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