DBRS Confirms Saskatchewan Power Corp. at AA, Stable Trend

DBRS has today confirmed the ratings of the Long-Term Obligations and Short-Term Obligations of Saskatchewan Power Corporation (SaskPower or the Utility) at AA and R-1 (high), respectively. The trends are Stable. Pursuant to the Power Corporation Act and as the agent of the Crown in right of the Province of Saskatchewan (the Province, rated AA; see separate press release), both the outstanding Short-Term Obligations and Long-Term Obligations of SaskPower represent a direct obligation of the Province. The ratings for SaskPower therefore directly reflect the short- and long-term ratings of the Province, which wholly owns SaskPower and substantially provides for all of its borrowing needs. The confirmation of SaskPower’s ratings follows the recent confirmation of the Province’s ratings.

Provincial support for the Utility is demonstrable by way of Order in Council, which allows SaskPower to obtain funding from the provincial government. SaskPower’s operating performance is also supported by stable financial and credit metrics within a reasonable regulatory regime, in addition to long-term power purchase agreements with key customers. The Utility’s strengths are offset by its elevated capital expenditure levels, fuel and purchased power cost exposure, a degree of exposure to economic swings as well as costs associated with ongoing environment-related concerns and “green” initiatives.

As a vertically integrated electric utility located within a supportive regulatory environment, SaskPower has historically generated stable cash flows and enjoyed a low business risk profile. The Utility’s regulated assets, which operate under a cost-of-service methodology, typically provide consistent earnings and by way of Order in Council, substantially all financing activities are conducted through the provincial government, thereby eliminating the need to issue debt in the capital markets. DBRS notes that the Power Corporation Act governing SaskPower includes a borrowing limit of $5 billion, which is well in excess of SaskPower’s total outstanding debt of $2.848 billion, as at March 31, 2011.

In April 2011, the provincial government approved construction of the $1.24 billion Boundary Dam Integrated Carbon Capture and Storage (ICCS) Demonstration Project at SaskPower’s Boundary Dam Power Station near Estevan. Once completed, the transformed generating unit will have a generating capacity of 110 MW and be one of the first commercial-scale carbon capture and storage facilities in the world. The federal government is providing $240 million in funding assistance toward development of the project which is anticipated to commence operations in 2014. DBRS notes that the challenge and execution risk surrounding the construction and operation of a “first-of-its-kind” project involving relatively new technology may result in cost and schedule overruns that may have to be borne by the Utility and ultimately be recovered over time through rate increases.

The project is part of SaskPower’s capital program, which will see billions of dollars invested in the Utility’s power production and transmission and distribution systems over the next decade. SaskPower continues to invest in its infrastructure over the medium to long term and it anticipates that capital expenditures will reach approximately $675 million in 2011. In light of the continued elevated capital program, the Board of the Crown Investments Corporation has determined that SaskPower will not be required to pay dividends in 2011. Regardless, the Utility’s heightened capital expenditure program is anticipated to cause free cash flow deficits and a reliance on debt financing over the near to medium term. The resulting free cash flow deficits will continue to be funded with additional debt financing provided by the Province. As such, DBRS anticipates that SaskPower’s credit metrics may weaken during the build-out period before assets are operational and can be accretive to earnings.

SaskPower transitioned to International Financial Reporting Standards (IFRS) 1 on January 1, 2011, and as a result, some volatility in net income and a limited number of other income statement items were observed. However, as anticipated, there was de minimis impact on cash flow and cash flow-related metrics. The Utility will continue to transition to IFRS 9 in 2013, however, the extent of any impacts on financial statements has not yet been determined. DBRS anticipates that the transition and any impact thereof will continue to be manageable and nominal.

In August 2010, the provincial cabinet accepted the recommendation of the Saskatchewan Rate Review Panel to approve a 4.5% system-wide rate increase. The recommendation to approve a rate that was 2.5% lower than SaskPower’s initial request was based on the Utility’s improved financial forecasts, largely resulting from positive changes in fuel and purchased power costs. This increase, combined with the 8.5% rate increase in July 2009, contributed to improved electricity revenues in 2010.

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

The applicable methodology is Rating Companies in the North American Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.