DBRS Confirms The Consumers’ Waterheater Income Fund at STA-2 (middle), Removes From Under Review – Developing

DBRS has today confirmed the stability rating of The Consumers’ Waterheater Income Fund (the Fund) at STA-2 (middle). This action removes 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 existing income trusts beginning in 2011.

The confirmation reflects DBRS’s expectation that the Fund will continue with its existing business and financing strategies despite the tax legislation. While the Fund’s ability to continue its distribution in the future at current levels could be impacted by the new legislation, DBRS stated in its November 1, 2006, press release that any reduction in future distributions due to the imposition of new taxes would be viewed as a one-time event, with the subsequent analytical focus being on the stability and sustainability of the revised distributions.

The Fund continues to demonstrate operational and financial results that support its current rating and distributions. DBRS expects that over the medium term the Fund will maintain a payout ratio of less than 90%.

Factors that limit the Fund’s stability rating include increased capital expenditure over the medium term to upgrade gas water heaters to meet new safety standards, limited geographic diversification, refinancing risk and the possible impact on cash flow from the proposed tax legislation. However, given the Fund’s moderately conservative payout ratio and stable water heater rental business, DBRS views these risks as acceptable at the STA-2 (middle) stability rating.

Note:
All figures are in Canadian dollars unless otherwise noted.