DBRS Comments on Fort Chicago Energy Partners L.P.’s Pristine Power Purchase

DBRS notes that Fort Chicago Energy Partners L.P. (the Partnership – rated BBB (high) with a Stable trend and STA-2 (low)) has today proposed to acquire all of the remaining outstanding shares (89%) of Pristine Power Inc. (Pristine) that it does not already own through a share exchange valued at approximately $314 million, including assumed debt that over time could reach approximately $195 million, subject to regulatory and other approvals (the Transaction). The proposed purchase price represents a premium of approximately 28% based on the 20-day weighted-average trading price of the Pristine shares. Assuming the proposed York Energy Centre project (York – 50% interest), one of the major assets to be acquired, is fully funded by 2012 (committed funding was recently obtained), the Transaction is expected to be financed 62/38 with debt/equity. The initial debt component will likely be substantially lower than 62%, most of which is primarily related to the York power project and is non-recourse. The Transaction, expected to close in the fourth quarter of 2010 (Q4 2010), will initially have a very modest impact on the Trust’s financial metrics and no impact on its current debt and stability ratings, although it is somewhat dilutive to cash flow per unit in the near term and should be accretive when York is in operation, which is anticipated by mid-2012.

The Transaction is viewed as positive from a strategic and operational perspective and is consistent with the Partnership’s intention to grow its power business, over time, alongside its mainstay pipeline operations (see the DBRS debt rating and stability reports dated September 3, 2010). The operating and development power assets to be added should be complementary to the existing and proposed run-of-river projects to be acquired from ENMAX Corporation (ENMAX, $115 million purchase price), as recently announced, with closing during the fall of this year. The Pristine and ENMAX assets are supported by long-term contracts with creditworthy counterparties, providing earnings and cash flow stability. The Transaction will also add to the Partnership’s tax horizon for its Canadian businesses for a potential one-year period. The Partnership’s nominal power capacity is expected to be about 650 megawatts (MW) on closing of the Transaction, with close to 40% under development to 2012/2013.

Pristine is an existing partner in some of the Partnership’s power projects, principally the East Windsor Cogeneration Centre (25% interest plus the Partnership’s 50% interest), and is an active electricity power developer and operator in the provinces of British Columbia and Ontario, both target markets and operating regions for the Partnership. It is also actively pursuing the development of a number of other power projects, including two wind power projects in Ontario under the feed-in tariff process. Pristine’s primary assets include the 50% interest in York mentioned above, which is a (nominal) 400 MW natural gas fired peaking generation facility located in King, north of Toronto. The estimated capital cost of $337 million is expected to be funded 80/20 with debt/equity through a recently announced $270 million non-recourse debt ($135 million net to Pristine) and other bank facilities. Construction has commenced, with commercial operations expected in Q2 2012. York will be supported by a 20-year peaking generation contract with the Ontario Power Authority (rated A (high) by DBRS) on project completion.

The Partnership plans to convert to a corporation on January 1, 2011. Post-conversion, it intends to continue to focus on long-term growth and on returning a significant portion of its income to shareholders. It currently anticipates maintaining its current annual cash distribution of $1 per unit in the form of dividends.

Notes:
All figures in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on our website under Methodologies.