Financial Report - Veresen Inc.

The level of commitments for transport on the Alliance pipeline after December 1, 2015 may be negatively impacted by the
development of new sources of natural gas. In particular, shale gas deposits in the United States could provide an alternate source
of natural gas to the Chicago hub, decreasing the U.S. northeast region’s reliance on natural gas imports from Canada, and
correspondingly, decreasing commitments for transport on the Alliance pipeline.
Demand for natural gas in the midwestern and northeastern United States depends, among other things, on weather, price and
consumption, and alternative energy sources. Upon maturity of the existing transportation contracts, Alliance faces competition in
pipeline transportation to Chicago area delivery points from both existing pipelines and proposed projects. Any new or upgraded
pipelines could either allow shippers and competing pipelines to have greater access to natural gas markets served by Alliance and the
pipelines to which it is connected or offer natural gas transportation services that are more desirable to shippers than those provided by
Alliance due to location, facilities or other factors. In addition, competing pipelines could charge rates or provide transportation services
to locations that result in greater net profit for shippers, which could result in reduced revenues and cash flows for Alliance.
Two large petrochemical companies, each of whom own and operate world-class petrochemical facilities in Alberta, drive the demand
for ethane shipped on AEGS. If, for any reason, either of these customers, or their successors, ceased to operate these facilities or
otherwise reduced or eliminated the quantities of ethane purchased by them, this could have a negative effect on the quantity of ethane
transported on AEGS and our earnings and cash flows.
We can give no assurance as to the respective abilities of Alliance and AEGS to replace contact commitments from shippers
or to negotiate terms similar to those under current transportation contracts upon their expiry in 2015 and 2018, respectively.
Rate Regulation
Alliance is subject to Canadian and United States federal regulation by the NEB and the FERC, respectively. AEGS is subject to Canadian
provincial regulation by the Alberta Utilities Commission. The ability of our pipelines to generate earnings and cash flows could be
adversely affected by changes in pipeline regulation, including:
• changes in interpretations of existing regulations by courts or regulators;
• the exclusion of any cost of service amounts;
• any other adverse change to the rates on the respective rate structures or terms and conditions of service; and
• in the case of Alliance, a reduction in the negotiated rate of return on equity.
Recovery of Capital
Alliance is permitted to recover from shippers costs incurred in the construction and operation of the pipeline system that are actually
and reasonably incurred in accordance with NEB and FERC regulations. Alliance has firm transportation service agreements for 90.5%
and 84.7% of its Canadian and U.S. capacity, respectively, until December 1, 2015, 2.3% and 2.1% until December 1, 2016, 1.5% and
1.4% until October 31, 2013, and 5.7% of its U.S. capacity until February 1, 2020. Firm transportation agreements for the remaining
capacity extend until December 1, 2018. Alliance is exposed to economic risk associated with the recovery of capital beyond the term
of the transportation service agreements. There is no assurance that Alliance will be able to replace the transportation agreements
with contracts, the terms of which would enable recovery of the remaining capital cost directly through tolls.
Risk Specific to Alliance and Aux Sable
Interdependency
There is a significant degree of interdependency between Alliance and Aux Sable, which are related parties through common controlling
ownership interests. On one hand, should Aux Sable fail to provide heat content management services to Alliance U.S. for any reason,
the Alliance pipeline and its shippers may experience operational issues, including in certain circumstances an interruption or
curtailment of transportation service on the Alliance pipeline. On the other hand, the volume and composition of inlet natural gas
available to Aux Sable is dependent on the volumes transported on the Alliance pipeline, which is subject to supply and demand
factors, including competitive pressures from other pipeline systems, and the operating performance of the Alliance pipeline.
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