Morningstar DBRS Confirms the Province of Québec's Credit Ratings at AA (low) and R-1 (middle), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Long-Term Debt credit rating of the Province of Québec (Québec or the Province) at AA (low) as well as its Short-Term Debt credit rating at R-1 (middle). Concurrently, Morningstar DBRS confirmed the Guaranteed Long-Term Debt and Commercial Paper credit ratings of Hydro-Québec at AA (low) and R-1 (middle), respectively. The trend on all credit ratings is Stable.

Morningstar DBRS has also discontinued and withdrawn the Long-Term Debt and Short-Term Debt credit ratings of Financement-Québec. The discontinuation reflects the dissolution of Financement-Québec, per the implementation of Bill 80. Effective April 1, 2025, 5.25% Series R debentures maturing on June 1, 2034, are now obligations of Québec payable out of the Province's consolidated revenue fund pursuant to section 10 of the Financial Administration Act. Morningstar DBRS continues to rate this security AA (low) by applying Québec's Long-Term Debt rating.

CREDIT RATING DRIVERS
A credit ratings upgrade is dependent on improvement in critical credit rating factors or sustained improvement in financial risk factors. A combination of a material erosion in economic fundamentals, sustained large operating deficits, and a significant increase in the debt-to-GDP ratio could result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Québec presented its latest budget on March 25, 2025, and now anticipates a deficit of $11.4 billion (before contributions to the Generations Fund) in 2025-26, compared with a better-than-expected shortfall of $8.1 billion for the fiscal year ended March 31, 2025. Because of the ongoing tariff threat, Morningstar DBRS anticipates some near-term deterioration in Québec's fiscal and debt metrics, potentially reducing flexibility within its current credit ratings. However, the slowing pace of expenditure growth and continued commitment to restore fiscal balance, along with the Province's large and diversified economy, give us comfort that Québec can minimize the deterioration in its public finances. Despite the near-term deterioration, the Province remains committed to restoring fiscal balance by 2029-30, consistent with the goal articulated in last year's budget. Morningstar DBRS adjusts reported results to include capital expenditures while excluding amortization of tangible capital assets and the contingency reserve. On this adjusted basis, Morningstar DBRS anticipates a deficit of 2.8% of GDP in 2025-26, gradually falling to 0.4% of GDP by 2029-30.

As a result of near-term deterioration in the fiscal outlook and a substantial capital investment program, Québec has relaxed its debt reduction targets. The Province now plans to reduce net debt-to-GDP to 35.5% by 2032-33 and 32.5% by 2037-38 (previously 33.0% and 30.0%, respectively). On an adjusted basis, including loan guarantees, Morningstar DBRS expects the debt-to-GDP ratio to approach 50% by 2027-28 before gradually declining thereafter.

Given heightened economic uncertainty resulting from U.S. trade policy, as part of its baseline economic forecast, Québec has assumed an average tariff of 10% will be in place for two years. Incorporating this assumption, the Province expects real GDP growth of 1.1% in 2025 before recovering to 1.4% in 2026. While the ongoing trade uncertainty is expected to weigh on consumer and business confidence and investment intentions, domestic consumption should remain supported by easing monetary policy, along with relatively strong labour markets and household savings.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196

CRITICAL RISK FACTORS (CRF) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of CRFs
In the analysis of the Province of Québec, the CRFs are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of the Province of Québec, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the CRF and the FRA
In the analysis of the Province of Québec, the CRF carries greater weight than the FRA.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Rating Canadian Provincial and Territorial Governments (April 25, 2025)
https://dbrs.morningstar.com/research/452575

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025, https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025)
https://dbrs.morningstar.com/research/454196

Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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