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

21 Earnings 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 (collectively the Renewable Assets), following their acquisition from wholly-owned subsidiaries of Enbridge in October Relative to the comparable periods of 2011 (for which Green Power earnings have been retrospectively adjusted to include Renewable Asset pre-tax earnings of $12.5 million and $48.1 million for the three and nine months ended 2011, respectively), earnings generated by the Renewable Assets have increased as a result of stronger solar resource at the Sarnia Solar Project and improved wind resource at the Ontario Wind Project. 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 (or otherwise retrospectively adjusted for presentation purposes) in the comparable periods of Further, non-cash deferred income taxes increased $2.4 million and $17.1 million for the three and nine months ended 2012, respectively, as a result of higher earnings generated by the Fund s subsidiary corporations. The Fund s liquids transportation and natural gas transmission assets continued to deliver stable and predictable earnings through the first nine months of 2012, with both Saskatchewan System earnings of $36.7 million and Alliance Canada earnings of $38.7 million comparable with the first nine months of The Fund s cash available for distribution (CAFD) totaled $43.3 million and $151.8 million for the three and nine months ended 2012 compared with $26.9 million and $83.9 million for the same periods of the prior year, an increase of 61% and 81%, respectively. The most significant contributor to the increase for the three and nine months ended 2012 was $25.2 million and $91.2 million of incremental cash flow from the Renewable Assets, partially offset by increased interest costs. FORWARD-LOOKING INFORMATION In the interest of providing the Fund s unitholders and potential investors with information about the Fund, its subsidiaries and joint ventures, including management s assessment of the Fund, its subsidiaries and joint ventures future plans and operations, 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 included or incorporated by reference in this document include, but are not limited to, statements with respect to: 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 levels of demand for the Fund s services; expected future earnings and cash flows; expected future actions of regulators; expected future distributions to unitholders and the taxability thereof; and expected cash available for distribution. Although the Fund believes that these forward-looking statements are reasonable based on the information available on the date such statements are made and processes used to prepare the information, such statements are not guarantees of future performance and readers are cautioned against placing undue reliance on forward-looking 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 THIRD QUARTER REPORT 19

22 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 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 amounts, or estimated future distributions. 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 and customer and regulatory approvals on construction schedules. The Fund s forward-looking statements are subject to risks and uncertainties pertaining to operating performance, regulatory parameters, project approval and support, weather, economic and competitive conditions, exchange rates, interest rates, commodity prices and supply and demand for commodities, including but not limited to those risks and uncertainties discussed in this MD&A and in the Fund s other filings 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 and the Fund s future course of action depends on management s assessment of all information available at the relevant time. Except to the extent required by law, the Fund assumes 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 Fund or persons acting on the Fund s behalf, are expressly qualified in their entirety by these cautionary statements. NON-GAAP MEASURES This MD&A contains references to cash available for distribution (CAFD). CAFD represents cash available to fund distributions on trust units and ECT preferred units, as well as for debt repayments and reserves. This measure is important to unitholders as the Fund s objective is to provide a predictable flow of distributable cash to unitholders. Please refer to the Cash Available for Distribution reconciliation. CAFD is not a measure that has standardized meaning prescribed by United States GAAP and is not considered a GAAP measure. Therefore, this measure may not be comparable with similar measures presented by other issuers. SELECTED OPERATING HIGHLIGHTS Three months ended Nine months ended September 30 September Green Power (thousands of megawatt hours produced) Ontario Wind Project Talbot Wind Project Sarnia Solar Project NRGreen (50%) Wind Power Joint Ventures (33% to 50%) Saskatchewan System 2 (thousands of barrels per day) Westspur System Saskatchewan Gathering System Weyburn System Virden System Alliance Canada (millions of cubic feet per day) 1, , , , Production volumes for the Ontario Wind Project, Talbot Wind Project and Sarnia Solar Project have been presented for 2011 periods, in advance of the Fund s acquisition of such assets in October 2011, for comparative information purposes. 2 Totals are not presented as the same volumes can be transported through a combination of the pipelines comprising the Saskatchewan System THIRD QUARTER REPORT 20

23 Total Green Power production for the three months ended 2012 was comparable with the same period in Strong wind and solar resources experienced at the Ontario Wind Project and the Sarnia Solar Project, respectively, were partially offset by lower production at the Talbot Wind Project and Wind Power Joint Venture facilities. Total Green Power production for the nine months ended September 30, 2012 was higher than the comparable period in 2011 which reflected strong wind resource at most wind facilities and improved solar resource at the Sarnia Solar Project. Throughput volumes for the rate-regulated pipelines within the Saskatchewan System were lower in the third quarter of 2012 compared with the third quarter of 2011 as a result of customers using alternative transportation options, primarily rail. Management expects volume to return to the Saskatchewan System as downstream expansion projects relieve bottlenecks and reduce price discounts for producers. Saskatchewan System throughput volumes for the nine months ended 2012, which were consistent with the comparable 2011 period, reflected higher throughput volumes in the first and second quarters of 2012 as a result of new customer connections offset by the increased use of alternative transportation options in the third quarter of Throughput volumes for the rate-regulated pipelines within the Saskatchewan System do not directly impact the Fund s earnings. Alliance Canada throughput volumes for the three and nine months ended 2012 decreased from the comparable periods of Authorized overrun service was 10.9% ( %) and 17.4% ( %) for the three and nine months ended 2012, respectively. The decrease was attributable to compressor equipment maintenance. GREEN POWER Overview Green Power includes assets that produce electricity from alternative energy sources and consists of the 190-MW Ontario Wind Project, the 99-MW Talbot Wind Project, the 80-MW Sarnia Solar Project as well as a 50% interest in NRGreen. Green Power also includes the Fund s 50% interest in the Sunbridge Wind Project and a 33% interest in each of the Magrath and Chin Chute wind projects (collectively Wind Power Joint Ventures). Power produced from the Ontario Wind Project, the Talbot Wind Project and the Sarnia Solar project is sold to the Ontario Power Authority (OPA) pursuant to long-term power purchase agreements (PPA). The power from the Sunbridge Wind Project and NRGreen is delivered into the Saskatchewan power grid and is sold under long-term PPAs. The power produced at Magrath and Chin Chute is delivered into the Alberta power grid and the Fund has entered into long-term agreements to substantially fix the price received for its share of production on these projects. Results of Operations Three months ended Nine months ended September 30 September (millions of Canadian dollars) Revenues Earnings Green Power earnings for 2011 periods have been retrospectively adjusted to furnish comparative information related to the October 2011 acquisition of the Renewable Assets. Green Power revenues and earnings increased by $1.0 million and $0.3 million, respectively, in the third quarter of 2012 compared with the same period of 2011 reflecting an increase in wind resource at the Ontario Wind Project and solar resource at the Sarnia Solar Project partially offset by lower wind resource at the Talbot Wind Project. Revenues and earnings for the nine months ended 2012 were $108.7 million and $56.9 million, respectively, compared with $102.6 million and $50.1 million in the prior year comparable period. Both revenues and earnings from the Renewable Assets benefited from higher wind and solar resources and strong operating availability. THIRD QUARTER REPORT 21

24 SASKATCHEWAN SYSTEM Overview The Saskatchewan System transports crude oil from producing fields in southeastern Saskatchewan and southwestern Manitoba, as well as natural gas liquids (NGLs) from the Steelman gas processing plant, to Cromer, Manitoba where the crude oil and NGLs enter Enbridge s mainline pipeline to be transported to the United States. The Saskatchewan System is comprised of the Saskatchewan Gathering, Westspur, Weyburn and Virden pipeline systems. Collectively referred to as the Saskatchewan System, these crude oil and liquids pipeline systems include approximately 420 kilometres of trunk line, approximately 1,900 kilometres of gathering pipeline and related terminals and tankage facilities. The capacity of each of the Saskatchewan Gathering and the Westspur Systems is 255,000 bpd and the capacity of the Weyburn and Virden Systems is approximately 47,000 bpd and 37,000 bpd, respectively. The Saskatchewan System also includes the Fund s ongoing business development activities in the Bakken region. Results of Operations Three months ended Nine months ended September 30 September (millions of Canadian dollars) Revenues Earnings Saskatchewan System revenues and earnings for the three months ended 2012 were $32.3 million and $12.0 million, respectively, a decrease of $1.4 million and $0.3 million compared with the three months ended The decrease in revenues and earnings is attributable to a reduction in the allowance for income taxes and certain costs which are recovered through tolls partially offset by the impact of new customer connections and capital expenditures added to rate base. Revenues and earnings for the nine months ended 2012 were $98.9 million and $36.7 million, respectively, compared with $92.6 million and $35.1 million in the prior year comparable period. Revenue and earnings growth attributable to new customer connections and capital expenditures added to rate base was partially offset by a reduction in the allowance for income taxes which is recovered through tolls. ALLIANCE CANADA Overview Alliance Canada consists of 1,560 kilometres of the Alliance System s natural gas mainline pipeline beginning near Gordondale, Alberta and connecting to Alliance US at the Canada/United States border near Elmore, Saskatchewan. Alliance Canada also includes the Alliance System s lateral pipelines, which connect the mainline to a number of upstream receipt points, primarily at natural gas processing facilities in northwestern Alberta and northeastern British Columbia, and related infrastructure. The Alliance System is designed to transport 1,325 mmcf/d of natural gas on a firm service basis primarily from supply areas in northwestern Alberta and northeastern British Columbia to delivery points near Chicago, Illinois. Additional transportation capacity is available to shippers for no additional cost other than the cost of the associated fuel requirements through Alliance Canada s Authorized Overrun Service. Alliance Canada has transportation agreements (TSAs) with shippers for substantially all of its available firm transportation capacity. The initial term of the TSAs expires in December 2015, with the exception of a small proportion of shippers who have elected to extend their contracts beyond THIRD QUARTER REPORT 22

25 Results of Operations Three months ended Nine months ended September 30 September (millions of Canadian dollars) Earnings The Fund s earnings from its equity investment in Alliance Canada were $13.4 million and $38.7 million for the three and nine months ended 2012, respectively, compared with $13.9 million and $41.0 million for the three and nine months ended The decline is primarily attributable to a lower equity return on Alliance Canada s depreciating investment base and a reduction in the allowance for income taxes. The rate used to calculate the equity return is not expected to change; however, the investment base upon which the equity return is calculated will change over time due to depreciation. CORPORATE Overview Corporate costs include corporate financing costs, incentive fees, current and deferred income taxes and management and administrative costs. Results of Operations Three months ended Nine months ended September 30 September (millions of Canadian dollars) Management and administrative Interest Income taxes Corporate costs Corporate costs for 2011 periods have been retrospectively adjusted for the impact of deferred income taxes in order to furnish comparative information related to the October 2011 acquisition of the Renewable Assets. Management and administrative expense included incentive fees of $3.1 million ( $ 2.5 million) and $9.3 million ( $7.3 million) for the three and nine months ended 2012, respectively. Incremental cash flows generated by the Renewable Assets enabled the Fund to increase its monthly distribution from $0.115 per unit to $0.121 per unit in November 2011 resulting in an increase in incentive fees which were based on distributions declared by the Fund compared to a predetermined distribution level. Management and administrative expense for the three months ended 2012 included $1.6 million of charges incurred to 2012 in connection with business development initiatives. Management and administration expense for the three and nine months ended 2011 included transaction costs which totalled $3.6 million related to the acquisition of the Renewable Assets. Corporate financing costs incurred in the three and nine months ended 2012 were $13.0 million and $40.9 million, respectively, an increase of $7.2 million and $22.9 million over the comparable periods of The primary driver of the increase was interest expense incurred on long-term debt issued to finance a portion of the Renewable Assets acquisition. Non-cash deferred income tax expense in the Corporate segment was $7.7 million ( $5.6 million) and $32.3 million ( $15.2 million) for the three and nine months ended Noncash deferred income taxes increased as a result of higher earnings generated by the Fund s subsidiary corporations. Deferred income tax for the three and nine months ended 2011 has been retrospectively adjusted and included $3.2 million and $12.3 million, respectively, of deferred income tax related to the Renewable Assets. THIRD QUARTER REPORT 23

26 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. 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 THIRD QUARTER REPORT 24

27 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 At 2012, the Fund had approximately $201.6 million of available standby credit capacity. Cash from operations in combination with available committed standby credit capacity is expected to be sufficient to meet currently forecast liquidity and capital resource requirements of the Fund. In addition, the Fund maintains a current shelf prospectus with Canadian securities regulators, which enables ready access to Canadian public capital markets, subject to market conditions. OPERATING ACTIVITIES Cash provided by operating activities was $52.9 million and $145.5 million for the three and nine months ended 2012, respectively, compared with $42.7 million and $157.1 million for the three and nine months ended Prior period cash flows were retrospectively adjusted to present Renewable Assets earnings from January 1, 2011 (as mandated by common control guidance); however, such retrospective adjustments were exclusive of associated financing costs whereas financing costs of $6.8 million and $21.4 million were incurred for the three and nine months ended 2012, respectively. INVESTING ACTIVITIES Cash used in investing activities for the three and nine months ended 2012 was $53.1 million and $86.2 million, respectively. Cash used in investing activities included $82.1 million ( $14.3 million) and $105.0 million ( $52.3 million) of capital expenditures for the three and nine months ended 2012, respectively, largely directed to the Bakken Expansion Program as well as new customer connections and maintenance capital expenditures on the Saskatchewan System. The Fund also made contributions to NRGreen to partially fund the Whitecourt Recovered Energy Project of $6.0 million and $12.0 million for the three and nine months ended 2012, respectively. FINANCING ACTIVITIES Cash provided by financing activities totaled $22.8 million for the nine months ended 2012 compared with cash provided by financing activities of $3.7 million in the corresponding period of In February 2012, the Fund issued $300.0 million of Medium Term Notes (MTNs) maturing in February 2019 with a coupon of 4.10% and $200.0 million of MTNs maturing in February 2022 with a coupon of 4.85%. The gross proceeds of $500.0 million were used to repay the outstanding balance on the loan provided by Enbridge in connection with the acquisition of the Renewable Assets. The Fund also received $6.9 million from ENF pursuant to a subordinated demand loan. Interest on the subordinated demand loan is charged at a fixed interest rate of 4.25% per annum. During the first three quarters of 2012, monthly distributions of $0.121 per unit were declared on the Fund trust units and ECT preferred units. Capital Expenditure Commitments At 2012, the Fund has signed contracts for the purchase of services, pipe and other materials totaling $46.6 million which are expected to be paid within the next two years. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS MARKET PRICE RISK The Fund s earnings, cash flows and other comprehensive income (OCI) are subject to movements in interest rates, foreign exchange rates and commodity prices (collectively, market price risk). Formal risk management policies, processes and systems have been designed to mitigate these risks. The following summarizes the types of market price risks to which the Fund is exposed and the risk management instruments used to mitigate them. THIRD QUARTER REPORT 25

28 Interest Rate Risk The Fund s earnings and cash flows are exposed to short term interest rate variability due to the regular repricing of its variable rate debt, primarily credit facilities. Floating to fixed interest rate swaps are used to hedge against the effect of future interest rate movements. The Fund has implemented a program to significantly mitigate the volatility of short-term interest rates on interest expense through 2016 at an average swap rate of 1.80%. The Fund s earnings and cash flows are also exposed to variability in longer term interest rates ahead of anticipated fixed rate debt issuances. Forward starting interest rate swaps are used to hedge against the effect of future interest rate movements. A total of $100 million of future fixed rate term debt issuances have been hedged at an average swap rate of 3.35%. The Fund uses qualifying derivative instruments to manage interest rate risk. Foreign Exchange Risk The Fund s earnings, cash flows and OCI are subject to foreign exchange rate variability due to United States dollar denominated expenses. The Fund uses qualifying derivative instruments to hedge foreign exchange rate risk. Commodity Price Risk The Fund s earnings and cash flows are exposed to changes in commodity prices due to its power generation operations and related floating rate supply agreements, as well as through commitments to purchase and sell natural gas in connection with capacity held on the Alliance System. The Fund uses power and natural gas derivative instruments to fix a portion of the variable price exposures that may arise from these activities. The Fund uses a combination of qualifying and non-qualifying derivative instruments to manage commodity price risk. LIQUIDITY RISK Liquidity risk is the risk that the Fund will not be able to meet its financial obligations, including commitments, as they become due. In order to manage this risk, the Fund forecasts the cash requirements over the near and long term to determine whether sufficient funds will be available when required. The Fund s primary sources of liquidity and capital resources are funds generated from operations, draws under committed credit facilities and the issuance of medium-term notes. The Fund maintains a current shelf prospectus with Canadian securities regulators, which enables, subject to market conditions, ready access to Canadian public capital markets. Cash flow from operations, in combination with available committed credit facilities and, if required, capital markets funding, is expected to be sufficient to meet the forecast liquidity and capital resource requirements of the Fund. CREDIT RISK Entering into derivative financial instruments may result in exposure to credit risk. Credit risk arises from the possibility that a counterparty will default on its contractual obligations and is limited to those contracts where the Fund would incur a loss in replacing the instrument. The Fund enters into risk management transactions only with institutions that possess investment grade credit ratings. Credit risk relating to derivative counterparties is mitigated by utilization of credit exposure limits, contractual requirements and frequent assessment of counterparty credit worthiness. Credit risk also arises from trade and other receivables, and is mitigated through credit exposure limits and by requiring less creditworthy shippers to provide credit enhancement which may include letters of credit, posting of collateral, netting provisions or other contractual requirements. The maximum exposure to credit risk related to non-derivative financial assets is their carrying value. THIRD QUARTER REPORT 26

29 EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME The following table presents the effect of cash flow hedges on the Fund s consolidated earnings and consolidated comprehensive income. Three months ended Nine months ended (unaudited; millions of Canadian dollars) Amount of unrealized gain/(loss) recognized in OCI Interest rate contracts (1.0) (1.7) (2.5) (2.8) Foreign exchange contracts (0.5) 1.3 (0.3) 0.7 Commodity contracts 5.2 (2.4) 9.1 (8.5) Total unrealized gain/(loss) recognized in OCI 3.7 (2.8) 6.3 (10.6) Amount of gain/(loss) reclassified from AOCI to earnings (effective portion) Interest rate contracts Foreign exchange contracts (0.5) 0.2 Commodity contracts Total gain reclassified from AOCI to earnings (effective portion) (Gain)/loss reported within Interest Expense in the Consolidated Statements of Earnings. 2 (Gain)/loss reported within Other Income in the Consolidated Statements of Earnings. 3 (Gain)/loss reported within Revenues in the Consolidated Statements of Earnings. FAIR VALUE MEASUREMENTS The Fund uses the most observable inputs available to estimate the fair value of its financial instruments. When possible, the Fund estimates the fair value of its financial instruments based on quoted market prices. If quoted market prices are not available, the Fund uses estimates from third party brokers. For non-exchange traded derivatives, the Fund uses standard valuation techniques to calculate the estimated fair value. These methods include discounted cash flows for forwards and swaps. Depending on the type of financial instrument and nature of the underlying risk, the Fund uses observable market prices (interest, foreign exchange and commodity) and volatility as primary inputs to these valuation techniques. Finally, the Fund considers its own credit default swap spread as well as the credit default swap spreads associated with its counterparties in its estimation of fair value. THIRD QUARTER REPORT 27

30 CASH AVAILABLE FOR DISTRIBUTION 1 Three months ended Nine months ended (millions of Canadian dollars) Cash provided by operating activities Renewable Assets pre-acquisition cash flows from operating activities 2 - (23.9) - (83.6) Green Power maintenance capital expenditures (0.2) - Green Power joint venture cash distributed/(retained) (0.9) Saskatchewan System maintenance capital expenditures 3 (2.8) (1.1) (7.0) (3.1) Change in operating assets and liabilities in the period 5 (7.1) Cash available for distribution Cash available for distribution is comprised of the following: Alliance Canada distributions Saskatchewan System operating income before depreciation and amortization Saskatchewan System maintenance capital expenditures (2.8) (1.1) (7.0) (3.1) Green Power operating income before depreciation and amortization Green Power maintenance capital expenditures - - (0.2) - Green Power joint venture distributions Corporate management and administrative expense (5.3) (6.3) (12.5) (12.7) Corporate interest expense (12.7) (5.4) (40.2) (15.1) Corporate current income taxes (0.2) (0.4) (0.5) (4.0) Cash available for distribution ECT preferred unit distributions declared Trust unit distributions declared Cash distributions declared Payout ratio 86.4% 93.3% 73.9% 89.9% 1 See Non-GAAP measures. 2 The Fund acquired the Renewable Assets on October 21, The Acquisition was accounted for as a transaction among entities under common control which resulted in earnings and cash flows for all 2011 periods being presented on a combined basis as if the Acquisition occurred at the beginning of the year. Cash provided by operating activities of the Renewable Assets prior to October 21, 2011 has been deducted from cash available for distribution as these cash flows were not available for distribution by the Fund. 3 Maintenance capital expenditures reduce cash available for distribution since these expenditures are funded through cash from operations. 4 The cash retained or distributed by certain Green Power joint ventures reflects the cash from operations of these segments that has not been distributed to the Fund or distributions in excess of cash earnings in the period. While this cash from operations is proportionately consolidated and included in the Fund s cash provided by operating activities, it is not available for distribution by the Fund until it has been received from certain Green Power joint ventures. Cash retained by certain Green Power joint ventures includes debt service reserves, capital expenditures and other cash needed to fund working capital or other requirements of these operations. 5 Change in operating assets and liabilities in the period reflect changes in non-cash working capital related to operating activities. The change has been added back to cash available for distribution since fluctuations in working capital are expected each period and are not indicative of changes in cash available to be distributed. As set out in the above table, cash available for distribution consists of operating cash flow from the Fund s underlying businesses adjusted for distributions received from the Fund s proportionately consolidated joint ventures less deductions for maintenance capital expenditures, the Fund s THIRD QUARTER REPORT 28

31 administrative and operating expenses, corporate segment interest expense, applicable taxes and other reserves determined by the Manager. CAFD represents cash available to fund distributions on trust units and ECT preferred units, as well as for debt repayments and reserves. The Fund s payout ratio for the three and nine months ended 2012 decreased to 86.4% and 73.9%, respectively. The Fund targets to distribute a high proportion of CAFD each calendar year, after prudently reserving for contingencies and debt repayment. The quarterly payout ratio is expected to vary from period to period as a result of variations in operating cash flows including seasonal variations in wind and solar resource, the timing of receipt of joint venture distributions and the timing of maintenance expenditures. ANALYSIS OF CASH DISTRIBUTIONS DECLARED Three months ended Nine months ended September 30 September (millions of Canadian dollars) Cash provided by operating activities Earnings Cash distributions declared Excess of cash provided by operating activities over cash distributions declared (Shortfall)/excess of earnings over cash distributions declared (25.1) (4.8) (66.1) Cash provided by operating activities for the three and nine months ended 2011 included Renewable Assets pre- Acquisition cash flows of $32.3 million and $70.3 million, respectively. For the three and nine months ended 2012, cash provided by operating activities exceeded cash distributions declared by $15.5 million ( $17.6 million) and $33.3 million ( $81.7 million), respectively. Excess cash was reserved for debt repayments, working capital requirements and maintenance capital expenditures, as well as cash retained by joint ventures. Earnings were $25.1 million (2011 $4.8 million) and $66.1 million (2011 exceeded by $0.3 million) lower than cash distributions for the three and nine months ended 2012, respectively. Earnings reflected non-cash items such as depreciation, deferred income taxes and amortization of deferred financing costs, all of which do not impact cash flow. Depreciation does not necessarily represent the cost of maintaining productive capacity; therefore, cash required for maintenance is generally lower than depreciation expense. CRITICAL ACCOUNTING ESTIMATES Asset Retirement Obligations In May 2009, the NEB released a report on the financial issues associated with pipeline abandonment and established a goal for pipelines regulated under the NEB Act to begin collecting and setting aside funds to cover future abandonment costs no later than January 1, Since then, the NEB has issued several revised base case assumptions based on feedback from member companies. Companies have the option to follow the base case assumptions or to submit pipeline specific applications. In November 2011, as required by the NEB, estimates of abandonments costs for the Fund s regulated pipelines systems, including Alliance Canada and Westspur System, were filed. The NEB is also requiring regulated pipeline companies to file a proposed process for collecting and setting aside the funds for future abandonment costs by November 30, 2012 for Group 1 companies and by March 31, 2013 for Group 2 companies. These costs would be recovered from shippers through tolls in accordance with NEB s determination that abandonment costs are a legitimate cost of providing services and are recoverable upon NEB approval from users of the system. THIRD QUARTER REPORT 29

32 Both of the required submissions will require NEB approval and will result in increases to transportation tolls and regulatory liabilities. The specific toll impacts are uncertain at this time as they will be the subject of an NEB filing in late 2012 and early Currently, for certain of the Fund s assets and the assets of its equity investees, including Alliance Canada, there is insufficient data or information to reasonably determine the timing and/or method of settlement for estimating the fair value of the asset retirement obligation (ARO). In these cases, the ARO cost is considered indeterminate for accounting purposes, as there is no data or information that can be derived from past practice, industry practice or the estimated economic life of the asset. CHANGES IN ACCOUNTING POLICIES United States GAAP (U.S. GAAP) First-time adoption of Part I International Financial Reporting Standards (Part I or IFRS) of the CICA Handbook was mandatory for Canadian publicly accountable enterprises on January 1, 2011, with the exception of certain qualifying entities. Part I was mandatory for qualifying entities, including those with operations subject to rate regulation, for periods beginning on or after January 1, The Fund was a qualifying entity for purposes of this deferral and presented its financial statements in accordance with pre-changeover accounting standards, Part V of the CICA Handbook, during the 2011 deferral period. As a rate regulated accounting standard has not been finalized by the International Accounting Standards Board, the Fund did not adopt IFRS in 2012 but rather U.S. GAAP. The Fund will be permitted to prepare its financial statements in accordance with U.S. GAAP for purposes of meeting its Canadian continuous disclosure obligations under a three-year exemption granted by securities regulators in Canada and has commenced reporting under U.S. GAAP for interim and annual financial statements beginning on January 1, Alliance Canada, a significant investee of the Fund, was also permitted to prepare its financial statements in accordance with U.S. GAAP under a similar order and commenced reporting under U.S. GAAP effective January 1, To facilitate users understanding of the Fund s transition to U.S. GAAP, the Fund filed with Canadian securities regulators, for information purposes, its 2011 financial statements restated under U.S. GAAP, along with the comparative period and related note disclosures. Fair Value Measurement Effective January 1, 2012, the Fund adopted Accounting Standards Update (ASU) , which revises the existing guidance on the disclosure of fair value measurements under U.S. GAAP as part of the Financial Accounting Standard Board s joint project with the International Accounting Standards Board. Under the revised standard, the Fund is required to provide additional disclosures about fair value measurements, including a description of the valuation methodologies used and information about the unobservable inputs and assumptions used in Level 3 fair value measurements, as well as the level in the fair value hierarchy of items that are not measured at fair value but whose fair value disclosure is required. As the adoption of this update impacted disclosure only, there was no impact to the Fund s earnings or cash flows for the current or prior periods presented. Statement of Comprehensive Income Effective January 1, 2012, the Fund adopted ASU , which updates the existing guidance on comprehensive income, requiring presentation of earnings and other comprehensive income (OCI) either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of earnings and OCI. The adoption of this pronouncement did not affect the Fund s presentation of comprehensive income and did not impact the Fund s consolidated financial statements. THIRD QUARTER REPORT 30

33 SELECTED QUARTERLY FINANCIAL INFORMATION Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 (millions of Canadian dollars) Revenue Earnings Cash distributions declared Revenues and earnings for Q forward are presented in accordance with U.S. GAAP. Revenues and earnings for Q are presented in accordance with Canadian GAAP (Part V). 2 Cash distributions declared on trust units and ECT preferred units. Significant items that have impacted quarterly financial information are as follows: Revenues and earnings for 2011 periods have been retrospectively adjusted and combine the results of operations of the Renewable Assets with the Fund. Revenues for 2012 and 2011 periods have been prepared on a U.S. GAAP basis whereby certain joint ventures, including Alliance Canada, have been accounted for as equity investments and not proportionately consolidated. Revenues for 2010 periods were prepared on a Canadian GAAP basis and include the Fund s proportionate share of revenues generated by joint ventures, including Alliance. The Fund issued an additional 14,616,000 trust units and 16,051,000 ECT preferred units in October 2011 in connection with the acquisition of the Renewable Assets. Incremental cash flows generated by the Renewable Assets enabled the Fund to increase the monthly distribution per unit to $0.121 effective with the November 2011 distribution. The increase in units outstanding and the increase in the amount of the monthly distribution per unit resulted in a corresponding increase in cash distributions declared. Third quarter 2011 earnings reflected acquisition-related costs of $3.6 million incurred in connection with the acquisition of the Renewable Assets. Following a modification to the terms of the ECT preferred units in December 2010, distributions on these units are recorded as a charge to equity; previously, they were presented as interest expense and were deducted from earnings. ECT preferred unit distributions charged to earnings totaled $10.9 million for the fourth quarter of Increased cash distributions declared in the first three quarters of 2011 compared with the fourth quarter of 2010 reflected an increase in the distribution from $0.288 per unit to $0.346 per unit. Phase II of the Saskatchewan System expansion was substantially completed and placed in service in December Revenues and earnings generated by the Green Power segment may be subject to seasonal variations. Wind resources are typically higher in the first and fourth quarters while solar resources are typically stronger in the second and third quarters. Fourth quarter revenues from the Fund s regulated entities, including the Westspur System and the Saskatchewan Gathering System, are typically higher than other quarters due to higher cost of service recoveries. The maintenance schedule of the Saskatchewan System has some seasonal variance which generally results in more maintenance projects being undertaken in the latter half of the year. OUTSTANDING UNIT DATA Number Trust units 49,241,000 ECT preferred units 54,074,750 Outstanding unit information is provided as at October 25, THIRD QUARTER REPORT 31

34 CONSOLIDATED STATEMENTS OF EARNINGS Three months ended Nine months ended (unaudited; millions of Canadian dollars) Revenues Expenses Operating and maintenance Management and administrative Depreciation and amortization Income from equity investments Other income Interest expense (13.0) (5.8) (40.9) (18.3) Income taxes (Note 8) (7.6) (5.9) (32.3) (18.9) Earnings Retrospectively adjusted to furnish comparative information related to the acquisition of the Renewable Entities. See Note 2. 2 See accompanying notes to the unaudited consolidated financial statements. THIRD QUARTER REPORT 32

35 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three months ended Nine months ended (unaudited; millions of Canadian dollars) Earnings Other comprehensive income/(loss) Change in unrealized loss on cash flow hedges, net of tax (2.5) 4.5 (8.1) Reclassification of cash flow hedges to earnings Other comprehensive income/(loss) 3.4 (1.3) 6.7 (4.6) Comprehensive income Retrospectively adjusted to furnish comparative information related to the acquisition of the Renewable Entities. See Note 2. 2 Tax expense/(recovery) was $1.2 million (2011 ($0.3) million) and $1.8 million (2011 ($2.5) million) for the three and nine months ended Tax expense/(recovery) was nil (2011 nil) for the three and nine months ended See accompanying notes to the unaudited consolidated financial statements. THIRD QUARTER REPORT 33

36 CONSOLIDATED STATEMENTS OF CHANGES IN Nine months ended (unaudited; millions of Canadian dollars) Deficit Balance at beginning of period (1,697.7) (171.1) Earnings Distributions to ECT preferred unitholders (58.7) (39.5) Distributions to trust unitholders (53.5) (35.9) Redemption value adjustment attributable to ECT preferred units (Note 6) (184.2) (11.1) Redemption value adjustment attributable to trust units (Note 7) (168.0) (10.4) Equity of former owner of Renewable Entities - (2.0) Balance at end of period (2,116.0) (194.3) Accumulated other comprehensive income/(loss) Balance at beginning of period (31.3) (21.3) Other comprehensive income/(loss), net of tax 6.7 (4.6) Balance at end of period (24.6) (25.9) Total unitholders deficit (2,140.6) (220.2) UNITHOLDERS EQUITY 1 Retrospectively adjusted to furnish comparative information related to the acquisition of the Renewable Entities. See Note 2. 2 See accompanying notes to the unaudited consolidated financial statements. THIRD QUARTER REPORT 34

37 CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended Nine months ended (unaudited; millions of Canadian dollars) Operating activities Earnings Depreciation and amortization Cash distributions in excess of equity earnings Deferred income taxes (Note 8) Other Changes in operating assets and liabilities (Note 9) 7.1 (9.2) (12.2) (14.4) Investing activities Additions to property, plant and equipment (82.1) (14.3) (105.0) (52.3) Additions to intangible assets (0.3) (1.9) (0.3) (1.9) Contributions to equity investees (6.0) (2.9) (12.5) (2.9) Change in construction payable (46.5) (53.1) (19.0) (86.2) (103.6) Financing activities Net change in long-term credit facility Short-term borrowings Demand loan advances received from unitholder (Note 11) Issuance of medium term notes (Note 5) Debt issue costs - (0.7) (2.6) (0.7) Repayment of affiliate loan (Note 5) - - (500.0) - ECT preferred unit distributions declared (19.6) (13.2) (58.7) (39.5) Trust unit distributions declared (17.8) (11.9) (53.5) (35.9) Change in distributions payable - (16.7) Partnership contributions received by Renewable Entities Partnership distributions paid by Renewable Entities (49.1) Increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplementary cash flow information Income taxes paid/(recovered) (0.6) (1.1) (0.5) 0.3 Interest paid Retrospectively adjusted to furnish comparative information related to the acquisition of the Renewable Entities. See Note 2. 2 See accompanying notes to the unaudited consolidated financial statements. THIRD QUARTER REPORT 35

38 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, (unaudited; millions of Canadian dollars) Assets Current assets Cash and cash equivalents Accounts receivable and other, net Property, plant and equipment, net 1, ,375.8 Intangible assets Long-term investments Long-term note receivable from equity investee Deferred amounts and other assets Deferred income taxes , ,921.4 Liabilities and unitholders' equity Current liabilities Short-term borrowings Accounts payable and other Due to affiliates (Note 11) Distributions payable Long-term debt (Note 5) 1, Long-term note payable to affiliate (Note 5) Other long-term liabilities Deferred income taxes , ,573.8 Commitments (Note 12) ECT preferred units (Note 6) 1, ,086.9 Trust units (Note 7) 1, , , Unitholders deficit Deficit (2,116.0) (1,697.7) Accumulated other comprehensive loss (24.6) (31.3) (2,140.6) (1,729.0) ( 1 See accompanying notes to the unaudited consolidated financial statements. 2, ,921.4 THIRD QUARTER REPORT 36

39 NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements of Enbridge Income Fund (the Fund) reflect all normal recurring adjustments that are necessary, in the opinion of management, to present fairly the results of operations in accordance with United States generally accepted accounting principles (U.S. GAAP). The Fund commenced reporting using U.S. GAAP as its primary basis of accounting effective January 1, 2012 and was permitted to do so for purposes of meetings its Canadian continuous disclosure obligations under a three year exemption granted by securities regulators in Canada. Comparative figures have been restated in accordance with U.S. GAAP and 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. These interim consolidated financial statements do not include all disclosures required for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Fund s U.S. GAAP consolidated financial statements as at and for the year ended December 31, These interim consolidated financial statements follow the same significant accounting policies as those included in the Fund s U.S. GAAP consolidated financial statements as at and for the year ended December 31, 2011, except as described in Note 3, Changes in Accounting Policies. 2. RENEWABLE ENTITIES ACQUISITION On October 21, 2011, the Fund acquired 100% interests in the following entities which were whollyowned by subsidiaries of Enbridge Inc. (Enbridge): Talbot Windfarm LP, Talbot Windfarm GP Inc., Enbridge Renewable Energy Infrastructure Canada Inc., Ontario Corp., Enbridge Renewable Energy Infrastructure Limited Partnership (ERIP) and ERIP s wholly-owned subsidiary, Ontario Sustainable Farms Inc. (collectively the Renewable Entities). The acquisition of the Renewable Entities (the Acquisition) was accounted for as a transaction among entities under common control, similar to a pooling of interests, whereby the assets and liabilities acquired were recorded at Enbridge s historic carrying values and the Fund s historical financial information has been retrospectively adjusted to present the results of operations for the Fund and the Renewable Entities on a combined basis for all periods presented. The incremental effect of retrospectively adjusting the Fund s consolidated financial statements to include the results of operations of the Renewable Entities for the period prior to the Acquisition is as follows: Three months ended 2011 Nine months ended 2011 (unaudited; millions of Canadian dollars) Earnings Revenues Operating and administrative (5.6) (16.6) Depreciation and amortization (11.8) (35.5) Interest expense, net Income tax expense (3.2) (12.3) Earnings THIRD QUARTER REPORT 37

40 Three months ended 2011 Nine months ended 2011 (unaudited; millions of Canadian dollars) Cash provided from operating activities Cash provided from/(used in) investing activities (20.9) (22.8) Cash used in financing activities - (29.3) CHANGES IN ACCOUNTING POLICIES Fair Value Measurement Effective January 1, 2012, the Fund adopted Accounting Standards Update (ASU) , which revises the existing guidance on the disclosure of fair value measurements under U.S. GAAP as part of the Financial Accounting Standard Board s joint project with the International Accounting Standards Board. Under the revised standard, the Fund is required to provide additional disclosures about fair value measurements, including a description of the valuation methodologies used and information about the unobservable inputs and assumptions used in Level 3 fair value measurements, as well as the level in the fair value hierarchy of items that are not measured at fair value but whose fair value disclosure is required. As the adoption of this update impacted disclosure only, there was no impact to the Fund s earnings or cash flows for the current or prior periods presented. Statement of Comprehensive Income Effective January 1, 2012, the Fund adopted ASU , which updates the existing guidance on comprehensive income, requiring presentation of earnings and other comprehensive income (OCI) either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of earnings and OCI. The adoption of this pronouncement did not affect the Fund s presentation of comprehensive income and did not impact the Fund s consolidated financial statements. 4. SEGMENTED INFORMATION Three months ended 2012 Green Power Saskatchewan System Alliance Canada Corporate Consolidated (unaudited; millions of Canadian dollars) Revenues Operating and maintenance (5.8) (12.4) - - (18.2) Management and administrative (5.3) (5.3) Depreciation and amortization (12.1) (8.4) - - (20.5) (5.3) 19.3 Income from equity investments Other income/(expense) (0.2) Interest expense and other (13.0) (13.0) Income tax recovery/(expense) (7.8) (7.6) Earnings (26.1) 12.3 Total assets 1, ,047.5 Additions to property, plant and equipment THIRD QUARTER REPORT 38

41 Three months ended Green Power Saskatchewan System Alliance Canada Corporate Consolidated (unaudited; millions of Canadian dollars) Revenues Operating and maintenance (5.9) (11.5) - - (17.4) Management and administrative (6.6) (6.6) Depreciation and amortization (12.1) (9.8) - - (21.9) (6.6) 17.8 Income from equity investments Other income/(expense) 0.5 (0.3) Interest expense and other (5.8) (5.8) Income tax recovery/(expense) (6.2) (5.9) Earnings (18.6) 20.3 Total assets 1, ,989.7 Additions to property, plant and equipment Retrospectively adjusted to furnish comparative information related to the acquisition of the Renewable Entities. See Note 2. Nine months ended 2012 Green Power Saskatchewan System Alliance Canada Corporate Consolidated (unaudited; millions of Canadian dollars) Revenues Operating and maintenance (16.1) (36.5) - - (52.6) Management and administrative (12.5) (12.5) Depreciation and amortization (36.3) (26.5) - - (62.8) (12.5) 79.7 Income from equity investments Other income/(expense) (0.2) Interest expense and other (40.9) (40.9) Income tax recovery/(expense) (32.8) (32.3) Earnings (86.2) 46.1 Total assets 1, ,047.5 Additions to property, plant and equipment Nine months ended Green Power Saskatchewan System Alliance Canada Corporate Consolidated (unaudited; millions of Canadian dollars) Revenues Operating and maintenance (17.6) (31.5) - - (49.1) Management and administrative (13.0) (13.0) Depreciation and amortization (36.4) (27.2) - - (63.6) (13.0) 69.5 Income from equity investments Other income Interest expense and other (0.3) - - (18.0) (18.3) Income tax recovery/(expense) (19.5) (18.9) Earnings (50.5) 75.7 Total assets 1, ,989.7 Additions to property, plant and equipment Retrospectively adjusted to furnish comparative information related to the acquisition of the Renewable Entities. See Note 2. THIRD QUARTER REPORT 39

42 5. LONG-TERM DEBT In May 2012, the Fund amended its existing $500.0 million unsecured revolving standby credit facility with a syndicate of commercial banks extending the term of this facility to May 17, 2015 and including a feature under which up to $250.0 million of additional standby credit may be provided on the same terms and conditions as the existing facility. The maturity date of the credit facility may be extended annually for an additional year from the end of the applicable term, at the lenders option. Consistent with previous credit facilities, the Fund s new credit facility includes covenants that limit outstanding debt to a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). In February 2012, the Fund issued $300.0 million of Medium Term Notes (MTNs) maturing in February 2019 with a coupon of 4.10% and $200.0 million of MTNs maturing in February 2022 with a coupon of 4.85%. The MTNs are unsecured and redeemable by the Fund prior to maturity, in whole or in part, from time to time, at the option of the Fund at a price equal to the greater of the applicable Government of Canada Yield price and par. The gross proceeds of $500.0 million were used to repay the outstanding balance on the affiliate loan from Enbridge. 6. ECT PREFERRED UNITS Number of units Amount Number of units Amount (unaudited; millions of Canadian dollars, except number of units) ECT preferred units, series 1 Balance, beginning of period 38,023, ,023, Redemption value adjustment Balance, end of period 38,023, ,023, ECT preferred units, series 2 Balance, beginning of period 16,051, Redemption value adjustment Balance, end of period 16,051, Total ECT preferred units 54,074,750 1, ,023, TRUST UNITS Number of Number of Units Amount Units Amount (unaudited; millions of Canadian dollars, except number of units) Common trust units, beginning of period 49,241, ,625, Redemption value adjustment Common trust units, end of period 49,241,000 1, ,625, THIRD QUARTER REPORT 40

43 8. INCOME TAXES Income tax expense included in earnings for the three months ended 2012 comprised current income tax expense of nil ( $0.7 million) and deferred income tax expense of $7.6 million ( $5.2 million). Income tax expense included in earnings for the nine months ended 2012 comprised current income tax expense of $0.5 million ( $4.2 million) and deferred income tax expense of $31.8 million ( $14.7 million). The effective tax rate for the three and nine months ended 2012 was 38.2% ( %) and 41.2% ( %), respectively. Significant variances between the effective rate and the weighted average Canadian statutory income tax rate were as follows: Three months ended Nine months ended (unaudited) Weighted average Canadian statutory tax rate 26.3% 27.8% 26.3% 27.8% Taxable component of trust distributions - (11.8%) - (12.1%) Temporary differences not recognized in non-taxable entities 7.6% (0.8%) 8.1% (0.2%) Deferred income taxes related to regulated operations 6.1% 10.7% 6.7% 6.9% Other (1.8%) (3.4%) 0.1% (2.4%) 38.2% 22.5% 41.2% 20.0% 1 Retrospectively adjusted to furnish comparative information related to the acquisition of the Renewable Entities. See Note CHANGES IN OPERATING ASSETS AND LIABILITIES Three months ended Nine months ended (unaudited; millions of Canadian dollars) Accounts receivable and other, net 12.0 (9.2) 1.9 (11.5) Deferred amounts and other assets (8.2) 0.4 (9.9) - Accounts payable and other Due to affiliates 3.0 (11.1) (7.4) (11.1) Other long-term liabilities (0.4) (0.3) 7.1 (9.2) (12.2) (14.4) 1 Retrospectively adjusted to furnish comparative information related to the acquisition of the Renewable Entities. See Note RISK MANAGEMENT AND HEDGING ACTIVITIES MARKET PRICE RISK The Fund s earnings, cash flows and OCI are subject to movements in interest rates, foreign exchange rates and commodity prices (collectively, market price risk). Formal risk management policies, processes and systems have been designed to mitigate these risks. The following summarizes the types of market price risks to which the Fund is exposed and the risk management instruments used to mitigate them. Interest Rate Risk The Fund s earnings and cash flows are exposed to short term interest rate variability due to the regular repricing of its variable rate debt, primarily credit facilities. Floating to fixed interest rate swaps are used to hedge against the effect of future interest rate movements. The Fund has implemented a program to significantly mitigate the volatility of short-term interest rates on interest expense through 2016 at an average swap rate of 1.80%. THIRD QUARTER REPORT 41

44 The Fund s earnings and cash flows are also exposed to variability in longer term interest rates ahead of anticipated fixed rate debt issuances. Forward starting interest rate swaps are used to hedge against the effect of future interest rate movements. A total of $100 million of future fixed rate term debt issuances have been hedged at an average swap rate of 3.35%. The Fund uses qualifying derivative instruments to manage interest rate risk. Foreign Exchange Risk The Fund s earnings, cash flows and OCI are subject to foreign exchange rate variability due to United States dollar denominated expenses. The Fund uses qualifying derivative instruments to hedge foreign exchange rate risk. Commodity Price Risk The Fund s earnings and cash flows are exposed to changes in commodity prices due to its power generation operations and related floating rate supply agreements, as well as through commitments to purchase and sell natural gas in connection with capacity held on the Alliance System. The Fund uses power and natural gas derivative instruments to fix a portion of the variable price exposures that may arise from these activities. The Fund uses a combination of qualifying and non-qualifying derivative instruments to manage commodity price risk. TOTAL DERIVATIVE INSTRUMENTS The following table summarizes the balance sheet location, carrying value and fair value of the Fund s derivative instruments. The Fund did not have any outstanding fair value or net investment hedges as at 2012 and December 31, (unaudited; millions of Canadian dollars) Accounts receivable and other Derivative Instruments Used as Cash Flow Hedges Non-Qualifying Derivative Instruments Total Derivative Instruments Interest rate contracts Commodity contracts Deferred amounts and other assets Interest rate contracts Commodity contracts Accounts payable and other Interest rate contracts (1.7) - (1.7) Foreign exchange contracts (0.2) - (0.2) Commodity contracts (0.1) (0.1) (0.2) (2.0) (0.1) (2.1) Other long-term liabilities Interest rate contracts (8.9) - (8.9) Foreign exchange contracts (0.7) - (0.7) Commodity contracts (0.1) (0.4) (0.5) (9.7) (0.4) (10.1) Total net derivative asset/(liability) Interest rate contracts (10.1) - (10.1) Foreign exchange contracts (0.9) - (0.9) Commodity contracts 0.8 (0.2) 0.6 (10.2) (0.2) (10.4) THIRD QUARTER REPORT 42

45 December 31, 2011 (unaudited; millions of Canadian dollars) Accounts receivable and other Derivative Instruments Used as Cash Flow Hedges Non-Qualifying Derivative Instruments Total Derivative Instruments Interest rate contracts Deferred amounts and other assets Interest rate contracts Accounts payable and other Interest rate contracts (1.9) - (1.9) Foreign exchange contracts (0.1) - (0.1) Commodity contracts (1.0) - (1.0) (3.0) - (3.0) Other long-term liabilities Interest rate contracts (8.5) - (8.5) Foreign exchange contracts (0.6) - (0.6) Commodity contracts (6.5) (0.3) (6.8) (15.6) (0.3) (15.9) Total net derivative asset/(liability) Interest rate contracts (8.9) - (8.9) Foreign exchange contracts (0.7) - (0.7) Commodity contracts (7.5) (0.3) (7.8) (17.1) (0.3) (17.4) The following table summarizes the maturity and notional principal or quantity outstanding related to the Fund s derivative instruments Thereafter Interest rate contracts - Short-term borrowings (millions of Canadian dollars) Interest rate contracts - Long-term debt (millions of Canadian dollars) U.S. dollar forwards (millions of United States dollars) Commodity contracts - Power (megawatts per hour) December 31, Thereafter Interest rate contracts - Short-term borrowings (millions of Canadian dollars) Interest rate contracts - Long-term debt (millions of Canadian dollars) U.S. dollar forwards (millions of United States dollars) Commodity contracts - Power (megawatts per hour) THIRD QUARTER REPORT 43

46 Effect of Derivative Instruments on the Statements of Earnings and Comprehensive Income The following table presents the effect of cash flow hedges on the Fund s consolidated earnings and consolidated comprehensive income. Three months ended Nine months ended (unaudited; millions of Canadian dollars) Amount of unrealized gain/(loss) recognized in OCI Interest rate contracts (1.0) (1.7) (2.5) (2.8) Foreign exchange contracts (0.5) 1.3 (0.3) 0.7 Commodity contracts 5.2 (2.4) 9.1 (8.5) Total unrealized gain/(loss) recognized in OCI 3.7 (2.8) 6.3 (10.6) Amount of gain/(loss) reclassified from AOCI to earnings (effective portion) Interest rate contracts Foreign exchange contracts (0.5) 0.2 Commodity contracts Total gain reclassified from AOCI to earnings (effective portion) (Gain)/loss reported within Interest Expense in the Consolidated Statements of Earnings. 2 (Gain)/loss reported within Other Income in the Consolidated Statements of Earnings 3 (Gain)/loss reported within Revenues in the Consolidated Statements of Earnings. The estimated net amount of existing losses reported in accumulated other comprehensive income that is expected to be reclassified to net income in the next 12 months is $1.8 million. Actual amounts reclassified to earnings depend on interest rates, foreign exchange rates and commodity prices in effect when derivative contracts that are currently outstanding mature. For all forecasted transactions, the maximum term over which the Fund is hedging exposures to the variability of cash flows is 15 months at Non-Qualifying Derivatives The following table presents the unrealized losses associated with changes in the fair value of the Fund s non-qualifying derivatives. Three months ended Nine months ended (unaudited; millions of Canadian dollars) Commodity contracts Total unrealized derivative fair value loss Loss reported within Revenues in the Consolidated Statements of Earnings. LIQUIDITY RISK Liquidity risk is the risk that the Fund will not be able to meet its financial obligations, including commitments (Note 12), as they become due. In order to manage this risk, the Fund forecasts the cash requirements over the near and long term to determine whether sufficient funds will be available when required. The Fund s primary sources of liquidity and capital resources are funds generated from operations, draws under committed credit facilities and the issuance of medium-term notes. The Fund maintains a current shelf prospectus with Canadian securities regulators, which enables, subject to market conditions, ready access to Canadian public capital markets. Cash flow from operations, in combination with available committed credit facilities and, if required, capital markets funding, is expected to be sufficient to meet the forecast liquidity and capital resource requirements of the Fund. THIRD QUARTER REPORT 44

47 CREDIT RISK Entering into derivative financial instruments may result in exposure to credit risk. Credit risk arises from the possibility that a counterparty will default on its contractual obligations and is limited to those contracts where the Fund would incur a loss in replacing the instrument. The Fund enters into risk management transactions only with institutions that possess investment grade credit ratings. Credit risk relating to derivative counterparties is mitigated by utilization of credit exposure limits, contractual requirements and frequent assessment of counterparty credit worthiness. At 2012 and December 31, 2011, the Fund had group credit concentrations and maximum credit exposure in the following counterparty segments: December 31, (unaudited; millions of Canadian dollars) Canadian financial institutions United States financial institutions Enbridge affiliate Credit risk also arises from trade and other receivables, and is mitigated through credit exposure limits and by requiring less creditworthy shippers to provide credit enhancement which may include letters of credit, posting of collateral, netting provisions or other contractual requirements. The maximum exposure to credit risk related to non-derivative financial assets is their carrying value. FAIR VALUE MEASUREMENTS The Fund s financial assets and liabilities measured at fair value on a recurring basis include derivative instruments. The fair value of derivative instruments reflects the Fund s best estimates of market value based on generally accepted valuation techniques or models and supported by observable market prices and rates. When such values are not available, the Fund uses discounted cash flow analysis from applicable yield curves based on observable market inputs to estimate fair value. At 2012, the Fund s long-term debt had a fair value of $1,255.6 million (December 31, $693.5 million). This fair value measurement has been classified as a level 2 fair value measurement. Fair Value of Financial Instruments The Fund categorizes its financial assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 Level 1 includes financial instruments measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. An active market for a financial instrument is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The Fund did not have any financial instruments categorized as Level 1 as at 2012 or December 31, Level 2 Level 2 includes financial instrument valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Financial instruments in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market for the entire duration of the financial instrument. Financial instruments valued using Level 2 inputs include non-exchange traded derivatives such as over-the-counter interest rate swaps for which observable inputs can be obtained. THIRD QUARTER REPORT 45

48 Level 3 Level 3 includes financial instrument valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the financial instruments fair value. Generally, Level 3 financial instruments are longer dated transactions, occur in less active markets, occur at locations where pricing information is not available or have no binding broker quote to support Level 2 classification. The Fund has developed methodologies, benchmarked against industry standards, to determine fair value for these financial instruments based on extrapolation of observable future prices and rates. Financial instruments valued using Level 3 inputs include long-dated derivative commodity contracts. The Fund uses the most observable inputs available to estimate the fair value of its financial instruments. When possible, the Fund estimates the fair value of its financial instruments based on quoted market prices. If quoted market prices are not available, the Fund uses estimates from third party brokers. For non-exchange traded derivatives classified in Levels 2 and 3, the Fund uses standard valuation techniques to calculate the estimated fair value. These methods include discounted cash flows for forwards and swaps. Depending on the type of financial instrument and nature of the underlying risk, the Fund uses observable market prices (interest, foreign exchange and commodity) and volatility as primary inputs to these valuation techniques. Finally, the Fund considers its own credit default swap spread as well as the credit default swap spreads associated with its counterparties in its estimation of fair value. The Fund has categorized its derivative assets and liabilities measured at fair value as follows: 2012 Level 1 Level 2 Level 3 Total (millions of Canadian dollars) Financial assets Current derivative assets Long-term derivative assets Financial liabilities Current derivative liabilities - (1.9) (0.2) (2.1) Long-term derivative liabilities - (9.6) (0.5) (10.1) Total net asset/(liability) - (10.9) 0.5 (10.4) December 31, 2011 Level 1 Level 2 Level 3 Total (millions of Canadian dollars) Financial assets Current derivative assets Long-term derivative assets Financial liabilities Current derivative liabilities - (2.0) (1.0) (3.0) Long-term derivative liabilities - (9.1) (6.8) (15.9) Total net asset/(liability) - (9.6) (7.8) (17.4) The significant unobservable inputs used in the fair value measurement of Level 3 derivative instruments were as follows: Fair value at September 30, 2012 (millions of Canadian dollars) Unobservable Input Minimum Price Maximum Price Weighted Average Price Commodity Contracts Financial 1 Natural Gas (0.1) Forward Gas Price $/mmbtu 2 Power 0.6 Forward Power Price $/MWH 1 Financial forward commodity contracts are valued using a market approach valuation technique. 2 One million British thermal units (mmbtu). If adjusted, the significant unobservable inputs disclosed in the table above would have a direct impact on the fair value of the Fund s Level 3 derivative instruments. The significant unobservable inputs used in the THIRD QUARTER REPORT 46

49 fair value measurement of Level 3 derivative instruments consist of forward commodity prices. Changes in forward commodity prices would result in significantly different fair values for long positions, with offsetting impacts to short positions. Changes in net fair value of derivative assets and liabilities classified as Level 3 in the fair value hierarchy were as follows: Three months ended Nine months ended (unaudited; millions of Canadian dollars) Level 3 net derivative asset/(liability) at beginning of period (4.6) (5.1) (7.8) 1.2 Total gains/(losses), unrealized Included in earnings 1 (0.7) 0.4 (1.1) 1.2 Included in OCI 5.8 (2.6) 9.4 (9.8) Settlements Transfers into Level Level 3 net derivative asset/(liability) at end of period 0.5 (7.2) 0.5 (7.2) 1 Gain/(loss) reported within Revenues in the Consolidated Statement of Earnings. Represents the total change in unrealized gain/(loss) relating to Level 3 derivative instruments still held at period end. 2 Represents the realized fair value of Level 3 derivative instruments settled during the period. The Fund s policy is to recognize transfers as of the last day of the reporting period. There were no transfers between levels as of 2012 or December 31, RELATED PARTY TRANSACTIONS In the second quarter of 2012, Enbridge Income Fund Holdings Inc. (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. 12. COMMITMENTS At 2012, the Fund has signed contracts for the purchase of services, pipe and other materials totaling $46.6 million which are expected to be paid within the next two years. 13. 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 47

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51

52 Enbridge Income Fund Holdings Inc. s common shares trade on the Toronto Stock Exchange under the symbol ENF. Enbridge Income Fund Holdings Inc. 3000, 425 1st Street S.W. Calgary, Alberta, Canada T2P 3L8 Telephone: Fax: Toll-free: enbridgeincomefund.com