Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
The Alliance System
The Alliance System (System) consists of a 3,849 kilometre (km) (2,392 mile) integrated Canadian and U.S. natural gas
transmission pipeline, delivering rich natural gas from the Western Canadian Sedimentary Basin (WCSB) and the
Williston Basin in North Dakota to the natural gas market in Chicago. The System has been in commercial service since
December 2000 and currently delivers an average of 1.7 billion cubic feet per day (bcf/d) of rich gas to the Aux Sable
natural gas liquids (NGLs) extraction facility, owned by Aux Sable Liquid Products LP (Aux Sable), an affiliate of Alliance
Pipeline Limited Partnership (Alliance Canada). Rich gas is natural gas with relatively high NGLs content; mainly ethane,
propane, butane and condensates.
The System connects with the Aux Sable NGLs extraction facility in Channahon, Illinois, which extracts NGLs from the
natural gas transported before delivery to downstream pipelines. The pipeline connects in the Chicago area, through its
downstream header, with five interstate natural gas pipelines and two local natural gas distribution systems, which provide
shippers with access to natural gas markets in the Midwestern and Northeastern U.S., and Eastern Canada. All shippers
have signed extraction agreements that give Aux Sable the exclusive right to extract the NGLs from the rich gas
transported. The System also has three connections, two in North Dakota and one in Iowa, to provide for deliveries of
small amounts of natural gas to ethanol production plants.
Facilities include 14 mainline compressor stations that operate between approximately 31,000 horsepower (hp) and
46,000 hp each, spaced at approximately 193 km intervals; mainline block valves, spaced, on average, at 32 km intervals;
operating and maintenance facilities; and an associated SCADA system.
Construction of the System began in May 1999 and commercial operations commenced on December 1, 2000. Shippers
executed transportation contracts with each of Alliance Canada and Alliance Pipeline L.P. (Alliance U.S.) that had a
primary term ending November 30, 2015. Those contracts provided for tolls based on a cost-of-service tolling mechanism
and the transportation of 100% of Alliance Canada’s available firm capacity.
Page | 1 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
On May 22, 2014, Alliance Canada filed an application with the National Energy Board (NEB) for regulatory approval of
the New Services Offering (Services Offering) tolls and tariff provisions, to be effective December 1, 2015. On July 9,
2015, the NEB approved Alliance Canada's Services Offering tolls and tariff, subject to certain Board directions and
conditions. The conditions included restrictions on Alliance Canada's discretion to set bid floors for seasonal and
interruptible transportation (IT) service to no more than 125% of the corresponding firm service toll, and on our ability to
discount seasonal service below the corresponding firm service toll. In 2016, Alliance Canada sought a review and
variance of the NEB’s decision regarding Prior Period Adjustment fees, however that issue has been commercially
resolved and once the resolution is implemented Alliance Canada will abandon its review and variance application. Similarly, Alliance U.S. applied to the Federal Energy Regulatory Commission (FERC) on May 29, 2015 for regulatory
approval of amendments to its FERC Gas Tariff, to be effective December 1, 2015. On June 30, 2015, the FERC
approved Alliance U.S.’s amendments to its FERC Gas Tariff. Although long-term firm shippers on Alliance U.S. have
negotiated rates, Alliance U.S. recourse rates were the subject of a proceeding during 2016. On December 15, 2016 the
FERC conditionally approved Alliance U.S.’s recourse rate settlement with minor modifications and severed and
remanded for hearing certain gas processing issues. That hearing has been temporarily suspended to permit further
settlement discussions.
On December 1, 2015, Alliance Canada commenced the implementation of its Services Offering providing shippers with
competitive long-term fixed firm tolls and biddable tolls for seasonal firm, short-term firm and IT services. The Services
Offering includes both full-path and segmented receipt and delivery services. A new Canadian trading pool and a revised
hydrocarbon dewpoint specification will also facilitate the transportation of rich gas.
The new services were developed in a manner that is cognizant of "cost based" parameters, but deviates from the costof-service tolling model and reflects a more dynamic and flexible market-focused approach under which Alliance Canada
will assume a higher degree of business risk and provide flexibility to effectively respond to evolving market conditions.
Alliance Canada has re-contracted all of its available year-round firm receipt capacity through 2018, and approximately
90% of available year-round firm receipt capacity in 2019 and 2020, with average contract durations of 5.3 years.
Following this successful marketing of Alliance Canada's initial firm contracts effective December 1, 2015, demand for
Alliance Canada's seasonal firm services has been in excess of available seasonal firm capacity. Alliance has also
effectively marketed short-term firm and IT services.
ALLIANCE CANADA
The Alliance Canada portion of the System consists of approximately 1,561 kms (970 miles) of natural gas mainline
pipeline and 732 kms (455 miles) of related lateral pipelines connected to natural gas receipt locations, primarily at gas
processing facilities in northwestern Alberta and northeastern British Columbia, and related infrastructure. Alliance
Canada owns the Canadian portion of the System. Alliance Canada is jointly owned by Enbridge Income Partners
Holdings Inc. and Veresen Energy Infrastructure Inc. (Partners) and is subject to federal regulation by the NEB.
ALLIANCE U.S.
The Alliance U.S. portion of the System consists of approximately 1,556 kms (967 miles) of infrastructure including the
129 km (80 mile) Tioga Lateral in North Dakota. Alliance U.S., an affiliate of Alliance Canada, owns the U.S. portion of the
System. Alliance U.S. is jointly owned by Enbridge Income Partners US Holdings Inc. and Fort Chicago Pipeline II U.S.
L.P. (a Veresen affiliate) and is subject to federal regulation by the FERC.
Page | 2 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016 Financial and Operating Highlights
($millions, except where noted)
Operating Highlights
Average daily long-term firm (mmcf/d) (1)
Average daily seasonal/short-term(2) firm (mmcf/d) (1)
Average daily interruptible(2) (mmcf/d) (1)
Total average daily contracted volume (mmcf/d) (1)
Financial Highlights
Total revenues
Operating expenses (excluding depreciation)
Depreciation expense
Net interest expense and other income
Extraordinary gain
Net income
Earnings before interest, taxes, depreciation and amortization (EBITDA) (3)
Partner distributions paid
Cash provided by operating activities
Capital additions
Financial Position
Working capital
Total long-term assets
Senior debt
Debt service coverage ratio (DSCR)
Years ended December 31
2015
2014
2016
1,327.2
137.7
69.3
1,534.2
1,335.3
4.8
5.5
1,345.6
1,325.0
1,325.0
519.8
198.5
70.7
52.3
198.2
329.7
175.0
252.1
5.5
514.9
205.5
117.2
66.5
3.2
128.8
310.9
137.3
253.7
7.6
533.7
225.2
117.0
73.3
118.2
309.4
143.2
238.3
9.6
43.3
1,108.0
866.6
15.8
1,173.8
948.5
(14.2)
1,278.4
1,037.0
2.3
2.1
2.0
(1) mmcf/d - Million cubic feet per day
(2) Seasonal firm, short-term firm and interruptible transportation service commenced on December 1, 2015. In December 2015 average daily seasonal and short-term firm
was 57.6 mmcf/d and average daily interruptible was 64.8 mmcf/d.
(3) Refer to “Non-GAAP Financial Measures”.
All financial information in this Management’s Discussion and Analysis (MD&A) has been prepared in accordance with
United States Generally Accepted Accounting Principles (U.S. GAAP). This MD&A reviews the significant events and
transactions that impacted our performance during the three and twelve months ended December 31, 2016. The following
MD&A is as of February 2, 2017 and should be read in conjunction with our audited consolidated financial statements for
the year ended December 31, 2016 and our 2015 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 Pipeline
Limited Partnership and Alliance Pipeline L.P. are referred to as the System. The cost‐of‐service model refers to the
originally contracted services, that Alliance Canada provided to customers, that concluded on November 30, 2015. The
Services Offering refers to the multi‐service, at risk transportation service model that was approved by National Energy
Board (NEB) on July 9, 2015 for service to commence December 1, 2015.
Page | 3 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016 Health and Safety Stewardship
At Alliance Canada, safety and environmental
stewardship are our top core values. We consider both in
our daily decisions and actions with the goal of being
incident free. That means protecting the environment
around us and keeping our neighbors, employees and
contractors safe. We comply with or exceed all applicable
health, safety and environmental laws and regulations in
all material respects.
Natural gas pipelines in Canada are required to meet
construction, operating and maintenance standards
established by the NEB, other federal regulators and the
Canadian Standards Association. Alliance Canada is
subject to the NEB’s Onshore Pipeline Regulations for
designing, constructing, operating and abandoning
pipelines. Operationally, we comply in all material
respects with the NEB Act, the Onshore Pipeline
Regulations and all applicable safety regulations,
standards and codes.
We conduct patrols of rights of way and required
inspections and audits of pipeline condition through
investigative excavations and assessments of the levels
of protection related to our cathodic protection system,
relief valves and mainline valves.
Our maintenance program includes monthly, quarterly,
semi-annual and annual inspections of all compressor
station and meter station facilities. Maintenance
expenditures vary from year to year. We are now in our
second decade of operations and as the System matures
and technology changes, we anticipate increased
maintenance requirements for some facilities and
optimization for other facilities that have undergone
improvements or upgrades.
As part of our maintenance inspection program, routine
internal safety and security audits are performed at
compressor station facilities with corrective actions as
required. We have developed a structured Health and
Safety Management System based on Occupational
Health and Safety Management Guidelines. This system
is part of Alliance’s Integrated Management System that
has been developed for integration of key operational
programs to manage hazards and risks associated with
operation of the System.
We allow inspections and audits when agencies that
regulate our industry request them, and follow defined
practices to meet regulatory requirements during the
construction, operation and maintenance of our facilities.
In addition to complying with general operating and
maintenance requirements, we have rigorous integrity
management programs that regularly assess the
condition of the System. Our robust pipeline integrity
lifecycle efforts have resulted in three cycles of inline
inspections completed in 16 years of operations.
Page | 4 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016 Environmental Stewardship
Even with the design features of the System making it
more efficient than older, conventional natural gas
pipelines, Greenhouse Gas (GHG) emissions are created
during the combustion of natural gas in turbines that
drive compressors to move natural gas through the
System.
Although GHG emissions have been reduced by using
high efficiency gas turbines, the emissions intensity from
the Alliance Canada pipeline still exceeds the net
emissions intensity limit calculated under Alberta's
Specified Gas Emitters Regulation (SGER). Under the
SGER, facilities that emit more than 100,000 tonnes of
CO2 annually, which includes the Alliance Canada
pipeline, are required to reduce their emissions intensity
commencing in 2009 by 12% of their baseline emissions.
Given that the Alliance Canada portion of the System is a
relatively recently constructed facility, further emission
reductions at the source are difficult and Alliance
Canada's remaining compliance options to meet its
required emission reduction target are to purchase
credits from the Alberta Climate Change Fund for $20.00
per credit in 2016 (1 credit = 1 tonne of CO2 emission
reductions) or to purchase offsets from qualified projects.
The Alberta Government announced changes to the
SGER program in June 2015. The reduction target
remained at 12% in 2015, but increased to 15% in 2016
and will increase to 20% in 2017. The cost of credits
remained at $15 per tonne for 2015, increased to $20 per
tonne in 2016 and will be $30 per tonne in 2017.
Beginning January 1, 2017, the new carbon levy will
apply to all fossil fuels at a rate of $20 per tonne of CO2
emissions and increasing to $30 per tonne starting
January 1, 2018. For the 2017 year, Bill 20 allows carbon
levy exemption for facilities subject to SGER. All of
Alliance Canada’s facilities in Alberta are eligible for the
SGER exemption.
British Columbia implemented the Carbon Tax Act in
2008, which taxes the consumption of all fuel sources in
the province. Alliance Canada's British Columbia
operations are subject to this tax.
The cost associated with the credits purchased from the
Alberta Climate Change Fund and/or qualified projects,
and the British Columbia carbon tax are included in the
transportation tolls and recovered from shippers.
In October 2016, the Federal Government passed a
motion in the House of Commons to introduce a carbon
pricing mechanism in accordance with the Paris Climate
Agreement. The motion included a requirement for
minimum carbon pricing in all jurisdictions in Canada by
2018. The minimum price on carbon emissions was set
at $10 per tonne in 2018, rising by $10 a year for the next
four years, reaching $50 per tonne in 2022. Provinces
are free to implement their own carbon plan, however,
the provincial plans must meet the federal minimum price
or the federal government will impose a levy that makes
up the difference.
In November 2015, the Government of Alberta
announced Alberta's “Climate Leadership Plan”, a
framework which includes an economy-wide tax on
carbon emissions starting in 2017. Subsequently, in June
2016, the Government of Alberta passed Bill 20, the
Climate Leadership Implementation Act. The new
legislation implements key elements of the Climate
Leadership Plan, including enacting the Climate
Leadership Act, which establishes Alberta's carbon levy.
Page | 5 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016 Overview of Services Offering
Alliance Canada introduced a market based Services
Offering effective December 1, 2015, replacing the
original firm service contracts that had a primary term
ending on November 30, 2015. Our Services Offering
combines service flexibility and firm toll predictability,
together with enhanced natural gas transportation
services that create economic value for customers. We
offer firm and IT services to shippers.
Natural Gas Transmission Services
Effective December 1, 2015, Alliance Canada’s Services
Offering includes the following key elements:
 Firm Receipt Service includes two zones with fixed
volumetric tolls, allowing shippers to move gas from
their contract receipt point(s) to the Alliance Trading
Pool (ATP). Shippers have the option to lock in their
receipt tolls for three to ten year terms. Firm receipt
shippers will also have access to a Priority
Interruptible Transportation Service (PITS) that can
provide additional transportation access as
production volumes grow. PITS is available to Firm
Receipt Service shippers with terms of three years or
more and allows them to flow up to 25% more
volume at their contracted receipt points. The two
receipt zones are:
o
Zone 1 includes all receipt points
downstream
of
the
Blueberry
Hill
Compressor Station near Gordondale,
Alberta.
o
Zone 2 includes the Blueberry Hill
Compressor Station and all receipts points
upstream of that station.

Firm Delivery Service allows shippers to deliver gas
from the ATP to the Canada – U.S. border. Fixed
tolls are offered on one to ten year terms.

Firm Full Path Service is a volumetrically tolled
service from Canadian receipt points in both Zone 1
and Zone 2 to the Canada – U.S. border, with fixed
toll terms between three and ten years. This service
requires a corresponding firm transportation service
contract with Alliance U.S.

ATP – a new Canadian trading pool allowing receipt
and delivery shippers to trade gas. The ATP is a
notional point connecting the receipt zones to the
delivery zone. The introduction of the ATP facilitates
the segmentation of services on the pipeline into
receipt and delivery services, providing a platform for
receipt and delivery shippers to transfer title and
allowing shippers to access Term Park and Loan
services.
The Services Offering also includes biddable tolls for
seasonal, short-term firm and IT services, rich gas
services, and the ability to stage contract commitments.
Page | 6 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016 To further establish Alliance Canada as the rich gas
transporter of choice, we received NEB approval to
change the Hydrocarbon Dewpoint (HCDP) gas quality
tariff specification from -10 degrees Celsius to -5 degrees
Celsius, effective December 1, 2015.
Similarly, effective December 1, 2015, Alliance U.S.
received approval from the FERC in 2015 to change the
HCDP gas quality tariff specification from 14 degrees
Fahrenheit to 23 degrees Fahrenheit.
By delivering NGLs within the natural gas stream,
Alliance Canada producers may gain a competitive
advantage by delivering value added products to
alternative markets for NGLs while only paying a
transportation charge based on volume.
This competitive advantage provided by the System has
resulted in increasing levels of NGLs transported by
Alliance Canada, a 58% increase since 2011.
The HCDP specification change will enhance shipper
access to rich gas transportation and facilitate an
increase in the NGLs content of the gas Alliance Canada
transports. In addition to this HCDP change, we offer
services that can further enable shippers to optimize the
heat content of the natural gas delivered to us.
Curtailment mechanisms are included in the tariffs to
ensure that pipeline operations and safety are not
compromised.
Competitiveness
Alliance Canada's Services Offering is uniquely designed to
enable rich gas producers to maximize the value of their
product. Alliance Canada has the ability to transport a
significant volume of NGLs (such as ethane, propane,
butane and condensates) within the natural gas stream.
This provides significant competitive advantages which can
include:
•
Saving producers processing and infrastructure
costs, and providing an opportunity to reduce the
time to market for their rich gas production;
•
Providing access to the Aux Sable NGLs extraction
facility allowing for considerable economies of scale;
and
•
Potentially providing a higher net back for rich natural
gas.
Page | 7 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016 Operational Performance
Pipeline Activities
The total throughput of all firm (including short-term and
seasonal) transportation contracted to the Canadian
border for 2016 averaged 1.5 bcf/d. In addition, Alliance
Canada sells IT service, which averaged 0.1 bcf/day in
2016.
The Saskatchewan Ministry of Highways and
Infrastructure is constructing a major highway bypass
project (Regina Bypass Project) near Regina,
Saskatchewan. To accommodate the development of this
project, Alliance Canada installed a new section of pipe
at each of two locations where the new highway crossed
our mainline. Alliance Canada has made arrangements
to be reimbursed for project costs and foregone revenue
from this planned outage.
The System was shut down for a period of approximately
seven days in October 2016 to facilitate the re-routing
and replacement of our existing pipe and installation of a
new block valve near Regina, Saskatchewan.
During the shutdown, Alliance Canada also carried out a
variety of maintenance and other activities along the
pipeline to make the most efficient use of the outage.
This is expected to minimize the need for future outages
required to maintain and enhance system integrity.
These activities included installing a NGLs scrubber at
our Blueberry compressor station.
Consistent with industry practice, other connected
facilities undertook maintenance activities during this
outage and as a result the outage required an extra day
due to a delay in maintenance activities at the Aux Sable
NGLs extraction facility in Illinois, U.S.
Page | 8 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
2016 Operating Income Highlights
For the twelve months ended December 31, 2016 operating income increased by $58.4 million to $250.5 million,
compared to $192.1 million for the same period in 2015.
TRANSPORTATION VOLUMES
For the first full year of operation under the Services
Offering, transportation volumes were strong throughout
the year. The 2016 average daily firm contracted
capacity, including short-term and seasonal, was 1,464.9
mmcf/d compared to the previous year’s firm contracted
amount of 1,340.1 mmcf/d. For the first 11 months of
2015, the contracted firm volumes were based on a costof-service model that limited firm transportation capacity
to 1,325.0 mmcf/d, with transportation above this level
categorized as Authorized Overrun Service (AOS). AOS
was available capacity offered to shippers at no extra
cost beyond fuel gas.
Total average daily contracted volumes for the year
ended 2016, for both firm and IT, amounted to 1,534.2
mmcf/d an increase of 188.6 mmcf/d as compared to the
prior year’s amount of 1,345.6 mmcf/d (excluding AOS).
This was due to the strong demand for the Services
Offering, which resulted in a high utilization of pipeline
capacity.
Under the new service model, there was strong initial
demand for more firm capacity, in particular firm
seasonal service. Increased shipper demand during 2016
resulted in Alliance Canada offering additional short-term
firm services as well as still allowing shippers to take
advantage of IT availability throughout the year.
Page | 9 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
Excluding the transportation fuel revenue, transportation
revenue decreased by $39.8 million for the year ended
December 31, 2016. This reduction is a result of lower
firm transportation toll receipts based on a lower cost
structure compared to the same period in 2015. This was
partially offset by an increase in contracted transportation
volumes.
Canadian Contracted Transportation
Volumes to the U.S. Border
2015
2014
Years Ended December 31 2016
Average daily long-term firm
(mmcf/d)
1,327.2 1,335.3 1,325.0
Average daily seasonal/
short-term firm (mmcf/d)
4.8
137.7
Average daily interruptible
(mmcf/d)
5.5
69.3
Total average daily
contracted volume
(mmcf/d)
1,534.2 1,345.6 1,325.0
Seasonal and short-term firm, and IT revenues were
$73.3 million for the year ended December 31, 2016.
Seasonal, short-term firm and IT services were
introduced on December 1, 2015. Ancillary services
revenue of $9.7 million includes rich gas service fees,
park and loan services and other related revenue.
TRANSPORTATION REVENUE
For the year ended December 31, 2016, transportation
revenue decreased $2.8 million to $460.8 million
compared to $463.6 million in the same period in 2015.
Years Ended December 31
Revenue
Long-term firm transportation
revenue
Seasonal/short-term firm
transportation services
IT services
Ancillary services
Transportation revenue
Service revenue from
related parties
Other revenue
Other related party revenue
Total revenue
2016
2015
2014
377.8
459.5
479.9
46.8
26.5
9.7
2.2
1.9
-
460.8
463.6
479.9
47.2
8.6
3.1
49.8
1.5
-
51.5
2.2
-
519.7
514.9
533.7
-
Starting in 2016, transportation revenue includes
recognition of revenue for the fuel gas that is consumed
in the transportation of natural gas. For the year ended
December 31, 2016, transportation fuel revenue was
$37.0 million, with an equal amount recorded as cost of
fuel gas consumed in operating expenses.
Page | 10 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
EXPENSES
For the year ended December 31, 2016, total expenses
decreased $67.7 million to $321.6 million compared to
$389.3 million for the same period in 2015.
Years Ended December 31
Operating expenses
Operations and
maintenance
General and administration
Property taxes
2016
2015
2014
General and Administration Expense
For the year ended December 31, 2016, general and
administrative expenses decreased $17.8 million
compared to 2015. The decrease is a result of lower
contractor, consulting and salary expense due to cost
reduction efforts in 2016.
Property Tax Expense
For the year ended December 31, 2016, property tax
expense decreased $1.0 million compared to 2015 due
to a reduced assessment value in Alberta.
93.1
78.9
23.5
84.4
96.7
24.5
98.1
103.0
24.1
Administrative service
agreement fee
3.0
-
-
Operating expenses
198.5
205.5
225.2
70.7
117.2
117.0
52.3
66.5
73.3
321.6
389.3
415.5
Depreciation and
amortization
Net interest expense and
other income
Total expenses
Administrative Service Agreement Fee
For the year ended December 31, 2016, the
administrative service agreement fee was $3.0 million.
This fee is a result of the Executive, Managerial, and
Administrative service agreement (EMA) with Alliance
U.S., effective January 1, 2016.
Depreciation Expense
For the year ended December 31, 2016, depreciation
and amortization expense decreased $46.5 million
compared to 2015.
For the year ended December 31, 2016, operating
expenses decreased $7.0 million compared to 2015. The
overall decrease was primarily a result of the reductions
in operations and maintenance, and general and
administrative expenses, partially offset by the cost of
fuel consumed in the transportation of natural gas in
operations and maintenance expenses.
The reduction is a result of depreciation rates being
lowered from 4.0% to a composite rate of 2.4% effective
January 1, 2016. The change in rates is the result of a
depreciation study that reviewed the service life
estimates of the pipeline in service assets.
Operations and Maintenance Expense
For the year ended December 31, 2016, operations and
maintenance increased $8.7 million as compared to the
same period in 2015.
Net Interest Expense and Other Income
For the year ended December 31, 2016, interest expense
decreased $6.9 million compared to 2015. The reduction
is due to declining long‐term debt balances as a result of
scheduled principal payments on the senior notes.
Starting in 2016, the operations and maintenance
expense includes the cost of fuel consumed in the
transportation of natural gas. For the year ended
December 31, 2016, the cost of fuel consumed in the
transportation of natural gas totaled $37.0 million, with an
equal amount recorded as transportation fuel revenue.
For the year ended December 31, 2016, interest income
and other increased $7.3 million compared to 2015. The
increase includes reimbursements of $8.0 million for
foregone revenues as a result of the Regina Bypass
Project.
Excluding the costs of fuel consumed, total operations
and maintenance expenses decreased by $28.3 million
for the year ended December 31, 2016 compared to
2015. This is primarily a result of reductions in salary
expenses, consulting and contractor fees, repair and
maintenance expenses, and general operating expenses.
Page | 11 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
Results of Operations for the Three Months ended December 31, 2016
2016
115.6
132.7
58.8
17.9
7.0
48.9
80.3
58.0
30.1
3.1
Transportation revenue
Total revenues
Operating expenses (excluding depreciation)
Depreciation expense
Net interest expense and other income
Net income
EBITDA(1)
Partner distributions paid
Cash provided by operating activities
Capital additions
2015
114.9
128.4
50.7
29.8
15.3
32.6
78.2
33.8
48.8
0.5
Change ($)
0.7
4.3
8.1
(11.9)
(8.3)
16.3
2.1
24.2
(18.7)
2.6
Change (%)
0.6
3.3
16.0
(39.8)
(54.2)
49.9
2.6
71.6
(38.3)
520.0
(1) Refer to “Non-GAAP Financial Measures”.
TRANSPORTATION REVENUE
Transportation revenue increased $0.7 million to $115.6
million for the three months ended December 31, 2016,
compared to $114.9 million for the three months ended
December 31, 2015.
OPERATING EXPENSES
Total operating expenses increased $8.1 million to $58.8
million for the three months ended December 31, 2016,
compared to $50.7 million for the three months ended
December 31, 2015.
Starting in 2016, transportation revenue includes
transportation fuel revenue related to the fuel gas that is
consumed in the transportation of natural gas. For the
three months ended December 31, 2016, this
transportation fuel revenue was $13.0 million.
In the fourth quarter of 2016, operating expenses include
$13.0 million for the cost of fuel consumed in the
transportation of natural gas.
Excluding the transportation fuel revenue, total
transportation revenue decreased by $12.3 million for the
three months ended December 31, 2016 compared to
the same period in 2015.
Excluding the costs of fuel consumed, operating
expenses decreased by $4.9 million for the three months
ended December 31, 2016 compared to the same period
in 2015. This is primarily as a result of reductions in
salary expenses and general operating expenses due to
the lower cost structure of the Services Offering.
The reduction in transportation revenue is due to
commencement of the Services Offering that became
effective December 1, 2015. While the Services Offering
had strong shipper interest and was fully subscribed, the
revenue generated was lower compared to the cost-ofservice tolls that expired on November 30, 2015 and
were based on different tolling principles.
DEPRECIATION EXPENSE
Depreciation expense decreased $11.9 million to $17.9
million for the three months ended December 31, 2016,
compared to $29.8 million for the same three months
ended December 31, 2015. The reduction is a result of
depreciation rates being lowered from 4.0% to a
composite rate of 2.4% effective January 1, 2016.
TOTAL REVENUES
Total revenues increased $4.3 million to $132.7 million
for the three months ended December 31, 2016,
compared to $128.4 million for the three months ended
December 31, 2015.
Total revenues increased due to $4.2 million of
operational linepack activities.
Page | 12 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
Cash available for distribution increased from the prior
year due to Alliance Canada’s transition from a cost-ofservice toll setting model to a new suite of transportation
services and contract arrangements that were well
received by Alliance Canada’s shippers. The new
services have contributed to higher cash balances as a
result of the strong utilization of available transportation
capacity along with a reduction in cash requirements
associated with Alliance Canada’s debt covenant
obligations.
Reductions
in
operating
expenses
throughout 2016 compared to 2015 also contributed to
the increase in cash available for distribution.
NET INTEREST EXPENSE AND OTHER INCOME
Interest expense decreased $1.5 million to $14.5 million
for three months ended December 31, 2016, compared
to $16.0 million for the three months ended December
31, 2015. The interest expense is lower due to declining
long-term debt balances as a result of scheduled
principal payments on the senior notes.
Interest income and other increased $6.8 million for the
three months ended December 31, 2016 compared to
2015. The increase includes reimbursements of $8.0
million for foregone revenues as a result of the Regina
Bypass Project.
CASH PROVIDED BY OPERATING ACTIVITIES
Cash provided by operating activities was $30.1 million
for the three months ended December 31, 2016, a
decrease of $18.7 million compared to $48.8 million for
the three months ended December 31, 2015.
NET INCOME
Net income is $48.9 million for the three months ended
December 31, 2016, an increase of $16.3 million when
compared to the same three months ended December
31, 2015. The increase in net income can largely be
attributed to lower depreciation due to a change in rates.
The decrease in cash provided by operating activities for
the three months ended December 31, 2016 can be
attributed to lower transportation tolls and higher
accounts receivable for expense reimbursements. This
was partially offset by lower expenses and higher
accounts payable at year end due to increased
maintenance activity compared to the three months
ended December 31, 2015.
EBITDA
EBITDA increased by $2.1 million to $80.3 million for the
three months ended December 31, 2016, compared to
$78.2 million for the same three months ended
December 31, 2015
The increase in EBITDA is due to higher total revenues
and reimbursement for foregone revenues for the Regina
Bypass Project, included in interest and other income,
partially offset by an increase in operating expenses.
CAPITAL ADDITIONS
Capital additions increased to $3.1 million for the three
months ended December 31, 2016, compared to the $0.5
million for the three months ended December 31, 2015.
While capital activities increased in 2016 compared to
2015, the Regina Bypass Project costs incurred were
reimbursed.
PARTNER DISTRIBUTIONS PAID
Distributions paid to Partners are $58.0 million for the
three months ended December 31, 2016, compared to
$33.8 million for the same quarter in 2015.
Page | 13 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
Results of Operations for Twelve Months ended December 31, 2016
2016
460.8
519.8
198.5
70.7
52.3
198.2
329.7
175.0
252.1
5.5
Transportation revenue
Total revenues
Operating expenses (excluding depreciation)
Depreciation expense
Net interest expense and other income
Extraordinary gain
Net income
EBITDA(1)
Partner distributions paid
Cash provided by operating activities
Capital additions
2015
463.6
514.9
205.5
117.2
66.5
3.2
128.8
310.9
137.3
253.7
7.6
Change ($)
(2.8)
4.9
(7.0)
(46.5)
(14.2)
(3.2)
69.4
18.8
37.7
(1.6)
(2.1)
Change (%)
(0.6)
0.9
(3.4)
(39.7)
(21.4)
(100.0)
53.9
6.0
27.5
(0.6)
(27.6)
(1) Refer to “Non-GAAP Financial Measures”.
TRANSPORTATION REVENUE
Transportation revenue decreased $2.8 million to $460.8
million for the year ended December 31, 2016, compared
to $463.6 million in 2015.
OPERATING EXPENSES
Operating expenses decreased $7.0 million to $198.5
million for the year ended December 31, 2016, compared
to $205.5 million in 2015.
Starting in 2016, transportation revenue includes
transportation fuel revenue related to the fuel gas that is
consumed in the transportation of natural gas. For the
year ended December 31, 2016 this transportation fuel
revenue was $37.0 million, with an equal amount
recorded as cost of fuel gas consumed.
In 2016, operating expenses include $37.0 million for the
cost of fuel consumed in the transportation of natural
gas.
Excluding the costs of fuel consumed, operating
expenses decreased by $44.0 million for the year ended
December 31, 2016 compared to 2015. This is primarily
as a result of decreased salary expenses, a reduction in
consulting and contractor fees, lower repairs and
maintenance expense and a reduction in general
operating expenses compared to the same period in
2015. Operating expense decreased due to lower cost
structure of the Services Offering when compared to the
2015 cost-of-service model.
Excluding the transportation fuel revenue, total
transportation revenue decreased by $39.8 million for the
year ended December 31, 2016.
The reduction in transportation revenue is due to
commencement of the Services Offering that became
effective December 1, 2015. While the Services Offering
had strong shipper interest and was fully subscribed, the
revenue generated was lower compared to the cost-ofservice tolls that expired on November 30, 2015 and
were based on different tolling principles.
DEPRECIATION EXPENSE
Depreciation expense decreased $46.5 million to $70.7
million for the year ended December 31, 2016, compared
to $117.2 million in 2015. The reduction is a result of
depreciation rates being lowered from 4.0% to a
composite rate of 2.4% effective January 1, 2016. The
change in rates is the result of a depreciation study that
reviewed the service life estimates of the pipeline in
service assets.
TOTAL REVENUES
Total revenues increased $4.9 million to $519.8 million
for the year ended December 31, 2016, compared to
$514.9 million in 2015.
Total revenues increased due to $10.7 million of
operational linepack activities partially offset by
decreases in transportation revenue of $2.8 million and
service revenue of $2.6 million.
Page | 14 Alliance Pipeline Limited Partnership
Management’s Discussion and Analysis
For the year ended December 31, 2016
NET INTEREST EXPENSE AND OTHER INCOME
For the year ended December 31, 2016, interest expense
decreased $6.9 million compared to 2015. The reduction
is due to declining long‐term debt balances as a result of
scheduled principal payments on the senior notes.
CASH PROVIDED BY OPERATING ACTIVITIES
Cash provided by operating activities is $252.1 million for
the year ended December 31, 2016, compared to $253.7
million in 2015.
The decrease in cash provided by operating activities
can be attributed to lower transportation tolls and higher
accounts receivable which resulted in lower cash
receipts. This was partially offset by lower operating
expenses.
For the year ended December 31, 2016, interest income
and other increased $7.3 million compared to 2015. The
increase includes reimbursements of $8.0 million for
foregone revenues as a result of the Regina Bypass
Project.
CAPITAL ADDITIONS
Capital additions are $5.5 million for the year ended
December 31, 2016, which is a net decrease of $2.1
million compared to capital additions of $7.6 million in
2015. While capital activities increased in 2016
compared to 2015, the Regina Bypass Project costs
incurred were reimbursed.
NET INCOME
Net income increased $69.4 million to $198.2 million for
the year ended December 31, 2016, compared to $128.8
million in 2015. The overall increase is due to lower
depreciation expense as a result of the rate decrease,
lower operating expenses and lower interest expense as
a result of reduced debt outstanding. This was offset by a
decrease in toll receipts for the year ended December
31, 2016 compared to the 2015 cost-of-service tolls that
expired on November 30, 2015.
EBITDA
EBITDA increased $18.8 million to $329.7 million for the
year ended December 31, 2016 compared to $310.9
million in 2015.
The increase in EBITDA is primarily due to lower
operating expenses, higher total revenues and other
income.
PARTNER DISTRIBUTIONS PAID
Distributions paid to Partners increased by $37.7 million
to $175.0 million for the year ended December 31, 2016,
compared to $137.3 million in 2015.
Cash available for distribution increased from the prior
year due to Alliance Canada’s transition from a cost-ofservice toll setting model to a new suite of transportation
services and contract arrangements that were well
received by Alliance Canada’s shippers. The Services
Offering has contributed to higher cash balances as a
result of the strong utilization of available transportation
capacity along with a reduction in cash requirements
associated with Alliance Canada’s debt covenant
obligations.
Reductions
in
operating
expenses
throughout 2016 compared to 2015 also contributed to
the increase in cash available for distributions.
Page | 15 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
Selected Quarterly Financial Information (1)
Total revenues
Net income
Net income per unit (2)
EBITDA (3)
Partner distributions paid
Distributions paid per unit (2)
(1)
(2)
(3)
Q4
2016
132.7
48.9
76.9
80.3
58.0
91.2
Q3
2016
128.4
48.3
75.9
81.2
49.0
77.0
Q2
2016
124.8
46.7
73.4
80.3
34.0
53.4
Q1
2016
133.9
54.3
85.4
87.9
34.0
53.4
Q4
2015
126.9
32.6
51.2
78.2
33.8
53.1
Q3
2015
122.8
29.8
46.8
75.6
33.9
53.3
Q2
2015
129.2
34.9
54.9
79.3
33.9
53.3
Q1
2015
134.0
31.5
49.5
77.8
35.7
56.1
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.
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.
Refer to “Non-GAAP Financial Measures”.
Significant items that impacted the quarterly financial results include the following:
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 is
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.
Q4 2016
Partner distributions 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.
Partner distributions increased compared to the second
quarter of 2016 due to the increase in cash available for
distribution.
Q3 2015
The third quarter 2015 transportation revenue reflects the
impact of Demand Charge Credits resulting from the
transportation service outage that occurred in August
2015.
Q2 2016
The second quarter increase 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.
Q2 2015
The second quarter 2015 net income reflects the
discontinuation of rate regulated accounting for a portion
of operations. We recognized an extraordinary gain of
$3.2 million mainly due to the de-recognition of regulatory
assets and liabilities.
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 is a result of the
lower fixed-cost structure and higher revenues in the first
quarter of 2016.
Q1 2015
The first quarter 2015 revenue reflects higher negotiated
depreciation rates in the transportation service contracts
for 2015 as compared to the negotiated depreciation
rates in effect in 2014.
Page | 16 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
Pipeline Ltd. (the General Partner) under the terms of the
Limited Partnership Agreement. Alliance Canada
reimburses the General Partner for service costs incurred
under the terms of the Limited Partnership Agreement on
a monthly basis. The General Partner does not record
any profit or margin for the services charged to Alliance
Canada.
Related Party Transactions
Alliance Canada provides transportation services to a
number of shippers that are related entities of the
Partners of Alliance Canada. The terms of these
contracts are the same as those agreed to with
independent third parties. For the year ended December
31, 2016, transportation revenue from related party
services amounted to $118.1 million (December 31, 2015
– $52.5 million).
All amounts exchanged under the Limited Partnership
Agreement are presented as general and administrative
and operating and maintenance costs.
The EMA allows Alliance Canada to provide services to
and receive services from Alliance U.S. in exchange for
reimbursement of incurred costs, plus an applicable
mark-up, and are invoiced on a monthly basis. All
amounts exchanged under this agreement are presented
as service revenue from related parties or general and
administrative expenses.
From time to time, Alliance Canada sells operational
linepack to Alliance U.S. to supplement operational
linepack or as fuel gas to support the efficient operation
of the pipeline.
The terms of these purchase transactions are the same
as those that would be associated with purchases made
from independent third parties.
Alliance
Canada
also
provides
management,
administrative, operational and workforce related
services to entities related by virtue of a common
ownership group. Amounts exchanged under these
services are presented as service revenue from related
parties.
Amounts Due From Related Parties (excluding
transportation revenue)
Years ended December 31
2016
2015
16.5
10.3
NRGreen Power Limited Partnership
0.8
0.7
Aux Sable entities
-
0.1
Alliance Pipeline entities
Occasionally, Alliance Canada leases equipment to a
related entity. As of December 31, 2016, no leases exist.
All amounts earned as a result of these transactions are
presented as other income. The total income earned for
the year ended December 31, 2016 is $nil (December
31, 2015 – $0.5 million).
Alliance Canada does not directly employ any of the
individuals responsible for managing or operating the
business, nor does Alliance Canada have any directors.
Alliance Canada obtains management, administrative,
operational and workforce related services from Alliance
Page | 17 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
Undrawn bank credit facilities are $122.0 million at
December 31, 2016. The total of cash, trust deposits and
the bank credit facility is, in management’s view,
adequate to meet on-going liquidity and capital resource
requirements.
Liquidity and Capital Resources
LIQUIDITY
Liquidity risk is managed by ensuring 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 funds are transportation toll receipts,
undrawn credit facilities and funding from the Partners.
Working capital deficiencies may occur from time to time
as a result of seasonal activity fluctuations, but any such
deficiencies have no material effect on our liquidity
because of regular monthly cash flow due to a high level
of firm contracts and available committed credit facilities.
We have no planned capital expenditures for 2017.
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, which include a DSCR.
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 bank credit facility. The bank credit facility
which was amended in the fourth quarter of 2016 to
mature June 29, 2019.
Subject to lender approval, a distribution of $40.0 million
will be paid to our Partners on February 2, 2017. We
intend to continue making Partner distributions on a
quarterly basis.
The debt service reserve is in addition to funds
transferred monthly to the debt service account held for
the semi-annual interest and principal payments on the
senior notes outstanding and the monthly debt service
amounts due on the credit facility.
Funds available under the revolving credit facility may
also be accessed from time to time should cash receipts
prove insufficient to fund the month’s operating and
investing activities. We may need to refinance our
indebtedness or may require additional financing
depending on future developments, enhancement
opportunities or acquisition plans.
As of December 31, 2016, we have $82.3 million in cash
and trust deposit accounts. Cash totaling $72.6 million is
held in trust accounts to meet certain covenants
contained in financing agreements. It also includes
restricted deposits provided by the shippers as well as
restricted deposits related to the Alliance Pipeline
Abandonment Trust (the Trust).
Page | 18 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
CAPITAL MANAGEMENT
PIPELINE ABANDONMENT COSTS
Alliance Canada’s objective in managing capital is to
optimize our capital structure so we can ensure a healthy
financial position to support our operations and growth
opportunities.
The NEB’s Land Matters Consultation Initiative is an
initiative that requires NEB regulated pipelines to set
aside funds to cover future pipeline abandonment costs.
The NEB provided several key guiding principles under
this initiative, including the position that abandonment
costs are legitimate costs of providing transportation
services and are recoverable, upon NEB approval, from
shippers.
Capital is managed by funding our rate base using 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. See NonGAAP Financial Measures section.
Alliance Canada collects abandonment funds through a
pipeline abandonment transportation surcharge as
defined in the Tariff. These funds are set aside in the
Trust until such time that the funds are required to settle
abandonment-related expenditures. The Trust is
consolidated and presented on the financial statements
as investments held in trust. As per the Trust agreement,
Alliance Canada is the primary beneficiary of the Trust.
The pipeline abandonment costs fall within the scope of
ASC 980 which results in the revenue being adjusted to
reflect differences between the period in which the
abandonment funding is collected through toll receipts
and the period the abandonment costs are incurred.
These differences are presented as a long-term
regulatory liability on the financial statements.
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 rate base by more than U.S.$10.0 million.
We are in compliance with all the terms and conditions of
the covenants associated with our senior debt for the
years ended December 31, 2015 and December 31,
2016 and expect to remain in compliance throughout
2017.
Page | 19 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
Emerging technologies could enable gas plays that are
currently not commercially viable or inaccessible to be
competitive in the marketplace that the System serves.
Risks and Uncertainties
COMPETITION
The System faces competition for natural gas pipeline
transportation services to the Chicago area from both
existing and proposed pipeline projects. Existing
pipelines, other than Alliance Canada, provide natural
gas transportation services from the WCSB and the
Bakken to natural gas markets in the Midwestern United
States. In addition, there could be proposals to upgrade
existing pipelines or to build new pipelines serving such
areas and markets. Any new or upgraded pipelines
could:

allow shippers to have greater access to natural gas
markets in addition to the markets served by the
System and the pipelines to which it is connected;

offer natural gas transportation services that are
more desirable to shippers than those provided by
the System because of location, facilities or other
factors; and

charge tolls or provide transportation services to
locations that result in greater net profit for shippers.
Alliance Canada’s pipeline system and services are
uniquely designed to enable rich gas producers to
maximize the value of their product. Alliance Canada has
the unique ability to transport NGLs (like ethane,
propane, butane and condensate) within the natural gas
stream. This provides significant competitive advantages
such as:

the ability to transport NGLs potentially saving
producers processing infrastructure and costs and
time to market;

the ability to access U.S. NGLs markets;

the opportunity to access the Aux Sable NGLs
extraction facility at the terminus of pipeline which
can provide considerable economies of scale; and

the capability to provide a higher netback for rich
natural gas.
DEMAND FOR TRANSPORTATION SERVICES
Beginning on December 1, 2015, Alliance Canada shifted
from a cost-of-service to a market based model as the
Services Offering became effective.
There is also competition from other sources of natural
gas such as the Marcellus and Utica shale plays within
the Appalachian Basin. Situated in an area ranging from
parts of Quebec and upstate New York to Virginia in the
south and as far west as Ohio. The Marcellus and Utica
shale plays are in relatively close proximity to the
Chicago Hub to which the System currently provides the
majority of its transportation service.
Under the Services Offering, Alliance Canada assumes
transportation revenue and cost risk for the majority of its
operations. There can be no assurance that all operating
costs incurred will be recoverable through the
transportation tolls.
Excess natural gas pipeline capacity out of the WCSB or
a sustained period of low natural gas and NGLs prices
could result in a reduction or deferral of investment in
upstream gas development could negatively impact the
demand for our transportation services going forward.
The on-going development of the shale gas resource
within the Appalachian Basin coupled with new
infrastructure provides an alternative source of gas to the
U.S. Midwest, and Northeast U.S. and Eastern Canada.
Growing demand in the region will absorb some of the
incremental volumes but there will be displacement of
flows, particularly from the Gulf Coast, Rockies and
Midcontinent regions. Similarly, the growth in
Appalachian supplies has reduced the reliance of the
Northeastern region of the United States on natural gas
imports from Canada.
Despite the recent general slowdown in the oil and gas
sector, Alliance Canada has successfully re-contracted
its long-term firm receipt transportation capacity through
2018, and approximately 90% of long-term firm receipt
capacity in 2019 and 2020.
Page | 20 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
Through 2016, demand was in excess of available firm
receipt capacity, and Alliance Canada began to market
other available services to capture this demand for
transportation services.
Regulation of Alliance Canada’s business includes, but is
not limited to, the ability to determine tolls, terms and
conditions of service, pipeline construction and
maintenance, and expansion of current operating
facilities. The nature and degree of regulation and
legislation affecting energy companies in Canada has
changed significantly in past years and there is no
assurance that further changes will not occur.
DEPENDENCE ON RELATED PARTIES
There is a significant degree of dependency on Aux
Sable, a related party, to satisfy its requirements to
provide heat content management services to Alliance
U.S. Should Aux Sable fail to provide heat content
management services for any reason, the System and
our shippers may experience operational issues. In
certain circumstances, the failure to provide heat content
management services could result in an interruption or
curtailment of transportation service on the System. It is
not possible to predict the extent or duration of these
operational issues or their precise financial or operational
effect on us.
Alliance Canada is subject to the risk of regulators or
other government bodies revising or rejecting proposed
or existing arrangements. This can include permits and
regulatory approvals for new projects, offering of new
services, and the tariff structure of Alliance Canada. Any
revisions or rejections to existing or proposed
arrangements could have a significant and potentially
adverse effect on Alliance Canada’s earnings and
financial condition. As well, compliance with legislative
changes may have an impact on the costs of existing
operations or future projects.
There is no assurance that Aux Sable will remain
continuously operational or will continue business
operations indefinitely. Aux Sable’s business involves
extracting and fractionating NGLs.
We believe that regulatory risk is mitigated through the
expertise of Alliance Canada’s legal and regulatory
teams, and their review of existing and proposed tariffs
and tolls for compliance with regulatory guidelines and
requirements. Alliance Canada has established and
maintains many strong relationships with our shippers
which helps reduce regulatory risk.
The System operates as an integrated pipeline.
Therefore, any matters which limit or restrict the ability of
the Alliance U.S. pipeline to operate could affect the
ability of the Alliance Canada pipeline to operate.
Alliance Canada may have no control over matters which
may adversely affect Alliance U.S. and/or Alliance U.S.
pipeline.
OPERATING RISKS
Operation of the System involves many risks, several of
which may be beyond our control, including but not
limited to:

breakdown or failure of equipment, information
systems or processes;

performance of equipment at levels below those
originally intended;

catastrophic events such as natural disasters, fires,
explosions, pipeline failure, wars, acts of terrorism
and other similar events;

lack of spare parts;

operator error; and

disputes with interconnecting facilities and carriers.
REGULATORY RISK
Alliance Canada is a federally-regulated, inter-provincial
natural gas pipeline under the jurisdiction of the NEB.
Our natural gas transportation assets and operations are
also subject to federal, provincial and local regulations,
as applicable.
Page | 21 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
The occurrence or continuance of any of these events
could increase the cost of operating the System and/or
reduce its transportation capacity, thereby potentially
impacting cash flows and operating income.
Reductions in producers’ capital and operating budgets
and the impact of reduced revenues on corporate
liquidity positions has resulted in an increase in potential
credit risk to Alliance Canada.
We maintain safety policies, disaster recovery
procedures and insurance coverage in accordance with
prudent pipeline operating standards in case of an
incident. Inspection and monitoring methods are also
employed to manage pipeline, turbine and facility
integrity as well as to minimize system disruptions.
Alliance Canada actively monitors the financial condition
of its shippers and may require shippers to provide letters
of credit or other suitable security, unless the shipper has
satisfactory credit worthiness. 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.
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.
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.
The credit risk arising from cash deposits is minimal as
cash is held with major financial institutions. As at
December 31, 2016, Alliance Canada holds two types of
investments: MAV II notes and investments held in the
Trust. Aside from these we do not hold any other short or
long-term investments.
Should shippers be unable to fulfill their contractual
obligations and if suitable replacement shippers were not
available, we may not be able to fund our operating and
financing costs or make distributions to our Partners. We
limit, to an extent, our exposure to this credit risk by
requiring shippers to provide letters of credit or other
suitable security if shippers do not maintain specified
credit ratings or a suitable financial position.
The MAV II notes were paid out on January 23, 2017.
LIQUIDITY RISK
Alliance Canada manages liquidity risk by ensuring
access to sufficient funds to meet its obligations. We
forecast cash requirements to ensure funds are available
to fund liabilities as they become due. The primary
sources of liquidity are funds received from transportation
tolls, undrawn committed credit facilities and funding from
Partners.
The risk of non-performance of our shippers is mitigated
by our credit approval process and on-going monitoring
procedures.
At December 31, 2016, approximately 52.2% 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 obligations
under the transportation contracts.
We are highly dependent on our shippers for revenues
from their contracted transportation capacity on the
System. The failure of the shippers to fulfill their
contractual obligations under the transportation
agreements or the failure to replace such shippers on
equivalent terms and conditions could have a material
adverse effect on our cash flows and financial condition,
and could impair our ability to service debt obligations
and continue paying distributions to our Partners.
Over the past two years, energy prices have experienced
significant volatility resulting in continued uncertainty for
companies throughout the oil and gas industry.
Page | 22 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
We also hold in our debt service reserve account an
amount at least equal to six months of scheduled interest
and principal payments, which is funded by letters of
credit as part of the bank credit facility. The debt service
reserve is in addition to the funds that are transferred
monthly to the debt service account to be held for the
semi-annual interest and principal payments on the
senior notes outstanding and the monthly debt service
amounts due on the credit facilities. Funds available
under revolving credit facilities may also be accessed
from time to time should cash receipts prove insufficient
to fund the month’s operating and investing activities.
CYBER RISK
Alliance Canada is exposed to cyber risk as day to day
business operations are connected and conducted over
the internet. These risks include, but are not limited to:

damage to corporate assets;

degradation of internally delivered services;

theft of personal or corporate information; and

compromise of data integrity.
These risks can be realized from malware infections in
emails or websites as well as social engineering activities
like phishing and employee impersonation.
We may need to refinance our indebtedness under our
credit facility and senior unsecured notes outstanding at
maturity date and may require additional financing
depending on future developments, enhancement
opportunities or acquisition plans.
Alliance Canada uses safeguards to ensure our
information systems remain secure and reliable. We
maintain communication with the Canadian Cyber
Incident Response Centre which allows us to stay current
with any new cyber threats. This information sharing is
bidirectional (where appropriate), resulting in cyber
threats and incidents being reported to authorities around
the world.
The ability to refinance existing indebtedness and
arrange additional financing in the future will depend, in
part, upon prevailing market conditions at the time, as
well as our business performance. There can be no
assurance that debt or equity financing will be available
or sufficient to meet or satisfy our initiatives, objectives or
requirements. Having an investment grade credit rating
supports our ability to re-finance existing debt as it
matures and the ability to access cost competitive capital
for future growth. A ratings downgrade below investment
grade may have a materially adverse effect on the ability
to obtain financing on favourable terms and conditions.
Numerous cyber security technologies have been
implemented throughout Alliance Canada as part of an
in-depth defense strategy. These technologies allow us
to correlate and respond to threats if needed. We are
regularly evaluating our cyber security technologies and
either replacing them or augmenting them as needed.
Future cash distributions may be adversely affected if we
are unable to refinance our indebtedness or arrange
additional financing on terms and conditions at least as
favourable as the existing terms and conditions of such
indebtedness.
If we are unable to refinance our
indebtedness then, at maturity, we will need to use
available cash to repay the indebtedness. If access to
additional capital, through either debt or equity financing,
is unavailable then future opportunities may be foregone.
Page | 23 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
CLIMATE ACTIVISM
Recently there has been an increase in climate change
or environmental activism with energy companies as their
targets. While their efforts have been focused primarily
on oil pipelines, these groups generally condemn all
forms of hydrocarbon extraction and transportation.
The activities of these groups can pose serious risks
including, but not limited to:
 intimidation of, or potential injury to employees,
landowners and others;

damage to corporate assets or interruption of
pipeline operations; and

adverse publicity.
Alliance Canada maintains communications with local,
provincial, and federal law enforcement, other agencies
and the NEB. This allows us a proces for sharing
information, receiving reports of relevant incidents, as
well as providing reports of incidents to the authorities as
well as industry peers.
INTEREST RATE RISK
We are exposed to interest rate fluctuations on variable
rate debt. Amounts outstanding under the revolving credit
facilities are floating-rate based. From time to time we
may implement risk management policies which allow us
to minimize the exposure to interest rate volatility. The
exposure to rate volatility has been lessened through the
issuance of fixed rate senior notes. As at December 31,
2016, we have fixed interest rates on 99.8% of total longterm debt.
Page | 24 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
The service life estimates resulting from the study are
based on informed engineering judgement which
incorporated analyses of historical plant retirement data.
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. Critical accounting
estimates are discussed below.
Additionally, a review of Alliance Canada’s practice and
outlook as they relate to plant operation and retirement
has been utilized in the study. The rates and depreciation
amounts are based on the straight line remaining life
method of depreciation. The updated composite
depreciation rate for pipeline in service assets is
estimated at 2.4%, as compared to 4.0% as at December
31, 2015. This change was implemented effective
January 1, 2016.
Management will continue to review the useful lives of
PP&E periodically when the circumstances indicate a
possible change in assumptions. Changes in these
assumptions could result in adjustments to the useful life
of PP&E which could result in material changes to the
financial statements. Due to uncertainty associated with
the long-lived nature of the pipeline and related assets,
future results may be affected if management’s current
assessment differs from future assessments or actual
performance.
DEPRECIATION AND AMORTIZATION
Property, Plant and Equipment (PP&E) represents 84.0%
of the total assets recognized on the Consolidated
Balance Sheets. Depreciation is generally provided on a
straight-line basis over the estimated useful life of the
assets and commences when the asset is placed inservice.
ASSET RETIREMENT OBLIGATION
In estimating the useful lives of PP&E, management
takes into account the most reliable evidence available at
the time the estimate is made. Considerations which form
the basis of the assumptions for these estimated useful
lives include third party assessments, demand for
pipeline transportation service, supply of natural gas in
proximity to the pipeline, pipeline operating experience
and industry experience.
The fair value of the asset retirement obligation (ARO)
associated with the retirement of long-lived assets is
recognized in the period when it can be reasonably
determined. The fair value of the statutory, contractual or
legal obligation associated with the retirement and
reclamation of tangible long-lived assets is recognized
with a corresponding increase to the carrying amount of
the related assets. This corresponding increase to
capitalized costs is amortized to income on a basis
consistent with depreciation and amortization of the
underlying assets. Subsequent changes in the estimated
fair value of the asset retirement obligations are
capitalized and amortized over the remaining useful life
of the underlying asset.
On November 30, 2015, Alliance Canada’s original longterm transportation service agreements expired and
Alliance Canada commenced operations under the
Services Offering framework. Alliance Canada completed
an assessment of the estimates used to determine
depreciation of the pipeline in service assets recognized
on the Consolidated Balance Sheets. The assessment
was performed by an external expert.
Page | 25 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
A provision for ARO has not been recognized in our
financial statements as it is not possible to make a
reasonable estimate of fair value of the liability due to the
indeterminate timing and scope of the retirement of
pipeline in service assets.
FINANCIAL INSTRUMENTS
Financial assets and financial liabilities held-for-trading
are measured at fair value with changes in those fair
values recognized in net income if hedge accounting is
not elected.
Useful lives of pipeline systems are primarily derived
from available supply sources and ultimate consumption
of those resources by customers. There is insufficient
information available to reasonably determine the timing
and/or method of settlement to correctly determine the
fair value of the ARO.
Financial assets available-for-sale are measured at fair
value with changes in those fair values recognized in
other comprehensive income.
Financial assets held-to-maturity, loans and receivables
and other financial liabilities are measured at amortized
cost using the effective interest method of amortization.
The above variables are considered indeterminate
because there is no data or information that can be
derived from past experience or industry practice. Such
indeterminable variables preclude us from making a
reasonable estimate of the ARO. These costs will be
recorded when sufficient information exists to reasonably
estimate potential settlement dates and abandonment
methods.
The NEB’s Land Matters Consultation Initiative
addresses the need for a collection method for funding
pipeline abandonment costs. The NEB provided several
key guiding in principles under this initiative, including the
position that abandonment costs are a legitimate cost of
providing pipeline service and are recoverable, upon
NEB approval, from shippers.
Page | 26 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
Prior to November 30, 2015, the Alliance Canada
transportation contracts were designed to provide toll
revenues sufficient to recover all transportation costs
including on allowed return on equity. Effective July 1,
2015, the equity component of financing is no longer
capitalized as a part of PP&E and are expensed in the
period they are incurred.
New Accounting Policies
ACCOUNTING FOR RATE REGULATION
Alliance Canada’s pipeline operations are regulated by
the NEB under the National Energy Board Act. The NEB
has jurisdiction to regulate the tolls that a pipeline may
charge for the services it provides.
Interest on borrowed funds for the construction of an
asset is capitalized as part of the asset constructed and
is amortized over its useful life.
Prior to the NEB’s approval of the Services Offering,
Alliance Canada was operating under a cost-of-service
tolling environment. Recognition of certain revenues and
expenses was different from results expected under U.S.
GAAP
applicable
to
non-regulated
operations.
Regulatory assets represented the right to recover
specific previously incurred costs in future periods
through tolls.
Regulatory liabilities represented an
obligation to refund previously collected amounts in
future periods through tolls.
INVENTORY
Inventory primarily consists of material and supplies
required for repair and maintenance of the meter and
compressor station facilities, and natural gas inventory
held as operational linepack required to support efficient
pipeline operations. Both material and supplies inventory
and natural gas inventory are a carried at the lower of
weighted average cost or net realizable value. Materials
and supplies are periodically reviewed for physical
deterioration and obsolescence.
Under the Services Offering, Alliance Canada is at risk
for transportation revenues and costs for the majority of
its operations. Due to this change in the tariff provisions
and the at risk toll setting approach, a portion of Alliance
Canada’s operations no longer meets the criteria outlined
in ASC 980. As a result, application of ASC 980 was
discontinued effective June 30, 2015, except for a portion
of operations that are still in scope of accounting for
regulated operations.
Under the new at risk toll setting approach, for the
majority of Alliance Canada’s operations the differences
between tolls collected and current period expenses are
no longer recognized as a transportation revenue
adjustment. This provides financial results that fluctuate
in response to changes in the current period expenses
and tolls received.
As a result of the discontinuation of accounting for
regulated operations, we recognized an extraordinary
gain of $3.2 million in the second quarter of 2015, mainly
due to the de-recognition of regulatory assets and
liabilities.
Page | 27 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
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. Rate base is
derived from balance sheet assets by making regulatory
adjustments for the net investment balance in pipeline in
service assets, general and administrative assets,
deferred financing fees and working capital amounts,
including inventory.
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.
EBITDA is reconciled from the components of net income
as noted below. EBITDA is expressed as net income
before total net interest expense, income taxes,
depreciation and amortization; and also includes
additional adjustments for any extraordinary loss (gain).
These additional adjustments are made to exclude
various non-cash items, or items of an unusual nature
that are not reflective of ongoing operations. 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
based on data from its income statement.
The following non-GAAP financial measures are provided
to assist readers of the MD&A and 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.
NON-GAAP RECONCILIATIONS
NET INCOME TO EBITDA
Three Months
ended
December 31
2016
2015
48.9
32.6
14.4
15.8
(0.9)
(0.1)
17.9
29.9
80.3
78.2
Net income
Interest expense
Interest income
Depreciation expense
Extraordinary gain
EBITDA
Years ended December 31
2016
198.2
62.3
(1.5)
70.7
329.7
2015
128.8
69.2
(1.1)
117.2
(3.2)
310.9
2014
118.2
75.1
(0.9)
117.0
309.4
Page | 28 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
INTERNAL
CONTROL
REPORTING
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 (CEO)
and Senior Vice President and CFO (CFO), on a timely
basis so that appropriate decisions can be made
regarding public disclosure.
CONTROL
FINANCIAL
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.
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.
CHANGES IN INTERNAL
FINANCIAL REPORTING
OVER
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.
The design and effectiveness of internal controls over
financial reporting was assessed as at December 31,
2016 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.
OVER
Effective December 1, 2015, management successfully
implemented a gas management system – CommPass
and made changes to certain related processes required
to implement Alliance Canada’s new suite of service
offerings. As a result of the gas management system
implementation, certain processes supporting our internal
controls over financial reporting have changed in 2016.
Other than the implementation of this gas management
system, there have been no changes in our internal
control over financial reporting during the year that have
materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
Page | 29 Alliance Pipeline Limited Partnership
Managements’ Discussion and Analysis
For the year ended December 31, 2016
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 Alliance System’s ability to accommodate new receipt volumes with variant 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 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 February 2, 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 | 30