THIRD QUARTER. Interim Report to Shareholders For the nine months ending September 30, Stability. matters

Transcription

1 THIRD QUARTER Interim Report to Shareholders For the nine months ending 2012 Stability matters ENBRIDGE INCOME FUND HOLDINGS INC. (ENF)

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3 NEWS RELEASE Enbridge Income Fund Holdings Inc. Announces Third Quarter Results HIGHLIGHTS Third quarter earnings totaled $14.6 million ($0.37 per common share); year-to-date earnings were $43.2 million ($1.09 per common share). The Fund s third quarter earnings were $12.3 million; year-to-date earnings were $46.1 million. The Fund s cash available for distribution (CAFD) for the three and nine months ended September 30, 2012 was $43.3 million and $151.8 million, respectively. The Company and the Fund announced execution of an agreement to purchase crude oil storage facilities and renewable power generation facilities from Enbridge Inc. for an aggregate value of $1.164 billion subject to approval by shareholders. Alliance Canada announced proposed new services and toll structures to support post-2015 recontracting. The Company declared a monthly dividend of $0.103 per common share to be paid on November 15, 2012 to shareholders of record on October 31, CALGARY, ALBERTA, October 25, 2012 Enbridge Income Fund Holdings Inc. (TSX: ENF) (ENF or the Company) announced today earnings of $14.6 million and $43.2 million, for the three and nine months ended 2012, respectively, reflecting the performance of its investment in Enbridge Income Fund (the Fund). The Company s financial performance is a direct reflection of the Fund s ability to generate cash for distribution to its unitholders. The Fund s cash available for distribution (CAFD) totaled $151.8 million for the nine months ended 2012, an increase of 81% compared with the same period of The improvement in the Fund s CAFD reflected contributions from the 190-megawatt (MW) Ontario Wind Project, 99-MW Talbot Wind Project and 80-MW Sarnia Solar Project (the Renewable Assets) which were acquired in October of The Company has delivered another quarter of solid financial performance, said John Whelen, President, Enbridge Income Fund Holdings Inc. Our renewable power generation facilities continue to experience high operational availability and were a strong contributor of earnings and distributable cash flow during the quarter. Our Gas Transmission and Liquids Transportation businesses also continued to generate steady and predictable financial results. We also advanced a number of commercial and strategic initiatives. In our Liquids Transportation business, the Bakken Expansion Program is under construction and is on track to be completed and inservice in the first quarter of In our Green Power business, the Whitecourt Recovered Energy Project, which is being undertaken by our 50% owned affiliate NRGreen, is also under construction and is expected to commence operations in the third quarter of next year. THIRD QUARTER REPORT 1

4 There were also developments in the Gas Transmission business, continued Mr. Whelen. Alliance Canada has announced a proposed new service model and toll structure that would apply to the pipeline system after existing firm service contracts expire in We believe that this new service offering, together with Alliance s inherent advantages in transporting liquids rich gas, will be very appealing to both existing and prospective shippers. The Company and the Fund also announced today in a separate news release the execution of an agreement to acquire crude oil storage facilities and additional renewable power generation assets from subsidiaries of Enbridge Inc. for an aggregate price of $1.164 billion (the Transaction). Completion of the Transaction is subject to shareholder approval, closing of related financing and receipt of regulatory and third party approvals. In connection with the Transaction, the Company also entered into an agreement with a syndicate of investment dealers for the sale of 9,597,000 million subscription receipts at a price of $23.15 per subscription receipt for total proceeds of $222.2 million. The subscription receipts will convert to common shares of the Company upon the Transaction receiving required shareholder approvals and satisfaction of other conditions. Please see the news release filed today on SEDAR under the caption Enbridge Income Fund to Acquire $1.164 billion of Crude Oil Storage and Renewable Power Generations Assets from Enbridge Inc. for more information. The prospect of acquiring this portfolio of assets is exciting, noted Mr. Whelen. We believe that these facilities which are all underpinned by long-term, fixed price contracts would be a great fit for the Fund. If approved by shareholders, this transaction would further diversify the Fund s business mix further reinforcing its value to investors seeking a steady and predictable payout of cash flow from low-risk energy infrastructure assets, concluded Mr. Whelen. THIRD QUARTER 2012 REVIEW The unaudited interim financial statements and Management s Discussion and Analysis (MD&A) of both ENF and the Fund, which contain additional notes and disclosures, are available on the Company s website at The Company s earnings for the three and nine months ended 2012 were $14.6 million ($0.37 per common share) and $43.2 million ($1.09 per common share), respectively, compared with $6.8 million ($0.27 per common share) and $20.5 million ($0.82 per common share) for the three and nine months ended The earnings increase is attributable to increased ownership in the Fund and an increase in per unit distributions received on such investment, as well as a reduction in income tax expense. During the first nine months of 2012, the Company owned 80.7% of the Fund s issued and outstanding trust units (which represented a 30.8% overall economic interest in the Fund, with the balance held by Enbridge Inc.) and received distributions of $0.121 per unit per month whereas during the nine months ended 2011 the Company owned 72.6% of the Fund s trust units (27.7% economic interest) and received distributions equivalent to $0.115 per unit per month. The Fund s cash available for distribution (CAFD) increased 61% and 81% to $43.3 million and $151.8 million for the three and nine months ended 2012, respectively, as a result of cash contributions from the Renewable Assets which were acquired in October The Renewable Assets benefited from high operational availability and strong wind and solar resource during the nine months ended The Fund s liquids transportation and natural gas transmission assets continued to deliver steady cash flows in the first nine months of CAFD generated by the Saskatchewan System ($55.7 million) and Alliance Canada ($54.4 million) was comparable with the first nine months of the prior year. The Fund s earnings for the three and nine months ended 2012 were $12.3 million and $46.1 million, respectively, compared with $20.3 million and $75.7 million in the prior year comparative periods. Earnings for the first nine months of 2012 included contributions from the Renewable Assets net of an increase in financing costs as a portion of the Renewable Asset acquisition was debt financed. Prior period earnings were retrospectively adjusted to present Renewable Asset earnings from January 1, 2011 (as mandated by common control guidance); THIRD QUARTER REPORT 2

5 however, such retrospective adjustments were exclusive of associated financing costs. Non-cash deferred income tax expense also increased as a result of increased earnings within the Fund s subsidiary corporations. The Bakken Expansion Program is currently under construction and on track to be in-service in the first quarter of The Program is being undertaken jointly with the Fund s affiliate Enbridge Energy Partners. Total expenditures to date on the Fund s share of the project were $99 million at On October 25, 2012, the Fund entered into an agreement to acquire contracted crude oil storage facilities and renewable power generation facilities owned by direct and indirect subsidiaries of Enbridge, a related party, for an aggregate value of $1.164 billion (the Transaction ). The crude oil storage facilities, which consist of the Hardisty Contract Terminals and Hardisty Storage Caverns in Alberta, provide approximately 11 million barrels of crude oil storage capacity at the Hardisty crude oil pipeline hub. The crude oil storage facilities are currently operating under long term take-or-pay storage contracts with remaining terms averaging 22 years. The renewable power generation facilities are located in Ontario and consist of 100% interests in the 99-megawatt (MW) Greenwich Wind Project, 15-MW Amherstburg Solar Project and 5-MW Tilbury Solar Project. The renewable power generation facilities are supported by fixed price power purchase agreements with the Ontario Power Authority with remaining terms exceeding 18 years. Enbridge, through its affiliates, will continue to manage the crude oil storage facilities and renewable power generation facilities pursuant to management and administrative agreements. The Transaction is subject to approval by shareholders, completion of related financing by the Company and the Fund and receipt of regulatory and third party approvals. On October 10, 2012, Alliance Canada announced a proposed new service model and toll structure that would apply to the pipeline system when the bulk of existing firm service contracts expire in December The new service offering provides shippers with choices that include new zonal and full path transportation services, fixed or index-based tolls and a range of contract terms. It builds on Alliance s unique capabilities to cost efficiently transport high-energy natural gas. Discussions with existing and prospective shippers are ongoing and an open season for the capacity that will come free in late 2015 is expected to be held in The proposals will be subject to commitments by shippers and approval by regulators. The Company s Board of Directors declared and paid dividends of $0.103 per common share for each month of the nine month period ended In addition, a monthly dividend of $0.103 per common share was declared on October 15, 2012 to be paid on November 15, 2012 to shareholders of record at the close of business on October 31, THIRD QUARTER REPORT 3

6 SELECTED FINANCIAL AND OPERATING HIGHLIGHTS ENBRIDGE INCOME FUND HOLDINGS INC. Three months ended Nine months ended (millions of Canadian dollars, except share and per share amounts) Earnings Earnings per common share, basic and diluted $0.37 $0.27 $1.09 $0.82 Cash provided by operating activities Dividends declared Dividends per common share $0.309 $0.288 $0.927 $0.864 Number of common shares outstanding 39,741,000 25,125,000 ENBRIDGE INCOME FUND 1 Three months ended Nine months ended (millions of Canadian dollars, except unit and per unit amounts) Earnings Green Power Saskatchewan System Alliance Canada Corporate (26.1) (18.6) (86.2) (50.5) Cash available for distribution 2 Green Power Saskatchewan System Alliance Canada Corporate (18.2) (12.1) (53.2) (31.8) Cash provided by operating activities Cash distributions declared Distributions per trust unit and ECT preferred unit $0.362 $0.346 $1.086 $1.038 Number of units outstanding ECT preferred units 54,074,750 38,023,750 Trust units 49,241,000 34,625,000 Operating Results Green Power (thousands of megawatt hours produced) Ontario Wind Project Talbot Wind Project Sarnia Solar Project NRGreen Wind Power Joint Ventures Saskatchewan System (thousands of barrels per day) Westspur System Saskatchewan Gathering System Weyburn System Virden System Alliance Canada (millions of cubic feet per day) 1, , , , Financial Highlights for Enbridge Income Fund have been extracted from financial statements prepared in accordance with United States generally accepted accounting principles. 2 See Non-GAAP Measures. 3 Green Power earnings and power production for all 2011 periods have been retrospectively adjusted to furnish comparative information related to the October 2011 acquisition of the Renewable Assets. The impact of the retrospective adjustments has been eliminated from CAFD as these cash flows were not available to distribute to unitholders. 4 Wind Power Joint Ventures is comprised of the Fund s interest in the Sunbridge, Magrath and Chin Chute wind projects. THIRD QUARTER REPORT 4

7 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 This Management s Discussion and Analysis (MD&A) for Enbridge Income Fund Holdings Inc. (ENF or the Company) should be read in conjunction with the unaudited interim financial statements and notes thereto of ENF as at and for the three and nine months ended 2012 and the audited financial statements and notes thereto contained in ENF s 2011 Annual Report. ENF prepared its financial statements for the three and nine months ended 2012 and the year ended December 31, 2011 in accordance with International Financial Reporting Standards (IFRS). All financial measures presented in this MD&A are expressed in Canadian dollars, unless otherwise indicated. Additional information, including the Company s Annual Information Form, is available on SEDAR at This MD&A is dated October 25, OVERVIEW ENF is a publicly traded corporation whose common shares trade on the Toronto Stock Exchange under the symbol ENF. The Company s business is limited to ownership of its interest in Enbridge Income Fund (the Fund) and its objective is to pay out a high proportion of available cash in the form of dividends to shareholders. At 2012, ENF held 80.7% ( %) of the Fund s issued and outstanding trust units, representing a 30.8% ( %) overall economic interest in the Fund, with the balance held by Enbridge Inc. (Enbridge). The Fund is involved in the generation and transportation of energy through interests in more than 400 megawatts (MW) of renewable and alternative power generation capacity (Green Power), its crude oil and liquids pipelines business in Saskatchewan (Saskatchewan System) and its 50% interest in the Canadian segment of Alliance Pipeline (Alliance Canada). The Company is managed by Enbridge Management Services Inc. (EMSI or the Manager), a whollyowned subsidiary of Enbridge. EMSI also manages the Fund and the Fund s subsidiary Enbridge Commercial Trust (ECT). ENF Financial Performance Three months ended Nine months ended (thousands of Canadian dollars, except per share amounts) Distribution and other income 14,434 8,702 43,224 26,088 Earnings 14,638 6,846 43,237 20,526 Earnings per common share, basic and diluted $0.37 $0.27 $1.09 $0.82 Cash flows from operating activities 13,526 14,459 39,096 23,154 Dividends declared 12,280 7,236 36,840 21,708 Dividends per common share $0.309 $0.288 $0.927 $0.864 Number of common shares outstanding 1 39,741,000 25,125,000 39,741,000 25,125,000 1 As at 2012 and The Company s earnings and cash flows are derived from its investment in the Fund and are dependent upon its ownership interest, the level of cash distributions paid by the Fund and income taxes. During the first nine months of 2012, the Company owned 80.7% of the Fund s issued and outstanding trust units and received distributions on such trust units of $0.121 per unit per month whereas the Company owned 72.6% of the Fund s trust units and received distributions equivalent to $0.115 per unit per month during the first, second and third quarters of The Company s increased investment in the Fund occurred in connection with the Fund s acquisition of a portfolio of wind and solar generation facilities and associated equity offerings in October The assets acquired included the 190-MW THIRD QUARTER REPORT 5

8 Ontario Wind Project, the 99-MW Talbot Wind Project and the 80-MW Sarnia Solar Project (the Renewable Assets). The contribution of incremental cash flows from the Renewable Assets enabled the Fund to increase its distribution to $0.121 per unit per month effective with the November 2011 distribution. The Company s cash flows from operating activities for the first nine months of 2012 reflected distributions received from the Fund less cash income taxes paid related to 2011 earnings and 2012 instalments. The Company s objective is to pay out a high proportion of available cash in the form of dividends to shareholders. The Company declared dividends of $0.103 per common share each month for the nine months ended 2012, a total of $36.8 million. Enbridge Income Fund Financial Performance A summary of financial information of the Company s investee, Enbridge Income Fund, derived from the Fund s consolidated financial statements prepared in accordance with U.S GAAP, for the three and nine months ended 2012 and 2011 is provided below. Readers are encouraged to read the Fund s financial statements and MD&A which are filed on SEDAR at Three months ended Nine months ended (thousands of Canadian dollars) Cash available for distribution, Enbridge Income Fund 1 Green Power 25, ,927 3,302 Saskatchewan System 17,480 21,117 55,664 58,007 Alliance Canada 18,398 17,335 54,408 54,405 Corporate (18,215) (12,103) (53,197) (31,803) Cash available for distribution, Enbridge Income Fund 43,304 26, ,802 83,911 ECT preferred unit distributions (19,576) (13,156) (58,726) (39,468) Cash retained (5,902) (1,780) (39,599) (8,500) Cash distributions declared to trust unitholders by Enbridge Income Fund 17,826 11,980 53,477 35,943 Percentage of units held by ENF 80.7% 72.6% 80.7% 72.6% Distribution income, ENF 14,389 8,693 43,160 26,080 Other income Income tax 204 (1,856) 13 (5,562) Earnings, ENF 14,638 6,846 43,237 20,526 1 See non-gaap measures. Cash available for distribution (CAFD) for the three and nine months ended 2012 reflected contributions from the 190-MW Ontario Wind Project, 99-MW Talbot Wind Project and 80-MW Sarnia Solar Project, following their acquisition from wholly-owned subsidiaries of Enbridge in October For the nine months ended 2012, the Renewable Assets benefited from high operational availability and strong wind and solar resource. For the three and nine months ended 2012, Corporate costs included $6.8 million and $21.4 million, respectively, of interest expense associated with the $655 million of long-term debt incurred in the fourth quarter of 2011 to partially finance the $1.24 billion acquisition of Renewable Assets. No similar interest expense was incurred in the comparable periods of THIRD QUARTER REPORT 6

9 The Fund s liquids transportation and natural gas transmission assets continued to deliver stable and predictable cash flows through the first three quarters of 2012, with both Saskatchewan System CAFD of $55.7 million and Alliance Canada CAFD of $54.4 million comparable with the first three quarters of FORWARD-LOOKING INFORMATION In the interest of providing the Company s shareholders and potential investors with information about the Company and its investee, the Fund, and the Fund s subsidiaries and joint ventures, including management s assessment of future plans and operations of the Company and the Fund, certain information provided in this MD&A constitutes forward-looking statements or information (collectively, forward-looking statements ). This information may not be appropriate for other purposes. Forward-looking statements are typically identified by words such as "anticipate", "expect", "project", estimate, forecast, plan, intend, target, believe and similar words suggesting future outcomes or statements regarding an outlook. In particular, forward-looking statements include: expected earnings or earnings per share; expected costs related to projects under construction; expected scope and in-service dates for projects under construction; expected timing and amount of recovery of capital costs of assets; expected capital expenditures; expected future dividends, Fund distributions and taxability thereof; the Fund s expected cash available for distribution; and expected future actions of regulators. Although the Company believes that these forward-looking statements are reasonable based on the information available on the date such statements are made and the processes used to prepare the information, such statements are not guarantees of future performance and readers are cautioned against placing undue reliance on forwardlooking statements. By their nature, these statements involve a variety of assumptions, known and unknown risks and uncertainties and other factors, which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Material assumptions include assumptions about: the expected supply and demand for crude oil, natural gas and natural gas liquids; prices of crude oil, natural gas and natural gas liquids; expected exchange rates; inflation; interest rates; the availability and price of labour and pipeline construction materials; operational reliability; customer project approvals; maintenance of support and regulatory approval for the Fund s projects; anticipated in-service dates; and weather. Assumptions regarding the expected supply and demand of crude oil, natural gas and natural gas liquids, and the prices of these commodities, are material to and underlay all forward-looking statements. These factors are relevant to all forward-looking statements as they may impact current and future levels of demand for the Fund s services. Similarly, exchange rates, inflation and interest rates impact the economies and business environments in which the Company and the Fund operates, may impact levels of demand for the Fund s services and cost of inputs, and are therefore inherent in all forward-looking statements. Due to the interdependencies and correlation of these macroeconomic factors, the impact of any one assumption on a forwardlooking statement cannot be determined with certainty, particularly with respect to expected earnings and associated per unit or per share amounts, or estimated future distributions or dividends. The most relevant assumptions associated with forward-looking statements on projects under construction, including estimated in-service dates and expected capital expenditures, include: the availability and price of labour and pipeline construction materials; the effects of inflation on labour and material costs; the effects of interest rates on borrowing costs; and the impact of weather, customer and regulatory approvals on construction schedules. The Company s forward-looking statements, and forward looking statements with respect to the Fund, are subject to risks and uncertainties pertaining to operating performance, regulatory parameters, project approval and support, weather, economic conditions, exchange rates, interest rates and commodity prices, including but not limited to those risks and uncertainties discussed in this MD&A and in the other filings of the Company and the Fund with Canadian securities regulators. The impact of any one risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these are interdependent of the future course of action of the Company and the Fund, depends on management s assessment of all information available at the relevant time. Except to the extent required by law, the Company and the Fund assume no obligation to publicly update or revise any forward-looking statements made in this MD&A or otherwise, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements whether written or oral, attributable to the Company or the Fund or persons acting on the Company s or the Fund s behalf, are expressly qualified in their entirety by these cautionary statements. NON-GAAP MEASURES This MD&A contains references to the Fund s cash available for distribution. Cash available for distribution represents the Fund s cash available to fund distributions on trust units and ECT preferred units as well as for debt repayments and reserves. Cash available for distribution consists of operating cash flow from the Fund s underlying businesses THIRD QUARTER REPORT 7

10 less deductions for maintenance capital expenditures, the Fund s administrative and operating expenses, corporate segment interest expense, applicable taxes and other reserves determined by the Manager. This measure is important to shareholders as the Company s objective is to provide a predictable flow of dividends to shareholders and the Company s cash flows are derived from its investment in the Fund. Cash available for distribution is not a measure that has standardized meaning prescribed by United States Generally Accepted Accounting Principles (GAAP) and is not considered a GAAP measure. Therefore, this measure may not be comparable with similar measures presented by other issuers. ENBRIDGE INCOME FUND RECENT DEVELOPMENTS AND OUTLOOK Crude Oil Storage and Renewable Power Acquisition On October 25, 2012, the Fund entered into an agreement to acquire contracted crude oil storage facilities and renewable power generation facilities owned by direct and indirect subsidiaries of Enbridge, a related party, for an aggregate value of $1.164 billion (the Transaction ). The crude oil storage facilities, which consist of the Hardisty Contract Terminals and Hardisty Storage Caverns in Alberta, provide approximately 11 million barrels of crude oil storage capacity at the Hardisty crude oil pipeline hub. The crude oil storage facilities are currently operating under long term take-or-pay storage contracts with remaining terms averaging 22 years. The renewable power generation facilities are located in Ontario and consist of 100% interests in the 99-megawatt (MW) Greenwich Wind Project, 15-MW Amherstburg Solar Project and 5-MW Tilbury Solar Project. The renewable power generation facilities are supported by fixed price power purchase agreements with the Ontario Power Authority with remaining terms exceeding 18 years. Enbridge, through its affiliates, will continue to manage the crude oil storage facilities and renewable power generation facilities pursuant to management and administrative agreements. The Transaction is subject to approval by shareholders, completion of related financing by the Company and the Fund and receipt of regulatory and third party approvals. Alliance Recontracting On October 10, 2012, Alliance Canada announced a proposed new service model and toll structure that would apply to the pipeline system when the bulk of existing firm service contracts expire in December The new service offering provides shippers with choices that include new zonal and full path transportation services, fixed or index-based tolls and a range of contract terms. It builds on Alliance s unique capabilities to cost efficiently transport high-energy natural gas. Discussions with existing and prospective shippers are ongoing and an open season for the capacity that will come free in late 2015 is expected to be held in The proposals will be subject to commitments by shippers and approval by regulators. Bakken Expansion Program A joint project to further expand crude oil pipeline capacity to accommodate growing production from the Bakken and Three Forks formations located in Montana, North Dakota, Saskatchewan and Manitoba is being undertaken by the Fund and Enbridge Energy Partners L.P. (EEP), a party related to the Fund. The Bakken Expansion Program will increase takeaway capacity from the Bakken area by an initial 145,000 bpd, which can be expanded to 325,000 bpd. The Bakken Expansion Program will involve construction of facilities in Canada undertaken by the Fund at a cost of approximately $190 million and construction of facilities in the United States undertaken by EEP at a cost of approximately US$370 million. Construction on both sides of the border is well underway with expenditures to date of approximately $99 million on the Fund portion and expenditures to date of approximately US$194 million on the EEP portion. Construction is expected to be completed in the first quarter of Saskatchewan System Shipper Complaint On December 17, 2010, the Saskatchewan System filed amended Westspur tariffs with the NEB with an effective date of February 1, In January 2011, a shipper on the Westspur system requested the NEB make the tolls interim effective February 1, 2011 pending discussions between the shipper and the Saskatchewan System on information requests put forward by the shipper. Subsequently, the shipper filed a complaint with the NEB on the basis that the information provided by the Fund was not adequate to allow an assessment to be made of the reasonableness of the tolls. Six parties have filed letters with the NEB supporting the shipper s complaint. The NEB directed additional discussion among the parties and, as of October 25, 2012, the Fund continues to review the structure of its tolls with shippers. THIRD QUARTER REPORT 8

11 Whitecourt Recovered Energy Project The Whitecourt Recovered Energy Project is a new waste heat recovery facility which is being built by NRGreen, a 50% investee of the Fund, adjacent to a compressor station on the Alliance Pipeline near Whitecourt, Alberta. The total cost of the Whitecourt Recovered Energy Project is expected to be approximately $68 million. A grant in the amount of $7 million from the Climate Change and Emissions Management Corporation under its Energy Efficiency Projects grant program will fund a portion of the project. The Fund s 50% share of the Whitecourt Recovered Energy Project is approximately $31 million of which the Fund has contributed $17 million as at The Whitecourt Recovered Energy Project is expected to be in service in the third quarter of LIQUIDITY AND CAPITAL RESOURCES The Company s primary source of liquidity is the cash distributions it receives from its investment in the Fund. Additional liquidity to finance future investment in the Fund, if necessary, is expected to be available through access to equity markets and bank credit. The Company s objective is to pay out a high proportion of its cash received from the Fund after prudently reserving for contingencies and with the objective of sustaining a predictable stream of dividends to its shareholders. Cash flows from operating activities were $13.5 million and $39.1 million for the three and nine months ended 2012, respectively. The Company received distributions from the Fund of $43.2 million and paid $2.5 million of income taxes in respect of 2011 cash income taxes and $1.5 million in respect of 2012 instalments. Although the Company does not expect to be taxable in 2012, it is required to make instalment payments throughout 2012 based on 2011 cash income taxes. The Company expects to recover the instalments in Cash flow used in investing activities was $6.9 million for the nine months ended 2012 in respect of cash advances to the Fund pursuant to a subordinated demand loan. Interest on the subordinated demand loan is charged at a fixed interest rate of 4.25% per annum. Cash flows used for financing activities totaled $12.3 million and $36.8 million for the three and nine months ended 2012, respectively, and were comprised of dividends paid to shareholders. The Company declared dividends of $0.103 per common share in each of the first nine months of The Company did not have any outstanding long-term debt as at 2012 or December 31, FUTURE ACCOUNTING POLICIES IFRS 9, Financial Instruments, addresses classification and measurement of financial assets. IFRS 9 replaces the model for measuring equity instruments and will require recognition of the Company s investment in the Fund at fair value through earnings. This standard is effective for accounting periods beginning on or after January 1, IFRS 13, Fair Value Measurement, defines fair value and provides a single IFRS framework for the measurement and disclosure of fair value within IFRS standards. This standard is effective for accounting periods beginning on or after January 1, THIRD QUARTER REPORT 9

12 SELECTED QUARTERLY FINANCIAL INFORMATION The following table presents a summary of the Company s quarterly financial results. The Company was incorporated in March 2010 and did not have any substantial business activities prior to the first quarter of Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 (thousands of Canadian dollars, except per share amounts) Revenues 14,434 14,399 14,391 14,182 8,702 8,693 8,693 - Earnings 14,638 14,315 14,284 16,800 6,846 6,840 6,840 Earnings per common share, basic and diluted Dividends declared per common share The Company subscribed for an additional 14,616,000 trust units of the Fund in October 2011 in connection with the Fund s acquisition of the Renewable Assets which increased the Company s ownership of trust units from 25,125,000 to 39,741,000. The incremental ownership of Fund trust units increased the Company s revenues and earnings in the fourth quarter of 2011 and the first, second and third quarters of The Company received increased distributions from the Fund commencing in November 2011 when the Fund increased its distribution from $0.115 per unit per month to $0.121 per unit per month. The Company increased its dividend per common share by 7.3% to $0.103 per month effective with the November 2011 dividend which corresponded with a distribution increase from the Fund. Third quarter 2012 earnings included a $0.2 million income tax recovery. The Company did not incur cash income tax expense in the first, second or third quarters of Fourth quarter 2011 earnings included a $2.6 million income tax recovery. OUTSTANDING SHARE DATA As at October 25, 2012, 39,741,000 common shares and 1 special voting share of the Company were issued and outstanding. THIRD QUARTER REPORT 10

13 ENBRIDGE INCOME FUND HOLDINGS INC. STATEMENTS OF COMPREHENSIVE INCOME (unaudited; thousands of Canadian dollars, except per share amounts) Three months ended Nine months ended Distribution and other income (Note 3) 14,434 8,702 43,224 26,088 Income tax recovery/(expense) (Note 5) 204 (1,856) 13 (5,562) Earnings 14,638 6,846 43,237 20,526 Other comprehensive income/(loss) Unrealized fair value change in available-for-sale investment 36,960 (14,321) 128,762 7,537 Income tax recovery/(expense) (Note 5) (4,836) 1,790 (16,311) (942) 32,124 (12,531) 112,451 6,595 Comprehensive income/(loss) 46,762 (5,685) 155,688 27,121 Basic and diluted earnings per common share (Note 4) The accompanying notes are an integral part of these unaudited financial statements. THIRD QUARTER REPORT 11

14 ENBRIDGE INCOME FUND HOLDINGS INC. STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Nine months ended (unaudited; thousands of Canadian dollars) Share capital Common shares 525, ,250 Special voting share - - Share premium 192, ,458 Retained earnings (deficit) Balance at beginning of period 2,492 - Earnings 43,237 20,526 Common share dividends declared (Note 4) (36,840) (21,708) Balance at end of period 8,889 (1,182) Accumulated other comprehensive income Balance at beginning of period 68,472 9,673 Other comprehensive income 112,451 6,595 Balance at end of period 180,923 16,268 Total shareholders equity 907, ,794 The accompanying notes are an integral part of these unaudited financial statements. THIRD QUARTER REPORT 12

15 ENBRIDGE INCOME FUND HOLDINGS INC. STATEMENTS OF CASH FLOWS (unaudited; thousands of Canadian dollars) Three months ended Nine months ended, Operating activities Earnings 14,638 6,846 43,237 20,526 Adjustments for Deferred income taxes (216) ,206 Changes in operating assets and liabilities Accounts receivable and other (756) (10) (1,239) 29 Distributions receivable - 5,794 - (2,899) Accounts payable and accrued liabilities (140) (25) (481) (64) Income taxes payable - 1,452 (2,456) 4,356 13,526 14,459 39,096 23,154 Investing activities Demand loan advances to investee (Note 6) (1,300) - (6,900) - Financing activities Subscription receipts issued - 219, ,506 Change in restricted cash - (219,506) - (219,506) Common share dividends paid (Note 4) (12,280) (12,060) (36,840) (19,296) (12,280) (12,060) (36,840) (19,296) Change in cash and cash equivalents (54) 2,399 (4,644) 3,858 Cash and cash equivalents at beginning of period 326 1,459 4,916 - Cash and cash equivalents at end of period 272 3, ,858 Supplementary cash flow information Income taxes paid 808-3,975 - The accompanying notes are an integral part of these unaudited financial statements. THIRD QUARTER REPORT 13

16 ENBRIDGE INCOME FUND HOLDINGS INC. STATEMENTS OF FINANCIAL POSITION (unaudited; thousands of Canadian dollars) 2012 December 31, 2011 Assets Current assets Cash and cash equivalents 272 4,916 Demand loan due from investee (Note 6) 6,900 - Accounts receivable and other 1, Distributions receivable (Note 3) 4,797 4,797 13,557 10,062 Investment in Enbridge Income Fund (Note 3) 924, , , ,074 Liabilities and shareholders equity Current liabilities Accounts payable and accrued liabilities Income taxes payable - 2,456 Dividends payable (Note 4) 4,093 4,093 4,145 7,082 Deferred income taxes 26,616 10,270 30,761 17,352 Shareholders equity Share capital 525, ,300 Share premium 192, ,458 Retained earnings 8,889 2,492 Accumulated other comprehensive income 180,923 68, , , , ,074 The accompanying notes are an integral part of these unaudited financial statements. THIRD QUARTER REPORT 14

17 ENBRIDGE INCOME FUND HOLDINGS INC. NOTES TO THE UNAUDITED FINANCIAL STATEMENTS 1. GENERAL BUSINESS DESCRIPTION Enbridge Income Fund Holdings Inc. (ENF or the Company) is a publicly traded corporation, incorporated on March 26, 2010 under the laws of the Province of Alberta. The Company s common shares commenced trading on the Toronto Stock Exchange on December 21, The Company holds an investment in Enbridge Income Fund (the Fund), which is an unincorporated open-ended trust established by a trust indenture under the laws of the Province of Alberta. The Company s registered office is 3000, st Street SW, Calgary, Alberta, Canada. The business of ENF is limited to investment in the Fund. The Fund is involved in the generation and transportation of energy through green power generation facilities, its crude oil and liquids pipelines business in Saskatchewan and its 50% interest in the Canadian segment of the Alliance Pipeline. 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES These unaudited interim condensed financial statements have been prepared using the same accounting policies as those used in the Company s annual financial statements for the year ended December 31, 2011 prepared in accordance with International Financial Reporting Standards (IFRS). These interim financial statements comply with International Accounting Standards (IAS) 34, Interim Financial Reporting and accordingly do not include all disclosures required for annual financial statements, and should therefore be read in conjunction with the financial statements and notes thereto included in the Company s 2011 Annual Report. Amounts are stated in Canadian dollars, the Company s functional and presentation currency. These financial statements were authorized for issuance by the Board of Directors of the Company on October 25, INVESTMENT IN ENBRIDGE INCOME FUND At 2012, the Company owned 39,741,000 (December 31, ,741,000), or 80.7%, of the Fund s issued and outstanding trust units. Nine months ended 2012 Twelve months ended December 31, 2011 (unaudited, thousands of Canadian dollars) Balance at beginning of period 796, ,763 Investment acquired - 274,050 Fair value change for the period 128,762 67,199 Balance at end of period 924, ,012 Summarized financial information of the Fund, derived from the Fund s consolidated financial statements prepared in accordance with United States generally accepted accounting principles (U.S. GAAP), is as follows: THIRD QUARTER REPORT 15

18 Three months ended Nine months ended (unaudited, thousands of Canadian dollars) Revenues 63,301 63, , ,189 Earnings 12,371 20,259 46,143 75, December 31, 2011 (unaudited, thousands of Canadian dollars) Total assets 2,047,496 1,921,369 Total liabilities 1,759,251 1,573,765 The Fund s summarized financial information, as prepared in accordance with U.S. GAAP, would differ had it been prepared under IFRS. The most significant differences between U.S. GAAP and IFRS applicable to the Fund are as follows: Rate Regulation The operations of Alliance Canada and certain assets within the Saskatchewan System are subject to regulation by various authorities which exercise statutory authority over matters such as construction, rates and ratemaking and agreements with customers. The timing of recognition of certain revenues and expenses impacted by regulation and the recognition of regulatory assets and liabilities under U.S. GAAP differs from IFRS. IFRS preparers have not historically recognized regulatory assets and liabilities. IFRS also prohibits recognition of the equity component of allowance for funds used during construction (AFUDC) as is permitted under U.S. GAAP. At 2012, the Fund s net regulatory asset as presented in accordance with U.S. GAAP was approximately $98.7 million (December 31, $95.6 million) including an equity component of AFUDC. The earnings impact of rate regulation was an approximate after tax increase of $5.0 million for the three months ended 2012 ( $2.0 million) and an approximate after tax increase of $2.2 million for the nine months ended September 30, 2012 ( $3.6 million decrease). Further, certain regulators prescribe the pool method of accounting for property, plant and equipment. Under U.S. GAAP similar assets are grouped and depreciated as a pool. Gains or losses are not recognized when the assets are disposed or retired. IFRS does not permit the pool method of accounting and would require gains or losses on retirement to be recognized in earnings. Preferred and Trust Unit Presentation Under U.S. GAAP, the Fund s preferred and trust units were presented as mezzanine equity on the Consolidated Statements of Financial Position between long-term liabilities and unitholders deficit. The Fund s preferred and trust units were recorded at their maximum redemption value with changes in estimated redemption value reflected as a charge or credit to deficit. Under IFRS, the Fund s preferred units would be designated as a financial liability at fair value through profit or loss. The Fund s trust units would be recognized at amortized cost and presented as a liability by virtue of the holders right to redeem the trust units for cash, subject to certain limitations. Adjustments to estimated future cash flows of a financial liability carried at amortized cost are recognized in earnings. Distribution Income The Fund declared monthly distributions of $0.121 per unit per month for each month during the nine month period ended The Fund declared distributions on a quarterly basis for the three month periods ended March 31, 2011 and June 30, 2011 at a quarterly rate of $0.346 per unit and a monthly distribution at a rate of $0.115 per unit for the months of July 2011 through September THIRD QUARTER REPORT 16

19 4. SHARE CAPITAL Dividends The Board of Directors of the Company declared monthly dividends at a rate of $0.103 per share for each month of the nine month period ended 2012 and a quarterly dividend at a rate of $0.288 per share for each of the first and second quarters of The Company amended its dividend payment frequency from quarterly to monthly commencing with the July 2011 dividend. The Board of Directors of the Company declared dividends of $0.096 per share for each of the months of July, August and September On October 15, 2012, the Company declared a monthly dividend of $0.103 per share to be paid on November 15, 2012 to shareholders of record on October 31, Earnings per Common Share Weighted average shares outstanding used to calculated both basic and diluted earnings per share were 39,741,000 ( ,125,000) for the three and nine month periods ended INCOME TAXES Income tax expense included in earnings for the three months ended 2012 comprised current income tax expense of $12,048 ( $1.5 million) and deferred income tax recovery of $0.2 million (2011 $0.4 million expense). Income tax expense included in earnings for the nine months ended 2012 comprised current income tax recovery of $48,036 ( $4.4 million expense) and deferred income tax expense of $35,119 (2011 $1.2 million). Income tax expense on distribution income is accrued in interim periods based on the estimated annual taxability and return of capital. Other comprehensive income included $4.8 million (2011 $1.8 million recovery) and $16.3 million ( $0.9 million) of deferred income tax expense for the three and nine months ended 2012, respectively, related to the change in the difference between the accounting and tax bases of the Investment in Enbridge Income Fund. 6. RELATED PARTY TRANSACTIONS In the second quarter of 2012, the Company and the Fund entered into a subordinated demand loan whereby the Company may make cash advances to the Fund. The Company made cash advances to the Fund of $5.6 million in the second quarter of 2012 and $1.3 million in the third quarter of Interest on the demand loan is charged to the Fund at 4.25% per annum. 7. SUBSEQUENT EVENT On October 25, 2012, the Fund entered into an agreement to acquire crude oil storage facilities and renewable power generation facilities owned by direct and indirect subsidiaries of Enbridge, a related party, for an aggregate value of $1.164 billion (the Transaction ). The crude oil storage facilities consist of the Hardisty Contract Terminals and Hardisty Storage Caverns. The renewable power generation facilities consist of 100% interests in the 99-megawatt (MW) Greenwich Wind Project, 15-MW Amherstburg Solar Project and 5-MW Tilbury Solar Project. The Transaction will be accounted for as a transaction among entities under common control, similar to a pooling of interests, whereby the assets and liabilities acquired will be recorded at Enbridge s historic carrying values. A portion of the Transaction will be funded by the Company which will increase its equity investment in the Fund. The Company has entered into an agreement with a syndicate of investment dealers for the sale of an aggregate 9,597,000 subscription receipts of the Company at a price of $23.15 per subscription receipt for gross proceeds of $222.2 million which will be used to purchase common trust units of the Fund. Upon completion of the Transaction, each holder of a subscription receipt will automatically receive one common share of the Company without further consideration. The Transaction is subject to approval by shareholders, completion of the financing and receipt of regulatory and third party approvals. THIRD QUARTER REPORT 17

20 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 This Management s Discussion and Analysis (MD&A) dated October 25, 2012 should be read in conjunction with the unaudited consolidated financial statements and notes thereto of Enbridge Income Fund (the Fund) as at and for the three and nine months ended 2012, which are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). It should also be read in conjunction with the audited consolidated financial statements prepared in accordance with Canadian GAAP (Part V) and MD&A contained in the Fund s Annual Report for the year ended December 31, In addition, annual consolidated financial statements for the years ended December 31, 2011 and 2010 were prepared in accordance with U.S. GAAP and were filed with Canadian securities regulators on a voluntary basis. Comparative figures contained in this MD&A have been restated in accordance with U.S. GAAP. Unless otherwise noted, all financial information is presented in Canadian dollars and financial information pertaining to Alliance Canada and certain Green Power joint ventures reflects the Fund s proportionate share of the entities within these segments. Additional information related to the Fund, including its Annual Information Form, is available on SEDAR at OVERVIEW The Fund is involved in the generation and transportation of energy through its interests in more than 400-megawatts (MW) of renewable and alternative power generation capacity (Green Power), its crude oil and liquids pipeline business in Saskatchewan (Saskatchewan System) and its 50% interest in the Canadian segment of Alliance Pipeline (Alliance Canada). The Fund is an unincorporated open-ended trust established by a trust indenture under the laws of the Province of Alberta. The Fund commenced operations on June 30, Enbridge Management Services Inc. (EMSI or the Manager), a wholly owned subsidiary of Enbridge Inc. (Enbridge) administers the Fund. EMSI also serves as the manager of Enbridge Commercial Trust (ECT), a subsidiary of the Fund, and Enbridge Income Fund Holdings Inc. (ENF), a unitholder of the Fund. FINANCIAL OVERVIEW Three months ended Nine months ended (millions of Canadian dollars) Earnings Green Power Saskatchewan System Alliance Canada Corporate 1 (26.1) (18.6) (86.2) (50.5) Cash available for distribution Green Power Saskatchewan System Alliance Canada Corporate 1 (18.2) (12.1) (53.2) (31.8) Green Power earnings for the 2011 comparative periods have been retrospectively adjusted to furnish comparative information related to the October 2011 acquisition of the Renewable Assets. The impact of the retrospective earnings adjustments for presentation purposes has been eliminated from cash available for distribution. The acquisition of the Renewable Assets from wholly-owned subsidiaries of Enbridge in October 2011 was accounted for as a transaction among entities under common control. Earnings for the 2011 comparative periods report the results of operations of the Fund and the Renewable Assets on a combined basis as though the Acquisition occurred at the beginning of the year, as required under U.S. GAAP. The incremental effect of combining the results of operations of the Renewable Assets for the three and nine months ended 2011 was an increase to earnings of $9.3 million and $35.8 million, respectively. Given that the previous owner of the Renewable Assets funded the assets differently, comparative financial information is not indicative of future results expected from the Renewable Assets. THIRD QUARTER REPORT 18