Gaz Metro Inc. Table Of Contents. Major Rating Factors' Business. Description Strong Business Risk Profile Intermediate Financial Risk Profile

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1 Société en commandite Gaz Métro Cause tarifaire 2009, R Gaz Metro Inc. ~rimary redit Analyst: Bato Kacarevic,.Toronto (1) ; Secondary.Credit Analyst: Nicole Martin, Toronto (1) ; Table Of Contents Major Rating Factors' Business. Description Strong Business Risk Profile Intermediate Financial Risk Profile Original : Standard & Poor's. All rights reserved. No reprint or dissemination witliout S&P?s permission. See Terms of Gaz Métro - 8, Document 11 UseIDisclaimer on the last page. (12 pages)

2 Major Kating Factors Strengths: Strong core gas distribution and transportation businesses * Stable financial performance and predictable cash flows Supportive regulatory regime Weaknesses: * Low residential customer penetration rate Reliance on industrial customers, resulting in greater cyclicality RationaBe The ratings on Gaz Metro Inc. (GMI) and Gaz Metro L.P. (GMLP or the trust) reflect the company's prudent management of its operations and balance sheet, its measured Pace of investment in other energy sectors, its stabilized credit metrics, a reasonable 2008 rate case decision, and the expected equity issue in The ratings also reflect the Province of Quebec's (A+/Positive/A-1) supportive regulation, moderate operational risk of GMI's key gas distribution business in Quebec, and consistent financial performance. Counterbalancing these positive elements are natural gas' relatively low market penetration in Quebec compared with that of electricity; and significant exposure to the industrial sector, where cash flows tend to be cyclical. The ratings also factor in the trust's strategy to diversify incrementally into other energy enterprises. The ratings of the parent company (GMI) and the operating company (GMLP) are equalized based on the unconditional debt guarantee from GMLP to GMI, investment activity restrictions at GMI, and GMLP's dominant position in the parent's business operations. GMI is the general partner of and holds a 71% interest in GMLP, the company's main asset and a Montreal-based partnership. GMI's business diversification is moderate, and cash flows are stable through the trust's interests of regulated gas and electricity distribution, and gas transportation and gas storage assets. Gas distribution assets in Quebec, which represent the vast majority of earnings, drive operating performance. GMLP's total debt outstanding at fiscal year-end Sept. 30,2007, was approximately C$1.7 billion. Standard & Poor's treats the parent company's approximately C$708 million of subordinated debentures as equity. Supportive regulation in Quebec underpins the gas distribution business' strong market position. The regulator determines the allowed return on capital that GMLP can generate for the delivery of natural gas. Commodity exposure is negligible, as natural gas commodity costs are entirely passed on to customers, thus reducing the adverse effects of price volatility. In addition, GMLP benefits from a performance-based regulatory arrangement with incentives. For 2008, the regulator accepted most of GMLP's proposals. As a result, the allowed return on equity (ROE) is 9.52%, composed of a base rate of return of 9.05% (higher than 2007 levels) and an incentive of 0.47% as a share of anticipated productivity gains. The regulator's assessment of the trust's business rislc is a key element of the base rate. Incentive returns have the potential to mitigate decreases in base rates of return that are linlted. to lower government bond yields. Standard & Poor's Ratings Services views the trust's natural gas distribution and transmission businesses as low 1 Standard & Poor's ~atin~s~irect 1 February 20,2008 Standard & Poor's. All rights resewed. No reprint or dissemination without S&P?s permission. SeeTens of Use/Disclaimer on the last page

3 risk. Nevertheless, GMI's recent shift in strategy to develop a more diversified energy services platform, including increased nonregulated services, could worsen its business risk profile. GMI appears to be diversifying at a modest rate; therefore, a ratings impact is unlilcely unless a material change in strategy occurs. Moreover, through its Limited Partnership Agreement and trust deed governing first-mortgage bonds, GMLP's investment in unregulated energy activity is limited to 10% of its aggregate assets. The 2007 acquisition of Green Mountain Power Corp. (GMP; BBBIStablel--) in Vermont illustrates this strategy and malces strategic sense. Other projects of interest to GMI include a proposed liquefied natural gas terminal and a proposed partnership to develop wind generation assets in Quebec. Accompanying any large-scale expansion projects are potential regulatory, construction, cornrnodity, and financing risks. GMI has an intermediate financial rislc profile, which is largely indicative of its highly leveraged balance sheet (60% debt to total capital) and low authorized rates of return compared with those of U.S: peers. Regulated assumptions and a deemed capital structure set rates. Debt levels increased materially in 2007 to finance the GMP acquisition. Influencing solid EBITDA performance in 2007 was increased volume in the industrial customers and more than 5,000 new residential customers. Cash flow generation will be more than adequate to finance al1 capital expenditures in GMLP's policy of distributing 95%-100% of its earnings to unitholders continues to constrain its financial flexibility. Nevertheless; the trust's capital market access remains intact and it plans to issue equity in 2008 to improve its capital structure. Despite its monopolistic-like position in the natural gas marlcet in Quebec, GMI must contend with low natural gas marlcet penetration in the province's energy marlcet. The penetration is appro~imately one-half the national average, due to highly competitive electricity rates. Consequently, GMI has a low penetration rate in the residential energy market, which undermines profitability due to high margins in this segment. In addition, the company has a large industrial customer base that faces economic fluctuations and results in less predictable cash flows. Quebec's economy is somewhat cyclical, given its significant manufacturing base. GMLP's key subsidiaries posted mixed performance in fiscal 2007, but they are mostly regulated entities with robust market positions. The trust's marketing strategy has increasingly focused on bolstering its position in the residential energy market. This strategy, which emphasizes the benefits of natural gas as an energy source along with more competitive gas prices, has gained some traction. Higher residential market penetration would improve operating margins and earnings stability, thus resulting in more predictable cash flows. Liquidity Standard & Poor's considers GMI's liquidity to be adequate. Organically geierated cash flow and accéss to credit facilities should provide sufficient funds to support capex, variable working capital requirements, and meet 2008 debt maturities. Cash flows should also be sufficient to meet the company's 2008 capital spending of approximately C$140-C$UO million (per Standard & Poor's estimates). GMI's various credit facilities and lines of credit, totaling nearly C$790 million at Sept. 30,2007, enhance liquidity. At Sept. 30,2007, the company had approximately C$300 million outstanding on these facilities. In addition, GMI's debt maturity schedule is laddered, and despite nearly C$5OO maturing during the next several years, debt maturities are manageable. The company is complying with al1 of the financial tests and covenants contained in its credit facilities. The commercial paper program is adequate when factoring in normal seasonal fluctuations resulting from building gas inventories in the surnrner and fa11 to meet winter demand. Standard & Poor's. All rights rese~ed. No reprint or dissemination without S&P?s permission. See Terms of Use/Disclaimer on the last page.

4 Gaz Metro 1kc. Recovery analysis The rating on GMI's first mortgage bonds is 'A', with a recovery rating of '1+', indicating a high expectation of full recovery (100%) in the event of a default. The secured debt at GMI is rated one notch higher than the corporate credit rating due to the amount of collateral securing the debt. The company's first mortgage bonds are secured under a trust deed that contains a hypothec on the universality of GMI's Quebec movable and immovable property, current and future. The creditors are also covered by a first immovable hypothec on GMLP's present and future pipelines and gas distribution system. The first mortgage bonds comprise nine individual debt issues, with maturities ranging from 2009 to 2036 (on a fiscal-year basis). Standard & Poor's believes that if GMI were to default, it would continue to operate as part of a reorganized entity because of the essential service nature of its business. The single most important factor in determining a utility's asset value upon emergence from bankruptcy is the revenue stream that regulators allow it to collect. In GMI's case, there is a high correlation between the value of the regulated rate base and the book value of the assets. Therefore, absent extenuating circumstances, we will assume that the book value of the assets represents a fair value for the assets. The recovery estimate compares the level of collateral to the potential amount of secured debt. Outlook The stable outloolc reflects the regulated aspect of GMI's operations, the dominant market position of most of its major businesses, and the trust's disciplined approach to managing its operations and financial position. The GMP acquisition has slightly weakened GMI's consolidated business risk and financial risk profiles, but offsetting this is the trust's solid operating performance and limitations of engaging in unregulated businesses. A negative ratings action is possible if GMI pursues large debt-financed acquisitions outside of its core cornpetencies, or its financial risk profile deteriorates. Conversely, a positive ratings action is not likely at this time, given the trust's energy diversification strategy and volatility of cash flow from the industrial customers in gas distribution. Busbess Description Standard & Poor's RatingsDirect 1 February 20,2008 Standard & Poor's. All rights reserved. No reprint or dissemination without S&P?s permission. See Terms of Use/Disclaimer on the last page.

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6 GMI's core business is the regulated distribution, transportation, and storage of natural gas in Quebec and Vermont. Overall, GMI has more than 200,000 customers and operates greater than 10,000 lcilometers of pipeline. In 2007 (approximately), 86% of GMLP's EBITDA and 80% of its assets came from gas distribution. As a result, the distribution segment's performance is critical to the ratings. In 2007, GMI acquired GMP, the second largest electricity distributor in Vermont, expanding its presence in the U.S. The trust is also involved in the transportation of natural gas through its 50% interest in Canada-based Trans Quebec & Maritimes Pipeline Inc. (TQM; BBB+/Stable/--), its 38.3% interest in Portland Natural Gas Transmission System (PNGTS), and the activities of the Champion Pipe Line Corp. Ltd. subsidiary. GMI also has interests in several small, nonregulated companies. On a consolidated basis, the contribution to revenues from nonregulated assets is approximately 4.5% at fiscal year-end 2007, and is not a material ratings factor. 1 Stroi~g Business Risk l[psofile Canadian regulatory fiamework has unique features. The Regie de l'energie (in.quebec) and the National Energy Board regulate GMI's Canadian operations. The regulation for the Quebec distribution assets is sirnilar compared with regulation in other provinces. Performance-based regulation limits any downside risk to a cost-of-service and rate-of-return method. In 2007, the total authorized ROE was 9.57% (9.91% was achieved), and it is 9.52% for Although the base rate is fixed, productivity gains allow GMLP to potentially earn up to 375 basis points higher than the base rate of return. Similar to other Canadian regulatory jurisdictions, the Company is insulated from commodity price risk, directly flowing these costs through to distribution customers. Quebec regulation also allows for a weather-normalization and as of Oct. 1,2007, wind normalization, deferral account. Rates are calculated on normal weather and wind velocity (30-year average); any variation is deferred through a normalized account and collected through rate adjustments in a five-year period. Interest-rate risk is also not a concern, because GMLP can defer any variation in floating interest rates through a normalization account. Unique to the regulatory environment in Quebec (for gas distribution assets) in Canada, the distribution operations are allowed to generate and have earned incentive earnings greater than the regulated base ROE. For the 2007 fiscal year, the allowed ROE was 9.57%, composed of a base return of 8.73% and an incentive of 0.84% as a share of expected productivity gains. The U.S. operations, which expanded considerably with the GMP acquisition, are subject to Federal Energy Regulatory Commission and the Vermont Public Service Board. In Standard & Poor's view, the regulatory framework for gas distribution in Vermont is not as favorable as that of Quebec, despite recent revisions. At Vermont Gas Systems Inc. (VGS), a new regulatory framework was adopted Oct. 1, It includes an adjustment mechanism for the price of gas sold to customers that reflects its acquisition cost and a mechanism where productivity gains can be shared. VGS is no longer exposed to commodity cost risk. Also, GMP's business risk is reduced with a price adjustment mechanism for electricity sold to customers. Market position depends heavily on the industrial customer base GMI's market position is weaker than that of other gas distribution companies in Canada. Due to a relatively higher concentration of customers within the industrial sector, operating results are more vulnerable to throughput changes due to price volatility of natural gas and econornic cyclicality. Furthermore, industrial customers have lower margins than residential customers. Residential customers account for a small portion of GMI's business mix, which is a Standard & Poor's RatingSDirect 1 February 20, Standard & Poor's. Ali rights reserved. No reprint or dissemination without S&P?s permission. See Terms of Use/Disclaimer on the last page. 6.a~ 1 :,r:<i>$.157

7 1 1 Gaz Metro Inc., competitive disadvantage. In 2007, approximately 60% of throughput volumes were industrial-based, of which about 12% had dual-fuel capabilities, approximately 30% came from commercial customers, and about 10% from residential customers. Standard & Poor's expects that the business mix will remain fairly stable in the 1 near-to-medium term. 1 The industrial customer base is well-diversified, which tempers the division's concentration and volatility. According to Standard & Poor's estimates, the highest concentrations of total volume are in the metallurgical sector. The pulp and paper sector, which once captured a considerable proportion of total volumes, has decreased significantly. Heavy reliance on industrial customers exposes GMI to economic slowdowns and cyclical commodity prices,.which can depress distribution revenue due to lower volume. As a result, GMI is focusing more marketing on developing its residential customer base to bolster operating stability and margins. Regulatory environment reduces operating risks Regulation protects the Company from the financial consequences of many operating rislts. Commodity prices do I not present a risk to cash flow because regulation allows the flow through of these costs in a tirnely manner through an automatic monthly adjustment mechanism. Because new home development represents a large Portion of 1 customer growth, the Quebec-based distribution assets are fairly new and efficient. Furthermore, GMI's interest in I natural gas storage facilities has strategic advantages, as it ensures that there are natural gas reserves and secures a short-to-medium-term natural gas supply. GMI has a low penetration rate on high-margin residential customers, which constrains increased economies of scale. and margin expansion potential. Consequently, the company's operating statistics, on a per customer basis, do not 1 compare favorably with those of other Canadian gas distributors such as Enbridge Gas Distribution Inc. (A-/Stable/--), Union Gas Ltd. (BBB/Positive/--), or Terasen Gas Inc. (BBBAVatch Negl--). The National Energy Board regulates the trust's 50% interest in Trans Quebec & Maritimes Pipeline Inc. (TQM; BBB+/Stable/--), a gas transportation pipeline in Quebec. This represents a substantial investment and operating risks are rnitigated by the existing long-term take-or-pay contract the pipeline has with its other joint owner, TransCanada PipeLines Ltd. (TCPL; A-Negativel--). Tolls are based on a cost-of-service approach, thus providing earnings stability. Volatile prices and fickle customers could mean a cornpetitive landscape A shifting energy landscape, price volatility, and growing energy needs could increase competition in the natural gas industry. GMLP's residential penetration rate in Quebec is quite low, at approximately 19%, despite delivering about 97% of the natural gas consumed in Quebec. For years, the Quebec government promoted cheap electricity through provincially owned Hydra-Quebec. Natural gas market penetration for Quebec is just 16%, according to Standard & Poor's estimates, which is low compared with that of neighboring Ontario and the national average of about 35%. We view tliis as a good market opportunity for GMLP, because there is growth potential inherent in new home construction and natural gas use in appliances. As such, this is a strategic imperative for the trust. Nevertheless, convincing non-gas consumers to switch, given the upfront conversion costs, will be challenging. Price volatility in energy markets, combined with the flexibility of large customers to switch energy sources, underpin more competitive market conditions wliere customers increasingly seek alternative energy sources in times of high energy prices. 1 Vermont Gas Systems Inc. is the sole gas distributor in Vermont, where natural gas continues to enjoy a price 1 advantage over electricity. Standard & Poor's expects additional customer growth will continue at the historical rate Standard & Poor's. All rights reserved. No reprint or dissemination without S&P?s permission. See Terms of Use/Disclaimer on the last page.

8 of 1%-2% in the near-to-medium term. In GMLP's transportation segment, the TQM pipeline is an extension of the TCPL system. TQM's low business rislz is due to its monopolistic position where there are no other means of transporting natural gas into Quebec. Nevertheless, the volumes that pass though TQM, where the pipeline interconnects with PNGTS, face more competition from primarily the Maritimes & Northeast Pipeline system, which transports offshore Canadian gas into the northeastern U.S. Profitability reflects customer consumption and new energy streams Because GMI is mostly a regulated business, its profitability is not expected to fluctuate materially, on a ROE basis. The most meaningful contributor to the trust's net income is its gas distribution business in Quebec, which for 2008 has an authorized rate of return of 9.52%, including anticipated productivity gains of 0.47%. Nonetheless, profitability growth has been inhibited by decreased energy consumption from residential customers, despite adding new customers. In our view, earnings could improve moderately based on several factors including: productivity improvements, organic growth opportunities, and green-field development projects. Conservation and renewable energy trends provide a back-drop for new energy streams such as liquefied natural gas and wind power. 1ntem.ediate FPn.ancial Risk Profile Accounting GMI reports its financial statements in accordance with Canadian GAAP. Standard & Poor's makes adjustments to GMI's financial risk profile to reflect the financial risk the company faces. Debt adjustments are made for accounts receivable sold and pension liabilities. Furthermore, the gross interest figure is adjusted to account for allowance for funds used during construction. The effect of these adjustments on overall financial metrics is immaterial. Expanded mission statement could increase risk GMI's expanded mission statement to dedicate more resources for business development outside of its core gas distribution business heightens the trust's risk profile to some extent. Although the diversification benefits are evident, cash flows could have greater uncertainty. Nevertheless, management's growth policy remains somewhat conservative, as strategic fit remains a key criterion for growth initiatives. While the Regie largely influences GMLP's modest financial risk profile, the trust has historically maintained fairly conservative financial policies for its nonregulated businesses. Standard & Poor's expects the company's financial policies, which include risk-management programs for interest rates and foreign exchange, will remain in effect in the medium-to-long term. Involvement in nonregulated energy activities is limited to 10% of GMLP non-consolidated assets by the trust deed governing first-mortgage bonds and by the partnership agreement, and GMLP cannot issue, assume, or guarantee long-term debtif the total long-term debt, after giving effect to suc11 issuer assumptions or guarantees, exceeds 65% of its nonconsolidated total capitalization. Baseline level of stable cas11 flow expected to continue GMI's cash flow protection measures have been stable in recent years and currently are satisfactory for the ratings. Despite fluctuating gas prices and the economy's impact on volume, the company has demonstrated relatively stable cash flow generation. Regulation of most of the trust's revenues reinforces cash flow stability and limits downside risks. In Standard & Poor's view, the trust will continue to generate a stable baseline level of cash flows. Standard & Poor's RatingsDirect 1. February 20,2008 Standard & Poor's. All rights rese~ed. No reprint or dissemination without S&P?s permission. See Terms of Use/Disclaimer on the last page.

9 However, because the trust distributes nearly al1 free cash flow to unitholders, it could have to increase debt on an incremental basis to finance growth projects or acquisitions. This could result weaker cash flow coverage metrics in the interim until such projects are in-service and accretive to cash flow. Capital structure and asset protection remain stable thanks to regulatory guidelines Standard & Poor's believes that GMI's capital structure will remain stable in the long term, given the regulatory directives it is subject to. In addition, an acceptable balance sheet must be maintained because of the capital intensive nature of the business. Regulatory guidelines largely dictate balance-sheet leverage; the guidelines stipulate a 38:5% (for Quebec distribution activity) deemed cornmon equity capital component and a 7.5% deemed preferred equity component. There is no incentive to diverge from these directives as excess equity generates a lower return than the approved ROE, while successfully operating with less than the deemed equity might signal that the allowed equity return is too generous. GMLP's commitment to pay out 95%-100% of earnings to unitholders limits its financial flexibility somewhat. Although the distribution policy is not fixed, management would be reluctant to curtail cash distributions to unitholders. Table 1 Industry sector: Gas --Average of past three fiscal years-- (Mil. C$) Gaz Metro Inc. Enbridge Gas Distribution Inc. Terasen Gas Inc. Union Gas Ltd. 'Ratinq as of Feb. 14,2008 A-/Sta blet-- A:/Stable/-- A/Stable/-- BBBt/Stable/A-2 Revenues , , ,001.3 Net income from continuing operations Funds from operations (FFO) Capital expenditures 151.O ^ Debt 1, , , ,227.3 Eauitv , ,088.4 Adjusted ratios Operatinq income (before D&A)/revenues (%) EBlT interest coverage (x) EBITDA interest coverage (x) Return on capital(%) "Fully adjusted (including postretirernent obligations). D&A--Depreciation and arnortization. Table 2 lndustry sector: Gas --Fiscal year ended Sept (Mil. C$) Rating history A-/Negative/-- A-/Negative/-- A-/Stable/-- A-/Stable/-- A-/Stable/-- Revenues 1, , , , , Standard & Poor's. All rights resewed. NO reprint or dissemination without S&P?s permission. See Ternis of Use/Disclaimer on the last page.

10 Table 2 Net income from continuing operations Funds from operations (FFO) Capital expenditures, Cash and investments Debt 1, , , , ,339.3 Equity Debt and equity 2, , , , ,095.0 Adjusted ratios EBlT interest coverage (x) FFO interest coveraqe (x) FFOIdebt (%) Discretionary cash flowldebt (%) Net'cash flow/caciex i%) Debtldebt and equity (%) Debtldebt and equity (%)y Return on comrnon eauitv (%) "Fully consolidated & adlusted (including postretirement obligations) We treated subordinated debt as equity, and adjusted interest expense on subordinated debt as dividends ncomplementary ratios for Gaz Metro L P Table 3 --Fiscal year ended Sept. 30,2007- Gaz Metro Inc. Operating Operating Operating reported income income income Cash flow Cash flow amounts (mil. Shareholders' (before (before (after lnterest from from Dividends Cs) Debt equity D&A) D&A) D&A) expense operations operations paid Reported 2, Standard & Poor's adjustments Equity-like (707.8) NIA NIA NIA (62.5) hybrids Postretirement 57.2 (80.5) NIA NIA benefit obligations Reclassification NIA NIA NIA NIA 7.5 NIA NIA NIA NIA of nonoperating lncome (expenses) Reclassificatiop NIA N/A NIA NIA NIA NIA (4.0) (4.0) NIA of interest, dividend, and tax cash flows Reclassification NIA NIA NIA ' NIA NIA NIA NIA (49.7) NIA of working-capital cash flow changes Total (650.6) (62.5) adiustments Standard & Poor's RatingsDirect 1 February 20,2008 Standard & Poor's. All rights rese~ed. No reprint or dissemination without S&P?s permission. See Terms of UseIDisclairner on tlie last page.

11 , 1 Table 3 Operating Standard & incorne Cash flow Poor's adjusted (before lnterest from Fundsfrom. Dividends amounts Debt Equity D&A) EBITDA EBIT expense operations operations paid Adjusted 1, "Gaz Metro Inc. reported amounts shown are taken from the company's financial statements but might include adjustments made by data providers or reclassifications made by Standard & Poor's analysts. Please note thattwo reported amounts (operating income before D&A and cash flow from operations] are used to derive more than one Standard & Poor's-adjusted amount (operating income before D&A and EBITDA, and cash flow from operations and funds from operations, respectively). Consequently, the first section in some tables may feature duplicate descriptions and amounts. D&A--Depreciation and amortization. NIA--Not applicable. "Unless otherwise noted, al1 ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Standard & Poor's. All rights reserved. No reprint or dissemination without s&p?~ permission. See Terms of UseIDisclairner on the las1 page.

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