DBRS Confirms SaskTel at AA (low), Trend Positive

DBRS has today confirmed its Issuer Rating for Saskatchewan Telecommunications Holding Corporation (SaskTel or the Company) at AA (low) with a Positive trend, reflecting the long-term rating of the Province of Saskatchewan (the Province). Please see DBRS’s report on the Province of Saskatchewan dated August 8, 2008, for further details. The confirmation of SaskTel represents a reflection of the Province’s rating, as SaskTel is an agent of the provincial government of Saskatchewan that ultimately provides creditors recourse to the provincial government. Hence, the provincial rating has been assigned to the Company. SaskTel receives the majority of its funding from the Province and does not currently issue debt in the capital markets, other than some small credit facilities.

From an operational perspective, SaskTel continues to face many of the same pressures that are affecting other Canadian telecommunications companies (telcos), notably, the shift in its revenue base from higher-margin voice services to lower-margin and more competitive growth services such as wireless, high-speed Internet and video. Despite this challenge, SaskTel has managed to continue to drive revenue growth from these new services, which has more than offset pressure on legacy wireline revenue services as a result of competition and technology substitution. Despite this industry trend, SaskTel continues to demonstrate strong market share for its services and to gain efficiency through productivity improvements. All of these factors have led to EBITDA growth while maintaining relatively stable EBITDA margins of just over 30%.

This has enabled SaskTel to generate sufficient cash flow from operations to fund its capital expenditure requirements and dividend payments to the Province. DBRS notes that SaskTel’s capital spending includes a five-year plan to upgrade its networks to better service its customers with higher bandwidth. As part of this deployment – which is nearly 60% completed – SaskTel is developing a core IP-based network that pushes fibre to the node. This has boosted broadband speeds and allowed it to deploy video services and gain over 62,000 video subscribers over the past few years.

Going forward, DBRS expects cash flow from operations to remain strong despite an increasingly tough competitive environment and as the Company becomes more dependent on revenue streams in which it is subject to stronger competition. DBRS believes that SaskTel will continue to generate free cash flow in 2009 with this possibly reduced as a result of higher levels of capital expenditures along with higher dividends. Should additional investments be made beyond SaskTel’s free cash flow, higher debt levels could be possible. Therefore, SaskTel’s financial metrics could decline modestly from their current strong levels.

However, DBRS notes that currently any changes in SaskTel’s business or financial risk profiles have no impact on the credit rating, as it is based on the Province’s rating. The Province’s rating applies to SaskTel as it is a Crown corporation and an agent of the provincial government. Without the recourse of the Province, SaskTel’s ratings would likely be investment grade and similar to those of the smaller regional Canadian incumbent telcos. On its own, despite strong market share, SaskTel faces size and scale limitations and generates lower-than-average EBITDA margins. This is offset by a good balance sheet, healthy free cash flow and sufficient liquidity.

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

The applicable methodology is Telecommunications which can be found on our website under Methodologies.

This is a Corporate rating.