Dec 20 - Fitch Ratings affirms Hydro-Quebec's (HQ) $3.5 billion commercial
paper (CP) program rating at 'F1+'. Fitch also affirms the short-term Issuer
Default Rating (IDR) at 'F1+'.
HQ has $529 million in commercial paper outstanding as Sept. 30, 2012.
Historically, commercial paper has been used primarily for added liquidity
purposes, with relatively small amounts outstanding at fiscal year end.
HQ's debt is secured by the net revenues of the consolidated HQ system.
Commercial paper notes are on parity with outstanding unsecured debentures and
medium-term notes. HQ's bonds and commercial paper are further secured by an
unconditional payment guarantee by the Province of Quebec (rated 'AA-/F1+' with
a Stable Outlook by Fitch).
KEY RATING DRIVERS
GOVERNMENT OWNED CORPORATION: HQ generates, transmits and distributes
electricity with a total installed capacity of 36,971 MW. With over 40% of
Canada's water resources in Quebec, HQ is able use renewable generating options
and large hydropower projects. The company serves the Quebec market and sells
its surplus on wholesale markets in northeastern North America.
PROVINCIAL GUARANTEE: HQ's credit ratings are driven by an unconditional
guarantee provided by the government of Quebec. This guarantee extends to both
the long- and short-term HQ ratings noted above, and ranks equally in right of
payment with all other unsecured obligations for borrowed money of the province
LOW-COST HYDROELECTRIC POWER: On a standalone basis, HQ is an integrated utility
with low-cost and largely carbon-free hydroelectric power resources (average of
2.11 cents per kWh [kilowatt hour] production cost for 2011).
COMPETITIVE ELECTRIC RATES: HQ's distribution division, regulated on a
cost-of-service basis, maintains some of the lowest retail rates in North
America (average revenue per delivered kWh of 6.76 cents as of April 2012). The
Regie de l'energie approved a distribution rate decrease of 0.41% (effective
April 1, 2011) and another 0.45% decrease for the period between April 1, 2012
and March 31, 2013. While the approval of a rate decrease is a concern, it is
offset by HQ's continued solid financial performance.
SOUND FINANCIAL POSITION: HQ has a history of solid financial performance, with
debt service coverage ranging from 1.75x to 2.47x for the past five years, and
equity-to-total capitalization presently stable at 30.9%.
LIQUIDITY SUPPORT AVAILABLE: In addition to the provincial guarantee, HQ's
commercial paper program is also supported by dedicated bank lines generally
totaling $1.64 billion-$2 billion.
WHAT COULD TRIGGER A RATING ACTION
QUEBEC PROVINCIAL RATING LINKAGE: The explicit guarantee by the government of
Quebec results in a direct linkage between the rating on HQ issued debt and the
COMMERCIAL PAPER PROGRAM
HQ's commercial paper is subordinate to $42.7 billion (as at Sept. 30, 2012) in
senior unsecured debt of HQ, however is supported by the same provincial
guarantee as the senior debt.
On Aug. 9, 2011, Fitch assigned an 'F1+' rating to HQ's increased commercial
paper program. The size of the authorized program was augmented to $3.5 billion
from $2.25 billion to provide ample financial flexibility through the remainder
of its capital expenditure program through 2013.
Although the full authorized amount of HQ's commercial paper program is not 100%
supported by bank lines, it is still rated 'F1+' due to the absolute and
unconditional provincial guarantee, which provides an enhancement to HQ's
Initially, two facilities totaling $2 billion were available to support the
program. In 2012, a $360 million facility expired while the remaining $1,640
billion will expire on December 2013. HQ's access to international markets
allows it to issue short term debt in U.S or Canadian market enhancing liquidity
and marketability of its commercial paper program.
Michael Mohammed Murad
One State Street Plaza
New York, NY 10004
Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:
Additional information is available on Fitch's web site at
'www.fitchratings.com'. The ratings above were solicited by, or on behalf of,
the issuer, and therefore, Fitch has been compensated for the provision of the
In addition to the sources of information identified in the Revenue-Supported
Rating Criteria, this action was additionally informed by information from
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Rating U.S Municipal Short-Term Debt' (Nov. 27, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Rating U.S. Municipal Short-Term Debt
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