Keyera Facilities Income Fund - Q3 Third Quarter Report



    Three months ended September 30, 2007

    CALGARY, Nov. 6 /CNW/ -

    
    2007 THIRD QUARTER HIGHLIGHTS

    -   For the fourth quarter in a row, Keyera delivered outstanding
        performance.

    -   Keyera recorded a 30% increase in net earnings compared to the third
        quarter of 2006.

    -   A seasonal increase in non-cash working capital of $43.0 million
        (primarily inventory) resulted in a net cash outflow from operating
        activities of $8.0 million. Distributable cash flow(1) was
        $34.7 million, up 54% compared to the third quarter of 2006 and
        $11.8 million higher than distributions.

    -   Year to date, cash flow from operating activities was $74.3 million,
        9% greater than 2006, including the use of $29.3 million to fund an
        increase in non-cash working capital. Year to date distributable cash
        flow(1) was $102.4 million, $35.2 million higher than distributions
        and 42% higher than last year.

    -   All business segments delivered strong third quarter results.
        Contribution from Gathering and Processing was $22.7 million, up 16%
        from the same period last year. The NGL Infrastructure contribution
        was $10.7 million, 8% lower than the third quarter of last year.
        Contribution from the Marketing business was $3.4 million,
        significantly higher than the third quarter of 2006, despite an
        unrealized loss of $5.7 million associated with financial contracts
        used to hedge inventory.

    -   Keyera announced a project to significantly expand its storage
        capacity in Fort Saskatchewan. The project, which involves the mining
        of four underground storage caverns, will increase Keyera's storage
        capacity at this facility by three million barrels, or 37% percent,
        to 11. 6 million barrels. The first cavern is expected to be put into
        service late in 2009.

    -   Significant progress has been made on a number of other projects. The
        truck terminal expansion at Fort Saskatchewan is nearing completion,
        as is the addition of a fourth pipeline connecting the Fort
        Saskatchewan facility with Keyera's Edmonton Terminal. Both projects
        are expected to be operational by early 2008. The ethane extraction
        project at Keyera's Rimbey gas plant is proceeding through the
        regulatory approval process.

    -   Three scheduled maintenance turnarounds were successfully completed
        in the third quarter at Keyera's Bigoray, Brazeau River and Medicine
        River gas processing plants.

    -   A number of projects have been identified for 2008 and Keyera
        anticipates spending between $70 million and $100 million on growth
        capital projects next year.

    (1) See "Non-GAAP Financial Measures" on page 5 and a reconciliation of
        distributable cash flow from operating activities on page 19.
    

    Message to Unitholders

    The past several months have been a very dynamic time in Alberta. With
the release of the Report of the Royalty Review Commission in September and
the Government of Alberta's response announced in October, the energy industry
has been the central focus of public debate for the past two months. Keyera
has directed considerable attention to dealing with and analyzing the
implications of these fundamental industry issues in an effort to
constructively contribute to finding a balanced resolution. In the course of
this process however, we have never lost sight of our primary focus, which
continues to be on growing our business and developing strategies for
continued success.
    Over the years, we believe Keyera has proven that we can adapt to the
ever changing political and business landscape, thanks in part to our
customer-focused business philosophy, our highly skilled team, and our very
strategic assets. In the coming months, as industry sorts through the
implications of the announced changes to the Alberta royalty regime, we will
be working with our business partners, customers and prospective customers to
adapt to the amendments so that we can continue to be a preferred service
provider. The Alberta government has indicated that it will retain and revamp
the deep gas drilling program, although details are still being released. They
also commented in their report that support for deep gas drilling is
instrumental to the viability of gas development in Alberta.
    We believe our performance in the third quarter of 2007 demonstrates our
ability to deliver strong operational and financial results in times of flux.
Despite the uncertainty that was created by the royalty review process, and
even though natural gas prices were low and drilling activity was modest in
the third quarter, Keyera built on the strong performance we delivered during
the first half of 2007 by recording net earnings of $15.3 million, 30% higher
than the same period in 2006. A seasonal increase in non-cash working capital
of $43.0 million (primarily inventory) resulted in a net cash outflow from
operating activities of $8.0 million. Distributable cash flow was
$34.7 million during the quarter, 54% higher than the same quarter last year
and $11.8 million higher than the $22.9 million of distributions paid. On a
year to date basis, Keyera's cash flow from operating activities was $74.3
million, 9% greater than 2006, including the use of $29.3 million to fund an
increase in non-cash working capital. Year to date distributable cash flow of
$102.4 million was $35.2 million greater than distributions paid and 42%
higher than last year.
    Our strong overall third quarter performance is the result of
contributions from each of our operating segments. Contribution from our
Gathering and Processing segment was $22.7 million, 16% higher than the same
period last year, primarily due to increased throughput at several of Keyera's
facilities. This performance was thanks in part to producers continuing to
develop and connect new gas to our facilities, particularly at our Strachan,
Nordegg River, Brazeau River, Bigoray and Caribou gas plants. Our NGL
Infrastructure segment also had a solid quarter, posting contribution of
$10.7 million, an 8% decrease from the same period last year. Strong results
from all aspects of our Marketing business allowed this segment to deliver
contribution of $3.4 million, despite an unrealized loss of $5.7 million
relating to forward contracts used to hedge the product inventory that we have
built up for sale in the winter heating season.
    We are continuing to pursue projects of significant scale and growth
potential that build on our long-term business strategy. At present, we have
over $100 million of projects that are either underway or in the development
stages. During the third quarter we initiated several new projects, one of the
most significant of which is our plan to expand our underground storage
facility in Fort Saskatchewan by 37% to 11.6 million barrels. Preparations to
mine the first of the proposed four new storage caverns are underway. If
planning and construction go as anticipated, we are optimistic that the first
cavern will be in service in 2009. We are also very pleased with the progress
that has been made on two previously announced projects related to our Fort
Saskatchewan facility: the addition of a fourth pipeline connecting Fort
Saskatchewan with our Edmonton terminal and the expansion of our truck
terminal. Assuming construction continues on target, we expect both of these
projects to be operational by early 2008.
    In our gathering and processing business, increases in gas throughput in
the Pembina area have created a demand for additional sour gas processing
capacity and as a result, we are looking at options to expand our sour
processing capacity in the west central and foothills regions of Alberta. As
well, in British Columbia, we are investigating options to expand the
processing capacity at our Caribou facility to accommodate new gas production
from proposed producer activity in the adjacent area.
    We have also taken steps to move forward the ethane extraction project at
our Rimbey gas plant. We have filed all the required regulatory applications
and are fully engaged in the approval process. Assuming the project is
approved and completed, we expect that we will be able to extract about
5,000 barrels per day of ethane at Rimbey, the majority of which will be
incremental to existing supply.
    We believe successful completion of these kinds of initiatives will allow
us to build on the competitive advantages we currently enjoy in each of our
operating segments, while at the same time allowing us to diversify our
business lines.
    As we face the challenges presented by the evolving regulatory
environment, including the changes that have been announced or implemented
over the course of the past year with respect to royalties, environmental
legislation and the tax treatment of income funds, Keyera is committed to
continuing to work proactively to maximize our business opportunities and to
provide value to our Unitholders. While we may need to make adjustments to
adapt to these changes, we are optimistic that we will be able to successfully
meet the challenges that lie ahead.
    On behalf of Keyera, I thank you for your support and look forward to
continued success.

    Jim V. Bertram
    President and CEO
    Keyera Facilities Income Fund


    Contribution From Operating Segments

    Keyera operates one of the largest natural gas midstream businesses in
Canada with three major operating segments: Gathering and Processing, NGL
Infrastructure and Marketing. The Gathering and Processing segment includes
natural gas gathering systems and processing plants strategically located in
the natural gas production areas on the western side of the Western Canadian
Sedimentary Basin. The NGL Infrastructure segment includes natural gas liquids
(NGLs) and crude oil pipelines, terminals, processing and storage facilities
in Edmonton and Fort Saskatchewan, Alberta, one of North America's major
energy hubs. The Marketing segment includes activities such as the marketing
of propane, butane and condensate to customers in Canada and the United
States, and crude oil midstream activities.
    Keyera's Gathering and Processing and NGL Infrastructure segments provide
a large portion of the total contribution. Keyera benefits from the
geographical diversity of its natural gas processing plants, NGL
infrastructure facilities and associated assets. The revenues generated from
these facilities are fee-for-service based, with minimal direct exposure to
commodity prices. The remainder of Keyera's contribution is derived from its
Marketing segment. Because of Keyera's integrated approach to its business,
its infrastructure provides a significant competitive advantage in NGL
marketing. Keyera also benefits from diversified sources of NGL supply and a
diversified customer base across North America.
    The following table shows the contribution from each of Keyera's
operating segments and includes inter-segment transactions that are eliminated
in the Fund's consolidated financial statements. Because contribution is not a
standard measure under Canadian generally accepted accounting principles
("GAAP"), it may not be comparable with the calculation of similar measures
for other entities. Contribution does not include the elimination of
inter-segment transactions as required by GAAP and refers to operating
revenues less operating expenses. Management believes contribution provides an
accurate portrayal of profitability by operating segment. The most comparable
GAAP measures are reported in note 16, Segmented Information, which is found
in the financial statements.

    
    -------------------------------------------------------------------------
                                  Three Months Ended          Year to Date
    Contribution by Operating        September 30,            September 30,
    Segment ($ thousands)           2007        2006        2007        2006
    -------------------------------------------------------------------------

    Gathering & Processing(1)
    Revenue before inter-
     segment eliminations(4)      51,440      45,014     139,222     125,661
    Operating expenses before
     inter-segment
     eliminations(4)             (28,771)    (25,543)    (79,710)    (74,246)
    -------------------------------------------------------------------------
    Gathering & Processing
     contribution                 22,669      19,471      59,512      51,415
    -------------------------------------------------------------------------

    NGL Infrastructure(1)
    Revenue before inter-
     segment eliminations(4)      16,495      18,570      51,834      49,330
    Operating expenses            (5,453)     (6,840)    (17,214)    (17,857)
    Unrealized gain/(loss)          (308)          -        (403)          -
                              -----------------------------------------------
    Operating expenses before
     inter-segment
     eliminations(4)              (5,761)     (6,840)    (17,617)    (17,857)
    -------------------------------------------------------------------------
    NGL Infrastructure
     contribution                 10,734      11,730      34,217      31,473
    -------------------------------------------------------------------------

    Marketing(2)
    Revenue                      282,683     278,682     887,001     874,871
    Unrealized gain/(loss)        (5,726)        810     (10,376)        703
                              -----------------------------------------------
    Revenue before inter-
     segment eliminations(4)     276,957     279,492     876,625     875,574
    Operating expenses before
     inter-segment
     eliminations(4)            (272,865)   (276,335)   (844,410)   (850,329)
    General & administration        (674)       (608)     (2,218)     (1,893)
    -------------------------------------------------------------------------
    Marketing contribution         3,418       2,549      29,997      23,352
    -------------------------------------------------------------------------
    Total contribution            36,821      33,750     123,726     106,240
    -------------------------------------------------------------------------
    Other expenses(3)            (18,243)    (19,313)    (61,643)    (57,800)
    -------------------------------------------------------------------------
    Earnings before tax and
     non-controlling interest     18,578      14,437      62,083      48,440
    -------------------------------------------------------------------------

    Notes:
    (1) Gathering and Processing and NGL Infrastructure contribution includes
        revenues for processing, transportation and storage services provided
        to Keyera's Marketing business.
    (2) The Marketing contribution is net of expenses for processing,
        transportation and storage services provided by Keyera's facilities
        and general and administrative costs directly attributable to the
        Marketing segment.
    (3) Other expenses include corporate general and administrative,
        interest, depreciation and amortization, accretion and impairment
        expense. Corporate general and administrative costs exclude the
        direct Marketing general and administrative costs.
    (4) Revenue and operating expenses before inter-segment eliminations as
        shown above are both non-GAAP measures and do not consider the
        elimination of inter-segment sales and expenses. Inter-segment
        transactions are eliminated upon consolidation of Keyera's financial
        results to arrive at external revenue and external operating
        expenses, both GAAP measures, as reported in note 16, Segmented
        Information.
    

    Management's Discussion and Analysis

    The following management's discussion and analysis ("MD&A") was prepared
as of November 6, 2007 and is a review of the results of operations and the
liquidity and capital resources of Keyera Facilities Income Fund (the "Fund)
and its subsidiaries (collectively "Keyera"). It should be read in conjunction
with the accompanying unaudited consolidated financial statements of the Fund
for the quarter ended September 30, 2007 and the notes thereto as well as the
consolidated financial statements of the Fund for the year ended December 31,
2006 and its related management's discussion and analysis. Additional
information related to the Fund, including the Fund's Annual Information Form,
is filed on SEDAR at www.sedar.com.

    NON-GAAP FINANCIAL MEASURES

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

    FORWARD LOOKING STATEMENTS

    Certain statements contained in this MD&A and accompanying documents
contain forward-looking statements. These statements relate to future events
or the Fund's future performance. Such statements are predictions only and
actual events or results may differ materially. The use of words such as
"anticipate," "continue", "estimate", "expect", "may", "will", "project",
"should," "plan," "intend," "believe," and similar expressions, including the
negatives thereof, is intended to identify forward looking statements. All
statements other than statements of historical fact contained in this document
are forward looking statements, including, without limitation, statements
regarding: the future financial position of Keyera; business strategy and
plans of management; anticipated growth and proposed activities; budgets,
including future capital, operating or other expenditures and projected costs;
estimated utilization rates; objectives of or involving Keyera; impact of
commodity prices; treatment of Keyera under governmental regulatory regimes;
the existence, operation and strategy of the risk management program,
including the approximate and maximum amount of forward sales and hedging to
be employed; and expectations regarding Keyera's ability to raise capital and
to add to its assets through acquisitions or internal growth opportunities.
    The forward looking statements reflect management's current beliefs and
assumptions with respect to such things as the outlook for general economic
trends, industry trends, commodity prices, capital markets, and the
governmental, regulatory and legal environment. In some instances, this MD&A
and accompanying documents may also contain forward-looking statements
attributed to third party sources. Management believes that its assumptions
and analysis are reasonable and that the expectations reflected in the forward
looking statements contained herein are also reasonable. However, Keyera
cannot assure readers that these expectations will prove to be correct.
    All forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, events, levels
of activity and achievements to differ materially from those anticipated in
the forward looking statements. Such factors include but are not limited to:
general economic, market and business conditions; operational matters,
including potential hazards inherent in our operations; risks arising from
co-ownership of facilities; activities of other facility owners; competitive
action by other companies; activities of producers and other customers and
overall industry activity levels; changes in gas composition; fluctuations in
commodity prices and supply/demand trends; processing and marketing margins;
effects of weather conditions; fluctuations in interest rates and foreign
currency exchange rates; changes in operating and capital costs, including
fluctuations in input costs; actions by governmental authorities; decisions or
approvals of administrative tribunals; changes in environmental and other
regulations; reliance on key personnel; competition for, among other things,
capital, acquisition opportunities and skilled personnel; changes in tax laws
relating to income trusts, including the effects that such changes may have on
Unitholders, and in particular any differential effects relating to
Unitholder's country of residence; and other factors, many of which are beyond
the control of Keyera, some of which are discussed in this MD&A and in
Keyera's Annual Information Form dated February 27, 2007 (the "Annual
Information Form") filed on SEDAR and available on the Keyera website at
www.keyera.com.
    In addition, the discussion of the proposed reorganization (the
"Reorganization") contained in this MD&A contains forward-looking information.
Unitholders and prospective investors are cautioned not to place undue
reliance on such forward-looking information as such information is based on
certain assumptions and a number of known and unknown risks and uncertainties,
of both a general and specific nature, that could result in the Reorganization
not being completed or not being completed in the manner described in Keyera's
Information Circular. These assumptions and factors include, but are not
limited to: the Alberta Court of Queen's Bench granting a final order
approving the plan of arrangement pursuant to which Keyera intends to
implement the Reorganization; the board of directors exercising its discretion
to proceed with the Reorganization; no change in taxation or other laws which
would have a material adverse significance in respect of the Reorganization; a
favourable advance ruling being obtained from the Canada Revenue Agency
("CRA"); all third party approvals and consents being obtained on terms which
are acceptable to Keyera; no laws or policies being enacted or promulgated, or
no order or decree being issued or made, which would cease trade, enjoin,
prohibit or impose material limitations on the Reorganization or the
transactions contemplated thereby; no material tax being payable by any
participant in the Reorganization; and the counterparties to certain material
contracts to which Keyera is a party agreeing to the assignment or amendment
of such agreements in order to reflect the new organizational structure and to
substantially preserve, in modified form, the existing governance structure of
the Fund going forward. Keyera cautions that the foregoing list of factors and
assumptions is not exhaustive.
    Readers are cautioned that they should not unduly rely on the forward
looking statements in this MD&A and accompanying documents. Further, readers
are cautioned that the forward looking statements in this MD&A speak only as
of the date of this MD&A and Keyera does not undertake any obligation to
publicly update or to revise any of the forward looking statements, whether as
a result of new information, future events or otherwise, except as may be
required by applicable laws.
    All forward looking statements contained in this MD&A and accompanying
documents are expressly qualified by this cautionary statement. Further
information about the factors affecting forward looking statements and
management's assumptions and analysis thereof, is available in filings made by
Keyera with Canadian provincial securities commissions available on SEDAR at
www.sedar.com.

    BUSINESS ENVIRONMENT

    Industry Activity

    Producers in Canada drilled almost 5,500 wells in the third quarter, up
significantly from the second quarter of 2007, although down 23% from the same
period last year. While industry rebounded after the wet spring and extended
spring breakup period in the second quarter, overall activity continues to be
affected by low commodity prices and high costs.
    In the foothills front region, the number of wells drilled in the third
quarter declined by 38% compared to the third quarter of 2006. The average
depth of wells drilled in this region in the third quarter was 2,349 metres,
as producers target the more prospective reservoirs found at deeper depths. In
the central Alberta region, wells drilled were 11% lower than the same quarter
last year, although the average depth per well increased by 4% compared to the
third quarter of 2006. British Columbia also experienced a decline in
drilling, with wells drilled falling 34% compared to the third quarter of last
year. Like the other regions, the average depth per well increased to over
2,400 metres, a 7% increase compared to the third quarter of 2006.
    The decline in drilling activity in Western Canada has not had a material
impact on the raw gas volumes delivered to Keyera's facilities for processing.
Throughput volumes at most Keyera plants increased again in the third quarter,
up 2% compared to the second quarter of 2007 and 1% from the same period last
year. These increases are the result of producer drilling undertaken in
previous years combined with current activity levels around our facilities.
However, lower activity levels, such as those experienced over the last
several quarters, may affect the volume of raw gas delivered to Keyera's
gathering and processing facilities in the future.
    Keyera's management believes that, over the long term, North American
natural gas demand will be strong and that the Western Canadian Sedimentary
Basin will continue to be a key supply basin for many years to come. Keyera's
facilities are well positioned in the western regions of the basin, which is
relatively under-developed and has deeper gas-prone zones that often contain
larger reserves. Keyera's facilities are able to process both sweet and sour
gas and extract NGLs from the raw gas stream, making them well suited to
process gas from this region.

    New Alberta Royalty Framework

    On October 25, 2007 the Government of Alberta announced a new royalty
framework for Alberta. The new royalty regime, which is expected to be
implemented in 2009, will change the royalty structure for natural gas and
conventional oil by introducing sliding rate formulas that are price and
volume sensitive. In addition, new price sensitive formulas will be adopted
for oil sands development at both the pre- and post-payout stages.
    Keyera is not a royalty payor, and therefore is not directly affected by
these announcements. However, as a service provider to the upstream industry,
Keyera will be affected by producers' responses to the new regime. Producers
are currently assessing the impact of the new royalty regime on their
operations and future exploration and development activities. Until we have
stronger indications from producers with respect to their plans, the long term
implications of the royalty announcement for Keyera are difficult to
determine. Keyera views the Government's decision to retain a variation of the
Deep Gas Drilling Program as a positive outcome, due in part to the fact that
many of Keyera's facilities are located west of the fifth meridian where gas
drilling tends to be deeper. In the coming months we will be taking a measured
approach to the new royalty framework and will be working with our partners,
customers and prospective customers to position ourselves to manage these
changes.
    Further information about the new royalty framework is available from the
Government of Alberta website at http://www.gov.ab.ca/ and a copy of the
framework itself can be found at
http://www.energy.gov.ab.ca/Org/Publications/royalty_Oct25.pdf

    Climate change regulations

    Earlier this year, both the Government of Alberta and the Government of
Canada announced new regulatory measures dealing with emissions. Keyera has
reported on both of these developments in its MD&A for the first and second
quarter of 2007. Keyera has initiated third party audits of its baseline
emission applications for the three of its plants that are affected by the
Alberta regulations. These applications must be submitted by December 31, 2007
for the compliance period July 1, 2007 to December 31, 2007. There has been no
change in management's interpretation of the effect of these programs.
    On October 2, 2007, the Government of Alberta announced a new cumulative
effects initiative covering a 317 square kilometer area northeast of Edmonton
known as the Alberta Industrial Heartland. This new initiative establishes
targets for air, water and land quality. All large industrial facilities
within the Industrial Heartland, including Keyera's Fort Saskatchewan
facility, will be subject to a cumulative airshed target of 25,000 tonnes per
year of nitrous oxides and 28,000 tonnes per year of sulphur dioxide These
airshed targets will be validated with stakeholders, including Keyera, and are
scheduled to come into effect in January 2009. A working group is being
established to determine the allocation for the airshed objectives in order to
implement an allocation system. In addition, working groups are being formed
to deal with water and land management issues, including sulphur and wetlands
management. Based on the information currently available, Keyera does not
anticipate that this initiative will require significant changes to current
operations. However, the effect that this program may have on future
operations or possible expansion is not clear at this time. Keyera will
continue to be involved in the consultative process that is being followed to
develop the management plans for the area under this initiative. Once more
details are known, Keyera will be in a better position to evaluate the
potential implications.

    New tax on flow-through entities

    Just over a year ago, the Government of Canada announced a new tax on the
distributions of publicly-traded Canadian income trusts and limited
partnerships, and in June of this year legislation was passed implementing
this new tax. Assuming Keyera only experiences "normal growth", the Fund, as
an existing income trust, will be subject to the new tax as of January 2011.
    Under the legislation, effective January 1, 2011 a tax of 31.5% will be
payable by Keyera on the portion of its distributions that is ordinary taxable
income. For a Canadian resident taxpayer, this portion of Keyera's
distributions will be treated as dividend income for tax purposes. The
legislation also provides there will be no change in taxation of Keyera's
distributions that are considered to be a return of capital or dividend
income.
    On October 30, 2007, the Federal government announced their future
economic plans. Included in this statement was the plan to reduce corporate
tax rates from 22.12% in 2007 to 15% by 2012. These lower tax rates would also
apply to income trusts. If these reduced tax measures are enacted into law,
the applicable tax rate to the Fund would be reduced from 31.5% to 29.5% in
2011 and 28.0% in 2012. The proposed reduction in federal tax rates has not
been included in the future tax provision for the third quarter of 2007 as
these reduced tax rates have not been substantively enacted.
    As at January 1, 2007, Keyera had approximately $385 million of
unutilized tax pools and deductions, consisting mostly of class 41
undepreciated capital costs, available for deduction by the Fund's
subsidiaries. Keyera is proposing to undertake a reorganization of its
internal legal structure as described under "Fund Reorganization" in this
MD&A. Due to the interpretation of the legislation implementing the new tax on
flow-through entities, Keyera has amended its advance ruling request to the
CRA. The amended reorganization will not result in any significant immediate
tax savings within Keyera's structure, but will permit Keyera to defer the
utilization of some tax pools until after January 1, 2011. Assuming the CRA
issues a favorable advance ruling on a timely basis, the amended
reorganization is expected to be implemented in early 2008. Keyera plans to
reduce the use of its available tax deductions in years 2008 through to 2010,
thereby increasing deductions available for the years after 2010.

    Results of Operations

    Keyera's midstream activities are conducted through three business
segments. The Gathering and Processing segment provides natural gas gathering
and processing services to producers. The NGL Infrastructure segment provides
NGL processing, transportation and storage services to producers, marketers
(including Keyera) and others. The services in both these segments are
provided on a fee-for-service basis. The Marketing segment is focused on the
marketing of by-products recovered from the processing of raw gas, primarily
NGLs, and crude oil midstream activities. A more complete description of
Keyera's businesses by segment can be found in the Annual Information Form.
    In the third quarter, Keyera delivered strong operational and financial
results, continuing the trend established in the first half of 2007. Net
earnings of $15.3 million were up $3.5 million or 30% compared to the same
period last year and operating margin of $37.5 million exceeded the same
quarter in 2006 by $3.1 million. These results were achieved despite the
completion of three plant turnarounds and the recording of a $5.7 million
unrealized loss on financial contracts that are used to hedge NGL product
inventories. Excluding the unrealized loss, operating margin in the third
quarter of 2007 was $43.2 million, 29% greater than the third quarter of 2006.
The unrealized loss on financial contracts is discussed in more detail in the
Marketing section of this report.
    The Gathering and Processing segment generated $22.0 million of operating
margin in the third quarter of 2007, a $3.2 million increase compared to the
same period last year, despite the completion of turnarounds at the Brazeau
River, Bigoray and Medicine River gas plants. Most of Keyera's gas plants
experienced higher throughput compared to the same period last year. Despite a
slowdown in drilling activity this year in western Canada, producers continued
to develop and connect new gas developments to Keyera infrastructure.
    Excluding the effect of the $5.7 million unrealized loss on financial
contracts, the Marketing segment generated $17.0 million of operating margin
in the third quarter of 2007, up $6.2 million compared to the same period last
year. Growth in the crude oil midstream business and sound performance by all
NGL products contributed to operating margin during a quarter that typically
experiences weaker demand due to the seasonal nature of the business.
    The NGL Infrastructure segment generated operating margin of $4.3 million
in the third quarter of 2007, up $0.2 million compared to the same period last
year as demand for storage remained strong.
    Year to date, a net loss of $25.5 million has been incurred compared to
net earnings of $53.2 million for the same period last year. The unfavourable
variance is primarily related to the $80.2 million non-cash future income tax
expense incurred in the second quarter of 2007, as a result of the recently
enacted tax on publicly-traded Canadian income trusts and limited
partnerships. This expense more than offset the growth in operating margin
resulting from higher throughput in the Gathering and Processing segment and
stronger unit margins in the Marketing segment.

    Gathering and Processing

    Gathering and Processing revenue for the third quarter of 2007 was
$50.7 million, an increase of $6.5 million or 15%, compared to the third
quarter of 2006. Higher throughput at most plants and higher fees at the
Bigoray and Brazeau River gas plants due to the flow-through of turnaround
costs accounted for the increase.
    Gathering and Processing operating expenses for the third quarter of 2007
were $28.8 million, an increase of $3.2 million or 13% compared to the third
quarter of 2006. The increase was primarily due to the turnaround work
completed at the Bigoray and Brazeau River gas plants and higher operating and
maintenance costs, offset by lower costs at the Chinchaga plant where a
turnaround was completed last year.
    Average gross processing throughput in the third quarter of 2007 was
830 million cubic feet per day, up 2% from the second quarter of 2007 and up
1% from the third quarter last year. Year to date, average gross processing
throughput was 829 million cubic feet per day, up 8 million cubic feet per day
compared to last year. Lower throughput at the Rimbey plant was offset by
higher deliveries of Tay River gas to the Strachan plant, the tie-in of new
wells that were drilled in previous periods and the capture of new volumes
through the Caribou North and Brazeau North gas gathering systems.
    Year to date, Gathering and Processing revenue was $137.0 million, an
increase of $13.9 million or 11% compared to last year. The increase was due
primarily to higher throughput at most gas plants, the recovery of 2007
operating expenses and the collection of previous years' expenses at the
Strachan plant where turnaround costs are recovered over a four-year period.
    Year to date, Gathering and Processing operating expenses were
$79.7 million, an increase of $5.5 million or 7% compared to last year. In
2007 operating costs were higher due to the turnarounds completed at the
Rimbey, Brazeau River, Bigoray and Brazeau North gas plants and unscheduled
repairs at the Caribou, Rimbey and Bigoray gas plants. The increase was
partially offset by lower costs at the Strachan and Caribou gas plants
relative to 2006, when extensive turnaround and refurbishment costs were
incurred.
    The assets in Keyera's Gathering and Processing segment were realigned
into new business regions, the Foothills Region and the North Central Region.
The Foothills Region consists of the Strachan, Brazeau River, Nordegg River,
Paddle River, Bigoray, Brazeau North, West Pembina and Tomahawk gas plants and
associated gathering pipelines. The North Central Region consists of the
Rimbey, Gilby, Medicine River, Worsley, Caribou, Chinchaga, North Star and
Greenstreet plants and associated gathering pipelines. This realignment is
reflected in the discussion below.

    Gathering and Processing - North Central Region

    The North Central Region delivered strong results during the quarter. Raw
gas throughput during the third quarter increased 13% from the second quarter
2007 due to the scheduled maintenance shutdown that was completed at the
Rimbey plant during the second quarter. Throughput in the quarter was down 3%
from the same quarter in 2006 due to a reduction in shallow gas and coalbed
methane drilling in the Rimbey area. These volumes require reduced processing
and, as a result, have had only a moderate impact on Keyera's revenues.
    At the Rimbey gas plant, work continued on a project to extract ethane
from the raw gas stream. Regulatory applications have been submitted and we
are fully engaged in the approval process. Assuming regulatory approvals and
other conditions are met, the project is expected to be completed in 2008 at
an estimated cost of $26 million. Once the project is operational, Keyera
expects to extract up to 5,000 barrels per day of ethane, most of which will
be incremental to Alberta supply.
    Producers continued to be active along Keyera's Caribou North gas
gathering system in northeastern British Columbia. Based on this trend, Keyera
expects additional production to be connected to the gathering system in the
fourth quarter of 2007, which should result in increased throughput at the
Caribou gas plant. As well, indications are that producers will remain active
in this area over the course of the winter.
    The Medicine River gas plant, Keyera's only non-operated gas processing
facility, was taken offline for approximately seven days during the quarter
for its scheduled maintenance turnaround. The costs for the turnaround are not
recoverable through the existing fee structure, but the impact on the North
Central Region's cash flow was not significant. All maintenance turnarounds
scheduled for the North Central Region in 2007 have now been completed.

    Gathering and Processing - Foothills Region

    The Foothills Region experienced another active quarter from a growth and
maintenance perspective. Despite the scheduled turnarounds at the Brazeau
River and Bigoray gas plants, throughput in the quarter was up 6% compared to
the third quarter of 2006 as a result of incremental volumes at several
plants. However, third quarter raw gas throughput was down 9% compared to the
second quarter of 2007 due to the two scheduled turnarounds.
    Activity east of the Strachan gas plant along the Garrington pipeline
continued during the quarter. Producers connected a number of new wells to the
gathering system, which resulted in incremental throughput at the Strachan
plant during the quarter. Incremental production was also delivered to the
Strachan plant from a new capture area via the Strachan North pipeline during
the quarter.
    Modifications and tie-ins were completed at the Paddle River gas plant
during the quarter to accommodate the reprocessing of a nearby gas stream and
enhance the NGL recovery efficiency of the facility. At the Nordegg River gas
plant, new inlet separation facilities were installed, to accommodate
incremental sweet gas throughput from an area southwest of the plant. This new
area continues to evolve and is expected to generate incremental throughput in
2008.
    In the Pembina region, where Keyera's Brazeau River, Bigoray and West
Pembina plants are located, producers continued to deliver sour Nisku gas at
sustained levels and a number of new wells were also connected at Keyera's
Easyford oil separation facility. The delivery of these incremental gas
volumes to Keyera facilities has resulted in sour gas handling nearing
capacity. Keyera is developing alternatives for sour gas handling in the area,
including plant expansions.
    The Bigoray and Brazeau River gas plants were both taken offline for
15 days during the quarter in order to perform their scheduled four-year
maintenance turnarounds. During that time, routine inspections, regular
maintenance and required repair work were completed. These costs were largely
recovered during the quarter. The scheduled maintenance turnarounds for 2007
have now been completed for the Foothills Region.

    NGL Infrastructure

    NGL Infrastructure revenue for the third quarter of 2007 was
$10.0 million, a decrease of $0.8 million or 8% compared to the third quarter
of 2006. This decrease is largely due to a fee adjustment and lower product
sales from the Rimbey Pipeline business as well as slightly lower throughput
at the Fort Saskatchewan fractionation plant.
    NGL Infrastructure operating expenses for the third quarter of 2007 were
$5.8 million, a decrease of $1.1 million or 16% compared to the third quarter
of 2006. The decrease was primarily due to lower natural gas costs.
    Year to date, NGL Infrastructure revenue was $29.3 million, an increase
of $0.2 million or 1% compared to the prior year. Increased revenues from
storage services throughout the year was partially offset by lower Rimbey
Pipeline revenues and lower throughput at the Fort Saskatchewan fractionation
plant in the third quarter of 2007.
    Year to date, NGL Infrastructure operating expenses were $17.6 million, a
decrease of $0.2 million or 1% compared to 2006. Lower natural gas costs in
the third quarter of 2007 were partially offset by higher operating costs
related to increased staffing levels at the railcar loading facility early in
the year and the replacement of a charcoal bed filter at the Edmonton
terminal.
    NGL Infrastructure facilities overall operated at typical levels for the
third quarter, a period when lower industry product demand usually results in
lower operational activity at rail loading facilities. Storage revenues were
strong in the third quarter, driven by normal winter season inventory
requirements and diluent demand for oil sands production. Fractionation
throughput was somewhat lower than usual due to short-term market conditions.
    Keyera continues to pursue opportunities to strengthen its competitive
advantages in the Edmonton/Fort Saskatchewan area. As part of that initiative,
Keyera continues to add connections to other pipelines in the area as well as
undertake specific expansion projects.
    In the third quarter, Keyera announced a significant expansion of its
storage capacity at its Fort Saskatchewan facility to meet the expected need
for additional storage capacity over the next decade to support oil sands
development, including the need for diluent. The project, which is expected to
take five to six years to complete, will expand the current storage capacity
by 37% to about 11.6 million barrels and is expected to cost $70 to
$80 million. Engineering work on the first cavern is being finalized,
equipment is being ordered and construction is expected to begin in the fourth
quarter. Cost of the first cavern is expected to be $18 million with a large
portion of the cost being spent in 2008. Assuming construction proceeds as
planned, the first cavern is expected to be put into service late in 2009.
    Work is also continuing on two other projects announced earlier this
year. Keyera is expanding its truck terminal at the Fort Saskatchewan
facility. The $5.6 million project is expected to enhance the loading and
unloading of propane, butane and condensate, thereby increasing Keyera's
operational flexibility and providing enhanced product loading services for
customers serving the domestic NGL market. The project is expected to be
operational in the first quarter of 2008.
    Keyera's project to tie in a fourth pipeline between the Fort
Saskatchewan facility and the Edmonton terminal is also expected to be
completed in early 2008, at an estimated cost of about $9 million net to
Keyera. The new pipeline will provide significantly more operational
flexibility, allowing Keyera to deliver condensate and butane at increased
rates into and out of the Edmonton terminal and Fort Saskatchewan storage and
other pipelines and terminals in the area. This pipeline is also expected to
support the new storage caverns and will add value to Keyera's storage
services by increasing the flexibility for customers.

    Marketing

    The Marketing segment posted sound results, delivering operating margin
of $11.2 million, down $0.3 million compared to the third quarter of 2006. The
decline was due entirely to the recognition of unrealized gains and losses on
financial instruments. Excluding the effect of these unrealized items,
operating margin grew $6.2 million in the third quarter compared to the same
period last year.
    Because of the seasonality associated with propane markets, propane sales
volumes are typically lower in the third quarter than in the winter months and
inventory levels increase to meet the winter heating season demands. While
this was the case in the third quarter of 2007, increased use of propane as a
feedstock for the petrochemical industry in the U.S. resulted in lower than
normal inventories in North America in the third quarter. Butane markets
performed well in the third quarter of 2007, with sales volumes and margins
consistent with typical third quarter levels. The supply and demand for
condensate was largely in balance throughout the third quarter and pricing was
considerably stronger than in the third quarter of 2006. As well, the crude
oil midstream business continued to perform well in the third quarter of 2007.
    NGL sales volumes for the third quarter of 2007 averaged 43,300 barrels
per day compared to 44,900 barrels per day in the third quarter of 2006. Year
to date, NGL sales volumes averaged 49,800 barrels per day compared to
51,100 barrels per day last year. The decreases were due to lower sales of
propane, partially offset by higher condensate and butane sales compared to
the third quarter of 2006.
    Marketing revenue for the third quarter of 2007 was $277.0 million, a
decrease of $2.5 million compared to the third quarter of 2006. The decrease
was primarily due to the inclusion of a $5.7 million unrealized loss on
financial instruments, lower propane sales volumes and lower butane prices
partially offset by higher butane and condensate sales volumes and growth in
crude oil midstream revenues. The $5.7 million unrealized loss on financial
instruments is discussed later in this section.
    Year to date, Marketing revenue was $876.6 million, an increase of
$1.1 million. The increase was primarily related to higher crude oil midstream
revenues, higher condensate and butane volumes partially offset by lower sales
volumes of propane and an unrealized loss on financial instruments, which is
discussed later in this section.
    The table below outlines the composition of the revenues generated from
Keyera's Marketing business.

    
                                                  Three Months   Nine Months
                                                      Ended         Ended
    Composition of Marketing Revenue              September 30, September 30,
    (in thousands of dollars)                          2007          2007
    -------------------------------------------------------------------------
    Physical sales                                     283,959       886,278
    Financial instruments - realized                    (1,276)          723
    Financial instruments - unrealized                  (5,726)      (10,376)
    -------------------------------------------------------------------------
    Marketing revenue                                  276,957       876,625
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Marketing operating expense for the third quarter of 2007 was
$265.7 million, a decrease of $2.2 million compared to the third quarter of
2006. The decrease was primarily due to lower sales volumes mostly offset by
the growth in the crude oil midstream business.
    Year to date, Marketing operating expense was $819.6 million, a decrease
of $7.9 million. Much like the second quarter of 2007, the decrease was a
result of lower sales volumes mostly offset by higher crude oil midstream
costs.
    NGL product inventories of $83.5 million were $2.3 million higher than in
the third quarter of 2006. Although the value of inventory had not changed
significantly, volumes in storage have increased slightly compared to the same
period last year. Propane inventory levels typically increase throughout the
second and third quarters due to the seasonality of product demand.
    At September 30, 2007, the unrealized loss on financial contracts
recognized in the third quarter was $5.7 million ($10.4 million recognized
year to date), primarily due to the change in the value of crude oil price
swap contracts and fixed price contracts. At September 30, 2007, the fair
market value of these contracts represented a liability of $9.5 million and an
asset of $1.4 million, which represents an estimate of the amount that Keyera
would pay or receive if these instruments had been closed out at the end of
the period. The estimated fair value of all derivatives held for trading is
based on quoted market prices and, if not available, on estimates from third
party brokers or dealers.
    Of the $10.4 million year to date unrealized loss, the portion relating
to changes in crude oil financial contracts amounted to approximately
$6.8 million. These contracts are used to protect inventory from fluctuations
in the price of NGL products. To the extent these contracts are effective
(i.e., the change in the market price of crude oil is correlated to the change
in the prices of the underlying physical NGL products), gains and losses on
these financial contracts will be offset by gains or losses in the proceeds
that will be realized upon the sale of the products.
    The remainder of the unrealized loss is primarily related to the change
in fair value of fixed price physical sales contracts. Keyera routinely
utilizes these contracts to sell forward a portion of its physical inventory.
The adoption of new accounting standards on January 1, 2007 resulted in a
$2.3 million unrealized loss in the first quarter of 2007 related to fixed
price physical contracts on hand at January 1, 2007. As the fixed price
contracts were priced higher than market, the new accounting standards
required an asset of $2.3 million to be recorded with a corresponding increase
in opening accumulated earnings. As these contracts matured and the actual
proceeds on the fixed price sales were recorded in revenue, the previously
recorded asset of $2.3 million was reduced to nil with a corresponding charge
(unrealized loss) to earnings in the first quarter of 2007.
    The adoption of the new accounting standards is expected to continue to
result in increased volatility in operating margins due to unrealized gains
and losses associated with financial instruments.
    The Marketing business is exposed to commodity price fluctuations arising
between the time contracted volumes are purchased and the time they are sold,
as well as fluctuations in the margins between purchase prices and sales
prices and other risks that affect price and supply - demand trends. Keyera
manages its supply and sales portfolio by monitoring its inventory position
and its purchase and sale commitments, as well as by actively participating in
various hub markets. In addition, Keyera manages some of its price risk by
using financial contracts, such as energy-related forward sales, price swaps,
physical exchanges and options and by offsetting some of its physical and
financial contracts in terms of volumes, timing of performance and delivery
obligation.
    For a further discussion of the risks and trends that could affect the
marketing performance and the steps that Keyera takes to mitigate these risks,
readers are referred to the descriptions in this MD&A and to Keyera's Annual
Information Form, which is available on SEDAR.

    Non-operating expenses and other earnings

    General and administrative expenses for the third quarter of 2007 were
$2.7 million, down $1.3 million from the third quarter of 2006. Long-term
incentive plan costs accounted for $1.0 million of the decrease, reflecting a
lower unit price.
    Year to date, general and administrative costs were $15.3 million, down
$0.2 million from last year. Higher long-term incentive plan costs resulting
from the increase in distributions in May 2007 were offset by lower short-term
incentive costs in the first quarter of 2007. Excluding the effect of the
long-term incentive plan, general and administrative expenses were in line
with those incurred in 2006.
    Interest expense, net of interest revenue, was $4.5 million for the third
quarter of 2007, $0.4 million lower than the third quarter of 2006 primarily
due to the reversal of a $0.7 million unrealized loss on an interest rate
financial contract. This financial contract was settled in the third quarter
of 2007 and a realized loss of $0.3 million was recorded in the period.
Excluding the effect of the financial contract, borrowing costs were virtually
unchanged.
    Year to date, interest expense net of interest revenue was $14.7 million,
$1.7 million higher than last year due primarily to higher average short-term
debt balances in the first two quarters of 2007 as well as the realized loss
of $0.3 million on the interest rate financial contract.
    Depreciation and amortization expenses were $10.5 million for the third
quarter of 2007, virtually unchanged from the third quarter of 2006, and
$31.5 million year to date, $2.0 million greater than last year. The increase
was due to growth in the asset base resulting from the completion of several
major growth capital projects during the past year.
    An impairment expense of $0.4 million was recorded in the third quarter
of 2007 to adjust the carrying value of a small, non-core gas plant that was
taken out of service.
    Income tax expense for the third quarter of 2007 was $3.3 million,
$0.9 million greater than the third quarter of 2006. Future income tax expense
for the third quarter of 2006 was unusually low due to recognizing the benefit
of non-capital losses existing in a subsidiary of the Fund.
    Current income tax expense for the third quarter of 2007 was
$0.5 million, $0.5 million lower than last year, largely as a result of lower
earnings posted by the Rimbey Pipeline business.
    Year to date, income tax expense was $87.3 million, $92.8 million higher
than the same period last year. This increase was primarily due to recording
$80.2 million of future income tax expense in the second quarter of 2007 and a
further $0.2 million in the third quarter of 2007 resulting from the new tax
imposed on publicly traded income trusts and limited partnerships in Canada.
The future income tax expense is an estimate of the tax that will ultimately
be payable by Keyera due to differences between the accounting and tax basis
of assets and liabilities of the operating partnership. As a result of the new
tax legislation, distributions will no longer be deductible by Keyera
beginning in 2011. Accordingly, any taxable income of the operating
partnership allocated to the Fund will be subject to this tax.
    The remainder of the $92.8 million variance was largely related to the
effect of recording a future income tax recovery in the second quarter of 2006
that reflected a reduction in future statutory income tax rates and the
deductibility of the long-term incentive plan costs.
    Current income tax expense on a year to date basis was $3.0 million,
$0.3 million lower than last year, largely as a result of lower earnings
posted by the Rimbey Pipeline business in the third quarter of 2007.

    Critical Accounting Estimates

    The Fund's consolidated financial statements have been prepared in
accordance with GAAP. Certain accounting policies require that management make
appropriate decisions with respect to the formulation of estimates and
assumptions that affect the recorded amounts of certain assets, liabilities,
revenues and expenses. Management reviews its assumptions and estimates
regularly, but new information and changes in circumstances may result in
actual results or revised estimates that differ materially from current
estimates. A description of the accounting estimates and the methodologies and
assumptions underlying the estimates are described in MD&A presented with the
December 31, 2006 consolidated financial statements of the Fund. There have
been no changes to the methodologies and assumptions. The most significant
estimates are those indicated below:

    Estimation of Gathering and Processing and NGL Infrastructure revenues:

    At September 30, 2007, operating revenues and accounts receivable for the
Gathering and Processing and NGL Infrastructure segments contained an estimate
of $19.9 million primarily for September 2007 operations.

    Estimation of Gathering and Processing and NGL Infrastructure operating
    expenses:

    At September 30, 2007, operating expenses and accounts payable contained
an estimate of $11.8 million primarily for September 2007 operations.

    Estimation of Gathering and Processing and NGL Infrastructure
    equalization adjustments:

    Much of the revenue from the Gathering and Processing and NGL
Infrastructure assets is generated on a cost-of-service basis. Under this
method, the operating component of the fee is a pro rata share of the
operating costs for the facility, calculated based upon total throughput.
Users of each facility are charged a fee per unit based upon estimated costs
and throughput, with an adjustment to actual throughput completed after the
end of the year. Each quarter, throughput volumes and operating costs are
reviewed to determine whether the estimated unit fee charged during the
quarter properly reflects the actual volumes and costs, and the allocation of
revenues and operating costs to other plant owners is also reviewed.
Appropriate adjustments to revenue and operating expenses are recognized in
the quarter and allocations to other owners are recorded.
    For the Gathering and Processing and NGL Infrastructure segments,
operating revenues and accounts receivable contained an equalization
adjustment of $8.3 million at September 30, 2007. Operating expenses and
accounts payable contained an estimate of $5.9 million.

    Estimation of Marketing revenues:

    At September 30, 2007, the Marketing sales and accounts receivable
contained an estimate for September 2007 revenues of $50.4 million.

    Estimation of Marketing product purchases:

    Marketing cost of goods sold, inventory and accounts payable contained an
estimate of NGL product purchases of $84.1 million at September 30, 2007.

    Estimation of Asset Retirement Obligation:

    In the third quarter of 2007, there were no material changes to the
assumptions used in the estimate prepared for December 31, 2006. Additional
information related to decommissioning, abandonment and reclamation costs is
provided in Keyera's Annual Information Form, which is available on SEDAR.

    LIQUIDITY AND CAPITAL RE

SOURCES Cash flow from operating activities Cash outflow from operating activities during the third quarter of 2007 was $8.0 million as Keyera used $43.0 million of cash to finance a seasonal increase in non-cash working capital, primarily due to product inventories. Before changes in non-cash working capital, cash flow from operating activities was $34.9 million. From this cash flow, Keyera paid $22.9 million of distributions to its unitholders and $6.9 million for capital expenditures, leaving $5.1 million of cash. Keyera also received $79.3 million of proceeds from the issuance of long-term debt and $0.8 million from the issuance of trust units under the distribution reinvestment plan ("DRIP"). From this cash, Keyera repaid $41.6 million of short-term borrowings and financed the $43.0 million change in non-cash working capital, leaving a cash surplus of $0.6 million at the end of the quarter. Year to date, cash provided by operating activities was $74.3 million, after the use of $29.3 million to fund changes in non-cash working capital primarily due to higher product inventories. Cash flow from operating activities before changes in non-cash working capital was $103.6 million. From this cash flow Keyera paid $66.8 million of distributions to its unitholders and $24.7 million for capital expenditures and acquisitions, leaving $12.1 million of cash. Keyera also received $4.2 million from the disposition of electrical generating equipment and $2.4 million from the issuance of trust units under the DRIP, bringing cash available to $18.7 million. Along with this cash, net proceeds of $79.3 million from the issuance of long-term debt were used to fund the repayment of $68.1 million of short-term borrowings and finance the $29.3 million change in non-cash working capital, leaving a $0.6 million cash surplus. Cash and working capital was $26.7 million at September 30, 2007 compared to a deficit of $41.1 million at December 31, 2006. The deficit at December 31, 2006 resulted from the use of short-term debt to finance growth capital expenditures and was eliminated in the third quarter of 2007 when Keyera received $79.3 million of proceeds of the issuance of long-term debt and used much of these proceeds to repay short-term debt. Capital expenditures Capital additions and Three months ended Nine months ended acquisitions September 30, September 30, (in millions of dollars) 2007 2006 2007 2006 ------------------------------------------------------------------------- Growth capital expenditures 8.0 12.6 15.5 63.0 Maintenance capital expenditures 0.2 0.5 0.9 2.7 ------------------------------------------------------------------------- Total capital expenditures 8.2 13.1 16.4 65.7 Acquisitions of non- controlling interest - - 6.7 - ------------------------------------------------------------------------- Total capital additions and acquisitions 8.2 13.1 23.1 65.7 ------------------------------------------------------------------------- In the third quarter of 2007, additions to property, plant and equipment including acquisitions amounted to $8.2 million, consisting of $0.2 million of maintenance capital and $8.0 million of growth capital. In addition to maintenance capital expenditures, Keyera incurred maintenance and repair expenses of $8.8 million that were included in operating costs during the third quarter of 2007. The growth capital expenditures included $2.1 million for the acquisition of a site in northeast B.C. close to our Caribou North gathering system to enable future expansion, $3.2 million at the Rimbey and Brazeau River gas plants to upgrade systems and equipment, $2.1 million to acquire new pipelines in the Foothills Region, $0.6 million for the expansion of the truck off loading facility at Fort Saskatchewan and various other small projects. Year to date, total capital additions and acquisitions amounted to $23.1 million, consisting of $0.9 million of maintenance capital, $15.5 million of growth capital and $6.7 million of acquisitions. In addition to maintenance capital expenditures, Keyera incurred maintenance and repair expenses of $24.8 million that were included in operating costs. The growth capital expenditures included those in the third quarter of 2007 described above and $2.3 million for the purchase of a pipeline to be used as a gathering line to extend the capture area of the Brazeau River gas plant, $1.5 million related to modifications at the Rimbey gas plant to enable the tie-in of equipment required for the ethane extraction project, $2.6 million for upgrades and expansion of equipment at the Rimbey gas plant and $6.7 million related to the acquisition of an additional ownership interest in RPLP, bringing Keyera's ownership to 100%. Keyera expects full year 2007 growth capital expenditures to be between $40 and $50 million and maintenance capital expenditures to be between $2 million and $3 million. This assumes timely receipt of regulatory approvals and construction schedules proceeding as currently planned. In 2008, Keyera anticipates spending between $70 million and $100 million on growth capital projects. Debt covenants In order for Keyera to manage seasonal fluctuations in cash flow and working capital and fund growth capital expenditures, Keyera has established credit facilities consisting of a $150 million revolving term facility that matures on April 21, 2010 and $25 million of revolving demand facilities. As at September 30, 2007, $40 million was drawn under these credit facilities. These credit facilities are subject to two major financial covenants: Debt to EBITDA and Debt to Capitalization. The calculation for each ratio is based on specific definitions, is not in accordance with GAAP and cannot be readily replicated by referring to the Fund's financial statements. These credit facilities provide for the deduction of net working capital in the calculation of debt. Following are the ratios as calculated in accordance with the covenants as at September 30, 2007: ------------------------------------------------------------------------- Covenant Position as at September 30, 2007 ------------------------------------------------------------------------- Debt to EBITDA not to exceed 3.50 1.66 ------------------------------------------------------------------------- Debt to Capitalization not to exceed 0.55 0.26 ------------------------------------------------------------------------- Keyera has $215 million of unsecured senior notes that were issued in 2003 and 2004. Of this amount, $20 million matures in August 2008 and bears interest at 5.42%, $90 million matures in October 2009 and bears interest at 5.23%, $52.5 million matures in August 2010 and bears interest at 5.79%, and $52.5 million matures in August 2013 and bears interest at 6.16%. These notes are subject to three major financial covenants: Debt to EBITDA, EBITDA to Interest Charges and Priority Debt to Total Assets. The calculations for each of these ratios are based on specified definitions. Following are the ratios as calculated in accordance with the covenants as at September 30, 2007: ------------------------------------------------------------------------- Covenant Position as at September 30, 2007 ------------------------------------------------------------------------- Debt to EBITDA not to exceed 3.50 2.32 ------------------------------------------------------------------------- EBITDA to Interest Charges not less than 3.00 10.46 ------------------------------------------------------------------------- Priority Debt to Total Assets not to exceed 15% 0% ------------------------------------------------------------------------- On September 4, 2007, Keyera completed a private placement of unsecured senior notes in the principal amount of $120 million: $60 million due in 2017 bearing interest at 5.89% and $60 million due in 2022 bearing interest at 6.14%. On September 4, 2007, $80 million of proceeds were received and a further $40 million will be received on December 3, 2007. In terms of payment obligation priority, the $120 million unsecured senior notes rank on a pari passu basis with the obligations under Keyera's existing credit facilities and with all other unsecured senior notes. The proceeds from these notes are a source of long-term funding for Keyera's ongoing growth capital program, working capital requirements and general corporate purposes. These new unsecured senior notes are subject to three major financial covenants: Debt to EBITDA, EBITDA to Interest Charges and Priority Debt to Total Assets. The calculations for each of these ratios are based on specified definitions. Following are the ratios as calculated in accordance with the covenants as at September 30, 2007: ------------------------------------------------------------------------- Covenant Position as at September 30, 2007 ------------------------------------------------------------------------- Debt to EBITDA not to exceed 5.0 1.74 ------------------------------------------------------------------------- EBITDA to Interest Charges not less than 2.00 7.83 ------------------------------------------------------------------------- Priority Debt to Total Assets not to exceed 15% 0% ------------------------------------------------------------------------- Failure to adhere to the covenants described above may impair Keyera's ability to pay distributions. Management expects that upon maturity of the credit facilities and unsecured senior notes, adequate replacement facilities will be established. For a discussion of the risks that could affect the liquidity and working capital of the Fund and the steps Keyera takes to mitigate these risks, as well as information relating to Keyera's commitments and contractual obligations, readers are referred to Keyera's 2006 MD&A and Annual Information Form which is available on SEDAR. Risk factors The business of the Fund is subject to operational and commercial risks that could adversely affect future operating results, earnings, cash flow and distributions to unitholders. These risks include declines in throughput, operational problems and hazards, cost overruns, increased competition, regulatory intervention, environmental considerations, uncertainty of abandonment costs and dependence upon key personnel. These risks are identified and discussed in greater detail in the most recent Annual Information Form available on www.sedar.com as well as in the "Business Environment", "Results of Operations - Marketing" and "Liquidity and Capital Resources" sections of this MD&A. Unitholder Distributions Comparison of distributions paid to cash flow from operating activities and net earnings The following table presents a comparison of distributions paid to net earnings and cash flow from operating activities: Three Nine months months ended ended Sept. 30 Sept. 30 (in thousands of dollars) 2007 2007 2006 2005 ------------------------------------------------------------------------- Cash flow from operating activities (8,049) 74,328 110,656 62,147 Net earnings (loss) 15,310 (25,548) 68,078 60,680 Cash distributions paid 22,923 66,847 86,509 77,013 ------------------------------------------------------------------------- Excess (shortfall) of cash from operating activities over distributions paid (30,972) 7,481 24,147 (14,866) Excess (shortfall) of net earnings (loss) over distributions paid (7,613) (92,395) (18,431) (16,333) ------------------------------------------------------------------------- In the third quarter of 2007, cash outflow from operating activities was $8.0 million due to the $43.0 million seasonal increase in non-cash working capital. As a result, cash flow from operating activities was $31.0 million less than distributions paid. Year to date, cash flow from operating activities was $74.3 million, $7.5 million greater than distributions paid. Included in the calculation of year-to-date cash flow from operating activities was $29.3 million to fund changes in non-cash working capital. It is Keyera's policy to finance temporary fluctuations in non-cash working capital with short-term debt. In the third quarter of 2007, distributions of $22.9 million exceeded net earnings by $7.6 million. Year to date, distributions of $66.8 million exceeded the net loss by $92.4 million. The shortfall is attributable to the inclusion of non-cash items for future income taxes ($2.7 million in the third quarter and $84.4 million year to date) and depreciation, amortization, accretion and impairment expense ($11.7 million in the third quarter and $33.9 million year to date) in the calculation of net income. Future income taxes can fluctuate from period to period as a result of changes in tax rates (such as the enactment in the second quarter of 2007 of the tax on distributions of flow-through entities or the reduction of corporate tax rates in 2006) or changes in the operating results of the underlying operating entities of Keyera. These items do not affect cash flow generated in the current period. Non-cash charges such as depreciation and amortization are based upon the historical cost of Keyera's property, plant and equipment and do not accurately represent the fair market value or the replacement cost of the assets in today's economic environment, nor do they affect cash flow generated in the current period. Due to the inclusion of non-cash charges in net earnings, distributions paid will normally exceed net earnings. Although non-cash charges do not affect current period cash generation, to the extent these accruals are ultimately realized, future distributions may be reduced or the excess of distributions over net income would be a return of unitholders' capital. Distributable Cash Flow Distributable cash flow is not a standard measure under GAAP and therefore may not be comparable with the calculation of similar measures for other entities. Distributable cash flow is used to assess the level of cash flow generated from ongoing operations and to evaluate the adequacy of internally generated cash flow to fund distributions. Following is a reconciliation of distributable cash flow to its most closely related GAAP measure, cash flow from operating activities. Distributable Three months ended Nine months ended Cash Flow September 30, September 30, (in thousands of dollars) 2007 2006(1) 2007 2006(1) ------------------------------------------------------------------------- Cash flow from operating activities (8,049) (12,449) 74,328 68,526 Add (deduct): Changes in non cash working capital 42,981 35,893 29,334 7,039 Maintenance capital (234) (563) (878) (2,723) Non-controlling interest distributable cash flow 0 (280) (369) (868) ------------------------------------------------------------------------- Distributable cash flow 34,698 22,601 102,415 71,974 ------------------------------------------------------------------------- Distributions to unitholders 22,931 21,679 67,242 64,863 (1) The calculation of distributable cash flow for the comparative period has been amended to consider the non-cash effect of unrealized foreign exchange gains and losses. For the three and nine months ended September 30, 2006, $4 and $60 of unrealized foreign exchange gains have been included in the change in non-cash working capital. Distributable cash flow of $34.7 million in the third quarter of 2007 and $102.4 million year to date exceeded distributions to unitholders of $22.9 million and $67.2 million in the respective periods. Changes in non-cash working capital are excluded from the determination of distributable cash flow because they are primarily the result of seasonal fluctuations in product inventories or other temporary changes and are generally funded with short-term debt. Also deducted from distributable cash flow are maintenance capital expenditures that are funded from current operating cash flow. Distribution policy In determining the level of cash distributions to unitholders, Keyera's Board of Directors takes into consideration current and expected future levels of distributable cash flow, capital expenditures, borrowings and debt repayments, changes in working capital requirements and other factors. Changes in non-cash working capital are primarily the result of seasonal fluctuations in product inventories or other temporary changes and are generally funded with short-term debt. These changes in non-cash working capital are therefore excluded in the determination of distributable cash flow. Over the long-term, Keyera expects to pay distributions from distributable cash flow. Growth capital expenditures will be funded from retained operating cash flow, along with proceeds from additional debt or equity, as required. Although Keyera intends to continue to make regular cash monthly distributions to its unitholders, these distributions are not guaranteed. Sustainability of distributions and asset base Keyera operates long-life infrastructure assets consisting of natural gas processing plants and gathering systems, NGL processing plants, storage facilities and transportation facilities. These facilities provide services to numerous energy producers over a wide geographic area. Throughput at each natural gas processing plant is dependent upon the natural gas production of third party producers within the capture area or franchise area of the plant. Demand for fractionation, storage and transportation services is dependent upon the supply of NGL mix obtained from the processing of third party raw natural gas and the market demand for end-use products (propane, butane and condensate). Keyera has comprehensive inspection, monitoring and maintenance programs in place. The objectives of these programs are to keep the facilities in good working order and to maintain their ability to operate reliably for many years. These maintenance and repair expenditures totaled $9.0 million in the third quarter of 2007 and $25.7 million year to date. Of these amounts $8.8 million and $24.8 million were included in operating costs and will be recovered through the fee structure over varying periods of time, depending upon the fee structure. At these levels of maintenance and repair, Keyera's plants and facilities can continue to operate safely for decades to come. Significant capital expenditures are not normally required to maintain the existing productive capacity, but may be required if significant changes are made in regulatory requirements. Several of Keyera's sour gas plants rely on acid gas injection to dispose of the hydrogen sulphide and other waste products removed during processing. Acid gas injection involves the injection and sequestration of carbon dioxide and hydrogen sulphide into depleted underground reservoirs. The sustainability of this particular process is dependent upon the availability of suitable reservoirs. If suitable reservoirs were to become unavailable, alternate processes would be required, the capacity of the plant could be reduced or expenditures required to replace the lost capacity would be necessary. These alternatives would have an adverse affect on cash flow. In addition to the operation of plant, pipeline and storage facilities, Keyera also conducts NGL marketing and crude oil midstream businesses. These businesses utilize facilities owned by Keyera to process, store and transport products that have been purchased from third parties. Cash flows from operating activities are determined primarily by the quantity and composition of product throughput at the facility and the fee structure. Throughput is influenced by the ongoing development activities of numerous third parties who may increase production volumes by drilling new wells, tying in previously drilled wells, completing new zones in existing wells or enhancing production volumes through stimulation or enhanced recovery techniques. If third parties are unsuccessful in their development activities, Keyera's cash flow could be adversely affected despite having physical capacity available. Growth capital expenditures are generally undertaken to expand capture areas, add new capacity or introduce new services. If Keyera is unsuccessful in extending capture areas or adding new capacity and services, cash flow from operating activities may be reduced, thereby adversely affecting distributions. Standard and Poor's has assigned the Fund an SR-3 stability rating, indicating the expectation of a high level of stability in distributions. Additional information on the capacities and constraints related to Keyera's plants, other risks and trends that could affect the financial performance of Keyera and the steps taken to mitigate these risks, readers are referred to the descriptions in this MD&A and to Keyera's 2007 Annual Information Form, which is available on SEDAR. Units and Convertible Debentures During the third quarter of 2007, $0.2 million of convertible debentures (before adjustment for deferred financing costs) were converted into 16,747 trust units and 47,057 trust units were issued under the DRIP in consideration of $0.8 million, bringing the total units outstanding at September 30, 2007 to 61,168,668. Convertible debentures outstanding at September 30, 2007 were $22.0 million. FUND REORGANIZATION Keyera proposed a reorganization of its legal structure that was presented in the Management's Discussion and Analysis for the quarter ended March 31, 2007 and is described in detail in Keyera's Notice of Meeting and Proxy Statement and Information Circular, which was filed on SEDAR (www.sedar.com) on May 8, 2007. The intent of the reorganization is to streamline the existing legal structure and simplify accounting, legal reporting and income tax compliance, thereby reducing the general and administrative costs associated with these activities. Unitholders approved the reorganization at the annual and special Meeting of Unitholders on June 6, 2007. Due to the interpretation of the legislation implementing the new tax on flow-through entities, Keyera has amended its advance ruling request to the CRA. The amended reorganization will not result in any significant immediate tax savings within Keyera's structure, but will permit Keyera to defer the utilization of some tax pools until after January 1, 2011. Assuming the CRA issues a favorable advance ruling request on a timely basis, the amended reorganization is expected to be implemented in early 2008, Keyera plans to reduce the use of its available tax deductions in years 2008 through to 2010, thereby increasing deductions available for the years after 2010. Distributions to Canadian residents are expected to be approximately 50% to 70% return of capital in 2007, with distributions becoming largely or fully taxable in 2008 for Canadian non-exempt unitholders. Accounting Matters and Controls Critical accounting policies Our unaudited Interim Consolidated Financial Statements have been prepared in accordance with Canadian GAAP. The changes in accounting policies are described in Note 3 to our unaudited Interim Consolidated Financial Statements and Note 2 of our 2006 Annual Report. Changes in accounting policies On January 1, 2007, we adopted the following CICA handbook sections: - Section 1530, Comprehensive Income; - Section 3251, Equity; - Section 3855, Financial Instruments - Recognition and Measurement; - Section 3861, Financial Instruments - Presentation and Disclosure; and - Section 3865, Hedges The new accounting standards address the classification, recognition and measurement and presentation and disclosure of financial instruments in the financial statements and require the inclusion of comprehensive income. As well, the new standards expand the definition of derivatives to include both financial and non-financial contracts. Upon adoption of these new accounting standards, financial assets and liabilities are initially recognized at fair value and are subsequently accounted for based on their classification. Gains and losses on financial instruments measured at fair value are recognized in net earnings in the period in which they arise. As of January 1, 2007, Keyera recorded $3.3 million as an asset held for trading and $0.1 million as a liability held for trading to recognize the fair value of the existing natural gas and electricity contracts previously designated as hedging items, as well as the fair value of all fixed price physical contracts not previously recognized. A corresponding adjustment was made to opening accumulated earnings. Subsequent changes in the fair value of the positions were recorded in net earnings. The changes in accounting policies were applied prospectively, where applicable. Comparative figures have not been restated. For further details, see Note 3 to the interim consolidated financial statements. Future changes in accounting policies In 2006, the CICA issued three new accounting standards: Section 1535, Capital Disclosures; Section 3862, Financial Instruments - Disclosures; and Section 3863, Financial Instruments - Presentation. These new standards will be effective for the Fund on January 1, 2008. Section 1535 establishes new disclosures of capital including disclosing information regarding capital objectives, policies and processes for managing capital. Section 3862 and 3863 replace Section 3861, revising and enhancing disclosure requirements. In June 2007, the CICA issued a new accounting standard, Section 3031, Inventories. This new standard replaces Section 3030 modifying the guidance concerning the scope, measurement and allocation of costs for inventory. This standard will be effective for the Fund on January 1, 2008. Internal control over financial reporting No changes were made in our internal control over financial reporting during the interim period ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. SUMMARY OF QUARTERLY RESULTS The following table presents selected financial information for Keyera: Three months ended (in thousands of dollars) ------------------------------------------------------------------------- Dec 31, Mar 31, Jun 30, Sep 30, 2005 2006 2006 2006 ------------------------------------------------------------------------- Operating revenues: - Marketing 317,863 316,841 279,241 279,492 - Gathering and Processing 37,278 38,053 40,772 44,290 - NGL Infrastructure 10,349 9,606 8,549 10,878 Net earnings(1) 15,491 15,384 25,969 11,797 Net earnings per unit ($/unit) Basic 0.26 0.26 0.43 0.19 Diluted 0.23 0.22 0.39 0.16 Trust units outstanding (thousands) Weighted average (basic) 59,926 60,291 60,560 60,692 Weighted average (diluted) 63,246 63,321 62,768 62,817 Distributions to unitholders 21,062 21,553 21,631 21,679 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Dec 31, Mar 31, Jun 30, Sep 30, 2006 2007 2007 2007 ------------------------------------------------------------------------- Operating revenues: - Marketing 286,325 307,342 292,326 276,957 - Gathering and Processing 43,621 41,949 44,277 50,744 - NGL Infrastructure 10,855 9,692 9,525 10,044 Net earnings(1) 14,928 19,012 (59,870) 15,310 Net earnings per unit ($/unit) Basic 0.25 0.31 (0.98) 0.25 Diluted 0.24 0.31 (0.95) 0.25 Trust units outstanding (thousands) Weighted average (basic) 60,865 60,972 61,061 61,136 Weighted average (diluted) 62,869 62,918 62,967 63,011 Distributions to unitholders 21,742 21,773 22,538 22,931 ------------------------------------------------------------------------- (1) Since the adoption of the new accounting standards effective January 1, 2007, Keyera has had no transactions that required the use of other comprehensive income and therefore comprehensive income equals net earnings. For a discussion of the factors affecting variations over the quarters, refer to "Results of Operations" in this MD&A. Investor Information Taxability of Distributions Keyera currently anticipates that, for Canadian residents, approximately 50% to 70% of the Fund's 2007 distributions will be deemed a tax-deferred return of capital, with distributions becoming largely or fully taxable for Canadian non-exempt unitholders in 2008. This outlook is affected by Keyera's organizational structure and the implementation of the proposed internal reorganization, which was approved by Unitholders in June. This outlook is subject to change, depending on the levels of profitability and capital expenditures in each of Keyera's operating entities. Both Canadian and non-resident unitholders should seek independent tax advice in respect of the consequences to them of acquiring, holding and disposing of units. Factors that could affect the performance of the Fund and the taxability of the distributions are discussed in the Fund's Annual Information Form. Supplementary Information A breakdown of Keyera's operational and financial results, including volumetric and contribution information by major business unit, is available on our website at www.keyera.com under Investor Information, Financial Information. In the third quarter, Keyera realigned its Gathering and Processing assets into new business regions, the Foothills Region and the North Central Region. To assist in analysis, Keyera has reformatted its historical supplementary information to conform to the new business regions. THIRD Quarter 2007 Results Conference Call and Webcast Keyera will be conducting a conference call and webcast for investors, analysts, brokers and media representatives to discuss the third quarter 2007 results at 8:00 am Mountain (10:00 am Eastern) on Wednesday, November 7, 2007. Callers may participate by either dialing 800-732-9303 or 416-644-3417. A recording of the call will be available for replay until midnight, November 14, 2007 by dialing 877-289-8525 or 416-640-1917 and entering pass code 21249885 followed by the pound key. Internet users can listen to the call live on Keyera's website at www.keyera.com under Investor Information, Webcasts. Shortly after the call, an audio archive will be posted on the website for 90 days. Questions We welcome questions from interested parties. Calls should be directed to Keyera's Investor Relations Department at 403-205-7670, toll free at 888-699-4853 or via email at ir@keyera.com. Information on Keyera can also be found on our website at www.keyera.com. Keyera Facilities Income Fund Interim Consolidated Statements of Financial Position (Thousands of Canadian dollars) (unaudited) September 30, December 31, 2007 2006 As at: $ $ ------------------------------------------------------------------------- ASSETS Current assets Cash 610 - Accounts receivable 200,187 160,112 Inventory 83,508 53,939 Asset held for sale (note 6) - 4,200 Other current assets 1,977 4,327 ------------------------------------------------------------------------- 286,282 222,578 Property, plant and equipment 916,896 924,947 Intangible assets 6,969 10,553 Goodwill 71,234 64,934 Future income tax assets (note 8) 481 - ------------------------------------------------------------------------- 1,281,862 1,223,012 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current liabilities Bank indebtedness - 96 Accounts payable and accrued liabilities 191,900 148,318 Distributions payable (note 11) 7,646 7,251 Credit facilities (note 4) 40,000 107,984 Current portion of long-term debt (note 4) 20,000 - ------------------------------------------------------------------------- 259,546 263,649 Long-term debt (note 4) 273,574 215,000 Convertible debentures (note 5) 21,998 23,542 Asset retirement obligation (note 7) 38,136 34,533 Future income tax liabilities (note 8) 156,562 65,424 ------------------------------------------------------------------------- 749,816 602,148 ------------------------------------------------------------------------- Non-controlling interest (note 17) - 2,744 Unitholders' equity Unitholders' capital (note 9) 680,557 677,025 Accumulated earnings 136,719 159,083 Accumulated distributions to unitholders (note 11) (285,230) (217,988) ------------------------------------------------------------------------- 532,046 618,120 ------------------------------------------------------------------------- 1,281,862 1,223,012 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments and contingencies (note 14) The accompanying notes to the interim consolidated financial statements are an integral part of these statements. Keyera Facilities Income Fund Interim Consolidated Statements of Net Earnings (Loss), Comprehensive Income (Loss) and Accumulated Earnings (Thousands of Canadian dollars, except unit information) (unaudited) Three months ended Nine months ended September 30, September 30, 2007 2006 2007 2006 $ $ $ $ ------------------------------------------------------------------------- Operating revenues Marketing 276,957 279,492 876,625 875,574 Gathering and Processing 50,744 44,290 136,970 123,115 NGL Infrastructure 10,044 10,878 29,261 29,033 ------------------------------------------------------------------------- 337,745 334,660 1,042,856 1,027,722 Operating expenses Marketing 265,718 267,919 819,585 827,486 Gathering and Processing 28,771 25,543 79,710 74,246 NGL Infrastructure 5,761 6,840 17,617 17,857 ------------------------------------------------------------------------- 300,250 300,302 916,912 919,589 ------------------------------------------------------------------------- 37,495 34,358 125,944 108,133 General and administrative 2,740 4,062 15,268 15,439 Interest expense on long- term indebtedness 3,421 3,447 11,176 10,416 Other interest expense 1,099 1,515 3,493 2,587 Depreciation and amortization 10,452 10,415 31,461 29,430 Accretion expense (note 7) 838 482 2,096 1,448 Impairment expense 367 - 367 373 ------------------------------------------------------------------------- 18,917 19,921 63,861 59,693 ------------------------------------------------------------------------- Earnings before income tax and non-controlling interest 18,578 14,437 62,083 48,440 Income tax expense (recovery) (note 8) 3,268 2,396 87,325 (5,500) ------------------------------------------------------------------------- Earnings (loss) before non-controlling interest 15,310 12,041 (25,242) 53,940 Non-controlling interest - 244 306 790 ------------------------------------------------------------------------- Net earnings (loss) 15,310 11,797 (25,548) 53,150 Other comprehensive income - - - - ------------------------------------------------------------------------- Comprehensive income (loss) (note 3) 15,310 11,797 (25,548) 53,150 Accumulated earnings, beginning of period 121,409 132,358 159,083 91,005 Change in accounting policies (note 3) - - 3,184 - ------------------------------------------------------------------------- Accumulated earnings, end of period 136,719 144,155 136,719 144,155 ------------------------------------------------------------------------- Weighted average number of units (thousands) (note 10) - basic 61,136 60,692 61,057 60,516 - diluted 63,011 62,817 62,966 62,769 Net earnings (loss) per unit (note 10) - basic 0.25 0.19 (0.42) 0.88 - diluted 0.25 0.16 (0.39) 0.83 ------------------------------------------------------------------------- The accompanying notes to the interim consolidated financial statements are an integral part of these statements. Keyera Facilities Income Fund Interim Consolidated Statements of Cash Flows (Thousands of Canadian dollars) (unaudited) Three months ended Nine months ended September 30, September 30, 2007 2006 2007 2006 Net inflow (outflow) of cash: $ $ $ $ ------------------------------------------------------------------------- Operating activities Net earnings (loss) 15,310 11,797 (25,548) 53,150 Items not affecting cash: Depreciation and amortization 10,452 10,415 31,461 29,430 Accretion expense 838 482 2,096 1,448 Impairment expense 367 - 367 373 Unrealized loss (gain) on derivatives held for trading 5,294 (809) 10,779 (703) Future income tax expense (recovery) (note 8) 2,726 1,341 84,357 (8,842) Non-controlling interest - 244 306 790 Asset retirement obligation expenditures (note 7) (55) (26) (156) (81) Changes in non-cash working capital (note 15) (42,981) (35,893) (29,334) (7,039) ------------------------------------------------------------------------- (8,049) (12,449) 74,328 68,526 ------------------------------------------------------------------------- Investing activities Capital expenditures (8,246) (13,093) (16,350) (65,730) Acquisition of non- controlling interest (note 17) - - (6,716) - Proceeds on sale of assets (note 6) - - 4,200 - Additions to intangibles - - - (1,115) Changes in non-cash working capital (note 15) 1,313 (3,030) (1,674) (3,300) ------------------------------------------------------------------------- (6,933) (16,123) (20,540) (70,145) ------------------------------------------------------------------------- Financing activities (Repayment) issuance of debt under credit facilities (35,000) 49,003 (67,984) 55,383 Issuance of long-term debt, net of financing costs (note 4) 79,313 - 79,313 - Issuance of trust units (note 9) 824 1,045 2,436 3,348 Distributions paid to unitholders (note 11) (22,923) (21,662) (66,847) (64,785) Distributions or dividends paid to others - - - (239) ------------------------------------------------------------------------- 22,214 28,386 (53,082) (6,293) ------------------------------------------------------------------------- Net cash inflow (outflow) 7,232 (186) 706 (7,912) ------------------------------------------------------------------------- (Bank indebtedness) cash, beginning of period (6,622) (2,092) (96) 5,634 ------------------------------------------------------------------------- Cash (bank indebtedness), end of period 610 (2,278) 610 (2,278) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes to the interim consolidated financial statements are an integral part of these statements. See note 15 for cash interest and taxes paid Keyera Facilities Income Fund Notes to Interim Consolidated Financial Statements As At and For the Three and Nine Months Ended September 30, 2007 (All amounts expressed in thousands of Canadian dollars, except as otherwise noted) (unaudited) 1. Structure of the Fund Keyera Facilities Income Fund (the "Fund") is an unincorporated open- ended trust established under the laws of the Province of Alberta pursuant to the Fund Declaration of Trust dated April 3, 2003. The Fund indirectly owns a 100% interest in Keyera Energy Partnership (the "Partnership"). The Partnership is involved in the business of natural gas gathering and processing, as well as natural gas liquids ("NGLs") and crude oil processing, transportation, storage and marketing in Canada and the U.S. Its subsidiaries include Keyera Energy Facilities Ltd. ("KEFL"), Keyera Energy Ltd. ("KEL"), Keyera Energy Inc. ("KEI"), Keyera RPL Holdings Ltd. ("KRPL") and Rimbey Pipeline Limited Partnership ("RPLP"). The Fund is administered by and the Partnership is managed by Keyera Energy Management Ltd. ("KEML" or the "Managing Partner"). The Managing Partner has a 33.83% interest in the Partnership. The Fund makes monthly cash distributions to unitholders of record on the last business day of each month. The amount of the distributions per trust unit is equal to the pro rata share of the distribution received indirectly from the Partnership and, in the event of the termination of the Fund, participating pro rata in the net assets remaining after satisfaction of all liabilities. 2. Basis of presentation These unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). The accounting policies applied are consistent with those disclosed in the Fund's consolidated financial statements as at and for the year ended December 31, 2006 as included in the Fund's 2006 Annual Report to unitholders except for the changes made in adopting new accounting standards. These unaudited interim consolidated financial statements as at and for the three and nine months ended September 30, 2007 do not include all disclosures required for the preparation of annual consolidated financial statements and should be read in conjunction with the Fund's consolidated financial statements as at and for the year ended December 31, 2006. Interim periods may not be representative of the results expected for the full year of operation due to seasonality. Certain of the comparative figures in prior periods have been reclassified to conform to the presentation in the current period. 3. Change in accounting policies Effective January 1, 2007, the Fund adopted the following accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"): - Section 1530, Comprehensive Income; - Section 3855, Financial Instruments - Recognition and Measurement; - Section 3861, Financial Instruments - Disclosure and Presentation; and - Section 3865, Hedges The Fund has adopted these standards prospectively and comparative consolidated financial statements have not been restated. The Fund has selected December 31, 2003 as the date for identification of embedded derivatives. Transition amounts have been recorded in opening accumulated earnings. Financial instruments and hedges All financial instruments must initially be recognized at fair value on the balance sheet. The Fund has classified each financial instrument into the following categories: - Financial assets and financial liabilities held for trading - Loans or receivables - Held to maturity - Financial assets available for sale - Other financial liabilities Subsequent measurement of the financial instruments is based on their classification. Financial assets and financial liabilities held for trading are measured at fair value and changes in those fair values are recognized in net earnings. Financial assets available for sale are measured at fair value, with changes in those fair values recognized in other comprehensive income. Financial assets held to maturity, loans or receivables and other financial liabilities are measured at amortized cost using the effective interest rate method of amortization. Upon adoption, the Fund has classified all financial assets as loans or receivables, with the exception of cash and cash equivalents and derivative instruments. Derivative instruments and cash and cash equivalents have been classified as held for trading. The Fund has classified all financial liabilities as other financial liabilities, with the exception of derivative instruments. Derivative instruments have been classified as held for trading. Gains and losses related to derivative contracts are recognized in revenue in the period in which they arise. The estimated fair value of assets and liabilities held for trading is determined by reference to quoted market prices and, if not available, to estimates from third-party brokers or dealers. For long-term financial liabilities, the transaction costs that are directly attributable to the issue of a financial liability are added to the fair value initially recognized for that financial instrument. These costs are amortized to earnings using the effective interest rate method. For all financial assets and short-term financial liabilities, transaction costs are charged to earnings as incurred. As of January 1, 2007, unamortized deferred financing fees of $985 relating to the Fund's long-term debt and $502 relating to convertible debentures have been reclassified for presentation purposes from intangible assets to long-term debt and convertible debentures. These fees are now amortized to earnings using the effective interest rate method. The Fund assesses at each balance sheet date whether a financial asset carried at cost is impaired. If there is objective evidence that an impairment loss exists, the amount of the loss is measured as the difference between the carrying amount of the asset and its fair value. The carrying amount of the asset is reduced and the amount of the loss is recognized in earnings. Effective January 1, 2007 the Fund has opted to discontinue the use of hedge accounting. All derivative instruments that previously qualified for hedge accounting have been recognized at fair value and unrealized gains and losses have been recorded in earnings. Adopting these standards on January 1, 2007 resulted in the recognition of an asset held for trading in the amount of $3,314, a liability held for trading in the amount of $130 and a $3,184 increase to opening accumulated earnings. Assets held for trading are included in accounts receivable and liabilities held for trading are included in accounts payable and accrued liabilities. The effect on basic and diluted net earnings per unit was $0.05. Comprehensive income Comprehensive income consists of net earnings (loss) and other comprehensive income ("OCI"). OCI comprises the changes in the fair value of the effective portion of derivatives used as hedging items in a cash flow hedge, changes in the fair value of any available for sale financial instruments and foreign currency translation adjustments of self-sustaining foreign operations. Accumulated other comprehensive income ("AOCI") is a new equity category comprised of the cumulative amounts of OCI. No amounts have been recorded in OCI or AOCI as a result of adopting this accounting standard. Future accounting changes In 2006, the CICA issued three new accounting standards: Section 1535, Capital Disclosures; Section 3862, Financial Instruments - Disclosures; and Section 3863, Financial Instruments - Presentation. These new standards will be effective for the Fund on January 1, 2008. Section 1535 establishes new disclosures of capital including disclosing information regarding capital objectives, policies and processes for managing capital. Sections 3862 and 3863 replace Section 3861, revising and enhancing disclosure requirements. In June 2007, the CICA issued the new accounting standard, Section 3031 - Inventories. This new standard replaces Section 3030 modifying the guidance concerning the scope, measurement and allocation of costs of inventory. This standard will be effective for the Fund on January 1, 2008. The Fund is currently evaluating the impact of adopting these new standards on the consolidated financial statements. 4. Credit facilities and long-term debt September 30, December 31, 2007 2006 As at $ $ --------------------------------------------------------------------- Bank credit facilities(a) 40,000 100,984 Revolving demand loan(a) - 7,000 --------------------------------------------------------------------- Total credit facilities 40,000 107,984 --------------------------------------------------------------------- --------------------------------------------------------------------- Current portion of long-term debt(b) 20,000 - Long-term debt(b) 275,000 215,000 Deferred financing costs(1) (1,426) - --------------------------------------------------------------------- Total long-term debt 293,574 215,000 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Deferred financing costs have been reclassified to long-term debt upon adoption of the new accounting standards (see note 3). Previously, these costs were included in intangible assets. (a) The Partnership has a $150,000 unsecured revolving credit facility with certain Canadian financial institutions led by the Royal Bank of Canada. The facility has a three-year revolving term and matures on April 21, 2010, unless extended. In addition, the Royal Bank of Canada has provided a $15,000 revolving demand facility and the Toronto Dominion Bank has provided a $10,000 revolving demand facility. The revolving credit facilities bear interest based on the lenders' rates for Canadian prime commercial loans, U.S. Base rate loans, Libor loans, or Bankers' Acceptances rates. The weighted average interest rates for the three and nine months ended September 30, 2007 were 5.80% and 5.63% (5.94% and 5.46% for the three and nine months ended September 30, 2006). As at September 30, 2007, the balance outstanding on the bank credit facilities was $40,000 ($100,984 as at December 31, 2006). On July 12, 2007, the $7,000 unsecured revolving demand loan facility related to a subsidiary of the Partnership was terminated. (b) In 2003, $125,000 of unsecured senior notes were issued by the Partnership and KEFL in three parts: $20,000 due in 2008 bearing interest at 5.42%, $52,500 due in 2010 bearing interest at 5.79% and $52,500 due in 2013 bearing interest at 6.16%. Interest is payable monthly. Financing costs of $1,215 have been deferred and are amortized using the effective interest rate method over the remaining terms of the related debt. The effective interest rates for the three and nine months ended September 30, 2007 were 5.63%, 5.95% and 6.29% for the notes due in 2008, 2010 and 2013 respectively (5.42%, 5.79% and 6.16% for the three and nine months ended September 30, 2006). In 2004, $90,000 of unsecured senior notes were issued by KEFL and guaranteed by the Partnership. The notes bear interest at 5.23% and mature on October 1, 2009. Interest is payable semi- annually. Financing costs of $568 have been deferred and are amortized using the effective interest rate method over the remaining term of the debt. The effective interest rate for the three and nine months ended September 30, 2007 was 5.37% (5.23% for the three and nine months ended September 30, 2006). On September 4, 2007, $80,000 of unsecured senior notes were issued by KEFL and guaranteed by the Partnership in two tranches: $40,000 due in 2017 bearing interest at 5.89% and $40,000 due in 2022 bearing interest at 6.14%. Interest is payable semi-annually. Financing costs of $687 have been deferred and are amortized using the effective interest rate method over the terms of the related debt. The effective interest rates for the period were 1.96% and 2.03% for the notes due in 2017 and 2022 respectively. An additional $40,000 of unsecured senior notes will be issued in December 2007 by KEFL in two tranches: $20,000 due in 2017 bearing interest at 5.89% and $20,000 due in 2022 bearing interest at 6.14%. 5. Convertible debentures In 2004, the Fund issued convertible unsecured subordinated debentures in the principal amount of $100,000. The convertible debentures bear interest at 6.75% per annum, payable semi-annually in arrears on June 30 and December 31 each year. Interest expense of $403 and $1,212 has been accrued for the three and nine months ended September 30, 2007 ($431 and $1,369 for the three and nine months ended September 30, 2006). These debentures will mature on June 30, 2011 and are convertible into trust units of the Fund at the option of the holders at any time prior to maturity at a conversion price of $12.00 per unit. At September 30, 2007, $77,604 debentures had been converted to trust units ($76,458 at December 31, 2006). Financing costs consisting of an underwriters' commission of $4,000 and issuance costs of $332 have been deferred, and when there are no conversions, are being amortized over the term of the debt using the effective interest rate method. Upon conversion of the debentures, the financing cost related to the principal amount of debt converted is adjusted and is recognized as a charge to unitholders' equity. As a result of conversions to date at September 30, 2007, $2,832 has been reclassified to unitholders' equity ($2,782 at December 31, 2006). As at September 30, 2007, $398 of deferred financing costs remain. The effective interest rate for the three and nine months ended September 30, 2007 was 7.36% (6.75% for the three and nine months ended September 30, 2006). 6. Asset held for sale Asset held for sale consisted of an interest in an electrical generator. In 2006, the equipment was written down to its estimated net realizable value recognizing a $373 charge to impairment expense. On January 23, 2007, the Fund sold its interest in the electrical generator for proceeds of $4,200. 7. Asset retirement obligation The following table presents the reconciliation between the beginning and ending aggregate carrying amount of the obligation associated with the retirement of the Fund's facilities. $ --------------------------------------------------------------------- Balance, January 1, 2006 27,776 Liabilities acquired 151 Liabilities settled (160) Revisions in estimated cash flows 4,509 Accretion expense 2,257 --------------------------------------------------------------------- Balance, December 31, 2006 34,533 Liabilities acquired 912 Liabilities settled (156) Revisions in estimated cash flows 751 Accretion expense 2,096 --------------------------------------------------------------------- Balance, September 30, 2007 38,136 --------------------------------------------------------------------- --------------------------------------------------------------------- 8. Income taxes On June 22, 2007, Bill C-52 Budget Implementation Act, 2007 was enacted by the Canadian federal government. This legislation proposes to tax publicly traded trusts in Canada. The new tax is not expected to apply to the Fund until 2011 as the government has provided a transition period for publicly traded trusts that existed prior to November 1, 2006. As a result of the new tax legislation, the Fund recorded an additional $80.2 million future income tax expense and increased its future income tax liability in the second quarter of 2007. This adjustment represents taxable temporary differences of the Partnership that were previously not recorded for future income tax purposes. These temporary differences have been recorded at a tax- effected rate of 31.5%, which is the rate that will be applicable in 2011 under the current legislation. The following is a reconciliation of income taxes, calculated at the combined federal and provincial income tax rate, to the income tax provision included in the consolidated statements of net earnings (loss). Three Months Ended Nine months ended September 30, September 30, 2007 2006 2007 2006 $ $ $ $ --------------------------------------------------------------------- Earnings before tax and non-controlling interest 18,578 14,437 62,083 48,440 Income from the Fund distributable to unitholders (11,469) (8,547) (37,746) (26,748) --------------------------------------------------------------------- Income before taxes - operating subsidiaries 7,109 5,890 24,337 21,692 --------------------------------------------------------------------- Income tax at statutory rate of 32.12% (2006 - 34.49%) 2,283 2,032 7,817 7,482 Impact of recording temporary differences of the Partnership 217 - 82,399 - Non deductible items excluded from income for tax purposes 481 (94) 1,208 (49) Rate adjustments and changes in estimates (64) (27) (3,435) (10,232) Benefit of long-term incentive plan previously not recorded - - - (2,202) Benefit of non-capital losses previously not recorded - 498 (786) (324) Resource allowance - 71 - 223 Adjustments to tax pool balances 322 - (154) (196) Other 29 (84) 276 (202) --------------------------------------------------------------------- 3,268 2,396 87,325 (5,500) --------------------------------------------------------------------- Classified as: Current 542 1,055 2,968 3,342 Future 2,726 1,341 84,357 (8,842) --------------------------------------------------------------------- Income tax expense (recovery) 3,268 2,396 87,325 (5,500) --------------------------------------------------------------------- --------------------------------------------------------------------- For income tax purposes, the Fund and its subsidiaries have non- capital losses carried forward of approximately $2,020 at September 30, 2007 ($11,987 at December 31, 2006) which are available to offset income of specific entities of the consolidated group in future periods. The benefit of these losses has been recorded at September 30, 2007. During the second quarter of 2007, the Fund recorded a $5,780 future income tax liability with a corresponding increase to Goodwill. This adjustment relates to a prior period acquisition that did not reflect a future income tax impact for a temporary difference. A further $520 future tax liability and increase to Goodwill was recorded relating to the acquisition of the minority interest in RPLP (see note 17). The future income tax (liabilities) assets relate to the (taxable) deductible temporary differences in the carrying values and tax bases as follows: September 30, December 31, 2007 2006 As at $ $ --------------------------------------------------------------------- Property, plant and equipment (165,315) (71,611) Asset retirement obligation 11,381 4,308 Long-term incentive plan 1,765 1,513 Non-capital losses 178 3,475 Intangible assets (1,217) (616) Other (3,354) (2,493) --------------------------------------------------------------------- Future income tax liabilities (156,562) (65,424) --------------------------------------------------------------------- --------------------------------------------------------------------- Property, plant and equipment (398) - Asset retirement obligation 65 - Non-capital losses 428 - Intangible assets 386 --------------------------------------------------------------------- Future income tax assets 481 - --------------------------------------------------------------------- --------------------------------------------------------------------- 9. Unitholders' capital The Declaration of Trust provides that an unlimited number of trust units may be authorized and issued. Each trust unit is transferable, and represents an equal undivided beneficial interest in any distribution from the Fund and in the net assets of the Fund in the event of termination or winding-up of the Fund. All trust units are of the same class with equal rights and privileges. The Declaration of Trust also provides for the issuance of an unlimited number of special trust units that will be used solely for providing voting rights to persons holding securities that are directly or indirectly exchangeable for units and that, by their terms, have voting rights in the Fund. The trust units are redeemable at the holder's option at an amount equal to the lesser of: (i) 90% of the weighted average price per unit during the period of the last 10 trading days during which the trust units were traded on the Toronto Stock Exchange; and (ii) an amount equal to (a) the closing market price of the units; (b) an amount equal to the average of the highest and lowest prices of units if there was trading on the date on which the units were tendered for redemption; or (c) the average of the last bid and ask prices if there was no trading on the date on which the units were tendered for redemption. Redemptions are subject to a maximum of $50 cash redemptions in any particular month. Redemptions in excess of this amount will be paid by way of a distribution in specie of assets of the Fund that may include Commercial Trust Series 1 notes. The Fund has a Distribution Reinvestment and Optional Unit Purchase Plan ("DRIP") that permits unitholders to reinvest cash distributions for additional units. This plan allows eligible participants an opportunity to reinvest distributions into trust units at a 3% discount to a weighted average market price, so long as units are issued from treasury under the DRIP. The Fund has the right to notify participants that units will be acquired in the market, in which case units will be purchased at the weighted average market price. Eligible unitholders can also make optional unit purchases under the optional unit purchase component of the plan at the weighted average market price. Trust units issued and unitholders' capital Number of Units $ --------------------------------------------------------------------- Balance, January 1, 2006 60,125,193 665,914 Units issued on conversion of convertible debentures 597,563 6,859 Units issued pursuant to DRIP 207,997 4,252 --------------------------------------------------------------------- Balance, December 31, 2006 60,930,753 677,025 Units issued on conversion of convertible debentures 95,489 1,096 Units issued pursuant to DRIP 142,426 2,436 --------------------------------------------------------------------- Balance, September 30, 2007 61,168,668 680,557 --------------------------------------------------------------------- --------------------------------------------------------------------- 10. Net earnings (loss) per unit Basic per unit calculations for the three and nine months ended September 30, 2007 and 2006 were based on the weighted average number of units outstanding for the related period. Convertible debentures were in the money for the three and nine months ended September 30, 2007 and 2006 and contributed to the increase in diluted weighted average number of units for these periods. Beginning in the second quarter of 2006, incentive awards have been excluded from the calculation of diluted weighted average number of units as units are delivered by acquiring them on the market, rather than issuing them from treasury. Three Months Ended Nine months ended September 30, September 30, (thousands) 2007 2006 2007 2006 --------------------------------------------------------------------- Weighted average number of units - basic 61,136 60,692 61,057 60,516 Additional units if debentures converted 1,875 2,125 1,909 2,253 --------------------------------------------------------------------- Weighted average number of units - diluted 63,011 62,817 62,966 62,769 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. Accumulated distributions to unitholders $ --------------------------------------------------------------------- Balance, January 1, 2006 131,383 Unitholders' distributions declared and paid 79,354 Unitholders' distributions declared 7,251 --------------------------------------------------------------------- Balance, December 31, 2006 217,988 Unitholders' distributions declared and paid 59,596 Unitholders' distributions declared 7,646 --------------------------------------------------------------------- Balance, September 30, 2007 285,230 --------------------------------------------------------------------- --------------------------------------------------------------------- Pursuant to the Fund Declaration of Trust dated April 3, 2003 and its subsequent amendments, the Fund makes monthly distributions to holders on record on the last day of each month. Payments are made on or about the 15th day of the following month. Distributions are paid from "Cash Flow of the Trust", a term that is defined in the Fund Declaration of Trust dated April 3, 2003. The Board of Directors of the Fund may, on or before each Distribution Record Date, declare payable all or any part of the Cash Flow of the Trust for the Distribution Period. The amount and level of distributions to be made for each Distribution Period is determined at the discretion of the Board of Directors of the Fund. In determining its distribution policy, the Board of Directors of the Fund considers several factors, including the Fund's current and future cash flow, capital requirements, debt repayments and other factors. 12. Compensation plans The Long Term Incentive Plan (the "LTIP" or the "Plan") compensates officers, directors, key employees and consultants by delivering units of the Fund or paying cash in lieu of units. Participants in the LTIP are granted rights ("unit awards") to receive units of the Fund on specified dates in the future. The Plan permits the directors of KEML to authorize the grant of unit awards from time to time. Units are acquired in the marketplace under the plan. The Plan consists of two types of unit awards, which are described below. Unit awards and the delivery of units under the Plan are accounted for in accordance with the intrinsic value method of accounting for stock-based compensation. The aggregate compensation cost recorded for the Plan was ($185) and $4,062 for the three and nine months ended September 30, 2007 ($1,474 and $4,266 for the three and nine months ended September 30, 2006). During the three months ended September 30, 2007, 389,541 units were purchased on the market at a cost of $7,237 and delivered to Plan participants under the Plan. (a) Performance Unit Awards The Performance Unit Awards will vest 100% on the third anniversary of the effective date of each award, July 1, 2005, July 1, 2006 and July 1, 2007. The number of units to be delivered will be determined by the financial performance of the Fund over the three-year period and is calculated by multiplying the number of unit awards by an adjustment ratio and a payout multiplier. The adjustment ratio adjusts the number of units to be delivered to reflect the per unit cash distributions paid by the Fund to its unitholders during the term that the unit award is outstanding. The payout multiplier is based upon the actual three-year average annual cash distributions per unit of the Fund. The table below describes the relationship between the three-year average annual cash distribution per unit and the payout multiplier. ------------------------------------------------------------------------- Three-year annual cash distributions per unit ------------------------------------------------------------------------- July 1, 2005 July 1, 2006 July 1, 2007 Payout Grant Grant Grant Multiplier ------------------------------------------------------------------------- Less than 1.32 Less than 1.42 Less than 1.44 Nil First range 1.32 - 1.39 1.42 - 1.51 1.44 - 1.51 50% - 99% Second range 1.40 - 1.55 1.52 - 1.71 1.52 - 1.67 100% - 199% Third range 1.56 and greater 1.72 and greater 1.68 or greater 200% ------------------------------------------------------------------------- As of September 30, 2007, 491,530 Performance Unit Awards (529,867 at December 31, 2006) were outstanding: 166,705 effective July 1, 2005, 147,100 effective July 1, 2006 and 177,725 effective July 1, 2007. The compensation cost recorded for these units for the three and nine months ended September 30, 2007 were ($371) and $3,288, using the applicable closing market price of a unit of the Fund ($422 and $2,685 for the three and nine months ended September 30, 2006). (b) Time Vested Unit Awards ("Restricted Unit Awards") Restricted Unit Awards will vest automatically, over a three-year period from the effective date of the award on July 1, 2005 and July 1, 2006 and July 1, 2007, regardless of the performance of the Fund. The number of units to be delivered will be modified by an adjustment ratio which reflects the per unit distributions paid by the Fund to its unitholders during the term that the unit award is outstanding. As of September 30, 2007, 90,895 Restricted Unit Awards (98,735 at December 31, 2006) were outstanding: 12,017 effective July 1, 2005, 25,753 effective July 1, 2006 and 53,125 effective July 1, 2007. The compensation cost recorded for these units for the three and nine months ended September 30, 2007 was $186 and $774, using the applicable closing market price of a unit of the Fund ($1,052 and $1,581 for the three and nine months ended September 30, 2006). 13. Financial instruments Financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, distributions payable, credit facilities, long-term debt, convertible debentures and derivatives held for trading (derivative financial instruments such as foreign exchange contracts, oil price contracts, natural gas price contracts, power price contracts and physical fixed price contracts). Derivatives held for trading Subsidiaries of the Fund enter into contracts to purchase and sell natural gas, NGLs and crude oil. These contracts are exposed to commodity price risk between the time contracted volumes are purchased and sold and currency exchange risk for those sales denominated in U.S. dollars. These risks are actively managed by using forward currency contracts and swaps, energy related forwards, swaps and options and by balancing physical and financial contracts in terms of volumes, timing of performance and delivery obligations. Management monitors the exposure to the above risks and regularly reviews its financial instrument activities and all outstanding positions. A significant amount of electricity is consumed by the operating entities at their facilities. Due to the fixed fee nature of some service contracts in place with customers, these entities are unable to flow the cost of electricity to customers in all situations. In order to mitigate this exposure to fluctuations in the price of electricity, price swap agreements may be used. Natural gas, NGL and crude oil contracts that require physical delivery at fixed prices and do not meet the Fund's expected purchase, sale or usage requirements are accounted for as derivative financial instruments. Derivative instruments held for trading are recorded on the consolidated statement of financial position at fair value. Changes in the fair value of these financial instruments are recognized in earnings in the period in which they arise. As at September 30, 2007, $2,136 of assets held for trading were included in accounts receivable and $9,807 of liabilities held for trading were included in accounts payable and accrued liabilities. Unrealized (losses) gains, representing the change in fair value of derivative contracts are recorded in Marketing operating revenue and NGL Infrastructure operating expense. The unrealized (loss) gain relating to derivative contracts were as follows: Three Months Ended Nine months ended September 30, September 30, Unrealized (loss) gain 2007 2006 2007 2006 --------------------------------------------------------------------- Marketing (5,726) 809 (10,376) 703 NGL Infrastructure (308) - (403) - --------------------------------------------------------------------- --------------------------------------------------------------------- The fair value of the derivatives are listed below and represent an estimate of the amount that the Fund would receive (pay) if these instruments were closed out at the end of the period. Weighted As at Carrying Fair Average Notional September 30, 2007 Amount $ Value $ Price $ Volume --------------------------------------------------------------------- Natural gas: Buyer of fixed price swaps (maturing by March 31, 2008) (262) (262) 7.85/GJ 183,000 GJs Electricity: Buyer of fixed price swaps (maturing by December 31, 2008) 760 760 55/MWh 27,480 MWhs NGLs: Seller of fixed price swaps (maturing by March 31, 2008) (8,098) (8,098) 69.90/Bbl 854,699 Bbls Buyer of fixed price swaps (maturing by March 31, 2008) 1,340 1,340 69.45/Bbl 138,000 Bbls Currency: Seller of forward contracts (maturing by October 15, 2007) 36 36 1.0326/USD US$1,000 Physical contracts: Seller of fixed price forward contracts (maturing by March 31, 2008) (1,447) (1,447) 49.67/Bbl 246,048 Bbls --------------------------------------------------------------------- --------------------------------------------------------------------- As at December 31, 2006 Natural gas: Buyer of fixed price swaps (maturing by March 31, 2007) - (130) 7.78/GJ 90,000 GJs Electricity: Buyer of fixed price swaps (maturing by December 31, 2008) - 1,031 55/MWh 43,860 MWhs NGLs: Seller of fixed price swaps (maturing by March 30, 2007) 211 211 72.25/Bbl 450,000 Bbls Currency: Seller of forward contracts (maturing by January 26, 2007) (287) (287) 1.1477/USD US$16,350 Physical contracts: Seller of fixed price forward contracts - - - - --------------------------------------------------------------------- --------------------------------------------------------------------- The estimated fair value of all derivatives held for trading is based on quoted market prices and, if not available, on estimates from third-party brokers or dealers. Fair value The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and distributions payable approximate their fair values because the instruments are near maturity or have no fixed repayment terms. The fair value of the credit facilities approximates fair value due to their floating rates of interest. Credit risk The majority of accounts receivable are due from entities in the oil and gas industry and are subject to normal industry credit risks. Concentration of credit risk is mitigated by having a broad domestic and international customer base. The Fund evaluates and monitors the financial strength of its customers in accordance with its credit policy. At September 30, 2007, the accounts receivable from the two largest customers amounted to 3% of accounts receivable (December 31, 2006 - less than 1%). Revenue from the two largest customers amounted to 19% and 16% of operating revenue for the three and nine months ended September 30, 2007 (14% and 12% for the three and nine months ended September 30, 2006). With respect to counterparties for derivative financial instruments, the credit risk is managed through dealing with recognized futures exchanges or investment grade financial institutions and by maintaining credit policies, which significantly minimize overall counter party credit risk. Foreign currency rate risk The Gathering and Processing and NGL Infrastructure segments, where all sales and virtually all purchases are denominated in Canadian dollars, are not subject to foreign currency rate risk. In the Marketing business, approximately US$44,123 and US$157,876 of sales were priced in U.S. dollars for the three and nine months ended September 30, 2007 (US$69,596 and US$234,458 for the three and nine months ended September 30, 2006). The Fund realized and recorded $510 and $1,222 of foreign currency loss in Marketing operating expenses for the three and nine months ended September 30, 2007 ($156 and ($381) for the three and nine months ended September 30, 2006). A further $241 and $1,526 of unrealized foreign currency gains were recorded in Marketing operating expenses for the three and nine months ended September 30, 2007 ($nil of unrealized foreign currency gains for the three and nine months ended September 30, 2006). Currency exchange risk is actively managed by using forward currency contracts and swaps. Management monitors the exposure to currency exchange risk and regularly reviews its financial instrument activities and all outstanding positions. Interest rate risk The majority of the Fund's interest rate risk is attributed to its fixed and floating rate debt, which is used to finance operations. The Fund's remaining financial instruments are not significantly exposed to interest rate risk. The floating rate debt creates exposure to interest rate cash flow risk, whereas the fixed rate debt creates exposure to interest rate price risk. At September 30, 2007, fixed rate borrowings comprised 88% of total debt outstanding (December 31, 2006 - 67%). The fair value of the senior fixed rate debt at September 30, 2007 was $295,257 (December 31, 2006 - $224,457). The fair value of the Fund's unsecured convertible debentures at September 30, 2007 was $34,266 (December 31, 2006 - $31,782). 14. Commitments and contingencies The Fund, through its operating entities, is involved in various contractual agreements with a major oil and gas producer. The agreements range from one to eleven years and comprise the processing of the producer's natural gas and the purchase of NGL production in the areas specified in the agreements. The purchase prices are based on current period market prices. There are operating lease commitments relating to railway tank cars, vehicles, computer hardware, office space, terminal space and natural gas transportation. The estimated annual minimum operating lease rental payments from these commitments are as follows: $ --------------------------------------------------------------------- 2007 2,268 2008 8,287 2009 7,369 2010 5,804 2011 4,721 Thereafter 5,864 --------------------------------------------------------------------- 34,313 --------------------------------------------------------------------- --------------------------------------------------------------------- There are legal actions for which the ultimate results cannot be ascertained at this time. Management does not expect the outcome of any of these proceedings to have a material effect on the financial position or results of operations. 15. Supplemental cash flow information Changes in non-cash working capital Three Months Ended Nine months ended September 30, September 30, 2007 2006 2007 2006 $ $ $ $ --------------------------------------------------------------------- Cash provided by (used in): Accounts receivable (30,163) (8,860) (47,371) 19,691 Inventory (36,568) (37,529) (29,569) (29,475) Other current assets 5,905 6,318 2,350 1,405 Accounts payable and accrued liabilities 19,158 1,148 43,582 (1,960) --------------------------------------------------------------------- Changes in non-cash working capital (41,668) (38,923) (31,008) (10,339) --------------------------------------------------------------------- Relating to: Operating activities (42,981) (35,893) (29,334) (7,039) Investing activities 1,313 (3,030) (1,674) (3,300) --------------------------------------------------------------------- Other cash flow information: Interest paid 5,637 6,206 14,377 14,421 Taxes paid - 1,123 1,992 3,644 16. Segmented information The Fund has three reportable segments: Marketing, Gathering and Processing and NGL Infrastructure. The Marketing business consists of marketing NGLs, sulphur and crude oil. Gathering and Processing includes natural gas gathering and processing. NGL Infrastructure includes NGL and crude oil processing, transportation and storage. The accounting policies of the segments are the same as that described in the summary of significant accounting policies. Inter- segment sales and expenses are recorded at current market prices. Gathering Three months and ended Process- NGL Infra- September 30, Marketing ing structure Corporate Total 2007 $ $ $ $ $ ------------------------------------------------------------------------- Revenue 276,957 51,440 16,495 - 344,892 Inter-segment revenue - (696) (6,451) - (7,147) ------------------------------------------------------------------------- External revenue 276,957 50,744 10,044 - 337,745 Operating expenses (272,865) (28,771) (5,761) - (307,397) Inter-segment expenses 7,147 - - - 7,147 ------------------------------------------------------------------------- External operating expenses (265,718) (28,771) (5,761) - (300,250) ------------------------------------------------------------------------- 11,239 21,973 4,283 - 37,495 General and administrative, interest and other - - - (7,260) (7,260) Depreciation and amortization (709) (7,296) (2,173) (274) (10,452) Accretion expense (3) (754) (81) - (838) Impairment expense - (367) - - (367) ------------------------------------------------------------------------- Earnings (loss) before tax and non-controlling interest 10,527 13,556 2,029 (7,534) 18,578 ------------------------------------------------------------------------- Income tax expense (270) - (2,089) (909) (3,268) ------------------------------------------------------------------------- Earnings (loss) before non-controlling interest 10,257 13,556 (60) (8,443) 15,310 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Identifiable assets 220,334 818,719 236,979 5,830 1,281,862 ------------------------------------------------------------------------- Capital expenditures 12 7,312 785 137 8,246 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gathering Three months and ended Process- NGL Infra- September 30, Marketing ing structure Corporate Total 2006 $ $ $ $ $ ------------------------------------------------------------------------- Revenue 279,492 45,014 18,570 - 343,076 Inter-segment revenue - (724) (7,692) - (8,416) ------------------------------------------------------------------------- External revenue 279,492 44,290 10,878 - 334,660 Operating expenses (276,335) (25,543) (6,840) - (308,718) Inter-segment expenses 8,416 - - - 8,416 ------------------------------------------------------------------------- External operating expenses (267,919) (25,543) (6,840) - (300,302) ------------------------------------------------------------------------- 11,573 18,747 4,038 - 34,358 General and administrative, interest and other - - - (9,024) (9,024) Depreciation and amortization (1,070) (7,211) (1,861) (273) (10,415) Accretion expense - (411) (71) - (482) Impairment expense - - - - - ------------------------------------------------------------------------- Earnings (loss) before tax and non-controlling interest 10,503 11,125 2,106 (9,297) 14,437 ------------------------------------------------------------------------- Income tax (expense) recovery (84) - (2,546) 234 (2,396) ------------------------------------------------------------------------- Earnings (loss) before non-controlling interest 10,419 11,125 (440) (9,063) 12,041 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Identifiable assets 185,983 819,449 233,074 22,613 1,261,119 ------------------------------------------------------------------------- Capital expenditures 4 4,693 8,015 381 13,093 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gathering Nine months and ended Process- NGL Infra- September 30, Marketing ing structure Corporate Total 2007 $ $ $ $ $ ------------------------------------------------------------------------- Revenue 876,625 139,222 51,834 - 1,067,681 Inter-segment revenue - (2,252) (22,573) - (24,825) ------------------------------------------------------------------------- External revenue 876,625 136,970 29,261 - 1,042,856 Operating expenses (844,410) (79,710) (17,617) - (941,737) Inter-segment expenses 24,825 - - - 24,825 ------------------------------------------------------------------------- External operating expenses (819,585) (79,710) (17,617) - (916,912) ------------------------------------------------------------------------- 57,040 57,260 11,644 - 125,944 General and administrative, interest and other - - - (29,937) (29,937) Depreciation and amortization (2,482) (21,801) (6,439) (739) (31,461) Accretion expense (8) (1,840) (248) - (2,096) Impairment expense - (367) - - (367) ------------------------------------------------------------------------- Earnings (loss) before tax and non-controlling interest 54,550 33,252 4,957 (30,676) 62,083 ------------------------------------------------------------------------- Income tax (expense) recovery 623 - (6,157) (81,791) (87,325) ------------------------------------------------------------------------- Earnings (loss) before non-controlling interest 55,173 33,252 (1,200) (112,467) (25,242) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Identifiable assets 220,334 818,719 236,979 5,830 1,281,862 ------------------------------------------------------------------------- Capital expenditures 550 13,676 5,174 616 20,016 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gathering Nine months and ended Process- NGL Infra- September 30, Marketing ing structure Corporate Total 2006 $ $ $ $ $ ------------------------------------------------------------------------- Revenue 875,574 125,661 49,330 - 1,050,565 Inter-segment revenue - (2,546) (20,297) - (22,843) ------------------------------------------------------------------------- External revenue 875,574 123,115 29,033 - 1,027,722 Operating expenses (850,329) (74,246) (17,857) - (942,432) Inter-segment expenses 22,843 - - - 22,843 ------------------------------------------------------------------------- External operating expenses (827,486) (74,246) (17,857) - (919,589) ------------------------------------------------------------------------- 48,088 48,869 11,176 - 108,133 General and administrative, interest and other - - - (28,442) (28,442) Depreciation and amortization (2,223) (20,777) (5,592) (838) (29,430) Accretion expense - (1,236) (212) - (1,448) Impairment expense - (373) - - (373) ------------------------------------------------------------------------- Earnings (loss) before tax and non-controlling interest 45,865 26,483 5,372 (29,280) 48,440 ------------------------------------------------------------------------- Income tax recovery (expense) (84) - (1,160) 6,744 5,500 ------------------------------------------------------------------------- Earnings (loss) before non-controlling interest 45,781 26,483 4,212 (22,536) 53,940 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Identifiable assets 185,983 819,449 233,074 22,613 1,261,119 ------------------------------------------------------------------------- Capital expenditures 12,036 39,492 13,030 1,172 65,730 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Months Ended Nine months ended September 30, September 30, 2007 2006 2007 2006 $ $ $ $ --------------------------------------------------------------------- Marketing revenue derived from export sales to the U.S. 13,953 12,699 46,946 53,569 Property, plant and equipment located in the U.S. 12,090 11,912 12,090 11,912 17. Non-controlling interest In the first quarter of 2007, the Fund purchased an additional ownership interest in Rimbey Pipe Line Co. Ltd. for a purchase price of $1,513. In the second quarter of 2007, Rimbey Pipe Line Co. Ltd. was converted to a limited partnership (RPLP) and the Fund acquired the remaining interest in RPLP for a purchase price of $5,203 bringing the Fund's ownership in RPLP to 100%. The difference between the fair value of the transactions and the carrying value of RPLP's net assets resulted in a difference of $3,666, which was applied to property, plant and equipment. A future tax liability and corresponding increase to Goodwill was recorded in the amount of $520. As a result, the non-controlling interest has been removed from the Consolidated Statement of Financial Position. Corporate Information Board of Directors Officers E. Peter Lougheed(1)(3) Jim V. Bertram Counsel President and Chief Executive Officer Bennett Jones LLP Calgary, Alberta David G. Smith Executive Vice President, Jim V. Bertram(4) Chief Financial Officer and President and CEO Corporate Secretary Keyera Energy Management Ltd. Calgary, Alberta Marzio Isotti Vice President, Foothills Region Robert B. Catell Chairman and CEO Steven B. Kroeker KeySpan Corporation Vice President, Corporate Development New York, New York Bradley W. Lock Michael B.C. Davies(2) Vice President, North Central Region Principal Davies & Co. David A. Sentes Banff, Alberta Vice President, Comptroller Nancy M. Laird(3)(4) Corporate Director Stock Exchange Listing Calgary, Alberta The Toronto Stock Exchange H. Neil Nichols(2)(3) Trading Symbols KEY.UN; KEY.DB Management Consultant Mississauga, Ontario Unit Trading Summary Q3 2007 --------------------------------------- William R. Stedman(3)(4) TSX:KEY.UN - Cdn $ Chairman and CEO --------------------------------------- ENTx Capital Corporation High $19.49 Calgary, Alberta Low $17.10 Close September 28, 2007 $18.17 Wesley R. Twiss(2) Volume 6,627,787 Corporate Director Average Daily Volume 106,899 Calgary, Alberta Auditors (1) Chairman of the Board Deloitte & Touche LLP (2) Member of the Audit Chartered Accountants Committee Calgary, Canada (3) Member of the Compensation and Governance Committee Investor Relations (4) Member of the Health, Contact: Safety and Environment John Cobb or Bradley White Committee Toll Free: 1-888-699-4853 Direct: 403-205-7670 Email: ir@keyera.com Head Office Keyera Facilities Income Fund Suite 600, Sun Life Plaza West Tower 144 - 4th Avenue S.W. Calgary, Alberta T2P 3N4 Main phone: 403-205-8300 Website: www.keyera.com %SEDAR: 00019203E

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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