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CALGARY, Nov. 5 /CNW/ - Peyto Energy Trust ("Peyto" or "the Trust") is pleased to present the operating and financial results for the third quarter of 2008. Peyto is an explorer and producer of unconventional tight gas assets in Alberta's Deep Basin and currently employs a trust structure to flow profits, in the form of distributions, from the success of that business to its unitholders. The success of Peyto's strategy over its ten year history has resulted in the growth of both assets and distributions over time.
Peyto is well known for building its own high quality, sweet natural gas assets that exhibit long reserve life, low operating costs and high revenue per boe. The following summarizes the Trust's foundation:
- Long reserve life - Proved Producing 13 years, Total Proved 16 years,
Proved plus Probable 21 years
- Low operating costs - $2.54/boe ($0.42/mcfe), three months ending
September 30, 2008
- High revenue per boe - $65.67/boe ($10.95/mcfe) before hedging,
$60.32/boe ($10.05/mcfe) after hedging, three months ending
September 30, 2008
- Low base G&A costs - $0.71/boe ($0.12/mcfe), three months ending
September 30, 2008
- High field netback - $44.09/boe ($7.35/mcfe), three months ending
September 30, 2008
- High operatorship - operates over 95% of its production
- Cash distributions - cash distributions of $47.7 million were 64% of
funds from operations for the three months ended September 30, 2008
- Debt to funds from operations ratio - 1.6:1 (net debt, before
provision for future compensation, divided by annualized third
quarter 2008 funds from operations)
- Distribution growth - distributions have been increased 6 times and
are now 100% higher than when the trust was formed in July, 2003
- Since inception, Peyto has raised a total of $410 million issuing
units from treasury, accumulated earnings of $869 million, and
distributed $762 million to unitholders
- Transparent capital structure - no convertible debentures, no
exchangeable shares, no stock options, no warrants
Continued strong commodity prices, sustained distributions and a high
level of capital investment highlighted the following summary of the third
quarter of 2008.
- Strong commodity prices - Natural gas prices, both before and after
hedging, were stronger in Q3 2008 with prices averaging $9.87/mcf and
$8.81/mcf, respectively versus $6.07/mcf and $7.61/mcf in Q3 2007
- Distributions per unit increased 7% from the third quarter of 2007
while the cash payout ratio decreased to 64% in Q3 2008 from 71% in
Q3 2007. A total of $47.7 million or $0.45 per unit was distributed
to unitholders in the third quarter of 2008
- Capital expenditures - $62.3 million was invested into finding and
developing new natural gas reserves in the quarter, a 46% increase
from Q3 2007. Capital expenditures for the three quarters ended
September 30, 2008 were $116.9 million versus $86.0 million for the
same period in 2007, an increase of 36%
- Per unit funds from operations - increased 18% to $0.70/unit in Q3
2008 from $0.60/unit in Q3 2007
- Production - increased 1% from 19,740 boe/d in the third quarter of
2007 to 19,920 boe/d in the third quarter of 2008
- Production per unit - decreased 4% per trust unit from the third
quarter of 2007, after adjusting for debt and future unrealized
performance based compensation
- Hedging - a $9.8 million loss for the three months ending
September 30, 2008 was realized
- Net debt increased 12% from $439 million in Q3 2007 to $490 million
in Q3 2008. This leaves available borrowing capacity of $60 million
on bank lines of $550 million, secured by over $2.5 billion of Proved
Producing assets (2007 PP NPV5%)
Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). This could be misleading if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.
(1) Per unit results are adjusted for changes in net debt (including
future performance-based compensation) and equity. Net debt is
converted to equity using the September 30 unit price of $17.75 for
2007 and $15.30 for 2008.
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3 Months Ended 9 Months Ended
September 30 % September 30 %
2008 2007 Change 2008 2007 Change
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Operations
Production
Natural gas
(mcf/d) 100,324 97,000 3% 99,872 101,632 (2)%
Oil & NGLs
(bbl/d) 3,199 3,573 (10)% 3,285 3,573 (8)%
Barrels of
oil
equivalent
(boe/d
@ 6:1) 19,920 19,740 1% 19,930 20,512 (3)%
Product prices
Natural gas
($/mcf) 8.81 7.61 16% 8.87 8.68 2%
Oil & NGLs
($/bbl) 99.28 70.51 41% 96.46 65.34 48%
Operating
expenses
($/boe) 2.54 2.48 2% 2.60 2.67 (3)%
Transportation
($/boe) 0.63 0.58 9% 0.63 0.58 9%
Field netback
($/boe) 44.09 38.57 14% 44.28 41.59 6%
General &
administrative
expenses
($/boe) 0.71 0.82 (13)% 0.99 0.97 2%
Interest
expense
($/boe) 2.74 3.10 (12)% 3.08 3.00 3%
Financial
($000, except
per unit)
Revenue 110,537 91,070 21% 329,508 304,646 8%
Royalties 23,930 15,481 55% 70,055 53,541 21%
Funds from
operations 74,485 62,938 18% 219,553 210,647 4%
Funds from
operations
per unit 0.70 0.60 17% 2.07 1.99 4%
Total
distributions 47,664 44,399 7% 139,067 133,148 4%
Total
distributions
per unit 0.45 0.42 7% 1.31 1.26 4%
Payout ratio 64 71 (10)% 63 63 -
Earnings 64,834 39,886 63% 128,686 135,594 (5)%
Earnings per
diluted unit 0.61 0.37 65% 1.21 1.28 (5)%
Capital
expenditures 62,271 42,598 46% 116,857 86,024 36%
Weighted
average trust
units
out-
standing 105,920,194 105,712,364 - 105,876,470 105,656,359 -
As at
September 30
Net debt
(before
future
compensation
expense) 489,867 439,325 12%
Unitholders'
equity 536,918 507,744 6%
Total assets 1,250,973 1,164,561 7%
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3 Months Ended 9 Months Ended
September 30 September 30
2008 2007 2008 2007
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Net Earnings 64,834 39,886 128,686 135,594
Items not requiring cash:
Non-cash provision for
performance based compensation (4,079) 202 4,766 640
Future income tax expense (4,910) 4,808 30,333 17,774
Depletion, depreciation and
accretion 18,640 18,042 55,768 56,639
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Funds from operations (1) 74,485 62,938 219,553 210,647
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(1) Funds from operations - Management uses funds from operations to
analyze the operating performance of its energy assets. In order to
facilitate comparative analysis, funds from operations is defined
throughout this report as earnings before performance based
compensation, non-cash and non-recurring expenses. Management
believes that funds from operations is an important parameter to
measure the value of an asset when combined with reserve life. Funds
from operations is not a measure recognized by Canadian generally
accepted accounting principles ("GAAP") and does not have a
standardized meaning prescribed by GAAP. Therefore, funds from
operations, as defined by Peyto, may not be comparable to similar
measures presented by other issuers, and investors are cautioned that
funds from operations should not be construed as an alternative to
net earnings, cash flow from operating activities or other measures
of financial performance calculated in accordance with GAAP. Funds
from operations cannot be assured and future distributions may vary.
Quarterly Review
In response to an improved natural gas price outlook, and therefore improved expected profitability, Peyto continued an accelerated capital spending program in the third quarter, investing $62.3 million. The drilling and completion of Deep Basin gas wells accounted for $54.6 million in the quarter, while wellsite equipment and tie-ins accounted for $6.1 million. Exploratory seismic data, acquired in the Pine Creek and Chime areas, along with minor land purchases made up the balance of the capital expenditures at $1.5 million.
Peyto drilled 25 gross (18.6 net, 74% working interest) gas wells, completed 56 gross (38.6 net) gas zones and brought 50 gross (32.9 net) gas zones on production in the quarter. Net production additions from this activity equated to approximately 2,100 boe/d. Production for the quarter averaged 19,920 boe/d, comprised of 100.3 mmcf/d of gas and 3,199 bbl/d of oil and natural gas liquids (NGLs).
Commodity prices during the third quarter 2008 continued to be extremely volatile, with Alberta daily natural gas price dropping from $11.21/GJ on July 1 to $5.80/GJ by September 30. Peyto's unhedged gas production realized an average natural gas price for the quarter of $8.47/GJ which translated into $9.87/mcf as a result of a 17% premium heat content. A portion of Peyto's gas production had already been sold at $7.01/GJ ($8.32/mcf) which, when combined with the unhedged price, resulted in a combined price of $8.81/mcf. An average liquids price of $99.28/bbl was also realized in the quarter. Alberta crown royalties averaged 21.6% or $13.06/boe ($2.18/mcfe), up from $8.52/boe ($1.40/mcfe) in the previous year due to higher commodity prices. Operating costs in Q3 2008 were $2.54/boe ($0.42/mcfe), down from $2.58/boe ($0.43/mcfe) in the previous quarter and $2.60/boe ($0.43/mcfe) a year ago.
The best protection Peyto can provide against periods of low commodity price is low cost structure. Peyto's total cash costs including operating costs, transportation costs, base G&A expenses and interest cost combine to represent only a small fraction of the realized price. When the Q3 2008 cash costs of $6.62/boe are combined with royalties of $13.06/boe, they represent just 30% of the unhedged price. In other words, a 70% profit margin ensures Peyto can withstand much commodity price volatility.
Activity Update
During the first half of the year, the price of raw materials used in the manufacturing of finished steel products skyrocketed. The rising cost of raw materials, coupled with a shortage of casing, materialized in the third quarter as a considerable increase in tubular costs for the oil and gas industry. Various grades of pipe, which Peyto uses for casing wells, production tubing and gathering systems, all increased in cost. The casing and tubing costs for a typical Deep Basin well rose from $400,000 in Q1 2008 to $780,000 in Q3 2008.
Steel prices have now begun to decline as a result of the general economic slowdown in the US. Peyto anticipates that tubular costs will continue to fall throughout the balance of the year. It is for this reason, and in light of the credit crisis in the banking sector, that the Trust has decided to reduce drilling for the remainder of the year. Completions, re-completion and tie-in activity will continue until all recently drilled wells are on-stream. This move will preserve Peyto's financial flexibility and allow the declining demand and cost of materials to make its way through the supply chain. Peyto remains poised to return to increased activity levels once this cost correction has occurred. As a result of this slowdown in activity, the Trust anticipates spending between $135 and $150 million for 2008.
Marketing
While current natural gas prices in Alberta are now similar to the start of 2008, the future prices are stronger. This is less a result of rising demand and mostly the result of a weaker Canadian dollar, which has fallen close to 20% in the last month. Despite this volatility in both commodity prices and exchange rates, Peyto has continued to "take" future prices and layer in those sales to smooth out future volatility. As at September 30, 2008, the Trust had committed to the future sale of 15,515,000 GJ of natural gas at an average price of $8.20/GJ ($9.59/mcf based on the historical heating value of Peyto's natural gas). Had these contracts been closed on September 30, 2008, the Trust would have realized a gain in the amount of $19.5 million, as compared to an $80 million loss in Q2 2008.
Outlook
With this third quarter, Peyto celebrates the completion of ten years as a Canadian energy business. By concentrating its efforts and sticking to a successful strategy, Peyto has built a top quality asset base comprised of long reserve life, low cost, natural gas reserves. Funding for this strategy, as highlighted in the following table, has come primarily from cashflow that was generated along the way.
Funding Sources for Capital Since Inception % of (1998 to 2008) ($000) Total ------------------------------------------------------------------------- Cashflow from projects found and developed by Peyto 1,390,716 61 Net Equity Issued 410,233 18 Net Debt 489,867 21 ------------------------------------------------------------------------- Total Sources of Capital 2,290,816 100 ------------------------------------------------------------------------- Accumulated Distributions 761,533 33 Capital Expenditures 1,529,283 67 ------------------------------------------------------------------------- Total Uses of Capital 2,290,816 100 -------------------------------------------------------------------------
During the past ten years, Peyto has experienced both periods of dramatic growth and periods of sustainability; taking advantage of times when economic conditions allowed for maximum returns to be generated. With the adoption of a trust structure, unitholders have been able to share in the profits of the business over time, without having to relinquish their holdings. In total, earnings of $869 million have been accumulated, while $762 million has been distributed. Starting in 2011, it appears that the Trust structure may not be the most effective way to share those profits with unitholders. Peyto will endeavor to seek out the best structure that will allow unitholders to continue to share in the profits and success of the underlying energy business.
Peyto has begun planning for 2009, with an initial capital program of approximately $100 to $130 million. Although global financial markets are in turmoil and there is great uncertainty in the banking sector, Canadian energy prices remain strong. The Trust has demonstrated in the past that it can live within its means during times of fiscal constraint while still replacing production. Peyto's track record of internally generating profitable drilling ideas speaks for itself with over 650 Deep Basin wells drilled in the last ten years. This same exploration strategy will continue into the future, with a significant number of locations already in inventory and many more currently under development. Ensuring the greatest return for unitholders will determine how and when those opportunities are funded.
Unitholders are encouraged to visit the Peyto website at www.Peyto.com for a monthly report from the President with up to date production and capital spending as well an investor presentation designed to educate and inform.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the 2008 third quarter results on Thursday, November 6th, 2008 at 9:00 a.m. Mountain Daylight Time (MDT), 11:00 a.m. Eastern Standard Time (EDT). To participate live by phone, please call 1-416-644-3418 or toll free 1-800-732-0232 for all participants. The conference call will also be available on replay by calling 1-416-640-1917 (Toronto area) or toll free 1-877-289-8525 for all other parties, using passcode 21285077, followed by the pound key. The replay will be available at 11:00 a.m. MDT, 1:00 p.m. EDT Thursday, November 6th, 2008 until midnight EDT on Thursday, November 13th, 2008. The conference call can also be accessed through the internet at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)2431440. The archived conference call will be available on the Peyto website at www.peyto.com.
Management's Discussion and Analysis
A copy of the third quarter report to Unitholders, including the Management's Discussion and Analysis, and unaudited interim financial statements and related notes is available at http://www.peyto.com/news/Q32008MDandA.pdf and will be filed at SEDAR, www.sedar.com , at a later date.
Darren Gee President and Chief Executive Officer November 5, 2008
Certain information set forth in this document and Management's Discussion and Analysis, including management's assessment of Peyto's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond these parties' control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Peyto's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits Peyto will derive therefrom. Peyto disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Peyto Energy Trust
Consolidated Balance Sheets
($000)
(unaudited)
September 30, December 31,
2008 2007
-------------------------------------------------------------------------
Assets
Current
Cash - 20,547
Accounts receivable (Note 10) 49,612 47,728
Financial derivative instruments (Note 10) 18,204 7,405
Prepaid expenses and deposits 6,704 5,020
-------------------------------------------------------------------------
74,520 80,700
-------------------------------------------------------------------------
Financial derivative instruments (Note 10) 1,290 -
Property, plant and equipment (Note 4) 1,175,163 1,111,532
-------------------------------------------------------------------------
1,176,453 1,111,532
-------------------------------------------------------------------------
1,250,973 1,192,232
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current
Accounts payable and accrued liabilities 80,295 85,923
Distributions payable 15,888 14,800
Future performance based compensation 4,724 16
Future income taxes - 2,285
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100,907 103,024
-------------------------------------------------------------------------
Long-term debt (Note 5) 450,000 430,000
Future performance based compensation 312 253
Asset retirement obligations 9,307 6,766
Future income taxes 153,529 123,197
-------------------------------------------------------------------------
613,148 560,216
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Unitholders' equity
Unitholders' capital (Note 6) 410,233 406,301
Accumulated earnings (Note 7) 107,191 117,572
Accumulated other comprehensive income (loss) 19,494 5,119
-------------------------------------------------------------------------
Accumulated earnings and other comprehensive
income (loss) 126,685 122,691
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536,918 528,992
-------------------------------------------------------------------------
1,250,973 1,192,232
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See accompanying notes
On behalf of the Board:
(signed) "Michael MacBean" (signed) "Darren Gee"
Director Director Peyto Energy Trust
Consolidated Statements of Earnings
($000 except per unit amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue
Oil and gas sales 120,340 76,982 345,149 268,900
Realized gain (loss) on hedges
(Note 10) (9,803) 14,088 (15,641) 35,746
Royalties (23,930) (15,481) (70,055) (53,541)
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Petroleum and natural gas
sales, net 86,607 75,589 259,453 251,105
-------------------------------------------------------------------------
Expenses
Operating (Note 8) 4,658 4,500 14,203 14,976
Transportation 1,153 1,045 3,446 3,245
General and administrative(Note 9) 1,293 1,483 5,414 5,428
Provision for future performance
based compensation (4,079) 202 4,766 640
Interest on long term debt 5,018 5,623 16,837 16,809
Depletion, depreciation and
accretion 18,640 18,042 55,768 56,639
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26,683 30,895 100,434 97,737
-------------------------------------------------------------------------
Earnings before taxes 59,924 44,694 159,019 153,368
Taxes
Future income tax expense (4,910) 4,808 30,333 17,774
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-------------------------------------------------------------------------
Net earnings for the period 64,834 39,886 128,686 135,594
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Earnings per unit (Note 6)
Basic and diluted 0.61 0.37 1.21 1.28
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See accompanying notes
Peyto Energy Trust
Consolidated Statements of Comprehensive Income (Loss)
($000 except per unit amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings for the period 64,834 39,886 128,686 135,594
Other comprehensive income
Change in unrealized gain (loss)
on hedges 109,629 (16,482) 30,015 (46,426)
Realized gain (loss) on hedges (9,803) 14,088 (15,641) 35,746
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Comprehensive income (loss) 164,660 37,492 143,060 124,914
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-------------------------------------------------------------------------
See accompanying notes
Peyto Energy Trust
Consolidated Statements of Accumulated Earnings and Accumulated Other
Comprehensive Income (Loss)
($000)
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Accumulated earnings, beginning
of period 90,021 93,195 117,572 86,237
Net earnings for the period 64,834 39,886 128,686 135,594
Distributions (Note 7) (47,664) (44,399) (139,067) (133,149)
-------------------------------------------------------------------------
Accumulated earnings, end of
period 107,191 88,682 107,191 88,682
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive
income, beginning of period (80,332) 15,155 5,119 -
Adoption of financial
instruments, net of tax - - - 23,441
Other comprehensive income (loss) 99,826 (2,394) 14,375 (10,680)
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Accumulated other comprehensive
income (loss), end of period 19,494 12,761 19,494 12,761
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Peyto Energy Trust
Consolidated Statements of Cash Flows
($000)
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in)
Operating Activities
Net earnings for the period 64,834 39,886 128,686 135,594
Items not requiring cash:
Future income tax expense (4,910) 4,808 30,333 17,774
Depletion, depreciation and
accretion 18,640 18,042 55,768 56,639
Change in non-cash working
capital related to operating
activities 2,873 10,163 (14,780) 9,167
-------------------------------------------------------------------------
81,437 72,899 200,007 219,174
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Financing Activities
Issue of trust units, net of
costs (Note 6) - - 3,932 2,825
Distributions paid (Note 7) (47,664) (44,399) (139,067) (133,149)
Increase (decrease) in bank debt - - 20,000 (10,000)
Change in non-cash working
capital related to financing
activities - - 1,088 5,107
-------------------------------------------------------------------------
(47,664) (49,399) (114,047) (135,217)
-------------------------------------------------------------------------
Investing Activities
Additions to property, plant
and equipment (62,271) (42,598) (116,858) (86,024)
Change in non-cash working capital
related to investing activities 22,772 7,341 10,351 (4,272)
-------------------------------------------------------------------------
(39,499) (35,257) (106,507) (90,296)
-------------------------------------------------------------------------
Net increase (decrease) in cash (5,726) (6,757) (20,547) (6,339)
Cash, beginning of period 5,726 11,224 20,547 10,806
-------------------------------------------------------------------------
Cash, end of period - 4,467 - 4,467
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Peyto Energy Trust
Notes to Consolidated Financial Statements
(unaudited)
September 30, 2008 and 2007
1. Summary of Significant Accounting Policies
The unaudited interim consolidated financial statements of Peyto
Energy Trust (the "Trust" or "Peyto") follow the same accounting
policies as the most recent annual audited consolidated financial
statements except as disclosed in Note 2. The interim consolidated
financial statement note disclosures do not include all of those
required by Canadian generally accepted accounting principles
("GAAP") applicable for annual financial statements. Accordingly,
these interim financial statements should be read in conjunction with
the December 31, 2007 audited consolidated financial statements.
These financial statements include the accounts of Peyto Energy Trust
and its wholly owned subsidiaries, Peyto Exploration & Development
Corp., Peyto Operating Trust, Peyto Energy Limited Partnership and
Peyto Energy Administration Corp.
2. Changes in Accounting Policies
a) Financial Instruments - Disclosure and Presentation
As of January 1, 2008, the Trust adopted CICA Handbook Sections,
Section 3862 "Financial Instruments - Disclosures" and Section 3863
"Financial Instruments - Presentation" which replaced Section 3861
"Financial Instruments - Disclosure and Presentation". The standards
require disclosure on the significance of financial instruments to an
entity's financial statements, the risks associated with the
financial instruments, and how those risks are managed. Specifically,
Section 3862 requires disclosure on the significance of financial
instruments to the Trust's financial position. In addition, the
guidance outlines revised requirements for the disclosure of
qualitative and quantitative information regarding exposure to risks
arising from financial instruments. The presentation requirements
under Section 3863 are relatively unchanged from Section 3861. Refer
to Note 10, "Financial Instruments and Risk Management" for the
additional disclosures under Section 3862.
b) Capital Disclosures
As of January 1, 2008, the Trust adopted CICA Handbook Section 1535
"Capital Disclosures", which requires entities to disclose their
objectives, policies and processes for management of capital and, in
addition, whether the entity has complied with any externally imposed
capital requirements. These disclosures include a description of the
Trust's objectives, policies and processes for managing capital, the
quantitative data relating to what the entity regards as capital,
whether the entity has complied with capital requirements, and, if it
has not complied, the consequences of such non-compliance. Refer to
Note 11, "Capital Disclosures".
3. Pending Accounting Pronouncements
Goodwill and Intangible Assets
As of January 1, 2009, the Trust will be required to adopt CICA
Handbook Section 3064 "Goodwill and Intangible Assets" which replaces
Section 3062 "Goodwill and Other Intangible Assets" and Section 3450
"Research and Development Costs." Various changes have been made to
other standards to be consistent with Section 3064, which establishes
standards for the recognition, measurement, presentation and
disclosure of goodwill and intangible assets. Standards concerning
goodwill are unchanged from the standards in Section 3062. The Trust
is assessing the impact of this standard on its consolidated
financial statements, however, the adoption is not expected to have a
material impact on its consolidated financial statements.
Adoption of IFRS
In January 2006, the CICA Accounting Standards Board ("ASCB") adopted
a strategic plan for the direction of accounting standards in Canada.
As part of that plan, accounting standards in Canada for public
companies are expected to converge with International Financial
Reporting Standards ("IFRS") by 2011. On February 13, 2008, The ASCB
confirmed that the use of IFRS will be required in 2011 for publicly
accountable profit-orientated enterprises. The Trust continues to
assess the impact of the convergence of Canadian GAAP and IFRS.
4. Property, Plant and Equipment
September 30, December 31,
($000) 2008 2007
---------------------------------------------------------------------
Property, plant and equipment 1,529,283 1,410,767
Accumulated depletion and depreciation (354,120) (299,235)
--------------------------------------------------------------------
1,175,163 1,111,532
---------------------------------------------------------------------
---------------------------------------------------------------------
At September 30, 2008 costs of $36.6 million (September 30, 2007 -
$38.6 million) related to undeveloped land has been excluded from the
depletion and depreciation calculation.
5. Long-Term Debt
The Trust has a syndicated $550 million extendible revolving credit
facility. The facility is made up of a $20 million working capital
sub-tranche and a $530 million production line. The facilities are
available on a revolving basis for a period of at least 364 days and
upon the term out date may be extended for a further 364 day period
at the request of the Trust, subject to approval by the lenders. In
the event that the revolving period is not extended, the facility is
available on a non-revolving basis for a one year term, at the end of
which time the facility would be due and payable. Outstanding amounts
on this facility bear interest at rates determined by the Trust's
debt to earnings before interest, taxes, depreciation, depletion and
amortization ("EBITDA") ratio that range from prime to prime plus
0.75% for debt to EBITDA ranging from less than 1:1 to greater than
2.5:1. A General Security Agreement with a floating charge on land
registered in Alberta is held as collateral by the bank.
6. Unitholders' Capital
Authorized: Unlimited number of voting trust units
Issued and Outstanding
Trust Units (no par value) ($000) Number of Units Amount
---------------------------------------------------------------------
Balance, December 31, 2006 105,251,394 398,434
Trust units issued by private placement 460,970 7,867
---------------------------------------------------------------------
Balance, December 31, 2007 105,712,364 406,301
---------------------------------------------------------------------
Trust units issued by private placement 207,830 3,932
---------------------------------------------------------------------
Balance, September 30, 2008 105,920,194 410,233
---------------------------------------------------------------------
---------------------------------------------------------------------
Per Unit Amounts
Earnings per unit have been calculated based upon the weighted
average number of units outstanding for three months ended
September 30, 2008 of 105,920,194 (2007 - 105,712,364) and for the
nine months ended September 30, 2008 of 105,861,789 (2007 -
105,656,359). There are no dilutive instruments outstanding.
7. Accumulated Distributions
The Trust paid total distributions to the unitholders in the
aggregate amount of $47.7 million in the three months ended
September 30, 2008 (2007 - total $44.4 million) and $139.1 million
for the nine months ended September 30, 2008 (2007 - total
$133.1 million) in accordance with the following schedule:
Production Period Record Date Distribution Date Per Unit
---------------------------------------------------------------------
Special Distribution January 1, 2008 January 15, 2008 $0.0035
January 2008 January 31, 2008 February 15, 2008 $0.14
February 2008 February 28, 2008 March 14, 2008 $0.14
March 2008 March 31, 2008 April 15, 2008 $0.14
April 2008 April 30, 2008 May 15, 2008 $0.14
May 2008 May 31, 2008 June 13, 2008 $0.15
June 2008 June 30, 2008 July 15, 2008 $0.15
July 2008 July 31, 2008 August 15, 2008 $0.15
August 2008 August 31, 2008 September 15, 2008 $0.15
September 2008 September 30, 2008 October 15, 2008 $0.15
Accumulated Earnings and Distributions
September 30, December 31,
($000) 2008 2007
---------------------------------------------------------------------
Opening accumulated earnings 740,038 531,154
Net earnings for the period 128,686 208,884
---------------------------------------------------------------------
Total accumulated earnings 868,724 740,038
Total accumulated distributions (761,533) (622,466)
---------------------------------------------------------------------
Accumulated earnings 107,191 117,572
---------------------------------------------------------------------
8. Operating Expenses
The Trust's operating expenses include all costs with respect to
day-to-day well and facility operations. Processing and gathering
income related to joint venture and third party natural gas reduces
operating expenses.
Three Months Ended Nine Months Ended
September 30 September 30
($000) 2008 2007 2008 2007
---------------------------------------------------------------------
Field expenses 7,724 6,476 22,602 21,297
Processing and gathering
income (3,066) (1,976) (8,399) (6,321)
---------------------------------------------------------------------
Total operating costs 4,658 4,500 14,203 14,976
---------------------------------------------------------------------
---------------------------------------------------------------------
9. General and Administrative ("G&A") Expenses
General and administrative expenses are reduced by operating and
capital overhead recoveries on operated properties.
Three Months Ended Nine Months Ended
September 30 September 30
($000) 2008 2007 2008 2007
---------------------------------------------------------------------
G&A expenses 2,485 2,536 7,953 7,595
Overhead recoveries (1,192) (1,053) (2,539) (2,167)
---------------------------------------------------------------------
Net G&A expenses 1,293 1,483 5,414 5,428
---------------------------------------------------------------------
---------------------------------------------------------------------
10. Financial Instruments and Risk Management
Market Risk
Market risk is the risk that changes in market prices, such as
commodity prices and interest rates will affect the Trust's net
earnings or the value of its financial instruments. The objective of
market risk management is to manage and control its exposures within
acceptable limits, while maximizing returns. These risks are
consistent with prior years.
Commodity Price Risk Management
The Trust is a party to certain derivative financial instruments,
including fixed price contracts. The Trust enters into these
contracts with well established counterparties for the purpose of
protecting a portion of its future earnings and cash flows from
operations from the volatility of petroleum and natural gas prices.
The Trust believes the derivative financial instruments are effective
as hedges, both at inception and over the term of the instrument, as
the term and notional amount do not exceed the Trust's firm
commitment or forecasted transaction and the underlying basis of the
instrument correlates highly with the Trust's exposure. A summary of
contracts outstanding in respect of the hedging activities at
September 30, 2008 are as follows:
Natural Gas Price
Period Hedged Type Daily Volume (CAD)
---------------------------------------------------------------------
April 1 to October 31, 2008 Fixed price 5,000 GJ $7.85/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $6.60/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $6.40/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $6.60/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $6.80/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $7.05/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $7.20/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $7.10/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $7.20/GJ
April 1 to October 31, 2008 Fixed price 5,000 GJ $7.40/GJ
April 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $7.05/GJ
April 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $6.82/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $7.25/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $7.50/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $7.60/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $8.00/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $8.25/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $8.40/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $8.65/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $9.00/GJ
Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $9.70/GJ
April 1 to October 31, 2009 Fixed price 5,000 GJ $7.85/GJ
April 1 to October 31, 2009 Fixed price 5,000 GJ $8.12/GJ
April 1 to October 31, 2009 Fixed price 5,000 GJ $8.95/GJ
April 1 to October 31, 2009 Fixed price 5,000 GJ $9.30/GJ
April 1 to October 31, 2009 Fixed price 5,000 GJ $10.20/GJ
As at September 30, 2008, the Trust had committed to the future sale
of 15,515,000 gigajoules (GJ) of natural gas at an average price of
$8.20 per GJ or $9.59 per mcf based on the historical heating value
of Peyto's natural gas. Had these contracts been closed on
September 30, 2008, the Trust would have realized a gain in the
amount of $19.5 million. If the AECO gas price on September 30, 2008
had been $1/GJ higher or lower, the unrealized loss on these closed
contracts would change by approximately $15.5 million and would be
reflected in the other comprehensive income of the Trust.
Subsequent to September 30, 2008 the Trust entered into the following
contracts:
Natural Gas Price
Period Hedged Type Daily Volume (CAD)
---------------------------------------------------------------------
April 1 to October 31, 2009 Fixed price 5,000 GJ $7.50/GJ
April 1, 2008 to March 31, 2010 Fixed price 5,000 GJ $7.65/GJ
Nov 1, 2009 to March 31, 2010 Fixed price 5,000 GJ $8.39/GJ
Nov 1, 2009 to March 31, 2010 Fixed price 5,000 GJ $8.35/GJ
Interest rate risk
The Trust is exposed to interest rate risk in relation to interest
expense on its revolving demand facility. Currently, the Trust has
not entered into any agreements to manage this risk. A 1% increase or
decrease in interest rates would have impacted the net income before
taxes of the Trust during the three and nine months ended
September 30, 2008 by approximately $1.1 million and $3.3 million,
respectively.
Fair Values of Financial Assets and Liabilities
The Trust's financial instruments include cash, accounts receivable,
financial derivative instruments, current liabilities (excluding
future income tax), provision for future performance based
compensation and long term debt. At September 30, 2008, the carrying
value of cash, accounts receivable, financial derivative instruments,
current liabilities (excluding future income tax) and provision for
future performance based compensation approximate their fair value
due to their short term nature or method of determination. The
carrying value of the long term debt approximates its fair value due
to the floating rate of interest charged under the credit facility.
Credit Risk
A substantial portion of the Trust's accounts receivable is with
petroleum and natural gas marketing entities.
Industry standard dictates that commodity sales are settled on the
25th day of the month following the month of production. The Trust
generally extends unsecured credit to these companies, and therefore,
the collection of accounts receivable may be affected by changes in
economic or other conditions and may accordingly impact the Trust's
overall credit risk. Management believes the risk is mitigated by the
size, reputation and diversified nature of the companies to which
they extend credit. The Trust has not previously experienced any
material credit losses on the collection of accounts receivable. Of
the Trust's significant individual accounts receivable at
September 30, 2008, approximately 65% was due from four companies
(December 31, 2007 - three companies, 72%). Of the Trust's revenue
for the nine months ended September 30, 2008, approximately 80% was
received from three companies (September 30, 2007 - three companies,
94%). The maximum exposure to credit risk is represented by the
carrying amount on the balance sheet. There are no material financial
assets that the Trust considers past due and no accounts have been
written off.
The Trust may be exposed to certain losses in the event of
non-performance by counter-parties to commodity price contracts. The
Trust mitigates this risk by entering into transactions with
counter-parties that have investment grade credit ratings.
Counterparties to financial instruments expose the Trust to credit
losses in the event of non-performance. Counterparties for derivative
instrument transactions are limited to high credit quality financial
institutions, which are all members of our syndicated credit
facility.
The Trust assesses quarterly if there should be any impairment of
financial assets. At September 30, 2008, there was no impairment of
any of the financial assets of the Trust.
Liquidity Risk
Liquidity risk includes the risk that, as a result of operational
liquidity requirements:
- The Trust will not have sufficient funds to settle a transaction
on the due date;
- The Trust will be forced to sell financial assets at a value which
is less than what they are worth; or
- The Trust may be unable to settle or recover a financial asset at
all.
The Trust's operating cash requirements, including amounts projected
to complete our existing capital expenditure program, are
continuously monitored and adjusted as input variables change. These
variables include, but are not limited to, available bank lines, oil
and natural gas production from existing wells, results from new
wells drilled, commodity prices, cost overruns on capital projects
and changes to government regulations relating to prices, taxes,
royalties, land tenure, allowable production and availability of
markets. As these variables change, liquidity risks may necessitate
the need for the Trust to conduct equity issues or obtain project
debt financing. The Trust also mitigates liquidity risk by
maintaining an insurance program to minimize exposure to some losses.
The following are the contractual maturities of financial liabilities
as at September 30, 2008:
---------------------------------------------------------------------
(less than) There-
($000s) 1 Year 1-2 Years 2-5 Years after
---------------------------------------------------------------------
Accounts payable and
accrued liabilities 80,295
---------------------------------------------------------------------
Distributions Payable 15,888
---------------------------------------------------------------------
Provision for future
performance based
compensation 4,724 312
---------------------------------------------------------------------
Long-term debt 450,000
---------------------------------------------------------------------
11. Capital Disclosures
The Trust's objectives when managing capital are: (i) to maintain a
flexible capital structure, which optimizes the cost of capital at
acceptable risk; and (ii) to maintain investor, creditor and market
confidence to sustain the future development of the business.
The Trust manages its capital structure and makes adjustments to it
in light of changes in economic conditions and the risk
characteristics of our underlying assets. The Trust considers its
capital structure to include unitholders' equity, debt and working
capital. To maintain or adjust the capital structure, the Trust may
from time to time, issue trust units, raise debt and/or adjust its
capital spending to manage its current and projected debt levels. The
Trust monitors capital based on the following non-GAAP measures:
current and projected debt to earnings before interest, taxes,
depreciation, depletion and amortization ("EBITDA") ratios, payout
ratios and net debt levels. To facilitate the management of these
ratios, the Trust prepares annual budgets, which are updated
depending on varying factors such as general market conditions and
successful capital deployment. The annual budget is approved by the
Board of Directors. The Trust's unitholders' capital is not subject
to any external financial covenants.
There were no changes in the Trust's approach to capital management
from the previous year.
September 30, December 31,
($000s) 2008 2007
---------------------------------------------------------------------
Unitholders' equity 536,918 528,992
Long-term debt 450,000 430,000
Working capital deficit (1) 26,387 22,324
---------------------------------------------------------------------
1,013,305 981,316
---------------------------------------------------------------------
(1) Current liabilities less current assets (includes unrealized
hedging gain of $18.2 million)
12. Supplemental Cash Flow Information
Three Months Ended Nine Months Ended
September 30 September 30
($000) 2008 2007 2008 2007
---------------------------------------------------------------------
Cash interest paid during the
period 5,018 5,623 16,837 16,809
---------------------------------------------------------------------
---------------------------------------------------------------------
13. Contingencies and Commitments
a) Contingent Liabilities
From time to time, Peyto is the subject of litigation arising out of
its day-to-day operations. While Peyto assesses the merits of each
lawsuit and defends itself accordingly, Peyto may be required to
incur significant expenses or devote significant resources to
defending itself against such litigation. These claims are not
currently expected to have a material impact on Peyto's financial
position or results of operations.
b) Commitments
The Trust is committed to payments under an operating lease for
office space as follows:
---------------------------------------------------------------------
($000) $
---------------------------------------------------------------------
2008 274
2009 1,097
2010 1,097
2011 1,097
---------------------------------------------------------------------
3,565
---------------------------------------------------------------------
---------------------------------------------------------------------
c) Income Taxes
Canada Revenue Agency ("CRA") has conducted an audit of restructuring
costs claimed as a result of the trust conversion in 2003 that has
resulted in the reclassification of $41.0 million dollars in
employment related costs as eligible capital. In October, 2008, the
Trust has received a notice of reassessment from the CRA and paid an
amount of $7.2 million related to this audit. Based upon consultation
with legal counsel, Management's view is that CRA's position has no
merit. A notice of objection has been filed.
Peyto Exploration & Development Corp. Information
Officers
Darren Gee Glenn Booth
President and Chief Executive Vice-President, Land
Officer
Scott Robinson Stephen Chetner
Executive Vice-President and Chief Corporate Secretary
Operating Officer
Kathy Turgeon
Vice-President, Finance and Chief
Financial Officer
Directors
Ian Mottershead, Chairman
Rick Braund
Don Gray
Brian Davis
Michael MacBean
Darren Gee
Gregory Fletcher
Auditors
Deloitte & Touche LLP
Solicitors
Burnet, Duckworth & Palmer LLP
Bankers
Bank of Montreal
Union Bank of California
Royal Bank of Canada
BNP Paribas
Societe Generale
ATB Financial
Fortis Capital (Canada) Ltd.
Transfer Agent
Valiant Trust Company
Stock Listing Symbol: PEY.un
Toronto Stock Exchange
%SEDAR: 00019597E