DBRS Confirms the Stability Rating of Enerplus Resources at STA-5 (high)

DBRS has today confirmed the stability rating of Enerplus Resources Fund (Enerplus or the Fund) at STA-5 (high), which removes the rating from Under Review with Developing Implications where it was placed on November 1, 2006, following the Canadian federal government’s proposed taxation of income trusts beginning in 2011, and subsequently maintained on December 3, 2007 (see separate press release). The latter rating action followed the announcement of the proposed merger between Enerplus and Focus Energy Trust (Focus), the Fund’s largest acquisition since inception, which closed on February 13, 2008, through a share exchange for approximately $1.7 billion (including assumed debt of approximately $300 million).

The rating confirmation reflects the Fund’s continued stable cash distributions per unit; expanding solid conventional asset base, including Focus (up 20% from 2007 production); strong credit metrics; and upside potential associated with its oil sands leases. Successful integration of Focus and satisfactory resolution of the partial or full disposal of the Fund’s interest in the Joslyn Creek Oil Sands Project (Joslyn) in Alberta could lead to positive rating actions. In this respect, DBRS expects Enerplus to fund cash distributions and sustaining capex with internally generated cash flow in a robust commodity pricing environment, which is consistent with its plans to achieve a more sustainable business model over the long term. Acquisitions and growth will continue to be funded with a combination of debt and equity to maintain the Fund’s conservative financial profile, which sets it apart from its peers.

The Fund benefits from its well-diversified production base, with above-average reserve life of 10.4 years pro forma Focus, which has been maintained over the past ten years, providing considerable inventory for development. The merger with Focus provides a good strategic fit with the existing assets, resulting in a larger and better diversified production and reserves base, with improved capital efficiency based on Focus’s lower-cost base. The Fund retains high operatorship (about 70%) in its properties and benefits from an enhanced position in two key properties (Shackleton, Saskatchewan, and Tommy Lakes, British Columbia). Total 2008 gross production is expected to average about 98,000 barrels of oil equivalent per day (boe/d), up 19% from 2007, weighted 61% to natural gas (compared with 82,300 barrels per day (b/d) and 47%, respectively, pre-merger). The more gas-weighted operation may introduce more volatility in the near term, but it should help achieve a more balanced portfolio when the oil sands projects come on stream in the medium term.

Pro forma credit metrics (premised on the nine months ended September 30, 2007, operating results for Enerplus and Focus) indicate improved payout based on operating cash flow of 68% versus 78% in 2007 for Enerplus only. Debt-to-cash flow also improved to 0.83 times (x) (0.88x in 2007) and debt-to-capital to 19% (22% in 2007). The related ratios achieved in Q1 2008, which were similar to 2007 levels, remain strong for the rating category. Credit metrics are expected to improve through 2008, helped by a strong commodity pricing environment. Should the lower payout ratio of 68% be maintained (guidance 60% to 90%), the Fund should be able to fund the higher capex projected at $580 million in 2008 (up 47% from $394 million in 2007) and increased total cash distributions estimated at approximately $830 million, with internal cash flow based on the current pricing environment. As typical of the trust industry, Enerplus has generally required certain external funding, including its distribution reinvestment program (DRIP), to fully fund its distributions and capital programs.

Enerplus’s move in 2007 to expand its oil sands operations through the acquisition of the Kirby Oil Sands Partnership (Kirby), a steam-assisted gravity drainage (SAGD) project in Alberta with initial production expected in mid-2012 (full production of 10,000 boe/d by 2013), is viewed as positive and should provide substantial growth opportunities based on long-life unconventional assets. This should mitigate in part the depleting conventional reserves, which result in the Weak ratings for Operating Characteristics and Asset Quality (see the rating report). The Fund’s strategic move to sell all or a portion of its 15% working interest in Joslyn should provide considerable funding for future capital investments, particularly for Kirby, of which it retains a 100% interest. The disposal proceeds would initially be used to reduce debt, increasing the Fund’s financial flexibility for higher capital years in the future. It also maintains sufficient liquidity through a three-year extendible $1.4 billion bank facility to November 2010 at Enermark Inc. (a wholly owned subsidiary). The larger size of Enerplus subsequent to the Focus transaction should further add to the Fund’s economies of scale, market presence and access to capital.

DBRS expects the Fund to maintain its current business strategy and trust structure, pending the proposed trust taxation in 2011, while evaluating alternatives to determine the optimal structure post-2010. While the proposed taxation could affect the Fund’s ability to continue its distribution at current levels, DBRS would view any such reduction in future distributions as a one-time event, with the subsequent analytical focus on the stability and sustainability of the revised distributions. The Fund’s substantial tax pools, estimated at $2.6 billion, should help shelter its taxes payable for one to two years based on current commodity prices. It also has approximately $10 billion of safe-harbour growth capacity under the government’s “normal growth” guidelines associated with Bill C-52, which should adequately support the Fund’s growth profile as a specified investment flow-through (SIFT) to the end of 2010. The Alberta government’s recently proposed increased royalty regime, starting in 2009, will have an impact on the Fund’s cash flows and operations in the context of the current pricing environment, but should not affect distributions per unit.

DBRS expects the Fund to maintain a stable cash distribution profile underpinned by a strong balance sheet and considerable development potentials from its existing asset base.

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