DBRS Confirms Spectra Energy Income Fund at STA-3 (middle)

DBRS has today confirmed the stability rating of Spectra Energy Income Fund (SEIF or the Fund) at STA-3 (middle). (The previous confirmation on March 8, 2007, removed the rating from Under Review with Developing Implications where it was placed on November 1, 2006, following the federal government’s proposed changes to the tax rules for income trusts, which would result in the taxation of income trusts, including SEIF, beginning in 2011.) The current rating reflects DBRS’s view that continuing strong operational results will allow for sustainable distributions going forward and that the Fund will not alter its fundamental financial and strategic objectives as a result of the proposed tax legislation. DBRS believes that the Fund’s current cash distribution ($0.84 per unit annually, expected to result in a conservative payout ratio in 2007) is sustainable based on its current operations until at least 2011 when the legislation is scheduled to take effect. The Fund’s ability to continue its distribution at current levels beyond that point could be impacted by the change in tax legislation as modified by Fund-specific tax considerations. However, as DBRS stated in its November 1, 2006, press release, any reduction in future distributions would be viewed as a one-time event, with the subsequent analytical focus on the stability and sustainability of the revised distributions.

As Bill C-52 Budget Implementation Act, 2007 was substantively enacted on June 12, 2007, the Fund has recorded a one-time $10.7 million future income tax expense in the second quarter. Although this reduced reported net income, there was no impact on operating cash flow or distribution levels.

The rating reflects the following factors: (1) The Fund benefits from fairly stable operations, with virtually all revenues derived on a fee-for-service basis, resulting in no direct commodity price exposure. Its facilities are well located in some of the most productive areas in the Western Canada Sedimentary Basin (WCSB), reducing potential throughput risk.

The August 2006 acquisition of the Westcoast Gas Services Inc. (WGSI) assets in the Fort St. John region increased the Fund’s exposure to higher-margin sour gas and increased its overall processing capacity. Natural gas price weakness over the past year has resulted in lower related capital expenditures, which could curtail production and SEIF processing volumes in the near term. However, this is likely to be a temporary trend, as SEIF’s facilities are largely located in areas of growing natural gas production and exploration activity. (2) The Fund’s operations remain focused on processing higher-margin sour gas, which allows it to capitalize on relatively high levels of sour gas production in the WCSB. SEIF remains one of the largest independent midstream operators in the WCSB. The majority of the Fund’s operational assets are relatively new, which reduces maintenance capital requirements and allows most operating cash flow to be available for distribution to unit holders. SEIF’s maintenance costs are expensed, which is a more conservative presentation of financial results. (3) The modest level of debt in the capital structure, combined with the availability of $63 million (as of June 30, 2007) under the Fund’s $200 million credit facility, provides the Fund with the financial flexibility and liquidity to pursue organic and acquisition-driven growth. SEIF’s debt-to-capital ratio (24.6% at June 30, 2007) is expected to remain in a conservative range supported by strong cash flow relative to debt, and a relatively conservative payout ratio (79% on a DBRS-adjusted basis for the 12 months ending June 30, 2007) to date. (4) While the Fund’s assets are located in productive regions, all are indirectly exposed to volatile commodity pricing movements. Reductions in drilling activity can lead to lower cash flow as a result of lower throughput volumes in a low gas price environment. (5) Over 90% of its customers’ natural gas production is connected exclusively to the Fund’s gathering and processing system, which reduces potential competition due to high switching costs and, in some cases, lack of alternatives. (6) The strong sponsorship/ownership by Westcoast, and its parent, Spectra Energy Corporation (Spectra Energy), provides support and significant expertise to the management of these assets. (7) DBRS expects current cash distributions to be sustainable over the medium term, supported by favourable operating conditions and underpinned by organic and acquisition-driven growth. The Valhalla Pipeline, which delivers gas to the Fund’s Gordondale East plant, commenced operations in April 2007 and is supported by firm take-or-pay contracts with area producers. Construction of a new sour gas processing facility at West Doe, located in the Peace River Arch area of northeast British Columbia, will be financed from existing credit facilities and is also supported by firm take-or-pay contracts with regional producers. Operations at West Doe are scheduled to begin in October 2007.