DBRS Confirms Lake Superior Power L.P. at BBB (high)

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of Lake Superior Power L.P. (“LSP”) at BBB (high). The ratings confirmation on the Cdn$77.0 million Senior Secured Bonds of LSP is based on the continued support of Brascan Power Inc. (“BPI”), which guarantees the price on the resale of LSP’s gas commitments during off-peak hours and will guarantee the price of gas required to operate the LSP generation facilities from expiry of the gas supply contracts until the expiry of the power purchase agreement (PPA) with the Ontario Electricity Financial Corporation (“OEFC”).

Cash flow from operations for the 12-month period ended June 30, 2005, was about Cdn$8 million below what was originally forecasted for the period, mainly due to lower revenues and higher operating costs associated with two material unplanned outages. However, DBRS notes that even with the outages, debt service coverage before capital expenditures was adequate to support the current rating.

Furthermore, as a result of the unplanned outages, capital expenditures were higher than expected. Hence, debt service coverage after capital expenditures was tight due to the higher-than-expected costs associated with the outages. However, DBRS notes that maintenance capital costs tend to be lumpy for cogeneration plants, which is the main reason LSP has a debt service reserve account. Normalized capital expenditures are expected to be approximately Cdn$2.1 million annually, and are adequately covered by expected cash flow after debt servicing costs.

DBRS also notes that it is unusual for a plant such as this to experience two material unplanned outages in such a short timeframe. These outages were not related to each other, and were on two different units altogether. Under such circumstances, new leased engines are delivered by General Electric Company within a 72 hour timeframe and take roughly 30 hours to start up after they are installed. The leased engines remain in place until the original units are repaired.

At current market natural gas prices, it is more economical for LSP to resell all of its off-peak gas instead of generating electricity. As such, all of LSP’s gas supply for off-peak electricity production has been sold forward until November 1, 2008, at fixed prices that provide higher margins than the OEFC PPA. All of the power generated by LSP during summer and winter on-peak periods is sold to the OEFC at significantly higher prices than during off-peak periods, provided LSP is able to meet its minimum availability targets.
Key contracts include: (1) A PPA with the OEFC (rated AA), which expires April 2014. The OEFC is obligated to purchase all of the power produced by LSP at winter and summer on-peak and off-peak rates that are adjusted annually by the Ontario direct customer rate. (2) All of LSP’s gas requirements are purchased under gas supply contracts with: (a) Talisman Energy Inc. [rated BBB (high)], which expires on November 1, 2008, and (b) Petro-Canada [rated A (low)], which expires January 1, 2009. (3) Gas transportation and distribution is provided by TransCanada Pipelines Limited (rated “A”) (until November 1, 2008) and Union Gas Limited (rated “A”), respectively. (4) Brascan Energy Marketing Inc. (“BEMI”), a wholly-owned subsidiary of BPI, will supply LSP with sufficient gas to produce power during on-peak hours from January 1, 2009, until April 1, 2014, at a fixed rate. The BEMI gas supply contract is guaranteed by BPI.