DBRS Rates Royal Utilities Income Fund at STA-2 (low)

Dominion Bond Rating Service ("DBRS") has today assigned a stability rating of STA-2 (low) to Royal Utilities Income Fund (“Royal” or the “Fund”).

The rating reflects the Fund’s status as the largest thermal coal producer in Canada and its superior operating characteristics. The mines have gone through significant modernization and improvement since 2003. All mines are surface mines, which generally are more cost-efficient with a higher coal recovery percentage. There are less operational risks with open pit mining than underground mining. The mines have large reserves and long mine lives with low maintenance capital needs.

DBRS notes that a substantial portion of Royal’s revenue comes from supplying thermal coal to utility customers (all rated solid investment grades) in Alberta and Saskatchewan under long-term contracts. The Fund’s mines are mine-mouth mines and supply baseload power plants operated by its utility customers (i.e., the mines are located next to the power plants) and are the exclusive coal suppliers to these power plants. The proximity to the power plants eliminates most of the transportation costs, giving the Fund a major cost advantage, and minimizing the risk that the utility customers would seek an alternate supply of coal and not renew existing contracts.

The Fund has a stable revenue source and has limited exposure to commodity prices. The coal supply is on long-term contracts that are either on a direct pass-through of operating costs or include inflation-indexed pricing for the majority of operating costs. In addition, the Fund has a substantial royalty income stream, about 36% of distributable income for the 12 months ending March 31, 2006, which adds to earnings and cash flow stability.

The Fund has a relatively conservative capital structure, providing it with financial flexibility, facilitating organic and acquisition-driven growth. DBRS expects the Fund’s debt-to-capital ratio to be in a conservative range, supported by strong cash flow relative to debt, offsetting somewhat the relatively high payout ratio, targeted at 97% of distributable cash.

Sherritt International Corporation (“Sherritt”) and Ontario Teachers’ Pension Fund will continue to hold a significant indirect interest in the Fund. Sherritt has considerable experience in the thermal coal industry and will continue as the operator of the mines, providing significant expertise to the management of these assets.

DBRS also notes that the major challenge to the Fund is its lack of diversification. The Fund concentrates on just one commodity, thermal coal, and only operates in Alberta and Saskatchewan, exposing it to the economic cycles of these two regions with similar industrial characteristics. Furthermore, the Fund is also exposed to a time lag between the changes in coal prices to reflect changes in input costs on the inflation based escalator contracts. Nevertheless, DBRS is of the view that these challenges are not significant and are easily manageable.

DBRS expects the Fund’s cash distribution to be sustainable over the medium term.