Press Release

DBRS Updates Report on Saskatchewan Power Corporation

Utilities & Independent Power
December 10, 2018

DBRS Limited (DBRS) 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 June 1, 2018). 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’s methodology titled “Rating Canadian Provincial Agents of the Crown” for further detail. DBRS considers SaskPower to be self-supporting, as it can fund its own operations and service its debt obligations.

Following a period of weak profitability and rising leverage, SaskPower’s key financial ratios and earnings profile strengthened in F2018. SaskPower has, over the past few years, applied for more moderate and gradual rate increases in order to avoid rate shock for customers. This placed pressure on the Company’s key financial ratios, with leverage rising to 75.6% for F2017, above the Crown Investment Corporation (CIC)-approved long-term target of 60% to 75%. Profitability for SaskPower has also suffered, with the return on equity (ROE) for F2014 to F2017 ranging between 3.0% and 4.4%, significantly below the CIC-approved target of 8.5%. DBRS views the Company’s plan to now apply for rate increases that will allow it to maintain leverage within the CIC-approved range and to earn the approved ROE as positive for its key financial ratios. The 3.5% rate increases effective January 1, 2017, and effective March 1, 2018, have helped improve ROE to 7.3% for F2018 and reduce leverage to 74.9%. The rate increases should also help fund the ongoing significant capital expenditures (capex) program to maintain aging infrastructure, connect new customers and meet growing demand (gross capex of $996 million for F2018; $886 million planned for F2019). DBRS expects incremental debt to finance the Company’s capex program to continue to be funded by the Province. Pursuant to the Act, SaskPower is authorized to have outstanding borrowings of up to $10 billion ($3.2 billion unused as at June 30, 2018), including $2 billion by way of temporary loans through the Province which also includes $51 million of unsecured credit facilities at financial institutions.

DBRS notes there is also uncertainty on how a potential carbon tax regime may impact SaskPower’s costs, and the resulting rate impacts. The Company has a large portfolio of coal generation facilities (34% of installed capacity and 44% of electricity generated in F2018), as well as gas generation. While recent changes in draft federal carbon price regulations have reduced the expected cost, the overall rate impact is still expected to be substantial. The carbon levy is estimated to increase rates by an average of over 3% across customer classes in the 2019 calendar year and have a total impact on average electricity rates of over 5% by 2022. DBRS will continue to monitor developments of the carbon tax regime and any impact on SaskPower.

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

The principal methodologies are Rating Canadian Provincial Agents of the Crown (April 2018) and Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2018), which can be found on dbrs.com under Methodologies.

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