UE Waterheater Income Fund
TSX : UWH.UN

UE Waterheater Income Fund

July 27, 2005 16:53 ET

UE Waterheater Income Fund Announces Strong Financial Results for Second Quarter Ended June 30, 2005

TORONTO, ONTARIO--(CCNMatthews - July 27, 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 second quarter ended June 30, 2005. Highlights for the quarter are as follows:

- Strong revenues for the second quarter of 2005, increasing by 5% over the same period last year

- Operating income increased by 5% to $15.4 million from $14.7 million in 2004

- Announced the proposed acquisition of Protectron Holdings Inc., and related subscription receipts offering

http://web-production.canada.ccnm/database/fax/2000/grossrev.pdf

Commenting on the Fund's performance during the quarter, Chief Executive Officer Roger Rossi said, "Management is very pleased with the Fund's performance during the second quarter of 2005, both in terms of improvements in operations and increased customer acquisitions. Current investments in marketing and growth in Comfort Protection Plan sales generate growth in revenues and cash flow, which in turn, provide a solid base for unitholder distributions. In addition, we expect the acquisition of Protectron Holdings Inc. to be accretive to cash available for distributions."



Financial Highlights
For the quarter ended June 30, 2005
(Unaudited)
(in thousands, except for unit information)

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Three months ended Six months ended
June 30, June 30,
---------------------------------------------
2005 2004 2005 2004
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Revenue $ 57,210 $ 54,381 $ 113,460 $ 108,643
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Cost of sales,
general and
administration 26,995 24,597 53,786 49,640
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Depreciation and
amortization 14,846 15,098 29,647 30,201
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Operating income 15,369 14,686 30,027 28,802
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Mark-to-market
valuation of
interest rate
contracts 295 (235) 381 5,275
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Finance and interest
charges 4,302 4,235 8,540 9,027
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Income before income
taxes 10,772 10,686 21,106 14,500
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Taxes 140 304 444 608
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Net income $ 10,632 $ 10,382 $ 20,662 $ 13,892
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Cash from operating
activities 31,237 24,524 44,565 48,564
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Cash used in
financing activities (9,341) (8,824) (18,508) (15,960)
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Cash used in
investing activities (16,909) (13,408) (30,303) (26,277)
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Unitholder
distributions
declared 9,341 8,820 18,681 17,644
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Unitholder cash
distributions paid 9,341 8,824 18,508 15,960
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Earnings before
finance and interest
charges, taxes,
depreciation and
amortization
(EBITDA) (1) 30,215 29,784 59,674 59,003
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Total assets 843,109 837,794 843,109 837,794
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Total outstanding
units 41,513,000 41,513,000 41,513,000 41,513,000
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Unit Analysis
Earnings per unit -
basic and diluted $0.26 $0.25 $0.50 $0.33
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EBITDA per unit -
basic and diluted $0.73 $0.72 $1.44 $1.42
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Distributions
declared per unit -
basic and diluted $0.23 $0.21 $0.45 $0.43
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(1) See section, "EBITDA"
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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 business.

Union Energy LP's main business is the rental and service of 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. Union Energy LP owns and services Canada's second largest portfolio of rental water heaters in a program that was initiated in the 1960s. In addition, Union Energy LP 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 as well as security monitoring and installation through Protectron Limited Partnership ("Protectron").

The following should be read in conjunction with the Fund's Consolidated Financial Statements for the year ended December 31, 2004. These consolidated financial statements, presented in Canadian dollars, have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

Additional information regarding the Fund, including its current Annual Information Form ("AIF"), is available on SEDAR at www.sedar.com.

Certain information included herein is forward looking and based upon assumptions and anticipated results that are subject to uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary materially from those expected.

RESULTS OF OPERATIONS

For the quarter ended June 30, 2005, the Fund's net income was $10.6 million on revenues of $57.2 million compared to net income of $10.4 million on revenues of $54.4 million for the three months ended June 30, 2004. Operating income for the quarter ended June 30, 2005 was $15.4 million, an increase of $0.7 million or 5%, over the same period last year.

For the six months ended June 30, 2005, the Fund's net income was $20.7 million on revenues of $113.5 million compared to net income of $13.9 million on revenues of $108.6 million for the six months ended June 30, 2004. Operating income for the six months ended June 30, 2005 was $30.0 million, an increase of $1.2 million or 4%, over the same period last year.

Results for the quarter are in line with management's expectations and reflect current period investments in marketing and customer acquisition costs as the Fund grows its Comfort Protection Plan business, the benefits of which will be realized in future periods. Customer acquisition costs reflect primarily telemarketing expenditures incurred by the Fund 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 Meeting. A staggered implementation approach will allow the Fund to better understand the impact of the move to a new name and will allow the Fund to effectively manage the transition.

Rental revenues increased by 4% and 5%, respectively for the three and six months ended June 30, 2005 when compared to the corresponding periods a year prior, reflecting price increases, rental pool growth, and changes in product mix.

Sales, service and other revenue was $9.2 million and $17.9 million for the three and six months ended June 30, 2005, respectively. Sales, service and other revenue was $8.5 million and $17.7 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 second quarter as compared to the second quarter of 2004. The small 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 $2.6 million and $5.3 million for the three and six months ended June 30, 2005, respectively, compared to $2.4 million and $4.8 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 for the quarter ended June 30, 2005 increased by $2.4 million or 10% to $27.0 million from $24.6 million for the same period in 2004. For the six months ended June 30, 2005, costs of sales, general and administrative expenses of $53.8 million were $4.1 million higher than the six-month period a year prior. The increases in 2005 over 2004 reflect marketing costs relating to branding initiatives and customer acquisition costs pertaining to growing the Fund's Comfort Protection Plan business.

EBITDA

Earnings before finance and interest charges, taxes and depreciation and amortization ("EBITDA") were $30.2 million for the quarter and $59.7 million for the six months ended June 30, 2005, an increase of $0.4 million, or 1% and $0.7 million, or 1%, respectively, when compared to EBITDA of $29.8 million and $59.0 million for the comparable periods in 2004.

Management 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. While EBITDA is commonly regarded as an indirect measure of operating cash flow excluding impacts of non-cash working capital, it is not a recognized measure under 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 with EBITDA, as calculated consistently for each period:

(in thousands)



---------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004

---------------------------------------------------------------------

Net income $ 10,632 $ 10,382 $ 20,662 $ 13,892
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Adjustments:
Depreciation and
amortization 14,846 15,098 29,647 30,201
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Finance and interest
charges (1) 4,597 4,000 8,921 14,302
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Income taxes 140 304 444 608
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Earnings before interest,
taxes, depreciation and
amortization (EBITDA) $ 30,215 $ 29,784 $ 59,674 $ 59,003
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(1) Includes finance and interest charges and mark-to-market valuation
of interest rate contracts
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Depreciation and amortization was $14.8 million for the quarter and $29.6 million for the six months ended June 30, 2005, a decrease of $0.3 million or 2% for the quarter and $0.6 million or 2% for the six months when compared to the same periods in 2004. This decrease reflects rental assets installed at a lower depreciation rate, as well as leasing rather than owning non-rental assets, including vehicles and computer hardware.

Finance and interest charges were $4.6 million and $8.9 million, respectively, for the quarter and six months ended June 30, 2005 compared to $4.0 million for the quarter and $14.3 million for the six months ended June 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, 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 expense of $0.3 million and $0.4 million for the three and six months ended June 30, 2005, respectively. For comparable periods, a credit to income of $0.2 million for the three months ended June 30, 2004 and a charge to income of $5.3 million for the six months ended June 30, 2004 resulted.

The liability accrued at June 30, 2005 of $14.4 million will reverse over the terms of the senior secured notes as payments are made under the terms of the interest rate contracts. No cash payments were made in the current quarter; $1.6 million was paid in the first quarter of 2005. No payments were made in the six months ended June 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 is dependent on operating performance, as cash available for distributions is derived solely from operating cash flows of the Fund's subsidiaries. The breakdown between return on and return of capital for 2005 distributions for unitholders subject to Canadian income taxes is not determinable at this time. Distributions for the year ended December 31, 2004 were wholly a return on capital, 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 as well as additional rental units purchased to offset the impact on rental portfolio revenues of buy-outs and terminations. 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 is not a recognized measure under 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. Distributable cash 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.

Distributable cash for the three and six months ended June 30, 2005 and 2004 has been calculated as follows:



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Three months ended Six months ended
June 30, June 30,
-----------------------------------------
(In thousands of dollars,
except per unit data) 2005 2004 2005 2004
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Cash flow from operating
activities $ 31,237 $ 24,524 $ 44,565 $ 48,564

Adjustments:
Operating cash flow from
finance contracts related
to Fund sales (678) 942 771 800
Change in non-cash
operating working capital (5,387) (1,049) 2,630 (1,341)
Change in warranty
liability 243 552 486 1,039
Maintenance capital
expenditures (1) (11,589) (10,649) (24,294) (22,818)
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Distributable cash $ 13,826 $ 14,320 $ 24,158 $ 26,244
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Total distributions
declared $ 9,341 $ 8,820 $ 18,681 $ 17,644
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Distributable cash
generated per unit $ 0.33 $ 0.34 $ 0.58 $ 0.63
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Distributions declared
per unit $ 0.23 $ 0.21 $ 0.45 $ 0.43
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(1) Total capital expenditures for the three and six months ended
June 30, 2005 were $16.6 million and $31.7 million, respectively.
The corresponding amounts for the three and six months ended June 30,
2004 were $13.9 million and $28.5 million, respectively.
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Distributable cash of $13.8 million and $24.2 million for the three and six months ended June 30, 2005 compares to distributable cash of $14.3 million and $26.2 million for the corresponding periods a year prior. The $0.5 million decrease in the current quarter from the second quarter of 2004 generally reflects increased maintenance capital of $1.0 million, resulting from a higher number of units replaced and compliance with newly implemented flammable vapour regulations, and offset by an increase in EBITDA of $0.4 million. The $2.0 million year-to-date decrease from the six months ended June 30, 2004 generally reflects increased maintenance capital of $1.5 million, resulting from a higher number of units replaced and compliance with newly implemented flammable vapour regulations, the semi-annual payment related to the interest rate contracts of $1.6 million, and offset by an increase in EBITDA of $0.7 million and reduced finance and interest charges of $0.5 million in 2005 when compared to the same period in 2004.

The Fund has 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.

The amount of earnings realized in the quarter is well in excess of those 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 7.0 times Net Interest Expense for the quarter ended June 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 consolidated 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, except Second First Fourth Third
per unit data) Quarter Quarter Quarter Quarter
--------------------------------------------------------------------
2005 2005 2004 2004
--------------------------------------------------------------------
Total revenue $ 57,210 $ 56,250 $ 55,742 $ 56,124
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Net income $ 10,632 $ 10,030 $ 7,500 $ 11,715
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Net income per
Fund unit - basic
and diluted $0.26 $0.24 $0.18 $0.28
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(In thousands of
dollars, except Second First Fourth Third
per unit data) Quarter Quarter Quarter Quarter
--------------------------------------------------------------------
2004 2004 2003 2003
--------------------------------------------------------------------
Total revenue $ 54,381 $ 54,262 $ 51,793 $ 50,736
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Net income $ 10,382 $ 3,510 $ (27,197) $ 7,253
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Net income per
Fund unit - basic
and diluted $0.25 $0.09 N/A N/A
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The second quarter of 2005 reflects increasing rental revenue as previously noted. Total revenue changes for successive quarters are primarily a result of rental portfolio growth, rental price increases, and changes in HVAC business. HVAC revenues change primarily as a result of continuing to leverage cross-selling opportunities to the Fund's rental customers, as well as the seasonal fluctuations inherent in the HVAC business.

Successive increases in net income for the 2005 quarters and as compared to the same quarters in 2004 reflect higher operating income as previously described. Changes in net income from quarter to quarter in 2004 are 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 acquisition costs. Changes in net income for 2004 quarters as compared to 2003 result 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.

LIQUIDITY AND CAPITAL RESOURCES

For the quarter ended June 30, 2005, cash generated from operating activities was $31.2 million compared to $24.5 million for the same period a year prior, primarily due to changes in non-cash working capital. The operating cash flow for the current quarter reflects the Fund's strong operating results as well as the net cash inflow of $0.7 million from finance contracts related to Fund sales, and changes in non-cash operating working capital. The change in non-cash working capital during the quarter primarily reflects an interest accrual of $4.4 million related to the senior secured notes not requiring payment until July 31, 2005, and other accruals. The change in non-cash operating working capital for the second quarter of 2004 primarily reflects collection of accounts receivable, net of payment of significant accounts payable. There were no interest payments on the senior secured notes or payments on the related interest rate contracts in the current quarter or the second quarter of 2004.

For the six months ended June 30, 2005, cash generated from operating activities was $44.6 million compared to $48.6 million a year prior. The 2005 period reflects the payment of $8.9 million of interest on the senior secured notes and $1.6 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. No payments were made on the senior secured notes or the related interest rate contracts in the six months ended June 30, 2004.

Cash used in financing activities for the quarter and six months ended June 30, 2005 was $9.3 million and $18.5 million compared to $8.8 million and $16.0 million for the corresponding periods in 2004, due to the increase in distributions to unitholders. For the quarter ended June 30, 2005, the Fund declared and paid distributions of $9.3 million. During the three and six months ended June 30, 2004, the Fund declared distributions of $8.8 million and $17.6 million and paid $8.8 million and $16.0 million to unitholders, respectively. On June 17, 2005, the Fund declared a distribution to unitholders of record on June 30, 2005 in the amount of $0.075 per unit, which will be paid on August 1, 2005, for a total payment of $3.1 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 given ratings 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. ("EPCOR") on December 19, 2003.

There were no debt or unit offerings in the six months ended June 30, 2005 or in the second quarter of 2004.

As at June 30, 2005, the Fund had available a $30.0 million secured revolving loan facility maturing on December 19, 2007, and a $10.0 million secured revolving demand loan facility. Both of these facilities are with Canadian chartered banks and were unused at June 30, 2005. Subsequent to June 30, 2005 the Fund amended the $30 million loan facility in conjunction with establishing an acquisition facility of up to $145.0 million to finance the transaction described in the subsequent section of this document, "Subscription Receipts Offering and Business Acquisition."

Cash used in investing activities for the three and six months ended June 30, 2005 was $16.9 million and $30.3 million, respectively, compared to $13.4 million and $26.3 million for the three and six months ended June 30, 2004, respectively, of which $16.6 million and $31.7 million was used for the purchase of property, plant and equipment compared to $13.9 million and $28.5 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 $0.9 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. Net changes in finance contracts with customers of independent dealers used a total of $1.2 million during the current quarter compared to a neutral cash effect in the second quarter of 2004. There was no significant cash effect from finance contracts with customers of independent dealers during the six months ending June 30, 2005, while $1.2 million was provided in the six months ended June 30, 2004. Proceeds from sale of property, plant and equipment were $0.9 million and $1.4 million for the three and six months ended June 30, 2005, and $0.5 million and $1.0 million for the corresponding periods in 2004.

For the three and six months ended June 30, 2005, the portfolio of rental assets grew by 3,220 and 5,900 net units, respectively, bringing the number of installed units to 1,065,223. In the second quarter of 2005, $9.0 million was spent to replace 16,310 rental units that had reached the end of their useful life and $7.0 million was spent on 9,134 additional rental units. Comparable figures for the second quarter in 2004 were 1,914 net additions, with the addition of 8,348 units at a cost of $5.5 million and 14,868 replacement units at a capital cost of $8.1 million. In the six months ended June 30, 2005, $19.2 million was spent to replace 33,956 water heaters that had reached the end of their useful life and $11.7 million was spent on 17,227 additional units. For the six months ended June 30, 2004, a total of 2,518 net units had been added, with 15,514 new units at a cost of $11.2 million and 31,764 replacement units at a capital cost of $16.5 million.

A breakdown of the changes in the installed units for the three and six months ended June 30, 2005 compared to the corresponding periods in 2004 is as follows:



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(in thousands) Three months Six months ended
ended June 30, June 30,
2005 2004 2005 2004
---------------------------------------------------------------------
Beginning units 1,062 1,050 1,059 1,049
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Retirements (16) (15) (34) (32)
Replacements 16 15 34 32
Buyouts and terminations (6) (6) (11) (13)
Additions 9 8 17 16
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Net change 3 2 6 3
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Ending units 1,065 1,052 1,065 1,052
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Summary of contractual obligations

The following significant changes in the contractual obligations have occurred from those reported in the Fund's management's discussion and analysis for the year ended December 31, 2004:

The Fund has entered into an agreement to purchase a group of installed water heaters for $1.5 million, with closing expected in August 2005; the Fund has extended the lease for its head-office premises beyond its December 31, 2006 term to 2016; and the acquisition and related financing discussed in "Subscriptions Receipts Offering and Business Acquisition" below.

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 June 30, 2005 and for the corresponding period in 2004, the Fund had no transactions with related parties.

SUBSCRIPTION RECEIPTS OFFERING AND BUSINESS ACQUISITION

On July 15, 2005, the Fund acquired 100% of the shares of Protectron, a privately held security monitoring and installation company headquartered in Montreal, Quebec, for approximately $135 million (the "Acquisition"). The transaction was financed through an offering of subscription receipts and bank credit facilities.

On July 15, 2005, the Fund issued 7,720,000 subscription receipts at a price of $13.60 per subscription receipt, for gross proceeds of approximately $105 million. Holders of the subscription receipts received, for no additional consideration, one unit of the Fund for each subscription receipt held with the closing of the Acquisition.

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 six months ended June 30, 2005, the Fund granted no Deferred Units. 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. 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 AN ACCOUNTING POLICY

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 six months ended June 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.

The implementation of the Deferred Unit Plan had no effect on the interim consolidated financial statements for the second quarter of 2005.

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 June 2003 reported on the leased water heaters and rental appliances acquired prior to November 2001. As a result of the June 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.

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.

EIC 144, 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.

RISKS AND UNCERTAINTIES

There are certain risk factors that could affect the operations of the Fund and the distributable cash generated by the Fund. Risks relating to the business conducted by the Fund include: (i) changes in the regulatory environment relating to the water heater industry, including amendments to the Consumer Protection Act (Ontario); (ii) lack of written water heater arrangements; (iii) the useful life of water heaters may be less than anticipated; (iv) buy-outs and returns of water heaters; (v) expiration of right to use trademarks and costs of rebranding; (vi) the concentration of suppliers and equipment; (vii) potential product defects and product liability claims; (viii) uninsured or underinsured risks; (ix) the negotiation of collective agreements; (x) changes in consumer practices or changes in water heating technology; (xi) lack of fixture filings; (xii) leverage and restrictive covenants related to the Senior Secured Notes; (xiii) potential tax assessments; (xiv) enforcement of indemnities against EPCOR relating to the acquisition of the portfolio of water heaters and related commercial activities; and (xv) the lack of geographic diversity in the portfolio of water heaters.

On July 15, 2005, the Fund acquired Protectron. Additional risks related to the security business operated by Protectron include: (i) customer attrition; (ii) competitive market with relatively low barriers to entry; (iii) technological obsolescence; (iv) dependence on key personnel; (v) dependence upon third party contractors and the authorized dealer network to sell, install, service and repair security systems; (vi) potential changes in the regulatory environment; (vii) possible adverse effect of "false alarm" ordinances; (viii) dependence on housing starts; (ix) maintenance of supplier relationships; and (x) potential legal proceedings related to inadequate alarm responses or system failures, and employee acts of omissions.

Risks relating to the structure of the Fund include: (i) nature of the units; (ii) the price of the units may fluctuate and may be affected by general market conditions; (iii) potential unitholder liability; (iv) possible dilution upon the issuance of additional units; (v) no assurance that redemptions of units will be paid in cash; (vi) potential delays in distributions to unitholders; (vii) reliance by unitholders on the judgments of the Trustees; (viii) reliance on Union Energy LP; (ix) reliance on key personnel; (x) certain income tax matters, including that there be no assurance the Fund will continue to qualify as a "mutual fund trust" under the Income Tax Act (Canada); (xi) changes in stability and/or credit ratings; (xii) restrictions on certain unitholders which may adversely affect the liquidity of the units; (xiii) interest rate fluctuations and hedging; (xiv) cash distributions that may fluctuate; (xv) restrictions on potential growth; and (xvi) the Fund's holding of Trust units and Subordinated Trust Notes which will be undiversified and illiquid.

OUTLOOK

The outlook for the Fund and its underlying business is positive and stable for 2005. The Fund has seen strong revenues during the second quarter of 2005 and should continue to deliver strong performance through 2005, which provides a reliable stream of stable cash flow to support cash distributions to unitholders. Management believes the acquisition of Protectron will be accretive to the Fund's per-unit cash available for distribution, will provide an opportunity to leverage its approximately one million customer relationships by cross-selling Protectron's suite of home security services, and is consistent with the Fund's objective of generating sustainable and growing distributable cash per unit.

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)
---------------------------------------------------------------------
---------------------------------------------------------------------
June 30, December 31,
2005 2004
---------------------------------------------------------------------

Assets

Current assets:

Cash and cash equivalents $ 18,447 $ 22,693
Accounts receivable 18,637 19,151
Inventories 4,149 4,053
Prepaid expenses 1,380 1,928
Current portion of finance
contracts (Note 4) 15,206 14,840
-------------------------------------------------------------------
57,819 62,665

Property, plant and equipment 411,223 405,354
Finance contracts (Note 4) 55,770 55,372
Intangible assets 198,657 203,296
Goodwill 119,640 119,640
---------------------------------------------------------------------

$ 843,109 $ 846,327
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities and Equity

Current liabilities:

Accounts payable and accrued
liabilities $ 27,391 $ 31,459
Distribution payable to unitholders 3,113 2,940
Unearned revenue 8,824 8,352
-------------------------------------------------------------------
39,328 42,751

Long-term liabilities:

Senior notes payable (Note 5) 400,000 400,000
Interest rate contracts (Note 6) 14,350 15,586
Warranty liability 485 971
Accrued pension liability 1,456 1,524
Employee future benefit liability 1,887 1,873
-------------------------------------------------------------------
418,178 419,954

Equity (Note 7) 385,603 383,622
---------------------------------------------------------------------
$ 843,109 $ 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 Six months ended
June 30, June 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Revenue:
Rental $ 45,381 $ 43,502 $ 90,345 $ 86,119
Sales, service and other 9,223 8,485 17,860 17,743
Finance 2,606 2,394 5,255 4,781
-------------------------------------------------------------------
57,210 54,381 113,460 108,643
Expenses:
Cost of sales, general and
administration 26,995 24,597 53,786 49,640
Depreciation of property,
plant and equipment 12,527 12,779 25,008 25,562
Amortization of intangible
assets 2,319 2,319 4,639 4,639
-------------------------------------------------------------------
41,841 39,695 83,433 79,841
---------------------------------------------------------------------

Operating income 15,369 14,686 30,027 28,802

Mark-to-market loss (gain)
on valuation of interest
rate contracts 295 (235) 381 5,275

Interest:
Long-term debt 4,421 4,421 8,794 6,899
Other (119) (186) (254) 2,128
---------------------------------------------------------------------

Income before income taxes 10,772 10,686 21,106 14,500

Income taxes:

Current 140 304 444 608
---------------------------------------------------------------------

Net income $ 10,632 $ 10,382 $ 20,662 $ 13,892
---------------------------------------------------------------------
---------------------------------------------------------------------

Net income per Fund unit

Basic and diluted $ 0.26 $ 0.25 $ 0.50 $ 0.33


(Weighted average units outstanding: 41,513,000)


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 Six months ended
June 30, June 30,
2005 2004 2005 2004
---------------------------------------------------------------------
Cash provided by
(used in):
Operating activities:
Net income $ 10,632 $ 10,382 $ 20,662 $ 13,892
Adjustments and
other items not
involving cash:
Depreciation and
amortization 14,846 15,098 29,647 30,201
Gain on disposal of
property,
plant and equipment (324) (184) (567) (261)
Difference between
pension and
other employee
benefits expense
and funding (34) (92) (54) (45)
Mark-to-market
valuation of
interest rate
contracts 295 (235) 381 5,275
Payments on interest
rate contracts, net - - (1,617) -
Warranty liability (243) (552) (486) (1,039)
Finance contracts
related to Fund
sales (Note 4) 678 (942) (771) (800)
Change in non-cash
operating
working capital
(Note 9(a)) 5,387 1,049 (2,630) 1,341
---------------------------------------------------------------------
31,237 24,524 44,565 48,564

Financing activities:
Distributions to
unitholders (9,341) (8,824) (18,508) (15,960)
Repayment of
bank loan - - - (400,000)
Proceeds from senior
secured notes - - - 400,000
---------------------------------------------------------------------
(9,341) (8,824) (18,508) (15,960)

Investing activities:

Purchase of
property,
plant and
equipment (16,640) (13,866) (31,696) (28,496)
Proceeds from
sale of
property,
plant and equipment 888 468 1,386 1,042
Finance contracts
related to
independent dealers
(Note 4) (1,157) (10) 7 1,177
---------------------------------------------------------------------
(16,909) (13,408) (30,303) (26,277)
---------------------------------------------------------------------
Increase (decrease) in
cash and
cash equivalents 4,987 2,292 (4,246) 6,327
Cash and cash
equivalents,
beginning of period 13,460 24,456 22,693 20,421
---------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 18,447 $ 26,748 $ 18,447 $ 26,748
---------------------------------------------------------------------
---------------------------------------------------------------------

Supplemental cash flow information (Note 9(b))

See accompanying notes to interim consolidated financial statements.


UE WATERHEATER INCOME FUND

Notes to Interim Consolidated Financial Statements

(Unaudited)

June 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.

2. Basis of presentation:

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 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. and GP Waterheater Trust.

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

3. Significant accounting policies:

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 reflects the potential dilution that would occur if units were issued in exchange for any outstanding Deferred Units, as described in Note 8.

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 six months ended June 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.

The implementation of the Deferred Unit Plan had no effect on the interim consolidated financial statements for the second quarter of 2005.



4. Finance contracts:

---------------------------------------------------------------------
---------------------------------------------------------------------
June 30, December 31,
2005 2004
---------------------------------------------------------------------
Finance contracts related to Fund sales $ 26,990 $ 26,219
Finance contracts related to independent
Dealers 43,986 43,993
---------------------------------------------------------------------
70,976 70,212
Less: current portion 15,206 14,840
---------------------------------------------------------------------
$ 55,770 $ 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. Senior notes payable:

---------------------------------------------------------------------
---------------------------------------------------------------------
Senior Annual Expected
Secured Interest Final Payment Maturity
Notes Rate Principal Date 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.

6. 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 to the Fund on an issue of long-term notes made 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 June 30, 2005:



---------------------------------------------------------------------
---------------------------------------------------------------------
Settlement Net Fair
Based On Fixed Total Value
Rate of Notional Asset Termination
Interest Value (Liability) Date
---------------------------------------------------------------------
Payment of
fixed rates, 4.74% $ 200,000 $ (11,993) January 2009
receipt of
floating rates 5.13% 200,000 (18,270) January 2011

Receipt of
fixed rates, 3.82% 200,000 5,017 January 2009
payment of
floating rates 4.46% 200,000 10,896 January 2011
---------------------------------------------------------------------
$ (14,350)
---------------------------------------------------------------------
---------------------------------------------------------------------

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

---------------------------------------------------------------------
---------------------------------------------------------------------
Settlement Net Fair
Based On Fixed Total Value
Rate of Notional Asset Termination
Interest Value (Liability) Date
---------------------------------------------------------------------
Payment of
fixed rates, 4.74% $ 200,000 $ (9,892) January 2009
receipt of
floating rates 5.13% 200,000 (13,237) January 2011

Receipt of fixed
rates, 3.82% 200,000 2,138 January 2009
payment of
floating rates 4.46% 200,000 5,405 January 2011
---------------------------------------------------------------------
$ (15,586)
---------------------------------------------------------------------
---------------------------------------------------------------------

7. Equity:

Equity as at June 30, 2005 and December 31, 2004 and 2003 is
comprised of:

----------------------------------------------
----------------------------------------------
Number of
Units Retained
Outstanding Amount Earnings Equity
----------------------------------------------
----------------------------------------------
Equity at the date of
formation of the Fund $ - $ - $ -

Units issued under
initial public
offering,
net of costs 36,100,000 342,048 - -
Units issued under
over-allotment option
on acquisition of the
business 5,413,000 54,130 - -
Net loss for the 13
days ended
December 31, 2003 - - (9,122) -
Distributions to
unitholders for the
period - - (1,256) -
----------------------------------------------
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
June 30, 2005 - - 20,662 -
Distributions to
unitholders for the
period ended
June 30, 2005 - - (18,681) -
----------------------------------------------
Equity as at
June 30, 2005 41,513,000 $ 396,178 $ (10,575) $ 385,603
----------------------------------------------
----------------------------------------------


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 Units, at which time each Right will permit the holder of the Right to purchase Units having a fair market value of $100 for $50.

8. Unit-based compensation:

Effective June 14, 2005, the Fund implemented 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").

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 units equal to the number of Deferred Units held at the time of retirement. The Fund will fulfill any obligation to deliver units under the Deferred Unit Plan by issuing the requisite number of units from treasury.

For the three and six months ended June 30, 2005, no Deferred Units were granted, and consequently no compensation expense was recorded. No compensation expense relating to Deferred Units was recorded in 2004.

The Fund 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 six months ended June 30, 2005, no units were issued pursuant to the long-term incentive plan.

9. Supplemental cash flow information:

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



---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Accounts receivable $ (541) $ 1,752 $ 514 $ 5,565
Inventories (29) 155 (96) 1,549
Prepaid expenses 253 439 548 (565)
Accounts payable and
accrued liabilities 5,391 (1,422) (4,068) (5,379)
Unearned revenue 313 125 472 171
---------------------------------------------------------------------
$ 5,387 $ 1,049 $ (2,630) $ 1,341
---------------------------------------------------------------------
---------------------------------------------------------------------

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

---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
---------------------------------------------------------------------

Interest paid $ - $ 23 $ 10,485 $ 2,356
Income and capital taxes paid 845 1,536 1,294 1,536
---------------------------------------------------------------------
---------------------------------------------------------------------


10. Defined benefit pension expense:

The total expense related to the defined benefit pension plan and post-retirement benefit program recognized in operating income was $119 and $244 (2004 - $334 and $674) for the second quarter and year-to-date respectively.

11. Subscription receipts offering and business acquisition:

On July 15, 2005 the Fund acquired 100% of the shares of Protectron Holdings Inc., a privately held security monitoring and installation company headquartered in Montreal, Quebec, for approximately $135 million (the "Acquisition"). The transaction was financed through an offering of subscription receipts and $38 million advanced on a new acquisition bank credit facility established after June 30, 2005.

On July 15, 2005, the Fund issued 7,720,000 subscription receipts at a price of $13.60 per subscription receipt, for gross proceeds of approximately $105 million. Holders of the subscription receipts received, for no additional consideration, one unit of the Fund for each subscription receipt with the closing of the Acquisition.

Contact Information