April 29, Filed Electronically Original via Mail

Size: px

Start display at page:

Download "April 29, Filed Electronically Original via Mail"

Joella Hart
5 years ago
Views:

1 Suite 1500, Bow Valley Square th Ave SW Calgary, Alberta T2P 3H7 Declan Russell Manager, Regulatory Affairs April 29, 2016 Filed Electronically Original via Mail Ms. Sheri Young Secretary of the Board National Energy Board th Avenue S.W. Calgary, Alberta T2P 0A8 Dear Ms. Young: Subject: Express Pipeline Ltd. (Express) 2015 Financial Surveillance Report Enclosed for filing with the National Energy Board ( Board ) is Express Financial Surveillance Report, pursuant to section 5(2)(b) of the Oil Pipeline Uniform Accounting Regulations, for the twelve month period ended December 31, Express is regulated as a Group 2 company by the Board. Please address any questions to the undersigned at or via at dprussell@spectraenergy.com or Lisa Connolly, General Manager of Regulatory Affairs, via at laconnolly@spectraenergy.com. Yours truly, Original Signed By Declan Russell Enclosure

2 FINANCIAL STATEMENTS Years ended December 31, 2015 and 2014

3 Deloitte LLP Suite nd Street SW Calgary AB T2P 0R8 Tel: (403) Fax: (587) INDEPENDENT AUDITOR S REPORT To the General Partner of Express Pipeline Limited Partnership: We have audited the accompanying financial statements of Express Pipeline Limited Partnership, which comprise the statements of financial position as at December 31, 2015, and December 31, 2014, and the statements of earnings, partners equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Express Pipeline Limited Partnership as at December 31, 2015 and December 31, 2014, and the results of its operations and its cash flows for the years then ended in accordance with Canadian accounting standards for private enterprises. Chartered Professional Accountants, Chartered Accountants April 28, 2016 Calgary, Alberta

5 STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (in thousands of CAD dollars) REVENUES Transportation $ 87,821 $ 64,356 Other revenue 4,322 6,406 92,143 70,762 EXPENSES Electricity 15,443 13,860 Operations and maintenance 22,619 16,441 Property taxes 2,507 2,049 Depreciation 10,103 9,541 50,672 41,891 OPERATING INCOME 41,471 28,871 FINANCING COSTS (INCOME) Interest expense 4,101 4,524 Amortization of deferred financing costs Foreign exchange loss 6,922 3,853 Interest income (55) - 11,342 8,786 NET EARNINGS $30,129 $20,085 See accompanying notes to the financial statements.

6 STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 2015 (in thousands of CAD dollars) ASSETS Current assets Cash (Note 3) $ 17,528 $ 18,875 Accounts receivable 31,742 23,628 Due from related parties (Note 8) 2,224 9,573 Prepaid expenses and other 1, Restricted cash (Note 4) ,248 53,593 Restricted cash (Note 4) 1,027 - Property, plant and equipment (Note 5) 149, ,964 TOTAL ASSETS $ 204,561 $ 201,557 LIABILITIES AND PARTNERS EQUITY Current liabilities Accounts payable and accrued liabilities $ 10,272 $ 6,155 Due to related parties (Note 8) 37,300 33,709 Deferred revenue 2,146 2,025 Interest payable 1, Current portion of long-term debt (Notes 7) 12,331 11,256 63,111 54,037 Long-term debt - net (Note 6 & 7) 42,860 45, ,971 99,961 Partners equity 98, ,596 TOTAL LIABILITIES AND PARTNERS EQUITY $ 204,561 $ 201,557 See accompanying notes to the financial statements. Approved by the Board of Directors of Express Pipeline Ltd., general partner of Express Pipeline LP: Duane Rae Director Bruce Pydee Director

7 STATEMENTS OF PARTNERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (in thousands of CAD dollars) Partners equity, beginning of year $ 101,596 $ 96,838 Net earnings 30,129 20,085 Distributions to owner (Note 8) (33,135) (15,327) Partners equity, end of year $ 98,590 $ 101,596 See accompanying notes to the financial statements.

8 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (in thousands of CAD dollars) Cash flows provided by / (used for) Operating activities: Net earnings $ 30,129 $ 20,085 Adjustments for non-cash items Depreciation 10,103 9,541 Unrealized foreign exchange on Debt 10,409 5,442 Amortization of deferred financing costs ,015 35,477 Changes in non-cash working capital 10,120 4,382 Cash provided by operating activities 61,135 39,859 Investing activities: Additions to property, plant and equipment (12,789) (5,074) Net change in restricted cash (1,183) (70) Cash used in investing activities (13,972) (5,144) Financing activities: Repayment of long-term debt (12,776) (9,906) Distributions to owner (33,135) (15,327) Cash used in financing activities (45,911) (25,233) Effect of foreign exchange rate on cash (2,599) (1,598) Net (decrease) increase in cash (1,347) 7,884 Cash, beginning of year 18,875 10,991 Cash, end of year $ 17,528 $ 18,875 See accompanying notes to the financial statements.

9 1. NATURE OF BUSINESS These audited financial statements are for Express Pipeline Limited Partnership ( Express Canada ). Express Canada (formed December 13, 1996) is part of the Express Pipeline System ( Express System ), that also includes Express Pipeline LLC ( Express US ) and Platte Pipe Line Company LLC ( Platte Co. ). Express Canada and Express U.S. were formed to build, own and operate the Canadian and United States portions, respectively, of a crude oil pipeline running from Hardisty, Alberta to Casper, Wyoming ( Express Pipeline ). The Express Pipeline is interconnected with a crude oil pipeline owned by Platte Co. that runs from Casper, Wyoming to Wood River, Illinois known as the Platte Pipeline. On March 14, 2013, Spectra Energy Corp. ( Spectra Energy ) acquired 100% of the ownership interests in Express System for U.S. $1.49 billion from a partnership of Borealis Infrastructure, the Ontario Teachers Pension Plan and Kinder Morgan Energy Partners ( Predecessor ). On August 2, 2013, Spectra Energy, the ultimate parent company of Express System, announced to sell 100 percent interest of Express Canada and 40 percent interest of Express US and Platte Co. to its master limited partnership, Spectra Energy Partners, LP ( Spectra Energy Partners ) for approximately U.S. $410 million in cash, U.S. $319 million in newly issued partnership units, and U.S. $129 million of acquired Express System debt. On November 1, 2013, Spectra Energy, sold the remaining 60 percent of the Express US and Platte Co. parent to its master limited partnership, Spectra Energy Partners. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with Canadian Accounting Standards for Private Enterprises ( ASPE ) for the purpose of reporting under the National Energy Board of Canada ( NEB ) Group 2 accounting requirements and financial reporting filing. Express Canada is unincorporated and the financial statements exclude any purchase price adjustments resulting from Spectra Energy s acquisition of Express System and do not include all of the owner s assets, liabilities, revenues and expenses. In the opinion of management, these financial statements have been properly prepared within reasonable limits of materiality and reflect the following summary of significant accounting policies: INCOME TAXES Express Canada is not subject to income taxes. The taxable income or loss of Express Canada is included as part of the taxable income for each of its partners. Accordingly, these financial statements do not include any provision for income taxes.

10 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REGULATION Express Canada is subject to the regulation of the National Energy Board of Canada ( NEB ). The NEB exercises statutory authority over such matters as rates of return, construction and operation of facilities, accounting practices, rates and tolls, and contractual agreements with customers. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including pipelines, tanks, buildings and other equipment, are stated at cost less accumulated depreciation. Cost includes all direct expenditures for system expansion, betterments and replacements, and capitalized interest. Depreciation of regulated assets is recorded on a straight-line basis over their useful lives. Depreciation rates for regulated assets are approved by the regulator. The average depreciation period is approximately 30 years. Assets under construction are not depreciated until they are placed in service. The cost of depreciable property retired, together with removal costs less salvage, is charged to accumulated depreciation. The carrying value of an item of property, plant and equipment is tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount is not recoverable and exceeds its fair value. ASSET RETIREMENT OBLIGATION Express Canada recognizes the fair value of a future asset retirement obligation if determinable, as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that results from the acquisition, construction, development, and/or normal use of the assets. Express Canada concurrently recognizes a corresponding increase in the carrying amount of the related long-lived asset that is depreciated over the life of the asset. The fair value of the asset retirement obligation is estimated using the expected cash flow approach that reflects a range of possible outcomes discounted at a credit-adjusted risk-free interest rate. Subsequent to the initial measurement, the asset retirement obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. Changes in the obligation due to the passage of time are recognized in income as an operating expense using the interest method. Changes in the obligation due to changes in estimated cash flows are recognized as an adjustment of the carrying amount of the related long-lived asset that is depreciated over the remaining life of the asset.

11 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ASSET RETIREMENT OBLIGATION (CONTINUED) As the fair value of future removal and site restoration costs for the Express Canada s pipeline system is not determinable, Express Canada has not recognized an asset retirement obligation as at December 31, 2015 and Express Canada was required by the NEB to set up an abandonment trust which is recorded within restricted cash in the financial statements, to recover costs for the possible future retirement of the Express Canada pipeline. This trust does not in any way measure the future costs or the remaining life of the asset. REVENUE RECOGNITION Revenues associated with the transportation of crude oil are recorded when products are delivered and adjusted according to terms prescribed by toll agreements with shippers and approved by regulators. INVENTORY SETTLEMENTS Express Canada recognizes income or expense associated with the settlement of shipper inventory balances in the period that the services have been completed. The net amount of collections and payments from shippers is recognized in income. During the year ended December 31, 2015 $4.3 million (December 31, $6.4 million) of inventory settlement income was recognized. FINANCIAL INSTRUMENTS (i) Initial measurement: Financial instruments are measured at fair value on origination or acquisition, adjusted by financing fees and transaction costs which are recognized in net earnings in the period incurred. (ii) Subsequent to initial recognition: Subsequent to initial recognition financial assets and liabilities held-to-maturity, are measured at amortized cost. All other financial assets and liabilities are initially measured at fair value, and are not re-measured subsequently to fair value because their initial carrying values approximate their fair values due to the short-term nature of the instruments.

12 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INSTRUMENTS (CONTINUED) (iii) Impairment: At year-end Express Canada assesses whether there are any indications that a financial asset may be impaired. For purposes of impairment testing, each individually significant asset is assessed individually. When there is an indication of impairment, Express Canada determines whether a significant adverse change has occurred during the period in the expected timing or amount of future cash flows from the financial asset. When there has been a significant adverse change, the carrying value of the asset is reduced to the highest of: (a.) (b.) The present value of expected cash flows, and The amount that could be realized by selling the asset, When the extent of impairment decreases and the decrease can be related to an event occurring after the impairment was recognized, the impairment is reversed. MEASUREMENT UNCERTAINTY The preparation of these financial statements in conformity with ASPE requires management to make estimates and assumptions that affect the reported amounts of accounts receivable (including accrued revenue), property, plant and equipment, accounts payable, accrued liabilities, and deferred revenue in the financial statements. Actual results could differ from these estimates. RELATED PARTY TRANSACTIONS Monetary and non-monetary related party transactions that have commercial substance are measured at the exchange amount. Where a transaction is not in the normal course of operations, it is measured at the exchange amount when there is a substantive change in the ownership of the item transferred and there is independent evidence of the exchange amount. All other related party transactions are measured at the carrying amount. 3. CASH Cash on deposit US Dollar Accounts (2015: U.S. $12,015; 2014: U.S. $14,694) $ 16,627 $ 17,076 Cash on deposit CDN Dollar Accounts 901 1,799 $ 17,528 $ 18,875

13 4. RESTRICTED CASH This account represents funds placed in trust to service Express System s long-term debt pursuant to the debt agreement. In addition as of January 1, 2015 the NEB ordered for Express Canada to set up and fund an abandonment trust based upon NEB guidelines. As of December 31, 2015 Express Canada had $2.0 million (Dec 31, 2014 $0.8 million) of restricted cash. Of the December 31, 2015 restricted cash $1.0 million relates to the abandonment trust which is long term. 5. PROPERTY, PLANT AND EQUIPMENT December 31, 2015 Cost Accumulated depreciation Net book value Oil pipeline and facilities $ 296,764 $ 147,478 $ 149,286 December 31, 2014 Cost Accumulated depreciation Net book value Oil pipeline and facilities $ 285,331 $ 137,367 $ 147,964 Property, plant and equipment includes $9.2 million ( $3.3 million) of assets under construction which are not being depreciated. 6. DEFERRED FINANCING COSTS In conjunction with the issuance of the Notes (Note 7), the Express System entered into interest rate swaps agreements with two financial institutions (the Counterparties ) with the effect of fixing the underlying interest rate on a notional principal amount of $300 million. These interest rate swaps agreements were settled on the closing date of the long-term debt resulting in a total one-time payment to the Counterparties of U.S. $29.7 million. This payment as well as other costs of U.S. $5.6 million related to the long-term debt are accounted for as deferred financing costs and are amortized over the life of the long-term debt (see Note 7). During 2005, U.S. $0.8 million of financing costs relating to the issuance of Guaranteed Notes was deferred and is amortized over the term of the Guaranteed Notes (see Note 7). Express Canada portion of the deferred financing costs is $17.4 million. Accumulated amortization at December 31, 2015 is $17.0 million (December 31, $16.7 million).

14 7. LONG-TERM DEBT December 31, 2015 December 31, % Subordinated Secured Notes due 2019 $ 17,437 $ 25,903 (U.S. $12,600, 2014 U.S. $22,290) 6.09% Senior Secured Guaranteed Notes due ,057 31,958 (U.S. $27,500, 2014 U.S. $27,500) Less: deferred financing costs (303) (681) 55,191 57,180 Less: long-term debt due within one year (12,331) (11,256) (a) 7.39% Subordinated Secured Notes $ 42,860 $ 45,924 On February 6, 1998 Express Canada and Express U.S. (the Issuers ) issued U.S. $250 million 7.39% Subordinated Secured Notes due 2019 (the Notes ) on a joint and several basis. Platte Co. has guaranteed the obligations of the Issuers under the Notes. The Notes are secured by the assignment of the Express System s receivables from its transportation revenues and a floating charge over the assets of Express Canada The Notes have a Scheduled Amortization and a Rated Amortization schedule. The Scheduled Amortization principal repayments commenced on June 30, Based on the Scheduled Amortization the principal of the Notes is expected to be paid in full by December 31, The Rated Amortization schedule required principal repayment of the Notes to begin no later than June 30, 2000 and the principal of the Notes to be paid in full by December 31, The Issuers have met the Scheduled Amortization schedule. Repayments by Express Canada based on the Scheduled Amortization schedule are as follows: (millions of U.S. dollars) Subordinated Note

15 7. LONG-TERM DEBT (CONTINUED) Under the terms of the Notes financing, Express System was to maintain a debt service coverage ratio ( DSCR ) of 1.3:1 during 2015 to meet the Restricted Payments Test (the Test ). Failure to meet the DSCR Test restricts the Express System from making distributions to the owners until such time as the Test has been met for four consecutive quarters. Express System met the requirements under the DSCR Test for every calendar quarter end in (b) 6.09% Senior Secured Guaranteed Notes On June 28, 2005 the Issuers issued U.S. $110.0 million 6.09% Senior Secured Guaranteed Notes ( Guaranteed Notes ) on a joint and several basis. The U.S. $110.0 million principal amount is due January 15, Of the U.S. $110.0 million Guaranteed Notes issued, U.S. $27.5 million were allocated to Express Canada. Platte Co. has guaranteed the obligations of the Issuers. The Guaranteed Notes are secured by the assignment of the Express System s receivables from its transportation revenues and a floating charge over the assets of Express Canada. The Guaranteed Notes rank pari passu to the Notes. Interest on the Guaranteed Notes is payable semi-annually on January 15 th and July 15 th of each year. 8. RELATED PARTY TRANSACTIONS All outstanding balances with related parties, occurred from the normal course of business operations, during 2015 and The balances are recorded at exchange amounts, are noninterest bearing, unsecured and payable on demand. The amounts receivable from related parties, all subsidiaries of Spectra Energy Corp. at December 31, 2015 and 2014 are as follows: Spectra Energy Transmission LLC 2,224 - Spectra Energy Express (Canada) Holding, ULC - 8,492 Platte Pipe Line Company, LLC SE Express Holdings, LLC Other - 37 Total $ 2,224 $ 9,573

16 8. RELATED PARTY TRANSACTIONS (CONTINUED) The amounts payable to related parties, all subsidiaries of Spectra Energy Corp. at December 31, 2015 and 2014 are as follows: Express Pipeline LLC $ 19,477 $ 13,147 Platte Pipe Line Company LLC 13,232 8,578 Spectra Energy Corp. 1,998 1,464 Westcoast Energy Inc ,891 Pan Energy Services LP Spectra Energy Partners LP Spectra Energy Operating Co., LLC SE Express Holdings, LLC Texas Eastern Transmission LP Union Gas Limited Spectra Energy Services, LLC Spectra Energy Transmission LLC - 68 Total $ 37,300 $ 33,709 Distribution to the parent of Express Canada for the year ended 2015 were $33.1 million and $15.3 million for FINANCIAL INSTRUMENTS (a) Fair value estimates The carrying values of financial instruments included in the statement of financial position, excluding long-term debt, approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of Express Canada s long-term debt is calculated by using available quoted market prices of similar debt instruments at December 31, Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates cannot be determined with precision as they are subjective in nature and involve uncertainties and matters of judgment.

17 9. FINANCIAL INSTRUMENTS (CONTINUED) Carrying Fair Carrying Amount Value Amount Fair Value 7.39% Subordinated Notes $ 17,437 $ 18,244 $ 25,903 $ 27, % Senior Secured Guaranteed 38,057 40,763 31,958 35,665 Notes $ 55,494 $ 59,007 $ 57,861 $ 62,993 (b) Credit risk Express Canada is exposed to concentration of credit risk as the ten largest shippers account for over 85% of trade accounts receivable at December 31, 2015 (December 31, %). The overall credit risk is mitigated through the use of letters of credit from shippers or prepayment terms depending on the credit rating of the shipper. Generally investment grade shippers are not required to provide letters of credit or prepayment. (c) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and commodity prices will affect the fair value of the financial instruments. Express Canada is exposed to currency risk on US dollar denominated revenue and debt. Express Canada adjusts the reported amounts of foreign currency denominated debt to their Canadian dollar equivalent at each balance sheet date. Any related foreign exchange gains and/or losses are recognized in the statement of earnings.

Michael Hrynchyshyn Technical Director FIN LP Business Partners

Michael Hrynchyshyn Technical Director FIN LP Business Partners tel 780 420 5353 michael.hrynchyshyn@enbridge.com Enbridge 200, 425 1 st Street SW Calgary, Alberta T2P 3L8 Canada April 24, 2018 E-FILED