not expect any material impact on the Company’s key financial ratios.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), DBRS Criteria: Guarantees and Other Forms of Support (February 2017) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on dbrs.com under Methodologies.

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