DBRS Conf Electricity Distributors Finance Corp. at A(low)

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of Electricity Distributors Finance Corporation (“EDFIN”) at A (low), with a Stable trend. The rating confirmation is currently based on the credit profile of Enwin Powerlines Ltd. (“Enwin Powerlines”), which continues to trend as expected.

The certificates represent undivided co-ownership interests in unsecured debentures issued by the three participating local distribution companies (“LDC Participants”). The rating on the unsecured debentures of EDFIN is supported by the credit strength of the LDC Participants. The obligations of the individual LDC Participants is several and not joint, and each LDC Participant is liable only for its obligations and not for the obligations of any others. Hence, the rating of the Unsecured Debentures of EDFIN is based on the rating of the weakest LDC Participant. In addition, default of the obligations to EDFIN of one LDC Participant will result in a proportionate default of the Unsecured Debentures issued by EDFIN. Of the three LDC Participants, Enwin Powerlines continues to have the weakest financial profile. However, its financial profile is expected to remain sufficiently strong to support the current rating over the medium term. This is based on DBRS’s expectation that Enwin Powerlines will generate in excess of Cdn$5.0 million of free cash flow annually, which will be used primarily to pay down debt. As such, cash flow-to-debt and interest coverage ratios will gradually improve to an acceptable level for the current rating.

DBRS is upgrading the rating on PowerStream Inc. (“PowerStream”) to “A” from A (low). The upgrade is based on the continued strengthening of PowerStream’s financial profile since it was formed by the amalgamation of three LDCs in June 2004, together with an overall improvement in the Ontario government’s support of electricity distributors and the electricity market as a whole. This follows the trend of upgrades on other LDCs in the past few months. DBRS expects PowerStream’s financial profile to remain relatively stable, and cash flow from operations to continue to fully fund capital expenditures and dividends to its shareholders.

The rating on Barrie Hydro Distribution Inc. (“Barrie Hydro”) is confirmed at “A”, based on the continued strength of its financial profile. However, DBRS notes that Barrie Hydro will incur significant capital expenditures over the next few years to accommodate growth in its service area. As such, leverage is expected to increase over the medium term to finance the growth, but is not expected to exceed Barrie Hydro’s deemed debt-to-capital of 55%. Hence, key financial ratios are expected to remain strong enough to support its rating.

DBRS highlights two uncertainties/risks going forward for regulated electricity distributors in Ontario: (1) The regulatory framework beyond 2006 remains uncertain. However, DBRS expects that the Ontario Energy Board (“OEB”) will maintain a supportive regulatory framework for electricity distributors, which would likely include full cost of service recovery, a market-based rate of return, and a performance-based incentive mechanism. (2) Political intervention remains a key risk, especially in light of rising electricity commodity prices and anticipated increases in transmission and distribution rates over the medium to longer term. Should the total cost of electricity to consumers rise too quickly, the government could interfere with the OEB’s rate-making process, or cap rates as has happened in the past. This risk would be highest leading up to a provincial election. However, DBRS considers this risk to be lower under the current government than the previous government, given the current government has made a strong commitment to passing on the full cost of electricity to consumers.