Market Insider By Frédéric Tomesco 78 Views

Hydro-Québec sees 2021 profit rebounding as demand picks up and interest costs fall

Hydro-Québec expects to claw back most of its profit shortfall in 2021 as demand from industrial and residential customers picks up amid a projected acceleration in economic activity.

Power sales in Quebec this year should rebound to 175 terawatt-hours from the 171.4 terawatt-hours recorded in 2020, bolstering 2021 net income to about $2.7 billion, chief financial officer Jean-Hugues Lafleur said Wednesday. Interest expenses should be lower now that the company has refinanced part of its debt, he also said.

Lafleur and chief executive officer Sophie Brochu briefed reporters after Hydro-Québec said 2020 net income fell 21 per cent to $2.3 billion due to mild weather and the COVID-19-induced economic slowdown. The state-owned utility will still pay Quebec — its lone shareholder — a $1.7-billion annual dividend, down about 22 per cent from 2019.

“We have a reasonable degree of comfort that we can deliver $400 million more in profit in 2021,” Brochu said on a conference call. “We hope we can deliver even more than that.”

Earnings this year should benefit from recent refinancing efforts, which have seen Hydro-Québec replace debt bearing 10 per cent annual interest with 35-40 year bonds that pay 2.2 per cent, Lafleur said. That strategy should lift 2021 profit by about $160 million, he said.

Canada’s biggest electricity producer initially targeted 2020 profit of between $2.8 billion and $3 billion before abandoning the goal as the pandemic gathered momentum.

In Quebec alone, COVID-19 cost the company about $325 million, according to a slide presentation released Wednesday. Warmer temperatures in the first and fourth quarters — compared with the corresponding periods in 2019 — contributed to a $146-million decline in net electricity sales, Hydro-Québec said.

As the virus spread, the company took steps to help consumers unable to pay their electricity bills, a move that ended up costing Hydro-Québec about $90 million for the full year. Measures included more flexible payment terms; a moratorium on service interruptions for the non-payment of bills; and the suspension — from March to September — of administration charges on unpaid bills.

“This has a cost, but it was the right thing to do,” Brochu said Wednesday.

Provisions for doubtful accounts soared 83 per cent last year to $157 million, an all-time high, Lafleur said. In a normal year, the figure would be about $90 million, he said.

Electricity consumption in Quebec fell four per cent last year due to prolonged lockdowns and manufacturing closures. Baseload demand from commercial, institutional and small industrial customers shrank seven per cent, as did demand from large industrial users. A four-per-cent rise in residential demand failed to make up for the shortfall.

Power exports generated income of $537 million, or 23 per cent of the company’s 2020 profit. That’s down from $631 million in 2019.

After slowing to $3.4 billion last year, Hydro-Québec’s capital expenditures will rebound to about $4.6 billion in 2021 as the utility puts greater emphasis on modernizing its power network, Lafleur said.

In fact, capital spending will remain elevated “for several years,” the CFO said. “These are investments that are made in Quebec to support our asset base. We have an aging network and we need to address it. The goal is to make sure we don’t fall behind on maintenance.”

Last spring’s six-week shutdown in construction sites across the province will have a ripple effect on one of the company’s most ambitious projects. Because of COVID-19 delays, Hydro-Québec’s planned $8.3 billion La Romaine power complex will now enter service in December 2022, one year later than planned, Brochu said. Even so, La Romaine’s estimated production costs will remain at 6.5 cents per kilowatt-hour, she said.