Three months ended March 31, 2008
TSX:KEY.UN; KEY.DB
CALGARY, May 13 /CNW/ -
2008 FIRST QUARTER HIGHLIGHTS- Keyera delivered strong first quarter financial results. Net earnings
were $55.5 million and included a non-cash future tax recovery of
$13.1 million and an unrealized gain of $12.8 million related to
financial contracts. Excluding the effect of these non-cash items,
net earnings were $3.9 million higher than the same period last year.
- First quarter cash flow from operating activities was $58.4 million,
up slightly from the first quarter of 2007. Distributable cash
flow(1) was $40.5 million ($0.66 per unit), 10% higher on a per unit
basis than the same period last year. Distributions to unitholders
totaled $25.7 million in the first quarter, or $0.42 per unit,
including the special distribution of $0.02 paid on January 2, 2008.
Excluding the special distribution, the payout ratio in the first
quarter was 60%.
- Keyera announced an 8% distribution increase on February 12, its
sixth distribution increase since inception. Beginning with the
February distribution, payable on March 17, Keyera's cash
distribution increased to 13.5 cents per unit per month, or $1.62 per
unit annually.
- All business segments delivered strong first quarter results, driven
by customer activity and growth capital projects completed in
previous years. Contribution from Gathering and Processing of
$29.0 million was particularly strong, up 35% from the first quarter
of 2007. Contribution from NGL Infrastructure was $12.8 million, 4%
higher than the same period last year. The Marketing business also
had a strong quarter, delivering contribution of $27.1 million,
including an unrealized gain from the change in fair value of
financial contracts of $12.3 million.
- Keyera invested $49.8 million on growth capital projects and
acquisitions in the first quarter and anticipates its 2008 capital
expenditures will be between $150 and $200 million. This assumes that
key projects proceed as planned and there is no material change in
the economic or fiscal environment.
- In the first quarter, Keyera completed the construction of a 24
kilometre extension of the Caribou North gathering system, a truck
terminal expansion at the Fort Saskatchewan facility and various
smaller projects around its facilities. Keyera also acquired a
diluent distribution terminal in the Edmonton/Fort Saskatchewan area
and, in May, acquired a 35.6% ownership interest in the West Pembina
gas plant.
(1) See "Non-GAAP Financial Measures" on page 4 and a reconciliation of
distributable cash flow to cash flow from operating activities on
page 19.Message to Unitholders
I am very pleased to announce another quarter of very strong financial
and operating results. These results come from a combination of the execution
of our business strategy, customer activity around our facilities and the
investment we have made in strategic infrastructure over the past several
years. I am proud to say that we continue to pursue our growth strategy by
targeting internal growth projects and strategic acquisitions, and we
completed a number of such projects in the first quarter.
Enhanced by the inclusion of $25.9 million of non-cash items related to
future income tax and financial contracts, net earnings of $55.5 million were
significantly higher than in first quarter of last year. First quarter cash
flow from operating activities was $58.4 million and distributable cash flow
was $40.5 million, or $0.66 per unit. This was 10% higher than the $0.60 per
unit posted in the same period last year. Distributions to unitholders were
$25.7 million in the first quarter, or $0.42 per unit, including the special
distribution of $0.02 paid on January 2, 2008. This allowed us to utilize the
remaining $14.8 million of cash to fund growth capital initiatives. Excluding
the special distribution, the payout ratio for the quarter was 60%.
In February we announced an 8% increase in our distributions to
13.5 cents per unit per month, or $1.62 per unit annually, effective with the
February distribution, payable to unitholders on March 17. This marks our
second increase in the last ten months and our sixth distribution increase
since inception. Since inception our unitholders have received an 8% compound
annual growth rate in distributions per unit.
All three of our business lines contributed to these strong results.
Significant producer activity around our gas plants resulted in contribution
increasing again this quarter in the Gathering and Processing segment. First
quarter contribution of $29.0 million was up 35% from the same period last
year and another 4% higher than the fourth quarter of 2007. Our NGL
Infrastructure also had a strong quarter, posting contribution of
$12.8 million, a 4% increase from the same period last year. Marketing
contribution of $27.1 million was significantly higher than the first quarter
of 2007 due to very strong operational results and the recording of a
$12.3 million non-cash unrealized gain for the quarter.
Keyera initiated and completed a number of internal projects and
acquisitions in the first quarter. In the first quarter, we acquired a diluent
distribution terminal in the Fort Saskatchewan/Edmonton area for $32 million,
which will be used primarily to deliver condensate into Alberta for use as
diluent in the oil sands sector. Known as the Alberta Diluent Terminal, the
facility will significantly enhance the capability and flexibility of Keyera's
existing logistics and storage businesses and will establish Keyera as a key
supplier of diluent in the province. Subsequent to the ADT acquisition, we
acquired an adjacent eight acre parcel of land for an additional $3.3 million.
Over the next year, we anticipate spending an additional $18 million to
integrate the facility with Keyera's NGL Infrastructure in the area.
On May 1, we closed the acquisition of a 35.6% ownership interest in the
ATCO West Pembina gas plant for $26 million and became plant operator. The
plant is located in an area of west central Alberta where the demand for sour
gas processing is increasing. Its 145 million cubic feet per day of sour gas
processing capacity, "deep cut" liquids extraction capability and
70 kilometres of gathering pipelines will allow us to provide a wide range of
services to customers. This acquisition further solidifies our position as the
leader in sour gas processing in Alberta.
At Fort Saskatchewan, we completed an expansion of our truck terminal and
continued work on our storage expansion project. The first cavern well bore is
expected to be drilled in the second quarter. In the North Central Region, we
received regulatory approval from the Energy Resources Conservation Board to
begin construction of the ethane extraction project at the Rimbey gas plant.
We have commenced work on this project and expect it to be completed in mid
2009. In northeastern British Columbia, we completed construction of the
Caribou North gas gathering system extension during the first quarter. This
24 kilometre pipeline project was completed on budget and on time and opens up
access to approximately 500 square kilometres of geologically prospective
lands north of the Caribou gas plant in the Trutch and Bougie areas. In
conjunction with this pipeline extension, we have initiated a detailed
engineering study to expand the Caribou gas plant capacity by about 60%, or
40 million cubic feet per day.
With the level of activity underway, Keyera now expects its 2008 growth
capital spending to be between $150 million and $200 million, assuming key
projects proceed as planned and there is no material change in the economic or
fiscal environment.
On behalf of the Fund's directors and management team, I thank you for
your continued support and look forward to continued success in 2008.
Jim V. Bertram
President and CEO
Keyera Facilities Income Fund
Contribution 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. Because of 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. Because 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, which is found
in the financial statements.-------------------------------------------------------------------------
Contribution by Operating Segment Three months ended
(in thousands of dollars) March 31,
2008 2007
-------------------------------------------------------------------------
Gathering & Processing(1)
Revenue before inter-segment eliminations(4) 49,815 42,708
Operating expenses before inter-segment
eliminations(4) (20,863) (21,226)
-------------------------------------------------------------------------
Gathering & Processing contribution 28,952 21,482
-------------------------------------------------------------------------
NGL Infrastructure(1)
Revenue before inter-segment eliminations(4) 18,162 17,681
Operating expenses (5,896) (5,492)
Unrealized gain/(loss) 487 112
----------------------
Operating expenses before inter-segment
eliminations(4) (5,409) (5,380)
-------------------------------------------------------------------------
NGL Infrastructure contribution 12,753 12,301
-------------------------------------------------------------------------
Marketing(2)
Revenue 481,034 312,799
Unrealized gain/(loss) 12,300 (5,457)
----------------------
Revenue before inter-segment eliminations(4) 493,334 307,342
Operating expenses before inter-segment
eliminations(4) (465,288) (298,056)
General & administration (936) (813)
-------------------------------------------------------------------------
Marketing contribution 27,110 8,473
-------------------------------------------------------------------------
Total contribution 68,815 42,256
-------------------------------------------------------------------------
Other expenses(3) (24,467) (20,396)
-------------------------------------------------------------------------
Earnings before income tax and
non-controlling interest 44,348 21,860
-------------------------------------------------------------------------
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 May 13, 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 March 31, 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. For example, the discussions with respect
to possible amendments to federal legislation imposing taxes on the
distributions of publicly traded income trusts and partnerships and the
proposed changes in the Alberta royalty system are based solely on news
releases and background information prepared by the federal and Alberta
governments respectively. 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 statement of net earnings contained in the unaudited interim
consolidated financial statements includes 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 months ended March 31, 2007 and the results
of operations of each of those entities and Alberta Diluent Terminal Limited
Partnership ("ADTLP") for the three months ended March 31, 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
In the first quarter of 2008, producers drilled approximately 5,161 wells
in Canada, virtually the same as the 5,243 wells drilled in the fourth quarter
of 2007, although down 15% from the first quarter last year. A number of
factors contributed to the decline in wells drilled in 2008, including lower
natural gas prices, and the announcement of changes to the Alberta royalty
regime.
In the foothills front region of Alberta, the number of wells drilled in
the first quarter declined by 16% compared to the same period in 2007. The
average depth of wells drilled in the region during the first quarter was
2,420 metres, similar to the depth drilled in the first quarter of last year.
In the central Alberta region, the number of wells drilled dropped by about 6%
compared to the first quarter of 2007, with the average depth decreasing
approximately 6% to 1,132 metres. British Columbia experienced a 19% drop in
the number of wells drilled compared to the first quarter of last year. The
average depth per well in British Columbia increased to just over
2,000 metres, 18% higher than the first quarter of last year.
Natural gas inventory levels in North America declined significantly over
the winter months. At the end of the first quarter, gas inventories in the
United States were at their lowest level in at least 36 months and were in
line with the five year average for that time of year. This decline resulted
from a number of factors, including increased use of natural gas for
electrical generation, higher demand resulting from more normal winter weather
in North America and lower imports of LNG. As a result of these factors,
natural gas prices have strengthened significantly in 2008. At the end of the
first quarter, the price of natural gas at the AECO hub in Alberta had
increased to approximately $8.93 per mcf, about $1.78 per mcf higher than the
same time last year. Over the same period, West Texas Intermediate oil has
increased over $45 per barrel and, at quarter end, was trading at about
$105 per barrel.
With natural gas supply and demand coming back into balance and an
apparent reduction in drilling costs in western Canada, indications are that
drilling activity may increase throughout the remainder of the year. The
Petroleum Services Association of Canada has revised its 2008 forecast of
wells drilled in Canada from 14,500 to 16,500.
Climate change regulations
Under Alberta's rules dealing with greenhouse gas emissions, facilities
with large emissions of CO(2) equivalent ((greater than)100 kilotonnes per
year) must reduce net emissions intensity to 88% of the average emissions
intensity at that facility between 2003 and 2005. If the actual emissions
intensity is above the target, the facility licensee may purchase "emissions
offsets", or fund credits at a cost of $15/tonne of CO(2) equivalent, or
emission "performance credits". Keyera operates three facilities which are
subject to these requirements: the Strachan, Rimbey and Brazeau River gas
plants. These requirements came into effect on July 1, 2007. The cost of these
new rules for Keyera for the second half of 2007 was less than $200,000.
Keyera's management anticipates that a portion of these costs will be
recoverable from customers as flow-through operating costs. Projects
implemented since 2002 at Keyera's facilities could generate emissions offsets
or performance credits; however, it is premature to determine what benefit, if
any, could be realized from those actions. Keyera is in the process of
preparing an application for emissions offsets from the acid gas injection
project at its Brazeau River gas plant.
On March 10, 2008, the federal government released further details of its
emissions reductions plan for larger emitters. Under the federal government's
plan, existing facilities are expected to improve their emissions intensity
(compared to 2006) by 18% in 2010 and an additional 2% each year thereafter.
The March 10 announcement states that these expectations will apply to
upstream oil and gas facilities that emit 3 kilotonnes per year or more of
CO(2) equivalent. Keyera operates 30 facilities, including plants and
compressors, with current emissions that exceed that threshold. The
announcement also indicates that the emissions requirements will only apply to
companies that are larger than a specified size - 10,000 barrels of oil
equivalent per day. It is not clear how this threshold will apply to Keyera.
The primary compliance mechanisms available to comply with the proposed
federal requirements will be emissions reductions, contributions to a
technology fund and the purchase of credits through a trading market.
Contributions to the technology fund will be limited and the contribution rate
will be $15/tonne between 2010 and 2012 and $20/tonne thereafter. The federal
government has predicted that carbon prices per tonne in this trading market
will be $25/tonne in 2010, $50/tonne in 2016 and $65/tonne in 2020. Keyera's
management anticipates that, if these requirements become applicable to
Keyera, a portion of these costs will be recoverable from customers as
flow-through operating costs. Alternative compliance mechanisms that will be
available to a limited extent under the federal initiative include limited use
of "clean development mechanism" credits under the Kyoto Protocol and limited
credits for early action.
The federal government has stated that it is committed to achieving a
common threshold and reporting regime in Alberta. The federal government has
also announced that it "will continue discussion with the Government of
Alberta on these issues, seeking a common practical approach to emissions
coverage, including the phasing of thresholds and the identification of
additional measures that could be implemented to address emissions in the rest
of the sector." The effect of these initiatives on Keyera can not be
determined until the federal and provincial governments provide additional
information.
On April 3, 2008, the British Columbia government announced a cap and
trade system that would establish an overall cap or limit on emissions with
the trading system allowing regulated emitters to buy and sell emissions
allowances or buy offset units. The cap and trade system will apply to
industries designated by the B.C. government through regulations. The
government has not released a draft of those regulations, but indications are
that the cap and trade system will apply to the upstream oil and gas industry.
The effect on Keyera can not be determined until the B.C. government provides
additional information.
A more complete description of the environmental regulations that affect
Keyera's businesses can be found in Keyera's Annual Information Form, which is
available on SEDAR.
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.
Continuing strong performance in all segments of the business generated
operating margin of $69.8 million in the first quarter of 2008, an increase of
$26.7 million compared to last year. Included in the 2008 operating margin was
$12.8 million of unrealized gain related to the change in fair value of
financial contracts compared to an unrealized loss of $5.3 million contained
in the 2007 results. Excluding the effect of unrealized gains and losses,
operating margin in the first quarter of 2008 was $57.0 million, $8.6 million
higher than the first quarter of 2007. This increase was due primarily to the
tie-in of new sour gas volumes and NGL extraction activities in the Gathering
and Processing segment and strong winter season results in the Marketing
segment.
Net earnings before tax and non-controlling interest in the first quarter
of 2008 were $44.3 million, an increase of $22.4 million compared to the first
quarter of 2007. Of this increase, $18.1 million was attributable to the
unrealized gains and losses. The remainder was due to the higher operating
margin, partially offset by a $3.6 million increase in general and
administrative expenses due primarily to higher incentive plan costs and
$0.7 million of higher interest costs.
An income tax recovery of $11.2 million was recorded in the first quarter
of 2008 bringing net earnings to $55.5 million, an increase of $36.5 million
compared to the first quarter of 2007. The income tax recovery was due to a
$13.1 million non-cash recovery related to a reduction in the future tax
liability resulting from the internal reorganization completed in January
2008, partially offset by $1.9 million of current tax expense.
Gathering and Processing
First quarter Gathering and Processing operating margin of $27.7 million
was 34% higher than the same period last year. This increase was due to higher
revenues compared to the first quarter of 2007.
Gathering and Processing revenue for the first quarter of 2008 was
$48.6 million, an increase of $6.6 million, or 16%, compared to the first
quarter of 2007. The tie-in of new higher fee volumes at the Bigoray and
Strachan gas plants, offsetting declines in lower priced volumes, and the
revenue generated from NGL extraction activities at the Rimbey and Paddle
River gas plants were significant contributors to the increase. The NGL
extraction activities contributed approximately $2.3 million to operating
margins in the first quarter of 2008 and are dependent upon favourable price
differentials between the NGL products produced and natural gas. Therefore,
these margins may not be permanently sustainable at current levels.
The favourable variances discussed above more than offset the decrease in
throughput and revenue at the Brazeau River gas plant resulting from the
curtailment of sour gas volumes during part of the first quarter of 2008. The
curtailment was necessary due to the loss of acid gas processing capability as
the old disposal reservoir approached its capacity. A new well was put into
service in March 2008 and volumes are returning to previous levels.
Gathering and Processing operating expenses for the first quarter of 2008
were $20.9 million, a decrease of $0.4 million, compared to the first quarter
of 2007. The decrease was primarily due to ongoing cost control efforts which
more than offset rising costs from general price increases. As well, a
significant amount of preventive maintenance work was completed last year at
the Caribou gas plant, where breakdowns in the first quarter of 2007
contributed to higher operating costs in that period.
Average gross processing throughput in the first quarter of 2008 was
843 million cubic feet per day, down 4% from the fourth quarter of 2007 and
about the same as the first quarter last year.
Gathering and Processing - North Central Region
The North Central Region delivered higher operating margin compared to
the first quarter of last year primarily due to higher margins at the Rimbey
and Caribou gas plants. Throughput for the quarter was 424 million cubic feet
per day, 6% lower than the first quarter of last year. This decrease was
primarily due to throughput declines at the Chinchaga and Rimbey gas plants.
In the first quarter, Keyera received regulatory approval to proceed with
its ethane extraction project at the Rimbey gas plant. Final design work and
bidding of equipment is underway and work is expected to begin in the second
quarter. The cost of the project is now estimated at $28 million and project
completion is expected to be in mid 2009. When operational, the project will
produce approximately 5,000 barrels per day of ethane. The regulatory
approvals were appealed by two energy industry participants in April and those
appeals are expected to take several months to reach a conclusion. The appeals
are not currently expected to affect project timing.
In the first quarter, Keyera installed a vapour recovery unit on the
flare system at the Rimbey gas plant. The unit will recover gas that would
otherwise be burned in the flare system and utilize it as fuel, thereby
reducing greenhouse gas emissions and fuel gas consumption at the plant. The
unit was commissioned in April and is currently being performance tested and
optimized.
A regularly scheduled maintenance turnaround at the Gilby gas plant is
planned to commence in May and last for ten days to two weeks. Some natural
gas volumes will be diverted to the Rimbey gas plant during the Gilby
shutdown. Costs associated with the turnaround will be fully recovered in
2008.
In December 2007, a number of land parcels in the areas around the
Caribou North gas gathering system were posted and sold in one of the largest
land sales in British Columbia's history. A number of producers conducted
active winter drilling programs in the first quarter and some production from
the winter drilling has been tied into the Caribou gas plant for processing.
In April, a producer completed a pipeline crossing of the Buckinghorse River
northwest of the plant and immediately began delivering significant gas
volumes. As a result, the Caribou gas plant is now operating near its capacity
of 65 million cubic feet per day.
In the first quarter, Keyera completed construction of a pipeline
extension at the north end of the Caribou North gas gathering system. The new
pipeline connects the Caribou gas plant with the Bougie gathering system and
plant site acquired in the second quarter of 2007 and crosses a number of the
sections of land that were posted in December.
As a result of the drilling activity in the area, Keyera has begun
detailed engineering to expand the Caribou gas plant processing capacity by
40 million cubic feet per day, to 105 million cubic feet per day. A decision
on whether to proceed with the expansion is expected in mid 2008.
Gathering and Processing - Foothills Region
The Foothills Region delivered significantly higher operating margin in
the first quarter compared to the same period last year. Higher sour gas
volumes at the Strachan and Bigoray gas plants contributed to the increase.
First quarter throughput in the Foothills Region was 418 million cubic
feet per day, 7% higher than the first quarter of 2007, although down somewhat
relative to the fourth quarter. Higher throughput at the Paddle River gas
plant as a result of the NGL extraction activities initiated in the fourth
quarter of 2007 also resulted in higher first quarter operating margins.
However, temporary volume restrictions in the first quarter at the Brazeau
River gas plant somewhat offset the throughput increases.
A new acid gas injection well was commissioned in February at the Brazeau
River gas plant. This new well provides access to a depleted gas reservoir,
replacing the previous reservoir which was approaching capacity. Despite
redirecting volumes to other Keyera plants for processing, some restrictions
on processing of sour gas volumes at Brazeau River were necessary for a short
period until the new well became operational. Since February, Brazeau River
has returned to previous processing levels. In April, construction was
completed on a new gathering pipeline southwest of the Brazeau River gas plant
and volumes in the area were redirected to Brazeau River for processing.
In the Pembina region, where Keyera's Brazeau River, Bigoray, Pembina
North and the recently acquired West Pembina gas plants are located, producers
continued to deliver sour Nisku gas at increasing levels. The delivery of
these incremental gas volumes to Keyera facilities has resulted in sour gas
handling nearing capacity in the area. Keyera is evaluating alternatives to
enhance sour gas processing services in the area.
Throughput remained steady at the Strachan gas plant in the first
quarter. A third, producer owned, field compressor is currently being
installed in a producing region southwest of the Nordegg River gas plant,
which is expected to deliver incremental volumes to the plant late in the
second quarter.
In the first quarter, Keyera agreed to acquire a 35.6% interest in the
ATCO West Pembina gas plant from three plant owners for a purchase price of
approximately $26 million. The plant has 145 million cubic feet per day of
sour gas processing capacity, "deep cut" natural gas liquids extraction
capability, 520 tonnes per day of sulphur handling capacity and 70 kilometres
of associated gathering pipelines. The transaction closed on May 1 and
approximately 40 of the plant's operations, maintenance and administrative
staff joined Keyera at that time. Concurrent with the closing, Keyera became
operator of the facility.
The scheduled maintenance turnaround for the Easyford oil battery was
completed in early May. The turnaround was approximately ten days and the
costs will be fully recovered in 2008. A turnaround is scheduled for the
Nordegg River gas plant in June. The turnaround is expected to last about
10 days and costs will be fully recoverable in the current year. During the
Nordegg River outage, some volumes will be diverted to the Strachan gas plant
for processing.
NGL Infrastructure
First quarter NGL Infrastructure operating margin of $5.5 million was 27%
higher than the first quarter of 2007. This increase was the result of higher
revenues compared to the first quarter of 2007.
NGL Infrastructure revenue for the first quarter of 2008 was
$10.9 million, an increase of $1.2 million compared to the first quarter of
2007. The higher revenue was primarily the result of continued demand for
storage at Fort Saskatchewan. Other contributors included higher volumes
transported on the Rimbey and Fort Saskatchewan pipelines and higher volumes
of propane moving through the rail rack at Edmonton. Somewhat offsetting these
favourable variances was lower third party processing revenue at the Fort
Saskatchewan fractionation plant.
NGL Infrastructure operating expenses for the first quarter of 2008 were
$5.4 million, unchanged compared to the first quarter of 2007. Lower operating
costs due to the reduction in fractionation volumes processed were offset by
higher integrity program costs.
In January, a leak in one of the pipelines on the Fort Saskatchewan
system resulted in the system being out of service for several days. Leakage
was minimal and the repair was completed quickly.
Construction of the truck terminal expansion at the Fort Saskatchewan
facility was completed in the first quarter and became operational in April.
The expanded terminal has the ability to load propane and butane and to load
or offload condensate. The new terminal enhances Keyera's service offering and
provides Keyera and its customers with greater logistics flexibility.
The connections and tie-ins for the fourth pipeline between the Edmonton
Terminal and the Fort Saskatchewan facility are under construction and are
expected to be completed in the third quarter.
Work is continuing on the storage facility expansion at Fort
Saskatchewan. Site preparation work is complete and the first well is expected
to be drilled in June. Once the well is completed, the cavern washing process
will begin. The cavern is expected to be put into service in mid 2010.
In late March, a subsidiary of Keyera acquired a diluent distribution
terminal in Edmonton. Known as the Alberta Diluent Terminal ("ADT"), the
terminal will enable the import and offload of over 50,000 barrels per day of
condensate, for use in the oil sands sector as diluent. A key feature of the
terminal is its ability to handle unit train deliveries, which consist of 100
rail cars. In addition to its rail handling and unloading capabilities, the
terminal also has a truck loading rack and 435,000 barrels of product storage
in above ground tanks. Subsequent to the acquisition of the ADT facility, the
same subsidiary of Keyera acquired an 8 acre parcel of land adjacent to the
ADT site for $3.3 million. Concurrent with the ADT announcement, Keyera
announced plans to invest $18 million to integrate the terminal with Keyera's
NGL infrastructure in the area, connecting the ADT facility by pipeline to
Keyera's Edmonton and Fort Saskatchewan facilities. The acquisition of the
terminal has generated significant interest from companies active in the oil
sands sector and Keyera is currently evaluating new proprietary and third
party business opportunities for the facility.
Marketing
Keyera's Marketing operating margin in the first quarter of 2008 was
$36.6 million, $18.6 million higher than the first quarter of 2007. Virtually
all of the variance was due to the unrealized gains related to the change in
fair value of financial contracts that are included in the results. Excluding
the unrealized gains and losses, operating margin in the first quarter of 2008
was $24.3 million, $0.8 million higher than in the first quarter of 2007.
Marketing revenue for the first quarter of 2008 was $493.3 million, an
increase of $186 million compared to the first quarter of 2007. The increase
was due to higher NGL sales volumes, higher prices and approximately
$12.3 million of unrealized gains related to the change in fair value of
financial contracts. The unrealized gain is discussed later in this section.
The table below outlines the composition of the revenues generated from
Keyera's Marketing business.Composition of Marketing Revenue
(in thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Physical sales 495,868 311,757
Financial instruments - realized (14,834) 1,042
Financial instruments - unrealized 12,300 (5,457)
-------------------------------------------------------------------------
Marketing revenue 493,334 307,342
-------------------------------------------------------------------------
-------------------------------------------------------------------------NGL sales volumes for the first quarter of 2008 averaged 66,100 barrels
per day an increase of approximately 6,500 barrels per day compared to the
first quarter of 2007. The increase was due primarily to the strong demand for
propane and condensate during the winter season. Prices for all NGL products
are generally correlated to crude oil and were strong throughout most of the
first quarter of 2008.
Marketing operating expenses for the first quarter of 2008 were
$456.8 million, an increase of $167.4 million compared to the first quarter of
2007. The $167.4 million increase is related to the growth in sales volumes
and higher hydrocarbon prices.
Keyera's crude oil midstream business continued to meet expectations in
the first quarter of 2008. Volumes delivered to field oil terminals remained
steady and quality differentials remained favourable.
NGL product inventories were $36.7 million at the end of the first
quarter, $23.4 million lower than the first quarter of 2007. This decrease was
due primarily to lower volumes in storage, partially offset by higher prices.
The 2007 inventories included a planned accumulation of product to meet
contracted sales upcoming in future periods.
Financial contracts are used by Keyera to protect 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 gains or losses in the
proceeds that will be realized upon the sale of the products. 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 be expected to
fully offset future propane, butane and condensate price movements.
In the first quarter of 2008, most of the financial contracts held at
December 31, 2007 matured. As the price of crude oil was higher than the
contracted fixed price, Keyera was obligated to pay $14.8 million to the
counterparties under the financial contracts. These payments were recorded in
revenue as offsets to the actual proceeds received from the sale of physical
products. As the financial contracts matured and no further obligation
existed, previously accrued unrealized losses were reversed, generating most
of the unrealized gain. The remainder of the unrealized gain was related to
changes in the value of financial contracts entered into during the first
quarter of 2008.
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 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 first quarter of 2008 were
$8.9 million, up $3.6 million from the first quarter of 2007. Long term
incentive plan costs accounted for $2.9 million of the variance, reflecting a
higher unit price and the effect of the distribution increase implemented in
February 2008. Excluding the effect of the incentive plan costs, general and
administrative expenses were $0.7 million higher reflecting higher activity
levels and staff costs.
Interest expense, net of interest revenue, was $5.3 million for the first
quarter of 2008, $0.7 million greater than the first quarter of 2007. The
increase was due to higher borrowings used to fund capital projects.
Depreciation and amortization expense was $10.5 million for the first
quarter of 2008, virtually unchanged from the first quarter of 2007.
An income tax recovery of $11.2 million was recorded in the first quarter
of 2008, compared to $2.6 million of income tax expense incurred in the first
quarter of 2007. This recovery was due to a $13.1 million reduction in future
income tax liabilities resulting from the internal reorganization completed in
January 2008, offset by $1.9 million of current tax expense.
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 March 31, 2008, operating revenues and accounts receivable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $21.5 million for March 2008 operations.
Estimation of Gathering and Processing and NGL Infrastructure operating
expenses:
At March 31, 2008, operating expenses and accounts payable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $7.8 million for March 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 $6.6 million at March 31, 2008. Operating expenses and accounts
payable contained an estimate of $9.5 million.
Estimation of Marketing revenues:
At March 31, 2008, the Marketing sales and accounts receivable contained
an estimate for March 2008 revenues of $71.5 million.
Estimation of Marketing product purchases:
Marketing cost of goods sold, inventory and accounts payable contained an
estimate of NGL product purchases of $96.0 million at March 31, 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. In
the first quarter of 2008, 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
March 31, 2008, the discounted net present value of this obligation was
$39.4 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
Cash flow from operating activities during the first quarter of 2008 was
$58.4 million, of which $17.6 million was generated from a decrease in
non-cash working capital. Before changes in non-cash working capital, cash
flow from operating activities was $40.8 million, from which $23.8 million of
distributions were paid to unitholders. Keyera received $0.8 million from the
issuance of trust units under the distribution reinvestment plan ("DRIP"),
$17.6 million from changes in non-cash working capital and $0.2 million of
proceeds from the disposition of equipment, bringing cash available to
$35.6 million. Capital expenditures required $44.7 million of cash, resulting
in a net cash outflow of $9.1 million in the first quarter of 2008.
Cash and working capital were $56.1 million at March 31, 2008, compared
to $75.7 million at December 31, 2007. The decline in working capital was
primarily due to funding capital expenditures.
Keyera has no exposure to asset backed commercial paper. Surplus cash is
held in interest bearing deposit accounts or invested in term deposits,
guaranteed investment certificates, or Bankers' Acceptances issued by Canadian
chartered banks.Capital Expenditures
Three months ended
March 31,
Capital Additions and Acquisitions
(in millions of dollars) 2008 2007
-------------------------------------------------------------------------
Growth capital expenditures 49.5 3.2
Maintenance capital expenditures 0.3 0.4
-------------------------------------------------------------------------
Total capital additions and acquisitions 49.8 3.6
-------------------------------------------------------------------------
In the first quarter of 2008, additions to property, plant and equipment
amounted to $49.8 million, consisting of $0.3 million of maintenance capital
and $49.5 million of growth capital. In addition to maintenance capital
expenditures, Keyera incurred maintenance and repair expenses of $1.1 million
that were included in operating costs. The growth capital expenditures
included $32 million related to the acquisition by a subsidiary of a
distribution terminal in the Edmonton area.
Other significant growth capital expenditures during the first quarter
were:
- $5.7 million for the construction of the North Trutch pipeline to
expand the capture area of the Caribou gas plant
- $4.0 million related to the construction of acid gas injection
facilities and other upgrades at the Brazeau River gas plant
- $2.1 million related to the expansion of the truck loading facility
at Fort Saskatchewan to increase capacity
- $1.5 million for the acquisition of pipelines in the West Pembina
region to expand the capture area of the Brazeau River gas plant
- $1.4 million for the construction of camp facilities at the Caribou
gas plant
- $0.6 million related to the construction of the pipeline between the
Edmonton and Fort Saskatchewan facilities to enhance deliverability
and operational flexibility
- $0.5 million on the storage expansion project at Fort Saskatchewan
- $0.3 million for the construction of a truck loading facility at the
Strachan gas plantGrowth 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. These growth capital expenditures could change
if one or more acquisition opportunities become available.
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. Historically, the largest allocation of working capital to fund
inventory has been approximately $84 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.
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 Keyera's 2007 MD&A and to Keyera's Annual
Information Form 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
March 31, 2008 there were no drawings 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 March 31, 2008:-------------------------------------------------------------------------
Covenant Position as at March 31, 2008
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 3.5 1.48
-------------------------------------------------------------------------
Debt to Capitalization not to exceed 0.55 0.33
-------------------------------------------------------------------------
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 March 31, 2008 for the notes maturing in 2008, 2009, 2010 and
2013:
-------------------------------------------------------------------------
Covenant Position as at March 31, 2008
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 3.5 2.08
-------------------------------------------------------------------------
EBITDA to Interest Charges not less than 3.0 9.69
-------------------------------------------------------------------------
Priority Debt to Total Assets not to exceed 15% 0%
-------------------------------------------------------------------------
The following are the ratios calculated in accordance with the covenants
as at March 31, 2008 for the notes maturing in 2017 and 2022:
-------------------------------------------------------------------------
Covenant Position as at March 31, 2008
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 5.0 1.48
-------------------------------------------------------------------------
EBITDA to Interest Charges not less than 2.0 8.35
-------------------------------------------------------------------------
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.
Risk factors
For a 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 months ended
March 31,
(in thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Cash flow from operating activities 58,412 57,591
Net earnings 55,502 19,012
Cash distributions paid 23,812 21,763
-------------------------------------------------------------------------
Excess (shortfall) of cash flow from
operating activities over distributions paid 34,600 35,828
Excess (shortfall) of net earnings
over distributions paid 31,690 (2,751)
-------------------------------------------------------------------------For the first quarter of 2008, cash flow from operating activities was
$58.4 million, $34.6 million greater than distributions paid. Included in the
calculation of cash flow from operating activities was $17.6 million generated
from a change in non-cash working capital primarily due to the reduction of
inventory, partially offset by the use of funds to finance growth in accounts
receivable. Cash flow from operating activities in the first quarter of 2008
was sufficient to fund cash distributions paid.
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 will be less than distributions paid during periods of inventory
accumulation and will be in a surplus position during periods when inventories
are drawn down and sold.
For the first quarter of 2008, net earnings of $55.5 million exceeded
cash distributions paid for the first quarter of 2008 by $31.7 million. The
strong operating margins earned in the first quarter of 2008 were augmented by
non-cash items for future income tax recoveries ($13.1 million) and unrealized
gains on financial instruments ($12.8 million) that more than offset the
non-cash charges for depreciation, amortization and accretion ($11.2 million)
in the calculation of net income.
Future income taxes can fluctuate from period to period as a result of
changes in tax laws and rates (such as the enactment of income taxes on the
distributions of flow-through entities or the reduction of income tax 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.
Due to the inclusion of such non-cash charges in net earnings,
distributions paid may exceed net earnings. Although non-cash charges do not
affect current period cash generation, any excess of distributions over net
earnings would be a return of unitholders' capital.
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
Distributable Cash Flow March 31,
(in thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Cash flow from operating activities 58,412 57,591
Add (deduct):
Changes in non-cash working capital (17,569) (20,376)
Maintenance capital (341) (351)
Non-controlling interest distributable cash flow - (316)
-------------------------------------------------------------------------
Distributable cash flow 40,502 36,548
-------------------------------------------------------------------------
Distributions declared to unitholders 25,661 21,773Distributable cash flow of $40.5 million in the first quarter of 2008
exceeded distributions declared to unitholders of $25.7 million. The
distributions declared in the first quarter of $25.7 million 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 first quarter of 2008, $0.5 million of convertible debentures
(before adjustment for deferred financing costs) were converted into
45,164 trust units and 45,374 trust units were issued under the DRIP in
consideration of $0.8 million, bringing the total units outstanding at
March 31, 2008 to 61,354,910. Convertible debentures outstanding at March 31,
2008 were $21.3 million.
FUND REORGANIZATION AND TAXATION INFORMATION
In June 2007, unitholders approved an internal reorganization of Keyera's
legal structure (the "Reorganization"). On January 2, 2008, upon receipt of a
favourable advance ruling from the Canada Revenue Agency and the final order
from the Alberta Court of Queen's Bench approving the plan of arrangement for
the amended Reorganization, the Reorganization was completed. The
Reorganization is described in detail in the Material Change Report as 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
in 2011, when Keyera is expected to become taxable under the SIFT Legislation.
While there were no significant immediate tax savings within Keyera's
structure as a result of the Reorganization, our recent capital investment
program 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.
With the announcement that provincial income tax rates applicable to
Keyera and other SIFTs will be harmonized with corporate income tax rates, it
is not expected to be materially more costly for Keyera to remain an income
trust after January 1, 2011. 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, regardless
of its structure. Although no decision has been made with respect to Keyera's
future structure, Keyera is well positioned to continue as an income trust.
However, if income trusts are no longer perceived as an attractive investment
vehicle, Keyera is also well positioned to consider conversion to a corporate
structure, at the appropriate time.
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
Convergence of Canadian GAAP with International Financial Reporting
Standards ("IFRSs")
In April 2008, 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 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 interim period ended March 31, 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)
-------------------------------------------------------------------------
Jun 30, Sep 30, Dec 31, Mar 31,
2006 2006 2006 2007
-------------------------------------------------------------------------
Operating revenues:
- Marketing 279,241 279,492 286,325 307,342
- Gathering and Processing 40,772 44,290 43,621 41,949
- NGL Infrastructure 8,549 10,878 10,855 9,692
Net earnings(1) 25,969 11,797 14,928 19,012
Net earnings per unit ($/unit)
Basic 0.43 0.19 0.25 0.31
Diluted 0.39 0.16 0.24 0.31
Trust units outstanding
(thousands):
Weighted average (basic) 60,560 60,692 60,865 60,972
Weighted average (diluted) 62,768 62,817 62,869 62,918
Distributions to unitholders 21,631 21,679 21,742 21,773
-------------------------------------------------------------------------
Three months ended (Thousands of Canadian dollars)
-------------------------------------------------------------------------
Jun 30, Sep 30, Dec 31, Mar 31,
2007 2007 2007 2008
-------------------------------------------------------------------------
Operating revenues:
- Marketing 292,326 276,957 373,916 493,334
- Gathering and Processing 44,277 50,744 50,520 48,573
- NGL Infrastructure 9,525 10,044 11,849 10,870
Net earnings(1) (59,870) 15,310 40,027 55,502
Net earnings per unit ($/unit)
Basic (0.98) 0.25 0.65 0.91
Diluted (0.95) 0.25 0.64 0.88
Trust units outstanding
(thousands):
Weighted average (basic) 61,061 61,136 61,219 61,295
Weighted average (diluted) 62,967 63,011 63,059 63,105
Distributions to unitholders 22,538 22,931 22,965 25,661
-------------------------------------------------------------------------
(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 $0.42 per unit in the first quarter.
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".
FIRST 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 first quarter 2008
results at 8:00 am MDT (10:00 am EDT) on May 14, 2008. Callers may participate
by dialing either 800-732-6179 or 416-644-3416. A recording of the call will
be available for replay until midnight, May 21, 2008 by dialing 877-289-8525
or 416-640-1917 and entering pass code 21268304 followed by the pound 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)
March 31, December 31,
2008 2007
As at: $ $
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents 6,572 15,657
Accounts receivable 270,032 243,889
Inventory (note 4) 36,701 76,594
Other current assets 5,677 2,299
-------------------------------------------------------------------------
318,982 338,439
Property, plant and equipment 954,680 914,087
Intangible assets 5,818 6,394
Goodwill 71,234 71,234
Future income tax assets (note 8) 355 845
-------------------------------------------------------------------------
1,351,069 1,330,999
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 234,600 235,124
Distributions payable (note 11) 8,283 7,658
Current portion of long-term debt 20,000 20,000
-------------------------------------------------------------------------
262,883 262,782
Long-term debt (note 5) 313,298 313,243
Convertible debentures (note 6) 20,981 21,476
Asset retirement obligation (note 7) 39,355 37,807
Future income tax liabilities (note 8) 131,674 145,214
-------------------------------------------------------------------------
768,191 780,522
-------------------------------------------------------------------------
Unitholders' equity
Unitholders' capital (note 9) 684,485 681,925
Deficit (101,607) (131,448)
-------------------------------------------------------------------------
582,878 550,477
-------------------------------------------------------------------------
1,351,069 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, Comprehensive Income and
Deficit
For the Three Months Ended March 31
(Thousands of Canadian dollars, except unit information)
(unaudited)
2008 2007
$ $
-------------------------------------------------------------------------
Operating revenues
Marketing 493,334 307,342
Gathering and Processing 48,573 41,949
NGL Infrastructure 10,870 9,692
-------------------------------------------------------------------------
552,777 358,983
Operating expenses
Marketing 456,754 289,308
Gathering and Processing 20,863 21,226
NGL Infrastructure 5,409 5,380
-------------------------------------------------------------------------
483,026 315,914
-------------------------------------------------------------------------
69,751 43,069
General and administrative 8,904 5,347
Interest expense on long-term indebtedness 5,269 3,501
Other interest expense 22 1,127
Depreciation and amortization 10,536 10,588
Accretion expense (note 7) 672 646
-------------------------------------------------------------------------
25,403 21,209
-------------------------------------------------------------------------
Earnings before tax and non-controlling interest 44,348 21,860
Income tax (recovery) expense (note 8) (11,154) 2,582
-------------------------------------------------------------------------
Earnings before non-controlling interest 55,502 19,278
Non-controlling interest (note 18) - 266
-------------------------------------------------------------------------
Net earnings 55,502 19,012
Other comprehensive income - -
-------------------------------------------------------------------------
Comprehensive income 55,502 19,012
Deficit, beginning of period (131,448) (55,721)
Distributions to unitholders (note 11) (25,661) (21,773)
-------------------------------------------------------------------------
Deficit, end of period (101,607) (58,482)
-------------------------------------------------------------------------
Weighted average number of units
(thousands) (note 10)
- basic 61,295 60,972
- diluted 63,105 62,918
Net earnings per unit (note 10)
- basic 0.91 0.31
- diluted 0.88 0.31
-------------------------------------------------------------------------
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
For the Three Months Ended March 31
(Thousands of Canadian dollars)
(unaudited)
2008 2007
Net inflow (outflow) of cash: $ $
-------------------------------------------------------------------------
Operating activities
Net earnings 55,502 19,012
Items not affecting cash:
Depreciation and amortization 10,536 10,588
Accretion expense 672 646
Unrealized (gain) loss on derivative
instruments held for trading (12,787) 5,345
Future income tax (recovery) expense (note 8) (13,050) 1,396
Non-controlling interest (note 18) - 266
Asset retirement obligation expenditures
(note 7) (29) (38)
Changes in non-cash working capital (note 16) 17,568 20,376
-------------------------------------------------------------------------
58,412 57,591
-------------------------------------------------------------------------
Investing activities
Capital expenditures (49,797) (2,102)
Acquisition of non-controlling interest (note 18) - (1,513)
Proceeds on sale of assets 150 4,200
Changes in non-cash working capital (note 16) 5,146 (3,354)
-------------------------------------------------------------------------
(44,501) (2,769)
-------------------------------------------------------------------------
Financing activities
Repayment of credit facilities - (32,149)
Issuance of trust units (note 9) 816 800
Distributions paid to unitholders (note 11) (23,812) (21,763)
-------------------------------------------------------------------------
(22,996) (53,112)
-------------------------------------------------------------------------
Net cash (outflow) inflow (9,085) 1,710
-------------------------------------------------------------------------
Cash (bank indebtedness), beginning of period 15,657 (96)
-------------------------------------------------------------------------
Cash, end of period 6,572 1,614
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
For Three Months Ended March 31, 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 months ended March 31, 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:
March 31, December 31,
2008 2007
As at $ $
---------------------------------------------------------------------
NGLs 36,310 76,112
Natural gas - 162
Other 391 320
---------------------------------------------------------------------
Total inventory 36,701 76,594
---------------------------------------------------------------------
---------------------------------------------------------------------
For the period ended March 31, 2008, all inventory was carried at
cost, and the cost of inventory expensed in the period was $451,666.
5. Credit facilities and long-term debt
March 31, December 31,
2008 2007
As at $ $
---------------------------------------------------------------------
Bank credit facilities(a) - -
---------------------------------------------------------------------
Total credit facilities - -
---------------------------------------------------------------------
---------------------------------------------------------------------
Current portion of long-term debt 20,000 20,000
Long-term debt(b) 315,000 315,000
Deferred financing costs (1,702) (1,757)
---------------------------------------------------------------------
Total long-term debt 333,298 333,243
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 months ended March 31, 2008 included a fixed commitment
fee resulting in a weighted average interest rate of 12.0%
(three months ended March 31, 2007 - 5.42%). As at March 31,
2008, the balance outstanding on the bank credit facilities was
$nil (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 months ended March 31,
2008 were 3.63%, 5.94% and 6.28% for the notes due in 2008,
2010 and 2013 respectively (three months ended March 31, 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 months ended March 31, 2008 was 5.36% (three months ended
March 31, 2007 - 5.37%).
In 2007, $120,000 of unsecured senior notes were issued by KEFL
and guaranteed by the Partnership and the Fund in two tranches:
$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 months ended March 31, 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
$367 has been accrued for the three months ended March 31, 2008
(three months ended March 31, 2007 - $421). 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 March 31, 2008, $78,720
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 March 31, 2008, $2,881 has been
reclassified to unitholders' equity (December 31, 2007 - $2,857). As
at March 31, 2008, $299 of financing costs remain. The effective
interest rate for the three months ended March 31, 2008 was 7.36%
(three months ended March 31, 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 1,548
Liabilities disposed (643)
Liabilities settled (29)
Revisions in estimated cash flows -
Accretion expense 672
---------------------------------------------------------------------
Balance, March 31, 2008 39,355
---------------------------------------------------------------------
---------------------------------------------------------------------
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.
2008 2007
Three months ended March 31 $ $
---------------------------------------------------------------------
Earnings before tax and non-controlling
interest 44,348 21,860
Income from the Fund distributable
to unitholders (24,730) (12,623)
---------------------------------------------------------------------
Income before taxes - operating subsidiaries 19,618 9,237
---------------------------------------------------------------------
Income tax at statutory rate of
29.5% (2007 - 32.12%) 5,787 2,967
Non (taxable) deductible items excluded
from income for tax purposes (3,812) 570
Rate adjustments (13,691) (349)
Benefit of non-capital losses
previously not recorded - (566)
Adjustments to tax pool balances 24 (296)
Other 538 256
---------------------------------------------------------------------
(11,154) 2,582
---------------------------------------------------------------------
Classified as:
Current 1,896 1,186
Future (13,050) 1,396
---------------------------------------------------------------------
Income tax (recovery) expense (11,154) 2,582
---------------------------------------------------------------------
---------------------------------------------------------------------
For income tax purposes, the subsidiaries of the Fund have non-
capital losses carried forward of approximately $2,834 at March 31,
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 March 31,
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:
March 31, December 31,
2008 2007
As at $ $
---------------------------------------------------------------------
Property, plant and equipment (138,972) (152,747)
Asset retirement obligation 9,381 9,992
Long-term incentive plan 2,505 1,954
Intangible assets (936) (941)
Other (3,652) (3,472)
---------------------------------------------------------------------
Future income tax liabilities (131,674) (145,214)
---------------------------------------------------------------------
---------------------------------------------------------------------
Property, plant and equipment (495) (444)
Asset retirement obligation 80 78
Non-capital losses 770 832
Intangible assets - 379
---------------------------------------------------------------------
Future income tax assets 355 845
---------------------------------------------------------------------
---------------------------------------------------------------------
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
reorganization (note 19) - 1,225
Units issued on conversion of
convertible debentures 45,164 519
Units issued pursuant to DRIP 45,374 816
---------------------------------------------------------------------
Balance, March 31, 2008 61,354,910 684,485
---------------------------------------------------------------------
---------------------------------------------------------------------
10. Net earnings per unit
Basic per unit calculations for the three months ended March 31, 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 months ended March 31, 2008 and 2007 and
contributed to the increase in diluted weighted average number of
units for these periods.
2008 2007
Three months ended March 31 $ $
---------------------------------------------------------------------
Net earnings - basic 55,502 19,012
Effect of convertible debentures (net of tax) 248 255
---------------------------------------------------------------------
Net earnings - diluted 55,750 19,267
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended March 31 (thousands) 2008 2007
---------------------------------------------------------------------
Weighted average number of units - basic 61,295 60,972
Additional units if debentures converted 1,810 1,946
---------------------------------------------------------------------
Weighted average number of units - diluted 63,105 62,918
---------------------------------------------------------------------
---------------------------------------------------------------------
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 15,937
Unitholders' distributions declared 8,283
Unitholders' special distribution -
non cash portion (note 19) 1,225
Unitholders' special distribution -
cash portion (note 19) 216
---------------------------------------------------------------------
Balance, March 31, 2008 333,855
---------------------------------------------------------------------
---------------------------------------------------------------------
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 $3,085 for the three months ended
March 31, 2008 (three months ended March 31, 2007 - $1,136).
(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 1.32 Less than 1.42 Less than 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 greater 1.72 and greater 1.68 or greater 200%
-------------------------------------------------------------------------
As of March 31, 2008, 482,155 Performance Unit Awards (485,105 at
December 31, 2007) were outstanding: 162,730 effective July 1, 2005,
142,075 effective July 1, 2006 and 177,350 effective July 1, 2007.
The compensation cost recorded for these units for the three months
ended March 31, 2008 was $2,766, using the applicable closing market
price of a unit of the Fund (three months ended March 31, 2007 -
$954).
(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 March 31, 2008, 84,420 Restricted Unit Awards (92,275 at
December 31, 2007) were outstanding: 9,692 effective July 1, 2005,
22,678 effective July 1, 2006 and 52,050 effective July 1, 2007. The
compensation cost recorded for these units for the three months ended
March 31, 2008 was $319, using the applicable closing market price of
a unit of the Fund (three months ended March 31, 2007 - $182).
13. Financial instruments and risk management
Financial instruments include cash and cash equivalents, 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 and cash equivalents 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
natural gas, NGLs 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.
A significant amount of electricity is 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 the cost of electricity to customers in all situations. In
order to mitigate this exposure to fluctuations in the price of
electricity, 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 occasions, 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 March 31, 2008, $4,023 of assets held for trading were included
in accounts receivable and $690 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
March 31,
2008 2007
Unrealized gain (loss) $ $
---------------------------------------------------------------------
Marketing 12,300 (5,457)
NGL Infrastructure 487 112
---------------------------------------------------------------------
---------------------------------------------------------------------
As at March 31, 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% change in
the price of the commodity:
March 31,
2008
As at $
---------------------------------------------------------------------
Natural gas (142)
Electricity (286)
NGLs 2,120
---------------------------------------------------------------------
Total increase (decrease) to net earnings and
comprehensive income attributable
to derivative instruments 1,692
---------------------------------------------------------------------
---------------------------------------------------------------------
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
As at Carrying Fair Average Notional
March 31, 2008 Amount $ Value $ Price $ Volume
-------------------------------------------------------------------------
Natural gas:
Buyer of fixed price
swaps (maturing by
October 31, 2008) 319 319 7.77/GJ 327,420 GJs
Electricity:
Buyer of fixed price
swaps (maturing by
December 31, 2008) 513 513 55/MWh 16,500 MWhs
NGLs:
Seller of fixed price
swaps (maturing by
March 31, 2009) 2,135 2,135 107.38/Bbl 467,955 Bbls
Buyer of fixed price
swaps (maturing by
September 30, 2008) 1,056 1,056 91.10/Bbl 283,790 Bbls
Currency:
Seller of forward
contracts (maturing by
May 5, 2008) (690) (690) 1.0279/USD US$21,500,000
Physical contracts:
Seller of fixed price
forward contracts - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted
As at Carrying Fair Average Notional
December 31, 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 717,345 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
Physical contracts:
Seller of fixed price
forward contracts
(maturing by March 31,
2008) (417) (417) 53.67/Bbl 54,584 Bbls
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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$111,603 of sales were priced in
U.S. dollars for the three months ended March 31, 2008 (three months
ended March 31, 2007 - US$81,958). 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 $802 of realized foreign currency gain relating to
U.S. dollar denominated cash, accounts receivable and accounts
payable in Marketing operating expenses for the three months ended
March 31, 2008 (three months ended March 31, 2007 - $176 loss). A
further $303 of unrealized foreign currency loss was recorded in
Marketing operating expenses (three months ended March 31, 2007 -
$154 gain).
As at March 31, 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 March 31, 2008
would have increased/decreased by approximately $210 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 March 31, 2008,
fixed rate borrowings comprised 100% 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
period ended March 31, 2008 would have decreased/increased by
approximately $30 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 17% of
operating revenue for the period ended March 31, 2008 (three months
ended March 31, 2007 - 12%).
The Fund's maximum exposure to credit risk, which is a worst case
scenario and does not reflect results expected by the Fund, is
$270,032 at March 31, 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 March 31,
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 March 31,
2008
As at $
---------------------------------------------------------------------
Neither impaired nor past due 242,493
Impaired 1,251
Not impaired but past due in the following periods:
31 to 60 days 11,914
61 to 90 days 4,427
Over 90 days 7,175
---------------------------------------------------------------------
Trade accounts receivable 267,260
Derivatives held for trading (all current) 4,023
Allowance for credit losses (1,251)
---------------------------------------------------------------------
Total accounts receivable 270,032
---------------------------------------------------------------------
---------------------------------------------------------------------
Allowance for credit losses March 31,
2008
As at $
---------------------------------------------------------------------
Allowance for credit losses, beginning of period (1,121)
Impairment expense (130)
---------------------------------------------------------------------
Allowance for credit losses, end of period (1,251)
---------------------------------------------------------------------
---------------------------------------------------------------------
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:
-------------------------------------------------------------------------
After
Within 1 2009 2010 2011 2012 2013 2013
year $ $ $ $ $ $ $
-------------------------------------------------------------------------
Accounts
payable
and
accrued
liabil-
ities 234,600 - - - - - -
Distri-
butions
payable 8,283 - - - - - -
Long-term
debt(1) 20,000 90,000 52,500 - - 52,500 120,000
Convertible
debent-
ures(2) - - - 21,280 - - -
-------------------------------------------------------------------------
(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 March 31, 2008 was $333,136
(December 31, 2007 - $337,589) based on third party estimates. The
fair value of the Fund's unsecured convertible debentures at
March 31, 2008 was $35,112 (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 March 31, 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 March 31,
2008
As at $
---------------------------------------------------------------------
Bank credit facilities -
Long-term debt 315,000
Working capital (surplus) deficit(1) (56,099)
---------------------------------------------------------------------
Consolidated debt 258,901
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated EBITDA March 31,
2008
Twelve months ended $
---------------------------------------------------------------------
Operating revenues(3) 1,672,935
Operating expenses(3) (1,467,167)
Unrealized (gain) loss on derivative
instruments(3) (5,569)
General and administrative expenses(2) (25,439)
---------------------------------------------------------------------
Consolidated EBITDA 174,760
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated debt to consolidated Guideline(1)
EBITDA (less than) 3.5 1.48
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 March 31, 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 262,000 786,000
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 prior to 2011. As at March 31, 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 6,470
2009 7,965
2010 6,446
2011 5,157
2012 4,059
Thereafter 2,034
---------------------------------------------------------------------
32,131
---------------------------------------------------------------------
---------------------------------------------------------------------
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 working capital
2008 2007
Three months ended March 31 $ $
---------------------------------------------------------------------
Cash provided by (used in):
Accounts receivable (13,266) (10,514)
Inventory 39,893 (6,155)
Other current assets (3,378) 978
Accounts payable and accrued liabilities (535) 32,713
---------------------------------------------------------------------
Changes in non-cash working capital 22,714 17,022
---------------------------------------------------------------------
Relating to:
Operating activities 17,568 20,376
Investing activities 5,146 (3,354)
---------------------------------------------------------------------
Other cash flow information
Interest paid 4,221 5,227
Taxes paid 3,980 957
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
March 31, 2008 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 493,334 49,815 18,162 - 561,311
Inter-segment
revenue - (1,242) (7,292) - (8,534)
-------------------------------------------------------------------------
External revenue 493,334 48,573 10,870 - 552,777
-------------------------------------------------------------------------
Operating expenses (465,288) (20,863) (5,409) - (491,560)
Inter-segment
expenses 8,534 - - - 8,534
-------------------------------------------------------------------------
External operating
expenses (456,754) (20,863) (5,409) - (483,026)
-------------------------------------------------------------------------
36,580 27,710 5,461 - 69,751
General and
administrative,
interest and other - - - (14,195) (14,195)
Depreciation and
amortization (708) (7,127) (2,443) (258) (10,536)
Accretion expense (4) (551) (117) - (672)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 35,868 20,032 2,901 (14,453) 44,348
Income tax recovery
(expense) (490) - (2,456) 14,100 11,154
-------------------------------------------------------------------------
Earnings (loss)
before
non-controlling
interest 35,378 20,032 445 (353) 55,502
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 237,792 798,490 304,092 10,695 1,351,069
-------------------------------------------------------------------------
Capital
expenditures - 14,335 35,456 6 49,797
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gathering
and NGL
Three Process- Infra-
months ended Marketing ing structure Corporate Total
March 31, 2008 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 307,342 42,708 17,681 - 367,731
Inter-segment
revenue - (759) (7,989) - (8,748)
-------------------------------------------------------------------------
External revenue 307,342 41,949 9,692 - 358,983
-------------------------------------------------------------------------
Operating expenses (298,056) (21,226) (5,380) - (324,662)
Inter-segment
expenses 8,748 - - - 8,748
-------------------------------------------------------------------------
External operating
expenses (289,308) (21,226) (5,380) - (315,914)
-------------------------------------------------------------------------
18,034 20,723 4,312 - 43,069
General and
administrative,
interest and other - - - (9,975) (9,975)
Depreciation and
amortization (1,071) (7,220) (2,095) (202) (10,588)
Accretion expense (3) (557) (86) - (646)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 16,960 12,946 2,131 (10,177) 21,860
Income tax recovery
(expense) 834 - (2,704) (712) (2,582)
-------------------------------------------------------------------------
Earnings (loss)
before
non-controlling
interest 17,794 12,946 (573) (10,889) 19,278
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 175,510 809,673 231,644 9,510 1,226,337
-------------------------------------------------------------------------
Capital expenditures 2 1,459 1,841 313 3,615
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 2007
Three months ended March 31 $ $
-------------------------------------------------------------------------
Marketing revenue derived from export
sales to the U.S. 30,970 23,821
Property, plant and equipment located in the U.S. 11,857 11,802
-------------------------------------------------------------------------
-------------------------------------------------------------------------
18. Non-controlling interest
In the first quarter of 2007, a subsidiary of the Fund purchased an
additional ownership interest in Rimbey Pipe Line Co. Ltd. for a
purchase price of $1,513. 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 for a
purchase price of $5,203 bringing the Fund's ownership in RPLP to
100%. The difference between the fair value of the transactions and
the carrying value of RPLP's net assets resulted in a difference of
$3,666, which was applied to property, plant and equipment. A future
tax liability and corresponding increase to goodwill was recorded in
the amount of $520. 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 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.
After completion of the reorganization, the Partnership is now
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 which resulted in an approximately $16,500
future income tax recovery. The net effect of the internal
reorganization was an approximately $13,000 future income tax
recovery.
20. Subsequent Event
On May 1, 2008, a subsidiary of the Fund purchased a 35.6% ownership
interest in the ATCO West Pembina gas plant for a purchase price of
approximately $26 million.
Corporate Information
Board of Directors Officers
E. Peter Lougheed(1)(3) Jim V. Bertram
Counsel President and Chief Executive Officer
Bennett Jones LLP
Calgary, Alberta David G. Smith
Executive Vice President,
Jim V. Bertram(4) Chief Financial Officer and
President and CEO Corporate Secretary
Keyera Energy Management Ltd.
Calgary, Alberta Graham Balzun
Vice President, Engineering
Robert B. Catell and Corporate Responsibility
Executive Director and
Deputy Chairman Marzio Isotti
National Grid plc Vice President, Foothills Region
New York, New York
Steven B. Kroeker
Michael B.C. Davies(2) Vice President, Corporate Development
Principal
Davies & Co. Bradley W. Lock
Banff, Alberta Vice President, North Central Region
Nancy M. Laird(3)(4) David A. Sentes
Corporate Director Vice President, Comptroller
Calgary, Alberta
Donald J. Nelson Stock Exchange Listing
President
Fairway Resources Inc. The Toronto Stock Exchange
Calgary, Alberta Trading Symbols KEY.UN; KEY.DB
H. Neil Nichols(2)(3) Unit Trading Summary Q1 2008
Management Consultant ---------------------------------------
Smiths Cove, Nova Scotia TSX:KEY.UN - Cdn $
---------------------------------------
William R. Stedman(3)(4) High $21.45
Chairman and CEO Low $16.55
ENTx Capital Corporation Close December 31, 2007 $21.00
Calgary, Alberta Volume 8,182,130
Average Daily Volume 131,970
Wesley R. Twiss(2)
Corporate Director Auditors
Calgary, Alberta Deloitte & Touche LLP
Chartered Accountants
(1) Chairman of the Board Calgary, Canada
(2) Member of the Audit
Committee Investor Relations
(3) Member of the Compensation Contact:
and Governance Committee John Cobb or Bradley White
(4) Member of the Health, Toll Free: 1-888-699-4853
Safety and Environment Direct: 403-205-7670
Committee 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
