ENBRIDGE INCOME PARTNERS LP MANAGEMENT S DISCUSSION AND ANALYSIS. December 31, 2016

Transcription

1 ENBRIDGE INCOME PARTNERS LP MANAGEMENT S DISCUSSION AND ANALYSIS December 31, 2016

2 GLOSSARY ACFFO Adjusted EBIT Alliance Pipeline Canada Alliance Pipeline US bpd Canadian L3R Program CTS EBIT ECT EIPLP Enbridge Enbridge Income Partners LP ENF EPAI EPI IDR IJT MW NEB NGL OCI ORM Plan PPA(s) SIR Southern Lights Canada Southern Lights Class A Units Southern Lights US the Fund the Fund Group the Manager or EMSI TPDR U.S. GAAP WCSB Available cash flow from operations EBIT adjusted for unusual, non-recurring or non-operating factors The Canadian portion of the Alliance Pipeline The United States portion of the Alliance Pipeline Barrels per day Canadian portion of the Line 3 Replacement Program Competitive Toll Settlement Earnings before interest and income taxes Enbridge Commercial Trust Enbridge Income Partners LP Enbridge Inc. EIPLP Enbridge Income Fund Holdings Inc. Enbridge Pipelines (Athabasca) Inc. Enbridge Pipelines Inc. Incentive Distribution Right International Joint Tariff Megawatts National Energy Board Natural gas liquids Other comprehensive income Operational Risk Management Plan Power purchase agreement(s) Special Interest Rights The Canadian portion of Southern Lights Pipeline Class A units of certain Enbridge subsidiaries which provide a defined cash flow stream from Southern Lights US The United States portion of Southern Lights Enbridge Income Fund The Fund, ECT, EIPLP and the subsidiaries and investees of EIPLP Enbridge Management Services Inc. Temporary Performance Distribution Right Generally accepted accounting principles in the United States of America Western Canadian Sedimentary Basin 1

3 MANAGEMENT S DISCUSSION AND 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. 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). 2

4 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 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. 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. 3

5 PERFORMANCE OVERVIEW Three months ended Year ended December 31, 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 1 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, cash flow data, total revenues, total assets and total long-term liabilities have been retrospectively adjusted to reflect the 2015 Transaction and the 2014 Transaction in information prior to the respective effective dates of the transactions as prescribed by U.S. GAAP for common control transactions. 2 Temporary Performance Distribution Right (TPDR) distributes Class D units and refers to the paid-in-kind component of the Special Interest Rights (SIR) distribution. Class D unit distributions are also paid-in-kind with the issuance of additional Class D units. 3 Incentive Distribution Right (IDR) refers to the cash component of the SIR distribution (see Liquidity and Capital Resources Distributions). 4 Adjusted earnings before interest and income taxes (adjusted EBIT) and adjusted earnings are non-gaap measures that do not have any standardized meaning prescribed by generally accepted accounting principles. For more information on non-gaap measures, refer to page These balances are presented net of adjusting items. 4

6 6 Available cash flow from operations (ACFFO) is defined as adjusted EBIT further adjusted for depreciation and amortization and distributions from investments in excess of/(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. ACFFO is a non-gaap measure that does not have any standardized meaning prescribed by U.S. GAAP see Non-GAAP Measures. 7 Refer to Liquidity and Capital Resources Sources and Uses of Cash Distributions for distribution rates. 8 Amounts do not include the one-time Class A unit distribution of $264 million paid in December 2016 following the close of the disposition of the South Prairie Region assets. 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 nonoperating 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 5

7 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. 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 6

8 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 7

9 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 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 8

10 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 ( $1,501 million; $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 ( $295 million; $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-to-market 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. 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 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: 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 9

11 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 forward-looking statements. Due to the interdependencies and correlation of these macroeconomic factors, the impact of any one assumption on a forwardlooking statement cannot be determined with certainty, particularly with respect to 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 forwardlooking 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 nonoperating factors included in adjusted EBIT, as well as adjustments for unusual, non-recurring or nonoperating 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 nonoperating 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 below summarize the reconciliation of the GAAP and non-gaap measures. 10

12 NON-GAAP RECONCILIATIONS EBIT to Adjusted EBIT Three months ended Year ended December 31, December 31, Earnings before interest and income taxes 1, , Retrospective adjustments 1 : 2015 Transaction - Liquids Pipelines (491) 2015 Transaction - Green Power (36) (37) 2015 Transaction - Eliminations and Other (9) (92) 2014 Transaction - Gas Pipelines (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 Northeastern Alberta wildfires pipeline and facilities restart costs Gain on sale of South Prairie Region assets (850) - (850) - - Gain on sale of non-core assets (22) - Leak insurance recoveries - (22) (5) (22) - Employee severance cost allocation Derecognition of regulatory balances (8) - Realized gain on subscription price (22) Other - (1) - (1) 3 Adjusted earnings before interest and income taxes , The impact of the retrospective adjustments related to the 2015 Transaction and the 2014 Transaction has been removed from adjusted EBIT to reflect earnings generated 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. 3 Changes in unrealized derivative fair value gains and losses are presented net of amounts realized on the settlement of derivative contracts during the applicable period. 11

13 Adjusted EBIT to Adjusted Earnings Three months ended Year ended December 31, 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. Available Cash Flow from Operations Three months ended Year ended December 31, 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) , Prior to the close of the 2015 Transaction, EIPLP received distributions from both Enbridge subsidiaries that indirectly owned the Southern Lights Class A Units. Subsequent to the close of the 2015 Transaction, EIPLP received distributions from the Enbridge subsidiary that indirectly owns Southern Lights US only. 2 Maintenance capital expenditures are expenditures that are required for the ongoing support and maintenance of the existing pipeline system or that are necessary to maintain the service capability of the existing assets (including the replacement of components that are worn, obsolete or completing their useful lives). For the purpose of ACFFO, maintenance capital excludes expenditures that extend asset useful lives, increase capacities from existing levels or reduce costs to enhance revenues or provide enhancements to the service 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. 12

14 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. 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 13

15 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; longterm 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 longterm 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. 14

16 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

17 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 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 cost-effective 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 16

18 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 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, 17

19 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 wellpositioned to provide value-added 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. 18

20 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. Expected Estimated Expenditures In-Service Capital Cost 1 to Date 2 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 $2.6 billion $2.2 billion 2017 Under Project (in phases) construction 4. Canadian Line 3 Replacement $4.9 billion $1.5 billion 2019 Pre- Program 4 construction 1 These amounts are estimates and are subject to upward or downward adjustment based on various factors. Where appropriate, the amounts reflect EIPLP s share of joint venture projects. 2 Expenditures to date reflect total cumulative expenditures incurred from inception of the project up to December 31, EIPLP will construct and operate the Norlite Pipeline System (Norlite). Keyera Corp. (Keyera) will fund 30% of the project. 4 As discussed under Canadian Line 3 Replacement Program below, the expected cost and in-service date of this project is under review by EIPLP in light of the schedule for regulatory review and approval communicated by the Minnesota Public Utilities Commission (MNPUC) on October 28,

21 20