DBRS Confirms AltaGas Income Trust’s Medium-Term Notes at BBB (low), Trend Now Stable; Confirms Stability Rating at STA-3 (middle)

DBRS has today confirmed the Medium-Term Notes and Stability ratings of AltaGas Income Trust (AltaGas or the Trust) at BBB (low), with a Stable trend, and STA-3 (middle), respectively. The confirmation follows today’s closing of the Trust’s acquisition of Taylor NGL Limited Partnership (Taylor). This removes the ratings from Under Review with Developing Implications, where they were placed on November 12, 2007, following the announcement that AltaGas had agreed to acquire all of the outstanding units of Taylor.

DBRS believes that the acquisition will result in a slightly improved business profile. However, the weaker financial profile, while still acceptable for the current rating, warrants the change to a Stable Trend, from Positive, for the debt rating. DBRS also expects that, over a relatively short time frame, AltaGas will address the near-term re-financing risk associated with increased credit facility borrowings as a result of this transaction in order to restore its liquidity position to previously strong levels.

In the November 12, 2007, press release, DBRS indicated that the purchase price was valued at $431 million, plus transaction costs and assumed debt at Taylor ($142 million) for a total transaction value of $590 million. The transaction was to be funded by the issue of AltaGas trust and exchangeable units ($186 million) as well as amounts drawn under existing credit facilities ($245 million). Taylor unit holders received 0.42 AltaGas units or $11.20 per unit for the outstanding units of Taylor (excluding the 9.5% of units already owned by AltaGas). Including assumed debt, the transaction value was to be initially funded with approximately $387 million (68%) of debt and $186 million (32%) of units. The transaction value equates to approximately 10 times Taylor’s EBITDA, which DBRS views as reasonable. AltaGas expects the acquisition to be immediately accretive to cash flow per unit and accretive on an earnings-per-unit basis beginning in 2009. DBRS notes that the final purchase metrics have not yet been disclosed. However, this is not expected to be material to the current ratings.

DBRS has also assigned an Issuer rating of BBB (low) with a Stable trend to AltaGas Holding Limited Partnership No. 1 (AGHLP No.1). DBRS notes that AGHLP No.1 is the borrower under the AltaGas credit facilities and guarantees the Medium-Term Notes issued by the Trust, thereby ensuring that all of the Trust’s senior debt ranks pari passu.

The Taylor acquisition has slightly improved AltaGas’s business-risk profile through the addition of long-life midstream assets with strong contractual arrangements and will result in benefits from increased scale and diversification due to the significant overlap of Taylor’s business operations with its own. The Trust’s financial profile, however, will show some deterioration due to the significant debt component (including assumed debt) of the transaction. In the November 12, 2007, press release, DBRS indicated that the Trust’s total debt-to-capital ratio would rise from 29% to the low- to mid-40% range and its cash flow-to-debt ratio would fall from 73% to the mid-30% range pro forma the acquisition as at September 30, 2007. These ratios, however, would remain at reasonable levels for the assigned ratings, although below the strong levels in place prior to the acquisition. DBRS further expects AltaGas to maintain its per unit distribution at a level that is consistent with its historically conservative payout policy (equal to 74% of cash available for distribution per unit for the 12 months ending September 30, 2007).

Taylor has assets in four segments of the energy sector: (1) natural gas processing; (2) natural gas liquids (NGL) extraction; (3) NGL byproduct transportation; and (4) hydroelectric generation. These assets are located in British Columbia and Alberta in areas where AltaGas has existing operations. AltaGas previously owned a 9.5% interest in Taylor and is therefore very familiar with Taylor and its businesses, mitigating some of the integration risk in this transaction.

The change in Trend to Stable from Positive largely reflects DBRS’s view that the Taylor acquisition consumed much of the financial flexibility that the Trust had in place prior to the announcement, while its credit metrics and liquidity position have been weakened.

DBRS’s review of the Taylor acquisition focused on a number of issues, including the following:

(1) Business Risk Profile: DBRS believes that the acquisition will result in a slightly improved business profile. DBRS believes that the Taylor acquisition (a large proportion of Taylor’s EBITDA is derived from lower-risk fee-based and cost-of-service contracts) will not materially change AltaGas’s proportional pre-hedge exposure to energy prices and fractionation spreads on a combined basis, although it does increase the Trust’s exposure to volume risk. In addition, DBRS estimates that AltaGas’s gas-to-power EBITDA split would change from a ratio of 44% to 56% for the nine months ended September 30, 2007, to a ratio of 57% to 43% on a pro forma basis. DBRS expects the impact of the new Alberta royalty regime on the Trust’s natural gas and NGL-related facilities to be manageable, although operational activity could be impacted by reduced capital expenditures by the oil and gas industry. DBRS will also continue to evaluate the potential impact of the Trust’s wind power strategy on its business risk profile.

(2) Financial Profile – Credit Metrics: DBRS estimates that the Taylor transaction will result in weaker credit metrics than those currently in place, although they will remain in line with the current rating. The Trust’s debt-to-capital ratio (low- to mid-40% range pro forma the acquisition at September 30, 2007) is expected to remain within its target range of 40% to 45%. DBRS also expects the potential financial impact on AltaGas of proceeding with growth projects at Taylor (which could exceed $130 million over the next three years) and development of its own wind power strategy, to be managed within current target credit metrics.

(3) Financial Profile – Liquidity and Distribution Policy: DBRS estimates that, pro forma, this transaction (and including funding of the debt-financed portion of the purchase price), AltaGas has adequate availability remaining on its and Taylor’s combined existing revolving credit facilities at closing. DBRS believes that this level is sufficient for supporting normal business operations. DBRS expects that, over a relatively short time frame, AltaGas will address the near-term re-financing risk associated with increased credit facility borrowings associated with this transaction in order to restore its liquidity position to previously stronger levels. This would also remove the current structural subordination to Taylor’s credit facility relative to the Taylor assets as all initial proceeds will be geared to repay that borrowing, which matures in June 2008. DBRS believes that the Trust’s payout ratio will remain relatively conservative as in the past. The pro forma increase in cash available for distribution from the Taylor acquisition supports the current distribution, including new units associated with the acquisition, pending taxation of income trusts beginning in 2011.

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