Financial Report - Veresen Inc.

Capital Funding and Liquidity
To fund our existing businesses and future growth, we rely on cash flows generated by our businesses and on the availability of debt
and equity from banks and the capital markets. Conditions within these markets can change dramatically, affecting both the availability
and cost of this capital. Higher capital costs directly affect our earnings and cash flows and, in turn, may affect total shareholder
returns. To reduce these risks, we prepare forecasts to confirm our capital requirements and adhere to a financing strategy that
supports being able to access capital on a timely and cost-effective basis. This strategy includes maintaining:
• a prudent capital structure supported by investment-grade credit ratings; and
• sufficient liquidity through cash balances, excess cash flow, committed revolving credit facilities, and our DRIP to meet our obligations.
Through this strategy, we strive to avoid having to raise additional capital where the costs or terms of which would be regarded as being
unfavourable. We have summarized recent changes to the components of our capital in the “Liquidity and Capital Resources” section of
this MD&A.
Foreign Currency
Significant portions of our assets, net earnings and cash flows are denominated in U.S. dollars. As a result, their accounting and economic
values vary with changes in the U.S./Canadian exchange rate. To date, we have not entered into any foreign currency hedges to reduce
our currency risk in respect of our net U.S. dollar investment.
We generally use net cash flows from our U.S. operations, supplemented where necessary with U.S. dollar borrowings, to fund our
U.S. dollar capital expenditures. From time to time, we have designated U.S. dollar borrowings as a hedge against our U.S. dollar net
investment in self-sustaining foreign operations. From an accounting perspective, to the extent these hedges are deemed to be
effective, we record any such gains or losses in other comprehensive income.
On December 31, 2012, approximately 37.2% of our net assets were denominated in U.S. dollars. For the year ended December 31,
2012, we recorded an unrealized foreign exchange loss of $5.6 million in other comprehensive income on the re-translation of our U.S.
net assets. At December 31, 2012, if the Canadian currency had strengthened or weakened by one cent against the U.S. dollar, with all
other variables constant, total assets, net income, and distributable cash would have been $5.1 million, $0.5 million, and $1.4 million,
respectively, lower or higher.
Interest Rate
We have financed portions of our operations with debt, including floating-rate debt. To the extent interest is not recoverable, we are
exposed to fluctuations in interest rates on floating-rate debt and to potentially higher fixed rates at the time existing debt obligations
need to be refinanced. To reduce this exposure, we maintain investment-grade credit ratings and generally fund long-term assets
utilizing long-term, fixed-rate debt. Our floating-rate debt is primarily comprised of drawdowns under committed bank credit facilities.
To reduce our exposure to interest rate fluctuations further, we may occasionally use derivative instruments, including interest rate
swaps, collars and forward rate agreements, to hedge against the effect of future interest rate movements. From an accounting
perspective, to the extent these hedges are deemed to be effective, we record any such gains or losses in other comprehensive income.
On December 31, 2012, 22% of our consolidated long-term debt was floating-rate debt. At December 31, 2012, if interest rates applied
to floating-rate debt were 100 basis points higher or lower with all other variables constant, net income before tax and distributable
cash each would have been $2.7 million lower or higher.
As part of York Energy Centre’s debt financing in 2010, it entered into two interest rate hedges. These hedges were entered into to
manage the exposure to changes in interest rates whereby York Energy Centre receives variable interest rates and pays fixed interest
rates. On April 30, 2012, one interest rate hedge was retired. Future changes in interest rates will affect the fair value of the remaining
hedge, impacting the amount of unrealized gains or losses recognized in the period through equity income. For the three and 12 months
ended December 31, 2012, equity income from York Energy Centre includes a $1.9 million and $0.2 million unrealized mark-to-market
gain, respectively, associated with these hedges.
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