Exhibit 99.1
CONSOLIDATED
BALANCE
SHEETS
($CDN thousands) unaudited | June 30, 2007 | December 31, 2006 | ||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Accounts receivable | $ | 233,591 | $ | 261,498 | ||||
| Prepaid expenses and deposits | 32,588 | 34,647 | ||||||
Financial derivative asset (Note 11) | 27,841 | – | ||||||
294,020 | 296,145 | |||||||
Property, plant and equipment, net of amortization (Note 5) | 4,447,624 | 4,597,654 | ||||||
Goodwill (Note 3) | 922,024 | 922,024 | ||||||
| Deferred financing charges, net of amortization | – | 8,996 | ||||||
Financial derivative asset (Note 11) | 452 | 6,157 | ||||||
| Total assets | $ | 5,664,120 | $ | 5,830,976 | ||||
| LIABILITIES AND UNITHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 245,226 | $ | 260,206 | ||||
| Income taxes payable | 11,632 | 10,979 | ||||||
| Distributions payable | 43,231 | 51,933 | ||||||
Convertible debentures (Note 6) | 1,309 | 1,697 | ||||||
Financial derivative liability (Note 11) | 21,730 | 1,124 | ||||||
323,128 | 325,939 | |||||||
| Bank debt | 1,342,738 | 1,289,678 | ||||||
Convertible debentures, net of deferred transaction costs (Note 6) | 250,550 | 258,959 | ||||||
Other long-term liabilities (Note 9) | 7,621 | 7,272 | ||||||
Financial derivative liability (Note 11) | 44 | – | ||||||
Future income taxes (Note 14) | 577,894 | 250,339 | ||||||
Asset retirement obligations (Note 7) | 194,042 | 191,874 | ||||||
2,696,017 | 2,324,061 | |||||||
Commitments and guarantees (Note 13) | ||||||||
| UNITHOLDERS’ EQUITY | ||||||||
Capital (Note 8) | 4,253,140 | 4,224,470 | ||||||
Convertible debentures (Note 6) | 6,584 | 6,584 | ||||||
Deficit (Note 10) | (1,291,621 | ) | (724,139 | ) | ||||
2,968,103 | 3,506,915 | |||||||
| Total liabilities and unitholders’ equity | $ | 5,664,120 | $ | 5,830,976 | ||||
See accompanying notes to consolidated financial statements.
1
CONSOLIDATED
STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME
AND DEFICIT
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
($CDN thousands except per unit amounts) unaudited | 2007 | 2006 | 2007 | 2006 | ||||||||||||
| REVENUE | ||||||||||||||||
| Petroleum and natural gas sales | $ | 372,385 | $ | 341,205 | $ | 738,594 | $ | 691,551 | ||||||||
| Royalty expense | (67,506 | ) | (65,095 | ) | (134,289 | ) | (132,219 | ) | ||||||||
304,879 | 276,110 | 604,305 | 559,332 | |||||||||||||
| EXPENSES | ||||||||||||||||
| Operating | 73,551 | 57,837 | 142,603 | 114,447 | ||||||||||||
| Transportation | 4,749 | 4,292 | 11,907 | 8,736 | ||||||||||||
| General and administrative | 16,535 | 21,364 | 28,505 | 35,163 | ||||||||||||
| Interest on bank debt | 15,824 | 11,103 | 31,713 | 20,289 | ||||||||||||
| Interest on convertible debentures | 4,523 | 1,456 | 9,421 | 2,116 | ||||||||||||
| Depletion, depreciation and amortization | 175,784 | 149,972 | 352,224 | 300,490 | ||||||||||||
Accretion of asset retirement obligations (Note 7) | 3,876 | 2,457 | 7,739 | 4,908 | ||||||||||||
(Gain) loss on financial derivatives (Note 11) | (47,473 | ) | 3,274 | (5,768 | ) | 6,369 | ||||||||||
247,369 | 251,755 | 578,344 | 492,518 | |||||||||||||
| Earnings before taxes | 57,510 | 24,355 | 25,961 | 66,814 | ||||||||||||
| Current income taxes (recovery) | 559 | (284 | ) | 2,447 | (272 | ) | ||||||||||
| Capital taxes | 2,426 | 1,340 | 4,627 | 4,054 | ||||||||||||
Future income tax expense (recovery) (Note 14) | 356,323 | (59,576 | ) | 327,555 | (79,038 | ) | ||||||||||
| NET (LOSS) EARNINGS AND COMPREHENSIVE (LOSS) INCOME | (301,798 | ) | 82,875 | (308,668 | ) | 142,070 | ||||||||||
| Deficit, beginning of period | (860,197 | ) | (443,151 | ) | (724,139 | ) | (363,712 | ) | ||||||||
| Distributions declared | (129,626 | ) | (139,567 | ) | (258,814 | ) | (278,201 | ) | ||||||||
| Deficit, end of period | $ | (1,291,621 | ) | $ | (499,843 | ) | $ | (1,291,621 | ) | $ | (499,843 | ) | ||||
Net (loss) earnings per unit (Note 12) | ||||||||||||||||
| Basic | $ | (1.33 | ) | $ | 0.41 | $ | (1.36 | ) | $ | 0.71 | ||||||
| Diluted | $ | (1.33 | ) | $ | 0.40 | $ | (1.36 | ) | $ | 0.69 | ||||||
Weighted average units outstanding (Note 12) | ||||||||||||||||
| Basic | 227,352 | 201,998 | 226,912 | 201,370 | ||||||||||||
| Diluted | 227,352 | 207,142 | 226,912 | 206,894 | ||||||||||||
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED
STATEMENTS
OF CASH FLOWS
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
($CDN thousands) unaudited | 2007 | 2006 | 2007 | 2006 | ||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||
| Net (loss) earnings | $ | (301,798 | ) | $ | 82,875 | $ | (308,668 | ) | $ | 142,070 | ||||||
| Adjustments for: | ||||||||||||||||
| Unit-based compensation | 4,594 | 11,697 | 4,441 | 18,670 | ||||||||||||
| Depletion, depreciation and amortization | 175,784 | 149,972 | 352,224 | 300,490 | ||||||||||||
| Accretion of asset retirement obligations | 3,876 | 2,457 | 7,739 | 4,908 | ||||||||||||
| Unrealized (gain) loss on financial derivatives | (46,898 | ) | (2,372 | ) | (1,482 | ) | (7,306 | ) | ||||||||
| Future income tax expense (recovery) | 356,323 | (59,576 | ) | 327,555 | (79,038 | ) | ||||||||||
| Accretion of deferred transaction costs | 163 | – | 603 | – | ||||||||||||
| Asset retirement costs incurred | (3,677 | ) | (2,468 | ) | (7,064 | ) | (5,924 | ) | ||||||||
| Changes in non-cash operating working capital | 3,282 | 33,021 | 7,770 | (50,752 | ) | |||||||||||
191,649 | 215,606 | 383,118 | 323,118 | |||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||
| Proceeds from (repayment of) bank debt | (5,972 | ) | 59,975 | 53,061 | 150,523 | |||||||||||
| Proceeds from issuance of units, net of issue costs | 10,076 | 12,011 | 21,378 | 16,350 | ||||||||||||
| Distributions to unitholders | (129,626 | ) | (139,236 | ) | (258,814 | ) | (272,115 | ) | ||||||||
| (125,522 | ) | (67,250 | ) | (184,375 | ) | (105,242 | ) | |||||||||
| INVESTING ACTIVITIES | ||||||||||||||||
| Acquisition of petroleum and natural gas properties | (917 | ) | (23,869 | ) | (1,836 | ) | (23,869 | ) | ||||||||
| Disposition of petroleum and natural gas properties | 46,470 | – | 49,427 | – | ||||||||||||
| Corporate acquisitions, net of cash | – | (36,000 | ) | – | (36,000 | ) | ||||||||||
| Capital expenditures | (111,680 | ) | (88,487 | ) | (246,334 | ) | (158,007 | ) | ||||||||
| (66,127 | ) | (148,356 | ) | (198,743 | ) | (217,876 | ) | |||||||||
Cash beginning and end of period | $ | – | $ | – | $ | – | $ | – | ||||||||
| The Trust paid the following cash amounts: | ||||||||||||||||
| Interest paid | $ | 22,289 | $ | 13,453 | $ | 45,019 | $ | 26,895 | ||||||||
| Income and capital taxes paid | $ | 5,509 | $ | 4,029 | $ | 12,911 | $ | 10,475 | ||||||||
See accompanying notes to consolidated financial statements.
3
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts, except per unit amounts, expressed in $CDN thousands, unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements include the accounts of Canetic Resources Trust and its direct and indirect wholly owned subsidiaries and partnerships (collectively, “Canetic” or the “Trust”). Except as discussed in Note 2 below, the interim consolidated financial statements have been prepared by management following the same accounting policies and methods that were used in and disclosed in the audited annual financial statements for Canetic for the year ended December 31, 2006. Certain information and footnote disclosure normally included in the audited annual consolidated financial statements has been condensed or omitted. These interim financial statements should be read in conjunction with the Canetic 2006 audited annual financial statements.
2. CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2007, the Trust adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 1530 “Comprehensive Income”, Section 3251 “Equity”, Section 3855 “Financial Instruments – Recognition and Measurement”, Section 3861 “Financial Instruments – Disclosure and Presentation”, and Section 3865 “Hedges”. As required by the new standards, prior periods have not been restated. The adoption of these standards has had no material impact on the Trust’s net earnings or cash flows. The effects of the implementation of the new standards are discussed below.
Comprehensive Income
The Trust does not have any items to be accounted as components of other comprehensive income (“OCI”) and as a result comprehensive income equals net (loss) earnings.
Financial Instruments
The financial instruments standard establishes the recognition and measurement criteria for financial assets, financial liabilities and derivatives. All financial instruments are required to be measured at fair value on initial recognition of the instrument, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as “held-for-trading”, “available-for-sale”, “held-to-maturity”, “loans and receivables”, or “other financial liabilities” as defined by the standard.
Financial assets and financial liabilities “held-for-trading” are measured at fair value with changes in those fair values recognized in net earnings. Financial assets “available-for-sale” are measured at fair value, with changes in those fair values recognized in OCI. Financial assets “held-to-maturity”, “loans and receivables”, and “other financial liabilities” are measured at amortized cost using the effective interest method of amortization. All derivative instruments, including embedded derivatives, are recorded in the balance sheet at fair value unless they qualify for the normal purchase, sale or usage exemption. All changes in their fair value are recorded in earnings unless hedge accounting is applied in which case changes in fair value related to the effective portion of cash flow hedges is recognized in OCI.
As a result of the adoption of these new standards, the Trust has classified its accounts receivable as “loans and receivables”. Deposits have been classified as “held-to-maturity”. Accounts payable and accrued liabilities, distributions payable, bank debt, and convertible debentures have been classified as “other financial liabilities”. Changes in fair values of derivatives and embedded derivatives are recognized in earnings as the Trust has maintained its policy not to use hedge accounting.
4
Transaction costs are netted against the carrying value of the asset or liability to which it relates and are then amortized over the expected life of the instrument using the effective interest method. On adoption of Section 3855 “Financial Instruments – Recognition and Measurement”, the Trust netted its remaining deferred financing charges against convertible debentures.
The Trust, also adopted Section 1506 – Accounting Changes the only impact of which is to provide disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. This is the case with Section 3862 – “Financial Instruments - Disclosures”, Section 3863 “Financial Instruments - Presentation” and section 1535 “Capital Disclosures” which are required to be adopted for fiscal years beginning on or after October 1, 2007. The Trust will adopt these standards on January 1, 2008 and it is expected the only effect on the Trust for adopting Sections 3862 and 3863 will be incremental disclosures regarding the significance of financial instruments for the entity's financial position and performance; and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. The effect on the Trust for adopting Section 1535 will be increased disclosure surrounding its objectives, policies and processes for managing capital.
3. STARPOINT ARRANGEMENT
Acclaim Energy Trust (“Acclaim”) and StarPoint Energy Trust (“StarPoint”) merged on January 5, 2006 pursuant to a Plan of Arrangement (“Arrangement”), which resulted in the creation of Canetic. Each Acclaim unitholder received 0.8333 of a Canetic trust unit for each trust unit they owned and each StarPoint unitholder received one Canetic trust unit for each trust unit they owned. Unitholders in both Acclaim and StarPoint also received common shares and warrants in a new publicly-listed junior exploration company, TriStar Oil & Gas Ltd. (“TriStar”), which was formed with assets from both Acclaim and StarPoint. Each Acclaim unitholder received 0.0833 of a TriStar common share for each trust unit they owned and each StarPoint unitholder received 0.1000 of a TriStar common share for each trust unit they owned. In addition, each Acclaim unitholder received 0.0175 of a TriStar warrant for each trust unit they owned and each StarPoint unitholder received 0.0210 of a TriStar warrant for each trust unit they owned.
The merger was accounted for as an acquisition of StarPoint by Acclaim using the purchase method of accounting.
($000s) | ||||
| Current assets | 124,803 | |||
| Property, plant and equipment | 2,511,746 | |||
| Goodwill | 834,070 | |||
| Accounts payable and accrued liabilities | (144,777 | ) | ||
| Distributions payable | (22,662 | ) | ||
| Long-term debt | (434,123 | ) | ||
| Financial derivative liability | (57,785 | ) | ||
| Convertible debentures – liability | (53,199 | ) | ||
| Convertible debentures – equity | (8,691 | ) | ||
| Future income taxes | (96,476 | ) | ||
| Asset retirement obligations | (54,343 | ) | ||
| 2,598,563 | ||||
| Consideration was comprised of: | ||||
| Issuance of 106,242,000 units of Canetic | 2,562,563 | |||
| Transaction costs | 36,000 | |||
| 2,598,563 | ||||
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4. SAMSON ACQUISITION
On August 31, 2006, Canetic completed the share acquisition of a private oil and gas company (“Samson”) for total consideration of $955.1 million.
The transaction was financed with bank debt and a $690.0 million bought deal financing which was completed on August 24, 2006. Under the bought deal financing, Canetic issued 20,769,000 units at a price of $22.15 per unit and $230.0 million principal amount of convertible extendible unsecured subordinated debentures.
The acquisition was accounted for using the purchase method of accounting as follows:
($000s) | ||||
| Cash | 57,635 | |||
| Current assets | 76,803 | |||
| Property, plant and equipment | 942,864 | |||
| Accounts payable and accrued liabilities | (60,035 | ) | ||
| Income taxes payable | (43,946 | ) | ||
| Asset retirement obligations | (18,228 | ) | ||
| 955,093 | ||||
| Consideration was comprised of: | ||||
| Cash | 951,314 | |||
| Transaction costs | 3,779 | |||
| 955,093 | ||||
5. PROPERTY, PLANT AND EQUIPMENT
($000s) | June 30, 2007 | December 31, 2006 | ||||||
| Property, plant and equipment, at cost | 6,081,717 | 5,879,523 | ||||||
| Accumulated depletion and depreciation | (1,634,093 | ) | (1,281,869 | ) | ||||
4,447,624 | 4,597,654 | |||||||
Costs relating to unproved properties of $295 million were excluded from costs subject to depletion and depreciation.
6. CONVERTIBLE DEBENTURES
During the year, $388,000 of 11% debentures were converted which resulted in the issuance of 35,000 trust units and $17,000 of 8% debentures were converted which resulted in the issuance of 1,000 trust units.
($000s) | 9.4% | 6.5% | 8% | 11% | 6.5% | |||||||||||||||||||
(CNE.DB.A) | (CNE.DB.B) | (CNE.DB.C) | (CNE.DB.D) | (CNE.DB.E) | Total | |||||||||||||||||||
| Balance, December 31, 2006 | 5,622 | 17,821 | 8,046 | 1,697 | 227,470 | 260,656 | ||||||||||||||||||
| Converted to units | – | – | (17 | ) | (388 | ) | – | (405 | ) | |||||||||||||||
| Deferred transaction costs | – | – | (268 | ) | (42 | ) | (8,082 | ) | (8,392 | ) | ||||||||||||||
| Balance, June 30, 2007 | 5,622 | 17,821 | 7,761 | 1,267 | 219,388 | 251,859 | ||||||||||||||||||
(000s) | 9.4% | 6.5% | 8% | 11% | 6.5% | |||||||||||||||||||
| Units Issuable Upon Conversion | (CNE.DB.A) | (CNE.DB.B) | (CNE.DB.C) | (CNE.DB.D) | (CNE.DB.E) | Total | ||||||||||||||||||
| Balance, December 31, 2006 | 351 | 940 | 517 | 152 | 8,663 | 10,623 | ||||||||||||||||||
| Converted to units | – | – | (1 | ) | (35 | ) | – | (36 | ) | |||||||||||||||
| Balance, June 30, 2007 | 351 | 940 | 516 | 117 | 8,663 | 10,587 | ||||||||||||||||||
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7. ASSET RETIREMENT OBLIGATIONS
Total future asset retirement obligations were estimated by management based on the Trust’s net ownership interest in all wells and facilities, estimated costs to reclaim and abandon the wells and facilities and the estimated timing of the costs to be incurred in future periods. The Trust has estimated the net present value of its total asset retirement obligations to be $194.0 million (December 31, 2006 - $191.9 million) based on a total future liability of $608.0 million (December 31, 2006 - $603.3 million). The costs are expected to be incurred over an average period of 15 years. The estimated liability has been computed using an inflation rate of 2.0 percent and discounted using a credit adjusted risk free rate of 8 percent.
The following table reconciles Canetic’s asset retirement obligations:
Asset Retirement Obligation($000s) | Six months Ended June 30, 2007 | Year Ended December 31, 2006 | ||||||
| Balance, beginning of period | 191,874 | 68,235 | ||||||
Acquisition of StarPoint (Note 3) | – | 54,343 | ||||||
Acquisition of Samson (Note 4) | – | 18,228 | ||||||
| Additions | 1,493 | 3,117 | ||||||
| Change in estimate | – | 53,418 | ||||||
| Settlement of liabilities during period | (7,064 | ) | (16,877 | ) | ||||
| Accretion expense | 7,739 | 11,410 | ||||||
| Balance, end of period | 194,042 | 191,874 | ||||||
8. CAPITAL
Authorized capital of the Trust is comprised of an unlimited number of units and an unlimited number of special voting units. There are no special voting units outstanding. Each unitholder can request redemption of trust units at a price calculated as the lesser of 90 percent of the market price during the 10 days after the date units are tendered and the closing market price on the date units are tendered. Cash payments for units tendered are limited to $100,000 per month. The Trust may issue notes for redemption in excess of cash payments.
Six Months Ended June 30, 2007 | Year Ended December 31, 2006 | |||||||||||||||
a) Trust Units | Units (000s) | Amount ($000s) | Units (000s) | Amount ($000s) | ||||||||||||
| Balance, beginning of period | 225,796 | 4,224,470 | 91,583 | 1,087,459 | ||||||||||||
| Issued: | ||||||||||||||||
| Bought deal financing, net of costs | – | – | 20,769 | 437,001 | ||||||||||||
| Employee Unit Savings Plan | 232 | 3,623 | 274 | 6,184 | ||||||||||||
| Distribution reinvestment plan | 1,469 | 21,379 | 2,470 | 44,825 | ||||||||||||
| Issued pursuant to Arrangement | – | – | 106,242 | 2,562,563 | ||||||||||||
| Properties contributed to TriStar | – | – | – | (5,000 | ) | |||||||||||
| Conversion of debentures | 36 | 405 | 2,042 | 36,302 | ||||||||||||
| Conversion of debentures – equity portion | – | – | – | 4,636 | ||||||||||||
| Conversion of exchangeable shares | – | – | 358 | 3,804 | ||||||||||||
| Unit award incentive plan | 217 | 3,263 | 2,058 | 46,696 | ||||||||||||
Balance, end of period | 227,750 | 4,253,140 | 225,796 | 4,224,470 | ||||||||||||
b) Distribution Reinvestment Plan
Canadian unitholders may elect to reinvest their cash distributions into additional units of the Trust. For the six months ended June 30, 2007, 1,469,000 units (2006 – 624,000 units) were issued with $21.4 million (2006 - $13.8 million) being credited to capital.
7
9. UNIT-BASED COMPENSATION PLAN
On December 19, 2005, the Board of Directors of Canetic approved a Restricted Trust Unit (“RTU”) and Performance Trust Unit (“PTU”) incentive plan (the “Plan”). Under the terms of the Plan, both RTUs and PTUs may be granted to directors, officers, employees of, and consultants and service providers to the Trust or its subsidiaries. The number of trust units issued pursuant to the Plan are adjusted for the value of the distributions from the time of the granting to the time when the trust units are issued. PTUs are also adjusted based on the Trust’s performance relative to the performance of a group of comparable publicly traded oil and gas royalty trusts and other performance criteria determined by the Board of Directors.
The following table summarizes the activity for the RTUs and PTUs:
(000s) | Number of RTU's | Number of PTU's | ||||||
| Balance, December 31, 2005 | 804 | 493 | ||||||
| Granted | 1,035 | 2,021 | ||||||
| Exercised | (804 | ) | (927 | ) | ||||
| Forfeited | (119 | ) | (201 | ) | ||||
| Balance, December 31, 2006 | 916 | 1,386 | ||||||
| Granted | 139 | 135 | ||||||
| Exercised | (202 | ) | (127 | ) | ||||
| Forfeited | (61 | ) | (71 | ) | ||||
| Balance, June 30, 2007 | 792 | 1,323 | ||||||
Other long-term liabilities consist of the long-term portion of the Trust’s estimated liability for the Plan as at June 30, 2007. The amount of $16.7 million is payable for the remainder of 2007 through 2010. The current portion of $9.1 million is included in accounts payable and accrued liabilities.
Canetic paid $2.5 million in taxes related to the payment of RTUs and PTUs (2006 - Nil).
EMPLOYEE UNIT SAVINGS PLAN
The Trust has a savings plan whereby the employees can place up to 5 percent of their annual base salary and the Trust will match up to 10 percent of their annual base salary. All amounts are then invested in units of the Trust by way of market purchases or issuances from Treasury. During the six months ended June 30, 2007, 232,000 (2006 – 110,000) units were issued from Treasury under the Employee Unit Savings Plan with $3.6 million (2006 - $2.5 million) being credited to capital (Note 8). The Trust matching portion is included in general and administrative expenses as a compensation expense to the employee.
10. DEFICIT
Deficit consists of accumulated earnings and accumulated distributions for the Trust since inception as follows:
($000s) | June 30, 2007 | December 31, 2006 | ||||||
| Accumulated earnings | 76,302 | 384,970 | ||||||
| Accumulated distributions | (1,367,923 | ) | (1,109,109 | ) | ||||
| (1,291,621 | ) | (724,139 | ) | |||||
8
The table below shows the cumulative distributions to unitholders:
Distributions on issued units(1) | $/Unit | Amount ($000s) | ||||||
| Year ended December 31, 2002 | 0.585 | 19,025 | ||||||
| Year ended December 31, 2003 | 2.340 | 121,338 | ||||||
| Year ended December 31, 2004 | 2.340 | 176,741 | ||||||
| Year ended December 31, 2005 | 2.340 | 208,477 | ||||||
| Year ended December 31, 2006 | 2.760 | 583,528 | ||||||
| Three months ended March 31, 2007 | 0.570 | 129,188 | ||||||
| Three months ended June 30, 2007 | 0.570 | 129,626 | ||||||
| Accumulated distributions | 1,367,923 | |||||||
(1) All disclosures of per unit amounts of Acclaim up to the merger on January 5, 2006 have been restated using the exchange ratio of 0.8333 of a Canetic unit for each Acclaim unit.
11. FINANCIAL INSTRUMENTS
The Trust’s financial instruments recognized on the consolidated balance sheets include accounts receivable, financial derivatives, current liabilities and bank debt. The fair values of financial instruments other than bank debt approximates their carrying amounts due to the short-term nature of these instruments. The carrying value of bank debt approximates its fair value due to floating interest terms.
The Trust is exposed to the commodity price fluctuations of crude oil and natural gas and to fluctuations in the Canada/US dollar exchange rate. The Trust manages this risk by entering into various derivative financial instruments.
The Trust is exposed to credit risk due to the potential non-performance of counterparties to the above financial instruments. The Trust mitigates this risk by dealing only with larger, well-established commodity marketing companies, Canadian chartered banks and major financial institutions which are part of our banking syndicate.
The Trust is exposed to interest rate risks as a result of its floating rate bank debt.
The following financial derivative contracts have been put in place as noted below:
FUTURE COMMODITY CONTRACTS
| Daily Quantity | Contract Price | Term |
Natural Gas – Collars (AECO) | ||
| 5,000 Gj/d | Cdn $7.35 - $11.00 | July 1, 2007 - October 31, 2007 |
| 5,000 Gj/d | Cdn $7.50 - $11.00 | July 1, 2007 - October 31, 2007 |
| 5,000 Gj/d | Cdn $7.50 - $11.40 | July 1, 2007 - October 31, 2007 |
| 5,000 Gj/d | Cdn $7.50 - $11.45 | July 1, 2007 - October 31, 2007 |
| 10,000 Gj/d | Cdn $7.00 - $9.04 | July 1, 2007 - October 31, 2007 |
| 10,000 Gj/d | Cdn $7.00 - $9.00 | July 1, 2007 - October 31, 2007 |
| 10,000 Gj/d | Cdn $7.00 - $9.50 | July 1, 2007 - October 31, 2007 |
| 20,000 Gj/d | Cdn $6.00 - $9.00 | July 1, 2007 - October 31, 2007 |
| 10,000 Gj/d | Cdn $6.50 - $9.25 | July 1, 2007 - October 31, 2007 |
| 20,000 Gj/d | Cdn $7.00 - $11.00 | November 1, 2007 - March 31, 2008 |
| 10,000 Gj/d | Cdn $7.00 - $10.65 | November 1, 2007 - March 31, 2008 |
| 10,000 Gj/d | Cdn $7.00 - $10.70 | November 1, 2007 - March 31, 2008 |
| 5,000 Gj/d | Cdn $7.00 - $11.10 | November 1, 2007 - March 31, 2008 |
| 5,000 Gj/d | Cdn $7.00 - $11.15 | November 1, 2007 - March 31, 2008 |
| 20,000 Gj/d | Cdn $7.00 - $11.30 | November 1, 2007 - March 31, 2008 |
| 20,000 Gj/d | Cdn $7.00 - $12.00 | November 1, 2007 - March 31, 2008 |
9
Natural Gas – Fixed Price Contracts (AECO) | ||
| 5,000 Gj/d | Cdn $8.47 | July 1, 2007 - December 31, 2007 |
| 20,000 Gj/d | Cdn $7.00 | July 1, 2007 - October 31, 2007 |
| 10,000 Gj/d | Cdn $7.14 | July 1, 2007 - October 31, 2007 |
| 10,000 Gj/d | Cdn $7.265 | July 1, 2007 - October 31, 2007 |
| 5,000 Gj/d | Cdn $7.95 | July 1, 2007 - October 31, 2007 |
Crude Oil – Collars (WTI) | ||
| 1,000 bbl/d | US $50.00 - $77.00 | July 1, 2007 - December 31, 2007 |
| 1,000 bbl/d | US $53.00 - $77.00 | July 1, 2007 - December 31, 2007 |
| 2,000 bbl/d | US $60.00 - $77.00 | July 1, 2007 - December 31, 2007 |
| 1,000 bbl/d | US $60.00 - $80.05 | July 1, 2007 - December 31, 2007 |
| 1,000 bbl/d | US $65.00 - $96.50 | July 1, 2007 - December 31, 2007 |
| 1,000 bbl/d | US $60.00 - $85.55 | January 1, 2008 - December 31, 2008 |
| 2,000 bbl/d | US $65.00 - $79.25 | January 1, 2008 - December 31, 2008 |
| 1,000 bbl/d | US $65.00 - $79.50 | January 1, 2008 - December 31, 2008 |
| 1,000 bbl/d | US $65.00 - $79.70 | January 1, 2008 - December 31, 2008 |
| 1,000 bbl/d | US $65.00 - $80.00 | January 1, 2008 - December 31, 2008 |
| 1,000 bbl/d | US $65.00 - $80.30 | January 1, 2008 - December 31, 2008 |
| 2,000 bbl/d | US $65.00 - $81.50 | January 1, 2008 - December 31, 2008 |
| 1,000 bbl/d | US $60.00 - $90.15 | January 1, 2008 - December 31, 2008 |
Crude Oil – Fixed Price Contracts (WTI) | ||
| 3,500 bbl/d | Cdn $70.70 | July 1, 2007 - December 31, 2007 |
| 4,500 bbl/d | Cdn $64.58 | July 1, 2007 - December 31, 2007 |
| 500 bbl/d | Cdn $72.20 | January 1, 2008 - June 30, 2008 |
| 1,000 bbl/d | US $48.12 | July 1, 2007 - December 31, 2007 |
| 500 bbl/d | US $48.08 | July 1, 2007 - December 31, 2007 |
The estimated fair value of financial derivative instruments is based on quoted market prices.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
($000s) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
| Realized (gain) loss on financial derivatives | (575 | ) | 5,646 | (4,286 | ) | 13,675 | ||||||||||
| Unrealized (gain) loss on financial derivatives | (46,898 | ) | (2,372 | ) | (1,482 | ) | (7,306 | ) | ||||||||
| (Gain) loss on financial derivatives | (47,473 | ) | 3,274 | (5,768 | ) | 6,389 | ||||||||||
12. NET (LOSS) EARNINGS PER UNIT
Net earnings per unit has been calculated based on the following:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
(000s) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
| Weighted average units outstanding | 227,352 | 201,998 | 226,912 | 201,370 | ||||||||||||
| Dilutive impact of RTUs and PTUs | – | 2,559 | – | 2,435 | ||||||||||||
| Dilutive impact of convertible debentures | – | 2,585 | – | 3,089 | ||||||||||||
Diluted weighted average units outstanding(1) | 227,352 | 207,142 | 226,912 | 206,894 | ||||||||||||
(1) All convertible debentures were anti-dilutive for all periods during 2007.
Basic net earnings per unit has been calculated based on net earnings (loss) divided by the weighted average trust units. Diluted net earnings per unit has been calculated based on net earnings (loss) before interest on dilutive convertible debentures divided by dilutive trust units.
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For the diluted weighted average units outstanding, the combined weighted average number of RTUs and PTUs that were anti-dilutive is 2,078,000 units and 2,066,000 units for the three and six months ended June 30, 2007, respectively.
The potential dilutive effect of the anti-dilutive convertible debentures was 10,599,000 units and 10,607,000 units for the three and six months ended June 30, 2007, respectively.
13. COMMITMENTS AND GUARANTEES
In addition to financial derivative commitments, the Trust has the following commitments:
(000s) | Total | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | |||||||||||||||||||||
| Bank debt | 1,342,738 | – | – | 1,342,738 | – | – | – | |||||||||||||||||||||
Convertible debentures(1) | 260,251 | 1,309 | 5,622 | 8,029 | 17,821 | 227,470 | – | |||||||||||||||||||||
| Office lease | 105,154 | 3,286 | 6,398 | 6,398 | 8,912 | 9,919 | 70,241 | |||||||||||||||||||||
| Pipeline contract | 9,080 | 270 | 776 | 992 | 1,127 | 1,472 | 4,443 | |||||||||||||||||||||
| Total | 1,717,223 | 4,865 | 12,796 | 1,358,157 | 27,860 | 238,861 | 74,684 | |||||||||||||||||||||
(1) Gross of deferred transaction costs.
14. INCOME TAXES
On June 12, 2007, Bill C-52 (Budget Implementation Act, 2007) was enacted for Canadian accounting purposes. This legislation contains provisions which provide for a new tax to be levied on distributions of income from publicly traded income trusts in Canada at a rate of 31.5 percent. This tax is not expected to apply to the Trust until 2011 as transitional relief is provided to publicly traded trusts which existed at October 31, 2006 and who conform on an ongoing basis with certain safe-harbour limits with respect to normal growth and expansion throughout this period as outlined in guidelines issued by the Department of Finance.
As a result of enactment of this legislation, the Trust has recognized additional future tax expense of $330 million in the quarter with a corresponding increase to the future tax liability. This adjustment represents the temporary differences on assets and liabilities held at the Trust level or in other flow-through entities tax-effected at the enacted rate expected to apply at the time when these differences reverse (zero percent to December 31, 2010 and 31.5 percent thereafter).
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CORPORATE INFORMATION
OFFICERS AND SENIOR MANAGEMENT J. Paul Charron, CA President and Chief Executive Officer David J. Broshko, B.Comm., CA Vice President, Finance and Chief Financial Officer Richard J. Tiede, P.Eng Chief Operating Officer Mark P. Fitzgerald, MBA, P.Eng Vice President, Operations Brian K. Keller, B.Sc. Vice President, Exploitation Brian D. Evans, LLB Vice President, General Counsel and Secretary David M. Sterna, B.A. Economics Vice President, Corporate Planning and Marketing Donald W. Robson, Vice President, Land Keith S. Rockley, B.A. Vice President, Human Resources & Corporate Administration DIRECTORS Jack C. Lee, BA, B.Comm. ICD.D Calgary, Alberta Chairman Robert G. Brawn, P.Eng, Calgary, Alberta Chairman, Emeritus and Director J. Paul Charron, CA, Calgary, Alberta President, Chief Executive Officer and Director W. Peter Comber, MBA, CA, Toronto, Ontario Murray M. Frame, Calgary, Alberta Daryl Gilbert, P.Eng, Calgary, Alberta Nancy M. Laird, MBA, Calgary, Alberta R. Gregory Rich, MBA, B.SC. (Eng.), Houston, Texas AUDITORS Deloitte & Touche LLP Calgary, Alberta | INVESTOR RELATIONS Telephone: (403) 539-6300 Investor Toll Free: 1-877-539-6300 E-mail: info@canetictrust.com BANKERS Bank of Montreal The Toronto Dominion Bank Canadian Imperial Bank of Commerce The Bank of Nova Scotia Royal Bank of Canada BNP Paribas (Canada) Alberta Treasury Branches National Bank of Canada Union Bank of California, NA Deutsche Bank AG HSBC Bank Canada Société Générale (Canada) Canadian Western Bank JP Morgan Chase Bank, NA Fortis Capital (Canada) Ltd. PETROLEUM CONSULTANTS GLJ Petroleum Consultants Ltd., Calgary, Alberta Sproule Associates Ltd., Calgary, Alberta LEGAL COUNSEL Burnet, Duckworth & Palmer LLP Calgary, Alberta Dorsey & Whitney LLP, New York, NY; Vancouver, BC REGISTRAR AND TRANSFER AGENT Computershare Trust Company of Canada Calgary, Alberta Computershare Trust Company, Inc. Golden, Colorado STOCK EXCHANGE LISTING Toronto Stock Exchange: CNE.UN New York Stock Exchange: CNE Debentures: 9.4% CNE.DB.A; 6.5% CNE.DB.B; 8.0% CNE.DB.C; 11.0% CNE.DB.D; 6.5% CNE.DB.E |
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