ALLIANCE PIPELINE LIMITED PARTNERSHIP Managment's Discussion and Analysis
Operating and Financial Highlights Three Months Ended Nine Months Ended September 30 2017 2016 2017 2016 ($ millions, except where noted) Operating Highlights Average long-term firm volume (mmcf/d) 1,335.2 1,337.6 1,341.8 1,357.1 Average seasonal/short-term firm volume (mmcf/d) 122.9 153.9 143.2 138.4 Average PITS/IT volume (mmcf/d) 72.2 52.7 74.0 76.0 Total average transportation volume (mmcf/d) 1,530.3 1,544.2 1,559.0 1,571.5 Financial Highlights Total revenues 132.4 130.2 411.1 387.3 Operational expenses (1) 51.8 49.1 157.9 138.6 Depreciation expense 17.6 17.6 53.1 52.8 Net interest expense and other income 13.6 15.2 40.8 46.6 Net income 49.4 48.3 159.2 149.3 EBITDA (2) 81.0 81.2 255.1 249.3 Distributions paid 55.0 49.0 157.0 117.0 September 30 December 31 2017 2016 Financial Position Working capital 61.3 43.3 Total long-term assets 1,063.3 1,108.0 Senior debt 823.6 865.6 DSCR 2.5 2.3 (1) Operational expenses includes general and administrative expenses, operations and maintenance expenses, property tax expenses and costs incurred under administrative service agreements. (2) Refer to "Non-GAAP Financial Measures". All financial information in this MD&A has been prepared in accordance with U.S. GAAP. This MD&A reviews the significant events and transactions that impacted our performance during the three and nine months ended September 30, 2017. The following MD&A is as of October 24, 2017 and should be read in conjunction with our unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2017, our MD&A and annual audited consolidated financial statements for the year ended December 31, 2016, and our 2016 Annual Information Form. All amounts in this MD&A are in millions of Canadian dollars except per unit amounts. Throughout this MD&A, the terms, we, us, our, and Alliance Canada mean Alliance Pipeline Limited Partnership. The term Alliance U.S. refers to Alliance Pipeline L.P., the owner of the U.S portion of the pipeline. 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 16. Page 1
The Alliance System Alliance Canada and Alliance U.S. provide a market based suite of services to transport rich natural gas from the WCSB and Bakken to the Chicago area. Alliance Canada s Services Offering combines tolling flexibility and predictability, together with enhanced natural gas transportation services that create economic value for shippers. Alliance Canada offers long-term firm, seasonal/short-term firm, and PITS/IT services. In addition, the ATP provides a range of opportunities for other market participants to transact on the pipeline. Additional information about our business is available at www.alliancepipeline.com and on SEDAR at www.sedar.com. Pipeline Activities Capacity Expansion Study In response to the high demand for our transportation services, Alliance Canada and Alliance U.S. announced a nonbinding request for expressions of interest for additional transportation service on the System. 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 is expected in the first half of 2018 with service anticipated to commence in the last half of 2021. Wapiti River Slope In June 2017, slope movement caused by runoff and rains in an area along the Wapiti River in northwestern Alberta impacted a section of Alliance Canada s mainline, prompting Alliance Canada to issue notice of a reduction in firm transportation service. 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. The service restriction resulted in zero natural gas flow at receipt points upstream from the affected area. No commercial impacts to firm contracts at receipt points downstream of the affected segment were experienced. During the service reduction, IT service was not available on Alliance Canada. Upon inspection it was determined no repairs to the pipe were required and Alliance Canada resumed normal service on June 17, 2017. Page 2
Third Quarter of 2017 Operating Income Highlights For the nine months ended September 30, 2017, operating income increased by $4.2 million to $200.1 million, compared to $195.9 million for the same period in 2016. Transportation Volumes Contracted Transportation Volumes to the Border Total average transportation volume decreased 12.5 mmcf/d to 1,559.0 mmcf/d for the nine months ended September 30, 2017 compared to 1,571.5 mmcf/d for the same period in 2016. The decrease was primarily due to the 2017 spring and fall outages for maintenance activies compared to 2016. In 2016, Alliance Canada deferred maintenance outages to coincide with the Regina Bypass project that occurred in October 2016. Nine Months Ended September 30 2017 2016 Average long-term firm volume (mmcf/d) 1,341.8 1,357.1 Average seasonal/short-term firm volume (mmcf/d) 143.2 138.4 Average PITS/IT volume (mmcf/d) 74.0 76.0 Total average transportation volume (mmcf/d) 1,559.0 1,571.5 Average Long-Term Firm Volume Average long-term firm volumes decreased 15.3 mmcf/d to 1,341.8 mmcf/d for the nine months ended September 30, 2017 compared to 1,357.1 mmcf/d for the same period in 2016. This decrease was primarily due to lower volumes from front-loaded full path staged contracts, partially offset by higher firm receipt volumes. Page 3
Average Seasonal/Short-Term Firm Volume Average seasonal/short-term firm volumes increased by 4.8 mmcf/d to 143.2 mmcf/d for the nine months ended September 30, 2017 compared to 138.4 mmcf/d for the same period in 2016 due to higher demand for seasonal and daily firm services. Average PITS/IT Volume Average PITS/IT volumes decreased 2.0 mmcf/d to 74.0 mmcf/d for the nine months ended September 30, 2017 compared to 76.0 mmcf/d in the same period for 2016. Higher demand for seasonal and daily firm services displaced capacity available for PITS/IT service compared to the same period for 2016. Transportation Revenue Transportation revenue increased $21.9 million to $368.4 million for the nine months ended September 30, 2017 compared to $346.5 million for the same period in 2016. Nine Months Ended September 30 2017 2016 Long-term firm transportation services 285.5 277.8 Seasonal / short-term firm transportation services 47.0 35.5 PITS/IT services 21.1 22.1 Ancillary revenue 14.8 11.1 Total transportation revenue 368.4 346.5 Long-Term Firm Transportation Revenue Long-term firm transportation revenue increased $7.7 million to $285.5 million for the nine months ended September 30, 2017 compared to $277.8 million for the same period in 2016. Toll receipts increased $1.0 million to $261.6 million for the nine months ended September 30, 2017, compared to $260.6 million for the same period in 2016. The increase was due to higher firm receipt service revenue, partially offset by lower full path service revenue compared to the same period in 2016. Non-cash fuel gas consideration increased $6.8 million to $27.6 million for the nine months ended September 30, 2017, compared to $20.8 million for the same period in 2016. The increase was due to higher index pricing for the nine months ended September 30, 2017, compared to the same period in 2016. Transportation revenue includes the recognition of noncash consideration for fuel gas that is consumed in the transportation of natural gas. For the nine months ended September 30, 2017 transportation fuel revenue was valued at $32.1 million, compared to a valuation of $24.0 million for the same period in 2016. The $8.1 million increase in the value of transportation fuel revenue was primarily due to higher index pricing when compared to the same period in 2016. 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. Seasonal/Short-Term Firm Transportation Revenue Seasonal/short-term firm transportation revenue increased $11.5 million to $47.0 million for the nine months ended September 30, 2017 compared to $35.5 million for the same period in 2016. Toll receipts increased $10.6 million to $44.4 million for the nine months ended September 30, 2017 compared to $33.8 million for the same period in 2016. The increase was due to higher demand for seasonal and daily firm services and higher pricing when compared to the same period in 2016. Page 4
Non-cash fuel gas consideration increased $0.8 million to $2.9 million for the nine months ended September 30, 2017 compared to $2.1 million for the same period in 2016. This increase was due to higher index pricing for the nine months ended September 30, 2017 compared to the same period in 2016. PITS/IT Services PITS/IT services decreased $1.0 million to $21.1 million for the nine months ended September 30, 2017 compared to $22.1 million for the same period in 2016. Toll receipts decreased $1.3 million to $19.8 million for the nine months ended September 30, 2017 compared to $21.1 million for the same period in 2016. Higher demand for seasonal and daily firm services displaced capacity available for PITS/IT service decreasing PITS/IT revenue compared to the same period in 2016. Non-cash fuel gas consideration increased $0.5 million to $1.6 million for the nine months ended September 30, 2017, compared to $1.1 million for the same period in 2016. The increase was due to higher index pricing for the nine months ended September 30, 2017 compared to the same period in 2016. Ancillary Revenue Ancillary revenues increased $3.7 million to $14.8 million for the nine months ended September 30, 2017 compared to $11.1 million for the same period in 2016. The increase was due to higher shipper demand and higher pricing associated with the ancillary services provided, as well as an increase related to the settlement of shipper imbalances. Operational Expenses Operational expenses increased $19.3 million to $157.9 million for the nine months ended September 30, 2017 compared to $138.6 million for the same period in 2016. This increase was due to higher valuation of non-cash fuel gas consumed, costs related to linepack management activities, settlement of shipper imbalances and higher pipeline maintenance and integrity activities. Nine Months Ended September 30 2017 2016 General and administrative 56.8 56.6 Operations and maintenance 81.4 62.2 Property taxes 17.1 17.6 Administrative service agreement fee 2.6 2.2 Total operational expenses 157.9 138.6 General and Administrative Expense General and administrative increased $0.2 million to $56.8 million for the nine months ended September 30, 2017, comparable to $56.6 million for the same period in 2016. Operations and Maintenance Expense Operations and maintenance expenses increased $19.2 million to $81.4 million for the nine months ended September 30, 2017 compared to $62.2 million for the same period in 2016. This increase was largely due to costs related to linepack management activities and settlement of shipper imbalances and higher non-cash fuel gas consumed of $8.1 million when compared to the same period in 2016 as a result of higher index pricing. Higher pipeline maintenance and integrity activities including the Wapiti River slope repair and remediation work as described in Pipeline Activities and unplanned repair costs to a compressor unit also contributed to higher operations and maintenance expense. Property Taxes Property taxes decreased $0.5 million to $17.1 million for the nine months ended September 30, 2017, comparable to $17.6 million for the same period in 2016. Administrative Service Agreement Fee Administrative service agreement fee expense increased $0.4 million to $2.6 million for the nine months ended September 30, 2017, comparable to $2.2 million for the same period in 2016. Page 5
Results of Operations for the Three Months Ended September 30, 2017 2017 2016 Change ($) Change (%) Transportation revenue 118.3 116.7 1.6 1.4 Total revenue 132.4 130.2 2.2 1.7 Operational expenses (1) 51.8 49.1 2.7 5.5 Depreciation expense 17.6 17.6 - - Net interest expense and other income 13.6 15.2 (1.6) (10.5) Net income 49.4 48.3 1.1 2.3 EBITDA (2) 81.0 81.2 (0.2) (0.2) Distributions paid 55.0 49.0 6.0 12.2 Cash provided by operating activities 76.7 85.1 (8.4) (9.9) (1) Operational expenses includes general and administrative expenses, operations and maintenance expenses, property tax expenses and costs incurred under administrative service agreements. (2) Refer to Non-GAAP Financial Measures. Transportation Revenue Transportation revenue increased $1.6 million to $118.3 million for the three months ended September 30, 2017 compared to $116.7 million for the same period in 2016. This was due to higher volumes contracted with favourable rates for seasonal and daily firm services, higher firm receipt services and higher ancillary revenue when compared to the same period in 2016. This was partially offset by a decrease in index pricing for the quarter that is used to value transportation fuel revenue. Total Revenue Total revenues increased $2.2 million to $132.4 million for the three months ended September 30, 2017 compared to $130.2 million for the same period in 2016. This was due to higher volumes contracted with favourable rates for seasonal and daily firm services, higher firm receipt services, higher ancillary revenue, and other revenue related services provided to other entities when compared to the same period in 2016. This was partially offset by a decrease in the index pricing for the quarter used to value transportation fuel revenue. Operational Expenses Operational expenses increased $2.7 million to $51.8 million for the three months ended September 30, 2017 compared to $49.1 million for the same period in 2016. This was largely due to costs related to fuel sales required for operational purposes, higher pipeline maintenance and integrity activities, consulting costs, pipeline operations costs, and fuel taxes, partially offset by lower valuation of non-cash fuel gas consumed in this quarter compared to the prior period. Depreciation Expense Depreciation expense was $17.6 million for the three months ended September 30, 2017, consistent with $17.6 million for the same period in 2016. Net Interest Expense and Other Income Net interest expense and other income decreased $1.6 million to $13.6 million for the three months ended September 30, 2017, compared to $15.2 million for the same period in 2016. This decrease is primarily due to lower interest costs as a result of lower outstanding senior debt balances. Net Income Net income increased $1.1 million to $49.4 million for the three months ended September 30, 2017 compared to $48.3 million for the same period in 2016. The increase in net income is due to higher total revenue and lower interest expense, offset by higher operational expenses. EBITDA EBITDA decreased $0.2 million to $81.0 million for the three months ended September 30, 2017, comparable to $81.2 million for the same period in 2016. Page 6
Distributions Paid Distributions paid increased $6.0 million to $55.0 million for the three months ended September 30, 2017 compared to $49.0 million for the same period in 2016 due to increased cash available from improved operating liquidity. Cash Provided By Operating Activities Cash provided by operating activities decreased $8.4 million to $76.7 million for the three months ended September 30, 2017 compared to $85.1 million for the same period in 2016. The decrease in cash provided by operating activities was attributed to changes in noncash working capital, partially offset by higher net income. Page 7
Results of Operations for the Nine Months Ended September 30, 2017 2017 2016 Change ($) Change (%) Transportation revenue 368.4 346.5 21.9 6.3 Total revenue 411.1 387.3 23.8 6.1 Operational expenses (1) 157.9 138.6 19.3 13.9 Depreciation expense 53.1 52.8 0.3 0.6 Net interest expense and other income 40.8 46.6 (5.8) (12.4) Net income 159.2 149.3 9.9 6.6 EBITDA (2) 255.1 249.3 5.8 2.3 Distributions paid 157.0 117.0 40.0 34.2 Cash provided by operating activities 242.0 222.0 20.0 9.0 (1) Operational expenses includes general and administrative expenses, operations and maintenance expenses, property tax expenses and costs incurred under administrative service agreements. (2) Refer to Non-GAAP Financial Measures. Transportation Revenue Transportation revenue increased $21.9 million to $368.4 million for the nine months ended September 30, 2017 compared to $346.5 million for the same period in 2016. This was due to higher demand for seasonal and daily firm services, higher ancillary revenue and an increase in the value of transportation fuel revenue for the nine months ended September 30, 2017 when compared to the same period in 2016. Total Revenue Total revenues increased $23.8 million to $411.1 million for the nine months ended September 30, 2017 compared to $387.3 million for the same period in 2016. This was due to higher demand for seasonal and daily firm services, higher ancillary revenue, an increase in the value of transportation fuel revenue for the nine months ended September 30, 2017, and revenues related to operational linepack activities when compared to the same period in 2016. Operational Expenses Operational expenses increased $19.3 million to $157.9 million for the nine months ended September 30, 2017 compared to $138.6 million for the same period in 2016. This increase was due to higher valuation of non-cash fuel gas consumed, costs related to linepack management activities, settlement of shipper imbalances and higher pipeline maintenance and integrity activities. Depreciation Expense Depreciation expense was $53.1 million for the nine months ended September 30, 2017, comparable to $52.8 million for the same period in 2016. Net Interest Expense and Other Income Net interest expense and other income decreased $5.8 million to $40.8 million for the nine months ended September 30, 2017 compared to $46.6 million for the same period in 2016. This is due to lower interest costs as a result of lower outstanding senior debt balances. Net Income Net income increased $9.9 million to $159.2 million for the nine months ended September 30, 2017 compared to $149.3 million for the same period in 2016. The increase in net income is due to higher revenue and lower interest expenses, offset by higher operational expenses. EBITDA EBITDA increased $5.8 million to $255.1 million for the nine months ended September 30, 2017 compared to $249.3 million for the same period in 2016. The increase in EBITDA is primarily due to higher net income. Page 8
Distributions Paid Distributions paid increased $40.0 million to $157.0 million for the nine months ended September 30, 2017 compared to $117.0 million for the same period in 2016 due to increased cash available as a result of improved operating performance and available liquidity. Cash Provided By Operating Activities Cash provided by operating activities increased $20.0 million to $242.0 million for the nine months ended September 30, 2017 compared to $222.0 million for the same period in 2016. The increase in cash provided by operating activities was attributed to higher net income and favourable changes in non-cash working capital. Page 9
Selected Quarterly Financial Information Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 (1) Total revenues 132.4 132.5 146.2 132.5 130.2 126.0 131.0 130.1 Net income 49.4 48.2 61.6 48.9 48.3 46.7 54.3 32.6 Net income per unit (2) 77.7 75.8 96.8 76.9 75.9 73.4 85.4 51.2 EBITDA (3) 81.0 80.5 93.7 80.3 81.2 80.3 87.8 78.2 Distributions paid 55.0 62.0 40.0 58.0 49.0 34.0 34.0 33.8 Distributions paid per unit (2) 86.5 97.5 62.9 91.2 77.0 53.4 53.4 53.1 (1) Prior to December 1, 2015, Alliance Canada operated under a cost-of-service business model that produced results that did not vary significantly quarter over quarter. (2) Per unit comparisons reflect amounts available to limited partners (99%). The number of units outstanding for each of the above reporting periods was 629,765.2. (3) Refer to Non-GAAP Financial Measures. Significant items that impacted the quarterly financial results include the following: Q3 2017 Total revenues continued to reflect strong demand for Alliance Canada s transportation services. Current period distributions reflect a continuation of favourable market conditions and operating performance. Q2 2017 Total revenue, net income, and EBITDA decreased compared to the first quarter of 2017 due to lower longterm firm and seasonal/short-term firm transportation services, as a result of the end of firm winter seasonal contracts, and increased operating expenses. Increased distributions paid in the quarter were related to improved operating results over the winter season. Q1 2017 Total revenue, net income, and EBITDA increased compared to the fourth quarter of 2016 due to higher demand for firm seasonal/short-term transportation services, partially offset by increased operating expenses. Q4 2016 Distributions paid increased compared to the third quarter of 2016 due to an increase in cash available for distribution. Total revenues increased due to operational linepack activities. Q3 2016 The third quarter net income increased due to higher revenues compared to the second quarter of 2016. Distributions paid increased compared to the second quarter of 2016 due to the increase in cash available for distribution. Q2 2016 The second quarter decrease in net income reflects a decrease from prior year in repair and maintenance costs, contractor and consulting costs and reduced salary expenses. The second quarter of 2016 transportation revenue also included a decrease in firm and IT revenue as compared to the first quarter of 2016. Q1 2016 The first quarter of 2016 reflects the first full quarter of operations under the Services Offering, in which Alliance Canada began offering a market based suite of services. The increase in net income and EBITDA was a result of the lower fixed-cost structure and higher revenues in the first quarter of 2016. Q4 2015 In the fourth quarter of 2015, Alliance Canada commenced operations under the Services Offering which resulted in a decrease in transportation tolls collected in December 2015. The toll reduction was primarily due to the lower fixed cost structure included in the Services Offering tolls. Fourth quarter net income also reflects lower operating expenses as a result of a reduction in contractor, consulting costs, and salary expenses due to reduced staffing requirements. Page 10
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. There have been no material changes to the nature or the type of related party transactions in the quarter. Amounts due from related parties (excluding transportation revenue) September 30 December 31 2017 2016 Alliance Pipeline entities 13.9 16.5 NRGreen Power Limited Partnership 0.6 0.8 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. As a result, Pembina Pipeline Corporation replaced Veresen Energy Infrastructure Inc. as a Partner of Alliance Canada. Liquidity and Capital Resources Liquidity 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 credit facilities and funding from the Partners. Undrawn credit facilities at September 30, 2017 of $121.4 million and the total of cash and trust deposits are, in management s view, adequate to meet on-going liquidity and capital resource requirements. 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 may be made quarterly, subject to Alliance Canada satisfying certain financing conditions, including a minimum DSCR requirement. Subject to lender approval, a distribution of $75.6 million was declared and is expected to be paid to our Partners and General Partner on November 2, 2017. Capital Management 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 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 as of September 30, 2017, and expect to remain in compliance throughout 2017. 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 credit facility. On April 27, 2017, the maturity date of the credit facility was extended from June 29, 2019 to June 29, 2020. Page 11
Risks and Uncertainties Alliance Canada is subject to certain risks and uncertainties. Readers should carefully consider, among other things, the risks described herein (including the risks and uncertainties listed in the Forward-Looking Information section in this MD&A) and the risk factors set forth in the Alliance Canada 2016 MD&A, which are incorporated by reference herein. Credit Risk Alliance Canada is exposed to credit risk as the business is concentrated in the natural gas transportation industry and its revenue is dependent upon the ability of shippers to pay monthly demand charges. A majority of the shippers operate in the oil and gas exploration and development, energy marketing or transportation industries and may be exposed to long-term downturns in energy commodity prices, including the price for natural gas, or other credit events impacting these industries. The risk of non-performance of our shippers is mitigated by our credit approval process and on-going monitoring procedures. At September 30, 2017 approximately 50% of firm capacity (as represented by percentage of those associated revenues) is contracted to shippers who do not have an investment grade rating or acceptable credit status and are required to post security. These shippers have provided required security, but in no case does such security cover more than three months of obligations under the transportation contracts. We expect that, should a shipper be unable to fulfill its contractual obligations in the future, re-contracting of the repudiated contract is possible, although there may be a risk that the revenue may be lower than the original transportation contract. Legal Matters Alliance Canada is subject to various legal actions which arise in the normal course of business. While the final outcome of such actions cannot be predicted with certainty, management believes that the resolution of such actions will not have a material impact on Alliance Canada s financial position or results of operations. Critical Accounting Estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions. Management s estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of revenues and expenses recorded during the reporting period. Estimates and assumptions are based on historical experience, current conditions and various other factors and are believed to be reasonable under the circumstances. Due to changes in facts and circumstances and the inherent uncertainty involved in making estimates, actual results may differ significantly from current estimates. Refer to the Alliance Canada 2016 MD&A for a detailed discussion on critical accounting estimates. Currently there are no material accounts receivable that meet the definition of past due and/or impaired. Alliance Canada will continue to monitor both current and potential shippers based upon our credit approval process. Page 12
Non-GAAP Financial Measures Certain non-gaap financial measures referred to in this MD&A, namely rate base and EBITDA are not measures recognized by U.S. GAAP. These non-gaap measures do not have standardized meanings prescribed by U.S. GAAP and therefore may not be comparable to similar measures presented by other entities. Readers are cautioned that non-gaap measures should not be construed as alternatives to other measures of financial performance calculated in accordance with U.S. GAAP. The following non-gaap financial measures are provided to assist readers of the MD&A and the condensed interim consolidated financial statements with their understanding of Alliance Canada, including their knowledge of its ability to generate cash and fund operations. Management considers these non-gaap financial measures to be important indicators in understanding its performance. Rate base generally consists of the value of property, as used by the utility, in providing service, in accordance with rules set by a regulatory agency. EBITDA is reconciled from the components of net income as noted below, and we report this measure as a supplementary indicator of our operating performance. EBITDA is expressed as net income before total net interest expense, income taxes, depreciation and amortization. These adjustments are also made to better reflect the historical measurement of EBITDA, as used by readers, as an approximate measure of an entity s operating cash flow. Non-GAAP Reconciliations Net Income to EBITDA Three Months Ended Nine Months Ended September 30 2017 2016 2017 2016 Net income 49.4 48.3 159.2 149.3 Interest expense 14.0 15.5 43.5 47.8 Interest income - (0.2) (0.7) (0.6) Depreciation expense 17.6 17.6 53.1 52.8 EBITDA 81.0 81.2 255.1 249.3 Page 13
Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the President and CEO, and the Senior Vice President and CFO, on a timely basis so that appropriate decisions can be made regarding public disclosure. As of the end of the period covered by this report, Alliance Canada s senior management evaluated the effectiveness of the design and operation of its disclosure controls and procedures, under the supervision of, and with the participation of the CEO and CFO. The inherent limitations in all control systems are such that they can provide only reasonable, not absolute, assurance that all control issues and instances of fraud or error, if any, within Alliance Canada have been detected. Based on senior management s evaluation, the CEO and CFO have concluded, subject to the inherent limitations noted above, that Alliance Canada s disclosure controls and procedures, as defined in National Instrument 52-109, Certification of Disclosure in Issuers Annual and Interim Filings, are effective at a reasonable assurance level to ensure that material information relating to Alliance Canada is made known to management on a timely basis and is included in this report. Internal Control over Financial Reporting Alliance Canada s management, with the participation of its CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision of the CFO, Alliance Canada s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. No changes were made to our financial internal controls during the three and nine months ended September 30, 2017 that have materially impacted, or are reasonable likely to materially impact, our financial reporting. The design and effectiveness of internal controls over financial reporting was assessed as at September 30, 2017 and based on this evaluation, the CEO and CFO have concluded that, subject to the inherent limitations noted above, internal control over financial reporting is effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Page 14
Forward-Looking Information Some information in this MD&A is forward looking. All information about activities, events or developments that we think may occur in the future is forward looking information. Forward looking information typically consists of statements containing words such as may, estimate, anticipate, believe, expect, plan, intend, target, project, proposed, forecast or similar words. Forward looking information in this MD&A includes statements about: our anticipated business projects including the timing, scope, and ability to achieve our expected results; our future financial and operating performance; the System s ability to accommodate new receipt volumes with variable gas compositions; whether available credit facilities can sufficiently fund our operations and planned capital expenditures; and our ability to remain compliant with the terms and conditions of our credit facilities. The risks and uncertainties that may impact the operations and development of our business include the following: our ability to successfully implement our corporate strategy; changes in natural gas production and the NGLs content of natural gas from exploration and production areas we serve, such as the Montney and Duvernay shale plays of Northeast British Columbia and Northwest Alberta and the Bakken shale play in North Dakota; operational issues at the Aux Sable NGLs extraction facility near Chicago, Illinois, where the rich gas we transport is processed and NGLs are extracted; interruption of operations due to natural disasters, sabotage (including cyber-attacks) or other causes; changes in sales prices for natural gas and NGLs in the delivery markets we serve; continued receipt of regulatory approvals allowing us to provide service under our tariffs and tolls; the availability and price of capital; customer credit risk and continued existence of contracted customers; changes in regulatory, environmental, and other laws and regulations; competitive factors in the pipeline, natural gas and NGLs industries; the availability of capacity on downstream pipelines in the delivery markets we serve; the impact of North American and international energy market conditions on our customers; the availability of energy commodities; fluctuations in foreign exchange and interest rates; and the operating performance of our pipeline assets. This list is not exhaustive. We cannot predict the impact of any particular risk, uncertainty or influencing factor on a forward-looking statement because we would need to assess it at that time in light of information available then. Each risk, uncertainty and influencing factor is independent of the others and each one, or a combination, may lead to different results. Although we believe that the expectations conveyed by the forward looking information are reasonable based on information available to us on the date we prepared this MD&A, we can give no assurances about future results. Readers should not place undue reliance on the forward looking information, as actual results achieved may vary materially from the information in this MD&A. In addition, we made the forward looking statements in this MD&A on October 24, 2017 and we have no obligation to publicly update or revise any forward looking information. This cautionary statement expressly qualifies all forward looking information in this MD&A. Page 15
Glossary of Terms Accounting Terms General and Operational Terms AFUDC ASU ARO EBITDA Allowance for funds used during construction Accounting Standards Update Asset retirement obligation Earnings before net interest, income taxes, depreciation and amortization ACE ATP Alliance Chicago Exchange delivers natural gas transported by the System to downstream markets after the NGLs have been extracted at Aux Sable Alliance Trading Pool is the Canadian trading pool allowing receipt and delivery shippers to trade gas FASB U.S. GAAP DSCR Financial Accounting Standards Board Generally accepted accounting principles in the United States of America Debt Service Coverage Ratio is defined as the ratio of cash inflows minus operating costs as compared with the scheduled debt service payable for a twelve month period Alliance Canada Alliance U.S. Aux Sable CEO CFO Alliance Pipeline Limited Partnership (the operator of the Canadian portion of the System) Alliance Pipeline L.P. (the operator of the United States portion of the System) Aux Sable Liquid Products LP Chief Executive Officer Chief Financial Officer Operating Income Units of Measure mmcf mmcf/d bcf/d Total revenue less total expenses, excluding net interest expense and other income million cubic feet million cubic feet per day billion cubic feet per day Cost-of-Service General Partner GHG HCDP IT MD&A NEB NGLs The originally contracted services provided to customers that concluded on November 30, 2015 Alliance Pipeline Ltd. manages Alliance Canada and is allocated 1% of net income and loss Greenhouse gas Hydrocarbon Dewpoint Interruptible Transportation Management s Discussion and Analysis National Energy Board Natural Gas Liquids which includes ethane, propane, butane and pentane Page 16
Partners PITS Services Offering System U.S. WCSB YTD Enbridge Income Partners Holdings Inc. and Pembina Pipeline Corporation are collectively known as the Partners of Alliance Canada and are equally allocated 99% of net income and loss Priority Interruptible Transportation Services The at risk transportation service model that commenced on December 1, 2015 Collectively, the System refers to the portions of the pipeline owned by Alliance Canada and Alliance U.S. United States of America Western Canadian Sedimentary Basin Year-to-Date Page 17