Bonterra Energy Income Trust Announces Third Quarter Results
CALGARY, Nov. 7 /CNW/ - Bonterra Energy Income Trust (the Trust or
Bonterra) (www.bonterraenergy.com) (TSX: BNE.UN) is pleased to announce its
financial and operational results for the three months and nine months ended
September 30, 2008.
HIGHLIGHTS
----------
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
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FINANCIAL ($000, except $ per unit)
Revenue - realized oil and gas 34,226 23,794 99,117 69,858
Adjusted Distribution Base(1) 21,158 13,149 60,568 37,973
Per Unit - Basic 1.24 0.78 3.56 2.25
Per Unit - Diluted 1.22 0.77 3.53 2.24
Cash Distributions per Unit 0.96 0.66 2.50 1.98
Payout Ratio 77% 85% 70% 88%
Net Earnings 21,125 8,945 44,841 21,978
Per Unit - Basic 1.23 0.53 2.63 1.30
Per Unit - Diluted 1.22 0.53 2.61 1.30
Capital Expenditures
and Acquisitions 6,038 2,763 15,002 12,087
Total Assets 150,120 138,140
Working Capital Deficiency(2) 47,499 50,041
Unitholders' Equity 57,623 50,820
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OPERATIONS
Oil and NGLs
Barrels Per Day 3,013 3,054 3,063 3,118
Average Price ($ per barrel) 103.36 73.68 97.29 67.87
Natural Gas
MCF Per Day 7,233 6,196 7,215 6,442
Average Price ($ per MCF) 8.20 5.47 8.71 6.77
Total BOE per Day(3) 4,219 4,088 4,266 4,192
(1) Adjusted distribution base is not a recognized measure under GAAP.
Management believes that in addition to cash flow from operations,
adjusted distribution base is a useful supplemental measure as it
demonstrates the Trust's ability to generate the funds necessary to
make trust distributions, repay debt or fund future growth through
capital investment. Investors are cautioned, however, that this
measure should not be construed as an indication of the Trust's
performance. The Trust's method of calculating this measure may
differ from other issuers and accordingly, it may not be comparable
to that used by other issuers. For these purposes, the Trust defines
adjusted distribution base as funds provided by operations before
changes in non-cash operating working capital items excluding gain on
sale of property and asset retirement expenditures.
The Canadian Institute of Chartered Accountants (CICA) published
recommendations regarding disclosure of a measure called Standardized
Distributable Cash. Please refer to page 9 of this report for the
reconciliation between adjusted distribution base and standardized
distributable cash.
(2) Includes 100 percent of debt.
(3) BOE are calculated using a conversion ratio of 6 MCF to 1 barrel of
oil. The conversion is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead and as such may be misleading if
used in isolation.
Report to Shareholders
Bonterra Energy Income Trust (Bonterra or the Trust) is pleased to report
its operating and financial results for the three months and nine months ended
September 30, 2008.
Bonterra delivered another quarter of excellent results despite the
significant volatility due to the continued fallout from the global credit
crisis which has resulted in major stock market declines; ongoing recession
fears in both the United States and Canada; and a subsequent weakening in
commodity prices for the last month of the quarter.
Highlights include:
- Record net earnings of approximately $21.1 million for the third
quarter of 2008, a 64 percent increase over the previous quarter and
a 136 percent increase over the third quarter of 2007;
- Third quarter revenue was approximately $34.2 million and remained
relatively stable when compared with revenue of $34.4 million during
the second quarter of the year. Compared with the third quarter of
2007, revenue increased 61 percent;
- Bonterra's adjusted distribution base remained stable at
approximately $21.2 million compared to $21.4 million recorded in the
second quarter of 2008 and increased 17 percent compared with the
same period in 2007; and
- Solid execution in the Trust's operations with record cash netbacks
of $56.45 per barrel of oil equivalent (BOE) and a 100 percent
drilling success rate during the quarter.
Bonterra has continued its long-term, disciplined approach to creating
value for its investors and during the third quarter proposed a plan that if
implemented will provide certainty and clarity with regards to its future. The
Board of Directors and Management recommended a proposal to convert from a
trust to a corporation through a plan of arrangement that includes the
acquisition of Silverwing Energy Inc. (Silverwing) and the reorganization with
SRX Post Holdings Inc. (SRX).
Management strongly believes that the corporate structure is better
suited to the Trust's core business model of growth, capital appreciation and
income generation for Unitholders. Bonterra has been successful in providing
strong returns for investors, however with the federal government's
introduction of trust taxation on October 31, 2006 and subsequent legislation,
there has been diminished value associated with the income trust structure
with negative impacts including prolonged depression in trust unit prices,
decreased access to capital and a limited ability to grow based on the "normal
growth" guidelines.
The plan of arrangement was overwhelmingly approved by over 99 percent of
Unitholders at the special meeting held on October 16, 2008 and the plan
implementation date is expected to be on or about November 12, 2008 after
further diligence with regard to the SRX transaction.
Selected benefits of the new corporate structure include:
- The ability to continue to provide income oriented investors with a
substantial cash yield. Bonterra intends to continue with a cash
dividend policy similar to that followed by the Trust, subject to
commodity prices and volumes of production, while allowing Bonterra
to aggressively pursue growth opportunities;
- Substantial tax pools of approximately $450 million which will allow
Bonterra to extend its taxable horizon to approximately 2015,
depending on commodity prices.
- Higher after-tax earnings for investors as dividends are taxed at
lower rates than distributions;
- Access to a broader domestic investor base that may result in more
financing opportunities;
- Removal of the current foreign ownership limitations of 50 percent of
the outstanding trust units, thereby potentially broadening the
investor base internationally;
- Removal of the growth limitation which currently exists under the
"normal growth" guidelines;
- The ability to increase capital investment over the next several
years with a view to providing enhanced returns to investors; and
- Bonterra is positioned to be valued as a growth-oriented, high-
dividend paying corporation with a proven history of accretive growth
and long term returns for investors.
The acquisition of Silverwing provides Bonterra with a new core area and
an additional 650 BOE per day of production and 2.2 MMBOE of reserves (proved
plus probable). The Silverwing assets are predominantly high-working interest,
largely operated properties located in northeastern British Columbia (BC). In
addition, Bonterra receives 10,000 net acres of undeveloped land with the
right to earn an additional 38,000 acres of non-producing lands in Alberta and
BC providing the Trust with significant potential for further development.
Production remained relatively flat quarter over quarter at 4,219 BOE per
day. During the first nine months of 2008, Bonterra incurred capital costs of
$15.0 million and drilled 18 gross (12.7 net) Cardium oil wells and one gross
(0.1 net) shallow gas well. The winter drilling program is well underway and
Bonterra anticipates drilling a total of 12 gross (11.4 net) Cardium oil
wells, six gross (five net) Edmonton sands natural gas wells and three gross
(2.8 net) Shaunavon oil wells in the fourth quarter.
It is currently anticipated that the majority of wells drilled during the
third and fourth quarter will be on production by the end of December with all
remaining drilled wells to be completed and tied-in during the first quarter
of 2009. Including additional production associated with the Silverwing
acquisition, Bonterra estimates a year end exit rate of approximately 5,100 to
5,200 BOE per day.
The ongoing global financial crisis has led to significant declines in
share prices across the energy sector and Bonterra's trust unit price has been
impacted as well. In respect to the substantial deterioration in oil prices
along with natural gas continuing to trade lower, the Board of Directors and
management has deemed it necessary to reduce the monthly dividend from $0.32
to $0.26 per trust unit to reflect the current pricing environment. The $0.32
distribution was based on approximate pricing of $115 per barrel for oil, $65
per barrel for liquids and $8.00 per MCF for natural gas (all Canadian
dollars). Commodity price forecasts for the foreseeable future are much lower
necessitating the reduction. The board will continue to monitor dividend
levels, payout ratios and capital expenditures on a monthly basis.
In conclusion, Bonterra remains well-positioned in the industry to
continue providing investors with above average results and returns. The
company's superior asset base provides a strong foundation for continued
success with a drilling inventory in excess of 10 years. The corporate
conversion positions the company to provide increased after-tax returns to
investors and removes uncertainty associated with trust taxation legislation.
Finally, the challenging conditions in the capital and commodity markets will
likely present further acquisition opportunities in the oil and gas sector.
Bonterra's balance sheet strength and conservative debt levels well-positions
the company to make additional strategic acquisitions. The company will
continue to assess all opportunities diligently to further add value on behalf
of investors.
Forward-looking Information
---------------------------
Certain statements contained in this discussion include statements which
contain words such as "anticipate", "could", "should", "expect", "seek",
"may", "intend", "likely", "will", "believe" and similar expressions, relating
to matters that are not historical facts, and such statements of our beliefs,
intentions and expectations about development, results and events which will
or may occur in the future, constitute "forward-looking information" within
the meaning of applicable Canadian securities legislation and are based on
certain assumptions and analysis made by us derived from our experience and
perceptions. Forward-looking information in this discussion includes, but is
not limited to: expected cash provided by continuing operations; cash
distributions; future capital expenditures, including the amount and nature
thereof; oil and natural gas prices and demand; expansion and other
development trends of the oil and gas industry; business strategy and outlook;
expansion and growth of our business and operations; and maintenance of
existing customer, supplier and partner relationships; supply channels;
accounting policies; credit risks; and other such matters.
All such forward-looking information is based on certain assumptions and
analyses made by us in light of our experience and perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe are appropriate in the circumstances. The risks,
uncertainties, and assumptions are difficult to predict and may affect
operations, and may include, without limitation: foreign exchange
fluctuations; equipment and labour shortages and inflationary costs; general
economic conditions; industry conditions; changes in applicable environmental,
taxation and other laws and regulations as well as how such laws and
regulations are interpreted and enforced; the ability of oil and natural gas
trusts to raise capital; the effect of weather conditions on operations and
facilities; the existence of operating risks; volatility of oil and natural
gas prices; oil and gas product supply and demand; risks inherent in the
ability to generate sufficient cash flow from operations to meet current and
future obligations; increased competition; stock market volatility;
opportunities available to or pursued by us; and other factors, many of which
are beyond our control.
Actual results, performance or achievements could differ materially from
those expressed in, or implied by, this forward-looking information and,
accordingly, no assurance can be given that any of the events anticipated by
the forward-looking information will transpire or occur, or if any of them do,
what benefits will be derived there from. Except as required by law, Bonterra
disclaims any intention or obligation to update or revise any forward-looking
information, whether as a result of new information, future events or
otherwise.
The forward-looking information contained herein is expressly qualified
by this cautionary statement.
Financial and Operational Discussion
------------------------------------
Production
----------
Three months ended Nine months ended
September June September September September
30, 2008 30, 2008 30, 2007 30, 2008 30, 2007
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Crude oil and NGLs
(barrels per day) 3,013 3,024 3,054 3,063 3,118
Natural gas
(MCF per day) 7,233 7,272 6,196 7,215 6,442
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Average BOE per day 4,219 4,236 4,086 4,266 4,192
-------------------------------------------------------------------------
Barrels of oil equivalent (BOE) are calculated using a conversion ratio
of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead and as such may be misleading if
used in isolation.
Production volumes for the third quarter were relatively unchanged from
the second quarter. Production increases resulting from the tie-in of 4 gross
and net Cardium wells and a 0.1 net natural gas well were offset by the
Trust's natural decline rate of approximately 9 percent.
The Trust drilled 15 gross (12.3 net) Cardium oil wells and 1 gross (0.1
net) shallow gas well in the first nine months of 2008 on its operated lands.
In addition the Trust participated in the drilling of 3 (0.4 net) Cardium
wells on non-operated lands. As at September 30, 2008, Bonterra had 5 gross
(4.2 net) Cardium oil wells and 3 gross (2.5 net) coalbed methane wells (CBM)
drilled but not on production. During the first nine months of 2008, the Trust
tied-in 20 gross (14.8 net) Cardium wells and 3 gross (2.1 net) natural gas
wells. The Trust anticipates drilling a total of 12 gross (11.4 net) Cardium
oil wells, 6 gross (5 net) Edmonton sands natural gas wells as well as 3 gross
(2.8 net) Shaunavon oil wells in the fourth quarter of 2008. In addition,
Bonterra anticipates closing the Silverwing acquisition on or about November
12, 2008 resulting in additional production of approximately 650 BOE per day.
It is currently projected that between 10 to 15 of the Cardium wells and
4 to 5 of the Edmonton sand wells drilled in the third and fourth quarters
will be on production by the end of December. All the remaining drilled wells
are scheduled to be completed and tied-in during the first quarter of 2009.
Should the Trust be successful in closing the Silverwing acquisition and
tie-ins as scheduled, it is estimated that the Trust's 2008 exit production
will be approximately 5,100 to 5,200 BOE per day.
Revenue
-------
Three months ended Nine months ended
September June September September September
30, 2008 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Revenue - oil
and gas sales (000's) 34,226 34,398 23,794 99,117 69,858
Average Realized Prices:
Crude oil and NGLs
(per barrel) 103.36 101.69 73.68 97.29 67.87
Natural gas (per MCF) 8.20 9.61 5.47 8.71 6.77
-------------------------------------------------------------------------
Third quarter realized gross revenue of $34,226,000 was slightly lower
than the second quarter 2008 due to slightly lower production volumes.
Included in revenue is a realized loss on risk management contracts of
$8,329,000 for the first nine months of 2008 ($924,000 gain in the first nine
months of 2007). In addition, the Trust also recorded an unrealized gain on
risk management contracts of $1,041,000 for the first nine months of 2008
(first nine months of 2007 - ($638,000)). All fair value adjustments related
to outstanding risk management contracts are recorded as adjustments to net
earnings.
The Trust anticipates lower fourth quarter realized revenue as commodity
prices have dropped over 40 percent from their highs in June and July. A
portion of this reduction should be offset with the Silverwing acquisition and
additional production from wells tied-in during the fourth quarter.
During the first quarter of 2008, the Trust reassessed its hedging
policy. With the disposal of the Trust's interest in the Dodsland properties,
which had production volume of approximately one barrel per day per well and
operating costs per barrel in the mid $30's, as well as the reduction in the
payout ratio from the high 80 percent to mid 60 percent range, Bonterra has
decided that at least in the near term it will not enter into further risk
management contracts. The Trust will however maintain the existing risk
management agreements until they expire. Kindly refer to Note 9 to the
attached interim financial statements for details of outstanding risk
management contracts. As at September 30, 2008, the fair value of the
outstanding risk management contracts was a net liability of $2,044,000
(December 31, 2007 - $3,085,000).
Royalties
---------
Three months ended Nine months ended
September June September September September
30, 2008 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Crown royalties 3,523 4,263 2,030 11,399 6,575
Freehold royalties,
gross overriding
royalties and net
carried interests 1,134 1,056 652 2,921 2,553
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Total royalty expense 4,657 5,319 2,682 14,320 9,128
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Royalties paid by the Trust consist primarily of Crown royalties paid to
the Provinces of Alberta and Saskatchewan. The non-Crown royalty figure for
the nine months ended September 30, 2007 includes a one-time prior year
royalty charge adjustment of $800,000.
The majority of the Trust's wells are low productivity wells and
therefore have low Crown royalty rates. The Trust's average Crown royalty rate
is approximately 10.6 percent (2007 - 9.5 percent) and approximately 2.7
percent (2007 - 2.5 percent) for other royalties before hedging adjustments.
Bonterra continues to expect an average combined royalty rate of approximately
13.5 percent for the balance of 2008.
The recently announced new Alberta Crown royalty rates vary by prices as
well as productivity levels. With the recent decline in commodity prices as
well as the Silvering acquisition (mostly BC production with lower Crown
royalty rates) may result in a lower average Crown royalty rate for Bonterra
in 2009.
Production Costs
----------------
Three months ended Nine months ended
September June September September September
30, 2008 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Production costs 6,148 6,089 6,401 18,554 18,538
$ per BOE 15.84 15.79 17.03 15.87 16.20
-------------------------------------------------------------------------
Due to increased demand for services resulting from high commodity prices
over the past year have resulted in service cost increases in the 5 to 10
percent range on a year over year basis. The Trust continues to monitor costs
and anticipates that costs should decline due to the recent commodity price
declines as well as the lower cost per BOE related to the Silverwing
production. The Trust expects costs per BOE to remain in the $15.50 to $16.00
range for the remainder of 2008 and $15.00 to $15.50 in 2009.
The Trust's production comes primarily from low productivity wells. These
wells generally result in higher production costs on a per unit-of-production
basis as costs such as municipal taxes, surface leases, power and personnel
costs are not variable with production volumes. The high production costs for
the Trust are substantially offset by current low royalty rates of
approximately 13.5 percent, which is much lower than industry average for
conventional production and results in high cash netbacks on a combined basis
despite higher than industry average production costs.
General and Administrative (G&A) Expense
----------------------------------------
Three months ended Nine months ended
September June September September September
30, 2008 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
G&A Expense 845 855 773 2,577 1,864
$ per BOE 2.18 2.22 2.06 2.20 1.63
-------------------------------------------------------------------------
The increase in G&A expense year over year was due to increased employee
compensation of approximately $822,000 as well as increases in other
professional service costs of approximately $100,000. Offsetting a portion of
the increase was increased cost recoveries of $40,000 from related
corporations (see Related Party section) and approximately an $80,000 increase
in general and administration charges to joint venture partners.
Interest Expense
----------------
Three months ended Nine months ended
September June September September September
30, 2008 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Interest Expense 545 650 709 1,994 2,150
-------------------------------------------------------------------------
Interest charges declined as decreases in average outstanding debt
balances and reduction in borrowing rates resulted in a reduction of $156,000
in 2008 borrowing costs compared to 2007. The quarter over quarter decrease
was due to slightly lower interest rates as well as reduced debt balances.
Increased cash flow resulting from high crude oil prices coupled with the
Trust's lower payout ratio resulted in a reduction of approximately $4,100,000
in the Trust's debt in Q3 from Q2 2008.
The acquisition of Silverwing as well as the reorganization with SRX into
a corporation will result in an approximate additional $44.5 million of debt.
This will result in higher interest expense in future quarters. Bonterra is
currently able to borrow at rates between 3.5 and 4 percent per annum, however
the new credit facility has an increased interest rate at approximately 0.75
to 0.85 percent.
The Trust's net debt as a percentage of annualized third quarter adjusted
distribution base was approximately seven months (56 percent). The Trust
believes that maintaining debt of approximately one year's adjusted
distribution base (calculated quarterly based on annualized quarterly results)
is an appropriate level to either take advantage of future acquisition
opportunities or provide flexibility to develop its infill oil, shallow gas
and CBM potential from its cash flow and additional bank loans.
Reorganization Costs
--------------------
Bonterra has incurred approximately $752,000 in costs related to the
conversion to a corporation. These costs consist primarily of legal,
accounting and printing costs related to the negotiation, due diligence and
preparation of the information circular. These are one time costs that will
not be incurred on a continuous basis. The Trust is liable to pay a finders
fee of $1,000,000 for the reorganization which will be expensed in the fourth
quarter if the transaction closes.
Unit Based Compensation
-----------------------
Unit based compensation is a statistically calculated value representing
the estimated expense of issuing employee unit options. The Trust records a
compensation expense over the vesting period based on the fair value of
options granted to employees, directors and consultants. During 2008, 29,000
employee unit options were issued with an estimated fair value of $115,000
($3.95 per option) using the Black-Scholes pricing model. With the affirmative
vote by the Trust's Unitholders, all Trust options have vested due to the
reorganization and therefore the remaining balance of $275,000 of unit based
compensation expense will be expensed during the fourth quarter of 2008.
Further compensation expense will be expensed when new options in the new
corporation are issued.
Depletion, Depreciation, Accretion and Dry Hole Costs
-----------------------------------------------------
Provision for depletion, depreciation and accretion was $10,611,000 and
$10,278,000, respectively for the nine month periods ending September 30, 2008
and September 30, 2007. The increase in the depletion amount was due primarily
to increased production volumes and a marginal increase in the average cost of
reserves.
The Trust continues to replace production declines with reserves from
newly drilled wells. The Trust has capital costs of approximately $6.10 per
proved BOE of reserves based on the December 31, 2007 independent engineering
report.
All wells drilled during the fourth quarter of 2007 and first nine months
of 2008 have been successful and therefore no dry hole costs were recorded
during 2008.
Taxes
-----
On October 31, 2006, the Canadian Federal Government announced a proposed
Trust taxation pertaining to taxation of distributions paid by publicly traded
income trusts. This was enacted by legislation in June 2007. Currently
distributions paid to Unitholders, other than return of capital, are claimed
as a deduction by the Trust in arriving at taxable income whereby tax is
eliminated at the Trust level and is paid by the Unitholders at each
Unitholder's rate of taxation. The June, 2007 legislation results in a
two-tiered tax structure whereby distributions commencing in 2011 would first
be subject to a 31.5 percent tax at the Trust level and then investors would
be subject to tax on the distribution as if it were a taxable dividend paid by
a taxable Canadian corporation. The tax rate was subsequently lowered to 29.5
percent in 2011 and 28 percent in 2012 and thereafter.
On February 26, 2008, the Minister of Finance announced that instead of
basing the provincial component of the trust tax rate on a flat rate of 13
percent, the provincial component will instead be based on the general
provincial corporate tax rate in each province in which the income trust has a
permanent establishment. Under the proposal the Trust would be considered to
have a permanent establishment in Alberta, where the provincial tax rate in
2011 is expected to be 10 percent.
The Trust has estimated its future income taxes based on its best
estimates of results from operations and tax pool claims and cash
distributions in the future assuming no material change to the Trust's current
organizational structure. As currently interpreted, Canadian Generally
Accepted Accounting Principles (GAAP) does not permit the Trust's estimate of
future income taxes to incorporate any assumptions related to a change in
organizational structure until such structures are given legal approval. The
reorganization currently contemplated by the arrangement agreement should
result in the new corporate entity having no current tax liability until 2015
depending on commodity prices. Upon closing of the plan of arrangement, the
resulting corporation will report an estimated $75,000,000 future income tax
asset with a corresponding $65,000,000 deferred tax credit which will be
amortized into income as the benefit of the additional tax pools are used to
shelter future income tax.
Currently, taxable income earned within the Trust is required to be
allocated to its Unitholders and as such the Trust will not incur any current
taxes. However, the Trust operates its oil and gas interests through its 100
percent owned subsidiaries Bonterra Energy Corp. (Bonterra Corp.) and Novitas
Energy Ltd. (Novitas) and these corporations may periodically be taxable.
These corporations pay the majority of their income to the Trust through
interest and royalty payments which are deductible for income tax purposes.
The current tax provision relates to a resource surcharge payable by the
Trust's subsidiaries to the Province of Saskatchewan. The surcharge is
calculated as a flat percent of revenues generated from the sale of petroleum
products produced in Saskatchewan. The provincial government of Saskatchewan
has reduced the resource surcharge rate to 3.1 percent on July 1, 2007 and to
3.0 percent on July 1, 2008.
When the plan of arrangement is completed, the resulting corporation
should have consolidated tax pools of approximately $440,000,000 which can be
used to shelter income from the oil and gas operations.
The Canadian taxable portion of distributions for each taxation year is
calculated on an annual basis and is reported by February 28 of the following
year.
Net Earnings
------------
Three months ended Nine months ended
September June September September September
30, 2008 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Net Earnings 21,125 12,912 8,945 44,841 21,978
-------------------------------------------------------------------------
Net earnings increased to an all time high of $44,841,000 in the first
nine months of 2008 from $21,978,000 in the corresponding 2007 period. Revenue
increases due to increased commodity prices and production were partially
offset by increased loss on realized risk management contracts as well as
increased royalty expense. The Trust's quarter over quarter net earnings
increased $8,212,000 due primarily to reduction in the loss on unrealized risk
management contracts offset partially by the future tax impact of those
contracts.
The Trust continues to return in excess of 40 percent of its gross
realized revenues in net earnings. The Trust's low capital costs combined with
a low debt to adjusted distribution base ratio all contribute to the high
return. Bonterra's higher than industry average per unit operating costs are
more than offset with its low royalty rates resulting in one of the highest
cash netbacks in the industry (see cash netback).
Comprehensive Income
--------------------
On January 1, 2007, the Trust adopted the new GAAP accounting standards
regarding the accounting for financial instruments. On adoption, the Trust
increased its investment in a related party by $1,836,000 for the fair value
of this investment. Other comprehensive income for the first nine months of
2008 included a decrease in the unrealized gain on investment in a related
party of $488,000 (2007 increase of $1,170,000) net of applicable income
taxes.
Standardized Distributable Cash
-------------------------------
Compliance with Guidance
This discussion is in all material respects in accordance with the
recommendations provided in CICA's publication "Standardized Distributable
Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation
and Disclosure".
The following discussion is presented for comparison purposes to previous
results. The resulting corporation from the plan of arrangement will not be
subject to the CICA's publication.
Definition and Disclosure of Standardized Distributable Cash
Cumulative
Amounts From
Inception
Nine Months Nine Months of Trust
Ended Ended (July 1, 2001)
September 30, September 30, to September
($000) 2008 2007 30, 2008
-------------------------------------------------------------------------
Cash Flow from Operating Activities 59,234 38,064 277,509
Less adjustment for:
Capital expenditures (15,002) (12,087) (109,500)
Financing restrictions caused
by debt - - -
-------------------------------------------------------------------------
Standardized Distributable Cash 44,232 25,977 168,009
-------------------------------------------------------------------------
Definition and Disclosure of Adjusted Distribution Base (Formerly Funds
Flow from Operations)
Cumulative
Amounts From
Inception
Nine Months Nine Months of Trust
Ended Ended (July 1, 2001)
September 30, September 30, to September
($000) 2008 2007 30, 2008
-------------------------------------------------------------------------
Standardized Distributable Cash
- per above 44,232 25,977 168,009
Adjusted for:
Capital expenditures 15,002 12,087 109,500
Gain on sale of property - - 1,089
Changes in accounts receivable 1,936 (369) 7,512
Changes in crude oil inventory (99) (33) 154
Changes in parts inventory (26) 41 (216)
Changes in prepaid expenses 997 188 1,495
Changes in accounts payable
and accrued liabilities (4,102) (450) (2,239)
Asset retirement obligations
settled 2,628 532 5,157
-------------------------------------------------------------------------
Adjusted Distribution Base(1) 60,568 37,973 290,461
-------------------------------------------------------------------------
(1) Adjusted distribution base is not a recognized measure under GAAP.
The Trust believes that in addition to cash flow from operations the
adjusted distribution base is a useful supplemental measure as it
demonstrates the Trust's ability to generate the funds necessary to
make trust distributions, repay debt or fund future growth through
capital investment. Investors are cautioned, however, that this
measure should not be construed as an indication of the Trust's
performance. The Trust's method of calculating this measure may
differ from other issuers and accordingly, it may not be comparable
to that used by other issuers. For these purposes, the Trust defines
adjusted distribution base as funds provided by operations before
changes in non-cash operating working capital items excluding gain on
sale of property and asset retirement obligations.
Working Capital Policies
The Trust, excluding current portion of debt, maintains a consistent
level of working capital. All items of working capital are generally turned
over every 30 to 60 days. Excluding minor variations due to payment of bonuses
and property taxes, there are no recurring items that would cause a seasonal
impact in working capital.
Analysis of Relationship between Standardized Distributable Cash,
Distributions, and Investing and Financing Activities
Nine Months
Ended Year ended Year ended Year ended
September 30, December December December,
($000) 2008 31, 2007 31, 2006 31, 2005
-------------------------------------------------------------------------
Standardized
Distributable Cash 44,232 32,133 14,346 23,413
Distributions(1) (42,660) (44,648) (47,281) (38,949)
Increase (decrease)
in bank debt (8,577) 12,043 25,202 11,717
Proceeds on exercise of
employee unit options 5,393 993 5,161 2,823
Issuance of units
(net of costs of issue) - - - (259)
Non-cash financing and
investing working capital
adjustments 1,612 (521) 2,572 1,255
-------------------------------------------------------------------------
(1) Includes the distribution declared in October in respect of September
operations and excludes the January, distribution as it was in
respect of December operations.
The only unfunded operating transaction of the Trust is its asset
retirement obligations. The Trust has the following estimated timing of
expenditures for asset retirement obligations:
Expected
Expenditure
Year ($000)
-------------------------------------------------------------------------
2008 (including expenditures incurred to date) 2,750
2009 250
2010 175
2011 563
2012 856
-------------------------------------------------------------------------
4,594
-------------------------------------------------------------------------
Definition and History of Productive Capacity and Strategy
Bonterra's primary objective is to continue paying distributions to its
Unitholders and if the reorganization closes in the future, dividends to its
shareholders. This is accomplished by developing and growing its reserves from
which cash flow is generated. The Trust defines Productive Capacity
Maintenance as the maintaining of the Trust's proven plus probable reserves.
The Trust follows a policy of internal development as its primary method of
planned growth. Bonterra has a significant inventory of undrilled Cardium oil
infill drilling locations as well as several shallow gas opportunities on its
lands or through farm-in agreements. It is management's view that the
calculation of the amount required for Productive Capacity Maintenance is the
amount of reserves produced in the relevant time period multiplied by the
Trust's finding and development costs for proven plus probable reserves. For
this purpose the Trust believes that the use of a three-year average rate is
reasonable given fluctuations in annual costs due to market conditions.
Nine Months
Ended Year ended Year ended Year ended
September 30, December December December,
2008 31, 2007 31, 2006 31, 2005
-------------------------------------------------------------------------
Proven and probable
reserves at
beginning of period
(BOE) 27,320,000 26,476,000 23,870,000 19,711,000
Reserves added due
to acquisitions
(BOE) - (421,000) 16,000 2,393,000
Reserves added due
to capital
expenditures (BOE) (1) 2,806,000 4,082,000 3,100,000
Production during
period (BOE) 1,169,000 1,540,000 1,476,000 1,334,000
Increase in
productive capacity
(BOE) (1) 845,000 2,606,000 4,159,000
Reserves per unit
(fully diluted) 1.52(1)(2) 1.62 1.57 1.46
Productive capacity
maintenance
requirements $12,941,000 $17,043,000 $17,472,000 $9,205,000
Capital
expenditures
for the period $15,002,000 $19,300,000 $38,348,000 $56,703,000
Capital
expenditures
in excess of
maintenance
requirements $2,061,000 $2,257,000 $20,876,000 $47,498,000
Cost of increased
productive
capacity
(per BOE) (1) $2.67 $8.01 $11.42
-------------------------------------------------------------------------
(1) The Trust does not update reserve information quarterly.
(2) Assuming no other additional reserves from all the wells drilled in
2008 or from acquisitions in 2008.
Financing Strategy
The Trust maintains a strategy of limiting its debt levels to
approximately one year adjusted distribution base. Bonterra has a long-term
goal to retain between 20 to 25 percent of its adjusted distribution base (in
the future 20 to 30 percent of its cash flow) to finance its capital
maintenance expenditures. Over the past years, this level of retention of
adjusted distribution base, along with the exercising of unit options and
modest increases in its bank loans has proven to be sufficient to maintain the
productive capacity of the Trust. To the extent additional capital
expenditures are incurred to increase reserves, the Trust anticipates
financing them through proceeds received on exercise of employee unit options
(share options), equity placements or from its line of credit.
Periods may exist where the cost of replacing reserves exceeds the level
of funds withheld. However, the Trust with its long life reserves and
relatively low debt levels compared to other income trusts/corporations has
the flexibility to increase or decrease its capital commitments depending on
commodity prices and costs of development.
It is management's strategy to finance the costs of reclamation as well
as potential income taxes from the adjusted distribution base (cash flow).
Compliance with Financial Covenants
Due to the relatively low debt levels maintained by the Trust, the
Trust's loan agreements do not contain any debt covenants other than that the
debt is payable upon demand.
Per Unit and Ratio Disclosures
Cumulative
Cumulative
Amounts From
Inception
Nine Months Nine Months of Trust
Ended Ended (July 1, 2001)
September 30, September 30, to September
($000) 2008 2007 30, 2008
-------------------------------------------------------------------------
Standardized Distributable Cash 44,232 25,977 168,009
Per weighted average unit 2.60 1.54 10.60
Per fully diluted unit 2.60 1.53 10.56
Cash distributions(1) 42,660 33,474 246,959
Payout ratio 0.96 1.29 1.47
Adjusted Distribution Base 60,568 37,973 290,461
Per weighted average unit 3.56 2.25 18.49
Per fully diluted unit 3.53 2.24 18.34
Cash distributions(1) 42,660 33,474 246,959
Payout ratio 0.70 0.88 0.86
-------------------------------------------------------------------------
(1) Includes distributions declared in October 2008 and 2007 in respect
of September 2008 and 2007 operations, respectively.
Tax Attributes of Distributions and the Trust's Assets
See discussion under Taxes.
Cash Netback
------------
The following table illustrates the Trust's cash netback from operations
(excludes reorganization costs) for the nine month periods ended (the 2007
netback includes one time charges to royalties as described above in this
report):
September 30, September 30,
$ per Barrel of Oil Equivalent (BOE) 2008 2007
-------------------------------------------------------------------------
Production volumes (BOE) 1,168,665 1,144,307
Gross production revenue $91.94 $60.24
Realized gain (loss) on risk
management contracts (7.13) 0.81
Royalties (12.25) (7.98)
Field operating costs (15.87) (16.20)
-------------------------------------------------------------------------
Field netback 56.69 36.87
General and administrative (2.20) (1.63)
Interest and taxes (2.03) (2.09)
-------------------------------------------------------------------------
Cash netback $52.46 $33.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table illustrates the Trust's cash netback from operations
(excludes reorganization costs) for the three month periods:
September 30, June 30,
$ per Barrel of Oil Equivalent (BOE) 2008 2008
-------------------------------------------------------------------------
Production volumes (BOE) 388,021 385,468
Gross production revenue $95.80 $99.66
Realized loss on risk management contracts (7.60) (10.43)
Royalties (12.00) (13.81)
Field operating (15.84) (15.80)
-------------------------------------------------------------------------
Field netback 60.36 59.62
General and administrative (2.18) (2.22)
Interest and taxes (1.73) (2.06)
-------------------------------------------------------------------------
Cash netback $56.45 $55.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
During the first nine months of 2008, the Trust incurred capital costs of
$15,002,000 (2007 - $12,087,000). The Trust and its partners drilled 18 gross
(12.7 net) Cardium oil wells and one gross (0.1 net) shallow gas well in the
first nine months of 2008.
The Trust currently has plans to drill a total of 12 gross (11.4 net)
Cardium infill oil wells, 6 gross (5 net) Edmonton sands natural gas wells,
and 3 gross (2.8 net) Shaunavon oil wells in the fourth quarter of 2008. Total
capital costs of approximately $25,000,000 are budgeted for 2008. It is
anticipated that the entire 2008 capital expenditures will be funded from cash
flow, funds from the exercise of employee unit options and its lines of
credit.
As previously mentioned, Bonterra will be acquiring Silvering for
consideration of approximately $13,468,000 cash, 7,745 units and the
assumption of approximately $16,500,000 in negative working capital and debt.
In addition, payments of approximately $11,250,000 cash to creditors of SRX
Post Holdings Inc. and a $1,000,000 finder's fee will be required on the
closing of the arrangement.
The Trust, through its operating subsidiaries, has a bank revolving
credit facility of $69,900,000 at September 30, 2008 (December 31, 2007 -
$69,900,000). The credit facilities carry an interest rate of Canadian
chartered bank prime.
The Trust is in the process of amending its credit facility to increase
its borrowing capacity to $100,000,000. As a result of the increased facility,
the borrowing rate of the Trust will increase to bank prime plus 0.75 to 0.85
percent depending on the ratio of debt to the preceding twelve month cash
flow.
The TSX does not accept responsibility for the adequacy or accuracy of
this release.
BONTERRA ENERGY INCOME TRUST
CONSOLIDATED BALANCE SHEETS
As at September 30, 2008 (unaudited) and December 31, 2007
($000) 2008 2007
-------------------------------------------------------------------------
Assets
Current
Accounts receivable 12,511 10,575
Crude oil inventory 638 792
Parts inventory 106 132
Prepaid expenses 2,327 1,330
Future income tax asset (Note 5) 604 913
Investments in related party (Note 2) 3,448 4,014
-------------------------------------------------------------------------
19,634 17,756
-------------------------------------------------------------------------
Property and Equipment (Note 3)
Petroleum and natural gas properties
and related equipment 202,243 187,288
Accumulated depletion and depreciation (71,757) (61,805)
-------------------------------------------------------------------------
Net Property and Equipment 130,486 125,483
-------------------------------------------------------------------------
150,120 143,239
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Distributions payable - 3,724
Accounts payable and accrued liabilities 16,244 12,291
Derivative liability 2,044 3,085
Debt (Note 4) 48,845 57,422
-------------------------------------------------------------------------
67,133 76,522
Future Income Tax Liability (Note 5) 12,530 7,595
Asset Retirement Obligations 12,834 14,904
-------------------------------------------------------------------------
92,497 99,021
-------------------------------------------------------------------------
Commitments (Note 9)
Unitholders' Equity (Note 6)
Unit capital 96,515 90,590
Contributed surplus 2,442 2,140
-------------------------------------------------------------------------
98,957 92,730
-------------------------------------------------------------------------
Deficit (43,877) (51,543)
Accumulated other comprehensive income (Note 7) 2,543 3,031
-------------------------------------------------------------------------
(41,334) (48,512)
-------------------------------------------------------------------------
Total Unitholders' Equity 57,623 44,218
-------------------------------------------------------------------------
150,120 143,239
-------------------------------------------------------------------------
-------------------------------------------------------------------------
BONTERRA ENERGY INCOME TRUST
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY
For the periods ended September 30 (unaudited)
Three Months Six Months
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Unitholders'
equity,
beginning of
period 46,612 51,920 44,218 53,359
Comprehensive
income for the
period 20,801 9,487 44,353 23,148
Adjustment of
opening
accumulated
comprehensive
income - - - 2,380
Net capital
contributions 903 140 5,393 845
Unit option based
compensation
adjustment 273 437 835 840
Distributions
declared (10,966) (11,164) (37,176) (29,752)
-------------------------------------------------------------------------
Unitholders'
Equity, End of
Period 57,623 50,820 57,623 50,820
-------------------------------------------------------------------------
-------------------------------------------------------------------------
BONTERRA ENERGY INCOME TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the periods ended September 30 (unaudited)
($000, Three Months Six Months
except $ per unit) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue
Oil and gas sales 37,174 23,685 107,446 68,934
Realized gain
(loss) on risk
management
contracts (2,948) 109 (8,329) 924
Unrealized gain
(loss) on risk
management
contracts
(Note 10) 8,066 (199) 1,041 (638)
Royalties (4,657) (2,682) (14,320) (9,128)
Interest and other 7 9 29 42
-------------------------------------------------------------------------
37,642 20,922 85,867 60,134
-------------------------------------------------------------------------
Expenses
Production costs 6,148 6,401 18,554 18,538
General and
administrative 845 773 2,577 1,864
Interest on debt 545 709 1,994 2,150
Reorganization costs 752 - 752 -
Unit option based
compensation 273 437 835 840
Dry hole costs - 1,244 - 1,720
Depletion,
depreciation and
accretion 3,601 3,492 10,611 10,278
-------------------------------------------------------------------------
12,164 13,056 35,323 35,390
-------------------------------------------------------------------------
Earnings before Taxes 25,478 7,866 50,544 24,744
-------------------------------------------------------------------------
Taxes (Recovery)
Current 128 89 381 247
Future 4,225 (1,168) 5,322 2,519
-------------------------------------------------------------------------
4,353 (1,079) 5,703 2,766
-------------------------------------------------------------------------
Net Earnings for
the Period 21,125 8,945 44,841 21,978
Deficit at beginning
of period (54,037) (42,800) (51,543) (37,245)
Distributions declared (10,965) (11,164) (37,175) (29,752)
-------------------------------------------------------------------------
Deficit at End
of Period (43,877) (45,019) (43,877) (45,019)
-------------------------------------------------------------------------
Net Earnings
per Trust Unit
- Basic (Note 6) 1.23 0.53 2.63 1.30
-------------------------------------------------------------------------
Net Earnings
per Trust Unit
- Diluted (Note 6) 1.22 0.53 2.61 1.30
-------------------------------------------------------------------------
BONTERRA ENERGY INCOME TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the periods ended September 30 (unaudited)
Three Months Six Months
($000, 2008 2007 2008 2007
except $ per unit) (Note 11) (Note 11)
-------------------------------------------------------------------------
Net Earnings for
the Period 21,125 8,945 44,841 21,978
Unrealized gains
and losses on
investments
(net of income
taxes; three
months ended
2008 - (56),
2007 - 93, nine
months ended 2008
- (78), 2007 - 202) (324) 542 (488) 1,170
-------------------------------------------------------------------------
Other Comprehensive
Income (Loss) (324) 542 (488) 1,170
-------------------------------------------------------------------------
Comprehensive Income 20,801 9,487 44,353 23,148
-------------------------------------------------------------------------
Comprehensive Income
Per Trust Unit
- Basic 1.21 0.56 2.60 1.37
-------------------------------------------------------------------------
Comprehensive Income
Per Trust Unit
- Diluted 1.21 0.56 2.59 1.37
-------------------------------------------------------------------------
BONTERRA ENERGY INCOME TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ended September 30 (unaudited)
Three Months Six Months
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating Activities
Net earnings for
the period 21,125 8,945 44,841 21,978
Items not affecting
cash
Unrealized (gain)
loss on risk
management
contracts (8,066) 199 (1,041) 638
Unit option based
compensation 273 437 835 840
Dry hole costs - 1,244 - 1,720
Depletion,
depreciation and
accretion 3,601 3,492 10,611 10,278
Future income
taxes 4,225 (1,168) 5,322 2,519
-------------------------------------------------------------------------
21,158 13,149 60,568 37,973
-------------------------------------------------------------------------
Change in non-cash
working capital
Accounts
receivable 2,901 (230) (1,936) 369
Crude oil
inventory 12 (32) 99 33
Parts inventory 15 (65) 26 (41)
Prepaid expenses 61 266 (997) (188)
Accounts payable
and accrued
liabilities (940) (979) 4,102 450
Asset retirement
obligations settled (715) (223) (2,628) (532)
-------------------------------------------------------------------------
1,334 (1,263) (1,334) 91
-------------------------------------------------------------------------
Cash Provided by
Operating Activities 22,492 11,886 59,234 38,064
-------------------------------------------------------------------------
Financing Activities
Increase (decrease)
in debt (4,135) 1,993 (8,577) 11,215
Unit option proceeds 903 140 5,393 845
Unit distributions (16,439) (11,164) (40,899) (33,802)
-------------------------------------------------------------------------
Cash Used in
Financing Activities (19,671) (9,031) (44,083) (21,742)
-------------------------------------------------------------------------
Investing Activities
Property and
equipment
expenditures (6,038) (2,763) (15,002) (12,087)
Change in non-cash
working capital
Accounts
receivable - - - 993
Accounts payable
and accrued
liabilities 3,217 (92) (149) (5,228)
-------------------------------------------------------------------------
Cash Used in
Investing Activities (2,821) (2,855) (15,151) (16,322)
-------------------------------------------------------------------------
Net Cash Inflow - - - -
Cash, beginning of period - - - -
-------------------------------------------------------------------------
Cash, End of Period - - - -
-------------------------------------------------------------------------
Cash Interest Paid 545 709 1,994 2,150
Cash Taxes Paid 109 90 477 273
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------
Periods Ended September 30, 2008 and 2007 unaudited
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and methods of application followed in the
preparation of the interim financial statements other than described
below are the same as those followed in the preparation of the Trust's
2007 annual financial statements. These interim financial statements do
not include all disclosure requirements for annual financial statements.
The interim financial statements as presented should be read in
conjunction with the 2007 annual financial statements.
The Trust adopted Section 1535 "Capital Disclosures", Section 3862,
"Financial Instruments - Disclosures" and Section 3863, "Financial
Instruments - Presentation". All the above Sections were required to be
adopted for fiscal years beginning on or after October 1, 2007. As a
result, the Trust has added Note 9 providing the required disclosures
regarding the Trust's objectives, policies and processes for managing
capital and the significance of financial instruments for the entity's
financial position and performance; and the nature, extent and management
of risks arising from financial instruments to which the entity is
exposed.
The Trust also adopted Section 3031 - "Inventories", which replaces
Section 3030. This section is harmonized with International Accounting
Standards and provides additional guidance on the measurement and
disclosure requirements for inventories. This new standard did not have
an impact on the Trust's financial statements.
Accounting changes
In February 2008, the CICA issued Section 3064, "Goodwill and Intangible
Assets", replacing Section 3062, "Goodwill and Other Intangible Assets"
and Section 3450, "Research and Development Costs". Various changes have
been made to other sections of the CICA Handbook for consistency
purposes. The new section will be applicable to financial statements
relating to fiscal years beginning on or after October 1, 2008.
Accordingly, the Trust will adopt the new standards for its fiscal year
beginning January 1, 2009. This standard establishes standards for the
recognition, measurement, presentation and disclosure of goodwill
subsequent to its initial recognition and of intangible assets by profit-
oriented enterprises. Standards concerning goodwill are unchanged from
the standards included in the previous Section 3062. The Trust does not
expect that the adoption of this new Section will have a material impact
on its consolidated financial statements.
2. INVESTMENT IN RELATED PARTY
The investment consists of 689,682 (December 31, 2007 - 689,682) common
shares in Comaplex Minerals Corp. (Comaplex), a company with common
directors and management. The investment is recorded at fair market
value. The fair market value as determined by using the trading price of
the stock at September 30, 2008 of $5.00 per share and at December 31,
2007 of $5.82 per share. The common shares trade on the Toronto Stock
Exchange under the symbol CMF. The investment represents less than one
and a half percent ownership in the outstanding shares of Comaplex.
3. PROPERTY AND EQUIPMENT
September 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Accumulated Accumulated
Depletion and Depletion and
($000) Cost Depreciation Cost Depreciation
-------------------------------------------------------------------------
Undeveloped land 433 - 316 -
Petroleum and natural
gas properties and
related equipment 21,153 70,970 185,947 61,105
Furniture, equipment
and other 1,090 787 1,025 700
-------------------------------------------------------------------------
202,243 71,757 187,288 61,805
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. DEBT
The Trust, through its operating subsidiaries, has a bank revolving
credit facility of $69,900,000 at September 30, 2008 (December 31, 2007 -
$69,900,000). The terms of the credit facility provide that the loan is
due on demand and is subject to annual review. The credit facility has no
fixed payment requirements. The amount available for borrowing under the
credit facility is reduced by the amount of outstanding letters of
credit. Letters of credit totalling $355,000 (December 31, 2007 -
$355,000) were issued at September 30, 2008. Security for the credit
facility consists of various fixed and floating demand debentures
totalling $79,000,000 over all of the Trust's assets, and a general
security agreement with first ranking over all personal and real
property.
The credit facility carries an interest rate of Canadian chartered bank
prime. Cash interest paid during the nine month periods ended September
30, 2008 and 2007 for these loans was $1,994,000 and $2,150,000,
respectively.
Subsequent to September 30, 2008, the Trust has amended its credit
facility. The new facility has a credit limit of $100,000,000 of which
$80,000,000 is a committed syndicated facility with the balance remaining
as a demand facility with the Trust's principle banker. With the increase
in the facility, the Trust's borrowing rate has increased to Canadian
chartered bank prime plus 0.75 to 0.85 percent depending on the ratio of
debt to preceding twelve months cash flow.
5. TAXES
The Trust has recorded a future income tax liability and a current income
tax asset related to assets and liabilities and related tax amounts:
September 30, December 31,
($000) 2008 2007
-------------------------------------------------------------------------
Future income tax liability related to
assets and liabilities: 13,063 11,517
Future tax asset related to finance costs: (29) (79)
Future tax asset related to corporate tax
losses carried forward in the subsidiary companies (504) (3,843)
-------------------------------------------------------------------------
Future income tax liability 12,530 7,595
-------------------------------------------------------------------------
Future income tax asset related to current portion
of derivative liability 604 913
-------------------------------------------------------------------------
The Trust's subsidiaries have the following tax pools, which may be used
to reduce taxable income in future years, limited to the applicable rates
of utilization:
Rate of Utilization
($000) % Amount
-------------------------------------------------------------------------
Undepreciated capital costs 20-100 17,431
Canadian oil and gas property expenditures 10 1,685
Canadian development expenditures 30 31,373
Canadian exploration expenditures 100 11
Income tax losses carried forward(1) 100 1,949
-------------------------------------------------------------------------
52,449
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Income tax losses carried forward expire in 2015 ($114,000), 2026
($112,000) and 2027 ($1,723,000).
The Trust has the following tax pools, which may be used in reducing
future taxable income allocated to its Unitholders:
Rate of Utilization
($000) % Amount
-------------------------------------------------------------------------
Canadian oil and gas property expenditures 10 13,225
Finance costs 20 123
Eligible capital expenditures 7 864
-------------------------------------------------------------------------
14,212
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On October 31, 2006, the Canadian Federal Government announced a proposed
Trust taxation pertaining to taxation of distributions paid by publicly
traded income trusts and this was enacted by legislation in June 2007.
Previously, distributions paid to Unitholders, other than returns of
capital, were claimed as a deduction by the Trust in arriving at taxable
income whereby tax is eliminated at the Trust level and tax is paid on
the distributions by the Unitholders at each Unitholder's rate of
taxation. The June, 2007 legislation results in a two-tiered tax
structure whereby distributions commencing in 2011 would first be subject
to a 31.5 percent tax at the Trust level and then investors would be
subject to tax on the distribution as if it were a taxable dividend paid
by a taxable Canadian corporation. The tax rate was subsequently lowered
to 29.5 percent in 2011 and 28 percent in 2012 and thereafter.
On February 26, 2008, the Minister of Finance announced that instead of
basing the provincial component of the trust tax rate on a flat rate of
13 percent, the provincial component will instead be based on the general
provincial corporate tax rate in each province in which the income trust
has a permanent establishment. Under the proposal, the Trust would be
considered to have a permanent establishment in Alberta, where the
provincial tax rate in 2011 is expected to be 10 percent. This would
result in an overall tax rate to the Trust of 26.5 percent in 2011 and 25
percent thereafter.
Prior to June 2007, the Trust estimated the future income tax on certain
temporary differences between amounts recorded on its balance sheet for
book and tax purposes at a nil effective tax rate. The entire balance of
the future income tax liability reported related to assets and
liabilities and related tax amounts held through the Trust's 100 percent
held subsidiaries. Under the legislation, the Trust now estimates the
effective tax rate on post 2010 reversals of these temporary differences
at the above mentioned tax rates. Temporary differences at the Trust
level reversing before 2011 will still give rise to nil future income
taxes.
Based on its assets and liabilities as at September 30, 2008, the Trust
has estimated the amount of its temporary differences which are estimated
to reverse post 2010 will be $14,303,000 (December 31, 2007 -
$14,496,000) resulting in an additional $4,022,000 future income tax
liability. The taxable temporary differences relate principally to the
excess of net book value of oil and gas properties over the remaining tax
pools attributable thereto.
The amount and timing of reversals of temporary differences will also
depend on the Trust's future operating results, acquisitions and
dispositions of assets and liabilities, and distribution policy. A
significant change in any of the preceding assumptions could materially
affect the Trust's estimate of the future income tax liability. As
announced, the Trust has commenced with the conversion from a trust to a
corporation by plan of arrangement dated September 17, 2008 and ratified
by the Unitholders and other parties to the Arrangement on October 16,
2008. Subject to court approval the reorganization is scheduled to close
on or about November 12, 2008. The Arrangement, when completed, will have
a material change on the future income tax amount.
6. UNIT CAPITAL
Authorized
The Trust is authorized to issue an unlimited number of trust units
without nominal or par value.
Issued Number Amount
-------------------------------------------------------------------------
Trust Units ($000)
Balance, January 1, 2008 16,928,158 90,590
Issued pursuant to Trust's unit option plan 213,200 5,393
Transfer of contributed surplus to unit capital - 532
-------------------------------------------------------------------------
Balance, September 30, 2008 17,141,358 96,515
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The number of trust units used to calculate diluted net earnings per unit
for the periods ended September 30:
Three Months Nine Months
2008 2007 2008 2007
-------------------------------------------------------------------------
Basic units
outstanding 17,111,033 16,915,767 17,030,399 16,907,105
Dilutive effect of
unit options 171,492 38,390 125,406 34,530
-------------------------------------------------------------------------
Diluted units
outstanding 17,282,525 16,954,157 17,155,805 16,941,635
-------------------------------------------------------------------------
The deficit balance is composed of the following items:
September 30, September 30,
($000) 2008 2007
-------------------------------------------------------------------------
Accumulated earnings 197,597 144,836
Accumulated cash distributions (241,474) (189,403)
-------------------------------------------------------------------------
Deficit (43,877) (44,567)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Trust provides an option plan for its directors, officers, employees
and service providers. Under the plan, the Trust may grant options for up
to 1,714,100 (December 31, 2007 - 1,693,000) trust units. The exercise
price of each option granted equals the market price of the trust unit on
the date of grant and the option's maximum term is five years.
A summary of the status of the Trust's unit option plan as of
September 30, 2008 and December 31, 2007, and changes during the nine
month and twelve month periods ended on those dates is presented below:
September 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Options Weighted-Average Options Weighted-Average
Exercise Price Exercise Price
-------------------------------------------------------------------------
Outstanding at
beginning of
period 1,177,000 $27.59 721,500 $26.55
Options granted 29,000 39.09 553,000 28.11
Options exercised (213,200) 25.29 (53,500) 18.56
Options cancelled - - (44,000) 27.92
-------------------------------------------------------------------------
Outstanding at end
of period 992,800 $28.42 1,177,000 $27.59
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options exercisable
at end of period 436,300 $27.94 530,000 $26.63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes information about unit options outstanding
at September 30, 2008:
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 9/30/08 Life Price At 9/30/08 Price
-------------------------------------------------------------------------
$23.35 98,500 0.3 years $23.35 98,500 $23.35
24.20-27.50 19,500 1.6 years 25.65 - -
28.30-28.75 805,800 1.0 years 28.46 297,800 28.71
32.00-33.75 40,000 1.1 years 33.55 40,000 33.55
38.80-39.20 29,000 2.3 years 39.09 - -
-------------------------------------------------------------------------
$23.35-$39.20 992,800 1.1 years $28.42 436,300 $27.94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a result of the affirmative vote of the Trust's Unitholders on
October 16, 2008 to the arrangement agreement and if the transaction
closes, all the remaining outstanding options will vest upon closing.
The Trust records compensation expense over the vesting period based on
the fair value of options granted to employees, directors and
consultants. The Trust granted 29,000 unit options with an estimated fair
value of $115,000 ($3.95 per option) in 2008 and 553,000 unit options in
2007 with an estimated fair value of $1,494,000 ($2.70 per option) using
the Black-Scholes option pricing model with the following key
assumptions:
2008 2007
----------------------------------------------------------------
Weighted-average risk free interest
rate (%) 2.9 4.7
Expected life (years) 2.5 2.3
Weighted-average volatility (%) 29.2 27.2
Dividend yield based on the percentage of
distributions paid to the
Unitholders during the period
7. ACCUMULATED OTHER COMPREHENSIVE INCOME
Other
January 1, Comprehensive September 30,
($000) 2008 Income (Loss) 2008
-------------------------------------------------------------------------
Unrealized gains (losses) on
available-for-sale financial
assets 3,031 (488) 2,543
-------------------------------------------------------------------------
Other
January 1, Comprehensive December 31,
($000) 2007 Income 2007
-------------------------------------------------------------------------
Unrealized gains on
available-for-sale financial
assets 1,566 1,465 3,031
-------------------------------------------------------------------------
8. RELATED PARTY TRANSACTIONS
The Trust received a management fee from Comaplex of $247,500 (2007 -
$225,000) for management services and office administration. This fee has
been included as a recovery in general and administrative expenses. As at
September 30, 2008, the Trust had an account receivable from Comaplex of
$108,000 (December 31, 2007 - $63,000).
The Trust received a management fee from Pine Cliff Energy Ltd. (Pine
Cliff) of $178,200 (2007 - $162,000) for management services and office
administration. This fee has been included as a recovery in general and
administrative expenses. As at September 30, 2008 the Trust had an
account receivable from Pine Cliff of $Nil (December 31, 2007 - $4,000).
The above charges represent the agreed to exchange amount of the services
rendered.
9. FINANCIAL AND CAPITAL RISK MANAGEMENT
Financial Risk Factors
----------------------
The Trust undertakes transactions in a range of financial instruments
including:
- Receivables
- Payables
- Common share investments
- Bank loans
- Derivatives
The Trust's activities result in exposure to a number of financial risks
including market risk (commodity price risk, interest rate risk, foreign
exchange risk, credit risk, and liquidity risk).
Bonterra's overall risk management program seeks to mitigate these risks
and reduce the volatility on the Trust's financial performance. Financial
risk management is carried out by senior management under the direction
of the Directors of Bonterra Energy Corp. (a subsidiary of the Trust).
The Trust enters into various risk management contracts in accordance
with Board approval to manage Bonterra's exposure to commodity price
fluctuations. Currently no risk management agreements are in place in
respect of interest rate risk. The Trust does not speculatively trade in
risk management contracts. The Trust's risk management contracts are
entered into to manage the risks relating to commodity prices from its
business activities.
Capital Risk Management
-----------------------
The Trust's objectives when managing capital are to safeguard the Trust's
ability to continue as a going concern, so that it can continue to
provide returns to its Unitholders and benefits for other stakeholders
and to maintain an optimal capital structure to reduce the cost of
capital. In order to maintain or adjust the capital structure, the Trust
may adjust the amount of distributions, the percentage of return of
capital or issue new units.
The Trust monitors capital on the basis of the ratio of debt to adjusted
distribution base. This ratio is calculated using each quarter end net
debt (total debt adjusted for working capital) and divided by the
annualized current quarter adjusted distribution base. For these
purposes, the Trust defines adjusted distribution base as funds provided
by operations before changes in non-cash operating working capital items
excluding gains or losses on sale of property and asset retirement
obligations.
The Trust believes that maintaining debt at approximately one year's
adjusted distribution base is an appropriate level to allow it to take
advantage in the future of either acquisition opportunities or to provide
flexibility to develop its infill oil, shallow gas and coalbed methane
potential without requiring the issuance of trust units.
The following section (a) of this note provides a summary of the Trust's
underlying economic positions as represented by the carrying values, fair
values and contractual face values of the Trust's financial assets and
financial liabilities. The Trust's debt to adjusted distribution base is
also provided.
The following section (b) addresses in more detail the key financial risk
factors that arise from the Trust's activities including its policies for
managing these risks.
The following section (c) provides details of the Trust's risk management
contracts that are used for financial risk management.
a) Financial assets, financial liabilities and debt ratio
The carrying amounts, fair value and face values of the Trust's financial
assets and liabilities are shown in Table 1.
Table 1
As at September 30, 2008 As at December 31, 2007
-------------------------------------------------------------------------
Carrying Fair Face Carrying Fair Face
($000) Value Value Value Value Value Value
Financial assets
Accounts
receivable 12,511 12,511 12,550 10,575 10,575 10,595
Investments in
related party 3,448 3,448 N/A 4,014 4,014 N/A
Financial
liabilities
Distribution payable - - - 3,724 3,724 3,724
Accounts payable
and accrued
liabilities 16,244 16,244 16,244 12,291 12,291 12,291
Derivative
liability 2,044 2,044 - 3,085 3,085 -
Debt 48,845 48,845 48,845 57,422 57,422 57,422
The net debt and adjusted distribution base figures for the three months
ended September 30, 2008 and September 30, 2007 are presented in Table 2.
Table 2
For the three month
periods ended September 30, September 30,
($000) 2008 2007
----------------------------------------------------------------
Debt 48,845 56,594
Accounts payable and accrued
liabilities 16,244 8,970
Derivative liability 2,044 -
Current assets (19,634) (15,523)
----------------------------------------------------------------
Net Debt 47,499 50,041
----------------------------------------------------------------
Cash flow from operations 22,492 11,886
Changes in non-cash operating
working capital (2,049) 1,040
Asset retirement obligations
settled 715 223
----------------------------------------------------------------
Adjusted Distribution Base 21,158 13,149
Annualized adjusted distribution
base 84,632 52,596
----------------------------------------------------------------
Net debt to adjusted distribution
base 0.56 0.95
----------------------------------------------------------------
b) Risks and mitigations
Market risk is the risk that the fair value or future cash flow of the
Trust's financial instruments will fluctuate because of changes in market
prices. Components of market risk to which Bonterra is exposed are
discussed below.
Commodity price risk
--------------------
The Trust's principal operation is the production and sale of crude oil,
natural gas and natural gas liquids. Fluctuations in prices of these
commodities directly impact the Trust's performance and ability to
continue with its distributions.
The Trust currently uses various risk management contracts to set price
parameters for a portion of its production (see section c below).
Management, in agreement with the Board of Directors, recently decided
that at least in the near term it will discontinue the use of commodity
price agreements. The Trust will assume full risk in respect of commodity
prices.
Sensitivity Analysis
Commodity prices have fluctuated significantly over the recent past. The
following table updates the annual cash flow sensitivity for movements in
the commodity prices of $1 U.S. WTI for crude oil, $0.10 per MCF AECO for
natural gas and $0.01 fluctuation in exchange rates. These figures have
been updated from December 31, 2007 to include commodity price hedges
entered into during 2008.
Cash Flow
-----------------------------------------------------------
U.S. $1.00 per barrel $ 692,000
Canadian $0.10 per MCF $ 181,000
Change of Canadian $0.01/U.S. $ exchange rate $ 587,000
-----------------------------------------------------------
Interest rate risk
------------------
Interest rate risk refers to the risk that the value of a financial
instrument or cash flows associated with the instrument will fluctuate
due to changes in market interest rates. Interest rate risk arises from
interest bearing financial assets and liabilities that Bonterra uses. The
principal exposure of the Trust is on its bank borrowings which have a
variable interest rate which gives rise to a cash flow interest rate
risk.
Bonterra's debt consists of an operating line as well as borrowings by
means of banker acceptances (BA's). The Trust manages its exposure to
interest rate risk through entering into various term lengths on its BA's
but in no circumstances do the terms exceed six months. As discussed
above, the Trust manages its capital such that its debt to adjusted
distribution base is no higher than approximately one year. This allows
flexibility in obtaining cost effective financing.
Sensitivity Analysis
Based on historic movements and volatilities in the interest rate markets
and management's current assessment of the financial markets, the Trust
believes that a one percent variation in the Canadian prime interest rate
is reasonably possible over a 12-month period. No income tax effect has
been calculated as the Trust remains non-taxable until January 1, 2011.
The following illustrates the annual impact of a one percent fluctuation
in the Canadian prime rate:
As at As at
September 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Plus 1% Minus 1% Plus 1% Minus 1%
($000) Earnings Equity Earnings Equity Earnings Equity Earnings Equity
Financial
assets
---------
Accounts
receivable - - - - - - - -
Investments
in related
party - - - - - - - -
Financial
liabilities
------------
Distribution
payable - - - - - - - -
Accounts
payable
and
accrued
liabilities - - - - - - - -
Derivative
liability - - - - - - - -
Debt (488) (488) 488 488 (574) (574) 574 574
-------------------------------------------------------------------------
Total
increase
(decrease) (488) (488) 488 488 (574) (574) 574 574
-------------------------------------------------------------------------
Foreign exchange risk
---------------------
The Trust has no foreign operations and currently sells all its product
sales in Canadian currency. The Trust however is exposed to currency risk
in that crude oil is priced in U.S. currency then converted to Canadian
currency. Bonterra mitigates some of this risk by using risk management
contracts for a portion of its crude oil production in Canadian dollars.
Please refer to sensitivity analysis under commodity price risk as well
as section "c" below for a list of currently outstanding risk management
agreements. Management, in agreement with the Board of Directors,
recently decided that at least in the near term it will discontinue the
use of commodity price agreements. The Trust will assume full risk in
respect of foreign exchange fluctuations.
Credit risk
-----------
Credit risk is the risk that a contracting party will not complete its
obligations under a financial instrument and cause the Trust to incur a
financial loss. Bonterra is exposed to credit risk on all financial
assets included on the balance sheet. To help mitigate this risk:
- The Trust only enters into material agreements with credit worthy
counterparties. These include major oil and gas companies or one of
the major Canadian chartered banks;
- Agreements for product sales are primarily on 30 day renewal terms;
and
- Investments are generally only with companies that have common
management with the Trust.
Of the accounts receivable balance of September 30, 2008 ($12,511,000)
and December 31, 2007 ($10,575,000) over 90 percent relates to product
sales with international oil and gas companies. All of the derivative
contracts as of both September 30, 2008 and December 31, 2007 were with
either Bonterra's principal banker or its major crude oil purchaser.
The Trust assesses quarterly, if there has been any impairment of the
financial assets of the Trust. During the three month period ended
September 30, 2008 there was no impairment provision required on any of
the financial assets of the Trust due to historical success of collecting
receivables. The Trust does have a credit risk exposure as the majority
of the Trust's accounts receivable are with counterparties having similar
characteristics. However, payments from the Trust's largest accounts
receivable counter parties have always been received within 30 days and
the sales agreements with these parties are cancellable with 30 days
notice if payments are not received.
The carrying value of accounts receivable approximates their fair value
due to the relatively short periods to maturity on this instrument. 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.
Liquidity risk
--------------
Liquidity risk includes the risk that, as a result of Bonterra's
operational liquidity requirements:
- The Trust will not have sufficient funds to settle a transaction on
the due date;
- Bonterra will not have sufficient funds to continue with its
distributions
- The Trust will be forced to sell assets at a value which is less than
what they are worth; or
- Bonterra may be unable to settle or recover a financial asset at all.
To help reduce these risks the Trust:
- Has a capital policy of maintaining no more than approximately one
year debt to adjusted distribution base;
- Uses of derivative instruments that are readily tradable should the
need arise; and
- Maintains a portfolio of high-quality, long reserve life oil and gas
assets.
c) Risk management contracts
The Trust entered into the following commodity hedging contracts for a
portion of its 2008 production:
Volume
Period of Agreement Commodity per day Index Price (Cdn.)
-------------------------------------------------------------------------
July 1, 2008 to Crude Oil 500 barrels WTI Floor of $73.00
December 31, 2008 and ceiling of
$80.68 per
barrel
July 1, 2008 to Crude Oil 500 barrels WTI Floor of $85.00
December 31, 2008 and ceiling of
$104.80 per
barrel
April 1, 2008 to Natural Gas 1,500 GJ's AECO Floor of $6.00
October 31, 2008 and ceiling of
$7.60 per GJ
As of September 30, 2008, the fair value of the outstanding commodity
risk management contracts was a net liability of $2,044,000
(December 31, 2007 - $3,085,000).
10. UNREALIZED LOSS ON RISK MANAGEMENT CONTRACTS
The following table reconciles the movement in the fair value of the
Trust's financial risk management contracts that have not been designated
as effect accounting hedges for the periods ended September 30:
Three Months Nine Months
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Fair Value,
beginning of period (10,110) 710 (3,085) 1,149
Fair Value, end of
period (2,044) 511 (2,044) 511
-------------------------------------------------------------------------
Unrealized gain (loss)
on risk management
contracts 8,066 (199) 1,041 (638)
-------------------------------------------------------------------------
11. RESTATEMENT
The Trust has determined that its cash flow hedges on commodities are no
longer effective hedges for accounting purposes. The following financial
statement items have been restated to eliminate the use of hedge
accounting:
Three months ended
September 30, 2007
($000 except $ per unit) Reported Adjustment Restated
-------------------------------------------------------------------------
Unrealized loss on risk management
contracts - (199) (199)
Future tax expense (recovery) (1,110) (58) (1,168)
Net earnings for the period 9,086 (141) 8,945
Deficit at beginning of period (42,489) (311) (42,800)
Deficit at end of period (44,567) (452) (45,019)
Net earnings per unit
(basic and diluted) 0.54 (0.01) 0.53
Other comprehensive income 401 141 542
-------------------------------------------------------------------------
Nine months ended
September 30, 2007
($000 except $ per unit) Reported Adjustment Restated
-------------------------------------------------------------------------
Unrealized loss on risk management
contracts - (638) (638)
Future tax expense (recovery) 2,705 (186) 2,519
Net earnings for the period 22,430 (452) 21,978
Deficit at end of period (44,567) (452) (45,019)
Net earnings per unit
(basic and diluted) 1.33 (0.03) 1.30
Other comprehensive income 718 452 1,170
-------------------------------------------------------------------------
12. SUBSEQUENT EVENT - DISTRIBUTIONS
Subsequent to September 30, 2008, the Trust declared a distribution of
$0.32 per unit payable on October 31, 2008 to Unitholders of record on
October 16, 2008.
On November 6, 2008, the Trust declared a distribution of $0.26 per unit
payable on November 28, 2008 to Unitholders as of November 17, 2008.
However, if the plan of arrangement does close as scheduled, the payment
will be considered a dividend payable on November 28, 2008 to
shareholders of record as of November 24, 2008.
13. SUBSEQUENT EVENT - REORGANIZATION
Trust has commenced with the conversion from a trust to a corporation by
plan of arrangement dated September 17, 2008 along with a corporate
acquisition both of which were ratified by the Unitholders and other
parties to the arrangement on October 16, 2008. Subject to court approval
the reorganization and acquisition are scheduled to close on or about
November 12, 2008.
The corporate acquisition will be completed by a cash payment of
approximately $13,468,000, issue of 7,745 trust units and the assumption
of approximately $16,500,000 of negative working capital and debt. In
addition, payments of approximately $11,250,000 cash to creditors of SRX
Post Holdings Inc. and a $1,000,000 finder's fee will be required on the
closing of the arrangement.
%SEDAR: 00017467E
For further information: Additional information relating to the Trust
may be found on www.sedar.com as well as on the Trust's website at
www.bonterraenergy.com or by contacting George F. Fink, President, and CEO or
Garth E. Schultz, Vice President - Finance, and CFO at (403) 262-5307 or by
fax at (403) 265-7488
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