UE Waterheater Income Fund
TSX : UWH.UN

UE Waterheater Income Fund

November 01, 2005 17:56 ET

UE Waterheater Income Fund Announces Financial Results for third quarter ended September 30, 2005 and a 7% increase in distributions effective January 2006

TORONTO, ONTARIO--(CCNMatthews - Nov. 1, 2005) -

NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICES.

UE Waterheater Income Fund (TSX:UWH.UN), today released financial results for the third quarter ended September 30, 2005. Highlights for the quarter are as follows:

- Strong revenues for the third quarter of 2005, increasing by 28% in total over the same period last year

- Acquired Protectron, increasing revenues by $12.9 million or 23%, and operating income by $1.4 million over the third quarter of 2004

- Operating income increased by 10% to $18.2 million from $16.6 million in 2004

To view the Gross Revenue graph please click the link below:
http://www.ccnmatthews.com/docs/gr1101.jpg

The Fund today announced a cash distribution of $0.08025 per unit (equivalent to $0.963 per unit on an annualized basis) for the month of January 2006. This represents a 7% increase over the 2005 distribution rate of $0.075 per unit (equivalent to $0.90 on an annualized basis). The January 2006 distribution is payable on February 28, 2006 to unitholders of record on January 31, 2006.

The Fund intends to pay the November and December 2005 distribution at the current level of $0.075 per unit.

"Management is pleased with the Fund's performance during the third quarter of 2005. We continued to invest successfully in the rapid growth of our Comfort Protection Plan business," says Roger Rossi, President and CEO, adding: "The phased introduction of our new name, Reliance Home Comfort, is going well, with the remainder of our electric customers served under the Ontario Hydro Energy brand expected to be converted early in 2006. The performance of our recent security business acquisition, Protectron, is in line with management's expectations. We are focused on identifying and realizing opportunities for revenue growth and cost saving, while constantly improving customer service. The latter should continue to provide growth in cash flow and a solid base for unitholder distributions."



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Consolidated Financial Highlights
For the quarter ended September 30, 2005
(Unaudited)
(in thousands of dollars, except for unit data)
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Three months ended Nine months ended
September 30, September 30,
----------------------------------------
2005 2004 2005 2004
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Revenue $ 71,981 $ 56,124 $ 185,441 $ 164,767
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Cost of sales, general
and administration 35,976 24,290 89,762 73,930
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Depreciation and amortization 17,850 15,214 47,497 45,415
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Operating income 18,155 16,620 48,182 45,422
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Mark-to-market (gain) loss
on valuation of interest rate
contracts (15) 263 366 5,538
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Finance and interest charges 4,817 4,339 13,357 13,366
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Income before income taxes 13,353 12,018 34,459 26,518
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Taxes 247 303 691 911
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Net income $ 13,106 $ 11,715 $ 33,768 $ 25,607
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Cash from operating
activities $ 25,662 $ 19,846 $ 70,227 $ 68,775
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Cash from (used in) financing
activities 125,820 (8,820) 107,312 (24,780)
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Cash used in investing
activities (158,335) (15,025) (188,638) (41,667)
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Unitholder distributions
declared 11,077 8,820 29,758 26,464
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Unitholder cash distributions
paid 10,498 8,820 29,006 24,780
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Earnings before finance and
interest charges, taxes,
depreciation and
amortization (EBITDA)(1) $ 36,005 $ 31,834 $ 95,679 $ 90,837
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Total assets $ 998,404 $837,276 $ 998,404 $ 837,276
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Unit Analysis
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Total outstanding units 49,233,000 49,233,000
41,513,000 41,513,000
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Deferred Units outstanding 3,535 N/A 3,535 N/A
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Earnings per unit
- basic and diluted $ 0.27 $ 0.28 $ 0.77 $ 0.62
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EBITDA per unit
- basic and diluted $ 0.75 $ 0.77 $ 2.19 $ 2.19
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Distributions declared
per unit - basic and diluted $ 0.23 $ 0.21 $ 0.68 $ 0.64
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(1) See "EBITDA" on page 5.
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November 1, 2005

This Management's Discussion and Analysis ("MD&A") is intended to assist in the understanding and assessment of the trends and significant changes in the results of operations and financial condition of UE Waterheater Income Fund (the "Fund") and its subsidiaries for the third quarter of 2005. It should be read in conjunction with the Fund's audited consolidated financial statements and accompanying notes for the year ended December 31, 2004, as well as the Fund's unaudited interim consolidated financial statements and accompanying notes for the period ended September 30, 2005. In this MD&A, "we", "us", "our" and "the Fund" refer to UE Waterheater Income Fund and its subsidiaries. The annual information form, annual report, other quarterly reports of, and other information relating to UE Waterheater Income Fund are available on SEDAR at www.sedar.com.

This MD&A contains forward-looking statements about the objectives, financial condition, results of operations and business of the Fund. These statements are "forward-looking," as they are based on current expectations about the Fund's business and the markets the Fund operates in, and on various estimates and assumptions.

- Forward-looking statements in this MD&A describe the Fund's expectations on November 1, 2005.

- Actual results could be materially different from the Fund's expectations if known and unknown risks affect the Fund's business or if the Fund's estimates or assumptions turn out to be inaccurate. As a result, the Fund cannot guarantee that any forward-looking statement will materialize.

- Forward-looking statements do not take into account the effect that transactions or non-recurring items announced or occurring after the statements are made have on the Fund's business.

- The Fund disclaims any intention or obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.

- Risks that could cause actual results to differ from the Fund's current expectations include the risks discussed under the heading "Risks and Uncertainties".

About the UE Waterheater Income Fund

UE Waterheater Income Fund is an unincorporated, open-ended, limited purpose trust established under the laws of Ontario, created to indirectly acquire and hold, through the UE Waterheater Operating Trust, the water heater rental business of Union Energy Limited Partnership ("Union Energy LP") and its related commercial activities. Each unit of the Fund represents an indirect ownership interest in Union Energy LP, which operates the businesses.

The Fund reports its operations in two segments, the "Water Heater and HVAC" segment, and the "Security" segment.

The Water Heater and HVAC segment rents and services a portfolio of more than one million residential water heaters in Ontario, under the Union Energy, Ontario Hydro Energy, and Reliance Home Comfort brand names. The residential water heater portfolio is Canada's second largest and was initiated in the 1960s. In addition, this segment has related commercial activities that complement the water heater rental business, being the retail sale, rental, servicing and financing of heating, ventilation and air-conditioning ("HVAC") equipment.

The Security segment operations began July 15, 2005 with the acquisition of Protectron Holdings Inc. This segment provides electronic security system sales, installation, service, monitoring, and related commercial activities across Canada, under the "Protectron" brand name.

RESULTS OF OPERATIONS - CONSOLIDATED FINANCIAL RESULTS

For the quarter ended September 30, 2005, the Fund's consolidated net income was $13.1 million on revenues of $72.0 million compared to net income of $11.7 million on revenues of $56.1 million for the three months ended September 30, 2004. Operating income for the quarter ended September 30, 2005 was $18.2 million, an increase of $1.6 million or 10% over the same period last year.

Revenues increased by $15.9 million, or 28%, during the three months ended September 30, 2005 with the acquisition of the security business contributing $12.9 million of the increase. Rental and security monitoring revenues increased by $11.3 million, or 25% in the current quarter; sales, service and other revenue increased $4.2 million, or 46%; and finance revenues increased $0.3 million, or 12% over the same quarter last year.

The $1.4 million increase in net income over the third quarter of 2004 is primarily due to the net effect of higher revenue, offset by increased investment in marketing on brand and customer growth in the Comfort Protection Plan business in the Water Heater and HVAC segment, plus the net income of the newly acquired Security business. In addition, the Fund incurred $0.5 million additional interest expense during the quarter ended September 30, 2005 from new debt related to the acquisition.

For the nine months ended September 30, 2005, the Fund's net income was $33.8 million on revenues of $185.4 million compared to net income of $25.6 million on revenues of $164.8 million for the nine months ended September 30, 2004. Operating income for the nine months ended September 30, 2005 was $48.2 million, an increase of $2.8 million or 6% over the same period last year.

Revenues increased by $20.6 million, or 13%, during the nine months ended September 30, 2005 with the acquisition of the security business contributing $12.9 million of the increase. Rental and security monitoring revenues increased by $15.5 million, or 12% during the nine month period; sales, service and other revenue increased $4.4 million, or 16%; and finance revenues increased $0.8 million, or 11% over the same period last year.

The increase in net income for the nine-month period is primarily due to the net effect of higher revenue, offset by increased investment in marketing on brand and customer growth in the Comfort Protection Plan business in the Water Heater and HVAC segment, plus the income of the newly acquired Security business.

EBITDA

Earnings before finance and interest charges, taxes and depreciation and amortization ("EBITDA") was $36.0 million for the quarter and $95.7 million for the nine months ended September 30, 2005. EBITDA increased $4.2 million, or 13%, and $4.8 million, or 5%, respectively, when compared to EBITDA of $31.8 million and $90.8 million for the comparable periods in 2004.

The Fund believes that in addition to net income or loss, EBITDA is a useful supplemental measure of cash available for distribution prior to debt service, changes in working capital, capital expenditures and income taxes. The Fund reports on EBITDA because it is a key measure used by management to evaluate performance, and is utilized in measuring compliance with debt covenants and in making decisions relating to distributions to unitholders. The Fund believes EBITDA assists investors in comparing its performance on a consistent basis from period to period without regard to depreciation and amortization, which are non-cash in nature, and interest and taxes.

EBITDA is not a recognized measure under generally accepted accounting principles "GAAP", and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. EBITDA is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. In particular, investors should also consider the impact of interest expense on the Fund's long-term debt and its capital expenditure requirements to fully assess the cash flow available to finance cash distributions.

The following table reconciles net income of the Fund determined under GAAP with EBITDA, as calculated consistently for each period:



(in thousands of dollars )

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Three months ended Nine months ended
September 30, September 30,
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2005 2004 2005 2004
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Net income $ 13,106 $ 11,715 $ 33,768 $ 25,607
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Adjustments:
Depreciation and amortization 17,850 15,214 47,497 45,415
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Finance and interest
charges(1) 4,802 4,602 13,723 18,904
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Income taxes 247 303 691 911
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Earnings before finance and
interest charges, taxes,
depreciation and
amortization (EBITDA) $ 36,005 $ 31,834 $ 95,679 $ 90,837
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(1) Includes finance and interest charges and mark-to-market
valuation of interest rate contracts.


Depreciation and amortization were $17.9 million for the quarter and $47.5 million for the nine months ended September 30, 2005, an increase of $2.6 million or 17% for the quarter and $2.1 million or 5% for the nine months when compared to the same periods in 2004. This increase reflects primarily depreciation and amortization of Security segment assets, as well as the leasing of rather than purchase of non-rental assets, including vehicles and computer hardware.

Finance and interest charges were $4.8 million and $13.7 million, respectively, for the quarter and nine months ended September 30, 2005 compared to $4.6 million for the quarter and $18.9 million for the nine months ended September 30, 2004. Finance and interest charges for 2005 represent interest on the senior secured notes, net interest payments and mark-to-market valuation of the related interest rate contracts, interest on short term debt beginning July 15, 2005 and other interest expenses, net of interest income. Finance and interest charges for 2004 represent interest on the senior secured notes that were issued on February 10, 2004 and on the bank credit facility prior to issuance of the notes as well as the net interest payments and mark-to-market valuation of the related interest rate contracts.

In November 2003, the Fund entered into interest rate contracts to substantially fix the average effective interest rate on the offering of senior secured notes that were issued on February 10, 2004. Upon issuance of the senior secured fixed interest rate notes, the Fund entered into offsetting interest rate contracts resulting in a total effective fixed cash interest rate of 5.23% per annum for the Fund.

The interest rate contracts are marked-to-market at each balance sheet date. Changes in the market values are recorded in income as they arise, resulting in an insignificant income effect in the current quarter and an expense of $0.4 million for the nine months ended September 30, 2005. For comparable periods, a charge to income of $0.3 million and $5.5 million for the three and nine months ended September 30, 2004 resulted.

The market value liability accrued at September 30, 2005 of $12.8 million will reduce as payments are made under the terms of the interest rate contracts. Payments of $1.6 million were made in each of the current quarter and the first quarter of 2005, for $3.2 million year-to-date. Payments totaling $1.6 million were made in the quarter ended September 30, 2004.

Distributable cash

The Fund distributes cash to its unitholders on a monthly basis. Although the Fund has made a distribution for each month of its operation, the amount and timing of distributions cannot be assured, and are dependent on operating performance, as cash available for distributions is derived solely from operating cash flows of the Fund's subsidiaries.

The Fund reports on cash distributions per unit because it is a key measure used by investors to value and assess the Fund. Cash distributions per unit depend on cash available for distributions and the Fund's distribution policy. Cash available for distributions is a non-GAAP measure generally used by Canadian open-ended trusts as an indicator of financial performance, and it should not be seen as a measurement of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. Cash available for distributions may differ from similar calculations as reported by other entities and, accordingly, may not be comparable to cash available for distributions as reported by such entities.

The breakdown between income and return of capital for 2005 cash distributions to its unitholders subject to Canadian income taxes is not determinable at this time. Cash distributions to unitholders by the Fund for the year ended December 31, 2004 were income, but management expects some return of capital with 2005 distributions.

Distributable cash flow is equal to the consolidated cash flow from operations of the Fund adjusted for changes in working capital and related items and reduced by maintenance capital expenditures (see chart below). This method has been applied consistently since the Fund's inception, and management believes this measure reflects cash generated from operations available to fund growth or distribute to unitholders.

Maintenance capital expenditures include expenditures during the period for rental equipment installed to replace rental equipment removed from service at the end of its useful life, additional rental units purchased to offset the impact on rental portfolio revenues of buy outs and terminations, and customer acquisition costs incurred to replace recurring monthly revenue attrition to the opening pool of customers. Non-maintenance capital expenditures are not recorded as a reduction from distributable cash as these expenditures are intended to be funded from either cash on hand or through the Fund's committed growth credit facility that is available for expansion, investments and acquisitions.

Distributable cash for the three and nine months ended September 30, 2005 and 2004 has been calculated and reconciled to cash from operating activities of the Fund as determined under GAAP as follows:



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Three months ended Nine months ended
September 30, September 30,
(In thousands of dollars, ----------------------------------------
except per unit data) 2005 2004 2005 2004
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Cash from operating
activities $ 25,662 $ 19,846 $ 70,227 $ 68,775

Adjustments:
Operating cash flow from
finance contracts related
to Fund sales 1,397 1,810 2,168 2,610
Change in non-cash operating
working capital 2,677 3,754 5,307 2,048
Change in warranty liability (430) 54 56 1,094
Maintenance capital
expenditures(1) (13,948) (11,142) (38,242) (33,960)
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Distributable cash $ 15,358 $ 14,322 $ 39,516 $ 40,567
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Total distributions declared $ 11,077 $ 8,820 $ 29,758 $ 26,464
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Distributable cash generated
per unit - basic and diluted $ 0.32 $ 0.35 $ 0.90 $ 0.98
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Distributions declared
per unit - basic and diluted $ 0.23 $ 0.21 $ 0.68 $ 0.64
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(1) Total capital expenditures for the three and nine months ended
September 30, 2005 were $18.1 million and $49.8 million,
respectively. The corresponding amounts for the three and nine
months ended September 30, 2004 were $15.0 million and $43.6
million, respectively.
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Distributable cash of $15.4 million and $39.5 million for the three and nine months ended September 30, 2005 compares to distributable cash of $14.3 million and $40.6 million for the corresponding periods a year prior. The $1.1 million increase in the current quarter from the third quarter of 2004 generally reflects higher operating cash generated from earnings activities, reduced by increased maintenance capital of $2.8 million, resulting primarily from a higher number of units replaced and compliance with recently implemented flammable-vapour regulations in the Water Heater and HVAC business as well as maintenance capital costs of $1.4 million incurred by the Security business. The $1.1 million year-to-date decrease from the nine months ended September 30, 2004 generally reflects higher operating cash generated from earnings activities, reduced by increased maintenance capital of $4.2 million, primarily resulting from a higher number of units replaced and compliance with recently implemented flammable-vapour regulations in the Water Heater and HVAC business in addition to maintenance capital of $1.4 million incurred by the Security business.

The Fund increased cash distributions to a monthly amount of $0.075 per unit (equivalent to $0.90 per unit on an annualized basis) as of January 2005. Cash distributions in 2004 were based on an annualized amount of $0.85 per unit, as disclosed in the prospectus for the Fund's initial public offering in December 2003. Total cash distributions increased in August, as a result of the new Fund units issued July 15, 2005.

The amount of earnings realized in the quarter is in excess of the cash distribution amount pertaining to unitholder distributions and the amounts determined by management to be adequate to service interest on the outstanding long-term debt of the Fund. Adjusted EBITDA (as defined in the Supplemental Trust Indentures) was 7.2 times Net Interest Expense for the nine months ended September 30, 2005, significantly in excess of the requirement of 3.0 times Net Interest Expense under the Supplemental Trust Indenture pursuant to which the Series 1 and Series 2 Senior Secured Notes were issued.

Summary of quarterly results

The following is a summary of selected financial information derived from the Fund's unaudited interim consolidated financial statements for each of the eight most recently completed quarters. Financial information for 2003 includes the results of operations of the business for the period prior to the initial issuance of units and acquisition on December 19, 2003, and as such, does not reflect net income per Fund unit:



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(In thousands of dollars, Third Second First Fourth
except per unit data) Quarter Quarter Quarter Quarter
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2005 2005 2005 2004
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Total revenue $ 71,981 $ 57,210 $ 56,250 $ 55,742
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Net income $ 13,106 $ 10,632 $ 10,030 $ 7,500
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Net income per Fund unit
- basic and diluted $ 0.27 $ 0.26 $ 0.24 $ 0.18
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(In thousands of dollars, Third Second First Fourth
except per unit data) Quarter Quarter Quarter Quarter
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2004 2004 2004 2003
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Total revenue $ 56,124 $ 54,381 $ 54,262 $ 51,793
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Net income $ 11,715 $ 10,382 $ 3,510 $(27,197)
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Net income per Fund unit
- basic and diluted $ 0.28 $ 0.25 $ 0.09 N/A
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The third quarter of 2005 reflects increasing Waterheater and HVAC segment revenue and the acquired Security segment revenues. Total revenue changes for successive quarters are primarily a result of rental portfolio growth, rental price increases, and changes in the HVAC business. HVAC revenue changes are primarily the result of the Fund continuing to leverage cross-selling opportunities to its rental customers, as well as the seasonal fluctuations inherent in the HVAC business. The increase in the third quarter of 2005 reflects the inclusion of the Security segment since acquisition on July 15, 2005.

Successive increases in net income for the 2005 quarters and as compared to the same quarters in 2004 reflect higher operating income. A reduction in net income per Fund unit in the third quarter as compared to the third quarter of 2004 resulted from the issuance of additional units during the period. Changes in net income from quarter to quarter in 2004 were primarily due to increases in operating income for the first three periods and reduced operating income in the fourth quarter resulting from increased one-year deferred consumer financing contracts related to HVAC sales and increased expenses related to marketing and customer growth in the Comfort Protection Plan business. Changes in net income as compared to the fourth quarter of 2003 resulted primarily from improved operating performance and changes in income taxes, interest, and mark-to-market valuation of interest rate contracts resulting from the Fund's restructuring in 2003.

RESULTS OF OPERATIONS - WATER HEATER AND HVAC SEGMENT

The following table presents selected unaudited financial information for the three and nine months ended September 30, 2005 and 2004:



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(in thousands of dollars) Three months ended Nine months ended
September 30, September 30,
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2005 2004 2005 2004
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Revenues:
Rental $ 45,949 $ 44,594 $ 136,294 $ 130,713
Sales, services and other 10,313 9,068 28,173 26,811
Finance 2,779 2,462 8,034 7,243
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Total revenues 59,041 56,124 172,501 164,767
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Cost of sales, general
and administration expenses 27,212 24,290 80,998 73,930
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Depreciation and amortization 15,098 15,214 44,745 45,415
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Operating income $ 16,731 $ 16,620 $ 46,758 $ 45,422
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Results for the quarter are in line with management's expectations and reflect the current period investments in marketing on brand and customer base growth as the Water Heater and HVAC segment grows its Comfort Protection Plan business, the benefits of which will be realized in future periods. Customer growth base costs reflect primarily telemarketing expenditures incurred by the segment as it continues to drive strong growth in its Comfort Protection Plan business. Increased marketing costs reflect expenditures related to researching, developing, and implementing a new brand, as the rights to use the Union Energy and the Ontario Hydro Energy brands expire in 2008 and 2007, respectively. The Fund has begun the process of introducing the brand name "Reliance Home Comfort" market by market, as announced at the Fund's recent annual general and special meetings held in June 2005. A staggered implementation approach allows the Fund to better understand the impact of the move to a new name and also allows the Fund to effectively manage the transition.

Revenues

Water Heater and HVAC segment rental revenues increased by 3% and 4%, respectively, for the three and nine months ended September 30, 2005 when compared to the corresponding periods a year prior, reflecting rental price increases, rental pool growth, and changes in product mix.

Sales, service and other revenue was $10.3 million and $28.2 million for the three and nine months ended September 30, 2005, respectively. Sales, service and other revenue was $9.1 million and $26.8 million, respectively, for the comparable periods in 2004. The Fund continues to leverage cross-selling opportunities to its base of approximately one million customers. Higher revenues from Comfort Protection Plans accounted for most of the revenue growth in the third quarter as compared to the third quarter of 2004. The increase in year-to-date sales, service and other revenues reflects growth in the Fund's Comfort Protection Plan business, offset by lower revenues in other product lines as compared to the particularly strong sales in 2004, especially in the first quarter.

Finance revenue was $2.8 million and $8.0 million for the three and nine months ended September 30, 2005, respectively, compared to $2.5 million and $7.2 million, respectively, for the comparable periods in 2004. Revenues fluctuate primarily with the balance of finance contracts outstanding.

Cost of Sales, General and Administration Expenses

Cost of sales, general and administration expenses in the Water Heater and HVAC segment for the quarter ended September 30, 2005 increased by $2.9 million or 12%, from $24.3 million for the same period in 2004. For the nine months ended September 30, 2005, cost of sales, general and administrative expenses of $81.0 million was $7.1 million higher than the nine-month period a year prior. The increases in 2005 over 2004 reflect primarily higher marketing costs relating to branding initiatives and customer acquisition costs pertaining to growing the Fund's Comfort Protection Plan business.

Depreciation and Amortization

Depreciation and amortization in the Water Heater and HVAC segment were $15.1 million for the quarter and $44.7 million for the nine months ended September 30, 2005, almost no change for the quarter and a decrease of $0.7 million for the nine months when compared to the same periods in 2004. The changes from period to period reflect a growing rental portfolio, as well as leasing, rather than owning non-rental assets, including vehicles and computer hardware.

Portfolio of Rental Assets

For the three and nine months ended September 30, 2005, the portfolio of Water Heater and HVAC rental assets grew by 9,637 and 15,537 net units, respectively, bringing the number of installed units to 1,074,860. In the third quarter of 2005, $8.4 million was spent to replace 14,246 rental units that had reached the end of their useful life and $8.9 million was spent on 15,085 additional rental units. Comparable figures for the third quarter in 2004 were 3,547 net additions, with the addition of 9,349 units at a cost of $7.9 million and 13,247 replacement units at a capital cost of $7.1 million. In the nine months ended September 30, 2005, $27.5 million was spent to replace 48,202 water heaters that had reached the end of their useful life and $21.8 million was spent on 32,312 additional units. For the nine months ended September 30, 2004, 6,065 net units had been added, with 24,863 new units at a cost of $19.9 million and 45,011 replacement units at a capital cost of $23.6 million. Included in the current quarter numbers was the acquisition of a portfolio of 5,500 installed water heaters for $1.5 million.

Installed units - Waterheater and HVAC Rental

The following table breaks out the changes in the installed units for the three and nine months ended September 30, 2005 compared to the corresponding periods in 2004:



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(in thousands) Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
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Beginning units 1,065 1,052 1,059 1,049
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Retirements (14) (13) (48) (45)
Replacements 14 13 48 45
Buyouts and terminations (5) (6) (16) (19)
Additions 15 9 32 25
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Net change 10 3 16 6
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Ending units 1,075 1,055 1,075 1,055
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Outlook

The outlook for the Water Heater and HVAC segment remains strong. Management expects rental revenues to continue to increase due to rental pool growth, and that investments in customer acquisition will lead to higher sales, service and other revenues.

RESULTS OF OPERATIONS - SECURITY SEGMENT

The following table presents selected unaudited financial information for the three months ended September 30, 2005 (operating results from July 15, 2005, the date the segment was acquired):



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(in thousands of dollars) Three months ended September 30,
2005(1)
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Revenues:
Monitoring $ 9,936
Sales, service and other 3,004
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Total revenues 12,940
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Cost of sales, general and administration 8,764
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Depreciation and amortization 2,753
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Operating income $ 1,423
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Total Number of Customers 178,800
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Recurring Monthly Revenue ("RMR") - end of period $ 3,920
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Annualized Net RMR Attrition Rate - Monitoring Accounts 8.84%
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(1) Operating results from July 15, 2005, the date the segment was
acquired.
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Recurring Monthly Revenue

Recurring monthly revenue ("RMR") is revenue in the Security segment that includes monitoring, leasing, service, supervised lines and patrol contracts in effect during that period. RMR provides a measure that can be used to estimate annualized revenue at current levels of activity and management believes it is a key measure that can be used to evaluate performance, results of operations and cash flows. The Fund's calculation of RMR may differ from similar calculations as reported by other entities and, accordingly, may not be comparable to RMR as reported by such entities. RMR should not be viewed or used by investors as an alternative to cash flow from operations or actual monthly revenues as determined under GAAP.

Net RMR Attrition Rate

RMR attrition is calculated based on the RMR lost due to customer cancellations reduced by reconnections of existing systems, existing customers moving to new homes and recoveries through cancellation guarantees provided by dealers and acquisition account vendors. Management believes this measure is useful when expressed as an annualized percentage of total RMR at the beginning of a specified period. RMR attrition may differ from similar calculations as reported by other entities and, accordingly, may not be comparable to RMR attrition as reported by such entities.

Revenues

Monitoring and service revenue of $12.9 million for the three months ended September 30, 2005 is consistent with expectations. During the period July 15, 2005 to September 30, 2005, the Fund increased its total number of customers by approximately 2,400 and its RMR by 1% from $3,873 to $3,920.

Cost of Sales, General and Administration Expenses

Cost of sales, general and administration expenses are consistent with expectations and reflect costs associated with monitoring and the installation of commercial customer installations.

Depreciation and Amortization

Depreciation and amortization of $2.8 million for the three months ended September 30, 2005 (results from July 15, 2005, the date the segment was acquired) reflects depreciation of security systems installed in customers' homes and corporate assets, and amortization of intangible assets, including customer relationships.

On July 15, 2005, the Fund purchased 100% of Protectron Holdings Inc. for approximately $137.9 million including acquisition costs. The results for the current quarter reflect the initial allocation of the purchase price to the fair values of the assets and liabilities required by the Fund.

The purchase price allocation has not yet been completed pending finalization of the valuation of the net identifiable assets acquired, including intangible assets, property, plant and equipment, certain accrued liabilities relating to employee costs and customer service costs, and unearned revenue.

Any adjustments resulting from the purchase price allocation finalization will be accounted for retroactively to July 15, 2005 and will not affect distributable cash.

Outlook

Prior to the Fund's acquisition of the business, this segment was increasing both revenues and income through acquisitions and new sales. Management expects this to continue, and in addition, intends to leverage its relationship with existing Water Heater and HVAC customers over time in Ontario to increase Security sales.

LIQUIDITY AND CAPITAL RESOURCES

For the quarter ended September 30, 2005, cash generated from operating activities was $25.7 million compared to $19.9 million for the same period in 2004. The operating cash flow for the current quarter reflects the Fund's strong operating results and changes in non-cash operating working capital. Semi-annual interest payments on the senior secured notes and net payments on the related interest rate contracts totaled $10.4 million during the current quarter, compared to $10.5 million paid in the same quarter in 2004.

For the nine months ended September 30, 2005, cash generated from operating activities was $70.2 million compared to $68.8 million a year prior. The 2005 period reflects the payment of $17.7 million of interest on the senior secured notes and $3.2 million for the related interest rate contracts, net of the interest and other accruals since the period of last payment. The 2004 period reflects collection of receivables and payment of significant accounts payable and accrued liabilities. For the nine months ended September 30, 2004, $8.4 million interest was paid on the senior secured notes, and $1.6 million was paid on the related interest rate contracts.

Cash provided in financing activities for the quarter and nine months ended September 30, 2005 was $125.8 million and $107.3 million, respectively, compared to cash used of $8.8 million and $24.8 million for the corresponding periods in 2004. On July 15, 2005, the Fund raised $98.6 million through a subscription receipts offering and the subsequent issuance of 7,720,000 units. In addition, the Fund obtained $38.2 million short-term debt to fund the Security segment acquisition. For the quarter ended September 30, 2005, the Fund declared distributions of $11.1 million and paid $10.5 million. For the nine months ended September 30, 2005, the Fund declared distributions of $29.8 million and paid $29.0 million. During the three and nine months ended September 30, 2004, the Fund declared distributions of $8.8 million and $26.5 million and paid $8.8 million and $24.8 million to unitholders, respectively.

On September 17, 2005, the Fund declared a distribution to unitholders of record on September 30, 2005 in the amount of $0.075 per unit, which will be paid on October 31, 2005, for a total payment of $3.7 million.

On February 10, 2004, UE Waterheater Operating Trust (the "Trust"), a wholly owned subsidiary of the Fund, issued $400 million of Series 1 and Series 2 Senior Secured Notes which were both given a rating of A from Standard & Poor's and AA (low) from Dominion Bond Rating Service. The proceeds of this issue were used to retire the bank credit facility that was drawn upon when the business was acquired from EPCOR Utilities Inc. on December 19, 2003.

The following table summarizes expected and actual proceeds from the subscription receipts offering and debt financing during the quarter ended September 30, 2005, and the expected and actual application of those proceeds:



---------------------------------------------------------------------
Expected and
actual
Nature of Expected and application
offering: actual proceeds of proceeds:
---------------------------------------------------------------------
July 15, Issuance of $105 million Acquisition
2005 7,720,000 Fund (gross); $98.6 of
units in relation million (net of Protectron
to subscription offering
receipts offering costs)
---------------------------------------------------------------------

July 15, Short-term $38.3 million Acquisition
2005 revolving of
credit facility Protectron
---------------------------------------------------------------------


In the subscription receipt offering and debt financing, the Fund achieved the expected proceeds and applied them as expected, purchasing 100% of the common shares of Protectron Holdings Inc. for approximately $137.9 million.

As at September 30, 2005, the Fund had the following credit facilities: a fully utilized $38.3 million secured revolving loan facility maturing on July 14, 2006; an unused $30.0 million secured revolving demand loan facility maturing on July 14, 2006; and a $10.0 million secured revolving demand loan facility, of which $0.75 million was utilized by way of an irrevocable standby letter of credit to guarantee the contract performance of a subsidiary. The letter of credit matures September 27, 2006, and is extendable automatically for one year. The facilities are with Canadian chartered banks.

Cash used in investing activities for the three and nine months ended September 30, 2005 was $158.3 million and $188.6 million, respectively, compared to $15.0 million and $41.7 million for the three and nine months ended September 30, 2004, respectively. Included in the 2005 three- and nine-month periods is $137.9 million used to acquire 100% of the outstanding equity of Protectron Holdings Inc. For the three and nine months ended September 30, 2005, $18.1 million and $49.8 million were used for the purchase of property, plant and equipment compared to $15.0 million and $43.6 million for the corresponding periods in 2004. Included in capital expenditures during the current quarter and year-to-date total are $0.4 million and $1.3 million related to compliance with new flammable-vapour regulations that became effective in late 2004 and are being phased in over the next two years. Finance contracts with customers of independent dealers used $1.1 million for both of the three and nine months ending September 30, 2005. Finance contracts with customers of independent dealers used $0.6 million in the third quarter of 2004, and provided cash of $0.2 million for the nine months ended September 30, 2004. Proceeds from the sale of property, plant and equipment were $0.6 million and $2.0 million for the three and nine months ended September 30, 2005, and $0.6 million and $1.6 million for the corresponding periods in 2004.

Summary of contractual obligations

Contractual obligations are substantially the same as those reported in management's discussion and analysis for the year ended December 31, 2004, except that the Fund has extended the lease for its head office premises beyond its December 31, 2006 term to 2016.

Refinancing of Senior Secured Notes

The Fund expects to refinance the outstanding Series 1 and Series 2 Senior Secured Notes on the expected final payment date for each series (being January 30, 2009 and January 31, 2011). A failure to refinance any series of senior secured notes on its Expected Final Payment Date would give rise to a Cash Sweep Remedy. A Cash Sweep Remedy essentially would preclude the Fund from making distributions and other expenditures (including capital expenditures other than for the replacement of existing water heaters) until the secured notes are paid in full. The maturity dates of the Series 1 and series 2 Senior Secured Notes are January 30, 2016 and January 31, 2018, respectively. Based on current market conditions, the Fund believes that it will be able to arrange such refinancing. However, no assurances can be given with respect to future market conditions.

INTERCOMPANY AND RELATED PARTY TRANSACTIONS

For the quarter ended September 30, 2005 and for the corresponding period in 2004, the Fund had no transactions with related parties.

DEFERRED UNIT PLAN

Effective June 14, 2005, the Fund unitholders approved a deferred unit compensation plan (the ''Deferred Unit Plan''). The Deferred Unit Plan provides for the grant to non-management trustees and directors of deferred Fund units (''Deferred Units'').

The Deferred Unit Plan provides that once a Deferred Unitholder ceases to be a trustee or a director, he or she will be entitled to receive a number of units equal to the number of Deferred Units held at the time of retirement.

Additional Deferred Units are granted to holders of Deferred Units based on distributions paid by the Fund on units. The number of Deferred Units granted is calculated by multiplying the aggregate number of Deferred Units held on the record date for a distribution by the amount of such distribution paid by the Fund on one unit and dividing the result by the market price of a unit on the date the distribution is paid.

For the nine months ended September 30, 2005, the Fund granted 3,535 Deferred Units and recorded approximately $48 thousand of compensation expense. No compensation expense relating to Deferred Units was recorded in 2004. The Fund records unit-related compensation expense in the consolidated statement of income using the fair value method.

UNITHOLDERS' RIGHTS PLAN

On February 23, 2005, the Fund approved and adopted a Unitholders' Rights Plan (the "Rights Plan"). The Rights Plan became effective on February 23, 2005. At the close of business on February 23, 2005, one right (a "Right") was issued and attached to each Fund unit outstanding, and will be issued and attached to each Fund unit subsequently issued.

The primary objectives of the Rights Plan are to provide sufficient time to explore and develop alternatives for maximizing unitholder value if a take-over bid is made for Fund units and to provide every unitholder with an equal opportunity to participate in such a bid.

The Rights Plan is similar to many other rights plans adopted by Canadian public issuers. The Rights are exercisable only after a person has acquired, or commences or announces a take-over bid to acquire 20% or more of the units, other than pursuant to a permitted bid (described below) or with the approval of the Board of Directors. Upon the acquisition by any person, or group of persons acting in concert (an "Acquiring Person"), of 20% or more of the units, other than by way of a permitted bid, each Right (other than those held by the Acquiring Person or related party) will permit the holder of the Right to purchase units having a fair market value of $100 for $50.

Under the Rights Plan, in order to qualify as a permitted bid ("Permitted Bid") a bid must: (i) be made by way of a take-over bid circular to all registered unitholders; (ii) be open for acceptance for a minimum period of 60 days; (iii) prohibit the bidder from taking up any units tendered pursuant to the take-over bid prior to the expiry of a 60- day period and then only if at such time more than 50% of the units held by unitholders, other than the bidder, have been tendered to the take-over bid and not withdrawn; and (iv) require the bidder if more than 50% of the units held by independent unitholders (as defined in the Rights Plan) are tendered to the take-over bid within the 60 day period, to make a public announcement of that fact and keep the take-over bid open for acceptance for at least 10 business days from the date of such public announcement.

ACCOUNTING POLICIES

INITIAL ADOPTION OF ACCOUNTING POLICIES

Unit-Based Compensation

On June 14, 2005, the Fund unitholders approved and implemented a deferred unit compensation plan (the "Deferred Unit Plan") providing for the grant to non-management trustees and directors of deferred Fund units ("Deferred Units") as described in the prior section "Deferred Unit Plan".

The Fund also has established a long-term incentive plan for certain senior executives. Payments under the incentive plan may be made in cash, units, or a combination of cash and units, at the option of the Fund. For the three and nine months ended September 30, 2005, no units were issued pursuant to the long-term incentive plan.

Under CICA Handbook Section 3870, Stock-based Compensation and Other Stock-Based Payments, Deferred Units and units granted under these plans are accounted for using the fair value-based method. The fair value of Deferred Units granted for annual director fees is recorded as compensation expense in the period granted. The fair value of Deferred Units granted in lieu of cash distributions is recorded as compensation expense in the period the distribution is declared. The fair value of units granted under the long-term incentive plan is recorded as compensation expense over the vesting period.

Vendor Rebates

EIC 144 Abstract, Accounting by a Purchaser for a Vendor Rebate, was amended to address when a customer should recognize and how a customer should measure a rebate. The abstract is effective for annual and interim periods commencing on or after February 15, 2005 and states that discretionary rebates should be recognized by a customer when paid by the vendor or when the vendor becomes obligated to pay. Where there is a binding agreement that requires the vendor to pay a rebate provided the customer completes a specified cumulative level of purchases or remains a customer for a specified period of time, the rebate should be recognized as a reduction of the cost of purchases for the period, provided the rebate is probable and reasonably estimable. The customer should measure the rebate based on the estimated amount of the rebate that is expected to be received for the underlying transactions that have occurred and that result in progress by the customer toward achieving the specified requirement to receive the rebate. There was an insignificant effect on net income from the date of adoption, April 1, 2005.

Revenue Recognition on Sale and Installation of Monitoring Products and Services

Revenues from installation of monitoring products and the related monitoring services provided to residential customers are accounted for as one unit of accounting. Installation revenues are deferred and amortized into rental and security monitoring revenue income on a straight-line basis at 10% per annum, the estimated life of the residential customer relationship. Monitoring revenues are reflected in income as services are provided.

Revenues generated from commercial installations and monitoring services are recognized in the period in which the sale is completed or the service is provided and collectability is reasonably assured.

Customers are billed for monitoring and maintenance services primarily on a monthly, quarterly or annual basis in advance of the period in which such services are provided. Contracts for monitoring services are generally for an initial non-cancelable term of three to five years with automatic renewal on an annual basis thereafter, unless terminated by either party. When customers are invoiced, the portion of unearned revenue is recorded as unearned revenue.

Deferred Costs Related to Customer Accounts

Internally generated customer accounts

Residential subscriber accounts are recorded at cost and include the direct and incremental costs incurred in originating contracts, installing equipment and activating monitoring services. All direct installation costs that result in deferred revenue, including materials and labour are capitalized to the extent such costs do not exceed the total of the deferred installation revenue and expected margin from monitoring services during the initial monitoring contract term. Capitalized residential customer costs, to the extent of deferred revenues, are amortized on a straight-line basis at a rate of 10% per annum, the estimated life of the customer relationship.

At the outset of the contract, to the extent that deferred customer costs exceed the total of deferred installation revenue and the expected margin from monitoring services during the initial monitoring contract term; the excess is expensed in the period in which the installation is completed.

When capitalized residential customer costs are in excess of deferred installation revenues, but less than the expected margin from monitoring services during the initial monitoring contract term, then the excess is amortized on a straight-line basis over the initial term of the monitoring contract, generally three to five years.

At each reporting period, the recoverability of the net deferred residential customer costs is compared to the total remaining deferred installation revenue and the expected margin from monitoring services during the remaining monitoring contract term. If the evaluation indicates that the carrying value is not recoverable from future estimated net undiscounted cash flows, then an impairment loss is recognized as a period cost.

Acquired customer accounts

Customer accounts acquired from dealers are recorded at cost. The costs of acquiring these accounts are capitalized and amortized on a straight-line basis at the rate of 10% per annum.

At each reporting period, the recoverability of the capitalized costs, net of accumulated amortization, is compared to the expected margin from monitoring services during the remaining monitoring contract term. If the evaluation indicates that the carrying value is not recoverable from future estimated net undiscounted cash flows, then an impairment loss is recognized as a period cost.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods. These estimates are based on our historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported amounts of revenues, expenses, assets and liabilities that are not readily apparent from other sources. The critical accounting estimates for the Fund are the estimated useful lives of rental assets and the allowance for doubtful accounts.

Estimated useful lives of rental assets

The estimated useful lives of the assets have a direct impact on the amount of the amortization expense. There is measurement uncertainty with respect to the remaining useful life of the installed rental assets; however, the method is supported by amortization studies. Management conducts comprehensive amortization studies on a periodic basis to ensure that the amortization expense is an accurate measurement of the cost of amortization for each asset category and to update the service lives and the resulting amortization rates.

A study completed in September 2003 reported on the leased water heaters and rental appliances acquired prior to November 2001. As a result of the September 2003 report, the effective amortization rates were revised and the change has been accounted for prospectively. No study has been completed on electric water heaters and, accordingly, new electric water heaters are being amortized based on estimates of useful life provided by manufacturers. With respect to the electric water heaters acquired from Hydro One Inc., the Fund is amortizing the cost attributed to these water heaters over the remaining useful lives based on data provided by Hydro One Inc. on the age of the water heaters acquired.

Allowance for doubtful accounts

The allowance for doubtful accounts is evaluated and established based on historical patterns of collections and economic conditions. Adequacy of the provision is assessed on a periodic basis.

Estimated attrition rate of security customers

The estimated attrition rate of the security customers has a direct impact on the amortization of deferred revenue into income as well as the amortization of deferred customer accounts into amortization expense.

The historical average annual customer attrition rate experienced prior to the acquisition of the security segment by the Fund was 8.5%. Customer attrition varies over time and results from relocation of customers, customers' inability or unwillingness to pay, competition and adverse financial or economic conditions among other factors.

FUTURE CHANGES IN ACCOUNTING STANDARDS

The Fund reviews all revisions to the Canadian Institute of Chartered Accountants ("CICA") Handbook when issued.

The following is a discussion of relevant Handbook revisions that were released, revised or became effective since the Fund's financial statements for the year ended December 31, 2004 were issued.

Handbook Section 3840, Related Party Transactions, replaces references to "culmination of the earnings process" with "commercial substance" as a result of issuing new Section 3831, Non-monetary Transactions. A non-monetary transaction has commercial substance when the entity's future cash flows are expected to change significantly as a result of the transaction. Based on our review, we do not expect a material effect on the Fund's financial statements when we adopt the new standard no later than January 1, 2006.

Handbook Section 1530, Comprehensive Income, requires presenting comprehensive income and its components (defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources) in financial statements as well as net income. Based on our review, we do not expect a material effect on the Fund's financial statements when we adopt the new standard no later than January 1, 2007.

Handbook Section 3855, Financial Instruments - Recognition and Measurement, establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. It provides standards for the classification of financial instruments, related interest, dividends, losses and gains, the circumstances in which financial assets and financial liabilities are offset, and disclosures about financial instruments and non-financial derivatives. Based on our review, we do not expect a material effect on the Fund's financial statements when we adopt the new standard no later than January 1, 2007.

Handbook Section 3865, Hedges, establishes standards for when and how hedge accounting may be applied, ensuring that counterbalancing gains, losses, revenues and expenses are recognized in net income in the same period or periods. Based on our review, we do not expect a material effect on the Fund's financial statements when we adopt the new standard no later than January 1, 2007.

Handbook Section 3051, Investments, establishes standards for accounting for investments subject to significant influence and for measuring and disclosing certain other non-financial instrument investments. Based on our review, we do not expect a material effect on the Fund's financial statements when we adopt the new standard no later than January 1, 2007.

Handbook Section 3251, Equity, replaces Handbook Section 3250, Surplus, and establishes standards for the presentation of equity and changes in equity during the reporting period. Based on our review, we do not expect a material effect on the Fund's financial statements when we adopt the new standard no later than January 1, 2007.

Handbook Section 3861, Financial Instruments - Disclosure and Presentation, replaces Handbook Section 3860, Financial Instruments - Disclosure and Presentation, and establishes standards for presentation of financial instruments and non-financial derivatives, and identifies information that should be disclosed. Based on our review, we do not expect a material effect on the Fund's financial statements when we adopt the new standard no later than January 1, 2007.

RISKS AND UNCERTAINTIES

Risks and uncertainties related to economic and industry factors and the structure of the Fund are discussed in detail in the 2004 annual MD&A, as well as the 2005 second quarter MD&A.

2005 OUTLOOK

The outlook for the Fund and its underlying businesses is positive and stable for 2005. The Fund has seen strong revenues during the third quarter and should continue to deliver strong performance through 2005, providing a reliable stream of stable cash flow to support cash distributions to unitholders.

Management believes that the ongoing cash flow from operations and credit facilities will be sufficient to allow it to meet ongoing requirements for capital expenditures, investments in working capital, interest expense and cash distributions. The Fund's actual cash flow will be dependent upon its future financial performance, which in turn will be subject to financial, tax, business and other factors, including elements beyond the Fund's control.



Attachments:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Cash Flows


UE WATERHEATER INCOME FUND
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
September 30, 2005 December 31, 2004
---------------------------------------------------------------------

Assets

Current assets:

Cash and cash equivalents $ 11,594 $ 22,693
Accounts receivable 24,740 19,151
Inventories 5,671 4,053
Prepaid expenses 1,676 1,928
Current portion of finance contracts
(Note 4) 15,591 14,840
--------------------------------------------------------------------
59,272 62,665

Property, plant and equipment 429,304 405,354
Finance contracts (Note 4) 57,869 55,372
Intangible assets and deferred
charges (Note 5) 303,591 203,296
Goodwill 148,368 119,640
---------------------------------------------------------------------

$ 998,404 $ 846,327
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities and Equity

Current liabilities:

Accounts payable and accrued
liabilities $ 32,764 $ 31,459
Distribution payable to unitholders 3,692 2,940
Unearned revenue 18,649 8,352
Short-term debt (Note 6) 38,241 -
--------------------------------------------------------------------
93,346 42,751

Long-term liabilities:

Senior notes payable (Note 7) 400,000 400,000
Interest rate contracts (Note 8) 12,769 15,586
Deferred revenue 1,318 -
Warranty liability 916 971
Other long-term debt 459 -
Accrued pension liability 1,412 1,524
Employee future benefit liability 1,859 1,873
---------------------------------------------------------------------
418,733 419,954

Equity (Note 9) 486,325 383,622
---------------------------------------------------------------------
$ 998,404 $ 846,327
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to interim consolidated financial statements.


UE WATERHEATER INCOME FUND
Consolidated Statements of Income
(In thousands of dollars, except per unit data)
(Unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Revenue:
Rental and security
monitoring $ 55,885 $ 44,594 $ 146,230 $ 130,713
Sales, service and other 13,317 9,068 31,177 26,811
Finance 2,779 2,462 8,034 7,243
--------------------------------------------------------------------
71,981 56,124 185,441 164,767
---------------------------------------------------------------------

Expenses:
Cost of sales, general and
administration 35,976 24,290 89,762 73,930
Depreciation of property,
plant and equipment 13,428 12,894 38,436 38,456
Amortization of intangible
assets 4,422 2,320 9,061 6,959
---------------------------------------------------------------------
53,826 39,504 137,259 119,345
---------------------------------------------------------------------

Operating income 18,155 16,620 48,182 45,422

Mark-to-market (gain) loss
on valuation of interest
rate contracts (15) 263 366 5,538
Interest:
Long-term debt 4,498 4,439 13,292 11,338
Other 319 (100) 65 2,028
---------------------------------------------------------------------

Income before income taxes 13,353 12,018 34,459 26,518

Income taxes:
Current 247 303 691 911
---------------------------------------------------------------------
Net income $ 13,106 $ 11,715 $ 33,768 $ 25,607
---------------------------------------------------------------------
---------------------------------------------------------------------

Net income per Fund unit
(Note 10)

Basic $ 0.27 $ 0.28 $ 0.77 $ 0.62
Diluted $ 0.27 $ 0.28 $ 0.77 $ 0.62

See accompanying notes to interim consolidated financial statements.


UE WATERHEATER INCOME FUND
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Cash provided by (used in):

Operating activities:
Net income $ 13,106 $ 11,715 $ 33,768 $ 25,607
Adjustments and other items
not involving cash:
Depreciation and
amortization 17,850 15,214 47,497 45,415
Amortization of deferred
financing costs 118 - 118 -
Gain on disposal of property,
plant and equipment (164) (130) (731) (391)
Unit-based compensation 48 - 48 -
Difference between pension
and other employee
benefits expense and funding (72) (6) (126) (51)
Mark-to-market valuation of
interest rate contracts (15) 263 366 5,538
Payments on interest rate
contracts, net (1,565) (1,592) (3,182) (1,592)
Warranty liability 430 (54) (56) (1,093)
Finance contracts related
to Fund sales (Note 4) (1,397) (1,810) (2,168) (2,610)
Change in non-cash operating
working capital (Note 13(a)) (2,677) (3,754) (5,307) (2,048)
---------------------------------------------------------------------
25,662 19,846 70,227 68,775
---------------------------------------------------------------------

Financing activities:
Distributions to unitholders (10,498) (8,820) (29,006) (24,780)
Proceeds from short-term debt,
net of repayments 38,241 - 38,241 -
Deferred financing costs (568) - (568) -
Proceeds from issuance of
subscription receipts 98,645 - 98,645 -
Repayment of bank loan - - - (400,000)
Proceeds from senior
secured notes - - - 400,000
---------------------------------------------------------------------
125,820 (8,820) 107,312 (24,780)
---------------------------------------------------------------------

Investing activities:
Purchase of property, plant
and equipment (18,066) (15,047) (49,762) (43,541)
Deferred revenue 1,318 - 1,318 -
Customer accounts (3,267) - (3,267) -
Proceeds from sale of property,
plant and equipment 586 593 1,972 1,633
Purchase of business, net
of cash acquired (Note 11) (137,864) - (137,864) -
Other long-term liabilities,
net 45 - 45 -
Finance contracts related to
independent dealers (Note 4) (1,087) (571) (1,080) 241
---------------------------------------------------------------------
(158,335) (15,025) (188,638) (41,667)
---------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (6,853) (3,999) (11,099) 2,328
Cash and cash equivalents,
beginning of period 18,447 26,748 22,693 20,421
---------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 11,594 $ 22,749 $ 11,594 $ 22,749
---------------------------------------------------------------------
---------------------------------------------------------------------
Supplemental cash flow
information (Note 13(b))

See accompanying notes to interim consolidated financial statements.

UE WATERHEATER INCOME FUND
Notes to Interim Consolidated Financial Statements
(Unaudited)
September 30, 2005
(In thousands of dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------


1. Nature of operations:

The UE Waterheater Income Fund (the "Fund") is an unincorporated, open-ended trust governed by the laws of the Province of Ontario.

The principal business of the Fund is integrated and consists of water heater rentals, sales, rental and service of heating, ventilation and air-conditioning ("HVAC") equipment and its related financing to customers within, but not limited to, Ontario. In addition, the Fund provides electronic security monitoring and installation to residential and commercial customers across Canada.

2. Basis of presentation and accounting policies:

The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the year ended December 31, 2004, with the exception of policies adopted with respect to the acquisition of Protectron Holdings Inc. and those relevant to unit-based compensation as disclosed in Note 3(b), but do not contain all disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles. Accordingly, the interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in the Fund's annual report for the year ended December 31, 2004.

The consolidated financial statements of the Fund include the accounts of the Fund and its wholly owned subsidiaries: UE Waterheater Operating Trust (the "Trust"), Union Energy Limited Partnership, 4211782 Canada Inc. (formerly Union Energy Inc.), 2035881 Ontario Inc., WestCap Trust, 4202201 Canada Inc., GP Waterheater Trust, Protectron Inc., 6411398 Canada Inc., 6415741 Canada Inc., Protectron Limited Partnership ("Protectron") and GP Protectron Trust.

Certain comparative figures have been reclassified to conform to the financial presentation adopted in the current period.

3. Significant accounting policies:

The following accounting policies and changes in policies have been adopted in the current year:

a) Earnings per unit

Basic earnings per unit are calculated by dividing the net earnings available to unitholders by the weighted average number of Fund units outstanding. Diluted earnings per unit reflect the potential dilution that would occur if units were issued in exchange for any outstanding Deferred Units, as described in Note 12.

b) Unit-based compensation

On June 14, 2005, the Fund approved and implemented a deferred unit compensation plan (the "Deferred Unit Plan") providing for the grant to non-management trustees and directors of deferred Fund units ("Deferred Units").

The Fund also has established a long-term incentive plan for certain senior executives. Payments under the incentive plan may be made in cash, units, or a combination of cash and units, at the option of the Fund. For the three and nine months ended September 30, 2005, no units were issued pursuant to the long-term incentive plan.

Under CICA Handbook Section 3870, Stock-based Compensation and Other Stock-Based Payments, Deferred Units and units granted under these plans are accounted for using the fair value-based method. The fair value of Deferred Units granted for annual director fees is recorded as compensation expense in the period granted. The fair value of Deferred Units granted in lieu of cash distributions is recorded as compensation expense in the period the distribution is declared. The fair value of units granted under the long-term incentive plan is recorded as compensation expense over the vesting period.

c) Accounting policies in connection with Protectron

Intangible assets:

Intangible assets represent the fair value of customer relationships, deferred customer accounts, trademarks, wholesaler and dealer relationships and other miscellaneous agreements and will be amortized using the following annual rates and methods:



---------------------------------------------------------------------
---------------------------------------------------------------------
Customer relationships 10% straight-line
Trademarks 10% straight-line
Wholesaler and dealer relationships 20% declining balance
Other 50% straight-line
---------------------------------------------------------------------
---------------------------------------------------------------------


Accounting for deferred customer accounts is described below.

Revenue recognition:

Revenues from installation of monitoring products and the related monitoring services provided to residential customers are accounted for as one unit of accounting. Installation revenues are deferred and amortized into rental and security monitoring revenue on a straight-line basis at a rate of 10% per annum, the estimated life of the residential customer relationship. Monitoring revenues are reflected in income as services are provided.

Revenues generated from commercial installations and monitoring services are recognized in the period in which the sale is completed or the service is provided and collectability is reasonably assured.

Customers are billed for monitoring and maintenance services primarily on a monthly, quarterly or annual basis in advance of the period in which such services are provided. Contracts for monitoring services are generally for an initial non-cancelable term of three to five years with automatic renewal on an annual basis thereafter, unless terminated by either party. When customers are invoiced, the portion of unearned revenue is recorded as unearned revenue.

Deferred costs relating to customer accounts:

Internally generated customer accounts

Residential customer accounts are recorded at cost and include the direct and incremental costs incurred in originating contracts, installing equipment and activating monitoring services. All direct installation costs that result in deferred revenue, including materials and labour are capitalized to the extent such costs do not exceed the total of the deferred installation revenue and expected margin from monitoring services during the initial monitoring contract term. Capitalized residential customer costs, to the extent of deferred revenues, are amortized on a straight-line basis at a rate of 10% per annum, the estimated life of the customer relationship.

At the outset of the contract, to the extent that deferred customer costs exceed the total of deferred installation revenue and the expected margin from monitoring services during the initial monitoring contract term; the excess is expensed in the period in which the installation is completed.

When capitalized residential customer costs are in excess of deferred installation revenues, but less than the expected margin from monitoring services during the initial monitoring contract term, then the excess is amortized on a straight-line basis over the initial term of the monitoring contract, generally three to five years.

At each reporting period, the recoverability of the net deferred residential customer costs is compared to the total remaining deferred installation revenue and the expected margin from monitoring services during the remaining monitoring contract term. If the evaluation indicates that the carrying value is not recoverable from future estimated net undiscounted cash flows, then an impairment loss is recognized as a period cost.

Acquired customer accounts

Customer accounts acquired from dealers are recorded at cost. The costs of acquiring these accounts are capitalized and amortized on a straight-line basis at the rate of 10% per annum.

At each reporting period, the recoverability of the capitalized costs, net of accumulated amortization, is compared to the expected margin from monitoring services during the remaining monitoring contract term. If the evaluation indicates that the carrying value is not recoverable from future estimated net undiscounted cash flows, then an impairment loss is recognized as a period cost.

4. Finance contracts:



---------------------------------------------------------------------
---------------------------------------------------------------------
September 30, 2005 December 31, 2004
---------------------------------------------------------------------
Finance contracts related to
Fund sales $ 28,387 $ 26,219
Finance contracts related to
independent dealers 45,073 43,993
---------------------------------------------------------------------
73,460 70,212
Less: current portion 15,591 14,840
---------------------------------------------------------------------
$ 57,869 $ 55,372
---------------------------------------------------------------------
---------------------------------------------------------------------


The Fund offers financing on HVAC equipment sold and installed by the Fund and on HVAC equipment sold and installed by independent dealers.

Beginning January 1, 2005, net cash flows from finance contracts related to Fund sales are reflected as operating activities. Net cash flows from finance contracts related to independent dealers are reflected as investing activities. The 2004 comparative figures have been reclassified to conform with the new presentation.



5. Intangible assets and deferred charges:

---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Net book
September 30, 2005 Cost amortization value
---------------------------------------------------------------------
Customer relationships
- waterheater rentals $ 210,300 $ 15,036 $ 195,264
Customer relationships - security 93,090 1,669 91,421
Trademarks - waterheater rentals 2,600 1,527 1,073
Trademarks - security 7,100 150 6,950
Wholesaler and dealer relationships 4,600 194 4,406
Deferred customer accounts 3,267 20 3,247
Deferred finance charges 568 118 450
Other 850 70 780
---------------------------------------------------------------------
$ 322,375 $ 18,784 $ 303,591
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Net book
December 31, 2004 Cost amortization value
---------------------------------------------------------------------
Customer relationships
- waterheater rentals $ 210,300 $ 8,727 $ 201,573
Trademarks 2,600 877 1,723
---------------------------------------------------------------------
$ 212,900 $ 9,604 $ 203,296
---------------------------------------------------------------------
---------------------------------------------------------------------


For a summary of additions to intangibles during the quarter, see Business Acquisition Note 11.

6. Short-term debt:

On June 15, 2005, the Fund amended its credit agreement with a Canadian chartered bank. The amended and restated agreement consists of the following facilities:

(a) $38.3 million revolving term facility maturing July 14, 2006;

(b) $30.0 million demand revolving facility maturing July 14, 2006, extendable annually at the option of the lender.

(c) $10.0 million revolving demand facility, of which $0.75 million has been drawn through an irrevocable standby letter of credit to guarantee the contract performance of a subsidiary. The letter of credit matures September 27, 2006, and is extendable automatically for one year.

The credit facilities are funded through demand loans or revolving bankers' acceptances issued by the chartered bank, at the option of the Fund. Interest on demand loans is payable monthly at the greater of the bank's Canadian commercial loan reference rate and the Canadian Dollar Offered Rate plus 0.625%. Interest on bankers' acceptances is payable at maturity of each bankers' acceptance at the lesser of the bank's offered rate and the Canadian Dollar Offered Rate. The agreement contains certain financial maintenance covenants, and the debt is secured by a general security agreement against substantially all assets of the Fund, subject to the priority of senior secured noteholders.



7. Senior notes payable:

---------------------------------------------------------------------
---------------------------------------------------------------------
Senior Secured Annual Expected Final
Notes Interest Rate Principal Payment Date Maturity Date
---------------------------------------------------------------------
Series 1 4.145% $ 200,000 January 30, January 30,
2009 2016
Series 2 4.722% 200,000 January 31, January 31,
2011 2018
---------------------------------------------------------------------
$ 400,000
---------------------------------------------------------------------
---------------------------------------------------------------------


The notes contain certain financial maintenance covenants and interest is paid semi-annually.

The Expected Final Payment Date for each series of notes is the date it is expected that the principal on the notes will be repaid. The Maturity Date is the maturity date for the series but the repayment date is expected to be the earlier date.

8. Interest rate contracts:

The Fund entered into interest rate contracts in November 2003 in order to fix, to the extent possible, the effective borrowing cost of long-term notes issued in February 2004.

The Fund does not enter into interest rate contracts or swap agreements for trading or speculative purposes. However, the interest rate contracts entered into by the Fund do not qualify for hedge accounting and, as such, are recorded at their fair value as either an asset or liability, with changes in fair value recognized in income in the period they occur.

The following is a summary of interest rate contracts outstanding at September 30, 2005 and December 31, 2004:



---------------------------------------------------------------------
---------------------------------------------------------------------
Settlement Fixed Rate Total Net Fair Net Fair
Based On of Interest Notional Value Asset Value Asset
Termination Value (Liability) (Liability)
Date
September December
30, 2005 31, 2004
---------------------------------------------------------------------

Payment of
fixed rates, 4.74% $ 200,000 $ (7,605) $ (9,892) January 2009
receipt of
floating
rates 5.13% 200,000 (13,343) (13,237) January 2011
Receipt of
fixed rates, 3.82% 200,000 1,535 2,138 January 2009
payment of
floating
rates 4.46% 200,000 6,644 5,405 January 2011
---------------------------------------------------------------------
$ (12,769) $ (15,586)
---------------------------------------------------------------------
---------------------------------------------------------------------

9. Equity:

Equity as at September 30, 2005 and December 31, 2004 is comprised
of:

---------------------------------------------------------------------
---------------------------------------------------------------------
Number of Number of
Units Deferred Contributed Retained
Outstanding Amount Units Surplus Earnings Equity
---------------------------------------------------------------------
Equity
as
at
December
31, 2003 41,513,000 $ 396,178 - - $ (10,378) $385,800
Net
income
for the
year
ended
December
31, 2004 - - - - 33,107
Distributions
to
unitholders
for
the year
ended
December 31,
2004 - - - - (35,285)
---------------------------------------------------------------------
---------------------------------------------------------------------

Equity as
at December
31, 2004 41,513,000 $ 396,178 - - $(12,556) $383,622

Net
income
for the
period
ended
September
30, 2005 - - - - 33,768
Units
issued
under
subscription
receipts
offering 7,720,000 98,645 - -
Deferred
units
granted
as
compensation - - 3,476 48
Deferred
units
granted in
lieu of
distributions - - 59 -
Distributions
to
unitholders
for the
period ended
September 30,
2005 - - - - (29,758)
---------------------------------------------------------------------

Equity as
at
September
30,
2005 49,233,000 $ 494,823 3,535 $ 48 $ (8,546) $486,325
---------------------------------------------------------------------
---------------------------------------------------------------------


On December 11, 2003, the Fund made an initial public offering of 36,100,000 units for cash consideration of $361,000 less offering costs of $18,952.

On December 18, 2003, the Fund issued 5,413,000 units as partial consideration for the acquisition of the business.

On February 23, 2005, the Fund approved and adopted a Unitholders' Rights Plan. The Rights Plan became effective on February 23, 2005, when at the close of business, one right (a "Right") was issued and attached to each Fund unit outstanding and will be issued and attached to each Fund unit subsequently issued. The Rights issued under the Rights Plan will be exercisable only after a person has acquired, or commences or announces a take-over bid to acquire, 20% or more of the Fund units, at which time each Right will permit the holder of the Right to purchase Fund units having a fair market value of $100 for $50.

On July 15, 2005, the Fund issued 7,720,000 subscription receipts for cash consideration of $104,992 less offering costs of $6,347. Holders of the subscription receipts received, for no additional consideration, one unit of the Fund for each subscription receipt held on July 15, 2005.

10. Net income per Fund unit:

The reconciliation of the number of units used in the basic and diluted net income per unit calculation is as follows:



---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Units outstanding for the
entire period 41,513,000 41,513,000 41,513,000 41,513,000
7,720,000 units issued
July 15, 2005 6,617,143 - 2,205,714 -
---------------------------------------------------------------------

Weighted average number
of units for basic
income per unit
calculations 48,130,143 41,513,000 43,718,714 41,513,000
Dilutive effect of
deferred units 3,535 - 3,535 -
---------------------------------------------------------------------
Weighted average of
units for dilutive
income per unit
calculations 48,133,678 41,513,000 43,722,249 41,513,000
---------------------------------------------------------------------
---------------------------------------------------------------------


11. Business acquisition:

On July 15, 2005, the Fund purchased 100% of issued and outstanding equity in Protectron Holdings Inc., a privately held security monitoring company, for approximately $137.9 million including acquisition costs. The consideration was paid in cash raised through a subscription receipts offering and a bank credit facility.

The acquisition has been accounted for using the purchase method, with the results of Protectron operations included in these financial statements from July 15, 2005.

The following table summarizes the initial allocation of the purchase price to the fair values of the assets and liabilities acquired by the Fund:



---------------------------------------------------------------------
---------------------------------------------------------------------
Net assets acquired:

Net working capital deficiency $ (9,954)
Property, plant and equipment 13,864

Intangible assets:
Customer relationships $ 93,090
Trademarks 7,100
Wholesaler and dealer relationships 4,600
Other 850 105,640
----------
Goodwill 28,728

Less liabilities assumed:
Other long-term liabilities (414)
---------------------------------------------------------------------
Total purchase price, including
costs of acquisition $ 137,864
---------------------------------------------------------------------
---------------------------------------------------------------------


The purchase price allocation has not yet been completed, pending finalization of the valuation of the net identifiable assets acquired, including intangible assets, property, plant and equipment, and certain accrued liabilities relating to employee costs, customer servicing costs, and unearned revenue.

12. Unit-based compensation:

(a) Deferred unit plan:

Pursuant to the Deferred Unit Plan, each eligible participant is entitled to elect in advance to have all or a portion of his or her annual retainer for the ensuing period allocated to the Deferred Unit Plan. Directors and trustees who have not achieved the requisite level of unit ownership as provided in the Fund's Unit Ownership Guidelines are required to elect to have at least one-third of their annual retainer allocated to the Deferred Unit Plan. Upon such election, a number of Deferred Units are allocated to the eligible participant in lieu of cash payment of remuneration based on the market value of the unit at the time of the allocation.

Additional Deferred Units are granted to holders of Deferred Units based on distributions paid by the Fund on units. The number of Deferred Units granted is calculated by multiplying the aggregate number of Deferred Units held on the record date for a distribution by the amount of such distribution paid by the Fund on one unit and dividing the result by the market price of a unit on the date the distribution is paid.

The Deferred Unit Plan provides that once a Deferred Unitholder ceases to be a trustee or a director, he or she will be entitled to receive a number of Fund units equal to the number of Deferred Units held at the time of retirement. The Fund will fulfill any obligation to deliver Fund units under the Deferred Unit Plan by issuing the requisite number of Fund units from treasury.

For the three and nine months ended September 30, 2005, the Fund granted 3,535 Deferred Units and recorded $48 as compensation expense. No compensation expense relating to Deferred Units was recorded in 2004.

The following table summarizes the information about Deferred Units at September 30, 2005



---------------------------------------------------------------------
---------------------------------------------------------------------
Deferred Units
---------------------------------------------------------------------
Outstanding, beginning of period -
Granted as compensation expense 3,476
Granted in lieu of distributions 59
---------------------------------------------------------------------
Outstanding, end of period 3,535
---------------------------------------------------------------------
---------------------------------------------------------------------


(b) Long-term incentive plan ("LTIP"):

Effective January 1, 2005, executives and senior management employees of Union Energy are eligible to participate in the LTIP. In order to be eligible for an incentive award, two performance gates must be satisfied for the relevant Performance Cycle (being a period of one calendar year commencing on January 1st of each year). In the case of 2005 grants, annual distributed cash for 2005 must be equal or exceed an established benchmark and the Fund must have adhered to the defined preventative maintenance program and equipment specification standards as approved by the Board of Trustees.

If both performance gates are satisfied the participant will be eligible to receive an incentive award the amount of which will be determined based on the Fund's financial performance during the Performance Cycle in relation to a target performance measure for the relevant Performance Cycle. For 2005 the performance measure will be based on distributable cash per Fund unit.

One-third of an incentive award will vest and be paid shortly after the end of the relevant Performance Cycle while the balance will vest and be paid in equal amounts on each of the first two anniversaries. Amounts paid on such later dates will be increased by any cash distributions made by the Fund on the units after the end of the Performance Cycle.

13. Supplemental cash flow information:

a) The change in non-cash operating working capital consists of the following:



---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Accounts receivable $ (430) $ (2,056) $ 86 $ 7,794
Inventories (32) 395 (129) 1,944
Prepaid expenses 482 (49) 1,031 (912)
Accounts payable and
accrued liabilities (3,210) (2,519) (7,280) (11,520)
Unearned revenue 513 475 985 646
---------------------------------------------------------------------

$ (2,677) $ (3,754) $ (5,307) $ (2,048)
---------------------------------------------------------------------
---------------------------------------------------------------------

b) Cash payments made related to interest and income and capital
taxes during the periods were as follows:

---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Interest paid $ 10,432 $ 9,974 $ 20,917 $ 12,330
Income and capital taxes paid 560 485 1,854 2,021
---------------------------------------------------------------------
---------------------------------------------------------------------


14. Defined benefit pension expense:

The total expense related to the defined benefit pension plan and post-retirement benefit program recognized in operating income was $131 and $385 (2004 - $102 and $295) for the third quarter and year-to-date respectively.

15. Segmented information:

Effective July 15, 2005, the Fund has two reportable segments after the acquisition of Protectron. The segments, based on differences in products and services are "Water Heater and HVAC", and "Security": The Water Heater and HVAC segment rents and services a portfolio of more than one million residential water heaters in Ontario and has related commercial activities that complement the water heater business, being the sale, rental, servicing and financing of HVAC equipment. The Security segment comprises security installation, monitoring and related activities.

Management measures and evaluates segment performance based on a number of measures including earnings before income taxes, depreciation and amortization ("EBITDA"), attrition rate, capital maintenance, number of services and other items. Operating revenues and expenses directly associated with each segment are included in the operating segment results. Inter-segment transactions are reflected at fair value; there were no inter-segment transactions during the period.

The accounting policies followed by the segments are the same as those of the Fund.

Neither segment relies on major customers, nor do transactions with any one customer exceed 10% of the Fund's revenues.



---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Revenue:

Water Heater and HVAC $ 59,041 $ 56,124 $ 172,501 $ 164,767
Security 12,940 - 12,940 -
---------------------------------------------------------------------
Net sales 71,981 56,124 185,441 164,767
-----------------------------------------

Operating income:

Water Heater and HVAC 16,731 16,620 46,758 45,422
Security 1,424 - 1,424 -
---------------------------------------------------------------------
Operating income $ 18,155 $ 16,620 $ 48,182 $ 45,422
-----------------------------------------

Mark-to-mark (gain) loss
on valuation of interest
rate of contracts (15) 263 366 5,538
Interest 4,817 4,339 13,357 13,366
Income taxes 247 303 691 911
---------------------------------------------------------------------
Net income $ 13,106 $ 11,715 $ 33,768 $ 25,607
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
---------------------------------------------------------------------
September 30,
2005 2004
---------------------------------------------------------------------
Identifiable assets:
Water Heater and HVAC $ 840,745 $ 837,276
Security 158,677 -
Eliminations (1,018) -
---------------------------------------------------------------------
$ 998,404 $ 837,276
---------------------------------------------------------------------
---------------------------------------------------------------------



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