Three months ended September 30, 2007
CALGARY, Nov. 6 /CNW/ -2007 THIRD QUARTER HIGHLIGHTS
- For the fourth quarter in a row, Keyera delivered outstanding
performance.
- Keyera recorded a 30% increase in net earnings compared to the third
quarter of 2006.
- A seasonal increase in non-cash working capital of $43.0 million
(primarily inventory) resulted in a net cash outflow from operating
activities of $8.0 million. Distributable cash flow(1) was
$34.7 million, up 54% compared to the third quarter of 2006 and
$11.8 million higher than distributions.
- Year to date, cash flow from operating activities was $74.3 million,
9% greater than 2006, including the use of $29.3 million to fund an
increase in non-cash working capital. Year to date distributable cash
flow(1) was $102.4 million, $35.2 million higher than distributions
and 42% higher than last year.
- All business segments delivered strong third quarter results.
Contribution from Gathering and Processing was $22.7 million, up 16%
from the same period last year. The NGL Infrastructure contribution
was $10.7 million, 8% lower than the third quarter of last year.
Contribution from the Marketing business was $3.4 million,
significantly higher than the third quarter of 2006, despite an
unrealized loss of $5.7 million associated with financial contracts
used to hedge inventory.
- Keyera announced a project to significantly expand its storage
capacity in Fort Saskatchewan. The project, which involves the mining
of four underground storage caverns, will increase Keyera's storage
capacity at this facility by three million barrels, or 37% percent,
to 11. 6 million barrels. The first cavern is expected to be put into
service late in 2009.
- Significant progress has been made on a number of other projects. The
truck terminal expansion at Fort Saskatchewan is nearing completion,
as is the addition of a fourth pipeline connecting the Fort
Saskatchewan facility with Keyera's Edmonton Terminal. Both projects
are expected to be operational by early 2008. The ethane extraction
project at Keyera's Rimbey gas plant is proceeding through the
regulatory approval process.
- Three scheduled maintenance turnarounds were successfully completed
in the third quarter at Keyera's Bigoray, Brazeau River and Medicine
River gas processing plants.
- A number of projects have been identified for 2008 and Keyera
anticipates spending between $70 million and $100 million on growth
capital projects next year.
(1) See "Non-GAAP Financial Measures" on page 5 and a reconciliation of
distributable cash flow from operating activities on page 19.Message to Unitholders
The past several months have been a very dynamic time in Alberta. With
the release of the Report of the Royalty Review Commission in September and
the Government of Alberta's response announced in October, the energy industry
has been the central focus of public debate for the past two months. Keyera
has directed considerable attention to dealing with and analyzing the
implications of these fundamental industry issues in an effort to
constructively contribute to finding a balanced resolution. In the course of
this process however, we have never lost sight of our primary focus, which
continues to be on growing our business and developing strategies for
continued success.
Over the years, we believe Keyera has proven that we can adapt to the
ever changing political and business landscape, thanks in part to our
customer-focused business philosophy, our highly skilled team, and our very
strategic assets. In the coming months, as industry sorts through the
implications of the announced changes to the Alberta royalty regime, we will
be working with our business partners, customers and prospective customers to
adapt to the amendments so that we can continue to be a preferred service
provider. The Alberta government has indicated that it will retain and revamp
the deep gas drilling program, although details are still being released. They
also commented in their report that support for deep gas drilling is
instrumental to the viability of gas development in Alberta.
We believe our performance in the third quarter of 2007 demonstrates our
ability to deliver strong operational and financial results in times of flux.
Despite the uncertainty that was created by the royalty review process, and
even though natural gas prices were low and drilling activity was modest in
the third quarter, Keyera built on the strong performance we delivered during
the first half of 2007 by recording net earnings of $15.3 million, 30% higher
than the same period in 2006. A seasonal increase in non-cash working capital
of $43.0 million (primarily inventory) resulted in a net cash outflow from
operating activities of $8.0 million. Distributable cash flow was
$34.7 million during the quarter, 54% higher than the same quarter last year
and $11.8 million higher than the $22.9 million of distributions paid. On a
year to date basis, Keyera's cash flow from operating activities was $74.3
million, 9% greater than 2006, including the use of $29.3 million to fund an
increase in non-cash working capital. Year to date distributable cash flow of
$102.4 million was $35.2 million greater than distributions paid and 42%
higher than last year.
Our strong overall third quarter performance is the result of
contributions from each of our operating segments. Contribution from our
Gathering and Processing segment was $22.7 million, 16% higher than the same
period last year, primarily due to increased throughput at several of Keyera's
facilities. This performance was thanks in part to producers continuing to
develop and connect new gas to our facilities, particularly at our Strachan,
Nordegg River, Brazeau River, Bigoray and Caribou gas plants. Our NGL
Infrastructure segment also had a solid quarter, posting contribution of
$10.7 million, an 8% decrease from the same period last year. Strong results
from all aspects of our Marketing business allowed this segment to deliver
contribution of $3.4 million, despite an unrealized loss of $5.7 million
relating to forward contracts used to hedge the product inventory that we have
built up for sale in the winter heating season.
We are continuing to pursue projects of significant scale and growth
potential that build on our long-term business strategy. At present, we have
over $100 million of projects that are either underway or in the development
stages. During the third quarter we initiated several new projects, one of the
most significant of which is our plan to expand our underground storage
facility in Fort Saskatchewan by 37% to 11.6 million barrels. Preparations to
mine the first of the proposed four new storage caverns are underway. If
planning and construction go as anticipated, we are optimistic that the first
cavern will be in service in 2009. We are also very pleased with the progress
that has been made on two previously announced projects related to our Fort
Saskatchewan facility: the addition of a fourth pipeline connecting Fort
Saskatchewan with our Edmonton terminal and the expansion of our truck
terminal. Assuming construction continues on target, we expect both of these
projects to be operational by early 2008.
In our gathering and processing business, increases in gas throughput in
the Pembina area have created a demand for additional sour gas processing
capacity and as a result, we are looking at options to expand our sour
processing capacity in the west central and foothills regions of Alberta. As
well, in British Columbia, we are investigating options to expand the
processing capacity at our Caribou facility to accommodate new gas production
from proposed producer activity in the adjacent area.
We have also taken steps to move forward the ethane extraction project at
our Rimbey gas plant. We have filed all the required regulatory applications
and are fully engaged in the approval process. Assuming the project is
approved and completed, we expect that we will be able to extract about
5,000 barrels per day of ethane at Rimbey, the majority of which will be
incremental to existing supply.
We believe successful completion of these kinds of initiatives will allow
us to build on the competitive advantages we currently enjoy in each of our
operating segments, while at the same time allowing us to diversify our
business lines.
As we face the challenges presented by the evolving regulatory
environment, including the changes that have been announced or implemented
over the course of the past year with respect to royalties, environmental
legislation and the tax treatment of income funds, Keyera is committed to
continuing to work proactively to maximize our business opportunities and to
provide value to our Unitholders. While we may need to make adjustments to
adapt to these changes, we are optimistic that we will be able to successfully
meet the challenges that lie ahead.
On behalf of Keyera, I thank you for your support and look forward to
continued success.
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 natural gas liquids
(NGLs) and crude oil pipelines, terminals, processing and storage facilities
in Edmonton and Fort Saskatchewan, Alberta, one of North America's major
energy 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 with the calculation of similar measures
for 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 profitability by operating segment. The most comparable
GAAP measures are reported in note 16, Segmented Information, which is found
in the financial statements.-------------------------------------------------------------------------
Three Months Ended Year to Date
Contribution by Operating September 30, September 30,
Segment ($ thousands) 2007 2006 2007 2006
-------------------------------------------------------------------------
Gathering & Processing(1)
Revenue before inter-
segment eliminations(4) 51,440 45,014 139,222 125,661
Operating expenses before
inter-segment
eliminations(4) (28,771) (25,543) (79,710) (74,246)
-------------------------------------------------------------------------
Gathering & Processing
contribution 22,669 19,471 59,512 51,415
-------------------------------------------------------------------------
NGL Infrastructure(1)
Revenue before inter-
segment eliminations(4) 16,495 18,570 51,834 49,330
Operating expenses (5,453) (6,840) (17,214) (17,857)
Unrealized gain/(loss) (308) - (403) -
-----------------------------------------------
Operating expenses before
inter-segment
eliminations(4) (5,761) (6,840) (17,617) (17,857)
-------------------------------------------------------------------------
NGL Infrastructure
contribution 10,734 11,730 34,217 31,473
-------------------------------------------------------------------------
Marketing(2)
Revenue 282,683 278,682 887,001 874,871
Unrealized gain/(loss) (5,726) 810 (10,376) 703
-----------------------------------------------
Revenue before inter-
segment eliminations(4) 276,957 279,492 876,625 875,574
Operating expenses before
inter-segment
eliminations(4) (272,865) (276,335) (844,410) (850,329)
General & administration (674) (608) (2,218) (1,893)
-------------------------------------------------------------------------
Marketing contribution 3,418 2,549 29,997 23,352
-------------------------------------------------------------------------
Total contribution 36,821 33,750 123,726 106,240
-------------------------------------------------------------------------
Other expenses(3) (18,243) (19,313) (61,643) (57,800)
-------------------------------------------------------------------------
Earnings before tax and
non-controlling interest 18,578 14,437 62,083 48,440
-------------------------------------------------------------------------
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 16, Segmented
Information.Management's Discussion and Analysis
The following management's discussion and analysis ("MD&A") was prepared
as of November 6, 2007 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 September 30, 2007 and the notes thereto as well as the
consolidated financial statements of the Fund for the year ended December 31,
2006 and its 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 with the calculation of similar measures for
other entities. Management believes that these supplemental measures
facilitate the understanding of the Fund's results of operations, leverage,
liquidity and financial position. Operating margin is used to assess the
performance of specific segments before general and administrative expenses
and other non-operating expenses. Distributable cash flow is used to assess
the level of cash flow generated from ongoing operations and to evaluate the
adequacy of internally generated cash flow to fund distributions. EBITDA is
commonly used by management, investors and creditors in the calculation of
ratios for assessing leverage and financial performance. Investors are
cautioned, however, that these measures should not be construed as an
alternative to net earnings determined in accordance with GAAP as an
indication of the Fund's performance.
FORWARD LOOKING STATEMENTS
Certain statements contained in this MD&A and accompanying documents
contain forward-looking statements. These statements relate to future events
or the Fund's future performance. Such statements are predictions only and
actual events or results may differ materially. The use of words such as
"anticipate," "continue", "estimate", "expect", "may", "will", "project",
"should," "plan," "intend," "believe," and similar expressions, including the
negatives thereof, is intended to identify forward looking statements. All
statements other than statements of historical fact contained in this document
are forward looking statements, including, without limitation, statements
regarding: the future financial position of Keyera; business strategy and
plans of management; anticipated growth and proposed activities; budgets,
including future capital, operating or other expenditures and projected costs;
estimated utilization rates; objectives of or involving Keyera; impact of
commodity prices; treatment of Keyera under governmental regulatory regimes;
the existence, operation and strategy of the risk management program,
including the approximate and maximum amount of forward sales and hedging to
be employed; and expectations regarding Keyera's ability to raise capital and
to add to its assets through acquisitions or internal growth opportunities.
The forward looking statements reflect management's current beliefs and
assumptions with respect to such things as the outlook for general economic
trends, industry trends, commodity prices, capital markets, and the
governmental, regulatory and legal environment. In some instances, this MD&A
and accompanying documents may also contain forward-looking statements
attributed to third party sources. Management believes that its assumptions
and analysis 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 27, 2007 (the "Annual
Information Form") filed on SEDAR and available on the Keyera website at
www.keyera.com.
In addition, the discussion of the proposed reorganization (the
"Reorganization") contained in this MD&A contains forward-looking information.
Unitholders and prospective investors are cautioned not to place undue
reliance on such forward-looking information as such information is based on
certain assumptions and a number of known and unknown risks and uncertainties,
of both a general and specific nature, that could result in the Reorganization
not being completed or not being completed in the manner described in Keyera's
Information Circular. These assumptions and factors include, but are not
limited to: the Alberta Court of Queen's Bench granting a final order
approving the plan of arrangement pursuant to which Keyera intends to
implement the Reorganization; the board of directors exercising its discretion
to proceed with the Reorganization; no change in taxation or other laws which
would have a material adverse significance in respect of the Reorganization; a
favourable advance ruling being obtained from the Canada Revenue Agency
("CRA"); all third party approvals and consents being obtained on terms which
are acceptable to Keyera; no laws or policies being enacted or promulgated, or
no order or decree being issued or made, which would cease trade, enjoin,
prohibit or impose material limitations on the Reorganization or the
transactions contemplated thereby; no material tax being payable by any
participant in the Reorganization; and the counterparties to certain material
contracts to which Keyera is a party agreeing to the assignment or amendment
of such agreements in order to reflect the new organizational structure and to
substantially preserve, in modified form, the existing governance structure of
the Fund going forward. Keyera cautions that the foregoing list of factors and
assumptions is not exhaustive.
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 available on SEDAR at
www.sedar.com.
BUSINESS ENVIRONMENT
Industry Activity
Producers in Canada drilled almost 5,500 wells in the third quarter, up
significantly from the second quarter of 2007, although down 23% from the same
period last year. While industry rebounded after the wet spring and extended
spring breakup period in the second quarter, overall activity continues to be
affected by low commodity prices and high costs.
In the foothills front region, the number of wells drilled in the third
quarter declined by 38% compared to the third quarter of 2006. The average
depth of wells drilled in this region in the third quarter was 2,349 metres,
as producers target the more prospective reservoirs found at deeper depths. In
the central Alberta region, wells drilled were 11% lower than the same quarter
last year, although the average depth per well increased by 4% compared to the
third quarter of 2006. British Columbia also experienced a decline in
drilling, with wells drilled falling 34% compared to the third quarter of last
year. Like the other regions, the average depth per well increased to over
2,400 metres, a 7% increase compared to the third quarter of 2006.
The decline in drilling activity in Western Canada has not had a material
impact on the raw gas volumes delivered to Keyera's facilities for processing.
Throughput volumes at most Keyera plants increased again in the third quarter,
up 2% compared to the second quarter of 2007 and 1% from the same period last
year. These increases are the result of producer drilling undertaken in
previous years combined with current activity levels around our facilities.
However, lower activity levels, such as those experienced over the last
several quarters, may affect the volume of raw gas delivered to Keyera's
gathering and processing facilities in the future.
Keyera's management believes that, over the long term, North American
natural gas demand will be strong and that the Western Canadian Sedimentary
Basin will continue to be a key supply basin for many years to come. Keyera's
facilities are well positioned in the western regions of the basin, which is
relatively under-developed and has deeper gas-prone zones that often contain
larger reserves. Keyera's facilities are able to process both sweet and sour
gas and extract NGLs from the raw gas stream, making them well suited to
process gas from this region.
New Alberta Royalty Framework
On October 25, 2007 the Government of Alberta announced a new royalty
framework for Alberta. The new royalty regime, which is expected to be
implemented in 2009, will change the royalty structure for natural gas and
conventional oil by introducing sliding rate formulas that are price and
volume sensitive. In addition, new price sensitive formulas will be adopted
for oil sands development at both the pre- and post-payout stages.
Keyera is not a royalty payor, and therefore is not directly affected by
these announcements. However, as a service provider to the upstream industry,
Keyera will be affected by producers' responses to the new regime. Producers
are currently assessing the impact of the new royalty regime on their
operations and future exploration and development activities. Until we have
stronger indications from producers with respect to their plans, the long term
implications of the royalty announcement for Keyera are difficult to
determine. Keyera views the Government's decision to retain a variation of the
Deep Gas Drilling Program as a positive outcome, due in part to the fact that
many of Keyera's facilities are located west of the fifth meridian where gas
drilling tends to be deeper. In the coming months we will be taking a measured
approach to the new royalty framework and will be working with our partners,
customers and prospective customers to position ourselves to manage these
changes.
Further information about the new royalty framework is available from the
Government of Alberta website at http://www.gov.ab.ca/ and a copy of the
framework itself can be found at
http://www.energy.gov.ab.ca/Org/Publications/royalty_Oct25.pdf
Climate change regulations
Earlier this year, both the Government of Alberta and the Government of
Canada announced new regulatory measures dealing with emissions. Keyera has
reported on both of these developments in its MD&A for the first and second
quarter of 2007. Keyera has initiated third party audits of its baseline
emission applications for the three of its plants that are affected by the
Alberta regulations. These applications must be submitted by December 31, 2007
for the compliance period July 1, 2007 to December 31, 2007. There has been no
change in management's interpretation of the effect of these programs.
On October 2, 2007, the Government of Alberta announced a new cumulative
effects initiative covering a 317 square kilometer area northeast of Edmonton
known as the Alberta Industrial Heartland. This new initiative establishes
targets for air, water and land quality. All large industrial facilities
within the Industrial Heartland, including Keyera's Fort Saskatchewan
facility, will be subject to a cumulative airshed target of 25,000 tonnes per
year of nitrous oxides and 28,000 tonnes per year of sulphur dioxide These
airshed targets will be validated with stakeholders, including Keyera, and are
scheduled to come into effect in January 2009. A working group is being
established to determine the allocation for the airshed objectives in order to
implement an allocation system. In addition, working groups are being formed
to deal with water and land management issues, including sulphur and wetlands
management. Based on the information currently available, Keyera does not
anticipate that this initiative will require significant changes to current
operations. However, the effect that this program may have on future
operations or possible expansion is not clear at this time. Keyera will
continue to be involved in the consultative process that is being followed to
develop the management plans for the area under this initiative. Once more
details are known, Keyera will be in a better position to evaluate the
potential implications.
New tax on flow-through entities
Just over a year ago, the Government of Canada announced a new tax on the
distributions of publicly-traded Canadian income trusts and limited
partnerships, and in June of this year legislation was passed implementing
this new tax. Assuming Keyera only experiences "normal growth", the Fund, as
an existing income trust, will be subject to the new tax as of January 2011.
Under the legislation, effective January 1, 2011 a tax of 31.5% will be
payable by Keyera on the portion of its distributions that is ordinary taxable
income. For a Canadian resident taxpayer, this portion of Keyera's
distributions will be treated as dividend income for tax purposes. The
legislation also provides there will be no change in taxation of Keyera's
distributions that are considered to be a return of capital or dividend
income.
On October 30, 2007, the Federal government announced their future
economic plans. Included in this statement was the plan to reduce corporate
tax rates from 22.12% in 2007 to 15% by 2012. These lower tax rates would also
apply to income trusts. If these reduced tax measures are enacted into law,
the applicable tax rate to the Fund would be reduced from 31.5% to 29.5% in
2011 and 28.0% in 2012. The proposed reduction in federal tax rates has not
been included in the future tax provision for the third quarter of 2007 as
these reduced tax rates have not been substantively enacted.
As at January 1, 2007, Keyera had approximately $385 million of
unutilized tax pools and deductions, consisting mostly of class 41
undepreciated capital costs, available for deduction by the Fund's
subsidiaries. Keyera is proposing to undertake a reorganization of its
internal legal structure as described under "Fund Reorganization" in this
MD&A. Due to the interpretation of the legislation implementing the new tax on
flow-through entities, Keyera has amended its advance ruling request to the
CRA. The amended reorganization will not result in any significant immediate
tax savings within Keyera's structure, but will permit Keyera to defer the
utilization of some tax pools until after January 1, 2011. Assuming the CRA
issues a favorable advance ruling on a timely basis, the amended
reorganization is expected to be implemented in early 2008. Keyera plans to
reduce the use of its available tax deductions in years 2008 through to 2010,
thereby increasing deductions available for the years after 2010.
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 Annual Information Form.
In the third quarter, Keyera delivered strong operational and financial
results, continuing the trend established in the first half of 2007. Net
earnings of $15.3 million were up $3.5 million or 30% compared to the same
period last year and operating margin of $37.5 million exceeded the same
quarter in 2006 by $3.1 million. These results were achieved despite the
completion of three plant turnarounds and the recording of a $5.7 million
unrealized loss on financial contracts that are used to hedge NGL product
inventories. Excluding the unrealized loss, operating margin in the third
quarter of 2007 was $43.2 million, 29% greater than the third quarter of 2006.
The unrealized loss on financial contracts is discussed in more detail in the
Marketing section of this report.
The Gathering and Processing segment generated $22.0 million of operating
margin in the third quarter of 2007, a $3.2 million increase compared to the
same period last year, despite the completion of turnarounds at the Brazeau
River, Bigoray and Medicine River gas plants. Most of Keyera's gas plants
experienced higher throughput compared to the same period last year. Despite a
slowdown in drilling activity this year in western Canada, producers continued
to develop and connect new gas developments to Keyera infrastructure.
Excluding the effect of the $5.7 million unrealized loss on financial
contracts, the Marketing segment generated $17.0 million of operating margin
in the third quarter of 2007, up $6.2 million compared to the same period last
year. Growth in the crude oil midstream business and sound performance by all
NGL products contributed to operating margin during a quarter that typically
experiences weaker demand due to the seasonal nature of the business.
The NGL Infrastructure segment generated operating margin of $4.3 million
in the third quarter of 2007, up $0.2 million compared to the same period last
year as demand for storage remained strong.
Year to date, a net loss of $25.5 million has been incurred compared to
net earnings of $53.2 million for the same period last year. The unfavourable
variance is primarily related to the $80.2 million non-cash future income tax
expense incurred in the second quarter of 2007, as a result of the recently
enacted tax on publicly-traded Canadian income trusts and limited
partnerships. This expense more than offset the growth in operating margin
resulting from higher throughput in the Gathering and Processing segment and
stronger unit margins in the Marketing segment.
Gathering and Processing
Gathering and Processing revenue for the third quarter of 2007 was
$50.7 million, an increase of $6.5 million or 15%, compared to the third
quarter of 2006. Higher throughput at most plants and higher fees at the
Bigoray and Brazeau River gas plants due to the flow-through of turnaround
costs accounted for the increase.
Gathering and Processing operating expenses for the third quarter of 2007
were $28.8 million, an increase of $3.2 million or 13% compared to the third
quarter of 2006. The increase was primarily due to the turnaround work
completed at the Bigoray and Brazeau River gas plants and higher operating and
maintenance costs, offset by lower costs at the Chinchaga plant where a
turnaround was completed last year.
Average gross processing throughput in the third quarter of 2007 was
830 million cubic feet per day, up 2% from the second quarter of 2007 and up
1% from the third quarter last year. Year to date, average gross processing
throughput was 829 million cubic feet per day, up 8 million cubic feet per day
compared to last year. Lower throughput at the Rimbey plant was offset by
higher deliveries of Tay River gas to the Strachan plant, the tie-in of new
wells that were drilled in previous periods and the capture of new volumes
through the Caribou North and Brazeau North gas gathering systems.
Year to date, Gathering and Processing revenue was $137.0 million, an
increase of $13.9 million or 11% compared to last year. The increase was due
primarily to higher throughput at most gas plants, the recovery of 2007
operating expenses and the collection of previous years' expenses at the
Strachan plant where turnaround costs are recovered over a four-year period.
Year to date, Gathering and Processing operating expenses were
$79.7 million, an increase of $5.5 million or 7% compared to last year. In
2007 operating costs were higher due to the turnarounds completed at the
Rimbey, Brazeau River, Bigoray and Brazeau North gas plants and unscheduled
repairs at the Caribou, Rimbey and Bigoray gas plants. The increase was
partially offset by lower costs at the Strachan and Caribou gas plants
relative to 2006, when extensive turnaround and refurbishment costs were
incurred.
The assets in Keyera's Gathering and Processing segment were realigned
into new business regions, the Foothills Region and the North Central Region.
The Foothills Region consists of the Strachan, Brazeau River, Nordegg River,
Paddle River, Bigoray, Brazeau North, West Pembina and Tomahawk gas plants and
associated gathering pipelines. The North Central Region consists of the
Rimbey, Gilby, Medicine River, Worsley, Caribou, Chinchaga, North Star and
Greenstreet plants and associated gathering pipelines. This realignment is
reflected in the discussion below.
Gathering and Processing - North Central Region
The North Central Region delivered strong results during the quarter. Raw
gas throughput during the third quarter increased 13% from the second quarter
2007 due to the scheduled maintenance shutdown that was completed at the
Rimbey plant during the second quarter. Throughput in the quarter was down 3%
from the same quarter in 2006 due to a reduction in shallow gas and coalbed
methane drilling in the Rimbey area. These volumes require reduced processing
and, as a result, have had only a moderate impact on Keyera's revenues.
At the Rimbey gas plant, work continued on a project to extract ethane
from the raw gas stream. Regulatory applications have been submitted and we
are fully engaged in the approval process. Assuming regulatory approvals and
other conditions are met, the project is expected to be completed in 2008 at
an estimated cost of $26 million. Once the project is operational, Keyera
expects to extract up to 5,000 barrels per day of ethane, most of which will
be incremental to Alberta supply.
Producers continued to be active along Keyera's Caribou North gas
gathering system in northeastern British Columbia. Based on this trend, Keyera
expects additional production to be connected to the gathering system in the
fourth quarter of 2007, which should result in increased throughput at the
Caribou gas plant. As well, indications are that producers will remain active
in this area over the course of the winter.
The Medicine River gas plant, Keyera's only non-operated gas processing
facility, was taken offline for approximately seven days during the quarter
for its scheduled maintenance turnaround. The costs for the turnaround are not
recoverable through the existing fee structure, but the impact on the North
Central Region's cash flow was not significant. All maintenance turnarounds
scheduled for the North Central Region in 2007 have now been completed.
Gathering and Processing - Foothills Region
The Foothills Region experienced another active quarter from a growth and
maintenance perspective. Despite the scheduled turnarounds at the Brazeau
River and Bigoray gas plants, throughput in the quarter was up 6% compared to
the third quarter of 2006 as a result of incremental volumes at several
plants. However, third quarter raw gas throughput was down 9% compared to the
second quarter of 2007 due to the two scheduled turnarounds.
Activity east of the Strachan gas plant along the Garrington pipeline
continued during the quarter. Producers connected a number of new wells to the
gathering system, which resulted in incremental throughput at the Strachan
plant during the quarter. Incremental production was also delivered to the
Strachan plant from a new capture area via the Strachan North pipeline during
the quarter.
Modifications and tie-ins were completed at the Paddle River gas plant
during the quarter to accommodate the reprocessing of a nearby gas stream and
enhance the NGL recovery efficiency of the facility. At the Nordegg River gas
plant, new inlet separation facilities were installed, to accommodate
incremental sweet gas throughput from an area southwest of the plant. This new
area continues to evolve and is expected to generate incremental throughput in
2008.
In the Pembina region, where Keyera's Brazeau River, Bigoray and West
Pembina plants are located, producers continued to deliver sour Nisku gas at
sustained levels and a number of new wells were also connected at Keyera's
Easyford oil separation facility. The delivery of these incremental gas
volumes to Keyera facilities has resulted in sour gas handling nearing
capacity. Keyera is developing alternatives for sour gas handling in the area,
including plant expansions.
The Bigoray and Brazeau River gas plants were both taken offline for
15 days during the quarter in order to perform their scheduled four-year
maintenance turnarounds. During that time, routine inspections, regular
maintenance and required repair work were completed. These costs were largely
recovered during the quarter. The scheduled maintenance turnarounds for 2007
have now been completed for the Foothills Region.
NGL Infrastructure
NGL Infrastructure revenue for the third quarter of 2007 was
$10.0 million, a decrease of $0.8 million or 8% compared to the third quarter
of 2006. This decrease is largely due to a fee adjustment and lower product
sales from the Rimbey Pipeline business as well as slightly lower throughput
at the Fort Saskatchewan fractionation plant.
NGL Infrastructure operating expenses for the third quarter of 2007 were
$5.8 million, a decrease of $1.1 million or 16% compared to the third quarter
of 2006. The decrease was primarily due to lower natural gas costs.
Year to date, NGL Infrastructure revenue was $29.3 million, an increase
of $0.2 million or 1% compared to the prior year. Increased revenues from
storage services throughout the year was partially offset by lower Rimbey
Pipeline revenues and lower throughput at the Fort Saskatchewan fractionation
plant in the third quarter of 2007.
Year to date, NGL Infrastructure operating expenses were $17.6 million, a
decrease of $0.2 million or 1% compared to 2006. Lower natural gas costs in
the third quarter of 2007 were partially offset by higher operating costs
related to increased staffing levels at the railcar loading facility early in
the year and the replacement of a charcoal bed filter at the Edmonton
terminal.
NGL Infrastructure facilities overall operated at typical levels for the
third quarter, a period when lower industry product demand usually results in
lower operational activity at rail loading facilities. Storage revenues were
strong in the third quarter, driven by normal winter season inventory
requirements and diluent demand for oil sands production. Fractionation
throughput was somewhat lower than usual due to short-term market conditions.
Keyera continues to pursue opportunities to strengthen its competitive
advantages in the Edmonton/Fort Saskatchewan area. As part of that initiative,
Keyera continues to add connections to other pipelines in the area as well as
undertake specific expansion projects.
In the third quarter, Keyera announced a significant expansion of its
storage capacity at its Fort Saskatchewan facility to meet the expected need
for additional storage capacity over the next decade to support oil sands
development, including the need for diluent. The project, which is expected to
take five to six years to complete, will expand the current storage capacity
by 37% to about 11.6 million barrels and is expected to cost $70 to
$80 million. Engineering work on the first cavern is being finalized,
equipment is being ordered and construction is expected to begin in the fourth
quarter. Cost of the first cavern is expected to be $18 million with a large
portion of the cost being spent in 2008. Assuming construction proceeds as
planned, the first cavern is expected to be put into service late in 2009.
Work is also continuing on two other projects announced earlier this
year. Keyera is expanding its truck terminal at the Fort Saskatchewan
facility. The $5.6 million project is expected to enhance the loading and
unloading of propane, butane and condensate, thereby increasing Keyera's
operational flexibility and providing enhanced product loading services for
customers serving the domestic NGL market. The project is expected to be
operational in the first quarter of 2008.
Keyera's project to tie in a fourth pipeline between the Fort
Saskatchewan facility and the Edmonton terminal is also expected to be
completed in early 2008, at an estimated cost of about $9 million net to
Keyera. The new pipeline will provide significantly more operational
flexibility, allowing Keyera to deliver condensate and butane at increased
rates into and out of the Edmonton terminal and Fort Saskatchewan storage and
other pipelines and terminals in the area. This pipeline is also expected to
support the new storage caverns and will add value to Keyera's storage
services by increasing the flexibility for customers.
Marketing
The Marketing segment posted sound results, delivering operating margin
of $11.2 million, down $0.3 million compared to the third quarter of 2006. The
decline was due entirely to the recognition of unrealized gains and losses on
financial instruments. Excluding the effect of these unrealized items,
operating margin grew $6.2 million in the third quarter compared to the same
period last year.
Because of the seasonality associated with propane markets, propane sales
volumes are typically lower in the third quarter than in the winter months and
inventory levels increase to meet the winter heating season demands. While
this was the case in the third quarter of 2007, increased use of propane as a
feedstock for the petrochemical industry in the U.S. resulted in lower than
normal inventories in North America in the third quarter. Butane markets
performed well in the third quarter of 2007, with sales volumes and margins
consistent with typical third quarter levels. The supply and demand for
condensate was largely in balance throughout the third quarter and pricing was
considerably stronger than in the third quarter of 2006. As well, the crude
oil midstream business continued to perform well in the third quarter of 2007.
NGL sales volumes for the third quarter of 2007 averaged 43,300 barrels
per day compared to 44,900 barrels per day in the third quarter of 2006. Year
to date, NGL sales volumes averaged 49,800 barrels per day compared to
51,100 barrels per day last year. The decreases were due to lower sales of
propane, partially offset by higher condensate and butane sales compared to
the third quarter of 2006.
Marketing revenue for the third quarter of 2007 was $277.0 million, a
decrease of $2.5 million compared to the third quarter of 2006. The decrease
was primarily due to the inclusion of a $5.7 million unrealized loss on
financial instruments, lower propane sales volumes and lower butane prices
partially offset by higher butane and condensate sales volumes and growth in
crude oil midstream revenues. The $5.7 million unrealized loss on financial
instruments is discussed later in this section.
Year to date, Marketing revenue was $876.6 million, an increase of
$1.1 million. The increase was primarily related to higher crude oil midstream
revenues, higher condensate and butane volumes partially offset by lower sales
volumes of propane and an unrealized loss on financial instruments, which is
discussed later in this section.
The table below outlines the composition of the revenues generated from
Keyera's Marketing business.Three Months Nine Months
Ended Ended
Composition of Marketing Revenue September 30, September 30,
(in thousands of dollars) 2007 2007
-------------------------------------------------------------------------
Physical sales 283,959 886,278
Financial instruments - realized (1,276) 723
Financial instruments - unrealized (5,726) (10,376)
-------------------------------------------------------------------------
Marketing revenue 276,957 876,625
-------------------------------------------------------------------------
-------------------------------------------------------------------------Marketing operating expense for the third quarter of 2007 was
$265.7 million, a decrease of $2.2 million compared to the third quarter of
2006. The decrease was primarily due to lower sales volumes mostly offset by
the growth in the crude oil midstream business.
Year to date, Marketing operating expense was $819.6 million, a decrease
of $7.9 million. Much like the second quarter of 2007, the decrease was a
result of lower sales volumes mostly offset by higher crude oil midstream
costs.
NGL product inventories of $83.5 million were $2.3 million higher than in
the third quarter of 2006. Although the value of inventory had not changed
significantly, volumes in storage have increased slightly compared to the same
period last year. Propane inventory levels typically increase throughout the
second and third quarters due to the seasonality of product demand.
At September 30, 2007, the unrealized loss on financial contracts
recognized in the third quarter was $5.7 million ($10.4 million recognized
year to date), primarily due to the change in the value of crude oil price
swap contracts and fixed price contracts. At September 30, 2007, the fair
market value of these contracts represented a liability of $9.5 million and an
asset of $1.4 million, which represents an estimate of the amount that Keyera
would pay or receive if these instruments had been closed out at the end of
the period. 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.
Of the $10.4 million year to date unrealized loss, the portion relating
to changes in crude oil financial contracts amounted to approximately
$6.8 million. These contracts are used to protect inventory from fluctuations
in the price 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 remainder of the unrealized loss is primarily related to the change
in fair value of fixed price physical sales contracts. Keyera routinely
utilizes these contracts to sell forward a portion of its physical inventory.
The adoption of new accounting standards on January 1, 2007 resulted in a
$2.3 million unrealized loss in the first quarter of 2007 related to fixed
price physical contracts on hand at January 1, 2007. As the fixed price
contracts were priced higher than market, the new accounting standards
required an asset of $2.3 million to be recorded with a corresponding increase
in opening accumulated earnings. As these contracts matured and the actual
proceeds on the fixed price sales were recorded in revenue, the previously
recorded asset of $2.3 million was reduced to nil with a corresponding charge
(unrealized loss) to earnings in the first quarter of 2007.
The adoption of the new accounting standards is expected to continue to
result in increased volatility in operating margins due to unrealized gains
and losses associated with financial instruments.
The Marketing business is exposed to commodity price fluctuations arising
between the time contracted volumes are purchased and the time they are sold,
as well as fluctuations in the margins between purchase prices and sales
prices and other risks that affect price and supply - demand trends. Keyera
manages its supply and sales portfolio by monitoring its inventory position
and its purchase and sale commitments, as well as by actively participating in
various hub markets. In addition, Keyera manages some of its price risk by
using financial contracts, such as energy-related forward sales, price swaps,
physical exchanges and options and by offsetting some of its physical and
financial contracts in terms of volumes, timing of performance and delivery
obligation.
For a further 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 third quarter of 2007 were
$2.7 million, down $1.3 million from the third quarter of 2006. Long-term
incentive plan costs accounted for $1.0 million of the decrease, reflecting a
lower unit price.
Year to date, general and administrative costs were $15.3 million, down
$0.2 million from last year. Higher long-term incentive plan costs resulting
from the increase in distributions in May 2007 were offset by lower short-term
incentive costs in the first quarter of 2007. Excluding the effect of the
long-term incentive plan, general and administrative expenses were in line
with those incurred in 2006.
Interest expense, net of interest revenue, was $4.5 million for the third
quarter of 2007, $0.4 million lower than the third quarter of 2006 primarily
due to the reversal of a $0.7 million unrealized loss on an interest rate
financial contract. This financial contract was settled in the third quarter
of 2007 and a realized loss of $0.3 million was recorded in the period.
Excluding the effect of the financial contract, borrowing costs were virtually
unchanged.
Year to date, interest expense net of interest revenue was $14.7 million,
$1.7 million higher than last year due primarily to higher average short-term
debt balances in the first two quarters of 2007 as well as the realized loss
of $0.3 million on the interest rate financial contract.
Depreciation and amortization expenses were $10.5 million for the third
quarter of 2007, virtually unchanged from the third quarter of 2006, and
$31.5 million year to date, $2.0 million greater than last year. The increase
was due to growth in the asset base resulting from the completion of several
major growth capital projects during the past year.
An impairment expense of $0.4 million was recorded in the third quarter
of 2007 to adjust the carrying value of a small, non-core gas plant that was
taken out of service.
Income tax expense for the third quarter of 2007 was $3.3 million,
$0.9 million greater than the third quarter of 2006. Future income tax expense
for the third quarter of 2006 was unusually low due to recognizing the benefit
of non-capital losses existing in a subsidiary of the Fund.
Current income tax expense for the third quarter of 2007 was
$0.5 million, $0.5 million lower than last year, largely as a result of lower
earnings posted by the Rimbey Pipeline business.
Year to date, income tax expense was $87.3 million, $92.8 million higher
than the same period last year. This increase was primarily due to recording
$80.2 million of future income tax expense in the second quarter of 2007 and a
further $0.2 million in the third quarter of 2007 resulting from the new tax
imposed on publicly traded income trusts and limited partnerships in Canada.
The future income tax expense is an estimate of the tax that will ultimately
be payable by Keyera due to differences between the accounting and tax basis
of assets and liabilities of the operating partnership. As a result of the new
tax legislation, distributions will no longer be deductible by Keyera
beginning in 2011. Accordingly, any taxable income of the operating
partnership allocated to the Fund will be subject to this tax.
The remainder of the $92.8 million variance was largely related to the
effect of recording a future income tax recovery in the second quarter of 2006
that reflected a reduction in future statutory income tax rates and the
deductibility of the long-term incentive plan costs.
Current income tax expense on a year to date basis was $3.0 million,
$0.3 million lower than last year, largely as a result of lower earnings
posted by the Rimbey Pipeline business in the third quarter of 2007.
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 MD&A presented with the
December 31, 2006 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 September 30, 2007, operating revenues and accounts receivable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $19.9 million primarily for September 2007 operations.
Estimation of Gathering and Processing and NGL Infrastructure operating
expenses:
At September 30, 2007, operating expenses and accounts payable contained
an estimate of $11.8 million primarily for September 2007 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 cost-of-service 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 allocation of
revenues and operating costs to other plant owners is also reviewed.
Appropriate adjustments to revenue 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 equalization
adjustment of $8.3 million at September 30, 2007. Operating expenses and
accounts payable contained an estimate of $5.9 million.
Estimation of Marketing revenues:
At September 30, 2007, the Marketing sales and accounts receivable
contained an estimate for September 2007 revenues of $50.4 million.
Estimation of Marketing product purchases:
Marketing cost of goods sold, inventory and accounts payable contained an
estimate of NGL product purchases of $84.1 million at September 30, 2007.
Estimation of Asset Retirement Obligation:
In the third quarter of 2007, there were no material changes to the
assumptions used in the estimate prepared for December 31, 2006. 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 outflow from operating activities during the third quarter of 2007
was $8.0 million as Keyera used $43.0 million of cash to finance a seasonal
increase in non-cash working capital, primarily due to product inventories.
Before changes in non-cash working capital, cash flow from operating
activities was $34.9 million. From this cash flow, Keyera paid $22.9 million
of distributions to its unitholders and $6.9 million for capital expenditures,
leaving $5.1 million of cash. Keyera also received $79.3 million of proceeds
from the issuance of long-term debt and $0.8 million from the issuance of
trust units under the distribution reinvestment plan ("DRIP"). From this cash,
Keyera repaid $41.6 million of short-term borrowings and financed the
$43.0 million change in non-cash working capital, leaving a cash surplus of
$0.6 million at the end of the quarter.
Year to date, cash provided by operating activities was $74.3 million,
after the use of $29.3 million to fund changes in non-cash working capital
primarily due to higher product inventories. Cash flow from operating
activities before changes in non-cash working capital was $103.6 million. From
this cash flow Keyera paid $66.8 million of distributions to its unitholders
and $24.7 million for capital expenditures and acquisitions, leaving
$12.1 million of cash. Keyera also received $4.2 million from the disposition
of electrical generating equipment and $2.4 million from the issuance of trust
units under the DRIP, bringing cash available to $18.7 million. Along with
this cash, net proceeds of $79.3 million from the issuance of long-term debt
were used to fund the repayment of $68.1 million of short-term borrowings and
finance the $29.3 million change in non-cash working capital, leaving a
$0.6 million cash surplus.
Cash and working capital was $26.7 million at September 30, 2007 compared
to a deficit of $41.1 million at December 31, 2006. The deficit at
December 31, 2006 resulted from the use of short-term debt to finance growth
capital expenditures and was eliminated in the third quarter of 2007 when
Keyera received $79.3 million of proceeds of the issuance of long-term debt
and used much of these proceeds to repay short-term debt.Capital expenditures
Capital additions and Three months ended Nine months ended
acquisitions September 30, September 30,
(in millions of dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Growth capital expenditures 8.0 12.6 15.5 63.0
Maintenance capital
expenditures 0.2 0.5 0.9 2.7
-------------------------------------------------------------------------
Total capital expenditures 8.2 13.1 16.4 65.7
Acquisitions of non-
controlling interest - - 6.7 -
-------------------------------------------------------------------------
Total capital additions and
acquisitions 8.2 13.1 23.1 65.7
-------------------------------------------------------------------------In the third quarter of 2007, additions to property, plant and equipment
including acquisitions amounted to $8.2 million, consisting of $0.2 million of
maintenance capital and $8.0 million of growth capital. In addition to
maintenance capital expenditures, Keyera incurred maintenance and repair
expenses of $8.8 million that were included in operating costs during the
third quarter of 2007. The growth capital expenditures included $2.1 million
for the acquisition of a site in northeast B.C. close to our Caribou North
gathering system to enable future expansion, $3.2 million at the Rimbey and
Brazeau River gas plants to upgrade systems and equipment, $2.1 million to
acquire new pipelines in the Foothills Region, $0.6 million for the expansion
of the truck off loading facility at Fort Saskatchewan and various other small
projects.
Year to date, total capital additions and acquisitions amounted to
$23.1 million, consisting of $0.9 million of maintenance capital, $15.5
million of growth capital and $6.7 million of acquisitions. In addition to
maintenance capital expenditures, Keyera incurred maintenance and repair
expenses of $24.8 million that were included in operating costs. The growth
capital expenditures included those in the third quarter of 2007 described
above and $2.3 million for the purchase of a pipeline to be used as a
gathering line to extend the capture area of the Brazeau River gas plant, $1.5
million related to modifications at the Rimbey gas plant to enable the tie-in
of equipment required for the ethane extraction project, $2.6 million for
upgrades and expansion of equipment at the Rimbey gas plant and $6.7 million
related to the acquisition of an additional ownership interest in RPLP,
bringing Keyera's ownership to 100%.
Keyera expects full year 2007 growth capital expenditures to be between
$40 and $50 million and maintenance capital expenditures to be between
$2 million and $3 million. This assumes timely receipt of regulatory approvals
and construction schedules proceeding as currently planned.
In 2008, Keyera anticipates spending between $70 million and $100 million
on growth capital projects.
Debt covenants
In order for Keyera to manage seasonal fluctuations in cash flow and
working capital and fund growth capital expenditures, Keyera has established
credit facilities consisting of a $150 million revolving term facility that
matures on April 21, 2010 and $25 million of revolving demand facilities. As
at September 30, 2007, $40 million was drawn under these credit facilities.
These credit facilities are 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. These
credit facilities provide for the deduction of net working capital in the
calculation of debt. Following are the ratios as calculated in accordance with
the covenants as at September 30, 2007:-------------------------------------------------------------------------
Covenant Position as at September 30, 2007
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 3.50 1.66
-------------------------------------------------------------------------
Debt to Capitalization not to exceed 0.55 0.26
-------------------------------------------------------------------------Keyera has $215 million of unsecured senior notes that were issued in
2003 and 2004. Of this amount, $20 million matures in August 2008 and bears
interest at 5.42%, $90 million matures in October 2009 and bears interest at
5.23%, $52.5 million matures in August 2010 and bears interest at 5.79%, and
$52.5 million matures in August 2013 and bears interest at 6.16%. These notes
are subject to three major financial covenants: Debt to EBITDA, EBITDA to
Interest Charges and Priority Debt to Total Assets. The calculations for each
of these ratios are based on specified definitions. Following are the ratios
as calculated in accordance with the covenants as at September 30, 2007:-------------------------------------------------------------------------
Covenant Position as at September 30, 2007
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 3.50 2.32
-------------------------------------------------------------------------
EBITDA to Interest Charges not less than 3.00 10.46
-------------------------------------------------------------------------
Priority Debt to Total Assets not to exceed 15% 0%
-------------------------------------------------------------------------On September 4, 2007, Keyera completed a private placement of unsecured
senior notes in the principal amount of $120 million: $60 million due in 2017
bearing interest at 5.89% and $60 million due in 2022 bearing interest at
6.14%. On September 4, 2007, $80 million of proceeds were received and a
further $40 million will be received on December 3, 2007. In terms of payment
obligation priority, the $120 million unsecured senior notes rank on a pari
passu basis with the obligations under Keyera's existing credit facilities and
with all other unsecured senior notes. The proceeds from these notes are a
source of long-term funding for Keyera's ongoing growth capital program,
working capital requirements and general corporate purposes. These new
unsecured senior notes are subject to three major financial covenants: Debt to
EBITDA, EBITDA to Interest Charges and Priority Debt to Total Assets. The
calculations for each of these ratios are based on specified definitions.
Following are the ratios as calculated in accordance with the covenants as at
September 30, 2007:-------------------------------------------------------------------------
Covenant Position as at September 30, 2007
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 5.0 1.74
-------------------------------------------------------------------------
EBITDA to Interest Charges not less than 2.00 7.83
-------------------------------------------------------------------------
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 and
unsecured senior notes, adequate replacement facilities will be established.
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 2006 MD&A and Annual Information
Form which is available on SEDAR.
Risk factors
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 the most recent Annual
Information Form available on www.sedar.com as well as in the "Business
Environment", "Results of Operations - Marketing" and "Liquidity and Capital
Resources" sections of this MD&A.
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 Nine
months months
ended ended
Sept. 30 Sept. 30
(in thousands of dollars) 2007 2007 2006 2005
-------------------------------------------------------------------------
Cash flow from operating
activities (8,049) 74,328 110,656 62,147
Net earnings (loss) 15,310 (25,548) 68,078 60,680
Cash distributions paid 22,923 66,847 86,509 77,013
-------------------------------------------------------------------------
Excess (shortfall) of cash
from operating activities
over distributions paid (30,972) 7,481 24,147 (14,866)
Excess (shortfall) of net
earnings (loss) over
distributions paid (7,613) (92,395) (18,431) (16,333)
-------------------------------------------------------------------------In the third quarter of 2007, cash outflow from operating activities was
$8.0 million due to the $43.0 million seasonal increase in non-cash working
capital. As a result, cash flow from operating activities was $31.0 million
less than distributions paid. Year to date, cash flow from operating
activities was $74.3 million, $7.5 million greater than distributions paid.
Included in the calculation of year-to-date cash flow from operating
activities was $29.3 million to fund changes in non-cash working capital. It
is Keyera's policy to finance temporary fluctuations in non-cash working
capital with short-term debt.
In the third quarter of 2007, distributions of $22.9 million exceeded net
earnings by $7.6 million. Year to date, distributions of $66.8 million
exceeded the net loss by $92.4 million. The shortfall is attributable to the
inclusion of non-cash items for future income taxes ($2.7 million in the third
quarter and $84.4 million year to date) and depreciation, amortization,
accretion and impairment expense ($11.7 million in the third quarter and
$33.9 million year to date) in the calculation of net income.
Future income taxes can fluctuate from period to period as a result of
changes in tax rates (such as the enactment in the second quarter of 2007 of
the tax on distributions of flow-through entities or the reduction of
corporate tax rates in 2006) 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.
Due to the inclusion of non-cash charges in net earnings, distributions
paid will normally exceed net earnings. Although non-cash charges do not
affect current period cash generation, to the extent these accruals are
ultimately realized, future distributions may be reduced or the excess of
distributions over net income 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 with the calculation of similar measures for
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.Distributable Three months ended Nine months ended
Cash Flow September 30, September 30,
(in thousands of dollars) 2007 2006(1) 2007 2006(1)
-------------------------------------------------------------------------
Cash flow from operating
activities (8,049) (12,449) 74,328 68,526
Add (deduct):
Changes in non cash
working capital 42,981 35,893 29,334 7,039
Maintenance capital (234) (563) (878) (2,723)
Non-controlling interest
distributable cash flow 0 (280) (369) (868)
-------------------------------------------------------------------------
Distributable cash flow 34,698 22,601 102,415 71,974
-------------------------------------------------------------------------
Distributions to
unitholders 22,931 21,679 67,242 64,863
(1) The calculation of distributable cash flow for the comparative period
has been amended to consider the non-cash effect of unrealized
foreign exchange gains and losses. For the three and nine months
ended September 30, 2006, $4 and $60 of unrealized foreign exchange
gains have been included in the change in non-cash working capital.Distributable cash flow of $34.7 million in the third quarter of 2007 and
$102.4 million year to date exceeded distributions to unitholders of
$22.9 million and $67.2 million in the respective periods.
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, capital expenditures, borrowings and debt
repayments, changes in working capital requirements and other factors.
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. These changes in non-cash working
capital are therefore excluded in the determination of distributable cash
flow.
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 cash
monthly distributions to its unitholders, these distributions are not
guaranteed.
Sustainability of distributions and asset base
Keyera operates long-life infrastructure assets consisting of natural gas
processing plants and gathering systems, NGL processing plants, storage
facilities and transportation facilities. These facilities provide services to
numerous energy producers over a wide geographic area. Throughput at each
natural gas processing plant is dependent upon the natural gas production of
third party producers within the capture area or franchise area of the plant.
Demand for fractionation, storage and transportation services is dependent
upon the supply of NGL mix obtained from the processing of third party raw
natural gas and the market demand for end-use products (propane, butane and
condensate).
Keyera has comprehensive inspection, monitoring and maintenance programs
in place. The objectives of these programs are to keep the facilities in good
working order and to maintain their ability to operate reliably for many
years. These maintenance and repair expenditures totaled $9.0 million in the
third quarter of 2007 and $25.7 million year to date. Of these amounts
$8.8 million and $24.8 million were included in operating costs and will be
recovered through the fee structure over varying periods of time, depending
upon the fee structure. At these levels of maintenance and repair, Keyera's
plants and facilities can continue to operate safely for decades to come.
Significant capital expenditures are not normally required to maintain the
existing productive capacity, but may be required if significant changes are
made in regulatory requirements.
Several of Keyera's sour gas plants rely on acid gas injection to dispose
of the hydrogen sulphide and other waste products removed during processing.
Acid gas injection involves the injection and sequestration of carbon dioxide
and hydrogen sulphide into depleted underground reservoirs. The sustainability
of this particular process is dependent upon the availability of suitable
reservoirs. If suitable reservoirs were to become unavailable, alternate
processes would be required, the capacity of the plant could be reduced or
expenditures required to replace the lost capacity would be necessary. These
alternatives would have an adverse affect on cash flow.
In addition to the operation of plant, pipeline and storage facilities,
Keyera also conducts NGL marketing and crude oil midstream businesses. These
businesses utilize facilities owned by Keyera to process, store and transport
products that have been purchased from third parties.
Cash flows from operating activities are determined primarily by the
quantity and composition of product throughput at the facility and the fee
structure. Throughput is influenced by the ongoing development activities of
numerous third parties who may increase production volumes by drilling new
wells, tying in previously drilled wells, completing new zones in existing
wells or enhancing production volumes through stimulation or enhanced recovery
techniques. If third parties are unsuccessful in their development activities,
Keyera's cash flow could be adversely affected despite having physical
capacity available. Growth capital expenditures are generally undertaken to
expand capture areas, add new capacity or introduce new services. If Keyera is
unsuccessful in extending capture areas or adding new capacity and services,
cash flow from operating activities may be reduced, thereby adversely
affecting distributions.
Standard and Poor's has assigned the Fund an SR-3 stability rating,
indicating the expectation of a high level of stability in distributions.
Additional information on the capacities and constraints related to
Keyera's plants, other risks and trends that could affect the financial
performance of Keyera and the steps taken to mitigate these risks, readers are
referred to the descriptions in this MD&A and to Keyera's 2007 Annual
Information Form, which is available on SEDAR.
Units and Convertible Debentures
During the third quarter of 2007, $0.2 million of convertible debentures
(before adjustment for deferred financing costs) were converted into
16,747 trust units and 47,057 trust units were issued under the DRIP in
consideration of $0.8 million, bringing the total units outstanding at
September 30, 2007 to 61,168,668. Convertible debentures outstanding at
September 30, 2007 were $22.0 million.
FUND REORGANIZATION
Keyera proposed a reorganization of its legal structure that was
presented in the Management's Discussion and Analysis for the quarter ended
March 31, 2007 and is described in detail in Keyera's Notice of Meeting and
Proxy Statement and Information Circular, which was filed on SEDAR
(www.sedar.com) on May 8, 2007. The intent of the reorganization is to
streamline the existing legal structure and simplify accounting, legal
reporting and income tax compliance, thereby reducing the general and
administrative costs associated with these activities. Unitholders approved
the reorganization at the annual and special Meeting of Unitholders on June 6,
2007.
Due to the interpretation of the legislation implementing the new tax on
flow-through entities, Keyera has amended its advance ruling request to the
CRA. The amended reorganization will not result in any significant immediate
tax savings within Keyera's structure, but will permit Keyera to defer the
utilization of some tax pools until after January 1, 2011. Assuming the CRA
issues a favorable advance ruling request on a timely basis, the amended
reorganization is expected to be implemented in early 2008, Keyera plans to
reduce the use of its available tax deductions in years 2008 through to 2010,
thereby increasing deductions available for the years after 2010.
Distributions to Canadian residents are expected to be approximately 50%
to 70% return of capital in 2007, with distributions becoming largely or fully
taxable in 2008 for Canadian non-exempt unitholders.
Accounting Matters and Controls
Critical accounting policies
Our unaudited Interim Consolidated Financial Statements have been
prepared in accordance with Canadian GAAP. The changes in accounting policies
are described in Note 3 to our unaudited Interim Consolidated Financial
Statements and Note 2 of our 2006 Annual Report.
Changes in accounting policies
On January 1, 2007, we adopted the following CICA handbook sections:- Section 1530, Comprehensive Income;
- Section 3251, Equity;
- Section 3855, Financial Instruments - Recognition and Measurement;
- Section 3861, Financial Instruments - Presentation and Disclosure;
and
- Section 3865, HedgesThe new accounting standards address the classification, recognition and
measurement and presentation and disclosure of financial instruments in the
financial statements and require the inclusion of comprehensive income. As
well, the new standards expand the definition of derivatives to include both
financial and non-financial contracts.
Upon adoption of these new accounting standards, financial assets and
liabilities are initially recognized at fair value and are subsequently
accounted for based on their classification. Gains and losses on financial
instruments measured at fair value are recognized in net earnings in the
period in which they arise.
As of January 1, 2007, Keyera recorded $3.3 million as an asset held for
trading and $0.1 million as a liability held for trading to recognize the fair
value of the existing natural gas and electricity contracts previously
designated as hedging items, as well as the fair value of all fixed price
physical contracts not previously recognized. A corresponding adjustment was
made to opening accumulated earnings. Subsequent changes in the fair value of
the positions were recorded in net earnings.
The changes in accounting policies were applied prospectively, where
applicable. Comparative figures have not been restated. For further details,
see Note 3 to the interim consolidated financial statements.
Future changes in accounting policies
In 2006, the CICA issued three new accounting standards: Section 1535,
Capital Disclosures; Section 3862, Financial Instruments - Disclosures; and
Section 3863, Financial Instruments - Presentation. These new standards will
be effective for the Fund on January 1, 2008. Section 1535 establishes new
disclosures of capital including disclosing information regarding capital
objectives, policies and processes for managing capital. Section 3862 and 3863
replace Section 3861, revising and enhancing disclosure requirements.
In June 2007, the CICA issued a new accounting standard, Section 3031,
Inventories. This new standard replaces Section 3030 modifying the guidance
concerning the scope, measurement and allocation of costs for inventory. This
standard will be effective for the Fund on January 1, 2008.
Internal control over financial reporting
No changes were made in our internal control over financial reporting
during the interim period ended September 30, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
SUMMARY OF QUARTERLY RESULTS
The following table presents selected financial information for Keyera:Three months ended (in thousands of dollars)
-------------------------------------------------------------------------
Dec 31, Mar 31, Jun 30, Sep 30,
2005 2006 2006 2006
-------------------------------------------------------------------------
Operating revenues:
- Marketing 317,863 316,841 279,241 279,492
- Gathering and Processing 37,278 38,053 40,772 44,290
- NGL Infrastructure 10,349 9,606 8,549 10,878
Net earnings(1) 15,491 15,384 25,969 11,797
Net earnings per unit ($/unit)
Basic 0.26 0.26 0.43 0.19
Diluted 0.23 0.22 0.39 0.16
Trust units outstanding (thousands)
Weighted average (basic) 59,926 60,291 60,560 60,692
Weighted average (diluted) 63,246 63,321 62,768 62,817
Distributions to unitholders 21,062 21,553 21,631 21,679
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Dec 31, Mar 31, Jun 30, Sep 30,
2006 2007 2007 2007
-------------------------------------------------------------------------
Operating revenues:
- Marketing 286,325 307,342 292,326 276,957
- Gathering and Processing 43,621 41,949 44,277 50,744
- NGL Infrastructure 10,855 9,692 9,525 10,044
Net earnings(1) 14,928 19,012 (59,870) 15,310
Net earnings per unit ($/unit)
Basic 0.25 0.31 (0.98) 0.25
Diluted 0.24 0.31 (0.95) 0.25
Trust units outstanding (thousands)
Weighted average (basic) 60,865 60,972 61,061 61,136
Weighted average (diluted) 62,869 62,918 62,967 63,011
Distributions to unitholders 21,742 21,773 22,538 22,931
-------------------------------------------------------------------------
(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
Taxability of Distributions
Keyera currently anticipates that, for Canadian residents, approximately
50% to 70% of the Fund's 2007 distributions will be deemed a tax-deferred
return of capital, with distributions becoming largely or fully taxable for
Canadian non-exempt unitholders in 2008. This outlook is affected by Keyera's
organizational structure and the implementation of the proposed internal
reorganization, which was approved by Unitholders in June. This outlook 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.
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.
In the third quarter, Keyera realigned its Gathering and Processing
assets into new business regions, the Foothills Region and the North Central
Region. To assist in analysis, Keyera has reformatted its historical
supplementary information to conform to the new business regions.
THIRD Quarter 2007 Results Conference Call and Webcast
Keyera will be conducting a conference call and webcast for investors,
analysts, brokers and media representatives to discuss the third quarter 2007
results at 8:00 am Mountain (10:00 am Eastern) on Wednesday, November 7, 2007.
Callers may participate by either dialing 800-732-9303 or 416-644-3417. A
recording of the call will be available for replay until midnight,
November 14, 2007 by dialing 877-289-8525 or 416-640-1917 and entering pass
code 21249885 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)
September 30, December 31,
2007 2006
As at: $ $
-------------------------------------------------------------------------
ASSETS
Current assets
Cash 610 -
Accounts receivable 200,187 160,112
Inventory 83,508 53,939
Asset held for sale (note 6) - 4,200
Other current assets 1,977 4,327
-------------------------------------------------------------------------
286,282 222,578
Property, plant and equipment 916,896 924,947
Intangible assets 6,969 10,553
Goodwill 71,234 64,934
Future income tax assets (note 8) 481 -
-------------------------------------------------------------------------
1,281,862 1,223,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Bank indebtedness - 96
Accounts payable and accrued liabilities 191,900 148,318
Distributions payable (note 11) 7,646 7,251
Credit facilities (note 4) 40,000 107,984
Current portion of long-term debt (note 4) 20,000 -
-------------------------------------------------------------------------
259,546 263,649
Long-term debt (note 4) 273,574 215,000
Convertible debentures (note 5) 21,998 23,542
Asset retirement obligation (note 7) 38,136 34,533
Future income tax liabilities (note 8) 156,562 65,424
-------------------------------------------------------------------------
749,816 602,148
-------------------------------------------------------------------------
Non-controlling interest (note 17) - 2,744
Unitholders' equity
Unitholders' capital (note 9) 680,557 677,025
Accumulated earnings 136,719 159,083
Accumulated distributions to unitholders
(note 11) (285,230) (217,988)
-------------------------------------------------------------------------
532,046 618,120
-------------------------------------------------------------------------
1,281,862 1,223,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (note 14)
The accompanying notes to the interim consolidated financial statements
are an integral part of these statements.
Keyera Facilities Income Fund
Interim Consolidated Statements of Net Earnings (Loss), Comprehensive
Income (Loss) and Accumulated Earnings
(Thousands of Canadian dollars, except unit information)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
$ $ $ $
-------------------------------------------------------------------------
Operating revenues
Marketing 276,957 279,492 876,625 875,574
Gathering and Processing 50,744 44,290 136,970 123,115
NGL Infrastructure 10,044 10,878 29,261 29,033
-------------------------------------------------------------------------
337,745 334,660 1,042,856 1,027,722
Operating expenses
Marketing 265,718 267,919 819,585 827,486
Gathering and Processing 28,771 25,543 79,710 74,246
NGL Infrastructure 5,761 6,840 17,617 17,857
-------------------------------------------------------------------------
300,250 300,302 916,912 919,589
-------------------------------------------------------------------------
37,495 34,358 125,944 108,133
General and administrative 2,740 4,062 15,268 15,439
Interest expense on long-
term indebtedness 3,421 3,447 11,176 10,416
Other interest expense 1,099 1,515 3,493 2,587
Depreciation and
amortization 10,452 10,415 31,461 29,430
Accretion expense (note 7) 838 482 2,096 1,448
Impairment expense 367 - 367 373
-------------------------------------------------------------------------
18,917 19,921 63,861 59,693
-------------------------------------------------------------------------
Earnings before income tax
and non-controlling
interest 18,578 14,437 62,083 48,440
Income tax expense
(recovery) (note 8) 3,268 2,396 87,325 (5,500)
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling interest 15,310 12,041 (25,242) 53,940
Non-controlling interest - 244 306 790
-------------------------------------------------------------------------
Net earnings (loss) 15,310 11,797 (25,548) 53,150
Other comprehensive income - - - -
-------------------------------------------------------------------------
Comprehensive income (loss)
(note 3) 15,310 11,797 (25,548) 53,150
Accumulated earnings,
beginning of period 121,409 132,358 159,083 91,005
Change in accounting
policies (note 3) - - 3,184 -
-------------------------------------------------------------------------
Accumulated earnings, end
of period 136,719 144,155 136,719 144,155
-------------------------------------------------------------------------
Weighted average number of
units (thousands)
(note 10)
- basic 61,136 60,692 61,057 60,516
- diluted 63,011 62,817 62,966 62,769
Net earnings (loss) per
unit (note 10)
- basic 0.25 0.19 (0.42) 0.88
- diluted 0.25 0.16 (0.39) 0.83
-------------------------------------------------------------------------
The accompanying notes to the interim consolidated financial statements
are an integral part of these statements.
Keyera Facilities Income Fund
Interim Consolidated Statements of Cash Flows
(Thousands of Canadian dollars)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
Net inflow (outflow) of cash: $ $ $ $
-------------------------------------------------------------------------
Operating activities
Net earnings (loss) 15,310 11,797 (25,548) 53,150
Items not affecting cash:
Depreciation and
amortization 10,452 10,415 31,461 29,430
Accretion expense 838 482 2,096 1,448
Impairment expense 367 - 367 373
Unrealized loss (gain)
on derivatives held for
trading 5,294 (809) 10,779 (703)
Future income tax expense
(recovery) (note 8) 2,726 1,341 84,357 (8,842)
Non-controlling interest - 244 306 790
Asset retirement obligation
expenditures (note 7) (55) (26) (156) (81)
Changes in non-cash working
capital (note 15) (42,981) (35,893) (29,334) (7,039)
-------------------------------------------------------------------------
(8,049) (12,449) 74,328 68,526
-------------------------------------------------------------------------
Investing activities
Capital expenditures (8,246) (13,093) (16,350) (65,730)
Acquisition of non-
controlling interest
(note 17) - - (6,716) -
Proceeds on sale of assets
(note 6) - - 4,200 -
Additions to intangibles - - - (1,115)
Changes in non-cash working
capital (note 15) 1,313 (3,030) (1,674) (3,300)
-------------------------------------------------------------------------
(6,933) (16,123) (20,540) (70,145)
-------------------------------------------------------------------------
Financing activities
(Repayment) issuance of
debt under credit
facilities (35,000) 49,003 (67,984) 55,383
Issuance of long-term debt,
net of financing costs
(note 4) 79,313 - 79,313 -
Issuance of trust units
(note 9) 824 1,045 2,436 3,348
Distributions paid to
unitholders (note 11) (22,923) (21,662) (66,847) (64,785)
Distributions or dividends
paid to others - - - (239)
-------------------------------------------------------------------------
22,214 28,386 (53,082) (6,293)
-------------------------------------------------------------------------
Net cash inflow (outflow) 7,232 (186) 706 (7,912)
-------------------------------------------------------------------------
(Bank indebtedness) cash,
beginning of period (6,622) (2,092) (96) 5,634
-------------------------------------------------------------------------
Cash (bank indebtedness),
end of period 610 (2,278) 610 (2,278)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes to the interim consolidated financial statements
are an integral part of these statements.
See note 15 for cash interest and taxes paid
Keyera Facilities Income Fund
Notes to Interim Consolidated Financial Statements
As At and For the Three and Nine Months Ended September 30, 2007
(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 indirectly owns a 100% interest in Keyera Energy 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 subsidiaries include Keyera Energy Facilities Ltd.
("KEFL"), Keyera Energy Ltd. ("KEL"), Keyera Energy Inc. ("KEI"),
Keyera RPL Holdings Ltd. ("KRPL") and Rimbey Pipeline Limited
Partnership ("RPLP").
The Fund is administered by and the Partnership is managed by Keyera
Energy Management Ltd. ("KEML" or the "Managing Partner"). The
Managing Partner has a 33.83% interest in the Partnership.
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 indirectly from the Partnership and, in the event of the
termination of the Fund, participating pro rata in the net assets
remaining after satisfaction of all liabilities.
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, 2006 as included
in the Fund's 2006 Annual Report to unitholders except for the
changes made in adopting new accounting standards.
These unaudited interim consolidated financial statements as at and
for the three and nine months ended September 30, 2007 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, 2006.
Interim periods may not be representative of the results expected for
the full year of operation due to seasonality. Certain of the
comparative figures in prior periods have been reclassified to
conform to the presentation in the current period.
3. Change in accounting policies
Effective January 1, 2007, the Fund adopted the following accounting
standards issued by the Canadian Institute of Chartered Accountants
("CICA"):
- Section 1530, Comprehensive Income;
- Section 3855, Financial Instruments - Recognition and
Measurement;
- Section 3861, Financial Instruments - Disclosure and
Presentation; and
- Section 3865, Hedges
The Fund has adopted these standards prospectively and comparative
consolidated financial statements have not been restated. The Fund
has selected December 31, 2003 as the date for identification of
embedded derivatives. Transition amounts have been recorded in
opening accumulated earnings.
Financial instruments and hedges
All financial instruments must initially be recognized at fair value
on the balance sheet. The Fund has classified each financial
instrument into the following categories:
- Financial assets and financial liabilities held for trading
- Loans or receivables
- Held to maturity
- Financial assets available for sale
- Other financial liabilities
Subsequent measurement of the financial instruments is based on their
classification. Financial assets and financial liabilities held for
trading are measured at fair value and changes in those fair values
are recognized in net earnings. Financial assets available for sale
are measured at fair value, with changes in those fair values
recognized in other comprehensive income. Financial assets held to
maturity, loans or receivables and other financial liabilities are
measured at amortized cost using the effective interest rate method
of amortization.
Upon adoption, the Fund has classified all financial assets as loans
or receivables, with the exception of cash and cash equivalents and
derivative instruments. Derivative instruments and cash and cash
equivalents have been classified as held for trading. The Fund has
classified all financial liabilities as other financial liabilities,
with the exception of derivative instruments. Derivative instruments
have been classified as held for trading. Gains and losses related to
derivative contracts are recognized in revenue in the period in which
they arise. The estimated fair value of assets and liabilities held
for trading is determined by reference to quoted market prices and,
if not available, to estimates from third-party brokers or dealers.
For long-term financial liabilities, the transaction costs that are
directly attributable to the issue of a financial liability are added
to the fair value initially recognized for that financial instrument.
These costs are amortized to earnings using the effective interest
rate method. For all financial assets and short-term financial
liabilities, transaction costs are charged to earnings as incurred.
As of January 1, 2007, unamortized deferred financing fees of $985
relating to the Fund's long-term debt and $502 relating to
convertible debentures have been reclassified for presentation
purposes from intangible assets to long-term debt and convertible
debentures. These fees are now amortized to earnings using the
effective interest rate method.
The Fund assesses at each balance sheet date whether a financial
asset carried at cost is impaired. If there is objective evidence
that an impairment loss exists, the amount of the loss is measured as
the difference between the carrying amount of the asset and its fair
value. The carrying amount of the asset is reduced and the amount of
the loss is recognized in earnings.
Effective January 1, 2007 the Fund has opted to discontinue the use
of hedge accounting. All derivative instruments that previously
qualified for hedge accounting have been recognized at fair value and
unrealized gains and losses have been recorded in earnings.
Adopting these standards on January 1, 2007 resulted in the
recognition of an asset held for trading in the amount of $3,314, a
liability held for trading in the amount of $130 and a $3,184
increase to opening accumulated earnings. Assets held for trading are
included in accounts receivable and liabilities held for trading are
included in accounts payable and accrued liabilities. The effect on
basic and diluted net earnings per unit was $0.05.
Comprehensive income
Comprehensive income consists of net earnings (loss) and other
comprehensive income ("OCI"). OCI comprises the changes in the fair
value of the effective portion of derivatives used as hedging items
in a cash flow hedge, changes in the fair value of any available for
sale financial instruments and foreign currency translation
adjustments of self-sustaining foreign operations. Accumulated other
comprehensive income ("AOCI") is a new equity category comprised of
the cumulative amounts of OCI.
No amounts have been recorded in OCI or AOCI as a result of adopting
this accounting standard.
Future accounting changes
In 2006, the CICA issued three new accounting standards: Section
1535, Capital Disclosures; Section 3862, Financial Instruments -
Disclosures; and Section 3863, Financial Instruments - Presentation.
These new standards will be effective for the Fund on January 1,
2008. Section 1535 establishes new disclosures of capital including
disclosing information regarding capital objectives, policies and
processes for managing capital. Sections 3862 and 3863 replace
Section 3861, revising and enhancing disclosure requirements.
In June 2007, the CICA issued the new accounting standard, Section
3031 - Inventories. This new standard replaces Section 3030 modifying
the guidance concerning the scope, measurement and allocation of
costs of inventory. This standard will be effective for the Fund on
January 1, 2008.
The Fund is currently evaluating the impact of adopting these new
standards on the consolidated financial statements.
4. Credit facilities and long-term debt
September 30, December 31,
2007 2006
As at $ $
---------------------------------------------------------------------
Bank credit facilities(a) 40,000 100,984
Revolving demand loan(a) - 7,000
---------------------------------------------------------------------
Total credit facilities 40,000 107,984
---------------------------------------------------------------------
---------------------------------------------------------------------
Current portion of long-term debt(b) 20,000 -
Long-term debt(b) 275,000 215,000
Deferred financing costs(1) (1,426) -
---------------------------------------------------------------------
Total long-term debt 293,574 215,000
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Deferred financing costs have been reclassified to long-term
debt upon adoption of the new accounting standards (see note 3).
Previously, these costs were included in intangible assets.
(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, 2010, 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 $10,000 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. The weighted average
interest rates for the three and nine months ended September 30,
2007 were 5.80% and 5.63% (5.94% and 5.46% for the three and
nine months ended September 30, 2006). As at September 30, 2007,
the balance outstanding on the bank credit facilities was
$40,000 ($100,984 as at December 31, 2006).
On July 12, 2007, the $7,000 unsecured revolving demand loan
facility related to a subsidiary of the Partnership was
terminated.
(b) In 2003, $125,000 of unsecured senior notes were issued by the
Partnership and KEFL in three parts: $20,000 due in 2008 bearing
interest at 5.42%, $52,500 due in 2010 bearing interest at 5.79%
and $52,500 due in 2013 bearing interest at 6.16%. Interest is
payable monthly. Financing costs of $1,215 have been deferred
and are amortized using the effective interest rate method over
the remaining terms of the related debt. The effective interest
rates for the three and nine months ended September 30, 2007
were 5.63%, 5.95% and 6.29% for the notes due in 2008, 2010 and
2013 respectively (5.42%, 5.79% and 6.16% for the three and nine
months ended September 30, 2006).
In 2004, $90,000 of unsecured senior notes were issued by KEFL
and guaranteed by the Partnership. The notes bear interest at
5.23% and mature on October 1, 2009. Interest is payable semi-
annually. Financing costs of $568 have been deferred and are
amortized using the effective interest rate method over the
remaining term of the debt. The effective interest rate for the
three and nine months ended September 30, 2007 was 5.37% (5.23%
for the three and nine months ended September 30, 2006).
On September 4, 2007, $80,000 of unsecured senior notes were
issued by KEFL and guaranteed by the Partnership in two
tranches: $40,000 due in 2017 bearing interest at 5.89% and
$40,000 due in 2022 bearing interest at 6.14%. Interest is
payable semi-annually. Financing costs of $687 have been
deferred and are amortized using the effective interest rate
method over the terms of the related debt. The effective
interest rates for the period were 1.96% and 2.03% for the notes
due in 2017 and 2022 respectively.
An additional $40,000 of unsecured senior notes will be issued
in December 2007 by KEFL in two tranches: $20,000 due in 2017
bearing interest at 5.89% and $20,000 due in 2022 bearing
interest at 6.14%.
5. 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
$403 and $1,212 has been accrued for the three and nine months ended
September 30, 2007 ($431 and $1,369 for the three and nine months
ended September 30, 2006). 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 September 30, 2007, $77,604 debentures had been
converted to trust units ($76,458 at December 31, 2006).
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 September 30, 2007, $2,832 has
been reclassified to unitholders' equity ($2,782 at December 31,
2006). As at September 30, 2007, $398 of deferred financing costs
remain. The effective interest rate for the three and nine months
ended September 30, 2007 was 7.36% (6.75% for the three and nine
months ended September 30, 2006).
6. Asset held for sale
Asset held for sale consisted of an interest in an electrical
generator. In 2006, the equipment was written down to its estimated
net realizable value recognizing a $373 charge to impairment expense.
On January 23, 2007, the Fund sold its interest in the electrical
generator for proceeds of $4,200.
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, 2006 27,776
Liabilities acquired 151
Liabilities settled (160)
Revisions in estimated cash flows 4,509
Accretion expense 2,257
---------------------------------------------------------------------
Balance, December 31, 2006 34,533
Liabilities acquired 912
Liabilities settled (156)
Revisions in estimated cash flows 751
Accretion expense 2,096
---------------------------------------------------------------------
Balance, September 30, 2007 38,136
---------------------------------------------------------------------
---------------------------------------------------------------------
8. Income taxes
On June 22, 2007, Bill C-52 Budget Implementation Act, 2007 was
enacted by the Canadian federal government. This legislation proposes
to tax 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. As a result of the new tax legislation, the Fund
recorded an additional $80.2 million future income tax expense and
increased its future income tax liability in the second quarter of
2007. This adjustment represents taxable temporary differences of the
Partnership that were previously not recorded for future income tax
purposes. These temporary differences have been recorded at a tax-
effected rate of 31.5%, which is the rate that will be applicable in
2011 under the current legislation.
The following is a reconciliation of income taxes, calculated at the
combined federal and provincial income tax rate, to the income tax
provision included in the consolidated statements of net earnings
(loss).
Three Months Ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
$ $ $ $
---------------------------------------------------------------------
Earnings before tax and
non-controlling interest 18,578 14,437 62,083 48,440
Income from the Fund
distributable to
unitholders (11,469) (8,547) (37,746) (26,748)
---------------------------------------------------------------------
Income before taxes -
operating subsidiaries 7,109 5,890 24,337 21,692
---------------------------------------------------------------------
Income tax at statutory
rate of 32.12% (2006
- 34.49%) 2,283 2,032 7,817 7,482
Impact of recording
temporary differences
of the Partnership 217 - 82,399 -
Non deductible items
excluded from income
for tax purposes 481 (94) 1,208 (49)
Rate adjustments and
changes in estimates (64) (27) (3,435) (10,232)
Benefit of long-term
incentive plan
previously not
recorded - - - (2,202)
Benefit of non-capital
losses previously not
recorded - 498 (786) (324)
Resource allowance - 71 - 223
Adjustments to tax
pool balances 322 - (154) (196)
Other 29 (84) 276 (202)
---------------------------------------------------------------------
3,268 2,396 87,325 (5,500)
---------------------------------------------------------------------
Classified as:
Current 542 1,055 2,968 3,342
Future 2,726 1,341 84,357 (8,842)
---------------------------------------------------------------------
Income tax expense
(recovery) 3,268 2,396 87,325 (5,500)
---------------------------------------------------------------------
---------------------------------------------------------------------
For income tax purposes, the Fund and its subsidiaries have non-
capital losses carried forward of approximately $2,020 at
September 30, 2007 ($11,987 at December 31, 2006) 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
September 30, 2007.
During the second quarter of 2007, the Fund recorded a $5,780 future
income tax liability with a corresponding increase to Goodwill. This
adjustment relates to a prior period acquisition that did not reflect
a future income tax impact for a temporary difference. A further $520
future tax liability and increase to Goodwill was recorded relating
to the acquisition of the minority interest in RPLP (see note 17).
The future income tax (liabilities) assets relate to the (taxable)
deductible temporary differences in the carrying values and tax bases
as follows:
September 30, December 31,
2007 2006
As at $ $
---------------------------------------------------------------------
Property, plant and equipment (165,315) (71,611)
Asset retirement obligation 11,381 4,308
Long-term incentive plan 1,765 1,513
Non-capital losses 178 3,475
Intangible assets (1,217) (616)
Other (3,354) (2,493)
---------------------------------------------------------------------
Future income tax liabilities (156,562) (65,424)
---------------------------------------------------------------------
---------------------------------------------------------------------
Property, plant and equipment (398) -
Asset retirement obligation 65 -
Non-capital losses 428 -
Intangible assets 386
---------------------------------------------------------------------
Future income tax assets 481 -
---------------------------------------------------------------------
---------------------------------------------------------------------
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 Commercial Trust Series 1 notes.
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, 2006 60,125,193 665,914
Units issued on conversion of
convertible debentures 597,563 6,859
Units issued pursuant to DRIP 207,997 4,252
---------------------------------------------------------------------
Balance, December 31, 2006 60,930,753 677,025
Units issued on conversion of
convertible debentures 95,489 1,096
Units issued pursuant to DRIP 142,426 2,436
---------------------------------------------------------------------
Balance, September 30, 2007 61,168,668 680,557
---------------------------------------------------------------------
---------------------------------------------------------------------
10. Net earnings (loss) per unit
Basic per unit calculations for the three and nine months ended
September 30, 2007 and 2006 were based on the weighted average number
of units outstanding for the related period. Convertible debentures
were in the money for the three and nine months ended September 30,
2007 and 2006 and contributed to the increase in diluted weighted
average number of units for these periods.
Beginning in the second quarter of 2006, incentive awards have been
excluded from the calculation of diluted weighted average number of
units as units are delivered by acquiring them on the market, rather
than issuing them from treasury.
Three Months Ended Nine months ended
September 30, September 30,
(thousands) 2007 2006 2007 2006
---------------------------------------------------------------------
Weighted average number
of units - basic 61,136 60,692 61,057 60,516
Additional units if
debentures converted 1,875 2,125 1,909 2,253
---------------------------------------------------------------------
Weighted average number
of units - diluted 63,011 62,817 62,966 62,769
---------------------------------------------------------------------
---------------------------------------------------------------------
11. Accumulated distributions to unitholders
$
---------------------------------------------------------------------
Balance, January 1, 2006 131,383
Unitholders' distributions declared and paid 79,354
Unitholders' distributions declared 7,251
---------------------------------------------------------------------
Balance, December 31, 2006 217,988
Unitholders' distributions declared and paid 59,596
Unitholders' distributions declared 7,646
---------------------------------------------------------------------
Balance, September 30, 2007 285,230
---------------------------------------------------------------------
---------------------------------------------------------------------
Pursuant to the Fund Declaration of Trust dated April 3, 2003 and its
subsequent amendments, the Fund makes monthly distributions to
holders on 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 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 is determined
at the discretion of the Board of Directors of the Fund. In
determining its distribution policy, the Board of Directors of the
Fund 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 directors
of KEML 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 ($185) and $4,062 for the three and
nine months ended September 30, 2007 ($1,474 and $4,266 for the three
and nine months ended September 30, 2006).
During the three months ended September 30, 2007, 389,541 units were
purchased on the market at a cost of $7,237 and delivered to Plan
participants under the Plan.
(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
and is 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 September 30, 2007, 491,530 Performance Unit Awards (529,867 at
December 31, 2006) were outstanding: 166,705 effective July 1, 2005,
147,100 effective July 1, 2006 and 177,725 effective July 1, 2007.
The compensation cost recorded for these units for the three and nine
months ended September 30, 2007 were ($371) and $3,288, using the
applicable closing market price of a unit of the Fund ($422 and
$2,685 for the three and nine months ended September 30, 2006).
(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 and 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 September 30, 2007, 90,895 Restricted Unit Awards (98,735 at
December 31, 2006) were outstanding: 12,017 effective July 1, 2005,
25,753 effective July 1, 2006 and 53,125 effective July 1, 2007. The
compensation cost recorded for these units for the three and nine
months ended September 30, 2007 was $186 and $774, using the
applicable closing market price of a unit of the Fund ($1,052 and
$1,581 for the three and nine months ended September 30, 2006).
13. Financial instruments
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 financial instruments
such as foreign exchange contracts, oil price contracts, natural gas
price contracts, power price contracts and physical fixed price
contracts).
Derivatives held for trading
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 time contracted volumes are
purchased and sold and currency exchange risk for those sales
denominated in U.S. dollars. These risks are actively managed by
using forward currency contracts and swaps, energy related forwards,
swaps and options and by balancing physical and financial contracts
in terms of volumes, timing of performance and delivery obligations.
Management monitors the exposure to the above risks and regularly
reviews its financial instrument activities and all outstanding
positions.
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.
Natural gas, NGL and crude oil contracts that require physical
delivery at fixed prices and do not meet the Fund's expected
purchase, sale or usage requirements are accounted for as derivative
financial 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 September 30, 2007, $2,136 of assets held for trading were
included in accounts receivable and $9,807 of liabilities held for
trading were included in accounts payable and accrued liabilities.
Unrealized (losses) gains, representing the change in fair value of
derivative contracts are recorded in Marketing operating revenue and
NGL Infrastructure operating expense.
The unrealized (loss) gain relating to derivative contracts were as
follows:
Three Months Ended Nine months ended
September 30, September 30,
Unrealized (loss) gain 2007 2006 2007 2006
---------------------------------------------------------------------
Marketing (5,726) 809 (10,376) 703
NGL Infrastructure (308) - (403) -
---------------------------------------------------------------------
---------------------------------------------------------------------
The fair value of the derivatives 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
September 30, 2007 Amount $ Value $ Price $ Volume
---------------------------------------------------------------------
Natural gas:
Buyer of fixed price
swaps (maturing by
March 31, 2008) (262) (262) 7.85/GJ 183,000 GJs
Electricity:
Buyer of fixed price
swaps (maturing by
December 31, 2008) 760 760 55/MWh 27,480 MWhs
NGLs:
Seller of fixed price
swaps (maturing by
March 31, 2008) (8,098) (8,098) 69.90/Bbl 854,699 Bbls
Buyer of fixed price
swaps (maturing by
March 31, 2008) 1,340 1,340 69.45/Bbl 138,000 Bbls
Currency:
Seller of forward
contracts (maturing
by October 15, 2007) 36 36 1.0326/USD US$1,000
Physical contracts:
Seller of fixed price
forward contracts
(maturing by March 31,
2008) (1,447) (1,447) 49.67/Bbl 246,048 Bbls
---------------------------------------------------------------------
---------------------------------------------------------------------
As at December 31, 2006
Natural gas:
Buyer of fixed price
swaps (maturing by
March 31, 2007) - (130) 7.78/GJ 90,000 GJs
Electricity:
Buyer of fixed price
swaps (maturing by
December 31, 2008) - 1,031 55/MWh 43,860 MWhs
NGLs:
Seller of fixed price
swaps (maturing by
March 30, 2007) 211 211 72.25/Bbl 450,000 Bbls
Currency:
Seller of forward
contracts (maturing
by January 26, 2007) (287) (287) 1.1477/USD US$16,350
Physical contracts:
Seller of fixed price
forward contracts - - - -
---------------------------------------------------------------------
---------------------------------------------------------------------
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.
Fair value
The carrying values of cash and cash equivalents, 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.
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. At September 30, 2007, the accounts receivable from the two
largest customers amounted to 3% of accounts receivable (December 31,
2006 - less than 1%). Revenue from the two largest customers amounted
to 19% and 16% of operating revenue for the three and nine months
ended September 30, 2007 (14% and 12% for the three and nine months
ended September 30, 2006). With respect to counterparties for
derivative financial instruments, the credit risk is managed through
dealing with recognized futures exchanges or investment grade
financial institutions and by maintaining credit policies, which
significantly minimize overall counter party credit risk.
Foreign currency rate risk
The Gathering and Processing and NGL Infrastructure segments, where
all sales and virtually all purchases are denominated in Canadian
dollars, are not subject to foreign currency rate risk. In the
Marketing business, approximately US$44,123 and US$157,876 of sales
were priced in U.S. dollars for the three and nine months ended
September 30, 2007 (US$69,596 and US$234,458 for the three and nine
months ended September 30, 2006).
The Fund realized and recorded $510 and $1,222 of foreign currency
loss in Marketing operating expenses for the three and nine months
ended September 30, 2007 ($156 and ($381) for the three and nine
months ended September 30, 2006). A further $241 and $1,526 of
unrealized foreign currency gains were recorded in Marketing
operating expenses for the three and nine months ended September 30,
2007 ($nil of unrealized foreign currency gains for the three and
nine months ended September 30, 2006).
Currency exchange risk is actively managed by using forward currency
contracts and swaps. Management monitors the exposure to currency
exchange risk and regularly reviews its financial instrument
activities and all outstanding positions.
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 September 30, 2007,
fixed rate borrowings comprised 88% of total debt outstanding
(December 31, 2006 - 67%). The fair value of the senior fixed rate
debt at September 30, 2007 was $295,257 (December 31, 2006 -
$224,457). The fair value of the Fund's unsecured convertible
debentures at September 30, 2007 was $34,266 (December 31, 2006 -
$31,782).
14. Commitments and contingencies
The Fund, through its operating entities, is involved in various
contractual agreements with a major oil and gas producer. The
agreements range from one to eleven years and comprise the processing
of the 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 space and natural
gas transportation. The estimated annual minimum operating lease
rental payments from these commitments are as follows:
$
---------------------------------------------------------------------
2007 2,268
2008 8,287
2009 7,369
2010 5,804
2011 4,721
Thereafter 5,864
---------------------------------------------------------------------
34,313
---------------------------------------------------------------------
---------------------------------------------------------------------
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.
15. Supplemental cash flow information
Changes in non-cash working capital
Three Months Ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
$ $ $ $
---------------------------------------------------------------------
Cash provided by
(used in):
Accounts receivable (30,163) (8,860) (47,371) 19,691
Inventory (36,568) (37,529) (29,569) (29,475)
Other current assets 5,905 6,318 2,350 1,405
Accounts payable and
accrued liabilities 19,158 1,148 43,582 (1,960)
---------------------------------------------------------------------
Changes in non-cash
working capital (41,668) (38,923) (31,008) (10,339)
---------------------------------------------------------------------
Relating to:
Operating activities (42,981) (35,893) (29,334) (7,039)
Investing activities 1,313 (3,030) (1,674) (3,300)
---------------------------------------------------------------------
Other cash flow
information:
Interest paid 5,637 6,206 14,377 14,421
Taxes paid - 1,123 1,992 3,644
16. 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
Three months and
ended Process- NGL Infra-
September 30, Marketing ing structure Corporate Total
2007 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 276,957 51,440 16,495 - 344,892
Inter-segment
revenue - (696) (6,451) - (7,147)
-------------------------------------------------------------------------
External revenue 276,957 50,744 10,044 - 337,745
Operating expenses (272,865) (28,771) (5,761) - (307,397)
Inter-segment
expenses 7,147 - - - 7,147
-------------------------------------------------------------------------
External operating
expenses (265,718) (28,771) (5,761) - (300,250)
-------------------------------------------------------------------------
11,239 21,973 4,283 - 37,495
General and
administrative,
interest and
other - - - (7,260) (7,260)
Depreciation and
amortization (709) (7,296) (2,173) (274) (10,452)
Accretion expense (3) (754) (81) - (838)
Impairment expense - (367) - - (367)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 10,527 13,556 2,029 (7,534) 18,578
-------------------------------------------------------------------------
Income tax expense (270) - (2,089) (909) (3,268)
-------------------------------------------------------------------------
Earnings (loss)
before
non-controlling
interest 10,257 13,556 (60) (8,443) 15,310
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable
assets 220,334 818,719 236,979 5,830 1,281,862
-------------------------------------------------------------------------
Capital
expenditures 12 7,312 785 137 8,246
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gathering
Three months and
ended Process- NGL Infra-
September 30, Marketing ing structure Corporate Total
2006 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 279,492 45,014 18,570 - 343,076
Inter-segment
revenue - (724) (7,692) - (8,416)
-------------------------------------------------------------------------
External revenue 279,492 44,290 10,878 - 334,660
Operating expenses (276,335) (25,543) (6,840) - (308,718)
Inter-segment
expenses 8,416 - - - 8,416
-------------------------------------------------------------------------
External operating
expenses (267,919) (25,543) (6,840) - (300,302)
-------------------------------------------------------------------------
11,573 18,747 4,038 - 34,358
General and
administrative,
interest and
other - - - (9,024) (9,024)
Depreciation and
amortization (1,070) (7,211) (1,861) (273) (10,415)
Accretion expense - (411) (71) - (482)
Impairment expense - - - - -
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 10,503 11,125 2,106 (9,297) 14,437
-------------------------------------------------------------------------
Income tax
(expense)
recovery (84) - (2,546) 234 (2,396)
-------------------------------------------------------------------------
Earnings (loss)
before
non-controlling
interest 10,419 11,125 (440) (9,063) 12,041
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 185,983 819,449 233,074 22,613 1,261,119
-------------------------------------------------------------------------
Capital expenditures 4 4,693 8,015 381 13,093
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gathering
Nine months and
ended Process- NGL Infra-
September 30, Marketing ing structure Corporate Total
2007 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 876,625 139,222 51,834 - 1,067,681
Inter-segment
revenue - (2,252) (22,573) - (24,825)
-------------------------------------------------------------------------
External revenue 876,625 136,970 29,261 - 1,042,856
Operating expenses (844,410) (79,710) (17,617) - (941,737)
Inter-segment
expenses 24,825 - - - 24,825
-------------------------------------------------------------------------
External operating
expenses (819,585) (79,710) (17,617) - (916,912)
-------------------------------------------------------------------------
57,040 57,260 11,644 - 125,944
General and
administrative,
interest and
other - - - (29,937) (29,937)
Depreciation and
amortization (2,482) (21,801) (6,439) (739) (31,461)
Accretion expense (8) (1,840) (248) - (2,096)
Impairment expense - (367) - - (367)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 54,550 33,252 4,957 (30,676) 62,083
-------------------------------------------------------------------------
Income tax
(expense)
recovery 623 - (6,157) (81,791) (87,325)
-------------------------------------------------------------------------
Earnings (loss)
before
non-controlling
interest 55,173 33,252 (1,200) (112,467) (25,242)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 220,334 818,719 236,979 5,830 1,281,862
-------------------------------------------------------------------------
Capital
expenditures 550 13,676 5,174 616 20,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gathering
Nine months and
ended Process- NGL Infra-
September 30, Marketing ing structure Corporate Total
2006 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 875,574 125,661 49,330 - 1,050,565
Inter-segment
revenue - (2,546) (20,297) - (22,843)
-------------------------------------------------------------------------
External revenue 875,574 123,115 29,033 - 1,027,722
Operating
expenses (850,329) (74,246) (17,857) - (942,432)
Inter-segment
expenses 22,843 - - - 22,843
-------------------------------------------------------------------------
External operating
expenses (827,486) (74,246) (17,857) - (919,589)
-------------------------------------------------------------------------
48,088 48,869 11,176 - 108,133
General and
administrative,
interest and
other - - - (28,442) (28,442)
Depreciation and
amortization (2,223) (20,777) (5,592) (838) (29,430)
Accretion expense - (1,236) (212) - (1,448)
Impairment expense - (373) - - (373)
-------------------------------------------------------------------------
Earnings (loss)
before tax and
non-controlling
interest 45,865 26,483 5,372 (29,280) 48,440
-------------------------------------------------------------------------
Income tax
recovery
(expense) (84) - (1,160) 6,744 5,500
-------------------------------------------------------------------------
Earnings (loss)
before
non-controlling
interest 45,781 26,483 4,212 (22,536) 53,940
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable assets 185,983 819,449 233,074 22,613 1,261,119
-------------------------------------------------------------------------
Capital
expenditures 12,036 39,492 13,030 1,172 65,730
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
$ $ $ $
---------------------------------------------------------------------
Marketing revenue derived
from export sales to
the U.S. 13,953 12,699 46,946 53,569
Property, plant and
equipment located in
the U.S. 12,090 11,912 12,090 11,912
17. Non-controlling interest
In the first quarter of 2007, 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 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 has been removed from
the Consolidated Statement of Financial Position.
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 Marzio Isotti
Vice President, Foothills Region
Robert B. Catell
Chairman and CEO Steven B. Kroeker
KeySpan Corporation Vice President, Corporate Development
New York, New York
Bradley W. Lock
Michael B.C. Davies(2) Vice President, North Central Region
Principal
Davies & Co. David A. Sentes
Banff, Alberta Vice President, Comptroller
Nancy M. Laird(3)(4)
Corporate Director Stock Exchange Listing
Calgary, Alberta
The Toronto Stock Exchange
H. Neil Nichols(2)(3) Trading Symbols KEY.UN; KEY.DB
Management Consultant
Mississauga, Ontario Unit Trading Summary Q3 2007
---------------------------------------
William R. Stedman(3)(4) TSX:KEY.UN - Cdn $
Chairman and CEO ---------------------------------------
ENTx Capital Corporation High $19.49
Calgary, Alberta Low $17.10
Close September 28, 2007 $18.17
Wesley R. Twiss(2) Volume 6,627,787
Corporate Director Average Daily Volume 106,899
Calgary, Alberta
Auditors
(1) Chairman of the Board Deloitte & Touche LLP
(2) Member of the Audit Chartered Accountants
Committee Calgary, Canada
(3) Member of the Compensation
and Governance Committee Investor Relations
(4) Member of the Health, Contact:
Safety and Environment John Cobb or Bradley White
Committee Toll Free: 1-888-699-4853
Direct: 403-205-7670
Email: ir@keyera.com
Head Office
Keyera Facilities Income Fund
Suite 600, Sun Life Plaza West Tower
144 - 4th Avenue S.W.
Calgary, Alberta T2P 3N4
Main phone: 403-205-8300
Website: www.keyera.com%SEDAR: 00019203E
