MANAGEMENT'S DISCUSSION AND ANALYSIS Alliance Pipeline ...

MANAGEMENT’S DISCUSSION AND ANALYSIS Alliance Pipeline Limited Partnership

For the year ended December 31, 2015 Page 1

TABLE OF CONTENTS

Forward-Looking Information 2 Introduction 3 Executive Overview 3 Corporate Strategy 4 Our Business 5 Natural Gas Transmission Services 5 Competitiveness 6 Increase in Natural Gas Transported 6 Growth in Natural Gas Supplies 7

Health, Safety and Environmental Stewardship 8 Health and Safety 9 Environment 9

2015 Financial Highlights 10 Results of Three Months Operations 12 Results of Twelve Months Operations 13

Selected Quarterly Information 14

Related Party Transactions 15

Liquidity and Capital Resources 16 Liquidity 16 Distributions to Partners 16 Capital Management 16

Pipeline Abandonment Costs 17

Risks and Uncertainties 17 Competition 17 Demand for Transportation Services 18 Dependence on Related Parties 18 Regulatory Risk 19 Operating Risks 19 Credit Risk 19 Liquidity Risk 20 Cyber Risk 20

Critical Accounting Estimates 21 Depreciation and Amortization 21 Asset Retirement Obligation 21

Financial Instruments 22

New Accounting Policies 22 Accounting for Rate Regulation 22 Inventories 23

Disclosure Controls and Procedures 23 Changes in Internal Control over Financial Reporting 23 Internal Controls over Financial Reporting 23



FORWARD-LOOKING INFORMATION

Some information in this Management’s Discussion and Analysis (MD&A) is forward-looking. All information about activities, events or developments that we think may occur in the future is forward-looking information. Forward-looking information typically consists of statements containing words such as "may", "estimate", "anticipate", "believe", "expect", "plan", "intend", "target", "project", "proposed", "forecast" or similar words. Forward-looking information in this MD&A includes:

o assessments of our anticipated business projects including the timing, scope, and ability to achieve our expected results;

o our financial and operating performance; o the Alliance Pipeline System’s ability to accommodate new receipt volumes with variant gas compositions; o the proposed in-service dates of announced and current construction projects; o whether available credit facilities can sufficiently fund our operations and planned capital expenditures; and o our ability to remain compliant with the terms and conditions of our credit facilities.

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

o our ability to successfully implement our corporate strategy; o continuing to receive regulatory approvals allowing us to provide service under our tariffs and tolls; o the availability and price of capital; o shipper credit risk and continued existence of contracted shippers; o changes in regulatory, environmental, and other laws and regulations; o competitive factors in the pipeline and natural gas liquids industries; o impact of North American and international energy market conditions on our shippers; o the availability of energy commodities; o fluctuations in foreign exchange and interest rates; o the operating performance of our pipeline assets; and o completion of announced projects in a reasonable time frame and within budget.

This list is not exhaustive. We cannot predict the effect of any particular risk, uncertainty or 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 achieved 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 at www.alliancepipeline.com.



INTRODUCTION

Alliance Pipeline Limited Partnership (Alliance Canada or the Partnership) owns the Canadian portion of the Alliance Pipeline System (the System). Alliance Pipeline L.P. (Alliance USA) owns the U.S. portion of the Alliance Pipeline System. Alliance Canada is jointly owned by Enbridge Income Partners Holdings Inc. and Veresen Energy Infrastructure Inc. (collectively known as the Partners). Alliance Canada is subject to federal regulation by the National Energy Board (NEB).

The System has capacity for transporting approximately 1.65 billion cubic feet per day (bcf/d) of rich gas (containing natural gas liquids (NGL) such as ethane, propane, butane, and pentane within the methane gas stream). Rich gas is delivered, via Alliance USA, to the Aux Sable extraction and fractionation plant, owned by Aux Sable Liquid Products LP (Aux Sable), an affiliate of Alliance Canada. The Aux Sable extraction and fractionation facility is located immediately upstream of the delivery header near Chicago which provides interconnections to five interstate natural gas pipelines and two local natural gas distribution systems.

This MD&A reviews the significant events and transactions that affected our performance during the twelve months ended December 31, 2015 relative to the same period in 2014. It should be read in conjunction with our December 31, 2015 audited consolidated financial statements and our 2014 Annual Information Form. Where the consolidated financial statements use capitalized terms we do not define here, they have the same meanings attributed to them in our December 31, 2015 audited consolidated financial statements. All financial information is in Canadian dollars unless otherwise noted. All financial information in this MD&A has been prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP).

EXECUTIVE OVERVIEW

On July 9, 2015, Alliance Canada achieved a significant milestone with the NEB approval of our filed New Services Offering. The New Services Offering is designed to provide producers and shippers with competitive fixed and biddable tolls, providing liquids rich natural gas transportation service from the Western Canadian Sedimentary Basin (WCSB) to the US Midwest, while ensuring the long-term economic viability of the pipeline. The NEB approved the New Services Offering and associated terms and conditions, as well as all of the firm tolls that became effective December 1, 2015. This approval allowed us to move forward with



the conversion of our executed Precedent Agreements into firm transportation contracts with our shippers, thereby replacing the original 15-year firm service contracts that expired on November 30, 2015.

The New Services Offering reflects a dynamic and flexible at-risk market-focused approach that was well received in the marketplace. Alliance Canada has re-contracted all of its year-round firm receipt capacity through 2018, and approximately 90% of firm receipt capacity in 2019 and 2020, with average contract durations of 5.3 years. Following this successful marketing of our initial firm contracts effective December 1, 2015, demand for our services has been far in excess of available capacity. We have successfully contracted all our available winter 2015/2016 and summer 2016 seasonal firm capacity, as well as additional short term firm service contracts with terms up to 90 days to capture this strong demand for transportation service. In December 2015, Alliance USA’s average daily throughput to the Aux Sable plant inlet was 1.65 bcf/d. This includes the marketing of available interruptible transportation services, resulting in an average of 73 million cubic feet per day (mmcf/d) of interruptible receipt service and 77 mmcf/d of interruptible delivery service during the month. Alliance Canada will continue to use our flexible and competitive suite of new services, along with the operational capabilities and reliability of our System, to optimize the physical and economic utilization of our pipeline.

Over the past year, energy prices have seen significant declines and volatility that affected companies throughout the oil and gas industry. A reduction in producers’ capital and operating budgets and the impact of reduced revenues on corporate liquidity positions has resulted in an increase in potential credit risk to Alliance. Alliance Canada actively monitors our shippers’ financial positions, along with their development and operating performance, and ensures that credit security is received in cases where a shipper does not have an investment grade rating or acceptable credit status. As a result of our re-contracting, Alliance Canada was able to sell firm receipt transportation services predominantly to rich gas producers with production from the Montney formation in the WCSB. The Montney ranks alongside the best gas plays in North America which bodes well for its continued development in a low energy price environment and utilization of the related contracted capacities on the System. However, a prolonged downturn in energy markets could affect our ability to re-contract volumes or cause a loss of revenue in excess of credit security provided, in the event of a shipper default.

Alliance Canada’s new gas management system (CommPass) provides shippers and Alliance Canada with a new state of the art system which manages all shipper transactions, including contracts, nominations, scheduling, allocations and billing. In the fall of 2016, Alliance Canada will be required to replace approximately 1,200 metres of existing pipe near Regina, Saskatchewan as a result of the Regina South Bypass construction project being carried out by the Saskatchewan Ministry of Highways and Infrastructure. The pipe replacement will also result in a complete System outage currently estimated at seven days, and we have made certain arrangements to recover the majority of these costs.

CORPORATE STRATEGY

Since initiating operations, we have concentrated on our core business by meeting our company objectives in all key areas of operational performance: safe operations, availability, reliability, throughput and efficiency. The System is unique in its ability to transport rich gas in a single continuous dense phase primarily from the WCSB to Chicago where the pipeline interconnects with Aux Sable. The natural gas liquids (NGL) are then extracted at Aux Sable and became available for sale in US markets, while the natural gas is delivered to downstream markets through the Alliance Chicago Exchange Hub. We are continuing to develop and deploy new operating techniques, along with relatively minor facility modifications, that optimize our ability to safely transport higher levels of NGL within the comingled gas stream.

There has been a greater than 27% increase since 2001 in gas production within a 40 kilometer radius of Alliance Canada due to the expanded liquids-rich gas supply from unconventional developments such as the Montney and Duvernay formations. The Montney and Duvernay plays have led supply growth in Western Canada through the recent low gas price environment and their asset economics remain highly competitive to other leading natural gas plays in North America. We are well positioned to transport volumes from these areas given the System’s strength is its rich gas capabilities. Since 2010, we have added or approved for construction receipt points that provide for approximately 1.65 bcf/d of new receipt capacity from rich gas plays in Canada, with approximately 0.5 bcf/d of that capacity installed or approved for construction in 2015 and 2016. Alliance USA has two receipt points for Bakken natural gas in North Dakota which is a major shale oil play with significant associated rich gas production. Firm long-term contract capacity on Alliance USA associated with receipts from the Prairie Rose Pipeline at Bantry, North Dakota is 93 mmcf/d. We also have a firm long-term contract with a shipper to transport 71 mmcf/d on the Tioga Lateral Pipeline. During 2015, Alliance transported on average over 137,000 barrels per day (bbls/d) of NGL within the gas stream, an increase of 65% from the average of approximately 83,000 bbls/d of NGL in 2010.



With the successful launch of our new suite of services and the strong utilization of our available capacity, Alliance Canada will continue to focus on the further development and optimization of our current services, along with supporting business processes and systems, in order to continue delivering strong financial results. Alliance Canada will share with its customers the risks and rewards of shipping in a dynamic and efficient marketplace. Longer term, we will continue to engage with current and potential customers in order to utilize our new services framework and leverage our tremendous assets and capabilities to be responsive to market needs and commercial opportunities.

OUR BUSINESS

Alliance Canada and Alliance USA provide a unique, customer-focused suite of transportation services from the WCSB and the Bakken to the Chicago market. Alliance Canada’s rich gas-capable system is connected, via the Alliance USA system, to the Aux Sable extraction and fractionation facility (Channahon Facility) immediately upstream of the delivery header near Chicago. Aux Sable owns the Channahon Facility, a world scale NGL extraction and fractionation facility that is capable of recovering up to 107,000 bbls/d of ethane, propane, normal butane, isobutane and natural gasoline. Aux Sable has executed several Rich Gas Premium agreements bringing the Channahon Facility to full capacity. As a result, Aux Sable has approved an expansion of the Channahon Facility which will increase propane and butane processing capacity. This operational advantage provides competitive transportation for rich natural gas that reduces investment in field gas processing facilities, minimizes logistics issues associated with the handling of NGL in the field and offers attractive natural gas and NGL related netbacks in a one-pipe solution. Alliance Canada’s unique ability to transport NGL has and will continue to set us apart from other competitors.

NATURAL GAS TRANSMISSION SERVICES

The New Services Offering includes full-path service from Canadian receipt points to the delivery point at the Canada-USA border, and on to Chicago through the Alliance USA portion of the System. Segmented services are also offered; including the option of nominating volumes from a Canadian receipt point, in one of two zones, to the new Canadian Alliance Trading Pool. Zone 1 will include all receipt points downstream of the Blueberry Hill Compressor Station near Gordondale, Alberta, and Zone 2 includes the Blueberry Hill Compressor Station and all receipts points upstream of that station. These services offer shippers competitive fixed tolls for terms out to ten years, and biddable tolls for interruptible and seasonal firm service. The design of the New Services Offering also includes rich gas services and the ability to stage contract commitments.

Effective December 1, 2015, Alliance has been providing new services to its customers. The new services include the following key service elements:

• Alliance Trading Pool (ATP) – a new Canadian trading pool allowing receipt and delivery shippers to trade gas. The ATP is a notional point connecting the receipt zones to the delivery zone (which extends from the ATP to the Canada-U.S. border), where the Canadian portion of the pipeline connects with Alliance USA. The introduction of the ATP facilitates the segmentation of services on the pipeline into receipt and delivery services, providing a platform for receipt and delivery shippers to transfer title and allowing shippers to access Term Park and Loan services.

• Firm Receipt Service includes two zones with fixed volumetric tolls, allowing shippers to move gas from their contract receipt point(s) to the ATP. Shippers have the option to lock in their receipt tolls for three to ten year terms. Firm receipt shippers will also have access to a Priority Interruptible Transportation Service (PITS) that can provide additional



transportation access as production volumes grow. PITS is available to Firm Receipt Service shippers with terms of three years or more and allows them to flow up to 25% more volume at their contracted receipt points.

• Firm Delivery Service allows shippers to deliver gas from the ATP to the Canada - United States border. Fixed tolls are offered on one to ten year contract terms.

• Firm Full Path Service is a volumetrically tolled service from Canadian receipt points to Chicago with fixed toll terms between three and ten years.

To further establish Alliance Canada as the rich gas transporter of choice, we received NEB approval to change the Hydrocarbon Dewpoint (HCDP) gas quality tariff specification from -10 degrees Celsius to -5 degrees Celsius effective December 1, 2015. Similarly, Alliance USA received approval from the Federal Energy Regulatory Commission (FERC) in 2015 to change the HCDP gas quality tariff specification from 14 degrees Fahrenheit to 23 degrees Fahrenheit, which was also effective December 1, 2015. Curtailment mechanisms are included in the tariffs to ensure that pipeline operations and safety are not compromised.

The HCDP specification change will enhance shipper access to rich gas transportation and thus facilitate an increase in the NGL content of the gas Alliance Canada transports. In addition to this HCDP change, we offer new services that can further enable shippers to optimize the heat content of the natural gas delivered to us.

COMPETITIVENESS

Alliance Canada’s pipeline system and services are uniquely designed to enable rich gas producers to maximize the value of their product. Alliance Canada has the unique ability to transport NGL (such as ethane, propane, butane, and pentane) within the methane gas stream. This provides significant competitive advantages which can include:

o Saving producers processing and infrastructure costs;

o Providing access to the Aux Sable extraction and fractionation facility allowing for considerable economies of scale; and

o Providing a higher netback for liquids-rich natural gas.

A key distinction between the System and other North American pipelines is the approved increase in the HCDP that will allow for greater access to the liquids-rich gas carrying capability of our high pressure pipeline. The design of the new services can benefit shippers by allowing them to avoid capital expenditures and reducing the time to market for rich gas production.

The System is 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.

INCREASE IN NATURAL GAS LIQUIDS TRANSPORTED

The unique design and physical capabilities of the Alliance Pipeline System allows shippers the ability to deliver NGL. By delivering products such as ethane, propane, butane and other condensates, Alliance Canada shippers may gain a competitive advantage by delivering value added products while paying a transportation charge based on volume. The benefit of this competitive advantage is illustrated in the table below where the transportation of NGL has increased by 65% since 2010.



GROWTH IN NATURAL GAS SUPPLIES

Alliance Canada continuously works with shippers to place into service new interconnection facilities that will increase receipt capacity from developing liquids-rich sources of natural gas in the WCSB. These opportunities provide Alliance Canada with additional growth in natural gas supplies that can support our continued strong financial performance. The cost to provide these receipt facilities is funded by the requesting customer. Since 2010, we have added or approved for construction, receipt points that provide approximately 1.65 bcf/d of new receipt capacity from rich gas plays. During 2015, two interconnection development agreements were executed for the construction of new facilities representing 425 mmcf/d of new receipt capacity:

o Installation of two NPS 10 meter runs at the existing Gold Creek receipt point with an aggregate design capacity of 325 mmcf/d, to be operational by February 1, 2016; and

o A new interconnection to the NPS 42 mainline near the Ante Creek lateral, that can provide 100 mmcf/d of receipt capacity, planned to be in-service by March 1, 2016.



The map below highlights the new receipt points added to Alliance Canada since June 2010 (does not include interconnections under construction).

HEALTH, SAFETY AND ENVIRONMENTAL STEWARDSHIP

At Alliance Canada, safety and environmental stewardship are our top core values. We consider both in our daily decisions and actions with the goal of being incident free and environmentally responsible. This 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.

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 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.

The NEB conducted a Safety Management Systems audit of five programs regulated under the Onshore Pipeline Regulation (OPR-99) in 2015, which included the Health and Safety and Environment programs. Formal audit reports are expected from the NEB in the first quarter of 2016, which will detail findings from the audit. Alliance Canada will prepare a corrective action plan to address any non-compliance with OPR-99 requirements that are identified in the reports.



HEALTH AND SAFETY

Alliance Canada is 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.

We conduct, and will continue to conduct, patrols of rights of way and required inspections and audits of pipeline condition through investigative excavations and assessments of the levels of protection related to our cathodic protection system, relief valves and mainline valves. In addition to complying with general operating and maintenance requirements, we have rigorous integrity management programs that regularly assess the condition of the pipeline system. Our robust pipeline integrity lifecycle efforts have resulted in three cycles of inline inspections completed in 15 years of operations.

Our maintenance program includes monthly, quarterly, semi-annual and annual inspections of all compressor station and meter station facilities. Maintenance expenditures vary from year to year. We are now into our second decade of operations and as the pipeline system matures and technology changes, we anticipate increased maintenance requirements for some facilities and optimization for other facilities that have undergone improvements or upgrades.

As part of our maintenance inspection program, routine internal safety and security audits are conducted at compressor facilities with corrective actions as required. We have developed a structured Health and Safety Management System based on Occupational Health and Safety Management guidelines. This system is part of Alliance’s Integrated Management System that has been developed for integration of key operational programs to manage hazards and risks associated with operation of Alliance’s pipeline system.

We allow inspections and audits when agencies that regulate our industry request them, and follow defined practices to meet regulatory requirements during the construction, operation and maintenance of our facilities.

ENVIRONMENT

Alliance Canada is committed to high standards of environmental protection when designing, building and operating its facilities. 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 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 the protection of the environment, including those related to Greenhouse Gas (GHG) emissions. Nonetheless, Alliance Canada and our shippers may be exposed to additional costs of complying with new, more stringent regulations. We maintain our focus on environmental stewardship through initiatives such as:

o 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. Our EMS is largely based on ISO 14001 - the international standard that specifies requirements for environmental management systems (which is part of Alliance’s Integrated Management System); and

o 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.

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:

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

o internally coated pipe to reduce friction, thereby reducing fuel consumption; and o 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, GHG emissions are created through the combustion of natural gas in the turbines that drive compressors moving 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% of their baseline emissions. Further emission reductions at the source for our 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 per credit (1 credit = 1 tonne of CO2 emission reductions) or to purchase offsets from qualified projects. The anticipated cost to purchase credits for 2015 is $1.24 million, with the final cost to be determined in the first quarter of 2016.

The Alberta government announced changes to the SGER program in June of 2015. The reduction target remained at 12% for 2015, but will increase to 15% in 2016 and 20% in 2017. The carbon cost remained at $15/tonne for 2015, but will increase to $20/tonne in 2016 and $30/tonne in 2017.

There is no definitive Federal framework for GHG regulation at this time. If a framework is developed, we expect that our facility emissions will exceed the regulatory thresholds that are established for the regulation.

We also conduct regular inspections of our facilities, allow inspections when agencies that monitor us request them, and follow defined practices to meet regulatory requirements during the construction, operation and maintenance of our facilities.

2015 FINANCIAL HIGHLIGHTS

Prior to the implementation of our new services, Alliance Canada followed a traditional cost of service toll setting approach. As a result, we were required to apply rate-regulated accounting guidelines outlined in ASC 980, Regulated Operations (ASC 980) in our consolidated financial statements. Under the new services framework, Alliance Canada will assume revenue and cost risk for the majority of its operations. Due to the change in tariff provisions and the at-risk toll setting approach, a portion of Alliance Canada’s operations no longer meets the criteria outlined in ASC 980. As a result, application of ASC 980 was discontinued effective June 30, 2015, except for the portion of operations that is still in scope of accounting for regulated operations. As a result of the discontinuation of accounting for rate regulated operations, we recognized an extraordinary gain of $3.2 million in the second quarter of 2015, mainly due to the de-recognition of regulatory assets and liabilities.

On August 7, 2015, Alliance Canada shut down its mainline pipeline system for six days after an amount of hydrogen sulfide entered its mainline pipeline through an upstream operator. Alliance Canada restarted its mainline pipeline on August 13, 2015 and safely resumed commercial operations and service for its customers. As a result of the shutdown, Alliance Canada issued approximately $7.4 million of Demand Charge Credits to shippers in October 2015, and we are pursuing avenues for the recovery of this loss.

Years ended December 31 (millions of dollars) 2015 2014 2013 Revenue 465.1 482.2 456.5 Net income 128.8 118.2 112.8 Net income per unit ($) (1) 202.5 185.8 177.3

(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.

REVENUE

Total revenue for the year ended December 31, 2015 is $465.1 million compared to $482.2 million for the year ended December 31, 2014. The decrease in revenue is due to the decrease in operating expenses under rate-regulated accounting guidelines that we applied until June 30, 2015 and the impact of a six day pipeline outage that occurred in the third quarter of 2015. The reduction in transportation revenue is also in part due to the commencement of new services on December 1, 2015. The New Services Offering had strong shipper interest and was fully subscribed. However, under the at-risk toll setting approach, the revenue was lower due to a reduction in our fixed cost structure. NET INCOME

Net income increased $10.6 million to $128.8 million for the year ended December 31, 2015, compared to the twelve months ended December 31, 2014. The overall increase in net income can be attributed to lower operating expenses as a result of a



reduction in contractor and consulting costs and salary related expenses due to lower staffing requirements, lower interest expense and a gain realized upon the discontinuation of ASC 980.

December 31 (millions of dollars) 2015 2014 Current assets 130.8 147.8 Long-term assets 1,173.3 1,278.4 Current liabilities 115.0 162.0 Long-term liabilities 888.5 956.4 Partners' equity 300.6 307.8

CURRENT ASSETS

Total current assets at December 31, 2015 are $130.8 million compared to $147.8 million at December 31, 2014. The lower current asset balance can be attributed to a decrease in the trust account balance of $11.9 million, which was a result of a reduction in cash security deposits and a lower trade receivable balance due to a decrease in transportation revenue in December 2015. This is partially offset by the elimination of the current regulatory asset in 2015 caused by the discontinuation of ASC 980.

LONG-TERM ASSETS

Long-term assets decreased $105.1 million to $1,173.3 million at December 31, 2015. The decrease in the long-term assets balance is primarily due to a $111.8 million decrease in the Property, Plant and Equipment balance mainly as a result of on-going depreciation. It was partially offset by capital additions of $12.5 million primarily due to the completion of the gas management system (CommPass) and by the increase in the investments held in trust to cover future pipeline abandonment costs. CURRENT LIABILITIES

Current liabilities at December 31, 2015 are $115.0 million, a decrease of $47.0 million compared to the December 31, 2014 balance of $162.0 million. The lower account balance can be primarily attributed to a decrease in restricted transportation deposits of $29.9 million. The reduction of the trade accounts payable balance of $10.2 million is due to a decrease in operating and capital expenditures and a lower current portion of the long-term debt, also contributed to the decrease in current liabilities. LONG-TERM LIABILITIES

Long-term liabilities decreased $67.9 million to $888.5 million at December 31, 2015. The change in the long-term liabilities balance is mainly attributed to a reduction in the long-term debt balance resulting from scheduled payments made in 2015. This reduction is partially offset by the inclusion of the regulatory liabilities related to the collection of pipeline abandonment funds that commenced on January 1, 2015. PARTNERS’ EQUITY

Partners’ equity decreased by $7.2 million to $300.6 million at December 31, 2015, compared to $307.8 million at December 31, 2014. The change is a result of distributions of $137.3 million, which are partially offset by net income of $128.8 million and capital contributions of $1.3 million.



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2015

(millions of dollars, unless otherwise noted) 2015 2014 Change ($) Change (%) Revenue 116.0 129.9 (13.9) (10.7) Operating expense 38.9 55.8 (16.9) (30.3) Depreciation expense 29.8 29.2 0.6 2.1 Interest expense 15.9 18.4 (2.5) (13.6) Net income 32.6 27.1 5.5 20.3 Partner distributions paid 33.8 35.7 (1.9) (5.3) Cash provided by operating activities 40.7 41.0 (0.3) (0.7) Capital expenditures 5.1 4.6 0.5 - Average daily throughput (bcf/d) 1.481 1.547 N/A (4.3)

REVENUE

Total revenue for the three months ended December 31, 2015 is $116.0 million compared to $129.9 million for the three months ended December 31, 2014. The reduction is due to lower transportation revenue based on the cost of service toll setting approach for October and November 2015 compared to the same period in 2014, and to the commencement of new services on December 1, 2015. The New Services Offering had strong shipper interest and was fully subscribed. However, under the at-risk toll setting approach, the revenue was lower due to a reduction in our fixed cost structure.

OPERATING EXPENSE

Total operating expenses are $38.9 million for the three months ended December 31, 2015, compared to $55.8 million for the three months ended December 31, 2014. The lower operating expenses are mainly a result of a reduction in contractor and consulting costs, and salary related expenses due to lower staffing requirements.

DEPRECIATION EXPENSE

Depreciation expense increased $0.6 million to $29.8 million for the three months ended December 31, 2015, compared to $29.2 million for the same three months ended December 31, 2014.

INTEREST EXPENSE

Interest expense decreased $2.5 million to $15.9 million for the three months ended December 31, 2015, compared to $18.4 million for the three months ended December 31, 2014. The interest expense is lower due to declining long-term debt balances as a result of scheduled principal payments on the senior notes.

NET INCOME

Net income is $32.6 million for the three months ended December 31, 2015, an increase of $5.5 million when compared to the same three months ended December 31, 2014. The increase to net income can be attributed to an overall decrease in the operating expenses, which is partially offset by the lower revenue for the three months ended December 31, 2015, compared to the three months ended December 31, 2014.

PARTNER DISTRIBUTIONS PAID

Distributions paid to Partners are $33.8 million for the three months ended December 31, 2015, compared to $35.7 million for the same quarter in 2014. The reduction in the distributions paid in the fourth quarter of 2015 can be attributed to lower October and November 2015 funds available for distribution compared to October and November 2014, and lower planned distributions for the first month under the New Services Offering implemented on December 1, 2015.

CASH PROVIDED BY OPERATING ACTIVITIES

Cash provided by operating activities is $40.7 million for the three months ended December 31, 2015, a decrease of $0.3 million compared to $41.0 million for the three months ended December 31, 2014. The decrease in cash provided by operating activities can be attributed to the settlement of current liabilities.



CAPITAL EXPENDITURES

Capital expenditures increased $0.5 million for the three months ended December 31, 2015, compared to the three months ended December 31, 2014.

AVERAGE DAILY THROUGHPUT

Average daily throughput for the three months ended December 31, 2015 was 1.481 bcf/d compared to 1.547 bcf/d for the three months ended December 31, 2014. The reduced throughput volume in the fourth quarter of 2015 was due to more planned and unplanned outages in 2015 than in 2014.

RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2015

(millions of dollars, unless otherwise noted) 2015 2014 Change ($) Change (%) Revenue 465.1 482.2 (17.1) (3.5) Operating expense 156.7 175.4 (18.7) (10.7) Depreciation expense 117.2 117.0 0.2 0.2 Interest expense 69.2 75.1 (5.9) (7.9) Net income 128.8 118.2 10.6 9.0 Partner distributions paid 137.3 143.2 (5.9) (4.1) Cash provided by operating activities 253.7 238.3 15.4 6.5 Capital expenditures 12.5 9.6 2.9 30.2 Average daily throughput volume (bcf/d) 1.488 1.556 N/A (4.4)

REVENUE

Total revenue for the year ended December 31, 2015 is $465.1 million compared to $482.2 million for the year ended December 31, 2014. The decrease in revenue is due to the decrease in operating expenses under rate-regulated accounting guidelines that we applied until June 30, 2015 and the impact of a six day pipeline outage that occurred in the third quarter of 2015. The reduction in transportation revenue is also in part due to the commencement of new services on December 1, 2015. The New Services Offering had strong shipper interest and was fully subscribed. However, under the at-risk toll setting approach, the revenue was lower due to a reduction in our fixed cost structure.

OPERATING EXPENSE

Total operating expenses are $156.7 million for the twelve months ended December 31, 2015, compared to $175.4 million for the twelve months ended December 31, 2014. The lower operating expenses are a result of the reduction in contractor and consulting costs and salary related expenses due to lower staffing requirements.

DEPRECIATION EXPENSE

Depreciation expense increased $0.2 million for the twelve months ended December 31, 2015, compared to the twelve months ended December 31, 2014.

INTEREST EXPENSE

Interest expense decreased $5.9 million to $69.2 million for the twelve months ended December 31, 2015, compared to $75.1 million for the twelve months ended December 31, 2014. The interest expense is lower due to declining long-term debt balances as a result of scheduled principal payments on the senior notes.

NET INCOME

Net income increased $10.6 million to $128.8 million for the twelve months ended December 31, 2015, compared to $118.2 million for the twelve months ended December 31, 2014. The overall increase in the net income can be attributed to lower operating expenses due to the reduction in contractor and consulting costs, salaries due to lower staffing requirements, lower interest expense and an extraordinary gain realized upon the discontinuation of ASC 980.



PARTNER DISTRIBUTIONS PAID

Distributions paid to Partners decreased by $5.9 million to $137.3 million for the twelve months ended December 31, 2015, compared to $143.2 million for the twelve months ended December 31, 2014. The reduction in the distributions paid in 2015 is due to lower funds available for distribution under the original transportation contracts compared to 2014 and the lower planned distributions for the first month under the New Services Offering implemented on December 1, 2015.

CASH PROVIDED BY OPERATING ACTIVITIES

Cash provided by operating activities is $253.7 million for the twelve months ended December 31, 2015, an increase of $15.4 million, compared to $238.3 million for the twelve months ended December 31, 2014. The increase in cash provided by operating activities can be primarily attributed to higher transportation tolls under the transportation contracts that expired on November 30, 2015 compared to the same period in 2014 as well as lower operating expenditures.

CAPITAL EXPENDITURES

Capital expenditures were $12.5 million for the twelve months ended December 31, 2015, which is a change of $2.9 million compared to capital expenditures of $9.6 million for the twelve months ended December 31, 2014. This increase in capital expenditures is attributed to spending required for the development and implementation of the gas management system (CommPass) in 2015, and installation of a separator and fuel gas filters.

AVERAGE DAILY THROUGHPUT

Average daily throughput for the twelve months ended December 31, 2015 was 1.488 bcf/d compared to 1.556 bcf/d for the twelve months ended December 31, 2014. The reduced throughput volume is a result of more planned and unplanned outages in 2015 as compared to 2014 and a six day pipeline outage that occurred in the third quarter of 2015.

SELECTED QUARTERLY FINANCIAL INFORMATION

(millions of dollars, except where noted) 2015 2014 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Revenue 116.0 113.3 117.9 117.9 129.9 118.9 121.0 112.4 Net income 32.6 29.8 34.9 31.5 27.1 29.0 30.2 32.0 Net income per unit ($) (1) 51.3 46.8 54.9 49.5 42.5 45.5 47.5 50.2 Partner distributions paid 33.8 33.9 33.9 35.7 35.7 35.6 35.6 36.3 Distributions paid per unit ($) (1) 53.1 53.3 53.3 56.1 56.1 56.0 56.0 57.1

(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.

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

o In the fourth quarter of 2015, Alliance Canada commenced operations under the new services framework which resulted in a decrease in transportation tolls collected in December 2015. The toll reduction is primarily due to the lower fixed cost structure included in the New Services Offering tolls. Fourth quarter net income also reflects lower operating expenses as a result of a reduction in contractor and consulting costs, and salaries due to reduced staffing requirements.

o The third quarter 2015 transportation revenue reflects the impact of the Demand Charge Credits, resulting from the transportation service outage that occurred in August 2015.

o The second quarter 2015 net income reflects the discontinuation of rate regulated accounting for a portion of operations. We recognized an extraordinary gain of $3.2 million mainly due to the de-recognition of regulatory assets and liabilities.

o The first quarter 2015 revenue reflects higher negotiated depreciation rates in the transportation service contracts for 2015 as compared to the negotiated depreciation rates in effect in 2014.

o The fourth quarter 2014 revenue reflects higher negotiated depreciation rates in the transportation service contracts for 2014 as compared to the negotiated depreciation rates in effect in 2013. The fourth quarter 2014 transportation revenue also reflects higher cost of service expenses as compared to third quarter 2014.



o The third quarter 2014 revenue reflects higher negotiated depreciation rates in the transportation service contracts for 2014 as compared to the negotiated depreciation rates in effect in 2013.

o The second quarter 2014 revenue reflects higher negotiated depreciation rates in the transportation service contracts for 2014 as compared to the negotiated depreciation rates in effect in 2013. The second quarter 2014 transportation revenue also reflects higher cost of service expenses as compared to first quarter 2014.

o The first quarter 2014 revenue reflects higher negotiated depreciation rates in the transportation service contracts for 2014 as compared to the negotiated depreciation rates in effect in 2013 and the gain on a sale of an asset.

RELATED PARTY TRANSACTIONS

Alliance provides transportation services to a number of shippers that are also related entities of the Partners of Alliance Canada. The terms of these contracts are the same as those offered to independent third parties.

For the year ended December 31, 2015, transportation revenue from related parties amounted to $53.7 million (December 31, 2014 - $46.8 million).

Occasionally, Alliance Canada leases equipment to a related entity. All amounts earned as a result of these transactions are presented as other income. The total income earned for the year ended December 31, 2015 is $0.5 million (December 31, 2014 – $1.3 million).

Alliance Pipeline Ltd., the General Partner, provides management, administrative, operational and workforce related services to Alliance Canada. 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 Canada.

Alliance Canada does not directly employ any of the individuals responsible for managing or operating the business, nor does Alliance Canada have any directors. Alliance Canada obtains management, administrative, operational and workforce related services from the General Partner under the terms of the Limited Partnership Agreement. Alliance Canada 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.

(All amounts in thousands of dollars)

Amounts Charged To Related Parties for Services Rendered (Excluding Transportation Revenue) Years ended December 31 2015 2014 Alliance Pipeline L.P. 44,712 43,483 NRGreen Power Limited Partnership 2,404 3,356 Aux Sable entities 691 1,181

Amounts Due From Related Parties (Excluding Transportation Revenue) Years ended December 31 2015 2014 Alliance Pipeline entities 3,263 4,478 NRGreen Power Limited Partnership 451 888 Enbridge Pipelines Inc. - 188 Aux Sable entities 109 54 Amounts Due To Related Parties Years ended December 31 2015 2014 Alliance Pipeline entities 856 660 NRGreen Power Limited Partnership 1 10



LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Liquidity risk is managed by ensuring access to sufficient funds required to meet obligations. Alliance Canada forecasts cash requirements to ensure funds are available to settle liabilities as they become due. The primary sources of funds 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 our liquidity because of regular monthly cash flow from operations and available committed credit facilities.

We also hold in our debt service reserve account an amount equal to at least six months scheduled interest and principal payments, which is funded by letters of credit as part of the bank credit facility which expires June 30, 2018. 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 facility.

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. We may need to refinance our indebtedness or may require additional financing depending on future developments, enhancement opportunities or acquisition plans.

As at December 31, 2015, we have $78.6 million in cash and trust deposit accounts. Cash totaling $74.8 million is held in trust accounts to meet certain covenants contained in financing agreements. It includes restricted security deposits provided by the shippers as well as restricted deposits related to the pipeline abandonment trust. Undrawn bank credit facilities are $117.0 million as at December 31, 2015. 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.

We have estimated capital expenditures of $13.8 million for 2016. Capital plans for the year include a right of way encroachment project and additional maintenance capital expenditures to optimize the heat content of natural gas delivered.

We are forecasting that transportation toll receipts during the year will be sufficient to meet our 2016 cash flow requirements.

DISTRIBUTIONS TO PARTNERS

Distribution decisions are made by the Board of Directors of 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 (DSCR). Subject to lender approval, a distribution of $34.0 million will be declared and paid by us to our Partners on February 3, 2016. We intend to continue making Partner distributions on a quarterly basis.

CAPITAL MANAGEMENT

Our objective in managing capital is to optimize our capital structure so we can ensure a healthy financial position to support our operations and growth opportunities.

Capital is managed by funding our rate base to a maximum ratio of 70% debt to 30% equity. 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. Rate base does not have a standardized meaning under US GAAP.



As at December 31 (millions of dollars) 2015 2014 Total Rate Base (for debt covenant purposes) 1,339.5 1,462.8 70% of Rate Base 937.7 1,024.0 Permitted Adjustments per Alliance Canada Financing Documents 95.4 93.2 Total Permitted Senior Debt 1,033.1 1,117.2 Actual Senior Debt (per financial statements) 948.5 1,037.0 Permitted Adjustments per Alliance Canada Financing Documents 62.3 58.9 Pro Forma Senior Debt for Purposes of Maximum Borrowing Test 1,010.8 1,095.9 Excess of Permitted over Actual Senior Debt 22.3 21.3

Senior Debt as a percentage of Rate Base 69.4% 69.4%

We are in compliance with all the terms and conditions of our committed credit facilities and expect to remain in compliance throughout 2016. DSCR is required to be 1.40 or above to be considered compliant. At December 31, 2015, the DSCR is 2.13 (December 31, 2014 – 1.99).

PIPELINE ABANDONMENT COSTS

The NEB Land Matters Consultation Initiative requires NEB regulated pipelines to set aside funds to cover future pipeline abandonment costs. The NEB provided several key guiding principles under this initiative, including the position that abandonment costs are legitimate costs of providing transportation services and are recoverable, upon NEB approval, from shippers.

Alliance Canada collects abandonment funds through a pipeline abandonment demand surcharge. These funds are set aside in the Alliance Pipeline Abandonment Trust (the Trust) until such time that the funds are required to settle abandonment-related expenditures. The Trust is consolidated and presented on the consolidated financial statements as investments held in trust. As per the Trust agreement, Alliance Canada is the primary beneficiary of the Trust. The pipeline abandonment costs fall within the scope of ASC 980. The application of accounting for regulated operations results in the revenue being adjusted to reflect the difference between the period in which the abandonment funding is collected through toll receipts and the period the abandonment costs are incurred. These differences are presented as a long-term regulatory liability on the consolidated financial statements.

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 could be proposals to upgrade existing pipelines or to build new pipelines serving such areas and markets. Any new or upgraded pipelines could:

o 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;

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

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

There is also competition from other sources of natural gas such as the Marcellus and Utica shale plays within the Appalachian Basin. Situated in an area ranging from parts of Quebec and upstate New York to Virginia in the south and as far west as Ohio, the Marcellus and Utica shale plays are in relatively close proximity to the Chicago Hub to which the System currently provides the majority of its transportation service. The ongoing development of the shale gas resource within the Appalachian Basin coupled with new infrastructure, provides an alternative source of gas to the U.S. Midwest. Growing demand in the region will absorb some of the incremental volumes but there will be displacement of traditional flows, particularly from the Gulf Coast,



Rockies and Midcontinent regions. Similarly, the growth in Appalachian supplies has reduced the reliance of the northeastern region of the United States 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’s pipeline system and services are uniquely designed to enable rich gas producers to maximize the value of their product. Alliance Canada has the unique ability to transport NGL (such as ethane, propane, butane, pentane) within the methane gas stream. This provides significant competitive advantages within our New Services Offering including:

o the ability to transport NGL, thereby reducing producers’ processing infrastructure and costs;

o the opportunity to access the Aux Sable extraction and fractionation facility at the terminus of the pipeline, which provides considerable economies of scale; and

o the capability to provide a higher netback for liquids-rich natural gas.

DEMAND FOR TRANSPORTATION SERVICES

Excess natural gas pipeline capacity out of the WCSB and a sustained period of low natural gas and crude prices could result in a significant reduction or deferral of investment in upstream gas development, and could negatively impact the demand for our transportation services going forward.

Effective December 1, 2015, Alliance Canada shifted from a cost-recovery to a market based model as the New Services Offering became effective. Under the new services framework, Alliance Canada assumed transportation revenue and cost risk for the majority of its operations. There can be no assurance that all operating costs incurred by us will be recoverable through the transportation tolls.

Despite the general slowdown in the oil and gas sector, Alliance Canada has successfully re-contracted its firm receipt transportation capacity through 2018, and approximately 90% of the firm receipt capacity in 2019 and 2020. Demand has been far in excess of available capacity, and Alliance Canada has begun to market other available services to capture this strong demand for transportation services. As well, Alliance Canada has converted all shippers with existing contracts that extend beyond November 30, 2015 to the new fixed negotiated tolls for firm full-path services commencing December 1, 2015.

In October 2015, Alliance Canada held a successful Open Season for Seasonal Firm Transportation service, under the New Services Offering, for both winter 2015/2016 and summer 2016. The bid floor was set at 125% of the firm five year toll and Alliance Canada received bids for tolls that exceeded the bid floor. A subsequent Open Season for January to March 2016 transportation capacity was also fully subscribed by a variety of Firm Receipt Services, Firm Delivery Services and Firm Full Path Services shippers.

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 us. A new Heat Content Management Agreement was agreed upon with Aux Sable and executed in January 2015 to clarify the expectations and mitigate risks.

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 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. We may have no control over matters which may adversely affect Alliance USA and/or the Alliance USA Pipeline.



REGULATORY RISK

Alliance Canada is a federally-regulated, inter-provincial natural gas pipeline under the jurisdiction of the National Energy Board. Our natural gas transportation assets and operations are also subject to federal, provincial and location regulations, as applicable. Regulation of Alliance Canada’s business includes, but is not limited to, the ability to determine tolls, terms and conditions of service, pipeline construction and maintenance, and expansion of current operating facilities. The nature and degree of regulation and legislation affecting energy companies in Canada has changed significantly in past years and there is no assurance that further changes will not occur.

Alliance Canada is subject to the risk of regulators or other government bodies revising or rejecting proposed or existing arrangements. This can include permits and regulatory approvals for new projects, offering of new services, and the tariff structure at Alliance Canada. Any revisions or rejections to existing or proposed arrangements could have a significant and potentially adverse effect on Alliance Canada’s earnings and financial condition. As well, compliance with legislative changes may have an impact on the costs of existing operations or future projects.

We believe that regulatory risk is mitigated through the expertise of Alliance Canada’s legal and regulatory teams, and their review of existing and proposed tariffs and tolls for compliance with regulatory guidelines and requirements. Alliance Canada has established and maintains many strong relationships with our shippers which help reduce regulatory risk.

OPERATING RISKS

Operation of the System involves many risks, several of which are beyond our control, including but not limited to:

o breakdown or failure of equipment, information systems or processes; o performance of equipment at levels below those originally intended; o catastrophic events such as natural disasters, fires, explosions, pipeline failure, wars, acts of terrorism and other similar

events; o lack of spare parts; o operator error; and o 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.

We maintain safety policies, disaster recovery procedures and insurance coverage at industry acceptable levels in the case of an incident. Inspection and monitoring methods are also employed to manage pipeline, turbine and facility integrity as well as to minimize system disruptions.

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 are exposed to the downturn in energy commodity prices, including the price for natural gas, and other credit events impacting these industries. Should shippers be unable to fulfill their contractual obligations and if suitable replacement shippers were not available, we may not be able to fund our operating and financing costs or make distributions to our Partners. The current low priced commodity environment may cause some shippers to endure financial hardship. We limit, to an extent, our exposure to this credit risk by requiring shippers to provide letters of credit or other suitable security unless shippers maintain specified credit ratings or a suitable financial position.

The risk of non-performance of our shippers is mitigated by our credit approval process and on-going monitoring procedures. As at December 31, 2015, approximately 42% of firm capacity (as represented by percentage of those associated revenues) on the Alliance Canada Pipeline 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 three months obligations under the transportation contracts. 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 transportation contract. Currently there are no accounts receivable that meet the definition of past due and/or impaired. Alliance Canada will continue to monitor both current and potential shippers based upon our credit approval process.



The credit risk arising from cash deposits is minimal as cash is held with major financial institutions. As at December 31, 2015, Alliance Canada holds two types of investments: MAV II notes and investments held in the Alliance Pipeline Abandonment Trust. Aside from these, we do not hold any other short or long-term investments.

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. We are highly dependent on our shippers for revenues from their contracted transportation capacity on the System. The failure of the shippers to fulfill their contractual obligations 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.

We also hold in our debt service reserve account an amount at least equal to six months of scheduled interest and principal payments, which is funded by letters of credit 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 facility expires June 30, 2018.

We may need to refinance our indebtedness under our credit facility and senior unsecured notes 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 our business performance. 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 below investment grade may have a materially adverse effect on the ability to obtain financing on favourable terms and conditions.

Future cash distributions may be adversely affected if we are unable to refinance our indebtedness or arrange additional financing on terms and conditions at least as favourable as the existing terms and conditions of such indebtedness. If we are unable to refinance our indebtedness then, at maturity, we 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 is exposed to cyber risk as day to day business operations are connected and conducted over the internet. These risks include, but are not limited to:

o damage to corporate assets; o degradation of internally delivered services; o theft of personal or corporate information; and o compromise of data integrity.

These risks can be realized from malware infections in emails or websites as well as social engineering activities like phishing and employee impersonation. Alliance Canada uses safeguards to ensure our information systems remain secure and reliable. We maintain communication with the Canadian Cyber Incident Response Centre which allows 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 authorities around the world. Numerous cyber security technologies have been implemented throughout Alliance Canada as part of an in-depth defense strategy. These technologies allow us to correlate and respond to threats if needed. We are regularly evaluating our cyber security technologies and either replacing them or augmenting them as needed.



CRITICAL ACCOUNTING ESTIMATES

The preparation of consolidated financial statements in accordance with US 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 consolidated 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.

DEPRECIATION AND AMORTIZATION

Property, Plant and Equipment (PP&E) represents approximately 88% 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.

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.

On November 30, 2015, Alliance Canada’s original long-term transportation service agreements expired and the Partnership commenced operations under the new services framework. As indicated by the change in circumstances, Alliance Canada is completing an assessment of the estimates used to determine depreciation of the pipeline in service assets recognized on the Consolidated Balance Sheet. The assessment was performed by an external expert.

The service life estimates resulting from the study are based on informed engineering judgement which incorporated analyses of historical plant retirement data. Additionally, a review of Alliance Canada’s practice and outlook as they relate to plant operation and retirement has been utilized in the study. The rates and depreciation amounts are based on the straight line remaining life method of depreciation. While the study is not finalized, it is anticipated to be complete in the first quarter of 2016.

Management will continue to review 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 consolidated financial statements. Due to uncertainty associated with the long-lived nature of the pipeline and related assets, future results may be affected if management’s current assessment differs from future assessments or actual performance.

ASSET RETIREMENT OBLIGATION

The fair value of the asset retirement obligation (ARO) associated with the retirement of long-lived assets is recognized in the period when it 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 has not been recognized in our consolidated 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 us from making a reasonable estimate of the ARO. These costs will be recorded when sufficient information exists to reasonably estimate potential settlement dates and abandonment methods.



The NEB Land Matters Consultation Initiative, discussed in the Risks and Uncertainties section, addresses the need for a collection method for funding pipeline abandonment costs. The NEB provided several key guiding principles under this initiative, including the position that abandonment costs are legitimate costs of providing pipeline service and are recoverable, upon NEB approval, from shippers.

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.

NEW ACCOUNTING POLICIES

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.

PRIOR TO NEB APPROVAL OF ALLIANCE CANADA’S NEW SERVICES OFFERING

Prior to the NEB’s approval of the New Services Offering on July 9, 2015, Alliance Canada was operating under a traditional cost of service tolling environment. The cost of service environment allowed for the economic effects of the actions of the regulator and provided information about our economic resources and performance. Recognition of certain revenues and expenses was different from results expected under US GAAP that is applicable to non-regulated operations. 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.

Transportation revenue included amounts related to expenses in the consolidated financial statements that were expected to be recovered from shippers in future tolls. Similarly, no revenue was recognized in a given period for tolls received that do not relate to certain period expenses per the consolidated financial statements. Differences between the recorded transportation revenue and actual toll receipts gave rise to regulatory assets or liabilities. In the absence of rate regulation, we 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 were made periodically as to whether regulatory assets were 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 was deemed impaired, an adjustment would have been recorded to reflect a market value that is less than cost.

ACCOUNTING GUIDANCE UNDER THE NEW SERVICES OFFERING

Under the new services framework, Alliance Canada assumes transportation revenue and cost risk for the majority of its operations. Due to this change in the tariff provisions and the at-risk toll setting approach, application of ASC 980 was discontinued effective June 30, 2015, except for a portion of operations that is still in scope of accounting for regulated operations. Under the new at-risk toll setting approach, for the majority of Alliance Canada’s operations, the differences between tolls collected and current period expenses are no longer recognized as a transportation revenue adjustment. This will provide financial results that fluctuate in response to changes in the current period expenses and tolls received.

As a result of the discontinuation of accounting for regulated operations, we recognized an extraordinary gain of $3.2 million in the second quarter of 2015, mainly due to the de-recognition of regulatory assets and liabilities.

The original transportation contracts were designed to provide toll revenues sufficient to recover all transportation costs including allowed return on equity funding related to the construction of assets. Effective July 1, 2015, the equity component of financing is no longer capitalized as a part of Property, Plant and Equipment due to discontinued application of ASC 980. The equity component of financing that had been capitalized prior to July 1, 2015 ($135.1 million) continues to be included in the cost of the related capital assets. Interest on borrowed funds for the construction of an asset is capitalized as part of the asset constructed and is amortized over its useful life.



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 ASC 980 these costs would be expensed in the period in which they occur. Effective July 1, 2015, indirect overhead costs are no longer capitalized as an item of Property, Plant and Equipment and are expensed in the period they are incurred.

INVENTORIES

Inventories primarily consist of material and supplies required for repair and maintenance of the meter station and compressor station facilities and natural gas inventory held as working linepack required to provide pipeline transportation services. Both material and supplies inventory and natural gas inventory held as working linepack are a carried at the lower of weighted average cost or market. Materials and supplies are periodically reviewed for physical deterioration and obsolescence.

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. 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 senior management’s evaluation, the CEO and CFO have concluded, subject to the inherent limitations noted above, that Alliance Canada’s disclosure controls and procedures, as defined in National Instrument 52-109, Certification of Disclosure in Issuers Annual and Interim Filings, are effective at a reasonable assurance level to ensure that material information relating to Alliance Canada is made known to management on a timely basis and is included in this report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Effective December 1, 2015, management successfully implemented the New Services Offering. Related changes to processes and internal controls over financial reporting were verified including confirmation of the output from the new gas accounting system (CommPass). There have been no other changes to our internal control over financial reporting during the twelve months ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, Alliance Canada’s financial reporting.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Alliance Canada’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, Alliance Canada’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.

The design and effectiveness of internal controls over financial reporting was assessed as at December 31, 2015 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 27, 2016