Operating Segments
The Fund will continue to focus on managing its existing assets and expansion through organic growth projects with the view of maximizing capacity and continuing to generate stable and sustainable distributions to unitholders.

Alliance Canada expects that it will play a major role in transporting incremental volumes of natural gas and/or natural gas liquids from Alberta to markets in midwestern and Eastern North America. The Alliance Canada system was constructed to allow quick and cost-effective expansion of its mainline system by adding infill compression, with scalable further expansion scenarios employing looped pipe.

On October 31, 2006, Alliance Canada filed its 2007 tolls with the NEB following consultation with shippers. Alliance Canada’s 2007 tolls will increase 5% effective January 1, 2007, from $0.74/mcf to $0.78/mcf, due primarily to higher operating costs and higher depreciation expense. The increases are partially offset by reduced financing costs, allowance for income taxes and equity return due to a declining investment base.

Alliance is proposing a B.C. expansion project, increasing receipt capacity for existing shippers with natural gas receipts originating in Northeastern British Columbia. A binding open season was held from October 5, 2006 to October 26, 2006. Alliance received binding subscriptions at an acceptable price for 150 mmcf/d.

To facilitate this project, Alliance is proposing to construct the Taylor Compression Station that would enable it to increase receipt capacity on the Taylor-Aitken Creek lateral system. Alliance is not proposing to increase the mainline capacity of its System with this project, only the ability for existing shippers to increase gas nominations at receipt points in B.C. Subject to Board of Director and NEB Board approval, Alliance has scheduled completion of the $17.5 million project for November 2008.

As part of Alliance’s focus on asset optimization, Alliance is planning to upgrade four gas turbines on the mainline delivery system. These upgrades are expected to extend the maintenance interval from its current requirement of 25,000 hours to 50,000 hours and are expected to yield annual fuel savings of approximately 70,000 MBTU to the shippers’ benefit.

The Saskatchewan System will continue to focus its efforts in 2007 on managing system assets and infrastructure and further developing its operational procedures and processes with a goal of maximizing available transportation capacity and the competitiveness of its tolls. This includes the Westspur and Weyburn System capacity expansions.

Green Power will continue to focus on its expansion within NRGreen through the construction of three 5.1-MW waste heat recovery facilities at Alliance Canada’s Alameda, Estlin and Loreburn compressor stations. Completion of these facilities is expected by the end of 2007, with commercial operation commencing as early as the second quarter of 2008.

Recent Tax Developments
On October 31, 2006, the Canadian Government announced a “Tax Fairness Plan” that would, among other things, create a new tax regime for publicly traded income trusts including the Fund. Under the proposed rules, the taxable portion of an income trust’s distributions would be subject to taxation in a manner similar to the treatment of taxable income within a corporation. For existing income trusts, the new rules would not become applicable until 2011 provided they limit their expansion to “normal growth” prior to that year. On December 15, 2006 the Government issued guidelines with respect to what it would consider “normal growth” for existing income trusts that wish to ensure that they do not become subject to the proposed tax rules until 2011. Under these guidelines, the amount of equity units that an income trust can issue to finance growth up to 2011 may not exceed the value of its publicly traded equity units on October 31, 2007 (subject to annual limits). The guidelines do not explicitly limit the amount of debt that an income trust can issue to fund growth, although as a practical matter this will be constrained by credit considerations and/or financial covenants.

On December 21, 2006, the Government released draft legislation for comment. Considerable uncertainty still exists as the draft legislation does not fully address all aspects of the tax regime introduced in the Tax Fairness Plan (including the “normal growth” guidelines). Further, the proposed legislation is now subject to review by a Parliamentary committee through an expedited public hearing process. Timing for enactment of the legislation by Parliament remains uncertain.

If enacted in their present form, the proposed tax changes would, all other things being equal, likely result in a reduction of cash available for distribution by the Fund commencing in 2011. With respect to the proposed limitations on equity unit issuances, the Manager believes that the Fund should be able to fund its currently identified growth plans. However, with the current uncertainty in the capital markets resulting from the proposed tax changes, there can be no assurance that sufficient capital will be available to fund further acquisitions or expansion projects. The Manager, with input from external legal and financial advisors, is closely monitoring legislative developments and carefully assessing the impact of the proposed legislation on the business and financial outlook of the Fund and its broader effect on the income trust sector as whole, all with a view to adopting a strategy that will maximize value to unitholders going forward once legislative framework is finalized. The Manager, through the Canadian Energy Infrastructure Group has also been active in lobbying the Government for changes to the proposed legislation, to mitigate its adverse effects.