DBRS Confirms Fording Canadian Coal Trust at STA-4 (middle)

Dominion Bond Rating Service (“DBRS”) has today confirmed the stability rating of the Fording Canadian Coal Trust (the “Trust”) at STA-4 (middle).

The Trust has been benefiting from record metallurgical coal prices, which have caused its profitability and distributions to surge. This volatility in earnings, driven by the Trust’s dependence on a single commodity and an extreme sensitivity to the Canadian dollar, explains why the Trust is constrained from moving into the STA-3 rating category, which generally requires less exposure to cyclical factors.

DBRS notes, however, that the fund compares favourably with other resource-based income funds, mainly oil and gas producers that rate in the STA-5 rating category and generally have weaker operating characteristics and asset quality. In fact, the Trust has superior rankings in the majority of its rating characteristics. Most notably, compared with other commodity-based funds, is the long-life, high-quality reserve base of the Trust (through its 61% investment in the Elk Valley Coal Partnership). With little need to continually replace reserves, which requires internal capital or causes equity dilution, the Trust can distribute most free cash to unitholders. In this sense, it is superior to oil and gas trusts that experience reserve declines of 6% to 8% annually, generally speaking. The Trust also benefits from a superior size, with a market capitalization of over Cdn$5 billion (at November 2005), making it one of the largest income funds in Canada, along with strong sponsorship and governance through the participation of Teck Cominco Limited and Ontario Teachers’ Pension Plan Board.

Based on DBRS’s expectation of strong metallurgical coal pricing prevailing for the 2006 coal year (starting April 2006), the fund should be able to maintain its elevated distributions in the near term. However, the Trust’s capacity to maintain per unit distribution at currently elevated levels beyond the near term is uncertain because cash generation will decline when currently high coal prices eventually return to more normalized levels, in DBRS’s opinion.