CALGARY, Aug. 5 - Acclaim Energy Trust ("Acclaim" or the "Trust")
(AE.UN - TSX) is pleased to announce its financial and operating results for
the six months ended June 30, 2004.
Highlights of the second quarter included:
- On May 25, 2004, Acclaim announced the acquisition of certain high
quality, concentrated assets from ChevronTexaco for $433.7 million.
The acquisition, which closed on June 30, 2004, is very accretive
on a per unit basis on all measures and will allow Acclaim to maintain
distributions at the current level while significantly reducing its
payout ratio.
- On April 19, 2004, Acclaim closed a $62.1 million "bought deal" equity
financing, issuing a total of 5,175,000 trust units at a price of
$12.00 per trust unit. Proceeds were used to fund an expanded capital
program and position the Trust for future opportunities.
- On June 15, in order to fund the $433.7 million acquisition of assets
acquired from ChevronTexaco, Acclaim closed a $200.3 million "bought
deal" equity financing, issuing a total of 16,350,000 trust units,
at a price of $12.25 per unit. Acclaim also issued $75 million of 8%
convertible debentures, which are convertible into trust units at a
price of $13.50 per unit.
- Indicative of Acclaim's growth over the past year, daily average
production was 24,884 boe/d for the first half of 2004, an increase
of 32 percent compared to the same period in 2003.
- Acclaim continued to provide strong cash flow from operations of
$40.3 million for the second quarter due to favourable commodity
prices and solid production.
- Distributions paid during the quarter totaled $38.5 million or $0.488
per unit. Acclaim has now made 22 consecutive monthly distributions
of $0.1625/unit.
- Acclaim provided unitholders a total return of 9.3 percent during the
second quarter 2004. Most recently, the Trust units traded at a new
52 week high of $14.74.
- Based on estimated annualized cash flow for the third quarter,
Acclaim's debt to cash flow ratio is conservative at approximately
1.1 times. Bank debt of $342 million reflects the ChevronTexaco
acquisition and related equity financing.
- During the second quarter, Acclaim incurred $13.3 million of net
development expenditures including $3.3 million for drilling,
$3.9 million for facilities and production equipment and $5.6 million
for workovers and turnarounds. Acclaim participated in drilling
10 gross (5.7 net) wells in the Spruce Grove, Bantry, Leon
Lake/Leitchville properties. All wells were successful and are
expected to be on production by August 15, 2004.
A conference call to discuss these results will be hosted at 9 a.m. MST
(11 a.m. EST) on Friday August 6, 2004. The call will also be available via
webcast from Acclaim Energy Trust's website (
www.acclaimtrust.com) and from
the VCall website (
www.vcall.com). To participate Toll-Free across North
America call: 1-877-888-3855 or within Toronto and area call: 416-695-6120. A
recorded playback of the call will also be made available until August 20,
2004, by calling toll-free across North America: 1-866-518-1010 or within
Toronto and area call: 416-695-5275.
Financial and Operating Summary
Financial
Three Months Ended Six Months Ended
($millions except June 30 June 30
per unit amounts) 2004 2003 % 2004 2003 %
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Gross revenue 91.4 64.1 43% 183.1 135.4 35%
Cash flow from operations 40.3 35.9 12% 82.8 71.0 17%
Per unit - basic 0.51 0.66 -23% 1.07 1.40 -24%
Per unit - diluted 0.48 0.66 -27% 1.01 1.40 -28%
Net earnings (loss) 4.4 33.2 -87% 10.2 40.7 -75%
Per unit - basic 0.05 0.57 -91% 0.12 0.74 -84%
Per unit - diluted 0.05 0.57 -91% 0.11 0.74 -85%
Cash distributions paid 38.5 26.1 48% 74.7 48.8 53%
Per unit 0.4875 0.4875 0% 0.975 0.975 0%
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Capital expenditures
Development expenditures 13.3 9.6 39% 29.3 18.4 59%
Net capital expenditures 489.4 146.1 235% 498.4 326.6 53%
Total assets 1,541.0 997.3 55% 1,541.0 997.3 55%
Working capital (deficiency) (12.6) 0.9 - (12.6) 0.9 -
Long-term debt 342.2 215.2 59% 342.2 215.2 59%
Net debt (excluding
financial derivatives) 345.0 214.2 61% 345.0 214.2 61%
Unitholders' equity 865.4 546.2 58% 865.4 546.2 58%
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Weighted average trust units
outstanding (thousands) 79,578 54,463 46% 77,254 50,592 53%
Trust units outstanding at
period end (thousands) 97,304 60,257 61% 97,304 60,257 61%
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Operating
Production
Natural gas (mmcf/d) 77.8 59.2 31% 79.7 57.2 39%
Crude oil (bbl/d) 9,475 7,673 23% 9,545 7,471 28%
Natural gas liquids (bbl/d) 2,170 1,838 18% 2,054 1,784 15%
Barrel of oil equivalent
(boe/d at 6:1) 24,607 19,372 27% 24,884 18,789 32%
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Average Prices(x)
Natural gas ($/mcf) 6.84 6.45 6% 6.76 6.87 -2%
Natural gas (net of
hedging) ($/mcf) 6.57 6.19 6% 6.54 6.48 1%
Crude oil ($/bbl) 39.86 32.87 21% 39.47 37.66 5%
Crude oil (net of
hedging) ($/bbl) 32.46 32.82 -1% 33.46 35.39 -5%
Natural gas liquids ($/bbl) 32.45 28.55 14% 32.37 31.24 4%
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Drilling activity (gross)
Natural gas wells 4 9 - 14 11 -
Oil wells 5 5 - 11 17 -
Other 1 - - 1 - -
Dry and abandoned - 1 - - 1 -
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Total 10 15 - 26 29 -
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Success rate (%) 100% 93% - 100% 97% -
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(x)net of transportation
MESSAGE TO UNITHOLDERS
The second quarter of 2004 was another exciting and important period in
Acclaim's history. On May 25, 2004, we announced that Acclaim and Enerplus
Resources Fund ("Enerplus") together entered into an agreement to acquire all
of ChevronTexaco's conventional oil and natural gas interests in western
Canada for total consideration of $1.089 billion. Acclaim's share of the
acquisition totaled $433.7 million. The transaction closed on June 30, 2004,
as a result, production and related cash flow will be reflected in the results
beginning July 1, 2004.
In this transaction Acclaim acquired a package of high quality,
concentrated producing properties in western Canada. Production from the
assets of approximately 17,000 barrels of oil equivalent per day (boe/d)
increased Acclaim's overall production to more than 42,000 boe/d, balanced at
55 percent crude oil and NGLs and 45 percent natural gas. This transaction
increased Acclaim's total proved reserves to nearly 100 million barrels of oil
equivalent (mmboe).
The acquisition provides the following financial and operational benefits
to unitholders:
- Accretion to Acclaim's 2004 and 2005 cash flow per unit is expected
to exceed 20 and 25 percent, respectively.
- Provides greater than 30 percent accretion to production per unit
and 20 percent accretion to proved producing reserves per unit.
- Production and reserve acquisition costs of $25,500 per flowing barrel
of oil equivalent, $15.47 per boe proved and $12.23 per boe proved
plus probable are favourable relative to other transactions reported
in the sector.
- Exceptional ratio of proved producing to total proved reserves on this
transaction of 96 percent.
- Several of Acclaim's senior technical head office and field personnel
including Brent DeFosse, Acclaim's Chief Operating Officer, are former
ChevronTexaco employees and have a strong working knowledge of the
properties acquired.
- Acclaim's position in the oil and gas trust sector will increase to
the fifth largest in terms of daily production and proved reserves,
which is expected to further increase the Trust's solid liquidity
levels and potentially, provide a reduced cost of capital.
During the second quarter, Acclaim held its Annual General and Special
Meeting on May 19, 2004. At the meeting, unitholders passed all motions,
including the special item to cancel the Trust Unit option plan and replace it
with a new Restricted Unit Award Plan. Acclaim believes that this new plan
significantly reduces potential dilution and will serve to better retain and
attract employees, while directly aligning interests of management and
employees with unitholders.
REVIEW OF OPERATIONS
The second quarter provided another solid quarter of operating results.
Daily production averaged 24,607 boe/d for the quarter compared to 19,372
boe/d for the same period in 2003. This represents an increase of 27 percent
which reflects the impact of the acquisitions completed over the course of
2003 and the success of our capital expenditure program.
Production volumes in the quarter were negatively impacted by major plant
turnarounds at the ATCO operated Golden Spike and Carbondale plants in central
Alberta, the Pengrowth operated Judy Creek facility in west central Alberta
and by a forest fire which required that the Judy Creek facility be shut down
and evacuated. The impact of these plant shutdowns on production for the
quarter totaled approximately 500 boe/d.
In 2004, our operational strategy continues to create value from a three
pronged approach targeted at generating low-risk, production and incremental
reserves through the following initiatives:
1) The effective exploitation of production optimization opportunities
from our existing asset inventory.
2) Selectively developing, maturing and executing drilling programs.
3) Proactively sharpening our focus on regulatory compliance, safety
and environmental stewardship throughout the Trust.
Operated Properties
First, we successfully conducted 77 workovers, 30 recompletions and 8
stimulations in all of our producing areas. These production optimization
operations provided incremental production of approximately 1,500 boe/d which
was added throughout the quarter and into July with a capital investment of
$5.9 million.
Secondly, our drilling program which was 100 percent successful consisted
of 7.0 gross operated wells (4.6 net operated wells) at a cost of $2.4
million. This program was executed safely and effectively and is expected to
deliver an incremental 170 boe/d production in the third quarter. Thirdly, we
continue to partner with the regulators to sharpen our focus on compliance and
to minimize production downtime by selectively upgrading our producing
facilities, pipelines, infrastructure and critical equipment. These
expenditures provide the means to promote reliability, safety, and cost-
effective environmental conscious operations in all areas.
Non-Operated Properties
Acclaim's non-operated portfolio continues to grow as a result of the
successful acquisition process. This increase in non-operated properties in
the quarter resulted in a 100 percent success with 3 gross (1.1 net) wells
being drilled. In addition, Acclaim participated in several recompletions and
workovers in the quarter. Expenditures on non-operated properties were $4.5
million, resulting in expected incremental production additions of 350 boe/d.
Acquisitions - Managing the Integration Process
In addition to the routine production enhancing operations, we began to
pre-plan for the seamless transition and merger of the ChevronTexaco assets
into the Acclaim portfolio. This preparatory work was instrumental in the
timely, incident free integration of the high-quality assets obtained from
ChevronTexaco in the Drayton Valley, Acheson, and Slave Lake areas. Acclaim
successfully managed the integration process and capitalized on a number of
operating cost synergies in the central Alberta and Slave Lake areas. We
estimate a one-time savings of $1.0 million and an annual savings of $1.6
million attributed to reduced labor costs, reduced materials costs, and
reduced power costs.
CASH DISTRIBUTIONS & TAXABILITY
During the second quarter 2004, Acclaim paid total cash distributions of
$38.5 million or $0.488 per trust unit, providing a payout ratio of 95
percent. The second quarter of 2004 represented the seventh consecutive
quarter of consistent distributions. While Acclaim's payout ratio was higher
than its intended range, it will be reduced significantly by the financial
accretion provided by the ChevronTexaco acquisition. The additional cash flow
associated with these assets, will result in an estimated payout ratio of 65
per cent for the balance of 2004. Even when assuming more normalized commodity
prices, rather than the current levels of record pricing, Acclaim's annualized
payout ratio in 2004 is expected to be less than 75 percent and in 2005, less
than 65 percent. This reduced payout ratio supports Acclaim's belief that a
more conservative distribution payout strategy provides longer-term
sustainability through reinvestment of greater amounts of capital into
Acclaim's asset base.
Acclaim's level of taxability in 2004 is expected to be approximately 20
to 25 percent compared to an estimated industry average in the oil and gas
trust sector of 60 to 70 percent, and will continue to provide a strong tax
advantage to unitholders.
Beginning with the distribution of June 30, 2004 paid on July 20, 2004,
distributions to non-resident investors were affected by the non-resident
withholding tax and the classification in the US brokerage system was changed
from Return of Capital to Dividend. As a result, a 15 percent non-resident
withholding tax has been adopted. Although the classification has changed,
Acclaim continues to expect that for 2004 US tax purposes, approximately 85
percent of its distributions may be classified as Return of Capital and 15
percent as Dividend Income.
PRICE RISK MANAGEMENT
Prior to the announcement of the ChevronTexaco transaction, Acclaim had a
price risk management program in place for approximately 45 percent of its
2004 estimated oil and gas production and approximately 15 percent of its
expected 2005 production. All the volumes acquired from ChevronTexaco receive
spot market prices. Following the announcement of the ChevronTexaco
transaction, during the month of June, Acclaim put positions in place on 3.65
million boe (6,660 boe/d for the balance of 2004 and 2005) in a combination of
fixed prices contracts, collars and three way contracts. The new positions
were split evenly between natural gas and oil.
On a combined product basis, Acclaim has positions in place on 42 percent
of its 2004 production and 33 percent of its estimated 2005 production. For
full details, please see the table of Acclaim's hedges included in the notes
to the financial statements.
Considering the current prices for commodities, Acclaim will continue to
prudently layer in positions in order to achieve the Trust's objective of
providing downside protection on approximately 50 percent of its production.
Strategically, Acclaim's price risk management program is designed to provide
stability in cash flow while retaining exposure to increasing commodity
prices.
OUTLOOK
The acquisition of the ChevronTexaco properties has again lifted Acclaim
to another level. These are high quality legacy assets with considerable
future development potential. One of the most important benefits of the
transaction is that it will allow us to maintain current distribution levels
while significantly reducing our payout ratio going forward. We are now the
fifth largest oil and natural gas trust in terms of daily production and
proven reserves.
Integration of the assets acquired from ChevronTexaco is effectively
complete in the field and well underway in the head office. Hiring of
additional personnel has largely been completed. The integration of financial,
operating and land information systems is also near completion and Acclaim is
optimistic that all stages of the integration process will be complete by the
end of August. The ability of Acclaim employees to successfully and
efficiently integrate acquisitions has been demonstrated over the past two
years. The efforts of our employees in this process is very much appreciated.
With continued strength in commodity prices, the additional equity raised
in April and increased cash flow resulting from the ChevronTexaco acquisition,
we are looking to increase our capital expenditure program to $75 million
($66 million net of dispositions) for 2004. We expect that the program will
largely offset our declines for the latter half of 2004.
We are planning a significantly expanded drilling program for the last
half of the year of approximately 65 wells, a shift in focus from a high level
of optimization in the first half of 2004 that provided volumes into a rising
price environment. The expanded drilling plans represent a movement by the
Company to broaden drilling programs, targeting increased efficiencies. The
program will focus on Willesdsen Green in west central Alberta, Yekau Lake in
central Alberta, Pouce Coupe in northern Alberta, Greater Furness in southeast
Alberta and Dodsland in southwest Saskatchewan.
We are excited about the opportunities related to our newly acquired
assets and the positive impact they have had on Acclaim. We look forward to
reporting our progress in the third quarter.
Jack C. Lee J. Paul Charron
Chairman President & Chief Executive Officer
August 5, 2004
ADVISORY: Certain information regarding Acclaim Energy Trust including
management's assessment of future plans and operations, may constitute forward-
looking statements under applicable securities law and necessarily involve
risks, including, without limitation, risks associated with oil and gas
exploration, development, exploitation, production, marketing and
transportation, loss of markets, volatility of commodity prices, currency
fluctuations, imprecision of reserve estimates, environmental risks,
competition, incorrect assessment of the value of acquisitions, failure to
realize the anticipated benefits of acquisitions and ability to access
sufficient capital from internal and external source; as a consequence, actual
results may differ materially from those anticipated in the forward-looking
statements. Readers are cautioned that the foregoing list of factors is not
exhaustive. Additional information on these and other factors that could
affect Acclaim's operations or financial results are included in Acclaim's
reports on file with Canadian securities regulatory authorities and may be
accessed through the SEDAR website (www.sedar.com), at Acclaim's website
(www.acclaimtrust.com) or by contacting Acclaim. Furthermore, the forward-
looking statements contained in this news release are made as of the date of
this news release, and Acclaim does not undertake any obligation to update
publicly or to revise any of the included forward-looking statements, whether
as a result of new information, future events or otherwise.
Where reserves or production are stated on a barrel of oil equivalent
(BOE) basis, natural gas volumes have been converted to a barrel of oil
equivalent (BOE) at a ratio of 6,000 cubic feet of natural gas to one barrel
of oil. This conversion ratio is based upon an energy equivalent conversion
method primarily applicable at the burner tip and does not represent value
equivalence at the wellhead. BOEs may be misleading, particularly if used in
isolation.
Management's Discussion & Analysis
Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the Consolidated Financial Statements and Notes thereto of
Acclaim Energy Trust ("Acclaim") for the year ended December 31, 2003, MD&A
for the year ended December 31, 2003 and the unaudited Consolidated Financial
Statements for the six months ended June 30, 2004. This MD&A is dated
August 5, 2004. The consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP").
This discussion provides Management's analysis of Acclaim's historical
financial and operating results and provides estimates of Acclaim's future
financial and operating performance based on information currently available.
Actual results will vary from estimates and the variances may be significant.
You should be aware that historical results are not necessarily indicative of
future performance.
We use the term cash flow from operations, which we define as net
earnings before deducting non-cash expenses, to analyze operating performance
and leverage. Cash flow does not have a standardized measure prescribed by
GAAP and therefore may not be comparable with the calculation of similar
measures for other companies or trusts.
All references are to Canadian dollars unless otherwise indicated.
Natural gas volumes recorded in thousand cubic feet ("mcf") are converted to
barrels of oil equivalent ("boe") using the ratio of six (6) thousand cubic
feet to one (1) barrel of oil ("bbl"). BOE's may be misleading, particularly
if used in isolation. A BOE conversion ratio of 6 mcf:one(1) bbl is based on
an energy equivalent conversion method primarily applicable at the burner tip
and does not represent a value equivalent at the wellhead.
2004 SIGNIFICANT EVENTS
Acquisition of ChevronTexaco Property Interests
On June 30, 2004, Acclaim completed its previously announced acquisition
of certain petroleum and natural gas interests from ChevronTexaco Corporation
("Chevron") for total cash consideration of $433.7 million. The transaction
was effective June 1, 2004. The transaction closed on June 30, 2004, as a
result, production and related cash flow will be reflected in the results
beginning July 1, 2004.
The transaction was financed with bank debt and a $275 million bought
deal financing which was completed on June 15, 2004. Under the bought deal
financing Acclaim issued 16,350,000 trust units at a price of $12.25 per trust
unit for gross proceeds of $200.3 million and $75 million principal amount of
8% convertible unsecured subordinated debentures. The convertible subordinated
debentures have a face value of $1,000 per debenture, a coupon of 8.0%, a
final maturity date of August 31, 2009, and will be convertible into trust
units of Acclaim at a price of $13.50 per trust unit. The convertible
debentures pay interest semi-annually on February 28 and August 31, with the
initial interest payment on February 28, 2005.
The assets acquired are located in the Central, Kaybob and Mitsue areas
of Alberta as well as in Manitoba. Production from these assets approximates
17,000 barrels of oil equivalent per day.
RESULTS OF OPERATIONS
During the first six months of 2004, Acclaim achieved record financial
and operating results. The increased production volumes associated with
property acquisitions made in 2003 combined with increased oil and natural gas
prices all contributed to the significant gains made.
Petroleum and Natural Gas Sales
Three Months Ended Six Months Ended
June 30 June 30
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Revenue analysis ($000s) 2004 2003 2004 2003
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Natural gas $ 49,711 $ 35,712 $ 100,785 $ 73,007
Crude oil and natural
gas liquids 41,696 28,417 82,331 62,377
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$ 91,407 $ 64,129 $ 183,116 $ 135,384
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Petroleum and natural gas sales, before royalties and transportation
costs increased to $183.1 million for the six months ended June 30, 2004, up
35 percent from $135.4 million reported for the corresponding period in 2003.
Revenue for the second quarter increased to $91.4 million, 43 percent higher
than the $64.1 million recorded in the second quarter 2003.
Production
Crude oil and natural gas liquids production for the first six months of
2004 averaged 11,599 barrels per day, a 25 percent increase over the 9,255
barrels per day reported for the corresponding period in 2003. Production in
the second quarter averaged 11,645 barrels per day, up more than 22 percent
from production levels in the second quarter of 2003.
Natural gas sales for the first six months of the year averaged
79.7 million cubic feet per day, 39 percent higher than the 57.2 million cubic
feet per day reported for the six months ended June 30, 2003. During the
second quarter natural gas sales averaged 77.8 million cubic feet per day,
31 percent higher than the 59.2 million cubic feet reported during the same
quarter in 2003.
Significant production increases will be recorded commencing July 1, from
the Chevron transaction which closed June 30, 2004. Production from the assets
approximates 17,000 barrels of oil equivalent per day including 34.0 million
cubic feet per day of natural gas and 11,400 barrels per day of light crude
oil and natural gas liquids. The acquisition will increase Acclaim's overall
current production to approximately 42,000 barrels of oil equivalent per day.
Commodity Prices
The price of West Texas Intermediate (WTI) crude averaged US$36.75 per
barrel during the first six months of 2004, up 17 percent from the average
price of US$31.36 per barrel for the same period in 2003. During the second
quarter WTI averaged US$38.34 per barrel, up from an average of US$35.16 per
barrel in the first quarter.
For the six months ended June 30, 2004, we received an average oil price
of $39.47 per barrel as compared to $37.66 per barrel for the comparable
period in 2003. Our average oil price was $39.86 per barrel during the second
quarter, up marginally from an average of $39.08 per barrel during the first
quarter.
Our average natural gas price was $6.76 per thousand cubic feet for the
six months ended June 30, 2004 as compared to $6.87 per thousand cubic feet
during the same period in 2003. The second quarter natural gas price averaged
$6.84 per thousand cubic feet.
All prices are net of transportation.
Petroleum And Natural Gas Transportation
It had been industry practice in prior periods for companies to net
transportation charges against petroleum and natural gas sales rather than
showing transportation as a separate item on the Statement of Earnings.
Effective January 1, 2004, we have presented sales before the deduction of
transportation charges and have also presented transportation expenses on the
Statement of Earnings. Prior periods have been reclassified for comparative
purposes. This adjustment has no impact on net income or cash flow.
Unrealized Loss On Financial Derivatives
Effective, January 1, 2004, the Trust adopted the new accounting standard
on accounting for unrealized gains and losses on financial contracts that are
settled in the future. The new standard requires that we determine the fair
value of our financial contracts and record a liability or asset at the end of
each accounting period. Any changes in the fair value of the financial
contracts are included in net earnings for the period. Prior to January 1,
2004, only realized gains and losses were recognized in the financial
statements.
The estimated fair value is based on a mark to market calculation as at
June 30, 2004 to settle the financial contracts. The actual gain or loss
realized upon settlement could vary significantly due to fluctuations in
commodity prices. The new accounting policy has been accounted for
prospectively.
The fair value of all financial contracts on January 1, 2004 was recorded
as a financial derivative liability with an offsetting financial derivative
loss. The deferred loss is being amortized to income over the term of the
underlying contracts for which the deferred loss relates. For the six months
ended June 30, 2004, $5.2 million was amortized including $2.0 million in the
second quarter.
The following table reconciles the change in the fair value of the
financial contracts during the period.
Financial Financial
Derivative Derivative Unrealized
Loss Liability Loss
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Balance, January 1, 2004 $ 11,180 $ (11,180) $ -
Amortization (5,236) - 5,236
Unrealized loss on financial
derivatives - (5,628) 5,628
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Balance, June 30, 2004 $ 5,944 $ (16,808) $ 10,864
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Financial Derivative Contracts
For the six months ended June 30, 2004, we realized a net derivative loss
of $13.6 million related to financial derivative instruments put in place to
manage commodity price risk. During the second quarter, the realized
derivative loss totaled $8.3 million.
The following financial derivative contracts have been put in place as
noted below:
Commodity Contracts 2004 Q3 2004 Q4 2005
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Natural Gas
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Fixed price (GJ/d) 10,000 6,667 4,167
Average price ($/GJ) $6.72 $6.91 $7.00
Collars (GJ/d) 41,000 37,000 20,417
Average floor price $5.30 $5.97 $6.09
Average ceiling price $6.92 $9.24 $8.72
Call options (sold) 3,000 3,000 2,500
Average call option price (sold) $2.80 $2.80 $2.80
Call spread (purchased) (GJ/d) - 3,333 1,250
Call spread floor ($/GJ) - $9.00 $9.00
Call spread ceiling ($/GJ) - $11.50 $11.50
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Crude Oil
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Fixed price (bbl/d) 2,000 2,000 1,500
Average price (US$) $34.05 $34.05 $36.07
Collars (bbl/d) 7,500 7,500 7,000
Average floor price (US$) $29.75 $29.61 $29.71
Average ceiling price (US$) $33.82 $33.96 $37.00
Call spread (purchased) bbl/d 1,000 1,000 1,000
Call spread floor (US$) $33.00 $33.00 $33.00
Call spread ceiling (US$) $39.00 $40.00 $39.00
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Royalties
Three Months Ended Six Months Ended
June 30 June 30
Royalties ($000s) 2004 2003 2004 2003
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Royalties, net of ARTC $ 17,233 $ 10,671 $ 34,243 $ 26,181
% of sales 19.3% 17.1% 19.2% 19.8%
$/boe $ 7.70 $ 6.05 $ 7.56 $ 7.70
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For the six months ended June 30, 2004, royalties totaled $34.2 million
as compared to $26.2 million during the same period a year earlier. As a
percentage of sales royalties averaged 19.2 percent, essentially unchanged
from our average 2003 royalty rate.
During the second quarter 2004, royalties averaged $7.70 per barrel of
oil equivalent or approximately 19.3 percent of Acclaim's total petroleum and
natural gas sales price (before hedging) of $39.83. This compares to $6.05 per
barrel of oil equivalent or 17.1 percent of the average sales price reported
for the same period in 2003. Royalty rates associated with the Chevron assets
are very similar to rates currently experienced by Acclaim and consequently
will not change materially our corporate rate in future quarters.
Operating Costs
Three Months Ended Six Months Ended
June 30 June 30
Operating Costs ($000s) 2004 2003 2004 2003
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Operating costs $ 16,702 $ 10,094 $ 33,655 $ 19,100
$/boe $ 7.46 $ 5.73 $ 7.43 $ 5.62
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Our operating costs net of processing fees for the six months ended
June 30, 2004, increased to $33.7 million as compared to $19.1 million during
the same period a year earlier. On a unit-of-production basis, operating costs
averaged $7.43 per barrel of oil equivalent as compared to $5.62 per barrel of
oil equivalent a year earlier.
During the second quarter operating costs totaled $16.7 million, or
$7.46 per barrel of oil equivalent as compared to $10.1 million or $5.73 per
barrel of oil equivalent for the same period in 2003. Although operating costs
generally have increased due to the characteristics inherent in the type of
assets acquired during the past twelve months, certain additional costs have
been incurred to ensure the predictability of production during periods of
higher commodity prices.
During the most recent quarter, we took advantage of this opportunity by
changing out certain equipment and performing the necessary repairs which
would further enhance or optimize production. With the most recent acquisition
of the Chevron assets, we anticipate operating costs will be slightly lower in
subsequent quarters.
General and Administrative Expenses
Three Months Ended Six Months Ended
General and Administrative June 30 June 30
Expenses ($000s) 2004 2003 2004 2003
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G&A expenses $ 5,407 $ 3,101 $ 10,102 $ 5,840
Overhead recoveries (2,473) (767) (3,748) (1,626)
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Net G&A expenses $ 2,934 $ 2,334 $ 6,354 $ 4,214
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$/boe $ 1.31 $ 1.32 $ 1.40 $ 1.24
General and administrative expenses net of overhead recoveries
totaled $6.4 million for the six months ended June 30, 2004, as compared
to $4.2 million during the same period in 2003. On a unit-of-production
basis, general and administrative expenses averaged $1.40 per barrel of oil
equivalent as compared to $1.24 per barrel of oil equivalent for the same
period in 2003. The magnitude of the increase reflects growth and the costs
associated with building the necessary corporate infrastructure, including
staff, necessary to administer the assets.
For the three months ended June 30, general and administrative expenses
totaled $2.9 million or $1.31 per barrel of oil equivalent as compared to
$2.3 million or $1.32 per barrel of oil equivalent for the second quarter a
year earlier. It is anticipated that the Chevron asset acquisition will
require limited head office staff thereby substantially reducing future
general and administrative expenses on a per unit basis.
Interest Expense
Three Months Ended Six Months Ended
June 30 June 30
Interest Expense ($000s) 2004 2003 2004 2003
-------------------------------------------------------------------------
Interest expense $ 2,348 $ 1,448 $ 5,188 $ 3,368
Bank loans $ 342,200 $ 215,173 $ 342,200 $ 215,173
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense, representing interest on bank debt increased to
$5.2 million or $1.14 per barrel of oil equivalent from $3.4 million or
$0.99 per barrel of oil equivalent a year earlier. Average debt levels have
increased as a result of the acquisitions made during 2003 and the most
recent acquisition of petroleum and natural gas interests from Chevron. To
fund the Chevron acquisition, new credit facilities were put in place
including a $400 million production facility and a $15 million operating
facility. At June 30, 2004 and subsequent to closing this transaction,
$342.2 million was drawn under these facilities.
Although interest rates continue to be favorable and are not expected to
increase substantially in the short-term, interest expense will increase as a
result of higher debt levels. Average rates incurred by Acclaim during the
second quarter 2004 averaged approximately 4 percent.
Interest expense in the amount of $1,181 (2003 - $2,325) related to
convertible debentures is included as a reduction of accumulated earnings to
reflect the equity nature of this debt.
Depletion, Depreciation and Amortization
The current quarter provision for depletion and depreciation totaled
$30.1 million as compared to $22.7 million in 2003. On a unit-of-production
basis, depletion, depreciation and amortization costs averaged $13.45 per
barrel of oil equivalent as compared to $12.87 per barrel of oil equivalent
during the same quarter in 2003.
Asset Retirement Obligations
The CICA recently issued Handbook Section 3110 - Asset Retirement
Obligations, which addresses statutory, regulatory, contractual and other
legal obligations associated with the retirement of a tangible long-lived
asset that results from its acquisition, construction, development or normal
operation.
Under this section, asset retirement obligations are initially measured
at fair value at the time the obligation is incurred, with a corresponding
amount capitalized as part of the asset's carrying value and depreciated over
the asset's useful life using a systematic and rational allocation method.
On initial recognition, the fair value of an asset retirement obligation
is determined based upon the expected present value of future cash flows. In
subsequent periods, the carrying amount of the liability would be adjusted to
reflect (a) the passage of time, and (b) revisions to either the timing or the
amount of the original estimate of undiscounted cash flows.
The total future asset retirement obligation was estimated by management
based on the Trust's net ownership interest in all wells and facilities,
estimated costs to reclaim and abandon the facilities and the estimated timing
of the costs to be incurred in future periods. The costs are expected to be
incurred over an average of 15 years. The estimated cash flow has been
discounted using a credit adjusted risk free rate of 8 percent and an
inflation rate of 1.5 percent.
As of June 30, 2004, the amount to be recorded as the fair value of the
liability was estimated to be $45.8 million. The net effect of the change on
the net earnings for the three months ended June 30, 2004 and 2003 was
immaterial.
The following December 31, 2003 balances were restated as a result of
the change:
As Previously
($000s) Reported Adjustment As Restated
-------------------------------------------------------------------------
Property, plant and equipment 918,767 14,103 932,870
Asset retirement
obligations liability 22,866 9,856 32,722
Future income tax liability 159,312 1,779 161,091
Accumulated earnings 63,385 2,468 65,853
-------------------------------------------------------------------------
Income Taxes
During 2004, Acclaim recorded a future income tax recovery of
$4.7 million due to substantively enacted changes in the Alberta provincial
income tax rate from 12.5 percent to 11.5 percent.
Net Earnings Per BOE
Three Months Ended Six Months Ended
June 30 June 30
($/boe) 2004 2003 2004 2003
-------------------------------------------------------------------------
Petroleum and natural
gas revenue(x) $ 36.13 $ 34.60 $ 36.44 $ 36.76
Less:
Royalties 7.70 6.05 7.56 7.70
Operating costs 7.46 5.73 7.43 5.62
-------------------------------------------------------------------------
Net operating income 20.97 22.82 21.45 23.44
General and administrative 1.31 1.32 1.40 1.24
Interest on long-term debt 1.05 0.82 1.14 0.99
Unit-based compensation
- cash paid 0.40 - 0.35 -
Current and large
corporation tax 0.21 0.32 0.27 0.32
-------------------------------------------------------------------------
Cash flow from operations 18.00 20.36 18.29 20.89
Depletion, depreciation
and amortization 13.45 12.87 13.30 12.90
Unrealized loss (gain)
on financial derivatives (0.09) - 2.40 -
Future income
taxes (recovery) 2.17 (11.37) (0.03) (4.01)
Non-cash stock
compensation 0.51 - 0.38 -
-------------------------------------------------------------------------
Net earnings $ 1.96 $ 18.86 $ 2.24 $ 12.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x)net of transportation and realized loss on financial derivatives.
Cash Flow
Three Months Ended Six Months Ended
June 30 June 30
Cash Flow ($000s) 2004 2003 2004 2003
-------------------------------------------------------------------------
Cash flow
from operations $ 40,315 $ 35,871 $ 82,836 $ 71,048
Unitholders' equity $ 865,409 $ 546,163 $ 865,409 $ 546,163
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended June 30, 2004, our cash flow from operations
totaled $82.8 million, a 17 percent increase from the $71.0 million during the
same period in 2003. On a per unit basis, however, cash flow totalled $1.07
per unit, 24 percent lower than the $1.40 per unit recorded for the six months
ended June 30, 2003. The reduction results from a 53 percent increase in the
weighted average trust units outstanding to 77.3 million units due to the
conversion of debentures and equity issued during 2003 and 2004 to fund
acquisitions and reduce bank indebtedness. Cash flow for the second quarter
totaled $40.3 million or $0.51 per unit as compared to $35.9 million or $0.66
per unit for the same period in 2003. Our weighted average units outstanding
totaled 79.6 million for the quarter ended June 30, 2004, as compared to 54.5
million for the same period in 2003.
Cash Distributions
Three Months Ended Six Months Ended
($000s except June 30 June 30
where indicated) 2004 2003 2004 2003
-------------------------------------------------------------------------
Cash flow from operations 40,315 35,871 82,836 71,048
Cash distributions paid 38,454 26,138 74,713 48,772
Distributions per unit ($) 0.4875 0.4875 0.975 0.975
Payout ratio (%) 95 73 90 69
-------------------------------------------------------------------------
-------------------------------------------------------------------------
We distribute the net cash flow from our petroleum and natural gas
properties to our Trust unitholders on a monthly basis with a portion of this
cash flow withheld to repay bank debt and fund capital expenditures. Although
the level of cash retained for debt repayment typically varies between 15 and
25 percent of total cash flow, we monitor our distribution policy with respect
to forecasted cash flows, debt levels and spending plans.
For the six months ended June 30, 2004, we distributed $74.7 million
which represented 90 percent of cash flow from operations. In addition, we
accrued $2.6 million as at June 30, 2004, paid on July 20, 2004, for
distributions associated with the 16,350,000 Trust units issued to fund the
ChevronTexaco acquisition.
For the three months ended June 30, 2004, the payout ratio increased to
95 percent as we generated $40.3 million of cash flow from operations and
distributed $38.5 million.
Our payout ratio for the remainder of 2004 will be reduced to
approximately 65 to 70 percent, a direct result of the increase in cash
flows associated with the Chevron assets.
Taxation of Cash Distributions
Due to the increased cash flow associated with increased commodity
prices and the limitation on tax pools received from the Chevron acquisition,
Acclaim's distributions will now be taxable at an estimated rate of 20 to 25
percent for 2004 as calculated under the Canadian Income Tax Act, effective
on the closing of the acquisition. Accordingly, Acclaim is now required
to withhold and remit the applicable non-resident withholding tax on
distributions made outside of Canada. Commencing with the July 20th
distribution, the customary rate is 25 percent, reduced to 15 percent
where Tax Treaties are in place with the country where the non-resident
unitholder resides. For unitholders in the United States, this rate is
reduced to 15 percent due to the Canada/US Tax Treaty. Unitholders are
encouraged to seek qualified tax advice in their country of residence.
Selected Quarterly Financial Information
($000s except per share amounts)
-------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------
Earnings Information Jun. 30 Mar. 31 Dec. 31 Sept. 30
-------------------------------------------------------------------------
Petroleum and natural
gas sales(1) 91,407 91,709 76,681 77,021
Net earnings (loss)(2) 4,412 5,751 1,767 5,177
Earnings (loss)
per unit(2)(3)
Basic 0.05 0.07 0.02 0.06
Diluted 0.05 0.07 0.02 0.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($000s except per share amounts)
-------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------
Earnings Information Jun. 30 Mar. 31 Dec. 31 Sept. 30
-------------------------------------------------------------------------
Petroleum and natural
gas sales(1) 64,129 71,255 45,991 25,347
Net earnings (loss)(2) 33,228 7,429 2,200 (3,694)
Earnings (loss)
per unit(2)(3)
Basic 0.57 0.13 0.05 (0.17)
Diluted 0.57 0.13 0.05 (0.17)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Petroleum and natural gas sales have been restated as a result of
changes in accounting policies for hedging and transportation costs.
(2) Net earnings (loss) and per unit amounts have been restated as a
result of a change in accounting policy for asset retirement
obligations.
(3) When calculating the weighted average number of units at the end of
a quarter, all units outstanding from the previous quarter are deemed
to be outstanding for the entire period, where as in the year to date
calculation those units are weighted according to the date of issue.
Consequently, the addition of the quarterly per unit results will not
add to the annual earnings per unit.
Net earnings for the six months ended June 30, 2004 totaled $10.2 million
or $0.11 per diluted unit, compared to $40.7 million or $0.74 per diluted unit
during the same period in 2003. Second quarter earnings totaled $4.4 million
or $0.05 per diluted unit.
Capital Expenditures
Three Months Ended Six Months Ended
Capital June 30 June 30
Expenditures ($000s) 2004 2003 2004 2003
-------------------------------------------------------------------------
Land $ 21 $ 170 $ 2,163 $ 170
Geological and
geophysical 426 835 675 1,334
Drilling 3,338 6,112 6,978 12,541
Workovers and
recompletions 5,628 - 9,814 -
Production equipment
and facilities 3,882 2,439 9,641 4,317
-------------------------------------------------------------------------
Net development
expenditures 13,295 9,556 29,271 18,362
Office equipment 645 331 982 331
Chevron acquisition 474,371 - 474,371 -
Other property
acquisitions 1,093 136,201 2,724 137,922
Property dispositions - - (8,906) -
Elk Point acquisition - - - 170,000
-------------------------------------------------------------------------
Net capital
expenditures $ 489,404 $ 146,088 $ 498,442 $ 326,615
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended June 30, 2004, expenditures for development
activities totaled $29.3 million as compared to $18.4 million during the
same period in 2003. A total of 10 gross (5.7 net) wells were drilled during
the quarter, compared to 15 gross (11.2 net) wells during the same period
in 2003 resulting in 4 (1.6 net) natural gas wells, 5 (3.5 net) oil wells and
1 (0.6 net) injection well. The primary focus again this quarter was on well
and facility optimization in areas that provide additional upside opportunity.
For the remainder of 2004 the Trust has plans to drill approximately 68
gross wells, including 40 gross wells in the third quarter.
Acquisitions
The acquisition of the Chevron assets which closed June 30, 2004,
was effective June 1, 2004. The purchase price recorded as required under
Generally Accepted Accounting Principles ("GAAP") is calculated as follows:
(000s)
-------------------------------------------------------------------------
Purchase price $ 433,565
June net revenue plus purchase price adjustments (12,202)
Estimated transaction costs 9,000
-------------------------------------------------------------------------
Cash purchase consideration 430,363
Future income tax liability 31,275
Asset retirement obligation 12,733
-------------------------------------------------------------------------
Adjusted purchase price $ 474,371
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Under GAAP we recorded a future income tax liability of $31.3 million.
This liability arises due to the deficiency in tax pools acquired in the
acquisition.
Guarantees/Off-Balance Sheet Arrangements
The Trust has no guarantees or off-balance sheet arrangements.
Capital
As at June 30, 2004, we had issued capital of 97.3 million Trust units
and at July 31, 2004, we had issued capital of 97.6 million units.
Our Trust units were consolidated on a one (1) for 2.5 basis during the
second quarter of 2003. This has resulted in retroactive restatement of all
trust units, employee stock options and other per unit information.
Number of
a) Trust Units Units(000s) Amount
-------------------------------------------------------------------------
Balance, December 31, 2003 74,601 $ 660,048
Pursuant to equity offerings, net of costs 21,525 248,723
On conversion of exchangeable shares 34 364
On conversion of debentures 954 9,313
Issued for employee savings plan 71 878
Distribution reinvestment plan 107 1,304
Exercise of unit options 12 116
Unit purchase loan plan receivable - (1,520)
-------------------------------------------------------------------------
Balance, June 30, 2004 97,304 $ 919,226
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On June 15, 2004, we closed a $275 million "bought deal" financing. Upon
closing the Chevron transaction we issued a total of 16,350,000 trust units
at a price of $12.25 per trust unit for gross proceeds of $200.3 million and
$75 million principal amount of 8% convertible unsecured subordinated
debentures. Net proceeds after underwriting fees and expenses amounted to
approximately $190.0 million and $71.9 million respectively.
On April 19, 2004, we closed a "bought deal" equity financing whereby we
issued 5,175,000 Trust units at $12.00 per trust unit for gross proceeds of
$62.1 million. Net proceeds, after underwriting fees and expenses amounted to
approximately $59.0 million.
Number of
b) Exchangeable Shares Units(000s) Amount
-------------------------------------------------------------------------
Balance, December 31, 2003 776 $ 8,566
Shares exchanged (34) (364)
Adjustment to exchange ratio for distributions 55 -
-------------------------------------------------------------------------
Balance, June 30, 2004 797 $ 8,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of Units
c) Debentures Available on
Conversion (000s) Amount
-------------------------------------------------------------------------
i) 8% Convertible Debentures
Balance, December 31, 2003 - -
Issued, June 15, 2004 5,556 $ 75,000
Issue costs - (3,092)
-------------------------------------------------------------------------
Balance, June 30, 2004 5,556 71,908
-------------------------------------------------------------------------
ii) 11% Convertible Debentures
Balance, December 31, 2003 2,195 19,326
Converted to units during the period (954) (9,313)
-------------------------------------------------------------------------
Balance, June 30, 2004 1,241 10,013
-------------------------------------------------------------------------
Total, June 30, 2004 6,797 $ 81,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On June 15, 2004, we issued $75.0 million, 8% convertible extendible
unsecured subordinated debentures. The convertible extendible subordinated
debentures have a face value of $1,000 per debenture, a coupon of 8.0%,
a final maturity date, if extended of August 31, 2009, and will be
convertible into trust units of Acclaim at a price of $13.50 per trust
unit. The convertible debentures pay interest semi-annually on February 28
and August 31, with the initial interest payment on February 28, 2005.
In December 2002, we issued $45.0 million, 11 percent convertible,
extendible, unsecured subordinated debentures. The debentures are convertible
into units at the option of the holder at any time prior to maturity, or at
a date set by the Trust at a conversion price of $9.75 per unit.
The debentures have been classified as equity because the Trust has the
option, and intends to settle, the principal and interest payable with the
issuance of units. Interest paid to the debenture holders is included in
Accumulated Earnings. Effective January 1, 2005, under amendments to CICA
Section 3860 Financial Instruments, we will be required to classify the 8%
and 11% convertible debentures currently outstanding as debt with the
corresponding interest expense rather than being accounted for as an
equity instrument. During 2004, $9.3 million of debentures were converted
resulting in the issuance of 954,000 Trust units.
Average
Number of Exercise
d) Unit Based Compensation Plan Options (000s) Price
-------------------------------------------------------------------------
Balance, December 31, 2003 2,737 $ 10.15
Exercised (12) 9.67
Repurchased and cancelled (2,725)
-------------------------------------------------------------------------
Balance, June 30, 2004 - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On May 19, 2004, the unitholders of Acclaim approved a new unit award
incentive plan to replace the Option Plan. The new plan authorizes the Board
of Directors to grant up to 2,500,000 units consisting of Restricted Units and
Performance Units to directors, officers, employees and consultants of the
Trust and its affiliates. The Restricted Units vest over a three-year period.
The Performance Units vest on the third anniversary of the date of the grant.
The number of Performance Units granted is dependent on the performance
of the Trust relative to a peer comparison group of petroleum and natural gas
trusts and other companies. A holder of a Restricted or Performance Unit may
elect, subject to consent of the Trust, to receive cash upon vesting in lieu
of the number of units held. The plan provides for adjustments to the number
of units issued based on the cumulative distributions of the Trust during the
period that the Restricted or Performance Unit is outstanding.
As of June 30, 2004, there were 769,573 Restricted Units and 234,400
Performance Units outstanding entitling holders to 1,082,393 units upon
vesting. A compensation expense of $1.1 million was recorded during the period
to approximate the fair value (based on period end price of the units) of the
Restricted Units in excess of the Option Plan that was replaced. A
compensation expense was not recognized for the approximate fair value of the
Performance Units as it is uncertain whether the performance criteria will be
met at the end of three years.
LIQUIDITY AND CAPITAL RESOURCES
Acclaim has an extendible revolving term credit facility with a
syndicate of financial institutions in the amount of $415 million including
a $400 million revolving facility and a $15 million operating facility.
Available borrowings are limited by a borrowing base, most recently
established based on the value of petroleum and natural gas assets as
determined by the lenders. The loan is reviewed annually and may be extended
at the option of the lender for an additional 364 day period. If not extended,
the revolving facility will automatically convert to a two year and one day
non-revolving term loan with the first payment due on the 366th day after the
commencement of the term period. The loan has therefore been classified as
long-term on the balance sheet.
At June 30, 2004, $342.2 million was drawn under the facility. Working
capital liquidity is maintained by drawing from and repaying the unutilized
credit facilities as needed. At June 30, 2004, Acclaim had working capital
deficiency of $12.6 million.
We continued our property rationalization program, disposing of
approximately $8.9 million of miscellaneous non-core assets primarily in
eastern Alberta and Saskatchewan in the first quarter. Production from these
assets approximated 450 barrels of oil equivalent per day.
June 30
Liquidity and Capital Resources ($000s) 2004
-------------------------------------------------------------------------
Long term debt $ 342,200
Working capital deficiency 12,623
-------------------------------------------------------------------------
Net debt(1) 354,823
-------------------------------------------------------------------------
Units outstanding (000s) 97,304
Trust unit price 12.95
-------------------------------------------------------------------------
Market value 1,260,087
-------------------------------------------------------------------------
Convertible debentures 81,921
-------------------------------------------------------------------------
Total capitalization $ 1,696,831
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net debt excludes the 8% and 11% convertible debentures which are
classified as equity.
Additional Information
Additional information regarding the Trust and its business
operations, including the Trust's annual information form for the period
ended December 31, 2003, is available on the Trust's SEDAR company profile
at www.sedar.com.
Consolidated Balance Sheet
June 30 December 31
($000s, unaudited) 2004 2003
-------------------------------------------------------------------------
(Restated
ASSETS - Note 2)
Current assets
Accounts receivable $ 62,197 $ 60,720
Prepaid expenses 12,493 8,202
Financial derivative loss (Note 7) 4,803 -
-------------------------------------------------------------------------
79,493 68,922
Financial derivative loss (Note 7) 1,141 -
Property, plant and equipment 1,658,990 1,160,548
Accumulated depletion and depreciation (286,602) (227,678)
-------------------------------------------------------------------------
1,372,388 932,870
-------------------------------------------------------------------------
Goodwill 87,954 87,954
-------------------------------------------------------------------------
Total assets $ 1,540,976 $ 1,089,746
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 61,875 $ 62,037
Distributions payable 15,580 11,881
Financial derivative liability (Note 7) 14,661 -
-------------------------------------------------------------------------
92,116 73,918
Bank debt 342,200 208,997
Other liabilities 1,075 2,161
Financial derivative liability (Note 7) 2,147 -
Future income taxes 192,223 161,091
Asset retirement obligations (Note 4) 45,806 32,722
-------------------------------------------------------------------------
675,567 478,889
UNITHOLDERS' EQUITY
Capital (Note 5) 919,226 657,475
Exchangeable shares (Note 5) 8,202 8,566
Convertible debentures (Note 5) 81,921 19,326
Accumulated earnings 74,835 65,853
Accumulated distributions (218,775) (140,363)
-------------------------------------------------------------------------
865,409 610,857
-------------------------------------------------------------------------
Total liabilities and unitholders' equity $ 1,540,976 $ 1,089,746
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Approved on behalf of the Board:
Jack C. Lee J. Paul Charron, C.A.
Chairman of the Board President and
Chief Executive Officer
Consolidated Statements of Earnings and Accumulated Earnings
Three Months Ended Six Months Ended
($000s except per unit June 30 June 30
amounts, unaudited) 2004 2003 2004 2003
-------------------------------------------------------------------------
(Restated (Restated
- Note 2) - Note 2)
REVENUE
Petroleum and natural
gas sales $ 91,407 $ 64,129 $ 183,116 $ 135,384
Royalty expense (net
of Alberta Royalty
Tax Credit) (17,233) (10,671) (34,243) (26,181)
-------------------------------------------------------------------------
74,174 53,458 148,873 109,203
EXPENSES
Operating 16,702 10,094 33,655 19,100
Transportation 2,225 1,679 4,438 3,253
General and
administrative 2,934 2,334 6,354 4,214
Interest 2,348 1,448 5,188 3,368
Unit-based
compensation (Note 5) 2,046 - 3,304 -
Depletion, depreciation
and amortization
(Note 2) 30,111 22,692 60,233 44,120
Realized loss on
financial derivatives 8,275 1,461 13,648 7,120
Unrealized loss (gain)
on financial
derivatives (Note 7) (207) - 10,864 -
-------------------------------------------------------------------------
64,434 39,708 137,684 81,175
Earnings before taxes 9,740 13,750 11,189 28,028
Provision for
capital taxes 479 571 1,169 1,100
Provision for (recovery
of) future income
taxes (Note 8) 4,849 (20,049) (143) (13,729)
-------------------------------------------------------------------------
NET EARNINGS 4,412 33,228 10,163 40,657
Accumulated earnings,
beginning of period,
as previously reported 71,060 29,257 63,385 22,121
Change in accounting for
asset retirement
obligations (Note 2) - - 2,468 879
-------------------------------------------------------------------------
Accumulated earnings,
beginning of period
as restated 71,060 29,257 65,853 23,000
Dividends on
preferred shares - (923) - (923)
Interest on
convertible debentures (637) (1,153) (1,181) (2,325)
-------------------------------------------------------------------------
Accumulated earnings,
end of period $ 74,835 $ 60,409 $ 74,835 $ 60,409
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per unit
Basic $ 0.05 $ 0.57 $ 0.12 $ 0.74
Diluted $ 0.05 $ 0.57 $ 0.11 $ 0.74
Weighted average
units outstanding
Basic 79,578 54,463 77,254 50,592
Diluted 83,275 54,640 81,818 50,742
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
Three Months Ended Six Months Ended
($000s except per unit June 30 June 30
amounts, unaudited) 2004 2003 2004 2003
-------------------------------------------------------------------------
CASH FLOWS RELATED TO (Restated (Restated
THE FOLLOWING ACTIVITIES: - Note 2) - Note 2)
OPERATING ACTIVITIES
Net earnings $ 4,412 $ 33,228 $ 10,163 $ 40,657
Adjustments for:
Unit-based
compensation
- non cash 1,150 - 1,719 -
Depletion,
depreciation
and amortization 30,111 22,692 60,233 44,120
Unrealized loss
(gain) on
financial derivatives (207) - 10,864 -
Provision for
(recovery of) future
income taxes 4,849 (20,049) (143) (13,729)
-------------------------------------------------------------------------
Cash flow
from operations 40,315 35,871 82,836 71,048
Site restoration
and abandonment
costs incurred (495) - (958) -
Changes in
non-cash operating
working capital 18,355 (12,429) 579 (12,805)
-------------------------------------------------------------------------
Cash flow provided by
operating activities 58,175 23,442 82,457 58,243
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank debt 116,171 65,726 133,203 83,361
Repayment of debentures - (824) - (1,648)
Proceeds from issuance
of units, net of
issue costs 249,979 91,612 251,021 93,866
Proceeds from issuance
of convertible
debentures, net of
issue costs 71,908 - 71,908 -
Reduction of
other liabilities (566) (1,093) (1,065) (2,394)
Distributions
to unitholders (38,454) (26,138) (74,713) (48,772)
Interest paid on
convertible debentures (637) (1,153) (1,181) (2,325)
Dividends on
preferred shares - (923) - (923)
Changes in non-cash
financing working capital 858 (172) 1,049 (282)
-------------------------------------------------------------------------
Cash flow provided by
financing activities 399,259 127,035 380,222 120,883
-------------------------------------------------------------------------
Cash flow provided by
operating and
financing activities 457,434 150,477 462,679 179,126
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of petroleum
and natural
gas properties (431,457) (136,201) (433,087) (137,922)
Disposition of petroleum
and natural
gas properties - - 8,906 -
Capital expenditures (13,940) (9,887) (30,253) (18,693)
Acquisition
of subsidiaries - - - (20,444)
Changes in
non-cash investing
working capital (12,037) (4,389) (8,245) (2,067)
-------------------------------------------------------------------------
Cash flow used in
investing activities (457,434) (150,477) (462,679) (179,126)
-------------------------------------------------------------------------
Cash, beginning and
end of period $ - $ - $ - $ -
-------------------------------------------------------------------------
The Trust paid the
following cash amounts:
Interest $ 2,942 $ 2,568 $ 4,910 $ 2,963
Capital taxes $ 438 $ 358 $ 1,086 $ 617
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to the Consolidated Financial Statements
(all tabular amounts, except per unit, expressed in $000s, unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of Acclaim Energy Trust
("Acclaim") have been prepared by management following the same
accounting policies and methods that were used in and disclosed in the
audited annual consolidated financial statements for the year ended
December 31, 2003 except for changes outlined in Note 2. 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
most recent audited annual consolidated financial statements.
2. CHANGES IN ACCOUNTING POLICIES
(a) Hedging Relationships
The Canadian Institute of Chartered Accountants ("CICA") issued
Accounting Guideline 13 - Hedging Relationships, which deals with the
identification, designation, documentation and effectiveness of hedging
relationships for the purpose of applying hedge accounting. The guideline
establishes conditions for applying hedge accounting. The guideline is
effective for fiscal years beginning on or after July 1, 2003. Where
hedge accounting does not apply, any changes in the fair value of the
financial derivative contracts relating to a financial period can either
reduce or increase net earnings and net earnings per trust unit for that
period. Acclaim enters into numerous financial instruments to manage
commodity price risk that do not qualify as hedges under the new
accounting guideline. Therefore, Acclaim has elected to not apply hedge
accounting and to follow the mark-to-market accounting method for all
financial instruments. The new accounting policy has been accounted for
prospectively.
Effective January 1, 2004, Acclaim recorded the fair value of financial
instruments as a liability of $11.2 million, and a deferred financial
derivative loss of $11.2 million. The deferred financial derivative loss
is recognized into net earnings over the life of the associated
contracts.
(b) Asset Retirement Obligations
The CICA issued Section 3110 Asset Retirement Obligations to harmonize
Canadian GAAP with Financial Accounting Standards Board Statement
No. 143. The section replaces previous guidance on future removal and
site restoration costs and is effective for fiscal years beginning on or
after January 1, 2004. The asset retirement obligation liability is
initially measured at fair value, which is the discounted future value of
the liability. The liability accretes until the obligation is settled.
The fair value is capitalized as part of the related asset and is
depleted over the useful life of the asset. The new accounting policy has
been applied retroactively with restatement of prior periods. As a result
of the retroactive application, the comparative statement of earnings has
been restated. The effect of the change on net earnings for the three
months and six months ended June 30, 2004 and 2003 was immaterial.
The following December 31, 2003 balances were restated as a result of
the change:
As Previously
($000s) Reported Adjustment As Restated
-------------------------------------------------------------------------
Property, plant and equipment 918,767 14,103 932,870
Asset retirement
obligations liability 22,866 9,856 32,722
Future income tax liability 159,312 1,779 161,091
Accumulated earnings 63,385 2,468 65,853
-------------------------------------------------------------------------
(c) Full Cost Accounting
The CICA issued Accounting Guideline 16 which replaced Accounting
Guideline 5, Full Cost Accounting in the Oil and Gas Industry. The
guideline is effective for fiscal years beginning on or after January 1,
2004 and is to be accounted for on a prospective basis. The most
significant change is the modification of the ceiling test to be
consistent with CICA Section 3063, Impairment of Long-lived Assets. The
new guideline limits the carrying value of oil and gas properties to
their fair value. The Trust adopted Accounting Guideline 16 effective
January 1, 2004 and as at January 1, 2004 and June 30, 2004, there were
no indications of impairment. The impairment test was calculated using
the consultant's average prices at April 1, 2004 for the years 2004 to
2008 as follows:
2004 2005 2006 2007 2008
-------------------------------------------------------------------------
WTI ($US/bbl) 34.25 29.00 27.00 25.00 25.00
AECO ($CDN/mcf) 6.65 5.55 5.20 5.00 5.00
-------------------------------------------------------------------------
(d) Transportation Costs
Effective January 1, 2004, the Trust has reclassified transportation
costs as a separate expense on the Statement of Earnings. Prior periods
have been reclassified for comparative purposes.
3. ACQUISITIONS
ChevronTexaco Property Acquisition
On May 25, 2004, Acclaim announced that Acclaim and Enerplus Resources
Fund ("Enerplus") entered into an agreement to acquire all of
ChevronTexaco Corporation's conventional oil and gas interests in Western
Canada. The transaction closed on June 30, 2004, with an effective date
of June 1, 2004. The acquisition was financed through the issuance of
Trust units, 8% convertible debentures (Note 5), and debt.
The allocation to the purchase cost of the assets was as follows:
Petroleum and natural gas properties $ 474,371
Future income taxes (31,275)
Asset retirement obligations (12,733)
-------------------------------------------------------------------------
Cash purchase consideration $ 430,363
-------------------------------------------------------------------------
The allocation is subject to change upon the final determination of fair
values.
In conjunction with the acquisition, Acclaim's existing credit facility
was amended and increased to $415 million, including a $400 million
revolving facility and a $15 million operating facility.
4. 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
obligation to be $45.8 million (December 31, 2003 - $32.7 million) based
on a total future liability of $144.2 million. The costs are expected to
be incurred over an average period of 15 years. The estimated liability
has been discounted using a credit adjusted risk free rate of 8 percent
and an inflation rate of 1.5 percent.
The following table reconciles Acclaim's asset retirement obligation:
Asset Retirement Obligation Amount
-------------------------------------------------------------------------
Balance, December 31, 2003 $ 32,722
Increase in liability during period 12,733
Settlement of liabilities during period (958)
Accretion expense 1,309
-------------------------------------------------------------------------
Balance, June 30, 2004 $ 45,806
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. CAPITAL
a) Trust Units Number of Units (000s) Amount
-------------------------------------------------------------------------
Balance, December 31, 2003 74,601 $ 660,048
Issued pursuant to equity offerings, net of costs 21,525 248,723
Conversion of exchangeable shares 34 364
Conversion of debentures 954 9,313
Issued for employee savings plan 71 878
Distribution reinvestment plan 107 1,304
Exercise of unit options 12 116
Unit purchase loan receivable - (1,520)
-------------------------------------------------------------------------
Balance, June 30, 2004 97,304 $ 919,226
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On April 19, 2004, the Trust issued 5,175,000 trust units at $12.00 per
trust unit for gross proceeds of $62.1 million. Net proceeds, after
underwriting fees and expenses amounted to approximately $59.0 million.
On June 15, 2004, the Trust issued 16,350,000 trust units at a price of
$12.25 per trust unit for gross proceeds of $200.3 million and
$75 million principal amount of 8% convertible extendible unsecured
subordinated debentures in connection with the Chevron acquisition. Net
proceeds of the issuance after the underwriting fees and expenses
amounted to approximately $262.0 million.
b) Exchangeable Shares Number of Units (000s) Amount
-------------------------------------------------------------------------
Balance, December 31, 2003 776 $ 8,566
Shares exchanged (34) (364)
Adjustment to exchange ratio for distributions 55 -
-------------------------------------------------------------------------
Balance, June 30, 2004 797 $ 8,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Each exchangeable share is exchangeable into units on a one-for-one basis
(subject to adjustments for distributions) with the exchangeable shares
being exchangeable into 617,292 units immediately and 179,578 units as to
one half on each October 1, 2004 and 2005.
Number of Units
c) Debentures Available on
Conversion (000s) Amount
-------------------------------------------------------------------------
i) 8% Convertible Debentures
Balance, December 31, 2003 - -
Issued, June 15, 2004 5,556 $ 75,000
Issue costs - (3,092)
-------------------------------------------------------------------------
Balance, June 30, 2004 5,556 71,908
-------------------------------------------------------------------------
ii) 11% Convertible Debentures
Balance, December 31, 2003 2,195 19,326
Converted to units during the period (954) (9,313)
-------------------------------------------------------------------------
Balance, June 30, 2004 1,241 10,013
-------------------------------------------------------------------------
Total, June 30, 2004 6,797 $ 81,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On June 15, 2004, the Trust issued $75.0 million, 8% convertible
extendible unsecured subordinated debentures. The debentures are
convertible into units at a conversion price of $13.50. Both the 8% and
11% debentures have been classified as equity because the Trust has the
option, and intends to settle, the principal and interest payable with
the issuance of units. Interest paid to the debenture holders is included
in Accumulated Earnings. During 2004, $9.3 million of debentures were
converted resulting in the issuance of 954,000 units.
In December 2002, the Trust issued $45.0 million, 11% convertible,
extendible, unsecured subordinated debentures. The debentures are
convertible into units at the option of the holder at any time prior to
maturity, or at a date set by the Trust at a conversion price of $9.75
per unit.
Number of Average
Options Exercise
d) Unit Based Compensation Plan (000s) Price
-------------------------------------------------------------------------
Balance, December 31, 2003 2,737 $ 10.15
Exercised (12) 9.67
Repurchased and cancelled (2,725) -
-------------------------------------------------------------------------
Balance, June 30, 2004 - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On May 19, 2004, the unitholders of Acclaim approved a new unit award
incentive plan to replace the Option Plan. The new plan authorizes the
Board of Directors to grant up to 2,500,000 units consisting of
Restricted Units and Performance Units to directors, officers, employees
and consultants of the Trust and its affiliates. The Restricted Units
vest over a three-year period. The Performance Units vest on the third
anniversary of the date of the grant. The number of Performance Units
granted is dependent on the performance of the Trust relative to a peer
comparison group of oil and gas trusts and other companies. A holder of a
Restricted or Performance Unit may elect, subject to consent of the
Trust, to receive cash upon vesting in lieu of the number of units held.
The plan provides for adjustments to the number of units issued based on
the cumulative distributions of the Trust during the period that the
Restricted or Performance Unit is outstanding.
As of June 30, 2004, there were 769,573 Restricted Units and 234,400
Performance Units outstanding entitling holders to 1,082,393 units upon
vesting. A compensation expense of $1.1 million was recorded during the
period to approximate the fair value (based on period end price of the
units) of the Restricted Units in excess of the Option Plan that was
replaced. A compensation expense was not recognized for the approximate
fair value of the Performance Units as it is uncertain whether the
performance criteria will be met at the end of three years.
6. DISTRIBUTIONS TO UNITHOLDERS
The following distributions have been made to unitholders:
$/Unit Amount
-------------------------------------------------------------------------
Balance, December 31, 2003 $ 2.4375 $ 140,363
-------------------------------------------------------------------------
January, 2004 0.1625 12,174
February, 2004 0.1625 12,203
March, 2004 0.1625 12,033
April, 2004 0.1625 13,101
May, 2004 0.1625 13,102
June, 2004 0.1625 15,799
-------------------------------------------------------------------------
$ 0.9750 $ 78,412
-------------------------------------------------------------------------
$ 3.4125 $ 218,775
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. FINANCIAL DERIVATIVE INSTRUMENTS
The following financial derivative contracts have been put in place as
noted below:
Commodity Contracts 2004 Q3 2004 Q4 2005
-------------------------------------------------------------------------
Natural Gas
-------------------------------------------------------------------------
Fixed price (GJ/d) 10,000 6,667 4,167
Average price ($/GJ) $6.72 $6.91 $7.00
Collars (GJ/d) 41,000 37,000 20,417
Average floor price $5.30 $5.97 $6.09
Average ceiling price $6.92 $9.24 $8.72
Call options (sold) 3,000 3,000 2,500
Average call option price (sold) $2.80 $2.80 $2.80
Call spread (purchased) (GJ/d) - 3,333 1,250
Call spread floor ($/GJ) - $9.00 $9.00
Call spread ceiling ($/GJ) - $11.50 $11.50
-------------------------------------------------------------------------
Crude Oil
-------------------------------------------------------------------------
Fixed price (bbl/d) 2,000 2,000 1,500
Average price (US$) $34.05 $34.05 $36.07
Collars (bbl/d) 7,500 7,500 7,000
Average floor price (US$) $29.75 $29.61 $29.71
Average ceiling price (US$) $33.82 $33.96 $37.00
Call spread (purchased) bbl/d 1,000 1,000 1,000
Call spread floor (US$) $33.00 $33.00 $33.00
Call spread ceiling (US$) $39.00 $40.00 $39.00
-------------------------------------------------------------------------
Future Commodity Contracts
-------------------------------------------------------------------------
Daily Quantity Contract Price Term
-------------------------------------------------------------------------
Natural Gas-Collars
(AECO)
-------------------------------------------------------------------------
8,000 GJ CDN$5.00-6.50 April 1, 2004-October 31, 2004
10,000 GJ CDN$5.00-7.00 April 1, 2004-October 31, 2004
3,000 GJ CDN$5.00-6.41 April 1, 2004-October 31, 2004
10,000 GJ CDN$6.25-7.85 July 1, 2004-October 31, 2004
5,000 GJ CDN$5.00-7.80 November 1, 2004-March 31, 2005
20,000 GJ CDN$7.00-11.00 November 1, 2004-March 31, 2005
5,000 GJ CDN$6.20-12.50 November 1, 2004-March 31, 2005
15,000 GJ CDN$6.00-8.00 April 1, 2005-October 31, 2005
Natural Gas-Three Way
Contracts (AECO)
-------------------------------------------------------------------------
5,000 GJ CDN$3.75-5.00-7.00 April 1, 2004-October 31, 2004
5,000 GJ CDN$4.00-5.00-5.81 April 1, 2004-October 31, 2004
5,000 GJ CDN$4.00-5.00-8.50 November 1, 2004-March 31, 2005
5,000 GJ CDN$5.00-6.00-8.00 April 1, 2005-October 31, 2005
Natural Gas-Fixed
Price Contracts (AECO)
-------------------------------------------------------------------------
5,000 GJ CDN$5.95 April 1, 2004-October 31, 2004
5,000 GJ CDN$7.50 July 1, 2004-October 31, 2004
5,000 GJ CDN$7.00 November 1, 2004-October 31, 2005
Natural Gas-Call
Spreads (AECO)
-------------------------------------------------------------------------
5,000 GJ
(purchased by
Acclaim) CDN$9.00-11.50 November 1, 2004-March 31, 2005
Crude Oil-Collars
(WTI)
-------------------------------------------------------------------------
1,000 bbl US$ 24.00-27.00 July 1, 2004-September 30, 2004
1,000 bbl US$ 23.00-28.05 October 1, 2004-December 31, 2004
3,000 bbl US$ 37.20-41.00 July 1, 2004-December 31, 2004
1,000 bbl US$ 32.00-38.40 January 1, 2005-December 31, 2005
2,000 bbl US$ 32.00-39.00 January 1, 2005-December 31, 2005
Crude Oil-Three Way
Collars (WTI)
-------------------------------------------------------------------------
1,000 bbl US$21.00-25.00-29.45 January 1, 2004-December 31, 2004
500 bbl US$23.00-27.00-30.00 April 1, 2004-December 31, 2004
1,000 bbl US$21.25-24.50-29.95 July 1, 2004-December 31, 2004
1,000 bbl US$21.50-24.50-29.25 July 1, 2004-December 31, 2004
1,000 bbl US$20.00-24.00-30.00 January 1, 2005-December 31, 2005
1,000 bbl US$24.00-27.00-34.00 January 1, 2005-December 31, 2005
1,000 bbl US$24.00-27.00-35.00 January 1, 2005-December 31, 2005
1,000 bbl US$30.00-34.00-43.60 January 1, 2005-December 31, 2005
Crude Oil-Fixed
(WTI)
-------------------------------------------------------------------------
1,000 bbl US$28.00 April 1, 2004-December 31, 2004
1,000 bbl US$40.10 July 1, 2004-December 31, 2004
1,000 bbl US$36.00 January 1, 2005-December 31, 2005
500 bbl US$36.20 January 1, 2005-December 31, 2005
1,000 bbl
(Heavy Oil
Differential) US$8.35 January 1, 2004-December 31, 2004
Crude Oil-Call
Spreads (WTI)
-------------------------------------------------------------------------
1,000 bbl
(purchased
by Acclaim) US$33.00-$40.00 October 1, 2004-December 31, 2004
1,000 bbl
(purchased
by Acclaim) US$33.00-$39.00 January 1, 2005-December 31, 2005
Alberta Power-Fixed
(Alberta Power Pool)
-------------------------------------------------------------------------
2 MWh CDN $43.75 January 1, 2004-December 31, 2005
2 MWh CDN $52.50 April 1, 2004-December 31, 2004
2 MWh CDN $47.50 January 1, 2005-December 31, 2005
The following table is a reconciliation of the change in the fair value
of the financial derivative instruments during the period:
Financial Financial
Derivative Derivative Unrealized
Loss Liability Loss
-------------------------------------------------------------------------
Balance, January 1, 2004 (Note 2) $ 11,180 $(11,180) $ -
Amortization (5,236) - 5,236
Unrealized loss on financial derivatives - (5,628) 5,628
-------------------------------------------------------------------------
Balance, June 30, 2004 $ 5,944 $(16,808) $ 10,864
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The estimated fair value of financial derivative instruments is based on
quoted market prices.
8. INCOME TAXES
During the first quarter of 2004, Acclaim recorded a future income tax
recovery of $4.7 million due to substantively enacted changes in the
Alberta provincial income tax rate from 12.5 percent to 11.5 percent.
9. COMMITMENTS AND GUARANTEES
In addition to hedging commitments, the Trust has various commitments and
guarantees in the normal course of business, none of which, in
management's view, are significant.
