ALLIANCE PIPELINE LIMITED PARTNERSHIP
ANNUAL INFORMATION FORM
For the Year Ended December 31, 2020
April 30, 2021
TABLE OF CONTENTS
GLOSSARY OF TERMS ...... 2 ABBREVIATIONS ...... 7 FORWARD-LOOKING INFORMATION ...... 8 CORPORATE STRUCTURE ...... 10 GENERAL DEVELOPMENT OF THE BUSINESS ...... 10 General ...... 10 Recent Developments ...... 12 DESCRIPTION OF THE BUSINESS ...... 13 The Alliance Pipeline System ...... 13 RISK FACTORS ...... 25 DESCRIPTION OF CAPITAL STRUCTURE ...... 38 Units ...... 38 Senior Notes ...... 40 Ratings ...... 41 Credit Facilities ...... 42 Liquidity ...... 42 DISTRIBUTIONS ...... 42 Cash Distributions ...... 42 Distribution Policy ...... 44 Distribution Limitations ...... 44 MARKET FOR SECURITIES ...... 44 SECURITIES SUBJECT TO CONTRACTUAL RESTRICTIONS ON TRANSFER ...... 44 DIRECTORS AND OFFICERS ...... 45 Name, Occupation and Security Holdings ...... 45 Conflicts of Interest ...... 47 AUDIT COMMITTEE ...... 47 Audit Committee Charter ...... 47 Composition of the Audit Committee ...... 48 Relevant Education and Experience ...... 48 CORPORATE GOVERNANCE DISCLOSURE ...... 50 Board of Directors ...... 50 Directorships ...... 50 Orientation and Continuing Education ...... 50 Ethical Business Conduct ...... 50 Nomination of Directors ...... 51 Assessments ...... 51 INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS ...... 51 INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS ...... 51 AUDITORS, REGISTRAR AND TRANSFER AGENT ...... 51 MANAGEMENT CONTRACTS ...... 51
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MATERIAL CONTRACTS ...... 52 Common Agreement ...... 52 INTERESTS OF EXPERTS ...... 58 ADDITIONAL INFORMATION ...... 58 APPENDIX A AUDIT COMMITTEE CHARTER ...... 1 APPENDIX B ADDITIONAL DEFINITIONS USED IN MATERIAL CONTRACTS SECTION ...... 1
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GLOSSARY OF TERMS
The following terms, when used in this Annual Information Form, have the meanings set forth below, unless otherwise indicated.
"Acceptable Credit Status" has the meaning ascribed thereto under the heading "Description of the Business – Credit".
"ACE Hub" means the Alliance Chicago Exchange at the delivery header of the Alliance USA Pipeline where services are offered by Alliance USA.
"Administrative Services Agreement" means the executive, managerial and administrative services agreement dated January 1, 2016 between Alliance Canada and Alliance USA.
"affiliate(s)" means, with respect to any person, any other person which, directly or indirectly, is in control of, is controlled by or is under common control with such person. For purposes of this definition, "control" of a person means the power, directly or indirectly, to either (i) vote securities having a majority of the ordinary voting power for the election of directors of such person or (ii) direct or cause the direction of the management and policies of such person, whether by contract or otherwise.
"Alliance" means, together, Alliance Canada and Alliance USA.
"Alliance Canada" means Alliance Pipeline Limited Partnership, an Alberta limited partnership.
"Alliance Canada Pipeline" means the Canadian portion of the System.
"Alliance USA" means Alliance Pipeline L.P., a Delaware limited partnership.
"Alliance USA Pipeline" means the U.S. portion of the System.
"Annual Information Form" means this annual information form.
"ATP" means the Alliance Trading Pool.
"Audit Committee" has the meaning ascribed thereto under the heading "Audit Committee".
"Aux Sable" means Aux Sable Extraction, the Aux Sable Extraction Facility and Aux Sable Liquid Products, or any one or more of them, as the context may require.
"Aux Sable Extraction" means Aux Sable Extraction L.P., a Delaware Limited Partnership.
"Aux Sable Extraction Facility" has the meaning ascribed thereto under the heading "Description of the Business – The Alliance Pipeline System".
"Aux Sable Liquid Products" means Aux Sable Liquid Products L.P., a Delaware Limited Partnership.
"Bakken" means the Bakken shale formation, which includes much of the Williston Basin, primarily located in Montana, North Dakota, Saskatchewan and Manitoba.
"Canadian General Partner" means Alliance Pipeline Ltd., the general partner of Alliance Canada.
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"CER" means the Canada Energy Regulator or any successor or analogous Canadian governmental authority.
"CER Act" means the Canadian Energy Regulator Act (Canada), as amended from time to time.
"Class A Units" means Units designated in the Limited Partnership Agreement as Class A Units in Alliance Canada.
"Class B Units" means Units designated in the Limited Partnership Agreement as Class B Units in Alliance Canada.
"Commercial Operations Services Agreement" means the commercial operations services agreement dated effective June 25, 2018 between Alliance Canada and the Pipeline Commercial Operator.
"Common Agreement" means the second amended and restated common agreement dated as of December 1, 2015 among Alliance Canada, Alliance USA, The Bank of Nova Scotia, National Bank of Canada, National Bank of Canada, New York Branch, National Bank Financial, Export Development Canada, The Bank of New York Mellon, BNY Trust Company of Canada, Deutsche Bank Trust Company Americas, Computershare Trust Company of Canada and the other lenders and lenders' representatives from time to time party thereto.
"Construction and Operation Services Agreement" means the construction and operation services agreement dated effective June 25, 2018 between Alliance Canada and the Pipeline Physical Operator.
"contracted capacity" means the daily volume of natural gas which a shipper has agreed to ship on the System on a firm basis or to pay reservation or demand charges in respect thereof, as set forth in the respective Transportation Contract.
"COVID-19" means the novel coronavirus, the global outbreak of which was declared a pandemic by the World Health Organization in March 2020.
"Credit Facility" means the $300 million revolving credit facility.
"Creditworthy" has the meaning ascribed thereto under the heading "Description of the Business – Credit".
"DBRS" means DBRS Limited, DBRS, Inc. or DBRS Ratings Limited, as the case may be, or any of their successors.
"DSCR" means the debt service coverage ratio, which for any period is the ratio of cash flows minus all operating costs for such period, divided by all scheduled debt service payable during such period.
"Enbridge" means Enbridge Inc. or its affiliates.
"FERC" means the United States Federal Energy Regulatory Commission or any successor or analogous U.S. federal governmental authority.
"firm capacity" means the volume of natural gas which Alliance is contractually committed to transport on a firm service basis.
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"GHG" has the meaning ascribed thereto under the heading "Description of the Business – Environmental".
"GP Board" means the board of directors of the Canadian General Partner.
"HCM Agreement" has the meaning ascribed thereto under the heading "Description of the Business – Aux Sable Extraction Facility".
"Investment Grade Rating" has the meaning ascribed thereto under the heading "Description of the Business – Credit".
"LIBOR" means the London Interbank Offered Rate.
"Limited Partners" means the limited partners of Alliance Canada, being Enbridge and Pembina.
"Limited Partnership Agreement" means the amended and restated limited partnership agreement relating to Alliance Canada dated effective as of June 25, 2018.
"MD&A" means Alliance Canada's Management's Discussion and Analysis dated February 25, 2021 for the year ended December 31, 2020, an electronic copy of which is available on Alliance Canada's profile on the SEDAR website at www.sedar.com or at www.alliancepipeline.com.
"Moody's" means Moody's Investors Service, Inc.
"NEB" means the National Energy Board or any successor or analogous Canadian governmental authority.
"NGL" means natural gas liquids, including ethane, propane, butane and condensate.
"NI 52-110" means National Instrument 52-110 – Audit Committees.
"NRGreen" means NRGreen Power Limited Partnership, an Alberta Limited Partnership.
"OPEC" means the Organization of Petroleum Exporting Countries.
"Operating Agreements" means, collectively, the Commercial Operations Services Agreement and the Construction and Operation Services Agreement.
"Operators" means, together, the Pipeline Commercial Operator and the Pipeline Physical Operator.
"Owner-Operator Transition" has the meaning ascribed thereto under the heading "General Development of the Business – Recent Developments – 2018".
"Owners" means, together, Enbridge and Pembina.
"Pembina" means Pembina Pipeline Corporation or its affiliates.
"person" includes an individual, partnership, corporation, business, trust, joint stock company, limited liability company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature.
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"PHMSA" has the meaning ascribed thereto under the heading "Description of the Business – Pipeline Safety".
"Pipeline Commercial Operator" means Pembina Alliance North Inc.
"Pipeline Physical Operator" means Enbridge Alliance (Canada) Management Inc.
"Rate Base" means the Alliance Canada regulatory rate base, which includes, among other things: (i) actual capital costs, which includes costs that Alliance Canada actually and reasonably incurred in developing, designing, financing, constructing, commissioning, operating and maintaining the Alliance Canada Pipeline (including construction cost overruns); and (ii) an allowance for funds used during construction, under which Alliance Canada has capitalized and, accordingly, is entitled to recover in tolls and the net cost of funds (both debt and equity) required to finance the development and construction of the Alliance Canada Pipeline.
"S&P" means Standard & Poor's Services LLC (a division of McGraw Hill Financial) or its successor.
"SCADA" means supervisory control and data acquisition.
"Security Required" has the meaning ascribed thereto under the heading "Description of the Business – Credit".
"SEDAR" means the System for Electronic Document Analysis and Retrieval of the Canadian Securities Administrators.
"Senior Note Indenture" means the indenture dated as of July 6, 1999 between Alliance Canada, as issuer, and The Trust Company of the Bank of Montreal, as trustee, as amended by the first supplemental indenture dated February 28, 2001, the second supplemental indenture dated October 30, 2002, the third supplemental indenture dated September 9, 2003 and the fourth supplemental indenture dated November 29, 2011.
"Senior Notes" means, collectively, the notes issued by Alliance Canada pursuant to the Senior Note Indenture.
"Services Offering" means the tolls and services framework approved by the NEB for Alliance's pipeline transportation services commencing December 1, 2015.
"Shareholders Agreement" means the amended and restated unanimous shareholders agreement dated effective June 25, 2018.
"shippers" means (i) collectively, the oil and natural gas exploration, production, pipeline, aggregator, local distribution and marketing companies, partnerships, trusts or other entities that are parties to Transportation Contracts, (ii) prospective shippers and (iii) parties to an interruptible transportation service agreement with Alliance.
"System" means the entire Alliance pipeline system of approximately 3,849 kms, including the approximately 2,988 km high-pressure transmission pipeline that runs from northeastern British Columbia to Illinois, approximately 732 kms of lateral pipelines in Canada, and the approximately 129 km Tioga Lateral and related infrastructure.
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"Tioga Lateral" means the 129 km lateral natural gas pipeline originating from a gas processing plant near Tioga, North Dakota and connecting to the Alliance USA Pipeline near Sherwood, North Dakota.
"Transportation Contracts" means agreements for firm transportation service between Alliance and shippers and "Transportation Contract" means any such agreement.
"TSA" means the United States Department of Homeland Security – Transportation Security Administration.
"Units" mean the interests of the Limited Partners in Alliance Canada, as represented by units.
"U.S." or "United States" means the United States of America.
"USA Managing General Partner" means Alliance Pipeline Inc., the managing general partner of Alliance USA.
"Vector Pipeline" means a pipeline connected to Alliance at the Chicago hub (among other pipelines) in Illinois and delivering gas to various markets in Michigan and to the Dawn hub in Ontario.
"WCSB" means the Western Canadian Sedimentary Basin.
All dollar amounts set forth in this Annual Information Form are in Canadian dollars unless otherwise indicated. References to "$" or "C$" are to Canadian dollars and references to "US$" are to U.S. dollars. On April 29, 2021, the daily average exchange rate reported by the Bank of Canada, was US$1.00 equals $1.2292.
Except where otherwise indicated, all information in this Annual Information Form is presented as at the end of Alliance's most recently completed financial year, being December 31, 2020.
A reference made in this Annual Information Form to other documents, or to information or documents available on a website, including www.alliancepipeline.com, does not constitute the incorporation by reference into this Annual Information Form of such other documents or such other information or documents available on such website unless otherwise stated.
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ABBREVIATIONS
In this Annual Information Form, the following abbreviations have the indicated meanings:
"bcf/d" means billion cubic feet per day;
"CO2e" means carbon dioxide equivalents; "hp" means horsepower; "km" means kilometre; and "mmcf/d" means million cubic feet per day.
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FORWARD-LOOKING INFORMATION
Certain information in this Annual Information Form constitutes forward-looking information or forward- looking statements (collectively, "forward-looking information") and is related to anticipated financial performance, events and strategies of Alliance Canada. The use of words such as "estimate", "proposed", "forecast", "anticipate", "believe", "plan", "project", "intend", "may", "will", "could result", "target", "expect" and "continue" or similar words or expressions may identify forward-looking information. By their nature, these statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause actual results or events to differ materially from those anticipated in such forward- looking information.
In particular, this Annual Information Form contains forward-looking information pertaining to the following: the timing, scope and nature of new contract offerings; the continued acceptance by the CER of the tolls and tolling methodology of the Transportation Contracts that Alliance has executed with its shippers; continuing acceptance of Alliance Canada's Services Offering; expectations relating to Alliance Canada's outlook, including the expected demand for seasonal firm or interruptible transportation service; expectations regarding the competitiveness of Alliance's tolls and rates, including expected competition risk; the effect of climate change regulations in Canada and the United States and the impact of such regulations on approved tolls; the effect of NOx (as defined herein) emissions regulations and Alliance Canada's ability to comply therewith; the expectation that costs associated with environmental requirements or abandonment will be recovered through transportation tolls; the continuing production of natural gas shipped on the System from the WCSB, the Bakken formation and the Appalachian basin; expectations regarding drilling activity in the current economic environment and the resulting impact on midstream services; the System's ability to accommodate new receipt volumes with varied gas compositions; the potential impact the COVID-19 pandemic may have on the economy and on Alliance Canada's business; the ability of Alliance Canada to replace shippers who may fail to perform their obligations under their respective Transportation Contracts; potential distributions to the Limited Partners; approval of the stipulation and agreement filed with the FERC; expectations relating to the consolidated pressure equipment integrity program; and expectations relating to liquidity and capital resources requirements, including liquidity risk.
The forward-looking information contained in this Annual Information Form is based on certain assumptions and analyses made by Alliance Canada in light of its experience and perception of historical trends, current conditions and expected future developments and other factors it believes are appropriate. The material factors and assumptions used to develop such forward-looking information include, but are not limited to: Alliance Canada's operations, structure, financial position and available credit facilities; Alliance Canada's assessment of commodity and currency markets; the markets and regulatory environment in which Alliance Canada operates; the state of capital markets; management's analysis of applicable tax legislation; the assumption that the currently applicable and proposed laws and regulations will not change and will be implemented, as applicable; the performance of contractors and suppliers; and that the Operators will continue to provide management, administrative, operational and workforce related services to Alliance. Alliance Canada believes the assumptions reflected in the forward- looking information are reasonable, but no assurance can be given that the expectations based on these assumptions will prove to be correct.
Whether actual results, performance or achievements will conform to Alliance Canada's expectations and predictions reflected in the forward-looking information is subject to a number of known and unknown risks, uncertainties and other factors which could cause actual results to differ materially from such expectations and predictions. These risks, uncertainties and other factors include, but are not limited to:
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risks relating to volatility of and assumptions regarding, natural gas or NGL prices, including substantial or extended decline in the prices thereof and the adverse effects on the operations and financial conditions of shippers; dependence on shippers who may fail to perform their obligations under their respective Transportation Contracts; the continuing ability of Alliance Canada to obtain new transportation commitments after the expiry of the initial term of the Transportation Contracts under the Services Offering; the continuing approval by the CER of Alliance Canada's Services Offering; dependence on the services provided by the Operators and Aux Sable; competitive factors in the pipeline transportation services industry; changing levels of natural gas supply from the WCSB, the Bakken and the Appalachian basin; factors affecting the continued operation of the Alliance USA Pipeline; the continuous conduct of inspections and audits in respect of the System and the implementation of changes necessitated by such inspections and audits; the breakdown or failure of equipment and facilities; public health crises, epidemics, pandemics or outbreaks of new infection diseases or viruses, including the global outbreak of COVID-19; the exposure of pipelines to terrorist attacks and exposure of information systems to cyber security attacks; changes in regulatory and government decisions, including changes to environmental regulations and regulatory authorities; trade disputes or other governmental action related to tariffs, international trade agreements and policies; recent increases in climate change or environmental activism; changes in existing and proposed tax laws and other legislation in Canada and the United States; adequacy of insurance; liquidity; changes in interest rates; and any changes in regulatory requirements relating to the abandonment of the Alliance Canada Pipeline. See "Risk Factors".
The foregoing risks, assumptions and other factors should not be considered exhaustive. Readers are cautioned not to place undue reliance on forward-looking information as actual results could differ materially from the plans, expectations, predictions, estimates or intentions expressed in the forward- looking information. Except as required by law, Alliance Canada disclaims any intention and assumes no obligation to update any forward-looking information, whether as a result of new information, future events or otherwise. Any forward-looking information contained herein is expressly qualified by this cautionary statement.
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CORPORATE STRUCTURE
Name, Address and Formation
Alliance Canada is a limited partnership formed under the Partnership Act (Alberta) on February 1, 1996 under the name "Alliance Pipeline Limited Partnership". The Canadian General Partner is the general partner of Alliance Canada. The head and registered office of both Alliance Canada and the Canadian General Partner is located at Suite 200, 425 – 1st Street SW, Calgary, Alberta T2P 3L8. Alliance Canada is governed by the terms and conditions of the Limited Partnership Agreement. Alliance Canada has no subsidiaries.
As of the date of this Annual Information Form, Enbridge and Pembina, directly or through their respective affiliates, each own 50% of Alliance Canada and the Canadian General Partner and 50% of Alliance USA and the USA Managing General Partner.
GENERAL DEVELOPMENT OF THE BUSINESS
Alliance Pipeline System
General
The business objective of Alliance Canada is to provide shippers with competitively priced, safe, reliable and efficient transportation of natural gas, including natural gas with entrained NGL (i.e., "rich gas") through the Alliance Canada Pipeline. Alliance transports natural gas to major markets in the midwestern United States and, via interconnections in the Chicago, Illinois area, reaches other markets in the United States and eastern Canada. Alliance Canada believes that the System offers several advantages over other
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existing natural gas transportation systems, including: market connectivity, competitiveness and design and operational efficiency, each as further described below.
(1) Market Connectivity
Alliance Canada Pipeline is in close proximity to significant natural gas production areas in northeastern British Columbia and northwestern Alberta, including liquids-rich plays, such as the Montney and Duvernay formations. Production in this region, within a 40 km radius of the Alliance Canada Pipeline, has grown significantly, driven by rich gas development. From 2015 to 2019, Alliance Canada added or approved for construction receipt points that provide for approximately 0.4 bcf/d of new receipt capacity from rich gas plays. No new receipt points were added in 2020. The ATP in the gathering area of Alliance Canada Pipeline has been a cleared trading point on ICE NGX Clearinghouse ("NGX") since December 1, 2015.
Alliance USA transports gas received from Alliance Canada as well as from the Bakken formation in North Dakota through the Tioga Lateral and the receipt point near Bantry, North Dakota. Alliance USA has seven long-term Transportation Contracts from the Bakken region in North Dakota: (i) four totaling 112.8 mmcf/d from the interconnection with the Prairie Rose pipeline near Bantry, North Dakota; and (ii) three totaling 88.9 mmcf/d on the Tioga Lateral and Alliance USA Pipeline. If further development of the Bakken area results in increased requests from shippers, the Tioga Lateral and its associated facilities are designed to be expandable to provide additional capacity beyond its current nameplate capacity of 96 mmcf/d.
The liquidity of the Chicago market along with the associated takeaway capacity and diversity of pipeline connections have enabled Alliance USA to offer market hub services at its delivery header in the Chicago area to shippers. Since 2014, the ACE Hub has been a cleared trading point on the NGX.
The delivery header has over 6 bcf/d of downstream natural gas delivery capability with major interstate pipelines, as well as local gas distribution systems operating in the midwestern U.S. These interstate pipelines and local gas distribution systems supply residential, commercial and industrial customers and have access to gas storage facilities.
(2) Competitiveness
Through its Services Offering for transportation services, Alliance Canada provides a unique solution for customers seeking to transport rich gas. Key features of the Services Offering include competitive, long- term fixed tolls for full path, as well as segmented receipt and delivery, transportation services that appeal to a diverse range of customers and the ATP, a Canadian trading pool.
Effective December 1, 2015, Alliance Canada received approval from the NEB to change the hydrocarbon dewpoint ("HCDP") gas quality tariff specification from -10 degrees Celsius to -5 degrees Celsius. Similarly, in 2015, Alliance USA received approval from the FERC to change the HCDP gas quality tariff specification from 14 degrees Fahrenheit to 23 degrees Fahrenheit effective December 1, 2015. Curtailment mechanisms are included in the tariffs to ensure that the pipeline operations and safety are not compromised. The HCDP specification change enhances shipper access to rich gas transportation, which, in turn, facilitates an increase in the NGL content of the gas Alliance transports for its shippers. In addition to the HCDP change, Alliance Canada also offers additional services that further enable shippers to optimize the heat content of their natural gas deliveries.
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(3) Design and Operational Efficiency
Alliance's pipeline service provides for the dense phase transmission of rich gas. As a result, Alliance Canada provides a unique solution for its shippers as the only direct pipeline link from the WCSB to the midwestern U.S. market for rich gas.
The System design provides an alternative for rich gas shippers looking to avoid building costly field extraction plants and reduce the time to market for their rich gas production.
In addition to long-term firm capacity, Alliance Canada has successfully contracted seasonal firm contracts as well as daily firm contracts, all through a bidding process, to capture the strong demand for its transportation services.
Recent Developments
2018
On March 27, 2018, Alliance announced that Enbridge and Pembina had decided to convert the operation and administration of Alliance into an owner-operator model, whereby Alliance's business functions would be carried out by Enbridge and Pembina or their respective affiliates.
Effective June 25, 2018, Alliance completed its transition to an owner-operator model whereby affiliates of Enbridge and Pembina, as the operators, assumed responsibility to manage all Alliance business functions (the "Owner-Operator Transition") in accordance with the terms of the Operating Agreements. Effective June 25, 2018, the Canadian General Partner engaged affiliates of Enbridge under the terms of the Construction and Operations Services Agreement and affiliates of Pembina under the Commercial Operations Services Agreement to provide management, administrative, operational and workforce related services to Alliance. The Pipeline Physical Operator is an affiliate of Enbridge and the Pipeline Commercial Operator is an affiliate of Pembina.
In March 2018, Alliance USA reached an agreement-in-principle to resolve a FERC hearing issue related to a gas processing issue disputed in 2016. The resulting uncontested settlement was approved by the FERC in June 2018.
On March 28, 2018, in response to expressions of interest from shippers for additional capacity, Alliance Canada issued a binding open season for additional firm transportation services from one or more designated receipt points to the point of interconnection between the Alliance Canada Pipeline and the Alliance USA Pipeline. On the same date, Alliance USA issued a similar binding open season for additional firm transportation services from one or more designated receipt points to one or more designated delivery points on the Alliance USA Pipeline. The expansion service would have been available primarily through incremental compression along the System to provide approximately 400 mmcf/d of additional capacity. On June 15, 2018, Alliance announced that the binding commitments for the capacity expansion open season did not reach the targeted 400 mmcf/d of additional capacity.
In October 2018, Alliance Canada conducted a month-long renewal window for contracts otherwise expiring on October 31, 2019. Approximately, 205 mmcf/d of firm receipt service and firm full path service capacity was eligible for renewal. Similarly, approximately 87 mmcf/d of firm delivery service capacity and 137 mmcf/d of firm U.S. transportation capacity were eligible for renewal. All eligible contracts were renewed in accordance with the renewal rights of the respective Transportation Contracts.
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2019
In the renewal window of 2019, all contracts delivering volumes to the Canadian/United States border and all United States contracts delivering volumes to Chicago were renewed. Also in October 2019, some 56 mmcf/d of firm delivery service (and corresponding firm United States transportation capacity) was offered to the market and fully subscribed. Approximately 75% of the offering was taken for a term of two years while the remainder was subscribed for a term of three years.
2020
In 2020, Alliance Canada conducted a renewal window where long-term firm customers were required to indicate whether they intended to renew their contracts expiring on October 31, 2021, by the end of October 31, 2020. Upon completion of the renewal window, over 80% of Alliance Canada's long-term firm capacity (approximately 1,057 mmcf/d) was contracted for the period commencing November 1, 2021, with an average remaining term of approximately 2.5 years.
DESCRIPTION OF THE BUSINESS
The Alliance Pipeline System
Construction of the System commenced in May 1999 and the System commenced commercial operations on December 1, 2000. The System includes an approximately 2,988 km integrated, high-pressure transmission pipeline and a series of gathering laterals located in western Canada and North Dakota and related equipment such as compressor stations, meter stations, block valves and communication and station control equipment. The System includes 14 mainline compressor stations that operate between approximately 31,000 hp and 46,000 hp each, spaced at approximately 193 km intervals. The facilities also include lateral compression facilities, meter stations and mainline block valves, spaced at 32 km intervals on average and an associated SCADA system.
The System delivers rich gas through a high-pressure transmission service primarily from the WCSB to the Chicago, Illinois area. The transportation of rich gas increases operating efficiency and delivers more energy to markets than a typical natural gas pipeline.
The Alliance Canada Pipeline consists of approximately 1,561 kms of natural gas mainline pipeline and 732 km of related lateral pipelines connected to 57 receipt point locations (including 51 natural gas receipt point locations, primarily at gas processing facilities in northwestern Alberta and northeastern British Columbia, and six NGL receipt points) and related infrastructure.
The Alliance USA Pipeline consists of an approximately 1,556 km natural gas mainline pipeline, including the approximately 129 km Tioga Lateral in North Dakota, four receipt points (one at the Canada-United States border, two in North Dakota, and one in Minnesota), 14 delivery points (three in North Dakota, one in Iowa and ten along the delivery header near Chicago) and related infrastructure owned by Alliance USA. The Alliance Canada Pipeline and the Alliance USA Pipeline are connected at the Canada-United States border near Elmore, Saskatchewan and operate as an integrated pipeline system.
The Alliance USA Pipeline connects near its terminus in the Chicago area with six interstate natural gas pipelines and two local natural gas distribution systems, which provide shippers with access to these and other major natural gas markets in the United States and eastern Canada.
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The Alliance USA Pipeline also connects with an NGL extraction plant (the "Aux Sable Extraction Facility") in Channahon, Illinois near the terminus of the System. The Aux Sable Extraction Facility is one of the largest extraction and fractionation plants in North America and provides access to multiple NGL markets and distribution channels. All existing Alliance Canada shippers have signed extraction agreements that give Aux Sable the exclusive right to extract the NGL from the rich gas transported on the System. The Aux Sable Extraction Facility is owned by Aux Sable Liquid Products, a related party of Alliance Canada. The System is also connected to three ethanol producing plants (two in North Dakota and one in Iowa) and a manufacturing plant in North Dakota.
A suite of services that leverages the System's interconnections in the Chicago area to other pipelines and downstream markets is available at the ACE Hub. The ACE Hub services enable shippers and other market participants to access greater commercial liquidity and delivery flexibility in their transactions.
Shippers and Transportation Contracts
As at December 31, 2020, Alliance Canada had 26 long-term firm shippers and Alliance USA had 22 long- term firm shippers. As at December 31, 2020, the total quantity of firm transportation contracted, including seasonal service (excluding daily seasonal service) with contract terms of greater than one day and up to one year less a day, was 1.612 bcf/d on the Alliance Canada Pipeline and 1.756 bcf/d on the Alliance USA Pipeline. Firm Transportation Contracts are take-or-pay and shippers are obligated to pay demand charges on contracted capacity in Canada and reservation charges on contracted capacity in the U.S. In addition, Alliance Canada sells seasonal firm and interruptible transportation service on a price- biddable basis. Long-term firm receipt and full path shippers in Canada are also able to nominate priority interruptible transportation service for up to 25% of their contracted capacity, if available, at premiums to their long-term firm tolls.
As at December 31, 2020, no shipper represented more than 32% of the transportation revenues on the Alliance Pipeline. The ten largest shippers, in terms of transportation revenues, represent approximately 82% and 90% of the transportation revenues of the Alliance Canada Pipeline and the Alliance USA Pipeline, respectively. Affiliates of Enbridge and Pembina accounted for approximately 18% of the transportation revenues on the Alliance Canada Pipeline and approximately 19% of the transportation revenues on the Alliance USA Pipeline for the year-ended December 31, 2020.
Credit
Alliance reviews the credit status of each shipper at least quarterly and determines whether the shipper or applicable guarantor possesses sufficient credit. Alliance and its Lenders (as defined in Appendix B to this Annual Information Form) may release a shipper from the requirement to post credit security if the shipper obtains Acceptable Credit Status or an Investment Grade Rating. The credit status of each shipper is classified into one of two categories:
(i) "Creditworthy" means a shipper who either possesses an Investment Grade Rating or has Acceptable Credit Status. "Investment Grade Rating" means a shipper or its respective guarantors, if applicable, or a shipper's senior unsecured securities, that has a credit rating of any of the following, as applicable (a) "Baa3" or better from Moody's, (b) "BBB-" or better from S&P or (c) "BBB" or better from DBRS. "Acceptable Credit Status" means a shipper or its respective guarantors, if applicable, that does not have an Investment Grade Rating, but is of sufficient financial strength that Alliance does not require such shipper to post security for such shipper's obligations to Alliance; or
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(ii) "Security Required" means shippers that do not have an Investment Grade Rating or Acceptable Credit Status and have, in accordance with the terms of the applicable Transportation Contract, either posted security in the form of letters of credit equal to three months of demand and reservation charges or have made other credit support arrangements satisfactory to Alliance and its Lenders.
The following is a summary percentage of contracted long-term firm revenue for Alliance Canada and Alliance USA and credit status of the shippers or their respective guarantors, if applicable, as at December 31, 2020:
Alliance Canada Pipeline % of Contracted Long Term Shippers Number of Shippers Revenue Investment Grade Rating 7 26.4% Acceptable Credit Status 1 37.2% Security Required 18 36.4% Total 26 100.0%
Alliance USA Pipeline % of Contracted Long Term Shippers Number of Shippers Revenue Investment Grade Rating 8 35.3% Acceptable Credit Status 1 34.1% Security Required 13 30.6% Total 22 100.0%
Alliance also contracts firm transportation to shippers on a seasonal or daily basis, which is not reflected in the contracted long-term revenue figures above.
Regulation in Canada
The Alliance Canada Pipeline is subject to Canadian federal regulation by the CER. The CER exercises jurisdiction over the construction, operation and abandonment of all international and interprovincial natural gas pipelines in Canada pursuant to the CER Act. Pursuant to the CER Act, the CER has jurisdiction with respect to commercial aspects of Alliance Canada's business, including in relation to toll and tariff matters, pipeline operations and the construction of new facilities.
Alliance Canada must comply with all laws and regulations regarding abandonment of the Alliance Canada Pipeline at the end of its economic life. The NEB previously directed that pipeline companies collect and set aside funds to cover future abandonment costs. The collected funds are deposited in a CER-approved pipeline abandonment trust. Each of Alliance Canada's transportation services includes a pipeline abandonment surcharge presently designed to collect in aggregate $11.6 million on an annual basis, subject to an annual adjustment to reflect prior period over/under revenue collections.
Regulation in the United States
Alliance USA is regulated by the FERC as a "natural gas company" under the Natural Gas Act of 1938, as amended (the "NGA"). Under such legislation, the FERC has jurisdiction over Alliance USA with respect to commercial aspects of its business, including transportation of natural gas, rates and charges, construction of new facilities, extension or abandonment of service and facilities, accounts and records, depreciation
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and amortization policies, the acquisition and disposition of facilities, the initiation and discontinuation of services, affiliate relationships and certain other matters.
In general, rates charged by interstate natural gas pipeline companies may not exceed the "recourse" rates approved by the FERC. However, under a FERC policy in effect since 1996, a pipeline may obtain approval to charge negotiated rates which differ from (and may exceed) the FERC-regulated recourse rate. The FERC approved Alliance USA's proposal to offer shippers both negotiated and recourse rate options. Accordingly, Alliance USA's current tariff contains recourse rates and expressly permits Alliance USA to charge negotiated rates.
Tolls and Tariff Structure
All of Alliance Canada's long-term firm service shippers pay CER-approved fixed tolls in accordance with the service and term selected. Seasonal/short-term firm service and interruptible service shippers pay tolls established through a bidding mechanism.
Most of Alliance USA's firm transportation shippers have agreed to receive service at fixed negotiated rates under their respective Transportation Contracts, although some of Alliance USA's firm shippers, along with interruptible shippers, have received services under the tariff recourse rate structure. On May 29, 2020, Alliance USA filed a rate case under the NGA and the FERC's regulations to comply with the filing date required by Alliance USA's 2015 rate case settlement. Alliance USA and all parties to the rate case agreed to a settlement in principle regarding all rates and other matters in the rate case in January 2021. The unopposed stipulation and agreement was filed with the FERC in March 2021. Alliance USA is currently awaiting approval of such stipulation and agreement by the FERC.
All shippers are required to provide fuel-in-kind based on annual fixed fuel rates by service type. The fuel rates are adjusted annually on an actual tracked and trued-up basis.
Technical Description of the Alliance Pipeline System
The Mainline Pipeline
The pipe used for the Alliance Canada Pipeline was manufactured using low carbon alloy steel, with controlled rolling practices used to improve strength, ductility, weldability and toughness. All piping and appurtenances were coated externally for corrosion protection and internally to reduce friction. A cathodic protection system was installed to protect against corrosion for the operating life of the Alliance Canada Pipeline.
The Alliance USA Pipeline was constructed with characteristics similar to the Alliance Canada Pipeline. Like the Alliance Canada Pipeline, the Alliance USA Pipeline has a cathodic protection system installed, has been coated externally to prevent corrosion and internally to reduce friction. U.S. regulations call for different requirements in calculating the maximum stress levels compared to Canadian regulations; as a result, the pipe wall thicknesses used in the Alliance USA Pipeline are slightly thicker than those used in the Alliance Canada Pipeline.
Interconnecting Pipelines and Local Distribution Companies
The System interconnects at its terminus in the Chicago, Illinois area with six interstate natural gas pipelines owned by the following entities: (i) ANR Pipeline Company (a subsidiary of TC Energy
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Corporation); (ii) Midwestern Gas Transmission Company (a subsidiary of ONEOK Partners, L.P.); (iii) Natural Gas Pipeline Company of America (a subsidiary of Kinder Morgan, Inc.); (iv) Vector Pipeline L.P. (an indirect subsidiary of Enbridge); (v) Guardian Pipeline L.L.C. (a subsidiary of ONEOK Partners, L.P.); and (vi) Horizon Pipeline Company LLC (a joint venture of the Natural Gas Pipeline Company of America which is owned by Kinder Morgan Energy Partners and NICOR Gas). The System connects with the following two local natural gas distribution systems: (i) NICOR Gas (a subsidiary of AGL Resources Inc.); and (ii) Peoples Gas (a subsidiary of Integrys Energy Group). These pipelines and local distribution systems serve major natural gas consuming areas in the midwestern United States and Ontario. Connection to these pipelines provides shippers with access to other major natural gas markets in the northeastern United States and eastern Canada. The current downstream natural gas receipt capability of these pipelines and local distribution systems in the Chicago area exceeds 6 bcf/d. The System also connects with the Aux Sable Extraction Facility and has four upstream delivery connections to ethanol producing plants owned and operated separately by three independent ethanol producers as well as an industrial manufacturer.
Operations and Maintenance
The Pipeline Physical Operator operates and maintains the Alliance Canada Pipeline and the Alliance USA Pipeline. Prior to that time, the Canadian General Partner and the USA Managing General Partner operated and maintained the Alliance Canada Pipeline and the Alliance USA Pipeline, respectively. The Pipeline Physical Operator maintains the requisite permits to ensure the continued operation of the System. Alliance Canada has entered into the Construction and Operation Services Agreement to have the Pipeline Physical Operator manage the operations and maintenance of the System. In addition, Alliance USA has contracted with Alliance Canada to provide certain managerial and administrative support pursuant to the Administrative Services Agreement.
Alliance Canada and Alliance USA previously entered into agreements with an original equipment manufacturer and its affiliate to provide for maintenance services for the System's mainline compressors. As of January 1, 2018, Alliance Canada and Alliance USA entered into limited service agreements with the original equipment manufacturer. This was renewed at the end of 2019 and extended into 2020. Ongoing evaluations continue with respect to further integrated services.
The System is remotely monitored, including by video, and operated from a main control centre located in Alberta. Control centre operators can remotely adjust operating parameters and shut down or start up individual stations or facilities on the System. Facilities monitored and operated from this control centre include receipt stations, compressor stations, delivery stations and mainline block valves. In addition, all facilities have local controls, which include emergency shutdown capabilities. A back-up control centre has been established in a different Alberta location.
Alliance utilizes a satellite communications system for data transmission to and from its remote facilities and the main and back-up control centres. The satellite system is backed up by land lines to key remote facilities. All major compressor station equipment integrity is monitored via on-site control systems that monitor sensors for parameters such as temperature, pressure and vibration. Compressor station equipment performance is monitored and controlled by an automated, station-sited programmable logic control system. Each compressor station is designed to be unmanned but is monitored and operated on a continuous year-round basis from the main control centre.
Alliance's gas management system ("GMS") is a critical element of the System's operations. The GMS meets both business and regulatory requirements by providing functionality which includes contract management, customer account management, capacity release/allocation, nomination entry, scheduling,
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confirmation and allocation, imbalance management, title transfers, wheeling, park and loan transactions, invoicing and reporting.
Pipeline Safety
Natural gas pipelines in Canada that cross a national or provincial border are required to meet construction, operating and maintenance standards established by the CER, other federal regulators and the Canadian Standards Association. Natural gas pipelines in the United States are required to meet construction, operation and maintenance regulations established by the United States Department of Transportation Pipeline and Hazardous Materials Safety Administration ("PHMSA") and standards established by the FERC.
The Alliance Canada Pipeline is subject to the Canadian Energy Regulator Onshore Pipeline Regulations (the "OPRs") and CSA Z662 Oil and Gas Pipeline Systems standard. The OPRs concern the design, construction, operation and abandonment of pipelines within the jurisdiction of the CER. CSA Z662 Oil and Gas Pipeline Systems is a consensus standard administered by the Canadian Standards Association with ongoing participation from regulators, industry, suppliers and engineering consultants. Alliance Canada has implemented practices and procedures common in the pipeline industry and in accordance with applicable laws in all material respects.
The Alliance USA Pipeline is subject to PHMSA regulations (Title 49, CFR 191, 192 ,195 and 199) promulgated under the United States Natural Gas Pipeline Safety Act of 1969, as amended. Alliance USA maintains and follows required plans, procedures and specifications written in compliance with these regulations for the design, construction, operation and maintenance of the Alliance USA Pipeline, including emergency response, employee qualifications, integrity programs, public awareness programs, control room management and drug and alcohol testing.
Alliance Canada conducted routine internal safety and security inspections at its compression facilities in 2020 with corrective actions being identified and addressed as appropriate. The CER also conducted safety inspections at certain Alliance Canada locations with no material findings resulting.
In 2019, Enbridge initiated the transition from the Alliance Integrated Management System ("AIMS") to the Gas Transmission and Midstream ("GTM") Integrated Management System ("IMS"). The transition plan incorporated an assessment by internal subject matter experts to identify any potential gaps between the legacy Alliance process and the superseding GTM/IMS process, allowing for a structured and measured management of change ("MOC"). The MOC was facilitated by the GTM/IMS team to ensure a consistent approach across all core and program level processes. In addition, the MOC required approval from the program and process owners (director and manager level) to ensure suitable oversight. In 2020, Enbridge finalized the transition from the AIMS to the GTM/IMS. This transition was managed in two phases: Phase 1, which was completed in 2019 and included the transition of core processes/elements such as requirements management, risk management, and management review, among others; and Phase 2, which was completed in 2020 for the transition of program level processes (e.g. integrity, safety, environment, etc.).
In 2019 Alliance performed an integrity management plan audit where 19 of 20 corrective and Preventative Action Plan milestones have been completed and the final deliverable, the development and rollout of a consolidated pressure equipment integrity program, was submitted to the CER on December 18, 2020 for close out in 2021. Several other compliance activities took place in 2020, including a security management information exchange, a safety inspection, emergency management (in response to the
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COVID-19 pandemic), a security inspection of a receipt point in Gold Creek, Alberta, a process safety information exchange, and an emergency management observation. All activities resulted in no enforcement actions unless otherwise noted.
Regular maintenance is performed on all portions of the System in accordance with industry and government standards. Regular maintenance includes, but is not limited to, inspections and tests of corrosion control systems, pressure control and overpressure protection, shut-off valves, gas detection, emergency shutdown devices and leak surveys and aerial patrols. In addition to complying with normal operations and maintenance requirements in both Canada and the U.S., Alliance has rigorous integrity management programs in which in-line inspection tools are used to assess the condition of the System. The frequency of these assessments is based on a detailed evaluation of risk, the not-to-exceed maximum intervals established under current Canadian and U.S. regulations and on conditions contained within the waiver granted to increase the maximum allowable operating pressure in the U.S. by PHMSA in July 2006. Alliance has excavated and examined the pipe and coating condition at several locations and on a range of pipeline segment diameters. As at the date hereof, no material anomalies requiring immediate pipe repair or replacement have been found in either the Alliance Canada Pipeline or the Alliance USA Pipeline.
Environmental
Several design features of the System make it more efficient than older, conventional designs of natural gas pipelines; however, GHG emissions are created during the combustion of the natural gas in turbines to drive compressors that move natural gas through the System. Such GHG emissions are regulated both federally and provincially.
GHG emissions are also generated from the pipeline system at pressure relieving devices, fittings, analyzer vents, and connections. As of January 1, 2020, the Federal Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds (Upstream Oil and Gas Sector) came into force. These regulations require the completion of three leak detection surveys at each surface facility per year, and confirmation that the identified leaking components are repaired within a defined timeline. Through this activity, Alliance Canada has demonstrated that leaks totaling over 4.1 million standard cubic feet in volume were repaired in 2020.
The Greenhouse Gas Pollution Pricing Act ("GGPPA") establishes the federal carbon pollution pricing system. The minimum price on carbon emissions was set at $10 per tonne in 2018, rising by $10 per year for the next four years, reaching $50 per tonne in 2022. On December 11, 2020, the federal government proposed that beginning in 2021 the price on carbon will rise by $15/tonne per a year up to $170/tonne per year in 2030. Provinces are free to implement their own carbon plan; however, the provincial plans must show equivalency with the federal system or the federal backstop will apply to that jurisdiction. The two main parts of the GGPPA backstop are a regulatory trading system for industry known as the Output- Based Pricing System ("OBPS") and a generally applicable fuel charge.
In Alberta, Alliance Canada is regulated under Alberta's industrial greenhouse gas emissions pricing regulation and emissions trading systems, the Technology Innovation and Emissions Reduction Regulation ("TIER"). TIER replaced the Carbon Competitiveness Incentive Regulation in January 2020. Facilities regulated under TIER are not subject to the federal GGPPA backstop. Under TIER, facilities that annually emit more than 100,000 tonnes of CO2e, or that "opt in" to the TIER, are subject to emission reduction obligations which are determined according to a facility-specific benchmark approach. While Alliance Canada's GHG emissions have been reduced by using high efficiency gas turbines, the emissions from the System still exceed the assigned benchmark target, resulting in a net compliance obligation. Given that
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the Alliance Canada Pipeline already uses efficient turbines, attaining further emission reductions at the source is challenging and Alliance Canada's remaining compliance options to meet its required emission benchmark are to pay into a TIER fund at a price of $30.00 per tonne in 2020 or to purchase emissions offsets from qualified projects. The total compliance cost for 2019 and 2020 was $3.9 million and $1.4 million, respectively.
In Saskatchewan, although the Management and Reduction of Greenhouse Gases (Standards and Compliance) Regulations does have equivalency with the federal GGPPA program, gas transmission pipelines were excluded from these regulations and therefore the Alliance Canada Pipeline in Saskatchewan falls under the federal GGPPA backstop program. The costs related to GGPPA compliance amounted to $3.0 million and $3.9 million in 2019 and 2020, respectively.
British Columbia implemented the Carbon Tax Act in 2008, which taxes consumption of all GHG emitting fuel sources in the province. Accordingly, the federal backstop in the GGPPA does not apply in British Columbia. Alliance Canada's facilities in British Columbia are subject to the tax under the Carbon Tax Act. The cost related to 2019 and 2020 amounted to $0.9 million and $0.5, respectively.
Certain provisions of the Federal Multi-Sector Air Pollutants Regulations ("MSAPR") are now in force. These regulations establish air pollutant emission standards for nitrogen oxides ("NOx") from industrial boilers and stationary spark-ignition engines. Alliance Canada has completed the required registration of equipment in accordance with these regulations and is preparing to undertake the testing of emissions from exhaust to confirm compliance with the 2021 NOx emission limits. The results of the 2021 testing will also provide Alliance Canada with an indication of potential risks related to meeting the more stringent requirements scheduled for 2026.
The operations of Alliance Canada are also subject to other federal, provincial and local laws and regulations relating to the protection of the environment. Alliance Canada has taken steps to implement measures to mitigate the environmental effects of the operation and maintenance of the Alliance Canada Pipeline. Alliance conducts regular inspections of its facilities, supports pertinent agency inspections and follows defined practices to ensure that regulatory requirements and commitments are met during the construction, operation and maintenance of its facilities.
Insurance
Alliance Canada maintains, either independently, or through inclusion in the corporate insurance programs maintained by Enbridge and Pembina in proportion to their respective interest in Alliance Canada, insurance coverage in types and amounts, and with terms and conditions, that are generally consistent with coverage considered customary for Alliance Canada's industry.
Competition
The System faces competition in pipeline transportation to its Chicago area delivery points and interconnected pipeline delivery points downstream of its Chicago terminus from both existing pipelines and proposed projects.
Alliance expects that substantially all of the natural gas shipped on the System for the foreseeable future will be produced from the WCSB and the Bakken formation in North Dakota. Continued sales of WCSB and Bakken natural gas by Alliance's shippers in the midwestern United States and to other parts of the United
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States and eastern Canada will be dependent on a number of factors over which Alliance has no control, including:
(i) the level of exploration, drilling, reserves and production of WCSB and Bakken natural gas and the price of such natural gas;
(ii) the accessibility of WCSB and Bakken natural gas, as such may be affected by weather, natural disasters or other impediments to access;
(iii) the price and quantity of natural gas available from alternative United States, Canadian and international sources and the differential in market demand for natural gas in western Canada and the midwestern U.S.;
(iv) the market demand for natural gas in North America;
(v) the market demand for natural gas (including liquefied natural gas) exported from North America;
(vi) the impact of domestic demand on the availability of WCSB natural gas for export; and
(vii) regulatory environments in Canada and the United States, including the continued willingness of both countries to permit the export of natural gas from Canada into the United States on a commercially acceptable basis.
Several other natural gas pipelines currently provide, and potential future natural gas pipelines may provide, transportation services for natural gas produced from the WCSB and the Bakken to natural gas markets in the midwestern United States and Ontario. Such pipelines, existing and proposed, constitute current and potential competitors to the System. In addition to the System, natural gas from the WCSB is currently transported to markets in the midwestern United States on the Viking Gas Pipeline, the Great Lakes Pipeline and the Foothills/Northern Border Pipeline, each of which is owned by TC Energy Corporation.
Alliance and its shippers are also exposed to competition from new sources of natural gas, such as the Permian and DJ basins, as well as the Marcellus and Utica plays in the Appalachian basin. Producers from these locations have also built or have proposed to build, repurpose or expand natural gas pipelines that deliver natural gas into the midwestern and eastern United States. In particular, the Marcellus and Utica plays in the Appalachian basin are in close proximity to the Chicago hub to which the Alliance USA Pipeline currently provides the majority of its transportation service. The continued development of these plays has and could continue to provide an alternate source of gas to this location and further decrease natural gas imports from Canada into the northeastern U.S. Following the construction of two interstate pipelines designed to deliver volumes to the Vector Pipeline and to send substantial incremental volumes to markets in central Canada, the majority of volumes delivered to Chicago by Alliance USA that were previously moved on to the Vector Pipeline were moved to markets in the midwestern U.S. on alternate pipelines. Overall, the Alliance USA Pipeline has maintained delivery levels as these two pipelines came into service.
Based on tolls and rates currently filed with the respective regulatory authorities, management believes Alliance's tolls and rates are competitive in each of the above markets; however, changes to the costs of service or rates and/or discounted tolls of any of these pipelines or new competition from any future
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pipeline may affect Alliance's competitiveness. In addition, emerging technologies could enable gas plays that are not currently commercially viable or accessible, to be competitive in the markets that the System serves.
Any new or upgraded pipelines could offer natural gas transportation services that may be more desirable to shippers than those provided by the System because of location, facilities or other factors, including reduced emissions. In addition, these pipelines could charge rates or provide attractive service to locations that result in greater net profit for shippers, which may result in a decrease to revenues and cash flow for Alliance.
Any project to expand the System could be subject to competition from other pipeline systems, which could be expanded or integrated to serve the market for shipping natural gas from the WCSB and the Bakken to the midwestern and eastern United States and eastern Canada.
From time to time, Alliance has short-term capacity available, above its long-term firm capacity levels, that is offered to the market on an interruptible or seasonal/short-term firm basis. This capacity is expected to have greater exposure to competition risk than Alliance's long-term firm capacity.
Outlook
Current market dynamics and increased rich gas development and/or supply from unconventional developments are key growth drivers for Alliance Canada, particularly given the System's significant and unique rich gas carrying capability. In addition to addressing egress issues faced by many WCSB producers, the System is a reliable connection to the vital midwestern U.S. market, which offers new market access and diversification options beyond western Canada.
Alliance Canada had sufficient renewals of long-term firm volumes in 2020 to keep approximately 80% of its available long-term firm delivery capacity contracted through the end of 2021. The advantages of the System resulted in a successful re-contracting campaign where receipt capacity on the Alliance Canada Pipeline has an average contract term of approximately two and a half years remaining as at December 31, 2020. Alliance Canada expects strong demand for seasonal firm or interruptible transportation service in addition to the high contract levels in place for long-term firm service.
Employees
As at December 31, 2020, due to the Owner-Operator Transition, the Canadian General Partner and the USA Managing General Partner do not have any employees. Affiliates of Enbridge and Pembina provide management, administrative, operational and workforce related services to Alliance.
Legal Proceedings and Regulatory Actions
Except as set forth below, there are no material legal proceedings to which Alliance Canada is or was a party to, or that any of Alliance Canada's property is or was subject to, during the year ended December 31, 2020, nor are any such proceedings known by Alliance to be contemplated.
JL Energy Transportation Inc.
On May 11, 2016, JL Energy Transportation Inc. ("JL Energy") filed a Statement of Claim in the Court of Queen's Bench of Alberta against Alliance Canada, the Canadian General Partner, Alliance USA, the USA
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Managing General Partner (collectively, the "Alliance Defendants") and certain other defendants (collectively with the Alliance Defendants, the "Defendants") alleging that the Defendants violated a technology licensing agreement with JL Energy and infringed a patent owned by JL Energy concerning certain technology relating to the injection of natural gas mixtures for the purpose of increasing hydraulic efficiency. JL Energy claims entitlement to the entirety of revenues obtained by the Defendants through the alleged improper use of the technology in the amount of $638,400,000 as well as injunctive and corollary relief.
The Alliance Defendants filed a defence to the claim asserting, among other things, that they do not use JL Energy's technology, have not violated the terms of any agreements with JL Energy and have not infringed any patents owned by JL Energy. The Alliance Defendants also filed an application to strike various portions of the JL Energy claim on the basis that, among other things, the claims of JL Energy are barred by the passage of the applicable limitation periods, are beyond the jurisdiction of the Alberta courts, and that JL Energy, in fact, suffered no damages. The Alliance Defendants seek to have the claims of JL Energy dismissed in their entireties.
Preliminary and other procedural matters, including applications in respect thereof, remain outstanding under the proceedings.
Hydrogen Sulfide Matter
In August 2015, Alliance experienced a short-term shutdown of its mainline pipeline due to the entry of hydrogen sulfide ("H2S") in excess of concentrations specified in Alliance's tariff into the pipeline from an upstream operator. In June 2016, Alliance filed a Statement of Claim in the Court of Queen's Bench of Alberta against the upstream operator and the manufacturer of the H2S analyzer that failed to send appropriate alarms to signal the entry of excess H2S. Statements of defense and affidavits of records have been filed and multiple rounds of questioning by the parties took place from 2017-2019. In March 2020, Alliance finished producing all records that it was required to produce as a result of the questioning.
Aux Sable Extraction Facility
The System is designed to permit the transportation of rich gas, which may then be processed for the extraction of NGL at the Chicago area terminus of the System. Aux Sable Extraction owns the Aux Sable Extraction Facility in Channahon, Illinois, near the terminus of the System and Aux Sable Liquid Products owns the fractionation facilities. Aux Sable Liquid Products operates the Aux Sable Extraction Facility, which is a two-train facility designed to process up to 2.1 bcf/d of natural gas, on behalf of Aux Sable Extraction. Aux Sable Extraction is, directly and indirectly, wholly-owned by Aux Sable Liquid Products. Aux Sable Liquid Products is owned, either directly or indirectly, by the entities set out below:
Name of Entity Ownership (%) Enbridge 42.698 Pembina 42.698 The Williams Companies, Inc. 14.604 Total 100.000
Enbridge and Pembina are not under any continuing obligation to maintain any direct or indirect ownership interest of Aux Sable Liquid Products. Pursuant to extraction agreements entered into between each of the shippers and Aux Sable Liquid Products, Aux Sable Liquid Products has the sole and exclusive right which, if exercised, allows it to extract and take title to NGL from shippers' natural gas. In return, Aux
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Sable Extraction has an obligation to compensate shippers for any NGL so extracted by replacing such NGL with "make-up" natural gas having a heat content equal to the heat content removed as a result of the extraction of such NGL.
In connection with these extraction arrangements, Aux Sable Liquid Products, Aux Sable Extraction and Alliance USA entered into a restated heat content management agreement (the "HCM Agreement"). Aux Sable Extraction and Alliance USA entered into a restated extraction facility interconnection agreement, which deals with technical matters relating to the interconnection of the Alliance USA Pipeline with the Aux Sable Extraction Facility. Under the terms of the HCM Agreement, Aux Sable Extraction has agreed with Alliance USA, subject to certain exceptions and limitations, to provide heat content management services involving the extraction of NGL to the extent required to reduce the gross heating value of the natural gas being delivered out of the System downstream of the Aux Sable Extraction Facility to a heating value that may be acceptable to the two local natural gas distribution systems and six interstate natural gas pipelines with which Alliance USA presently has delivery interconnection agreements. Under certain circumstances, if Aux Sable Extraction fails to perform the heat content management services, Alliance USA may itself perform or cause the performance of such services. Although the heat content management services are provided primarily through the extraction of NGL, Aux Sable Extraction also has the option to implement alternative heat content reduction arrangements should it so elect.
NRGreen Power
NRGreen is an entity related to Alliance Canada by virtue of a common ownership group. NRGreen produces electricity generated by harnessing and converting to electrical energy the waste heat produced by certain of Alliance Canada's gas turbines. As part of these operations, NRGreen and Alliance Canada have entered into agreements with respect to waste heat supply, manpower services and compressor site access.
Related Party Transactions
Alliance Canada provides transportation services to a number of shippers, accounting for approximately 18% of transportation revenues as at December 31, 2020 (December 31, 2019 – 17%), that are related entities of Enbridge and Pembina or their respective affiliates. The terms of these Transportation Contracts are the same as those agreed to with independent third parties.
Pursuant to the Administrative Services Agreement, Alliance Canada provides or receives services to or from Alliance USA in exchange for the reimbursement of incurred costs plus an applicable mark-up. Certain amounts reimbursed under the Administrative Services Agreement also include a recovery of costs, plus an applicable mark-up, relating to the use of common administrative assets. Amounts charged to Alliance USA under the Administrative Services Agreement for the year ended December 31, 2020 were $25.6 million (December 31, 2019 – $31.1 million), while amounts charged by Alliance USA to Alliance Canada under the Administrative Services Agreement for the year ended December 31, 2020 were $2.1 million (December 31, 2019 – $2.2 million).
From time to time, Alliance Canada sells operational linepack to Alliance USA to supplement operational linepack or as fuel gas to support the efficient operation of the Alliance USA Pipeline. The terms of these purchase transactions are similar to those that would be associated with purchases made from independent third parties.
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The Operators provide management, administrative, operational and workforce related services to Alliance Canada pursuant to the terms of the Operating Agreements and are reimbursed for the cost of these services in accordance with the terms of such agreements. Services are invoiced and settled on a monthly basis.
On September 13, 2011, Alliance Canada executed an Offset Purchase Agreement to purchase offset credits from NRGreen. In 2018, 2019 and 2020, Alliance purchased available offset credits from NRGreen under the terms of the Offset Purchase Agreement.
During 2018, Alliance Canada engaged a related entity to assess the commercial feasibility of increasing throughput by adding more compression facilities along the Alliance Canada Pipeline.
RISK FACTORS
The following information is a summary only of certain risk factors relating to Alliance Canada and is qualified in its entirety by reference to and must be read in conjunction with, the detailed information appearing elsewhere in this Annual Information Form.
Pipeline Operating Risks
Operational risks include, but are not limited to: pipeline leaks; the breakdown or failure of equipment, pipelines and facilities, information systems or processes; the compromise of information and control systems; the performance of equipment at levels below those originally intended (whether due to misuse, unexpected degradation or design, construction or manufacturing defects); releases; failure to maintain adequate supplies of spare parts; operator error; labour disputes; disputes with interconnected facilities and carriers; operational disruptions or apportionment on third party systems or facilities, which may prevent the full utilization of Alliance Canada's assets; and catastrophic events, including, but not limited to, those related to climate change and extreme weather events, including fires, floods and other natural disasters, explosions, earthquakes, widespread epidemics or pandemic outbreaks (including the COVID- 19 pandemic), acts of civil protest or disobedience, terrorism or sabotage, and other similar events, many of which are beyond the control of Alliance Canada and all of which could result in operational disruptions, damage to assets, related spills or releases or other environmental issues. Alliance Canada may also be exposed from time to time to additional operational risks not stated in the immediately preceding sentence. The occurrence or continuance of any of the foregoing events could increase the cost of operating Alliance Canada's assets or reduce revenue, thereby impacting earnings. Additionally, facilities and pipelines are reliant on electrical power for their operations. A failure or disruption within the local or regional electrical power supply or distribution or transmission systems could significantly affect ongoing operations on the System.
Alliance Canada is committed to proactively managing operational risk through safe and reliable operations. Alliance Canada maintains safety policies, disaster recovery procedures and insurance coverage in accordance with prudent pipeline operating standards in the case of an incident. Inspection, robust maintenance and monitoring methods are also employed to manage pipeline, turbine and facility integrity, as well as to minimize system disruptions.
Regulatory Risk
The Alliance Canada Pipeline is a federally-regulated, inter-provincial natural gas pipeline under the jurisdiction of the CER. Alliance Canada's natural gas transportation assets and operations are also subject
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to federal, provincial and local regulations, as applicable. Regulation of Alliance Canada's business includes, but is not limited to, the methodology to determine tolls, terms and conditions of service, pipeline construction, operations and maintenance and expansion of current operating facilities.
Alliance Canada is subject to the risk of regulatory authorities or other government bodies revising or rejecting proposed or existing arrangements and agreements. This can include international trade agreements, permits and regulatory approvals for offerings of new services and the tariff structure of Alliance Canada. Any revisions or rejections to existing or proposed arrangements or agreements could have a significant and potentially adverse effect on Alliance Canada's earnings and financial condition. As well, compliance with legislative changes may have an impact on the costs of existing operations or future projects.
In the U.S., tolls on pipelines, including the Alliance USA Pipeline, are regulated by and reported to the FERC and pipeline operations are governed by the PHMSA, which sets standards for the design, construction, pressure testing, operation and maintenance, corrosion control, training and qualification of personnel, accident reporting and record keeping. The Office of Pipeline Safety, within the PHMSA, inspects and enforces the pipeline safety regulations across the U.S. All regulations and environmental compliance obligations are subject to change at the initiative of PHMSA. Alliance Canada and Alliance USA continually monitor existing and changing regulations in all jurisdictions in which they currently operate or into which they may expand in the future and the potential implications to their operations; however, Alliance Canada cannot predict future regulatory changes and any such compliance and regulatory changes could have a material adverse impact on Alliance Canada and its financial results.
Bill C-69, An Act to enact the Impact Assessment Act and the Canadian Energy Regulator Act, to amend the Navigation Protection Act and to make consequential amendments to other Acts ("Bill C-69") came into force on August 28, 2019. Bill C-69 resulted in the NEB being replaced by the CER. The CER oversees approved and certain proposed federal, interprovincial and international energy projects in a manner similar to the former regime under the NEB. Bill C-69 also constituted an overhaul of the federal environmental assessment regime in Canada under the Canadian Environmental Assessment Act, 2012 (Canada) which has been replaced with the Impact Assessment Act (Canada) ("IAA"). At this point, while few projects have been subject to the new federal impact assessment regime, Alliance Canada continues to actively monitor developments in this area. To the extent developments lengthen the review timeline for projects or expand the scope of matters to be considered, the new regime could materially impact the amount of time and capital resources required by Alliance Canada to obtain approval to construct and operate international or interprovincial pipelines or other projects designated pursuant to the IAA project list or ministerial designation powers under the IAA. The new regime could therefore materially and directly impact Alliance Canada's business and financial results. Such regulatory initiatives could also indirectly affect Alliance Canada's business and financial results by impacting the financial condition and growth projects of its customers and, ultimately, production levels and throughput on the System.
Alliance Canada believes that regulatory risk is managed through the expertise of Alliance Canada's Operators' respective legal and regulatory teams and their review of existing and proposed tariffs and tolls for compliance with regulatory guidelines and requirements. Alliance Canada has established and maintains strong relationships with our shippers, which also helps to reduce regulatory risk.
See "Description of the Business – Regulation in Canada" and "Description of the Business – Regulation in the United States".
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Demand for Transportation Services
Effective December 1, 2015, Alliance Canada shifted from a cost-of-service model to a market-based model as the Services Offering became effective. Under the new services framework, Alliance Canada assumed transportation revenue and cost risk for the majority of its operations. There can be no assurance that all operating costs incurred by Alliance Canada will be recoverable through the transportation tolls.
Accordingly, Alliance Canada's business is exposed to commodity price volatility and a substantial decline in the prices of these commodities could adversely affect its financial results. Recent market events and conditions, including decreased global demand due to the COVID-19 pandemic, have caused significant weakness and volatility in commodity prices and corresponding reductions in industry capital and operating budgets, as well as the shutting-in of certain producing assets by oil and gas producers.
A decrease in volumes transported on the System due to depressed natural gas and NGL prices can directly and adversely affect Alliance Canada's financial results. The demand for, and utilization of, the System may be impacted by factors such as those noted in the foregoing paragraph as well as other changing market fundamentals, capacity bottlenecks, operational incidents, regulatory restrictions, system maintenance, weather and increased competition. Market fundamentals, such as commodity prices and price differentials, natural gas consumption, alternative energy sources and global supply disruptions outside of Alliance Canada's control can impact both the supply of and demand for the commodities transported on the System.
Despite the general slowdown in the oil and gas sector, Alliance Canada has successfully re-contracted sufficient volume to keep approximately 80% of its year-round firm delivery transportation capacity committed to Alliance under long-term firm contracts beyond 2021. On average for 2020, demand was in excess of available long-term firm capacity and Alliance Canada marketed other available services to capture this strong demand for transportation services.
In addition to long-term firm capacity, Alliance has successfully contracted winter and summer seasonal firm contracts as well as short-term firm contracts, all through a bidding process, to capture the strong demand for transportation services. In 2020, Alliance posted and processed approximately 241 bidding windows for daily short-term firm and interruptible service and held 11 open seasons where the term in the capacity offering was a month or greater.
Ongoing Impact of the COVID-19 Pandemic
COVID-19 Related Impacts
Alliance Canada's business and operations may continue to be materially adversely affected by the COVID- 19 pandemic, including ongoing uncertainty with respect to the extent and duration of the pandemic. The ongoing COVID-19 pandemic and actions that have, and may be, taken by governmental authorities in response thereto has resulted, and may continue to result in, among other things: an overall slowdown in the global economy; a decrease in global energy demand; increased volatility in financial and commodity markets; disruptions to global supply chains; labour shortages; significant impacts to the workforce; reductions in trade volumes; temporary operational restrictions and restrictions on gatherings of individuals, as well as shelter-in-place declarations and quarantine orders; business closures and travel bans; political and economic instability; and civil unrest. The recent resurgence of the COVID-19 virus and the recent spread of new variants thereof in certain geographic areas, including certain areas in which Alliance Canada has operations, and the possibility that a resurgence of the COVID-19 virus or the spread
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of such new or other variants or mutations thereof may occur in other areas, has resulted in the re- imposition of certain of the foregoing restrictions, and may result in further restrictions, by governmental authorities in certain jurisdictions, including certain jurisdictions in which Alliance Canada has operations. This further increases the risk and uncertainty as to the extent and duration of the COVID-19 pandemic and its ultimate impact on the global economy and other items noted above.
The risks to Alliance Canada of the ongoing COVID-19 pandemic include, among other things: risks to the health and safety of the Operators and their ability to manage the business of Alliance Canada (see "Risk Factors – Dependence on Related Parties"); a slowdown or temporary suspension of operations in certain geographic locations in which Alliance Canada operates; and supply chain disruptions, all or any of which could materially adversely impact Alliance Canada's business operations and financial results.
The full extent and impact of the COVID-19 pandemic continues to be unknown at this time and the degree to which it may impact Alliance Canada's business operations and financial results will depend on future developments, which are uncertain and cannot be predicted with any degree of certainty, including: the duration, severity and geographic spread of the COVID-19 virus and variants and mutations thereof, including in respect of the recent resurgence of the virus and the recent spread of new variants thereof in certain geographic areas, including certain areas in which Alliance Canada has operations; further actions that may be taken by governmental authorities, including in respect of travel restrictions and business disruptions; the effectiveness and timing of actions taken to contain and treat the COVID-19 virus and variants and mutations thereof, including the vaccines developed in response thereto; and how quickly and to what extent normal economic and operating conditions will resume.
In addition, if any such events cause restrictions on or impediments to Alliance Canada performing the transportation services that it is obligated to perform under transportation contracts, this may require Alliance Canada to incur penalties or sanctions under certain of its contracts or additional non- compensable costs, or this may result in the cancellation of such contracts. The occurrence of any of these events could materially adversely impact the ability of Alliance Canada to service obligations under its debt securities and other debt obligations.
Impact on General Risks
Depending on the extent and duration of the COVID-19 pandemic, it may also have the effect of heightening many of the other risks described herein, including the risks relating to Alliance Canada's ability to maintain its investment grade credit rating; shippers' ability to replace their reserves; credit risk; demand for Alliance Canada's transportation services; maintaining sufficient liquidity to meet Alliance Canada's financial obligations and service obligations under its debt securities and other debt obligations; and otherwise complying with the covenants contained in the agreements that govern Alliance Canada's existing indebtedness.
Reserve Replacement
Future throughput on the System and replacement of natural gas and NGL reserves in the service areas will be dependent upon the activities of producers operating in those areas as they relate to exploiting their existing reserve bases and exploring for and developing additional reserves and technological improvements leading to increased recovery rates. Without reserve additions, or expansion of the service areas, volumes on pipelines and in facilities would decline over time as reserves are depleted. As natural gas and NGL reserves are depleted, production costs may increase relative to the value of the remaining reserves in place, causing producers to shut-in production or seek out lower cost alternatives for
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transportation. If, as a result, the level of tolls collected by Alliance Canada decreases, cash flow available to service obligations under Alliance Canada's debt securities and other debt obligations could be adversely affected.
Over the long-term, the ability and willingness of shippers to continue production will also depend, in part, on the level of demand and prices for natural gas and NGL in the areas and markets served by Alliance Canada. Producers may shut-in production at lower product prices or higher production costs.
Global economic events may continue to have a substantial impact on the prices of natural gas and NGL and Alliance Canada cannot predict with any degree of certainty the impact of future supply/demand or economic conditions, fuel conservation measures, alternative fuel requirements, governmental regulation or technological advances in fuel efficiency and energy generation in the energy and petrochemical industries or future demand for and prices of natural gas and NGL. A lower commodity price environment will generally reduce drilling activity and, as a result, the demand for midstream infrastructure could decline. Producers in the areas serviced by Alliance Canada may not be successful in exploring for and developing additional reserves or achieving technological improvements to increase recovery rates and lower production costs during periods of lower commodity prices, which may also reduce demand for midstream infrastructure.
Future prices of these hydrocarbons are determined by supply and demand factors, including weather and general economic conditions as well as economic, political and other conditions in other crude oil and natural gas producing regions, all of which are beyond Alliance Canada's control. The rate and timing of production from proven natural gas and NGL reserves is at the discretion of producers and is subject to regulatory constraints. Producers have no obligation to produce from their natural gas and NGL reserves, which means production volumes are at the discretion of producers. Lower production volumes may lead to less demand for pipeline and processing capacity, and could adversely impact Alliance Canada's ability to re-contract on favourable terms with shippers as current agreements expire.
Competition
The System faces competition for natural gas pipeline transportation services to the Chicago, Illinois area from both existing and proposed pipeline projects. Existing pipelines, other than the System, provide natural gas transportation services from the WCSB and the Bakken to natural gas markets in the midwestern and northeastern United States and the Gulf Coast and eastern Canada. In addition, there could be proposals to upgrade existing pipelines or to build new pipelines serving such areas and markets. Any new or upgraded pipelines could: (i) allow shippers and competing pipelines to have greater access to natural gas markets in addition to the markets served by the System and the pipelines to which it is connected; (ii) offer natural gas transportation services that are more desirable to shippers than those provided by the System because of location, facilities or other factors; or (iii) charge tolls or provide transportation services to locations that result in greater net profit for shippers. In addition, the introduction of competing transportation alternatives into the areas served by the System could limit Alliance Canada's ability to adjust tolls as it may deem necessary and result in the reduction of throughput on the System.
There is also competition from other sources of natural gas, such as the Marcellus and Utica shale plays within the Appalachian Basin. Situated in an area ranging from parts of Quebec and upstate New York to Virginia in the south and as far west as Ohio, the Marcellus and Utica shale plays are in relatively close proximity to the Chicago hub and eastern Canadian markets to which the System currently provides the majority of its transportation service. The ongoing development of shale gas within the Appalachian Basin,
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coupled with new infrastructure, provides an alternative source of gas to the midwestern and northeastern United States and eastern Canada. Growing demand in the region is expected to absorb some of the incremental volumes but it is expected that there will be displacement of flows, particularly from the Gulf Coast, Rockies and midcontinent regions. Similarly, the growth in Appalachian supplies has reduced the reliance of the northeast region of the United States on natural gas imports from Canada.
Alliance Canada's pipeline system and services are uniquely designed to enable natural gas producers to maximize the value of their product. Alliance Canada has the unique ability to transport NGL within the methane gas stream. This provides significant competitive advantages to producers and shippers within our Services Offering, including: (i) the ability to transport NGL, thereby potentially reducing producers' processing infrastructure and costs and time to market; (ii) the ability to access U.S. NGL markets; (iii) the opportunity to access the Aux Sable Extraction Facility at the terminus of the Alliance USA Pipeline, which can provide considerable economies of scale; and (iv) the capability to provide a higher netback for liquids- rich natural gas.
See "Description of the Business – Competition".
Dependence on Related Parties
There is a significant dependence on Enbridge and Pembina due to the Owner-Operator Transition. See "General Development of the Business – Recent Developments" and "Description of the Business – Employees".
There is also a significant degree of dependency on Aux Sable, a related party, to satisfy its requirements to provide heat content management services to Alliance USA. Should the Aux Sable Extraction Facility fail to provide heat content management services for any reason, the System and the shippers may experience operational issues. In certain circumstances, the failure to provide heat content management services could result in an interruption or curtailment of transportation service on the System. It is not possible to predict the extent or duration of these operational issues or their financial or operational impact to Alliance Canada.
There can be no assurance that Aux Sable will remain continuously operational or will continue business operations indefinitely. Aux Sable's business involves processing, refining and marketing NGL and its profitability will depend in part on the differential in the price of natural gas versus the price of various NGL in its market area.
The System operates as an integrated pipeline. Therefore, any matters which limit or restrict the ability of the Alliance USA Pipeline to operate could affect the ability of the Alliance Canada Pipeline to operate. Alliance Canada may have no control over matters which may adversely affect the Alliance USA Pipeline.
See "Description of the Business – Aux Sable Extraction Facility".
Pursuant to the Transportation Contracts, each shipper is obligated to pay monthly demand charges based on the shipper's contracted capacity. A number of the shippers, accounting for approximately 18% of transportation revenues as at December 31, 2020 (December 31, 2019 – 17%), are also related entities of Enbridge and Pembina or their respective affiliates; however, the terms of these Transportation Contracts are the same as those agreed to with independent third parties. Alliance Canada recorded transportation revenue from the Transportation Contracts of $72.2 million for the year ended December 31, 2020 (December 31, 2019 – $82.0 million) for charges to shippers who are or were affiliates of the Limited
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Partners. Accounts receivable at December 31, 2020 included $4.9 million (December 31, 2019 – $6.1 million) of transportation revenue receivable from shippers who are related entities of the Limited Partners.
Environmental Costs and Liabilities
Alliance Canada's operations are subject to extensive federal, provincial and local environmental, health and safety laws and regulations governing, among other things, discharges to air, land and water, the handling and storage of natural gas and NGL and hazardous materials, waste disposal, the protection of employee health, safety and the environment and the investigation and remediation of contamination. Alliance Canada's facilities may experience incidents, malfunctions or other unplanned events that may result in spills, emissions or releases and/or result in personal injury, fines, penalties, other sanctions or property damage. Alliance Canada may also incur liability for environmental contamination associated with past and present activities and properties.
Alliance Canada and the System must maintain a number of environmental and other permits from various governmental authorities in order to operate, and these facilities are subject to inspection from time to time. Failure to maintain compliance with these requirements could result in operational interruptions, fines or penalties, or the need to install additional pollution control technology. Licenses and permits must be renewed from time to time and there is no guarantee that a license or permit will be renewed on the same or similar conditions as it was initially granted. There can also be no assurance that Alliance Canada will be able to obtain all licenses, permits, registrations, approvals and authorizations that may be required to conduct operations that it may wish to undertake.
Alliance Canada and each of the Operators has established safety and environmental policies that are designed to reduce Alliance Canada's exposure to the inherent risks of operating a natural gas pipeline. Alliance Canada's and the Operators' policies and practices are designed to ensure that all aspects of its operations comply with existing laws and regulations relating to personal safety and protection of the environment, including those related to GHG emissions. Nonetheless, Alliance Canada and its shippers may be exposed to additional costs of complying with new, more stringent regulations.
While Alliance Canada believes its current operations are in compliance with all applicable environmental, health and safety laws, there can be no assurance that substantial costs or liabilities will not be incurred as a result of non-compliance with such laws. Moreover, it is possible that other developments, such as changes in environmental, health and safety laws, regulations and enforcement policies thereunder, including with respect to climate change and claims for damages to persons or property resulting from Alliance Canada's operations, could result in significant costs and liabilities to Alliance Canada. If Alliance Canada is not able to recover the resulting costs or increased costs through insurance or increased tolls, Alliance Canada's financial results and ability to service its obligations under its debt securities and other debt obligations could be adversely affected.
Changes in environmental, health and safety regulations and legislation, including with respect to climate change, may also impact Alliance Canada's customers and could result in natural gas and NGL development and production becoming uneconomical, which could adversely impact throughput on the System and Alliance Canada's financial results and its ability to service its obligations under its debt securities and other debt obligations.
See "Description of the Business – Environmental".
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Pipeline Right-of-Way Encroachment
Population growth adjacent to the System's right-of-way is a normal event that occurs throughout Canada and the U.S.; however, when industrial, commercial or residential development activities occur in close proximity to a pipeline right-of-way, pipeline companies are required to make an assessment of the changed circumstances and whether there is a need for remedial action and, in Canada, if required, to submit a plan for approval by the CER of the steps to be taken by the pipeline company to address the encroachment. Remedial actions can impact operations and result in significant costs associated with maintaining pipeline safety and could include moving the pipeline or reducing the pressure in a segment of the pipeline or other alternatives. A pipeline re-route could require a services curtailment and a pressure reduction in a pipeline segment could result in lower volumes transported.
Adequacy of Insurance
Alliance Canada is exposed to operational risks and hazards inherent in operating in the pipeline industry (see "Risk Factors – Pipeline Operating Risks"). Alliance Canada maintains, either independently or through inclusion in the corporate insurance programs maintained by the Owners in proportion to their respective interest in Alliance Canada, insurance coverage in types and amounts, and with terms and conditions, that are generally consistent with coverage considered customary for the pipeline industry. Alliance Canada's insurance program includes policies covering general liability and property and corresponding business interruption resulting from insured perils. There can be no assurance, however, that these insurance policies will fully compensate Alliance Canada for all losses and certain provisions of such insurance may limit the availability thereof. Further, the pipeline industry is subject to environmental regulations pursuant to federal, provincial, state and local laws of Canada and the United States. A breach of such laws may result in the imposition of fines or the issuance of clean-up orders, the cost of which may not be recoverable through insurance.
See "Description of the Business – Insurance".
Abandonment Costs
Pipeline companies are responsible for compliance with all applicable laws and regulations regarding the dismantling, decommissioning, environmental, reclamation and remediation activities on abandonment of their pipeline systems and other assets at the end of their economic life and these abandonment costs may be substantial. The NEB directed pipeline companies, including Alliance Canada, to collect abandonment funds starting January 1, 2015. Alliance Canada's transportation services include a pipeline abandonment surcharge designed to collect in aggregate $11.6 million on an annual basis, subject to an annual adjustment to reflect prior period over/under revenue collections. The collected funds are deposited in a CER-approved pipeline abandonment trust fund. To the best of its knowledge, Alliance Canada has complied with all CER requirements for abandonment funding and has completed the compliance-based filings that are required under the applicable CER rules and regulations regarding abandonment.
As the costs of future abandonment cannot be precisely determined at this time, such collection is based on preliminary cost estimates that may be periodically adjusted over time. The actual costs of abandonment will depend on the regulatory requirements and economic factors prevailing at the time of abandonment, as well as the acceptance by the applicable regulatory authority of Alliance Canada's specific abandonment plans.
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While this collection mechanism is designed to mitigate abandonment funding risks, it may not entirely eliminate the risk of any funding shortfall. Additionally, the introduction of this collection mechanism could potentially impact Alliance's competitiveness, depending on its relative magnitude (i.e., relative to the amount of funds collected by competing pipeline companies).
See "Description of the Business – Regulation in Canada".
Operating and Capital Costs
The operating and capital costs of Alliance Canada's assets may vary considerably from current and forecasted values and rates and represent significant components of the cost of providing service. In general, as equipment ages, costs associated with such equipment may increase over time. In addition, operating and capital costs may increase as a result of a number of factors beyond Alliance Canada's control, including general economic, business and market conditions and supply, demand and/or inflation in respect of required goods and/or services. If significant increases in operating or capital costs are incurred, this may adversely impact the ability of Alliance Canada to service its debt obligations.
Although certain operating costs are recaptured through the tolls charged on natural gas and NGL volumes transported, to the extent such tolls escalate, producers may seek lower cost alternatives or stop production of their natural gas and NGL reserves.
Credit Risk
Alliance Canada is exposed to credit risk as the business is concentrated in the natural gas transportation industry and its revenue is dependent upon the ability of shippers to pay monthly charges. A majority of the shippers operate in the crude oil and natural gas exploration, development and production, energy marketing or transportation industries and may be exposed to long-term downturns in energy commodity prices, including the price for natural gas, or other credit events impacting these industries.
Should a shipper be unable to fulfill their contractual obligations and if suitable replacement shippers are not readily available, Alliance Canada's financial results may be adversely impacted. Alliance Canada limits, to an extent, its exposure to this credit risk by requiring shippers to provide letters of credit or other suitable security if shippers do not maintain specified credit ratings or a suitable financial position. The risk of non-performance of shippers is mitigated by Alliance Canada's credit approval process and ongoing monitoring procedures. Alliance Canada believes these measures are prudent and allow for effective management of its counterparty credit risk, but there is no certainty that they will protect Alliance Canada against all material losses, and this risk is heightened in the current low commodity price environment. As part of its ongoing operations, Alliance Canada must balance its market and counterparty credit risks when making business decisions.
At December 31, 2020, approximately 64% of firm capacity (as represented by percentage of those associated revenues) was contracted to shippers who either have an investment grade rating or acceptable credit status. Shippers without an investment grade rating or acceptable credit status have provided required security, but, in no case, does such security cover more than three months of obligations under the applicable Transportation Contract.
Over the past three years, energy prices have experienced significant volatility resulting in continued uncertainty for companies throughout the crude oil and natural gas industry. Reductions in producers'
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capital and operating budgets and the impact of reduced revenues on corporate liquidity positions has resulted in an increase in potential credit risk to Alliance Canada.
Alliance Canada actively monitors the financial condition of its shippers and requires shippers to provide letters of credit or other suitable security, if shippers do not maintain specified credit ratings or a suitable financial position. Alliance Canada expects that, should a shipper be unable to fulfill its contractual obligations in the future, re-contracting of the repudiated contract is possible, although there may be a risk that the revenue may be lower than the original Transportation Contract.
Currently there are no material accounts receivable that meet the definition of past due and/or impaired. Alliance Canada will continue to monitor both current and potential shippers based upon Alliance Canada's credit approval process.
The credit risk arising from cash deposits is minimal as cash is held with major financial institutions. Aside from this, Alliance Canada does not hold any other short or long-term investments.
See "Description of the Business – Shippers and Transportation Contracts".
Liquidity Risk
Alliance Canada manages liquidity risk by ensuring access to sufficient funds to meet its obligations. It forecasts cash requirements to ensure funds are available to fund debt obligations as they become due. The primary sources of liquidity are funds received from transportation tolls, borrowings under the Credit Facility and funding from the Limited Partners. Alliance Canada is highly dependent upon its shippers for revenues from their contracted capacity on the Alliance Canada Pipeline portion of the System. The failure of such shippers to fulfill their contractual obligations under the applicable Transportation Contracts or the failure to replace such shippers on equivalent terms and conditions could have a material adverse effect on Alliance Canada's financial results and could impair its ability to service its obligations under its debt securities and other debt obligations.
Alliance Canada also holds in its debt service reserve account an amount at least equal to six months of scheduled interest and principal payments, which is funded by letters of credit under the Credit Facility. The debt service reserve is in addition to the funds that are transferred monthly to the debt service account to be held for the semi-annual interest and principal payments on the Senior Notes outstanding and the monthly debt service amounts due on the Credit Facility. Funds available under the Credit Facility may also be accessed from time to time should cash receipts prove insufficient to fund the month's operating and investing activities.
Alliance Canada may be required to refinance its indebtedness under the Credit Facility and the outstanding Senior Notes at their maturity date and may require additional financing depending on future developments, enhancement opportunities or acquisition plans. If Alliance Canada is unable to access additional capital, through either debt or equity financing, then future opportunities may be foregone.
The ability of Alliance Canada to refinance existing indebtedness and arrange additional financing in the future will depend, in part, upon prevailing market conditions at the time, as well as the business performance of Alliance Canada. There can be no assurance that debt or equity financing will be available, including on terms acceptable to Alliance or sufficient to meet or satisfy Alliance Canada's initiatives, objectives or requirements.
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Uncertainty and volatility in financial markets may adversely affect Alliance Canada's ability to arrange permanent long-term financing for significant capital expenditures and potentially to refinance indebtedness under the Credit Facility or the outstanding Senior Notes at their maturity date. This may also affect Alliance Canada's credit ratings.
Having an investment grade credit rating supports Alliance Canada's ability to refinance existing debt as it matures and the ability to access cost competitive capital for future growth. Rating agencies regularly evaluate Alliance Canada and determine their ratings of its debt based on a number of factors. This includes Alliance Canada's financial strength as well as factors not entirely within Alliance Canada's control, including conditions affecting the industry in which Alliance Canada operates generally and the wider state of the economy. There can be no assurance that one or more of Alliance Canada's credit ratings will not be downgraded. A ratings downgrade below investment grade may have a materially adverse effect on the ability of Alliance Canada to obtain financing on favourable terms and conditions.
Reliance on Management and Other Key Individuals
Alliance Canada is dependent on the Operators and certain employees of the Limited Partners who, due to the Owner-Operator Transition, are the senior management and directors of the Canadian General Partner that manages the business of Alliance. The loss of the services of key individuals who have historical knowledge about the business and assets of Alliance could have a detrimental effect on Alliance Canada. There can be no assurance that the Operators or the Limited Partners will continue to attract, retain and dedicate the resources and personnel necessary for the successful operation of the business of Alliance Canada.
Trade Policies
Tariffs, retaliatory tariffs or other trade restrictions on products that Alliance Canada or its customers export could cause the prices of such products to increase, which could, in turn, reduce the demand for, or margins on, such products. Direct or unforeseen consequences of tariffs, retaliatory tariffs or other trade restrictions may also alter the competitive landscape of Alliance Canada or its customers' products in Canada or the United States. There can be no certainty with respect to how the Canadian or U.S. governments will act with respect to tariffs, international trade agreements and policies. A trade dispute or other governmental action related to tariffs or international trade agreements or policies has the potential to negatively impact Alliance Canada and/or its customers' costs, demand for Alliance Canada's services or its customers' products, and/or the international economy or certain sectors thereof, which may adversely impact Alliance Canada's results from operations and financial condition.
On January 25, 2021, U.S. President Joe Biden signed the "Executive Order on Ensuring the Future is Made in All of America by All of America's Workers". The order states that "the United States Government should, consistent with applicable law, use terms and conditions of Federal financial assistance awards and Federal procurements to maximize the use of goods, products, and materials produced in, and services offered in, the United States''. Waivers from the order are provided for in certain circumstances. The order applies to all U.S. government procurement and supports the acquisition of all manner of goods, products and materials produced in the United States, with a particular focus on steel, iron and manufactured goods. While the full implications of the order are still uncertain, to the extent the United States government procures oil and gas products or provides financial assistance to U.S. oil and gas producers, it will favour domestic production over foreign (Canadian) producers and products, subject to applicable law, which could adversely impact throughput on the System and Alliance Canada's financial results and its ability to service its obligations under its debt securities and other debt obligations.
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Interest Rate Risk
Alliance Canada is exposed to interest rate fluctuations, as the amounts outstanding under the Credit Facility are subject to floating interest rates. Variations in interest rates could result in significant changes in the amounts required to be repaid under the Credit Facility. As at December 31, 2020, Alliance Canada had fixed interest rates on 68% of its total long-term debt (including indebtedness outstanding under the Credit Facility).
Litigation
In the course of its business, Alliance Canada may be subject to lawsuits and other claims. Defence and settlement costs associated with such lawsuits and claims may be substantial, even with respect to lawsuits and claims that have no merit. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal or other proceeding may have a material adverse effect on Alliance Canada and its financial results, which could materially adversely impact the ability of Alliance Canada to service obligations under its debt securities and other debt obligations.
Cyber Security
Alliance Canada is exposed to cyber security risks, including, but not limited to: damage to corporate assets and interruption to pipeline operations; compromise of the System's operating system; degradation of internally delivered services; theft of personal or corporate information; compromise of data integrity; and cyber extortion. These risks can be realized from malware infections in emails or websites as well as social engineering activities such as phishing and employee impersonation.
Alliance Canada and each of the Operators uses safeguards to ensure their information systems remain secure and reliable. Alliance Canada maintains communication with the Canadian Center for Cyber Security, formerly the Canadian Cyber Incident Response Centre, which allows it to stay current with any new cyber threats. This information sharing is bi-directional, where appropriate, resulting in cyber threats and incidents being reported to authorities around the world.
Numerous cyber security technologies and practices have been implemented throughout Alliance Canada's business as part of an in-depth defense strategy that follows guidelines issued by the Canadian Standards Association and National Institute of Standards and Technology and is recommended by the CER in Canada and the TSA and FERC in the U.S. These technologies and practices provide detection and protection of and response to, cyber security threats. Alliance Canada regularly evaluates its cyber security technologies and practices and either replaces them or augments them as needed.
Terrorism or Sabotage Risk
Alliance Canada has taken specific measures to enhance the security of its pipelines from risk of terrorism or sabotage and other threats. These measures include instituting baseline security assessments according to the risk profile of each facility and initiating upgrades in equipment and procedures as required, although there is no assurance that its assets and facilities will not become the subject of a terrorist attack regardless of the steps taken to increase security.
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Climate Change-Related Risks
Energy Market Transition
Changing consumer preferences, new technologies, government regulation or other external factors may result in a rapid transition from fossil-based sources of energy, including energy derived from crude oil and natural gas, to renewable and other alternative sources of energy. This may lead to lower global demand for natural gas and NGL and, in turn, may lead to lower prices for such commodities. This could negatively impact the Company's producing customers and lead to less demand for Alliance Canada's services, which could adversely impact Alliance Canada's financial results and its ability to service its obligations under its debt securities and other debt obligations.
Risks Relating to Weather Conditions
Weather conditions (including those associated with climate change) may impact Alliance Canada's ability to complete capital projects, repairs or turnarounds on time, potentially resulting in delays and increased costs. Weather may also affect access to Alliance Canada's assets, and the operations and projects of Alliance Canada's customers or shippers, which may impact the supply and/or demand for Alliance Canada's services.
Changes and/or extreme variability in weather patterns, as well as increases in the frequency of extreme weather events, such as floods, cyclones, hurricanes, droughts and forest fires, increases the potential risk for Alliance Canada's assets, including operational disruptions, transportation difficulties, supply chain disruptions, employee safety incidents, and damage to assets, which may result in lower revenues or higher costs.
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DESCRIPTION OF CAPITAL STRUCTURE
Alliance Canada has been capitalized through the issuance of the Units, the Senior Notes and through borrowings under its Credit Facility.
Units
General
Alliance Canada is authorized to issue an unlimited number of Class A Units and an unlimited number of Class B Units. As of December 31, 2020, Alliance Canada has issued Class A Units and Class B Units to the Limited Partners, as follows:
Limited Partner Total Units Held Percent (%) Enbridge Class A: 278,103.6305 50 Class B: 36,778.9505 314,882.5810 Pembina Class A: 278,103.6305 50 Class B: 36,778.9505 314,882.5810 Total Class A: 556,207.2610 100 Class B: 73,557.9010 629,765.1620
The Class A Units and the Class B Units are equal with respect to all rights, benefits, obligations and limitations provided for under the Limited Partnership Agreement.
The holders of the Class A Units and Class B Units are entitled:
(i) to one vote in respect of each Class A Unit and Class B Unit held on any matters requiring the approval or consent of the partners in general or the Limited Partners in particular, unless otherwise specified in the Limited Partnership Agreement; and
(ii) to participate in profits, to have allocated to them any losses or to receive distribution of the Capital Contribution (as defined in the Limited Partnership Agreement) in respect of each Class A Unit and Class B Unit.
Limited Liability of Holders of Units
The Limited Partners are not permitted to, among other things, take part in the control or management of the business of Alliance Canada or to transact any business on behalf of Alliance Canada or to bind or hold themselves out as having the authority or power to bind Alliance Canada. The Canadian General Partner has the full and exclusive right, power and authority to manage, control, administer and operate the business and affairs of Alliance Canada.
Alliance Canada was formed in order for each Limited Partner to benefit from limited liability to the extent of the capital contributed to Alliance Canada, plus its pro rata share of any undistributed income of Alliance Canada. A Limited Partner may lose the protection of limited liability if, among other things, it
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takes part in the control or management of the business of Alliance Canada. In the event that the limited liability of a Limited Partner is lost by reason of a breach by the Canadian General Partner of the Limited Partnership Agreement or any act or omission of the Canadian General Partner or any of its officers, directors, shareholders, employees or agents, the Canadian General Partner is required to indemnify and hold harmless such Limited Partner.
Allocation of Net Income and Losses
The net income or loss, as the case may be, of Alliance Canada as determined for accounting purposes for a given fiscal year of Alliance Canada is allocated among the Canadian General Partner and the holders of the Class A Units and the Class B Units as follows:
(i) 1% to the Canadian General Partner; and
(ii) 99% to the holders of the Class A Units and the Class B Units at the end of such fiscal year in proportion to the number of Class A Units and Class B Units respectively held by them.
The net income or loss, as the case may be, of Alliance Canada for tax purposes for a given fiscal year, which may vary from the net income or loss of Alliance Canada as determined for accounting purposes, is allocated among the Canadian General Partner and the holders of the Class A Units and the Class B Units in the same proportions and manner as the allocation of net income or loss for accounting purposes.
Distributions
The Canadian General Partner may, at any time, distribute to the Canadian General Partner and the holders of the Class A Units and the Class B Units such portion of the net income of Alliance Canada, including any undistributed income, as the Canadian General Partner determines in good faith to be in the best interests of Alliance Canada, as follows:
(i) 1% to the Canadian General Partner; and
(ii) 99% to the holders of the Class A Units and the Class B Units on the record date for such distribution in proportion to the number of Class A Units and Class B Units respectively held by them.
See "Distributions – Cash Distributions" for a summary of the distributions per Unit declared and paid by Alliance Canada during Alliance Canada's three most recently completed financial years.
No distribution is permitted to be made to the Canadian General Partner or the Limited Partners unless the distribution complies with the Common Agreement and provided that, after making the distribution, sufficient property of Alliance Canada remains to satisfy all liabilities of and claims against Alliance Canada, except liabilities to Limited Partners (on account of the capital contributions made by them to Alliance Canada) and to the Canadian General Partner.
See "Material Contracts – Common Agreement".
Return of Capital
The Canadian General Partner may, at any time, subject to applicable laws, return as capital to the holders of the Class A Units and the Class B Units and to the Canadian General Partner such portion of the capital
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contributions respectively made by them as the Canadian General Partner determines in good faith to be in the best interest of Alliance Canada. Any such return of capital is required to be allocated among the Canadian General Partner and the holders of the Class A Units and the Class B Units in the same proportions and manner as any distribution of net income made to them.
Dissolution
In conjunction with a dissolution of Alliance Canada and after the payment of, or provision for, the debts, liabilities and liquidation expenses of Alliance Canada, the holders of the Class A Units and the Class B Units are entitled, on the date of dissolution, in proportion to the number of Class A Units and Class B Units respectively held by them:
(i) to an amount equal to the balance in the capital account maintained under the Limited Partnership Agreement at such time or a pro rata share where sufficient funds are not otherwise available; and
(ii) to a distribution of 99% of the balance of the remaining assets of Alliance Canada.
Right of First Refusal
A Limited Partner that proposes to transfer any of its Units to a purchaser that is not an affiliate or nominee of such Limited Partner or to a financial investor or that undergoes a change of control must first offer such Units to the other Limited Partners at the same price and on the same terms, unless such transfers are approved by an extraordinary resolution of the Limited Partners.
Constraints of Ownership
Under the terms of the Limited Partnership Agreement, each Limited Partner is prohibited from becoming a "non-resident" of Canada within the meaning of the Income Tax Act (Canada) and must promptly advise the Canadian General Partner if it becomes a "non-Canadian" within the meaning of the Investment Canada Act (Canada). Upon request, each Limited Partner must provide the Canadian General Partner with evidence of its status under such legislation. If a Limited Partner fails to provide such evidence within a reasonable time of request or if the evidence it provides is not reasonably satisfactory, the Canadian General Partner has the right, subject to the right of first refusal granted to the Limited Partners under the Limited Partnership Agreement, to sell or purchase for cancellation the Units held by such Limited Partner for the lesser of their acquisition cost or their fair market value determined in accordance with the terms of the Limited Partnership Agreement. In addition, pursuant to the Limited Partnership Agreement, no transfer of Units is permitted if the transferee of the Units is a "non-resident" of Canada within the meaning of the Income Tax Act (Canada).
Senior Notes
As at December 31, 2020, the following Senior Notes were outstanding: (i) $139.8 million aggregate principal amount bearing interest at 7.181% per annum and maturing on June 30, 2023; (ii) $23.8 million aggregate principal amount bearing interest at 5.546% per annum and maturing on December 31, 2023; (iii) $130.7 million aggregate principal amount bearing interest at 6.765% per annum maturing on December 31, 2025; and (iv) $114.4 million aggregate principal amount bearing interest at 7.217% per annum and maturing on December 31, 2025. Interest and principal repayments on the Senior Notes are payable semi-annually on June 30 and December 31 of each year.
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Alliance Canada may be required to redeem the Senior Notes, in whole or in part, from proceeds received under insurance claims or other claims for damages if the proceeds are not applied to repair or rebuild the Alliance Canada Pipeline.
Along with the Credit Facilities, the Senior Notes are collateralized by a first priority perfected security interest in the Transportation Contracts with a term greater than one year, Alliance Canada's CER permit, certain other material contracts, the trust accounts into which Alliance Canada's transportation revenue is deposited and a floating charge debenture over Alliance Canada's real property and tangible personal property. The Senior Notes rank equally with the Credit Facilities and may be redeemed by Alliance Canada at any time at a price equal to the greater of: (i) the applicable Government of Canada yield plus a premium; and (ii) par, together with accrued interest.
See "Material Contracts – Senior Note Indenture".
Ratings
The Senior Notes are rated "BBB+" (stable) by S&P and "Baa2" (negative) by Moody's. Credit ratings are intended to provide investors with an independent measure of the credit quality of any issue of securities.
S&P's credit ratings on long-term debt range from AAA to D, which represents the range from highest to lowest quality of such securities rated. A rating of BBB by S&P is the fourth highest of its ten rating categories. According to the S&P credit rating system, an obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor's capacity to meet its financial commitments on the obligation. The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (–) sign to show relative standing within the rating categories.
Moody's credit ratings are on a long-term debt rating scale that ranges from Aaa to C, which represents the range from highest to lowest quality of such securities rated. A rating of Baa by Moody's is the fourth highest of its nine rating categories. According to the Moody's rating system, debt securities rated Baa are judged to be medium-grade and subject to moderate credit risk and as such, may possess certain speculative characteristics. Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through Caa in its corporate bond rating system. The modifier 1 indicates that the issue ranks in the higher end of its generic rating category, the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the obligation ranks in the lower end of its generic rating category.
The credit ratings accorded to the Senior Notes by the rating agencies are not recommendations to purchase, hold or sell the Senior Notes, as such ratings do not comment as to market price or suitability for a particular investor and may be subject to revision or withdrawal at any time by the rating agencies. Alliance Canada cannot provide assurance that any rating will remain in effect for any given period of time or that any rating will not be revised or withdrawn entirely by a rating agency in the future. If, in the judgment of a rating agency, circumstances so warrant and if any such rating is so revised or withdrawn, Alliance Canada is not obliged to update this Annual Information Form.
Alliance pays industry-standard fees to Moody's and S&P with respect to the ratings of its Senior Notes. Alliance Canada has not made any payments to these credit rating agencies for services unrelated to the provision of such credit ratings during the last two years.
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Credit Facilities
On June 26, 2015, Alliance Canada entered into the Credit Facility, a three-year revolving credit facility with a syndicate of lenders. On December 10, 2019, Alliance Canada exercised the supplemental commitments provision under the credit agreement governing the Credit Facility, increasing the total available commitments by $100 million to $300 million, and extended the maturity date of the Credit Facility to December 12, 2022.
Loans under the Credit Facility bear interest at floating rates based on Canadian bankers' acceptance and LIBOR rates plus an applicable margin to those rates. The credit agreement governing the Credit Facility includes customary representations, warranties, covenants (including financial covenants and restrictions on additional indebtedness) and conditions to funding.
See "Material Contracts – Common Agreement".
The Credit Facility ranks pari passu with other senior secured debt of Alliance Canada, including the Senior Notes, and the lenders under the Credit Facility share the benefit of all collateral required to be provided under the Senior Note Indenture on a pari passu basis. Any letters of credit drawn under the Credit Facility will constitute senior debt; however, the reimbursement obligations arising pursuant to the letters of credit will rank after payment of other senior debt.
The maturity date of the Credit Facility is December 12, 2022. There are provisions in the credit agreement governing the Credit Facility to extend the term; however, the length of the Credit Facility cannot extend beyond four years. Extensions are subject to acceptance of the lenders under the credit agreement governing the Credit Facility.
As of December 31, 2020, the amount available to draw down on the Credit Facility had been reduced by the outstanding debt service reserve letters of credit of $57.7 million, outstanding letters of credit to support commercial obligations of $3.0 million and by drawings of $195.5 million.
Liquidity
As at December 31, 2020, Alliance Canada had $7.4 million in cash and trust deposit accounts. Cash totaling $7.1 million is held in trust accounts to meet certain covenants contained in financing agreements and restricted deposits on behalf of shippers. Undrawn amounts under the Credit Facility were $43.8 million as at December 31, 2020. The total of cash, trust deposits and the Credit Facility are, in management's view, adequate to meet ongoing liquidity and capital resource requirements.
DISTRIBUTIONS
Cash Distributions
The following tables summarize the distributions declared and paid by Alliance Canada to the Limited Partners and to the Canadian General Partner, respectively, in each of Alliance Canada's three most recently completed financial years. The distributions made to the Limited Partners represent the 99% allocation of distributable net income to which the Limited Partners are entitled and the distributions made to the Canadian General Partner represent the 1% allocation of distributable net income to which the Canadian General Partner is entitled, in each case pursuant to the Limited Partnership Agreement.
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The historical distribution payments in the tables below are not indicative of future distribution payments that may be made to the Limited Partners and the Canadian General Partner.
Net Cash Distribution to Limited Partners ($ per Unit) Payment Date 2020 2019 2018 First Quarter $83.9456 $149.9702 $92.7489 Second Quarter 80.4821 132.2065 134.5645 Third Quarter 74.5135 110.0410 110.6699 Fourth Quarter 78.1291 48.5753 96.0501 Total $317.0753 $440.7930 $434.0334
Alliance Canada has both Class A Units and Class B Units outstanding. The cash distributions declared and paid per Class A Unit and per Class B Unit during the three most recently completed financial years of Alliance Canada were equal. The Canadian General Partner does not own any Units.
The following table sets forth the gross distributions declared and the net distributions paid to the Limited Partners in each of the preceding three financial years:
Net Distributions to Limited Partners ($ per Unit) 2020 2019 2018 Gross Cash Distribution $317.0753 $440.7930 $434.0332 Maintenance Capital Contribution - (5.5073) - Net Distributions $317.0753 $435.2856 $434.0332
Gross Cash Distribution to the Canadian General Partner ($ per Unit) Payment Date 2020 2019 2018 First Quarter $534.00 $954.00 $590.00 Second Quarter 512.00 841.00 856.00 Third Quarter 474.00 700 .00 704.00 Fourth Quarter 497.00 309.00 611.00 Total $2,017.00 $2,804.00 $2,761.00
Prior year distribution balances paid to the Canadian General Partner reflect the gross distribution paid to the Canadian General Partner.
In January 2021, the Canadian General Partner declared a distribution of $23.1086 per Unit payable to the Limited Partners and a distribution of $147,000 payable to the Canadian General Partner, in each case, on January 28, 2021.
In February 2021, the Canadian General Partner declared a distribution of $30.1827 per Unit payable to the Limited Partners and a distribution of $192,000 payable to the Canadian General Partner, in each case, on February 25, 2021.
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In March 2021, the Canadian General Partner declared a distribution of $30.1827 per Unit payable to the Limited Partners and a distribution of $192,000 payable to the Canadian General Partner, in each case, on March 30, 2021.
Distribution Policy
Alliance Canada targets to distribute to the Limited Partners an amount equal to revenues less operating costs and amounts required to service debt obligations. In determining what amounts may be paid, Alliance Canada takes into account the prevailing circumstances at the time, including expected capital expenditures and working capital requirements and limitations placed on Alliance Canada as a result of its financing agreements. Increases in distributions to the Limited Partners may be supported by increases in cash available for distribution due to consistent performance and operational results, along with available liquidity.
Distribution Limitations
Pursuant to the Common Agreement, Alliance Canada may make quarterly distributions so long as at the time of distribution: (i) no potential event of default or event of default has occurred and is continuing; (ii) its debt service reserve account is fully funded; (iii) its debt service account is fully funded; and (iv) its DSCR for the preceding four fiscal quarters and the projected DSCR for the four succeeding fiscal quarters are at least 1.25 to 1.
See "Material Contracts – Common Agreement".
MARKET FOR SECURITIES
The Units and the Senior Notes are not listed on any exchange or similar market.
SECURITIES SUBJECT TO CONTRACTUAL RESTRICTIONS ON TRANSFER
The following table sets out the securities subject to contractual restrictions on transfer as at December 31, 2020:
Number of Securities that are Subject to a Contractual Restriction on Description of Class Transfer Percentage of Class (%) Class A Units (1) 556,207.2610 100 Class B Units (1) 73,557.9010 100 Note: (1) The Units are subject to contractual restrictions on transfer under the Limited Partnership Agreement, which do not expire. See "Description of Capital Structure – Units – Right of First Refusal" and "Description of Capital Structure – Units – Constraints of Ownership".
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DIRECTORS AND OFFICERS
Name, Occupation and Security Holdings
The GP Board monitors management's activities and reviews the business strategies of Alliance Canada. As of the date of this Annual Information Form, the GP Board consisted of six members, each of whom will serve as a director of the Canadian General Partner until the next annual meeting of its shareholders or until such director's successor is duly elected or appointed. The table below sets out, as of the date of this Annual Information Form, the full name of each director and executive officer of the Canadian General Partner, his or her municipality of residence and position with the Canadian General Partner, his or her current principal occupation and, if applicable, principal occupations within the five preceding years and, for each director, the year in which such individual became a director of the Canadian General Partner. No director or executive officer of the Canadian General Partner and no associate or affiliate of any director or executive officer of the Canadian General Partner beneficially owns, directly or indirectly or exercises control or direction over, any Units.
Name and Municipality of Residence Position Principal Occupation Director Since BRIAN S. JOHNSON Director and Chief Executive Chief Executive Officer of the July 31, 2020 Calgary, Alberta, Canada Officer Canadian General Partner since July 31, 2020. Mr. Johnson also currently serves as Vice President, Canadian Gas Transmission & Midstream for Enbridge. Prior to his current role, Mr. Johnson served as Vice President of Customer Service and Mainline Asset Performance, Liquids Pipelines for Enbridge Pipelines Inc. from 2016 to 2020. He also serves as a Director, President, and/or Vice President of various other Enbridge subsidiaries, and has served as Director and President of Westcoast Energy, Inc. since July 2020.
DARREN D. MARINE Director and Chief Financial Chief Financial Officer of the September 1, 2019 Calgary, Alberta, Canada Officer Canadian General Partner since September 1, 2019. Prior thereto Vice President of the Canadian General Partner from June 2018 to September 2019. Vice President, Transmission Business Unit of Pembina since October 2, 2017, Senior Vice President, Business Joint Ventures of Veresen Inc. from February 2014 to October 1, 2017. Director of Alliance Canada from February 19, 2014 to October 2, 2017. President of SemCAMS ULC (an owner and operator of gas gathering, compression and processing assets) from September 2006 to January 2011.
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Name and Municipality of Residence Position Principal Occupation Director Since DAVE DUNLOP(1) Director, Vice President and Vice President of the Canadian September 1, 2019 Calgary, Alberta, Canada Controller General Partner since September 1, 2019. Controller of the Canadian General Partner since June 2018. Senior Manager, Controller, Transmission Pipelines of Pembina since October 2, 2017. Vice President, Finance of Veresen Inc. since September 1, 2014.
HANIF KASSAM Vice President Vice President of the Canadian N/A Calgary, Alberta, Canada General Partner since September 1, 2019. Senior Manager Business Development for the Transmission Business Unit at Pembina Pipelines since February 2019. Senior Manager Business Development for the New Ventures and Marketing division for Pembina from January 2018 to February 2019. Manager Corporate Development at Pembina from February 2015 to January 2018.
CHRISTOPHER A. HARGREAVES(1) Director and Vice President Vice President of the Canadian October 22, 2018 Calgary, Alberta, Canada General Partner since June 2018. Technical Manager, JV Management, Canadian Gas Transmission & Midstream of Enbridge since March 2018. Manager, Commercial South Peace, Canadian Gas Transmission & Midstream of Enbridge from March 2017 to February 2018. Director, Commercial Development of Spectra Energy Midstream Corporation from August 2016 to February 2017. Director, Pricing and Market Research of Spectra Energy Corp. from January 2015 to July 2016. Director, Commercial Development of Spectra Energy Midstream Corporation from March 2013 to December 2015.
HARRY K. ANDERSEN Director Senior Vice President and Chief Operating Officer, Pipelines of Pembina since April 1, 2021. Previously, Senior Vice President, External Affairs and Chief Legal Officer of Pembina from July 1, 2017 to March 31, 2021 and Vice President, Legal and General Counsel of Pembina from April 2013 until July 1, 2017.
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Name and Municipality of Residence Position Principal Occupation Director Since STEPHEN J. NEYLAND(1) Director Vice President, Finance & September 1, 2016 Houston, Texas, U.S. Business Partners, GTM of Enbridge since 2016. Mr. Neyland also currently serves as Manager on the Board of Managers and Vice President, Finance of Spectra Energy Partners GP, LLC. Since joining Enbridge in 2001, Mr. Neyland has served in various other financial management positions, including Controller and Vice President-Finance for Enbridge and its subsidiaries. He has also been Vice President, Finance of Westcoast Energy Inc. since 2017.
DAVID TANIGUCHI Corporate Secretary Corporate Secretary of the N/A Calgary, Alberta, Canada Canadian General Partner since June 2018. Associate General Counsel of Enbridge since 2014, and Corporate Secretary for Enbridge's Canadian subsidiaries, including Enbridge Pipelines Inc., Enbridge Gas Inc. and Westcoast Energy Inc.
Notes: (1) Member of the Audit Committee. Mr. Neyland is the Chair of the Audit Committee.
Conflicts of Interest
A potential material conflict of interest may exist between Alliance Canada and the directors of the Canadian General Partner by virtue of the following:
(i) the directors of the Canadian General Partner are also officers or employees of Enbridge Management Services Inc., Enbridge or Pembina or their respective affiliates;
(ii) certain affiliates of Enbridge and Pembina are also shippers on the System; and
(iii) Enbridge and Pembina or their affiliates also have ownership interests in Aux Sable Extraction and Aux Sable Liquid Products.
AUDIT COMMITTEE
Alliance Canada is a "venture issuer" as defined in NI 52-110. Accordingly, in presenting certain information regarding the audit committee of the Canadian General Partner (the "Audit Committee") below, Alliance Canada is relying on the venture issuer exemption set out in Section 6.1 of NI 52-110.
Audit Committee Charter
A copy of the Audit Committee charter is attached as Appendix A to this Annual Information Form.
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Composition of the Audit Committee
As of December 31, 2020, the members of the Audit Committee were Stephen Neyland (Chair), Dave Dunlop and Christopher Hargreaves and, each of whom is independent and financially literate (each within the meaning of NI 52-110).
Relevant Education and Experience
A summary of the education and experience of each member of the Audit Committee is set out below:
Stephen Neyland (Chair)
Mr. Neyland is a Certified Public Accountant and has over 25 years of experience in accounting and financial reporting. Mr. Neyland’s roles have included: Vice President – Finance & Business Partners, GTM for Enbridge since 2016; Vice President, Finance for Enbridge Energy Partners, L.P. and Spectra Energy Partners GP, LLC; Vice-President, Finance for Westcoast Energy Inc.; and Vice President – Finance of Midcoast Holdings, L.L.C., general partner of Midcoast Energy Partners, L.P. Since joining Enbridge in 2001, Mr. Neyland has served in various other financial management positions, including Controller and Vice President-Finance for Enbridge and its subsidiaries.
Dave Dunlop
Mr. Dunlop was appointed the Vice President of the Canadian General Partner on September 1, 2019 and Controller in June 2018. Mr. Dunlop was appointed Senior Manager, Controller, Transmission Pipelines of Pembina on October 2, 2017. Mr. Dunlop was Vice President, Finance of Veresen Inc. from September 1, 2014 to October 2, 2017. Responsibilities of his position include overseeing financial, treasury, accounting, and corporate planning functions. Mr. Dunlop is a senior finance professional with other 25 years of experience in the energy industry in progressively more senior roles within accounting, financial reporting, finance and business planning. Mr. Dunlop has a Bachelor of Commerce from the University of Alberta (1986) a Chartered Professional Accountant designation (1989), a Master of Business Administration from Northwestern University and York University (2014) and a Chartered Financial Analyst designation (2017).
Christopher Hargreaves
Mr. Hargreaves was appointed the Vice President of the Canadian General Partner in June 2018. Mr. Hargreaves was appointed Technical Manager, JV Management, Canadian Gas Transmission & Midstream of Enbridge in March 2018. Mr. Hargreaves is a senior commercial professional with over 20 years of experience in the energy industry in progressively more senior roles within commercial, business development, market research and revenue forecasting. In his current role, Mr. Hargreaves has a wide array of commercial responsibilities within Enbridge's Gas Transmission and Midstream Business Unit, including assisting with the preparation and review of requisite continuous disclosure documents. Mr. Hargreaves has a Bachelor of Management from the University of Lethbridge (1995) and has assisted with reviews of Alliance's financial statements since 2018.
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External Auditor Service Fees
The following table sets out the fees billed to Alliance Canada for professional services provided by MNP LLP, Alliance Canada's auditor, during each of the last two years:
Audit-Related Year Audit Fees(1) Fees(2) Tax Fees(3) All Other Fees(4)
2020 $143,000 $10,010 Nil Nil
2019 $143,000 $7,150 Nil Nil
Notes: (1) Audit fees were for professional services rendered by MNP LLP for the audit of Alliance Canada's annual financial statements and reviews of Alliance Canada's quarterly financial statements, as well as services provided in connection with statutory and regulatory filings or engagements. (2) Audit-related fees are for assurance and related services, reasonably related to the performance of the audit or review of Alliance Canada's financial statements and not reported under "Audit Fees" above. (3) Tax fees are for tax compliance and non-audit tax services. (4) All other fees are fees for products and services provided by Alliance Canada's auditors primarily for accounting assistance other than those described as "Audit Fees", "Audit-Related Fees" and "Tax Fees".
DIRECTOR AND OFFICER COMPENSATION
Subsequent to the Owner-Operator Transition and pursuant to the Operating Agreements, certain employees of either Enbridge or Pembina serve as the directors and/or officers of the Canadian General Partner. Each of such individuals acts as a director and/or officer of the Canadian General Partner in the course of fulfilling his duties of employment with the applicable Limited Partner (or their respective affiliates). See "Directors and Officers".
As a result, neither Alliance Canada nor the Canadian General Partner pays compensation to any of the current officers and/or the directors of the Canadian General Partner. Aggregate compensation is paid to such individuals by Enbridge or Pembina, as applicable, for serving as an employee of Enbridge or Pembina, respectively, which also includes compensation for their service as a director and/or officer of the Canadian General Partner, although no separate amount of compensation is specifically allocated to those individuals for serving as directors and/or officers of the Canadian General Partner.
Information relating to the compensation programs of Enbridge and Pembina, including information relating to the compensation governance and programs and policies of Enbridge and Pembina, can be found in the proxy statement of Enbridge dated March 2, 2021 and the management information circular of Pembina dated March 19, 2021, electronic copies of which are available on the profiles of Enbridge and Pembina, respectively, on the SEDAR website at www.sedar.com.
Directors' and Officers' Indemnity
The Canadian General Partner maintains, either independently or through inclusion in the corporate insurance programs maintained by Enbridge and Pembina in proportion to their respective interest in Alliance Canada, directors' and officers' liability insurance. Subject to policy conditions, this program is intended to cover each individual's liability arising from their duties as a director or officer of the Canadian
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General Partner, provided that such individual has acted honestly and in good faith with a view to the best interests of the Canadian General Partner and Alliance Canada.
CORPORATE GOVERNANCE DISCLOSURE
The GP Board considers good corporate governance to be central to the effective and efficient operation of Alliance Canada. The corporate governance practices of Alliance Canada and the Canadian General Partner are set forth below.
Board of Directors
As of the date of this Annual Information Form, the GP Board consisted of six directors, all of whom are independent (within the meaning of NI 52-110). Under NI 52-110, a director is independent if he or she has no direct or indirect material relationship with Alliance Canada. A material relationship is a relationship which could, in the view of the GP Board, be reasonably expected to interfere with the exercise of a director's independent judgement. Certain types of relationships, specified in NI 52-110, are by their nature considered to be material relationships.
Directorships
As of the date of this Annual Information Form, none of the directors of the Canadian General Partner is a director of another issuer that is a reporting issuer (or the equivalent).
Orientation and Continuing Education
There is no formal orientation program for directors; however, new directors elected or appointed to the GP Board are provided with information relating to the functioning of the GP Board and the Audit Committee, information about the business of the Canadian General Partner and Alliance Canada and access to management.
The GP Board does not provide formal continuing education for directors. Directors maintain the skill and knowledge necessary to meet their obligations as directors through a combination of their existing education, their experience as businesspersons and managers and their service as directors of other issuers (as applicable), as well as through the advice they receive from Alliance Canada's legal counsel, auditors and other advisers.
Ethical Business Conduct
The GP Board takes various steps to encourage and promote a culture of ethical business conduct by Alliance Canada. The skill and knowledge of the GP Board's members and advice from counsel ensure that directors exercise independent judgement in considering transactions and agreements in respect of which a director or officer has a material interest. The directors of the Canadian General Partner are also subject to the general obligation under the Canada Business Corporations Act to disclose and not vote on any material contract or transaction with the Canadian General Partner or Alliance Canada in which they have an interest. The GP Board also receives annual training on compliance with Alliance Canada's Code of Business Conduct, as well as initial and annual training with respect to requirements unique to the pipeline business, including those contained in the FERC Standards of Conduct. In addition, the directors and officers of the Canadian General Partner are reminded of their compliance obligations at each meeting of the GP Board.
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Nomination of Directors
The Shareholders Agreement governs the nomination of directors to the GP Board. Pursuant to the Shareholders Agreement, the GP Board is required to have six directors, each of whom is elected by the shareholders of the Canadian General Partner from the nominees put forth by them, in accordance with the cumulative voting provisions of the Canada Business Corporations Act. The Shareholders Agreement further provides that the chairman of the GP Board is to be appointed by the GP Board at the time of the annual general meeting of the shareholders of the Canadian General Partner. The chairman of the GP Board is required to be rotated on an annual basis among the nominees of the shareholders of the Canadian General Partner.
Assessments
The GP Board has responsibility for assessing the effectiveness of the GP Board, the committees of the GP Board and the contribution of individual directors. This task has not been assigned to any committee of directors of the GP Board and no formal process is in place.
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
As at the date of this Annual Information Form, no current or former executive officer, director or employee of the Canadian General Partner was indebted to Alliance Canada or the Canadian General Partner, nor were any of such individuals indebted to Alliance Canada or the Canadian General Partner at any time during the most recently completed financial year.
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Other than as set forth in this Annual Information Form, to the knowledge of the directors and executive officers of the Canadian General Partner, no director or executive officer of the Canadian General Partner, no person that is the direct or indirect beneficial owner of, or that directly or indirectly exercises control or direction over, more than 10% of the outstanding voting securities of the Canadian General Partner and no associate or affiliate of any of the foregoing, has or has had any material interest, direct or indirect, in any transaction since January 1, 2018 that has materially affected or is reasonably expected to materially affect Alliance Canada.
AUDITORS, REGISTRAR AND TRANSFER AGENT
MNP LLP is the auditor of Alliance Canada and have confirmed that they are independent with respect to Alliance Canada within the meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulations. MNP LLP was first appointed as auditor of Alliance Canada on April 5, 2019.
Computershare Trust Company of Canada is the registrar and transfer agent for the Senior Notes and the Units. The register and transfer books for the Senior Notes are kept at the principal office of Computershare Trust Company of Canada in the City of Calgary, Alberta.
MANAGEMENT CONTRACTS
Pursuant to the terms of the Limited Partnership Agreement, the Canadian General Partner manages and directs the activities of Alliance Canada.
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MATERIAL CONTRACTS
The only material contract Alliance Canada has entered into since January 1, 2002, which is outside the ordinary course of business and still in effect, is the Common Agreement.
The existing senior indebtedness of Alliance Canada and Alliance USA, which includes the Canadian Facilities, the U.S. Facilities and the Senior Notes, is governed by a series of finance documents originally entered into in connection with the construction of the System, including: (i) the Common Agreement, which is summarized below; (ii) the Facility Agreements, which establish the Credit Facilities; (iii) the Senior Note Indenture, under which the Senior Notes were issued; (iv) the Security Trust Agreements, which require the use of collateral accounts for the deposit and application of all revenues accruing to Alliance Canada and Alliance USA; (v) the Security Documents, which establish the security for the Credit Facilities and the Senior Notes; and (vi) the Intercreditor Agreement, which governs any actions to be taken with respect to the enforcement of the Security Documents.
Terms not defined in the Glossary of Terms of this Annual Information Form but used in this "Material Contracts" section have the meanings ascribed to such terms in Appendix B hereto.
Common Agreement
The Common Agreement is an umbrella document which sets forth, among other things: (i) common representations and warranties, affirmative and negative covenants, events of default and remedies applicable to the Credit Facilities; (ii) certain mechanics for voting and decision-making among the Senior Lenders; (iii) requirements for mandatory and voluntary prepayments; and (iv) the appointment of the Intercreditor Agent to administer the provisions of the Common Agreement and the Intercreditor Agreement and (v) the appointment of the Canadian and U.S. Facility Administrative Agents and Security Trustees. The following description of the terms and conditions of the Common Agreement is intended to be a summary only and readers should refer to the copy of the Common Agreement available on Alliance Canada's SEDAR profile at www.sedar.com.
Affirmative Covenants
The affirmative covenants contained in the Common Agreement include:
(i) Maximum Borrowing Amount. Alliance Canada shall ensure that its Senior Debt outstanding does not at any time exceed, by more than US$10 million, the aggregate of:
(a) 70% of the Rate Base applicable to the Alliance Canada Pipeline excluding, to the extent, if any, included in such Rate Base, the DSR Required Amount in connection with the Alliance Canada Pipeline or part thereof on deposit in the Canadian Debt Service Reserve Account in the form of cash, Permitted Investments or Acceptable Credit Support;
(b) 70% of the proceeds of disposition of any asset previously forming part of the Rate Base applicable to the Alliance Canada Pipeline pending the application thereof in a manner permitted thereby;
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(c) the amount of all capital expenditures actually made by Alliance Canada in respect of an expansion, provided that such amount shall be reduced to 70% of the Rate Base applicable to such expansion six months after the completion of such expansion; and
(d) the DSR Required Amount.
For the purposes of the calculations contemplated above, the amount of undisbursed proceeds of any Senior Debt and any amount deposited with the applicable Security Trustee or depositary to defease Senior Debt will be deducted from Senior Debt.
(ii) DSR Required Amount. Alliance Canada shall cause to be deposited with the Canadian Security Trustee cash, Permitted Investments or Acceptable Credit Support equal to its DSR Required Amount.
Negative Covenants
The negative covenants contained in the Common Agreement include:
(i) Limitation on Indebtedness. Alliance Canada shall not create, incur, assume or suffer to exist any Indebtedness, other than Permitted Indebtedness.
(ii) Limitation on Liens. Alliance Canada shall not create or suffer to exist or permit any lien upon any of the material assets of the System, other than Permitted Liens.
(iii) Limitation on Disposition of Assets. Alliance Canada shall not convey, sell, lease, assign, transfer or otherwise dispose of all or any part of the System or the Collateral other than:
(a) as expressly permitted in or contemplated by any of the Transaction Documents;
(b) any sales or dispositions made in the ordinary course of business;
(c) any sales or dispositions made outside the ordinary course of business or any sales or dispositions of surplus, obsolete or worn out equipment having, in either case, an aggregate fair value consideration in any given year not exceeding the Threshold Amount;
(d) any sales or dispositions of assets to the extent that Alliance Canada acquires substantially similar replacement assets therefor of equal or greater value or utility within one year of such sale or disposition; or
(e) any sales or dispositions of assets at fair market value provided that 90% of the purchase price therefor is satisfied in cash or in assets that will form part of Alliance Canada's Rate Base,
provided, with respect to sales or dispositions referred to in paragraphs (d) and (e) above, that any cash proceeds of such sale or disposition are either reinvested in the Rate Base of Alliance Canada within one year of such sale or disposition or, at Alliance Canada's option, used within such period to prepay Senior Debt or to make Special Distributions; and provided in each such case that the maximum borrowing amount
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covenant in the Common Agreement is complied with after giving effect to such application.
(iv) Limitation on Mergers. Alliance Canada shall not merge or consolidate with or into any other person or liquidate, wind up, dissolve or otherwise transfer or dispose of all or substantially all of its property, assets or business unless (a) the surviving entity is Alliance Canada or another entity organized under the laws of Canada or any province thereof; (b) the surviving entity shall have expressly assumed all of the obligations of Alliance Canada with respect to the Finance Documents; (c) immediately after giving effect to such transaction or series of transactions, the surviving entity shall have an Investment Grade Rating; (d) immediately after given effect to such transactions or series of transactions, no potential Event of Default or Event of Default shall have occurred and be continuing; and (e) the surviving entity shall have delivered to the Intercreditor Agent a responsible officer's certificate and an opinion of counsel each stating that such amalgamation, consolidation, merger or sale of assets, as the case may be, complies with the foregoing.
(v) Limitation on Assignment of Transportation Contracts. Alliance Canada shall not consent to any assignment or transfer by any shipper of its obligations under its Transportation Contract without the prior consent of the Majority Lenders, unless the transferee or its guarantor, complies with the Shipper Credit Policy.
(vi) Distributions. Alliance Canada shall not make any Distribution, except that:
(a) on each Distribution Date, subject, if applicable, to the terms of the Canadian Security Trust Agreement, Alliance Canada may make Distributions so long as, at the time of any such Distribution:
(A) no potential Event of Default or Default shall have occurred and be continuing;
(B) the Canadian Debt Service Reserve Account shall be fully funded or supported to the levels required pursuant to the Common Agreement;
(C) the amount on deposit in the Canadian Debt Service Accounts or, if the conditions to the release of Alliance Canada's obligation to maintain its debt service accounts have been met, the aggregate amount of Alliance Canada's cash and cash equivalents (the "Cash Reserve") is and immediately following such Distribution would be, equal to or greater than the Required Balance. "Required Balance" means, at any time, the sum of each Debt Service Reserve Amount for each payment of Scheduled Debt Service scheduled to become due within six months, in the case of payments in respect of the Senior Notes or three months in the case of payments in respect of the Bank Facilities. As used in this definition, "Debt Service Reserve Amount" for any payment of principal, interest and associated fees in respect of Senior Notes means the product of the amount of such payment multiplied by a fraction the numerator of which is equal to six minus the number of months (counting any portion of a month as a whole month) remaining until such payment becomes due and the denominator of which is six and in respect of any payment of principal, interest and associated fees in respect of Bank Facilities
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means the product amount of such payment multiplied by a fraction the numerator of which is equal to the excess, if any, of three over the number of months (counting any portion of a month or a whole month) remaining until such payment becomes due and the denominator or which is three; and
(D) Alliance Canada shall have provided to the Intercreditor Agent a responsible officer's certificate setting forth a calculation of the DSCR for the four preceding fiscal quarters and the projected DSCR for the four succeeding fiscal quarters and such DSCR and projected DSCR (as applicable) are, for Alliance Canada, at least 1.25 to 1; provided that if, on any such Distribution Date, the aggregate of the contracted capacities under Transportation Contracts in good standing is less than 910 mmcf/d, then each of (1) the DSCR for the preceding four fiscal quarters, (2) the projected DSCR for each successive period of four consecutive fiscal quarters ending before the latest maturity date of any of the Senior Notes then outstanding and (3) the projected DSCR for the period, if any, beginning at the end of the last period referred to in (2) and ending on the latest maturity date of any of the Senior Notes then outstanding shall be at least 1.40 to 1; and
(b) Alliance Canada may make Special Distributions provided that the conditions set forth in subparagraphs (a)(A), (B) and (C) above are met.
(vii) New Credit Facilities. Alliance Canada is prohibited from entering into any new credit facility agreement having terms and conditions substantially more restrictive than those applicable to the Credit Facilities unless Alliance Canada promptly offers to extend to the Lenders the benefit of any such more restrictive terms and conditions.
Permitted Indebtedness
As noted above, Alliance Canada has agreed not to create, incur, assume or suffer to exist any Indebtedness other than Permitted Indebtedness. Permitted Indebtedness includes:
(i) Indebtedness in respect of the Credit Facilities and the outstanding Senior Notes;
(ii) Permitted Replacement Debt, Permitted Additional Debt and Mandatory Debt (each as more particularly described below);
(iii) Standby Commercial Paper Facilities and commercial paper issued pursuant thereto;
(iv) any obligations of Alliance Canada in respect of any DSR Letter of Credit, any advances made to reimburse the issuing bank for drawings thereunder and any other letter of credit issued under the Credit Facilities;
(v) purchase money Indebtedness (including financing leases) in an aggregate amount not exceeding the Threshold Amount or such greater amount as may from time to time be permitted by the Majority Lenders;
(vi) trade or other similar Indebtedness incurred in the ordinary course of Alliance Canada's business and not involving the borrowing of money by Alliance Canada;
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(vii) Hedging Contracts;
(viii) Subordinated Debt which is unsecured;
(ix) amounts payable under the Operative Documents;
(x) any Guarantee Obligations in respect of any of the foregoing; and
(xi) Indebtedness incurred by an Unrestricted Subsidiary of Alliance Canada so long as neither Alliance Canada nor Alliance USA has any Guarantee Obligations in respect thereof,
(collectively, "Permitted Indebtedness").
Permitted Additional Debt
Permitted Additional Debt is Indebtedness incurred by Alliance Canada which does not otherwise qualify as Permitted Indebtedness under the Common Agreement, if each of the following conditions is met (taking into account the resulting increase in Indebtedness):
(i) after incurrence of such additional Indebtedness and the application of the proceeds thereof, no default or Event of Default shall have occurred and be continuing;
(ii) Alliance Canada shall have obtained written evidence that no Ratings Downgrade will occur in respect of the Senior Notes as a result of such increase in the amount of the Indebtedness and the Senior Notes will have at least an Investment Grade Rating from each Relevant Rating Agency; and
(iii) such incurrence of Indebtedness will not violate any Permits or Governmental Consents,
(collectively, "Permitted Additional Debt").
Permitted Replacement Debt
Permitted Replacement Debt is Indebtedness incurred by Alliance Canada to refinance existing Senior Debt from time to time by repaying or prepaying or cancelling unutilized commitments in respect of, all or any portion of the Senior Debt, provided that:
(i) the principal amount of such Indebtedness may not exceed the principal amount of the Senior Debt being repaid by such Permitted Replacement Debt and the reasonable expenses associated with such refinancing;
(ii) if the Senior Debt being replaced was incurred under a Bank Facility and a default or Event of Default shall have occurred and be continuing, then either (a) Alliance Canada shall have obtained written evidence that no Ratings Downgrade shall occur as a result of the incurrence of such Indebtedness or (b) such Indebtedness shall have a weighted average life to maturity, calculated in accordance with accepted financial practice, equal to or greater than and a final maturity date no earlier than, the Senior Debt being replaced;
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(iii) if the Senior Debt is being replaced by Senior Notes, then Alliance Canada shall have obtained written evidence that no Ratings Downgrade of any then outstanding Senior Notes shall occur as a result of the incurrence of such Indebtedness;
(iv) after incurrence and application of such Indebtedness, no default or Event of Default shall have occurred and be continuing; and
(v) such incurrence of new Senior Debt shall not violate any Permits or Governmental Consents,
(collectively, "Permitted Replacement Debt").
Mandatory Debt
Alliance Canada may incur any Indebtedness necessary to fund up to 70% of any capital expenditure that it is required to make to comply with any applicable law ("Mandatory Debt").
Subordinated Debt
Alliance Canada may incur unsecured Indebtedness which is subordinate in priority of payment to the Senior Debt in accordance with the subordination provisions set forth in the Common Agreement ("Subordinated Debt").
Security
The performance of the Obligations is secured pursuant to the Security Documents. The Canadian Security Trust Agreement governs Alliance Canada's Accounts and sets forth provisions regarding, among other things, the disbursement and application of Cash Flows. Pursuant to the Common Agreement, the Security Trustees are authorized to act on behalf of the Senior Lenders under and in accordance with the Security Documents and to apply the proceeds of any realization of the Collateral in accordance with the priorities set forth in the Common Agreement.
The Collateral consists of senior first priority perfected liens and security interests in the following, to the extent a lien or security interest can be created therein:
(i) all transportation contracts and all documents and security provided by shippers pursuant to their Transportation Contracts and Firm Service Contracts (as defined in the Common Agreement);
(ii) the other Operative Documents (including the proceeds of any insurance policies, the Permits and the Governmental Consents);
(iii) the Accounts (except that the Accounts for the proceeds of the Senior Notes will be pledged solely for the benefit of the holders of the Senior Notes);
(iv) the Aux Sable Security Documents; and
(v) all of Alliance Canada's real property and tangible personal property.
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Senior Note Indenture
A summary of the key provisions of the Senior Note Indenture and the Senior Notes can be found in Alliance Canada's Short Form Base Shelf Prospectus dated June 12, 2003 under the heading "Description of the Notes and the Indenture", a copy of which is available on Alliance Canada's profile at www.sedar.com.
INTERESTS OF EXPERTS
MNP LLP has been the auditor of Alliance Canada since April 5, 2019 and has prepared a report with respect to the financial statements of Alliance Canada as at and for the financial year ended December 31, 2020. MNP LLP has confirmed that it is independent in accordance with the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulations.
ADDITIONAL INFORMATION
Additional information relating to Alliance Canada may be obtained:
on Alliance Canada's SEDAR profile at www.sedar.com;
on Alliance Canada's website at www.alliancepipeline.com; and
by written request to the Corporate Secretary of the Canadian General Partner, at Suite 200, 425 – 1st Street SW, Calgary, Alberta T2P 3L8.
Alliance Canada is not required to prepare a management information circular. Additional financial information relating to Alliance Canada is provided in Alliance Canada's financial statements and MD&A for its most recently completed financial year, copies of which have been filed under Alliance Canada's profile on SEDAR at www.sedar.com.
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APPENDIX A AUDIT COMMITTEE CHARTER
Composition of the Committee
1. The Audit Committee shall consist of a minimum of three (3) directors as determined by the Board of Directors of Alliance Pipeline Ltd. (the "Corporation"). The Audit Committee shall consist of one (1) director from each of the shareholders of the Corporation, with a third director rotated on an annual basis among nominees of the shareholders.
2. All Audit Committee members must be financially literate within the meaning set forth under National Instrument 52-110. Currently, "financially literate" means the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Corporation's financial statements.
3. A majority of the members of the Audit Committee shall not be executive officers, employees or control persons of the Corporation or an affiliate of the Corporation.
4. The Board of Directors of the Corporation (the "Board") shall appoint the members of the Audit Committee at the first meeting of the Board following each annual meeting of the shareholders of the Corporation (an "Annual Meeting").
5. The Board shall appoint one member of the Audit Committee to be the Chair of the Audit Committee.
6. A director appointed by the Board to the Audit Committee shall be a member of the Audit Committee until the next Annual Meeting or until his or her earlier resignation or removal by the Board. A member shall cease to be a member of the Audit Committee upon ceasing to be a director of the Corporation.
7. The Board may remove or replace any member of the Audit Committee at any time.
8. The Audit Committee shall appoint a Secretary of the Audit Committee.
Meetings of the Committee
1. The Audit Committee shall convene at such times and places designated by the Chair of the Audit Committee on a quarterly basis and whenever else a meeting is requested by the Board, a member of the Audit Committee, the external independent auditors (the "External Auditors") or a senior officer of the Corporation.
2. Notice of each meeting of the Audit Committee shall be given to each member of the Audit Committee and to the External Auditors, who shall be entitled to attend each meeting of the Audit Committee and shall attend whenever requested to do so by a member of the Audit Committee or the Secretary of the Committee.
3. Notice of a meeting of the Audit Committee shall:
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(i) be in writing;
(ii) state the nature of the business to be transacted at the meeting in reasonable detail;
(iii) to the extent practicable, be accompanied by copies of documentation to be considered at the meeting; and
(iv) be given at least 72 hours preceding the time stipulated for the meeting, unless such requirement is waived by all of the Audit Committee members.
4. A quorum for the transaction of business at a meeting of the Audit Committee shall consist of two members of the Audit Committee representing both of the shareholders of the Corporation.
5. A member or members of the Audit Committee may participate in a meeting of the Audit Committee by means of such telephonic, electronic or other communication facilities as permit all persons participating in the meeting to communicate adequately with each other and a member participating in such a meeting by any such means is deemed to be present at that meeting.
6. In the absence of the Secretary of the Audit Committee, the members shall choose one of the persons present to be the Secretary of the meeting.
7. With the consent of a member of the Audit Committee, senior management of the Corporation and other parties may attend meetings of the Audit Committee.
8. The Audit Committee shall make every reasonable effort to meet separately on an in-camera basis with each of the External Auditors, the internal auditor, management and among themselves, without the External Auditors and management, at every meeting.
9. Minutes shall be kept of all meetings of the Audit Committee and shall be signed by the Chair and the Secretary of the meeting.
10. Matters required to be approved by the Audit Committee, at a meeting or by written consent, must be approved by unanimous agreement of all members of the Audit Committee. In the context of a meeting, "unanimous agreement" means agreement of all members of the Audit Committee in attendance at a duly constituted meeting.
Mandate of the Committee
General Duties
1. The primary duty of the Audit Committee is to assist the Board in the proper discharge of its statutory responsibilities in regard to the review, approval and issuance of the Corporation's financial statements and the financial statements of Alliance Pipeline Limited Partnership (the "Partnership").
2. The Audit Committee will approve on behalf of the Board the quarterly financial statements of the Corporation and the Partnership, the related Management's Discussion and Analysis (the
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"MD&A") of the Partnership and any earnings press releases.
3. The Audit Committee will review and recommend for approval by the Board the annual financial statements of the Corporation and the Partnership, the related MD&A of the Partnership and any earnings press releases.
4. The Audit Committee shall also assist the Board in communicating with the internal and External Auditors, establishing the scope of the external audit and in overseeing the effectiveness and integrity of management information systems, reporting systems and internal controls of the Corporation and the Partnership.
5. The Audit Committee shall establish procedures for receipt, retention and appropriate treatment of complaints against the Corporation or Partnership regarding:
(i) accounting, internal accounting controls or auditing matters; and
(ii) non-compliance with legal or ethical standards,
and for confidentially addressing anonymous submissions by employees or others concerning the matters set out in paragraphs (a) and (b) above. Such procedures shall also provide a forum for employees or others to request and obtain guidance or advice, on an anonymous basis, in respect of any legal, ethical or financial matter.
6. In the performance of any of its duties and responsibilities, the Audit Committee shall have the right to:
(i) inspect any and all of the books and records of the Corporation and the Partnership, their subsidiaries and affiliates;
(ii) discuss with any officer or with the internal or External Auditors, such accounts, records and other matters as any member of the Audit Committee considers necessary and appropriate; and
(iii) engage, set compensation for and pay independent counsel and other advisors as it determines necessary to carry out its duties.
7. The Audit Committee shall report the results of reviews undertaken and any associated recommendations to the Board in the manner so agreed with or as directed by the Board. The Audit Committee shall apprise the Board where certain methods and frequency of communication and reporting to the Board is required in order to ensure the proper discharge of Audit Committee responsibilities under this charter.
8. The Audit Committee shall be responsible for ensuring that adequate procedures are in place for the review of the Corporation's public disclosure of financial information extracted or derived from the Corporation's financial statements and must periodically assess the adequacy of those procedures.
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Audits and Financial Reporting
Annual financial statements must be reviewed and recommended for approval by the Audit Committee before they are approved by the Board in order to (i) obtain enough information from the Corporation's External Auditors and management to ensure effective discussion of the statements at Board meetings, (ii) determine that the External Auditors are satisfied with the quality and not just acceptability, of the Corporation's and the Partnership's accounting principles as applied in their financial reporting and (iii) determine that the External Auditors are satisfied with the financial statement content and disclosure. A review process shall take place for quarterly financial statements before they are approved by the Audit Committee on behalf of the Board.
In conducting their quarterly and annual reviews, the Audit Committee shall, as applicable or required:
1. review the annual external audit plan for the Corporation and the Partnership with the External Auditors and with management;
2. review with management and, as deemed necessary, review with the External Auditors, any proposed changes in major accounting policies, the presentation and impact of significant risks and uncertainties and key estimates and judgements of management that may be material to financial reporting;
3. review with management and with the External Auditors, significant financial reporting issues arising during the fiscal period and the methods of resolution;
4. review any problems experienced by the External Auditors in performing an audit or interim review, including any restrictions imposed by management or significant accounting issues on which there was a disagreement with management;
5. review audited annual financial statements, in conjunction with the report of the External Auditors and obtain an explanation from management of all significant variances between comparative reporting periods;
6. review the post-audit or management letter containing the recommendations of the External Auditors and management's response, if any, including an evaluation of the adequacy and effectiveness of the internal financial controls of the Corporation and the Partnership and subsequent follow-up to any identified weaknesses;
7. review interim unaudited financial statements with the External Auditors and management and discuss the results of the External Auditors' interim review, including any matters required to be communicated to the Audit Committee by the External Auditors under generally accepted auditing standards, before release to the public;
8. review the evaluation of internal controls by the External Auditors with management;
9. enquire as to whether management has designed and implemented an effective system of internal controls over financial reporting through the request and review of management reports or other such means as the Audit Committee deems necessary.
10. review the terms of reference of the internal auditor;
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11. review the annual reports and annual plan issued by the internal auditor including the response, if any, of management and subsequent follow-up to any identified weaknesses;
12. ensure that the manager of internal audit has direct and open communication with the Audit Committee with respect to progress on planned audits, significant audit findings, recommendations made and management's response and that the manager of internal audit meets regularly with the Audit Committee without management present;
13. direct that the work of the internal and External Auditors provides an appropriate level of audit coverage and is effectively coordinated;
14. enquire into and determine the appropriate resolution of conflicts of interest in respect of audit or finance matters between or among any officer, director, shareholder, the internal auditors or the External Auditors of the Corporation, which are directed to the Audit Committee by the Chairman of the Board, the Board, a shareholder, the internal auditors, the External Auditors or management; and
15. enquire into and examine any of the financial affairs of the Corporation or the Partnership, their subsidiaries or affiliates or any of them and, if deemed appropriate, make recommendations to the Board, to the internal auditors, to the External Auditors or to management.
The External Auditors
The External Auditors shall report directly to the Audit Committee. Audit Committee practices intended to preserve the independence of the External Auditors shall include the following:
1. discussing with the External Auditors their accountability to the Board and the Audit Committee, as representatives of the shareholders to whom the auditor should be ultimately responsible;
2. reviewing the recommendations of management in respect of the appointment of the External Auditors and recommending to the Board the External Auditors to be put forward for shareholder approval at the Annual Meeting;
3. receiving assurance that the External Auditors participate in oversight programs established by the Canadian Public Accountability Board (the "CPAB") and are participants in good standing with the CPAB;
4. reviewing the terms of the External Auditors' engagement, including the appropriateness and reasonableness of the proposed audit fees and any unpaid fees. Upon satisfactory review, a recommendation shall be presented to the Board for their approval of the external audit engagement and related compensation;
5. receiving a formal written document from the External Auditors detailing all relationships existing between the External Auditors and the Corporation and the Partnership and pre-approving engagements for non-audit services to be provided by the External Auditors' firm or its affiliates, together with estimated fees and considering the potential impact of such services on the independence of the External Auditors. The Chair is delegated authority to independently pre- approve non-audit engagements and related fees up to $25,000, for the Canadian and U.S.
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Alliance Pipeline entities combined and shall report all such engagements to the Committee at its next regular meeting;
6. when there is to be a change of External Auditors, reviewing all issues and documentation related to the change, including the information to be included in the Notice of Change of Auditors and documentation called for under the policies and procedures specified by the Canadian Securities Administrators and the planned steps for an orderly transition period; and
7. reviewing all reportable events, including disagreements, unresolved issues and consultations, on a routine basis, whether or not there is to be a change of External Auditors.
Review and Assessment of Audit Committee Mandate
To assist in maintaining leading practices in discharging its mandate, the Audit Committee shall review and reassess its Charter at least annually and shall obtain approval of the Charter from the Board of Directors when changes are proposed.
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APPENDIX B ADDITIONAL DEFINITIONS USED IN MATERIAL CONTRACTS SECTION
"Acceptable Credit Support" means an irrevocable, unconditional, stand-by letter of credit or guarantee in customary form, issued by a bank, trust company or other entity whose long-term debt is rated "A2" or higher by Moody's and "A" or higher by S&P which may be secured by any or all of the Collateral.
"Accounts" means each collateral account established and maintained by Alliance Canada under the Canadian Security Trust Agreement.
"Aux Sable Security Documents" has the meaning ascribed thereto in the Common Agreement.
"Bank Facility" means any debt facility of Alliance Canada or Alliance USA with banks or other financial institutions.
"Canadian Debt Service Accounts" means the Canadian debt service accounts maintained by the Canadian Security Trustee pursuant to the Canadian Security Trust Agreement.
"Canadian Debt Service Reserve Account" means the Canadian debt service reserve accounts maintained by the Canadian Security Trustee pursuant to the Canadian Security Trust Agreement.
"Canadian Facilities" means the credit facilities of Alliance Canada.
"Canadian Facility Administrative Agent" means The Bank of Nova Scotia.
"Canadian Floating Charge" means a floating charge debenture creating a mortgage and charge, by way of a floating charge, over all of the real property and tangible personal property in which Alliance Canada has an interest from time to time, together with a debenture pledge agreement under which such debenture has been pledged to the Canadian Security Trustee.
"Canadian Note Trustee" means BNY Trust Company of Canada.
"Canadian Security Trust Agreement" means the Third Amended and Restated Canadian Security Trust Agreement, dated as of June 28, 2006, as amended, among Alliance Canada, the Canadian Security Trustee, the Intercreditor Agent, the Canadian Note Trustee and the Canadian Facility Administrative Agent.
"Canadian Security Trustee" means Computershare Trust Company of Canada.
"Cash Flows" generally means all revenues accruing to Alliance Canada, including:
(i) (a) revenues earned: (A) pursuant to the Transportation Contracts and (B) from amounts in the Accounts and (b) gains and/or losses arising from any Hedging Contracts;
(ii) proceeds paid or credited to Alliance Canada from any business interruption insurance policies; and
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(iii) all other amounts paid, earned or credited to Alliance Canada in connection with the ownership and operation of the Alliance Canada Pipeline, but excluding extraordinary gains or losses as determined in accordance with Canadian generally accepted accounting principles and any provision required by generally accepted accounting principles for regulated entities.
"Cash Reserve" has the meaning ascribed thereto under the heading "Material Contracts – Common Agreement – Negative Covenants - Distributions".
"Collateral" means, all assets, which at any particular time are subject to a lien purported to be created or granted pursuant to any Security Document.
"Credit Facilities" means the Canadian Facilities and the U.S. Facilities.
"Debt Service Reserve Amount" has the meaning ascribed thereto under the heading "Material Contracts – Common Agreement - Negative Covenants – Distributions".
"Distribution" means, with respect to either Alliance Canada or Alliance USA, any payment on account of any interest in Alliance Canada or Alliance USA, any payment in respect of Subordinated Debt of Alliance Canada or Alliance USA, any investment by Alliance Canada or Alliance USA in any Unrestricted Subsidiaries and certain other transfers or withdrawals which either Alliance Canada or Alliance USA is permitted to make or direct from the applicable Proceeds Account pursuant to the applicable Security Trust Agreement.
"Distribution Date" means any date within 45 days following each March 31, June 30, September 30 and December 31, on which either Alliance USA or Alliance Canada proposes to make a Distribution (other than a Special Distribution).
"DSR Letter of Credit" means an irrevocable letter of credit issued by a Facility Lender in favour of the Canadian Security Trustee or the U.S. Security Trustee, as applicable, pursuant to the Facility Agreements.
"DSR Required Amount" generally means, at any date, in respect of Alliance Canada, the relevant dollar amount equal to, from such date, six months of Scheduled Debt Service payable by Alliance Canada.
"Events of Default" has the meaning ascribed thereto in the Common Agreement.
"Facility Agreements" means the agreements evidencing the Canadian Facilities and U.S. Facilities.
"Facility Lenders" mean the Lenders pursuant to the Canadian Facilities and the U.S. Facilities.
"Finance Documents" means, collectively, the Common Agreement, the Facility Agreements, the Note Indentures, the Senior Notes, the Security Documents, the Hedging Contracts, the Intercreditor Agreement and all corresponding documents relating to Permitted Additional Debt, Permitted Replacement Debt, Mandatory Debt and any reimbursement agreement relating to a DSR Letter of Credit.
"Governmental Consents" generally means, all material authorizations of or with any governmental authority that are required for the ownership, financing, use, operation and maintenance of the System and all such other matters as may be necessary in connection with the System.
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"Guarantee Obligations" means guarantee and similar obligations in respect of Indebtedness.
"Hedging Contracts" means, collectively, hedging contracts with respect to interest and currency.
"Indebtedness" means, of any person at any date:
(i) all indebtedness of such person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices);
(ii) any other indebtedness of such person which is evidenced by a note, bond, debenture or similar instrument;
(iii) all obligations of such person under the financing leases;
(iv) all obligations of such person in respect of acceptances issued or created for the account of such person;
(v) all deferred obligations of such person to reimburse any bank or other person in respect of amounts paid or advanced under a letter of credit or other instrument;
(vi) all Guarantee Obligations of such person;
(vii) all net obligations in respect of any interest rate or currency swaps, caps, collars or other similar derivative instruments;
(viii) all indebtedness for borrowed money secured by any lien on any property owned by such person even though such person has not assumed or otherwise become liable for the payment thereof; and
(ix) any other contingent liability of such person which is required by Canadian GAAP or U.S. GAAP, as applicable, to be shown on such person's balance sheet other than as current trade liabilities or deferred taxes or other deferred credits.
"Intercreditor Agent" means The Bank of Nova Scotia.
"Intercreditor Agreement" means the amended and restated intercreditor agreement dated May 16, 2003 among the Lenders' Representatives, as amended.
"Lenders" means, collectively, all lenders and other credit providers to Alliance Canada and Alliance USA pursuant to the Credit Facilities, the Hedging Contracts, the Senior Notes, the Permitted Additional Debt, the Permitted Replacement Debt or Mandatory Debt.
"Lenders' Representatives" means, collectively, the Canadian and U.S. Facility Administrative Agents, the Intercreditor Agent, the Security Trustees, the Note Trustees and any other similar parties in relation to other Lenders.
"Majority Lenders" generally means Lenders holding at least 66⅔% of the aggregate outstanding principal amount of Senior Debt.
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"Mandatory Debt" has the meaning ascribed thereto under the heading "Material Contracts – Common Agreement – Mandatory Debt".
"NAIC" means United States National Association of Insurance Commissioners.
"Note Indentures" means the Senior Note Indenture and the U.S. Note Indenture.
"Note Trustees" means the Canadian Note Trustee and the U.S. Note Trustee.
"Obligations" generally means:
(i) all loans, advances, debts, liabilities and obligations owed by Alliance Canada and Alliance USA pursuant to the terms of the Common Agreement or any of the other Finance Documents;
(ii) any and all sums advanced by any of the Security Trustees or any Lender or Lender's Representatives in order to preserve the Collateral or preserve the Lenders' and the Lenders' Representatives security interest in the Collateral; and
(iii) in the event of any proceedings for the collection or enforcement of the Obligations, after an Event of Default shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sales or lease, selling or otherwise disposing of or realizing on the Collateral or of any exercise by the Security Trustees and/or the Lenders' and the Lenders' Representatives of any or all of their rights under the Security Documents, together with reasonable legal fees and court costs; provided that "Obligations" shall not include any Subordinated Debt.
"Operative Documents" includes the principal agreements and documents relating to the operation of the System.
"Permits" means the permits, authorizations or other approvals issued by the NEB and FERC with respect to the System.
"Permitted Additional Debt" has the meaning ascribed to it under the heading "Material Contracts – Common Agreement - Permitted Additional Debt".
"Permitted Indebtedness" has the meaning ascribed thereto under the heading "Material Contracts – Common Agreement – Permitted Indebtedness".
"Permitted Investments" means deposits of a financial institution whose long-term debt is rated A2 or higher by Moody's, A or higher by S&P and A or higher by DBRS, obligations of the Governments of Canada and the United States and commercial paper rated at least A-1, R-1 or P-1 by the Rating Agencies and such other investments as may be permitted by the Majority Lenders.
"Permitted Liens" means:
(i) liens securing the Senior Debt (including any Permitted Replacement Debt, Permitted Additional Debt or Standby Commercial Paper Facility) created by or pursuant to the Security
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Documents or the Common Agreement so long as the Senior Notes are secured equally and ratably with or prior to, the obligations secured by such liens;
(ii) liens securing purchase money indebtedness (including financing leases) which is Permitted Indebtedness;
(iii) liens or encumbrances arising in the ordinary course of its business (excluding liens of the nature described in subparagraph (ii) above) which would not in the aggregate secure Indebtedness exceeding the Threshold Amount (or such greater amount as may from time to time be permitted by the Majority Lenders) or have a material adverse effect;
(iv) liens limited to interests in Alliance Canada, Alliance USA, the Canadian General Partner and the USA Managing General Partner which are permitted by the applicable constating documents;
(v) liens for taxes or other amounts payable to Governmental Authorities (as defined in the Common Agreement) not yet delinquent or being contested in good faith by Alliance Canada; and
(vi) construction liens, builders' liens or mechanics' liens or liens under other similar legislation and other liens and encumbrances arising by operation of law for amounts not yet due or, in each case, for amounts being contested in good faith.
"Permitted Replacement Debt" has the meaning ascribed thereto under the heading "Material Contracts – Common Agreement – Permitted Replacement Debt".
"Proceeds Account" means the Canadian proceeds account maintained by the Canadian Security Trustee pursuant to the Canadian Security Trust Agreement.
"Rating Agencies" means, collectively S&P, Moody's, DBRS and NAIC.
"Ratings Downgrade" means, at any time, a reduction of the ratings assigned to any Senior Notes issued pursuant to the Note Indentures by any of the Relevant Rating Agencies at such time.
"Relevant Ratings Agency" means Moody's, S&P and DBRS.
"Required Balance" has the meaning ascribed thereto under the heading "Material Contracts – Common Agreement – Negative Covenants – Distributions".
"Scheduled Debt Service" means, in respect of Alliance Canada, for any period, an amount equal to the sum, without duplication of:
(i) interest due and payable on the Senior Debt of Alliance Canada during such period plus or minus any net amount due and payable in respect of Hedging Contracts during such period;
(ii) scheduled principal due and payable on the Senior Debt of Alliance Canada during such period (excluding any principal which exceeds 70% of the amortization of the Rate Base adjusted to reflect 70% of the current year's provision for deferred taxes during such period and which Alliance Canada reasonably expects to refinance during such period);
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(iii) drawing fees, commitment fees, letter of credit fees and other amounts due and payable to the Lenders by Alliance Canada during such period pursuant to the Finance Documents; and
(iv) any amounts payable with respect to the deduction or withholding of tax on such payments.
"Security Documents" generally means the Canadian and U.S. security agreements, the Security Trust Agreements, the Canadian Floating Charge and the Transportation Contract Security.
"Security Trust Agreements" means, collectively, the Canadian Security Trust Agreement and the U.S. Security Trust Agreement.
"Security Trustees" means the Canadian Security Trustee and the U.S. Security Trustee.
"Senior Debt" generally means the principal amounts of Indebtedness of Alliance Canada described in paragraphs (i), (ii), (iii), (iv) and (vii) of the definition of "Permitted Indebtedness", the corresponding amounts in respect of Alliance USA outstanding from time to time and any Guarantee Obligations of Alliance Canada or Alliance USA in respect thereof, provided that solely for purposes of the affirmative covenant described under the heading "Material Contracts – Covenants – (i) Maximum Borrowing Amount", Senior Debt excludes Indebtedness described in paragraph (vii) of that definition but includes Indebtedness described in paragraph (v) of that definition, in each case together with any Guarantee Obligations of either borrower in respect thereof.
"Senior Lenders" means the Lenders of the Senior Debt.
"Shipper Credit Policy" means the requirements with respect to financial assurances and creditworthiness of shippers set out from time to time in the tariffs approved from time to time by the FERC or the NEB.
"Special Distribution" generally means (i) a distribution of the net cash proceeds of an asset disposition permitted pursuant to the Common Agreement (ii) a release of funds from the Debt Service Reserve Accounts pursuant to the Security Trust Agreements, (iii) insurance proceeds received by Alliance Canada or Alliance USA in an amount which Alliance Canada or Alliance USA is not required to pay over or cause to be paid over, to the applicable Security Trustee pursuant to the Common Agreement and which are not required for repair or reconstruction of the System (iv) after termination of the Security Trust Agreements, means any amount to which subparagraph (i) above would have applied if the Security Trust Agreements were then in effect.
"Standby Commercial Paper Facilities" means, a Bank Facility established in part to support a commercial paper program.
"Subordinated Debt" has the meaning ascribed thereto under the heading "Material Contracts – Common Agreement – Subordinated Debt".
"Threshold Amount" means US$20 million (indexed), provided, however, that if Alliance Canada and Alliance USA expends more than US$200 million in connection with one or more expansions, the Threshold Amount shall mean from time to time thereafter the greater of US$20 million (indexed) and 1% of the regulatory rate base of Alliance Canada or Alliance USA, as applicable.
"Transaction Documents" means the Finance Documents and the Operative Documents.
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"Transportation Contract Security" means any security provided by a shipper pursuant to subparagraph (iii) of the definition of "Shipper Credit Policy".
"Unrestricted Subsidiary" means a subsidiary (i) in respect of which neither Alliance Canada nor Alliance USA has any Guarantee Obligations and (ii) which is a corporation, a limited liability company, a limited partnership or a similar organization which is organized pursuant to laws which limit the liability of investors (including Alliance Canada or Alliance USA, as applicable) for the obligations thereof.
"U.S. Facilities" means the credit facilities of Alliance USA;
"U.S. Facility Administrative Agent" means The Bank of Nova Scotia.
"U.S. Note Indenture" means the trust indenture dated June 23, 1999 as amended and includes any other indenture or indentures, entered into from time to time, between Alliance USA and the U.S. Note Trustee providing for the issuance of bonds, notes or other evidence of Senior Debt.
"U.S. Note Trustee" means The Bank of New York Mellon.
"U.S. Security Trust Agreement" means the Third Amended and Restated Security Trust Agreement dated as of June 28, 2006, as amended, among Alliance USA, as borrower, Aux Sable Extraction L.P., the Depositary, the U.S. Security Trustee, the U.S. Facility Administrative Agent, the U.S. Note Trustee and the Intercreditor Agent, as amended, in connection with, among other things, the establishment and maintenance of the Accounts.
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