DBRS Confirms Royal Utilities at BBB with a Stable Trend

DBRS has today confirmed the Unsecured Senior Debt rating of Royal Utilities Income Fund (the Company or Royal) at BBB with a Stable trend after Sherritt International Corporation (Sherritt) successfully acquired all the outstanding units that it did not previously own. With this rating action, the Company has been removed from Under Review with Negative Implications where it was placed on March18, 2008.

The rationale for confirming the Company’s rating is as follows:

(1) Royal’s business risk profile and financial position remain unchanged after the merger and are compatible with a BBB-rated company. The Company has limited exposure to commodity prices. A substantial portion of Royal’s revenue comes from supplying thermal coal to baseload utility customers (all rated solid investment grade) in Alberta and Saskatchewan. Its coal supply contracts are long term, with either a direct pass-through of operating costs or inflation-indexed pricing for the majority of operating costs. DBRS expects the Company’s operating performance to remain stable in the foreseeable future.

(2) Royal will continue to operate as a separate legal entity, albeit a wholly owned subsidiary of Sherritt. Royal’s assets are not commingled with that of Sherritt, and Royal does not provide any guarantees to Sherritt’s obligations. Based on the current legal structure, Royal’s debtholders are ranked ahead of Sherritt’s debtholders in the claim to Royal’s assets. Accordingly, DBRS’s methodology does allow for a wholly owned subsidiary with a stronger risk profile to be rated higher than its parent.

(3) Sherritt has significant influence over Royal, being its 100% owner, and full access to Royal’s cash flow. Developments at Sherritt could lead to actions that may have a significant impact on the risk profile of Royal. Consequently, DBRS deems a notch differential between the ratings of Royal and Sherritt to be appropriate. Hence, a BBB rating is acceptable for Royal in relation to the BBB (low) rating for Sherritt.

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