2017 ANNUAL ALLIANCE PIPELINE LIMITED PARTNERSHIP. Management s Discussion and Analysis

Transcription

1 2017 ANNUAL ALLIANCE PIPELINE LIMITED PARTNERSHIP Management s Discussion and Analysis

2 The Alliance System The Alliance System (System) consists of a 3,849 kilometre (km) (2,392 mile) integrated Canadian and United States (U.S.) natural gas transmission pipeline, delivering rich natural gas from the Western Canadian Sedimentary Basin (WCSB) and the Williston Basin in North Dakota to the natural gas market in Chicago. The System has been in commercial service since December 2000 and currently delivers an average of 1.6 billion cubic feet per day (bcf/d) of rich gas to the Aux Sable natural gas liquids (NGLs) extraction facility, owned by Aux Sable Liquid Products L.P. (Aux Sable), an affiliate of Alliance Pipeline Limited Partnership (Alliance Canada). Rich gas is natural gas with relatively high NGLs content; mainly ethane, propane, butane and condensates. The System connects with the Aux Sable NGLs extraction facility in Channahon, Illinois, which extracts NGLs from the natural gas transported before delivery to downstream pipelines. The pipeline connects in the Chicago area, through its downstream header, with five interstate natural gas pipelines and two local natural gas distribution systems, which provide shippers with access to natural gas markets in the Midwest, the Northeast, and the Gulf Coast of the U.S., and Eastern Canada. All shippers have signed extraction agreements that give Aux Sable the right to extract the NGLs from the rich gas transported. The System also has three connections, two in North Dakota and one in Iowa, to provide for deliveries of small amounts of natural gas to ethanol production plants. Facilities include 14 mainline compressor stations that operate between approximately 31,000 horsepower (hp) and 46,000 hp each spaced at approximately 193 km intervals; mainline block valves spaced on average at 32 km intervals; operating and maintenance facilities; and an associated SCADA system. Page 1

3 Construction of the System began in May 1999 and commercial operations commenced on December 1, Shippers executed transportation contracts with each of Alliance Canada and Alliance Pipeline L.P. (Alliance U.S.) that had a primary term ending November 30, Those contracts provided for the transportation of 100% of Alliance Canada s available firm capacity and tolls based on a negotiated cost-of-service tolling mechanism. On December 1, 2015, Alliance Canada commenced the implementation of its Services Offering providing shippers with competitive long-term fixed firm tolls and biddable tolls for seasonal firm, short-term firm and interruptible transportation (IT) services. This replaced the original firm cost-of-service contracts. The Services Offering provides shippers with a variety of natural gas transmission services and tolling options for the safe and reliable transportation of their gas, and includes both full-path and segmented receipt and delivery services. A new Canadian trading pool and a revised Hydrocarbon Dewpoint (HCDP) specification were also introduced to further facilitate the transportation of rich gas. Alliance Canada The Alliance Canada portion of the System consists of approximately 1,561 kms (970 miles) of natural gas mainline pipeline and 732 kms (455 miles) of related lateral pipelines connected to natural gas receipt locations, primarily at gas processing facilities in northwestern Alberta and northeastern British Columbia, and related infrastructure. Alliance Canada owns the Canadian portion of the System. Alliance Canada is jointly owned by an affiliate of Enbridge Inc. and an affiliate of Pembina Pipeline Corporation and is subject to federal regulation by the National Energy Board (NEB). Alliance U.S. The Alliance U.S. portion of the System consists of approximately 1,556 kms (967 miles) of infrastructure including the 129 km (80 mile) Tioga Lateral in North Dakota. Alliance U.S., an affiliate of Alliance Canada, owns the U.S. portion of the System. Alliance U.S. is jointly owned by an affiliate of Enbridge Inc. and an affiliate of Pembina Pipeline Corporation and is subject to federal regulation by the Federal Energy Regulatory Commission (FERC). About this Document The following Management s Discussion and Analysis (MD&A) is as of February 5, 2018 and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2017, and our 2016 Annual Information Form. All amounts in this MD&A are in millions of Canadian dollars except per unit amounts. All financial information in this MD&A has been prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP). This MD&A reviews the significant events and transactions that impacted our performance during the three and twelve months ended December 31, Throughout this MD&A, the terms, we, us, our, and Alliance Canada mean Alliance Pipeline Limited Partnership. Collectively, Alliance Canada and Alliance U.S. are referred to as the System. Abbreviations and acronyms that are not defined in this document are defined in the glossary of terms on page 28. Additional information about our business is available at and on SEDAR at Page 2

4 Strategy The Alliance System is unique in its ability to transport rich natural gas. Rich natural gas, primarily from the WCSB, is transported in a single continuous dense phase to Chicago where the pipeline interconnects with the Aux Sable NGLs extraction facility. The NGLs extracted at the Aux Sable facility are available for sale in U.S. markets, while the natural gas is delivered to downstream markets through the Alliance Chicago Exchange hub (ACE). Alliance Canada s business model is based on extensive consultation with shippers resulting in a variety of natural gas transmission services and tolling options. This business model was developed in a manner that is cognizant of "cost based" parameters. These services provide a more dynamic and flexible market-focused approach under which Alliance Canada assumes a higher degree of business risk and provides service flexibility to effectively respond to evolving market conditions. Alliance Canada's natural gas transmission services, coupled with rich gas delivery capabilities, are designed to enable producers to maximize the value of their product. This provides significant competitive advantages which can include: Saving producers processing and infrastructure costs, and providing an opportunity to reduce the time to market for their rich gas production; Providing access to the Aux Sable NGLs extraction facility allowing for considerable economies of scale; and Delivering value added products to alternative markets for NGLs while only paying a transportation charge based on volume. These services can potentially provide shippers with a higher net back for rich natural gas. Since implementing our new services in late 2015, solid asset performance allowed us to benefit from favourable market conditions, which is reflected in our strong results. Alliance Canada s long-term prospects are strong. We have sold all of our year-round firm capacity through 2019, and 96% of year-round firm capacity for Alliance Canada will continue to engage with shippers to support the optimization of commercial operations and the evaluation of new opportunities and services that meet the current and potential needs of shippers as they plan for growth initiatives and future prospects. Capacity Expansion Study In response to the high demand for our transportation services, Alliance Canada and Alliance U.S. announced a non-binding request for expressions of interest for additional transportation services on the System with an anticipated commencement date as early as the second half of Alliance Canada is currently engaging with interested parties and assessing the commercial feasibility of adding more compression facilities along the System in order to increase throughput capacity by up to 500 mmcf/d. In conjunction with this engagement and assessment, extensions of the terms of the current transportation contracts portfolio are being discussed. A binding open season process to support a potential expansion should commence as early as the first quarter of Page 3

5 Health and Safety Stewardship At Alliance Canada, safety and environmental stewardship are our top core values. We consider both of these core values in our daily decisions and actions with the goal of being incident free. That means protecting the environment around us and keeping our neighbours, employees and contractors safe. We comply with or exceed all applicable health, safety and environmental laws and regulations in all material respects. Natural gas pipelines in Canada are required to meet construction, operating and maintenance standards established by the NEB, other federal regulators and the Canadian Standards Association. Alliance Canada is subject to the NEB s Onshore Pipeline Regulations for designing, constructing, operating and abandoning pipelines. Operationally, we comply in all material respects with the NEB Act, the Onshore Pipeline Regulations and all applicable safety regulations, standards and codes. We conduct patrols of rights of way, required inspections and audits of pipeline condition through investigative excavations, and assessments of the levels of protection related to our cathodic protection system, relief valves and mainline valves. As part of our maintenance inspection program, routine internal safety and security audits are performed at compressor station facilities with corrective actions as required. We have developed a structured Health and Safety Management System based on Occupational Health and Safety Management Guidelines. This system is part of Alliance Canada s Integrated Management System that has been developed for integration of key operational programs to manage hazards and risks associated with operation of the System. We allow inspections and audits when agencies that regulate our industry request them, and follow defined practices to meet regulatory requirements during the construction, operation and maintenance of our facilities. In addition to complying with general operating and maintenance requirements, we have rigorous integrity management programs that regularly assess the condition of the System. Our robust pipeline integrity lifecycle efforts have resulted in three cycles of in-line inspections completed in 17 years of operations. Our maintenance program includes monthly, quarterly, semi-annual and annual inspections of all compressor station and meter station facilities. Maintenance expenditures vary from year to year. We are now in our second decade of operations and as the System matures and technology changes, we anticipate increased maintenance requirements for some facilities and optimization for other facilities that have undergone improvements or upgrades. Page 4

6 Environmental Regulation In designing the System, Alliance Canada took advantage of being able to design all our facilities at the same time using modern technology and materials. These features make the System more efficient than older, conventional designs of natural gas pipelines. However, greenhouse gas (GHG) emissions are created during the combustion of natural gas in turbines that drive compressors to move natural gas through the System as well as through periodic venting activity. Alliance Canada and our shippers are exposed to additional costs of complying with regulations related to the protection of the environment. The costs associated with the payments of carbon taxes and credits purchased from federal and provincial climate change funds and/or qualified projects are included as recoverable costs in our transportation contracts. The Federal Government requires a minimum carbon pricing in all jurisdictions in Canada of $10 per tonne of carbon emissions in 2018, rising by $10 per year for the next four years, reaching $50 per tonne of carbon emissions in Alliance Canada has operations in British Columbia, Alberta and Saskatchewan that are subject to carbon tax. In British Columbia, the tax is currently set at $30 per tonne of CO 2 equivalent. The British Columbia Government committed to raise the carbon tax by $5 per tonne of CO 2 equivalent annually (starting April 2018) until it meets the federal floor price of $50 per tonne of CO 2 equivalent. In Alberta, the carbon levy that was effective January 1, 2017 applies to all fossil fuels at a rate of $20 per tonne of CO 2 emissions, increasing to $30 per tonne of CO 2 emissions starting January 1, Alliance Canada can purchase credits from the Alberta Climate Change Fund or purchase offsets from qualified projects Operating Highlights Wapiti River Slope In June 2017, slope movement, caused by rains and runoff in an area along the Wapiti River in northwestern Alberta, impacted a section of Alliance Canada s mainline. Alliance Canada declared an event of Force Majeure on June 13, 2017, for four days, in order to limit pipeline pressure in the impacted area to safely accommodate work to expose and inspect the pipeline, and relieve any pipe stress. During the services reduction, IT service was not available on Alliance Canada. Upon inspection it was determined no repairs to the pipe were required. Alliance Canada stabilized the slope to mitigate further ground movement and resumed normal services on June 17, Ownership Change On October 2, 2017, Pembina Pipeline Corporation announced the closing of its business combination with Veresen Inc. whereby it acquired all issued and outstanding common shares of Veresen Inc. On December 20, 2017, all Class A and Class B units of Alliance Canada were transferred from Pembina Pipeline Corporation to an affiliate of Pembina Pipeline Corporation, a Partner of Alliance Canada. Chief Executive Officer Effective December 13, 2017, Terrance Kutryk, President and CEO, is no longer with the General Partner of Alliance Canada. On an interim basis, Jason Wiun of Pembina Pipeline Corporation and Mark Fiedorek of Enbridge Inc. will act as co-presidents of the General Partner. The Government of Saskatchewan has until September 1, 2018 to outline how they are implementing carbon pricing to meet minimum federal standards. Page 5

7 Overview of Services Alliance Canada s natural gas transmission services combine flexibility and firm toll predictability, together with enhanced natural gas transmission services that create economic value for customers. We offer a variety of firm and IT services to shippers. Alliance Canada shippers have a menu of options that allows them to tailor their gas transportation to best meet their specific needs with flexibility of services. These services feature optionality of pricing value and duration, including firm, interruptible and seasonal services, lower cost tolling options, trading points and hub services that are open to other market participants. Firm Delivery Services allow shippers to deliver gas from the ATP to the Canada U.S. border. Fixed tolls are offered on one to ten year terms. Firm Full Path Services are a volumetrically tolled service from Canadian receipt points in both Zone 1 and Zone 2 to the Canada U.S. border, with fixed toll terms between three and ten years. These services require a corresponding firm transportation service contract with Alliance U.S. ATP a Canadian trading pool allowing receipt and delivery shippers to trade gas. The ATP is a notional point connecting the receipt zones to the delivery zone. The ATP facilitates the segmentation of services on the pipeline into receipt and delivery services, providing a platform to transfer title and allowing shippers to access term park and loan services. Firm Receipt and Full Path services, with initial terms of three years or more, also have access to Priority Interruptible Transportation Services (PITS) that can provide additional transportation access as production volumes grow, allowing shippers to flow up to 25% more volume than contracted. Alliance Canada s natural gas transmission services include the following key elements: The natural gas transmission services also include biddable tolls for seasonal, short-term firm and IT services, rich gas services, and the ability to stage contract commitments on firm services with initial terms of 5 years or longer. Firm Receipt Services include two zones with fixed volumetric tolls, allowing shippers to move gas from their contract receipt point(s) to the Alliance Trading Pool (ATP). Shippers have the option to lock in their receipt tolls for three to ten year terms. The two receipt zones are: o Zone 1 includes all receipt points downstream of the Blueberry Hill Compressor Station near Gordondale, Alberta. o Zone 2 includes the Blueberry Hill Compressor Station and all receipts points upstream of that station. To further establish Alliance Canada as the rich gas transporter of choice, Alliance Canada changed the HCDP gas quality tariff specification from -10 degrees Celsius to -5 degrees Celsius, and Alliance U.S. changed the HCDP gas quality tariff specification from 14 degrees Fahrenheit to 23 degrees Fahrenheit. The HCDP specification change, effective December 1, 2015, enhanced shipper access to rich gas transportation and facilitated an increase in the NGLs content of the gas Alliance Canada transports. In addition to this HCDP change, we offer services that can further enable shippers to optimize the heat content of the natural gas delivered to us. Curtailment mechanisms are included in the tariffs to ensure that pipeline operations and safety are not compromised. Page 6

8 Results of Operations for the Three and Twelve Months Three Months Ended Twelve Months Ended December ($ millions, except where noted) Operational Results Average long-term firm volume (mmcf/d) 1, , , , ,335.3 Average seasonal/short-term firm volume (mmcf/d) Average PITS/IT volume (mmcf/d) Total Average Transportation Volume (mmcf/d) 1, , , , ,345.6 Financial Results Transportation revenue Service and other revenue Total Revenue General and administrative expenses Operations and maintenance expenses Property tax expenses Administration service agreement fee Total Operational Expenses Depreciation expense Interest expense Interest income and other (1.3) (8.5) (3.9) (10.0) (2.7) Extraordinary gain (3.2) Net Income EBITDA (1) Cash provided by operating activities Distributions paid (1) Refer to Non-GAAP financial measures. Page 7

9 Transportation Volumes Contracted Transportation Volumes to the Border Total average transportation volume increased mmcf/d to 1,564.2 mmcf/d for the three months ended December 31, 2017 compared to 1,434.7 mmcf/d for the same period in Total average transportation volume increased 26.2 mmcf/d to 1,560.4 mmcf/d for the year ended December 31, 2017 compared to 1,534.2 mmcf/d for the same period in Average Long-Term Firm Volume Average long-term firm volumes increased by 87.1 mmcf/d to 1,335.4 mmcf/d for the three months ended December 31, 2017 compared to 1,248.3 mmcf/d for the same period in Average long-term firm volumes increased by 13.0 mmcf/d to 1,340.2 mmcf/d for the year ended December 31, 2017 compared to 1,327.2 mmcf/d for the same period in These increases were primarily due to higher firm receipt services volumes as a result of the scheduled increase in firm capacity under staged contracts. In addition, volumes in the fourth quarter of 2016 were reduced by the seven day outage required to complete the work on the Regina Bypass Project. Average Seasonal/Short-Term Firm Volume Average seasonal/short-term firm volumes were mmcf/d for three months ended December 31, 2017 and mmcf/d for the year ended December 31, 2017 which were comparable with mmcf/d and mmcf/d for the same periods in 2016, respectively. Average PITS/IT Volume Average PITS/IT volumes increased 37.9 mmcf/d to 87.7 mmcf/d for the three months ended December 31, 2017 compared to 49.8 mmcf/d in the same period for This increase was primarily due to the additional IT delivery services that were required to transport higher volumes from staged Firm Receipt Services contracts to the border. Average PITS/IT volumes were 77.5 mmcf/d for the year ended December 31, 2017 which was comparable with 69.3 mmcf/d in the same period for Transportation Revenues Transportation revenue increased $17.6 million to $133.2 million for the three months ended December 31, 2017 compared to $115.6 million for the same period in Transportation revenue increased $40.8 million to $501.6 million for the year ended December 31, 2017 compared to $460.8 million for the same period in Transportation revenue, excluding ancillary revenue, includes the recognition of non-cash consideration for fuel gas that is consumed in the transportation of natural gas and collected from shippers. An equivalent value was recognized as cost of fuel gas consumed and included in operations and maintenance expenses, resulting in no impact to net income. Transportation revenue also includes regulatory revenue adjustments related to the recoverable cost variance and shipper settlements. Long-Term Firm Transportation Revenue Long-term firm transportation revenue increased $3.7 million to $93.1 million for the three months ended December 31, 2017 compared to $89.4 million for the same period in The increase was primarily due to increased firm receipt services from the staged contracts, partially offset by a decrease in the value of transportation fuel revenue due to lower index pricing. Page 8

10 Long-term firm transportation revenue increased $11.3 million to $378.5 million for the year ended December 31, 2017 compared to $367.2 million for the same period in The increase was due to higher firm receipt services provided, and an increase in the value of transportation fuel revenue. This higher transportation fuel revenue was due to an increase in compressor fuel volumes that were consumed to transport commercial volumes. Toll Receipts Toll receipts increased $8.9 million to $87.3 million for the three months ended December 31, 2017 compared to $78.4 million for the same period in Toll receipts increased $10.0 million to $348.9 million for the year ended December 31, 2017 compared to $338.9 million for the same period in Toll receipts were higher in 2017 compared to 2016 due to the Regina Bypass Project outage related reimbursements for foregone revenues being recognized in 2016 as interest income and other. Toll receipts were also higher in 2017 due to increased firm receipt services from staged contracts. Seasonal/Short-Term Firm Seasonal/short-term firm transportation revenue increased $11.4 million to $25.7 million for the three months ended December 31, 2017 compared to $14.3 million for the same period in This increase was due to higher prices for daily firm services, partially offset by the decrease in non-cash fuel gas consideration. Seasonal/short-term firm transportation revenue increased $22.9 million to $72.7 million for the year ended December 31, 2017, compared to $49.8 million for the same period in Seasonal firm services experienced higher prices on average for 2017, as well as increased compressor fuel that was consumed to transport commercial volumes when compared to Toll Receipts Toll receipts increased $12.0 million to $25.1 million for the three months ended December 31, 2017 compared to $13.1 million for the same period in Toll receipts increased $22.7 million to $69.5 million for the year ended December 31, 2017 compared to $46.8 million for the same period in These increases were due to higher prices for daily firm services as a result of favourable market conditions. Also, seasonal firm services experienced higher prices on average in 2017 for both the three months and the year ended December 31, 2017, when compared to PITS/IT Services PITS/IT services increased $4.3 million to $10.6 million for the three months ended December 31, 2017 compared to $6.3 million for the same period in The increase was primarily due to additional IT delivery services requirements for the higher volumes from the firm receipt services related to the staged contracts. PITS/IT services increased $5.9 million to $31.8 million for the year ended December 31, 2017 compared to $25.9 million for the same period in The increase is primarily due to higher pricing on the additional IT delivery services required to transport the higher volumes of firm receipt services related to the staged contracts to the border. Toll Receipts Toll receipts increased $4.4 million to $10.2 million for the three months ended December 31, 2017 compared to $5.8 million for the same period in Toll receipts increased $5.5 million to $30.0 million for the year ended December 31, 2017 compared to $24.5 million for the same period in These increases are primarily due to higher pricing on the additional IT delivery services for the higher volumes of firm receipt services from staged contracts. Non-Cash Fuel Consideration For the three months ended December 31, 2017, transportation fuel revenue was valued at $8.3 million, compared to a valuation of $13.0 million for the same period in The decrease in the value of transportation fuel revenue was primarily due to lower index pricing when compared to the same period in Page 9

11 Three Months Ended December Long-term firm Seasonal/short-term firm PITS/IT Total non-cash fuel consideration For the year ended December 31, 2017, transportation fuel revenue was valued at $40.4 million, compared to a valuation of $37.0 million for the same period in The increase in the value of transportation fuel revenue was primarily due to the increased compressor fuel that was consumed to transport commercial volumes in Years Ended December Long-term firm Seasonal/short-term firm PITS/IT Total non-cash fuel consideration Ancillary Revenue Ancillary revenues decreased $1.8 million to $3.8 million for the three months ended December 31, 2017 compared to $5.6 million for the same period in The decrease in ancillary revenue was related to reduced shipper imbalance transactions compared to the same period in Ancillary revenues were $18.6 million for the year ended December 31, 2017 which was comparable to $17.9 million for the same period in Service and Other Revenue Service and other revenue was $16.9 million for the three months ended December 31, 2017 and $59.6 million for the year ended December 31, 2017 which was comparable to $17.1 million and $58.9 million for the same periods in 2016, respectively. Operational Expenses Operational expenses decreased $8.5 million to $51.4 million for the three months ended December 31, 2017 compared to $59.9 million for the same period in Operational expenses increased $10.8 million to $209.3 million for the year ended December 31, 2017 compared to $198.5 million for the same period in General and Administrative Expense General and administrative expenses were $22.1 million for the three months ended December 31, 2017 which was comparable to $22.3 million for the same period in 2016 and $78.9 million for the year ended December 31, 2017 which was comparable with $78.9 million for the same period in Post-employment costs increased during the three months ended December 31, 2017 which was offset by reduced employee and consulting costs for the year ended December 31, Operations and Maintenance Expense Operations and maintenance expenses decreased $8.2 million to $22.7 million for the three months ended December 31, 2017 compared to $30.9 million for the same period in This decrease was largely due to lower non-cash expense related to fuel gas consumed, lower compensation and related costs, and lower pipeline maintenance costs, offset by the net change in gas imbalances, and higher consulting related costs compared to the same period in Operations and maintenance expenses increased $11.0 million to $104.1 million for the year ended December 31, 2017 compared to $93.1 million for the same period in Page 10

12 This increase was largely due to a higher non-cash expense related to fuel gas consumed, increased consulting costs related to system monitoring, maintenance, integrity and engineering studies, unplanned compressor repair costs, unplanned Wapiti River slope repair and remediation, increased carbon levy requirements, purchases of carbon offsets, and increased fuel taxes, that were offset by the net change in gas imbalances compared to the same period in Property Taxes Property taxes were $5.7 million for the three months ended December 31, 2017, comparable to $5.9 million in the same period in 2016, and $22.8 million for the year ended December 31, 2017, comparable to $23.5 million in the same period in This decrease in assessed property taxes from Alberta was partially offset by increases in assessed property taxes from Saskatchewan for both the three months and the year ended December 31, Administrative Service Agreement Fee Administrative service agreement fee expense was $0.9 million for the three months ended December 31, 2017, comparable to $0.8 million the same period in 2016, and $3.5 million for the year ended December 31, 2017, comparable to $3.0 million for the same period in The fee is a result of the Executive, Managerial, and Administrative Service Agreement (EMA) with Alliance U.S. Refer to the Related Party Transactions discussion for information on the EMA. Depreciation Expense Depreciation expense was $16.9 million, a decrease of $1.0 million for the three months ended December 31, 2017, compared to $17.9 million for the same period in 2016, and $70.0 million for the year ended December 31, 2017, comparable to $70.7 million for the same period in Interest Expense Interest expense decreased $0.5 million to $14.0 million for the three months ended December 31, 2017, comparable to $14.5 million for the same period in Interest expense decreased $4.8 million to $57.5 million for the year ended December 31, 2017 compared to $62.3 million for the same period in These decreases were due to the declining long-term debt balances as a result of scheduled principal payments on the senior secured notes. Interest Income and Other Interest income and other decreased $7.2 million to $1.3 million for the three months ended December 31, 2017 compared to $8.5 million for the same period in Interest income and other decreased $6.1 million to $3.9 million for the year ended December 31, 2017 compared to $10.0 million for the same period in These decreases were primarily due to reimbursements of $8.0 million that were recognized in the fourth quarter of 2016 for foregone revenues relating to the Regina Bypass Project. Net Income Net income increased $20.2 million to $69.1 million for the three months ended December 31, 2017 compared to $48.9 million for the same period in The increase in net income was due to higher revenue, and lower operations and maintenance expenses, partially offset by lower interest income and other. Net income increased $30.1 million to $228.3 million for the year ended December 31, 2017 compared to $198.2 million for the same period in The increase in net income was due to higher revenue and lower interest expense, partially offset by higher operations and maintenance expenses and lower interest income and other. Page 11

13 Earnings before Net Interest, Income Taxes, Depreciation and Amortization (EBITDA) (1) EBITDA increased $18.8 million to $99.1 million for the three months ended December 31, 2017 compared to $80.3 million for the same period in EBITDA increased $24.6 million to $354.3 million for the year ended December 31, 2017, compared to $329.7 million for the same period in These increases were due to higher net income when compared to the same periods in Distributions Paid Distributions paid increased $17.6 million to $75.6 million for the three months ended December 31, 2017 compared to $58.0 million for the same period in For the year ended December 31, 2017, distributions paid increased $57.6 million to $232.6 million for the year ended December 31, 2017 compared to $175.0 million for the same period in These increases were primarily due to improved operating performance and available liquidity. (1) Refer to Non-GAAP Financial Measures. Cash Provided by Operating Activities Cash provided by operating activities increased $44.6 million to $74.7 million for three months ended December 31, 2017, compared to $30.1 million for the same period in For the year ended December 31, 2017, cash flow provided by operating activities increased $64.6 million to $316.7 million compared to $252.1 million for the same period in This increase was due to increased net income and favourable working capital changes for both the three months and the year ended December 31, Page 12

14 Selected Quarterly Financial Information Q Q Total revenues Net income EBITDA (1) Distributions paid Q Q Q Q Q Q (1) Refer to Non-GAAP Financial Measures. The market based suite of services provided by Alliance Canada continues to offer shippers flexibility and a competitive cost structure, which provides Alliance Canada consistent and favourable performance and operational results. Increased production and take away constraints in the WCSB led to increased demand for transportation services due to Alliance Canada s close proximity to the Montney and Duvernay areas. In addition, market conditions led to strong pricing and our solid asset performance contributed to positive results over the quarters presented. During the periods presented in the table above, Alliance Canada s results were impacted by the following factors and trends: 2017 Revenues remained strong as a result of continuous demand and strong pricing for seasonal and ancillary services The revenue for the first quarter of 2016 reflects the first full quarter of operations in which Alliance Canada began offering a market based suite of services. This suite of services had strong shipper support and was fully subscribed. Net income improved due to strong seasonal and IT revenue, operational performance initiatives, and reduced interest costs as a result of scheduled principal payments on the senior secured notes. These reductions were partially offset by an increase in post-employment costs. The increase in EBITDA reflects the strong operational performance that contributed to higher net income. Net income reflects the impacts of the consistent shipper support in Alliance Canada s market based services, as well as the corporate redesign and operational performance initiatives. Also impacting net income were reductions in interest costs due to declining long-term debt balances as a result of scheduled principal payments on the senior secured notes. Increases in total Partner distributions paid compared to 2016 have been supported by increases in revenue as a result of solid asset performance, the continuation of favourable market conditions, and available liquidity. The increase in EBITDA reflects the strong operational performance that contributed to higher net income and the consistent shipper support in the market based suite of services. Increases in Partner distributions quarter over quarter were supported by increases in cash available for distribution due to consistent performance and operational results, along with available liquidity. Page 13

15 Related Party Transactions Alliance Canada provides transportation services to a number of shippers that are related entities of the Partners of Alliance Canada. The terms of these contracts are the same as those agreed to with independent third parties. For the year ended December 31, 2017, toll receipts from related party services amounted to $117.2 million (December 31, 2016 $118.1 million, December 31, 2015 $52.5 million). Alliance Canada provides services to, and receives services from, Alliance U.S. under the EMA in exchange for reimbursement of incurred costs, plus an applicable mark-up. All amounts exchanged under this agreement are presented as service revenue from related parties or administrative service agreement fee. Alliance Canada also provides management, administrative, operational and workforce related services to entities related by virtue of a common ownership group. Alliance Canada does not directly employ any of the individuals responsible for managing or operating the business, nor does Alliance Canada have any directors. Alliance Canada obtains management, administrative, operational and workforce related services from Alliance Pipeline Ltd. (the General Partner) under the terms of the Limited Partnership Agreement. Alliance Canada reimburses the General Partner for service costs incurred under the terms of the Limited Partnership Agreement on a monthly basis. The General Partner does not record any profit or margin for the services charged to Alliance Canada. From time to time, Alliance Canada sells operational line pack to Alliance U.S. to supplement operational line pack or as fuel gas to support the efficient operation of the System. The terms of these transactions are the same as those that would be associated with independent third parties. Alliance Canada provides management, administrative, operational and workforce related services to NRGreen Power Limited Partnership (NRGreen), an entity related by virtue of a common ownership group. Agreements between Alliance Canada and NRGreen, with respect to waste heat supply, manpower services and compressor site access, have been executed in exchange for reimbursement of incurred costs. Alliance Canada purchased carbon offsets from NRGreen in 2017 under the terms of the Offset Purchase Agreement. During the year Alliance Canada engaged a related entity to assess the commercial feasibility to increase throughput by adding more compression facilities along the pipeline. All amounts incurred to date are presented as operating and maintenance expenses. Pipeline Abandonment Costs The NEB has directed that federally-regulated pipeline companies in Canada collect and set aside funds to cover future pipeline abandonment costs. The NEB provided several key guiding principles under this program, including the position that abandonment costs are legitimate costs of providing transportation services and are recoverable, upon NEB approval, from shippers. Alliance Canada has been collecting abandonment funds since the start of 2015 through a pipeline abandonment transportation surcharge as defined in the Tariff. These funds are set aside in the Company s Pipeline Abandonment Trust (Trust) until such time that the funds are required to settle abandonment-related expenditures. The Trust is consolidated and presented on the consolidated financial statements as investments held in trust. As per the Trust agreement, Alliance Canada is the primary beneficiary of the Trust. The pipeline abandonment costs fall within the scope of Accounting Standards Codification (ASC) 980 which results in revenue being adjusted to reflect differences between the period in which the abandonment funding is collected through toll receipts and the period the abandonment costs are incurred. These differences are presented as part of a long-term regulatory liability on the consolidated financial statements. Page 14

16 Liquidity and Capital Resources December Working capital Variable rate debt (1) Revolving credit facility Total variable rate debt outstanding Total fixed rate debt outstanding (1) Total debt outstanding Cash and trust accounts Undrawn portion of the revolving credit facility Total cash and undrawn portion of the revolving credit facility DSCR (2) Total debt outstanding to EBITDA (2) (1) Carrying value. (2) Refer to Non-GAAP Financial Measures. Liquidity and Capital Liquidity risk is managed to ensure access to sufficient funds required to meet obligations. Alliance Canada forecasts cash requirements to ensure funds are available to settle liabilities as they become due. The primary sources of liquidity are transportation toll receipts, undrawn revolving credit facility and funding from the Partners. Working capital deficiencies may occur from time to time as a result of seasonal activity fluctuations, but any such deficiencies have no material effect on our liquidity because of regular monthly cash flow due to a high level of firm contracts and available committed revolving credit facility. We hold in our debt service reserve account an amount equal to at least six months scheduled interest and principal payments, which is funded by letters of credit as part of the revolving credit facility. On April 27, 2017, the maturity date of the revolving credit facility was extended from June 29, 2019 to June 29, The debt service reserve is in addition to the funds that are transferred monthly to the debt service account to be held for the semi-annual interest and principal payments on the senior notes outstanding and the monthly debt service amounts due on the revolving credit facility. Funds available under the revolving credit facility may also be accessed from time to time should cash receipts prove insufficient to fund the month s operating and investing activities. We may need to refinance our indebtedness or may require additional financing depending on future developments, enhancement opportunities or expansion plans. The undrawn revolving credit facility at December 31, 2017 and the total of cash and trust deposits are, in management s view, adequate to meet on-going liquidity and capital resource requirements. Page 15

17 Capital Management Alliance Canada s objective in managing capital is to optimize our capital structure so we can ensure a healthy financial position to support our operations and growth opportunities. Capital is managed by funding our rate base to a maximum ratio of 70% debt to 30% equity. Senior debt consists of senior notes, including the current portion, and revolving credit facility drawings. Rate base does not have a standardized meaning under U.S. GAAP. Refer to Non-GAAP Financial Measures. We monitor our capital structure by periodically calculating the ratio of senior debt to rate base to ensure compliance with debt covenant requirements contained in financing agreements, which set a maximum borrowing amount for senior debt that will not exceed 70% of the rate base by more than U.S. $10.0 million. We are in compliance with all the terms and conditions of the covenants associated with our senior debt for the year ended December 31, 2017, and expect to remain compliant throughout A distribution of $59.0 million was declared and paid to our Partners and General Partner on February 2, We intend to continue making Partner distributions on a regular basis. Credit Rating Credit ratings provide an independent measure of credit quality of any issues of securities. The credit ratings assigned by the rating agencies are not recommendations to purchase, hold or sell the securities nor do the ratings comment on market price or suitability for a particular investor. Any rating may not remain in effect for a given period of time or may be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant. Alliance Canada s senior secured debt is rated BBB+ by S&P and Baa2 by Moody s. Moody s rates Alliance Canada s senior unsecured debt as Baa3. All rating outlooks are stable. Distributions to Partners Distribution decisions are approved by the Board of Directors of the General Partner, on the basis of cash flow, financial requirements and other conditions existing at the time. Distributions are subject to Alliance Canada satisfying certain financing conditions, including a minimum Debt Service Coverage Ratio (DSCR) requirement. Page 16

18 Risks and Uncertainties Competition Risk The System faces competition for natural gas pipeline transportation services to the Chicago area from both existing and proposed pipeline projects. Existing pipelines, other than the Alliance Canada pipeline, provide natural gas transportation services from the WCSB and the Bakken to natural gas markets in the Midwest, the Northeast, and the Gulf Coast of the U.S. and Eastern Canada. In addition, there could be proposals to upgrade existing pipelines or to build new pipelines serving such areas and markets. Any new or upgraded pipelines could: allow shippers to have greater access to natural gas markets in addition to the markets served by the System and the pipelines to which it is connected; offer natural gas transportation services that are more desirable to shippers than those provided by the System because of location, facilities or other factors; and charge tolls or provide transportation services to locations that result in greater net profit for shippers. There is also competition from other sources of natural gas such as the Marcellus and Utica shale plays within the Appalachian Basin. Situated in an area ranging from parts of Quebec and upstate New York to Virginia in the south and as far west as Ohio, the Marcellus and Utica shale plays are in relatively close proximity to the Chicago Hub and Eastern Canadian markets to which the System currently provides the majority of its transportation service. The on-going development of the shale gas resource within the Appalachian Basin, coupled with new infrastructure, provides an alternative source of gas to the Midwest and the Northeast U.S. and Eastern Canada. Growing demand in the region will absorb some of the incremental volumes but there will be displacement of flows, particularly from the Gulf Coast, Rockies and Midcontinent regions. Similarly, the growth in Appalachian supplies has reduced the reliance of the Northeast region of the U.S. on natural gas imports from Canada. Emerging technologies could enable gas plays that are currently not commercially viable or inaccessible to be competitive in the marketplace that the System serves. Alliance Canada s pipeline and services are uniquely designed to enable rich gas producers to maximize the value of their product. Demand for Transportation Services Excess natural gas pipeline capacity out of the WCSB or a sustained period of low natural gas and NGLs prices could result in a reduction or deferral of investment in upstream gas development which could negatively impact the demand for our transportation services going forward. Despite the general slowdown in the oil and gas sector, Alliance Canada has successfully re-contracted all of its long-term firm receipt transportation capacity through 2019 and approximately 96% of long-term firm receipt capacity for Page 17

19 Dependence on Related Parties There is a significant degree of dependency on Aux Sable, a related party, to satisfy its requirements to provide heat content management services to Alliance U.S. Should the Aux Sable NGLs extraction facility fail to provide heat content management services for any reason, the System and our shippers may experience operational issues. In certain circumstances, the failure to provide heat content management services could result in an interruption or curtailment of transportation services on the System. It is not possible to predict the extent or duration of these operational issues or their precise financial or operational impact to Alliance Canada. There is no assurance that Aux Sable will remain continuously operational or will continue business operations indefinitely. The System operates as an integrated pipeline. Therefore, any matters which limit or restrict the ability of the Alliance U.S. pipeline to operate could affect the ability of the Alliance Canada pipeline to operate. Alliance Canada may have no control over matters which may adversely affect the Alliance U.S. pipeline. Regulatory Risk Alliance Canada is a federally-regulated, inter-provincial natural gas pipeline under the jurisdiction of the NEB. Our natural gas transportation assets and operations are also subject to federal, provincial and local regulations, as applicable. Regulation of Alliance Canada s business includes, but is not limited to, the methodology to determine tolls, terms and conditions of service, pipeline construction, operations and maintenance, and expansion of current operating facilities. Alliance Canada is subject to the risk of regulators or other government bodies revising or rejecting proposed or existing arrangements and agreements. This can include international trade agreements, permits and regulatory approvals for new projects, offering of new services, and the tariff structure of Alliance Canada. Any revisions or rejections to existing or proposed arrangements or agreements could have a significant and potentially adverse effect on Alliance Canada s earnings and financial condition. As well, compliance with legislative changes may have an impact on the costs of existing operations or future projects. We believe that regulatory risk is managed through the expertise of Alliance Canada s legal and regulatory teams, and their review of existing and proposed tariffs and tolls for compliance with regulatory guidelines and requirements. Alliance Canada has established and maintains strong relationships with our shippers which helps to reduce regulatory risk. The NEB continues to oversee operating requirements, financial reporting, risk standards and affiliate rules. Alliance Canada continues to meet these and all regulatory requirements by ensuring we are a process driven and operationally compliant organization. Safety and Environmental Risks Alliance Canada has established safety and environmental policies and practices that are designed to reduce exposure to the inherent risks of operating a natural gas pipeline. These risks include possible damage to the environment and claims or other disputes with landowners or other individuals affected by the operation of the Alliance Canada pipeline. Alliance Canada's policies and practices are designed to ensure that all aspects of its operations comply with existing laws and regulations relating to personal safety and protection of the environment, including those related to GHG emissions. The operations of Alliance Canada are subject to federal, provincial and local laws and regulations relating to the protection of the environment. Alliance Canada believes that adequate measures have been taken to monitor and mitigate the environmental effects of the operation and maintenance of the Alliance Canada pipeline. Alliance Canada conducts regular inspections of its facilities, allows pertinent agency inspections as required, and follows defined practices to ensure that regulatory requirements and commitments are met during the construction, operation, and maintenance of its facilities. Page 18