TSX:KEY.UN; KEY.DB
CALGARY, Aug. 12 /CNW/ -
2008 SECOND QUARTER HIGHLIGHTS- Keyera delivered exceptional results in the second quarter.
Distributable cash flow(1) of $56.0 million ($0.91 per unit) was the
highest in Keyera's history, almost 80% higher on a per unit basis
than the second quarter of 2007. Distributions to unitholders totaled
$24.9 million in the second quarter, or $0.41 per unit.
- Keyera announced today an 11% distribution increase, its second
distribution increase this year. Beginning with the August
distribution, payable on September 15, Keyera's cash distribution will
increase to 15.0 cents per unit per month, or $1.80 per unit annually.
- Second quarter net earnings were $22.7 million and included a non-cash
future income tax expense of $14.9 million and an unrealized loss of
$7.0 million related to financial contracts. Cash flow from operating
activities in the second quarter was $2.4 million, including
$54.3 million of cash used to finance a seasonal increase in non-cash
working capital, primarily due to an increase in NGL inventories.
- All business segments contributed to the strong second quarter
results. Contribution from the Gathering and Processing segment of
$28.9 million was particularly strong, about the same as the first
quarter of 2008 and up 88% from the second quarter of 2007.
Contribution from NGL Infrastructure was $11.4 million, slightly
higher than the same period last year. The Marketing business had a
tremendous quarter, delivering contribution of $18.6 million,
including a non-cash unrealized loss from the change in fair value of
financial contracts of $7.3 million. Excluding non-cash items, second
quarter marketing results were 50% higher than the second quarter of
2007.
- Keyera is proceeding with a 40 million cubic foot per day expansion at
the Caribou gas plant in northeastern British Columbia at a cost of
approximately $35 million. The expansion is expected to be completed
in the second quarter of 2009.
- Keyera invested $41.2 million on growth capital projects in the second
quarter, bringing the year-to-date growth capital total to
$90.7 million. During the quarter, Keyera agreed to acquire a 50%
ownership interest in the Bonnie Glen crude oil and condensate
pipeline system and an additional 20.3% ownership interest in the
Judy Creek NGL pipeline system and closed the acquisition of the
West Pembina gas plant. In July, Keyera completed construction of the
fourth NGL pipeline between the Edmonton Terminal and the
Fort Saskatchewan facility.
- Scheduled turnarounds were completed on time and on budget during the
quarter at the Gilby and Nordegg River gas plants.
(1) See "Non-GAAP Financial Measures" on page 5 and a reconciliation of
distributable cash flow to cash flow from operating activities
on page 21.Message to Unitholders
Keyera continues to pursue its strategy of delivering steady value growth
to unitholders, and again this quarter we have delivered exceptional financial
and operating results. Second quarter results were very strong in all business
areas and re-affirm that our business strategy is effective and producing the
desired results.
Second quarter distributable cash flow of $56.0 million, or 91 cents per
unit, was the highest ever recorded and significantly higher than the same
period last year. Distributable cash flow was $31.1 million higher than the
$24.9 million ($0.41 per unit) of distributions paid, providing cash for
investment in growth capital projects and to fund working capital
requirements.
As a result of the strong performance of our business this year and the
numerous growth capital projects currently underway, we are increasing our
monthly cash distribution by 11% to 15.0 cents per unit per month, or $1.80
per unit annually, beginning with the August distribution. This is our second
increase this year and reflects Keyera's commitment to providing steady value
growth to unitholders.
All three of our business segments contributed to the excellent financial
and operational results. Consistent throughput levels at our gas processing
plants resulted in contribution from the Gathering and Processing segment of
$28.9 million, about the same as the first quarter of 2008 and up 88% from the
second quarter of 2007. Our NGL Infrastructure segment had another solid
quarter, contributing $11.4 million, about the same as the second quarter last
year. All four products in our Marketing business posted strong results in the
quarter, resulting in an unusually high second quarter Marketing contribution
of $18.6 million. These results included a non-cash unrealized loss of
$7.3 million relating to the change in fair value of financial contracts used
to protect our NGL inventory. Excluding non-cash items, second quarter
marketing contribution was 50% higher than the second quarter of 2007.
We continue to pursue an active growth capital program, investing
$41.2 million on growth projects in the second quarter and $90.7 million on a
year-to-date basis. We continue to anticipate that growth capital spending
will be between $150 and $200 million in 2008. After reaching mutually
agreeable terms with producers in the Caribou area of northeastern British
Columbia, we are proceeding with an expansion of the Caribou gas plant from 65
to 105 million cubic feet per day. Capital costs are expected to be about
$35 million and we expect the expansion to be operational in the second
quarter of 2009.
In the second quarter we also agreed to acquire a 50% ownership interest
in the Bonnie Glen crude oil and condensate pipeline system and a further
20.3% ownership interest in the Judy Creek NGL pipeline system. The
transactions will close in the third quarter and the total purchase price is
approximately $24 million, including linefill in the Bonnie Glen system. These
pipeline systems deliver oil, condensate and NGLs from western Alberta into
the Edmonton hub and will complement Keyera's NGL Infrastructure and Marketing
strategies.
Construction of the fourth NGL pipeline between Keyera's Fort
Saskatchewan facility and the Edmonton Terminal was completed in July and the
pipeline is now operational. This pipeline gives us the ability to deliver
propane, butane, condensate and NGL mix in either direction between the two
facilities. In particular, we can now direct condensate delivered to our
offload facilities in the Edmonton area into storage at the Fort Saskatchewan
facility or into feeder pipelines for delivery to the Fort McMurray area. We
have completed the first wellbore in our four cavern storage expansion program
and expect to be washing the cavern in mid September.
Work is proceeding on our ethane extraction project at the Rimbey gas
plant and we are continuing with plans to bring the Alberta Diluent Terminal
into operation.
With the successful completion of the turnarounds at the Nordegg River
and Gilby gas plants, we have now completed all of our scheduled maintenance
turnarounds for the year. Both turnarounds were completed on schedule and on
budget.
On behalf of Keyera and its employees, I thank you for your continued
support and look forward to continued success in 2008 and beyond.Jim V. Bertram
President and CEO
Keyera Facilities Income FundContribution From Operating Segments
Keyera operates one of the largest natural gas midstream businesses in
Canada with three major operating segments: Gathering and Processing, NGL
Infrastructure and Marketing. The Gathering and Processing segment includes
natural gas gathering systems and processing plants strategically located in
the natural gas production areas on the western side of the Western Canadian
Sedimentary Basin. The NGL Infrastructure segment includes NGL and crude oil
pipelines, terminals, processing and storage facilities in Edmonton and Fort
Saskatchewan, Alberta, one of North America's major NGL hubs. The Marketing
segment includes activities such as the marketing of propane, butane and
condensate to customers in Canada and the United States, and crude oil
midstream activities.
Keyera's Gathering and Processing and NGL Infrastructure segments provide
a large portion of the total contribution. Keyera benefits from the
geographical diversity of its natural gas processing plants, NGL
infrastructure facilities and associated assets. The revenues generated from
these facilities are fee-for-service based, with minimal direct exposure to
commodity prices. The remainder of Keyera's contribution is derived from its
Marketing segment. Due to Keyera's integrated approach to its business, its
infrastructure provides a significant competitive advantage in NGL marketing.
Keyera also benefits from diversified sources of NGL supply and a diversified
customer base across North America.
The following table shows the contribution from each of Keyera's
operating segments and includes inter-segment transactions that are eliminated
in the Fund's consolidated financial statements. Since contribution is not a
standard measure under Canadian generally accepted accounting principles
("GAAP"), it may not be comparable to similar measures reported by other
entities. Contribution does not include the elimination of inter-segment
transactions as required by GAAP and refers to operating revenues less
operating expenses. Management believes contribution provides an accurate
portrayal of operating profitability by segment. Keyera's Gathering and
Processing and NGL Infrastructure segments charge Keyera's Marketing segment
for the use of facilities at market rates. Those charges are reflected in
contribution, but are eliminated in GAAP segment measures. The most comparable
GAAP measures are reported in note 17, Segmented Information, to the
accompanying unaudited consolidated financial statements.-------------------------------------------------------------------------
Contribution by Operating Three months ended Six months ended
Segment June 30, June 30,
(in thousands of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Gathering & Processing(1)
Revenue before inter-segment
eliminations(4) 60,003 45,074 109,818 87,782
Operating expenses before
inter-segment eliminations(4) (31,114) (29,713) (51,977) (50,939)
-------------------------------------------------------------------------
Gathering & Processing
contribution 28,889 15,361 57,841 36,843
-------------------------------------------------------------------------
NGL Infrastructure(1)
Revenue before inter-segment
eliminations(4) 19,937 17,658 38,099 35,339
Operating expenses (8,866) (6,269) (14,762) (11,761)
Unrealized gain/(loss) 323 (207) 810 (95)
------------------------------------------
Operating expenses before
inter-segment eliminations(4) (8,543) (6,476) (13,952) (11,856)
-------------------------------------------------------------------------
NGL Infrastructure contribution 11,394 11,182 24,147 23,483
-------------------------------------------------------------------------
Marketing(2)
Revenue 466,882 291,519 947,916 604,318
Unrealized gain/(loss) (7,308) 807 4,992 (4,650)
------------------------------------------
Revenue before inter-segment
eliminations(4) 459,574 292,326 952,908 599,668
Operating expenses before
inter-segment
eliminations(4) (440,178) (273,489) (905,466) (571,545)
General & administration (826) (731) (1,762) (1,544)
-------------------------------------------------------------------------
Marketing contribution 18,570 18,106 45,680 26,579
-------------------------------------------------------------------------
Total contribution 58,853 44,649 127,668 86,905
-------------------------------------------------------------------------
Other expenses(3) (23,062) (23,004) (47,529) (43,400)
-------------------------------------------------------------------------
Earnings before tax and
non-controlling interest 35,791 21,645 80,139 43,505
-------------------------------------------------------------------------
Notes:
(1) Gathering and Processing and NGL Infrastructure contribution
includes revenues for processing, transportation and storage services
provided to Keyera's Marketing business.
(2) The Marketing contribution is net of expenses for processing,
transportation and storage services provided by Keyera's facilities
and general and administrative costs directly attributable to the
Marketing segment.
(3) Other expenses include corporate general and administrative,
interest, depreciation and amortization, accretion and impairment
expense. Corporate general and administrative costs exclude the
direct Marketing general and administrative costs.
(4) Revenue and operating expenses before inter-segment eliminations as
shown above are both non-GAAP measures and do not consider the
elimination of inter-segment sales and expenses. Inter-segment
transactions are eliminated upon consolidation of Keyera's financial
results to arrive at external revenue and external operating
expenses, both GAAP measures, as reported in note 17, Segmented
Information.Management's Discussion and Analysis
The following management's discussion and analysis ("MD&A") was prepared
as of August 12, 2008 and is a review of the results of operations and the
liquidity and capital resources of Keyera Facilities Income Fund (the "Fund")
and its subsidiaries (collectively "Keyera"). It should be read in conjunction
with the accompanying unaudited consolidated financial statements of the Fund
for the quarter ended June 30, 2008 and the notes thereto as well as the
consolidated financial statements of the Fund for the year ended December 31,
2007 and the related management's discussion and analysis. Additional
information related to the Fund, including the Fund's Annual Information Form,
is filed on SEDAR at www.sedar.com.
NON-GAAP FINANCIAL MEASURES
This discussion and analysis refers to certain financial measures that
are not determined in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP"). Measures such as operating margin (operating revenues
minus operating expenses), distributable cash flow (cash flow from operating
activities adjusted for changes in non-cash working capital, maintenance
capital expenditures and the distributable cash flow attributable to any non-
controlling interest) and EBITDA (earnings before interest, taxes,
depreciation and amortization) are not standard measures under GAAP and
therefore may not be comparable to similar measures reported by other
entities. Management believes that these supplemental measures facilitate the
understanding of the Fund's results of operations, leverage, liquidity and
financial position. Operating margin is used to assess the performance of
specific segments before general and administrative expenses and other non-
operating expenses. Distributable cash flow is used to assess the level of
cash flow generated from ongoing operations and to evaluate the adequacy of
internally generated cash flow to fund distributions. EBITDA is commonly used
by management, investors and creditors in the calculation of ratios for
assessing leverage and financial performance. Investors are cautioned,
however, that these measures should not be construed as an alternative to net
earnings determined in accordance with GAAP as an indication of the Fund's
performance.
FORWARD LOOKING STATEMENTS
Certain statements contained in this MD&A and accompanying documents
contain forward-looking statements. These statements relate to future events
or the Fund's future performance. Such statements are predictions only and
actual events or results may differ materially. The use of words such as
"anticipate", "continue", "estimate", "expect", "may", "will", "project",
"should", "plan", "intend", "believe", and similar expressions, including the
negatives thereof, is intended to identify forward looking statements. All
statements other than statements of historical fact contained in this document
are forward looking statements, including, without limitation, statements
regarding: the future financial position of Keyera; business strategy and
plans of management; anticipated growth and proposed activities; budgets,
including future capital, operating or other expenditures and projected costs;
estimated utilization rates; objectives of or involving Keyera; impact of
commodity prices; treatment of Keyera under governmental regulatory regimes;
the existence, operation and strategy of the risk management program,
including the approximate and maximum amount of forward sales and hedging to
be employed; and expectations regarding Keyera's ability to raise capital and
to add to its assets through acquisitions or internal growth opportunities.
The forward looking statements reflect management's current beliefs and
assumptions with respect to such things as the outlook for general economic
trends, industry trends, commodity prices, capital markets, and the
governmental, regulatory and legal environment. In some instances, this MD&A
and accompanying documents may also contain forward-looking statements
attributed to third party sources. Management believes that its assumptions
and analysis in this MD&A are reasonable and that the expectations reflected
in the forward looking statements contained herein are also reasonable.
However, Keyera cannot assure readers that these expectations will prove to be
correct.
All forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, events, levels
of activity and achievements to differ materially from those anticipated in
the forward looking statements. Such factors include but are not limited to:
general economic, market and business conditions; operational matters,
including potential hazards inherent in our operations; risks arising from co-
ownership of facilities; activities of other facility owners; competitive
action by other companies; activities of producers and other customers and
overall industry activity levels; changes in gas composition; fluctuations in
commodity prices and supply/demand trends; processing and marketing margins;
effects of weather conditions; fluctuations in interest rates and foreign
currency exchange rates; changes in operating and capital costs, including
fluctuations in input costs; actions by governmental authorities; decisions or
approvals of administrative tribunals; changes in environmental and other
regulations; reliance on key personnel; competition for, among other things,
capital, acquisition opportunities and skilled personnel; changes in tax laws
relating to income trusts, including the effects that such changes may have on
unitholders, and in particular any differential effects relating to
unitholder's country of residence; and other factors, many of which are beyond
the control of Keyera, some of which are discussed in this MD&A and in
Keyera's Annual Information Form dated February 26, 2008 (the "Annual
Information Form") filed on SEDAR and available on the Keyera website at
www.keyera.com.
Readers are cautioned that they should not unduly rely on the forward
looking statements in this MD&A and accompanying documents. Further, readers
are cautioned that the forward looking statements in this MD&A speak only as
of the date of this MD&A and Keyera does not undertake any obligation to
publicly update or to revise any of the forward looking statements, whether as
a result of new information, future events or otherwise, except as may be
required by applicable laws.
All forward looking statements contained in this MD&A and accompanying
documents are expressly qualified by this cautionary statement. Further
information about the factors affecting forward looking statements and
management's assumptions and analysis thereof, is available in filings made by
Keyera with Canadian provincial securities commissions, which can be viewed on
SEDAR at www.sedar.com.
INTRODUCTION
The statements of net earnings contained in the unaudited interim
consolidated financial statements include the results of operations of the
Fund, Keyera Energy Limited Partnership (the "Partnership"), Keyera Energy
Facilities Limited ("KEFL"), Keyera Energy Ltd. ("KEL"), Keyera Energy
Management Ltd. ("KEML"), Keyera Energy Inc. ("KEI"), Rimbey Pipeline Limited
Partnership ("RPLP") for the three and six months ended June 30, 2007 and the
results of operations of each of those entities and Alberta Diluent Terminal
Limited Partnership ("ADTLP") for the three and six months ended June 30,
2008. The Fund and its subsidiaries are collectively referred to as "Keyera".
A diagram of Keyera's organizational structure and descriptions of the Fund
and its subsidiaries can be found on Keyera's website at www.keyera.com .
BUSINESS ENVIRONMENT
Industry Activity
Producers in Canada drilled approximately 1,575 wells in the second
quarter, a decrease of about 11% compared to the same period in 2007. The
foothills front region of Alberta saw a decrease of 16% in the number of wells
drilled during the second quarter versus the same period a year ago. The
average depth of wells drilled in the region was 2,547 meters, a slight
decrease compared to the second quarter of 2007. In the central Alberta
region, the number of wells drilled was down versus the second quarter of
2007, with the average depth decreasing by approximately 6% to 1,331 metres.
British Columbia also experienced a decline of almost 8% in the number of
wells drilled when compared to the same period a year earlier. The average
depth in British Columbia has increased to 3,415 metres, 22% higher than the
second quarter of 2007.
The slowdown in drilling for the quarter can be largely attributed to an
unseasonably wet second quarter, a longer than usual spring break-up and lower
producer capital spending budgets put into place almost a year earlier.
Despite a lower well count for the quarter, recent increases in capital
spending by a number of producers within Keyera's core areas suggest a more
active drilling program in the second half of 2008.
Natural gas fundamentals in North America have improved significantly
over the past year. At the end of July, the AECO spot price for natural gas
had increased substantially from a year ago, from approximately $5.44/mcf to
$7.90/mcf. This increase in price is largely attributable to a drawdown in
natural gas inventories in the United States, from 2,415 bcf of gas at the end
of the second quarter a year ago to 2,033 bcf this year. Since the end of the
quarter, United States natural gas storage levels have remained just under the
five year average. As well, the price of West Texas Intermediate oil doubled
from a year ago, from approximately U.S.$70.68 per barrel to approximately
U.S. $140 per barrel at quarter end.
Climate change
On July 1, 2008, the British Columbia government's carbon tax came into
effect. At Caribou, Keyera's only B.C. facility, the operating cost impact for
the remainder of 2008 is estimated at $150,000 to $200,000. These costs will
grow over time with the proposed increase in the carbon tax rate and increased
fuel consumption due to an expansion of the plant in 2009. However, the net
impact to Keyera is expected to be small as these costs are largely
recoverable from producers via flow through operating costs.
A description of Alberta's rules dealing with greenhouse gas emissions,
the federal government's plans relating to greenhouse gas emissions and the
cap and trade system proposed by the B.C. government can be found in Keyera's
MD&A for the first quarter of 2008, which is available on SEDAR. A more
complete description of the other environmental regulations that affect
Keyera's businesses can be found in Keyera's Annual Information Form, which is
available on SEDAR.
Keyera participated in the 2008 Carbon Disclosure Project ("CDP") annual
survey. The CDP is an organization supported by institutional investors with
combined assets under management of $57 trillion. Keyera's response to the CDP
survey will be available from the CDP in September and is available in the
"About Keyera" section of Keyera's website.
RESULTS OF OPERATIONS
Keyera's midstream activities are conducted through three business
segments. The Gathering and Processing segment provides natural gas gathering
and processing services to producers. The NGL Infrastructure segment provides
NGL processing, transportation and storage services to producers, marketers
(including Keyera) and others. The services in both these segments are
provided on a fee-for-service basis. The Marketing segment is focused on the
marketing of by-products recovered from the processing of raw gas, primarily
NGLs, and crude oil midstream activities. A more complete description of
Keyera's businesses by segment can be found in the Fund's Annual Information
Form, which is available at www.sedar.com.
Strong performance from the Gathering and Processing and Marketing
segments during the second quarter of 2008 contributed to an operating margin
of $59.7 million, an increase of $14.3 million compared to the same period
last year. Included in the operating margin for the second quarter of 2008 was
a $7.0 million unrealized loss related to the change in fair value of
financial contracts, compared to a $0.6 million unrealized gain in the second
quarter of 2007.
The growth in operating margin was due primarily to the Gathering and
Processing and Marketing segments. In the Gathering and Processing segment,
throughput was up compared to the second quarter of 2007 and remained
consistent with the first quarter of 2008. However, turnaround activity in the
second quarter of 2007 was the largest contributor to the favourable operating
margin variance. Also contributing to the favourable variance was $2.8 million
of positive equalization adjustments recorded in the second quarter of 2008.
Higher sales volumes and strong margins underpinned the Marketing segment's
contribution to the increase in operating margin.
Net earnings before tax and non-controlling interest in the second
quarter of 2008 were $35.8 million, an increase of $14.1 million compared to
the second quarter of 2007. The increase was primarily attributable to the
higher operating margin discussed above. The decrease in general and
administrative costs of $1.4 million was largely offset by a $1.1 million
impairment expense related to the disposition of the non-core Tomahawk gas
plant.
An income tax expense of $13.1 million was recorded in the second quarter
of 2008, bringing net earnings to $22.7 million, compared to a loss of
$59.9 million in the second quarter of 2007. The net loss in the second
quarter of 2007 was primarily due to an $80.2 million non-cash future income
tax expense related to the enactment of a new tax on publicly traded trusts.
In the second quarter of 2008, income tax expense was $13.1 million, resulting
from a $15.0 million future income tax expense partially offset by a
$1.9 million current income tax recovery. The $15.0 million future income tax
expense resulted from higher CCA claims in the quarter and a change in
estimates for future tax deductions. The acquisition of assets by KEFL in May
2008 created sufficient tax shelter to reduce current taxes to virtually nil
and therefore resulted in $1.9 million of current income tax recovery in the
second quarter.
Year-to-date, net earnings were $78.2 million, compared to a net loss of
$40.9 million for the same period last year. The favourable variance was
primarily related to the inclusion of the $80.2 million non-cash future income
tax expense in the second quarter of 2007, stronger operating margins earned
in the Gathering and Processing segment throughout 2008 and in the Marketing
segment in the first quarter of 2008.
Gathering and Processing
Gathering and Processing operating margin for the second quarter of 2008
was $27.6 million, an increase of $13.0 million, or 89%, compared to the
second quarter of 2007. The significant increase was primarily attributable to
turnarounds completed in the second quarters of 2007 and 2008, $2.8 million of
positive equalization adjustments related to prior periods and higher
throughput at most plants.
Turnaround activity in the second quarter of each year had a considerable
effect on the favourable variance in the second quarter. In the second quarter
of 2007, the turnaround completed at Rimbey, Keyera's largest gas plant, added
approximately $9.5 million to operating expenses. The fee structure in place
at Rimbey provides for recovery of these costs over a four year period.
Accordingly, these costs had a significant adverse effect on second quarter
2007 operating margin. The turnarounds completed at the Gilby and Nordegg
River gas plants in the second quarter of 2008 were much smaller in scale and
the fee structure in place at these plants allows for full recovery in the
current period. Therefore, their effect on operating margin in the second
quarter of 2008 was less significant.
NGL extraction activities contributed approximately $0.5 million to
operating margins in the second quarter of 2008 compared to approximately
$0.3 million in the second quarter of 2007. These margins are dependent upon
favourable price differentials between the NGL products produced and natural
gas. As a result, margins may vary significantly from period to period.
Gathering and Processing revenue for the second quarter of 2008 was
$58.7 million, an increase of $14.4 million, or 33%, compared to the second
quarter of 2007. The increase was due primarily to higher operating fees at
the Gilby and Nordegg River gas plants to recover turnaround costs, higher
fees earned at the Rimbey gas plant that was down for turnaround in the second
quarter of 2007, the strong performance of NGL extraction activities,
incremental revenues from the West Pembina gas plant acquired in May 2008 and
$2.8 million of positive equalization adjustments related to prior periods.
While volumes increased by 12% from a year ago, the revenues from those
volumes increased by a greater amount. Declines in lower-fee volumes were more
than offset by increases in higher-fee volumes.
Gathering and Processing operating expenses for the second quarter of
2008 were $31.1 million, an increase of $1.4 million, or 5%, compared to the
second quarter of 2007. The increase was attributable to the cost of
turnarounds completed at the Nordegg River and Gilby gas plants ($3.7 million
in total), operating costs associated with recently acquired West Pembina gas
plant and maintenance projects completed at the Bigoray and Strachan gas
plants, offset by lower operating expense at the Rimbey gas plant compared to
the second quarter of 2007, where operating expenses in the second quarter of
2007 included $9.5 million of costs related to the plant turnaround.
Average gross processing throughput in the second quarter of 2008 was
896 million cubic feet per day, up over 6% from the first quarter of 2008 and
up 12% from the second quarter last year. Year-to-date, average gross
processing throughput was 869 million cubic feet per day, up over 7% from
2007. The growth in throughput between the second quarter of 2008 and the same
period last year was due primarily to volumes from the recently acquired West
Pembina gas plant, reprocessing activity at the Paddle River gas plant that
commenced in September 2007 and higher throughput at the Rimbey gas plant,
partially offset by lower throughput at the Brazeau River and Chinchaga gas
plants.
Year-to-date, Gathering and Processing revenue was $107.3 million, an
increase of $21.0 million or 24% compared to last year. The increase is due
primarily to the same factors as those that affected the second quarter of
2008. Year-to-date Gathering and Processing operating expenses were
$52.0 million, an increase of $1.0 million or 2% compared to last year. The
variance was also primarily due to the same factors discussed for the second
quarter of 2008.
Gathering and Processing - North Central Region
The North Central Region delivered strong results in the second quarter,
despite the loss of some throughput during the scheduled maintenance
turnaround at the Gilby gas plant. Activity levels in the area remained steady
during the quarter. Throughput in the second quarter was 427 million cubic
feet per day, 9% higher than the second quarter of last year, largely due to
lower volumes in 2007 as a result of the turnaround at the Rimbey gas plant.
A number of projects were initiated in the North Central Region during
the second quarter. At the Rimbey gas plant, work on the ethane extraction
project is proceeding. Long delivery equipment has been ordered and the
pipeline portion of the project is expected to be completed this winter. The
project is expected to be operational in mid year 2009. The Rimbey vapour
recovery project was commissioned in late April. The vapour recovery unit
recovers natural gas which was previously consumed in the flare gas system,
reducing fuel gas consumption and greenhouse gas emissions, providing benefits
to Keyera, its producing customers and the environment.
In the Caribou area of northeastern British Columbia, Keyera reached
mutually acceptable terms with producers for future processing capacity and,
as a result, made a decision to proceed with an expansion of the Caribou gas
plant. The project will increase the plant's inlet capacity from 65 to
105 million cubic feet per day. The expansion is expected to cost $35 million
and be fully operational in the second quarter of 2009. Detailed engineering
is ongoing and long delivery equipment has been ordered.
Keyera completed its final scheduled maintenance turnaround of the year
in the second quarter at the Gilby gas plant. The two week shut down was
completed on time and on budget, and the costs will be fully recovered in
2008.
Gathering and Processing - Foothills Region
The Foothills Region also posted a strong second quarter. Foothills
Region results were slightly higher than the same period last year and about
the same as the first quarter of 2008. Although wet weather in the area
resulted in lower than usual producer activity in the quarter, a number of
producers have announced higher drilling budgets for the remainder of the
year. Foothills Region throughput in the second quarter was 469 million cubic
feet per day, 16% higher than the same period last year. The increase was
largely the result of the West Pembina gas plant acquisition.
On May 1, 2008, Keyera acquired a 35.6% interest in the West Pembina gas
plant and became operator of the facility.
At the Strachan gas plant, a second NGL truck loading rack was added
during the quarter, providing Keyera with access to additional NGL volumes.
As a result of the sharp increase in global demand for sulphur and the
resulting increase in sulphur prices, Keyera has initiated a number of
projects to provide enhanced sulphur handling services at the Strachan gas
plant. Keyera is constructing two sulphur re-melt facilities to allow existing
sulphur blocks in west central Alberta to be dismantled and delivered to
Strachan for processing and loading prior to sale in the domestic and offshore
markets. These new facilities will augment the existing sulphur handling
facilities at Strachan and generate fee-for-service revenues for Keyera, while
allowing producers to realize significant netbacks.
During the quarter, Keyera completed a scheduled maintenance turnaround
at the Nordegg River gas plant. The turnaround was completed on time and on
budget and costs associated with the turnaround will be recovered this year.
No further maintenance turnarounds are scheduled for 2008.
Also during the quarter, Keyera agreed to sell its interest in the non-
core Tomahawk gas plant.
NGL Infrastructure
NGL Infrastructure operating margin was $2.6 million for the second
quarter of 2008, a decrease of $0.5 million compared to the second quarter of
2007. Higher operating costs and lower volumes on the Rimbey Pipeline were
mostly offset by growing storage revenues.
NGL Infrastructure revenue for the second quarter of 2008 was
$11.1 million, an increase of $1.6 million compared to the second quarter of
2007. This increase was due primarily to ongoing demand for storage services
at Fort Saskatchewan, partially offset by lower volumes on the Rimbey Pipeline
resulting from the closure of the Bonnie Glen gas plant.
NGL Infrastructure operating expenses for the second quarter of 2008 were
$8.5 million, an increase of $2.1 million compared to the second quarter of
2007. The increase was primarily due to higher utility costs and the
acceleration of maintenance project schedules.
Year-to-date, NGL Infrastructure revenue was $22.0 million, an increase
of $2.8 million compared to last year. The higher revenue in 2008 was the
result of ongoing demand for storage services and higher fractionation fees,
partially offset by lower fractionation volumes.
Year-to-date, NGL Infrastructure operating expenses were $14.0 million,
an increase of $2.1 million compared to last year. Higher operating costs were
due to increased activity at the Edmonton rail terminal in the first quarter
of 2008, repairs to a leak in the Fort Saskatchewan Pipeline in early 2008,
and the acceleration of maintenance project schedules in the second quarter of
2008.
A number of projects are in various stages of completion in the
Edmonton/Fort Saskatchewan area. The Fort Saskatchewan storage expansion
project is well underway. Drilling of the well bore for the first cavern is
now complete and preparations are underway to inject water into the salt
formation to begin shaping the cavern. The first cavern is expected to be
operational by the middle of 2010.
Construction of the fourth NGL pipeline between the Edmonton logistics
terminal and the Fort Saskatchewan fractionation and storage facility was
competed in late July. The fourth pipeline will provide enhanced operational
flexibility, allowing Keyera to deliver NGLs at increased rates in either
direction between the two facilities. In particular, Keyera is now able to
deliver condensate by rail from the U.S. into storage at Fort Saskatchewan, or
into feeder pipelines for delivery to the Fort McMurray area.
The newly acquired Alberta Diluent Terminal was put into limited service
in the second quarter storing rail cars. Design work is underway to connect
the facility to the Edmonton Terminal and the Fort Saskatchewan facility.
Keyera has been approached by a number of parties interested in accessing the
facility, and Keyera continues to evaluate new proprietary and third party
business opportunities for the facility.
The truck terminal expansion at Fort Saskatchewan, which was commissioned
in the first quarter, has been operating near capacity in the second quarter.
Modifications to the rail rack at the Edmonton Terminal were completed in the
second quarter, allowing propane and butane to be delivered by rail into
Keyera's infrastructure from facilities across western Canada that do not have
efficient transportation alternatives.
In the second quarter, Keyera agreed to acquire a 50% ownership interest
in the Bonnie Glen crude oil and condensate pipeline system and a further
20.3% ownership interest in the Judy Creek NGL pipeline system. Keyera will
own 39.3% of the Judy Creek NGL pipeline, which connects the Judy Creek area
of Alberta to the Nisku Products Pipeline for eventual delivery of NGLs into
the Edmonton Hub. The Bonnie Glen pipeline system includes the Wizard Lake
pipeline and delivers oil and condensate from west central Alberta into
Edmonton. The transaction is expected to close in the third quarter and the
total purchase price is approximately $24 million, including 50% of the
linefill on the Bonnie Glen system. The two pipelines will provide additional
flexibility with respect to oil and NGL deliveries into the Edmonton/Fort
Saskatchewan hub and support Keyera's infrastructure and marketing strategies
in Alberta.
Marketing
In the second quarter of 2008, strong demand and margins for propane,
butane and condensate, along with favourable pricing differentials for the
crude oil midstream activities, enabled the Marketing segment to achieve
exceptional performance. Operating margin in the second quarter of 2008 was
$29.5 million, an increase of $1.8 million or 6% compared to the second
quarter of 2007.
Marketing revenue for the second quarter of 2008 was $459.6 million, an
increase of $167.2 million compared to the second quarter of 2007. The
increase was primarily due to significantly higher product sales prices,
approximately 53% higher than the same period last year, along with higher
propane sales volumes and growth in the crude oil midstream business. Also
affecting revenues for the quarter was a $7.3 million unrealized loss on
financial instruments, which is discussed later in this section.
Year-to-date, Marketing revenue was $952.9 million, an increase of
$353.2 million from 2007. The increase was primarily related to significantly
higher commodity prices, higher sales volumes, higher crude oil midstream
revenues and an unrealized gain of $5.0 million on financial instruments,
which is discussed later in this section.
The table below outlines the composition of the revenues generated from
Keyera's Marketing business:Composition of Marketing Three months ended Six months ended
revenue June 30, June 30,
(in thousands of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Physical sales 470,238 290,562 966,106 602,319
Financial instruments -
realized (3,356) 957 (18,190) 1,999
Financial instruments -
unrealized (7,308) 807 4,992 (4,650)
-------------------------------------------------------------------------
Marketing revenue 459,574 292,326 952,908 599,668
-------------------------------------------------------------------------NGL sales volumes for the second quarter of 2008 averaged 48,600 barrels
per day compared to 45,300 barrels per day in the second quarter of 2007,
primarily due to higher propane sales. Year-to-date, NGL sales volumes
averaged 57,400 barrels per day compared to 53,100 barrels per day last year,
due primarily to higher propane sales throughout the year and higher
condensate sales in the first quarter of 2008.
Marketing operating expense for the second quarter of 2008 was
$430.0 million, an increase of $165.5 million compared to the second quarter
of 2007. Year-to-date Marketing operating expense was $886.8 million, an
increase of $332.9 million. The increase was primarily due to higher sales
volumes and significantly higher prices.
In the second quarter of 2008, a $7.3 million unrealized loss on
financial contracts was recorded, of which approximately $8.2 million was
related to the change in the fair value of crude oil and NGL price swap
contracts. This unrealized loss was partially offset by changes in the fair
value of fixed price physical NGL sales contracts and changes in the fair
value of forward currency contracts.
On a year-to-date basis, an unrealized gain of $5.0 million has been
recorded, as the $7.3 million unrealized loss arising primarily from the
change in fair value of the crude oil and NGL price swap contracts in the
second quarter of 2008, partially offsets the $12.3 million unrealized gain
recorded in the first quarter of 2008. At June 30, 2008, the fair market value
of these contracts resulted in a liability of $15.7 million, partially offset
by an asset of $10.9 million. These amounts represent an estimate of what the
Fund would pay or receive if these instruments had been closed out at the end
of the period. The estimated fair value of all derivative instruments held for
trading is based on quoted market prices and, if not available, on estimates
from third party brokers or dealers. If the commodity price for derivative
instruments held at June 30, 2008 were to increase by 10%, the effect of the
change in fair value of these derivative instruments on net earnings would be
a decrease of approximately $9.7 million.
Propane demand was strong during the early part of the second quarter due
to cold weather in local Canadian markets. Demand at the Keyera terminals in
the U.S. was more typical of the slower summer season. The strong demand in
western Canada early in the second quarter of 2008 enabled Keyera to achieve
higher volumes and higher than expected propane margins. By the end of the
second quarter, propane demand in western Canada had returned to more normal
levels for this time of year.
Butane markets continued to perform well during the second quarter of
2008. Term contract demand was steady and Keyera was also able to capture
opportunities in the spot market. Sales volumes were higher than the same
period last year and margins remained strong.
Condensate market conditions were very strong during the second quarter
of 2008. Keyera was able to use its asset infrastructure to import condensate
from the U.S. and deliver strong condensate margins in the quarter.
Keyera's crude oil midstream activities continued to grow in the second
quarter of 2008, relative to the first quarter of 2008 and to the same period
last year.
Keyera expects that Marketing operating margin will return to more
typical summer levels in the third quarter as the result of a number of
factors. Propane demand has declined significantly from the beginning of the
second quarter and is expected to remain at this lower level throughout the
third quarter. Temporary demand disruptions are expected to result in reduced
butane sales in the third quarter. Increased supply and seasonal summer
weather has resulted in reduced condensate margins in Alberta, and this is
expected to continue for the next few months. Finally, the operating margin in
Keyera's crude oil midstream business in the second half of the year is
expected to be lower than the strong performance achieved in the first half of
2008.
NGL product inventories were $139.9 million at the end of the second
quarter, $93.0 million higher than the second quarter of 2007. This increase
was due to both higher volumes in storage and higher prices. Although this
growth in inventory value will result in higher financing costs, Keyera's
balance sheet is well positioned to provide the liquidity necessary to
continue to execute its marketing strategy.
Financial contracts are one of several strategies used by Keyera to
protect its NGL inventory from fluctuations in the prices of NGL products. To
the extent these contracts are effective (i.e., the change in the market price
of crude oil is correlated to the change in the prices of the underlying
physical NGL products), gains and losses on these financial contracts will be
offset by changes in the proceeds that will be realized upon the sale of the
products. Management regularly monitors the fair value of Keyera's financial
contracts and inventory volumes and performs stress testing on these
positions. The strategy of utilizing crude oil price swaps to hedge the
commodity price risk related to NGL products is subject to basis risk between
the price of crude oil and the prices of the NGL products. As a result, this
strategy cannot always be expected to fully offset future propane, butane and
condensate price movements.
For a more complete discussion of the risks and trends that could affect
the marketing performance and the steps that Keyera takes to mitigate these
risks, readers are referred to the descriptions in the Liquidity and Capital
Resources section of this MD&A and to Keyera's Annual Information Form, which
is available on SEDAR.
Non-operating expenses and other earnings
General and administrative expenses for the second quarter of 2008 were
$5.8 million, down $1.4 million from the second quarter of 2007. A reduction
in long-term incentive plan ("LTIP") costs accounted for virtually all of the
decrease, as the second quarter 2007 LTIP accrual reflected the effect of the
distribution increase implemented in May 2007.
Keyera has adopted a different performance metric for newly granted LTIP
performance awards. Starting with the 2008 LTIP performance awards, the payout
multiplier will be based on the average pre-tax distributable cash flow per
unit over the three-year vesting period (July 1, 2008 through June 30, 2011).
There was no change to the payout multiplier for the LTIP performance awards
previously granted. The relationship between the three year average annual
pre- tax distributable cash flow per unit and the payout multiplier for the
2008 LTIP performance awards is described in the table below:-------------------------------------------------------------------------
July 1, 2008
Grant Payout Multiplier
-------------------------------------------------------------------------
Less than $2.50 Nil
$2.50 - $2.82 50% - 99%
$2.83 - $3.49 100% - 199%
$3.50 and greater 200%
-------------------------------------------------------------------------Year-to-date, general and administrative costs were $14.7 million, up
$2.2 million compared to last year. Higher activity levels and staff costs
accounted for $1.5 million of the increase and long-term incentive plan costs
in 2008, accounted for $0.7 million of the increase.
Interest expense, net of interest revenue, was $5.5 million for the
second quarter of 2008, unchanged from the second quarter of 2007, and
$10.8 million year-to-date, $0.7 million greater than last year. Higher debt
balances in 2008 contributed to higher interest costs in 2008. The 2007
interest expense included a $0.7 million unrealized loss on financial
instruments related to an interest rate financial contract used to lock in
interest rates on a portion of the long-term debt that was issued later in
2007.
Depreciation and amortization expenses were $10.8 million for the second
quarter of 2008, $0.4 million greater than the second quarter of 2007, and
$21.3 million year-to-date, $0.3 million greater than last year. The increase
was modest given the growth in the asset base, as some new assets had not yet
been commissioned.
Income tax expense for the second quarter of 2008 was $13.1 million,
$68.4 million lower than the second quarter of 2007. Future income tax expense
for the second quarter of 2008 was $65.3 million lower than last year
primarily due to recording $80.2 million of future income taxes related to the
enactment of a new tax on publicly traded trusts in the second quarter of
2007. During the second quarter of 2008, a $15.0 million future income tax
expense was recorded as a result of higher CCA claims in the quarter and a
change in estimates for future tax deductions.
Year-to-date income tax expense was $1.9 million, $82.1 million lower
than the same period last year. Future income tax expense for 2008 was
$79.7 million lower than 2007, primarily due to the recording of future income
taxes related to the tax on publicly traded trusts enacted in the second
quarter of 2007. Current income tax expense was $2.4 million lower in 2008
compared to the prior year as a result of the acquisition of assets in certain
corporate subsidiaries of the Fund. These acquisitions have created sufficient
tax shelter to reduce current taxes for the first six months of 2008 to nil.
Critical accounting estimates
The Fund's consolidated financial statements have been prepared in
accordance with GAAP. Certain accounting policies require that management make
appropriate decisions with respect to the formulation of estimates and
assumptions that affect the recorded amounts of certain assets, liabilities,
revenues and expenses. Management reviews its assumptions and estimates
regularly, but new information and changes in circumstances may result in
actual results or revised estimates that differ materially from current
estimates. A description of the accounting estimates and the methodologies and
assumptions underlying the estimates are described in management's discussion
and analysis presented with the December 31, 2007 consolidated financial
statements of the Fund. There have been no changes to the methodologies and
assumptions. The most significant estimates are those indicated below:
Estimation of Gathering and Processing and NGL Infrastructure revenues:
At June 30, 2008, operating revenues and accounts receivable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $22.0 million for June 2008 operations.
Estimation of Gathering and Processing and NGL Infrastructure operating
expenses:
At June 30, 2008, operating expenses and accounts payable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $13.2 million for June 2008 operations.
Estimation of Gathering and Processing and NGL Infrastructure
equalization adjustments:
Much of the revenue from the Gathering and Processing and NGL
Infrastructure assets is generated on a recovery of operating costs basis.
Under this method, the operating component of the fee is a pro rata share of
the operating costs for the facility, calculated based upon total throughput.
Users of each facility are charged a fee per unit based upon estimated costs
and throughput, with an adjustment to actual throughput completed after the
end of the year. Each quarter, throughput volumes and operating costs are
reviewed to determine whether the estimated unit fee charged during the
quarter properly reflects the actual volumes and costs, and the allocations of
revenues and operating costs to other plant owners are also reviewed.
Appropriate adjustments to revenues and operating expenses are recognized in
the quarter and allocations to other owners are recorded.
For the Gathering and Processing and NGL Infrastructure segments,
operating revenues and accounts receivable contained an estimated equalization
adjustment of $9.4 million at June 30, 2008. Operating expenses and accounts
payable contained an estimate of $8.2 million.
Estimation of Marketing revenues:
At June 30, 2008, the Marketing sales and accounts receivable contained
an estimate for June 2008 revenues of $103.3 million.
Estimation of Marketing product purchases:
Marketing cost of goods sold, inventory and accounts payable contained an
estimate of NGL product purchases of $133.6 million at June 30, 2008.
Estimation of asset retirement obligation:
Keyera will be responsible for compliance with all applicable laws and
regulations regarding the decommissioning, abandonment and reclamation of its
facilities at the end of their economic life. The determination of the
estimate of these obligations is based upon settlement between 2018 and 2038.
Keyera utilizes a documented process to estimate the future liability and the
anticipated cost of the decommissioning, abandonment and reclamation of its
facilities.
The process, overseen by the Health, Safety and Environment Committee, is
undertaken by professionals involved in activities that deal with the design,
construction, operation and decommissioning of assets. Specialists with
knowledge and assessment processes specific to environmental and
decommissioning activities and costs are also utilized in the process.
The process requires Keyera to obtain third party environmental liability
assessments for major sites, which are updated on a five year frequency. These
assessments typically utilize a Monte Carlo statistical simulation to develop
a liability cost range, from which the median is used. Next, the
decommissioning and abandonment component is derived from a matrix of third-
party cost quotations for a range of facilities, then adjusted for known and
pertinent factors at each site, such as construction style, plant processes
and site condition. Ultimately, all medium and large facilities will be
independently assessed in accordance with regulatory requirements.
At December 31, 2007, Keyera had estimated that the total undiscounted
amount required to settle the asset retirement obligations was $183.0 million
and a discounted net present value of this obligation was $37.8 million. Year-
to-date, the asset retirement obligations were updated for acquisitions and
there were no material changes to the assumptions used in the estimate
prepared for December 31, 2007 asset retirement obligations. At June 30, 2008,
the discounted net present value of this obligation was $40.1 million.
It is not possible to predict these costs with certainty since they will
be a function of regulatory requirements at the time of decommissioning,
abandonment and reclamation and the actual costs may exceed the current
estimates, which are the basis of the asset retirement obligation shown in
Keyera's financial statements.
Additional information related to decommissioning, abandonment and
reclamation costs is provided in Keyera's Annual Information Form, which is
available on SEDAR.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities
Cashflow from operating activities during the second quarter of 2008 was
$2.4 million, as Keyera used $54.3 million of cash to finance a seasonal
increase in non-cash working capital, primarily due to an increase in NGL
inventories. Before changes in non-cash working capital, cash flow from
operating activities was $56.7 million. From this cash flow, Keyera paid
$24.9 million of distributions to its unitholders, leaving $31.8 million.
Keyera borrowed $65.0 million from its revolving credit facility and received
$1.6 million from the issuance of trust units under the distribution
reinvestment plan ("DRIP"), resulting in $98.4 million of cash flow. From this
cash flow, Keyera utilized $42.5 million for capital expenditures and financed
the $54.3 million change in non-cash working capital related to operating
activities, leaving a $1.6 million cash inflow for the quarter.
Year-to-date, cash provided by operating activities was $60.8 million.
Cash provided by operating activities before changes in non-cash working
capital was $97.5 million. From this cash flow, the Fund paid $48.7 million of
distributions to unitholders, leaving $48.8 million. Keyera borrowed
$65.0 million from its revolving credit facility and received $2.4 million
from the issuance of trust units under the DRIP resulting in $116.2 million of
cash flow. From this cash flow, Keyera utilized $87.0 million for capital
expenditures and financed the $36.7 million change in non-cash working capital
related to operating activities, resulting in a cash outflow of $7.5 million
for the year.
Cash and working capital was $40.7 million at June 30, 2008 compared to a
surplus of $75.7 million at December 31, 2007. The decline in working capital
results from the use of short-term debt to finance growth capital
expenditures.Capital additions and Three months ended Six months ended
acquisitions June 30, June 30,
(in millions of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Growth capital expenditures 41.2 5.8 90.7 7.5
Maintenance capital expenditures 0.6 0.2 0.9 0.6
-------------------------------------------------------------------------
Total capital expenditures 41.8 6.0 91.6 8.1
-------------------------------------------------------------------------
Acquisition of
non-controlling interest - 5.2 - 6.7
-------------------------------------------------------------------------
Total capital additions
and acquisitions 41.8 11.2 91.6 14.8
-------------------------------------------------------------------------In the second quarter of 2008, additions to property, plant and
equipment, including acquisitions, amounted to $41.8 million, consisting of
$0.6 million of maintenance capital and $41.2 million of growth capital. In
addition to maintenance capital expenditures, Keyera incurred maintenance and
repair expenses of $10.4 million that were included in operating costs.
Significant growth capital expenditures during the second quarter of 2008
were:- $27.0 million for the acquisition of a 35.6% working interest in the
West Pembina gas plant, which provides sweet and sour processing
capacity and "deep cut" natural gas liquids extraction capability
- $3.3 million for the creation of incremental underground NGL storage
capacity at Fort Saskatchewan
- $3.3 million for the acquisition of land near the new Alberta Diluent
Terminal to enhance operational flexibilityYear-to-date, total capital additions and acquisitions amounted to
$91.6 million, consisting of $0.9 million of maintenance capital and
$90.7 million of growth capital. In addition to maintenance capital
expenditures, Keyera incurred maintenance and repair expenses of $11.6 million
that were included in operating costs. Year-to-date, Keyera has invested in
the following significant growth projects:- $35.6 million for the acquisition of the Alberta Diluent Terminal in
the Edmonton area to increase Keyera's capability to import and
deliver condensate and other hydrocarbon products, including the
acquisition of adjacent land to enhance operational flexibility
- $27.0 million for the acquisition of a 35.6% working interest in the
West Pembina gas plant
- $6.1 million related to the construction of acid gas injection
facilities and other upgrades at the Brazeau River gas plant and for
the acquisition of pipelines in the West Pembina region to expand
capture areas
- $4.3 million for the construction of the North Trutch pipeline to
expand the capture area of the Caribou gas plant
- $3.8 million for the creation of incremental underground NGL storage
capacity at Fort Saskatchewan
- $3.4 million related to the construction of the NGL pipeline between
the Edmonton and Fort Saskatchewan facilities to enhance
deliverability and operational flexibility
- $2.7 million related to the expansion of the truck loading facility
at Fort Saskatchewan to increase capacityGrowth capital expenditures for 2008 are expected to be between $150 and
$200 million, assuming that there are no significant changes in plans and
activities of producers and other customers and overall industry activity
levels; no delays due to unusual weather conditions or due to decisions,
approvals or delays by regulators; or material changes in general business,
market or economic conditions.
Working capital requirements are strongly influenced by the volume of
NGLs held in storage and their related commodity prices. NGL inventories are
required to meet seasonal demand patterns and will vary depending on the time
of year. The largest allocation of working capital to fund inventory occurred
in the second quarter of 2008 and was approximately $140 million. If crude oil
prices remain at current levels, Keyera expects that the working capital that
will be used to fund inventory later this year will significantly exceed that
amount. In addition to the working capital required for inventory, Keyera
typically utilizes approximately $25 to $45 million to finance the other
components of working capital.
Financial contracts are one of several strategies used by Keyera to
protect its NGL inventory from fluctuations in the prices of NGL products. To
the extent these contracts are effective (i.e., the change in the market price
of crude oil is correlated to the change in the prices of the underlying
physical NGL products), gains and losses on these financial contracts will be
offset by changes in the proceeds that will be realized upon the sale of the
products. However, until these financial contracts are settled at maturity,
their fair value may create a liability that Keyera is required to
collateralize by posting cash margin with the counterparty to the transaction.
Management believes that Keyera's balance sheet is well positioned to provide
the liquidity necessary to execute its marketing strategy, even if market
prices were to move significantly against our position in financial contracts.
For a discussion of the risks that could affect the liquidity and working
capital of the Fund and the steps Keyera takes to mitigate these risks, as
well as information relating to Keyera's commitments and contractual
obligations, readers are referred to note 13, Financial instruments and risk
management, to the accompanying unaudited consolidated financial statements
for the Fund and to Keyera's 2007 MD&A and Keyera's Annual Information Form,
each of which is available on SEDAR.
Debt covenants
Keyera has established credit facilities consisting of a $150 million
committed unsecured revolving term facility that matures on April 21, 2011,
and $30 million of unsecured revolving demand facilities. These credit
facilities bear interest based on the lenders' rates for Canadian prime
commercial loans, U.S. base rate loans, Libor loans or Bankers' Acceptances
rates. As of June 30, 2008, $65 million was drawn under these credit
facilities.
The bank credit facilities contain a covenant that the Fund and its
subsidiaries will not distribute in any twelve month period more than 105% of
the distributable cash flow attributable to that twelve month period. Those
facilities are also subject to two major financial covenants: "Debt to EBITDA"
and "Debt to Capitalization". The calculation for each ratio is based on
specific definitions, is not in accordance with GAAP and cannot be readily
replicated by referring to the Fund's financial statements. The definitions in
the credit agreements provide for the deduction of net working capital items
in the calculation of debt. The following are the ratios as calculated in
accordance with the covenants as at June 30, 2008:-------------------------------------------------------------------------
Covenant Position as at June 30, 2008
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 3.5 1.58
-------------------------------------------------------------------------
Debt to Capitalization not to exceed 0.55 0.34
-------------------------------------------------------------------------Keyera has $335 million of long-term senior unsecured notes as follows:
$20 million bearing interest at 5.42% and maturing in August 2008; $90 million
bearing interest at 5.23% and maturing in October 2009; $52.5 million bearing
interest at 5.79% and maturing in August 2010; $52.5 million bearing interest
at 6.155% and maturing in August 2013; $60 million bearing interest at 5.89%
and maturing in December 2017; and $60 million bearing interest at 6.14% and
maturing in December 2022. These notes are subject to three major financial
covenants: "Consolidated Debt to Consolidated EBITDA", "Consolidated EBITDA to
Consolidated Interest Charges" and "Priority Debt to Consolidated Total
Assets".
The calculations for each of these ratios are based on specified
definitions. The following are the ratios calculated in accordance with the
covenants as at June 30, 2008 for the notes maturing in 2008, 2009, 2010 and
2013:-------------------------------------------------------------------------
Covenant Position as at June 30, 2008
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 3.5 2.15
-------------------------------------------------------------------------
EBITDA to Interest Charges not
less than 3.0 10.66
-------------------------------------------------------------------------
Priority Debt to Total Assets
not to exceed 15% 0%
-------------------------------------------------------------------------
The following are the ratios calculated in accordance with the covenants
as at June 30, 2008 for the notes maturing in 2017 and 2022:
-------------------------------------------------------------------------
Covenant Position as at June 30, 2008
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 5.0 1.39
-------------------------------------------------------------------------
EBITDA to Interest Charges not
less than 2.0 9.46
-------------------------------------------------------------------------
Priority Debt to Total Assets not
to exceed 15% 0%
-------------------------------------------------------------------------Failure to adhere to the covenants described above may impair Keyera's
ability to pay distributions. Management expects that upon maturity of the
credit facilities, adequate replacement facilities will be established.
Credit risk
The majority of Keyera's accounts receivable are due from entities in the
oil and gas industry and are subject to normal industry credit risks.
Concentration of credit risk is mitigated by having a broad domestic and
international customer base. Keyera evaluates and monitors the financial
strength of its customers in accordance with its credit policy. Management
believes these measures minimize Keyera's overall credit risk; however, there
can be no assurance that these processes will protect against all losses from
non-performance. With respect to counterparties for financial instruments used
for economic hedging purposes, Keyera limits its credit risk by dealing with
recognized futures exchanges or investment grade financial institutions and by
maintaining credit policies that significantly reduce overall counterparty
credit risk.
All of Keyera's business units had minor business dealings with
subsidiaries of SemGroup L.P. After exercising its lien and other rights,
Keyera is owed between $50,000 and $150,000 by those subsidiaries.
Risk factors
For a more detailed discussion of the risks and trends that could affect
the financial performance of the Fund and the steps that Keyera takes to
mitigate these risks, readers are referred to the descriptions in this MD&A
and to Keyera's Annual Information Form, which is available on SEDAR.
Unitholder Distributions
Comparison of distributions paid to cash flow from operating activities
and net earnings
The following table presents a comparison of distributions paid to net
earnings and cash flow from operating activities:Three Six
months months
ended ended
June 30, June 30,
(in thousands of dollars) 2008 2008 2007 2006
-------------------------------------------------------------------------
Cash flow from operating
activities 2,391 60,803 119,825 110,656
Net earnings 22,729 78,231 14,479 68,078
Cash distributions paid 24,864 48,676 89,799 86,509
-------------------------------------------------------------------------
Excess (shortfall) of cash
from operating activities
over distributions paid (22,473) 12,127 30,026 24,147
Excess (shortfall) of net
earnings over
distributions paid (2,135) 29,555 (75,320) (18,431)
-------------------------------------------------------------------------In the second quarter of 2008, cash flow from operating activities was
$2.4 million due to the $54.3 million seasonal increase in non-cash working
capital. As a result, cash flow from operating activities was $22.5 million
less than distributions paid. Year-to-date, cash flow from operating
activities was $60.8 million, $12.1 million greater than distributions paid.
Included in the calculation of year-to-date cash flow from operating
activities was $36.7 million to fund changes in non-cash working capital.
Changes in non-cash working capital are primarily the result of seasonal
fluctuations in product inventories or other temporary changes and are
generally funded with short-term debt. In general, cash flow from operating
activities may be less than distributions paid during periods of inventory
accumulation.
In the second quarter of 2008, distributions of $24.9 million exceeded
net earnings by $2.1 million. The shortfall is attributable to the inclusion
of non-cash items, including $14.9 million of future income tax expense and
$19.6 million of depreciation, amortization, accretion, unrealized loss on
financial contracts and impairment expense in the calculation of net income in
the second quarter. Year-to-date, net earnings of $78.2 million exceeded
distributions paid by $29.6 million.
Due to the inclusion of non-cash charges, net earnings are not an
accurate representation of current period cash generation. Accordingly,
distributions paid may exceed net earnings and any excess of distributions
over net earnings would be a return of unitholders' capital. Following is a
discussion of how some of the more significant non-cash charges can vary from
period to period.
Future income taxes can fluctuate from period to period as a result of
changes in tax laws and rates, the extent to which available tax deductions
are utilized or changes in the operating results of the underlying operating
entities of Keyera. These items do not affect cash flow generated in the
current period.
Non-cash charges such as depreciation and amortization are based upon the
historical cost of Keyera's property, plant and equipment and do not
accurately represent the fair market value or the replacement cost of the
assets in today's economic environment, nor do they affect cash flow generated
in the current period.
Non-cash unrealized gains and losses on financial instruments result from
Keyera's use of financial contracts, such as energy-related forward sales,
price swaps, physical exchanges and options, to manage the commodity price
risk inherent in the marketing business. Their fair value is determined based
upon estimates of future prices. The change in fair value of these contracts
during the current period has no effect on cash flow generated. Upon
settlement in future periods, the unrealized estimate is reversed and the
realized gain or loss is included in earnings.
Distributable cash flow
Distributable cash flow is not a standard measure under GAAP and
therefore may not be comparable to similar measures reported by other
entities. Distributable cash flow is used to assess the level of cash flow
generated from ongoing operations and to evaluate the adequacy of internally
generated cash flow to fund distributions.
Following is a reconciliation of distributable cash flow to its most
closely related GAAP measure, cash flow from operating activities:Three months ended Six months ended
Distributable cash flow June 30, June 30,
-------------------------------------------------------------------------
(in thousands of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flow from operating
activities 2,391 24,786 60,803 82,377
Add (deduct):
Changes in non-cash
working capital 54,266 6,729 36,698 (13,647)
Maintenance capital expenditures (608) (293) (949) (644)
Non-controlling interest
distributable cash flow - (53) - (369)
-------------------------------------------------------------------------
Distributable cash flow 56,049 31,169 96,552 67,717
-------------------------------------------------------------------------
Distributions declared
to unitholders 24,882 22,538 50,543 44,311Distributable cash flow of $56.0 million in the second quarter of 2008
exceeded distributions declared to unitholders of $24.9 million.
Year-to-date, distributable cash flow of $96.6 million exceeded
distributions declared to unitholders of $50.5 million. Distributions declared
included a special distribution of $1.4 million ($0.023529 per unit) as part
of the internal reorganization, completed on January 2, 2008, of certain of
the Fund's subsidiaries. This special distribution consisted of cash in the
amount of $0.2 million ($0.003529 per unit) and securities of certain
subsidiaries of the Fund having an aggregate value of $1.2 million ($0.02 per
unit). Each security was redeemed for one special non-voting unit of the Fund
("Fund special units"). These Fund special units were then converted into
regular units. The regular units were consolidated such that, upon completion
of the reorganization, each unitholder continued to hold the same number of
units as was held immediately prior to the reorganization.
Changes in non-cash working capital are excluded from the determination
of distributable cash flow because they are primarily the result of seasonal
fluctuations in product inventories or other temporary changes and are
generally funded with short-term debt. Also deducted from distributable cash
flow are maintenance capital expenditures that are funded from current
operating cash flow.
Distribution policy
In determining the level of cash distributions to unitholders, Keyera's
Board of Directors takes into consideration current and expected future levels
of distributable cash flow (including income tax), capital expenditures,
borrowings and debt repayments, changes in working capital requirements and
other factors.
Over the long-term, Keyera expects to pay distributions from
distributable cash flow. Growth capital expenditures will be funded from
retained operating cash flow, along with proceeds from additional debt or
equity, as required. Although Keyera intends to continue to make regular
monthly cash distributions to its unitholders, these distributions are not
guaranteed.
The business of the Fund is subject to operational and commercial risks
that could adversely affect future operating results, earnings, cash flow and
distributions to unitholders. These risks include declines in throughput,
operational problems and hazards, cost overruns, increased competition,
regulatory intervention, environmental considerations, uncertainty of
abandonment costs and dependence upon key personnel. These risks are
identified and discussed in greater detail in Keyera's Annual Information
Form, available on SEDAR, as well as in the "Business Environment", "Results
of Operations - Marketing" and "Liquidity and Capital Resources" sections of
this MD&A.
Standard and Poor's has assigned the Fund an SR-3 stability rating,
indicating the expectation of a high level of stability in distributions.
Units and Convertible Debentures
During the second quarter of 2008, $0.6 million of convertible debentures
(before adjustment for deferred financing costs) were converted into 49,330
trust units and 73,446 trust units were issued under the DRIP in consideration
of $1.5 million, bringing the total units outstanding at June 30, 2008 to
61,477,686. Convertible debentures outstanding at June 30, 2008 were
$20.7 million.
Subsequent to June 30, 2008, a further $0.3 million of convertible
debentures were converted into 22,748 trust units, and 13,644 trust units were
issued to unitholders enrolled in the DRIP in consideration for $0.3 million,
bringing the total units outstanding at August 8, 2008 to 61,514,078.
Convertible debentures outstanding at August 8, 2008 were $20.4 million.
FUND REORGANIZATION AND TAXATION INFORMATION
In June 2007, unitholders approved an internal reorganization of Keyera's
legal structure (the "Reorganization"). The Reorganization, which was
completed on January 2, 2008, is described in detail in the Material Change
Report filed on SEDAR (www.sedar.com) on January 11, 2008.
The Reorganization streamlined Keyera's legal structure and simplified
accounting, legal reporting and income tax compliance, all of which is
expected to reduce the general and administrative costs associated with these
activities. The new structure also permits Keyera to defer the utilization of
some tax pools until after January 1, 2011. This enhanced tax planning
flexibility should enable Keyera to minimize the amount of cash taxes payable
beginning on January 1, 2011.
While there were no significant immediate tax savings within Keyera's
structure as a result of the Reorganization, our recent capital investments
and associated changes will have the added benefit of reducing cash taxes
payable in the short-term. As well, Keyera plans to reduce the use of its
available tax deductions from 2008 through 2010, thereby increasing deductions
available for the years after 2010. As at January 1, 2008, Keyera had
approximately $325 million of unutilized tax pools and deductions, consisting
mostly of class 41 undepreciated capital costs, available for deduction by the
Fund's subsidiaries.
On July 14, 2008, the federal government released draft tax rules (the
"SIFT conversion rules") that will allow the conversion of income trusts into
corporations without undue tax effects. If enacted as proposed, the SIFT
conversion rules would generally permit an existing income trust to adopt
either of two approaches to achieve a conversion into corporate form on a tax
deferred rollover basis, provided the conversion is completed prior to
December 31, 2012. The first method involves the exchange of units of an
income trust for shares of a corporation. The second method involves the
distribution to the income trust's unitholders of shares of an underlying
corporation. Under either of the proposed approaches, it will be necessary to
hold a meeting of the unitholders of the income trust at which unitholder
approval will be required, typically by a 66 2/3% vote in favor of the
proposed conversion.
As a result of the recently completed Reorganization and the ability to
preserve tax pools until 2011, Keyera will be able to minimize income taxes
into the future, whether as an income trust or as a corporation. It is
Keyera's intent to continue to grow by investing in long-life assets and
thereby grow its distributions to unitholders. If the SIFT conversion rules
are enacted as proposed, it is likely that Keyera would consider a conversion
to a corporate form in 2011 or 2012, but no decision has yet been made.
ACCOUNTING MATTERS AND CONTROLS
Critical accounting policies
Keyera's unaudited Interim Consolidated Financial Statements have been
prepared in accordance with Canadian GAAP. The changes in accounting policies
are described in Note 3 to the unaudited interim consolidated financial
statements and Note 2 of the 2007 Annual Report.
Changes in accounting policies
Effective January 1, 2008, the Fund adopted the following accounting
standards issued by the Canadian Institute of Chartered Accountants ("CICA"):- Section 1535, Capital Disclosures;
- Section 3031, Inventories;
- Section 3862, Financial Instruments - Disclosures; and
- Section 3863, Financial Instruments - PresentationSection 1535, Capital Disclosures, requires entities to provide users of
financial statements with information to evaluate the entity's objectives,
policies and processes for managing capital. Adoption of this new standard did
not have an effect on the statements of financial position, net earnings or
cash flows of the Fund. The new disclosure requirements have been included in
the notes to the interim consolidated financial statements.
Section 3031, Inventories, requires the measurement of inventories at the
lower of cost and net realizable value and the consistent use of either first-
in, first-out or a weighted-average cost formula to measure cost. The reversal
of previous net realizable value write-downs is required when there is a
subsequent increase to the value of inventories. The Fund adopted this
standard prospectively on January 1, 2008, in accordance with the transitional
provisions. Inventory is measured at the lower of cost and net realizable
value, less any costs to sell. Cost is determined on a weighted-average cost
formula. There was no material impact upon adoption of this standard.
Section 3862, Financial Instruments - Disclosures, requires entities to
provide disclosures in their financial statements that enable users to
evaluate the significance of financial instruments to the entity's financial
position and performance. It also requires that entities disclose the nature
and extent of risks arising from financial instruments and how the entity
manages those risks.
Section 3863, Financial Instruments - Presentation, establishes standards
for presentation of financial instruments and non-financial derivatives and
deals with the classification of financial instruments, from the perspective
of the issuer, between liabilities and equity, the classification of related
interest, dividends, losses and gains, and the circumstances in which
financial assets and financial liabilities are offset.
Adoption of sections 3862 and 3863 did not have an effect on the
statements of financial position, net earnings or cash flows of the Fund. The
new disclosure requirements have been included in the notes to the interim
consolidated financial statements.
Future changes in accounting policies
Transition to International Financial Reporting Standards (IFRS)
In February 2008, the Accounting Standards Board confirmed that IFRS will
replace Canadian Generally Accepted Accounting Principles (GAAP) for fiscal
years beginning on or after January 1, 2011 for publicly accountable
enterprises. At this time, the impact on Keyera's future financial position
and results of operations is not reasonably determined or estimable.
Keyera commenced its IFRS conversion project in early 2008 and has
established a formal project governance structure. This structure includes a
steering committee and a stakeholder working group consisting of senior levels
of management from finance, information technology, investor relations and
operations. Regular reporting to senior executive management, the Audit
Committee and the Board of Directors will occur to ensure appropriate
monitoring and governance. Keyera has also engaged an external expert advisor.
Keyera's IFRS project consists of three phases: diagnostic; design and
planning; and implementation. Keyera is currently completing the diagnostic
phase which involves a high level review of the major differences between
current Canadian GAAP and IFRS. Currently, Keyera has determined that the
areas of accounting difference with the highest potential impact are
accounting for fixed assets, impairment testing and initial adoption of IFRS
under the provisions of IFRS 1, First-Time Adoption of IFRS.
Goodwill and Intangible Assets
In February 2008, the Accounting Standards Board ("AcSB") issued CICA
Handbook Section 3064, Goodwill and Intangible Assets, replacing existing
guidance (Sections 3062 and 3450) for these areas. This new section
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill and intangible assets subsequent to their initial
recognition. Standards concerning goodwill are unchanged from the standards
included in the previous Section 3062. This new section will be effective for
the Fund for periods ending after January 1, 2009. The Fund is currently
evaluating the impact of the adoption of this new section on its consolidated
financial statements.
Internal control over financial reporting
No changes were made in Keyera's internal control over financial
reporting during the three month period ended June 30, 2008 that have
materially affected, or are reasonably likely to materially affect, Keyera's
internal control over financial reporting.SUMMARY OF QUARTERLY RESULTS
The following table presents selected financial information for Keyera:
Three months ended (Thousands of Canadian dollars)
-------------------------------------------------------------------------
Sep 30, Dec 31, Mar 31, Jun 30, Sep 30,
2006 2006 2007 2007 2007
-------------------------------------------------------------------------
Operating revenues:
- Marketing 279,492 286,325 307,342 292,326 276,957
- Gathering and Processing 44,290 43,621 41,949 44,277 50,744
- NGL Infrastructure 10,878 10,855 9,692 9,525 10,044
Net earnings (loss)(1) 11,797 14,928 19,012 (59,870) 15,310
Net earnings (loss) per unit
($/unit)
Basic 0.19 0.25 0.31 (0.98) 0.25
Diluted 0.16 0.24 0.31 (0.98) 0.25
Trust units outstanding
(thousands):
Weighted average (basic) 60,692 60,865 60,972 61,061 61,136
Weighted average (diluted) 62,817 62,869 62,918 61,061 63,011
Distributions to unitholders 21,679 21,742 21,773 22,538 22,931
-------------------------------------------------------------------------
Three months ended (Thousands of Canadian dollars)
-------------------------------------------------------
Dec 31, Mar 31, Jun 30,
2007 2008 2008
-------------------------------------------------------
Operating revenues:
- Marketing 373,916 493,334 459,474
- Gathering and Processing 50,520 48,573 58,679
- NGL Infrastructure 11,849 10,870 11,113
Net earnings (loss)(1) 40,027 55,502 22,729
Net earnings (loss) per unit
($/unit)
Basic 0.65 0.91 0.37
Diluted 0.64 0.88 0.36
Trust units outstanding
(thousands):
Weighted average (basic) 61,219 61,295 61,411
Weighted average (diluted) 63,059 63,105 63,156
Distributions to unitholders 22,965 25,661 24,882
-------------------------------------------------------
(1) Since the adoption of the new accounting standards effective
January 1, 2007, Keyera has had no transactions that required the
use of other comprehensive income and therefore comprehensive income
equals net earnings.For a discussion of the factors affecting variations over the quarters,
refer to "Results of Operations" in this MD&A.
Investor Information
DISTRIBUTIONS TO UNITHOLDERS
Distributions to unitholders were $0.41 per unit in the second quarter.
Effective with the August distribution, the monthly cash distribution will
increase by 11% to 15.0 cents per unit per month, or $1.80 per unit annually.
The August distribution is paid on September 15 to unitholders of record on
August 29, 2008. The Fund is focused on stable long-term distributions that
grow over time. The Board of Directors will consider increasing the level of
cash distributions when it is confident that such increase can be sustained.
TAXABILITY OF DISTRIBUTIONS
For income tax purposes, distributions paid and declared to Canadian
residents in 2007 were 66.2% return of capital with the remainder ordinary
income. Additional information is available on Keyera's website under
"Investor Information". Both Canadian and non-resident unitholders should seek
independent tax advice in respect of the consequences to them of acquiring,
holding and disposing of units.
Keyera currently anticipates distributions will be largely or fully
taxable for Canadian non-exempt unitholders in 2008. This outlook is affected
by Keyera's organizational structure and is subject to change, depending on
the levels of profitability and capital expenditures in each of Keyera's
operating entities. Both Canadian and non-resident unitholders should seek
independent tax advice in respect of the consequences to them of acquiring,
holding and disposing of units. Factors that could affect the performance of
the Fund and the taxability of the distributions are discussed in the Fund's
Annual Information Form, which is available on SEDAR.
SUPPLEMENTARY INFORMATION
A breakdown of Keyera's operational and financial results, including
volumetric and contribution information by major business unit, is available
on our website at www.keyera.com under "Investor Information, Financial
Information".
SECOND QUARTER 2008 RESULTS CONFERENCE CALL AND WEBCAST
Keyera will be conducting a conference call and webcast for investors,
analysts, brokers and media representatives to discuss the second quarter 2008
results at 8:00 am MDT (10:00 am EDT) on August 13, 2008. Callers may
participate by dialing either 800-731-5319 or 416-644-3421. A recording of the
call will be available for replay until midnight, August 20, 2008 by dialing
877-289-8525 or 416-640-1917 and entering pass code 21278410 followed by the
pound (No.) key.
Internet users can listen to the call live on Keyera's website at
www.keyera.com under "Investor Information, Webcasts". Shortly after the call,
an audio archive will be posted on the website for 90 days.
QUESTIONS
We welcome questions from interested parties. Calls should be directed to
Keyera's Investor Relations Department at 403-205-7670, toll free at 888-699-
4853 or via email at ir@keyera.com. Information on Keyera can also be found on
our website at www.keyera.com.Keyera Facilities Income Fund
Interim Consolidated Statements of Financial Position
(Thousands of Canadian dollars)
(unaudited)
June 30, December 31,
2008 2007
As at: $ $
-------------------------------------------------------------------------
ASSETS
Current assets
Cash 8,133 15,657
Accounts receivable 298,111 243,889
Inventory (note 4) 139,902 76,594
Other current assets 8,831 2,299
-------------------------------------------------------------------------
454,977 338,439
Property, plant and equipment 985,843 914,087
Intangible assets 5,243 6,394
Goodwill 71,234 71,234
Future income tax assets (note 8) 547 845
-------------------------------------------------------------------------
1,517,844 1,330,999
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 321,019 235,124
Distributions payable (note 11) 8,299 7,658
Credit facilities (note 5) 65,000 -
Current portion of long-term debt 20,000 20,000
-------------------------------------------------------------------------
414,318 262,782
Long-term debt (note 5) 313,398 313,243
Convertible debentures (note 6) 20,436 21,476
Asset retirement obligation (note 7) 40,059 37,807
Future income tax liabilities (note 8) 146,799 145,214
-------------------------------------------------------------------------
935,010 780,522
-------------------------------------------------------------------------
Unitholders' equity
Unitholders' capital (note 9) 686,594 681,925
Deficit (103,760) (131,448)
-------------------------------------------------------------------------
582,834 550,477
-------------------------------------------------------------------------
1,517,844 1,330,999
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (note 15)
The accompanying notes to the interim consolidated financial statements
are an integral part of these statements.
Keyera Facilities Income Fund
Interim Consolidated Statements of Net Earnings (Loss),
Comprehensive Income (Loss) and Deficit
(Thousands of Canadian dollars, except unit information)
(unaudited)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
Operating revenues
Marketing 459,574 292,326 952,908 599,668
Gathering and Processing 58,679 44,277 107,252 86,226
NGL Infrastructure 11,113 9,525 21,983 19,217
-------------------------------------------------------------------------
529,366 346,128 1,082,143 705,111
Operating expenses
Marketing 430,030 264,559 886,784 553,867
Gathering and Processing 31,114 29,713 51,977 50,939
NGL Infrastructure 8,543 6,476 13,952 11,856
-------------------------------------------------------------------------
469,687 300,748 952,713 616,662
-------------------------------------------------------------------------
59,679 45,380 129,430 88,449
General and administrative 5,787 7,181 14,691 12,528
Interest expense on long-term
indebtedness 5,294 4,254 10,563 7,755
Other interest expense 233 1,267 255 2,394
Depreciation and amortization 10,796 10,421 21,332 21,009
Accretion expense (note 7) 665 612 1,337 1,258
Impairment expense 1,113 - 1,113 -
-------------------------------------------------------------------------
23,888 23,735 49,291 44,944
-------------------------------------------------------------------------
Earnings before tax and
non-controlling interest 35,791 21,645 80,139 43,505
Income tax expense (note 8) 13,062 81,475 1,908 84,057
-------------------------------------------------------------------------
Earnings (loss) before non-
controlling interest 22,729 (59,830) 78,231 (40,552)
Non-controlling interest
(note 18) - 40 - 306
-------------------------------------------------------------------------
Net earnings (loss) 22,729 (59,870) 78,231 (40,858)
Other comprehensive income - - - -
-------------------------------------------------------------------------
Comprehensive income (loss) 22,729 (59,870) 78,231 (40,858)
Deficit, beginning of
period (101,607) (58,482) (131,448) (55,721)
Distributions to unit-
holders (note 11) (24,882) (22,538) (50,543) (44,311)
-------------------------------------------------------------------------
Deficit, end of period (103,760) (140,890) (103,760) (140,890)
-------------------------------------------------------------------------
Weighted average number of
units (thousands) (note 10)
- basic 61,411 61,061 61,353 61,017
- diluted 63,156 61,061 63,131 61,017
Net earnings (loss) per unit
(note 10)
- basic 0.37 (0.98) 1.28 (0.67)
- diluted 0.36 (0.98) 1.25 (0.67)
-------------------------------------------------------------------------
The accompanying notes to the interim consolidated financial statements
are an integral part of these statements.
Keyera Facilities Income Fund
Interim Consolidated Statements of Cash Flows
(Thousands of Canadian dollars)
(unaudited)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
Net inflow (outflow) of cash: $ $ $ $
-------------------------------------------------------------------------
Operating activities
Net earnings (loss) 22,729 (59,870) 78,231 (40,858)
Items not affecting cash:
Depreciation and
amortization 10,796 10,421 21,332 21,009
Accretion expense 665 612 1,337 1,258
Impairment expense 1,113 - 1,113 -
Unrealized loss (gain) on
derivative instruments
held for trading 6,985 140 (5,802) 5,485
Future income tax expense
(note 8) 14,933 80,235 1,883 81,631
Non-controlling interest
(note 18) - 40 - 306
Asset retirement obligation
expenditures (note 7) (564) (63) (593) (101)
Changes in non-cash working
capital (note 16) (54,266) (6,729) (36,698) 13,647
-------------------------------------------------------------------------
2,391 24,786 60,803 82,377
-------------------------------------------------------------------------
Investing activities
Capital expenditures (41,895) (6,002) (91,692) (8,104)
Acquisition of non-
controlling interest
(note 18) - (5,203) - (6,716)
Proceeds on sale of assets - - 150 4,200
Changes in non-cash working
capital (note 16) (616) 367 4,530 (2,987)
-------------------------------------------------------------------------
(42,511) (10,838) (87,012) (13,607)
-------------------------------------------------------------------------
Financing activities
Issuance (repayment) of debt
under credit facilities
(note 5) 65,000 (835) 65,000 (32,984)
Issuance of trust units
(note 9) 1,545 812 2,361 1,612
Distributions paid to
unitholders (note 11) (24,864) (22,161) (48,676) (43,924)
-------------------------------------------------------------------------
41,681 (22,184) 18,685 (75,296)
-------------------------------------------------------------------------
Net cash inflow (outflow) 1,561 (8,236) (7,524) (6,526)
-------------------------------------------------------------------------
Cash (bank indebtedness),
beginning of period 6,572 1,614 15,657 (96)
-------------------------------------------------------------------------
Cash (bank indebtedness),
end of period 8,133 (6,622) 8,133 (6,622)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes to the interim consolidated financial statements
are an integral part of these statements.
See note 16 for cash interest and taxes paid.
Keyera Facilities Income Fund
Notes to Interim Consolidated Financial Statements
As at and for the three and six months ended June 30, 2008
(All amounts expressed in thousands of Canadian dollars, except as
otherwise noted) (unaudited)
1. Structure of the Fund
Keyera Facilities Income Fund (the "Fund") is an unincorporated open-
ended trust established under the laws of the Province of Alberta
pursuant to the Fund Declaration of Trust dated April 3, 2003. The
Fund has a 100% direct and indirect interest in Keyera Energy Limited
Partnership (the "Partnership").
The Partnership is involved in the business of natural gas gathering
and processing, as well as natural gas liquids ("NGLs") and crude oil
processing, transportation, storage and marketing in Canada and the
U.S. Its operating subsidiaries include Keyera Energy Facilities Ltd.
("KEFL"), Keyera Energy Ltd. ("KEL"), Keyera Energy Inc. ("KEI"),
Rimbey Pipeline Limited Partnership ("RPLP") and Alberta Diluent
Terminal Limited Partnership ("ADTLP").
The Fund makes monthly cash distributions to unitholders of record on
the last business day of each month. The amount of the distributions
per trust unit is equal to the pro rata share of the distribution
received directly from the Partnership.
2. Basis of presentation
These unaudited interim consolidated financial statements have been
prepared by management in accordance with Canadian generally accepted
accounting principles ("GAAP"). The accounting policies applied are
consistent with those disclosed in the Fund's consolidated financial
statements as at and for the year ended December 31, 2007 as included
in the Fund's 2007 Annual Report to unitholders except for the
changes made in adopting new accounting standards discussed in
note 3.
These unaudited interim consolidated financial statements as at and
for the three and six months ended June 30, 2008 do not include all
disclosures required for the preparation of annual consolidated
financial statements and should be read in conjunction with the
Fund's consolidated financial statements as at and for the year ended
December 31, 2007.
Interim periods may not be representative of the results expected for
the full year of operation due to seasonality.
3. Changes in accounting policies
Effective January 1, 2008, the Fund adopted the following accounting
standards issued by the Canadian Institute of Chartered Accountants
("CICA"):
- Section 1535, Capital Disclosures;
- Section 3031, Inventories;
- Section 3862, Financial Instruments - Disclosures; and
- Section 3863, Financial Instruments - Presentation
Section 1535, Capital Disclosures, requires entities to provide users
of financial statements with information to evaluate the entity's
objectives, policies and processes for managing capital. Adoption of
this new standard did not have an effect on the statements of
financial position, net earnings or cash flows of the Fund. The new
disclosure requirements have been included in these notes to the
unaudited interim consolidated financial statements.
Section 3031, Inventories, requires the measurement of inventories at
the lower of cost and net realizable value and the consistent use of
either first- in, first-out or a weighted-average cost formula to
measure cost. The reversal of previous net realizable value write-
downs is permitted when there is a subsequent increase to the value
of inventories. The Fund adopted this standard prospectively on
January 1, 2008 in accordance with the transitional provisions.
Inventory is measured at the lower of cost and net realizable value,
less any costs to sell. Cost is determined on a weighted-average cost
formula. There was no material impact upon adoption of this standard.
Section 3862, Financial Instruments - Disclosures, requires entities
to provide disclosures in their financial statements that enable
users to evaluate the significance of financial instruments to the
entity's financial position and performance. It also requires that
entities disclose the nature and extent of risks arising from
financial instruments and how the entity manages those risks.
Section 3863, Financial Instruments - Presentation, establishes
standards for presentation of financial instruments and non-financial
derivatives and deals with the classification of financial
instruments, from the perspective of the issuer, between liabilities
and equity, the classification of related interest, dividends, losses
and gains, and the circumstances in which financial assets and
financial liabilities are offset.
Adoption of sections 3862 and 3863 did not have an effect on the
statements of financial positions, net earnings or cash flows of the
Fund. The new disclosure requirements have been included in these
notes to the unaudited interim consolidated financial statements.
Future accounting and reporting changes
Convergence of Canadian GAAP with International Financial Reporting
Standards ("IFRSs")
In April 2008, the CICA published the exposure draft "Adopting IFRSs
in Canada". The exposure draft proposes to incorporate IFRSs into the
CICA Accounting Handbook effective for interim and annual financial
statements relating to fiscal years beginning on or after January 1,
2011. At this date, publicly accountable enterprises will be required
to prepare financial statements in accordance with IFRSs. The Fund is
currently reviewing the standards to determine the potential impact
on its consolidated financial statements.
Goodwill and Intangible Assets
In February 2008, the Accounting Standards Board ("AcSB") issued CICA
Handbook Section 3064, Goodwill and Intangible Assets, replacing
existing guidance (Sections 3062 and 3450) for these areas. This new
section establishes standards for the recognition, measurement,
presentation and disclosure of goodwill and intangible assets
subsequent to their initial recognition. Standards concerning
goodwill are unchanged from the standards included in the previous
Section 3062. This new section will be effective for the Fund
beginning January 1, 2009. The Fund is currently evaluating the
impact of the adoption of this new section on its consolidated
financial statements.
4. Inventory
The total carrying amount and classification of inventory is as
follows:
June 30, December 31,
2008 2007
As at $ $
---------------------------------------------------------------------
NGLs 139,668 76,112
Natural gas 150 162
Other 84 320
---------------------------------------------------------------------
Total inventory 139,902 76,594
---------------------------------------------------------------------
---------------------------------------------------------------------
For the period ended June 30, 2008, all inventory was carried at
cost, and the cost of inventory expensed for the three and six months
ended June 30, 2008 were $423,538 and $875,204.
5. Credit facilities and long-term debt
June 30, December 31,
2008 2007
As at $ $
---------------------------------------------------------------------
Bank credit facilities (a) 65,000 -
---------------------------------------------------------------------
Total credit facilities 65,000 -
---------------------------------------------------------------------
---------------------------------------------------------------------
Current portion of long-term debt 20,000 20,000
Long-term debt (b) 315,000 315,000
Deferred financing costs (1,602) (1,757)
---------------------------------------------------------------------
Total long-term debt 333,398 333,243
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) The Partnership has a $150,000 unsecured revolving credit
facility with certain Canadian financial institutions led by
the Royal Bank of Canada. The facility has a three-year
revolving term and matures on April 21, 2011, unless extended.
In addition, the Royal Bank of Canada has provided a $15,000
revolving demand facility and the Toronto Dominion Bank has
provided a $15,000 revolving demand facility. The revolving
credit facilities bear interest based on the lenders' rates for
Canadian prime commercial loans, U.S. Base rate loans, Libor
loans, or Bankers' Acceptances rates. Interest expense for the
three and six months ended June 30, 2008 included a fixed
commitment fee resulting in a weighted average interest rate of
6.31% and 7.23% respectively (three and six months ended
June 30, 2007 - 5.70% and 5.56%). As at June 30, 2008, the
balance outstanding on the bank credit facilities was $65,000
(December 31, 2007 - $nil).
(b) In 2003, $125,000 of unsecured senior notes were issued by the
Partnership and KEFL in three parts: $20,000 due in 2008
bearing interest at 5.42%, $52,500 due in 2010 bearing interest
at 5.79% and $52,500 due in 2013 bearing interest at 6.16%.
Interest is payable monthly. Financing costs of $1,215 have
been deferred and are amortized using the effective interest
rate method over the remaining terms of the related debt. The
effective interest rates for the three and six months ended
June 30, 2008 were 5.54%, 5.94% and 6.28% for the notes due in
2008, 2010 and 2013 respectively (three and six months ended
June 30, 2007 - 5.63%, 5.95% and 6.29%).
In 2004, $90,000 of unsecured senior notes were issued by KEFL
and guaranteed by the Partnership. The notes bear interest at
5.23% and mature on October 1, 2009. Interest is payable semi-
annually. Financing costs of $568 have been deferred and are
amortized using the effective interest rate method over the
remaining term of the debt. The effective interest rate for the
three and six months ended June 30, 2008 was 5.36% (three and
six months ended June 30, 2007 - 5.37%).
In 2007, $120,000 of unsecured senior notes were issued by KEFL
in two tranches and guaranteed by the Partnership and the Fund:
$60,000 due in 2017 bearing interest at 5.89% and $60,000 due
in 2022 bearing interest at 6.14%. Interest is payable semi-
annually. Financing costs of $1,116 have been deferred and are
amortized using the effective interest rate method over the
remaining terms of the related debt. The effective interest
rates for the three and six months ended June 30, 2008 were
6.03% and 6.26% for the notes due in 2017 and 2022
respectively.
6. Convertible debentures
In 2004, the Fund issued convertible unsecured subordinated
debentures in the principal amount of $100,000. The convertible
debentures bear interest at 6.75% per annum, payable semi-annually in
arrears on June 30 and December 31 each year. Interest expense of
$353 and $720 has been accrued for the three and six months ended
June 30, 2008 (three and six months ended June 30, 2007 - $409 and
$809). These debentures will mature on June 30, 2011 and are
convertible into trust units of the Fund at the option of the holders
at any time prior to maturity at a conversion price of $12.00 per
unit. At June 30, 2008, $79,312 debentures had been converted to
trust units (December 31, 2007 - $78,178).
Financing costs consisting of an underwriters' commission of $4,000
and issuance costs of $332 have been deferred, and when there are no
conversions are being amortized over the term of the debt using the
effective interest rate method. Upon conversion of the debentures,
the financing cost related to the principal amount of debt converted
is adjusted and is recognized as a charge to unitholders' equity. As
a result of conversions to date at June 30, 2008, $2,906 has been
reclassified to unitholders' equity (December 31, 2007 - $2,857). As
at June 30, 2008, $252 of financing costs remain. The effective
interest rate for the three and six months ended June 30, 2008 was
7.36% (three and six months ended June 30, 2007 - 7.36%).
7. Asset retirement obligation
The following table presents the reconciliation between the beginning
and ending aggregate carrying amount of the obligation associated
with the retirement of the Fund's facilities.
$
---------------------------------------------------------------------
Balance, January 1, 2007 34,533
Liabilities acquired 644
Liabilities settled (213)
Revisions in estimated cash flows 361
Accretion expense 2,482
---------------------------------------------------------------------
Balance, December 31, 2007 37,807
Liabilities acquired 2,151
Liabilities disposed (643)
Liabilities settled (593)
Revisions in estimated cash flows -
Accretion expense 1,337
---------------------------------------------------------------------
Balance, June 30, 2008 40,059
---------------------------------------------------------------------
---------------------------------------------------------------------
8. Income taxes
On June 22, 2007, Bill C-52 Budget Implementation Act, 2007 was
enacted by the Canadian federal government. As a result of this
legislation, a new tax will be applied to distributions from publicly
traded trusts in Canada. The new tax is not expected to apply to the
Fund until 2011 as the government has provided a transition period
for publicly traded trusts that existed prior to November 1, 2006.
The following is a reconciliation of income taxes, calculated at the
combined federal and provincial income tax rate, to the income tax
provision included in the consolidated statements of net earnings
(loss).
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
Earnings before tax and
non-controlling interest 35,791 21,645 80,139 43,505
Income from the Fund
distributable to unit-
holders (36,077) (13,654) (60,807) (26,277)
-------------------------------------------------------------------------
Income (loss) before taxes
- operating subsidiaries (286) 7,991 19,332 17,228
-------------------------------------------------------------------------
Income tax at statutory rate
of 29.5% (2007 - 32.12%) (84) 2,567 5,703 5,534
Impact of recording temporary
differences of the Partnership - 82,182 - 82,182
Non (taxable) deductible items
excluded from income for tax
purposes 2,070 157 (1,742) 727
Rate adjustments 10,764 (3,022) (2,927) (3,371)
Benefit of non-capital losses
previously not recorded - (220) - (786)
Adjustments to tax pool
balances 295 (180) 319 (476)
Other 17 (9) 555 247
-------------------------------------------------------------------------
13,062 81,475 1,908 84,057
-------------------------------------------------------------------------
Classified as:
Current (1,871) 1,240 25 2,426
Future 14,933 80,235 1,883 81,631
-------------------------------------------------------------------------
Income tax expense 13,062 81,475 1,908 84,057
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For income tax purposes, the subsidiaries of the Fund have non-
capital losses carried forward of approximately $5,822 at June 30,
2008 (December 31, 2007 - $2,981) which are available to offset
income of specific entities of the consolidated group in future
periods. The benefit of these losses has been recorded at June 30,
2008.
The future income tax (liabilities) assets relate to losses and to
the (taxable) deductible temporary differences in the carrying values
and tax bases as follows:
June 30, December 31,
2008 2007
As at $ $
---------------------------------------------------------------------
Property, plant and equipment (155,626) (152,747)
Asset retirement obligation 10,411 9,992
Long-term incentive plan 3,207 1,954
Intangible assets (885) (941)
Other (3,906) (3,472)
---------------------------------------------------------------------
Future income tax liabilities (146,799) (145,214)
---------------------------------------------------------------------
---------------------------------------------------------------------
Property, plant and equipment (549) (444)
Asset retirement obligation 81 78
Non-capital losses 1,015 832
Intangible assets - 379
---------------------------------------------------------------------
Future income tax assets 547 845
---------------------------------------------------------------------
---------------------------------------------------------------------
9. Unitholders' capital
The Declaration of Trust provides that an unlimited number of trust
units may be authorized and issued. Each trust unit is transferable,
and represents an equal undivided beneficial interest in any
distribution from the Fund and in the net assets of the Fund in the
event of termination or winding-up of the Fund. All trust units are
of the same class with equal rights and privileges.
The Declaration of Trust also provides for the issuance of an
unlimited number of special trust units that will be used solely for
providing voting rights to persons holding securities that are
directly or indirectly exchangeable for units and that, by their
terms, have voting rights in the Fund.
The trust units are redeemable at the holder's option at an amount
equal to the lesser of: (i) 90% of the weighted average price per
unit during the period of the last 10 trading days during which the
trust units were traded on the Toronto Stock Exchange; and (ii) an
amount equal to (a) the closing market price of the units; (b) an
amount equal to the average of the highest and lowest prices of units
if there was trading on the date on which the units were tendered for
redemption; or (c) the average of the last bid and ask prices if
there was no trading on the date on which the units were tendered for
redemption.
Redemptions are subject to a maximum of $50 cash redemptions in any
particular month. Redemptions in excess of this amount will be paid
by way of a distribution in specie of assets of the Fund that may
include notes issued by the Fund.
The Fund has a Distribution Reinvestment and Optional Unit Purchase
Plan ("DRIP") that permits unitholders to reinvest cash distributions
for additional units. This plan allows eligible participants an
opportunity to reinvest distributions into trust units at a 3%
discount to a weighted average market price, so long as units are
issued from treasury under the DRIP. The Fund has the right to notify
participants that units will be acquired in the market, in which case
units will be purchased at the weighted average market price.
Eligible unitholders can also make optional unit purchases under the
optional unit purchase component of the plan at the weighted average
market price.
Trust units issued and
unitholders' capital Number of Units $
---------------------------------------------------------------------
Balance, January 1, 2007 60,930,753 677,025
Units issued on conversion of
convertible debentures 143,321 1,645
Units issued pursuant to DRIP 190,298 3,255
---------------------------------------------------------------------
Balance, December 31, 2007 61,264,372 681,925
Units issued as part of re-
organization (note 19) - 1,225
Units issued on conversion of
convertible debentures 94,494 1,083
Units issued pursuant to DRIP 118,820 2,361
---------------------------------------------------------------------
Balance, June 30, 2008 61,477,686 686,594
---------------------------------------------------------------------
---------------------------------------------------------------------
10. Net earnings per unit
Basic per unit calculations for the three and six months ended
June 30, 2008 and 2007 were based on the weighted average number of
units outstanding for the related period. Convertible debentures were
in the money for the three and six months ended June 30, 2008 and
contributed to the increase in diluted weighted average number of
units for these periods.
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------------------------
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
Net earnings - basic 22,729 (59,870) 78,231 (40,858)
Effect of convertible
debentures (net of tax)(1) 248 - 506 -
-------------------------------------------------------------------------
Net earnings (loss) -
diluted 22,977 (59,870) 78,737 (40,858)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The effect of convertible debentures has been excluded for 2007 as it
is anti-dilutive.
(in thousands)
-------------------------------------------------------------------------
Weighted average number of
units - basic 61,411 61,061 61,353 61,017
Additional units if debentures
converted(1) 1,745 - 1,778 -
-------------------------------------------------------------------------
Weighted average number of
units - diluted 63,156 61,061 63,131 61,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The effect of convertible debentures has been excluded for 2007 as it
is anti-dilutive.
11. Accumulated distributions to unitholders
$
---------------------------------------------------------------------
Balance, January 1, 2007 217,988
Unitholders' distributions declared and paid 82,548
Unitholders' distributions declared 7,658
---------------------------------------------------------------------
Balance, December 31, 2007 308,194
Unitholders' distributions declared and paid 40,803
Unitholders' distributions declared 8,299
Unitholders' special distribution - non-cash
portion (note 19) 1,225
Unitholders' special distribution - cash
portion (note 19) 216
---------------------------------------------------------------------
Balance, June 30, 2008 358,737
---------------------------------------------------------------------
---------------------------------------------------------------------
Pursuant to the Fund Declaration of Trust dated April 3, 2003 and its
subsequent amendments, the Fund makes monthly distributions to
holders of record on the last day of each month. Payments are made on
or about the 15th day of the following month.
Distributions are paid from "Cash Flow of the Trust", a term that is
defined in the Fund Declaration of Trust dated April 3, 2003. The
Board of Directors of the Fund's administrator may, on or before each
Distribution Record Date, declare payable all or any part of the Cash
Flow of the Trust for the Distribution Period. The amount and level
of distributions to be made for each Distribution Period are
determined at the discretion of the Board of Directors. In
determining its distribution policy, the Board of Directors considers
several factors, including the Fund's current and future cash flow,
capital requirements, debt repayments and other factors.
12. Compensation plans
The Long Term Incentive Plan (the "LTIP" or the "Plan") compensates
officers, directors, key employees and consultants by delivering
units of the Fund or paying cash in lieu of units. Participants in
the LTIP are granted rights ("unit awards") to receive units of the
Fund on specified dates in the future. The Plan permits the Board of
Directors to authorize the grant of unit awards from time to time.
Units are acquired in the marketplace under the plan.
The Plan consists of two types of unit awards, which are described
below. Unit awards and the delivery of units under the Plan are
accounted for in accordance with the intrinsic value method of
accounting for stock-based compensation. The aggregate compensation
cost recorded for the Plan was $1,822 and $4,907 for the three and
six months ended June 30, 2008 (three and six months ended June 30,
2007 - $3,111 and $4,247).
(a) Performance Unit Awards
The Performance Unit Awards will vest 100% on the third anniversary
of the effective date of each award, July 1, 2005, July 1, 2006 and
July 1, 2007. The number of units to be delivered will be determined
by the financial performance of the Fund over the three-year period.
The number of units to be delivered will be calculated by multiplying
the number of unit awards by an adjustment ratio and a payout
multiplier. The adjustment ratio adjusts the number of units to be
delivered to reflect the per unit cash distributions paid by the Fund
to its unitholders during the term that the unit award is
outstanding. The payout multiplier is based upon the actual three-
year average annual cash distributions per unit of the Fund. The
table below describes the relationship between the three-year average
annual cash distribution per unit and the payout multiplier.
---------------------------------------------------------------------
Three-year annual cash distributions per unit
---------------------------------------------------------------------
July 1, 2005 July 1, 2006 July 1, 2007 Payout
Grant Grant Grant Multiplier
---------------------------------------------------------------------
Less than Less than Less than
1.32 1.42 1.44 Nil
First
range 1.32 - 1.39 1.42 - 1.51 1.44 - 1.51 50% - 99%
Second
range 1.40 - 1.55 1.52 - 1.71 1.52 - 1.67 100% - 199%
Third
range 1.56 and 1.72 and 1.68 or 200%
greater greater greater
---------------------------------------------------------------------
As of June 30, 2008, 482,080 Performance Unit Awards (485,105 at
December 31, 2007) were outstanding: 161,755 effective July 1, 2005,
141,100 effective July 1, 2006 and 179,225 effective July 1, 2007.
The compensation cost recorded for these units for the three and six
months ended June 30, 2008 was $1,477 and $4,243, using the
applicable closing market price of a unit of the Fund (three and six
months ended June 30, 2007 - $2,705 and $3,659).
(b) Time Vested Unit Awards ("Restricted Unit Awards")
Restricted Unit Awards will vest automatically, over a three-year
period from the effective date of the award on July 1, 2005,
July 1, 2006 and July 1, 2007, regardless of the performance of the
Fund. The number of units to be delivered will be modified by an
adjustment ratio which reflects the per unit distributions paid by
the Fund to its unitholders during the term that the unit award is
outstanding.
As of June 30, 2008, 84,393 Restricted Unit Awards (92,275 at
December 31, 2007) were outstanding: 9,367 effective July 1, 2005,
22,351 effective July 1, 2006 and 52,675 effective July 1, 2007. The
compensation cost recorded for these units for the three and six
months ended June 30, 2008 was $345 and $664, using the applicable
closing market price of a unit of the Fund (three and six months
ended June 30, 2007 - $406 and $588).
13. Financial instruments and risk management
Financial instruments include cash, accounts receivable, accounts
payable and accrued liabilities, distributions payable, credit
facilities, long-term debt, convertible debentures and derivatives
held for trading (derivative instruments such as foreign exchange
contracts, oil price contracts, natural gas price contracts, power
price contracts and physical fixed price commodity contracts).
Derivative instruments and cash are classified as held for trading
and are measured at fair value. Accounts receivable are classified as
other receivables and are measured at amortized cost. With the
exception of derivative instruments held for trading, all financial
liabilities are classified as other financial liabilities and are
recorded at amortized cost.
Market risk and derivative instruments
Subsidiaries of the Fund enter into contracts to purchase and sell
primarily NGLs, as well as natural gas and crude oil. These contracts
are exposed to commodity price risk between the times contracted
volumes are purchased and sold and foreign currency risk for those
sales denominated in U.S. dollars. These risks are actively managed
by balancing physical and financial contracts which include energy
related forwards, swaps and forward currency contracts and swaps. A
risk management committee meets regularly to review and assess the
risks inherent in existing contracts and the effectiveness of the
risk management strategies. This is achieved by modeling future sales
and purchase contracts to monitor the sensitivity of changing prices
and volumes.
Significant amounts of electricity and natural gas are consumed by
the operating entities at their facilities. Due to the fixed fee
nature of some service contracts in place with customers, these
entities are unable to flow increases in the cost of electricity and
natural gas to customers in all situations. In order to mitigate this
exposure to fluctuations in the price of electricity and natural gas,
price swap agreements may be used. These agreements are accounted for
as derivative instruments.
Certain natural gas, NGL and crude oil contracts that require
physical delivery at fixed prices are accounted for as derivative
instruments.
On occasion, subsidiaries of the Fund will enter into NGL purchase
and sale contracts that are settled in a currency other than the
currency that is routinely denominated for such commercial
transactions. In these instances, the Fund records these non-
financial contracts as embedded derivatives. Embedded derivatives are
accounted for as derivative instruments.
Derivative instruments held for trading are recorded on the
consolidated statement of financial position at fair value. Changes
in the fair value of these financial instruments are recognized in
earnings in the period in which they arise.
As at June 30, 2008, $12,012 of assets held for trading were included
in accounts receivable and $15,665 of liabilities held for trading
were included in accounts payable and accrued liabilities
(December 31, 2007 - $3,112 included in accounts receivable and
$12,566 included in accounts payable and accrued liabilities). The
change in fair value of derivative instruments is recorded in
Marketing operating revenue and NGL Infrastructure operating expense.
The change in fair value relating to derivative instruments were as
follows:
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
Unrealized gain (loss) $ $ $ $
---------------------------------------------------------------------
Marketing (7,308) 807 4,992 (4,650)
NGL Infrastructure 323 (207) 810 (95)
---------------------------------------------------------------------
---------------------------------------------------------------------
As at June 30, 2008, derivative instruments held for trading were
exposed to commodity price risk. The following table outlines the
increase (decrease) to net earnings and comprehensive income
attributable to derivative instruments if there was a 10% decrease
(increase) in the price of the commodity:
Six months
ended
As at June 30, 2008
$
---------------------------------------------------------------------
Natural gas (215)
Electricity (107)
NGLs 9,993
---------------------------------------------------------------------
Total increase (decrease) to net earnings and
comprehensive income attributable to commodity
derivative instruments 9,671
---------------------------------------------------------------------
---------------------------------------------------------------------
The fair values of the derivative instruments held for trading are
listed below and represent an estimate of the amount that the Fund
would receive (pay) if these instruments were closed out at the end
of the period.
Weighted
Carrying Fair Average Notional(1)
As at June 30, 2008 Amount $ Value $ Price $ Volume
---------------------------------------------------------------------
Natural gas:
Buyer of fixed price
swaps (maturing by
October 31, 2008) 692 692 7.77/GJ 188,190 GJs
Electricity:
Buyer of fixed price
swaps (maturing by
December 31, 2008) 463 463 55/MWh 11,040 MWhs
NGLs:
Seller of fixed price
swaps (maturing by
June 30, 2009) (15,526) (15,526) 116.51/Bbl 1,673,585 Bbls
Buyer of fixed price
swaps (maturing by
June 30, 2009) 10,499 10,499 118.51/Bbl 862,395 Bbls
Currency:
Seller of forward
contracts (maturing by
July 25, 2008) 90 90 1.0036/USD US$6,000,000
Physical contracts:
Seller of fixed price
forward contracts
(maturing by
December 31, 2008) (129) (129) 45.41/Bbl 49,562 Bbls
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted
As at December 31, Carrying Fair Average Notional(1)
2007 Amount $ Value $ Price $ Volume
---------------------------------------------------------------------
Natural gas:
Buyer of fixed price
swaps (maturing by
October 31, 2008) (98) (98) 6.90/GJ 198,000 GJs
Electricity:
Buyer of fixed price
swaps (maturing by
December 31, 2008) 444 444 55/MWh 21,960 MWhs
NGLs:
Seller of fixed price
swaps (maturing by
March 31, 2008) (11,984) (11,984) 77.97/Bbl 713,345 Bbls
Buyer of fixed price
swaps (maturing by
March 31, 2008) 2,489 2,489 78.43/Bbl 153,999 Bbls
Currency:
Seller of forward
contracts (maturing
by January 25, 2008) 111 111 1.0199/USD US$6,500,000
Physical contracts:
Seller of fixed price
forward contracts
(maturing by March 31,
2008) (417) (417) 53.67/Bbl 54,584 Bbls
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) All notional amounts represent actual volumes and are not
expressed in thousands.
The estimated fair value of all derivatives held for trading is based
on quoted market prices and, if not available, on estimates from
third-party brokers or dealers.
Foreign currency risk
Foreign currency risk arises on financial instruments that are
denominated in a foreign currency. The Fund's functional currency is
the Canadian dollar. All of the Fund's debt is denominated in
Canadian dollars and is therefore not exposed to foreign currency
risk. The Gathering and Processing and NGL Infrastructure segments
are also not subject to foreign currency risk as all sales and
virtually all purchases are denominated in Canadian dollars. In the
Marketing business, approximately US$62,496 and US$174,099 of sales
were priced in U.S. dollars for the three and six months ended
June 30, 2008 ($31,795 and $113,753 for the three and six months
ended June 30, 2007). Foreign currency risk is actively managed by
using forward currency contracts and swaps. Management monitors the
exposure to foreign currency risk and regularly reviews its financial
instrument activities and all outstanding positions.
The Fund recorded $527 of unrealized foreign currency loss and $275
of unrealized foreign currency gain relating to U.S. dollar
denominated cash, accounts receivable and accounts payable in
Marketing operating expenses for the three and six months ended
June 30, 2008 (three and six months ended June 30, 2007 - $1,131 and
$1,285 of unrealized foreign currency gains).
As at June 30, 2008, portions of the Fund's cash, accounts receivable
and accounts payable were denominated in U.S. dollars. Based on these
U.S. dollar financial instrument balances, net earnings and
comprehensive income for the period ended June 30, 2008 would have
increased/decreased by approximately $110 for every $0.01
decrease/increase in the value of the U.S./Canadian dollar exchange
rate.
Interest rate risk
The majority of the Fund's interest rate risk is attributed to its
fixed and floating rate debt, which is used to finance operations.
The Fund's remaining financial instruments are not significantly
exposed to interest rate risk. The floating rate debt creates
exposure to interest rate cash flow risk, whereas the fixed rate debt
creates exposure to interest rate price risk. At June 30, 2008, fixed
rate borrowings comprised 84% of total debt outstanding (December 31,
2007 - 100%). The fair value of future cash flows for fixed rate debt
fluctuates with changes in market interest rates. It is the Fund's
intention to not repay fixed rate debt until maturity and therefore
future cash flows would not fluctuate.
The Fund's earnings are sensitive to changes in interest rates on
floating rate borrowings. If the interest rates applicable to
floating rate borrowings were to have increased/decreased by 1%, it
is estimated that net earnings and comprehensive income for the three
and six months ended June 30, 2008 would have decreased/increased by
approximately $168 and $100 respectively based on weighted average
debt balances.
Credit risk
The majority of accounts receivable are due from entities in the oil
and gas industry and are subject to normal industry credit risks.
Concentration of credit risk is mitigated by having a broad domestic
and international customer base. The Fund evaluates and monitors the
financial strength of its customers in accordance with its credit
policy. Revenue from the two largest customers amounted to 21% and
19% of operating revenue for the three and six months ended
June 30, 2008 (three and six months ended June 30, 2007 - 19% and
15%).
The Fund's maximum exposure to credit risk, which is a worst case
scenario and does not reflect results expected by the Fund, is
$298,111 at June 30, 2008. The Fund does not typically renegotiate
the terms of trade accounts receivable; however, if a renegotiation
does take place, the outstanding balance is included in the accounts
receivable analysis below based on the original payment terms. There
were no significant renegotiated balances outstanding at June 30,
2008. With respect to counterparties for derivative financial
instruments, the credit risk is managed through dealing primarily
with recognized futures exchanges or investment grade financial
institutions and by maintaining credit policies, which significantly
reduce overall counter party credit risk.
The allowance for credit losses is reviewed on a monthly basis. An
assessment is made whether an account is deemed impaired based on the
number of days outstanding and the likelihood of collection from the
counter party.
Accounts receivable June 30,
2008
As at $
---------------------------------------------------------------------
Neither impaired nor past due 264,332
Impaired 1,453
Not impaired but past due in the following periods:
31 to 60 days 11,332
61 to 90 days 5,311
Over 90 days 5,124
---------------------------------------------------------------------
Trade accounts receivable 287,552
Derivatives held for trading (all current) 12,012
Allowance for credit losses (1,453)
---------------------------------------------------------------------
Total accounts receivable 298,111
---------------------------------------------------------------------
---------------------------------------------------------------------
Allowance for credit losses June 30,
2008
As at $
---------------------------------------------------------------------
Allowance for credit losses, beginning of period (1,121)
Impairment expense (332)
---------------------------------------------------------------------
Allowance for credit losses, end of period (1,453)
---------------------------------------------------------------------
---------------------------------------------------------------------
Liquidity risk
Liquidity risk is the risk that suitable sources of funding for the
Fund's business activities may not be available. The Fund manages
liquidity risk by maintaining bank credit facilities, continuously
managing forecast and actual cash flows and monitoring the maturity
profiles of financial assets and financial liabilities. The Fund has
access to a wide range of funding at competitive rates through
capital markets and banks to meet the immediate and ongoing
requirements of the business.
The following table shows the contractual maturities for financial
liabilities of the Fund:
---------------------------------------------------------------------
Within 1 After
year 2009 2010 2011 2012 2013 2013
$ $ $ $ $ $ $
---------------------------------------------------------------------
Accounts
payable and
accrued
liabilities 321,019 - - - - - -
Distributions
payable 8,299 - - - - - -
Long-term
debt(1) 20,000 90,000 52,500 - - 52,500 120,000
Credit
facilities(1) 65,000 - - - - - -
Convertible
debentures
(1),(2) - - - 20,688 - - -
---------------------------------------------------------------------
(1) Amounts represent principal only and exclude accrued interest.
(2) Convertible debentures are convertible into trust units of the
Fund at the option of the holders at any time prior to maturing
(note 6).
Fair value
The carrying values of accounts receivable, accounts payable and
accrued liabilities and distributions payable approximate their fair
values because the instruments are near maturity or have no fixed
repayment terms. The fair value of the credit facilities approximates
fair value due to their floating rates of interest. The fair value of
the senior fixed rate debt at June 30, 2008 was $338,844
(December 31, 2007 - $337,589) based on third party estimates. The
fair value of the Fund's unsecured convertible debentures at June 30,
2008 was $39,098 (December 31, 2007 - $32,078) as determined by
reference to quoted market price for the Fund's debentures.
14. Capital Management
The Fund's objectives when managing capital are:
- to safeguard the Fund's ability to continue as a going concern;
- to maintain financial flexibility in order to fund investment
opportunities and meet financial obligations; and
- to distribute to unitholders a significant portion of its current
cash flow, after
I. satisfaction of debt service obligations (principal and
interest) and income tax expenses,
II. satisfaction of any reclamation funding requirements,
III. providing for maintenance capital expenditures and
IV. retaining reasonable reserves for administrative and other
expense obligations and reasonable reserves for working
capital and capital expenditures as may be considered
appropriate.
The Fund defines its capital as follows:
- Unitholders' equity,
- long-term debt, including working capital;
- credit facilities; and
- cash.
The Fund manages its capital structure and makes adjustments to it in
light of changes in economic conditions and the risk characteristics
of the underlying assets. In order to maintain or adjust the capital
structure, the Fund may adjust the amount of distributions paid to
unitholders, issue new units, issue new debt or issue new debt to
replace existing debt with different characteristics.
The Fund monitors its capital structure primarily based on its
consolidated debt to consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA") ratio. This ratio is
calculated as consolidated debt divided by a twelve-month trailing
EBITDA, which are non- GAAP measures.
For the period ended June 30, 2008, the Fund's capital management
strategy was unchanged from the prior year. The Fund currently
intends to maintain a consolidated debt to consolidated EBITDA ratio
of less than 3.5.
Consolidated Debt June 30,
2008
As at $
Long-term debt 315,000
Working capital (surplus) deficit(2) (40,659)
---------------------------------------------------------------------
Consolidated debt 274,341
---------------------------------------------------------------------
Consolidated EBITDA June 30,
2008
Twelve months ended $
---------------------------------------------------------------------
Operating revenues(3) 1,856,173
Operating expenses(3) (1,636,106)
Unrealized loss on derivative instruments(3) 1,276
General and administrative expenses(3) (24,045)
---------------------------------------------------------------------
Consolidated EBITDA 197,298
---------------------------------------------------------------------
---------------------------------------------------------------------
Guideline(1)
Consolidated debt to consolidated EBITDA less than 3.5 1.39
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) The Fund currently intends to maintain a consolidated debt to
consolidated EBITDA ratio of less than 3.5.
(2) Working capital is defined as current assets less current
liabilities.
(3) Operating revenues, operating expenses, unrealized (gain) loss on
derivative instruments and general and administrative expenses
shown above are on a trailing twelve-month basis and therefore
can not be directly derived from the financial statements.
Consolidated debt to consolidated EBITDA is also a measure used as a
financial covenant for the Fund's credit facilities and long-term
debt agreements. The Fund is also subject to the following financial
covenants:
- Debt to capitalization
- Consolidated EBITDA to consolidated interest charges
- Priority debt to consolidated total assets
The calculation for each financial covenant is based on specific
definitions, is not in accordance with GAAP and cannot be directly
derived from the financial statements. The Fund was in compliance
with all financial covenants as at June 30, 2008.
As a result of the Canadian trust taxation legislation passed in
June 2007, the Fund is subject to certain limitations on the issuance
of new equity referred to as "normal growth" limitations. The amount
of new equity that can be issued by the Fund for the current and
following two years, based on the Fund's market capitalization on
October 31, 2006, is approximately as follows:
Annual Cumulative
Normal growth capital allowed in: $ $
---------------------------------------------------------------------
2008 786,000 786,000
2009 262,000 1,048,000
2010 262,000 1,310,000
---------------------------------------------------------------------
---------------------------------------------------------------------
If the normal growth limitations were exceeded, the Fund may be
subject to taxation on its distributions prior to 2011. As at
June 30, 2008, the normal growth limitations have not been exceeded.
15. Commitments and contingencies
The Fund, through its operating entities, is involved in various
contractual agreements in the normal course of its operations. The
agreements range from one to eleven years and comprise the processing
of a major oil and gas producer's natural gas and the purchase of NGL
production in the areas specified in the agreements. The purchase
prices are based on current period market prices.
There are operating lease commitments relating to railway tank cars,
vehicles, computer hardware, office space, terminal lease space and
natural gas transportation. The estimated annual minimum operating
lease rental payments from these commitments are as follows:
$
---------------------------------------------------------------------
2008 4,570
2009 8,314
2010 6,763
2011 5,418
2012 4,170
Thereafter 2,114
---------------------------------------------------------------------
31,349
---------------------------------------------------------------------
---------------------------------------------------------------------
There are legal actions for which the ultimate results cannot be
ascertained at this time. Management does not expect the outcome of
any of these proceedings to have a material effect on the financial
position or results of operations.
16. Supplemental cash flow information
Changes in non-cash Three months ended Six months ended
working capital June 30, June 30,
2008 2007 2008 2007
$ $ $ $
---------------------------------------------------------------------
Cash provided by (used in):
Accounts receivable (34,944) (6,694) (48,210) (17,208)
Inventory (103,201) 13,154 (63,308) 6,999
Other current assets (3,154) (4,533) (6,532) (3,555)
Accounts payable and
accrued liabilities 86,417 (8,289) 85,882 24,424
---------------------------------------------------------------------
Changes in non-cash
working capital (54,882) (6,362) (32,168) 10,660
---------------------------------------------------------------------
Relating to:
Operating activities (54,266) (6,729) (36,698) 13,647
Investing activities (616) 367 4,530 (2,987)
---------------------------------------------------------------------
Other cash flow information:
Interest paid 7,583 3,513 11,804 8,740
Taxes paid 1,477 1,035 5,457 1,992
17. Segmented information
The Fund has three reportable segments: Marketing, Gathering and
Processing and NGL Infrastructure. The Marketing business consists of
marketing NGLs, sulphur and crude oil. Gathering and Processing
includes natural gas gathering and processing. NGL Infrastructure
includes NGL and crude oil processing, transportation and storage.
The accounting policies of the segments are the same as that
described in the summary of significant accounting policies. Inter-
segment sales and expenses are recorded at current market prices.
Gathering
and NGL
Three Process- Infra-
months ended Marketing ing structure Corporate Total
June 30, 2008 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 459,574 60,003 19,937 - 539,514
Inter-segment
revenue - (1,324) (8,824) - (10,148)
-------------------------------------------------------------------------
External revenue 459,574 58,679 11,113 - 529,366
-------------------------------------------------------------------------
Operating expenses (440,178) (31,114) (8,543) - (479,835)
Inter-segment
expenses 10,148 - - - 10,148
-------------------------------------------------------------------------
External operating
expenses (430,030) (31,114) (8,543) - (469,687)
-------------------------------------------------------------------------
29,544 27,565 2,570 - 59,679
General and
administrative,
interest and other - - - (11,314) (11,314)
Depreciation and
amortization (708) (7,395) (2,435) (258) (10,796)
Accretion expense (3) (585) (77) - (665)
Impairment expense - (1,113) - - (1,113)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 28,833 18,472 58 (11,572) 35,791
Income tax recovery
(expense) 192 - 7,690 (20,944) (13,062)
-------------------------------------------------------------------------
Earnings (loss)
before
non-controlling
interest 29,025 18,472 7,748 (32,516) 22,729
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 359,964 825,153 313,004 19,723 1,517,844
-------------------------------------------------------------------------
Capital
expenditures - 30,445 11,352 98 41,895
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gathering
and NGL
Three Process- Infra-
months ended Marketing ing structure Corporate Total
June 30, 2007 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 292,326 45,074 17,658 - 355,058
Inter-segment
revenue - (797) (8,133) - (8,930)
-------------------------------------------------------------------------
External revenue 292,326 44,277 9,525 - 346,128
Operating expenses (273,489) (29,713) (6,476) - (309,678)
Inter-segment
expenses 8,930 - - - 8,930
-------------------------------------------------------------------------
External operating
expenses (264,559) (29,713) (6,476) - (300,748)
-------------------------------------------------------------------------
27,767 14,564 3,049 - 45,380
General and
administrative,
interest and
other - - - (12,702) (12,702)
Depreciation and
amortization (702) (7,285) (2,171) (263) (10,421)
Accretion expense (2) (529) (81) - (612)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 27,063 6,750 797 (12,965) 21,645
-------------------------------------------------------------------------
Income tax (expense)
recovery 60 - (1,364) (80,171) (81,475)
-------------------------------------------------------------------------
(Loss) earnings
before
non-controlling
interest 27,123 6,750 (567) (93,136) (59,830)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 167,112 811,139 238,101 11,205 1,227,557
-------------------------------------------------------------------------
Capital
expenditures 536 4,905 2,548 166 8,155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gathering
and NGL
Six Process- Infra-
months ended Marketing ing structure Corporate Total
June 30, 2008 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 952,908 109,818 38,099 - 1,100,825
Inter-segment
revenue - (2,566) (16,116) - (18,682)
-------------------------------------------------------------------------
External revenue 952,908 107,252 21,983 - 1,082,143
Operating expenses (905,466) (51,977) (13,952) - (971,395)
Inter-segment
expenses 18,682 - - - 18,682
-------------------------------------------------------------------------
External operating
expenses (886,784) (51,977) (13,952) - (952,713)
-------------------------------------------------------------------------
66,124 55,275 8,031 - 129,430
General and
administrative,
interest and other - - - (25,509) (25,509)
Depreciation and
amortization (1,415) (14,522) (4,878) (517) (21,332)
Accretion expense (6) (1,136) (195) - (1,337)
Impairment expense - (1,113) - - (1,113)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 64,703 38,504 2,958 (26,026) 80,139
-------------------------------------------------------------------------
Income tax (expense)
recovery (298) - 5,234 (6,844) (1,908)
-------------------------------------------------------------------------
Earnings (loss)
before
non-controlling
interest 64,405 38,504 8,192 (32,870) 78,231
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 359,964 825,153 313,004 19,724 1,517,844
-------------------------------------------------------------------------
Capital
expenditures - 44,781 46,809 102 91,692
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gathering
and NGL
Six Process- Infra-
months ended Marketing ing structure Corporate Total
June 30, 2007 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 599,668 87,782 35,339 - 722,789
Inter-segment
revenue - (1,556) (16,122) - (17,678)
-------------------------------------------------------------------------
External revenue 599,668 86,226 19,217 - 705,111
Operating expenses (571,545) (50,939) (11,856) - (634,340)
Inter-segment
expenses 17,678 - - - 17,678
-------------------------------------------------------------------------
External operating
expenses (553,867) (50,939) (11,856) - (616,662)
-------------------------------------------------------------------------
45,801 35,287 7,361 - 88,449
General and
administrative,
interest and
other - - - (22,677) (22,677)
Depreciation and
amortization (1,773) (14,505) (4,266) (465) (21,009)
Accretion expense (5) (1,086) (167) - (1,258)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 44,023 19,696 2,928 (23,142) 43,505
-------------------------------------------------------------------------
Income tax (expense)
recovery 893 - (4,068) (80,882) (84,057)
-------------------------------------------------------------------------
(Loss) earnings
before
non-controlling
interest 44,916 19,696 (1,140) (104,024) (40,552)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 167,112 811,139 238,101 11,205 1,227,557
-------------------------------------------------------------------------
Capital
expenditures 538 6,364 4,389 479 11,770
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
Marketing revenue derived
from export sales to the U.S. 14,103 9,172 45,073 32,993
Property, plant and equipment
located in the U.S. 11,725 12,212 11,725 12,212
-------------------------------------------------------------------------
18. Non-controlling interest
In the second quarter of 2007, Rimbey Pipe Line Co. Ltd. was
converted to a limited partnership (RPLP) and a subsidiary of the
Fund acquired the remaining interest in RPLP, bringing the Fund's
ownership in RPLP to 100%. As a result, the non-controlling interest
was removed from the consolidated statement of financial position.
19. Internal reorganization
On January 2, 2008, the Fund completed an internal reorganization of
certain of its subsidiaries. As part of the reorganization, a special
distribution in the aggregate amount of $1,441 ($0.023529 per unit)
was declared. These special distributions consisted of cash in the
amount of $216 ($0.003529 per unit) and securities of certain
subsidiaries of the Fund having an aggregate value of $1,225 ($0.02
per unit). Each of these securities was redeemed for one special non-
voting unit of the Fund ("Fund special units"). These Fund special
units were then converted into regular units which were consolidated
such that, upon completion of the reorganization, each unitholder
continued to hold the same number of units as was held immediately
prior to the reorganization.
After completion of the reorganization, the Partnership is directly
owned by the Fund, and Keyera Energy Management Ltd. ("KEML") no
longer has an interest in the Partnership. The future income tax rate
applicable to the Fund is 2.5% higher than that of KEML which
resulted in a future income tax expense of approximately $3,500. As a
result of the new organizational structure, the Fund is able to
preserve tax shelter within its operating entities for the next three
years. Based on current projections, taxable temporary differences
relating to property, plant and equipment are expected to reverse at
a 0% tax rate. In the first quarter of 2008, it was anticipated that
a greater amount of tax shelter would be preserved resulting in a
future income tax recovery of $16,500. However, based on revised
earnings projections as at June 30, 2008, the future income tax
recovery has been reduced from $16,500 to $6,500.
Corporate Information
Board of Directors Officers
E. Peter Lougheed(1)(3) Jim V. Bertram
Counsel President and Chief Executive
Bennett Jones LLP Officer
Calgary, Alberta
David G. Smith
Jim V. Bertram(4) Executive Vice President,
President and CEO Chief Financial Officer and
Keyera Energy Management Ltd. Corporate Secretary
Calgary, Alberta
Graham Balzun
Robert B. Catell Vice President, Engineering and
Executive Director and Corporate Responsibility
Deputy Chairman
National Grid plc Marzio Isotti
New York, New York Vice President, Foothills Region
Michael B.C. Davies(2) Steven B. Kroeker
Principal Vice President, Corporate
Davies & Co. Development
Banff, Alberta
Bradley W. Lock
Nancy M. Laird(3)(4) Vice President, North Central Region
Corporate Director
Calgary, Alberta David A. Sentes
Vice President, Comptroller
Donald J. Nelson
President Stock Exchange Listing
Fairway Resources Inc.
Calgary, Alberta The Toronto Stock Exchange
Trading Symbols KEY.UN; KEY.DB
H. Neil Nichols(2)(3)
Management Consultant
Smiths Cove, Nova Scotia Unit Trading Summary Q2 2008
-----------------------------------
William R. Stedman(3)(4) TSX:KEY.UN - Cdn $
Chairman and CEO -----------------------------------
ENTx Capital Corporation High $23.79
Calgary, Alberta Low $19.40
Close June 30, 2008 $22.15
Wesley R. Twiss(2) Volume 6,738,465
Corporate Director Average Daily Volume 105,289
Calgary, Alberta
Auditors
(1) Chairman of the Board Deloitte & Touche LLP
(2) Member of the Audit Committee Chartered Accountants
(3) Member of the Compensation Calgary, Canada
and Governance Committee
(4) Member of the Health, Safety Investor Relations
and Environment Committee Contact: John Cobb or Bradley White
Toll Free: 1-888-699- 4853
Direct: 403-205-7670
Email: ir@keyera.com
Head Office
Keyera Facilities Income Fund
Suite 600, Sun Life Plaza West Tower
144 - 4th Avenue S.W.
Calgary, Alberta T2P 3N4
Main phone: 403-205-8300
Website: www.keyera.com%SEDAR: 00019203E
