Keyera Facilities Income Fund - 2008 Second Quarter Report



    TSX:KEY.UN; KEY.DB

    CALGARY, Aug. 12 /CNW/ -

    2008 SECOND QUARTER HIGHLIGHTS

    
    -  Keyera delivered exceptional results in the second quarter.
       Distributable cash flow(1) of $56.0 million ($0.91 per unit) was the
       highest in Keyera's history, almost 80% higher on a per unit basis
       than the second quarter of 2007. Distributions to unitholders totaled
       $24.9 million in the second quarter, or $0.41 per unit.

    -  Keyera announced today an 11% distribution increase, its second
       distribution increase this year. Beginning with the August
       distribution, payable on September 15, Keyera's cash distribution will
       increase to 15.0 cents per unit per month, or $1.80 per unit annually.

    -  Second quarter net earnings were $22.7 million and included a non-cash
       future income tax expense of $14.9 million and an unrealized loss of
       $7.0 million related to financial contracts. Cash flow from operating
       activities in the second quarter was $2.4 million, including
       $54.3 million of cash used to finance a seasonal increase in non-cash
       working capital, primarily due to an increase in NGL inventories.

    -  All business segments contributed to the strong second quarter
       results. Contribution from the Gathering and Processing segment of
       $28.9 million was particularly strong, about the same as the first
       quarter of 2008 and up 88% from the second quarter of 2007.
       Contribution from NGL Infrastructure was $11.4 million, slightly
       higher than the same period last year. The Marketing business had a
       tremendous quarter, delivering contribution of $18.6 million,
       including a non-cash unrealized loss from the change in fair value of
       financial contracts of $7.3 million. Excluding non-cash items, second
       quarter marketing results were 50% higher than the second quarter of
       2007.

    -  Keyera is proceeding with a 40 million cubic foot per day expansion at
       the Caribou gas plant in northeastern British Columbia at a cost of
       approximately $35 million. The expansion is expected to be completed
       in the second quarter of 2009.

    -  Keyera invested $41.2 million on growth capital projects in the second
       quarter, bringing the year-to-date growth capital total to
       $90.7 million. During the quarter, Keyera agreed to acquire a 50%
       ownership interest in the Bonnie Glen crude oil and condensate
       pipeline system and an additional 20.3% ownership interest in the
       Judy Creek NGL pipeline system and closed the acquisition of the
       West Pembina gas plant. In July, Keyera completed construction of the
       fourth NGL pipeline between the Edmonton Terminal and the
       Fort Saskatchewan facility.

    -  Scheduled turnarounds were completed on time and on budget during the
       quarter at the Gilby and Nordegg River gas plants.

    (1) See "Non-GAAP Financial Measures" on page 5 and a reconciliation of
        distributable cash flow to cash flow from operating activities
        on page 21.
    

    Message to Unitholders

    Keyera continues to pursue its strategy of delivering steady value growth
to unitholders, and again this quarter we have delivered exceptional financial
and operating results. Second quarter results were very strong in all business
areas and re-affirm that our business strategy is effective and producing the
desired results.
    Second quarter distributable cash flow of $56.0 million, or 91 cents per
unit, was the highest ever recorded and significantly higher than the same
period last year. Distributable cash flow was $31.1 million higher than the
$24.9 million ($0.41 per unit) of distributions paid, providing cash for
investment in growth capital projects and to fund working capital
requirements.
    As a result of the strong performance of our business this year and the
numerous growth capital projects currently underway, we are increasing our
monthly cash distribution by 11% to 15.0 cents per unit per month, or $1.80
per unit annually, beginning with the August distribution. This is our second
increase this year and reflects Keyera's commitment to providing steady value
growth to unitholders.
    All three of our business segments contributed to the excellent financial
and operational results. Consistent throughput levels at our gas processing
plants resulted in contribution from the Gathering and Processing segment of
$28.9 million, about the same as the first quarter of 2008 and up 88% from the
second quarter of 2007. Our NGL Infrastructure segment had another solid
quarter, contributing $11.4 million, about the same as the second quarter last
year. All four products in our Marketing business posted strong results in the
quarter, resulting in an unusually high second quarter Marketing contribution
of $18.6 million. These results included a non-cash unrealized loss of
$7.3 million relating to the change in fair value of financial contracts used
to protect our NGL inventory. Excluding non-cash items, second quarter
marketing contribution was 50% higher than the second quarter of 2007.
    We continue to pursue an active growth capital program, investing
$41.2 million on growth projects in the second quarter and $90.7 million on a
year-to-date basis. We continue to anticipate that growth capital spending
will be between $150 and $200 million in 2008. After reaching mutually
agreeable terms with producers in the Caribou area of northeastern British
Columbia, we are proceeding with an expansion of the Caribou gas plant from 65
to 105 million cubic feet per day. Capital costs are expected to be about
$35 million and we expect the expansion to be operational in the second
quarter of 2009.
    In the second quarter we also agreed to acquire a 50% ownership interest
in the Bonnie Glen crude oil and condensate pipeline system and a further
20.3% ownership interest in the Judy Creek NGL pipeline system. The
transactions will close in the third quarter and the total purchase price is
approximately $24 million, including linefill in the Bonnie Glen system. These
pipeline systems deliver oil, condensate and NGLs from western Alberta into
the Edmonton hub and will complement Keyera's NGL Infrastructure and Marketing
strategies.
    Construction of the fourth NGL pipeline between Keyera's Fort
Saskatchewan facility and the Edmonton Terminal was completed in July and the
pipeline is now operational. This pipeline gives us the ability to deliver
propane, butane, condensate and NGL mix in either direction between the two
facilities. In particular, we can now direct condensate delivered to our
offload facilities in the Edmonton area into storage at the Fort Saskatchewan
facility or into feeder pipelines for delivery to the Fort McMurray area. We
have completed the first wellbore in our four cavern storage expansion program
and expect to be washing the cavern in mid September.
    Work is proceeding on our ethane extraction project at the Rimbey gas
plant and we are continuing with plans to bring the Alberta Diluent Terminal
into operation.
    With the successful completion of the turnarounds at the Nordegg River
and Gilby gas plants, we have now completed all of our scheduled maintenance
turnarounds for the year. Both turnarounds were completed on schedule and on
budget.
    On behalf of Keyera and its employees, I thank you for your continued
support and look forward to continued success in 2008 and beyond.

    
    Jim V. Bertram
    President and CEO
    Keyera Facilities Income Fund
    

    Contribution From Operating Segments

    Keyera operates one of the largest natural gas midstream businesses in
Canada with three major operating segments: Gathering and Processing, NGL
Infrastructure and Marketing. The Gathering and Processing segment includes
natural gas gathering systems and processing plants strategically located in
the natural gas production areas on the western side of the Western Canadian
Sedimentary Basin. The NGL Infrastructure segment includes NGL and crude oil
pipelines, terminals, processing and storage facilities in Edmonton and Fort
Saskatchewan, Alberta, one of North America's major NGL hubs. The Marketing
segment includes activities such as the marketing of propane, butane and
condensate to customers in Canada and the United States, and crude oil
midstream activities.
    Keyera's Gathering and Processing and NGL Infrastructure segments provide
a large portion of the total contribution. Keyera benefits from the
geographical diversity of its natural gas processing plants, NGL
infrastructure facilities and associated assets. The revenues generated from
these facilities are fee-for-service based, with minimal direct exposure to
commodity prices. The remainder of Keyera's contribution is derived from its
Marketing segment. Due to Keyera's integrated approach to its business, its
infrastructure provides a significant competitive advantage in NGL marketing.
Keyera also benefits from diversified sources of NGL supply and a diversified
customer base across North America.
    The following table shows the contribution from each of Keyera's
operating segments and includes inter-segment transactions that are eliminated
in the Fund's consolidated financial statements. Since contribution is not a
standard measure under Canadian generally accepted accounting principles
("GAAP"), it may not be comparable to similar measures reported by other
entities. Contribution does not include the elimination of inter-segment
transactions as required by GAAP and refers to operating revenues less
operating expenses. Management believes contribution provides an accurate
portrayal of operating profitability by segment. Keyera's Gathering and
Processing and NGL Infrastructure segments charge Keyera's Marketing segment
for the use of facilities at market rates. Those charges are reflected in
contribution, but are eliminated in GAAP segment measures. The most comparable
GAAP measures are reported in note 17, Segmented Information, to the
accompanying unaudited consolidated financial statements.

    
    -------------------------------------------------------------------------
    Contribution by Operating       Three months ended     Six months ended
     Segment                               June 30,              June 30,
    (in thousands of dollars)          2008       2007       2008       2007
    -------------------------------------------------------------------------

    Gathering & Processing(1)
    Revenue before inter-segment
     eliminations(4)                 60,003     45,074    109,818     87,782
    Operating expenses before
     inter-segment eliminations(4)  (31,114)   (29,713)   (51,977)   (50,939)
    -------------------------------------------------------------------------
    Gathering & Processing
     contribution                    28,889     15,361     57,841     36,843
    -------------------------------------------------------------------------

    NGL Infrastructure(1)
    Revenue before inter-segment
     eliminations(4)                 19,937     17,658     38,099     35,339


    Operating expenses               (8,866)    (6,269)   (14,762)   (11,761)
    Unrealized gain/(loss)              323       (207)       810        (95)
                                   ------------------------------------------
    Operating expenses before
     inter-segment eliminations(4)   (8,543)    (6,476)   (13,952)   (11,856)
    -------------------------------------------------------------------------
    NGL Infrastructure contribution  11,394     11,182     24,147     23,483
    -------------------------------------------------------------------------

    Marketing(2)
    Revenue                         466,882    291,519    947,916    604,318
    Unrealized gain/(loss)           (7,308)       807      4,992     (4,650)
                                   ------------------------------------------
    Revenue before inter-segment
     eliminations(4)                459,574    292,326    952,908    599,668
    Operating expenses before
     inter-segment
     eliminations(4)               (440,178)  (273,489)  (905,466)  (571,545)
    General & administration           (826)      (731)    (1,762)    (1,544)
    -------------------------------------------------------------------------
    Marketing contribution           18,570     18,106     45,680     26,579
    -------------------------------------------------------------------------
    Total contribution               58,853     44,649    127,668     86,905
    -------------------------------------------------------------------------
    Other expenses(3)               (23,062)   (23,004)   (47,529)   (43,400)
    -------------------------------------------------------------------------
    Earnings before tax and
     non-controlling interest        35,791     21,645     80,139     43,505
    -------------------------------------------------------------------------
    Notes:
    (1) Gathering and Processing and NGL Infrastructure contribution
        includes revenues for processing, transportation and storage services
        provided to Keyera's Marketing business.
    (2) The Marketing contribution is net of expenses for processing,
        transportation and storage services provided by Keyera's facilities
        and general and administrative costs directly attributable to the
        Marketing segment.
    (3) Other expenses include corporate general and administrative,
        interest, depreciation and amortization, accretion and impairment
        expense. Corporate general and administrative costs exclude the
        direct Marketing general and administrative costs.
    (4) Revenue and operating expenses before inter-segment eliminations as
        shown above are both non-GAAP measures and do not consider the
        elimination of inter-segment sales and expenses. Inter-segment
        transactions are eliminated upon consolidation of Keyera's financial
        results to arrive at external revenue and external operating
        expenses, both GAAP measures, as reported in note 17, Segmented
        Information.
    

    Management's Discussion and Analysis

    The following management's discussion and analysis ("MD&A") was prepared
as of August 12, 2008 and is a review of the results of operations and the
liquidity and capital resources of Keyera Facilities Income Fund (the "Fund")
and its subsidiaries (collectively "Keyera"). It should be read in conjunction
with the accompanying unaudited consolidated financial statements of the Fund
for the quarter ended June 30, 2008 and the notes thereto as well as the
consolidated financial statements of the Fund for the year ended December 31,
2007 and the related management's discussion and analysis. Additional
information related to the Fund, including the Fund's Annual Information Form,
is filed on SEDAR at www.sedar.com.

    NON-GAAP FINANCIAL MEASURES

    This discussion and analysis refers to certain financial measures that
are not determined in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP"). Measures such as operating margin (operating revenues
minus operating expenses), distributable cash flow (cash flow from operating
activities adjusted for changes in non-cash working capital, maintenance
capital expenditures and the distributable cash flow attributable to any non-
controlling interest) and EBITDA (earnings before interest, taxes,
depreciation and amortization) are not standard measures under GAAP and
therefore may not be comparable to similar measures reported by other
entities. Management believes that these supplemental measures facilitate the
understanding of the Fund's results of operations, leverage, liquidity and
financial position. Operating margin is used to assess the performance of
specific segments before general and administrative expenses and other non-
operating expenses. Distributable cash flow is used to assess the level of
cash flow generated from ongoing operations and to evaluate the adequacy of
internally generated cash flow to fund distributions. EBITDA is commonly used
by management, investors and creditors in the calculation of ratios for
assessing leverage and financial performance. Investors are cautioned,
however, that these measures should not be construed as an alternative to net
earnings determined in accordance with GAAP as an indication of the Fund's
performance.

    FORWARD LOOKING STATEMENTS

    Certain statements contained in this MD&A and accompanying documents
contain forward-looking statements. These statements relate to future events
or the Fund's future performance. Such statements are predictions only and
actual events or results may differ materially. The use of words such as
"anticipate", "continue", "estimate", "expect", "may", "will", "project",
"should", "plan", "intend", "believe", and similar expressions, including the
negatives thereof, is intended to identify forward looking statements. All
statements other than statements of historical fact contained in this document
are forward looking statements, including, without limitation, statements
regarding: the future financial position of Keyera; business strategy and
plans of management; anticipated growth and proposed activities; budgets,
including future capital, operating or other expenditures and projected costs;
estimated utilization rates; objectives of or involving Keyera; impact of
commodity prices; treatment of Keyera under governmental regulatory regimes;
the existence, operation and strategy of the risk management program,
including the approximate and maximum amount of forward sales and hedging to
be employed; and expectations regarding Keyera's ability to raise capital and
to add to its assets through acquisitions or internal growth opportunities.
    The forward looking statements reflect management's current beliefs and
assumptions with respect to such things as the outlook for general economic
trends, industry trends, commodity prices, capital markets, and the
governmental, regulatory and legal environment. In some instances, this MD&A
and accompanying documents may also contain forward-looking statements
attributed to third party sources. Management believes that its assumptions
and analysis in this MD&A are reasonable and that the expectations reflected
in the forward looking statements contained herein are also reasonable.
However, Keyera cannot assure readers that these expectations will prove to be
correct.
    All forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, events, levels
of activity and achievements to differ materially from those anticipated in
the forward looking statements. Such factors include but are not limited to:
general economic, market and business conditions; operational matters,
including potential hazards inherent in our operations; risks arising from co-
ownership of facilities; activities of other facility owners; competitive
action by other companies; activities of producers and other customers and
overall industry activity levels; changes in gas composition; fluctuations in
commodity prices and supply/demand trends; processing and marketing margins;
effects of weather conditions; fluctuations in interest rates and foreign
currency exchange rates; changes in operating and capital costs, including
fluctuations in input costs; actions by governmental authorities; decisions or
approvals of administrative tribunals; changes in environmental and other
regulations; reliance on key personnel; competition for, among other things,
capital, acquisition opportunities and skilled personnel; changes in tax laws
relating to income trusts, including the effects that such changes may have on
unitholders, and in particular any differential effects relating to
unitholder's country of residence; and other factors, many of which are beyond
the control of Keyera, some of which are discussed in this MD&A and in
Keyera's Annual Information Form dated February 26, 2008 (the "Annual
Information Form") filed on SEDAR and available on the Keyera website at
www.keyera.com.
    Readers are cautioned that they should not unduly rely on the forward
looking statements in this MD&A and accompanying documents. Further, readers
are cautioned that the forward looking statements in this MD&A speak only as
of the date of this MD&A and Keyera does not undertake any obligation to
publicly update or to revise any of the forward looking statements, whether as
a result of new information, future events or otherwise, except as may be
required by applicable laws.
    All forward looking statements contained in this MD&A and accompanying
documents are expressly qualified by this cautionary statement. Further
information about the factors affecting forward looking statements and
management's assumptions and analysis thereof, is available in filings made by
Keyera with Canadian provincial securities commissions, which can be viewed on
SEDAR at www.sedar.com.

    INTRODUCTION

    The statements of net earnings contained in the unaudited interim
consolidated financial statements include the results of operations of the
Fund, Keyera Energy Limited Partnership (the "Partnership"), Keyera Energy
Facilities Limited ("KEFL"), Keyera Energy Ltd. ("KEL"), Keyera Energy
Management Ltd. ("KEML"), Keyera Energy Inc. ("KEI"), Rimbey Pipeline Limited
Partnership ("RPLP") for the three and six months ended June 30, 2007 and the
results of operations of each of those entities and Alberta Diluent Terminal
Limited Partnership ("ADTLP") for the three and six months ended June 30,
2008. The Fund and its subsidiaries are collectively referred to as "Keyera".
A diagram of Keyera's organizational structure and descriptions of the Fund
and its subsidiaries can be found on Keyera's website at www.keyera.com .

    BUSINESS ENVIRONMENT

    Industry Activity
    Producers in Canada drilled approximately 1,575 wells in the second
quarter, a decrease of about 11% compared to the same period in 2007. The
foothills front region of Alberta saw a decrease of 16% in the number of wells
drilled during the second quarter versus the same period a year ago. The
average depth of wells drilled in the region was 2,547 meters, a slight
decrease compared to the second quarter of 2007. In the central Alberta
region, the number of wells drilled was down versus the second quarter of
2007, with the average depth decreasing by approximately 6% to 1,331 metres.
British Columbia also experienced a decline of almost 8% in the number of
wells drilled when compared to the same period a year earlier. The average
depth in British Columbia has increased to 3,415 metres, 22% higher than the
second quarter of 2007.
    The slowdown in drilling for the quarter can be largely attributed to an
unseasonably wet second quarter, a longer than usual spring break-up and lower
producer capital spending budgets put into place almost a year earlier.
Despite a lower well count for the quarter, recent increases in capital
spending by a number of producers within Keyera's core areas suggest a more
active drilling program in the second half of 2008.
    Natural gas fundamentals in North America have improved significantly
over the past year. At the end of July, the AECO spot price for natural gas
had increased substantially from a year ago, from approximately $5.44/mcf to
$7.90/mcf. This increase in price is largely attributable to a drawdown in
natural gas inventories in the United States, from 2,415 bcf of gas at the end
of the second quarter a year ago to 2,033 bcf this year. Since the end of the
quarter, United States natural gas storage levels have remained just under the
five year average. As well, the price of West Texas Intermediate oil doubled
from a year ago, from approximately U.S.$70.68 per barrel to approximately
U.S. $140 per barrel at quarter end.

    Climate change
    On July 1, 2008, the British Columbia government's carbon tax came into
effect. At Caribou, Keyera's only B.C. facility, the operating cost impact for
the remainder of 2008 is estimated at $150,000 to $200,000. These costs will
grow over time with the proposed increase in the carbon tax rate and increased
fuel consumption due to an expansion of the plant in 2009. However, the net
impact to Keyera is expected to be small as these costs are largely
recoverable from producers via flow through operating costs.
    A description of Alberta's rules dealing with greenhouse gas emissions,
the federal government's plans relating to greenhouse gas emissions and the
cap and trade system proposed by the B.C. government can be found in Keyera's
MD&A for the first quarter of 2008, which is available on SEDAR. A more
complete description of the other environmental regulations that affect
Keyera's businesses can be found in Keyera's Annual Information Form, which is
available on SEDAR.
    Keyera participated in the 2008 Carbon Disclosure Project ("CDP") annual
survey. The CDP is an organization supported by institutional investors with
combined assets under management of $57 trillion. Keyera's response to the CDP
survey will be available from the CDP in September and is available in the
"About Keyera" section of Keyera's website.

    RESULTS OF OPERATIONS

    Keyera's midstream activities are conducted through three business
segments. The Gathering and Processing segment provides natural gas gathering
and processing services to producers. The NGL Infrastructure segment provides
NGL processing, transportation and storage services to producers, marketers
(including Keyera) and others. The services in both these segments are
provided on a fee-for-service basis. The Marketing segment is focused on the
marketing of by-products recovered from the processing of raw gas, primarily
NGLs, and crude oil midstream activities. A more complete description of
Keyera's businesses by segment can be found in the Fund's Annual Information
Form, which is available at www.sedar.com.
    Strong performance from the Gathering and Processing and Marketing
segments during the second quarter of 2008 contributed to an operating margin
of $59.7 million, an increase of $14.3 million compared to the same period
last year. Included in the operating margin for the second quarter of 2008 was
a $7.0 million unrealized loss related to the change in fair value of
financial contracts, compared to a $0.6 million unrealized gain in the second
quarter of 2007.
    The growth in operating margin was due primarily to the Gathering and
Processing and Marketing segments. In the Gathering and Processing segment,
throughput was up compared to the second quarter of 2007 and remained
consistent with the first quarter of 2008. However, turnaround activity in the
second quarter of 2007 was the largest contributor to the favourable operating
margin variance. Also contributing to the favourable variance was $2.8 million
of positive equalization adjustments recorded in the second quarter of 2008.
Higher sales volumes and strong margins underpinned the Marketing segment's
contribution to the increase in operating margin.
    Net earnings before tax and non-controlling interest in the second
quarter of 2008 were $35.8 million, an increase of $14.1 million compared to
the second quarter of 2007. The increase was primarily attributable to the
higher operating margin discussed above. The decrease in general and
administrative costs of $1.4 million was largely offset by a $1.1 million
impairment expense related to the disposition of the non-core Tomahawk gas
plant.
    An income tax expense of $13.1 million was recorded in the second quarter
of 2008, bringing net earnings to $22.7 million, compared to a loss of
$59.9 million in the second quarter of 2007. The net loss in the second
quarter of 2007 was primarily due to an $80.2 million non-cash future income
tax expense related to the enactment of a new tax on publicly traded trusts.
In the second quarter of 2008, income tax expense was $13.1 million, resulting
from a $15.0 million future income tax expense partially offset by a
$1.9 million current income tax recovery. The $15.0 million future income tax
expense resulted from higher CCA claims in the quarter and a change in
estimates for future tax deductions. The acquisition of assets by KEFL in May
2008 created sufficient tax shelter to reduce current taxes to virtually nil
and therefore resulted in $1.9 million of current income tax recovery in the
second quarter.
    Year-to-date, net earnings were $78.2 million, compared to a net loss of
$40.9 million for the same period last year. The favourable variance was
primarily related to the inclusion of the $80.2 million non-cash future income
tax expense in the second quarter of 2007, stronger operating margins earned
in the Gathering and Processing segment throughout 2008 and in the Marketing
segment in the first quarter of 2008.

    Gathering and Processing

    Gathering and Processing operating margin for the second quarter of 2008
was $27.6 million, an increase of $13.0 million, or 89%, compared to the
second quarter of 2007. The significant increase was primarily attributable to
turnarounds completed in the second quarters of 2007 and 2008, $2.8 million of
positive equalization adjustments related to prior periods and higher
throughput at most plants.
    Turnaround activity in the second quarter of each year had a considerable
effect on the favourable variance in the second quarter. In the second quarter
of 2007, the turnaround completed at Rimbey, Keyera's largest gas plant, added
approximately $9.5 million to operating expenses. The fee structure in place
at Rimbey provides for recovery of these costs over a four year period.
Accordingly, these costs had a significant adverse effect on second quarter
2007 operating margin. The turnarounds completed at the Gilby and Nordegg
River gas plants in the second quarter of 2008 were much smaller in scale and
the fee structure in place at these plants allows for full recovery in the
current period. Therefore, their effect on operating margin in the second
quarter of 2008 was less significant.
    NGL extraction activities contributed approximately $0.5 million to
operating margins in the second quarter of 2008 compared to approximately
$0.3 million in the second quarter of 2007. These margins are dependent upon
favourable price differentials between the NGL products produced and natural
gas. As a result, margins may vary significantly from period to period.
    Gathering and Processing revenue for the second quarter of 2008 was
$58.7 million, an increase of $14.4 million, or 33%, compared to the second
quarter of 2007. The increase was due primarily to higher operating fees at
the Gilby and Nordegg River gas plants to recover turnaround costs, higher
fees earned at the Rimbey gas plant that was down for turnaround in the second
quarter of 2007, the strong performance of NGL extraction activities,
incremental revenues from the West Pembina gas plant acquired in May 2008 and
$2.8 million of positive equalization adjustments related to prior periods.
While volumes increased by 12% from a year ago, the revenues from those
volumes increased by a greater amount. Declines in lower-fee volumes were more
than offset by increases in higher-fee volumes.
    Gathering and Processing operating expenses for the second quarter of
2008 were $31.1 million, an increase of $1.4 million, or 5%, compared to the
second quarter of 2007. The increase was attributable to the cost of
turnarounds completed at the Nordegg River and Gilby gas plants ($3.7 million
in total), operating costs associated with recently acquired West Pembina gas
plant and maintenance projects completed at the Bigoray and Strachan gas
plants, offset by lower operating expense at the Rimbey gas plant compared to
the second quarter of 2007, where operating expenses in the second quarter of
2007 included $9.5 million of costs related to the plant turnaround.
    Average gross processing throughput in the second quarter of 2008 was
896 million cubic feet per day, up over 6% from the first quarter of 2008 and
up 12% from the second quarter last year. Year-to-date, average gross
processing throughput was 869 million cubic feet per day, up over 7% from
2007. The growth in throughput between the second quarter of 2008 and the same
period last year was due primarily to volumes from the recently acquired West
Pembina gas plant, reprocessing activity at the Paddle River gas plant that
commenced in September 2007 and higher throughput at the Rimbey gas plant,
partially offset by lower throughput at the Brazeau River and Chinchaga gas
plants.
    Year-to-date, Gathering and Processing revenue was $107.3 million, an
increase of $21.0 million or 24% compared to last year. The increase is due
primarily to the same factors as those that affected the second quarter of
2008. Year-to-date Gathering and Processing operating expenses were
$52.0 million, an increase of $1.0 million or 2% compared to last year. The
variance was also primarily due to the same factors discussed for the second
quarter of 2008.

    Gathering and Processing - North Central Region
    The North Central Region delivered strong results in the second quarter,
despite the loss of some throughput during the scheduled maintenance
turnaround at the Gilby gas plant. Activity levels in the area remained steady
during the quarter. Throughput in the second quarter was 427 million cubic
feet per day, 9% higher than the second quarter of last year, largely due to
lower volumes in 2007 as a result of the turnaround at the Rimbey gas plant.
    A number of projects were initiated in the North Central Region during
the second quarter. At the Rimbey gas plant, work on the ethane extraction
project is proceeding. Long delivery equipment has been ordered and the
pipeline portion of the project is expected to be completed this winter. The
project is expected to be operational in mid year 2009. The Rimbey vapour
recovery project was commissioned in late April. The vapour recovery unit
recovers natural gas which was previously consumed in the flare gas system,
reducing fuel gas consumption and greenhouse gas emissions, providing benefits
to Keyera, its producing customers and the environment.
    In the Caribou area of northeastern British Columbia, Keyera reached
mutually acceptable terms with producers for future processing capacity and,
as a result, made a decision to proceed with an expansion of the Caribou gas
plant. The project will increase the plant's inlet capacity from 65 to
105 million cubic feet per day. The expansion is expected to cost $35 million
and be fully operational in the second quarter of 2009. Detailed engineering
is ongoing and long delivery equipment has been ordered.
    Keyera completed its final scheduled maintenance turnaround of the year
in the second quarter at the Gilby gas plant. The two week shut down was
completed on time and on budget, and the costs will be fully recovered in
2008.

    Gathering and Processing - Foothills Region
    The Foothills Region also posted a strong second quarter. Foothills
Region results were slightly higher than the same period last year and about
the same as the first quarter of 2008. Although wet weather in the area
resulted in lower than usual producer activity in the quarter, a number of
producers have announced higher drilling budgets for the remainder of the
year. Foothills Region throughput in the second quarter was 469 million cubic
feet per day, 16% higher than the same period last year. The increase was
largely the result of the West Pembina gas plant acquisition.
    On May 1, 2008, Keyera acquired a 35.6% interest in the West Pembina gas
plant and became operator of the facility.
    At the Strachan gas plant, a second NGL truck loading rack was added
during the quarter, providing Keyera with access to additional NGL volumes.
    As a result of the sharp increase in global demand for sulphur and the
resulting increase in sulphur prices, Keyera has initiated a number of
projects to provide enhanced sulphur handling services at the Strachan gas
plant. Keyera is constructing two sulphur re-melt facilities to allow existing
sulphur blocks in west central Alberta to be dismantled and delivered to
Strachan for processing and loading prior to sale in the domestic and offshore
markets. These new facilities will augment the existing sulphur handling
facilities at Strachan and generate fee-for-service revenues for Keyera, while
allowing producers to realize significant netbacks.
    During the quarter, Keyera completed a scheduled maintenance turnaround
at the Nordegg River gas plant. The turnaround was completed on time and on
budget and costs associated with the turnaround will be recovered this year.
No further maintenance turnarounds are scheduled for 2008.
    Also during the quarter, Keyera agreed to sell its interest in the non-
core Tomahawk gas plant.

    NGL Infrastructure

    NGL Infrastructure operating margin was $2.6 million for the second
quarter of 2008, a decrease of $0.5 million compared to the second quarter of
2007. Higher operating costs and lower volumes on the Rimbey Pipeline were
mostly offset by growing storage revenues.
    NGL Infrastructure revenue for the second quarter of 2008 was
$11.1 million, an increase of $1.6 million compared to the second quarter of
2007. This increase was due primarily to ongoing demand for storage services
at Fort Saskatchewan, partially offset by lower volumes on the Rimbey Pipeline
resulting from the closure of the Bonnie Glen gas plant.
    NGL Infrastructure operating expenses for the second quarter of 2008 were
$8.5 million, an increase of $2.1 million compared to the second quarter of
2007. The increase was primarily due to higher utility costs and the
acceleration of maintenance project schedules.
    Year-to-date, NGL Infrastructure revenue was $22.0 million, an increase
of $2.8 million compared to last year. The higher revenue in 2008 was the
result of ongoing demand for storage services and higher fractionation fees,
partially offset by lower fractionation volumes.
    Year-to-date, NGL Infrastructure operating expenses were $14.0 million,
an increase of $2.1 million compared to last year. Higher operating costs were
due to increased activity at the Edmonton rail terminal in the first quarter
of 2008, repairs to a leak in the Fort Saskatchewan Pipeline in early 2008,
and the acceleration of maintenance project schedules in the second quarter of
2008.
    A number of projects are in various stages of completion in the
Edmonton/Fort Saskatchewan area. The Fort Saskatchewan storage expansion
project is well underway. Drilling of the well bore for the first cavern is
now complete and preparations are underway to inject water into the salt
formation to begin shaping the cavern. The first cavern is expected to be
operational by the middle of 2010.
    Construction of the fourth NGL pipeline between the Edmonton logistics
terminal and the Fort Saskatchewan fractionation and storage facility was
competed in late July. The fourth pipeline will provide enhanced operational
flexibility, allowing Keyera to deliver NGLs at increased rates in either
direction between the two facilities. In particular, Keyera is now able to
deliver condensate by rail from the U.S. into storage at Fort Saskatchewan, or
into feeder pipelines for delivery to the Fort McMurray area.
    The newly acquired Alberta Diluent Terminal was put into limited service
in the second quarter storing rail cars. Design work is underway to connect
the facility to the Edmonton Terminal and the Fort Saskatchewan facility.
Keyera has been approached by a number of parties interested in accessing the
facility, and Keyera continues to evaluate new proprietary and third party
business opportunities for the facility.
    The truck terminal expansion at Fort Saskatchewan, which was commissioned
in the first quarter, has been operating near capacity in the second quarter.
Modifications to the rail rack at the Edmonton Terminal were completed in the
second quarter, allowing propane and butane to be delivered by rail into
Keyera's infrastructure from facilities across western Canada that do not have
efficient transportation alternatives.
    In the second quarter, Keyera agreed to acquire a 50% ownership interest
in the Bonnie Glen crude oil and condensate pipeline system and a further
20.3% ownership interest in the Judy Creek NGL pipeline system. Keyera will
own 39.3% of the Judy Creek NGL pipeline, which connects the Judy Creek area
of Alberta to the Nisku Products Pipeline for eventual delivery of NGLs into
the Edmonton Hub. The Bonnie Glen pipeline system includes the Wizard Lake
pipeline and delivers oil and condensate from west central Alberta into
Edmonton. The transaction is expected to close in the third quarter and the
total purchase price is approximately $24 million, including 50% of the
linefill on the Bonnie Glen system. The two pipelines will provide additional
flexibility with respect to oil and NGL deliveries into the Edmonton/Fort
Saskatchewan hub and support Keyera's infrastructure and marketing strategies
in Alberta.

    Marketing

    In the second quarter of 2008, strong demand and margins for propane,
butane and condensate, along with favourable pricing differentials for the
crude oil midstream activities, enabled the Marketing segment to achieve
exceptional performance. Operating margin in the second quarter of 2008 was
$29.5 million, an increase of $1.8 million or 6% compared to the second
quarter of 2007.
    Marketing revenue for the second quarter of 2008 was $459.6 million, an
increase of $167.2 million compared to the second quarter of 2007. The
increase was primarily due to significantly higher product sales prices,
approximately 53% higher than the same period last year, along with higher
propane sales volumes and growth in the crude oil midstream business. Also
affecting revenues for the quarter was a $7.3 million unrealized loss on
financial instruments, which is discussed later in this section.
    Year-to-date, Marketing revenue was $952.9 million, an increase of
$353.2 million from 2007. The increase was primarily related to significantly
higher commodity prices, higher sales volumes, higher crude oil midstream
revenues and an unrealized gain of $5.0 million on financial instruments,
which is discussed later in this section.
    The table below outlines the composition of the revenues generated from
Keyera's Marketing business:

    
    Composition of Marketing        Three months ended     Six months ended
     revenue                               June 30,              June 30,
    (in thousands of dollars)          2008       2007       2008       2007
    -------------------------------------------------------------------------
    Physical sales                  470,238    290,562    966,106    602,319
    Financial instruments -
     realized                        (3,356)       957    (18,190)     1,999
    Financial instruments -
     unrealized                      (7,308)       807      4,992     (4,650)
    -------------------------------------------------------------------------
    Marketing revenue               459,574    292,326    952,908    599,668
    -------------------------------------------------------------------------
    

    NGL sales volumes for the second quarter of 2008 averaged 48,600 barrels
per day compared to 45,300 barrels per day in the second quarter of 2007,
primarily due to higher propane sales. Year-to-date, NGL sales volumes
averaged 57,400 barrels per day compared to 53,100 barrels per day last year,
due primarily to higher propane sales throughout the year and higher
condensate sales in the first quarter of 2008.
    Marketing operating expense for the second quarter of 2008 was
$430.0 million, an increase of $165.5 million compared to the second quarter
of 2007. Year-to-date Marketing operating expense was $886.8 million, an
increase of $332.9 million. The increase was primarily due to higher sales
volumes and significantly higher prices.
    In the second quarter of 2008, a $7.3 million unrealized loss on
financial contracts was recorded, of which approximately $8.2 million was
related to the change in the fair value of crude oil and NGL price swap
contracts. This unrealized loss was partially offset by changes in the fair
value of fixed price physical NGL sales contracts and changes in the fair
value of forward currency contracts.
    On a year-to-date basis, an unrealized gain of $5.0 million has been
recorded, as the $7.3 million unrealized loss arising primarily from the
change in fair value of the crude oil and NGL price swap contracts in the
second quarter of 2008, partially offsets the $12.3 million unrealized gain
recorded in the first quarter of 2008. At June 30, 2008, the fair market value
of these contracts resulted in a liability of $15.7 million, partially offset
by an asset of $10.9 million. These amounts represent an estimate of what the
Fund would pay or receive if these instruments had been closed out at the end
of the period. The estimated fair value of all derivative instruments held for
trading is based on quoted market prices and, if not available, on estimates
from third party brokers or dealers. If the commodity price for derivative
instruments held at June 30, 2008 were to increase by 10%, the effect of the
change in fair value of these derivative instruments on net earnings would be
a decrease of approximately $9.7 million.
    Propane demand was strong during the early part of the second quarter due
to cold weather in local Canadian markets. Demand at the Keyera terminals in
the U.S. was more typical of the slower summer season. The strong demand in
western Canada early in the second quarter of 2008 enabled Keyera to achieve
higher volumes and higher than expected propane margins. By the end of the
second quarter, propane demand in western Canada had returned to more normal
levels for this time of year.
    Butane markets continued to perform well during the second quarter of
2008. Term contract demand was steady and Keyera was also able to capture
opportunities in the spot market. Sales volumes were higher than the same
period last year and margins remained strong.
    Condensate market conditions were very strong during the second quarter
of 2008. Keyera was able to use its asset infrastructure to import condensate
from the U.S. and deliver strong condensate margins in the quarter.
    Keyera's crude oil midstream activities continued to grow in the second
quarter of 2008, relative to the first quarter of 2008 and to the same period
last year.
    Keyera expects that Marketing operating margin will return to more
typical summer levels in the third quarter as the result of a number of
factors. Propane demand has declined significantly from the beginning of the
second quarter and is expected to remain at this lower level throughout the
third quarter. Temporary demand disruptions are expected to result in reduced
butane sales in the third quarter. Increased supply and seasonal summer
weather has resulted in reduced condensate margins in Alberta, and this is
expected to continue for the next few months. Finally, the operating margin in
Keyera's crude oil midstream business in the second half of the year is
expected to be lower than the strong performance achieved in the first half of
2008.
    NGL product inventories were $139.9 million at the end of the second
quarter, $93.0 million higher than the second quarter of 2007. This increase
was due to both higher volumes in storage and higher prices. Although this
growth in inventory value will result in higher financing costs, Keyera's
balance sheet is well positioned to provide the liquidity necessary to
continue to execute its marketing strategy.
    Financial contracts are one of several strategies used by Keyera to
protect its NGL inventory from fluctuations in the prices of NGL products. To
the extent these contracts are effective (i.e., the change in the market price
of crude oil is correlated to the change in the prices of the underlying
physical NGL products), gains and losses on these financial contracts will be
offset by changes in the proceeds that will be realized upon the sale of the
products. Management regularly monitors the fair value of Keyera's financial
contracts and inventory volumes and performs stress testing on these
positions. The strategy of utilizing crude oil price swaps to hedge the
commodity price risk related to NGL products is subject to basis risk between
the price of crude oil and the prices of the NGL products. As a result, this
strategy cannot always be expected to fully offset future propane, butane and
condensate price movements.
    For a more complete discussion of the risks and trends that could affect
the marketing performance and the steps that Keyera takes to mitigate these
risks, readers are referred to the descriptions in the Liquidity and Capital
Resources section of this MD&A and to Keyera's Annual Information Form, which
is available on SEDAR.

    Non-operating expenses and other earnings

    General and administrative expenses for the second quarter of 2008 were
$5.8 million, down $1.4 million from the second quarter of 2007. A reduction
in long-term incentive plan ("LTIP") costs accounted for virtually all of the
decrease, as the second quarter 2007 LTIP accrual reflected the effect of the
distribution increase implemented in May 2007.
    Keyera has adopted a different performance metric for newly granted LTIP
performance awards. Starting with the 2008 LTIP performance awards, the payout
multiplier will be based on the average pre-tax distributable cash flow per
unit over the three-year vesting period (July 1, 2008 through June 30, 2011).
There was no change to the payout multiplier for the LTIP performance awards
previously granted. The relationship between the three year average annual
pre- tax distributable cash flow per unit and the payout multiplier for the
2008 LTIP performance awards is described in the table below:

    
    -------------------------------------------------------------------------
                    July 1, 2008
                       Grant              Payout Multiplier
    -------------------------------------------------------------------------
                  Less than $2.50                Nil
                    $2.50 - $2.82             50% - 99%
                    $2.83 - $3.49            100% - 199%
                 $3.50 and greater               200%
    -------------------------------------------------------------------------
    

    Year-to-date, general and administrative costs were $14.7 million, up
$2.2 million compared to last year. Higher activity levels and staff costs
accounted for $1.5 million of the increase and long-term incentive plan costs
in 2008, accounted for $0.7 million of the increase.
    Interest expense, net of interest revenue, was $5.5 million for the
second quarter of 2008, unchanged from the second quarter of 2007, and
$10.8 million year-to-date, $0.7 million greater than last year. Higher debt
balances in 2008 contributed to higher interest costs in 2008. The 2007
interest expense included a $0.7 million unrealized loss on financial
instruments related to an interest rate financial contract used to lock in
interest rates on a portion of the long-term debt that was issued later in
2007.
    Depreciation and amortization expenses were $10.8 million for the second
quarter of 2008, $0.4 million greater than the second quarter of 2007, and
$21.3 million year-to-date, $0.3 million greater than last year. The increase
was modest given the growth in the asset base, as some new assets had not yet
been commissioned.
    Income tax expense for the second quarter of 2008 was $13.1 million,
$68.4 million lower than the second quarter of 2007. Future income tax expense
for the second quarter of 2008 was $65.3 million lower than last year
primarily due to recording $80.2 million of future income taxes related to the
enactment of a new tax on publicly traded trusts in the second quarter of
2007. During the second quarter of 2008, a $15.0 million future income tax
expense was recorded as a result of higher CCA claims in the quarter and a
change in estimates for future tax deductions.
    Year-to-date income tax expense was $1.9 million, $82.1 million lower
than the same period last year. Future income tax expense for 2008 was
$79.7 million lower than 2007, primarily due to the recording of future income
taxes related to the tax on publicly traded trusts enacted in the second
quarter of 2007. Current income tax expense was $2.4 million lower in 2008
compared to the prior year as a result of the acquisition of assets in certain
corporate subsidiaries of the Fund. These acquisitions have created sufficient
tax shelter to reduce current taxes for the first six months of 2008 to nil.

    Critical accounting estimates

    The Fund's consolidated financial statements have been prepared in
accordance with GAAP. Certain accounting policies require that management make
appropriate decisions with respect to the formulation of estimates and
assumptions that affect the recorded amounts of certain assets, liabilities,
revenues and expenses. Management reviews its assumptions and estimates
regularly, but new information and changes in circumstances may result in
actual results or revised estimates that differ materially from current
estimates. A description of the accounting estimates and the methodologies and
assumptions underlying the estimates are described in management's discussion
and analysis presented with the December 31, 2007 consolidated financial
statements of the Fund. There have been no changes to the methodologies and
assumptions. The most significant estimates are those indicated below:

    Estimation of Gathering and Processing and NGL Infrastructure revenues:
    At June 30, 2008, operating revenues and accounts receivable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $22.0 million for June 2008 operations.

    Estimation of Gathering and Processing and NGL Infrastructure operating
    expenses:
    At June 30, 2008, operating expenses and accounts payable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $13.2 million for June 2008 operations.

    Estimation of Gathering and Processing and NGL Infrastructure
    equalization adjustments:
    Much of the revenue from the Gathering and Processing and NGL
Infrastructure assets is generated on a recovery of operating costs basis.
Under this method, the operating component of the fee is a pro rata share of
the operating costs for the facility, calculated based upon total throughput.
Users of each facility are charged a fee per unit based upon estimated costs
and throughput, with an adjustment to actual throughput completed after the
end of the year. Each quarter, throughput volumes and operating costs are
reviewed to determine whether the estimated unit fee charged during the
quarter properly reflects the actual volumes and costs, and the allocations of
revenues and operating costs to other plant owners are also reviewed.
Appropriate adjustments to revenues and operating expenses are recognized in
the quarter and allocations to other owners are recorded.
    For the Gathering and Processing and NGL Infrastructure segments,
operating revenues and accounts receivable contained an estimated equalization
adjustment of $9.4 million at June 30, 2008. Operating expenses and accounts
payable contained an estimate of $8.2 million.

    Estimation of Marketing revenues:
    At June 30, 2008, the Marketing sales and accounts receivable contained
an estimate for June 2008 revenues of $103.3 million.

    Estimation of Marketing product purchases:
    Marketing cost of goods sold, inventory and accounts payable contained an
estimate of NGL product purchases of $133.6 million at June 30, 2008.

    Estimation of asset retirement obligation:
    Keyera will be responsible for compliance with all applicable laws and
regulations regarding the decommissioning, abandonment and reclamation of its
facilities at the end of their economic life. The determination of the
estimate of these obligations is based upon settlement between 2018 and 2038.
Keyera utilizes a documented process to estimate the future liability and the
anticipated cost of the decommissioning, abandonment and reclamation of its
facilities.
    The process, overseen by the Health, Safety and Environment Committee, is
undertaken by professionals involved in activities that deal with the design,
construction, operation and decommissioning of assets. Specialists with
knowledge and assessment processes specific to environmental and
decommissioning activities and costs are also utilized in the process.
    The process requires Keyera to obtain third party environmental liability
assessments for major sites, which are updated on a five year frequency. These
assessments typically utilize a Monte Carlo statistical simulation to develop
a liability cost range, from which the median is used. Next, the
decommissioning and abandonment component is derived from a matrix of third-
party cost quotations for a range of facilities, then adjusted for known and
pertinent factors at each site, such as construction style, plant processes
and site condition. Ultimately, all medium and large facilities will be
independently assessed in accordance with regulatory requirements.
    At December 31, 2007, Keyera had estimated that the total undiscounted
amount required to settle the asset retirement obligations was $183.0 million
and a discounted net present value of this obligation was $37.8 million. Year-
to-date, the asset retirement obligations were updated for acquisitions and
there were no material changes to the assumptions used in the estimate
prepared for December 31, 2007 asset retirement obligations. At June 30, 2008,
the discounted net present value of this obligation was $40.1 million.
    It is not possible to predict these costs with certainty since they will
be a function of regulatory requirements at the time of decommissioning,
abandonment and reclamation and the actual costs may exceed the current
estimates, which are the basis of the asset retirement obligation shown in
Keyera's financial statements.
    Additional information related to decommissioning, abandonment and
reclamation costs is provided in Keyera's Annual Information Form, which is
available on SEDAR.

    LIQUIDITY AND CAPITAL RE

SOURCES Cash flow from operating activities Cashflow from operating activities during the second quarter of 2008 was $2.4 million, as Keyera used $54.3 million of cash to finance a seasonal increase in non-cash working capital, primarily due to an increase in NGL inventories. Before changes in non-cash working capital, cash flow from operating activities was $56.7 million. From this cash flow, Keyera paid $24.9 million of distributions to its unitholders, leaving $31.8 million. Keyera borrowed $65.0 million from its revolving credit facility and received $1.6 million from the issuance of trust units under the distribution reinvestment plan ("DRIP"), resulting in $98.4 million of cash flow. From this cash flow, Keyera utilized $42.5 million for capital expenditures and financed the $54.3 million change in non-cash working capital related to operating activities, leaving a $1.6 million cash inflow for the quarter. Year-to-date, cash provided by operating activities was $60.8 million. Cash provided by operating activities before changes in non-cash working capital was $97.5 million. From this cash flow, the Fund paid $48.7 million of distributions to unitholders, leaving $48.8 million. Keyera borrowed $65.0 million from its revolving credit facility and received $2.4 million from the issuance of trust units under the DRIP resulting in $116.2 million of cash flow. From this cash flow, Keyera utilized $87.0 million for capital expenditures and financed the $36.7 million change in non-cash working capital related to operating activities, resulting in a cash outflow of $7.5 million for the year. Cash and working capital was $40.7 million at June 30, 2008 compared to a surplus of $75.7 million at December 31, 2007. The decline in working capital results from the use of short-term debt to finance growth capital expenditures. Capital additions and Three months ended Six months ended acquisitions June 30, June 30, (in millions of dollars) 2008 2007 2008 2007 ------------------------------------------------------------------------- Growth capital expenditures 41.2 5.8 90.7 7.5 Maintenance capital expenditures 0.6 0.2 0.9 0.6 ------------------------------------------------------------------------- Total capital expenditures 41.8 6.0 91.6 8.1 ------------------------------------------------------------------------- Acquisition of non-controlling interest - 5.2 - 6.7 ------------------------------------------------------------------------- Total capital additions and acquisitions 41.8 11.2 91.6 14.8 ------------------------------------------------------------------------- In the second quarter of 2008, additions to property, plant and equipment, including acquisitions, amounted to $41.8 million, consisting of $0.6 million of maintenance capital and $41.2 million of growth capital. In addition to maintenance capital expenditures, Keyera incurred maintenance and repair expenses of $10.4 million that were included in operating costs. Significant growth capital expenditures during the second quarter of 2008 were: - $27.0 million for the acquisition of a 35.6% working interest in the West Pembina gas plant, which provides sweet and sour processing capacity and "deep cut" natural gas liquids extraction capability - $3.3 million for the creation of incremental underground NGL storage capacity at Fort Saskatchewan - $3.3 million for the acquisition of land near the new Alberta Diluent Terminal to enhance operational flexibility Year-to-date, total capital additions and acquisitions amounted to $91.6 million, consisting of $0.9 million of maintenance capital and $90.7 million of growth capital. In addition to maintenance capital expenditures, Keyera incurred maintenance and repair expenses of $11.6 million that were included in operating costs. Year-to-date, Keyera has invested in the following significant growth projects: - $35.6 million for the acquisition of the Alberta Diluent Terminal in the Edmonton area to increase Keyera's capability to import and deliver condensate and other hydrocarbon products, including the acquisition of adjacent land to enhance operational flexibility - $27.0 million for the acquisition of a 35.6% working interest in the West Pembina gas plant - $6.1 million related to the construction of acid gas injection facilities and other upgrades at the Brazeau River gas plant and for the acquisition of pipelines in the West Pembina region to expand capture areas - $4.3 million for the construction of the North Trutch pipeline to expand the capture area of the Caribou gas plant - $3.8 million for the creation of incremental underground NGL storage capacity at Fort Saskatchewan - $3.4 million related to the construction of the NGL pipeline between the Edmonton and Fort Saskatchewan facilities to enhance deliverability and operational flexibility - $2.7 million related to the expansion of the truck loading facility at Fort Saskatchewan to increase capacity Growth capital expenditures for 2008 are expected to be between $150 and $200 million, assuming that there are no significant changes in plans and activities of producers and other customers and overall industry activity levels; no delays due to unusual weather conditions or due to decisions, approvals or delays by regulators; or material changes in general business, market or economic conditions. Working capital requirements are strongly influenced by the volume of NGLs held in storage and their related commodity prices. NGL inventories are required to meet seasonal demand patterns and will vary depending on the time of year. The largest allocation of working capital to fund inventory occurred in the second quarter of 2008 and was approximately $140 million. If crude oil prices remain at current levels, Keyera expects that the working capital that will be used to fund inventory later this year will significantly exceed that amount. In addition to the working capital required for inventory, Keyera typically utilizes approximately $25 to $45 million to finance the other components of working capital. Financial contracts are one of several strategies used by Keyera to protect its NGL inventory from fluctuations in the prices of NGL products. To the extent these contracts are effective (i.e., the change in the market price of crude oil is correlated to the change in the prices of the underlying physical NGL products), gains and losses on these financial contracts will be offset by changes in the proceeds that will be realized upon the sale of the products. However, until these financial contracts are settled at maturity, their fair value may create a liability that Keyera is required to collateralize by posting cash margin with the counterparty to the transaction. Management believes that Keyera's balance sheet is well positioned to provide the liquidity necessary to execute its marketing strategy, even if market prices were to move significantly against our position in financial contracts. For a discussion of the risks that could affect the liquidity and working capital of the Fund and the steps Keyera takes to mitigate these risks, as well as information relating to Keyera's commitments and contractual obligations, readers are referred to note 13, Financial instruments and risk management, to the accompanying unaudited consolidated financial statements for the Fund and to Keyera's 2007 MD&A and Keyera's Annual Information Form, each of which is available on SEDAR. Debt covenants Keyera has established credit facilities consisting of a $150 million committed unsecured revolving term facility that matures on April 21, 2011, and $30 million of unsecured revolving demand facilities. These credit facilities bear interest based on the lenders' rates for Canadian prime commercial loans, U.S. base rate loans, Libor loans or Bankers' Acceptances rates. As of June 30, 2008, $65 million was drawn under these credit facilities. The bank credit facilities contain a covenant that the Fund and its subsidiaries will not distribute in any twelve month period more than 105% of the distributable cash flow attributable to that twelve month period. Those facilities are also subject to two major financial covenants: "Debt to EBITDA" and "Debt to Capitalization". The calculation for each ratio is based on specific definitions, is not in accordance with GAAP and cannot be readily replicated by referring to the Fund's financial statements. The definitions in the credit agreements provide for the deduction of net working capital items in the calculation of debt. The following are the ratios as calculated in accordance with the covenants as at June 30, 2008: ------------------------------------------------------------------------- Covenant Position as at June 30, 2008 ------------------------------------------------------------------------- Debt to EBITDA not to exceed 3.5 1.58 ------------------------------------------------------------------------- Debt to Capitalization not to exceed 0.55 0.34 ------------------------------------------------------------------------- Keyera has $335 million of long-term senior unsecured notes as follows: $20 million bearing interest at 5.42% and maturing in August 2008; $90 million bearing interest at 5.23% and maturing in October 2009; $52.5 million bearing interest at 5.79% and maturing in August 2010; $52.5 million bearing interest at 6.155% and maturing in August 2013; $60 million bearing interest at 5.89% and maturing in December 2017; and $60 million bearing interest at 6.14% and maturing in December 2022. These notes are subject to three major financial covenants: "Consolidated Debt to Consolidated EBITDA", "Consolidated EBITDA to Consolidated Interest Charges" and "Priority Debt to Consolidated Total Assets". The calculations for each of these ratios are based on specified definitions. The following are the ratios calculated in accordance with the covenants as at June 30, 2008 for the notes maturing in 2008, 2009, 2010 and 2013: ------------------------------------------------------------------------- Covenant Position as at June 30, 2008 ------------------------------------------------------------------------- Debt to EBITDA not to exceed 3.5 2.15 ------------------------------------------------------------------------- EBITDA to Interest Charges not less than 3.0 10.66 ------------------------------------------------------------------------- Priority Debt to Total Assets not to exceed 15% 0% ------------------------------------------------------------------------- The following are the ratios calculated in accordance with the covenants as at June 30, 2008 for the notes maturing in 2017 and 2022: ------------------------------------------------------------------------- Covenant Position as at June 30, 2008 ------------------------------------------------------------------------- Debt to EBITDA not to exceed 5.0 1.39 ------------------------------------------------------------------------- EBITDA to Interest Charges not less than 2.0 9.46 ------------------------------------------------------------------------- Priority Debt to Total Assets not to exceed 15% 0% ------------------------------------------------------------------------- Failure to adhere to the covenants described above may impair Keyera's ability to pay distributions. Management expects that upon maturity of the credit facilities, adequate replacement facilities will be established. Credit risk The majority of Keyera's accounts receivable are due from entities in the oil and gas industry and are subject to normal industry credit risks. Concentration of credit risk is mitigated by having a broad domestic and international customer base. Keyera evaluates and monitors the financial strength of its customers in accordance with its credit policy. Management believes these measures minimize Keyera's overall credit risk; however, there can be no assurance that these processes will protect against all losses from non-performance. With respect to counterparties for financial instruments used for economic hedging purposes, Keyera limits its credit risk by dealing with recognized futures exchanges or investment grade financial institutions and by maintaining credit policies that significantly reduce overall counterparty credit risk. All of Keyera's business units had minor business dealings with subsidiaries of SemGroup L.P. After exercising its lien and other rights, Keyera is owed between $50,000 and $150,000 by those subsidiaries. Risk factors For a more detailed discussion of the risks and trends that could affect the financial performance of the Fund and the steps that Keyera takes to mitigate these risks, readers are referred to the descriptions in this MD&A and to Keyera's Annual Information Form, which is available on SEDAR. Unitholder Distributions Comparison of distributions paid to cash flow from operating activities and net earnings The following table presents a comparison of distributions paid to net earnings and cash flow from operating activities: Three Six months months ended ended June 30, June 30, (in thousands of dollars) 2008 2008 2007 2006 ------------------------------------------------------------------------- Cash flow from operating activities 2,391 60,803 119,825 110,656 Net earnings 22,729 78,231 14,479 68,078 Cash distributions paid 24,864 48,676 89,799 86,509 ------------------------------------------------------------------------- Excess (shortfall) of cash from operating activities over distributions paid (22,473) 12,127 30,026 24,147 Excess (shortfall) of net earnings over distributions paid (2,135) 29,555 (75,320) (18,431) ------------------------------------------------------------------------- In the second quarter of 2008, cash flow from operating activities was $2.4 million due to the $54.3 million seasonal increase in non-cash working capital. As a result, cash flow from operating activities was $22.5 million less than distributions paid. Year-to-date, cash flow from operating activities was $60.8 million, $12.1 million greater than distributions paid. Included in the calculation of year-to-date cash flow from operating activities was $36.7 million to fund changes in non-cash working capital. Changes in non-cash working capital are primarily the result of seasonal fluctuations in product inventories or other temporary changes and are generally funded with short-term debt. In general, cash flow from operating activities may be less than distributions paid during periods of inventory accumulation. In the second quarter of 2008, distributions of $24.9 million exceeded net earnings by $2.1 million. The shortfall is attributable to the inclusion of non-cash items, including $14.9 million of future income tax expense and $19.6 million of depreciation, amortization, accretion, unrealized loss on financial contracts and impairment expense in the calculation of net income in the second quarter. Year-to-date, net earnings of $78.2 million exceeded distributions paid by $29.6 million. Due to the inclusion of non-cash charges, net earnings are not an accurate representation of current period cash generation. Accordingly, distributions paid may exceed net earnings and any excess of distributions over net earnings would be a return of unitholders' capital. Following is a discussion of how some of the more significant non-cash charges can vary from period to period. Future income taxes can fluctuate from period to period as a result of changes in tax laws and rates, the extent to which available tax deductions are utilized or changes in the operating results of the underlying operating entities of Keyera. These items do not affect cash flow generated in the current period. Non-cash charges such as depreciation and amortization are based upon the historical cost of Keyera's property, plant and equipment and do not accurately represent the fair market value or the replacement cost of the assets in today's economic environment, nor do they affect cash flow generated in the current period. Non-cash unrealized gains and losses on financial instruments result from Keyera's use of financial contracts, such as energy-related forward sales, price swaps, physical exchanges and options, to manage the commodity price risk inherent in the marketing business. Their fair value is determined based upon estimates of future prices. The change in fair value of these contracts during the current period has no effect on cash flow generated. Upon settlement in future periods, the unrealized estimate is reversed and the realized gain or loss is included in earnings. Distributable cash flow Distributable cash flow is not a standard measure under GAAP and therefore may not be comparable to similar measures reported by other entities. Distributable cash flow is used to assess the level of cash flow generated from ongoing operations and to evaluate the adequacy of internally generated cash flow to fund distributions. Following is a reconciliation of distributable cash flow to its most closely related GAAP measure, cash flow from operating activities: Three months ended Six months ended Distributable cash flow June 30, June 30, ------------------------------------------------------------------------- (in thousands of dollars) 2008 2007 2008 2007 ------------------------------------------------------------------------- Cash flow from operating activities 2,391 24,786 60,803 82,377 Add (deduct): Changes in non-cash working capital 54,266 6,729 36,698 (13,647) Maintenance capital expenditures (608) (293) (949) (644) Non-controlling interest distributable cash flow - (53) - (369) ------------------------------------------------------------------------- Distributable cash flow 56,049 31,169 96,552 67,717 ------------------------------------------------------------------------- Distributions declared to unitholders 24,882 22,538 50,543 44,311 Distributable cash flow of $56.0 million in the second quarter of 2008 exceeded distributions declared to unitholders of $24.9 million. Year-to-date, distributable cash flow of $96.6 million exceeded distributions declared to unitholders of $50.5 million. Distributions declared included a special distribution of $1.4 million ($0.023529 per unit) as part of the internal reorganization, completed on January 2, 2008, of certain of the Fund's subsidiaries. This special distribution consisted of cash in the amount of $0.2 million ($0.003529 per unit) and securities of certain subsidiaries of the Fund having an aggregate value of $1.2 million ($0.02 per unit). Each security was redeemed for one special non-voting unit of the Fund ("Fund special units"). These Fund special units were then converted into regular units. The regular units were consolidated such that, upon completion of the reorganization, each unitholder continued to hold the same number of units as was held immediately prior to the reorganization. Changes in non-cash working capital are excluded from the determination of distributable cash flow because they are primarily the result of seasonal fluctuations in product inventories or other temporary changes and are generally funded with short-term debt. Also deducted from distributable cash flow are maintenance capital expenditures that are funded from current operating cash flow. Distribution policy In determining the level of cash distributions to unitholders, Keyera's Board of Directors takes into consideration current and expected future levels of distributable cash flow (including income tax), capital expenditures, borrowings and debt repayments, changes in working capital requirements and other factors. Over the long-term, Keyera expects to pay distributions from distributable cash flow. Growth capital expenditures will be funded from retained operating cash flow, along with proceeds from additional debt or equity, as required. Although Keyera intends to continue to make regular monthly cash distributions to its unitholders, these distributions are not guaranteed. The business of the Fund is subject to operational and commercial risks that could adversely affect future operating results, earnings, cash flow and distributions to unitholders. These risks include declines in throughput, operational problems and hazards, cost overruns, increased competition, regulatory intervention, environmental considerations, uncertainty of abandonment costs and dependence upon key personnel. These risks are identified and discussed in greater detail in Keyera's Annual Information Form, available on SEDAR, as well as in the "Business Environment", "Results of Operations - Marketing" and "Liquidity and Capital Resources" sections of this MD&A. Standard and Poor's has assigned the Fund an SR-3 stability rating, indicating the expectation of a high level of stability in distributions. Units and Convertible Debentures During the second quarter of 2008, $0.6 million of convertible debentures (before adjustment for deferred financing costs) were converted into 49,330 trust units and 73,446 trust units were issued under the DRIP in consideration of $1.5 million, bringing the total units outstanding at June 30, 2008 to 61,477,686. Convertible debentures outstanding at June 30, 2008 were $20.7 million. Subsequent to June 30, 2008, a further $0.3 million of convertible debentures were converted into 22,748 trust units, and 13,644 trust units were issued to unitholders enrolled in the DRIP in consideration for $0.3 million, bringing the total units outstanding at August 8, 2008 to 61,514,078. Convertible debentures outstanding at August 8, 2008 were $20.4 million. FUND REORGANIZATION AND TAXATION INFORMATION In June 2007, unitholders approved an internal reorganization of Keyera's legal structure (the "Reorganization"). The Reorganization, which was completed on January 2, 2008, is described in detail in the Material Change Report filed on SEDAR (www.sedar.com) on January 11, 2008. The Reorganization streamlined Keyera's legal structure and simplified accounting, legal reporting and income tax compliance, all of which is expected to reduce the general and administrative costs associated with these activities. The new structure also permits Keyera to defer the utilization of some tax pools until after January 1, 2011. This enhanced tax planning flexibility should enable Keyera to minimize the amount of cash taxes payable beginning on January 1, 2011. While there were no significant immediate tax savings within Keyera's structure as a result of the Reorganization, our recent capital investments and associated changes will have the added benefit of reducing cash taxes payable in the short-term. As well, Keyera plans to reduce the use of its available tax deductions from 2008 through 2010, thereby increasing deductions available for the years after 2010. As at January 1, 2008, Keyera had approximately $325 million of unutilized tax pools and deductions, consisting mostly of class 41 undepreciated capital costs, available for deduction by the Fund's subsidiaries. On July 14, 2008, the federal government released draft tax rules (the "SIFT conversion rules") that will allow the conversion of income trusts into corporations without undue tax effects. If enacted as proposed, the SIFT conversion rules would generally permit an existing income trust to adopt either of two approaches to achieve a conversion into corporate form on a tax deferred rollover basis, provided the conversion is completed prior to December 31, 2012. The first method involves the exchange of units of an income trust for shares of a corporation. The second method involves the distribution to the income trust's unitholders of shares of an underlying corporation. Under either of the proposed approaches, it will be necessary to hold a meeting of the unitholders of the income trust at which unitholder approval will be required, typically by a 66 2/3% vote in favor of the proposed conversion. As a result of the recently completed Reorganization and the ability to preserve tax pools until 2011, Keyera will be able to minimize income taxes into the future, whether as an income trust or as a corporation. It is Keyera's intent to continue to grow by investing in long-life assets and thereby grow its distributions to unitholders. If the SIFT conversion rules are enacted as proposed, it is likely that Keyera would consider a conversion to a corporate form in 2011 or 2012, but no decision has yet been made. ACCOUNTING MATTERS AND CONTROLS Critical accounting policies Keyera's unaudited Interim Consolidated Financial Statements have been prepared in accordance with Canadian GAAP. The changes in accounting policies are described in Note 3 to the unaudited interim consolidated financial statements and Note 2 of the 2007 Annual Report. Changes in accounting policies Effective January 1, 2008, the Fund adopted the following accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"): - Section 1535, Capital Disclosures; - Section 3031, Inventories; - Section 3862, Financial Instruments - Disclosures; and - Section 3863, Financial Instruments - Presentation Section 1535, Capital Disclosures, requires entities to provide users of financial statements with information to evaluate the entity's objectives, policies and processes for managing capital. Adoption of this new standard did not have an effect on the statements of financial position, net earnings or cash flows of the Fund. The new disclosure requirements have been included in the notes to the interim consolidated financial statements. Section 3031, Inventories, requires the measurement of inventories at the lower of cost and net realizable value and the consistent use of either first- in, first-out or a weighted-average cost formula to measure cost. The reversal of previous net realizable value write-downs is required when there is a subsequent increase to the value of inventories. The Fund adopted this standard prospectively on January 1, 2008, in accordance with the transitional provisions. Inventory is measured at the lower of cost and net realizable value, less any costs to sell. Cost is determined on a weighted-average cost formula. There was no material impact upon adoption of this standard. Section 3862, Financial Instruments - Disclosures, requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments to the entity's financial position and performance. It also requires that entities disclose the nature and extent of risks arising from financial instruments and how the entity manages those risks. Section 3863, Financial Instruments - Presentation, establishes standards for presentation of financial instruments and non-financial derivatives and deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. Adoption of sections 3862 and 3863 did not have an effect on the statements of financial position, net earnings or cash flows of the Fund. The new disclosure requirements have been included in the notes to the interim consolidated financial statements. Future changes in accounting policies Transition to International Financial Reporting Standards (IFRS) In February 2008, the Accounting Standards Board confirmed that IFRS will replace Canadian Generally Accepted Accounting Principles (GAAP) for fiscal years beginning on or after January 1, 2011 for publicly accountable enterprises. At this time, the impact on Keyera's future financial position and results of operations is not reasonably determined or estimable. Keyera commenced its IFRS conversion project in early 2008 and has established a formal project governance structure. This structure includes a steering committee and a stakeholder working group consisting of senior levels of management from finance, information technology, investor relations and operations. Regular reporting to senior executive management, the Audit Committee and the Board of Directors will occur to ensure appropriate monitoring and governance. Keyera has also engaged an external expert advisor. Keyera's IFRS project consists of three phases: diagnostic; design and planning; and implementation. Keyera is currently completing the diagnostic phase which involves a high level review of the major differences between current Canadian GAAP and IFRS. Currently, Keyera has determined that the areas of accounting difference with the highest potential impact are accounting for fixed assets, impairment testing and initial adoption of IFRS under the provisions of IFRS 1, First-Time Adoption of IFRS. Goodwill and Intangible Assets In February 2008, the Accounting Standards Board ("AcSB") issued CICA Handbook Section 3064, Goodwill and Intangible Assets, replacing existing guidance (Sections 3062 and 3450) for these areas. This new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to their initial recognition. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. This new section will be effective for the Fund for periods ending after January 1, 2009. The Fund is currently evaluating the impact of the adoption of this new section on its consolidated financial statements. Internal control over financial reporting No changes were made in Keyera's internal control over financial reporting during the three month period ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, Keyera's internal control over financial reporting. SUMMARY OF QUARTERLY RESULTS The following table presents selected financial information for Keyera: Three months ended (Thousands of Canadian dollars) ------------------------------------------------------------------------- Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, 2006 2006 2007 2007 2007 ------------------------------------------------------------------------- Operating revenues: - Marketing 279,492 286,325 307,342 292,326 276,957 - Gathering and Processing 44,290 43,621 41,949 44,277 50,744 - NGL Infrastructure 10,878 10,855 9,692 9,525 10,044 Net earnings (loss)(1) 11,797 14,928 19,012 (59,870) 15,310 Net earnings (loss) per unit ($/unit) Basic 0.19 0.25 0.31 (0.98) 0.25 Diluted 0.16 0.24 0.31 (0.98) 0.25 Trust units outstanding (thousands): Weighted average (basic) 60,692 60,865 60,972 61,061 61,136 Weighted average (diluted) 62,817 62,869 62,918 61,061 63,011 Distributions to unitholders 21,679 21,742 21,773 22,538 22,931 ------------------------------------------------------------------------- Three months ended (Thousands of Canadian dollars) ------------------------------------------------------- Dec 31, Mar 31, Jun 30, 2007 2008 2008 ------------------------------------------------------- Operating revenues: - Marketing 373,916 493,334 459,474 - Gathering and Processing 50,520 48,573 58,679 - NGL Infrastructure 11,849 10,870 11,113 Net earnings (loss)(1) 40,027 55,502 22,729 Net earnings (loss) per unit ($/unit) Basic 0.65 0.91 0.37 Diluted 0.64 0.88 0.36 Trust units outstanding (thousands): Weighted average (basic) 61,219 61,295 61,411 Weighted average (diluted) 63,059 63,105 63,156 Distributions to unitholders 22,965 25,661 24,882 ------------------------------------------------------- (1) Since the adoption of the new accounting standards effective January 1, 2007, Keyera has had no transactions that required the use of other comprehensive income and therefore comprehensive income equals net earnings. For a discussion of the factors affecting variations over the quarters, refer to "Results of Operations" in this MD&A. Investor Information DISTRIBUTIONS TO UNITHOLDERS Distributions to unitholders were $0.41 per unit in the second quarter. Effective with the August distribution, the monthly cash distribution will increase by 11% to 15.0 cents per unit per month, or $1.80 per unit annually. The August distribution is paid on September 15 to unitholders of record on August 29, 2008. The Fund is focused on stable long-term distributions that grow over time. The Board of Directors will consider increasing the level of cash distributions when it is confident that such increase can be sustained. TAXABILITY OF DISTRIBUTIONS For income tax purposes, distributions paid and declared to Canadian residents in 2007 were 66.2% return of capital with the remainder ordinary income. Additional information is available on Keyera's website under "Investor Information". Both Canadian and non-resident unitholders should seek independent tax advice in respect of the consequences to them of acquiring, holding and disposing of units. Keyera currently anticipates distributions will be largely or fully taxable for Canadian non-exempt unitholders in 2008. This outlook is affected by Keyera's organizational structure and is subject to change, depending on the levels of profitability and capital expenditures in each of Keyera's operating entities. Both Canadian and non-resident unitholders should seek independent tax advice in respect of the consequences to them of acquiring, holding and disposing of units. Factors that could affect the performance of the Fund and the taxability of the distributions are discussed in the Fund's Annual Information Form, which is available on SEDAR. SUPPLEMENTARY INFORMATION A breakdown of Keyera's operational and financial results, including volumetric and contribution information by major business unit, is available on our website at www.keyera.com under "Investor Information, Financial Information". SECOND QUARTER 2008 RESULTS CONFERENCE CALL AND WEBCAST Keyera will be conducting a conference call and webcast for investors, analysts, brokers and media representatives to discuss the second quarter 2008 results at 8:00 am MDT (10:00 am EDT) on August 13, 2008. Callers may participate by dialing either 800-731-5319 or 416-644-3421. A recording of the call will be available for replay until midnight, August 20, 2008 by dialing 877-289-8525 or 416-640-1917 and entering pass code 21278410 followed by the pound (No.) key. Internet users can listen to the call live on Keyera's website at www.keyera.com under "Investor Information, Webcasts". Shortly after the call, an audio archive will be posted on the website for 90 days. QUESTIONS We welcome questions from interested parties. Calls should be directed to Keyera's Investor Relations Department at 403-205-7670, toll free at 888-699- 4853 or via email at ir@keyera.com. Information on Keyera can also be found on our website at www.keyera.com. Keyera Facilities Income Fund Interim Consolidated Statements of Financial Position (Thousands of Canadian dollars) (unaudited) June 30, December 31, 2008 2007 As at: $ $ ------------------------------------------------------------------------- ASSETS Current assets Cash 8,133 15,657 Accounts receivable 298,111 243,889 Inventory (note 4) 139,902 76,594 Other current assets 8,831 2,299 ------------------------------------------------------------------------- 454,977 338,439 Property, plant and equipment 985,843 914,087 Intangible assets 5,243 6,394 Goodwill 71,234 71,234 Future income tax assets (note 8) 547 845 ------------------------------------------------------------------------- 1,517,844 1,330,999 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities 321,019 235,124 Distributions payable (note 11) 8,299 7,658 Credit facilities (note 5) 65,000 - Current portion of long-term debt 20,000 20,000 ------------------------------------------------------------------------- 414,318 262,782 Long-term debt (note 5) 313,398 313,243 Convertible debentures (note 6) 20,436 21,476 Asset retirement obligation (note 7) 40,059 37,807 Future income tax liabilities (note 8) 146,799 145,214 ------------------------------------------------------------------------- 935,010 780,522 ------------------------------------------------------------------------- Unitholders' equity Unitholders' capital (note 9) 686,594 681,925 Deficit (103,760) (131,448) ------------------------------------------------------------------------- 582,834 550,477 ------------------------------------------------------------------------- 1,517,844 1,330,999 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments and contingencies (note 15) The accompanying notes to the interim consolidated financial statements are an integral part of these statements. Keyera Facilities Income Fund Interim Consolidated Statements of Net Earnings (Loss), Comprehensive Income (Loss) and Deficit (Thousands of Canadian dollars, except unit information) (unaudited) Three months ended Six months ended June 30, June 30, 2008 2007 2008 2007 $ $ $ $ ------------------------------------------------------------------------- Operating revenues Marketing 459,574 292,326 952,908 599,668 Gathering and Processing 58,679 44,277 107,252 86,226 NGL Infrastructure 11,113 9,525 21,983 19,217 ------------------------------------------------------------------------- 529,366 346,128 1,082,143 705,111 Operating expenses Marketing 430,030 264,559 886,784 553,867 Gathering and Processing 31,114 29,713 51,977 50,939 NGL Infrastructure 8,543 6,476 13,952 11,856 ------------------------------------------------------------------------- 469,687 300,748 952,713 616,662 ------------------------------------------------------------------------- 59,679 45,380 129,430 88,449 General and administrative 5,787 7,181 14,691 12,528 Interest expense on long-term indebtedness 5,294 4,254 10,563 7,755 Other interest expense 233 1,267 255 2,394 Depreciation and amortization 10,796 10,421 21,332 21,009 Accretion expense (note 7) 665 612 1,337 1,258 Impairment expense 1,113 - 1,113 - ------------------------------------------------------------------------- 23,888 23,735 49,291 44,944 ------------------------------------------------------------------------- Earnings before tax and non-controlling interest 35,791 21,645 80,139 43,505 Income tax expense (note 8) 13,062 81,475 1,908 84,057 ------------------------------------------------------------------------- Earnings (loss) before non- controlling interest 22,729 (59,830) 78,231 (40,552) Non-controlling interest (note 18) - 40 - 306 ------------------------------------------------------------------------- Net earnings (loss) 22,729 (59,870) 78,231 (40,858) Other comprehensive income - - - - ------------------------------------------------------------------------- Comprehensive income (loss) 22,729 (59,870) 78,231 (40,858) Deficit, beginning of period (101,607) (58,482) (131,448) (55,721) Distributions to unit- holders (note 11) (24,882) (22,538) (50,543) (44,311) ------------------------------------------------------------------------- Deficit, end of period (103,760) (140,890) (103,760) (140,890) ------------------------------------------------------------------------- Weighted average number of units (thousands) (note 10) - basic 61,411 61,061 61,353 61,017 - diluted 63,156 61,061 63,131 61,017 Net earnings (loss) per unit (note 10) - basic 0.37 (0.98) 1.28 (0.67) - diluted 0.36 (0.98) 1.25 (0.67) ------------------------------------------------------------------------- The accompanying notes to the interim consolidated financial statements are an integral part of these statements. Keyera Facilities Income Fund Interim Consolidated Statements of Cash Flows (Thousands of Canadian dollars) (unaudited) Three months ended Six months ended June 30, June 30, 2008 2007 2008 2007 Net inflow (outflow) of cash: $ $ $ $ ------------------------------------------------------------------------- Operating activities Net earnings (loss) 22,729 (59,870) 78,231 (40,858) Items not affecting cash: Depreciation and amortization 10,796 10,421 21,332 21,009 Accretion expense 665 612 1,337 1,258 Impairment expense 1,113 - 1,113 - Unrealized loss (gain) on derivative instruments held for trading 6,985 140 (5,802) 5,485 Future income tax expense (note 8) 14,933 80,235 1,883 81,631 Non-controlling interest (note 18) - 40 - 306 Asset retirement obligation expenditures (note 7) (564) (63) (593) (101) Changes in non-cash working capital (note 16) (54,266) (6,729) (36,698) 13,647 ------------------------------------------------------------------------- 2,391 24,786 60,803 82,377 ------------------------------------------------------------------------- Investing activities Capital expenditures (41,895) (6,002) (91,692) (8,104) Acquisition of non- controlling interest (note 18) - (5,203) - (6,716) Proceeds on sale of assets - - 150 4,200 Changes in non-cash working capital (note 16) (616) 367 4,530 (2,987) ------------------------------------------------------------------------- (42,511) (10,838) (87,012) (13,607) ------------------------------------------------------------------------- Financing activities Issuance (repayment) of debt under credit facilities (note 5) 65,000 (835) 65,000 (32,984) Issuance of trust units (note 9) 1,545 812 2,361 1,612 Distributions paid to unitholders (note 11) (24,864) (22,161) (48,676) (43,924) ------------------------------------------------------------------------- 41,681 (22,184) 18,685 (75,296) ------------------------------------------------------------------------- Net cash inflow (outflow) 1,561 (8,236) (7,524) (6,526) ------------------------------------------------------------------------- Cash (bank indebtedness), beginning of period 6,572 1,614 15,657 (96) ------------------------------------------------------------------------- Cash (bank indebtedness), end of period 8,133 (6,622) 8,133 (6,622) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes to the interim consolidated financial statements are an integral part of these statements. See note 16 for cash interest and taxes paid. Keyera Facilities Income Fund Notes to Interim Consolidated Financial Statements As at and for the three and six months ended June 30, 2008 (All amounts expressed in thousands of Canadian dollars, except as otherwise noted) (unaudited) 1. Structure of the Fund Keyera Facilities Income Fund (the "Fund") is an unincorporated open- ended trust established under the laws of the Province of Alberta pursuant to the Fund Declaration of Trust dated April 3, 2003. The Fund has a 100% direct and indirect interest in Keyera Energy Limited Partnership (the "Partnership"). The Partnership is involved in the business of natural gas gathering and processing, as well as natural gas liquids ("NGLs") and crude oil processing, transportation, storage and marketing in Canada and the U.S. Its operating subsidiaries include Keyera Energy Facilities Ltd. ("KEFL"), Keyera Energy Ltd. ("KEL"), Keyera Energy Inc. ("KEI"), Rimbey Pipeline Limited Partnership ("RPLP") and Alberta Diluent Terminal Limited Partnership ("ADTLP"). The Fund makes monthly cash distributions to unitholders of record on the last business day of each month. The amount of the distributions per trust unit is equal to the pro rata share of the distribution received directly from the Partnership. 2. Basis of presentation These unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). The accounting policies applied are consistent with those disclosed in the Fund's consolidated financial statements as at and for the year ended December 31, 2007 as included in the Fund's 2007 Annual Report to unitholders except for the changes made in adopting new accounting standards discussed in note 3. These unaudited interim consolidated financial statements as at and for the three and six months ended June 30, 2008 do not include all disclosures required for the preparation of annual consolidated financial statements and should be read in conjunction with the Fund's consolidated financial statements as at and for the year ended December 31, 2007. Interim periods may not be representative of the results expected for the full year of operation due to seasonality. 3. Changes in accounting policies Effective January 1, 2008, the Fund adopted the following accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"): - Section 1535, Capital Disclosures; - Section 3031, Inventories; - Section 3862, Financial Instruments - Disclosures; and - Section 3863, Financial Instruments - Presentation Section 1535, Capital Disclosures, requires entities to provide users of financial statements with information to evaluate the entity's objectives, policies and processes for managing capital. Adoption of this new standard did not have an effect on the statements of financial position, net earnings or cash flows of the Fund. The new disclosure requirements have been included in these notes to the unaudited interim consolidated financial statements. Section 3031, Inventories, requires the measurement of inventories at the lower of cost and net realizable value and the consistent use of either first- in, first-out or a weighted-average cost formula to measure cost. The reversal of previous net realizable value write- downs is permitted when there is a subsequent increase to the value of inventories. The Fund adopted this standard prospectively on January 1, 2008 in accordance with the transitional provisions. Inventory is measured at the lower of cost and net realizable value, less any costs to sell. Cost is determined on a weighted-average cost formula. There was no material impact upon adoption of this standard. Section 3862, Financial Instruments - Disclosures, requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments to the entity's financial position and performance. It also requires that entities disclose the nature and extent of risks arising from financial instruments and how the entity manages those risks. Section 3863, Financial Instruments - Presentation, establishes standards for presentation of financial instruments and non-financial derivatives and deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. Adoption of sections 3862 and 3863 did not have an effect on the statements of financial positions, net earnings or cash flows of the Fund. The new disclosure requirements have been included in these notes to the unaudited interim consolidated financial statements. Future accounting and reporting changes Convergence of Canadian GAAP with International Financial Reporting Standards ("IFRSs") In April 2008, the CICA published the exposure draft "Adopting IFRSs in Canada". The exposure draft proposes to incorporate IFRSs into the CICA Accounting Handbook effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. At this date, publicly accountable enterprises will be required to prepare financial statements in accordance with IFRSs. The Fund is currently reviewing the standards to determine the potential impact on its consolidated financial statements. Goodwill and Intangible Assets In February 2008, the Accounting Standards Board ("AcSB") issued CICA Handbook Section 3064, Goodwill and Intangible Assets, replacing existing guidance (Sections 3062 and 3450) for these areas. This new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to their initial recognition. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. This new section will be effective for the Fund beginning January 1, 2009. The Fund is currently evaluating the impact of the adoption of this new section on its consolidated financial statements. 4. Inventory The total carrying amount and classification of inventory is as follows: June 30, December 31, 2008 2007 As at $ $ --------------------------------------------------------------------- NGLs 139,668 76,112 Natural gas 150 162 Other 84 320 --------------------------------------------------------------------- Total inventory 139,902 76,594 --------------------------------------------------------------------- --------------------------------------------------------------------- For the period ended June 30, 2008, all inventory was carried at cost, and the cost of inventory expensed for the three and six months ended June 30, 2008 were $423,538 and $875,204. 5. Credit facilities and long-term debt June 30, December 31, 2008 2007 As at $ $ --------------------------------------------------------------------- Bank credit facilities (a) 65,000 - --------------------------------------------------------------------- Total credit facilities 65,000 - --------------------------------------------------------------------- --------------------------------------------------------------------- Current portion of long-term debt 20,000 20,000 Long-term debt (b) 315,000 315,000 Deferred financing costs (1,602) (1,757) --------------------------------------------------------------------- Total long-term debt 333,398 333,243 --------------------------------------------------------------------- --------------------------------------------------------------------- (a) The Partnership has a $150,000 unsecured revolving credit facility with certain Canadian financial institutions led by the Royal Bank of Canada. The facility has a three-year revolving term and matures on April 21, 2011, unless extended. In addition, the Royal Bank of Canada has provided a $15,000 revolving demand facility and the Toronto Dominion Bank has provided a $15,000 revolving demand facility. The revolving credit facilities bear interest based on the lenders' rates for Canadian prime commercial loans, U.S. Base rate loans, Libor loans, or Bankers' Acceptances rates. Interest expense for the three and six months ended June 30, 2008 included a fixed commitment fee resulting in a weighted average interest rate of 6.31% and 7.23% respectively (three and six months ended June 30, 2007 - 5.70% and 5.56%). As at June 30, 2008, the balance outstanding on the bank credit facilities was $65,000 (December 31, 2007 - $nil). (b) In 2003, $125,000 of unsecured senior notes were issued by the Partnership and KEFL in three parts: $20,000 due in 2008 bearing interest at 5.42%, $52,500 due in 2010 bearing interest at 5.79% and $52,500 due in 2013 bearing interest at 6.16%. Interest is payable monthly. Financing costs of $1,215 have been deferred and are amortized using the effective interest rate method over the remaining terms of the related debt. The effective interest rates for the three and six months ended June 30, 2008 were 5.54%, 5.94% and 6.28% for the notes due in 2008, 2010 and 2013 respectively (three and six months ended June 30, 2007 - 5.63%, 5.95% and 6.29%). In 2004, $90,000 of unsecured senior notes were issued by KEFL and guaranteed by the Partnership. The notes bear interest at 5.23% and mature on October 1, 2009. Interest is payable semi- annually. Financing costs of $568 have been deferred and are amortized using the effective interest rate method over the remaining term of the debt. The effective interest rate for the three and six months ended June 30, 2008 was 5.36% (three and six months ended June 30, 2007 - 5.37%). In 2007, $120,000 of unsecured senior notes were issued by KEFL in two tranches and guaranteed by the Partnership and the Fund: $60,000 due in 2017 bearing interest at 5.89% and $60,000 due in 2022 bearing interest at 6.14%. Interest is payable semi- annually. Financing costs of $1,116 have been deferred and are amortized using the effective interest rate method over the remaining terms of the related debt. The effective interest rates for the three and six months ended June 30, 2008 were 6.03% and 6.26% for the notes due in 2017 and 2022 respectively. 6. Convertible debentures In 2004, the Fund issued convertible unsecured subordinated debentures in the principal amount of $100,000. The convertible debentures bear interest at 6.75% per annum, payable semi-annually in arrears on June 30 and December 31 each year. Interest expense of $353 and $720 has been accrued for the three and six months ended June 30, 2008 (three and six months ended June 30, 2007 - $409 and $809). These debentures will mature on June 30, 2011 and are convertible into trust units of the Fund at the option of the holders at any time prior to maturity at a conversion price of $12.00 per unit. At June 30, 2008, $79,312 debentures had been converted to trust units (December 31, 2007 - $78,178). Financing costs consisting of an underwriters' commission of $4,000 and issuance costs of $332 have been deferred, and when there are no conversions are being amortized over the term of the debt using the effective interest rate method. Upon conversion of the debentures, the financing cost related to the principal amount of debt converted is adjusted and is recognized as a charge to unitholders' equity. As a result of conversions to date at June 30, 2008, $2,906 has been reclassified to unitholders' equity (December 31, 2007 - $2,857). As at June 30, 2008, $252 of financing costs remain. The effective interest rate for the three and six months ended June 30, 2008 was 7.36% (three and six months ended June 30, 2007 - 7.36%). 7. Asset retirement obligation The following table presents the reconciliation between the beginning and ending aggregate carrying amount of the obligation associated with the retirement of the Fund's facilities. $ --------------------------------------------------------------------- Balance, January 1, 2007 34,533 Liabilities acquired 644 Liabilities settled (213) Revisions in estimated cash flows 361 Accretion expense 2,482 --------------------------------------------------------------------- Balance, December 31, 2007 37,807 Liabilities acquired 2,151 Liabilities disposed (643) Liabilities settled (593) Revisions in estimated cash flows - Accretion expense 1,337 --------------------------------------------------------------------- Balance, June 30, 2008 40,059 --------------------------------------------------------------------- --------------------------------------------------------------------- 8. Income taxes On June 22, 2007, Bill C-52 Budget Implementation Act, 2007 was enacted by the Canadian federal government. As a result of this legislation, a new tax will be applied to distributions from publicly traded trusts in Canada. The new tax is not expected to apply to the Fund until 2011 as the government has provided a transition period for publicly traded trusts that existed prior to November 1, 2006. The following is a reconciliation of income taxes, calculated at the combined federal and provincial income tax rate, to the income tax provision included in the consolidated statements of net earnings (loss). Three months ended Six months ended June 30, June 30, 2008 2007 2008 2007 $ $ $ $ ------------------------------------------------------------------------- Earnings before tax and non-controlling interest 35,791 21,645 80,139 43,505 Income from the Fund distributable to unit- holders (36,077) (13,654) (60,807) (26,277) ------------------------------------------------------------------------- Income (loss) before taxes - operating subsidiaries (286) 7,991 19,332 17,228 ------------------------------------------------------------------------- Income tax at statutory rate of 29.5% (2007 - 32.12%) (84) 2,567 5,703 5,534 Impact of recording temporary differences of the Partnership - 82,182 - 82,182 Non (taxable) deductible items excluded from income for tax purposes 2,070 157 (1,742) 727 Rate adjustments 10,764 (3,022) (2,927) (3,371) Benefit of non-capital losses previously not recorded - (220) - (786) Adjustments to tax pool balances 295 (180) 319 (476) Other 17 (9) 555 247 ------------------------------------------------------------------------- 13,062 81,475 1,908 84,057 ------------------------------------------------------------------------- Classified as: Current (1,871) 1,240 25 2,426 Future 14,933 80,235 1,883 81,631 ------------------------------------------------------------------------- Income tax expense 13,062 81,475 1,908 84,057 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For income tax purposes, the subsidiaries of the Fund have non- capital losses carried forward of approximately $5,822 at June 30, 2008 (December 31, 2007 - $2,981) which are available to offset income of specific entities of the consolidated group in future periods. The benefit of these losses has been recorded at June 30, 2008. The future income tax (liabilities) assets relate to losses and to the (taxable) deductible temporary differences in the carrying values and tax bases as follows: June 30, December 31, 2008 2007 As at $ $ --------------------------------------------------------------------- Property, plant and equipment (155,626) (152,747) Asset retirement obligation 10,411 9,992 Long-term incentive plan 3,207 1,954 Intangible assets (885) (941) Other (3,906) (3,472) --------------------------------------------------------------------- Future income tax liabilities (146,799) (145,214) --------------------------------------------------------------------- --------------------------------------------------------------------- Property, plant and equipment (549) (444) Asset retirement obligation 81 78 Non-capital losses 1,015 832 Intangible assets - 379 --------------------------------------------------------------------- Future income tax assets 547 845 --------------------------------------------------------------------- --------------------------------------------------------------------- 9. Unitholders' capital The Declaration of Trust provides that an unlimited number of trust units may be authorized and issued. Each trust unit is transferable, and represents an equal undivided beneficial interest in any distribution from the Fund and in the net assets of the Fund in the event of termination or winding-up of the Fund. All trust units are of the same class with equal rights and privileges. The Declaration of Trust also provides for the issuance of an unlimited number of special trust units that will be used solely for providing voting rights to persons holding securities that are directly or indirectly exchangeable for units and that, by their terms, have voting rights in the Fund. The trust units are redeemable at the holder's option at an amount equal to the lesser of: (i) 90% of the weighted average price per unit during the period of the last 10 trading days during which the trust units were traded on the Toronto Stock Exchange; and (ii) an amount equal to (a) the closing market price of the units; (b) an amount equal to the average of the highest and lowest prices of units if there was trading on the date on which the units were tendered for redemption; or (c) the average of the last bid and ask prices if there was no trading on the date on which the units were tendered for redemption. Redemptions are subject to a maximum of $50 cash redemptions in any particular month. Redemptions in excess of this amount will be paid by way of a distribution in specie of assets of the Fund that may include notes issued by the Fund. The Fund has a Distribution Reinvestment and Optional Unit Purchase Plan ("DRIP") that permits unitholders to reinvest cash distributions for additional units. This plan allows eligible participants an opportunity to reinvest distributions into trust units at a 3% discount to a weighted average market price, so long as units are issued from treasury under the DRIP. The Fund has the right to notify participants that units will be acquired in the market, in which case units will be purchased at the weighted average market price. Eligible unitholders can also make optional unit purchases under the optional unit purchase component of the plan at the weighted average market price. Trust units issued and unitholders' capital Number of Units $ --------------------------------------------------------------------- Balance, January 1, 2007 60,930,753 677,025 Units issued on conversion of convertible debentures 143,321 1,645 Units issued pursuant to DRIP 190,298 3,255 --------------------------------------------------------------------- Balance, December 31, 2007 61,264,372 681,925 Units issued as part of re- organization (note 19) - 1,225 Units issued on conversion of convertible debentures 94,494 1,083 Units issued pursuant to DRIP 118,820 2,361 --------------------------------------------------------------------- Balance, June 30, 2008 61,477,686 686,594 --------------------------------------------------------------------- --------------------------------------------------------------------- 10. Net earnings per unit Basic per unit calculations for the three and six months ended June 30, 2008 and 2007 were based on the weighted average number of units outstanding for the related period. Convertible debentures were in the money for the three and six months ended June 30, 2008 and contributed to the increase in diluted weighted average number of units for these periods. Three months ended Six months ended June 30, June 30, ------------------------------------------------------------------------- 2008 2007 2008 2007 $ $ $ $ ------------------------------------------------------------------------- Net earnings - basic 22,729 (59,870) 78,231 (40,858) Effect of convertible debentures (net of tax)(1) 248 - 506 - ------------------------------------------------------------------------- Net earnings (loss) - diluted 22,977 (59,870) 78,737 (40,858) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The effect of convertible debentures has been excluded for 2007 as it is anti-dilutive. (in thousands) ------------------------------------------------------------------------- Weighted average number of units - basic 61,411 61,061 61,353 61,017 Additional units if debentures converted(1) 1,745 - 1,778 - ------------------------------------------------------------------------- Weighted average number of units - diluted 63,156 61,061 63,131 61,017 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The effect of convertible debentures has been excluded for 2007 as it is anti-dilutive. 11. Accumulated distributions to unitholders $ --------------------------------------------------------------------- Balance, January 1, 2007 217,988 Unitholders' distributions declared and paid 82,548 Unitholders' distributions declared 7,658 --------------------------------------------------------------------- Balance, December 31, 2007 308,194 Unitholders' distributions declared and paid 40,803 Unitholders' distributions declared 8,299 Unitholders' special distribution - non-cash portion (note 19) 1,225 Unitholders' special distribution - cash portion (note 19) 216 --------------------------------------------------------------------- Balance, June 30, 2008 358,737 --------------------------------------------------------------------- --------------------------------------------------------------------- Pursuant to the Fund Declaration of Trust dated April 3, 2003 and its subsequent amendments, the Fund makes monthly distributions to holders of record on the last day of each month. Payments are made on or about the 15th day of the following month. Distributions are paid from "Cash Flow of the Trust", a term that is defined in the Fund Declaration of Trust dated April 3, 2003. The Board of Directors of the Fund's administrator may, on or before each Distribution Record Date, declare payable all or any part of the Cash Flow of the Trust for the Distribution Period. The amount and level of distributions to be made for each Distribution Period are determined at the discretion of the Board of Directors. In determining its distribution policy, the Board of Directors considers several factors, including the Fund's current and future cash flow, capital requirements, debt repayments and other factors. 12. Compensation plans The Long Term Incentive Plan (the "LTIP" or the "Plan") compensates officers, directors, key employees and consultants by delivering units of the Fund or paying cash in lieu of units. Participants in the LTIP are granted rights ("unit awards") to receive units of the Fund on specified dates in the future. The Plan permits the Board of Directors to authorize the grant of unit awards from time to time. Units are acquired in the marketplace under the plan. The Plan consists of two types of unit awards, which are described below. Unit awards and the delivery of units under the Plan are accounted for in accordance with the intrinsic value method of accounting for stock-based compensation. The aggregate compensation cost recorded for the Plan was $1,822 and $4,907 for the three and six months ended June 30, 2008 (three and six months ended June 30, 2007 - $3,111 and $4,247). (a) Performance Unit Awards The Performance Unit Awards will vest 100% on the third anniversary of the effective date of each award, July 1, 2005, July 1, 2006 and July 1, 2007. The number of units to be delivered will be determined by the financial performance of the Fund over the three-year period. The number of units to be delivered will be calculated by multiplying the number of unit awards by an adjustment ratio and a payout multiplier. The adjustment ratio adjusts the number of units to be delivered to reflect the per unit cash distributions paid by the Fund to its unitholders during the term that the unit award is outstanding. The payout multiplier is based upon the actual three- year average annual cash distributions per unit of the Fund. The table below describes the relationship between the three-year average annual cash distribution per unit and the payout multiplier. --------------------------------------------------------------------- Three-year annual cash distributions per unit --------------------------------------------------------------------- July 1, 2005 July 1, 2006 July 1, 2007 Payout Grant Grant Grant Multiplier --------------------------------------------------------------------- Less than Less than Less than 1.32 1.42 1.44 Nil First range 1.32 - 1.39 1.42 - 1.51 1.44 - 1.51 50% - 99% Second range 1.40 - 1.55 1.52 - 1.71 1.52 - 1.67 100% - 199% Third range 1.56 and 1.72 and 1.68 or 200% greater greater greater --------------------------------------------------------------------- As of June 30, 2008, 482,080 Performance Unit Awards (485,105 at December 31, 2007) were outstanding: 161,755 effective July 1, 2005, 141,100 effective July 1, 2006 and 179,225 effective July 1, 2007. The compensation cost recorded for these units for the three and six months ended June 30, 2008 was $1,477 and $4,243, using the applicable closing market price of a unit of the Fund (three and six months ended June 30, 2007 - $2,705 and $3,659). (b) Time Vested Unit Awards ("Restricted Unit Awards") Restricted Unit Awards will vest automatically, over a three-year period from the effective date of the award on July 1, 2005, July 1, 2006 and July 1, 2007, regardless of the performance of the Fund. The number of units to be delivered will be modified by an adjustment ratio which reflects the per unit distributions paid by the Fund to its unitholders during the term that the unit award is outstanding. As of June 30, 2008, 84,393 Restricted Unit Awards (92,275 at December 31, 2007) were outstanding: 9,367 effective July 1, 2005, 22,351 effective July 1, 2006 and 52,675 effective July 1, 2007. The compensation cost recorded for these units for the three and six months ended June 30, 2008 was $345 and $664, using the applicable closing market price of a unit of the Fund (three and six months ended June 30, 2007 - $406 and $588). 13. Financial instruments and risk management Financial instruments include cash, accounts receivable, accounts payable and accrued liabilities, distributions payable, credit facilities, long-term debt, convertible debentures and derivatives held for trading (derivative instruments such as foreign exchange contracts, oil price contracts, natural gas price contracts, power price contracts and physical fixed price commodity contracts). Derivative instruments and cash are classified as held for trading and are measured at fair value. Accounts receivable are classified as other receivables and are measured at amortized cost. With the exception of derivative instruments held for trading, all financial liabilities are classified as other financial liabilities and are recorded at amortized cost. Market risk and derivative instruments Subsidiaries of the Fund enter into contracts to purchase and sell primarily NGLs, as well as natural gas and crude oil. These contracts are exposed to commodity price risk between the times contracted volumes are purchased and sold and foreign currency risk for those sales denominated in U.S. dollars. These risks are actively managed by balancing physical and financial contracts which include energy related forwards, swaps and forward currency contracts and swaps. A risk management committee meets regularly to review and assess the risks inherent in existing contracts and the effectiveness of the risk management strategies. This is achieved by modeling future sales and purchase contracts to monitor the sensitivity of changing prices and volumes. Significant amounts of electricity and natural gas are consumed by the operating entities at their facilities. Due to the fixed fee nature of some service contracts in place with customers, these entities are unable to flow increases in the cost of electricity and natural gas to customers in all situations. In order to mitigate this exposure to fluctuations in the price of electricity and natural gas, price swap agreements may be used. These agreements are accounted for as derivative instruments. Certain natural gas, NGL and crude oil contracts that require physical delivery at fixed prices are accounted for as derivative instruments. On occasion, subsidiaries of the Fund will enter into NGL purchase and sale contracts that are settled in a currency other than the currency that is routinely denominated for such commercial transactions. In these instances, the Fund records these non- financial contracts as embedded derivatives. Embedded derivatives are accounted for as derivative instruments. Derivative instruments held for trading are recorded on the consolidated statement of financial position at fair value. Changes in the fair value of these financial instruments are recognized in earnings in the period in which they arise. As at June 30, 2008, $12,012 of assets held for trading were included in accounts receivable and $15,665 of liabilities held for trading were included in accounts payable and accrued liabilities (December 31, 2007 - $3,112 included in accounts receivable and $12,566 included in accounts payable and accrued liabilities). The change in fair value of derivative instruments is recorded in Marketing operating revenue and NGL Infrastructure operating expense. The change in fair value relating to derivative instruments were as follows: Three months ended Six months ended June 30, June 30, 2008 2007 2008 2007 Unrealized gain (loss) $ $ $ $ --------------------------------------------------------------------- Marketing (7,308) 807 4,992 (4,650) NGL Infrastructure 323 (207) 810 (95) --------------------------------------------------------------------- --------------------------------------------------------------------- As at June 30, 2008, derivative instruments held for trading were exposed to commodity price risk. The following table outlines the increase (decrease) to net earnings and comprehensive income attributable to derivative instruments if there was a 10% decrease (increase) in the price of the commodity: Six months ended As at June 30, 2008 $ --------------------------------------------------------------------- Natural gas (215) Electricity (107) NGLs 9,993 --------------------------------------------------------------------- Total increase (decrease) to net earnings and comprehensive income attributable to commodity derivative instruments 9,671 --------------------------------------------------------------------- --------------------------------------------------------------------- The fair values of the derivative instruments held for trading are listed below and represent an estimate of the amount that the Fund would receive (pay) if these instruments were closed out at the end of the period. Weighted Carrying Fair Average Notional(1) As at June 30, 2008 Amount $ Value $ Price $ Volume --------------------------------------------------------------------- Natural gas: Buyer of fixed price swaps (maturing by October 31, 2008) 692 692 7.77/GJ 188,190 GJs Electricity: Buyer of fixed price swaps (maturing by December 31, 2008) 463 463 55/MWh 11,040 MWhs NGLs: Seller of fixed price swaps (maturing by June 30, 2009) (15,526) (15,526) 116.51/Bbl 1,673,585 Bbls Buyer of fixed price swaps (maturing by June 30, 2009) 10,499 10,499 118.51/Bbl 862,395 Bbls Currency: Seller of forward contracts (maturing by July 25, 2008) 90 90 1.0036/USD US$6,000,000 Physical contracts: Seller of fixed price forward contracts (maturing by December 31, 2008) (129) (129) 45.41/Bbl 49,562 Bbls --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted As at December 31, Carrying Fair Average Notional(1) 2007 Amount $ Value $ Price $ Volume --------------------------------------------------------------------- Natural gas: Buyer of fixed price swaps (maturing by October 31, 2008) (98) (98) 6.90/GJ 198,000 GJs Electricity: Buyer of fixed price swaps (maturing by December 31, 2008) 444 444 55/MWh 21,960 MWhs NGLs: Seller of fixed price swaps (maturing by March 31, 2008) (11,984) (11,984) 77.97/Bbl 713,345 Bbls Buyer of fixed price swaps (maturing by March 31, 2008) 2,489 2,489 78.43/Bbl 153,999 Bbls Currency: Seller of forward contracts (maturing by January 25, 2008) 111 111 1.0199/USD US$6,500,000 Physical contracts: Seller of fixed price forward contracts (maturing by March 31, 2008) (417) (417) 53.67/Bbl 54,584 Bbls --------------------------------------------------------------------- --------------------------------------------------------------------- (1) All notional amounts represent actual volumes and are not expressed in thousands. The estimated fair value of all derivatives held for trading is based on quoted market prices and, if not available, on estimates from third-party brokers or dealers. Foreign currency risk Foreign currency risk arises on financial instruments that are denominated in a foreign currency. The Fund's functional currency is the Canadian dollar. All of the Fund's debt is denominated in Canadian dollars and is therefore not exposed to foreign currency risk. The Gathering and Processing and NGL Infrastructure segments are also not subject to foreign currency risk as all sales and virtually all purchases are denominated in Canadian dollars. In the Marketing business, approximately US$62,496 and US$174,099 of sales were priced in U.S. dollars for the three and six months ended June 30, 2008 ($31,795 and $113,753 for the three and six months ended June 30, 2007). Foreign currency risk is actively managed by using forward currency contracts and swaps. Management monitors the exposure to foreign currency risk and regularly reviews its financial instrument activities and all outstanding positions. The Fund recorded $527 of unrealized foreign currency loss and $275 of unrealized foreign currency gain relating to U.S. dollar denominated cash, accounts receivable and accounts payable in Marketing operating expenses for the three and six months ended June 30, 2008 (three and six months ended June 30, 2007 - $1,131 and $1,285 of unrealized foreign currency gains). As at June 30, 2008, portions of the Fund's cash, accounts receivable and accounts payable were denominated in U.S. dollars. Based on these U.S. dollar financial instrument balances, net earnings and comprehensive income for the period ended June 30, 2008 would have increased/decreased by approximately $110 for every $0.01 decrease/increase in the value of the U.S./Canadian dollar exchange rate. Interest rate risk The majority of the Fund's interest rate risk is attributed to its fixed and floating rate debt, which is used to finance operations. The Fund's remaining financial instruments are not significantly exposed to interest rate risk. The floating rate debt creates exposure to interest rate cash flow risk, whereas the fixed rate debt creates exposure to interest rate price risk. At June 30, 2008, fixed rate borrowings comprised 84% of total debt outstanding (December 31, 2007 - 100%). The fair value of future cash flows for fixed rate debt fluctuates with changes in market interest rates. It is the Fund's intention to not repay fixed rate debt until maturity and therefore future cash flows would not fluctuate. The Fund's earnings are sensitive to changes in interest rates on floating rate borrowings. If the interest rates applicable to floating rate borrowings were to have increased/decreased by 1%, it is estimated that net earnings and comprehensive income for the three and six months ended June 30, 2008 would have decreased/increased by approximately $168 and $100 respectively based on weighted average debt balances. Credit risk The majority of accounts receivable are due from entities in the oil and gas industry and are subject to normal industry credit risks. Concentration of credit risk is mitigated by having a broad domestic and international customer base. The Fund evaluates and monitors the financial strength of its customers in accordance with its credit policy. Revenue from the two largest customers amounted to 21% and 19% of operating revenue for the three and six months ended June 30, 2008 (three and six months ended June 30, 2007 - 19% and 15%). The Fund's maximum exposure to credit risk, which is a worst case scenario and does not reflect results expected by the Fund, is $298,111 at June 30, 2008. The Fund does not typically renegotiate the terms of trade accounts receivable; however, if a renegotiation does take place, the outstanding balance is included in the accounts receivable analysis below based on the original payment terms. There were no significant renegotiated balances outstanding at June 30, 2008. With respect to counterparties for derivative financial instruments, the credit risk is managed through dealing primarily with recognized futures exchanges or investment grade financial institutions and by maintaining credit policies, which significantly reduce overall counter party credit risk. The allowance for credit losses is reviewed on a monthly basis. An assessment is made whether an account is deemed impaired based on the number of days outstanding and the likelihood of collection from the counter party. Accounts receivable June 30, 2008 As at $ --------------------------------------------------------------------- Neither impaired nor past due 264,332 Impaired 1,453 Not impaired but past due in the following periods: 31 to 60 days 11,332 61 to 90 days 5,311 Over 90 days 5,124 --------------------------------------------------------------------- Trade accounts receivable 287,552 Derivatives held for trading (all current) 12,012 Allowance for credit losses (1,453) --------------------------------------------------------------------- Total accounts receivable 298,111 --------------------------------------------------------------------- --------------------------------------------------------------------- Allowance for credit losses June 30, 2008 As at $ --------------------------------------------------------------------- Allowance for credit losses, beginning of period (1,121) Impairment expense (332) --------------------------------------------------------------------- Allowance for credit losses, end of period (1,453) --------------------------------------------------------------------- --------------------------------------------------------------------- Liquidity risk Liquidity risk is the risk that suitable sources of funding for the Fund's business activities may not be available. The Fund manages liquidity risk by maintaining bank credit facilities, continuously managing forecast and actual cash flows and monitoring the maturity profiles of financial assets and financial liabilities. The Fund has access to a wide range of funding at competitive rates through capital markets and banks to meet the immediate and ongoing requirements of the business. The following table shows the contractual maturities for financial liabilities of the Fund: --------------------------------------------------------------------- Within 1 After year 2009 2010 2011 2012 2013 2013 $ $ $ $ $ $ $ --------------------------------------------------------------------- Accounts payable and accrued liabilities 321,019 - - - - - - Distributions payable 8,299 - - - - - - Long-term debt(1) 20,000 90,000 52,500 - - 52,500 120,000 Credit facilities(1) 65,000 - - - - - - Convertible debentures (1),(2) - - - 20,688 - - - --------------------------------------------------------------------- (1) Amounts represent principal only and exclude accrued interest. (2) Convertible debentures are convertible into trust units of the Fund at the option of the holders at any time prior to maturing (note 6). Fair value The carrying values of accounts receivable, accounts payable and accrued liabilities and distributions payable approximate their fair values because the instruments are near maturity or have no fixed repayment terms. The fair value of the credit facilities approximates fair value due to their floating rates of interest. The fair value of the senior fixed rate debt at June 30, 2008 was $338,844 (December 31, 2007 - $337,589) based on third party estimates. The fair value of the Fund's unsecured convertible debentures at June 30, 2008 was $39,098 (December 31, 2007 - $32,078) as determined by reference to quoted market price for the Fund's debentures. 14. Capital Management The Fund's objectives when managing capital are: - to safeguard the Fund's ability to continue as a going concern; - to maintain financial flexibility in order to fund investment opportunities and meet financial obligations; and - to distribute to unitholders a significant portion of its current cash flow, after I. satisfaction of debt service obligations (principal and interest) and income tax expenses, II. satisfaction of any reclamation funding requirements, III. providing for maintenance capital expenditures and IV. retaining reasonable reserves for administrative and other expense obligations and reasonable reserves for working capital and capital expenditures as may be considered appropriate. The Fund defines its capital as follows: - Unitholders' equity, - long-term debt, including working capital; - credit facilities; and - cash. The Fund manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Fund may adjust the amount of distributions paid to unitholders, issue new units, issue new debt or issue new debt to replace existing debt with different characteristics. The Fund monitors its capital structure primarily based on its consolidated debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio. This ratio is calculated as consolidated debt divided by a twelve-month trailing EBITDA, which are non- GAAP measures. For the period ended June 30, 2008, the Fund's capital management strategy was unchanged from the prior year. The Fund currently intends to maintain a consolidated debt to consolidated EBITDA ratio of less than 3.5. Consolidated Debt June 30, 2008 As at $ Long-term debt 315,000 Working capital (surplus) deficit(2) (40,659) --------------------------------------------------------------------- Consolidated debt 274,341 --------------------------------------------------------------------- Consolidated EBITDA June 30, 2008 Twelve months ended $ --------------------------------------------------------------------- Operating revenues(3) 1,856,173 Operating expenses(3) (1,636,106) Unrealized loss on derivative instruments(3) 1,276 General and administrative expenses(3) (24,045) --------------------------------------------------------------------- Consolidated EBITDA 197,298 --------------------------------------------------------------------- --------------------------------------------------------------------- Guideline(1) Consolidated debt to consolidated EBITDA less than 3.5 1.39 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) The Fund currently intends to maintain a consolidated debt to consolidated EBITDA ratio of less than 3.5. (2) Working capital is defined as current assets less current liabilities. (3) Operating revenues, operating expenses, unrealized (gain) loss on derivative instruments and general and administrative expenses shown above are on a trailing twelve-month basis and therefore can not be directly derived from the financial statements. Consolidated debt to consolidated EBITDA is also a measure used as a financial covenant for the Fund's credit facilities and long-term debt agreements. The Fund is also subject to the following financial covenants: - Debt to capitalization - Consolidated EBITDA to consolidated interest charges - Priority debt to consolidated total assets The calculation for each financial covenant is based on specific definitions, is not in accordance with GAAP and cannot be directly derived from the financial statements. The Fund was in compliance with all financial covenants as at June 30, 2008. As a result of the Canadian trust taxation legislation passed in June 2007, the Fund is subject to certain limitations on the issuance of new equity referred to as "normal growth" limitations. The amount of new equity that can be issued by the Fund for the current and following two years, based on the Fund's market capitalization on October 31, 2006, is approximately as follows: Annual Cumulative Normal growth capital allowed in: $ $ --------------------------------------------------------------------- 2008 786,000 786,000 2009 262,000 1,048,000 2010 262,000 1,310,000 --------------------------------------------------------------------- --------------------------------------------------------------------- If the normal growth limitations were exceeded, the Fund may be subject to taxation on its distributions prior to 2011. As at June 30, 2008, the normal growth limitations have not been exceeded. 15. Commitments and contingencies The Fund, through its operating entities, is involved in various contractual agreements in the normal course of its operations. The agreements range from one to eleven years and comprise the processing of a major oil and gas producer's natural gas and the purchase of NGL production in the areas specified in the agreements. The purchase prices are based on current period market prices. There are operating lease commitments relating to railway tank cars, vehicles, computer hardware, office space, terminal lease space and natural gas transportation. The estimated annual minimum operating lease rental payments from these commitments are as follows: $ --------------------------------------------------------------------- 2008 4,570 2009 8,314 2010 6,763 2011 5,418 2012 4,170 Thereafter 2,114 --------------------------------------------------------------------- 31,349 --------------------------------------------------------------------- --------------------------------------------------------------------- There are legal actions for which the ultimate results cannot be ascertained at this time. Management does not expect the outcome of any of these proceedings to have a material effect on the financial position or results of operations. 16. Supplemental cash flow information Changes in non-cash Three months ended Six months ended working capital June 30, June 30, 2008 2007 2008 2007 $ $ $ $ --------------------------------------------------------------------- Cash provided by (used in): Accounts receivable (34,944) (6,694) (48,210) (17,208) Inventory (103,201) 13,154 (63,308) 6,999 Other current assets (3,154) (4,533) (6,532) (3,555) Accounts payable and accrued liabilities 86,417 (8,289) 85,882 24,424 --------------------------------------------------------------------- Changes in non-cash working capital (54,882) (6,362) (32,168) 10,660 --------------------------------------------------------------------- Relating to: Operating activities (54,266) (6,729) (36,698) 13,647 Investing activities (616) 367 4,530 (2,987) --------------------------------------------------------------------- Other cash flow information: Interest paid 7,583 3,513 11,804 8,740 Taxes paid 1,477 1,035 5,457 1,992 17. Segmented information The Fund has three reportable segments: Marketing, Gathering and Processing and NGL Infrastructure. The Marketing business consists of marketing NGLs, sulphur and crude oil. Gathering and Processing includes natural gas gathering and processing. NGL Infrastructure includes NGL and crude oil processing, transportation and storage. The accounting policies of the segments are the same as that described in the summary of significant accounting policies. Inter- segment sales and expenses are recorded at current market prices. Gathering and NGL Three Process- Infra- months ended Marketing ing structure Corporate Total June 30, 2008 $ $ $ $ $ ------------------------------------------------------------------------- Revenue 459,574 60,003 19,937 - 539,514 Inter-segment revenue - (1,324) (8,824) - (10,148) ------------------------------------------------------------------------- External revenue 459,574 58,679 11,113 - 529,366 ------------------------------------------------------------------------- Operating expenses (440,178) (31,114) (8,543) - (479,835) Inter-segment expenses 10,148 - - - 10,148 ------------------------------------------------------------------------- External operating expenses (430,030) (31,114) (8,543) - (469,687) ------------------------------------------------------------------------- 29,544 27,565 2,570 - 59,679 General and administrative, interest and other - - - (11,314) (11,314) Depreciation and amortization (708) (7,395) (2,435) (258) (10,796) Accretion expense (3) (585) (77) - (665) Impairment expense - (1,113) - - (1,113) ------------------------------------------------------------------------- Earnings (loss) before tax and non-controlling interest 28,833 18,472 58 (11,572) 35,791 Income tax recovery (expense) 192 - 7,690 (20,944) (13,062) ------------------------------------------------------------------------- Earnings (loss) before non-controlling interest 29,025 18,472 7,748 (32,516) 22,729 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Identifiable assets 359,964 825,153 313,004 19,723 1,517,844 ------------------------------------------------------------------------- Capital expenditures - 30,445 11,352 98 41,895 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gathering and NGL Three Process- Infra- months ended Marketing ing structure Corporate Total June 30, 2007 $ $ $ $ $ ------------------------------------------------------------------------- Revenue 292,326 45,074 17,658 - 355,058 Inter-segment revenue - (797) (8,133) - (8,930) ------------------------------------------------------------------------- External revenue 292,326 44,277 9,525 - 346,128 Operating expenses (273,489) (29,713) (6,476) - (309,678) Inter-segment expenses 8,930 - - - 8,930 ------------------------------------------------------------------------- External operating expenses (264,559) (29,713) (6,476) - (300,748) ------------------------------------------------------------------------- 27,767 14,564 3,049 - 45,380 General and administrative, interest and other - - - (12,702) (12,702) Depreciation and amortization (702) (7,285) (2,171) (263) (10,421) Accretion expense (2) (529) (81) - (612) ------------------------------------------------------------------------- Earnings (loss) before tax and non-controlling interest 27,063 6,750 797 (12,965) 21,645 ------------------------------------------------------------------------- Income tax (expense) recovery 60 - (1,364) (80,171) (81,475) ------------------------------------------------------------------------- (Loss) earnings before non-controlling interest 27,123 6,750 (567) (93,136) (59,830) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Identifiable assets 167,112 811,139 238,101 11,205 1,227,557 ------------------------------------------------------------------------- Capital expenditures 536 4,905 2,548 166 8,155 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gathering and NGL Six Process- Infra- months ended Marketing ing structure Corporate Total June 30, 2008 $ $ $ $ $ ------------------------------------------------------------------------- Revenue 952,908 109,818 38,099 - 1,100,825 Inter-segment revenue - (2,566) (16,116) - (18,682) ------------------------------------------------------------------------- External revenue 952,908 107,252 21,983 - 1,082,143 Operating expenses (905,466) (51,977) (13,952) - (971,395) Inter-segment expenses 18,682 - - - 18,682 ------------------------------------------------------------------------- External operating expenses (886,784) (51,977) (13,952) - (952,713) ------------------------------------------------------------------------- 66,124 55,275 8,031 - 129,430 General and administrative, interest and other - - - (25,509) (25,509) Depreciation and amortization (1,415) (14,522) (4,878) (517) (21,332) Accretion expense (6) (1,136) (195) - (1,337) Impairment expense - (1,113) - - (1,113) ------------------------------------------------------------------------- Earnings (loss) before tax and non-controlling interest 64,703 38,504 2,958 (26,026) 80,139 ------------------------------------------------------------------------- Income tax (expense) recovery (298) - 5,234 (6,844) (1,908) ------------------------------------------------------------------------- Earnings (loss) before non-controlling interest 64,405 38,504 8,192 (32,870) 78,231 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Identifiable assets 359,964 825,153 313,004 19,724 1,517,844 ------------------------------------------------------------------------- Capital expenditures - 44,781 46,809 102 91,692 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gathering and NGL Six Process- Infra- months ended Marketing ing structure Corporate Total June 30, 2007 $ $ $ $ $ ------------------------------------------------------------------------- Revenue 599,668 87,782 35,339 - 722,789 Inter-segment revenue - (1,556) (16,122) - (17,678) ------------------------------------------------------------------------- External revenue 599,668 86,226 19,217 - 705,111 Operating expenses (571,545) (50,939) (11,856) - (634,340) Inter-segment expenses 17,678 - - - 17,678 ------------------------------------------------------------------------- External operating expenses (553,867) (50,939) (11,856) - (616,662) ------------------------------------------------------------------------- 45,801 35,287 7,361 - 88,449 General and administrative, interest and other - - - (22,677) (22,677) Depreciation and amortization (1,773) (14,505) (4,266) (465) (21,009) Accretion expense (5) (1,086) (167) - (1,258) ------------------------------------------------------------------------- Earnings (loss) before tax and non-controlling interest 44,023 19,696 2,928 (23,142) 43,505 ------------------------------------------------------------------------- Income tax (expense) recovery 893 - (4,068) (80,882) (84,057) ------------------------------------------------------------------------- (Loss) earnings before non-controlling interest 44,916 19,696 (1,140) (104,024) (40,552) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Identifiable assets 167,112 811,139 238,101 11,205 1,227,557 ------------------------------------------------------------------------- Capital expenditures 538 6,364 4,389 479 11,770 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, 2008 2007 2008 2007 $ $ $ $ ------------------------------------------------------------------------- Marketing revenue derived from export sales to the U.S. 14,103 9,172 45,073 32,993 Property, plant and equipment located in the U.S. 11,725 12,212 11,725 12,212 ------------------------------------------------------------------------- 18. Non-controlling interest In the second quarter of 2007, Rimbey Pipe Line Co. Ltd. was converted to a limited partnership (RPLP) and a subsidiary of the Fund acquired the remaining interest in RPLP, bringing the Fund's ownership in RPLP to 100%. As a result, the non-controlling interest was removed from the consolidated statement of financial position. 19. Internal reorganization On January 2, 2008, the Fund completed an internal reorganization of certain of its subsidiaries. As part of the reorganization, a special distribution in the aggregate amount of $1,441 ($0.023529 per unit) was declared. These special distributions consisted of cash in the amount of $216 ($0.003529 per unit) and securities of certain subsidiaries of the Fund having an aggregate value of $1,225 ($0.02 per unit). Each of these securities was redeemed for one special non- voting unit of the Fund ("Fund special units"). These Fund special units were then converted into regular units which were consolidated such that, upon completion of the reorganization, each unitholder continued to hold the same number of units as was held immediately prior to the reorganization. After completion of the reorganization, the Partnership is directly owned by the Fund, and Keyera Energy Management Ltd. ("KEML") no longer has an interest in the Partnership. The future income tax rate applicable to the Fund is 2.5% higher than that of KEML which resulted in a future income tax expense of approximately $3,500. As a result of the new organizational structure, the Fund is able to preserve tax shelter within its operating entities for the next three years. Based on current projections, taxable temporary differences relating to property, plant and equipment are expected to reverse at a 0% tax rate. In the first quarter of 2008, it was anticipated that a greater amount of tax shelter would be preserved resulting in a future income tax recovery of $16,500. However, based on revised earnings projections as at June 30, 2008, the future income tax recovery has been reduced from $16,500 to $6,500. Corporate Information Board of Directors Officers E. Peter Lougheed(1)(3) Jim V. Bertram Counsel President and Chief Executive Bennett Jones LLP Officer Calgary, Alberta David G. Smith Jim V. Bertram(4) Executive Vice President, President and CEO Chief Financial Officer and Keyera Energy Management Ltd. Corporate Secretary Calgary, Alberta Graham Balzun Robert B. Catell Vice President, Engineering and Executive Director and Corporate Responsibility Deputy Chairman National Grid plc Marzio Isotti New York, New York Vice President, Foothills Region Michael B.C. Davies(2) Steven B. Kroeker Principal Vice President, Corporate Davies & Co. Development Banff, Alberta Bradley W. Lock Nancy M. Laird(3)(4) Vice President, North Central Region Corporate Director Calgary, Alberta David A. Sentes Vice President, Comptroller Donald J. Nelson President Stock Exchange Listing Fairway Resources Inc. Calgary, Alberta The Toronto Stock Exchange Trading Symbols KEY.UN; KEY.DB H. Neil Nichols(2)(3) Management Consultant Smiths Cove, Nova Scotia Unit Trading Summary Q2 2008 ----------------------------------- William R. Stedman(3)(4) TSX:KEY.UN - Cdn $ Chairman and CEO ----------------------------------- ENTx Capital Corporation High $23.79 Calgary, Alberta Low $19.40 Close June 30, 2008 $22.15 Wesley R. Twiss(2) Volume 6,738,465 Corporate Director Average Daily Volume 105,289 Calgary, Alberta Auditors (1) Chairman of the Board Deloitte & Touche LLP (2) Member of the Audit Committee Chartered Accountants (3) Member of the Compensation Calgary, Canada and Governance Committee (4) Member of the Health, Safety Investor Relations and Environment Committee Contact: John Cobb or Bradley White Toll Free: 1-888-699- 4853 Direct: 403-205-7670 Email: ir@keyera.com Head Office Keyera Facilities Income Fund Suite 600, Sun Life Plaza West Tower 144 - 4th Avenue S.W. Calgary, Alberta T2P 3N4 Main phone: 403-205-8300 Website: www.keyera.com %SEDAR: 00019203E

For further information:

For further information: 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


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