CALGARY, ALBERTA–(Marketwired – Nov. 1, 2016) – Veresen Inc. (“Veresen”) (TSX:VSN) today announced its third quarter operating and financial results.
“Veresen’s operational and financial performance in each of the first three quarters has continued to exceed expectations and has enabled us to raise guidance for the second time this year,” said Don Althoff, President and CEO of Veresen. “Our underlying business remains strong, and we believe that Veresen Midstream will continue to provide meaningful growth. Importantly, through the expected sale of our power assets and the additional credit facilities secured within Veresen Midstream, our $1.3 billion of growth projects under construction is fully funded and will drive per share growth.”
Third Quarter Financial and Operational Highlights
- Distributable cash for the quarter of $101 million or $0.33 per Common Share compared to $94 million or $0.30 per Common Share in the second quarter, with Alliance releasing an additional $8 million in distributable cash previously held in trust
- Throughput volumes on Alliance remained particularly strong in the third quarter, driven by continuing shipper uptake of seasonal firm and interruptible transportation in response to stronger relative pricing in U.S. Mid-West markets
- Total of $271 million ($128 million net to Veresen) in growth capital was invested by Veresen Midstream during the third quarter, including $244 million ($116 million net) for the construction of the Sunrise, Tower and Saturn Phase II processing facilities
- Full year 2016 distributable cash guidance increased approximately 6% to a range of $1.12 per Common Share to $1.16 per Common Share to reflect the continued strong performance in the underlying businesses and management’s confidence in sustained momentum through the fourth quarter
Update on Key Strategic Initiatives
- In August, Veresen announced its intention to pursue the sale of its power generation business and the suspension of its Premium Dividend™ and Dividend Reinvestment Plan. Proceeds from the divestiture will initially be used to reduce debt outstanding and subsequently used to fund the remaining equity component of projects currently under construction through 2018
- In early September, Veresen Midstream secured an additional $650 million of new credit facilities comprised of a new US$150 million Senior Secured Term Loan B, a $405 million increase in the Expansion Facility and an incremental $50 million of capacity within the Revolving Facility. With the expansion of Veresen Midstream’s credit facilities, the balance of the capital requirements within Veresen Midstream are now fully funded
- Subsequent to the end of the third quarter, Cutbank Ridge Partnership (“CRP”) and Encana sanctioned approximately $22 million ($11 million net to Veresen) of incremental capital projects, with the continued expectation that additional capital projects will be sanctioned within Veresen Midstream by the end of this year
Financial Overview
| Three Months Ended | |||
| September 30 | |||
| ($ Millions, except per Common Share amounts) | 2016 | 2015 | |
| Adjusted net income attributable to Common Shares | 21 | 12 | |
| Per Common Share ($) | 0.07 | 0.04 | |
| Net income attributable to Common Shares | 19 | 8 | |
| Per Common Share ($) | 0.06 | 0.03 | |
| Distributable Cash(1) | |||
| Pipeline | 96 | 79 | |
| Midstream | 18 | 12 | |
| Power | 10 | 10 | |
| Veresen – Corporate | (17) | (10) | |
| Taxes | – | (13) | |
| Preferred Share dividends | (6) | (6) | |
| Total Distributable Cash | 101 | 72 | |
| Per Common Share ($) | 0.33 | 0.25 | |
| (1) | See the reconciliation of distributable cash to cash from operating activities in tables attached to this news release. |
During the third quarter, Veresen generated adjusted net income attributable to Common Shares of $21 million or $0.07 per Common Share, reflecting the strength of the pipeline business and increased contribution from the midstream segment, tempered by higher project development spending to continue the advancement of the Jordan Cove LNG project.
Distributable cash for the third quarter was $101 million or $0.33 per Common Share, compared to $72 million or $0.25 per Common Share for the same period last year. This was driven by increases from the pipeline and midstream segments and lower cash taxes.
Proportionate Consolidation(1)
| Three Months | Pipelines | Midstream | ||||||
| Ended September 30 | Veresen | Aux | ||||||
| ($ millions) | Alliance(2) | Ruby(3) | AEGS | Midstream | Sable | Power | Corporate | Total |
| EBITDA(4) | 74 | 48 | 7 | 17 | 6 | 24 | (11) | 165 |
| Interest | (12) | (14) | (1) | (5) | (8) | (6) | (46) | |
| Principal Repayment | (16) | (12) | (1) | (1) | (4) | (34) | ||
| Maintenance Capex | (2) | (1) | (1) | (4) | ||||
| Other(5) | 15 | 8 | 7 | (3) | (1) | (6) | 20 | |
| Distributable Cash | 61 | 30 | 5 | 16 | 2 | 10 | (23) | 101 |
| Long-term Debt | 707 | 715 | 78 | 646 | 6 | 414 | 1,068 | 3,634 |
| Growth Capital(4) | 128 | 6 | 28 | 162 | ||||
| (1) | This table contains non-GAAP measures. Balances for Veresen’s jointly controlled businesses represent Veresen’s proportional share based on Veresen’s ownership interest, and includes consolidation adjustments. See the reconciliation of distributable cash to cash from operating activities tables attached to this news release. |
| (2) | Approximately 54% of Alliance EBITDA was earned in C$. |
| (3) | Ruby EBITDA presented as a 50% proportionate share with benefit of preferred distribution structure reflected in “other”. |
| (4) | Presented on incurred basis. Corporate EBITDA and growth capital do not include $26 million of Jordan Cove project development spending expensed during the quarter. Corporate growth capital includes $26 million of Burstall investment. |
| (5) | Alliance “other” includes $8 million of cash previously held in trust. Corporate “other” relates to preferred share dividends. |
Business Segment Overview
| Volumes by Segment | Q3 2016 | Q2 2016 | Q1 2016 | Q4 2015 | Q3 2015 | ||
| Pipeline | |||||||
| Alliance (bcf/d) | |||||||
| Firm | 1.338 | 1.320 | 1.391 | 1.325 | 1.325 | ||
| Authorized Overrun Service (1) | n/a | n/a | n/a | 0.156 | 0.011 | ||
| Seasonal Firm | 0.153 | 0.144 | 0.094 | n/a | n/a | ||
| Priority Interruptible Transportation Service and Interruptible Transportation | 0.053 | 0.095 | 0.139 | n/a | n/a | ||
| Total Canadian Volumes | 1.544 | 1.559 | 1.624 | 1.481 | 1.336 | ||
| U.S. Bakken Volumes | 0.138 | 0.139 | 0.131 | 0.161 | 0.153 | ||
| Total Deliveries into Channahon | 1.682 | 1.698 | 1.755 | 1.642 | 1.489 | ||
| Ruby (bcf/d) | 0.698 | 0.555 | 0.705 | 1.013 | 0.930 | ||
| AEGS (mbbls/d) | 298 | 287 | 286 | 280 | 286 | ||
| Midstream | |||||||
| Veresen Midstream (mmcf/d) | |||||||
| Hythe / Steeprock | 385 | 385 | 386 | 392 | 392 | ||
| Dawson | 670 | 724 | 767 | 709 | 608 | ||
| Total Veresen Midstream | 1,055 | 1,109 | 1,153 | 1,101 | 1,000 | ||
| Aux Sable (mbbls/d) | 65 | 91 | 69 | 73 | 57 | ||
| Power | |||||||
| Power (GWh, net) | 177 | 209 | 208 | 155 | 133 | ||
| (1) | Under the prior cost of service model, Authorized Overrun Service (“AOS”) allowed all firm shippers certain additional capacity without an incremental toll. Under the new service model, capacity in excess of long-term firm may be sold as seasonal firm, Priority Interruptible Transportation Service (“PITS”) or Interruptible Transportation (“IT”). |
Pipeline
Alliance
Throughput volumes on Alliance remained strong, with total deliveries into Channahon of 1.682 bcf/d during the third quarter. This represents an increase of 13% relative to the comparable quarter in 2015 and is effectively in-line with the second quarter of 2016. Importantly, Canadian average daily throughput remained strong. Since Canadian volumes are transported through several segments of the pipeline, Alliance collects higher per unit tolls on deliveries into Channahon from Canada than from U.S. Bakken deliveries.
Producer demand for Seasonal Firm, PITS and IT service continues to be driven largely by a wide AECO – Chicago gas price basis differential as well as outages and curtailments on alternative egress options out of western Canada. Veresen expects these drivers to persist, resulting in volumes on Alliance remaining strong in the near term.
Distributable cash from Alliance was $61 million in the third quarter, an increase of approximately $16 million over the run rate in the first half of the year, driven partly by the release of an additional $8 million in distributable cash previously held in trust. Veresen continues to believe that distributable cash in the first nine months of 2016, excluding the additional amounts released in the third quarter, remains indicative of future run rate in an environment where there is very strong demand for Alliance’s service. However, the company expects that there will continue to be some degree of variability in quarterly distributable cash due to operational seasonality and cash flow timing.
Subsequent to the end of the third quarter, Alliance undertook a planned shut-down to perform certain pipe replacement work to accommodate the construction of a highway near Regina, Saskatchewan. There is no significant financial impact as Alliance will be reimbursed for the costs incurred and revenues forgone as a result of the planned shut-down.
Ruby
Volumes on Ruby during the third quarter continued to be impacted by low western Canadian natural gas pricing and a weak Canadian dollar, improving AECO’s competitiveness into Malin Hub relative to sourcing from Opal Hub. Volumes of 0.698 bcf/d in the third quarter, represented an increase from the 0.555 bcf/d in the second quarter, but were only about three-quarters of the volumes in the third quarter of 2015. The additional throughput volumes relative to the second quarter were a result of increased seasonal power demand and widening of basis between Opal Hub and Malin Hub.
Veresen’s preferred distribution from Ruby provides the company with US$91 million per year, with variance in Veresen’s distributable cash only as a result of fluctuating foreign exchange rates. The company remains confident that Ruby can continue to support its preferred distribution to Veresen. Investment grade shippers on Ruby represent sufficient volumes to meet Veresen’s preferred distribution, with continued debt amortization reducing volumes required for distribution coverage. Weighted average contract length on Ruby is approximately seven years.
AEGS
Both volumes and distributable cash from AEGS remain very stable. AEGS is a critical part of the infrastructure supporting the petrochemical industry in Alberta, with distributable cash underpinned by long-term take-or-pay contracts.
Midstream
Veresen Midstream
Veresen Midstream’s strong operational performance continued in the third quarter with Veresen Midstream’s facilities running at nearly 100% plant reliability. Volumes at Dawson continued to be impacted by third-party downstream curtailments, including a 16 day planned turnaround in September. Volumes at Hythe / Steeprock were in-line with expectations and included some volumes from third party producers.
The 50 mmcf/d refrigeration expansion of the Hythe gas processing facility that was placed into service in June operated at full capacity during the third quarter. The refrigeration expansion was Veresen Midstream’s first brownfield expansion and was designed, constructed and placed into service by Veresen Midstream. Importantly, it is indicative of opportunities Veresen Midstream expects to capitalize on in the future. The expansion, as part of the Hythe / Steeprock assets, is operated by Veresen Midstream and is governed by the existing take-or-pay Midstream Services Agreement with Encana.
Veresen Midstream currently provides Veresen with approximately $16 million of distributable cash each quarter. Veresen’s share of EBITDA for the quarter of $17 million was slightly below each of the first two quarters of 2016 largely as a result of the third-party downstream curtailments. Costs remained in-line with the prior quarter. EBITDA from Dawson is expected to continue to grow as additional gathering lines, compression and gas plants are brought into service.
During the third quarter, a total of $271 million ($128 million net to Veresen) in capital was invested by Veresen Midstream, including $244 million ($116 million net) for the construction of the Sunrise, Tower and Saturn Phase II processing facilities. Construction of the three processing facilities remains on budget and on schedule, with more than 45% of capital incurred to date. The company continues to expect the combined cost of the processing facilities currently under construction to be approximately $2.5 billion (approximately $1.2 billion net to Veresen), with the Sunrise and Tower plants expected to be in-service by the end of 2017 and the Saturn Phase II plant in-service by mid-2018.
When all three of these facilities are operational, Veresen Midstream will have 1.5 bcf/d of processing capacity in operation and will be a dominant player in the core of the Montney, one of North America’s most prolific and competitive resource plays. Once commissioned, these facilities are expected to generate incremental run-rate EBITDA of between $250 million to $300 million (approximately $120 million to $140 million net to Veresen), based on target volumes.
Subsequent to the end of the third quarter, CRP and Encana sanctioned two incremental capital projects as a result of the need for increased liquids-rich gas processing capacity. The CRP has sanctioned modifications to an existing compressor station to process richer gas at a cost of approximately $12 million ($6 million net to Veresen). Encana has further sanctioned approximately $10 million ($5 million net to Veresen) of capital projects to increase liquids handling capabilities at the Hythe gas processing plant. Both the compressor station modifications and the improvements at the Hythe gas processing plant will be made under existing 15 year, take-or-pay agreements.
Since Veresen Midstream was formed in early 2015, a total of $3.3 billion (approximately $1.6 billion net to Veresen) in capital projects have been sanctioned under the agreement with Cutbank Ridge Partnership (“CRP”) and Encana to fund up to $5 billion of new infrastructure. At the end of the third quarter, approximately $680 million of these capital projects were in service.
Aux Sable
Distributable cash from Aux Sable of $2 million in the third quarter was a slight decrease relative to the second quarter and reflects NGL margins remaining near cyclical lows. While a recovery in ethane margins during the second quarter had led to the resumption of ethane extraction, weaker margins in the third quarter resulted in a return to the periodic rejection of ethane at the Channahon Facility. Aux Sable’s NGL Sales Agreement with BP continued to provide downside protection during the third quarter, with the need for NGL margins to increase somewhat meaningfully before Aux Sable’s profitability reflects a more fulsome NGL margin recovery.
During the third quarter, Aux Sable commissioned the Fractionation Expansion at the Channahon Facility with commercial deliveries beginning in mid-September. With approximately US$5 million of expenditures incurred in the third quarter and total spend of US$49 million, the project came in below the original budget of US$56 million. The expansion adds 24,500 bbl/d of largely propane plus liquids handling capacity, and will allow for increased liquids to flow on the Alliance pipeline.
Burstall Ethane Storage Facility
Veresen continues to advance the construction of a one million barrel ethane storage facility located near Burstall, Saskatchewan, underpinned by a 20-year contract with NOVA Chemicals. The total cost of construction is expected to be approximately $140 million, with $26 million spent during the third quarter. Veresen has incurred approximately 45% of the cost of construction to date and anticipates spending an additional $10 million to $15 million in the remainder of the year. Veresen expects that the construction of Burstall will be completed in late 2018.
Power
Distributable cash of $10 million from the power segment was slightly lower than the first two quarters of the year as a result of lower contribution from the run-of-river assets.
Jordan Cove LNG Project and Pacific Connector
The company continues to pursue the Jordan Cove LNG Project and related Pacific Connector natural gas pipeline with a current focus of securing additional agreements for the long-term sale of natural gas liquefaction capacity at the export terminal as well as securing the requisite regulatory permits for both the terminal and the pipeline.
Approximately $26 million of project development spend was incurred in the third quarter. More than half of the costs incurred at Jordan Cove in 2016 were related to the competitive bid process for the lump-sum turn-key contract for the construction of the terminal, with the bid process expected to be completed in the fourth quarter. Veresen expects the project development spend run rate to decrease once the competitive bid process is completed.
While the company has continued to advance both regulatory and commercial work streams, the delay in the Federal Energy Regulatory Commission (“FERC”) providing a substantive ruling on the project’s request for rehearing has created a lack of immediacy, delaying further commercial progress and is beginning to slow the process for securing approvals from other agencies.
Increased 2016 Guidance
Veresen has increased its 2016 distributable cash guidance by approximately 6% to a the range of $1.12 per Common Share to $1.16 per Common Share, reflecting continuing strong performance of the underlying business and the incremental cash flow received from Alliance in the third quarter relating to cash previously held in trust.
The increased guidance range reflects a payout ratio of approximately 86% to 89% of distributable cash. Further details concerning 2016 guidance can be found on the home page of Veresen’s web site at www.vereseninc.com.
Balance Sheet and Funding Strategy
During the third quarter, Veresen announced its intention to sell its power generation business. The divestiture process was formally launched in October and Veresen anticipates entering into binding sale agreements in the first quarter of 2017, with closing in the first half of the year. Proceeds of the sale will be initially directed to reduce debt outstanding and subsequently used to fully fund the remaining equity component of the approximately $1.3 billion of projects currently under construction.
At the end of the third quarter, approximately $610 million of the aggregate cost of these projects had been incurred, with a remaining equity component of approximately $300 to $375 million to be funded over the next two years. Until the proceeds of the power business are realized, Veresen expects to primarily use its $750 million revolving credit facility on an interim basis to fund its equity contributions into Veresen Midstream and the equity component of Burstall. During this period, distributable cash is expected to fully cover the dividend but is only expected to provide limited retained cash for reinvestment into the business.
As at September 30, 2016, Veresen had approximately $379 million of available, undrawn capacity on its $750 million revolving credit facility. Subsequent to the end of the quarter, the maturity of Veresen’s revolving credit facility was extended by one year to May 31, 2020.
During the third quarter, Veresen made an equity contribution of $155 million into Veresen Midstream, with the next contribution expected in the first quarter of 2017. Veresen Midstream intends to fund its capital investment using 55% to 60% debt. To complete the construction of sanctioned projects at Veresen Midstream, an additional $225 to $275 million in equity contributions by Veresen are anticipated over the next two years.
In early September, Veresen Midstream secured an additional $650 million of new credit facilities comprised of a new US$150 million Senior Secured Term Loan B, a $405 million increase in the Expansion Facility and an incremental $50 million of capacity within the Revolving Facility. With the expansion of Veresen Midstream’s credit facilities, the balance of the capital requirements within Veresen Midstream are now fully funded.
In aggregate, the credit facilities in place within Veresen Midstream had $1,310 million (approximately $620 million net to Veresen) of available capacity as at September 30, 2016. Debt at the partnership level is non-recourse to Veresen.
Proportionate Consolidation of Debt – Amortization Schedule(1)
| ($ millions) | Q4 2016 | 2017 | 2018 | 2019 | 2020 | 2021+ | Total | ||
| Fixed Term | |||||||||
| Pipeline | |||||||||
| Alliance | 16 | 65 | 64 | 125 | 65 | 328 | 663 | ||
| Ruby | 12 | 145 | 57 | 57 | 57 | 340 | 668 | ||
| AEGS | 1 | 4 | 4 | 4 | 65 | 79 | |||
| Total | 29 | 214 | 125 | 186 | 187 | 668 | 1,409 | ||
| Veresen Midstream(2) | 1 | 4 | 22 | 30 | 196 | 393 | 646 | ||
| Power | 5 | 18 | 37 | 124 | 16 | 198 | 398 | ||
| Corporate | 300 | 150 | 200 | 50 | 700 | ||||
| Total Fixed Term | 35 | 536 | 334 | 540 | 399 | 1,309 | 3,153 | ||
| Revolving (Floating Rate) | |||||||||
| Alliance | 44 | 44 | |||||||
| Ruby | 47 | 47 | |||||||
| Veresen Midstream | – | ||||||||
| Aux Sable | 6 | 6 | |||||||
| Power | 16 | 16 | |||||||
| Corporate | 368 | 368 | |||||||
| Total Floating Rate | – | 53 | 44 | 16 | 368 | – | 481 | ||
| Total | 35 | 589 | 378 | 556 | 767 | 1,309 | 3,634 | ||
| (1) | This table contains non-GAAP measures. Balances for Veresen’s jointly controlled businesses represent Veresen’s proportional share based on Veresen’s ownership interest, and includes consolidation adjustments. |
| (2) | Once the Sunrise, Tower and Saturn Phase II facilities currently under construction are in operation, Veresen intends to refinance the Veresen Midstream expansion facility with non-amortizing debt. |
The company’s debt on a proportionate consolidation basis as at September 30, 2016 was $3.6 billion or approximately 5.2x proportionately consolidated EBITDA on a trailing 12 month basis of $693 million. Veresen expects that debt to EBITDA will be in the range of approximately 4.0x – 4.5x once the projects under construction are on-line. The company also believes that it is prudent to look at distributable cash after the amortization of debt within each of the business, even where significant value will remain in the assets after the debt is fully amortized. Veresen is committed to maintaining strong investment grade credit ratings.
Conference Call & Webcast Details
A conference call and webcast presentation will be held to discuss third quarter 2016 financial and operating results at 7:00am Mountain Time (9:00am Eastern Time) on Wednesday, November 2, 2016.
To listen to the conference call, please dial 647-788-4919 or 1-877-291-4570 (toll-free). This call will also be broadcast live on the Internet and may be accessed directly at the following URL:
http://www.gowebcasting.com/8078
A presentation will accompany the conference call and will be available via the webcast. Alternatively, the presentation will be made available immediately prior to the conference call start time of 7:00am Mountain Time on Veresen’s website at: http://www.vereseninc.com/invest/events-presentations.
A digital recording will be available for replay two hours after the call’s completion, and will remain available until November 16, 2016 21:59 Mountain Time (23:59 Eastern Time). To listen to the replay, please dial 416-621-4642 or 1-800-585-8367 (toll-free) and enter Conference ID 94202117. A digital recording will also be available for replay on the company’s website.
About Veresen Inc.
Veresen is a publicly-traded dividend paying corporation based in Calgary, Alberta that owns and operates energy infrastructure assets across North America. Veresen is engaged in three principal businesses: a pipeline transportation business comprised of interests in the Alliance Pipeline, the Ruby Pipeline and the Alberta Ethane Gathering System; a midstream business which includes a partnership interest in Veresen Midstream Limited Partnership which assets owns in western Canada, and an ownership interest in Aux Sable, which owns a world-class natural gas liquids (NGL) extraction facility near Chicago, and other natural gas and NGL processing energy infrastructure; and a power business comprised of a portfolio of assets in Canada. Veresen is also developing Jordan Cove LNG, a six million tonne per annum natural gas liquefaction facility proposed to be constructed in Coos Bay, Oregon, and the associated Pacific Connector Gas Pipeline. In the normal course of business, Veresen regularly evaluates and pursues acquisition and development opportunities.
Veresen’s Common Shares, Cumulative Redeemable Preferred Shares, Series A, Cumulative Redeemable Preferred Shares, Series C, and Cumulative Redeemable Preferred Shares, Series E trade on the Toronto Stock Exchange under the symbols “VSN”, “VSN.PR.A”, “VSN.PR.C” and “VSN.PR.E”, respectively. For further information, please visit www.vereseninc.com.
Forward-looking Information
Certain information contained herein relating to, but not limited to, Veresen and its businesses and the offering of the notes, constitutes forward-looking information under applicable securities laws. All statements, other than statements of historical fact, which address activities, events or developments that Veresen expects or anticipates may or will occur in the future, are forward-looking information. Forward-looking information typically contains statements with words such as “may”, “estimate”, “anticipate”, “believe”, “expect”, “plan”, “intend”, “target”, “project”, “forecast” or similar words suggesting future outcomes or outlook. Forward-looking statements in this news release include, but are not limited to, statements with respect to: growth to be contributed by Veresen Midstream; the use of proceeds from the sale of Veresen’s power business; the funding plan of Veresen; capital projects to be sanctioned by Veresen Midstream in 2016; demand for services on Alliance; the amount of distributable cash to be generated by Veresen in 2016; the amount of EBITDA to be contributed by Dawson; in service dates and cost of construction of, and amount of EBITDA to be generated by, the Sunrise and Tower gas plants, and the Saturn Phase II processing facility; the in service date and cost of construction of the Burstall ethane storage facility; timing of the bid process for a construction contract for Jordan Cove LNG; project development spending for Jordan Cove LNG and Pacific Connector; the timing of the sale of Veresen’s power business; the sources of equity and debt financing required to fund the capital of Veresen and Veresen Midstream; the uses and amount of Veresen’s distributable cash; and debt to EBITDA levels once projects under construction are on-line. Readers are also cautioned that such additional information is not exhaustive.
The impact of any one risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these factors are independent and management’s future course of action would depend on its assessment of all information at that time. Although Veresen believes that the expectations conveyed by the forward-looking information are reasonable based on information available on the date of preparation, no assurances can be given as to future results, levels of activity and achievements. Undue reliance should not be placed on the information contained herein, as actual results achieved will vary from the information provided herein and the variations may be material. Veresen makes no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking information. Furthermore, the forward-looking statements contained herein are made as of the date hereof, and Veresen does not undertake any obligation to update publicly or to revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable laws. Any forward-looking information contained herein is expressly qualified by this cautionary statement.
Certain financial information contained in this news release may not be standard measures under Generally Accepted Accounting Principles (“GAAP”) in the United States and may not be comparable to similar measures presented by other entities. These measures are considered to be important measures used by the investment community and should be used to supplement other performance measures prepared in accordance with GAAP in the United States. US GAAP requires us to equity account for our investments in jointly-controlled businesses. However, we have chosen to provide some information on our jointly-controlled businesses on a proportionate basis to assist the reader. For further information on other non-GAAP financial measures used by Veresen see Management’s Discussion and Analysis, in particular, the section entitled “Non-GAAP Financial Measures” contained in the annual Management Discussion and Analysis, filed by Veresen with Canadian securities regulators.
™ denotes trademark of Canaccord Genuity Corp.
| Veresen Inc. |
| Consolidated Statement of Financial Position |
| (Canadian $ Millions; number of shares in Millions; unaudited) | September 30, 2016 | December 31, 2015 | |||
| Assets | |||||
| Current assets | |||||
| Cash and short-term investments | 106 | 58 | |||
| Restricted cash | 3 | 7 | |||
| Distributions receivable | 66 | 52 | |||
| Accounts receivable and other | 42 | 36 | |||
| 217 | 153 | ||||
| Investments in jointly-controlled businesses | 1,486 | 1,312 | |||
| Investments held at cost | 1,878 | 1,981 | |||
| Pipeline, plant and other capital assets | 890 | 919 | |||
| Intangible assets | 150 | 151 | |||
| Due from jointly-controlled businesses | 3 | 42 | |||
| Other assets | 7 | 2 | |||
| 4,631 | 4,560 | ||||
| Liabilities | |||||
| Current liabilities | |||||
| Payables | 65 | 65 | |||
| Deferred revenue | 2 | 2 | |||
| Dividends payable | 26 | 25 | |||
| Current portion of long-term senior debt | 313 | 13 | |||
| 406 | 105 | ||||
| Long-term senior debt | 997 | 1,076 | |||
| Deferred tax liabilities | 278 | 256 | |||
| Other long-term liabilities | 43 | 36 | |||
| 1,724 | 1,473 | ||||
| Shareholders’ Equity | |||||
| Share capital | |||||
| Preferred Shares | 536 | 536 | |||
| Common Shares (314 and 299 outstanding at September 30, 2016 and December 31, 2015, respectively) | 3,482 | 3,354 | |||
| Additional paid-in capital | 28 | 4 | |||
| Cumulative other comprehensive income | 224 | 359 | |||
| Accumulated deficit | (1,363 | ) | (1,166 | ) | |
| 2,907 | 3,087 | ||||
| 4,631 | 4,560 | ||||
| Veresen Inc. |
| Consolidated Statement of Income |
| Three months ended September 30 | Nine months ended September 30 | ||||||||
| (Canadian $ Millions, except per Common Share amounts; unaudited) | 2016 | 2015 | 2016 | 2015 | |||||
| Equity income | 44 | 15 | 132 | 57 | |||||
| Dividend income | 30 | 30 | 90 | 85 | |||||
| Operating revenues | 39 | 37 | 114 | 147 | |||||
| Operations and maintenance | (15 | ) | (15 | ) | (44 | ) | (60 | ) | |
| General and administrative | (14 | ) | (6 | ) | (37 | ) | (33 | ) | |
| Project development | (26 | ) | (19 | ) | (104 | ) | (56 | ) | |
| Depreciation and amortization | (13 | ) | (15 | ) | (41 | ) | (46 | ) | |
| Interest and other finance | (12 | ) | (14 | ) | (35 | ) | (42 | ) | |
| Foreign exchange and other | – | 2 | – | 6 | |||||
| Gain on sale of assets | – | – | – | 37 | |||||
| Net income before tax | 33 | 15 | 75 | 95 | |||||
| Current tax | (3 | ) | (9 | ) | (8 | ) | (30 | ) | |
| Deferred tax | (5 | ) | 8 | (13 | ) | 8 | |||
| Net income, before extraordinary loss | 25 | 14 | 54 | 73 | |||||
| Extraordinary loss, net of tax | – | – | – | (10 | ) | ||||
| Net income | 25 | 14 | 54 | 63 | |||||
| Preferred Share dividends | (6 | ) | (6 | ) | (19 | ) | (17 | ) | |
| Net income attributable to Common Shares | 19 | 8 | 35 | 46 | |||||
| Continuing operations | 0.06 | 0.03 | 0.11 | 0.20 | |||||
| Extraordinary loss | – | – | – | (0.04 | ) | ||||
| Net income per Common Share | 0.06 | 0.03 | 0.11 | 0.16 | |||||
| Consolidated Statement of Comprehensive Income (Loss) | ||||||||||
| Three months ended September 30 | Nine months ended September 30 | |||||||||
| (Canadian $ Millions; unaudited) | 2016 | 2015 | 2016 | 2015 | ||||||
| Net income | 25 | 14 | 54 | 63 | ||||||
| Other comprehensive income (loss) | ||||||||||
| Unrealized foreign exchange gain (loss) on translation | 21 | 176 | (135 | ) | 338 | |||||
| Other comprehensive income (loss) | 21 | 176 | (135 | ) | 338 | |||||
| Comprehensive income (loss) | 46 | 190 | (81 | ) | 401 | |||||
| Preferred Share dividends | (6 | ) | (6 | ) | (19 | ) | (17 | ) | ||
| Comprehensive income (loss) attributable to Common Shares | 40 | 184 | (100 | ) | 384 | |||||
| Veresen Inc. |
| Consolidated Statement of Cash Flows |
| Three months ended September 30 | Nine months ended September 30 | ||||||||
| (Canadian $ Millions; unaudited) | 2016 | 2015 | 2016 | 2015 | |||||
| Operating | |||||||||
| Net income | 25 | 14 | 54 | 63 | |||||
| Equity income | (44 | ) | (15 | ) | (132 | ) | (57 | ) | |
| Distributions from jointly-controlled businesses | 75 | 67 | 208 | 168 | |||||
| Depreciation and amortization | 13 | 15 | 41 | 46 | |||||
| Foreign exchange and other non-cash items | 2 | 3 | 3 | 13 | |||||
| Deferred tax | 5 | (9 | ) | 13 | (9 | ) | |||
| Gain on sale of assets | – | – | – | (37 | ) | ||||
| Extraordinary loss, net of tax | – | – | – | 10 | |||||
| Changes in non-cash working capital | 2 | 2 | 5 | 14 | |||||
| 78 | 77 | 192 | 211 | ||||||
| Investing | |||||||||
| Proceeds from sale of assets | 81 | – | 81 | 420 | |||||
| Proceeds from sale of discontinued operations | – | – | – | 34 | |||||
| Investments in jointly-controlled businesses | (157 | ) | (14 | ) | (308 | ) | (41 | ) | |
| Return of capital from jointly-controlled businesses | 5 | 1 | 11 | 26 | |||||
| Pipeline, plant and other capital assets | (23 | ) | (17 | ) | (65 | ) | (49 | ) | |
| Other | – | 1 | 3 | (1 | ) | ||||
| (94 | ) | (29 | ) | (278 | ) | 389 | |||
| Financing | |||||||||
| Long-term debt repaid | (2 | ) | (114 | ) | (8 | ) | (734 | ) | |
| Net change in credit facilities | 92 | 84 | 224 | 83 | |||||
| Preferred Shares issued, net of issue costs | – | – | – | 194 | |||||
| Common Share dividends paid | (44 | ) | (28 | ) | (101 | ) | (79 | ) | |
| Preferred Share dividends paid | (6 | ) | (6 | ) | (19 | ) | (17 | ) | |
| Advances to jointly-controlled businesses | 41 | 25 | 41 | – | |||||
| Other | (1 | ) | (2 | ) | (1 | ) | – | ||
| 80 | (41 | ) | 136 | (553 | ) | ||||
| Increase in cash and short-term investments | 64 | 7 | 50 | 47 | |||||
| Effect of foreign exchange rate changes on cash and short-term investments | – | 7 | (2 | ) | 10 | ||||
| Cash and short-term investments at the beginning of the period | 42 | 94 | 58 | 51 | |||||
| Cash and short-term investments at the end of the period | 106 | 108 | 106 | 108 | |||||
| Veresen Inc. |
| Distributable Cash |
| Three months ended September 30 | Nine months ended September 30 | |||||||
| (Canadian $ Millions, except per Common Share amounts; unaudited) | 2016 | 2015 | 2016 | 2015 | ||||
| Pipeline | 96 | 79 | 255 | 219 | ||||
| Midstream | 18 | 12 | 55 | 57 | ||||
| Power | 10 | 10 | 34 | 29 | ||||
| Veresen – Corporate | (17 | ) | (10 | ) | (49 | ) | (44 | ) |
| Current tax | – | (13 | ) | – | (27 | ) | ||
| Preferred Share dividends | (6 | ) | (6 | ) | (19 | ) | (17 | ) |
| Distributable cash (1) | 101 | 72 | 276 | 217 | ||||
| Distributable cash per Common Share ($) (2) | 0.33 | 0.25 | 0.90 | 0.75 | ||||
| Dividends paid/payable (3) | 78 | 74 | 230 | 218 | ||||
| Dividends paid/payable per Common Share ($) | 0.25 | 0.25 | 0.75 | 0.75 | ||||
| (1) | Distributable cash is not a standard measure under generally accepted accounting principles in the United States and may not be comparable to similar measures presented by other entities. Distributable cash represents the cash available to Veresen for distribution to common shareholders after providing for debt service obligations, Preferred Share dividends, and any maintenance and sustaining capital expenditures. Distributable cash does not include distribution reserves, if any, available in jointly-controlled businesses, project development costs, or transaction costs incurred in conjunction with acquisitions. Project development costs are discretionary, non-recoverable costs incurred to assess the commercial viability of greenfield business initiatives unrelated to the Company’s operating businesses. The Company considers transaction costs to be part of the consideration paid for an acquired business and, as such, are unrelated to the Company’s operating businesses. Distributable cash is an important measure used by the investment community to assess the source and sustainability of Veresen’s cash distributions and should be used to supplement other performance measures prepared in accordance with generally accepted accounting principles in the United States. See the following table for the reconciliation of distributable cash to cash from operating activities. |
| (2) | The number of Common Shares used to calculate distributable cash per Common Share is based on the average number of Common Shares outstanding at each record date. For the three and nine months ended September 30, 2016, the average number of Common Shares outstanding for this calculation was 313,139,434 and 308,318,619 (2015 – 292,313,045 and 289,351,842). |
| (3) | Includes $17 million and $114 million of dividends for the three and nine months ended September 30, 2016, respectively (2015 – $46 million and $138 million) satisfied through the issuance of Common Shares under the Company’s Premium Dividend™ (trademark of Canaccord Genuity Corp.) and Dividend Reinvestment Plan, which was recently discontinued beginning with the August 2016 dividend |
| Veresen Inc. |
| Reconciliation of Distributable Cash to Cash from Operating Activities |
| Three months ended September 30 | Nine months ended September 30 | ||||||||
| (Canadian $ Millions; unaudited) | 2016 | 2015 | 2016 | 2015 | |||||
| Cash from operating activities | 78 | 77 | 192 | 211 | |||||
| Add (deduct): | |||||||||
| Project development costs (4) | 26 | 19 | 104 | 56 | |||||
| Change in non-cash working capital and other | (16 | ) | (4 | ) | (1 | ) | (22 | ) | |
| Loan of operating cash flow from jointly controlled business (5) | – | 3 | – | 6 | |||||
| Principal repayments on senior notes | (3 | ) | (3 | ) | (9 | ) | (9 | ) | |
| Maintenance capital expenditures | (1 | ) | – | (4 | ) | (2 | ) | ||
| Distributions earned greater (less) than distributions received (6) | 23 | (14 | ) | 13 | (6 | ) | |||
| Preferred Share dividends | (6 | ) | (6 | ) | (19 | ) | (17 | ) | |
| Distributable cash | 101 | 72 | 276 | 217 | |||||
| (4) | Represents costs incurred by us in relation to projects where the recoverability of such costs has not yet been established. Amounts incurred for the three and nine months ended September 30, 2016 relate primarily to the Jordan Cove LNG terminal project and the Pacific Connector Gas Pipeline project. |
| (5) | We were provided a loan by the York Energy Centre, a jointly-controlled business. The loan was non-interest bearing and was due on demand. As at September 30, 2015, the balance outstanding was $6 million. The loan is intended to provide us with operating cash flows from the York Energy Centre in a more tax efficient manner. |
| (6) | Represents the difference between distributions declared by jointly-controlled businesses and distributions received. |
| Veresen Inc. |
| Reconciliation of Net Income to Adjusted Net Income Attributable to Common Shares |
| Three months ended September 30 | Nine months ended September 30 | ||||||||
| (Canadian $ Millions; unaudited) | 2016 | 2015 | 2016 | 2015 | |||||
| Adjusted net income attributable to Common Shares | 21 | 12 | 52 | 50 | |||||
| Extraordinary loss, net of tax (7) | – | – | – | (10 | ) | ||||
| Midstream – gain on sale of assets (8) | – | – | – | 37 | |||||
| Midstream – gain (loss) on revaluation of Veresen Midstream debt (9) | (3 | ) | (26 | ) | 20 | (25 | ) | ||
| Midstream – unrealized gain (loss) on Veresen Midstream cross currency swap (10) | 3 | 26 | (22 | ) | 21 | ||||
| Midstream – write-down of deferred financing costs (11) | – | – | – | (2 | ) | ||||
| Midstream – potential customer settlement (12) | – | – | – | (16 | ) | ||||
| Power – unrealized loss on interest rate hedge (13) | (2 | ) | (6 | ) | (12 | ) | (6 | ) | |
| Taxes (14) | – | 2 | 4 | – | |||||
| Effect of Alberta corporate tax rate increase (15) | – | – | – | (3 | ) | ||||
| Capital gains tax on U.S.-based organizational restructuring (16) | – | – | (7 | ) | – | ||||
| Net income attributable to Common Shares | 19 | 8 | 35 | 46 | |||||
| Net income attributable to Common Shares includes the following items which are non-operating in nature and/or unusual items and which we do not expect to recur: | |
| (7) | Loss due to the de-recognition of regulatory assets and liabilities related to Alliance. |
| (8) | Gain on the sale of the Hythe/Steeprock assets to Veresen Midstream on March 31, 2015. |
| (9) | Gain (loss) on the revaluation of US dollar-denominated Term Loan B held by Veresen Midstream. |
| (10) | Gain (loss) on the Veresen Midstream cross currency swap entered into to hedge the impact of changes in foreign exchange and interest rates on the Term Loan B held by Veresen Midstream. |
| (11) | Adjustment to deferred financing costs related to fees incurred on a modification to Veresen Midstream’s debt. |
| (12) | Provision recognized in the second quarter of 2015 in respect of potential adjustments related to Aux Sable customer obligations. |
| (13) | Loss on revaluation of interest rate hedges held by York Energy Centre, Grand Valley I and Grand Valley II. |
| (14) | The related taxes on the adjusting items described above. |
| (15) | Impact of increased corporate income tax rate in province of Alberta. |
| (16) | Capital gains tax arising from our U.S.-based organizational restructuring effective January 1, 2016. |
