Veresen Inc. Annual Information Form Year Ended December 31, 2010 March 23, 2011

Transcription

1 Veresen Inc. Annual Information Form Year Ended December 31, 2010 March 23, 2011

2 TABLE OF CONTENTS WHAT IS THIS ANNUAL INFORMATION FORM?...1 ADDITIONAL INFORMATION ABOUT US...1 DEFINED TERMS...3 TECHNICAL ABBREVIATIONS...4 INDUSTRY AND FINANCIAL TERMS...4 REFERENCES TO LEGISLATION...5 CURRENCY REFERENCES AND EXCHANGE RATES...5 FORWARD-LOOKING INFORMATION...5 VERESEN INC....7 EMPLOYEES...7 SUBSIDIARIES AND OPERATING ENTITIES...7 GENERAL DEVELOPMENT OF OUR BUSINESS...8 RECENT DEVELOPMENTS DEVELOPMENTS DEVELOPMENTS DEVELOPMENTS OUR BUSINESS OUR PIPELINE BUSINESS OVERVIEW OF OUR PIPELINE BUSINESS ALLIANCE PIPELINE Overview Shippers on Alliance Credit Status of Alliance Shippers Expansion Capability Regulation in Canada Regulation in the US Tolls and Tariffs Environmental Matters Operations and Maintenance Pipeline Safety Outlook Competition The Natural Gas Transportation Industry ALBERTA ETHANE GATHERING SYSTEM Overview Shipper Profile and Ethane Transportation Agreements Ethane Customers Operations and Maintenance Regulatory Environment Environmental Matters Outlook Competition The Specification Ethane Transportation Industry Ethane Market Structure Current Ethane Supply Current Ethane Demand OUR MIDSTREAM BUSINESS OVERVIEW OF OUR MIDSTREAM BUSINESS CHANNAHON FACILITY... 30

3 NGL SALES AGREEMENT DOWNSTREAM FACILITIES FIRM TRANSPORTATION CONTRACTS AND INJECTION FACILITIES OFF-GAS PROCESSING SEPTIMUS GAS PLANT ENVIRONMENTAL MATTERS SAFETY OUTLOOK COMPETITION THE MIDSTREAM INDUSTRY Market Demand NGL Economics THE OFF-GAS PROCESSING INDUSTRY OUR POWER BUSINESS OVERVIEW OF OUR POWER BUSINESS REGULATORY ENVIRONMENT US Canada ENVIRONMENTAL MATTERS US Canada OUTLOOK COMPETITION THE ELECTRICAL POWER INDUSTRY THE DISTRICT ENERGY INDUSTRY OTHER INITIATIVES JORDAN COVE ENERGY PROJECT AND PACIFIC CONNECTOR GAS PIPELINE RISK FACTORS DESCRIPTION OF CAPITAL STRUCTURE COMMON SHARES PREFERRED SHARES SERIES C DEBENTURES DIVIDENDS RATINGS MARKET FOR SECURITIES CLASS A UNITS SERIES B DEBENTURES SERIES C DEBENTURES EXCHANGEABLE DEBENTURES DIRECTORS AND OFFICERS AUDIT COMMITTEE INFORMATION INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS TRANSFER AGENT AND REGISTRAR MATERIAL CONTRACTS EXPERTS APPENDIX "A" TERMS OF REFERENCE OF THE AUDIT COMMITTEE... A-1 -ii-

4 WHAT IS THIS ANNUAL INFORMATION FORM? Veresen Inc. is required by Canadian securities laws to file an Annual Information Form each year. The Annual Information Form is a disclosure document intended to provide material information about us and our business at a point in time in the context of our historical and possible future development. This Annual Information Form describes our company, operations and prospects, risks and other external factors that impact us specifically. The disclosure in this Annual Information Form is supplemented throughout the year by subsequent continuous disclosure filings including news releases, material change reports, business acquisition reports, financial statements and management's discussion and analysis. Prior to January 1, 2011, we operated as a limited partnership structure under the name of Fort Chicago Energy Partners L.P. (Fort Chicago). Pursuant to a plan of arrangement (Arrangement) under the Business Corporations Act (Alberta) (ABCA), at 12:01 a.m. (Calgary time) on January 1, 2011 Fort Chicago converted to a corporate structure and holders of Class A limited partnership units of Fort Chicago (Class A Units) exchanged their Class A Units for common shares of Veresen Inc. (Common Shares) on a one-for-one basis. The Common Shares commenced trading on the Toronto Stock Exchange (TSX) on January 6, 2011 and the Class A Units were concurrently voluntarily delisted. All capitalized words used in this Annual Information Form which are not otherwise defined herein shall have the meanings ascribed thereto under Defined Terms. Certain disclosures required herein relate to information prior to January 1, As the exchange of Class A Units for Common Shares pursuant to the Arrangement was effective at 12:01 a.m. (Calgary time) on January 1, 2011, information provided before such date is provided for Fort Chicago and information provided at January 1, 2011 and later is provided for Veresen Inc. Therefore, as the context requires, references to "Veresen, we, us or our" when used in a historical context prior to January 1, 2011 refers to Fort Chicago and when used in the present tense or prospectively those terms refer to Veresen Inc. Unless otherwise noted, information is provided as at December 31, ADDITIONAL INFORMATION ABOUT US Our Information Circular dated March 10, 2010 relating to our annual meeting of holders of Class A Units held on April 29, 2010 and our Information Circular dated March 23, 2011 relating to our annual meeting of holders of Common Shares to be held on May 12, 2011 provide additional information about us, including: compensation and indebtedness of the directors and certain executive officers; the principal holders of our securities; and securities authorized for issuance under our equity compensation plans, if any. Our 2010 Report to Shareholders and our 2010 Financial Report, which includes our Management's Discussion and Analysis and our audited consolidated financial statements as at and for the year ended December 31, 2010, give more financial information. This Annual Information Form, the above noted Information Circulars, our 2010 Report to Shareholders and our 2010 Financial Report, are available on our website at and under our profile on SEDAR at or copies may be obtained upon request by contacting:

5 Veresen Inc. Suite 440, Livingston Place 222 3rd Avenue S.W. Calgary, Alberta, Canada T2P 0B4 Attention: Investor Relations Telephone: (403) Fax: (403)

6 DEFINED TERMS AEGS... Alliance... Alliance Canada... Alliance Canada Marketing... Alliance Canada Pipeline... Alliance Pipeline... Alliance US... Alliance US Pipeline... Aux Sable... Aux Sable Canada... Aux Sable US... Class A Units... Common Shares... ERCB... FERC... GHG... MD&A... NEB... Preferred Shares... SEDAR... Shareholders... WCSB... Alberta Ethane Gathering System Alliance Canada and Alliance US Alliance Pipeline Limited Partnership Alliance Canada Marketing L.P. That portion of the Alliance Pipeline that is located in Canada A natural gas transmission pipeline that runs from northwestern Alberta and northeastern British Columbia to Channahon, Illinois Alliance Pipeline L.P. That portion of the Alliance Pipeline that is located in the US Aux Sable Canada, Aux Sable US and Alliance Canada Marketing Aux Sable Canada LP Aux Sable Liquid Products LP and Aux Sable Extraction LP Class A limited partnership units of Fort Chicago Energy Partners L.P. Common Shares of Veresen Inc. Energy Resources Conservation Board US Federal Energy Regulatory Commission Greenhouse gas Management's Discussion and Analysis National Energy Board Preferred Shares of Veresen Inc. System for Electronic Document Analysis and Retrieval Holders of Common Shares Western Canadian Sedimentary Basin -3-

7 TECHNICAL ABBREVIATIONS bbls = barrels (42 US gallons) hp = horsepower bbls/d = barrels per day km = kilometer bcf = billion cubic feet LNG = liquefied natural gas bcf/d = billion cubic feet per day mmcf/d = million cubic feet per day btu = British thermal unit MW = megawatt btu/cf = British thermal unit per one cubic foot INDUSTRY AND FINANCIAL TERMS This is a glossary of certain industry and financial terms used in this Annual Information Form: capital structure... financing structure of an entity, usually a combination of equity securities and debt cogeneration... generation of electricity and the capture and use of otherwise wasted heat energy byproducts; cogeneration is also referred to as a combined heat and power system combined cycle... in a combined cycle power plant, or combined cycle gas turbine plant, a gas turbine generates electricity and the waste heat is used to make steam to generate additional electricity via a steam turbine downstream... processes or other activities, such as refining or marketing, that occur after a product leaves a facility Energy Recovery Generation (ERG )... the ERG process captures the heat energy by-product from industrial operations through the use of heat recovery technology and converts it to usable electrical energy firm transportation... pipeline service that is available at all times during a period covered by a transportation contract; also, the service is not subject to a prior claim from another customer and receives the same priority as any other customer having a right to firm transportation greenfield... a project or development that is originally conceived and executed where no assets or operations exist NGL... those hydrocarbon components that can be recovered from natural gas as liquids including ethane, propane, butanes, pentanes plus and condensate run-of-river... hydroelectric technology that uses the natural flow of water from a river to produce electricity without an associated large dam or reservoir shipper.... a company that holds a contract to transport natural gas, and NGL, if applicable, on a pipeline straddle plant... a gas processing plant located on or near a gas pipeline which removes NGL from gas and returns the gas to the pipeline -4-

8 REFERENCES TO LEGISLATION All references to legislation or policies of government agencies in this Annual Information Form include any amendments to such legislation or policies. References to legislation also include any regulations issued under such legislation. CURRENCY REFERENCES AND EXCHANGE RATES All references to "$" or "dollars" in this Annual Information Form are references to Canadian dollars unless otherwise noted. The noon-day Canadian to US dollar exchange rates for Cdn. $1.00, as reported by the Bank of Canada, were: (US$ per Cdn. $1.00) December Average High Low On March 23, 2011, the noon-day exchange rate was US$ per Cdn. $1.00. FORWARD-LOOKING INFORMATION Some of the information in this Annual Information Form is forward-looking information under Canadian securities laws. All information that addresses activities, events or developments which may or will occur in the future is forward-looking information. Forward-looking information typically contains statements with words such as may, estimate, anticipate, believe, expect, plan, intend, target, project, forecast or similar words suggesting future outcomes or outlook. Forward-looking statements in this Annual Information Form include statements about the: sources of additional gas supplies for transportation on the Alliance Pipeline; anticipated cost to purchase GHG emission credits for the Alliance Pipeline; projected in-service dates for Alliance Canada's new receipt points; impact of Canadian and US federal emissions regulations on the Alliance Pipeline; timetable for the introduction of climate change proposals and regulations in Canada and the US; sources of additional ethane supplies for transportation on the Alberta Ethane Gathering System; anticipated results of the off-gas processing arrangements between Aux Sable Canada and Dow Chemical; anticipated results of the off-gas processing arrangements between Aux Sable Canada and Shell Canada Products; NGL available to Aux Sable for processing sourced from shale developments; timing of commencement of sales of distilled water at our Ripon power facility; projected in-service date for our power facilities under construction; -5-

9 emissions credit positions of our power and district energy facilities; pursuit of the development of a renewable energy portfolio; timing of and obtaining of regulatory approvals and the sources of LNG available for our Jordan Cove LNG terminal and Pacific Connector gas pipeline projects; potential increased volume to Aux Sable's Channahon facility from the Prairie Rose Pipeline connection to the Alliance Pipeline; and projected in-service date for Aux Sable Canada's Heartland off-gas facility. The risks and uncertainties that may cause actual results to vary from forward-looking information or may affect the operations, performance, development and results of our businesses include the following factors: our ability to successfully implement our strategic initiatives and achieve expected benefits; levels of oil and gas exploration and development activity; the status, credit risk and continued existence of contracted customers; the availability and price of capital; the availability and price of energy commodities; the availability of construction services and materials; fluctuations in foreign exchange and interest rates; our ability to successfully obtain regulatory approvals; changes in tax, regulatory, environmental, and other laws and regulations; competitive factors in the pipeline, midstream and power industries; operational breakdowns, failures, or other disruptions; and the prevailing economic conditions in North America. Additional information on these and other risks, uncertainties and factors is included in our filings with the securities commissions or similar authorities in each of the provinces of Canada. We caution you that this list of factors and risks is not exhaustive. The effect of any one risk, uncertainty or factor on a particular forward-looking statement is uncertain because these factors are independent and management's future course of action will depend on our assessment of all information at that time. Although we believe that the expectations in the forward-looking information are reasonable based on information currently available to us, we can give no assurances on future results, levels of activity and achievements. You should not place undue reliance on the information contained herein, as actual results achieved will vary from the information provided herein and the variations may be material. We do not promise that -6-

10 actual results will be the same in whole or in part as those set out in the forward-looking information. Furthermore, the forward-looking statements herein are made as of the date of this Annual Information Form, and, except as required by applicable law, we may not update publicly or revise any forwardlooking information. This cautionary statement qualifies all forward-looking information in this Annual Information Form. VERESEN INC. Veresen Inc. was incorporated as Alberta Ltd. on October 1, 2010 pursuant to the provisions of the ABCA for the sole purpose of participating in the Arrangement. On October 15, 2010, Alberta Ltd. filed articles of amendment to change its name to Veresen Inc. As a result of the Arrangement, Veresen Inc. became the sole holder of all of the issued and outstanding Class A Units. The registered office of Veresen Inc. is located at 4500, 855 2nd Street S.W., Calgary, Alberta, Canada, T2P 4K7 and its principal place of business is Suite 440, Livingston Place, 222 3rd Avenue S.W., Calgary, Alberta, Canada, T2P 0B4. EMPLOYEES On December 31, 2010, we had 109 employees as set forth in the following table: Calgary, Alberta, Corporate Office London, Ontario, Office Power Accounting... 6 London District Energy System (London, Ontario) Toronto, Ontario, Office Ontario Power Development... 3 Vancouver, British Columbia, Office B.C. Power Development... 4 PEI District Energy System (Charlottetown, Prince Edward Island) San Marcos, California US Power Operations and Development... 2 Total SUBSIDIARIES AND OPERATING ENTITIES The following organization chart presents the name and jurisdiction of incorporation or organization of, and our direct or indirect ownership interest in the voting securities of, each of our principal subsidiaries on January 1, 2011 after giving effect to the Arrangement. The chart includes each of our subsidiaries and operating entities that had total assets that exceeded 10% of our total consolidated assets, or revenues that exceeded 10% of our total consolidated revenues, as at January 1, The chart does not include all of our subsidiaries. The aggregate assets and revenues of the excluded subsidiaries did not exceed 20% of our total consolidated assets or total consolidated revenues as at January 1,

11 Veresen Inc. (Alberta) Fort Chicago Energy Partners L.P. (Alberta) (100%) Fort Chicago Pipelines (Canada) Ltd. (Alberta) (100%) Alliance Pipeline L.P. (Delaware) (50%) Alberta Ethane Gathering System LP (Alberta) (100%) Alliance Pipeline Limited Partnership (Alberta) (50%) Aux Sable Liquid Products L.P. (Delaware) (42.698%) NRGreen Power Limited Partnership (Alberta) (50%) East Windsor Cogeneration Limited Partnership (Ontario) (75%) GENERAL DEVELOPMENT OF OUR BUSINESS The following describes the recent development of our business, the general development of our business over the last three financial years and the significant acquisitions, dispositions, events or conditions that have had an influence on that development. Recent Developments March 2011 Our Board of Directors appoints Stephen W.C. Mulherin as Chairman of the Board to be effective May 12,

12 February 2011 We complete the purchase from ENMAX Corporation (ENMAX) of interests in a portfolio of run-of-river hydroelectric facilities and development projects in British Columbia including a 99% interest in the 11 MW Furry Creek hydroelectric facility, a 100% interest in two 11 MW Clowhom hydroelectric facilities and a 50% interest in the 15 MW Culliton Creek hydroelectric project. February 2011 Aux Sable Canada announces its acquisition of the Crew Energy Inc. (Crew) Septimus Gas Plant expansion in the liquids-rich Montney region of northeast British Columbia. January 2011 Henry W. Sykes and J. Paul Charron are appointed to our Board of Directors. January 2011 We complete the Arrangement and all outstanding Class A Units are exchanged for Common Shares on a one-for-one basis resulting in our conversion from a limited partnership structure to a corporate structure. January 2011 Aux Sable Canada announces its commercial arrangement with Trilogy Energy Corp. to receive the NGL in Trilogy's liquids-rich natural gas stream originating from the Kaybob area that flows into the Alliance Canada Pipeline Developments During 2010 Alliance Canada receives NEB approval for construction of two new meter station facilities, the Septimus meter station located near Taylor, British Columbia and the Sunrise meter station located northwest of Dawson Creek, British Columbia. December 2010 Eight percent of shippers on the Alliance Pipeline elect to extend their existing commercial contracts from December 1, 2015 to at least December 1, November 2010 We complete the purchase of the common shares and common share purchase warrants of Pristine Power Inc. (Pristine) by way of take-over bid on the basis of of a Class A Unit for each Pristine common share and $0.02 for each Pristine common share purchase warrant. October 2010 Fort Chicago Power Ltd. redeems all of its outstanding 6.25% exchangeable unsecured subordinated debentures due October 31, October 2010 We enter into an arrangement agreement regarding the Arrangement and announce that the new corporation will be named Veresen Inc.. September 2010 Aux Sable Canada commences commercial operations of the Septimus liquids-rich natural gas pipeline that interconnects with the Alliance Canada Pipeline at a receipt point near Septimus, British Columbia. August 2010 We complete the purchase of all of the common shares of Swift Power Corp. (Swift) by way of take-over bid for cash consideration of $0.35 for each Swift common share. July 2010 We complete a public offering of $86.25 million aggregate principal amount (including the exercise of over-allotment options by the syndicate of underwriters) of 5.75% convertible unsecured subordinated debentures, Series C due July 31, June 2010 Aux Sable Canada executes a long-term off-gas processing agreement with Shell Canada Products (Shell), securing a new feedstock source for Aux Sable Canada's Heartland off-gas facility -9-

13 located in Fort Saskatchewan, Alberta. The facility is expected to process up to 20 mmcf/d of off-gas and produce hydrogen, ethane and a propane-plus mix, which will be delivered by pipeline to Shell. April 2010 London District Energy expands its services to the St. Joseph's Hospital and a large hotel and city centre complex. March 2010 We complete the purchase of a 100% interest in Northbook New York, LLC, which owns the 33 MW Glen Park hydroelectric power generation facility in upstate New York for an aggregate purchase price of US$80.1 million. February 2010 Pecan Pipeline (North Dakota), Inc. (Pecan Pipeline) commences delivery of liquidsrich natural gas to the Alliance US Pipeline at a receipt point near Bantry, North Dakota. January 2010 Aux Sable Canada receives regulatory approval to construct the Septimus liquids-rich natural gas pipeline, a 20-inch diameter, 20-km rich-gas pipeline connecting gas from the Septimus Gas Plant to the Alliance Canada Pipeline Developments December 2009 FERC issues an order authorizing Jordan Cove Energy Project L.P. to site, construct and operate an LNG import terminal and issues a certificate approving an application by Pacific Connector Gas Pipeline, L.P. to construct and operate an interstate natural gas transmission system. December Aux Sable Canada announces its acquisition of the 25 mmcf/d Septimus Gas Plant located near Fort St. John, British Columbia from Crew. November 2009 Aux Sable Canada and BA Energy Inc. enter into a settlement agreement allowing Aux Sable Canada to retain title to and control of the Heartland off-gas facility. November 2009 Commercial operations commence at the East Windsor Cogeneration Centre in Windsor, Ontario. September 2009 Alliance US commences construction of a new measurement receipt station at Bantry, North Dakota in support of a firm transportation agreement with Pecan Pipeline. June and July 2009 Alliance holds concurrent open seasons for two new services: Gathering Receipt Service and Canadian Delivery Service in response to market interest presented to Alliance. June 2009 Aux Sable US enters into a long-term processing agreement with Pecan Pipeline to process high btu content associated gas from the Bakken oil developments in North Dakota. June 2009 Alliance US, Questar Overthrust Pipeline Company and Spectra Energy Transmission, LLC sign a memorandum of understanding to pursue construction of the Rockies Alliance Pipeline. May 2009 Jordan Cove Energy Project L.P. and Pacific Connector Gas Pipeline, L.P. received a Final Environmental Impact Statement issued by FERC in respect of their applications for approval to construct an LNG import terminal and an interstate natural gas transmission system, respectively Developments During 2008 Alliance adds two new delivery points, one at Lyle, Iowa and the second at Hankinson, North Dakota. -10-

14 December 2008 Commercial operations commence at our new cogeneration facility in London, Ontario. December 2008 Commercial operations commence at the new distilled water plant at our San Gabriel cogeneration facility in Pomona, California. December 2008 Aux Sable Canada repurchases all interests held in it by Williams Natural Gas Liquids Canada, Inc., increasing our interest in Aux Sable Canada to 50%. December 2008 Alliance Canada completes the Taylor Junction compressor station in northeast British Columbia. This new 7,700 hp compressor station provides Alliance Canada with the ability to receive an additional 150 mmcf/d from gas fields in the area. November 2008 The Alameda, Saskatchewan waste heat power generation facility of NRGreen Power Limited Partnership commences operations. October 2008 Construction is curtailed at Aux Sable Canada's Heartland off-gas facility due to BA Energy Inc. suspending construction of its upgrader. BA Energy reimburses Aux Sable Canada for all capital costs and commitments incurred in respect of this facility. October 2008 Alliance US receives FERC approval to receive NGL-rich gas from Pecan Pipeline. October 2008 Alliance US and Questar Overthrust Pipeline Company jointly propose construction of a natural gas pipeline to be called the Rockies Alliance Pipeline. The Rockies Alliance Pipeline would connect the US Rocky Mountain region to the Chicago market hub. September 2008 Alliance US signs a precedent agreement with Pecan Pipeline for the proposed firm transportation of NGL-rich gas in the amount of 40 mmcf/d for the first year and 80 mmcf/d per year thereafter, for an initial ten-year period. September 2008 We acquire a 100% interest in the Brush II generation facility, a nominal 70 MW natural gas-fired combined cycle power generation facility located in Colorado. August 2008 Jordan Cove Energy Project L.P. and Pacific Connector Gas Pipeline, L.P. receive a draft Environmental Impact Statement issued by FERC in respect of their applications for approval to construct an LNG import terminal and an interstate natural gas transmission system, respectively. July 2008 The Loreburn and Estlin, Saskatchewan waste heat power generation facilities of NRGreen Power Limited Partnership commence operations. March 2008 We make a $11.3 million investment in an independent power company developing new technology for solar power. January 2008 Sable NGL Canada LP and Dow Chemical Inc. enter into an exclusive strategic alliance agreement to pursue new off-gas processing opportunities in Alberta. -11-

15 OUR BUSINESS We are a publicly traded corporation based in Calgary, Alberta, that owns and operates energy infrastructure assets across North America. We are engaged in three principal businesses: a. a Pipeline Business comprised of interests in two pipeline systems, the Alliance Pipeline and the Alberta Ethane Gathering System; b. a Midstream Business which includes a significant interest in a world-class NGL extraction facility near Chicago; and c. a Power Business with renewable and gas-fired facilities and development projects in Canada and the United States, and district energy systems in Ontario and Prince Edward Island. We, and our businesses, are also actively developing a number of greenfield investment opportunities that will be a key source of future growth. These opportunities include: a. LNG and pipeline facilities on the US west coast; b. Alberta-based ethane and NGL extraction facilities; c. waste heat and other power facilities along the Alliance Pipeline; and d. various power opportunities including gas-fired power facilities and renewable energy projects such as run-of-river hydroelectric operations and wind power projects in British Columbia and Ontario. The following table shows our revenues from operations by business segment for the years ended December 31, 2010 and Revenues From Operations ($ thousands) Pipeline Business , ,912 Midstream Business , ,709 Power Business... 98,662 75,709 Total Revenues , ,

16 Map of Our Business Opportunities Below is a map showing the location of each of our assets and our projects in development. -13-

17 Map of our Pipeline and Midstream Assets -14-

18 OUR PIPELINE BUSINESS Overview of Our Pipeline Business Our Pipeline Business is comprised of: a. a 50% interest in the Alliance Pipeline, which is an integrated pipeline system consisting of an approximately 3,000 km high pressure natural gas mainline pipeline located in Canada and the US, a series of lateral pipelines located in Canada and related infrastructure; and b. a 100% interest in the Alberta Ethane Gathering System, a 1,324 km pipeline that transports pure ethane within Alberta from various ethane extraction plants to major petrochemical complexes located near Joffre and Fort Saskatchewan, Alberta. Alliance Pipeline All dollar amounts in this section reflect 100% of Alliance's interest therein and have not been adjusted to reflect our proportionate share. Overview The Alliance Pipeline consists of an approximately 3,000 km integrated high pressure natural gas mainline pipeline located in Canada and the US, a series of lateral pipelines located in Canada and related infrastructure. Alliance Canada has entered into transportation contracts with shippers to transport bcf/d of natural gas, on a firm transportation basis, from supply areas in the northwestern Alberta and northeastern British Columbia portions of the WCSB to delivery points primarily near Chicago, Illinois. In addition, one supply point is located in southeastern Saskatchewan. Alliance US has entered into transportation contracts with shippers, on a firm transportation basis, to transport bcf/d of natural gas. In February 2010, Alliance US added a receipt point on the Alliance US Pipeline near Bantry, North Dakota. Also, during 2010, Alliance Canada added three new receipt points: Septimus, located near Taylor, British Columbia went into service in September 2010; Sunrise, located northwest of Dawson Creek, British Columbia is expected to be placed into service in the second quarter of 2011; and Pine Creek, Alberta, which is located on an existing Alliance Canada site, will be placed into service upon completion of the interconnecting pipeline. The Alliance Pipeline connects in the Chicago area with two local natural gas distribution systems and five interstate natural gas pipelines, which provide shippers with access to natural gas markets in the midwestern and northeastern US and eastern Canada. The Alliance Pipeline connects with the Aux Sable NGL extraction facility in Channahon, Illinois, near the terminus of the Alliance Pipeline, which extracts NGL from the natural gas transported on the system. All shippers have signed extraction agreements that give Aux Sable the exclusive right to extract the NGL from the rich gas transported on the Alliance Pipeline. Alliance has agreed to use all reasonable efforts to assist Aux Sable in obtaining extraction agreements from all future shippers and all assignees of present and future shippers. Upon the renewal of an existing transportation contract, the agreement of the respective shipper with Aux Sable to extract NGL from the rich gas remains in effect. The Alliance Pipeline 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. -15-

19 The Alliance Pipeline facilities include 14 mainline compressor stations that operate between approximately 31,000 hp and 40,000 hp each, spaced at approximately 193 km intervals. The Alliance Pipeline's facilities also include mainline block valves, spaced, on average, at 32 km intervals, operating and maintenance facilities and an associated supervisory control and data acquisition, or SCADA, system. The Alliance Canada Pipeline is comprised of an approximately 1,560 km natural gas mainline pipeline, approximately 730 km of lateral pipelines connected to the pipeline's mainline and 52 receipt point locations, primarily at natural gas processing facilities in northwestern Alberta and northeastern British Columbia (with one receipt point in southeastern Saskatchewan) and related infrastructure. The Alliance US Pipeline consists of an approximately 1,426 km natural gas mainline pipeline, 11 delivery points (two in North Dakota, one in Iowa and eight along the delivery header near Chicago) and related infrastructure owned by Alliance US. The Alliance Canada Pipeline and the Alliance US Pipeline are connected at the Canada-US border near Elmore, Saskatchewan and operate as an integrated pipeline system. Shippers on Alliance There are 30 shippers on the Alliance Pipeline, comprised of oil and natural gas exploration and production, pipeline, and aggregator and marketing companies. Alliance Canada has firm transportation agreements with shippers for bcf/d of natural gas and Alliance US has firm transportation agreements with shippers for bcf/d of natural gas, which is 100% of the firm transportation capacity on the Alliance Pipeline. Firm service shippers have the first right to access pipeline capacity above the firm contracted level. This additional service is called authorized overrun service. Authorized overrun service has averaged 21% of the contracted capacity for the past five years, producing average annual aggregate throughput on the Alliance Pipeline of approximately 1.6 bcf/d. Authorized overrun service is available to firm shippers at no cost other than fuel, which is provided in kind by shippers. When a shipper uses this service, the per unit transportation cost of all gas shipped by it on the Alliance Pipeline is reduced. Twenty-eight shippers transport an aggregate of bcf/d of natural gas on the Alliance Pipeline under 15-year primary term transportation contracts which commenced on December 1, One additional shipper holds a short-term transportation contract for 20 mmcf/d that expires at the end of March 2011 and another shipper holds a contract, for the Alliance US Pipeline only, for 40 mmcf/d (which effective February 2011 increased to 80 mmcf/d) that expires February 1, In December of 2010, shippers representing approximately 8% of original firm transportation capacity elected to extend their transportation service agreements for an additional year, to at least December 1, Shippers that did not renew their transportation service agreements in December 2010 will continue to receive service to December 1, 2015 based on their current contract provisions. Alliance Canada will continue to meet the evolving needs of current and new shippers beyond 2015 by implementing new service offerings in addition to the direct service offering to the Chicago area. No shipper represents more than 14% of the firm transportation capacity on the Alliance Pipeline. The ten largest shippers, in terms of transportation commitments, represent approximately 70% of the firm transportation capacity on the Alliance Pipeline. Owners or affiliates of owners of Alliance and Aux Sable hold approximately 15% of the firm transportation capacity. Credit Status of Alliance Shippers Alliance reviews the credit status of each shipper at least quarterly. The credit status of each shipper is classified into one of the following categories: -16-

20 a. "Investment Grade Rating" means a shipper or its respective guarantors, if applicable, or a shipper's senior unsecured securities, that has a credit rating of any of the following, as applicable: (i) "Baa3" or better from Moody's Investors Service, Inc.; (ii) "BBB-" or better from Standard & Poor's Rating Services; or (iii) "BBB" or better from Dominion Bond Rating Service Limited; b. "Acceptable Credit Status" means a shipper, or its respective guarantors, if applicable, that does not have an Investment Grade Rating, but is of sufficient financial strength that Alliance does not require such shipper to post security for such shipper's obligations to Alliance; or c. shippers who do not have an Investment Grade Rating or Acceptable Credit Status and have, in accordance with the terms of the transportation contracts, either posted security in the form of letters of credit equal to 12 months of demand and reservation charges, or have made other credit support arrangements satisfactory to Alliance and its lenders. The following is a summary of the shipping commitments and credit status of the shippers, or their respective guarantors, as at December 31, 2010: Shippers Number of Shippers Contracted Capacity (mmcf/d) % of Firm Capacity Investment Grade Rating , Acceptable Credit Status Security Required Total , Expansion Capability The Alliance Pipeline is designed to be able to cost-effectively increase the firm transportation capability by approximately 30% by adding compression facilities, including up to 14 new compressor stations. Larger expansions of firm transportation capability are possible through the construction of parallel pipelines and additional compression facilities. An expansion is not imminent. Alliance will not decide to expand the pipeline until it is satisfied that sufficient market demand exists and it has arranged financing for the expansion. Any expansion would also require regulatory approval in either or both Canada and the US. Regulation in Canada The NEB exercises jurisdiction over all international and interprovincial pipelines in Canada pursuant to the National Energy Board Act (Canada) (NEB Act). The NEB regulates the tolls and tariff for the Alliance Canada Pipeline. All shippers have accepted toll principles negotiated with Alliance Canada and have signed transportation contracts incorporating the same toll principles and tariff. Alliance Canada expects that the negotiated toll principles and its transportation contracts will generally be respected and given effect by the NEB, though the absolute level of tolls will be subject to change from time to time. Regulation in the US Alliance US is subject to extensive regulation by FERC as a "natural gas company" under the US Natural Gas Act of Under such legislation, FERC has jurisdiction over Alliance US with respect to virtually all commercial aspects of its business, including transportation of natural gas, rates and charges, -17-

21 construction of new facilities, extension or abandonment of service and facilities, accounts and records, depreciation and amortization policies, the acquisition and disposition of facilities, the initiation and discontinuation of services, affiliate relationships and certain other matters. In general, rates charged by interstate natural gas pipeline companies may not exceed the statutory "just and reasonable" or "recourse" rates approved by FERC and natural gas pipeline companies are prohibited from granting any undue preference to any person or maintaining any unreasonable difference in their rates or terms and conditions of service. However, under FERC's current policies, a pipeline may obtain approval to charge negotiated rates which differ from (and may exceed) the "just and reasonable" FERC regulated "recourse" rate. FERC approved Alliance US's proposal to offer shippers both negotiated and "recourse" rate options. Accordingly, Alliance US's existing tariff contains both negotiated and "recourse" rates. Currently, all of Alliance US's shippers have chosen to be governed by negotiated rates under their respective transportation contracts. Pursuant to the transportation contracts, Alliance US may file revised rates from time to time. While shippers may contest such revised rates, they have contractually agreed not to take any action to frustrate the continued ability of Alliance US to charge rates established pursuant to the negotiated rate principles. FERC also has statutory authority under Section 5 of the Natural Gas Act of 1938 to initiate, either on its own motion or upon complaint, an investigation of a pipeline's rates and terms and conditions of service. Tolls and Tariffs All shippers have accepted toll principles negotiated with Alliance Canada and have signed transportation contracts incorporating the same toll principles and tariff. Under the applicable policies of the NEB, Alliance Canada expects that the toll principles and its transportation contracts will generally be respected and given effect by the NEB, though the absolute level of tolls is subject to change from time to time. The Alliance Canada Pipeline regulatory rate base includes, among other things: a. actual capital costs, which includes costs that Alliance Canada actually and reasonably incurred in developing, designing, financing, constructing, commissioning, operating and maintaining the Alliance Canada Pipeline (including construction cost overruns); and b. an allowance for funds used during construction, under which Alliance Canada has capitalized and hence is entitled to recover in tolls, the net cost of funds (both debt and equity) required to finance the development and construction of the Alliance Canada Pipeline. Alliance Canada charges each shipper a monthly amount for the contracted capacity reserved by such shipper, which amount is calculated to permit Alliance Canada to recover from the shippers, on an annual basis and assuming firm capacity of bcf/d, all fixed costs of providing service, including the following: a. all operating and maintenance costs, general and administrative expenses and property and municipal taxes actually and reasonably incurred; b. a cost of debt calculated on the basis of a deemed capital structure of 70% debt and 30% equity (regardless of what Alliance Canada's actual capital structure may be); c. an allowance for income taxes calculated on a flow-through basis; -18-

22 d. a return on equity (currently approximately 11.3% after tax) calculated on a deemed capital structure of 30% equity (regardless of what Alliance Canada's actual capital structure may be); and e. depreciation expense based on a 25-year amortization period, but utilizing a negotiated schedule of annual depreciation percentages. The toll principles reference a commodity charge that would recover those costs that vary with volumes actually shipped. The commodity charge is currently set by Alliance Canada at "Nil". Under the toll principles, fuel requirements are to be recovered on an actual tracked basis and each shipper is obliged to supply fuel but not to maintain contracted capacity for fuel. Effectively, the shippers bear fuel costs by providing natural gas in kind to be consumed as fuel or to otherwise satisfy the fuel requirements. Under the Alliance US rate principles, Alliance US will recover approximately 53% of its regulatory rate base in the first 15 years of operation. For the approximately 92% of shippers that did not renew, Alliance US is entitled to increase the rates charged to such shipper over the remaining five years of the term of the transportation contract. This mechanism does not exist in the transportation contracts to which Alliance Canada is a party. Environmental Matters In developing its design basis for the Alliance Pipeline, Alliance made several decisions to take advantage of the fact it was a greenfield facility and to exploit modern technology and materials. The most significant of these design features are: a. dry low emission turbines which utilize state-of-the art technology to reduce nitrogen oxide and carbon monoxide emissions, and increase fuel efficiency when driving the mainline compressors; b. internally coated pipe to reduce friction, thereby reducing fuel consumption; and c. high pressure/rich gas technology, which also improves efficiency. These features and others make the Alliance Pipeline more efficient than older, conventional designs of natural gas pipelines. However, GHG emissions are created during the combustion of natural gas in turbines to drive compressors that move natural gas through the Alliance Pipeline system. Although the GHG emissions have been reduced by using high efficiency gas turbines, the emissions intensity from the Alliance Pipeline still exceeds the net emissions intensity limit calculated under Alberta's new Specified Gas Emitters Regulation (SGER). Under the SGER, facilities that annually emit more than 100,000 tonnes of CO 2, which includes Alliance Canada Pipeline, are required to reduce their emissions intensity in 2009 and beyond by 12% of their baseline emissions. Given that the Alliance Canada Pipeline is a state-of-the art facility, further emission reductions at the source are difficult and Alliance's remaining compliance options to meet its required emission reduction target are to purchase credits from the Alberta Climate Change Fund for $15.00 per credit (1 credit = 1 tonne of CO 2 emission reductions) or to purchase offsets from qualified projects. The anticipated cost to purchase the necessary credits for 2010 is $1.2 million, with the final cost to be determined in the first quarter of The cost of purchasing such credits is included in the transportation tolls. -19-

23 Development of Federal GHG regulation has been delayed in Canada. Although timing of this regulation is uncertain, it is expected that Alliance Canada s facility emissions will exceed the regulatory threshold for any Federal framework. The Canadian regulations are expected to follow and be consistent with US legislation, however, congressional action on climate change in the US is not expected in the near future. Alliance US is subject to two new GHG regulations promulgated by the Environmental Protection Agency. The first is the Mandatory Reporting Rule which requires pipeline transmission facilities emitting more than 25,000 metric tons of CO2e to report combustion CO2e emissions for All of the Alliance US compressor stations exceed this threshold. These facilities will have to add certain fugitive and venting sources of GHG for the 2011 reporting period. The second new GHG regulation is the Tailoring Rule which is being implemented in a staged fashion in This regulation requires facilities that emit more than 100,000 short tons of CO2e to have a Title V Operating permit. This regulation also requires best available control technology considerations for facilities that add 75,000 short tons or more of CO2e during modifications, or 100,000 short tons or more for construction of new facilities. All of the Alliance US compressor stations already operate under Title V Operating permits. It is expected that these permits will be updated to include GHG as a pollutant during normal permit renewal cycles. The operations of Alliance Canada are subject to federal, provincial and local laws and regulations relating to the protection of the environment. Alliance Canada developed and implemented an environmental management system for operations and maintenance activities relating to the Alliance Canada Pipeline. This environmental management system includes environmental operating practices that ensure proper stewardship of the environment during operations and due consideration of environmental protection during maintenance activities. Alliance Canada believes it has taken adequate measures to mitigate the environmental effects of the operation and maintenance of the Alliance Canada Pipeline. All prudently incurred costs related to any environmental requirements would normally be expected to be recovered through the transportation tolls. Alliance US has a similar environmental management system in operation. In 2010, Alliance completed a full review and consolidation of its environmental management systems (Canada and US) into one program for purposes of updating and improving the use of such program as a tool for auditing and assuring compliance with environmental regulations and Alliance's standards. Alliance also conducts regular inspections of its facilities, allows pertinent agency inspections as requested, and follows defined practices to ensure that regulatory requirements and commitments are met during the construction, operation, and maintenance of its facilities. Operations and Maintenance The pipe used for the Alliance Canada Pipeline was manufactured using low carbon alloy steel, with controlled rolling practices used to improve strength, ductility, weldability and toughness. All piping and appurtenances were coated externally for corrosion protection and internally to reduce friction. A cathodic protection system was installed to protect against corrosion for the operating life of the Alliance Canada Pipeline. Long term pipeline inspection includes periodic intelligent "pig" surveys to assess pipeline integrity. The Alliance US Pipeline was constructed with characteristics similar to the Alliance Canada Pipeline. Like the Alliance Canada Pipeline, the Alliance US Pipeline has a cathodic protection system installed, has been coated externally to prevent corrosion and internally to reduce friction and is inspected and monitored using intelligent "pig" surveys as well as monthly aerial patrols and periodic above ground surveys. US regulations call for different requirements in calculating the maximum stress levels compared to Canadian regulations; therefore, the pipewall thicknesses used in the Alliance US Pipeline -20-

24 are slightly thicker than those used in the Alliance Canada Pipeline. As at the date hereof, no material anomalies requiring pipe replacement have been found in either the Alliance Canada Pipeline or the Alliance US Pipeline. Alliance maintains the requisite permits to ensure the continued operation of the Alliance Pipeline. Alliance US has retained Alliance Canada to provide certain managerial and administrative support under an executive, managerial and administrative services agreement. Alliance Canada and Alliance US have each entered agreements with the manufacturers of the mainline compressors on the Alliance Canada Pipeline and the Alliance US Pipeline, respectively to provide for maintenance and preventative maintenance services. A main control center for the Alliance Pipeline is located in Alberta which has control, alarm and leak detection monitoring capability. Control center operators have the ability to remotely shut down individual stations or facilities on the Alliance Pipeline. In addition, each remote station has local emergency shutdown capabilities. A back-up control center has also been established in a different location in Alberta. Alliance utilizes a satellite communication system for data transmission to and from its remote facilities and the main control center. The satellite system is backed up by land lines to the remote facilities. Mainline block valves are linked to the control center to monitor gas pressure and temperature and provide for rapid closure of block valves in the event of an emergency. All major compressor station equipment is monitored by on-site sensors for parameters such as temperature, pressure and vibration. Station compressor units, throughput, valves, inlet, outlet and bypass are monitored and controlled by a station programmable logic controller. Each compressor station is normally unmanned but is monitored and operated on a continuous year-round basis from the manned system control center. Alliance's gas management system is a critical element of Alliance's operations. It meets both business and regulatory requirements by providing such functions as contract management, customer account management, capacity release, nomination entry, scheduling, confirmation and allocation, imbalance management, invoicing and reporting. Alliance will continue to utilize the system and enhance functionality as business requirements change or new opportunities arise. Pipeline Safety 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. Natural gas pipelines in the US are required to meet construction, operation and maintenance regulations established by the US Department of Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA) office of Pipeline Safety. The Alliance Canada Pipeline is subject to the Onshore Pipeline Regulations, 1999, as amended, promulgated pursuant to the NEB Act and CSA Z662 Oil and Gas Pipeline Systems. The Onshore Pipeline Regulations, 1999 concern the design, construction, operation and abandonment of pipelines within the jurisdiction of the NEB. CSA Z662 Oil and Gas Pipeline Systems is a consensus standard administered by the Canadian Standards Association with ongoing participation from regulators, industry, suppliers and engineering consultants. The Alliance Canada Pipeline and its operation comply in all material respects with the NEB Act, the Onshore Pipeline Regulations, 1999 and the requirements of all applicable safety regulations, standards and codes. Alliance Canada has implemented practices and -21-

25 procedures common in the pipeline industry and necessary to meet applicable laws in all material respects. The Alliance US Pipeline is subject to PHMSA regulations (Title 49, CFR 191, 192 and 199) promulgated under the US Natural Gas Pipeline Safety Act of 1969, as amended. Alliance maintains and follows required plans, procedures and specifications written in compliance with these regulations for the design, construction, operation, maintenance and management of the Alliance US Pipeline, including emergency response, employee qualifications, integrity programs and drug and alcohol testing. Alliance has conducted and is expected to continue to conduct the required inspections and audits of items such as cathodic protection, relief valves, mainline valves and patrols of rights of way. In addition to complying with normal operations and maintenance requirements in both the US and Canada, Alliance has rigorous integrity management programs in which in-line inspection tools are run periodically to assess the condition of the Alliance Pipeline. The frequency of these assessments are based on a detailed evaluation of risk not to exceed maximum intervals established under current US and Canadian regulations and conditions contained within the waiver granted upon approval of the MAOP project by PHMSA in July In 2009, PHMSA audited Alliance US Pipeline for compliance with the Supplemental Safety criteria contained in the waiver which allows Alliance to operate at an alternative operating pressure. No action items or issues were identified by this audit. Alliance has the necessary procedures in place as required by applicable regulatory authorities. In 2007, Alliance and various regulatory bodies conducted numerous safety audits and reviews, including: a. an internal safety audit of all facilities; b. an NEB safety and security inspection of certain Alliance Canada locations; and c. a third party safety audit conducted as part of the Certificate of Recognition program. In 2008, Alliance addressed a number of non-material items identified in the 2007 audits and reviews and continued to implement changes in In addition, Alliance began revamping and enhancing its Emergency Response Program in 2008 with the objectives of consolidating the Canadian and US programs into one program and all of its emergency response plans and manuals into one document. The new Emergency Management Program was implemented in 2009, with ongoing training continuing. In 2008, Alliance conducted a review of its health and safety plans, practices and procedures and, in June 2009, began to implement the revisions arising out of such review. Alliance conducts ongoing due diligence regarding each of these programs, plans, practices and procedures. Outlook In the late 1990 s, producers, marketers and other natural gas shippers were seeking a competitive export option for WCSB natural gas and NGL to be shipped to the midwestern US market. Alliance responded by constructing a high pressure, dense phase, high btu natural gas pipeline system that was somewhat unique in that it allowed for a higher energy value or heat content to be delivered per volumetric unit. In other words, more energy could be shipped per unit of volume on the Alliance Pipeline than could be shipped on other competing pipelines. The Alliance Pipeline was designed to operate efficiently with a heat content of up to approximately 1,200 btu/cf. Alliance has since implemented a number of operational and system enhancements to further improve the efficiency of the Alliance Pipeline. High levels of operational performance, the opportunity for shippers to reduce field processing investments, and tariff provisions that effectively lower the average cost of transportation as the heat content of gas delivered onto the Alliance Pipeline increases, result in a competitive rich gas transportation service for -22-

26 shippers. Further, the Alliance Pipeline was designed to transport natural gas from the WCSB and deliver it directly to gas processing facilities in Chicago without loss of liquids to gas users along the way. This is particularly important if the liquids value of the gas is high in the midwestern US market at the time. Alliance also has a delivery header system with over six bcf/d of downstream natural gas receipt capability with major interstate pipelines and local gas distribution systems in the midwestern US. This provides liquidity, access to gas storage and good price discovery for shippers. Further, the compatibility of services offered by Alliance and Aux Sable enables Alliance to offer commercial services to respond to changing industry needs for natural gas and NGL and the development of transportation and processing options for emerging gas plays. The design characteristics and operational performance of the Alliance Pipeline, as discussed above, have encouraged greater utilization of the Alliance Pipeline since inception. Although fully contracted, Alliance has added 11 new receipt locations since initiating operations, along with four new delivery locations and three new NGL injection facilities. A receipt only service, introduced along with the startup of the Taylor Junction compressor station in 2008, provided an additional 150 mmcf/d of receipt capacity in the developing northeastern British Columbia area. The Alliance Pipeline is adjacent to the developing Montney shale play in northeastern British Columbia and traverses across the Bakken in Saskatchewan and North Dakota. Alliance expects to offer competitive services and economic transport capacity in these developing areas to enable commercial development. Both areas have significant rich gas potential, with the Bakken's associated gas having the potential for substantially higher NGL content. In December 2010, shippers representing approximately 8% of original capacity elected to extend their transportation service agreements for an additional year, to at least December 1, The existing transportation contracts continue to provide shippers with a dependable and competitive rich gas transportation service to the midwestern US and markets beyond. The tolling principles in the transportation contracts provide for a projected decline past the primary term for fixed toll components, such as depreciation, allowance for income taxes and return on equity. Shippers who did not renew past the primary term under the transportation contracts are subject to increased rates on the Alliance US Pipeline upon notice of non-renewal. Alliance recognizes that the transportation service agreement expiration, the operational and commercial potential of the Alliance Pipeline and the evolving North American gas markets brings a demand for new services and requests for commercial terms that differ from those in its existing transportation contracts. Therefore, Alliance will continue its development activities with the intent of developing new facilities, services and contracts in an effort to transition to a multi-service business model to meet the evolving market needs. Given: the advantages that Alliance can provide in operational efficiency; the wide spectrum of operating parameters that the Alliance Pipeline can accommodate to transport gas streams of variable heat content or energy value; the proximity of the Alliance Pipeline to emerging gas developments; and the ability to incorporate new deliveries off the Alliance Pipeline into current or new pipeline systems, hubs and industrial areas, Alliance expects that the Alliance Pipeline will be utilized beyond 2015 with a portfolio of contracts and services, including an existing shipper under a current transportation contract as well as new shippers operating under new transportation terms and conditions. -23-

27 Competition The Alliance Pipeline faces competition in pipeline transportation to its Chicago area delivery points from both existing pipelines and proposed projects. Alliance expects that substantially all of the natural gas shipped on the Alliance Pipeline for the near future will be produced from the WCSB, Bakken and Montney formations. Continued sales of WCSB, Bakken and Montney natural gas in the midwestern and northeastern US and eastern Canada will depend on a number of factors over which Alliance has no control, including the: a. level of exploration, drilling, reserves and production of WCSB, Bakken and Montney natural gas and the price of such natural gas; b. accessibility of WCSB, Bakken and Montney natural gas, as such may be affected by weather, natural disasters or other impediments to access; c. price and quantity of natural gas available from alternative US, Canadian and international sources; d. market demand for natural gas in North America; e. impact of domestic Canadian demand on the availability of WCSB natural gas for export; and f. regulatory environments in the US and Canada, including the continued willingness of both countries to permit the export of natural gas from Canada into the US on a commercially acceptable basis. A number of other natural gas pipelines currently provide, and potential future natural gas pipelines may provide, transportation services for natural gas produced from the WCSB, Bakken and Montney to natural gas markets in the midwestern US and Ontario. Such pipelines, existing and proposed, constitute current and potential competitors to the Alliance Pipeline. In addition to the Alliance Pipeline, natural gas from the WCSB is currently transported to markets in the midwestern US through the following pipelines: TransCanada/Viking Gas Transmission; TransCanada/Great Lakes Gas Transmission; and TransCanada/Foothills/Northern Border Pipeline. Alliance is also exposed to competition from new sources of natural gas, such as the Marcellus Basin which runs from upstate New York to as far south as Virginia. The Marcellus Basin is in close proximity to the Chicago Hub which the Alliance Pipeline currently provides the majority of its transportation service to. The development of the Marcellus Basin could provide an alternate source of gas to this location and perhaps decrease reliance on natural gas imports from Canada in the northeastern region of the US. To supply natural gas markets in the midwestern and eastern US, producers from other supply basins, including the Rocky Mountain, San Juan and Gulf of Mexico basins, have also proposed to build new or expand existing natural gas pipelines that would deliver natural gas into the midwestern and eastern US. Such pipelines may compete against the Alliance Pipeline in the future. -24-

28 Shippers on the Alliance Pipeline may also elect to access the Ontario market through a combination of the Alliance Pipeline and the pipeline owned by Vector Pipeline L.P. Natural gas from the WCSB is also transported to markets in Ontario via the TransCanada system. Based on rates currently filed with the respective regulatory authorities, Alliance's rates are competitive in each of the above markets; however, changes to the costs of service of any of these pipelines, or new competition from any future pipeline may affect Alliance's competitiveness. Any new or upgraded pipelines could offer natural gas transportation services that may be more desirable to shippers than those provided by the Alliance Pipeline because of location, facilities or other factors. In addition, these pipelines could charge rates or provide service to locations that result in greater net profit for shippers, which may result in a decrease to revenues and cash flow for Alliance after the primary term depending on the level of capacity utilization and the structure of new services offered by Alliance. Any project to expand the Alliance Pipeline could be subject to competition from other pipeline systems, which could be expanded or integrated to serve the market for shipping natural gas from the WCSB and the Bakken to the midwestern and eastern US and eastern Canada. During the primary term under the transportation contracts, the shippers' obligations to purchase their contracted capacity are firm and are not affected by a competitive market for natural gas in the midwestern and eastern US and eastern Canada. After the expiry of the primary term and based on the results of the December 2010 contract renewal process, new transportation contracts will need to be negotiated and entered into. The Natural Gas Transportation Industry The natural gas transportation industry from western Canada to eastern markets has historically been controlled by companies affiliated with TransCanada PipeLines Limited. Natural gas supply and pipeline infrastructure has grown over the past several years creating increased competition throughout North America. Production in the US has increased, primarily due to shale gas production, and the lower cost of shale gas has increased competition and created opportunity for customer selection. Production in the mature WCSB has declined in recent years due to reduced drilling activity, although activity remains strong in certain areas of the WCSB. Alberta Ethane Gathering System Overview AEGS transports pure ethane within Alberta from various ethane extraction plants to major petrochemical complexes located near Joffre and Fort Saskatchewan, Alberta. At 1,324 km in total length, AEGS is an integrated system that has interconnections with an underground storage site and is made up of three legs, east and west legs and a bi-directional north leg. Shipper Profile and Ethane Transportation Agreements The AEGS shipper community is currently comprised of NOVA Chemicals Corporation, Dow Chemical Canada Inc., Inter Pipeline Fund and BP Canada Energy Company. Each of these shippers is either a major ethane producer or consumer and all have substantive energy infrastructure and/or petrochemical investments in Alberta. Each shipper is party to a long-term take-or-pay ethane transportation agreement extending to December 31, The transportation agreements provide for the following: -25-

29 a minimum revenue stream to AEGS based on specified committed volumes; the recovery of all operating costs; the right for each shipper to transport ethane on AEGS up to their committed volumes; limited rights in favour of the shipper for toll relief in the event AEGS is unable to transport volumes of ethane up to the shipper's contracted capacity; and right to terminate the transportation agreement in certain circumstances where the shipper is unable to transport ethane on AEGS for a period of 180 days or more. AEGS also holds a contract with the BP Canada-operated Fort Saskatchewan Storage Joint Venture for the storage of up to 700,000 bbls of ethane in underground caverns located near Fort Saskatchewan, Alberta. The term of this contract currently matches the existing termination date of the transportation agreements. The transportation agreements provide for the recovery of the costs of storage from the AEGS shippers. Ethane Customers AEGS delivers substantively all of the ethane feedstock requirements for NOVA Chemicals' ethylene facilities located near Joffre. These facilities comprise one of the largest ethylene and polyethylene complexes in the world. Ethane is also transported to Dow Chemical's ethylene facilities located near Fort Saskatchewan, Alberta and to Dow Chemical facilities located near Joffre, Alberta. Correspondingly, all major ethane producers in Alberta rely upon AEGS as their primary means of ethane distribution. Operations and Maintenance We have an operating agreement with NOVA Chemicals whereby NOVA Chemicals has agreed to physically operate AEGS from a control facility at Joffre. NOVA Chemicals' responsibilities under the operating agreement include: maintaining AEGS; obtaining and managing all operational personnel in the field; obtaining and maintaining all regulatory authorizations required for operation; and maintaining cost records. We remain responsible for commercial operations in respect of AEGS, including: receiving and scheduling nominations from shippers; invoicing shippers; approving facility outages and annual operating cost budgets; informing shippers of issues, facts and circumstances affecting AEGS; -26-

30 resolving disputes with shippers; and entering into, renewing or amending contracts with shippers, including the ethane transportation agreements. The operating agreement will remain in effect until terminated in accordance with its terms. Reasons for termination include: permanent cessation of operations of AEGS; insolvency of either party; default by either party in performing any of its material obligations where such default is not caused by the party seeking termination and the default causes or is likely to cause a material adverse change in the party seeking termination (subject to a cure period); operator providing 12 months notice of its intent to resign as operator; and in certain circumstances, us providing 12 months notice of our intent to assume operation of AEGS. During 2010, we continued with annual in-line inspections and correlation digs on AEGS. To date, no material issues have been identified. This pipeline integrity program will continue in Regulatory Environment AEGS is licensed under the jurisdiction of the ERCB. As a contract carrier, rather than a regulated common carrier, its tolls are not subject to regular review by the ERCB. Environmental Matters All pump stations on AEGS utilize electrically driven pumps. Accordingly, no air permits or air monitoring is required for any rights of way or pump station locations, and no routine emissions reports are required. AEGS utilizes waste management services to ensure proper classification and disposal of waste generated at its facilities. Provincial regulations, including those for waste tracking and manifesting, are the principles employed for waste management. There are no waste management facilities maintained by AEGS. Pipeline filters at pump stations remove particles, including naturally occurring radioactive materials from the ethane stream. These filters are the principal waste generated by AEGS. Procedures are in place to safely change these filters and temporarily store them on site. Each pump station has small, dedicated storage sheds to provide temporary storage for these filters prior to processing and disposal. No water discharge permits are required for operations along AEGS and groundwater is not required at any of the rights of way or pump station locations on AEGS. -27-

31 Outlook We will continue to focus on maintaining high levels of operational stability and efficiency. In addition, we continue to evaluate opportunities to respond to recent decreases in ethane production within Alberta. Potential sources of additional ethane include: Competition installation of additional deep cut facilities at existing extraction facilities; construction of new extraction facilities in Alberta; oil sands bitumen upgrading projects, which produce ethane as a by-product; and natural gas from the Mackenzie Delta and/or Alaska, as well as incremental supply from the lower 48 US regions. During 2010, AEGS transported the majority of ethane extracted in Alberta. As AEGS is currently connected to almost all of the major sources and users of ethane, at this time there are no known viable, lower cost alternatives that could reasonably compete for this business. The Specification Ethane Transportation Industry Ethane occurs normally as a constituent of natural gas. As with other components of NGL, ethane is in gaseous form at the pressures and temperatures under which natural gas is typically gathered and transported. Natural gas value is enhanced by extracting ethane and other NGL, which usually have a higher value as specification products than when retained in the natural gas stream. When natural gas is processed at efficient field gas plants or at large straddle plants ethane is separated and recovered in liquid form. Ethane is used as a feedstock for ethylene production. In turn, the ethylene produced in Alberta is used as a feedstock for polyethylene production. In rare circumstances, ethane is used as a miscible flood agent in enhanced oil recovery applications. Ethane Market Structure The western Canadian ethane market is characterized by a small number of product suppliers. The suppliers are the owners of the straddle plants and extraction facilities. There are a smaller number of purchasers which are primarily the major petrochemical producers. The Alberta ethane market is to a large extent insulated from the supply and demand forces of the substantially larger US market as most of the ethane production is contracted under long-term agreements, under which purchase prices often reflect supply costs. Current Ethane Supply Ethane supply produced or available in western Canada is approximately 250,000 bbls/d. The supply capability is a function of a number of factors, including: gas production rates in the WCSB; -28-

32 the percentage of gas processed in the region (as compared to the percentage that bypasses straddle plants or is exported via the Alliance Pipeline); the average ethane content of raw gas produced; and the ethane extraction efficiency and capacity of facilities within Alberta. In recent years, the interaction of these forces has resulted in ethane supply declines in western Canada. These declines are largely due to shifting supply and demand dynamics in North American natural gas markets. The resulting lower raw gas flows past Alberta's extraction plants has had a direct negative correlation on ethane production levels. Deep cut projects designed to increase the percentage of ethane extracted from the gas stream at certain Empress facilities have increased the recovery efficiencies in recent years. This has helped to offset the supply declines. The ERCB continues to review the ethane extraction conventions with input from the industry with a goal of increasing ethane recoveries in the future. Current Ethane Demand Ethane consumption in Alberta generally matches available supply. The majority of ethane is consumed by the major ethylene petrochemical facilities at Joffre and Fort Saskatchewan, Alberta. Ethylene plant operating rates, which are a function of ethylene demand, are determined by the relative cost competitiveness between ethylene producers in Alberta and their global competitors. Thus, subject to any government changes in the ethane industry and provided Alberta's petrochemical industry remains competitive globally, the current demand for ethane in Alberta's ethylene plants is generally anticipated to remain stable for the foreseeable future. OUR MIDSTREAM BUSINESS Overview of Our Midstream Business Our Midstream Business, which we jointly control through our % interest in each of Aux Sable US and Alliance Canada Marketing, and our 50% interest in Aux Sable Canada, is comprised of: a. a world-scale NGL extraction and fractionation facility located at Channahon, Illinois, capable of processing up to 2.1 bcf/d of natural gas and recovering up to 80,000 bbls/d of NGL consisting of ethane, propane, normal butane, iso-butane and natural gasoline; b. distribution facilities downstream of the Channahon facility including NGL storage, rail loading, truck loading and pipelines; c. the 60 mmcf/d Septimus Gas Plant near Fort St. John, British Columbia including the Septimus Gas Pipeline, a 20-inch diameter, 20-km pipeline connecting gas from the plant to the Alliance Pipeline; -29-

33 d. the development of off-gas processing opportunities in Alberta, including the Heartland off-gas facility with a long-term off-gas processing agreement with Shell to process up to 20 mmcf/d of off-gas and produce hydrogen, ethane and a propane-plus mix, which will be delivered by pipeline to Shell; e. long-term contracts for 76.2 mmcf/d of firm transportation capacity and rights to authorized overrun service on the Alliance Pipeline held by Alliance Canada Marketing; f. various NGL injection facilities connected to the Alliance Canada Pipeline in Alberta and British Columbia that are utilized by Aux Sable Canada LP, but owned and operated by Alliance Canada and other third parties; g. the development of new sources of rich gas to be transported on the Alliance Pipeline by others and then processed at Aux Sable's Channahon facility; and h. the development of new facilities to extract ethane from the Alliance Pipeline in the Fort Saskatchewan, Alberta area. The NGL produced by Aux Sable is an integral component of numerous products used directly as energy products (including home and industrial heating, crop drying, cooking, and motor fuel). NGL is also used as feedstock for the petrochemical industry (for the production of ethylene, propylene, butadiene and other derivatives, which are used to produce products such as polyethylene, rubber, plastics, solvents, and foam materials) and crude oil refining (for gasoline and gasoline blending). Overall, economic activity and weather conditions provide strong influences on the demand for NGL. Crude oil and natural gas prices, commodity inventory positions as well as seasonal factors strongly influence midstream margins. Channahon Facility The Alliance Pipeline transports rich gas to Chicago, including any NGL injected at the NGL injection facilities. NGL is extracted from the rich gas at the Channahon facility. The NGL extracted by the Channahon facility is separated at the downstream facilities into ethane, propane, normal butane, isobutane and pentanes plus. Aux Sable Liquid Products LP sells NGL production at the Channahon facility to BP Products North America, Inc., and affiliates thereof, pursuant to a long-term NGL sales agreement described below. The Channahon facility manages the higher heat content levels associated with the rich gas flowing in the Alliance Pipeline in order to meet downstream pipeline heat content requirements. The facility is strategically located in Channahon, Illinois at the terminus of the Alliance Pipeline and close to major markets that are frequently NGL supply-constrained in the first and fourth quarters of each year. Aux Sable is a significant supplier of propane and ethane to the midwestern US, particularly in Illinois and its neighbouring states. The Channahon facility is capable of extracting liquid hydrocarbons present in the gas stream and processing the peak day volumes delivered by the Alliance US Pipeline. With only one of its two trains operating, the Channahon facility is capable of processing sufficient volumes for the Alliance US Pipeline to meet the maximum heat content requirements of the downstream pipelines. Aux Sable Liquid Products LP has the exclusive right to extract NGL from natural gas transported on the Alliance Pipeline at the point of its interconnection with the Channahon facility. Aux Sable Liquid -30-

34 Products LP has an obligation to compensate shippers for any NGL so extracted by replacing such NGL with "make-up" natural gas having a heat content equal to the heat content removed due to the extraction of such NGL. Under the NGL sales agreement, BP supplies, at an agreed upon indexed price, all net make-up and fuel natural gas to the Channahon facility. In connection with these extraction agreements, Aux Sable US and Alliance US entered into a heat content management agreement and Aux Sable Extraction LP entered into an interconnection agreement with Alliance US. Under the heat content management agreement, Aux Sable Extraction LP provides heat content management services. This requires extracting NGL to the extent required to reduce the gross heating value of the natural gas delivered out of the Alliance US Pipeline downstream of the Channahon facility. The company will reduce the heating value to a level acceptable to the two local natural gas distribution systems and the five interstate natural gas pipeline companies, following FERC guidelines. Alliance US has delivery interconnection agreements with these seven systems and companies. Although the heat content management services are provided primarily through the extraction of NGL, Aux Sable Extraction LP has the option to implement alternative heat content reduction arrangements. During 2004, the heat content requirement with one downstream interconnection was amended to give Aux Sable increased operating flexibility. This amendment is expected to largely eliminate Aux Sable's exposure to negative extraction margins. The heat content management agreement has a term of 25 years which commenced on December 1, 2000, subject to any earlier termination of Aux Sable Liquid Products LP's extraction rights. Subject to any contrary directive issued by any regulatory or other public authority, Alliance US has covenanted to the shippers on Alliance Pipeline not to: a. consent to any amendment or early termination of the heat content management agreement; b. jeopardize the heat content management agreement or the performance of Aux Sable Extraction LP's obligations thereunder; or c. waive or otherwise fail to enforce any of Aux Sable Extraction LP's obligations or Alliance US's rights under the heat content management agreement. Any breach of this covenant by Alliance US which results in interruption or curtailment of transportation service on the Alliance Pipeline could result in reimbursements or credits payable by Alliance US for reservation or demand charges paid or payable by the shippers to Alliance for the unavailable transportation service on the Alliance Pipeline. NGL Sales Agreement Aux Sable Liquid Products LP and BP entered into an NGL sales agreement dated effective December 31, 2005, pursuant to which Aux Sable Liquid Products LP sells all of its NGL production at the Channahon facility to BP. In return, BP pays Aux Sable Liquid Products LP a fixed annual fee and a percentage share of any net margin generated from the business in excess of specified thresholds. In addition, BP compensates Aux Sable Liquid Products LP for all operating, maintenance and capital costs associated with the Channahon facility, subject to certain limits in the case of capital costs. The NGL sales agreement has an initial term expiring March 31, 2026, and may be extended by mutual agreement for 10-year terms on a continuous basis. BP has the option to terminate the NGL sales agreement if cumulative losses from the business exceed a specified amount, however, Aux Sable Liquid Products LP retains the right to reduce such losses and thereby avoid termination. -31-

35 The cash flow generated from our Midstream Business will vary primarily according to changes in the difference between its supply costs and the sale price of its products. The supply costs consist largely of the cost to purchase shrinkage make-up gas. The NGL sales agreement provides greater stability to the earnings stream of Aux Sable Liquid Products LP. Downstream Facilities Aux Sable Liquid Products LP constructed, and operates, downstream facilities to further process the ethane plus (C 2 +) output from the Channahon facility. These downstream facilities include: fractionation facilities to separate the ethane plus (C 2 +) into its constituents (being ethane, propane, normal butane, iso-butane and pentanes plus); approximately 200,000 bbls of onsite storage; pumping facilities to deliver the NGL to downstream pipelines for distribution in the midwestern US; truck and rail car loading facilities; and a rail storage yard which will become operational in the second quarter of Aux Sable also owns and operates a 40-mile pipeline system that connects the Channahon facility to Citgo Petroleum Corporation's Lemont Refinery and ExxonMobil's Joliet Refinery. Aux Sable provides transportation of refinery fuel gas on this pipeline under a multi-year contract with Citgo. Aux Sable also owns and/or leases three other small diameter pipelines in the Chicago area and a two-spot truck loading facility. Aux Sable is continuing to develop its logistics infrastructure in the Chicago area through new and converted pipelines to more effectively manage NGL product storage and distribution in the area, which may or may not form part of the distribution facilities associated with the NGL sales agreement with BP. Aux Sable is also developing several potential processing arrangements to deliver NGL directly to the Channahon facility by rail or pipeline. Firm Transportation Contracts and Injection Facilities Alliance Canada Marketing holds total firm transportation capacity of 76.2 mmcf/d on the Alliance Pipeline for the purposes of optimizing the capacity of the Alliance Pipeline and assisting in the delivery of make-up gas to meet the make-up gas obligations of Aux Sable. As a shipper on the Alliance Pipeline, Alliance Canada Marketing is entitled to the relevant capacity and is obligated to pay the associated demand charges. Arrangements have been made whereby each of the partners in Alliance Canada Marketing has committed to provide its pro rata share of any revenue shortfalls in such partnership and to provide Alliance with security for its demand charge obligations under such transportation contracts in accordance with the terms and conditions of the relevant tolls and tariffs. Each partner therein, including us, has provided appropriate guarantees or letters of credit as its pro rata share of such security. Pursuant to the NGL sales agreement, Alliance Canada Marketing has assigned to BP the capacity in Canada it holds on the Alliance Canada Pipeline. Alliance Canada Marketing has appointed BP as agent in the US for the Alliance US Pipeline capacity. BP has agreed to pay market rates to use this capacity. BP uses the capacity to provide transportation of rich gas and injected NGL for use and processing at Aux Sable's facilities. -32-

36 Aux Sable Liquid Products LP no longer has direct responsibilities for the firm transportation contracts held by Alliance Canada Marketing and is no longer an energy affiliate of Alliance under FERC guidelines. Alliance Canada Marketing and BP manage the firm transportation contracts held by Alliance Canada Marketing. Enbridge manages Alliance Canada Marketing on behalf of the owners of Alliance Canada Marketing. Off-Gas Processing During 2007 and 2008, Aux Sable Canada progressed the construction of its wholly-owned Heartland offgas facility. The proposed multi-phased facility was to be the first of several "deep cut" off-gas gas processing facilities being pursued by Aux Sable Canada associated with BA Energy Inc.'s Heartland Upgrader, a new bitumen upgrader that was then being constructed near the Heartland off-gas facility in the Fort Saskatchewan, Alberta area. Construction of Aux Sable Canada's Heartland off-gas facility was curtailed in the fall of 2008 as BA Energy cancelled further construction of its upgrader. In November 2008, BA Energy reimbursed Aux Sable for all capital costs and commitments incurred by Aux Sable Canada for this facility. In December 2008, BA Energy sought protection from its creditors under the Companies' Creditors Arrangement Act (Canada) (CCAA). BA Energy and Aux Sable Canada entered into a settlement agreement in November 2009 releasing both parties from obligations under the previous arrangement and addressing repayment conditions. This agreement allowed Aux Sable Canada to retain title and control of the Heartland off-gas facility. At that time, the facility was 80% complete as originally designed and Aux Sable Canada took steps to preserve the economic value of the facility. In June 2010, Aux Sable Canada executed a long-term off-gas processing agreement with Shell that secured a new feedstock source for the Heartland off-gas facility. The facility, which is being completed and modified, is expected to process up to 20 mmcf/d of off-gas and produce hydrogen, ethane and a propane-plus mix. All products produced from the facility will be delivered to Shell. The facility is expected to be operational by the summer of Septimus Gas Plant In August 2009, Aux Sable entered into an agreement forming a strategic alliance with Crew that included the construction and operation of the 25 mmcf/d Septimus Gas Plant in the liquids-rich Montney region of northeast British Columbia. Upon commencement of operations in December 2009, Aux Sable purchased the plant from Crew at the cost of construction. Crew operates the facility and pays Aux Sable capital throughput fees on a take-or-pay basis. Expansion of the facility commenced in October 2010 to increase the plant's capacity to up to 60 mmcf/d. The expansion was placed in service in February 2011, at which time Aux Sable purchased the expansion facilities from Crew. Crew has the option to repurchase 50% of the plant until January 1, In December 2009, Aux Sable Canada submitted an application to the British Columbia Oil and Gas Commission for the construction and operation of a 20-inch diameter, 20-km pipeline connecting the Septimus Gas Plant to the Alliance Pipeline. A Permit to Construct was issued by the commission in January The pipeline allows for the delivery of Montney rich gas to export markets and provides processing and transportation alternatives for producers in the Septimus area and was placed into service in September

37 Environmental Matters Construction of Aux Sable's Channahon facility was completed in 2000 and used design criteria based on meeting the applicable US Environmental Protection Act standards. Aux Sable's operations have, and continue to, meet or exceed all license and regulatory requirements. Facility inspections are conducted as required by regulation and any deficiencies are remediated prior to recommissioning of the applicable facilities. Aux Sable is currently reviewing its baseline position and options with respect to GHG, with the primary source of GHG being from the exhaust of the gas recompressors for the residue gas stream after the extraction of NGL is completed and the gas is returned to the Alliance Pipeline for delivery in the Chicago area. There are currently no limits on GHG emissions or any associated costs. Safety Aux Sable continues to place a top priority on safety in terms of workforce training, facility design and the operation of its facilities. Aux Sable meets or exceeds all applicable laws and regulatory requirements, including a strong focus on Process Safety Management, annual risk assessments and a commitment to safety at all levels in the organization. Following a period of over eight years of operations without a lost time injury, Aux Sable had one reportable incident in Outlook Aux Sable is well positioned with operational and commercial capability to pursue additional investment opportunities (largely on a fee-for-service basis), including those leveraged off of the rich gas stream flowing on the Alliance Pipeline as well as longer term opportunities associated with northern gas. In western Canada, Aux Sable Canada primarily focuses on increasing rich gas deliveries by Alliance shippers into the Alliance Pipeline. Developments to optimize existing gas supply and connect new sources of rich gas supply are being expanded to include British Columbia and Saskatchewan based on the new rich shale gas developments in these regions. Aux Sable Canada's activity in the Septimus area of northeast British Columbia is one component of this strategy. Aux Sable Canada provides processing and transportation alternatives for northeast British Columbia rich gas, as well as delivery of gas and liquids to export markets. Aux Sable Canada will continue to work with the Alberta petrochemical industry and the Alberta government to determine if there is an economically justified project involving the extraction of ethane from Alliance gas in Alberta. Aux Sable US is pursuing several growth initiatives in the Bakken oil developments of North Dakota and Montana. The Channahon facility is well positioned to participate in the growth of gas production and the associated NGL from these regions. Aux Sable is currently receiving NGL mix by railcars from the Marcellus shale development in the northeastern US. These growth initiatives are expected to provide accretive and predictable earnings over and above the cash flow generated from Aux Sable US's existing NGL facilities. -34-

38 Competition Aux Sable Liquid Products LP has the exclusive right to extract NGL from all of the natural gas transported by the shippers on the Alliance Pipeline for the period of the transportation agreements. Should the owners of Alliance expand the Alliance Pipeline, Aux Sable Liquid Products LP could potentially compete with other suppliers of NGL extraction services for the rights to extract the NGL contained in the additional volumes of natural gas transported. The shippers on the Alliance Pipeline do not have a contractual commitment to transport rich gas for processing in the Channahon facility. The receipt points into the Alliance Pipeline largely fall into two categories. One-third of these receipt points have NGL extraction capability and the balance do not. For facilities with NGL extraction capability, a shipper will transport rich gas on the Alliance Pipeline for processing at the Channahon facility if the price of natural gas in Chicago, less additional transportation costs, exceeds the value of the NGL in Edmonton less extraction costs plus the cost to transport the NGL from the receipt point to Edmonton. Should the financial incentive to transport rich gas to Chicago be lost and a shipper choose to extract the NGL, an incentive may be offered to the shipper to continue to ship rich gas on the Alliance Pipeline. As volumetric tolls are used on the Alliance Pipeline, shippers thereon get the energy cost transport benefit of shipping higher btu gas. For those receipt points that do not have NGL extraction capabilities, Aux Sable US competes with the cost of the shipper installing and operating such facilities. Once the gas has been delivered into a receipt point on the Alliance Pipeline, Aux Sable has the exclusive right to extract the NGL or be compensated by the shipper if deliveries are made upstream of Aux Sable's extraction facilities. The Midstream Industry Natural gas is a mixture of various hydrocarbon components. The main component of natural gas is methane but it also contains other higher value hydrocarbons that are in gaseous form at the typical pressures and temperatures under which natural gas is transported and consumed. The basis of the NGL extraction industry is recovery of these higher value hydrocarbons in natural gas for sale in a liquid form. The higher value components are referred to as NGL and consist of ethane, propane, normal butane, isobutane and condensate (pentanes plus) and mixtures thereof. NGL are recovered primarily from three sources: field plants, straddle plants (such as the Channahon facility) and oil refineries. Typically, field plants process raw natural gas produced from wells in the area of the field plant to remove impurities such as water, sulphur, and carbon dioxide, and to extract a portion of NGL. The function of straddle plants is to reprocess the natural gas that is produced from field plants and extract more refined NGL. Although there are in excess of 300 field plants that extract NGL in western Canada, eight straddle plants extract approximately one-third of the total propane and butane recovered. Straddle plants in Canada are found on major high volume transportation systems, other than the Alliance Pipeline, that transport natural gas from the producing region to end markets. To meet end-user needs with specification products, the NGL mix must be separated into its constituent components. Most field or straddle plants in Alberta produce an NGL mix that is shipped to Edmonton or Sarnia for subsequent separation. NGL is used directly as an energy product and as feedstock for the petrochemical and crude oil refining industries. Uses for propane include primarily home and industrial heating, crop drying, cooking and motor fuel. Butane is used in gasoline blending. Condensate is used in crude oil blending and as a refinery feedstock to make gasoline. The petrochemical industry uses ethane as a feedstock. -35-

39 The petrochemical industry can use all NGL as a feedstock for producing ethylene, propylene, butadiene and other NGL derivatives. These intermediate compounds form the raw materials for end-use products such as polyethylene, polypropylene, plastics, solvents and foam materials. Market Demand As NGL in North America are used as both a heating fuel and as a petrochemical/refining feedstock, general demand for these liquids is influenced by weather conditions as well as by the overall level of economic activity. NGL Economics Plants that extract NGL from natural gas must have an agreement with the owner of the natural gas to allow the processing of the natural gas and the extraction of the NGL. There are several types of agreements used by the midstream industry in the US and Canada. Where an agreement requires the processor to replace the energy removed from the natural gas when the NGL are extracted, the processor must purchase make-up gas to replace the heating content removed due to the extraction of NGL. The cost of make up gas is the largest cost component in the production of NGL. As NGL product prices tend to vary with oil prices, the relative spread between natural gas prices and oil prices influences gross margins in the midstream business. The impact on margins can be dramatic during periods when the prices of NGL and natural gas move at different rates or in different directions. Other arrangements may involve a firm processing fee, a cost of service fee or a fee equal to a percentage share of the value of the NGL extracted, or variations that involve various components of these arrangement types, with the NGL Sales Agreement being such a hybrid form of arrangement. The Off-Gas Processing Industry Although off-gas processing is relatively new to Alberta, it is a common process in other energy/petrochemical industrial centres in eastern Canada, the US and elsewhere in the world. The business premise is that the potential NGL components in the produced off-gas from a refiner/upgrader have a value greater than their inherent energy value. The products produced contain both paraffins (ethane, propane, butane and heavier products) and olefins (ethylene, propylene, butylenes and other similar products), with the compositions varying with the type of refinery or upgrading technology supplying the off-gas. To the extent that the majority of the potential NGL (both paraffins and olefins) can be removed and sold to a higher-value market, primarily to the petrochemical industry, facilities that remove the NGL, rather than leave it in the gas stream to be used as fuel, can be justified on an economic basis. In addition to the more valuable end use of these components, off-gas processing typically results in GHG emission reductions for heavy oil upgraders in the range of 12% to 15%. -36-

40 OUR POWER BUSINESS Map of Our Power Assets -37-