Veresen Announces 2014 Second Quarter Results and Updates Guidance

Transcription

1 Veresen Announces 2014 Second Quarter Results and Updates Guidance CALGARY, ALBERTA (August 6, 2014) Veresen Inc. ( Veresen or the Company ) (TSX: VSN) announced today financial and operating results for the three months ended June 30, Highlights Veresen generated distributable cash 1 of $63.7 million ($0.29 per Common Share) in the second quarter of 2014 compared to $49.2 million ($0.25 per Common Share) in the second quarter of Veresen recorded a net loss attributable to Common Shares of $2.4 million ($0.01 net loss per Common Share) in the second quarter of 2014 compared to net income attributable to Common Shares of $11.5 million ($0.06 net income per Common Share) in the second quarter of Cash from operating activities was $47.9 million in the second quarter of 2014 compared to $55.0 million in the second quarter of In July, Jordan Cove LNG achieved a key regulatory milestone with the receipt of the Notice of Schedule for the environmental review of the LNG terminal and related pipeline from the Federal Energy Regulatory Commission ( FERC ). Alliance Pipeline filed an application with the National Energy Board ( NEB ) for regulatory approval of the tolls and tariff provisions required for Alliance to implement its proposed new services. We continue to make good progress in advancing our key strategic initiatives, including the recontracting of the Alliance Pipeline and development of Jordan Cove LNG. During the first half of 2014, we also completed key financing activities to bolster our financial strength and flexibility, said Don Althoff, President and CEO. The filing of Alliance Pipeline s revised toll and tariff application with the NEB, is an important milestone in the re-contracting process. Signing of Precedent Agreements with producers and shippers is ongoing as we move through the regulatory process with the NEB. Don Althoff added, With the receipt of our Notice of Schedule from the FERC for our Jordan Cove LNG project, we now have a line of sight to obtaining our Final Environmental Impact Statement, and I m confident we will obtain this critical permit. 1 This is not a standard measure under GAAP and may not be comparable to similar measures used by other entities. See the reconciliation of distributable cash to cash from operating activities in the tables attached to this news release. 1

2 Financial Highlights Three months ended June 30 Six months ended June 30 ($ Millions, except per Common Share amounts) Net income (loss) before tax Pipeline Midstream Power (2.0) 10.5 Veresen Corporate (40.6) (26.6) (69.3) (53.5) (0.2) Gain on sale of assets Tax recovery (expense) 1.9 (12.3) (10.0) (19.2) Net income Preferred Share dividends (4.1) (2.2) (8.2) (4.4) Net income (loss) attributable to Common Shares (2.4) Per Common Share ($) (0.01) Financial Performance For the three months ended June 30, 2014, Veresen recorded a net loss attributable to Common Shares of $2.4 million or $0.01 net loss per Common Share compared to net income of $11.5 million or $0.06 per Common Share for the same period last year. The decrease in earnings was primarily driven by higher project development spending related to Jordan Cove LNG, lower midstream earnings, and the revaluation of the York Energy Centre interest rate hedge. Higher project development spending in the second quarter of 2014 reflects Veresen s efforts to further advance Jordan Cove LNG following its receipt of a conditional order from the U.S. Department of Energy to export liquefied natural gas to those countries that do not have Free Trade Agreement status with the U.S. As Veresen has continued to de-risk this project, the Company has dedicated additional resources towards its commercial, engineering and financing activities and, as anticipated, development spending has increased accordingly. The Midstream business generated net income of $8.7 million before tax for the three months ended June 30, 2014 compared to $15.6 million for the same period in Hythe/Steeprock generated consistent earnings relative to the comparative period, while Aux Sable s results were negatively impacted by lower NGL margins resulting from higher gas prices. A revaluation of the York Energy Centre interest rate hedge resulted in an $11.7 million reduction in second quarter Power earnings compared to the same period last year. Partially offsetting this reduction was the receipt of a $3.9 million retroactive adjustment related to York Energy Centre s power purchase agreement with the Ontario Power Authority. Second quarter 2014 results also reflect an increase in Pipeline earnings from Alliance, primarily due to higher negotiated depreciation rates and contributions from the Tioga Lateral pipeline. 2

3 Distributable Cash Three months ended June 30 Six months ended June 30 ($ Millions, except per Common Share amounts) Pipeline Midstream Power Veresen Corporate (15.0) (15.8) (32.0) (34.3) Current tax (2.6) (1.5) (6.7) (1.7) Preferred Share dividends (4.1) (2.2) (8.2) (4.4) Distributable Cash (1) Per Common Share ($) (1) See the reconciliation of distributable cash to cash from operating activities in the tables attached to this news release. For the three months ended June 30, 2014, Veresen generated distributable cash of $63.7 million or $0.29 per Common Share compared to $49.2 million or $0.25 Common Share for the same period in Higher distributable cash reflects increased contributions from each of Veresen s Pipeline, Midstream and Power businesses, partially offset by higher taxes and Preferred Share dividends. Overview of Business Segments Pipelines In the second quarter of 2014, Alliance Pipeline filed an application with the NEB for regulatory approval of the tolls and tariff provisions required to implement Alliance s proposed new services commencing December 1, The NEB application is a key milestone for Alliance as it reflects a move to a new business model under new natural gas transportation agreements. Regulatory approval will allow Alliance to offer its customers a menu of new services and competitive tolls replacing the 15-year service contracts that expire November 30, Alliance's new services offering reflects extensive market consultation and includes full-path and segmented receipt and delivery services, a new Canadian trading pool, and a revised hydrocarbon dewpoint specification. Alliance plans to file a regulatory application with the FERC in 2015 to revise its U.S. tariff. Alliance continues to be in active negotiations with prospective and existing shippers with respect to re-contracting its pipeline capacity post The signing of binding Precedent Agreements will be timed with the RGP agreements that Aux Sable is negotiating with the producer community. Midstream Veresen s maintenance turnaround at the Steeprock natural gas processing plant in British Columbia was completed on budget and on schedule in June Turnaround activities were performed in a manner consistent with Veresen s ongoing commitment to the health and safety of its employees and contractors, and safeguarding of the environment. The majority of the costs associated with the turnaround will be recovered under Veresen s Midstream Services Agreement with Encana Corporation. 3

4 Aux Sable continues to work with producers within an economic radius of the Alliance pipeline to provide options and value for natural gas and natural gas liquids ( NGLs ) to reach large and liquid U.S. markets. Aux Sable holds several RGP agreements with producers that will enhance the value of the producers NGLs. In June 2014, Aux Sable executed an additional long-term RGP agreement with 7G. The agreement significantly increases the volumes originally agreed to by the companies in February Under this new long-term agreement, volumes of liquids-rich natural gas are expected to ramp up to 500 mmcf/d. These supplies will be processed at Aux Sable s extraction and fractionation facilities located in Channahon, Illinois. Power Construction of the Dasque-Middle run-of-river project in northwest British Columbia is proceeding as planned and it is expected to be in-service in the fourth quarter of Construction of the 33 MW St. Columban wind project is progressing, with commercial in-service expected in the first half of The 40 MW Grand Valley III wind project continues to advance through the regulatory process. Testing and commissioning of the 13 MW Whitecourt waste heat facility is ongoing and the facility is expected to be in service by the fourth quarter of Jordan Cove LNG In July 2014, Jordan Cove LNG and the associated Pacific Connector Gas Pipeline received their collective Notice of Schedule for environmental review from the FERC. Receipt of this schedule is an important milestone in the regulatory process. FERC s schedule calls for a final EIS to be issued on February 27, Based on this schedule, Veresen has reviewed and updated its project timeline and expects to make a final investment decision in mid With a four-year construction period, commercial LNG production is targeted for mid- to late Once the FERC issues Jordan Cove LNG its Draft Environment Impact Statement, a public hearing process is initiated. Veresen continues to be in active negotiations to secure long-term arrangements to produce LNG for international customers. Veresen s objective is to execute binding agreements this year for all of Jordan Cove LNG s initial capacity of 6 million tonnes per annum. Veresen also continues to negotiate the engineering, procurement and construction contract with a joint venture formed by Kiewit and Black & Veatch for the design and construction the LNG terminal. Veresen expects the EPC contract to be completed in late 2014, following which a Class 1 cost estimate and schedule will be generated by the contractor. In the second quarter of 2014, Veresen engaged Macquarie Capital as its financial advisor for the Jordan Cove LNG project Guidance Update Veresen has narrowed its guidance for 2014 distributable cash to be in the range of $1.02 per Common Share to $1.20 per Common Share, with a midpoint of $1.11 per Common Share. Further details concerning 2014 guidance can be found in the "Invest" section of Veresen's web site at 4

5 Conference Call and Webcast Veresen will host a conference call and webcast on August 7, 2014 at 9:00 am MT (11:00 am ET) to discuss its results. Dial-in: 1 (888) or 1 (647) Conference ID The link to the conference call webcast is available on Veresen s website by selecting Invest and then Events & Presentations. A replay of the call will be available at approximately 12:00 pm MT (2:00 pm ET) on August 7, 2014 by dialing and The access code is , followed by the pound sign. The replay will expire at midnight (ET) on August 14, MD&A, Financial Statements and Notes Management's Discussion and Analysis ("MD&A") and consolidated financial statements provide a detailed explanation of Veresen s financial results for the second quarter ended June 30, 2014 compared to the second quarter ended June 30, 2013 and should be read in conjunction with this news release. These documents are available at and at About Veresen Inc. Veresen is a publicly-traded dividend paying corporation based in Calgary, Alberta, that owns and operates energy infrastructure assets across North America. Veresen is engaged in three principal businesses: a pipeline transportation business comprised of interests in two pipeline systems, the Alliance Pipeline and the Alberta Ethane Gathering System; a midstream business which includes ownership interests in a world-class natural gas liquids extraction facility near Chicago, the Hythe/Steeprock complex, and other natural gas and NGL processing energy infrastructure; and a power business with a portfolio of assets in Canada and the United States. Veresen is also actively developing a number of greenfield projects and, in the normal course of its business, regularly evaluates and pursues acquisition and development opportunities. Veresen's Common Shares, Series A Preferred Shares, Series C Preferred Shares and 5.75% convertible unsecured subordinated debentures, Series C due July 31, 2017 are listed on the Toronto Stock Exchange under the symbols "VSN", VSN.PR.A, VSN.PR.C and VSN.DB.C", respectively. For further information, please visit Forward-Looking Information Certain information contained herein relating to, but not limited to, Veresen and its businesses constitutes forward-looking information under applicable securities laws. All statements, other than statements of historical fact, which address activities, events or developments that Veresen expects or anticipates may or will occur in the future, are forward-looking information. Forward-looking information typically contains statements with words such as "may", "estimate", "anticipate", "believe", "expect", "plan", "intend", "target", "project", "forecast" or similar words suggesting future outcomes or outlook. Forward-looking statements in this news release include, but are not limited to, statements with respect to: the ability of Aux Sable and Alliance to implement new service offerings; the timing of completion of construction and start-up of the Dasque-Middle hydro project and the St. Columban Wind Project; the estimated capital cost and timing of the final investment decision of the Jordan Cove LNG project, Veresen s ability to negotiate long-term service agreements with offtake customers for LNG; Veresen s ability to realize its growth objectives; the availability of financing for current capital projects 5

6 and new investment opportunities; and the ability of each of its businesses to generate distributable cash in The risks and uncertainties that may affect the operations, performance, development and results of Veresen s businesses include, but are not limited to, the following factors: the ability of Veresen to successfully implement its strategic initiatives and achieve expected benefits; levels of oil and gas exploration and development activity; the status, credit risk and continued existence of contracted customers; the availability and price of capital; the availability and price of energy commodities; the availability of construction services and materials; fluctuations in foreign exchange and interest rates; Veresen s ability to successfully obtain regulatory approvals; changes in tax, regulatory, environmental, and other laws and regulations; competitive factors in the pipeline, midstream and power industries; operational breakdowns, failures, or other disruptions; and the prevailing economic conditions in North America. Additional information on these and other risks, uncertainties and factors that could affect Veresen s operations or financial results are included in its filings with the securities commissions or similar authorities in each of the provinces of Canada, as may be updated from time to time. Readers are also cautioned that the foregoing list of factors and risks is not exhaustive. The impact of any one risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these factors are independent and management s future course of action would depend on its assessment of all information at that time. Although Veresen believes that the expectations conveyed by the forward-looking information are reasonable based on information available on the date of preparation, no assurances can be given as to future results, levels of activity and achievements. Undue reliance should not be placed on the information contained herein, as actual result achieved will vary from the information provided herein and the variations may be material. Veresen makes no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking information. Furthermore, the forward-looking statements contained herein are made as of the date hereof, and Veresen does not undertake any obligation to update publicly or to revise any forward-looking information, whether as a result of new information, future events or otherwise. Any forward-looking information contained herein is expressly qualified by this cautionary statement. Certain financial information contained in this news release may not be standard measures under Generally Accepted Accounting Principles ("GAAP") in the United States and may not be comparable to similar measures presented by other entities. These measures are considered to be important measures used by the investment community and should be used to supplement other performance measures prepared in accordance with GAAP in the United States. For further information on non-gaap financial measures used by Veresen see Management s Discussion and Analysis, in particular, the section entitled Non-GAAP Financial Measures contained in the annual Management Discussion and Analysis, filed by Veresen with Canadian securities regulators. For further information, please contact: Dorreen Miller, Director, Investor Relations Phone: (403) investor-relations@vereseninc.com # # # NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES. 6

7 VERESEN INC. Management s Discussion and Analysis Three and six months ended June 30, 2014 FINANCIAL AND OPERATING HIGHLIGHTS Three months ended June 30 Six months ended June 30 ($ Millions, except where noted) Operating Highlights (100%) Pipeline Alliance billion cubic feet per day AEGS thousand barrels per day Midstream Hythe/Steeprock million cubic feet per day Aux Sable thousand barrels per day Power gigawatt hours (net) Financial Results Equity income Operating revenues Net income (loss) attributable to Common Shares (2.4) Per Common Share ($) basic and diluted (0.01) Cash from operating activities Distributable cash 3, Per Common Share ($) basic and diluted Dividends paid/payable Per Common Share ($) Capital expenditures Financial Position June 30, 2014 As at Dec. 31, 2013 Cash and short-term investments Total assets 3, ,973.4 Senior debt 1, ,187.5 Subordinated convertible debentures Shareholders equity 1, ,305.7 Common Shares Outstanding as at period end 7 220,342, ,476,244 Average daily volume 575, ,801 Price per Common Share close ($) Average daily volume for AEGS is based on toll volumes. 2. Average daily volume for Hythe/Steeprock is based on fee volumes. 3. This item is not a standard measure under US GAAP and may not be comparable to similar measures presented by other entities. See section entitled Non-GAAP Financial Measures in this MD&A. 4. We have provided a reconciliation of distributable cash to cash from operating activities in the Non-GAAP Financial Measures section of this MD&A. 5. Includes $14.0 million and $25.0 million of dividends satisfied through the issuance of Common Shares under our Premium Dividend TM and Dividend Reinvestment Plan (trademark of Canaccord Genuity Corp.) for the three and six months ended June 30, 2014 ( $11.0 million and $21.8 million). 6. Capital expenditures for wholly-owned and majority-controlled businesses, as presented on the consolidated statement of cash flows. 7. As at the close of markets on August 1, 2014 we had 220,625,395 Common Shares outstanding. 7

8 This MD&A, dated August 6, 2014, provides a review of the significant events and transactions that affected our performance during the three and six months ended June 30, 2014 relative to the same periods last year. It should be read in conjunction with our consolidated financial statements and notes as at and for the three and six months ended June 30, 2014 and as at and for the year ended December 31, 2013, prepared in accordance with accounting principles generally accepted in the United States. ACCOUNTING STANDARDS AND BASIS OF PRESENTATION Our consolidated financial statements as at and for the three and six months ended June 30, 2014 have been prepared by management in accordance with US GAAP. All financial information is in Canadian dollars unless otherwise noted and, as it relates to our financial results, has been derived from information used to prepare our US GAAP consolidated financial statements. Capitalized terms used in this MD&A that have not been defined have the same meanings attributed to them in our 2013 consolidated financial statements. Additional information concerning our business is available on SEDAR at or on our website at FORWARD-LOOKING AND NON-GAAP INFORMATION Some of the information contained in this MD&A is forward-looking information under Canadian securities laws. All information that addresses activities, events or developments which may or will occur in the future is forward-looking information. Forward-looking information typically contains statements with words such as may, estimate, anticipate, believe, expect, plan, intend, target, project, forecast or similar words suggesting future outcomes or outlook. Forward-looking statements in this MD&A include statements about: the ability of Alliance to successfully realize its proposed new services framework and the timing thereof; Aux Sable s ability to realize upon the extraction agreements with producers and to attract volumes into the Alliance pipeline; the 2014 pricing environment for ethane and propane; producer responses to the expansion of the Hythe gas processing facility; the projected in-service date of NRGreen s Whitecourt Recovered Energy Project; the projected in-service date of the Dasque-Middle run-of-river facility; the projected in-service date of the St. Columban wind project; the sufficiency of our liquidity; the sufficiency of our available committed credit facilities to fund working capital, dividends and capital expenditures; the ability of each of our businesses to generate distributable cash and the timing under which distributable cash will be generated; and our ability to pay dividends. The risks and uncertainties that may affect our operations, performance, development and the results of our businesses include, but are not limited to, the following factors: our ability to successfully implement our strategic initiatives and achieve expected benefits; levels of oil and gas exploration and development activity; status, credit risk and continued existence of contracted customers; availability and price of capital; availability and price of energy commodities; availability of construction services and materials; fluctuations in foreign exchange and interest rates; our ability to successfully obtain regulatory approvals; changes in tax, regulatory, environmental, and other laws and regulations; competitive factors in the pipeline, midstream and power industries; operational breakdowns, failures, or other disruptions; and prevailing economic conditions in North America. Additional information on these and other risks, uncertainties and factors that could affect our operations or financial results are included in our filings with the securities commissions or similar authorities in each of the provinces of Canada, as may be updated from time to time. We caution readers that the foregoing list of factors and risks is not exhaustive. The impact of any one risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these factors are independent and management s future course of action would depend on its assessment of all information at that time. Although we believe the expectations conveyed by the forwardlooking information are reasonable based on information available to us on the date of preparation, we can give no assurances as to future results, levels of activity and achievements. Readers should not place undue reliance on the information contained in this MD&A, as actual results achieved will vary from the information provided herein and the variations may be material. We make no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking information. Furthermore, the forward-looking statements contained herein are made as of the date hereof, and, except as required by law, we do not undertake any obligation to update publicly or to revise any forward-looking information, whether as a result of new information, future events or otherwise. We expressly qualify any forward-looking information contained in this MD&A by this cautionary statement. Certain financial information contained in this MD&A may not be standard measures under GAAP in the United States and may not be comparable to similar measures presented by other entities. These measures are considered to be important measures used by the investment community and should be used to supplement other performance measures prepared in accordance with GAAP in the United States. For further information on non-gaap financial measures used by us see the section entitled Non-GAAP Financial Measures contained in this MD&A. 8

9 OVERALL FINANCIAL PERFORMANCE Net Income attributable to Common Shares Three months ended June 30 Six months ended June 30 ($ Millions, except per Common Share amounts) Net income (loss) before tax Pipeline Midstream Power (2.0) 10.5 Veresen Corporate (40.6) (26.6) (69.3) (53.5) Gain on sale of assets Tax recovery (expense) 1.9 (12.3) (10.0) (19.2) Net income Preferred Share dividends (4.1) (2.2) (8.2) (4.4) Net income (loss) attributable to Common Shares (2.4) Per Common Share ($) (0.01) For the three and six months ending June 30, 2014, we generated a net loss attributable to Common Shares of $2.4 million or $0.01 per Common Share and net income of $28.9 million or $0.14 per Common Share, respectively. For the same periods last year, we generated income of $11.5 million or $0.06 per Common Share and $12.7 million or $0.06 per Common Share. The decrease in second quarter earnings was primarily driven by three factors: higher project development spending relating to our Jordan Cove LNG project; higher natural gas prices impacting midstream earnings; and the revaluation of the York Energy Centre interest rate hedge. Year-to-date earnings were buoyed by the strength of first quarter results, which benefited from an unprecedented widening of the Chicago - AECO natural gas price differential and gains on asset sales. In March 2014, our proposed Jordan Cove LNG project received a conditional order from the U.S. Department of Energy to export LNG to countries that do not have Free Trade Agreement status with the United States. With the reduction in risk resulting from receipt of this conditional order, we dedicated additional resources towards our commercial, engineering, and financing work efforts. Consequently, as anticipated, our development spending has increased accordingly. The Midstream business generated $8.7 million and $42.6 million of net income before tax for the three and six months ended June 30, 2014, compared to $15.6 million and $27.0 million for the same periods last year. Hythe/Steeprock generated consistent earnings relative to the comparative period, while Aux Sable s results were negatively impacted by lower NGL margins resulting from higher gas prices. The Power segment had strong operational performance in the quarter and also reflect the receipt of a $3.9 million retroactive adjustment in relation to York Energy Centre s power purchase agreement with the Ontario Power Authority. From an earnings perspective, this was offset by the impact of the revaluation of the York Energy Centre interest rate hedge which resulted in an $11.7 million and $17.6 million reduction in Power earnings for the three and six months periods, respectively, compared to the same periods last year. Current quarter and year-to-date earnings also reflect higher Pipeline earnings from Alliance primarily due to higher negotiated depreciation rates and contributions from the Tioga Lateral pipeline. 9

10 Distributable Cash Three months ended June 30 Six months ended June 30 ($ Millions, except per Common Share amounts) Pipeline Midstream Power Veresen Corporate (15.0) (15.8) (32.0) (34.3) Current tax (2.6) (1.5) (6.7) (1.7) Preferred Share dividends (4.1) (2.2) (8.2) (4.4) Distributable Cash (1) Per Common Share ($) (1) See the reconciliation of distributable cash to cash from operating activities in the Non-GAAP Financial Measures section of this MD&A. For the for the three and six months ended June 30, 2014, we generated distributable cash of $63.7 million and $129.3 million or $0.29 and $0.62 per Common Share, compared to $49.2 million and $103.8 million or $0.25 and $0.52 per Common Share for the same periods last year. The increase in distributable cash reflects increased contributions from each of our business segments, partially offset by higher taxes and Preferred Share dividends. Although Aux Sable second quarter earnings decreased relative to the comparative period, distributions increased by $2.3 million as some of the income earned during the first quarter of 2014 was carried over and realized as cash in the second quarter. Aux Sable distributions for the year-to-date increased by $16.8 million compared to the same period last year on the strength of first quarter 2014 earnings. Distributions from Hythe/Steeprock increased by $1.0 million and $2.0 million over the same periods last year due to higher capital recoveries and the impact of annual fee escalation. Alliance generated an additional $2.1 million this quarter and $4.4 million over the first half of the year which was largely driven by higher negotiated depreciation rates and contributions from the Tioga Lateral pipeline. Power distributable cash increased on both a quarter and year-to-date basis from higher earnings at York Energy Centre which benefited from a one-time retroactive revenue settlement adjustment, and higher cash flows at our other Ontario gas-fired facilities and our Glen Park run-of-river facility, which benefited from high energy prices influenced by the extreme cold temperatures in the first few months of the year. Current tax was higher in the current year due primarily to higher U.S.-based taxable earnings from our Pipeline business. Higher Preferred Share dividends reflect the October 2013 issuance of Preferred Shares. Cash from Operating Activities Three months ended June 30 Six months ended June 30 ($ Millions) Pipeline Midstream Power Veresen Corporate (36.0) (19.5) (73.7) (65.3) For the three and six months ended June 30, 2014, we generated $47.9 million and $92.9 million of cash from operating activities compared to $55.0 million and $92.4 million for the same periods last year. The decrease in the current quarter reflects higher Corporate cash outflows largely driven by higher project development costs, partially offset by lower interest costs. These decreases were partially offset by higher operating cash flows from our Midstream and Power businesses driven by the same factors impacting distributable cash. 10

11 Cash from operating activities on a year-to-date basis is consistent with the prior year, with the changes by business segment generally reflecting the same factors impacting distributable cash. Power operating cash flows were further reduced by changes in non-cash working capital and Corporate cash outflows were further increased by higher project development costs. RESULTS OF OPERATIONS BY BUSINESS SEGMENT Pipeline Business Three months ended June 30, 2014 Three months ended June 30, 2013 ($ Millions, except where noted) Total Alliance AEGS Total Alliance AEGS Earnings before interest, tax depreciation and amortization ( EBITDA ) (1) Depreciation and amortization (3.5) - (3.5) (3.5) - (3.5) Interest and other finance (1.3) - (1.3) (1.2) - (1.2) Equity income Net income before tax Distributable cash Volumes (100%) bcf/d mbbls/d (2) bcf/d mbbls/d (2) Pipeline Business Six months ended June 30, 2014 Six months ended June 30, 2013 ($ Millions, except where noted) Total Alliance AEGS Total Alliance AEGS Earnings before interest, tax depreciation and amortization ( EBITDA ) (1) Depreciation and amortization (7.0) - (7.0) (7.0) - (7.0) Interest and other finance (2.5) - (2.5) (2.5) - (2.5) Equity income Net income before tax Distributable cash Volumes (100%) bcf/d mbbls/d (2) bcf/d mbbls/d (2) (1) This item is not a standard measure under US GAAP and may not be comparable to similar measures presented by other entities. See section entitled Non-GAAP Financial Measures in this MD&A. (2) Average daily volumes for AEGS are based on toll volumes. Alliance Pipeline Operational Highlights Transportation deliveries for the three and six months ended June 30, 2014 averaged bcf/d and bcf/d, compared to bcf/d and bcf/d for the same periods last year. Financial Highlights Distributable cash for the three and six months ended June 30, 2014 was $35.8 million and $72.0 million compared to $33.7 million and $67.6 million for the same periods last year. The increases reflect higher revenues due to an increase in negotiated depreciation rates and contributions from the Tioga Lateral, along with a weakening of the Canadian dollar in Net income before tax for the three and six months ended June 30, 2014 was $28.0 million and $57.4 million compared to $26.0 million and $49.0 million for the same periods last year. This increase reflects the factors impacting distributable cash and a first quarter 2013 reduction in the recoverable toll costs. 11

12 Outlook Subject to regulatory approval, Alliance is offering capacity for transportation commencing December 1, 2015, under a proposed new services framework. The new services framework, which includes both fixed and flexible tolling options, responds to current market requirements and the diverse needs of existing and prospective shippers. The new service offering includes both full-path and segmented services with a new Canadian trading pool and a revised hydrocarbon dewpoint specification, which will facilitate the transportation of higher heat content natural gas. The services offer shippers competitive fixed tolls for medium and long-term services and biddable tolls for interruptible and seasonal service. On May 22, 2014, Alliance Canada filed an application with Canada's National Energy Board for regulatory approval of the tolls and tariff provisions Alliance needs to implement its new services. Similarly, Alliance USA will be applying to the U.S. Federal Energy Regulatory Commission in 2015 for regulatory approval. On June 6, 2014, the NEB issued a procedural letter for the purpose of soliciting comments from interested parties by July 7, 2014, stating their position with respect to the application and what further process, if any, the NEB should establish prior to deciding on the application. Comments were submitted by 12 interested parties with 11 parties supportive of a written proceeding. Alliance filed its reply comments on July 21, 2014 and is awaiting direction from the NEB as to next steps. During the first half of 2014, Alliance placed into service several new receipt interconnection facilities that increased the pipeline's receipt capacity by 130 mmcf/d from developing liquids-rich sources of natural gas in northeastern British Columbia and northwestern Alberta. The cost to provide these receipt facilities is funded by the requesting customer. A number of additional receipt interconnection facilities are in the planning and design stage. AEGS Operational Highlights Toll volumes for the three and six months ended June 30, 2014 were thousand barrels per day and mbbls/d, respectively, compared to mbbls/d and mbbls/d for the same periods last year. A planned turnaround for a major petrochemical plant served by AEGS and additional outages at facilities connected to AEGS resulted in lower ethane deliveries relative to last year. Financial Highlights For the three and six months ended June 30, 2014, AEGS generated $4.8 million and $9.6 million in distributable cash, respectively, and $2.0 million and $4.1 million in net income before tax. Current year results reflect higher toll revenues. Midstream Business ($ Millions, except where noted) Total Three months ended June 30, 2014 Three months ended June 30, 2013 Hythe/ Steeprock Aux Sable Total Hythe/ Steeprock Aux Sable EBITDA Depreciation and amortization (9.9) (9.9) - (9.8) (9.8) - Equity income Net income before tax Distributable cash Volumes (100%) Fee Volumes (1) mmcf/d mmcf/d Ethane Propane plus mbbls/d mbbls/d 12

13 Midstream Business ($ Millions, except where noted) Total Six months ended June 30, 2014 Six months ended June 30, 2013 Hythe/ Steeprock Aux Sable Total Hythe/ Steeprock Aux Sable EBITDA Depreciation and amortization (19.8) (19.8) - (19.7) (19.7) - Equity income Net income before tax Distributable cash Volumes (100%) Fee Volumes (1) mmcf/d mmcf/d Ethane Propane plus mbbls/d mbbls/d (1) Hythe/Steeprock fee volumes represent (i) either the minimum commitment volumes for which we earned processing fees or actual volumes processed if in excess of the minimum threshold in respect of the Midstream Services Agreement with our primary customer, and (ii) fees for volumes processed for other producers. Hythe/Steeprock Hythe/Steeprock earnings are primarily generated from a 20-year midstream services agreement, referred to as the MSA, entered into on February 9, 2012 with our primary customer, a major natural gas producer. The MSA provides for minimum monthly fees based on specific committed volumes and unit fees, as well as the recovery of operating and maintenance costs. Volume commitments and unit fees are adjusted annually based on a predetermined schedule to reflect anticipated production profiles and moderate fee escalation. Operational Highlights For the three and six months ended June 30, 2014, fee volumes at Hythe/Steeprock averaged mmcf/d and mmcf/d respectively, which is comprised of the minimum volume commitment from our primary customer and natural gas from third party producers. Fee volumes decreased three percent compared to the same period last year, reflecting the annual contractual adjustments in the minimum volume commitment under the MSA and lower volumes from third party producers. As part of our ongoing commitment to asset integrity and reliability, we successfully completed the Steeprock facility turnaround in the month of June. The full scope of the turnaround was completed under budget and ahead of schedule. The minimum volume commitment under the MSA remained applicable during the turnaround period. A turnaround of this scale for the Steeprock facility is currently planned to be completed every three years. During the second quarter of 2014, excluding the turnaround period, the Hythe and Steeprock facilities operated at reliability factors of 99.8% and 100%, respectively, which exceeded the target factors under the MSA. Financial Highlights For the three and six months ended June 30, 2014, distributable cash for Hythe/Steeprock was $18.7 million and $37.3 million respectively, compared to $17.7 million and $35.3 million for the same periods last year. The higher distributable cash was due to a combination of higher revenues related to recovery of maintenance capital expenditures from our primary customer coupled with the annual fee escalation as per the MSA. Net income before tax for the three and six months ended June 30, 2014 was $7.9 million and $16.2 million respectively, approximating earnings from the same periods last year and underscoring the stability of earnings generated under the MSA. 13

14 Aux Sable NGL Market Overview Three months ended June 30 Six months ended June Average USGC ethane margin (US$/gallon) (0.01) 0.01 Average USGC propane plus margin (US$/gallon) Average Henry Hub natural gas (US$/mmbtu) Average WTI crude oil (US$/bbl) Average Chicago - AECO differential ($/mmbtu) Following the volatile natural gas price environment in the first quarter created by extremely cold temperatures in the U.S. Mid-West, natural gas prices moderated in the second quarter. The Chicago Citygate gas price averaged US$4.65 per mmbtu in the second quarter compared to US$9.74 per mmbtu in the first quarter and US$4.08 per mmbtu for the second quarter in U.S. Gulf Coast ethane margins were zero or close to zero on a quarter and year-to-date basis in both 2014 and Ethane continues to be oversupplied with widespread rejection, particularly in the Rockies, Upper Midwest and Appalachian regions, driving down prices which in turn are completely offset by the cost of makeup gas. USGC propane plus margins for the three and six month periods increased relative to the same periods last year due to a stronger pricing environment. Margins realized by Aux Sable were less favourable due to higher make-up gas costs. Following a volatile first quarter in 2014 that saw propane in short supply due to a harsh winter, a strong crop drying season and significant year-over-year growth in export activity, propane storage levels in the U.S. rebounded sharply in the second quarter, primarily driven by USGC inventory builds. Overall, U.S. propane inventories were 52 million barrels at the end of the second quarter of 2014, more than doubling over the first quarter and only 2%, or 1 million barrels, below the end of the second quarter of Operational Highlights Three months ended June 30 Six months ended June Average volume receipts Prairie Rose Pipeline (mmcf/d) Average sales Ethane (mbbls/d) Propane plus (mbbls/d) Total NGLs (mbbls/d) During the three and six months ended June 30, 2014, Aux Sable processed 98% of the natural gas delivered by Alliance compared to 99% for the same periods last year. The slight decreases are attributed to uneconomic margins coupled with brief operational downtime for maintenance. Receipts into the Prairie Rose Pipeline in North Dakota averaged 98 mmcf/d and 93 mmcf/d during the three and six months ended June 30, 2014, respectively, compared to 107 mmcf/d and 102 mmcf/d for the same periods last year. The average heat content of the natural gas delivered to the Alliance interconnection at Bantry, North Dakota was approximately 1,365 btu/ft3 and 1,372 btu/ft3 for the three and six months ended June 30, 2014, respectively, compared to 1,381 btu/ft3 and 1,375 btu/ft3 for the same periods last year. Prairie Rose Pipeline s volumes and heat content have been reduced due to the movement of certain volumes to the Tioga Lateral, commencing in the second quarter of The heat content of the liquids-rich natural gas stream being delivered out of the Bakken continues to be very high. In comparison, the heat content including 14

15 western Canada natural gas delivered on the Alliance system for the six months ended June 30, 2014 averaged 1,120 btu/ft3. Aux Sable sold 75.5 mbbls/d and 66.7 mbbls/d of NGLs during the three and six months ended June 30, 2014, respectively, compared to 55.2 mbbls/d and 62.7 mbbls/d for the same periods last year. Average ethane volumes sold increased to 26.5 mbbls/d and 21.2 mbbls/d for the three and six months ended June 30, 2014, respectively, from 9.2 mbbls/d and 19.5 mbbls/d for the same periods last year. Increased ethane sales volumes are attributable to lower reinjection, although margins remain very low. Propane plus sales volumes were 49 mbbls/d and 45.5 mbbls/d for the three and six months ended June 30, 2014, respectively, compared to 46 mbbls/d and 43.2 mbbls/d for the same periods last year due to increased contracted volumes, primarily from the success Aux Sable has achieved through their Rich Gas Premium Agreement initiative, and the commencement of the Tioga Lateral in the second quarter of Financial Highlights For the three months ended June 30, 2014, Aux Sable generated $8.3 million of distributable cash and $0.8 million in net income before tax, compared to $6.0 million of distributable cash and $7.6 million in net income before tax during the same period last year. For the six months ended June 30, 2014, Aux Sable generated $32.4 million of distributable cash and $26.4 million of net income before tax, compared to $15.6 million of distributable cash and $10.7 million of net income before tax during the same period last year. Net income decreased in the current quarter primarily due to higher make-up gas prices, and lower volumes flowing through Aux Sable's Palermo Conditioning Plant as a result of the Hess Tioga Gas Plant commencing service in May Net income on a year-to-date basis increased significantly, benefiting from the positive margins generated from the purchase and sale of natural gas utilizing Alliance pipeline capacity held by certain Aux Sable entities in the first quarter. Aux Sable benefited from the significant widening Chicago - AECO gas price differential driven by the extreme cold winter weather in the U.S. Mid-West during the first quarter. Distributable cash increased during the quarter and on a year-to-date basis. Some of the income earned during the first quarter of 2014 was carried over and realized as cash in the second quarter. Year-to-date distributions increased on the strength of first quarter 2014 earnings. For the six months ended June 30, 2014, the Channahon fractionation facility generated $6.2 million of marginbased lease revenues, none of which was recognized in income. During the same period last year, the facility generated $11.6 million, of which $1.1 million was recognized in the second quarter. The decrease from the prior year reflects the high cost of make-up gas eroding NGL margins, particularly in the first quarter. Power Business ($ Millions, except where noted) Total Three months ended June 30, 2014 Three months ended June 30, 2013 Gas-Fired/ District Energy Renewables Power- Corporate Total Gas-Fired/ District Energy Renewables Power- Corporate EBITDA (2.0) (2.7) Depreciation and amortization (10.7) (8.4) (2.3) - (8.4) (6.0) (2.3) (0.1) Interest and other finance (3.8) (2.4) (1.4) - (3.6) (2.5) (1.1) - Equity income Foreign exchange and other Net income (loss) before tax (1.8) (2.8) Distributable cash (2.1) (2.7) Volumes (GWh) Gross Net

16 Power Business ($ Millions, except where noted) Total Six months ended June 30, 2014 Six months ended June 30, 2013 Gas-Fired/ District Energy Renewables Power- Corporate Total Gas-Fired/ District Energy Renewables Power- Corporate EBITDA (4.4) (4.8) Depreciation and amortization (20.8) (16.2) (4.6) - (16.9) (12.2) (4.5) (0.2) Interest and other finance (7.3) (4.9) (2.4) - (7.2) (5.0) (2.2) - Equity income - (2.0) Foreign exchange and other Net income (loss) before tax (2.0) (1.6) 3.7 (4.1) (5.0) Distributable cash (4.5) (4.8) Volumes (GWh) Gross Net Operational Highlights and Project Updates During the first half of 2014, our power facilities operated in line with our expectations. We continue to progress construction of the Dasque-Middle run-of-river hydro facility in northwest British Columbia. Commercial in-service is expected in the fourth quarter of The 13-MW Whitecourt waste heat facility, currently being constructed by NRGreen, is nearing completion. The commercial in-service date has been delayed to the fourth quarter of Construction of the 33 MW St. Columban wind project commenced during the first quarter of 2014 with completion and in-service date expected in Q Financial Highlights For the three and six months ended June 30, 2014, distributable cash was $17.8 million and $24.9 million, an increase of $10.7 million and $8.0 million compared to the same periods last year. Our gas-fired facilities and district energy systems contributed $7.6 million of additional distributable cash for the current period compared to last year primarily due to higher cash flows from the York Energy Centre. In addition to its strong operating performance, York Energy Centre results reflect a retroactive adjustment received in relation to its power purchase agreement with the OPA. The amendment to the contract was made to address current Independent Electricity System Operator market rules that were not contemplated in the original contract. The original contract payment mechanism resulted in a misalignment between contract capacity and actual power generation. The amended contract capacity payment mechanism corrects this misalignment. The retroactive adjustment was applied to the period from commencement of operations in May 2012 to April 2014, amounting to $3.9 million. Second quarter distributable cash from our renewable power facilities increased by $2.5 million compared to the same three month period last year, driven primarily by higher production at our Glen Park run-of-river hydro facility and EnPower. Net income before tax was $1.7 million for the three months ended June 30, 2014 and a net loss of $2.0 million for the six months ended June 30, 2014, a $7.8 million and $12.5 million decrease compared to the same periods last year. The decrease is mainly attributable to a $3.5 million and $7.7 million fair value loss related to York Energy Centre's interest rate hedges in the current quarter and year-to-date 2014, respectively, compared to a $8.2 million and $9.9 million gain for the same periods in 2013, coupled with higher depreciation associated with our California cogeneration facilities. 16