DBRS Confirms Great Lakes Hydro Income Fund at STA-2 (high) and Removes Under Review Developing

DBRS has today confirmed the stability rating of Great Lakes Hydro Income Fund’s (GLHIF or the Fund) at STA-2 (high) and removed the rating from Under Review with Developing Implications, where it was placed on November 1, 2006 due to the income tax legislation. The removal from Under Review with Developing Implications reflects the following considerations:

(1) DBRS believes that the Fund will continue with its existing business and financing strategies until more information is available to further assess the impact of the income tax changes.

(2) The Fund continues to demonstrate operational and financial results that support its current rating and distribution of $1.25 per unit annually prior to 2011.

(3) While GLHIF estimated that the new legislation would reduce the Fund’s distribution by $0.18 per unit after 2011, DBRS stated in its November 1, 2006, press release that any reduction in future distributions due to the imposition of new taxes would be viewed as a one-time event, with the subsequent analytical focus being on the stability and sustainability of the revised distributions.

The stability rating of GLHIF continues to be supported by the long-term expectations of hydroelectric production of the Fund’s generation portfolio. For the 12 months ended September 30, 2007, hydrology and energy production were weaker than the strong performance in 2006 but stayed within the range of expected variation from the long-term average level. The Fund continued its intensified capital expenditure program during the same period to enhance the long-term productivity and efficiency of its generation assets. Cash flow contribution from these programs will provide support to the stability of the Fund’s distribution in the longer term. This, together with hydrology conditions recovering to the long-term average level, is expected to normalize the payout ratio to the targeted level of around 95%. In 2008, capital spending is expected to be managed down to a long-term average level of under $20 million. DBRS expects that the operating cash flow together with cash on hand will be sufficient to fund the capital expenditure plan and maintain the current level of distribution. Any unexpected shortfall will be covered by the Fund’s existing credit facilities.

While the Fund’s operating cash flow is influenced by the cyclicality of hydrology, this risk is somewhat mitigated by a geographically diverse portfolio of facilities spread over various drainage basins and climatic regions. Sales of electricity production under long-term power purchase agreements (PPAs) guaranteed by Brookfield Power Inc. (BPI, rated BBB (high) with a Stable trend) also give an element of stability to the Fund’s cash flow. DBRS notes that the Fund’s low operating cost hydroelectric facilities provide flexibility to sell power at favourable margins in the open market, in the event BPI failed to honour its underlying guarantees. The PPAs, coupled with the strong sponsorship from BPI, are a key factor supporting the Fund’s current stability profile.

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