DBRS Rates Energy Split Corporation’s Preferred Shares, Class B at Pfd-2 (low)

Dominion Bond Rating Service (DBRS) has today assigned a new rating to the Preferred Shares, Class B (Preferred Shares) issued by Energy Split Corporation (the Corporation), a split share company. As a result of a capital reorganization the Corporation issued 2.4 million of Preferred Shares for $21 per share, together with the net proceeds from the partial pre-settlement of a forward purchase and sale agreement were used to partially fund the redemption of Capital Yield Shares and ROC Preferred Shares on September 15, 2006. Subsequent to such reorganization the remaining 2.4 million Capital Shares at $25 per share provide downside protection of approximately 54% (after expenses) to the Preferred Shares.

The investors of the Preferred Shares and Capital Yield Shares will gain exposure to a portfolio of Canadian oil and gas income trusts (the Royalty Trust Portfolio) vis-à-vis a forward purchase and sale agreement (the Forward Agreement) with the Bank of Nova Scotia (the Counterparty). At the time of the re-organization, the Corporation and the Counterparty agreed to extend the Forward Agreement and the Royalty Fund was rebalanced to reflect all the trusts in the SCITI Energy Trust Index with float capitalization exceeding $500 million. The holders of the Preferred Shares will receive a fixed preferred quarterly distribution equal to an annual yield of 4.5%. The holders of the Capital Yield Shares will be entitled to leveraged tax efficient distributions that are in excess of fixed distributions paid to the Preferred Shares and all operating expenses of the Corporation. The distributions will be made by quarterly unwinds of the Forward Agreement which will consist of return of capital distributions and capital gains dividends.

On the redemption date, September 16, 2011, the Corporation will pay the outstanding principal amount of the Preferred Shares by liquidating the Royalty Trust Portfolio by selling the underlying income funds in the open market and the remaining balance will be distributed to the Capital Yield Share holders.

The main constraint to the rating is the dependence of the Corporation on the value and distributions on the underlying Royalty Fund units to make distributions to the Preferred Shares. These could change from time to time, since the Royalty Fund unit value and ability to make distributions is correlated to the price of crude oil and natural gas.

Note:
All figures in Canadian dollars unless otherwise noted.