Duke Energy Income Fund
TSX : DET.UN

Duke Energy Income Fund

November 07, 2006 17:01 ET

Duke Energy Income Fund Reports Third Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 7, 2006) - Duke Energy Income Fund (TSX:DET.UN) (the "Fund") today released its financial and operating results for the three months ended September 30, 2006.

Third Quarter Highlights:

- On September 29, 2006, the Fund completed the acquisition of interests in four northeastern B.C. facilities owned by the Westcoast Gas Services Inc. ("WGSI") for approximately $145 million.

- As a result of the acquisition and effective with the October distribution, the Fund announced an increase in monthly cash distributions to $0.07 per unit, from $0.067 per unit, or $0.84 per unit on an annualized basis.

- Duke Energy Facilities LP ("DEF LP") revenue grew 7.0 per cent year-over-year to $22.9 million, due mainly to higher processing volumes.

- During the quarter, the Fund declared distributions of $4.3 million from distributable cash of $4.9 million, for a payout ratio of 87 percent.

- On November 7, the Fund's Board of Trustees approved the construction of two projects in the Peace River Arch region for a total estimated cost of $28.3 million.

- Coincident with the spin-off of Duke Energy's gas business, the name of the Fund will change to Spectra Energy Income Fund.

"We are very pleased to have completed the WGSI acquisition and to have increased distributions. The transaction will immediately contribute accretive value to our unit holders," said Doug Haughey, president and chief executive officer of the Fund's manager. "We are also excited to announce two new organic-growth projects for 2007 in one of our core operating areas."

New Projects:

Approval was given by the Fund's Board of Trustees on November 7, for the construction of the Valhalla Pipeline Project ("Valhalla") and the West Doe Plant Project ("West Doe") in the Peace River Arch area.

West Doe will consist of a plant with 23.5 million cubic feet per day of sour gas processing capability and associated gas gathering and sales gas pipelines. This facility will be located in northeast British Columbia, close to the Fund's existing Pouce Coupe facility, and is supported by firm take-or-pay contracts. Completion of West Doe is scheduled for September 2007, at an estimated cost of $22.5 million.

Valhalla will be a 25 kilometer, 6 inch sour gas gathering pipeline connected to the Fund's Gordondale East processing facility, which is located in northwestern Alberta. The cost of Valhalla is estimated to be $5.8 million and is supported by firm take-or-pay contracts. This project, which has a scheduled in-service date of April 1, 2007, will provide incremental gas for processing at the Gordondale East plant.

Sponsor Update:

On October 30, Duke Energy announced its existing natural gas business will be renamed Spectra Energy Corp. ("Spectra Energy") when the operations become a stand-alone, publicly traded company, which is targeted for January 1, 2007. The newly formed company will include the Duke Energy Gas Transmission ("DEGT") assets, as well as Duke Energy's 50 percent interest in DCP Midstream. Coincident with the spin-off of Duke Energy's gas business, the name of the Fund will change to Spectra Energy Income Fund. In addition, ownership of the Fund's sponsor and manager will be transferred from Duke Energy to Spectra Energy. Expectations are that the Fund, including its operations and management personnel, will remain largely unaffected by this change.

Effective immediately, Mr. Alan Harris, Group Vice President and Chief Financial Officer for DEGT and one of the Sponsor's representatives on the Fund's board of trustees will be replaced on the Fund's Board of Trustees by Mr. William Garner, who will be General Counsel and Secretary for Spectra Energy.

Federal Tax Proposal:

On October 31, 2006, the Minister of Finance announced proposed changes to the income tax treatment of "flow-through entities", including income trusts. If the proposal is implemented in its current form, income trusts will be subject to tax at corporate rates on the taxable portion of their distributions. Further, unitholders will be treated as if they have received a dividend equal to the taxable portion of their distributions, and will be taxed accordingly. These proposed changes will generally apply beginning in the 2007 taxation year for trusts that begin to be publicly-traded after October 2006, but would only apply beginning with the 2011 taxation year to those income trusts, such as the Fund, that were already publicly traded at the time of the announcement. While the proposed changes have not yet been implemented, such changes could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units.

As a result of this announcement, on November 1, 2006, The Dominion Bond Rating Service ("DBRS") placed the stability rating of the Fund (STA-3 (middle)) "Under Review with Developing Implications".

Financial and Operating Results:

DEF LP's revenue for the third quarter of 2006 was $22.9 million, an increase of 7.0 percent or $1.5 million from the comparable quarter in 2005. The increase was mainly due to higher processing and gathering volumes from new wells, more firm take-or-pay contracts, higher average fees from processing gas with higher concentrations of sour gas and the impact of a plant turnaround during the third quarter of 2005.

Net income for the third quarter of 2006 was $4.1 million, up $2.3 million from the same period a year earlier, due primarily to an increase in revenue, decreases in operations and maintenance costs, and a decrease in net interest expense and other income. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter was $11.6 million, an increase of 8.5 percent, or approximately $0.9 million, from the third quarter last year due primarily to increased revenue and decreased operations and maintenance expenses, partially offset by an increase in general and administrative expenses.

For the Fund, distributable cash for the third quarter was $4.9 million and declared distributions were $0.201 per unit, totaling $4.3 million for a payout ratio of 87 percent.

For the current nine-month period, distributable cash was $13.0 million and declared distributions were $0.603 per unit, for total distributions of $10.5 million resulting in a payout ratio of 81 percent.



--------------------------------------------------------------------------
From
inception
on
Three Nine November 2,
months ended months ended 2005 to
September 30, September 30, December 31,
Statement of Distributable Cash 2006 2006 2005(2)
--------------------------------------------------------------------------
Duke Energy Facilities LP
Cash flow from operating
activities $ 8,475 $ 25,425 $ 1,939
Changes in non-cash working capital 1,800 4,549 (910)
Amortization of deferred
financing charges (47) (143) -
Maintenance capital expenditures (415) (982) -
------------ ------------ -----------

Distributable Cash(1) from
Duke Energy Facilities LP $ 9,813 $ 28,849 $ 1,029
------------ ------------ -----------
------------ ------------ -----------

Duke Energy Income Fund
Share of distributable cash from
Duke Energy Facilities LP $ 4,452 $ 12,526 $ 413
Interest income earned by the Fund 486 486 -
Management and administrative
expenses(3) 4 14 (10)
------------ ------------ -----------

Distributable Cash(1) from
Duke Energy Income Fund $ 4,942 $ 13,026 $ 403
------------ ------------ -----------
------------ ------------ -----------

Weighted average number of units
outstanding (units) 15,594,587 15,404,037 14,000,000

Distributable Cash ($ / Unit)(1) $ 0.317 $ 0.846 $ 0.029
------------ ------------ -----------

Cash distributions declared
($ / Unit) $ 0.201 $ 0.603 $ 0.026
------------ ------------ -----------

Distributions declared(4) $ 4,294 $ 10,485 $ 364
------------ ------------ -----------
------------ ------------ -----------

Payout Ratio (distributions
declared/distributable cash)(1) 87% 81% 90%
------------ ------------ -----------

(1) References to "Distributable Cash" are to cash available for
distribution to unitholders in accordance with the distribution
policies of the Fund. Distributable cash, distributable cash per unit
and payout ratio are non-GAAP measures generally used by Canadian
open-ended trusts as an indicator of financial performance. They are
considered key measures, as they demonstrate the cash available for
distribution to unit holders. The method of determining Distributable
Cash for the Partnership is derived from cash flow from operating
activities, a measure recognized under GAAP, and is equivalent to
EBITDA less net interest expense, current taxes and maintenance
capital expenditures for the period.

References to "EBITDA" are to earnings before interest, income taxes,
depreciation and accretion. EBITDA is a non-GAAP measure that
represents earnings generated to fund capital investments, meet
financial obligations and fund distributions. It is considered a key
measure, as it demonstrates the ability of the business to meet its
capital and financing commitments.

(2) For periods prior to the third quarter of 2006, distributable cash for
the Partnership was calculated as EBITDA less net interest expense and
maintenance capital expenditures. Distributable cash from the
Partnership for this period has been recalculated and is derived from
cash flow from operating activities and is equivalent to EBITDA less
net interest expense, current taxes and maintenance capital
expenditures. This has lead to an increase in distributable cash of
$19 thousand for the Partnership and $8 thousand for the Fund, for
the period ended December 31, 2005.

(3) Management and administrative expenses are reimbursed by the
Partnership.

(4) Includes $600 thousand distribution to Subscription Receipt holders
in third quarter.


Conference Call and Webcast:

A conference call to discuss the financial results will take place on Wednesday, November 8, 2006, at 6 a.m. MT (8 a.m. ET). The call will be hosted by Doug Haughey, President and CEO of the Fund's manager. Also participating in the call from the Fund's manager will be Tim Curry, Vice President, finance; Duane Rae, Vice President; and Bob Bissett, Director, business development and investor relations. Following management's presentation, there will be a question and answer session for analysts and institutional investors.

To participate in the conference call, please dial 416-644-3421 or 1-866-250-4892. A webcast of the call will be available at www.dukeenergyincomefund.com. A replay of the conference call will be available as of 10 a.m. ET the same day until 12 a.m. on November 14, 2006. To access the replay, dial 416-640-1917 or 1-877-289-8525 followed by the passcode 21207229#.

Non-GAAP Measures:

The Fund provides financial measures that do not have a standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP). These non-GAAP measures may not be comparable to similar measures presented by other entities. All of the measures have been calculated consistent with previous disclosures by Duke LP.

Forward-Looking Statements:

This news release includes statements that do not directly or exclusively relate to historical facts, referred to as "forward-looking statements." You can typically identify forward-looking statements by the use of forward-looking words, such as "may", "will", "could", "should", "project", "believe", "anticipate", "expect", "estimate", "continue", "potential", "plan", "forecast" and other similar words. The forward-looking statements reflect management's current intentions, plans, expectations, beliefs and assumptions about future events, including the outlook for general economic trends, industry trends, commodity prices, capital markets, and the governmental, legal and regulatory environment. Forward-looking statements relate to, among other things, anticipated financial performance, business prospects, strategies, regulatory developments, new services, market forces, commitments and technological developments. These statements are subject to various known and unknown risks and uncertainties that are outside our control and could cause actual results to differ materially from the results expressed or implied by the forward-looking statements. Those risks and uncertainties include market and general economic conditions, future costs, treatment under government regulatory, tax and environmental regimes and the other material risks discussed in the Fund's Annual Information Form dated March 31, 2006, under "Risk Factors" and in the management's discussion and analysis of the Fund and Duke Energy Facilities LP under the headings "Risk Profile" contained in the Fund's Annual Report for the year ended Dec. 31, 2005. Undue reliance should not be placed on this forward-looking information, which is given as of the date of this release, and the Fund undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.

About Duke Energy Income Fund:

Duke Energy Income Fund is an unincorporated open-ended trust established under the laws of the Province of Alberta and owns a 53.8 per cent indirect interest in DEF LP which owns 100 per cent of Duke Energy Midstream Services Canada Corporation ("Duke Midstream"). Duke Midstream is one of the largest independent midstream operators in the Western Canadian Sedimentary Basin ("WCSB") with interests in 13 natural gas processing plants with a net processing capacity of 904 mmcf/d and over 1,600 kilometres of natural gas gathering pipelines located throughout natural gas prone areas in the western extent of the WCSB. More information on Duke Energy Income Fund can be found at: http://www.dukeenergyincomefund.com.

Duke Energy Gas Transmission (DEGT) is a North American leader in the long-haul transportation and storage of natural gas. For more than three quarters of a century DEGT and its predecessor companies have developed the critically important pipelines and related energy infrastructure that connects natural gas supply sources to premium markets. Based in Houston, Texas, the company's assets include about 17,500 miles of transmission pipeline and 250 billion cubic feet of storage capacity in the U.S. and Canada. DEGT also has natural gas gathering, processing and distribution assets and natural gas liquids operations that are among the largest in Canada. DEGT, along with its 50 percent ownership in Duke Energy Field Services, will separate from Duke Energy to become a pure play company known as Spectra Energy Corp. The targeted effective date for the new company is January 1, 2007. More information can be found at: http://www.degt.duke-energy.com.

Duke Energy is a diversified energy company with a portfolio of natural gas and electric businesses, both regulated and unregulated, and an affiliated real estate company. Duke Energy supplies, delivers and processes energy for customers in the Americas. Headquartered in Charlotte, N.C., Duke Energy is a Fortune 500 company traded on the New York Stock Exchange under the symbol DUK. More information about the company is available on the Internet at: http://www.duke-energy.com.

DUKE ENERGY INCOME FUND

and

DUKE ENERGY FACILITIES LP

Interim

Management Discussion and Analysis

And

Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2006

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management's discussion and analysis ("MD&A") of financial condition and results of operations is prepared as of November 7, 2006. This MD&A should be read together with the accompanying unaudited consolidated financial statements of Duke Energy Income Fund (the "Fund") and Duke Energy Facilities LP (the "Partnership") as at and for the three and nine months ended September 30, 2006 and the related notes thereto. The unaudited consolidated financial statements of the Fund and the Partnership are prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

The selected financial information and discussion below also refers to certain measures to assist in assessing financial performance. These "non-GAAP measures" such as "EBITDA", "Distributable Cash", "Distributable Cash per unit", "Operating Cash Flow" and "Payout Ratio" should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of performance or as a measure of liquidity and cash flow. Non-GAAP measures do not have standard meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers.

Unless otherwise noted, all amounts are reported in thousands of Canadian dollars.

Additional information relating to the Fund or the Partnership including the Annual Information Form ("AIF") is available on the Fund's profile on the System for Electronic Data Analysis and Retrieval ("SEDAR") website at www.sedar.com.

Forward-Looking Statements

This MD&A includes statements that do not directly or exclusively relate to historical facts, referred to as "forward-looking statements". You can typically identify forward-looking statements by the use of forward-looking words, such as "may", "will", "could", "should", "project", "believe", "anticipate", "expect", "estimate", "continue", "potential", "plan", "forecast" and other similar words. The forward-looking statements reflect management's current intentions, plans, expectations, beliefs and assumptions about future events, including the outlook for general economic trends, industry trends, commodity prices, capital markets, and the governmental, legal and regulatory environment. Forward-looking statements relate to, among other things, anticipated financial performance, business prospects, strategies, regulatory developments, new services, market forces, commitments and technological developments. These statements are subject to various known and unknown risks and uncertainties that are outside our control and could cause actual results to differ materially from the results expressed or implied by the forward-looking statements. Those risks and uncertainties include market and general economic conditions, future costs, treatment under government regulatory, tax and environmental regimes and the other material risks discussed in the Fund's Annual Information Form dated March 31, 2006 under "Risk Factors" and in the management's discussion and analysis of the Fund and the Partnership under the headings "Risk Profile" contained in the Fund's Annual Report for the year ended December 31, 2005. Undue reliance should not be placed on this forward-looking information, which is given as of the date of this presentation, and the Fund undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.

Overview

The Fund is an unincorporated open-ended trust created pursuant to a trust indenture dated November 2, 2005 as amended and restated on December 20, 2005, and governed by the laws of the Province of Alberta. The Fund is a "mutual fund trust" for the purposes of the Income Tax Act (Canada). The Fund is administered by Duke Energy Facilities Management LP (the "Manager").

The Fund effectively commenced operations through its indirect investment in the Partnership on December 20, 2005, and income recorded by the Fund commenced on that date.

The Partnership is a limited partnership established under the laws of the Province of Alberta. On December 20, 2005 it acquired all the issued and outstanding shares of Duke Energy Midstream Services Canada Corporation ("DEMSCC"). DEMSCC and its wholly owned subsidiaries own interests in thirteen natural gas processing plants and related gathering pipeline facilities in the Western Canadian Sedimentary Basin. Additional information relating to the business is available at www.dukeenergyincomefund.com.

In June 2006, the Board of Directors of Duke Energy Corporation ("Duke Energy") authorized management to pursue a plan to create two separate publicly traded companies by spinning off Duke Energy's natural gas business to Duke Energy shareholders. The new natural gas company, which will be known as Spectra Energy Corp., will principally consist of Duke Energy's Natural Gas Transmission business segment, which includes Westcoast Energy Inc. (which includes an ownership interest in the Partnership), and will include Duke Energy's 50% ownership interest in DCP Midstream (formerly Duke Energy Field Services). The decision to spin off the natural gas business is expected to deliver long-term value to shareholders as the stand-alone companies will be able to more easily participate in growth opportunities in their own industries as well as the gas and power industry consolidations. Duke Energy is targeting a January 1, 2007 effective date for the transaction. As a result of the spin off, the Fund will change its name to Spectra Energy Income Fund effective January 1, 2007.

On September 29, 2006 the Fund, through the Partnership, acquired the interests in four raw gas processing plants and related gas gathering systems (the "WGSI Facilities") owned by Westcoast Gas Services Inc. ("WGSI") in northeastern British Columbia for approximately $145 million. The acquisition was accomplished by the purchase of all the issued and outstanding shares of WGSI from Westcoast Energy Inc. ("WEI"), a subsidiary of Duke Energy and the sponsor of the Fund, and was funded by a $108.8 million issuance of additional units, as described below, with the balance funded by borrowing under the Partnership's credit facility and using cash on hand. The acquisition was approved by the Fund unitholders, other than WEI and its affiliates, on September 15, 2006.

The WGSI Facilities consist of interests in four raw gas processing plants and associated natural gas gathering systems in the Fort St. John area of northeastern British Columbia ("the Fort St. Region"). The WGSI Facilities, three of which process sour gas, have an aggregate net raw gas processing capacity of 288 mmcf/d. Three of the four WGSI Facilities are operated by the Partnership. Along with the processing facilities, the WGSI Facilities also include interests in over 230 km of raw gas gathering pipelines that deliver raw gas to the plants for processing.

As a result of the acquisition, the Fund has increased its monthly cash distributions to $0.07 per unit from $0.067 per unit, or $0.84 per unit on an annualized basis. Unitholders of record on October 31, 2006 will be entitled to the initial expected increased distribution, payable in November, 2006.

In connection with the acquisition, the Fund entered into an agreement to sell, to a syndicate of Canadian underwriters, 8,951,000 subscription receipts at $12.15 per receipt to raise gross proceeds of $108.8 million on a bought deal basis. The subscription receipts were exchanged into units of the Fund on a one-for-one basis upon the closing of the acquisition on September 29, 2006. After giving effect to the acquisition and the issuance of units under the financing, the Fund now indirectly holds 53.8% of the Partnership and Duke Energy indirectly holds 46.2% of the Partnership.

Outlook

On October 31, 2006, the Minister of Finance announced proposed changes to the income tax treatment of "flow-through entities", including income trusts. If the proposal is implemented in its current form, income trusts will be subject to tax at corporate rates on the taxable portion of their distributions. Further, unitholders will be treated as if they have received a dividend equal to the taxable portion of their distributions, and will be taxed accordingly. These proposed changes will generally apply beginning in the 2007 taxation year for trusts that begin to be publicly-traded after October 2006, but would only apply beginning with the 2011 taxation year to those income trusts, such as the Fund, that were already publicly traded at the time of the announcement. While the proposed changes have not yet been implemented, such changes could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units.

On November 7, 2006, approval was given by the Fund's Board of Trustees for the construction of the Valhalla Pipeline Project ("Valhalla"). Valhalla will be a 25 kilometer, 6 inch sour gas pipeline located in the Peace River Arch area of northwestern Alberta. It will provide incremental gas for processing at the Fund's Gordondale East plant, and is underpinned by firm take-or-pay contracts with area producers. The capital cost is estimated to be $5.8 million, and the project has a planned in-service date of April 1, 2007. Valhalla will be financed from existing credit facilities.

On November 7, 2006, approval was given by the Fund's Board of Trustees for the construction of a greenfield sour gas processing facility at West Doe, which is located in the Peace River Arch area of northeast British Columbia. This facility, which will be located close to the Fund's existing Pouce Coupe plant, will consist of a sour gas plant capable of processing 23.5 million cubic feet of gas per day, plus related gas gathering and sales gas pipelines. The capital cost of this facility is estimated at $22.5 million, and will be financed from existing credit facilities. This project is underpinned by firm take-or-pay contracts and is expected to begin operations during September, 2007.

Duke Energy Income Fund

Summarized Financial Results

The following table sets out summary consolidated financial information as at and for the nine month period ended September 30, 2006 and as at and for the twelve day period ended December 31, 2005.



--------------------------------------------------------------------------
September 30, 2006 December 31, 2005
--------------------------------------------------------------------------
Statement of Operations
Equity income from Duke Energy
Facilities LP $ 5,860 $ 151
Net income $ 6,360 $ 141
Net income per unit (in dollars) $ 0.413 $ 0.010

Distributions
Units outstanding (in units) 24,351,000 14,000,000
Distributions declared per unit
(in dollars) $ 0.603 $ 0.026

Balance Sheet
Total assets $ 260,199 $ 143,575
Total liabilities $ 1,792 $ 3,798
--------------------------------------------------------------------------


Quarterly Information

The following table sets forth selected consolidated financial information for each of the most recently completed quarters since the Fund began operations on December 20, 2005.



--------------------------------------------------------------------------
2006 2005
Q3 Q2 Q1 Q4(1)
--------------------------------------------------------------------------

Revenues $ 2,526 $ 2,372 $ 2,323 $ 151
Expenses (320) (337) (204) (10)
--------------------------------------------------------------------------
Net income $ 2,206 $ 2,035 $ 2,119 $ 141
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Earnings per unit, basic and
diluted $ 0.142 $ 0.132 $ 0.139 $ 0.010
Cash distributions declared(2) $ 4,294 $ 3,095 $ 3,096 $ 364
Cash distributions declared
per unit $ 0.201 $ 0.201 $ 0.201 $ 0.026
--------------------------------------------------------------------------

(1) For the twelve days ended December 31, 2005.

(2) Includes $600 thousand distribution to Subscription Receipt holders in
third quarter.


Results of Operations

The following table presents the consolidated operating results for the three and nine month periods ended September 30, 2006.



--------------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2006 September 30, 2006
--------------------------------------------------------------------------
Equity income from Duke Energy
Facilities LP $ 1,716 $ 5,860
Other revenue 324 875
Interest income 486 486
-------------- ------------------
2,526 7,221
Management and administrative
expenses 320 861
-------------- ------------------
Net income $ 2,206 $ 6,360
--------------------------------------------------------------------------


Equity income represents the 53.8% (42.41% prior to September, 2006) indirect investment in the Partnership as well as a 100% indirect investment in the General Partner ("GP"), Duke Energy Facilities Inc. The Partnership reimburses the Fund for all of its management and administrative expenses per the administration and governance agreement, and this reimbursement is described as other revenue.

Liquidity and Capital Resources

The Fund does not actively operate a business and is dependent upon distributions from the Partnership. During the third quarter of 2006, the Fund received $3,095 thousand of distributions from the Partnership, bringing the year to date total to $8,618 thousand. The Fund paid distributions to unitholders of $3,695 thousand during the third quarter of 2006, with the year to date total reaching $9,218 thousand. The Partnership's cash flow from operations before changes in non-cash working capital of $10,275 thousand (consisting of net cash provided by operating activities of $8,475 thousand plus net working capital changes other than cash and short term investments of $1,800 thousand) for the third quarter of 2006, and $29,974 thousand (consisting of net cash provided by operating activities of $25,425 thousand plus net working capital changes other than cash and short term investments of $4,549 thousand) year to date, was sufficient to fund all the distributions made to the Fund and other partners. No borrowings were required by the Fund or the Partnership to support the distributions made to unitholders.

The Dominion Bond Rating Service ("DBRS") assigned a rating of STA-3 (middle) to the Units. The Fund has been advised that DBRS has confirmed this rating after giving effect to the acquisition of the WGSI Facilities; however, as a result of the proposed income tax changes announced by the Minister of Finance as noted in the Outlook section of this MD&A, DBRS placed the stability rating of the Fund "Under Review with Developing Implications". Income funds rated at STA-3 are considered by DBRS to have good stability and sustainability of distributions per unit but performance may be more sensitive to economic factors, have greater cyclical tendencies, and may not be as well diversified as an income fund with a STA-2 rating, resulting in some potential for distributions per unit to fluctuate.

Distributions

The following tables set out the distributions for the periods ended September 30, 2006 and December 31, 2005.



--------------------------------------------------------------------------
From
inception
on
Three Nine November 2,
months ended months ended 2005 to
September 30, September 30, December 31,
Statement of Distributable Cash 2006 2006 2005(2)
--------------------------------------------------------------------------
Duke Energy Facilities LP
Cash flow from operating
activities $ 8,475 $ 25,425 $ 1,939
Changes in non-cash working capital 1,800 4,549 (910)
Amortization of deferred
financing charges (47) (143) -
Maintenance capital expenditures (415) (982) -
------------ ------------ -----------

Distributable Cash (1) from
Duke Energy Facilities LP $ 9,813 $ 28,849 $ 1,029
------------ ------------ -----------
------------ ------------ -----------


--------------------------------------------------------------------------
From
inception
on
Three Nine November 2,
months ended months ended 2005 to
September 30, September 30, December 31,
Statement of Distributable Cash 2006 2006 2005(2)
--------------------------------------------------------------------------
Duke Energy Income Fund
Share of distributable cash from
Duke Energy Facilities LP $ 4,452 $ 12,526 $ 413
Interest income earned by the Fund 486 486 -
Management and administrative
expenses(3) 4 14 (10)
------------ ------------ -----------

Distributable Cash(1) from
Duke Energy Income Fund $ 4,942 $ 13,026 $ 403
------------ ------------ -----------
------------ ------------ -----------

Weighted average number of units
outstanding (units) 15,594,587 15,404,037 14,000,000

Distributable Cash ($ / Unit)(1) $ 0.317 $ 0.846 $ 0.029
------------ ------------ -----------

Cash distributions declared
($ / Unit) $ 0.201 $ 0.603 $ 0.026
------------ ------------ -----------

Distributions declared(4) $ 4,294 $ 10,485 $ 364
------------ ------------ -----------
------------ ------------ -----------

Payout Ratio (distributions
declared / distributable cash)(1) 87% 81% 90%
------------ ------------ -----------

(1) References to "Distributable Cash" are to cash available for
distribution to unitholders in accordance with the distribution
policies of the Fund. Distributable cash, distributable cash per
unit and payout ratio are non-GAAP measures generally used by Canadian
open-ended trusts as an indicator of financial performance. They are
considered key measures, as they demonstrate the cash available for
distribution to unit holders. The method of determining Distributable
Cash for the Partnership is derived from cash flow from operating
activities, a measure recognized under GAAP, and is equivalent to
EBITDA less net interest expense, current taxes and maintenance
capital expenditures for the period.

References to "EBITDA" are to earnings before interest, income taxes,
depreciation and accretion. EBITDA is a non-GAAP measure that
represents earnings generated to fund capital investments, meet
financial obligations and fund distributions. It is considered a key
measure, as it demonstrates the ability of the business to meet its
capital and financing commitments.

(2) For periods prior to the third quarter of 2006, distributable cash for
the Partnership was calculated as EBITDA less net interest expense and
maintenance capital expenditures. Distributable cash from the
Partnership for this period has been recalculated and is derived from
cash flow from operating activities and is equivalent to EBITDA less
net interest expense, current taxes and maintenance capital
expenditures. This has lead to an increase in distributable cash of
$19 thousand for the Partnership and $8 thousand for the Fund, for the
period ended December 31, 2005.

(3) Management and administrative expenses are reimbursed by the
Partnership.

(4) Includes $600 thousand distribution to Subscription Receipt holders in
third quarter.


Income Taxes

The Fund is a mutual fund trust for income tax purposes. As such, the Fund is only taxable on any amount not allocated to unitholders. The Fund intends to distribute substantially all of its taxable income to its unitholders and to comply with the provisions of the Income Tax Act (Canada) that permit, among other items, the deduction of distributions to unitholders from the Fund's taxable income.

On October 31, 2006, the Minister of Finance announced proposed changes to the income tax treatment of "flow-through entities", including income trusts. If the proposal is implemented in its current form, income trusts will be subject to tax at corporate rates on the taxable portion of their distributions. Further, unitholders will be treated as if they have received a dividend equal to the taxable portion of their distributions, and will be taxed accordingly. These proposed changes will generally apply beginning in the 2007 taxation year for trusts that begin to be publicly-traded after October 2006, but would only apply beginning with the 2011 taxation year to those income trusts, such as the Fund, that were already publicly traded at the time of the announcement. While the proposed changes have not yet been implemented, such changes could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units.

Related Party Transactions

Duke Energy Facilities Management LP as administrator of the Fund, the manager of Duke Energy Commercial Trust and the Partnership, receives a base fee and reimbursement of costs for its services. During the three months ended September 30, 2006, these amounts were $15 thousand (2005 - $nil), and year to date these amounts were $241 thousand (2005 - $nil).

The Partnership reimburses the Fund for all of its management and administrative expenses per the administration and governance agreement, and this reimbursement is described as other revenue in the consolidated statement of operations and net accumulated deficit. Accounts receivable - affiliate represents the unpaid portion of these reimbursed expenses. The amount receivable for costs related to the formation of the Fund at December 31, 2005 has been received.

Accounts payable - affiliate at December 31, 2005, due to WEI, the sponsor of the Fund, for costs related to the formation of the Fund, have been repaid.

Outstanding Securities of the Fund

The beneficial interests in the Fund are represented and constituted by two classes of units described and designated as Units and Special Voting Units. An unlimited number of the Units and Special Voting Units may be issued pursuant to the trust indenture of the Fund dated November 2, 2005, as amended on December 20, 2005 (the "Fund Trust Indenture"). The Fund may also issue an unlimited number of Other Fund Securities (as defined in the Fund Trust Indenture). As at November 7, 2006, there were 24,351,000 Units and 20,913,750 Special Voting Units outstanding.

Each Unit represents an equal, undivided beneficial interest in the Fund property and ranks equally with all of the other Units without discrimination, preference or priority. Each Unit entitles the holder to one vote at all meetings of holders of Units. Except for the right to attend and vote at meetings of holders of Units or in respect of written resolutions of holders of Units, Special Voting Units do not confer upon the holders thereof any other rights. Each Special Voting Unit entitles the holder to a number of votes at all meetings of trust unitholders or in respect of any written resolution of trust unitholders equal to the number of Units into which the Exchangeable Securities ("Exchangeable LP Units") to which such Special Voting Units relate are, directly or indirectly, exchangeable, exercisable or convertible. The Exchangeable LP Units, issued by the Partnership, are exchangeable for Units on the basis of one Unit for each Exchangeable LP Unit. The holder of an Exchangeable LP Unit may initiate the exchange procedure at any time by delivering to the GP, as exchange agent, a unit certificate in respect of that portion of its Exchangeable LP Units to be exchanged.

Risk Profile

The Fund's 2006 AIF contains a thorough description of the business and other risk factors and should be read in conjunction herewith. Additional information relating to the Fund, including the Fund's AIF is available on SEDAR at www.sedar.com.

The Fund is entirely dependent on distributions from the Partnership to make its own distributions to unitholders. Any decrease in the cash generated by the Partnership or any requirements for the Partnership to retain cash for capital or other expenditures will reduce the cash distributions made by the Partnership to the Fund and as a result will decrease the distributions to unitholders.

On October 31, 2006, the Minister of Finance announced proposed changes to the income tax treatment of "flow-through entities", including income trusts. While the proposed changes have not yet been implemented, such changes could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units.

Duke Energy Facilities LP

Quarterly Information

Q3 Results

- Revenue for the third quarter of 2006 increased by $1,494 thousand over the same period in 2005 due mainly to higher processing and gathering volumes.

- Expenses for the third quarter of 2006 decreased by $773 thousand over the same period in 2005 due mainly to lower net interest expense partially offset by higher general and administrative expenses in 2006.

The following table sets forth selected consolidated financial information for each of the eight most recently completed quarters. These results include the operations of the WGSI Facilities for two days, subsequent to the closing of the acquisition of the WGSI Facilities on September 29, 2006.



--------------------------------------------------------------------------
2006 2005
Q3 Q2 Q1 Q4 Q3 Q2 Q1
--------------------------------------------------------------------------
Revenues 22,862 22,754 23,240 22,065 21,368 19,287 19,214
Expenses (18,792) (17,980) (18,243) (20,879) (19,565) (19,847) (18,595)
--------------------------------------------------------------------------
Net
income
(loss) 4,070 4,774 4,997 1,186 1,803 (560) 619
--------------------------------------------------------------------------
--------------------------------------------------------------------------


--------------------------------------------------------------------------
2004
Q4
--------------------------------------------------------------------------
Revenues 21,230
Expenses (18,211)
--------------------------------------------------------------------------
Net income (loss) 3,019
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Quarterly results are impacted primarily by the timing and level of costs associated with plant turnarounds (where a facility is taken out of service for a period of time to undergo inspections and maintenance), throughput volumes and plant and gathering system expansions.

Results of Operations

The following tables present the consolidated operating results for the three and nine months ended September 30, 2006 and 2005.



--------------------------------------------------------------------------
Three months ended September 30
2006 2005 Variance
--------------------------------------------------------------------------
Operating revenues $ 22,862 $ 21,368 $ 1,494
Operating expenses (16,218) (15,487) (731)
Net interest expense and
other income (1,322) (3,365) 2,043
Income taxes (future and current) (1,252) (713) (539)
------------ ------------ -----------
Net income $ 4,070 $ 1,803 $ 2,267
------------ ------------ -----------
------------ ------------ -----------


--------------------------------------------------------------------------
Nine months ended September 30
2006 2005 Variance
--------------------------------------------------------------------------
Operating revenues $ 68,856 $ 59,869 $ 8,987
Operating expenses (49,887) (48,098) (1,789)
Net interest expense and
other income (3,762) (8,854) 5,092
Income taxes (future and current) (1,366) (1,055) (311)
------------ ------------ -----------
Net income $ 13,841 $ 1,862 $ 11,979
------------ ------------ -----------
------------ ------------ -----------


For the Three Months Ended September 30, 2006 compared to the Three Months Ended September 30, 2005

Operating Revenues

During the three months ended September 30, 2006, operating revenues increased by $1,494 thousand compared to the same period in 2005, to a total of $22,862 thousand, due primarily to:

- Revenue increased in the Brazeau River region by $465 thousand due mainly to higher average fees as a result of gas production on stream with higher sour gas content.

- Revenue increased in the Peace River Arch region by $454 thousand due mainly to more firm take-or-pay contracts, as well as lower revenue in 2005 due to a turnaround at the Fourth Creek plant.

- Revenue increased in the Nevis region by $362 thousand due mainly to higher gathering and processing volumes from increased production of sweet gas.

- Revenue of $209 thousand for the Fort St. John region for two days has been included in the third quarter total following the closing of the acquisition of the WGSI Facilities on September 29, 2006.

- Revenue increased in the Pesh Complex region by $4 thousand due mainly to processing volumes of $450 thousand diverted from the Fort Nelson facilities operated by WEI during a plant turnaround, partially offset by volume adjustments related to prior periods of $390 thousand.

Operating Expenses

Operating expenses increased by $731 thousand for the three months ended September 30, 2006 compared to the same period in 2005, to a total of $16,218 thousand, due primarily to:

Operations and Maintenance

Operations and maintenance expenses were $9,268 thousand for the three months ended September 30, 2006, a decrease of $358 thousand compared to the same period in 2005. This was due largely to increased maintenance and repair expenses primarily for the plant turnarounds in 2005 of $1,025 thousand, lower air travel costs in 2006 for the Pesh complex of $125 thousand due to the construction of the roads to the Tooga and Peggo sour gas processing plants, and lower equalization payments in 2006 at the Brazeau River plant of $60 thousand, partially offset by an environmental remediation accrual of $475 thousand in 2006 for the Peace River Arch region, higher utility costs in 2006 at the Brazeau River plant of $285 thousand, and the addition of the Fort St. John facilities of $100 thousand in 2006.

Depreciation

Depreciation expense was $4,650 thousand for the three months ended September 30, 2006, an increase of $129 thousand compared to the same period in 2005, due primarily to capital expenditures in the Peace River Arch region during the fourth quarter of 2005, and the inclusion of the Fort St. John facilities.

General and Administrative

General and administrative expenses were $2,044 thousand for the three months ended September 30, 2006, an increase of $947 thousand compared to the same period in 2005, due primarily to public company costs and enhanced engineering and environmental health and safety support expenses, as well as lower payroll expenses in 2005.

Net Interest Expense and Other Income

Interest and other expenses totaled $1,322 thousand for the three months ended September 30, 2006, a decrease of $2,043 thousand compared to the same period in 2005, due primarily to a lower average debt balance and a lower interest rate.

Income Taxes

Partnership earnings are taxed at the corporate partner level rather than at the Partnership financial statement reporting level. The Partnership reports only corporate income tax related to corporate entities included in the Partnership's consolidated financial statements.

Income tax expense for the three months ended September 30, 2006 was $1,252 thousand, an increase of $539 thousand compared to the same period in 2005. The increase is attributable to an increase in the income tax rate due to the change in provincial allocation as a result of the WGSI Facilities acquisition and an increase in current period earnings related to corporate entities included in the Partnership's consolidated financial statements.

For the Nine Months Ended September 30, 2006 compared to the Nine Months Ended September 30, 2005

Operating Revenues

During the nine months ended September 30, 2006, operating revenues increased by $8,987 thousand compared to the same period in 2005, to a total of $68,856 thousand, due primarily to:

- Revenue increased in the Peace River Arch region by $3,556 thousand due mainly to increased gathering and processing volumes from new wells on stream of $2,772 thousand, and to lower revenues in 2005 of $784 thousand due to plant turnarounds.

- Revenue increased in the Brazeau River region by $1,891 thousand due mainly to higher volumes and higher average fees as a result of new gas production on stream with higher sour gas content of $1,102 thousand, a positive equalization adjustment of $336 thousand, as well as other volume adjustments of $453 thousand.

- Revenue increased in the Nevis region by $1,674 thousand due mainly to higher gathering and processing volumes of $598 thousand from increased production of sweet gas, lower revenues in 2005 of $576 thousand due to a plant turnaround, and a positive equalization adjustment of $500 thousand in 2006.

- Revenue increased in the Pesh Complex region by $1,657 thousand. Increased volumes from a facility expansion, as well as new wells on stream, accounted for $982 thousand of the increase. A further increase of $615 thousand was due to lower revenue in 2005 as a result of more lengthy plant turnarounds in 2005. Revenues were also augmented by processing volumes of $450 thousand diverted from the Fort Nelson facilities operated by WEI during a plant turnaround, partially offset by volume adjustments related to prior periods of $390 thousand.

- Revenue of $209 thousand for the Fort St. John region for two days has been included in the third quarter total following the closing of the acquisition of the WGSI Facilities on September 29, 2006.

Operating Expenses

Operating expenses increased by $1,789 thousand for the nine months ended September 30, 2006 compared to the same period in 2005, to a total of $49,887 thousand, due primarily to:

Operations and Maintenance

Operations and maintenance expenses were $28,605 thousand for the nine months ended September 30, 2006, a decrease of $1,318 thousand compared to the same period in 2005. This was due primarily to increased maintenance and repair expenses primarily for the plant turnarounds in 2005 at all of the plants except Brazeau River totaling approximately $3,625 thousand, higher equalization payments at the Brazeau River plant in 2005 of approximately $1,160 thousand, and lower air travel costs in 2006 for the Pesh complex of $125 thousand due to the construction of the roads to the Tooga and Peggo sour gas processing plants. These increased 2005 expenses were partially offset by a decrease in the environmental reserve for the Nevis plant in 2005 of $1,470 thousand, higher costs associated with pipeline integrity work both in the Nevis region and at the Fourth Creek plant totaling $557 thousand, $500 thousand in 2006 for equipment repairs caused by an acid gas compressor failure at Brazeau River, an environmental remediation accrual of $475 thousand in 2006 for the Peace River Arch region, higher utilities costs in 2006 at the Brazeau River plant of $470 thousand, higher maintenance costs of $167 thousand at the Pesh Complex in 2006 related to the expanded facility, and the addition of the Fort St. John facilities of $100 thousand in 2006.

Depreciation

Depreciation expense was $13,848 thousand for the nine months ended September 30, 2006, an increase of $677 thousand compared to the same period in 2005, due primarily to capital expenditures at the Pesh Complex in 2005 and capital expenditures in the Peace River Arch region during the fourth quarter of 2005.

General and Administrative

General and administrative expenses were $6,664 thousand for the nine months ended September 30, 2006, an increase of $2,389 thousand compared to the same period in 2005, due primarily to public company costs and enhanced engineering and environmental health and safety support expenses.

Net Interest Expense and Other Income

Interest and other expenses totaled $3,762 thousand for the nine months ended September 30, 2006, a decrease of $5,092 thousand compared to the same period in 2005, due primarily to a lower average debt balance and a lower interest rate.

Income Taxes

Partnership earnings are taxed at the corporate partner level rather than at the Partnership financial statement reporting level. The Partnership reports only corporate income tax related to corporate entities included in the Partnership's consolidated financial statements.

Income tax expense for the nine months ended September 30, 2006 was $1,366 thousand, an increase of $311 thousand compared to the same period in 2005. The increase is attributable to higher tax expense associated with increased current period earnings related to corporate entities included in the Partnership's consolidated financial statements and an increase in the income tax rate due to the change in provincial allocation as a result of the WGSI Facilities acquisition. This increase was partially offset by the impact of the Federal income tax rate reductions recorded in the period.

Cash Flow, Liquidity and Capital Resources

Cash flow from operating activities provides the primary source of funds to finance operating needs, expansion projects and capital expenditures. In addition, the Partnership may supplement cash from operating activities with borrowings as needed based on management's evaluation of the capital structure.

On December 20, 2005, the Partnership entered into a credit facility with a syndicate of financial institutions (the "Credit Facility"). The Credit Facility contains restrictive covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, the Partnership's ability to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. In addition, the Credit Facility contains financial covenants that require the Partnership to meet certain financial ratios and financial condition tests. A failure to comply with the obligations in the Credit Facility could result in an event of default which, if not cured or waived, could permit acceleration of the relevant indebtedness and may limit the Fund's ability to make distributions. The Partnership was in full compliance with all covenants of the Credit Facility as at September 30, 2006.

The following tables set out the comparison of cash flows for the three and nine months ended September 30, 2006 and 2005.



--------------------------------------------------------------------------
Three months ended September 30
2006 2005 Variance
--------------------------------------------------------------------------
Cash provided by (used in)
operating activities $ 8,475 $ (1,678) $ 10,153
Cash used in investing activities (142,949) (6,393) (136,556)
Cash provided by (used in)
financing activities 135,391 (40,859) 176,250
------------ ------------ -----------
Net increase (decrease) in cash and
short term investments $ 917 $ (48,930) $ 49,847
------------ ------------ -----------
------------ ------------ -----------


--------------------------------------------------------------------------
Nine months ended September 30
2006 2005 Variance
--------------------------------------------------------------------------
Cash provided by
operating activities $ 25,425 $ 15,438 $ 9,987
Cash used in investing activities (144,392) (22,827) (121,565)
Cash provided by (used in)
financing activities 118,011 (41,328) 159,339
------------ ------------ -----------
Net (decrease) in cash and
short term investments $ (956) $ (48,717) $ 47,761
------------ ------------ -----------
------------ ------------ -----------


Cash Provided by Operating Activities

Cash from operating activities was generated primarily from fees charged for the gathering, processing and transportation of natural gas and natural gas liquids fractionation and is reduced by facility operating costs, labour costs and general and administrative expenditures. During the three months ended September 30, 2006, cash provided by operating activities was $8,475 thousand, an increase of $10,153 thousand compared to the same period in 2005. This increase is due mainly to an increase in net income as well as a more rapid collection of fees charged to customers. During the nine months ended September 30, 2006, cash provided by operating activities was $25,425 thousand, an increase of $9,987 thousand compared to the same period in 2005. This increase is due mainly to an increase in net income.

Cash Used in Investing Activities

Cash used in investing activities was comprised mainly of the acquisition of the WGSI Facilities on September 29, 2006 in the amount of $145,191 thousand, as well as capital expenditures related to the Partnership's other facilities. The decrease in expansion capital expenditures during the three and nine months ended September 30, 2006 relates primarily to the Pesh Complex expansion during the three and nine months ended September 30, 2005. The decrease in maintenance capital expenditures during the three and nine months ended September 30, 2006 is due primarily to the timing of the maintenance projects. The Partnership anticipates that maintenance capital expenditures for existing Partnership assets will be approximately $2,200 thousand over the next three months of 2006, with the accumulated total by year end estimated at $3,200 thousand. The estimated annual total for maintenance capital expenditures will be lower than originally estimated because a technical analysis determined that a planned vessel replacement at the Nevis facility was not required. The Partnership has invested the following maintenance and expansion amounts in the business, excluding the acquisition of the WGSI Facilities.



--------------------------------------------------------------------------
Three months ended September 30
2006 2005 Variance
--------------------------------------------------------------------------
Maintenance(i) $ 415 $ 2,021 $ (1,606)
Expansion 43 4,254 (4,211)
------------ ------------ -----------
Total capital expenditures $ 458 $ 6,275 $ (5,817)
------------ ------------ -----------
------------ ------------ -----------
(i)Includes maintenance and information systems costs.


--------------------------------------------------------------------------
Nine months ended September 30
2006 2005 Variance
--------------------------------------------------------------------------
Maintenance(i) $ 982 $ 3,685 $ (2,703)
Expansion 919 18,964 (18,045)
------------ ------------ -----------
Total capital expenditures $ 1,901 $ 22,649 $ (20,748)
------------ ------------ -----------
------------ ------------ -----------
(i)Includes maintenance and information systems costs.


Cash Provided by Financing Activities

Cash provided by financing activities for the three months ended September 30, 2006 was comprised of three components. Funds in the amount of $39,000 thousand were borrowed from the credit facility to partially finance the acquisition of the WGSI Facilities, and net proceeds of $103,691 thousand were received from the issuance of Ordinary LP Units of the Partnership upon the closing of the acquisition on September 29, 2006. These increases in cash were partially offset by distributions of $7,300 thousand paid to partners of which $3,095 thousand were paid to the Fund.

Cash provided by financing activities for the nine months ended September 30, 2006 was comprised of six components. Funds in the amount of $39,000 thousand were borrowed from the Credit Facility to partially finance the acquisition of the WGSI Facilities, and net proceeds of $103,691 thousand were received from the issuance of Ordinary LP Units of the Partnership upon the closing of the acquisition on September 29, 2006. These increases in cash were partially offset by distributions of $20,375 thousand paid to partners of which $8,618 thousand were paid to the Fund, payments made in the second quarter to reduce the credit facility balance owing by $3,000 thousand, capital leases of $1,071 thousand paid upon the exercise of the Partnership's option to purchase outright its only remaining capital lease equipment, and legal fees of $234 thousand paid for the credit facility.

The Partnership received proceeds of $14,000 thousand from the issuance of Ordinary LP Units of the Partnership upon the exercise of the underwriters Over-Allotment Option on January 13, 2006. The Partnership paid to DEGT Midstream Holdings Partnership ("DEGT MHP") $14,000 thousand which reduced the carrying value of the Exchangeable LP Units without changing the total Exchangeable LP Units held.

Distributable Cash Flow

The Partnership pays distributions to its partners on a monthly basis from its distributable cash, as determined in accordance with the terms of a partnership agreement dated December 5, 2005. The Partnership's distributable cash for each month will generally be all of its cash flow from operations for such month, including dividends received from subsidiaries, after satisfaction of its debt service obligations, reclamation expenditures, maintenance capital expenditures, other expense obligations and reasonable reserves for working capital and capital expenditures as may be considered appropriate by the Manager of the Partnership.

In the three months ended September 30, 2006 the Partnership declared $7,899 thousand of distributions to partners of which $3,695 thousand was due to the Fund, and in the nine months ended September 30, 2006 the Partnership declared $22,499 thousand of distributions to partners of which $9,886 thousand was due to the Fund.

Critical Accounting Estimates

In preparation of the Partnership's consolidated financial statements, management has made estimates that affect the recorded amounts of certain assets, liabilities, revenues and expenses. A description of the accounting estimates and the methodologies and assumptions underlying the estimates are described in management's discussion and analysis presented with the December 31, 2005 annual consolidated financial statements of the Partnership. There have been no changes to the methodologies and assumptions.

New Accounting Standards

On April 1, 2005, the Canadian Accounting Standards Board issued new Handbook Sections 1530, 3855, and 3865, entitled "Comprehensive Income", "Financial Instruments - Recognition and Measurement", and "Hedges", respectively. Under these new standards, all financial assets should be measured at fair value with the exception of loans, receivables and investments that are intended to be held to maturity and certain equity investments, which should be measured at cost. Similarly, all financial liabilities should be measured at fair value when they are held for trading or they are derivatives.

Gains and losses on financial instruments measured at fair value will be recognized in the income statement in the periods they arise with the exception of gains and losses arising from:

- financial assets held for sale, for which unrealized gains and losses are deferred in other comprehensive income until sold or impaired; and

- certain financial instruments that qualify for hedge accounting.

Other comprehensive income comprises revenues, expenses, gains and losses that are recognized in comprehensive income, but are excluded from net income. Unrealized gains and losses on qualifying hedging instruments, translation of self-sustaining foreign operations, and unrealized gains or losses on financial instruments held for sale will be included in other comprehensive income and reclassified to net income when realized. Comprehensive income and its components will be a required disclosure under the new standards.

These new standards are effective for fiscal years beginning on or after October 1, 2006 and early adoption is permitted. These standards will be adopted by the Partnership as of January 1, 2007 on a prospective basis. The Partnership does not expect these new Canadian requirements to have a significant impact on the Partnership's consolidated financial statements.

Related Party Transactions

The Partnership has entered into various management, administrative and governance agreements with the Manager and its affiliates. The Manager provides management, administrative and governance services for a base fee plus reasonable direct costs. The Partnership has also entered into service agreements with Duke Energy and its affiliates, who provide services such as legal, human resources, IT, infrastructure, information management, environmental health and safety, controllers, taxes, and corporate governance.

The Partnership, through its subsidiary DEMSCC, provided accounting services in prior years to Gas Supply Resources LLC ("GSRI"), an affiliated company. These services are no longer provided.

The acquisition of the WGSI Facilities is also a related party transaction, as described in detail in the Overview section of this management discussion and analysis.

The following table outlines the various transactions for the three and nine months ended September 30, 2006 and 2005.



--------------------------------------------------------------------------
Management,
Administrative,
and
Governance
Agreements Service Agreement
Charges Charges
--------------------------------------------------------------------------

Three months ended September 30, 2006
Duke Energy Facilities Management LP $ 1,896 $ -
Westcoast Energy Inc. - 804
Union Gas Limited - 62
Duke Energy Corporation - 75
Allocation to Duke Energy
Facilities Inc. - (22)
-------------- ------------------
Totals $ 1,896 $ 919
-------------- ------------------
-------------- ------------------

Three months ended September 30, 2005
Gas Supply Resources LLC $ - $ (99)
-------------- ------------------
Totals $ - $ (99)
-------------- ------------------
-------------- ------------------

Nine months ended September 30, 2006
Duke Energy Facilities Management LP $ 5,384 $ -
Westcoast Energy Inc. - 2,399
Union Gas Limited - 183
Duke Energy Corporation - 178
Allocation to Duke Energy Facilities Inc. - (22)
-------------- ------------------
Totals $ 5,384 $ 2,738
-------------- ------------------
-------------- ------------------

Nine months ended September 30, 2005
Gas Supply Resources LLC $ - $ (394)
-------------- ------------------
Totals $ - $ (394)
-------------- ------------------
-------------- ------------------


The Partnership had the following balances receivable from and due to affiliates and related parties reflected in current assets and current liabilities.



--------------------------------------------------------------------------
As at
September 30, 2006 December 31, 2005
--------------------------------------------------------------------------

Due from affiliates $ - $ 1,438

Due to affiliates $ 1,681 $ 4,146
--------------------------------------------------------------------------


The accounts receivable from GSRI at December 31, 2005 in the amount of $14 thousand has been repaid as of March 31, 2006.

Notes Receivable - affiliate at December 31, 2005 of $1,424 thousand, due from DEGT MHP for the reimbursement of certain costs associated with the formation of the Partnership, has been repaid as of June 30, 2006.

Accounts payable - affiliates at December 31, 2005 included $3,424 thousand related to reimbursement of costs to Duke Energy Commercial Trust (the "CT") pursuant to the Expense Reimbursement Agreement dated December 5, 2005 between the Partnership, the CT and the Fund. This amount has been repaid as of June 30, 2006.

The balance in accounts payable - affiliate at September 30, 2006 of $1,681 thousand relates to the management, administrative and governance agreement charges, the service agreement charges noted above, and WGSI's pension liability transfer upon its acquisition of $1,648 thousand. The balance owing for these services at December 31, 2005 has been repaid during the first quarter of 2006.

Supplemental Information on Quarterly Results

The Partnership's operating assets are located in five geographically distinct operating areas (the Peace River Arch region, the Nevis region, the Pesh Complex region, the Brazeau River region and the Fort St. John Region). The following table illustrates throughput volumes by region for each of the eight most recently completed quarters:



--------------------------------------------------------------------------
Average
Daily
Throughput (mmcf /d) 2006 2005 2004
Q3 Q2(1) Q1 Q4 Q3 Q2 Q1 Q4
--------------------------------------------------------------------------
Peace River
Arch Region 172 185 200 191 179 168 179 172
Nevis Region 83 82 77 75 73 67 82 83
Pesh Complex Region 98 103 85 87 96 104 73 92
Brazeau
River Region(2) 70 74 71 67 68 69 63 69
Fort St. John
Region(3) - - - - - - - -
--------------------------------------------------------------------------
Total average
daily throughput 423 444 433 420 416 408 397 416
--------------------------------------------------------------------------

(1) Figures have been adjusted to reflect differences between actual and
estimated volumes.

(2) Average volume for Brazeau River for Q2 2006 was inadvertently
misstated in Q2, and has now been corrected.

(3) This figure has not been provided as the WGSI Facilities were held
for only two days during Q3 2006.


EBITDA and Operating Cash Flow by Region

The Partnership provides financial measures in this MD&A that do not have a standardized meaning prescribed by GAAP. These non-GAAP measures may not be comparable to similar measures presented by other entities.

The purpose of these financial measures and their reconciliation to GAAP financial measures is shown below. All of the measures have been calculated consistent with previous disclosures by the Partnership.

The following table illustrates Operating Cash Flow by region and EBITDA for each of the eight most recently completed quarters:



--------------------------------------------------------------------------
2006 2005 2004
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
--------------------------------------------------------------------------
Peace River
Arch Region 5,573 4,052 5,713 5,718 4,228 2,222 4,350 4,789
Nevis Region 1,977 2,747 2,723 2,718 1,916 969 3,061 3,077
Pesh Complex
Region 3,732 3,277 2,629 3,623 3,616 3,740 276 3,348
Brazeau River
Region 2,203 2,642 2,874 1,153 1,982 1,506 2,080 2,774
Fort St. John
Region(3) 109 - - - - - - -
--------------------------------------------------------------------------
Operating
cash
flow(1) 13,594 12,718 13,939 13,212 11,742 8,437 9,767 13,988
General and
administrative 2,044 2,147 2,473 3,137 1,097 1,693 1,485 1,640
--------------------------------------------------------------------------
EBITDA(2) 11,550 10,571 11,466 10,075 10,645 6,744 8,282 12,348
Less:
Taxes
(current
& future) 1,252 (319) 433 300 713 (22) 364 1,868
Net interest
expense 1,322 1,264 1,176 3,746 3,365 2,717 2,772 2,978
Depreciation
and accretion 4,906 4,852 4,860 4,843 4,764 4,609 4,527 4,483
--------------------------------------------------------------------------
Net income
(loss) (GAAP) 4,070 4,774 4,997 1,186 1,803 (560) 619 3,019
--------------------------------------------------------------------------

(1) References to "Operating Cash Flow" are to revenue less direct
operating expenses, which includes operating and maintenance
expenses but excludes general and administrative expenses and
accretion expense. It is considered a key measure, as it demonstrates
the ability of the business to generate cash to meet its capital and
financing commitments.

(2) References to "EBITDA" are to earnings before interest, income taxes,
depreciation and accretion. EBITDA is a non-GAAP measure that
represents earnings generated to fund capital investments, meet
financial obligations and fund distributions. It is considered a key
measure, as it demonstrates the ability of the business to meet its
capital and financing commitments.

(3) These facilities were acquired on September 29, 2006.


Peace River Arch Region

Operating cash flow increased by $1,345 thousand during the three months ended September 30, 2006 as compared to the same period in 2005. The increase was due primarily to a decrease in expenses of $891 thousand mainly from increased repair and maintenance expenses for plant turnarounds in 2005 partially offset by an environmental remediation accrual in 2006, and an increase in revenues of $454 thousand mainly from more firm take-or-pay contracts in 2006 and lower revenues in 2005 due to a plant turnaround at the Fourth Creek plant.

Operating cash flow increased by $4,538 thousand during the nine months ended September 30, 2006 as compared to the same period in 2005. The increase was due primarily to an increase in revenues of $3,556 thousand from higher processing and gathering volumes from new wells on stream in 2006 and lower revenues in 2005 due to plant turnarounds. The remainder of the operating cash flow increase was due to a decrease in expenses of $982 thousand due mainly to higher maintenance expenses in 2005 related to plant turnarounds, partially offset by an environmental remediation accrual.

Nevis Region

Operating cash flow increased by $61 thousand during the three months ended September 30, 2006 as compared to the same period in 2005. The increase was due primarily to an increase in revenues of $362 thousand due mainly to higher gathering and processing volumes from increased production of sweet gas, partially offset by plant turnaround cost adjustments in 2005.

Operating cash flow increased by $1,501 thousand during the nine months ended September 30, 2006 as compared to the same period in 2005. The increase was due primarily to an increase in revenues of $1,674 thousand due mainly to lower revenues in 2005 from a plant turnaround, a one-time positive equalization adjustment in 2006, as well as increased sweet gas production in 2006. The operating cash flow increase was partially offset by an increase in expenses of $173 thousand due mainly to a reduction in the environmental reserve in 2005, increased costs associated with pipeline integrity work and an engine failure in 2006, partially offset by increased maintenance costs in 2005 from a plant turnaround.

Pesh Complex Region

Operating cash flow increased by $116 thousand during the three months ended September 30, 2006 as compared to the same period in 2005. The increase was due primarily to increased revenues of $4 thousand due mainly to processing volumes of $450 thousand diverted from the Fort Nelson facilities operated by WEI during a plant turnaround partially offset by volume adjustments related to prior periods of $390 thousand, and lower expenses of $112 thousand due mainly to lower air travel costs in 2006 due to the construction of the roads to the Tooga and Peggo sour gas processing plants.

Operating cash flow increased by $2,006 thousand during the nine months ended September 30, 2006 as compared to the same period in 2005. The increase was due primarily to an increase in revenues of $1,657 thousand due mainly to increased volumes from facilities expansion and new wells on stream, as well as lower revenues in 2005 as a result of more lengthy plant turnarounds in 2005. The remainder of the operating cash flow increase was due to lower expenses of $349 thousand in 2006 due mainly to more lengthy plant turnarounds in 2005, lower air travel costs in 2006 due to the construction of the roads to the Tooga and Peggo sour gas processing plants, partially offset by higher costs to operate the expanded facility in 2006.

Brazeau River Region

Operating cash flow increased by $221 thousand during the three months ended September 30, 2006 as compared to the same period in 2005. The increase was due primarily to an increase in revenues of $465 thousand due mainly to higher average fees as a result of gas production on stream with higher sour gas content, partially offset by an increase in expenses of $244 thousand due primarily to higher utility costs.

Operating cash flow increased by $2,151 thousand during the nine months ended September 30, 2006 as compared to the same period in 2005. The increase was due primarily to an increase in revenues of $1,891 thousand due mainly to higher volumes and higher average fees as a result of new gas production on stream with higher sour gas content, a one-time positive equalization adjustment, and other volume adjustments, and a decrease in expenses of $260 thousand due primarily to higher equalization payments in 2005, partially offset by higher utilities costs and acid gas injection compressor repair costs in 2006.

Fort St. John Region

Operating cash flow during the two day period ended September 30, 2006 was $109 thousand. As the facilities were acquired on September 29, 2006, there are no comparative figures for the prior year.

EBITDA

EBITDA increased by $905 thousand in the three months ended September 30, 2006 to $11,550 thousand compared to the same period in 2005, primarily as a result of higher revenues of $1,494 thousand and lower operations and maintenance costs of $358 thousand, partially offset by higher general and administrative costs of $947 thousand.

EBITDA increased by $7,916 thousand in the nine months ended September 30, 2006 to $33,587 thousand compared to the same period in 2005, primarily as a result of higher revenues of $8,987 thousand and lower operations and maintenance costs of $1,318 thousand, partially offset by higher general and administrative costs of $2,389 thousand.

DUKE ENERGY INCOME FUND

Interim

Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2006



Duke Energy Income Fund
Consolidated Statement of Operations and Net Accumulated Deficit
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
(in thousands of Canadian
dollars, except unit and Three months Ended Nine months Ended
per unit amounts) September 30, 2006 September 30, 2006
--------------------------------------------------------------------------

Equity income from Duke Energy
Facilities LP (Note 3) $ 1,716 $ 5,860
Other revenue (Note 6) 324 875
Interest income 486 486
-------------- ------------------

2,526 7,221

Management and administrative
expenses (Note 6) 320 861
-------------- ------------------

Net income 2,206 6,360

Net accumulated deficit,
beginning of period (2,260) (223)

Distributions (4,294) (10,485)
-------------- ------------------

Net accumulated deficit,
end of period $ (4,348) $ (4,348)
-------------- ------------------
-------------- ------------------
Weighted average number of units
outstanding during the period 15,594,587 15,404,037

Earnings per unit (basic and diluted)
(Note 4) $ 0.142 $ 0.413
-------------- ------------------
-------------- ------------------

See accompanying notes to the unaudited consolidated financial statements.


Duke Energy Income Fund
Consolidated Balance Sheets
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
(in thousands of Canadian dollars) As at
ASSETS September 30, 2006 December 31, 2005
--------------------------------------------------------------------------
CURRENT ASSETS
Accounts receivable $ 39 $ -
Accounts receivable - affiliate 13 3,424
Distributions receivable 1,632 364
-------------- ------------------
1,684 3,788
-------------- ------------------
LONG-TERM ASSETS
Investment in Duke Energy
Facilities LP (Note 3) 258,515 139,787
-------------- ------------------

TOTAL ASSETS $ 260,199 $ 143,575
-------------- ------------------
-------------- ------------------

--------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
--------------------------------------------------------------------------
CURRENT LIABILITIES
Bank indebtedness $ 58 $ -
Accounts payable and accrued
liabilities 102 10
Accounts payable - affiliate - 3,424
Distributions payable 1,632 364
-------------- ------------------
1,792 3,798
-------------- ------------------

UNITHOLDERS' EQUITY
Unitholders' capital (Note 5) 262,755 140,000
Net accumulated deficit (4,348) (223)
-------------- ------------------
258,407 139,777

TOTAL LIABILITIES AND UNITHOLDERS'
EQUITY $ 260,199 $ 143,575
-------------- ------------------
-------------- ------------------

See accompanying notes to the unaudited consolidated financial statements.

Approved by the Trustees of Duke Energy Commercial Trust on behalf of Duke
Energy Income Fund

Beverley A. Briscoe John G. Schissel
Trustee Trustee


Duke Energy Income Fund
Consolidated Statement of Cash Flows
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
(in thousands of Three months ended Nine months ended
Canadian dollars) September 30, 2006 September 30, 2006
--------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,206 $ 6,360
Add (deduct) items not involving
cash:
Equity income from Duke Energy
Facilities LP (Note 3) (1,716) (5,860)
Net working capital changes
other than cash 45 55
-------------- ------------------
Net cash provided by operating activities 535 555
-------------- ------------------

INVESTING ACTIVITIES
Increase in investment in Duke Energy
Facilities LP (Note 3) (108,755) (122,755)
Net cash used in investing activities (108,755) (122,755)

FINANCING ACTIVITIES
Distributions received 3,095 8,618
Distributions paid (3,695) (9,218)
Net advances from affiliate 2 (13)
Issuance of Fund units 108,755 122,755
-------------- ------------------
Net cash provided by financing activities 108,157 122,142
-------------- ------------------

(DECREASE) IN CASH (63) (58)

CASH, BEGINNING OF PERIOD 5 0

(BANK INDEBTEDNESS), END OF PERIOD $ (58) $ (58)
-------------- ------------------

See accompanying notes to the unaudited consolidated financial statements.


Duke Energy Income Fund

Notes to the Consolidated Financial Statements

For the three and nine months ended September 30, 2006

(unaudited)

1. Organization and Business

Duke Energy Income Fund (the "Fund") is an unincorporated open-ended trust established under the laws of the Province of Alberta by a Trust Indenture on November 2, 2005 as amended and restated on December 20, 2005 (the "Fund Trust Indenture"). The Fund indirectly owns a 53.8% interest in Duke Energy Facilities LP (the "LP" or the "Partnership").

The Partnership is involved in the business of natural gas gathering and processing in the Western Canadian Sedimentary Basin through its wholly-owned subsidiary, Duke Energy Midstream Services Canada Corporation. The Fund is administered by and the Partnership is managed by Duke Energy Facilities Management LP (the "Manager"). The general partner of the Partnership is Duke Energy Facilities Inc. ("DEF Inc." or "GP"), a corporation incorporated under the laws of Canada.

The Fund commenced operations on December 20, 2005, with the initial acquisition of a 40.1% indirect interest in the Partnership. On January 13, 2006, the Fund acquired an additional 2.31% indirect interest in the Partnership, and on September 29, 2006, the Fund acquired a further 11.39% indirect interest in the Partnership, giving the Fund an indirect interest in the Partnership of 53.8%.

2. Basis of Presentation

These unaudited interim consolidated financial statements as at and for the three and nine months ended September 30, 2006 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The accounting policies applied are consistent with those outlined in the Fund's audited consolidated financial statements as at and for the period ended December 31, 2005. These unaudited interim consolidated financial statements do not include all disclosures required in the annual consolidated financial statements and should be read in conjunction with the Fund's audited consolidated financial statements as at and for the period ended December 31, 2005 and the Partnership's consolidated financial statements as at and for the year ended December 31, 2005 as contained in the Fund's 2005 Annual Report to unitholders, as well as the unaudited interim consolidated financial statements of the Partnership as at and for the three and nine months ended September 30, 2006.

The Fund effectively commenced operations through its indirect investment in the Partnership on December 20, 2005, and income recorded by the Fund commenced on that date. Accordingly, there are no comparative statements of operations or cash flows for the three and nine month periods ended September 30, 2005.

Interim periods may not be representative of the results expected for the full year of operation due to seasonality.

3. Investment in Duke Energy Facilities LP

On December 20, 2005, the Fund issued 14,000,000 units of the Fund ("Units") in an initial public offering ("IPO") at a price of $10.00 per unit of the Fund for gross proceeds of $140,000 thousand. The proceeds received from the IPO were used to indirectly acquire 14,000,000 LP Units.

An additional 1,400,000 Units were issued on January 13, 2006 for gross proceeds of $14,000 thousand pursuant to an over-allotment option exercised by the underwriters of the Fund's initial public offering, the proceeds of which were used by the Fund to acquire additional units of the Partnership from DEGT Midstream Holdings Partnership resulting in the Fund indirectly owning a 42.41% interest in the Partnership.

An additional 8,951,000 Units were issued on September 29, 2006 for gross proceeds of $108,755 thousand in a public offering. The proceeds were used to indirectly acquire 8,951,000 LP Units, resulting in the Fund indirectly owning a 53.8% interest in the Partnership.

Changes in the Fund's equity investment in the Partnership and GP during the nine months ended September 30, 2006 were as follows:



--------------------------------------------------------------------------
(in thousands of Canadian dollars)

--------------------------------------------------------------------------
Investment at December 31, 2005 $ 139,787

Additional investment on January 13, 2006 14,000

Additional investment on September 29, 2006 108,755

Equity income 5,860

Distributions (9,887)
-----------

Investment at September 30, 2006 $ 258,515
-----------
-----------


4. Earnings Per Unit

Earnings per unit are calculated using net income divided by the weighted average number of Units outstanding. Basic and diluted earnings per unit are the same because the Fund currently has no dilutive instruments.

5. Unitholders' Capital

Changes in the unitholders' capital during the nine months ended September 30, 2006 were as follows:



--------------------------------------------------------------------------
(in thousands of Canadian dollars, except unit amounts)
Number of
Units
--------------------------------------------------------------------------
FUND UNITS
Balance, December 31, 2005 14,000,000 $ 140,000
Issued upon exercise of over-allotment
option (Note 3) 1,400,000 14,000
Issued in a public offering during the
third quarter of 2006 (Note 3) 8,951,000 108,755
-------------- ------------------

Balance, September 30, 2006 24,351,000 $ 262,755
-------------- ------------------
-------------- ------------------


6. Related Party Transactions

Duke Energy Facilities Management LP as administrator of the Fund, the manager of Duke Energy Commercial Trust and the Partnership, receives a base fee and reimbursement of costs for its services. During the three months ended September 30, 2006, these amounts were $15 thousand (2005 - $nil), and year to date these amounts were $141 thousand (2005 - $nil).

The Partnership reimburses the Fund for all of its management and administrative expenses per the administration and governance agreement, and this reimbursement is described as other revenue in the consolidated statement of operations and net accumulated deficit. Accounts receivable - affiliate represents the unpaid portion of these reimbursed expenses. The amount receivable for costs related to the formation of the Fund at December 31, 2005 has been received.

Accounts payable - affiliate at December 31, 2005, due to Westcoast Energy Inc., the sponsor of the Fund, for costs related to the formation of the Fund, have been repaid.

On August 22, 2006, the Fund received gross proceeds of $108,755 thousand from the issuance of subscription receipts of the Fund. On September 29, 2006 the subscription receipts were converted to Fund units and the net proceeds of $103,691 thousand, after deducting underwriters' fees and other costs, were used by the Fund to acquire additional LP Units resulting in the Fund indirectly owning a 53.8% interest in the Partnership. The Partnership used the net proceeds from the Fund, as well as additional borrowings under its credit facility, to indirectly acquire all of the outstanding shares of WGSI from WEI.

7. Subsequent Events

On October 31, 2006, the Minister of Finance announced proposed changes to the income tax treatment of "flow-through entities", including income trusts. If the proposal is implemented in its current form, income trusts will be subject to tax at corporate rates on the taxable portion of their distributions. Further, unitholders will be treated as if they have received a dividend equal to the taxable portion of their distributions, and will be taxed accordingly. These proposed changes will generally apply beginning in the 2007 taxation year for trusts that begin to be publicly-traded after October 2006, but would only apply beginning with the 2011 taxation year to those income trusts, such as the Fund, that were already publicly traded at the time of the announcement. While the proposed changes have not yet been implemented, such changes could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units.

As a result of this announcement, on November 1, 2006, The Dominion Bond Rating Service ("DBRS") placed the stability rating of the Fund (STA-3 (middle)) "Under Review with Developing Implications".

On November 7, 2006, approval was given by the Fund's Board of Trustees for the construction of the Valhalla Pipeline Project ("Valhalla"). Valhalla will be a 25 kilometer, 6 inch sour gas pipeline located in the Peace River Arch area of northwestern Alberta. It will provide incremental gas for processing at the Fund's Gordondale East plant, and is underpinned by firm take-or-pay contracts with area producers. The capital cost is estimated to be $5.8 million, and the project has a planned in-service date of April 1, 2007. Valhalla will be financed from existing credit facilities.

On November 7, 2006, approval was given by the Fund's Board of Trustees for the construction of a greenfield sour gas processing facility at West Doe, which is located in the Peace River Arch area of northeast British Columbia. This facility, which will be located close to the Fund's existing Pouce Coupe plant, will consist of a sour gas plant capable of processing 23.5 million cubic feet of gas per day, plus related gas gathering and sales gas pipelines. The capital cost of this facility is estimate at $22.5 million, and will be financed from existing credit facilities. This project is underpinned by firm take-or-pay contracts and is expected to begin operations during September, 2007.

DUKE ENERGY FACILITIES LP

Interim

Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2006



Duke Energy Facilities LP
Consolidated Statements of Operations
Information for the periods ended September 30, 2005 represents
information of the Predecessor (unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
(in thousands of Canadian Three months ended Nine months ended
dollars) September 30 September 30
2006 2005 2006 2005
--------------------------------------------------------------------------
OPERATING REVENUES $ 22,862 $ 21,368 $ 68,856 $ 59,869
------- ------- ------- -------

OPERATING EXPENSES
Operations and maintenance 9,268 9,626 28,605 29,923
Depreciation 4,650 4,521 13,848 13,171
Accretion expense 256 243 770 729
General and administrative 2,044 1,097 6,664 4,275
------- ------- ------- -------
16,218 15,487 49,887 48,098
------- ------- ------- -------
OPERATING INCOME BEFORE OTHER
INCOME (EXPENSE) 6,644 5,881 18,969 11,771
------- ------- ------- -------

OTHER INCOME 56 121 232 751

INTEREST EXPENSE (Note 7) (1,378) - (3,994) -

INTEREST EXPENSE - Affiliate - (3,486) - (9,605)
------- ------- ------- -------
INCOME BEFORE TAXES 5,322 2,516 15,207 2,917
------- ------- ------- -------
TAXES
Current - 202 (6) 612
Future 1,252 511 1,372 443
------- ------- ------- -------
1,252 713 1,366 1,055
------- ------- ------- -------
NET INCOME $ 4,070 $ 1,803 $ 13,841 $ 1,862
------- ------- ------- -------
------- ------- ------- -------

See accompanying notes to the unaudited consolidated financial statements.


Duke Energy Facilities LP
Consolidated Balance Sheets
Information as at December 31, 2005 combines information of
Duke Energy Facilities LP and its Predecessor (unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
(in thousands of Canadian dollars) As at
ASSETS September 30, 2006 December 31, 2005
--------------------------------------------------------------------------
CURRENT ASSETS
Cash and short term investments $ 3,961 $ 4,917
Accounts receivable (Note 6) 38,838 30,565
Notes receivable - affiliate (Note 6) - 1,424
Taxes receivable 442 429
Prepaid expenses and deposits 1,426 183
-------------- ------------------
44,667 37,518
-------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Cost 607,549 439,403
Accumulated depreciation (98,102) (84,254)
-------------- ------------------
509,447 355,149
-------------- ------------------

DEFERRED FINANCING CHARGES (Note 7) 561 470
GOODWILL 80,855 80,855
-------------- ------------------
TOTAL ASSETS $ 635,530 $ 473,992
-------------- ------------------
-------------- ------------------

--------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
--------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 10,749 $ 7,156
Accounts payable - affiliate (Note 6) 1,681 4,146
Distributions payable 3,033 908
Capital lease obligations due
within one year (Note 4) - 971
-------------- ------------------
15,463 13,181
-------------- ------------------
LONG-TERM DEBT
Credit facility (Note 7) 141,643 105,792
Capital lease obligations (Note 4) - 100
-------------- ------------------
141,643 105,892
-------------- ------------------
LONG-TERM LIABILITIES 15,937 15,168
-------------- ------------------

FUTURE INCOME TAX LIABILITIES 34,048 6,345
-------------- ------------------
PARTNERS' EQUITY (Note 1)
Partners' capital (Note 5) 419,229 315,538
Contributed surplus 18,400 18,400
Partners' deficit (9,190) (532)
-------------- ------------------
428,439 333,406
-------------- ------------------

TOTAL LIABILITIES AND PARTNERS' EQUITY $ 635,530 $ 473,992
-------------- ------------------
-------------- ------------------

See accompanying notes to the unaudited consolidated financial statements.

On behalf of the Board of Directors of Duke Energy Facilities Management
Inc. as general partner and on behalf of Duke Energy Facilities Management
LP, manager of Duke Energy Facilities LP

Douglas J. Haughey Bruce E. Pydee
Director Director


Duke Energy Facilities LP
Consolidated Statements of Cash Flows
Information for the periods ended September 30, 2005 represents
information of the Predecessor (unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
(in thousands of Canadian Three months ended Nine months ended
dollars) September 30 September 30
2006 2005 2006 2005
--------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 4,070 1,803 13,841 $ 1,862
Add (deduct) items not
involving cash:
Future income taxes 1,252 511 1,372 443
Depreciation of property,
plant and equipment 4,650 4,521 13,848 13,171
Accretion of asset retirement
obligation 256 243 770 729
Amortization of deferred
financing charges 47 - 143 -
Net working capital changes
other than cash and short
term investments (1,800) (8,756) (4,549) (767)
------- ------- ------- -------
Net cash provided by (used in)
operating activities 8,475 (1,678) 25,425 15,438
------- ------- ------- -------
INVESTING ACTIVITIES
Capital expenditures (458) (6,275) (1,901) (22,649)
Acquisition of WGSI (145,191) - (145,191) -
Cash acquired on acquisition 2,700 - 2,700 -
Other - (118) - (178)
------- ------- ------- -------
Net cash used in investing
activities (142,949) (6,393) (144,392) (22,827)
------- ------- ------- -------
FINANCING ACTIVITIES
Payment of deferred
financing fees - - (234) -
Proceeds from the issuance of
Ordinary LP units (Note 5) 103,691 - 117,691 -
Payment to DEGT MHP for
exercise of over-allotment
option (Note 6) - - (14,000) -
Distributions paid (7,300) - (20,375) -
Credit facility advances 39,000 - 36,000 -
Divisional equity dividends - (40,556) - (40,556)
Capital lease payments
(Note 4) - (303) (1,071) (772)
------- ------- ------- -------
Net cash provided by (used in)
financing activities 135,391 (40,859) 118,011 (41,328)
------- ------- ------- -------
INCREASE (DECREASE) IN CASH
AND SHORT TERM INVESTMENTS 917 (48,930) (956) (48,717)

CASH AND SHORT TERM
INVESTMENTS, BEGINNING
OF PERIOD 3,044 49,851 4,917 49,638
------- ------- ------- -------
CASH AND SHORT TERM
INVESTMENTS, END OF PERIOD $ 3,961 $ 921 $ 3,961 $ 921
------- ------- ------- -------
------- ------- ------- -------
Supplemental Information
Cash paid for
Interest $ 1,187 $ 25 $ 3,328 $ 88
Income taxes $ - $ 238 $ - $ 714

See accompanying notes to the unaudited consolidated financial statements.


Duke Energy Facilities LP
Consolidated Statements of Partners' Deficit and Divisional Equity
Information for the periods ended September 30, 2005 represents
information of the Predecessor (unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
(in thousands of Canadian Three months ended Nine months ended
dollars) September 30 September 30
2006 2005 2006 2005
--------------------------------------------------------------------------
DIVISIONAL EQUITY -
NET INVESTMENT
Beginning of period $ - $147,113 $ - $147,054
Net income - 1,803 - 1,862
Dividends - (40,556) - (40,556)
------- ------- ------- -------
End of period - 108,360 - 108,360
------- ------- ------- -------

PARTNERS' DEFICIT
Beginning of period (5,361) - (532) -
Net income 4,070 - 13,841 -
Distributions declared to
General Partner (1) - (3) -
Distributions declared to
Ordinary Unitholders (3,695) - (9,886) -
Distributions declared to
Exchangeable Unitholders (4,203) - (12,610) -
------- ------- ------- -------
End of period (9,190) - (9,190) -
------- ------- ------- -------

TOTAL PARTNERS' DEFICIT AND
DIVISIONAL EQUITY $ (9,190) $108,360 $ (9,190) $108,360
------- ------- ------- -------
------- ------- ------- -------

See accompanying notes to the unaudited consolidated financial statements.


Duke Energy Facilities LP

Notes to the Consolidated Financial Statements

For the three and nine months ended September 30, 2006 and 2005

(unaudited)

1. Organization and Business

Duke Energy Facilities LP (the "Partnership") is a limited partnership established under the laws of the Province of Alberta. The Partnership through its subsidiaries operates and manages several natural gas processing plants and related natural gas gathering pipelines located throughout the Western Canadian Sedimentary Basin.

Duke Energy Income Fund (the "Fund") is an unincorporated open-ended trust established under the laws of the Province of Alberta by a Trust Indenture on November 2, 2005 as amended and restated on December 20, 2005. The Fund indirectly owns a 53.8% interest in the Partnership.

The general partner of the Partnership is Duke Energy Facilities Inc. ("DEF Inc." or "GP"), a corporation incorporated under the laws of Canada. As general partner, GP has the authority to manage the business and affairs of the Partnership and has unlimited liability for the obligations of the Partnership. GP is entitled to an allocation of 0.01% of income or loss of the Partnership for each fiscal year.

The Partnership itself is not subject to income tax however the Partnership consolidates corporate entities that are subject to corporate income taxes.

2. Basis of Presentation

The Partnership is considered to be a continuation of the business acquired from DEGT Midstream Holdings Partnership ("DEGT MHP"), an indirect wholly-owned subsidiary of Westcoast Energy Inc. and Duke Energy Corporation. Accordingly, the Partnership follows the continuity of interest method of accounting. Under the continuity of interest method of accounting, the Partnership's acquisition of the issued and outstanding shares of Duke Energy Midstream Services Canada Corporation ("DEMSCC") from DEGT MHP were recorded at their net book value as of the purchase date and the equity of the Partnership represents the equity of the assets at that date. The consolidated financial statements include the accounts of the Partnership and its wholly-owned subsidiaries.

These unaudited interim consolidated financial statements as at and for the three and nine months ended September 30, 2006 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The accounting policies applied are consistent with those outlined in the Partnership's audited consolidated financial statements as at and for the year ended December 31, 2005. These unaudited interim consolidated financial statements do not include all disclosures required in the annual consolidated financial statements and should be read in conjunction with the Partnership's audited consolidated financial statements as at and for the year ended December 31, 2005 and the Fund's consolidated financial statements as at and for the period ended December 31, 2005 as contained in the Fund's 2005 Annual Report to unitholders, as well as the unaudited interim consolidated financial statements of the Fund as at and for the three and nine months ended September 30, 2006.

Interim periods may not be representative of the results expected for the full year of operation due to seasonality. Certain of the comparative figures in prior periods have been reclassified to conform to the presentation in the current period.

3. Acquisition of Westcoast Gas Services Inc.

The Partnership indirectly acquired all of the outstanding common shares of Westcoast Gas Services Inc. ("WGSI") from Westcoast Energy Inc. ("WEI") on September 29, 2006. The Partnership paid $145,000 thousand in cash, plus $191 thousand in costs. The purchase price in respect of the acquisition was settled by the use of $39,000 thousand from the issue of long-term debt, $103,691 thousand of net proceeds from the sale of units to the Fund, and $2,500 thousand from the general funds of the Partnership.

The purchase price has been allocated to the fair value of the assets and liabilities as follows:



Cash and short term investments $ 2,700
Accounts receivable 7,326
Prepaid expenses and deposits 413
Net property, plant & equipment 166,167
-----------

Total Assets Acquired 176,606
-----------

Accounts payable and accrued liabilities 3,130
Accounts payable - affiliate 1,843
Taxes payable 110
Future income tax liabilities 26,332
-----------

Total Liabilities Assumed 31,415
-----------

Net Assets Acquired $ 145,191
-----------
-----------


4. Capital Lease Obligations

On February 13, 2006, the Partnership exercised its option to purchase equipment under capital lease for $1,071 thousand. Consequently, the Partnership has extinguished its capital lease obligations.

5. Partners' Capital

The Partnership is authorized to issue two classes of partnership interests, ordinary limited partnership units and exchangeable limited partnership units.



--------------------------------------------------------------------------
(in thousands of Canadian dollars, except unit amounts)
Units
--------------------------------------------------------------------------
ORDINARY LIMITED PARTNERSHIP UNITS
Balance, November 2, 2005 - $ -
Issued to Duke Energy Commercial Trust 14,000,000 140,000
-------------- ------------------
Balance, December 31, 2005 14,000,000 140,000
Issued to Duke Energy Commercial
Trust (Note 6) 1,400,000 14,000
-------------- ------------------
Balance, June 30, 2006 15,400,000 154,000
Issued to Duke Energy Commercial
Trust (Note 6) 8,951,000 103,691
-------------- ------------------
Balance, September 30, 2006 24,351,000 $ 257,691
-------------- ------------------
-------------- ------------------

EXCHANGEABLE LIMITED PARTNERSHIP UNITS
Balance, November 2, 2005 - $ -
Transfer of residual book value
to Exchangeable LP units Upon
acquisition of DEMSCC 20,913,750 175,538
-------------- ------------------
Balance, December 31, 2005 20,913,750 175,538
Reduction of carrying value upon
exercise of over-allotment
option (Note 6) - (14,000)
-------------- ------------------
Balance, September 30, 2006 20,913,750 $ 161,538
-------------- ------------------
-------------- ------------------


6. Related Party Transactions

On January 13, 2006, the Over-Allotment Option was exercised, the proceeds of which were used by the Fund to acquire additional LP Units resulting in the Fund indirectly owning a 42.41% interest in the Partnership. The Partnership paid to DEGT MHP cash equal to the proceeds from the Over-Allotment Option which reduced the carrying value of the Exchangeable LP Units. On August 22, 2006, the Fund received gross proceeds of $108,755 thousand from the issuance of subscription receipts of the Fund. On September 29, 2006 the subscription receipts were converted to Fund units and the net proceeds of $103,691 thousand, after deducting underwriters' fees and other costs, were used by the Fund to acquire additional LP Units resulting in the Fund indirectly owning a 53.8% interest in the Partnership. The Partnership used the net proceeds from the Fund, as well as additional borrowings under its credit facility, to indirectly acquire all of the outstanding shares of WGSI from WEI.

In connection with the closing of the acquisition of WGSI, on September 28, 2006, DEMSCC issued one voting preferred share to DEMSCC Holdings Corporation, a subsidiary of WEI, for $100. Such voting preferred share carries votes sufficient to elect or remove the board of directors of DEMSCC. Such voting preferred share is redeemable at the option of DEMSCC, and, in certain circumstances, is automatically redeemable. The holder of such voting preferred share is entitled to receive dividends if, as and when declared by the board of directors of DEMSCC. In the event of liquidation, dissolution or winding up of DEMSCC or other distribution of the assets of DEMSCC to its shareholders, the holder of the voting preferred share will be entitled to receive a sum equal to $100 less any dividends paid on such voting preferred share before any amount is paid to the holders of shares ranking junior to the voting preferred share.

The Partnership had the following balances receivable from and due to affiliates and related parties reflected in current assets and current liabilities.



--------------------------------------------------------------------------
(in thousands Canadian of dollars) As at
September 30, 2006 December 31, 2005
--------------------------------------------------------------------------

Due from affiliates $ - $ 1,438

Due to affiliates $ 1,681 $ 4,146
--------------------------------------------------------------------------


The Partnership, through its subsidiary DEMSCC, provided accounting services in prior years to Gas Supply Resources LLC ("GSRI"), an affiliated company. During the three month period ended September 30, 2005, the charges totaled $99 thousand, and during the nine month period ended September 30, 2005, the charges totaled $394 thousand. These services are no longer provided. The accounts receivable from GSRI at December 31, 2005 in the amount of $14 thousand was repaid as of March 31, 2006.

Notes Receivable - affiliate at December 31, 2005 of $1,424 thousand, due from DEGT MHP for the reimbursement of certain costs associated with the formation of the Partnership, has been repaid as of June 30, 2006.

Accounts payable - affiliates at December 31, 2005 included $3,424 thousand related to reimbursement of costs to Duke Energy Commercial Trust (the "CT") pursuant to the Expense Reimbursement Agreement dated December 5, 2005 between the Partnership, the CT and the Fund. This amount has been repaid as of June 30, 2006.

The Partnership has entered into various management, administration and governance agreements with Duke Energy Corporation and its affiliated companies. The Partnership receives management, administrative and governance services and pays a base fee and reimburses reasonable direct costs. In the third quarter of 2006, the fees were $1,896 thousand (2005 - $nil), and year to date the fees were $5,384 thousand (2005 - $nil). At September 30, 2006, $634 thousand (December 31, 2005 - $nil) remains outstanding.

The remaining balance in accounts payable - affiliates relates to amounts owing to affiliate companies for services provided, as well as for WGSI's pension liability transfer upon its acquisition. These services include charges for legal, human resources, IT, infrastructure, information management, environmental health and safety, controllers and taxes as well as charges for corporate governance. During the third quarter of 2006, total charges of $919 thousand (2005 - $nil) were recognized as part of General and Administrative Expenses, and year to date the total charges were $2,738 thousand (2005 - $nil). The balance owing for these services at December 31, 2005 has been repaid during the first quarter of 2006.

7. Long-Term Debt

On December 20, 2005, the Partnership entered into a credit facility with a syndicate of financial institutions (the "Credit Facility"). The Credit Facility, which expires in December 2009, consists of a $200,000 thousand four year revolving facility that is extendible for further one year periods. The Credit Facility bears interest at rates that vary depending on the consolidated debt to EBITDA ratio of the Partnership and which may be based on the lender's Canadian prime rate or US base rate, Canadian bankers' acceptance or the LIBOR drawing rate plus a margin. The Partnership may drawdown the Credit Facility in either Canadian or US Dollars. The Credit Facility is unsecured and guaranteed by certain partners and subsidiaries of the Partnership. The Partnership was in full compliance with all covenants of the Credit Facility as at September 30, 2006.

On December 20, 2005, funds of $105,645 thousand were drawn on the Credit Facility to partially fund the acquisition of the Partnership's assets from DEGT MHP. The liability reported on the balance sheet at December 31, 2005 represents the face value of the loan of $106,300 thousand, net of deferred interest. During the second quarter of 2006 the Partnership made a payment of $3,000 thousand to reduce the face value of the indebtedness under the Credit Facility to $103,300 thousand at June 30, 2006. Additional funds of $39,000 thousand were drawn on the Credit Facility on September 29, 2006 to partially fund the acquisition of the WGSI shares, increasing the face value of the indebtedness to $142,300 thousand.

The Partnership paid $470 thousand as arrangement fees for the initial set up of the Credit Facility, as well as $234 thousand in 2006 for legal fees. These costs are deferred and are being amortized over the term of the Credit Facility of four years. For the three month period ended September 30, 2006, amortization expense of $47 thousand (2005 - $nil) has been included in interest expense, and for the nine month period ended September 30, 2006, amortization expense of $143 thousand (2005 - $nil) has been included in interest expense.

At September 30, 2006, there exists a Demand Operating Loan Agreement for $10 million between the Partnership and a Chartered Canadian bank that took effect on December 20, 2005. As at September 30, 2006 no drawings had occurred against the operating loan.

8. Subsequent Events

On November 7, 2006, approval was given by the Fund's Board of Trustees for the construction of the Valhalla Pipeline Project ("Valhalla"). Valhalla will be a 25 kilometer, 6 inch sour gas pipeline located in the Peace River Arch area of northwestern Alberta. It will provide incremental gas for processing at the Fund's Gordondale East plant, and is underpinned by firm take-or-pay contracts with area producers. The capital cost is estimated to be $5.8 million, and the project has a planned in-service date of April 1, 2007. Valhalla will be financed from existing credit facilities.

On November 7, 2006, approval was given by the Fund's Board of Trustees for the construction of a greenfield sour gas processing facility at West Doe, which is located in the Peace River Arch area of northeast British Columbia. This facility, which will be located close to the Fund's existing Pouce Coupe plant, will consist of a sour gas plant capable of processing 23.5 million cubic feet of gas per day, plus related gas gathering and sales gas pipelines. The capital cost of this facility is estimate at $22.5 million, and will be financed from existing credit facilities. This project is underpinned by firm take-or-pay contracts and is expected to begin operations during September 2007.


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