Three months ended March 31, 2007
CALGARY, May 8 /CNW/ -2007 FIRST QUARTER HIGHLIGHTS
- Keyera delivered strong first quarter financial results, with net
earnings of $19.0 million, up 24% compared to the same period last
year. Distributable cash flow(1) was $36.5 million ($0.60 per unit),
43% higher than the first quarter of 2006.
- Distributions to unitholders totaled $21.8 million in the first
quarter, or $0.357 per unit.
- Keyera is announcing a 5% cash distribution increase to 12.5 cents
per unit per month, beginning with the May distribution, payable on
June 15.
- All business segments delivered strong first quarter results, driven
by growth capital projects completed in 2006. Contribution from
Gathering and Processing was $21.5 million, up 16% from the first
quarter of 2006. Contribution from NGL Infrastructure was
$12.3 million, 13% higher than the same period last year. The
Marketing business posted contribution of $8.5 million, significantly
better than the fourth quarter of 2006, but down 22% from the record
results in the first quarter of last year.
- Keyera announced a pipeline project that will enhance its operational
capability at the Edmonton/Fort Saskatchewan hub. After connections
have been constructed, Keyera will operate four pipelines between our
Edmonton terminal and our NGL fractionation and storage facility in
Fort Saskatchewan.
- Several internal growth projects were initiated in the first quarter,
including extending the Caribou North Gas Gathering System, enhancing
compression and gathering pipelines serving the Strachan gas plant
and constructing a condensate truck loading rack at the Rimbey gas
plant.
- In a separate release, Keyera announced a proposed internal
reorganization intended to streamline Keyera's existing structure and
enhance tax planning flexibility.
(1) See "Non-GAAP Financial Measures" on page 4Message to Unitholders
I am very pleased to announce strong financial and operating results
again in the first quarter of 2007. The growth capital projects we completed
in 2006 are contributing to Keyera's success, delivering cash flow and
enabling us to grow our business.
The first quarter results set new records for Keyera. First quarter
distributable cash flow was $36.5 million, or $0.60 per unit, the highest in
Keyera's history and 43% higher than the $0.42 per unit posted in the same
period last year. First quarter earnings before tax and non controlling
interest were $21.9 million, another record for Keyera and 16% higher than the
same period in 2006. Concurrent with the release of our strong first quarter
financial results, we are announcing a 5% increase in our distributions to
12.5 cents per unit per month, effective with the May distribution, payable to
unitholders on June 15. This marks our fifth distribution increase in
four years and represents a 38% increase in distributions per unit since we
went public in 2003.
All three of our business lines contributed to these strong results.
Contribution from our Gathering and Processing segment was $21.5 million, 16%
higher than the same period last year. Our NGL Infrastructure also had a
strong quarter, posting contribution of $12.3 million, a 13% increase from the
same period last year. Marketing contribution of $8.5 million was more typical
of first quarter levels, although 22% lower than the record results in the
first quarter of 2006.
In the first quarter, several internal growth projects were in various
stages of evaluation, planning and construction. We have agreed to lease a
pipeline in the Edmonton/Fort Saskatchewan area that will significantly
enhance our operational capabilities. When associated construction is
completed, we will have four pipelines delivering NGLs between our Edmonton
logistics terminal and our NGL fractionation and storage facility in Fort
Saskatchewan. The new pipeline will allow condensate and butane to be
delivered into and out of storage at increased rates and may support the
development of new storage caverns at Fort Saskatchewan in the future.
In northeastern British Columbia, we extended our Caribou North Gas
Gathering System in the first quarter to capture new gas development north of
the existing pipeline. At our Strachan gas plant, we are enhancing our
compression and gathering pipelines to accommodate new gas southeast of the
plant. At our Rimbey gas plant, we are in the process of adding a condensate
truck loading rack to enhance our product delivery capability. And in early
May we were successful in acquiring the remaining ownership interests in
Rimbey Pipe Line and now own 100%. We continue to investigate new
opportunities to expand our asset portfolio and maximize value from existing
facilities in all three of our business lines, with a view to growing cash
flow.
At our meeting of unitholders on June 6, 2007, we will be recommending
approval of a reorganization of Keyera's internal legal structure. We believe
the reorganization will enhance unitholder value by streamlining Keyera's
structure, immediately reducing administrative costs and cash taxes. The
reorganization will also provide enhanced tax planning flexibility and assist
us in managing Keyera's future taxability.
On behalf of the Fund's directors and management team, I thank you for
your continued support and look forward to another successful year in 2007.
Jim V. Bertram
President and CEO
Keyera Facilities Income Fund
Contribution From Operating Segments
Keyera operates one of the largest natural gas midstream businesses in
Canada with three major operating segments: Gathering and Processing, NGL
Infrastructure and Marketing. The Gathering and Processing segment includes
natural gas gathering systems and processing plants strategically located in
the natural gas production areas on the western side of the Western Canadian
Sedimentary Basin. The NGL Infrastructure segment includes NGL and crude oil
pipelines, terminals, processing and storage facilities in Edmonton and Fort
Saskatchewan, Alberta, one of North America's major NGL hubs. The Marketing
segment includes activities such as the marketing of propane, butane and
condensate to customers in Canada and the United States, and crude oil
midstream activities.
Keyera's Gathering and Processing and NGL Infrastructure segments provide
most 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.-------------------------------------------------------------------------
Contribution by Operating Segment Three months ended
(in thousands of dollars) March 31
2007 2006
-------------------------------------------------------------------------
Gathering & Processing(1)
Revenue 42,708 38,992
Operating expenses (21,226) (20,514)
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Gathering & Processing contribution 21,482 18,478
-------------------------------------------------------------------------
NGL Infrastructure(1)
Revenue 17,569 16,468
Operating expenses (5,380) (5,628)
Contribution before unrealized gain/(loss) 12,189 10,840
Unrealized gain/(loss) 112 -
-------------------------------------------------------------------------
NGL Infrastructure contribution 12,301 10,840
-------------------------------------------------------------------------
Marketing(2)
Revenue 312,799 317,311
Operating expenses (298,056) (305,337)
General & administration (813) (586)
Contribution before unrealized gain/(loss) 13,930 11,388
Unrealized gain/(loss) (5,457) (470)
-------------------------------------------------------------------------
Marketing contribution 8,473 10,918
-------------------------------------------------------------------------
Total contribution 42,256 40,236
-------------------------------------------------------------------------
Other expenses(3) (20,396) (21,315)
-------------------------------------------------------------------------
Earnings before tax and non-controlling interest 21,860 18,921
-------------------------------------------------------------------------
Notes:
Gathering and Processing, NGL Infrastructure and Marketing contribution,
as defined below, are not standard measures under Canadian generally
accepted accounting principles ("GAAP"). Therefore, these measures 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 (Gathering and Processing expenses, NGL Infrastructure
expenses and Marketing expenses, where applicable). Management believes
contribution provides an accurate portrayal of profitability by operating
segment. Additional disclosure regarding segment results is contained in
financial statement note 16, Segmented information.
(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.Management's Discussion and Analysis
The following management's discussion and analysis ("MD&A") was prepared
as of May 8, 2007 and is a review of the results of operations and the
liquidity and capital resources of Keyera Facilities Income Fund (the "Fund").
It should be read in conjunction with the accompanying unaudited consolidated
financial statements of the Fund for the quarter ended March 31, 2007 and the
notes thereto as well as the consolidated financial statements of the Fund for
the year ended December 31, 2006 and the related management's discussion and
analysis. Additional information related to the Fund, including the Fund's
Annual Information Form, is filed on SEDAR at www.sedar.com.
NON-GAAP FINANCIAL MEASURES
This discussion and analysis refers to certain financial measures that
are not determined in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP"). These measures do not have standardized meanings and may
not be comparable to similar measures presented by other trusts or
corporations. Measures such as operating margin (operating revenues minus
operating expenses), EBITDA (earnings before interest, taxes, depreciation and
amortization) and 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) 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 and financial position.
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. 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.
This MD&A and accompanying documents may contain forward-looking
statements attributed to third party sources. For example, the discussion on
the legislative changes proposed by the Government of Canada with respect to
the taxation of flow-through investment vehicles and greenhouse gas emissions
and the legislative changes proposed by the Government of Alberta with respect
to greenhouse gas emissions are based on information made publicly available
by applicable government departments. No assurance can be given that any final
legislation or regulations implementing these proposed changes will be
consistent with the information available as of the date hereof. To the extent
that the proposed legislation and regulations are changed or additional
legislative initiatives are implemented, the descriptions and analysis of the
impact on Keyera contained in this MD&A may be materially different.
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; 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.
INTRODUCTION
The statement of net earnings contained in the unaudited interim
consolidated financial statements includes the results of operations of the
Fund, Keyera Energy Partnership ("the Partnership"), Keyera Energy Facilities
Limited ("KEFL"), Keyera Energy Ltd. ("KEL"), Keyera Energy Management Ltd.
("KEML"), Keyera Energy Inc. ("KEI") and Rimbey Pipe Line Co. Ltd. ("Rimbey
Pipe Line") for the three months ended March 31, 2007 and the three months
ended March 31, 2006. The Fund and its subsidiaries are collectively referred
to as "Keyera". A diagram of Keyera's organizational structure and
descriptions of the Fund and its subsidiaries can be found in the Fund's
Annual Information Form which is available at www.sedar.com.
BUSINESS ENVIRONMENT
Producers in Canada drilled over 6,000 wells during the first quarter, up
10% from the fourth quarter of 2006. While drilling during the quarter was
down 21% from the record levels experienced in the first quarter of 2006,
activity was on pace with the first quarters of 2004 and 2005.
Overall, drilling in the regions where Keyera operates increased in the
first quarter compared to the fourth quarter of 2006. The foothills front
region of Alberta experienced a 20% increase in drilling, while British
Columbia wells drilled virtually doubled from the fourth quarter last year.
The number of wells drilled in Central Alberta decreased 4% from the fourth
quarter, as producers reduced the drilling of shallow gas and coal bed methane
wells. Compared to the record first quarter of 2006, drilling activity in
these areas declined as lower commodity prices and higher costs affected
producer programs.
Drilling adjacent to most of Keyera's facilities remains strong,
especially those located in the western regions of the Western Canadian
Sedimentary Basin, which is relatively under-explored compared to other
regions in the basin. Gas-prone zones in these regions tend to be deeper,
require more time to fully develop and, as a result, are not as sensitive to
short-term commodity price fluctuations. Keyera's facilities are well suited
to process gas from these regions as they are able to process sweet and sour
gas and extract the NGLs that are typically associated with the raw gas from
deeper horizons.
Keyera's NGL Infrastructure facilities are also well positioned to
benefit from future industry activity. Incremental heavy oil and bitumen
production expected from oil sands development is expected to drive increased
demand for diluent as well as logistics and storage services. Keyera completed
a number of projects in 2006 to provide additional products and services and
is well positioned to expand its service offering further as market conditions
dictate.
Climate change regulations
On March 8, 2007 the Alberta government introduced amendments to the
Climate Change and Emissions Management Act (Bill 3) and the accompanying
Specified Gas Emitters Regulation (the "Regulation"). The Regulation applies
to all facilities in Alberta that produce over 100,000 tonnes of carbon
dioxide equivalent ("CO(2)e") annually. The Regulation is intended to take
effect July 1, 2007. The program is designed to reduce the emissions intensity
of greenhouse gases ("GHG") at applicable facilities. Emissions intensity
refers to the amount of GHG, measured on a CO(2)e basis, emitted on a unit of
production basis.
Under the Regulation, existing large emitters must reduce net emissions
intensity to 88% of the baseline emissions intensity. The baseline emissions
intensity is the average emissions intensity at a facility over the period
between 2003 and 2005. If the actual emissions intensity is above the net
emissions intensity, then the facility licensee can bring the facility into
compliance by:- Purchasing emission offsets. Emissions offsets are classified as
actions or projects which have resulted in reduced greenhouse gas
emissions in Alberta on or since January 1, 2002.
- Purchasing fund credits from the Climate Change and Emissions
Management Fund at a cost of $15/tonne of CO(2)e.
- Purchasing emission performance credits. Performance credits are
reductions in greenhouse gas emissions beyond the 88% of the baseline
emissions intensity.Keyera is the operator of three facilities which could be subject to the
announced legislation: the Strachan, Rimbey and Brazeau River gas plants.
Based on a worst case scenario, which assumes that Keyera purchases fund
credits at $15/tonne to reduce its net emissions intensity to the intended
target and that no emission offsets or performance emission credits are
purchased at a cost less than $15/tonne, the anticipated financial impact of
the new Regulation on Keyera's operations is estimated at $550,000 in 2007.
Thereafter, on an annual basis, the financial impact is expected to be
approximately $1 million per year.
Keyera believes that projects implemented since 2002 at Keyera's
facilities could potentially generate emission offsets or performance credits
that could be used or traded to reduce the financial impact outlined above,
however it is premature at this stage to determine what benefit, if any, could
be realized from such actions.
Following the Alberta announcement, the federal government released the
Regulatory Framework for Air Emissions (the "Framework") on April 26, 2007
which sets out new GHG and air pollutant ("AP") emission reduction targets for
various industrial sectors, including the oil and gas industry. The Framework
will form the basis for consultations over the next months and the draft GHG
and AP regulations are to be released in the spring of 2008. Details of the
proposed federal regulations are not yet known and additional clarity will be
required before the effect on Keyera can be determined.
Proposed tax on flow-through entitites
On October 31, 2006, the Government of Canada announced a new tax on a
portion of the distributions of publicly-traded Canadian income trusts and
limited partnerships. Legislation to implement this tax has been introduced.
Assuming this legislation or similar legislation is passed in substantially
the same form as has been introduced and that Keyera only experiences "normal
growth", the Fund, as an existing income trust, will be subject to the new tax
as of January 2011. Details of the Government's proposed changes can be found
in the Government's website at http://www.fin.gc.ca/news06/06-061e.html.
Under the proposed 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
proposed 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.
As at January 1, 2007, Keyera had approximately $375 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.
Assuming the reorganization is approved by Keyera's unithholders and
implemented as planned, Keyera plans to reduce the use of its available tax
deductions in the years 2007 through 2010, thereby maximizing 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 Fund's Annual Information
Form, which is available at www.sedar.com.
Strong performance in all segments resulted in $19.0 million of
consolidated net earnings for the first quarter of 2007, an increase of
$3.6 million from the first quarter of 2006. The strong performance was
underpinned by the growth capital and maintenance projects completed in the
Gathering and Processing and NGL Infrastructure segments in 2006. The
Marketing segment delivered results that were in line for the first quarter,
when seasonal demand and margins are normally higher. However, unrealized
losses recorded on financial instruments in accordance with new accounting
standards contributed to a $1.3 million decline in marketing operating margin
compared to the same period last year. Overall, the lower marketing operating
margin and a $1.3 million increase in depreciation and amortization expense
were offset by a $2.3 million decrease in general and administrative costs.
Gathering and Processing
Gathering and Processing revenue for the first quarter of 2007 was
$41.9 million, an increase of $3.9 million, or 10%, compared to the first
quarter of 2006. The increase was due primarily to new volumes on the Caribou
North Gas Gathering System that was commissioned in April 2006, higher volumes
processed at the Caribou gas plant, greater contribution from increased
ownership in the Medicine River Pipeline in 2006 and greater ancillary
revenues at the Rimbey gas plant.
Gathering and Processing operating expenses for the first quarter of 2007
were $21.2 million, an increase of $0.7 million, or 3%, compared to the first
quarter of 2006. The increase was primarily due to higher expenses at the
Caribou gas plant resulting from increased volumes, unscheduled repairs to
rotating equipment at the Caribou gas plant and to a boiler at the Rimbey
plant. Partially offsetting this increase were lower first quarter costs at
the Strachan gas plant, compared to the significant refurbishment expenses
incurred in the first quarter of 2006.
Average gross processing throughput in the first quarter of 2007 was
838 million cubic feet per day, up 4% from the fourth quarter of 2006 and
about the same as the first quarter last year. Higher volumes in the Foothills
region primarily due to increases at the Strachan and Caribou gas plants
offset the volume decline experienced in the West Central region.
Gathering and Processing - West Central Region
The West Central Region experienced another solid quarter, benefiting
from internal growth projects completed in 2006. Raw gas throughput for the
region was down 6% from the same period in 2006 and down slightly from the
fourth quarter.
The Rimbey area experienced a decline in shallow gas and coal bed methane
drilling. Gas from these types of wells tends to be sweet and dry and requires
limited processing. As a result, this slowdown had only moderate impact on
Keyera's revenues. Indications are that, while producers will continue to
pursue medium depth and deeper targets in the area, the drilling for shallow
gas and coal bed methane in 2007 will continue to lag.
At the Rimbey gas plant, additional compression for the Gull Lake
pipeline was commissioned in the first quarter, allowing the Gull Lake
pipeline to operate at lower pressures. This enables additional low pressure
wells to deliver gas to the Rimbey gas plant. A new condensate truck loading
facility is being constructed at the Rimbey gas plant which will provide
additional truck loading capacity for delivery to market locations, increasing
flexibility in the marketing of condensate. The loading facility is expected
to be operational in the second quarter of 2007.
Producers continued to be active in the first quarter in the Drayton
Valley region, where Keyera's Bigoray, West Pembina and Brazeau North
facilities are located. Compressor modifications were completed at the Bigoray
gas plant in February to provide additional sour gas processing capability.
The Rimbey gas plant will undergo its scheduled maintenance turnaround
during the second quarter of 2007. Maintenance turnarounds are performed at
Keyera's facilities every four years and involve inspections, required repairs
and cleaning of vessels and equipment at the facility. The size and scope of
the maintenance work will be significant and will require the facility to be
offline for approximately two weeks. The cost of the Rimbey turnaround will be
recovered over a four-year period, with only a portion of those costs being
recoverable in 2007. As a result, the turnaround is expected to have a
substantial impact on the West Central Region's contribution in the second
quarter.
Maintenance shutdowns are also scheduled for the second and third
quarters at the Bigoray, Brazeau North and Medicine River gas plants. With the
exception of the Medicine River gas plant, where costs are not recoverable
through the fee structure, the costs for the remaining turnarounds will be
largely recoverable in the period in which they occur.
Gathering and Processing - Foothills Region
In the Foothills Region, first quarter throughput was up 7% from the same
period a year ago and 10% higher than the fourth quarter of 2006.
At the Strachan gas plant, extensive work was completed in 2006 to
prepare the plant for increased producer activity. Several producers have
either connected, or are in the process of connecting, gas to the facility.
Deliveries of Tay River gas to Strachan averaged 50 million cubic feet per day
in the first quarter and are expected to remain at those levels for the
remainder of 2007. Strong drilling activity is occurring east and north of the
Strachan plant and incremental volumes from these areas were delivered to
Strachan during the quarter.
South of the Nordegg River gas plant, along the Strachan North Pipeline,
a gathering pipeline is currently under construction which will capture gas
from recently completed wells in the area. This incremental gas is expected to
be on stream by the third quarter of 2007. It is anticipated that this
production will be processed at the Strachan and Nordegg River gas plants.
Drilling activity continued over the winter along the Caribou North Gas
Gathering System, as well as to the north of the pipeline. During the quarter,
the gathering system was extended across the Trutch Creek at the north end of
the system and gas from this new area began flowing to the Caribou gas plant
in late March. A number of new wells were connected along the gathering system
during the quarter, and producers continue to license new wells in this area.
At the Nordegg River plant, repairs to a sulphur condenser and sulphur
pit were completed in February. While repairs were underway, a portion of the
sour gas volumes was diverted to other facilities. Sweet gas processing was
unaffected, and the plant resumed processing sour gas volumes in late
February. As a result, sour gas throughput at Nordegg River was reduced during
the quarter.
At the Brazeau River gas plant, a number of operational issues at
producer owned batteries were resolved, leading to increased throughput from
the Pembina region. Assuming producer activity continues, throughput is
expected to continue to increase in the coming months.
The Brazeau River plant will undergo its scheduled maintenance turnaround
in 2007. The costs of the turnaround will be fully recoverable during the
current year.
NGL Infrastructure
NGL Infrastructure revenue for the first quarter of 2007 was
$9.7 million, an increase of $0.1 million compared to the first quarter of
2006, which included a non-recurring adjustment of approximately $1 million.
The brine pond expansion undertaken at Fort Saskatchewan and the expansion of
the rail rack facility at the Edmonton terminal in 2006 contributed to the
results achieved in the first quarter of 2007. Strong demand for storage
continued at Fort Saskatchewan and cold weather in various U.S. markets
resulted in higher volumes moving through the rail rack at Edmonton.
NGL Infrastructure operating expenses for the first quarter of 2007 were
$5.4 million, a decrease of $0.2 million compared to the first quarter of
2006. Increased staffing costs to handle the higher rail rack volumes at
Edmonton were more than offset by lower fuel gas costs at the Fort
Saskatchewan fractionation facilities.
Demand for storage and logistics services in the Edmonton/Fort
Saskatchewan region is expected to continue to increase, driven primarily by
oil sands development. Keyera's brine pond construction and rail rack
expansion in 2006 served to increase the level of services in this region and
resulted in increased cash flows for the business line.
The demand for storage services continues to generate opportunities for
Keyera's NGL Infrastructure business. In May 2007, Keyera announced that it
will lease a 6-inch, 30 kilometre pipeline between its Edmonton and Fort
Saskatchewan facilities, providing a fourth pipeline connecting the two
facilities. Capital costs of approximately $4.6 million will be required to
construct the necessary connections at the facilities. The new pipeline is
expected to be operational at year end.
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 facilities. These
operational improvements provide more value to Keyera's existing storage
services, and the increased flexibility may support the development of new
storage caverns in the future.
Keyera acquired an additional 2.4% interest in Rimbey Pipe Line in the
first quarter, bringing its ownership interest to 91.8%. Subsequently, Keyera
acquired the remaining ownership interests, bringing its ownership to 100%.
These acquisitions are consistent with Keyera's strategy of increasing its
ownership in key facilities.
Marketing
Marketing revenue for the first quarter of 2007 was $307.3 million, a
decrease of $9.5 million compared to the first quarter of 2006. The decrease
was due to a decline in NGL sales volumes and approximately $5.5 million of
unrealized losses on financial instruments. The unrealized loss is discussed
later in this section.
The table below outlines the composition of the revenues generated from
Keyera's Marketing business.Composition of Marketing Revenue
(in thousands of dollars) 2007
-------------------------------------------------------------------------
Physical sales 311,757
Financial instruments - realized 1,042
Financial instruments - unrealized (5,457)
-------------------------------------------------------------------------
Marketing revenue 307,342
-------------------------------------------------------------------------
-------------------------------------------------------------------------NGL sales volumes for the first quarter of 2007 averaged 59,600 barrels
per day compared to 62,800 barrels per day in the first quarter of 2006. The
decrease was due to lower sales of butane compared to the first quarter of
2006.
Marketing operating expenses for the first quarter of 2007 was
$289.3 million, a decrease of $8.2 million compared to the first quarter of
2006. The $8.2 million decrease is related to a decline in sales volumes and
lower hydrocarbon prices.
NGL product inventories of $60.1 million were $35.6 million higher than
the first quarter of 2006. This increase is due primarily to a planned
accumulation of product to meet upcoming contracted sales. Forward sales of
crude oil have been executed in order to secure future sales prices.
Propane demand was strong during the quarter as North America experienced
more normal winter weather. Keyera was able to utilize its logistics expertise
and infrastructure, including propane terminals in the U.S., to access niche
markets where demand was high, which resulted in higher margins during the
quarter.
Butane markets began improving towards the end of 2006 and continued to
improve during the first quarter of 2007. As a result, first quarter demand
and margins for butane returned to more normal levels.
Market conditions for condensate improved in the first quarter of 2007 as
supply and demand for diluent in Alberta came into balance in early 2007.
Although there were periods of volatility, overall margins achieved were more
typical of historical averages.
Keyera's crude oil midstream business continued to meet expectations in
the first quarter of 2007. Volumes delivered to field oil terminals remained
steady and quality differentials remained favourable. Another midstream joint
venture project became operational in early January 2007 and is operating in
line with expectations.
The $5.5 million unrealized loss in the first quarter of 2007 is related
to the change in value of crude oil price swap contracts and fixed price
physical contracts. The unrealized loss related to changes in crude oil
financial contracts amounted to $3.2 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.
On January 1, 2007, new accounting standards related to the measurement,
recognition and disclosure of financial instruments came into effect. In
accordance with the new accounting standards, a fixed price physical contract
is considered a derivative financial instrument that must be recognized on the
balance sheet. As Keyera routinely utilizes fixed price physical contracts to
sell forward a portion of its physical inventory, the adoption of this
standard resulted in a $2.3 million unrealized loss related to the maturity of
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 first quarter earnings.
The adoption of the new accounting standards is expected to result in
increased volatility in operating margins due to unrealized gains and losses.
Keyera enters into contracts to purchase and sell natural gas, NGLs and
crude oil. These activities expose Keyera to market risks resulting from
movements in commodity prices between the time volumes are purchased and the
time they are sold and from fluctuations in the margins between purchase
prices and sales prices. Also, crude oil margins are exposed to variations in
the quality of crude received and volatility in price differentials.
For a discussion of the risks and trends that could affect the marketing
performance and the steps that Keyera takes to mitigate these risks, readers
are referred to the descriptions in this MD&A and to Keyera's Annual
Information Form, which is available on SEDAR.
Non-operating expenses and other earnings
General and administrative expenses for the first quarter of 2007 were
$5.3 million, down $2.3 million from the first quarter of 2006. Long-term
incentive plan costs were $1.4 million lower than in 2006, reflecting a lower
unit price. As well, short-term incentive plan costs were $0.9 million lower
than in 2006. Excluding the effect of the incentive plans, general and
administrative expenses were in line with those of the first quarter of 2006.
Interest expense, net of interest revenue, was $4.6 million for the first
quarter of 2007, $0.5 million greater than the first quarter of 2006. The
increase was due to higher short-term borrowings used to fund capital
projects, partially offset by a reduction in interest paid on lower
convertible debenture balances.
Depreciation and amortization expense was $10.6 million for the first
quarter of 2007, $1.3 million greater than the first quarter of 2006. The
increase was due to growth in the asset base resulting from the completion of
several major growth capital projects during the past year.
Income tax expense for the first quarter of 2007 was $2.6 million,
$0.6 million less than the same period last year, due to the inclusion of a
non-recurring revenue item in the earnings of Rimbey Pipe Line in 2006.
On October 31, 2006 the federal government announced its intention to
impose a new tax on distributions from existing public income trusts effective
in 2011. Legislation to implement the proposed tax has been introduced but has
not been enacted, and the accounting guidance for future income taxes in
flow-through entities has not been finalized. If the proposed legislation is
put into effect, it is anticipated that the Fund's future income tax liability
would increase significantly, with a corresponding decrease in net earnings in
the period in which the legislation is substantively enacted.
Critical Accounting Estimates
The Fund's consolidated financial statements have been prepared in
accordance with GAAP. Certain accounting policies require that management make
appropriate decisions with respect to the formulation of estimates and
assumptions that affect the recorded amounts of certain assets, liabilities,
revenues and expenses. Management reviews its assumptions and estimates
regularly, but new information and changes in circumstances may result in
actual results or revised estimates that differ materially from current
estimates. A description of the accounting estimates and the methodologies and
assumptions underlying the estimates are described in management's discussion
and analysis presented with the December 31, 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 March 31, 2007, operating revenues and accounts receivable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $18.7 million for March 2007 operations.
Estimation of Gathering and Processing and NGL Infrastructure operating
expenses:
At March 31, 2007, operating expenses and accounts payable contained an
estimate of $7.9 million for March 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 $6.4 million at March 31, 2007. Operating expenses and accounts
payable contained an estimate of $4.3 million.
Estimation of Marketing revenues:
At March 31, 2007, the Marketing sales and accounts receivable contained
an estimate for March 2007 revenues of $37.9 million.
Estimation of Marketing product purchases:
Marketing cost of goods sold, inventory and accounts payable contained an
estimate of NGL product purchases of $96.9 million at March 31, 2007.
Estimation of Asset Retirement Obligation:
In the first 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
Liquidity and working capital
Cash provided by operating activities during the first quarter of 2007
was $57.6 million. Cash provided by operating activities before changes in
non-cash operating working capital was $37.2 million. Changes in non-cash
working capital provided a further $17.0 million. Proceeds received from the
disposal of electrical generation equipment contributed $4.2 million and
$0.8 million of proceeds were received from the Distribution Reinvestment Plan
("DRIP"). From this cash flow, the Fund paid $21.8 million of distributions to
unitholders, repaid $32.1 million of short-term debt, used $3.6 million for
capital expenditures and added $1.7 million to cash on hand.
A deficiency of $30.5 million in cash and working capital existed at
March 31, 2007 compared to a deficit of $41.1 million at December 31, 2006.
The deficit in working capital results from the use of short-term debt to
finance growth capital expenditures in 2005 and 2006.Three months ended
March 31
Additions to Property, Plant and Equipment
(in millions of dollars) 2007 2006
-------------------------------------------------------------------------
Growth capital expenditures 3.2 24.5
Maintenance capital expenditures 0.4 1.8
-------------------------------------------------------------------------
Total capital expenditures 3.6 26.3
-------------------------------------------------------------------------In the first quarter of 2007, additions to property, plant and equipment
amounted to $3.6 million, consisting of $0.4 million of maintenance capital
and $3.2 million of growth capital. In addition to maintenance capital
expenditures, Keyera incurred maintenance and repair expenses of $4.2 million
that were included in operating costs. The growth capital expenditures
included $1.5 million related to the acquisition of an additional ownership
interest in Rimbey Pipe Line. Subsequent to March 31, 2007, Keyera acquired
the remaining ownership interests and reorganized Rimbey Pipe Line as a
wholly-owned limited partnership. The reorganization has no immediate effect
on earnings but is a preliminary step to the Fund's reorganization discussed
later in this MD&A.
Growth capital expenditures for 2007 are expected to be between $40 and
$60 million, assuming available opportunities continue to develop.
For a discussion of the risks that could effect 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 to Keyera's AIF
which is available on SEDAR.
Debt covenants
In order for Keyera to manage seasonal fluctuations in cash flow and
working capital, fund growth capital expenditures and stabilize distributions,
if required, 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 March 31, 2007,
$70.8 million was drawn under these credit facilities. Management expects
that, upon maturity of these facilities, adequate replacement facilities will
be established.
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. The
definitions in this agreement 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 March 31, 2007:-------------------------------------------------------------------------
Covenant Position as at March 31, 2007
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 3.50 1.95
-------------------------------------------------------------------------
Debt to Capitalization not to exceed 0.55 0.26
-------------------------------------------------------------------------Keyera has $215 million of unsecured senior notes. Of that 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 March 31, 2007:-------------------------------------------------------------------------
Covenant Position as at March 31, 2007
-------------------------------------------------------------------------
Debt to EBITDA not to exceed 3.50 2.35
-------------------------------------------------------------------------
EBITDA to interest charges not less than 3.00 9.81
-------------------------------------------------------------------------
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.
Risk factors
For a discussion of the risks and trends that could affect the financial
performance of the Fund and the steps that Keyera takes to mitigate these
risks, readers are referred to the descriptions in this MD&A and to Keyera's
Annual Information Form, which is available on SEDAR.
Unitholder Distributions
Keyera pays distributions to unitholders from its distributable cash
flow. The Fund declared $21.8 million of distributions to unitholders in the
first quarter of 2007. The Fund's distributable cash flow of $36.5 million was
sufficient to fund all the distributions made to unitholders. In determining
the level of distributions to unitholders, the Board of Directors takes into
consideration current and expected future levels of cash flow, growth capital
expenditures, debt repayments, working capital requirements and other factors.
The following table presents the calculation of "distributable cash flow"
for the Fund. Keyera management believes that distributable cash flow is an
appropriate measure of the Fund's cash flow available for distribution to
Unitholders. Because distributable cash flow is a non GAAP measure, it may not
be comparable to similar measures reported by other business entities.
Therefore, when assessing Keyera's performance relative to other entities,
"cash flow from operating activities" as presented in the Fund's Consolidated
Statements of Cash Flows may be a more comparable measure.Three months ended
Distributable Cash Flow March 31
(in thousands of dollars) 2007 2006(1)
-------------------------------------------------------------------------
Cash flow from operating activities 57,591 77,401
Add (deduct):
Changes in non cash working capital (20,376) (49,662)
Maintenance capital (351) (1,803)
Non-controlling interest distributable cash flow (316) (388)
-------------------------------------------------------------------------
Distributable cash flow 36,548 25,548
-------------------------------------------------------------------------
Distributions to unitholders 21,763 21,553
(1) The calculation of distributable cash flow for the comparative period
has been amended to consider the non-cash effect of foreign exchange
gains and losses. For the three months ended March 31, 2006, $447 of
unrealized foreign exchange losses have been included in the change
in non-cash working capital.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.
Standard and Poor's has assigned the Fund an SR-3 stability rating,
indicating the expectation of a high level of stability in distributions.
Units and Convertible Debentures
During the first quarter of 2007, $0.5 million of convertible debentures
(before adjustment for deferred financing costs) were converted into
38,746 trust units and 49,860 trust units were issued under the DRIP in
consideration of $0.8 million, bringing the total units outstanding at
March 31, 2007 to 61,019,359. Convertible debentures outstanding at March 31,
2007 were $22.6 million.
FUND REORGANIZATION
Keyera is proposing to undertake a reorganization in the third quarter of
2007 by way of plan of arrangement. 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. The proposed
reorganization will result in the elimination of most taxable Canadian
corporations from Keyera's structure. As a result it is anticipated that cash
taxes within the structure, which were $4.3 million in 2006, will be largely
eliminated until 2011.
Implementation of the reorganization is subject to a number of conditions
precedent, including, but not limited to, the receipt of a favourable ruling
from the Canada Revenue Agency, court approval of the plan of arrangement and
Unitholder approval. Assuming the conditions precedent are fulfilled, and the
reorganization is implemented as planned, Keyera plans to reduce the use of
its available tax deductions in years 2007 through to 2010, thereby increasing
deductions available for the years after 2010. As a result of the adoption of
this strategy, distributions to Canadian residents are expected to be
approximately 30% to 40% return of capital in 2007, with distributions
becoming fully taxable in 2008 for Canadian non-exempt unitholders.
The proposed reorganization 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. Unitholders will be asked to approve the
reorganization at the Annual and Special Meeting of Unitholders on June 6,
2007 at 9:30 a.m. (MDT).
Keyera has applied to the Canada Revenue Agency for an advance income tax
ruling confirming that the proposed reorganization can be completed without
adverse tax consequences for the Fund and its Unitholders resident in Canada.
Keyera also applied for, and was granted, an interim order from the Alberta
Court of Queens Bench with respect to the plan of arrangement. A copy of the
interim order is included in Keyera's Information Circular. If Unitholders
approve the reorganization, Keyera intends to apply for a final order.
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 will be 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 - PresentationThese new standards will be effective for the Fund on January 1, 2008.
Section 1535 establishes disclosure 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. The Fund is currently evaluating the impact of the
adoption of these new standards on the consolidated financial statements.
Internal control over financial reporting
No changes were made in our internal control over financial reporting
during the interim period ended March 31, 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)
-------------------------------------------------------------------------
Jun 30, Sep 30, Dec 31, Mar 31,
2005 2005 2005 2006
-------------------------------------------------------------------------
Operating revenues:
- Marketing 223,590 243,114 317,863 316,841
- Gathering and Processing 35,516 35,927 37,278 38,053
- NGL Infrastructure 7,276 8,506 10,349 9,606
Net earnings(1) 11,157 16,200 15,491 15,384
Net earnings per unit ($/unit)
Basic 0.19 0.27 0.26 0.26
Diluted 0.17 0.25 0.23 0.22
Trust units outstanding (thousands)
Weighted average (basic) 58,596 59,475 59,926 60,291
Weighted average (diluted) 62,988 63,194 63,246 63,321
Distributions to unitholders 19,332 20,223 21,062 21,553
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Jun 30, Sep 30, Dec 31, Mar 31,
2006 2006 2006 2007
-------------------------------------------------------------------------
Operating revenues:
- Marketing 279,241 279,492 286,325 307,342
- Gathering and Processing 40,772 44,290 43,621 41,949
- NGL Infrastructure 8,549 10,878 10,855 9,692
Net earnings(1) 25,969 11,797 14,928 19,012
Net earnings per unit ($/unit)
Basic 0.43 0.19 0.25 0.31
Diluted 0.39 0.16 0.24 0.31
Trust units outstanding (thousands)
Weighted average (basic) 60,560 60,692 60,865 60,972
Weighted average (diluted) 62,768 62,817 62,869 62,918
Distributions to unitholders 21,631 21,679 21,742 21,763
-------------------------------------------------------------------------
(1) Upon adoption of the new accounting standards effective January 1,
2007, for the period ended March 31, 2007, Keyera had no transactions
that required the use of other comprehensive income therefore
comprehensive income equals net earnings.For a discussion of the factors affecting variations over the quarters,
refer to "Results of Operations" in this MD&A.
Investor Information
DISTRIBUTIONS TO UNITHOLDERS
Distributions to Unitholders were $0.357 per unit in the first quarter.
Keyera has announced a 5% increase in its distribution to 12.5 cents per unit
per month, beginning with its May distribution, payable to unitholders on
June 15, 2007. The Fund is focused on stable long-term distributions that grow
over time. The Board of Directors considers increasing the level of cash
distributions when it is confident that such an increase can be sustained.
TAXABILITY OF DISTRIBUTIONS
Assuming that Keyera's proposed reorganization is approved and
implemented as planned, in the third quarter of 2007 Keyera plans to reduce
the use of its available tax deductions to those required to minimize taxes
paid by Keyera and its subsidiaries. As a result, Keyera currently anticipates
that, for Canadian residents, approximately 30% to 40% of the Fund's 2007
distributions will be deemed a tax-deferred return of capital, with
distributions becoming fully taxable for Canadians non-exempt unitholders in
2008. This outlook is subject to change, depending on the levels of
profitability and capital expenditures in each of Keyera's operating entities.
Additional information is available on Keyera's website under "Investor
Information". Both Canadian and non-resident unitholders should seek
independent tax advice in respect of the consequences to them of acquiring,
holding and disposing of units. 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.
FIRST 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 first quarter 2007
results at 8:00 am MST (10:00 am EST) on May 9, 2007. Callers may participate
by either dialing 800-814-4859 or 416-644-3417. A recording of the call will
be available for replay until midnight, May 16, 2007 by dialing 877-289-8525
or 416-640-1917 and entering pass code 21219242 followed by the pound key.
Internet users can listen to the call live on Keyera's website at
www.keyera.com under Investor Information, Webcasts. Shortly after the call,
an audio archive will be posted on the website for 90 days.
QUESTIONS
We welcome questions from interested parties. Calls should be directed to
Keyera's Investor Relations Department at 403-205-7670, toll free at
888-699-4853 or via email at ir@keyera.com. Information on Keyera can also be
found on our website at www.keyera.com.Keyera Facilities Income Fund
Interim Consolidated Statements of Financial Position
(Thousands of Canadian dollars)
(unaudited)
March 31, December 31,
2007 2006
As at: $ $
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents 1,614 -
Accounts receivable 168,555 160,112
Inventory 60,094 53,939
Asset held for sale (note 6) - 4,200
Other current assets 3,349 4,327
-------------------------------------------------------------------------
233,612 222,578
Property, plant and equipment 919,671 924,947
Intangible assets 8,120 10,553
Goodwill 64,934 64,934
-------------------------------------------------------------------------
1,226,337 1,223,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Bank indebtedness - 96
Accounts payable and accrued liabilities 181,031 148,318
Distributions payable (note 11) 7,261 7,251
Credit facilities (note 4) 75,835 107,984
-------------------------------------------------------------------------
264,127 263,649
Long-term debt (note 4) 214,079 215,000
Convertible debentures (note 5) 22,622 23,542
Asset retirement obligation (note 7) 35,893 34,533
Future income tax liability (note 8) 66,820 65,424
-------------------------------------------------------------------------
603,541 602,148
-------------------------------------------------------------------------
Non-controlling interest 3,009 2,744
Unitholders' equity
Unitholders' capital (note 9) 678,269 677,025
Accumulated earnings 181,279 159,083
Accumulated distributions to unitholders
(note 11) (239,761) (217,988)
-------------------------------------------------------------------------
619,787 618,120
-------------------------------------------------------------------------
1,226,337 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, Comprehensive Income and
Accumulated Earnings
For the Three Months Ended March 31
(Thousands of Canadian dollars, except unit information)
(unaudited)
2007 2006
$ $
-------------------------------------------------------------------------
Operating revenues
Marketing 307,342 316,841
Gathering and Processing 41,949 38,053
NGL Infrastructure 9,692 9,606
-------------------------------------------------------------------------
358,983 364,500
Operating expenses
Marketing 289,308 297,536
Gathering and Processing 21,226 20,514
NGL Infrastructure 5,380 5,628
-------------------------------------------------------------------------
315,914 323,678
-------------------------------------------------------------------------
43,069 40,822
General and administrative 5,347 7,608
Interest expense on long-term indebtedness 3,501 3,513
Other interest expense 1,127 590
Depreciation and amortization 10,588 9,334
Accretion expense (note 7) 646 483
Impairment expense - 373
-------------------------------------------------------------------------
21,209 21,901
-------------------------------------------------------------------------
Earnings before tax and non-controlling interest 21,860 18,921
Income tax expense (note 8) 2,582 3,180
-------------------------------------------------------------------------
Earnings before non-controlling interest 19,278 15,741
Non-controlling interest 266 357
-------------------------------------------------------------------------
Net earnings 19,012 15,384
Other comprehensive income - -
-------------------------------------------------------------------------
Comprehensive income (note 3) 19,012 15,384
Accumulated earnings, beginning of period 159,083 91,005
Change in accounting policy (note 3) 3,184 -
-------------------------------------------------------------------------
Accumulated earnings, end of period 181,279 106,389
-------------------------------------------------------------------------
Weighted average number of units (thousands)
(note 10)
- basic 60,972 60,291
- diluted 62,918 63,321
Net earnings per unit (note 10)
- basic 0.31 0.26
- diluted 0.31 0.22
-------------------------------------------------------------------------
The accompanying notes to the interim consolidated financial statements
are an integral part of these statements.
Keyera Facilities Income Fund
Interim Consolidated Statements of Cash Flows
For the Three Months Ended March 31
(Thousands of Canadian dollars) (unaudited)
2007 2006
Net inflow (outflow) of cash: $ $
-------------------------------------------------------------------------
Operating activities
Net earnings 19,012 15,384
Items not affecting cash:
Depreciation and amortization 10,588 9,334
Accretion expense 646 483
Impairment expense - 373
Unrealized loss on derivatives held for trading 5,345 470
Future income tax expense (note 8) 1,396 1,362
Non-controlling interest 266 357
Asset retirement obligation expenditures (note 7) (38) (24)
Changes in non-cash working capital (note 15) 20,376 49,662
-------------------------------------------------------------------------
57,591 77,401
-------------------------------------------------------------------------
Investing activities
Capital expenditures (3,615) (26,273)
Proceeds on sale of assets 4,200 -
Changes in non-cash working capital (note 15) (3,354) 7,340
-------------------------------------------------------------------------
(2,769) (18,933)
-------------------------------------------------------------------------
Financing activities
Repayment of credit facilities (32,149) (40,000)
Issuance of trust units (note 9) 800 1,360
Distributions paid to unitholders (note 11) (21,763) (21,510)
-------------------------------------------------------------------------
(53,112) (60,150)
-------------------------------------------------------------------------
Net cash inflow (outflow) 1,710 (1,682)
-------------------------------------------------------------------------
(Bank indebtedness) cash and cash equivalents,
beginning of period (96) 5,634
-------------------------------------------------------------------------
Cash and cash equivalents, end of period 1,614 3,952
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
For Three Months Ended March 31, 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 wholly-owned subsidiaries include Keyera Energy Facilities
Ltd. ("KEFL"), Keyera Energy Ltd. ("KEL") and Keyera Energy Inc.
("KEI").
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 months ended March 31, 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. 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.
Comprehensive income
Comprehensive income consists of net earnings 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. Section 3862 and 3863 replace Section
3861, revising and enhancing disclosure requirements. The Fund is
currently evaluating the impact of the adoption of these new
standards on the consolidated financial statements.
4. Credit facilities and long-term debt
March 31, December 31,
2007 2006
As at $ $
---------------------------------------------------------------------
Bank credit facilities (a) 70,835 100,984
Revolving demand loan (d) 5,000 7,000
---------------------------------------------------------------------
Total credit facilities 75,835 107,984
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term debt (b & c) 215,000 215,000
Deferred financing costs(1) (921) -
---------------------------------------------------------------------
Total long-term debt 214,079 215,000
---------------------------------------------------------------------
---------------------------------------------------------------------
(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, 2009, 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 rate for the
three months ended March 31, 2007 was 5.42% (4.74% for the three
months ended March 31, 2006). As at March 31, 2006, the balance
outstanding on the bank credit facilities was $70,835 ($100,984
as at December 31, 2006).
(b) In 2003, $125,000 of unsecured senior notes were issued by the
Partnership and KEFL in three parts: Series A of $52,500 due in
2010, bearing interest at 5.79%, Series B of $52,500 due in 2013,
bearing interest at 6.16%, and $20,000 due in 2008, bearing
interest at 5.42%. 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 rate for the three months
ended March 31, 2007 for the unsecured senior notes was 5.95% for
Series A, 6.29% for Series B and 5.63% for the note due in 2008.
(c) In 2004, $90,000 of unsecured senior notes were issued by KEFL
and guaranteed by the Partnership. The notes bear interest at
5.23% and mature on October 1, 2009. Interest is payable semi-
annually. Financing costs of $568 have been deferred and are
amortized using the effective interest rate method over the
remaining term of the debt. The effective interest rate for the
three months ended March 31, 2007 was 5.37%.
(d) A subsidiary of the Partnership has an unsecured revolving demand
loan facility with a major Canadian chartered bank in the amount
of $7,000, of which $5,000 was drawn as at March 31, 2007 ($7,000
as at December 31, 2006). Borrowings under the loan facility bear
interest based on the lender's rates for Canadian prime
commercial loans or Bankers' Acceptances rates. The weighted
average interest rate for the three months ended March 31, 2007
was 5.51% (4.25% for the three months ended March 31, 2006).
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
$421 has been accrued for the three months ended March 31, 2007 ($497
for the three months ended March 31, 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 March 31, 2007 $76,923
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 March 31, 2007, $2,801 has been
reclassified to unitholders' equity ($2,782 at December 31, 2006). As
at March 31, 2007, $455 of deferred financing costs remain. The
effective interest rate for the three months ended March 31, 2007 was
7.36%.
6. Asset held for sale
Asset held for sale consists 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 settled (38)
Revisions in estimated cash flows 752
Accretion expense 646
---------------------------------------------------------------------
Balance, March 31, 2007 35,893
---------------------------------------------------------------------
---------------------------------------------------------------------
8. Income taxes
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.
2007 2006
Three months ended March 31 $ $
---------------------------------------------------------------------
Earnings before tax and non-controlling
interest 21,860 18,921
Income from the Fund distributable to
unitholders (12,623) (10,058)
---------------------------------------------------------------------
Income before taxes - operating subsidiaries 9,237 8,863
---------------------------------------------------------------------
Income tax at statutory rate of 32.12%
(2006 - 35.62%) 2,967 3,157
Non deductible items excluded from income for
tax purposes 570 470
Rate adjustments and changes in estimates (349) (81)
Benefit of non-capital losses previously not
recorded (566) (216)
Resource allowance - (9)
Adjustments to tax pool balances (296) (161)
Other 256 (117)
Large corporation tax - 137
---------------------------------------------------------------------
2,582 3,180
---------------------------------------------------------------------
Classified as:
Current 1,186 1,818
Future 1,396 1,362
---------------------------------------------------------------------
Income tax expense 2,582 3,180
---------------------------------------------------------------------
---------------------------------------------------------------------
For income tax purposes, the subsidiaries of the Fund have non-
capital losses carried forward of approximately $8,045 at March 31,
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 March 31,
2007.
The future income tax liability relates to the (taxable) deductible
temporary differences in the carrying values and tax bases as
follows:
March 31, December 31,
2007 2006
As at $ $
---------------------------------------------------------------------
Property, plant and equipment (71,575) (71,611)
Asset retirement obligation 4,461 4,308
Long-term incentive plan 1,585 1,513
Non-capital losses 2,328 3,475
Intangible assets (563) (616)
Other (3,056) (2,493)
---------------------------------------------------------------------
Future income tax liability (66,820) (65,424)
---------------------------------------------------------------------
---------------------------------------------------------------------
The unrecorded future tax liability attributable to the Partnership
at March 31, 2007 was $72,678 ($72,882 at December 31, 2006).
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.
In 2005, the Fund instituted 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.
Number of
Trust units issued and unitholders' capital 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 38,746 444
Units issued pursuant to DRIP 49,860 800
---------------------------------------------------------------------
Balance, March 31, 2007 61,019,359 678,269
---------------------------------------------------------------------
---------------------------------------------------------------------
10. Net earnings per unit
Basic per unit calculations for the three months ended March 31, 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 months ended March 31, 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 March 31 (thousands) 2007 2006
---------------------------------------------------------------------
Weighted average number of units - basic 60,972 60,291
Net additional units if incentive awards vested - 602
Additional units if debentures converted 1,946 2,428
---------------------------------------------------------------------
Weighted average number of units - diluted 62,918 63,321
---------------------------------------------------------------------
---------------------------------------------------------------------
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 14,512
Unitholders' distributions declared 7,261
---------------------------------------------------------------------
Balance, March 31, 2007 239,761
---------------------------------------------------------------------
---------------------------------------------------------------------
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 $1,136 for the three months ended
March 31, 2007 ($2,499 for the three months ended March 31, 2006).
(a) Performance Unit Awards
The Performance Unit Awards will vest 100% on the third anniversary
of the effective date of each award, July 1, 2004, July 1, 2005 and
July 1, 2006. The number of units to be delivered will be determined
by the financial performance of the Fund over the three-year period.
The number of units to be delivered will be calculated by multiplying
the number of unit awards by an adjustment ratio and a payout
multiplier. The adjustment ratio adjusts the number of units to be
delivered to reflect the per unit cash distributions paid by the Fund
to its unitholders during the term that the unit award is
outstanding. The payout multiplier is based upon the actual three-
year average annual cash distributions per unit of the Fund. The
table below describes the relationship between the three-year average
annual cash distribution per unit and the payout multiplier.
---------------------------------------------------------------------
Three-year annual cash distributions per unit
---------------------------------------------------------------------
July 1, 2004 July 1, 2005 July 1, 2006 Payout
Grant Grant Grant Multiplier
---------------------------------------------------------------------
Less than 1.15 Less than 1.32 Less than 1.42 Nil
First
range 1.15 - 1.22 1.32 - 1.39 1.42 - 1.51 50% - 99%
Second
range 1.23 - 1.38 1.40 - 1.55 1.52 - 1.71 100% - 199%
Third
range 1.39 and 1.56 and 1.72 and 200%
greater greater greater
---------------------------------------------------------------------
As of March 31, 2007, 494,367 Performance Unit Awards (529,867 at
December 31, 2006) were outstanding: 148,237 effective July 1, 2004,
184,830 effective July 1, 2005 and 161,300 effective July 1, 2006.
The compensation cost recorded for these units for the three months
ended March 31, 2007 was $954, using the applicable closing market
price of a unit of the Fund ($1,935 for the three months ended
March 31, 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, 2004, July 1,
2005 and July 1, 2006, regardless of the performance of the Fund. The
number of units to be delivered will be modified by an adjustment
ratio which reflects the per unit distributions paid by the Fund to
its unitholders during the term that the unit award is outstanding.
As of March 31, 2007, 94,235 Restricted Unit Awards (98,735 at
December 31, 2006) were outstanding: 21,549 effective July 1, 2004,
29,086 effective July 1, 2005 and 43,600 effective July 1, 2006. The
compensation cost recorded for these units for the three months ended
March 31, 2007 was $182, using the applicable closing market price of
a unit of the Fund ($564 for the three months ended March 31, 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 March 31, 2007, $1,164 of assets held for trading were included
in accounts receivable and $3,401 of liabilities held for trading
were included in accounts payable and accrued liabilities. For the
three months ended March 31, 2007, the Fund realized and recorded
$1,042 in Marketing revenue and $8 in NGL Infrastructure revenue
related to the settlement of financial instruments. A further $5,457
of unrealized losses were recorded in Marketing revenue and $112 of
unrealized gains were recorded in NGL Infrastructure revenue,
representing the change in fair value of derivative contracts for the
period ended March 31, 2007.
The fair values 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 Average Notional Fair
March 31, 2007 Amount $ Price Volume Value $
---------------------------------------------------------------------
Natural gas:
Price swaps
(maturing
by March 31,
2008) 30 $7.77/GJ 168,000 GJs 30
Electricity:
Price swaps
(maturing by
December 31,
2008) 983 $55/MWh 38,460 MWhs 983
NGLs:
Price swaps
(maturing by
March 31, 2008) (3,363) $74.17/Bbl 671,000 Bbls (3,363)
Currency:
Forward contracts
(maturing by
April 23, 2007) 134 $1.1606/USD US$17,500 134
Physical contracts:
Fixed price forward
contracts (maturing
by November 30,
2007) (21) $48.06/Bbls 6,000 Bbls (21)
---------------------------------------------------------------------
As at December 31,
2006
Natural gas:
Price swaps
(maturing by
March 31, 2007) - $7.78/GJ 90,000 GJs (130)
Electricity:
Price swaps
(maturing by
December 31,
2008) - $55/MWh 43,860 MWhs 1,031
NGLs:
Price swaps
(maturing by
March 30, 2007) 211 $72.25/Bbl 450,000 Bbls 211
Currency:
Forward contracts
(maturing by
January 26, 2007) (287) $1.1477/USD US$16,350 (287)
Physical contracts:
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 March 31, 2007, the accounts receivable from the two
largest customers amounted to less than 1% of accounts receivable
(December 31, 2006 - less than 1%). Revenue from the two largest
customers amounted to 12% of operating revenue for the period ended
March 31, 2007 (March 31, 2006 - 11%). 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$81,958 of sales were priced in
U.S. dollars for the three months ended March 31, 2007 (three months
ended March 31, 2006 - US$90,238). 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.
The Fund realized and recorded $176 of realized foreign currency loss
in marketing operating expenses for the three months ended March 31,
2007. A further $154 of unrealized foreign currency gain was recorded
in marketing operating expenses.
Interest rate risk
The majority of the Fund's interest rate risk is attributed to its
fixed and floating rate debt, which is used to finance operations.
The Fund's remaining financial instruments are not significantly
exposed to interest rate risk. The floating rate debt creates
exposure to interest rate cash flow risk, whereas the fixed rate debt
creates exposure to interest rate price risk. At March 31, 2007,
fixed rate borrowings comprised 74% of total debt outstanding
(December 31, 2006 - 67%). The fair value of the senior fixed rate
debt at March 31, 2007 was $219,205 (December 31, 2006 - $224,457).
The fair value of the Fund's unsecured convertible debentures at
March 31, 2007 was $32,308 (December 31, 2006 - $31,782). Net
interest expense of $4,628 was composed of interest expense of
$4,872, interest income of $279 and fee expense of $35 for financial
instruments that were not classified as "held for trading".
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 7,594
2008 5,895
2009 4,403
2010 2,832
2011 2,188
Thereafter 3,669
---------------------------------------------------------------------
26,581
---------------------------------------------------------------------
---------------------------------------------------------------------
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
2007 2006
Three months ended March 31 $ $
---------------------------------------------------------------------
Cash provided by (used in):
Accounts receivable (10,514) 43,702
Inventory (6,155) 27,239
Other current assets 978 562
Accounts payable and accrued liabilities 32,713 (14,501)
---------------------------------------------------------------------
Changes in non-cash working capital 17,022 57,002
---------------------------------------------------------------------
Relating to:
Operating activities 20,376 49,662
Investing activities (3,354) 7,340
---------------------------------------------------------------------
Other cash flow information:
Interest paid 5,227 4,803
Taxes paid 957 1,433
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.
Three months
ended Gathering and NGL
March 31, Marketing Processing Infrastructure Corporate Total
2007 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 307,342 42,708 17,681 - 367,731
Inter-
segment
revenue - (759) (7,989) - (8,748)
-------------------------------------------------------------------------
External
revenue 307,342 41,949 9,692 - 358,983
Operating
expenses (298,056) (21,226) (5,380) - (324,662)
Inter-
segment
expenses 8,748 - - - 8,748
-------------------------------------------------------------------------
External
operating
expenses (289,308) (21,226) (5,380) - (315,914)
-------------------------------------------------------------------------
18,034 20,723 4,312 - 43,069
General and
administrative,
interest
and other - - - (9,975) (9,975)
Depreciation
and
amortization (1,071) (7,220) (2,095) (202) (10,588)
Accretion
expense (3) (557) (86) - (646)
-------------------------------------------------------------------------
Earnings
(loss) before
tax and non-
controlling
interest 16,960 12,946 2,131 (10,177) 21,860
Income tax
recovery
(expense) 834 - (2,704) (712) (2,582)
-------------------------------------------------------------------------
Earnings
(loss) before
non-
controlling
interest 17,794 12,946 (573) (10,889) 19,278
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable
assets 175,510 809,673 231,644 9,510 1,226,337
-------------------------------------------------------------------------
Capital
expenditures 2 1,459 1,841 313 3,615
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months
ended Gathering and NGL
March 31, Marketing Processing Infrastructure Corporate Total
2006 $ $ $ $ $
-------------------------------------------------------------------------
Revenue 316,841 38,992 16,468 - 372,301
Inter-segment
revenue - (939) (6,862) - (7,801)
-------------------------------------------------------------------------
External
revenue 316,841 38,053 9,606 - 364,500
Operating
expenses (305,337) (20,514) (5,628) - (331,479)
Inter-segment
expenses 7,801 - - - 7,801
-------------------------------------------------------------------------
External
operating
expenses (297,536) (20,514) (5,628) - (323,678)
-------------------------------------------------------------------------
19,305 17,539 3,978 - 40,822
General
and
administrative,
interest
and other - - - (11,711) (11,711)
Depreciation
and
amortization (575) (6,612) (1,855) (292) (9,334)
Accretion
expense - (413) (70) - (483)
Impairment
expense - (373) - - (373)
-------------------------------------------------------------------------
Earnings
(loss)
before tax
and non-
controlling
interest 18,730 10,141 2,053 (12,003) 18,921
Income tax
(expense) - - (2,264) (916) (3,180)
-------------------------------------------------------------------------
Earnings
(loss)
before non-
controlling
interest 18,730 10,141 (211) (12,919) 15,741
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable
assets 112,717 817,262 221,355 12,207 1,163,541
-------------------------------------------------------------------------
Capital
expenditures - 24,938 1,335 - 26,273
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007 2006
Three months ended March 31 $ $
-------------------------------------------------------------------------
Marketing revenue derived from export sales
to the US 23,821 26,170
Property, plant and equipment located in the U.S. 11,802 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
17. Subsequent Event
On April 16, 2007 the maturity of the $150,000 unsecured revolving
credit facility was extended from April 21, 2009 to April 21, 2010.
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, West Central 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, Engineering &
Principal Operational Services
Davies & Co.
Banff, Alberta David A. Sentes
Vice President, Comptroller
Nancy M. Laird(3)(4)
Corporate Director K. Jamie Urquhart
Calgary, Alberta Vice President, Foothills Region
H. Neil Nichols(2)(3) Stock Exchange Listing
Management Consultant The Toronto Stock Exchange
Mississauga, Ontario Trading Symbols KEY.UN; KEY.DB
William R. Stedman(3)(4) Unit Trading Summary Q1 2007
Chairman and CEO ---------------------------------------
ENTx Capital Corporation TSX:KEY.UN - Cdn $
Calgary, Alberta ---------------------------------------
High $17.98
Wesley R. Twiss(2) Low $15.51
Corporate Director Close March 30, 2007 $17.46
Calgary, Alberta Volume 8,945,833
Average Daily Volume 139,778
(1) Chairman of the Board
(2) Member of the Audit Auditors
Committee Deloitte & Touche LLP
(3) Member of the Compensation Chartered Accountants
and Governance Committee Calgary, Canada
(4) Member of the Health,
Safety and Environment Investor Relations
Committee Contact:
John Cobb or Avery Reiter
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
