DBRS Confirms Balancing Pool at AA

DBRS has today confirmed the Issuer Rating of the Balancing Pool (the Company) at AA with a Stable trend. The confirmation is based largely on the Balancing Pool’s legislated right to levy charges on ratepayers to cover any financial shortfalls, on its solid financial profile and on the continued strong and stable underlying demand for electricity in Alberta.

The Balancing Pool’s rating is based largely on the rating of the Province of Alberta (the Province; currently rated AAA), given that the Balancing Pool is a creation of the Province and receives its powers through provincial legislation and regulation. Included in the Company’s powers is the legislated right to recover from electricity consumers any cash shortfalls arising from its operations without recourse to or permission from any other legislation or entity. However, the Balancing Pool’s rating remains lower than the Province’s rating due to the following factors: (1) lack of any explicit guarantee from the Province; (2) an untested cost-recovery mechanism; (3) the risk of simultaneous negative extraordinary events exceeding the Balancing Pool’s risk-management capabilities; and (4) the risk of political intervention in the Balancing Pool’s operations.

Operating income continued to remain robust for the third consecutive year, despite lower average pool prices in 2007. This can be primarily attributed to the increased revenues stemming from the profitable sale of electricity under the Genesee power purchase agreement (Genesee PPA) and the revenue from the Hydro power purchase agreement (Hydro PPA), as well as the investment income from a growing investment portfolio of marketable securities.
The Company continues to generate strong free cash flow surpluses spurred by the robust operating income and relatively modest annual PPA obligations. Free cash flow surpluses coupled with the proceeds from the sale of the Sheerness PPA in F2005 contributed to the significant increase in the Company’s balance sheet cash and investment portfolio, which had a balance of approximately $950 million as at December 31, 2007.

The progressive increase in the Company’s deferral account surplus balance, which represents the amount by which total assets exceed total liabilities, coupled with the decreases in total PPA obligations, has significantly strengthened the Balancing Pool’s balance sheet and financial profile.

As an owner of Genesee PPA (coal-based generation), the Company has estimated the incremental cost of complying with the new provincial greenhouse gas reduction regulations that became effective in July 2007 at $120 million (or $10 million annually) over the next 12 years. DBRS does not expect the provincial greenhouse gas reduction regulations to have material impact on the credit profile of the Balancing Pool.

Continued strong operating performance has enabled the Company to progressively increase the Consumer Allocation over the last three years. Effective January 1, 2008, the Company increased the allocation to $5/MWh of consumption, or approximately $280 million per annum (2007 – $3/MWh, or $162 million per annum). The allocation amount will be reviewed by the Company annually. Based upon the Company’s financial position, even with the consumer allocations, DBRS believes that no external financing will be needed over the medium term, notwithstanding material adverse events.

The Balancing Pool’s expected sale of its last remaining generating PPA (762 MW Genesee PPA) has been delayed due to the following two major market uncertainties: (1) the finalization and implementation of the Alberta Department of Energy’s regulatory policy review related to limits on the holding of generation capacity in Alberta; and (2) pending federal legislation with respect to greenhouse gas emission standards that may impact the cost structure of the Genesee PPA and other coal-based PPAs within Alberta. In the unlikely event that certain coal-based power purchase agreements in Alberta are deemed uneconomical due to the pending federal legislation, the Balancing Pool can exercise its legislated right to recover from electricity consumers any financial shortfalls arising from the federal legislation without recourse to or permission from any other legislation or entity.

Looking ahead, DBRS believes that despite the Company’s exposure to spot electricity prices in Alberta, its financial profile will remain stable over the medium term, due to the strong and stable underlying demand for electricity in the province spurred by a strong economy and fast-growing population.

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