DBRS Confirms Churchill Falls (Labrador) Corporation Limited

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Churchill Falls (Labrador) Corporation Limited (“CF(L)Co” or the “Company”) at “A”. The trend is Stable.

The rating confirmation on CF(L)Co reflects the Province of Québec’s rating and, given that 90% of the power generated is sold to Hydro-Québec under a long-term contract, the rating is largely based on the credit strength of Hydro-Québec.

With variable costs at Cdn0.13¢ per kWh, and all-in costs of producing power at about Cdn0.22¢ per kWh, CF(L)Co is possibly the lowest-cost generator of electricity in the world; therefore, DBRS expects that Hydro Québec would step in to support CF(L)Co in the unlikely event of any major operational or financial problems, in order to preserve the extremely attractive power rates of Cdn0.25¢ per kWh until 2016 and then Cdn0.20¢ per kWh until 2041, excluding the Guaranteed Winter Availability (GWA) agreement.

Both net income and operating cash flow improved during 2004, with the positive earnings impact of continued revenue growth under the GWA agreement with Hydro-Québec, and declining interest costs offset by the lower electricity sales to Hydro-Québec. Earnings will remain relatively stable over the medium term, with modest growth coming from the GWA agreement and further declines in interest expense as debt is paid down. CF(L)Co continued to pay down debt in 2004, as expected, and will continue to record substantial free cash flow surpluses despite the projected increase in annual capital expenditures averaging about Cdn$12 million over the next four years. Annual capital expenditures are expected to remain at a higher level (Cdn$8 million to Cdn$11 million) beyond 2006 for major repairs and replacements to maintain the plant’s capacity over the long term, but this will not require debt financing. As at December 31, 2004, the Company’s long-term debt outstanding was Cdn$101 million. All of CF(L)Co’s First Mortgage Bonds will be repaid in 2007 and the Company plans to reduce its dividend payout until 2010 to build up its cash position to cover the remaining Cdn$55 million bullet maturity in 2010. Consequently, the Company’s financial profile will continue to improve as all of its term debt is repaid.