CALGARY, Aug. 6 /PRNewswire-FirstCall/ -- Peyto Energy Trust ("Peyto" or "the Trust") is pleased to present the operating and financial results for the second 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 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 - $2.58/boe, three months ending June 30, 2008 - High revenue per boe - $70.16/boe before hedging, $64.45/boe after hedging, three months ending June 30, 2008 - Low base general and administrative costs - $1.08/boe, three months ending June 30, 2008 - High field netback - $46.12/boe, three months ending June 30, 2008 - High operatorship - operates over 95% of its production - Cash distributions - cash distributions of $46.6 million were 63% of funds from operations for the three months ended June 30, 2008 - Low debt to funds from operations ratio - 1.5:1 (net debt, before provision for future compensation, divided by annualized second quarter 2008 funds from operations) - Distribution growth - distributions have been increased 6 times; they have never decreased, 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 $804 million, and distributed $714 million to unitholders - Transparent capital structure - no convertible debentures, no exchangeable shares, no stock options, no warrants
The second quarter was highlighted by stronger commodity prices, increased distributions and increased capital spending as improved business conditions offered better returns. The following summarizes performance highlights of the business for the second quarter of 2008.
- Capital expenditures - $21.5 million was invested into finding and developing new natural gas reserves in the quarter, a 66% increase from Q2 2007. Over 75% of the capital was spent in June following spring breakup. Capital expenditures for the first half of 2008 were $54.6 million versus $43.4 million for the first half of 2007, an increase of 26% - Production - decreased 5% from 20,509 boe/d in the second quarter of 2007 to 19,530 boe/d in the second quarter of 2008 - Production per unit - decreased 5% per trust unit from the second quarter of 2007, after adjusting for debt and future unrealized performance based compensation - Per unit funds from operations - increased 7% from the previous year to $0.70/unit - Strong commodity prices - Natural gas prices, both before and after hedging, were stronger in Q2 2008 with prices averaging $10.46/mcf and $9.32/mcf, respectively versus $8.10/mcf and $8.59/mcf in Q2 2007 - Hedging - a $10.1 million loss for the three months ending June 30, 2008 was realized - Distributions per unit increased 5% from the second quarter of 2007 while the cash payout ratio decreased to 63% in Q2 2008 from 64% in Q2 2007. A total of $46.6 million or $0.44 per unit was distributed to unitholders in the second quarter of 2008 - Net debt increased 9% from $415 million in Q2 2007 to $454 million in Q2 2008. This leaves available borrowing capacity of $96 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 June 30 unit price of $18.20 for 2007 and $20.15 for 2008. ------------------------------------------------------------------------- 3 Months Ended June 30 % 6 Months Ended June 30 % 2008 2007 Change 2008 2007 Change ------------------------------------------------------------------------- Operations Production Natural gas (mcf/d) 97,819 101,812 (4)% 99,644 103,986 (4)% Oil & NGLs (bbl/d) 3,226 3,540 (9)% 3,328 3,574 (7)% Barrels of oil equivalent (boe/d @ 6:1) 19,530 20,509 (5)% 19,936 20,904 (5)% Product prices Natural gas ($/mcf) 9.32 8.59 8% 8.90 9.19 (3)% Oil & NGLs ($/bbl) 107.45 65.65 64% 95.08 62.71 52% Operating expenses ($/boe) 2.58 2.70 (4)% 2.63 2.77 (5)% Transportation ($/boe) 0.64 0.57 12% 0.63 0.58 9% Field netback ($/boe) 46.12 41.21 12% 44.38 43.04 3% General & administrative expenses ($/boe) 1.08 1.10 (2)% 1.14 1.04 10% Interest expense ($/boe) 3.34 2.95 13% 3.26 2.96 10% Financial ($000, except per unit) Revenue 114,543 100,750 14% 218,971 213,576 3% Royalties 26,861 17,734 51% 46,125 38,060 21% Funds from operations 74,113 69,345 7% 145,068 147,709 (2)% Funds from operations per unit 0.70 0.66 7% 1.37 1.40 (2)% Total distributions 46,605 44,399 5% 91,403 88,750 3% Total distributions per unit 0.44 0.42 5% 0.86 0.84 2% Payout ratio 63 64 (2)% 63 60 5% Earnings 31,412 38,825 (19)% 63,852 95,709 (33)% Earnings per diluted unit 0.30 0.37 (19)% 0.60 0.91 (34)% Capital expenditures 21,528 12,949 66% 54,587 43,426 26% Weighted average trust units out- standing 105,920,194 105,712,364 - 105,876,470 105,670,476 - As at June 30 Net debt (before future compensation expense) 454,417 415,266 9% ------- ------- Unitholders' equity 419,922 514,651 (15)% Total assets 1,196,367 1,150,589 4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- 3 Months Ended 6 Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Net Earnings 31,412 38,825 63,852 95,709 Items not requiring cash: Non-cash provision for performance based compensation 5,349 431 8,845 438 Future income tax expense 19,510 11,326 35,243 12,965 Depletion, depreciation and accretion 17,842 18,763 37,128 38,597 ------------------------------------------------------------------------- Funds from operations(1) 74,113 69,345 145,068 147,709 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 the second quarter, Peyto spent $21.5 million drilling and connecting new tight gas wells in its Alberta Deep Basin core areas. The majority of the capital was invested in June, following spring breakup, as the Trust embarked on its expanded capital program. Drilling and completions accounted for $17.0 million in the quarter, while wellsite equipment and tie-ins accounted for $3.2 million. Successful land sale bids and new seismic data made up the balance of the capital expenditures at $1.2 million.
Peyto drilled 9 gross (6.9 net, 77% working interest) gas wells, completed 16 gross (14 net) gas zones and brought 15 gross (13.5 net) gas zones on production in the quarter. Production for the quarter averaged 19,530 boe/d, comprised of 97.8 mmcf/d of gas and 3,226 bbl/d of oil and natural gas liquids (NGLs).
Strong commodity prices were realized in the quarter with an average natural gas price of $9.32/mcf and an average liquids price of $107.45/bbl, after hedging losses. Royalties to the Alberta government averaged 23.5% or $15.11/boe, up from $9.50/boe in the previous year due to higher commodity prices. Operating costs in Q2 2008 were $2.58/boe, down from $2.68/boe in the previous quarter and $2.70/boe a year ago. Reductions in operating costs resulted from lower third party processing charges which more than offset increases due to property taxes, chemicals and fuel. The high commodity prices and low costs combined to yield the highest field netback in the Trust's history at $46.12/boe.
Activity Update
Post breakup, there have been five drilling rigs actively exploring and developing both the extensive Cardium gas trend across the Trust's land base, as well as the established Notikewin and Cadomin trends in the greater Sundance area. This compares to three drilling rigs working at this same time last year. The five rigs currently active are drilling much more efficiently than in past years, effectively delivering as many wells as 7 to 8 rigs were in 2006.
To date in 2008, Peyto has drilled 34 gross (24.6 net) wells and brought on 37 gross (35.0 net) zones accounting for approximately 2500 boe/d of new production. The Trust is looking to maintain this level of activity through the balance of 2008, on track with previous capital guidance for the year of approximately $175 million. Other than some minor pipeline looping, it is anticipated that existing processing facilities and gathering infrastructure will be sufficient to handle this year's new volumes.
Marketing
Natural gas prices have been extremely volatile over the last few months. In January 2008, the monthly average AECO (Alberta) price was $6.10/GJ. The price then rose to $10.80/GJ by July followed promptly by a 22% drop in August to $8.44/GJ. Oil prices, to which our condensate price is closely tied, were only slightly less volatile, dropping approximately 15% in the last month. Numerous factors are at play in the energy markets including global supply and demand, US economic recession, currency markets, Middle East unrest, weather forecasts and environmental concerns. It makes predicting future natural gas prices challenging and is the reason that Peyto adheres to a marketing strategy which smoothes out such volatility through future sales. As at June 30, 2008, the Trust had committed to the future sale of 21,035,000 GJ of natural gas at an average price of $7.88/GJ ($9.22/mcf based on the historical heating value of Peyto's natural gas). Had these contracts been closed on June 30, 2008, the Trust would have realized a loss in the amount of $80 million. By comparison, had these contracts been closed at July 31, 2008 prices, the Trust would have realized a loss in the amount of $12 million.
For the second quarter of 2008, Peyto's natural gas price before future sales was $10.46/mcf, up 29% from $8.10 in Q2 2007. Forward sales for the second quarter 2008 decreased the realized natural gas price by $1.14/mcf versus a $0.49/mcf gain in the equivalent period in 2007. In general, this approach of forward selling a portion of the Trust's production will realize hedging losses when the short term prices rise and hedging gains when the short term prices fall.
Outlook
Despite the recent drop in natural gas price futures, 2008 is unfolding as a year of record commodity prices. Industry activity has re-aligned service costs such that good returns are again being realized. Alberta's new royalty framework, to take effect January 2009, has been incorporated into the economic evaluation of future drilling ideas. With an industry leading cost structure to help offset the increased royalties, Peyto remains in the enviable position of having an abundance of profitable drilling prospects. The Trust is actively working to execute on them in both a timely and cost efficient manner.
Peyto remains committed to its strategy of exploration and development of Deep Basin tight gas. These high quality assets, when combined with Peyto's low cost structure, deliver some of the highest returns on capital in the industry. Unitholders who visit the Peyto website at http://www.peyto.com/ will find 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 second quarter results on Thursday, August 7th, 2008 at 9:00 a.m. Mountain Daylight Time (MDT), 11:00 a.m. Eastern Daylight Time (EDT). To participate live by phone, please call 1-416-915-5647 or toll free 1-800-814-3911 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 21279259, followed by the pound key. The replay will be available at 11:00 a.m. MDT, 1:00 p.m. EDT Thursday, August 7th, 2008 until midnight EDT on Thursday, August 14th, 2008. The conference call can also be accessed through the internet at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2357520. The archived conference call will be available on the Peyto website at http://www.peyto.com/.
Management's Discussion and Analysis
A copy of the second 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/Q22008MDandA.pdf and will be filed at SEDAR, http://www.sedar.com/, at a later date.
Darren Gee President and Chief Executive Officer August 6, 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) June 30, December 31, 2008 2007 ------------------------------------------------------------------------- Assets Current Cash 5,726 20,547 Accounts receivable (Note 10) 53,462 47,728 Financial derivative instruments (Note 10) - 7,405 Prepaid expenses and deposits 6,289 5,020 ------------------------------------------------------------------------- 65,477 80,700 Property, plant and equipment (Note 4) 1,130,890 1,111,532 ------------------------------------------------------------------------- 1,196,367 1,192,232 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Unitholders' Equity Current Accounts payable and accrued liabilities 54,006 85,923 Distributions payable 15,888 14,800 Provision for future performance based compensation 4,346 16 Financial derivative instruments (Note 10) 75,793 - Future income taxes - 2,285 ------------------------------------------------------------------------- 150,033 103,024 ------------------------------------------------------------------------- Long-term debt (Note 5) 450,000 430,000 Provision for future performance based compensation 4,769 253 Asset retirement obligations 8,664 6,766 Financial derivative instruments (Note 10) 4,539 - Future income taxes 158,440 123,197 ------------------------------------------------------------------------- 626,412 560,216 ------------------------------------------------------------------------- Unitholders' equity Unitholders' capital (Note 6) 410,233 406,301 Accumulated earnings (Note 7) 90,021 117,572 Accumulated other comprehensive income (loss) (80,332) 5,119 ------------------------------------------------------------------------- Accumulated earnings and other comprehensive income (loss) 9,689 122,691 ------------------------------------------------------------------------- 419,922 528,992 ------------------------------------------------------------------------- 1,196,367 1,192,232 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 Six Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenue Oil and gas sales 114,543 100,750 218,971 213,576 Royalties (26,861) (17,733) (46,125) (38,060) ------------------------------------------------------------------------- Petroleum and natural gas sales, net 87,682 83,017 172,846 175,516 ------------------------------------------------------------------------- Expenses Operating (Note 8) 4,580 5,038 9,545 10,476 Transportation 1,133 1,071 2,293 2,200 General and administrative (Note 9) 1,918 2,061 4,121 3,945 Future performance based compensation provision 5,349 431 8,845 438 Interest on long term debt 5,938 5,502 11,819 11,186 Depletion, depreciation and accretion (Note 4) 17,842 18,763 37,128 38,597 ------------------------------------------------------------------------- 36,760 32,866 73,751 66,842 ------------------------------------------------------------------------- Earnings before taxes 50,922 50,151 99,095 108,674 ------------------------------------------------------------------------- Taxes Future income tax expense 19,510 11,326 35,243 12,965 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings for the period 31,412 38,825 63,852 95,709 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per unit (Note 6) Basic and diluted 0.30 0.37 0.60 0.91 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Peyto Energy Trust Consolidated Statements of Comprehensive Income (Loss) ($000 except per unit amounts) (unaudited) Three Months Ended Six Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Net earnings for the period 31,412 38,825 63,852 95,709 Other comprehensive income (loss) Change in unrealized gain (loss) on cash flow hedges (32,234) 9,650 (79,613) (4,166) Realized gain (loss) on cash flow hedges (10,150) 3,674 (5,838) (4,121) ------------------------------------------------------------------------- Comprehensive income (loss) (10,972) 52,149 (21,599) 87,422 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Peyto Energy Trust Consolidated Statements of Accumulated Earnings and Accumulated Other Comprehensive Income (Loss) ($000) (unaudited) Three Months Ended Six Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Accumulated earnings, beginning of period 105,214 98,769 117,572 86,236 Net earnings for the period 31,412 38,825 63,852 95,709 Distributions (Note 7) (46,605) (44,399) (91,403) (88,750) ------------------------------------------------------------------------- Accumulated earnings, end of period 90,021 93,195 90,021 93,195 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accumulated other comprehensive income, beginning of period (37,948) 1,831 5,119 - Adoption of financial instruments, net of tax - - - 23,442 Other comprehensive income (loss) (42,384) 13,324 (85,451) (8,287) ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), end of period (80,332) 15,155 (80,332) 15,155 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Peyto Energy Trust Consolidated Statements of Cash Flows ($000) (unaudited) Three Months Ended Six Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Cash provided by (used in) Operating Activities Net earnings for the period 31,412 38,825 63,852 95,709 Items not requiring cash: Future income tax expense 19,510 11,326 35,243 12,965 Depletion, depreciation and accretion 17,842 18,763 37,128 38,597 Change in non-cash working capital related to operating activities (2,677) (40) (17,653) (996) ------------------------------------------------------------------------- 66,087 68,874 118,570 146,275 ------------------------------------------------------------------------- Financing Activities Issue of trust units, net of costs - - 3,932 2,825 Distributions paid (Note 7) (46,605) (44,399) (91,403) (88,750) Increase (decrease) in bank debt 10,000 (5,000) 20,000 (10,000) Change in non-cash working capital related to financing activities 1,059 - 1,088 5,107 ------------------------------------------------------------------------- (35,546) (49,399) (66,383) (90,818) ------------------------------------------------------------------------- Investing Activities Additions to property, plant and equipment (21,520) (12,949) (54,587) (43,426) Change in non-cash working capital related to investing activities (5,759) (5,828) (12,421) (11,613) ------------------------------------------------------------------------- (27,279) (18,777) (67,008) (55,039) ------------------------------------------------------------------------- Net increase (decrease) in cash 3,262 698 (14,821) 418 Cash, beginning of period 2,464 10,526 20,547 10,806 ------------------------------------------------------------------------- Cash, end of period 5,726 11,224 5,726 11,224 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Peyto Energy Trust Notes to Consolidated Financial Statements (unaudited) June 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 two new CICA Handbook Sections, Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation" which replaced 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 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 June 30, December 31, ($000) 2008 2007 --------------------------------------------------------------------- Property, plant and equipment 1,466,745 1,410,767 Accumulated depletion and depreciation (335,855) (299,235) --------------------------------------------------------------------- 1,130,890 1,111,532 --------------------------------------------------------------------- --------------------------------------------------------------------- At June 30, 2008 costs of $37.8 million (June 30, 2007 - $38.8 million) related to undeveloped land have 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 Number of Trust Units (no par value) ($000) 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, June 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 June 30, 2008 of 105,920,194 (2007 - 105,712,364) and for the six months ended June 30, 2008 of 105,876,470 (2007 - 105,670,476). There are no dilutive instruments outstanding. 7. Accumulated Distributions The Trust paid total distributions to the unitholders in the aggregate amount of $46.6 million in the three months ended June 30, 2008 (2007 - total $44.4 million) and $91.4 million for the six months ended June 30, 2008 (2007 - total $88.8 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 Accumulated Earnings and Distributions June 30, December 31, ($000) 2008 2007 --------------------------------------------------------------------- Opening accumulated earnings 740,038 531,154 Net earnings for the period 63,852 208,884 --------------------------------------------------------------------- Total accumulated earnings 803,890 740,038 Total accumulated distributions (713,869) (622,466) --------------------------------------------------------------------- Accumulated earnings 90,021 117,572 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 Six Months Ended June 30 June 30 ($000) 2008 2007 2008 2007 --------------------------------------------------------------------- Field expenses 7,328 7,714 14,878 14,821 Processing and gathering income (2,748) (2,676) (5,333) (4,345) --------------------------------------------------------------------- Total operating costs 4,580 5,038 9,545 10,476 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 Six Months Ended June 30 June 30 ($000) 2008 2007 2008 2007 --------------------------------------------------------------------- G&A expenses 2,579 2,522 5,468 5,059 Overhead recoveries (661) (461) (1,347) (1,114) --------------------------------------------------------------------- Net G&A expenses 1,918 2,061 4,121 3,945 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 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 June 30, 2008 is as follows: Price Natural Gas 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 June 30, 2008, the Trust had committed to the future sale of 21,035,000 gigajoules (GJ) of natural gas at an average price of $7.88 per GJ or $9.22 per mcf based on the historical heating value of Peyto's natural gas. Had these contracts been closed on June 30, 2008, the Trust would have realized a loss in the amount of $80.3 million. If the AECO gas price on June 30, 2008 had been $1/GJ higher or lower, the unrealized loss on these closed contracts would change by approximately $21.0 million and would be reflected in the other comprehensive income of the Trust. 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 June 30, 2008 by approximately $1.1 million and year to date by approximately $2.2 million. 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 June 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 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 June 30, 2008, approximately 81% was due from four companies (December 31, 2007 - three companies, 72%). Of the Trust's revenue for the six months ended June 30, 2008, approximately 83% was received from three companies (June 30, 2007 - three companies, 86%). 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. At June 30, 2008, there was no impairment of 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. 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 June 30, 2008: less than There- ($000s) 1 Year 1-2 Years 2-5 Years after --------------------------------------------------------------------- Accounts payable and accrued liabilities 54,006 --------------------------------------------------------------------- Derivative financial instruments 75,793 4,769 --------------------------------------------------------------------- Distributions Payable 15,888 --------------------------------------------------------------------- Provision for future performance based compensation 4,346 4,769 --------------------------------------------------------------------- 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. June 30, December 31, ($000) 2008 2007 --------------------------------------------------------------------- Unitholders' equity 419,922 528,992 Long-term debt 450,000 430,000 Working capital deficit(1) 84,556 22,324 --------------------------------------------------------------------- 954,478 981,316 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Current liabilities less current assets (includes unrealized hedging loss of $80 million) 12. Supplemental Cash Flow Information Three Months Ended Six Months Ended June 30 June 30 ($000) 2008 2007 2008 2007 --------------------------------------------------------------------- Cash interest paid during the period 5,938 5,502 11,819 11,186 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 operating leases for office space as follows: --------------------------------------------------------------------- ($000) $ --------------------------------------------------------------------- 2008 548 2009 1,097 2010 1,097 2011 1,097 --------------------------------------------------------------------- 3,839 --------------------------------------------------------------------- --------------------------------------------------------------------- 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. The Trust has not yet received a notice of reassessment from the CRA. Based upon consultation with legal counsel, Management's view is that CRA's position has no merit. A notice of objection will be filed upon receipt of the notice of reassessment. No provision has been made in these financial statements. 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
