alliance pipeline limited partnership pipeline limited partnership management’s discussion and...

Year Ended December 31, 2012

Alliance PipelineLimited Partnership

Table of Contents

Management’s Discussion and Analysis 4

Map of Alliance Pipeline System 4

Forward-Looking Information 6

Financial Highlights 7

Operating Highlights 7

Proposed Service Offering 7

2012 Fall System Outage 7

2013 Toll Filing 8

Land Matters Consultation Initiative 8

Chief Executive Officer 9

Corporate Vision & Strategy 9

Corporate Vision 9

Corporate Strategy 9

Market Connectivity 10

Competitiveness 10

Design and System Efficiency 11

Key Goals 11

Health, Safety and Environmental Stewardship 11

Pipeline Safety 11

Environment 12

Leveraging Existing Assets and Competitive Advantages as a Platform for Growth 13

Excellence and Innovation in Operations 13

Delivery Requirements 13

Systems and Processes 14

Strategic Relationships with Equipment Manufacturers 14

Outlook 15

Results Three Months Operations 15

Results Twelve Months Operations 17

Selected Quarterly Information 18

Financial Position Highlights 19

Liquidity and Capital Resources 20

Liquidity 20

Distributions to Partners 21

Capital Management 21

Accounting Policy Changes 21

Adoption of United States Generally Accepted Accounting Principles 21

Risks and Uncertainties 22

Competition 22

Recovery of Capital 22

Dependence on Related Parties 22

Credit Risk 23

Operating Risks 23

Environmental Matters 24

Liquidity Risk 24

Cyber Risk 25

Critical Accounting Estimates 25

Accounting for Rate Regulation 26

Depreciation and Amortization 26

Asset Retirement Obligation 27

Financial Instruments 28

Master Asset Vehicle II Notes 28

Foreign Currency Forward Contracts 28

Related Party Transactions 29

Disclosure Controls and Procedures 30

Internal Controls over Financial Reporting 30

Auditor’s Letter 31

Statements of Income 32

Statements of Comprehensive Income 33

Statements of Cash Flow 34

Balance Sheets 35

Statements of Changes in Partners’ Equity 36

Notes to the Financial Statements 37

Windfall

Blueberry

Taylor

Morinville

Kerrobert

Estlin

Loreburn

Alameda

Irma

Towner

Fairmount

Albert Lea

Wimbledon

Olivia

Aux Sable

Manchester

Tampico

British Columbia Alberta Saskatchewan

NoNoNoNNNorth DakotaNorMinnesota

Iowa

Illinois

Eden Prairie

Calgary

NORTH DAKOTA

UNITED STATES

CANADA

D ST

O

MinotStanley

NewTown

Ray

Williston

TiogaPRAIRIE ROSE PIPELINE 08

Towner Comp. Stn.

Alameda Comp. Stn.

BantryReceipt Point

TIOGA LATERAL PL

Gas Plant

(under construction)

BlueberryStation

TaylorJunctionStation

AuxSablePlant

ALBERTA

Mainline Compressor Stations

Head Offices

Incremental Supply

ACE Hub

Prairie Rose Pipeline

Fort Saskatchewan(Gas Processing Area)

Lateral Compressor Stations

Moontneyy

nDuvernnnayrn

Bakkekkenn

Alliance Pipeline

Septimus Pipeline

Tioga Lateral Pipeline

Alliance Pipeline SystemThe Alliance Pipeline System (the System) has two principal assets: the Alliance Canada Pipeline, owned

and operated by Alliance Pipeline Limited Partnership (Alliance Canada or the Partnership) and the

Alliance USA Pipeline, owned and operated by Alliance Pipeline L.P. (Alliance USA). The System delivers

rich gas - natural gas with relatively high natural gas liquids (NGL) content – through a high-pressure

transmission service primarily from the Western Canadian Sedimentary Basin (WCSB) to the Chicago

area. Our capacity to receive rich gas from the Bakken region in North Dakota is increasing with the

Tioga Lateral Pipeline currently being constructed and expected to be in-service by the third quarter of

2013. In 2010, the Prairie Rose Pipeline interconnection at the Bantry Receipt Station was completed

providing an initial contract capacity of 80 mmcf/d on a long-term basis.

Alliance Pipeline Limited Partnership

Management’s Discussionand Analysis

The Alliance Canada mainline connects to the Alliance USA Pipeline at the Canada/US border near Elmore, Saskatchewan. The Alliance USA Pipeline connects near its terminus in the Chicago area with five interstate natural gas pipelines and two local natural gas distribution systems. These pipelines and local distribution systems service major natural gas consuming areas in the mid-western United States and Ontario with access to residential, commercial, industrial and storage connections. The System is also connected to three ethanol producing plants; two in North Dakota and one in Iowa.

Transporting rich gas increases operating efficiency and delivers more energy to markets than a typical natural gas pipeline. The Alliance System has capacity for 1.6 billion cubic feet of gas per day. The System interconnects at its endpoint near Chicago with the Aux Sable extraction plant. The Aux Sable extraction facility is one of the largest, state-of-the-art extraction and fractionation plants in North America and provides access to multiple NGL markets and distribution channels. The Aux Sable extraction facility is owned by Aux Sable Liquid Products LP (Aux Sable), an affiliate of Alliance Canada. This allows access to export markets for the liquids carried in the gas, such as ethane, propane, butane, and pentane. These liquids sell at prices that correlate more to oil prices than natural gas prices. The extracted liquids are sold in U.S. Midwest market or moved to other markets, such as the U.S. Gulf Coast.

All our transportation service agreements require shippers to pay our service costs monthly, regardless of whether or not they transport gas on the System in a given month.

Alliance Canada is jointly owned by Enbridge Income Partners Holdings Inc. and Veresen Energy Infrastructure Inc. Alliance Canada is subject to federal regulation by the National Energy Board (NEB). Alliance USA is subject to regulation by the Federal Energy Regulatory Commission (FERC).

This Management’s Discussion and Analysis (MD&A) should be read with our December 31, 2012 audited financial statements and our April 18, 2012 Annual Information Form. Where we use capitalized terms we do not define here, they have the same meanings as in our December 31, 2012 audited financial statements. All financial information is in Canadian dollars unless otherwise noted.

On May 4, 2011 Alliance Canada applied to the Canadian securities regulators under section 5.1 of National Instrument 52-107 – Acceptable Accounting Principles and Auditing Standards (NI 52-107) for exemptive relief from the requirements of section 3.2 of NI 52-107. On June 17, 2011 we received exemptive relief that permits us to prepare and file financial statements in accordance with United States Generally Accepted Accounting Principles (US GAAP) for financial years commencing on and after January 1, 2012 but before January 1, 2015. Alliance Canada adopted US GAAP effective January 1, 2012 and all financial information in this MD&A has been prepared in accordance with US GAAP.

This adoption date requires the applying of US GAAP retrospectively, for comparative purposes, of amounts reported by Alliance Canada for the annual and quarterly periods within the year ended December 31, 2011. Alliance Canada’s financial statements reflect this change in accounting standards.

Alliance Pipeline Limited Partnership Management’s Discussion and Analysis

Windfall

Blueberry

Taylor

Morinville

Kerrobert

Estlin

Loreburn

Alameda

Irma

Towner

Fairmount

Albert Lea

Wimbledon

Olivia

Aux Sable

Manchester

Tampico

British Columbia Alberta Saskatchewan

NoNoNoNNNorth DakotaNorMinnesota

Iowa

Illinois

Eden Prairie

Calgary

NORTH DAKOTA

UNITED STATES

CANADA

D ST

O

MinotStanley

NewTown

Ray

Williston

TiogaPRAIRIE ROSE PIPELINE 08

Towner Comp. Stn.

Alameda Comp. Stn.

BantryReceipt Point

TIOGA LATERAL PL

Gas Plant

(under construction)

BlueberryStation

TaylorJunctionStation

AuxSablePlant

ALBERTA

Mainline Compressor Stations

Head Offices

Incremental Supply

ACE Hub

Prairie Rose Pipeline

Fort Saskatchewan(Gas Processing Area)

Lateral Compressor Stations

Moontneyy

nDuvernnnayrn

Bakkekkenn

Alliance Pipeline

Septimus Pipeline

Tioga Lateral Pipeline

Forward-looking Information

This MD&A reviews the significant events and transactions that affected our performance during the three and twelve months ended December 31, 2012 relative to the same periods in 2011. Some information in this MD&A is forward-looking information under applicable Canadian securities laws. All information about activities, events or developments that we think, may or will occur is forward-looking information. Forward-looking information typically consists of statements containing words suggesting future outcomes or outlook, like “may”, “estimate”, “anticipate”, “believe”, “expect”, “plan”, “intend”, “target”, “project”, “proposed”, “forecast” or similar words. Forward-looking information in this MD&A includes:

considering whether available credit facilities can sufficiently fund our operations and planned capital expenditures;

the timing, scope and nature of proposed contract offerings;

assessing our ability to re-contract firm capacity past the primary contract term;

the proposed in-service dates of announced and current construction projects;

the System’s ability to accommodate new receipt volumes with variant gas compositions.

The risks and uncertainties that may affect the operations and development of our businesses include the following:

our ability to successfully implement our strategic initiatives and achieve expected benefits;

the status, credit risk and continued existence of contracted shippers;

the availability and price of capital;

the availability of energy commodities;

changes in regulatory, environmental, and other laws and regulations;

competitive factors in the pipeline and natural gas liquids industries;

operational breakdowns, failures, or other disruptions;

prevailing economic conditions in North America.

This list is not exhaustive. Our filings with the securities commissions or similar authorities in each of the provinces and territories of Canada contain additional information on the items listed above. Our filing also addresses other risks, uncertainties, and factors that could affect our operations or financial results. We cannot predict the effect of any particular risk, uncertainty, and influencing factor on a forward-looking statement, because we would have to assess it at that time in light of information available then. Each risk, uncertainty, and influencing factor is independent of the others, and each one, or a combination, may lead to different results.

Although we believe that the expectations conveyed by the forward-looking information are reasonable based on information available to us on the date we prepared this MD&A, we can give no assurances about future results. Readers should not place undue reliance on the forward-looking information, as actual results may vary materially from the information in this MD&A. In addition, we made the forward-looking statements in this MD&A on today’s date and we have no obligation to publicly update or revise any forward-looking information. This cautionary statement expressly qualifies all forward-looking information in this MD&A.

Additional information about our business is available on SEDAR or at www.alliancepipeline.com.


Financial Highlights

Twelve months ended December 31,

(millions of dollars, unless otherwise noted) 2012 2011 2010

Revenue 462.5 457.3 457.2

Comprehensive income 108.0 115.2 118.8

Comprehensive income per unit ($)(1) 169.7 181.1 186.8

Total assets 1,791.0 1,923.6 2,016.2

Long-term debt 1,120.3 1,200.1 1,271.4

Partner distributions paid (2) 148.7 150.5 152.8

Distributions paid per unit ($)(1) 233.8 236.6 240.2

(1) Per unit comparisons reflect amounts available to limited partners (99%). 629,765.1 units were outstanding for each of the reporting periods presented above.

(2) Distributions are paid net of the 30% equity share of maintenance capital expenditures (Equity Holdback).

Operating Highlights

Proposed Service Offerings

On October 10, 2012, Alliance Canada unveiled proposed new service offerings. The new services model builds on Alliance Canada’s rich gas advantage and provides shippers with choices that include a segmented service structure in Canada. The implementation date is December 2015, at which time the 15-year primary term of the original transportation agreements with shippers will end.

Alliance Canada’s proposed new service offering is designed to offer increased flexibility, with cost-effective and predictable tolls. Under the proposal, the Canadian pipeline will be split into two receipt zones and one transmission zone. Shippers would pay a fixed volumetric toll on the receipt zones. We will also give shippers choices including a fixed transmission zone toll or a variable based toll that varies with the Chicago-AECO market basis. Shippers may also sell their natural gas out of the receipt zones into a new Alliance Transfer Pool. The U.S. transmission service from the Canada – U.S. border to the terminus of the System would remain relatively unchanged. A full path service from Canadian receipt points to Chicago will still be offered. Tolls can vary based on length of term.

2012 Fall System Outage

Population growth adjacent to a pipeline’s right-of-way is a common event that occurs throughout Canada. However, when industrial, commercial or residential development occurs close to a pipeline right-of-way, the NEB requires pipeline companies to assess the circumstances and decide if there is a need for remedial action.

The development of a commercial establishment near the Alliance Canada mainline in northwestern Alberta, close to Whitecourt, resulted in a reclassification of the applicable pipeline design parameters for this localized pipeline segment.


The NEB directed us to replace this segment with heavier-wall pipe by May 31, 2013. The NEB also allowed us to consider re-routing the pipe or reducing pressure within this same time frame. Ultimately, Alliance Canada requested NEB approval to re-route this pipe segment.

The NEB approved Alliance Canada’s re-route plan on June 13, 2012. On October 1, 2012 the Alliance Canada portion of the System temporarily shut down for the first time since operational start up in 2000 to allow re-routing of the pipe.

We suspended firm service and Authorized Overrun Service (AOS) during the outage. AOS was also affected in the days leading up to and after the outage. Natural gas transportation service on the Alliance Canada pipeline resumed on October 4, 2012 ahead of the originally anticipated 96-hour schedule.

Alliance Canada expects to recover all costs of the NEB safety related order through its 2013 tolls. Total project costs included in the 2013 tolls were forecasted at $15.0 million which includes $5.0 million of indirect costs associated with Alliance Canada’s inability to meet its firm service delivery requirements during the outage.

2013 Toll Filing

On October 31, 2012, we filed amended tolls with the NEB following consultation with our shippers. Effective January 1, 2013, our 2013 firm service transportation tolls increased $0.02/mcf or 2.2% from $0.925/mcf to $0.945/mcf. The increase in tolls is primarily due to higher provisions for current income taxes, higher negotiated depreciation rates for 2013, and an increase in expenditures related to operational pipeline systems applications. The increases are partially offset by a decrease in interest expense on senior debt, a reduction in maintenance expenditures and a decrease in the return on equity due to a declining investment base.

The 2013 tolls are interim to date, pending settlement of an intervention filed with the NEB by two shippers. This intervention is in respect of indirect costs of approximately $5.0 million included in the 2013 toll filing. The costs in question were incurred during the fall 2012 System outage, which occurred to comply with an NEB safety order.

Land Matters Consultation Initiative

Alliance Canada is responsible for compliance with all laws and regulations concerning the abandonment of the pipeline and related facilities at the end of their respective lives. In the fall of 2007, the NEB established a Land Matters Consultation Initiative (LMCI) as part of its examination of key land issues. The LMCI is a result of a desire to improve understanding and dialogue between pipeline companies and landowners.

On May 26, 2009, the NEB adopted a report on the financial issues of pipeline abandonment that will require companies to set aside funds to cover future abandonment costs. The issuance of this report followed a public hearing, held in January 2009, into the financial matters of pipeline abandonment.

As a result of the mandated framework and action plan, Alliance Canada filed preliminary abandonment cost estimates, largely based on NEB assumptions, on November 30, 2011. As part of the NEB submission, included were refined versions of the preliminary physical plans for pipeline abandonment, originally filed on May 31, 2011.

The NEB held Pipeline Abandonment hearings in early November 2012 to consider the reasonableness of each company’s submitted cost estimates, including abandonment methods, environmental considerations, the scope and rationale for each abandonment activity considered for estimating the costs, and the approach to the estimation of the contingency and provisions for post-abandonment. Decisions from the November hearings are expected from the NEB in February 2013. The NEB’s finding may result in pipeline companies filing revised cost estimates.


The next steps include filings from the pipeline companies in February 2013 for the Set-Aside Mechanism which will be held in trust and a filing detailing the Collection Mechanism, which is the annual collection amount, due in May 2013.

Under the NEB’s current directive, Alliance Canada will have to start collecting such funds no later than the 2015 toll year.

Chief Executive Officer

The Board of Directors of Alliance Pipeline Ltd. appointed Mr. Terrance Kutryk as the President and Chief Executive Officer effective October 1, 2012. He replaced Mr. Murray Birch who retired on July 31, 2012.

Corporate Vision & Strategy

Corporate Vision

Alliance Canada’s vision is to:

expand the delivery of safe, reliable, and efficient energy in North America;

provide shipper value by offering superior natural gas transportation services;

set standards for the industry by implementing new technology to enhance pipeline optimization.

We are committed to deliver customer focused services to meet the demands of the natural gas transportation market well into the future.

Corporate Strategy

Since initiating operations, we have concentrated on our core business by meeting our company objectives in all key areas of operational performance: availability, reliability, safe operations, throughput and efficiency. Alliance Canada and Alliance USA operate state-of-the-art technology, providing a high-pressure, liquids-rich service from western Canada to the Chicago market hub. We have developed strategic relationships with major equipment manufacturers enabling us to lower maintenance costs, achieve higher equipment availability and access operating equipment best practices.

We have implemented a number of pipeline system optimization projects including installation of the Taylor Junction compressor station, which started commercial operations in 2009, in response to shipper demand for increased receipt capacity from northeastern British Columbia. We have further increased our receipt capacity from liquids-rich sources of natural gas. These include the Montney shale play connecting into Alliance Canada and the Bakken formation in North Dakota delivering into Alliance USA.

Since 2010, Alliance Canada has added 375 mmcf/d of new receipt capacity to the System. A new receipt interconnect for an additional 40 mmcf/d of contract capacity onto the Fort St. John Lateral Pipeline is expected to be in-service late in the first quarter of 2013. We also entered into an agreement in February, 2013 to develop and construct a facility to connect a new shipper owned lateral line into Alliance Canada’s existing Kaybob North Lateral. The facility design will allow for an additional 140 mmcf/d of receipt capacity onto the System and is expected to be in-service in the second quarter of 2013.


In the Bakken formation we connected the Prairie Rose Pipeline in 2010 and started construction of the Tioga Lateral Pipeline in the fall of 2012, which we expect to be in-service in the third quarter of 2013.

We launched the ACE Hub service on the Alliance USA delivery header system in 2011. It saw immediate shipper interest, and represents a step forward in our progress to a multi-service business model. We expect that the ACE Hub will continue to expose Alliance USA to new customers and commercial prospects, and contribute to our future business growth.

In preparing for contracting after 2015, when the original primary term of the transportation contracts expires, Alliance Canada has consulted with shippers and is proposing new services and tolls. We have designed the new terms to provide maximum flexibility; including fixed and variable tolls, and varying contract lengths. Discussions with shippers continue to focus on incremental services before 2015 and new services beyond 2015.

We believe the advantages of the Alliance System include:

market connectivity;

competitiveness;

design and operational efficiency.

Market connectivity

Alliance Canada’s pipeline is close to significant natural gas production areas in northeastern British Columbia and northwestern Alberta including liquids-rich plays such as the Montney and Duvernay. Production in this region has grown by 14% since 2001 driven by recent rich gas development and approximately 5.5 bcf/d of natural gas production is within a 40 km radius of the Alliance Canada Pipeline.

The Bakken region in North Dakota has been a very successful and rapidly growing shale oil play with significant associated rich gas production. We anticipate that on-going development may result in a substantial expansion of gas production that could be delivered to the System. In 2011, firm long-term contract capacity from the Prairie Rose Pipeline doubled to 80 mmcf/d. In the last few months of 2012, over 100 mmcf/d has been delivered to the Alliance System through the interconnection at Bantry, North Dakota. We have also contracted with a shipper to transport 62 mmcf/d on the Tioga Lateral Pipeline, which is currently under construction with a design capacity of 126 mmcf/d. Both the interconnection at the Bantry Receipt Station and the Tioga Lateral Pipeline, through the addition of in-fill compression, can be expanded to accommodate future growth beyond current design capacities.

Two factors have enabled Alliance USA to offer new market hub services at its delivery header in the Chicago area to existing shippers and new customers:

the liquidity of the Chicago market;

the associated takeaway capacity and diversity of pipeline connections.

The delivery header has over 6 bcf/d of downstream natural gas receipt capability with major interstate pipelines and local gas distribution systems in the mid-western U.S. These interstate pipelines and local gas distribution systems supply residential, commercial and industrial customers, and have access to gas storage facilities.

Competitiveness

Alliance Canada’s tariff provisions contain a volumetric tolling methodology that benefits shippers that deliver high-energy natural gas.


Competitive transportation tolls currently provide shippers with daily AOS. AOS is available capacity offered to shippers in proportion to their contracted shipping capacity for no extra cost beyond fuel gas. AOS reduces shippers’ effective per unit transportation cost.

Since the startup of operations on December 1, 2000, Alliance Canada has averaged 1.9% annual transportation toll increases.

Design and operational efficiency

A high-pressure pipeline service provides for the dense phase transmission of rich gas, which increases the efficiency of the System.

We designed the System with the capability to accommodate higher energy natural gas either at current receipt stations or at new stations with what is expected to be minor System modifications and routine regulatory approvals. This is an advantage in the current environment in which liquids-rich gas drilling is common. The System design provides an alternative for liquids-rich gas shippers looking to avoid building costly field extraction plants.

The System was designed to be able to increase the firm transportation capability by approximately 30% by adding compression facilities. While an expansion is not imminent, adding compressor stations may prove to be less expensive than constructing new large diameter pipeline facilities, which require more extensive regulatory and environmental approvals and possibly additional right-of-way.

Key Goals

Our key goals focus on:

health, safety and environmental stewardship;

leveraging existing assets and competitive advantages as a platform for growth;

excellence and innovation in operations.

Health, Safety and Environmental Stewardship

Alliance Canada is committed to high standards of environmental protection when designing, building and operating its facilities. We are also committed to maintaining public and employee health and safety throughout all operations and construction. We believe that health and safety are the responsibility of each employee and contractor and that accident prevention is an integral part of every job.

At Alliance Canada, we never compromise safety and environmental stewardship is one of our core values. We consider both in our daily decisions and actions with the goal of being incident free and environmentally responsible. That means protecting the environment around us and keeping our neighbours, employees and contractors safe. We comply with or exceed all applicable health, safety and environmental laws and regulations in all material respects.


Pipeline safety

Natural gas pipelines in Canada are required to meet construction, operating and maintenance standards established by the NEB, other federal regulators and the Canadian Standards Association. Alliance Canada is subject to the NEB’s Onshore Pipeline Regulations for designing, constructing, operating and abandoning pipelines. Operationally we comply in all material respects with the NEB Act, the Onshore Pipeline Regulations, and all applicable safety regulations, standards and codes. Our practices and procedures are common in the pipeline industry and meet applicable laws in all material respects.

We conduct, and expect to continue conducting patrols of rights of way and required inspections and audits of items such as cathodic protection, relief valves and mainline valves. In addition to complying with normal operating and maintenance requirements, we have rigorous integrity management programs that periodically assess the condition of the System.

An update of Alliance Canada’s Emergency Management Plan was completed and implemented in 2012. Alliance Canada conducted routine internal safety and security inspections at its compression facilities in 2012 with corrective actions being identified and addressed as appropriate. Alliance Canada is currently developing a structured Health and Safety Management System based on Occupational Health and Safety Management Guidelines.

Environment

In designing the System, Alliance Canada took advantage of being able to design all our facilities at the same time using modern technology and materials. The most significant of these design features are:

dry low emission turbines that use state-of-the-art technology to reduce nitrogen oxides and carbon dioxide (CO2) emissions, and increase fuel efficiency when driving the mainline compressors;

internally coated pipe to reduce friction, thereby reducing fuel consumption;

high pressure/rich gas technology that also improves efficiency.

These features make the System more efficient than older, conventional designs of natural gas pipelines. However, greenhouse gas (GHG) emissions are created when natural gas combusts in turbines to drive compressors that move natural gas through the System. Although we have reduced the GHG emissions by using high efficiency gas turbines, the emissions intensity from the System still exceeds the net emissions intensity limit calculated under Alberta’s Specified Gas Emitters Regulation (SGER). Under the SGER, facilities that emit more than 100,000 tonnes of CO2 must reduce their emissions intensity by 12 percent of their baseline emissions. Further emission reductions at the source for high efficiency turbines are difficult to achieve. Our remaining options to meet Alberta emission reduction targets are to purchase Alberta Climate Change Fund credits at $15.00 per credit (1 credit = 1 tonne of CO2 emission reductions) or to purchase offsets from qualified projects. The anticipated cost to purchase credits for 2012 is $1.2 million, with the final cost to be determined in the first quarter of 2013. The increase in cost over 2011 comes from additional credits needed to offset emissions from Alliance Canada’s mainline outage in the fall of 2012. The cost of these credits is included in the transportation tolls.

The government of British Columbia implemented the Carbon Tax Act in 2008, which taxes the consumption of all fuel sources in the province. Alliance Canada’s Taylor Junction compressor station is subject to this tax and the cost for 2012 is expected to be $0.5 million based on current operations. As of July 2012, the Carbon Tax has increased to $30 per CO2 equivalent ($0.057 per m3 of natural gas consumed). A provincial review is currently underway to determine the next steps for any tax increase or decrease.


In Saskatchewan, The Management and Reduction of Greenhouse Gases Act was introduced in the provincial legislature and received Royal Assent on May 20, 2010. When enacted, the Act will set emission reduction targets and impose a carbon compliance payment if the target is not achieved. We expect the requirements and compliance options to be similar to those in Alberta and anticipate that they will be in place within the next year.

We also expect our facility emissions to exceed the regulatory threshold for the anticipated federal regulatory framework in Canada, although the timing for enacting this framework is uncertain. It is probable that we will need to comply with a federal regulatory scheme in Canada since our pipeline crosses several provinces and is regulated by the NEB.

Alliance Canada also conducts regular inspections of its facilities, allows inspections when agencies that monitor us request them, and follows defined practices to meet regulatory requirements during the construction, operation and maintenance of its facilities.

Leveraging Existing Assets and Competitive Advantages as a Platform for Growth

Alliance Canada’s strategy is to grow from a single-service, single-toll pipeline to a multi-service pipeline. This will enhance its competitive position by giving shippers greater commercial options, attracting a more diverse shipper community and creating new sources of revenue. We have designed the proposed new service offerings to attract and retain customers, and build on existing infrastructure.

To increase growth, Alliance Canada will leverage its advantages including:

The pipeline has a unique ability to transport rich gas, a combination of natural gas (methane) and natural gas liquids (such as ethane, propane, and butane). This delivers more product (energy) to market than a typical natural gas pipeline system at competitive tolls. This transportation advantage positions Alliance Canada to be competitive in producing areas in British Columbia, Alberta and the Bakken region. With fractionation spreads for NGL in today’s market, the value of the delivered products in the markets accessed by the System has the potential to be higher than on competitor’s pipelines. The System’s efficiency in preserving liquids until the point of liquid extraction considerably increases the value of the rich gas.

The Aux Sable NGL extraction and fractionation plant connects to the pipeline near its terminus in the Chicago area. One of the largest plants of its type in North America, this state-of-the-art facility provides access to multiple NGL markets, distribution channels, and storage.

Excellence and Innovation in Operations

Alliance Canada is focused on maximizing reliability, availability and throughput of its transportation services in a safe and environmentally responsible manner. We continue to ensure effective and prudent management of our operating costs, as part of our focus on Alliance Canada’s long-term competitiveness.

Delivery requirements

Alliance Canada provides firm take-or-pay transportation services under negotiated contracts, and shippers are required to pay for contracted volumes regardless of whether they ship natural gas. With the exception of the NEB directed fall outage, Alliance Canada continues to meet its contracted daily firm service shipping requirements and shippers continue to use substantially all the AOS we offer.


The average AOS we offered for 2012 was 17.2%, compared to the 18.0% offered in 2011. The decrease in offered AOS was primarily because of an increase in maintenance work during 2012 (including scheduled compressor control panel replacements). We expect the 2013 offered AOS to be similar to 2012.

Systems and processes

The main control centre for the System is in Alberta, and has control, alarm and leak detection monitoring capability. Control centre operators can remotely shut down individual stations or facilities on the System. In addition, each remote station has local emergency shutdown capabilities. We have also established a back-up control centre in a different location in Alberta.

We use a satellite communications system to transmit data to and from remote facilities and the main and back-up control centres. The satellite system is backed up by land lines to the remote facilities. Mainline block valves are linked to the control centre to monitor gas pressure and temperature and allow for rapid closure of block valves in emergencies.

Each compressor station is designed to be unmanned, but all are continuously monitored and operated year-round from the manned system control centre. On-site sensors monitor and automatically control compressor station performance and throughput. These sensors monitor major compressor station equipment for parameters such as temperature, pressure and vibration.

Our gas management system is a critical element of our business. It meets both business and regulatory requirements through services such as contract management, customer account management, capacity release, nomination entry, scheduling, confirmation and allocation, imbalance management, invoicing and reporting.

Alliance Canada’s maintenance program includes semi-annual inspections of compressor stations as well as internal corrosion inspections and annual pipe-to-soil surveys, atmospheric inspections, above ground indirect assessments and the repair and replacement of compressor parts. We complete in-line inspection of the mainline pipeline on a seven year recurring schedule. Maintenance expenditures vary from year to year. Alliance Canada is now into its second decade of operations and as the System matures and technology changes, we anticipate increased maintenance requirements.

Strategic relationships with equipment manufacturers

We have developed a strategic supply and equipment maintenance relationship with the manufacturers of major components on Alliance Canada’s compressor units.

One long-term contract has provided major compressor equipment maintenance services since 2008 and our contract covers these services through 2017. Additional services under this agreement include resident engineers and technicians that can provide expertise aimed at enhancing Alliance Canada’s efficient, reliable and economic equipment operation. These are achievements that might not otherwise be possible under a more standard maintenance and overhaul program. We track Key Performance Indicators (KPIs) to evaluate the effectiveness of the maintenance program. KPIs evaluated include equipment availability, mean time between failures, fired hour costs and the depot and workshop turnaround time for major overhauls.

A second contract covers replacing control panels that run the power turbine, gas generator and compressor unit functions at the mainline compressor facilities along the System. The current control panel software and equipment are becoming obsolete and the vendor will discontinue their support for the components in 2013. Panel replacements continued through 2012, with 47% of the System replacements completed to date. We have planned installations of control panels at the remaining compressor sites throughout the System in 2013 and 2014.


Outlook

Current market dynamics, including advantageous NGL fractionation margins, and expanded liquids-rich gas supply from unconventional development are key growth drivers for Alliance Canada given the System’s strength is its rich gas capability. With fractionation spreads for NGL in today’s market, the value of the delivered product and potential netbacks to shippers have the opportunity to be higher than on competitor pipelines. The System is flexible enough to be able to transport natural gas with higher heat content than current levels. This added flexibility can be achieved with what are expected to be minor modifications to the System.

Currently, Alliance Canada is in consultation with existing and prospective shippers regarding the proposed new services, described in the Corporate Strategy section. Alliance Canada is planning to have precedent agreements signed in 2013, after which an open season process will be used to determine any additional shipper interest. The next several years represent a transition period covering the development, regulatory approval, contracting and implementation of the proposed new services to replace the transportation contracts which end in December, 2015.

Results of Operations for the Three Months Ended December 31, 2012

(millions of dollars, unless otherwise noted) 2012 2011 Change $ Change %

Transportation revenue 122.0 124.8 (2.8) (2.2)

Operating expense 42.0 44.5 (2.5) (5.6)

Depreciation expense 34.0 29.9 4.1 13.7

Interest expense 21.2 22.2 (1.0) (4.5)

Comprehensive income 27.3 28.4 (1.1) (3.9)

Partner distributions paid 37.1 37.2 (0.1) (0.3)

Cash provided by operating activities 26.2 34.7 (8.5) (24.5)

Capital expenditures (1.0) (5.1) 4.1 -

Average daily throughput volume (bcf/d) 1.561 1.562 N/A (0.6)

Transportation Revenue

Transportation revenue decreased $2.8 million to $122.0 million for the three months ended December 31, 2012, compared to $124.8 million for the three months ended December 31, 2011. The decrease is mainly due to lower actual cost of service as compared to Q4, 2011, which is partially offset by an increase of the 2012 transportation tolls compared to the 2011 transportation tolls. Effective January 1, 2012, the 2012 firm service transportation tolls increased $0.011/mcf or 1.2% from $0.914/mcf to $0.925/mcf.


Operating Expense

Total operating expenses are $42.0 million for the three months ended December 31, 2012 compared to $44.5 million for the three months ended December 31, 2011. The change is mainly due to relatively higher fourth quarter 2011 equipment maintenance and pipeline integrity expenses. Activities in 2011, which included in-line inspections and the purchase of replacement control panels for the compressors, are cyclical in nature and did not occur in the fourth quarter of 2012.

Depreciation Expense

Depreciation expense increased $4.1 million to $34.0 million for the three months ended December 31, 2012 compared to $29.9 million for the same three months in 2011. The increase is due to the decommissioning of a receipt meter station and compressor station at the Paddle River site in Alberta, and the residual value associated with the asset.

Interest Expense

Interest expense decreased $1.0 million to $21.2 million for the three months ended December 31, 2012 compared to $22.2 million for the three months ended December 31, 2011. The interest expense is lower due to declining long-term debt balances as a result of scheduled principal payments on the senior notes.

Comprehensive Income

Comprehensive income decreased $1.1 million to $27.3 million for the three months ended December 31, 2012, compared to $28.4 million for the three months ended December 31, 2011. The decrease is mainly due to a lower return on equity, which is the result of a depreciating investment base, and a reduction in the allowance for income taxes.

Partner Distributions Paid

Distributions paid to partners remain essentially unchanged, at $37.1 million for the three months ended December 31, 2012 compared to $37.2 million for the same quarter in 2011.

Cash Provided by Operating Activities

Cash provided by operating activities is $26.2 million for the three months ended December 31, 2012 a decrease of $8.5 million, compared to $34.7 million for the three months ended December 31, 2011. The reduction is due to a decrease in the current portion of the regulatory liabilities, which represents the difference between expenses included in the financial statements and expenses included in transportation tolls. The decrease is partially offset by an increase in trade accounts payable.

Capital Expenditures

Capital expenditures are a net reduction of $1.0 million, compared to a net reduction of $5.1 million for the fourth quarter of 2011. The net reduction is due to a decrease in inventory levels of capital spares used in the fall maintenance activities.


Results of Operations for the Twelve Months Ended December 31, 2012

(millions of dollars, unless otherwise noted) 2012 2011 Change $ Change %

Transportation revenue 462.5 457.3 5.2 1.1

Operating expense 147.5 133.0 14.5 10.9

Depreciation expense 124.2 120.1 4.1 3.4

Interest expense 86.2 90.3 (4.1) (4.5)

Comprehensive income 108.0 115.2 (7.2) (6.3)

Partner distributions paid 148.7 150.5 (1.8) (1.2)

Cash provided by operating activities 215.8 238.2 (22.4) (9.4)

Capital expenditures 3.1 - 3.1 N/A

Average daily throughput volume (bcf/d) 1.553 1.564 N/A (0.7)

Transportation Revenue

Transportation revenue increased $5.2 million to $462.5 million for the twelve months ended December 31, 2012, compared to $457.3 million for the twelve months ended December 31, 2011. The increase is mainly due to a higher actual cost of service and an increase in the 2012 transportation tolls compared to the 2011 transportation tolls. Effective January 1, 2012, the 2012 firm service transportation tolls increased $0.011/mcf or 1.2% from $0.914/mcf to $0.925/mcf.

Operating Expense

Total operating expenses are $147.5 million compared to $133.0 million for the twelve months ended December 31, 2011. The change is mainly due to increased project costs which include: mainline pipe replacement to remediate a right-of-way encroachment; compressor control panel replacement; and higher compensation expenses.

Depreciation Expense

Depreciation expense increased $4.1 million for the twelve months ended December 31, 2012 in comparison to the twelve months ended December 31, 2011. The increase is due to the residual value of a receipt meter station and compressor station that were decommissioned at the Paddle River site in Alberta.

Interest Expense

Interest expense decreased $4.1 million to $86.2 million for the twelve months ended December 31, 2012 compared to $90.3 million for the twelve months ended December 31, 2011. The interest expense is lower due to declining long-term debt balances as a result of scheduled principal payments on the senior notes.

Comprehensive Income

Comprehensive income decreased $7.2 million to $108.0 million for the twelve months ended December 31, 2012, compared to $115.2 million for the twelve months ended December 31, 2011. The decrease is mainly due to a lower return on equity, which is the result of a depreciating investment base and a reduction in the allowance for income taxes.


Partner Distributions Paid

Distributions paid to partners decreased by $1.8 million to $148.7 million for the twelve months ended December 31, 2012 compared to $150.5 million for the twelve months ended December 31, 2011. The decrease is due to relatively higher distributions in the first quarter of 2011, which included a $3.5 million litigation settlement.

Cash Provided by Operating Activities

Cash provided by operating activities is $215.8 million for the twelve months ended December 31, 2012 a decrease of $22.4 million, compared to $238.2 million for the twelve months ended December 31, 2011. The decrease is due to lower regulatory liabilities, which represent the difference between expenses in the financial statements and expenses included in transportation tolls. The decrease is offset by an increase to trade accounts payable and accrued liabilities.

Capital Expenditures

Capital expenditures are $3.1 million, an increase of $3.1 million compared to 2011. Capital expenditures in 2012 include an increase in capital spares and head office renovations.

Selected Quarterly Financial Information

(millions of dollars, except where noted)

2012

2011

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Transportation revenue 122.0 118.1 115.9 106.5 124.7 114.4 109.7 108.5

Comprehensive income 27.3 26.6 26.9 27.2 28.4 29.7 28.5 28.6

Comprehensive income per unit ($)(1) 42.9 41.9 42.2 42.8 44.6 46.7 44.8 44.9

Partner distributions paid (2) 37.1 37.2 37.2 37.2 37.2 36.5 36.2 40.6

Distributions paid per unit ($)(1) 58.3 58.5 58.5 58.5 58.5 57.4 56.9 63.8

(1) Per unit comparisons reflect amounts available to limited partners (99%). The number of units outstanding for each of the above reporting periods was 629,765.1.

(2) Distributions are paid net of the 30% equity share of maintenance capital expenditures (Equity Holdback).

A key benefit of Alliance Canada’s consistent and stable operations is limited variability in results. Variations generally result from one-time events. Interim results may fluctuate due to seasonal spending patterns as revenue is recognized relative to cost of service expenses in the period in which the cost of service is incurred.

Significant items that impacted the quarterly financial results include the following:

The fourth quarter 2012 transportation revenue reflects higher cost of service expenses as a result of an NEB directive to re-route a section of mainline pipeline. The project was completed in October, 2012 and project costs are reflected in the third and fourth quarters of 2012. As well, during the outage several additional maintenance activities were performed.



The third quarter 2012 transportation revenue reflects higher operating expenses as a result of the NEB directive to re-route a section of mainline pipeline.

The second quarter 2012 transportation revenue reflects higher operating expenses as a result of seasonal variation.

The first quarter 2012 transportation revenue reflects lower operating expenses as a result of seasonal variation and a lower return on equity due to a depreciating investment base.

The fourth quarter 2011 transportation revenue reflects an increase in the cost of service for compressor control panel replacements at several compressor sites, a project to remediate river bank erosion and subsequent pipe exposure, a compressor overhaul not included in the monthly equipment maintenance agreement and an increase in monthly office rental expenses.

The third quarter 2011 transportation revenue reflects higher operating expenses due to the deferral of some operating and project activities from the first and second quarters to the third quarter.

The second quarter 2011 transportation revenue reflects lower operating expenses due to the deferral of some operating and project activities to later in the year, along with reductions in government levies and Alberta property taxes.

The first quarter 2011 distributions reflect the receipt of a construction litigation settlement in the fourth quarter of 2010, subsequently included in the first quarter 2011 distributions. The first quarter 2011 revenue reflects a decrease in the cost of service resulting from year over year differences between estimates and actual payouts for compensation plans, lower operations expenses due to the deferral of some operating and project activities to the second quarter of 2011, and a reduction in government levies. The first quarter 2011 comprehensive income reflects a lower return on equity due to a depreciating investment base.

Financial Position Highlights

As At

(millions of dollars) December 31, 2012 December 31, 2011

Current assets 93.4 92.5

Long-term assets 1,697.6 1,831.0

Current liabilities 104.8 116.7

Long-term liabilities 1,128.5 1,209.5

Partners’ equity 557.6 597.4

The total current assets at December 31, 2012 are $93.4 million compared to $92.5 million at December 31, 2011. The change is due to increases in the current portion of the regulatory assets, which represent differences between expenses included in the financial statements and expenses included in transportation tolls, and an increase in the current portion of the long-term receivable, which represents the differences between the depreciation rates negotiated in the transportation service contracts and the depreciation rates used for financial statement reporting. The increase is mostly offset by a decrease in trust accounts.

Long-term assets decreased to $1,697.6 million during the twelve months ended December 31, 2012. The decrease is primarily due to lower net property, plant and equipment balances as a result of on-going depreciation.


Current liabilities at December 31, 2012 are $104.8 million compared to the December 31, 2011 balance of $116.7 million, a decrease of $11.9 million for the twelve month period. The decrease is mainly due to lower trade accounts payable and accrued liabilities, and a reduction in the current portion of the regulatory liabilities, which represent differences between expenses included in the financial statements and expenses included in transportation tolls.

Long-term liabilities decreased $81.0 million to $1,128.5 million for the twelve months ended December 31, 2012. The decrease is mainly due to the scheduled repayment of principal on the senior notes, which is payable semi-annually in June and December.

Partners’ equity decreased $39.8 million for the twelve months ended December 31, 2012. This decrease is a result of the 2012 year to date distributions of $148.7 million to the partners, which is partially offset by comprehensive income for the twelve months of $108.0 million.

Liquidity and Capital Resources

Liquidity

Liquidity risk is managed by ensuring access to sufficient funds to meet obligations. Alliance Canada forecasts cash requirements to ensure funds are available to settle liabilities as they become due. The primary sources of liquidity are transportation tolls, undrawn credit facilities and owner funding. Working capital deficiencies may occur from time to time as a result of seasonal activity fluctuations, but have no material effect on the liquidity of the Partnership because of regular monthly cash flow from operations. In 2012, transportation toll receipts collected from shippers, total approximately $38.1 million each month providing sufficient funds to meet operational cash flow requirements until the next revenue cycle.

Alliance Canada also holds in its debt service reserve account an amount equal to at least six months’ interest and principal payments on the senior notes, which is funded by letters of credit as part of the bank credit facility. The debt service reserve is in addition to funds transferred monthly to the debt service account held for the semi-annual interest and principal payments on the senior debt outstanding and the monthly debt service amounts due on the credit facilities.

Funds available under the revolving credit facility may also be accessed from time to time should cash receipts prove insufficient to fund the month’s operating and investing activities. The Partnership may need to refinance its indebtedness or may require additional financing depending on future developments, enhancement opportunities or acquisition plans.

As of December 31, 2012, Alliance Canada has $31.6 million in cash and trust deposit accounts. Cash totaling $29.5 million is held in trust accounts to meet certain covenants contained in financing agreements. Undrawn bank credit facilities are $118.0 million at December 31, 2012. The total of cash, trust deposits and the bank credit facility are, in management’s view, adequate to meet on-going liquidity and capital resource requirements.

Alliance Canada has estimated capital expenditures of $14.5 million for 2013. Capital plans for the upcoming year include pipeline optimization projects and head office renovations.


Distributions to Partners

Distribution decisions are made by the Board of Directors of Alliance Pipeline Ltd., the General Partner, on the basis of cash flow, financial requirements and other conditions existing at the time. Distributions may be made quarterly, subject to Alliance Canada satisfying certain financing conditions, which include a debt service coverage ratio. Subject to lender approval, a distribution of $37.1 million is planned to be paid by Alliance Canada to its partners on January 30, 2013. We intend to continue to make future partner distributions on a quarterly basis.

Capital Management

Our objectives in managing capital are to optimize our capital structure so we can ensure a healthy financial position to support our operations and growth opportunities in a manner which balances the interests of our shippers and owners.

Capital is managed by funding our rate base using a ratio of 70% debt to 30% equity. This capital structure is defined in the transportation service agreements. Senior debt consists of senior notes, including the current portion, and credit facility drawings. We monitor our capital structure by periodically calculating the ratio of senior debt to rate base to ensure compliance with debt covenant requirements contained in financing agreements, which set a maximum borrowing amount for senior debt that will not exceed 70% of the rate base by more than US$10.0 million.

Alliance Canada is in compliance with all the terms and conditions of its committed credit facilities and expects to remain in compliance throughout 2013. The debt service coverage ratio (DSCR) is required to be 1.25 or above to be considered compliant. At December 31, 2012, the DSCR is 1.93 (December 31, 2011 – 1.97).

Accounting Policy Changes

Adoption of United States Generally Accepted Accounting Principles

Alliance Canada adopted US GAAP on January 1, 2012. The retrospective application of US GAAP was applied to amounts reported for the annual and quarterly periods within the year ended December 31, 2011 for comparative purposes.

The 2012 financial statements reflect this change in accounting standards. Alliance Canada’s basis of preparation and adoption of US GAAP and significant accounting policies can be found in note 2 of the December 31, 2012 annual audited financial statements. The on-going impact of the differences identified between Canadian GAAP and US GAAP are mostly limited to changes in classification and presentation within the financial statements and additional disclosure requirements. There were no material measurement differences identified by management.


Risks and Uncertainties

Competition

The System faces competition for natural gas pipeline transportation services to the Chicago area from both existing and proposed pipeline projects. Existing pipelines, other than Alliance Canada, provide natural gas transportation services from the WCSB and the Bakken to natural gas markets in the mid-western United States. In addition, there are proposals to upgrade existing pipelines or to build new pipelines serving such areas and markets. Any new or upgraded pipelines could:

allow shippers to have greater access to natural gas markets in addition to the markets served by the System and the pipelines to which it is connected;

offer natural gas transportation services that are more desirable to shippers than those provided by the System because of location, facilities or other factors;

charge tolls or provide transportation services to locations that result in greater net profit for shippers.

There is also competition from new sources of natural gas such as the Marcellus Basin. Situated in an area from upstate New York to as far south as Virginia; the Marcellus Basin is in close proximity to the Chicago Hub to which the System currently provides the majority of its transportation service. The development of the Marcellus Basin could provide an alternate source of gas to the U.S. Midwest, as well as decreasing this northeastern region of the United States’ reliance on natural gas imports from Canada.

Emerging technologies could enable gas plays that are currently non-commercially viable or accessible, to be competitive in the marketplace that the System serves.

Alliance Canada transportation tolls are calculated on the basis of a minimum deemed firm capacity. A loss of any shipper without obtaining a replacement shipper at the same transportation toll would decrease our revenues and earnings.

Recovery of Capital

Alliance Canada is permitted to recover from shippers costs incurred in the construction and operation of the System that are actually and reasonably incurred in accordance with NEB regulations. There can be no assurance that all costs incurred by Alliance Canada will be recoverable through the transportation tolls. Alliance Canada has firm transportation service agreements ending on October 31, 2013 for 20 mmcf/d of contract capacity; on December 1, 2015 for 1,199 mmcf/d of contract capacity and on December 1, 2016 for 30 mmcf/d of contract capacity. For 76 mmcf/d of contract capacity, the contract term has been extended to December 1, 2018. Alliance Canada is exposed to economic risk associated with the recovery of capital beyond the term of the transportation service agreements.

There is no assurance that Alliance Canada will be able to replace the transportation service agreements with contracts, the terms of which would enable recovery of the remaining capital cost directly through tolls.

Dependence on Related Parties

There is a significant degree of dependency on Aux Sable, a related party, to satisfy its requirements to provide heat content management services to Alliance USA. Should Aux Sable fail to provide heat content management services for any reason, the System and the shippers may experience operational issues. In certain circumstances, the failure to provide heat content management services could result in an interruption or


curtailment of transportation service on the System. It is not possible to predict the extent or duration of these operational issues or their precise financial or operational effect on Alliance Canada.

There is no assurance that Aux Sable will remain continuously operational or will continue business operations indefinitely. Aux Sable’s business involves processing, refining and marketing NGL and its profitability will depend in part on the differential in the price of natural gas versus the price of various NGL in its market area.

The System is comprised of the Alliance Canada Pipeline and the Alliance USA Pipeline. The System operates as an integrated pipeline. Therefore, any matters which limit or restrict the ability of the Alliance USA pipeline to operate could affect the ability of the Alliance Canada Pipeline to operate. Alliance Canada may have no control over matters which may adversely affect Alliance USA and/or the Alliance USA Pipeline.

Credit Risk

Alliance Canada is exposed to credit risk because the business is concentrated in the natural gas transportation industry and its revenue is dependent upon the ability of shippers to pay monthly demand charges. A majority of the shippers operate in the oil and gas exploration and development, energy marketing or transportation industries and may be exposed to long-term downturns in energy commodity prices, including the price for natural gas, or other credit events impacting these industries. Should shippers be unable to fulfill the contractual obligations and if suitable replacement shippers were not available, Alliance Canada may not be able to recover its operating and financing costs or make distributions to its partners. Alliance Canada limits, to an extent, its exposure to this credit risk by requiring shippers to provide letters of credit or other suitable security if shippers do not maintain specified credit ratings or a suitable financial position.

At December 31, 2012, the Partnership considers that the risk of non-performance of its shippers is minimal based on the Partnership’s credit approval process, on-going monitoring procedures and historical experiences. Currently, approximately 5% of firm capacity is contracted to shippers who do not have an investment grade rating or acceptable credit status and are required to post security. These shippers have provided security, but in no case does such security cover more than one year’s obligations under the transportation contracts. There can be no assurance that a shipper’s security will be adequate to compensate us if the shipper is unable to fulfill its obligations under its transportation contract. We expect that, should a shipper be unable to fulfill its contractual obligations in the future, re-contracting of the repudiated contract is possible, even though the revenue may be lower than the original demand charges. Currently there are no accounts receivable that meet the definition of past due and/or impaired.

Alliance Canada is exposed to credit risk in the event of non-performance by counterparties to the Master Asset Vehicle II (MAVII) notes. Due to a limited market for the investments, our estimate of fair value is subject to significant uncertainty. While we believe our valuation technique is appropriate, changes in significant assumptions could substantially affect the fair value of this investment. The market limitations for the MAVII notes have no significant impact on operations.

The credit risk arising from cash deposits is minimal as cash is held with major Canadian financial institutions. Apart from a MAVII note investment, as at December 31, 2012, Alliance Canada does not hold any short-term or long-term investments.

Operating Risks

Operation of the System involves many risks, several of which are beyond the control of Alliance Canada, including but not limited to: breakdown or failure of equipment, information systems or processes; the performance of equipment at levels below those originally intended; catastrophic events such as natural


disasters, fires, explosions, pipeline failure, wars, acts of terrorism and other similar events; lack of spare parts; operator error; and disputes with interconnecting facilities and carriers. The occurrence or continuance of any of these events could increase the cost of operating the System and/or reduce its transportation capacity, thereby potentially impacting cash flow. The Partnership maintains safety policies, disaster recovery procedures and insurance coverage at industry acceptable levels in the case of an accident. Inspection and monitoring methods are also employed to manage pipeline, turbine and facility integrity as well as to minimize system disruptions.

Environmental Matters

The operation of Alliance Canada is subject to federal, provincial and local laws and regulations relating to the protection of the environment. Failure to comply with these laws and regulations may result in the assessment of administrative, civil, and criminal penalties; imposition of remedial requirements; and the issuance of injunctions to ensure future compliance.

We have established safety and environmental policies that are designed to reduce our exposure to the inherent risks of operating a natural gas pipeline. These risks include possible damage to the environment and claims or other disputes with landowners or other individuals affected by the operation of the pipeline. Our policies are designed to ensure that all aspects of our operations comply with existing laws and regulations relating to personal safety and protection of the environment, including those related to GHG emissions. Nonetheless, the Partnership and its shippers may be exposed to additional costs of complying with new, more stringent regulations. Alliance Canada maintains its focus on environmental stewardship through initiatives such as:

The Environmental Management System (EMS), a comprehensive system of policies, programs and procedures developed to manage environmental issues related to pipeline operation, new pipeline and facility construction, and facility upgrades. Alliance Canada’s EMS is largely based on ISO 14001 - the international standard that specifies requirements for environmental management systems.

Site inspections for compressor and metering facilities are performed along our lateral and mainline system. These inspections focus on federal and provincial regulatory compliance, EMS and Environmental Operating Procedure compliance, industry guidelines and applicable management practices.

Liquidity Risk

Alliance Canada manages liquidity risk by ensuring access to sufficient funds to meet its obligations. We forecast cash requirements to ensure funds are available to fund liabilities as they become due. The primary sources of liquidity are funds received from transportation tolls, undrawn committed credit facilities and owner funding. The working capital deficiency on December 31, 2012 of $11.4 million has no material effect on the liquidity of the Partnership due to the regular monthly cash flow from operations. In 2012, transportation toll receipts, which are collected from shippers, total approximately $38.1 million per month providing sufficient funds to meet operational cash flow requirements until the next revenue cycle. We are highly dependent upon our shippers for revenues from their contracted transportation capacity on our System. The failure of the shippers to perform under the transportation agreements or the failure to replace such shippers on equivalent terms and conditions could have a material adverse effect on our cash flows and financial condition and could impair our ability to service debt obligations and continue paying distributions to our partners.

Alliance Canada also holds in its debt service reserve account an amount at least equal to six months interest and principal payments on its senior notes, which is funded by letters of credit as part of the bank credit facility.


The debt service reserve is in addition to the funds that are transferred monthly to the debt service account to be held for the semi-annual interest and principal payments on the senior debt outstanding and the monthly debt service amounts due on the credit facilities. Funds available under revolving credit facilities may also be accessed from time to time should cash receipts prove insufficient to fund the month’s operating and investing activities. The current credit facilities expire October 30, 2015 and Alliance Canada expects that such facilities will provide sufficient liquidity.

The Partnership may need to refinance its indebtedness under its various credit facilities outstanding at their maturity dates and may require additional financing depending on future developments, enhancement opportunities or acquisition plans. The ability to refinance existing indebtedness and arrange additional financing in the future will depend, in part, upon prevailing market conditions at the time, as well as the business performance of the Partnership. There can be no assurance that debt or equity financing will be available or sufficient to meet or satisfy our initiatives, objectives, or requirements. Having an investment grade credit rating supports our ability to re-finance existing debt as it matures and the ability to access cost competitive capital for future growth. A ratings downgrade may have a material adverse effect on the ability to obtain financing or obtain financing on favourable terms and conditions.

Future cash distributions may be adversely affected if the Partnership is unable to refinance its indebtedness or arrange additional financing on terms and conditions at least as favourable as the existing terms and conditions of such indebtedness. If the Partnership is unable to refinance its indebtedness then, at maturity, the Partnership will have to use available cash to repay the indebtedness. If access to additional capital, through either debt or equity financing, is unavailable then future opportunities may be foregone.

Cyber Risk

Alliance Canada uses safeguards to ensure our information systems remain secure and reliable. We maintain working relationships and sit on committees within the Industrial Control Systems Joint Working Group, RCMP, Public Safety Canada and Natural Resources Canada. These relationships foster communications, training and information sharing, and allow us to stay current with any new cyber threats. This information sharing is bidirectional (where appropriate), resulting in cyber threats and incidents being reported to the Computer Emergency Response Teams, Industrial Control Systems Cyber Emergency Response Team, and authorities around the world.

Numerous cyber security technologies have been implemented throughout the organization as part of an in-depth defense strategy. These technologies, including the use of a Security Incident and Event Management system, allow us to correlate and respond to threats if needed. We are constantly evaluating our cyber security technologies and either replacing them, or augmenting them as needed.

Critical Accounting Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions. Management’s estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of revenues and expenses recorded during the reporting period. Estimates and assumptions are based on historical experience, current conditions and various other factors and are believed to be reasonable under the circumstances. Due to changes in facts and circumstances and the inherent uncertainty involved in making estimates, actual results may differ significantly from current estimates. Critical accounting estimates are discussed below.


Accounting for Rate Regulation

Alliance Canada’s pipeline operations are regulated by the NEB under the National Energy Board Act. The NEB has jurisdiction to regulate the tolls that a pipeline may charge for the services it provides. In order to reflect the economic effects of the actions of the regulator and provide information about the Partnership’s economic resources and performance, recognition of certain revenues and expenses may differ from results expected under the GAAP that is applicable to non-regulated businesses. Regulatory assets represent the right to recover specific previously incurred costs in future periods through tolls. Regulatory liabilities represent an obligation to refund previously collected amounts in future periods through tolls.

The transportation contracts are designed to provide toll revenues sufficient to recover the costs of providing transportation service to shippers, including operating and maintenance and administrative costs, depreciation, income taxes, costs of indebtedness, and an allowed return on equity. The portion of such costs expected to be recovered each year under the existing transportation contracts is equal to the percentage of the firm transportation capacity held under such contracts.

Transportation revenue includes amounts related to expenses in the financial statements that are expected to be recovered from shippers in future tolls. Similarly, no revenue is recognized in a given period for tolls received that do not relate to current period expenses per these financial statements. Differences between the recorded transportation revenue and actual toll receipts give rise to regulatory assets or liabilities.

In the absence of rate regulation, Alliance Canada would not recognize regulatory assets or liabilities and the income impact would be recognized in the period the expenses were incurred or revenues earned.

Assessments are made periodically as to whether regulatory assets are recoverable through the presence of indicators such as increased market risks, regulatory changes and recent toll orders applicable to other regulated entities. If a regulatory asset is deemed impaired an adjustment may be recorded to reflect a market value that is less than cost.

Depreciation and Amortization

Property, Plant and Equipment (PP&E) represents 83% of the total assets recognized on the Balance Sheet. Depreciation is generally provided on a straight-line basis over the estimated useful life of the assets and commences when the asset is placed in-service. Due to the magnitude of the PP&E accounts, changes in the estimated depreciation rates can have a material impact on depreciation and amortization expense, transportation revenue and the long-term receivable.

For purposes of calculating tolls, depreciation of pipeline-in-service assets is based on negotiated depreciation rates contained in the transportation service agreements, while depreciation expense in the financial statements is recorded on a straight-line basis commencing at the in-service date. The negotiated depreciation rate was less than the straight-line rate in earlier years and is higher than straight-line depreciation in later years of the transportation service agreements. This resulted in the recognition of transportation revenues and a long-term receivable in earlier years equal to the excess of straight-line depreciation over the negotiated depreciation rate. The receivable recovery from shippers commenced in 2012, when the negotiated depreciation rate exceeded that calculated on a straight-line basis. Any change in the depreciation rates would change the estimated value of any receivable or payable balance arising from the difference in the two depreciation rates.

In estimating the useful lives of PP&E, management takes into account the most reliable evidence available at the time the estimate is made. Considerations which form the basis of the assumptions for these estimated useful lives include third party assessments, demand for pipeline transportation service, supply of natural gas in proximity to the pipeline, pipeline operating experience and industry experience. Management reviews the useful lives of PP&E periodically when the circumstances indicate a possible change in assumptions. Changes in these assumptions could result in adjustments to the useful life of PP&E which could result in material changes to the financial statements. Due to uncertainty surrounding the pipeline and related assets, future results may be affected if management’s current assessment differs from future assessment or actual performance.

Renewal and replacement assets, which were retired from use as a result of repair and maintenance activities, are still classified as assets under rate-regulated accounting and are currently being amortized to December 1, 2015. Effective January 1, 2011, the renewals and replacements amortization period was reduced from December 1, 2025 to coincide with the end date of the primary term of the original transportation service agreements.

Asset Retirement Obligation

The fair value of asset retirement obligations (ARO’s) associated with the retirement of long-lived assets are recognized in the period when they can be reasonably determined. The fair value of the statutory, contractual or legal obligation associated with the retirement and reclamation of tangible long-lived assets is recognized with a corresponding increase to the carrying amount of the related assets. This corresponding increase to capitalized costs is amortized to income on a basis consistent with depreciation and amortization of the underlying assets. Subsequent changes in the estimated fair value of the asset retirement obligations are capitalized and amortized over the remaining useful life of the underlying asset.

The fair value approximates the cost a third party would charge in performing the tasks necessary to retire such assets and is recognized at the present value of expected future cash flows. The present value of expected cash flows is determined using assumptions such as the probability of abandonment in place versus removal and the estimated costs required upon abandonment in each case, the discount rate and the estimated time to abandonment.

A provision for ARO’s has not been recognized in our financial statements as it is not possible to make a reasonable estimate of fair value of the liability due to the indeterminate timing and scope of the retirement of pipeline-in-service assets. Useful lives of pipeline systems are primarily derived from available supply sources and ultimate consumption of those resources by customers. There is insufficient information available to reasonably determine the timing and/or method of settlement to correctly determine the fair value of the ARO. The above variables are considered indeterminate because there is no data or information that can be derived from past experience or industry practice. Such indeterminable variables preclude Alliance Canada from making a reasonable estimate of the ARO. These costs will be recorded when sufficient information exists to reasonably estimate potential settlement dates and methods.

The NEB’s LMCI action plan, detailed in the previously presented Operating Highlights section, addresses the need for a collection method for funding pipeline abandonment costs. Although the LMCI plan is a collection method only, should the plan result in a reasonable accounting estimate of asset retirement obligations, financial statement recognition of those obligations may be made in future periods. As a result, regulatory assets and liabilities may be recognized to the extent the timing of recovery from shippers differs from the recognition of abandonment costs for accounting purposes.


Financial Instruments

Financial assets and financial liabilities held-for-trading are measured at fair value with changes in those fair values recognized in net income if hedge accounting is not elected. Financial assets available-for-sale are measured at fair value, with changes in those fair values recognized in other comprehensive income. Financial assets held-to-maturity, loans and receivables and other financial liabilities are measured at amortized cost using the effective interest method of amortization.

Master Asset Vehicle II Notes

On January 22, 2009 Alliance Canada received $12.4 million in various classes of MAVII notes in exchange for an investment in asset backed commercial paper. During 2009 a total fair value loss of $3.4 million was recognized on the MAVII notes resulting in an estimated fair value of $9.0 million at December 31, 2009. Quarterly analysis of impairment has been on-going since that time and at December 31, 2012 a fair value recognition of $11.2 million was made on the MAVII note investment.

The investment in MAVII notes is classified as held-for-trading. The fair value of MAVII notes is estimated using a present value analysis of future cash flows that incorporates floating coupon payments tied to Bankers’ Acceptance rates and risk adjusted discount rates. Discount rates are estimated based on Government of Canada benchmark rates plus expected spreads for similarly rated instruments with comparable risk profiles. It is not anticipated that the investment in MAVII notes will have any significant impact on the Partnership’s operations or ability to meet upcoming debt obligations.

Foreign Currency Forward Contracts

The Partnership has committed to making a number of payments denominated in Euro currency under certain maintenance service and compressor control panel supply contracts. Foreign currency forward contracts were in place in the first and second quarters of 2012 to mitigate our exposure to currency fluctuations, the majority of which were accounted for at fair value under hedge accounting principles. Effectiveness was tested at the end of each reporting period to determine if the instruments were performing as intended and hedge accounting could still be applied. The fair value of the foreign currency forward contracts was determined based on observable inputs other than unadjusted quoted prices, such as fair value estimates, provided by Alliance Canada’s lenders, interest rates and currency exchange rates.

The effective portion of changes in the fair value of financial instruments designated as a cash flow hedge was recognized in other comprehensive income. The ineffective portion was recognized immediately in net income. Gains and losses were reclassified from other comprehensive income and recognized in net income in the same period that the hedged transactions impacted net income. There are no forward contracts that remain outstanding at December 31, 2012.


Related Party Transactions

Shippers accounting for approximately 15% of the contracted capacity at December 31, 2012 (December 31, 2011 – 15%) are related entities of limited partners of Alliance Canada; however, the terms of these contracts are the same as those agreed to with independent third parties. Transportation revenue from related parties is $46.1 million for the twelve months ended December 31, 2012 (December 31, 2011 - $42.8 million).

Alliance Canada does not directly employ any of the individuals responsible for managing or operating the business, nor does it have any directors. The General Partner, under the terms of the Limited Partnership Agreement provides management, administrative, operational and workforce related services to Alliance Canada. Actual costs incurred by the General Partner are reimbursed by Alliance Canada on a monthly basis and Alliance Pipeline Ltd. does not record any profit or margin for the services provided to the Partnership. Costs incurred under the administrative services agreement were $43.3 million for 2012 ($39.6 million – 2011).

Amounts Charged To (By) Related Parties For Services Rendered

Three Months Ended Twelve Months Ended

Dec. 31, Dec. 31, Dec. 31, Dec. 31, (thousands of dollars) 2012 2011 2012 2011

Alliance Pipeline L.P. 9,314 8,963 38,630 34,298

NRGreen Power Limited Partnership 551 552 2,199 2,264

Aux Sable entities 1 153 198 603

Amounts Due From Related Parties As At

(thousands of dollars) Dec. 31, 2012 Dec. 31, 2011

Alliance Pipeline entities 4,537 3,762

NRGreen Power Limited Partnership 597 563

Aux Sable entities 6 98

Amounts Due To Related Parties As At

(thousands of dollars) Dec. 31, 2012 Dec. 31, 2011

Alliance Pipeline entities 752 510

NRGreen Power Limited Partnership 23 –


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 and CEO (CEO) and Senior Vice President and CFO (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure.

As of the end of the period covered by this report, Alliance Canada’s senior management evaluated the effectiveness of the design and operation of its disclosure controls and procedures, under the supervision of, and with the participation of the CEO and CFO. Alliance Canada’s senior management, inclusive of the CEO and the CFO, does not expect that the Partnership’s disclosure controls and procedures will prevent or detect all error and fraud. The inherent limitations in all control systems are such that they can provide only reasonable, not absolute, assurance that all control issues and instances of fraud or error, if any, within the Partnership have been detected. Based on this evaluation, the CEO and CFO have concluded that Alliance Canada’s disclosure controls and procedures, as defined in National Instrument 52-109F2, Certification of Disclosure in Issuers Annual and Interim Filings, are effective to ensure that material information relating to Alliance Canada is made known to management on a timely basis and is included in this report.

Internal Control over Financial Reporting

The Partnership’s management, with the participation of its CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision of the CFO the Partnership’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.

Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements.

No changes were made to our financial internal controls during the twelve months ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our financial reporting.

The design and effectiveness of internal controls over financial reporting was assessed as at December 31, 2012 and based on this evaluation, the CEO and CFO have concluded that, subject to the inherent limitations noted above, internal control over financial reporting is effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.

January 28, 2013


Auditor’s LetterFebruary 13, 2013

Independent Auditor’s Report

To the Directors of the Managing General Partner of Alliance Pipeline Limited Partnership

We have audited the accompanying financial statements of Alliance Pipeline Limited Partnership, which comprise the balance sheets as at December 31, 2012 and 2011 and the statements of income, comprehensive income, changes in partners’ equity, and cash flow for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with principles generally accepted in the United States of America, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide abasis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of Alliance Pipeline Limited Partnership as at December 31, 2012 and 2011 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Chartered Accountants


Statements of Income Years ended December 31 (thousands of Canadian dollars) 2012 2011 (1) 2010 (1)

Revenues

Transportation revenue (Note 3) 416,431 414,537 425,223

Transportation revenue from related parties (Note 7) 46,070 42,783 31,988

462,501 457,320 457,211

Expenses

General and administrative 50,662 48,544 53,009

Operations and maintenance 99,079 86,913 75,895

Costs incurred under administrative services agreement (Note 7) 43,297 39,640 36,072

Reimbursement under administrative services agreement (Note 7) (45,567) (42,115) (38,644)

Depreciation and amortization 124,249 120,070 117,243

271,720 253,052 243,575

Operating Income 190,781 204,268 213,636

Interest and other income 3,336 1,094 683

Amortization of deferred financing charges (1,075) (995) (1,072)

Interest expense (Note 6) (85,086) (89,300) (94,283)

Net Income 107,956 115,067 118,964

Net income attributable to Limited Partner ownership interests in Alliance Pipeline Limited Partnership 106,876 113,916 117,774

Net income attributable to General Partner ownership interests in Alliance Pipeline Limited Partnership 1,080 1,151 1,190

(1) US GAAP retrospectively applied (Note 2)

See accompanying notes to the financial statements

On behalf of the Board of Alliance Pipeline Ltd., General Partner:

(signed) (signed) Richard G. Weech, Director John K. Whelen, Director


Statements of Comprehensive Income

Years ended December 31 (thousands of Canadian dollars) 2012 2011 (1) 2010 (1)

Net Income 107,956 115,067 118,964

Other Comprehensive Income (Loss)

Gains and losses on derivative instruments designated as cash flow hedges (15) 172 (109)

Reclassification to net income of gains and losses on derivative instruments designated as cash flow hedges 41 (68) (22)

Other comprehensive income (loss) 26 104 (131)

Comprehensive income 107,982 115,171 118,833

Comprehensive income attributable to Limited Partner ownership interests in Alliance Pipeline Limited Partnership 106,902 114,019 117,645

Comprehensive income attributable to General Partner ownership interests in Alliance Pipeline Limited Partnership 1,080 1,152 1,188




Statements of Cash Flow Years ended December 31 (thousands of Canadian dollars) 2012 2011 (1) 2010 (1)

Operating Activities

Net income 107,956 115,067 118,964

Non-cash transportation revenue adjustment (Note 3) (8,972) (5,359) (15,087)

Depreciation and amortization 124,249 120,070 117,243

Amortization of deferred financing charges 1,075 995 1,072

Changes in trade accounts receivable 123 2,707 (2,999)

Changes in accounts receivable from related parties (Note 7) (537) 18 (2,796)

Changes in prepaids, deposits, and other 39 (159) 513

Changes in trade accounts payable and accrued liabilities (Note 14) (5,604) 6,717 1,412

Changes in accounts payable to related parties (Note 7) 265 185 4

Other (2,799) (2,003) 4,417

215,795 238,238 222,743

Investing Activities

Changes in trust accounts 14,711 (13,136) (2,786)

Additions to property, plant and equipment (Note 4) (3,939) (1,219) (12,777)

Recovery of capital costs through settlements - - 9,075

Changes in other long-term liabilities - - 2,876

10,772 (14,355) (3,612)

Financing Activities

Capital contributions 900 800 -

Repayment of long-term debt (77,860) (72,574) (67,766)

Distributions to partners (148,700) (150,500) (152,800)

Issuance of long-term debt, net of issue costs - (805) 45

(225,660) (223,079) (220,521)

Net change in cash and cash equivalents 907 804 (1,390)

Cash and cash equivalents, beginning of year 1,115 311 1,701

Cash and cash equivalents, end of year 2,022 1,115 311

Supplemental disclosure of cash flow information:

Interest payments 80,390 89,229 93,920

Non-cash changes in property, plant and equipment 794 1,178 557




Balance SheetsDecember 31 (thousands of Canadian dollars) 2012 2011 (1)

ASSETS

Current assets

Cash 2,022 1,115

Trust accounts 29,544 44,255

Trade accounts receivable 35,082 35,205

Accounts receivable from related parties (Note 7) 8,794 8,257

Prepaids, deposits and other 1,947 1,986

Current portion of regulatory assets 7,398 -

Current portion of long-term receivable 8,606 1,728

93,393 92,546

Regulatory assets (Note 3) 2,092 5,311

Other long-term assets 17,223 15,590

Long-term receivable 189,403 200,197

Property, plant and equipment (Note 4) 1,487,662 1,606,663

Intangible assets 1,183 3,286

1,790,956 1,923,593

LIABILITIES

Current liabilities

Trade accounts payable and accrued liabilities (Note 14) 22,560 28,958

Accounts payable to related parties (Note 7) 775 510

Current portion of long-term debt (Note 6) 79,831 77,860

Current portion of regulatory liabilities (Note 3) - 8,709

Other current liabilities 1,674 643

104,840 116,680

Other long-term liabilities 8,268 9,416

Long-term debt (Note 6) 1,120,279 1,200,110

Commitments and contingencies (Note 17)

PARTNERS’ EQUITY 557,569 597,387

1,790,956 1,923,593

(1) Comparative information restated (Note 2)



Statements of Changes in Partners’ Equity December 31 (thousands of Canadian dollars) 2012 2011

Class A Units

Class A - number of units 556,207 556,207

Class A unit value - opening balance 489,880 520,862

Net income and comprehensive income 94,392 100,611

Distributions to partners (130,018) (131,592)

Class A unit value - closing balance 454,254 489,881

Class B Units

Class B - number of units 73,558 73,558

Class B unit value - opening balance 75,931 80,028



Class B unit value - closing balance 71,221 75,931

Contributed Surplus

Contributed surplus - opening balance 21,833 21,033

Partner contributions 900 800

Contributed surplus - closing balance 22,733 21,833

General Partner

General Partner - opening balance 9,768 10,122



General Partner - closing balance 9,361 9,768

PARTNERS’ EQUITY BEFORE ACCUMULATED OTHER

COMPREHENSIVE INCOME 557,569 597,413

Accumulated other comprehensive income (AOCI)

AOCI - opening balance (26) (131)

Other comprehensive income 26 105

AOCI - closing balance - (26)

TOTAL PARTNERS’ EQUITY 557,569 597,387



Notes to the Financial Statements(In thousands of Canadian dollars, unless otherwise noted)

NOTE 1 GENERAL BUSINESS DESCRIPTION

Alliance Pipeline Limited Partnership (Alliance) was formed under the laws of the Province of Alberta on February 1, 1996. Alliance owns and operates the Canadian portion (1,560 km) of a 3,000 km high-pressure natural gas transmission pipeline, a series of laterals located in Canada and the related infrastructure. The U.S. portion of the pipeline is owned by Alliance Pipeline L.P. (Alliance US). Alliance and Alliance US have entered into contracts with shippers to transport natural gas, on a firm transportation basis, from supply areas primarily in the northwestern Alberta and the northeastern British Columbia portions of the Western Canadian Sedimentary Basin, to delivery points primarily near Chicago, Illinois. The pipeline connects in the Chicago area with two local natural gas distribution systems and five interstate natural gas pipelines, which provide shippers with access to natural gas markets in the midwestern and northeastern United States and eastern Canada.

ALLIANCE PIPELINE LTD

Alliance is managed by its General Partner, Alliance Pipeline Ltd. (the General Partner). The General Partner was established on April 17, 1997 and continues to operate under the federal laws of Canada.

The General Partner is allocated 1% of net income and loss, and undistributed income of Alliance with the remaining 99% being allocated equally between Enbridge Income Partners Holdings Inc. and Veresen Energy Infrastructure Inc. (the partners). The General Partner’s sole activity is managing the business and affairs of Alliance. The powers, duties and obligations of the General Partner of Alliance are set out in the Alliance’s Limited Partnership Agreement dated as of December 31, 1998, as amended.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements of Alliance Pipeline Limited Partnership have been prepared by management in accordance with United States generally accepted accounting principles (US GAAP). All dollar amounts are stated in thousands of Canadian dollars, unless otherwise noted.

In preparing the financial statements, management has amended certain accounting methods previously applied in the Canadian generally accepted accounting principles financial statements to comply with US GAAP.

In management’s opinion, the financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies.

USE OF ESTIMATES

The preparation of these financial statements requires management to make estimates and assumptions that affect both the amount and the timing of Alliance’s assets, liabilities, revenues and expenses and the related disclosures. Management regularly evaluates these estimates utilizing historical experience, consultation with experts and other methods management considers reasonable in the circumstances. Actual results may differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.

REGULATED OPERATIONS

Alliance’s pipeline operations are regulated by the National Energy Board (NEB) under the National Energy Board Act. In order to reflect the economic effects of the actions of the regulator, recognition of certain revenues and expenses may differ from that otherwise expected under US GAAP applicable to non-regulated businesses.

Regulatory assets represent amounts that are expected to be recovered from shippers in future periods through tolls. Regulatory liabilities represent amounts that are expected to be refunded to shippers in future periods through tolls. In the absence of rate regulation, Alliance would not recognize regulatory assets or liabilities and the income impact would be recognized in the period the expenses were incurred or revenues earned. Alliance continuously monitors to ensure compliance with regulatory accounting guidelines as presented in US GAAP.

Alliance complies with NEB Gas Pipeline Uniform Accounting Regulations which rely on practices of group asset accounting. This requires property to be identified, unified and recognized in plant in service accounts.

Recoverability

Alliance periodically assesses whether regulatory assets are recoverable through the presence of indicators such as regulatory changes and recent rate orders applicable to other regulated entities.

REVENUE RECOGNITION

Alliance’s transportation service agreements are designed to provide Alliance with revenues sufficient to recover the costs of providing transportation services to shippers, including a return of capital and an allowed return on equity. Transportation revenues are recognized in a manner consistent with the underlying shipper agreements as approved by the NEB. Differences between transportation revenue and actual toll receipts are recognized as assets or liabilities and settled through future tolls.

PROPERTY, PLANT AND EQUIPMENT

Pipeline in Service Assets

Pipeline in service assets are recognized at cost and are depreciated commencing from the in service date. Where applicable, the cost of pipeline in service assets are reduced by contributions in aid of construction received from third parties, in support of constructing specific pipeline facilities.

Pipeline in service assets include the pipeline, linepack, compressor stations, meter stations and other assets used to provide transmission services. The pipeline in service assets also include components such as renewals and replacements, allowance for funds used during construction (AFUDC) and capitalized overhead.

Renewals and replacements are the capital cost of assets in rate-regulated operations that have been retired or otherwise disposed of in the normal course of business as a result of repair and maintenance activities. The continuing recognition of the assets, the resulting revenue and the depreciation of the assets would not be permitted in the absence of rate regulation.

Accounting for regulated operations permits the capitalization of AFUDC instead of capitalized interest. AFUDC represents the cost of financing, consisting of interest on borrowed funds and equity return on the pipeline’s own funds invested, during the construction of assets to be used in regulated operations. The allowance for the equity portion of AFUDC is accrued on a pre-tax basis determined using Alliance’s weighted average cost of capital and enacted corporate tax rates. The debt portion of the AFUDC is comprised of interest expense, commitment fees and credit facility financing fees incurred during construction. Interest income derived from debt sourced funds was netted against interest expense in determining the allowance for debt funds used during construction. Interest income attributable to equity sourced funds is included in net income in the year earned. AFUDC is included in the capital cost of and depreciated over the life of the related asset. The recognition of the equity component of financing as an asset and the resulting revenue and depreciation of the asset would not be permitted in the absence of rate regulation.

Capitalized overhead is comprised of indirect overhead costs that due to the actions of the regulator are capitalized and recovered through revenue. In the absence of rate regulation these costs would be expensed in the period in which they occur.

Other Assets

General plant assets consist of field offices and ancillary equipment. These assets are recognized at cost and are depreciated over the useful life of the assets.

Administrative assets include head office furniture and equipment, information systems and leasehold improvements. These assets are recognized at cost and depreciated over the useful life of the asset or term of the lease.

Capital spare parts are valued at the lower of average cost or net realizable value and are not subject to depreciation until they are in service.

Land and assets under construction are recognized at cost and are not subject to depreciation.

Alliance Pipeline Limited Partnership Notes to the Financial Statements

Depreciation rates

Asset Category Method Depreciation Rate

Pipeline in service Straight line depreciation 4%Renewals and replacements Straight line depreciation 20% - 33%General plant assets Straight line depreciation 10% - 20%Administrative assets Straight line depreciation 20% - 33%Capital spares Not depreciated Not depreciatedLand Not depreciated Not depreciatedAssets under construction Not depreciated Not depreciated

Accounting for Major Equipment Overhaul Expenditures

Due to the rapid consumption rate associated with compressor overhaul and major equipment renewal activities and the fact that the activity consists primarily of replacing equipment components that are worn or obsolete, costs associated with these activities are expensed in the period in which the maintenance activity occurs.

Additions and Disposals

Additions to property, plant and equipment are recognized at cost, including direct and indirect costs allowed by the regulator. Expenditures included in the costs of property, plant and equipment are reviewed to determine if expenditures increase the output, lower the associated operating costs, or extend the useful life of the assets. Costs not meeting the criteria of the capitalization policy are expensed.

When depreciable property is retired or disposed of as an extraordinary retirement, the impact is recognized in net income or as a deferred credit (subject to regulatory approval). Extraordinary retirement is defined as a retirement of depreciable plant that results from causes that could not reasonably be foreseen.

INTANGIBLE ASSETS

Intangible assets are comprised of computer software and the cost includes AFUDC where applicable. Purchased computer software is recognized at cost and amortized over its useful life.

Asset Category Method Amortization Rate

Computer Software Straight line amortization 33%

ASSET RETIREMENT OBLIGATION

The asset retirement obligation (ARO) associated with the retirement of a long-lived asset is recognized in the period when it can be reasonably determined. The statutory, contractual or legal obligation associated with the retirement and reclamation of a tangible long-lived asset is recognized at fair value. The fair value approximates the cost a third party would charge to retire the asset and is recognized at the present value of future cash flows. The ARO is depreciated on a basis consistent with depreciation and amortization of the underlying assets.

A provision for ARO has not been recognized in these financial statements. The ARO cost is considered indeterminate because there is no information that can be derived from past practice, industry practice or management intentions to enable Alliance to reasonably estimate the timing of the pipeline retirement.

ASSET IMPAIRMENT

Long-lived and intangible assets are periodically reviewed for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When indicators exist that provide evidence of an impairment, a loss is recognized if the carrying value of the long-lived asset is not recoverable and exceeds its fair value.



CASH AND CASH EQUIVALENTS

Cash

Cash consists of amounts held in demand deposit accounts with Canadian chartered banks. The carrying value of cash approximates fair value due to the short-term nature of these assets.

Cash Equivalents

Cash equivalents are short-term, highly liquid investments with maturities of three months or less when purchased that are readily convertible to known amounts of cash. Alliance currently does not have any cash equivalents on hand.

Trust Accounts

The use of amounts in the operating and debt service trust accounts is restricted and are classified as trust accounts in the financial statements.

Under the terms of Alliance’s financing agreements, all funds received from shippers in settlement of transportation tolls, including interest earned on trust account balances, are restricted and segregated in trust accounts. Funds are first applied to meet debt service and operating requirements before distributions are made to the partners. At the completion of each fiscal quarter, management determines the amount of cash and cash equivalents necessary to satisfy these requirements and applies to have funds, if any, in excess of this amount transferred to a non-trust account. Only funds in non-trust accounts may be distributed to the partners.

DERIVATIVE INSTRUMENTS

Derivative instruments are recognized at fair value. Changes in the fair values of derivative instruments are recognized in net income with the exception of the effective portion of derivatives designated as cash flow hedges, which are recognized in other comprehensive income.

HEDGING ACTIVITIES

Alliance applies hedge accounting to all qualifying hedging activities entered into under the Risk Management Policy approved by the Board of Directors. At the inception of a hedge designation, Alliance prepares documentation to define the relationship between the hedging instrument, the hedged item, the risk management objectives and strategy for undertaking the hedging transaction. Alliance assesses the hedge relationship at inception and at each reporting date to determine whether the derivatives designated as hedges effectively offset the changes in fair value or cash flows of the hedged item. Alliance considers counterparty risk when determining the fair value of these derivatives.

The hedging instruments are measured at fair value and the effective portion of the change in the fair value of financial instruments designated as a cash flow hedge is recognized in other comprehensive income. The ineffective portion, if any, is recognized immediately in net income. Gains and losses are reclassified from other comprehensive income and recognized in net income in the same period as hedged transactions are recognized in net income.

Hedge accounting is discontinued prospectively when a hedging relationship ceases to be effective or the derivative is terminated, exercised, sold or upon the sale or early termination of the hedged item. When hedge accounting is discontinued, the amounts previously recognized in other comprehensive income are reclassified to net income. The cash flows of the contracts will be classified in the same manner as the cash flows of the position being hedged.

FAIR VALUE MEASUREMENT

Alliance is required to determine the fair value of all its financial instruments using valuation techniques based on the fair value hierarchy. The hierarchy is based on whether inputs are observable in an active market or unobservable. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to quoted prices in an active market and the lowest to unobservable data as outlined below:

Level 1

This category includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets. An active market for an asset or liability is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.


Level 2

This category includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Financial instruments in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market for the entire duration of the financial instrument.

Level 3

Level 3 financial instruments are those with inputs for the asset or liability that are not based on observable market data (unobservable inputs).

DEFERRED FINANCING COSTS

Alliance capitalizes external costs of obtaining debt financing and includes them in other long-term assets and the deferred charge is amortized over the life of the related debt using the effective interest method.

FOREIGN CURRENCY TRANSLATION

Alliance transacts business in Canadian dollars and foreign currency. Transactions denominated in foreign currencies are translated into Canadian dollars using the exchange rate prevailing at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the rate of exchange in effect at the Balance Sheets date. Exchange gains and losses resulting from translation are included in the Statements of Income in the period in which they arise.

CONTINGENT LIABILITIES

Contingent liabilities are recognized if it is probable that a liability has been incurred at the date of the financial statements and the amount can be reasonably estimated. An accrual is made on the most likely amount or if no amount is more likely, an accrual is made on the minimum range of loss. Alliance assesses contingent liabilities on a quarterly basis.

TRANSACTIONS WITH RELATED PARTIES

Alliance did not engage in related party transactions that are not in the normal course of business. Related party transactions were at exchange amounts agreed to by both parties. Transportation revenue transactions were the same as those agreed to with independent parties.

INCOME TAXES

Alliance is not a taxable entity for federal and provincial income tax purposes. Accordingly, no recognition is given to income taxes for financial reporting purposes. Tax on Alliance’s net income is borne by the individual partners through the allocation of taxable income. Alliance’s transportation service agreements permit current income taxes to be recovered through toll revenue. Alliance includes in its toll revenue an amount which represents the current income taxes which would be payable for the year if Alliance were an entity subject to income tax. Net income for financial statement purposes may differ significantly from taxable income for individual partners as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the Alliance partnership agreement. The net taxable temporary difference, which has not been recognized in these financial statements, is $463.0 million (December 31, 2011 - $519.9 million).

NOTE 3 REGULATED OPERATIONS

TRANSPORTATION REVENUE

Transportation revenue includes amounts related to expenses in the financial statements that are expected to be recovered from shippers in future tolls. Similarly, no revenue is recognized in a given period for tolls received that do not relate to current period expenses. Differences between the recognized transportation revenue and actual toll receipts give rise to transportation revenue adjustments which can be classified as regulatory assets or liabilities.

The change in the long-term receivable reflects the difference between depreciation expense recognized in the Statements of Income in the current year and the depreciation expense recovered through tolls in the current year as negotiated in the firm service transportation service agreements. The cumulative difference between depreciation expense presented in the financial statements and the negotiated depreciation expense is a regulatory asset and classified on the Balance Sheets as the long-term receivable.


Transportation revenue is adjusted to reflect differences between the period in which costs are recovered through toll receipts and the period these costs are expensed in the financial statements, as follows:

Years ended December 31 2012 2011 2010

Tolls invoiced 453,529 451,961 442,124Increase (decrease) for: Transportation revenue adjustments – current year 4,099 (4,506) (2,884) Transportation revenue adjustments – prior years 8,709 4,354 5,097 Change in long-term receivable (3,836) 5,511 12,874

8,972 5,359 15,087

Transportation revenue 462,501 457,320 457,211

Surcharge Revenue

Alliance receives surcharge revenue from the Taylor Aitken Creek (TAC) facilities in British Columbia. The TAC facilities provide service to shippers through take or pay contracts that are billed based on the shipper’s primary receipt point capacities at TAC locations. Surcharge revenue for the year ended December 31, 2012 is $4.8 million (December 31, 2011 - $4.6 million, December 31, 2010 - $4.4 million).

Additional revenue arises from providing Receipt Only Service (ROS) to shippers at Taylor Junction, British Columbia from take or pay contracts for ROS and provided revenue of $5.5 million for the year ended December 31, 2012 (December 31, 2011 - $5.5 million, December 31, 2010 - $5.5 million).

Significant Shippers

Alliance has three shippers that each represent 15%, 13%, and 13% of contracted revenue (December 31, 2011 – 15%, 14%, and 13%, December 31, 2010 – 15%, 14%, and 13%). Total contracted revenue based on transportation service agreements from these shippers amounted to $187.2 million for the year ended December 31, 2012 (December 31, 2011 - $186.6 million, December 31, 2010 - $182.5 million).

REGULATORY ACCOUNTING

Alliance is required to apply the authoritative accounting provisions applicable to Accounting Standards Codification 980 – Regulated Operations. This allows Alliance to recognize certain revenue, expenses, assets and liabilities that would not otherwise be recognized with non-regulated operations.

Natural gas transmission is provided under transportation contracts that provide for cost recovery, including return of and return on capital as approved by the NEB. Under the transportation contracts, Alliance charges each shipper a monthly amount for contract capacity calculated to permit Alliance to recover all costs on an annual basis.

Tolls are based on a cost of service model that forecasts costs to determine the revenues for the upcoming year. These costs include a specified annual return on capital, the cost of debt and equity, an allowance for income tax, and all necessary operating expenses, taxes and depreciation. A difference between forecast and actual results causes an under or over collection of revenue in any given year. Under or over collections of revenue are recognized in the financial statements and are recovered or refunded in the following years.


The following table describes the impact of accounting for regulated operations to the financial statements.

Balance Sheets Impact Regulatory Asset (Liability)

December 31 2012 2011

Transportation revenue adjustments – current year 7,398 (8,709)Transportation revenue adjustments – long-term (3,901) 4,182Transportation revenue adjustments – prior years 5,993 1,129Long-term receivable 197,329 201,142

Statements of Income Impact Revenue (Expense)


Transportation revenue adjustments – current year 16,107 (4,355) 743Transportation revenue adjustments – long-term (8,082) 2,711 510Transportation revenue adjustments – prior years 4,863 601 1,295Long-term receivable (3,813) 5,511 12,874

TRANSPORTATION REVENUE ADJUSTMENTS – CURRENT YEAR AND LONG-TERM

Alliance’s net transportation revenue adjustment is presented in regulatory assets and liabilities on the Balance Sheets and includes a net asset balance of $9.5 million (December 31, 2011 - $3.4 million liability). Amounts relate to differences between expenses included in the financial statements and expenses included in transportation tolls. Any differences remaining at year-end will be included in the shipper tolls in future periods and included in transportation revenue as prior years’ transportation revenue adjustments. The estimated settlement period for the current portion is within one year. The long-term portion is estimated to be settled within two years.

TRANSPORTATION REVENUE ADJUSTMENTS – PRIOR YEARS

Alliance’s prior years’ transportation revenue adjustments are based on a rolling three year term. The previous year’s final toll and current year’s reforecast combine to produce either a net over or under recovery, which is applied to either reduce (if previous periods are over recovered) or increase (if previous periods are under recovered) the upcoming estimated forecast revenue requirement. The estimated settlement of the prior years’ transportation revenue adjustments are within one year.

LONG-TERM RECEIVABLE

The long-term receivable is a regulatory asset primarily relating to the cumulative difference between depreciation expense included in the financial statements and depreciation expense negotiated in the transportation service agreements. In 2012, Alliance began recovering this regulatory asset as the negotiated depreciation rate exceeded the rate applied in the financial statements. The estimated settlement period of the long-term receivable is 13 years.


NOTE 4 PROPERTY, PLANT, AND EQUIPMENT

December 31 2012 2011

Cost Pipeline in service assets 2,747,522 2,753,092 Renewals and replacements 28,801 28,243 General plant and administrative assets 46,874 46,225 Assets under construction - 603 Capital spares 20,331 18,575 Land 2,554 2,554

2,846,082 2,849,292

Accumulated depreciation Pipeline in service assets 1,305,811 1,197,082 Renewals and replacements 14,796 9,997 General plant and administrative assets 37,813 35,550

1,358,420 1,242,629

1,487,662 1,606,663

Property, plant and equipment includes an equity component of allowance for funds used during construction of $135.1 million (December 31, 2011 - $135.1 million) as a capitalized asset, recorded at cost. The recorded value, after accumulated amortization, is $79.8 million (December 31, 2011 - $85.2 million).

Depreciation expense for property, plant and equipment is included as part of depreciation and amortization expense in the Statements of Income. For the year ended December 31, 2012, Alliance recognized $122.2 million of depreciation expense related to property, plant and equipment (December 31, 2011 - $118.0 million, December 31, 2010 - $112.3 million).

NOTE 5 INTANGIBLE ASSETS

December 31 2012 2011

Cost Computer software 34,101 34,111Accumulated amortization Computer software 32,918 30,825

1,183 3,286

Amortization expense for intangible assets is included as part of depreciation and amortization expense in the Statements of Income. For the year ended December 31, 2012, Alliance recognized $2.1 million of amortization expense related to intangible assets (December 31, 2011 - $2.1 million, December 31, 2010 - $2.5 million).

The 2013 estimated annual amortization expense for intangible assets is approximately $1.2 million as the intangible assets will be fully amortized by December 31, 2013.


NOTE 6 LONG-TERM DEBT

December 31 2012 2011

Credit facility 2,000 2,0007.230% senior notes due 2015 75,464 121,4657.181% senior notes due 2023 317,222 321,0795.546% senior notes due 2023 157,752 170,7547.217% senior notes due 2025 246,248 253,2486.765% senior notes due 2025 281,424 289,4244.928% senior notes due 2019 120,000 120,000

1,200,110 1,277,970Less: current portion (79,831) (77,860)

1,120,279 1,200,110

The interest on long-term debt for the year ended December 31, 2012 is $83.8 million (December 31, 2011 - $88.8 million, December 31, 2010 - $93.8 million).

LONG-TERM DEBT COMMITMENTS AND FINANCIAL COVENANTS

Scheduled principal repayments of long-term debt for the twelve months ending December 31 are as follows:

2013 79,8312014 83,2812015 90,4662016 82,9592017 83,961Thereafter 779,612

1,200,110

Alliance must maintain a debt service reserve equal to scheduled principal and interest payments in the succeeding six month period. At December 31, 2012 and December 31, 2011, this debt service reserve was satisfied by letters of credit. Alliance is in compliance with all debt covenants as at December 31, 2012.

Alliance’s long-term debt consists of senior secured and unsecured notes, credit facility draws and debt service reserve letters of credit. The senior secured notes and the credit facility are collateralized by a first priority perfected security interest in Alliance’s transportation service agreements with its shippers, NEB permit, certain other material contracts, trust accounts into which transportation revenue is deposited, and a floating charge debenture over Alliance’s real property and tangible personal property.

Alliance has covenants governing its long-term debt. Key financial covenants include a maximum borrowing amount not to exceed at any time 70% of the rate base by more than US $10.0 million. Prior to making any distributions, Alliance’s debt service coverage ratio shall be at least 1.25 for the four preceding fiscal quarters and the four succeeding fiscal quarters, calculated as of the distribution date. The debt service coverage ratio is defined as the ratio of cash inflows minus operating costs as compared with the scheduled debt service payable for a twelve month period.

SENIOR NOTES

The 4.928% senior unsecured note pays interest in arrears, on June 16 and December 16 of each year and the principal repayment amount is due in 2019.

All other senior notes pay interest and principal repayments semi-annually on June 30 and December 31. The principal repayments of these senior secured notes are closely tied to the recovery rates for depreciation contained in the transportation service agreements.

CREDIT FACILITY

The bank credit facility consists of a committed extendible revolving credit facility in the amount of $200.0 million with an expansion provision to facilitate timely increases of the facility to $300.0 million, if required. The facility is currently comprised of $80.0 million in letters of credit that Alliance is required to maintain as a debt service reserve and a $120.0 million operating line of credit.

The allocation of the facility between the debt service reserve and operating line can change from year to year depending on Alliance’s debt service reserve requirement, which changes over time. The maturity date of the facility is October 30, 2015. There are provisions to extend the facility on each anniversary of the closing date, but in no case can the length of the facility extend beyond four years. Extensions are subject to bank syndicate acceptance. The facility has been reduced by drawings of $2.0 million and by outstanding letters of credit in the amount of $80.0 million.

Interest is accrued and payable based on bankers’ acceptance rates, plus applicable margins, for terms not exceeding six months. Upon each maturity, the interest rates are reset at the then prevailing interest rates. Amounts outstanding under the credit facility at December 31, 2012 bear interest at an average rate of 2.28% (December 31, 2011 – 1.84%) and the interest rate was reset on January 28, 2013.

NOTE 7 RELATED PARTIES

RELATED PARTY TRANSPORTATION REVENUE

Alliance has firm service transportation service agreements with shippers who are obligated to pay monthly demand charges on 1,325 mmcf/d of contracted capacity. A number of these shippers, approximately 15% of the contracted capacity at December 31, 2012 (December 31, 2011 – 15%), are also related entities of the partners of Alliance. The terms of these contracts are the same as those agreed to with independent third parties.

For the year ended December 31, 2012, natural gas transmission services provided to related parties, net of capacity assignments, amounted to $46.1 million (December 31, 2011 - $42.8 million, December 31, 2010 - $32.0 million).

ALLIANCE PIPELINE LTD

The General Partner provides management, administrative, operational and workforce related services to Alliance. The costs of all compensation, benefits and employer expenses for these employee-partners are charged directly by the General Partner. The General Partner does not record any profit or margin for the services charged to Alliance.

Alliance does not directly employ any of the individuals responsible for managing or operating the business, nor does Alliance have any directors. Alliance obtains management, administrative, operational and workforce related services from the General Partner under the terms of the Limited Partnership Agreement. Alliance reimburses the General Partner for service costs incurred under the terms of the Limited Partnership Agreement. Invoiced services are based on actual costs incurred and are settled on a monthly basis. All amounts exchanged under this agreement are presented as general and administrative costs and costs incurred under administrative service agreements.

ALLIANCE PIPELINE L P

Administrative and operations service agreements allow Alliance to provide or receive services to or from Alliance US, an entity related by virtue of a common ownership group, in exchange for reimbursement of incurred costs. Certain amounts reimbursed under the service agreements with Alliance US also include a recovery of costs relating to the use of common administrative assets.

Invoiced services provided to Alliance US are based on actual costs and are settled in Canadian dollars on a monthly basis. All amounts exchanged under this agreement are presented as costs incurred under administrative service agreements and reimbursement under administrative service agreements.



NRGREEN POWER LIMITED PARTNERSHIP

Alliance provides management, administrative, operational and workforce related services to the NRGreen Power Limited Partnership (NRGreen), an entity related by virtue of a common ownership group. Agreements between Alliance and NRGreen, with respect to waste heat supply, manpower services and compressor site access, have been executed in exchange for reimbursement of incurred costs. Services are based on actual costs and are invoiced to NRGreen on a quarterly basis in the month following the quarter-end. All amounts exchanged under this agreement are presented as costs incurred under administrative service agreements and reimbursement under administrative service agreements.

AUX SABLE CANADA L P

Alliance provides Aux Sable Canada L.P., an entity related by virtue of a common ownership group, with administrative and facility support services. Services are invoiced to Aux Sable Canada L.P. on a monthly basis. All amounts exchanged under this agreement are presented as costs incurred under administrative service agreements and reimbursement under administrative service agreements.

Costs Incurred And Reimbursed Under Administrative Service Agreements


Operations and maintenance NRGreen Power Limited Partnership 1,440 1,545 1,454 Alliance Pipeline L.P. (273) 707 790General and administrative Alliance Pipeline L.P. 41,173 36,066 32,521 Aux Sable entities 198 603 600 NRGreen Power Limited Partnership 759 719 707

Costs incurred under administrative service agreements 43,297 39,640 36,072

Reimbursement of costs incurred under administrative service agreements (43,297) (39,640) (36,072)Common administrative asset charge Alliance Pipeline L.P. (2,270) (2,475) (2,572)

(45,567) (42,115) (38,644)

Accounts Receivable From Related Parties (Excluding Transportation Revenue)

December 31 2012 2011

Alliance Pipeline entities 4,357 3,762NRGreen Power Limited Partnership 597 563Aux Sable entities 6 98

4,960 4,423

Accounts Payable To Related Parties

December 31 2012 2011

Alliance Pipeline entities 752 510NRGreen Power Limited Partnership 23 -

775 510


NOTE 8 PARTNERS’ EQUITY

PARTNERS’ CAPITAL

Alliance is authorized to issue an unlimited number of Class A and B units. The Class A and B units are voting and participate equally in profits, losses and capital distributions of Alliance. The Class A Units and the Class B units are equal with respect to all rights, benefits, obligations and limitations provided under the limited partnership agreement.

The Class A and B units are held equally by Alliance’s partners. The General Partner does not hold any units. Any units issued by Alliance must be first offered to the existing group of Limited Partners in proportion to their ownership interests.

DISTRIBUTIONS

The General Partner may, at any time, distribute to the General Partner and the holders of the Class A units and the Class B units such portion of the net income of Alliance, including any undistributed income and net of contributions, as the General Partner determines in good faith to be in the best interest of Alliance, as follows:

• 1% to the General Partner; and• 99% to the holders of Class A units and Class B units

Distributions are only permitted to be made to the General Partner and/or the holders of the Class A and Class B units upon trustee approval.

NOTE 9 FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table provides the fair value of financial instruments. Regulatory assets and liabilities are not considered financial instruments and therefore are not included.

December 31, 2012 Carrying Value Fair Value

Financial Assets Cash 2,022 2,022 Trust accounts 29,544 29,544 Trade accounts receivable 35,082 35,082 Accounts receivable from related parties 8,794 8,794 Investment in MAVII notes 11,155 11,155Financial Liabilities Trade accounts payable and accrued liabilities 22,560 22,560 Accounts payable to related parties 775 775 Long-term debt 1,200,110 1,417,183 Other long-term liabilities 8,268 8,268

December 31, 2011 Carrying Value Fair Value

Financial Assets Cash 1,115 1,115 Trust accounts 44,255 44,255 Trade accounts receivable 35,205 35,205 Accounts receivable from related parties 8,257 8,257 Investment in MAVII notes 8,996 8,996Financial Liabilities Trade accounts payable and accrued liabilities 28,958 28,958 Accounts payable to related parties 510 510 Foreign currency forward contracts 121 121 Long-term debt 1,277,970 1,497,459 Other long-term liabilities 9,416 9,416


Long-term debt in the above schedule includes the current portion of the liability for comparison to the fair value. The fair value of the long-term debt is based on the quoted market prices for similar instruments. At December 31, 2012, long-term debt qualifies as a Level 2 measurement.

The fair value of the foreign currency forward contracts is determined based on observable inputs other than unadjusted quoted prices, such as fair value estimates provided by Alliance’s lenders, interest rates and currency exchange rates.

Other financial assets and liabilities, including trade accounts receivable and trade accounts payable, are short-term in nature, and as such, their carrying values approximate fair values. At December 31, 2012, cash and cash equivalents qualify as a Level 2 measurement.

At December 31, 2012, MAVII notes qualify as a Level 3 measurement. Following is a reconciliation of the Level 3 category financial instruments. Gains reflect changes in the fair value of Level 3 financial instruments and are presented as a component of interest and other income.

December 31 2012 2011

Opening balance 8,996 8,996Gains recognized in net income 2,159 -Settlements - -Transfers into level 3 - -

Closing balance 11,155 8,996

INVESTMENT IN MAVII NOTES

On January 22, 2009 Alliance received a $12.4 million investment in MAVII notes in exchange for Alliance’s investment in asset-backed commercial paper.

The composition of the MAVII notes consists of various classes of notes, which carry separate ratings from DBRS and are presented below:

Class A-1 notes 49% AA (low)Class A-2 notes 41% BBB (high)Class B notes 7% No ratingClass C notes 3% No rating

While the legal maturity of these notes is July 15, 2056, the expected repayment date of the notes is January 22, 2017.

To date, Alliance has estimated the fair value loss on investment to be $1.3 million at December 31, 2012 (December 31, 2011 - $3.4 million, December 2010 - $3.4 million). These estimates may vary from the actual prices that would be achieved in an arm’s length transaction at the reporting date.

Fair Value of MAVII Notes

Active market quotes were not available in measuring the fair value of the MAVII notes. Management employs a valuation technique comprised of quantitative and qualitative measures.

Each class is valued using the same methodology, but using different discount rates. Alliance estimates the fair values of the MAVII notes using a present value analysis of future cash flow that incorporates floating coupon payments tied to Bankers Acceptance (BA) rates and risk adjusted discount rates. Discount rates are estimated based on Government of Canada benchmark rates plus expected spreads for similarly rated instruments with comparable risk profiles from a rating agency. For Class B and C, the discount rates are estimated based on the 10-year US Treasury notes plus spread as these notes are not rated.

Class A-1 and A-2 notes are valued using a comparable market rate, with A-2 notes more heavily discounted as they are subordinated to A-1 notes. Class B notes are subordinated to A-2 notes, and Class C notes are subordinated to Class B notes. Therefore, Class B notes are valued by comparing high yield bond spreads, while Class C notes are valued by comparing CCC or lower bond spreads. In addition, unlike Classes A-1, A-2 and B notes that pay interest at BA rates less 50 basis points, Class C notes pay interest at 120% of the BA rate. Based on this information, Alliance estimates the fair values of the MAVII notes using a present value analysis of future cash flows that incorporates estimated floating coupon payments tied to BA rates and risk adjusted discount rates.


NOTE 10 RISK MANAGEMENT

CREDIT RISK

Alliance is exposed to credit risk, which is the risk that a shipper or counterparty will fail to perform an obligation or settle a liability resulting in a financial loss to Alliance. Alliance’s business is concentrated in the natural gas transportation industry and is dependent upon the ability of its shippers to pay monthly revenue charges. A majority of the shippers operate in the oil and gas exploration and development, or energy marketing or transportation industries. They may be exposed to long-term downturns in energy commodity prices, including the price for natural gas, or other credit events impacting these industries.

Alliance limits its exposure to credit risk by requiring shippers who fail to maintain specified credit ratings or a suitable financial position to provide acceptable security, generally equal to one year of demand charges. Should shippers be unable to fulfill their contractual obligations with Alliance and if suitable replacement shippers are not available, Alliance may not be able to recover its costs or make distributions to its partners. Alliance considers the risk of non-performance of its shippers is minimal based on credit approval, ongoing monitoring procedures and historical experience.

Transportation security may consist of cash deposits or letters of credit and/or other security acceptable to Alliance and its lenders.

At December 31, 2012, Alliance holds letters of credit of $26.9 million (December 31, 2011 – $26.8 million).

At December 31, 2012, and December 31, 2011, the shipper accounts receivable balance outstanding that meets the definition of past due and/or impaired is nil.

Alliance has recognized a long-term receivable for the non-cash cumulative difference between depreciation expense included in the financial statements and the shipper negotiated depreciation expense included in the transportation tolls. The long-term receivable is a regulatory asset and is exposed to the same credit risk as Alliance.

Alliance’s cash is held with major financial institutions. This minimizes the risk of non-performance by counter parties.

The accounts receivable balances relate to customers in the oil and gas industry and are subject to normal industry credit risks.

LIQUIDITY RISK

Liquidity risk is the risk that Alliance will not be able to meet its financial obligations, including commitments and guarantees, as they become due. Alliance manages its liquidity risk by ensuring that it has access to sufficient funds to meet its obligations. Alliance forecasts cash requirements to ensure funding is available to settle financial liabilities when they become due. In the normal course of business, Alliance accesses cash, undrawn committed bank credit facilities, owner funding or cash from operations to pay current and long-term liabilities.

Alliance is in compliance with all the terms and conditions of its committed credit facilities. Therefore, the entire credit facility is available and the banks are obligated to fund and have been funding Alliance under the terms of the facility.

Annual cash inflows are collected equally over twelve months. The cash outflows are less predictable and require the use of a revolving credit facility to manage short-term working capital fluctuations. Alliance continues to balance the operating, investing and financing of cash through ongoing operations of its business. Alliance is required to manage all cash and borrowings on the credit facility to maintain an adequate ability to cover operational and business needs as determined by the debt service coverage ratio as defined in the amended and restated Common Agreement dated May 16, 2003. The debt service coverage ratio is defined as the ratio of cash inflows minus operating costs as compared with the scheduled debt service payable for a twelve month period. The ratio is required to be 1.25 or above. At December 31, 2012, the debt service coverage ratio is 1.93 (December 31, 2011 – 1.97).

A quantitative maturity analysis of non-derivative financial liabilities at December 31, 2012 to the contractual maturity dates is as follows:

Up to 1 Year 1 - 3 Years 3 - 5 Years Over 5 Years Total

Trade accounts payable and accrued liabilities 22,560 - - - 22,560Accounts payable to related parties 775 - - - 775Current portion of long-term debt 79,831 - - - 79,831Long-term debt - 173,746 166,921 779,612 1,120,279Other long-term liabilities - 4,554 1,292 2,422 8,268

Total 103,166 178,300 168,213 782,034 1,231,713


Alliance considers its expected cash flows from financial assets, cash and accounts receivable in assessing and managing liquidity risk. Alliance’s existing cash resources and accounts receivable are sufficient to cover current cash outflow requirements.

FOREIGN EXCHANGE RISK

Alliance is exposed to foreign exchange risk, primarily on its US dollar and Euro purchases of pipeline maintenance services and assets. To manage this risk, policies have been implemented which allow Alliance to minimize the exposure to volatility on foreign currency markets by entering into foreign currency derivatives, or by buying and holding foreign currency. Alliance undertakes hedging activities, as authorized and approved by the Board of Directors, under the risk management policy for forecasted operating and approved capital expenditures. Foreign currency derivatives may be designated as hedging instruments for accounting purposes.

INTEREST RATE RISK

Alliance is exposed to interest rate fluctuations on its variable rate debt. Amounts outstanding under the revolving credit facilities are floating-rate based. To manage this risk, policies have been implemented which allow Alliance to minimize the exposure to volatility of interest rates. All hedging policies are authorized and approved by the Board of Directors through the risk management policy.

Alliance has significantly reduced this overall risk through the issuance of fixed rate notes. At December 31, 2012, Alliance has fixed interest rates on 99.8% (December 31, 2011 – 99.8%) of total long-term debt. Consequently, the exposure to fluctuations in future cash flows, with respect to debt, as a result of changes in interest rates is limited.

NOTE 11 DERIVATIVES AND HEDGING ACTIVITIES

FOREIGN CURRENCY FORWARD CONTRACTS

Alliance is committed to making a number of payments denominated in Euro currency under certain maintenance service and compressor control panel contracts. Alliance has mitigated the foreign currency risk exposure by entering into foreign currency forward contracts. At inception, these derivatives were designated as cash flow hedges and are recognized at fair value. Several cash flow hedges have been discontinued because they were no longer effective.

The fair value of the cash flow hedges with a term less than one year approximates the estimated net amount of existing gains and losses reported in accumulated other comprehensive income that is expected to be reclassified to net income within the next year. Amounts are reclassified from accumulated other comprehensive income when hedged transactions affect income or hedge accounting is discontinued and it is probable that the anticipated transactions will not occur within a specified period.

The fair value of the foreign currency forward contracts are determined based on observable inputs other than unadjusted quoted prices such as fair value estimates provided by Alliance’s lenders, interest rates and currency rates. This methodology is consistent with level 2 assets.

Forward contracts maturing within a year are presented as part of the other current assets, and the remainder of the foreign currency forward contracts is presented as part of the other long-term assets.

Cash flows associated with the foreign currency forward contracts not designated as hedging instruments are presented in the same manner as the cash flows of the intended hedge position.

All foreign currency forward contracts outstanding on December 31, 2011 matured on or before June 4, 2012.

NOTE 12 INTEREST AND OTHER INCOME


Gain on MAVII notes 2,159 - -Interest income 749 670 268Compressor unit waste heat supply 428 424 415

Interest and other income 3,336 1,094 683


NOTE 13 TRADE ACCOUNTS RECEIVABLE

December 31 2012 2011

Transportation revenue 34,717 33,851Other 365 1,354

Trade accounts receivable 35,082 35,205

NOTE 14 TRADE ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

December 31 2012 2011

Trade accounts payable and accrued liabilities 4,772 7,291Interest accruals 528 339Operating accruals 7,279 7,820Capital accruals 1,285 3,804Employee benefits payable 8,475 9,118Other 221 586

Trade accounts payable and accrued liabilities 22,560 28,958

NOTE 15 OTHER LONG-TERM ASSETS

December 31 2012 2011

MAVII notes 11,155 8,996Unamortized deferred financing charges 5,384 6,423Other 684 171

Other long-term assets 17,223 15,590

At December 31, 2012, deferred financing charges are net of accumulated amortization of $13.0 million (December 31, 2011 - $11.9 million).

NOTE 16 OTHER LONG-TERM LIABILITIES

December 31 2012 2011

Deferred lease incentive benefits 5,006 5,948Other 3,262 3,468

Other long-term liabilities 8,268 9,416


NOTE 17 COMMITMENTS AND CONTINGENCIES

LEASES

Alliance has operating lease commitments for office premises, vehicles and maintenance commitments. The expected minimum lease payments for the years ending December 31 are as follows:

2013 7,2672014 7,0812015 6,6992016 6,3342017 6,173

33,554

Expenses for operating leases for the year ended December 31, 2012 are $4.4 million (December 31, 2011 - $3.0 million, December 31, 2010 - $1.7 million).

SERVICE AGREEMENTS

On March 31, 2008 Alliance signed a service agreements contract with a manufacturer of compressor equipment which expires in December 2017. The service agreements relate to maintenance of Alliance’s compressor equipment. Alliance has outstanding commitments of US $0.6 million ($0.6 million) per month and €0.3 million ($0.3 million) per month relating to this contract. These fees may escalate each year based on an indexed price formula contained within the contract.

On August 1, 2009, Alliance entered into a contract with a manufacturer of compressor equipment for development and purchase of compressor control panel replacement units and test panels. The contract requires progress payments in Euros, with outstanding commitments of €0.8 million ($1.1 million) for the twelve months ended December 31, 2013.

Alliance may be required to refund deposits for certain construction projects funded by third parties should a confirming event occur. The uncertainty in relation to the occurrence of the future confirming event will be resolved in the third quarter of 2013. At December 31, 2012, the cumulative amount of the deposits is $8.4 million.

Alliance is, or may be named as, a party to various legal claims associated with its normal course of business. As at the date of these financial statements, the resolution of these claims is not expected to have a material adverse impact on the operations or financial position and is not accrued in these financial statements.

CROSS-COLLATERALIZATION

The senior debt of Alliance and Alliance US contain cross-default provisions, whereby an event of default by one entity constitutes an event of default by the other. Alliance and Alliance US are in compliance with all applicable debt covenants at December 31, 2012.

The following assets are pledged as collateral to Alliance’s lenders and to the lenders of Alliance US.

• All transportation contracts and all documents and security provided by the shipper pursuant to their transportation contracts• Other operative documents (including permits, government consents and any insurance policies)• The trust accounts (except the note proceeds account will be pledged solely for the benefit of note holders)• Aux Sable security documents • Alliance’s real property and tangible personal property

NOTE 18 SUBSEQUENT EVENTS

On December 11, 2012, the Board of Directors of the General Partner approved a distribution of $37.1 million to be paid by Alliance to the partners of Alliance on or about January 30, 2013.

Subsequent events were evaluated until the Audit Committee review and approval on January 28, 2012 upon which date the financial statements became available to be issued.

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