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(TSX: AVN.UN, NYSE: AAV)
CALGARY, Aug. 14 /PRNewswire-FirstCall/ - Advantage Energy Income Fund ("Advantage" or the "Fund") is pleased to announce its unaudited operating and financial results for the second quarter ended June 30, 2008.
Financial and Operating Highlights
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
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Financial ($000, except
as otherwise indicated)
Revenue before
royalties(1) $ 208,868 $ 125,075 $ 397,373 $ 260,577
per Trust Unit(2) $ 1.51 $ 1.10 $ 2.88 $ 2.35
per boe $ 71.69 $ 50.69 $ 67.03 $ 51.31
Funds from operations $ 103,754 $ 62,634 $ 198,372 $ 128,279
per Trust Unit(3) $ 0.74 $ 0.54 $ 1.42 $ 1.13
per boe $ 35.62 $ 25.38 $ 33.46 $ 25.26
Distributions declared $ 50,364 $ 52,096 $ 100,385 $ 102,302
per Trust Unit(3) $ 0.36 $ 0.45 $ 0.72 $ 0.90
Expenditures on property
and equipment $ 21,632 $ 25,678 $ 88,535 $ 75,374
Working capital
deficit(4) $ 42,201 $ 11,512 $ 42,201 $ 11,512
Bank indebtedness $ 547,946 $ 377,812 $ 547,946 $ 377,812
Convertible debentures
(face value) $ 224,587 $ 180,725 $ 224,587 $ 180,725
Trust Units outstanding
at end of period (000) 140,271 116,091 140,271 116,091
Basic weighted average
Trust Units (000) 138,612 113,854 138,105 111,108
Operating
Daily Production
Natural gas (mcf/d) 123,104 108,978 124,109 111,636
Crude oil and NGLs
(bbls/d) 11,498 8,952 11,890 9,452
Total boe/d at 6:1 32,015 27,115 32,575 28,058
Average prices
(including hedging)
Natural gas ($/mcf) $ 9.18 $ 7.52 $ 8.70 $ 7.80
Crude oil and NGLs
($/bbl) $ 101.34 $ 61.93 $ 92.81 $ 60.21
(1) includes realized derivative gains and losses
(2) based on basic weighted average Trust Units outstanding
(3) based on Trust Units outstanding at each distribution record date
(4) working capital deficit excludes derivative assets and liabilities
MESSAGE TO UNITHOLDERS
Record Second Quarter Funds from Operations and Payout Ratio:
- Strong natural gas and crude oil pricing combined with solid
operational results generated a record level of funds from operations
during the second quarter of 2008 resulting in a payout ratio of 49%.
This is the lowest payout ratio in the history of Advantage and
reinforces our strategy to finance our highly efficient capital
program from operating cash flow.
- Funds from operations for the second quarter of 2008 increased 66% to
$103.8 million and 37% to $0.74 per Trust Unit compared to
$62.6 million or $0.54 per Trust Unit for the same period of 2007.
- The Fund declared three distributions during the quarter totaling
$0.36 per Trust Unit. Since inception, the Fund has distributed
$980.2 million or $16.98 per Trust Unit.
- Production volumes in the second quarter of 2008 increased 18% to
32,015 boe/d compared to 27,115 boe/d in the second quarter of 2007.
Second quarter 2008 production volumes were negatively impacted by a
significant number of third party turnaround maintenance outages
which amounted to approximately 1,400 boe/d for the quarter.
- Natural gas production for the second quarter of 2008 increased 13%
to 123.1 mmcf/d, compared to 109.0 mmcf/d reported in the second
quarter of 2007. Crude oil and natural gas liquids production
increased 28% to average 11,498 bbls/d compared to 8,952 bbls/d in
the second quarter of 2007.
Drilling Underway at our Glacier Montney Natural Gas Resource Play
Following increased Capital Budget
- On June 27, 2008, Advantage's Board of Directors approved an increase
of $55 million to the 2008 capital budget, which has resulted in an
annual budget total of $200 million.
- Approximately $39 million will be spent on the next phase of
development at Glacier that includes drilling an additional 5 gross
horizontal wells, 5 gross vertical delineation wells, and initial
infrastructure activities. During the first quarter of 2008, the Fund
drilled 5 vertical delineation wells at Glacier which helped confirm
geological formations, reservoir productivity and pool continuity.
- Drilling has commenced with three drilling rigs on the property and
initial commitments toward facilities expansion plans have been made.
We anticipate longer term development plans to be further defined by
year-end based on the timing of well information.
- Advantage's extensive 83 section land block, which may support in
excess of 150 horizontal wells, is located directly adjacent and on-
trend to EnCana's Swan Lake and Murphy's Tupper project developments
which are continuing to exhibit successful results.
Strong Results Continue with our Conventional Assets
- Capital spending for the quarter was $21.6 million net which included
$9.4 million on drilling and completion activities. During the second
quarter, 4 gross (3 net) wells were drilled at 100% success rate with
the balance of capital activity directed at well completions carried
over from the first quarter, facilities expansions and maintenance
capital. Year to date drilling activity has resulted in 57 gross
(41 net) wells at a 98% success rate.
- At Nevis in Central Alberta, horizontal light oil wells are exceeding
initial budgeted productivities and additional oil facilities
expansion work is required. Further to our phase 1 Horseshoe Canyon
coal bed methane program, which included 22 wells in the first
quarter, an additional 15 well phase 2 program has commenced on the
lands acquired in connection with the acquisition of Sound Energy
Trust. The wells have excellent initial productivities ranging from
125 to 250 mcf/d. Several years of future light oil and natural gas
drilling opportunities are available at our Nevis property.
- At Martin Creek in Northwest British Columbia, new well production
information from our highly successful first quarter drilling program
is confirming the significant upside potential that exists in this
property.
- At Willesden Green in Central Alberta, follow-up drilling locations
are being pursued on a light oil discovery that was made in the first
quarter of 2008.
- With continued drilling success and a highly attractive suite of
assets, Advantage has over 5 years of conventional drilling inventory
and is well positioned to additionally capitalize on the significant
natural gas resource play in the Montney formation at our Glacier and
Stoddart properties.
Improved Commodity Prices & Hedging Update
- With improved natural gas and crude oil pricing realized through the
first six months of 2008 and including our commodity risk management
positions for this year, we anticipate generating cash flow in excess
of our $200 million revised capital budget and current distribution
requirements. Surplus cash flow provides security to our current
distribution level, flexibility to fund our highly efficient capital
program, and the ability to capitalize on acquisition opportunities
or reduce debt.
- Advantage maintains a hedging program to reduce cash flow volatility
and to ensure that our capital program can be funded out of cash
flow. Additional natural gas pricing hedges have been secured for
April to December of 2009 for approximately 23% of our gross
production at an average AECO price of $8.76 Canadian per mcf or
equivalent to approximately NYMEX $9.64 US per mmbtu. Details on our
hedging program are available in our MD&A for the quarter and on our
website.
Looking Forward
- Our 2008 annual guidance includes capital expenditures of
$200 million and production of 32,000 to 34,000 boe/d with a 63%
weighting to natural gas. Royalty rates are estimated to range
between 18% to 20%. Operating costs are now forecasted to be $13.40
to $13.90/boe due to cost escalations resulting from increased third
party processing fees especially at our Lookout Butte property. The
higher commodity price environment has also increased electrical
power costs and the cost of supplies derived from crude oil and
natural gas as feedstocks.
- Production at our Lookout Butte property in Southern Alberta will be
impacted during the third quarter by an extended third party facility
outage at Shell's Waterton gas plant where a significant modification
project is underway. Estimates provided by Shell indicate a potential
outage of approximately 55 to 75 days that begins August 13, 2008.
- Advantage's current intention is to continue to be a cash
distributing entity after 2010. We will continue to closely monitor
industry dynamics and are considering a number of alternative
structures. Advantage's significant tax pools of $1.7 billion affords
us flexibility to evaluate many options in this regard.
MANAGEMENT'S DISCUSSION & ANALYSIS
The following Management's Discussion and Analysis ("MD&A"), dated as of August 14, 2008, provides a detailed explanation of the financial and operating results of Advantage Energy Income Fund ("Advantage", the "Fund", "us", "we" or "our") for the three and six months ended June 30, 2008 and should be read in conjunction with the consolidated financial statements contained within this interim report and the audited financial statements and MD&A for the year ended December 31, 2007. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and all references are to Canadian dollars unless otherwise indicated. All per barrel of oil equivalent ("boe") amounts are stated at a conversion rate of six thousand cubic feet of natural gas being equal to one barrel of oil or liquids.
Non-GAAP Measures
The Fund discloses several financial measures in the MD&A that do not have any standardized meaning prescribed under GAAP. These financial measures include funds from operations, funds from operations per Trust Unit and cash netbacks. Management believes that these financial measures are useful supplemental information to analyze operating performance, leverage and provide an indication of the results generated by the Fund's principal business activities prior to the consideration of how those activities are financed or how the results are taxed. Investors should be cautioned that these measures should not be construed as an alternative to net income, cash provided by operating activities or other measures of financial performance as determined in accordance with GAAP. Advantage's method of calculating these measures may differ from other companies, and accordingly, they may not be comparable to similar measures used by other companies.
Funds from operations, as presented, is based on cash provided by operating activities before expenditures on asset retirement and changes in non-cash working capital. Funds from operations per Trust Unit is based on the number of Trust Units outstanding at each distribution record date. Cash netbacks are dependent on the determination of funds from operations and include the primary cash revenues and expenses on a per boe basis that comprise funds from operations. Funds from operations reconciled to cash provided by operating activities is as follows:
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Cash provided by
operating
activities $ 93,882 $ 49,932 88% $175,475 $100,452 75%
Expenditures on
asset retirement 982 (302) (425)% 5,947 3,707 60%
Changes in non-cash
working capital 8,890 13,004 (32)% 16,950 24,120 (30)%
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Funds from
operations $103,754 $ 62,634 66% $198,372 $128,279 55%
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Forward-Looking Information
The information in this report contains certain forward-looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "would" and similar expressions. These statements involve substantial known and unknown risks and uncertainties, certain of which are beyond Advantage's control, including: the impact of general economic conditions; industry conditions; changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; fluctuations in commodity prices and foreign exchange and interest rates; stock market volatility and market valuations; volatility in market prices for oil and natural gas; liabilities inherent in oil and natural gas operations; uncertainties associated with estimating oil and natural gas reserves; competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; changes in income tax laws or changes in tax laws, royalty regimes and incentive programs relating to the oil and gas industry and income trusts; geological, technical, drilling and processing problems and other difficulties in producing petroleum reserves; obtaining required approvals of regulatory authorities; and other risk factors set forth in Advantage's Annual Information Form which is available at www.advantageincome.com and www.sedar.com. Additionally, references to test production rates and test rates for recently drilled wells are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will commence production and decline thereafter. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for the Fund. Advantage's actual results, performance or achievement could differ materially from those expressed in, or implied by, such forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do, what benefits that Advantage will derive from them. Except as required by law, Advantage undertakes no obligation to publicly update or revise any forward-looking statements.
Overview
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Cash provided by
operating
activities
($000) $ 93,882 $ 49,932 88% $175,475 $100,452 75%
Funds from
operations
($000) $103,754 $ 62,634 66% $198,372 $128,279 55%
per Trust
Unit(1) $ 0.74 $ 0.54 37% $ 1.42 $ 1.13 26%
(1) Based on Trust Units outstanding at each distribution record date.
Cash provided by operating activities and funds from operations have increased significantly as compared to 2007 due to considerably higher revenue. The increased revenue has been primarily due to improved commodity prices that continue to exceed the prior year. Our financial results have also substantially benefited from the Sound Energy Trust ("Sound") acquisition, which closed on September 5, 2007. The financial and operating results from the acquired Sound properties are included in all 2008 figures but are not included in the three and six month periods ended June 30, 2007. Funds from operations per Trust Unit have also increased significantly, but not in the same proportion as funds from operations due to the higher number of Trust Units outstanding for 2008. Trust Units outstanding has increased due to Trust Units issued in exchange for the Sound acquisition and our distribution reinvestment plan that allows Unitholders to purchase Trust Units in exchange for their regular monthly distributions. The number of Trust Units has increased 21% from June 30, 2007.
The primary factor that causes significant variability of Advantage's cash provided by operating activities, funds from operations, and net income is commodity prices. Refer to the section "Commodity Prices and Marketing" for a more detailed discussion of commodity prices and our price risk management.
Distributions
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Distributions
declared ($000) $ 50,364 $ 52,096 (3)% $100,385 $102,302 (2)%
per Trust
Unit(1) $ 0.36 $ 0.45 (20)% $ 0.72 $ 0.90 (20)%
(1) Based on Trust Units outstanding at each distribution record date.
Total distributions for both the three and six months ended June 30, 2008 are comparable to 2007. Although the Fund has more Trust Units outstanding during 2008, there has been a 20% reduction in the monthly distribution per Trust Unit. In December 2007, we decreased the monthly distribution from the $0.15 per Trust Unit paid for January to November 2007 to $0.12 per Trust Unit due to the weak natural gas prices at that time. The monthly distribution currently remains at $0.12 per Trust Unit. Commodity prices have strengthened in 2008 such that the current environment, in combination with our hedging program, provides strong support for continuation of the current distribution level and our expanded 2008 capital program.
Distributions from the Fund to Unitholders are entirely discretionary and are determined by Management and the Board of Directors. We closely monitor our distribution policy considering forecasted cash flows, optimal debt levels, capital spending activity, working capital requirements, and other potential cash expenditures. Distributions are announced monthly and are based on the cash available after retaining a portion to meet such spending requirements. The level of distributions are primarily determined by cash flows received from the production of oil and natural gas from existing Canadian resource properties and will be susceptible to the risks and uncertainties associated with the oil and natural gas industry generally. If the oil and natural gas reserves associated with the Canadian resource properties are not supplemented through additional development or the acquisition of additional oil and natural gas properties, our distributions will decline over time in a manner consistent with declining production from typical oil and natural gas reserves. Therefore, distributions are highly dependent upon our success in exploiting the current reserve base and acquiring additional reserves. Furthermore, monthly distributions we pay to Unitholders are highly dependent upon the prices received for such oil and natural gas production. Oil and natural gas prices can fluctuate widely on a month-to-month basis in response to a variety of factors that are beyond our control. Declines in oil or natural gas prices will have an adverse effect upon our operations, financial condition, reserves and ultimately on our ability to pay distributions to Unitholders. The Fund attempts to mitigate the volatility in commodity prices through our hedging program. It is our long-term objective to provide stable and sustainable distributions to the Unitholders, while continuing to grow the Fund. However, given that funds from operations can vary significantly from month-to-month due to these factors, the Fund may utilize various financing alternatives, including our credit facility, as an interim measure to maintain stable distributions.
Revenue
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Natural gas
excluding
hedging $115,687 $ 74,760 55% $205,681 $153,093 34%
Realized
hedging gains
(losses) (12,861) (136) 9,357% (9,151) 4,484 (304)%
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Natural gas
including
hedging $102,826 $ 74,624 38% $196,530 $157,577 25%
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Crude oil and
NGLs excluding
hedging $115,266 $ 50,371 129% $211,370 $101,310 109%
Realized
hedging gains
(losses) (9,224) 80 (11,630)% (10,527) 1,690 (723)%
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Crude oil and
NGLs including
hedging $106,042 $ 50,451 110% $200,843 $103,000 95%
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Total revenue $208,868 $125,075 67% $397,373 $260,577 52%
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Revenues have increased significantly for 2008 due to additional production, primarily from the Sound acquisition, as well as stronger commodity prices. The higher revenue has been partially offset by our realized hedging losses that have also resulted from the higher commodity price environment. The Fund enters derivative contracts whereby realized hedging gains and losses partially offset commodity price fluctuations, which can positively or negatively impact revenues.
Production
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Natural gas
(mcf/d) 123,104 108,978 13% 124,109 111,636 11%
Crude oil
(bbls/d) 9,311 6,615 41% 9,581 7,083 35%
NGLs (bbls/d) 2,187 2,337 (6)% 2,309 2,369 (3)%
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Total (boe/d) 32,015 27,115 18% 32,575 28,058 16%
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Natural gas (%) 64% 67% 64% 67%
Crude oil (%) 29% 24% 29% 25%
NGLs (%) 7% 9% 7% 8%
The Fund's total daily production averaged 32,015 boe/d for the three months and 32,575 boe/d for the six months ended June 30, 2008, an increase of 18% and 16%, respectively. Production increases were realized primarily due to the Sound acquisition. Natural declines and third party facility turnarounds have caused total production in the second quarter of 2008 to decrease 3% from 33,133 boe/d realized in the first quarter of 2008. Wet weather delays in the second quarter of 2008 prevented some of our new wells from being put into production that would have offset such declines. For 2008, we expect production to average approximately 32,000 to 34,000 boe/d, weighted 63% to natural gas.
Commodity Prices and Marketing
Natural Gas
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June 30 June 30
($/mcf) 2008 2007 % change 2008 2007 % change
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Realized natural
gas prices
Excluding
hedging $ 10.33 $ 7.54 37% $ 9.11 $ 7.58 20%
Including
hedging $ 9.18 $ 7.52 22% $ 8.70 $ 7.80 12%
AECO monthly
index $ 9.35 $ 7.37 27% $ 8.24 $ 7.42 11%
Realized natural gas prices, excluding hedging, were considerably higher for the three and six months ended June 30, 2008 with a significant improvement from the first quarter of 2008. The 2007/2008 winter season in North America has caused inventory levels that had been high prior to winter, to decline to approximately the five-year average. In addition, reduced liquefied natural gas imports into the US and the slowdown in natural gas drilling in Western Canada has provided upward price support. We believe that longer-term pricing fundamentals for natural gas will be supported due to: (i) the continued strength of crude oil prices, which has eliminated the economic advantage of fuel switching away from natural gas, (ii) significantly less natural gas drilling in Canada projected for 2008, which will reduce productivity to offset declines, (iii) the increasing focus on resource style natural gas wells, which have high initial declines and require a higher threshold economic price than conventional gas drilling and (iv) the demand for natural gas for the Canadian oil sands projects.
Crude Oil and NGLs
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June 30 June 30
($/bbl) 2008 2007 % change 2008 2007 % change
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Realized crude
oil prices
Excluding
hedging $ 113.71 $ 64.23 77% $ 100.57 $ 61.48 64%
Including
hedging $ 102.83 $ 64.37 60% $ 94.53 $ 62.79 51%
Realized NGLs
prices
Excluding
hedging $ 95.02 $ 55.05 73% $ 85.67 $ 52.47 63%
Realized crude
oil and NGLs
prices
Excluding
hedging $ 110.15 $ 61.84 78% $ 97.68 $ 59.22 65%
Including
hedging $ 101.34 $ 61.93 64% $ 92.81 $ 60.21 54%
WTI ($US/bbl) $ 124.00 $ 65.02 91% $ 110.98 $ 61.59 80%
$US/$Canadian
exchange rate $ 0.99 $ 0.91 9% $ 0.99 $ 0.88 13%
Advantage's crude oil prices are based on the benchmark pricing of West Texas Intermediate Crude ("WTI") adjusted for quality, transportation costs and $US/$Canadian exchange rates. For the three and six months ended June 30, 2008, WTI increased 91% and 80%, respectively. Advantage's realized crude oil price has not changed to the same extent as WTI, owing to the Canadian dollar achieving parity with the US dollar, and changes in Canadian crude oil differentials relative to WTI. The price of WTI fluctuates based on worldwide supply and demand fundamentals. There has been significant price volatility experienced over the last several years whereby WTI has reached historic high levels. Many developments have resulted in the current price levels, including significant continuing geopolitical issues, general market speculation and ongoing supply concerns. As a result, prices have continued to increase, with WTI recently surpassing US$140/bbl. However, we have recently seen a correction in the price levels as demand has appeared to decline, with WTI decreasing to approximately US$115/bbl. Regardless whether the current price level is sustainable or a short-term anomaly, we believe that the pricing fundamentals for crude oil remain strong with many factors affecting the continued strength including (i) supply management and supply restrictions by the OPEC cartel, (ii) ongoing civil unrest in Venezuela, Nigeria, and the Middle East, (iii) strong relative world wide demand, particularly in China, India and the United States and (iv) North American refinery capacity constraints.
Commodity Price Risk
The Fund's operational results and financial condition will be dependent on the prices received for oil and natural gas production. Oil and natural gas prices have fluctuated widely during recent years and are determined by economic and, in the case of oil prices, political factors. Supply and demand factors, including weather and general economic conditions as well as conditions in other oil and natural gas regions, impact prices. Any movement in oil and natural gas prices could have an effect on the Fund's financial condition and therefore on the distributions to holders of Advantage Trust Units. As current and future practice, Advantage has established a financial hedging strategy and may manage the risk associated with changes in commodity prices by entering into derivatives. Although these commodity price risk management activities could expose Advantage to losses or gains, entering derivative contracts helps us to stabilize cash flows and ensure that our capital expenditure program is substantially funded by such cash flows. To the extent that Advantage engages in risk management activities related to commodity prices, it will be subject to credit risk associated with counterparties with which it contracts. Credit risk is mitigated by entering into contracts with only stable, creditworthy parties and through frequent reviews of exposures to individual entities. Currently, the Fund has fixed the commodity price on anticipated production as follows:
Approximate Production Average
Commodity Hedged, Net of Royalties Price
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Natural gas - AECO
July to September 2008 70% Cdn$7.22/mcf
October to December 2008 65% Cdn$7.64/mcf
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Total 2008 56% Cdn$7.52/mcf
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January to March 2009 64% Cdn$7.87/mcf
April to June 2009(1) 29% Cdn$8.76/mcf
July to September 2009(1) 29% Cdn$8.76/mcf
October to December 2009(1) 29% Cdn$8.76/mcf
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Total 2009 38% Cdn$8.38/mcf
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Crude Oil - WTI
July to September 2008 49% Cdn$94.39/bbl
October to December 2008 47% Cdn$94.39/bbl
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Total 2008 40% Cdn$94.07/bbl
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January to March 2009 33% Cdn$95.84/bbl
(1) Derivative contracts entered into after June 30, 2008.
For the six month period ended June 30, 2008, we recognized in income a realized derivative loss of $19.7 million (June 30, 2007 - $6.2 million realized derivative gain). As at June 30, 2008, the fair value of the derivatives outstanding and to be settled from July 2008 to March 2009 was a net liability of approximately $121.7 million (December 31, 2007 - $2.2 million net asset). For the six months ended June 30, 2008, $123.9 million was recognized in income as an unrealized derivative loss due to changes in the fair values of these contracts since December 31, 2007. The valuation of the derivatives is the estimated fair value to settle the contracts as at June 30, 2008 and is based on pricing models, estimates, assumptions and market data available at that time. As such, the unrealized amounts are not cash and the actual gains or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices as compared to the valuation assumptions. These fair values are extremely sensitive to assumptions regarding forward commodity prices and such prices have declined significantly since June 30, 2008. As a result, at August 14, 2008, it is estimated that the net liability of our derivatives at June 30, 2008, have reduced by approximately $70 million. The Fund does not apply hedge accounting and current accounting standards require changes in the fair value to be included in the consolidated statement of income and comprehensive income as an unrealized derivative gain or loss with a corresponding derivative asset and liability recorded on the balance sheet. These derivative contracts will settle from July 2008 to March 2009 corresponding to when Advantage will receive revenues from production.
Royalties
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Royalties
($000) $ 46,173 $ 22,749 103% $ 80,054 $ 48,914 64%
per boe $ 15.85 $ 9.22 72% $ 13.50 $ 9.63 40%
As a percentage
of revenue,
excluding
hedging 20.0% 18.2% 1.8% 19.2% 19.2% -
Advantage pays royalties to the owners of mineral rights from which we have leases. The Fund currently has mineral leases with provincial governments, individuals and other companies. Royalties have increased in total due to the increase in revenue from higher production and commodity prices. Royalties as a percentage of revenue, excluding hedging, have increased as higher prices generally attract a higher royalty rate. Royalty rates are dependent on prices and individual well production levels such that average royalty rates will vary as the nature of our properties change through ongoing development activities and acquisitions. We expect the royalty rate to be in the range of 18% to 20% for the remainder of 2008 given the current environment.
Operating Costs
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Operating costs
($000) $ 39,917 $ 26,919 48% $ 80,189 $ 57,189 40%
per boe $ 13.70 $ 10.91 26% $ 13.53 $ 11.26 20%
Total operating costs increased 48% for the three months and 40% for the six months ended June 30, 2008 as compared to 2007, mainly due to increased production from the Sound acquisition, which closed September 5, 2007. Total operating costs for the three months ended June 30, 2008 was slightly down from $40.3 million incurred in the three months ended March 31, 2008. Operating costs per boe increased 26% for the three months and 20% for the six months ended June 30, 2008, due to severe cold weather experienced in the first quarter of 2008, lower production volumes resulting from several third party facility turnaround maintenance outages in the second quarter of 2008, a higher percentage of oil properties which incur higher operating costs than gas properties, and escalating costs including electricity, chemicals, gas processing fees, and transportation. We will continue to be opportunistic and proactive in pursuing optimization initiatives that will improve our operating cost structure. We expect that operating costs per boe will be in the range of $13.40 to $13.90 for the remainder of the 2008 year.
General and Administrative
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2008 2007 % change 2008 2007 % change
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General and
administrative
expense ($000) $ 5,763 $ 4,861 19% $ 12,995 $ 9,577 36%
per boe $ 1.98 $ 1.97 - $ 2.19 $ 1.89 16%
Employees at
June 30 174 135 29%
Total general and administrative ("G&A") expense has increased 19% and 36% for the three and six months ended June 30, 2008. The higher total G&A expense has been primarily due to an increase in staff levels that have resulted from the Sound acquisition, general growth of the Fund, and a one-time payment to terminate an office lease that occurred in the first quarter of 2008. Total G&A expense has decreased 20% as compared to the first quarter of 2008.
Management Internalization
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Management
internalization
($000) $ 2,439 $ 5,350 (54)% $ 4,930 $ 10,719 (54)%
per boe $ 0.84 $ 2.17 (61)% $ 0.83 $ 2.11 (61)%
In 2006, the Fund and the Manager reached an agreement to internalize the pre-existing management contract arrangement. As part of the agreement, Advantage agreed to purchase all of the outstanding shares of the Manager pursuant to the terms of the Arrangement, thereby eliminating the management fee and performance incentive effective April 1, 2006. The Trust Unit consideration issued in exchange for the outstanding shares of the Manager was placed in escrow for a 3-year period and is being deferred and amortized into income as management internalization expense over the specific vesting periods during which employee services are provided. The management internalization is lower for the three and six months as one third vested and was paid in June 2007 with an additional one third vested and paid in June 2008.
Interest
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June 30 June 30
2008 2007 % change 2008 2007 % change
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Interest expense
($000) $ 7,118 $ 5,005 42% $ 14,884 $ 10,192 46%
per boe $ 2.44 $ 2.03 20% $ 2.51 $ 2.01 25%
Average effective
interest rate 5.1% 5.4% (0.3)% 5.4% 5.4% -
Bank indebtedness
at June 30 ($000) $547,946 $377,812 45%
Total interest expense and interest expense per boe increased as compared to 2007 primarily due to the additional debt assumed by the Fund from the Sound acquisition on September 5, 2007. Interest expense versus the first quarter of 2008 was 8% less as our debt level decreased during the second quarter of 2008. We monitor the debt level to ensure an optimal mix of financing and cost of capital that will provide a maximum return to our Unitholders. Our current credit facilities have been a favorable financing alternative with an effective interest rate of only 5.4% for the six months ended June 30, 2008. The Fund's interest rates are primarily based on short term Bankers Acceptance rates plus a stamping fee.
Interest and Accretion on Convertible Debentures
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Interest on
convertible
debentures
($000) $ 4,204 $ 3,293 28% $ 8,391 $ 6,531 28%
per boe $ 1.44 $ 1.33 8% $ 1.42 $ 1.29 10%
Accretion on
convertible
debentures
($000) $ 720 $ 605 19% $ 1,440 $ 1,204 20%
per boe $ 0.25 $ 0.25 - $ 0.24 $ 0.24 -
Convertible
debentures
maturity value
at June 30 ($000) $224,587 $180,725 24%
Interest and accretion on convertible debentures has increased compared to 2007 due to Advantage assuming Sound's 8.75% and 8.00% convertible debentures on the acquisition. The increased interest and accretion from the additional debentures has been slightly offset by the maturation of the 10% convertible debentures with a face value of $1.4 million on November 1, 2007. The interest per boe for 2008 is slightly higher as our convertible debentures outstanding have somewhat increased relative to our level of production.
Depletion, Depreciation and Accretion
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Depletion,
depreciation
and accretion
($000) $ 74,704 $ 61,365 22% $151,584 $125,283 21%
per boe $ 25.64 $ 24.87 3% $ 25.57 $ 24.67 4%
Depletion and depreciation of property and equipment is provided on the "unit-of-production" method based on total proved reserves. The depletion, depreciation and accretion ("DD&A") provision has increased in total due to the increase in production and fixed assets in comparison to the three and six months ended June 30, 2007, mainly attributed to the Sound acquisition. The slight increase in the DD&A rate per boe compared to the prior year is due to high capital expenditures in the first half of 2008 and the higher value assigned to the Sound acquisition than accumulated from prior development activities.
Taxes
Current taxes paid or payable for the quarter ended June 30, 2008 amounted to $0.9 million, as compared to the $0.2 million expensed for the same period of 2007. Current taxes primarily represent Saskatchewan resource surcharge, which is based on the petroleum and natural gas revenues within the province of Saskatchewan.
Future income taxes arise from differences between the accounting and tax bases of the assets and liabilities. For the six months ended June 30, 2008, the Fund recognized an income tax reduction of $44.0 million compared to a reduction of $16.3 million for 2007. As at June 30, 2008, the Fund had a future income tax liability of $22.7 million compared to $66.7 million at December 31, 2007.
Under the Fund's current structure, payments are made between the operating company and the Fund transferring income tax obligations to Unitholders and as a result no cash income taxes would be paid by the operating company or the Fund prior to 2011. However, the Specified Investment Flow-Through Entity ("SIFT") tax legislation was enacted on June 22, 2007 altering the tax treatment by subjecting income trusts to a two-tier tax structure, similar to that of corporations, whereby the taxable portion of distributions paid by trusts will be subject to tax at the trust level and at the Unitholder level. The rules are effective for tax years beginning in 2011 for existing publicly-traded trusts. The effect of the new tax law was recognized in the future income tax expense and liability for the year ended December 31, 2007. Canadian generally accepted accounting principles require that a future income tax liability be recorded when the book value of assets exceeds the balance of tax pools.
On July 14, 2008, the Department of Finance released draft legislative proposals to facilitate the conversion of SIFT trusts into corporations. In general, the rules are meant to ensure that existing SIFT's can choose to reorganize as corporations on a tax efficient basis without undue tax effects for unitholders and the SIFT trust. It is expected that the draft legislative proposals will form part of a bill to be introduced into Parliament later in 2008. Management continues to review the impact of the SIFT tax on its business strategy and the Fund's organizational structure.
Net Income (Loss)
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Net income
(loss)
($000) $(14,369) $ 4,531 (417)% $(38,491) $ 4,872 (890)%
per Trust
Unit -
Basic and
diluted $ (0.10) $ 0.04 (350)% $ (0.28) $ 0.04 (800)%
Advantage has experienced net losses for 2008 as compared to the similar periods of 2007. Although higher production and commodity prices in the three and six months ended June 30, 2008 resulted in considerable increased revenue, this was more than offset by unrealized losses on derivatives of $62.7 million and $123.9 million for the three and six months ended June 30, 2008, respectively. The unrealized losses on derivatives are due to improved forward commodity prices as compared to the prices per the open derivative positions. The unrealized amounts are not cash and the actual gains or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices. The Fund does not apply hedge accounting and current accounting standards require changes in the fair value to be included in the consolidated statement of income and comprehensive income as an unrealized derivative gain or loss with a corresponding derivative asset and liability recorded on the balance sheet. These derivative contracts will settle from July 2008 to March 2009 corresponding to when Advantage will receive revenues from production.
Cash Netbacks
Three months ended
June 30
2008 2007
$000 per boe $000 per boe
-------------------------------------------------------------------------
Revenue $230,953 $ 79.27 $125,131 $ 50.71
Realized gain (loss) on
derivatives (22,085) (7.58) (56) (0.02)
Royalties (46,173) (15.85) (22,749) (9.22)
Operating costs (39,917) (13.70) (26,919) (10.91)
-------------------------------------------------------------------------
Operating $122,778 $ 42.14 $ 75,407 $ 30.56
General and administrative(1) (6,831) (2.34) (4,232) (1.72)
Interest (7,118) (2.44) (5,005) (2.03)
Interest on convertible
debentures(1) (4,204) (1.44) (3,293) (1.33)
Income and capital taxes (871) (0.30) (243) (0.10)
-------------------------------------------------------------------------
Funds from operations $103,754 $ 35.62 $ 62,634 $ 25.38
-------------------------------------------------------------------------
Six months ended
June 30
2008 2007
$000 per boe $000 per boe
-------------------------------------------------------------------------
Revenue $417,051 $ 70.35 $254,403 $ 50.09
Realized gain (loss) on
derivatives (19,678) (3.32) 6,174 1.22
Royalties (80,054) (13.50) (48,914) (9.63)
Operating costs (80,189) (13.53) (57,189) (11.26)
-------------------------------------------------------------------------
Operating $237,130 $ 40.00 $154,474 $ 30.42
General and administrative(1) (13,924) (2.35) (8,948) (1.76)
Interest (14,884) (2.51) (10,192) (2.01)
Interest on convertible
debentures(1) (8,391) (1.42) (6,531) (1.29)
Income and capital taxes (1,559) (0.26) (524) (0.10)
-------------------------------------------------------------------------
Funds from operations $198,372 $ 33.46 $128,279 $ 25.26
-------------------------------------------------------------------------
(1) General and administrative expense excludes non-cash unit-based
compensation expense. Interest on convertible debentures excludes
non-cash accretion expense.
Funds from operations of Advantage increased for both the three and six months ended June 30, 2008, compared to corresponding periods in 2007, due primarily to additional production from the Sound acquisition and greatly improved commodity prices. Cash netbacks per boe are also higher due to stronger realized commodity prices. Increased cash netbacks were partially offset by realized losses on derivatives, and increased operating expenses and royalties. Realized hedging losses resulted from the higher commodity price environment as the Fund entered derivative contracts to lessen commodity price fluctuations, which can positively or negatively impact cash flows and resulting distributions. Operating costs have steadily increased over the past year due to significantly higher field costs associated with supplies and services, an overall industry labour cost increase, and higher relative operating costs from the Sound acquisition. Specific to the Fund, we have experienced production outages caused by weather and turnaround shut-downs in 2008. Royalties have increased as would be expected since they are generally based on current commodity prices.
Contractual Obligations and Commitments
The Fund has contractual obligations in the normal course of operations including purchases of assets and services, operating agreements, transportation commitments, sales contracts and convertible debentures. These obligations are of a recurring and consistent nature and impact cash flow in an ongoing manner. The following table is a summary of the Fund's remaining contractual obligations and commitments. Advantage has no guarantees or off-balance sheet arrangements other than as disclosed.
Payments due by period
($ millions) Total 2008 2009 2010 2011 2012
-------------------------------------------------------------------------
Building
leases $ 13.4 $ 2.1 $ 4.1 $ 4.1 $ 1.8 $ 1.3
Capital leases 7.0 0.8 2.1 2.2 1.9 -
Pipeline/
transportation 5.7 2.0 2.4 1.0 0.3 -
Convertible
debentures(1) 224.6 5.4 87.0 69.9 62.3 -
-------------------------------------------------------------------------
Total
contractual
obligations $ 250.7 $ 10.3 $ 95.6 $ 77.2 $ 66.3 $ 1.3
-------------------------------------------------------------------------
(1) As at June 30, 2008, Advantage had $224.6 million convertible
debentures outstanding (excluding interest payable during the various
debenture terms). Each series of convertible debentures are
convertible to Trust Units based on an established conversion price.
The Fund settled the principal amount of 9.00% convertible debenture
by payment of $5.4 million in cash on August 1, 2008. All remaining
obligations related to convertible debentures have the option to be
settled through the issuance of Trust Units.
(2) Bank indebtedness of $547.9 million has been excluded from the
contractual obligations table as the credit facilities constitute a
revolving facility for a 364 day term which is extendible annually
for a further 364 day revolving period at the option of the
syndicate. If not extended, the revolving credit facility is
converted to a two year term facility with the first payment due one
year and one day after commencement of the term.
Liquidity and Capital Resources
The following table is a summary of the Fund's capitalization structure.
($000, except as otherwise indicated) June 30, 2008
-------------------------------------------------------------------------
Bank indebtedness (long-term) $ 547,946
Working capital deficit(1) 42,201
-------------------------------------------------------------------------
Net debt $ 590,147
-------------------------------------------------------------------------
Trust Units outstanding (000) 140,271
Trust Unit closing market price ($/Trust Unit) $ 13.15
-------------------------------------------------------------------------
Market value $ 1,844,563
-------------------------------------------------------------------------
Convertible debentures maturity value (long-term) $ 184,489
Capital lease obligation (long-term) 5,008
-------------------------------------------------------------------------
Total capitalization $ 2,624,207
-------------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
distributions payable, and the current portion of capital lease
obligations and convertible debentures.
Unitholders' Equity and Convertible Debentures
Advantage has utilized a combination of Trust Units, convertible debentures and bank debt to finance acquisitions and development activities.
As at June 30, 2008, the Fund had 140.3 million Trust Units outstanding. During the six months ended June 30, 2008, 1,854,776 Trust Units were issued as a result of the Premium Distribution(TM), Distribution Reinvestment and Optional Trust Unit Purchase Plan (the "Plan"), generating $19.5 million reinvested in the Fund and representing an approximate 20% participation rate (for six months ended June 30, 2007, 2,076,686 Trust Units were issued under the Plan, generating $24.6 million reinvested in the Fund). As at August 14, 2008, Advantage had 140.6 million Trust Units issued and outstanding.
At both June 30, 2008 and December 31, 2007, the Fund had $224.6 million convertible debentures outstanding that were immediately convertible to 9.8 million Trust Units based on the applicable conversion prices. During the period ended June 30, 2008, $25,000 debentures were converted resulting in the issuance of 1,001 Trust Units. As at August 14, 2008, the convertible debentures outstanding have decreased to $219.2 million given that the 9.00% debentures matured on August 1, 2008, resulting in a cash payment of $5,392,000 to the debenture holders.
Advantage has a Trust Units Rights Incentive Plan for external directors as approved by the Unitholders of the Fund. A total of 500,000 Trust Units have been reserved for issuance under the plan with an aggregate of 400,000 rights granted since inception. The initial exercise price of rights granted under the plan may not be less than the current market price of the Trust Units as of the date of the grant and the maximum term of each right is not to exceed ten years with all rights vesting immediately upon grant. At the option of the rights holder, the exercise price of the rights can be adjusted downwards over time based upon distributions paid by the Fund to Unitholders. In June 2008, all remaining 150,000 outstanding rights were exercised at $8.60 per right for total cash proceeds of $1,290,000, of which $322,500 was received after June 30, 2008.
Bank Indebtedness, Credit Facility and Other Obligations
At June 30, 2008, Advantage had bank indebtedness outstanding of $547.9 million. The Fund has a $710 million credit facility agreement consisting of a $690 million extendible revolving loan facility and a $20 million operating loan facility. The current credit facilities are collateralized by a $1 billion floating charge demand debenture, a general security agreement and a subordination agreement from the Fund covering all assets and cash flows. During the second quarter, the Fund repaid $15.6 million of bank indebtedness due to the strength of our operating results. Bank indebtedness is relatively unchanged from December 31, 2007. In June 2008, the Fund renewed its credit facilities for a further year with the next annual review scheduled to occur in June 2009.
Advantage had a working capital deficiency of $42.2 million as at June 30, 2008. Our working capital includes items expected for normal operations such as trade receivables, prepaids, deposits, trade payables and accruals as well as the current portion of capital lease obligations and convertible debentures. Working capital varies primarily due to the timing of such items, the current level of business activity including our capital program, commodity price volatility, and seasonal fluctuations. Advantage has no unusual working capital requirements. We do not anticipate any problems in meeting future obligations as they become due given the strength of our funds from operations. It is also important to note that working capital is effectively integrated with Advantage's operating credit facility, which assists with the timing of cash flows as required.
Advantage has capital lease obligations on various pieces of equipment used in its operations. The total amount of principal obligation outstanding at June 30, 2008 is $6.3 million, bearing interest at effective rates ranging from 5.5% to 6.7%, and is collateralized by the related equipment. The leases expire at dates ranging from December 2009 to August 2010.
Capital Expenditures
Three months ended Six months ended
June 30 June 30
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Land and seismic $ 11 $ 1,581 $ 4,181 $ 3,921
Drilling, completions
and workovers 9,425 15,475 46,169 42,610
Well equipping and facilities 11,978 8,464 37,576 28,574
Other 218 158 609 269
-------------------------------------------------------------------------
$ 21,632 $ 25,678 $ 88,535 $ 75,374
Property acquisitions - - - 12,851
Property dispositions - - (91) (427)
-------------------------------------------------------------------------
Total capital expenditures $ 21,632 $ 25,678 $ 88,444 $ 87,798
-------------------------------------------------------------------------
Advantage's growth strategy has been to acquire properties in or near areas where we have large land positions, shallow to medium depth drilling opportunities, and a balance of year round access. We focus on areas where past activity has yielded long-life reserves with high cash netbacks. Advantage is very well positioned to selectively exploit the highest value-generating drilling opportunities given the size, strength and diversity of our asset base. As a result, the Fund has a high level of flexibility to distribute its capital program and ensure a risk-balanced platform of projects. Our preference is to operate a high percentage of our properties such that we can maintain control of capital expenditures, operations and cash flows.
For the three month period ended June 30, 2008, the Fund spent a net $21.6 million. The majority of the capital expenditures for this quarter related to completions, tie-ins and the addition of new facilities related to bringing production on-stream from wells drilled during the very active first quarter winter drilling program. As operations wound down with the onset of seasonal spring breakup, only 3 net (4 gross) wells were drilled in the second quarter. Total capital spending in the quarter included $8.5 million at Nevis, $2.4 million at Sousa, $1.3 million at Glacier, $1.2 million at Willesden Green, and $1.2 million at Martin Creek.
On June 27, 2008, the Board of Directors approved an increase of $55.0 million to the 2008 capital expenditures budget, bringing the 2008 total capital expenditure budget to $200.0 million. It is anticipated that these additional expenditures can be fully funded with funds from operations, and therefore no incremental debt or other financing will be required. The increased capital spending will be primarily directed towards further drilling in our Montney natural gas resource play at Glacier in Northwest Alberta with the balance directed towards additional opportunities that have resulted from increased commodity prices.
Sources and Uses of Funds
The following table summarizes the various funding requirements during the six months ended June 30, 2008 and 2007 and the sources of funding to meet those requirements:
Six months ended
June 30
($000) 2008 2007
-------------------------------------------------------------------------
Sources of funds
Funds from operations $198,372 $128,279
Units issued, net of costs 925 104,486
Increase in bank indebtedness 520 -
Property dispositions 91 427
-------------------------------------------------------------------------
$199,908 $233,192
-------------------------------------------------------------------------
Uses of funds
Expenditures on property and equipment $ 88,535 $ 75,374
Distributions to Unitholders 80,632 79,305
Increase in working capital 23,882 27,123
Expenditures on asset retirement 5,947 3,707
Reduction of capital lease obligations 912 2,070
Decrease in bank indebtedness - 32,762
Property acquisitions - 12,851
-------------------------------------------------------------------------
$199,908 $233,192
-------------------------------------------------------------------------
The Fund has enjoyed a substantial increase in funds from operations during 2008 from the higher production levels and stronger commodity price environment. As a result, the Fund has been able to adequately finance its capital expenditures and distributions to Unitholders without additional debt. We believe that our current strategy, including our capital program and distribution level, are balanced and will continue to ensure that Advantage is well positioned for future growth.
Quarterly Performance
2008 2007
($000, except as
otherwise indicated) Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Daily production
Natural gas (mcf/d) 123,104 125,113 128,556 115,991
Crude oil and NGLs
(bbls/d) 11,498 12,281 12,895 10,014
Total (boe/d) 32,015 33,133 34,321 29,346
Average prices
Natural gas ($/mcf)
Excluding hedging $ 10.33 $ 7.90 $ 6.23 $ 5.62
Including hedging $ 9.18 $ 8.23 $ 6.97 $ 6.35
AECO monthly index $ 9.35 $ 7.13 $ 6.00 $ 5.62
Crude oil and NGLs
($/bbl)
Excluding hedging $ 110.15 $ 85.99 $ 73.40 $ 69.03
Including hedging $ 101.34 $ 84.83 $ 70.40 $ 68.51
WTI ($US/bbl) $ 124.00 $ 97.96 $ 90.63 $ 75.33
Total revenues (before
royalties) $ 208,868 $ 188,505 $ 165,951 $ 130,830
Net income (loss) $ (14,369) $ (24,122) $ 13,795 $ (26,202)
per Trust Unit -
basic and diluted $ (0.10) $ (0.18) $ 0.10 $ (0.22)
Funds from operations $ 103,754 $ 94,618 $ 80,519 $ 62,345
Distributions declared $ 50,364 $ 50,021 $ 57,875 $ 55,017
2007 2006
($000, except as
otherwise indicated) Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Daily production
Natural gas (mcf/d) 108,978 114,324 117,134 122,227
Crude oil and NGLs
(bbls/d) 8,952 9,958 9,570 9,330
Total (boe/d) 27,115 29,012 29,092 29,701
Average prices
Natural gas ($/mcf)
Excluding hedging $ 7.54 $ 7.61 $ 6.90 $ 5.89
Including hedging $ 7.52 $ 8.06 $ 7.27 $ 5.90
AECO monthly index $ 7.37 $ 7.46 $ 6.36 $ 6.03
Crude oil and NGLs
($/bbl)
Excluding hedging $ 61.84 $ 56.84 $ 54.58 $ 67.77
Including hedging $ 61.93 $ 58.64 $ 55.86 $ 67.77
WTI ($US/bbl) $ 65.02 $ 58.12 $ 60.21 $ 70.55
Total revenues (before
royalties) $ 125,075 $ 135,502 $ 127,539 $ 124,521
Net income (loss) $ 4,531 $ 341 $ 8,736 $ 1,209
per Trust Unit -
basic and diluted $ 0.04 $ 0.00 $ 0.08 $ 0.01
Funds from operations $ 62,634 $ 65,645 $ 62,737 $ 63,110
Distributions declared $ 52,096 $ 50,206 $ 58,791 $ 60,498
The table above highlights the Fund's performance for the second quarter of 2008 and also for the preceding seven quarters. A combination of natural reserve declines and spring breakup resulted in production decreases from the third quarter of 2006 through the second quarter of 2007. The second quarter of 2007 was further disrupted by several facility turnarounds in that period. The Sound acquisition closed on September 5, 2007, and significantly increased production for the third and fourth quarters of 2007. Production has gradually decreased since the acquisition of Sound once again due to natural declines combined with spring breakup and facility turnarounds that occurred in the second quarter of 2008. Financial results have also steadily improved during these periods, particularly revenues and funds from operations, as both commodity prices and production have generally increased. We experienced a net loss in the third quarter of 2007 due to a significant drop in natural gas prices realized at that time, amortization of the management internalization consideration and increased depletion and depreciation expense. Net income increased in the fourth quarter of 2007 due to the full integration of the Sound acquisition and moderately improved commodity prices. Net losses were realized in the first and second quarters of 2008, primarily as a result of significant unrealized losses on hedging positions for future periods. These losses are not cash and have no impact on our cash position, funds from operations, or our distributions.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires Management to make certain judgments and estimates. Changes in these judgments and estimates could have a material impact on the Fund's financial results and financial condition.
Management relies on the estimate of reserves as prepared by the Fund's independent qualified reserves evaluator. The process of estimating reserves is critical to several accounting estimates. The process of estimating reserves is complex and requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development and production activities becomes available and as economic conditions impact crude oil and natural gas prices, operating costs, royalty burden changes, and future development costs. Reserve estimates impact net income through depletion and depreciation of fixed assets, the provision for asset retirement costs and related accretion expense, and impairment calculations for fixed assets and goodwill. The reserve estimates are also used to assess the borrowing base for the Fund's credit facilities. Revision or changes in the reserve estimates can have either a positive or a negative impact on net income and the borrowing base of the Fund.
Management's process of determining the provision for future income taxes, the provision for asset retirement obligation costs and related accretion expense, and the fair values assigned to any acquired company's assets and liabilities in a business combination is based on estimates. These estimates are significant and can include reserves, future production rates, future crude oil and natural gas prices, future costs, future interest rates, future tax rates and other relevant assumptions. Revisions or changes in any of these estimates can have either a positive or a negative impact on asset and liability values and net income.
In accordance with GAAP, derivative assets and liabilities are recorded at their fair values at the reporting date, with unrealized gains and losses recognized directly into net income and comprehensive income in the same period. The fair value of derivatives outstanding is an estimate based on pricing models, estimates, assumptions and market data available at that time. As such, the unrealized amounts are not cash and the actual gains or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices as compared to the valuation assumptions.
International Financial Reporting Standards ("IFRS")
In February 2008, the Accounting Standards Board of the Canadian Institute of Chartered Accountants confirmed that publicly accountable entities will be required to adopt IFRS effective January 1, 2011, including preparation of comparative financial information. Management is currently evaluating the effects of adopting IFRS on its financial statements and is in the planning stage, including assessment and evaluation of key differences between Canadian GAAP and IFRS. Upon completion of this initial diagnosis stage, we will be organizing a detailed project plan to ensure all accounting differences are dealt with and implemented in a timely manner such that Advantage's financial statements are prepared in accordance with IFRS by the required deadline.
Controls and Procedures
The Fund has established procedures and internal control systems to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Management of the Fund is committed to providing timely, accurate and balanced disclosure of all material information about the Fund. Disclosure controls and procedures are in place to ensure all ongoing reporting requirements are met and material information is disclosed on a timely basis. The Chief Executive Officer and Vice-President, Finance and Chief Financial Officer, individually, sign certifications that the financial statements, together with the other financial information included in the regular filings, fairly present in all material respects the financial condition, results of operations, and cash flows as of the dates and for the periods presented in the filings. The certifications further acknowledge that the filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the filings. During the six months ended June 30, 2008, there were no significant changes that would materially affect, or are reasonably likely to materially affect, the internal controls over financial reporting.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even those systems determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Outlook
The Fund's 2008 Budget, as approved by the Board of Directors, retains a high degree of activity and focus on drilling in many of our key properties where a high level of success was realized through 2007. Capital has also been directed to delineate the Montney natural gas resource play at Glacier in Northwest Alberta and to accommodate facility expansions and enhanced recovery schemes as necessary.
For 2008, we are forecasting production to be in the range of 32,000 to 34,000 boe/d. Advantage's 2008 capital expenditures budget was originally estimated to be approximately $145 million to drill approximately 143 gross (88 net) wells. On June 27, 2008, the Board approved an increase of $55 million to the capital budget, bringing the 2008 total capital budget to $200 million. The additional capital spending will be directed primarily towards the Montney natural gas resource play at Glacier in Northwest Alberta, and any remainder towards additional opportunities. During the first quarter of 2008, the Fund drilled five vertical delineation wells in the Glacier property which helped confirm geological formations, reservoir productivity and pool continuity. Additional activity will be pursued during the balance of 2008 to further define longer term development plans. The Glacier property is accessible through most of the year and rigs have been secured to drill the additional wells. Approximately $39 million will be spent on the next phase of development at Glacier where the Fund plans to drill five gross horizontal wells, five gross vertical delineation wells and initiate infrastructure expansion.
Operating costs on an annual basis are expected to now range between $13.40 and $13.90 per boe. Industry supply, servicing and maintenance costs have increased during the first six months of 2008 driven primarily from higher crude oil and natural gas prices. In particular, we have seen significant increases from electrical power costs, processing fees, steel and chemicals.
On October 25, 2007, the Alberta Provincial Government announced changes to royalties for conventional oil, natural gas and oil sands that will become effective January 1, 2009. Royalty rates will be commodity price sensitive and dependent on individual well productivity. Advantage has a significant number of lower rate wells producing within our long life Alberta properties. We also have a significant Horseshoe Canyon coal bed methane drilling inventory that can be pursued which will also have a favorable royalty treatment due to lower rate per well characteristics. Our exposure in Northeast British Columbia and Saskatchewan also affords us further flexibility with mitigating the royalty impact in our capital program. If the current higher price commodity environment were to continue, we would expect our future royalty rates to be higher than what we have historically experienced under the current royalty regime. We anticipate our royalty rates will range from 18% to 20% for the 2008 year.
Advantage's funds from operations in 2008 will continue to be impacted by the volatility of crude oil and natural gas prices and the $US/$Canadian exchange rate. Hedging has been completed for 2008 and a portion of 2009 to (i) stabilize cash flows and (ii) ensure that the Fund's capital program is substantially funded out of cash flow. Approximately 56% of our natural gas production, net of royalties, is hedged for the 2008 calendar year at an average price of $7.52 Canadian per mcf. Advantage has also hedged 40% of its 2008 crude oil production, net of royalties, at an average price of $94.07 Canadian per bbl.
Advantage will continue to follow its strategy of acquiring properties that provide highly economic development opportunities to enhance long-term cash flow. Advantage will also continue to focus on efficient production and reserve additions through low to medium risk development drilling opportunities that have arisen as a result of the acquisitions completed in prior years and from the significant inventory of drilling opportunities that has resulted from the Ketch and Sound acquisitions.
Looking forward, Advantage's high quality assets combined with a greater than five year conventional drilling inventory, exposure to the Montney natural gas resource play and excellent tax pools provides many options for the Fund and we are committed to maximizing value generation for our Unitholders.
Additional Information
Additional information relating to Advantage can be found on SEDAR at www.sedar.com and the Fund's website at www.advantageincome.com. Such other information includes the annual information form, the annual information circular - proxy statement, press releases, material contracts and agreements, and other financial reports. The annual information form will be of particular interest for current and potential Unitholders as it discusses a variety of subject matter including the nature of the business, structure of the Fund, description of our operations, general and recent business developments, risk factors, reserves data and other oil and gas information.
August 14, 2008
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, December 31,
(thousands of dollars) 2008 2007
-------------------------------------------------------------------------
(unaudited)
Assets
Current assets
Accounts receivable $ 117,925 $ 95,474
Prepaid expenses and deposits 14,939 21,988
Derivative asset (note 10) 545 7,027
-------------------------------------------------------------------------
133,409 124,489
Derivative asset (note 10) - 174
Fixed assets (note 3) 2,125,736 2,177,346
Goodwill 120,271 120,271
-------------------------------------------------------------------------
$2,379,416 $2,422,280
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 117,232 $ 122,087
Distributions payable to Unitholders 16,833 16,592
Current portion of capital lease
obligations (note 4) 1,270 1,537
Current portion of convertible
debentures (note 5) 39,730 5,333
Derivative liability (note 10) 122,246 2,242
-------------------------------------------------------------------------
297,311 147,791
Derivative liability (note 10) - 2,778
Capital lease obligations (note 4) 5,008 5,653
Bank indebtedness (note 6) 547,946 547,426
Convertible debentures (note 5) 179,221 212,203
Asset retirement obligations (note 7) 62,797 60,835
Future income taxes 22,683 66,727
-------------------------------------------------------------------------
1,114,966 1,043,413
-------------------------------------------------------------------------
Unitholders' Equity
Unitholders' capital (note 8) 2,053,471 2,027,065
Convertible debentures equity component (note 5) 9,632 9,632
Contributed surplus (note 8) 58 2,005
Accumulated deficit (note 9) (798,711) (659,835)
-------------------------------------------------------------------------
1,264,450 1,378,867
-------------------------------------------------------------------------
$2,379,416 $2,422,280
-------------------------------------------------------------------------
Commitments (note 12)
see accompanying Notes to Consolidated Financial Statements
Consolidated Statements of Income (Loss),
Comprehensive Income (Loss) and Accumulated Deficit
(thousands of dollars, Three months ended Six months ended
except for per Trust June 30, June 30, June 30, June 30,
Unit amounts) (unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue
Petroleum and natural
gas $ 230,953 $ 125,131 $ 417,051 $ 254,403
Realized gain (loss) on
derivatives (note 10) (22,085) (56) (19,678) 6,174
Unrealized gain (loss)
on derivatives (note 10) (62,696) 10,126 (123,882) (1,903)
Royalties (46,173) (22,749) (80,054) (48,914)
-------------------------------------------------------------------------
99,999 112,452 193,437 209,760
-------------------------------------------------------------------------
Expenses
Operating 39,917 26,919 80,189 57,189
General and administrative 5,763 4,861 12,995 9,577
Management internalization
(note 8) 2,439 5,350 4,930 10,719
Interest 7,118 5,005 14,884 10,192
Interest and accretion on
convertible debentures 4,924 3,898 9,831 7,735
Depletion, depreciation
and accretion 74,704 61,365 151,584 125,283
-------------------------------------------------------------------------
134,865 107,398 274,413 220,695
-------------------------------------------------------------------------
Income (loss) before taxes (34,866) 5,054 (80,976) (10,935)
Future income tax expense
(reduction) (21,368) 280 (44,044) (16,331)
Income and capital taxes 871 243 1,559 524
-------------------------------------------------------------------------
(20,497) 523 (42,485) (15,807)
-------------------------------------------------------------------------
Net income (loss) and
comprehensive income (loss) (14,369) 4,531 (38,491) 4,872
Accumulated deficit,
beginning of period (733,978) (486,971) (659,835) (437,106)
Distributions declared (50,364) (52,096) (100,385) (102,302)
-------------------------------------------------------------------------
Accumulated deficit, end
of period $ (798,711) $ (534,536) $ (798,711) $(534,536)
-------------------------------------------------------------------------
Net income (loss) per
Trust Unit (note 8)
Basic and diluted $ (0.10) $ 0.04 $ (0.28) $ 0.04
-------------------------------------------------------------------------
see accompanying Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Three months ended Six months ended
(thousands of dollars) June 30, June 30, June 30, June 30,
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (14,369) $ 4,531 $ (38,491) $ 4,872
Add (deduct) items not
requiring cash:
Unrealized loss (gain)
on derivatives 62,696 (10,126) 123,882 1,903
Unit-based compensation (1,068) 629 (929) 629
Management internalization 2,439 5,350 4,930 10,719
Accretion on convertible
debentures 720 605 1,440 1,204
Depletion, depreciation
and accretion 74,704 61,365 151,584 125,283
Future income taxes (21,368) 280 (44,044) (16,331)
Expenditures on asset
retirement (982) 302 (5,947) (3,707)
Changes in non-cash
working capital (8,890) (13,004) (16,950) (24,120)
-------------------------------------------------------------------------
Cash provided by
operating activities 93,882 49,932 175,475 100,452
-------------------------------------------------------------------------
Financing Activities
Units issued, net of
costs (note 8) 967 386 925 104,486
Increase (decrease) in
bank indebtedness (15,554) 23,369 520 (32,762)
Reduction of capital
lease obligations (306) (1,719) (912) (2,070)
Distributions to Unitholders (40,330) (39,767) (80,632) (79,305)
-------------------------------------------------------------------------
Cash used in financing
activities (55,223) (17,731) (80,099) (9,651)
-------------------------------------------------------------------------
Investing Activities
Expenditures on property
and equipment (21,632) (25,678) (88,535) (75,374)
Property acquisitions - - - (12,851)
Property dispositions - - 91 427
Changes in non-cash
working capital (17,027) (6,523) (6,932) (3,003)
-------------------------------------------------------------------------
Cash used in investing
activities (38,659) (32,201) (95,376) (90,801)
-------------------------------------------------------------------------
Net change in cash - - - -
Cash, beginning of period - - - -
-------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
-------------------------------------------------------------------------
Supplementary Cash Flow
Information
Interest paid $ 10,013 $ 10,171 $ 18,579 $ 17,176
Taxes paid $ 638 $ 469 $ 792 $ 830
see accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008 (unaudited)
All tabular amounts in thousands except as otherwise indicated.
The interim consolidated financial statements of Advantage Energy Income
Fund ("Advantage" or the "Fund") have been prepared by management in
accordance with Canadian generally accepted accounting principles using
the same accounting policies as those set out in note 2 to the
consolidated financial statements for the year ended December 31, 2007,
except as described below. The interim consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements of Advantage for the year ended December 31, 2007 as set out
in Advantage's Annual Report.
1. Changes in Accounting Policies
(a) Capital disclosures
Effective January 1, 2008, the Fund adopted CICA Handbook Section
1535, Capital Disclosures. This Section establishes standards for
disclosing information about an entity's capital and how it is
managed to enable users of financial statements to evaluate the
entity's objectives, policies and procedures for managing capital.
The adoption of this Section requires that information on capital
management be included in the notes to the consolidated financial
statements (note 11). This new standard does not have any effect on
our financial position or results of operations.
(b) Comparative figures
Certain comparative figures have been reclassified to conform to the
current year's presentation.
(c) Recent accounting changes not implemented
(i) Goodwill and intangible assets
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. The new Section will become effective January 1, 2009.
Management has evaluated the new Section and there will be no
impact for the financial statements of the Fund. The only
applicable item for the Fund is goodwill, and the standards
concerning goodwill are unchanged from the prior standard.
(ii) International Financial Reporting Standards ("IFRS")
In February 2008, the CICA Accounting Standards Board confirmed
that IFRS will replace Canadian GAAP effective January 1, 2011
for publicly accountable enterprises. Management is currently
evaluating the effects of all current and pending pronouncements
of the International Accounting Standards Board on the financial
statements of the Fund, and is developing a plan for
implementation.
2. Sound Energy Trust Acquisition
On September 5, 2007, Advantage acquired all of the issued and
outstanding Trust Units and Exchangeable Shares of Sound Energy Trust
("Sound") for $21.4 million cash consideration, 16,977,184 Advantage
Trust Units and $0.9 million of acquisition costs. Sound Unitholders
and Exchangeable Shareholders could elect to receive 0.30 Advantage
Trust Units for each Sound Trust Unit or receive $0.66 in cash and
0.2557 Advantage Trust Units for each Sound Trust Unit. All of the
Sound Exchangeable Shares were exchanged for Advantage Trust Units on
the same ratio as the Sound Trust Units based on the conversion ratio
in effect at the effective date of the acquisition. Sound was an
energy trust engaged in the development, acquisition and production
of natural gas and crude oil in western Canada. The acquisition is
being accounted for using the "purchase method" with the results of
operations included in the consolidated financial statements as of
the closing date of the acquisition.
The purchase price has been allocated as follows:
Net assets acquired and Consideration:
liabilities assumed:
Fixed assets $ 513,604 16,977,184 Trust
Accounts receivable 27,654 Units issued $ 228,852
Prepaid expenses Cash 21,403
and deposits 3,873 Acquisition costs
Derivative asset, net 2,797 incurred 904
Bank indebtedness (107,959) -----------
Convertible debentures (101,553) $ 251,159
Accounts payable and -----------
accrued liabilities (39,565)
Future income taxes (29,430)
Asset retirement
obligations (16,695)
Capital lease
obligations (1,567)
-----------
$ 251,159
-----------
The value of the Trust Units issued as consideration was determined
based on the weighted average trading value of Advantage Trust Units
during the two-day period before and after the terms of the
acquisition were agreed to and announced. The allocation of the
purchase price has been revised in 2008 due to the realization of
estimates and is subject to further refinement as additional cost
estimates and tax balances are finalized. As a result, fixed assets
increased $4.0 million, accounts receivable increased $0.2 million,
and accounts payable and accrued liabilities increased $4.2 million.
3. Fixed Assets
Accumulated
Depletion and Net Book
June 30, 2008 Cost Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas
properties $ 3,113,515 $ 993,153 $ 2,120,362
Furniture and equipment 11,157 5,783 5,374
---------------------------------------------------------------------
$ 3,124,672 $ 998,936 $ 2,125,736
---------------------------------------------------------------------
Accumulated
Depletion and Net Book
December 31, 2007 Cost Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas
properties $ 3,016,243 $ 844,671 $ 2,171,572
Furniture and equipment 10,548 4,774 5,774
---------------------------------------------------------------------
$ 3,026,791 $ 849,445 $ 2,177,346
---------------------------------------------------------------------
During the six months ended June 30, 2008, Advantage capitalized
general and administrative expenditures directly related to
exploration and development activities of $6,349,000 (June 30, 2007 -
$3,943,000).
4. Capital Lease Obligations
The Fund has capital leases on a variety of fixed assets. Future
minimum lease payments at June 30, 2008 consist of the following:
2008 $ 799
2009 2,040
2010 2,200
2011 1,925
---------------------------------------------
6,964
Less amounts representing interest (686)
---------------------------------------------
6,278
Current portion (1,270)
---------------------------------------------
$ 5,008
---------------------------------------------
5. Convertible Debentures
The balance of debentures outstanding at June 30, 2008 and changes in
the liability and equity components during the six months ended June
30, 2008 are as follows:
9.00% 8.25% 8.75% 7.50%
---------------------------------------------------------------------
Debentures
outstanding $ 5,392 $ 4,867 $ 29,839 $ 52,268
---------------------------------------------------------------------
Liability
component:
Balance at
Dec. 31,
2007 $ 5,333 $ 4,767 $ 29,382 $ 50,671
Accretion
of
discount 50 46 152 451
Converted to
Trust Units - - - -
---------------------------------------------------------------------
Balance at
June 30,
2008 $ 5,383 $ 4,813 $ 29,534 $ 51,122
---------------------------------------------------------------------
Equity
component:
Balance at
Dec. 31,
2007 $ 229 $ 248 $ 852 $ 2,248
Converted to
Trust Units - - - -
---------------------------------------------------------------------
Balance at
June 30,
2008 $ 229 $ 248 $ 852 $ 2,248
---------------------------------------------------------------------
6.50% 7.75% 8.00% Total
---------------------------------------------------------------------
Debentures
outstanding $ 69,927 $ 46,766 $ 15,528 $ 224,587
---------------------------------------------------------------------
Liability
component:
Balance at
Dec. 31,
2007 $ 68,092 $ 44,360 $ 14,931 $ 217,536
Accretion
of
discount 368 300 73 1,440
Converted to
Trust Units (25) - - (25)
---------------------------------------------------------------------
Balance at
June 30,
2008 $ 68,435 $ 44,660 $ 15,004 $ 218,951
---------------------------------------------------------------------
Equity
component:
Balance at
Dec. 31,
2007 $ 2,971 $ 2,286 $ 798 $ 9,632
Converted to
Trust Units - - - -
---------------------------------------------------------------------
Balance at
June 30,
2008 $ 2,971 $ 2,286 $ 798 $ 9,632
---------------------------------------------------------------------
During the six months ended June 30, 2008, $25,000 debentures (June
30, 2007 - $5,000 debentures) were converted resulting in the
issuance of 1,001 Trust Units (June 30, 2007 - 375 Trust Units). The
principal amount of 9.00% convertible debentures matured on August 1,
2008 and the Fund settled the obligation by payment of $5.4 million
in cash.
6. Bank Indebtedness
Advantage has a credit facility agreement with a syndicate of
financial institutions which provides for a $690 million extendible
revolving loan facility and a $20 million operating loan facility.
The loan's interest rate is based on either prime, US base rate,
LIBOR or bankers' acceptance rates, at the Fund's option, subject to
certain basis point or stamping fee adjustments ranging from 0.00% to
1.50% depending on the Fund's debt to cash flow ratio. The credit
facilities are collateralized by a $1 billion floating charge demand
debenture, a general security agreement and a subordination agreement
from the Fund covering all assets and cash flows. The credit
facilities are subject to review on an annual basis with the next
review due in June 2009. Various borrowing options are available
under the credit facilities, including prime rate-based advances, US
base rate advances, US dollar LIBOR advances and bankers' acceptances
loans. The credit facilities constitute a revolving facility for a
364 day term which is extendible annually for a further 364 day
revolving period at the option of the syndicate. If not extended, the
revolving credit facility is converted to a two year term facility
with the first payment due one year and one day after commencement of
the term. The credit facilities contain standard commercial covenants
for facilities of this nature. The only financial covenant is a
requirement for Advantage Oil & Gas Ltd. ("AOG") to maintain a
minimum cash flow to interest expense ratio of 3.5:1, determined on a
rolling four quarter basis. The credit facilities also prohibit the
Fund from entering into any derivative contract where the term of
such contract exceeds two years or the aggregate of such contracts
hedge greater than 60% of the Fund's estimated oil and gas
production. Breach of any covenant will result in an event of default
in which case AOG has 20 days to remedy such default. If the default
is not remedied or waived, and if required by the majority of
lenders, the administrative agent of the lenders has the option to
declare all obligations of AOG under the credit facilities to be
immediately due and payable without further demand, presentation,
protest, or notice of any kind. Distributions by AOG to the Fund (and
effectively by the Fund to Unitholders) are subordinated to the
repayment of any amounts owing under the credit facilities.
Distributions to Unitholders are not permitted if the Fund is in
default of such credit facilities or if the amount of the Fund's
outstanding indebtedness under such facilities exceeds the then
existing current borrowing base. Interest payments under the
debentures are also subordinated to indebtedness under the credit
facilities and payments under the debentures are similarly
restricted. For the six months ended June 30, 2008, the effective
interest rate on the outstanding amounts under the facility was
approximately 5.4% (June 30, 2007 - 5.4%).
7. Asset Retirement Obligations
A reconciliation of the asset retirement obligations is provided
below:
Six months
ended Year ended
June 30, December 31,
2008 2007
---------------------------------------------------------------------
Balance, beginning of period $ 60,835 $ 34,324
Accretion expense 2,093 2,795
Assumed in Sound acquisition - 16,695
Liabilities incurred and
change in estimates 5,816 13,972
Liabilities settled (5,947) (6,951)
---------------------------------------------------------------------
Balance, end of period $ 62,797 $ 60,835
---------------------------------------------------------------------
8. Unitholders' Equity
(a) Unitholders' capital
(i) Authorized
Unlimited number of voting Trust Units
(ii) Issued
Number of Units Amount
---------------------------------------------------------------------
Balance at December 31, 2007 138,269,374 $ 2,036,121
Distribution reinvestment plan 1,854,776 19,512
Issued for cash, net of costs - (42)
Issued on conversion of debentures 1,001 25
Issued on exercise of Trust Unit rights 150,000 1,981
Management internalization forfeitures (4,193) (84)
---------------------------------------------------------------------
140,270,958 $ 2,057,513
---------------------------------------------------------------------
Management internalization
escrowed Trust Units (4,042)
---------------------------------------------------------------------
Balance at June 30, 2008 $ 2,053,471
---------------------------------------------------------------------
On June 23, 2006, Advantage internalized the external management
contract structure and eliminated all related fees for total original
consideration of 1,933,208 Advantage Trust Units initially valued at
$39.1 million and subject to escrow provisions over a 3-year period,
vesting one-third each year beginning June 23, 2007. For the six
months ended June 30, 2008, a total of 4,193 Trust Units issued for
the management internalization were forfeited (June 30, 2007 -
14,139 Trust Units) and $4.9 million has been recognized as
management internalization expense (June 30, 2007 - $10.7 million).
As at June 30, 2008, 594,725 Trust Units remain held in escrow
(December 31, 2007 - 1,193,622 Trust Units).
During the six months ended June 30, 2008, 1,854,776 Trust Units
(June 30, 2007 - 2,076,686 Trust Units) were issued under the Premium
Distribution(TM), Distribution Reinvestment and Optional Trust Unit
Purchase Plan, generating $19.5 million (June 30, 2007 -
$24.6 million) reinvested in the Fund.
Effective June 25, 2002, a Trust Units Rights Incentive Plan for
external directors was established and approved with a total of
500,000 Trust Units reserved for issuance and an aggregate of
400,000 rights granted since inception. At December 31, 2007,
150,000 rights remained outstanding under the plan, all of which were
exercised at $8.60 per right in June 2008 for total cash proceeds of
$1,290,000, of which $322,500 was received after June 30, 2008.
Contributed surplus of $691,000 in respect of these rights has been
transferred to Unitholders' capital. No rights are outstanding as of
June 30, 2008.
(b) Contributed surplus
Six months
ended Year ended
June 30, December 31,
2008 2007
---------------------------------------------------------------------
Balance, beginning of period $ 2,005 $ 863
Unit-based compensation (1,256) 1,256
Expiration of convertible debentures
equity component - 58
Exercise of Trust Unit Rights (691) (172)
---------------------------------------------------------------------
Balance, end of period $ 58 $ 2,005
---------------------------------------------------------------------
(c) Net income (loss) per Trust Unit
The calculations of basic and diluted net income (loss) per Trust
Unit are derived from both income (loss) available to Unitholders and
weighted average Trust Units outstanding, calculated as follows:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------
Income (loss)
available to
Unitholders
Basic and
diluted $ (14,369) $ 4,531 $ (38,491) $ 4,872
---------------------------------------------------------------------
Weighted average
Trust Units
outstanding
Basic 138,611,924 113,854,335 138,105,497 111,108,403
Trust Units
Rights
Incentive
Plan - 43,259 - 39,487
Management
Internali-
zation - 223,495 - 152,844
---------------------------------------------------------------------
Diluted 138,611,924 114,121,089 138,105,497 111,300,734
---------------------------------------------------------------------
The calculation of diluted net income per Trust Unit excludes all
series of convertible debentures for the three and six months ended
June 30, 2008 and 2007 as the impact would be anti-dilutive. Total
weighted average Trust Units issuable in exchange for the convertible
debentures and excluded from the diluted net income per Trust Unit
calculation for the three and six months ended June 30, 2008 were
9,846,252 and 9,846,610, respectively (June 30, 2007 - 8,334,353 and
8,334,403 Trust Units, respectively). As at June 30, 2008, the total
convertible debentures outstanding were immediately convertible to
9,846,252 Trust Units (June 30, 2007 - 8,334,077 Trust Units).
All of the Trust Unit Rights and Management Internalization escrowed
Trust Units have been excluded from the calculation of diluted net
income per Trust Unit for the three and six months ended June 30,
2008, as the impact would be anti-dilutive. Total weighted average
Trust Units issuable in exchange for the Trust Unit Rights and
excluded from the diluted net income per Trust Unit calculation for
the three and six months ended June 30, 2008 were 42,145 and 37,634.
Total weighted average Trust Units issuable in exchange for the
Management Internalization escrowed Trust Units and excluded from the
diluted net income per Trust Unit calculation for the three and six
months ended June 30, 2008 were 528,068 and 484,869, respectively.
9. Accumulated Deficit
Accumulated deficit consists of accumulated income and accumulated
distributions for the Fund since inception as follows:
June 30, Dec |
