2017 Annual Alliance Pipeline Limited Partnership
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2017 ANNUAL ALLIANCE PIPELINE LIMITED PARTNERSHIP Management’s Discussion and Analysis Alliance Pipeline Limited Partnership 2017 Annual Management’s Discussion and Analysis The Alliance System The Alliance System (System) consists of a 3,849 kilometre (km) (2,392 mile) integrated Canadian and United States (U.S.) natural gas transmission pipeline, delivering rich natural gas from the Western Canadian Sedimentary Basin (WCSB) and the Williston Basin in North Dakota to the natural gas market in Chicago. The System has been in commercial service since December 2000 and currently delivers an average of 1.6 billion cubic feet per day (bcf/d) of rich gas to the Aux Sable natural gas liquids (NGLs) extraction facility, owned by Aux Sable Liquid Products L.P. (Aux Sable), an affiliate of Alliance Pipeline Limited Partnership (Alliance Canada). Rich gas is natural gas with relatively high NGLs content; mainly ethane, propane, butane and condensates. The System connects with the Aux Sable NGLs extraction facility in Channahon, Illinois, which extracts NGLs from the natural gas transported before delivery to downstream pipelines. The pipeline connects in the Chicago area, through its downstream header, with five interstate natural gas pipelines and two local natural gas distribution systems, which provide shippers with access to natural gas markets in the Midwest, the Northeast, and the Gulf Coast of the U.S., and Eastern Canada. All shippers have signed extraction agreements that give Aux Sable the right to extract the NGLs from the rich gas transported. The System also has three connections, two in North Dakota and one in Iowa, to provide for deliveries of small amounts of natural gas to ethanol production plants. Facilities include 14 mainline compressor stations that operate between approximately 31,000 horsepower (hp) and 46,000 hp each spaced at approximately 193 km intervals; mainline block valves spaced on average at 32 km intervals; operating and maintenance facilities; and an associated SCADA system. Page 1 Alliance Pipeline Limited Partnership 2017 Annual Management’s Discussion and Analysis Construction of the System began in May 1999 and commercial operations commenced on December 1, 2000. Shippers executed transportation contracts with each of Alliance Canada and Alliance Pipeline L.P. (Alliance U.S.) that had a primary term ending November 30, 2015. Those contracts provided for the transportation of 100% of Alliance Canada’s available firm capacity and tolls based on a negotiated cost-of-service tolling mechanism. On December 1, 2015, Alliance Canada commenced the implementation of its Services Offering providing shippers with competitive long-term fixed firm tolls and biddable tolls for seasonal firm, short-term firm and interruptible transportation (IT) services. This replaced the original firm cost-of-service contracts. The Services Offering provides shippers with a variety of natural gas transmission services and tolling options for the safe and reliable transportation of their gas, and includes both full-path and segmented receipt and delivery services. A new Canadian trading pool and a revised Hydrocarbon Dewpoint (HCDP) specification were also introduced to further facilitate the transportation of rich gas. Alliance Canada The Alliance Canada portion of the System consists of approximately 1,561 kms (970 miles) of natural gas mainline pipeline and 732 kms (455 miles) of related lateral pipelines connected to natural gas receipt locations, primarily at gas processing facilities in northwestern Alberta and northeastern British Columbia, and related infrastructure. Alliance Canada owns the Canadian portion of the System. Alliance Canada is jointly owned by an affiliate of Enbridge Inc. and an affiliate of Pembina Pipeline Corporation and is subject to federal regulation by the National Energy Board (NEB). Alliance U.S. The Alliance U.S. portion of the System consists of approximately 1,556 kms (967 miles) of infrastructure including the 129 km (80 mile) Tioga Lateral in North Dakota. Alliance U.S., an affiliate of Alliance Canada, owns the U.S. portion of the System. Alliance U.S. is jointly owned by an affiliate of Enbridge Inc. and an affiliate of Pembina Pipeline Corporation and is subject to federal regulation by the Federal Energy Regulatory Commission (FERC). About this Document The following Management’s Discussion and Analysis (MD&A) is as of February 5, 2018 and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2017, and our 2016 Annual Information Form. All amounts in this MD&A are in millions of Canadian dollars except per unit amounts. All financial information in this MD&A has been prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP). This MD&A reviews the significant events and transactions that impacted our performance during the three and twelve months ended December 31, 2017. Throughout this MD&A, the terms, we, us, our, and Alliance Canada mean Alliance Pipeline Limited Partnership. Collectively, Alliance Canada and Alliance U.S. are referred to as the System. Abbreviations and acronyms that are not defined in this document are defined in the glossary of terms on page 28. Additional information about our business is available at www.alliancepipeline.com and on SEDAR at www.sedar.com Page 2 Alliance Pipeline Limited Partnership 2017 Annual Management’s Discussion and Analysis Strategy The Alliance System is unique in its ability to transport Since implementing our new services in late 2015, solid rich natural gas. Rich natural gas, primarily from the asset performance allowed us to benefit from favourable WCSB, is transported in a single continuous dense market conditions, which is reflected in our strong results. phase to Chicago where the pipeline interconnects with the Aux Sable NGLs extraction facility. The NGLs Alliance Canada’s long-term prospects are strong. We extracted at the Aux Sable facility are available for sale in have sold all of our year-round firm capacity through U.S. markets, while the natural gas is delivered to 2019, and 96% of year-round firm capacity for 2020. downstream markets through the Alliance Chicago Exchange hub (ACE). Alliance Canada will continue to engage with shippers to support the optimization of commercial operations and Alliance Canada’s business model is based on extensive the evaluation of new opportunities and services that consultation with shippers resulting in a variety of natural meet the current and potential needs of shippers as they gas transmission services and tolling options. This plan for growth initiatives and future prospects. business model was developed in a manner that is cognizant of "cost based" parameters. These services provide a more dynamic and flexible market-focused Capacity Expansion Study In response to the high demand for our transportation approach under which Alliance Canada assumes a services, Alliance Canada and Alliance U.S. announced higher degree of business risk and provides service a non-binding request for expressions of interest for flexibility to effectively respond to evolving market additional transportation services on the System with an conditions. anticipated commencement date as early as the second half of 2021. Alliance Canada's natural gas transmission services, coupled with rich gas delivery capabilities, are designed Alliance Canada is currently engaging with interested to enable producers to maximize the value of their parties and assessing the commercial feasibility of product. This provides significant competitive advantages adding more compression facilities along the System in which can include: order to increase throughput capacity by up to 500 Saving producers processing and infrastructure mmcf/d. costs, and providing an opportunity to reduce the time to market for their rich gas production; In conjunction with this engagement and assessment, Providing access to the Aux Sable NGLs extraction extensions of the terms of the current transportation facility allowing for considerable economies of scale; contracts portfolio are being discussed. A binding open and season process to support a potential expansion should Delivering value added products to alternative commence as early as the first quarter of 2018. markets for NGLs while only paying a transportation charge based on volume. These services can potentially provide shippers with a higher net back for rich natural gas. Page 3 Alliance Pipeline Limited Partnership 2017 Annual Management’s Discussion and Analysis As part of our maintenance inspection program, routine Health and Safety Stewardship internal safety and security audits are performed at At Alliance Canada, safety and environmental compressor station facilities with corrective actions as stewardship are our top core values. We consider both of required. We have developed a structured Health and these core values in our daily decisions and actions with Safety Management System based on Occupational the goal of being incident free. That means protecting the Health and Safety Management Guidelines. This system environment around us and keeping our neighbours, is part of Alliance Canada’s Integrated Management employees and contractors safe. We comply with or System that has been developed for integration of key exceed all applicable health, safety and environmental operational programs to manage hazards and risks laws and regulations in all material respects. associated with operation