DBRS Upgrades the Balancing Pool to AA from AA (low)

Dominion Bond Rating Service (“DBRS”) has today upgraded the rating on the Balancing Pool to AA from AA (low), with a Stable trend. The upgrade is largely based on the improvement of the Balancing Pool’s financial flexibility with: (1) the addition of two credit facilities totalling Cdn$100 million, which provides the Balancing Pool with a means to fund operating deficits on a short-term basis until a customer charge can be levied to collect the shortfall, and (2) the termination of the money-losing Clover Bar power purchase arrangement (“PPA”) on October 1, 2005.

The Balancing Pool’s rating is based on the rating of the Province of Alberta (the “Province”) (currently rated AAA), given that the Balancing Pool is a creation of the Province and receives its powers through provincial legislation and regulation. Included in its powers is the regulated right to recover from electricity consumers any cash shortfalls arising from its operations, without recourse to, or permission from, any other legislation or entity. However, the Balancing Pool’s rating remains lower than the Province’s rating due to the following factors: (1) No explicit guarantee from the Province, (2) the risk of simultaneous “extraordinary events” exceeding the Balancing Pool’s risk management capabilities, (3) the risk of political intervention in the Balancing Pool’s operations, and (4) an untested cost recovery mechanism.

As expected, the Balancing Pool generated an EBIT loss and a gross free cash flow deficit for the 12 months ended June 30, 2005. The deficit has been the result of the carrying costs of the Balancing Pool’s PPAs being higher than the revenues received from the sale of generating capacity under the MAP II contracts. One of the main contributors to this deficit has been the contracted sale of power from the Clover Bar PPA, which has been losing about Cdn$50 million a year and led to the Balancing Pool’s decision to close the plant.

The cash flow deficit in 2004 was funded with the Balancing Pool’s cash balance, which had reduced to Cdn$41.2 million at December 31, 2004, from Cdn$138.4 million a year earlier. A positive change in working capital during the first six months of 2005 improved the Balancing Pool’s cash position to Cdn$61.3 million at June 30, 2005.

With the continuation of operating losses associated with the MAP II contracts and a termination payment of about Cdn$80 million associated with the Clover Bar PPA, the Balancing Pool is expected to generate a significant cash flow deficit for 2005. This cash flow deficit will be funded with the Balancing Pool’s remaining cash balance and a significant draw down on its credit facilities.

In September 2005, the Balancing Pool determined that it would not be necessary to levy a customer charge for 2006, despite the expectation of a significant balance outstanding on its credit facilities at the end of 2005. The decision to not levy a customer charge in 2006 is largely based on the expected outcome of the MAP III process (the contracted sale of output from the PPAs associated with the Genesee and Sheerness generating plants). Based on current market prices, these PPAs are in-the-money and would generate sufficient cash flow for the Balancing Pool such that, together with other sources of revenue and no longer incurring a loss on the Clover Bar PPA, the outstanding balance on the credit facilities could be paid down by the end of 2006.

Factors affecting the Balancing Pool’s external cash requirements going forward will depend heavily on the outcome of future MAP auctions, as well as on spot electricity prices from one year to the next. Despite these uncertainties, the Balancing Pool’s financial profile is expected to remain relatively stable over the medium term given that it has the regulated right to recover from electricity consumers any cash shortfalls arising from its operations.

Note:
Issuer Ratings apply to all general senior unsecured obligations of the issuer in question.