for immediate release veresen announces 2013 second quarter … · 2013-08-07 · for immediate...

For Immediate Release

Veresen Announces 2013 Second Quarter Results and Updates Guidance

CALGARY, ALBERTA (August 7, 2013) – Veresen Inc. (“Veresen” or the “Company”) (TSX: VSN) announced today its financial and operating results for the three months ended June 30, 2013.

Highlights:

Second quarter financial results:

Distributable cash1 of $49.2 million or $0.25 per Common Share.

Net income attributable to Common Shares of $11.5 million or $0.06 per Common Share.

Cash from operating activities of $55.0 million.

Alliance Pipeline advanced to the next stage of the recontracting process, offering firm capacity on its system for natural gas transportation services effective December 1, 2015.

The Jordan Cove Energy Project and the Pacific Gas Connector Pipeline each filed an application with the U.S. Federal Energy Regulatory Commission ("FERC") to construct and operate a liquefied natural gas ("LNG") export terminal and natural gas pipeline, respectively, on the west coast of the United States.

Veresen successfully completed a major turnaround at its Hythe natural gas processing plant, under budget and ahead of schedule.

“During the second quarter, we continued to advance several key strategic initiatives,” said Don Althoff, President and CEO. “The initiation of Alliance’s precedent agreement process is the culmination of months of consultation with potential shippers and is the exciting next stage in Alliance’s efforts to contract the system beyond 2015. While expressions of interest for capacity will officially start in mid-August, Alliance has already received positive feedback from the shipper community.” “The filing of the FERC applications for approval to construct the Jordan Cove LNG terminal and the Pacific Connector pipeline was another major milestone achieved this quarter. Fulfilling these significant regulatory requirements, combined with our U.S. Department of Energy application for approval to export LNG to non-Free Trade Agreement countries, takes us further down the path of realizing our growth objectives.” Mr. Althoff added, “Operationally, I’m particularly proud our midstream team successfully completed the turnaround at the Hythe plant. The team achieved outstanding results in protecting the health and safety of our workforce and the environment. The meticulous planning and execution of the turnaround allowed us to resume operations ahead of plan. We also completed critical tie-ins for a future debottleneck project that will expand the plant’s capacity to meet growing demand for processing services. I’m excited about the many opportunities that lie ahead for our independent Canadian midstream business given the significant need for infrastructure in the growing Montney and Duvernay resource plays.”

1 This is not a standard measure under GAAP and may not be comparable to similar measures used by other entities. See the reconciliation of distributable cash

to cash from operating activities in the tables attached to this news release.

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FINANCIAL HIGHLIGHTS

Three months ended

June 30 Six months ended

June 30 ($ Millions, except per Common Share amounts) 2013 2012 (1) (2) 2013 2012 (1) (2) Net income (loss) before tax and non-controlling interest Pipeline

27.5 24.0 52.3 48.1 Midstream 15.6 21.7 27.0 34.5 Power 9.5 (2.3) 10.5 0.5 Veresen – Corporate (26.6) (23.2) (53.5) (47.2) 26.0 20.2 36.3 35.9 Tax expense (12.3) (8.4) (19.2) (14.5) Net income attributable to non-controlling interest - - - (0.1)

Net income 13.7 11.8 17.1 21.3

Preferred Share dividends (2.2) (3.3) (4.4) (3.3)

Net income attributable to Common Shares 11.5 8.5 12.7 18.0

Per Common Share ($) 0.06 0.04 0.06 0.09 (1) Effective January 1, 2013, certain costs have been reclassified between Power and Veresen – Corporate. As a result, comparative results for Power and Veresen – Corporate have been restated. (2) Comparative figures for the six months ended June 30, 2012 have been revised. See Veresen’s June 30, 2013 consolidated

financial statements.

Financial Performance

For the second quarter of 2013, Veresen generated net income attributable to Common Shares of $11.5 million or $0.06 per Common Share compared to $8.5 million or $0.04 per Common Share for the same period in 2012. Each of Veresen’s businesses performed in line with expectations in the second quarter and, with the exception of Aux Sable, delivered consistent or higher earnings before interest, taxes, depreciation and amortization (“EBITDA2”) in comparison to the same period last year. As anticipated, Aux Sable earnings continued to be under pressure due to ongoing weak market fundamentals, driven by the continued oversupply of ethane in Aux Sable’s market regions and high propane inventory levels. The Company’s continued focus on growth resulted in higher development spending in respect of the Jordan Cove LNG project. Second quarter earnings also reflect a higher fair value gain on the interest rate hedge for the York Energy Centre compared to the same period last year.

Distributable Cash

Three months ended June 30 Six months ended June 30 ($ Millions, except per Common Share amounts) 2013 2012 2013 2012 Pipeline

37.9 36.9 76.4 73.4 Midstream 23.7 31.5 50.9 54.2 Power 7.1 7.3 16.9 9.8 Veresen - Corporate (15.8) (15.6) (34.3) (31.8) Current tax (1.5) (6.0) (1.7) (8.8) Preferred Share dividends (2.2) (2.2) (4.4) (3.3)

Distributable Cash (1) 49.2 51.9 103.8 93.5

Per Common Share ($) 0.25 0.26 0.52 0.49 (1) See the reconciliation of distributable cash to cash from operating activities in the tables attached to this news release.

2 This is not a standard measure under GAAP and may not be comparable to similar measures used by other entities. See the reconciliation of distributable cash to

cash from operating activities in the tables attached to this news release.

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In the second quarter of 2013, Veresen generated distributable cash of $49.2 million or $0.25 per Common Share, a slight decrease from $51.9 million or $0.26 per Common Share for the same period last year. As was the case with EBITDA, second quarter distributable cash from Veresen’s Pipeline, Power and independent Midstream businesses approximated or exceeded amounts generated during the same period last year, but were offset by the reduction in distributions from Aux Sable. Business Segment Overview Pipelines On July 15, 2013, Alliance announced the offering of capacity on its system for natural gas transportation services effective December 1, 2015. Customers can express interest in capacity through a process which begins on August 15, 2013, with the execution of precedent agreements expected over the next several months. The transportation service offerings are consistent with the new services framework introduced by Alliance in October 2012, and have been refined based on feedback received from potential customers. One such refinement includes Alliance’s intent to apply for regulatory approval to amend its hydrocarbon dewpoint tariff specification as of December 1, 2015. This change will facilitate an increase in the NGL component of the natural gas Alliance transports, further enhancing Alliance’s rich gas advantage. Construction of Alliance’s 127-km (79-mile) Tioga Lateral Pipeline and associated facilities in North Dakota is proceeding, with commercial in-service expected in the third quarter of 2013. The Tioga Lateral will transport liquids-rich gas from the anchor shipper’s processing facility to an interconnection point on the Alliance pipeline for onward shipment to Aux Sable’s Channahon facility. Midstream

During the second quarter, Veresen successfully completed a scheduled major turnaround at the Hythe natural gas processing plant. Turnaround activities were performed in a manner reflecting Veresen’s ongoing commitment to the health and safety of its employees and contractors and safeguarding the environment. The turnaround was completed under budget and ahead of schedule, demonstrating Veresen’s operational excellence. While the Hythe plant was out of service, Veresen proactively completed key tie-ins that will facilitate a future debottleneck project to expand the Hythe plant’s processing capacity. The Company’s midstream team is currently soliciting producer interest to undertake such an expansion, with positive feedback to date. In addition to developing strategic plans for growth through leveraging its existing midstream assets, Veresen continues to explore new opportunities to grow its midstream footprint in the Western Canadian Sedimentary Basin, driven by its view that additional infrastructure will be required to support the growing Montney and Duvernay resource plays. Aux Sable continues to work with producers within an economic radius of the Alliance pipeline to provide options and value for natural gas and NGLs to reach large and liquid U.S. markets. Aux Sable holds a number of rich gas premium agreements with producers that will enhance the value of the producers’ NGLs. Power

Veresen continues to construct the Dasque-Middle run-of-river hydro facility located in northwest British Columbia. This project has experienced delays due to challenges in progressing the civil works, with the project’s previous primary sub-contractor being placed into receivership. Veresen is in the process of securing the necessary sub-contractors to complete the remaining civil works. Consequently, commercial in-service is expected to be delayed until 2014. The 13-MW Whitecourt waste heat facility, currently being constructed by NRGreen (50% owned by Veresen), is proceeding and is expected to be placed into service late in the third quarter of 2013.

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LNG Development Project

In May 2013, Jordan Cove Energy Project filed an application with the FERC to construct and operate an LNG export facility on the west coast of the U.S. within the international Port of Coos Bay, Oregon. Filing of the FERC application followed more than a year of engineering and design activities, public consultation, and working closely with the FERC to ensure a completed application. Veresen expects to receive a certificate approving the construction and operation of the Jordan Cove LNG facility within approximately 12 to 18 months from the date of filing. Veresen is awaiting a response from the U.S. Department of Energy (“DOE”) regarding the Company’s application for a license to export natural gas to non-Free Trade Agreement countries. Jordan Cove Energy Project’s application is well-positioned in the queue, ranking within the next five projects for review by the DOE. Pacific Connector Gas Pipeline, L.P. has also filed its application with the FERC to construct a 234-mile, 36-inch diameter pipeline. The Pacific Connector pipeline will extend from the Malin, Oregon natural gas trading hub to the Jordan Cove terminal and the South Dunes Power Plant facilities. The South Dunes power facility, wholly-owned by Veresen, is a proposed natural gas-fueled, combined-cycle power plant with a planned base-load capacity of 420 MW. Dedicated to the operation of Jordan Cove, and sited adjacent to the LNG facility, South Dunes is currently undergoing the permitting process with the Oregon Energy Facility Siting Council. Veresen continues to engage in discussions to secure a long-term arrangement to produce LNG for international customers.

2013 Guidance As the year progresses, Veresen is able to narrow its guidance range. For 2013, Veresen expects distributable cash to be in the range of $1.00 to $1.15 per Common Share, with a midpoint of $1.08 per Common Share. This reflects a $0.03 and $0.02 per Common share increase in the low end and midpoint, respectively, of the range relative to guidance issued May 8, 2013. Further details concerning 2013 guidance can be found in the "Invest" section of Veresen's web site at www.vereseninc.com. Conference Call and Webcast Veresen will host a conference call and webcast at 3:00 pm MT (5:00 pm ET) today to discuss its results. Dial-in: 1 (888) 231-8191 or 1 (647) 427-7450, Conference ID: 20497075 The link to the conference call webcast is available on Veresen’s website under Invest, Events & Presentations. A replay of the call will be available at approximately 5:00 pm MT (7:00 pm ET) on August 7, 2013 by dialing 1 (855) 859-2056 and 1 (416) 849-0833. The access code is 20497075, followed by the pound sign. The replay will expire at midnight (ET) on August 14, 2013. MD&A, Financial Statements and Notes

Management's Discussion and Analysis ("MD&A") and consolidated financial statements provide a detailed explanation of Veresen’s financial results for the second quarter ended June 30, 2013 compared to the second quarter ended June 30, 2012 and should be read in conjunction with this news release. These documents are available at www.vereseninc.com and at www.sedar.com.

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http://www.vereseninc.com/


http://www.sedar.com/

About Veresen Inc.

Veresen is a publicly-traded dividend paying corporation based in Calgary, Alberta, that owns and operates energy infrastructure assets across North America. Veresen is engaged in three principal businesses: a pipeline transportation business comprised of interests in two pipeline systems, the Alliance Pipeline and the Alberta Ethane Gathering System; a midstream business which includes ownership interests in a world-class natural gas liquids extraction facility near Chicago, the Hythe/Steeprock gas gathering and processing complex, and other natural gas and NGL processing energy infrastructure; and a power business with renewable and gas-fired facilities and development projects in Canada and the United States, and district energy systems in Ontario and Prince Edward Island. Veresen and each of its pipeline, midstream and power businesses are also actively developing a number of greenfield projects. In the normal course of its business, Veresen and each of its businesses regularly evaluate and pursue acquisition and development opportunities. Veresen's Common Shares, Series A Preferred Shares, and 5.75% convertible unsecured subordinated debentures, Series C due July 31, 2017 are listed on the Toronto Stock Exchange under the symbols "VSN", “VSN.PR.A” and VSN.DB.C", respectively. For further information, please visit www.vereseninc.com. Forward-Looking Information

Certain information contained herein relating to, but not limited to, Veresen and its businesses constitutes forward-looking information under applicable securities laws. All statements, other than statements of historical fact, which address activities, events or developments that Veresen expects or anticipates may or will occur in the future, are forward-looking information. Forward-looking information typically contains statements with words such as "may", "estimate", "anticipate", "believe", "expect", "plan", "intend", "target", "project", "forecast" or similar words suggesting future outcomes or outlook. Forward-looking statements in this news release include, but are not limited to, statements with respect to: the ability of Alliance to implement new service offerings; the timing of completion of construction and start-up of the Dasque-Middle hydro project, the Tioga Lateral Pipeline and the Whitecourt waste heat facility; Veresen’s ability to realize its growth objectives; the availability of financing for current capital projects and new investment opportunities; the timing and receipt of the U.S. FERC and DOE regulatory approvals for the Jordan Cove Energy Project, and the ability of each of its businesses to generate distributable cash in 2013. The risks and uncertainties that may affect the operations, performance, development and results of Veresen’s businesses include, but are not limited to, the following factors: the ability of Veresen to successfully implement its strategic initiatives and achieve expected benefits; levels of oil and gas exploration and development activity; the status, credit risk and continued existence of contracted customers; the availability and price of capital; the availability and price of energy commodities; the availability of construction services and materials; fluctuations in foreign exchange and interest rates; Veresen’s ability to successfully obtain regulatory approvals; changes in tax, regulatory, environmental, and other laws and regulations; competitive factors in the pipeline, midstream and power industries; operational breakdowns, failures, or other disruptions; and the prevailing economic conditions in North America. Additional information on these and other risks, uncertainties and factors that could affect Veresen’s operations or financial results are included in its filings with the securities commissions or similar authorities in each of the provinces of Canada, as may be updated from time to time. Readers are also cautioned that the foregoing list of factors and risks is not exhaustive. The impact of any one risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these factors are independent and management’s future course of action would depend on its assessment of all information at that time. Although Veresen believes that the expectations conveyed by the forward-looking information are reasonable based on information available on the date of preparation, no assurances can be given as to future results, levels of activity and achievements. Undue reliance should not be placed on the information contained herein, as actual result achieved will vary from the information provided herein and the variations may be material. Veresen makes no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking information. Furthermore, the forward-looking statements contained herein are made as of the date hereof, and Veresen does not undertake any obligation to update publicly or to revise 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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Certain financial information contained in this news release may not be standard measures under Generally Accepted Accounting Principles ("GAAP") in the United States and may not be comparable to similar measures presented by other entities. These measures are considered to be important measures used by the investment community and should be used to supplement other performance measures prepared in accordance with GAAP in the United States. For further information on non-GAAP financial measures used by Veresen see Management’s Discussion and Analysis, in particular, the section entitled “Non-GAAP Financial Measures” contained in the annual Management Discussion and Analysis, filed by Veresen with Canadian securities regulators.

# # #

For further information, please contact: Dorreen Miller, Director, Investor Relations Phone: (403) 213-3633 Email: [email protected]

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

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mailto:[email protected]

VERESEN INC.Management’s Discussion and AnalysisThree and six months ended June 30, 2013

FINANCIAL AND OPERATING HIGHLIGHTS

Three months ended June 30 Six months ended June 30($ Millions, except where noted) 2013 2012 1 2013 2012 1

Operating Highlights (100%)Pipeline

Alliance – billion cubic feet per day 1.554 1.536 1.593 1.582AEGS – thousand barrels per day 2 290.4 270.2 292.8 280.4

MidstreamHythe/Steeprock – million cubic feet per day 3 412.6 397.0 413.8 389.0Aux Sable – thousand barrels per day 55.2 66.3 62.7 74.0

Power – gigawatt hours (net) 225.2 249.6 419.1 457.6

Financial ResultsEquity income 41.2 32.6 69.6 68.1Operating revenues 89.8 70.0 161.4 125.0Net income attributable to Common Shares 11.5 8.5 12.7 18.0

Per Common Share ($) – basic and diluted 0.06 0.04 0.06 0.09Cash from operating activities 55.0 36.9 92.4 66.3Distributable cash 4, 5 49.2 51.9 103.8 93.5

Per Common Share ($) – basic and diluted 0.25 0.26 0.52 0.49Dividends paid/payable 6 49.8 48.8 99.4 95.0Per Common Share ($) 0.25 0.25 0.50 0.50Capital expenditures 7 15.0 16.5 24.1 33.5Acquisitions, net of cash acquired - 8.0 - 889.2

June 30, 2013As at

Dec. 31, 20121

Financial PositionCash and short-term investments 27.8 16.1Total assets 3,010.5 2,961.0Senior debt 1,320.6 1,259.3Subordinated convertible debentures 86.2 86.2Shareholders’ equity 1,190.8 1,231.0

Common SharesOutstanding – as at period end 8 199,576,918 197,804,153Average daily volume 291,241 378,758Price per Common Share – close ($) 12.47 11.83

1. Certain comparative figures as at December 31, 2012 and for the three and six months ended June 30, 2012 have been revised. See Note 1 in our June 30, 2013 consolidated financial statements.

2. Average daily volume for AEGS is based on toll volumes.3. Average daily volume for Hythe/Steeprock is based on fee volumes.4. This item is not a standard measure under US GAAP and may not be comparable to similar measures presented by other entities. See

section entitled “Non-GAAP Financial Measures” in this MD&A.5. We have provided a reconciliation of distributable cash to cash from operating activities in the “Non-GAAP Financial Measures” section

of this MD&A.6. Includes $11.0 million and $21.8 of dividends satisfied through the issuance of Common Shares under our Premium DividendTM and

Dividend Reinvestment Plan (trademark of Canaccord Genuity Corp.) for the three and six months ended June 30, 2013, respectively (2012 - $20.7 million and $57.8 million).

7. Capital expenditures for wholly-owned and majority-controlled businesses, as presented on the consolidated statement of cash flows.8. As at the close of markets on July 30, 2013, we had 199,890,490 Common Shares outstanding.

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This MD&A, dated August 7, 2013, provides a review of the significant events and transactions that affected our performance during the three and six months ended June 30, 2013 relative to the same periods last year. It should be read in conjunction with our consolidated financial statements and notes as at and for the three and six months ended June 30, 2013 and as at and for the year ended December 31, 2012, prepared in accordance with accounting principles generally accepted in the United States.

REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS

During the first quarter of 2013, our equity-accounted investee, Alliance, identified a requirement to change the method of accounting for the difference between depreciation expense recorded under US GAAP and the depreciation rate recovered in transportation tolls. Accordingly, prior period financial statements have been revised. The revision impacted the Pipeline segment equity income and net income attributable to Common Shares, as well as consolidated net income attributable to Common Shares reported in prior periods. There was no impact on cash from operating activities and distributable cash. The discussion and analysis included herein is based on the revised financial results as at December 31, 2012 and for the three and six months ended June 30, 2012.

ACCOUNTING STANDARDS AND BASIS OF PRESENTATION

Our consolidated financial statements as at and for the three and six months ended June 30, 2013 have been prepared by management in accordance with US GAAP. All financial information is in Canadian dollars unless otherwise noted and, as it relates to our financial results, has been derived from information used to prepare our US GAAP consolidated financial statements. Capitalized terms used in this MD&A that have not been defined have the same meanings attributed to them in our 2012 consolidated financial statements. Additional information concerning our business is available on SEDAR at www.sedar.com or on our website at www.vereseninc.com.

FORWARD-LOOKING AND NON-GAAP INFORMATION

Some of the information contained in this MD&A is forward-looking information under Canadian securities laws. All information that addresses activities, events or developments which may or will occur in the future is forward-looking information. Forward-looking information typically contains statements with words such as may, estimate, anticipate, believe, expect, plan, intend, target, project, forecast or similar words suggesting future outcomes or outlook. Forward-looking statements in this MD&A include statements about:

• the ability of Alliance to successfully realize its proposed new services framework and the timing thereof; • the projected in-service date of the Tioga Lateral Project;• Aux Sable’s ability to realize upon the extraction agreements;• the 2013 pricing environment for ethane and propane:• the projected in-service date of NRGreen’s Whitecourt Recovered Energy Project;• the projected in-service date and capital cost of the Dasque-Middle run-of-river facility;• the sufficiency of our liquidity;• the sufficiency of our available committed credit facilities to fund working capital, dividends and capital expenditures; • the ability of each of our businesses to generate distributable cash and the timing under which distributable cash will be generated;

and• our ability to pay dividends.

The risks and uncertainties that may affect our operations, performance, development and the results of our businesses include, but are not limited to, the following factors:

• our ability to successfully implement our strategic initiatives and achieve expected benefits; • levels of oil and gas exploration and development activity; • status, credit risk and continued existence of contracted customers; • availability and price of capital; • availability and price of energy commodities; • availability of construction services and materials; • fluctuations in foreign exchange and interest rates; • our ability to successfully obtain regulatory approvals; • changes in tax, regulatory, environmental, and other laws and regulations; • competitive factors in the pipeline, midstream and power industries; • operational breakdowns, failures, or other disruptions; and • prevailing economic conditions in North America.

Additional information on these and other risks, uncertainties and factors that could affect our operations or financial results are included in our filings with the securities commissions or similar authorities in each of the provinces of Canada, as may be updated from time to time. We caution readers that the foregoing list of factors and risks is not exhaustive. The impact of any one risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these factors are independent and management’s future course of action would depend on its assessment of all information at that time. Although we believe the expectations conveyed by the forward-looking information are reasonable based on information available to us on the date of preparation, we can give no assurances as to future

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results, levels of activity and achievements. Readers should not place undue reliance on the information contained in this MD&A, as actual results achieved will vary from the information provided herein and the variations may be material. We make no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking information. Furthermore, the forward-looking statements contained herein are made as of the date hereof, and, except as required by law, we do not undertake any obligation to update publicly or to revise any forward-looking information, whether as a result of new information, future events or otherwise. We expressly qualify any forward-looking information contained in this MD&A by this cautionary statement.

Certain financial information contained in this MD&A may not be standard measures under GAAP in the United States and may not be comparable to similar measures presented by other entities. These measures are considered to be important measures used by the investment community and should be used to supplement other performance measures prepared in accordance with GAAP in the United States. For further information on non-GAAP financial measures used by us see the section entitled “Non-GAAP Financial Measures” contained in this MD&A.

OVERALL FINANCIAL PERFORMANCE

Net Income attributable to Common Shares

Three months ended June 30 Six months ended June 30

($ Millions, except per Common Share amounts) 2013

2012 (1)(2) 2013 2012 (1)(2)

Net income before tax and non-controlling interest Pipeline 27.5 24.0 52.3 48.1 Midstream 15.6 21.7 27.0 34.5 Power 9.5 (2.3) 10.5 0.5 Veresen–Corporate (26.6 ) (23.2) (53.5 ) (47.2)

26.0 20.2 36.3 35.9Tax expense (12.3 ) (8.4) (19.2 ) (14.5)Net income attributable to non-controlling interest - - - (0.1)Net income 13.7 11.8 17.1 21.3Preferred Share dividends (2.2) (3.3) (4.4) (3.3)Net income attributable to Common Shares 11.5 8.5 12.7 18.0 Per Common Share ($) 0.06 0.04 0.06 0.09

(1) Effective January 1, 2013, certain costs have been re-classified between Power and Veresen-Corporate. As a result, comparative results for Power and Veresen-Corporate have been restated.

(2) Certain comparative figures for the three and six months ended June 30, 2012 have been revised. See Note 1 in our June 30, 2013 consolidated financial statements.

For the three and six months ended June 30, 2013, we generated net income attributable to Common Shares of $11.5 million or $0.06 per Common Share and $12.7 million or $0.06 per Common Share, respectively. For the same periods last year, we generated net income attributable to Common Shares of $8.5 million or $0.04 per Common Share and $18.0 million or $0.09 per Common Share. Second quarter and year-to-date earnings reflect increases in the Pipeline and Power segments offset by a decrease in the Midstream segment, an increase in Corporate costs and higher corporate taxes compared to the first half of 2012.

The Midstream business generated $15.6 million and $27.0 million of net income before tax for the three and six months ended June 30, 2013 compared to $21.7 million and $34.5 million for the same periods last year. The Hythe/Steeprock complex successfully completed a full plant turnaround during late May and early June while generating $8.0 million and $16.3 million of net income before tax for the three and six months ended June 30, 2013, compared to $5.9 million and $11.0 million for the same periods last year. For the three and six months ended June 30, 2013, equity income from Aux Sable was $7.6 million and $10.7 million, compared to $15.8 million and $23.5 million for the same periods last year. Aux Sable’s earnings continue to be negatively impacted by unfavourable NGL market conditions, driven by the continued oversupply of ethane in Aux Sable’s market region and high levels of propane inventory. These factors drove lower fractionation margins relative to the same periods last year, resulting in Aux Sable reinjecting ethane during much of the first half of 2013 when economics did not support production.

Our Pipeline business generated $27.5 million and $52.3 million of net income before tax for the three and six months ended June 30, 2013, compared to $24.0 million and $48.1 million for the same periods last year. The increases reflects higher earnings from both Alliance and AEGS.

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The Power business performed in line with our expectations and generated net income before tax and non-controlling interest of $9.5 million and $10.5 million for the three and six months ended June 30, 2013, compared to a $2.3 million net loss before tax and non-controlling interest and $0.5 million net income before tax and non-controlling interest for the same periods last year. The increases were primarily due to a higher fair value gain on the interest rate hedge for the York Energy Centre as compared to the same periods last year.Corporate costs increased from the prior year, primarily due to higher interest costs, higher project development costs related to our Jordan Cove LNG project and higher corporate taxes reflecting the timing of recognizing the benefit of foreign tax credits and deferred taxes related to Canadian rate-regulated operations.

Distributable CashThree months ended June 30 Six months ended June 30

($ Millions, except per Common Share amounts) 2013 2012 2013 2012Pipeline 37.9 36.9 76.4 73.4Midstream 23.7 31.5 50.9 54.2Power 7.1 7.3 16.9 9.8Veresen–Corporate (15.8) (15.6) (34.3) (31.8)Current tax (1.5) (6.0) (1.7) (8.8)Preferred Share dividends (2.2) (2.2) (4.4) (3.3)Distributable Cash (1) 49.2 51.9 103.8 93.5 Per Common Share ($) 0.25 0.26 0.52 0.49

(1) See the reconciliation of distributable cash to cash from operating activities in the “Non-GAAP Financial Measures” section of this MD&A.

For the three and six months ended June 30, 2013, we generated distributable cash of $49.2 million and $103.8 million respectively, or $0.25 and $0.52 per Common Share, compared to $51.9 million and $93.5 million or $0.26 and $0.49 per Common Share for the same periods last year.

The decrease in distributable cash for the three months ended June 30, 2013 reflects a $8.6 million reduction in distributions from Aux Sable driven by lower fractionation margins, partially offset by growth in the Hythe/Steeprock business and lower taxes.

The increase for the six months ended June 30, 2013 reflects growth in Hythe/Steeprock, Power and Pipeline businesses and lower taxes, partially offset by reductions in Aux Sable distributions due to lower fractionation margins. Distributable cash from our Power business increased by $7.1 million compared to the same period last year, due to contributions from York Energy Centre and Grand Valley, which were successfully commissioned in May and late March of 2012, respectively, and the release of operating funds generated by East Windsor Cogeneration, previously held in reserve. Hythe/Steeprock generated an additional $8.9 million compared to the same period last year, resulting from our ownership for a full two quarters and an escalation in fees under the processing agreement with our primary customer. These increases were partially offset by a $12.2 million decrease in distributions from Aux Sable driven by lower fractionation margins, higher Veresen-Corporate costs associated with our growth initiatives, and dividends on our Preferred Shares issued in February 2012.

Current tax was lower than the comparative periods due primarily to lower U.S.-based earnings from our Midstream business.

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Cash from Operating ActivitiesThree months ended June 30 Six months ended June 30

($ Millions) 2013 2012 (1) 2013 2012 (1)

Pipeline 37.8 38.1 77.2 75.9Midstream 26.2 16.7 56.2 36.7Power 10.5 5.5 24.3 8.3Veresen–Corporate (19.5) (23.4) (65.3) (54.6)

55.0 36.9 92.4 66.3(1) Effective January 1, 2013, certain costs have been re-classified between Power and Veresen-Corporate. As a result, comparative

results for Power and Veresen-Corporate have been restated.

For the three and six months ended June 30, 2013, we generated $55.0 million and $92.4 million of cash from operating activities, compared to $36.9 million and $66.3 million for the same periods last year. The increase reflects higher operating cash flows fromHythe/Steeprock and from our Power business. For the six months ended June 30, 2013, these increases were partially offset by higher Corporate operating cash outflows, reflecting higher project development and interest costs.

RESULTS OF OPERATIONS – BY BUSINESS SEGMENT

Pipeline BusinessThree months ended June 30, 2013 Three months ended June 30, 2012

($ Millions, except where noted) Total Alliance (1) AEGS Total Alliance (1)(2) AEGSEarnings before interest, tax

depreciation and amortization (“EBITDA”) (3) 6.2 65.6 6.2 5.9 66.1 5.9

Depreciation and amortization (3.5) (26.9) (3.5) (3.3) (26.6) (3.3)Interest and other finance (1.2) (12.7) (1.2) (1.3) (16.8) (1.3)Equity income 26.0 26.0 - 22.7 22.7 -Net income before tax 27.5 26.0 1.5 24.0 22.7 1.3Volumes (100%) 1.554 290.4 1.536 270.2

bcf/d mbbls/d (4) bcf/d mbbls/d (4)

Six months ended June 30, 2013 Six months ended June 30, 2012($ Millions, except where noted) Total Alliance(1) AEGS Total Alliance(1)(2) AEGS

EBITDA 12.8 130.7 12.8 11.9 132.2 11.9Depreciation and amortization (7.0) (53.8) (7.0) (6.6) (53.2) (6.6)Interest and other finance (2.5) (27.9) (2.5) (2.6) (33.6) (2.6)Equity income 49.0 49.0 - 45.4 45.4 -Net income before tax 52.3 49.0 3.3 48.1 45.4 2.7Volumes (100%) 1.593 292.8 1.582 280.4

bcf/d mbbls/d (4) bcf/d mbbls/d (4)

(1) Amounts in the shaded area represent our 50% share in each of the line items of Alliance Pipeline’s income statement, including consolidation adjustments, and are provided for the reader’s information. Net income before tax equals our share of equity income, as determined in accordance with US GAAP.


(3) This item is not a standard measure under US GAAP and may not be comparable to similar measures presented by other entities. See section entitled “Non-GAAP Financial Measures” in this MD&A.

(4) Average daily volumes for AEGS are based on toll volumes.

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Alliance Pipeline

Operational HighlightsTransportation deliveries for each of the three and six months ended June 30, 2013 averaged 1.554 bcf/d and 1.593 bcf/d, compared to 1.536 bcf/d and 1.582 bcf/d for the same periods last year.

Tioga Lateral PipelineConstruction of the 127 km (79 mile) Tioga Lateral and associated facilities is progressing and commercial in-service is expected in the third quarter of this year. Upon completion, the Tioga Lateral will be capable of transporting 126 million cubic feet per day of liquids-rich natural gas from a gas processing facility near Tioga, North Dakota to an interconnection point on the Alliance pipeline for onward delivery to Aux Sable’s Channahon facility.

2013 Tolls/RatesOn November 30, 2012, Alliance filed its proposed 2013 tolls rates for the U.S. portion of the pipeline with the FERC. The FERC accepted and suspended the amended 2013 U.S. rates, subject to certain refund and conditions after interventions were filed by two shippers. The interventions relate to Alliance’s inclusion of Tioga Lateral costs in the 2013 rates and Alliance’s reservation charge credit tariff provisions. Alliance has filed an appeal of the FERC order.

Financial HighlightsEquity income for the three and six months ended June 30, 2013 was $26.0 million and $49.0 million, respectively, compared to $22.7 million and $45.4 million for the same periods last year. The increase reflects higher revenues due to an increase in negotiated depreciation rates and higher income tax recoveries, partially offset by lower returns as a result of a declining investment base and a first quarter reduction in the 2013 recoverable toll costs.

OutlookOn July 15, 2013, Alliance announced that starting August 15, 2013, through a precedent agreement process, shippers can express interest in December 1, 2015 capacity in the system. Subsequent to this, an open season process may be used to determine any additional shipper interest.

AEGS

Operational HighlightsToll volumes for the three and six months ended June 30, 2013 were 290.4 thousand barrels per day and 292.8 mbbls/d, respectively, compared to 270.2 mbbls/d and 280.4 mbbls/d for the same periods last year. In the second quarter of 2012, planned turnarounds for two major petrochemical plants served by AEGS resulted in lower ethane deliveries relative to the current year.

Financial Highlights For the three and six months ended June 30, 2013, AEGS generated $6.2 million and $12.8 million in EBITDA, respectively, and $1.5 million and $3.3 million in net income before tax. Current year results reflect higher transportation revenues from new services associated with two extensions completed in 2012.

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Midstream BusinessThree months ended June 30, 2013 Three months ended June 30, 2012

($ Millions, except where noted) TotalHythe/

Steeprock Aux Sable (1) TotalHythe/

Steeprock (2) Aux Sable (1)

EBITDA 17.8 17.8 9.3 16.9 16.9 18.5Depreciation and amortization (9.8) (9.8) (2.5) (11.0) (11.0) (2.5)Interest and other finance - - 0.8 - - (0.2)Equity income 7.6 - 7.6 15.8 - 15.8Net income before tax 15.6 8.0 7.6 21.7 5.9 15.8Volumes (100%)Fee Volumes(3) 412.6 397.0

mmcf/d mmcf/dEthane 9.2 35.8Propane plus 46.0 30.5

55.2 66.3mbbls/d mbbls/d

Six months ended June 30, 2013 Six months ended June 30, 2012

($ Millions, except where noted) TotalHythe/

Steeprock Aux Sable (1) TotalHythe/

Steeprock (2) Aux Sable (1)

EBITDA 36.0 36.0 15.2 26.4 26.4 28.9Depreciation and amortization (19.7) (19.7) (5.0) (15.4) (15.4) (4.9)Interest and other finance - - 0.5 - - (0.5)Equity income 10.7 - 10.7 23.5 - 23.5Net income before tax 27.0 16.3 10.7 34.5 11.0 23.5Volumes (100%)Fee Volumes(3) 413.8 389.0

mmcf/d mmcf/dEthane 19.5 42.6Propane plus 43.2 31.4

62.7 74.0mbbls/d mbbls/d

(1) Amounts in the shaded area represent our 42.7% and 50% share, respectively, in each of the line items of Aux Sable U.S. and Aux Sable Canada’s income statements, including consolidation adjustments, and are provided for the reader’s information. Net income before tax equals our share of equity income, as determined in accordance with US GAAP.

(2) Hythe/Steeprock year-to-date results are for the period February 9 to June 30, 2012.(3) Hythe/Steeprock fee volumes represent (i) either the minimum commitment volumes for which we earned processing fees or actual

volumes processed if in excess of the minimum threshold in respect of the Midstream Services Agreement with our primary customer, and (ii) fees for volumes processed for other producers.

Hythe/Steeprock Hythe/Steeprock earnings are primarily generated from a long-term midstream services agreement, referred to as the “MSA”, entered into on February 9, 2012 with our primary customer, a major natural gas producer. The MSA provides for minimum monthly fees based on specific committed volumes and unit fees, as well as the recovery of operating and maintenance costs. Volume commitments and unit fees are adjusted annually based on a pre-determined schedule to reflect anticipated production profiles and moderate fee escalation.

Operational HighlightsFor the three months ended June 30, 2013, fee volumes at Hythe/Steeprock averaged 412.6 mmcf/d, which is comprised of the minimum volume commitment under the MSA and 12.3 mmcf/d of natural gas from third party producers. The minimum volume commitment under the MSA remained applicable during the turnaround period. Fee volumes increased four percent compared to the same period last year, reflecting the contractual annual increase in the minimum volume commitment under the MSA and the addition of volumes from third party producers.

During the second quarter of 2013, the Hythe and Steeprock facilities operated at reliability factors of 99.28% and 99.43%, respectively, excluding the turnaround period, which exceeded the target factors under the MSA.

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We completed a full plant turnaround of both the sweet and sour facilities at the Hythe facility in late May and early June. The full scope of the turnaround was completed well ahead of the projected end of the outage window and was completed under budget. The scale of this turnaround (both the sweet and sour plants coincident) is not planned to occur again until 2025 given that major maintenance is expected every four years for the sweet plant and 6 years for the sour plant. In addition to maintenance, the tie-ins for a future debottleneck project were also completed during the turnaround, which will significantly increase the capacity of our sour plant facilities on a cost-competitive basis while minimizing plant downtime to implement. Veresen is currently actively marketing this debottleneck capacity to natural gas producers in the Hythe area.

Financial Highlights Hythe/Steeprock generated $17.8 million and $36.0 million in EBITDA for the three and six months ended June 30, 2013, compared to $16.9 million and $26,4 million for the same periods last year. These amounts are primarily comprised of the fee commitments under the MSA. The favourable variance in the quarter and year-to-date compared to last year is mainly due to the annual increase in the minimum volume commitment under the MSA, as well as growth in third party gas flows. The year-to-date increase also reflects our ownership for two full quarters in 2013, with the prior year results for the period February 9 to June 30, 2012.

Net income before tax for the three months ended June 30, 2013 was $8.0 million, before corporate financing costs, compared to $5.9 million for the same period last year. Higher EBITDA coupled with lower depreciation and accretion expense, resulted in a positive variance in the current year compared to last year. The higher depreciation and accretion expense in the quarter last year were primarily due to one-time adjustments.

Aux SableNGL Market OverviewDuring the second quarter of 2013, NGL market conditions and higher natural gas prices continued to put downward pressure on fractionation margins. U.S. Gulf Coast ("USGC") ethane prices averaged US$0.27 per gallon for both the second quarter and year-to-date, a 20% and 38% decrease compared to the same periods last year, respectively. Surplus ethane supply originating in the Eagle Ford development is keeping ethane inventories high. USGC ethane margins decreased to US$0.004 per gallon and US$0.014 per gallon for the second quarter and year-to-date, respectively, a 98% and 95% decrease compared to the same periods last year. Consistent with the industry, ethane production continued to be curtailed through reinjection in the second quarter for Aux Sable.

USGC propane plus prices averaged US$1.08 per gallon and US$1.13 per gallon for the second quarter and year-to-date, respectively, down US$0.18 per gallon and US$0.27 per gallon from the same periods last year, respectively. Propane stocks remain high due to greater production from Eagle Ford and Marcellus production regions, however, the balance between supply and demand is tempered by increasing exports and greater petrochemical feedstock demand. USGC propane plus margins were US$0.70 per gallon and US$0.77 per gallon for the second quarter and year to date, respectively, a 33% and 35% decrease compared to the same periods last year.

USGC propane prices appear to have stabilized in the US$0.89 to US$0.91 range over the last three quarters, down significantly compared to the second quarter of 2012. Overall, propane inventories were 551 million barrels at the end of the second quarter of 2013, down 87 million barrels or 16% from the same period last year.

Operational Highlights During each of the three and six months ended June 30, 2013, Aux Sable processed 99% of the natural gas delivered by Alliance compared to 98% and 99% for the same periods last year.

Receipts into the Prairie Rose Pipeline in North Dakota averaged 107 mmcf/d and 102 mmcf/d during the three and six months ended June 30, 2013, respectively, compared to 82 mmcf/d and 75 mmcf/d for the same periods last year. The average heat content of the natural gas delivered to the Alliance interconnection at Bantry, North Dakota was approximately 1,375 btu/ft3 for the six months ended June 30, 2013, indicative of the high heat content of the liquids-rich natural gas stream being delivered out of the Bakken. In comparison, the heat content of the western Canada natural gas delivered on the Alliance system averages 1,107 btu/ft3 .

Aux Sable sold 55.2 mbbls/d and 62.7 mbbls/d of NGLs during the three and six months ended June 30, 2013, respectively, compared to 66.3 mbbls/d and 74.0 mbbls/d for the same periods last year due to ethane reinjection in 2013. For the three and six months ended June 30, 2013, average ethane volumes decreased to

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9.2 mbbls/d and 19.5 mbbls/d, respectively, from 35.8 mbbls/d and 42.6 mbbls/d, respectively, for the same periods last year. The decreased ethane sales volumes are attributable to reinjection due to uneconomic margins in 2013.

Propane plus sales volumes were 46.0 mbbls/d and 43.2 mbbls/d for the three and six months ended June 30, 2013, respectively, up compared to 30.5 mbbls/d and 31.4 mbbls/d for the same periods last year due to increased volumes and higher heat content of the natural gas from the Bakken area in North Dakota and from western Canada.

Financial HighlightsFor the three and six months ended June 30, 2013, we recorded $7.6 million and $10.7 million of equity income from Aux Sable, respectively, a $8.2 million and $12.8 million decrease compared to the same periods last year.

For the three and six months ended June 30, 2013, EBITDA, included in Aux Sable equity income, was $9.3 million and $15.2 million, respectively, a $9.2 million and $13.7 million decrease compared to the same periods last year. For the three and six months ended June 30, 2013, fixed fees increased by $2.2 million and $3.1 million, respectively, to $10.7 million and $19.5 million due primarily to Aux Sable's assets in the Bakken region of North Dakota. This increase was more than offset by a $11.3 million and $15.9 million decrease in operating margins from Aux Sable’s margin-based activities, which amounted to $3.8 million and $5.6 million.

For the three and six months ended June 30, 2013, Aux Sable generated $5.3 million and $11.6 million, respectively, of margin-based lease revenues, none of which was recognized in EBITDA in the first quarter and $1.1 million was recognized in the second quarter. We anticipate recognizing the remaining $10.5 million later this year when its realization is more certain. In comparison, Aux Sable generated $7.6 million and $25.2 million of margin-based lease revenues in the same periods last year, of which $12.1 million and $17.6 million was recognized during the three and six month periods and $7.6 million was deferred and recognized later in 2012.

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Power BusinessThree months ended June 30, 2013 Three months ended June 30, 2012 (1)

($ Millions, exceptwhere noted) Total

Gas-Fired/DistrictEnergy Renewables

Power-Corporate Total


Power-Corporate

Proportionately Consolidated (2)

EBITDA 20.1 16.1 6.7 (2.7) 20.1 13.8 5.8 0.5Depreciation and

amortization (12.0) (8.7) (3.2) (0.1) (10.5) (7.2) (3.2) (0.1)Interest and other finance (6.9) (5.3) (1.6) - (5.8) (4.0) (1.9) 0.1Fair value gain (loss) 8.2 8.2 - - (6.1) (6.1) - -Foreign exchange and

other 0.1 - 0.1 - - (0.1) 0.1 -Net income (loss)

before tax and non-controlling interest 9.5 10.3 2.0 (2.8) (2.3) (3.6) 0.8 0.5

Volumes (GWh)Gross 250.2 92.2 158.0 - 274.8 132.8 142.1 -Net 225.2 87.1 138.1 - 249.6 127.1 122.5 -

Six months ended June 30, 2013 Six months ended June 30, 2012 (1)

($ Millions, exceptwhere noted) Total


Power-Corporate Total


Power-Corporate

Proportionately Consolidated (2)

EBITDA 38.4 31.3 11.9 (4.8) 30.1 23.0 9.2 (2.1)Depreciation and

amortization (24.1) (17.5) (6.4) (0.2) (19.3) (13.1) (5.9) (0.3)Interest and other finance (13.8) (10.5) (3.3) - (9.0) (6.6) (3.2) 0.8Fair value gain (loss) 9.9 9.9 - - (1.2) (1.2) - -Foreign exchange and

other 0.1 - 0.1 - (0.1) (0.1) - -Net income (loss)

before tax and non-controlling interest 10.5 13.2 2.3 (5.0) 0.5 2.0 0.1 (1.6)

Volumes (GWh)Gross 475.5 195.0 280.5 - 507.9 250.3 257.6 -Net 419.1 182.2 236.9 - 457.6 240.9 216.7 -


(2) Our jointly-controlled power businesses (York Energy Centre, NRGreen, and Grand Valley) are presented in the above results on a proportionately consolidated basis, which does not conform to US GAAP. A reconciliation to US GAAP is provided in the “Non-GAAP Financial Measures” section of this MD&A.

Operational Highlights During the first half of 2013, our power facilities performed in line with our expectations.

We continue to progress construction of the Dasque-Middle run-of-river hydro facility in northwest British Columbia. The project has experienced challenges in progressing the civil works, with the project's previous primary sub-contractor being placed into receivership, and commercial in-service now expected in 2014.

Financial HighlightsFor the three and six months ended June 30, 2013, EBITDA from our Power business, as determined on a proportionately consolidated basis, was $20.1 million and $38.4 million, compared to $20.1 million and $30.1 million during the same periods last year. Our gas-fired and district energy systems generated a $2.3 million and $8.3 million increase over the three and six month periods last year, due in large measure to a $2.8 million and $8.8 million contribution from York Energy Centre, which commenced operations in May 2012. EBITDA from our renewable power facilities increased by $0.9 million and $2.7 million for the three and six month periods, due primarily to a $0.1 million and $1.5 million contribution from Grand Valley, which commenced operations at the

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end of March 2012, and improved energy prices realized at our Glen Park run-of-river hydro facility which provided an additional $0.9 million and $1.1 million over the same periods last year. Power EBITDA for the three and six months ending June 30, 2012 includes a $3.0 million completion bonus, which we received in the second quarter of 2012 due to the successful commissioning of York Energy within schedule and under budget. This income was recorded in Power-Corporate.

Net income before tax and non-controlling interest was $9.5 million and $10.5 million for the three and six months ended June 30, 2013, an $11.8 million and $10.0 million increase over the same periods last year. Excluding the effect of fair value gains and losses related to York Energy Centre's interest rate hedges and the $3.0 million completion bonus received in the second quarter of 2012, net income before tax and non-controlling interest was $1.3 million and $0.6 million for the three and six months ended June 30, 2013, an increase of $0.5 million and $1.9 million over the same periods last year. The increase in EBITDA from our renewable and gas-fired and district energy systems, discussed above, were partially offset by increased depreciation and interest costs associated with York Energy Centre and Grand Valley.

Veresen-CorporateThree months ended June 30 Six months ended June 30

($ Millions) 2013 2012 (1)(2) 2013 2012 (1)(2)

Equity loss 1.5 0.4 2.6 0.8General & administrative

Recurring 5.7 4.8 14.2 11.6Non-recurring - 1.3 - 2.9

Project development 9.1 6.4 15.8 12.0Depreciation and amortization 0.6 0.6 1.1 1.1Interest and other finance 10.8 10.1 21.4 18.7Foreign exchange and other (1.1) (0.4) (1.6) 0.1Net expenses before tax 26.6 23.2 53.5 47.2Current tax 2.4 6.0 3.4 8.8Deferred tax 9.9 2.4 15.8 5.7Net expenses 38.9 31.6 72.7 61.7



For the three and six months ended June 30, 2013, we incurred $26.6 million and $53.5 million, respectively, of net corporate expenses before taxes, a $3.4 million and $6.3 million increase compared to the same periods last year. The increase reflects higher corporate administrative costs incurred to support our growth activities, higher interest costs, primarily associated with 2012 financing activities related to the Hythe/Steeprock acquisition, and higher project development spending related to our Jordan Cove LNG project. Current taxes are lower as a result of lower U.S. midstream earnings whereas future taxes are higher due to timing of recognizing the benefit of foreign tax credits and the impact of deferred taxes related to Canadian rate-regulated operations.

LIQUIDITY AND CAPITAL RESOURCES

Overall, there has not been any significant change in our financial condition or that of our businesses compared with the positions as at December 31, 2012.

At June 30, 2013, we had cash and short-term investments of $27.8 million (December 31, 2012 - $16.1 million) and working capital of $72.2 million (December 31, 2012 - $57.9 million). We expect to continue to utilize cash from operations, drawings on our Revolving Credit Facility, and cash raised through our DRIP to fund liabilities as they become due, finance capital expenditures, fund debt repayments and pay dividends.

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Cash from Operating ActivitiesThree months ended June 30 Six months ended June 30

($ Millions) 2013 2012 (1) 2013 2012 (1)

Pipeline 37.8 38.1 77.2 75.9Midstream 26.2 16.7 56.2 36.7Power 10.5 5.5 24.3 8.3Veresen–Corporate (19.5) (23.4) (65.3) (54.6)

55.0 36.9 92.4 66.3(1) Effective January 1, 2013, certain costs have been re-classified between Power and Veresen-Corporate. As a result, comparative

results for Power and Veresen-Corporate have been restated.

For the three and six months ended June 30, 2013, cash generated from operating activities was $55.0 million and $92.4 million compared to $36.9 million and $66.3 million, respectively, for the same periods last year, reflecting:

• higher cash flows from Hythe/Steeprock, partially offset by lower distributions received from Aux Sable; • higher cash flows from our Power business due to distributions received from York Energy Centre and

Grand Valley;• lower corporate cash outflows in the second quarter primarily due to working capital movements; and• higher year-to-date corporate cash outflows due to increased project development and interest costs.

Investing Activities For the first half of 2013, we used $62.8 million of cash to fund our investing activities, compared to $951.6 million in the same period last year. Significant investing activities for the six months ended June 30, 2013 included:

• $35.9 million in equity contributions to our jointly-controlled businesses; and• $24.1 million of capital expenditures, primarily related to our Midstream business ($8.0 million),

construction of the Dasque-Middle run-of-river hydro facility ($9.9 million), and our operating power facilities ($4.3 million).

Investing activities for the same period last year included:• $864.2 million related to the Hythe/Steeprock acquisition;• $25.0 million related to the acquisition of the remaining 25% interests in East Windsor Cogeneration

and EnPower; • $29.0 million in equity contributions to our jointly-controlled businesses; and• $33.5 million of capital expenditures.

Financing Activities For the first half of 2013, we used $18.1 million to fund our financing activities, compared to $891.5 million cash provided for the same period last year. Financing activities for the six months ended June 30, 2013 included:

• $77.6 million of Common Share dividend payments;• $67.0 million of net draws from our Revolving Credit Facility; • $5.8 million of senior debt repayments; and• $4.4 million of Preferred Share dividend payments.

Significant financing activities for the same period last year included:• $347.1 million from our December 2011 subscription receipts offering, released from escrow in February

2012;• $249.1 million of short-term debt borrowed, net of issue costs, and $250.0 million repaid;• $347.8 million from our March 2012 medium term note offering, net of issue costs;• $193.7 million from our February 2012 Series A Preferred Share offering, net of issue costs;• $5.6 million of senior debt repayments;• $64.0 million of net draws from our Revolving Credit Facility;• $27.1 million of Common Share dividend payments;• $3.3 million of Preferred Share dividend payments; and• $21.5 million advanced to a jointly-controlled business.

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DIVIDENDSPolicyOur general dividend policy is to establish and maintain a sustainable and stable monthly dividend, having regard for forecast distributable cash and our growth capital requirements.

We pay dividends on our Common Shares on a monthly basis to common shareholders of record as at the last business day of each month on the 23rd day of the month following such record date, or if not a business day, then on the preceding business day.

The holders of Series A Preferred Shares are entitled to receive fixed cumulative preferential cash dividends at an annual rate of 4.4%, payable quarterly. The dividend rate will reset on September 30, 2017 and every five years thereafter based on then-market rates.

Sustainability of Dividends and Productive CapacityWe intend to continue to pay dividends, although such dividends are not guaranteed and do not represent a legal obligation. The sustainability of such dividends is a function of several factors including, among other things:

• earnings and cash flows we generate;• ongoing maintenance of each business’s physical and economic productive capacity;• our ability to comply with debt covenants and refinance debt as it comes due; and• our ability to satisfy any applicable legal requirements.

For a complete discussion of the significant risks and uncertainties affecting us, see the “Risks” section contained in our 2012 MD&A.

Dividends Paid/Payable Relative to Cash from Operating Activities and Net Income Attributable to Common Shares

Three months ended June 30 Six months ended June 30($ Millions) 2013 2012 (1) 2013 2012 (1)

Cash from operating activities 55.0 36.9 92.4 66.3Net income attributable to Common Shares 11.5 8.5 12.7 18.0

Dividends paid/payable 49.8 48.8 99.4 95.0

Less dividends paid in Common Shares under DRIP (11.0) (20.7) (21.8) (57.8)Net dividends paid/payable 38.8 28.1 77.6 37.2

Excess of cash from operating activities over net dividends paid/payable 16.2 8.8 14.8 29.1

Deficiency of net income attributable to Common Shares over net dividends paid/payable (27.3) (19.6) (64.9) (19.2)


The excess of cash from operating activities over net dividends paid/payable generally represents the cash we use for maintenance capital expenditures, scheduled amortization of any long-term debt, and cash we retain to fund growth.

Net income attributable to Common Shares is generally less than dividends paid/payable as our net income includes certain non-cash expenses such as depreciation and deferred tax, and can include unrealized foreign exchange and fair value gains and losses which are not reflected in calculating the amount of cash available for the payment of dividends. As a result of high participation rates under our DRIP, net income attributable to Common Shares was less than net dividends paid/payable for the three and six months ended June 30, 2012. In May 2012, we suspended the Premium DividendTM component of our DRIP (trademark of Canaccord Genuity Corp.), resulting in a lower participation rate and correspondingly higher net dividends paid/payable during the

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three and six months ended June 30, 2013 compared to the same periods last year. Further, the nature of Aux Sable’s revenue recognition policy typically results in lower amounts of margin-based lease revenues being recognized through equity income in the first half of the year and the recognition of such deferred amounts in the last half of the year.

DISTRIBUTABLE CASH

The amount of distributable cash we earn is comprised of and will vary depending on: • distributions received/receivable from our jointly-controlled businesses and cash flows from our wholly-

owned and majority-controlled businesses, which, in each case, are after providing for scheduled amortization of long-term debt and capital expenditures that are not growth-oriented or recoverable;

• operating support payments required by each of our businesses; • cash taxes and financing costs we incur, including scheduled principal repayments on long-term debt; • our general and administrative costs; and • cash we hold in reserve.

The calculation of distributable cash for the three and six months ended June 30, 2013 and 2012 is set out below:

Distributable Cash

Three months ended June 30 Six months ended June 30($ Millions, except where noted) 2013 2012 2013 2012Alliance distributions, prior to withholdings for capital expenditures and net of

debt service 33.7 33.0 67.6 65.6AEGS distributable cash, after non-recoverable capital expenditures and debt service 4.2 3.9 8.8 7.8Hythe/Steeprock distributable cash, after non-

recoverable maintenance capital expenditures 17.7 16.9 35.3 26.4Aux Sable distributions, net of support payments,

non-recoverable maintenance capital expendituresand debt service 6.0 14.6 15.6 27.8

Power distributable cash, after maintenance capitalexpenditures and debt service 7.1 7.3 16.9 9.8

68.7 75.7 144.2 137.4Corporate General and administrative (5.7) (6.1) (14.2) (14.2) Interest and other finance (10.1) (9.5) (20.1) (17.6)

(15.8) (15.6) (34.3) (31.8) Current tax (1.5) (6.0) (1.7) (8.8) Preferred Share dividends (2.2) (2.2) (4.4) (3.3)

(19.5) (23.8) (40.4) (43.9)Distributable cash (1) 49.2 51.9 103.8 93.5

Distributable cash per Common Share ($) (2) 0.25 0.26 0.52 0.49

Dividends paid/payable (3) 49.8 48.8 99.4 95.0

Dividends paid/payable per Common Share ($) 0.25 0.25 0.50 0.50(1) See “Non-GAAP Financial Measures” for reconciliation of distributable cash to cash from operating activities.(2) The number of Common Shares used to calculate distributable cash per Common Share is based on the average number of Common

Shares outstanding at each record date. For the three months ended June 30, 2013 the average number of Common Shares outstanding for this calculation was 199,282,658 (2012 – 195,474,685) and 205,189,167 (2012 – 201,381,193) on a basic and diluted basis, respectively. For the six months ended June 30, 2013, the average number of Common Shares outstanding for this calculation was 198,844,197 (2012 – 190,065,393) and 204,750,705 (2012 – 195,972,018) on a basic and diluted basis, respectively. The number of Common Shares outstanding would increase by 5,906,508 (2012 – 5,906,508) Common Shares if the outstanding Convertible Debentures on June 30, 2013 were converted into Common Shares.

(3) Includes $11.0 million and $21.8 of dividends for the three and six months ended June 30, 2013 (2012 – $20.7 million and $57.8 million, respectively) satisfied through the issuance of Common Shares under our DRIP.

20

Distributable cash for the three and six months ended June 30, 2013 was $49.2 million and $103.8 million, or $0.25 and $0.52 per Common Share, compared to $51.9 million and $93.5 million, or $0.26 and $0.49 per Common Share, for the same periods last year, reflecting lower current tax and increased cash flows from Hythe/Steeprock and the Pipeline business segment, partially offset by lower contributions from Aux Sable.

Second quarter 2013 distributions from Alliance amounted to $33.7 million, a $0.7 million increase compared to amounts distributed in the second quarter of 2012. For the year-to-date, Alliance distributions were $67.6 million, a $2.0 million increase compared to the same period last year. The increase reflects higher income tax recoveries, partially offset by lower return on equity due to the ongoing depreciation of Alliance’s investment base.

AEGS distributable cash of $4.2 million approximated amounts distributed in the second quarter of 2012. For the year-to-date, AEGS distributions were $8.8 million, a $1.0 million increase over the same period in 2012 as a result of higher EBITDA.

The Hythe/Steeprock complex generated $17.7 million and $35.3 million of distributable cash in the three and six months ended June 30, 2013, compared to $16.9 million and $26.4 million for the same periods last year. The increase reflects an escalation in fees under the processing agreement with our primary customer and the year-to-date increase resulting from two full quarters of operations.

Aux Sable distributed $6.0 million and $15.6 million to us in the three and six months ended June 30, 2013, a $8.6 million and $12.2 million decrease compared to the same periods last year. The decreased distributions primarily resulted from lower realized fractionation margins. The decrease in margin-based cash flows was partially offset by incremental fixed fee cash flows generated from Aux Sable's assets in the Bakken region of North Dakota.

Power distributable cash for the three and six months ended June 30, 2013 was $7.1 million and $16.9 million, approximating the second quarter last year and a $7.1 million increase compared to the year-to-date period last year. The increase for the six months ended June 30, 2013 reflects higher first quarter distributable cash from our gas-fired and district energy systems, primarily due to distributions from York Energy Centre and the release of East Windsor Cogeneration’s operating funds previously held in reserve. Our renewable facilities generated increased distributable cash primarily reflecting distributions from Grand Valley.

Corporate costs for the three and six months ended June 30, 2013 were $15.8 million and $34.3 million, representing a $0.2 million and $2.5 million increase from the same periods last year, primarily related to financing the Hythe/Steeprock acquisition.

Current tax for the three and six months ended June 30, 2013 was $1.5 million and $1.7 million, respectively, a $4.5 million and $7.1 million decrease compared to the same periods last year. The decrease primarily results from reduced earnings from Aux Sable due to lower NGL margins in the United States.

FINANCIAL INSTRUMENTS

We and our jointly-controlled businesses periodically enter into interest rate hedges to manage interest rate exposures. For the three and six ended June 30, 2013, equity income from York Energy Centre includes a $8.2 million and $9.9 million unrealized mark-to-market gain ($6.1 million and $7.4 million after tax), associated with an interest rate hedge. For the same periods last year, equity income from York Energy Centre includes a $6.1 million and $1.2 million unrealized mark-to-market loss, respectively ($4.6 million and $0.9 million after tax).

NEW ACCOUNTING STANDARDS

The following new Accounting Standards Updates (“ASU”) have been issued, as of June 30, 2013.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU provides guidance for enhanced disclosure on amounts reclassified out of cumulative other comprehensive income. This guidance became effective for annual and interim periods beginning after December 15, 2012. We adopted this ASU effective January 1, 2013. The impact of adoption is not material to us.

21

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters: Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. This ASU provides guidance for transactions that require the entire amount of a cumulative translation adjustment related to an entity’s investment in a foreign entity to be released. This guidance is effective for annual and interim periods beginning after December 15, 2013, and is not expected to have a material impact to us.

NON-GAAP FINANCIAL MEASURES

Certain financial measures referred to in this MD&A are not measures recognized under US GAAP. These non-GAAP financial measures do not have standardized meanings prescribed by US GAAP and therefore may not be comparable to similar measures presented by other entities. We caution investors not to construe these non-GAAP financial measures as alternatives to other measures of financial performance calculated in accordance with US GAAP. We further caution investors not to place undue reliance on any one financial measure.

We provide the following non-GAAP financial measures to assist investors with their evaluation of us, including their assessment of our ability to generate distributable cash to fund monthly dividends. We consider these non-GAAP financial measures, together with other financial measures calculated in accordance with US GAAP, to be important factors that assist investors in assessing performance.

Distributable Cash - represents the cash we have available for distribution to common shareholders after providing for debt service obligations, Preferred Share dividends, and any maintenance and sustaining capital expenditures. Distributable cash does not include distribution reserves, if any, available in jointly-controlled businesses, project development costs, or transaction costs incurred in conjunction with acquisitions. Project development costs are discretionary, non-recoverable costs incurred to assess the commercial viability of greenfield business initiatives unrelated to our operating businesses. We consider transaction costs to be part of the consideration paid for an acquired business and, as such, are unrelated to our operating businesses. The investment community uses distributable cash to assess the source and sustainability of our dividends. The following is a reconciliation of distributable cash to cash from operating activities.

Reconciliation of Distributable Cash to Cash From Operating Activities

Three months ended June 30 Six months ended June 30($ Millions) 2013 2012 2013 2012Cash from operating activities 55.0 36.9 92.4 66.3Add (deduct): Project development costs (1) 9.1 6.4 15.8 12.0Change in non-cash working capital (4.5) 12.7 8.3 31.1Principal repayments on senior notes (3.0) (3.5) (5.8) (5.6)Maintenance capital expenditures (1.8) (2.5) (3.8) (3.4)Distributions earned greater (less) than distributions

received (2) (4.2) 5.2 (0.3) (3.6)Preferred Share dividends (2.2) (3.3) (4.4) (3.3)Current tax on Preferred Share dividends 0.8 - 1.6 -Distributable cash 49.2 51.9 103.8 93.5

(1) Represents costs incurred by us in relation to projects where the recoverability of such costs has not yet been established. Amounts incurred for the three and six months ended June 30, 2013 relate primarily to the Jordan Cove LNG terminal project, the Pacific Connector Gas Pipeline project, and various power development projects.

(2) Represents the difference between distributions declared by jointly-controlled businesses and distributions received.

Distributable Cash per Common Share - reflects the per common share amount of distributable cash calculated based on the average number of common shares outstanding on each record date.

EBITDA - refers to earnings before interest, tax, depreciation and amortization. EBITDA is reconciled to net income before tax by deducting interest, depreciation and amortization, and asset impairment losses, if any. The investment community uses this measure, together with other measures, to assess the source and sustainability of cash distributions.

Power net income before tax and non-controlling interest with jointly-controlled power businesses presented on a proportionately consolidated basis - Under US GAAP, we account for each of York Energy

22

Centre, NRGreen and Grand Valley using the equity method due to our joint control of these entities. However, we believe the presentation of their earnings on a proportionately consolidated line-by-line basis provides more insightful information. We and the investment community use EBITDA on a proportionately consolidated basis to assess the performance of our Power business. The following reconciles the results of our Power business as presented in “Results of Operations – Power Business” to the results as presented in accordance with US GAAP.

Power BusinessThree months ended June 30, 2013 Three months ended June 30, 2012 (1)

($ Millions)Proportionately

Consolidated

Reverseproportionateconsolidation;

apply equityaccounting US GAAP

ProportionatelyConsolidated



EBITDA 20.1 (7.7) 12.4 20.1 (4.8) 15.3Depreciation and

amortization (12.0) 3.6 (8.4) (10.5) 2.0 (8.5)Interest and other finance (6.9) 3.3 (3.6) (5.8) 2.2 (3.6)Fair value gain

(loss) 8.2 (8.2) - (6.1) 6.1 -Foreign exchange

and other 0.1 (0.1) - - - -Equity income - 9.1 9.1 - (5.5) (5.5)Net income

before tax and non-controlling interest 9.5 - 9.5 (2.3) - (2.3)

Six months ended June 30, 2013 Six months ended June 30, 2012 (1)

($ Millions)Proportionately

Consolidated



ProportionatelyConsolidated



EBITDA 38.4 (16.3) 22.1 30.1 (6.1) 24.0Depreciation and

amortization (24.1) 7.2 (16.9) (19.3) 2.5 (16.8)Interest and other finance (13.8) 6.6 (7.2) (9.0) 2.3 (6.7)Fair value gain

(loss) 9.9 (9.9) - (1.2) 1.2 -Foreign exchange

and other 0.1 (0.1) - (0.1) 0.1 -Equity income - 12.5 12.5 - - -Net income

before tax and non-controlling interest 10.5 - 10.5 0.5 - 0.5


23

SELECTED QUARTERLY FINANCIAL INFORMATION

2013 2012 (1) 2011 (1)

($ Millions, except where noted) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3Operating revenues 89.8 71.6 67.7 71.5 70.0 55.0 42.4 48.8Net income attributable to Common

Shares 11.5 1.2 13.1 12.5 8.5 9.5 14.0 10.6Net income per Common Share ($) – basic and diluted 0.06 0.01 0.07 0.06 0.04 0.05 0.08 0.06Distributable cash 49.2 54.6 56.5 61.4 51.9 41.6 53.2 54.4Distributable cash per Common

Share ($) – basic and diluted 0.25 0.27 0.29 0.31 0.26 0.23 0.32 0.33Cash from operating activities 55.0 37.4 65.1 48.5 36.9 29.4 59.9 54.5

(1) Certain comparative figures have been revised. See Note 1 in our June 30, 2013 consolidated financial statements.

Significant items that affected quarterly financial results include the following:• Second quarter 2013 reflected continued weakness in NGL market conditions and increased finance

costs.• First quarter 2013 reflected continued weakness in NGL market conditions and increased administrative

and finance costs.• Fourth quarter 2012 reflected continued weakness in NGL market conditions, resulting in decreased

fractionation margins, increased results from our Power business and increased administrative and finance costs to support the Hythe/Steeprock acquisition. Fourth quarter results also included a $4.3 million and a $16.5 million contribution to net income before tax and distributable cash, respectively, from Hythe/Steeprock.

• Third quarter 2012 reflected continued weakness in NGL market conditions, resulting in decreased fractionation margins, reduced results from our Power business and increased administrative and finance costs to support the Hythe/Steeprock acquisition. Third quarter results also included an $8.0 million and a $17.3 million contribution to net income before tax and distributable cash, respectively, from Hythe/Steeprock.

• Second quarter 2012 reflected continued weakness in NGL market conditions, resulting in decreased fractionation margins, reduced results from our Power business and increased administrative and finance costs to support the Hythe/Steeprock acquisition. Second quarter results also included a $5.9 million and a $16.9 million contribution to net income before tax and distributable cash, respectively, from Hythe/Steeprock.

• First quarter 2012 included a $5.1 million and a $9.5 million contribution to net income before tax and distributable cash, respectively, from Hythe/Steeprock.

• Fourth quarter 2011 reflected the recognition of $30.6 million of NGL margin-based lease revenues, a new record for us, in net income attributable to Common Shares through our equity income from Aux Sable and distributable cash.

• Third quarter 2011 reflected the recognition of $24.4 million of NGL margin-based lease revenues in net income attributable to Common Shares through our equity income from Aux Sable and distributable cash, and incremental earnings contributed from our power facilities acquired in the fourth quarter of 2010 and the first quarter of 2011, offset by a $12.1 million (after tax) or $0.07 per Common Share unrealized mark-to-market loss on York Energy’s interest rate swap.

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the President & Chief Executive Officer (CEO) and Senior Vice President, Finance and Chief Financial Officer (CFO), on a timely basis so appropriate decisions can be made regarding public disclosure.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision of our CEO and CFO. Based on this evaluation, we concluded the disclosure controls and procedures, as defined in National Instrument 52-109, were effective as of June 30, 2013.

24

INTERNAL CONTROLS OVER FINANCIAL REPORTING

We are responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP. We assessed the design and effectiveness of internal controls over financial reporting as at June 30, 2013, and, based on that assessment, determined the design and operating effectiveness of internal controls over financial reporting was effective. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis.

No changes were made to internal controls over financial reporting during the period ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

25

Veresen Inc.

Consolidated Statement of Financial Position

(Canadian $ Millions; number of shares in Millions; unaudited) June 30, 2013 December 31, 2012 (note 1)

AssetsCurrent assetsCash and short-term investments 27.8 16.1Restricted cash 4.8 5.8Distributions receivable 36.1 39.9Receivables 88.6 72.6Other 13.5 11.5

170.8 145.9

Investments in jointly-controlled businesses (note 3) 849.1 807.0Rate-regulated asset 38.3 43.8Pipeline, plant and other capital assets 1,445.1 1,443.8Intangible assets 443.6 455.0Other assets 63.6 65.5

3,010.5 2,961.0

LiabilitiesCurrent liabilitiesPayables 73.6 63.4Dividends payable 12.9 12.9Current portion of long-term senior debt 12.1 11.7

98.6 88.0

Long-term senior debt 1,308.5 1,247.6Subordinated convertible debentures 86.2 86.2Deferred tax liability 280.9 262.0Other long-term liabilities 45.5 46.2

1,819.7 1,730.0

Shareholders’ EquityShare capital (note 4) Preferred shares 195.2 195.2 Common shares (199.6 and 197.8 outstanding at June 30,

2013 and December 31, 2012, respectively) 1,826.1 1,804.3Additional paid-in capital 4.3 4.3Cumulative other comprehensive loss (140.1) (164.8)Accumulated deficit (694.8) (608.1)

1,190.7 1,230.9Non-controlling interest 0.1 0.1

1,190.8 1,231.03,010.5 2,961.0

Commitments and Contingencies (note 8)

See accompanying Notes to the Consolidated Financial Statements

26

Veresen Inc.

Consolidated Statement of Income

(Canadian $ Millions, except per Common Share Three months ended June 30 Six months ended June 30amounts (note 4); unaudited) 2013 2012 (note 1) 2013 2012 (note 1)

Equity income (note 3) 41.2 32.6 69.6 68.1Operating revenues 89.8 70.0 161.4 125.0Operations and maintenance (47.0) (27.5) (78.7) (53.8)General, administrative and project development (21.2) (16.9) (41.8) (35.4)Depreciation and amortization (22.3) (23.4) (44.7) (39.9)Interest and other finance (15.6) (15.0) (31.1) (28.0)Foreign exchange and other 1.1 0.4 1.6 (0.1)Net income before tax and non-controlling interest 26.0 20.2 36.3 35.9Current tax (2.4) (6.0) (3.4) (8.8)Deferred tax (9.9) (2.4) (15.8) (5.7)Net income before non-controlling interest 13.7 11.8 17.1 21.4Non-controlling interest — — — (0.1)Net income 13.7 11.8 17.1 21.3Preferred Share dividends (2.2) (3.3) (4.4) (3.3)Net income attributable to Common Shares 11.5 8.5 12.7 18.0

Net income per Common ShareBasic and diluted 0.06 0.04 0.06 0.09

Consolidated Statement of Comprehensive IncomeThree months ended June 30 Six months ended June 30

(Canadian $ Millions; unaudited) 2013 2012 (note 1) 2013 2012 (note 1)

Net income before non-controlling interest 13.7 11.8 17.1 21.4Other comprehensive income Cumulative translation adjustment Unrealized foreign exchange gain on translation 15.4 8.1 24.7 5.3Other comprehensive income 15.4 8.1 24.7 5.3Comprehensive income before non-controlling interest 29.1 19.9 41.8 26.7Comprehensive income attributable to non-controlling

interest — — — (0.1)Comprehensive income 29.1 19.9 41.8 26.6Preferred Share dividends (2.2) (3.3) (4.4) (3.3)Comprehensive income attributable to Common Shares 26.9 16.6 37.4 23.3


27

Veresen Inc.

Consolidated Statement of Cash FlowsThree months ended June 30 Six months ended June 30

(Canadian $ Millions; unaudited) 2013 2012 (note 1) 2013 2012 (note 1)OperatingNet income before non-controlling interest 13.7 11.8 17.1 21.4Equity income (41.2) (32.6) (69.6) (68.1)Distributions from jointly-controlled businesses 45.5 42.6 92.0 97.3Depreciation and amortization 22.3 23.4 44.7 39.9Foreign exchange and other non-cash items 0.6 0.2 (0.8) (2.3)Deferred tax 9.9 2.4 15.8 5.7Changes in non-cash working capital (note 7) 4.2 (10.9) (6.8) (27.6)

55.0 36.9 92.4 66.3InvestingAcquisitions, net of cash acquired — (8.0) — (889.2)Investments in jointly-controlled businesses (13.5) (13.1) (35.9) (29.0)Pipeline, plant and other capital assets (15.0) (16.5) (24.1) (33.5)Restricted cash (0.4) — (2.9) 0.4Other 0.1 (0.1) 0.1 (0.3)

(28.8) (37.7) (62.8) (951.6)FinancingRestricted cash — (0.1) 3.9 347.0Short-term debt issued, net of issue costs — — — 249.1Short-term debt repaid — — — (250.0)Long-term debt issued, net of issue costs — — — 347.8Long-term debt repaid (3.8) (3.5) (5.8) (5.6)Net change in credit facilities 23.0 (17.0) 67.0 64.0Preferred Shares issued, net of issue costs — — — 193.7Common Share dividends paid (38.8) (18.0) (77.6) (27.1)Preferred Share dividends paid (2.2) (3.3) (4.4) (3.3)Repayments from (advances to) jointly-controlled

businesses 0.4 — 0.7 (21.5)Other 0.6 — (1.9) (2.6)

(20.8) (41.9) (18.1) 891.5Increase (decrease) in cash and short-term investments 5.4 (42.7) 11.5 6.2Effect of foreign exchange rate changes on cash and

short-term investments 0.1 0.2 0.2 0.2Cash and short-term investments at the beginning of the

period 22.3 70.8 16.1 21.9Cash and short-term investments at the end of the period 27.8 28.3 27.8 28.3


28

Veresen Inc.

Consolidated Statement of Shareholders' EquitySix months ended June 30

(Canadian $ Millions; unaudited) 2013 2012 (note 1)Preferred SharesJanuary 1 195.2 —Series A Preferred Shares issued, net of issue costs — 195.3Balance at the end of the period 195.2 195.3

Common SharesJanuary 1 1,804.3 1,391.0Subscription receipts converted into Common Shares, net of issue costs — 334.2Common Shares issued under Premium Dividend and Dividend Reinvestment Plan

("DRIP") 18.1 54.3June 30 1,822.4 1,779.5Common Shares to be issued under DRIP 3.7 3.6Balance at the end of the period 1,826.1 1,783.1

Additonal paid-in capitalJanuary 1 4.3 —Additional paid-in capital from disposition of non-controlling interest — 4.3Balance at the end of the period 4.3 4.3

Cumulative other comprehensive lossJanuary 1 (164.8) (159.2)Other comprehensive income 24.7 5.3Balance at the end of the period (140.1) (153.9)

Accumulated deficitJanuary 1 (608.1) (458.2)Net income 17.1 21.3Preferred Share dividends (4.4) (3.3)Common Share dividends (99.4) (95.0)Balance at the end of the period (694.8) (535.2)

1,190.7 1,293.6

Non-controlling interestJanuary 1 0.1 31.7Non-controlling interest disposition — (31.7)Net income attributable to non-controlling interest — 0.1Balance at the end of the period 0.1 0.1

Shareholders' Equity 1,190.8 1,293.7


29

Notes to the Consolidated Financial Statements

Three and six months ended June 30, 2013 and 2012 (Canadian $ Millions, except where noted; unaudited)

1. Basis of Presentation

These unaudited interim consolidated financial statements of Veresen Inc. (“Veresen” or the “Company”) have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, financial instruments and taxes. Actual amounts could differ from these estimates. Significant estimates used in the preparation of these consolidated financial statements relate to the determination of any impairment in the carrying value of long-term assets, the estimated useful lives over which certain assets are depreciated or amortized, and the measurement of asset retirement obligations.

These consolidated financial statements include the accounts of the Company and its subsidiaries. The Company consolidates its interest in entities over which it is able to exercise control. To the extent there are interests owned by other parties, the other parties’ interests are included in Non-Controlling Interest. Veresen accounts for its jointly-controlled businesses using the equity method.

In connection with the preparation of the consolidated financial statements for the three months ended March 31, 2013, an accounting change was identified which resulted in a reduction in the carrying value of the Company’s equity investment in Alliance.The accounting policies applied, other than the revision as described above, are consistent with those outlined in Veresen’s annual audited US GAAP consolidated financial statements for the year ended December 31, 2012. The year-end balance sheet data was derived from audited financial statements but these interim financial statements do not include all disclosures required by US GAAP and should be read in conjunction with the unaudited consolidated financial statements for the three months ended March 31, 2013 and the 2012 audited US GAAP consolidated financial statements. Operating results for the three and six months ended June 30, 2013 and June 30, 2012 are not necessarily indicative of the results for the full year.

In management’s opinion all adjustments necessary for fair presentation are reflected in the interim periods presented.

2. New Accounting Pronouncements

The following new Accounting Standards Updates (“ASU”) have been issued, as of June 30, 2013.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU provides guidance for enhanced disclosure on amounts reclassified out of cumulative other comprehensive income. This guidance became effective for annual and interim periods beginning after December 15, 2012, and did not have a material impact to the Company.

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters: Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. This ASU provides guidance for transactions that require the entire amount of a cumulative translation adjustment related to an entity’s investment in a foreign entity to be released. This guidance is effective for annual and interim periods beginning after December 15, 2013, and is not expected to have a material impact to the Company.

30

3. Investments in Jointly-Controlled Businesses

Condensed financial information (100%) for the Company’s jointly-controlled businesses:

As at June 30, 2013Six months ended

June 30, 2013As at June

30, 2013

Sixmonths

endedJune 30,

2013

100%CurrentAssets

Non-CurrentAssets

Current Liabilities(1)

Non-Current

Liabilities(1)Senior

Debt Revenues Expenses

Profit(Loss)before

TaxOwner-

ship (%)Equity

Investment

EquityIncome(Loss)

Alliance Canada (2) 199.9 1,450.9 91.1 17.4 1,200.1 224.4 168.2 56.2 50 214.3 24.9

Alliance U.S. (3) (6) 176.8 1,174.8 99.3 8.2 707.6 160.3 109.6 50.7 50 242.3 24.1

Aux Sable Canada 19.8 125.9 16.7 6.7 2.0 93.8 85.4 8.4 50 59.1 4.2

ASLP (4) (6) 49.3 421.3 67.3 4.6 14.1 61.7 57.9 3.8 42.7 128.9 2.5

ASM (6) 33.5 232.8 26.6 0.4 - 242.9 218.4 24.5 42.7 100.8 10.5

ACM 3.0 - 3.9 - - 79.7 93.8 (14.1) 42.7 0.4 (4.8)

Sable NGL Services 0.3 - 0.5 - - 2.9 6.3 (3.4) 50 0.1 (1.7)

York Energy Centre (5) 16.7 297.8 7.6 28.4 263.8 30.3 6.0 24.3 50 53.1 10.9

NRGreen 18.9 123.9 13.0 7.8 39.5 5.7 3.9 1.8 50 41.5 0.9

Grand Valley 4.6 54.1 4.0 44.3 - 4.2 3.2 1.0 75 7.8 0.7

Other (6) 1.4 0.8 0.8 - - - 4.9 (4.9) 50-75 0.8 (2.6)

849.1 69.6

As at December 31, 2012Six months ended

June 30, 2012

As atDecember

31, 2012

Sixmonths

endedJune 30,

2012

100%CurrentAssets

Non-CurrentAssets

Current Liabilities (1)

Non-Current

Liabilities (1)Senior

Debt Revenues Expenses

Profit(Loss)before

taxOwner-

ship (%)Equity

Investment

EquityIncome(Loss)

Alliance Canada (2) (7) 87.2 1,516.2 25.5 17.5 1,200.1 223.9 168.8 55.1 50 224.4 24.8

Alliance U.S. (3) (6) (7) 154.8 1,092.7 68.7 11.4 664.2 157.4 113.1 44.3 50 228.8 20.6

Aux Sable Canada 20.6 124.7 16.6 7.5 - 47.9 41.0 6.9 50 59.6 3.4

ASLP (4) (6) 55.1 378.5 60.1 5.3 11.9 95.1 54.7 40.4 42.7 115.3 18.0

ASM (6) 47.4 218.4 34.8 0.3 - 162.3 145.1 17.2 42.7 94.9 7.3

ACM 1.1 - 3.4 - - 50.5 62.5 (12.0) 42.7 0.4 (3.8)

Sable NGL Services 1.3 - 0.8 - - 3.4 6.3 (2.9) 50 0.3 (1.4)

York Energy Centre (5) 16.7 304.5 6.3 48.2 267.3 7.5 8.3 (0.8) 50 46.2 (0.8)

NRGreen 24.6 90.7 10.8 5.6 40.6 5.8 4.4 1.4 50 29.6 0.7

Grand Valley 4.2 54.6 4.1 45.0 - 1.9 1.7 0.2 75 7.2 0.1

Other (6) 1.6 0.8 1.4 - - - 2.1 (2.1) 33.3-75 0.3 (0.8)

807.0 68.1

(1) Current liabilities and non-current liabilities exclude senior debt.(2) At June 30, 2013, the Company had a $64.0 million (December 31, 2012 - $67.3 million) difference between the carrying value of Alliance

Canada and the underlying equity in the net assets primarily resulting from the purchase price discrepancy as part of the acquisitions in 1997, 2002, and 2003 resulting in 50% ownership.

(3) At June 30, 2013, the Company had a US$ 7.2 million (December 31, 2012 - US$ 5.7 million) negative difference between the carrying value of Alliance U.S. and the underlying equity in the net assets primarily resulting from the purchase price discrepancy as part of the acquisitions in 1997, 2002, and 2003 resulting in 50% ownership.

(4) At June 30, 2013, the Company had a US$ 32.1 million (December 31, 2012 - US$ 33.0 million) negative difference between the carrying value of ASLP and the underlying equity in the net assets primarily resulting from the purchase price discrepancy as part of the acquisitions in 1997, 2002, and 2003 resulting in 42.7% ownership.

(5) At June 30, 2013, the Company had a $47.0 million (December 31, 2012 - $48.3 million) difference between the carrying value of York Energy Centre and the underlying equity in the net assets primarily resulting from the purchase price discrepancy as part of the acquisition in 2010 resulting in 50% ownership. Expenses include unrealized gains or losses on the interest rate hedge (note 5).

(6) Assets and liabilities of these investments have been translated into Canadian dollars using the exchange rate in effect at the balance sheet date and revenues and expenses have been translated into Canadian dollars at average exchange rates during the period.

(7) Certain comparative figures as at December 31, 2012 and for the six months ended June 30, 2012 have been revised (note 1).

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4. Share Capital

Common SharesThe weighted average number of Common Shares outstanding used to determine net income per Common Share on a basic and diluted basis for the three months ended June 30, 2013, was 199,066,665 (2012 – 194,903,151) and 204,973,173 (2012 – 200,809,660), respectively. The weighted average number of Common Shares outstanding used to determine net income per Common Share on a basic and diluted basis for the six months ended June 30, 2013 was 198,627,825 (2012 – 188,162,977) and 204,534,333 (2012 – 194,070,716), respectively. The number of Common Shares outstanding would increase by 5,906,508 (2012 – 5,906,508) if the outstanding convertible debentures on June 30, 2013 were converted into Common Shares. These were excluded from the diluted earnings per Common Share calculation as the effect was anti-dilutive for the three and six months ended June 30, 2013.

Preferred SharesOn February 14, 2012, the Company issued 8 million Cumulative Redeemable Preferred Shares, Series A (“Series A Preferred Shares”) at a price of $25 per Series A Preferred Share. The holders of Series A Preferred Shares are entitled to receive fixed cumulative preferential cash dividends at an annual rate of 4.4%, payable quarterly for an initial period up to but excluding September 30, 2017 if and when declared by the Board of Directors. The dividend rate will reset on September 30, 2017 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 2.92%. The Series A Preferred Shares are redeemable by the Company, at the Company’s option, on September 30, 2017 and on September 30 of every fifth year thereafter.

Holders of Series A Preferred Shares have the right to convert all or any part of their shares into Cumulative Redeemable Preferred Shares, Series B (“Series B Preferred Shares”) subject to certain conditions, on September 30, 2017 and on September 30 of every fifth year thereafter. The holders of Series B Preferred Shares are entitled to receive quarterly floating rate cumulative dividends at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 2.92%.

5. Fair Value Measurement and Derivative Financial Statements

Fair value is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act.

The fair values of financial instruments included in cash and short-term investments, restricted cash, distributions receivable, receivables, other assets, payables, dividends payable, and other long-term liabilities approximate their carrying amounts due to the nature of the item and/or the short time to maturity. The fair values of senior debt are calculated by discounting future cash flows using discount rates estimated based on government bond rates plus expected spreads for similarly-rated instruments with comparable risk profiles. The fair values of subordinated convertible debentures are measured at quoted market prices.

US GAAP establishes a fair value hierarchy that distinguishes between fair values developed based on market data obtained from sources independent of the reporting entity, and fair values developed using the reporting entity’s own assumptions based on the best information available in the circumstances. The levels of the fair value hierarchy are:

Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.Level 2: Inputs are other than the quoted prices included in Level 1 that are observable for the asset or liability,

either directly or indirectly.Level 3: Inputs are not based on observable market data.

Veresen has categorized senior debt as Level 2. At June 30, 2013 senior debt had a carrying value of $1,320.6 million (December 31, 2012 – $1,259.3 million) and fair value of $1,365.0 million (December 31, 2012 – $1,322.8 million).

Veresen and its jointly-controlled businesses periodically enter into interest rate hedges (“hedges”) to manage interest rate exposures. York Energy Centre, a jointly-controlled business, entered into two hedges as part of its

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debt financing. As at June 30, 2013 and December 31, 2012, York Energy Centre had one hedge outstanding. Future changes in interest rates will affect the fair value of the hedge, impacting the amount of unrealized gains or losses included in equity income from jointly-controlled businesses recognized in the period.

The following is a summary of the interest rate hedge in place as at June 30, 2013:

Variable Debt Interest Rate Fixed RateNotional Amount

(50%)Fair

Value (50%) TermCAD-BA-CDOR 4.24% $131.9 $(14.2) April 30, 2012 to June 30, 2032

The following is a summary of the interest rate hedge in place as at December 31, 2012:

Variable Debt Interest Rate Fixed RateNotional Amount

(50%)Fair

Value (50%) TermCAD-BA-CDOR 4.24% $133.6 $(24.1) April 30, 2012 to June 30, 2032

The fair values approximate the amount that York Energy Centre would have either paid or received to settle the contract, and are included in the Company’s investment in York Energy Centre.

6. Segmented Information

Pipelines Midstream Power Corporate(1) TotalThree months ended June 30 2013 2012(2) 2013 2012 2013 2012(3) 2013 2012(2)(3) 2013 2012(2)

Equity income (loss) 26.0 22.7 7.6 15.8 9.1 (5.5) (1.5) (0.4) 41.2 32.6

Operating revenues 13.2 11.7 44.7 26.9 31.9 31.4 - - 89.8 70.0

Operations and maintenance (6.0) (5.2) (25.5) (9.8) (15.5) (12.5) - - (47.0) (27.5)

General, administrative and project development (1.0) (0.6) (1.4) (0.2) (4.0) (3.6) (14.8) (12.5) (21.2) (16.9)

Depreciation and amortization (3.5) (3.3) (9.8) (11.0) (8.4) (8.5) (0.6) (0.6) (22.3) (23.4)

Interest and other finance (1.2) (1.3) - - (3.6) (3.6) (10.8) (10.1) (15.6) (15.0)

Foreign exchange and other - - - - - - 1.1 0.4 1.1 0.4

Net income (loss) before tax and non-controlling interest 27.5 24.0 15.6 21.7 9.5 (2.3) (26.6) (23.2) 26.0 20.2

Tax expense(4) - - - - - - (12.3) (8.4) (12.3) (8.4)

Non-controlling interest - - - - - - - - - -

Net income (loss) 27.5 24.0 15.6 21.7 9.5 (2.3) (38.9) (31.6) 13.7 11.8

Preferred Share dividends - - - - - - (2.2) (3.3) (2.2) (3.3)

Net income (loss) attributable to Common Shares 27.5 24.0 15.6 21.7 9.5 (2.3) (41.1) (34.9) 11.5 8.5

Total assets(5) 754.9 788.8 1,234.8 1,183.5 920.5 876.6 100.3 85.9 3,010.5 2,934.8

Capital expenditures(6) 0.1 1.5 5.9 6.1 8.8 8.8 0.2 0.1 15.0 16.5

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Pipelines Midstream Power Corporate(1) TotalSix months ended June 30 2013 2012(2) 2013 2012 2013 2012(3) 2013 2012(2)(3) 2013 2012(2)

Equity income (loss) 49.0 45.4 10.7 23.5 12.5 - (2.6) (0.8) 69.6 68.1

Operating revenues 25.5 23.5 75.4 42.9 60.5 58.6 - - 161.4 125.0

Operations and maintenance (11.0) (10.3) (36.8) (16.3) (30.9) (27.2) - - (78.7) (53.8)

General, administrative andproject development (1.7) (1.3) (2.6) (0.2) (7.5) (7.4) (30.0) (26.5) (41.8) (35.4)

Depreciation and amortization (7.0) (6.6) (19.7) (15.4) (16.9) (16.8) (1.1) (1.1) (44.7) (39.9)

Interest and other finance (2.5) (2.6) - - (7.2) (6.7) (21.4) (18.7) (31.1) (28.0)

Foreign exchange and other - - - - - - 1.6 (0.1) 1.6 (0.1)

Net income (loss) before tax and non-controlling interest 52.3 48.1 27.0 34.5 10.5 0.5 (53.5) (47.2) 36.3 35.9

Tax expense(4) - - - - - - (19.2) (14.5) (19.2) (14.5)

Non-controlling interest - - - - - (0.1) - - - (0.1)

Net income (loss) 52.3 48.1 27.0 34.5 10.5 0.4 (72.7) (61.7) 17.1 21.3

Preferred Share dividends - - - - - - (4.4) (3.3) (4.4) (3.3)

Net income (loss) attributable toCommon Shares 52.3 48.1 27.0 34.5 10.5 0.4 (77.1) (65.0) 12.7 18.0

Total assets(5) 754.9 788.8 1,234.8 1,183.5 920.5 876.6 100.3 85.9 3,010.5 2,934.8

Capital expenditures(6) 1.7 7.3 8.0 6.1 14.2 13.5 0.2 6.6 24.1 33.5

(1) Reflects unallocated amounts applicable to Veresen’s head office activities. Corporate office general and administrative costs for the three and six months ended June 30, 2013 include project development costs of $9.1 million (2012 - $6.4 million) and $15.8 million (2012 - $12.0 million), respectively.

(2) Certain comparative figures as at June 30, 2012 and for the three and six months ended June 30, 2012 have been revised (note 1).(3) Effective January 1, 2013, project development costs are classified in Corporate. As a result, comparative results for Power and

Corporate have been restated.(4) The Company holds its ownership interests in multiple business lines through partnerships, which are consolidated into various corporate

entities. Consequently, the tax provision is determined on a consolidated basis and, as such, the Company is not able to present income tax by segment.

(5) After giving effect to intersegment eliminations and allocations to businesses.(6) Reflects capital expenditures related only to wholly-owned and majority-controlled businesses.

7. Supplemental Cash Flow Information

Three months ended June 30 Six months ended June 302013 2012 2013 2012

Receivables (17.8) (28.7) (13.0) (39.2)Other assets 0.7 1.4 (1.9) (2.4)Payables 21.3 16.4 8.1 14.0Changes in non-cash operating working capital 4.2 (10.9) (6.8) (27.6)

8. Commitments and Contingencies

On March 30, 2012, a Statement of Claim was filed against the Company’s equity-accounted investees, Aux Sable Liquid Products, L.P., Aux Sable Canada L.P., Aux Sable Extraction LP and Aux Sable Canada Ltd., relating to differences in interpretation of certain terms of the NGL Sales Agreement. On March 18, 2013, the Company’s equity-accounted investees were served with a Statement of Claim. The Company’s share of the potential exposure, through its equity investment, is approximately $13.0 million (42.7%). At this time, the Company is unable to predict the likely outcome of this matter.

9. Subsequent Events

On July 22, 2013, the Company declared its July dividend of $0.0833 per Common Share, payable on August 23, 2013 to shareholders of record on July 31, 2013.

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for immediate release veresen announces 2013 second quarter … · 2013-08-07 · for immediate...

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