OREANDA-NEWS. Fitch Ratings affirms the following ratings for Hydro-Quebec (HQ; debt figures are outstanding as of Dec. 31. 2014):

--Long-term Issuer Default Rating (IDR) at 'AA-';
--Short-term IDR at 'F1+';
--C$44.5 billion parity unsecured debentures and medium-term notes at 'AA-';
--US$3.5 billion commercial paper (CP) program at 'F1+'.

The Rating Outlook remains Negative.

HQ's rating takes into account $267 million in outstanding parity lien perpetual notes (not rated by Fitch).

SECURITY

HQ's debt, including the perpetual notes and CP program, are supported by an unconditional payment guarantee by the Province of Quebec (rated 'AA-' with a Negative Outlook by Fitch). The CP notes are subordinate in payment to HQ's senior unsecured obligations.

KEY RATING DRIVERS

PROVINCIAL RATING: HQ's ratings are closely linked to the 'AA-' rating assigned to the province given the government of Quebec's unconditional guarantee of HQ's debt. HQ's Negative Outlook, as a result, reflects the rating outlook maintained by Fitch on the province. The guarantee ranks equally in right of payment with Quebec's other unsecured obligations for borrowed money. HQ's debt represents about 15% of the province's total debt.

LOW-COST HYDROELECTRIC POWER: HQ benefits from a very low-cost hydroelectric-based generating system that is largely carbon-free. Its substantial reservoirs provide a distinct energy storage advantage over neighboring Canadian and U.S. electric utilities.

SOUND FINANCIAL POSITION: HQ has exhibited strong financial performance over the past five fiscal years, with average annual debt service coverage of 1.84x, after accounting for transfers to the province as operating expenses. Net income for the first nine months of fiscal 2015 (C$2.47 billion) is just slightly below robust fiscal 2014 net results, with cold winter weather boosting demand and higher export sales.

SIZEABLE CAPITAL PLAN: HQ has been investing heavily in new generation, adding transmission and meeting customer growth since 2009. Capital expenditures for the past five years approximated $20 billion. The plant additions were needed to meet load growth and provide power for the generation division's profitable export sales.

INCREASING OFFSYSTEM SALES: Prospectively, HQ's business profile could be subject to greater revenue volatility as HQ's generation division may increase its reliance on more variable export sales. HQ is in the process of updating its strategic and financial plan for 2016-2020.

STAGGERED DEBT MATURITIES: HQ's debt structure is similar to corporate utilities with mainly bullet maturities, as opposed to annually amortizing debt. Positively, HQ staggers debt maturities to alleviate debt pay down and refinancing risk. With modest debt coming due between 2023-2034, HQ maintains adequate debt capacity going forward.

SIZEABLE COMMERCIAL PAPER PROGRAM: HQ's US$3.5 billion (or equivalent in C$) CP program is supported by a syndicated credit facility sized at US$2 billion which expires in April 2020. 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 (province short-term rating of 'F1+') and available cash reserves of HQ ($2.5 billion at Sept. 30, 2015).

RATINGS SENSITIVITIES

RELATIONSHIP TO PROVINCIAL RATING: 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. Consequently, the resolution of the Negative Outlook is expected to be consistent with the resolution of the province's Outlook.

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 36,643 MW, as of Dec. 31, 2014. HQ generates roughly 99% of its energy through low-cost hydroelectric power.

HQ is comprised 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 -- 68% for fiscal year-end (FYE) 2014.

STABLE FINANCIAL PERFORMANCE

HQ is a self-supporting utility with a history of stable consolidated financial performance. Debt service coverage is solid, ranging from 1.91x-2.88x since fiscal 2010. Coverage of full obligations, which incorporates HQ's substantial transfers to the Province as an operating expense, declines but remains sound 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 384 days operating liquidity for FYE2014.

While HQ's long-term financial and strategic plan will not be available until 2016, Fitch anticipates HQ will maintain conservative financial and operating practices going forward.

HYDROPOWER DEVELOPMENTS

Over the last 12 years, HQ Production has added 4,254 MW of new hydroelectric generating capacity. Through 2020, HQ Production plans to add two additional hydro generating stations (645 MW) to complete its Romaine complex. With these new generation additions, HQ's unregulated production division will continue to expand its export sales, which accounted for roughly one-third of HQ's Production's net income in 2014. However, growing export sales could be a longer-term concern as it subjects HQ to greater price and volume variability than the contracted and more stable regulated sales within Quebec.

Favorably, HQ's vast hydropower portfolio is a valued resource as it is both renewable and 'green' - extremely low carbon-emitting. Additionally, HQ's hydropower is uniquely supported by a substantial set of reservoirs, which help mitigate exposure to variable hydrological and electricity market conditions.

LARGE BUT STAGGERED DEBT MATURITIES
HQ's leverage is sizeable at $44.5 billion, as measured by debt per retail customer of $10,075 versus the rating category peer median of $3,032. However, HQ generates considerable cash flow to support this debt, resulting in a more moderate debt-to-funds-available for debt service ratio of 5.4 for fiscal 2014. Additionally, HQ also staggers its predominantly bullet maturities to alleviate refinancing and/or redemption exposure. Near term maturities, of up to $3.0 billion per year through 2020, appear manageable relative to HQ's cash from operations of $5.6 billion (fiscal 2014).