2004 Crown Investments Corporation of Saskatchewan Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSISManaging Capital Resources in the Crown SectorA key priority for CIC is to manage the capital resources within the consolidated group of entities to optimizevalue in the Crown sector and also provide a return to the GRF. CIC manages this priority through its capitalallocation framework that is developed from two integrated policies. The policies are based on the principle thatthere are three potential uses for cash profits:Reinvestment in our businesses to sustain infrastructure and operations, to grow and diversify revenues,and support public policy initiatives and economic development;Dividends to the holding company to be used in accordance with the CIC Dividend Policy; andDebt reduction to support the financial flexibility of CIC’s businesses.The first policy, the Subsidiary Dividend Policy, focuses on managing capital resources to support the investmentneeds and business viability of the various business segments. The second policy, CIC Dividend Policy, ensuresthat the investments into businesses provide a return to the government of Saskatchewan to support programspaid for from the GRF.Subsidiary Dividend PolicyEach commercial Crown’s ability to pay dividends isdetermined after the CIC Board allocates a portionof cash profits to reinvestment and debt reduction.The CIC Board has approved debt and capitalstructure targets for CIC’s subsidiaries based onindustry benchmarks. Therefore, for subsidiariesthat pay dividends, the amount paid is determinedin relation to a business’ target capital structurecompared to actual capital structure.ReinvestmentCrown CorporationCash ProfitsDividends to CICDebt Reduction ifnecessaryCIC Dividend PolicyIn a similar way, cash paid by subsidiary Crowncorporations is used by CIC for reinvestment,debt reduction, and dividends to the GRF. CIC,as a holding company, does not have any debt.Therefore, cash is used to pay dividends to theGRF. As well, CIC uses funds to support publicpolicy initiatives, such as providing Saskatchewanhouseholds with the lowest cost utility bundle.New InvestmentsCICCash ProfitsDividend to GRFand Public PolicyExpendituresDebt ReductionCIC’s ability to pay regular dividends to the GRF mainly depends on the level of Crown dividends to CIC lessCIC’s operating costs. These costs include support to non-dividend paying Crown corporations and publicpolicy expenditures. Crown dividend levels depend on their net earnings and capital structure. In addition tocash constraints, CIC’s ability to declare dividends to the GRF depends on its retained earnings (a company’sretained earnings are the aggregate amount of undistributed income since its inception). CIC’s earnings and,hence, dividend capacity outlook are sensitive to adverse developments in its operating expenditures and Crownearnings forecasts.C I C40