Enbridge Income Fund Holdings Inc Annual Report

Transcription

1 Enbridge Income Fund Holdings Inc Annual Report

2 Enbridge Income Fund Holdings Inc Annual Report A low-risk business model delivering reliable, predictable cash flows and stable dividend growth to our investors

3 High-Quality Assets Fort St. John Fort McMurray Cheecham Edmonton Hardisty CANADA Regina Cromer Gretna Clearbrook St. John Fund Group CURRENT ASSETS Superior Montreal Liquids Pipelines Southern Lights U.S. Gas Pipelines Other Enbridge Pipelines Contract Storage UNITED STATES Manhattan Chicago Toledo Buffalo Wind Farms Solar Farms Patoka Waste Heat Recovery Cushing Our Structure ENF Dividends $ $ $ 1. The Fund Group 1 Holds a diversified portfolio of strategically positioned energy infrastructure assets with low-risk business models Pays distributions to its unitholders (ENF and Enbridge Inc.) Is managed by Enbridge Inc., North America's largest energy infrastructure company 2. Enbridge Income Fund Holdings (ENF) 2 Publicly traded company (ENF.TO) Receives cash flow through ownership interest in the Fund Group 3. ENF Shareholders Receive stable and predictable dividends 10 percent expected dividend growth annually through 2019 Low-risk investment 1 The Fund Group is comprised of the Enbridge Income Fund (the Fund) and its direct and indirect investees, Enbridge Commercial Trust (ECT) and Enbridge Income Partners LP (EIPLP), which holds the operating assets through its subsidiaries and investees. 2 ENF s business is limited to its ownership interest in the Fund. At December 31, 2016, ENF held 56.9 percent of the issued ordinary trust units (Fund Units) in the Fund and an approximate 16.4 percent overall economic interest in the Fund Group. ENF s corporate structure is discussed in greater detail in Enbridge Income Fund Holding's Financial Statements and Management s Discussion and Analysis available at enbridgeincomefund.com/report-delivery.

4 A Premier Canadian Energy Infrastructure Investment Vehicle ENF is a premier Canadian energy infrastructure investment vehicle for those seeking predictable and growing dividend income from a diversified portfolio of high-quality liquids pipelines, natural gas transmission and renewable power generation assets. The ENF business is specifically designed to perform predictably and consistently in all market conditions, and has produced a consistent track record of increasing dividends for shareholders. Since 2006, the Company's annual dividend has increased by 120 percent. This growth has been achieved organically through extension and expansion of existing assets and through drop-downs of additional low-risk energy infrastructure from Enbridge Inc. These assets, held in the Fund Group, play a critical role in fueling the quality of life for millions of people, every day. The Company's low-risk business model is supported by solid business fundamentals; minimal direct exposure to commodity prices and interest and foreign exchange rates; and long-term commercial agreements with strong creditworthy counterparties. The Fund Group s assets performed well in 2016, execution of the secured growth program moved ahead on schedule and we see strong prospects for additional growth opportunities beyond We are confident that ENF s low-risk business model will continue to deliver strong, predictable returns to our investors well into the future. Perry Schuldhaus, President, Enbridge Income Fund Holdings Inc. On the strength of the Fund Group's existing assets and commercially secured growth projects, ENF is expected to deliver dividend increases of 10 percent annually through Dividend Reinvestment Plan (DRIP) An Efficient Way to Invest ENF offers a dividend reinvestment plan through which shareholders can automatically reinvest cash dividends into additional ENF shares at a two-percent discount to the market price. DRIP participants are also eligible to purchase up to an additional $20,000 in ENF shares without incurring brokerage fees. The DRIP allows our shareholders to cost-effectively increase their holdings in ENF, and it provides us with an additional source of funds for investment in the Fund on an ongoing basis. For more information on the DRIP and how to enroll, please visit enbridgeincomefund.com/drip 2016 Annual Report 1

5 Investment Proposition Delivering Solid Value for Our Shareholders ENF is a sound choice for investors looking for a low-risk investment with solid growth potential that can perform predictably through any market condition. Consistent Dividend Growth $2.50 $ % Annual 10% Increases through 2019 Anticipated 2.05 >7% ENF has delivered compound average annual dividend-pershare growth of over seven percent in the last 10 years. $1.50 $1.00 $ year CAGR 1 = 7.3% $9B The Fund Group s diversified portfolio of assets and $9-billion suite of commercially secured growth projects currently in execution are expected to provide strong and predictable cash flow growth through 2019 and beyond. $ e 19e Taxable distribution paid by the Fund prior to restructuring in December 2010 Eligible dividend paid by ENF post restructuring Expected eligible dividend paid by ENF on an annualized basis 1 Compound Annual Growth Rate of an investment over a specified time period. 10-year CAGR from 2006 through 2016 = 7.3 percent; 5-year CAGR from 2011 to 2016 = 9.9 percent; 2017e = monthly dividend of $ per share, annualized. +10% We expect to increase ENF s dividend by 10 percent annually through 2019 on the strength of the Fund Group's existing assets and secured-growth program. 2 Enbridge Income Holdings Inc.

6 Underpinned by the Fund Group s strong portfolio of highly reliable and low-risk businesses, ENF is well-positioned to provide solid returns to shareholders well into the future. Quality Assets A diversified portfolio of low-risk energy infrastructure assets in North America, strategically positioned between established and growing producing basins and markets looking for secure supply Liquids: Preeminent Canadian liquids pipeline assets; includes the Canadian Mainline system, which ships approximately 2.6 million barrels per day (bpd) of crude oil from Western Canada to the United States and eastern Canada; achieved record deliveries in late 2016 and early 2017 Gas: The fully contracted Alliance Pipeline (Alliance) connects a growing supply of natural gas from Western Canada s most prolific liquids-rich basins to key markets in the U.S. Midwest Green Power: Diversified geographically and underpinned by long-term, fixed-price power purchase agreements, providing over 1 GW of net generating capacity Stability Highly reliable, low-risk business model designed to provide strong and predictable results in all market conditions Minimal commodity price and throughput exposure: <1 percent of cash flow exposed to movements in market prices (commodity prices, interest rates and foreign exchange rates) Minimal contract risk: 99 percent of cash flow underpinned by longterm commercial agreements with strong counterparties Growth Highly visible and secured $9-billion capital program currently in execution through 2019 ~$3.7 billion of projects expected to be placed into service in 2017 Growth projects contribute additional sources of cash flow that drive projected dividend growth of 10 percent per annum through 2019 Strategic positioning of existing assets provides a strong platform to extend growth beyond 2019 Over 350,000 bpd of expansion potential to the Mainline system through a series of efficient and low-cost expansion projects beyond those that are already secured and in execution Additional expansion opportunities on Alliance 2016 Annual Report 3

7 Letter to Investors Strong Results, Growing Returns ENF s business model proved its resilience in 2016, delivering strong results and dividend increases despite challenging conditions in broader energy markets. In January 2017, we increased ENF s dividend by 10 percent on the strength of solid earnings and cash flow growth from the Fund Group's energy infrastructure assets. Perry Schuldhaus President Harry Roberts Chair, Board of Directors We re pleased to report that ENF once again delivered on its value proposition to shareholders despite a challenging year that included prolonged low commodity prices and impacts from wildfires in northeastern Alberta. ENF's low-risk business model is designed to deliver strong results in all market conditions producing predictable and growing cash flow, which in turn delivers predictable and growing dividends for our investors. ENF derives its cash flow from a diversified portfolio of high-quality, strategically located energy delivery and power generation assets that are owned by the Fund Group. This cash flow is stable and predictable because 99 percent of it is underpinned by long-term commercial agreements with strong, creditworthy customers. In addition, ENF shareholders are expected to benefit from the Fund Group s $9-billion growth capital program that is currently in execution. This program includes a suite of commercially secured liquids pipelines projects, three of which will be completed in 2017 and one will be completed in True to our business model, the recently completed projects, as well as those under construction, are underpinned by low-risk commercial arrangements. These arrangements will generate incremental cash flow, and are structured to provide growing cash flow over the first five to seven years following the in-service dates. This growing cash flow from the newly invested capital supports ENF s projected dividend growth over the next few years. The strength of the Fund Group s three main business segments (liquids pipelines, gas pipelines and green energy), in combination with its secured growth program provides us with confidence that we will deliver 10-percent increases in ENF s dividend each year through Looking beyond 2019, the Fund Group will continue to leverage the competitive position of its assets to pursue further expansions and organic growth, while also exploring other non-organic acquisition opportunities that fit within our low-risk business model. Solid financial performance Our business model proved its resilience in 2016, delivering strong results in line with guidance as well as year-over-year dividend increases. Notably, the Fund Group s Canadian liquids pipelines business, which includes the Canadian portion of the Enbridge Mainline liquids pipeline (the Mainline) and Regional Oil Sands systems, performed strongly despite temporary 4 Enbridge Income Holdings Inc.

8 The Fund Group will continue to leverage the competitive position of its assets to pursue further expansions and organic growth. impacts to regional and Mainline volumes as a result of the extreme wildfires in northeastern Alberta that curtailed oil sands production in May. The strength of the Alliance natural gas pipeline and other legacy assets also contributed to cash flow growth over the year. In 2016, the Fund Group s Available Cash Flow from Operations (ACFFO) totaled $1.8 billion, which represents an increase of 120 percent over This increase was attributable to incremental cash flows resulting from full-year contributions from the liquids pipelines and renewable energy assets the Fund Group acquired from Enbridge Inc. in September 2015 (the 2015 Transaction), as well as new system expansion projects that came into service in the second half of ENF has a consistent track record of annual dividend increases, with a compound annual growth rate of 9.9 percent over the last five years. From September 2015 to January 2017, ENF increased its dividend by 10 percent three times on the strength of the Fund Group s solid earnings and cash flow performance from its underlying business. In 2016, we again demonstrated our ability to efficiently raise capital to fund growth, even in difficult market conditions. In April, we successfully completed a public offering and concurrent private placement of common shares for combined gross proceeds of $718 million; and in December, the Fund Group announced the sale of non-core liquids pipelines and related assets in the South Prairie Region for $1.08 billion. Both of these transactions provided an efficient source of financing for the Fund Group s secured growth capital program and, together, will address all of the Fund Group's equity funding needs through 2017 for that program Annual Report 5

9 Letter to Investors Quality assets, strong prospects Liquids Pipelines Apart from the temporary impact of the Alberta wildfires, the Mainline ran at near full capacity in 2016, with throughput ex-gretna at the Canada-U.S. border reaching a record 2.6 million barrels per day (bpd) in December. We expect the high utilization of the Mainline and Regional Oil Sands system will continue. These assets are directly connected upstream to Alberta s massive oil resources, which are expected to experience further growth from producers projects currently in execution. The Mainline is also connected downstream through the Enbridge pipeline network to many of the best markets in North America and directly to 1.9 million bpd of refinery demand, as well as an additional 1.6 million bpd of indirect refinery demand through interconnecting pipelines. The scale and reach of the Mainline system generates stable and competitive tolls for Canadian producers, which is critical in the current low-oil-price environment as it enables them to achieve the best netbacks. The largest project in the Fund Group s capital growth program the $4.9-billion Line 3 Replacement (L3R) Program is progressing and expected to be in service in In an important milestone for this project and its customers, the Canadian federal government approved the Canadian portion of L3R in November Regulatory approvals for the U.S. portion of L3R are in progress. This replacement program will enhance the safety of the line and restore its original capacity of 760,000 barrels a day. Replacing Line 3 is the most timely and reliable solution for transporting western Canadian crude oil to the Chicago, U.S. Gulf Coast, eastern U.S. and Canadian refinery markets. In 2017, we expect the following Fund Group growth projects to come on stream: The $2.6-billion Regional Oil Sands Optimization, which consists of two phases, will connect growing oil sands supply to the Canadian portion of the Mainline. The Athabasca Pipeline Twin project was completed in January 2017 and the Wood Buffalo Pipeline Extension is expected to be in service in December Enbridge Income Holdings Inc.

10 The Mainline ran at near full capacity in 2016, with throughput ex-gretna at the Canada-U.S. border reaching a record 2.6 million barrels per day in December. The $0.9-billion Norlite Diluent Pipeline will transport diluent from Edmonton and Fort Saskatchewan to the Fund Group s Cheecham and Athabasca terminals to meet the needs of regional oil sands producers, principally the Suncor-operated Fort Hills project. The $0.2-billion JACOS Pipeline Project will connect the Japan Canada Oil Sands Limited (JACOS) Hangingstone Oil Sands Project to the Cheecham Terminal. The Fund Group s liquids pipelines currently service nine oil sands projects, which will increase to 11 once the Regional Oil Sands Optimization and JACOS projects are in service. Gas Pipelines Alliance, which is 50 percent owned by the Fund Group, continues to be a highperforming asset and is the only rich-gas export pipeline out of Western Canada. With high utilization rates, Alliance is delivering strong results under its new tolling and service delivery model. Alliance was successfully recontracted on December 1, 2015, with firm take-or-pay structures through a combination of receipt-zone and full-path subscriptions of over 1.3 billion cubic feet per day (bcf/d). These contracts have an average length of approximately five years. Market fundamentals have created strong demand for both interruptible and firm seasonal service for Alliance, which is generating incremental revenue under the new tolling model. Alliance has also benefited from efficiencies that have reduced operating costs, and it continues to be a strong contributor to our revenues and cash flow. Green Power Through the 2015 Transaction, the Fund Group added four new wind projects to its portfolio three in Quebec and one in Alberta. The Fund Group is now one of the largest suppliers of emissions-free electricity in Canada with the capacity to produce 1,437 megawatts of power on a gross basis (net to the Fund Group: 1,052 megawatts). Its renewable assets are diversified geographically, which provides a natural portfolio benefit as wind resource and solar radiance can vary from time to time and across locations. We expect these assets will continue to provide a stable cash flow stream over the long term. Acknowledgements In 2016, we welcomed Laura Cillis and George Lewis to the Board. They added significant expertise, depth and strength to the governance and stewardship of ENF. As a result of changes at Enbridge Inc., Charlie Fisher and Cathy Williams resigned as Directors and John Whelen was appointed to the Board at the end of February We thank Charlie and Cathy for their service and guidance, and welcome John, who was President of ENF from 2011 to Looking ahead We re starting out 2017 from a position of strength, which we expect will translate into 2017 ACFFO for the Fund Group of between $1.9 billion and $2.1 billion. Moreover, due to ACFFO growth generated by the base business and new projects coming into service, we expect dividends to increase by a further 10 percent in each of 2018 and Looking beyond 2019, we see additional potential for growth. The Fund Group s assets are well-positioned to be highly utilized and can be readily extended or expanded to address customer needs Annual Report 7

11 Letter to Investors Due to the high quality and strategic location of the Fund Group s liquids pipelines assets, we believe we re ideally positioned to advance projects to further augment export capacity for Canadian producers to premium markets in the U.S. Our Mainline and Regional Oil Sands customers are the largest and best capitalized players in the energy space globally. Many are integrated with downstream refining operations or are refiners themselves. Generally, they like to have surplus pipeline capacity at a certain margin above supply to ensure pipeline capacity is never constrained. Based on the most recent forecast from the Canadian Association of Petroleum Producers, it is anticipated that the Western Canada Sedimentary Basin (WCSB) will produce about 600,000 bpd of incremental supply through 2020 that will require additional pipeline capacity. In the current environment, large and expensive megaprojects may not necessarily be the best solution to meet shippers needs. The Mainline system provides a low-cost option that can be efficiently expanded, in stages, to bring on capacity to match the pace of supply growth. Due to the high quality and strategic location of the Fund Group s liquids pipelines assets, we believe we re ideally positioned to advance projects to further augment the export capacity for Canadian producers to premium markets in the U.S. Therefore, as oil supply grows, we will continue to seek out opportunities for additional cost-effective, scalable, low-risk and highly executable incremental expansions. This could prove to be particularly important, given the potential for further delays to large-scale liquids pipeline infrastructure projects being planned by others. Because of its strategic geographic positioning, Alliance, too, has the potential to be expanded further as natural gas supply from the WCSB grows. Lastly, there is further acquisition or drop-down potential from our sponsor, Enbridge North America s largest energy infrastructure company. Our shared top priority is the safe and reliable operation of our assets. We directly benefit from Enbridge s tremendous operational expertise and risk management systems and processes. The Fund Group is also able to leverage Enbridge s major projects capability in the development and construction of its secured growth capital program. Going forward, we will continue to optimize the Fund Group s existing operations, adhere to prudent financial policies and practices, and bring our growth projects into service on time and on budget. We re very pleased with the progress ENF has made, and we re confident that ENF s low-risk business model and growth capital program will continue to deliver strong, predictable and growing returns to our investors well into the future. Perry F. Schuldhaus President Ernest F.H. (Harry) Roberts Chair, Board of Directors March 13, Enbridge Income Holdings Inc.

12 Enbridge Income Fund Holdings Inc. Financial Report Management s Discussion & Analysis 10 Overview 11 Enbridge Income Fund Holdings Inc. Financial Performance 13 Fund Group Objectives and Strategy 13 Liquidity and Capital Resources 14 Related Party Transactions 15 Risk Management and Financial Instruments 16 Future Accounting Policies 16 Critical Accounting Estimates 16 Controls and Procedures 17 Selected Quarterly Financial Information 17 Outstanding Share Data Financial Statements 18 Management s Report 19 Independent Auditor s Report 20 Statements of Comprehensive Income (Loss) 21 Statements of Changes in Shareholders Equity 22 Statements of Cash Flows 23 Statements of Financial Position Notes to the Financial Statements General Business Description Basis of Preparation Summary of Significant Accounting Policies Investment in Enbridge Income Fund Share Capital and Share Premium Income Taxes Risk Management Fair Value of Financial Instruments Capital Disclosures Related Party Transactions 156 Glossary

13 Management s Discussion & Analysis For the Year Ended December 31, 2016 This Management s Discussion and Analysis (MD&A) dated February 17, 2017 should be read in conjunction with the audited financial statements and notes thereto of Enbridge Income Fund Holdings Inc. (ENF or the Company) for the year ended December 31, 2016, prepared in accordance with International Financial Reporting Standards (IFRS). All financial information is presented in Canadian dollars, unless otherwise indicated. Additional information related to the Company, including its Annual Information Form (AIF), is available on SEDAR at Overview The Company is a publicly traded corporation whose common shares trade on the Toronto Stock Exchange (TSX) under the symbol ENF. The Company s business is limited to its ownership 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. The Fund is an unincorporated open-ended trust established by a trust indenture under the laws of the Province of Alberta. The Fund, through its indirect investment in Enbridge Income Partners LP (EIPLP), is involved in the transportation, storage and generation of energy. EIPLP owns interests in liquids transportation and storage assets, including the Canadian Mainline, the Regional Oil Sands System, a 50% interest in the Alliance Pipeline system, which transports natural gas from Canada to the United States, and interests in renewable and alternative power generation assets. Readers are encouraged to read EIPLP s consolidated financial statements and MD&A which are filed under the Fund s profile on SEDAR at At December 31, 2016, Enbridge held 19.9% of the Company s common shares, with the public shareholders holding the remaining 80.1%. Also at December 31, 2016, the Company held 56.9% of the issued and outstanding ordinary trust units of the Fund (Fund Units) and Enbridge held the remaining 43.1%. The Company s overall economic interest in the Fund Group was 16.4% as at December 31, The 2015 Transaction On September 1, 2015, EIPLP acquired 100% interests in entities holding certain Canadian liquids pipelines, storage and renewable energy assets from Enbridge and certain of its subsidiaries for aggregate consideration of $30.4 billion plus incentive distribution and performance rights and working capital adjustments (the 2015 Transaction). The Company did not directly participate in the 2015 Transaction. The 2014 Transaction On November 7, 2014, the Company and the Fund completed a transaction whereby indirect wholly-owned subsidiaries of the Fund acquired from Enbridge a 50% equity interest in the United States portion of the Alliance Pipeline and subscribed for and purchased Class A Units of certain Enbridge subsidiaries which provide a defined cash flow stream from the United States portion of Southern Lights for aggregate consideration of $1.8 billion (the 2014 Transaction). At the time of the 2014 Transaction, the Fund previously owned a 50% investment in the Canadian portion of the Alliance Pipeline. The unitholders of the Fund are the Company and Enbridge Inc. (Enbridge), a North American transporter, distributor and generator of energy listed on the TSX and New York Stock Exchange. The Company is managed by Enbridge Management Services Inc. (the Manager or EMSI), a wholly-owned subsidiary of Enbridge. EMSI also serves as the manager of the Fund, Enbridge Commercial Trust (ECT), a wholly-owned investment of the Fund, and EIPLP. EIPLP is a limited partnership between ECT and Enbridge. The Fund, ECT, EIPLP and the subsidiaries and investees of EIPLP are referred to as the Fund Group. 10 Enbridge Income Fund Holdings Inc Annual Report

14 Enbridge Income Fund Holdings Inc. Financial Performance The Company s earnings and cash flows are derived from its investment in the Fund and are dependent upon its ownership interest, the cash distributions per unit paid by the Fund and income taxes. Readers are encouraged to read the Fund s financial statements and MD&A which are filed on SEDAR at Three months ended December 31, Year ended December 31, (millions of Canadian dollars, except per unit, per share and share amounts) Fund Unit distribution per unit Cash distributions declared to holders of Fund Units Percentage of Fund Units held by ENF 56.8% 56.9% 42.8% 50.8% 50.8% 56.9% 42.8% 88.1% 85.6% 88.1% Distribution income, ENF Interest income and other Income taxes (1) (2) (5) (6) Earnings, ENF Earnings per common share Diluted earnings per common share Cash flow from operating activities Dividends declared Dividends per common share Dividend payout ratio 86.6% 90.2% 86.9% 86.7% 89.9% Total assets 1 4,338 2,740 2,850 Number of common shares outstanding 1 124,189,207 97,186,918 70,351,000 1 AsatDecember31,2016,2015and2014. Cash distributions declared to holders of Fund Units increased significantly in 2016, compared with 2015 and The primary drivers for the increased distributions were additional Fund Units outstanding as result of both the 2015 Transaction and the 2014 Transaction and the compounding impact of the increases in the monthly Fund Unit distribution in each of 2016, 2015 and The Company s distribution income and earnings for the year ended December 31, 2016 increased significantly compared to the same period of 2015 given the increase in the monthly Fund Unit distribution in January 2016 and further investment in the Fund. The Company, using proceeds from its November 2015 and April 2016 common equity offerings and Dividend Reinvestment and Share Purchase Plan (DRIP), invested in additional Fund Units. As a result, the Company s ownership in the Fund at December 31, 2016 increased to 56.9% from 50.8% as at December 31, The Company incurs income taxes on distributions received from the Fund, the level of which will vary depending on the taxability of such distributions in any given year. To the extent that a portion of the distribution represents a tax-free intercorporate dividend or return of capital, cash tax will not be incurred on a portion of the distribution. The Company recorded lower current income taxes expense for the year ended December 31, 2016 as compared to 2015 and 2014 as a lesser portion of the distributions are taxable due to the 2015 Transaction. The Company pays monthly dividends to its shareholders. Dividends for the year ended December 31, 2016 were declared at an annual aggregate rate of $ per common share (2015 $1.5936) representing total dividends of $219 million (2015 $119 million) and an earnings payout ratio of 86.9% ( %). In January 2017, the Company announced a 10% increase in the monthly dividend to $ per common share, or $ per common share annualized, commencing with the January dividend. The trends experienced for the three months ended December 31, 2016 compared with the same period of 2015 are consistent with those discussed above for the corresponding annual periods. Management s Discussion & Analysis 11

15 Forward-Looking Information Forward-looking information, or forward-looking statements, have been included in this MD&A to provide information about the Company and the Fund Group, including management s assessment of the Company and the Fund Group s future plans and operations. 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, likely and similar words suggesting future outcomes or statements regarding an outlook. Forward-looking information or statements included or incorporated by reference in this document include, but are not limited to, statements with respect to the following: earnings/(loss) or adjusted earnings/(loss); earnings/(loss) or adjusted earnings/(loss) per share; cash flows; dividends or distributions; distributions to the Company by the Fund; dividend payout expectation; working capital requirements; flexibility of distributions; organic growth opportunities; use of retained cash; and investment opportunities. Although the Company believes 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 following: supply, demand and prices for crude oil, natural gas, natural gas liquids (NGL) and renewable energy; exchange rates; inflation; interest rates; availability and price of labour and construction materials; operational reliability; customer and regulatory approvals; maintenance of support and regulatory approvals for the Fund Group s projects; in-service dates; weather; the impact of the dividend policy on the Company s or the Fund Group s future cash flows; the Fund Group s credit ratings; capital project funding; earnings/(loss) or adjusted earnings/(loss); earnings/(loss) per share; cash flows; and dividends or distributions. Assumptions regarding the supply of and demand for crude oil, natural gas, NGL and renewable energy, and the prices of these commodities, are material to and underlie all forward-looking statements. These factors are relevant to all forwardlooking statements as they may impact current and future levels of demand for the Fund Group s services. Similarly, exchange rates, inflation and interest rates impact the economies and business environments in which the Company and the Fund Group operate and may impact levels of demand for the Fund Group 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 forward-looking statement cannot be determined with certainty, particularly with respect to earnings/(loss), adjusted earnings/(loss) and associated per share amounts, or future dividends or distributions. The most relevant assumptions associated with forward-looking statements on projects under construction, including completion dates and capital expenditures, include the following: the availability and price of labour and construction materials; the effects of inflation and foreign exchange rates on labour and material costs; the effects of interest rates on borrowing costs; the impact of weather; and customer and regulatory approvals on construction and in-service schedules. The Company s and the Fund Group s forward-looking statements are subject to risks and uncertainties pertaining to operating performance, regulatory parameters, project approval and support, renewals of rights of way, weather, economic and competitive conditions, public opinion, changes in tax laws and tax rates, exchange rates, interest rates, commodity prices and supply of and demand for commodities, including but not limited to those risks and uncertainties discussed in this MD&A and in the Company s and the Fund Group 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 Company s or the Fund Group s future course of action depends on management s assessment of all information available at the relevant time. Except to the extent required by applicable law, the Company and the Fund Group 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 Group or persons acting on the Company s or the Fund Group s behalf, are expressly qualified in their entirety by these cautionary statements. 12 Enbridge Income Fund Holdings Inc Annual Report

16 Fund Group Objectives and Strategy The Fund Group s objectives are to provide a predictable flow of distributable cash and to increase, where prudent, cash distributions through investment in and ongoing management of low risk energy infrastructure assets. The Fund Group s objectives and strategies are also aligned to support the corporate vision and strategies of its sponsor, Enbridge. In order to achieve these objectives, the Manager relies on the following strategic priorities: Commitment to Safety and Operational Reliability; Strengthen Core Businesses; Focus on Project Management; and Preserve Financing Strength and Flexibility. The Fund Group is closely focused on safety, system performance and operating effectiveness. The commitment to safety and operational reliability means achieving and maintaining industry leadership in safety (process, public and personal) and ensuring the operational reliability and integrity of the systems the Fund Group operates in order to generate, transport and deliver the energy society counts on while protecting the environment. Within the Fund Group s Liquids Pipelines assets, strategies to strengthen the core business are focused on optimizing asset performance, strengthening stakeholder and customer relationships and providing access to new markets for production from western Canada, all while ensuring safe and reliable operations. The Fund Group s assets are strategically located and well-positioned to capitalize on opportunities. In 2016, despite unfavourable commodity market conditions, the Canadian Mainline delivered record volumes of crude, driven by strong supply and refinery demand in combination with efforts to maximize capacity and throughput as well as enhanced scheduling efficiency with shippers. The Liquids Pipelines business that the Fund Group acquired in the 2015 Transaction is expected to have future organic growth opportunities beyond the current inventory of secured projects. The Fund Group will have a first right to execute any such projects that fall within the footprint of the Canadian Liquids Pipelines business. Within the Gas Pipelines assets, the Fund Group seeks to optimize the competitive advantage of its existing asset footprint, as the Alliance Pipeline is well-positioned to provide liquids-rich gas transportation services to developing regions in northeastern British Columbia, northwestern Alberta and the Bakken. In 2015, Alliance Pipeline successfully re-contracted its firm capacity with shippers under its new services framework that came into effect in December Long-term contracts have been secured through staged and non-staged receipt or full path services with an average contract length of approximately five years. In 2016, Alliance Pipeline benefitted from strong demand for seasonal firm services through its open season process. Within the Green Power assets, strategies are driven by the objective to manage and maintain facilities in such a way as to maximize power generation and related revenues when the relevant wind, solar or waste heat energy resource is available. The Manager will continue to assess ways to generate value for the Fund Group, including reviewing opportunities that may lead to acquisitions or other strategic transactions, some of which may be material and may involve Enbridge. Opportunities are screened, analyzed and assessed using strict operating, strategic and financial criteria with the objective of ensuring the effective deployment of capital and the enduring financial strength and stability of the Fund Group. Preservation of financial flexibility will continue to be a strategic priority. Ongoing access to cost effective sources of debt and equity capital is critical to the successful execution of the Fund Group s strategy to expand existing assets and acquire or develop new energy infrastructure. Liquidity and Capital Resources The Company pays out a high proportion of distributions received from the Fund. Retained cash is expected to be used for future income tax payments and as a reserve to sustain a predictable stream of dividends to shareholders over the long term. Cash not required to fund dividends or to meet working capital requirements is advanced to a subsidiary corporation of EIPLP pursuant to a subordinated demand loan with an interest rate of 4.25% per annum. At December 31, 2016, $78 million (2015 $48 million) was outstanding to the Company. The Company s working capital requirements are not expected to be significant in The Company has an agreement with ECT whereby ECT reimburses the Company for all expenses incurred relating to the normal course administration of the Company as a publicly traded corporation. The Company did not have any outstanding long-term debt as at December 31, 2016 and Additional capital resources to finance the Company s future investment in the Fund are expected to be available through access to equity markets, subject to the Company s ability to access the market on favourable terms. Management s Discussion & Analysis 13

17 Sources and Uses of Cash Year ended December 31, Operating activities Financing activities Investing activities (797) (892) Increase in cash and cash equivalents Operating Activities Cash flows provided by operating activities reflect distributions received from the Fund, net of income taxes and changes in operating assets and liabilities. Financing Activities The decrease in cash provided by financing activities in 2016 compared with 2015 reflects the smaller share issuance by the Company in April 2016 with proceeds of $718 million as compared to the Company s November 2015 share issuance with proceeds of $874 million. The decrease in cash provided by financing activities was also due to an increase in dividends paid in 2016 compared with 2015 primarily due to the increased number of shares outstanding combined with a higher monthly dividend rate in 2016 compared with The Company declared dividends of $ per common share in 2016 or $219 million in aggregate (2015 $ per common share or $119 million in aggregate). The Company s shareholders are able to participate in the DRIP, which enables the participants to reinvest their dividends in common shares of the Company at a 2% discount to market price. For the year ended December 31, 2016, the Company retained $49 million (2015 $1 million) of cash in respect of reinvested dividends, representing an average participation rate of 22.4% ( %)in thedrip. Investing Activities Proceeds of $718 million from the Company s common share issuance in April 2016 were used to subscribe for 25.4 million Fund Units. Proceeds of $49 million from the Company s common share issuances under the DRIP for the year ended December 31, 2016 were used to subscribe for 1.6 million Fund Units. Also included in investing activities are advances to and repayments from a subsidiary corporation of EIPLP pursuant to a subordinated demand loan. These activities are considered related party transactions. Related Party Transactions In 2016, the Company advanced $30 million, net of repayments (2015 $17 million) to a subsidiary corporation of EIPLP pursuant to a subordinated demand loan. At December 31, 2016, $78 million (2015 $48 million) was outstanding on the loan. Interest on the demand loan was charged at 4.25% per annum. Interest income earned on the loan was $2 million (2015 $2 million) for the year ended December 31, 2016 and accounts receivable were minimal as at December 31, 2016 and In connection with the Company s April 2016 public offering of 20.4 million common shares, the Fund reimbursed the Company for share issue costs of $24 million pursuant to a payment assistance agreement. Proceeds from the equity offering were used by the Company to purchase additional Fund Units. In connection with the Company s November 2015 public offering of 21.5 million common shares, the Fund reimbursed the Company for share issue costs of $28 million pursuant to a payment assistance agreement. Proceeds from the equity offering were used by the Company to purchase additional Fund Units. 14 Enbridge Income Fund Holdings Inc Annual Report

18 Amounts due to affiliate relating to the Fund at December 31, 2016 were nil. At December 31, 2015, amounts due to affiliate relating to the Fund were $2 million related to corporate costs paid by the Fund and Fund Units issued in December The Company has an agreement with ECT whereby ECT reimburses the Company for certain corporate costs. ECT reimbursed the Company $1 million (2015 $1 million) for corporate costs incurred in At December 31, 2016 and 2015, accounts receivable from ECT were nil. The Company has an agreement with EMSI to provide management and administrative services to the Company. Provided that the Fund is paying a base fee to EMSI for the services received by the Fund, no fee is payable to EMSI by the Company, as was the case for the years ended December 31, 2016 and Risk Management and Financial Instruments The Company pays out a high proportion of cash in the form of dividends to investors, while maintaining a reliable and low-risk business model. The Fund Group actively manages both financial and non-financial risks it is exposed to. The Fund Group performs an annual corporate risk assessment to identify all potential risks. Risks are ranked based on severity and likelihood both before and after mitigating actions. In addition, the Fund Group has adopted a Cash Flow at Risk (CFAR) policy to manage exposure to movements in interest rates, foreign exchange rates and commodity prices. CFAR is a statistically derived measurement that quantifies the maximum adverse impact on cash flows over a specified period of time within a pre-defined level of statistical confidence. The Fund Group s CFAR limit has been set at 2.5% of forward annual available cash flows from operations of the Fund Group. Market Price Risk The Company s other comprehensive income (OCI) is subject to market price risk resulting from changes in the fair value of the Company s investment in the Fund, which is referenced to the Company s common share price. The Company does not typically manage this risk. A $1.00 increase or decrease in the Company s common share price at December 31, 2016 would have resulted in an increase or decrease in OCI, before income taxes of $124 million and $107 million after income taxes (2015 $97 million and $84 million, respectively) due to the revaluation of the investment. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. Accounts payable and accrued liabilities and dividends payable are due within one month. In order to manage this risk, the Company forecasts its cash flow over the near and long term and ensures that sufficient funds will be available when required. The Company s primary source of liquidity is cash distributions it receives from its investment in the Fund. Additional liquidity, if necessary, is expected to be available through collection of amounts advanced to a subsidiary corporation of EIPLP pursuant to a subordinated demand loan. The future level of distributions received from the Fund may vary depending on, but not limited to, the performance of the Fund s business through its indirect investment in EIPLP, the level of continued investment or the Fund Group s ability to obtain financing. Further factors which may impact the Fund s ability to sustain distributions include future demand for the services provided by the Fund Group s businesses and the Fund s ability to comply with covenants in its debt agreements and repay or refinance its debt as it comes due. The Company oversees its investment in the Fund through its Directors, who are also ECT Trustees. The ECT Board of Trustees provides oversight of the Fund Group and the operation and strategies of the entities that generate cash for distribution to the Company and Enbridge. Credit Risk Credit risk arises from the possibility that a counterparty may default on its contractual obligations to the Company. Demand loan due from affiliate, Accounts receivable and other and Distributions receivable are subject to credit risk, the maximum exposure of which is the carrying value as presented on the Statements of Financial Position. The Company s credit risk is mitigated as the majority of its financial assets are with affiliates. Fair Value of Financial Instruments At December 31, 2016 and 2015, the Company s financial instruments were comprised of the Company s investment in the Fund, Demand loan due from affiliate, Accounts receivable and other, Distributions receivable, Accounts payable and other and Dividends payable. The fair value of the Company s investment in the Fund is based on the quoted market price of the Company s common shares adjusted for assets and liabilities of the Company which are not applicable to the Fund. The fair value of Demand loan due from affiliate, Accounts receivable and other, Distributions receivable, Accounts payable and other and Dividends payable approximates their carrying values due to their short-term maturities. Business Risks Readers are referred to the Risk Management and Financial Instruments disclosure in the Fund s MD&A and EIPLP s MD&A as well as Risk Factors in the Company s AIF and the Fund s AIF. The following are certain risk factors relating to the activities of the Company and ownership of ENF common shares. Future Dividends Dividends declared on the common shares will be wholly-dependent on the declaration of distributions by the Fund. Future dividend payments by the Company and the level thereof are uncertain as the Company s dividend practices and the funds available for the payment of dividends from time to time will be dependent upon, among other things, operating cash flow generated by investees of the Fund and their respective operations and investments, financial requirements for the Fund and its investees operations and the Fund s ability to execute its growth strategy. Management s Discussion & Analysis 15

19 Pre-emptive Right Pursuant to pre-emptive rights contained in the Fund Trust Indenture, the Company and Enbridge are entitled to acquire any Fund Units proposed to be issued by the Fund in proportion to their respective economic interest in the Fund. If the Company fails to fully subscribe for its proportionate economic interest, its holdings in the Fund may be diluted. Restriction in Business Activities The Company s business is restricted to investment in the Fund. Therefore, the Company s financial results are dependent on the Fund. The inability of the Fund to manage its business and investments effectively could have a material adverse impact on the Company s operations and prospects. Further, the level of the consolidated indebtedness of the Fund and its investees from time to time could impair the Company s ability to obtain additional financing on a timely basis to take advantage of permitted business opportunities that may arise. Availability of Financing If the Company pays out a high proportion of the distributions received from the Fund to shareholders by way of dividend, it may have to enter into financings or other transactions involving the issuance of securities by the Company in order to obtain funds for business purposes. An inability to raise new equity capital may limit the Company s ability to grow and execute its business plan. The issuance of equity securities may also be dilutive to shareholders. Future Accounting Policies Financial Instruments IFRS 9 (2014), Financial Instruments, addresses classification and measurement of financial assets. IFRS 9 (2014) replaces the model for measuring equity instruments and generally requires the recognition of a financial instrument s fair value through earnings, except in limited circumstances. This standard is effective for accounting periods beginning on or after January 1, 2018 with early adoption permitted, and is generally applied on a retrospective basis. The Company is currently assessing the impact of the new standard on its financial statements. Critical Accounting Estimates Long-Term Investment The Company holds an investment in the Fund, representing 56.9% ( %) of the outstanding Fund Units as at December 31, The Company accounts for its investment as an available-for-sale financial asset. Management concluded that the Company does not control the Fund, but rather that Enbridge, through the combination of direct and indirect equity interests, investment in preferred units of ECT (ECT Preferred Units) and its role as manager of the Fund, is the primary beneficiary of the Fund. Significant estimates are also required in determining the fair value and recoverability of the investment. The fair value of the investment is estimated by relying on the quoted market price of the Company s common shares adjusting for other assets and liabilities not attributable to the Fund and significant or prolonged declines in fair value below cost are assessed for evidence of impairment. Controls and Procedures Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed with, or submitted to, securities regulatory authorities is recorded, processed, summarized and reported within the time periods specified under Canadian securities law. Based on the requirements of National Instrument Certification of Disclosure in Issuers Annual and Interim Filings (NI ), EMSI evaluated the effectiveness of the Company s disclosure controls and procedures (as defined in NI ) and concluded that the Company s disclosure controls and procedures were effective as at December 31, Management s Report on Internal Controls Over Financial Reporting The Manager is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the rules of the Canadian Securities Administrators. The Company s internal control over financial reporting is a process designed, under the supervision and with the participation of executive and financial officers of the Manager, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company s financial statements for external reporting purposes in accordance with IFRS. The Company s internal controls over financial reporting include policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company s assets that could have a material effect on the financial statements. The Company s internal control over financial reporting may not prevent or detect all misstatements because of inherent limitations. Additionally, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the Company s policies and procedures. EMSI assessed the effectiveness of the Company s internal control over financial reporting as at December 31, 2016, based on the framework established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Manager concluded that the Company maintained effective internal control over financial reporting as at December 31, Enbridge Income Fund Holdings Inc Annual Report

20 Selected Quarterly Financial Information 2016 Q1 Q2 Q3 Q4 Total (millions of Canadian dollars, except per share amounts) Revenues Earnings Earnings per common share Diluted earnings per common share Dividends declared per common share Q1 Q2 Q3 Q4 Total (millions of Canadian dollars, except per share amounts) Revenues Earnings Earnings per common share Diluted earnings per common share Dividends declared per common share Significant items that have impacted quarterly financial information are as follows: In April 2016, the Company subscribed for 25.4 million Fund Units with proceeds from the Company s issuance of common shares to the public and Enbridge, which increased the total Fund Units owned by the Company to million at that time. The incremental ownership of the Fund Units increased the amount of distributions received on the Fund Units and, therefore, increased the Company s revenues and earnings. The Company increased its dividend per common share by 10% to $ per month effective with the January 2016 dividend as a result of the anticipated growth in distributions from the Fund and decreased taxability of the distributions received from the Fund. In November 2015, the Company subscribed for 26.8 million Fund Units with proceeds from the Company s issuance of common shares to the public and Enbridge, which increased the total Fund Units owned by the Company from 70.4 million to 97.2 million. The incremental ownership of Fund Units increased the amount of distributions received on the Fund Units and, therefore, increased the Company s revenues and earnings. The Company increased its dividend per common share by 10% to $ per month effective with the September 2015 dividend as a result of the anticipated growth in distributions from the Fund and decreased taxability of the distributions received from the Fund in connection with the 2015 Transaction. Pursuant to agreements entered into by the Company in connection with the 2015 Transaction, the EIPLP Class C units, ECT Preferred Units and Fund Units held by Enbridge, directly and indirectly, may be exchanged into ENF common shares, subject to certain restrictions, creating potential dilution of the Company s earnings per common share. Outstanding Share Data As at February 6, 2017, 124,320,723 common shares and one special voting share of the Company were issued and outstanding. Management s Discussion & Analysis 17

21 Management s Report To the Shareholders of Enbridge Income Fund Holdings Inc. (ENF) Financial Reporting The management of Enbridge Management Services Inc. is responsible for the accompanying financial statements and all related financial information contained in the annual report, including Management s Discussion and Analysis. The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and necessarily include amounts that reflect management s judgment and best estimates. The Board of Directors (the Board) and the Audit Committee are responsible for all aspects related to governance of ENF. The Audit Committee, composed of independent and financially literate directors, has a specific responsibility to oversee management s efforts to fulfill its responsibilities for financial reporting and internal controls related thereto. The Audit Committee meets with management, internal auditors and independent auditors to review the financial statements and the internal controls as they relate to financial reporting. The Audit Committee reports its findings to the Board for its consideration in approving the financial statements for issuance to the shareholders. The internal auditors and independent auditors have unrestricted access to the Audit Committee. Internal Control Over Financial Reporting Management is also responsible for establishing and maintaining adequate internal control over financial reporting. ENF s internal control over financial reporting includes policies and procedures to facilitate the preparation of relevant, reliable and timely information, to prepare financial statements for external reporting purposes in accordance with IFRS and provide reasonable assurance that assets are safeguarded. PricewaterhouseCoopers LLP, independent auditors appointed by the shareholders of ENF, have conducted an audit of the financial statements of ENF in accordance with Canadian generally accepted auditing standards and have issued an unqualified audit report, which is accompanying the financial statements. Perry F. Schuldhaus President Wanda M. Opheim Chief Financial Officer February 17, Enbridge Income Fund Holdings Inc Annual Report

22 Independent Auditor s Report To the Shareholders of Enbridge Income Fund Holdings Inc. We have audited the accompanying financial statements of Enbridge Income Fund Holdings Inc., which comprise the statements of financial position as at December 31, 2016 and December 31, 2015 and the statements of comprehensive income (loss), changes in shareholders equity and cash flows for the years then ended and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Enbridge Income Fund Holdings Inc. as at December 31, 2016 and December 31, 2015 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants Calgary, Alberta February 17, 2017 Financial Statements 19

23 Statements of Comprehensive Income (Loss) Year ended December 31, (millions of Canadian dollars, except per share amounts) Distribution and other income (Notes4and10) Income taxes expense (Note 6) (2) (5) Earnings Other comprehensive income/(loss) Unrealized fair value change in available-for-sale investment (Note 4) 793 (1,008) Deferred income taxes recovery/(expense) (Note 6) (107) 123 Other comprehensive income/(loss) 686 (885) Comprehensive income/(loss) 938 (747) Earnings per common share (Note 5) Diluted earnings per common share (Note 5) The accompanying notes are an integral part of these financial statements. 20 Enbridge Income Fund Holdings Inc Annual Report

24 Statements of Changes in Shareholders Equity Year ended December 31, Share capital Common shares (Note 5) Balance at beginning of year 2,217 1,342 Share issuance Dividend reinvestment and share purchase plan ,984 2,217 Special voting share (Note 5) Balance at end of year 2,984 2,217 Share premium (Note 5) Retained earnings Balance at beginning of year Earnings Common share dividends declared (219) (119) Balance at end of year Accumulated other comprehensive income Balance at beginning of year 229 1,114 Other comprehensive income/(loss) 686 (885) Balance at end of year Total shareholders equity 4,173 2,687 The accompanying notes are an integral part of these financial statements.. Financial Statements 21

25 Statements of Cash Flows Year ended December 31, Operating activities Earnings Changes in operating assets and liabilities (9) (7) Financing activities Share issuances (Note 5) Common share dividends (164) (113) Investing activities Purchase of Enbridge Income Fund trust units (Note 4) (767) (875) Demand loan advances to affiliate (Note 10) (74) (21) Demand loan repayments from affiliate (Note 10) 44 4 (797) (892) Change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplementary cash flow information Income taxes paid 3 8 The accompanying notes are an integral part of these financial statements. 22 Enbridge Income Fund Holdings Inc Annual Report

26 Statements of Financial Position December 31, Assets Current assets Accounts receivable and other 1 1 Demand loan due from affiliate (Note 10) Income taxes receivable 2 1 Distributions receivable Investment in Enbridge Income Fund (Notes4and8) 4,235 2,675 4,338 2,740 Liabilities and shareholders equity Current liabilities Accounts payable and other 1 Due to affiliates (Note 10) 2 Dividends payable Deferred income taxes Shareholders equity Share capital (Note 5) 2,984 2,217 Share premium (Note 5) Retained earnings Accumulated other comprehensive income ,173 2,687 4,338 2,740 The accompanying notes are an integral part of these financial statements. Approved by the Board of Directors: Bruce G. Waterman Director E.F.H. Roberts Director Financial Statements 23

27 Notes to the Financial Statements 1. General Business Description Enbridge Income Fund Holdings Inc. (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 200, st Street SW, Calgary, Alberta, Canada. The business of the Company is limited to its investment in the Fund. The Fund, through its indirect investment in Enbridge Income Partners LP (EIPLP), is involved in the transportation, storage and generation of energy. EIPLP owns interests in liquids transportation and storage assets, including the Canadian Mainline, the Regional Oil Sands System, a 50% interest in the Canadian and United States portions of the Alliance Pipeline, which transports natural gas, and interests in renewable and alternative power generation assets. 2. Basis of Preparation The Company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Amounts are stated in Canadian dollars, the Company s functional and presentation currency, unless otherwise indicated. The Company has consistently applied the same accounting policies throughout all periods presented, as if these policies had always been in effect. These financial statements were authorized for issuance on February 17, 2017 by the Company s Board of Directors (the Board). 3. Summary of Significant Accounting Policies Basis of Measurement These financial statements have been prepared under the historical cost convention except for the revaluation of available-for-sale financial assets to fair value. Cash and Cash Equivalents Cash and cash equivalents include short-term investments with an initial term to maturity of three months or less when purchased. Financial Instruments The Company classifies financial assets and liabilities as held for trading, available-for-sale, loans or receivables and financial liabilities at amortized cost. All financial instruments are initially recorded at fair value on the statements of financial position. Subsequent measurement of the financial instrument is based on its classification. Available-for-Sale Available-for-sale financial assets are non-derivatives that are not classified in any of the other categories. The Company s available-for-sale asset is comprised of an investment in the Fund. Available-for-sale financial assets are recognized initially at fair value plus transaction costs and subsequently carried at fair value. Gains and losses arising from changes in fair value are recognized in Other comprehensive income/(loss) (OCI). Distributions from available-for-sale instruments are recognized in earnings when the Company s right to receive payment is established. The Company accounts for its investment in trust units of the Fund as an available-for-sale financial asset due to the redeemable nature of the Fund s trust units. The redemption feature permits holders to redeem trust units for cash, subject to certain limitations. Further, the Company does not consolidate its investment in the Fund as its investment does not confer control. Enbridge Inc. (Enbridge) is the controlling party for accounting purposes through the combination of its direct and indirect equity interests and preferred unit investment in Enbridge Commercial Trust (ECT), a subsidiary of the Fund, as well as through Enbridge s role as manager of the Fund. Loans and Receivables Loans and receivables, which include Accounts receivable and other, Demand loan due from affiliate and Distributions receivable, are measured at amortized cost, using the effective interest rate method, net of any impairment losses recognized. Financial Liabilities at Amortized Cost Other financial liabilities are recorded at amortized cost using the effective interest rate method and include Accounts payable and other and Dividends payable. Impairment With respect to loans and receivables, the Company assesses the assets for impairment when it no longer has reasonable assurance of timely collection. If evidence of impairment is noted, the Company reduces the value of the loan or receivable to its estimated realizable amount, determined using discounted expected future cash flows. For available-for-sale financial assets, the Company assesses at the end of each reporting period whether there is objective evidence that a financial asset is impaired. In the case of investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is evidence that the asset is impaired. If any such evidence of impairment exists, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in earnings, is removed from OCI and recognized in earnings. Impairment losses on available-for-sale equity instruments are not reversed. 24 Enbridge Income Fund Holdings Inc Annual Report

28 Income Taxes The liability method of accounting for income taxes is followed. Deferred income tax assets and liabilities are recorded based on temporary differences between the tax bases of assets and liabilities and their carrying values for accounting purposes. Deferred income tax assets and liabilities are measured using the tax rate that is expected to apply when the temporary differences reverse. Earnings Per Share Basic earnings per share is calculated by dividing earnings for the year by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding for the potential number of shares which may have a dilutive effect on earnings. The weighted average number of diluted shares is calculated based on the exchange rights of securities issued by the Fund, ECT and EIPLP (Note 5). Dividends Dividends on common shares are recognized in the Company s financial statements in the period in which the dividends are declared by the Board. Accounting Estimates The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements. Significant estimates and assumptions used in preparation of the financial statements include, but are not limited to: the fair value of available-for-sale financial asset (Note 8). Actual results could differ from these estimates. Future Accounting Policy Changes Financial Instruments IFRS 9 (2014), Financial Instruments, addresses classification and measurement of financial assets. IFRS 9 (2014) replaces the model for measuring equity instruments and generally requires the recognition of a financial instrument s fair value through earnings, except in limited circumstances. This standard is effective for accounting periods beginning on or after January 1, 2018 with early adoption permitted, and is generally applied on a retrospective basis. The Company is currently assessing the impact of the new standard on its financial statements. 4. Investment in Enbridge Income Fund As at December 31, 2016, the Company owned million units ( million), or 56.9% ( %), of the Fund s issued and outstanding ordinary trust units (Fund Units). During the year ended December 31, 2016, the Company used the proceeds from its public offering and the cash retained and invested under its Dividend Reinvestment and Share Purchase Plan (DRIP) (Note 5) to purchase 27.0 million Fund Units ( million). Year ended December 31, Balance at beginning of year 2,675 2,808 Investment acquired Fair value change for the year 793 (1,008) Balance at end of year 4,235 2,675 On September 1, 2015, EIPLP acquired 100% interests in entities holding certain Canadian liquids pipelines, storage and renewable energy assets from Enbridge and certain of its subsidiaries for aggregate consideration of $30.4 billion plus incentive distribution and performance rights and working capital adjustments (the 2015 Transaction). The Fund issued Fund Units as part of the consideration for the 2015 Transaction. As the Company did not participate in the Fund Unit issuance in September 2015, the Company s ownership of the Fund s issued and outstanding Fund Units decreased from 88.1% at December 31, 2014 to 42.8% at September 30, Notes to the Financial Statements 25

29 Distribution Income The Fund declared distributions on a monthly basis of $ (2015 $0.1574) per unit during the year ended December 31, 2016 or $252 million (2015 $141 million) in aggregate to the Company. Summarized Financial Information 1 Summarized financial information of the Fund which supports the Company s earnings, derived from the Fund s financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP), was as follows: Year ended December 31, Revenues Income from equity investments Earnings Other comprehensive loss 2 (74) (76) Total comprehensive income Current assets Non-current assets 3 2,521 2,083 Current liabilities Non-current liabilities 3 2,100 2,218 1 SummarizedfinancialinformationoftheFundispreparedinaccordancewithU.S.GAAP.Assuchtheresultsmayhavebeendifferenthadtheybeenpreparedin accordance with IFRS. 2 The2015TransactionresultedinchangestotheFund smethodofaccountingforitsinvestmentsinectandeiplp.thefundceasedtoconsolidateectandeiplp,ect prospectivelyappliedtheequitymethodtoaccountforitsinvestmentineiplpandthefundprospectivelyappliedtheequitymethodtoaccountforitsinvestmentinect. 3AsatDecember31,2016and Share Capital and Share Premium Authorized The authorized share capital of the Company consists of an unlimited number of common shares, first preferred shares issuable in series limited to one half of the number of common shares issued and outstanding at the relevant time and one special voting share. Issued and Outstanding Year ended December 31, Number of Shares Amount Number of Shares Amount (millions of Canadian dollars; number of shares in millions) Common shares Balance at beginning of year 97 2, ,342 Share issuance DRIP Balance at end of year , ,217 Special voting share 1 Balance at end of year 124 2, ,217 1 Enbridgeowns24.7million( million)commonsharesandone(2015 one)specialvotingshare. 26 Enbridge Income Fund Holdings Inc Annual Report

30 Plan of Arrangement Pursuant to a plan of arrangement to restructure the Fund (the Plan), 20.1 million Fund Units held by public unitholders, together with 5.0 million Fund Units held by Enbridge, were exchanged for 25.1 million common shares of the Company on December 17, The initial stated capital of the Company for purposes of the Business Corporations Act (Alberta) was established to be $251 million, as determined at the discretion of the Board. The residual amount of $192 million by which the fair value of the consideration received exceeded the stated capital was assigned to Share Premium. The Board may elect in the future to reinstate Share Premium to stated capital under certain circumstances. Common Shares Each common share represents an equal undivided beneficial interest in the net assets in the event of termination or wind-up of the Company. Holders of common shares are entitled to one vote per share at meetings of the Company s shareholders. Dividends The Company declared monthly dividends of $ per share for each month during the year ended December 31, 2016, which were paid in the following month. The Company declared monthly dividends of $ per share for the months of January to August 2015 and $ per share for the months of September to December 2015, which were paid in the following month. On January 5, 2017, the Company announced a monthly dividend of $ per common share to be paid on February 15, 2017 to shareholders of record on January 31, On February 17, 2017, the Company announced a monthly dividend of $ per common share to be paid on March 15, 2017 to shareholders of record on February 28, Dividend Reinvestment and Share Purchase Plan The Company s shareholders are able to participate in the DRIP. The DRIP enables participants to reinvest their dividends in common shares of the Company at a 2% discount to market price and to make additional optional cash payments to purchase common shares at the market price, free of brokerage or other charges. The issuance of common shares from treasury for dividends reinvested pursuant to the DRIP enables the Company to retain cash which it in turn uses to purchase additional Fund Units. For the year ended December 31, 2016, the Company used $49 million of cash in respect of reinvested dividends and optional cash payments from the DRIP to purchase 1.6 million Fund Units. Special Voting Share Enbridge, the holder of the special voting share, is entitled to receive notice of and to attend all annual and special meetings of shareholders and may elect one director to the Board for so long as it beneficially owns or controls, directly or indirectly, between 15% and 39% of the issued and outstanding common shares, provided that if it elects to exercise its right to elect one director, it will not exercise the votes attached to the portion of common shares representing its pro-rata representation on the Board in respect of the election of the remaining directors of the Company at meetings of shareholders. The holder of the special voting share will not be entitled to receive, in respect of the special voting share, any dividends or to participate in any distribution of the property or assets of the Company upon the liquidation, dissolution or winding-up of the Company. The special voting share may only be transferred or assigned to an affiliate of Enbridge. Share Issuances In April 2016, the Company completed a public equity offering of 20.4 million common shares at a price of $28.25 per share (the Offering Price) for gross proceeds of $575 million. Concurrent with the closing of the equity offering, Enbridge subscribed for 5.0 million common shares at the Offering Price, for gross proceeds of $143 million, on a private placement basis to maintain its 19.9% ownership interest in the Company. The Company used the proceeds from the common share issuances to subscribe for 25.4 million Fund Units. In November 2015, the Company completed a public offering of 21.5 million common shares at a price of $32.60 per common share for gross proceeds of $700 million. Concurrently, Enbridge subscribed for an additional 5.3 million common shares at a price of $32.60 per common share for gross proceeds of $174 million. The Company used the aggregate gross proceeds of $874 million to subscribe for 26.8 million Fund Units. Earnings Per Common Share Basic Earnings per common share is calculated by dividing earnings by the weighted average number of common shares outstanding. Diluted In connection with the 2015 Transaction, securities were issued by the Fund and EIPLP to Enbridge, which may be exchanged into common shares of the Company. In addition, the terms of existing Fund Units and preferred units of ECT (ECT Preferred Units), held by Enbridge directly and indirectly, were amended to include exchange rights into common shares of the Company. If the securities are exchanged into common shares of the Company, the Company would subscribe for the same number of additional Fund Units which would increase the Company s distribution income. Notes to the Financial Statements 27

31 Weighted average shares outstanding used to calculate basic and diluted earnings per share are as follows: December 31, (millions of Canadian dollars, except per share amounts) Numerator Earnings Dilutive effect of exchangeable securities 1, Numerator for diluted earnings per share 1, Denominator (millions of shares) Weighted average number of shares outstanding Dilutive effect of exchangeable securities Fund Units ECT Preferred Units EIPLP Class C units Denominator for diluted earnings per share Earnings per share Basic Diluted Shareholders Rights Plan The Shareholders Rights Plan is designed to ensure the fair treatment of shareholders in connection with any takeover offer for the Company. Rights issued under the Shareholders Rights Plan become exercisable when a person and any related parties, acquires or announces its intention to acquire shares which combined with existing holdings would represent 20% or more of the Company s outstanding common shares without complying with certain provisions set out in the Shareholders Rights Plan or without approval of the Board. Should such an acquisition occur, each rights holder other than the acquiring person and related parties will have the right to purchase common shares of the Company at a discount to the market price at the time. 6. Income Taxes The initial acquisition of Fund Units under the Plan did not constitute a business combination, nor did the transaction affect earnings. As such, recognition of the resulting deferred income tax liability relating to the estimated taxable temporary difference of $71 million which arose on initial recognition of the investment in the Fund is not permitted. At December 31, 2016 and 2015, deferred income taxes represented the difference in accounting and tax bases of the Investment in the Fund, less the deferred income tax liability not recognized on initial acquisition of the investment on December 17, Income taxes expense was comprised primarily of current income tax expense of $2 million for the year ended December 31, 2016 (2015 $5 million). OCI included $107 million of deferred income tax expense (2015 $123 million recovery) for the year ended December 31, 2016, related to the change in the difference between the accounting and tax bases of the investment in the Fund. Effective July 1, 2015, the Alberta government enacted an increase to the provincial tax rate from 10% to 12%, resulting in deferred tax expense of $13 million included primarily in OCI for the year ended December 31, Income Tax Rate Reconciliation Year ended December 31, Earnings before income taxes Combined statutory income tax rate 27.0% 26.0% Income taxes at statutory income tax rate Decrease resulting from non-taxable dividend (67) (32) Income taxes expense 2 5 Effective income tax rate 1.0% 3.4% 28 Enbridge Income Fund Holdings Inc Annual Report

32 7. Risk Management Market Price Risk The Company s OCI is subject to market price risk resulting from changes in the fair value of the Company s investment in the Fund, which is referenced to the Company s common share price. The Company does not typically manage this risk. A $1.00 increase or decrease in the Company s common share price at December 31, 2016 would have resulted in an increase or decrease OCI, before income taxes of $124 million and $107 million after income taxes (2015 $97 million and $84 million, respectively) due to the revaluation of the investment. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. Accounts payable and accrued liabilities and dividends payable are due within one month. In order to manage this risk, the Company forecasts its cash flow over the near and long term and ensures that sufficient funds will be available when required. The Company s primary source of liquidity is cash distributions it receives from its investment in the Fund. Additional liquidity, if necessary, is expected to be available through collection of amounts advanced to a subsidiary corporation of EIPLP pursuant to a subordinated demand loan. Credit Risk Credit risk arises from the possibility that a counterparty may default on its contractual obligations to the Company. Demand loan due from affiliate, Accounts receivable and other and Distributions receivable are subject to credit risk, the maximum exposure of which is the carrying value as presented on the Statements of Financial Position. The Company s credit risk is mitigated as the majority of its financial assets are with affiliates. 8. Fair Value of Financial Instruments The fair value of financial instruments reflects the Company s best estimates of market value based on valuation techniques, supported by observable market prices where available. The fair value of loans and receivables and other financial liabilities approximate their carrying value due to the short period to maturity. The Company categorizes those 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 Company did not have any financial instruments categorized as Level 1 as at December 31, 2016 or Level 2 Level 2 includes financial instrument valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. The fair value measurement of the investment in the Fund is classified as Level 2, as the valuation technique references the quoted market price of the Company s common shares, and adjusts for assets and liabilities not applicable to the Fund. At December 31, 2016, the Company s investment in the Fund had a fair value of $4.2 billion (2015 $2.7 billion). 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 Company did not have any financial instruments categorized as Level 3 as at December 31, 2016 or The Company s policy is to recognize transfers as of the last day of the reporting period. There were no transfers between levels as at December 31, 2016 and Notes to the Financial Statements 29

33 9. Capital Disclosures The Company defines capital as shareholders equity less cash and cash equivalents. Capital totalled $4.2 billion (2015 $2.7 billion) at December 31, The Company s objectives when managing capital are to provide liquidity for additional investment in the Fund and to generate adequate returns and predictable cash flow for distribution to shareholders in the form of dividends. New capital, if necessary, may be raised through the issuance of equity securities. 10. Related Party Transactions In 2016, the Company advanced $30 million, net of repayments (2015 $17 million) to a subsidiary corporation of EIPLP pursuant to a subordinated demand loan. At December 31, 2016, $78 million (2015 $48 million) was outstanding on the loan. Interest on the demand loan was charged at 4.25% per annum. Interest income earned on the loan was $2 million (2015 $2 million) for the year ended December 31, 2016 and accounts receivable were minimal as at December 31, 2016 and In connection with the Company s April 2016 public offering of 20.4 million common shares, the Fund reimbursed the Company for share issue costs of $24 million pursuant to a payment assistance agreement. Proceeds from the equity offering were used by the Company to purchase additional Fund Units. In connection with the Company s November 2015 public offering of 21.5 million common shares, the Fund reimbursed the Company for share issue costs of $28 million pursuant to a payment assistance agreement. Proceeds from the equity offering were used by the Company to purchase additional Fund Units. Amounts due to affiliate relating to the Fund at December 31, 2016 were nil. At December 31, 2015, amounts due to affiliate relating to the Fund were $2 million related to corporate costs paid by the Fund and Fund Units issued in December The Company has an agreement with ECT whereby ECT reimburses the Company for certain corporate costs. ECT reimbursed the Company $1 million (2015 $1 million) for corporate costs incurred in At December 31, 2016 and 2015, accounts receivable from ECT were nil. The Company is managed by Enbridge Management Services Inc. (EMSI), a wholly-owned subsidiary of Enbridge. EMSI serves as the manager of the Fund, ECT and EIPLP. The Company has an agreement with EMSI to provide management and administrative services to the Company. Provided that the Fund is paying a base fee to EMSI for the services received by the Fund, no fee is payable to EMSI by the Company, as was the case for the years ended December 31, 2016 and Enbridge Income Fund Holdings Inc Annual Report

34 Enbridge Income Fund Financial Report Management s Discussion & Analysis 32 Overview 33 Enbridge Income Fund Performance Overview 35 Non-GAAP Measures 37 Fund Group Objectives and Strategy 38 Liquidity and Capital Resources 39 Analysis of Cash Distributions Declared 40 Quarterly Financial Information 41 Related Party Transactions 42 Risk Management and Financial Instruments 44 Changes in Accounting Policies 45 Fund Ownership Financial Statements 46 Management s Report 47 Independent Auditor s Report 48 Statements of Earnings 49 Statements of Comprehensive Income 50 Statements of Changes in Unitholders Equity 51 Statements of Cash Flows 52 Statements of Financial Position Notes to the Financial Statements General Business Description Summary of Significant Accounting Policies Changes in Accounting Policies Segmented Information Related Party Transactions Long-Term Investment Derivative Financial Instruments and Hedging Activities Other Long-Term Investments Debt ECT Preferred Units Trust Units Other Income Changes in Operating Assets and Liabilities Income Taxes 156 Glossary

35 Management s Discussion & Analysis This Management s Discussion and Analysis (MD&A) dated February 17, 2017 should be read in conjunction with the audited financial statements and notes thereto of Enbridge Income Fund (the Fund) as at and for the year ended December 31, 2016, prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). Unless otherwise noted, all financial information is presented in Canadian dollars. Additional information related to the Fund, including its Annual Information Form, is available on SEDAR at Overview The Fund is an unincorporated open-ended trust established by a trust indenture under the laws of the Province of Alberta. The Fund, through its indirect investment in Enbridge Income Partners LP (EIPLP), is involved in the transportation, storage and generation of energy. EIPLP owns interests in liquids transportation and storage assets, including the Canadian Mainline, the Regional Oil Sands System, a 50% interest in the Alliance Pipeline, which transports natural gas from Canada to the United States, and interests in renewable and alternative power generation assets. EIPLP is a partnership between Enbridge Commercial Trust (ECT) and Enbridge Inc. (Enbridge). The unitholders of the Fund are Enbridge Income Fund Holdings Inc. (ENF), a public company listed on the Toronto Stock Exchange (TSX), and Enbridge, a North American transporter, distributor and generator of energy listed on the TSX and New York Stock Exchange. The Fund is a member of the Fund Group, which also includes ECT, EIPLP and the subsidiaries and investees of EIPLP. The Fund owns a direct investment in ECT and an indirect investment in EIPLP. The financial performance of the Fund is underpinned by the results of EIPLP, which holds the underlying operating entities and investments of the Fund Group. Enbridge, through its wholly-owned subsidiary Enbridge Management Services Inc. (the Manager or EMSI), is responsible for the operations and day-to-day management of the Fund Group. The Manager also provides administrative and general support services to the Fund Group. Enbridge s total economic interest in the Fund Group was 86.9% at December 31, 2016 and at February 17, 2017 based on its indirect interest in the Fund through ENF, its direct interest in the Fund through ordinary trust units of the Fund (Fund Units), its interest in preferred units of ECT (ECT Preferred Units) and its direct and indirect interest in units of EIPLP. The 2015 Transaction On September 1, 2015, EIPLP acquired 100% interests in entities holding certain Canadian liquids pipelines, storage and renewable energy assets from Enbridge and certain of its subsidiaries for aggregate consideration of $30.4 billion plus incentive distribution and performance rights and working capital adjustments (the 2015 Transaction). The 2015 Transaction resulted in changes to the Fund s method of accounting for its investments in ECT and EIPLP from consolidation accounting to the equity method of accounting due to certain ownership and governance changes (the Accounting Impacts). These changes were applied prospectively from September 1, 2015, the closing date of the 2015 Transaction. The results of operations prior to September 1, 2015 were accounted for on a consolidated basis. As such, the comparative period balances do not follow the same method of accounting as the current period and therefore lack comparability. ECT applies the Hypothetical Liquidation at Book Value (HLBV) method to its equity method investments where cash distributions, including both preference and residual distributions, are not based on the investor s ownership percentages. Under the HLBV method, a calculation is prepared at each balance sheet date to determine the amount that ECT would receive if EIPLP were to liquidate all of its assets, as valued in accordance with U.S. GAAP, and distribute that cash to the investors. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is ECT s share of the earnings or losses from the equity investment for the period. The 2014 Transaction On November 7, 2014, the Fund completed a transaction whereby indirect wholly-owned subsidiaries of the Fund acquired from Enbridge a 50% equity interest in the United States portion of the Alliance Pipeline (Alliance Pipeline US) and subscribed for and purchased Class A Units of certain Enbridge subsidiaries which provide a defined cash flow stream from the United States portion of Southern Lights (Southern Lights Class A Units) for aggregate consideration of $1.8 billion (the 2014 Transaction). At the time of the 2014 Transaction, the Fund previously owned a 50% investment in the Canadian portion of the Alliance Pipeline. The financial performance of the Fund is a direct reflection of the performance of EIPLP, which owns all of the operating business held by the Fund Group. Readers are encouraged to read EIPLP s consolidated financial statements and MD&A which are filed under the Fund s profile on SEDAR at 32 Enbridge Income Fund Holdings Inc Annual Report

36 Enbridge Income Fund Performance Overview (millions of Canadian dollars, except per unit amounts) Three months ended December 31, Year ended December 31, Earnings Cash flow data Cash provided by operating activities Cash provided by/(used in) investing activities 522 (874) (921) (3,995) (1,806) Cash provided by/(used in) financing activities (866) ,457 1,483 Distributions Fund Unit distributions declared Fund Unit distribution per unit Total assets 2 3,246 2,628 4,072 Total long-term liabilities 2 2,100 2,218 3,003 1 EarningsincludeconsolidatedresultsforallperiodspriortoSeptember1, AsatDecember31,2016,2015and2014. Earnings The Fund s earnings are primarily comprised of income from its indirect investment in EIPLP, reduced by incentive fees and preferred distributions paid to Enbridge by ECT. Earnings were $648 million for the year ended December 31, 2016, compared with $120 million and $150 million for the comparable periods of 2015 and 2014, respectively. Current year earnings include 12 months of equity investment income from ECT compared to the prior year which includes eight months of consolidated earnings of $146 million and four months of equity investment loss from ECT of $26 million, reflecting the changes in accounting discussed in Overview The 2015 Transaction. As a result, 2016 earnings lack comparability to the prior year. Additionally, the Fund s equity investment earnings for the current year were impacted by a number of unusual, non-recurring and non-operating factors in EIPLP s earnings, most notably a pre-tax gain of $850 million related to the disposition of the South Prairie Region assets in December 2016, changes in unrealized derivative fair value gains and losses, changes in unrealized position on foreign currency translation on a United States dollar intercompany loan receivable and pipelines and facilities restart costs incurred as a result of the northeastern Alberta wildfires. Earnings for the three months ended December 31, 2016 were $446 million compared with $2 million for the three months ended December 31, The increase was primarily due to higher equity earnings in the fourth quarter of 2016 resulting from the gain on sale of the South Prairie Region assets discussed above. Cash Flows Cash provided by operating activities was $733 million for the year ended December 31, 2016 compared to $509 million and $323 million for the years ended December 31, 2015 and 2014, respectively. As a result of the 2015 Transaction, cash provided by operating activities lack comparability to prior years due to the Accounting Impacts. Since the 2015 Transaction, the Fund s cash from operating activities is derived primarily from distributions received from ECT. These are underpinned by distributions from EIPLP and reflect the impacts to earnings, discussed above. In 2016, distributions paid by ECT to the Fund were $42 million higher than the equity earnings recognized by the Fund from ECT, which were impacted by the gain on sale of the South Prairie Region assets. EIPLP made a special one-time distribution to ECT utilizing proceeds from the sale and ECT in turn paid a distribution of $264 million to the Fund. Cash used in investing activities and cash provided by financing activities for the year ended December 31, 2016 reflect the investment in additional common units of ECT (ECT Trust Units) and issuance of Fund Units, draws on the credit facility, repayment of medium-term notes (MTNs) and increased Fund Unit distributions. For the year ended December 31, 2015, cash used in investing activities and cash provided by financing activities reflect the investment in additional ECT Trust Units Enbridge Income Fund Management s Discussion & Analysis 33

37 and issuance of Fund Units in association with the 2015 Transaction. Cash used in investing activities and cash provided by financing activities for the year ended December 31, 2014 reflect the investment in Alliance Pipeline US and Southern Lights Class A Units and the issuance of Fund Units, all in respect of the 2014 Transaction. Further details on cash used in investing activities and cash provided by financing activities are discussed in Distributions and Liquidity and Capital Resources. The trends in cash provided by operating activities experienced during the fourth quarter of 2016 reflect the sale of the South Prairie Region assets discussed above. Cash provided by investing activities for the fourth quarter of 2016 reflected repayments from ECT of the demand notes receivable. Cash used in financing activities reflected repayment of credit facility draws and MTNs in the fourth quarter of 2016 using proceeds from the special one-time distribution from ECT discussed above. Fund Unit distributions also increased in the fourth quarter of 2016 as compared to the prior comparative period. For the three months ended December 31, 2015, cash used in investing activities and provided by financing activities are consistent with those discussed above for the corresponding annual period. Distributions The Fund pays monthly distributions to its unitholders. Distributions for the year ended December 31, 2016 were declared at an annual aggregate rate of $ per unit representing total distributions of $454 million. Distributions for the years ended December 31, 2015 and 2014 were declared at an annual aggregate rate of $ per unit representing total distributions of $323 million, inclusive of distributions on the ECT Preferred Units owned by Enbridge prior to the close of the 2015 Transaction, and $ per unit representing total distributions of $240 million, respectively. The increases in distributions through the years were due to the increased number of Fund Units outstanding and increases to the distribution rates per Fund Unit. Forward-Looking Information Forward-looking information, or forward-looking statements, have been included in this MD&A to provide information about the Fund Group, including management s assessment of future plans and operations of the Fund Group. 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, likely and similar words suggesting future outcomes or statements regarding an outlook. Forward-looking information or statements included or incorporated by reference in this document include, but are not limited to, statements with respect to the following: earnings/(loss); adjusted earnings/(loss), adjusted earnings before interest and taxes (EBIT) or available cash flow from operations (ACFFO); cash flows; capital expenditures; capital requirements through 2017; organic growth opportunities beyond secured projects; impact of hedging program; future distributions to the Fund by ECT; use of proceeds from the sale of Fund Units; the filing of an MTN shelf prospectus; taxation of distributions; and future distributions and distribution targets. Although the Fund believes 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 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 following: supply, demand and prices for crude oil, natural gas, natural gas liquids (NGL) and renewable energy; exchange rates; inflation; Canadian pipeline export capacity; levels of competition; interest rates; availability and price of labour and construction materials; operational reliability; customer and regulatory approvals; maintenance of support and regulatory approvals for the Fund Group s projects; in-service dates; weather; the Fund Group s credit ratings; earnings/(loss); adjusted earnings/(loss) or adjusted EBIT; cash flows and ACFFO; and distributions. Assumptions regarding the expected supply of and demand for crude oil, natural gas, NGL and renewable energy, and the prices of these commodities, are material to and underlie all forward-looking statements. These factors are relevant to all forward-looking statements as they may impact current and future level of demand for the Fund Group s services. Similarly, exchange rates, inflation and interest rates impact the economies and business environments in which the Fund Group operates and may impact level of demand for the Fund Group 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 forward-looking statement cannot be determined with certainty, particularly with respect to earnings/(loss), adjusted earnings/(loss), adjusted EBIT, ACFFO or future distributions. The most relevant assumptions associated with forward-looking statements on projects under construction, including completion dates and capital expenditures include the following: availability and price of labour and construction materials; effects of inflation and foreign exchange rates on labour and material costs; effects of interest rates on borrowing costs; impact of weather; and customer, government and regulatory approvals on construction and in-service schedules and cost recovery regimes. The Fund Group s forward-looking statements are subject to risks and uncertainties pertaining to operating performance, regulatory parameters, project approval and support, renewals of rights of way, weather, economic and competitive conditions, public opinion, changes in tax laws and tax rates, exchange rates, interest rates, commodity prices and supply of and demand for commodities, including but not limited to those risks and uncertainties discussed in this MD&A and in the Fund Group 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 Group s future course of action depends on management s assessment of all information available at the relevant time. Except to the extent required by applicable 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 Group or persons acting on the Fund Group s behalf, are expressly qualified in their entirety by these cautionary statements. 34 Enbridge Income Fund Holdings Inc Annual Report

38 Non-GAAP Measures This MD&A contains references to the Fund s adjusted earnings, EIPLP adjusted EBIT and EIPLP ACFFO. The Fund s adjusted earnings represent the Fund s earnings adjusted for unusual, non-recurring or non-operating factors, including unusual, non-recurring or non-operating factors underpinning the Fund s indirect equity earnings of EIPLP. EIPLP adjusted EBIT represent EIPLP s earnings before interest and income taxes, respectively, adjusted for unusual, non-recurring or non-operating factors on a consolidated basis. These factors, referred to as adjusting items, are reconciled and discussed in Non-GAAP Reconciliation Fund Earnings to Fund Adjusted Earnings and Enbridge Income Partners LP Performance Overview. EIPLP ACFFO represents EIPLP s cash available to fund distributions on EIPLP Class A and EIPLP Class C units, as well as for debt repayments and reserves. EIPLP ACFFO consists of EIPLP adjusted EBIT further adjusted for non-cash items, representing cash flow from EIPLP s underlying businesses, less deductions for maintenance capital expenditures, interest expense, applicable taxes and further adjusted for unusual, non-recurring or non-operating factors not indicative of the underlying or sustainable cash flows of the business. EIPLP ACFFO is important to unitholders as the Fund Group s objective is to provide a predictable flow of distributions to unitholders. The Manager believes the presentation of the Fund s adjusted earnings, EIPLP adjusted EBIT and EIPLP ACFFO give useful information to investors and unitholders as they provide increased transparency and insight into the performance of the Fund Group. The Manager uses the Fund s adjusted earnings, EIPLP adjusted EBIT and EIPLP ACFFO to set targets, including the distribution payout target, and to assess the performance of the Fund Group. The Fund s adjusted earnings, EIPLP adjusted EBIT and EIPLP ACFFO are not measures that have standardized meanings prescribed by U.S. GAAP and are not U.S. GAAP measures. Therefore, these measures may not be comparable with similar measures presented by other issuers. The tables below summarize the reconciliation of the GAAP and non-gaap measures. Non-GAAP Reconciliation Earnings to Adjusted Earnings Three months ended December 31, Year ended December 31, Earnings Fund adjusting items: Adjusting items at EIPLP 2 (427) 34 (582) 91 Transaction costs Alliance Pipeline US retrospective accounting adjustments 4 (39) Other 5 (22) (6) Fund adjusted earnings See Overview for impacts of the 2015 Transaction and the 2014 Transaction. 2 Represents ECT s portion of the unusual, non-recurring or non-operating items within earnings of EIPLP. 3Includestransactioncostsrelatedtothe2015Transactionandthe2014Transaction.Transactioncostsincludefeesprimarilyrelatedtofinancial,technicalandlegaladvisors. 4InaccordancewithU.S.GAAP,earningsfortheyearendedDecember31,2014havebeenretrospectivelyadjustedtofurnishcomparativeinformationrelatedtoAlliancePipelineUS. TheimpactoftheretrospectiveadjustmentshasbeenremovedfromadjustedearningstoreflectearningsgeneratedundertheFund sownershipeffectivenovember7, Primarily includes changes in unrealized derivative instrument fair value and changes in unrealized position on foreign currency translation on a United States dollar intercompany loan receivable. Adjusted earnings for the year ended December 31, 2016 were $66 million compared with $201 million for the year ended December 31, 2015 and $111 million for the year ended December 31, Adjusted earnings for the three months ended December 31, 2016 were $19 million compared with $36 million for the three months ended December 31, The Fund s adjusted earnings were impacted by the same factors impacting earnings, discussed previously; however, the Fund adjusted for ECT s portion of the unusual, non-recurring or non-operating items within earnings of EIPLP, the most noteworthy of which related to changes in unrealized derivative fair value gains and losses and a pre-tax gain of $850 million related to the sale of the South Prairie Region assets. Enbridge Income Fund Management s Discussion & Analysis 35

39 Enbridge Income Partners LP Performance Overview The performance of the Fund is ultimately derived from the underlying operating segments of its indirect investee EIPLP. These operating segments are strategic business units established by senior management to facilitate the achievement of EIPLP s long-term objectives and the objectives of EIPLP s partners, as well as to aid in resource allocation decisions and to assess operational performance. Financing costs, current and deferred income taxes and other costs not attributable to specific business segments are presented on a consolidated basis. An overview of EIPLP s operating segments, Liquids Pipelines, Gas Pipelines and Green Power, is provided below. Liquids Pipelines Overview Liquids Pipelines consists of common carrier and contract crude oil, NGL and refined products pipelines, feeder pipelines, gathering systems and terminals in Canada, including Canadian Mainline, Regional Oil Sands System, Southern Lights Pipeline, which includes Southern Lights Canada and Southern Lights Class A Units, Bakken System and Feeder Pipelines and Other. Gas Pipelines Overview Gas Pipelines includes EIPLP s 50% interest in the Alliance Pipeline system, which transports liquids-rich natural gas from northeast British Columbia, northwest Alberta and the Bakken area of North Dakota to Channahon, Illinois. Green Power Overview Green Power includes approximately 1,437 megawatts (MW) (1,052 MW net after taking into account third party interests) of renewable and alternative energy generating capacity from wind farms, solar facilities and waste heat recovery facilities located primarily in the provinces of Alberta, Saskatchewan, Ontario and Quebec. Performance Overview A summary of financial information of EIPLP derived from its consolidated financial statements prepared in accordance with U.S. GAAP is provided below. Readers are encouraged to read EIPLP s financial statements and MD&A which are filed on SEDAR at under the Fund s profile. Three months ended December 31, Year ended December 31, (millions of Canadian dollars, except per unit amounts) Earnings before interest and income taxes 1, , Retrospective adjustments (684) Changes in unrealized derivative fair value (gains)/loss (502) GainonsaleofSouthPrairieRegionassets (850) (850) Other 20 (25) 143 (165) (35) EIPLP adjusted EBIT , EIPLP ACFFO , Distributions Class A Unit distributions declared to ECT Class A Unit distribution per unit Theimpactoftheretrospectiveadjustmentsrelatedtothe2015TransactionhasbeenremovedfromEIPLPadjustedEBITtoreflectearningsgeneratedunderEIPLP sownership prior to September 1, Retrospective adjustments also include the impacts of significant, unusual, non-recurring or non-operating factors included in the retrospectively adjustedamountsforu.s.gaappurposes. 2 EIPLPadjustedEBITandEIPLPACFFOarenon-GAAPmeasuresthatdonothaveastandardizedmeaningprescribedbyU.S.GAAP.Formoreinformation,seeNon-GAAPMeasures. 36 Enbridge Income Fund Holdings Inc Annual Report

40 EIPLP Adjusted EBIT The increase in EIPLP adjusted EBIT year-over-year is attributable to the substantial increase of EIPLP s asset base following the 2015 Transaction. The most notable assets contributing incremental EIPLP adjusted EBIT were the Canadian Mainline, due to expansion, as well as the reversal and expansion of Line 9B in the fourth quarter of 2015 and the Regional Oil Sands System, which benefitted from assets placed into service late in These incremental contributions were partially offset by the impact of extreme wildfires in northeastern Alberta and the combination of lower average International Joint Tariff (IJT) Residual Benchmark Tolls on the Canadian Mainline, which decreased effective April 1, 2016, and a lower foreign exchange rate on hedges used to convert Canadian Mainline United States dollar toll revenues to Canadian dollars. Also bolstering EIPLP s adjusted EBIT were higher contributions from its Gas Pipelines segment resulting from operational efficiencies achieved by Alliance Pipeline. EIPLP adjusted EBIT for the fourth quarter decreased slightly in 2016 compared with the same period of 2015, reflecting increased volumes and the impact of the reversal and expansion of Line 9B, more than offset by a decrease in the Canadian Mainline IJT Residual Benchmark Toll and a lower rate on foreign exchange hedges of United States dollar toll revenue over the prior year, as discussed above. The IJT Residual Benchmark Toll is reset on an annual basis, effective April 1 of each year. EIPLP ACFFO Similar to adjusted EBIT, the year-over-year increase in EIPLP ACFFO was driven by the significant increase of EIPLP s asset base following the 2015 Transaction as well as stronger contributions from EIPLP s investment in Alliance Pipeline and lower current income taxes due to the optimization of tax deductions within the Fund Group. The respective increases were partially offset by higher maintenance capital expenditures and higher interest expense, both resulting from increased business activity associated with the increased asset base. EIPLP ACFFO was also negatively impacted by approximately $36 million as a result of the northeastern Alberta wildfires in the second quarter of 2016 and incentive distributions paid to Enbridge beginning in The fourth quarter of 2016 reflected similar operational trends as noted in the discussion on EIPLP adjusted EBIT. EIPLP Distributions EIPLP declares distributions to its partners on a monthly basis. The year-over-year increase in the distributions declared to ECT is a direct result of the units issued in connection with the 2015 Transaction and an increase in the distribution rate in In addition, EIPLP also paid a special one-time distribution to ECT of $264 million following the close of the disposition of the South Prairie Region assets in December The distributions received by ECT are used to fund the fees paid to Enbridge and distributions payable to its unitholders, Enbridge and the Fund. Recent Developments Disposition of South Prairie Region Assets On December 1, 2016, EIPLP sold the South Prairie Region assets within Feeder Pipelines and Other to an unrelated party for cash proceeds of $1.08 billion. The proceeds from this transaction are expected to be sufficient to meet all of the Fund s currently anticipated capital requirements through Fund Group Objectives and Strategy The Fund Group s objectives are to provide a predictable flow of distributable cash and to increase, where prudent, cash distributions through investment in and ongoing management of low risk energy infrastructure assets. The Fund Group s objectives and strategies are also aligned to support the corporate vision and strategies of its sponsor, Enbridge. In order to achieve these objectives, the Manager relies on the following strategic priorities: Commitment to Safety and Operational Reliability; Strengthen Core Businesses; Focus on Project Management; and Preserve Financing Strength and Flexibility. The Fund Group is closely focused on safety, system performance and operating effectiveness. The commitment to safety and operational reliability means achieving and maintaining industry leadership in safety (process, public and personal) and ensuring the operational reliability and integrity of the systems the Fund Group operates in order to generate, transport and deliver the energy society counts on while protecting the environment. Within the Fund Group s Liquids Pipelines assets, strategies to strengthen the core business are focused on optimizing asset performance, strengthening stakeholder and customer relationships and providing access to new markets for production from western Canada, all while ensuring safe and reliable operations. The Fund Group s assets are strategically located and well-positioned to capitalize on opportunities. In 2016, despite unfavourable commodity market conditions, the Canadian Mainline delivered record volumes of crude, driven by strong supply and refinery demand in combination with efforts to maximize capacity and throughput as well as enhanced scheduling efficiency with shippers. The Liquids Pipelines business that the Fund Group acquired in the 2015 Transaction is expected to have future organic growth opportunities beyond the current inventory of secured projects. The Fund Group will have a first right to execute any such projects that fall within the footprint of the Canadian Liquids Pipelines business. Within the Gas Pipelines assets, the Fund Group seeks to optimize the competitive advantage of its existing asset footprint, as the Alliance Pipeline is well-positioned to provide liquids-rich gas transportation services to developing regions in northeastern British Columbia, northwestern Alberta and the Bakken. Alliance Pipeline successfully re-contracted its firm capacity with shippers under its new services framework that came into effect in December Enbridge Income Fund Management s Discussion & Analysis 37

41 Long-term contracts have been secured through staged and non-staged receipt or full path services with an average contract length of approximately five years. In 2016, Alliance Pipeline benefitted from strong demand for seasonal firm services through its open season process. Within the Green Power assets, strategies are driven by the objective to manage and maintain facilities in such a way as to maximize power generation and related revenues when the relevant wind, solar or waste heat energy resource is available. The Manager will continue to assess ways to generate value for the Fund Group, including reviewing opportunities that may lead to acquisitions or other strategic transactions, some of which may be material and may involve Enbridge. Opportunities are screened, analyzed and assessed using strict operating, strategic and financial criteria with the objective of ensuring the effective deployment of capital and the enduring financial strength and stability of the Fund Group. Preservation of financial flexibility will continue to be a strategic priority. Ongoing access to cost effective sources of debt and equity capital is critical to the successful execution of the Fund Group s strategy to expand existing assets and acquire or develop new energy infrastructure. Liquidity and Capital Resources In keeping with its low risk value proposition, the Fund actively monitors and manages exposure to financial risks. The Fund s financing strategy is to maintain strong investment grade credit ratings and ongoing access to capital markets. To protect against more severe market disruptions, the Manager targets to maintain sufficient liquidity in the form of committed standby credit facilities to finance anticipated operating and capital requirements for at least one year without having to access long-term capital markets. Sources and Uses of Cash The Fund s primary uses of cash are distributions to unitholders, investments, administrative expense and interest and principal repayments on the Fund s long-term debt. Liquidity can be met through a variety of sources including cash distributions from ECT, new offerings of debt and equity, draws under the Fund s committed standby credit facilities, as well as loans from affiliates. The Fund expects to file a current shelf prospectus for MTNs with Canadian securities regulators in the first quarter of 2017, which will enable ready access to Canadian public capital markets, subject to market conditions. In September 2016, the Fund s credit ratings were affirmed as follows: DBRS Limited affirmed the Fund s issuer rating and MTNs and unsecured debentures rating of BBB (high) with stable outlook. Moody s Investor Services, Inc. affirmed the Fund s corporate credit rating and unsecured debt rating of Baa2 with negative outlook. Long-term Debt Long-term debt consists of MTNs and a committed credit facility. As at December 31, 2016, the Fund had a $1,500 million committed credit facility, of which $225 million (2015 nil) was drawn and letters of credit totalling $11 million (2015 $11 million) were issued, leaving $1,264 million (2015 $1,489 million) unutilized. The Fund must adhere to covenants under its credit facility agreement, including covenants that limit outstanding debt to a percentage of the Fund s and EIPLP s capitalization. The Fund was in compliance with all covenants as at December 31, No MTNs were issued during the years ended December 31, 2016 and For the years ending December 31, 2017 through December 31, 2021, MTN maturities are $325 million, $125 million, $300 million, $100 million and nil, respectively, and $1,225 million thereafter. Equity In April 2016, ENF completed a public equity offering of 20.4 million common shares at a price of $28.25 per share (the Offering Price) for gross proceeds of $575 million. Concurrent with the closing of the equity offering, Enbridge subscribed for 5.0 million ENF common shares at the Offering Price, for total proceeds of $143 million, on a private placement basis. ENF used the proceeds from the sale of its common shares to subscribe for 25.4 million Fund Units at the Offering Price for gross proceeds of $718 million. ENF shareholders are able to participate in an amended Dividend Reinvestment and Share Purchase Plan (DRIP). Registration in the DRIP enables ENF shareholders to reinvest their dividends in ENF Common Shares at a 2% discount to market price and to make additional optional cash payments to purchase ENF Common Shares at the market price, free of brokerage or other charges. The issuance of common shares from treasury for dividends reinvested pursuant to the DRIP enables ENF to retain cash which it in turn uses to purchase additional Fund Units. For the year ended December 31, 2016, ENF retained approximately $49 million (2015 $1 million) of cash in respect of reinvested dividends and optional cash payments from ENF s DRIP which was used to purchase 1.6 million ( ,918) Fund Units. It is expected that the proceeds from the Fund Unit issuances will ultimately be used to fund the secured capital growth projects associated with the Canadian liquids pipelines assets owned by EIPLP. Investments During the second quarter of 2016, the Fund used the gross proceeds of $718 million from the Fund Unit issuances to ENF to invest in 25.4 million ECT common units. In turn, ECT used the proceeds to invest in 25.4 million Class A units of EIPLP, increasing the Fund s indirect investment in EIPLP to 46.0%. EIPLP used the proceeds to fund the secured capital growth projects within the Fund Group. Distributions Effective with the January 2016 distribution, the Fund s monthly distribution rate increased to $ per outstanding Fund Unit, representing aggregate distributions for the year of $454 million. During 2015, the Fund declared distributions on its outstanding Fund Units at a rate of $ per unit per month, representing aggregate distributions for the year of $213 million. 38 Enbridge Income Fund Holdings Inc Annual Report

42 Analysis of Cash Distributions Declared Year ended December 31, Cash provided by operating activities Earnings Cash distributions declared Excess of cash provided by operating activities over cash distributions declared Excess/(shortfall) of earnings over cash distributions declared 194 (203) (90) 1 FortheyearendedDecember31,2015,CashprovidedbyoperatingactivitiesandEarningsreflecttheAccountingImpactsofthe2015Transaction,asdiscussedinOverview. CashprovidedbyoperatingactivitiesandEarningsfortheyearendedDecember31,2014havebeenretrospectivelyadjustedby$53millionand$39million,respectively,tofurnish comparativeinformationrelatedtoalliancepipelineusasprescribedbyu.s.gaapforcommoncontroltransactions.theseretrospectiveadjustmentswerenotavailable to distribute by the Fund during those periods. For the year ended December 31, 2016, cash provided by operating activities exceeded cash distributions declared by $279 million (2015 $186 million). Cash provided by operating activities includes the cash distributions received from the Fund s equity investments which may not be reflective of the income from the Fund s equity investments. Cash distributions received from the Fund s investments are the primary source of cash flow the Fund uses to pay distributions to its unitholders and service its long-term debt. Earnings exceeded cash distributions by $194 million for the year ended December 31, 2016 (2015 $203 million shortfall). Earnings reflected non-cash items such as income from equity investments and amortization of deferred financing costs. The comparative year also reflected depreciation, deferred income taxes and changes in unrealized derivative fair value gains and losses, all of which do not impact cash flow. Taxation of Distributions and Dividends Under Canadian tax laws, a component of the Fund s cash distributions is taxable in the hands of the unitholder, with the remaining portion treated as a return of capital. In addition, a portion of the distribution can take the form of a non-taxable intercorporate dividend. Sustainability of Distributions and Productive Capacity The current level of distributions may change based on the performance of the Fund s investments, the level of continued investment or the Fund s ability to raise capital. The ECT Board of Trustees periodically approves changes to distributions. Distributable cash flow is defined to generally mean cash from operating, investing and financing activities, less certain items, including repayment of any indebtedness required in the period and any cash withheld as a reserve as determined by the Manager. The sustainability of the Fund s distributions is a function of several factors, including: the ability to economically obtain financing to fund growth; the ability to comply with covenants in debt agreements; the ability to repay or refinance debt as it comes due; and the performance of the businesses underpinning EIPLP s investments, including the demand for the services provided and the effective maintenance of the productive capacity of the asset base. To the extent that ENF does not fund portions of the growth capital, Enbridge will be required until December 31, 2020 to provide the Fund Group with equity financing for such projects, unless the project is related to the Line 3 Replacement Program in which case Enbridge s obligation will be to fund the equity requirements for such project until it is placed into service. Enbridge Income Fund Management s Discussion & Analysis 39

43 Quarterly Financial Information 2016 Q1 Q2 Q3 Q4 Total (millions of Canadian dollars, except per unit amounts) Income from equity investments Earnings/(loss) 216 (19) Cash distributions received in excess of/(less than) equity earnings (98) (85) 42 Cash distributions declared Cash distributions declared per unit Q1 Q2 Q3 1 Q4 Total (millions of Canadian dollars, except per unit amounts) Revenues Income from equity investments Earnings Cash distributions received in excess of/(less than) equity earnings (8) (9) Cash distributions declared Cash distributions declared per unit Thethirdquarterof2015includestwomonthsaccountedforonaconsolidatedbasisandonemonthaccountedforonanequitymethodbasisasaresultoftheAccountingImpacts. 2 IncludesincomefromtheFund sinvestmentinectsubsequenttothecloseofthe2015transactionandincomefromthefund sinvestmentinalliancepipelinepriortotheclose ofthe2015transactionrecordedwithinincomefromequityinvestmentinectandincomefromotherequityinvestmentsonthestatementsofearnings. As a result of the Accounting Impacts of the 2015 Transaction, quarterly information presented for periods prior to the close of the 2015 Transaction on September 1, 2015 are presented on a consolidated basis and quarterly information presented for periods subsequent to the close of the 2015 Transaction are presented on an equity method basis. Further, cash distributions declared prior to September 1, 2015 include distributions on both the Fund Units and ECT Preferred Units. Subsequent to September 1, 2015, cash distributions declared include only distributions on the Fund Units. Therefore, the Fund s quarterly results before and after September 1, 2015 lack comparability and the analysis of the quarterly results described below has been segregated between the equity method basis period and the consolidated basis period. Equity Method Basis Several factors impact comparability of the Fund s financial results on a quarterly basis through its indirect investment in EIPLP, including, but not limited to, fluctuations in market prices such as foreign exchange rates and commodity prices, disposals of investments or assets and the timing of in-service dates of new projects. EIPLP actively manages its exposure to market risks including, but not limited to, interest rates, commodity prices and foreign exchange rates. To the extent derivative instruments used to manage these risks are non-qualifying for the purposes of applying hedge accounting, changes in unrealized derivative fair value gains and losses on these instruments will impact earnings. In addition to the impacts of changes in unrealized derivative fair value gains and losses outlined above, the following significant items have impacted quarterly financial information: The fourth quarter of 2016 includes the sale of South Prairie Region assets, which closed on December 1, 2016 resulting in a pre-tax gain of $850 million within EIPLP. Following the sale, a one-time cash distribution of $264 million was received from ECT. The second quarter of 2016 includes reduced equity earnings from EIPLP due to the northeastern Alberta wildfires. Also in the second quarter of 2016, the Fund issued 25.4 million Fund Units increasing the total cash distributions declared. In the first quarter of 2016, the monthly Fund Unit distribution rate increased to $ commencing with the January 2016 distribution. In the fourth quarter of 2015, cash distributions received from the Fund s investment in ECT were in excess of the equity earnings received from the same investment reflecting the significant cash generating ability in the underlying asset base. In the third quarter of 2015, revenues and earnings for the period decreased due to the Accounting Impacts. 40 Enbridge Income Fund Holdings Inc Annual Report

44 Consolidated Basis Significant items that have impacted quarterly financial information are as follows: In thefirstquarterof 2015, thefund realizedafullquarterof benefitsfromthe2014transaction. Earnings also included the benefit of favourable foreign exchange on the translation of a United States dollar denominated intercompany loan partially offset by unrealized derivative fair value losses. Related Party Transactions Unless otherwise noted, all related party transactions have been measured at the exchange amount of consideration established and agreed to by the related parties. The 2015 Transaction and the 2014 Transaction were accounted for as transactions among entities under common control. See Overview for additional information. As a result of the 2015 Transaction, the majority of the Fund s affiliate balances are with ECT. Previously, these balances were eliminated on consolidation. Demand Notes Receivable from Enbridge Commercial Trust December 31, Non-interest bearing note, due on demand from ECT 303 Floatinginterestratenote,dueondemandfromECT For the year ended December 31, 2016, Other income affiliates included interest income of $8 million (2015 $1 million) related to the floating interest rate note payable from ECT. Both the non-interest bearing note receivable and the floating interest rate note receivable are due on demand. Accounts Receivable from Affiliates December 31, Distributions receivable from ECT Accounts receivable from ECT 2 13 Accounts receivable from EPI 12 Other accounts receivable from affiliates For the year ended December 31, 2016, the Fund s investment in ECT reflects $789 million of distributions (2015 $168 million) and $718 million of contributions (2015 $3,874 million). For the year ended December 31, 2015 and 2014, Other income affiliates included $51 million and $6 million, respectively, of interest income related to the Southern Lights Class A Units long-term receivable which were subscribed for and purchased as part of the 2014 Transaction. Long-term Notes Receivable from Enbridge Commercial Trust December 31, %dueJune22,2017fromECT %dueNovember12,2020fromECT Thisnotereceivablehasbeenclassifiedasnon-currentontheStatementsofFinancialPositionasthematuritydateisexpectedtobeextendedpriortomaturity. For the year ended December 31, 2016, Other income affiliates included $13 million (2015 $4 million) of interest income related to the long-term notes receivable from ECT. Enbridge Income Fund Management s Discussion & Analysis 41

45 Distributions Payable to Affiliates As at December 31, 2016, Distributions payable to affiliates included Fund Unit distributions payable to ENF of $22 million (2015 $15 million) and to Enbridge of $17 million (2015 $15 million). Due to Affiliates Under the management and administrative agreements with EMSI, an incentive fee is payable annually from ECT to EMSI based on cash distributions above a base distribution level. For the year ended December 31, 2016, no incentive fees were recorded as the Fund no longer consolidates ECT. Prior to September 1, 2015, the results of ECT s operations were accounted for on a consolidated basis and incentive fees of $23 million were recorded within Operating and administrative expense affiliate on the Statements of Earnings for both the years ended December 31, 2015 and The Fund does not have any employees and prior to September 1, 2015, wholly-owned subsidiaries of the Fund used the services of Enbridge for managing and operating the businesses. For the year ended December 31, 2016, no service fees were recorded as the Fund no longer consolidates ECT. Prior to September 1, 2015, the results of operations from the Fund s wholly-owned subsidiaries were accounted for on a consolidated basis and the service fees of $34 million and $48 million were recorded for the years ended December 31, 2015 and 2014, respectively, were recorded within Operating and administrative expense affiliate on the Statements of Earnings. These services were charged at cost in accordance with the service agreements. Other Affiliate Transactions During 2016, the Fund paid $24 million (2015 $28 million; 2014 $14 million) for share issue costs incurred in connection with the public offering of 20.4 million common shares ( million common shares; million subscription receipts) by ENF. On September 1, 2015, the Fund entered into interest rate derivative instrument agreements with Enbridge to limit the Fund Group s exposure to interest rate fluctuations in addition to its pre-existing external agreements. The Fund also had existing foreign exchange derivative instrument agreements with external counterparties and offsetting foreign exchange derivative instrument agreements with a wholly-owned subsidiary of EIPLP. The net affiliate derivative instrument balance was $45 million asset (2015 $2 million asset). In November 2014, the Fund received an $878 million loan from Enbridge, a related party by virtue of its ownership of ECT Preferred Units and Fund Units, to partially finance the purchase of Southern Lights Class A Units and Alliance Pipeline US. Interest expense on this loan of $2 million was incurred by the Fund for the year ended December 31, 2014 and had been paid in full as at December 31, The subscription price for the Southern Lights Class A Units was at a fixed exchange rate of Canadian dollars to the United States dollar price. Given exchange rates on the date of closing, the Fund recorded a realized foreign exchange gain of $22 million in the fourth quarter Risk Management and Financial Instruments Maintaining a reliable and low risk business model is central to the Fund Group s objective of paying out a predictable cash flow to unitholders. The Fund Group actively manages both financial and non-financial risks it is exposed to. The Fund Group performs an annual corporate risk assessment to identify all potential risks. Risks are ranked based on severity and likelihood both before and after mitigating actions. In addition, the Fund Group has adopted a Cash Flow at Risk (CFAR) policy to manage exposure to movements in interest rates, foreign exchange rates and commodity prices. CFAR is a statistically derived measurement that quantifies the maximum adverse impact on cash flows over a specified period of time within a pre-defined level of statistical confidence. The Fund Group s CFAR limit has been set at 2.5% of forward annual available cash flows from operations of the Fund Group. Interest Rate Risk The Fund s earnings, cash flows and other comprehensive income (OCI) 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 mitigate the volatility of short-term interest rates on interest expense with the execution of floating to fixed rate interest rateswapsatanaverageswaprateof2.5%. The Fund s earnings, cash flows and OCI are also exposed to variability in longer term interest rates ahead of anticipated fixed rate debt issuances. Forward starting interest rate swaps may be used to hedge against the effect of future interest rate movements. The Fund has implemented a program to mitigate its exposure to long-term interest rate variability on select forecast term debt issuances with the execution of floating to fixed interest rate swaps at an average swap rate of 3.1%. The Fund uses qualifying derivative instruments to manage interest rate risk. 42 Enbridge Income Fund Holdings Inc Annual Report

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 earnings and comprehensive income. Year ended December 31, Amount of unrealized gains/(loss) recognized in OCI Interest rate contracts (44) (43) (29) Foreign exchange contracts 2 1 Commodity contracts 1 3 (44) (40) (25) Amount of (gains)/loss reclassified from accumulated other comprehensive loss (AOCI) to earnings (effective portion) Interest rate contracts Commodity contracts 4 (1) (1) Amount of loss reclassified due to change to equity accounting Foreign exchange contracts (3) Commodity contracts (2) Total loss reclassified due to change to equity accounting (5) Amount of loss reclassified from AOCI to earnings (ineffective portion and amount excluded from effectiveness testing) Interest rate contracts Amount of unrealized loss from non-qualifying derivatives included in earnings Foreign exchange contracts 3 (77) (25) 1 See Overview for impacts of the 2015 Transaction and the 2014 Transaction. 2 Reported within Interest expense in the Statements of Earnings. 3 Reported within Other income in the Statements of Earnings. 4 Reported within Electricity sales revenues in the Statements of Earnings. 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 its indirect investment in EIPLP, draws under committed credit facilities, issuance of MTNs and the issuance of Fund Units. The Fund expects to file a current MTN shelf prospectus with Canadian securities regulators in the first quarter of 2017, which will enable, subject to market conditions, ready access to Canadian public capital markets. Additional liquidity, if necessary, is expected to be available through intercompany transactions with Enbridge or other related entities. 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. 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 credit exposure limits and contractual requirements, netting arrangements and ongoing monitoring of counterparty credit exposure using external credit rating services and other analytical tools. Enbridge Income Fund Management s Discussion & Analysis 43

47 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, the Fund uses observable market prices 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. General Business Risks Readers are referred to EIPLP s risk factor disclosure under the headings General Business Risks and Risk Management and Financial Instruments in EIPLP s MD&A. The following are certain risk factors relating to the activities of the Fund. Future Distributions Distributions declared on the Fund Units are wholly-dependent on the declaration of distributions by ECT. ECT s distribution declarations are in turn wholly-dependent on the declaration of distributions by EIPLP. Future distribution payments by the Fund and the level thereof are uncertain as the Fund s distributions practices and the funds available for the payment of distributions from time to time will be dependent upon, among other things, operating cash flow generated by EIPLP and its respective operations and investments, financial requirements for the Fund and its investments operations and the Fund Group s ability to execute its growth strategy. Availability of Financing If the Fund pays out a high proportion of the distributions received from ECT to unitholders by way of distributions, it may have to enter into financings or other transactions involving the issuance of securities by the Fund in order to obtain funds for business purposes. An inability to raise new debt and equity capital may limit the Fund Group s ability to grow and execute its business plan. The issuance of equity securities may also be dilutive to unitholders. To the extent that ENF does not fund portions of the growth capital, Enbridge will be required until December 31, 2020 to provide the Fund Group with equity financing for such projects, unless the project is related to the Line 3 Replacement Program in which case Enbridge s obligation will be to fund the equity requirements for such project until it is placed into service. Changes in Accounting Policies Adoption of New Standards Simplifying the Presentation of Debt Issuance Costs Effective January 1, 2016, the Fund adopted Accounting Standards Update (ASU) on a retrospective basis which, as at December 31, 2015, resulted in a decrease in Deferred amounts and other assets of $7 million and a corresponding decrease in Long-term debt of $7 million. The new standard requires debt issuance costs related to a recognized debt liability to be presented in the Statements of Financial Position as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts or premiums. Further, effective January 1, 2016, the Fund adopted ASU which clarifies that debt issuance costs associated with line-of-credit arrangements may be deferred as an asset and subsequently amortized over the term of the arrangement. The adoption of ASU did not have a material impact on the Fund s financial statements. Amendments to the Consolidation Analysis Effective January 1, 2016, the Fund adopted ASU on a modified retrospective basis, which amended and clarified the guidance on variable interest entities (VIEs). There was a significant change in the assessment of limited partnerships and other similar legal entities as VIEs, including the removal of the presumption that the general partner should consolidate a limited partnership. As a result, the Fund has determined that the limited partnership that is currently equity accounted for is a VIE. The amended guidance did not impact the Fund s accounting treatment of the entity, however, material disclosures for VIEs have been provided, as necessary. Development Stage Entities Effective January 1, 2016, the Fund adopted ASU , relating to the amendment eliminating the exception to the sufficiency of equity at risk criteria for development stage entities on a retrospective basis. The new criteria amended the consolidation guidance to eliminate the development stage entity relief when applying the VIE model and evaluating the sufficiency of equity at risk. The adoption of the pronouncement did not have a material impact on the Fund s financial statements. 44 Enbridge Income Fund Holdings Inc Annual Report

48 Future Accounting Policy Changes Clarifying the Definition of a Business in an Acquisition ASU was issued in January 2017 with the intent of clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or businesses. The Fund is currently assessing the impact of the new standard on the financial statements. The accounting update is effective for annual and interim periods beginning on or after December 15, 2017 and is to be applied on a prospective basis. Accounting for Intra-Entity Asset Transfers ASU was issued in October 2016 with the intent of improving the accounting for the income tax consequences of intra-entity asset transfers other than inventory. Under the new guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The selling entity is required to recognize a current tax expense or benefit upon transfer of the asset, whereas the purchasing entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset. The accounting update is effective for annual and interim periods beginning on or after December 15, 2017 and is to be applied on a modified retrospective basis, with early adoption permitted. Effective January 1, 2017, the Fund will elect to early adopt ASU The adoption of the pronouncement is not anticipated to have a material impact on the Fund s financial statements. Simplifying Cash Flow Classification ASU was issued in August 2016 with the intent of reducing diversity in practice of how certain cash receipts and cash payments are classified in the Statements of Cash Flows. The new guidance addresses eight specific presentation issues. The Fund is currently assessing the impact of the new standard on its financial statements. The accounting update is effective for annual and interim periods beginning on or after December 15, 2017 and is to be applied on a retrospective basis. Recognition and Measurement of Financial Assets and Liabilities ASU was issued in January 2016 with the intent to address certain aspects of recognition, measurement, presentation, and disclosure of financial assets and liabilities. The amendments revise accounting related to the classification and measurement of investments in equity securities, the presentation of certain fair value changes for financial liabilities measured at fair value, and the disclosure requirements associated with the fair value of financial instruments. The Fund is currently assessing the impact of the new standard on its financial statements. The accounting update is effective for fiscal years beginning after December 15, 2017, and is to be applied by means of a cumulative-effect adjustment to the Statements of Financial Position as of the beginning of the fiscal year of adoption, with amendments related to equity securities without readily determinable fair values to be applied prospectively. Fund Ownership The following table presents the direct and indirect ownership of the Fund: AsatFebruary6,2017 (number Fund Units outstanding) Held by Enbridge 94,150,000 Held by ENF 124,320, ,470,723 Enbridge Income Fund Management s Discussion & Analysis 45

49 Management s Report To the Unitholders of Enbridge Income Fund (The Fund) Financial Reporting The management of Enbridge Management Services Inc. is responsible for the accompanying financial statements and all related financial information contained in the annual report, including Management s Discussion and Analysis. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and necessarily include amounts that reflect management s judgment and best estimates. The Board of Trustees (the Board) and its committees are responsible for all aspects related to governance of the Fund. The Audit, Finance & Risk Committee (the AF&RC), composed of trustees who are unrelated and independent, has a specific responsibility to oversee management s efforts to fulfill its responsibilities for financial reporting and internal controls related thereto. The AF&RC meets with management, internal auditors and independent auditors to review the financial statements and the internal controls as they relate to financial reporting. The AF&RC reports its findings to the Board for its consideration in approving the financial statements for issuance to the unitholders. The internal auditors and independent auditors have unrestricted access to the AF&RC. Internal Control Over Financial Reporting Management is also responsible for establishing and maintaining adequate internal control over financial reporting. The Fund s internal control over financial reporting includes policies and procedures to facilitate the preparation of relevant, reliable and timely information, to prepare financial statements for external reporting purposes in accordance with U.S. GAAP and provide reasonable assurance that assets are safeguarded. PricewaterhouseCoopers LLP, independent auditors appointed by the unitholders of the Fund, have conducted an audit of the financial statements of the Fund in accordance with Canadian generally accepted auditing standards and have issued an unqualified audit report, which is accompanying the financial statements. Perry F. Schuldhaus President, Enbridge Income Fund Enbridge Management Services Inc. Wanda M. Opheim Chief Financial Officer, Enbridge Income Fund Enbridge Management Services Inc. February 17, Enbridge Income Fund Holdings Inc Annual Report

50 Independent Auditor s Report To the Unitholders of Enbridge Income Fund We have audited the accompanying financial statements of Enbridge Income Fund, which comprise the statements of financial position as at December 31, 2016 and December 31, 2015 and the statements of earnings, comprehensive income, changes in unitholders equity and cash flows for each of the three years in the period ended December 31, 2016, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with generally accepted accounting principles in the United States of America, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Enbridge Income Fund as at December 31, 2016 and December 31, 2015 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016 in accordance with accounting principles generally accepted in the United States of America. Chartered Professional Accountants Calgary, Alberta February 17, 2017 Enbridge Income Fund Financial Statements 47

51 Statements of Earnings Year ended December 31, Revenues Transportation and other services Electricity sales Expenses Operating and administrative Operating and administrative affiliate (Note 5) Depreciation and amortization (1) Income from equity investment in Enbridge Commercial Trust (Note 6) Income from other equity investments (Note 8) Other income (Note 12) Other income affiliates (Note 5) Interest expense (Note 9) (119) (108) (78) Income taxes (Note 14) (72) (63) Earnings attributable to unitholders The accompanying notes are an integral part of these financial statements. 1 Reflects the deconsolidation of Enbridge Commercial Trust and Enbridge Income Partners LP (Note 2). 2 Retrospectively adjusted to furnish comparative information related to the 2014 Transaction (Note 2). 48 Enbridge Income Fund Holdings Inc Annual Report

52 Statements of Comprehensive Income Year ended December 31, Earnings Other comprehensive income/(loss), net of tax Change in unrealized loss on cash flow hedges (42) (41) (26) Other comprehensive loss from equity investee (Note 6) (51) (34) Reclassification to earnings of realized cash flow hedges (Note 7) Reclassification to earnings of unrealized cash flow hedges (Note 7) 13 4 Change in foreign currency translation adjustment (9) 5 Other comprehensive loss (74) (76) (18) Comprehensive income attributable to unitholders The accompanying notes are an integral part of these financial statements. 1 Reflects the deconsolidation of Enbridge Commercial Trust and Enbridge Income Partners LP (Note 2). 2 Retrospectively adjusted to furnish comparative information related to the 2014 Transaction (Note 2). Enbridge Income Fund Financial Statements 49

53 Statements of Changes in Unitholders Equity Year ended December 31, Deficit Balance at beginning of year (5,171) (5,752) (2,569) Earnings attributable to unitholders Enbridge Commercial Trust preferred unit distributions (110) (126) Distributions to unitholders (454) (213) (114) Redemption value adjustment attributable to Enbridge Commercial Trust preferred units (Note 10) 661 (1,351) Reversal of cumulative redemption value adjustment attributable to Enbridge Commercial Trust preferred units (Note 6) 1,260 Redemption value adjustment attributable to trust units (Note 11) (1,436) 1,768 (1,244) The 2015 Transaction Adjustments: Deconsolidation of September 1, 2015 opening retained earnings 4,718 Enbridge Income Partners LP equity of former owners of acquired interest (Note 6) (7,259) Equity investment other comprehensive loss (Note 6) (32) Other (Note 6) (16) Equity investment dilution loss, net (Note 6) (156) (316) Excess purchase price over historical carrying value acquired (Note 6) (6) (392) Equity of former owners of acquired interest (106) Balance at end of year Accumulated other comprehensive loss (6,575) (5,171) (5,752) Balance at beginning of year (108) (32) (14) Other comprehensive loss, net of tax (74) (76) (18) Balance at end of year (182) (108) (32) Total unitholders deficit (6,757) (5,279) (5,784) The accompanying notes are an integral part of these financial statements. 1 Reflects the deconsolidation of Enbridge Commercial Trust and Enbridge Income Partners LP (Note 2). 2 Retrospectively adjusted to furnish comparative information related to the 2014 Transaction (Note 2). 50 Enbridge Income Fund Holdings Inc Annual Report

54 Statements of Cash Flows Year ended December 31, Operating activities Earnings Cash distributions in excess of equity earnings Depreciation and amortization Deferred income taxes (Note 14) Changes in unrealized derivative instrument fair value, net (Note 7) Unrealized gain on translation of United States dollar intercompany loan receivable (Note 12) (99) (16) Gain on disposition of certain assets held by Enbridge Income Partners LP (Note 12) (22) Other Changes in operating assets and liabilities (Note 13) (26) Investing activities Acquisition of long-term investment (Note 6) (718) (3,874) Affiliate loans, net (203) Cash divested on deconsolidation (Note 2) (118) Additions to property, plant and equipment (34) (40) Proceeds from disposition 26 Long-term receivable from affiliates 10 (925) Contributions to equity investees (5) (6) Purchase of equity investment (Note 2) (835) Additions to intangible assets (1) Acquisition and other 1 (921) (3,995) (1,806) Financing activities Net change in bank indebtedness Net change in credit facility draws 225 (140) 100 Repayment of medium term notes (330) (290) Issuance of medium term notes, net 1,075 Loans received from affiliates Repayment of affiliate loans (885) Enbridge Commercial Trust preferred units issued (Note 10) 461 Trust units issued, net (Note 11) 743 3, Enbridge Commercial Trust preferred unit distributions declared (110) (126) Trust unit distributions declared (454) (213) (114) Change in distributions payable Contributions received and shares issued by acquired interest (Note 2) 26 Distributions and dividends paid by acquired interest (Note 2) (73) 194 3,457 1,483 Increase/(decrease) in cash and cash equivalents 6 (29) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 6 29 Supplementary cash flow information Income taxes paid Interest paid The accompanying notes are an integral part of these financial statements. 1 Reflects the deconsolidation of Enbridge Commercial Trust and Enbridge Income Partners LP (Note 2). 2 Retrospectively adjusted to furnish comparative information related to the 2014 Transaction (Note 2). Enbridge Income Fund Financial Statements 51

55 Statements of Financial Position December 31, Assets Current assets Cash and cash equivalents 6 Demand notes receivable from Enbridge Commercial Trust (Note 5) Accounts receivable from affiliates (Note 5) Other accounts receivable 1 Current portion of derivative assets (Note 7) 1 Current portion of derivative assets from affiliates (Note 7) Long-term notes receivable from Enbridge Commercial Trust (Note 5) Long-term investment (Note 6) 2,244 1,781 Long-term portion of derivative assets (Note 7) 105 Long-term portion of derivative assets from affiliates (Note 7) 80 Deferred amounts and other assets 1 1 3,246 2,628 Liabilities and unitholders equity Current liabilities Bank indebtedness 1 Interest payable Current portion of derivative liabilities (Note 7) Current portion of derivative liabilities to affiliates (Note 7) Other accounts payable 1 1 Distributions payable to affiliates (Note 5) Current maturities of long-term debt (Note 9) Long-term debt (Note 9) 1,969 2,067 Long-term portion of derivative liabilities (Note 7) Long-term portion of derivative liabilities to affiliates (Note 7) 4 3 Other long-term liabilities 1 2,558 2,641 Trust units (Note 11) 7,445 5,266 7,445 5,266 Unitholders deficit Deficit (6,575) (5,171) Accumulated other comprehensive loss (182) (108) (6,757) (5,279) 3,246 2,628 The accompanying notes are an integral part of these financial statements. 1 Reflects the deconsolidation of Enbridge Commercial Trust and Enbridge Income Partners LP (Note 2). Approved by the Trustees of Enbridge Commercial Trust on behalf of Enbridge Income Fund: Bruce G. Waterman Trustee E.F.H. Roberts Trustee 52 Enbridge Income Fund Holdings Inc Annual Report

56 Notes to the Financial Statements 1. General Business Description Enbridge Income Fund (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), a wholly-owned subsidiary of Enbridge Inc. (Enbridge), manages the Fund. EMSI also serves as the manager of Enbridge Commercial Trust (ECT), a wholly-owned investment of the Fund, Enbridge Income Partners LP (EIPLP), an indirect investment of the Fund and Enbridge Income Fund Holdings Inc. (ENF), a unitholder of the Fund. EIPLP is a partnership between ECT and Enbridge. The Fund, ECT, EIPLP and the subsidiaries of EIPLP are referred to as the Fund Group. The Fund, through its indirect investment in EIPLP, is involved in the transportation, storage and generation of energy. EIPLP owns its interests in liquids transportation and storage assets, including the Canadian Mainline, the Regional Oil Sands System, a 50% interest in the Canadian and United States portions of the Alliance Pipeline, which transports natural gas, and interests in renewable alternative power generation assets. 2. Summary of Significant Accounting Policies Basis of Presentation and Use of Estimates The financial statements of the Fund have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). Amounts are stated in Canadian dollars unless otherwise noted. The Fund is permitted to use U.S. GAAP as its primary basis of accounting for purposes of meeting its continuous disclosure obligations under an exemption granted by securities regulators in Canada. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities in the financial statements. Significant estimates and assumptions used in preparation of the financial statements for the year ended and as at December 31, 2016 include, but are not limited to fair values of financial instruments (Note 7). Significant estimates and assumptions used in preparation of the financial statements for the year ended and as at December 31, 2015 include, but are not limited to: depreciation rates; amortization rates of intangible assets; fair values of financial instruments (Note 7) and income taxes (Note 14). Significant estimates and assumptions used in the preparation of the financial statements for the year ended December 31, 2014 include, but are not limited to: carrying values of regulatory assets and liabilities; depreciation rates and carrying value of property, plant and equipment; measurement of and amortization rates of intangible assets; measurement of goodwill; fair values of financial instruments (Note 7); income taxes (Note 14); and commitments and contingencies. Actual results could differ from these estimates. The 2015 Transaction On September 1, 2015, EIPLP acquired 100% interests in entities holding certain Canadian liquids pipelines, storage and renewable energy assets from Enbridge and certain of its subsidiaries for aggregate consideration of $30.4 billion plus incentive distribution and performance rights and working capital adjustments (the 2015 Transaction). The 2015 Transaction resulted in changes to the Fund s method of accounting for its investments in ECT and EIPLP from consolidation accounting to the equity method of accounting. These changes were applied prospectively from September 1, 2015, the closing date of the 2015 Transaction. The results of operations prior to September 1, 2015 were accounted for on a consolidated basis. The significant factors which resulted in the change to the equity method of accounting for each investment upon closing of the 2015 Transaction were: Enbridge received a contractual right to control the majority of the Board of Trustees of ECT. As a result, the Fund ceased to consolidate ECT as it was no longer the primary beneficiary of ECT nor did it control ECT. As part of the consideration for the 2015 Transaction, EIPLP issued class C units to Enbridge reducing ECT s ownership percentage in EIPLP from 100% to 42.8%. Further, Enbridge acquired a 51% direct interest in the general partner of EIPLP which has the right to manage, control and operate the businesses of EIPLP. As a result, ECT no longer controls EIPLP. The 2014 Transaction On November 7, 2014, the Fund completed a transaction whereby indirect wholly-owned subsidiaries of the Fund acquired from Enbridge a 50% equity interest in the United States portion of the Alliance Pipeline (Alliance Pipeline US) and subscribed for and purchased class A units of Enbridge subsidiaries which provide a defined cash flow stream from the United States portion of Southern Lights (Southern Lights Class A Units) for $1.8 billion (the 2014 Transaction). At the time of the 2014 Transaction, the Fund previously owned a 50% investment in the Canadian portion of Alliance Pipeline (Alliance Pipeline Canada). Enbridge Income Fund Notes to the Financial Statements 53

57 The Alliance Pipeline US component of the 2014 Transaction 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. Financial information for periods prior to November 7, 2014 has been retrospectively adjusted to present the result of operations for the Fund and its interests in Alliance Pipeline US on a combined basis. The Southern Lights Class A Unit component of the 2014 Transaction was accounted for as a loan investment and did not require retrospective restatement. Subsequent to the close of the 2015 Transaction and deconsolidation, these investments are accounted for by the Fund within the indirect equity investment in EIPLP. The incremental effect of retrospectively adjusting the Fund s financial statements to include the results of operations of Alliance Pipeline US for the periods prior to the 2014 Transaction is as follows: Year ended December 31, 2014 Earnings Income from equity investments 64 Income taxes (25) Earnings 39 Year ended December 31, 2014 millions of Canadian dollars) Cash provided by operating activities 47 Cash used in financing activities (47) Continuing Accounting Policies The following accounting policies are primarily applicable for transactions and balances as at and for the year ended December 31, Cash and Cash Equivalents Cash and cash equivalents include short-term investments with a term to maturity of three months or less when purchased. Derivative Instruments and Hedging Non-qualifying Derivatives The Fund, through its indirect investment in EIPLP, has non-qualifying derivative instruments. Non-qualifying derivative instruments are used primarily to economically hedge foreign exchange exposure. Non-qualifying derivatives are measured at fair value with changes in fair value recognized in earnings, within Electricity sales revenue and Other income. Derivatives in Qualifying Hedging Relationships The Fund, and its indirect investee EIPLP, uses derivative financial instruments to manage its exposure to changes in interest rates and commodity prices. Hedge accounting is optional and requires the Fund to document the hedging relationship and test the hedging item s effectiveness in offsetting changes in fair values or cash flows of the underlying hedged item on an ongoing basis. The Fund presents the earnings effects of hedging items with the hedged transaction. Derivatives in qualifying hedging relationships are categorized as cash flow hedges or fair value hedges. 54 Enbridge Income Fund Holdings Inc Annual Report

58 Cash Flow Hedges The Fund uses cash flow hedges to manage exposure to changes in interest rates, commodity prices and foreign exchange rates. The effective portion of the change in the fair value of a cash flow hedging instrument is recorded in Other comprehensive income/(loss) (OCI) and is reclassified to earnings when the hedged item impacts earnings. Any hedge ineffectiveness is recorded in current period earnings. If a derivative instrument designated as a cash flow hedge ceases to be effective or is terminated, hedge accounting is discontinued and the gain or loss at that date is deferred in OCI and recognized concurrently with the related transaction. If a hedged anticipated transaction is no longer probable, the gain or loss is recognized immediately in earnings. Subsequent gains and losses from derivative instruments for which hedge accounting has been discontinued are recognized in earnings in the period in which they occur. Classification of Derivatives The Fund recognizes the fair market value of derivative instruments on the Statements of Financial Position as current and long-term assets or liabilities depending on the timing of the settlements and the resulting cash flows associated with the instruments. Fair value amounts related to cash flows occurring beyond one year are classified as long-term. Cash inflows and outflows related to derivative instruments are classified as operating activities on the Statements of Cash Flows. Balance Sheet Offset Assets and liabilities arising from derivative instruments may be offset in the Statements of Financial Position when the Fund has the legal right and intention to settle them on a net basis. Transaction Costs Transaction costs are incremental costs directly related to the acquisition of a financial asset or the issuance of a financial liability. The Fund incurs transaction costs primarily through the issuance of debt and accounts for these costs as a deduction from Long-term debt on the Statements of Financial Position. These costs are amortized using the effective interest rate method over the term of the related debt instrument and are recorded in Interest expense. Transaction costs directly related to business combinations are expensed in the period incurred. Equity Investments Equity investments, over which the Fund exercises significant influence but does not have controlling financial interests, are accounted for using the equity method. Equity investments are initially measured at cost and are adjusted for the Fund s proportionate share of undistributed equity earnings or loss. Equity investments are increased for contributions made to and decreased for distributions received from the investees. As a result of the 2015 Transaction, ECT determines its equity investment earnings from EIPLP using the Hypothetical Liquidation at Book Value (HLBV) method. ECT applies the HLBV method to its equity method investments where cash distributions, including both preference and residual distributions, are not based on the investor s ownership percentages. Under the HLBV method, a calculation is prepared at each balance sheet date to determine the amount that ECT would receive if EIPLP were to liquidate all of its assets, as valued in accordance with U.S. GAAP, and distribute that cash to the investors. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is ECT s share of the earnings or losses from the equity investment for the period. See the Long-term investment note (Note 6) for more information. Income Taxes Pursuant to the Income Tax Act (Canada), the Fund, as a trust, is not subject to income taxes to the extent that taxable income and taxable capital gains are paid or payable to unitholders. Deferred income taxes have not been recognized because it is anticipated that all future earnings will be paid or payable to unitholders. Impairment With respect to equity investments, the Fund assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired by completing a quantitative or qualitative analysis of factors impacting the investment. If there is determined to be objective evidence of impairment, the Fund internally values the expected discounted cash flows using observable market inputs and determines whether the decline below carrying value is other than temporary. If the decline is determined to be other than temporary, an impairment charge is recorded in earnings with an offsetting reduction to the carrying value of the asset. With respect to financial assets, other than equity investments, the Fund assesses the assets for impairment when it no longer has reasonable assurance of timely collection. If evidence of impairment is noted, the Fund reduces the value of the financial asset to its estimated realizable amount, determined using discounted expected future cash flows. Enbridge Income Fund Notes to the Financial Statements 55

59 Loans and Receivables Long-term notes receivable from affiliate are measured at amortized cost using the effective interest rate method, net of any impairment losses recognized. Accounts receivable and other are measured at cost. Interest income is recognized in earnings as it is earned with the passage of time. Deferred Amounts and Other Assets Deferred amounts and other assets primarily include derivative financial instruments. Redeemable Securities Trust Units Ordinary trust units issued by the Fund (Fund Units) are classified as temporary equity and reflected within the mezzanine section of the Statements of Financial Position between long-term liabilities and Unitholders deficit. Fund Units are recorded at their maximum redemption value with changes in estimated redemption value reflected as a charge or credit to deficit. Principles of Consolidation Upon inception of a contractual agreement, the Fund performs an assessment to determine whether the arrangement contains a variable interest in a legal entity and whether that legal entity is a variable interest entity (VIE). Where the Fund concludes it is the primary beneficiary of a VIE, the Fund consolidates the accounts of that entity and all significant intercompany accounts and transactions are eliminated upon consolidation. Commitments and Contingencies Liabilities for commitments and contingencies are recognized when, after fully analysing available information, the Fund determines it is either probable that an asset has been impaired, or that a liability has been incurred, and the amount of impairment or loss can be reasonably estimated. When a range of probable loss can be estimated, the Fund recognizes the most likely amount, or if no amount is more likely than another, the minimum of the range of probable loss is accrued. The Fund expenses legal costs associated with loss contingencies as such costs are incurred. At December 31, 2016, the Fund did not have any significant commitments or known contingencies. Comparative Period Accounting Policies The following accounting policies are primarily applicable for transactions prior to the 2015 Transaction on September 1, 2015 and for transactions for the year ended December 31, Revenue Recognition Revenues from business operations in EIPLP and ECT prior to the closing of the 2015 Transaction on September 1, 2015 were accounted for on a consolidated basis. Subsequent to September 1, 2015, revenues from business operations in EIPLP and ECT are recorded within the Fund s equity accounting for its indirect investment in EIPLP. For the Fund Group s businesses that are not rate-regulated, revenues were recorded when products were delivered or services were performed, the amount of revenue was reliably measured and collectability was reasonably assured. Customer credit worthiness was assessed prior to agreement signing as well as throughout the contract duration. Certain pipelines revenues were recognized under the terms of committed delivery contracts rather than the cash tolls received. Long-term take-or-pay contracts, under which shippers are obligated to pay fixed amounts rateably over the contract period regardless of volumes shipped, may contain make-up rights. Make-up rights are earned by shippers when minimum volume commitments are not utilized during the period but under certain circumstances can be used to offset overages in future periods, subject to expiry periods. The Fund recognized revenues associated with make-up rights at the earlier of when the make-up volume was shipped, the make-up right expired or when it was determined that the likelihood that the shipper will utilize the make-up right was remote. For the Fund Group s rate-regulated businesses, revenues were recognized in a manner that was consistent with the underlying agreements as approved by the regulators. Regulation Prior to the closing of the 2015 Transaction on September 1, 2015, the financial statement effect of rate regulation was recorded directly in the Fund and subsequent to September 1, 2015, the financial statement effect of rate regulation is recorded within the Fund s equity accounting for its indirect investment in EIPLP. Certain of the Fund Group s businesses are subject to regulation by various authorities including, but not limited to the National Energy Board (NEB), Federal Energy Regulatory Commission (FERC), Saskatchewan Ministry of Economy (SME) and Manitoba Mineral Resources. Regulatory bodies exercise statutory authority over matters such as construction, rates and ratemaking and agreements with customers. To recognize the economic effects of the actions of the regulator, the timing of recognition of certain revenues and expenses in these operations may differ from that otherwise expected under U.S. GAAP for non rate-regulated entities. Regulatory assets represent amounts that are expected to be recovered from customers in future periods through rates. Regulatory liabilities represent amounts that are expected to be refunded to customers in future periods through rates or expected to be paid to cover future abandonment costs in relation to NEB s Land Matters Consultation Initiative (LMCI). Long-term regulatory assets were recorded in Deferred amounts and other assets and current regulatory assets were recorded in Accounts receivable and other. Long-term regulatory liabilities were included in Other long-term liabilities and current regulatory liabilities were recorded in Accounts payable and other. Regulatory assets were assessed for impairment if the Fund identified an event indicative of possible impairment. The recognition of regulatory assets and liabilities is based on the actions, or expected future actions of the regulator. To the extent that the regulator s actions differ from the Fund s expectations, the timing and amount of recovery or settlement of regulatory balances could have differed significantly from those recorded. In the absence of rate regulation, regulatory assets or liabilities would not generally be recognized and the earnings impact would be recorded in the period the expenses are incurred or revenues are earned. A regulatory asset or liability was recognized in respect of deferred income taxes when it was expected the amounts would be recovered or settled through future regulator-approved rates. 56 Enbridge Income Fund Holdings Inc Annual Report

60 Allowance for funds used during construction (AFUDC) was included in the cost of property, plant and equipment and is depreciated over future periods as part of the total cost of the related asset. AFUDC included both an interest component and, if approved by the regulator, a cost of equity component which were both capitalized based on rates set out in a regulatory agreement. In the absence of rate regulation, the Fund would have capitalized interest using a capitalization rate based on its cost of borrowing, whereas the capitalized equity component, the corresponding earnings during the construction phase and the subsequent depreciation would not be recognized. Income Taxes Pursuant to the Income Tax Act (Canada), the Fund and ECT, as trusts, are not subject to income taxes to the extent that taxable income and taxable capital gains are paid or payable to unitholders. However, certain previously consolidated subsidiary corporations are taxable and applicable income taxes have been reflected in these financial statements for the periods prior to September 1, Following the liability method of accounting for income taxes, deferred income tax assets and liabilities were recorded based on temporary differences between the tax bases of assets and liabilities and their carrying value for accounting purposes. Deferred income tax assets and liabilities were measured using the tax rate that is expected to apply when the temporary differences reverse. For the Fund s previously consolidated regulated operations, a deferred income tax liability was recognized with a corresponding regulatory asset to the extent taxes could be recovered through rates. Interest and penalties related to tax are reflected in income taxes. Foreign Currency Transactions and Translation Foreign currency transactions are those transactions whose terms are denominated in a currency other than the currency of the primary economic environment in which the Fund or a previously consolidated subsidiary operates, referred to as the functional currency. Transactions denominated in foreign currencies are translated into the functional currency using the exchange rate prevailing at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency using the rate of exchange in effect at the balance sheet date. Exchange gains and losses resulting from translation of monetary assets and liabilities are included in the Statements of Earnings in the period in which they arise. Gains and losses arising from translation of a foreign operation s functional currency to the Fund s Canadian dollar presentation currency were included in the cumulative translation adjustment component of accumulated other comprehensive income (AOCI) and would have been recognized in earnings upon sale of the foreign operation. Asset and liability accounts were translated at the exchange rates in effect on the balance sheet date, while revenues and expenses were translated using monthly average exchange rates. Deferred Amounts Deferred amounts and other assets in the prior year also included costs which regulatory authorities have permitted, or were expected to permit, to be recovered through future rates including deferred income taxes. Property, Plant and Equipment Property, plant and equipment was recorded at historical cost. Expenditures for construction, expansion, major renewals and betterments were capitalized. Maintenance and repair costs were expensed as incurred. Expenditures for project development were capitalized if they were expected to have future benefit. The Fund capitalized interest incurred during construction. Two primary methods of depreciation were utilized. For distinct assets, depreciation was generally provided on a straight-line basis over the estimated useful lives of the assets commencing when the asset was placed in service. For largely homogeneous groups of assets with comparable useful lives, the pool method of accounting for property, plant and equipment was followed whereby similar assets are grouped and depreciated as a pool. When those assets were retired or otherwise disposed of, gains and losses were booked as an adjustment to accumulated depreciation. Certain pipeline assets in service were depreciated based on unit of throughput. Intangible Assets Intangible assets consisted primarily of acquired power production and incentive agreements for wind and solar projects and computer software. The Fund capitalized costs incurred during the development stage of internal use software projects. Intangible assets were amortized on a straight-line basis over their expected lives. Goodwill Goodwill represents the excess of the purchase price over the fair value of net identifiable assets on acquisition of a business. The carrying value of goodwill, which is not amortized, is assessed for impairment annually, or more frequently if events or changes in circumstances arise that suggest the carrying value of goodwill may be impaired. The Fund did not have any goodwill as at December 31, 2015 and did not recognize any goodwill impairments for the eight month period prior to September 1, 2015 and the year ended December 31, Asset Retirement Obligations Asset retirement obligations (ARO) associated with the retirement of long-lived assets are measured at fair value and recognized as other long-term liabilities in the period in which they can be reasonably determined. The fair value approximates the cost a third party would charge to perform the tasks necessary to retire such assets and is recognized at the present value of expected future cash flows. ARO are added to the carrying value of the associated asset and depreciated over the asset s useful life. The corresponding liability is accreted over time through charges to earnings and is reduced by actual costs of decommissioning and reclamation. Enbridge Income Fund Notes to the Financial Statements 57

61 For the majority of the assets within the indirect investments of the Fund, it is not possible to make a reasonable estimate of ARO due to the indeterminate timing and scope of the asset retirements. Redeemable Securities ECT preferred units Prior to the 2015 Transaction, preferred units issued by ECT (ECT Preferred Units) were classified as temporary equity and reflected within the mezzanine section of the Statements of Financial Position between long-term liabilities and Unitholders deficit. ECT Preferred Units were recorded at their maximum redemption value with changes in estimated redemption value reflected as a charge or credit to deficit. 3. Changes in Accounting Policies Adoption of New Standards Simplifying the Presentation of Debt Issuance Costs Effective January 1, 2016, the Fund adopted Accounting Standards Update (ASU) on a retrospective basis which, as at December 31, 2015, resulted in a decrease in Deferred amounts and other assets of $7 million and a corresponding decrease in Long-term debt of $7 million. The new standard requires debt issuance costs related to a recognized debt liability to be presented in the Statements of Financial Position as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts or premiums. Further, effective January 1, 2016, the Fund adopted ASU which clarifies that debt issuance costs associated with line-of-credit arrangements may be deferred as an asset and subsequently amortized over the term of the arrangement. The adoption of ASU did not have a material impact on the Fund s financial statements. Amendments to the Consolidation Analysis Effective January 1, 2016, the Fund adopted ASU on a modified retrospective basis, which amended and clarified the guidance on VIEs. There was a significant change in the assessment of limited partnerships and other similar legal entities as VIEs, including the removal of the presumption that the general partner should consolidate a limited partnership. As a result, the Fund has determined that the limited partnership that is currently equity accounted for is a VIE. The amended guidance did not impact the Fund s accounting treatment of the entity, however, material disclosures for VIEs have been provided, as necessary. Development Stage Entities Effective January 1, 2016, the Fund adopted ASU , relating to the amendment eliminating the exception to the sufficiency of equity at risk criteria for development stage entities on a retrospective basis. The new criteria amended the consolidation guidance to eliminate the development stage entity relief when applying the VIE model and evaluating the sufficiency of equity at risk. The adoption of the pronouncement did not have a material impact on the Fund s financial statements. Future Accounting Policy Changes Clarifying the Definition of a Business in an Acquisition ASU was issued in January 2017 with the intent of clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or businesses. The Fund is currently assessing the impact of the new standard on the financial statements. The accounting update is effective for annual and interim periods beginning on or after December 15, 2017 and is to be applied on a prospective basis. Accounting for Intra-Entity Asset Transfers ASU was issued in October 2016 with the intent of improving the accounting for the income tax consequences of intra-entity asset transfers other than inventory. Under the new guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The selling entity is required to recognize a current tax expense or benefit upon transfer of the asset, whereas the purchasing entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset. The accounting update is effective for annual and interim periods beginning on or after December 15, 2017 and is to be applied on a modified retrospective basis, with early adoption permitted. Effective January 1, 2017, the Fund will elect to early adopt ASU The adoption of the pronouncement is not anticipated to have a material impact on the Fund s financial statements. Simplifying Cash Flow Classification ASU was issued in August 2016 with the intent of reducing diversity in practice of how certain cash receipts and cash payments are classified in the Statements of Cash Flows. The new guidance addresses eight specific presentation issues. The Fund is currently assessing the impact of the new standard on its financial statements. The accounting update is effective for annual and interim periods beginning on or after December 15, 2017 and is to be applied on a retrospective basis. Recognition and Measurement of Financial Assets and Liabilities ASU was issued in January 2016 with the intent to address certain aspects of recognition, measurement, presentation, and disclosure of financial assets and liabilities. The amendments revise accounting related to the classification and measurement of investments in equity securities, the presentation of certain fair value changes for financial liabilities measured at fair value, and the disclosure requirements associated with the fair value of financial instruments. The Fund is currently assessing the impact of the new standard on its financial statements. The accounting update is effective for fiscal years beginning after December 15, 2017, and is to be applied by means of a cumulative-effect adjustment to the Statements of Financial Position as of the beginning of the fiscal year of adoption, with amendments related to equity securities without readily determinable fair values to be applied prospectively. 58 Enbridge Income Fund Holdings Inc Annual Report

62 4. Segmented Information The changes in accounting resulting from the 2015 Transaction (Note 2) have been applied on a prospective basis and result in the Fund having one operating segment subsequent to September 1, Prior to this date, the Fund had four operating segments: Liquids Transportation and Storage, Natural Gas Transmission, Green Power and Corporate. 5. Related Party Transactions Unless otherwise noted, all related party transactions have been measured at the exchange amount of consideration established and agreed to by the related parties. The 2015 Transaction and the 2014 Transaction were accounted for as transactions among entities under common control. See Note 2 for additional information. As a result of the 2015 Transaction (Note 2), the majority of the Fund s affiliate balances are with ECT. Previously, these balances were eliminated on consolidation. Demand Notes Receivable from Enbridge Commercial Trust December 31, Non-interest bearing note, due on demand from ECT 303 Floatinginterestratenote,dueondemandfromECT For the year ended December 31, 2016, Other income affiliates included interest income of $8 million (2015 $1 million) related to the floating interest rate note payable from ECT. Both the non-interest bearing note receivable and the floating interest rate note receivable are due on demand. Accounts Receivable from Affiliates December 31, Distributions receivable from ECT Accounts receivable from ECT 2 13 Accounts receivable from EPI 12 Other accounts receivable from affiliates For the year ended December 31, 2016, the Fund s investment in ECT reflects $789 million of distributions (2015 $168 million) and $718 million of contributions (2015 $3,874 million) (Note 6). For the year ended December 31, 2015 and 2014, Other income affiliates included $51 million and $6 million, respectively, of interest income related to the Southern Lights Class A Units long-term receivable which were subscribed for and purchased as part of the 2014 Transaction (Note 2). Long-term Notes Receivable from Enbridge Commercial Trust December 31, %dueJune22,2017fromECT %dueNovember12,2020fromECT Thisnotereceivablehasbeenclassifiedasnon-currentontheStatementsofFinancialPositionasthematuritydateisexpectedtobeextendedpriortomaturity. For the year ended December 31, 2016, Other income affiliates included $13 million (2015 $4 million) of interest income related to the long-term notes receivable from ECT. Enbridge Income Fund Notes to the Financial Statements 59

63 Distributions Payable to Affiliates As at December 31, 2016, Distributions payable to affiliates included Fund Unit distributions payable to ENF of $22 million (2015 $15 million) and to Enbridge of $17 million (2015 $15 million). Due to Affiliates Under the management and administrative agreements with EMSI, an incentive fee is payable annually from ECT to EMSI based on cash distributions above a base distribution level. For the year ended December 31, 2016, no incentive fees were recorded as the Fund no longer consolidates ECT. Prior to September 1, 2015, the results of ECT s operations were accounted for on a consolidated basis and incentive fees of $23 million were recorded within Operating and administrative expense affiliate on the Statements of Earnings for both the years ended December 31, 2015 and The Fund does not have any employees and prior to September 1, 2015, wholly-owned subsidiaries of the Fund used the services of Enbridge for managing and operating the businesses. For the year ended December 31, 2016, no service fees were recorded as the Fund no longer consolidates ECT. Prior to September 1, 2015, the results of operations from the Fund s wholly-owned subsidiaries were accounted for on a consolidated basis and the service fees of $34 million and $48 million were recorded for the years ended December 31, 2015 and 2014, respectively, were recorded within Operating and administrative expense affiliate on the Statements of Earnings. These services were charged at cost in accordance with the service agreements. In November 2014, the Fund received an $878 million loan from Enbridge, a related party by virtue of its ownership of ECT Preferred Units and Fund Units, to partially finance the purchase of Southern Lights Class A Units and Alliance Pipeline US (Note 2). Interest expense on this loan of $2 million was incurred by the Fund for the year ended December 31, 2014 and had been paid in full as at December 31, The subscription price for the Southern Lights Class A Units was at a fixed exchange rate of Canadian dollars to the United States dollar price. Given exchange rates on the date of closing, the Fund recorded a realized foreign exchange gain of $22 million in the fourth quarter Long-Term Investment Investment in Enbridge Commercial Trust ECT is a VIE as the holders of the common units of ECT lack decision making abilities. Enbridge has the power to make decisions which impact ECT s performance and therefore, the Fund is not considered the primary beneficiary of ECT and equity accounts for its investment in ECT. As at December 31, 2016, the Fund s maximum exposure to loss is limited to the carrying amount of its equity investment in ECT, which is $ 2,244 million (2015 $1,781 million). ECT s assets consist primarily of an equity investment in EIPLP and affiliate receivables. ECT s liabilities are primarily comprised of preferred units of ECT (ECT Preferred Units), held by Enbridge, and affiliate loans. As at December 31, 2016, the carrying value of ECT s assets was $4,764 million and the carrying value of its liabilities was $2,520 million. Other Affiliate Transactions During 2016, the Fund paid $24 million (2015 $28 million; 2014 $14 million) for share issue costs incurred in connection with the public offering of 20.4 million common shares ( million common shares; million subscription receipts) by ENF (Note 11). On September 1, 2015, the Fund entered into interest rate derivative instrument agreements with Enbridge to limit the Fund Group s exposure to interest rate fluctuations in addition to its pre-existing external agreements. The Fund also had existing foreign exchange derivative instrument agreements with external counterparties and offsetting foreign exchange derivative instrument agreements with a wholly-owned subsidiary of EIPLP. The net affiliate derivative instrument balance was $45 million asset (2015 $2 million asset) (Note 7). 60 Enbridge Income Fund Holdings Inc Annual Report

64 Further upon closing of the 2015 Transaction, the ECT Preferred Units were reclassified from mezzanine equity to liabilities. Accordingly, ECT reduced the recorded redemption value of its Preferred Units to their aggregate par value amount of $1,578 million with the difference recorded to Unitholders equity. Consequently, the Fund s long-term investment in ECT was increased by $1,260 million representing the difference between the September 1, 2015 ECT Preferred Unit redemption amount and the ECT aggregate par value. December 31, Investment balance at beginning of period 1 1,781 1,568 Investment acquired 718 3,874 Reversal of redemption value adjustment attributable to ECT Preferred Units 1,260 The 2015 Transaction adjustments: Equity true-up September 1, ,866 EIPLP s excess purchase price over historical carrying value acquired (6) (7,259) Equity investment other comprehensive loss (32) Other (16) Equity investment income Equity investment other comprehensive loss (51) (3) Equity investment dilution loss, net (156) (316) Distributions 2 (789) (168) Investment balance at end of year 2,244 1,781 1 Openingbalancefor2015asatSeptember1,2015,followingthechangeinaccountingofECTfromconsolidationtoequitymethodaccounting. 2 SubsequenttothesaleofEIPLP ssouthprairieregionassetsindecember2016,eiplpmadeaspecialone-timedistributiontoectutilizingproceedsfromthesale,whichinturn waspaidfromecttothefundandisincludedindistributions. As at December 31, 2016, the Fund owned 306 million ( million) units of ECT, representing all of ECT s issued and outstanding common units. Prior to September 1, 2015, ECT was a subsidiary of the Fund and was consolidated (Note 2). In September 2015, the Fund used the aggregate proceeds of $3 billion from the issuance of Fund Units to Enbridge to purchase additional common units of ECT. ECT used the aggregate proceeds of $3 billion to purchase additional class A units issued by EIPLP (EIPLP Class A Units). In November 2015, the Fund used the aggregate proceeds of $874 million from the issuance of Fund Units to ENF to purchase additional common units of ECT, and ECT used the aggregate proceeds of $874 million to purchase additional EIPLP Class A Units. Indirect Investment in EIPLP EIPLP is considered a VIE as its limited partners lack substantive kick-out rights and participating rights. As the Fund does not have the power to direct the activities that most significantly impact EIPLP s economic performance, the Fund is not considered the primary beneficiary of EIPLP. As the Fund does not directly own an interest in EIPLP, its maximum exposure to loss equates to its indirect investment in EIPLP through the ownership of ECT. At December 31, 2016, the Fund, through its 100% ownership of ECT, owned 382 million ( million) of the issued and outstanding EIPLP Class A Units, representing an indirect ownership of 45.8% ( %) of EIPLP s total issued and outstanding common units. Enbridge Income Fund Notes to the Financial Statements 61

65 The following table represents ECT s investment in EIPLP: December 31, Investment balance at beginning of period 1 3,902 3,086 Investment acquired 718 3,874 The 2015 Transaction adjustments: Equity true-up September 1, ,687 EIPLP s excess purchase price over historical carrying value acquired (6) (7,259) Equity investment other comprehensive loss (32) Other (16) Equity investment income 1, Equity investment other comprehensive loss (51) (3) Equity investment dilution loss, net (156) (316) Distributions 2 (1,115) (223) Investment balance at end of year 4,360 3,902 1 Openingbalancefor2015asatSeptember1,2015,followingthechangeinaccountingofECTfromconsolidationtoequitymethodaccounting. 2 SubsequenttothesaleofEIPLP ssouthprairieregionassetsindecember2016,eiplpmadeaspecialone-timedistributiontoectutilizingproceedsfromthesale. Equity issuances from EIPLP result in dilution gains or losses, with a corresponding charge or credit to deficit, when each of EIPLP s partners do not participate equally in the issuance. For the year ended December 31, 2016, ECT recorded a net dilution loss of $156 million (2015 $316 million loss) resulting from its increase in ownership of EIPLP Class A Units partially offset by EIPLP s issuance of Class D Units to Enbridge. ECT s net dilution loss is recorded as a component of the Fund s equity pickup of ECT. Summarized financial information of EIPLP accounted for under the equity method was as follows: Year ended December 31, Revenues 3,922 1,874 2,186 Earnings 2, Retrospectively adjusted to furnish comparative information related to the 2015 and 2014 Transactions (Note 2). December 31, Current assets Property, plant and equipment, net 22,455 21,064 Other long-term assets 3,919 3,792 Current liabilities 2,174 1,928 Long-term debt 6,043 5,591 Other long-term liabilities 9,514 9, Enbridge Income Fund Holdings Inc Annual Report

66 Financial Statement Effects of Rate Regulation The financial statement effect of rate regulation is recorded within the Fund s equity accounting for its indirect investment in EIPLP. The Canadian Mainline and Southern Lights Pipeline businesses within EIPLP are subject to regulation by the National Energy Board (NEB). EIPLP also collects and sets aside funds to cover future pipeline abandonment costs for all NEB regulated pipelines as a result of the NEB s regulatory requirements under the NEB s Land Matters Consultation Initiative. Amounts expected to be paid to cover future abandonment costs are recognized as long-term regulatory liabilities. EIPLP s significant regulated businesses and other related accounting impacts are described below. Canadian Mainline Canadian Mainline includes the Canadian portion of the mainline system and is subject to regulation by the NEB. Canadian Mainline tolls (excluding Lines 8 and 9) are currently governed by the 10-year CTS, which establishes a Canadian Local Toll for all volumes shipped on the Canadian Mainline and an International Joint Tariff for all volumes shipped from western Canadian receipt points to delivery points on Enbridge s Lakehead System and delivery points on the Canadian Mainline downstream of the Lakehead System. The CTS was negotiated with shippers in accordance with NEB guidelines, was approved by the NEB in June 2011 and took effect July 1, Under the CTS, a regulatory asset is recognized to offset deferred income taxes as a NEB rate order governing flow-through income tax treatment permits future recovery. No other material regulatory assets or liabilities are recognized under the terms of the CTS. Southern Lights Pipeline Southern Lights Canada is regulated by the NEB. Shippers on Southern Lights Canada are subject to long-term transportation contracts under a cost of service toll methodology. Toll adjustments are filed annually with the NEB. Saskatchewan Gathering System The Saskatchewan Gathering System is regulated by the Saskatchewan Ministry of Economy. The Saskatchewan Gathering System follows a cost of service methodology. In May 2016, EIPLP reached a Settlement Agreement (the Settlement) with a group of shippers that revised the tolling methodology on the Saskatchewan Gathering System. The regulatory governance of the Settlement changed and as such, all of the criteria required for the continued application of rate-regulated accounting treatment were no longer met and derecognition of regulatory balances as at May 1, 2016 was required. Alliance Pipeline Alliance Pipeline Canada has tolls and tariffs regulated by the NEB and Alliance Pipeline US has tolls and tariffs regulated by the FERC. With the expiration of Alliance Pipeline s transportation service agreements in December 2015, Alliance Pipeline announced a new services framework and the related tolls and tariff provisions required to implement the new services (collectively, New Services Framework). Pursuant to the New Services Framework, Alliance Pipeline retains exposure to potential variability in certain future costs and throughput volumes. As such, the majority of Alliance Pipeline s operations no longer meet all of the criteria required for the continued application of rate-regulated accounting treatment and derecognition of regulatory balances as at June 30, 2015 was required. 7. Derivative Financial Instruments and Hedging Activities Interest Rate Risk The Fund s earnings, cash flows and OCI 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 mitigate the volatility of short-term interest rates on interest expense with the execution of floating to fixed rate interest rate swaps at an average swap rate of 2.5%. The Fund s earnings, cash flows and OCI are also exposed to variability in longer term interest rates ahead of anticipated fixed rate debt issuances. Forward starting interest rate swaps may be used to hedge against the effect of future interest rate movements. The Fund has implemented a program to mitigate its exposure to long-term interest rate variability on select forecast term debt issuances with the execution of floating to fixed interest rate swaps at an average swap rate of 3.1%. The Fund uses qualifying derivative instruments to manage interest rate risk. On December 1, 2016, EIPLP disposed of the Saskatchewan Gathering System as part of the sale of the South Prairie Region assets. Enbridge Income Fund Notes to the Financial Statements 63

67 Total Derivative Instruments The following table summarizes the Statements of Financial Position location and carrying value of the Fund s derivative instruments. The Fund did not have any outstanding fair value hedges as at December 31, 2016 or The Fund generally has a policy of entering into individual International Swaps and Derivatives Association, Inc. agreements, or other similar derivative agreements, with the majority of its derivative counterparties. These agreements provide for the net settlement of derivative instruments outstanding with specific counterparties in the event of bankruptcy or other significant credit event, and would reduce the Fund s credit risk exposure on derivative asset positions outstanding with the counterparties in these particular circumstances. The following table also summarizes the maximum potential settlement in the event of these specific circumstances. All amounts are presented gross in the Statements of Financial Position. December 31, 2016 Derivative Instruments used as Cash Flow Hedges Non Qualifying Derivative Instruments Total Gross Derivative Instruments as Presented Amounts Available for Offset Total Net Derivative Instruments Current portion of derivative assets Foreign exchange contracts Current portion of derivative assets affiliates Foreign exchange contracts (1) (1) 17 Long-term portion of derivative assets affiliates Foreign exchange contracts Current portion of derivative liabilities Interest rate contracts (5) (5) (5) Foreign exchange contracts (18) (18) (18) (5) (18) (23) (23) Current portion of derivative liabilities affiliates Interest rate contracts (48) (48) (48) Foreign exchange contracts (1) (1) 1 (48) (1) (49) 1 (48) Long-term portion of derivative liabilities Interest rate contracts (47) (47) (47) Foreign exchange contracts (80) (80) (80) (47) (80) (127) (127) Long-term portion of derivative liabilities affiliates Interest rate contracts (4) (4) (4) (4) (4) (4) Total net derivative liability Interest rate contracts (104) (104) (104) Foreign exchange contracts (104) (104) (104) 64 Enbridge Income Fund Holdings Inc Annual Report

68 December 31, 2015 Current portion of derivative assets affiliates Derivative Instruments used as Cash Flow Hedges Non Qualifying Derivative Instruments Total Gross Derivative Instruments as Presented Amounts Available for Offset Total Net Derivative Instruments Foreign exchange contracts Long-term portion of derivative assets Foreign exchange contracts Current portion of derivative liabilities Interest rate contracts (3) (3) (3) Foreign exchange contracts (22) (22) (22) Current portion of derivative liabilities affiliates (3) (22) (25) (25) Interest rate contracts (17) (17) (17) Long-term portion of derivative liabilities (17) (17) (17) Interest rate contracts (42) (42) (42) Foreign exchange contracts (105) (105) (105) Long-term portion of derivative liabilities affiliates (42) (105) (147) (147) Interest rate contracts (3) (3) (3) Total net derivative liability (3) (3) (3) Interest rate contracts (65) (65) (65) Foreign exchange contracts (65) (65) (65) The following table summarizes the maturity and notional principal or quantity outstanding related to the Fund s derivative instruments. December 31, Thereafter Interest rate contracts short-term borrowings Interest rate contracts long-term borrowings Foreign exchange contracts United States dollar forwards purchase (millions of United States dollars) Foreign exchange contracts United States dollar forwards sell (millions of United States dollars) December 31, Thereafter Interest rate contracts short-term borrowings Interest rate contracts long-term borrowings Foreign exchange contracts United States dollar forwards purchase (millions of United States dollars) Foreign exchange contracts United States dollar forwards sell (millions of United States dollars) Enbridge Income Fund Notes to the Financial Statements 65

69 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 earnings and comprehensive income. Year ended December 31, Amount of unrealized gains/(loss) recognized in OCI Interest rate contracts (44) (43) (29) Foreign exchange contracts 2 1 Commodity contracts 1 3 Total unrealized loss recognized in OCI (44) (40) (25) Amount of (gains)/loss reclassified from AOCI to earnings (effective portion) Interest rate contracts Commodity contracts 2 (1) (1) TotallossreclassifiedfromAOCItoearnings(effective portion) Amount of loss reclassified due to change to equity accounting Foreign exchange contracts (3) Commodity contracts (2) Total loss reclassified due to change to equity accounting (5) Amount of loss reclassified from AOCI to earnings (ineffective portion and amount excluded from effectiveness testing) Interest rate contracts Reported within Interest expense in the Statements of Earnings. 2 Reported within Electricity sales revenues in the Statements of Earnings. The estimated net amount of existing losses reported in AOCI that is expected to be reclassified to net income within the next 12 months is $8 million. Actual amounts reclassified to earnings depend on the interest rates in effect when derivative contracts that are currently outstanding are settled. Non-Qualifying Derivatives The following table presents the unrealized gains and losses associated with changes in the fair value of the Fund s non-qualifying derivatives. Year ended December 31, Foreign exchange contracts 1 (77) (25) Total unrealized derivative fair value loss (77) (25) 1 Reported within Other income in the Statements of Earnings. 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 its indirect investment in EIPLP, draws under committed credit facilities and the issuance of medium term notes (MTNs) and the issuance of Fund Units. The Fund expects to file a current MTN shelf prospectus with Canadian securities regulators in the first quarter of 2017, which will enable, subject to market conditions, ready access to Canadian public capital markets. Additional liquidity, if necessary, is expected to be available through intercompany transactions with Enbridge or other related entities. 66 Enbridge Income Fund Holdings Inc Annual Report

70 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. 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 credit exposure limits and contractual requirements, netting arrangements and ongoing monitoring of counterparty credit exposure using external credit rating services and other analytical tools. The Fund had group credit concentrations and maximum credit exposure, with respect to derivative instruments, in the following counterparty segments: December 31, European financial institutions 1 Due from affiliate 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. Fair Value of Financial Instruments The Fund categorizes those 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 December 31, 2016 or 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. 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 did not have any financial instruments categorized as Level 3 as at December 31, 2016 or Enbridge Income Fund Notes to the Financial Statements 67

71 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 or foreign exchange) 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 instruments, measured at fair value as follows: December 31, 2016 Level 1 Level 2 Level 3 Total Gross Derivative Instruments Financial assets Current derivative assets Long-term derivative assets Financial liabilities Current derivative liabilities (72) (72) Long-term derivative liabilities (131) (131) Total net liability (104) (104) December 31, 2015 Level 1 Level 2 Level 3 Total Gross Derivative Instruments Financial assets Current derivative assets Long-term derivative assets Financial liabilities Current derivative liabilities (42) (42) Long-term derivative liabilities (150) (150) Total net liability (65) (65) Changes in net fair value of financial instruments classified as Level 3 in the fair value hierarchy were as follows: Year ended December 31, Level 3 net derivative asset at beginning of year Settlements Level3netderivativeassetatendofyear 2 (2) The Fund s policy is to recognize transfers as at the last day of the reporting period. There were no transfers between levels as at December 31, 2016 and Fair Value of Other Financial Instruments At December 31, 2016, the Fund s long-term debt had a fair value of $2,415 million (2015 $2,395 million). This fair value measurement has been classified as a Level 2 fair value measurement. 68 Enbridge Income Fund Holdings Inc Annual Report

72 8. Other Long-Term Investments As a result of the deconsolidation of EIPLP, the Fund s interest in other equity investments in Alliance Pipeline, NRGreen Power Limited Partnership, and SunBridge Wind Power Facility, were removed from the Fund s Statements of Financial Position at September 1, 2015, the closing date of the 2015 Transaction. Income from these other equity investments for the year ended December 31, 2015 relate to the first eight months of the year. Summarized combined financial information of the Fund s interests in other investments accounted for under the equity method was as follows: Year ended December 31, Earnings Revenues Operating and administrative (90) (145) Depreciation and amortization (72) (106) Other income 5 2 Interest expense (36) (56) Earnings Reflects the deconsolidation of ECT and EIPLP (Note 2). 2 Retrospectively adjusted to furnish comparative information related to Alliance Pipeline US (Note 2). 9. Debt December 31, Medium-term notes 5.00% due June 22, % due December 14, % due December 20, % due February 22, % due November 12, % due February 22, % due January 13, %dueNovember19, %dueNovember21, Floating rate due November 21, Credit facilities 225 Debt discount and financing costs (6) (8) Total debt 2,294 2,397 Current maturities (325) (330) Long-term debt 1,969 2,067 Medium-Term Notes The MTNs are unsecured and redeemable by the Fund prior to maturity, in whole or in part, from time to time, and at the option of the Fund at a price equal to the greater of the applicable Government of Canada yield price and par. Interest on the MTNs is payable semi-annually. No MTNs were issued during the year ended December 31, For the years ending December 31, 2017 through December 31, 2021, MTN maturities are $325 million, $125 million, $300 million, $100 million and nil, respectively, and $1,225 million thereafter. As at December 31, 2016, the MTNs had a fair value of $2,190 million (2015 $2,395 million) based on quoted market prices. Enbridge Income Fund Notes to the Financial Statements 69

73 Credit Facility In October 2015, the Fund increased the size of its unsecured $500 million, 3-year standby committed credit facility with a syndicate of commercial banks by $1,000 million, to a total of $1,500 million. On an annual basis, the Fund may request a one-year extension of the applicable maturity date. This was utilized in August 2016 and the Fund extended the maturity date to August 3, At December 31, 2016, there was $225 million (2015 nil) drawn on the facility. Letters of credit totalled $11 million (2015 $11 million) leaving $1,264 million (2015 $1,489 million) of the credit facility available for use at December 31, The Fund s credit facility carries a standby fee of 0.2% ( %) per annum. The Fund is subject to several covenants under its credit facility, including covenants that limit outstanding debt to a percentage of the Fund s and EIPLP s capitalization. The Fund was in compliance with all covenants as at December 31, Interest Expense Year ended December 31, Interest expense on long-term debt Interest on affiliate loans (Note 5) 1 3 Amortization of financing costs and bank charges Interest obligations on the Fund s MTNs for the years ending December 31, 2017 through 2021 are $84 million, $75 million, $63 million, $57 million and $52 million, respectively. 10. ECT Preferred Units Number of Units Mezzanine Equity Number of Units Mezzanine Equity (millions of Canadian dollars; number of units in millions) ECT Preferred Units, series 1 Balance, beginning of year 38 1, Redemption value adjustment (287) 632 Deconsolidation adjustment (38) (1,230) Balance, end of year 38 1,517 ECT Preferred Units, series 2 Balance, beginning of year Redemption value adjustment (121) 267 Deconsolidation adjustment (16) (520) Balance, end of year ECT Preferred Units, series 3 Balance, beginning of year Redemption value adjustment (99) 219 Deconsolidation adjustment (13) (426) Balance, end of year ECT Preferred Units, series 4 Balance, beginning of year Redemption value adjustment (39) 87 Deconsolidation adjustment (5) (170) Balance, end of year ECT Preferred Units, series 5 Balance, beginning of year Issued Redemption value adjustment (115) 146 Deconsolidation adjustment (15) (492) Balance, end of year Total ECT Preferred Units 87 3,499 1 Reflects the deconsolidation of ECT and EIPLP (Note 2). ECT Preferred Units are entitled to non-cumulative distributions when declared by ECT, have no direct voting rights except in limited circumstances and all mature on June 30, Enbridge Income Fund Holdings Inc Annual Report

74 11. Trust Units December 31, (millions of Canadian dollars; number of units in millions) Number of Units Amount Number of Units Amount Number of Units Amount Fund Units, beginning of year 191 5, , ,536 Issued , Share issue costs (24) (28) (14) Redemption value adjustment 1,436 (1,768) 1,244 FundUnits,endofyear , , ,187 1 Enbridgeowned94millioncommontrustunitsatDecember31,2016( million; million). Holders of the class C units of EIPLP (EIPLP Class C Units), ECT Preferred Units and Fund Units may exchange such securities in whole or in part for ECT Preferred Units, Fund Units or ENF common shares, as applicable, at any time or from time to time, directly or indirectly on a one-for-one basis pursuant to the terms of such securities and an exchange right support agreement entered into with ENF (Exchange Right). Pursuant to the Trust Indenture, an unlimited number of Fund Units may be issued by the Fund. Each Fund Unit represents an equal undivided beneficial interest in any distributions from the Fund and in the net assets in the event of termination or wind-up of the Fund. All Fund Units are voting and have equal rights and privileges. The Fund is required to reserve a sufficient number of Fund Units to satisfy the Exchange Right. Fund Units are redeemable at any time at the option of the holder. At December 31, 2016 and 2015, the redemption price per Fund Unit is equal to the net asset value per Fund Unit, calculated with reference to the market price of an ENF common share, adjusted for non-consolidated assets and liabilities of ENF. The maximum amount payable by the Fund in respect of redemptions in any calendar month is limited to $0.1 million. To the extent that a unitholder is not entitled to receive cash upon the redemption of Fund Units, the redemption price shall be satisfied, subject to all necessary regulatory approvals, by way of a distribution of Fund property, which may include ECT notes or other assets held by the Fund. 12. Other Income Year ended December 31, Realized loss on derivative instruments (9) 21 Unrealized loss on derivative instruments (77) (25) Unrealized gain on foreign intercompany loan Realized gain on foreign intercompany loan 8 Gain on disposition Reflects the deconsolidation of ECT and EIPLP (Note 2). Enbridge Income Fund Notes to the Financial Statements 71

75 13. Changes in Operating Assets and Liabilities Year ended December 31, Accounts receivable and other, net (1) (7) (22) Accounts receivable from other affiliates (25) Other accounts payable 17 1 Interest payable 1 4 Due to affiliates 5 Deferred amounts and other assets Other long-term liabilities (1) (8) (16) (26) 1 Reflects the deconsolidation of ECT and EIPLP (Note 2). 2 Retrospectively adjusted to furnish comparative information related to the 2014 Transaction (Note 2). 14. Income Taxes Income Tax Rate Reconciliation Year ended December 31, Earnings before income taxes Combined statutory income tax rate 3 48% 15% 15% Income taxes at federal statutory rate Increase/(decrease) resulting from: Provincial and state taxes Foreign and other statutory rate differentials Taxable component of trust distributions (216) (7) (8) Deferred income taxes related to regulated operations Temporary differences not recognized (95) 1 (1) Non-taxable portion of capital gains (9) Other 3 Income tax expense Effective income tax rate 37.5% 29.6% 1 Reflects the deconsolidation of ECT and EIPLP (Note 2). 2 Retrospectively adjusted to furnish comparative information related to the 2014 Transaction (Note 2). 3Asaresultofthe2015Transaction,the2016rateisthecombinedfederalandprovincialtrustincometaxrate.The2015and2014ratesarethefederalcorporateincometaxrate. 4 The amounts in 2015 included the federal component of the tax effect of the write-off of regulatory receivables. Components of Pretax Earnings and Income Taxes Year ended December 31, Earnings before income taxes Canada United States Current income taxes Canada 18 4 United States Deferred income taxes Canada United States Income taxes on earnings Reflects the deconsolidation of ECT and EIPLP (Note 2). 2 Retrospectively adjusted to furnish comparative information related to the 2014 Transaction (Note 2). 72 Enbridge Income Fund Holdings Inc Annual Report

76 Enbridge Income Partners LP Financial Report Management s Discussion & Analysis 74 Overview 76 Performance Overview 80 Non-GAAP Measures 82 Objectives and Strategy 84 Industry Fundamentals 87 Growth Projects 90 Liquids Pipelines 97 Gas Pipelines 99 Green Power 101 Eliminations and Other 102 Liquidity and Capital Resources 106 Quarterly Financial Information 107 Related Party Transactions 109 Risk Management and Financial Instruments 114 Critical Accounting Estimates 115 Changes in Accounting Policies 117 EIPLP Ownership Consolidated Financial Statements 118 Independent Auditor s Report 119 Consolidated Statements of Earnings 120 Consolidated Statements of Comprehensive Income 121 Consolidated Statements of Partners Capital 122 Consolidated Statements of Cash Flows 123 Consolidated Statements of Financial Position Notes to the Consolidated Financial Statements General Business Description Summary of Significant Accounting Policies Changes in Accounting Policies Segmented Information Financial Statement Effects of Rate Regulation Acquisitions Dispositions Accounts Receivable and Other Property, Plant and Equipment Variable Interest Entities Long-Term Investments Restricted Long-Term Investments Deferred Amounts and Other Assets Intangible Assets Accounts Payable and Other Debt Other Long-Term Liabilities Asset Retirement Obligations Partners Interests Components of Accumulated Other Comprehensive Loss Risk Management and Financial Instruments Income Taxes Other Income Changes in Operating Assets and Liabilities Related Party Transactions Commitments and Contingencies Guarantees 156 Glossary

77 Management s Discussion & Analysis This Management s Discussion and Analysis (MD&A) dated February 17, 2017 should be read in conjunction with the audited consolidated financial statements and notes thereto of Enbridge Income Partners LP (EIPLP) for the year ended December 31, 2016, prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). All financial measures presented in this MD&A are expressed in Canadian dollars, unless otherwise indicated. EIPLP supplements Enbridge Income Fund s (the Fund) financial statements and MD&A, and additional information related to EIPLP is available under the Fund s profile on SEDAR at Overview EIPLP was formed in 2002 and is involved in the generation, transportation and storage of energy through its interests in its liquids pipelines business, including the Canadian Mainline and the Regional Oil Sands System, its 50% interest in the Alliance Pipeline, which transports natural gas from Canada to the United States, and its renewable and alternative power generation assets. EIPLP is a member of the Fund Group, which also includes Enbridge Commercial Trust (ECT) and the Fund. EIPLP holds all of the underlying operating entities of the Fund Group through its subsidiaries and investees. Enbridge Inc. (Enbridge), through its wholly-owned subsidiary, Enbridge Management Services Inc. (the Manager or EMSI), is responsible for the operations and day-to-day management of the Fund Group. The Manager also provides administrative and general support services to the Fund Group. The limited partners of EIPLP are ECT and Enbridge and certain of its subsidiaries. The 2015 Transaction On September 1, 2015, EIPLP acquired 100% interests in entities holding certain Canadian liquids pipelines, storage assets and renewable energy assets (collectively, the Purchased Entities) from Enbridge and certain of its subsidiaries for aggregate consideration of $30.4 billion plus incentive distribution and performance rights and working capital adjustments (the 2015 Transaction). As a result of the 2015 Transaction, EIPLP allocates earnings based on the Hypothetical Liquidation at Book Value (HLBV) method. The HLBV method is applied for allocation of earnings and other comprehensive income (OCI) where cash distributions, including both preference and residual distributions, are not based on the investor s ownership percentages. Under the HLBV method, a calculation is prepared at each balance sheet date to determine the amount that partners would receive if EIPLP were to liquidate all of its assets, as valued in accordance with U.S. GAAP, and distribute that cash to the investors. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, are the partners share of the earnings or loss from EIPLP for the period. The 2015 Transaction 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. Financial information for periods prior to September 1, 2015 have been retrospectively adjusted to present the results of operations for EIPLP and its interests in the Purchased Entities on a combined basis. 74 Enbridge Income Fund Holdings Inc Annual Report

78 The 2014 Transaction On November 7, 2014, EIPLP completed a transaction whereby it acquired from Enbridge a 50% equity interest in the United States portion of the Alliance Pipeline (Alliance Pipeline US) and subscribed for and purchased Class A units (Southern Lights Class A units) of certain Enbridge subsidiaries which provide a defined cash flow stream from the United States portion of Southern Lights (Southern Lights US) for aggregate consideration of $1.8 billion (the 2014 Transaction). At the time of the 2014 Transaction, EIPLP previously owned a 50% investment in the Canadian portion of the Alliance Pipeline (Alliance Pipeline Canada). The Alliance Pipeline US component of the 2014 Transaction was accounted for as a transaction among entities under common control, similar to the 2015 Transaction. Financial information for periods prior to November 7, 2014 have been retrospectively adjusted to present the result of operations for EIPLP and its interests in Alliance Pipeline US on a combined basis. The Southern Lights Class A Unit component of the 2014 Transaction was accounted for as a loan investment and did not require retrospective restatement. As part of the 2015 Transaction, EIPLP indirectly acquired the Class B units of the Canadian portion of Southern Lights Pipeline (Southern Lights Canada). Together with the Class A units EIPLP acquired in the 2014 Transaction, EIPLP holds all the ownership, economic interests and voting rights, direct and indirect, of Southern Lights Canada. For further details refer to Liquids Pipelines Southern Lights Pipeline. Operating Segments Liquids Pipelines Liquids Pipelines consists of common carrier and contract crude oil, natural gas liquids (NGL) and refined products pipelines, feeder pipelines, gathering systems and terminals in Canada, including Canadian Mainline, Regional Oil Sands System, Southern Lights Pipeline, which includes Southern Lights Canada and Southern Lights Class A Units, Bakken System and Feeder Pipelines and Other. Gas Pipelines Gas Pipelines includes EIPLP s 50% interest in the Alliance Pipeline system, which transports liquids-rich natural gas from northeast British Columbia, northwest Alberta and the Bakken area of North Dakota to Channahon, Illinois. Green Power Green Power includes approximately 1,437 megawatts (MW) (1,052 MW net after taking into account third party interests) of renewable and alternative energy generating capacity from wind farms, solar facilities and waste heat recovery facilities located primarily in the provinces of Alberta, Saskatchewan, Ontario and Quebec. Eliminations and Other In addition to the segments noted above, Eliminations and Other includes operating and administrative costs and foreign exchange costs which are not allocated to business segments. Also included in Eliminations and Other are new business development activities, general corporate investments and elimination of transactions between segments required to present financial performance and financial position on a consolidated basis. EIPLP conducts its business through three business segments: Liquids Pipelines, Gas Pipelines and Green Power. These operating segments are strategic business units established by senior management to facilitate the achievement of EIPLP s long-term objectives and the objectives of EIPLP s partners, as well as to aid in resource allocation decisions and to assess operational performance. Financing costs, current and deferred income taxes and other costs not attributable to specific business segments are presented on a consolidated basis. Enbridge Income Partners LP Management s Discussion & Analysis 75

79 Performance Overview Three months ended December 31, Year ended December 31, Earnings attributable to partners 1 Liquids Pipelines 1, ,770 (1) 575 Gas Pipelines Green Power Eliminations and Other 4 20 (6) Earnings before interest and income taxes 1, , Interest expense (105) (95) (392) (327) (316) Income taxes recovery/(expense) (142) (20) (407) 59 5 Special interest rights distributions TPDR 2 (66) (44) (262) (58) Special interest rights distributions IDR 3 (12) (47) Earnings attributable to general and limited partners , Adjusted earnings 4 Liquids Pipelines , Gas Pipelines Green Power Eliminations and Other Adjusted earnings before interest and income taxes , Interest expense 5 (95) (95) (371) (132) (12) Income taxes 5 (45) (41) (189) (95) (34) Special interest rights distributions TPDR 2 (66) (44) (262) (58) Special interest rights distributions IDR 3 (12) (47) Adjusted earnings attributable to general and limited partners , Cash flow data Cash provided by operating activities ,906 1,949 1,700 Cash provided by/(used in) investing activities 548 (699) (1,316) (5,305) (3,472) Cash provided by/(used in) financing activities (992) 104 (426) 3,321 1,800 Available cash flow from operations , Distributions 7 Cash distributions to ECT Cash distributions to Enbridge TPDR and Class D unit distributions to Enbridge Total revenues ,922 1,874 2,186 Total assets 1 27,262 25,634 23,283 Total long-term liabilities 1 15,557 14,943 6,293 1 Earnings,cashflowdata,totalrevenues,totalassetsandtotallong-termliabilitieshavebeenretrospectivelyadjustedtoreflectthe2015Transactionandthe2014Transaction ininformationpriortotherespectiveeffectivedatesofthetransactionsasprescribedbyu.s.gaapforcommoncontroltransactions. 2 TemporaryPerformanceDistributionRight(TPDR)distributesClassDunitsandreferstothepaid-in-kindcomponentoftheSpecialInterestRights(SIR)distribution.ClassDunit distributionsarealsopaid-in-kindwiththeissuanceofadditionalclassdunits. 3 Incentive Distribution Right (IDR) refers to the cash component of the SIR distribution (see Liquidity and Capital Resources Distributions). 4Adjustedearningsbeforeinterestandincometaxes(adjustedEBIT)andadjustedearningsarenon-GAAPmeasuresthatdonothaveanystandardizedmeaningprescribed by generally accepted accounting principles. For more information on non-gaap measures, refer to page These balances are presented net of adjusting items. 6Availablecashflowfromoperations(ACFFO)isdefinedasadjustedEBITfurtheradjustedfordepreciationandamortizationanddistributionsfrominvestmentsinexcessof/ (less than) equity earnings, less deductions for maintenance capital expenditures, interest expense, applicable taxes and other adjusting items. For further information on ACFFO, refer to Performance Overview Available Cash Flow from Operations. ACFFOisanon-GAAPmeasurethatdoesnothaveanystandardizedmeaningprescribedbyU.S.GAAP see Non-GAAP Measures. 7 Refer to Liquidity and Capital Resources Sources and Uses of Cash Distributions for distribution rates. 8Amountsdonotincludetheone-timeClassAunitdistributionof$264millionpaidinDecember2016followingthecloseofthedispositionoftheSouthPrairieRegionassets. 76 Enbridge Income Fund Holdings Inc Annual Report

80 Earnings Before Interest and Income Taxes Earnings before interest and income taxes (EBIT) was $3,096 million for the year ended December 31, 2016 compared with $448 million for the year ended December 31, 2015 and $942 million for the year ended December 31, The comparability of EIPLP s results was impacted by a number of unusual, non-recurring or non-operating factors that are listed in the Non-GAAP Reconciliation tables and discussed in the results for each reporting segment. Changes in the unrealized derivative fair value gains and losses is a significant non-operating factor. EIPLP has a comprehensive long-term economic hedging program to mitigate interest rate, foreign exchange and commodity price risks that create volatility in short-term earnings. Over the long term, EIPLP believes its hedging program supports reliable cash flows. The majority of EIPLP s unrealized derivative fair value gains and losses are within its Liquids Pipelines segment, specifically within the Canadian Mainline, which was acquired as part of the 2015 Transaction. Financial derivative instruments are used to hedge exposure to fluctuations in foreign exchange rates, power costs and the price of allowance oil which are inherent in the Competitive Toll Settlement (CTS) and drives Canadian Mainline revenue. For the year ended December 31, 2016, Canadian Mainline recognized net unrealized derivative gains of $467 million, compared with net unrealized derivative losses of $1,390 million and $499 million in the corresponding 2015 and 2014 periods, respectively. In addition, EBIT for 2016 reflected an $850 million gain within the Liquids Pipelines segment related to the disposition of the South Prairie Region assets in December Excluding the impact of unusual, non-recurring or non-operating factors, EIPLP EBIT increased in 2016 primarily as a result of stronger contributions from the Liquids Pipelines and Gas Pipelines segments. The Canadian Mainline contribution increased primarily due to strong oil sands production growth in western Canada enabled by pipeline capacity expansion projects placed into service in EBIT growth was partially offset by the impact of extreme wildfires in northeastern Alberta and the combination of a lower average International Joint Tariff (IJT) Residual Benchmark Toll, which decreased effective April 1, 2016, and a lower foreign exchange rate on hedges used to convert Canadian Mainline United States dollar toll revenues to Canadian dollars. For more information on the wildfires, refer to Liquids Pipelines Impact of Wildfires in Northeastern Alberta. Similarly, the increase in EIPLP EBIT in 2015 was driven by stronger operating performance from the Canadian Mainline due to higher throughput, partly attributed to the expansion of the Canadian Mainline completed in July Other factors contributing to an increase in EBIT in 2015 were higher terminalling revenues and a favourable United States/Canada foreign exchange rate. Partially offsetting these positive factors was a lower average IJT, higher power costs associated with higher throughput and increased depreciation expense due to an increased asset base. Partially mitigating the impact of a lower average IJT were new surcharges related to system expansions in Within Gas Pipelines, EBIT from Alliance Pipeline for the year ended December 31, 2016 was higher compared with the corresponding 2015 and 2014 periods primarily due to improved operational efficiencies and stronger asset performance resulting from strong demand for seasonal firm service under Alliance Pipeline s new services framework that commenced in the fourth quarter of The increase in 2015 EBIT when compared with 2014 was primarily due to incremental contributions from Alliance Pipeline US as a result of the 2014 Transaction, partially offset by a shutdown of Alliance Pipeline Canada in August The Green Power segment EBIT decreased in 2016 as a result of disruptions at certain eastern Canadian wind farms in the first quarter and fourth quarter of 2016 due to weather conditions that caused icing of blades as well as weaker wind resources experienced at certain facilities in Canada during the first half and fourth quarter of The significant increase in 2015 EBIT when compared with 2014 was due to incremental earnings from the purchase of additional interests in the Lac Alfred and Massif du Sud wind projects in the fourth quarter of Factors unique to the fourth quarter include the gain related to the disposition of the South Prairie Region assets. Excluding the impact of the gain on disposition and other non-recurring or non-operating factors, performance drivers were largely consistent with the year-to-date trend of strong throughput in Liquids Pipelines and Gas Pipelines, including a record month of throughput on the Canadian Mainline in December Earnings Attributable to General and Limited Partners Earnings attributable to general and limited partners of EIPLP were $1,988 million for the year ended December 31, 2016 compared with $122 million for the year ended December 31, 2015 and $631 million for the year ended December 31, In addition to the factors discussed in Performance Overview Earnings Before Interest and Income Taxes above, the change in earnings attributable to general and limited partners in 2016 was also impacted by TPDR and IDR distributions on SIR issued as part of the 2015 Transaction, higher interest expense resulting from incremental debt incurred to fund asset growth and lower capitalized interest period-over-period as a result of projects coming into service. Additionally, income taxes increased in 2016 largely due to the increase in earnings before tax compared to 2015 and deferred taxes of $119 million related to the sale of the South Prairie Region assets. Similarly, earnings attributable to general and limited partners in 2015 were impacted by the TPDR distributions on SIR issued as part of the 2015 Transaction, higher income taxes recovery due to taxable losses and higher interest expense resulting from higher levels of debt in the third and fourth quarters of Fourth quarter performance drivers for earnings attributable to general and limited partners were consistent with the factors impacting EBIT discussed above. Enbridge Income Partners LP Management s Discussion & Analysis 77

81 Adjusted EBIT Adjusted EBIT was $1,887 million for the year ended December 31, 2016 compared with $933 million and $248 million for the comparative 2015 and 2014 periods, respectively. The increase in adjusted EBIT is attributable to the substantial increase of EIPLP s asset base following the 2015 Transaction. The most notable assets contributing incremental adjusted EBIT were the Canadian Mainline, due to expansion, as well as the reversal and expansion of Line 9B in the fourth quarter of 2015 and the Regional Oil Sands System, which benefitted from assets placed into service late in Also bolstering adjusted EBIT were higher contributions from the Gas Pipelines segment as discussed above. Fourth quarter adjusted EBIT decreased slightly in 2016 compared with the same period of 2015, reflecting increased volumes and the impact of the reversal and expansion of Line 9B, more than offset by a decrease in the Canadian Mainline IJT Residual Benchmark Toll and a lower rate on foreign exchange hedges of United States dollar toll revenue over the prior year, as discussed above. The IJT Residual Benchmark Toll is reset on an annual basis, effective April 1 of each year. Adjusted Earnings Attributable to General and Limited Partners Adjusted earnings attributable to general and limited partners, referred to as adjusted earnings, were $1,018 million for the year ended December 31, 2016 compared with $648 million and $202 million for the comparative 2015 and 2014 periods, respectively. The increases reflected in the Performance Overview Adjusted EBIT discussion above were partially offset by higher interest expense due to higher levels of debt and higher income taxes expense due to increased business activity, as well as TPDR and IDR distributions on the SIR. Fourth quarter performance drivers for adjusted earnings were consistent with the factors impacting adjusted EBIT discussed above. Available Cash Flow from Operations ACFFO represents cash available to fund distributions on Class A and Class C units, as well as for debt repayments and reserves. Such reserves are determined by the Manager and are used for payment of committed charges, such as interest and income taxes, and for execution of the capital maintenance program. For the year ended December 31, 2016, EIPLP s ACFFO was $2,051 million compared with $986 million and $367 million for the comparative 2015 and 2014 periods, respectively. Similar to adjusted EBIT, the year-over-year increase in ACFFO was driven by the significant increase of EIPLP s asset base following the 2015 Transaction as well as stronger contributions from EIPLP s investment in Alliance Pipeline and lower current income taxes due to the optimization of tax deductions within the Fund Group. These increases were partially offset by higher maintenance capital expenditures and higher interest expense, both resulting from increased business activity associated with the increased asset base. ACFFO was also negatively impacted by approximately $36 million as a result of the northeastern Alberta wildfires in the second quarter of The fourth quarter of 2016 reflected similar operational trends as noted in the discussion on adjusted EBIT. Cash Flows Cash provided by operating activities was $1,906 million for the year ended December 31, 2016 compared with $1,949 million and $1,700 million for the years ended December 31, 2015 and 2014, respectively. Cash provided by operating activities for 2016 and 2015 reflected stronger contributions from EIPLP s operating assets, most notably the Canadian Mainline and Alliance Pipeline, as well as incremental cash flow generated from assets placed into service in recent years, as further discussed in Liquidity and Capital Resources. These positive effects were offset by higher interest and income taxes. To finance the 2015 Transaction, in addition to issuing equity to Enbridge as a portion of the consideration, Class A units were issued to ECT for $3,000 million to fund the cash components of the purchase price. Additional Class A units were issued to ECT in November 2015 subsequent to Enbridge Income Fund Holdings Inc. s (ENF) public issuance to facilitate the funding of the secured capital growth program. As part of the 2014 Transaction, EIPLP acquired a 50% interest in Alliance Pipeline US and subscribed for and purchased Southern Lights Class A Units which provide a defined cash flow stream from the Southern Lights Pipeline. To finance these investments, EIPLP issued Class A units to ECT for $1,760 million. In addition to the above transactions, EIPLP s cash flows fluctuate with normal business activities. The financing and investing activities cash flows are impacted by the financing and execution of the secured capital growth program prior to projects going into service and providing cash inflows from operating activities. Impact of Low Commodity Prices The majority of EIPLP s earnings and cash flows are generated from tolls and fees charged for the energy delivery services that it provides to its customers. Business arrangements are structured to minimize exposure to commodity price movements and any residual exposure is closely monitored and managed through disciplined hedging programs. Commercial structures are typically designed to provide a measure of protection against the risk of a scenario where falling commodity prices indirectly impact the utilization of EIPLP s facilities. Protection against volume risk is generally achieved through regulated cost of service tolling arrangements, long-term take-or-pay contract structures and fee for service arrangements with specific features to mitigate exposure to falling throughput. Benchmark prices for West Texas Intermediate (WTI) crude fell below US$30 per barrel at the beginning of 2016 and have remained volatile as the market seeks to re-balance supply and demand. Prices began to recover throughout the year and have climbed above US$50 per barrel periodically. WTI crude prices averaged US$43 per barrel for 2016 but ended the year above US$53 per barrel. WTI crude prices averaged US$52.50 per barrel in January Although EIPLP is exposed to throughput risk under the CTS on the Canadian Mainline and under certain tolling agreements applicable to other liquids pipelines assets, including Southern Lights Canada, the reduction of investment in exploration and development programs 78 Enbridge Income Fund Holdings Inc Annual Report

82 by EIPLP s shippers is not expected to materially impact the financial performance of EIPLP. It is expected that existing conventional and oil sands production should be more than sufficient to support continued high utilization of EIPLP s Canadian Mainline, and in fact, mainline throughput as measured at the Canada/United States border at Gretna, Manitoba saw record throughput of 2.6 million barrels per day (bpd) in the month of December Also in 2016, the Canadian Mainline has continued to be subject to apportionment of heavy crudes, as nominated volumes currently exceed capacity on portions of the system. Due to the nature of the commercial structures described above, EIPLP s earnings and cash flows are not expected to be materially affected by the current low price environment. The lower oil prices are also causing some sponsors of oil sands development programs to reconsider the timing of previously announced upstream development projects. Cancellation or deferral of these projects would affect longer-term supply growth from the Western Canadian Sedimentary Basin (WCSB). EIPLP s existing growth capital program, which includes the Canadian portion of the Line 3 Replacement Program (Canadian L3R Program), has been commercially secured and is expected to generate reliable and predictable earnings growth through 2019 and beyond. Importantly, after taking into account the potential for some of these projects to be cancelled or deferred in an environment where low prices persist, EIPLP s most recent near-term supply forecast reaffirms that the expansions and extensions of its liquids pipeline system that were completed in 2015, as well as the projects currently in progress will provide cost-effective transportation services to key markets in North America and will be well utilized. In the current low-price environment, EIPLP is working closely with producers to find ways to optimize capacity and provide enhanced access to markets in order to alleviate locational pricing discounts. Examples include the expansion of EIPLP s Canadian Mainline completed in July 2015 and the reversal and expansion of Line 9B which was completed in December Distributions Distributions to partners are declared monthly and paid in the following month. Cash distributions to ECT based on Class A unit ownership were declared at an annual aggregate rate of $ per unit, representing $850 million for the year ended December 31, 2016 compared with $ per unit or $546 million for the year ended December 31, 2015 and $ per unit or $349 million for the year ended December 31, In addition, EIPLP also paid a one-time Class A unit distribution to ECT of $ per unit or $264 million following the close of the disposition of the South Prairie Region assets in December Cash distributions to Enbridge based on Class C unit ownership were declared at an annual aggregate rate of $ per unit or $952 million for the year ended December 31, 2016 compared with $ per unit or $279 million for the year ended December 31, Cash distributions based on the IDR component of the SIR were $47 million for the year ended December 31, 2016 compared with nil for the year ended December 31, Paid-in-kind distributions to Enbridge on Class D unit ownership were $13 million and the TPDR component of the SIR were $262 million for the year ended December 31, 2016 compared with $1 million on the Class D unit ownership and $58 million on the TPDR component of the SIR for the year ended December 31, Refer to Liquidity and Capital Resources Sources and Uses of Cash Distributions for more details on the distributions. The increase in distributions declared in 2016 compared with 2015 is due to the units issued during the year as well as higher distribution rates for the Class A units, Class C units and Class D units in 2016 compared with Similarly, the increase in distributions declared in 2015 compared with 2014 is due to units issued in 2015, with a portion of the Class A units issued in 2015, as well as the Class C units and SIR issued in conjunction with the 2015 Transaction. Additionally, the Class A units distribution rates for 2015 were higher than in Revenues EIPLP generates revenues from three primary sources: transportation and other services, electricity sales and revenues from affiliates. Transportation and other services revenue of $3,602 million for the year ended December 31, 2016 (2015 $1,501 million; 2014 $1,877 million) were earned from EIPLP s crude oil transportation businesses. For EIPLP s transportation assets operating under market-based arrangements, revenues are driven by volumes transported and the corresponding tolls for transportation services. For assets operating under take-or-pay contracts, revenues reflect the terms of the underlying contract for services or capacity. For rate-regulated assets, revenues are charged in accordance with tolls established by the regulator, and in most cost-of-service based arrangements are reflective of EIPLP s cost to provide the service plus a regulator-approved rate of return. Increased throughput on EIPLP s core liquids pipeline assets combined with incremental revenues associated with assets placed into service in recent years resulted in revenue increases; however, for 2015 and 2014, the increases were more than offset by unrealized derivative fair value losses on foreign exchange contracts. Electricity sales of $268 million for the year ended December 31, 2016 (2015 $295 million; 2014 $258 million) include power production revenues from EIPLP s portfolio of renewable and power generation assets. The decrease in electricity sales in 2016 compared with 2015 reflected weather conditions during the first half and fourth quarter of 2016 that negatively impacted power production at certain wind facilities in Canada. Higher revenues in 2015 compared with 2014 reflected incremental revenues from the purchase of additional interests in the Lac Alfred and Massif du Sud wind projects in the fourth quarter of EIPLP s revenues also included changes in unrealized derivative fair value gains and losses related to foreign exchange and commodity price contracts used to manage exposures from movements in foreign exchange rates and commodity prices. The unrealized mark-tomarket accounting creates volatility and impacts the comparability of revenues in the short-term, but EIPLP believes over the long-term, the economic hedging program supports reliable cash flows. Enbridge Income Partners LP Management s Discussion & Analysis 79

83 Forward-Looking Information Forward-looking information, or forward-looking statements, have been included in this MD&A to provide information about EIPLP and EIPLP s subsidiaries and affiliates, including management s assessment of EIPLP s plans and operations. 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, likely and similar words suggesting outcomes or statements regarding an outlook. Forward-looking information or statements included or incorporated by reference in this document include, but are not limited to, statements with respect to the following: EBIT or adjusted EBIT; earnings/(loss) or adjusted earnings/(loss); ACFFO; cash flows; distributions and policy; costs related to announced projects and projects under construction; in-service dates for announced projects and projects under construction; capital expenditures; actions of regulators; costs related to leak remediation and potential insurance recoveries; expectations regarding commodity prices; supply forecasts; and expectations on impact of hedging program. Although EIPLP believes 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 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 following: the expected supply of and demand for crude oil, natural gas, NGL and renewable energy; prices of crude oil, natural gas, NGL and renewable energy; exchange rates; inflation; Canadian pipeline export capacity; levels of competition; interest rates; availability and price of labour and construction materials; operational reliability; customer and regulatory approvals; maintenance of support and regulatory approvals for EIPLP s projects; anticipated in-service dates; weather; credit ratings; capital project funding; EBIT or adjusted EBIT; earnings/(loss) or adjusted earnings/(loss); ACFFO; and distributions. Assumptions regarding the expected supply of and demand for crude oil, natural gas, NGL and renewable energy, and the prices of these commodities, are material to and underlie all forward-looking statements. These factors are relevant to all forward-looking statements as they may impact current and future levels of demand for EIPLP s services. Similarly, exchange rates, inflation and interest rates impact the economies and business environments in which EIPLP operates and may impact levels of demand for EIPLP s services and cost of inputs, and are therefore inherent in all forwardlooking statements. Due to the interdependencies and correlation of these macroeconomic factors, the impact of any one assumption on a forward-looking statement cannot be determined with certainty, particularly with respect to EBIT, adjusted EBIT, earnings/(loss), adjusted earnings/(loss), ACFFO or distributions. The most relevant assumptions associated with forward-looking statements on announced projects and projects under construction, including estimated completion dates and expected capital expenditures, include the following: the availability and price of labour and construction materials; the effects of inflation and foreign exchange rates on labour and material costs; the effects of interest rates on borrowing costs; and the impact of weather and customer, government and regulatory approvals on construction and in-service schedules and cost recovery regimes. EIPLP s forward-looking statements are subject to risks and uncertainties pertaining to distribution policy, operating performance, regulatory parameters, project approval and support, renewals of rights of way, weather, economic and competitive conditions, public opinion, changes in tax laws and tax rates, exchange rates, interest rates, commodity prices, political decisions, supply of and demand for commodities, including but not limited to those risks and uncertainties discussed in this MD&A. 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 EIPLP s future course of action depends on management s assessment of all information available at the relevant time. Except to the extent required by applicable law, EIPLP 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 EIPLP or persons acting on EIPLP s behalf, are expressly qualified in their entirety by these cautionary statements. Non-GAAP Measures This MD&A contains references to adjusted EBIT, adjusted earnings and ACFFO. Adjusted EBIT represents EBIT adjusted for unusual, non-recurring or non-operating factors on both a consolidated and segmented basis. Adjusted earnings represents earnings adjusted for unusual, non-recurring or non-operating factors included in adjusted EBIT, as well as adjustments for unusual, non-recurring or non-operating factors in respect of interest expense and income taxes on a consolidated basis. These factors, referred to as adjusting items, are reconciled and discussed in the financial results sections for the affected business segments. ACFFO represents cash available to fund distributions on Class A and Class C units, as well as for debt repayments and reserves. ACFFO consists of adjusted EBIT further adjusted for non-cash items, representing cash flow from EIPLP s underlying businesses, less deductions for maintenance capital expenditures, interest expense, applicable taxes and further adjusted for unusual, non-recurring or non-operating factors not indicative of the underlying or sustainable cash flows of the business. ACFFO is important to unitholders as the Fund Group s objective is to provide a predictable flow of distributions to unitholders. The Manager believes the presentation of adjusted EBIT, adjusted earnings and ACFFO give useful information to partners and unitholders as they provide increased transparency and insight into the performance of EIPLP. The Manager uses adjusted EBIT, adjusted earnings and ACFFO to set targets and to assess the performance of EIPLP. Adjusted EBIT, adjusted earnings and ACFFO are not measures that have standardized meaning prescribed by U.S. GAAP and are not U.S. GAAP measures. Therefore, these measures may not be comparable with similar measures presented by other issuers. The tables opposite summarize the reconciliation of the GAAP and non-gaap measures. 80 Enbridge Income Fund Holdings Inc Annual Report

84 Non-GAAP Reconciliations EBIT to Adjusted EBIT Three months ended December 31, Year ended December 31, Earnings before interest and income taxes 1, , Retrospective adjustments 1 : 2015 Transaction Liquids Pipelines 324 (491) 2015Transaction GreenPower (36) (37) 2015 Transaction Eliminations and Other (9) (92) 2014Transaction GasPipelines (64) Adjusting items 2 : Changes in unrealized derivative fair value (gains)/loss (502) Unrealized (gains)/loss on translation of United States dollar intercompany loan receivable (10) (20) 43 (130) (16) Make-up rights adjustments 1 31 Northeastern Alberta wildfires pipeline and facilities restart costs 8 47 GainonsaleofSouthPrairieRegionassets (850) (850) Gain on sale of non-core assets (22) Leak insurance recoveries (22) (5) (22) Employee severance cost allocation Derecognition of regulatory balances 6 (8) Realized gain on subscription price (22) Other (1) (1) 3 Adjusted earnings before interest and income taxes , Theimpactoftheretrospectiveadjustmentsrelatedtothe2015Transactionandthe2014TransactionhasbeenremovedfromadjustedEBITtoreflectearningsgenerated under EIPLP s ownership effective September 1, 2015 and November 7, 2014, respectively. Retrospective adjustments also include the impacts of significant, unusual, non-recurring or non-operating factors included in the retrospectively adjusted amounts for U.S. GAAP purposes. 2 The above table summarizes adjusting items by nature. For a detailed listing of adjusting items by segment, refer to individual segment discussions. 3Changesinunrealizedderivativefairvaluegainsandlossesarepresentednetofamountsrealizedonthesettlementofderivativecontractsduringtheapplicableperiod. Adjusted EBIT to Adjusted Earnings Three months ended December 31, Year ended December 31, Liquids Pipelines , Gas Pipelines Green Power Eliminations and Other Adjusted earnings before interest and income taxes , Interest expense 1 (95) (95) (371) (132) (12) Income taxes 1 (45) (41) (189) (95) (34) Special interest rights distributions TPDR (66) (44) (262) (58) Special interest rights distributions IDR (12) (47) Adjusted earnings attributable to general and limited partners , These balances are presented net of adjusting items. Enbridge Income Partners LP Management s Discussion & Analysis 81

85 Available Cash Flow from Operations Three months ended December 31, Year ended December 31, Adjusted earnings before interest and income taxes , Depreciation and amortization expense Distributions from Southern Lights Class A Units Cash distributions in excess of/(less than) equity earnings (12) 11 Maintenance capital expenditures 2 (38) (6) (109) (40) (13) Interest expense 3 (80) (91) (343) (124) (12) Current income taxes 3 (2) (41) (34) (97) (4) Special interest rights distributions IDR (12) (47) Other adjusting items Available cash flow from operations (ACFFO) , Priortothecloseofthe2015Transaction,EIPLPreceiveddistributionsfrombothEnbridgesubsidiariesthatindirectlyownedtheSouthernLightsClassAUnits.Subsequentto thecloseofthe2015transaction,eiplpreceiveddistributionsfromtheenbridgesubsidiarythatindirectlyownssouthernlightsusonly. 2 Maintenancecapitalexpendituresareexpendituresthatarerequiredfortheongoingsupportandmaintenanceoftheexistingpipelinesystemorthatarenecessarytomaintainthe servicecapabilityoftheexistingassets(includingthereplacementofcomponentsthatareworn,obsoleteorcompletingtheirusefullives).forthepurposeofacffo,maintenance capitalexcludesexpendituresthatextendassetusefullives,increasecapacitiesfromexistinglevelsorreducecoststoenhancerevenuesorprovideenhancementstotheservice capability of the existing assets. Maintenance capital expenditures occur primarily within EIPLP s Liquids Pipelines segment. 3 These balances are presented net of adjusting items. Objectives and Strategy EIPLP s objective is to provide a predictable flow of distributable cash and to increase, where prudent, cash distributions to its partners, being ECT and Enbridge. EIPLP s objectives and strategies are also aligned to support the corporate vision and strategies of ENF and the Fund, as well as of EIPLP s sponsor, Enbridge. In order to achieve these objectives, the Manager relies on the following strategic priorities: Commitment to Safety and Operational Reliability; Strengthen Core Businesses; Focus on Project Management; and Preserve Financing Strength and Flexibility. Commitment to Safety and Operational Reliability The commitment to safety and operational reliability means achieving and maintaining industry leadership in safety (process, public and personal) and ensuring the reliability and integrity of the systems Enbridge and its subsidiaries operate in order to generate, transport and deliver the energy society counts on and to protect the environment. Under the umbrella of Enbridge s Operational Risk Management Plan (ORM Plan) introduced in 2010, Enbridge has undertaken extensive maintenance, integrity and inspection programs across its pipeline systems. The ORM Plan has resulted in strong improvements in the area of safety and operational risk management, a bolstering of incident response capabilities, employee and public safety protocols and improved communications with landowners and first responders. In addition, an enterprise-wide safety and risk management framework has been implemented to ensure Enbridge identifies, prioritizes and effectively prevents and mitigates risks across the enterprise. Enbridge strives to embed a common risk management framework within its operations and those of its joint venture partners. Supporting these initiatives is a safety culture that strives towards a target of 100% safe operations, with a belief that all incidents can be prevented. To achieve the goal of industry leadership, Enbridge measures its performance as compared to standard industry performance, transparently reports its results and continues to use external assessments to measure its performance. 82 Enbridge Income Fund Holdings Inc Annual Report

86 Strengthen Core Businesses The 2015 Transaction was transformational for EIPLP. It provided a greater asset base and continued to generate value for EIPLP s partners throughout the year. Within EIPLP s Liquids Pipelines business, strategies to strengthen the core business are focused on optimizing asset performance, strengthening stakeholder and customer relationships and providing access to new markets for production from western Canada, all while ensuring safe and reliable operations. EIPLP s asset optimization efforts focus on maximizing the operational and financial performance of its infrastructure assets within established risk parameters, providing competitive services and value to customers. EIPLP s assets are strategically located and well-positioned to capitalize on opportunities. In 2016, despite unfavourable commodity market conditions, the Canadian Mainline delivered record volumes of crude into markets in the United States. EIPLP s existing asset footprint, access to major North American markets and the ability to incrementally enhance its capacity through low-cost expansions provide EIPLP s customers with an attractive and reliable path to market. The Liquids Pipelines business acquired by EIPLP is expected to have future organic growth opportunities beyond the current inventory of secured projects, which are discussed in Growth Projects. EIPLP will have a first right to execute any such projects that fall within the footprint of the Canadian Liquids Pipelines business. In Gas Pipelines, EIPLP seeks to optimize the competitive advantage of its existing asset footprint, as the Alliance Pipeline is well-positioned to provide liquids-rich gas transportation services to developing regions in northeastern British Columbia, northwestern Alberta and the Bakken. Alliance Pipeline successfully re-contracted its firm capacity with shippers under its new services framework that came into effect in December Long-term contracts have been secured through staged and non-staged receipt or full path services with an average contract length of approximately five years. In 2016, Alliance Pipeline has benefitted from strong demand for seasonal firm services through its open season process. For further details refer to Gas Pipelines Alliance Pipeline System. In Green Power, strategies are driven by the objective to manage and maintain facilities in such a way as to maximize power generation and related revenues when the relevant wind, solar or waste heat energy resource is available. The Manager will continue to assess ways to generate value for EIPLP s partners, including reviewing opportunities that may lead to acquisitions or other strategic transactions, some of which may be material and involve EIPLP s sponsor, Enbridge. Opportunities are screened, analysed and assessed using strict operating, strategic and financial criteria with the objective of ensuring the effective deployment of capital and the enduring financial strength and stability of EIPLP. Focus on Project Management Enbridge s enterprise-wide objective is to safely deliver projects on time and on budget and at the lowest practical cost while maintaining the highest standards for safety, quality, customer satisfaction and environmental and regulatory compliance. With the large slate of commercially secured growth projects being undertaken by EIPLP, successful project execution is critical to the success of EIPLP s strategy. Growth projects across the Enbridge entities, including those being undertaken by EIPLP, are managed centrally by Enbridge s Major Projects Group, which continues to build upon and enhance the key elements of its rigorous project management processes including: employee and contractor safety; long-term supply chain agreements; quality design, materials and construction; extensive regulatory and public consultation; robust cost, schedule and risk controls; and efficient project transition to operating units. Ongoing work to ensure project execution costs remain competitive in any market environment is a priority. Preserve Financing Strength and Flexibility Adequate financing strength and flexibility is crucial to the growth strategy of EIPLP. Ongoing access to cost effective sources of debt and equity capital is critical to the successful execution of EIPLP s strategy to expand existing assets and acquire or develop new energy infrastructure. With support from Enbridge and the Fund Group, EIPLP s financial strategies are designed to ensure it has sufficient financial flexibility to meet its capital requirements. To support this objective, Enbridge and the Fund Group develop financing plans and strategies to manage credit ratings, diversify funding sources and maintain substantial standby bank credit capacity and access to capital markets. For further discussion on EIPLP s financing strategies, refer to Liquidity and Capital Resources. As part of Enbridge s enterprise-wide risk management policy, EIPLP engages in a comprehensive long-term economic hedging program to mitigate the impact of fluctuations in interest rates, foreign exchange and commodity price on EIPLP s earnings. For further details, refer to Risk Management and Financial Instruments. To the extent that ENF does not fund any portions of the growth capital, Enbridge will be required until December 31, 2020 to provide EIPLP with equity financing for such projects, unless the project is related to the Line 3 Replacement Program in which case Enbridge s obligation will be to fund the equity requirements for such project until it is placed into service. Enbridge Income Partners LP Management s Discussion & Analysis 83

87 Industry Fundamentals Supply and Demand for Liquids Enbridge has an established and successful history of being the largest transporter of crude oil to the United States, the world s largest market. While United States demand for Canadian crude oil production will support the use of Enbridge infrastructure for the foreseeable future, North American and global crude oil supply and demand fundamentals are shifting, and Enbridge has a role to play in this transition by developing long-term transportation options that enable the efficient flow of crude oil from supply regions to end-user markets. In the third quarter of 2014, the price of crude oil began a dramatic decline. The downturn in crude oil prices has impacted EIPLP s liquids pipelines customers, who responded by reducing their exploration and development spending for 2016 and into The international market for crude oil has seen a significant increase in production from North American basins and increased production from the Organization of Petroleum Exporting Countries (OPEC) in the face of slower global demand growth. Benchmark prices for WTI crude fell below US$30 per barrel at the beginning of 2016 and have remained volatile as the market seeks to re-balance supply and demand. Prices began to recover throughout the year, in response to anticipated cuts in OPEC country production among other factors, and have climbed above US$50 per barrel periodically. WTI crude prices averaged US$43 per barrel for 2016 but ended the year above US$53 per barrel. WTI crude prices averaged US$52.50 per barrel in January Notwithstanding the low price environment, the mainline system has thus far continued to be highly utilized and in fact, mainline throughput as measured at the Canada/United States border at Gretna, Manitoba saw record throughput of 2.6 million bpd in the month of December The mainline system continues to be subject to apportionment of heavy crudes, as nominated volumes currently exceed capacity on portions of the system. The impact of low crude oil prices on the financial performance of EIPLP s liquids pipelines business is expected to be relatively modest given the commercial arrangements which underpin many of the pipelines that make up the liquids system and provide a significant measure of protection against volume fluctuations. In addition, EIPLP s mainline system is well positioned to continue to provide safe and efficient transportation which will enable western Canadian and Bakken production to reach attractive markets in the United States and eastern Canada at a competitive cost relative to other alternatives. The fundamentals of oil sands production and low crude oil prices have caused some sponsors to reconsider the timing of their upstream oil sands development projects. However, recently updated forecasts continue to reflect long-term supply growth from the WCSB, although the projected pace of growth is slower than previous forecasts as companies continue to assess the viability of certain capital investments in the current low price environment. Over the long term, global energy consumption is expected to continue to grow, with the growth in crude oil demand primarily driven by emerging economies in regions outside the Organization for Economic Cooperation and Development (OECD), mainly India and China. While OECD countries, including Canada, the United States and western European nations, will experience population growth, the emphasis placed on energy efficiency, conservation and a shift to lower carbon fuels, such as natural gas and renewables, will reduce crude oil demand over the long term. Accordingly, there is a strategic opportunity for North American producers to grow production to displace foreign imports and participate in the growing global demand outside North America. In terms of supply, long-term global crude oil production is expected to continue to grow through 2035, with growth in supply primarily contributed by North America, Brazil and OPEC. Growth in North America is largely driven by production from the oil sands and the continued development of tight oil plays including the Permian, Bakken and Eagle Ford formations. Growth in supply from OPEC is primarily a result of a shift in OPEC s strategy from balancing supply to competing for market share in Asia and Europe. However, political uncertainty in certain oil producing countries, including Libya and Iraq, increases risk in those regions supply growth forecasts and makes North America one of the most secure supply sources of crude oil. As witnessed throughout 2016 and early 2017, North American supply growth can be influenced by macro-economic factors that drive down the global crude prices. OPEC has since changed its strategy after its November 2016 meeting in which OPEC agreed to cut production by 1.2 million bpd effective January Over the longer term, North American production from tight oil plays, including the Bakken, is expected to grow as technology continues to improve well productivity and reduce costs. The WCSB, in Canada, is viewed as one of the world s largest and most secure supply sources of crude oil. However, the pace of growth in North America and level of investment in the WCSB could be tempered in future years by a number of factors including a sustained period of low crude oil prices and corresponding production decisions by OPEC, increasing environmental regulation, prolonged approval processes for new pipelines and the continuation of access restrictions to tide-water in Canada for export. In recent years, the combination of relatively flat domestic demand, growing supply and long-lead time to build pipeline infrastructure led to a fundamental change in the North American crude oil landscape. The inability to move increasing inland supply to tide-water markets resulted in a divergence between WTI and world pricing, resulting in lower netbacks for North American producers than could otherwise be achieved if selling into global markets. The impact of price differentials has been even more pronounced for western Canadian producers as insufficient pipeline infrastructure resulted in a further discounting of Alberta crude against WTI. With a number of market access initiatives completed by the industry in recent years, including those introduced by Enbridge, the crude oil price differentials significantly narrowed in 2015, and resulted in higher 84 Enbridge Income Fund Holdings Inc Annual Report

88 netbacks for producers. The differentials between WTI and world pricing remained narrow in This has resulted in crude oil continuing to move off of alternative transportation networks such as rail to fill the additional pipeline capacity as it became available. However, Canadian pipeline export capacity is expected to remain essentially full, resulting in incremental production utilizing non-pipeline transportation services until such time as pipeline capacity is made available. As the supply in North America continues to grow, the growth and flexibility of pipeline infrastructure will need to keep pace with the sensitive demand and supply balance. Over the longer term, EIPLP believes pipelines will continue to be the most costeffective means of transportation in markets where the differential between North American and global oil prices remain narrow. Utilization of rail to transport crude is expected to be substantially limited to those markets not readily accessible by pipelines. As prices continue to remain sensitive to capacity limitations to markets, there is a heightened need to expand access to coastal markets. EIPLP s and Enbridge s role in helping to address the evolving supply and demand fundamentals and alleviating price discounts for producers and supply costs to refiners is to provide expanded pipeline capacity and sustainable connectivity to alternative markets. As discussed in Growth Projects, in 2016, EIPLP continued to execute its growth projects plan in furtherance of this objective. Supply and Demand for Natural Gas and NGL Experiencing a similar price trend as crude oil, the prices of natural gas and NGL and other commodities whose prices are highly correlated to crude oil have also weakened. However, global energy demand is expected to increase 30% by 2040, according to the International Energy Agency, driven primarily by expected economic growth from non-oecd countries. Natural gas will play an important role in meeting this energy demand and is anticipated to grow by 50% during this period as one of the world s fastest growing energy sources, second only to renewables. Most natural gas demand will stem from the need for greater power generation capacity, as natural gas is a cleaner alternative to coal, which currently has the largest market share for power generation. Within North America, United States natural gas demand growth is also expected to be driven by the next wave of gas-intensive petrochemical facilities which are now starting to enter service, along with the growing volume of LNG exports. Over the longer term, higher United States natural gas demand is expected to be driven by the industrial sector and from power generation and will be supplemented by higher exports, via liquefied natural gas (LNG) and to Mexico. Within Canada, natural gas demand growth is expected to be largely tied to oil sands development and growth in gas-fired power generation. Canadian gas demand growth will be accelerated with implementation of coal fired power replacements resulting from impending legislation to meet emissions targets. North American supply from tight formations continues to create a demand and supply imbalance for natural gas and some NGL products. North American gas supply continues to be significantly impacted by development in the northeastern United States, primarily the prolific Marcellus shale, and the rapidly growing Utica shale. The abundance of supply from these shale plays continues to fundamentally alter natural gas flow patterns in North America, as this region has largely displaced flows from the Gulf Coast and the WCSB that historically supplied eastern markets. Similar pressures are also being felt in the midwest and southern markets. Additional production is expected from this region as pipeline constraints are eliminated, with several proposed pipeline projects targeted for in-service over the next two years. Natural gas production from regions other than the northeastern United States has largely been flat or has declined over the past several years in the face of lower-cost production from the Appalachian region, in addition to prolonged weak North American natural gas prices. One exception would be WCSB production, reaching an all-time record high in early 2016, which was triggered by the combination of new infrastructure and the connection of previously drilled wells. Producers remain focused on the Montney shale and the developing Duvernay, where core areas are among the most competitive within North America. Economic drivers vary and include: continuous productivity improvements overall, extremely low cost dry gas plays and abundant liquids and/or condensate rich gas resources, where liquid products enhance or drive economics. The highly prolific Permian Basin in West Texas/Southeast New Mexico is also experiencing significant benefit from technology improvements, where producer focus is primarily crude oil, however, with significant NGL-rich associated gas production. In the longer term, while low natural gas prices are expected to be a key driver in future natural gas demand and infrastructure growth, producer break-even costs continue to decline and as a result it is expected there will continue to be ample economic supply that will respond quickly to rising demand, thereby limiting price advances. Natural gas prices have been relatively weak over the last year as a result of warm weather and high storage inventories; however, although rig counts have trended lower, production levels have remained generally flat due to productivity gains, the high number of drilled and uncompleted wells and continued focus on liquids-rich and condensate plays. NGL that can be extracted from liquids-rich gas streams include ethane, propane, butane and natural gasoline, which are used in a variety of industrial, commercial and other applications. The robust gas production has created regional supply imbalances for some NGL products and weakened the economics of NGL extraction, although these imbalances modestly improved over the second half of 2016 as crude prices have rebounded and NGL export capacity has expanded. Over the longer term, the growth in NGL demand is expected to be robust, driven largely by incremental Enbridge Income Partners LP Management s Discussion & Analysis 85

89 ethane demand. Ethane is the key feedstock to the United States Gulf Coast petrochemical industry, which is the world s second lowest-cost ethylene production region and is currently undergoing significant expansion that has started to enter service and will accelerate in When this new infrastructure is completed and fully online in late 2018, ethane prices and resulting extraction margins are expected to improve, reducing the amount of ethane retained in the gas stream. In addition, the inaugural export cargo of ethane was shipped in March 2016 and if waterborne exports rise significantly, the ethane market will further tighten. Similarly, rapidly growing supplies of propane have been outpacing demand leading to record storage levels and downward pressure on prices. The outlook for abundant propane supplies in excess of domestic demand has prompted the development and expansion of export facilities for liquefied petroleum gas (LPG). Over a few short years, the United States has become the world s largest LPG exporter, with volumes reaching over one million bpd at times in 2016, which have helped to reduce the inventory overhang and provide support to propane prices. In Canada, the WCSB basin is well-situated to capitalize on the evolving NGL fundamentals over the longer term as the Montney formation in northern British Columbia and the Duvernay shale in Alberta contain significant liquids-rich resources at competitive extraction costs. Longer-term, NGL fundamentals provide a positive outlook for growth and would be further supported with a continued recovery in crude oil prices. Consequently, the crude-to-gas price ratio is expected to remain well above energy conversion value levels and continue to be supportive of NGL extraction over the longer term. Conditions for western Canadian LNG exports remain favourable, as industry proponents continue to assess updated project economics considering a scale down in construction costs, ample lower cost gas supplies and a stabilizing market, as supply/demand begins to rebalance. Proponents who have the benefit of an integrated model (upstream supply and downstream market) have the greatest probability of making a favourable final investment decision. There continues to be regional opposition to proposed projects in general, primarily stemming from a climate change/ greenhouse gas (GHG) emissions agenda, mixed with some local Indigenous opposition as it relates to environmental impacts on wildlife and fish habitats. The Government of British Columbia continues to advocate strongly for west coast LNG. The short term outlook for LNG fundamentals points to a continued oversupply, as it will take some time for the market to fully absorb the large volumes of new supply coming online. Post-2025, forecasts indicate demand will exceed projected supply as growing markets seek to diversify supply sources. This should be supportive of Canadian LNG exports. In response to these evolving natural gas and NGL fundamentals, the Manager believes EIPLP is well-positioned to provide valueadded solutions to producers. Alliance Pipeline traverses through the heart of key liquids-rich plays in the WCSB and is uniquely positioned to transport liquids-rich gas. Alliance Pipeline has developed new service offerings to best meet the needs of producers and shippers, and demand for transportation services continues to be robust. Supply and Demand for Renewable Energy The power generation and transmission network in North America is expected to undergo significant growth over the next 20 years. On the demand side, North American economic growth over the longer term is expected to drive growing electricity demand, although continued efficiency gains are expected to make the economy less energy-intensive and temper demand growth. On the supply side, impending legislation in Canada is expected to accelerate the retirement of aging coal-fired generation plants, resulting in a requirement for significant new generation capacity. While coal and nuclear facilities will continue to be core components of power generation in North America, gas-fired and renewable energy facilities, including biomass, hydro, solar and wind, are expected to be the preferred sources to replace coal-fired generation due to their lower carbon intensities. North American wind and solar resources fundamentals remain strong. In the United States there is over 75 gigawatts (GW) of installed wind power capacity and in Canada over 11 GW of installed wind power capacity. Solar resources in southwestern states such as Arizona, California and Nevada are considered to be some of the best in the world for large-scale solar plants and the United States currently has over 31 GW of installed solar photovoltaic capacity. In late 2015, the United States passed legislation extending the availability of certain Federal tax incentives which have supported the profitability of wind and solar projects. However, expanding renewable energy infrastructure in North America is not without challenges. Growing renewable generation capacity is expected to necessitate substantial capital investment to upgrade existing transmission systems or, in many cases, build new transmission lines, as these high quality wind and solar resources are often found in regions that are not in close proximity to markets. In the near-term, uncertainty over the availability of tax or other government incentives in various jurisdictions, the ability to secure long-term power purchase agreements (PPA) through government or investor-owned power authorities and low market prices of electricity may hinder the pace of future new renewable capacity development. However, continued improvement in technology and manufacturing capacity in the past few years has reduced capital costs associated with renewable energy infrastructure and has also improved yield factors of power generation assets. These positive developments are expected to render renewable energy more competitive and support ongoing investment over the long term. EIPLP has interests in 1,052 MW of net renewable energy generation and together with Enbridge, its sponsor, it will continue to seek new opportunities to expand its power generation business, growing its portfolio by investing in assets that meet its investment criteria. 86 Enbridge Income Fund Holdings Inc Annual Report

90 Growth Projects The following table summarizes the current status of EIPLP s commercially secured projects, organized by business segment. The estimated capital costs and the expenditures to date are inclusive of costs incurred prior to the closing of the 2015 Transaction. Estimated Capital Cost 1 Expenditures to Date 2 Expected In Service Date Status (Canadian dollars) Liquids Pipelines 1. Norlite Pipeline System 3 $1.3 billion $0.8 billion 2017 Under construction 2. JACOS Hangingstone Project $0.2 billion $0.1 billion 2017 Under construction 3. Regional Oil Sands Optimization Project $2.6 billion $2.2 billion 2017 (in phases) Under construction 4. Canadian Line 3 Replacement Program 4 $4.9 billion $1.5 billion 2019 Pre construction 1 Theseamountsareestimatesandaresubjecttoupwardordownwardadjustmentbasedonvariousfactors.Whereappropriate,theamountsreflectEIPLP sshare of joint venture projects. 2 ExpenditurestodatereflecttotalcumulativeexpendituresincurredfrominceptionoftheprojectuptoDecember31, EIPLPwillconstructandoperatetheNorlitePipelineSystem(Norlite).KeyeraCorp.(Keyera)willfund30%oftheproject. 4 As discussed under Canadian Line 3 Replacement Program below,theexpectedcostandin-servicedateofthisprojectisunderreviewbyeiplpinlightoftheschedule forregulatoryreviewandapprovalcommunicatedbytheminnesotapublicutilitiescommission(mnpuc)onoctober28,2016. Liquids Pipelines Norlite Pipeline System EIPLP is undertaking the development of Norlite, a new industry diluent pipeline originating from Edmonton, Alberta to meet the needs of multiple producers in the Athabasca oil sands region. The scope of the project was increased to a 24-inch diameter pipeline and based on current engineering design, will provide an initial capacity of approximately 218,000 bpd of diluent, with the potential to be further expanded to approximately 465,000 bpd of capacity with the addition of pump stations. Norlite will be anchored by throughput commitments from Suncor Energy Inc., Total E&P Canada Ltd. and Teck Resources Limited (Fort Hills Partners) for production from the proposed Fort Hills Partners oil sands project (Fort Hills Project) and from Suncor Energy Oil Sands Limited Partnership s (Suncor Partnership) proprietary oil sands production. Norlite will involve the construction of a new 449-kilometre (278-mile) pipeline from EIPLP s Stonefell Terminal to its Cheecham Terminal with an extension to Suncor Partnership s East Tank Farm, which is adjacent to EIPLP s existing Athabasca Terminal. Under an agreement with Keyera, Norlite has the right to access certain existing capacity on Keyera s pipelines between Edmonton, Alberta and Stonefell, Alberta and, in exchange, Keyera has elected to participate in the new pipeline infrastructure project as a 30% non-operating owner. Norlite is expected to be completed in the second quarter of 2017 at an estimated cost of approximately $1.3 billion, with expenditures to date of approximately $0.8 billion. JACOS Hangingstone Project EIPLP is undertaking the construction of facilities and it will provide transportation services to the Japan Canada Oil Sands Limited (JACOS) Hangingstone Oil Sands Project (JACOS Hangingstone). JACOS and Nexen Energy ULC, a wholly-owned subsidiary of China National Offshore Oil Corporation Limited, are partners in the project which is operated by JACOS. EIPLP is constructing a new 53-kilometre (33-mile), 12-inch lateral pipeline to connect the JACOS Hangingstone project site to EIPLP s existing Cheecham Terminal. The project, which will provide capacity of 40,000 bpd, has been delayed at the shippers request and is targeted to enter service in the third quarter of The estimated cost of the project is approximately $0.2 billion, with expenditures to date of approximately $0.1 billion. Enbridge Income Partners LP Management s Discussion & Analysis 87

91 Fort McMurray CANADA 2 Cheecham 1 3 Fort McMurray Cheecham Edmonton Edmonton Hardisty Hardisty Blaine 4 Portland Gretna Superior Montreal UNITED STATES OF AMERICA Chicago Toledo Buffalo Patoka Wood River Cushing M E X I C 0 Houston New Orleans Liquids Pipelines 1 Norlite Pipeline System 2 JACOS Hangingstone Project 3 Regional Oil Sands Optimization Project 4 Canadian Line 3 Replacement Program Assets in Operation* Growth Projects Wind Assets in Operation Solar Assets in Operation * AssetsinOperationincludeassetsownedbyEIPLP saffiliate,enbridge. 88 Enbridge Income Fund Holdings Inc Annual Report