/FIRST AND FINAL ADD - TO413 - Advantage Energy Income Fund/
The calculation of diluted net income per Trust Unit excludes all
series of convertible debentures for the three months ended March 31,
2008 and 2007 as the impact would be anti-dil
8. Accumulated Deficit
Accumulated deficit consists of accumulated income and accumulated
distributions for the Fund since inception as follows:
March 31, December 31,
2008 2007
--------------------------------------------------------------------- Accumulated Income $ 195,866 $ 219,988
Accumulated Distributions (929,844) (879,823)
--------------------------------------------------------------------- Accumulated Deficit $ (733,978) $ (659,835)
---------------------------------------------------------------------
For the three months ended March 31, 2008 the Fund declared
$50.0 million in distributions representing $0.36 per distributable
Trust Unit (three months ended March 31, 2007 - $50.2 million in
distributions representing $0.45 per distributable Trust Unit).
9. Financial Instruments
Financial instruments of the Fund include accounts receivable,
deposits, accounts payable and accrued liabilities, distributions
payable to Unitholders, bank indebtedness, convertible debentures and
derivative assets and liabilities.
Accounts receivable and deposits are classified as loans and
receivables and measured at amortized cost. Accounts payable and
accrued liabilities, distributions payable to Unitholders and bank
indebtedness are all classified as other liabilities and similarly
measured at amortized cost. As at March 31, 2008, there were no
significant differences between the carrying amounts reported on the
balance sheet and the estimated fair values of these financial
instruments due to the short terms to maturity and the floating
interest rate on the bank indebtedness.
The Fund has convertible debenture obligations outstanding, of which
the liability component has been classified as other liabilities and
measured at amortized cost. The convertible debentures have different
fixed terms and interest rates (note 4) resulting in fair values that
will vary over time as market conditions change. As at March 31,
2008, the estimated fair value of the total outstanding convertible
debenture obligation was $224.7 million (December 31, 2007 - $215.4 million). The fair value of the liability component of
convertible debentures was determined primarily based on a discounted
cash flow model assuming no future conversions and continuation of
current interest and principal payments as well as taking into
consideration the current public trading activity of such debentures.
The Fund applied discount rates of between 6.75 and 7% considering
current available market information, assumed credit adjustments, and
various terms to maturity.
Advantage has an established strategy to manage the risk associated
with changes in commodity prices by entering into derivatives, which
are recorded at fair value as derivative assets and liabilities with
gains and losses recognized through earnings. As the fair value of
the contracts varies with commodity prices, they give rise to
financial assets and liabilities. The fair values of the derivatives
are determined through valuation models completed by third parties.
Various assumptions based on current market information were used in
these valuations, including settled forward commodity prices,
interest rates, foreign exchange rates, volatility and other relevant
factors. The actual gains and losses realized on eventual cash
settlement can vary materially due to subsequent fluctuations in
commodity prices as compared to the valuation assumptions.
Credit Risk
Accounts receivable, deposits, and derivative assets are subject to
credit risk exposure and the carrying values reflect Management's
assessment of the associated maximum exposure to such credit risk.
Substantially all of the Fund's accounts receivable are due from
customers and joint operation partners concentrated in the Canadian
oil and gas industry. As such, accounts receivable are subject to
normal industry credit risks. Advantage mitigates such credit risk by
closely monitoring significant counterparties and dealing with a
broad selection of partners that diversify risk within the sector.
The Fund's deposits are primarily due from the Alberta Provincial
government and are viewed by Management as having minimal associated
credit risk. To the extent that Advantage enters derivatives to
manage commodity price risk, it may be subject to credit risk
associated with counterparties with which it contracts. Credit risk
is mitigated by entering into contracts with only stable,
creditworthy parties and through frequent reviews of exposures to
individual entities. In addition, the Fund generally enters into
derivative contracts with investment grade institutions that are
members of Advantage's credit facility syndicate to further mitigate
associated credit risk.
Liquidity Risk
The Fund is subject to liquidity risk attributed from accounts
payable and accrued liabilities, distributions payable to
Unitholders, bank indebtedness, convertible debentures, and
derivative liabilities. Accounts payable and accrued liabilities,
distributions payable to Unitholders and derivative liabilities are
primarily due within one year of the balance sheet date and Advantage
does not anticipate any problems in satisfying the obligations due to
the strength of cash provided by operating activities and the
existing credit facility. The Fund's bank indebtedness is subject to
a $710 million credit facility agreement which mitigates liquidity
risk by enabling Advantage to manage interim cash flow fluctuations.
The credit facility constitutes a revolving facility for a 364 day
term which is extendible annually for a further 364 day revolving
period at the option of the syndicate. If not extended, the revolving
credit facility is converted to a two year term facility with the
first payment due one year and one day after commencement of the
term. The terms of the credit facility are such that it provides
Advantage adequate flexibility to evaluate and assess liquidity
issues if and when they arise. Additionally, the Fund regularly
monitors liquidity related to obligations by evaluating forecasted
cash flows, optimal debt levels, capital spending activity, working
capital requirements, and other potential cash expenditures. This
continual financial assessment process further enables the Fund to
mitigate liquidity risk.
Advantage has several series of convertible debentures outstanding
that mature from 2008 to 2011 (note 4). Interest payments are made
semi-annually with excess cash provided by operating activities. As
the debentures become due, the Fund can satisfy the obligations in
cash or issue Trust Units at a price determined in the applicable
debenture agreements. This settlement alternative allows the Fund to
adequately manage liquidity, plan available cash resources and
implement an optimal capital structure.
To the extent that Advantage enters derivatives to manage commodity
price risk, it may be subject to liquidity risk as derivative
liabilities become due. While the Fund has elected not to follow
hedge accounting, derivative instruments are not entered for
speculative purposes and Management closely monitors existing
commodity risk exposures. As such, liquidity risk is mitigated since
any losses actually realized are subsidized by increased cash flows
realized from the higher commodity price environment.
Interest Rate Risk
The Fund is exposed to interest rate risk to the extent that bank
indebtedness is at a floating rate of interest and the Fund's maximum
exposure to interest rate risk is based on the effective interest
rate and the current carrying value of the bank indebtedness. The
Fund monitors the interest rate markets to ensure that appropriate
steps can be taken if interest rate volatility compromises the Fund's
cash flows. A 1% interest rate fluctuation for the three months ended
March 31, 2008 could potentially have impacted net income by
approximately $1.0 million for that period.
Price and Currency Risk
Advantage's derivative assets and liabilities are subject to both
price and currency risks as their fair values are based on
assumptions including forward commodity prices and foreign exchange
rates. The Fund enters derivative financial instruments to manage
commodity price risk exposure relative to actual commodity production
and does not utilize derivative instruments for speculative purposes.
Changes in the price assumptions can have a significant effect on the
fair value of the derivative assets and liabilities and thereby
impact net income. It is estimated that a 10% change in the forward
natural gas prices used to calculate the fair value of the natural
gas derivatives at March 31, 2008 could impact net income by
approximately $15.6 million for the three months ended March 31,
2008. As well, a change of 10% in the forward crude oil prices used
to calculate the fair value of the crude oil derivatives at March 31,
2008 could impact net income by $9.0 million for the three months
ended March 31, 2008. A change of 10% in the forward power prices
used to calculate the fair value of the power derivatives at March
31, 2008 could impact net income by $0.1 million for the three months
ended March 31, 2008. A similar change in the currency rate
assumption underlying the derivatives fair value does not have a
material impact on net income.
As at March 31, 2008 the Fund had the following derivatives in place:
Description of
Derivative Term Volume Average Price
------------------------------------------------------------------------- Natural gas - AECO
Fixed April 2008 to 14,217 mcf/d Cdn$6.85/mcf
price October 2008
Fixed April 2008 to 9,478 mcf/d Cdn$7.25/mcf
price October 2008
Fixed April 2008 to 14,217 mcf/d Cdn$7.83/mcf
price October 2008
Fixed April 2008 to 14,217 mcf/d Cdn$7.10/mcf
price March 2009
Fixed April 2008 to 14,217 mcf/d Cdn$7.06/mcf
price March 2009
Fixed November 2008 to 14,217 mcf/d Cdn$7.77/mcf
price March 2009
Fixed November 2008 to 4,739 mcf/d Cdn$8.10/mcf
price March 2009
Fixed November 2008 to 14,217 mcf/d Cdn$9.45/mcf
price March 2009
Crude oil - WTI
Fixed February 2008 to 2,000 bbls/d Cdn$90.93/bbl
price January 2009
Collar February 2008 to 2,000 bbls/d Sold put Cdn$70.00/bbl
January 2009 Purchase call Cdn$105.00/bbl
Cost Cdn$1.52/bbl
Fixed April 2008 to 2,500 bbls/d Cdn$97.15/bbl
price March 2009
Electricity - Alberta Pool Price
Fixed January 2008 to 3.0 MW Cdn$54.00/MWh
price December 2008
As at March 31, 2008, the fair value of the derivatives outstanding
resulted in an asset of approximately $597,000 (December 31, 2007 - $7,201,000) and a liability of approximately $59,602,000 (December
31, 2007 - $5,020,000). For the three months ended March 31, 2008,
$61,186,000 was recognized in income as an unrealized derivative loss
(March 31, 2007 - $12,029,000) and $2,407,000 was recognized in
income as a realized derivative gain (March 31, 2007 - $6,230,000).
10. Capital Management
The Fund manages its capital with the following objectives:
- To ensure sufficient financial flexibility to achieve the ongoing
business objectives including replacement of production, funding
of future growth opportunities, and pursuit of accretive
acquisitions; and
- To maximize Unitholder return and provide stable distributions
that will enhance the Trust Unit value.
Advantage monitors its capital structure and makes adjustments
according to market conditions in an effort to meet its objectives
given the current outlook of the business and industry in general.
The capital structure of the Fund is composed of working capital
(excluding derivative assets and liabilities), bank indebtedness,
convertible debentures, capital lease obligations and Unitholders'
equity. The Fund internally views convertible debentures as another
form of equity as it is expected that the obligations will be settled
either directly or indirectly through the issuance of Trust Units.
Advantage may manage its capital structure by issuing new Trust
Units, obtaining additional financing either through bank
indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, adjust the
amount of monthly distributions, suspend or renew its distribution
reinvestment plan, adjust capital spending, or dispose of non-core
assets. The capital structure is reviewed by Management and the Board
of Directors on an ongoing basis. Advantage's capital structure as at
March 31, 2008 is as follows:
March 31, 2008
---------------------------------------------------------------------
Bank indebtedness (long-term) $ 563,500
Working capital deficit(1) 35,375
--------------------------------------------------------------------- Net debt 598,875
Trust Units outstanding market value 1,642,029
Convertible debentures maturity value (long-term) 214,328
Capital lease obligations (long-term) 5,332
--------------------------------------------------------------------- Total $ 2,460,564
---------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
distributions payable, and the current portion of capital lease
obligations and convertible debentures.
The Fund's bank indebtedness is governed by a $710 million credit
facility agreement (note 5) that contains standard commercial
covenants for facilities of this nature. The only financial covenant
is a requirement for AOG to maintain a minimum cash flow to interest
expense ratio of 3.5:1, determined on a rolling four quarter basis.
The Fund is in compliance with all credit facility covenants. As
well, the borrowing base for the Fund's credit facilities is
determined through utilizing the regular reserve estimates. Revision
or changes in the reserve estimates can have either a positive or a
negative impact on the borrowing base of the Fund. Advantage's
issuance of convertible debentures is limited by its Trust Indenture
which currently restricts the issuance of additional convertible
debentures to 25% of market capitalization subsequent to issuance.
Advantage's Trust Indenture also provides for the issuance of an
unlimited number of Trust Units. However, through new tax
legislation, an income trust is restricted to doubling its market
capitalization as it stands on October 31, 2006 by growing a maximum
of 40% in 2007 and 20% for the years 2008 to 2010. In addition, an
income trust may replace debt that was outstanding as of October 31,
2006 with new equity or issue new, non-convertible debt without
affecting the normal growth percentage. As a result of the "normal
growth" guidelines, the Fund is permitted to issue approximately
$2.0 billion of new equity from October 31, 2006 to January 1, 2011,
which we believe is adequate for any growth we expect to incur. If an
income trust exceeds the established limits on the issuance of new
trust units and convertible debt that constitute normal growth, the
income trust will be immediately subject to the Specified Investment
Flow-Through Entity tax legislation whereby the taxable portion of
distributions paid will be subject to tax at the trust level.
Management of the Fund's capital structure is facilitated through its
financial and operational forecasting processes. The forecast of the
Fund's future cash flows is based on estimates of production,
commodity prices, forecast capital and operating expenditures, and
other investing and financing activities. The forecast is regularly
updated based on new commodity prices and other changes, which the
Fund views as critical in the current environment. Selected forecast
information is frequently provided to the Board of Directors.
The Fund's capital management objectives, policies and processes have
remained unchanged during the three month period ended March 31,
2008.
11. Commitments
Advantage has several lease commitments relating to office buildings.
The estimated remaining annual minimum operating lease rental
payments for buildings are as follows:
2008 $ 3,083
2009 4,126
2010 4,141
2011 1,735
2012 1,314
----------------------------------------- $ 14,399
-----------------------------------------
END FIRST AND FINAL ADD
Source: Advantage Energy Income Fund
CONTACT: PRNewswire - - 05/14/2008
2008-05-14 23:13:34 0362126 PRNEWSWIRE