SYMBOL: PEY.UN - TSX
CALGARY, May 7 /CNW/ - Peyto Energy Trust ("Peyto") is pleased to present the operating and financial results for the first quarter of the 2008 fiscal year. Peyto is an explorer and producer of unconventional tight gas assets in Alberta's Deep Basin and, due to its trust structure, is able to flow profits from the success of that business to its unitholders in the form of distributions. The success of Peyto's strategy has resulted in the growth of both assets and distributions over time.
Peyto is well known for owning high quality, sweet 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 - $2.68/boe, three months ending March 31, 2008
- High revenue natural gas - $54.09/boe before hedging, $56.41/boe
after hedging, three months ending March 31, 2008
- Low base general and administrative costs - $1.19/boe, three months
ending March 31, 2008
- High field netback - $42.70/boe, three months ending March 31, 2008
- High operatorship - operates over 95% of its production
- Cash distributions - cash distributions of $44.4 million were 63% of
funds from operations for the three months ended March 31, 2008
- Low debt to funds from operations ratio - 1.6:1 (net debt, before
provision for future compensation, divided by annualized first
quarter 2008 funds from operations)
- Distribution growth - distributions have been increased 5 times; they
have never decreased, and are now 87% 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 $772 million, and
distributed $667 million to unitholders
- Transparent capital structure - no convertible debentures, no
exchangeable shares, no stock options, no warrants
The first quarter was highlighted by sustained distributions, increasing
natural gas prices and improved financial flexibility. The following
summarizes performance highlights of the business for the first quarter of
2008:
- Capital expenditures - $33.1 million was invested into finding and
developing new natural gas reserves, down from $35.5 million in the
previous quarter, but up from $30.5 million in Q1 2007
- Production - decreased 5% from 21,305 boe/d in the first quarter of
2007 to 20,342 boe/d in the first quarter of 2008
- Production per unit - decreased 4% per trust unit from the first
quarter of 2007, after adjusting for net debt and future unrealized
performance-based compensation
- Per unit funds from operations - decreased 9% from the previous year
to $0.67/unit
- Commodity prices - natural gas prices, both before and after hedges,
were lower in Q1 2008 with prices averaging $7.93/mcf and $8.49/mcf,
respectively, versus $8.17/mcf and $9.77/mcf in Q1 2007
- Hedging - a $4.3 million gain for the three months ending March 31,
2008 was realized
- Distributions per unit were unchanged from the fourth quarter 2007
while the cash payout ratio decreased by 1% to 63%. A total of
$44.8 million or $0.42 per unit was distributed to unitholders in the
first quarter of 2008
- Net debt increased 7% from $427 million in Q1 2007 to $460 million in
Q1 2008. This leaves available borrowing capacity of $90 million on
bank lines of $550 million
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 March 31 unit price of $17.30 for 2007
and $19.48 for 2008.
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3 Months Ended Mar. 31 %
2008 2007 Change
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Operations
Production
Natural gas (mcf/d) 101,468 106,183 (4)%
Oil & NGLs (bbl/d) 3,430 3,607 (5)%
Barrels of oil equivalent
(boe/d at 6:1) 20,342 21,305 (5)%
Product prices
Natural gas ($/mcf) 8.49 9.77 (13)%
Oil & NGLs ($/bbl) 83.45 59.79 40%
Operating expenses ($/boe) 2.68 2.84 (6)%
Transportation ($/boe) 0.63 0.59 7%
Field netback ($/boe) 42.70 44.82 (5)%
General & administrative expenses
($/boe) 1.19 0.98 21%
Interest expense ($/boe) 3.18 2.96 9%
Financial ($000, except per unit)
Revenue 104,428 112,825 (7)%
Royalties (net of ARTC) 19,264 20,326 (5)%
Funds from operations 70,955 78,364 (9)%
Funds from operations per unit 0.67 0.74 (9)%
Total distributions 44,798 44,350 1%
Total distributions per unit 0.42 0.42 -
Payout ratio 63 57 8%
Earnings 32,440 57,303 (43)%
Earnings per diluted unit 0.31 0.54 (43)%
Capital expenditures 33,054 30,478 8%
Weighted average trust units
outstanding 105,744,338 105,542,484 -
As at December 31
Net debt (before future
compensation expense and
unrealized hedging losses) 460,397 427,263 8%
Unitholders' equity 477,499 506,901 (6)%
Total assets 1,179,705 1,142,858 3%
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Net Earnings 32,440 57,303
Items not requiring cash:
Provision for performance
based compensation 3,496 6
Future income tax expense 15,733 1,639
Depletion, depreciation
and accretion 19,286 19,416
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Funds from operations(1) 70,955 78,364
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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
During the first quarter 2008, Peyto maintained the improved capital efficiency achieved in 2007, investing $33.1 million into drilling and connecting new Deep Basin gas wells. Drilling and completions accounted for $26.9 million, while wellsite equipment and pipelines accounted for $5.6 million. Additional seismic data was acquired for $0.5 million, accounting for the balance of the capital expenditures.
In the first quarter, the Trust drilled 15 gross (12.9 net, 86% working interest) gas wells, completed 17 gross (13.5 net) gas zones and brought 14 gross (11.4 net) zones on production. Production for the quarter averaged 20,342 boe/d down from 21,134 boe/d in the previous quarter due to the steep initial decline from the additions in Q4 2007 which exceeded the new production additions of Q1 2008.
Operating costs in the first quarter 2008, reflecting increased methanol consumption during winter months, were $2.68/boe, up from $2.25/boe in the fourth quarter of 2007, but down from $2.84/boe in Q1 2007. Elimination of third party processing costs in the Chime area and increased processing income contributed to the year over year reduction. Despite continued upward pressure on labor, chemicals, fuel and power costs in Alberta, Peyto has maintained its low cost advantage, leading the industry by a wide margin.
Royalties to the province of Alberta totaled $19.3 million in the quarter, representing 18% of sales or $10.40/boe. Further clarity by the Alberta government regarding the New Royalty Framework was announced on April 10, 2008, with the incentives for deeper gas exploration being partially re-established. Unfortunately, previously announced pricing curves were not modified, and therefore much of the recent natural gas price improvement will result in increased royalty rates in January 2009. Those increased royalty rates would lessen the positive impact to funds from operations that would have otherwise been derived from higher gas prices. Peyto's independent engineers have assessed the impact of the new royalty framework on the value to the Trust's reserve assets and determined that the overall impact on net present value is similar to that of funds from operations but much less pronounced.
Natural gas prices for the first quarter 2008 averaged $8.49/mcf, after hedging gains of $0.56/mcf, while liquids prices averaged $83.45/boe, after hedging losses of $2.84/boe. The combined impact of Peyto's forward sales resulted in a total hedging gain of $2.32/boe. The high heat content, premium gas price Peyto achieved, combined with its low operating costs resulted in field netbacks of $42.70/boe for the quarter.
Peyto underwent its annual bank review in the quarter and despite the recent uncertainty in lending markets, the Trust's banking syndicate has increased bank lines from $525 million to $550 million. With quarter end net debt at $460 million, this leaves $90 million in available bank lines.
Activity Update
Peyto tied-in an additional 6 wells in April before spring breakup caused road bans, preventing further activity in the Trust's core areas. A return to field operations in late May to early June is anxiously anticipated as the Trust plans on expanding the capital program for the year to between $150 and $175 million. Peyto's core areas offer year round access which enables the Trust to accelerate capital spending in the summer months when much of the industry is inactive, ensuring better quality services at competitive pricing.
Marketing
Natural gas demand exceeded supply in 2007 and it is expected this trend will continue through 2008. The US working gas in storage is currently at the mid point of the five year average and well below last year at this time. European natural gas prices are significantly higher than North America and as a result, LNG imports into the US are much lower than last year as cargos are redirected to Europe and Asia. All of these factors are contributing to higher North American natural gas prices. A strong Canadian dollar, however, means Canadian gas supplies are achieving a price that is net of the transportation cost to ship it to southern US markets.
A strategy of forward selling a portion of the Trust's production to secure prices for upcoming distributions and capital programs has worked successfully in the past. This strategy will result in Peyto's realized price trailing the current market price by twelve to eighteen months and will be reflected as a hedging loss as commodity prices strengthen and a hedging gain as they weaken. Since natural gas prices can be unpredictable, this systematic use of forward sales smoothes out the fluctuations in realized price that would otherwise cause volatility in funds from operations.
As of March 31, 2008, Peyto had committed to the forward sale of 21,460,000 gigajoules (GJ) of natural gas at an average price of $7.35/GJ. This translates into a price of $8.59/mcf (17% premium) due to the high heat content nature of Peyto gas production. Had these contracts been closed on March 31, 2008, the Trust would have realized a loss of $37.9 million.
Outlook
The reduced activity levels of the last year afforded the Peyto team time to build upon the inventory of top quality, Deep Basin drilling prospects. Now that market conditions have improved, it is time to capitalize on those opportunities, deploying the execution proficiency the Trust has gained over the last nine years. The financial flexibility that was retained during a time of high costs and lower natural gas prices enables Peyto to accelerate this capital program prior to the realization of higher commodity prices and greater funds from operations. This will not be done, however, at the expense of unitholder returns on capital. Ongoing results will be monitored continuously to ensure they meet expectations. This expanded capital program can be funded with a combination of funds from operations, bank lines and equity. Unitholders are encouraged to visit the Peyto website at www.peyto.com where there is a wealth of information designed to inform and educate investors.
Conference Call and Webcast
A conference call will be held on Thursday, May 8th, 2008, at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT), where the senior management of Peyto will answer questions with respect to the 2008 first quarter financial results. To participate, please call 1-416-646-3096 (Toronto area) or 1-866-250-4909 for all other participants. The conference call will also be available on replay by calling 1-416-640-1917 (Toronto area) or 1-877-289-8525 for all other parties, using passcode 21271243 followed by the pound key (number sign). The replay will be available at 11:00 a.m. MDT, 1:00 p.m. EDT Thursday, May 8th, 2008 until midnight EDT on Thursday, May 15th, 2008. The conference call can also be accessed through the internet at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)2275680. After this time the conference call will be archived on the Peyto Energy Trust website at www.peyto.com.
Annual General Meeting
The Trust's Annual General Meeting of Unitholders is scheduled for 2:30 p.m. on Tuesday, May 13, 2008 at the Macleod Hall B/C, TELUS Convention Centre, 120-9th Avenue SE, Calgary, Alberta. To listen to the Annual General Meeting live, please enter http://w.on24.com/r.htm?e(equal sign)109792&s(equal sign)1&k(equal sign)D7F42466986D70CFBF8E2361A7FB5CC8 in your web browser.
Management's Discussion and Analysis
A copy of the first 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/Q12008MDandA.pdf and will be filed at SEDAR, www.sedar.com, at a later date.
Darren Gee
President and CEO
May 7, 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)
March 31, December 31,
2008 2007
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Assets
Current
Cash 2,464 20,547
Accounts receivable 46,196 47,728
Financial derivative instruments (Note 10) - 7,405
Prepaid expenses and deposits 4,041 5,020
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52,701 80,700
Property, plant and equipment (Note 4) 1,127,004 1,111,532
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1,179,705 1,192,232
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Liabilities and Unitholders' Equity
Current
Accounts payable and accrued liabilities 58,277 85,923
Distributions payable 14,829 14,800
Provision for future performance based
compensation 1,415 16
Financial derivative instruments (Note 10) 37,948 -
Future income taxes - 2,285
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112,469 103,024
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Long-term debt (Note 5) 440,000 430,000
Provision for future performance based
compensation 2,351 253
Asset retirement obligations 8,456 6,766
Future income taxes 138,930 123,197
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589,737 560,216
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Unitholders' equity
Unitholders' capital (Note 6) 410,233 406,301
Accumulated earnings (Note 7) 105,214 117,572
Accumulated other comprehensive income (loss) (37,948) 1,831
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Accumulated earnings and other comprehensive
income (loss) 67,266 122,691
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477,499 528,992
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1,179,705 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
Peyto Energy Trust
Consolidated Statements of Earnings
($000 except per unit amounts)
(unaudited)
For the three months ended March 31,
2008 2007
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Revenue
Oil and gas sales 104,428 112,825
Royalties (19,264) (20,326)
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Petroleum and natural gas sales, net 85,164 92,499
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Expenses
Operating (Note 8) 4,965 5,438
Transportation 1,160 1,129
General and administrative (Note 9) 2,202 1,884
Future performance based compensation provision 3,496 6
Interest on long term debt 5,882 5,684
Depletion, depreciation and accretion (Note 4) 19,286 19,836
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36,991 33,977
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Earnings before taxes 48,173 58,522
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Taxes
Future income tax expense 15,733 1,639
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Net earnings for the period 32,440 56,883
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Earnings per unit (Note 6)
Basic 0.31 0.54
Diluted 0.31 0.54
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See accompanying notes
Peyto Energy Trust
Consolidated Statements of Comprehensive Income
($000 except per unit amounts)
(unaudited)
For the three months ended March 31,
2008 2007
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Net earnings for the period 32,440 56,883
Other comprehensive income (loss)
Change in unrealized gain (loss) on cash
flow hedges (47,369) (13,817)
Realized gain (loss) on cash flow hedges 4,302 (7,794)
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Comprehensive income (loss) (10,627) 35,272
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See accompanying notes
Peyto Energy Trust
Consolidated Statements of Accumulated Earnings and Accumulated Other
Comprehensive Income
($000)
(unaudited)
For the three months ended March 31,
2008 2007
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Accumulated earnings, beginning of period 117,572 86,236
Net earnings for the period 32,440 56,883
Distributions (Note 7) (44,798) (44,350)
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Accumulated earnings, end of period 105,214 98,769
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Accumulated other comprehensive income,
beginning of period 5,119 -
Adoption of financial instruments, net of tax - 23,442
Other comprehensive income (loss) (43,067) (21,611)
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Accumulated other comprehensive income (loss),
end of period (37,948) 1,831
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See accompanying notes
Peyto Energy Trust
Consolidated Statements of Cash Flows
($000)
(unaudited)
For the three months ended March 31,
2008 2007
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Cash provided by (used in)
Operating Activities
Net earnings for the period 32,440 56,883
Items not requiring cash:
Future income tax expense 15,733 1,639
Depletion, depreciation and accretion 19,286 19,836
Change in non-cash working capital related
to operating activities (14,976) (957)
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52,483 77,401
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Financing Activities
Issue of trust units, net of costs 3,932 2,825
Distribution paid (44,798) (44,350)
Increase (decrease) in bank debt 10,000 (5,000)
Change in non-cash working capital related
to financing activities 29 5,107
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(30,837) (41,418)
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Investing Activities
Additions to property, plant and equipment (33,067) (30,478)
Change in non-cash working capital related
to investing activities (6,662) (5,785)
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(39,729) (36,263)
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Net increase (decrease) in cash (18,083) (280)
Cash, beginning of period 20,547 10,806
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Cash, end of period 2,464 10,526
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See accompanying notes
Peyto Energy Trust
Notes to Consolidated Financial Statements
(unaudited)
March 31, 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 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 two new CICA Handbook
Sections, Section 3862 "Financial Instruments - Disclosures" and
Section 3863 "Financial Instruments - Presentation" which will
replace current Section 3861 "Financial Instruments - Disclosure and
Presentation". The new 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 new 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 the new Section 3064, which
establishes standards for the recognition, measurement, presentation
and disclosure of goodwill and of intangible assets. Standards
concerning goodwill are unchanged from the standards in the previous
Section 3062. The Trust is assessing the impact of this new 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
monitor and assess the impact of the convergence of Canadian GAAP and
IFRS.
4. Property, Plant and Equipment
March 31, December 31,
2008 2007
($000) $ $
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Property, plant and equipment 1,445,023 1,410,767
Accumulated depletion and depreciation (318,019) (299,235)
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1,127,004 1,111,532
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At March 31, 2008 costs of $37.8 million (March 31, 2007 -
$38.9 million) related to undeveloped land have been excluded from
the depletion and depreciation calculation.
5. Long-Term Debt
The Trust has a syndicated $525 million extendible revolving credit
facility. The facility is made up of a $20 million working capital
sub-tranche and a $505 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. On April 30,
2008, an amendment to the Trust's credit agreement was signed
increasing the credit facilities to $550 million.
6. Unitholders' Capital
Authorized: Unlimited number of voting trust units
Issued and Outstanding Number
Trust Units (no par value) ($000) of Units Amount
---------------------------------------------------------------------
Balance, December 31, 2006 105,251,394 398,434
Trust units issued by private placement 460,970 7,867
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Balance, December 31, 2007 105,712,364 406,301
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Trust units issued by private placement 207,830 3,932
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Balance, March 31, 2008 105,920,194 410,233
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Per Unit Amounts
Earnings per unit have been calculated based upon the weighted
average number of units outstanding for the three months ended
March 31, 2008 of 105,744,338 (2007 - 105,712,364). There are no
dilutive instruments outstanding.
7. Accumulated Distributions
The Trust paid total distributions to the unitholders in the
aggregate amount of $44.8 million in the three months ended March 31,
2008 of which all was settled in cash (2007 - total $44.4 million) in
accordance with the following schedule:
Production Period Record Date Distribution Date Per Unit
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Special Distribution January 1, 2008 January 15, 2008 $0.0035
January 2008 January 31, 2008 February 15, 2008 $0.14
February 2008 February 29, 2008 March 15, 2008 $0.14
March 2008 March 31, 2008 April 15, 2008 $0.14
Accumulated Earnings and Distributions
($000) 2008 2007
---------------------------------------------------------------------
Opening accumulated earnings 740,038 531,154
Net earnings for the year 32,440 208,884
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Total accumulated earnings 772,478 740,038
Total accumulated distributions (667,264) (622,466)
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Accumulated earnings 105,214 117,572
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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 March 31
2008 2007
($000) $ $
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Field expenses 7,550 7,107
Processing and gathering income (2,585) (1,669)
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Total operating costs 4,965 5,438
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9. General and Administrative Expenses (G & A)
General and administrative expenses are reduced by operating and
capital overhead recoveries on operated properties.
Three Months Ended March 31
2008 2007
($000) $ $
---------------------------------------------------------------------
G&A expenses 2,694 2,537
Overhead recoveries (492) (653)
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Net G&A expenses 2,202 1,884
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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 financial instruments. The objective of
market risk management is to manage and control 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 off balance sheet 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
March 31, 2008 is as follows:
Natural Gas Price
Period Hedged Type Daily Volume (CAD)
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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
April 1, 2009 to October 1, 2009 Fixed price 5,000 GJ $7.85/GJ
As at March 31, 2008, the Trust had committed to the future sale of
21,460,000 gigajoules (GJ) of natural gas at an average price of
$7.35 per GJ or $8.59 per mcf based on the historical heating value
of Peyto's natural gas. Had these contracts been closed on March 31,
2008, the Trust would have realized a loss in the amount of
$37.9 million. If the AECO gas price on March 31, 2008 had been $1/GJ
higher or lower, the unrealized loss on these closed contracts would
change by approximately $21.5 million and would be reflected in the
other comprehensive income of the Trust.
Subsequent to March 31, 2008 the Trust entered into the following
contracts:
Natural Gas Price
Period Hedged Type Daily Volume (CAD)
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Nov 1, 2008 to March 31, 2009 Fixed price 5,000 GJ $9.70/GJ
April 1, 2009 to October 1, 2009 Fixed price 5,000 GJ $8.12/GJ
Fair Values of Financial Assets and Liabilities
The Trust's financial instruments include accounts receivable,
financial derivative assets, current liabilities, provision for
future performance based compensation and long term debt. At
March 31, 2008, the carrying value of accounts receivable, financial
derivative assets, current liabilities 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 facilities.
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 March 31, 2008,
approximately 83% was due from three companies (March 31, 2007 - two
companies, 72%). Of the Trust's revenue for the three months ended
March 31, 2008, approximately 93% was received from three companies
(March 31, 2007 - three companies, 95%). 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 assesses quarterly if there should be any impairment of
financial assets. During the three months ended March 31, 2008, there
was no impairment required on any of the financial assets of the
Trust.
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.
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 quarter ended March 31, 2008 by
approximately $1.1 million.
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 March 31, 2008:
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less than
($000s) 1 Year 1-2 Years 2-5 Years Thereafter
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Accounts payable and
accrued liabilities 58,278
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Derivative financial
instruments 29,303 8,645
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Distributions Payable 14,829
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Provision for future
performance based
compensation 1,415 2,351
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Long-term debt 440,000
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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 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.
March 31, December 31,
2008 2007
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Unitholders' equity 477,499 528,992
Long-term debt 440,000 430,000
Working capital deficit(1) 59,768 22,324
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977,267 981,316
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(1) Current liabilities less current assets
12. Supplemental Cash Flow Information
Three Months Ended March 31
2008 2007
($000) $ $
---------------------------------------------------------------------
Cash interest paid during the period 5,882 5,684
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13. Contingencies and Commitments
a) Contingent Liability
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 operating leases for office
space as follows:
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($000) $
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2008 822
2009 1,097
2010 1,097
2011 1,097
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4,113
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c) Income Taxes
Canada Revenue Agency ("CRA") has conducted an audit of restructuring
costs claimed as a result of the trust conversion in 2003. In late
April, 2008, the Trust received a proposed settlement letter from CRA
that would result in the reclassification of $41.0 million dollars in
employment related costs as eligible capital. The Trust is preparing
a response to the proposed settlement letter and will provide further
information supporting management's view that CRA's position has no
merit and intends to object to any notice of assessment that may be
received. The outcome of this audit is uncertain at this time and as
such no provisions have been made in these financial statements.
%SEDAR: 00019597E