Veresen : Announces Second Quarter Financial Results and Increased 2017 Guidance

CALGARY, ALBERTA--(Marketwired - Aug 2, 2017) - Veresen Inc. ("Veresen") (TSX:VSN) today announced its second quarter operating and financial results.

"Veresen continued to deliver strong business performance during the second quarter while we work towards closing the combination with Pembina," said Don Althoff, President and CEO of Veresen. "We expect distributable cash for the year will be well ahead of our initial expectations as a result of supportive fundamentals at both Alliance and Aux Sable. At Veresen Midstream, we continue to secure additional investment opportunities and the construction of our major growth projects remains ahead of schedule and below budget."

Financial and Operational Highlights

• Generated distributable cash in the second quarter of $100 million ($0.32 per Common Share), an increase over the $94 million ($0.30 per Common Share) in the second quarter of 2016

• Invested $336 million ($157 million net to Veresen) in growth capital within Veresen Midstream during the quarter, including $233 million ($109 million net to Veresen) for the construction of the Sunrise, Tower and Saturn Phase II processing facilities

• Increased full year 2017 distributable cash guidance mid-point by 12% to $1.26 per Common Share on the strength of Alliance's performance, an improved outlook for NGL margins at Aux Sable, as well as management's continued confidence in the strength of the underlying business

• Continued to close the sale of power assets during the second quarter such that approximately two thirds of the previously announced $1.18 billion in total proceeds has been received to date, with the expectation that the company will successfully close the sale of its remaining power facilities in the third quarter

Agreement to Combine with Pembina

• During the quarter, Veresen entered into a plan of arrangement with Pembina Pipeline Corporation ("Pembina"), under which Pembina will acquire all the issued and outstanding common shares of Veresen in exchange for $18.65 in cash or 0.4287 of a common share of Pembina, subject to maximum consideration of approximately 99.5 million Pembina common shares and $1.523 billion in cash. At announcement, the offer represented a 22.5% premium to Veresen's last closing price

• Subsequent to the end of the quarter, Veresen shareholders, at Special Meetings of Veresen's common and preferred shareholders, voted to approve the previously announced plan of arrangement, with greater than 99 percent of each of Veresen common shares and preferred shares voted at the meeting being in favor. Additionally, the Court of Queen's Bench of Alberta approved the plan of arrangement between Pembina and Veresen

• Closing of the transaction remains subject certain regulatory and government approvals and other customary closing conditions, including final acceptance of the Toronto Stock Exchange and approval under the Canadian Competition Act. Pembina and Veresen currently expect the transaction will close late in the third quarter or early in the fourth quarter

• Veresen expects the combined entity will bolster the delivery of the existing strategy through an integrated business across the energy infrastructure value chain with a robust portfolio of secured projects to drive meaningful per share growth. The combined platform offers compelling customer service offering enhancements, as well as integration and investment potential, exceeding what Veresen could deliver on a stand-alone basis. The combined entity will also offer an attractive cash dividend underpinned entirely by fee-based cash flows at a lower payout ratio with a stronger balance sheet

Financial Overview

Veresen generated adjusted net income attributable to Common Shares of $24 million or $0.08 per Common Share in the second quarter, driven by the continued strength of the pipeline business, increased contributions from the midstream segment and reduced project development spending.

Distributable cash for the second quarter was $100 million or $0.32 per Common Share, compared to $94 million or $0.30 per Common Share for the same period last year. This was driven by increased distributions from Alliance.

Proportionate Consolidation⁽¹⁾

Business Segment Overview

Pipeline

Alliance

Throughput volumes on Alliance remained strong in the second quarter of 2017. Total deliveries into Channahon of 1.662 bcf/d were slightly lower than the 1.698 bcf/d delivered in the second quarter of 2016. During the quarter, Alliance undertook a four day required shutdown on a portion of the pipeline due to slope movement caused by spring runoff and heavy rains near the Wapiti River, approximately 25 kilometers southwest of Grande Prairie, Alberta. During the required shutdown, Alliance completed an excavation and inspection of the affected pipeline segment and confirmed that there were no integrity concerns. Alliance declared force majeure under its agreements with firm shippers, resulting in a minimal impact on revenues for the quarter.

Distributable cash from Alliance in the second quarter of 2017 of $56 million was an increase from the $51 million for the second quarter of 2016 and a seasonal decrease from the $62 million in the first quarter of 2017. Relative to the comparable quarter in 2016, distributable cash in the second quarter of 2017 was higher as a result of lower general and administrative and operating costs as well as the distribution of incremental cash flow using Alliance's available liquidity, which offset slightly lower revenues. Lower distributable cash in the second quarter of 2017 relative to the first quarter of the year was a result of seasonally lower throughput volumes driving reduced revenues, which was partly offset by a larger distribution of incremental cash from available liquidity in the second quarter.

Shipper demand for Seasonal Firm service for the balance of the year and into the first quarter of 2018 has been robust, and IT sales also remain strong. Demand continues to be driven largely by a wide AECO - Chicago gas price basis differential, and is augmented by Alliance's high rate of availability which provides alternative transportation services to shippers when there are outages or curtailments on other egress options out of western Canada. Demand is also driven by Alliance's unique capability to transport liquids out of the basin. Seasonal Firm has been realizing a premium to Firm or IT service, resulting in higher weighted average tolls.

These market dynamics are expected to continue to underpin strong throughput volumes on Alliance over the near- and medium-term. In response to strong shipper interest, Alliance is in discussions with shippers to extend the term of existing contracts and continues to advance the engineering, commercial and regulatory preparations required to support a potential expansion of the pipeline's capacity by approximately 0.5 bcf/d through additional compression.

Alliance anticipates launching a binding open season for the potential expansion of the pipeline's capacity by the first half of 2018, with a target in-service date in late 2020. Successful re-contracting of the current capacity remains an important step towards advancing a potential expansion of the pipeline's capacity and re-evaluating the optimal capital structure at Alliance.

Ruby

Volumes on Ruby in the second quarter continued to be impacted by low western Canadian natural gas pricing and a weak Canadian dollar, which improved AECO's competitiveness into Malin Hub relative to sourcing from Opal Hub. Volumes in the second quarter were seasonally lower than in the first quarter of 2017 and were slightly lower than the second quarter of the prior year as a result of increased hydro power generation displacing natural gas power generation in the pacific northwest, leading to additional Canadian natural gas volumes reaching Malin Hub.

Veresen's perpetual, cumulative preferred distribution from Ruby provides the company with US$91 million per year and is underpinned by long-term take-or-pay contracts with predominantly investment grade shippers. Variance in Veresen's distributable cash is only as a result of fluctuating foreign exchange rates. The preferred interest can be converted into a common interest at Veresen's election or if additional firm volumes are contracted at terms similar to those held by existing shippers, which would effectively fill the pipeline and, upon conversion to a common equity interest, hold Veresen's distribution whole relative to the current preferred amount.

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. The existing agreements have been in place since 1998 and expire at the end of 2018.

Midstream

Veresen Midstream

At Veresen Midstream, the Veresen-operated facilities ran at nearly 100% plant reliability in the second quarter. Volumes at Hythe / Steeprock remain in-line with expectations under the existing take-or-pay contract, and include some volumes from third party producers. During the second quarter, Veresen Midstream performed a scheduled two-week turnaround of the Hythe gas processing plant. The scheduled turnaround was completed three days ahead of schedule, below budget and will not impact Veresen Midstream's revenue under the existing take-or-pay agreement.

Volumes at Dawson are consistent with expectations as additional infrastructure currently under construction is required to facilitate increases in throughput ahead of the Tower and Sunrise gas processing facilities coming into service later this year.

During the second quarter, Veresen Midstream provided Veresen with approximately $17 million in distributable cash. Veresen's share of EBITDA for the quarter of $17 million was in-line with the last several quarters. EBITDA from Dawson will grow as additional gathering lines, compression, liquids handling and gas plants are brought into service, while operating costs continue to be consistent with expectations.

In May, the South Central Liquids Hub was placed into service ahead of schedule and approximately 15% below budget. The South Central Liquids Hub will allow the existing gathering system in the area to handle development anticipated to occur over the next several years and can be expanded in the future to meet CRP's long-term liquids handling needs as well as provide services to third party producers in the area.

Subsequent to the end of the second quarter, Cutbank Ridge Partnership ("CRP") sanctioned South Central Liquids Hub Phase II, which will double throughput capacity and provide pipeline connectivity for condensate directly to a third party pipeline system and produced water to a Veresen Midstream disposal facility. South Central Liquids Hub Phase II is expected to be in service in the first quarter of 2018 at a capital cost of $70 million ($33 million net to Veresen).

Construction of the three processing facilities is ahead of schedule and is trending under budget, with more than 75% of capital incurred to date. The company expects 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 in the fourth quarter of 2017 and the Saturn Phase II plant in-service by early 2018.

When all three facilities are operational, Veresen Midstream will have 1.5 bcf/d of gas 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 liquids-rich resource plays. Once commissioned, these facilities are expected to generate incremental run-rate EBITDA between $250 million to $300 million (approximately $120 million to $140 million net to Veresen), based on target volumes.

Veresen continues to expect that incremental sanctioned capital for gathering pipelines, natural gas processing and liquids handling in this region will amount to $200 million to $400 million per year for Veresen Midstream over the next several years. Since the start of the year, approximately $165 million ($78 million net to Veresen) of capital projects have been sanctioned by CRP and Encana leading to over $265 million ($125 million net to Veresen) of capital projects currently under construction within Veresen Midstream in addition to the three gas plants.

During the second quarter, $336 million ($157 million net to Veresen) of capital was invested by Veresen Midstream, including $233 million ($109 million net to Veresen) of expenditures for the Sunrise, Tower and Saturn Phase II processing facilities. Since Veresen Midstream was formed in early 2015, a total of $3.6 billion (approximately $1.7 billion net to Veresen) in capital projects including those acquired on closing of the transaction have been sanctioned under the agreement with CRP and Encana to fund up to $5 billion of new infrastructure. At the end of the second quarter of 2017, approximately $775 million of these capital projects were in service.

Aux Sable

Propane plus and ethane margins during the second quarter of 2017 were slightly lower than in the first quarter but remained above the cyclical lows of the past two years. Under Aux Sable's NGL Sales Agreement with BP, the sharing of margins is determined on an annual basis, which results in the deferred recognition and distribution of margins generated in the earlier part of the year. As a result, distributable cash from Aux Sable of $5 million does not include $2 million of margin that was generated during the quarter. Distributable cash in the second quarter was slightly lower than the first quarter of the year due to lower margin revenues and slightly higher costs.

Propane plus margins remain the largest profit driver at Aux Sable. While these margins have weakened somewhat from seasonal highs earlier in the year, based on current spot margins as well as indicative future pricing, the company expects the $11 million of margin generated in the first half of the year will be recognised and distributed later in the year. Veresen also expects that for the balance of the year, margin will be recognised and distributed in the quarter in which it is generated.

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. During the second quarter, the National Energy Board approved the pipeline connecting Burstall to the existing ethane infrastructure in the region. Veresen has incurred over three-quarters of the cost of construction to date and anticipates spending in 2017 to be between $30 million to $40 million. Veresen expects that the construction of Burstall will be completed in late 2018.

Jordan Cove LNG and Pacific Connector

The company continues to advance the Jordan Cove LNG Project and related Pacific Connector natural gas pipeline. Approximately US$19 million of project development spend was incurred in the second quarter, with the majority of spend directed to position the project to make a formal FERC submission in the third quarter. Subsequent to the end of the quarter, Jordan Cove LNG selected KBJ, a joint venture partnership comprised of Kiewit Energy Group Inc., Black & Veatch Construction, Inc., and JGC US Projects, LLC, to provide engineering, procurement and construction services for the development of the Jordan Cove export terminal.

During the second quarter, Jordan Cove LNG continued to advance discussions with additional off-takers. Based on the progress to date and the expectation that Jordan Cove LNG will achieve additional key milestones during the balance of the year, Veresen's Board of Directors approved an additional US$32 million in project development spend for 2017.

Increased 2017 Guidance

Veresen has increased its 2017 distributable cash guidance by approximately 12% to a range of $1.21 per Common Share to $1.31 per Common Share. The increased guidance reflects higher than anticipated demand for Seasonal Firm and Interruptible service at Alliance, continued strength in NGL margins at Aux Sable as well as management's continued confidence in the strength of the underlying business.

The increased guidance range represents a payout ratio of approximately 76% to 83% of distributable cash, and implies full coverage of the dividend pro forma the sale of the power business. Further details concerning 2017 guidance can be found on the home page of Veresen's web site at www.vereseninc.com.

Balance Sheet and Funding Strategy

During the second quarter, the company closed the sale of certain power assets such that approximately two thirds of the previously announced $1.18 billion in total proceeds has been received to date. Veresen and its counterparties on the sale of the remaining power assets continue to make progress in securing all outstanding third party approvals and Veresen remains confident the company will successfully close the sale of its entire power business in the third quarter.

Proceeds from the sale will be initially directed to reduce debt outstanding and subsequently used to fully fund the remaining equity component of the approximately $1.4 billion of projects currently under construction with no need to access the capital markets. Additionally, the divestiture strengthens Veresen's balance sheet, further underpinning the dividend and providing additional flexibility to fund incremental growth projects.

At the end of the second quarter, approximately $1.1 billion of the aggregate cost of the $1.4 billion of capital projects had been incurred, with a remaining equity component of approximately $125 to $175 million to be funded based on target leverage of 55% to 60% debt in capital investments. The remaining debt has been fully secured within Veresen Midstream, with sufficient capacity on the corporate facility to complete construction at Burstall.

As at June 30, 2017, Veresen's $750 million revolving credit facility had approximately $485 million of available, undrawn capacity. The company expects that proceeds from closing the remainder of the power divestiture will be more than sufficient to fully repay outstanding balances on the revolving credit facility.

Proportionate Consolidation of Debt - Amortization Schedule⁽¹⁾

The company's debt on a proportionate consolidation basis as at June 30, 2017 was $3.4 billion or approximately 5.1x proportionately consolidated EBITDA on a trailing 12 month basis of $678 million. Pro forma the reduction of debt from the sale of the power business, including $191 million in cash on the balance sheet at the end of the quarter and less associated trailing 12 month EBITDA of $86 million, proportionately consolidated debt would have been approximately 4.7x trailing twelve month EBITDA.

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 it is prudent to consider distributable cash after the amortization of debt within each of the business, as significant value will remain in the assets after the debt is fully amortized.

Conference Call & Webcast Details

A conference call and webcast presentation will be held to discuss second quarter 2017 financial and operating results at 7:00am Mountain Time (9:00am Eastern Time) on Thursday, August 3, 2017.

To listen to the conference call, please dial 478-219-0009 or 1-844-285-7148 (toll-free). This call will also be broadcast live on the Internet and may be accessed directly at the following URL:

http://edge.media-server.com/m/p/5heeobh8

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 August 5, 2017 10:00am Mountain Time (12:00pm Eastern Time). To listen to the replay, please dial 404-537-3406 or 1-855-859-2056 (toll-free) and enter Conference ID 50122520. The webcast will remain accessible for a 12 month period at the following URL: http://edge.media-server.com/m/p/5heeobh8 and 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 owns assets 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 7.8 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: the timing of regulatory approvals and the timing of the closing of the transaction between Veresen and Pembina; the completion timing and cost estimates of major growth projects; the amount of distributable cash to be generated by Veresen in 2017; the outlook for NGL margins at Aux Sable; the confidence in the strength of the underlying business; the use of proceeds from, financial impact on Veresen and its ability to fund growth projects, and timing of completion of, the sale of Veresen's power business; the results to be generated by, and the ability to deliver the existing strategy by the combination of Veresen and Pembina; expectation that market dynamics will continue to underpin strong throughput volumes at Alliance; the potential for re-contracting of Alliance and the corresponding impact on an expansion decision and the optimal capital structure; the anticipated timing of the launch of a binding open season on Alliance; the in-service date of a future expansion of Alliance; the ability of Ruby to support Veresen's preferred distribution; the ability to recontract AEGS; expectations regarding incremental EBITDA from Dawson as additional infrastructure is brought into service; in-service dates of, 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 potential for Veresen Midstream to secure incremental capital projects; ability to recognize and distribute margin earned in the first half of the year later in the year; the in-service date of, and anticipated spending in 2017 on, the Burstall ethane storage facility; the expectation that Jordan Cove LNG will achieve additional key milestones during the balance of the year; the ability to fully cover the dividend pro forma the sale of the power business; the sources of equity and debt financing required to fund the capital of Veresen and Veresen Midstream; 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.