Financial Report - Veresen Inc.

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MANAGEMENT’S DISCUSSION AND ANALYSIS Risks Specific to the Hythe/Steeprock Complex Plant Turnaround We are scheduled to perform a major plant turnaround at the Hythe/Steeprock complex in May 2013 that will take approximately 16 days. There is a risk the turnaround could extend longer than expected if additional remedial work on equipment is required. Our strategy to mitigate the risk of an extended outage involves hiring competent engineering and technical staff to plan the turnaround and building remedial work into the schedule. We have retained many of the same staff who have participated in previous successful turnaround activities at the Hythe/Steeprock complex. Should the turnaround extend past the scheduled completion date, we will be unable to charge the full fees associated with operating the plant to third party producers, and will forfeit certain operating incentives contained in the MSA. Natural Gas Throughput As with any natural gas processing complex, the Hythe/Steeprock complex faces the risk of lower throughput due to potential production declines, particularly at times of lower drilling activity in the industry. We believe this risk is mitigated by our long-term take or pay contract with a major producer for a substantial component of the Hythe/Steeprock complex’s capacity, and by our commercial development efforts to increase third party volumes to the facility. Further, exploration and development activity in the Montney production area of British Columbia and Alberta, where the Hythe/Steeprock complex is located, has remained active, even in the current challenging natural gas pricing environment. Risks Specific to the Power Business Gas Supply The operation of our gas-fired power generation and London district energy facilities requires the delivery of natural gas. If there is any interruption in the provision of natural gas for any of these facilities, the ability to generate electricity and, in the case of the cogeneration facilities, steam or distilled water, will be negatively affected and may have a negative impact on our earnings and cash flows. These facilities are dependent on pipeline deliveries of natural gas and a functioning and integrated North America supply grid. We have attempted to mitigate this risk by purchasing natural gas at major supply hubs and entering into firm delivery contracts with major transporters of natural gas. Critical Accounting Policies Alliance is subject to rate regulation in Canada and the United States. Our consolidated financial statements are prepared in accordance with US GAAP, which include specific provisions applicable to rate-regulated businesses, such as Alliance. As a consequence, these principles may differ from those used by non-rate-regulated entities. In order to achieve a proper matching of revenues and expenses, certain revenues and expenses are recognized in equity income from Alliance differently than would otherwise be expected under US GAAP applicable to non-regulated businesses. Alliance transportation contracts are designed to provide toll revenues sufficient to recover all prudently incurred costs, including an 11.26% return on equity in Canada and a 10.88% return on equity in the United States. The period in which costs are recovered from toll receipts may differ from the period when these costs are expensed under US GAAP. Differences between Alliance’s recorded toll revenue and actual toll receipts give rise to receivable or payable balances, reflected in our equity investment in Alliance. In the case of Alliance’s Canadian rate-regulated business, the taxes payable method is used to recover tax expense and, as such, Alliance’s Canadian tolls do not include the recovery of future income taxes. For purposes of calculating tolls, depreciation of the Alliance pipeline is based on negotiated rates contained in the transportation contracts, while depreciation expense under US GAAP, reflected in our equity income from Alliance, is recorded on a straight-line basis at a rate of four percent per annum commencing on the in-service date. The negotiated depreciation rates were generally less than the straight-line rate in earlier years resulting in accrued revenues and receivables in those years. These receivables are expected to be recovered from shippers in subsequent years when the negotiated depreciation in the toll exceeds the depreciation recorded for financial statement purposes. 32
Critical Accounting Estimates The preparation of our consolidated financial statements requires us to make judgements, estimates and assumptions about future events when applying US GAAP that affect the recorded amounts of certain assets, liabilities, revenues and expenses. These judgements, estimates and assumptions are subject to change as the events occur or new information becomes available. The following highlights our more significant accounting estimates. Readers should also refer to note three of our consolidated financial statements for more detailed disclosures of our significant accounting policies. Impairment of Long-lived Assets We evaluate, at least annually, our long-lived assets for impairment when events or changes in circumstances indicate, in our judgement, the carrying value of such assets may not be recoverable. If we determine the recoverability of the asset’s carrying value has been impaired, the amount of the impairment is determined by estimating the fair value of the assets and recording a loss for the amount the carrying value exceeds the estimated fair value. Judgements and assumptions are inherent in the determination of the recoverability of such assets and the estimate of their fair value. In our view, at December 31, 2012, there has not been impairment in the carried value of our long-lived assets. Asset Retirement Obligation The estimated fair value of legal obligations associated with the retirement of tangible long-lived assets is to be recognized in the period in which they are incurred if a reasonable estimate of a fair value can be determined. The asset retirement cost, deemed to be the fair value of the asset retirement obligation, is capitalized as part of the cost of the related long-lived assets and is amortized over the remaining life of these assets. This amortization is included in depreciation and amortization in the consolidated statement of income. <strong>Inc</strong>reases in the asset retirement obligation resulting from the passage of time are recorded as accretion expense in depreciation and amortization in the consolidated statement of income and comprehensive income, over the estimated time period until settlement of the obligation. Actual expenditures incurred are charged against the accumulated asset retirement obligation. We have recognized provisions for asset retirement obligations in our consolidated financial statements with respect to the AEGS pipeline system, the Hythe/Steeprock complex, and the EnPower, East Windsor Cogeneration, Furry Creek and Clowhom power facilities. With respect to our jointly-controlled businesses, Aux Sable’s Septimus and Heartland facilities, and the NRGreen and Grand Valley power facilities have each recognized provisions for asset retirement obligations. Aux Sable has not recognized a provision for asset retirement obligations in respect of its U.S.-based assets as the expected legal obligations are not material. Alliance has not recognized an asset retirement obligation provision for the Alliance pipeline. It is not currently possible to make a reasonable estimate of the fair value of the liability for the Alliance pipeline due to the indeterminate timing and scope of the asset retirement. The NEB’s LMCI action plan, previously discussed in the “Results of Operations by Business Segment – Pipeline Business – Alliance Pipeline” section of this MD&A, addresses the need for a collection method for funding pipeline abandonment costs. The LMCI plan is not a method for determining the timing of retirement obligations. However, in the event the plan results in a reasonable estimate of asset retirement obligations for accounting purposes, financial statement recognition of those obligations may be made in future periods. As a result, regulatory assets and liabilities may be recognized to the extent the timing of recovery from shippers differs from the recognition of abandonment costs for accounting purposes. We believe it is reasonable to assume that all asset retirement obligations associated with the Alliance pipeline will be recoverable through future tolls. Depreciation and Amortization Our pipeline, plant and other capital assets and intangible assets are depreciated and amortized based on their estimated useful lives. A change in the estimation of useful lives could have a material impact on our consolidated net income. Regulatory Asset Our equity investment in Alliance includes a long-term receivable for the cumulative difference between depreciation expense included in our equity income from Alliance and depreciation expense included in Alliance’s transportation tolls. The carrying value of this asset reflects our assessment as to the ultimate recoverability of this receivable. 33
Page 1 and 2: 03 04 05 06 07 08 09 10 11 2012 VER
Page 3 and 4: Management‘s Discussion and Analy
Page 5 and 6: Business Overview We are a Canadian
Page 7 and 8: • Aux Sable Canada (50% ownership
Page 9 and 10: Earnings also reflect increased cor
Page 11 and 12: Alliance Pipeline Alliance has firm
Page 13 and 14: On May 26, 2009, the NEB adopted a
Page 15 and 16: Financial Highlights Hythe/Steeproc
Page 17 and 18: Opportunities and Developments Aux
Page 19 and 20: Operational performance from our ga
Page 21 and 22: For the three and 12 months ended D
Page 23 and 24: Sustainability of Dividends and Pro
Page 25 and 26: Distributable cash for the three an
Page 27 and 28: Capital Funding and Liquidity To fu
Page 29 and 30: Fair Values Fair value is the amoun
Page 31 and 32: We and our businesses employ variou
Page 33: The level of commitments for transp
Page 37 and 38: Reconciliation of Distributable Cas
Page 39 and 40: Significant items that affected qua
Page 41 and 42: Independent Auditor’s Report To t
Page 43 and 44: Consolidated Statement of Income Ye
Page 45 and 46: Consolidated Statement of Sharehold
Page 47 and 48: JOINTLY-CONTROLLED Entity (1) Pipel
Page 49 and 50: In December 2011, the FASB issued A
Page 51 and 52: Financial Instruments Financial ass
Page 53 and 54: Note 6. Investments in Jointly-Cont
Page 55 and 56: Note 9. Pipeline, Plant and Other C
Page 57 and 58: Medium Term Notes On March 14, 2012
Page 59 and 60: Geographical Components Net income
Page 61 and 62: Common Shares 2012 2011 Common Shar
Page 63 and 64: The following table summarizes our
Page 65 and 66: Credit Risk Veresen and its jointly
Page 67 and 68: Corporate Information Officers Step

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