DBRS Confirms SaskTel at AA, Stable Trend

DBRS has today confirmed the AA Issuer Rating of Saskatchewan Telecommunications Holding Corporation (SaskTel or the Company), reflecting the long-term rating of the Province of Saskatchewan (the Province). Please see DBRS’s report on the Province of Saskatchewan dated August 1, 2012, for further details.

SaskTel is an agent of the provincial government of Saskatchewan which ultimately provides creditors with recourse to the provincial government. Therefore, the provincial rating of Saskatchewan has been assigned to SaskTel in the form of an Issuer Rating. SaskTel receives the majority of any funding it requires from the Province and does not currently issue its own debt in the capital markets, other than some small credit facilities. Without the recourse of the Province, SaskTel’s credit risk profile would be assessed on its own business characteristics and financial profile.

The Company is the incumbent telecommunications provider in Saskatchewan, with over 492,000 access lines and over 608,000 wireless subscribers as of December 31, 2012. SaskTel maintains strong market share in the local, long-distance and wireless markets while continuing to grow its position in television services. SaskTel’s network covers the Province and has the capability to offer high-speed Internet coverage to 100% of the population in Saskatchewan. SaskTel’s high-speed Internet coverage is particularly impressive given the very low population density within the Province. This network facilitates the Company’s offering to 250,000 internet and data subscribers as of December 31, 2012.

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, while competition and technology substitution continue to impact its traditional fixed-line voice business. These new growth services typically come with subscriber acquisition costs and, increasingly, other marketing incentives such as promotional pricing.

It should be noted that SaskTel’s areas of operations have shown limited population growth, maintain low population density and tend to focus on higher-cost rural service areas. These factors reduce profitability and margins in relation to other Canadian incumbent telcos. Furthermore, compared with other Canadian telcos and its largest cable competitor, SaskTel lacks size and economies of scale. Additionally, greater levels of competition have become more prevalent, as DBRS notes that both BCE Inc. and Rogers Communications Inc. have increased their investment in the region in 2012.

Notes:
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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.