2009-11-11 23:24:01 -

Fitch Ratings assigns an 'AA-' rating to Hydro Quebec's (HQ) $500 million (CAN$) series JN senior unsecured debentures. This series of JN debentures rank equally with Hydro-Quebec's $35.5 billion of outstanding long-term debt securities. This is an additional tranche of the JN debentures, of which, $1 billion is currently outstanding. In addition, the Rating Outlook is revised to Stable from

Positive.

Fitch also affirms HQ's existing ratings as follows.

-Long term Issuer Default Rating (IDR) at 'AA-';

-Short-term IDR at 'F1+';

-Unsecured debentures at 'AA-';

-Medium term notes at 'AA-';

-Commercial paper at 'F1+'.

The Outlook revision to Stable primarily reflects Fitch's revised outlook for the Province of Quebec (IDR of 'AA-'; Outlook to Stable, on May 15, 2009). HQ's ratings are supported by an unconditional and irrevocable guarantee by HQ's sole owner, the Province of Quebec (the Province). The bond proceeds will be used to finance a portion of capital expenditures, refund outstanding debt, and/or for general corporate purposes. All of the series JN debentures have a final maturity of Feb. 15, 2050, a 5% coupon, and are underwritten by a syndicate of Canadian banks.

HQ's standalone credit quality is derived from its quasi-monopoly position in the province, continued solid consolidated financial metrics consistent with that of other municipal electricity providers in the 'AA-' category, cost-competitive fleet of mostly 'green' hydroelectric power resources (97% of generation), and dispatch flexibility provided by its enormous reservoir system. As of Dec. 31, 2008, HQ's reservoirs provided energy reserves equivalent to 116 terawatt-hours (twh). HQ kwh sales inside Quebec totaled 170.4 twh for the same period in 2008.
Additionally, the Regie de L'energie, the utility regulatory authority in Quebec, has approved adequate annual rate adjustments for HQ's distribution and transmission divisions in order to maintain stable financial performance for those divisions.

Since 2008, HQ has embarked on a major, roughly $25 billion capital program (through 2013), which includes the construction of several large hydropower projects, transmission additions and distribution system upgrades. The projects are in varying stages of development and continue to meet important milestones and commissioning dates. By 2013, HQ is projecting to have another 1,000 megawatts (MW) of new hydro-generating capacity on-line (compared to existing capacity of 36,429MW for 2008).
While a portion of the new generation is needed to meet modest native load growth, an increasing proportion will be used to increase exported power sales - a credit concern, as off-system revenues are more volatile and fluctuate based on electricity market prices. On a positive note, given HQ's extensive reservoir capacity and its mainly 'green' (non-carbon emitting) power resources, its power resources are likely to remain in demand, both inside and outside of Quebec for the foreseeable future, particularly as the U.S. and Canada increasingly focus on attaining renewable and carbon emission reduction environmental targets.

The key rating drivers Fitch will be monitoring going forward are.

--The credit rating of the Province, the sole shareholder of HQ and guarantor of HQ debt;

--Construction risks associated with build-out of large hydroelectric power facilities and HQ's generation division's ability to manage growing revenue volatility related to increasing sales for export;

--HQ's ability to maintain financial metrics as projected, albeit at slightly weaker levels, to remain in-line with comparable 'AA-' rated municipal utilities;

--HQ will be adding approximately $17.7 billion of debt through 2013; equity capitalization will decline to just under 30%, from 37.7% at fiscal year end (FYE) 2008; interest coverage will fall to 1.75x in 2013, from 2.12x in FYE 2008.

Finally, On Oct. 29, 2009, HQ and New Brunswick Power (a neighboring province-owned utility [NB]) announced an agreement (MOU) under which, HQ would acquire most of the assets of NB for $C4.75 billion (amount equivalent to NB outstanding debt). Included in the quality generation, transmission and distribution assets to be acquired by HQ are NB's Point Lepreau Nuclear Plant (currently being refurbished) and key transmission lines into Maine. Positively, HQ would not assume any liabilities with respect to the Point Lepreau nuclear facility. The transaction is also projected to be accretive to HQ earnings in the first year, with a projected return on equity of more than 10%. Fitch will monitor the proposed acquisition and coordination of the new resources into HQ's generation and transmission resource mix. Pursuant to the MOU, March 31, 2010 is the closing date set for substantially all the asset transfers.

Hydro-Quebec operates one of the two largest vertically integrated electric systems in Canada. HQ provides electricity to virtually all of Quebec, or approximately 3.9 million customers. Quebec is the largest province in Canada in terms of land area, and second largest in terms of population.

Additional information is available at ' www.fitchratings.com : '.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS : .

IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM : '.

PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings, New YorkLina Santoro, 212-908-0522Christopher
Jumper, 212-908-0594orMedia Relations:Cindy Stoller,
212-908-0526Email: cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com