True Energy Trust announces first quarter 2008 financial results
Thu May 8, 5:04 PMTSX: TUI.UN
CALGARY, May 8 /CNW/ - (TSX: TUI-UN.TO) True Energy Trust ("True" or the "Trust") announces its financial and operating results for the three months ended March 31, 2008. Highlights from the quarter include:
- In the first quarter of 2008, monthly distributions of $0.04 per unit
were declared and paid on February 17, 2008, March 17, 2008 and
April 15, 2008. The Board has announced it has set a distribution
policy for the second quarter of 2008 at a monthly rate of $0.04 per
unit, subject to monthly confirmation, based on current commodity
prices, hedging program, anticipated production volumes and market
conditions. True anticipates its $0.04 per unit monthly distributions
to be sustainable in the current gas price, foreign exchange rate and
cost environment.
- True generated average sales volumes for the first quarter of 2008 of
13,552 boe/d as compared to 14,937 boe/d for the fourth quarter of
2007. In addition to natural production declines, field production
for the first quarter of 2008 was adversely impacted by extreme
weather experienced in January and February 2008. An unplanned third
party plant outage also impacted production in west central Alberta
for February 2008.
- Funds flow from operations* for the first quarter of 2008 was
$24.3 million on gross sales of $70.0 million compared to funds flow
from operations of $30.0 million on gross sales of $71.2 million for
the same period in 2007. The decrease in funds flow for the 2008
first quarter was primarily the result of lower sales volumes,
partially offset by higher overall commodity prices and operating
netbacks for the period. Funds flow from operations for the first
quarter of 2008 increased 25% from fourth quarter 2007 funds flow
from operations of $19.5 million, reflecting improved commodity
prices.
- The net loss for the first quarter of 2008 of $18.6 million was
primarily due to higher mark-to-market unrealized losses on commodity
risk management contracts of $17.7 million. This compares to a net
loss of $8.6 million for the first quarter of 2007.
- During the first quarter of 2008, True achieved a 75% success rate in
drilling or participation in 4 (3.0 net) working interest wells,
resulting in 2 (1.0 net) gas wells, 1 (1.0 net) light oil wells, and
1 (1.0 net) dry hole.
- In the first quarter of 2008, True was successful in completing the
divestiture of a small non-core property in the Northeast area of
Alberta for net proceeds after adjustments of $5.8 million.
- Further to True's announcement of its intention to divest of a
portfolio of its Saskatchewan assets, on April 30, 2008, True closed
on the sale of its Dodsland-Stranraer property for net proceeds of
$39.3 million, after closing adjustments, which will be reflected in
True's second quarter results. Dodsland-Stranraer was 1 of 5 packages
of Saskatchewan assets announced for divestiture as part of a new
strategic direction.
- On April 30, 2008 True further announced its decision not to pursue
further Saskatchewan asset dispositions at this time. The Trust feels
that the new strategic direction goal of increased financial
flexibility is sufficiently achieved through the combination of
vastly improved commodity prices, receipt of the Dodsland-Stranraer
disposition proceeds, and a continued distribution level of $0.04 per
unit per month, while retaining the benefit of a larger production
base.
- The Kerrobert SAGD project continues to show positive response to the
ongoing reservoir heating. Temperatures of up to 140 degrees Celsius
are being observed in the new thermal producing wells as compared to
initial reservoir temperatures of approximately 30 degrees Celsius.
Fluid production rates from the new thermal producers are being
carefully restricted to control continued steam chamber development
and ensure uniform heating and conformance.
* Refer to note (2) in the highlights section of the first quarter
report in respect of the term "funds flow from operations", which is
also commonly referred to as "cash flow from operations".
True's first quarter report is presented below.
HIGHLIGHTS
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Three months ended March 31,
2008 2007
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FINANCIAL
(CDN $000s except unit and per unit amounts)
Revenue (before royalties and hedging(1)) 70,033 71,196
Funds flow from operations(2) 24,233 29,988
Per basic trust unit $ 0.31 $ 0.43
Per diluted trust unit $ 0.30 $ 0.42
Net loss (18,621) (8,571)
Per basic trust unit $ (0.24) $ (0.12)
Per diluted trust unit $ (0.24) $ (0.12)
Distributions paid 9,507 16,866
Per trust unit $ 0.12 $ 0.24
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Exploration and development 8,453 45,653
Corporate and property acquisitions 197 705
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Capital expenditures - cash 8,650 46,358
Property dispositions - cash (5,788) (18,443)
Other - non-cash (193) 624
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Total capital expenditures - net 2,669 28,539
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Long-term debt 171,850 178,379
Convertible debentures(3) 79,837 78,243
Working capital deficiency (excess)(3) (11,369) 31,748
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Total net debt(3) 240,318 288,370
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Total assets 861,569 979,160
Unitholders' equity 435,232 481,547
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OPERATING
Daily sales volumes
Crude oil and NGLs (bbls/d) 4,873 6,472
Natural gas (mcf/d) 52,252 71,931
Total oil equivalent (boe/d) 13,552 18,461
Average prices
Crude oil and NGLs ($/bbl) 71.59 41.26
Crude oil and NGLs (including
hedging(1)) ($/bbl) 61.98 43.75
Natural gas ($/mcf) 7.97 7.26
Natural gas (including hedging(1)) ($/mcf) 7.99 7.52
Total oil equivalent ($/boe) 56.31 42.74
Total oil equivalent (including
hedging(1)) ($/boe) 52.96 44.64
Statistics
Operating netback(4) ($/boe) 29.28 24.36
Operating netback (including
hedging(1))(4) ($/boe) 25.92 26.25
Transportation expenses ($/boe) 0.68 0.41
Production expenses ($/boe) 13.78 9.01
General & administrative ($/boe) 3.06 2.95
Royalties as a % of sales after
transportation 23% 21%
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Three months ended March 31
2008 2007
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TRUST UNITS
Trust units outstanding 79,230,460 70,276,890
Trust unit incentive rights outstanding 5,232,665 5,227,333
Units issuable for exchangeable shares 337,351 303,547
Units issuable for convertible debentures 5,390,625 5,390,625
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Diluted trust units outstanding 90,191,101 81,198,395
Diluted weighted average trust units(5) 79,223,088 70,275,770
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TRUST UNIT TRADING STATISTICS
(CDN$, except volumes) based on intra-day trading
High 4.00 7.47
Low 2.94 4.87
Close 3.66 5.85
Average daily volume 257,218 601,724
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(1) The Trust has entered into various commodity risk management
contracts which are considered to be economic hedges. Per unit
metrics after hedging includes only the realized portion of gains or
losses on commodity contracts.
Effective January 1, 2007 on adoption of CICA handbook sections 3855
and 3865, the Trust no longer applies hedge accounting to these
contracts. As such, these contracts are revalued to fair value at the
end of each reporting date. This results in recognition of unrealized
gains or losses over the term of these contracts which is reflected
each reporting period until these contracts are settled, at which
time realized gains or losses are recorded. These unrealized gains or
losses on commodity contracts are not included for purposes of per
unit metrics calculations disclosed.
(2) The highlights section contains the term "funds flow from operations"
(or as commonly referred to as "cash flow from operations"), which
should not be considered an alternative to, or more meaningful than
cash flow from operating activities as determined in accordance with
Canadian generally accepted accounting principles ("GAAP") as an
indicator of the Trust's performance. Therefore reference to diluted
funds flow from operations or funds flow from operations per trust
unit may not be comparable with the calculation of similar measures
for other entities. Management uses funds flow from operations to
analyze operating performance and leverage and considers funds flow
from operations to be a key measure as it demonstrates the Trust's
ability to generate the cash necessary to fund future capital
investments and to repay debt. The reconciliation between funds flow
from operations and cash flow from operating activities can be found
in the Management Discussion and Analysis ("MD&A"). Funds flow from
operations per trust unit is calculated using the weighted average
number of trust units for the period.
(3) Net debt includes the net working capital deficiency before short-
term commodity contract assets and liabilities and short-term future
income tax assets. Total net debt also includes the liability
component of convertible debentures and excludes asset retirement
obligations and the future income tax liability.
(4) Operating netbacks are calculated by subtracting royalties,
transportation, and operating costs from revenues.
(5) In computing weighted average diluted earnings per trust unit for the
three month period ended March 31, 2008 a total of 337,351(2007:
303,347) exchangeable shares, 5,232,665 (2007: 5,227,333) trust
incentive rights and 5,390,625 (2007: 5,390,625) trust units issuable
pursuant to conversion of convertible debentures were excluded from
the calculation of diluted earnings per trust unit as they were not
dilutive. To calculate weighted average diluted funds flow from
operations for the three month period ended March 31, 2008, 337,351
exchangeable shares were added to the denominator, resulting in
diluted weighted average trust units of 79,558,882 under this
calculation. To calculate weighted average diluted funds flow from
operations for the three month period ended March 31, 2007, a total
of $1.98 million for interest accretion expense was added to the
numerator and 303,347 exchangeable shares and 5,390,625 trust units
were added to the denominator for units issuable on conversion of
convertible debentures, resulting in diluted weighted average trust
units of 75,969,942 and funds flow from operations per diluted trust
unit of $0.42 under this calculation.
REPORT TO UNITHOLDERS
Dramatically improved commodity prices, and natural gas pricing in particular, is providing some long awaited relief for a stressed sector. However the improved pricing has also placed significant negative pressure on commodity hedges entered into under an entirely different environment. True's hedges were placed over a span of several months to ensure adequate funding would be available to meet distribution requirements. Approximately 50% of Trust's natural gas production and 60% the liquids production remains un-hedged and open to the upside in commodity pricing.
Accomplishments for the first quarter ended March 31, 2008 include:
Distributions
In the first quarter of 2008, monthly distributions of $0.04 per unit were declared and paid on February 15, 2008, March 17, 2008 and April 15, 2008.
On April 8, 2008, the Trust announced that the Board has set the distribution policy for the second quarter of 2008 at a monthly distribution rate of $0.04 per unit, subject to monthly confirmation by the Board of Directors, based on current commodity prices, hedging program, anticipated production volumes and market conditions. True anticipates its $0.04 per unit monthly distributions to be sustainable in the current gas price, foreign exchange rate and cost environment.
Production
2008 first quarter sales volumes averaged 13,552 boe/d as compared to 14,937 boe/d in the fourth quarter of 2007. In addition to natural production declines, field production in the first quarter of 2008 was adversely impacted by the extreme weather experienced in January and February of 2008. An unplanned third party plant outage also impacted production in west central Alberta for February 2008.
The Kerrobert SAGD project continues to show positive response to the ongoing reservoir heating. Temperatures of up to 140 degrees Celsius are being observed in the new thermal producing wells as compared to initial reservoir temperatures of approximately 30 degrees Celsius. Fluid levels and reservoir pressure continue to build however withdrawal rates are being carefully restricted to control development of the steam chamber and ensure uniform heating and conformance along the entire length of the horizontal producers. True's goal is to maximize the long term success of the project and avoid issues experienced in earlier projects by other operators such as collapsing the steam chamber or pulling in cold bottom water by drawing on the producers too hard, too early in the process.
Drilling
During the first quarter of 2008, True achieved a 75% success rate in drilling or participation in 4 (3.0 net) working interest wells, resulting in 2 (1.0 net) gas wells, 1 (1.0 net) light oil wells, and 1 (1.0 net) dry hole. The drilling program is expected to resume in third quarter following spring break-up and the associated road ban issues.
Financial
Funds flow from operations for the first quarter of 2008 was $24.3 million on gross sales of $70.0 million compared to funds flow from operations of $30.0 million on gross sales of $71.2 million for the same period in 2007. The decrease in funds flow for the 2008 first quarter was primarily the result of lower sales volumes, partially offset by higher overall commodity prices and operating netbacks in the period. Funds flow from operations for the first quarter of 2008 increased 25% from fourth quarter 2007 funds flow from operations of $19.5 million, reflecting improved commodity prices.
The net loss for the first quarter of 2008 of $18.6 million was primarily due to higher mark-to-market unrealized losses on commodity risk management contracts of $17.7 million. This compares to a net loss of $8.6 million for the first quarter of 2007.
Dispositions
On December 17, 2007, True announced its intention to divest of its Saskatchewan assets and reduce the distribution level as part of a new strategic direction for the Trust. Proceeds from the proposed divestiture would be utilized to reduce True's bank indebtedness and the reduced distribution level ensured additional financial resources.
The additional cash flow generated though improved pricing has eased debt concerns and allowed the Trust to modify the path of the new strategic direction. On April 30, 2008 True announced that the sale of the Dodsland-Stranraer asset, one of five asset packages comprising the Saskatchewan divestiture program, had been successfully completed for net proceeds after adjustments of $39.3 million, which will be reflected in True's second quarter results. True further announced its decision to not pursue further Saskatchewan asset disposition options at this time. The Trust feels that the goal of increased financial flexibility is sufficiently achieved through the combination of improved commodity prices, receipt of the Dodsland-Stranraer sale proceeds, and a continued distribution level of $0.04 per unit per month, while retaining a larger asset and production base.
In the first quarter of 2008, True was successful in completing the divestiture of a non-core property in the Northeast area of Alberta for net proceeds after adjustments of $5.8 million. Subsequent to quarter-end and in early April 2008, True was also successful in completing the divestiture of a small non-core property in the Northwest area of Alberta for net proceeds after adjustments of $0.3 million. The proceeds were used to pay down debt. True continuously reviews and optimizes its portfolio, divesting of non-core and high cost properties.
Liquidity
True's net debt, excluding unrealized commodity contract assets and liabilities, future income taxes and asset retirement obligations, as at March 31, 2008 was $240.3 million, representing $171.9 million outstanding on the credit facility, $79.8 million in convertible debentures (liability component) and net the balance of working capital.
As at March 31, 2008, the existing credit facility consists of a $15 million demand operating facility provided by one Canadian bank and a $175 million extendible revolving term credit facility syndicated by two Canadian chartered banks, a U.S. bank, a Canadian financial institution and one institutional lender.
On March 31, 2008, True's borrowing base redetermination was re-scheduled for renewal on or before June 2, 2008, while the Saskatchewan asset divestiture was being finalized. To reflect the recent dispositions in True's borrowing base, True's borrowing base was reduced from $190 million as at March 31, 2008 to $164.5 million effective as at April 30, 2008. As at April 30, 2008, there is approximately $40 million not drawn on these facilities. Further borrowing base reductions are scheduled to occur on June 2, 2008 and June 30, 2008, which will bring True's borrowing base to $152 million as at June 30, 2008. The revolving period on the term credit facility is also subject for renewal on June 28, 2008. The revolving period on the term credit facility ends on June 30, 2008, unless extended for a further 364 day period. Should the facilities not be renewed they convert to 366 day non-revolving term facilities on the renewal date.
True does not hold any Asset-Backed Commercial Paper investments.
In August 2007, True received Toronto Stock Exchange approval for its normal course issuer bid ("NCIB") for the repurchase of its trust units from August 28, 2007 to August 27, 2008, entitling the Trust to purchase up to approximately 7.8 million of its outstanding trust units. Starting in the fourth quarter and through the end of 2007, 500,000 units were repurchased at a total price of $1.7 million. Future repurchases will be dependent on excess cash available after consideration of the Trust's priority uses of cash and the trading price of the Trust's units. No units were purchased during the first quarter of 2008.
True has maintained an active commodity price risk management program. Approximately 50% of current natural gas production is hedged through the remainder of 2008 and approximately 29% is hedged through the first half of 2009. Approximately 40% of current liquids production is hedged through the remainder of 2008. No liquids are currently hedged subsequent to December 31, 2008. The Trust will continue its hedging strategies focusing on maintaining sufficient cash flow to fund True's unitholder distributions and the capital program.
Alberta Royalty Regime
On October 25, 2007, the Alberta Government announced its intent to increase royalty rates commencing on January 1, 2009. As of December 31, 2007, the province had not introduced the enabling legislation nor had they provided enough clarity on a number of issues for the Trust's independent reserves evaluator, GLJ Petroleum Consultants Ltd. ("GLJ"), to provide a precise calculation of the net reserves and NPV under the New Royalty Framework ("NRF"). However, GLJ did provide analysis of the proposed royalty regime, based on a high and low sensitivity to the NRF utilizing the Consultants' Consensus Methodology recommended by the Society of Petroleum Engineers, Calgary Chapter (the "Consensus Methodology"). Based on public information available when the Trust's reserves were evaluated, the net present value of future net revenue of proved and probable reserves based on the high scenario at a 10% discount rate using the Consultants' Average Forecast Prices would be $8.9 million or 1.5 percent higher and $1.9 million or 0.33% percent higher based on the NRF for the low scenario, in each case, as compared to the existing royalty rules. The proposed royalty changes are very sensitive to production rate and natural gas prices.
Since the foregoing sensitivity was prepared, the Alberta Government has announced new royalty incentives for deep, high-cost drilling. The incentives will apply to oil exploration wells and to both development and exploration gas wells. This initiative provides some relief to the recently introduced NRF. On the oil side, a royalty credit of up to $1 million will pertain to exploration wells drilled below 2,000m. Gas wells drilled below 2,500m qualify for credits with no distinction for development versus exploration wells drilled from 2,500m-4,000m. Overall, the deep royalty credits are a modest positive for the industry with a more significant impact for producers that target deep and prolific gas wells at a depth greater than 4,000m. The impact of these new incentives is not expected to be significant to True.
The majority of True's current Alberta wells are in the 500m to 1,000m depth range and typically produce at lower rates. The overall impact of the NRF, as currently announced, is mitigated by the Trust's current Saskatchewan properties and the lower shallow gas Alberta natural gas rate royalty production in True's Alberta conventional oil and gas production portfolio. The NRF will impact future drilling decisions in order for the Trust to maintain acceptable rates of return on its capital deployed.
2008 True Capex Budget
True's first quarter 2008 capital program of approximately $8.7 million compares to a front end loaded 2007 capital program of approximately $46 million in first quarter 2007. True plans to continue to take a balanced approach to the priority use of cash flow between level of distributions and size of its 2008 capital program. True's 2008 capital expenditure program is currently planned at $40 million. Given the nature of True's lands and their inherent advantage of year round access, True plans to spread its 2008 capital program more evenly through the full year of 2008 to take advantage of reduced service costs during non-peak times. True plans to focus on increasing its farm-out activity in non-core areas. As the 2008 outlook for commodity prices improves, True may look to increase its capital spending in the latter part of 2008.
Personnel Announcements
As noted in the recently published Information Circular - Proxy Statement, Mr. Norman Holton is not standing for nomination as a continuing Director. On behalf of the Board I would like to thank Norm for his contributions to True.
True's annual and special meeting is scheduled for 2:00pm on May 21, 2008 in the Grand Lecture Theatre at the Metropolitan Conference Center in Calgary.
Wayne M. Chorney, P. Eng.
President, CEO and COO
May 8, 2008
MANAGEMENT'S DISCUSSION AND ANALYSIS
May 8, 2008 - The following Management's Discussion and Analysis of financial results as provided by the management of True Energy Trust ("True" or the "Trust") should be read in conjunction with the unaudited interim consolidated financial statements and selected notes for the three months ended March 31, 2008 and the audited consolidated financial statements for the years ended December 31, 2007 and 2006 for the Trust. This commentary is based on information available to, and is dated, May 8, 2008. The financial data presented is in accordance with Canadian generally accepted accounting principles ("GAAP") in Canadian dollars, except where indicated otherwise.
CONVERSION: The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent (6 mcf/bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived from converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.
NON-GAAP MEASURES: This Management's Discussion and Analysis contains the term "funds flow from operations" (or also commonly referred to as "cash flow from operations"), which should not be considered an alternative to, or more meaningful than "cash flow from operating activities" as determined in accordance with Canadian GAAP as an indicator of the Trust's performance. Therefore reference to funds flow from operations or funds flow from operations per unit may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations to analyze operating performance and leverage and considers funds flow from operations to be a key measure as it demonstrates the Trust's ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation between funds flow from operations and cash flow from operating activities can be found in the Management's Discussion and Analysis. Funds flow from operations per unit is calculated using the weighted average number of units for the period.
This Management's Discussion and Analysis also contains other terms such as net debt and operating netbacks, which are not recognized measures under Canadian GAAP. Management believes these measures are useful supplemental measures of firstly, the total amount of current and long-term debt and secondly, the amount of revenues received after transportation, royalties and operating costs. Readers are cautioned, however, that these measures should not be construed as an alternative to other terms such as current and long-term debt or net income determined in accordance with GAAP as measures of performance. True's method of calculating these measures may differ from other entities, and accordingly, may not be comparable to measures used by other trusts or companies.
Additional information relating to the Trust, including the Trust's Annual Information Form, is available on SEDAR at www.sedar.com.
FORWARD LOOKING STATEMENTS: Certain information contained herein may contain forward looking statements including management's assessment of future plans and operations, drilling plans and the timing thereof, expected production increases from certain projects and the timing thereof, the effect of government announcements, proposals and legislation, plans regarding wells to be drilled, expected or anticipated production rates, expected exchange rates, distributions and method of funding thereof, proportion of distributions anticipated to be taxable and non-taxable, anticipated borrowing base under credit facility, maintenance of productive capacity and capital expenditures and the nature of capital expenditures and the timing and method of financing thereof, may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. The recovery and reserve estimates of True's reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Events or circumstances may cause actual results to differ materially from those predicted, as a result of the risk factors set out and other known and unknown risks, uncertainties, and other factors, many of which are beyond the control of True. In addition, forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although the Trust believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because the Trust can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified herein, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which the Trust operates; the timely receipt of any required regulatory approvals; the ability of the Trust to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Trust has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Trust to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development of exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Trust to secure adequate product transportation; future commodity gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Trust operates; and the ability of the Trust to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which have been used. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Additional information on these and other factors that could effect True's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), at True's website (www.trueenergytrust.com). Furthermore, the forward-looking statements contained herein are made as at the date hereof and True does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
The reader is further cautioned that the preparation of financial statements in accordance with GAAP requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes.
Net Income (Loss) and Funds Flow from Operations
True generated funds flow from operations of $24.2 million ($0.30 per diluted unit) for the three months ended March 31, 2008, down 20% from the $30.0 million ($0.42 per diluted unit) for the first quarter of 2007. The decrease in funds flow from operations for the 2008 period was primarily the result of lower sales volumes, offset significantly by improved commodity prices and operating netbacks for 2008. Funds flow from operations for the first quarter of 2008 increased 25% from fourth quarter 2007 funds flow from operations of $19.5 million.
True generated a net loss of $18.6 million ($(0.24) per diluted unit) in the first quarter of 2008 primarily due to higher mark-to-market unrealized losses on commodity risk management contracts of $17.7 million. This compares to a net loss of $8.6 million ($(0.12) per diluted unit) for the same period in 2007.
Funds Flow From Operations and Net Income
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Three months ended March 31,
($000s, except per unit amounts) 2008 2007
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Funds flow from operations 24,233 29,988
Basic ($/unit) 0.31 0.43
Diluted ($/unit) 0.30 0.42
Net income (loss) (18,621) (8,571)
Basic ($/unit) (0.24) (0.12)
Diluted ($/unit) (0.24) (0.12)
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Reconciliation of Funds Flow from Operations and Cash Flow from Operating
Activities
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Three months ended March 31,
($000s, except per unit amounts) 2008 2007
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Funds flow from operations 24,233 29,988
Asset retirement costs incurred (589) (188)
Change in non-cash working capital (5,801) 10,159
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Cash flow from operating activities 17,843 39,959
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Sales Volumes
Sales volumes for the three months ended March 31, 2008 averaged 13,552 boe/d as compared to 18,461 boe/d for the same period in 2007, representing a 27% decrease. In comparison, sales volumes for the fourth quarter of 2008 were 14,937 boe/d. The decrease in average sales volumes from first quarter 2007 to 2008 was mainly due to natural production declines and decreased production due to property dispositions during 2007. In addition, field production for the first quarter of 2008 was adversely impacted by extreme weather experienced in January and February 2008, as well as an unplanned third party plant outage impacting production in wet central Alberta for February 2008.
Sales Volumes
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Three months ended March 31,
2008 2007
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Natural gas (mcf/d) 52,252 71,931
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Heavy oil (bbls/d) 2,824 4,355
Light oil and condensate (bbls/d) 1,391 1,519
NGLs (bbls/d) 628 598
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Total crude oil and NGLs (bbls/d) 4,843 6,472
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Total boe/d (6:1) 13,552 18,461
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During the first quarter of 2008, True achieved a 75% success rate in drilling or participation in 4 (3.0 net) working interest wells, resulting in 2 (1.0 net) gas wells, 1 (1.0 net) light oil wells, and 1 (1.0 net) dry hole. The drilling program is expected to resume in third quarter following spring break-up and the associated road ban issues.
The Kerrobert SAGD project continues to show positive response to the ongoing reservoir heating. Temperatures of up to 140 degrees Celsius are being observed in the new thermal producing wells as compared to initial reservoir temperatures of approximately 30 degrees Celsius. Fluid levels and reservoir pressure continue to build however withdrawal rates are being carefully restricted to control development of the steam chamber and ensure uniform heating and conformance along the entire length of the horizontal producers. True's goal is to maximize the long term success of the project and avoid issues experienced in earlier projects by other operators such as collapsing the steam chamber or pulling in cold bottom water by drawing on the producers too hard, too early in the process.
For the three months ended March 31, 2008, the weighting towards natural gas sales averaged 64% compared to 65% in the same period in 2007. Heavy oil sales made up 21% of total production for the 2008 first quarter compared to 24% in the 2007 first quarter.
Sales of natural gas averaged 52.3 mmcf/d for the first quarter of 2008, compared to 71.9 mmcf/d in the same period of 2007, a decrease of 27%. Crude oil and NGL sales for the first quarter of 2008 averaged 4,843 bbls/d, compared to 2007 first quarter average sales of 6,472 bbls/d.
Commodity Prices
Average Commodity Prices
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Three months ended March 31,
2008 2007 % change
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Exchange rate (US$/Cdn$) 0.9950 0.8535 17
Natural gas:
NYMEX (US$/mmbtu) 8.64 7.17 20
Alberta spot ($/mcf) 7.97 7.39 8
True's average price ($/mcf) 7.97 7.26 10
True's average price (including
hedging(1)) ($/mcf) 7.99 7.52 6
Crude oil:
WTI (US$/bbl) 97.22 58.27 67
Edmonton par - light oil ($/bbl) 98.16 67.73 45
Bow River - medium/heavy oil ($/bbl) 77.47 49.73 56
Hardisty Heavy - heavy oil ($/bbl) 70.05 42.50 65
True's average prices ($/bbl)
Light crude oil, condensate and
NGLs 85.65 50.77 69
Light crude oil, condensate and
NGLs (including hedging(1)) 62.58 58.36 7
Heavy crude oil 61.55 36.64 68
Total crude oil and NGLs 71.59 41.26 74
Total crude oil and NGLs (including
hedging(1)) 61.98 43.75 42
-------------------------------------------------------------------------
(1) Per unit metrics including hedging include realized gains or losses
on commodity contracts and exclude unrealized gains or losses on
commodity contracts.
True's natural gas is primarily sold on the daily spot market. During the first quarter of 2008, the AECO Spot reference price increased by 8% compared to the same period in 2007. Similarly, True's average sales price before hedging for the first quarter of 2008 increased by 10% compared to the same period in 2007. In comparison, True's first quarter 2008 natural gas price before hedging was 25% higher than the fourth quarter 2007 price of $6.40/mcf. True's natural gas price after including hedging for the first quarter of 2008 was $7.99/mcf compared to $7.52/mcf for the same period in 2007.
For heavy crude oil, True received an average price before transportation of $61.55/bbl for the first quarter of 2008, a increase of 68% over prices in the 2007 period. The Bow River reference price increased by 56% and the Hardisty Heavy reference price increased by 65% over the same period. The majority of True's heavy crude oil density ranges between 11 and 16 degrees API consistent with the Hardisty Heavy reference price.
For light oil, condensate and NGLs, True recorded an average $85.65/bbl before hedging during the first quarter of 2008, 69% higher than the average price received in the same period of 2007. The Edmonton par price increased by 45% over the same period. The average WTI crude oil US dollar based price increased 67% from the first quarter of 2007 to that in 2008. In comparison, True's realized price for the first quarter of 2008 increased 9% from the fourth quarter 2007 average price of $78.42/bbl, whereas the Edmonton par price increased by 13%. True's realized price after including hedging was $62.58/bbl for the first quarter of 2008 compared to $57.88/bbl for the same period in 2007.
Revenue
Revenue before other income and hedging for the three months ended March 31, 2008 was $69.4 million, 2% less than the $71.0 million in the same period in 2007. The lower revenue for the 2008 period was the result of lower production volumes for natural gas, crude oil, condensate and NGLs, offset significantly by increased crude oil and natural gas prices.
-------------------------------------------------------------------------
Three months ended March 31,
($000s) 2008 2007
-------------------------------------------------------------------------
Light crude oil, condensate and NGLs 15,734 9,675
Heavy oil 15,818 14,362
-------------------------------------------------------------------------
Crude oil and NGLs 31,552 24,037
Natural gas 37,894 46,982
-------------------------------------------------------------------------
Total revenue before other 69,446 71,019
Other(1) 587 177
-------------------------------------------------------------------------
Total revenue before royalties and hedging 70,033 71,196
-------------------------------------------------------------------------
(1) Other revenue primarily consists of processing and other third party
income.
Financial Instruments
The Trust has a formal risk management policy which permits management to use specified price risk management strategies for up to 50% of crude oil, natural gas and NGL production including fixed price contracts, costless collars and the purchase of floor price options and other derivative financial instruments to reduce the impact of price volatility and ensure minimum prices for a maximum of eighteen months beyond the current date. The program is designed to provide price protection on a portion of the Trust's future production in the event of adverse commodity price movement, while retaining significant exposure to upside price movements. By doing this, the Trust seeks to provide a measure of stability to cash distributions, as well as, to ensure True realizes positive economic returns from its capital developments and acquisition activities.
The Trust will continue its hedging strategies focusing on maintaining sufficient cash flow to fund True's unitholder distributions and capital program.
A summary of the hedge volumes and average prices by quarter currently outstanding as of May 8, 2008 is shown in the following tables (see Note 15 to the consolidated financial statements for a detailed disclosure of all commodity contracts in place as at May 8, 2008):
Crude oil and liquids Average Volumes (bbls/d)
-------------------------------------------------------------------------
Q2-Q3 2008 Q4 2008 Q1 2009 Q2 2009
-------------------------------------------------------------------------
Costless collars 2,000 2,000 - -
-------------------------------------------------------------------------
Total bbls/d 2,000 2,000 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Price (US$/bbl WTI)
-------------------------------------------------------------------------
Q2-Q3 2008 Q4 2008 Q1 2009 Q2 2009
-------------------------------------------------------------------------
Collar ceiling price 82.00 82.00 - -
Collar floor price 65.00 65.00 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Natural gas Average Volumes (GJ/d)
-------------------------------------------------------------------------
Q2-Q3 2008 Q4 2008 Q1 2009 Q2 2009
-------------------------------------------------------------------------
Costless collars - - - -
Fixed 24,326 24,326 10,550 10,550
-------------------------------------------------------------------------
Total GJ/d 24,326 24,326 10,550 10,550
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Price ($/GJ AECO C)
-------------------------------------------------------------------------
Q2-Q3 2008 Q4 2008 Q1 2009 Q2 2009
-------------------------------------------------------------------------
Collar ceiling price - - - -
Collar floor price - - - -
Fixed 6.68 6.89 7.74 7.01
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As of March 31, 2008, the fair value of True's outstanding commodity
contracts is an unrealized liability of $28.0 million as reflected in the
financial statements.
The following is a summary of the gain (loss) on commodity contracts for
the three month period ended March 31, 2008 and 2007:
Commodity contracts
-------------------------------------------------------------------------
Crude Oil Natural 2008
($000s) & Liquids Gas Total
-------------------------------------------------------------------------
Realized cash gain (loss) on
contracts (4,239) 97 (4,142)
Unrealized gain (loss) on
contracts(2) 898 (18,585) (17,687)
-------------------------------------------------------------------------
Total gain (loss) on commodity
contracts (3,341) (18,488) (21,829)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Crude Oil Natural 2007
($000s) & Liquids Gas Total
-------------------------------------------------------------------------
Realized cash gain (loss) on
contracts(1) 1,447 1,697 3,144
Unrealized gain (loss) on
contracts(2) (92) (2,373) (2,465)
-------------------------------------------------------------------------
Total gain (loss) on commodity
contracts 1,355 (676) 679
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes the crude oil and natural gas commodity contract premium
expenses in the period and the amortization of prior year crude oil
and natural gas commodity contract premiums of a total $2.4 million
for the three months ended March 31, 2007.
(2) Unrealized gain (loss) commodity contracts represent non-cash
adjustments for changes in the fair value of these contracts during
the period.
Royalties
For the three months ended March 31, 2008, total royalties were
$15.0 million, compared to $14.9 million incurred in the same period in 2007.
Overall royalties as a percentage of revenue (after transportation costs) in
the first quarter of 2008 were 23%, compared with 21% in the same period in
2007. Royalties for the 2007 first quarter included the impact of the reversal
of certain over accruals of light and heavy crude oil royalties from periods
prior to 2007 of approximately $1.9 million; excluding that adjustment, the
average royalty rate for the first quarter of 2007 would have been 24%.
-------------------------------------------------------------------------
Royalties by Commodity Type Three months ended March 31,
($000s, except where noted) 2008 2007
-------------------------------------------------------------------------
Light crude oil, condensate and NGLs 3,766 881
$/bbl 20.50 4.62
Average light crude oil, condensate, and NGLs
royalty rate (%) 25 9
Heavy Oil 2,291 1,519
$/bbl 8.91 3.88
Average heavy oil royalty rate (%) 15 11
Natural Gas 9,443 12,494
$/mcf 1.99 1.93
Average natural gas royalty rate (%) 25 27
-------------------------------------------------------------------------
Total 15,500 14,894
-------------------------------------------------------------------------
$/boe 12.57 8.96
-------------------------------------------------------------------------
Average total royalty rate (%) 23 21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Royalties, by Type
-------------------------------------------------------------------------
Three months ended March 31,
($000s) 2008 2007
-------------------------------------------------------------------------
Crown royalties 9,899 6,203
Indian Oil and Gas Canada royalties 4,215 3,142
Freehold & GORR 1,386 5,549
-------------------------------------------------------------------------
Total 15,500 14,894
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Expenses
-------------------------------------------------------------------------
Three months ended March 31,
($000s) 2008 2007
-------------------------------------------------------------------------
Production 16,996 14,972
Transportation 843 689
General and administrative 3,770 4,904
Interest and financing charges 4,516 4,547
Unit-based compensation 269 1,112
-------------------------------------------------------------------------
Expenses per boe
-------------------------------------------------------------------------
Three months ended March 31,
($ per boe) 2008 2007
-------------------------------------------------------------------------
Production 13.78 9.01
Transportation 0.68 0.41
General and administrative 3.06 2.95
Interest and financing charges 3.66 2.74
Unit-based compensation 0.22 0.67
-------------------------------------------------------------------------
Production Expenses
For the three months ended March 31, 2008, production expenses totaled $17.0 million, compared to $15.0 million recorded in the same period in 2007. During the first quarter of 2008, production expenses averaged $13.78/boe, compared to $9.01/boe over the same period in 2007. Production expenses are increased as additional natural gas input costs are required to operate the Kerrobert SAGD facility after startup in late 2007; this adds approximately $1.83/boe to production expenses in the first quarter of 2008. The increase in 2008 costs on a boe basis was also due to a significant fixed component of production expenses in combination with substantially reduced production volumes.
Production Expenses, by Commodity Type
-------------------------------------------------------------------------
Three months ended March 31,
($000s, except where noted) 2008 2007
-------------------------------------------------------------------------
Light crude oil, condensate and NGLs 3,081 2,517
$/bbl 16.77 13.21
Heavy oil 5,035 5,408
$/bbl 19.59 13.79
Natural gas 8,880 7,050
$/mcf 1.87 1.09
-------------------------------------------------------------------------
Total 16,996 14,972
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$/boe 13.78 9.01
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total 16,996 14,972
Processing and other third party income(1) (587) (177)
-------------------------------------------------------------------------
Total after deducting processing and other third
party income 16,409 14,795
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$/boe 13.31 8.90
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Processing and other third party income is included within petroleum
and natural gas sales on the statement of income.
Operating Netback
For the first quarter of 2008, corporate field operating netback (before hedging) was $29.28/boe compared to $24.36/boe in the same period in 2007. This was the result of increased overall commodity prices, offset by higher royalties and operating costs experienced in the 2008 period. By comparison, corporate field operating netback (before hedging) for the fourth quarter of 2007 was $20.51/boe. After including hedging activities, the corporate field operating netback for the first quarter of 2008 was $25.92/boe compared to $26.25/boe in the same period in 2007.
Field Operating Netback - Corporate (before hedging)
-------------------------------------------------------------------------
Three months ended March 31,
($/boe) 2008 2007
-------------------------------------------------------------------------
Sales 56.31 42.74
Transportation (0.68) (0.41)
Royalties (12.57) (8.96)
Production expense (13.78) (9.01)
-------------------------------------------------------------------------
Field operating netback 29.28 24.36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Field operating netback for natural gas for the first quarter of 2008 increased 3% to $4.21/mcf, compared to $4.09/mcf for the same period in 2007, reflecting stronger natural gas prices experienced, the effects of which were partially offset by higher production expenses. After including hedging activities, field operating netback for natural gas for the first quarter of 2008 was $4.23/mcf compared to $4.35/mcf in the same period in 2007.
Field Operating Netback - Natural Gas (before hedging)
-------------------------------------------------------------------------
Three months ended March 31,
($/mcf) 2008 2007
-------------------------------------------------------------------------
Sales 7.97 7.26
Transportation 0.10 (0.15)
Royalties (1.99) (1.93)
Production expense (1.87) (1.09)
-------------------------------------------------------------------------
Field operating netback 4.21 4.09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Field operating netback for crude oil and NGLs averaged $36.48/bbl for the first quarter of 2008, up 52% compared to $24.06/bbl for the same period in 2007, compared to a 74% increase in the crude oil and NGLs sales price over the same period. After including hedging activities, field operating netback for crude oil and NGLs for the first quarter of 2008 was $26.86/boe compared to $26.55/boe in the same period in 2007.
Field Operating Netback - Crude Oil and NGLs (before hedging)
-------------------------------------------------------------------------
Three months ended March 31,
($/bbl) 2008 2007
-------------------------------------------------------------------------
Sales 71.59 41.26
Transportation (2.95) 0.52
Royalties (13.74) (4.12)
Production expense (18.42) (13.60)
-------------------------------------------------------------------------
Field operating netback 36.48 24.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
General and Administrative
Net general and administrative ("G&A") expenses for the three months ended March 31, 2008 was $3.8 million compared to $4.9 million for the same period in 2007. The decrease in the G&A expense from the first quarter of 2007 to the same period in 2007 is reflects a reduction of the number of salaried personnel on staff and other efforts to reduce costs. On a per boe basis, G&A expenses were $3.06/boe for the first quarter of 2008 compared to $2.95/boe for 2007. The increase in G&A on a per boe basis is consistent with reduced sales volumes experienced in the first quarter of 2008 compared to 2007.
General and Administrative Expenses
-------------------------------------------------------------------------
Three months ended March 31,
($000s, except where noted) 2008 2007
-------------------------------------------------------------------------
Gross expenses 4,879 6,410
Capitalized (507) (693)
Recoveries (602) (813)
-------------------------------------------------------------------------
Net expenses 3,770 4,904
-------------------------------------------------------------------------
Net expenses, per unit ($/boe) 3.06 2.95
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest and Financing Charges
True recorded $4.9 million of interest and financing charges for the three months ended March 31, 2008 compared to $4.6 million in the same period in 2007. True's net debt at March 31, 2008 of $240.3 million includes the $79.8 million liability portion of convertible debentures, $171.9 million of bank debt and net of the balance of working capital.
Interest and Financing Charges
-------------------------------------------------------------------------
Three months ended March 31,
($000s, except where noted) 2008 2007
-------------------------------------------------------------------------
Interest and financing charges 4,516 4,547
Interest and financing charges ($/boe) 3.66 2.74
Net debt(1) including convertible debentures
at quarter end 240,318 288,370
Debt to periods funds flow from operations
ratio annualized(2) 2.5x 2.4x
Net debt excluding convertible debentures at
quarter end 160,481 210,127
Debt to periods funds flow from operations ratio
annualized(2) 1.7x 1.8x
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net debt includes the net working capital deficiency before short-
term commodity contract assets and liabilities and short-term future
tax assets. Total net debt also includes the liability component of
convertible debentures and excludes asset retirement obligations and
the future income tax liability.
(2) Debt to funds flow from operations ratio is calculated based upon
first quarter funds flow from operations annualized.
Unit-Based Compensation
Non-cash unit-based compensation expense for the three month period ended March 31, 2008 was $0.3 million compared to $1.1 million in the same period in 2007. The decrease in the expense for the first quarter of 2008 reflects a reduction in the estimated weighted average fair value of incentive rights granted for more recent options, a reduction to the 2008 expense of $0.2 million for a reversal of prior year unit-based compensation expense for 2008 forfeitures of unvested incentive rights and reduced incentive rights being granted in 2008 compared to the 2007 period.
Capital Expenditures
True invested $8.5 million on exploration and development activities during the first three months of 2008, compared to $45.7 million in the same period in 2007.
During the first quarter of 2008, True achieved a 75% success rate in drilling or participation in 4 (3.0 net) working interest wells, resulting in 2 (1.0 net) gas wells, 1 (1.0 net) light oil wells, and 1 (1.0 net) dry hole.
Capital Expenditures(1)
-------------------------------------------------------------------------
Three months ended March 31,
($000s) 2008 2007
-------------------------------------------------------------------------
Lease acquisitions and retention 550 791
Geological and geophysical 67 6,919
Drilling and completion costs 6,512 33,071
Facilities and equipment 1,324 4,872
-------------------------------------------------------------------------
Exploration and development 8,453 45,653
Corporate and property acquisitions 197 705
-------------------------------------------------------------------------
Total capital expenditures - cash 8,650 46,358
Property dispositions - cash (5,788) (18,443)
-------------------------------------------------------------------------
Total net capital expenditures - cash 2,862 27,915
-------------------------------------------------------------------------
Other - non-cash(2) (193) 624
-------------------------------------------------------------------------
Total capital expenditures 2,669 28,539
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes capitalized costs related to asset retirement obligation
expenditures incurred during the year.
(2) Other includes current period's asset retirement obligations and unit
based compensation capitalized.
The $8.7 million capital program for the first quarter of 2008 was financed entirely with funds flow from operations compared to 65% in the same period in 2007.
True plans to continue to take a balanced approach to the priority use of cash flow between level of distributions and size of its 2008 capital program. True's 2008 capital expenditure program is currently planned at $40 million. Given the nature of True's lands and their inherent advantage of year round access, True plans to spread its 2008 capital program more evenly through the full year of 2008 to take advantage of reduced service costs during non-peak times. True plans to focus on increasing its farm-out activity in non-core areas. As the 2008 outlook for commodity prices improves, True may look to increase its capital spending in latter part of 2008.
True holds an extensive land base. At March 31, 2008, True had approximately 503,200 net undeveloped acres of land of its total developed and undeveloped net acreage position of 893,500 net acres in Saskatchewan, Alberta, and British Columbia.
Dispositions during the first quarter of 2008 consisted principally of the divestiture of a small non-core property in the Northeast area of Alberta for net proceeds after adjustments and closing costs of $5.8 million. All significant conditions of closing of this divestiture were satisfied on March 31, 2008 and the disposal proceeds, included in accounts receivable at March 31, 2008, were received on April 2, 2008.
Subsequent to quarter-end and in early April 2008, True was successful in completing the divestiture of another small non-core property in the Northwest area of Alberta for net proceeds after adjustments of $0.3 million. The proceeds were used to pay down debt.
On April 30, 2008 True closed on the sale of its Dodsland-Stranrear property in Saskatchewan for net proceeds of $39.3 million, after closing adjustments and costs. Dodsland-Stranrear is 1 of 5 packages of Saskatchewan assets originally announced for divestiture.
At the end of the first quarter of 2008, the Trust had committed to drill a total of 2 wells in Alberta with varying commitment dates up to the end of the third quarter of 2008 pursuant to various farm-in agreements with oil and gas companies. True expects to satisfy these various drilling commitments at an estimated cost for True's interest of approximately $2.8 million.
Depletion, Depreciation and Accretion
Depletion, depreciation and accretion expense for the three months ended March 31, 2008 was $36.3 million ($29.44/boe), compared to the $47.5 million ($28.56/boe) in the same period of 2007, which reflects reduced carrying costs in 2008, combined with lower production volumes in the 2008 period as compared to 2007.
For the three month period ended March 31, 2008, True has included $54.2 million for future development costs in the depletion calculation and excluded from the depletion calculation $35.2 million for undeveloped land and $45.9 million for estimated salvage.
Depletion, Depreciation and Accretion Costs
-------------------------------------------------------------------------
Three months ended March 31,
($000s, except where noted) 2008 2007
-------------------------------------------------------------------------
Depletion and Depreciation 35,748 46,947
Accretion 555 511
-------------------------------------------------------------------------
Total 36,303 47,458
-------------------------------------------------------------------------
Per unit ($/boe) 29.44 28.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ceiling Test
The Trust calculates a ceiling test quarterly and annually to place a limit on the aggregate carrying value of its capitalized costs, which may be amortized against revenues of future periods. The ceiling test is performed in accordance with the requirements of the Canadian Institute of Chartered Accountants ("CICA") AcG-16 "Oil and Gas Accounting - Full Cost, a two step process.
The Trust performed a ceiling test calculation at March 31, 2008 resulting in undiscounted cash flows from proved reserves and the undeveloped properties not exceeding the carrying value of oil and gas assets. Consequently, True performed stage two of the ceiling test assessing whether discounted future cash flows from the production of proved plus probable reserves plus the carrying cost of undeveloped properties, net of any impairment allowance, exceeds the carrying value of its petroleum and natural gas properties. No impairment in oil and gas assets was identified as at March 31, 2008.
The ceiling test calculation will be updated during the remainder of 2008 on a quarterly and annual basis based upon the latest available data, including but not limited to an updated annual external reserve engineering report which incorporates a full evaluation of reserves or internal reserve updates at quarterly periods, and the latest commodity pricing deck. Estimating reserves is very complex, requiring many judgments based on available geological, geophysical, engineering and economic data. Changes in these judgments could have a material impact on the estimated reserves. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available and as the economic environment changes.
Asset Retirement Obligations
As at March 31, 2008, the Trust has recorded an Asset Retirement Obligation ("ARO") of $28.5 million, compared to $26.4 million at March 31, 2007, for future abandonment and reclamation of the Trust's properties. For the three months ended March 31, 2008, the ARO increased by $0.1 million total as a result of accretion expense of $0.6 million, and $0.5 million net changes in estimates and liabilities incurred on development activities, offset by $0.4 million of liabilities released on dispositions and $0.6 million of liabilities settled during the year.
Income Taxes
For the three months ended March 31, 2008, the Trust has recorded capital tax expense of $0.5 million compared to $0.9 million expensed in the same period of 2007. Capital taxes are based on debt and equity levels of the Trust at the end of the year in addition to a resource surcharge component of provincial taxes calculated as a percentage of revenues. In the second quarter of 2006, the federal government enacted legislation that eliminates federal capital tax, retroactive to January 1, 2006. As a result, since that date capital taxes are based on only provincial capital taxes.
Future income taxes arise from differences between the accounting and tax bases of the Trust's assets and liabilities. For the three months ended March 31, 2008, the Trust recognized a future income tax recovery of $11.8 million compared to a recovery of $12.8 million in the same period in 2007. On June 6, 2006 the federal government enacted a two percent decrease to the federal corporate tax rate from January 1, 2008 to January 1, 2010 and an elimination of the 1.12 percent federal surtax at January 1, 2008. On June 12, 2007, the federal government further reduced the general corporate tax rate by 0.5 percent starting 2011. Further as indicated on October 30, 2007 and enacted on December 14, 2007, the federal government announced changes to the tax system including reduction of the corporate income tax rate from 22.1 percent to 15 percent by 2012, with these reductions to be phased in between 2008 and 2012. The reduction in the general corporate tax rate will also apply to the taxation of Income Trusts. On February 26, 2008, the federal government, in its budget, announced changes to the provincial component of the SIFT tax whereby such component will be based on the provincial rates where the SIFT has a permanent establishment rather than using a 13 percent flat rate. As True currently has its permanent establishment in the Province of Alberta, its combined SIFT tax rate applicable in 2012 is expected to fall from 28 percent to 25 percent.
Under our current structure, the operating entities make interest and royalty payments to the Trust, which transfers taxable income to the Trust to eliminate income subject to corporate and other income taxes in the operating entities. With the new legislation (as referred to below), such amounts transferred to the Trust could be taxable beginning in 2011 as distributions will no longer be deductible for income tax purposes. At that time, True could claim tax pools in its operating companies, reduce the income transferred to the Trust, and pay all or a portion of distributions as a return of capital. Until 2011, under the terms of its trust indenture, the Trust is required to distribute amounts equal to at least its taxable income. In the event that the Trust has undistributed taxable income in a taxation year (prior to 2011), an additional special taxable distribution, subject to certain withholding taxes, would be required by the terms of its trust indenture.
The estimate of future taxes is based on the current tax status of the Trust. Future events, which could materially affect future income taxes such as acquisitions and dispositions and modifications to the distribution policy, are not reflected under Canadian GAAP until the events occur and the related legal requirements have been fulfilled. As a result, future changes to the tax legislation could lead to a material change in the recorded amount of future income taxes.
The new legislation is not expected to directly affect our cash flow levels and distribution policies until 2011 at the earliest.
Enactment of the Tax on Income Trusts
On June 12, 2007, the legislation implementing the new tax (the "SIFT tax") on publicly traded income trusts and limited partnerships, referred to as "Specified investment flow-through" ("SIFTs") entities (Bill C-52) received third reading in the House of Commons and on June 22, 2007, Bill C-52 received Royal assent. As a result, the SIFT tax was considered to be enacted for accounting purposes in June 2007, which resulted in a $1.2 million future income tax recovery amount being recorded to reflect current temporary differences between the book and tax basis of assets and liabilities expected to be remaining in the Trust in 2011. The SIFT tax announcement and the related future income tax recovery did not affect cash flow or distributions and is not expected to affect distribution policies until 2011 at the earliest.
SIFTs are certain publicly traded income and royalty trusts and limited partnerships including True. For SIFTs in existence on October 31, 2006 the SIFT tax will be effective in 2011, unless certain rules related to "undue expansion" are not adhered to. Under the guidance provided, True can increase its equity by approximately $737 million between now and 2011 without prematurely triggering the SIFT tax.
Under the current SIFT tax rules, distributions from certain types of income will not be deductible for income tax purposes by SIFTs in 2011, and thereafter, and any resultant trust level taxable income will be taxed at a SIFT tax rate which will be the federal general corporate income tax rate plus the provincial SIFT tax factor (which is set at a fixed rate of 13%). The SIFT tax rate was initially proposed at 31.5 percent; however, on October 30, 2007, the Government of Canada, in its Mini-Budget (Bill C-28), proposed reductions to the general corporate tax rate, thereby reducing the SIFT rate to 29.5 percent in 2011 and 28.0 percent in 2012 and later. On December 14, 2007, Bill C-28 received royal assent, resulting in a reduction to the SIFT tax rate as it becomes effective in 2011, and lowering the rate at which any corporate income taxes will be paid by True's operating entities. As the operating companies currently have a significant tax pool base and expect to increase such tax pool base until 2011, it is expected that the operating companies could shelter its taxable income for a period after the effective date of the SIFT tax. It is expected that funds could move from the operating companies to the Trust as repayments of debt with the result that Trust distributions out of the funds repaid would not be out of Trust income. Distributions of this nature would not be currently taxable to unitholders as they would represent a return of capital that would continue to be an adjustment to a unitholder's adjusted cost base of trust units. Distributions from income subject to the SIFT tax will be considered taxable dividends to unitholders and will generally be eligible for the dividend tax credit. As a result, the SIFT tax will not adversely affect Canadian investors who hold True units in a non-tax deferred account.
On February 26, 2008, the Federal Minister of Finance announced (the "Provincial SIFT Tax Proposal") that instead of basing the provincial component of the SIFT tax on a flat rate of 13%, the provincial component will instead be based on the general provincial corporate income tax rate in each province in which the SIFT has a permanent establishment. For purposes of calculating this component of the tax, the general corporate taxable income allocation formula will be used. Specifically, the Trust's taxable distributions will be allocated to provinces by taking half of the aggregate of:
- that proportion of the Trust's taxable distributions for the year
that the Trust's wages and salaries in the province are of its total
wages and salaries in Canada; and
- that proportion of the Trust's taxable distributions for the year
that the Trust's gross revenues in the province are of its total
gross revenues in Canada.
Under the Provincial SIFT Tax Proposal the Trust would be considered to have a permanent establishment only in Alberta, where the provincial tax rate in 2011 is expected to be 10%. There can be no assurance, however, that the Provincial SIFT Tax Proposal will be enacted as proposed.
On December 20, 2007, the Finance Minister announced technical amendments to provide some clarification to the SIFT tax legislation. As part of the announcement the Minister indicated that the federal government intends to provide legislation in 2008 to permit income trusts to convert to taxable Canadian corporations without any undue tax consequences to investors or the Trust.
The True Board of Directors and Management continue to review the impact of this tax on business strategy. At the present time, True believes some or all of the following actions will or could result due to the enactment of the SIFT tax:
- If structural or other similar changes are not made, the distribution
yield net of the SIFT tax in 2011 and beyond to taxable Canadian
investors will remain approximately the same; however, the
distribution yield to tax-deferred Canadian investors (RRSPs, RRIFs,
pension plans, etc.) would fall by an estimated 26.5 percent in 2011
and 25.0 percent in 2012 and beyond. For U.S. investors, the
distribution yield net of the SIFT and withholding taxes would fall
by an estimated 25.3 percent in 2011 and 25.1 percent in 2012 and
beyond;
- A portion of True's cash flow could be allocated to the payment of
the SIFT tax, or other forms of tax, and would not be available for
distribution or re-investment;
- True could convert to a corporate structure to facilitate investing a
higher proportion or all of its cash flow in exploration and
development projects. Such a conversion and change to capital
programs could result in a significant reduction to or elimination of
distributions and/or dividends;
- True might determine that it is more economic to remain in the trust
structure, at least for a period of time, and shelter its taxable
income using tax pools and pay all or a portion of its distributions
on a return of capital basis, likely at a lower payout ratio.
The Trust is reviewing all organizational structures and alternatives to minimize the impact of the SIFT tax on our unitholders. While there can be no assurance that the negative effect of the tax can be minimized or eliminated, True and its advisors will continue to work diligently on these issues.
As at March 31, 2008, the operating subsidiaries and the Trust itself have a total future income tax liability balance of $52.6 million. Canadian GAAP requires that a future income tax liability be recorded when the book value of assets exceeds the balance of tax pools.
At March 31, 2008, the Trust and operating subsidiaries of the Trust had approximately $521 million in tax pools available for deduction against future income as follows:
-------------------------------------------------------------------------
Operating
($000s) Trust subsidiaries Total
-------------------------------------------------------------------------
Intangible resource pools 15,000 322,000 337,000
Undepreciated capital cost - 142,000 142,000
Loss carryforwards (expire
through 2027) - 35,000 35,000
Unit issue costs 4,000 3,000 7,000
-------------------------------------------------------------------------
19,000 502,000 521,000
-------------------------------------------------------------------------
Distributions
Trust unitholders who held their trust units throughout the first quarter of 2008 received distributions of $0.12 per unit. For the three months ended March 31, 2008 the Trust declared $9.5 million in total distributions as follows:
-------------------------------------------------------------------------
($000s, except per unit amount) Distribution
Three months ended March 31, 2008 Per Unit Total
-------------------------------------------------------------------------
Distributions declared $ 0.12 $ 9,507
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Distribution Paid History(1)
Distributions comprise a taxable portion and a return of capital portion (tax deferred). The return of capital component reduces the cost basis of the trust units held, as described below. For additional information, please see our website at www.trueenergytrust.com.
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Distributions Taxable Return
Calendar Year per unit Portion of Capital
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2005 (two months)(2) $ 0.480 $ 0.456 $ 0.024
2006 2.640 2.033 0.607
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Cumulative to Dec. 31, 2006 $ 3.120 $ 2.489 $ 0.631
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2007 year 0.960 0.960 -
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Cumulative to Dec. 31, 2007 $ 4.080 $ 3.449 $ 0.631
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2008 year to date (three
months)(3) 0.120
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Cumulative to March 31, 2008 $ 4.200
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(1) Applies to unitholders who are residents of Canada and hold their
trust units as capital property.
(2) Based upon the distributions paid in the 2005 calendar year, after
the November 2, 2005 Arrangement with TKE Energy Trust.
(3) It is currently estimated that the approximate taxable portion of
2008 distributions to Canadian unitholders will be between 90 to
100%. Any non-taxable amounts will be treated as a tax deferred
return of capital, or an adjustment to the cost base of the units.
Actual taxable amounts may vary depending on actual distributions and
are dependent upon production, commodity prices and funds flow from
operations experienced throughout the year.
In consultation with its U.S. tax advisors, True believes that its
trust units should be "qualified dividends" for U.S. federal
purposes. As such, the portion of distributions made during 2007 that
are considered dividends for U.S. federal purposes should qualify for
the reduced rate of tax applicable to long-term capital gains.
Unitholders or potential unitholders should consult their own legal
or tax advisors as to their particular income tax consequences of
holding True units. Please view our February 27, 2008 press release
addressing this.
Monthly Distributions
Actual distributions paid and declared per trust unit along with relevant payment dates for 2008 to date are as follows:
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Ex-distribution Distribution
Date Record Date Payment Date per unit
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December 27, 2007 December 31, 2007 January 15, 2008 $ 0.08
January 29, 2008 January 31, 2008 February 15, 2008 0.04
February 27, 2008 February 29, 2008 March 17, 2008 0.04
March 27, 2008 March 31, 2008 April 15, 2008 0.04
April 28, 2008 April 30, 2008 May 15, 2008 0.04
May 28, 2008(1) May 30, 2008 June 16, 2008 0.04(2)
June 26, 2008(1) June 30, 2008 July 15, 2008 0.04(2)
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(1) Anticipated ex-distribution dates for May and June 2008. These dates
are subject to change and/or confirmation by the Toronto Stock
Exchange and will be confirmed by monthly press.
(2) Subject to confirmation by the board of directors and based on True's
current commodity prices, hedge positions, anticipated production
volumes and market conditions and subject to change based an actual
conditions.
During 2008, to date distributions have been funded from funds flow from operations.
Foreign Ownership Update
Based on information from Trust records and information provided by intermediaries holding Trust units for others, The Trust estimates that, as of April 18, 2008 approximately 28 percent of unitholders are non-Canadian residents with the remaining 72 percent being Canadian residents. True's trust indenture provides that not more than 40 percent of its trust units can be held by non-Canadian residents.
Liquidity and Capital Resources
True's net debt as at March 31, 2008 was $240.3 million, representing $171.9 million outstanding on the credit facility, $79.8 million in convertible debentures (liability component) and net the balance of working capital.
During the three month period ended March 31, 2008, the Trust has reduced its net debt by approximately $10.8 million. Our calculation of net debt includes the net working capital deficiency before short-term commodity contract assets and liabilities and short-term future income tax assets. Total net debt also includes the liability component of convertible debentures and excludes asset retirement obligations and long-term future income taxes.
As at March 31, 2008, the credit facility consists of a $15 million demand operating facility provided by one Canadian bank and a $175 million extendible revolving term credit facility syndicated by two Canadian chartered banks, a U.S. bank, a Canadian financial institution and one institutional lender. The revolving period on the revolving term credit facility ends on June 29, 2008, unless extended for a further 364 day period. Should the facilities not be renewed they convert to 366 day non-revolving term facilities on the renewal date.
On March 31, 2008, True's borrowing base redetermination was re-scheduled for renewal on or before June 2, 2008, while the Saskatchewan asset divestiture was being finalized. To reflect the recent dispositions in True's borrowing base, True's borrowing base was reduced from $190 million as at March 31, 2008 to $164.5 million effective as at April 30, 2008. As at April 30, 2008, there is approximately $40 million not drawn on these facilities. Further borrowing base reductions are scheduled to occur on June 2, 2008 and June 30, 2008, which will bring True's borrowing base to $152 million as at June 30, 2008. The revolving period on the term credit facility is also subject for renewal on June 28, 2008.
The Trust does not hold any Asset-Backed Commercial Paper investments.
On June 15, 2006 the Trust completed a bought deal public offering of 86,250 7.5% convertible unsecured subordinated debentures at a price of $1,000 per debenture for aggregate gross proceeds of $86,250,000. The debentures have a face value of $1,000 per debenture and a maturity date of June 30, 2011. The debentures bear interest at an annual rate of 7.50% payable semi-annually on June 30 and December 31 in each year commencing December 31, 2006. The debentures are convertible at anytime at the option of the holders into trust units of the Trust at a conversion price of $16.00 per trust unit. The Trust will have the right to redeem all or a portion of the debentures at a price of $1,050 per debenture after June 30, 2009 and on or before June 30, 2010 and at a price of $1,025 per debenture after June 30, 2010 and before the maturity date. Upon maturity or redemption of the debentures, the Trust may, subject to notice and regulatory approval, pay the outstanding principal and premium (if any) on the debentures in cash or through the issue of additional trust units at 95% of the weighted average trading price of the trust units.
As at April 16, 2008, the Trust had outstanding a total of 5,219,165 incentive units exercisable at an average exercise price of $8.55 per unit, 374,099 exchangeable shares (convertible, as at April 16, 2008 into an aggregate of 340,909 trust units, subject to further adjustments based on distributions made on trust units), $86.25 million principal amount of debentures convertible into trust units (at a conversion price of $16.00 per trust unit) and 79,230,460 trust units.
On April 30, 2008, True closed on the sale of its Dodsland-Stranraer property in Saskatchewan for net proceeds of $39.3 million, after closing adjustments. The net proceeds were used to pay down bank indebtedness. True continuously reviews and optimizes its portfolio, divesting of non-core and high cost properties.
Commitments
As at March 31, 2008, the Trust had committed to drill a total of 2 wells in Alberta with varying commitment dates up to end of the third quarter of 2008 pursuant to various farm-in agreements with oil and gas companies. True expects to satisfy these various drilling commitments at an estimated cost for True's interest of approximately $2.8 million.
Off-Balance Sheet Arrangements
The Trust has certain lease agreements, including primarily office space leases, which were entered into in the normal course of operations. All leases have been treated as operating leases whereby the lease payments are included in operating expenses or G&A expenses depending on the nature of the lease. No asset or liability value has been assigned to these leases in the balance sheet as of March 31, 2008.
Business Prospects and 2008 Outlook
Since its formation in September 2000, True Energy Inc. has experienced significant growth in its production and land base. The Trust continues to develop its core assets and conduct some exploration programs utilizing its large inventory of geological prospects. In addition, the Trust will continue to explore potential acquisition opportunities. Currently, the Trust's producing properties are located in Saskatchewan, Alberta and British Columbia.
The Kerrobert SAGD project continues to show positive response to the ongoing reservoir heating. Temperatures of up to 140 degrees Celsius are being observed in the new thermal producing wells as compared to initial reservoir temperatures of approximately 30 degrees Celsius. Fluid levels and reservoir pressure continue to build however withdrawal rates are being carefully restricted to control development of the steam chamber and ensure uniform heating and conformance along the entire length of the horizontal producers. True's goal is to maximize the long term success of the project and avoid issues experienced in earlier projects by other operators such as collapsing the steam chamber or pulling in cold bottom water by drawing on the producers too hard, too early in the process.
True anticipates the US$/Cdn.$ exchange rate to average 1.00 through the 2008 year.
The Trust continues to maintain a large undeveloped land base of approximately 749,100 (503,200 net) acres containing a significant multi-year drilling inventory.
True's first quarter 2008 capital program of approximately $8.7 million compares to a front end loaded 2007 capital program of approximately $46 million in first quarter 2007. True plans to continue to take a balanced approach to the priority use of cash flow between level of distributions and size of its 2008 capital program. True's 2008 capital expenditure program is currently planned at $40 million. Given the nature of True's lands and their inherent advantage of year round access, True plans to spread its 2008 capital program more evenly through the full year of 2008 to take advantage of reduced service costs during non-peak times. True plans to focus on increasing its farm-out activity in non-core areas. As the 2008 outlook for commodity prices improves, True may look to increase its capital spending in the latter part of 2008.
Financial Reporting Update
Capital disclosures
The CICA issued a new accounting standard, Section 1535 "Capital Disclosures", which requires the disclosure of both qualitative and quantitative information that provides users of financial statements with information to evaluate the entity's objective, policies and processes for managing capital. This new section is effective for the Trust beginning January 1, 2008. Refer to note 15 of the financial statements for additional disclosure for this new section.
Financial instruments
Two new accounting standards were issued by the CICA, Section 3862 "Financial Instruments - Disclosures", and Section 3863 "Financial Instruments - Presentation". These sections will replace Section 3861 "Financial Instruments - Disclosure and Presentation" once adopted. The objective of Section 3862 is to provide users with information to evaluate the significance of the financial instruments on the entity's financial position and performance, the nature and extent of risks arising from financial instruments, and how the entity manages those risks. The provisions of Section 3863 deal with the classification of financial instruments, related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. These new sections are effective for the Trust beginning January 1, 2008. The additional disclosures required under these sections are included in note 15 of the financial statements.
International Financial Reporting Standards ("IFRS")
In September 2007, the Accounting Standards Board ("AcSB") issued a bulletin relating to the transition to IFRS from Canadian GAAP and based on work undertaken to date, no significant impediments to adopting IFRS by the proposed transition date have been identified. True is monitoring industry discussion regarding the replacement of the CICA's Accounting Guideline 16 with IFRS 6, which is expected to have major implications for True's current full cost accounting policies. In February 2008, the AcSB confirmed the transition date for adopting IFRS will be January 1, 2011.
Business Risks and Uncertainties
The reader is advised that True continues to be subject to various types of business risks and uncertainties as described in the Management Discussion and Analysis for the year ended December 31, 2007 or the Trust's Annual Information Form. In addition, the Trust is also subject to the following business risks and uncertainties:
Environmental Regulations and Risks
All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial and local laws and regulations. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. In 2002, the Government of Canada ratified the Kyoto Protocol (the "Protocol"), which calls for Canada to reduce its greenhouse gas emissions to specified levels. The Federal government has introduced legislation aimed at reducing greenhouse gas emissions using a "intensity based" approach, the specifics of which have yet to be determined. Bill C-288, which is intended to ensure that Canada meets its global climate change obligations under the Kyoto Protocol, was passed by the House of Commons on February 14, 2007. There has been much public debate with respect to Canada's ability to meet these targets and the Government's strategy or alternative strategies with respect to climate change and the control of greenhouse gases. Implementation of strategies for reducing greenhouse gases whether to meet the limits required by the Protocol or as otherwise determined could have a material impact on the nature of oil and natural gas operations, including those of the Trust.
In Alberta, the reduction emission guidelines outlined the Climate Change and Emissions Management Amendment Act (the "Act") came into effect July 1, 2007. Alberta facilities emitting more than 100,000 tonnes of greenhouse gases a year must reduce their emissions intensity by 12 per cent. Industries have three options to choose from in order to meet the reduction requirements outlined in the Act, and these are: (a) by making improvement to operations that result in reductions; (b) by purchasing emission credits from other sectors or facilities that have emissions below the 100,000 tonne threshold and are voluntarily reducing their emissions; or (c) by contributing to the Climate Change and Emissions Management Fund. Industries can either choose one of these options or a combination thereof. On April 26, 2007, the Federal Government released its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as ecoACTION which includes the Regulatory Framework for Air Emissions. This Action Plan covers not-only large industry, but regulates the fuel efficiency of vehicles and the strengthening of energy standards for a number of energy-using products.
In January 24, 2008, the Alberta Government announced a new climate change action plan that will cut Alberta's projected 400 million tonnes of emissions in half by 2050. This plan is based on three areas: (i) carbon capture and storage, which will be mandatory for in situ oil sand facilities that use heavy fuels for steam generation; (ii) energy conservation and efficiency; and (iii) greening production through increased investment in clean energy technology, including supporting research on new oil sands extraction processes, as well as the funding of projects that reduce the cost of separating CO(2) from other emissions supporting carbon capture and storage.
The Government of Canada and the Province of Alberta released on January 31, 2008 the final report of the Canada-Alberta ecoENERGY Carbon Capture and Storage Task Force, which recommends among others: (i) incorporating carbon capture and storage into Canada's clean air regulations; (ii) allocating new funding into projects through competitive process; and targeting research to lower the cost of technology.
On March 10, 2008, the Government of Canada released "Turning the Corner - Taking Action to Fight Climate Change" (the "Updated Action Plan") which provides some additional guidance with respect to the Government's plan to reduce greenhouse gas emissions by 20% by 2020 and by 60% to 70% by 2050. Details of the Updated Action Plan are provided in the Trust's Annual Information Form for the year ended December 31, 2007.
Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not currently possible to predict either the nature of those requirements or the impact on the Trust and its operations and financial condition.
Alberta Royalty and Tax Regime
On October 25, 2007, the Alberta Government announced its intent to increase royalty rates commencing on January 1, 2009. As of December 31, 2007, the province had not introduced the enabling legislation nor had they provided enough clarity on a number of issues for the Trust's independent reserves evaluator, GLJ Petroleum Consultants Ltd. ("GLJ"), to provide a precise calculation of the net reserves and NPV under the New Royalty Framework ("NRF"). However, GLJ did provide analysis of the proposed royalty regime, based on a high and low sensitivity to the NRF utilizing the Consultants' Consensus Methodology recommended by the Society of Petroleum Engineers, Calgary Chapter (the "Consensus Methodology"). Based on public information available when the Trust's reserves were evaluated, the net present value of future net revenue of proved and probable reserves based on the high scenario at a 10% discount rate using the Consultants' Average Forecast Prices would be $8.9 million or 1.5 percent higher and $1.9 million or 0.33% percent higher based on the NRF for the low scenario, in each case, as compared to the existing royalty rules. The proposed royalty changes are very sensitive to production rate and natural gas prices.
Since the foregoing sensitivity was prepared, the Alberta Government has announced new royalty incentives for deep, high-cost drilling. The incentives will apply to oil exploration wells and to both development and exploration gas wells. This initiative provides some relief to the recently introduced NRF. On the oil side, a royalty credit of up to $1 million will pertain to exploration wells drilled below 2,000m. Gas wells drilled below 2,500m qualify for credits with no distinction for development versus exploration wells drilled from 2,500m-4,000m. Overall, the deep royalty credits are a modest positive for the industry with a more significant impact for producers that target deep and prolific gas wells at a depth greater than 4,000m. The impact of these new incentives is not expected to be significant to True.
The majority of True's current Alberta wells are in the 500m to 1,000m depth range and typically produce at lower rates. The overall impact of the NRF, as currently announced, is mitigated by the Trust's current Saskatchewan properties and the lower shallow gas Alberta natural gas rate royalty production in True's Alberta conventional oil and gas production portfolio. The NRF will impact future drilling decisions in order for the Trust to maintain acceptable rates of return on its capital deployed.
Critical Accounting Estimates
The reader is advised that the critical accounting estimates, policies, and practices as described in the Management Discussion and Analysis for the year ended December 31, 2007 continue to be critical in determining True's unaudited financial results as at March 31, 2008. Except as described in Note 3 of the attached unaudited interim consolidated financial statement, there were no changes in accounting policies for the three month period ended March 31, 2008
Legal, Environmental Remediation and Other Contingent Matters
The Trust reviews legal, environmental remediation and other contingent matters to both determine whether a loss is probable based on judgment and interpretation of laws and regulations and determine that the loss can reasonably be estimated. When the loss is determined, it is charged to earnings. The Trust's management monitor known and potential contingent matters and make appropriate provisions by charges to earnings when warranted by the circumstances.
Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to the Trust, including its consolidated subsidiaries, is made known to the Trust's Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which the annual and interim filings are being prepared.
Internal Controls over Financial Reporting
The Trust's Chief Executive Officer and Chief Financial Officer have designed or caused to be designed under their supervision internal controls over financial reporting to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of financial statements for external purposes in accordance with the Canadian GAAP.
The Trust's Chief Executive Officer and Chief Financial Officer are required to cause the Trust to disclose herein any change in the Trust's internal control over financial reporting that occurred during the Trust's most recent interim period that has materially affected, or is reasonably likely to materially affect, the Trust's internal control over financial reporting. No material changes in the Trust's internal control over financial reporting were identified during the three months ended March 31, 2008, that has materially affected, or are reasonably likely to materially affect, the Trust's internal control over financial reporting.
It should be noted that a control system, including the Trust's disclosure and internal controls and procedures, no matter how well conceived, can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.
Standardized Distributable Cash
The Canadian Securities Administrators recently revised and re-issued National Policy 41-201 "Income Trusts and Other Indirect Offerings", which includes disclosures regarding distributable cash for Income Trusts. Further, the Canadian Institute of Chartered Accountants ("CICA") issued the Interpretive Release "Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure" (the "Release") in July 2007, which is required for the third quarter of 2007 forward. In the new guidance, sustainability concepts are discussed and standardized distributable cash is defined as cash flow from operating activities less adjustments for productive capacity maintenance, long-term unfunded contractual obligations and the effect of any foreseeable financing matters, related to debt covenants, which could impair True's ability to pay distributions or maintain productive capacity. This Management Discussion and Analysis is in all material respects in accordance with the recommendations provided in CICA's Release and NP 41-201.
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($000s, except per unit amounts Three months ended March 31,
and percentages) 2008 2007
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Net loss (18,621) (8,571)
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Cash flow from operating activities 17,843 39,959
Productive capacity maintenance(1) (8,021) (45,653)
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Standardized distributable cash 9,822 (5,694)
Proceeds on sale of property, plant and equipment 5,788 18,443
Corporate and property acquisition and other
capital expenditures (629) (705)
Bank borrowings (debt repayment) and working
capital changes and other (5,474) 4,822
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Cash Distributions declared 9,507 16,866
Accumulated distributions, beginning of period 215,167 141,716
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Accumulated distributions, end of period 224,674 158,582
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Standardized distributable cash per unit
- basic $ 0.12 $ (0.08)
Standardized distributable cash per unit
- diluted $ 0.12 $ (0.08)
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