Financial Report - Veresen Inc.

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MANAGEMENT’S DISCUSSION AND ANALYSIS New Accounting Standards The following new Accounting Standards Updates have been issued, as of December 31, 2011. In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (IFRS)”. ASU 2011-04 results in a consistent definition of fair value, as well as common requirements for measurement and disclosure of fair value information between US GAAP and IFRS. In addition, the amendments set forth enhanced disclosure requirements with respect to recurring Level 3 measurements, non-financial assets measured or disclosed at fair value, transfers between levels in the fair value hierarchy, and assets and liabilities disclosed but not recorded at fair value. The revised fair value measurement guidance became effective on a prospective basis for the Company’s interim and annual periods beginning January 1, 2012. We adopted this ASU effective January 1, 2012. The impact of this is not material to us. In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income”. This ASU provides two options for presenting items of net income, comprehensive income and total comprehensive income, by either creating one statement of income and comprehensive income or two separate consecutive statements. This guidance became effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU effective January 1, 2012 and have elected to use two separate consecutive statements. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. This ASU defers certain provisions of ASU 2011-05 pertaining to the presentation of reclassifications adjustments, including amounts reclassified out of accumulated OCI, such as realized gains and losses on a derivative instrument designated as a cash flow hedge. This guidance became effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU effective January 1, 2012. The impact of adoption is not material to us. In December 2011, the FASB issued ASU 2011-11, “Balance Sheet: Disclosures about Offsetting Assets and Liabilities”. This ASU provides guidance for enhanced disclosures on the effect or potential effect of netting arrangements on an entity’s financial position. This guidance is effective for annual and interim periods beginning on or after January 1, 2013 and is not expected to have a material impact to us. In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU provides guidance for enhanced disclosure on amounts reclassified out of cumulative other comprehensive income. This guidance is effective for annual and interim periods beginning after December 15, 2012, and is not expected to have a material impact to us. Non-GAAP Financial Measures Certain financial measures referred to in this MD&A are not measures recognized under US GAAP. These non-GAAP financial measures do not have standardized meanings prescribed by US GAAP and therefore may not be comparable to similar measures presented by other entities. We caution investors not to construe these non-GAAP financial measures as alternatives to other measures of financial performance calculated in accordance with US GAAP. We further caution investors not to place undue reliance on any one financial measure. We provide the following non-GAAP financial measures to assist investors with their evaluation of us, including their assessment of our ability to generate distributable cash to fund monthly dividends. We consider these non-GAAP financial measures, together with other financial measures calculated in accordance with US GAAP, to be important factors that assist investors in assessing performance. Distributable Cash – represents the cash we have available for distribution to common shareholders after providing for debt service obligations, preferred dividends, and any maintenance and sustaining capital expenditures. Distributable cash does not include distribution reserves, if any, available in jointly-controlled businesses, project development costs, or transaction costs incurred in conjunction with acquisitions. Project development costs are discretionary, non-recoverable costs incurred to assess the commercial viability of greenfield business initiatives unrelated to our operating businesses. We consider transaction costs to be part of the consideration paid for an acquired business and, as such, are unrelated to our operating businesses. The investment community uses distributable cash to assess the source and sustainability of our dividends. The following is a reconciliation of distributable cash to cash from operating activities. 34
Reconciliation of Distributable Cash to Cash From Operating Activities Three months ended December 31, Year ended December 31, ($ Millions) 2012 2011 2012 2011 Cash from operating activities 65.1 59.9 179.9 191.4 Add (deduct): Project development costs (1) 7.0 2.5 23.9 11.1 Change in non-cash working capital (19.8) (12.4) 30.0 (12.3) Deferred revenue 2.8 – 2.8 – Principal repayments on senior notes (2.9) (2.9) (11.3) (10.8) Maintenance capital expenditures (2.7) (1.1) (7.5) (2.9) Distributions earned greater (less) than distributions received (2) 6.3 7.2 (1.6) 16.5 Preferred Share dividends (2.2) – (7.7) – Current tax on Preferred Share dividends 2.9 – 2.9 – Distributable cash 56.5 53.2 211.4 193.0 (1) Represents costs incurred by us in relation to projects where the recoverability of such costs has not yet been established. Amounts incurred for the three and 12 months ended December 31, 2012 relate primarily to the Jordan Cove LNG terminal project, the Pacific Connector Gas Pipeline project, and various power development projects. (2) Represents the difference between distributions declared by jointly-controlled businesses and distributions received. Distributable Cash per Common Share – reflects the per common share amount of distributable cash calculated based on the average number of common shares outstanding on each record date. EBITDA – refers to earnings before interest, taxes, depreciation and amortization. EBITDA is reconciled to net income before tax by deducting interest, depreciation and amortization, and asset impairment losses, if any. The investment community uses this measure, together with other measures, to assess the source and sustainability of cash distributions. Power net income before tax and non-controlling interest with jointly-controlled power businesses presented on a proportionately consolidated basis – Under US GAAP, we account for each of York Energy Centre, NRGreen and Grand Valley using the equity method due to our joint control of these entities. However, we believe the presentation of their earnings on a proportionately consolidated line-by-line basis provides more insightful information. We and the investment community use EBITDA on a proportionately consolidated basis to assess the performance of our Power business. The following reconciles the results of our power business as presented in “Results of Operations – Power Business” to the results as presented in accordance with US GAAP. Power Business Three months ended December 31, 2012 Three months ended December 31, 2011 Reverse Reverse proportionate proportionate consolidation; consolidation; Proportionately apply equity Proportionately apply equity ($ Millions) Consolidated accounting US GAAP Consolidated accounting US GAAP Proportionately Consolidated EBITDA 17.6 (7.9) 9.7 8.1 (0.5) 7.6 Depreciation & amortization (11.7) 3.5 (8.2) (9.0) 0.6 (8.4) Interest (7.2) 3.5 (3.7) (3.6) (0.2) (3.8) Fair value gains (losses) 1.9 (1.9) – (4.7) 4.7 – Foreign exchange and other 0.1 (0.1) – – (0.1) (0.1) Equity income (loss) – 2.9 2.9 – (4.5) (4.5) Net income before taxes and non-controlling interest 0.7 – 0.7 (9.2) – (9.2) 35
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 and 34: The level of commitments for transp
Page 35: Critical Accounting Estimates The p
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

Financial Report - Veresen Inc.

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