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Business Risks
The risks identified below are specific to Alliance Canada. General risks that affect the Fund as a whole are described under Risk Factors.
Re-Contracting Risk
The revenue generated by Alliance Canada is derived from tolls that are based on the TSAs which, unless renewed, will terminate at the end of the primary term in November 2015. Beyond the primary term, the decision by shippers to renew will depend on numerous factors, including the level of demand for natural gas in the geographic areas which can be served by pipelines and distribution facilities connected to the Alliance System, the ability and willingness of shippers to meet such demand, the competitiveness of Alliance Canada’s toll structure and general market conditions. If shippers do not renew their TSAs, Alliance Canada may be forced to lower its tolls to avoid losing shippers, thereby reducing Alliance Canada’s cash flow from the TSAs.
When the primary term of the TSAs expires, Alliance Canada is expected to have recovered approximately 54% of the capital cost of the Alliance Canada pipeline through depreciation charges collected from shippers. Since there is no guarantee that all shippers will extend their contracts beyond the primary term, the undepreciated capital cost and the deferred transportation revenue may not be recovered as soon as expected. In order to mitigate the risk of non-renewal, there are financial incentives for shippers to renew their contracts beyond the primary term. Additionally, Alliance Canada continues to focus on ensuring the competitiveness of its tolls and providing a high level of service through system enhancements.
Competition
The Alliance System faces competition in pipeline transportation from both existing and proposed projects. Any new or upgraded pipelines could provide shippers and competing pipelines greater access to natural gas markets or offer more desirable natural gas transportation services due to location, facilities or other factors. Further, these pipelines could charge tolls or provide service to locations that result in greater net profit for shippers. As a result, Alliance Canada may be forced to lower its transportation tolls upon the expiration of the primary term of the TSAs. Alliance Canada mitigates this risk through its continued focus on strong shipper relations and competitive tolls as well as its AOS, which allows shippers access to transportation capacity at no additional cost.
Exposure to Shippers
Alliance Canada is highly dependent on shippers for revenues from contracted capacity on the Alliance Canada system. Failure of the shippers to fulfill their contractual obligations under the TSAs could have an adverse effect on the cash flows and financial condition of Alliance Canada and could impair the ability of Alliance Canada to meet its debt obligations and make distributions to its limited partners. A prolonged economic downturn in the energy industry, significant reductions in the supply of natural gas in the Western Canadian Sedimentary Basin, competition from alternative sources of natural gas supply and from other providers of natural gas transportation services, and the price of and demand for natural gas and natural gas transportation services in markets served by Alliance Canada, among other things, could impact the ability of some or all of the shippers to fulfill their obligations under the TSAs.
Credit Risk
Currently, approximately 9.0% of firm capacity on Alliance Canada’s system is contracted to shippers who do not have an investment-grade rating or equivalent strong credit status and are required to post security. These shippers have provided security to Alliance Canada, but in no case does it fully cover more than one year’s demand charges under the TSAs. There can be no assurance that the security will be adequate to compensate Alliance Canada if a shipper is unable to fulfill its obligations under its TSA.
Recovery of Costs
Pursuant to the terms of the TSAs and in accordance with the negotiated toll principles accepted by the NEB, Alliance Canada is permitted to recover from the shippers costs incurred in the construction and operation of the Alliance System that are actually and reasonably incurred. There can be no certainty that all costs incurred by Alliance Canada will be recoverable through the transportation tolls. Since transportation tolls are set in advance based on forecast expenses, and adjusted periodically to reflect actual expenses, there is no assurance that the variances in the estimate will be recovered from shippers in subsequent periods.
Dependence on Interconnected Systems and Facilities
The Alliance System operates as an integrated pipeline; therefore, any matters which limit or restrict the ability of Alliance US to operate will equally affect the ability of Alliance Canada to operate. Alliance Canada may have no control over matters which may adversely affect Alliance US. In addition, the debt obligations of Alliance Canada and Alliance US are cross-collateralized. In the event of a default of the debt obligations of either Alliance Canada or Alliance US, the assets of the non-defaulting entity may be used to satisfy the debts of the defaulting entity. The debt obligations of both Alliance Canada and Alliance US also contain default provisions related to the occurrence of certain bankruptcy, insolvency or other adverse events affecting Aux Sable Extraction LP, where those events would have a material adverse effect on Alliance.
There is a significant degree of dependency on Aux Sable Liquid Products LP (Aux Sable), a related party to Alliance Canada through common ownership interest, to satisfy its requirements to provide heat content management services to Alliance US. Should Aux Sable fail to provide heat content management services for any reason, Alliance Canada may experience operational issues, including an interruption or curtailment of transportation service on the Alliance System. It is not possible to predict the extent or duration of these operational problems or their precise financial or operational effect on Alliance Canada.