Spectra Energy Income Fund
TSX : SP.UN

Spectra Energy Income Fund

March 08, 2007 17:09 ET

Spectra Energy Income Fund Reports Fourth Quarter and Year End Results

CALGARY, ALBERTA--(CCNMatthews - March 8, 2007) - Spectra Energy Income Fund (TSX:SP.UN) (the "Fund") today released its financial and operating results for the three months and year ended December 31, 2006. Unless otherwise noted, the following references the results of Spectra Energy Facilities LP ("SEF LP"), of which the Fund currently has a 53.8 per cent indirect ownership.

Highlights:

- SEF LP's revenue for the fourth quarter was $33.0 million compared to $22.1 million for the same period last year. Annual operating revenue increased $19.9 million from the previous year to $101.8 million; both increases were due mainly to the Westcoast Gas Services Inc. ("WGSI") acquisition, higher average fees, and a positive equalization adjustment. In addition to the preceding, lower turnaround activity and increased volumes resulted in higher revenue during 2006 compared to 2005.

- During the fourth quarter, the Fund increased monthly cash distributions to $0.07 per unit and declared total distributions of $5.1 million from distributable cash of $5.9 million, for a payout ratio of 86 percent; the annual payout ratio for 2006 was 82 percent.

- Average daily throughputs in the fourth quarter were 594 mmcf/d compared to 420 mmcf/d in the same period last year.

- The four northeastern British Columbia facilities resulting from the WGSI acquisition have been successfully integrated into SEF LP operations as the Fort St. John region.

- The Fund's Board of Trustees approved the West Doe Plant Project and the Valhalla Pipeline Project ("Valhalla") to expand operations in the Peace River Arch region. Due to increased firm-service demand from area customers, Valhalla has been increased from the original planned 6 inch sour gas pipeline to an 8 inch sour gas pipeline with capital expenditures expected to increase from $5.8 to $7.1 million. The total capital expenditure for these two projects is estimated at $29.6 million.

- Coincident with the formation of Spectra Energy Corp on January 2, 2007, Spectra Energy Income Fund became the new name for what was previously known as Duke Energy Income Fund.

"Spectra Energy Income Fund's first full year of operation as a public entity was very successful. Our assets performed well and this was evident in the growth in revenue and EBITDA achieved in fiscal 2006. The WGSI acquisition at the end of September was immediately accretive and directly contributed to this growth," said Doug Haughey, president and chief executive officer of the Fund's manager. "Our expansion projects in the Peace River Arch region are well underway and on schedule for completion later this year."

"For 2007, the Fund will continue to focus on organic growth in our existing operating regions through optimization of existing assets and customer-driven expansions. We will continue to target growth in businesses we know how to run and that have a risk profile similar to our existing business," continued Haughey.

Financial and Operating Results:

SEF LP's revenue for the fourth quarter of 2006 was $33.0 million, an increase of 49.5 percent or $10.9 million from the comparable quarter in 2005. Annual revenue for 2006 was $101.8 million, an increase of 24.3 percent or $19.9 million from the previous year. Both increases are mainly due to the WGSI acquisition, higher average fees from processing gas with higher concentrations of sour gas and a positive equalization adjustment. In addition, lower turnaround activity and increased volumes resulted in higher revenue during 2006 compared to 2005.

Earnings before interest, income taxes, depreciation and accretion (EBITDA) for the fourth quarter was $14.3 million, an increase of approximately 41.7 percent, or $4.2 million, from the fourth quarter last year. EBITDA for 2006 was $47.9 million, an increase of 33.9 percent or $12.1 million from 2005. For the fourth quarter, the 2006 EBITDA increase was due primarily to the inclusion of the Fort St. John region results, which was partially offset by higher maintenance and repair costs in the Peace River Arch region and higher utility expenses in the Brazeau River region. The $12.1 million EBITDA increase in 2006 was due to higher revenue in part offset by increased operation and maintenance costs and general and administrative costs due to inclusion of the Fort St. John region results.

Net income for the fourth quarter of 2006 was $4.2 million, up $3.0 million from the same period a year earlier. Net income for 2006 was $18.0 million, up $15.0 million from 2005. The increase in quarterly net income is due primarily to lower interest expense and the WGSI acquisition. For 2006, the WGSI acquisition, increased plant throughput, fewer plant turnarounds in 2006 and lower interest expense contributed to the increase in net income.

For the Fund, distributable cash for the fourth quarter was $5.9 million and declared distributions were $0.210 per unit, totaling $5.1 million, for a payout ratio of 86 percent. For 2006, distributable cash was $19.0 million and declared distributions were $0.813 per unit, for total distributions of $15.6 million, resulting in a payout ratio of 82 percent.



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Statement of Distributable From
Cash (in thousands of inception
dollars, except Three months Year on November 2,
where noted) ended ended 2005 to
December 31, December 31, December 31,
2006 2006 2005 (2)
--------------------------------------------------------------------------
Spectra Energy Facilities LP
Cash flow from operating
activities $ 14,887 $ 40,312 $ 1,939
Changes in non-cash working
capital (2,437) 2,112 (910)
Amortization of deferred
financing charges (48) (191) -
Maintenance capital
expenditures (2,003) (2,985) -
----------- -------------- --------------
Distributable Cash(1) from
Spectra Energy Facilities LP $ 10,399 $ 39,248 $ 1,029
----------- -------------- --------------
----------- -------------- --------------

Spectra Energy Income Fund
Share of Spectra Energy
Facilities LP's
distributable cash $ 5,942 $ 18,468 $ 413
Interest income earned by
the Fund 1 487 -
Management and administrative
expenses (3) (13) 1 (10)
----------- -------------- --------------
Distributable Cash(1) from
Spectra Energy Income Fund $ 5,930 $ 18,956 $ 403
----------- -------------- --------------
----------- -------------- --------------
Weighted average number of
units outstanding (units) 24,351,000 17,659,162 14,000,000
Distributable Cash
($ / Unit) (1) $ 0.244 $ 1.073 $ 0.029
----------- -------------- --------------
Cash distributions declared
($ / Unit) $ 0.210 $ 0.813 $ 0.026
----------- -------------- --------------
Distributions declared (4) $ 5,114 $ 15,599 $ 364
----------- -------------- --------------
----------- -------------- --------------
Payout Ratio (distributions
declared / distributable
cash) (1) 86% 82% 90%
----------- -------------- --------------
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(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 periods after the second quarter of 2006 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 led 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.


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 proposed changes are implemented, income trusts will be subject to tax at the rate of 31.5 percent on the taxable portion of their distributions. 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 income trusts created after October 2006, but would only apply beginning with the 2011 taxation year to income trusts, such as the Fund, that were already publicly traded as of the date of the announcement.

On December 15, 2006, the Department of Finance provided further guidance on "normal growth" for flow-through entities. The guidance limits the amount of new equity that can be issued if an entity wishes to retain its current tax status until 2011. The guidance indicates, subject to annual limits, that the Fund can issue up to $296 million of new equity prior to December 31, 2010 without losing its current tax status.

The legislation is still in draft form and subject to continuing debate. The implementation of the legislation could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units. Management will seek to adapt SEF LP's business strategies as the tax legislation evolves with the goal of growing unitholder value.

Conference Call and Webcast:

A conference call to discuss the financial results will take place at 8 a.m. MT (10:00 a.m. ET), Friday, March 9. 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 and accounting; 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 416-644-3420 or 1-800-731-5319. A webcast of the call will be available at www.spectraenergyfund.com. A replay of the conference call will be available as of 12 p.m. ET the same day until 12 a.m. on March 17, 2007. To access the replay, dial 416-640-1917 or 1-877-289-8525 followed by the passcode 21221289#.

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 Spectra Energy 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 Spectra 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 Spectra Energy Income Fund

Spectra Energy Income Fund is an unincorporated open-ended trust established under the laws of the Province of Alberta and owns a 53.8 percent indirect interest in Spectra Energy Facilities LP ("SEF LP") which owns 100 percent of Spectra Energy Midstream Corporation ("Spectra Midstream"). Spectra Energy Corp. indirectly owns the remaining 46.2 percent interest of SEF LP and is the sponsor of the Fund. Spectra Midstream is one of the largest independent midstream operations in the Western Canadian Sedimentary Basin ("WCSB") with interests in thirteen natural gas processing plants with a net processing capacity of 908 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 Spectra Energy Income Fund can be found at: http://www.spectraenergyfund.com.

Spectra Energy Corp. (NYSE:SE) is one of North America's premier pure play natural gas midstream companies serving three key links in the natural gas value chain: gathering and processing, transmission and storage and distribution. For close to a century, Spectra Energy and its predecessor companies have developed critically important pipelines and related energy infrastructure connecting natural gas supply sources to premium markets. Based in Houston, Texas, the company operates in the United States and Canada approximately 17,500 miles of transmission pipeline, 250 billion cubic feet of storage, natural gas gathering and processing, natural gas liquids operations and local distribution assets. Spectra Energy Corp also has a 50 percent ownership in DCP Midstream, one of the largest natural gas gatherers and processors in the United States. Visit www.spectraenergy.com for more information.

SPECTRA ENERGY INCOME FUND

(formerly Duke Energy Income Fund)

and

SPECTRA ENERGY FACILITIES LP

(formerly Duke Energy Facilities LP)

Management Discussion and Analysis And Consolidated Financial Statements For the Year Ended December 31, 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 March 8, 2007. This MD&A should be read together with the accompanying consolidated financial statements of Spectra Energy Income Fund (the "Fund", formerly Duke Energy Income Fund) and Spectra Energy Facilities LP (the "Partnership", formerly Duke Energy Facilities LP) as at and for the year ended December 31, 2006 and the related notes thereto. The 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.

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 for the year ended December 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, 2006. 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 Spectra Energy Facilities Management LP (the "Manager", formerly Duke Energy Facilities Management LP).

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 Spectra Energy Midstream Corporation ("Spectra Midstream", formerly Duke Energy Midstream Services Canada Corporation). Spectra Midstream and its wholly owned subsidiaries own interests in thirteen natural gas processing plants and related gathering pipeline facilities in the Western Canadian Sedimentary Basin. The business of these facilities is referred herein to as Spectra Energy Midstream. Additional information relating to the business is available at www.spectraenergyfund.com.

Spectra Energy Midstream is in the business of processing natural gas and natural gas liquids in western Canada on a fee-for-service basis. Revenue generated is based solely on the volumes of energy processed and the fees levied for the various services offered. Spectra Energy Midstream has no direct exposure to commodity prices.

Spectra Energy Midstream has focused mainly on sour gas processing in the western extent of the Western Canadian Sedimentary Basin ("WCSB") for the following reasons:

- it has significant operating expertise in sour gas processing;

- due to increasing regulatory scrutiny, sour gas processing has high barriers to entry;

- sour gas processing commands higher margins; and

- management believes that demand for sour gas processing is growing in the WCSB.

Management estimates that approximately one-third of the natural gas production in the WCSB is sour gas, and management expects this percentage to continue to grow as producers increasingly focus on deeper drilling targets which tend to have higher sour gas content. Many of these drilling targets are in areas where Spectra Energy Midstream's assets are located.

The Management of Spectra Energy Midstream will continue to investigate both organic expansion and acquisition opportunities. Growth focus will continue to be on sour gas opportunities with low-risk profiles and enhanced cash flow potential. During the period from 2002 through 2006, Spectra Energy Midstream spent approximately $228 million of capital to grow the business.

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, Spectra Energy Corp., consists of Duke Energy's Natural Gas Transmission business segment, which includes Westcoast Energy Inc. ("WEI", which includes an ownership interest in the Partnership), and includes Duke Energy's 50% ownership interest in DCP Midstream (formerly Duke Energy Field Services). As a result of the spin off, which occurred on January 2, 2007, several entities within and related to both the Partnership and the Fund, changed their names as follows:

- Duke Energy Income Fund became Spectra Energy Income Fund

- Duke Energy Facilities LP became Spectra Energy Facilities LP

- Duke Energy Midstream Services Canada Corporation became Spectra Energy Midstream Corporation

- DEGT Midstream Holdings Partnership became Spectra Energy Midstream Holdings Partnership

- Duke Energy Facilities Inc. became Spectra Energy Facilities Inc.

- Duke Energy Facilities Management Inc. became Spectra Energy Facilities Management Inc.

- Duke Energy Facilities Management LP became Spectra Energy Facilities Management LP

- Duke Energy Commercial Trust became Spectra Energy Commercial Trust

- DEFS Canada Investments L.P. became Spectra Energy Canada Investments L.P.

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 WEI, a subsidiary of Spectra Energy Corp. 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's 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. John Region"). The WGSI Facilities, three of which process sour gas, have an aggregate net raw gas processing capacity of 288 million standard cubic feet per day ("mmcf/d"). Three of the four WGSI Facilities are operated and owned 100% by Spectra Energy Midstream. 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 were entitled to the initial increased distribution, which was paid 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 for 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, the Fund now indirectly holds 53.8% of the Partnership and Spectra Energy Corp. 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 proposed changes are implemented, income trusts will be subject to tax at the rate of 31.5% on the taxable portion of their distributions. 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 income trusts created after October 2006, but would only apply beginning with the 2011 taxation year to income trusts, such as the Fund, that were already publicly traded as of the date of the announcement.

On December 15, 2006, the Department of Finance provided further guidance on "normal growth" for flow-through entities. The guidance limits the amount of new equity that can be issued if an entity wishes to retain its current tax status until 2011. The guidance indicates, subject to annual limits, that the Fund can issue up to $296 million of new equity prior to December 31, 2010 without losing its current tax status.

The legislation is still in draft form and subject to continuing debate. The implementation of the legislation could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units. Management will seek to adapt the Partnership's business strategies as the tax legislation evolves with the goal of growing unitholder value.

On November 7, 2006, the Trustees of Spectra Energy Commercial Trust (the "CT", formerly Duke Energy Commercial Trust) approved the construction of the Valhalla Pipeline Project ("Valhalla"). Valhalla will be a 25 kilometer 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. Originally planned as a 6 inch pipeline, the size has been increased to 8 inches to meet additional firm-service demand from area producers. The estimated $7.1 million capital cost, an increase from $5.8 million due to the change in project scope, will be financed from existing credit facilities. Construction on the project is underway, with operations expected to commence in April, 2007.

On November 7, 2006, the CT Trustees approved 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 estimated $22.5 million capital cost of this facility will be financed from existing credit facilities and is underpinned by firm take-or-pay contracts. Project development is underway, with operations expected to commence in September, 2007.

During the period 2004 through 2006, western Canada experienced historic levels of natural gas drilling activity. Beginning in late 2006 a reduction in western Canadian drilling has been occurring when compared to the levels generally experienced during the previous three years. If lower levels of drilling activity persist on a longer-term basis, the Fund's operating and financial results may be adversely impacted.

Spectra Energy Income Fund

Summarized Financial Results

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



-------------------------------------------------------------------------
(in thousands of dollars, except December 31, December 31,
where noted) 2006 2005
-------------------------------------------------------------------------
Statement of Operations
Equity income from Spectra Energy
Facilities LP 8,451 151
Net income 8,939 141
Net income per unit (in dollars) 0.506 0.010
Distributions
Units outstanding (in units) 24,351,000 14,000,000
Distributions declared per
unit (in dollars) 0.813 0.026
Balance Sheet
Total assets 258,236 143,575
Total liabilities 2,364 3,798
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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.



--------------------------------------------------------------------------
(in thousands of dollars, 2006 2005
except where noted) Q4 Q3 Q2 Q1 Q4(1)
--------------------------------------------------------------------------
Revenues 3,004 2,526 2,372 2,323 151
Expenses (425) (320) (337) (204) (10)
--------------------------------------------------------------------------
Net income 2,579 2,206 2,035 2,119 141
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per unit, basic and
diluted (in dollars) 0.106 0.142 0.132 0.139 0.010
Cash distributions declared (2) 5,114 4,294 3,095 3,096 364
Cash distributions declared
per unit (in dollars) 0.210 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 months and year ended December 31, 2006.



--------------------------------------------------------------------------
Three months Year
ended ended
December 31, December 31,
(in thousands of dollars) 2006 2006
--------------------------------------------------------------------------
Equity income from Spectra Energy
Facilities LP 2,591 8,451
Other income 412 1,287
Interest income 1 487
----------- -----------
3,004 10,225
Management and administrative expenses 425 1,286
----------- -----------
Net income 2,579 8,939
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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"), Spectra Energy Facilities Inc. (formerly 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 income.

Liquidity and Capital Resources

The Fund does not actively operate a business and is dependent upon distributions from the Partnership. During the fourth quarter of 2006, the Fund received $5,155 thousand of distributions from the Partnership, bringing the year to date total to $13,773 thousand. The Fund paid distributions to unitholders of $5,041 thousand during the fourth quarter of 2006, with the year to date total reaching $14,259 thousand. The Partnership's cash flow from operations before changes in non-cash working capital of $12,450 thousand (consisting of net cash provided by operating activities of $14,887 thousand less net working capital changes other than cash and short term investments of $2,437 thousand) for the fourth quarter of 2006, and $42,424 thousand (consisting of net cash provided by operating activities of $40,312 thousand plus net working capital changes other than cash and short term investments of $2,112 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. Management expects that cash flows from the operations of the Partnership will continue to be sufficient to fund distributions to the Fund and other partners.

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", as they did with many other income funds. 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 December 31, 2006 and December 31, 2005.



--------------------------------------------------------------------------
Three months Year From inception on
(in thousand of dollars) ended ended November 2, 2005
Statement of Distributable December 31, December 31, to December 31,
Cash 2006 2006 2005 (2)
--------------------------------------------------------------------------
Spectra Energy Facilities LP
Cash flow from operating
activities 14,887 40,312 1,939
Changes in non-cash working
capital (2,437) 2,112 (910)
Amortization of deferred
financing charges (48) (191) -
Maintenance capital
expenditures (2,003) (2,985) -
----------- ----------- -------------
Distributable Cash(1) from
Spectra Energy Facilities LP 10,399 39,248 1,029
----------- ----------- -------------
----------- ----------- -------------
--------------------------------------------------------------------------


--------------------------------------------------------------------------
Three months Year From inception on
(in thousand of dollars) ended ended November 2, 2005
Statement of Distributable December 31, December 31, to December 31,
Cash 2006 2006 2005 (2)
--------------------------------------------------------------------------
Spectra Energy Income Fund
Share of Spectra Energy
Facilities LP's
distributable cash 5,942 18,468 413
Interest income earned by
the Fund 1 487 -
Management and administrative
expenses (3) (13) 1 (10)
----------- ----------- -----------------
Distributable Cash(1) from
Spectra Energy Income Fund 5,930 18,956 403
----------- ----------- -------------
----------- ----------- -------------
Weighted average number of
units outstanding (units) 24,351,000 17,659,162 14,000,000
Distributable Cash
($ / Unit) (1) 0.244 1.073 0.029
----------- ----------- -------------
Cash distributions declared
($ / Unit) 0.210 0.813 0.026
----------- ----------- -------------
Distributions declared (4) 5,114 15,599 364
----------- ----------- -------------
----------- ----------- -------------
Payout Ratio (distributions
declared / distributable
cash) (1) 86% 82% 90%
----------- ----------- -------------
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(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 periods after the second quarter of 2006 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 led 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 proposed changes are implemented, income trusts will be subject to tax at the rate of 31.5% on the taxable portion of their distributions. 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 income trusts created after October 2006, but would only apply beginning with the 2011 taxation year to income trusts, such as the Fund, that were already publicly traded as of the date of the announcement.

On December 15, 2006, the Department of Finance provided further guidance on "normal growth" for flow-through entities. The guidance limits the amount of new equity that can be issued if an entity wishes to retain its current tax status until 2011. The guidance indicates, subject to annual limits, that the Fund can issue up to $296 million of new equity prior to December 31, 2010 without losing its current tax status.

The legislation is still in draft form and subject to continuing debate. The implementation of the legislation could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units. Management will seek to adapt the Partnership's business strategies as the tax legislation evolves with the goal of growing unitholder value.

Related Party Transactions

Spectra Energy Facilities Management LP as administrator of the Fund, the manager of the CT and the Partnership, receives a base fee, an incentive fee, and reimbursement of costs for its services per the management agreement and the administration and governance agreement. During the three months ended December 31, 2006, these amounts were $155 thousand (2005 - $nil), and year to date these amounts were $296 thousand (2005 - $nil). Accounts payable represents the unpaid portion of these fees, as well as amounts owing to various related parties for expenses paid on behalf of the Fund.

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 income in the consolidated statements of operations and net accumulated deficit. Accounts receivable 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 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 March 8, 2007, 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 AIF for the year ended December 31, 2006 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.

As indicated in the Outlook section of this report, on October 31, 2006, the Minister of Finance announced proposed changes to the income tax treatment of "flow-through entities", including income trusts. The legislation is still in draft form and subject to continuing debate. The implementation of the legislation could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units.

Spectra Energy Facilities LP

Summarized Financial Results

The following table sets out summary consolidated financial information at and for the three years ended December 31, 2006, 2005, and 2004.



---------------------------------------------------------------------------
(in thousands of dollars, except where noted)
Years ended December 31 2006 2005 2004
---------------------------------------------------------------------------
Statement of Operations
Total revenue 101,845 81,934 79,221
Net income 18,024 3,048 8,707
Distributions
Units outstanding (in units) 45,264,750 34,913,750 n/a
Distribution per Exchangeable LP unit (in
dollars) 0.813 0.026 n/a
Distribution per Ordinary LP unit (in
dollars) 0.813 0.026 n/a
Balance Sheet
Total assets 635,290 473,992 510,509
Long-term liabilities 194,489 127,405 298,004
---------------------------------------------------------------------------


Net income during 2006 was $18,024 thousand, up $14,976 thousand compared to 2005 primarily as a result of higher operating income from the acquisition of WGSI at the end of the third quarter, increased plant throughput, and fewer plant turnarounds in 2006, as well as lower interest expense due to a lower average debt balance and a lower interest rate.

Net income during 2005 was $3,048 thousand, down $5,659 thousand compared to 2004 primarily as a result of higher operating costs and foregone revenue due to additional downtime resulting from the timing of scheduled plant turnaround activity. During this period, the Partnership completed scheduled turnarounds at eight of its nine processing plants and three scheduled turnarounds were completed in the same period in 2004. Impacts of the turnaround activity were offset partially by higher revenues from higher plant throughput levels and fee increases.

Total assets increased in 2006 compared to 2005 due primarily to the acquisition of WGSI on September 29, 2006.

Total assets decreased in 2005 compared to 2004 due primarily to a dividend of $40,556 thousand being declared and paid in August of 2005.

Long term liabilities increased in 2006 compared to 2005 due primarily to the debt financing for the acquisition of WGSI on September 29, 2006, as well as future income tax liabilities assumed upon the acquisition of WGSI.

Long term liabilities decreased in 2005 compared to 2004 due to the notes payable - affiliate, which was settled for cash and non-cash consideration of exchangeable units of the Partnership (the "Exchangeable LP Units") pursuant to the Purchase and Sale Agreement dated December 20, 2005. This is partially offset by new indebtedness under a credit facility with a syndicate of financial institutions on December 20, 2005 (the "Credit Facility").

Quarterly Information

Q4 Results

- Revenue for the fourth quarter of 2006 increased by $10,924 thousand over the same period in 2005 due mainly to the acquisition of the WGSI Facilities, higher average fees, and a positive equalization adjustment.

- Expenses for the fourth quarter of 2006 increased by $7,927 thousand over the same period in 2005 due mainly to the acquisition of the WGSI Facilities, partially offset by lower net interest expense.

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 subsequent to the closing of the acquisition of the WGSI Facilities on September 29, 2006.



-----------------------------------------------------------------
(in thousands of dollars) 2006
Q4 Q3 Q2 Q1
-----------------------------------------------------------------
Revenues 32,989 22,862 22,754 23,240
Expenses (28,806) (18,792) (17,980) (18,243)
-----------------------------------------------------------------
Net income (loss) 4,183 4,070 4,774 4,997
-----------------------------------------------------------------
-----------------------------------------------------------------

-----------------------------------------------------------------
(in thousands of dollars) 2005
Q4 Q3 Q2 Q1
-----------------------------------------------------------------
Revenues 22,065 21,368 19,287 19,214
Expenses (20,879) (19,565) (19,847) (18,595)
-----------------------------------------------------------------
Net income (loss) 1,186 1,803 (560) 619
-----------------------------------------------------------------
-----------------------------------------------------------------


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.

Revenues and expenses during the fourth quarter of 2006 increased by $10,127 thousand and $10,014 thousand, respectively, compared to the third quarter of 2006 due primarily to the acquisition of the WGSI Facilities.

Results of Operations

The following tables present the consolidated operating results for the three months and years ended December 31, 2006 and 2005.



-------------------------------------------------------------------------
(in thousands of dollars) Three months ended December 31
2006 2005 Variance
-------------------------------------------------------------------------
Operating revenues 32,989 22,065 10,924
Operating expenses (26,360) (16,833) (9,527)
Net interest expense and other income (1,811) (3,746) 1,935
Income taxes (future and current) (635) (300) (335)
------- ------ ------
Net income 4,183 1,186 2,997
------- ------ ------
------- ------ ------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
(in thousands of dollars) Year ended December 31
2006 2005 Variance
-------------------------------------------------------------------------
Operating revenues 101,845 81,934 19,911
Operating expenses (76,247) (64,931) (11,316)
Net interest expense and other income (5,573) (12,600) 7,027
Income taxes (future and current) (2,001) (1,355) (646)
------- ------ ------
Net income 18,024 3,048 14,976
------- ------ ------
------- ------ ------
-------------------------------------------------------------------------


For the Three Months Ended December 31, 2006 compared to the Three Months Ended December 31, 2005

Operating Revenues

During the three months ended December 31, 2006, operating revenues increased by $10,924 thousand compared to the same period in 2005, to a total of $32,989 thousand, due primarily to:

- Revenue of $9,144 thousand for the Fort St. John region has been included in the fourth quarter total following the closing of the acquisition of the WGSI Facilities on September 29, 2006.

- Revenue increased in the Nevis region by $961 thousand due mainly to a positive equalization adjustment and higher gathering and processing volumes from increased production of sweet gas.

- Revenue increased in the Brazeau River region by $606 thousand due mainly to higher volumes and higher average fees as a result of increased gas production on stream with higher sour gas content.

- Revenue increased in the Pesh Complex region by $232 thousand due mainly to higher average fees from newly renegotiated contracts, partially offset by lower gathering and processing volumes.

- Revenue decreased in the Peace River Arch region by $19 thousand due mainly to lower gathering and processing volumes, partially offset by higher average fees from renegotiated contracts.

Operating Expenses

Operating expenses increased by $9,527 thousand for the three months ended December 31, 2006 compared to the same period in 2005, to a total of $26,360 thousand, due primarily to:

Operations and Maintenance

Operations and maintenance expenses were $15,497 thousand for the three months ended December 31, 2006, an increase of $6,644 thousand compared to the same period in 2005. This was due largely to the addition of the Fort St. John facilities in the amount of $4,994 thousand, higher maintenance and repair expenses in 2006, mainly in the Peace River Arch region for equipment overhauls, of $850 thousand, and higher utility costs in 2006 at the Brazeau River plant of $700 thousand.

Depreciation

Depreciation expense was $7,389 thousand for the three months ended December 31, 2006, an increase of $2,794 thousand compared to the same period in 2005, due primarily to the inclusion of the Fort St. John facilities.

General and Administrative

General and administrative expenses were $3,218 thousand for the three months ended December 31, 2006, an increase of $81 thousand compared to the same period in 2005, due primarily to the inclusion of the Fort St. John facilities, partially offset by higher costs in 2005 related to the formation of the trust.

Net Interest Expense and Other Income

Interest and other expenses totaled $1,811 thousand for the three months ended December 31, 2006, a decrease of $1,935 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 December 31, 2006 was $635 thousand, an increase of $335 thousand compared to the same period in 2005. The increase is attributable to an increase in current period earnings related to corporate entities included in the Partnership's consolidated financial statements.

For the Year Ended December 31, 2006 compared to the Year Ended December 31, 2005

Operating Revenues

During the year ended December 31, 2006, operating revenues increased by $19,911 thousand compared to 2005, to a total of $101,845 thousand, due primarily to:

- Revenue of $9,353 thousand for the Fort St. John region for three months and two days has been included in the year to date total following the closing of the acquisition of the WGSI Facilities on September 29, 2006.

- Revenue increased in the Peace River Arch region by $3,537 thousand due mainly to increased gathering and processing volumes from new wells on stream of $2,753 thousand, and to lower revenues in 2005 of $784 thousand due to plant turnarounds.

- Revenue increased in the Brazeau River region by $2,497 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 $1,708 thousand, a positive equalization adjustment of $336 thousand, as well as other volume adjustments of $453 thousand.

- Revenue increased in the Nevis region by $2,635 thousand due mainly to higher gathering and processing volumes of $1,051 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 $1,008 thousand in 2006.

- Revenue increased in the Pesh Complex region by $1,889 thousand. Increased volumes from a facility expansion, as well as new wells on stream, accounted for $824 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 revenues of $450 thousand due to volumes diverted from the Fort Nelson facilities operated by WEI during a plant turnaround.

Operating Expenses

Operating expenses increased by $11,316 thousand for the year ended December 31, 2006 compared to 2005, to a total of $76,247 thousand, due primarily to:

Operations and Maintenance

Operations and maintenance expenses were $44,102 thousand for the year ended December 31, 2006, an increase of $5,326 thousand compared to 2005. This was due primarily to the addition of the Fort St. John facilities of $5,094 thousand in 2006, a decrease in the environmental reserve for the Nevis plant in 2005 of $1,470 thousand, higher utilities costs in 2006 at the Brazeau River plant of $1,170 thousand, $850 thousand of equipment overhauls in the Peace River Arch region, 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, and an environmental remediation accrual of $475 thousand in 2006 for the Peace River Arch region. These increased 2006 expenses were partially offset by 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, and higher equalization payments at the Brazeau River plant in 2005 of approximately $1,160 thousand.

Depreciation

Depreciation expense was $21,237 thousand for the year ended December 31, 2006, an increase of $3,471 thousand compared to 2005, due primarily to the inclusion of the Fort St. John facilities in 2006 and capital expenditures at the Pesh Complex in 2005.

General and Administrative

General and administrative expenses were $9,882 thousand for the year ended December 31, 2006, an increase of $2,470 thousand compared to 2005, due primarily to public company costs, enhanced engineering and environmental health and safety support expenses, and the inclusion of the Fort St. John facilities, partially offset by higher costs in 2005 related to the formation of the trust.

Net Interest Expense and Other Income

Interest and other expenses totaled $5,573 thousand for the year ended December 31, 2006, a decrease of $7,027 thousand compared to 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 year ended December 31, 2006 was $2,001 thousand, an increase of $646 thousand compared to 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. 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 December 31, 2006.

The following tables set out the comparison of cash flows for the three months and years ended December 31, 2006 and 2005.



-------------------------------------------------------------------------
(in thousands of dollars) Three months ended December 31
2006 2005 Variance
-------------------------------------------------------------------------
Cash provided by operating activities 14,887 4,665 10,222
Cash used in investing activities (2,912) (2,759) (153)
Cash (used in) provided by financing
activities (9,503) 2,090 (11,593)
------- ------ -------
Net increase in cash and short term
investments 2,472 3,996 (1,524)
------- ------ -------
------- ------ -------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
(in thousands of dollars) Year ended December 31
2006 2005 Variance
-------------------------------------------------------------------------
Cash provided by operating activities 40,312 20,103 20,209
Cash used in investing activities (147,304) (25,586) (121,718)
Cash provided by (used in) financing
activities 108,508 (39,238) 147,746
------- ------ -------
Net increase (decrease) in cash and
short term investments 1,516 (44,721) 46,237
------- ------ -------
------- ------ -------
-------------------------------------------------------------------------


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 December 31, 2006, cash provided by operating activities was $14,887 thousand, an increase of $10,222 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 year ended December 31, 2006, cash provided by operating activities was $40,312 thousand, an increase of $20,209 thousand compared to 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 $142,523 thousand, as well as capital expenditures related to the Partnership's other facilities. The Partnership has invested the following maintenance and expansion amounts in the business, excluding the initial acquisition of the WGSI Facilities.




-------------------------------------------------------------------------
(in thousands of dollars) Three months ended December 31
2006 2005 Variance
-------------------------------------------------------------------------
Maintenance(i) 2,003 597 1,406
Expansion 877 2,147 (1,270)
------- ------ -------
Total capital expenditures 2,880 2,744 136
------- ------ -------
------- ------ -------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
(in thousands of dollars) Year ended December 31
2006 2005 Variance
-------------------------------------------------------------------------
Maintenance(i) 2,985 4,282 (1,297)
Expansion 1,796 21,111 (19,315)
------- ------ -------
Total capital expenditures 4,781 25,393 (20,612)
------- ------ -------
------- ------ -------
-------------------------------------------------------------------------

(i)Includes maintenance and information systems costs.


The increase in maintenance capital expenditures during the three months ended December 31, 2006 is due primarily to the timing of the maintenance projects. Maintenance capital expenditures for the year were lower than in 2005 primarily because technical analysis determined that a planned vessel replacement at the Nevis facility was not required. The decrease in expansion capital expenditures during the year ended December 31, 2006 relates primarily to the Pesh Complex expansion during 2005.

The Partnership anticipates that maintenance capital expenditures will be approximately $5 million and expansion capital expenditures will be approximately $30 million in 2007. The maintenance capital expenditures will be funded from operating cash flows, while the expansion capital expenditures will be funded primarily from additional borrowing under the Credit Facility as well as operating cash flows.

Cash Provided by Financing Activities

Cash used in financing activities for the three months ended December 31, 2006 was comprised mainly of distributions of $9,483 thousand paid to partners, of which $5,155 thousand were paid to the Fund.

Cash provided by financing activities for the year ended December 31, 2006 was comprised of several 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 $103,671 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 $29,858 thousand paid to partners, of which $13,773 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 Spectra Energy Midstream Holdings Partnership ("SEMHP", formerly DEGT Midstream Holdings Partnership) $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.

During the three months ended December 31, 2006, the Partnership declared $9,620 thousand of distributions to partners of which $5,227 thousand was due to the Fund, and during the year ended December 31, 2006, the Partnership declared $32,119 thousand of distributions to partners of which $15,113 thousand was due to the Fund.

Contractual and Other Long Term Obligations

The Partnership enters into contracts that require payments of cash in specific periods. The following table summarizes the contractual cash obligations as at December 31, 2006 for each of the periods presented.



-------------------------------------------------------------------------
Payment Due by Period
--------------------------------------------------
1 to 3 4 to 5 After 5
Less years years years
(in thousands than 1 (2008 and (2010 and (beyond
of dollars) Total Year (2007) 2009) 2011) 2011)
-------------------------------------------------------------------------
Long-term debt (1) 142,300 - 142,300 - -
-------------------------------------------------------------------------
Power contract (2) 2,751 2,751 - - -
-------------------------------------------------------------------------

(1) The Partnership has a $200 million revolving long-term credit facility
maturing in 2009 with a banking syndicate. As at December 31, 2006,
the face value of the indebtedness under the Credit Facility is $142.3
million.

(2) A subsidiary of the Partnership has entered into a one year contract
expiring on December 31, 2007 for the purchase of electricity at a
fixed price and fixed quantity.


Other long-term liabilities include $2.3 million of environmental reserve, $36.7 million of future income taxes and $13.9 million of asset retirement obligations recognized on the December 31, 2006 consolidated balance sheet.

Risk Profile

Business Risk

Management has summarized below, what it considers to be important business risks that could potentially have a material impact on the operations and financial results of the Partnership. The Fund's AIF for the year ended December 31, 2006 contains a thorough description of these and other risk factors and should be read in conjunction herewith. Additional information on the Fund including the Fund's AIF can be found on SEDAR at www.sedar.com.

The business of the Partnership is subject to operational and commercial risks that could adversely affect future earnings and distributions. These risks include decline in facilities throughput, change in gas composition, operational problems and hazards, cost overruns, increased competition, regulatory intervention, environmental considerations, uncertainty of abandonment costs and dependence upon key personnel.

The Partnership has structured business arrangements to mitigate the effect of certain of these risks on the Partnership's revenues and distributions. Operational risks are mitigated by application of high standards in the planning, construction, maintenance and operation of the facilities. In addition, the Partnership places high emphasis on training in safety and lost time prevention.

Business risk is also mitigated through the purchase of insurance coverage, including coverage for property damages, business interruptions and liability.

The Partnership is indirectly exposed to the impact of market fluctuations in the price of natural gas.

Financial Instruments and Financial Risk

The Partnership's financial instruments are comprised of cash, short term investments, accounts receivable, accounts payable, distributions payable, and the credit facility. Due to the short-term nature of the investments, accounts receivable, accounts payable, and distributions payable, the carrying values approximate fair value.

The Partnership entered into a Credit Facility with a syndicate of financial institutions on December 20, 2005. 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 U.S. base rate, Canadian bankers' acceptance or the LIBOR drawing rate plus a margin. The carrying value approximates the fair value due to the variable nature of the interest rates.

At December 31, 2006, there exists a Demand Operating Loan Agreement for $10 million between the Partnership and the Bank of Nova Scotia that took effect on December 20, 2005. As at December 31, 2006, no drawings had occurred against the operating loan.

The Partnership does not own the product that it processes and thus there is no direct exposure to commodity price risk as it relates to the Partnership's cash flows from its revenues. The pricing of the services provided is covered by contractual arrangements over varying terms.

The Partnership is subject to price fluctuations for electricity consumed in the operation of its facilities. In order to minimize this risk, a subsidiary of the Partnership has entered into a fixed price electricity purchase contract for the calendar year 2007.

All of the operations are conducted in Canadian dollars, so there is minimal exposure to foreign exchange fluctuations.

Credit Risk

The Partnership has extensive contractual relationships with natural gas, natural gas liquids and electricity producers and customers, natural gas marketers, local distribution companies, commercial enterprises, industrial companies, suppliers and financial institutions. The risk of non-performance by a contracting party may be analyzed and managed but it cannot be entirely eliminated. Ongoing consolidation of customers, financial institutions and partners may increase the severity of a default.

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 had also entered into service agreements with Duke Energy and its affiliates, who provided services such as legal, human resources, IT, infrastructure, information management, environmental health and safety, controllers, taxes, and corporate governance. The Partnership expects to enter into similar agreements with Spectra Energy and its affiliates in 2007.

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

The following table outlines the various transactions for the three months and years ended December 31, 2006 and 2005.



----------------------------------------------------------------------
Management,
Administrative,
(in thousands of dollars) and Governance Service
Agreements Agreement
Charges Charges
----------------------------------------------------------------------
Three months ended December 31, 2006
Spectra Energy Facilities Management LP 2,891 -
Westcoast Energy Inc. - 1,055
Union Gas Limited - 91
Duke Energy Corporation - 101
Allocation to Spectra Energy Facilities Inc. - (7)
-------- -------
Totals 2,891 1,240
-------- -------
-------- -------

Three months ended December 31, 2005
Westcoast Energy Inc. - 556
Union Gas Limited - 33
Duke Energy Corporation - 13
-------- -------
Totals - 602
-------- -------
-------- -------

Year ended December 31, 2006
Spectra Energy Facilities Management LP 8,275 -
Westcoast Energy Inc. - 3,454
Union Gas Limited - 274
Duke Energy Corporation - 279
Allocation to Spectra Energy Facilities Inc. - (29)
-------- -------
Totals 8,275 3,978
-------- -------
-------- -------

Year ended December 31, 2005
Westcoast Energy Inc. - 556
Union Gas Limited - 33
Duke Energy Corporation - 13
Gas Supply Resources LLC - (394)
-------- -------
Totals - 208
-------- -------
-------- -------
----------------------------------------------------------------------


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 acquisition has been accounted for using the purchase method, whereby the purchase consideration was allocated to the estimated fair values of the assets acquired and liabilities assumed at the effective date of the purchase.



The allocation of the purchase cost for the acquisition is as follows:

(in thousands of dollars)

Net assets acquired $ 145,223
Less: Cash acquired (2,700)
---------
Net non-cash assets acquired $ 142,523
---------
---------
Allocation:
Accounts receivable 7,326
Prepaid expenses and deposits 413
Net property, plant &
equipment 168,264
Accounts payable and accrued
liabilities (3,130)
Accounts payable -- affiliate (199)
Other taxes payable (110)
Long term payable -- affiliate (1,644)
Future income tax liabilities (28,397)
---------
Net cash consideration $ 142,523
---------
---------


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



-------------------------------------------------------------
(in thousands of dollars) As at
December 31, December 31,
2006 2005
-------------------------------------------------------------
Due from affiliates 1,360 1,438
Due to affiliates 3,692 4,146
-------------------------------------------------------------


Due from affiliates (GSRI) at December 31, 2005 in the amount of $14 thousand has been repaid as of March 31, 2006.

Due from affiliates at December 31, 2006 of $1,360 thousand represents certain costs associated with the acquisition of WGSI due from WEI, as well as fees due from WEI for natural gas processing by the WGSI facilities.

Due from affiliates at December 31, 2005 of $1,424 thousand, due from SEMHP for the reimbursement of certain costs associated with the formation of the Partnership, has been repaid as of June 30, 2006.

Due to affiliates at December 31, 2005 included $3,424 thousand related to reimbursement of costs to 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 Due to affiliates at December 31, 2006 of $3,692 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 $2,324 thousand. The balance owing for the management, administrative and governance agreement charges and the service agreement charges at December 31, 2005 has been repaid during the first quarter of 2006.

The Partnership also had transactions with companies related through common or joint control and significantly influenced investees as follows:



--------------------------------------------------------------------------
(in thousands
of dollars) For the period from September 29 to December 31, 2006
--------------------------------------------------------------------------
Processing Gathering Operating
Fees Revenue Fees Paid Expenses

Westcoast Energy Inc. 2,144 1,177 153
Westcoast Indemnity Co. Ltd. - - 82
--------------------------------------------------------------------------


These transactions are in the normal course of operations and are recorded at exchange amounts established and agreed between the related parties.

Critical Accounting Estimates

The application of accounting estimates is an important process that continues to evolve as the Partnership's operations change and accounting guidance evolves. The Partnership has identified a number of critical accounting estimates that require the use of significant estimates and judgment. The Partnership considers an accounting estimate to be critical if: (i) an accounting estimate requires it to make assumptions about matters that were highly uncertain at the time the accounting estimate was made; and (ii) changes in an estimate that are reasonably likely to occur from period to period, or use different estimates that the Partnership reasonably could have used in the current period would have a material impact on the Partnership's financial condition or results of operations. Changes in estimates used in these and other items could have a material impact on the Partnership's financial condition or results of operations.

Management bases its estimates and judgments on historical experience and on other various assumptions that they believe are reasonable at the time of application. The estimates and judgments may change as time passes and more information about the Partnership's environment becomes available. If estimates and judgments are different than the actual amounts recorded, adjustments are made in subsequent periods to take into consideration the new information. The Partnership discusses its critical accounting estimates and other accounting policies with senior management.

Revenue Recognition

The Partnership recognizes revenue on a fee-for-service basis when the service has been performed as third party product is gathered and treated in accordance with the applicable agreements.

Property, Plant and Equipment

Management uses estimated expected future net cash flows to measure the recoverability of its investment in these assets. The estimation of expected future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economics and market conditions. If, in future periods, there are changes in the estimates or assumptions incorporated in to the impairment review analysis, the changes could result in a reduction to the book value of these assets.

Depreciation is calculated on a straight line basis over the estimated remaining useful lives of the capital assets over periods of up to twenty five years.

Goodwill

Impairment testing of goodwill is performed annually and consists of a two-step process. The first step involves a comparison of the fair value of a reporting unit with its book value. Within the Partnership, there are no reporting units below the consolidated level. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and book value of the goodwill of that reporting unit. If the book value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Additional impairment tests are performed between the annual reviews if events or changes in circumstances make it more likely than not that the fair value of the reporting unit is below its book value.

During the years ended December 31, 2006 and 2005, the fair value of the Partnership was determined to exceed the book value, and therefore, there were no goodwill impairment charges.

Asset Retirement Obligations

The Partnership provides for future asset retirement obligations associated with the retirement of property, plant and equipment when those obligations result from the acquisition, construction, development or normal operation of the assets. The obligations are measured initially at fair market value, discounted using a credit adjusted risk free interest rate and the resulting costs capitalized as part of the carrying amount of the related asset. The asset retirement cost is depreciated over the life of the asset. In subsequent periods, the liability increases due to the passage of time based on the time value of money until the obligation is settled and reflects changes in the amount or timing of the underlying future cash flows.

The gathering systems acquired with the purchase of the WGSI assets can be extended to serve exploration growth in the northwestern area of the Western Canadian Sedimentary Basin and, as well, are integrated with the large diameter gathering systems in the area. Therefore, management has determined that, for the operating assets acquired upon the acquisition of WGSI, these assets do not have a determinate life and therefore, a liability for asset retirement obligations has not been recorded for these assets.

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 2006 2005
(mmcf /d) Q4 Q3 (1) Q2 Q1 Q4 Q3 Q2 Q1
--------------------------------------------------------------------------
Peace River Arch Region 172 172 185 200 191 179 168 179
Nevis Region 85 83 82 77 75 73 67 82
Pesh Complex Region 80 100 103 85 87 96 104 73
Brazeau River Region 73 70 74 71 67 68 69 63
Fort St. John Region (2) 184 - - - - - - -
--------------------------------------------------------------------------
Total average daily throughput 594 425 444 433 420 416 408 397
--------------------------------------------------------------------------

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

(2) The WGSI Facilities, referred to as the Fort St. John region, were
acquired on September 29, 2006. The average daily throughputs for this
region for the second and third quarters of 2006 were 195 mmcf/d and
191 mmcf/d, respectively.


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:



--------------------------------------------------------------------------
(in thousands of 2006 2005
dollars) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
--------------------------------------------------------------------------
Peace River Arch
Region 4,909 5,573 4,052 5,713 5,718 4,228 2,222 4,350
Nevis Region 3,706 1,977 2,747 2,723 2,718 1,916 969 3,061
Pesh Complex
Region 3,654 3,732 3,277 2,629 3,623 3,616 3,740 276
Brazeau River
Region 1,073 2,203 2,642 2,874 1,153 1,982 1,506 2,080
Fort St. John
Region (3) 4,150 109 - - - - - -
--------------------------------------------------------------------------
Operating cash
flow (1) 17,492 13,594 12,718 13,939 13,212 11,742 8,437 9,767
General and
administrative 3,218 2,044 2,147 2,473 3,137 1,097 1,693 1,485
--------------------------------------------------------------------------
EBITDA (2) 14,274 11,550 10,571 11,466 10,075 10,645 6,744 8,282
Less:
Taxes (current
& future) 635 1,252 (319) 433 300 713 (22) 364
Net interest
expense 1,811 1,322 1,264 1,176 3,746 3,365 2,717 2,772
Depreciation
and accretion 7,645 4,906 4,852 4,860 4,843 4,764 4,609 4,527
--------------------------------------------------------------------------
Net income
(loss) (GAAP) 4,183 4,070 4,774 4,997 1,186 1,803 (560) 619
--------------------------------------------------------------------------

(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 decreased by $809 thousand during the three months ended December 31, 2006 as compared to the same period in 2005. The decrease was due primarily to an increase in expenses of $790 thousand mainly from higher maintenance and repair costs in 2006 for equipment overhauls, and a decrease in revenues of $19 thousand mainly from lower gathering and processing volumes due to natural declines in this area, partially offset by higher average fees from renegotiated contracts in the first quarter of 2006.

Operating cash flow increased by $3,729 thousand during the year ended December 31, 2006 as compared to 2005. The increase was due primarily to an increase in revenues of $3,537 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 $192 thousand due mainly to higher maintenance expenses in 2005 related to plant turnarounds, partially offset by equipment overhauls and an environmental remediation accrual in 2006.

Nevis Region

Operating cash flow increased by $988 thousand during the three months ended December 31, 2006 as compared to the same period in 2005. The increase was due primarily to an increase in revenues of $961 thousand due mainly to a positive equalization adjustment and higher gathering and processing volumes from increased production of sweet gas.

Operating cash flow increased by $2,489 thousand during the year ended December 31, 2006 as compared to 2005. The increase was due primarily to an increase in revenues of $2,635 thousand due mainly to lower revenues in 2005 from a plant turnaround, positive equalization adjustments 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 $146 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 due mainly to a plant turnaround.

Pesh Complex Region

Operating cash flow increased by $31 thousand during the three months ended December 31, 2006 as compared to the same period in 2005. The increase was due primarily to increased revenues of $232 thousand due mainly to higher average fees from newly renegotiated contracts, partially offset by lower gathering and processing volumes, partially offset by higher expenses of $201 thousand due mainly to increased water disposal costs from shutting down the boil-away tanks at the Tooga processing plant.

Operating cash flow increased by $2,037 thousand during the year ended December 31, 2006 as compared to 2005. The increase was due primarily to an increase in revenues of $1,889 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 $148 thousand in 2006 due mainly to more lengthy plant turnarounds in 2005, partially offset by higher costs to operate the expanded facility in 2006.

Brazeau River Region

Operating cash flow decreased by $80 thousand during the three months ended December 31, 2006 as compared to the same period in 2005. The decrease was due primarily to an increase in expenses of $686 thousand due mainly to higher utility costs, partially offset by an increase in revenues of $606 thousand due primarily to higher volumes and higher average fees as a result of increased gas production on stream with higher sour gas content.

Operating cash flow increased by $2,071 thousand during the year ended December 31, 2006 as compared to 2005. The increase was due primarily to an increase in revenues of $2,497 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 positive equalization adjustment, and other volume adjustments, partially offset by an increase in expenses of $426 thousand due primarily to higher utilities costs and acid gas injection compressor repair costs in 2006, partially offset by higher equalization payments in 2005.

Fort St. John Region

Operating cash flow during the three month and two day period ended December 31, 2006 was $4,259 thousand. As the facilities were acquired on September 29, 2006, there are no comparative figures for the prior year.

EBITDA

EBITDA increased by $4,199 thousand during the three months ended December 31, 2006 to $14,274 thousand compared to the same period in 2005, primarily as a result of higher revenues of $10,924 thousand, partially offset by higher operations and maintenance costs of $6,644 thousand and higher general and administrative costs of $81 thousand.

EBITDA increased by $12,115 thousand during the year ended December 31, 2006 to $47,861 thousand compared to 2005, primarily as a result of higher revenues of $19,911 thousand, partially offset by higher operations and maintenance costs of $5,326 thousand and higher general and administrative costs of $2,470 thousand.

New Accounting Standards

On April 1, 2005, the 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 in which 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 Fund and the Partnership as of January 1, 2007 on a prospective basis. The Fund and the Partnership do not expect these new Canadian requirements to have a significant impact on the consolidated financial statements of the Fund and the Partnership.

On December 1, 2006, the Accounting Standards Board issued new Handbook Section 1535, entitled "Capital Disclosures". Under this new standard, an entity will be required to disclose information about its capital and how it is managed. This information will enable users of its financial statements to evaluate the entity's objectives, policies and processes for managing capital. This new standard is effective for fiscal years beginning on or after October 1, 2007 and early adoption is permitted. This standard will be adopted by the Fund and the Partnership as of January 1, 2008.

On December 1, 2006, the Accounting Standards Board issued new Handbook Sections 3862 and 3863, entitled "Financial Instruments - Disclosures" and "Financial Instruments - Presentation", respectively. Under these new standards, an entity will be required to disclose qualitative and quantitative information about its financial instruments and the risks associated with them. The new standard of disclosure will be more detailed than current disclosure requirements and is expected to give users of financial statements a better understanding of the significance of financial instruments in the determination of an entity's financial position, performance and cash flows, as well as a better understanding of the nature and extent of risks arising from financial instruments to which an entity is exposed during the period and at the balance sheet date, and how an entity manages those risks. These new standards are effective for fiscal years beginning on or after October 1, 2007 and early adoption is permitted. These standards will be adopted by the Fund and the Partnership as of January 1, 2008.

Disclosure Controls and Internal Controls over Financial Reporting

Management, including the President and Chief Executive Officer and the Vice-President of Finance and Accounting, of Spectra Energy Facilities Management Inc. (formerly Duke Energy Facilities Management Inc.) as general partner for and on behalf of Spectra Energy Facilities Management LP, the administrator of the Fund ("the Administrator") and Manager of Spectra Energy Commercial Trust and the Partnership has evaluated the effectiveness of the Fund's and the Partnership's disclosure controls and procedures as of the end of the period covered by the annual filings and has concluded that the disclosure controls are effective in ensuring that all material information required to be filed in this report has been made known to them in a timely fashion. The required information was effectively recorded, processed, summarized and reported within the time period necessary to prepare the annual filings. The disclosure controls and procedures are effective in ensuring that information required to be disclosed pursuant to applicable securities laws are accumulated and communicated to management, including the President and Chief Executive Officer and the Vice-President of Finance and Accounting of the Administrator and Manager as appropriate to allow timely decisions regarding required disclosure. Management has also designed internal controls over financial reporting for the Fund and the Partnership to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. Management has determined that there has been no change in internal control over financial reporting for the Fund and the Partnership that occurred during the reporting period that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.



Spectra Energy Income Fund (formerly Duke Energy Income Fund)
Consolidated Statements of Operations and Net Accumulated Deficit

-------------------------------------------------------------------------
(in thousands of Canadian dollars, From
except unit and per unit amounts) For The inception on
Year Ended November 2 to
December 31, December 31,
2006 2005
-------------------------------------------------------------------------

Equity income from Spectra Energy
Facilities LP (Note 4) $ 8,451 $ 151
Other income (Note 7) 1,287 -
Interest income 487 -
----------- -----------

Total income 10,225 151

Management and administrative
expenses (Note 7) 1,286 10
----------- -----------

Net income 8,939 141
Net accumulated deficit, beginning of
period (223) -
Distributions (15,599) (364)
----------- -----------

Net accumulated deficit, end of period $ (6,883) $ (223)
----------- -----------
----------- -----------

Weighted average number of units
outstanding during the period 17,659,162 14,000,000

Earnings per unit (basic and diluted)
(Note 5) $ 0.506 $ 0.010
----------- -----------
----------- -----------

See accompanying notes to the consolidated financial statements


Spectra Energy Income Fund (formerly Duke Energy Income Fund)
Consolidated Balance Sheets

-------------------------------------------------------------------------
(in thousands of Canadian dollars) As at
ASSETS December 31, December 31,
2006 2005
-------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 150 $ -
Accounts receivable (Note 7) 501 3,424
Distributions receivable 1,705 364
----------- -----------
2,356 3,788
----------- -----------
LONG-TERM ASSETS
Investment in Spectra Energy
Facilities LP (Note 4) 255,880 139,787
----------- -----------

TOTAL ASSETS $ 258,236 $ 143,575
----------- -----------
----------- -----------

-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
-------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued
liabilities (Note 7) $ 659 $ 3,434
Distributions payable 1,705 364
----------- -----------
2,364 3,798
----------- -----------
UNITHOLDERS' EQUITY
Unitholders' capital (Note 6) 262,755 140,000
Accumulated earnings 9,080 141
Accumulated distributions (15,963) (364)
----------- -----------
255,872 139,777
----------- -----------

TOTAL LIABILITIES AND UNITHOLDERS' EQUITY $ 258,236 $ 143,575
----------- -----------
----------- -----------

Commitments (Note 10)
See accompanying notes to the consolidated financial statements

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

Beverley A. Briscoe John G. Schissel
Trustee Trustee


Spectra Energy Income Fund (formerly Duke Energy Income Fund)
Consolidated Statements of Cash Flows

-------------------------------------------------------------------------
(in thousands of Canadian dollars) From
For The inception on
Year Ended November 2 to
December 31, December 31,
2006 2005
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 8,939 $ 141
Distributions received 13,773 -
Add (deduct) items not involving cash:
Equity income from Spectra Energy
Facilities LP (Note 4) (8,451) (151)
Net working capital changes other than cash 147 10
----------- -----------
Net cash provided by operating
activities 14,408 -
----------- -----------

INVESTING ACTIVITIES
Acquisition of investment in Spectra
Energy Facilities LP (Note 4) - (140,000)
Increase in investment in Spectra
Energy Facilities LP (Note 4) (122,755) -
----------- -----------
Net cash used in investing activities (122,755) (140,000)
----------- -----------

FINANCING ACTIVITIES
Distributions declared (15,599) (364)
Change in distributions payable 1,341 364
Issuance of Fund units 122,755 140,000
----------- -----------
Net cash provided by financing activities 108,497 140,000
----------- -----------

INCREASE IN CASH 150 -
----------- -----------

CASH, BEGINNING OF PERIOD - -
----------- -----------

CASH, END OF PERIOD $ 150 $ -
----------- -----------
----------- -----------

See accompanying notes to the consolidated financial statements


Spectra Energy Income Fund (formerly Duke Energy Income Fund)

Notes to the Consolidated Financial Statements

For the years ended December 31, 2006 and 2005

1. Organization and Business

Spectra Energy Income Fund (the "Fund", formerly Duke Energy Income 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 is a mutual fund trust for the purposes of the Income Tax Act (Canada). Pursuant to an underwriting agreement dated December 5, 2005, the Fund sold 14,000,000 units ("Units"), at a price of $10.00 per unit for aggregate proceeds of $140,000 thousand. The proceeds of the offering were used to indirectly acquire 14,000,000 limited partnership units ("LP Units") in Spectra Energy Facilities LP (the "LP" or the "Partnership", formerly Duke Energy Facilities LP) representing 40.1% of the total issued and outstanding units in the Partnership at December 31, 2005. In addition, the Fund granted the underwriters an option (the "Over-Allotment Option"), exercisable for a period of 30 days from the closing of the offering on December 20, 2005, to purchase up to an additional 1,400,000 Units at the offering price.

Pursuant to a purchase and sale agreement dated December 20, 2005, the Partnership acquired all the issued and outstanding shares of Spectra Energy Midstream Corporation ("Spectra Midstream", formerly Duke Energy Midstream Services Canada Corporation) from Spectra Energy Midstream Holdings Partnership ("SEMHP", formerly DEGT Midstream Holdings Partnership) for cash of $235,650 thousand and by issuing 20,913,750 exchangeable limited partnership units ("Exchangeable LP Units") of the Partnership. SEMHP is a wholly-owned subsidiary of Westcoast Energy Inc. ("WEI"), and WEI is a wholly-owned subsidiary of Spectra Energy Corp. ("Spectra Energy", formerly part of Duke Energy Corporation). Spectra Midstream is involved in the business of natural gas gathering and processing in the Western Canadian Sedimentary Basin. The Partnership financed the acquisition by borrowing $106,300 thousand under its credit facility and by using the net proceeds from the investment made by the Fund. The Exchangeable LP Units owned by SEMHP are exchangeable on a one-for-one basis for Units at the option of SEMHP. Holders of Exchangeable LP Units of the Partnership are entitled to one vote for each Exchangeable LP Unit held at all meetings of holders of Units.

As well, the Partnership entered into an agreement on December 20, 2005 with SEMHP. Under the terms of this agreement, the Partnership promised to pay SEMHP assets valued at $14,000 thousand on the earlier of (a) the date of the exercise of the Over-Allotment Option and (b) the expiration date of the Over-Allotment Option. On the exercise of the Over-Allotment Option, the $14,000 thousand would be paid in cash and in the case where the Over-Allotment Option expires; the payment would be in the form of 1,400,000 Exchangeable LP Units in the Partnership.

The Over-Allotment Option was exercised on January 13, 2006, the proceeds of which were used by the Fund to indirectly acquire additional LP Units of the Partnership. The Partnership paid to SEMHP cash equal to the proceeds from the Over-Allotment Option which reduced the carrying value of the Exchangeable LP Units without changing the total Exchangeable LP Units held as the Over-Allotment Option was anticipated to be exercised.

On September 29, 2006, the Partnership indirectly acquired all of the outstanding common shares of Westcoast Gas Services Inc. ("WGSI") from WEI. The Partnership paid gross cash consideration of $145,223 thousand, including $223 thousand in costs. The gross purchase price in respect of the acquisition was settled by the use of $39,000 thousand from the issue of long-term debt, $103,671 thousand of net proceeds from the issue of 8,951,000 ordinary limited partnership units to the Fund, and $2,552 thousand from the general funds of the Partnership.

The general partner of the Partnership is Spectra Energy Facilities Inc. ("SEF Inc." or "GP", formerly Duke Energy Facilities Inc.), 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 Fund indirectly owns 100% of the shares of SEF Inc., but does not account for its investment on a consolidated basis due to SEMHP having the ability to appoint a majority of the board positions. The Fund's investment in GP has been combined with its investment in the Partnership for financial reporting purposes.

Pursuant to a management agreement dated December 19, 2005 ("the Management Agreement"), Spectra Energy Facilities Management LP (the "Manager", formerly Duke Energy Facilities Management LP) has agreed to provide and perform most of the duties and obligations required of GP as general partner of the Partnership. The Manager is also the administrator of the Fund pursuant to an administration and governance agreement dated December 19, 2005 (the "Administration and Governance Agreement") and manager of Spectra Energy Commercial Trust (the "CT", formerly Duke Energy Commercial Trust) pursuant to the Management Agreement. Under the terms of the Management Agreement and the Administration and Governance Agreement, the Manager receives a base fee and direct reimbursement of costs reasonably incurred to provide such services. Under the terms of the Management Agreement, the Manager will also be paid an incentive fee equal to 25% of cash distributions above a base level of $0.80 per Unit and Exchangeable LP Unit per year.

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, income reported for the period ended December 31, 2005, represents 12 days of operations and is therefore not representative of typical monthly, quarterly or yearly operating results. 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. Significant Accounting Policies

Accounting Principles

The Fund prepares its financial statements in accordance with Canadian generally accepted accounting principles ("GAAP"). The consolidated financial statements are presented in Canadian dollars, unless otherwise stated.

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Although these estimates are based on management's best available knowledge at the time, actual results could differ.

Investments

The Fund indirectly holds a 53.8% interest in the Partnership, but does not account for its investment on a consolidated basis. The Fund does not have the ability to appoint a majority of the board positions responsible for the governance of the Partnership and therefore the Fund does not control the strategic operating, investing and financing decisions. Accordingly, the Fund's investment in the Partnership is accounted for using the equity basis of accounting whereby the cost of the investment is increased or decreased for net earnings or losses and reduced by the cash distributions paid to the Fund.

The Fund indirectly owns 100% of the shares of SEF Inc., but does not account for its investment on a consolidated basis due to SEMHP having the ability to appoint a majority of the board positions of SEF Inc. The Fund's investment in GP has been combined with its investment in the Partnership for financial reporting purposes.

The Fund reviews and evaluates the carrying value of its investments for impairment annually. More frequent reviews are conducted as conditions necessitate. In the event a decrease in the value of an investment is other than a temporary decline, the investment will be written down to recognize any impairment in the carrying value.

Earnings Per Unit

Net earnings and distributions accruing to unitholders per trust unit are calculated by dividing net earnings and distributions accruing to unitholders, respectively, by the weighted average number of trust units outstanding during the period. For the purposes of the weighted average number of trust units calculation, trust units are determined to be outstanding from the date they are issued. Diluted earnings per unit are calculated the same as basic earnings per unit except the weighted average numbers of diluted Fund units outstanding are used in the denominator.

Comparative Figures

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, the comparative statements of operations and cash flows for 2005 represent the results since the commencement of operations.

3. Financial Instruments

The Fund's financial instruments are comprised of cash, intercompany accounts receivable and payable, distributions receivable and payable and accounts payable and accrued liabilities. Due to the short-term nature of the instruments, the carrying values approximate fair value.

4. Investment in Spectra 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 SEMHP 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 in connection with the Partnership's acquisition of WGSI. 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 year ended December 31, 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 8,451

Distributions (15,113)
-----------

Investment at December 31, 2006 $ 255,880
-----------
-----------
-------------------------------------------------------------------------


5. 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.

6. Unitholders' Capital

Changes in the unitholders' capital during the year ended December 31, 2006 were as follows:



-------------------------------------------------------------------------
(in thousands of Canadian dollars, Number of
except unit amounts) Units
-------------------------------------------------------------------------
FUND UNITS
Balance, December 31, 2005 14,000,000 $ 140,000
Issued upon exercise of
over-allotment option (Note 4) 1,400,000 14,000
Issued in a public offering during
the third quarter of 2006 (Note 4) 8,951,000 108,755
----------- -----------

Balance, December 31, 2006 24,351,000 $ 262,755
----------- -----------
----------- -----------
-------------------------------------------------------------------------


7. Related Party Transactions

Spectra Energy Facilities Management LP as administrator of the Fund, the manager of the CT and the Partnership, receives a base fee, an incentive fee (as described in Note 1), and reimbursement of costs for its services. During the year ended December 31, 2006, these amounts were $296 thousand (2005 - $nil). Accounts payable represents the unpaid portion of these fees, as well as amounts owing to various related parties for expenses paid on behalf of the Fund.

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 income in the consolidated statement of operations and net accumulated deficit. Accounts receivable 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 in 2006.

Accounts payable at December 31, 2005, due to WEI, the sponsor of the Fund, for costs related to the formation of the Fund, have been repaid in 2006.

8. Income Taxes

Under the current terms of the Canadian Income Tax Act, the Fund, as a mutual fund unit trust, is not subject to income taxes to the extent that its taxable income and taxable gains are paid or payable to unitholders. In addition, the Fund is contractually committed to distribute to its unitholders all or virtually all of its taxable income and taxable capital gains that would otherwise be taxable to it and the Fund intends to continue not to be subject to income taxes. The net differences between the carrying amount of the net assets of the Fund exceeded their tax basis by an amount of $31,706 thousand at December 31, 2006 (December 31, 2005 - $22,361 thousand).

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 proposed changes are implemented, income trusts will be subject to tax at the rate of 31.5% on the taxable portion of their distributions. 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 income trusts created after October 2006, but would only apply beginning with the 2011 taxation year to income trusts, such as the Fund, that were already publicly traded as of the date of the announcement.

On December 15, 2006, the Department of Finance provided further guidance on "normal growth" for flow-through entities. The guidance limits the amount of new equity that can be issued if an entity wishes to retain its current tax status until 2011. The guidance indicates, subject to annual limits, that the Fund can issue up to $296 million of new equity prior to December 31, 2010 without losing its current tax status.

The legislation is still in draft form and subject to continuing debate. The implementation of the legislation could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units.

9. Economic Dependence

For the purposes of declaring distributions, the Fund is entirely dependent on cash distributions, the business and operations of the Partnership.

10. Commitments

On November 7, 2006, the CT Trustees approved the construction by the Partnership of a sour gas pipeline and a greenfield sour gas processing facility in 2007. Committed costs for the Partnership for these projects will vary over time, but the total estimated costs will be approximately $30 million.

11. Subsequent Events

On January 2, 2007, Duke Energy Corporation ("Duke Energy") created two separate publicly traded companies by spinning off Duke Energy's natural gas business to Duke Energy shareholders. The new natural gas company, Spectra Energy Corp., principally consists of Duke Energy's Natural Gas Transmission business segment, which includes WEI, and includes Duke Energy's 50% ownership interest in DCP Midstream (formerly Duke Energy Field Services). As a result of the spin off, several entities within and related to both the Partnership and the Fund, changed their names. The following is a partial list of the name changes:

- Duke Energy Income Fund became Spectra Energy Income Fund

- Duke Energy Facilities LP became Spectra Energy Facilities LP

- Duke Energy Midstream Services Canada Corporation became Spectra Energy Midstream Corporation

- DEGT Midstream Holdings Partnership became Spectra Energy Midstream Holdings Partnership

- Duke Energy Facilities Inc. became Spectra Energy Facilities Inc.

- Duke Energy Facilities Management LP became Spectra Energy Facilities Management LP

- Duke Energy Facilities Management Inc. became Spectra Energy Facilities Management Inc.

- Duke Energy Commercial Trust became Spectra Energy Commercial Trust

- DEFS Canada Investments L.P. became Spectra Energy Canada Investments L.P.



Spectra Energy Facilities LP (formerly Duke Energy Facilities LP)
Consolidated Statements of Operations
Information for the year ended December 31, 2005 combines information from
Duke Energy Facilities LP and its Predecessor

-------------------------------------------------------------------------
For the years ended December 31 (in
thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------

OPERATING REVENUES $ 101,845 $ 81,934
----------- -----------

OPERATING EXPENSES
Operations and maintenance 44,102 38,776
Depreciation 21,237 17,766
Accretion expense 1,026 977
General and administrative 9,882 7,412
----------- -----------
76,247 64,931
----------- -----------

OPERATING INCOME BEFORE OTHER INCOME
(EXPENSE) 25,598 17,003
----------- -----------

OTHER INCOME 280 861

INTEREST EXPENSE (Note 7) (5,853) (258)

INTEREST EXPENSE - Affiliate (Note 11) - (13,203)
----------- -----------

INCOME BEFORE TAXES 20,025 4,403
----------- -----------

TAXES (Note 9)
Current 55 489
Future 1,946 866
----------- -----------
2,001 1,355
----------- -----------

NET INCOME $ 18,024 $ 3,048
----------- -----------
----------- -----------

See accompanying notes to the consolidated financial statements


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

-------------------------------------------------------------------------
(in thousands of Canadian dollars) As at
ASSETS December 31, December 31,
2006 2005
-------------------------------------------------------------------------
CURRENT ASSETS
Cash and short term investments $ 6,433 $ 4,917
Accounts receivable 36,936 30,551
Accounts and notes receivable -
affiliate (Note 11) 1,360 1,438
Taxes receivable 377 429
Prepaid expenses and deposits 357 183
Other asset held for resale (Note 5) 276 -
----------- -----------
45,739 37,518
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 6)
Cost 613,674 439,403
Accumulated depreciation (105,491) (84,254)
----------- -----------
508,183 355,149
----------- -----------

DEFERRED FINANCING CHARGES (Note 7) 513 470
GOODWILL 80,855 80,855
----------- -----------

TOTAL ASSETS $ 635,290 $ 473,992
----------- -----------
----------- -----------

-------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
-------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 10,958 $ 7,156
Accounts payable - affiliate (Note 11) 3,692 4,146
Distributions payable 3,169 908
Capital lease obligations due within
one year - 971
----------- -----------
17,819 13,181
----------- -----------
LONG-TERM DEBT
Credit facility (Note 7) 141,609 105,792
Capital lease obligations - 100
----------- -----------
141,609 105,892
----------- -----------
LONG-TERM LIABILITIES (Note 8) 16,193 15,168
----------- -----------

FUTURE INCOME TAX LIABILITIES (Note 9) 36,687 6,345
----------- -----------
PARTNERS' EQUITY (Note 1)
Partners' capital (Note 10) 419,209 315,538
Contributed surplus (Note 9) 18,400 18,400
Partners' deficit (14,627) (532)
----------- -----------
422,982 333,406
----------- -----------

TOTAL LIABILITIES AND PARTNERS' EQUITY $ 635,290 $ 473,992
----------- -----------
----------- -----------

Commitments and Contingencies (Note 13)
See accompanying notes to the consolidated financial statements

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

Douglas J. Haughey Bruce E. Pydee
Director Director


Spectra Energy Facilities LP (formerly Duke Energy Facilities LP)
Consolidated Statements of Cash Flows
Information for the year ended December 31, 2005 combines information from
Duke Energy Facilities LP and its Predecessor

-------------------------------------------------------------------------
For the years ended December 31 (in
thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 18,024 $ 3,048
Add (deduct) items not involving cash:
Future income taxes 1,946 866
Depreciation of property, plant and
equipment 21,237 17,766
Accretion of asset retirement obligation 1,026 977
Amortization of deferred financing charges 191 -
Net working capital changes other than cash
and short term investments (Note 12) (2,112) (2,554)
----------- -----------
Net cash provided by operating activities 40,312 20,103
----------- -----------
INVESTING ACTIVITIES
Capital expenditures (6,007) (16,846)
Change in accounts payable related to
capital assets acquired 1,226 (8,547)
Acquisition of WGSI (Note 4) (142,523) -
Other - (193)
----------- -----------
Net cash used in investing activities (147,304) (25,586)
----------- -----------
FINANCING ACTIVITIES
Payment of deferred financing fees (234) (470)
Net proceeds from the issuance of
Ordinary LP units (Notes 1 and 11) 117,671 132,650
Payment to SEMHP on acquisition of
Spectra Midstream (Note 1) - (235,650)
Payment to SEMHP for exercise of
over-allotment option (Note 1) (14,000) -
Distributions declared (32,119) (908)
Change in distributions payable 2,261 908
Credit facility advances 36,000 105,792
Divisional equity dividends - (40,556)
Capital lease payments (1,071) (1,004)
----------- -----------
Net cash provided by (used in)
financing activities 108,508 (39,238)
----------- -----------

INCREASE (DECREASE) IN CASH AND SHORT
TERM INVESTMENTS 1,516 (44,721)

CASH AND SHORT TERM INVESTMENTS,
BEGINNING OF PERIOD 4,917 49,638
----------- -----------

CASH AND SHORT TERM INVESTMENTS, END
OF PERIOD $ 6,433 $ 4,917
----------- -----------
----------- -----------

SUPPLEMENTAL CASH FLOW INFORMATION
(Note 12)

See accompanying notes to the consolidated financial statements


Spectra Energy Facilities LP (formerly Duke Energy Facilities LP)
Consolidated Statements of Partners' Deficit and Divisional Equity
Information for the year ended December 31, 2005 combines information from
Duke Energy Facilities LP and its Predecessor

-------------------------------------------------------------------------
For the years ended December 31 (in
thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
DIVISIONAL EQUITY - NET INVESTMENT
Beginning of period $ - $ 147,054
Net income from January 1 to
December 19, 2005 - 2,672
Dividends - (40,556)
Contribution of notes and interest
receivable from Spectra Midstream
(Notes 1 and 11) - 311,368
Paid to SEMHP on acquisition of
Spectra Midstream (Note 1) - (235,650)
Issuance costs - (9,350)
Transfer of residual book value to
Exchangeable LP units Upon
acquisition of Spectra Midstream - (175,538)
----------- -----------
End of period - -
----------- -----------

PARTNERS' DEFICIT
Beginning of year (532) -
Net income 18,024 376
Distributions declared to General Partner (3) -
Distributions declared to Ordinary
Unitholders (15,113) (364)
Distributions declared to
Exchangeable Unitholders (17,003) (544)
----------- -----------
End of year (14,627) (532)
----------- -----------

TOTAL PARTNERS' DEFICIT AND
DIVISIONAL EQUITY $ (14,627) $ (532)
----------- -----------
----------- -----------

See accompanying notes to the consolidated financial statements


Spectra Energy Facilities LP (formerly Duke Energy Facilities LP)

Notes to the Consolidated Financial Statements

For the years ended December 31, 2006 and 2005

1. Organization and Business

Spectra Energy Facilities LP (the "Partnership", formerly Duke Energy Facilities LP - see Note 15) 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.

Spectra Energy Income Fund (the "Fund", formerly Duke Energy Income Fund - see Note 15) 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 is a mutual fund trust for the purposes of the Income Tax Act (Canada). Pursuant to an underwriting agreement dated December 5, 2005, the Fund sold 14,000 thousand units ("Units"), at a price of $10.00 per unit for aggregate proceeds of $140,000 thousand. The proceeds of the offering were used to indirectly acquire 14,000 thousand limited partnership units ("LP Units") in the Partnership representing 40.1% of the total issued and outstanding units in the Partnership at December 31, 2005. In addition, the Fund granted the underwriters an option (the "Over-Allotment Option"), exercisable for a period of 30 days from the closing of the offering on December 20, 2005, to purchase up to an additional 1,400 thousand Units at the offering price.

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%.

Pursuant to a purchase and sale agreement dated December 20, 2005, the Partnership acquired all the issued and outstanding shares of Spectra Energy Midstream Corporation ("Spectra Midstream", formerly Duke Energy Midstream Services Canada Corporation - see Note 15) from Spectra Energy Midstream Holdings Partnership ("SEMHP", formerly DEGT Midstream Holdings Partnership - see Note 15) for cash of $235,650 thousand and by issuing 20,913,750 exchangeable limited partnership units ("Exchangeable LP Units") of the Partnership. The Partnership financed the acquisition by borrowing $106,300 thousand under its credit facility and by using the net proceeds from the investment made by the Fund. The Exchangeable LP Units owned by SEMHP are exchangeable on a one-for-one basis for Units at the option of SEMHP. Holders of Exchangeable LP Units of the Partnership are entitled to one vote for each Exchangeable LP Unit held at all meetings of holders of Units.

As well, the Partnership entered into an agreement on December 20, 2005 with SEMHP. Under the terms of this agreement, the Partnership promised to pay SEMHP assets valued at $14,000 thousand on the earlier of (a) the date of the exercise of the Over-Allotment Option and (b) the expiration date of the Over-Allotment Option. On the exercise of the Over-Allotment Option, the $14,000 thousand would be paid in cash and in the case where the Over-Allotment Option expires; the payment would be in the form of 1,400,000 Exchangeable LP Units in the Partnership.

Spectra Midstream owned interests in the underlying operating assets prior to being acquired by the Partnership on December 20, 2005. Spectra Midstream was a wholly owned subsidiary of Duke Energy Field Services Canada Holdings Inc., a U.S. company incorporated in the state of Delaware until August 8, 2005. On that date, Spectra Midstream's common shares were transferred to SEMHP, a wholly owned subsidiary of Westcoast Energy Inc. ("WEI"). WEI is a wholly owned subsidiary of Spectra Energy Corp. ("Spectra Energy", formerly part of Duke Energy Corporation - see Note 15).

The Over-Allotment Option was exercised on January 13, 2006, the proceeds of which were used by the Fund to acquire additional LP Units of the Partnership. The Partnership paid to SEMHP cash equal to the proceeds from the Over-Allotment Option which reduced the carrying value of the Exchangeable LP Units without changing the total Exchangeable LP Units held as the Over-Allotment Option was anticipated to be exercised.

On September 29, 2006, the Partnership indirectly acquired all of the outstanding common shares of Westcoast Gas Services Inc. ("WGSI") from WEI. WGSI owned interests in four raw gas processing plants and related gas gathering systems in northeastern British Columbia. The Partnership paid gross cash consideration of $145,223 thousand, including $223 thousand in costs. The gross purchase price in respect of the acquisition was settled by the use of $39,000 thousand from the issue of long-term debt, $103,671 thousand of net proceeds from the issue of 8,951,000 ordinary limited partnership units to the Fund, and $2,552 thousand from the general funds of the Partnership.

The general partner of the Partnership is Spectra Energy Facilities Inc. ("SEF Inc." or "GP", formerly Duke Energy Facilities Inc. - see Note 15), 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.

Pursuant to a management agreement dated December 19, 2005 ("the Management Agreement"), Spectra Energy Facilities Management LP (the "Manager", formerly Duke Energy Facilities Management LP - see Note 15) has agreed to provide and perform most of the duties and obligations required of GP as general partner of the Partnership. The Manager is also the administrator of the Fund pursuant to an administration and governance agreement dated December 19, 2005 (the "Administration and Governance Agreement") and manager of Spectra Energy Commercial Trust (the "CT", formerly Duke Energy Commercial Trust - see Note 15) pursuant to the Management Agreement. Under the terms of the Management Agreement and the Administration and Governance Agreement, the Manager receives a base fee and direct reimbursement of costs reasonably incurred to provide such services. Under the terms of the Management Agreement, the Manager will also be paid an incentive fee equal to 25% of cash distributions above a base level of $0.80 per Unit and Exchangeable LP Unit per year.

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

2. Significant Accounting Policies

Accounting Principles

The Partnership prepares its financial statements in accordance with Canadian generally accepted accounting principles ("GAAP"). The consolidated financial statements are presented in Canadian dollars, unless otherwise stated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. These include the recoverability of assets and the amounts recorded for depreciation, accretion, asset retirement obligation costs which depend on estimates of the operating lives of the assets and future cash flows from those assets, and cost recovery estimates related to revenues. Although these estimates are based on management's best available knowledge at the time, actual results may differ.

Basis of Presentation

The Partnership is considered to be a continuation of the business acquired from SEMHP. 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 Spectra Midstream from SEMHP 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, its wholly-owned subsidiaries, and its investments in joint working interests. The joint working interests of the Partnership are its interests in Brazeau River, Boundary Lake, and Gordondale West. These joint working interests are recorded using the proportionate consolidation method, whereby its proportionate share of the assets, liabilities, revenues and expenses of the joint working interest are recorded in its financial statements.

Revenue Recognition

The Partnership recognizes revenue on a fee-for-service basis when the service has been performed as third party product is gathered and treated in accordance with the applicable agreements.

Cash and Short Term Investments

Short term investments, consisting of money market instruments with original maturities of three months or less, are considered to be cash equivalents and are recorded at cost, which approximates current market value.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. The Partnership capitalizes all construction-related direct labour and material costs, as well as indirect construction costs. The cost of renewals and betterments that extend the useful life of property, plant and equipment is also capitalized. The cost of repairs, replacements and major maintenance projects that do not extend the useful life or increase the expected output is expensed as incurred.

Management uses estimated expected future net cash flows to measure the recoverability of its investment in these assets. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in a reduction to the book value of these assets.

Depreciation is calculated on a straight line basis over the estimated remaining useful lives of the capital assets over periods of up to twenty five years.

Deferred Financing Charges

Deferred financing charges represent the costs associated with arranging the Credit Facility in 2005. The costs are being amortized on a straight-line basis over the four-year term of the Credit Facility. If the Credit Facility is paid out prior to the expiry of the term then the remaining balance of the deferred financing charges will be expensed at that time.

Goodwill

Impairment testing of goodwill is performed annually and consists of a two-step process. The first step involves a comparison of the fair value of a reporting unit with its book value. Within the Partnership, there are no reporting units below the consolidated level. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and book value of the goodwill of that reporting unit. If the book value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Additional impairment tests are performed between the annual reviews if events or changes in circumstances make it more likely than not that the fair value of the reporting unit is below its book value.

During the years ended December 31, 2006 and 2005, the fair value was determined to exceed the book value, and therefore, there were no goodwill impairment charges.

Asset Retirement Obligations

The Partnership provides for future asset retirement obligations associated with the retirement of property, plant and equipment when those obligations result from the acquisition, construction, development or normal operation of the assets. The obligations are measured initially at fair market value, discounted using a credit adjusted risk free interest rate and the resulting costs capitalized as part of the carrying amount of the related asset. The asset retirement cost is depreciated over the life of the asset. In subsequent periods, the liability increases due to the passage of time based on the time value of money until the obligation is settled and reflects changes in the amount or timing of the underlying future cash flows.

For the operating assets acquired upon the acquisition of WGSI, management has determined that these operating assets do not have a determinate life and therefore, a liability for asset retirement obligations has not been recorded for these assets.

Income Taxes

The liability method of tax allocation is used in accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Segment Information

The Partnership operates thirteen raw gas processing plants and related gathering systems in five geographically distinct areas. Due to the similar nature, management and reporting of each of the facilities, the operations of the Partnership are deemed to be one segment and therefore, no further breakdown has been provided.

Reclassification

Certain of the comparative figures in 2005 have been reclassified to conform to the presentation in the current year.

3. Financial Instruments

The Partnership's financial instruments are comprised of cash, short term investments, accounts receivable, accounts payable, distributions payable, and the credit facility. Due to the short-term nature of the investments, accounts receivable, accounts payable, and distributions payable, the carrying values approximate fair value.

The Partnership's 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 U.S. base rate, Canadian bankers' acceptance or the LIBOR drawing rate plus a margin. The carrying value approximates the fair value due to the variable nature of the interest rates.

The Partnership is exposed to various risks related to its financial instruments as follows:

Commodity Price Risk

The Partnership does not own the product that it processes and thus there is no direct exposure to commodity price risk as it relates to the Partnership's cash flows from its revenues. The pricing of the services provided is covered by contractual arrangements over varying terms.

The Partnership is subject to price fluctuations for electricity consumed in the operation of its facilities. In order to minimize this risk, a subsidiary of the Partnership has entered into a fixed price electricity purchase contract for the calendar year 2007.

Interest Rate Risk

The Partnership's Credit Facility bears interest at a variable rate and as such is exposed to interest rate fluctuations. There is minimal mitigation of interest rate exposure.

Currency Risk

All of the Partnership's operations are conducted in Canadian dollars and thus there is minimal exposure to foreign exchange fluctuations.

Credit Risk

Management monitors the creditworthiness of the customers on a regular basis and carries insurance coverage consistent with companies engaged in similar commercial operations with similar type properties.

4. Acquisition of Westcoast Gas Services Inc.

The Partnership indirectly acquired all of the outstanding common shares of WGSI from WEI on September 29, 2006. WGSI owned interests in four raw gas processing plants and related gas gathering systems in northeastern British Columbia. The Partnership paid gross cash consideration of $145,223 thousand, including $223 thousand in costs. The gross purchase price in respect of the acquisition was settled by the use of $39,000 thousand from the issue of long-term debt, $103,671 thousand of net proceeds from the sale of units to the Fund, and $2,552 thousand from the general funds of the Partnership. The net earnings of WGSI for the period from the date of acquisition, September 29, 2006, to December 31, 2006 have been included in the consolidated statement of operations of the Partnership for the year ended December 31, 2006.

The acquisition has been accounted for using the purchase method, whereby the purchase consideration was allocated to the estimated fair values of the assets acquired and liabilities assumed at the effective date of the purchase. The allocation of the purchase cost for the acquisition is as follows:



(in thousands of Canadian dollars)
Net assets acquired $ 145,223
Less: Cash acquired (2,700)
-----------
Net non-cash assets acquired $ 142,523
-----------
-----------
Allocation:
Accounts receivable 7,326
Prepaid expenses and deposits 413
Net property, plant & equipment 168,264
Accounts payable and accrued liabilities (3,130)
Accounts payable - affiliate (199)
Other taxes payable (110)
Long term payable - affiliate (1,644)
Future income tax liabilities (28,397)
-----------
Net cash consideration $ 142,523
-----------
-----------


5. Other Asset Held for Resale

In December, 2006, the Partnership acquired a property as part of an employee relocation program in the amount of $276 thousand. The Partnership intends to sell the property in the short term.

6. Property, Plant and Equipment



-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------

Cost
Natural gas gathering systems $ 71,776 $ 63,042
Processing plants 541,898 376,361
----------- -----------
Total Cost 613,674 439,403
----------- -----------
Accumulated Depreciation
Natural gas gathering systems (13,440) (10,553)
Processing plants (92,051) (73,701)
----------- -----------
Total Accumulated Depreciation (105,491) (84,254)
----------- -----------
Net Property, Plant and Equipment $ 508,183 $ 355,149
-------------------------------------------------------------------------


Leases of equipment that were treated as capital leases in 2005 were included in the 2005 Processing plant cost above in the amount of $6,058 thousand. Accumulated depreciation related to the assets under capital lease was $1,161 thousand as at December 31, 2005. As at December 31, 2006, there are no remaining leases of equipment that are treated as capital leases.

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 December 31, 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 SEMHP. 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 liability reported on the balance sheet at December 31, 2006 represents the face value of the loan, net of deferred interest.

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 year ended December 31, 2006, amortization expense of $191 thousand (2005 - $nil) has been included in interest expense.

At December 31, 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 December 31, 2006, no drawings had occurred against the operating loan.

8. Long-Term Liabilities

The fair value of asset retirement obligations have been calculated using a discount rate of 6.6% and an inflation factor of 2.3%. The total estimated cash flows required to settle the asset retirement obligations were $83,385 thousand as at December 31, 2006. The actual costs are currently expected to be incurred between 2010 and 2039.

Changes to the Partnership's asset retirement obligation for the years ended December 31, 2006 and 2005 are as follows:



-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------

Opening Balance $ 12,854 $ 11,536
Additions - 400
Accretion 1,026 977
Expenditures - (59)
----------- -----------
Closing Balance $ 13,880 $ 12,854
-------------------------------------------------------------------------


The gathering systems acquired with the purchase of the WGSI assets can be extended to serve exploration growth in the northwestern area of the Western Canadian Sedimentary Basin and, as well, are integrated with the large diameter gathering systems in the area. Therefore, management has determined that, for the operating assets acquired upon the acquisition of WGSI, these assets do not have a determinate life and therefore, a liability for these asset retirement obligations has not been recorded for these assets.

The balance of the long-term liabilities is primarily comprised of a provision established for specific environmental remediation. In 2005, the provision was re-appraised and reduced to the level of the expected remaining expenditures, the reduction of $1,470 thousand being offset against operations and maintenance expense.

9. Income Taxes

The Partnership itself is not subject to income tax; however, the Partnership consolidates corporate entities that are subject to corporate income taxes. In respect of the assets and liabilities of the Partnership where income is taxed directly in the hands of the Partners, the net book value for accounting purposes of these net assets exceeds their tax base by an amount of $58,942 thousand at December 31, 2006 (December 31, 2005 - $55,776 thousand). Due to the formation of the Partnership, and acquisition of shares of Spectra Midstream from SEMHP as described in Note 1, future income tax liabilities decreased by $18,400 thousand, which amount has been recorded in contributed surplus.

Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Partnership's future tax liabilities and assets related to consolidated corporate subsidiaries are as follows:



-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------

Future Tax Liabilities
Property, plant and equipment $ (39,249) $ (10,054)
Other (433) (167)

Future Tax Assets
Asset retirement obligation 1,487 1,574
Capital lease obligation - 131
Environmental remediation liability 258 278
Loss carry forwards 1,282 1,929
Valuation allowance (32) (36)
----------- -----------
Net Future Tax Liabilities $ (36,687) $ (6,345)
-------------------------------------------------------------------------


At December 31, 2006, the corporate subsidiaries of the Partnership had estimated non-capital losses available to be carried forward of $3,835 thousand for income tax purposes which expire as follows:



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

2011 $ 38
2012 -
Thereafter 3,797
-----------
Total $ 3,835
-------------------------------------------------------------------------


In addition, at December 31, 2006, the corporate subsidiaries of the Partnership had estimated capital losses available of $213 thousand which can be carried forward indefinitely.

The reconciliation of taxes attributable to net income before taxes computed at the statutory tax rates to tax expense is:



-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------

Combined Canadian federal and provincial
Statutory income tax rates, including
surtaxes 34.70% 37.62%

Statutory income tax applied to
accounting income 6,948 1,656
Increase (decrease) in income taxes
resulting from
Income tax attributed to the Partners (3,751) (1,060)
Resource allowance deduction (134) 195
Future income tax rate adjustments (1,619) (163)
Other permanent differences 557 238
Large corporations tax - 489
----------- -----------
Total Taxes Attributable to Net Income $ 2,001 $ 1,355
-------------------------------------------------------------------------


10. 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 Spectra Energy Commercial Trust 14,000,000 140,000
----------- -----------
Balance, December 31, 2005 14,000,000 140,000
Issued to Spectra Energy Commercial
Trust (Note 11) 1,400,000 14,000
----------- -----------
Balance, March 31, 2006 15,400,000 154,000
Issued to Spectra Energy Commercial
Trust (Note 11) 8,951,000 103,671
----------- -----------
Balance, December 31, 2006 24,351,000 $ 257,671
----------- -----------
----------- -----------

EXCHANGEABLE LIMITED PARTNERSHIP UNITS
Balance, November 2, 2005 - $ -
Transfer of residual book value to
Exchangeable LP units Upon
acquisition of Spectra Midstream 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 11) - (14,000)
----------- -----------
Balance, December 31, 2006 20,913,750 $ 161,538
----------- -----------
----------- -----------
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11. Related Party Transactions

During 2005, the Partnership through a series of transactions described in Note 1 was formed as part of the formation of the Fund.

On August 8, 2005, per agreement with Spectra Energy Canada Investments L.P. ("SE Canada", formerly DEFS Canada Investments L.P.), accrued interest payable of $47,984 thousand relating to the non-recourse debt to SE Canada, a partnership under the control of Spectra Midstream's parent company, was rolled into the principal balance of the long-term note payable and the note was ultimately transferred to SEMHP (a partnership which became the parent of Spectra Midstream and later the parent of the Partnership) from SE Canada. The notes payable was interest bearing at the Canadian Prime Rate plus fifty basis points per annum, and was a demand note. The principal balance in the amount of $305,611 thousand and related accrued interest of $5,756 thousand were settled for cash of $235,650 thousand and Exchangeable LP units issued to SEMHP pursuant to a purchase and sale agreement dated December 20, 2005.

On January 13, 2006, the Over-Allotment Option was exercised and the proceeds of $14,000 thousand 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 SEMHP 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 $103,671 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, Spectra Midstream 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 Spectra Midstream. Such voting preferred share is redeemable at the option of Spectra Midstream, 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 Spectra Midstream. In the event of liquidation, dissolution or winding up of Spectra Midstream or other distribution of the assets of Spectra Midstream 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
December 31, December 31,
2006 2005
-------------------------------------------------------------------------

Due from affiliates $ 1,360 $ 1,438

Due to affiliates $ 3,692 $ 4,146
-------------------------------------------------------------------------


The Partnership, through its subsidiary Spectra Midstream, provided accounting services in prior years to Gas Supply Resources LLC ("GSRI"), an affiliated company. During the year ended December 31, 2005, the charges totaled $394 thousand. These services are no longer provided. The due from affiliates (GSRI) at December 31, 2005 in the amount of $14 thousand was repaid as of March 31, 2006.

Due from affiliates at December 31, 2006 of $1,360 thousand represents certain costs associated with the acquisition of WGSI due from WEI, as well as fees due from WEI for natural gas processing by the WGSI facilities.

Due from affiliates at December 31, 2005 of $1,424 thousand, due from SEMHP for the reimbursement of certain costs associated with the formation of the Partnership, has been repaid as of June 30, 2006.

Due to affiliates at December 31, 2005 included $3,424 thousand related to reimbursement of costs to 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 Spectra Energy and its affiliated companies. The Partnership receives management, administrative and governance services and pays a base fee and reimburses reasonable direct costs. During the year ended December 31, 2006, the fees were $8,275 thousand (2005 - $nil). At December 31, 2006, $1,388 thousand (December 31, 2005 - $nil) remains outstanding.

The remaining balance Due to 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 year ended December 31, 2006, total charges of $3,978 thousand (2005 - $602) were recognized as part of General and Administrative Expenses. The balance owing for these services at December 31, 2005 has been repaid during the first quarter of 2006.

The Partnership also had transactions with companies related through common or joint control and significantly influenced investees as follows:



-------------------------------------------------------------------------
(in thousands of Canadian dollars) For the period from
September 29 to December 31, 2006
-------------------------------------------------------------------------
Processing Gathering
Fees Fees Operating
Revenue Paid Expenses
Westcoast Energy Inc. $ 2,144 $ 1,177 $ 153
Westcoast Indemnity Co. Ltd. $ - $ - $ 82
-------------------------------------------------------------------------


These transactions are in the normal course of operations and are recorded at exchange amounts established and agreed between the related parties.

12. Supplemental Cash Flow Information

Working capital changes other than cash



-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------

Accounts receivable $ 941 $ (7,164)
Accounts and notes receivable - affiliate 78 -
Prepaid expenses and deposits 238 740
Accounts payable and accrued liabilities (829) (8,170)
Accounts payable - affiliate (2,261) 685
Interest payable - affiliate (36) 13,203
Income and other taxes (58) (406)
Other assets and liabilities
attributable to operating activities (185) (1,442)
----------- -----------
Net working capital changes other than cash $ (2,112) $ (2,554)
-------------------------------------------------------------------------


Interest and Tax Payments



-------------------------------------------------------------------------
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------

Interest paid $ 4,780 $ 111
Income taxes paid $ - $ 954
-------------------------------------------------------------------------


13. Commitments and Contingencies

The Partnership and its subsidiaries, in the course of its operations, are subject to environmental and other claims, lawsuits and contingencies. Accruals are made in instances where it is probable that liabilities will be incurred and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Partnership has no reason to believe that the ultimate outcome of these matters would have a material impact on its financial position, results of operations or cash flows.

The Partnership is committed to the purchase of electricity for its operational facilities in the amount of $2,751 thousand during the fiscal year ended December 31, 2007.

On November 7, 2006, the CT Trustees approved the construction of a sour gas pipeline and a greenfield sour gas processing facility in 2007. Committed costs for these projects will vary over time, but the total estimated costs will be approximately $30 million.

14. Guarantees and Indemnifications

The Partnership's Credit Facility, as described in Note 7, is unsecured and guaranteed by certain partners and subsidiaries of the Partnership.

The Partnership and each of its wholly-owned subsidiaries have entered into various indemnification agreements related to purchase and sale agreements and other types of contractual agreements with vendors and other third parties. These indemnification agreements typically cover environmental, tax, litigation, and other matters, as well as breaches of representations, warranties and covenants set forth in these agreements. Typically, claims may be made by third parties under these indemnification agreements for various period of time depending on the nature of the claim. The maximum potential exposure of the Partnership under these indemnification agreements can range from a specific dollar amount to an unlimited amount depending on the nature of the claim and the particular transaction. The Partnership is unable to estimate the total maximum potential amount of the future payments under these indemnification agreements due to several factors, including uncertainty as to whether claims will be made under these indemnities.

As of December 31, 2006, the Partnership had no material liabilities recorded for the above mentioned guarantees and indemnifications.

15. Subsequent Events

On January 2, 2007, Duke Energy Corporation ("Duke Energy") created two separate publicly traded companies by spinning off Duke Energy's natural gas business to Duke Energy shareholders. The new natural gas company, Spectra Energy Corp., principally consists of Duke Energy's Natural Gas Transmission business segment, which includes WEI, and includes Duke Energy's 50% ownership interest in DCP Midstream (formerly Duke Energy Field Services). As a result of the spin off, several entities within and related to both the Partnership and the Fund, changed their names. The following is a partial list of the name changes:

- Duke Energy Income Fund became Spectra Energy Income Fund

- Duke Energy Facilities LP became Spectra Energy Facilities LP

- Duke Energy Midstream Services Canada Corporation became Spectra Energy Midstream Corporation

- DEGT Midstream Holdings Partnership became Spectra Energy Midstream Holdings Partnership

- Duke Energy Facilities Inc. became Spectra Energy Facilities Inc.

- Duke Energy Facilities Management LP became Spectra Energy Facilities Management LP

- Duke Energy Facilities Management Inc. became Spectra Energy Facilities Management Inc.

- Duke Energy Commercial Trust became Spectra Energy Commercial Trust

- DEFS Canada Investments L.P. became Spectra Energy Canada Investments L.P.

Contact Information

  • Spectra Energy
    Bob Bissett
    Director, Business Development and Investor Relations
    (403) 705-2008 or (713) 627-4747 (24-hour media line)
    Website: www.spectraenergyfund.com