DBRS Limited (DBRS Morningstar) updated its report on Saskatchewan Power Corporation (SaskPower or the Company). The ratings assigned to the Company’s Long-Term Obligations and Short-Term Obligations are flow-through of the ratings of the Province of Saskatchewan (the Province; rated AA and R-1 (high) with Stable trends by DBRS Morningstar). Pursuant to The Power Corporation Act, SaskPower does not issue debt directly in the capital markets but obtains funding from the Province’s Ministry of Finance. Please see “Global Methodology for Government Related Entities” for further detail. DBRS Morningstar considers SaskPower to be self-supporting, as it can fund its own operations and service its debt obligations.
In May 2019, the Province and the Government of Canada entered into an equivalency agreement regarding greenhouse gas emissions from electricity producers in the Province (the Equivalency Agreement). Under the Equivalency Agreement, electricity producers will gradually reduce greenhouse gas emissions over 10 years. DBRS Morningstar considers the Equivalency Agreement to be positive for SaskPower as it will allow the Company to manage greenhouse gas emissions on a system-wide basis rather than on a generation unit by generation unit basis, providing flexibility on when coal power plants will need to be replaced. SaskPower also continues to make advances in achieving the Company's target of reducing emissions by 40% from 2005 levels by 2030. In F2020, SaskPower completed the Chinook Power Station, a 353-megawatt (MW) combined cycle natural gas facility (in service November 2019), announced it will proceed with the 350 MW natural gas-fired Moose Jaw Natural Gas Plant (expected in service 2024), announced a Request of Qualification for up to 300 MW of utility-scale wind facilities, and signed a term sheet with The Manitoba Hydro-Electric Board to purchase 215 MW of renewable electricity beginning 2022. DBRS Morningstar expects the Company will continue to pursue opportunities to help offset the expected loss in capacity once the coal power plants are retired.
SaskPower’s key financial metrics saw modest improvements in F2019 and in the last 12 months ending June 30, 2019 (LTM 2020). While leverage remained at the top of the Crown Investment Corporation approved long-term target of 60% to 75% (73.7% for LTM 2020), it has continued to decrease after peaking at 75.6% in F2017. Profitability has also improved, with the Company achieving the long-term return on equity target of 8.5% for F2019. DBRS Morningstar expects capital expenditures (capex) for SaskPower to remain elevated over the medium term as the Company continues construction on generation facilities in preparation for the eventual coal facility shutdowns, as well as transmission build-outs to connect new independent power producers. In order to finance the capex, DBRS Morningstar expects SaskPower to continue to request for moderate rate increases going forward, with any net free cash flow deficits to be funded through incremental debt from the Province.
The principal methodologies are Global Methodology for Government Related Entities (April 2019) and Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2019), which can be found on dbrs.com under Methodologies & Criteria.
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