ColAlta Pipeline, Ltd. is a Canadian corporation based in Calgary, Alberta, and traded on the Toronto stock exchange (symbol CAP). The company owns and operates the ColAlta Pipeline, a natural gas pipeline extending approximately 2,700 kilometers from northwestern Alberta to Denver, Colorado, which was built specifically to transport "wet" natural gas from northern British Columbia and Alberta to markets in the western United States. The company's pipeline connects to the New Horizon natural gas plant, a large natural gas processing plant outside of Denver, Colorado. Located at the receiving end of the ColAlta Pipeline, the plant processes natural gas by separating methane from other natural gas components. The plant's location was chosen to take advantage of easy access to several pipelines to deliver "dry" natural gas to Colorado, Wyoming, and Utah, areas with growing demand for natural gas. NATURAL GAS Natural gas is a fossil fuel, like coal and oil. Fossil fuels are formed when the remains of a plant or animal (organic matter) become trapped underground at very high pressure for very long periods of time. Over time, mud, sediment, and other deposits build up over top of the plant or animal remains. The more material builds up, the greater the pressure. Over millions of years, the organic matter decomposes and produces one or more of the fossil fuels. Because of their common origin, oil and natural gas are often found in close proximity to each other, and often the search for one yields deposits of both. The earth's temperature increases in relation to depth; the deeper one goes into the earth, the higher the temperature. Shallower deposits of organic matter are at lower temperatures; more oil is produced relative to natural gas at shallow depths. At deeper levels, where the temperature is much higher, more natural gas is produced than oil. Typical natural gas deposits are found at depths of two to three kilometers below the surface. Natural gas is primarily made up of methane (CH4). Drawn from the ground, natural gas typically consists of between 70% and 90% methane, up to 20% ethane (C,H,), up to 8% carbon dioxide (CO.), and small amounts of propane, butane, oxygen, nitrogen, and other gases. Industry terminology refers to natural gas as wet" when it contains other hydrocarbons such as propane and butane; "dry" natural gas is almost pure methane. In most cases, "dry" natural gas is the result of human processing after extraction; however, very deep deposits of natural gas (often greater than three or four kilometers) are, in many cases, pure methane. In its natural state, natural gas is colourless, odourless, tasteless... and highly flammable. This makes it very desirable for use in heating, cooking, and generating electricity; however, undetected leaks of natural gas can be very hazardous, especially in the vicinity of sparks or open flame. As a safety feature, a chemical called mercaptan is added to natural gas before the gas is distributed commercially. Mercaptan has a distinctly unpleasant smell, similar to that of rotten eggs. This makes detecting leaks much easier, and the use of natural gas much safer. Natural gas is often measured in two different ways. As a gas, it can be measured by the volume it takes up at certain specified temperatures and pressures. Volume is typically expressed in cubic feet (cf), millions of cubic feet (MMcf), or trillions of cubic feet (Tcf) in the United States, or by cubic meters (m) in Canada. Natural gas can also be measured by its potential energy output, expressed in British thermal units (Btu), where one Btu is the amount of natural gas required to heat one pound of water by one degree at normal pressure. One cubic foot of natural gas contains about 1,027 Btus. The Canadian equivalent is the gigajoule (GJ), where one gigajoule is approximately equal to the energy output of half a barrel (250 lbs) of oil. There is some dispute over which country has the largest proven reserves of natural gas, but the largest producers include Iran, Russia, Qatar, Canada, and the United States. Canada and the United States are also large consumers of natural gas. In 2010, the United States consumed 24.1 Tcf of natural gas. The United States typically accounts for 20% to 25% of the total worldwide consumption of natural gas annually. Although the United States is also one of the world's largest producers of natural gas, approximately 17% of its needs are provided by importing natural gas, and almost 90% of those imports are from Canada. COMPANY HISTORY In the oil and gas industry, companies are typically referred to as upstream, midstream, and downstream, depending on what types of activities the company engages in. Upstream companies (often referred to as exploration and production companies) are typically involved in locating and extracting natural resources such as oil and natural gas from the earth. Midstream companies are involved in the transportation and storage of natural resources. Downstream firms are those involved in the processing of oil and natural gas into a useable state, as well as the marketing and distribution of those products to consumers. During the mid-1990s, pipeline capacity, especially capacity of pipelines leading to the United States, was a major issue for western Canada's natural gas producers. The limited capacity on the pipeline network taking gas to market meant that many producers were "flaring" excess natural gas, in other words burning the gas at the well head. Potential profits were literally going up in flames. At the time, "wet" natural gas that was drawn out of the ground was processed at or near the well site, which required large processing plants to be built in close proximity to the natural gas fields. The by-products such as butane, propane, and other gasses were separated from the methane before entering the pipeline system, and "dry"natural gas was shipped down pipelines to consumers. The need to process the gas before entering into the pipeline system created backlogs and capacity issues throughout the system. Glenn Thorne was the President and CEO of a mid-sized upstream oil and gas company in Calgary in the mid-1990s, and as such was well aware of the difficulties and lost revenues that his company faced due to the shortage of pipeline capacity. One day in 1997, Thorne had lunch at a downtown Calgary restaurant with an old friend, Paul Cartwright. The two had attended high school together years before; Cartwright had moved to Denver, Colorado shortly afterwards. Cartwright was in Calgary for a short visit, and arranged to meet his old high school friend for lunch. Cartwright was the CEO of a downstream natural gas processing company (New Horizon, Inc.) outside of Denver. Cartwright mentioned the growing market for "dry" natural gas in the Colorado/Wyoming/Utah area, and that his company's processing plant was the chief supplier to those markets. However, his plant was operating significantly under capacity. Thorne bemoaned the problem of having to flare excess gas that simply couldn't be shipped on the existing, full-capacity pipeline system. An idea began to form: instead of stripping out the various components of natural gas at the well heads in northern Alberta, why not ship the "wet" natural gas through a new pipeline to the New Horizon processing facility, and separate the components at the destination? As the discussion progressed, the two realized that they had stumbled on an idea that could have tremendous potential as a business venture: form a midstream company and build a pipeline to carry "wet" natural gas from the gas-producing areas of northern Alberta and British Columbia to the Denver processing facility that could separate the gas and distribute it to consumers. Building a massive 2,700 kilometer-long pipeline would not be easy. There were routing issues to consider, negotiations with landowners, the challenge of obtaining regulatory approvals from both countries, not to mention the huge amount of money required to build the pipeline. Over the next five years, Thorne and Cartwright began seriously investigating the feasibility of their idea. They consulted with industry experts, engineers, and chemists as to the practicality of transporting "wet" natural gas as opposed to the industry standard of transporting "dry." They interviewed countless representatives from most of the major oil and gas producing companies, to see if there was an appetite to ship natural gas to a processing facility rather than separate "on-site." Finally, they began gathering expressions of interest in investing in their idea. By 2002, the two formed a partnership with the express goal of building a pipeline to transport wet natural gas from northern Alberta to the New Horizon processing facility in Colorado. Raising capital was perhaps the biggest stumbling block: even the most conservative estimate of construction costs was well in excess of a billion dollars, with some estimates approaching two billion dollars. Some funding was raised by incorporating the partnership as ColAlta Pipeline, Ltd. The vast majority of funding was raised by issuing a series of long-term bonds. Construction on the pipeline itself began in early 2003. Due to the extensive planning that Thorne and Cartwright had engaged in over the previous several years, construction moved smoothly and quickly. Overall, pipeline systems are the safest method for transporting natural gas. As it was designed and built in the early 2000's, ColAlta Pipeline was able to take advantage of the latest advances in pipeline technology. The walls of the one-meter diameter pipeline were built 30% thicker than most competitor's pipelines; not only did this reduce the potential for damage and reduce the risk of failure due to corrosion, it also allowed ColAlta to operate the pipeline at a higher pressure, meaning the gas could get to its destination faster. Safety regulations required the pipeline to be buried a minimum of one meter below the surface. Below roads and rivers, the pipeline was buried even deeper to prevent damage. Construction was primarily finished by late 2004, after which followed several months of testing and calibrating the pipeline to ensure it would operate safely. On July 1, 2005, the pipeline began accepting natural gas from its customers, and the dream of ColAlta Pipeline became a reality. BUSINESS OPERATIONS In simplistic terms, ColAlta Pipeline is a transportation company. Just as an airline provides the service of transporting passengers from one place to another, ColAlta merely charges customers for the service of transporting the natural gas from Canada to the processing facility in Colorado. As a midstream company, ColAlta does not own the natural gas it transports; ownership of the gas itself remains with the upstream customer. ColAlta's customers contract for the transportation of the gas to the processing plant. For safety reasons, as well as the need to perform periodic inspections and routine maintenance, the pipeline does not operate at 100% capacity. Taking into consideration downtime for such activities, the ColAlta pipeline operates at about 93% of theoretical capacity. Approximately 90% of that capacity is allocated to the company's major customers, who have each signed long-term contracts for transportation services. The long-term contracts are typically for a period of ten years or more, and require the customer to commit to transporting a set volume of natural gas annually. In return, contract customers receive preferential pricing at fixed rates for the entire length of their contract term. The remainder of the pipeline's capacity is available for "one-off" customers seeking transportation of individual loads of natural gas to the processing facility. As these customers have not committed to long- term contracts, service is dependent on whether there is any open capacity on the pipeline at the time, and the price charged is higher than that charged to contract customers. ColAlta charges its customers on the basis of the volume of natural gas transported and the distance travelled. "Wet" natural gas may enter the pipeline at a variety of connection points over the course of the pipeline, through linkages with other pipeline systems or by connection to a tanker truck. Transportation rates vary depending on the distance the gas is transported. For gas entering the pipeline in Canada, rates are charged to and paid by customers in Canadian dollars. For gas entering the pipeline in the United States, rates are charged to and paid by customers in US dollars. As a result, individual transportation invoices can vary greatly depending on the volume transported, distance travelled, and point of entry. Transportation Rates per m' Contract "One-Off Alberta Connection Points Customers Customers Silver Valley 0.35 0.44 Gordondale 0.34 0.43 Beaverlodge 0.33 0.42 Grande Cache 0.31 0.39 Pincher Creek 0.29 0.37 Contract "One-Off" Customers Customers Montana Connection Points (USD) (USD) Choteau 0.26 0.33 Big Sky 0.25 0.32 MANAGEMENT AND EMPLOYEE PROFILES Glenn Thorne, Founder and Past Chairman of the Board of Directors Glenn Thorne is one of the founding partners of ColAlta Pipeline, and its first President. After one year as President, Glenn was appointed Chairman of the Board of Directors. Glenn served in this capacity until he retired to the Okanagan in 2009. Financial Description of Statement Potential Financial Financial Statement Account(s) Affected Explanation / Justification Statement Risk Assertion(s) ColAlta Pipeline, Ltd. Identification of financial statement users December 31, 20 Financial Statement Financial Statement Area of Users Most Concern to User Explanation / Justification ColAlta Pipeline, Ltd. Calculation of recommended overall materiality December 31, 20 Low Threshold High Threshold Materiality Formula (thousands of Canadian dollars) (thousands of Canadian dollars) Net Income 3% to 7% of Net Income Total Assets 1% to 3% of Total Assets Equity 3% to 5% of Equity Revenue 1% to 3% of Revenue ColAlta Pipeline, Ltd. is a Canadian corporation based in Calgary, Alberta, and traded on the Toronto stock exchange (symbol CAP). The company owns and operates the ColAlta Pipeline, a natural gas pipeline extending approximately 2,700 kilometers from northwestern Alberta to Denver, Colorado, which was built specifically to transport "wet" natural gas from northern British Columbia and Alberta to markets in the western United States. The company's pipeline connects to the New Horizon natural gas plant, a large natural gas processing plant outside of Denver, Colorado. Located at the receiving end of the ColAlta Pipeline, the plant processes natural gas by separating methane from other natural gas components. The plant's location was chosen to take advantage of easy access to several pipelines to deliver "dry" natural gas to Colorado, Wyoming, and Utah, areas with growing demand for natural gas. NATURAL GAS Natural gas is a fossil fuel, like coal and oil. Fossil fuels are formed when the remains of a plant or animal (organic matter) become trapped underground at very high pressure for very long periods of time. Over time, mud, sediment, and other deposits build up over top of the plant or animal remains. The more material builds up, the greater the pressure. Over millions of years, the organic matter decomposes and produces one or more of the fossil fuels. Because of their common origin, oil and natural gas are often found in close proximity to each other, and often the search for one yields deposits of both. The earth's temperature increases in relation to depth; the deeper one goes into the earth, the higher the temperature. Shallower deposits of organic matter are at lower temperatures; more oil is produced relative to natural gas at shallow depths. At deeper levels, where the temperature is much higher, more natural gas is produced than oil. Typical natural gas deposits are found at depths of two to three kilometers below the surface. Natural gas is primarily made up of methane (CH4). Drawn from the ground, natural gas typically consists of between 70% and 90% methane, up to 20% ethane (C,H,), up to 8% carbon dioxide (CO.), and small amounts of propane, butane, oxygen, nitrogen, and other gases. Industry terminology refers to natural gas as wet" when it contains other hydrocarbons such as propane and butane; "dry" natural gas is almost pure methane. In most cases, "dry" natural gas is the result of human processing after extraction; however, very deep deposits of natural gas (often greater than three or four kilometers) are, in many cases, pure methane. In its natural state, natural gas is colourless, odourless, tasteless... and highly flammable. This makes it very desirable for use in heating, cooking, and generating electricity; however, undetected leaks of natural gas can be very hazardous, especially in the vicinity of sparks or open flame. As a safety feature, a chemical called mercaptan is added to natural gas before the gas is distributed commercially. Mercaptan has a distinctly unpleasant smell, similar to that of rotten eggs. This makes detecting leaks much easier, and the use of natural gas much safer. Natural gas is often measured in two different ways. As a gas, it can be measured by the volume it takes up at certain specified temperatures and pressures. Volume is typically expressed in cubic feet (cf), millions of cubic feet (MMcf), or trillions of cubic feet (Tcf) in the United States, or by cubic meters (m) in Canada. Natural gas can also be measured by its potential energy output, expressed in British thermal units (Btu), where one Btu is the amount of natural gas required to heat one pound of water by one degree at normal pressure. One cubic foot of natural gas contains about 1,027 Btus. The Canadian equivalent is the gigajoule (GJ), where one gigajoule is approximately equal to the energy output of half a barrel (250 lbs) of oil. There is some dispute over which country has the largest proven reserves of natural gas, but the largest producers include Iran, Russia, Qatar, Canada, and the United States. Canada and the United States are also large consumers of natural gas. In 2010, the United States consumed 24.1 Tcf of natural gas. The United States typically accounts for 20% to 25% of the total worldwide consumption of natural gas annually. Although the United States is also one of the world's largest producers of natural gas, approximately 17% of its needs are provided by importing natural gas, and almost 90% of those imports are from Canada. COMPANY HISTORY In the oil and gas industry, companies are typically referred to as upstream, midstream, and downstream, depending on what types of activities the company engages in. Upstream companies (often referred to as exploration and production companies) are typically involved in locating and extracting natural resources such as oil and natural gas from the earth. Midstream companies are involved in the transportation and storage of natural resources. Downstream firms are those involved in the processing of oil and natural gas into a useable state, as well as the marketing and distribution of those products to consumers. During the mid-1990s, pipeline capacity, especially capacity of pipelines leading to the United States, was a major issue for western Canada's natural gas producers. The limited capacity on the pipeline network taking gas to market meant that many producers were "flaring" excess natural gas, in other words burning the gas at the well head. Potential profits were literally going up in flames. At the time, "wet" natural gas that was drawn out of the ground was processed at or near the well site, which required large processing plants to be built in close proximity to the natural gas fields. The by-products such as butane, propane, and other gasses were separated from the methane before entering the pipeline system, and "dry"natural gas was shipped down pipelines to consumers. The need to process the gas before entering into the pipeline system created backlogs and capacity issues throughout the system. Glenn Thorne was the President and CEO of a mid-sized upstream oil and gas company in Calgary in the mid-1990s, and as such was well aware of the difficulties and lost revenues that his company faced due to the shortage of pipeline capacity. One day in 1997, Thorne had lunch at a downtown Calgary restaurant with an old friend, Paul Cartwright. The two had attended high school together years before; Cartwright had moved to Denver, Colorado shortly afterwards. Cartwright was in Calgary for a short visit, and arranged to meet his old high school friend for lunch. Cartwright was the CEO of a downstream natural gas processing company (New Horizon, Inc.) outside of Denver. Cartwright mentioned the growing market for "dry" natural gas in the Colorado/Wyoming/Utah area, and that his company's processing plant was the chief supplier to those markets. However, his plant was operating significantly under capacity. Thorne bemoaned the problem of having to flare excess gas that simply couldn't be shipped on the existing, full-capacity pipeline system. An idea began to form: instead of stripping out the various components of natural gas at the well heads in northern Alberta, why not ship the "wet" natural gas through a new pipeline to the New Horizon processing facility, and separate the components at the destination? As the discussion progressed, the two realized that they had stumbled on an idea that could have tremendous potential as a business venture: form a midstream company and build a pipeline to carry "wet" natural gas from the gas-producing areas of northern Alberta and British Columbia to the Denver processing facility that could separate the gas and distribute it to consumers. Building a massive 2,700 kilometer-long pipeline would not be easy. There were routing issues to consider, negotiations with landowners, the challenge of obtaining regulatory approvals from both countries, not to mention the huge amount of money required to build the pipeline. Over the next five years, Thorne and Cartwright began seriously investigating the feasibility of their idea. They consulted with industry experts, engineers, and chemists as to the practicality of transporting "wet" natural gas as opposed to the industry standard of transporting "dry." They interviewed countless representatives from most of the major oil and gas producing companies, to see if there was an appetite to ship natural gas to a processing facility rather than separate "on-site." Finally, they began gathering expressions of interest in investing in their idea. By 2002, the two formed a partnership with the express goal of building a pipeline to transport wet natural gas from northern Alberta to the New Horizon processing facility in Colorado. Raising capital was perhaps the biggest stumbling block: even the most conservative estimate of construction costs was well in excess of a billion dollars, with some estimates approaching two billion dollars. Some funding was raised by incorporating the partnership as ColAlta Pipeline, Ltd. The vast majority of funding was raised by issuing a series of long-term bonds. Construction on the pipeline itself began in early 2003. Due to the extensive planning that Thorne and Cartwright had engaged in over the previous several years, construction moved smoothly and quickly. Overall, pipeline systems are the safest method for transporting natural gas. As it was designed and built in the early 2000's, ColAlta Pipeline was able to take advantage of the latest advances in pipeline technology. The walls of the one-meter diameter pipeline were built 30% thicker than most competitor's pipelines; not only did this reduce the potential for damage and reduce the risk of failure due to corrosion, it also allowed ColAlta to operate the pipeline at a higher pressure, meaning the gas could get to its destination faster. Safety regulations required the pipeline to be buried a minimum of one meter below the surface. Below roads and rivers, the pipeline was buried even deeper to prevent damage. Construction was primarily finished by late 2004, after which followed several months of testing and calibrating the pipeline to ensure it would operate safely. On July 1, 2005, the pipeline began accepting natural gas from its customers, and the dream of ColAlta Pipeline became a reality. BUSINESS OPERATIONS In simplistic terms, ColAlta Pipeline is a transportation company. Just as an airline provides the service of transporting passengers from one place to another, ColAlta merely charges customers for the service of transporting the natural gas from Canada to the processing facility in Colorado. As a midstream company, ColAlta does not own the natural gas it transports; ownership of the gas itself remains with the upstream customer. ColAlta's customers contract for the transportation of the gas to the processing plant. For safety reasons, as well as the need to perform periodic inspections and routine maintenance, the pipeline does not operate at 100% capacity. Taking into consideration downtime for such activities, the ColAlta pipeline operates at about 93% of theoretical capacity. Approximately 90% of that capacity is allocated to the company's major customers, who have each signed long-term contracts for transportation services. The long-term contracts are typically for a period of ten years or more, and require the customer to commit to transporting a set volume of natural gas annually. In return, contract customers receive preferential pricing at fixed rates for the entire length of their contract term. The remainder of the pipeline's capacity is available for "one-off" customers seeking transportation of individual loads of natural gas to the processing facility. As these customers have not committed to long- term contracts, service is dependent on whether there is any open capacity on the pipeline at the time, and the price charged is higher than that charged to contract customers. ColAlta charges its customers on the basis of the volume of natural gas transported and the distance travelled. "Wet" natural gas may enter the pipeline at a variety of connection points over the course of the pipeline, through linkages with other pipeline systems or by connection to a tanker truck. Transportation rates vary depending on the distance the gas is transported. For gas entering the pipeline in Canada, rates are charged to and paid by customers in Canadian dollars. For gas entering the pipeline in the United States, rates are charged to and paid by customers in US dollars. As a result, individual transportation invoices can vary greatly depending on the volume transported, distance travelled, and point of entry. Transportation Rates per m' Contract "One-Off Alberta Connection Points Customers Customers Silver Valley 0.35 0.44 Gordondale 0.34 0.43 Beaverlodge 0.33 0.42 Grande Cache 0.31 0.39 Pincher Creek 0.29 0.37 Contract "One-Off" Customers Customers Montana Connection Points (USD) (USD) Choteau 0.26 0.33 Big Sky 0.25 0.32 MANAGEMENT AND EMPLOYEE PROFILES Glenn Thorne, Founder and Past Chairman of the Board of Directors Glenn Thorne is one of the founding partners of ColAlta Pipeline, and its first President. After one year as President, Glenn was appointed Chairman of the Board of Directors. Glenn served in this capacity until he retired to the Okanagan in 2009. Financial Description of Statement Potential Financial Financial Statement Account(s) Affected Explanation / Justification Statement Risk Assertion(s) ColAlta Pipeline, Ltd. Identification of financial statement users December 31, 20 Financial Statement Financial Statement Area of Users Most Concern to User Explanation / Justification ColAlta Pipeline, Ltd. Calculation of recommended overall materiality December 31, 20 Low Threshold High Threshold Materiality Formula (thousands of Canadian dollars) (thousands of Canadian dollars) Net Income 3% to 7% of Net Income Total Assets 1% to 3% of Total Assets Equity 3% to 5% of Equity Revenue 1% to 3% of Revenue ColAlta Pipeline, Ltd. is a Canadian corporation based in Calgary, Alberta, and traded on the Toronto stock exchange (symbol CAP). The company owns and operates the ColAlta Pipeline, a natural gas pipeline extending approximately 2,700 kilometers from northwestern Alberta to Denver, Colorado, which was built specifically to transport "wet" natural gas from northern British Columbia and Alberta to markets in the western United States. The company's pipeline connects to the New Horizon natural gas plant, a large natural gas processing plant outside of Denver, Colorado. Located at the receiving end of the ColAlta Pipeline, the plant processes natural gas by separating methane from other natural gas components. The plant's location was chosen to take advantage of easy access to several pipelines to deliver "dry" natural gas to Colorado, Wyoming, and Utah, areas with growing demand for natural gas. NATURAL GAS Natural gas is a fossil fuel, like coal and oil. Fossil fuels are formed when the remains of a plant or animal (organic matter) become trapped underground at very high pressure for very long periods of time. Over time, mud, sediment, and other deposits build up over top of the plant or animal remains. The more material builds up, the greater the pressure. Over millions of years, the organic matter decomposes and produces one or more of the fossil fuels. Because of their common origin, oil and natural gas are often found in close proximity to each other, and often the search for one yields deposits of both. The earth's temperature increases in relation to depth; the deeper one goes into the earth, the higher the temperature. Shallower deposits of organic matter are at lower temperatures; more oil is produced relative to natural gas at shallow depths. At deeper levels, where the temperature is much higher, more natural gas is produced than oil. Typical natural gas deposits are found at depths of two to three kilometers below the surface. Natural gas is primarily made up of methane (CH4). Drawn from the ground, natural gas typically consists of between 70% and 90% methane, up to 20% ethane (C,H,), up to 8% carbon dioxide (CO.), and small amounts of propane, butane, oxygen, nitrogen, and other gases. Industry terminology refers to natural gas as wet" when it contains other hydrocarbons such as propane and butane; "dry" natural gas is almost pure methane. In most cases, "dry" natural gas is the result of human processing after extraction; however, very deep deposits of natural gas (often greater than three or four kilometers) are, in many cases, pure methane. In its natural state, natural gas is colourless, odourless, tasteless... and highly flammable. This makes it very desirable for use in heating, cooking, and generating electricity; however, undetected leaks of natural gas can be very hazardous, especially in the vicinity of sparks or open flame. As a safety feature, a chemical called mercaptan is added to natural gas before the gas is distributed commercially. Mercaptan has a distinctly unpleasant smell, similar to that of rotten eggs. This makes detecting leaks much easier, and the use of natural gas much safer. Natural gas is often measured in two different ways. As a gas, it can be measured by the volume it takes up at certain specified temperatures and pressures. Volume is typically expressed in cubic feet (cf), millions of cubic feet (MMcf), or trillions of cubic feet (Tcf) in the United States, or by cubic meters (m) in Canada. Natural gas can also be measured by its potential energy output, expressed in British thermal units (Btu), where one Btu is the amount of natural gas required to heat one pound of water by one degree at normal pressure. One cubic foot of natural gas contains about 1,027 Btus. The Canadian equivalent is the gigajoule (GJ), where one gigajoule is approximately equal to the energy output of half a barrel (250 lbs) of oil. There is some dispute over which country has the largest proven reserves of natural gas, but the largest producers include Iran, Russia, Qatar, Canada, and the United States. Canada and the United States are also large consumers of natural gas. In 2010, the United States consumed 24.1 Tcf of natural gas. The United States typically accounts for 20% to 25% of the total worldwide consumption of natural gas annually. Although the United States is also one of the world's largest producers of natural gas, approximately 17% of its needs are provided by importing natural gas, and almost 90% of those imports are from Canada. COMPANY HISTORY In the oil and gas industry, companies are typically referred to as upstream, midstream, and downstream, depending on what types of activities the company engages in. Upstream companies (often referred to as exploration and production companies) are typically involved in locating and extracting natural resources such as oil and natural gas from the earth. Midstream companies are involved in the transportation and storage of natural resources. Downstream firms are those involved in the processing of oil and natural gas into a useable state, as well as the marketing and distribution of those products to consumers. During the mid-1990s, pipeline capacity, especially capacity of pipelines leading to the United States, was a major issue for western Canada's natural gas producers. The limited capacity on the pipeline network taking gas to market meant that many producers were "flaring" excess natural gas, in other words burning the gas at the well head. Potential profits were literally going up in flames. At the time, "wet" natural gas that was drawn out of the ground was processed at or near the well site, which required large processing plants to be built in close proximity to the natural gas fields. The by-products such as butane, propane, and other gasses were separated from the methane before entering the pipeline system, and "dry"natural gas was shipped down pipelines to consumers. The need to process the gas before entering into the pipeline system created backlogs and capacity issues throughout the system. Glenn Thorne was the President and CEO of a mid-sized upstream oil and gas company in Calgary in the mid-1990s, and as such was well aware of the difficulties and lost revenues that his company faced due to the shortage of pipeline capacity. One day in 1997, Thorne had lunch at a downtown Calgary restaurant with an old friend, Paul Cartwright. The two had attended high school together years before; Cartwright had moved to Denver, Colorado shortly afterwards. Cartwright was in Calgary for a short visit, and arranged to meet his old high school friend for lunch. Cartwright was the CEO of a downstream natural gas processing company (New Horizon, Inc.) outside of Denver. Cartwright mentioned the growing market for "dry" natural gas in the Colorado/Wyoming/Utah area, and that his company's processing plant was the chief supplier to those markets. However, his plant was operating significantly under capacity. Thorne bemoaned the problem of having to flare excess gas that simply couldn't be shipped on the existing, full-capacity pipeline system. An idea began to form: instead of stripping out the various components of natural gas at the well heads in northern Alberta, why not ship the "wet" natural gas through a new pipeline to the New Horizon processing facility, and separate the components at the destination? As the discussion progressed, the two realized that they had stumbled on an idea that could have tremendous potential as a business venture: form a midstream company and build a pipeline to carry "wet" natural gas from the gas-producing areas of northern Alberta and British Columbia to the Denver processing facility that could separate the gas and distribute it to consumers. Building a massive 2,700 kilometer-long pipeline would not be easy. There were routing issues to consider, negotiations with landowners, the challenge of obtaining regulatory approvals from both countries, not to mention the huge amount of money required to build the pipeline. Over the next five years, Thorne and Cartwright began seriously investigating the feasibility of their idea. They consulted with industry experts, engineers, and chemists as to the practicality of transporting "wet" natural gas as opposed to the industry standard of transporting "dry." They interviewed countless representatives from most of the major oil and gas producing companies, to see if there was an appetite to ship natural gas to a processing facility rather than separate "on-site." Finally, they began gathering expressions of interest in investing in their idea. By 2002, the two formed a partnership with the express goal of building a pipeline to transport wet natural gas from northern Alberta to the New Horizon processing facility in Colorado. Raising capital was perhaps the biggest stumbling block: even the most conservative estimate of construction costs was well in excess of a billion dollars, with some estimates approaching two billion dollars. Some funding was raised by incorporating the partnership as ColAlta Pipeline, Ltd. The vast majority of funding was raised by issuing a series of long-term bonds. Construction on the pipeline itself began in early 2003. Due to the extensive planning that Thorne and Cartwright had engaged in over the previous several years, construction moved smoothly and quickly. Overall, pipeline systems are the safest method for transporting natural gas. As it was designed and built in the early 2000's, ColAlta Pipeline was able to take advantage of the latest advances in pipeline technology. The walls of the one-meter diameter pipeline were built 30% thicker than most competitor's pipelines; not only did this reduce the potential for damage and reduce the risk of failure due to corrosion, it also allowed ColAlta to operate the pipeline at a higher pressure, meaning the gas could get to its destination faster. Safety regulations required the pipeline to be buried a minimum of one meter below the surface. Below roads and rivers, the pipeline was buried even deeper to prevent damage. Construction was primarily finished by late 2004, after which followed several months of testing and calibrating the pipeline to ensure it would operate safely. On July 1, 2005, the pipeline began accepting natural gas from its customers, and the dream of ColAlta Pipeline became a reality. BUSINESS OPERATIONS In simplistic terms, ColAlta Pipeline is a transportation company. Just as an airline provides the service of transporting passengers from one place to another, ColAlta merely charges customers for the service of transporting the natural gas from Canada to the processing facility in Colorado. As a midstream company, ColAlta does not own the natural gas it transports; ownership of the gas itself remains with the upstream customer. ColAlta's customers contract for the transportation of the gas to the processing plant. For safety reasons, as well as the need to perform periodic inspections and routine maintenance, the pipeline does not operate at 100% capacity. Taking into consideration downtime for such activities, the ColAlta pipeline operates at about 93% of theoretical capacity. Approximately 90% of that capacity is allocated to the company's major customers, who have each signed long-term contracts for transportation services. The long-term contracts are typically for a period of ten years or more, and require the customer to commit to transporting a set volume of natural gas annually. In return, contract customers receive preferential pricing at fixed rates for the entire length of their contract term. The remainder of the pipeline's capacity is available for "one-off" customers seeking transportation of individual loads of natural gas to the processing facility. As these customers have not committed to long- term contracts, service is dependent on whether there is any open capacity on the pipeline at the time, and the price charged is higher than that charged to contract customers. ColAlta charges its customers on the basis of the volume of natural gas transported and the distance travelled. "Wet" natural gas may enter the pipeline at a variety of connection points over the course of the pipeline, through linkages with other pipeline systems or by connection to a tanker truck. Transportation rates vary depending on the distance the gas is transported. For gas entering the pipeline in Canada, rates are charged to and paid by customers in Canadian dollars. For gas entering the pipeline in the United States, rates are charged to and paid by customers in US dollars. As a result, individual transportation invoices can vary greatly depending on the volume transported, distance travelled, and point of entry. Transportation Rates per m' Contract "One-Off Alberta Connection Points Customers Customers Silver Valley 0.35 0.44 Gordondale 0.34 0.43 Beaverlodge 0.33 0.42 Grande Cache 0.31 0.39 Pincher Creek 0.29 0.37 Contract "One-Off" Customers Customers Montana Connection Points (USD) (USD) Choteau 0.26 0.33 Big Sky 0.25 0.32 MANAGEMENT AND EMPLOYEE PROFILES Glenn Thorne, Founder and Past Chairman of the Board of Directors Glenn Thorne is one of the founding partners of ColAlta Pipeline, and its first President. After one year as President, Glenn was appointed Chairman of the Board of Directors. Glenn served in this capacity until he retired to the Okanagan in 2009. Financial Description of Statement Potential Financial Financial Statement Account(s) Affected Explanation / Justification Statement Risk Assertion(s) ColAlta Pipeline, Ltd. Identification of financial statement users December 31, 20 Financial Statement Financial Statement Area of Users Most Concern to User Explanation / Justification ColAlta Pipeline, Ltd. Calculation of recommended overall materiality December 31, 20 Low Threshold High Threshold Materiality Formula (thousands of Canadian dollars) (thousands of Canadian dollars) Net Income 3% to 7% of Net Income Total Assets 1% to 3% of Total Assets Equity 3% to 5% of Equity Revenue 1% to 3% of Revenue ColAlta Pipeline, Ltd. is a Canadian corporation based in Calgary, Alberta, and traded on the Toronto stock exchange (symbol CAP). The company owns and operates the ColAlta Pipeline, a natural gas pipeline extending approximately 2,700 kilometers from northwestern Alberta to Denver, Colorado, which was built specifically to transport "wet" natural gas from northern British Columbia and Alberta to markets in the western United States. The company's pipeline connects to the New Horizon natural gas plant, a large natural gas processing plant outside of Denver, Colorado. Located at the receiving end of the ColAlta Pipeline, the plant processes natural gas by separating methane from other natural gas components. The plant's location was chosen to take advantage of easy access to several pipelines to deliver "dry" natural gas to Colorado, Wyoming, and Utah, areas with growing demand for natural gas. NATURAL GAS Natural gas is a fossil fuel, like coal and oil. Fossil fuels are formed when the remains of a plant or animal (organic matter) become trapped underground at very high pressure for very long periods of time. Over time, mud, sediment, and other deposits build up over top of the plant or animal remains. The more material builds up, the greater the pressure. Over millions of years, the organic matter decomposes and produces one or more of the fossil fuels. Because of their common origin, oil and natural gas are often found in close proximity to each other, and often the search for one yields deposits of both. The earth's temperature increases in relation to depth; the deeper one goes into the earth, the higher the temperature. Shallower deposits of organic matter are at lower temperatures; more oil is produced relative to natural gas at shallow depths. At deeper levels, where the temperature is much higher, more natural gas is produced than oil. Typical natural gas deposits are found at depths of two to three kilometers below the surface. Natural gas is primarily made up of methane (CH4). Drawn from the ground, natural gas typically consists of between 70% and 90% methane, up to 20% ethane (C,H,), up to 8% carbon dioxide (CO.), and small amounts of propane, butane, oxygen, nitrogen, and other gases. Industry terminology refers to natural gas as wet" when it contains other hydrocarbons such as propane and butane; "dry" natural gas is almost pure methane. In most cases, "dry" natural gas is the result of human processing after extraction; however, very deep deposits of natural gas (often greater than three or four kilometers) are, in many cases, pure methane. In its natural state, natural gas is colourless, odourless, tasteless... and highly flammable. This makes it very desirable for use in heating, cooking, and generating electricity; however, undetected leaks of natural gas can be very hazardous, especially in the vicinity of sparks or open flame. As a safety feature, a chemical called mercaptan is added to natural gas before the gas is distributed commercially. Mercaptan has a distinctly unpleasant smell, similar to that of rotten eggs. This makes detecting leaks much easier, and the use of natural gas much safer. Natural gas is often measured in two different ways. As a gas, it can be measured by the volume it takes up at certain specified temperatures and pressures. Volume is typically expressed in cubic feet (cf), millions of cubic feet (MMcf), or trillions of cubic feet (Tcf) in the United States, or by cubic meters (m) in Canada. Natural gas can also be measured by its potential energy output, expressed in British thermal units (Btu), where one Btu is the amount of natural gas required to heat one pound of water by one degree at normal pressure. One cubic foot of natural gas contains about 1,027 Btus. The Canadian equivalent is the gigajoule (GJ), where one gigajoule is approximately equal to the energy output of half a barrel (250 lbs) of oil. There is some dispute over which country has the largest proven reserves of natural gas, but the largest producers include Iran, Russia, Qatar, Canada, and the United States. Canada and the United States are also large consumers of natural gas. In 2010, the United States consumed 24.1 Tcf of natural gas. The United States typically accounts for 20% to 25% of the total worldwide consumption of natural gas annually. Although the United States is also one of the world's largest producers of natural gas, approximately 17% of its needs are provided by importing natural gas, and almost 90% of those imports are from Canada. COMPANY HISTORY In the oil and gas industry, companies are typically referred to as upstream, midstream, and downstream, depending on what types of activities the company engages in. Upstream companies (often referred to as exploration and production companies) are typically involved in locating and extracting natural resources such as oil and natural gas from the earth. Midstream companies are involved in the transportation and storage of natural resources. Downstream firms are those involved in the processing of oil and natural gas into a useable state, as well as the marketing and distribution of those products to consumers. During the mid-1990s, pipeline capacity, especially capacity of pipelines leading to the United States, was a major issue for western Canada's natural gas producers. The limited capacity on the pipeline network taking gas to market meant that many producers were "flaring" excess natural gas, in other words burning the gas at the well head. Potential profits were literally going up in flames. At the time, "wet" natural gas that was drawn out of the ground was processed at or near the well site, which required large processing plants to be built in close proximity to the natural gas fields. The by-products such as butane, propane, and other gasses were separated from the methane before entering the pipeline system, and "dry"natural gas was shipped down pipelines to consumers. The need to process the gas before entering into the pipeline system created backlogs and capacity issues throughout the system. Glenn Thorne was the President and CEO of a mid-sized upstream oil and gas company in Calgary in the mid-1990s, and as such was well aware of the difficulties and lost revenues that his company faced due to the shortage of pipeline capacity. One day in 1997, Thorne had lunch at a downtown Calgary restaurant with an old friend, Paul Cartwright. The two had attended high school together years before; Cartwright had moved to Denver, Colorado shortly afterwards. Cartwright was in Calgary for a short visit, and arranged to meet his old high school friend for lunch. Cartwright was the CEO of a downstream natural gas processing company (New Horizon, Inc.) outside of Denver. Cartwright mentioned the growing market for "dry" natural gas in the Colorado/Wyoming/Utah area, and that his company's processing plant was the chief supplier to those markets. However, his plant was operating significantly under capacity. Thorne bemoaned the problem of having to flare excess gas that simply couldn't be shipped on the existing, full-capacity pipeline system. An idea began to form: instead of stripping out the various components of natural gas at the well heads in northern Alberta, why not ship the "wet" natural gas through a new pipeline to the New Horizon processing facility, and separate the components at the destination? As the discussion progressed, the two realized that they had stumbled on an idea that could have tremendous potential as a business venture: form a midstream company and build a pipeline to carry "wet" natural gas from the gas-producing areas of northern Alberta and British Columbia to the Denver processing facility that could separate the gas and distribute it to consumers. Building a massive 2,700 kilometer-long pipeline would not be easy. There were routing issues to consider, negotiations with landowners, the challenge of obtaining regulatory approvals from both countries, not to mention the huge amount of money required to build the pipeline. Over the next five years, Thorne and Cartwright began seriously investigating the feasibility of their idea. They consulted with industry experts, engineers, and chemists as to the practicality of transporting "wet" natural gas as opposed to the industry standard of transporting "dry." They interviewed countless representatives from most of the major oil and gas producing companies, to see if there was an appetite to ship natural gas to a processing facility rather than separate "on-site." Finally, they began gathering expressions of interest in investing in their idea. By 2002, the two formed a partnership with the express goal of building a pipeline to transport wet natural gas from northern Alberta to the New Horizon processing facility in Colorado. Raising capital was perhaps the biggest stumbling block: even the most conservative estimate of construction costs was well in excess of a billion dollars, with some estimates approaching two billion dollars. Some funding was raised by incorporating the partnership as ColAlta Pipeline, Ltd. The vast majority of funding was raised by issuing a series of long-term bonds. Construction on the pipeline itself began in early 2003. Due to the extensive planning that Thorne and Cartwright had engaged in over the previous several years, construction moved smoothly and quickly. Overall, pipeline systems are the safest method for transporting natural gas. As it was designed and built in the early 2000's, ColAlta Pipeline was able to take advantage of the latest advances in pipeline technology. The walls of the one-meter diameter pipeline were built 30% thicker than most competitor's pipelines; not only did this reduce the potential for damage and reduce the risk of failure due to corrosion, it also allowed ColAlta to operate the pipeline at a higher pressure, meaning the gas could get to its destination faster. Safety regulations required the pipeline to be buried a minimum of one meter below the surface. Below roads and rivers, the pipeline was buried even deeper to prevent damage. Construction was primarily finished by late 2004, after which followed several months of testing and calibrating the pipeline to ensure it would operate safely. On July 1, 2005, the pipeline began accepting natural gas from its customers, and the dream of ColAlta Pipeline became a reality. BUSINESS OPERATIONS In simplistic terms, ColAlta Pipeline is a transportation company. Just as an airline provides the service of transporting passengers from one place to another, ColAlta merely charges customers for the service of transporting the natural gas from Canada to the processing facility in Colorado. As a midstream company, ColAlta does not own the natural gas it transports; ownership of the gas itself remains with the upstream customer. ColAlta's customers contract for the transportation of the gas to the processing plant. For safety reasons, as well as the need to perform periodic inspections and routine maintenance, the pipeline does not operate at 100% capacity. Taking into consideration downtime for such activities, the ColAlta pipeline operates at about 93% of theoretical capacity. Approximately 90% of that capacity is allocated to the company's major customers, who have each signed long-term contracts for transportation services. The long-term contracts are typically for a period of ten years or more, and require the customer to commit to transporting a set volume of natural gas annually. In return, contract customers receive preferential pricing at fixed rates for the entire length of their contract term. The remainder of the pipeline's capacity is available for "one-off" customers seeking transportation of individual loads of natural gas to the processing facility. As these customers have not committed to long- term contracts, service is dependent on whether there is any open capacity on the pipeline at the time, and the price charged is higher than that charged to contract customers. ColAlta charges its customers on the basis of the volume of natural gas transported and the distance travelled. "Wet" natural gas may enter the pipeline at a variety of connection points over the course of the pipeline, through linkages with other pipeline systems or by connection to a tanker truck. Transportation rates vary depending on the distance the gas is transported. For gas entering the pipeline in Canada, rates are charged to and paid by customers in Canadian dollars. For gas entering the pipeline in the United States, rates are charged to and paid by customers in US dollars. As a result, individual transportation invoices can vary greatly depending on the volume transported, distance travelled, and point of entry. Transportation Rates per m' Contract "One-Off Alberta Connection Points Customers Customers Silver Valley 0.35 0.44 Gordondale 0.34 0.43 Beaverlodge 0.33 0.42 Grande Cache 0.31 0.39 Pincher Creek 0.29 0.37 Contract "One-Off" Customers Customers Montana Connection Points (USD) (USD) Choteau 0.26 0.33 Big Sky 0.25 0.32 MANAGEMENT AND EMPLOYEE PROFILES Glenn Thorne, Founder and Past Chairman of the Board of Directors Glenn Thorne is one of the founding partners of ColAlta Pipeline, and its first President. After one year as President, Glenn was appointed Chairman of the Board of Directors. Glenn served in this capacity until he retired to the Okanagan in 2009. Financial Description of Statement Potential Financial Financial Statement Account(s) Affected Explanation / Justification Statement Risk Assertion(s) ColAlta Pipeline, Ltd. Identification of financial statement users December 31, 20 Financial Statement Financial Statement Area of Users Most Concern to User Explanation / Justification ColAlta Pipeline, Ltd. Calculation of recommended overall materiality December 31, 20 Low Threshold High Threshold Materiality Formula (thousands of Canadian dollars) (thousands of Canadian dollars) Net Income 3% to 7% of Net Income Total Assets 1% to 3% of Total Assets Equity 3% to 5% of Equity Revenue 1% to 3% of Revenue ColAlta Pipeline, Ltd. is a Canadian corporation based in Calgary, Alberta, and traded on the Toronto stock exchange (symbol CAP). The company owns and operates the ColAlta Pipeline, a natural gas pipeline extending approximately 2,700 kilometers from northwestern Alberta to Denver, Colorado, which was built specifically to transport "wet" natural gas from northern British Columbia and Alberta to markets in the western United States. The company's pipeline connects to the New Horizon natural gas plant, a large natural gas processing plant outside of Denver, Colorado. Located at the receiving end of the ColAlta Pipeline, the plant processes natural gas by separating methane from other natural gas components. The plant's location was chosen to take advantage of easy access to several pipelines to deliver "dry" natural gas to Colorado, Wyoming, and Utah, areas with growing demand for natural gas. NATURAL GAS Natural gas is a fossil fuel, like coal and oil. Fossil fuels are formed when the remains of a plant or animal (organic matter) become trapped underground at very high pressure for very long periods of time. Over time, mud, sediment, and other deposits build up over top of the plant or animal remains. The more material builds up, the greater the pressure. Over millions of years, the organic matter decomposes and produces one or more of the fossil fuels. Because of their common origin, oil and natural gas are often found in close proximity to each other, and often the search for one yields deposits of both. The earth's temperature increases in relation to depth; the deeper one goes into the earth, the higher the temperature. Shallower deposits of organic matter are at lower temperatures; more oil is produced relative to natural gas at shallow depths. At deeper levels, where the temperature is much higher, more natural gas is produced than oil. Typical natural gas deposits are found at depths of two to three kilometers below the surface. Natural gas is primarily made up of methane (CH4). Drawn from the ground, natural gas typically consists of between 70% and 90% methane, up to 20% ethane (C,H,), up to 8% carbon dioxide (CO.), and small amounts of propane, butane, oxygen, nitrogen, and other gases. Industry terminology refers to natural gas as wet" when it contains other hydrocarbons such as propane and butane; "dry" natural gas is almost pure methane. In most cases, "dry" natural gas is the result of human processing after extraction; however, very deep deposits of natural gas (often greater than three or four kilometers) are, in many cases, pure methane. In its natural state, natural gas is colourless, odourless, tasteless... and highly flammable. This makes it very desirable for use in heating, cooking, and generating electricity; however, undetected leaks of natural gas can be very hazardous, especially in the vicinity of sparks or open flame. As a safety feature, a chemical called mercaptan is added to natural gas before the gas is distributed commercially. Mercaptan has a distinctly unpleasant smell, similar to that of rotten eggs. This makes detecting leaks much easier, and the use of natural gas much safer. Natural gas is often measured in two different ways. As a gas, it can be measured by the volume it takes up at certain specified temperatures and pressures. Volume is typically expressed in cubic feet (cf), millions of cubic feet (MMcf), or trillions of cubic feet (Tcf) in the United States, or by cubic meters (m) in Canada. Natural gas can also be measured by its potential energy output, expressed in British thermal units (Btu), where one Btu is the amount of natural gas required to heat one pound of water by one degree at normal pressure. One cubic foot of natural gas contains about 1,027 Btus. The Canadian equivalent is the gigajoule (GJ), where one gigajoule is approximately equal to the energy output of half a barrel (250 lbs) of oil. There is some dispute over which country has the largest proven reserves of natural gas, but the largest producers include Iran, Russia, Qatar, Canada, and the United States. Canada and the United States are also large consumers of natural gas. In 2010, the United States consumed 24.1 Tcf of natural gas. The United States typically accounts for 20% to 25% of the total worldwide consumption of natural gas annually. Although the United States is also one of the world's largest producers of natural gas, approximately 17% of its needs are provided by importing natural gas, and almost 90% of those imports are from Canada. COMPANY HISTORY In the oil and gas industry, companies are typically referred to as upstream, midstream, and downstream, depending on what types of activities the company engages in. Upstream companies (often referred to as exploration and production companies) are typically involved in locating and extracting natural resources such as oil and natural gas from the earth. Midstream companies are involved in the transportation and storage of natural resources. Downstream firms are those involved in the processing of oil and natural gas into a useable state, as well as the marketing and distribution of those products to consumers. During the mid-1990s, pipeline capacity, especially capacity of pipelines leading to the United States, was a major issue for western Canada's natural gas producers. The limited capacity on the pipeline network taking gas to market meant that many producers were "flaring" excess natural gas, in other words burning the gas at the well head. Potential profits were literally going up in flames. At the time, "wet" natural gas that was drawn out of the ground was processed at or near the well site, which required large processing plants to be built in close proximity to the natural gas fields. The by-products such as butane, propane, and other gasses were separated from the methane before entering the pipeline system, and "dry"natural gas was shipped down pipelines to consumers. The need to process the gas before entering into the pipeline system created backlogs and capacity issues throughout the system. Glenn Thorne was the President and CEO of a mid-sized upstream oil and gas company in Calgary in the mid-1990s, and as such was well aware of the difficulties and lost revenues that his company faced due to the shortage of pipeline capacity. One day in 1997, Thorne had lunch at a downtown Calgary restaurant with an old friend, Paul Cartwright. The two had attended high school together years before; Cartwright had moved to Denver, Colorado shortly afterwards. Cartwright was in Calgary for a short visit, and arranged to meet his old high school friend for lunch. Cartwright was the CEO of a downstream natural gas processing company (New Horizon, Inc.) outside of Denver. Cartwright mentioned the growing market for "dry" natural gas in the Colorado/Wyoming/Utah area, and that his company's processing plant was the chief supplier to those markets. However, his plant was operating significantly under capacity. Thorne bemoaned the problem of having to flare excess gas that simply couldn't be shipped on the existing, full-capacity pipeline system. An idea began to form: instead of stripping out the various components of natural gas at the well heads in northern Alberta, why not ship the "wet" natural gas through a new pipeline to the New Horizon processing facility, and separate the components at the destination? As the discussion progressed, the two realized that they had stumbled on an idea that could have tremendous potential as a business venture: form a midstream company and build a pipeline to carry "wet" natural gas from the gas-producing areas of northern Alberta and British Columbia to the Denver processing facility that could separate the gas and distribute it to consumers. Building a massive 2,700 kilometer-long pipeline would not be easy. There were routing issues to consider, negotiations with landowners, the challenge of obtaining regulatory approvals from both countries, not to mention the huge amount of money required to build the pipeline. Over the next five years, Thorne and Cartwright began seriously investigating the feasibility of their idea. They consulted with industry experts, engineers, and chemists as to the practicality of transporting "wet" natural gas as opposed to the industry standard of transporting "dry." They interviewed countless representatives from most of the major oil and gas producing companies, to see if there was an appetite to ship natural gas to a processing facility rather than separate "on-site." Finally, they began gathering expressions of interest in investing in their idea. By 2002, the two formed a partnership with the express goal of building a pipeline to transport wet natural gas from northern Alberta to the New Horizon processing facility in Colorado. Raising capital was perhaps the biggest stumbling block: even the most conservative estimate of construction costs was well in excess of a billion dollars, with some estimates approaching two billion dollars. Some funding was raised by incorporating the partnership as ColAlta Pipeline, Ltd. The vast majority of funding was raised by issuing a series of long-term bonds. Construction on the pipeline itself began in early 2003. Due to the extensive planning that Thorne and Cartwright had engaged in over the previous several years, construction moved smoothly and quickly. Overall, pipeline systems are the safest method for transporting natural gas. As it was designed and built in the early 2000's, ColAlta Pipeline was able to take advantage of the latest advances in pipeline technology. The walls of the one-meter diameter pipeline were built 30% thicker than most competitor's pipelines; not only did this reduce the potential for damage and reduce the risk of failure due to corrosion, it also allowed ColAlta to operate the pipeline at a higher pressure, meaning the gas could get to its destination faster. Safety regulations required the pipeline to be buried a minimum of one meter below the surface. Below roads and rivers, the pipeline was buried even deeper to prevent damage. Construction was primarily finished by late 2004, after which followed several months of testing and calibrating the pipeline to ensure it would operate safely. On July 1, 2005, the pipeline began accepting natural gas from its customers, and the dream of ColAlta Pipeline became a reality. BUSINESS OPERATIONS In simplistic terms, ColAlta Pipeline is a transportation company. Just as an airline provides the service of transporting passengers from one place to another, ColAlta merely charges customers for the service of transporting the natural gas from Canada to the processing facility in Colorado. As a midstream company, ColAlta does not own the natural gas it transports; ownership of the gas itself remains with the upstream customer. ColAlta's customers contract for the transportation of the gas to the processing plant. For safety reasons, as well as the need to perform periodic inspections and routine maintenance, the pipeline does not operate at 100% capacity. Taking into consideration downtime for such activities, the ColAlta pipeline operates at about 93% of theoretical capacity. Approximately 90% of that capacity is allocated to the company's major customers, who have each signed long-term contracts for transportation services. The long-term contracts are typically for a period of ten years or more, and require the customer to commit to transporting a set volume of natural gas annually. In return, contract customers receive preferential pricing at fixed rates for the entire length of their contract term. The remainder of the pipeline's capacity is available for "one-off" customers seeking transportation of individual loads of natural gas to the processing facility. As these customers have not committed to long- term contracts, service is dependent on whether there is any open capacity on the pipeline at the time, and the price charged is higher than that charged to contract customers. ColAlta charges its customers on the basis of the volume of natural gas transported and the distance travelled. "Wet" natural gas may enter the pipeline at a variety of connection points over the course of the pipeline, through linkages with other pipeline systems or by connection to a tanker truck. Transportation rates vary depending on the distance the gas is transported. For gas entering the pipeline in Canada, rates are charged to and paid by customers in Canadian dollars. For gas entering the pipeline in the United States, rates are charged to and paid by customers in US dollars. As a result, individual transportation invoices can vary greatly depending on the volume transported, distance travelled, and point of entry. Transportation Rates per m' Contract "One-Off Alberta Connection Points Customers Customers Silver Valley 0.35 0.44 Gordondale 0.34 0.43 Beaverlodge 0.33 0.42 Grande Cache 0.31 0.39 Pincher Creek 0.29 0.37 Contract "One-Off" Customers Customers Montana Connection Points (USD) (USD) Choteau 0.26 0.33 Big Sky 0.25 0.32 MANAGEMENT AND EMPLOYEE PROFILES Glenn Thorne, Founder and Past Chairman of the Board of Directors Glenn Thorne is one of the founding partners of ColAlta Pipeline, and its first President. After one year as President, Glenn was appointed Chairman of the Board of Directors. Glenn served in this capacity until he retired to the Okanagan in 2009. Financial Description of Statement Potential Financial Financial Statement Account(s) Affected Explanation / Justification Statement Risk Assertion(s) ColAlta Pipeline, Ltd. Identification of financial statement users December 31, 20 Financial Statement Financial Statement Area of Users Most Concern to User Explanation / Justification ColAlta Pipeline, Ltd. Calculation of recommended overall materiality December 31, 20 Low Threshold High Threshold Materiality Formula (thousands of Canadian dollars) (thousands of Canadian dollars) Net Income 3% to 7% of Net Income Total Assets 1% to 3% of Total Assets Equity 3% to 5% of Equity Revenue 1% to 3% of Revenue ColAlta Pipeline, Ltd. is a Canadian corporation based in Calgary, Alberta, and traded on the Toronto stock exchange (symbol CAP). The company owns and operates the ColAlta Pipeline, a natural gas pipeline extending approximately 2,700 kilometers from northwestern Alberta to Denver, Colorado, which was built specifically to transport "wet" natural gas from northern British Columbia and Alberta to markets in the western United States. The company's pipeline connects to the New Horizon natural gas plant, a large natural gas processing plant outside of Denver, Colorado. Located at the receiving end of the ColAlta Pipeline, the plant processes natural gas by separating methane from other natural gas components. The plant's location was chosen to take advantage of easy access to several pipelines to deliver "dry" natural gas to Colorado, Wyoming, and Utah, areas with growing demand for natural gas. NATURAL GAS Natural gas is a fossil fuel, like coal and oil. Fossil fuels are formed when the remains of a plant or animal (organic matter) become trapped underground at very high pressure for very long periods of time. Over time, mud, sediment, and other deposits build up over top of the plant or animal remains. The more material builds up, the greater the pressure. Over millions of years, the organic matter decomposes and produces one or more of the fossil fuels. Because of their common origin, oil and natural gas are often found in close proximity to each other, and often the search for one yields deposits of both. The earth's temperature increases in relation to depth; the deeper one goes into the earth, the higher the temperature. Shallower deposits of organic matter are at lower temperatures; more oil is produced relative to natural gas at shallow depths. At deeper levels, where the temperature is much higher, more natural gas is produced than oil. Typical natural gas deposits are found at depths of two to three kilometers below the surface. Natural gas is primarily made up of methane (CH4). Drawn from the ground, natural gas typically consists of between 70% and 90% methane, up to 20% ethane (C,H,), up to 8% carbon dioxide (CO.), and small amounts of propane, butane, oxygen, nitrogen, and other gases. Industry terminology refers to natural gas as wet" when it contains other hydrocarbons such as propane and butane; "dry" natural gas is almost pure methane. In most cases, "dry" natural gas is the result of human processing after extraction; however, very deep deposits of natural gas (often greater than three or four kilometers) are, in many cases, pure methane. In its natural state, natural gas is colourless, odourless, tasteless... and highly flammable. This makes it very desirable for use in heating, cooking, and generating electricity; however, undetected leaks of natural gas can be very hazardous, especially in the vicinity of sparks or open flame. As a safety feature, a chemical called mercaptan is added to natural gas before the gas is distributed commercially. Mercaptan has a distinctly unpleasant smell, similar to that of rotten eggs. This makes detecting leaks much easier, and the use of natural gas much safer. Natural gas is often measured in two different ways. As a gas, it can be measured by the volume it takes up at certain specified temperatures and pressures. Volume is typically expressed in cubic feet (cf), millions of cubic feet (MMcf), or trillions of cubic feet (Tcf) in the United States, or by cubic meters (m) in Canada. Natural gas can also be measured by its potential energy output, expressed in British thermal units (Btu), where one Btu is the amount of natural gas required to heat one pound of water by one degree at normal pressure. One cubic foot of natural gas contains about 1,027 Btus. The Canadian equivalent is the gigajoule (GJ), where one gigajoule is approximately equal to the energy output of half a barrel (250 lbs) of oil. There is some dispute over which country has the largest proven reserves of natural gas, but the largest producers include Iran, Russia, Qatar, Canada, and the United States. Canada and the United States are also large consumers of natural gas. In 2010, the United States consumed 24.1 Tcf of natural gas. The United States typically accounts for 20% to 25% of the total worldwide consumption of natural gas annually. Although the United States is also one of the world's largest producers of natural gas, approximately 17% of its needs are provided by importing natural gas, and almost 90% of those imports are from Canada. COMPANY HISTORY In the oil and gas industry, companies are typically referred to as upstream, midstream, and downstream, depending on what types of activities the company engages in. Upstream companies (often referred to as exploration and production companies) are typically involved in locating and extracting natural resources such as oil and natural gas from the earth. Midstream companies are involved in the transportation and storage of natural resources. Downstream firms are those involved in the processing of oil and natural gas into a useable state, as well as the marketing and distribution of those products to consumers. During the mid-1990s, pipeline capacity, especially capacity of pipelines leading to the United States, was a major issue for western Canada's natural gas producers. The limited capacity on the pipeline network taking gas to market meant that many producers were "flaring" excess natural gas, in other words burning the gas at the well head. Potential profits were literally going up in flames. At the time, "wet" natural gas that was drawn out of the ground was processed at or near the well site, which required large processing plants to be built in close proximity to the natural gas fields. The by-products such as butane, propane, and other gasses were separated from the methane before entering the pipeline system, and "dry"natural gas was shipped down pipelines to consumers. The need to process the gas before entering into the pipeline system created backlogs and capacity issues throughout the system. Glenn Thorne was the President and CEO of a mid-sized upstream oil and gas company in Calgary in the mid-1990s, and as such was well aware of the difficulties and lost revenues that his company faced due to the shortage of pipeline capacity. One day in 1997, Thorne had lunch at a downtown Calgary restaurant with an old friend, Paul Cartwright. The two had attended high school together years before; Cartwright had moved to Denver, Colorado shortly afterwards. Cartwright was in Calgary for a short visit, and arranged to meet his old high school friend for lunch. Cartwright was the CEO of a downstream natural gas processing company (New Horizon, Inc.) outside of Denver. Cartwright mentioned the growing market for "dry" natural gas in the Colorado/Wyoming/Utah area, and that his company's processing plant was the chief supplier to those markets. However, his plant was operating significantly under capacity. Thorne bemoaned the problem of having to flare excess gas that simply couldn't be shipped on the existing, full-capacity pipeline system. An idea began to form: instead of stripping out the various components of natural gas at the well heads in northern Alberta, why not ship the "wet" natural gas through a new pipeline to the New Horizon processing facility, and separate the components at the destination? As the discussion progressed, the two realized that they had stumbled on an idea that could have tremendous potential as a business venture: form a midstream company and build a pipeline to carry "wet" natural gas from the gas-producing areas of northern Alberta and British Columbia to the Denver processing facility that could separate the gas and distribute it to consumers. Building a massive 2,700 kilometer-long pipeline would not be easy. There were routing issues to consider, negotiations with landowners, the challenge of obtaining regulatory approvals from both countries, not to mention the huge amount of money required to build the pipeline. Over the next five years, Thorne and Cartwright began seriously investigating the feasibility of their idea. They consulted with industry experts, engineers, and chemists as to the practicality of transporting "wet" natural gas as opposed to the industry standard of transporting "dry." They interviewed countless representatives from most of the major oil and gas producing companies, to see if there was an appetite to ship natural gas to a processing facility rather than separate "on-site." Finally, they began gathering expressions of interest in investing in their idea. By 2002, the two formed a partnership with the express goal of building a pipeline to transport wet natural gas from northern Alberta to the New Horizon processing facility in Colorado. Raising capital was perhaps the biggest stumbling block: even the most conservative estimate of construction costs was well in excess of a billion dollars, with some estimates approaching two billion dollars. Some funding was raised by incorporating the partnership as ColAlta Pipeline, Ltd. The vast majority of funding was raised by issuing a series of long-term bonds. Construction on the pipeline itself began in early 2003. Due to the extensive planning that Thorne and Cartwright had engaged in over the previous several years, construction moved smoothly and quickly. Overall, pipeline systems are the safest method for transporting natural gas. As it was designed and built in the early 2000's, ColAlta Pipeline was able to take advantage of the latest advances in pipeline technology. The walls of the one-meter diameter pipeline were built 30% thicker than most competitor's pipelines; not only did this reduce the potential for damage and reduce the risk of failure due to corrosion, it also allowed ColAlta to operate the pipeline at a higher pressure, meaning the gas could get to its destination faster. Safety regulations required the pipeline to be buried a minimum of one meter below the surface. Below roads and rivers, the pipeline was buried even deeper to prevent damage. Construction was primarily finished by late 2004, after which followed several months of testing and calibrating the pipeline to ensure it would operate safely. On July 1, 2005, the pipeline began accepting natural gas from its customers, and the dream of ColAlta Pipeline became a reality. BUSINESS OPERATIONS In simplistic terms, ColAlta Pipeline is a transportation company. Just as an airline provides the service of transporting passengers from one place to another, ColAlta merely charges customers for the service of transporting the natural gas from Canada to the processing facility in Colorado. As a midstream company, ColAlta does not own the natural gas it transports; ownership of the gas itself remains with the upstream customer. ColAlta's customers contract for the transportation of the gas to the processing plant. For safety reasons, as well as the need to perform periodic inspections and routine maintenance, the pipeline does not operate at 100% capacity. Taking into consideration downtime for such activities, the ColAlta pipeline operates at about 93% of theoretical capacity. Approximately 90% of that capacity is allocated to the company's major customers, who have each signed long-term contracts for transportation services. The long-term contracts are typically for a period of ten years or more, and require the customer to commit to transporting a set volume of natural gas annually. In return, contract customers receive preferential pricing at fixed rates for the entire length of their contract term. The remainder of the pipeline's capacity is available for "one-off" customers seeking transportation of individual loads of natural gas to the processing facility. As these customers have not committed to long- term contracts, service is dependent on whether there is any open capacity on the pipeline at the time, and the price charged is higher than that charged to contract customers. ColAlta charges its customers on the basis of the volume of natural gas transported and the distance travelled. "Wet" natural gas may enter the pipeline at a variety of connection points over the course of the pipeline, through linkages with other pipeline systems or by connection to a tanker truck. Transportation rates vary depending on the distance the gas is transported. For gas entering the pipeline in Canada, rates are charged to and paid by customers in Canadian dollars. For gas entering the pipeline in the United States, rates are charged to and paid by customers in US dollars. As a result, individual transportation invoices can vary greatly depending on the volume transported, distance travelled, and point of entry. Transportation Rates per m' Contract "One-Off Alberta Connection Points Customers Customers Silver Valley 0.35 0.44 Gordondale 0.34 0.43 Beaverlodge 0.33 0.42 Grande Cache 0.31 0.39 Pincher Creek 0.29 0.37 Contract "One-Off" Customers Customers Montana Connection Points (USD) (USD) Choteau 0.26 0.33 Big Sky 0.25 0.32 MANAGEMENT AND EMPLOYEE PROFILES Glenn Thorne, Founder and Past Chairman of the Board of Directors Glenn Thorne is one of the founding partners of ColAlta Pipeline, and its first President. After one year as President, Glenn was appointed Chairman of the Board of Directors. Glenn served in this capacity until he retired to the Okanagan in 2009. Financial Description of Statement Potential Financial Financial Statement Account(s) Affected Explanation / Justification Statement Risk Assertion(s) ColAlta Pipeline, Ltd. Identification of financial statement users December 31, 20 Financial Statement Financial Statement Area of Users Most Concern to User Explanation / Justification ColAlta Pipeline, Ltd. Calculation of recommended overall materiality December 31, 20 Low Threshold High Threshold Materiality Formula (thousands of Canadian dollars) (thousands of Canadian dollars) Net Income 3% to 7% of Net Income Total Assets 1% to 3% of Total Assets Equity 3% to 5% of Equity Revenue 1% to 3% of Revenue