Alliance Pipeline Limited Partnership

Transcription

1 Alliance Pipeline Limited Partnership Year Ended December 31, 2012

2 Table of Contents Management s Discussion and Analysis 4 Map of Alliance Pipeline System 4 Forward-Looking Information 6 Financial Highlights 7 Operating Highlights 7 Proposed Service Offering Fall System Outage Toll Filing 8 Land Matters Consultation Initiative 8 Chief Executive Officer 9 Corporate Vision & Strategy 9 Corporate Vision 9 Corporate Strategy 9 Market Connectivity 10 Competitiveness 10 Design and System Efficiency 11 Key Goals 11 Health, Safety and Environmental Stewardship 11 Pipeline Safety 11 Environment 12 Leveraging Existing Assets and Competitive Advantages as a Platform for Growth 13 Excellence and Innovation in Operations 13 Delivery Requirements 13 Systems and Processes 14 Strategic Relationships with Equipment Manufacturers 14 Outlook 15 Results Three Months Operations 15 Results Twelve Months Operations 17 Selected Quarterly Information 18 Financial Position Highlights 19 Liquidity and Capital Resources 20 Liquidity 20 Distributions to Partners 21 Capital Management Accounting Policy Changes 21 Adoption of United States Generally Accepted Accounting Principles 21 Page 2

3 Risks and Uncertainties 22 Competition 22 Recovery of Capital 22 Dependence on Related Parties 22 Credit Risk 23 Operating Risks 23 Environmental Matters 24 Liquidity Risk 24 Cyber Risk 25 Critical Accounting Estimates 25 Accounting for Rate Regulation 26 Depreciation and Amortization 26 Asset Retirement Obligation 27 Financial Instruments 28 Master Asset Vehicle II Notes 28 Foreign Currency Forward Contracts 28 Related Party Transactions 29 Disclosure Controls and Procedures 30 Internal Controls over Financial Reporting 30 Auditor s Letter 31 Statements of Income 32 Statements of Comprehensive Income 33 Statements of Cash Flow 34 Balance Sheets 35 Statements of Changes in Partners Equity 36 Notes to the Financial Statements 37 Page 3

4 Alliance Pipeline Limited Partnership Management s Discussion and Analysis Taylor Junction Station ALBERTA Montney Taylor Blueberry Aux Sable Plant Blueberry Station Duvernay Windfall Morinville British Columbia Alberta Saskatchewan Calgary Irma Loreburn Kerrobert Bakken Estlin Alameda North Dakota Towner Fairmount Wimbledon Minnesota Olivia Albert Lea Iowa CANADA UNITED STATES Eden Prairie Manchester Tampico Gas Plant Williston ORTH DAKOTA Illinois Tioga Ray Aux Sable TIOGA LATERAL PL Stanley (under construction) New Town Alameda Comp. Stn. PRAIRIE ROSE PIPELINE Minot 08 Towner Comp. Stn. Bantry Receipt Point Alliance Pipeline Tioga Lateral Pipeline Prairie Rose Pipeline Septimus Pipeline Mainline Compressor Stations Lateral Compressor Stations Head Offices Incremental Supply Fort Saskatchewan (Gas Processing Area) ACE Hub Alliance Pipeline System The Alliance Pipeline System (the System) has two principal assets: the Alliance Canada Pipeline, owned and operated by Alliance Pipeline Limited Partnership (Alliance Canada or the Partnership) and the Alliance USA Pipeline, owned and operated by Alliance Pipeline L.P. (Alliance USA). The System delivers rich gas - natural gas with relatively high natural gas liquids (NGL) content through a high-pressure transmission service primarily from the Western Canadian Sedimentary Basin (WCSB) to the Chicago area. Our capacity to receive rich gas from the Bakken region in North Dakota is increasing with the Tioga Lateral Pipeline currently being constructed and expected to be in-service by the third quarter of In 2010, the Prairie Rose Pipeline interconnection at the Bantry Receipt Station was completed providing an initial contract capacity of 80 mmcf/d on a long-term basis. Page 4

5 Alliance Pipeline Limited Partnership Management s Discussion and Analysis The Alliance Canada mainline connects to the Alliance USA Pipeline at the Canada/US border near Elmore, Saskatchewan. The Alliance USA Pipeline connects near its terminus in the Chicago area with five interstate natural gas pipelines and two local natural gas distribution systems. These pipelines and local distribution systems service major natural gas consuming areas in the mid-western United States and Ontario with access to residential, commercial, industrial and storage connections. The System is also connected to three ethanol producing plants; two in North Dakota and one in Iowa. Transporting rich gas increases operating efficiency and delivers more energy to markets than a typical natural gas pipeline. The Alliance System has capacity for 1.6 billion cubic feet of gas per day. The System interconnects at its endpoint near Chicago with the Aux Sable extraction plant. The Aux Sable extraction facility is one of the largest, state-of-the-art extraction and fractionation plants in North America and provides access to multiple NGL markets and distribution channels. The Aux Sable extraction facility is owned by Aux Sable Liquid Products LP (Aux Sable), an affiliate of Alliance Canada. This allows access to export markets for the liquids carried in the gas, such as ethane, propane, butane, and pentane. These liquids sell at prices that correlate more to oil prices than natural gas prices. The extracted liquids are sold in U.S. Midwest market or moved to other markets, such as the U.S. Gulf Coast. All our transportation service agreements require shippers to pay our service costs monthly, regardless of whether or not they transport gas on the System in a given month. Alliance Canada is jointly owned by Enbridge Income Partners Holdings Inc. and Veresen Energy Infrastructure Inc. Alliance Canada is subject to federal regulation by the National Energy Board (NEB). Alliance USA is subject to regulation by the Federal Energy Regulatory Commission (FERC). This Management s Discussion and Analysis (MD&A) should be read with our December 31, 2012 audited financial statements and our April 18, 2012 Annual Information Form. Where we use capitalized terms we do not define here, they have the same meanings as in our December 31, 2012 audited financial statements. All financial information is in Canadian dollars unless otherwise noted. On May 4, 2011 Alliance Canada applied to the Canadian securities regulators under section 5.1 of National Instrument Acceptable Accounting Principles and Auditing Standards (NI ) for exemptive relief from the requirements of section 3.2 of NI On June 17, 2011 we received exemptive relief that permits us to prepare and file financial statements in accordance with United States Generally Accepted Accounting Principles (US GAAP) for financial years commencing on and after January 1, 2012 but before January 1, Alliance Canada adopted US GAAP effective January 1, 2012 and all financial information in this MD&A has been prepared in accordance with US GAAP. This adoption date requires the applying of US GAAP retrospectively, for comparative purposes, of amounts reported by Alliance Canada for the annual and quarterly periods within the year ended December 31, Alliance Canada s financial statements reflect this change in accounting standards. Page 5

6 Alliance Pipeline Limited Partnership Management s Discussion and Analysis Forward-looking Information This MD&A reviews the significant events and transactions that affected our performance during the three and twelve months ended December 31, 2012 relative to the same periods in Some information in this MD&A is forward-looking information under applicable Canadian securities laws. All information about activities, events or developments that we think, may or will occur is forward-looking information. Forwardlooking information typically consists of statements containing words suggesting future outcomes or outlook, like may, estimate, anticipate, believe, expect, plan, intend, target, project, proposed, forecast or similar words. Forward-looking information in this MD&A includes: considering whether available credit facilities can sufficiently fund our operations and planned capital expenditures; the timing, scope and nature of proposed contract offerings; assessing our ability to re-contract firm capacity past the primary contract term; the proposed in-service dates of announced and current construction projects; the System s ability to accommodate new receipt volumes with variant gas compositions. The risks and uncertainties that may affect the operations and development of our businesses include the following: our ability to successfully implement our strategic initiatives and achieve expected benefits; the status, credit risk and continued existence of contracted shippers; the availability and price of capital; the availability of energy commodities; changes in regulatory, environmental, and other laws and regulations; competitive factors in the pipeline and natural gas liquids industries; operational breakdowns, failures, or other disruptions; prevailing economic conditions in North America. This list is not exhaustive. Our filings with the securities commissions or similar authorities in each of the provinces and territories of Canada contain additional information on the items listed above. Our filing also addresses other risks, uncertainties, and factors that could affect our operations or financial results. We cannot predict the effect of any particular risk, uncertainty, and influencing factor on a forward-looking statement, because we would have to assess it at that time in light of information available then. Each risk, uncertainty, and influencing factor is independent of the others, and each one, or a combination, may lead to different results. Although we believe that the expectations conveyed by the forward-looking information are reasonable based on information available to us on the date we prepared this MD&A, we can give no assurances about future results. Readers should not place undue reliance on the forward-looking information, as actual results may vary materially from the information in this MD&A. In addition, we made the forward-looking statements in this MD&A on today s date and we have no obligation to publicly update or revise any forward-looking information. This cautionary statement expressly qualifies all forward-looking information in this MD&A. Additional information about our business is available on SEDAR or at Page 6

7 Alliance Pipeline Limited Partnership Management s Discussion and Analysis Financial Highlights Twelve months ended December 31, (millions of dollars, unless otherwise noted) Revenue Comprehensive income Comprehensive income per unit ($) (1) Total assets 1, , ,016.2 Long-term debt 1, , ,271.4 Partner distributions paid (2) Distributions paid per unit ($) (1) (1) Per unit comparisons reflect amounts available to limited partners (99%). 629,765.1 units were outstanding for each of the reporting periods presented above. (2) Distributions are paid net of the 30% equity share of maintenance capital expenditures (Equity Holdback). Operating Highlights Proposed Service Offerings On October 10, 2012, Alliance Canada unveiled proposed new service offerings. The new services model builds on Alliance Canada s rich gas advantage and provides shippers with choices that include a segmented service structure in Canada. The implementation date is December 2015, at which time the 15-year primary term of the original transportation agreements with shippers will end. Alliance Canada s proposed new service offering is designed to offer increased flexibility, with cost-effective and predictable tolls. Under the proposal, the Canadian pipeline will be split into two receipt zones and one transmission zone. Shippers would pay a fixed volumetric toll on the receipt zones. We will also give shippers choices including a fixed transmission zone toll or a variable based toll that varies with the Chicago-AECO market basis. Shippers may also sell their natural gas out of the receipt zones into a new Alliance Transfer Pool. The U.S. transmission service from the Canada U.S. border to the terminus of the System would remain relatively unchanged. A full path service from Canadian receipt points to Chicago will still be offered. Tolls can vary based on length of term Fall System Outage Population growth adjacent to a pipeline s right-of-way is a common event that occurs throughout Canada. However, when industrial, commercial or residential development occurs close to a pipeline right-of-way, the NEB requires pipeline companies to assess the circumstances and decide if there is a need for remedial action. The development of a commercial establishment near the Alliance Canada mainline in northwestern Alberta, close to Whitecourt, resulted in a reclassification of the applicable pipeline design parameters for this localized pipeline segment. Page 7

8 Alliance Pipeline Limited Partnership Management s Discussion and Analysis The NEB directed us to replace this segment with heavier-wall pipe by May 31, The NEB also allowed us to consider re-routing the pipe or reducing pressure within this same time frame. Ultimately, Alliance Canada requested NEB approval to re-route this pipe segment. The NEB approved Alliance Canada s re-route plan on June 13, On October 1, 2012 the Alliance Canada portion of the System temporarily shut down for the first time since operational start up in 2000 to allow rerouting of the pipe. We suspended firm service and Authorized Overrun Service (AOS) during the outage. AOS was also affected in the days leading up to and after the outage. Natural gas transportation service on the Alliance Canada pipeline resumed on October 4, 2012 ahead of the originally anticipated 96-hour schedule. Alliance Canada expects to recover all costs of the NEB safety related order through its 2013 tolls. Total project costs included in the 2013 tolls were forecasted at $15.0 million which includes $5.0 million of indirect costs associated with Alliance Canada s inability to meet its firm service delivery requirements during the outage Toll Filing On October 31, 2012, we filed amended tolls with the NEB following consultation with our shippers. Effective January 1, 2013, our 2013 firm service transportation tolls increased $0.02/mcf or 2.2% from $0.925/mcf to $0.945/mcf. The increase in tolls is primarily due to higher provisions for current income taxes, higher negotiated depreciation rates for 2013, and an increase in expenditures related to operational pipeline systems applications. The increases are partially offset by a decrease in interest expense on senior debt, a reduction in maintenance expenditures and a decrease in the return on equity due to a declining investment base. The 2013 tolls are interim to date, pending settlement of an intervention filed with the NEB by two shippers. This intervention is in respect of indirect costs of approximately $5.0 million included in the 2013 toll filing. The costs in question were incurred during the fall 2012 System outage, which occurred to comply with an NEB safety order. Land Matters Consultation Initiative Alliance Canada is responsible for compliance with all laws and regulations concerning the abandonment of the pipeline and related facilities at the end of their respective lives. In the fall of 2007, the NEB established a Land Matters Consultation Initiative (LMCI) as part of its examination of key land issues. The LMCI is a result of a desire to improve understanding and dialogue between pipeline companies and landowners. On May 26, 2009, the NEB adopted a report on the financial issues of pipeline abandonment that will require companies to set aside funds to cover future abandonment costs. The issuance of this report followed a public hearing, held in January 2009, into the financial matters of pipeline abandonment. As a result of the mandated framework and action plan, Alliance Canada filed preliminary abandonment cost estimates, largely based on NEB assumptions, on November 30, As part of the NEB submission, included were refined versions of the preliminary physical plans for pipeline abandonment, originally filed on May 31, The NEB held Pipeline Abandonment hearings in early November 2012 to consider the reasonableness of each company s submitted cost estimates, including abandonment methods, environmental considerations, the scope and rationale for each abandonment activity considered for estimating the costs, and the approach to the estimation of the contingency and provisions for post-abandonment. Decisions from the November hearings are expected from the NEB in February The NEB s finding may result in pipeline companies filing revised cost estimates. Page 8

9 Alliance Pipeline Limited Partnership Management s Discussion and Analysis The next steps include filings from the pipeline companies in February 2013 for the Set-Aside Mechanism which will be held in trust and a filing detailing the Collection Mechanism, which is the annual collection amount, due in May Under the NEB s current directive, Alliance Canada will have to start collecting such funds no later than the 2015 toll year. Chief Executive Officer The Board of Directors of Alliance Pipeline Ltd. appointed Mr. Terrance Kutryk as the President and Chief Executive Officer effective October 1, He replaced Mr. Murray Birch who retired on July 31, Corporate Vision & Strategy Corporate Vision Alliance Canada s vision is to: expand the delivery of safe, reliable, and efficient energy in North America; provide shipper value by offering superior natural gas transportation services; set standards for the industry by implementing new technology to enhance pipeline optimization. We are committed to deliver customer focused services to meet the demands of the natural gas transportation market well into the future. Corporate Strategy Since initiating operations, we have concentrated on our core business by meeting our company objectives in all key areas of operational performance: availability, reliability, safe operations, throughput and efficiency. Alliance Canada and Alliance USA operate state-of-the-art technology, providing a high-pressure, liquids-rich service from western Canada to the Chicago market hub. We have developed strategic relationships with major equipment manufacturers enabling us to lower maintenance costs, achieve higher equipment availability and access operating equipment best practices. We have implemented a number of pipeline system optimization projects including installation of the Taylor Junction compressor station, which started commercial operations in 2009, in response to shipper demand for increased receipt capacity from northeastern British Columbia. We have further increased our receipt capacity from liquids-rich sources of natural gas. These include the Montney shale play connecting into Alliance Canada and the Bakken formation in North Dakota delivering into Alliance USA. Since 2010, Alliance Canada has added 375 mmcf/d of new receipt capacity to the System. A new receipt interconnect for an additional 40 mmcf/d of contract capacity onto the Fort St. John Lateral Pipeline is expected to be in-service late in the first quarter of We also entered into an agreement in February, 2013 to develop and construct a facility to connect a new shipper owned lateral line into Alliance Canada s existing Kaybob North Lateral. The facility design will allow for an additional 140 mmcf/d of receipt capacity onto the System and is expected to be in-service in the second quarter of Page 9

10 Alliance Pipeline Limited Partnership Management s Discussion and Analysis In the Bakken formation we connected the Prairie Rose Pipeline in 2010 and started construction of the Tioga Lateral Pipeline in the fall of 2012, which we expect to be in-service in the third quarter of We launched the ACE Hub service on the Alliance USA delivery header system in It saw immediate shipper interest, and represents a step forward in our progress to a multi-service business model. We expect that the ACE Hub will continue to expose Alliance USA to new customers and commercial prospects, and contribute to our future business growth. In preparing for contracting after 2015, when the original primary term of the transportation contracts expires, Alliance Canada has consulted with shippers and is proposing new services and tolls. We have designed the new terms to provide maximum flexibility; including fixed and variable tolls, and varying contract lengths. Discussions with shippers continue to focus on incremental services before 2015 and new services beyond We believe the advantages of the Alliance System include: market connectivity; competitiveness; design and operational efficiency. Market connectivity Alliance Canada s pipeline is close to significant natural gas production areas in northeastern British Columbia and northwestern Alberta including liquids-rich plays such as the Montney and Duvernay. Production in this region has grown by 14% since 2001 driven by recent rich gas development and approximately 5.5 bcf/d of natural gas production is within a 40 km radius of the Alliance Canada Pipeline. The Bakken region in North Dakota has been a very successful and rapidly growing shale oil play with significant associated rich gas production. We anticipate that on-going development may result in a substantial expansion of gas production that could be delivered to the System. In 2011, firm long-term contract capacity from the Prairie Rose Pipeline doubled to 80 mmcf/d. In the last few months of 2012, over 100 mmcf/d has been delivered to the Alliance System through the interconnection at Bantry, North Dakota. We have also contracted with a shipper to transport 62 mmcf/d on the Tioga Lateral Pipeline, which is currently under construction with a design capacity of 126 mmcf/d. Both the interconnection at the Bantry Receipt Station and the Tioga Lateral Pipeline, through the addition of in-fill compression, can be expanded to accommodate future growth beyond current design capacities. Two factors have enabled Alliance USA to offer new market hub services at its delivery header in the Chicago area to existing shippers and new customers: the liquidity of the Chicago market; the associated takeaway capacity and diversity of pipeline connections. The delivery header has over 6 bcf/d of downstream natural gas receipt capability with major interstate pipelines and local gas distribution systems in the mid-western U.S. These interstate pipelines and local gas distribution systems supply residential, commercial and industrial customers, and have access to gas storage facilities. Competitiveness Alliance Canada s tariff provisions contain a volumetric tolling methodology that benefits shippers that deliver high-energy natural gas. Page 10

11 Alliance Pipeline Limited Partnership Management s Discussion and Analysis Competitive transportation tolls currently provide shippers with daily AOS. AOS is available capacity offered to shippers in proportion to their contracted shipping capacity for no extra cost beyond fuel gas. AOS reduces shippers effective per unit transportation cost. Since the startup of operations on December 1, 2000, Alliance Canada has averaged 1.9% annual transportation toll increases. Design and operational efficiency A high-pressure pipeline service provides for the dense phase transmission of rich gas, which increases the efficiency of the System. We designed the System with the capability to accommodate higher energy natural gas either at current receipt stations or at new stations with what is expected to be minor System modifications and routine regulatory approvals. This is an advantage in the current environment in which liquids-rich gas drilling is common. The System design provides an alternative for liquids-rich gas shippers looking to avoid building costly field extraction plants. The System was designed to be able to increase the firm transportation capability by approximately 30% by adding compression facilities. While an expansion is not imminent, adding compressor stations may prove to be less expensive than constructing new large diameter pipeline facilities, which require more extensive regulatory and environmental approvals and possibly additional right-of-way. Key Goals Our key goals focus on: health, safety and environmental stewardship; leveraging existing assets and competitive advantages as a platform for growth; excellence and innovation in operations. Health, Safety and Environmental Stewardship Alliance Canada is committed to high standards of environmental protection when designing, building and operating its facilities. We are also committed to maintaining public and employee health and safety throughout all operations and construction. We believe that health and safety are the responsibility of each employee and contractor and that accident prevention is an integral part of every job. At Alliance Canada, we never compromise safety and environmental stewardship is one of our core values. We consider both in our daily decisions and actions with the goal of being incident free and environmentally responsible. That means protecting the environment around us and keeping our neighbours, employees and contractors safe. We comply with or exceed all applicable health, safety and environmental laws and regulations in all material respects. Page 11

12 Alliance Pipeline Limited Partnership Management s Discussion and Analysis 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. Alliance Canada is subject to the NEB s Onshore Pipeline Regulations for designing, constructing, operating and abandoning pipelines. Operationally we comply in all material respects with the NEB Act, the Onshore Pipeline Regulations, and all applicable safety regulations, standards and codes. Our practices and procedures are common in the pipeline industry and meet applicable laws in all material respects. We conduct, and expect to continue conducting patrols of rights of way and required inspections and audits of items such as cathodic protection, relief valves and mainline valves. In addition to complying with normal operating and maintenance requirements, we have rigorous integrity management programs that periodically assess the condition of the System. An update of Alliance Canada s Emergency Management Plan was completed and implemented in Alliance Canada conducted routine internal safety and security inspections at its compression facilities in 2012 with corrective actions being identified and addressed as appropriate. Alliance Canada is currently developing a structured Health and Safety Management System based on Occupational Health and Safety Management Guidelines. Environment In designing the System, Alliance Canada took advantage of being able to design all our facilities at the same time using modern technology and materials. The most significant of these design features are: dry low emission turbines that use state-of-the-art technology to reduce nitrogen oxides and carbon dioxide (CO 2 ) emissions, and increase fuel efficiency when driving the mainline compressors; internally coated pipe to reduce friction, thereby reducing fuel consumption; high pressure/rich gas technology that also improves efficiency. These features make the System more efficient than older, conventional designs of natural gas pipelines. However, greenhouse gas (GHG) emissions are created when natural gas combusts in turbines to drive compressors that move natural gas through the System. Although we have reduced the GHG emissions by using high efficiency gas turbines, the emissions intensity from the System still exceeds the net emissions intensity limit calculated under Alberta s Specified Gas Emitters Regulation (SGER). Under the SGER, facilities that emit more than 100,000 tonnes of CO 2 must reduce their emissions intensity by 12 percent of their baseline emissions. Further emission reductions at the source for high efficiency turbines are difficult to achieve. Our remaining options to meet Alberta emission reduction targets are to purchase Alberta Climate Change Fund credits at $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 credits for 2012 is $1.2 million, with the final cost to be determined in the first quarter of The increase in cost over 2011 comes from additional credits needed to offset emissions from Alliance Canada s mainline outage in the fall of The cost of these credits is included in the transportation tolls. The government of British Columbia implemented the Carbon Tax Act in 2008, which taxes the consumption of all fuel sources in the province. Alliance Canada s Taylor Junction compressor station is subject to this tax and the cost for 2012 is expected to be $0.5 million based on current operations. As of July 2012, the Carbon Tax has increased to $30 per CO 2 equivalent ($0.057 per m 3 of natural gas consumed). A provincial review is currently underway to determine the next steps for any tax increase or decrease. Page 12

13 Alliance Pipeline Limited Partnership Management s Discussion and Analysis In Saskatchewan, The Management and Reduction of Greenhouse Gases Act was introduced in the provincial legislature and received Royal Assent on May 20, When enacted, the Act will set emission reduction targets and impose a carbon compliance payment if the target is not achieved. We expect the requirements and compliance options to be similar to those in Alberta and anticipate that they will be in place within the next year. We also expect our facility emissions to exceed the regulatory threshold for the anticipated federal regulatory framework in Canada, although the timing for enacting this framework is uncertain. It is probable that we will need to comply with a federal regulatory scheme in Canada since our pipeline crosses several provinces and is regulated by the NEB. Alliance Canada also conducts regular inspections of its facilities, allows inspections when agencies that monitor us request them, and follows defined practices to meet regulatory requirements during the construction, operation and maintenance of its facilities. Leveraging Existing Assets and Competitive Advantages as a Platform for Growth Alliance Canada s strategy is to grow from a single-service, single-toll pipeline to a multi-service pipeline. This will enhance its competitive position by giving shippers greater commercial options, attracting a more diverse shipper community and creating new sources of revenue. We have designed the proposed new service offerings to attract and retain customers, and build on existing infrastructure. To increase growth, Alliance Canada will leverage its advantages including: The pipeline has a unique ability to transport rich gas, a combination of natural gas (methane) and natural gas liquids (such as ethane, propane, and butane). This delivers more product (energy) to market than a typical natural gas pipeline system at competitive tolls. This transportation advantage positions Alliance Canada to be competitive in producing areas in British Columbia, Alberta and the Bakken region. With fractionation spreads for NGL in today s market, the value of the delivered products in the markets accessed by the System has the potential to be higher than on competitor s pipelines. The System s efficiency in preserving liquids until the point of liquid extraction considerably increases the value of the rich gas. The Aux Sable NGL extraction and fractionation plant connects to the pipeline near its terminus in the Chicago area. One of the largest plants of its type in North America, this state-of-the-art facility provides access to multiple NGL markets, distribution channels, and storage. Excellence and Innovation in Operations Alliance Canada is focused on maximizing reliability, availability and throughput of its transportation services in a safe and environmentally responsible manner. We continue to ensure effective and prudent management of our operating costs, as part of our focus on Alliance Canada s long-term competitiveness. Delivery requirements Alliance Canada provides firm take-or-pay transportation services under negotiated contracts, and shippers are required to pay for contracted volumes regardless of whether they ship natural gas. With the exception of the NEB directed fall outage, Alliance Canada continues to meet its contracted daily firm service shipping requirements and shippers continue to use substantially all the AOS we offer. Page 13

14 Alliance Pipeline Limited Partnership Management s Discussion and Analysis The average AOS we offered for 2012 was 17.2%, compared to the 18.0% offered in The decrease in offered AOS was primarily because of an increase in maintenance work during 2012 (including scheduled compressor control panel replacements). We expect the 2013 offered AOS to be similar to Systems and processes The main control centre for the System is in Alberta, and has control, alarm and leak detection monitoring capability. Control centre operators can remotely shut down individual stations or facilities on the System. In addition, each remote station has local emergency shutdown capabilities. We have also established a back-up control centre in a different location in Alberta. We use a satellite communications system to transmit data to and from remote facilities and the main and backup control centres. The satellite system is backed up by land lines to the remote facilities. Mainline block valves are linked to the control centre to monitor gas pressure and temperature and allow for rapid closure of block valves in emergencies. Each compressor station is designed to be unmanned, but all are continuously monitored and operated yearround from the manned system control centre. On-site sensors monitor and automatically control compressor station performance and throughput. These sensors monitor major compressor station equipment for parameters such as temperature, pressure and vibration. Our gas management system is a critical element of our business. It meets both business and regulatory requirements through services such as contract management, customer account management, capacity release, nomination entry, scheduling, confirmation and allocation, imbalance management, invoicing and reporting. Alliance Canada s maintenance program includes semi-annual inspections of compressor stations as well as internal corrosion inspections and annual pipe-to-soil surveys, atmospheric inspections, above ground indirect assessments and the repair and replacement of compressor parts. We complete in-line inspection of the mainline pipeline on a seven year recurring schedule. Maintenance expenditures vary from year to year. Alliance Canada is now into its second decade of operations and as the System matures and technology changes, we anticipate increased maintenance requirements. Strategic relationships with equipment manufacturers We have developed a strategic supply and equipment maintenance relationship with the manufacturers of major components on Alliance Canada s compressor units. One long-term contract has provided major compressor equipment maintenance services since 2008 and our contract covers these services through Additional services under this agreement include resident engineers and technicians that can provide expertise aimed at enhancing Alliance Canada s efficient, reliable and economic equipment operation. These are achievements that might not otherwise be possible under a more standard maintenance and overhaul program. We track Key Performance Indicators (KPIs) to evaluate the effectiveness of the maintenance program. KPIs evaluated include equipment availability, mean time between failures, fired hour costs and the depot and workshop turnaround time for major overhauls. A second contract covers replacing control panels that run the power turbine, gas generator and compressor unit functions at the mainline compressor facilities along the System. The current control panel software and equipment are becoming obsolete and the vendor will discontinue their support for the components in Panel replacements continued through 2012, with 47% of the System replacements completed to date. We have planned installations of control panels at the remaining compressor sites throughout the System in 2013 and Page 14

15 Alliance Pipeline Limited Partnership Management s Discussion and Analysis Outlook Current market dynamics, including advantageous NGL fractionation margins, and expanded liquids-rich gas supply from unconventional development are key growth drivers for Alliance Canada given the System s strength is its rich gas capability. With fractionation spreads for NGL in today s market, the value of the delivered product and potential netbacks to shippers have the opportunity to be higher than on competitor pipelines. The System is flexible enough to be able to transport natural gas with higher heat content than current levels. This added flexibility can be achieved with what are expected to be minor modifications to the System. Currently, Alliance Canada is in consultation with existing and prospective shippers regarding the proposed new services, described in the Corporate Strategy section. Alliance Canada is planning to have precedent agreements signed in 2013, after which an open season process will be used to determine any additional shipper interest. The next several years represent a transition period covering the development, regulatory approval, contracting and implementation of the proposed new services to replace the transportation contracts which end in December, Results of Operations for the Three Months Ended December 31, 2012 (millions of dollars, unless otherwise noted) Change $ Change % Transportation revenue (2.8) (2.2) Operating expense (2.5) (5.6) Depreciation expense Interest expense (1.0) (4.5) Comprehensive income (1.1) (3.9) Partner distributions paid (0.1) (0.3) Cash provided by operating activities (8.5) (24.5) Capital expenditures (1.0) (5.1) Average daily throughput volume (bcf/d) N/A (0.6) Transportation Revenue Transportation revenue decreased $2.8 million to $122.0 million for the three months ended December 31, 2012, compared to $124.8 million for the three months ended December 31, The decrease is mainly due to lower actual cost of service as compared to Q4, 2011, which is partially offset by an increase of the 2012 transportation tolls compared to the 2011 transportation tolls. Effective January 1, 2012, the 2012 firm service transportation tolls increased $0.011/mcf or 1.2% from $0.914/mcf to $0.925/mcf. Page 15

16 Alliance Pipeline Limited Partnership Management s Discussion and Analysis Operating Expense Total operating expenses are $42.0 million for the three months ended December 31, 2012 compared to $44.5 million for the three months ended December 31, The change is mainly due to relatively higher fourth quarter 2011 equipment maintenance and pipeline integrity expenses. Activities in 2011, which included inline inspections and the purchase of replacement control panels for the compressors, are cyclical in nature and did not occur in the fourth quarter of Depreciation Expense Depreciation expense increased $4.1 million to $34.0 million for the three months ended December 31, 2012 compared to $29.9 million for the same three months in The increase is due to the decommissioning of a receipt meter station and compressor station at the Paddle River site in Alberta, and the residual value associated with the asset. Interest Expense Interest expense decreased $1.0 million to $21.2 million for the three months ended December 31, 2012 compared to $22.2 million for the three months ended December 31, The interest expense is lower due to declining long-term debt balances as a result of scheduled principal payments on the senior notes. Comprehensive Income Comprehensive income decreased $1.1 million to $27.3 million for the three months ended December 31, 2012, compared to $28.4 million for the three months ended December 31, The decrease is mainly due to a lower return on equity, which is the result of a depreciating investment base, and a reduction in the allowance for income taxes. Partner Distributions Paid Distributions paid to partners remain essentially unchanged, at $37.1 million for the three months ended December 31, 2012 compared to $37.2 million for the same quarter in Cash Provided by Operating Activities Cash provided by operating activities is $26.2 million for the three months ended December 31, 2012 a decrease of $8.5 million, compared to $34.7 million for the three months ended December 31, The reduction is due to a decrease in the current portion of the regulatory liabilities, which represents the difference between expenses included in the financial statements and expenses included in transportation tolls. The decrease is partially offset by an increase in trade accounts payable. Capital Expenditures Capital expenditures are a net reduction of $1.0 million, compared to a net reduction of $5.1 million for the fourth quarter of The net reduction is due to a decrease in inventory levels of capital spares used in the fall maintenance activities. Page 16

17 Alliance Pipeline Limited Partnership Management s Discussion and Analysis Results of Operations for the Twelve Months Ended December 31, 2012 (millions of dollars, unless otherwise noted) Change $ Change % Transportation revenue Operating expense Depreciation expense Interest expense (4.1) (4.5) Comprehensive income (7.2) (6.3) Partner distributions paid (1.8) (1.2) Cash provided by operating activities (22.4) (9.4) Capital expenditures N/A Average daily throughput volume (bcf/d) N/A (0.7) Transportation Revenue Transportation revenue increased $5.2 million to $462.5 million for the twelve months ended December 31, 2012, compared to $457.3 million for the twelve months ended December 31, The increase is mainly due to a higher actual cost of service and an increase in the 2012 transportation tolls compared to the 2011 transportation tolls. Effective January 1, 2012, the 2012 firm service transportation tolls increased $0.011/mcf or 1.2% from $0.914/mcf to $0.925/mcf. Operating Expense Total operating expenses are $147.5 million compared to $133.0 million for the twelve months ended December 31, The change is mainly due to increased project costs which include: mainline pipe replacement to remediate a right-of-way encroachment; compressor control panel replacement; and higher compensation expenses. Depreciation Expense Depreciation expense increased $4.1 million for the twelve months ended December 31, 2012 in comparison to the twelve months ended December 31, The increase is due to the residual value of a receipt meter station and compressor station that were decommissioned at the Paddle River site in Alberta. Interest Expense Interest expense decreased $4.1 million to $86.2 million for the twelve months ended December 31, 2012 compared to $90.3 million for the twelve months ended December 31, The interest expense is lower due to declining long-term debt balances as a result of scheduled principal payments on the senior notes. Comprehensive Income Comprehensive income decreased $7.2 million to $108.0 million for the twelve months ended December 31, 2012, compared to $115.2 million for the twelve months ended December 31, The decrease is mainly due to a lower return on equity, which is the result of a depreciating investment base and a reduction in the allowance for income taxes. Page 17

18 Alliance Pipeline Limited Partnership Management s Discussion and Analysis Partner Distributions Paid Distributions paid to partners decreased by $1.8 million to $148.7 million for the twelve months ended December 31, 2012 compared to $150.5 million for the twelve months ended December 31, The decrease is due to relatively higher distributions in the first quarter of 2011, which included a $3.5 million litigation settlement. Cash Provided by Operating Activities Cash provided by operating activities is $215.8 million for the twelve months ended December 31, 2012 a decrease of $22.4 million, compared to $238.2 million for the twelve months ended December 31, The decrease is due to lower regulatory liabilities, which represent the difference between expenses in the financial statements and expenses included in transportation tolls. The decrease is offset by an increase to trade accounts payable and accrued liabilities. Capital Expenditures Capital expenditures are $3.1 million, an increase of $3.1 million compared to Capital expenditures in 2012 include an increase in capital spares and head office renovations. Selected Quarterly Financial Information (millions of dollars, except where noted) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Transportation revenue Comprehensive income Comprehensive income per unit ($) (1) Partner distributions paid (2) Distributions paid per unit ($) (1) (1) Per unit comparisons reflect amounts available to limited partners (99%). The number of units outstanding for each of the above reporting periods was 629, (2) Distributions are paid net of the 30% equity share of maintenance capital expenditures (Equity Holdback). A key benefit of Alliance Canada s consistent and stable operations is limited variability in results. Variations generally result from one-time events. Interim results may fluctuate due to seasonal spending patterns as revenue is recognized relative to cost of service expenses in the period in which the cost of service is incurred. Significant items that impacted the quarterly financial results include the following: The fourth quarter 2012 transportation revenue reflects higher cost of service expenses as a result of an NEB directive to re-route a section of mainline pipeline. The project was completed in October, 2012 and project costs are reflected in the third and fourth quarters of As well, during the outage several additional maintenance activities were performed. Page 18

19 Alliance Pipeline Limited Partnership Management s Discussion and Analysis The third quarter 2012 transportation revenue reflects higher operating expenses as a result of the NEB directive to re-route a section of mainline pipeline. The second quarter 2012 transportation revenue reflects higher operating expenses as a result of seasonal variation. The first quarter 2012 transportation revenue reflects lower operating expenses as a result of seasonal variation and a lower return on equity due to a depreciating investment base. The fourth quarter 2011 transportation revenue reflects an increase in the cost of service for compressor control panel replacements at several compressor sites, a project to remediate river bank erosion and subsequent pipe exposure, a compressor overhaul not included in the monthly equipment maintenance agreement and an increase in monthly office rental expenses. The third quarter 2011 transportation revenue reflects higher operating expenses due to the deferral of some operating and project activities from the first and second quarters to the third quarter. The second quarter 2011 transportation revenue reflects lower operating expenses due to the deferral of some operating and project activities to later in the year, along with reductions in government levies and Alberta property taxes. The first quarter 2011 distributions reflect the receipt of a construction litigation settlement in the fourth quarter of 2010, subsequently included in the first quarter 2011 distributions. The first quarter 2011 revenue reflects a decrease in the cost of service resulting from year over year differences between estimates and actual payouts for compensation plans, lower operations expenses due to the deferral of some operating and project activities to the second quarter of 2011, and a reduction in government levies. The first quarter 2011 comprehensive income reflects a lower return on equity due to a depreciating investment base. Financial Position Highlights As At (millions of dollars) December 31, 2012 December 31, 2011 Current assets Long-term assets 1, ,831.0 Current liabilities Long-term liabilities 1, ,209.5 Partners equity The total current assets at December 31, 2012 are $93.4 million compared to $92.5 million at December 31, The change is due to increases in the current portion of the regulatory assets, which represent differences between expenses included in the financial statements and expenses included in transportation tolls, and an increase in the current portion of the long-term receivable, which represents the differences between the depreciation rates negotiated in the transportation service contracts and the depreciation rates used for financial statement reporting. The increase is mostly offset by a decrease in trust accounts. Long-term assets decreased to $1,697.6 million during the twelve months ended December 31, The decrease is primarily due to lower net property, plant and equipment balances as a result of on-going depreciation. Page 19