DBRS Confirms Churchill Falls (Labrador) Corporation Limited at A (high) with a Stable Trend

DBRS has today confirmed the rating of Churchill Falls (Labrador) Corporation Limited's (CF(L)Co or the Company) First Mortgage Bonds at A (high) with a Stable trend. The rating reflects the A (high) rating of Hydro-Québec, whose long-term rating is a flow-through of the long-term rating of the province of Québec (the Province), which remains at A (high), with a Stable trend.

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

With variable costs at 0.15 cents per kWh and all-in costs of producing power at about 0.23 cents per kWh, CF(L)Co is an extremely low cost generator. Therefore, DBRS expects that Hydro-Québec and/or Newfoundland and Labrador Hydro 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 0.25 cents per kWh until 2016 and then 0.20 cents per kWh until 2041, excluding the Guaranteed Winter Availability (GWA) agreement.

CF(L)Co continues to report improved net income and operating cash flow, largely due to the modest growth in revenues from Hydro-Québec under the GWA agreement, higher electricity sales and lower interest costs. Earnings are expected to rise moderately over the medium term, with modest growth coming from the GWA agreement and further declines in interest expense as debt is paid down.

Pursuant to the terms of the 1999 shareholders’ agreement with Hydro-Québec, CF(L)Co contributed $17 million in January 2007, to the creation of a $75 million segregated reserve fund for unexpected capital expenditures above normal levels for which cash balances are not sufficient. CF(L)Co will fund the reserve in six consecutive annual tranches of $17 million for three years and $8 million for the remaining three years. CF(L)Co continued to pay down debt in 2006 and 2005, as expected, and is expected to record substantial free cash flow surpluses despite a projected increase in annual capital expenditures averaging about $12 million over the next three to four years. Increased capital expenditures will be necessary to maintain and extend the plant’s operating capacity. The capital expenditures are not expected to require any external financing.

Note:
All figures are in Canadian dollars unless otherwise noted.