ALLIANCE PIPELINE LIMITED PARTNERSHIP Statements of Income March 31 March 31 (1) (unaudited, thousands of Canadian dollars) 2012 2011 Revenues Transportation revenue (Note 3) 94,826 97,933 Transportation revenue from related parties (Note 3, 7) 11,651 10,536 106,477 108,469 Expenses General and administrative 11,165 11,195 Operations and maintenance 16,947 16,760 Costs incurred under administrative services agreement (Note 7) 14,803 13,817 Reimbursement under administrative services agreement (Note 7) (15,420) (14,351) Depreciation and amortization 30,073 30,072 57,568 57,493 Operating Income 48,909 50,976 Interest and other income (Note 11) 278 243 Amortization of deferred financing charges (273) (251) Interest expense (21,695) (22,473) Net income attributable to Limited Partner ownership interests in Alliance Pipeline Limited Partnership 26,947 28,210 Net income attributable to General Partner ownership interests in Alliance Pipeline Limited Partnership 272 285 27,219 28,495 (1) US GAAP retrospectively applied (Note 18) See accompanying notes to the financial statements ALLIANCE PIPELINE LIMITED PARTNERSHIP Statements of Comprehensive Income March 31 March 31 (unaudited, thousands of Canadian dollars) 2012 2011 Net Income 27,219 28,495 Other Comprehensive (Loss)/Income Gains and losses on derivative instruments (1) 120 designated as cash flow hedges Reclassification to net income of gains and losses on - (32) derivative instruments designated as cash flow hedges Other comprehensive (loss)/ income (1) 88 Comprehensive income attributable to general and limited partner ownership interests in Alliance Pipeline Limited Partnership 27,218 28,583 See accompanying notes to the financial statements Three Months Ended Three Months Ended
Transcript
ALLIANCE PIPELINE LIMITED PARTNERSHIP
Statements of Income
March 31 March 31 (1)
(unaudited, thousands of Canadian dollars) 2012 2011
Revenues
Transportation revenue (Note 3) 94,826 97,933
Transportation revenue from related parties (Note 3, 7) 11,651 10,536
106,477 108,469
Expenses
General and administrative 11,165 11,195
Operations and maintenance 16,947 16,760
Costs incurred under administrative services agreement (Note 7) 14,803 13,817
Reimbursement under administrative services agreement (Note 7) (15,420) (14,351)
Depreciation and amortization 30,073 30,072
57,568 57,493
Operating Income 48,909 50,976
Interest and other income (Note 11) 278 243
Amortization of deferred financing charges (273) (251)
Interest expense (21,695) (22,473)
Net income attributable to Limited Partner ownership interests in Alliance Pipeline Limited Partnership 26,947 28,210
Net income attributable to General Partner ownership interests in Alliance Pipeline Limited Partnership 272 285
27,219 28,495
(1) US GAAP retrospectively applied (Note 18)
See accompanying notes to the financial statements
ALLIANCE PIPELINE LIMITED PARTNERSHIP
Statements of Comprehensive Income
March 31 March 31
(unaudited, thousands of Canadian dollars) 2012 2011
Net Income 27,219 28,495
Other Comprehensive (Loss)/IncomeGains and losses on derivative instruments (1) 120 designated as cash flow hedges
Reclassification to net income of gains and losses on - (32)
derivative instruments designated as cash flow hedgesOther comprehensive (loss)/ income (1) 88
Comprehensive income attributable to general and limited partner ownership interests in Alliance Pipeline Limited Partnership 27,218 28,583
See accompanying notes to the financial statements
Three Months Ended
Three Months Ended
ALLIANCE PIPELINE LIMITED PARTNERSHIP
Statements of Cash Flow
March 31 March 31 (1)
(unaudited, thousands of Canadian dollars) 2012 2011
See accompanying notes to the financial statements
ALLIANCE PIPELINE LIMITED PARTNERSHIP
Balance Sheets
ALLIANCE PIPELINE LIMITED PARTNERSHIP
Statements of Changes in Partners' Equity
March 31 December 31
(unaudited, thousands of Canadian dollars) 2012 2011
Class A UnitsClass A - number of units 556,207 556,207
Class A unit value - opening balance 489,883 520,864 Net income and comprehensive income 23,798 100,611 Distributions to Partners (32,526) (131,592) Class A unit value - closing balance 481,155 489,883
Class B UnitsClass B - number of units 73,558 73,558
Class B unit value - opening balance 75,931 80,028 Net income and comprehensive income 3,148 13,306 Distributions to Partners (4,302) (17,403) Class B unit value - closing balance 74,777 75,931
General Partner General Partner - opening balance 9,768 10,122 Net income and comprehensive income 272 1,151 Distributions to Partners (372) (1,505) General Partner - closing balance 9,668 9,768
PARTNERS' EQUITY BEFORE ACCUMULATED OTHER COMPREHENSIVE INCOME 588,133 597,414
Accumulated other comprehensive income ("AOCI")AOCI - opening balance (27) (131) AOCI - current year (1) 104 AOCI - closing balance (28) (27)
TOTAL PARTNERS' EQUITY 588,105 597,387
See accompanying notes to the financial statements
NOTES TO THE FINANCIAL STATEMENTS | 1
Alliance Pipeline Limited Partnership (Unaudited, in thousands of Canadian dollars, unless otherwise noted)
GENERAL BUSINESS DESCRIPTION NOTE 1Alliance Pipeline Limited Partnership (“Alliance”) was formed under the laws of the Province of Alberta on February 1,
1996. Alliance owns and operates the Canadian portion (1,560 km) of a 3,000 km high-pressure natural gas
transmission pipeline, a series of laterals located in Canada and the related infrastructure. The U.S. portion of the
pipeline is owned by Alliance Pipeline L.P. (“Alliance US”). Alliance and Alliance US have entered into contracts with
shippers to transport natural gas, on a firm transportation basis, from supply areas primarily in the northwestern
Alberta and the northeastern British Columbia portions of the Western Canadian Sedimentary Basin, to delivery
points primarily near Chicago, Illinois. The pipeline connects in the Chicago area with two local natural gas
distribution systems and five interstate natural gas pipelines, which provide shippers with access to natural gas
markets in the midwestern and northeastern United States and eastern Canada.
ALLIANCE PIPELINE LTD.
Alliance is managed by its General Partner, Alliance Pipeline Ltd. (the “General Partner”). The General Partner was
established on April 17, 1997 and continues to operate under the federal laws of Canada. The General Partner is
allocated 1% of net income and loss, and undistributed income of Alliance with the remaining 99% being allocated
equally between Enbridge Income Partners Holdings Inc. and Veresen Energy Infrastructure Inc. The General
Partner’s sole activity is managing the business and affairs of Alliance. The powers, duties and obligations of the
General Partner of Alliance are set out in the Alliance’s Limited Partnership Agreement dated as of December 31,
1998, as amended.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NOTE 2The unaudited interim financial statements of Alliance Pipeline Limited Partnership (“Alliance”) have been prepared
by management in accordance with United States generally accepted accounting principles (“US GAAP”). These
financial statements do not contain all disclosures required by US GAAP for annual audited financial statements. All
dollar amounts are stated in Canadian dollars. Operating results for the three months ended March 31, 2012, are not
necessarily indicative of the results that may be expected for the full year ended December 31, 2012.
These are Alliance’s first financial statements where US GAAP has been applied. In preparing the interim financial
statements, management has amended certain accounting methods previously applied in the Canadian generally
accepted accounting principles (“CGAAP”) financial statements to comply with US GAAP. The comparative balances
were retroactively restated to reflect these adjustments. Reconciliations and descriptions of the effect of the transition
from CGAAP to US GAAP on equity, earnings and comprehensive income are provided in Note 18 to these financial
statements.
In management’s opinion, the financial statements have been properly prepared within reasonable limits of materiality
and within the framework of the significant accounting policies. In the opinion of management, all adjustments are of
a recurring nature and necessary to fairly state the financial position of Alliance.
USE OF ESTIMATES
The preparation of these financial statements requires management to make estimates and assumptions that affect
both the amount and the timing of Alliance’s assets, liabilities, revenues and expenses and the related disclosures.
Management regularly evaluates these estimates utilizing historical experience, consultation with experts and other
methods management considers reasonable in the circumstances. Actual results may differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future
periods affected.
NOTES TO THE FINANCIAL STATEMENTS | 2
REGULATED OPERATIONS
Alliance’s pipeline operations are regulated by the National Energy Board (“NEB”) under the National Energy Board
Act. In order to provide information about Alliance’s economic resources and performance, recognition of certain
revenues and expenses may differ from that otherwise expected under US GAAP applicable to non-regulated
businesses in order to reflect the economic effects of the actions of the regulator.
Regulatory assets represent amounts that are expected to be recovered from shippers in future periods through tolls.
Regulatory liabilities represent amounts that are expected to be refunded to shippers in future periods through tolls.
In the absence of rate regulation, Alliance would not recognize regulatory assets or liabilities and the income impact
would be recognized in the period the expenses were incurred or revenues earned.
Alliance complies with NEB “Gas Pipeline Uniform Accounting Regulations” which rely on practices of group asset
accounting. This requires property to be identified, unified and recognized in plant in service accounts.
Recoverability
Alliance periodically assesses whether regulatory assets are recoverable through the presence of indicators such as
regulatory changes and recent rate orders applicable to other regulated entities.
REVENUE RECOGNITION
Transportation Revenue
Alliance’s transportation service agreements are designed to provide Alliance with revenues sufficient to recover the
costs of providing transportation services to shippers, including a return of capital and an allowed return on equity.
The portion of such costs expected to be recovered each year under the existing transportation service agreements is
equal to the percentage of the firm-service transportation capacity held under such contracts. Transportation
revenues are recognized based on contractual terms under the shipper agreement. Transportation revenue includes
adjustments for refunds or recoveries that will be returned or collected in future tolls.
PROPERTY, PLANT AND EQUIPMENT
Pipeline in Service Assets
Pipeline in service assets are recognized at cost and are depreciated commencing from the in service date. Where
applicable, the cost of pipeline in service assets are reduced by contributions in aid of construction received from third
parties, in support of constructing specific pipeline facilities.
Pipeline in service assets include the pipeline, linepack, compressor stations, meter stations and other assets used to
provide transmission services. The pipeline in service assets also include components such as renewals and
replacements, allowance for funds used during construction (“AFUDC”) and capitalized overhead. These
components are capitalized and recovered through revenue in periods that differ from those otherwise expected
under US GAAP applicable to non-regulated businesses.
Renewals and replacements are the capital cost of assets in rate-regulated operations that have been retired or
otherwise disposed of in the normal course of business as a result of repair and maintenance activities. The
continuing recognition of the asset and the resulting revenue and depreciation of the asset would not be permitted in
the absence of rate regulation.
NOTES TO THE FINANCIAL STATEMENTS | 3
Accounting for regulated operations permits the capitalization of AFUDC instead of capitalized interest. AFUDC
represents the cost of financing, consisting of interest on borrowed funds and equity return on the pipeline's own
funds used, during the construction of assets to be used in regulated operations. The allowance for the equity portion
of AFUDC is accrued on a pre-tax basis determined using Alliance’s weighted average cost of capital and enacted
corporate tax rates. The debt portion of the AFUDC is comprised of interest expense, commitment fees and credit
facility financing fees incurred during construction. Interest income derived from debt sourced funds was netted
against interest expense in determining the allowance for debt funds used during construction. Interest income
attributable to equity sourced funds is included in net income in the year earned. AFUDC is included in the capital
cost of and depreciated over the life of the related asset. The recognition of the equity component of financing as an
asset and the resulting revenue and depreciation of the asset would not be permitted in the absence of rate
regulation.
Capitalized overhead is comprised of indirect overhead costs that due to the actions of the regulator are capitalized
and recovered through revenue. In the absence of rate regulation these costs would be expensed in the period in
which they occur.
Other Assets
General plant assets consist of field offices and ancillary equipment. These assets are recognized at cost and are
being depreciated over the useful life of the assets.
Administrative assets include head office furniture and equipment, information systems and leasehold improvements.
These assets are recognized at cost and depreciated over the useful life of the asset or term of the lease.
Capital spare parts are valued at the lower of average cost or net realizable value and are not subject to depreciation
until they are in service.
Land and assets under construction are valued at cost and are not subject to depreciation.
Depreciation rates Asset Category Method Depreciation Rate Pipeline in service Straight line depreciation 4% Renewals and Replacements Straight line depreciation 20% General plant assets Straight line depreciation 10% - 20% Administrative assets Straight line depreciation 20% - 33% Capital spares Not depreciated Not depreciated Land Not depreciated Not depreciated Assets under construction Not depreciated Not depreciated
Accounting for Major Equipment Overhaul Expenditures
Due to the rapid consumption rate associated with compressor overhaul and major equipment renewal activities and
the fact that the activity consists primarily of replacing equipment components that are worn or obsolete, costs
associated with these activities are expensed in the period in which the maintenance activity occurs.
Asset Impairment
Long-lived and intangible assets are periodically reviewed for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When indicators exist that provide evidence of
impairment, a loss is recognized if the carrying value amount of the long-lived asset is not recoverable and exceeds
its fair value.
NOTES TO THE FINANCIAL STATEMENTS | 4
INTANGIBLE ASSETS
Intangible assets are comprised of computer software and the cost includes AFUDC where applicable. Purchased
computer software is recognized at cost and amortized over its useful life.
The fair value of asset retirement obligations (“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.
A provision for ARO has not been recognized in these financial statements. There is insufficient information to
reasonably determine the timing to estimate the fair value of the ARO. The ARO cost is considered indeterminate
because there is no data or information that can be derived from past practice, industry practice or management
intentions to enable Alliance to reasonably estimate the timing of the pipeline retirement. Changes in regulatory
requirements or other information could change this assessment.
These obligations will be recorded when sufficient information exists to reasonably estimate a potential retirement
date for the pipeline assets.
CASH AND CASH EQUIVALENTS
Cash
Cash consists of amounts held in demand deposit accounts with Canadian chartered banks. The carrying value of
cash approximates fair value due to the short-term nature of these assets.
Cash Equivalents
Cash equivalents are short-term, highly liquid investments with maturities of three months or less when purchased
that are readily convertible to known amounts of cash. Alliance currently does not have any cash equivalents on
hand.
Trust Accounts
Under the terms of Alliance’s financing agreements, all funds received from shippers in settlement of transportation
tolls, including interest earned on trust account balances, are restricted and segregated in trust accounts. Funds are
first applied to meet debt service and operating requirements before distributions are made to the partners. At the
completion of each fiscal quarter, management determines the amount of cash and cash equivalents necessary to
satisfy these requirements and applies to have funds, if any, in excess of this amount transferred to a non-trust
account. Only funds in non-trust accounts may be distributed to the partners.
Pursuant to Alliance’s financing agreements, amounts required to meet current principal repayment and debt service
requirements must be deposited into debt service trust accounts.
Amounts in the operating and debt service trust accounts are restricted as to usage by Alliance and are classified as
trust accounts in the financial statements.
NOTES TO THE FINANCIAL STATEMENTS | 5
DERIVATIVE INSTRUMENTS
Derivative instruments are recognized at fair value. Changes in the fair values of derivative instruments are
recognized in net income with the exception of the effective portion of derivatives designated as cash flow hedges,
which are recognized in other comprehensive income.
HEDGING ACTIVITIES
Alliance applies hedge accounting to all hedging activities entered into under the Risk Management Policy approved
by the Board of Directors. At the inception of a hedge designation, Alliance prepares documentation to define the
relationship between the hedging instrument, the hedged item, the risk management objectives and strategy for
undertaking the hedging transaction. Alliance assesses the hedge relationship at inception and at each reporting date
to determine whether the derivatives designated as hedges effectively offset the changes in fair value or cash flows of
the hedged item. Alliance considers counterparty risk when determining the fair value of these derivatives.
The hedging instruments are measured at fair value and the effective portion of the change in the fair value of
financial instruments designated as a cash flow hedge is recognized in other comprehensive income. The ineffective
portion, if any, is recognized immediately in net income. Gains and losses are reclassified from other comprehensive
income and recognized in net income in the same period as hedged transactions are recognized in net income.
Hedge accounting is discontinued prospectively when a hedging relationship ceases to be effective or the derivative
is terminated, exercised, sold or upon the sale or early termination of the hedged item. When hedge accounting is
discontinued, the amounts previously recognized in other comprehensive income are reclassified to net income. The
cash flows of the contracts will be classified in the same manner as the cash flows of the position being hedged.
FAIR VALUE MEASUREMENT
Alliance is required to determine the fair value of all its derivatives using various valuation techniques based on the
fair value hierarchy. The hierarchy is based on whether inputs are observable in an active market or unobservable.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement. The hierarchy gives the highest priority to quoted prices in an active market and the lowest to
unobservable data as outlined below:
Level 1
This category includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical
assets and liabilities in active markets. An active market for an asset or liability is considered to be a market where
transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
This category includes valuations determined using directly or indirectly observable inputs other than quoted prices
included within Level 1. Derivative instruments in this category are valued using models or other industry standard
valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted
forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market for
the entire duration of the derivative instrument.
Level 3
Level 3 financial instruments are those with inputs for the asset or liability that are not based on observable market
data (unobservable inputs).
NOTES TO THE FINANCIAL STATEMENTS | 6
DEBT FINANCING COSTS
Alliance capitalizes external costs of obtaining debt financing and includes them in other long-term assets and the
deferred charge is amortized over the life of the related debt using the effective interest method.
FOREIGN CURRENCY TRANSLATION
Alliance transacts business in foreign currency, specifically US dollars and Euros. Transactions denominated in
foreign currencies are translated into Canadian dollars using the exchange rate prevailing at the date of transaction.
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the rate
of exchange in effect at the Balance Sheets date. Exchange gains and losses resulting from translation are included
in the Statements of Income in the period in which they arise.
CONTINGENT LIABILITIES
Contingent losses are recognized if it is probable that an asset has been impaired or a liability has been incurred at
the date of the financial statements and the amount can be reasonably estimated. An accrual is made on the most
likely amount or if no amount is more likely, an accrual is made on the minimum range of loss. Alliance assesses
contingent losses on a quarterly basis.
ENVIRONMENTAL COSTS
Alliance expenses environmental costs if they relate to current pipeline conditions affected by past operations and do
not contribute to current or future revenue generation. Alliance capitalizes environmental costs if the costs extend the
life of the underlying asset, increase capacity, improve safety or efficiency, mitigate or prevent environmental
contamination that has yet to occur, or relate to legal asset retirement obligations. Provisions are recognized when it
is likely that Alliance has an environmental remediation obligation and the costs can be reasonably estimated.
TRANSACTIONS WITH RELATED PARTIES
Alliance did not engage in related party transactions that are not in the normal course of business. Related party
transactions were at exchange amounts agreed to by both parties. Transportation revenue transactions were the
same as those agreed to with independent parties.
INCOME TAXES
Alliance is not a taxable entity for federal and provincial income tax purposes. Accordingly, no recognition is given to
income taxes for financial reporting purposes. Tax on Alliance’s net income is borne by the individual partners
through the allocation of taxable income. Alliance’s transportation service agreements permit current income taxes to
be recovered through toll revenue. Alliance includes in its toll revenue an amount which represents the current
income taxes which would be payable for the year if Alliance were an entity subject to income tax. Net income for
financial statement purposes may differ significantly from taxable income for individual partners as a result of
differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income
allocation requirements under the Alliance partnership agreement.
NOTES TO THE FINANCIAL STATEMENTS | 7
REGULATED OPERATIONS NOTE 3TRANSPORTATION REVENUE
Transportation revenue includes amounts related to expenses in the financial statements that are expected to be
recovered from shippers in future tolls. Similarly, no revenue is recognized in a given period for tolls received that do
not relate to current period expenses. Differences between the recognized transportation revenue and actual toll
receipts give rise to transportation revenue adjustments which can be classified as regulatory assets or liabilities.
The change in the long-term receivable reflects the difference between depreciation expense recognized in the
Statements of Income in the current year and the depreciation expense recovered through tolls in the current year as
negotiated in the firm service transportation service agreements. The cumulative difference between depreciation
expense presented in the financial statements and the negotiated depreciation expense is a regulatory asset and
classified on the Balance Sheets as the long-term receivable.
Transportation revenue is adjusted to reflect differences between the period in which costs are recovered through toll
receipts and the period these costs are expensed in the financial statements, as follows:
Three Months Ended
March 31
2012
March 31
2011
Tolls invoiced 114,396 112,981
Increase (decrease) for:
Change in long-term receivable (498) 1,378
Transportation revenue adjustments – current year (9,598) (6,978)
Transportation revenue adjustments – prior years 2,177 1,088
(7,919) 4,512
Transportation revenue 106,477 108,469
Surcharge Revenue
Alliance receives surcharge revenue from the Taylor Aitken Creek (“TAC”) facilities in British Columbia. The TAC
facilities provide service to shippers through take or pay contracts that are billed based on the shipper’s primary
receipt point capacities at TAC locations. For the three months ended March 31, 2012, the TAC surcharge provided
$1.2 million (March 31, 2011 - $1.1 million).
Additional revenue arises from providing Receipt Only Service (“ROS”) to shippers at Taylor Junction, British
Columbia from take or pay contracts for ROS and provided revenue of $1.4 million for the three months ended March
31, 2012 (March 31, 2011 - $1.4 million).
Significant Shippers
Alliance has three shippers that each represent 15%, 14% and 13% of contracted revenue (March 31, 2011 – 15%,
14%, and 13%). Total contracted revenue based on transportation service agreements from these shippers
amounted to $47.2 million for the three months ended March 31, 2012 (March 31, 2011 - $46.6 million).
REGULATORY ACCOUNTING
Alliance is required to apply the authoritative accounting provisions applicable to Accounting Standards Codification 980 - Regulated Operations. This allows Alliance to recognize certain revenue, expenses, assets and liabilities that
would not otherwise be recognized with non-regulated operations.
NOTES TO THE FINANCIAL STATEMENTS | 8
Natural gas transmission is provided under transportation contracts that provide for cost recovery, including return of
and return on capital as approved by the National Energy Board (“NEB”). Under the transportation contracts Alliance
charges each shipper a monthly amount for contract capacity calculated to permit Alliance to recover all costs on an
annual basis.
Tolls are based on a cost of service model that forecasts costs to determine the revenues for the upcoming year.
These costs include a specified annual return on capital, the cost of debt and equity, an allowance for income tax, and
all necessary operating expenses, taxes and depreciation. A difference between forecast and actual results causes
an under or over collection of revenue in any given year. Under or over collections of revenue are recognized in the
financial statements and are deferred to be recovered or refunded in the following years.
The following table describes the impact of accounting for regulated operations to the financial statements.
(millions of Canadian dollars)
Balance Sheets Impact
Regulatory Asset (Liability)
Statements of Income Impact
Revenue (Expense)
March 31
2012
December 31
2011
March 31
2012
March 31
2011
Transportation revenue
adjustments – current year (6.5) (8.7) 2.2 1.1
Transportation revenue
adjustments – long-term (3.1) 4.2 (7.3) (4.6)
Transportation revenue
adjustments – prior years (0.5) 1.1 (1.6) (2.7)
Long-term receivable 200.7 201.1 (0.4) (1.4)
TRANSPORTATION REVENUE ADJUSTMENTS – CURRENT YEAR
Alliance’s net transportation revenue adjustment is presented in regulatory assets and liabilities on the Balance
Sheets and includes a net balance of $10.1 million (December 31, 2011 - $3.4 million). Amounts relate to differences
between expenses included in the financial statements and expenses included in transportation tolls. Any differences
remaining at year-end will be included in the shipper tolls in future periods and included in transportation revenue as a
prior years’ transportation revenue adjustments. The estimated settlement period for the current portion is within one
year. The long-term portion is estimated to be settled within two years.
TRANSPORTATION REVENUE ADJUSTMENTS – PRIOR YEARS
Alliance’s prior years’ transportation revenue adjustments are based on a rolling three year term. The previous year’s
final toll and current year’s reforecast combine to produce either a net over or under recovery, which is applied to
either reduce (if previous periods are over recovered) or increase (if previous periods are under recovered) the
upcoming estimated forecast revenue requirement. The estimated settlement of the prior years’ transportation
revenue adjustments are within one year.
LONG-TERM RECEIVABLE
The long-term receivable is a regulatory asset primarily relating to the cumulative difference between depreciation
expense included in the financial statements and depreciation expense negotiated in the transportation service
agreements. This year, Alliance began recovering this regulatory asset as the negotiated depreciation rate exceeded
the rate applied in the financial statements. The estimated settlement period of the long-term receivable is 14 years.
NOTES TO THE FINANCIAL STATEMENTS | 9
PROPERTY, PLANT, AND EQUIPMENT NOTE 4
PROPERTY, PLANT AND EQUIPMENT
March 31
2012
December 31
2011
Cost
Pipeline in service assets 2,753,092 2,753,092
Renewals and replacements 28,807 28,243
General plant and administrative assets 46,184 46,225
Assets under construction 924 603
Capital spares 20,024 18,575
Land 2,554 2,554
2,851,585 2,849,292
Accumulated depreciation
Pipeline in service assets 1,224,837 1,197,082
Renewals and replacements 11,198 9,997
General plant and administrative assets 36,138 35,550
1,272,173 1,242,629
1,579,412 1,606,663
Property, plant and equipment includes AFUDC equity of $135.0 million (December 31, 2011 - $135.0 million) as a
capitalized asset, recorded at cost. The recorded value, after accumulated amortization, is $83.8 million (December
31, 2011 - $85.2 million).
Depreciation expense for property, plant and equipment is included as part of depreciation and amortization expense
in the Statements of Income. For the three months ended March 31, 2012, Alliance recognized $29.5 million of
depreciation expense related to property, plant and equipment (March 31, 2011 - $29.4 million).
INTANGIBLE ASSETS NOTE 5
INTANGIBLE ASSETS
March 31
2012
December 31
2011
Cost
Computer software
34,111 34,111
Accumulated amortization
Computer software 31,361 30,825
2,750 3,286
Amortization expense for intangible assets is included as part of depreciation and amortization expense in the
Statements of Income. For the three months ended March 31, 2012, Alliance recognized $0.6 million of amortization
expense related to intangible assets (March 31, 2011 – $0.6 million).
The estimated annual amortization expense for intangible assets is approximately $2.0 million. The intangible assets
will be fully amortized by December 31, 2013.
NOTES TO THE FINANCIAL STATEMENTS | 10
LONG-TERM DEBT NOTE 6
March 31
2012
December 31
2011
Credit facility 2,000 2,000
7.230% senior notes due 2015 121,465 121,465
7.181% senior notes due 2023 321,079 321,079
5.546% senior notes due 2023 170,754 170,754
7.217% senior notes due 2025 253,248 253,248
6.765% senior notes due 2025 289,424 289,424
4.928% senior notes due 2019 120,000 120,000
1,277,970 1,277,970
Less: current portion (77,860) (77,860)
1,200,110 1,200,110
The interest on long-term debt for the three months ended March 31, 2012 is $21.3 million (March 31, 2011 - $22.5
million).
LONG-TERM DEBT COMMITMENTS AND FINANCIAL COVENANTS
Scheduled principal repayments of long-term debt for the twelve months ended March 31 are as follows:
2013 77,860
2014 79,830
2015 83,281
2016 90,466
2017 82,959
Thereafter 863,574
1,277,970
Alliance must maintain a debt service reserve equal to scheduled principal and interest payments in the succeeding
six month period. At March 31, 2012 and December 31, 2011, this debt service reserve was satisfied by letters of
credit. Alliance is in compliance with all debt covenants as at March 31, 2012.
Alliance’s long-term debt consists of senior secured and unsecured notes, credit facility draws and debt service
reserve letters of credit. Long-term debt is collateralized by a first priority perfected security interest in Alliance’s
transportation service agreements with its shippers, NEB permit, certain other material contracts, trust accounts into
which transportation revenue is deposited, and a floating charge debenture over Alliance’s real property and tangible
personal property.
Alliance has covenants governing its long-term debt. Key financial covenants include a maximum borrowing amount
not to exceed at any time 70% of the rate base by more than US$10.0 million. Prior to making any distributions,
Alliance’s debt service coverage ratio shall be at least 1.25 for the four preceding fiscal quarters and the four
succeeding fiscal quarters, calculated as of the distribution date. The debt service coverage ratio is defined as the
ratio of cash inflows minus operating costs as compared with the schedule debt service payable for a twelve month
period.
NOTES TO THE FINANCIAL STATEMENTS | 11
SENIOR NOTES
The 4.928% senior unsecured note pays interest in arrears, on June 16 and December 16 of each year and the
principal repayment amount is due in 2019.
All other senior notes pay interest and principal repayments semi-annually on June 30 and December 31. The
principal repayments of these senior secured notes are closely tied to the recovery rates for depreciation contained in
the transportation service agreements.
CREDIT FACILITY
The bank credit facility consists of a committed extendible revolving credit facility in the amount of $200.0 million with
an expansion provision to facilitate timely increases of the facility to $300.0 million, if required. The facility is currently
comprised of $80.0 million in letters of credit that Alliance is required to maintain as a debt service reserve and a
$120.0 million operating line of credit.
The allocation of the facility between the debt service reserve and operating line can change from year to year
depending on Alliance’s debt service reserve requirement, which changes over time. The maturity date of the facility
is October 30, 2015. There are provisions to extend the facility on each anniversary of the closing date, but in no
case can the length of the facility extend beyond four years. Extensions are subject to bank syndicate acceptance.
The facility has been reduced by drawings of $2.0 million and by outstanding letters of credit in the amount of $80.0
million.
Interest is accrued and payable based on bankers’ acceptance rates, plus applicable margins, for terms not
exceeding six months. Upon each maturity, the interest rates are reset at the then prevailing interest rates. Amounts
outstanding under the credit facility at March 31, 2012 bear interest at an average rate of 2.30% (March 31, 2011 –
1.63%) and the interest will be reset on April 26, 2012.
RELATED PARTIES NOTE 7RELATED PARTY TRANSPORTATION REVENUE
Alliance has firm service transportation service agreements with shippers who are obligated to pay monthly demand
charges on 1,325 mmcf/d of contracted capacity. A number of these shippers, accounting for approximately 15% of
the contracted capacity at March 31, 2012 (December 31, 2011 – 15%), are also related entities of the Limited
Partners of Alliance. The terms of these contracts are the same as those agreed to with independent third parties.
For the three months ended March 31, 2012, natural gas transmission services provided to related parties, net of
capacity assignments, amounted to $11.7 million (March 31, 2011 - $10.5 million).
NOTES TO THE FINANCIAL STATEMENTS | 12
Three Months Ended
COSTS INCURRED AND REIMBURSED UNDER ADMINISTRATIVE
SERVICE AGREEMENTS
March 31
2012
March 31
2011
Related Entity Nature of Service
Alliance Pipeline L.P. General and Administration 14,112 12,849
Aux Sable Canada L.P. General and Administration - 98
Aux Sable Liquid Products L.P. General and Administration 104 55
NRGreen Power Limited Partnership General and Administration 344 503
NRGreen Power Limited Partnership Operations and Maintenance 315 112
Alliance Pipeline L.P. Operations and Maintenance (72) 200
Costs incurred under administrative
service agreements
14,803 13,817
Reimbursement of costs incurred
under administrative service
agreements
Reimbursement of costs
(14,803) (13,817)
Alliance Pipeline L.P.
Common Administrative Asset
Charge (617) (534)
(15,420) (14,351)
AMOUNTS DUE FROM RELATED PARTIES (EXCLUDING
TRANSPORTATION REVENUE)
March 31
2012
December 31
2011
Alliance Pipeline L.P. 7,409 3,752
Alliance Pipeline Ltd. 10 10
NRGreen Power Limited Partnership 670 563
Aux Sable Canada L.P. 67 40
Aux Sable Liquid Products L.P. - 58
8,156 4,423
AMOUNTS DUE TO RELATED PARTIES
March 31
2012
December 31
2011
Alliance Pipeline L.P. - 169
Alliance Pipeline Ltd. 784 341
784 510
ALLIANCE PIPELINE LTD.
The General Partner provides management and administrative, operational and workforce related services to
Alliance. The costs of all compensation, benefits expenses and employer expenses for these employee-partners are
charged directly by the General Partner. The General Partner does not record any profit or margin for the services
charged to Alliance.
NOTES TO THE FINANCIAL STATEMENTS | 13
Alliance does not directly employ any of the individuals responsible for managing or operating the business, nor does
Alliance have any directors. Alliance obtains management and administrative, operational and workforce related
services from the General Partner under the terms of the Limited Partnership Agreement. Alliance reimburses the
General Partner for costs incurred for these services under the terms of the Limited Partnership Agreement. Services
are based on actual costs incurred and are invoiced and settled on a monthly basis. All amounts exchanged under
this agreement are presented as general and administrative costs and costs incurred under administrative service
agreements. The total amount reimbursed by Alliance for services received pursuant to the Limited Partnership
Agreement for the three months ended March 31, 2012 is $26.7 million (March 31, 2011 - $25.1 million).
ALLIANCE PIPELINE L.P.
Administrative and operations service agreements allow for Alliance to provide or receive services to or from Alliance
US an entity related by virtue of a common ownership group, in exchange for reimbursement of incurred costs.
Certain amounts reimbursed under the service agreements with Alliance US also include a recovery of costs relating
to the use of common administrative assets. Services provided to Alliance US are based on actual costs incurred and
are invoiced and settled in Canadian dollars on a monthly basis. All amounts exchanged under this agreement are
presented as costs incurred under administrative service agreements and reimbursement under administrative
service agreements.
NRGREEN POWER LIMITED PARTNERSHIP
Alliance provides management and administrative, operational and workforce related services to the NRGreen Power
Limited Partnership (“NRGreen”), an entity related by virtue of a common ownership group. Agreements between
Alliance and NRGreen, with respect to waste heat supply, manpower services and compressor site access, have
been put into place in exchange for reimbursement of incurred costs. Services are based on actual costs and are
invoiced to NRGreen on a quarterly basis in the month following the quarter-end. All amounts exchanged under this
agreement are presented as costs incurred under administrative service agreements and reimbursement under
administrative service agreements.
AUX SABLE CANADA L.P. AND AUX SABLE LIQUID PRODUCTS L.P.
Alliance provides Aux Sable Canada L.P. and Aux Sable Liquid Products L.P., entities related by virtue of a common
ownership group, with administrative and facility support services. Services are invoiced to Aux Sable Canada L.P.
and Aux Sable Liquid Products L.P. on a monthly basis. All amounts exchanged under this agreement are presented
as costs incurred under administrative service agreements and reimbursement under administrative service
agreements.
PARTNERS’ EQUITY NOTE 8PARTNERS’ CAPITAL
Alliance is authorized to issue an unlimited number of Class A and B units. The Class A and B units are voting and
participate equally in profits, losses and capital distributions of Alliance. The Class A Units and the Class B units are
equal with respect to all rights, benefits, obligations and limitations provided under the limited partnership agreement.
The Class A and B units are held equally by Alliance’s Limited Partners, Enbridge Income Partners Holdings Inc. and
Veresen Energy Infrastructure Inc. The General Partner does not hold any units. Any units issued by Alliance must
be first offered to the existing group of Limited Partners in proportion to their ownership interests.
NOTES TO THE FINANCIAL STATEMENTS | 14
DISTRIBUTIONS
The General Partner may, at any time, distribute to the General Partner and the holders of the Class A units and the
Class B units such portion of the net income of Alliance, including any undistributed income and net of contributions,
as the General Partner determines in good faith to be in the best interest of Alliance, as follows:
1% to the General Partner; and
99% to the holders of Class A units and Class B units
Distributions are only permitted to be made to the General Partner and/or the Limited Partners upon trustee approval.
FINANCIAL INSTRUMENTS NOTE 9FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table provides the fair value of financial instruments. Regulatory assets and liabilities are not financial
instruments and therefore are not included.
March 31, 2012
(millions of Canadian dollars) Carrying value Fair value
Financial Assets
Cash 1.8 1.8
Trust accounts 79.0 79.0
Trade accounts receivable 35.3 35.3
Due from related parties 12.0 12.0
Investment in MAVII notes 9.0 9.0
Financial Liabilities
Trade accounts payable and accrued liabilities 43.8 43.8
Due to related parties 0.1 0.1
Long-term debt 1,278.0 1,495.9
Other long-term liabilities 7.0 7.0
December 31, 2011
(millions of Canadian dollars) Carrying value Fair value
Financial Assets
Cash 1.1 1.1
Trust accounts 44.3 44.3
Trade accounts receivable 35.2 35.2
Due from related parties 8.3 8.3
Investment in MAVII notes 9.0 9.0
Financial Liabilities
Trade accounts payable and accrued liabilities 29.0 29.0
Due to related parties 0.5 0.5
Foreign currency forward contracts 0.1 0.1
Long-term debt 1,278.0 1,497.5
Other long-term liabilities 9.4 9.4
Long-term debt in the above schedule includes the current portion of the liability for comparison to the fair value. The
fair value of the long-term debt is based on quoted market prices. At March 31, 2012, long-term debt qualifies as a
Level 1 measurement.
NOTES TO THE FINANCIAL STATEMENTS | 15
The fair value of the foreign currency forward contracts are determined based on observable inputs other than
unadjusted quoted prices, such as fair value estimates provided by Alliance’s lenders, interest rates and currency
exchange rates. At March 31, 2012, foreign exchange forward contracts are considered a Level 2 measurement.
Other financial assets and liabilities, including trade accounts receivable and trade accounts payable, are short-term
in nature, and as such, their carrying values approximate fair values. At March 31, 2012, cash and cash equivalents
qualify as a Level 2 measurement.
At March 31, 2012, MAVII notes qualify as a Level 3 measurement. There have been no gains or losses, settlements
or transfers into the level 3 category financial instruments as at March 31, 2012 or December 31, 2011.
INVESTMENT IN MAVII NOTES
On January 22, 2009 Alliance received a $12.4 million investment in MAVII notes in exchange for Alliance's
investment in asset-backed commercial paper.
The composition of the MAVII notes consists of various classes of notes, which carry separate ratings from DBRS and
are presented below:
Class A-1 notes 49% A (high)
Class A-2 notes 41% BBB (high)
Class B notes 7% No rating
Class C notes 3% No rating
While the legal maturity of these notes is July 15, 2056, the expected repayment date of the notes is January 22,
2017.
To date, Alliance has estimated the fair value loss on investment to be $3.4 million at March 31, 2012 (December 31,
2011 - $3.4 million). These estimates may vary from the actual prices that would be achieved in an arm's length
transaction at the reporting date.
Fair Value of MAVII Notes
Alliance has classified its investment in the MAVII notes as a trading security. Active market quotes were not
available in measuring the fair value of the MAVII notes. Management employs a valuation technique comprised of
quantitative and qualitative measures.
Each class is valued using the same methodology, but using different discount rates. Alliance estimates the fair
values of the MAVII notes using a present value analysis of future cash flow that incorporates floating coupon
payments tied to Bankers Acceptance (“BA”) rates and risk adjusted discount rates. Discount rates are estimated
based on Government of Canada benchmark rates plus expected spreads for similarly rated instruments with
comparable risk profiles of DBRS ratings. For Class B and C, the discount rates are estimated based on the 10-year
US Treasury notes plus spread as these notes are not rated.
Class A-1 and A-2 notes are valued using a comparable market rate, with A-2 notes more heavily discounted as they
are subordinated to A-1 notes. Class B notes are subordinated to A-2 notes, and Class C notes are subordinated to B
notes. Therefore, Class B notes are valued by comparing high yield bond spreads, while Class C notes are valued by
comparing CCC or lower bond spreads. In addition, unlike Classes A-1, A-2 and B notes that pay interest at BA rates
less 50 basis points, Class C notes pay interest at 120% of the BA rate. Based on this information, Alliance estimates
the fair values of the MAVII notes using a present value analysis of future cash flows that incorporates estimated
floating coupon payments tied to BA rates and risk adjusted discount rates.
NOTES TO THE FINANCIAL STATEMENTS | 16
RISK MANAGEMENT NOTE 10CREDIT RISK
Alliance limits, to an extent, its exposure to credit risk by requiring shippers who fail to maintain specified credit ratings
or a suitable financial position to provide acceptable security, generally equal to one year of demand charges, in
accordance with Alliance’s transportation service agreements. Transportation security may consist of cash deposits
or letters of credit and/or other security acceptable to Alliance and its lenders. Should shippers be unable to fulfill
their contractual obligations with Alliance and if suitable replacement shippers are not available, Alliance may not be
able to recover its operating and financing costs or make distributions to its partners. Alliance considers the risk of
non-performance of its shippers is minimal based on credit approval, ongoing monitoring procedures and historical
experience. At March 31, 2012, the shipper accounts receivable balance outstanding that meets the definition of past
due and/or impaired is nil (March 31, 2011 – nil).
At March 31, 2012, Alliance holds letters of credit of $26.9 million (December 31, 2011 – $26.8 million).
LIQUIDITY RISK
Annual cash inflows are collected equally over twelve months. The cash outflows are less predictable and require the
use of a revolving credit facility to manage short-term working capital fluctuations. Alliance continues to balance the
operating, investing and financing of cash through ongoing operations of its business. Alliance is required to manage
all cash and borrowings on the credit facility to maintain an adequate ability to cover operational and business needs
as determined by the debt service coverage ratio as defined in the amended and restated Common Agreement dated
May 16, 2003. The debt service coverage ratio is defined as the ratio of cash inflows minus operating costs as
compared with the schedule debt service payable for a twelve month period. The ratio is required to be 1.25 or
above. At March 31, 2012, the debt service coverage ratio is 1.98 (March 31, 2011 – 1.99).
FOREIGN EXCHANGE RISK
Alliance is exposed to foreign exchange risk, primarily on its US dollar and Euro purchases of pipeline maintenance
services and assets. To manage this risk, policies have been implemented which allow Alliance to minimize the
exposure to volatility on foreign currency markets by entering into foreign currency derivatives, or by buying and
holding foreign currency. Alliance undertakes hedging activities, as authorized and approved by the Board of
Directors, under the risk management policy for forecast operating and approved capital expenditures. Foreign
currency derivatives may be designated as hedging instruments for accounting purposes.
INTEREST RATE RISK
Alliance has significantly reduced this overall interest rate risk through the issuance of fixed rate notes. At March 31,
2012, Alliance has fixed interest rates on 99.8% (December 31, 2011 – 99.8%) of total long-term debt. Consequently,
the exposure to fluctuations in future cash flows, with respect to debt, as a result of changes in interest rates is
limited.
INTEREST AND OTHER INCOME NOTE 11 March 31
2012
March 31
2011
Interest income (170) (137)
Compressor unit waste heat supply (108) (106)
Interest and other income (278) (243)
NOTES TO THE FINANCIAL STATEMENTS | 17
TRADE ACCOUNTS RECEIVABLE NOTE 12 March 31
2012
December 31
2011
Transportation revenue 33,676 33,851
Other 1,647 1,354
Trade accounts receivable 35,323 35,205
TRADE ACCOUNTS PAYABLE AND ACCRUED LIABILITIES NOTE 13 March 31
2012
December 31
2011
Trade accounts payable and accrued liabilities 4,858 7,291
Interest accruals 21,793 339
Property tax accruals 5,129 -
Operating accruals 4,133 7,820
Capital accruals 3,893 3,804
Employee benefits payable 3,553 9,118
Other 486 586
Trade accounts payable and accrued liabilities 43,845 28,958
