DBRS Updates Report on Hydro-Québec

DBRS Limited (DBRS) updated its report on Hydro-Québec (the Company). 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 essentially of bonds and medium-term notes (approximately 96% of total debt as at December 31, 2017). 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.

Hydro-Québec’s business risk profile continues to benefit from its integrated operations, especially its significant generating capacity (37.3 gigawatts as at December 31, 2017), of which 99% is from relatively low-cost hydroelectric generation and provides the Company with a strong market position in the northeast region. In 2018, Hydro-Québec’s Distribution segment transitioned into the first year of a four-year performance-based regulation (PBR) regime. Under PBR, the Distribution segment’s 2018–2019 revenue requirement was determined under cost-of service, while revenue requirement for the subsequent three years will increase by inflation and growth factors less productivity and stretch factors. DBRS notes that under PBR, the Distribution segment must achieve productivity for the cost elements subject to indexation (i.e. excluding electricity purchases and transmission costs) at least equal to the regulatory productivity and stretch factors in order to achieve the allowed return on equity (8.20% for 2018–2019). However, DBRS views earnings pressure to be manageable as the 2019–2020 productivity and stretch factors are reasonable at 0.30% and 0.00%, respectively. Additionally, DBRS notes that the Transmission segment is expected to transition to the PBR framework as well beginning in 2019 for a four-year period.

Hydro-Québec is currently in the midst of significant capital expenditures ($3.8 billion in 2017 and $3.6 billion planned for 2018), with work continuing on the Romaine Complex generation project (Romaine-3 commissioned in September 2017 and Romaine-4 expected to be in service around 2020) and transmission line maintenance and upgrades. The Company also plans to grow by acquiring assets or stakes in companies internationally, with a focus on targets involved in transmission or hydroelectric generation. DBRS notes that if Hydro-Québec acquires assets or companies that (1) operate in a less favourable regulatory regime or (2) for merchant generation, operate in more challenging environments, this could negatively affect the Company’s business risk profile. Additionally, if these investments are debt financed, this could have a negative impact on the financial profile. DBRS expects Hydro-Québec to be stringent in its investment decisions and only invest in assets or companies that are commensurate with its current risk profile and to remain prudent in its financing plans.

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 (January 2018), which can be found on dbrs.com under Methodologies.

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.