DBRS Confirms Lake Superior Power Limited Partnership at BBB (high)

DBRS has today confirmed the rating on the Senior Secured Bonds (the Bonds) of Lake Superior Power Limited Partnership (LSP or the Project) at BBB (high) with a Stable trend. The bonds are secured by the generation assets of the Project. The rating confirmation is based on the strength of LSP’s long-term contractual arrangements with investment-grade counterparties and the continuous support by Brookfield Power Inc. (BPI, rated BBB (high) with a Stable trend) for the resale of the off-peak excess gas during the terms of the current fuel supply agreements (FSAs) and thereafter the supply of the fuel requirements.

Cash flow under contracts is relatively stable and predictable and can provide for full amortization of the Bonds by maturity in September 2009. Operating performance has met the PPA requirements and allowed LSP to receive the full amount of the on-peak capacity payments. As a result, the operating cash flow after capital expenditures for the most recent 12-month period was approximately $34 million and the debt service coverage ratio (DSCR) was 1.84 times. Both remained solid for the current rating category.

Capital expenditures have been lower than expected in recent years. The maintenance capital costs for gas-fuelled cogeneration plants tend to cluster around the time of major maintenance. On a normalized basis, LSP’s annual capital expenditures are expected to be approximately $2.1 million until the maturity of the Bonds. The next scheduled major capital work is after the maturity of the Bonds.

LSP has the following key contracts: (1) Under a PPA with the Ontario Electricity Financial Corporation (OEFC, rated AA with a Stable trend) through April 2014, LSP sells all its power production to OEFC at an annually adjusted price consisting of three main components for energy, on-peak capacity and fuel-adjustment, respectively. (2) Gas requirements are provided 50-50 under two FSAs; one with Talisman Energy Inc. (Talisman, rated BBB (high), with a Stable trend) through November 1, 2008, and the other with Petro-Canada (rated A (low), with a Stable trend) through January 1, 2009. Gas supply from 2009 to 2014 will be provided under forward contracts with Brookfield Energy Marketing LP. (BEMLP, unrated), a wholly owned subsidiary of BPI. Prior to 2009, BEMLP is also the agent for the resale of the off-peak excess gas. BEMLP’s obligations, both prior to and after 2009, are guaranteed by BPI. (3) Gas transportation and distribution are provided, with regulated tariffs, by TransCanada Pipelines Limited (rated “A”) and Union Gas Limited (rated “A”), respectively.

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