(TSX: AVN.UN, NYSE: AAV) CALGARY, May 14 /PRNewswire-FirstCall/ --
Advantage Energy Income Fund ("Advantage" or the "Fund") is pleased
to announce its unaudited operating and financial results for the
first quarter ended March 31, 2009. Financial and Operating
Highlights Three months Three months ended ended March 31, March
31, 2009 2008
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Financial ($000, except as otherwise indicated) Revenue before
royalties(1) $ 122,950 $ 188,505 per Trust Unit(2) $ 0.86 $ 1.37
per boe $ 44.64 $ 62.52 Funds from operations $ 55,591 $ 94,618 per
Trust Unit(3) $ 0.38 $ 0.68 per boe $ 20.19 $ 31.37 Distributions
declared $ 17,266 $ 50,021 per Trust Unit(3) $ 0.12 $ 0.36
Expenditures on property and equipment $ 52,643 $ 66,903 Working
capital deficit(4) $ 128,455 $ 35,375 Bank indebtedness $ 615,438 $
563,500 Convertible debentures (face value) $ 214,328 $ 224,587
Trust Units outstanding at end of period (000) 145,203 139,273
Basic weighted average Trust Units (000) 143,691 137,599 Operating
Daily Production Natural gas (mcf/d) 117,968 125,113 Crude oil and
NGLs (bbls/d) 10,942 12,281 Total boe/d at 6:1 30,603 33,133
Average prices (including hedging) Natural gas ($/mcf) $ 6.52 $
8.23 Crude oil and NGLs ($/bbl) $ 54.54 $ 84.83 (1) includes
realized derivative gains and losses (2) based on basic weighted
average Trust Units outstanding (3) based on Trust Units
outstanding at each distribution record date (4) working capital
deficit 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 MESSAGE TO UNITHOLDERS Montney Development
Program at Glacier on-track - For the three month period ended
March 31, 2009, the Fund's capital program amounted to $51.9
million net and included the drilling of 9.6 net (11 gross) wells
at a 100% success rate. Total capital spending in the quarter
included $40.6 million at Glacier, $5.0 million at Martin Creek,
and $0.7 million at Nevis. - Glacier capital investment included
drilling 3 net (3 gross) horizontal wells and 2 net (2 gross)
vertical wells during the quarter. Two new Montney horizontal wells
were brought on-stream at combined rates of 8 to 10 mmcf/d at the
end of January 2009. Facilities work involving the expansion of
compression facilities and our pipeline gathering system was
completed at the end of the quarter and has taken our overall
facility capacity to approximately 25 mmcf/d after commissioning
the expansion in the second quarter of 2009. The remaining Montney
wells drilled in 2008 and the first quarter of 2009 will provide
sufficient production deliverability to keep the facilities near
capacity for the remainder of the year. New wells brought on-stream
after March 31, 2009 will qualify for the Alberta royalty incentive
program which results in a 5% royalty rate for one year or 0.5 bcf
of gas production. The development program at Glacier is on-track
and design work is underway to increase production to 50 mmcf/d in
2010. - At Martin Creek, 3.6 net (4 gross) wells were successfully
drilled and have been brought on-stream before the end of the
quarter to help offset declines during the remainder of the year.
Production is currently at facility capacity. - At Nevis, activity
focused on increasing battery capacity and preparatory work for new
Wabamun light oil and Horseshoe Canyon coal bed methane wells. This
program may be drilled during the remainder of 2009. Strong Hedging
Program and Operating Cost Reductions Mitigates Lower Commodity
Prices - Our hedging program contributed a gain of $23.3 million to
funds from operations which helped to partially mitigate a
significant reduction in commodity prices. - Operating costs for
the three months ended March 31, 2009 was $13.08 per boe, a
decrease of 11% (16% on an absolute cost basis) from the fourth
quarter of 2008 and a decrease of 2% (11% on an absolute cost
basis) when compared to the same period in 2008. An aggressive
optimization program through 2008 is beginning to demonstrate
positive benefits and we will continue to seek opportunities to
further improve our operating cost structure. We also anticipate
that service and supply costs may decrease further during the
remainder of 2009 due to the reduced activity in the oil and gas
industry. - Significantly lower average natural gas and crude oil
prices resulted in a 41% decrease in funds from operations to $55.6
million for the first quarter of 2009 as compared to $94.6 million
for the same period of 2008. Funds from operations on a per unit
basis decreased 44% to $0.38 per Trust Unit compared to $0.68 per
Trust Unit for the three months ended March 31, 2008. - Average
daily production for the three months ended March 31, 2009
decreased 3% to 30,603 boe/d compared to the fourth quarter of
2008. This decline was due to 1,100 boe/d (73% natural gas) being
curtailed since August 2008 at our Lookout Butte property as a
result of an ongoing third party facility outage. Cold weather
related production issues also impacted production during the month
of January 2009. Production decreased 8% when compared to the same
period of 2008. - Natural gas production for the three months ended
March 31, 2009 decreased 6% to 118.0 mmcf/d, compared to 125.1
mmcf/d for the same period of 2008. Crude oil and natural gas
liquids production decreased 11% to 10,942 bbls/d compared to
12,281 bbls/d for the three months ended March 31, 2008. - The Fund
declared distributions totaling $0.12 per Trust Unit or $17.3
million during the three months ended March 31, 2009. On March 18,
2009, the Fund announced it would discontinue cash distributions.
Strong Hedging Program - Advantage's hedging program includes 56%
of our net natural gas production hedged for 2009 at an average
price of $8.09 per mcf and 48% hedged for 2010 at an average price
of $7.46 per mcf. Crude oil hedges include 46% of our net crude oil
production hedged at an average floor price of $69.38 Cdn per bbl
and 26% hedged for 2010 at an average price of $67.83 Cdn per bbl.
Details on our hedging program are available on our website. - For
the remaining three quarters of 2009, Advantage has 54% of our net
natural gas hedged at $8.17/mcf. Approximate Production Hedged,
Average Average Commodity Net of Royalties Floor Price Ceiling
Price
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Natural gas - AECO April to June 2009 53% Cdn$8.17/mcf Cdn$8.17/mcf
July to September 2009 54% Cdn$8.17/mcf Cdn$8.17/mcf October to
December 2009 56% Cdn$8.17/mcf Cdn$8.17/mcf
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Total 2009 56% Cdn$8.09/mcf Cdn$8.09/mcf
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January to March 2010 62% Cdn$7.64/mcf Cdn$7.64/mcf April to June
2010 53% Cdn$7.53/mcf Cdn$7.53/mcf July to September 2010 38%
Cdn$7.27/mcf Cdn$7.27/mcf October to December 2010 38% Cdn$7.27/mcf
Cdn$7.27/mcf
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Total 2010 48% Cdn$7.46/mcf Cdn$7.46/mcf
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January to March 2011 6% Cdn$7.25/mcf Cdn$7.25/mcf
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Crude Oil - WTI April to June 2009 48% Cdn$62.40/bbl Cdn$69.40/bbl
July to September 2009 48% Cdn$62.40/bbl Cdn$69.40/bbl October to
December 2009 50% Cdn$62.40/bbl Cdn$69.40/bbl
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Total 2009 46% Cdn$69.38/bbl Cdn$74.92/bbl
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January to March 2010 26% Cdn$62.80/bbl Cdn$62.80/bbl April to June
2010 26% Cdn$69.50/bbl Cdn$69.50/bbl July to September 2010 26%
Cdn$69.50/bbl Cdn$69.50/bbl October to December 2010 26%
Cdn$69.50/bbl Cdn$69.50/bbl
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Total 2010 26% Cdn$67.83/bbl Cdn$67.83/bbl
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January to March 2011 9% Cdn$69.50/bbl Cdn$69.50/bbl
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Looking Forward - On March 18, 2009, Advantage announced that our
Board of Directors had approved conversion to a growth oriented
corporation and a strategic asset disposition program to increase
financial flexibility. - The corporate conversion will be subject
to two-thirds Unitholder approval as well as customary court and
regulatory approvals, anticipated to be completed on or about June
29, 2009. The conversion will enable Advantage to pursue a business
plan that is focused on the development and growth of the Montney
natural gas resource play at Glacier. - The Fund has retained
advisors to assist with the disposition of properties producing up
to 11,900 boe/d of light oil and natural gas properties located in
Northeast British Columbia, West Central Alberta and Northern
Alberta. The net proceeds from these sales or other oil and natural
gas property sales will initially be used to reduce outstanding
bank debt to improve Advantage's financial flexibility. Advantage
may also draw down its credit facilities in the future to redeem
certain of the Fund's convertible debentures. Proposals are
anticipated by mid May 2009 and the selected assets will be
available in four distinct packages varying in size from
approximately 1,600 to 5,400 boe/d of production. - As another step
to increase Advantage's financial flexibility and to focus on
development and growth at Glacier, we discontinued payment of cash
distributions with the final cash distribution paid on March 16,
2009 to unitholders of record as of February 27, 2009. Going
forward, Advantage does not anticipate paying distributions or
dividends and will instead, direct cash flow to capital
expenditures and debt repayment. - We will provide updated guidance
subsequent to the results of our asset disposition program and our
corporate conversion. MANAGEMENT'S DISCUSSION & ANALYSIS The
following Management's Discussion and Analysis ("MD&A"), dated
as of May 14, 2009, provides a detailed explanation of the
financial and operating results of Advantage Energy Income Fund
("Advantage", the "Fund", "us", "we" or "our") for the three months
ended March 31, 2009 and should be read in conjunction with the
consolidated financial statements contained within this interim
report and the audited financial statements and MD&A for the
year ended December 31, 2008. The consolidated financial statements
have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and all references are to Canadian
dollars unless otherwise indicated. All per barrel of oil
equivalent ("boe") amounts are stated at a conversion rate of six
thousand cubic feet of natural gas being equal to one barrel of oil
or liquids. Non-GAAP Measures The Fund discloses several financial
measures in the MD&A that do not have any standardized meaning
prescribed under GAAP. These financial measures include funds from
operations, funds from operations per Trust Unit and cash netbacks.
Management believes that these financial measures are useful
supplemental information to analyze operating performance, leverage
and provide an indication of the results generated by the Fund's
principal business activities prior to the consideration of how
those activities are financed or how the results are taxed.
Investors should be cautioned that these measures should not be
construed as an alternative to net income, cash provided by
operating activities or other measures of financial performance as
determined in accordance with GAAP. Advantage's method of
calculating these measures may differ from other companies, and
accordingly, they may not be comparable to similar measures used by
other companies. Funds from operations, as presented, is based on
cash provided by operating activities before expenditures on asset
retirement and changes in non-cash working capital. Funds from
operations per Trust Unit is based on the number of Trust Units
outstanding at each distribution record date. Cash netbacks are
dependent on the determination of funds from operations and include
the primary cash revenues and expenses on a per boe basis that
comprise funds from operations. Funds from operations reconciled to
cash provided by operating activities is as follows: Three months
ended March 31 ($000) 2009 2008 % change
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Cash provided by operating activities $ 41,879 $ 81,593 (49)%
Expenditures on asset retirement 2,577 4,965 (48)% Changes in
non-cash working capital 11,135 8,060 38%
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Funds from operations $ 55,591 $ 94,618 (41)%
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Forward-Looking Information This MD&A contains certain
forward-looking statements, which are based on our current internal
expectations, estimates, projections, assumptions and beliefs.
These statements relate to future events or our future performance.
All statements other than statements of historical fact may be
forward-looking statements. Forward-looking statements are often,
but not always, identified by the use of words such as "seek",
"anticipate", "plan", "continue", "estimate", "expect", "may",
"will", "project", "predict", "potential", "targeting", "intend",
"could", "might", "should", "believe", "would" and similar or
related expressions. These statements are not guarantees of future
performance. In particular, forward-looking statements included in
this MD&A include, but are not limited to, statements with
respect to average production and projected exit rates; areas of
operations; spending and capital budgets; availability of funds for
our capital program; the size of, and future net revenues from,
reserves; the focus of capital expenditures; expectations regarding
the ability to raise capital and to continually add to reserves
through acquisitions and development; projections of market prices
and costs; the performance characteristics of our properties; our
future operating and financial results; capital expenditure
programs; supply and demand for oil and natural gas; average
royalty rates; and amount of general and administrative expenses.
In addition, statements relating to "reserves" or "resources" are
deemed to be forward-looking statements, as they involve the
implied assessment, based on certain estimates and assumptions,
that the resources and reserves described can be profitably
produced in the future. These forward-looking statements involve
substantial known and unknown risks and uncertainties, many of
which are beyond our control, including the effect of acquisitions;
changes in general economic, market and business conditions;
changes or fluctuations in production levels; unexpected drilling
results, changes in commodity prices, currency exchange rates,
capital expenditures, reserves or reserves estimates and debt
service requirements; changes to legislation and regulations and
how they are interpreted and enforced, changes to investment
eligibility or investment criteria; our ability to comply with
current and future environmental or other laws; our success at
acquisition, exploitation and development of reserves; actions by
governmental or regulatory authorities including increasing taxes,
changes in investment or other regulations; the occurrence of
unexpected events involved in the exploration for, and the
operation and development of, oil and gas properties; competition
from other producers; the lack of availability of qualified
personnel or management; changes in tax laws, royalty regimes and
incentive programs relating to the oil and gas industry and income
trusts; hazards such as fire, explosion, blowouts, cratering, and
spills, each of which could result in substantial damage to wells,
production facilities, other property and the environment or in
personal injury; stock market volatility; and ability to access
sufficient capital from internal and external sources. Many of
these risks and uncertainties are described in Advantage's Annual
Information Form which is available at http://www.sedar.com/ and
http://www.advantageincome.com/. Readers are also referred to risk
factors described in other documents Advantage files with Canadian
securities authorities. With respect to forward-looking statements
contained in this MD&A, Advantage has made assumptions
regarding: current commodity prices and royalty regimes;
availability of skilled labour; timing and amount of capital
expenditures; future exchange rates; the price of oil and natural
gas; the impact of increasing competition; conditions in general
economic and financial markets; availability of drilling and
related equipment; effects of regulation by governmental agencies;
royalty rates and future operating costs. Management has included
the above summary of assumptions and risks related to
forward-looking information provided in this MD&A in order to
provide Unitholders with a more complete perspective on Advantage's
future operations and such information may not be appropriate for
other purposes. Advantage's actual results, performance or
achievement could differ materially from those expressed in, or
implied by, these forward-looking statements and, accordingly, no
assurance can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of
them do so, what benefits that Advantage will derive there from.
Readers are cautioned that the foregoing lists of factors are not
exhaustive. These forward-looking statements are made as of the
date of this MD&A and Advantage disclaims any intent or
obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or results or
otherwise, other than as required by applicable securities laws.
Corporate Conversion and Asset Disposition On March 18, 2009, we
announced that our Board of Directors had approved conversion to a
growth oriented corporation and a strategic asset disposition
program to increase financial flexibility. The corporate conversion
will be subject to approval by at least two-thirds of the Fund's
Unitholders as well as customary court and regulatory approvals,
anticipated to be completed on or about June 29, 2009. The
conversion will enable Advantage to pursue a business plan that is
focused on the development and growth of the Montney natural gas
resource play at Glacier, Alberta. The conversion will have the
added benefit of removing the uncertainty surrounding the upcoming
changes in Canadian tax law whereby the government will begin
imposing taxes on income trusts on January 1, 2011. The Fund has
retained advisors to assist with the disposition of properties
producing up to 11,900 boe/d of light oil and natural gas
properties located in Northeast British Columbia, West Central
Alberta and Northern Alberta. The net proceeds from these sales or
other oil and natural gas property sales will initially be used to
reduce outstanding bank debt to improve Advantage's financial
flexibility. Advantage may also draw down its credit facilities in
the future to redeem certain of the Fund's convertible debentures.
Proposals are anticipated by mid May 2009 and the selected assets
will be available in four distinct packages varying in size from
approximately 1,600 to 5,400 boe/d of production. As another step
to increase Advantage's financial flexibility and to focus on
development and growth at Glacier, Advantage has discontinued
payment of cash distributions. Going forward, we do not anticipate
paying dividends in the immediate future and will instead direct
cash flow to capital expenditures and debt repayment. Given these
business developments, historical operating and financial
performance may not be indicative of future performance depending
on the magnitude of the asset disposition process and pending
approval of the corporate conversion. Overview Three months ended
March 31 2009 2008 % change
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Cash provided by operating activities ($000) $ 41,879 $ 81,593
(49)% Funds from operations ($000) $ 55,591 $ 94,618 (41)% per
Trust Unit(1) $ 0.38 $ 0.68 (44)% (1) Based on Trust Units
outstanding at each distribution record date. Cash provided by
operating activities, funds from operations and funds from
operations per Trust Unit have decreased significantly for the
three months ended March 31, 2009 as compared to the same period of
2008 due to considerably lower revenue. Lower revenue was primarily
caused by severely depressed commodity prices and a slight decrease
in production. The first quarter of 2009 has seen a worsening of
the global recession, which has resulted in drastic reductions in
commodity prices from lower demand and perceived excess supply.
This challenging environment has continued into the second quarter
of 2009. The primary factor that causes significant variability of
Advantage's cash provided by operating activities, funds from
operations, and net income is commodity prices. Refer to the
section "Commodity Prices and Marketing" for a more detailed
discussion of commodity prices and our price risk management.
Distributions Three months ended March 31 2009 2008 % change
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Distributions declared ($000) $ 17,266 $ 50,021 (65)% per Trust
Unit(1) $ 0.12 $ 0.36 (67)% (1) Based on Trust Units outstanding at
each distribution record date. Distributions for the three months
ended March 31, 2009 are lower in total and per Trust Unit compared
to the same period of 2008 as a result of decreases in the
distribution declared per Trust Unit. For the majority of 2008,
including the three months ended March 31, 2008, we paid a monthly
distribution of $0.12 per Trust Unit and reduced the distribution
to $0.08 per Trust Unit effective for the December 2008
distribution paid in January 2009. We further reduced the monthly
distribution to $0.04 per Trust Unit for the February 2009
distribution paid in March 2009. As commodity prices weakened
throughout these periods, we reduced distributions to more
appropriately reflect the current price environment. On March 18,
2009, we announced the discontinuance of future distributions,
consistent with our strategy to reduce debt and convert to a growth
oriented corporation that will focus capital on our Montney natural
gas resource play at Glacier, Alberta. Going forward, Advantage
does not anticipate paying dividends in the immediate future.
Revenue Three months ended March 31 ($000) 2009 2008 % change
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Natural gas excluding hedging $ 56,860 $ 89,994 (37)% Realized
hedging gains 12,386 3,710 234%
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Natural gas including hedging $ 69,246 $ 93,704 (26)%
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Crude oil and NGLs excluding hedging $ 42,744 $ 96,104 (56)%
Realized hedging gains (losses) 10,960 (1,303) (941)%
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Crude oil and NGLs including hedging $ 53,704 $ 94,801 (43)%
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Total revenue $ 122,950 $ 188,505 (35)%
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Natural gas, crude oil and NGLs revenues, excluding hedging,
decreased significantly for the three months ended March 31, 2009,
as compared to 2008. This is primarily the result of lower
commodity prices from the ongoing global recession that has reduced
demand and increased perceived supply. Realized natural gas prices,
excluding hedging, decreased by 32% while realized crude oil and
NGL prices, excluding hedging, decreased a substantial 50%. As a
result of our commodity price risk management program, we
recognized natural gas and crude oil hedging gains of $23.3 million
for the three months ended March 31, 2009. The Fund enters
derivative contracts whereby realized hedging gains and losses
partially offset commodity price fluctuations, which can positively
or negatively impact revenues. Production Three months ended March
31 2009 2008 % change
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Natural gas (mcf/d) 117,968 125,113 (6)% Crude oil (bbls/d) 8,677
9,851 (12)% NGLs (bbls/d) 2,265 2,430 (7)%
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Total (boe/d) 30,603 33,133 (8)%
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Natural gas (%) 65% 63% Crude oil (%) 28% 30% NGLs (%) 7% 7% The
Fund's total daily production averaged 30,603 boe/d for the three
months ended March 31, 2009, a decrease of 8% from the same period
of 2008. Total daily production for the quarter was 3% lower
compared to the fourth quarter of 2008, mainly due to natural
declines and a slow recovery from cold weather conditions that
caused brief production outages in late December. Production of
1,100 boe/d at our Lookout Butte property in Southern Alberta
remained shut-in during the first quarter by an extended third
party facility outage that began in August 2008 at the Waterton gas
plant where a significant modification project is underway.
Original estimates provided by the third party indicated a
potential outage of approximately 55 to 75 days. However, current
information now indicates that the gas plant may be down until June
1, 2009. Additionally, we drilled a number of wells during the
current quarter but delayed production until after March 31 such
that we could benefit from the new 5% Alberta royalty rate
available on such wells for the next twelve month period. On March
18, 2009, we announced the intention to dispose of properties
producing up to 11,900 boe/d of light oil and natural gas
properties located in Northeast British Columbia, West Central
Alberta and Northern Alberta. The net proceeds from these sales or
other oil and natural gas property sales will initially be used to
reduce outstanding bank debt to improve Advantage's financial
flexibility. Proposals are anticipated by mid May 2009 and the
selected assets will be available in four distinct packages varying
in size from approximately 1,600 to 5,400 boe/d of production.
Assuming asset sales of approximately 10,000 to 11,900 boe/d of
production are completed, we expect production of approximately
20,000 to 22,000 boe/d from a focused asset base (60% natural gas,
40% oil and natural gas liquids). Commodity Prices and Marketing
Natural Gas Three months ended March 31 ($/mcf) 2009 2008 % change
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Realized natural gas prices Excluding hedging $ 5.36 $ 7.90 (32)%
Including hedging $ 6.52 $ 8.23 (21)% AECO monthly index $ 5.64 $
7.13 (21)% Realized natural gas prices, excluding hedging, were
significantly lower for the three months ended March 31, 2009 than
the same period of 2008 and decreased 25% from the fourth quarter
of 2008. The 2007/2008 winter season in North America caused
inventory levels, which had been high prior to winter, to decline
to approximately the five-year average resulting in stronger prices
during early 2008. However, the second half of 2008 and the first
quarter of 2009 experienced significant softening of natural gas
prices from higher US domestic natural gas production, mild weather
conditions and forecasts, and the ongoing global recession that has
impacted demand. These factors have resulted in much higher
inventory levels that continue to place considerable downward
pressure on natural gas prices. Unfortunately, these conditions
have also continued beyond the first quarter of 2009 with AECO gas
presently trading at approximately $4.25/GJ. Although we continue
to believe in the longer-term pricing fundamentals for natural gas,
we are concerned about the current pricing and economic environment
that has the potential to extend for a considerable period of time.
The global recession could delay the recovery of natural gas
pricing longer than anticipated. While the current pricing
situation is quite weak, some of the factors that we believe will
support stronger future natural gas prices include: (i)
significantly less natural gas drilling in Canada and the US
projected for 2009, which will reduce productivity to offset
declines, (ii) the increasing focus on resource style natural gas
wells, which have high initial declines, and which are becoming a
larger proportion of the total natural gas supply based in Canada
and the US, and (iii) the potential demand for natural gas for the
Canadian oil sands projects. Crude Oil and NGLs Three months ended
March 31 ($/bbl) 2009 2008 % change
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Realized crude oil prices Excluding hedging $ 44.94 $ 88.15 (49)%
Including hedging $ 58.97 $ 86.69 (32)% Realized NGLs prices
Excluding hedging $ 37.54 $ 77.25 (51)% Realized crude oil and NGL
prices Excluding hedging $ 43.41 $ 85.99 (50)% Including hedging $
54.54 $ 84.83 (36)% WTI ($US/bbl) $ 43.21 $ 97.96 (56)%
$US/$Canadian exchange rate $ 0.80 $ 1.00 (20)% Realized crude oil
and NGLs prices, excluding hedging, decreased 50% for the three
months ended March 31, 2009, as compared to the same period of 2008
and decreased 19% from the fourth quarter of 2008. Advantage's
realized crude oil price may not change to the same extent as WTI,
due to changes in the $US/$Canadian exchange rate, and changes in
Canadian crude oil differentials relative to WTI. The price of WTI
fluctuates based on worldwide supply and demand fundamentals. There
has been significant price volatility experienced over the last
several years whereby WTI reached historic high levels in the first
half of 2008, followed by a record decline in the latter half of
the year, the result of demand destruction brought on by the
current global recession. There has been a modest recovery
subsequent to the first quarter of 2009, and WTI is currently
trading at approximately US$58/bbl. The impact from this decrease
in WTI will be somewhat mitigated for Advantage due to the
strengthening US dollar relative to the Canadian dollar. As with
natural gas, it seems evident that the global recession will likely
prolong depressed crude oil prices through the coming year.
Regardless of this significant decrease, we believe that the
longer-term pricing fundamentals for crude oil remain strong with
many factors affecting the continued strength including (i) supply
management and supply restrictions by the OPEC cartel, (ii)
frequent civil unrest in various crude oil producing countries and
regions, (iii) strong relative demand in developing countries,
particularly in China and India, and (iv) production declines and
reduced drilling due to the lower price environment. Commodity
Price Risk The Fund's operational results and financial condition
will be dependent on the prices received for oil and natural gas
production. Oil and natural gas prices have fluctuated widely
during recent years and are determined by economic and, in the case
of oil prices, political factors. Supply and demand factors,
including weather and general economic conditions as well as
conditions in other oil and natural gas regions, impact prices. Any
movement in oil and natural gas prices could have an effect on the
Fund's financial condition and performance. As current and future
practice, Advantage has established a financial hedging strategy
and may manage the risk associated with changes in commodity prices
by entering into derivatives. Although these commodity price risk
management activities could expose Advantage to losses or gains,
entering derivative contracts helps us to stabilize cash flows and
ensures that our capital expenditure program is substantially
funded by such cash flows. To the extent that Advantage engages in
risk management activities related to commodity prices, it will be
subject to credit risk associated with counterparties with which it
contracts. Credit risk is mitigated by entering into contracts with
only stable, creditworthy parties and through frequent reviews of
exposures to individual entities. We have been active in entering
new financial contracts to protect future cash flows and currently
the Fund has fixed commodity prices on anticipated production as
follows: Approximate Production Hedged, Average Average Commodity
Net of Royalties(1) Floor Price Ceiling Price
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Natural gas - AECO April to June 2009 53% Cdn$8.17/mcf Cdn$8.17/mcf
July to September 2009 54% Cdn$8.17/mcf Cdn$8.17/mcf October to
December 2009 56% Cdn$8.17/mcf Cdn$8.17/mcf
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Total 2009 56% Cdn$8.09/mcf Cdn$8.09/mcf
-----------------------------------------------------------------------
January to March 2010 62% Cdn$7.64/mcf Cdn$7.64/mcf April to June
2010 53% Cdn$7.53/mcf Cdn$7.53/mcf July to September 2010 38%
Cdn$7.27/mcf Cdn$7.27/mcf October to December 2010 38% Cdn$7.27/mcf
Cdn$7.27/mcf
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Total 2010 48% Cdn$7.46/mcf Cdn$7.46/mcf
-----------------------------------------------------------------------
January to March 2011 6% Cdn$7.25/mcf Cdn$7.25/mcf
-----------------------------------------------------------------------
Crude Oil - WTI April to June 2009 48% Cdn$62.40/bbl Cdn$69.40/bbl
July to September 2009 48% Cdn$62.40/bbl Cdn$69.40/bbl October to
December 2009 50% Cdn$62.40/bbl Cdn$69.40/bbl
-----------------------------------------------------------------------
Total 2009 46% Cdn$69.38/bbl Cdn$74.92/bbl
-----------------------------------------------------------------------
January to March 2010 26% Cdn$62.80/bbl Cdn$62.80/bbl April to June
2010 26% Cdn$69.50/bbl Cdn$69.50/bbl July to September 2010 26%
Cdn$69.50/bbl Cdn$69.50/bbl October to December 2010 26%
Cdn$69.50/bbl Cdn$69.50/bbl
-----------------------------------------------------------------------
Total 2010 26% Cdn$67.83/bbl Cdn$67.83/bbl
-----------------------------------------------------------------------
January to March 2011 9% Cdn$69.50/bbl Cdn$69.50/bbl
-----------------------------------------------------------------------
(1) Approximate production hedged is based on our assumed average
production by quarter net of royalty payments; however, this will
be impacted by the magnitude of our asset disposition program. For
the three month period ended March 31, 2009, we recognized in
income a realized derivative gain of $23.3 million (March 31, 2008
- $2.4 million) on settled derivative contracts. As at March 31,
2009, the fair value of the derivatives outstanding and to be
settled was a net asset of approximately $65.4 million (December
31, 2008 - $41.0 million net asset). For the three months ended
March 31, 2009, $24.4 million was recognized in income as an
unrealized derivative gain (March 31, 2008 - $61.2 million
unrealized derivative loss) due to changes in the fair values of
these contracts since December 31, 2008. The valuation of the
derivatives is the estimated fair value to settle the contracts as
at March 31, 2009 and is based on pricing models, estimates,
assumptions and market data available at that time. As such, the
recognized amounts are not cash and the actual gains or losses
realized on eventual cash settlement can vary materially due to
subsequent fluctuations in commodity prices as compared to the
valuation assumptions. The Fund does not apply hedge accounting and
current accounting standards require changes in the fair value to
be included in the consolidated statement of income and
comprehensive income as an unrealized derivative gain or loss with
a corresponding derivative asset and liability recorded on the
balance sheet. These derivative contracts will settle from April
2009 to January 2011 corresponding to when Advantage will receive
revenues from production. Royalties Three months ended March 31
2009 2008 % change
-------------------------------------------------------------------------
Royalties ($000) $ 16,080 $ 33,881 (53)% per boe $ 5.84 $ 11.24
(48)% As a percentage of revenue, excluding hedging 16.1% 18.2%
(2.1)% Advantage pays royalties to the owners of mineral rights
from which we have leases. The Fund currently has mineral leases
with provincial governments, individuals and other companies.
Royalties have decreased in total for the three months ended March
31, 2009 compared to the same period of 2008 due to the decrease in
revenue from significantly lower commodity prices. Royalties as a
percentage of revenue, excluding hedging, decreased compared to the
first quarter of 2008. Effective January 1, 2009, the Alberta
Provincial Government implemented a new royalty framework for
conventional oil, natural gas and oil sands and Alberta royalties
are now affected by depths and productivity of wells and commodity
prices. Given our production profile and the current commodity
price environment, our royalty rate has decreased as compared to
prior periods. Additionally, our royalties were positively impacted
during the current quarter as we received a $1.4 million annual
adjustment related to our 2008 Alberta natural gas crown royalties.
We expect the royalty rate to be in the range of 17% to 19% for
2009 given the current environment. Operating Costs Three months
ended March 31 2009 2008 % change
-------------------------------------------------------------------------
Operating costs ($000) $ 36,031 $ 40,272 (11)% per boe $ 13.08 $
13.36 (2)% Total operating costs decreased 11% for the three months
ended March 31, 2009 compared to the first quarter of 2008 which
resulted in a reduction in operating costs per boe by 2% for the
period. When compared to the fourth quarter of 2008, total
operating costs decreased 16% and operating costs per boe decreased
by 11%. An aggressive optimization program through 2008 is
beginning to demonstrate positive benefits and we will continue to
seek opportunities to improve our operating cost structure. We
further anticipate that operating costs may decrease in the
remainder of 2009 as the slower economy may reduce the cost of
services and supplies. In 2009, the Fund also entered into fixed
price power hedges whereby 2.0 MW have been hedged at an average
fixed price of $63.33/MWh from April to June 2009 and 2.0 MW have
been hedged at an average fixed price of $75.43/MWh from March to
December 2009. General and Administrative Three months ended March
31 2009 2008 % change
-------------------------------------------------------------------------
General and administrative expense ($000) $ 7,380 $ 7,232 2% per
boe $ 2.68 $ 2.40 12% Employees at March 31 165 163 1% General and
administrative ("G&A") expense for the three months ended March
31, 2009 was comparable to the three months ended March 31, 2008.
Total G&A for the quarter included the recognition of $1.3
million of unit-based compensation expense related to Restricted
Trust Units ("RTUs") granted to employees by the Board of Directors
in January 2009. A total of 171,093 Trust Units were issued to
employees for the first one-third of the grant that vested. The
remaining two-thirds of the RTUs granted will vest over the
subsequent two yearly anniversary dates with corresponding
compensation expense recognized over the service period. Management
Internalization Three months ended March 31 2009 2008 % change
-------------------------------------------------------------------------
Management internalization ($000) $ 964 $ 2,491 (61)% per boe $
0.35 $ 0.83 (58)% In 2006, the Fund and Advantage Investment
Management Ltd. (the "Manager") reached an agreement to internalize
the pre-existing management contract arrangement. As part of the
agreement, Advantage agreed to purchase all of the outstanding
shares of the Manager pursuant to the terms of the Arrangement,
thereby eliminating the management fee and performance incentive
effective April 1, 2006. The Trust Unit consideration issued in
exchange for the outstanding shares of the Manager was placed in
escrow for a 3-year period and is being deferred and amortized into
income as management internalization expense over the specific
vesting periods during which employee services are provided. The
management internalization is lower for the three months ended
March 31, 2009 compared to the same period of 2008 because one
third vested and was paid in June 2007 with an additional one third
vested and paid in June 2008. Interest on Bank Indebtedness Three
months ended March 31 2009 2008 % change
-------------------------------------------------------------------------
Interest expense ($000) $ 4,916 $ 7,766 (37)% per boe $ 1.78 $ 2.58
(31)% Average effective interest rate 3.3% 5.6% (2.3)% Bank
indebtedness at March 31 ($000) $ 615,438 $ 563,500 9% Total
interest expense decreased 37% and 31% per boe for the three months
ended March 31, 2009 as compared to the three months ended March
31, 2008. The interest expense decrease is the result of lower
interest rates as bank lending rates have declined significantly in
response to rate reductions enacted by central banks to stimulate
the economy. We monitor the debt level to ensure an optimal mix of
financing and cost of capital that will provide a maximum return to
our Unitholders. Our current credit facilities have been a
favorable financing alternative with an effective interest rate of
only 3.3% for the three months ended March 31, 2009. The Fund's
interest rates are primarily based on short term Bankers Acceptance
rates plus a stamping fee. Interest and Accretion on Convertible
Debentures Three months ended March 31 2009 2008 % change
-------------------------------------------------------------------------
Interest on convertible debentures ($000) $ 3,969 $ 4,187 (5)% per
boe $ 1.44 $ 1.39 4% Accretion on convertible debentures ($000) $
682 $ 720 (5)% per boe $ 0.25 $ 0.24 4% Convertible debentures
maturity value at March 31 ($000) $ 214,328 $ 224,587 (5)% Interest
and accretion on convertible debentures for the three months ended
March 31, 2009 has decreased compared to 2008 due to the maturity
of the 9.00% and 8.25% debentures occurring on August 1, 2008 and
February 1, 2009, respectively. The interest and accretion per boe
for the quarter was slightly higher as our production was lower for
the three months ended March 31, 2009 compared to the same period
of 2008. Depletion, Depreciation and Accretion Three months ended
March 31 2009 2008 % change
-------------------------------------------------------------------------
Depletion, depreciation and accretion ($000) $ 69,922 $ 76,880 (9)%
per boe $ 25.39 $ 25.50 - Depletion and depreciation of fixed
assets is provided on the "unit-of-production" method based on
total proved reserves. Accretion represents the increase in the
asset retirement obligation liability each reporting period due to
the passage of time. The depletion, depreciation and accretion
("DD&A") provision has decreased 9% for the three months ended
March 31, 2009 compared to 2008 due to the slightly lower
production. On a per boe basis, DD&A has remained constant.
Taxes Current taxes paid or payable for the quarter ended March 31,
2009 amounted to $0.3 million, compared to $0.7 million expensed
for the same period of 2008. Current taxes primarily represent
Saskatchewan resource surcharge, which is based on the petroleum
and natural gas revenues within the province of Saskatchewan. Under
the Fund's current structure, payments are made between the
operating company and the Fund transferring income tax obligations
to Unitholders and as a result no cash income taxes would be paid
by the operating company or the Fund prior to 2011. However, the
Specified Investment Flow-Through Entity ("SIFT") tax legislation
was enacted on June 22, 2007 altering the tax treatment by
subjecting income trusts to a two-tier tax structure, similar to
that of corporations, whereby the taxable portion of distributions
paid by trusts will be subject to tax at the trust level and at the
Unitholder level. The rules are effective for tax years beginning
in 2011 for existing publicly-traded trusts. Canadian generally
accepted accounting principles require that a future income tax
liability be recorded when the book value of assets exceeds the
balance of tax pools. On March 12, 2009, the Government of Canada
enacted legislation reducing the provincial component of the SIFT
tax from 13% to 10%, resulting in a future income tax reduction of
approximately $8.9 million for the three months ended March 31,
2009. Under Canadian GAAP, the future income tax impact of the
planned corporate conversion, which is anticipated to be completed
on or about June 29, 2009, is to be recorded in the fiscal period
that the conversion occurs. For the three months ended March 31,
2009, the Fund recognized a total future income tax reduction of
$11.8 million compared to $22.7 million for the same period of
2008. As at March 31, 2009, the Fund had a future income tax
liability balance of $44.1 million, compared to $55.9 million at
December 31, 2008. Net Income (Loss) Three months ended March 31
2009 2008 % change
-------------------------------------------------------------------------
Net income (loss) ($000) $ 18,890 $ (24,122) (178)% per Trust Unit
- Basic $ 0.13 $ (0.18) (172)% - Diluted $ 0.13 $ (0.18) (172)% Net
income for the three months ended March 31, 2009 was $18.9 million,
as compared to a net loss of $24.1 million for the three months
ended March 31, 2008. Although the first quarter of 2009 presented
major challenges relating to the commodity price environment that
adversely impacted revenues, we were able to deliver significant
results that contributed to our net income. Advantage had
implemented a very successful commodity price risk management
program that resulted in $23.3 million of realized derivative gains
and $24.4 million of unrealized derivative gains. The unrealized
gain on derivatives is due to continued poor commodity prices as
compared to the prices per the open derivative positions. The
recognized amounts are not cash and the actual gains or losses
realized on eventual cash settlement can vary materially due to
subsequent fluctuations in commodity prices. The Fund does not
apply hedge accounting and current accounting standards require
changes in the fair value to be included in the consolidated
statement of income and comprehensive income as an unrealized
derivative gain or loss with a corresponding derivative asset and
liability recorded on the balance sheet. These derivative contracts
will settle from April 2009 to January 2011. Through ongoing
optimization efforts, we were also able to reduce operating costs
and plan to continue these positive efforts. We also recognized
significant benefits from the lower Alberta royalty rates, reduced
interest rates on bank indebtedness, and a future income tax
reduction from a lower provincial component of the SIFT tax. Cash
Netbacks Three months ended Three months ended March 31, 2009 March
31, 2008 $000 per boe $000 per boe
-------------------------------------------------------------------------
Revenue $ 99,604 $ 36.16 $ 186,098 $ 61.72 Realized gain on
derivatives 23,346 8.48 2,407 0.80 Royalties (16,080) (5.84)
(33,881) (11.24) Operating costs (36,031) (13.08) (40,272) (13.36)
-------------------------------------------------------------------------
Operating $ 70,839 $ 25.72 $ 114,352 $ 37.92 General and
administrative(1) (6,083) (2.21) (7,093) (2.35) Interest (4,916)
(1.78) (7,766) (2.58) Interest on convertible debentures(2) (3,969)
(1.44) (4,187) (1.39) Income and capital taxes (280) (0.10) (688)
(0.23)
-------------------------------------------------------------------------
Funds from operations and cash netbacks $ 55,591 $ 20.19 $ 94,618 $
31.37
-------------------------------------------------------------------------
(1) General and administrative expense excludes non-cash unit-based
compensation expense. (2) Interest on convertible debentures
excludes non-cash accretion expense. Funds from operations and cash
netbacks decreased in total and per boe for the quarter ended March
31, 2009 compared to the first quarter of 2008. As compared to the
fourth quarter of 2008, cash netbacks decreased 16% from $23.90 per
boe for that period. The lower cash netback in total and per boe is
primarily due to much weaker crude oil and natural gas prices that
adversely impacted revenue. However, as a result of our successful
commodity price risk management program, we were able to recognize
significant gains on derivatives. Royalties also decreased during
the current quarter as would be expected since they are
significantly based on commodity prices. Operating costs, which had
increased steadily over the 2008 year, have decreased modestly as
we begin to realize benefits from our ongoing optimization efforts.
We also realized modest benefits from lower general and
administrative expense and interest expense. Contractual
Obligations and Commitments The Fund has contractual obligations in
the normal course of operations including purchases of assets and
services, operating agreements, transportation commitments, sales
contracts and convertible debentures. These obligations are of a
recurring and consistent nature and impact cash flow in an ongoing
manner. The following table is a summary of the Fund's remaining
contractual obligations and commitments. Advantage has no
guarantees or off-balance sheet arrangements other than as
disclosed. Payments due by period ($ millions) Total 2009 2010 2011
2012
-------------------------------------------------------------------------
Building leases $ 9.4 $ 2.9 $ 3.9 $ 1.5 $ 1.1 Capital leases 5.7
1.6 2.2 1.9 - Pipeline/transportation 4.8 2.3 2.0 0.5 - Convertible
debentures(1) 214.3 82.1 69.9 62.3 -
-------------------------------------------------------------------------
Total contractual obligations $ 234.2 $ 88.9 $ 78.0 $ 66.2 $ 1.1
-------------------------------------------------------------------------
(1) As at March 31, 2009, Advantage had $214.3 million convertible
debentures outstanding (excluding interest payable during the
various debenture terms). Each series of convertible debentures are
convertible to Trust Units based on an established conversion
price. All remaining obligations related to convertible debentures
can be settled through the payment of cash or issuance of Trust
Units at Advantage's option. (2) Bank indebtedness of $615.4
million has been excluded from the contractual obligations table as
the credit facilities constitute a revolving facility for a 364 day
term which is extendible annually for a further 364 day revolving
period at the option of the syndicate. If not extended, the
revolving credit facility is converted to a two year term facility
with the first payment due one year and one day after commencement
of the term. Liquidity and Capital Resources The following table is
a summary of the Fund's capitalization structure. ($000, except as
otherwise indicated) March 31, 2009
-------------------------------------------------------------------------
Bank indebtedness (long-term) $ 615,438 Working capital deficit(1)
128,455
-------------------------------------------------------------------------
Net debt $ 743,893
-------------------------------------------------------------------------
Trust Units outstanding (000) 145,203 Trust Units closing market
price ($/Trust Unit) $ 3.07
-------------------------------------------------------------------------
Market value $ 445,773
-------------------------------------------------------------------------
Convertible debentures maturity value (long-term) $ 132,221 Capital
lease obligations (long term) 3,612
-------------------------------------------------------------------------
Total capitalization $ 1,325,499
-------------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
and the current portion of capital lease obligations and
convertible debentures. 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. 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, adjusting or discontinuing the amount of
monthly distributions, suspending or renewing its distribution
reinvestment plan, adjusting capital spending, or disposing of
assets. The capital structure is reviewed by Management and the
Board of Directors on an ongoing basis. The ongoing global
recession has significantly impacted the ability to raise capital
although there have been recent signs of improvements. Despite this
situation, the Fund continues to generate funds from operations
sufficient to fund our operations and a reduced capital program.
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. This continual financial assessment
process further enables the Fund to mitigate risks. The Fund
continues to satisfy all liabilities and commitments as they come
due. We have an established $710 million credit facility agreement
with a syndicate of financial institutions; the balance of which
utilized at March 31, 2009 was $615.4 million. This facility will
be subject for renewal again in June 2009. The Fund additionally
has several convertible debentures that will mature in 2009,
whereby we have the option to settle such obligations by cash or
through the issuance of Trust Units. Management has budgeted for a
capital program of $100 to $130 million for fiscal 2009, as it is
important to bring on additional production to offset natural
reserve declines and to grow the Fund. Management has significantly
reduced the capital program from 2008 and will continually monitor
our capital expenditures and make adjustments as needed in order to
remain self-sufficient within our funds from operations through the
foreseeable future. The current economic situation has also placed
additional pressure on commodity prices. Crude oil has dropped from
a historic high in 2008 to approximately US$58/bbl. The impact from
the decrease in WTI will be somewhat mitigated for Advantage due to
the strengthening US dollar relative to the Canadian dollar.
Natural gas prices that had been improving early in 2008, have now
declined due to the ailing economy as well as increased inventory
levels from strong injections and mild weather. Natural gas has
dropped with AECO gas presently trading at approximately $4.25/GJ.
The outlook for the Fund from prolonged weak commodity prices would
be reductions in operating netbacks and funds from operations.
Management has partially mitigated this risk through our commodity
hedging program but the lower commodity price environment has still
had a significant negative impact. In order to strengthen our
financial position and balance our cash flows, the monthly
distribution has been discontinued to repay debt and focus capital
spending on our Montney natural gas resource play. In summary, we
have implemented a strategy to maximize self sufficiency such that
funds from operations will satisfy our capital program, reduce
debt, and meet other expenditure requirements. We do not anticipate
any problems satisfying obligations as they become due. A
successful hedging program was also executed to help protect our
funds from operations. As a result, we feel that Advantage has
implemented adequate strategies to protect our business as much as
possible in this environment. However, as with all companies, we
are still exposed to risks as a result of the current economic
situation and the potential duration. We continue to closely
monitor the possible impact on our business and strategy, and will
make adjustments as necessary with prudent management. Unitholders'
Equity and Convertible Debentures Advantage has utilized a
combination of Trust Units, convertible debentures and bank debt to
finance acquisitions and development activities. As at March 31,
2009, the Fund had 145.2 million Trust Units outstanding. During
the three months ended March 31, 2009, 1,263,158 Trust Units were
issued as a result of the Premium Distribution(TM), Distribution
Reinvestment and Optional Trust Unit Purchase Plan (the "Plan"),
generating $5.2 million reinvested in the Fund and representing an
approximate 17% participation rate (March 31, 2008 - 1,006,673
Trust Units were issued under the Plan, generating $9.6 million
reinvested in the Fund). As at May 14, 2009, Trust Units
outstanding have not changed from March 31, 2009. At March 31,
2009, the Fund had $214.3 million convertible debentures
outstanding that were immediately convertible to 9.2 million Trust
Units based on the applicable conversion prices (December 31, 2008
- $219.2 million outstanding and convertible to 9.5 million Trust
Units). During the three months ended March 31, 2009, there were no
conversions of debentures (March 31, 2008 - $25,000 converted
resulting in the issuance of 1,001 Trust Units). The principal
amount of 8.25% convertible debentures matured on February 1, 2009
and the Fund settled the obligation by issuing 946,887 Trust Units.
As at May 14, 2009, the convertible debentures outstanding have not
changed from March 31, 2009. We have $29.8 million of 8.75%
debentures that will mature on June 30, 2009 and $52.3 million of
7.50% debentures that mature on October 1, 2009. These obligations
can be settled through the payment of cash or issuance of Trust
Units at Advantage's option. Bank Indebtedness, Credit Facility and
Other Obligations At March 31, 2009, Advantage had bank
indebtedness outstanding of $615.4 million. Bank indebtedness
increased $28.0 million since December 31, 2008 as a significant
portion of our 2009 capital expenditure program was incurred during
the first quarter. The Fund has a $710 million credit facility
agreement consisting of a $690 million extendible revolving loan
facility and a $20 million operating loan facility. The current
credit facilities are secured by a $1 billion floating charge
demand debenture, a general security agreement and a subordination
agreement from the Fund covering all assets and cash flows. As
well, the borrowing base for the Fund's credit facilities is
determined through utilizing our regular reserve estimates. The
banking syndicate thoroughly evaluates the reserve estimates based
upon their own commodity price expectations to determine the amount
of the borrowing base. Revision or changes in the reserve estimates
and commodity prices can have either a positive or a negative
impact on the borrowing base of the Fund. The next annual review is
scheduled to occur in June 2009. There can be no assurances that
the $710 million credit facility will be renewed at the current
borrowing base level given the present commodity price environment.
On March 18, 2009, we announced our intention to dispose of certain
assets. The net proceeds from these sales or other oil and natural
gas property sales will initially be used to reduce our outstanding
bank debt to improve Advantage's financial flexibility. Advantage
had a working capital deficiency of $128.5 million as at March 31,
2009. Our working capital includes items expected for normal
operations such as trade receivables, prepaids, deposits, trade
payables and accruals as well as the current portion of capital
lease obligations. Working capital varies primarily due to the
timing of such items, the current level of business activity
including our capital program, commodity price volatility, and
seasonal fluctuations. We do not anticipate any problems in meeting
future obligations as they become due given the strength of our
funds from operations. It is also important to note that working
capital is effectively integrated with Advantage's operating credit
facility, which assists with the timing of cash flows as required.
The increase in our working capital deficiency is due to the
additional inclusion of $82.1 million in principal amount of
convertible debentures that mature during the remainder of 2009 and
are classified as a current liability. We have $29.8 million of
8.75% debentures that will mature on June 30, 2009 and $52.3
million of 7.50% debentures that mature on October 1, 2009.
Advantage has capital lease obligations on various pieces of
equipment used in its operations. The total amount of principal
obligation outstanding at March 31, 2009 is $5.3 million, bearing
interest at effective rates ranging from 5.5% to 6.7%, and is
collateralized by the related equipment. The leases expire at dates
ranging from December 2009 to August 2010. Capital Expenditures
Three months ended March 31 ($000) 2009 2008
-------------------------------------------------------------------------
Land and seismic $ 1,667 $ 4,170 Drilling, completions and
workovers 37,612 36,744 Well equipping and facilities 13,297 25,598
Other 67 391
-------------------------------------------------------------------------
$ 52,643 $ 66,903 Property dispositions (759) (91)
-------------------------------------------------------------------------
Total capital expenditures $ 51,884 $ 66,812
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Advantage's exploitation and development program focuses on areas
where past activity has yielded long-life reserves with high cash
netbacks. We are very well positioned to selectively exploit the
highest value-generating drilling opportunities given the size,
strength and diversity of our asset base as evidenced by our
success at Glacier, Nevis and Martin Creek. As a result, the Fund
has a high level of flexibility to allocate its capital program and
ensure a risk-balanced platform of projects. Our preference is to
operate a high percentage of our properties such that we can
maintain control of capital expenditures, operations and cash
flows. Advantage's acquisition strategy has been to acquire
long-life properties with strong drilling opportunities while
retaining a balance of year round access and risk. For the three
month period ended March 31, 2009, the Fund spent a net $51.9
million and drilled a total of 9.6 net (11 gross) wells at a 100%
success rate. Total capital spending in the quarter included $40.6
million at Glacier, $5.0 million at Martin Creek, and $0.7 million
at Nevis. Glacier capital spending included 3 net (3 gross)
horizontal wells and 2 net (2 gross) vertical wells during the
quarter. Two new Montney horizontal wells were brought on-stream at
combined rates of 8 to 10 mmcf/d at the end of January 2009.
Facilities work involving the expansion of compression facilities
and our pipeline gathering system was completed at the end of the
quarter and has taken our overall facility capacity to 25 mmcf/d
after commissioning the expansion in the second quarter of 2009.
With the facilities work completed, our Montney wells drilled in
the fourth quarter of 2008 and the first quarter of 2009 will
utilize all available capacity. The development program at Glacier
is on-track and design work is underway to allow production to be
increased to 50 mmcf/d in 2010. Our new wells brought on-stream
after March 31, 2009 will qualify for the Alberta royalty incentive
program which results in a 5% royalty rate for one year or 0.5 bcf
of gas production. At Martin Creek, 3.6 net (4 gross) wells were
drilled and have been brought on-stream before the end of the
quarter to help offset declines during the remainder of the year.
At Nevis, activity focused on increasing battery capacity and
preparatory work for new Wabamun light oil and coal bed methane
wells which may be drilled during the remainder of 2009. Sources
and Uses of Funds The following table summarizes the various
funding requirements during the three months ended March 31, 2009
and 2008 and the sources of funding to meet those requirements:
Three months ended March 31 ($000) 2009 2008
-------------------------------------------------------------------------
Sources of funds Funds from operations $ 55,591 $ 94,618 Increase
in bank indebtedness 27,291 16,074 Property dispositions 759 91
Decrease in working capital - 2,035 Units issued, net of costs -
(42)
-------------------------------------------------------------------------
$ 83,641 $ 112,776
-------------------------------------------------------------------------
Uses of funds Expenditures on property and equipment $ 52,643 $
66,903 Distributions to Unitholders 23,481 40,302 Increase in
working capital 4,620 - Expenditures on asset retirement 2,577
4,965 Reduction of capital lease obligations 320 606
-------------------------------------------------------------------------
$ 83,641 $ 112,776
-------------------------------------------------------------------------
The Fund generated lower funds from operations during the three
months ended March 31, 2009 compared to the same period of 2008,
due to a sharp decrease in commodity prices. Consequently, our bank
indebtedness increased as a result to assist with the timing of
first quarter cash flow requirements. The major use of funds during
the first quarter was expenditures on property and equipment
whereby we spent approximately 50% of our entire 2009 capital
budget. As a result, we will see less capital expenditures over the
remainder of the year. Distributions were lower in the first
quarter of 2009 as we reduced the distribution level given the
current commodity price environment and subsequently suspended all
monthly distributions indefinitely, in order to maintain our
budgeted capital program including significant investment at our
Glacier Montney natural gas property and to repay bank
indebtedness. Quarterly Performance 2009 2008 ($000, except as
otherwise indicated) Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Daily production Natural gas (mcf/d) 117,968 120,694 122,627
123,104 Crude oil and NGLs (bbls/d) 10,942 11,413 11,980 11,498
Total (boe/d) 30,603 31,529 32,418 32,015 Average prices Natural
gas ($/mcf) Excluding hedging $ 5.36 $ 7.15 $ 8.65 $ 10.33
Including hedging $ 6.52 $ 7.61 $ 7.55 $ 9.18 AECO monthly index $
5.64 $ 6.79 $ 9.27 $ 9.35 Crude oil and NGLs ($/bbl) Excluding
hedging $ 43.41 $ 53.65 $ 107.96 $ 110.15 Including hedging $ 54.54
$ 61.67 $ 100.02 $ 101.34 WTI ($US/bbl) $ 43.21 $ 58.75 $ 118.13 $
124.00 Total revenues (before royalties) $ 122,950 $ 149,205 $
195,384 $ 208,868 Net income (loss) $ 18,890 $ (95,477) $ 113,391 $
(14,369) per Trust Unit - basic $ 0.13 $ (0.67) $ 0.81 $ (0.10) -
diluted $ 0.13 $ (0.67) $ 0.79 $ (0.10) Funds from operations $
55,591 $ 69,370 $ 93,345 $ 103,754 Distributions declared $ 17,266
$ 45,514 $ 50,743 $ 50,364 2008 2007 ($000, except as otherwise
indicated) Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Daily production Natural gas (mcf/d) 125,113 128,556 115,991
108,978 Crude oil and NGLs (bbls/d) 12,281 12,895 10,014 8,952
Total (boe/d) 33,133 34,321 29,346 27,115 Average prices Natural
gas ($/mcf) Excluding hedging $ 7.90 $ 6.23 $ 5.62 $ 7.54 Including
hedging $ 8.23 $ 6.97 $ 6.35 $ 7.52 AECO monthly index $ 7.13 $
6.00 $ 5.62 $ 7.37 Crude oil and NGLs ($/bbl) Excluding hedging $
85.99 $ 73.40 $ 69.03 $ 61.84 Including hedging $ 84.83 $ 70.40 $
68.51 $ 61.93 WTI ($US/bbl) $ 97.96 $ 90.63 $ 75.33 $ 65.02 Total
revenues (before royalties) $ 188,505 $ 165,951 $ 130,830 $ 125,075
Net income (loss) $ (24,122) $ 13,795 $ (26,202) $ 4,531 per Trust
Unit - basic $ (0.18) $ 0.10 $ (0.22) $ 0.04 - diluted $ (0.18) $
0.10 $ (0.22) $ 0.04 Funds from operations $ 94,618 $ 80,519 $
62,345 $ 62,634 Distributions declared $ 50,021 $ 57,875 $ 55,017 $
52,096 The table above highlights the Fund's performance for the
first quarter of 2009 and also for the preceding seven quarters.
Production during the 2006/2007 winter was steady until we
experienced a decrease in the second quarter of 2007 due to several
facility turnarounds at that time. The Sound acquisition closed on
September 5, 2007, and significantly increased production for the
third and fourth quarters of 2007. Production has gradually
decreased through the first half of 2008 due to natural declines,
wet and cold weather delays, and facility turnarounds. Production
increased modestly in the third quarter of 2008 as new wells were
brought on production and most facility turnarounds were completed.
During the fourth quarter of 2008 and the first quarter of 2009,
production again decreased as we experienced freezing conditions
from early cold weather in December and a slow recovery from such
cold weather conditions. An extended third party facility outage
has continued into 2009 and it is expected that the outage will not
be completed until June 1, 2009. Financial results, particularly
revenues and funds from operations, have increased through to the
second quarter of 2008, as both commodity prices and production
steadily increased over that timeframe. However, revenues and funds
from operations slightly declined in the third quarter of 2008, as
commodity prices began to decline in response to the financial
crisis that materialized in the fall of 2008. This trend worsened
in the fourth quarter, as a full global recession set in, and
commodity prices continued on a downward trend. We experienced a
net loss in the third quarter of 2007 due to a significant drop in
natural gas prices realized at that time, amortization of the
management internalization consideration and increased depletion
and depreciation expense. Net income increased in the fourth
quarter of 2007 due to the full integration of the Sound
acquisition and moderately improved commodity prices. Net losses
were realized in the first and second quarters of 2008, primarily
as a result of significant unrealized losses on commodity
derivative contracts for future periods. Commodity price declines
in the third quarter of 2008 gave rise to significant unrealized
gains on these same derivative contracts, and in turn the Fund
reported record high net income. We recognized a considerable net
loss in the fourth quarter of 2008, a combined result of falling
commodity prices and an impairment of our entire balance of
goodwill. In the first quarter of 2009, the global economy showed
no clear sign of recovery and commodity prices, particularly
natural gas, were weak in comparison to prior quarters. However,
Advantage was still able to recognize net income as we recognized
both realized and unrealized gains on our derivative contracts and
moderately lower expenses, including operating costs. Critical
Accounting Estimates The preparation of financial statements in
accordance with GAAP requires Management to make certain judgments
and estimates. Changes in these judgments and estimates could have
a material impact on the Fund's financial results and financial
condition. Management relies on the estimate of reserves as
prepared by the Fund's independent qualified reserves evaluator.
The process of estimating reserves is critical to several
accounting estimates. The process of estimating reserves is complex
and requires significant judgments and decisions based on available
geological, geophysical, engineering and economic data. These
estimates may change substantially as additional data from ongoing
development and production activities becomes available and as
economic conditions impact crude oil and natural gas prices,
operating costs, royalty burden changes, and future development
costs. Reserve estimates impact net income through depletion and
depreciation of fixed assets, the provision for asset retirement
costs and related accretion expense, and impairment calculations
for fixed assets and goodwill. The reserve estimates are also used
to assess the borrowing base for the Fund's credit facilities.
Revision or changes in the reserve estimates can have either a
positive or a negative impact on net income and the borrowing base
of the Fund. Management's process of determining the provision for
future income taxes, the provision for asset retirement obligation
costs and related accretion expense, and the fair values assigned
to any acquired company's assets and liabilities in a business
combination is based on estimates. These estimates are significant
and can include reserves, future production rates, future crude oil
and natural gas prices, future costs, future interest rates, future
tax rates and other relevant assumptions. Revisions or changes in
any of these estimates can have either a positive or a negative
impact on asset and liability values and net income. In accordance
with GAAP, derivative assets and liabilities are recorded at their
fair values at the reporting date, with unrealized gains and losses
recognized directly into net income and comprehensive income in the
same period. The fair value of derivatives outstanding is an
estimate based on pricing models, estimates, assumptions and market
data available at that time. As such, the recognized amounts are
not cash and the actual gains or losses realized on eventual cash
settlement can vary materially due to subsequent fluctuations in
commodity prices as compared to the valuation assumptions.
International Financial Reporting Standards ("IFRS") In February
2008, the Accounting Standards Board of the Canadian Institute of
Chartered Accountants confirmed that publicly accountable entities
will be required to adopt IFRS effective January 1, 2011, including
preparation of comparative financial information. Management has
engaged its key personnel responsible for financial reporting and
developed an overall plan to address IFRS implementation. The
initial stage of the plan involved staff training and ongoing
education. Key personnel received professional education on IFRS
accounting principles and standards, both in general and for the
oil and gas industry in particular. Review of changes to IFRS has
been incorporated into existing processes of internal control over
financial reporting. A preliminary project plan for IFRS
implementation has been drafted and will be subject to ongoing
revision as there are developments. As well, appropriate operating
personnel have been engaged, as necessary, to determine how to
implement the requirements of IFRS into the Fund's manual and
information systems that collect and process financial data. We
expect to have continual discussion with our external and internal
auditors throughout the process regarding IFRS and implementation.
The most significant change identified will be accounting for
property, plant and equipment. The Fund, like many Canadian oil and
gas reporting issuers, applies the "full cost" concept in
accounting for its oil and gas assets. Under full cost, capital
expenditures are maintained in a single cost centre for each
country, and the cost centre is subject to a single depletion
calculation and impairment test. IFRS will require the Fund to make
a much more detailed assessment of its oil and gas property, plant
and equipment. For depletion and depreciation, the Fund must
identify asset components, and determine an appropriate
depreciation or depletion method for each component. With regard to
impairment test calculations, we must identify "Cash Generating
Units", which are defined as the smallest group of assets that
produce independent cash flows. An impairment test must be
performed individually for all cash generating units. The
recognition of impairments in a prior year can be reversed
subsequently depending on such calculations. It is also important
to note that the International Accounting Standards Board ("IASB")
is currently undertaking an extractive industries project, to
develop accounting standards specifically for businesses like that
of the Fund. However, the project will not be complete prior to
IFRS adoption in Canada. We have also identified a number of other
areas whereby differences between Canadian GAAP and IFRS are likely
to exist for Advantage. However, currently we are concentrating on
the accounting for property, plant and equipment and will evaluate
these other areas in due course and develop more detailed plans to
address the identified issues. Disclosure Controls and Internal
Controls over Financial Reporting Disclosure controls and
procedures have been designed to provide reasonable assurance that
information required to be disclosed by the Fund is recorded,
processed, summarized and reported within the time periods
specified under the Canadian securities law. Advantage's Chief
Executive Officer and Chief Financial Officer have concluded, based
on their evaluation, that the disclosure controls and procedures as
of the end of March 31, 2009, are effective and provide reasonable
assurance that material information related to the Fund is made
known to them by others within Advantage. Advantage's Chief
Executive Officer and Chief Financial Officer are responsible for
establishing and maintaining internal controls over financial
reporting ("ICFR"). They have, as at the quarter ended March 31,
2009, designed ICFR or caused it to be designed under their
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with Canadian GAAP.
The control framework Advantage's officers used to design the ICFR
is the Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations. Advantage's Chief Executive
Officer and Chief Financial Officer are required to disclose any
change in the internal controls over financial reporting that
occurred during our most recent interim period that has materially
affected, or is reasonably likely to affect, the Fund's internal
controls over financial reporting. No material changes in the
internal controls were identified during the period ended March 31,
2009 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
It should be noted that a control system, including Advantage's
disclosure and internal controls and procedures, no matter how well
conceived or operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system will be met and
it should be not be expected that the disclosure and internal
controls and procedures will prevent all errors or fraud. Outlook
On March 18, 2009, we announced the intention to dispose of
properties producing up to 11,900 boe/d of light oil and natural
gas properties located in Northeast British Columbia, West Central
Alberta and Northern Alberta. The net proceeds from these sales or
other oil and natural gas property sales will initially be used to
reduce outstanding bank debt to improve Advantage's financial
flexibility. Proposals are anticipated by mid May 2009 and the
selected assets will be available in four distinct packages varying
in size from approximately 1,600 to 5,400 boe/d of production.
Assuming asset sales of approximately 10,000 to 11,900 boe/d of
production are completed, we expect production of approximately
20,000 to 22,000 boe/d from a focused asset base (60% natural gas,
40% oil and natural gas liquids). Industry supply, servicing and
maintenance costs increased through much of 2008 driven primarily
from higher crude oil and natural gas prices. Also, there were
significant increases from electrical power costs, processing fees,
steel and chemicals. We initiated an aggressive optimization
program in 2008 and are beginning to see benefits in terms of cost
reductions and efficiencies. We expect to see some further easing
of operating costs as the lower commodity price environment is
expected to remain for a sustained period. Advantage's funds from
operations in 2009 will continue to be impacted by the volatility
of crude oil and natural gas prices and the $US/$Canadian exchange
rate. Additional hedging has been completed for 2009 and 2010 to
stabilize cash flows and ensure that the Fund's capital program is
fully funded. Approximately 56% of our natural gas production, net
of royalties, is now hedged for the 2009 calendar year at an
average fixed price of $8.09/mcf. Advantage has also hedged 46% of
its 2009 crude oil production, net of royalties, at an average
floor price of $69.38/bbl. For 2010, we have hedged 48% of our
natural gas production, net of royalties, at an average fixed price
of $7.46/mcf and 26% of our crude oil production, net of royalties,
at an average fixed price of $67.83/bbl. We will provide updated
guidance subsequent to the results of our asset disposition program
and our corporate conversion. Looking forward, Advantage's high
quality assets combined with a significant unconventional and
conventional inventory, strong hedging program and excellent tax
pools positions us well to create value growth for our Unitholders.
Additional Information Additional information relating to Advantage
can be found on SEDAR at http://www.sedar.com/ and the Fund's
website at http://www.advantageincome.com/. Such other information
includes the annual information form, the annual information
circular - proxy statement, press releases, material contracts and
agreements, and other financial reports. The annual information
form will be of particular interest for current and potential
Unitholders as it discusses a variety of subject matter including
the nature of the business, structure of the Fund, description of
our operations, general and recent business developments, risk
factors, reserves data and other oil and gas information. May 14,
2009 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets
March 31, December 31, (thousands of dollars) 2009 2008
-------------------------------------------------------------------------
(unaudited) Assets Current assets Accounts receivable $ 68,149 $
84,689 Prepaid expenses and deposits 10,734 11,571 Derivative asset
(note 10) 66,230 41,472
-------------------------------------------------------------------------
145,113 137,732 Derivative asset (note 10) 10,835 1,148 Fixed
assets (note 3) 2,149,751 2,163,866
-------------------------------------------------------------------------
$ 2,305,699 $ 2,302,746
-------------------------------------------------------------------------
Liabilities Current liabilities Accounts payable and accrued
liabilities $ 124,049 $ 146,046 Distributions payable to
Unitholders - 11,426 Current portion of capital lease obligations
(note 4) 1,721 1,747 Current portion of convertible debentures
(note 5) 81,568 86,125 Derivative liability (note 10) 5,366 611
Future income taxes 17,750 11,939
-------------------------------------------------------------------------
230,454 257,894 Derivative liability (note 10) 6,332 1,039 Capital
lease obligations (note 4) 3,612 3,906 Bank indebtedness (note 6)
612,008 584,717 Convertible debentures (note 5) 129,221 128,849
Asset retirement obligations (note 7) 75,198 73,852 Future income
taxes 26,398 43,976
-------------------------------------------------------------------------
1,083,223 1,094,233
-------------------------------------------------------------------------
Unitholders' Equity Unitholders' capital (note 8) 2,087,858
2,075,877 Convertible debentures equity component (note 5) 9,155
9,403 Contributed surplus (note 8) 893 287 Accumulated deficit
(note 9) (875,430) (877,054)
-------------------------------------------------------------------------
1,222,476 1,208,513
-------------------------------------------------------------------------
$ 2,305,699 $ 2,302,746
-------------------------------------------------------------------------
Commitments (note 12) See accompanying Notes to Consolidated
Financial Statements Consolidated Statements of Income (Loss),
Comprehensive Income (Loss) and Accumulated Deficit Three months
Three months ended ended (thousands of dollars, except for March
31, March 31, per Trust Unit amounts) (unaudited) 2009 2008
-------------------------------------------------------------------------
Revenue Petroleum and natural gas $ 99,604 $ 186,098 Realized gain
on derivatives (note 10) 23,346 2,407 Unrealized gain (loss) on
derivatives (note 10) 24,397 (61,186) Royalties (16,080) (33,881)
-------------------------------------------------------------------------
131,267 93,438
-------------------------------------------------------------------------
Expenses Operating 36,031 40,272 General and administrative 7,380
7,232 Management internalization (note 8) 964 2,491 Interest 4,916
7,766 Interest and accretion on convertible debentures 4,651 4,907
Depletion, depreciation and accretion 69,922 76,880
-------------------------------------------------------------------------
123,864 139,548
-------------------------------------------------------------------------
Income (loss) before taxes 7,403 (46,110) Future income tax
reduction (11,767) (22,676) Income and capital taxes 280 688
-------------------------------------------------------------------------
(11,487) (21,988)
-------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) 18,890 (24,122)
Accumulated deficit, beginning of period (877,054) (659,835)
Distributions declared (17,266) (50,021)
-------------------------------------------------------------------------
Accumulated deficit, end of period $ (875,430) $ (733,978)
-------------------------------------------------------------------------
Net income (loss) per Trust Unit (note 8) Basic and diluted $ 0.13
$ (0.18)
-------------------------------------------------------------------------
see accompanying Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows Three months Three months
ended ended March 31, March 31, (thousands of dollars) (unaudited)
2009 2008
-------------------------------------------------------------------------
Operating Activities Net income (loss) $ 18,890 $ (24,122) Add
(deduct) items not requiring cash: Unrealized loss (gain) on
derivatives (24,397) 61,186 Unit-based compensation 1,297 139
Management internalization 964 2,491 Accretion on convertible
debentures 682 720 Depletion, depreciation and accretion 69,922
76,880 Future income tax reduction (11,767) (22,676) Expenditures
on asset retirement (2,577) (4,965) Changes in non-cash working
capital (11,135) (8,060)
-------------------------------------------------------------------------
Cash provided by operating activities 41,879 81,593
-------------------------------------------------------------------------
Financing Activities Units issued, net of costs - (42) Increase in
bank indebtedness 27,291 16,074 Reduction of capital lease
obligations (320) (606) Distributions to Unitholders (23,481)
(40,302)
-------------------------------------------------------------------------
Cash provided by (used in) financing activities 3,490 (24,876)
-------------------------------------------------------------------------
Investing Activities Expenditures on property and equipment
(52,643) (66,903) Property dispositions 759 91 Changes in non-cash
working capital 6,515 10,095
-------------------------------------------------------------------------
Cash used in investing activities (45,369) (56,717)
-------------------------------------------------------------------------
Net change in cash - - Cash, beginning of period - -
-------------------------------------------------------------------------
Cash, end of period $ - $ -
-------------------------------------------------------------------------
Supplementary Cash Flow Information Interest paid $ 8,247 $ 8,566
Taxes paid $ 375 $ 154 see accompanying Notes to Consolidated
Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009 (unaudited) All tabular amounts in thousands except
as otherwise indicated. The interim consolidated financial
statements of Advantage Energy Income Fund ("Advantage" or the
"Fund") have been prepared by management in accordance with
Canadian generally accepted accounting principles ("GAAP") using
the same accounting policies as those set out in note 2 to the
consolidated financial statements for the year ended December 31,
2008, except as described below. The interim consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements of Advantage for the year ended
December 31, 2008 as set out in Advantage's Annual Report. 1.
Business and Structure of the Fund Advantage was formed on May 23,
2001 as a result of a plan of arrangement. For Canadian tax
purposes, Advantage is an open-ended unincorporated mutual fund
trust created under the laws of the Province of Alberta pursuant to
a Trust Indenture originally dated April 17, 2001, and as
occasionally amended, between Advantage Oil & Gas Ltd. ("AOG")
and Computershare Trust Company of Canada, as trustee. The Fund
commenced operations on May 24, 2001. The beneficiaries of the Fund
are the holders of the Trust Units (the "Unitholders"). The
principal undertaking of the Fund is to indirectly acquire and hold
interests in petroleum and natural gas properties and assets
related thereto. The business of the Fund is carried on by its
wholly-owned subsidiary, AOG. The Fund's primary assets are
currently the common shares of AOG, a royalty in the producing
properties of AOG (the "AOG Royalty") and notes of AOG (the "AOG
Notes"). The Fund's strategy, through AOG, is to minimize exposure
to exploration risk while focusing on growth through acquisitions
and development of producing crude oil and natural gas properties.
The original purpose of the Fund was to distribute available cash
flow to Unitholders on a monthly basis in accordance with the terms
of the Trust Indenture. The Fund's available cash flow includes
principal repayments and interest income earned from the AOG Notes,
royalty income earned from the AOG Royalty, and any dividends
declared on the common shares of AOG less any expenses of the Fund
including interest on convertible debentures. Cash received on the
AOG Notes, AOG Royalty and common shares of AOG result in the
effective transfer of the economic interest in the properties of
AOG to the Fund. However, while the royalty is a contractual
interest in the properties owned by AOG, it does not confer
ownership in the underlying resource properties. Any distributions
from the Fund to Unitholders are entirely discretionary and are
determined by Management and the Board of Directors. We closely
monitor our distribution policy considering forecasted cash flows,
optimal debt levels, capital spending activity, taxability to
Unitholders, working capital requirements, and other potential cash
expenditures. Distributions are based on the cash available after
retaining a portion to meet such spending requirements. The level
of distributions are primarily determined by cash flows received
from the production of oil and natural gas from existing Canadian
resource properties and are highly dependent upon our success in
exploiting the current reserve base and acquiring additional
reserves. Furthermore, monthly distributions we pay to Unitholders
are highly dependent upon the prices received for such oil and
natural gas production. On March 18, 2009, Advantage announced the
Board of Directors had approved conversion to a growth oriented
corporation and a strategic asset disposition program combined with
suspension of the monthly distribution to increase financial
flexibility. The corporate conversion will be subject to approval
by at least two-thirds of the Fund's Unitholders as well as
customary court and regulatory approvals, anticipated to be
completed on or about June 29, 2009. The conversion will enable
Advantage to pursue a business plan that is focused on the
development and growth of the Montney natural gas resource play at
Glacier, Alberta. The Fund has engaged an advisory firm to assist
in the disposal of light oil and natural gas properties located in
Northeast British Columbia, West Central Alberta and Northern
Alberta with proposals anticipated by mid May 2009. Going forward,
Advantage does not anticipate paying dividends in the immediate
future and will instead direct cash flow to capital expenditures
and debt repayment. 2. Changes in Accounting Policies (a) Goodwill
and intangible assets In February 2008, the Canadian Institute of
Chartered Accountants ("CICA") issued Section 3064, Goodwill and
Intangible Assets, replacing Section 3062, Goodwill and Other
Intangible Assets and Section 3450, Research and Development Costs.
The new Section became effective January 1, 2009. Management has
implemented the new Section and there was no impact for the
financial statements of the Fund. (b) Recent accounting
pronouncements issued but not implemented (i) International
Financial Reporting Standards ("IFRS") In February 2008, the CICA
Accounting Standards Board confirmed that IFRS will replace
Canadian GAAP effective January 1, 2011 for publicly accountable
enterprises. Management is currently evaluating the effects of all
current and pending pronouncements of the International Accounting
Standards Board on the financial statements of the Fund, and has
developed a plan for implementation. (c) Comparative figures
Certain comparative figures have been reclassified to conform to
the current period presentation. 3. Fixed Assets Accumulated
Depletion and Net Book March 31, 2009 Cost Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas properties $ 3,354,098 $ 1,208,966 $
2,145,132 Furniture and equipment 11,638 7,019 4,619
---------------------------------------------------------------------
$ 3,365,736 $ 1,215,985 $ 2,149,751
---------------------------------------------------------------------
Accumulated Depletion and Net Book December 31, 2008 Cost
Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas properties $ 3,299,657 $ 1,140,710 $
2,158,947 Furniture and equipment 11,572 6,653 4,919
---------------------------------------------------------------------
$ 3,311,229 $ 1,147,363 $ 2,163,866
---------------------------------------------------------------------
4. Capital Lease Obligations The Fund has capital leases on a
variety of fixed assets. Future minimum lease payments at March 31,
2009 consist of the following: 2009 $ 1,640 2010 2,200 2011 1,925
----------------------------------------- 5,765 Less amounts
representing interest (432)
----------------------------------------- 5,333 Current portion
(1,721) ----------------------------------------- $ 3,612
----------------------------------------- 5. Convertible Debentures
The balance of debentures outstanding at March 31, 2009 and changes
in the liability and equity components during the three months
ended March 31, 2009 are as follows: 8.25% 8.75% 7.50%
--------------------------------------------------------- Trading
symbol AVN.DBB AVN.DBF AVN.DBC Debentures outstanding $ - $ 29,839
$ 52,268 ---------------------------------------------------------
Liability component: Balance at December 31, 2008 $ 4,859 $ 29,687
$ 51,579 Accretion of discount 8 75 227 Matured (4,867) - -
--------------------------------------------------------- Balance
at March 31, 2009 $ - $ 29,762 $ 51,806
--------------------------------------------------------- Equity
component: Balance at December 31, 2008 $ 248 $ 852 $ 2,248 Expired
(248) - - ---------------------------------------------------------
Balance at March 31, 2009 $ - $ 852 $ 2,248
--------------------------------------------------------- 6.50%
7.75% 8.00% Total
---------------------------------------------------------------------
Trading symbol AVN.DBE AVN.DBD AVN.DBG Debentures outstanding $
69,927 $ 46,766 $ 15,528 $ 214,328
---------------------------------------------------------------------
Liability component: Balance at December 31, 2008 $ 68,807 $ 44,964
$ 15,078 $ 214,974 Accretion of discount 184 150 38 682 Matured - -
- (4,867)
---------------------------------------------------------------------
Balance at March 31, 2009 $ 68,991 $ 45,114 $ 15,116 $ 210,789
---------------------------------------------------------------------
Equity component: Balance at December 31, 2008 $ 2,971 $ 2,286 $
798 $ 9,403 Expired - - - (248)
---------------------------------------------------------------------
Balance at March 31, 2009 $ 2,971 $ 2,286 $ 798 $ 9,155
---------------------------------------------------------------------
During the three months ended March 31, 2009, there were no
convertible debenture conversions (March 31, 2008 - $25,000
converted resulting in the issuance of 1,001 Trust Units). The
principal amount of 8.25% convertible debentures matured on
February 1, 2009 and the Fund settled the obligation by issuing
946,887 Trust Units. 6. Bank Indebtedness March 31, December 31,
2009 2008
---------------------------------------------------------------------
Revolving credit facility $ 615,438 $ 587,404 Discount on Bankers
Acceptances (3,430) (2,687)
---------------------------------------------------------------------
Balance, end of period $ 612,008 $ 584,717
---------------------------------------------------------------------
Advantage has a credit facility agreement with a syndicate of
financial institutions which provides for a $690 million extendible
revolving loan facility and a $20 million operating loan facility.
The loan's interest rate is based on either prime, US base rate,
LIBOR or bankers' acceptance rates, at the Fund's option, subject
to certain basis point or stamping fee adjustments ranging from
0.00% to 1.50% depending on the Fund's debt to cash flow ratio. The
credit facilities are collateralized by a $1 billion floating
charge demand debenture, a general security agreement and a
subordination agreement from the Fund covering all assets and cash
flows. The credit facilities are subject to review on an annual
basis with the next renewal due in June 2009. Various borrowing
options are available under the credit facilities, including prime
rate-based advances, US base rate advances, US dollar LIBOR
advances and bankers' acceptances loans. The credit facilities
constitute a revolving facility for a 364 day term which is
extendible annually for a further 364 day revolving period at the
option of the syndicate. If not extended, the revolving credit
facility is converted to a two year term facility with the
principal payable at the end of such two year term. The credit
facilities contain 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 credit facilities
also prohibit the Fund from entering into any derivative contract
where the term of such contract exceeds two years or the aggregate
of such contracts hedge greater than 60% of the Fund's estimated
oil and gas production. Breach of any covenant will result in an
event of default in which case AOG has 20 days to remedy such
default. If the default is not remedied or waived, and if required
by the majority of lenders, the administrative agent of the lenders
has the option to declare all obligations of AOG under the credit
facilities to be immediately due and payable without further
demand, presentation, protest, or notice of any kind. Distributions
by AOG to the Fund (and effectively by the Fund to Unitholders) are
subordinated to the repayment of any amounts owing under the credit
facilities. Distributions to Unitholders are not permitted if the
Fund is in default of such credit facilities or if the amount of
the Fund's outstanding indebtedness under such facilities exceeds
the then existing current borrowing base. Interest payments under
the debentures are also subordinated to indebtedness under the
credit facilities and payments under the debentures are similarly
restricted. For the three months ended March 31, 2009, the
effective interest rate on the outstanding amounts under the
facility was approximately 3.3% (March 31, 2008 - 5.6%). 7. Asset
Retirement Obligations A reconciliation of the asset retirement
obligations is provided below: Three months ended Year ended March
31, December 31, 2009 2008
---------------------------------------------------------------------
Balance, beginning of period $ 73,852 $ 60,835 Accretion expense
1,300 4,186 Liabilities incurred 340 1,526 Change in estimates
2,283 16,564 Liabilities settled (2,577) (9,259)
---------------------------------------------------------------------
Balance, end of period $ 75,198 $ 73,852
---------------------------------------------------------------------
8. Unitholders' Equity (a) Unitholders' capital (i) Authorized
Unlimited number of voting Trust Units (ii) Issued Number of Units
Amount
---------------------------------------------------------------------
Balance at December 31, 2008 142,824,854 $ 2,077,760 Distribution
reinvestment plan 1,263,158 5,211 Issued on maturity of debentures
946,887 4,867 Issued pursuant to Restricted Trust Unit Plan 171,093
939 Management internalization forfeitures (3,155) (65)
---------------------------------------------------------------------
145,202,837 $ 2,088,712
---------------------------------------------------------------------
Management internalization escrowed Trust Units (854)
---------------------------------------------------------------------
Balance at March 31, 2009 $ 2,087,858
---------------------------------------------------------------------
On June 23, 2006, Advantage internalized the external management
contract structure and eliminated all related fees for total
original consideration of 1,933,208 Advantage Trust Units initially
valued at $39.1 million and subject to escrow provisions over a
3-year period, vesting one-third each year beginning June 23, 2007.
For the three months ended March 31, 2009, a total of 3,155 Trust
Units issued for the management internalization were forfeited
(March 31, 2008 - 4,193 Trust Units) and $1.0 million has been
recognized as management internalization expense (March 31, 2008 -
$2.5 million). As at March 31, 2009, 529,854 Trust Units remain
held in escrow (December 31, 2008 - 564,612 Trust Units). During
the three months ended March 31, 2009, 1,263,158 Trust Units (March
31, 2008 - 1,006,673 Trust Units) were issued under the Premium
Distribution(TM), Distribution Reinvestment and Optional Trust Unit
Purchase Plan, generating $5.2 million (March 31, 2008 - $9.6
million) reinvested in the Fund. The principal amount of 8.25%
convertible debentures matured on February 1, 2009 and the Fund
settled the obligation by issuing 946,887 Trust Units. (b)
Contributed surplus Three months ended Year ended March 31,
December 31, 2009 2008
---------------------------------------------------------------------
Balance, beginning of period $ 287 $ 2,005 Unit-based compensation
358 (1,256) Expiration of convertible debentures equity component
248 229 Exercise of Trust Unit Rights - (691)
---------------------------------------------------------------------
Balance, end of period $ 893 $ 287
---------------------------------------------------------------------
(c) Unit-based compensation Advantage's current employee
compensation includes a Restricted Trust Unit Plan, as approved by
the Unitholders on June 23, 2006. The purpose of the long-term
compensation plan is to retain and attract employees, to reward and
encourage performance, and to focus employees on operating and
financial performance that results in lasting Unitholder return.
Although Advantage experienced a negative return for the 2008 year,
the approved peer group also experienced likewise negative returns.
As a result, Advantage's 2008 annual return was within the top
two-thirds of the approved peer group and the Board of Directors
granted Restricted Trust Units ("RTUs") at their discretion. The
RTUs were deemed to be granted at January 15, 2009 and was valued
at $3.8 million to be issued in Trust Units at $5.49 per Trust
Unit. Unit-based compensation expense of $1.3 million has been
included in general and administration expense for the period ended
March 31, 2009 and 171,093 Trust Units were issued to employees in
January 2009 for the first one-third of the grant that vested. The
remaining two-thirds of the RTUs granted will vest over the
subsequent two yearly anniversary dates with corresponding
compensation expense recognized over the service period. Since
implementing the Plan in 2006, the grant thresholds have not been
previously met, and there have been no RTU grants made during prior
years and no related compensation expense has been recognized. (d)
Net income (loss) per Trust Unit The calculation of basic and
diluted net income (loss) per Trust Unit are derived from both
income (loss) available to Unitholders and weighted average Trust
Units outstanding calculated as follows: Three months Three months
ended ended March 31, March 31, 2009 2008
---------------------------------------------------------------------
Income (loss) available to Unitholders Basic and diluted $ 18,890 $
(24,122)
---------------------------------------------------------------------
Weighted average Trust Units outstanding Basic 143,691,270
137,599,070 Management Internalization 302,058 -
---------------------------------------------------------------------
Diluted 143,993,328 137,599,070
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The calculation of diluted net income per Trust Unit excludes all
series of convertible debentures for the three months ended March
31, 2009 and 2008 as the impact would be anti-dilutive. Total
weighted average Trust Units issuable in exchange for the
convertible debentures and excluded from the diluted net income per
Trust Unit calculation for the three months ended March 31, 2009
were 9,335,706 (March 31, 2008 - 9,846,967). As at March 31, 2009,
the total convertible debentures outstanding were immediately
convertible to 9,234,106 Trust Units (March 31, 2008 - 9,846,252).
Escrowed RTUs granted in January 2009 have been excluded from the
calculation of diluted net income per Trust Unit for the three
months ended March 31, 2009, as the impact would have been
anti-dilutive. Total weighted average Trust Units issuable in
exchange for the RTUs and excluded from the diluted net income per
Trust Unit calculation for the three months ended March 31, 2009
was 542,807. Management Internalization escrowed Trust Units have
been excluded from the calculation of diluted net income per Trust
Unit for the three months ended March 31, 2008, as the impact would
have been anti-dilutive. Total weighted average Trust Units
issuable in exchange for the Management Internalization escrowed
Trust Units and excluded from the diluted net income per Trust Unit
calculation for the three months ended March 31, 2008 was 559,073.
9. Accumulated Deficit Accumulated deficit consists of accumulated
income and accumulated distributions for the Fund since inception
as follows: March 31, December 31, 2009 2008
---------------------------------------------------------------------
Accumulated Income $ 218,301 $ 199,411 Accumulated Distributions
(1,093,731) (1,076,465)
---------------------------------------------------------------------
Accumulated Deficit $ (875,430) $ (877,054)
---------------------------------------------------------------------
For the three months ended March 31, 2009 the Fund declared $17.3
million in distributions representing $0.12 per Trust Unit (March
31, 2008 - $50.0 million in distributions representing $0.36 per
Trust Unit). 10. 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, 2009, 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 5) resulting in fair values that will vary over time as
market conditions change. As at March 31, 2009, the estimated fair
value of the total outstanding convertible debenture obligation was
$180.1 million (December 31, 2008 - $191.2 million). The fair value
of convertible debentures was determined based on the public
trading activity of such debentures. 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 internally and 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. 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 only enters
into derivative contracts with major national banks and
international energy firms to further mitigate associated 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. As at March 31, 2009,
$11.5 million or 17% of accounts receivable are outstanding for 90
days or more (December 31, 2008 - $14.2 million or 17% of accounts
receivable). The Fund believes that the entire balance is
collectible, and in some instances we have the ability to mitigate
risk through withholding production or offsetting payables with the
same parties. Accordingly, management has not provided for an
allowance for doubtful accounts at March 31, 2009. 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. Although the credit facility is a source of liquidity
risk, the facility also 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
principal payable at the end of such two year 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 2009 to 2011 (note 5).
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. The
timing of cash outflows relating to financial liabilities are as
follows: Less than One to Four to one year three years five years
Thereafter
---------------------------------------------------------------------
Accounts payable and accrued liabilities $ 124,049 $ - $ - $ -
Derivative liabilities 5,366 6,332 - - Bank indebtedness -
principal - 615,438 - - - interest 11,759 23,518 - - Convertible
debentures - principal 82,107 132,221 - - - interest 14,637 12,005
- -
---------------------------------------------------------------------
$ 237,918 $ 789,514 $ - $ -
---------------------------------------------------------------------
The Fund's bank indebtedness does not have specific maturity dates.
It is governed by a credit facility agreement with a syndicate of
financial institutions (note 6). Under the terms of the agreement,
the facility is reviewed annually, with the next review scheduled
in June 2009. The facility is revolving, and is extendible at each
annual review for a further 364 day period at the option of the
syndicate. If not extended, the credit facility is converted at
that time into a two year term facility, with the principal payable
at the end of such two year term. Management fully expects that the
facility will be extended at each annual review. 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% increase in interest rates
for the three months ended March 31, 2009 could have decreased 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, 2009 could
impact net income by approximately $12.3 million for the three
months ended March 31, 2009. 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, 2009 could impact net income by
$8.7 million for the three months ended March 31, 2009. A change of
10% in the forward power prices used to calculate the fair value of
the power derivatives at March 31, 2009 could impact net income by
$0.1 million for the three months ended March 31, 2009. 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, 2009 the Fund had the following derivatives in place:
Description of Derivative Term Volume Average Price
-------------------------------------------------------------------------
Natural gas - AECO Fixed price April 2009 to 9,478 mcf/d Cdn
$8.66/mcf December 2009 Fixed price April 2009 to 9,478 mcf/d Cdn
$8.67/mcf December 2009 Fixed price April 2009 to 9,478 mcf/d Cdn
$8.94/mcf December 2009 Fixed price April 2009 to 14,217 mcf/d Cdn
$7.59/mcf March 2010 Fixed price April 2009 to 14,217 mcf/d Cdn
$7.56/mcf March 2010 Fixed price January 2010 to 14,217 mcf/d Cdn
$8.23/mcf June 2010 Fixed price January 2010 to 18,956 mcf/d Cdn
$7.29/mcf December 2010 Fixed price April 2010 to 18,956 mcf/d Cdn
$7.25/mcf January 2011 Crude oil - WTI Collar April 2009 to 2,000
bbl/d Bought put Cdn $62.00/bbl December 2009 Sold call Cdn
$76.00/bbl Fixed price April 2009 to 2,000 bbls/d Cdn $62.80/bbl
March 2010 Fixed price April 2010 to 2,000 bbls/d Cdn $69.50/bbl
January 2011 Electricity - Alberta Pool Price Fixed price April
2009 to 2.0 MW Cdn $63.33/MWh June 2009 Fixed price March 2009 to
2.0 MW Cdn $75.43/MWh December 2009 As at March 31, 2009, the fair
value of the derivatives outstanding resulted in an asset of
approximately $77,065,000 (December 31, 2008 - $42,620,000) and a
liability of approximately $11,698,000 (December 31, 2008 -
$1,650,000). For the three months ended March 31, 2009, $24,397,000
was recognized in income as an unrealized derivative gain (March
31, 2008 - $61,186,000 unrealized derivative loss) and $23,346,000
was recognized in income as a realized derivative gain (March 31,
2008 - $2,407,000 realized derivative gain). 11. 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 through enhancing 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. 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, adjusting or discontinuing the amount of monthly
distributions, suspending or renewing its distribution reinvestment
plan, adjusting capital spending, or disposing of 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, 2009 is as follows: March 31, 2009
---------------------------------------------------------------------
Bank indebtedness (long-term) $ 615,438 Working capital deficit(1)
128,455
---------------------------------------------------------------------
Net debt 743,893 Trust Units outstanding market value 445,773
Convertible debentures maturity value (long-term) 132,221 Capital
lease obligations (long-term) 3,612
---------------------------------------------------------------------
Total capitalization $ 1,325,499
---------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
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 6) 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
Advantage's regular reserve estimates. The banking syndicate
thoroughly evaluates the reserve estimates based upon their own
commodity price expectations to determine the amount of the
borrowing base. Revision or changes in the reserve estimates and
commodity prices can have either a positive or a negative impact on
the borrowing base of the Fund. On March 18, 2009, we announced our
intention to dispose of certain assets with the net proceeds from
these sales and other oil and natural gas property sales initially
utilized to reduce outstanding bank debt and improve Advantage's
financial flexibility. The amount of the borrowing base will be
impacted by the magnitude of the dispositions and the resulting
effect on reserves. 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 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 $2.3 billion of new equity from
April 1, 2009 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
any 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, 2009. 12. Commitments
Advantage has several lease commitments relating to office
buildings. The estimated remaining annual minimum operating lease
rental payments for buildings are as follows: 2009 $ 2,896 2010
3,878 2011 1,471 2012 1,072
---------------------------------------------------------------------
$ 9,317
---------------------------------------------------------------------
Advisory The information in this release contains certain
forward-looking statements. These statements relate to future
events or our future performance. All statements other than
statements of historical fact may be forward-looking statements.
Forward-looking statements are often, but not always, identified by
the use of words such as "seek", "anticipate", "plan", "continue",
"estimate", "expect", "may", "will", "project", "predict",
"potential", "targeting", "intend", "could", "might", "should",
"believe", "would" and similar expressions. These statements
involve substantial known and unknown risks and uncertainties,
certain of which are beyond Advantage's control, including: the
impact of general economic conditions; industry conditions; changes
in laws and regulations including the adoption of new environmental
laws and regulations and changes in how they are interpreted and
enforced; fluctuations in commodity prices and foreign exchange and
interest rates; stock market volatility and market valuations;
volatility in market prices for oil and natural gas; liabilities
inherent in oil and natural gas operations; uncertainties
associated with estimating oil and natural gas reserves;
competition for, among other things, capital, acquisitions, of
reserves, undeveloped lands and skilled personnel; incorrect
assessments of the value of acquisitions; changes in income tax
laws or changes in tax laws and incentive programs relating to the
oil and gas industry and income trusts; geological, technical,
drilling and processing problems and other difficulties in
producing petroleum reserves; and obtaining required approvals of
regulatory authorities. Advantage's actual results, performance or
achievement could differ materially from those expressed in, or
implied by, such forward-looking statements and, accordingly, no
assurances can be given that any of the events anticipated by the
forward-looking statements will transpire or occur or, if any of
them do, what benefits that Advantage will derive from them. Except
as required by law, Advantage undertakes no obligation to publicly
update or revise any forward-looking statements. DATASOURCE:
Advantage Energy Income Fund CONTACT: Investor Relations, Toll
free: 1-866-393-0393, Advantage Energy Income Fund, 700, 400 - 3rd
Avenue SW, Calgary, Alberta, T2P 4H2, Phone: (403) 718-8000, Fax:
(403) 718-8300, Web Site: http://www.advantageincome.com/, E-mail:
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