DBRS Updates its Report on SaskPower

DBRS Limited (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 November 20, 2014). Pursuant to The Power Corporation Act (the Act), SaskPower does not issue debt directly in the capital markets but obtains funding from the Government of Saskatchewan Ministry of Finance. Please see the “DBRS Criteria: Guarantees and Other Forms of Explicit Support” methodology for further detail.

In September 2014, the Cabinet approved a system-average rate increase of 5.5% for SaskPower retroactive to January 1, 2014, and reduced the previous conditionally approved system-average rate increase of 5.0% effective January 1, 2015, to 3.0%. The Company implemented the remaining 2.0% of the 2015 rate increase on September 1 as a result of the challenges with maintaining and renewing its aging infrastructure, new peak power demand for winter and summer 2015, and damage from large storms and wildfires. Based on these rate increases, the Company had a return on equity (ROE) of 3.3% for 2014 and is expected to earn an ROE that will still be below the Crown Investment Corporation (CIC)-approved long-term ROE target of 8.5% in 2015.

DBRS views the lower ROEs as negative to SaskPower as it will result in weaker earnings and cash flows, especially during this period of significant capital expenditures (capex) to upgrade aging infrastructure and increase system capacity. In 2014, the Company had gross capex of approximately $1.28 billion, including $618 million for transmission and distribution assets and $580 million on generation projects. The 2014 capex included the remaining investment to complete the $1.23 billion (with an additional $240 million contributed by the federal government) Boundary Dam Integrated Carbon Capture and Storage Demonstration Project which went in-service in October 2014. SaskPower has forecast capex of around $1.1 billion for 2015, which will likely result in a net free cash flow deficit. As the Company has primarily funded its deficits through debt, SaskPower’s debt-to-capital ratio has increased by approximately 10% since 2010 from 65.1% to 75.2% as at June 30, 2015. The Company’s other key financial metrics – cash flow-to-debt and EBIT interest coverage – have been pressured as well. DBRS notes that the CIC has suspended regular dividend payments from SaskPower during this period of elevated capex. Additionally, DBRS expects incremental debt to finance the Company’s capital projects to be continued 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 ($2.4 billion unused as at June 30, 2015).

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

DBRS Limited (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 November 20, 2014). Pursuant to The Power Corporation Act (the Act), SaskPower does not issue debt directly in the capital markets but obtains funding from the Government of Saskatchewan Ministry of Finance. Please see the “DBRS Criteria: Guarantees and Other Forms of Explicit Support” methodology for further detail.

In September 2014, the Cabinet approved a system-average rate increase of 5.5% for SaskPower retroactive to January 1, 2014, and reduced the previous conditionally approved system-average rate increase of 5.0% effective January 1, 2015, to 3.0%. The Company implemented the remaining 2.0% of the 2015 rate increase on September 1 as a result of the challenges with maintaining and renewing its aging infrastructure, new peak power demand for winter and summer 2015, and damage from large storms and wildfires. Based on these rate increases, the Company had a return on equity (ROE) of 3.3% for 2014 and is expected to earn an ROE that will still be below the Crown Investment Corporation (CIC)-approved long-term ROE target of 8.5% in 2015.

DBRS views the lower ROEs as negative to SaskPower as it will result in weaker earnings and cash flows, especially during this period of significant capital expenditures (capex) to upgrade aging infrastructure and increase system capacity. In 2014, the Company had gross capex of approximately $1.28 billion, including $618 million for transmission and distribution assets and $580 million on generation projects. The 2014 capex included the remaining investment to complete the $1.23 billion (with an additional $240 million contributed by the federal government) Boundary Dam Integrated Carbon Capture and Storage Demonstration Project which went in-service in October 2014. SaskPower has forecast capex of around $1.1 billion for 2015, which will likely result in a net free cash flow deficit. As the Company has primarily funded its deficits through debt, SaskPower’s debt-to-capital ratio has increased by approximately 10% since 2010 from 65.1% to 75.2% as at June 30, 2015. The Company’s other key financial metrics – cash flow-to-debt and EBIT interest coverage – have been pressured as well. DBRS notes that the CIC has suspended regular dividend payments from SaskPower during this period of elevated capex. Additionally, DBRS expects incremental debt to finance the Company’s capital projects to be continued 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 ($2.4 billion unused as at June 30, 2015).

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 (October 2014) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2014), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.