2009 FINANCIAL REPORT. Customer focused, Results driven

Transcription

1 2009 FINANCIAL REPORT Customer focused, Results driven

2 KEYERA 2009 FINANCIAL REPORT Corporate Profile As one of the largest midstream operators in Canada, Keyera provides key services and products to oil and gas producers in western Canada and markets related natural gas liquids (NGLs) throughout North America. Our business consists of two strategically located and integrated business units: Gathering and Processing, and the Liquids Business Unit. Keyera trades on The Toronto Stock Exchange under the symbols KEY.UN, KEY.DB and KEY.DB.A. FINANCIAL HIGHLIGHTS Revenues ($ millions) 1, , , , ,187.6 Net earnings ($ millions) Per unit (basic) ($) Capital expenditures ($ millions) Cash flow from operating activities ($ millions) Distributable cash flow 1 ($ millions) Per unit ($) Distributions to unitholders ($ millions) Per unit ($) REVENUES ($ millions) NET EARNINGS ($ millions) CASH FLOW FROM OPERATING ACTIVITIES ($ millions) 2009 CONTRIBUTION 1 Gathering & Processing 47% NGL Infrastructure 22% NGL Marketing 31% % of 2009 Contribution: $1,188 $1,369 $1,479 $2,175 $1,545 $61 $68 $14 $165 $150 $70 $111 $120 $91 $313 Fee-For-Service 69% Margin 31% 1 See Note Regarding Non-GAAP Financial Measures on page 31. Distributable cash flow and contribution are not standard measures under Canadian generally accepted accounting principles (GAAP) and therefore may not be comparable to similar measures reported by other entities. The most comparable GAAP measure to distributable cash flow is cash flow from operating activities. A reconciliation between distributable cash flow and cash flow from operating activities can be found on page 20. TABLE OF CONTENTS 1 Management s Discussion and Analysis 3 Consolidated Financial Results 4 Segmented Results of Operations 11 Non-Operating Expenses 14 Summary Fourth Quarter Results 15 Critical Accounting Estimates 17 Liquidity and Capital Resources 25 Environmental Regulation and Climate Change 26 Selected Financial Information 27 Summary of Quarterly Results 28 Changes in Accounting Standards 30 Control Environment 30 Units and Convertible Debentures 31 Corporate Conversion 31 Non-GAAP Financial Measures 32 Forward Looking Statements 34 Management s Report 35 Auditors Report 36 Consolidated Financial Statements 39 Notes to Consolidated Financial Statements 68 Fund Information

3 MANAGEMENT S DISCUSSION AND ANALYSIS Management s Discussion and Analysis The following management s discussion and analysis ( MD&A ) was prepared as of February 18, 2010 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 ). The MD&A should be read in conjunction with the accompanying audited consolidated financial statements of the Fund for the years ended December 31, 2009 and 2008 and the notes thereto. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ) and are stated in Canadian dollars. Additional information related to the Fund, including the Fund s Annual Information Form, is filed on SEDAR at The MD&A contains non-gaap measures and forward-looking statements and readers are cautioned that the MD&A should be read in conjunction with the Fund s disclosure under Non-GAAP Financial Measures and Forward Looking Statements included at the end of this MD&A. KEYERA S BUSINESS Keyera operates one of the largest natural gas midstream businesses in Canada. Midstream entities operate in the oil and gas sector between the upstream sector, which includes oil and gas exploration and production businesses, and the downstream sector, which includes the refining, distribution and retail marketing of finished products. Keyera is organized into two integrated businesses: 1. Gathering and Processing Keyera owns and operates raw gas gathering pipelines and processing plants, which collect and process raw natural gas, remove waste products and separate the economic components before the sales gas is injected into long-distance pipeline systems for transportation to end-use markets. 2. Liquids Business Unit, consisting of the following operating segments: NGL Infrastructure Keyera owns and operates a network of facilities for the processing, storage and transportation of the by-products of natural gas processing, including natural gas liquids ( NGLs ) such as ethane, propane, butane and condensate. Marketing Keyera markets a range of products associated with its two infrastructure business lines, primarily NGLs, and also engages in crude oil midstream activities. The core commodities that Keyera focuses its marketing activities on are propane, butane, condensate and crude oil. OVERVIEW Keyera posted outstanding financial results in 2009 driven by the strong operating results from all three of its business segments. Net earnings were $150.3 million or $2.36 per unit. Cash flow metrics reached an historical high. Cash flow from operating activities was $313.2 million and distributable cash flow was $260.0 million in As 2009 commenced, the economy was fully entrenched in a global recession where access to capital was limited and there was extreme volatility in the financial markets. Due to the recession, several oil sands projects were put on hold and natural gas drilling activity hit the lowest levels since Financial Report KEYERA 1

4 Natural gas markets are primarily affected by the economy and the weather. Colder than normal temperatures in the summer of 2009 contributed to high storage levels and low prices. By September, natural gas storage levels were at unusually high levels resulting in prices hitting a seven year low of $1.96 per Mcf on September 4, This combination of high storage levels and low prices kept drilling activity and new well licensing weak. However, with extreme cold weather throughout North America in mid-december and into early January, demand for natural gas increased and significantly reduced storage levels. Recent reports suggest that storage levels may exit winter near the five-year average. As a result, the AECO spot gas price has increased significantly since September to average $5.46 per Mcf during the week ending February 12, The effect of reduced drilling activity in 2009 may result in lower throughput at Keyera s gathering and processing facilities in However, assuming natural gas prices remain stable and drilling activity resumes, management expects a decline in volumes would be short-lived. Keyera is encouraged by the recent drilling activity that has resumed in the Caribou area. This prompted Keyera to resume activities to complete the Caribou plant expansion. Assuming construction proceeds as planned, the expansion is expected to be operational by mid In addition, producers in the Rimbey area have been successful utilizing horizontal drilling and multi-stage fracturing techniques to target tight gas in the area. Several liquids-rich wells were tied into the Rimbey facility in December 2009 and several more wells are expected to be tied-in in Producers have also been actively drilling in the Garrington area, which is located near Keyera s Strachan gas plant, as well as along the corridor between the Strachan and West Pembina gas plants. Demand for condensate through much of 2009 was weak due to the slow down in oil sands activity. In late 2009 and early 2010, several major producers announced the recommencement of projects that were previously delayed. As a result, the demand for condensate is expected to increase in Alberta as these projects are completed and the production of bitumen increases. Condensate is often used as a diluent that is blended with bitumen to enable it to flow via pipeline to upgrading facilities. During the fourth quarter of 2009, Keyera announced that it has entered into a long-term agreement with Imperial Oil Resources Ventures Limited ( Imperial ) to provide diluent transportation, storage and rail offload services in the Edmonton/Fort Saskatchewan area for Imperial s Kearl oil sands project. This agreement is expected to provide Keyera with long-term, fee-for-service revenues, beginning in late 2012, as well as the potential to generate significant incremental new business opportunities. This assumes that construction of the new Keyera operated facilities is completed on time and the Kearl project timing and bitumen production occurs as planned. 2 KEYERA 2009 Financial Report

5 MANAGEMENT S DISCUSSION AND ANALYSIS Consolidated Financial Results The following table highlights some of the key consolidated financial results for the years ended December 31, 2009 and December 31, 2008: (Thousands of Canadian dollars, except per unit data) Net earnings 150, ,485 Net earnings per unit (basic) Total contribution 1 266, ,919 Cash flow from operating activities 313,184 91,302 Distributable cash flow 2 259, ,702 Distributable cash flow per unit 2 (basic) Distributions declared 3 144, ,501 Distributions declared per unit Total contribution refers to total operating revenues less total operating expenses and general and administrative expenses associated with the Marketing segment. See note 18, Segmented Information, of the accompanying audited consolidated financial statements. Distributable cash flow is not a standard measure under GAAP and, therefore, may not be comparable to similar measures reported by other entities. See the section titled Unitholder Distributions: Distributable Cash Flow for a reconciliation of distributable cash flow to its most closely related GAAP measure. Distributions declared for 2009 include the payment of a special distribution in the fourth quarter totaling $29.2 million ($0.45 per unit). Of this amount, $14.6 million ($0.225 per unit) was paid by issuing units of the Fund and the remainder was paid in cash. For the year ended December 31, 2009, net earnings were $15.2 million lower than the same period in Total contribution was $4.9 million higher in 2009, as a result of the solid performance by all operating segments. The effect of higher contribution was more than offset by higher interest expense, a higher long-term incentive plan charge and a $4.6 million non-cash loss on disposition of assets. The higher contribution in 2009 was largely driven by the following factors: strong demand for fractionation and storage services throughout 2009; incremental Gathering and Processing revenues resulting from acquisitions completed in late 2008 as well as the start-up of the ethane extraction facility at the Rimbey gas plant; and strong margins for propane during the winter heating season (first and fourth quarters of 2009) as well as steady margins for butane throughout the year. For the year ended December 31, 2009, cash flow from operating activities of $313.2 million and distributable cash flow of $260.0 million were at historically high levels. Cash flow metrics in 2009 were exceptional primarily due to the sale of inventory during the first quarter and the related settlement of risk management contracts. Solid operating results from all business segments also contributed to strong cash flow in Distributable cash flow in 2008 was unusually low due to the inclusion of a $77.8 million write-down of inventory. Refer to the section titled Unitholder Distributions: Distributable Cash Flow for more details on how this non-gaap measure is calculated Financial Report KEYERA 3

6 Segmented Results of Operations Keyera operates one of the largest natural gas midstream businesses in Canada and is organized into two integrated businesses: Gathering and Processing and Liquids Business Unit. The Liquids Business Unit consists of the NGL Infrastructure and Marketing operating segments. A complete description of Keyera s businesses by segment can be found in the Fund s Annual Information Form, which is available at The discussion of the results of operations for each of the operating segments focuses on contribution. Contribution refers to operating revenues less operating expenses and does not include the elimination of inter-segment transactions. Management believes contribution provides an accurate portrayal of operating profitability by segment. Keyera s Gathering and Processing and NGL Infrastructure segments charge Keyera s Marketing segment for the use of facilities at market rates. These segment measures of profitability for the years ended December 31, 2009 and 2008 are reported in note 18, Segmented Information, of the accompanying audited consolidated financial statements. GATHERING AND PROCESSING Keyera has interests in 15 gas plants in western Canada, of which it operates 14, and is one of the largest gas processors in Alberta. The Gathering and Processing segment includes raw gas gathering systems and processing plants strategically located in the natural gas production areas on the western side of the Western Canada Sedimentary Basin. Several of the gas plants are interconnected by raw gas gathering pipelines. These pipelines allow raw gas to be directed to the gas plant best suited to process a particular type of gas. Keyera s facilities and gathering systems collectively constitute a network that is well positioned to serve drilling and production activity. Contribution for the Gathering and Processing segment for the years ended December 31, 2009 and 2008 were as follows: Contribution and Throughput Information (Thousands of Canadian dollars) Revenue including inter-segment transactions 251, ,398 Operating expenses (127,204) (116,777) Contribution 124, ,621 Gross processing throughput (MMcf/d) Net processing throughput 1 (MMcf/d) Net processing throughput refers to Keyera s share of raw gas processed at its processing facilities. Despite difficult industry and economic conditions in 2009, Keyera s contribution from the Gathering and Processing segment reached an historical high of $124.4 million. Contribution increased by $14.8 million compared to the prior year largely due to the following factors: The acquisitions of the Nevis gas plant and additional ownership interests in the Brazeau River and Rimbey gas plants completed in December These acquisitions also contributed to the increase in throughput. Additional contribution from the ethane extraction facility at the Rimbey gas plant that commenced production in August Higher operating revenue at the Rimbey gas plant in 2009 resulting from the recovery of operating costs from prior years. The operating fees at the Rimbey gas plant are calculated based on a fouryear average of operating expenses. 4 KEYERA 2009 Financial Report

7 MANAGEMENT S DISCUSSION AND ANALYSIS Higher contribution at the Caribou gas plant relative to 2008 when operational problems resulted in unscheduled outages at the plant and maintenance activity resulted in higher than expected operating costs. Operating fees at the Caribou gas plant are fixed-fee in nature. Accordingly, higher operating costs have a direct effect on contribution at this plant. The higher contribution in 2009 was partly offset by the following: A one-time downward adjustment to revenue was recorded in the first quarter of 2009 at the Brazeau River gas plant for $1.9 million. This adjustment related to a prior period equalization amount. Equalization adjustments are required to ensure revenue collected reflects the actual operating costs for the facility. Lower operating revenue at the Bigoray gas plant and oil battery primarily resulting from lower throughput in the first quarter of 2009 relative to the same period last year. Revenues were $25.2 million higher for the year ended December 31, 2009 compared to The higher revenues were largely due to the same factors that resulted in the increase in contribution. Operating costs for 2009 were $10.4 million higher than the prior year primarily due to the incremental costs associated with the 2008 acquisitions and additional expenses associated with the Rimbey ethane facility. These higher expenses were partly offset by lower electricity costs as well as Keyera s ongoing efforts to reduce operating and major maintenance expenses. Although lower costs do not have a significant impact on contribution, they do provide improved economics to Keyera s customers. Gross processing throughput was 907 million cubic feet per day in 2009, 4% higher than the prior year. This increase was a result of the Nevis acquisition completed in late 2008 partly offset by a decline in throughput at certain plants in The largest decline in volumes in 2009 occurred at the Rimbey gas plant. However, the effect of lower throughput at Rimbey was more than offset by the increased ownership interest in the plant, cash flow generated from the extraction and sale of ethane beginning in August and higher fees to recover prior years operating costs. Throughput at the Rimbey gas plant in the fourth quarter of 2009 remained relatively flat compared to the prior quarter. Keyera is encouraged by the recent resumption of drilling activity around the Rimbey area. A number of producers have been successful utilizing horizontal drilling and multi-stage fracturing techniques to target tight gas in the area. Several wells were tied into the Rimbey facility in December Throughput at the Strachan plant remained strong in 2009 largely due to the successful drilling by several producers in the Garrington area. The ethane extraction facility at the Rimbey gas plant commenced production in August Since then, the plant has been producing between 4,000 and 4,200 barrels per day of ethane that is sold to a petrochemical producer in Alberta under a long-term contract. The facility has capacity to produce approximately 5,000 barrels per day of ethane. Production was lower than capacity primarily due to lower raw gas throughput at the Rimbey gas plant. During the fourth quarter of 2009, Keyera invested approximately $27 million to acquire an additional 33% ownership interest in the West Pembina gas plant, increasing Keyera s ownership to approximately 69%. In addition to the plant interests, Keyera also acquired other ancillary assets associated with the West Pembina plant, including a sour gas gathering pipeline, as well as sulphur and water handling and disposal facilities. As part of the purchase agreement, Keyera also entered into long-term processing agreements at the facility with the two vendors Financial Report KEYERA 5

8 In late 2009, activity resumed to complete the expansion of the Caribou gas plant. Keyera has entered into an agreement with a producer in the area committed to deliver gas to the new plant when it is operational. Keyera continues to be in discussions with several other producers who are actively drilling in the Caribou area to attract volumes which will further support the expansion. Assuming construction proceeds as planned, the 40 million cubic foot per day expansion is expected to be completed and commissioned in mid The new facility will increase total capacity of the Caribou gas plant to 105 million cubic feet per day. NGL INFRASTRUCTURE The NGL Infrastructure segment provides gathering, fractionation, storage, transportation and terminalling services for NGLs and crude oil. These services are provided to customers through an extensive network of facilities, including the following assets: underground NGL storage caverns; NGL fractionation facilities; NGL and crude oil pipelines; and pipeline, rail and truck terminals. Most of these integrated assets are located in, or connected to, the Edmonton/Fort Saskatchewan area in Alberta, one of four key energy hubs in North America. A significant portion of the NGL production from Alberta raw gas processing plants is delivered into the Edmonton/Fort Saskatchewan area via several NGL gathering systems. The underground storage caverns at Fort Saskatchewan allow products like propane and butane to be stored in the summer months in order to meet the winter season demand, as well as provide the ability to inject or withdraw condensate to meet diluent supply/demand swings in the oil sands sector. These assets also support Keyera s Marketing segment, providing the ability to source, transport, process, store and deliver products across North America. A portion of the revenues earned by this segment relate to services provided to Keyera s Marketing business. Contribution for the NGL Infrastructure segment for the years ended December 31, 2009 and 2008 were as follows: Contribution (Thousands of Canadian dollars) Revenue including inter-segment transactions 90,310 80,450 Operating expenses before unrealized loss (30,555) (29,931) Unrealized loss on electricity and natural gas contracts (851) (582) Total operating expenses (31,406) (30,513) Contribution 58,904 49,937 Contribution increased by $9.0 million for the year ended December 31, 2009 compared to 2008 largely due to the following: Higher revenues resulting from the continued demand for fractionation and storage services. The strong demand for storage services in particular is expected to continue into Incremental revenues from the Bonnie Glen pipeline that was acquired in late August KEYERA 2009 Financial Report

9 MANAGEMENT S DISCUSSION AND ANALYSIS These factors were partly offset by approximately $1.9 million of costs relating to the start-up of the Alberta Diluent Terminal ( ADT ). Revenues for 2009 were $9.9 million higher than the prior year. This increase was due to the same factors discussed for the increase in contribution in For the year ended December 31, 2009, the Bonnie Glen pipeline system has provided incremental contribution of approximately $4.0 million to the NGL Infrastructure segment. However, volumes may be lower in 2010 as a significant customer has recently communicated plans to divert volumes away from the Bonnie Glen pipeline in early Keyera will pursue attracting other customers to this pipeline system to mitigate the negative impact. Washing of the new storage cavern at Keyera s Fort Saskatchewan facility continued during Assuming progress proceeds as expected, the cavern is expected to be completed by mid 2010 and available for commissioning. ADT was commissioned in February 2009 and continues to receive rail shipments of condensate. Condensate deliveries have been lower in 2009 than originally anticipated primarily due to the slowdown in oil sands development activity. However, as previously delayed oil sands projects commence, the demand for condensate in Alberta is expected to grow. In the fourth quarter of 2009, Keyera announced a long-term agreement with Imperial Oil Resources Ventures Limited to provide diluent transportation, storage and rail offload services in the Edmonton/ Fort Saskatchewan area for Imperial s Kearl oil sands project. Diluent is a light hydrocarbon, most often condensate, which is blended with bitumen to enable it to flow via pipeline to upgrading facilities. This agreement is expected to provide Keyera with long-term, fee-for-service revenues, beginning in late 2012, as well as the potential to generate incremental new business opportunities. Under the terms of the agreement, Keyera will transport diluent by pipeline from supply sources in the Edmonton area to a diluent delivery pipeline north of Fort Saskatchewan for delivery to the Kearl site located near Fort McMurray. Keyera will also provide diluent storage and rail offload services at the ADT and the Edmonton Terminal, both owned 100% by Keyera, as well as at the Keyera-operated Fort Saskatchewan Fractionation and Storage Facility. To provide these services to Imperial, Keyera will construct additional pipeline connections and pumping and metering facilities to extend and enhance its existing infrastructure. These facilities are currently expected to cost approximately $58 million and will have capacity beyond that required to meet the contractual commitments to Imperial. Keyera intends to fund this expenditure from cash flow from operations and its existing credit facility. Keyera anticipates that the expansion of its infrastructure in the Edmonton/Fort Saskatchewan area will provide it with opportunities to pursue arrangements with other third parties to utilize the excess capacity and to generate additional operating cash flow. The new pipeline and connections that Keyera will be constructing pursuant to this agreement with Imperial are expected to enhance access to diluent supply and diluent markets. This will increase Keyera s ability to meet demand for diluent transportation, storage and terminalling services in the region Financial Report KEYERA 7

10 MARKETING The Marketing segment is involved in the marketing of NGLs such as propane, butane and condensate to customers in Canada and the United States, as well as various crude oil midstream activities. Keyera has a long-term supply arrangement with a major producer that provides a base supply of NGLs for its Marketing business. Additional volumes of NGLs are purchased under short-term supply contracts, most of which have one-year terms. Keyera negotiates sales contracts with customers in Canada and the U.S. based on the volumes it has contracted to purchase. In the case of butane and condensate, the majority of the product is sold to customers in Alberta shortly after it is purchased. Propane markets, on the other hand, are more seasonal and geographically diverse. Propane is sold in markets throughout western North America, often where the only option for delivery is via rail car or tank truck. Keyera is well positioned to serve these markets because of its extensive infrastructure. Further, because demand for propane tends to be significantly higher in the winter, Keyera can utilize its NGL storage facilities to build an inventory of propane during the summer months when prices are typically soft in order to fulfill winter term sales commitments. Overall, the integration of Keyera s business lines means that its Marketing segment can draw on the resources available through its two facilities segments, including access to key fractionation, storage and transportation infrastructure and logistics expertise. Keyera manages its supply and sales portfolio by monitoring its inventory position and purchase and sale commitments. Nevertheless, the Marketing business is exposed to commodity price fluctuations arising between the time contracted volumes are purchased and the time they are sold and between different geographic locations. These risks are actively managed by generally purchasing and selling product at prices based on similar indices or benchmarks, and through physical and financial contracts which include energy related forward contracts, price swaps and forward currency contracts. A more detailed description of the risks associated with the Marketing segment is available in the Fund s Annual Information Form, which is available at Contribution for the Marketing segment for the years ended December 31, 2009 and 2008 were as follows: Contribution and Sales Volume Information (Thousands of Canadian dollars) Revenue 1,253,026 1,909,356 Operating expenses including inter-segment transactions (1,165,453) (1,803,397) General and administrative expenses (4,103) (3,598) Contribution 83, ,361 Sales volumes (bbl/d) 65,800 60,400 8 KEYERA 2009 Financial Report

11 MANAGEMENT S DISCUSSION AND ANALYSIS Composition of Marketing Revenue (Thousands of Canadian dollars) Physical sales 1,253,393 1,792,876 Realized cash gain on financial contracts 1 51,116 49,347 Unrealized (loss) gain due to reversal of financial contracts existing at end of prior year (49,136) 9,383 Unrealized gain due to fair value of financial contracts existing at end of current year 6,977 49,136 Unrealized (loss) gain fixed price physical contracts 2 (9,323) 8,614 Total unrealized (loss) gain on risk management contracts (51,482) 67,133 Total (loss) gain on risk management contracts (366) 116,480 Total marketing revenue 1,253,026 1,909, Realized cash gains and losses represent actual cash settlements or receipts under the respective contracts. Unrealized gains and losses represent the change in fair value of fixed price physical contracts that meet the GAAP definition of a derivative instrument. NGL product sales averaged 65,800 barrels per day in 2009 compared to 60,400 barrels per day in NGL volumes were higher primarily due to increased contracted term sales arrangements. Despite the increase in sales volumes, total marketing revenue was $656.3 million lower for the year ended December 31, 2009 compared to Revenues were lower in 2009 primarily due to significantly lower commodity prices in the first half of 2009 relative to the same period in the prior year. In addition, included in revenue was an unrealized loss on risk management contracts of $51.5 million in 2009 compared to an unrealized gain of $67.1 million in the prior year. Compared to 2008, contribution was $18.9 million lower in 2009 largely due to the change in fair value of fixed price physical contracts between periods. An unrealized gain of $8.6 million was recorded in 2008 compared to an unrealized loss of $9.3 million in Fixed price physical contracts are used as a risk management tool to lock in margins at a point in the future. Accounting standards require that these contracts be marked to market at the end of each period. However, the resulting unrealized gains or losses only represent the opportunity gained or lost relating to that contract and will never be realized in cash. As these contracts are settled, the revenue is recorded in physical sales and the unrealized gain or loss is reversed. Excluding the effect of non-cash gains and losses from fixed price physical contracts, contribution was relatively flat year over year. As a result of the unprecedented volatility in commodity prices in 2008, large realized and unrealized gains relating to risk management contracts were recorded in that year. Keyera s risk management program was successful in protecting the value of its inventory and restoring margins in Included in operating expenses in 2008 was an inventory write down of $77.8 million. Strong contribution in 2009 of $83.5 million was primarily driven by the following factors: High demand for propane in the first and fourth quarters of 2009 resulting from cold winter weather. Steady volumes and margins throughout 2009 resulting from contracted term sales of butane Financial Report KEYERA 9

12 In 2009, market fundamentals contributed to strong results for Keyera s propane business. Cold weather early in the year resulted in high demand and strong contribution. Growing inventories and lower seasonal demand during the middle of the year resulted in softer prices while Keyera built inventory to meet the seasonal winter demand. A longer than usual crop drying season in the U.S. was followed by cold winter weather generating strong prices and margins in the fourth quarter. Propane inventory levels that had exceeded the five year average at the beginning of the fourth quarter, closed out the year below the average as a result of this high demand. With anticipated seasonal demand, prices and margins are expected to remain strong during most of the first quarter of Keyera continued to develop its terminal network in key U.S. markets in the third quarter of 2009 through the acquisition of two propane terminals located in Hermiston, Oregon and Shelton, Washington. The addition of these terminals strengthens Keyera s existing infrastructure and enhances its ability to deliver propane to these regional U.S. markets. Keyera now owns five terminals in the U.S. Keyera utilizes a term sale strategy in its butane markets, effectively contracting most of its butane supply to term buyers. This strategy essentially matches monthly sales volumes to purchase volumes in order to minimize inventory levels and mitigate commodity price risk for this product. In 2009, this strategy generated strong, stable margins throughout the year. The decline in crude prices in late 2008 and early 2009 led to a slowdown in heavy oil and bitumen project development activity. This resulted in lower condensate volumes and margins during 2009 as diluent demand softened. In late 2009 and early 2010, several oil sands development projects have been announced, and these are expected to contribute to continued growth in condensate demand. Risk Management Keyera typically uses crude oil financial contracts as a hedging strategy to protect its NGL inventory from fluctuations in commodity prices. However, there is basis risk between the prices of crude oil and the respective NGL products. These contracts are generally put in place as inventory builds during the second and third quarters and are settled over the winter period when products are withdrawn from inventory and sold. In general, as commodity prices fall, the increase in the fair value of the financial contracts is intended to mitigate the decline in the value of inventory. For the year ended December 31, 2009, a loss on risk management contracts of $0.4 million was recorded compared to a gain of $116.5 million in The fair value of energy related and foreign currency financial contracts existing at December 31, 2008 resulted in an unrealized gain of $49.1 million. During the first quarter of 2009, substantially all of these financial contracts were settled as the inventory existing at December 31, 2008 was sold. As a result, a realized cash gain of $59.3 million was recorded in the first quarter of 2009 followed by a loss of $8.2 million in the remainder of As a result of the significant decline in crude oil prices in the last half of 2008, large unrealized and realized gains were recorded in these periods. The fair value of financial contracts existing at December 31, 2009 resulted in an unrealized gain of $7.0 million. Refer to note 14(c), Financial Instruments and Risk Management, of the accompanying audited consolidated financial statements for a summary of the financial contracts existing at December 31, 2009 and the sensitivity to earnings resulting from changes in commodity prices. 10 KEYERA 2009 Financial Report

13 MANAGEMENT S DISCUSSION AND ANALYSIS As required by GAAP, certain fixed price commodity contracts also must be accounted for as derivative instruments. Accordingly, at the end of each period the change in the fair value of these physical contracts is recorded in marketing revenue. The unrealized loss of $9.3 million recorded for the year ended December 31, 2009 represents the change in fair value of physical fixed price contracts since the end of The classification of Marketing risk management contracts on Keyera s balance sheet are as follows: Classification of Marketing Risk Management Contracts As at December 31, (Thousands of Canadian dollars) Asset held for trading included in accounts receivable 20,099 93,309 Liability held for trading included in accounts payable (13,123) (44,173) Fair value of financial contracts 1 6,976 49,136 Fixed price physical contracts included in accounts receivable 276 8,766 Fixed price physical contracts included in accounts payable (1,402) (569) Total fair value of risk management contracts 5,850 57,333 1 The fair value of the financial contracts represents an estimate of the amount that Keyera would pay or receive if those contracts were closed on December 31, 2009 and December 31, 2008 respectively. Non-Operating Expenses Non-Operating Expenses Years ended December 31, (Thousands of Canadian dollars) General and administrative (net of overhead recoveries on operated facilities) 36,722 29,793 Interest 33,240 25,763 Depreciation, amortization and accretion 45,432 43,735 Foreign currency gain on U.S. debt (685) Other (loss on disposal, impairment expense) 7,410 2,506 Income tax recovery (1,536) (1,765) GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ( G&A ) expenses increased 23% or $6.9 million in 2009 compared to 2008 largely due to higher long-term incentive plan ( LTIP ) costs. The LTIP costs were approximately $4.1 million higher in 2009 due to the 37% growth in unit price compared to the end of G&A expenses were also higher in 2009 due to an increase in compensation costs associated with higher staff levels and a $0.9 million provision for non-recoverable accounts receivable. Keyera continues to actively manage the collection of its accounts receivable and will monitor the provision on an ongoing basis. INTEREST Interest expense, net of interest income, was $33.2 million for the year ended December 31, 2009, $7.5 million higher than The increase in interest expense was due to the issuance of $80 million of convertible debentures in December 2008 and the issuance of $35 million and US$50 million of unsecured senior notes on April 30, Higher interest expense was partly offset by the repayment of $90 million of unsecured senior notes on October 1, Financial Report KEYERA 11

14 DEPRECIATION, AMORTIZATION AND ACCRETION Depreciation, amortization and accretion was $45.4 million for the year ended December 31, 2009, $1.7 million higher than The increase was primarily due to the larger asset base resulting from the significant acquisitions made throughout The effect of the larger asset base was partly offset by revisions to the useful lives of Keyera s gathering and processing facilities. These revisions resulted in longer useful life estimates and lowered the depreciation rates for these assets on a go-forward basis. FOREIGN CURRENCY GAIN ON U.S. DEBT A net $0.7 million unrealized foreign currency gain was recorded in 2009 relating to the US$50 million long-term debt issued on April 30, The non-cash foreign currency related items were as follows: An unrealized foreign currency gain of $7.4 million resulting from the translation of US$50 million long-term debt into Canadian dollars. The foreign currency gain was a result of the stronger Canadian dollar since the issuance of debt on April 30, A $2.5 million realized foreign currency gain resulting from the exchange of currencies in accordance with the cross currency swap agreement entered into on May 1, These gains were partly offset by: A $9.2 million unrealized loss, representing the fair value of the cross currency swap agreement used to mitigate the currency exposure on the U.S. denominated debt and future interest payments. The fair value of the cross currency swap agreements will fluctuate between periods due to changes in the forward curve for foreign exchange rates as well as an adjustment to reflect credit risk. See note 14(b), Financial Instruments and Risk Management, to the audited consolidated financial statements for more information on the swap agreement. OTHER During the third quarter of 2009, Keyera disposed of a portion of its interest in a gathering system connected to the Rimbey gas plant when a co-owner of the system exercised its buy-out right. The proceeds on disposition were $0.8 million resulting in a non-cash loss of $4.1 million. Similarly in 2008, a gathering system at the Rimbey gas plant was sold resulting in a non-cash loss of $1.4 million. These gathering systems are considered to be non-core assets. Impairment Keyera tested its property, plant and equipment for impairment as at December 31, 2009 using the guidelines prescribed by GAAP. In addition, Keyera frequently assesses whether events or changes in circumstances indicate that an asset is impaired. Accordingly, an impairment expense of $2.8 million was recorded for the year ended December 31, The impairment expense was recorded to adjust the carrying value of the Greenstreet gathering and processing facility, the Medicine River gathering system and a small propane terminal located in the United States. In 2008, a $1.1 million impairment expense was recorded to adjust the carrying value of the Tomahawk gas plant that was later sold in the third quarter of KEYERA 2009 Financial Report

15 MANAGEMENT S DISCUSSION AND ANALYSIS The goodwill balance of $71.2 million arose as a result of previous business acquisitions and represents the excess of the total purchase price over the fair value of the net identifiable assets and liabilities acquired. Accounting standards require the goodwill balance to be assessed for impairment at least annually or more frequently if events or changes in circumstances indicate the balance might be impaired. If such impairment exists, it would be charged to earnings in the period in which the impairment occurs. No goodwill impairment exists as at December 31, Refer to note 2, Summary of Significant Accounting Policies, of the accompanying audited consolidated financial statements for greater detail related to the impairment testing for property, plant and equipment and goodwill. TAXES Future Income Taxes Future income taxes arise from differences between the accounting and tax basis of assets and liabilities. A future income tax recovery of $0.5 million was recorded for the year ended December 31, 2009, compared to a future income tax recovery of $1.8 million in The lower future income tax recovery is largely due to higher capital cost allowance ( CCA ) claims as a result of higher taxable income in 2009 compared to the prior year. As the financial contracts relating to the Marketing segment were settled in the first quarter of 2009, a realized gain of approximately $59 million was included in taxable income resulting in higher CCA claims in The impact of higher CCA claims was partly offset by the 3% reduction in the general provincial rate (applicable to trusts in 2011) recorded in the first quarter of Current Income Taxes A current income tax recovery of $1.0 million for the year ended December 31, 2009 was recorded, compared to current taxes of close to $nil for the same period in The current income tax recovery recorded for 2009 was largely a result of carrying back approximately $3.5 million of non-capital losses to the 2007 taxation year for a subsidiary of the Fund. This resulted in the recovery of approximately $1.2 million of income taxes paid in Keyera s current tax situation for 2009 was unique. As a result of the significant drop in crude oil and NGL prices in late 2008, a write-down of inventory was required. This write-down reduced 2008 taxable income; however, the offsetting gains of approximately $59 million from the financial contracts put in place to protect the inventory value were not realized and included in taxable income until A decision was made to declare and pay a special distribution in order to reduce 2009 taxable income. The special distribution of $0.45 per unit, paid to unitholders on December 15, 2009, was deducted for tax purposes in Accordingly, cash taxes for 2009 were not significant. Keyera estimates its tax pools at December 31, 2009 were approximately $544 million consisting primarily of class 41 undepreciated capital costs Financial Report KEYERA 13

16 Summary Fourth Quarter Results Fourth Quarter Financial and Operational Highlights Three months ended December 31, (Thousands of Canadian dollars, except per unit and volumetric information) Contribution Gathering and Processing 28,154 20,919 NGL Infrastructure 15,397 14,875 Marketing 26,456 43,614 Net earnings 39,205 50,877 Net earnings per unit (basic) Cash flow from operating activities 33, ,760 Distributable cash flow 43,064 35,763 Distributable cash flow per unit (basic) Capital expenditures 35, ,555 Dispositions (10) 723 Volumetric Information Gathering and Processing: Gross processing throughput (MMcf/d) Net processing throughput (MMcf/d) NGL Infrastructure: Gross processing throughput (Mbbl/d) Net processing throughput (Mbbl/d) Marketing: Sales volumes (bbl/d) 70,000 75,700 Contribution for the Gathering and Processing business increased by $7.2 million compared to the fourth quarter of 2008 largely due to acquisitions completed in December Contribution in the fourth quarter of 2009 was unusually low as a result of the following factors: Equalization adjustments were made at several gas plants relating to the current and prior year. These adjustments are required to appropriately reflect operating revenues based on actual operating costs. Refer to the section titled Critical Accounting Estimates for more information on how equalization adjustments are calculated. Approximately $3.0 million in repairs and maintenance as well as environmental remediation work was completed at various facilities. Approximately $1.0 million of these expenditures will be recovered through higher operating fees in future periods. The NGL Infrastructure segment continued to see strong demand for storage and fractionation services in the fourth quarter of The demand for storage services in particular is expected to continue into Contribution from the Marketing segment was $17.2 million lower in the fourth quarter of 2009 compared to the same period last year, primarily due to lower margins for condensate. Net earnings for the fourth quarter of 2009 was $11.7 million lower than the same period in 2008 largely due to lower contribution from the Marketing segment as well as a higher LTIP charge (included in G&A) resulting from the 24% growth in unit price compared to the end of the third quarter of KEYERA 2009 Financial Report

17 MANAGEMENT S DISCUSSION AND ANALYSIS 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. The most significant estimates are those indicated below: OPERATING REVENUES Gathering and Processing and NGL Infrastructure: For each month, actual volumes processed and fees earned from the Gathering and Processing and NGL Infrastructure assets are not known at the end of the month. Accordingly, the financial statements contain an estimate of one month s revenue based upon a review of historic trends. This estimate is adjusted for events that are known to have a significant effect on the month s operations such as nonroutine maintenance projects. At December 31, 2009, operating revenues and accounts receivable for the Gathering and Processing and NGL Infrastructure segments contained an estimate of $27.7 million primarily for December 2009 operations. Marketing: The majority of the Marketing sales revenue is recorded based upon actual volumes and prices; however, in many cases actual product lifting volumes have not yet been confirmed and sales prices that are dependent on other variables are not yet known. Accordingly, the financial statements contain an estimate for these sales. Estimates are prepared based upon contract quantities and known events. The estimates are reviewed and compared to expected results to verify their accuracy. They are reversed in the following month and replaced with actual results. At December 31, 2009, the Marketing sales and accounts receivable contained an estimate for December 2009 revenues of $55.1 million. OPERATING EXPENSES AND PRODUCT PURCHASES Gathering and Processing and NGL Infrastructure: The period in which invoices are rendered for the supply of goods and services necessary for the operation of the Gathering and Processing and NGL Infrastructure assets is generally later than the period in which the goods or services were provided. Accordingly, the financial statements contain an estimate of one month s operating costs based upon a review of historical trends. This estimate is adjusted for events that are known to have a significant effect on the month s operations such as nonroutine maintenance projects. At December 31, 2009, operating expenses and accounts payable contained an estimate of $10.8 million primarily for December 2009 operations. Marketing: NGL mix feedstock and specification products such as propane, butane and condensate are purchased from facilities located throughout western Canada and in some locations in the United States. The majority of NGL mix purchases are estimated each month as actual volume information is generally not available until the next month. The estimates are prepared based upon a three month rolling 2009 Financial Report KEYERA 15

18 average of production volumes for each facility and an estimate of price based upon historical information. Specification product volumes and prices are based upon contract volumes and prices. Accordingly, these financial statements contain an estimate for one month of these purchases. Marketing cost of goods sold, inventory and accounts payable contained an estimate of NGL product purchases of $89.6 million at December 31, EQUALIZATION ADJUSTMENTS Much of the revenue from the Gathering and Processing assets includes a recovery of operating costs. 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 segment, an equalization adjustment of $5.7 million was included in revenue and accounts receivable at December 31, Operating expenses and accounts payable contained an equalization adjustment of $10.1 million. ASSET RETIREMENT OBLIGATION Keyera will be responsible for compliance with all applicable laws and regulations regarding the decommissioning, abandonment and reclamation of its facilities at the end of their economic life. The determination of the estimate of these obligations is based upon settlement between 2013 and The process, overseen by the Health, Safety and Environment Committee, is undertaken by professionals involved in activities that deal with the design, construction, operation and decommissioning of assets. Specialists with knowledge and assessment processes specific to environmental and decommissioning activities and costs are also utilized in the process. Ultimately, all medium and large facilities will be independently assessed in accordance with regulatory requirements. Refer to note 8, Asset Retirement Obligation, of the accompanying audited consolidated financial statements for a reconciliation of the beginning and ending carrying amount of the decommissioning liability. Additional information related to decommissioning, abandonment and reclamation costs is also provided in Keyera s Annual Information Form, which is available on SEDAR. DERIVATIVE FINANCIAL INSTRUMENTS Keyera utilizes derivative financial instruments to manage its exposure to market risks relating to commodity prices and foreign currency exchange rates. Fair values of derivative contracts fluctuate depending on the underlying estimate of future commodity prices or foreign currency exchange rates. The estimated fair value of all derivative financial instruments are based on observable market data, including commodity price curves, foreign currency curves and credit spreads. Refer to note 14 (c), Financial Instruments and Risk Management, of the accompanying audited consolidated financial statements for a summary of the fair value of derivative financial instruments existing at December 31, ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for credit losses is reviewed on a monthly basis. An assessment is made whether an account is deemed impaired based on the number of days outstanding and the likelihood of collection from the counter-party. The allowance for doubtful accounts was $3.5 million as at December 31, KEYERA 2009 Financial Report