Alliance Pipeline Limited Partnership Management's Discussion and Analysis

Transcription

1 2018 Management's Discussion and Analysis

2 The Alliance System The Alliance System ( System ) consists of a 3,849 kilometre ( km ) (2,392 mile) integrated Canadian and United States ( U.S. ) natural gas transmission pipeline, delivering rich natural gas from the Western Canadian Sedimentary Basin ( WCSB ) and the Williston Basin in North Dakota to the natural gas market in Chicago. The System has been in commercial service since December 2000 and currently delivers an average of 1.7 billion cubic feet per day ( bcf/d ) of rich gas to the Aux Sable natural gas liquids ( NGLs ) extraction facility, owned by Aux Sable Liquid Products L.P. ( Aux Sable ), an affiliate of ( Alliance Canada ). Rich gas is natural gas with relatively high NGLs content; mainly ethane, propane, butane and condensates. The System connects with the Aux Sable NGLs extraction facility in Channahon, Illinois, which extracts NGLs from the natural gas transported before delivery to downstream pipelines. The pipeline connects in the Chicago area, through its downstream header, with five interstate natural gas pipelines and two local natural gas distribution systems, which provide shippers with access to natural gas markets in the Midwest, the Northeast, and the Gulf Coast of the U.S., and Eastern Canada. All shippers have signed extraction agreements that give Aux Sable the right to extract the NGLs from the rich gas transported. The System also has three connections, two in North Dakota and one in Iowa, to provide for deliveries of small amounts of natural gas to ethanol production plants. Facilities include 14 mainline compressor stations that operate between approximately 31,000 horsepower ( hp ) and 46,000 hp each spaced at approximately 193 km intervals; mainline block valves spaced on average at 32 km intervals; operating and maintenance facilities; and an associated SCADA system. Page 1

3 On December 1, 2015, Alliance Canada commenced the implementation of its Services Offering providing shippers with competitive long-term fixed firm tolls and biddable tolls for seasonal firm, short-term firm and interruptible transportation ( IT ) services. This replaced the original firm cost-of-service contracts. The Services Offering provides shippers with a variety of natural gas transmission services and tolling options for the safe and reliable transportation of their gas, and includes both full-path and segmented receipt and delivery services. A new Canadian trading pool and a revised Hydrocarbon Dewpoint ( HCDP ) specification were also introduced to further facilitate the transportation of rich gas. Alliance Canada The Alliance Canada portion of the System consists of approximately 1,561 kms (970 miles) of natural gas mainline pipeline and 732 kms (455 miles) of related lateral pipelines connected to natural gas receipt locations, primarily at gas processing facilities in northwestern Alberta and northeastern British Columbia, and related infrastructure. Alliance Canada owns the Canadian portion of the System. Alliance Canada is jointly owned by an affiliate of Enbridge Inc. and an affiliate of Pembina Pipeline Corporation and is subject to federal regulation by the National Energy Board ( NEB ). Alliance U.S. The Alliance U.S. portion of the System consists of approximately 1,556 kms (967 miles) of infrastructure including the 129 km (80 mile) Tioga Lateral in North Dakota. Alliance U.S., an affiliate of Alliance Canada, owns the U.S. portion of the System. Alliance U.S. is jointly owned by an affiliate of Enbridge Inc. and an affiliate of Pembina Pipeline Corporation and is subject to federal regulation by the Federal Energy Regulatory Commission ( FERC ). About this Document The following Management s Discussion and Analysis ( MD&A ) is as of February 4, 2019 and should be read in conjunction with our audited, consolidated financial statements for the year ended December 31, 2018, and our 2017 Annual Information Form dated May 4, All amounts in this MD&A are in millions of Canadian dollars except per unit amounts. All financial information in this MD&A has been prepared in accordance with United States Generally Accepted Accounting Principles ( U.S. GAAP ). This MD&A reviews the significant events and transactions that impacted our performance during the the three and twelve months ended December 31, Throughout this MD&A, the terms, we, us, our, and Alliance Canada mean. Collectively, Alliance Canada and Alliance Pipeline L.P. ( Alliance U.S. ) are referred to as the System. Additional information about our business is available at and on SEDAR at Page 2

4 Strategy The Alliance System is unique in its ability to transport rich natural gas. Rich natural gas, primarily from the WCSB, is transported in a single continuous dense phase to Chicago where the pipeline interconnects with the Aux Sable NGLs extraction facility. The NGLs extracted at the Aux Sable facility are available for sale in U.S. markets, while the natural gas is delivered to downstream markets through the Alliance Chicago Exchange hub ( ACE ). Alliance Canada s business model is based on extensive consultation with shippers resulting in a variety of natural gas transmission services and tolling options. This business model was developed in a manner that is cognizant of "cost based" parameters. These services provide a more dynamic and flexible market-focused approach under which Alliance Canada assumes a higher degree of business risk and provides service flexibility to effectively respond to evolving market conditions. Alliance Canada's natural gas transmission services, coupled with rich gas delivery capabilities, are designed to enable producers to maximize the value of their product. This provides significant competitive advantages which can include: Saving producers processing and infrastructure costs, and providing an opportunity to reduce the time to market for their rich gas production; Providing access to the Aux Sable NGLs extraction facility allowing for considerable economies of scale; and Delivering value added products to alternative markets for NGLs while only paying a transportation charge based on volume. These services can potentially provide shippers with a higher net back for rich natural gas. Alliance Canada will continue to engage with shippers to support the optimization of commercial operations and the evaluation of new opportunities and services that meet the current and potential needs of shippers as they plan for growth initiatives and future prospects. Health and Safety Stewardship At Alliance Canada, safety and environmental stewardship are our top core values. We consider both of these core values in our daily decisions and actions with the goal of being incident free. That means protecting the environment around us and keeping our neighbours, employees and contractors safe. We comply with or exceed all applicable health, safety and environmental laws and regulations in all material respects. Natural gas pipelines in Canada are required to meet construction, operating and maintenance standards established by the NEB, other federal regulators and the Canadian Standards Association. Alliance Canada is subject to the NEB s Onshore Pipeline Regulations for designing, constructing, operating and abandoning pipelines. Operationally, we comply in all material respects with the NEB Act, the Onshore Pipeline Regulations and all applicable safety regulations, standards and codes. We conduct patrols of rights of way, required inspections and audits of pipeline condition through investigative excavations, and assessments of the levels of protection related to our cathodic protection system, relief valves and mainline valves. In addition to complying with general operating and maintenance requirements, we have rigorous integrity management programs that regularly assess the condition of the System. Our robust pipeline integrity lifecycle efforts have resulted in three cycles of in-line inspections completed in 18 years of operations. Page 3

5 Our maintenance program includes monthly, quarterly, semi-annual and annual inspections of all compressor station and meter station facilities. Maintenance expenditures vary from year to year. We are now in our second decade of operations and as the System matures and technology changes, we anticipate increased maintenance requirements for some facilities and optimization for other facilities that have undergone improvements or upgrades. As part of our maintenance inspection program, routine internal safety and security audits are performed at compressor station facilities with corrective actions as required. We have developed a structured Health and Safety Management System based on Occupational Health and Safety Management Guidelines. This system is part of Alliance Canada s Integrated Management System that has been developed for integration of key operational programs to manage hazards and risks associated with operation of the System. We facilitate inspections and audits when agencies that regulate our industry request them, and follow defined practices to meet regulatory requirements during the construction, operation and maintenance of our facilities. Environmental Regulation In designing the System, Alliance Canada took advantage of being able to design all our facilities at the same time using modern technology and materials. These features make the System more efficient than older, conventional designs of natural gas pipelines. However, greenhouse gas ( GHG ) emissions are created during the combustion of natural gas in turbines that drive compressors to move natural gas through the System as well as through periodic venting activity. Alliance Canada and our shippers are exposed to additional costs of complying with regulations related to the protection of the environment. The costs associated with the payments of carbon taxes and credits purchased from federal and provincial climate change funds and/or qualified projects are included as recoverable costs in our transportation contracts. The Federal Government requires a minimum carbon pricing in all jurisdictions in Canada of $10 per tonne of carbon emissions in 2018, rising by $10 per year for the next four years, reaching $50 per tonne of carbon emissions in Alliance Canada has operations in British Columbia, Alberta and Saskatchewan that are subject to carbon tax under the federal or provincial regulation. Any province that does not have an established carbon pricing regulation is subject to the new federal regulations drafted under the Greenhouse Gas Pollution Pricing Act. In British Columbia, the tax is currently set at $35 per tonne of carbon dioxide ( CO 2 ) equivalent. The British Columbia Government committed to raise the carbon tax by $5 per tonne of CO 2 equivalent annually, starting April 2018, until it meets the federal floor price of $50 per tonne of CO 2 equivalent in In Alberta, the carbon levy is currently set at $30 per tonne of CO 2 equivalent, with an increase to $40 per tonne in 2021 and an increase to $50 per tonne in Alliance Canada can purchase credits from the Alberta Climate Change Fund or purchase offsets from qualified projects. In Saskatchewan, the new federal regulations became effective on January 1, The province of Saskatchewan is challenging the new regulations through the Saskatchewan Court of Appeal. Federal regulations targeting emissions of methane, nitrous oxides, and sulfur oxides from specific equipment will be implemented in 2019 and 2020 that will impact costs related to the Alliance System. The costs include additional emissions testing programs, potential equipment retrofits or upgrades, and payment for exceeding the imposed limits. Page 4

6 2018 Operating Highlights Implementation of an Owner-Operator Model On March 27, 2018, Alliance Pipeline Ltd., as the General Partner of Alliance Canada, announced a transition to an Owner-Operator model whereby an Enbridge Inc. ( Enbridge ) affiliate and a Pembina Pipeline Corporation ( Pembina ) affiliate (collectively referred to as the Owners, the Partners and the Operators ) will manage all of Alliance Canada s functions. This new model took effect on June 25, 2018 and will continue to provide shippers with safe and reliable transportation of their gas. Capacity Expansion Study In response to the demand for our transportation services, Alliance Canada and Alliance U.S. announced a binding open season for expansion capacity commitments. The open season was for an estimated 400 million cubic feet per day ( mmcf/d ) of additional firm service, commencing at an anticipated in-service date in the fourth quarter of The two-month open season which began on March 28, 2018, and closed on May 30, 2018, did not reach the target of 400 mmcf/d. Based on the open season results and feedback from producers, Alliance Canada is assessing potential alternatives and next steps. Overview of Services Alliance Canada s natural gas transmission services combine flexibility and firm toll predictability, together with enhanced natural gas transmission services that create economic value for customers. We offer a variety of firm and IT services to shippers. Alliance Canada shippers have a menu of options that allows them to tailor their gas transportation to best meet their specific needs with flexibility of services. These services feature optionality of pricing value and duration, including firm, interruptible and seasonal services, lower cost tolling options, trading points and hub services that are open to other market participants. Page 5

7 Alliance Canada s natural gas transmission services include the following key elements: Firm Receipt Services include two zones with fixed volumetric tolls, allowing shippers to move gas from their contract receipt point(s) to the Alliance Trading Pool ( ATP ). Shippers have the option to lock in their receipt tolls for three to ten year terms. The two receipt zones are: o o Zone 1 includes all receipt points downstream of the Blueberry Hill Compressor Station near Gordondale, Alberta. Zone 2 includes the Blueberry Hill Compressor Station and all receipts points upstream of that station. Firm Delivery Services allow shippers to deliver gas from the ATP to the Canada U.S. border. Fixed tolls are offered on one to ten year terms. Firm Full Path Services are a volumetrically tolled service from Canadian receipt points in both Zone 1 and Zone 2 to the Canada U.S. border, with fixed toll terms between three and ten years. These services require a corresponding firm transportation service contract with Alliance U.S. ATP a Canadian trading pool allowing receipt and delivery shippers to trade gas. The ATP is a notional point connecting the receipt zones to the delivery zone. The ATP facilitates the segmentation of services on the pipeline into receipt and delivery services, providing a platform to transfer title and allowing shippers to access term park and loan services. Firm Receipt and Full Path services, with initial terms of three years or more, also have access to Priority Interruptible Transportation Services ( PITS ) that can provide additional transportation access as production volumes grow, allowing shippers to flow up to 25% more volume than contracted. The natural gas transmission services also include biddable tolls for seasonal, short-term firm and IT services, rich gas services, and the ability to stage contract commitments on firm services with initial terms of 5 years or longer. Alliance Canada is the rich gas transporter of choice with HCDP gas quality tariff specification of -5 degrees Celsius, and Alliance U.S. gas quality tariff specification of 23 degrees Fahrenheit. Curtailment mechanisms are included in the tariffs to ensure that pipeline operations and safety are not compromised. Page 6

8 Results of Operations for the Three and Twelve Months Three Months Ended Years Ended December ($ millions, except where noted) Operating Results Total average transportation volume 1, , , , ,534.2 (million cubic feet per day ("mmcf/d")) Financial Results Revenue Operational expenses Other income and expenses Net income EBITDA (1) Cash provided by operating activities Distributions paid (1) Refer to Non-GAAP Financial Measures. Certain 2016 and 2017 balances have been adjusted for the impact of the adoption of Accounting Standards Codification ( ASC ) 606, Revenue from Contracts with Customers. Certain expenses have been reclassified as a result of the transition to the Owner-Operator model effective June 25, Net Income Net income increased $6.7 million for the three months ended December 31, 2018 and increased $47.9 million for the year ended December 31, 2018 when compared the same periods in These increases were primarily due to strong shipper demand for seasonal/short-term services and lower expenses incurred compared to Earnings before Interest, Income Taxes, Depreciation and Amortization ( EBITDA ) (1) EBITDA increased $5.6 million for the three months ended December 31, 2018 and increased $39.8 million for the year ended December 31, 2018 when compared to the same periods in These increases were primarily due to improved operating performance. Operating Results Average Transportation Volumes Three Months Ended Years Ended December (mmcf/d) Average long-term firm volume 1, , , , ,327.2 Average seasonal/short-term firm volume Average PITS/IT volume Total average transportation volume 1, , , , ,534.2 Page 7

9 Total average contracted transportation volumes to the border increased 20.2 mmcf/d for the three months ended December 31, 2018 and increased 27.2 mmcf/d for the year ended December 31, 2018 when compared to the same periods in Average long-term firm volumes decreased 33.9 mmcf/d for the three months ended December 31, 2018 and decreased 9.5 mmcf/d for the year ended December 31, 2018, compared to the same periods. These decreases are primarily due to long-term delivery contracts ending in 2018 that were replaced with seasonal contracts. Average seasonal/short-term firm volumes increased 63.2 mmcf/d for the three months ended December 31, 2018, and increased 39.6 mmcf/d for the year ended December 31, 2018 when compared to the same periods in These increases were primarily due to higher demand for seasonal and short-term firm services. Average PITS/IT volumes decreased 9.1 mmcf/d for the three months ended December 31, 2018 and decreased 2.9 mmcf/d for the year ended December 31, 2018 compared to the same periods in The decrease is due to higher demand for short-term firm services for the three and twelve months ended December 31, 2018 which displaced the IT services available to shippers. Financial Results Revenue Three Months Ended Years Ended December ($ millions, except where noted) Long-term firm transportation services Seasonal/short-term firm transportation services PITS/IT transportation services Ancillary revenue Total transportation revenue Service and other revenue Total revenue Certain 2016 and 2017 balances have been adjusted for the impact of the adoption of Accounting Standards Codification 606. Transportation Revenue Transportation revenue increased $7.0 million for the three months ended December 31, 2018 and increased $32.1 million for the year ended December 31, 2018 when compared to the same periods in Transportation revenue is recognized in a manner consistent with the underlying shipper agreements and contains adjustments related to the recoverable cost variance and shipper settlements. Transportation revenue is comprised of toll receipts from commercial transactions with shippers and the recognition of non-cash compressor fuel gas ( Fuel Gas ) that is collected from shippers in-kind as part of the consideration received in exchange for transportation services. Toll Receipts Toll receipts increased $7.8 million for the three months ended December 31, 2018 and increased $40.0 million for the year ended December 31, 2018 when compared to the same periods in These increases in toll receipts were primarily due to strong shipper demand and higher revenue from seasonal/short-term firm services. Page 8

10 Fuel Gas Fuel gas decreased $0.8 million for the three months ended December 31, 2018 and decreased $7.8 million for the year ended December 31, 2018 when compared to the same periods in The decreases were primarily due to a lower index price used to value the compressor fuel gas collected in-kind, slightly offset by higher fuel volumes collected in-kind from shippers. Service and Other Revenue Service and other revenue decreased $2.1 million for the three months ended December 31, 2018 and decreased $6.2 million for the year ended December 31, 2018 when compared to the same periods in The decreases were primarily due to lower shared services charged to Alliance U.S. as a result of the transition to the Owner-Operator model on June 25, Operational Expenses Three Months Ended Years Ended December ($ millions, except where noted) General and administration General and administration from related parties Operations and maintenance Operations and maintenance from related parties Property tax expense Total operational expenses Certain expenses have been reclassified as a result of the transition to the Owner-Operator model effective June 25, Operational expenses decreased $1.0 million for the three months ended December 31, 2018 and decreased $15.7 million for the year ended December 31, 2018 when compared to the same periods in These decreases were primarily due to lower non-cash compressor fuel gas consumption, reduced labour, consulting, software, and building related costs resulting from the transition to the Owner-Operator model, and lower repair and maintenance costs, partially offset by higher corridor management and repair related costs. Page 9

11 Other Income and Expenses Three Months Ended Years Ended December ($ millions, except where noted) Depreciation Interest expense Interest income and other (0.6) (1.3) (2.0) (3.9) (10.0) Total other income and expenses Other income and expenses decreased $0.8 million for the three months ended December 31, 2018 and decreased $6.3 million for the year ended December 31, 2018 when compared to the same periods in These decreases were primarily due to lower interest expense related to declining long-term debt balances as a result of scheduled principal payments on the senior notes and a reduction in depreciation expense due to certain assets becoming fully depreciated during Cash Provided by Operating Activities and Distributions Paid ($ millions, except where noted) Three Months Ended Years Ended December Cash provided by operating activities Distributions paid Cash provided by operating activities decreased $0.1 million for the three months ended December 31, 2018 and increased $21.9 million for the year ended December 31, 2018 when compared to the same periods in The increase was primarily due to higher net income and lower non-cash working capital movements. Distributions paid decreased $14.5 million for the three months ended December 31, 2018 primarily due to lower liquidity draws when compared to the same period in Distributions paid increased $43.5 million for the year ended December 31, 2018 when compared to the same period in These increases were primarily due to improved operating performance, available liquidity, and the implementation of monthly distributions in the second quarter of Page 10

12 Selected Quarterly Financial Information Q Q Total revenues Net income Cash provided by operating activities EBITDA (1) Distributions paid (1) Refer to Non-GAAP Financial Measures. Certain 2017 balances have been adjusted for the impact of the adoption of ASC 606. Q Q Q Q Q Q The trends for Alliance Canada s EBITDA and distributions paid over the past eight quarters are a result of: market conditions and shipper demand for flexible services; solid asset performance and competitive cost structure; and available liquidity. Related Party Transactions Alliance Canada provides transportation services to a number of shippers that are related entities of the Partners of Alliance Canada. The terms of these contracts are the same as those agreed to with independent third parties. For the year ended December 31, 2018, toll receipts from related party services amounted to $83.3 million (December 31, 2017 $117.2 million, December 31, 2016 $118.1 million). Effective June 25, 2018, Alliance Pipeline Ltd. ( General Partner ) engages affiliates of the Owners, which are also referred to as the Operators, to provide management, administrative, operational and workforce related services. Affiliates of Enbridge also provide consulting services associated with the commercial feasibility study for an expansion related to the open season that occurred earlier this year under the Services Agreements. These services were previously provided under a separate consulting services agreement. Alliance Canada reimburses the Operators for service costs incurred, on a cost recovery basis, under the terms of such Services Agreements. Prior to the transition to the Owner- Operator model, the General Partner provided these services to Alliance Canada. Alliance Canada does not directly employ any of the individuals responsible for managing or operating the business, nor does Alliance Canada have any directors. The Executive, Managerial and Administrative service agreement ( EMA ) allows Alliance Canada and Alliance U.S. to allocate shared services in exchange for reimbursement of incurred costs, plus an applicable mark-up. Services provided to Alliance U.S. are invoiced in Canadian dollars on a monthly basis and recognized over time using the input method based on the costs incurred to date. All amounts exchanged under this agreement are presented as general and administrative expenses from related parties, or operations and maintenance expenses from related parties, or other revenue from related parties, depending on the nature of the transaction. From time to time, Alliance Canada sells operational line pack to Alliance U.S. to supplement operational line pack or as fuel gas to support the efficient operation of the System. The terms of these transactions are the same as those that would be associated with independent third parties. Page 11

13 Alliance Canada provides management, administrative, operational and workforce related services to NRGreen Power Limited Partnership ( NRGreen ), an entity related by virtue of common ownership. Agreements between Alliance Canada and NRGreen, with respect to waste heat supply, manpower services and compressor site access, have been executed in exchange for reimbursement of incurred costs. Alliance Canada purchased carbon offsets from NRGreen in 2018 under the terms of the Offset Purchase Agreement. During the year Alliance Canada engaged a related entity to assess the commercial feasibility to increase throughput by adding more compression facilities along the pipeline. All amounts incurred to date are presented as operating and maintenance expenses from related parties. Pipeline Abandonment Costs The NEB has directed that federally-regulated pipeline companies in Canada collect and set aside funds to cover future pipeline abandonment costs. The NEB provided several key guiding principles under this program, including the position that abandonment costs are legitimate costs of providing transportation services and are recoverable, upon NEB approval, from shippers. Alliance Canada has been collecting abandonment funds since 2015 through a pipeline abandonment transportation surcharge as defined in the Tariff. These funds are set aside in the Company s Pipeline Abandonment Trust ( Trust ) until such time that the funds are required to settle abandonment-related expenditures. The Trust is consolidated and presented on the consolidated financial statements as investments held in trust. As per the Trust agreement, Alliance Canada is the primary beneficiary of the Trust. The pipeline abandonment costs fall within the scope of ASC 980, Regulated Operations which results in revenue being adjusted to reflect differences between the period in which the abandonment funding is collected through toll receipts and the period the abandonment costs are incurred. These differences are presented as part of a long-term regulatory liability on the consolidated financial statements. Liquidity and Capital Resources December 31 December Working capital (deficit) (127.3) 22.0 Variable rate debt (1) Revolving credit facility Total variable rate debt outstanding Total fixed rate debt outstanding (1) Total debt outstanding Cash and trust accounts Undrawn portion of the revolving credit facility Total cash and undrawn portion of the revolving credit facility (1) Carrying value. Certain 2017 balances have been adjusted for the impact of the adoption of ASC 606. Page 12

14 Liquidity and Capital Liquidity risk is managed to ensure access to sufficient funds required to meet obligations. Alliance Canada forecasts cash requirements to ensure funds are available to settle liabilities as they become due. The primary sources of liquidity are transportation toll receipts, undrawn revolving credit facility and funding from the Partners. Working capital deficits may occur from time to time as a result of seasonal activity fluctuations, or the timing related to debt re-financing, but any such deficiencies have no material effect on our liquidity because of regular monthly cash flow due to a high level of firm contracts and available committed revolving credit facility. We hold in our debt service reserve account an amount equal to at least six months of scheduled interest and principal payments, which is secured by letters of credit as part of the revolving credit facility. On May 3, 2018, the maturity date of the credit facility was extended from June 29, 2020 to June 29, The debt service reserve is in addition to the funds that are transferred monthly to the debt service account to be held for the semi-annual interest and principal payments on the senior notes outstanding and the monthly debt service amounts due on the revolving credit facility. Funds available under the revolving credit facility may also be accessed from time to time should cash receipts prove insufficient to fund the month s operating and investing activities. We may need to refinance our indebtedness or may require additional financing depending on future developments, enhancement opportunities or expansion plans. The undrawn portion of the revolving credit facility at December 31, 2018 and the total of cash and trust deposits are, in management s view, adequate to meet on-going liquidity and capital resource requirements. Capital Management Alliance Canada s objective in managing capital is to optimize our capital structure so we can ensure a healthy financial position to support our operations and growth opportunities. Capital is managed ensuring the debt outstanding compared to rate base does not exceed a maximum ratio of 70% debt to 30% equity. Senior debt consists of senior notes, including the current portion, and revolving credit facility drawings. Rate base does not have a standardized meaning under U.S. GAAP. Refer to Non-GAAP Financial Measures. We monitor our capital structure by periodically calculating the ratio of senior debt to rate base to ensure compliance with debt covenant requirements contained in financing agreements, which set a maximum borrowing amount for senior debt that will not exceed 70% of the rate base by more than U.S. $10.0 million. We are in compliance with all the terms and conditions of the covenants associated with our senior debt at for the year ended December 31, 2018, and expect to remain compliant throughout Distributions to Partners Distribution decisions are approved by the Board of Directors of the General Partner, on the basis of cash flow, financial requirements and other conditions existing at the time. Distributions are subject to Alliance Canada satisfying certain financing conditions, including a minimum Debt Service Coverage Ratio ( DSCR ) requirement. A distribution of $38.0 million was paid to our Partners on January 18, We intend to continue making Partner distributions on a monthly basis. Page 13

15 Credit Rating Credit ratings provide an independent measure of credit quality of any issues of securities. The credit ratings assigned by the rating agencies are not recommendations to purchase, hold or sell the securities nor do the ratings comment on market price or suitability for a particular investor. Any rating may not remain in effect for a given period of time or may be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant. On June 28, 2018, the Standard & Poor s Rating Service affirmed the credit rating for Alliance Canada senior secured debt as BBB+, and revised their rating outlook from stable to positive. On March 22, 2018, Moody s reaffirmed their previous credit rating for senior secured debt as Baa2, stable, and their previous credit rating for senior unsecured debt as Baa3, stable. Risks and Uncertainties Competition Risk The System faces competition for natural gas pipeline transportation services to the Chicago area from both existing and proposed pipeline projects. Existing pipelines, other than the Alliance Canada pipeline, provide natural gas transportation services from the WCSB and the Bakken to natural gas markets in the Midwest, the Northeast, and the Gulf Coast of the U.S. and Eastern Canada. In addition, there could be proposals to upgrade existing pipelines or to build new pipelines serving such areas and markets. Any new or upgraded pipelines could: allow shippers to have greater access to natural gas markets in addition to the markets served by the System and the pipelines to which it is connected; offer natural gas transportation services that are more desirable to shippers than those provided by the System because of location, facilities or other factors; and charge tolls or provide transportation services to locations that result in greater net profit for shippers. There is also competition from other sources of natural gas such as the Marcellus and Utica shale plays within the Appalachian Basin. Situated in an area ranging from parts of Quebec and upstate New York to Virginia in the south and as far west as Ohio, the Marcellus and Utica shale plays are in relatively close proximity to the Chicago Hub and Eastern Canadian markets to which the System currently provides the majority of its transportation service. The on-going development of the shale gas resource within the Appalachian Basin, coupled with new infrastructure, provides an alternative source of gas to the Midwest and the Northeast U.S. and Eastern Canada. Growing demand in the region will absorb some of the incremental volumes but there will be displacement of flows, particularly from the Gulf Coast, Rockies and Midcontinent regions. Similarly, the growth in Appalachian supplies has reduced the reliance of the Northeast region of the U.S. on natural gas imports from Canada. Emerging technologies could enable gas plays that are currently not commercially viable or inaccessible to be competitive in the marketplace that the System serves. Alliance Canada s pipeline and services are uniquely designed to enable rich gas producers to maximize the value of their product. Demand for Transportation Services Excess natural gas pipeline capacity out of the WCSB or a sustained period of low natural gas and NGLs prices could result in a reduction or deferral of investment in upstream gas development which could negatively impact the demand for our transportation services going forward. Page 14

16 Despite the general slowdown in the oil and gas sector, Alliance Canada has successfully contracted all of its long-term firm receipt transportation capacity through Dependence on Related Parties There is a significant degree of dependency on Aux Sable, a related party, to satisfy its requirements to provide heat content management services to Alliance U.S. Should the Aux Sable NGLs extraction facility fail to provide heat content management services for any reason, the System and our shippers may experience operational issues. In certain circumstances, the failure to provide heat content management services could result in an interruption or curtailment of transportation services on the System. It is not possible to predict the extent or duration of these operational issues or their precise financial or operational impact to Alliance Canada. There is no assurance that Aux Sable will remain continuously operational or will continue business operations indefinitely. The System operates as an integrated pipeline. Therefore, any matters which limit or restrict the ability of the Alliance U.S. pipeline to operate could affect the ability of the Alliance Canada pipeline to operate. Alliance Canada may have no control over matters which may adversely affect the Alliance U.S. pipeline. Regulatory Risk Alliance Canada is a federally-regulated, inter-provincial natural gas pipeline under the jurisdiction of the NEB. Our natural gas transportation assets and operations are also subject to federal, provincial and local regulations, as applicable. Regulation of Alliance Canada s business includes, but is not limited to, the methodology to determine tolls, terms and conditions of service, pipeline construction, operations and maintenance, and expansion of current operating facilities. Alliance Canada is subject to the risk of regulators or other government bodies revising or rejecting proposed or existing arrangements and agreements. This can include international trade agreements, permits and regulatory approvals for new projects, offering of new services, and the tariff structure of Alliance Canada. Any revisions or rejections to existing or proposed arrangements or agreements could have a significant and potentially adverse effect on Alliance Canada s earnings and financial condition. As well, compliance with legislative changes may have an impact on the costs of existing operations or future projects. We believe that regulatory risk is managed through the expertise of the legal and regulatory services provided to Alliance Canada, including the review of existing and proposed tariffs and tolls for compliance with regulatory guidelines and requirements. Alliance Canada has established and maintains strong relationships with our shippers which helps to reduce regulatory risk. The NEB continues to oversee operating requirements, financial reporting, risk standards and affiliate rules. Alliance Canada continues to meet these and all regulatory requirements by ensuring we are a process driven and operationally compliant organization. Page 15

17 Safety and Environmental Risks Alliance Canada has established safety and environmental policies and practices that are designed to reduce exposure to the inherent risks of operating a natural gas pipeline. These risks include possible damage to the environment and claims or other disputes with landowners or other individuals affected by the operation of the Alliance Canada pipeline. Alliance Canada's policies and practices are designed to ensure that all aspects of its operations comply with existing laws and regulations relating to personal safety and protection of the environment, including those related to GHG emissions. The operations of Alliance Canada are subject to federal, provincial and local laws and regulations relating to the protection of the environment. Alliance Canada believes that adequate measures have been taken to monitor and mitigate the environmental effects of the operation and maintenance of the Alliance Canada pipeline. Alliance Canada conducts regular inspections of its facilities, allows pertinent agency inspections as required, and follows defined practices to ensure that regulatory requirements and commitments are met during the construction, operation, and maintenance of its facilities. Alliance Canada and its shippers will be exposed to additional costs of complying with new, more stringent regulations. Pipeline Right-of-Way Encroachment Population growth adjacent to the System s right-of-way is a normal event that occurs throughout Canada and the U.S. However, when industrial, commercial, or residential development activities occur in close proximity to a pipeline right-ofway, pipeline companies are required to make an assessment of the changed circumstances and whether there is a need for remedial action, and in Canada if required, to submit a plan for approval by the NEB of the steps to be taken by the pipeline company to address the encroachment. Remedial actions can impact operations and result in significant costs associated with maintaining pipeline safety, and could include replacing or moving the pipeline or reducing the pressure in a segment of the System or other alternatives. A pipeline re-route could require a services curtailment, and a pressure reduction in a pipeline segment which could result in lower volumes transported. Operating Risks Operation of the System involves many risks, several of which may be beyond our control, including but not limited to: breakdown or failure of equipment, information systems or processes; disputes and operational issues with interconnecting facilities and operators; performance of equipment at levels below those originally intended; catastrophic events such as natural disasters, fires, explosions, pipeline failure, wars, acts of terrorism and other similar events; and lack of spare parts. The occurrence or continuance of any of these events could increase the cost of operating the System and/or reduce its transportation capacity, thereby potentially impacting cash flows and operating income. We maintain disaster recovery procedures and insurance coverage in accordance with prudent pipeline operating standards in case of an incident. Inspection, robust maintenance and system monitoring methods are also employed to manage pipeline, turbine and facility integrity as well as to minimize system disruptions. Page 16

18 Credit Risk Alliance Canada is exposed to credit risk as the business is concentrated in the natural gas transportation industry and its revenue is dependent upon the ability of shippers to pay monthly demand charges. A majority of the shippers operate in the oil and gas exploration and development, energy marketing or transportation industries and may be exposed to longterm downturns in energy commodity prices, including the price for natural gas, or other credit events impacting these industries. Should a shipper be unable to fulfill their contractual obligations and if a suitable replacement shipper(s) were not readily available, Alliance Canada s ability to fund our financing and operating costs and distributions to Partners may be impacted. We limit, to an extent, our exposure to this credit risk by requiring shippers to provide letters of credit or other suitable security if shippers do not maintain specified credit ratings or a suitable financial position. We expect that, should a shipper be unable to fulfill its contractual obligations in the future, re-contracting of the repudiated contract is possible, although there may be a risk that the revenue may be lower than the original transportation contract The risk of non-performance of our shippers is mitigated by our credit approval process and on-going monitoring procedures. At December 31, 2018, approximately 75% of firm capacity (as represented by percentage of those associated revenues) is contracted to shippers who do not have an investment grade rating or acceptable credit status and are required to post security. These shippers have provided required security, but in no case does such security cover more than three months of obligations under the transportation contracts. Currently there are no material accounts receivable that meet the definition of past due and/or impaired. Alliance Canada will continue to monitor both current and potential shippers based upon our credit approval process. The credit risk arising from cash deposits is minimal as cash is held with major financial institutions. As at December 31, 2018, Alliance Canada has investments held in the Trust. Aside from these we do not hold any other short or long-term investments. Liquidity Risk Alliance Canada manages liquidity risk by ensuring access to sufficient funds to meet its obligations. We forecast cash requirements to ensure funds are available to fund liabilities as they become due. The primary sources of liquidity are funds received from transportation tolls, undrawn committed revolving credit facility and funding from Partners. At December 31, 2018, the 4.928% senior notes due in 2019 are presented as part of the current portion of long-term debt. As a result, Alliance Canada has a working capital deficit on December 31, 2018 of $127.3 million. Refer to Non- GAAP measures for a definition of working capital deficit. Working capital deficits, which occur occasionally and temporarily in some quarters, have no material effect on the liquidity of Alliance Canada. We are assessing alternatives for refinancing the 4.928% senior notes in We are highly dependent on our shippers for revenues from their contracted transportation capacity on the System. The failure of the shippers to fulfill their contractual obligations under the transportation agreements or the failure to replace such shippers on equivalent terms and conditions could have a material adverse effect on our cash flows and financial condition, and could impair our ability to service debt obligations and continue paying distributions to our Partners. Page 17

19 We hold in our debt service reserve account an amount at least equal to six months of scheduled interest and principal payments, which is funded by letters of credit as part of the revolving credit facility. The debt service reserve is in addition to the funds that are transferred monthly to the debt service account to be held for the semi-annual interest and principal payments on the senior notes outstanding and the monthly debt service amounts due on the revolving credit facility. Funds available under the revolving credit facility may also be accessed from time to time should cash receipts prove insufficient to fund the month s operating and investing activities. We may need to refinance our indebtedness under our revolving credit facility and senior unsecured notes outstanding at maturity date and may require additional financing depending on future developments, enhancement opportunities or acquisition plans. The ability to refinance existing indebtedness and arrange additional financing in the future will depend, in part, upon prevailing market conditions at the time, as well as our business performance. Having an investment grade credit rating supports our ability to re-finance existing debt as it matures and the ability to access cost competitive capital for future growth. A ratings downgrade below investment grade may have a materially adverse effect on the ability to obtain financing on favourable terms and conditions. Future cash distributions may be adversely affected if we are unable to refinance our indebtedness or arrange additional financing on terms and conditions at least as favourable as the existing terms and conditions of such indebtedness. If we are unable to refinance our indebtedness then, at maturity, we will need to use available cash to repay the indebtedness. If access to additional capital, through either debt or equity financing, is unavailable then future opportunities may be foregone. Cyber Risk Alliance Canada is exposed to cyber risk as day to day business operations are connected and conducted over the internet. These risks include, but are not limited to: damage to corporate assets; compromise of the pipeline s operating systems; degradation of internally delivered services; theft of personal or corporate information; and compromise of data integrity. These risks can be realized from malware infections in s or websites as well as social engineering activities like phishing and employee impersonation. Alliance Canada uses safeguards to ensure our information systems remain secure and reliable. We maintain communication with the Canadian Cyber Incident Response Centre which allows us to stay current with any new cyber threats. This information sharing is bi-directional, where appropriate, resulting in cyber threats and incidents being reported to authorities around the world. Numerous cyber security technologies have been implemented throughout Alliance Canada as part of an in-depth defence strategy. These technologies allow us to correlate and respond to threats, if needed. We are regularly evaluating our cyber security technologies and either replacing them or augmenting them as needed. Page 18