(The following statement was released by the rating agency)
NEW YORK, June 17 (Fitch) Fitch Ratings has affirmed the following ratings for
Hydro-Quebec (HQ) (outstanding par amounts as of Dec. 31. 2015):
--Long-Term Issuer Default rating at 'AA-';
--Short-Term Issuer Default rating at 'F1+';
--C$45.7 billion parity unsecured debentures and medium-term notes at 'AA-';
--US$3.5 billion or equivalent in C$ commercial paper program (CP) at 'F1+'.
The Rating Outlook is revised to Stable from Negative.
SECURITY
HQ's debt, including the CP, is an unsecured obligation of the utility and
further supported by an unconditional payment guarantee by the Province of
Quebec (rated 'AA-'/Stable Outlook).
KEY RATING DRIVERS
PROVINCIAL OUTLOOK CHANGE: The revised Outlook for HQ reflects Fitch's recent
revision of the Province's Rating Outlook to Stable from Negative (June 14,
2016). HQ's foremost rating driver is the Province's irrevocable and
unconditional payment guarantee of HQ debt. The guarantee extends to the vast
majority of long- and short-term debt of HQ, and ranks equally in right of
payment with all other unsecured obligations of the Province.
LOW-COST HYDROELECTRIC POWER: HQ maintains one of the lowest-cost hydroelectric
generating systems in North America. This favorably 'green' resource is
supported by substantial reservoirs which provide a distinct energy storage
advantage over neighboring Canadian and U.S. hydro-based utilities.
SOUND FINANCIAL POSITION: HQ has exhibited strong financial performance over the
past five years, with average annual debt service coverage of 1.80x (2015 peer
median is 1.43x), after accounting for transfers to the province as operating
expenses. Net income, for the second year in a row, was robust at C$3.1 billion,
primarily due to cold winter weather boosting native demand and a higher volume
of export sales than anticipated.
LARGE CAPITAL PLAN: HQ has been investing heavily in utility infrastructure
since 2009. Capital expenditures for the past five years have approximated C$20
billion and HQ projects spending another C$18.1 billion through 2020. The
capital additions have been needed to meet load growth, maintain reliable
service and provide generation for the production division's profitable export
sales.
MANAGEABLE DEBT: HQ's debt structure is similar to corporate utilities, with
mainly bullet maturities, as opposed to amortizing debt. Positively, HQ staggers
debt maturities to alleviate debt paydown and refinancing risk. With modest debt
coming due from 2023-2034, HQ's debt capacity remains adequate going forward.
Leverage is moderate as measured by debt-to-funds available for debt service
(FADS) of 5.5x, but slightly weaker than the peer median of 4.8x (2015). Equity
capitalization has been stable and is projected to remain at approximately 30%
through 2020.
INCREASING BUSINESS RISK: Prospectively, HQ's consolidated business profile
could be subject to greater margin volatility as it increases its reliance on
more variable export sales from its production division and the utility explores
power-related investments outside of Quebec for added revenue growth.
SIZEABLE CP PROGRAM: HQ's US$3.5 billion CP program is supported by a syndicated
credit facility sized at C$2 billion which expires in April 2021. While the
credit facility does not fully cover the maximum liquidity exposure of the CP
program, it is rated 'F1+' due to the support provided by the provincial
guarantee (Short-Term rating of 'F1+) and HQ's considerable unrestricted cash
and equivalents of C$2.6 billion as of Dec. 31, 2015.
RATINGS SENSITIVITIES
CHANGE IN CREDIT QUALITY OF QUEBEC: Fitch traditionally rates Hydro-Quebec in
line with the Province of Quebec, given the provincial ownership of HQ,
considerable transfers from HQ to the province, and the province's guarantee of
HQ's debt.
UTILITY FUNDAMENTALS SOUND: Although unlikely at the current rating level, HQ's
rating could be revised separately from rating action on the province, if Fitch
determined that HQ's utility operations, projected financial performance, and
independence from the province supported a higher rating than that provided by
the guarantee.
CREDIT PROFILE
Hydro-Quebec is a vertically integrated electric system in Canada, providing
electric service to 4.2 million customers in Quebec. HQ is among the largest
electric systems in North America, with installed generating capacity of 36,912
MW, as of Dec. 31, 2015. HQ generates roughly 99% of its energy through
low-cost, environmentally valuable, hydroelectric power.
HQ is composed of four principal operating divisions: HQ Production (power
generation); HQ TransEnergie (transmission division); HQ Distribution; and HQ
Equipement et Services Partages and Societe d' energie de la Baie-James
(designs, builds and refurbishes generation and transmission facilities). Both
the HQ Transmission and Distribution divisions are subject to rate and
regulatory oversight by the Province's utility commission, the Regie' de
l'energie. HQ's unregulated production division generates the largest proportion
of HQ consolidated net income - 67.7% for FYE2015.
PROVINCIAL OUTLOOK STABILIZED
The key driver supporting HQ's Outlook revision to Stable is the June 14, 2016
rating action taken on the Province. Fitch affirmed Quebec's 'AA-/F1+' IDRs and
revised the Outlook to Stable from Negative, reflecting the Province's success
in achieving fiscal budgetary balance in 2015 and the likelihood of continued
stronger operating performance prospectively.
The current provincial rating essentially provides a lower boundary for HQ's
ratings. Although unlikely at the current rating level, HQ's rating could be
revised separately from rating action on the province, if Fitch determined that
HQ's utility operations, projected financial performance, and independence from
the province supported a higher rating than that provided by the guarantee.
STABLE FINANCIAL PERFORMANCE
HQ is a self-supporting utility with a history of stable consolidated financial
performance. Debt service coverage is strong, ranging from 1.91x-2.88x since
fiscal 2011. Coverage of full obligations, which incorporates HQ's dividend
payment and other substantial transfers to the Province as operating expenses,
is very solid for the rating category at 1.40x-2.21x. HQ's business divisions
have been able to sufficiently raise rates, meet project development on time and
within budget, and take advantage of increasing export sales to generate net
income.
HQ also maintains solid liquidity levels, with several external bank credit
lines, in aggregate contributing to an ample 501 days operating liquidity for
FYE2015. Fitch anticipates HQ will maintain its conservative financial and
operating practices going forward.
For additional information please see the Fitch press release dated Dec. 18,
2015, available at www.fitchratings.com.
Contact:
Primary Analyst
Lina Santoro
Analytical Consultant - Power
+1-212-908-0522
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:
elizabeth.fogerty@fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
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_id=1006275
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006275
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det
ail=31
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