DBRS Updates Its Report on SaskPower

DBRS has today updated its report on Saskatchewan Power Corporation (SaskPower or the Company). The ratings assigned to the Company’s Long- and Short-Term Obligations are a flow-through of the ratings of the Province of Saskatchewan (the Province; rated AA and R-1 (high) with Stable trends by DBRS; see DBRS’s report on the Province dated October 30, 2013). Pursuant to The Power Corporation Act, SaskPower does not issue debt directly in the capital markets but obtains funding from the Government of Saskatchewan Ministry of Finance. See the methodology DBRS Criteria: Guarantees and Other Forms of Explicit Support for further detail.

The Saskatchewan Rate Review Panel (the Panel) released its recommendations on SaskPower’s 2014, 2015 and 2016 rate application in April 2014. The Panel recommended that the Province approve, conditionally approve, and deny the system-average rate increases of 5.5% effective January 1, 2014, 5.0% effective January 1, 2015, and 5.0% effective January 1, 2016, respectively. Based on these rate increases, the Company has forecast a return on equity (ROE) of only 2.2% for 2014 and 2.0% for 2015. DBRS views this as negative to SaskPower’s business risk profile as these rates of return are significantly below the Crown Investments Corporation (CIC)-approved long-term ROE target of 8.5%.

If approved, the rate application and recommendation is expected to be negative to SaskPower’s financial risk profile as the weaker earnings and cash flows going forward will further pressure the Company’s key financial ratios. SaskPower is currently undergoing a period of substantial capex to renew infrastructure and secure future generation supply, spending approximately $1.32 billion in 2013. The sizable capex has resulted in significant free cash flow deficits that have been largely funded through incremental debt, resulting in deteriorations in the Company’s key financial ratios. While the CIC has suspended regular dividend payments from SaskPower during this period of elevated capex, the Company anticipates the debt-to-capital ratio to increase to 76.4% and 77.0% in 2015 and 2016, respectively, exceeding its long-term debt ratio target of 60% to 75%. However, DBRS expects the rising debt load and the free cash flow deficits generated by the Company to continue to be funded by the Province. Pursuant to the Act, SaskPower is authorized to have outstanding borrowings of up to $8.0 billion, including $1.4 billion by way of temporary loans through the Province and $51 million from unsecured credit facility at financial institutions ($3.5 billion unused as at March 31, 2014).

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

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.