DBRS Updates Report on British Columbia Hydro and Power Authority

DBRS Limited (DBRS) updated its report on British Columbia Hydro and Power Authority (BC Hydro or the Utility). On October 26, 2017, DBRS confirmed the ratings of AA (high) and R-1 (high) with Stable trends on BC Hydro’s Long-Term Obligations and Short-Term Obligations, respectively. The ratings of the Utility 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 by DBRS; see DBRS’s report on the Province dated October 26, 2017). Pursuant to the British Columbia 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. Refer to the “DBRS Criteria: Guarantees and Other Forms of Support” methodology for further details. DBRS considers BC Hydro to be self-supporting as it is able to fund its own operations and service its debt obligations.

On December 11, 2017, the Province announced that BC Hydro will complete construction on the Site C Clean Energy Project (Site C), a 1,100-megawatt (MW) hydroelectric generating station. This announcement followed a British Columbia Utilities Commission (BCUC) inquiry on (1) if the project was on target to be completed by 2024 and within the proposed budget of $8.3 billion (excluding $440 million of reserves); and (2) the implications of completing Site C, suspending the project while maintaining an option to resume construction until 2024 or terminating the project and remediating the site. The Province also asked the BCUC if Site C was currently on time and on budget, what the costs to ratepayers would be of suspending or terminating the project, and potential mechanisms to recover those costs, as well as what, if any, other portfolio of commercially feasible generating projects and demand-side management initiatives could provide similar benefits to ratepayers at similar or lower unit energy costs as the project. The BCUC was not tasked with providing a recommendation on which option the Province should proceed with. The BCUC released its final report in November 2017 and found that (1) suspending Site C was the riskiest and most costly scenario, (2) the project was not on target for completion in 2024 and that (3) costs may exceed $10 billion. However, in a number of areas, the BCUC report was inconclusive in its findings. As noted in the commentary, “DBRS Comments on the British Columbia Government’s Decision to Complete Site C Construction,” dated December 12, 2017, DBRS viewed this development as positive for BC Hydro as it removes some uncertainty on the status of Site C, as well as the possibility of the non-recoverability of the $2.1 billion construction cost to date and the estimated remediation expenses of $1.8 billion. However, DBRS notes that risks remain, which could prevent the project from remaining on schedule and on budget as revised. DBRS is encouraged by the increased project oversight through a new Project Assurance Board and support from external consultants. DBRS will continue to monitor the project for its impact on BC Hydro’s financial outlook.

BC Hydro’s business profile continues to be supported by its substantial generating capacity (12,053 MW), most of which is in the form of low-cost hydroelectric generation and its integrated operations. In November 2017, the Province announced a one-year rate freeze for BC Hydro as it conducts a review of the Utility’s operations. DBRS notes that this rate freeze is subject to approval by the BCUC. If approved, the foregone revenues, as a result of the rate freeze, will be deferred to BC Hydro’s rate-smoothing regulatory account for recovery in future periods. The rate freeze, if approved, is expected to further pressure the Utility’s cash flow metrics in F2019, especially during this period of elevated capital expenditures. However, DBRS expects the Utility to continue delivering on its 10 Year Rates Plan, which should help improve its financial profile. Under the 10 Year Rates Plan, BC Hydro’s key financial metrics are expected to improve through initiatives (such as the reduction of dividends beginning F2018) until leverage reaches 60% from the current 80% level. The Province has also announced that a comprehensive review of BC Hydro will be undertaken, and that a refreshed plan for rates will be developed to keep electricity rates low and predictable over the long term.

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 (September 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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