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Peak Energy Services Trust Reports Its Financial Results for the Three and Nine Months Ended September 30, 2007
(Marketwire (English) Via Thomson Dialog NewsEdge)
CALGARY, ALBERTA--(Marketwire - Nov. 6, 2007) - Peak Energy Services Trust (TSX:PES.UN)
Financial Highlights
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Three months ended Nine months ended
September 30 September 30
(in '000 of CAD, -------------------------------------------------
except otherwise noted) 2007 2006 Change 2007 2006 Change
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Revenue 27,504 31,974 -14% 81,446 97,216 -16%
EBITDA (1) 6,769 10,659 -36% 19,191 31,099 -38%
Per unit - diluted 0.24 0.40 -40% 0.69 1.16 -41%
Normalized income (1) 1,547 5,221 -70% 6,238 19,127 -67%
Per unit - diluted 0.06 0.19 -68% 0.23 0.72 -68%
Net income (loss) (13,413) 5,221 -357% (8,722) 19,127 -146%
Per unit - diluted (0.48) 0.19 -353% (0.32) 0.72 -144%
Standardized distributable
cash (1) (3,827) (11,186) 66% 9,470 (6,104) 255%
Per unit - diluted (0.14) (0.42) 67% 0.34 (0.23) 248%
Adjusted distributable
cash (1) 4,628 8,979 -48% 16,562 25,876 -36%
Per unit - diluted 0.17 0.33 -48% 0.60 0.96 -38%
Distributions declared 3,878 7,275 -47% 14,680 21,467 -32%
Per unit 0.140 0.270 -48% 0.530 0.805 -34%
Payout ratios (2) (3)
Standardized distributable
cash N/C N/C 155% N/C
Adjusted distributable
cash 84% 81% 89% 83%
Drilling rig operating
days
(4) 31,371 41,596 -25% 90,120 122,745 -27%
Service rig utilization
(4) 58% 70% -17% 56% 68% -18%
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(1) Refer to the "Non-GAAP Measures" section for further details.
(2) Payout ratio is calculated as distributions declared divided by either
standardized distributable cash or adjusted distributable cash.
(3) Not calculatable ("N/C") as standardized distributable cash was
negative.
(4) Sources: Canadian Association of Oilwell Drilling Contractors ("CAODC"),
the Daily Oil Bulletin ("DOB") and Petroleum Services Association of
Canada ("PSAC")
Financial Summary
During the third quarter of fiscal 2007, natural gas prices continued to show near-term weakness driven primarily by the larger than historical norm of natural gas inventory in North America. The Western Canadian Sedimentary Basin ("WCSB") recent years' drilling activity have been between 60 and 70 percent natural gas oriented, hence depressed natural gas prices have had a significant adverse impact on drilling activity. Furthermore, it is not expected that producers will be motivated to increase their natural gas directed drilling programs until natural gas prices improve significantly, which is now not anticipated to occur until the later part of 2008. Conversely, oil prices have shown relative strength and this has motivated some producers to focus their efforts towards oil related activities and is partially offsetting the lack of natural gas related activities. Adding further uncertainty to the industry was the mid September 2007 Alberta Royalty Review report and subsequent late October 2007 Alberta provincial government announced increases to Alberta royalty rates paid by producers. The increased royalty rates will reduce producers' return on Alberta related investments, adversely impacting expectations of WCSB industry activity levels (historically, approximately 75 percent of drilling rig operating days have been generated in Alberta).
For the third quarter of 2007, drilling rig operating days were down 25 percent or 10,225 days as compared to the prior year period. Furthermore, service rig utilization decreased from 70 percent in the third quarter of 2006 to 58 percent for the third quarter of this year. Peak Energy Services Trust ("Peak" or the "Trust") revenue for the three months ended September 30, 2007, as compared to the prior year period, decreased by $4.5 million or 14 percent to $27.5 million. For the third quarter of 2007, as compared to the prior year period, EBITDA decreased $3.9 million or 36 percent to $6.8 million and as a percentage of revenue decreased to 25 percent, while adjusted distributable cash decreased $4.4 million or 48 percent to $4.6 million. Meanwhile, Peak recorded a normalized income of $1.5 million ($0.06 per Unit diluted) for the third quarter of 2007, a decrease of $3.7 million or 70 percent over the third quarter of 2006. Lastly, the Trust recorded a net loss and comprehensive loss of $13.4 million (loss of $0.48 per Unit diluted) for the three months ended September 30, 2007, a decrease of $18.6 million or 357 percent over the prior year period.
Year-to-date, drilling rig operating days were down 27 percent or 32,625 days as compared to the prior year period. Furthermore, service rig utilization decreased from 68 percent for the first nine months of fiscal 2006 to 56 percent for the first nine months of this year. Peak's revenue for the nine months ended September 30, 2007, as compared to the prior year period, decreased by $15.8 million or 16 percent to $81.4 million. For the first nine months of fiscal 2007, as compared to the prior year period, EBITDA decreased $11.9 million or 38 percent to $19.2 million and as a percentage of revenue decreased to 24 percent, while adjusted distributable cash decreased $9.3 million or 36 percent to $16.6 million. Meanwhile, Peak recorded a normalized income of $6.2 million ($0.23 per Unit diluted) year-to-date, a decrease of $12.9 million or 67 percent over the prior year period. Lastly, the Trust recorded a net loss and comprehensive loss of $8.7 million (loss of $0.32 per Unit diluted) for the nine months ended September 30, 2007, a decrease of $27.8 million or 146 percent over the prior year period.
Distributions declared to Unitholders were $14.7 million (2006 - $21.5 million) or $0.530 per Unit (2006 - $0.805 per Unit), which resulted in an adjusted distributable cash payout ratio of 89 percent (2006 - 83 percent) for the nine months ended September 30, 2007.
Total assets decreased $23.8 million or 9 percent from $271.7 million at December 31, 2006 to $247.9 million at September 30, 2007. Total liabilities decreased $1.1 million or 1 percent from $109.0 million at December 31, 2006 to $107.9 million at September 30, 2007. Unitholders' equity decreased $22.7 million or 14 percent from $162.7 million at December 31, 2006 to $140.0 million at September 30, 2007.
Revenue
For the three months ended September 30, 2007, Peak generated revenue of $27.5 million compared to $32.0 million for the prior year period, representing a decrease of 14 percent compared to a 25 percent decrease in drilling rig operating days and a 17 percent decrease in service rig activity over this time period. Total drilling rig operating days for the third quarter of 2007 were 31,371 days compared to 41,596 days for the prior year period. Meanwhile service rig utilization was 58 percent for the three months ended September 30, 2007, compared to 70 percent for the same period of 2006.
For the nine months ended September 30, 2007, Peak generated revenue of $81.4 million compared to $97.2 million for the prior year period, representing a decrease of 16 percent compared to a 27 percent decrease in drilling rig operating days and an 18 percent decrease in service rig activity over this time period. Total drilling rig operating days for the first three quarters of 2007 were 90,120 days compared to 122,745 days for the prior year period. Meanwhile service rig utilization was 56 percent for the nine months ended September 30, 2007, compared to 68 percent for the same period of 2006.
Drilling Services' revenue decreased by $3.6 million or 18 percent as it generated $16.5 million in revenue or 60 percent of the Trust's total revenue for the three months ended September 30, 2007, compared to $20.0 million or 63 percent for the prior year period. The decrease in revenue was better than the 25 percent decrease in drilling rig operating days. The primary reason for Peak's revenue variance not being as drastic as the industry activity level decline, was the significant net capital expenditures made throughout fiscal 2006 to expand Peak's drilling equipment product offerings more than offsetting the decrease in overall equipment utilization.
Year-to-date Drilling Services' revenue decreased by $12.3 million or 20 percent as it generated $47.9 million in revenue or 59 percent of the Trust's total revenue, compared to $60.2 million or 62 percent for the prior year period. Consistent with the current quarter, the revenue decrease was better than the 27 percent decrease in drilling rig operating days. The same current quarter factors attributed to the less significant decrease in revenue as compared to the industry activity level.
Production Services' revenue decreased by $0.9 million or 8 percent as it contributed $11.0 million in revenue or 40 percent of the Trust's total revenue for the three months ended September 30, 2007, compared to $11.9 million or 37 percent for the prior year period. Consistent with the Drilling Services' revenue variance, the decrease in revenue was not as drastic as the 17 percent decrease in service rig activity and was the result of significant net capital expenditures made throughout fiscal 2006 to expand Peak's production equipment product offerings more than offsetting the decrease in overall equipment utilization.
For the first three quarters of fiscal 2007, Production Services' revenue decreased by $3.5 million or 9 percent as it generated $33.5 million in revenue or 41 percent of the Trust's total revenue, compared to $37.0 million or 38 percent for the prior year period. Consistent with the current quarter, the revenue decrease was better than the 18 percent decrease in service rig activity. The same current quarter factors attributed to the less drastic decrease in revenue as compared to the industry activity level.
Expenses
Operating expenses - For the three months ended September 30, 2007, operating expenses were lower than the comparable prior year period by $1.7 million or 11 percent. However as a percentage of revenue, operating expenses were 52 percent compared to the prior year period of 50 percent. The primary drivers of the net increase in operating expenses as a percentage of revenue were:
- the lower revenue performance in the third quarter of fiscal 2007 not offsetting the relatively high fixed portion of Peak's operating expenses;
- an increase in heavy truck and equipment fuel costs, as a percentage of revenue, primarily driven by a significant increase in revenue activities related to longer distance fluids handling work; and
- an increase in employee related compensation costs, as a percentage of revenue, incurred as a result of the western Canada (especially Alberta) wide increase in demand for skilled employees placing upward pressure on these costs.
Partially offsetting the net increase in operating expenses, as a percentage of revenue, were lower repairs and maintenance ("R&M") costs. Management has implemented a selective R&M program, whereby equipment identified as not likely to be utilized in the near-term, due to lower industry activity levels, are having their required R&M deferred until the equipment is expected to be utilized.
For the nine months ended September 30, 2007, operating expenses were lower than the comparable prior year period by $4.8 million or 10 percent. However as a percentage of revenue, operating expenses were 54 percent compared to the prior year period of 50 percent. In addition to the factors detailed above, severance costs incurred late in the first quarter of fiscal 2007 to adjust the number of employees required to support operations at near-term industry activity levels anticipated and an increase in light vehicle and related costs, as a percentage of revenue, contributed to the net increase in operating expenses as a percentage of revenue.
General and administrative expenses - For the third quarter of fiscal 2007, general and administrative expenses (G&A) were $1.1 million or 21 percent higher than the comparable prior year period. As a percentage of revenue, G&A costs increased to 23 percent for the current quarter as compared to 17 percent for the third quarter of 2006. The primary contributors to the net dollar increase were:
- increased facility costs (rent, utilities and property taxes) resulting from the recent build out of a "super shop" in Red Deer, Alberta, a new shop in Slave Lake, Alberta and head office in Calgary, Alberta to support activities; and
- increased financing costs related to the renewal of Peak's financing facilities.
For the first nine months of 2007, G&A costs were $0.9 million or 5 percent higher than the comparable prior year period. As a percentage of revenue, G&A costs increased to 23 percent for the current year period as compared to 18 percent for the prior year period. The contributing factors partially offsetting the net dollar increase detailed for the third quarter above were:
- lower advertising and promotion costs, as management focused on reducing these cost to be consistent with revenue levels being achieved;
- lower professional consulting fees associated with the Trust's regulatory compliance activities as management has employed more "in-house" expertise to better manage these costs; and
- lower employee relations costs, as the second quarter of fiscal 2006 had certain non-recurring costs associated with celebrating Peak's 10th year anniversary.
In addition to the facility costs detailed for the third quarter, higher costs resulting from the recent build out of "super shops" in Grand Prairie, Alberta and Leduc, Alberta to support Peak's operations contributed to the year-to-date increase.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") - EBITDA decreased $3.9 million or 36 percent to $6.8 million for the three months ended September 30, 2007. EBITDA as a percentage of revenue, was 25 percent for the current quarter as compared to 33 percent for the comparable prior year quarter. The primary drivers of the quarter-over-quarter percentage of revenue decrease are detailed above.
EBITDA decreased $11.9 million or 38 percent to $19.2 million for the nine months ended September 30, 2007. EBITDA as a percentage of revenue, was 24 percent for the current year period as compared to 32 percent for the prior year period. The primary drivers of the year-over-year percentage of revenue decrease are detailed above.
Depreciation and amortization expenses - For the three months ended September 30, 2007, depreciation and amortization expenses were lower than the prior year period by $0.8 million or 15 percent. The reduction was the result of lower utilization based depreciation due to lower activity levels, partially offset by a larger overall asset base being depreciated. For the nine months ended September 30, 2007, depreciation and amortization expenses were lower than the prior year period by $1.2 million or 9 percent. The reduction was consistent with factors for the third quarter detailed above.
Interest on long-term debt expense - Interest on long-term debt expense increased to $1.2 million for the three months ended September 30, 2007, representing an increase of $0.4 million or 55 percent over the third quarter of 2006. Interest on long-term debt expense increased to $3.4 million for the nine months ended September 30, 2007, representing an increase of $1.4 million or 71 percent over the first nine months of fiscal 2006. Of the debt facility currently outstanding, $30.0 million is at a fixed rate of 5.8 percent, $10.0 million is at a fixed rate of 6.7 percent with the remaining $30.8 million at a floating rate tied to the bank prime lending rate.
Impairment loss on goodwill - Goodwill is recorded at cost and is not amortized. The Trust performed a goodwill impairment test in the third quarter as conditions presented themselves that suggested goodwill may be impaired. The results determined that the carrying amount of the Production Services operating segment assets exceeded their fair value. The conditions which precipitated the impairment of goodwill were:
- the mid September 2007 Alberta Royalty Review report and subsequent late October 2007 Alberta provincial government announced increases to Alberta royalty rates paid by producers that will reduce producers' return on Alberta related investments, adversely impacting expectations of WCSB industry activity levels;
- near-term commodity price weakness of natural gas negatively impacting expectations of industry activity levels;
- recent changes to tax laws and rates for trusts commencing in 2011 reducing after tax cash flows the Trust; and
- upward cost pressures experienced by the industry adversely impacting operating margins.
The culmination of these conditions has decreased the enterprise value of the Trust, which is reflected in the market value of the Trust at September 30, 2007. Accordingly, a goodwill impairment loss of $15.6 million was recognized in the Production Services operating segment as an impairment loss on goodwill.
Loss on sale of equipment - For the three and nine months ended September 30, 2007, the loss on sale of equipment amounted to a loss of $0.8 million and a loss of $1.3 million, respectively. The primary transactions contributing to the year-to-date loss related to the disposal of access matting assets that were no longer able to generate rental revenue and the write-off of head office leasehold improvements resulting from the early termination of a prior lease in order to facilitate the transition to a new head office location with favorable long-term lease conditions.
Provision for income taxes - The current tax expense of $0.5 million and future tax reduction of $2.1 million, resulted in a net income tax recovery of $1.6 million and an effective income tax rate of 11 percent for the three months ended September 30, 2007. Meanwhile, for the nine months ended September 30, 2007, the current income tax expense of $0.8 million and future income tax reduction of $6.1 million, resulted in a net income tax recovery of $5.3 million and an effective income tax rate of 38 percent. Contributing to the significant year-to-date future income tax reduction was the impact of the federal government's approval of a reduction in the general tax rate for fiscal 2011, along with changes in management's estimate of effective tax rates applied to recognize certain future income tax assets and liabilities on "temporary differences" (differences between the accounting basis and the tax basis of the entities assets and liabilities). The effective income tax rate differs significantly from the statutory corporate rate of 32 percent as the result of the Trust's legal structure. As a mutual fund trust for purposes of the Income Tax Act (Canada), the Trust is currently only subject to statutory income taxes on taxable income not distributed to Unitholders. The distributions for the first nine months of 2007 were $14.7 million resulting in a tax sheltering of $4.4 million.
The federal government's announced intentions to require income trusts to pay income taxes at rates consistent with corporations has effectively been enacted into law during June 2007. Commencing in fiscal 2011, Peak will be required to pay a tax of 31.5 percent on distributions it makes to Unitholders. This change in the tax laws will materially reduce the cash available to distribute to Unitholders. This has had a significant impact on existing trusts', including Peak's, enterprise values and their ability to access debt and equity financing at previously experienced levels. Despite this, Peak's underlying business activities remain the same and management is evaluating its options to determine the optimal capital structure for the Trust on a go-forward basis.
Income
Normalized income - For the three months ended September 30, 2007, normalized income for impairment loss on goodwill was $1.5 million ($0.06 per Unit diluted) which represented a 70 percent decrease from the prior year period amount of $5.2 million ($0.19 per Unit diluted). For the nine months ended September 30, 2007, normalized income for impairment loss on goodwill was $6.2 million ($0.23 per Unit diluted) which represented a 67 percent decrease from the prior year period amount of $19.1 million ($0.72 per Unit diluted).
Net income - For the three months ended September 30, 2007, net income and comprehensive income decreased 357 percent to a net loss and comprehensive loss of $13.4 million (loss of $0.48 per Unit diluted) compared to net income and comprehensive income of $5.2 million ($0.19 per Unit diluted) for the prior year period. For the nine months ended September 30, 2007, net income and comprehensive income decreased 146 percent to a loss of $8.7 million (loss of $0.32 per Unit diluted) compared to net income and comprehensive income of $19.1 million ($0.72 per Unit diluted) for the prior year period.
Balance Sheet
The Trust's balance sheet remains strong with working capital (defined as current assets less current liabilities excluding current portion of long-term debt) of $19.2 million, net debt (defined as interest bearing debt less cash and cash equivalents) of $66.8 million on tangible assets of $204.9 and Unitholders' equity of $140.0 million at September 30, 2007.
Cash Flow
For the third quarter of 2007 and year-to-date, cash provided by operating activities was $1.9 million (2006 - $4.3 million) and $24.4 million (2006 - $31.8 million), respectively. Cash provided by operating activities are heavily dependent on the generation of sufficient income before non-cash items. As such, changes in the level of industry activity will significantly affect cash provided by operating activities.
Net cash used in investing activities for the third quarter of fiscal 2007 was $5.4 million (2006 - $15.7 million) and year-to-date was $12.2 million (2006 - $36.5 million). For the nine months ended September 30, 2007, the activities were the result of:
- $9.5 million of net equipment purchases including proceeds on sale of equipment of $5.4 million; and
- a $2.7 million net working capital decrease in accounts payable and accruals.
Net cash used in financing activities for the three months ended September 30, 2007 was $4.4 million (2006 - net cash provided by financing activities was $5.5 million) and year-to-date was $12.1 million (2006 - net cash provided by financing activities was $3.2 million). For the nine months ended September 30, 2007, the activities were the result of:
- an increase in long-term debt of $3.0 million used to fund internal capital expenditures;
- the issuance of Trust Units in the amount of $1.0 million associated with the Trust's Distribution Reinvestment Plan ("DRIP") and Premium DRIP; and
- the payment of $16.0 million in Trust distributions to Unitholders.
Capital Expenditure Program
For the first nine months of fiscal 2007 the Trust expended the following, by segment, on capital related items:
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Nine months ended September 30, 2007 Drilling Production
(in '000 of CAD) Services Services Total
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Growth 677 2,677 3,354
Maintenance 640 387 1,027
Infrastructure - - 10,550
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1,317 3,064 14,931
Proceeds on sale of equipment (5,394)
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9,537
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Peak's capital expenditure program for fiscal 2007 has increased from what
was disclosed in the MD&A of the 2006 Annual Report. Management now expects
to spend the following for fiscal 2007:
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Fiscal 2007 capital expenditure program Drilling Production
(in '000 of CAD) Services Services Total
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Growth 718 3,338 4,056
Maintenance 1,383 623 2,006
Infrastructure - - 12,243
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2,101 3,961 18,305
Proceeds on sale of equipment (5,516)
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12,789
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Included in infrastructure capital expenditures are $2.4 million of leasehold inducements that have been capitalized as deferred lease inducements. This amount will be amortized over the term of the lease as a reduction of rent expense in G&A costs. The Trust will receive the $2.4 million leasehold inducement by year end. In addition to the planned capital expenditures for fiscal 2007, the Trust intends on continuing to identify, evaluate and acquire oil and gas service companies and/or service assets that complement Peak's business model. The Trust plans to use cash generated from operating activities to fund maintenance capital expenditures and to utilize its existing long-term debt and equity facilities outlined below to fund growth and infrastructure capital expenditures and any strategic business acquisitions contemplated for fiscal 2007.
Distributable cash
Standardized distributable cash - Standardized distributable cash is defined as cash flow from operating activities less adjustments for total capital expenditures, as reported in the GAAP financial statements, and restrictions on distributions arising from compliance with financial covenants restrictive as of the date of the calculation.
The following was the Trust's standardized distributable cash and associated
payout ratio of distributions declared:
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Three months ended Nine months ended
September 30 September 30
(in '000 of CAD, ----------------------------------------
except otherwise noted) 2007 2006 2007 2006
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Cash flow from operating activities 1,920 4,275 24,401 31,821
Less adjustments for:
Business acquisitions - - - (4,106)
Purchase of equipment (5,747) (15,461) (14,931) (33,819)
Distribution restrictions caused by
financial covenant - - - -
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Standardized distributable cash (3,827) (11,186) 9,470 (6,104)
Distributions declared to Unitholders 3,878 7,275 14,680 21,467
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Distribution deficit (7,705) (18,461) (5,210) (27,571)
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Payout ratio of standardized
distributable cash (1) N/C N/C 155% N/C
Standardized distributable cash
Per unit - basic (0.14) (0.42) 0.34 (0.23)
Standardized distributable cash
Per unit - diluted (0.14) (0.42) 0.34 (0.23)
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(1) Not calculatable ("N/C") as standardized distributable cash was
negative.
Standardized distributable cash for the three months ended September 30, 2007 was negative $3.8 million (negative $0.14 per Unit diluted). Meanwhile distributions declared for third quarter of 2007 were $3.9 million. The payout ratio of standardized distributable cash was not calculable as standardized distributable cash was negative. The $7.7 million distribution deficit between standardized distributable cash and distributions declared was primarily funded by cash on hand at the end of the second quarter of 2007 from the accumulation of cash as a result of the seasonal working capital impact on the Trust. The Trust's activities are significantly influenced by the seasonal activity in the WCSB whereby activity typically begins to increase in the summer / fall, peaks in the winter and decreases in the spring. Additional non-cash working capital is required during the increase in activity as a result of the increase in revenue and associated operational expenses. Revenue will exceed operational expenses during this increase in activity, hence the "net revenue" results in a build up of non-cash working capital in the form of a net increase in accounts receivable less accounts payable. Subsequently, in the spring during the decrease in activity, non-cash working capital decreases as the increase in accounts receivable associated with winter are collected. Overall, non-cash working capital will fluctuate due to the seasonal effects of the industry, however it should not materially change on a year-over-year basis.
For the nine months ended September 30, 2007, standardized distributable cash was $9.5 million ($0.34 per Unit diluted). Meanwhile distributions declared year-to-date were $14.7 million. The payout ratio of standardized distributable cash was 155 percent. The $5.2 million distribution deficit between standardized distributable cash and distributions declared was primarily funded by $5.4 million in proceeds on the sale of equipment and $3.0 million of long-term debt.
Adjusted distributable cash - Adjusted distributable cash is defined as standardized distributable cash adjusted for business acquisitions, growth and infrastructure capital expenditures and seasonal changes in non-cash working capital. Adjusted distributable cash is used by management to measure the Trust's ability to generate the cash necessary to make distributions, repay debt or fund future growth through capital investment.
It is management's strategy to fund business acquisitions, growth and infrastructure capital expenditures from additional long-term debt or equity financing as these activities are enhancing the Trust's overall productive capacity. Furthermore, management's non-cash working capital strategy is to maintain a consistent long-term balance, however non-cash working capital is subject to seasonal fluctuations as detailed above. As a result of these strategies, the aforementioned items are adjusted for in determining adjusted distributable cash.
Effectively, adjusted distributable cash is the same as the Trust's former disclosed measure of funds from operations less maintenance capital expenditures. Management views maintenance capital expenditures as an operating expenditure required to maintain the Trust's productive capacity, hence does not adjust for maintenance capital expenditures in determining adjusted distributable cash.
The following was the Trust's adjusted distributable cash and associated
payout ratio of distributions declared:
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Three months ended Nine months ended
September 30 September 30
(in '000 of CAD, -------------------------------------
except otherwise noted) 2007 2006 2007 2006
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Standardized distributable cash (3,827) (11,186) 9,470 (6,104)
Adjusted for:
Business acquisitions - - - 4,106
Growth capital expenditures 914 12,149 3,355 25,769
Infrastructure capital expenditures 4,204 1,273 10,545 3,312
Seasonal change in non-cash
working capital 3,337 6,743 (6,808) (1,207)
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Adjusted distributable cash 4,628 8,979 16,562 25,876
Distributions declared to Unitholders 3,878 7,275 14,680 21,467
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Distribution surplus 750 1,704 1,882 4,407
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Payout ratio of adjusted
distributable cash 84% 81% 89% 83%
Adjusted distributable cash
Per unit - basic 0.17 0.33 0.60 0.97
Adjusted distributable cash
Per unit - diluted 0.17 0.33 0.60 0.96
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The adjusted distributable cash payout ratio was 84 percent and 89 percent (2006 - 81 percent and 83 percent) for the three and nine months ended September 30, 2007. The distribution surplus between adjusted distributable cash and distributions declared was $0.8 million and $1.9 million for the three and nine months ended September 30, 2007 and was used for funding growth and infrastructure capital expenditures. The Trust's Indentures (for both Peak and Peak Commercial Trust) govern the amounts that the Trustee and the Administrator, Peak Energy Services Ltd. ("PESL"), can distribute to Unitholders. These Indentures give management the latitude to withhold reasonable reserves for operations. Management's long-term objective is to pay in the range of 65 to 75 percent of the Trust's adjusted distributable cash on an annual basis. Formerly, management disclosed its objective was to distribute 50 to 60 percent of fund from operations. Adjusted distributable cash is effectively funds from operations less maintenance capital expenditures, hence the increase in the range is to reflect the impact of maintenance capital expenditures. Management believes that this payout ratio level will allow it to fulfill its vision and execute on its strategy, while maintaining a stable financial position that will insulate the Trust from any short-term fluctuations in anticipated industry activity levels without having to reduce or eliminate the current distribution amount per Unit. The current adjusted distributable cash payout ratio is higher than management's long-term objective of 65 to 75 percent, due to seasonality of the Trust's operations and the current downturn in industry activity levels adversely impacting the Trust's financial results. Management and the Board of Directors closely monitor the adjusted distributable cash payout ratio and will make adjustments to the monthly distributions declared based on its expectations of the Trust's forecasted financial performance. It should be noted that there can be no absolute assurances made that the Trust will make any future distributions.
Financing strategy - The Trust's current long-term debt facilities are intended to be utilized primarily for productive capacity expansion initiatives in the form of growth capital expenditures and strategic business acquisitions. Since inception of the Trust, it has been management's strategy to indefinitely carry a reasonable amount of core long-term debt and when the opportunity presented itself to reduce its core long-term debt only through equity financing to create additional facilities to fund future business acquisitions and growth capital expenditures. Since the changes in tax laws regarding trusts was announced by the federal government last year, it has become increasing more difficult to raise equity capital as a trust. Consequently, management is considering shifting is financing strategy which may include using a significant portion of its adjusted distributable cash to reduce the Trust's core long-term debt to create additional facilities to be available for when future business acquisitions and growth capital expenditure opportunities present themselves.
Corporate Governance
The regulatory and statutory compliance environment in Canada is rapidly evolving to ensure effective corporate governance frameworks exist within publicly held entities. These standards involve ensuring more timely, accurate and complete financial reporting and disclosures. Of the recently added compliance requirements, the most significant expenditure of resources for the Trust has and will involve the requirements of National Instrument ("NI") 52-109. Peak's CEO and CFO have filed the necessary certifications to September 30, 2007.
Outlook
The outlook for the fourth quarter of 2007 is somewhat restrained due to Management's expectations that drilling utilization will continue to emulate the lower than seasonal levels of activity that the oil and gas industry has experienced in the third quarter of this year. Similar to what was experienced in 2006 the historical "ramp up" in activity normally associated with the fourth quarter of the year is once again not materializing as would be expected. Management expects rig utilization levels for the fourth quarter of 2007 to average in the range of 45 to 50 percent, down by approximately 10 to 15 percent compared to the same period in 2006 when rig utilization averaged 56 percent. Activity levels have continued to be adversely impacted due to the overhang in natural gas inventory which has been a lingering issue since mid 2006. Coupled with this, the Alberta Government's recent announcement of its "New Royalty Framework" on October 25th has cast a foreboding shadow of uncertainty throughout the oil and gas industry in Alberta in the form of higher royalty payments to be made by oil and gas producers. Although it is certain that the affects of this new royalty program will have a negative impact on drilling activity in Alberta for the short-term, management expects it will take several weeks or even months for the magnitude of the impact over the long-term to be quantified.
Peak generated revenue of $81.4 million for the nine months ended September 2007 which represents a decrease of 16 percent as compared to the prior year period while rig operating days decreased 27 percent for the corresponding period. Although the Trust's organic growth plan was cut back substantially in 2007 due to lower industry activity levels, an aggressive capital expenditure program over the previous two fiscal years of approximately $121.0 million (including the first nine months of 2007) has allowed Peak's revenue to hold up relatively well on a year-over-year basis as compared to the drop in drilling rig operating days for the corresponding period. Pricing for our equipment and services has also contributed positively to the Trust's reasonably strong revenue performance year-to-date as it has remained relatively firm for the period. Peak also continued to focus on the build out of its infrastructure during the third quarter with larger, more efficient operations facilities being completed in Red Deer, Alberta, Slave Lake, Alberta and Estevan, Saskatchewan as well as new head office space in Calgary, Alberta. This larger, enhanced infrastructure will permit Peak to more effectively manage its current asset base as well as any future growth opportunities that may be encountered. The combination of Peak's larger asset base and management's continued commitment to focusing internally leave the Trust well positioned as industry moves forward into the winter drilling season.
Consistent with the two previous downturns in Peak's history, the Trust continues to proactively manage its business by focusing internally on cash flow management, cost reduction initiatives and growth opportunities. This internal focus is evidenced by the Trust's strategy to lower distributions in the first and third quarters of 2007, a reduction in its workforce by a total of 18 percent over the past 14 months and its selective repair and maintenance program, whereby equipment is made field ready only on an "as needed basis" commensurate with the levels of activity being experienced at any given time. Although some of these initiatives are difficult decisions to make, management continues to believe strongly in its fiduciary responsibility to act in a fiscally responsible manner on behalf of all of its stakeholders. To that end, Peak's operating expenses have been reduced by $4.8 million during the first nine months of 2007, allowing the Trust to generate a positive gross margin of 46 percent for the period.
Although the current downturn has become more protracted than originally anticipated, management continues to believe that the long-term outlook for the oil and gas industry in North America remains positive and that Peak remains in a position of strength that will allow it to generate significant growth and value for its stakeholders as more robust activity levels return in the future. As in the past, the Trust will remain vigilant and will pursue any strategic growth opportunities that may arise in the future.
Non-GAAP Measures
EBITDA is defined as earnings before interest, taxes, depreciation and amortization and other items. EBITDA is not a recognized measure under Canadian GAAP. Management believes, in addition to net income, EBITDA is a useful supplemental measure as it provides an indication of the results generated by Peak's principle business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions. Readers should be cautioned that EBITDA should not be construed as an alternative to net income determined in accordance with Canadian GAAP as an indicator of the Trust's performance. Peak's method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies.
Normalized income is defined as net income before the after-tax impact of impairment loss on goodwill. Normalized income is not a recognized measure under Canadian GAAP. Management believes, in addition to net income, normalized income is a useful supplemental measure as it provides an indication of income before unusual items. Readers should be cautioned that normalized income should not be construed as an alternative to net income, determined in accordance with Canadian GAAP, as an indicator of the Trust's performance. Peak's method of calculating normalized income, may differ from other companies and, accordingly, normalized income may not be comparable to measures used by other companies.
Standardized distributable cash is defined as cash flow from operating activities less adjustments for total capital expenditures, as reported in the GAAP financial statements, and restrictions on distributions arising from compliance with financial covenants restrictive as of the date of the calculation. Standardized distributable cash is not a recognized measure under Canadian GAAP, however standardized distributable cash is in accordance with the recommendations provided by the CICA's publication "Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure". Readers should be cautioned that standardized distributable cash should not be construed as an alternative to cash flow from operating activities, as an indicator of the Trust's performance. Peak's method of calculating standardized distributable cash may differ from other companies and, accordingly, standardized distributable cash may not be comparable to measures used by other entities.
Adjusted distributable cash is defined as standardized distributable cash adjusted for business acquisitions, growth and infrastructure capital expenditures and seasonal changes in non-cash working capital. Adjusted distributable cash is not a recognized measure under Canadian GAAP. Management believes, in addition to standardized distributable cash, adjusted distributable cash is a useful supplemental measure as it demonstrates the Trust's ability to generate the cash necessary to make distributions, repay debt or fund future growth through capital investment. Readers should be cautioned that adjusted distributable cash should not be construed as an alternative to standardized distributable cash, determined in accordance with the recommendations provided by the CICA's publication "Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure", as an indicator of the Trust's performance. Peak's method of calculating adjusted distributable cash may differ from other companies and, accordingly, adjusted distributable cash may not be comparable to measures used by other entities.
Conference Call
Management will hold a conference call to discuss the quarter end results at 9:30 a.m. MT (11:30 a.m. ET) on Wednesday, November 7, 2007. To participate, please dial 1-800-525-6384. Participants are asked to call at least 10 minutes before the start of the call. For those unable to participate in the live call, a replay will be available until Wednesday, November 14, 2007 by dialing 1-416-695-5800 or 1-800-408-3053, verbal pass code 3240358.
Financial Results
The following selected financial information summarizes Peak's consolidated financial results for the three and nine months ended September 30, 2007. Peak's quarterly report, including the consolidated financial statements and management's discussion and analysis for the three and nine months ended September 30, 2007 and 2006 will be available at www.sedar.com on or about November 14, 2007.
CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND
DEFICIT
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Three months ended Nine months ended
September 30, September 30,
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(in thousands of CAD, except per
Unit amounts) (unaudited) 2007 2006 2007 2006
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Revenue $ 27,504 $ 31,974 $ 81,446 $ 97,216
Expenses:
Operating 14,288 15,969 43,709 48,479
General and administrative 6,447 5,346 18,546 17,638
Depreciation and amortization 4,262 5,018 12,964 14,206
Interest on long-term debt 1,202 776 3,423 2,007
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26,199 27,109 78,642 82,330
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Income before other items 1,305 4,865 2,804 14,886
Other items:
Impairment loss on goodwill 15,559 - 15,559 -
Loss on sale of equipment 787 490 1,261 390
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16,346 490 16,820 390
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Income (loss) before income
taxes and non-controlling
interest (15,041) 4,375 (14,016) 14,496
Provision for income taxes:
Current 451 53 837 244
Future (reduction) (2,079) (899) (6,131) (4,945)
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(1,628) (846) (5,294) (4,701)
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