FRONT STREET U.S. MLP INCOME FUND LTD.

Transcription

1 FRONT STREET U.S. MLP INCOME FUND LTD. Interim Management Report of Fund Performance and Unaudited Interim Financial Statements June 30, 2013

2 Interim Management Report of Fund Performance As at June 30, 2013 Front Street U.S. MLP Income Fund Ltd. This Interim Management Report of Fund Performance contains financial highlights but does not contain the complete interim financial statements for Front Street U.S. MLP Income Fund Ltd. (the Fund ). The interim financials of the Fund are attached behind this report and you can also get a copy of the interim (or annual) financial statements at your request, and at no cost, by calling , by writing to us at Front Street Capital 2004, 33 Yonge Street, Suite 600, Toronto, Ontario M5E 1G4 or by visiting our website at or SEDAR at Securityholders may also contact us using one of these methods to request a copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure relating to the Fund. Forward Looking Information This Interim Management Report of Fund Performance contains forward-looking information and statements relating, but not limited to, anticipated or prospective financial performance and results of operations of the Fund. Forward looking information involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information. For this purpose, any statements that are contained herein that are not statements of historical fact may be deemed to be forward-looking information. Without limiting the foregoing, the words "believes", "anticipates", "plans", "intends", "will", "should", "expects", "projects", and similar expressions are intended to identify forward-looking information. Although the Fund believes it has a reasonable basis for making the forecasts or projections included in this Interim Management Report of Fund Performance, readers are cautioned not to place undue reliance on such forward-looking information. By its nature, the forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. These factors include, but are not limited to, those associated with the performance of the equity securities market, expectations about interest rates and factors incorporated by reference herein as risk factors. The above list of important factors affecting forward looking information is not exhaustive, and reference should be made to the other risks discussed in the Fund s filings with Canadian securities regulatory authorities. The forward looking information is given as of the date of this Management Report of Fund Performance, and the Fund undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.

3 Management Discussion of Fund Performance INVESTMENT OBJECTIVES AND STRATEGIES The Fund s investment objectives are to provide holders of Equity Shares ( Shareholders ) with quarterly tax-advantaged cash distributions and long-term capital appreciation, through its economic exposure to the MLP Portfolio through the Forward Agreement (as defined herein). The Fund has been created to: (i) provide Shareholders with exposure to the performance of an actively managed, diversified notional portfolio (the MLP Portfolio ) of energy infrastructure master limited partnerships ( MLPs ) that are U.S. limited partnerships or limited liability companies that are (a) publicly traded on U.S. securities exchanges and (b) primarily engaged in the transportation, storage, processing, refining, marketing, exploration and production and mining of minerals or natural resources; and (ii) seek to provide Canadian investors with the benefits of exposure to the MLP asset class, including (a) high levels of cash distributions, (b) the opportunity for capital appreciation, and (c) protection against inflation, as the revenues of many MLPs are linked to the U.S. Producer Price Index or other inflation indices pursuant to U.S. federal regulation. The return to Shareholders and the Fund is dependent upon the economic performance of the MLP Portfolio by virtue of the Forward Agreement that the Fund has entered into to gain economic exposure to the MLP Portfolio. In addition, as the value of the MLP Portfolio is calculated in U.S. dollars and payments under the Forward Agreement will be made in Canadian dollars, the Fund will be subject to the risk of currency fluctuations in the value of the U.S. dollar relative to the Canadian dollar, except to the extent the Manager elects to hedge such currency exposure under the Forward Agreement. Front Street Capital 2004 is the manager of the Fund (the Manager ). SteelPath Fund Advisors, LLC, the specialist MLP portfolio advisor (the MLP Advisor ), in actively managing the MLP Portfolio, will focus on MLPs it believes offer attractive risk reward opportunities and sustainable or growing distributions. The MLP Advisor uses a detailed, bottom-up analysis in selecting MLPs for the MLP Portfolio. The MLP Portfolio is managed by the MLP Advisor on a similar basis as the SteelPath Long-Only Managed Account strategy. The SteelPath Long-Only Managed Account strategy is focused on those MLPs that own and operate hard assets which transport and store liquid hydrocarbons and natural gas. These MLPs have toll-road business models as they generally do not take title to the commodity, do not depend on the level of commodity prices as their revenues are generally unaffected by these fluctuations and receive a specified tariff for storing or transporting a product over a certain distance. The MLP Advisor examines the following quantitative and qualitative fundamental factors to determine which MLPs meet its criteria: management acumen and experience; product-specific demand drivers and volatility; historical and projected operating and financial data; capital structure and distribution coverage; and valuation.

4 RISK An investment in the Equity Shares of the Fund is subject to certain risk factors. Certain of these relate to the Fund and certain of these relate to the MLP Portfolio. These risks associated with the Fund and MLP Portfolio remains as described in the Annual Information Form. RESULTS OF OPERATIONS During the period ended June 30, 2013, the Fund earned investment income of 1,707 from interest. There were net realized gains on the sale of investments of 463,714, unrealized depreciation on investments of 5.8 million, and an unrealized appreciation of forward contract of 53.7 million. Operating expenses, excluding management fees, totaled 225,092 during the period ended June 30, The MLP sector modestly underperformed the broader market for the second quarter of 2013 after strong first quarter performance. Taken together, the first two quarters of the year have provided the best start to a year since the first half of 2009 when the sector recovered from its oversold condition in the wake of the financial crisis. Notably, first-half 2013 MLP price performance has outpaced the broader market by 6.0%, helping to offset some of the 14.6% of 2012 price underperformance. We believe first-half 2013 price performance reflects a bounce from 2012 underperformance as well as greater investor recognition of, and interest in, the U.S. energy renaissance. Further, the technical equity supply and demand dynamic has been relatively more supportive than experienced over Recall that for 2012, a record setting 28 billion in equity supply, from both secondary and initial public offerings, seemed to simply overwhelm the demand for units as fund flows into MLP-focused investment vehicles, such as open-end, closed-end and index-based products approximated only 7.5 billion. By comparison, first quarter and second quarter equity issuance and MLP product fund-flows were far more balanced with equity supply only outpacing MLP fund flows by 3.3 billion. RECENT DEVELOPMENTS At year-end 2012, the spread between WTI at Cushing and Brent was per barrel (bbl) compared to the near parity pricing relationship that existed prior to 2011; at the end of June 2013, this spread had narrowed to 5.67 per bbl. The implications of the narrowing span are felt across the energy industry. Perhaps the most dramatically impacted are refineries that had been able to source these relatively cheap midcontinent crudes. These refineries are now assumed to have experienced a significant narrowing of margin and, as a result, have experienced dramatic stock price corrections. While the future of this spread remains uncertain and frequently debated it is important to note that the vast majority of infrastructure focused MLPs have little direct exposure to this spread. Further, we believe that those which have been benefiting from this spread are generally well positioned to absorb its narrowing. Natural gas prices gave back the 17.2% first quarter gain, falling 11.4% over the quarter to close at 3.57 per mmbtu (one thousand British thermal units). Despite the recent weakness, natural gas prices are still

5 well above the 1.84 per mmbtu low reached in Natural gas prices remain below that which would reflect the historical relationship to crude oil. As a result, producers continue to primarily focus on liquids-rich production areas and most dry gas basins continue to see little producer interest. Notably, the midstream services required to exploit liquids-rich natural gas production are extensive and, therefore, producer focus on liquids-rich plays is generally supportive of the midstream sector. Natural gas liquids ( NGL ) pricing, based on a composite of individual liquids, weakened by 15% over the quarter with all components exhibiting weakness (ethane, propane, normal butane, etc.). The June-end NGL composite price of 0.81 per gallon is 40% below the record setting levels realized over NGL extraction is expected to continue to keep pricing weak until large chemical manufacturing capacity additions enter service in 2017 to Though we continue to believe NGL and crude oil prices may disappoint the market in 2013 as production success could continue to outpace the logistical and industrial changes needed to spur demand, we remain confident in our outlook for midstream MLPs. We note both crude oil and NGL pricing could fall substantially while still supporting robust producer activity and volume growth to the benefit of energy infrastructure operators. Though valuations within the sector rose modestly, we believe these valuations are supported by the sector s growth potential. The midstream opportunity set created by the macro trend of dramatic growth in domestic crude oil, natural gas and NGL production volumes are widespread, robust, and long-term in nature and support current valuations. We prefer to seek exposure to these dynamics through MLPs with fee or fee-like exposure to this volume growth versus commodity price exposure as we believe such entities offer the most attractive risk to reward opportunity within the sector. On August 1, 2013, Front Street U.S. MLP Income Fund Ltd. ( FS MLP ) and Front Street Strategic Yield Fund Ltd. ( FSSYL ) announced that the merger of FS MLP and FSSYL (together, the Funds ) was completed. The Funds merged to form a new amalgamated corporation, known as Front Street U.S. MLP Income Fund Ltd. ( New MLP Fund ). Pursuant to the completed merger, each shareholder of FSSYL received Equity Shares, Series C of New MLP Fund for each Equity Share of FSSYL held at the close of business on July 31, This exchange ratio was calculated based on the net asset value per Equity Share of FSSYL at the close of business on July 31, 2013, divided by the net asset value per Equity Share, Series C of FS MLP at the close of business on July 31, Equity Shares of FSSYL had a net asset value of at the close of business on July 31, 2013, and Equity Shares, Series C of FS MLP had a net asset value of at the close of business on July 31, Each shareholder of FS MLP received one Equity Share of New MLP Fund for each Equity Share of FS MLP held at the close of business on July 31, Shareholders who held Equity Shares, Series C of FS MLP received Equity Shares, Series C of New MLP Fund, and shareholders who held Equity Shares, Series U of FS MLP received Equity Shares, Series U of New MLP Fund. As a result of the merger, the Equity Shares of FS MLP and FSSYL were de-listed from the TSX. The Equity Shares, Series C of New MLP Fund was listed on the TSX under the symbol MLP. As indicated in the joint management proxy circular of the Funds dated March 8, 2013 with respect to the merger, distributions for New MLP Fund will be made on a monthly basis. Because of the merger date, New MLP Fund will make a distribution for the period from July 1, 2013 to the quarter ended September 30, 2013 and will make monthly distributions thereafter.

6 International Financial Reporting Standards Effective for its fiscal year commencing January 1, 2014, the Fund must adopt IFRS. In preparation thereof, the Manager continues to monitor and implement the Fund s changeover plan and will continue to assess the impact on the implementation as new IFRS guidance become available from the International Accounting Standards Board ( IASB ). The Manager has reviewed the current IFRS against the Fund s current accounting policies and financial statement presentation under Canadian generally accepted accounting principles ( Canadian GAAP ), and the following areas of differences have been identified: (a) IAS 32, Financial Instruments: Disclosure and Presentation, requires shareholders equity to be classified as liability unless certain criteria are met. The Fund s shareholders equity meets the definition of a puttable instrument. The Manager has assessed the Fund s shareholder structure and has determined the liability treatment is the most appropriate classification. (b) IFRS 13, Fair Value Measurements, that was released in May 2011 provides guidance on the fair value measurements and allows for the possible use of closing prices to value investments. The Manager has assessed the guidance that will apply under IFRS and has determined that the use of closing market prices is appropriate in valuing investments. The anticipated impact of IFRS on accounting policies and implementation decisions will predominantly be on the financial statement presentation and note disclosures in the Fund s financial statements. In particular, the Fund will be required to present a statement of cash flows, and will be required to include certain additional and enhanced disclosures. The Fund s changeover plan includes key activities in (a) preparation of financial statements, (b) information processing and record keeping, (c) business policy assessment and (d) systems and controls. Based on the Manager s current analysis, the Manager believes the changeover to IFRS will not materially affect the Fund s existing business arrangements. RELATED-PARTY TRANSACTIONS Pursuant to the management agreement, Front Street Capital 2004 is the manager of the Fund and, as such, is responsible for managing and directing the business, operations, and affairs of the Fund and providing or arranging for required general and administrative services to the Fund. The management fees charged to operations have been reported in accordance with the agreement, totalling 1,436,646 for the period. As at June 30, 2013, the Fund has recognized a liability of 734,395 for management fees payable. Recommendations or reports by the Independent Review Committee The Independent Review Committee of the Fund tabled no special reports and made no extraordinary material recommendations to management of the Fund during the period ended June 30, 2013.

7 FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund's financial performance. This information is derived from the Fund's audited annual financial statements and from the unaudited interim financial statements for the six-month period ended June 30, Series C The Fund's Net Assets per Share (1) June 30 December 31 May 20, 2011 to December 31, 2011 Net Assets, beginning of the period (3) Increase (decrease) from operations: Total revenue Total expenses (0.11) (0.22) (0.14) Realized gains (losses) for the period (0.10) Unrealized gains (losses) for the period Total increase (decrease) from operations (2) (0.06) Distributions to Shareholders: From income (excluding dividends) From dividends From capital gains Return of capital (0.33) (0.58) (0.32) Total distributions to Shareholders (0.33) (0.58) (0.32) Net Assets, end of the period (1) This information is derived from the Fund's unaudited interim and audited annual financial statements. The net assets per security presented in the financial statements differ from the net asset value calculated for fund pricing purposes. [An explanation of these differences can be found in the notes to the financial statements] (2) Net assets and distributions are based on the actual number of shares outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of shares outstanding over the financial period. (3) Initial offering price, net of cost associated with offering of 3,369,400 (or 0.60 per share) Ratios and Supplemental Data (based on Net Asset Value) Total net asset value (000's) (1) 171, ,341 72,855 Number of shares outstanding (1) 15,132,205 15,121,536 8,447,778 Management expense ratio (2) 2.07% 2.76% 11.00% Management expense ratio before waivers or absorptions 2.07% 2.76% 11.00% Trading expense ratio (3) Portfolio turnover rate (4) 18.40% 37.93% 15.30% Net asset value per share Closing market price, end of period (1) This information is provided as at end of the period shown. (2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as annualized percentage of daily average net asset value during the period. In the period the shares are established, the MER is annualized from the date of commencement of May 20, 2011 to December 31, During the period ended December 31, 2012 and 2011, additional fees were charged related to agents fees and other issue costs (referred to collectively as "start-up costs"), which affected the MER. The effect of these one time start-up costs on the MER was to increase the management expense ratio from 2.52% to 2.76% and 2.81% to 11.00%, in the periods ended December 31, 2012 and 2011, respectively. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net assets during the period. (4) The Fund's portfolio turnover rate indicates how actively the Fund's portfolio adviser manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the period. The higher a fund's portfolio turnover rate in a period, the greater the trading costs payable by the fund in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessary a relationship between a high turnover rate and the performance of a fund.

8 Series U The Fund's Net Assets per Share (1) June 30 December 31 October 25, 2011 to December 31, 2011 Net Assets, beginning of the period (3) Increase (decrease) from operations: Total revenue Total expenses (0.09) (0.22) (0.06) Realized gains (losses) for the period (0.07) Unrealized gains (losses) for the period Total increase (decrease) from operations (2) Distributions to Shareholders: From income (excluding dividends) From dividends From capital gains Return of capital (0.28) (0.58) (0.13) Total distributions to Shareholders (0.28) (0.58) (0.13) Net Assets, end of the period (1) This information is derived from the Fund's unaudited interim and audited annual financial statements. The net assets per security presented in the financial statements differ from the net asset value calculated for fund pricing purposes. [An explanation of these differences can be found in the notes to the financial statements] (2) Net assets and distributions are based on the actual number of shares outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of shares outstanding over the financial period. (3) Initial offering price, net of cost associated with offering of 43,819 (or 0.45 per share) Ratios and Supplemental Data (based on Net Asset Value) Total net asset value (000's) (1) Number of shares outstanding (1) 47,700 66,200 96,450 Management expense ratio (2) 1.81% 2.94% 9.80% Management expense ratio before waivers or absorptions 1.81% 2.94% 9.80% Trading expense ratio (3) Portfolio turnover rate (4) 18.40% 37.93% 15.30% Net asset value per share (1) This information is provided as at end of the period shown. (2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as annualized percentage of daily average net asset value during the period. In the period the shares are established, the MER is annualized from the date of commencement of October 25, 2011 to December 31, During the periods ended December 31, 2012 and 2011, additional fees were charged related to agents fees and other issue costs (referred to collectively as "start-up costs"), which affected the MER. The effect of these one time start-up costs on the MER was to increase the management expense ratio from 2.60% to 2.94% and 4.16% to 9.80%, in the periods ended December 31, 2012 and 2011, respectively. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net assets during the period. (4) The Fund's portfolio turnover rate indicates how actively the Fund's portfolio adviser manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the period. The higher a fund's portfolio turnover rate in a period, the greater the trading costs payable by the fund in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessary a relationship between a high turnover rate and the performance of a fund.

9 MANAGEMENT FEES AND OTHER EXPENSES Management Fee The Manager and the MLP Advisor are collectively entitled to a fee (the Management Fee ) equal to the sum of 1.5% per annum of MLP Portfolio Value (as defined herein) plus any applicable taxes. The Manager may in its discretion from time to time waive a portion of the Management Fee otherwise payable to it Counterparty Fee The Fund pays the Counterparty a fee under the Forward Agreement equal to (a) up to 0.50% per annum of the MLP Portfolio Value, net of leverage, calculated daily and payable monthly, plus (b) an additional fee which is intended to compensate the Counterparty for the costs of hedging its exposure under the Forward Agreement if it chooses to do so. The costs to the Counterparty of hedging its exposure under the Forward Agreement includes (i) an amount, which initially will not exceed 0.95% per annum of the MLP Portfolio Value, calculated and payable monthly in arrears, to hedge its obligation to provide the Fund with exposure to the MLP Portfolio, and (ii) an amount, which initially will not exceed 0.25% per annum of the value of the Common Share Portfolio, calculated daily and payable monthly, to hedge its exposure to the Common Share Portfolio to be delivered by the Fund to the Counterparty. In addition, the Fund pays the Counterparty an amount on account of notional interest, calculated daily and payable monthly, equal to one-month US dollar LIBOR plus initially 0.25% on any leverage that it employs. Administrative, Marketing and Operating Expenses The Fund pays all of its administrative, marketing and operating expenses, which expenses include administration fees, prime broker fees, expenses relating to portfolio transactions, legal, audit and valuation fees, listing fees, reporting costs, registrar and transfer agency costs, Warrant Agent costs, printing and mailing costs, pro rated fees or expenses relating to the Fund s independent review committee, costs and expenses relating to the issue of Equity Shares or the exercise of Warrants, and costs incurred in connection with the Fund s continuous public filing obligations.

10 PAST PERFORMANCE The past performance of the Fund is set out below and includes year-by-year returns. With respect to the charts displayed below, please note the following: (a) the returns or performance information shown assumes that all distributions made by the Fund in the periods shown were reinvested in additional shares of the Fund; (b) (c) the return or performance information does not take into account sales, redemption, distribution or other optional charges or income taxes payable that would have reduced returns or performance; and how the Fund has performed in the past does not necessarily indicate how it will perform in the future. YEAR-BY-YEAR RETURNS *Series U returns are calculated based on U.S. dollar net asset values.

11 SUMMARY OF MLP PORTFOLIO AS AT JUNE 30, 2013 The Fund obtains economic exposure to the MLP portfolio through a forward contract. Accordingly, the investments in the MLP portfolio are as follows: Percentage of Total Net Assets Underlying MLP portfolio Global Partners LP/MA 6.91% Buckeye Partners LP 6.43% Genesis Energy LP 6.41% Plains All American Pipeline LP 5.72% Enterprise Products Partners LP 5.62% Exterran Partners LP 5.30% Enbridge Energy Partners LP 4.95% Western Gas Partners LP 4.69% Energy Transfer Equity LP 4.52% NuStar Energy LP 4.38% El Paso Pipeline Partners LP 4.13% Martin Midstream Partners LP 4.06% DCP Midstream Partners LP 4.01% Teekay LNG Partners LP 4.00% MarkWest Energy Partners LP 3.39% ONEOK Partners LP 3.39% Golar LNG Partners LP 3.30% Regency Energy Partners LP 3.24% Holly Energy Partners LP 3.19% Transmontaigne Partners LP 3.17% Teekay Offshore Partners LP 3.15% Magellan Midstream Partners LP 3.00% Targa Resources Partners LP 2.99% Sunoco Logistics Partners LP 2.86% Crosstex Energy LP 2.79% NuStar GP Holdings LLC 1.75% Leverage and other -7.35% 100.0% TOTAL NET ASSETS (000s) 171,061 The following table summarizes the sector breakdown of investments in MLP Portfolio as at June 30, 2013 and December 31, 2012: Sector % % Petroleum transportation 49.2% 55.7% Gathering and processing of natural gas 24.6% 20.8% Natural gas pipelines 13.3% 14.0% Shipping 9.7% 4.9% Diversified 3.2% 4.6% The information contained in the foregoing list may change due to the ongoing portfolio transactions of the MLP portfolio. A quarterly update may be obtained by contacting FSC.

12 FRONT STREET CAPITAL 33 Yonge Street, Suite 600 Toronto, ON M5E 1G4 Tel.: 1 (800) or (416) Fax: (416)

13 INTERIM FINANCIAL STATEMENTS FRONT STREET U.S. MLP INCOME FUND LTD. FOR THE SIX MONTHS ENDED JUNE 30, 2013 NOTICE OF NO AUDITOR REVIEW OF THE INTERIM FINANCIAL STATEMENTS The accompanying interim financial statements have not been reviewed by the external auditors of the Fund in accordance with standards established by the Canadian Institute of Chartered Accountants. The external auditors will be auditing the annual financial statements of the Fund in accordance with Canadian generally accepted auditing standards.

14 Statements of Net Assets June 30, 2013 (unaudited) and December 31, 2012 (audited) Assets Investments - at fair value (cost - 107,014,620; ,750,896) 91,409, ,941,965 Cash and cash equivalents 286, ,105 Other assets Unrealized gain on forward contract (note 3) 82,857,138 29,195, ,553, ,642,201 Liabilities Management fees payable (notes 6 and 11) 734, ,426 Distributions payable (note 8) 2,656,483 2,278,491 Accounts payable and accrued liabilities 101, ,536 Redemptions payable 17,679 3,492,875 3,241,132 Shareholders' Equity Series C shares (note 4) 119,894, ,658,433 Series U shares (note 4) 334, ,374 Class A shares (note 4) Contributed surplus (note 7) Retained earnings (deficit) 50,831,805 4,260, ,060, ,401,069 Number of shares outstanding, Series C (note 4) 15,132,205 15,121,536 Number of shares outstanding, Series U (note 4) 47,700 66,200 Net asset per share, Series C (note 5) Net asset per share, Series U (note 5) Approved by the Board of Directors Director Gary P. Selke Director David A. Conway The accompanying notes are an integral paqrt of these financial statements.

15 Statements of Operations and Retained Earnings (Deficit) (unaudited) For the six month period ended June 30, 2013 and Investment income Interest 1,707 1,395 Expenses (note 6) Management fees 1,436, ,362 Shareholder reporting costs 140,468 40,469 Legal fees 56,454 14,504 Audit fees 23,909 6,459 Independent review committee 3,924 1,198 Administration fees ,661, ,249 Net investment loss for the period (1,660,031) (886,854) Realized and unrealized gain (loss) on investments and forward contract Net realized gain on sale of investments 463,714 4,004,717 Change in unrealized appreciation (depreciation) on investments (5,796,449) (10,073,613) Change in the unrealized appreciation of forward contract 53,661,207 6,272,805 Net gain on investments and forward contract for the period 48,328, ,909 Increase (decrease) in net assets from operations for the period 46,668,441 (682,945) Increase (decrease) in net assets from operations for the period, Series C 46,481,806 (679,056) Increase (decrease) in net assets from operations per share, Series C 3.07 (0.08) Increase (decrease) in net assets from operations for the period, Series U 186,635 (3,889) Increase (decrease) in net assets from operations per share, Series U 3.02 (0.04) Retained earnings (deficit) - Beginning of period 4,260,062 (305,362) Redemptions above average cost (96,698) (11,379) Increase (decrease) in net assets from operations for the period 46,668,441 (682,945) Retained earnings (deficit) - End of period 50,831,805 (999,686) The accompanying notes are an integral part of these financial statements.

16 Statements of Changes in Net Assets (unaudited) For the six month period ended June 30, 2013 and Series C Net assets, Beginning of period 128,854,501 72,603,671 Increase (decrease) in net assets from operations for the period 46,481,806 (679,056) Capital transactions Gross proceeds from issuance of shares 197,667 57,044 Distributions of return of capital (note 8) (4,918,151) (2,431,001) Reinvestments 124,055 40,824 Redemptions (197,453) (4,793,882) (2,333,133) Net assets - End of period 170,542,425 69,591,482 Series U Net assets, Beginning of period 546, ,450 Increase in net assets from operations for the period 186,635 (3,889) Capital transactions Gross proceeds from issuance of shares Distributions of return of capital (note 8) (17,453) (26,135) Redemptions (197,667) (57,044) (215,120) (83,179) Net assets - End of period 518, ,382 Total Net assets, Beginning of period 129,401,069 73,408,121 Increase (decrease) in net assets from operations for the period 46,668,441 (682,945) Capital transactions Gross proceeds from issuance of shares 197,667 57,044 Distributions of return of capital (note 8) (4,935,604) (2,457,136) Reinvestments 124,055 40,824 Redemptions (395,120) (57,044) (5,009,002) (2,416,312) Net assets - End of period 171,060,508 70,308,864 The accompanying notes are an integral part of these financial statements.

17 Statement of Investment Portfolio (unaudited) As at June 30, 2013 Number of Fair Percentage of Shares/units Cost Value net assets % Common share portfolio (note 3) Energy (24.1%) Athabasca Oil Corporation 602,434 7,071,800 3,909,797 Bankers Petroleum Limited 473,890 3,427,472 1,236,853 BlackPearl Resources Inc. 1,945,603 8,018,830 3,035,141 Crew Energy Inc. 653,751 4,641,632 3,379,893 MEG Energy Corporation 621,263 19,474,456 17,842,673 Paramount Resources Limited 79,887 2,776,855 2,840,782 Tourmaline Oil Corporation 211,977 7,128,722 8,903,034 52,539,767 41,148, Health Care (2.5%) Catamaran Corporation 83,905 3,901,582 4,287, Industrials (3.2%) ATS Automation Tooling Systems Inc. 496,442 5,113,353 5,495, Information Technology (14.8%) Celestica Inc. 1,038,670 8,842,487 10,178,966 CGI Group Inc. 'A' 490,821 11,411,654 15,068,205 20,254,141 25,247, Materials (8.9%) Lundin Mining Corporation 1,722,022 8,431,644 6,870,867 New Gold Inc. 242,212 2,782,206 1,627,665 Osisko Mining Corporation 875,581 6,691,982 2,994,487 Silver Standard Resources Inc. 205,412 4,521,656 1,339,286 Tahoe Resources Inc. 163,381 2,778,289 2,398,433 25,205,777 15,230, Total investments 107,014,620 91,409, Unrealized gain on Forward Contract 82,857, Net fair value of indirect investments in MLP portfolio (Schedule A)* 174,266, Cash and cash equivalents 286, Liabilities, less other assets (3,492,675) (2.10) Total net assets 171,060,

18 Statement of Investment Portfolio (Unaudited) continued As at June 30, 2013 Schedule A The investments in the MLP portfolio under the forward contract are as follows: Notional Underlying MLP Fair units portfolio value 149,074 Buckeye Partners LP 11,003, ,800 Crosstex Energy LP 4,768, ,445 DCP Midstream Partners LP 6,855, ,600 El Paso Pipeline Partners LP 7,056, ,855 Enbridge Energy Partners LP 8,463, ,728 Energy Transfer Equity LP 7,723, ,155 Enterprise Products Partners LP 9,621, ,278 Exterran Partners LP 9,060, ,979 Genesis Energy LP 10,958, ,630 Global Partners LP/MA 11,821, ,301 Golar LNG Partners LP 5,643, ,538 Holly Energy Partners LP 5,464,248 89,500 Magellan Midstream Partners LP 5,131,637 82,538 MarkWest Energy Partners LP 5,804, ,811 Martin Midstream Partners LP 6,948, ,029 NuStar Energy LP 7,493, ,300 NuStar GP Holdings LLC 2,989, ,400 ONEOK Partners LP 5,803, ,724 Plains All American Pipeline LP 9,789, ,302 Regency Energy Partners LP 5,541,458 72,830 Sunoco Logistics Partners LP 4,899,900 96,406 Targa Resources Partners LP 5,116, ,999 Teekay LNG Partners LP 6,850, ,700 Teekay Offshore Partners LP 5,387, ,862 Transmontaigne Partners LP 5,417, ,417 Western Gas Partners LP 8,015, ,631,290 Leverage (note 3) (5,721,656) Net amount 177,909,634 Fees charged on the forward contract are disclosed in note 6. The MLP portfolio investments and related leverage, all US denominated amounts, are expressed in Canadian dollars. The following table summarizes the sector breakdown of investments in MLP portfolio as at June 30, 2013 and Dec. 31, 2012: Sector % % Petroleum transportation 49.2% 55.7% Gathering and processing of natural gas 24.6% 20.8% Natural gas pipelines 13.3% 14.0% Shipping 9.7% 4.9% Diversified 3.2% 4.6%

19 Notes to Financial Statements June 30, 2013 (Unaudited) 1 Nature of operations Front Street U.S. MLP Income Fund Ltd. (the Fund) is an investment fund created by articles of incorporation pursuant to the CBCA on December 12, 2012 from the amalgamation of Front Street MLP Income Fund Ltd.(MLP1) and Front Street MLP Income Fund II Ltd.(MLP2). The Fund was created to provide the shareholders with exposure to the performance of an actively managed, diversified notional portfolio (the MLP portfolio) of energy infrastructure master limited partnerships (MLPs) on a leveraged basis. MLPs are US limited partnerships that are publicly traded on US securities exchanges. MLPs are primarily engaged in the transportation, storage, processing, refining, marketing, exploration, production and mining of minerals or natural resources. The Fund obtains exposure to the performance of the MLP portfolio through forward purchase and sale agreements entered into with a Canadian chartered bank and/or its affiliate. The manager has retained SteelPath Fund Advisors, LLC (the MLP advisor) as the specialist MLP advisor. The Fund invests in a portfolio of common shares of Canadian public companies (the common share portfolio). On the scheduled settlement date of the forward contract, the counterparty will pay the Fund an amount based on the value of the MLP portfolio as the purchase price for the common share portfolio. The return to the Fund is based on the performance of the MLP portfolio. Accordingly, the net asset value per share varies depending on the performance of the MLP portfolio and the expenses of the Fund. The Fund, through exposure to an actively managed diversified notional portfolio of MLPs, will seek to achieve the following objectives: a) to provide shareholders with quarterly tax-advantaged cash distributions, currently targeted to be per quarter; and b) to provide shareholders with long-term capital appreciation. Shares of the Fund commenced trading on May 20, 2011 on the Toronto Stock Exchange. Net proceeds of 53,190,600 (net of agents fees and other issue costs of 3,369,400) were raised in the initial public offering and the exercise of the over-allotment option on the issuance of 5,300,000 and 356,000 Series C equity shares, respectively. On October 25, 2011, the Fund completed an additional new offering of Series C and U equity shares. Net proceeds of 21,991,015 (net of agents fees and other issue costs of 1,100,691) in Series C and net proceeds of 756,621 (net of agents fees and other issue costs of 43,819) in Series U were raised. Fund amalgamation On December 3, 2012, MLP1 shareholders approved the special resolution to authorize the merger of the Front Street MLP Income Fund Ltd. and Front Street MLP Income Fund II Ltd. MLP2 shareholders previously approved the special resolution to authorize the merger of the Funds at its meeting held on November 21, 2012.The effective date of the merger was the close of business on December 12, 2012.

20 Notes to Financial Statements June 30, 2013 (Unaudited) Effective December 12, 2012 ( the Effective date ), the fund was created from the amalgamation of Front Street MLP Income Fund and Front Street MLP Income Fund II. The net assets of MLP1 and MLP2 were transferred into the Fund in exchange for shares of the Fund. In accordance with CICA 1582: Business Combinations, the amalgamation was recorded as a reverse acquisition for accounting purposes.mlp2 was identified for accounting purposes as the acquiring fund based on criteria such as the principal investment objectives and policies, portfolio composition, asset size, expense structure and expense ratios and overall management arrangements. The use of reverse takeover accounting resulted in the following: a) As MLP2 is deemed the acquirer for accounting purposes, its assets and liabilities are included in the financial statements at their historical; values and the financial statements present the continuation of MLP2.The results of MLP1 and the Fund are included only from the effective Date. b) The comparative figures reported are those of MLP2 c) The number and class of outstanding shares as at December 31, 2012 are those of the Fund. Each shareholder of MLP1 received equity shares, Series C of Front Street U.S. MLP Income fund Ltd. for each equity share of MLP1 held at the close of business on December 12, This exchange ratio was calculated based on the net asset value per equity share of MLP1 at the close of business on December 12, 2012, divided by the net asset value per equity share, Series C of MLP2 at the close of business on December 12, After the amalgamation, shares of each of the Funds were exchanged for shares of the Fund as follows: On the date of the amalgamation, the fair value of the consideration to the Fund was 62,466,938, which was the net asset value of the MLP I fund on the date of the amalgamation. The specific assets and liabilities transferred to the Fund, including their respective fair values on the amalgamation date were: (in thousands) Cash 148 Investments 49,998 Unrealized Gains on forward contract 12,678 Other Liabilities 357 As a result of the amalgamation, the equity shares of MLP1 and MLP2 were de-listed from the TSX. The Equity Shares, Series C of Front Street U.S. MLP Income Fund is listed on the TSX under the symbol MLP. The Series U equity shares are designed for investors wishing to make their investment in US dollars and not listed on a stock exchange, but are convertible into Series C shares on a monthly basis. National Bank Correspondent Network is the custodian and Citigroup Fund Services Canada, Inc. provides fund valuation and financial reporting services to the Fund.

21 Notes to Financial Statements June 30, 2013 (Unaudited) 2 Summary of significant accounting policies Basis of presentation The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). The following is a summary of the significant accounting policies followed by the Fund: Valuation of investments The Fund s investments are held-for-trading and are presented at fair value. Securities listed on a recognized public stock exchange are valued at their bid price on the valuation date for financial reporting purposes. Financial instruments - disclosures Canadian Institute of Chartered Accountants (CICA) Handbook Section 3862, Financial Instruments - Disclosures, requires disclosure of a three-level fair value hierarchy that prioritizes the quality and reliability of information used in estimating the fair value of financial instruments. The fair values for the three levels are based on: Level 1 - unadjusted quoted prices in active markets for identical financial instruments Level 2 - inputs for the financial instruments other than quoted prices in active markets that are observable for the financial instruments Level 3 - inputs for the financial instruments that are not based on observable market data These disclosures are included in note 10. The Fund s financial instruments include cash and cash equivalents, investments, forward contract, due to manager, management fees payable, distributions payable and accounts payable and accrued liabilities. Investments and the forward contract are classified as held-for-trading and are recorded at fair value. Additionally, due to manager, management fees payable, distributions payable and accounts payable and accrued liabilities are classified as financial liabilities and are carried at their amortized cost, which approximates their fair value, due to their short-term nature. Section 14.2 of National Instrument , Investment Fund Continuous Disclosure, issued by the Canadian Securities Administrators (the CSA), requires that the net asset value (the NAV) of an investment fund reported in its financial statements be calculated in accordance with Canadian GAAP (the GAAP net assets). Effective September 8, 2008, the CSA granted relief to investment funds from complying with CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement, for the purposes of calculating and reporting NAV for purposes other than financial reporting. Therefore, on a daily basis and for purposes of issuing and redeeming shares (the transactional NAV), investment funds are permitted to calculate the NAV by valuing securities traded in active markets using the latest traded price. A reconciliation between the transactional NAV per equity share and the GAAP net assets per equity share has been provided in note 5.

22 Notes to Financial Statements June 30, 2013 (Unaudited) Investment transactions and income Investment transactions are accounted for on the trade date. Interest income is accrued daily and dividend income is recognized on the ex-dividend date. Realized and unrealized gains and losses from investment transactions are calculated on an average cost basis. Income and expense allocation The net assets of each class is computed by calculating the value of that class s proportionate share of the Fund s assets less that class s proportionate share of the Fund s common liabilities and less class specific liabilities, if any. Expenses directly attributable to a class are charged to that class. Other income and expenses are allocated to each class proportionately, based on the relative net assets of each class. Income taxes The Fund is taxed as a mutual fund corporation under the Income Tax Act (Canada) (the Act). As a mutual fund corporation, the Fund is entitled, in certain circumstances, to a refund of income taxes paid by it in respect of its net realized capital gains. Also, as a mutual fund corporation, the Fund maintains a capital gains dividend account in respect of capital gains realized by the Fund and from which it may elect to pay dividends, which will be treated as capital gains in the hands of the shareholders of the Fund. Temporary differences between the carrying value of assets and liabilities for accounting and income tax purposes give rise to future income tax assets and liabilities. When the fair value of a security in the Fund exceeds its cost base, a future income tax liability arises. As capital gains taxes payable by the Fund are refundable under the provisions of the Act, the future income tax liability is offset by these future refundable taxes. If the cost base exceeds the fair value of the security, a future income tax asset is generated. A full valuation allowance is taken to offset this asset given the uncertainty that such future assets will ultimately be realized. Future income tax assets or liabilities are calculated using substantively enacted income tax rates expected to apply in the period that the temporary differences are expected to reverse. Non-capital losses are available to be carried forward for 20 years and applied against future taxable income. Capital losses for income tax purposes may be carried forward indefinitely and applied against capital gains realized in future years. As at December 31, 2012, the Fund had estimated non-capital losses of 8,474,222, which will expire after 2029, and capital losses of 8,133,545. Net assets per equity share The net assets per equity share are calculated by dividing the net assets attributable to each class by the total number of equity shares outstanding of that class at the end of the period. The increase (decrease) in net assets from operations per equity share is calculated as the increase (decrease) in net assets attributable to the class divided by the average number of equity shares outstanding in that class during the period.

23 Notes to Financial Statements June 30, 2013 (Unaudited) Forward contract The value of the forward contract on a valuation date is equal to the gain or loss that would be realized if the forward contract were closed out. On cash settlement, the fair value of the forward contract would equal the difference between the fair value of the securities held in the MLP portfolio, net of leverage and the currency hedge overlay, and the value of the common share portfolio held by the Fund, net of contractual expenses, including counterparty fees. The common share securities sold forward and the MLP portfolio are valued at their closing prices on the valuation date for the purpose of determining the value of the forward contract. All unrealized gains (losses) arising from the forward contract are recorded as part of change in unrealized appreciation (depreciation) of forward contract in the statement of operations and retained earnings (deficit) and unrealized gain (loss) on forward contract in the statement of net assets until the forward contract is closed out, at which time, the gains (losses) are realized and reported as realized gain (loss) on investments in the statement of operations and retained earnings (deficit). Use of estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents have maturities of less than 90 days from the date of original maturity. Agents fees and other issue costs Agents fees and other issue costs incurred relate to the initial public offering and issuance of the equity shares described in note 4 and has been accounted for as a reduction of the stated capital value of the equity shares issued by the Fund. Foreign currency translation Foreign currency transactions are translated into Canadian dollars using the foreign currency exchange rates prevailing at the dates of the transactions. As at the reporting date, the fair values of assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the foreign currency exchange rates prevailing at such reporting date. Foreign currency exchange gains or losses resulting from the settlement of such transactions and from the translation as at the reporting date of assets and liabilities denominated in foreign currencies are reflected as part of change in unrealized appreciation (depreciation) of forward contract in the statement of operations and retained earnings (deficit).