Canadian Hydro Developers, Inc.
TSX : KHD

Canadian Hydro Developers, Inc.

May 12, 2006 15:59 ET

Canadian Hydro Announces First Quarter Results

CALGARY, ALBERTA--(CCNMatthews - May 12, 2006) - Canadian Hydro Developers, Inc. (TSX:KHD) ("Canadian Hydro" or the "Company") reported cash flow from operations(2) of $2,087,000 ($0.02 per share, diluted(3)) on generation of 127 million kWh for the first quarter ended March 31, 2006 ("Q1 2006"), compared to cash flow from operations(2) of $1,741,000 ($0.02 per share, diluted(3)) on generation of 81 million kWh for Q1 2005. The Company reported a net loss of $436,000 ($nil per share, diluted) for Q1 2006, compared to net earnings of $105,000 ($nil per share, diluted) for Q1 2005.

Consistent quarter-over-quarter same plant operations, combined with the early start-up of the 67.5 MW Melancthon I Wind Plant ("Melancthon I"), the contribution from the July 2005 commissioned Upper Mamquam Hydroelectric Plant ("Mamquam") and interest income from the investment of cash on hand, lead to improved financial results for Q1 2006. However, lower than expected operating results from the Grande Prairie EcoPower® Centre ("GPEC") lead to lower financial results than what would have otherwise occurred.



------------------------------------------------------------------------
3 Months Ended
March 31 (unaudited),
2006 2005
------------------------------------------------------------------------
Financial Results (in thousands of
dollars except per share amounts)
Revenue 8,942 5,233
EBITDA(1) 3,767 3,233
Cash flow from operations(2) 2,087 1,741
Per share (diluted)(3) 0.02 0.02
Earnings (loss) (436) 105
Per share (diluted) - -

Operating Results
Electricity generation - MWh (net) 126,863 81,221
Average price received per MWh ($) 70 64
Average spot price received per MWh ($) 59 43
Power generation under contract (%) 89 86
------------------------------------------------------------------------
(1) EBITDA is provided to assist management and investors in determining
the ability of the Company to generate cash from operations2. EBITDA
as presented is defined as cash flow from operations2, plus interest
on debt and current tax expense. This measure does not have any
meaning prescribed in Canadian generally accepted accounting
principles ("GAAP") and may not be comparable to similar measures
presented by other companies.
(2) Cash flow from operations before changes in non-cash working
capital.
(3) Cash flow from operations2 per share (diluted) is provided to assist
management and investors in determining the Company's cash flow from
operations2 on a per share basis and does not have any meaning
prescribed in GAAP and may not be comparable to similar measures
presented by other companies.


Q1 2006 Achievements:

- Achieved commercial operations nearly one month early and $2 million under budget at Melancthon I;

- Readied 70 megawatts of renewable energy prospects for bids into the B.C. 2006 Call for Tender. Contracts will be awarded in August 2006 to successful participants; and

- Continued permitting the 132 MW Melancthon II Wind Project ("Melancthon II") with anticipated construction this summer.

"The commissioning of Melancthon I, our largest plant in operations to date, reflects the hard work of a dedicated team," said John Keating, Chief Executive Officer. "Melancthon I is a great addition to our diversified portfolio of low-impact, renewable power plants and will strengthen the Company's long-term, stable cash flows. With Melancthon II permitting underway and progressing well, we look forward to construction expected to start this summer."

"While operations at GPEC have not met our expectations, production at the plant has been steadily improving," said John Keating. "Our focus for this plant is on operational efficiencies and we continue to see improvements on a monthly basis. We fully expect this plant will generate stable cash flows over the long-term."

Canadian Hydro is a developer, owner and operator of 18 power generation facilities totalling net 230 MW in operation and has an additional 340 MW nearing construction. The generation portfolio is diversified across three technologies (water, wind and biomass) in the provinces of British Columbia, Alberta and Ontario. This portfolio is unique in Canada as all facilities are certified, or slated for certification, under Environment Canada's EcoLogoM Program.

Canadian Hydro Developers, Inc. is passionate about meeting the goals of investors and the needs of the environment. As industry leaders, Canadian Hydro is focused on building a sustainable future for Canada, and with over 15 years experience, Canadian Hydro is the working model for the unlimited development potential of low-impact renewable energy.

Common shares outstanding: 119,288,773

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

The following MD&A, dated May 5, 2006, should be read in conjunction with the unaudited interim consolidated financial statements as at and for the 3 months ended March 31, 2006 and 2005, and should also be read in conjunction with the audited consolidated financial statements and MD&A included in the Annual Report as at and for the year ended December 31, 2005. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). All tabular amounts in the following MD&A are in thousands of Canadian dollars unless otherwise noted. Additional information respecting the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.

Forward-Looking Statements

Certain statements contained in this MD&A, constitute forward-looking statements. These statements relate to future events or the Company's future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect, "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes that the expectations reflected in those forward looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. These statements speak only as of the date of this MD&A. The Company does not intend, and does not assume any obligation, to update these forward-looking statements.

Revenue

For Q1 2006, revenue increased 71% to $8,942,000 on generation of 127 million kWh compared to $5,233,000 on generation of 81 million kWh in Q1 2005. The increase in revenue was due to a 56% increase in generation as a result of a new plant additions, including Melancthon I, which became operational nearly one month ahead of schedule, GPEC and Mamquam as well as a windier season in Alberta. Hydroelectric generation for Alberta and Ontario was consistent with prior year. On a same plant basis, the Company experienced lower hydroelectric generation in B.C. compared to the prior year, however, Q1 2005 generation was much higher than normal as a result of extremely warm and wet weather in B.C. Current year generation is slightly below average long-term generation due to dry conditions.

Approximately 89% of the Company's generation was sold pursuant to long-term sales contracts in Q1 2006 (Q1 2005 - 86%). The average price received by the Company for electricity from all operations for Q1 2006 was $70/MWh (Q1 2005 - $64/MWh).



Electricity Generation - by Province and Technology

------------------------------------------------------------------------
Electricity Generation - MWh(1)
Q1 2006 Q1 2005 Variance
------------------------------------------------------------------------

British Columbia 18,877 20,563 - 8%
Alberta 72,712 41,150 + 77%
Ontario 35,274 19,508 + 81%
------------------------------------------------------------------------
Totals 126,863 81,221 + 56%
------------------------------------------------------------------------

Hydroelectric 47,855 47,656 -%
Wind 53,314 33,565 + 59%
Biomass 25,694 - +100%
------------------------------------------------------------------------
Totals 126,863 81,221 + 56%
------------------------------------------------------------------------
(1) Reflecting the Company's net interest.


------------------------------------------------------------------------
Electricity Generation for
Same Plants - MWh(1)
Q1 2006 Q1 2005 Variance
------------------------------------------------------------------------

Hydroelectric 36,277 47,656 - 24%
Wind 39,623 33,565 + 18%
------------------------------------------------------------------------
Totals 75,900 81,221 - 7%
------------------------------------------------------------------------
(1) Reflecting the Company's net interest.


----------------------------------------------
Electricity Generation for New Plants - MWh(1)
Q1 2006
----------------------------------------------
Melancthon I 13,690
GPEC 25,694
Mamquam 11,579
----------------------------------------------
Total - new 50,963
----------------------------------------------
(1) Reflecting the Company's net interest.


Operating Expenses

Operating expenses increased 183% to $4,314,000 in Q1 2006 compared to $1,525,000 in Q1 2005. Gross margins (revenue less operating expenses; expressed as a percentage of revenue) were lower at 52% in Q1 2006 (Q1 2005 - 69%). The increase in operating expenses was due primarily to the addition of biomass operations in Q2 2005, which has higher operating expenses and lower gross margins than the Company's hydroelectric and wind plants, and the addition of Melancthon I and Mamquam with no comparable operating expenses in Q1 2005. However, GPEC, which continued to encounter issues with commissioning during the first quarter, has seen an improvement over the prior year and continued improvement into the second quarter of 2006. Excluding GPEC, the gross margins for Q1 2006 were 70%, consistent with Q1 2005 and expectations.

Interest on Long-Term Debt, Long-Term Debt and Revolving Construction Lines of Credit

Interest on long-term debt (excluding capitalized interest) in Q1 2006 increased 7% to $1,337,000 compared to $1,248,000 in Q1 2005. The increase is due to higher outstanding debt on completed projects, offset partially by $1,315,000 in interest income earned during the quarter from cash invested in term deposits.

Capitalized interest associated with construction-in-progress in Q1 2006 was $426,000 compared to $645,000 in Q1 2005. The decrease was due to fewer projects under construction compared to the prior year (Q1 2006 - Melancthon I and Melancthon II; Q1 2005 - GPEC, Mamquam and Melancthon I).

Long-term debt (including current portion) as at March 31, 2006 was $226,319,000 (March 31, 2005 - $96,185,000) compared to $226,765,000 as at December 31, 2005. The decrease was due to regular repayments on the long-term debt during the quarter.

As at March 31, 2006, the Company has a 41/59 debt/equity mixture (December 31, 2005 - 41/59) compared to a stated target of 65/35. The debt/equity mixture remains unchanged from the prior year as the Company used cash flow from operations and cash received from the equity issuance in December 2005 to finance costs related to construction projects as opposed to increasing drawings on the construction facility, of which $19 million is available to be drawn at March 31, 2006.

Amortization Expense

Amortization expense increased 114% to $2,331,000 for Q1 2006 (Q1 2005 - $1,091,000) due to the addition of Melancthon I in March 2006, Mamquam in July 2005 and GPEC in June 2005. The wind plant is amortized over a 30 year period and the hydroelectric and biomass plants are amortized over a 40 year period.

Administration Expense

Administration expense increased 76% to $1,328,000 in Q1 2006 compared to $755,000 in Q1 2005. The increase in 2006 was due to moderately higher salary costs with the addition of new employees, bonuses paid to certain employees in the first quarter of 2006 compared to the second quarter prior year and increased stock compensation expense due to 1,695,000 options granted in Q1 2006 (Q1 2005 - 100,000). Capitalized administration costs associated with construction-in-progress in Q1 2006 were $761,000 compared to $218,000 in Q1 2005. Melancthon I (67.5 MW) and Melancthon II (132.0 MW) were under construction and being readied for construction, respectively, in the current quarter compared to GPEC, Mamquam, and Melancthon I, totaling 117.5 MW, in the same quarter prior year.

Financial Instruments

When a contract does not meet the criteria for hedge accounting, the changes in the fair value are recorded into income as either a gain or a loss, with a corresponding asset or liability, respectively, on the balance sheet. Loss on derivative financial instruments increased to $202,000 in Q1 2006 compared to a loss of $100,000 in Q1 2005. The loss is a result of the $401,000 fair value decrease of a contract for differences ("CFD") that expired on March 31, 2006, offset partially by $156,000 in cash payments from another party in connection with the expired CFD and the $43,000 recognition of the deferred credit to income relating to a CFD that did not qualify for hedge accounting in 2005. In Q1 2005, the loss was comprised of a $355,000 decrease in the fair value of various CFDs, offset partially by $212,000 in cash payments received from other parties relating to CFDs and the $43,000 amortization into income of the deferred credit (see above).

As disclosed in the December 31, 2005 MD&A, the Company has entered into various CFDs with other parties whereby the other parties have agreed to pay a fixed price to the Company based on the average monthly Pool price for an aggregate of 184,330 MWh per year of electricity from January 1, 2006, maturing from 2007 to 2024. At March 31, 2006, the fair value of the CFDs that qualify as hedges would result in a loss of $318,000.

Taxes

The Company does not anticipate paying cash income taxes for several years, other than in respect of the Cowley Ridge Wind Plant, through its wholly owned subsidiary, Cowley Ridge Wind Power Inc. However, the Company is liable for the Federal Tax on Large Corporations ("LCT") and Provincial Capital Taxes in Ontario, which comprise the current tax provision. The Company's larger capital base resulted in higher current taxes compared to the prior year. LCT will be phased out by the Federal Government by January 1, 2008.

Cowley Ridge Wind Power Inc. is fully taxable, but is entitled to recover approximately 175% of cash taxes paid annually (limited to 15% of eligible gross revenue) in accordance with the Revenue Rebate Regulation of the Alberta Small Power Research and Development Act. This Regulation will apply until the associated power sale agreements expire in 2013 (9.0 MW) and 2014 (9.9 MW).

Future income tax recovery was $413,000 in Q1 2006 compared to a future income tax expense of $165,000 in Q1 2005. The decrease was due to lower taxable earnings in the current quarter combined with tax pools available to the Company to offset current taxes to future periods compared to higher taxable earnings in Q1 2005.

Net (Loss) Earnings and Cash Flow from Operations before Changes in Non-Cash Working Capital

The Company had a net loss of $436,000 ($nil per share) in Q1 2006 compared to net earnings of $105,000 ($nil per share) in Q1 2005. The loss is a result of lower than expected operating results from GPEC; offset partially by the addition of Melancthon I during the quarter and Mamquam in July 2005 and interest income from the investment of cash on hand. GPEC operating results have not met expectations, however, they have improved from Q4 2005 and continue to improve in Q2 2006. The Company continues to focus on operational improvements and expects improved future results. Excluding non-cash items, cash flow from operations of $2,087,000 in Q1 2006 increased 20% from $1,741,000 in Q1 2005 as a result of new plant additions discussed above.

Capital Asset Additions and Prospect Development Costs

Capital asset additions were $23,634,000 in Q1 2006 (Q1 2005 - $19,953,000), resulting in a 7% increase in the net book value of capital assets since December 31, 2005. These additions relate to construction costs associated with Melancthon I, which achieved commercial operations on March 4, 2006, and Melancthon II, which is anticipated to commence construction this summer. Additions of prospect development costs were $8,690,000 in Q1 2006 (Q1 2005 - $429,000), relating primarily to wind turbine equipment deposits for Wolfe Island.



Financial Position

The following chart outlines significant changes in the consolidated
balance sheet from December 31, 2005 to March 31, 2006:

------------------------------------------------------------------------
Increase Explanation
(Decrease)
$
------------------------------------------------------------------------
Cash (33,253) Decrease due to capital asset additions
for Melancthon I and Melancthon II,
prospects development costs, long-term
debt repayments and payments of
accounts payable since year end; offset
partially by interest income received
on cash invested in term deposits and
issuance of common shares through the
exercise of stock options.

Capital assets 24,687 Construction costs related to
Melancthon I and Melancthon II;
partially offset by amortization.

Prospect development
costs 8,875 Increase due to costs related to the
development of Wolfe Island (see Note 5
to the interim consolidated financial
statements).

Share capital 1,049 Increase due to stock option exercises
(see Note 8 to the interim consolidated
financial statements).
------------------------------------------------------------------------


Capital Resources and Liquidity

The Company's current capital expenditure plans total approximately $707,000,000 for the construction of three projects in Ontario from 2006 to 2008. Up to $180,200,000 of the capital costs will be financed from proceeds of the public offering completed in 2005, a further $62,500,000 from expected future cash flow to be generated by the Company and potential future equity offerings, and the remaining $464,300,000 through anticipated debt financings.

In Q1 2006, the Company issued 1,064,900 common shares (Q1 2005 - 495,000) through the exercise of stock options at an average exercise price of $0.97 per share (Q1 2005 - $0.58 per share) for gross proceeds of $1,029,000 (Q1 2005 - $285,000).

Disclosure Controls

As of the end of the period covered by this quarterly report, the Company has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company has concluded that the disclosure controls and procedures continue to be effective.



Outstanding Share Data

----------------------------------------------
As at May 5, 2006
(Unaudited)
----------------------------------------------
Basic common shares 119,288,773
Convertible securities:
Warrants 500,000
Options 4,762,250
----------------------------------------------
Fully diluted common shares 124,551,023
----------------------------------------------
----------------------------------------------


Outlook

Melancthon I became operational in March 2006. The Company expects generation in 2006 from this 67.5 MW wind plant to be approximately 143,000 MWh (194,800 MWh on a full year basis). The Company will start construction of the 132 MW Melancthon II Wind Project in July, provided the necessary permits are received as anticipated.

Reservoir levels in Alberta, where four of the Company's hydroelectric plants are located, are currently at above normal levels for this time of year. Depending on the need for irrigation from farmers and ranchers this spring and summer, which impacts water flows to the Company's plants, the Company expects average to above average hydroelectric generation in Alberta for the remainder of the year.

In B.C., snow packs in the mountains surrounding Mamquam at March 31, 2006 and in April 2006 were slightly above normal levels. Provided that precipitation levels are normal, the Company expects average water levels for the next quarter. Snow packs in the mountains surrounding the Pingston and Akolkolex Hydroelectric Plants are currently at 89% of normal levels. The Company also expects average hydroelectric generation at these plants for the remainder of the year because snow packs are near normal and water flows could be enhanced with glacial melt.

Precipitation in Ontario is normal and is expected to be slightly below normal this spring. However, it is too early to determine whether hydroelectric generation at the Company's plants will be different for the remainder of 2006 versus 2005.

The Company continues to pursue the development of the Dunvegan Hydroelectric Prospect. With the two-year physical modeling program on the plant for fish passage complete, the Company plans to submit its application to the joint Alberta Energy and Utilities Board and Natural Resources Conservation Board in July 2006, with a possible hearing date in the spring of 2007, and a regulatory decision in the first half of 2007.



CANADIAN HYDRO DEVELOPERS, INC.
CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS AND RETAINED
EARNINGS (Unaudited)
(in thousands of dollars except per share amounts)

3 months ended March 31 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------

Revenue
Electric energy sales 8,783 5,096
Revenue rebate 159 137
------------------------------------------------------------------------
8,942 5,233
------------------------------------------------------------------------

Expenses (income)
Operating 4,314 1,525
Interest on long-term debt (Note 4) 1,337 1,248
Amortization 2,331 1,091
Administration (Note 4) 1,328 755
Loss on derivative financial
instrument (Note 3) 202 100
Foreign exchange gain (64) -
------------------------------------------------------------------------
9,448 4,719
------------------------------------------------------------------------

(Loss) Earnings before taxes (506) 514
------------------------------------------------------------------------

Tax (recovery) expense
Current 343 244
Future (413) 165
------------------------------------------------------------------------
(70) 409
------------------------------------------------------------------------

Net (loss) earnings (436) 105

Retained earnings, beginning of period 13,992 13,172
------------------------------------------------------------------------

Retained earnings, end of period 13,556 13,277
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings per share (Note 8)
Basic - -
Diluted - -

See accompanying notes to the consolidated financial statements


CANADIAN HYDRO DEVELOPERS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands of dollars)

March 31, December 31,
2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------

ASSETS
Current assets
Cash and cash equivalents 146,548 179,801
Accounts receivable 6,219 6,178
Revenue rebate 675 515
Prepaid expenses 379 771
Derivative financial instruments (Note 3) - 401
------------------------------------------------------------------------

153,821 187,666

Deferred financing costs 2,172 2,072
Capital assets (Note 4) 388,213 363,526
Prospect development costs (Note 5) 38,960 30,085
------------------------------------------------------------------------

TOTAL ASSETS 583,166 583,349
------------------------------------------------------------------------
------------------------------------------------------------------------


LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 9,252 9,252
Current portion of long-term debt (Note 6) 1,876 1,838
Deferred credit (Note 3) 229 272
Taxes payable 101 251
------------------------------------------------------------------------

11,458 11,613

Long-term debt (Note 6) 224,443 224,927
Future income taxes 19,845 20,231
------------------------------------------------------------------------

255,746 256,771
------------------------------------------------------------------------
Commitments and contingencies (Note 9)

SHAREHOLDERS' EQUITY
Share capital (Note 7) 312,820 311,771
Contributed surplus (Note 8) 1,044 815
Retained earnings 13,556 13,992
------------------------------------------------------------------------

327,420 326,578
------------------------------------------------------------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 583,166 583,349
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements

Approved by the Board
"signed" "signed"
David J. Stenason Dennis Erker


CANADIAN HYDRO DEVELOPERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands of dollars)

3 months ended March 31 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------

OPERATING ACTIVITIES
Net (loss) earnings (436) 105
Adjustments for:
Amortization 2,331 1,091
Loss on derivative financial
instrument (Note 3) 358 312
Stock compensation expense (Note 8) 247 68
Future income tax (recovery) expense (413) 165
------------------------------------------------------------------------

Cash flow from operations before changes
in non-cash working capital 2,087 1,741
Changes in non-cash working capital (3,613) (5,442)
------------------------------------------------------------------------

(1,526) (3,701)
------------------------------------------------------------------------

FINANCING ACTIVITIES
Issue of common shares, net of issue
costs (Note 7) 1,029 250
Long-term debt advances (Note 6) - 35,000
Long-term debt repayments (446) (5,312)
Revolving construction lines of
credit advances - 3,700
Deferred financing costs 14 (350)
------------------------------------------------------------------------

597 33,288
------------------------------------------------------------------------

INVESTING ACTIVITIES
Capital asset additions (23,634) (19,953)
Prospect development costs (8,690) (429)
Net cash acquired on acquisition - 638
Proceeds on sale of capital assets - -
------------------------------------------------------------------------

(32,324) (19,744)
------------------------------------------------------------------------

NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (33,253) 9,843
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 179,801 1,434
------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, END OF PERIOD 146,548 11,277
------------------------------------------------------------------------
------------------------------------------------------------------------

Supplemental information
Cash interest paid 3,016 1,948
Cash income and capital taxes paid 242 231

See accompanying notes to the consolidated financial statements


CANADIAN HYDRO DEVELOPERS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 and 2005 (Unaudited)
(Tabular amounts in thousands of dollars, except as otherwise noted)


1. SIGNIFICANT ACCOUNTING POLICIES

The accompanying interim consolidated financial statements of Canadian Hydro Developers, Inc. and its wholly-owned subsidiaries (the "Company") have been prepared in accordance with Canadian generally accepted accounting principles and reflect all adjustments (consisting of normal recurring adjustments and accruals) that are, in the opinion of management, necessary for a fair presentation of the results for the interim period.

Certain hydroelectric activities of the Company are conducted jointly with others and accordingly, the accounts reflect only the proportionate interest of the Company's 50% owned unincorporated joint ventures.

These interim consolidated financial statements do not include all of the disclosures included in the Company's annual consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the Company's most recent annual consolidated financial statements.

These accounting policies used in the preparation of these interim consolidated financial statements conform to those used in the Company's most recent annual consolidated financial statements.

2. COMPANY OPERATIONS

Interim results fluctuate due to plant maintenance, seasonal demands and demand for electricity and supply of water, and the timing and recognition of regulatory decisions and policies. Consequently, interim results are not necessarily indicative of annual results. The Company expects interim results for the second and third quarters to be higher than those from the first and fourth quarters of 2006.

3. DERIVATIVE FINANCIAL INSTRUMENTS

To support the Company's obligations under a guarantee to a third party, the Company entered into a contract with another party whereby the other party will pay the Alberta Power Pool price to the Company in return for the Company paying the other party a fixed price for approximately 5 MW of electricity per year for three years commencing April 1, 2003. As at December 31, 2005, the Company had recorded $401,000 as a derivative financial instrument asset representing the fair value of the contract. On March 31, 2006, this contract expired and as a result, the asset was reversed to reflect a $nil fair market value with a corresponding $401,000 loss on derivative financial instrument recorded into income. Offsetting this loss was $156,000 in payments received from the other party in connection with this contract recognized into income as a gain on derivative financial instruments during the quarter.

Included in the loss on derivative financial instrument for Q1 2006 is amortization of the deferred credit of $43,000 (Q1 2005 - $43,000) related to a contract that did not qualify for hedge accounting in the prior year. The deferred credit is recognized into income over the life of the contract.

The Company has entered into various foreign exchange contracts, expiring in 2007, which fix the Company's U.S. dollar and Euro payments under wind turbine purchase contracts in Canadian dollars. The aggregate remaining amount of U.S. dollar purchases is $134,832,780, which is fixed at a blended rate of 1.1515 for an aggregate Canadian dollar amount of $155,259,946. The aggregate amount of Euro purchases is EUR 26,161,630, which is fixed at a blended average rate of 1.4095 for an aggregate Canadian dollar amount of $36,874,817. These foreign exchange contracts qualify as hedges for accounting purposes.

The Company has entered into various Contracts for Differences ("CFDs") with other parties whereby the other parties have agreed to pay a fixed price to the Company based on the average monthly Pool price for an aggregate of 184,330 MWh per year of electricity from January 1, 2006, maturing from 2007 to 2024. While the CFDs do not create any obligation by the Company for the physical delivery of electricity to other parties, management believes it has sufficient electrical generation, which is not subject to contract, to satisfy the CFDs. The Company is unable to fair value two of the CFDs for an aggregate of 4,150 MWh per year of electricity because the CFD prices includes the sale of Renewable Energy Certificates along with the settlement of the average monthly Pool price. The Company's assumptions for fair valuing its CFDs, given the ongoing illiquidity of the forward market, assumes the actual contract prices contained in the CFDs are the same as the forward prices for years where no forward market exists. At March 31, 2006, the fair value of the CFDs that qualify as hedges would result in a loss of $318,000.


4. CAPITAL ASSETS

The major categories of capital assets at cost and related accumulated
depreciation are as follows:

December 31,
March 31, 2006 2005
--------------------------------------------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
--------------------------------------------------

Generating plants
- operating 397,959 30,620 367,339 243,813
- construction-in-
progress 19,190 - 19,190 118,317
Vehicles 1,104 743 361 283
Equipment, other 2,221 898 1,323 1,113
--------------------------------------------------

420,474 32,261 388,213 363,526
--------------------------------------------------
--------------------------------------------------


For the 3 months ended March 31, 2006, interest costs of $426,000 (3 months ended March 31, 2005 - $645,000) and administration expenses of $761,000 (3 months ended March 31, 2005 - $218,000) associated with the construction-in-progress have been capitalized during construction. During the quarter, construction costs of $123,464,000 relating to the Melancthon I Wind Plant ("Melancthon I") were transferred from construction-in-progress to operating plants and prospect development costs of $19,190,000 relating to the Melancthon II Wind Project ("Melancthon II") were transferred into construction-in-progress. In Q1 2005, construction-in-progress related to costs associated with the Grande Prairie EcoPower® Centre, the Upper Mamquam Hydroelectric Plant and Melancthon I.



5. PROSPECT DEVELOPMENT COSTS

Prospect development costs are comprised of the following:

March 31, December 31,
2006 2005
$ $
-----------------------

Wind prospects 27,966 20,004
Dunvegan Hydroelectric Prospect 7,830 7,676
Hydroelectric prospects 3,164 2,405
-----------------------

Total 38,960 30,085
-----------------------
-----------------------


The majority of the costs included in wind prospects relate to turbine supply and preliminary engineering and design for the Wolfe Island Wind Project ("Wolfe Island"). During the quarter, the Company acquired all of the issued and outstanding shares of Valisa Energy Incorporated ("Valisa"). The purchase price was entirely allocated to prospect development costs. Valisa owns the Serpentine Hydroelectric Prospect in British Columbia, which costs are included above.



6. LONG-TERM DEBT

At March 31, 2006, the Company had letters of credit in the amount of
$22,397,000 (December 31, 2005 - $24,138,000) outstanding with its
corporate lenders.

March 31, December 31,
2006 2005
$ $
-----------------------

Debentures, bearing interest at 5.334%,
10-year term with interest payable
semi-annually and no principal repayments
until maturity, senior unsecured 120,000 120,000

Pingston Debt, bearing interest at 5.281%,
10-year term with interest payable
semi-annually and no principal repayments
until maturity, secured by the Pingston
Hydroelectric Plant, without recourse to
joint venture participants 35,000 35,000

Construction Facility, bearing interest at
Bankers' Acceptances plus a stamping fee of
0.80% per annum, unsecured non- revolving
credit facility with a 364-day drawdown period,
followed by a two-year non-amortizing term out
period 56,600 56,600

Mortgage on Cowley, bearing interest at 10.867%,
secured by the plant, related contracts and a
reserve fund for $725,000 that has been provided
by a letter of credit to the lender. Monthly
repayments of principal and interest are $121,000
until December 15, 2013 7,581 7,735

Mortgage, bearing interest at 10.7% and secured
by letter of guarantee. Monthly repayments of
principal and interest are $84,000 until May 31,
2010 3,370 3,529

Mortgage, bearing interest at 10.68%, secured by
letters of guarantee. Monthly repayments of
principal are $31,000 plus interest until
December 30, 2012 2,531 2,625

Promissory note, bearing interest fixed at 6%,
secured by a second fixed charge on three of
the Alberta hydroelectric plants. Monthly
repayments of principal and interest are $19,000
until August 1, 2012 1,237 1,276
-----------------------

226,319 226,765

Less current portion 1,876 1,838
-----------------------

Long-term debt 224,443 224,927
-----------------------
-----------------------

7. SHARE CAPITAL

Number of Amount
Shares $
---------------------------
Balance, December 31, 2005 118,223,873 311,771
Issued on exercise of stock options 1,064,900 1,029
Stock compensation on shares exercised - 20
---------------------------

Balance, March 31, 2006 119,288,773 312,820
---------------------------
---------------------------


8. EARNINGS PER SHARE AND STOCK COMPENSATION

The following table shows the dilutive effect of dilutive securities on
the weighted average common shares outstanding.

---------------------------
3 Months Ended March 31,
2006 2005
---------------------------

Basic weighted average shares outstanding 118,955,676 77,868,673
Effect of dilutive securities:
Options 2,841,937 2,092,914
---------------------------

Diluted weighted average shares 121,797,613 79,961,587
---------------------------
---------------------------


Using the fair value method of accounting for stock options issued to employees on or after January 1, 2003, the Company recognized $247,000 or $nil per share (Q1 2005 - $68,000 or $nil per share) of compensation expense in the consolidated statement of earnings, with a corresponding increase recorded to contributed surplus in the consolidated balance sheet as at and for the 3 months ended March 31, 2006. The Company issued 1,695,000 options during the three months ended March 31, 2006 (100,000 options during the three months ended March 31, 2005). The weighted average fair value of options granted during the 3 months ended March 31, 2006 was $1.97 per share (Q1 2005 - $1.71 per share), which was estimated using the Black-Scholes option-pricing model, assuming a risk free interest rate of 4.08% (2005 - 4.28%), expected volatility of 36.63% (Q1 2005 - 37.53%), expected weighted average life of four years (Q1 2005 - eight years), and no annual dividends paid.

If the fair value method of accounting had been used for stock options issued to employees on or after January 1, 2002, but prior to January 1, 2003, then the effect would have been a decrease in net loss of $30,000 or $nil per share for the 3 months ended March 31, 2006, and an increase in net earnings of $31,000 or $nil per share for the 3 months ended March 31, 2005.

9. COMMITMENTS AND CONTINGENCIES

In the ordinary course of constructing new projects, the Company routinely enters into contracts for goods and services. As at March 31, 2006, the Company committed to approximately $390,920,000 for goods and services for Melancthon I, Melancthon II and Wolfe Island, which will be expended between 2006 and 2008. Melancthon I was completed in March 2006, and Melancthon II and Wolfe Island are expected to be completed in 2007 and 2008, respectively.

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