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Trans America Industrial Com Npv | TSXV:TSA | TSX Venture | Common Stock |
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Bonavista Energy Trust (TSX:BNP.UN) is pleased to report to unitholders its interim consolidated financial and operating results for the three and nine months ended September 30, 2008. ---------------------------------------------------------------------------- Highlights ---------------------------------------------------------------------------- Three months Nine months ended September 30, ended September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- Financial ($ thousands, except per unit) Production revenues 354,667 219,885 1,102,609 668,985 Funds from operations (1) 173,091 120,382 512,135 375,005 Per unit (1) (2) 1.48 1.14 4.54 3.57 Distributions declared 84,859 76,972 246,716 230,265 Per unit 0.90 0.90 2.70 2.70 Percentage of funds from operations (1) 49% 64% 48% 61% Net income 207,594 58,990 309,174 154,556 Per unit (2) 1.77 0.56 2.74 1.47 Total assets 2,488,447 2,188,154 Long-term debt, including working capital deficiency 648,572 690,093 Long-term debt, net of adjusted working capital (3) 635,785 683,121 Unitholders' equity 1,361,847 1,072,264 Capital expenditures: Exploitation and development 89,847 50,889 245,278 209,220 Acquisitions, net 2,743 98,311 176,888 99,121 Weighted average outstanding equivalent trust units: (thousands) (2) Basic 117,032 105,983 112,889 105,132 Diluted 119,439 108,405 115,313 107,729 ---------------------------------------------------------------------------- Operating (boe conversion - 6:1 basis) Production: Natural gas (mmcf/day) 177 171 176 171 Oil and liquids (bbls/day) 23,912 24,938 23,860 23,784 Total oil equivalent (boe/day) 53,473 53,382 53,157 52,328 Product prices: (4) Natural gas ($/mcf) 8.21 5.86 8.56 7.02 Oil and liquids ($/bbl) 80.31 56.36 76.82 53.12 Operating expenses ($/boe) 9.56 8.51 9.30 8.44 General and administrative expenses ($/boe) 0.73 0.71 0.73 0.68 Cash costs ($/boe) (5) 11.72 11.15 11.86 10.82 Operating netback ($/boe) (6) 37.34 27.16 37.73 28.63 ---------------------------------------------------------------------------- NOTES: (1) Management uses funds from operations to analyze operating performance, distribution coverage and leverage. Funds from operations as presented do not have any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculations of similar measures for other entities. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period nor should it be viewed as an alternative to cash flow from operating activities, net income or other measures of financial performance calculated in accordance with Canadian GAAP. All references to funds from operations throughout this report are based on cash flow from operating activities before changes in non-cash working capital and asset retirement expenditures. Funds from operations per unit is calculated based on the weighted average number of units outstanding consistent with the calculation of net income per unit. (2) Basic per unit calculations include exchangeable shares which are convertible into trust units on certain terms and conditions. (3) Long-term debt, net of adjusted working capital excludes unrealized losses on financial instruments and its related tax impact. (4) Product prices include realized gains or losses on financial instruments. (5) Cash costs equal the total of operating, general and administrative, and financing expenses. (6) Operating netback equals production revenues including realized gains or losses on financial instruments, less royalties, transportation and operating expenses, calculated on a boe basis. ---------------------------------------------------------------------------- Three months ended ------------------------------------------------- Trust Unit Trading September 30, June 30, March 31, December 31, Statistics 2008 2008 2008 2007 ---------------------------------------------------------------------------- ($ per unit, except volume) High 37.65 37.64 31.35 31.85 Low 25.01 28.96 24.24 24.14 Close 26.29 37.45 29.85 28.50 Average Daily Volume - Units 273,074 329,638 231,949 275,892 ---------------------------------------------------------------------------- MESSAGE TO UNITHOLDERS Bonavista Energy Trust ("Bonavista" or the "Trust") is pleased to report to its unitholders (the "Unitholders") its consolidated financial and operating results for the three and nine months ended September 30, 2008. Bonavista has continued on its course of generating profitable results since commencing operations as an energy trust in July 2003. The continued execution of Bonavista's proven strategies in the third quarter of 2008 are a testament to the validity and effectiveness of an operationally and technically focused energy trust. The third quarter results for 2008 are also highlighted by an active drilling program, which has led to continued success in several of our key areas. Bonavista plans to spend approximately $475 million in 2008 on its conventional drilling and acquisition programs, drilling approximately 210 wells, and forecasts production of approximately 53,500 boe per day. In addition, in 2008 Bonavista plans to invest up to $15 million in both resource land purchases and the application of new technology towards longer term resource play development. Bonavista is well positioned for the future given our significant financial flexibility and opportunity rich land base within the Western Canadian Sedimentary Basin. Other significant 2008 accomplishments for Bonavista include: - Operationally, production volumes averaged 53,473 boe per day during the third quarter of 2008. Production volumes averaged 53,157 boe per day for the nine months ended September 30, 2008 a 2% increase compared to the 52,328 boe per day for the same period in 2007; - Maintained an active capital program during the third quarter of 2008. In the quarter, Bonavista invested $89.8 million in exploitation and development activities by drilling 74 wells with an overall 95% success rate. In addition, Bonavista spent $2.7 million on net acquisitions within our core regions. For the nine months ended September 30, 2008, Bonavista invested $245.3 million in exploitation and development activities, drilling 171 wells with an overall 94% success rate and completed 15 core area acquisitions for $176.9 million; - Drilled 23 successful horizontal wells, year to date, on the highly prospective, light oil Bakken trend in our Southeast Saskatchewan area resulting in production reaching 1,400 bbls per day from 17 completed and producing wells. In addition to our Bakken resource initiatives, we have identified additional resource plays to pursue in the coming months using horizontal drilling and multi-stage fracture stimulation technology; - On January 14, 2008 Bonavista completed a $169.0 million acquisition of producing and undeveloped oil and natural gas properties (61% natural gas weighted) in the greater Willesden Green area. This acquisition further complemented the property acquisition that we completed in the third quarter of 2007 and our pre-existing assets in this area where we have recently experienced tremendous success utilizing new technology. We now have a concentrated position in this area with current production of approximately 5,800 boe per day and numerous exploitation and optimization opportunities to pursue in the future; - Continued to actively participate at crown land sales and freehold purchases, investing $22.1 million in land activity, further enhancing our future drilling prospect inventory to more than three years; - Generated funds from operations of $173.1 million ($1.48 per unit) in the third quarter of 2008 and $512.1 million ($4.54 per unit) for the nine months ended September 30, 2008. Of the total funds from operations generated in the respective periods, Bonavista distributed 49% of these funds in the third quarter and 48% of these funds for the nine months ended September 30, 2008 back to Unitholders with the remaining funds reinvested in the business to continue growing our production base; - Continued to record strong profitability in both the third quarter and the nine months ended September 30, 2008 with a strong average return on equity of 31% and 32% respectively, and a strong net income to funds from operations ratio in both periods of 57%. The above ratios reflect net income adjusted to negate the after tax impact of the unrealized gains and losses on financial instruments; - As a result of weaker commodity prices and recent global market events, Bonavista currently has an attractive cash-on-cash yield of 17%. In addition, since inception as a Trust, Bonavista has delivered cumulative distributions of $1.4 billion or $18.21 per trust unit. These cumulative distributions are in excess of our initial closing trading price of $15.85 on the day we became an energy trust on July 2, 2003; - On April 29, 2008 Bonavista completed a $214.0 million equity financing which improves financial flexibility to pursue future growth opportunities through expansions in our drilling and acquisitions programs. Current third quarter annualized funds from operations stands at a ratio of 0.9:1 compared to the quarter end debt level; and - On August 25, 2008, Bonavista extended its financial covenant-based $1.0 billion syndicated bank loan facility to August 10, 2011. This facility also includes an accordion feature providing that at any time during the term, on participation of any existing or additional lenders, we can increase the facility by $250 million. Strengths of Bonavista Energy Trust Since restructuring into an energy trust in July 2003, Bonavista has maintained a high level of investment activity on its asset base, growing production by over 50% since that time. This activity stems from the operational and technical focus of our Trust and the ability to generate economic prospects on our asset base within the Western Canadian Sedimentary Basin. Our experienced and consistent technical teams have a solid understanding of our assets and possess the necessary discipline and commitment to deliver profitable results to our Unitholders for the long term. We actively participate in undeveloped land acquisitions through Crown land sales, property purchases or farm-in opportunities, which have all continued to add to our already extensive low-risk drilling inventory. This has led to low cost reserve additions, lengthening of our reserve life index, an increase in the quality and quantity of our drilling inventory and a growing production base. Our production base is balanced 53% in favour of natural gas and 47% towards oil and liquids and is geographically focused within select medium depth, multi-zone regions in Alberta, Saskatchewan and British Columbia. This asset base has a low operating cost structure resulting in attractive operating netbacks. In addition, these high working interest assets are predominantly operated by Bonavista, ensuring that operating and capital cost efficiencies are maintained and that Bonavista controls the pace of its operations. Bonavista is also pleased to announce the following senior management appointments with Mr. Jason Skehar, our current Vice President, Production promoted to President and Chief Operating Officer, Mr. Johannes Thiessen our current Vice President, Exploration promoted to Senior Vice President, Exploration and Mr. Thomas Mullane our current Vice President, Engineering promoted to Senior Vice President, Engineering. Each of Messrs. Skehar, Thiessen, and Mullane are long serving employees of Bonavista who have contributed significantly to our success. Mr. Keith MacPhail will remain fully engaged in the company's activities and continue to provide leadership to Bonavista in his role as Chairman and Chief Executive Officer. Our team brings a successful track record of executing low to medium risk development programs, including both asset and corporate acquisitions, along with a record of sound financial management. Unitholders benefit from a fully internalized, industry leading cost structure, which results in one of the lowest per unit overhead costs in the energy trust industry. Our management team and Board of Directors possess extensive experience in oil and natural gas operations, corporate governance and financial management. Directors, management and employees also own approximately 17% of the Trust, resulting in a close alignment of interests with all Unitholders. MANAGEMENT'S DISCUSSION AND ANALYSIS Management's discussion and analysis ("MD&A") of the financial condition and results of operations should be read in conjunction with Bonavista Energy Trust's ("Bonavista" or the "Trust") audited consolidated financial statements and MD&A for the year ended December 31, 2007. The following MD&A of the financial condition and results of operations was prepared at, and is dated November 6, 2008. Our audited consolidated financial statements, Annual Report, and other disclosure documents for 2007 are available through our filings on SEDAR at www.sedar.com or can be obtained from Bonavista's website at www.bonavistaenergy.com. Basis of Presentation - The financial data presented below has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and the measurement currency is the Canadian dollar. For the purpose of calculating unit costs, natural gas is converted to a barrel of oil equivalent ("boe") using six thousand cubic feet of natural gas equal to one barrel of oil unless otherwise stated. A boe may be misleading, particularly if used in isolation. A boe conversion of 6 Mcf to one barrel is based on an energy equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Bonavista's future plans and operations, contains forward-looking statements including; (i) forecasted capital expenditures; (ii) exploration, drilling and development plans; (iii) anticipated production rates; (iv) expected royalty rate; (v) annualized debt to funds from operations; (vi) funds from operations, (vii) anticipated operating costs; (viii) expected service agreement fees and (ix) interest expense per boe, which are provided to allow investors to better understand our business. By their nature, forward-looking statements are subject to numerous risks and uncertainties; some of which are beyond Bonavista's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, changes in environmental tax and royalty legislation, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Bonavista's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements or if any of them do so, what benefits that Bonavista will derive therefrom. Bonavista disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Investors are also cautioned that cash-on-cash yield represents a blend of return of an investor's initial investment and a return on investors' initial investment and is not comparable to traditional yield on debt instruments where investors are entitled to full return of the principal amount of debt on maturity in addition to a return on investment through interest payments. Non-GAAP Measurements - Within Management's discussion and analysis, references are made to terms commonly used in the oil and natural gas industry. Management uses "funds from operations" and the "ratio of debt to funds from operations" to analyze operating performance and leverage. Funds from operations as presented does not have any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculation of similar measures for other entities. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period nor should it be viewed as an alternative to cash flow from operating activities, net income or other measures of financial performance calculated in accordance with Canadian GAAP. All references to funds from operations throughout this report are based on cash flow from operating activities before changes in non-cash working capital and abandonment expenditures. Funds from operations per unit is calculated based on the weighted average number of trust units outstanding consistent with the calculation of net income per unit. Operating netbacks equal production revenue and realized gains or losses on financial instruments, less royalties, transportation and operating expenses calculated on a boe basis. Total boe is calculated by multiplying the daily production by the number of days in the period. Management uses these terms to analyze operating performance and leverage. Operations - Bonavista's exploitation and development program for the first nine months of 2008 led to the drilling of 171 wells in our four core regions with an overall success rate of 94%. This program resulted in 64 natural gas wells, 97 oil wells and 10 dry holes. Bonavista continues to pursue deeper, higher impact drilling opportunities particularly in the Bakken play in our Southeast Saskatchewan area and Lower Mannville sands in our Central region in Alberta, where we have experienced excellent success and attractive finding and development costs over the past couple of years. These activities have also continued to lengthen our reserve life index and the predictability in our overall production base. In addition to the exploitation and development program, Bonavista executed 15 complementary acquisitions in its core regions during the first nine months of 2008. Production - For the third quarter of 2008, production remained relatively unchanged at 53,473 boe per day when compared to 53,382 boe per day for the same period in 2007. Natural gas production increased 4% to 177 mmcf per day in the third quarter of 2008 from 171 mmcf per day for the same period a year ago, while total oil and liquids production decreased 4% to 23,912 bbls per day in the third quarter of 2008 (comprised of 17,237 bbls per day of light and medium oil and 6,675 bbls per day of heavy oil) from 24,938 bbls per day (comprised of 16,967 bbls per day of light and medium oil and 7,971 bbls per day of heavy oil) for the same period in 2007. Our current production is approximately 54,500 boe per day consisting of 53% natural gas, 34% light and medium oil and 13% heavy oil. Production for the nine months ended September 30, 2008, increased 2% to 53,157 boe per day when compared to 52,328 boe per day for the same period in 2007. Natural gas production increased 3% to 176 mmcf per day in the first nine months of 2008 from 171 mmcf per day for the same period a year ago, while total oil and liquids production increased slightly to 23,860 bbls per day in the first nine months of 2008 (comprised of 17,212 bbls per day of light and medium oil and 6,648 bbls per day of heavy oil) from 23,784 bbls per day (comprised of 16,372 bbls per day of light and medium oil and 7,412 bbls per day of heavy oil) for the same period in 2007. Bonavista's diversified commodity investment approach minimizes our dependence on any one product. We anticipate production volumes in 2008 to average approximately 53,500 boe per day. Production revenues - Production revenues for the third quarter of 2008 increased by 61% to $354.7 million when compared to $219.9 million in the third quarter of 2007, primarily due to higher average commodity prices. In the third quarter of 2008, natural gas prices increased 47% to $8.33 per mcf, when compared to $5.68 per mcf realized in the same period in 2007. The average oil and liquids price increased to $99.48 per bbl (comprised of $99.92 per bbl for light and medium oil and $98.35 per bbl for heavy oil) in the third quarter of 2008 from $56.97 per bbl (comprised of $61.28 per bbl for light and medium oil and $47.80 per bbl for heavy oil) for the same period in 2007. Production revenues, for the nine months ended September 30, 2008 increased by 51% to $1,012.6 million when compared to $669.0 million for the same period a year ago due to higher average commodity prices and increased production volumes. For the nine month period ended September 30, 2008, natural gas prices increased 24% to $8.62 per mcf, compared to $6.94 per mcf realized in the same period in 2007. The average oil and liquids price increased 73% to $91.43 per bbl (comprised of $93.19 per bbl for light and medium oil and $86.87 per bbl for heavy oil) for the nine month period ended September 30, 2008 from $52.99 per bbl (comprised of $57.18 per bbl for light and medium oil and $43.73 per bbl for heavy oil) for the same period in 2007. The following table highlights Bonavista's realized commodity pricing for the three and nine months ended September 30: Three months Nine months ended September 30, ended September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- Natural gas ($/mcf): Production revenues $ 8.33 $ 5.68 $ 8.62 $ 6.94 Realized gains (losses) on financial instruments (0.12) 0.18 (0.06) 0.08 ----------------------------------------- 8.21 5.86 8.56 7.02 ----------------------------------------- Light and medium oil ($/bbl): Production revenues 99.92 61.28 93.19 57.18 Realized gains (losses) on financial instruments (18.65) (1.01) (14.85) 0.14 ----------------------------------------- 81.27 60.27 78.34 57.32 ----------------------------------------- Heavy oil ($/bbl): Production revenues 98.35 47.80 86.87 43.73 Realized gains (losses) on financial instruments (20.50) 0.23 (14.00) 0.10 ----------------------------------------- $ 77.85 $ 48.03 $ 72.87 $ 43.83 ---------------------------------------------------------------------------- Commodity price risk management - As part of our financial management strategy, Bonavista has adopted a disciplined commodity price risk management program. The purpose of this program is to stabilize funds from operations against volatile commodity prices and protect acquisition economics. Bonavista's Board of Directors has approved a commodity price risk management limit of 60% of forecast production, net of royalties, primarily using costless collars. Our strategy of using costless collars limits Bonavista's exposure to downturns in commodity prices, while allowing for participation in commodity price increases. In the third quarter of 2008, our risk management program on financial instruments resulted in a net gain of $110.4 million, consisting of a realized loss of $44.1 million and an unrealized gain of $154.5 million. The realized loss of $44.1 million consisted of a $1.9 million loss on natural gas commodity derivative contracts and a $42.2 million loss on crude oil commodity derivative contracts. For the nine months ended September 30, 2008, our risk management program on financial instruments resulted in a net loss of $71.6 million consisting of a realized loss of $98.4 million and an unrealized gain of $26.8 million. The realized loss of $98.4 million consisted of a $2.8 million loss on natural gas commodity derivative contracts and a $95.6 million loss on crude oil commodity derivative contracts. A summary of commodity price risk management contracts in place as at September 30, 2008 is included in note 7 of the consolidated financial statements. Royalties - For the three months ended September 30, 2008, royalties increased 96% to $69.7 million from $35.5 million for the same period a year ago, largely attributed to an increase in commodity prices and increased heavy oil royalties resulting from the payout of two oilsands royalty projects. In addition, royalties as a percentage of revenue (including realized gains and losses on financial instruments) for the third quarter of 2008 increased to 22.4% compared to 16.1% in 2007 for similar reasons discussed above and the result of realized losses on financial instruments. For the three months ended September 30, 2008, royalties by product as a percentage of revenues (including realized gains and losses on financial instruments) were 23.1% for natural gas, 20.7% for light and medium oil and 25.3% for heavy oil. In the third quarter of 2007, royalties by product as a percentage of revenue (including realized gains and losses on financial instruments) were 15.4% for natural gas, 16.6% for light and medium oil and 16.1% for heavy oil. For the nine months ended September 30, 2008, royalties also increased significantly by 77% to $200.2 million from $112.8 million for the same period a year ago, for similar reasons discussed above. In addition, royalties as a percentage of revenue (including realized gains and losses on financial instruments) for the nine month period also increased from 16.7% in 2007 to 21.9% in 2008, for the same reasons as discussed above. For the nine months ended September 30, 2008, royalties by product as a percentage of revenue (including realized gains and losses on financial instruments) were 22.5% for natural gas, 20.8% for light and medium oil and 22.9% for heavy oil. For the nine months ended September 30, 2007, royalties by product as a percentage of revenues (including realized gains and losses on financial instruments) were 17.4% for natural gas, 16.5% for light and medium oil and 15.1% for heavy oil. On October 25, 2007, the Alberta Government announced the New Royalty Framework ("NRF") which is proposed to take effect on January 1, 2009. The proposed NRF includes new royalty formulas for conventional oil and natural gas that will operate on sliding scales that are determined by commodity prices and well productivity. The Government of Alberta, on April 10, 2008, provided some further clarification on the NRF and introduced two new royalty programs related to the development of deep oil and natural gas reserves. The Trust has reviewed the information that is currently available and has determined that the impact of these changes may increase our existing average corporate royalty rate up to 5%, based on benchmark pricing as at September 30, 2008. Operating expenses - Operating expenses for the third quarter of 2008 increased 13% to $47.1 million compared to $41.8 million for the same period a year ago. Operating costs increased primarily due to the continuation of industry wide operating cost pressures, primarily driven by higher fuel, power, trucking, chemical and labour costs. These factors resulted in average per unit operating costs increasing by 12% for the three months ended September 30, 2008, to $9.56 per boe from $8.51 per boe in the comparable period of 2007. Operating costs by product for the third quarter of 2008 were $1.37 per mcf for natural gas, $10.18 per bbl for light and medium oil and $13.93 per bbl for heavy oil compared to $1.17 per mcf for natural gas, $9.19 per bbl for light and medium oil and $12.39 per bbl for heavy oil for the same period in 2007. For the nine months ended September 30, 2008 operating expenses increased 12% to $135.5 million compared to $120.5 million for the same period a year ago. The increase in operating costs are for similar reasons noted above. Average per unit operating costs increased 10% for the nine months ended September 30, 2008, to $9.30 per boe from $8.44 per boe in the comparable period of 2007. Operating costs by product for the first nine months of 2008 were $1.32 per mcf for natural gas, $9.95 per bbl for light and medium oil and $13.56 per bbl for heavy oil compared to $1.18 per mcf for natural gas, $9.11 per bbl for light and medium oil and $12.23 per bbl for heavy oil for the same period in 2007. Notwithstanding these cost increases, Bonavista continues to experience one of the lowest operating costs of any producer in the energy trust sector and remains optimistic that the recent upward trend in operating costs will subside in 2009. Transportation expenses - For the three months ended September 30, 2008, transportation expenses decreased 5% to $10.1 million ($2.06 per boe) when compared to $10.6 million ($2.16 per boe) for the same period last year. The 5% decrease in transportation expenses on a per boe basis was primarily due to a decrease in natural gas transportation costs because of the expiry of certain firm export service obligations. For similar reasons, transportation costs for the nine months ended September 30, 2008 decreased 6% to $29.2 million ($2.00 per boe) compared to $31.0 million ($2.17 per boe) for the same period a year ago. Transportation expenses by product for the third quarter of 2008 were $0.39 per mcf for natural gas, $0.85 per bbl for light and medium oil and $3.86 per bbl for heavy oil compared to $0.44 per mcf for natural gas, $0.87 per bbl for light and medium oil and $3.14 per bbl for heavy oil for the third quarter of 2007. For the first nine months of 2008 transportation expenses by product were $0.39 per mcf for natural gas, $0.85 per bbl for light and medium oil and $3.50 per bbl for heavy oil compared to $0.44 per mcf for natural gas, $0.94 per bbl for light and medium oil and $3.17 per bbl for heavy oil for the same period a year ago. General and administrative expenses - General and administrative expenses, after overhead recoveries, increased 4% to $3.6 million for the three months ended September 30, 2008 from $3.5 million in the same period in 2007 and increased 9% to $10.6 million for the nine months ended September 30, 2008 from $9.7 million in the same period in 2007. On a per boe basis, general and administrative expenses increased 3% for the three months ended September 30, 2008 to $0.73 per boe from $0.71 per boe in the same period in 2007 and increased 7% for the nine months ended September 30, 2008 to $0.73 per boe from $0.68 per boe in the same period in 2007. These increases are largely due to the higher staffing levels required to manage our operations and increasing cost pressures currently experienced throughout our industry. In addition, through the services agreement with NuVista Energy Ltd., ("NuVista") Bonavista provides certain administrative activities. The fee charged under this agreement was $330,000 for the three months ended September 30, 2008 as compared to $360,000 in the same period in 2007 and $1.1 million for the nine months ended September 30, 2008 as compared to $1.0 million for the same period in 2007. The fees charged to NuVista through the services agreement will decrease in the following quarter as most administrative services provided to NuVista will cease to exist as of November 1, 2008. In connection with its Trust Unit Incentive Rights Plan, Bonavista also recorded a unit-based compensation charge of $1.6 million and $6.4 million for the three and nine months ended September 30, 2008 respectively, compared to $1.7 million and $4.5 million for the same periods in 2007. Financing expenses - Financing expenses, which include interest expense on long-term debt and convertible debentures, decreased 27% to $7.0 million for the three months ended September 30, 2008, from $9.5 million for the same period in 2007 and on a boe basis, decreased 27% to $1.42 per boe for the three months ended September 30, 2008 from $1.94 per boe for the same period in 2007. This decrease in financing expenses is primarily due to the proceeds received from a $214.0 million equity financing used to reduce long-term debt. For the nine months ended September 30, 2008, financing expenses increased 10% to $26.8 million from $24.3 million for the same period in 2007 and on a boe basis increased 8% to $1.84 per boe for the nine months ended September 30, 2008 from $1.70 per boe in the same period in 2007. This increase is due to increased average debt levels used to fund Bonavista's capital program. During the third quarter of 2008, Bonavista paid cash interest of $6.4 million compared to $9.0 million in 2007. For the nine months ended September 30, 2008, Bonavista paid cash interest of $26.5 million compared to $24.1 million for the same period in 2007. Depreciation, depletion and accretion expenses - Depreciation, depletion and accretion expenses increased 13% to $67.9 million for the three months ended September 30, 2008 from $60.1 million in the same period of 2007. For the nine months ended September 30, 2008 depreciation, depletion and accretion expenses also increased 15% to $197.3 million from $172.1 million. Both increases were due to higher costs of finding and developing reserves and a larger asset base in 2008. For the three months ended September 30, 2008, the average cost increased to $13.80 per boe from $12.23 per boe for the same period in 2007 and for the nine months ended September 30, 2008 the average cost increased to $13.55 per boe from $12.04 per boe for the same period a year ago. The increase in depreciation, depletion and accretion expenses are due to increased costs associated with adding new reserves. Over the past few years our industry has seen cost escalation in all areas of activities. Income taxes - For the three months ended September 30, 2008, the provision for income tax was $50.5 million compared to a reduction of $4.8 million for the same period in 2007. For the nine months ended September 30, 2008, the provision for income tax was $26.1 million compared to $30.3 million for the same period in 2007. Bonavista made no cash payments relating to installments for either of the three or nine months ended September 30, 2008, or for the comparative periods in 2007. On February 26, 2008, the Federal government announced that the provincial component of the SIFT tax is to be determined based on the general corporate provincial tax rate in each province that the Trust has a permanent establishment. On June 18, 2008, the legislation to re-define the provincial component of the tax rate was passed. The specific rules governing how the provincial component is to be calculated was released in draft on July 14, 2008, however, it is not considered to be substantively enacted as at September 30, 2008. As a result, any changes in the tax rate for the Trust's future income tax has not been reflected in the Trust's consolidated financial statements. Funds from operations, net income and comprehensive income - For the three months ended September 30, 2008, Bonavista experienced a 44% increase in funds from operations to $173.1 million ($1.48 per unit, basic) from $120.4 million ($1.14 per unit, basic) for the same period in 2007. For the nine month period ended September 30, 2008, Bonavista experienced a 37% increase in funds from operations to $512.1 million ($4.54 per unit, basic) from $375.0 million ($3.57 per unit, basic) for the same period in 2007. Funds from operations increased for the three and nine months ended September 30, 2008 primarily due to higher commodity prices. Net income for the three months ended September 30, 2008, increased 252% to $207.6 million ($1.77 per unit, basic) from $59.0 million ($0.56 per unit, basic) for the same period in 2007. For the nine months ended September 30, 2008, net income increased 100% to $309.2 million ($2.74 per unit, basic) from $154.6 million ($1.47 per unit, basic) for the same period in 2007. Other comprehensive income for the three months ended September 30, 2008 included a charge of nil (2007 - $781,000) relating to the amortization of the amount recognized in accumulated other comprehensive income on January 1, 2007 for the fair value of financial instruments on adoption of the new accounting standards for financial instruments. This resulted in a total comprehensive income for the three months ended September 30, 2008 of $207.6 million (2007 - $58.2 million). Other comprehensive income for the nine months ended September 30, 2008 included a charge of nil (2007 - $3.5 million) relating to the amortization of the amount recognized in accumulated other comprehensive income on January 1, 2007 for the fair value of financial instruments on adoption of the new accounting standards for financial instruments. This resulted in total comprehensive income for the nine months ended September 30, 2008 of $309.2 million (2007 - $151.1 million). The following table is a reconciliation of a non-GAAP measure, funds from operations, to its nearest measure prescribed by GAAP: ---------------------------------------------------------------------------- Three months ended September 30, Calculation of Funds From Operations: 2008 2007 ---------------------------------------------------------------------------- (thousands) Cash flow from operating activities $ 191,437 $ 128,685 Asset retirement expenditures 3,046 2,081 Changes in non-cash working capital (21,392) (10,384) ---------------------------------------------------------------------------- Funds from operations $ 173,091 $ 120,382 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures - Capital expenditures for the three month period ended September 30, 2008 were $92.6 million, consisting of $89.8 million on exploitation and development spending and $2.8 million on net property acquisitions. For the same period in 2007 capital expenditures were $149.2 million, consisting of $50.9 million on exploitation and development spending and $98.3 million on net property acquisitions. Capital expenditures for the nine month period ended September 30, 2008 were $422.2 million, consisting of $245.3 million on exploitation and development spending and $176.9 million on net property acquisitions. For the same period in 2007 capital expenditures were $308.3 million, consisting of $209.2 million on exploitation and development spending and $99.1 million on net property acquisitions. Our consistent exploitation and development program continues to generate predictable and attractive re-investment efficiencies in the current service cost environment. Liquidity and capital resources - As at September 30, 2008, long-term debt including working capital (excluding unrealized losses on financial instruments and related tax impact), was $635.8 million with a debt to 2008 annualized funds from operations ratio of 0.9:1. Bonavista has significant flexibility to finance future expansions of its capital programs or acquisition opportunities as they arise, through the use of its bank credit facility of $1.0 billion of which $364.2 million is unused borrowing capability and the use of its funds from operations, or through a combination of both bank debt and funds from operations. Bonavista's bank loan facility is provided by a syndicate of 12 domestic and international banks. The bank loan facility is a three year revolving facility and may at the request of the Trust with the consent of the lenders be extended on an annual basis. On August 25, 2008, Bonavista and its lenders agreed to extend its bank credit facility to August 10, 2011 with no principal repayments required until then. In addition the lenders approved to increase the bank loan facility by $250 million on the participation of any existing or additional lenders. Under the terms of the credit facility, the Trust has provided the covenant that its consolidated senior debt borrowing will not exceed three times net income before interest, taxes and depreciation, depletion and accretion; consolidated total debt will not exceed three and one half times consolidated net income before interest, taxes and depreciation, depletion and accretion; and consolidated senior debt borrowing will not exceed one-half of consolidated total debt plus consolidated unitholders' equity of the Trust. In 2008, Bonavista plans to invest approximately $490 million on its capital programs to expand its core regions, which will be financed through a combination of funds from operations, recent equity issuance and bank debt. The Trust is committed to the fundamental principle of maintaining financial flexibility and the prudent use of debt. As such, the 2008 capital expenditure program is based on using a conservative amount of debt in our financing structure. Unitholders' equity - As at September 30, 2008, Bonavista had 117.1 million equivalent trust units outstanding. This includes 12.0 million exchangeable shares, which are exchangeable into 22.6 million trust units. The exchange ratio in effect at September 30, 2008 for exchangeable shares was 1.87946:1. As at November 6, 2008, Bonavista had 117.3 million equivalent trust units outstanding. This includes 12.0 million exchangeable shares, which are exchangeable into 22.7 million trust units. The exchange ratio in effect at November 6, 2008 for exchangeable shares was 1.90081:1. In addition, Bonavista has 3.3 million trust unit incentive rights outstanding at November 6, 2008, with an average exercise price of $26.00 per trust unit. Distributions - Bonavista's distribution policy is constantly monitored and is dependent upon its forecasted operations, funds from operations, debt levels and capital expenditures. One of the paramount objectives of the Trust is to be a sustainable entity, which is defined as maintaining both production and reserves over an extended period of time. This is accomplished by retaining sufficient funds from operations to replace the reserves that have been produced. With these considerations, for the three months ended September 30, 2008 the Trust declared distributions of $84.9 million ($0.90 per trust unit) compared to $77.0 million ($0.90 per trust unit) in the same period in 2007. For the nine months ended September 30, 2008 the Trust declared distributions of $246.7 million ($2.70 per trust unit) compared to $230.3 million ($2.70 per trust unit) in the same period in 2007. We continuously monitor all the factors influencing our distribution rate and the necessity to adjust the monthly distribution in the future. The following table illustrates the relationship between cash flow provided from operating activities and distributions declared, as well as net income and distributions declared. Net income includes significant non-cash charges, such as depreciation, depletion and accretion, unrealized gains and losses on financial instruments, fluctuations in future income taxes due to changes in tax rates and tax rules, these non-cash charges do not represent the actual cost of maintaining our production capacity given the natural declines associated with oil and natural gas assets. For the three months ended September 30, 2008, the non-cash charges resulted in a non-cash add back of $34.5 million compared to a non-cash charge of $61.4 million for the same period in 2007. For the nine months ended September 30, 2008, the non-cash charges amounted to $203.0 million compared to $220.4 million for the same period in 2007. In instances where distributions exceed net income, a portion of the cash distribution paid to Unitholders may be considered an economic return of Unitholders' capital. ---------------------------------------------------------------------------- Three months ended September 30, Distribution Analysis 2008 2007 ---------------------------------------------------------------------------- (thousands) Cash flow provided from operating activities $ 191,437 $ 128,685 Net income 207,594 58,990 Distributions declared 84,859 76,972 Excess of cash flow provided from operating activities over distributions declared 106,578 51,713 Excess (shortfall) of net income over distributions declared 122,735 (17,982) ---------------------------------------------------------------------------- Bonavista announces its distribution policy on a quarterly basis. Distributions are determined by the Board of Directors and are dependent upon the commodity price environment, production levels, and the amount of capital expenditures to be financed from funds from operations. Bonavista's current monthly distribution rate is $0.30 per unit. This monthly distribution is comprised of the base distribution of $0.28 per unit plus a supplementary distribution of $0.02 per unit, due to the average realized commodity prices in excess of budget prices. The combined base and supplementary distribution incorporates the withholding of sufficient funds from operations to fund capital expenditures required to maintain or modestly grow the current production base and provide sustainable distributions in the long-term. Our long-term objective is to distribute between 50% and 60% of our funds from operations. Our current distribution rate of $0.30 per unit per month places us slightly below this range for 2008. Quarterly financial information - The following table highlights Bonavista's performance for the eight quarterly periods ending on December 31, 2006 to September 30, 2008: ---------------------------------------------------------------------------- 2008 --------------------------------------------------- September 30 June 30 March 31 December 31 -------------- --------- ---------- ------------- ($ thousands, except per unit amounts) Production revenues 354,667 361,555 296,387 242,361 Net income 207,594 29,282 72,298 63,631 Net income per unit: Basic 1.77 0.26 0.67 0.60 Diluted 1.75 0.26 0.67 0.59 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2007 2006 --------------------------------------------------- September 30 June 30 March 31 December 31 -------------- --------- ---------- ------------- ($ thousands, except per unit amounts) Production revenues 219,885 223,878 225,222 220,484 Net income 58,990 33,936 61,630 67,635 Net income per unit: Basic 0.56 0.32 0.59 0.65 Diluted 0.55 0.32 0.59 0.65 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Bonavista has seen growth in its production revenues over the past eight quarters due largely from increased commodity prices. Specifically in the third quarter of 2008, revenues were 61% higher than the same period in 2007 as a result of a 47% increase in natural gas prices and a 75% increase in oil and liquids prices. Net income in the past eight quarters has fluctuated from a low of $29.3 million in June 2008 to a high of $207.6 million in September 2008. These fluctuations are primarily influenced by commodity prices, unrealized gains and losses on financial instruments and future income tax recoveries associated with the reduction in corporate income tax rates. Net income increased 252% in the third quarter of 2008 as compared to the third quarter of 2007. The increase in net income in the third quarter of 2008 is attributed to a $110.4 million gain on financial instruments consisting of a $44.1 million realized loss and an unrealized gain of $154.5 million as compared to a $2.9 million loss consisting of a $1.4 million realized gain and an unrealized loss of $4.3 million in the same period in 2007. The large decrease in net income in the second quarter of 2007 is primarily attributable to the non-cash future income tax charge to net income of $41.0 million to reflect changes to income tax legislation, substantially enacted in the second quarter of 2007. Disclosure and internal controls - Disclosure controls and procedures have been designed to ensure that information required to be disclosed by Bonavista is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosures. The Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by the interim filings, that Bonavista's disclosure controls and procedures are effectively designed to provide reasonable assurance that material information related to the issuer is made known to them by others within the Trust. It should be noted that while the Trust's Chief Executive Officer and Chief Financial Officer believe that the disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objective of the control system is met. Update on regulatory and financial reporting matters - On August 15, 2008, the Canadian Securities Administrators published its final version of National Instrument 52-109 and is effective for the Trust's 2008 year end reporting. The national instrument includes the certification of the operating effectiveness of internal controls over financial reporting ("ICFR"), requires the use of a control framework to design and evaluate internal controls, provides specific guidance regarding the documentation, testing and evaluation of controls, and provides clarification regarding the definition of material weaknesses and conclusions on disclosure controls and procedures when there is a material weakness in ICFR. Bonavista has examined this national instrument and is implementing procedures to be compliant on the effective date. On February 13, 2008, Canada's Accounting Standards Board confirmed January 1, 2011 as the effective date for complete convergence of Canadian GAAP to International Financial Reporting Standards ("IFRS"). Canadian generally accepted accounting principles as we currently know them, will cease to exist for all publicly reporting entities. Currently, the application of IFRS to the oil and gas industry in Canada requires considerable clarification. The Canadian Securities Administrators are in the process of examining changes to securities rules as a result of this initiative. Bonavista has completed a preliminary analysis of the accounting differences and has plans in place to perform a detailed assessment of the impact of IFRS on our results of operations, financial position and disclosures. Effective January 1, 2008, Bonavista adopted Canadian Institute of Chartered Accountants ("CICA") Section 3862, "Financial Instruments - Disclosures", Section 3863, "Financial Instruments - Presentation" and Section 1535, "Capital Disclosure". The first two sections establish standards for the presentation and disclosure of information that enables users to evaluate the significance of financial instruments to the entity's financial position, and the nature and extent of risks arising from financial instruments and how the entity manages the risks. The last section establishes standards for disclosing information about an entity's capital and how it is managed. The Trust will also be required to adopt Section 3064 "Goodwill and Intangible Assets" on January 1, 2009, which defines the criteria for the recognition of intangible assets. OUTLOOK As we enter our twelfth year since restructuring the Company in 1997, and our sixth year since converting to an energy trust, we continue to benefit from all of the same qualities that drove the success of Bonavista as a public company and an energy trust. We apply a similar proven strategy and execute this strategy in a disciplined and cost-effective manner much the same as in 1997 when we started on our mission of creating value for our investors. The foundation of this strategy is to actively pursue low to medium risk drilling opportunities on our extensive undeveloped land base within geographically concentrated areas of operations. Despite a very active exploitation and development program over the past few years, the quality and quantity of our drilling opportunities continues to improve as we move toward 2009. Bonavista has currently identified approximately 700 drilling prospects on its land base and remains flexible to consider accelerating or decelerating the capital program depending on market conditions. This steady increase in inventory over the past several years can be directly attributed to the detailed and tireless work of our talented technical team, who possess a strong commitment and a solid understanding of the Western Canadian Sedimentary Basin. We also continue to search and have been successful in strategic acquisition opportunities where we can add value utilizing our own technical expertise. Over the last winter, we witnessed acquisition prices decreasing to a level that compared favourably with our cost of adding reserves organically, and we acted on this by completing a significant, natural gas-weighted, property acquisition in January 2008. Our timely and prudent approach to capital investments has been very effective in the past, and together with our steadfast commitment to adding Unitholder value and attention to detail, will continue to provide the foundation for the future success of the Trust. Today our activity, efficiency, productivity and profitability remain among the strongest levels in our eleven year history. For 2009, given the current instability of commodity prices and the developments in the global economies stemming from the credit crisis, Bonavista has elected to establish a conservative preliminary base budget between $300 and $320 million which, at this time, is being allocated entirely to our exploration and development program. It is anticipated that this level of capital expenditures will result in the drilling of between 170 and 190 wells and production levels increasing modestly over 2008 to between 54,000 and 54,500 boe per day. The drilling program will consist of approximately 50 horizontal wells, predominantly in our Southeast Saskatchewan and Central Alberta areas. Although we have not allocated any budget towards acquisitions in 2009, market conditions are developing such that companies with financial and operational flexibility could easily benefit in this environment. We will closely monitor this situation as we move closer to 2009 and remain opportunistic to further expand our capital programs on additional property or land acquisitions and/or drilling opportunities as they present themselves. We are extremely proud of our achievements over the past eleven years and remain enthusiastic about the growing opportunities that exist for Bonavista in the future. We would like to thank our employees for their significant effort and their continued enthusiasm and excitement as we pursue these opportunities. Despite the setbacks we have endured over the past couple of years such as the passage of legislation in the Canadian House of Commons on the taxation of distributions from certain publicly traded Canadian trusts, the introduction of the New Royalty Framework by the Government of Alberta, and the recent market selloff, Bonavista's commitment and value creation process has not changed. Throughout many business cycles and changes in the business environment, Bonavista has converted adversity into opportunity and has emerged an even stronger company as a result of this attitude. Our success is based on the consistent application of our core philosophy and operating strategies. Our legal structure may ultimately change by 2011 when the new tax laws become effective, but our steadfast commitment to creating shareholder value will not change in any environment. Our team remains committed to this over the long term, regardless of the changing landscape. ---------------------------------------------------------------------------- Consolidated Balance Sheets September 30, December 31, (thousands) 2008 2007 ---------------------------------------------------------------------------- (unaudited) Assets: Current assets: Accounts receivable $ 125,297 $ 125,390 Future income tax asset 5,479 13,517 ---------------------------------------------------------------------------- 130,776 138,907 Oil and natural gas properties and equipment 2,316,350 2,074,993 Goodwill 41,321 41,321 ---------------------------------------------------------------------------- $ 2,488,447 $ 2,255,221 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities and Unitholders' Equity: Current liabilities: Accounts payable and accrued liabilities $ 167,543 $ 78,469 Distributions payable 28,334 25,729 Unrealized losses on financial instruments 18,266 45,058 ---------------------------------------------------------------------------- 214,143 149,256 Long-term debt 565,205 712,654 Convertible debentures 43,531 48,830 Asset retirement obligations 121,648 116,893 Future income taxes 182,073 166,621 Unitholders' equity: Unitholders' capital and debenture conversion component 1,092,751 851,685 Exchangeable shares 73,546 74,710 Contributed surplus 7,889 9,369 Accumulated earnings 187,661 125,203 ---------------------------------------------------------------------------- 1,361,847 1,060,967 ---------------------------------------------------------------------------- $ 2,488,447 $ 2,255,221 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. Consolidated Statements of Operations, Comprehensive Income and Accumulated Earnings (thousands, except per unit Three months Nine months amounts) ended September 30, ended September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- (unaudited) Revenues: Production $ 354,667 $ 219,885 $1,012,609 $ 668,985 Royalties (69,716) (35,535) (200,166) (112,777) ---------------------------------------------------------------------------- 284,951 184,350 812,443 556,208 ---------------------------------------------------------------------------- Realized gains (losses) on financial instruments (44,094) 1,438 (98,344) 4,343 Unrealized gains (losses) on financial instruments 154,480 (4,373) 26,792 (13,548) ---------------------------------------------------------------------------- 110,386 (2,935) (71,552) (9,205) ---------------------------------------------------------------------------- 395,337 181,415 740,891 547,003 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Expenses: Operating 47,050 41,778 135,450 120,504 Transportation 10,112 10,624 29,155 31,033 General and administrative 3,611 3,479 10,585 9,715 Financing 6,993 9,525 26,774 24,294 Unit-based compensation 1,582 1,709 6,355 4,542 Depreciation, depletion and accretion 67,940 60,070 197,271 172,063 ---------------------------------------------------------------------------- 137,288 127,185 405,590 362,151 ---------------------------------------------------------------------------- Income before taxes 258,049 54,230 335,301 184,852 Income taxes (reductions) 50,455 (4,760) 26,127 30,296 ---------------------------------------------------------------------------- Net income 207,594 58,990 309,174 154,556 Changes in comprehensive income, net of taxes - (781) - (3,482) ---------------------------------------------------------------------------- Comprehensive income 207,594 58,209 309,174 151,074 ---------------------------------------------------------------------------- Accumulated earnings, beginning of period 64,926 156,690 125,203 214,417 Distributions declared (84,859) (76,972) (246,716) (230,265) ---------------------------------------------------------------------------- Accumulated earnings, end of period $ 187,661 $ 138,708 $ 187,661 $ 138,708 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net income per unit - basic $ 1.77 $ 0.56 $ 2.74 $ 1.47 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net income per unit - diluted $ 1.75 $ 0.55 $ 2.71 $ 1.47 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. Consolidated Statements of Cash Flows (thousands) Three months Nine months ended September 30, ended September 30, 2008 2007 2008 2007 ---------------------------------------------------------------------------- (unaudited) Cash provided by (used in): Operating Activities: Net income $ 207,594 $ 58,990 $ 309,174 $ 154,556 Items not requiring cash from operations: Depreciation, depletion and accretion 67,940 60,070 197,271 172,063 Unit-based compensation 1,582 1,709 6,355 4,542 Unrealized (gains) losses on financial instruments (154,480) 4,373 (26,792) 13,548 Future income taxes (reductions) 50,455 (4,760) 26,127 30,296 Asset retirement expenditures (3,046) (2,081) (10,168) (3,554) Changes in non-cash working capital items 21,392 10,384 34,813 6,111 ---------------------------------------------------------------------------- 191,437 128,685 536,780 377,562 ---------------------------------------------------------------------------- Financing Activities: Issuance of equity, net of issue costs 3,489 809 222,592 7,180 Distributions (84,768) (76,940) (244,111) (230,046) Changes in long-term debt (41,927) 96,375 (147,449) 156,627 Changes in non-cash working capital items 589 512 263 241 ---------------------------------------------------------------------------- (122,617) 20,756 (168,705) (65,998) ---------------------------------------------------------------------------- Investing Activities: Exploitation and development (89,847) (50,889) (245,278) (209,220) Property acquisitions (8,948) (98,311) (183,776) (99,221) Property dispositions 6,205 - 6,888 100 Changes in non-cash working capital items 23,770 (241) 54,091 (3,223) ---------------------------------------------------------------------------- (68,820) (149,441) (368,075) (311,564) ---------------------------------------------------------------------------- Change in cash - - - - Cash, beginning of period - - - - ---------------------------------------------------------------------------- Cash, end of period $ - $ - $ - $ - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. BONAVISTA ENERGY TRUST Notes to Consolidated Financial Statements For the three and nine months ended September 30, 2008 (unaudited) Structure of the Trust and Basis of Presentation: Bonavista Energy Trust ("Bonavista" or the "Trust") is an open-ended unincorporated investment trust governed by the laws of the Province of Alberta. The Trust was established on July 2, 2003 under a Plan of Arrangement entered into by the Trust, Bonavista Petroleum Ltd. ("BPL") and its subsidiaries and partnerships and NuVista Energy Ltd. ("NuVista"). Under the Plan of Arrangement, a wholly-owned subsidiary of the Trust amalgamated with BPL and became the successor company. The Trust has two significant subsidiaries in which it owns 100% of the common shares of BPL (excluding the exchangeable shares - see note 6) and 100% of the units of Bonavista Trust (2003) ("BT"). The activities of these entities are financed through interest bearing notes from the Trust and third party debt as described in the notes to the consolidated financial statements. The business of the Trust is carried on through the entities owned by the subsidiaries of the Trust, Bonavista Petroleum, a general partnership ("BP") and Bonavista Energy Limited Partnership ("BELP"). The net income of the Trust is generated from interest on notes advanced to its subsidiaries, royalty payments on oil and natural gas assets owned by BP, as well as any dividends or distributions paid by its subsidiaries. The Trustee must declare payable to the Trust Unitholders all of the taxable income of the Trust. The unaudited consolidated financial statements include the accounts of the Trust and its wholly-owned subsidiaries and partnerships, and have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles. The interim consolidated financial statements and notes should be read in conjunction with the consolidated financial statements for the year ended December 31, 2007. Certain amounts have been reclassified to conform to the current period's presentation. 1. Changes in accounting policy: a) Financial instruments On January 1, 2008, the Trust adopted CICA Handbook Section 3862, "Financial Instruments - Disclosures", and Section 3863, "Financial Instruments - Presentation". Section 3862 and 3863 establish standards for the presentation and disclosure of information that enable users to evaluate the significance of financial instruments to the entity's financial position, and the nature and extent of risks arising from financial instruments and how the entity manages these risks. The implementation of these standards did not impact the Trust's financial results, however it did result in additional disclosure presented in note 7 of the Trust's notes to the consolidated financial statements. b) Capital disclosures On January 1, 2008, the Trust adopted CICA Handbook Section 1535 "Capital Disclosures". Section 1535 establishes standards for disclosing information about an entity's capital and how it is managed. This section specifies disclosure about objectives, policies and processes for managing capital, quantitative data about what an entity regards as capital, whether an entity has complied with all capital requirements, and if it has not complied, the consequences of such non-compliances. The implementation of this standard did not impact the Trust's financial results, however it did result in additional disclosure presented in note 8 of the Trust's notes to the consolidated financial statements. c) Goodwill As of January 1, 2009, the Trust will be required to adopt CICA Handbook Section 3064 "Goodwill and Intangible Assets", which defines the criteria for the recognition of intangible assets. This new standard is not expected to have a material impact on the Trust's consolidated financial statements. d) International Financial Reporting Standards On February 13, 2008, Canada's Accounting Standards Board confirmed January 1, 2011 as the effective date for the convergence of Canadian GAAP to International Financial Reporting Standards ("IFRS"). The Canadian Securities Administrators are in the process of examining the changes to securities rules as a result of this initiative. Bonavista has completed a preliminary analysis of the accounting differences and has plans in place to perform a detailed assessment of the impact of IFRS on our results of operations, financial position and disclosures. 2. Business relationships: Bonavista and NuVista are considered related as two directors of NuVista, one of whom is NuVista's chairman, are directors and officers of Bonavista and a director and an officer of NuVista are also officers of Bonavista. Pursuant to the Plan of Arrangement, Bonavista entered into a Technical Services Agreement ("TSA") with NuVista, whereby, Bonavista received payment for certain technical and administrative services provided by it to NuVista on a cost recovery basis. Effective January 1, 2007 the terms of the TSA were amended to reflect the reduced level of services provided by Bonavista and subsequently on August 31, 2007 the TSA was terminated and replaced with a new services agreement that reflects the remaining ongoing services that will be provided by Bonavista. For the three months ended September 30, 2008 Bonavista charged NuVista $330,000 (2007 - $360,000) in fees relating to general and administrative services provided to NuVista, in addition NuVista charged Bonavista management fees for a jointly owned partnership totaling $337,500 (2007 - $337,500). For the nine months ended September 30, 2008 Bonavista charged NuVista $1.1 million (2007 - $1.0 million) in fees relating to general and administrative services provided to NuVista, in addition NuVista charged Bonavista management fees for a jointly owned partnership totaling $1.0 million (2007 - $1.0 million). NuVista also credited Bonavista $211,000 (2007 - $638,000) for interest accrued during the first nine months of 2008, relating to the cash balance within the jointly owned partnership. As at September 30, 2008, the amount payable to NuVista was $427,000. 3. Asset retirement obligations: The Trust's asset retirement obligations result from net ownership interests in oil and natural gas assets including well sites, gathering systems and processing facilities. The Trust estimates the total undiscounted amount of expenditures required to settle its asset retirement obligations is approximately $559.2 million (2007 - $506.0 million) which will be incurred over the next 51 years. The majority of the costs will be incurred between 2010 and 2037. A credit-adjusted risk-free rate of 7.5% (2007 - 7.5%) and an inflation rate of 2% (2007 - 2%) were used to calculate the fair value of the asset retirement obligations. A reconciliation of the asset retirement obligations is provided below: ---------------------------------------------------------------------------- Nine months ended September 30, 2008 2007 ---------------------------------------------------------------------------- (thousands) Balance, beginning of period $ 116,893 $ 96,324 Accretion expense 6,330 5,218 Liabilities incurred 6,106 656 Liabilities acquired 2,487 3,976 Liabilities settled (10,168) (3,554) ---------------------------------------------------------------------------- Balance, end of period $ 121,648 $ 102,620 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 4. Long-term debt: The Trust has a $1.0 billion credit facility with a syndicate of chartered banks. This facility is an unsecured, covenant-based, extendible revolving facility and includes a $50 million working capital facility. The facility provides that advances may be made by way of prime rate loans, bankers' acceptances and/or US dollar LIBOR advances. These advances bear interest at the banks' prime rate and/or at money market rates plus a stamping fee. The facility is a three year revolving credit and may, at the request of the Trust with the consent of the lenders, be extended on an annual basis. On August 25, 2008 the facility was extended to August 10, 2011 with no principal payments required until then. This facility also includes an accordion feature providing that at anytime during the term, on participation of any existing or additional lenders, we can increase the facility by $250 million. Under the terms of the credit facility, the Trust has provided the covenant that its consolidated senior debt borrowing will not exceed three times net income before interest, taxes and depreciation, depletion and accretion; consolidated total debt will not exceed three and one half times consolidated net income before interest, taxes and depreciation, depletion and accretion; and consolidated senior debt borrowing will not exceed one-half of consolidated total debt plus consolidated unitholders' equity of the Trust. Financing expenses for the nine months ended September 30, 2008 include interest on bank loans of $24.3 million (2007 - $21.6 million) and convertible debentures of $2.5 million (2007 - $2.7 million). For the nine months ended September 30, 2008, Bonavista paid cash interest of $26.5 million (2007 - $24.1 million). For the nine months ending September 30, 2008 our effective interest rate was 4.1% (2007 - 5.1%). 5. Convertible debentures: The debt component of the debentures has been recorded net of the fair value of the conversion feature and issue costs. The fair value of the conversion feature of the debentures included in Unitholders' equity at the date of issue was $4.7 million. The issue costs are amortized to net income over the term of the obligation and the debt component of the obligation is adjusted for the amortization as well as for the portion of issue costs relating to conversions. The debt portion is accreted over the term of the obligation to the principal value on maturity with a corresponding charge to net income. The following table sets out the convertible debenture activities to September 30, 2008: ---------------------------------------------------------------------------- Debt Equity Component Component ---------------------------------------------------------------------------- (thousands) Balance, December 31, 2007 $ 48,830 $ 1,054 Accretion 45 - Issue expenses related to conversions to trust units 43 - Amortization of issue expenses 515 - Conversion to trust units (5,902) (121) ---------------------------------------------------------------------------- Balance, September 30, 2008 $ 43,531 $ 933 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 6. Unitholders' equity: a) Authorized: Unlimited number of voting trust units. b) Issued and outstanding: (i) Trust units: ---------------------------------------------------------------------------- Number Amount ---------------------------------------------------------------------------- (thousands) Balance, December 31, 2007 85,757 $ 850,631 Issued for cash 7,000 214,200 Issued on conversion of convertible debentures 215 5,902 Issued on conversion of exchangeable shares 354 1,164 Issued upon exercise of trust unit incentive rights 1,054 19,455 Conversion of restricted trust units 65 - Issue costs, related to debenture conversions - (43) Issue costs, net of future tax benefit - (8,426) Adjustment to equity component of debenture on conversion - 121 Unit-based compensation - 8,814 ---------------------------------------------------------------------------- Balance, September 30, 2008 94,445 $ 1,091,818 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (ii) Contributed surplus: ---------------------------------------------------------------------------- Amount ---------------------------------------------------------------------------- (thousands) Balance, December 31, 2007 $ 9,369 Unit-based compensation expense 6,355 Unit-based compensation capitalized 979 Exercise of trust unit incentive rights and conversion of restricted trust units (8,814) ---------------------------------------------------------------------------- Balance, September 30, 2008 $ 7,889 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (iii) Exchangeable shares: ---------------------------------------------------------------------------- Number Amount ---------------------------------------------------------------------------- (thousands) Balance, December 31, 2007 12,230 $ 74,710 Exchanged for trust units (190) (1,164) ---------------------------------------------------------------------------- Balance, September 30, 2008 12,040 $ 73,546 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Exchange ratio, September 30, 2008 1.87946 - ---------------------------------------------------------------------------- Trust units issuable on exchange 22,628 $ 73,546 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As a result of minimal conversions of exchangeable shares into trust units over the last few years, Bonavista has elected to redeem 10% of its exchangeable shares outstanding on January 16, 2009. This redemption will allow Bonavista to manage the dilution created by the compounding effect of the exchangeable shares, maintain an optimal capital and tax efficient trust structure for the Trust and its unitholders. In connection with this redemption, Bonavista has exercised its overriding "redemption call right" to purchase such exchangeable shares from holders of record. Each redeemed exchangeable share will be purchased for trust units of the Trust in accordance with the exchange ratio in effect at January 16, 2009, rounded to the nearest whole trust unit for each holder of record. A Notice of Redemption has been mailed to all exchangeable shareholders outlining the terms of this redemption. Bonavista will also mail a formal Letter of Transmittal to all exchangeable shareholders of record on January 16, 2009 to complete this transaction. c) Long term incentive plans: For the three months ended September 30, 2008 there were 53,415 restricted trust units granted and 685,260 trust unit incentive rights issued with an average exercise price of $35.99 per trust unit and an estimated fair value of $10.56 per trust unit. As at September 30, 2008 there were 146,833 restricted trust units outstanding and 3,177,940 trust unit rights outstanding with an average exercise price of $26.59 per trust unit. The Trust uses the fair value based method for the determination of the unit-based compensation costs. The fair value of each incentive right granted was estimated on the date of grant using the modified Black-Scholes option-pricing model. In the pricing model, the risk free interest was 3.5%; volatility of 28%; a forfeiture rate of 10% and an expected life of 4.5 years. d) Per unit amounts: The following table summarizes the weighted average trust units, exchangeable shares and convertible debentures used in calculating net income per trust unit: ---------------------------------------------------------------------------- Three months ended September 30, 2008 ---------------------------------------------------------------------------- (thousands) Trust units 94,223 Exchangeable shares converted at the exchange ratio 22,809 ---------------------------------------------------------------------------- Basic equivalent trust units 117,032 Convertible debentures 1,636 Trust unit incentive rights 624 Restricted trust units 147 ---------------------------------------------------------------------------- Diluted equivalent trust units 119,439 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- For the purposes of calculating net income per trust unit on a diluted basis, the net income has been increased by $1.0 million (2007 - $1.1 million) with respect to the accretion, amortization and interest expense on the convertible debentures. 7. Financial instruments: The Trust has exposure to credit, liquidity and market risks from its use of financial instruments. This note provides information about the Trust's exposure to each of these risks, the Trust's objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are included throughout these financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Trust's risk management framework. The Board has implemented and monitors compliance with risk management policies. The Trust's risk management policies are established to identify and analyze the risks faced by the Trust, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Trust's activities. (a) Credit risk: Credit risk is the risk of financial loss to the Trust if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Trust is exposed to credit risk with respect to its accounts receivable and commodity price risk contracts. A majority of the Trusts accounts receivable relate to oil and natural gas sales which are exposed to typical industry credit risks. The Trust manages this risk by entering into sales contracts with established creditworthy entities along with reviewing our exposure to these entities on a quarterly basis. The Trust also reduces its credit risk of commodity prices risk contracts by entering into agreements with counterparties that are either i) part of our existing banking syndicate or ii) have an investment grade rating. Substantially all of the Trust's crude oil and natural gas production is marketed under standard industry terms. Receivables from crude oil and natural gas marketers are normally collected on the 25th day of the month following production. The Trust's policy to mitigate credit risk associated with these balances is to establish marketing relationships with large credit worthy purchasers and to sell through multiple purchasers. The Trust historically has not experienced any collection issues with its crude oil and natural gas marketers. Joint venture receivables are typically collected within three months of the joint venture bill being issued to the partner. The Trust attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to the expenditure. However, the receivables are from participants in the crude oil and natural gas sector, and collection of the outstanding balances can be impacted by industry factors such as commodity price fluctuations, limited capital availability and unsuccessful drilling programs. The Trust does not typically obtain collateral from crude oil and natural gas marketers or joint venture partners; however the Trust does have the ability in most cases to withhold production from joint venture partners in the event of non-payment. The carrying amount of accounts receivable represents the maximum credit exposure. As at September 30, 2008 the Trust's receivables consisted of $85.7 million of receivables from crude oil and natural gas marketers which has substantially been collected, $23.8 million from joint venture partners of which $3.4 million has been subsequently collected, and $15.8 million of Crown deposits and prepaid expenses. As at September 30, 2008 the Trust has $8.9 million in accounts receivable that is considered to be past due. Although these amounts have been outstanding for greater than 90 days, they are still deemed to be collectible. The Trust does not have an allowance for doubtful accounts as at September 30, 2008 and did not provide for any doubtful accounts nor was it required to write-off any receivables during the period ended September 30, 2008. (b) Liquidity risk: Liquidity risk is the risk that the Trust will encounter difficulty in meeting obligations associated with the financial liabilities. The Trust's financial liabilities consist of accounts payable and accrued liabilities, financial instruments, bank debt and convertible debentures. Accounts payable consists of invoices payable to trade suppliers for office, field operating activities, capital expenditures, and distributions payable. The Trust processes invoices within a normal payment period. Accounts payable and financial instruments have contractual maturities of less than one year. The Trust maintains a three year revolving credit facility, as outlined in note 4, which may, at the request of the Trust with the consent of the lenders, be extended on an annual basis. The Trust also has two series of convertible debentures outstanding. The 7.5% debentures have a conversion price of $23.00 per trust unit, maturing on June 30, 2009 and the 6.75% debentures have a conversion price of $29.00 per trust unit, maturing on June 30, 2010. The Trust may elect to satisfy the principal obligation of these debentures by issuing trust units to the holders of the debentures. The Trust also maintains and monitors a certain level of cash flow which is used to partially finance all operating, investing and capital expenditures. (c) Market risk: Market risk is the risk that changes in market conditions, such as commodity prices, interest rates, and foreign exchange rates, will affect the Trust's net income or the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing the Trust's returns. The Trust utilizes both financial derivatives and physical delivery sales contracts to manage market risks. All such transactions are conducted in accordance with the Trust's risk management policy that has been approved by the Board of Directors. i) Commodity price risk Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for crude oil and natural gas are impacted not only by global economic events that dictate the levels of supply and demand but also by the relationship between the Canadian and United States dollar. The Trust has attempted to mitigate a portion of the commodity price risk through the use of various financial derivative and physical delivery sales contracts. The Trust's policy is to enter into commodity price contracts when considered appropriate to a maximum of 60% of forecasted production volumes. As at September 30, 2008, the Trust has hedged by way of costless collars to sell natural gas and crude oil as follows: ---------------------------------------------------------------------------- Volume Average Price Term ---------------------------------------------------------------------------- 35,000 gjs/d CDN$ 7.43 - CDN$ 8.77 - AECO October 1, 2008 - October 31, 2008 10,000 gjs/d CDN$ 9.25 - CDN$ 13.50 - AECO November 1, 2008 - March 31, 2009 5,000 gjs/d CDN$ 9.00 - CDN$ 12.00 - AECO April 1, 2009 - October 31, 2009 5,000 mmbtu/d US$ 6.81 - US$ 7.91 - AECO November 1, 2008 - March 31, 2009 7,000 bbls/d US$ 65.43 - US$ 78.58 - WTI October 1, 2008 - December 31, 2008 4,000 bbls/d CDN$ 61.75 - CDN$ 70.88 - Bow River October 1, 2008 - December 31, 2008 1,000 bbls/d CDN$ 70.00 - CDN$ 78.00 - Bow River January 1, 2009 - December 31, 2009 2,000 bbls/d CDN$ 92.50 - CDN$140.25 - WTI January 1, 2009 - December 31, 2009 2,000 bbls/d US$ 65.00 - US$ 80.50 - WTI January 1, 2009 - March 31, 2009 2,000 bbls/d CDN$ 105.00 - CDN$ 169.00 - WTI April 1, 2009 - December 31, 2009 1,000 bbls/d US$ 85.00 - US$ 105.60 - WTI April 1, 2009 - December 31, 2009 ---------------------------------------------------------------------------- Derivatives are recorded on the balance sheet at fair value at each reporting period with the change in fair value being recognized as an unrealized gain or loss on the consolidated statement of operations, comprehensive income and retained earnings. These contracts had the following reflected in the consolidated statement of operations, comprehensive income and retained earnings: ---------------------------------------------------------------------------- Three months ended September 30, 2008 2007 Realized gains (losses) on financial instruments $ (44,094) $ 1,438 Unrealized gains (losses) on financial instruments 154,480 (4,373) ---------------------------------------------------------------------------- $ 110,386 $ (2,935) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Bonavista mitigates its risk associated with fluctuations in commodity prices by entering into commodity price contracts. A $0.10 change to the price per thousand cubic feet of natural gas - AECO and a $1.00 change to the price per barrel of oil - WTI would have an impact of approximately $290,000 and $1.6 million, respectively, on net income for those commodity price contracts that were in place as at September 30, 2008. ii) Physical purchase contracts: As at September 30, 2008, the Trust has entered into direct sale costless collars to sell natural gas as follows: ---------------------------------------------------------------------------- Volume Average Price (CDN$ - AECO) Term ---------------------------------------------------------------------------- 45,000 gjs/d $ 7.19 - $ 8.36 October 1, 2008 - October 31, 2008 40,000 gjs/d $ 8.16 - $ 10.69 November 1, 2008 - March 31, 2009 10,000 gjs/d $ 8.00 - $ 10.84 April 1, 2009 - October 31, 2009 ---------------------------------------------------------------------------- iii) Foreign currency exchange rate risk Foreign currency exchange rate risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. The Trust sells crude oil and natural gas that is denominated in both US and Canadian dollars. Canadian commodity prices are influenced by fluctuations in the Canadian to U.S. dollar exchange rate. The Trust had no forward exchange rate contracts in place as at or during the period ended September 30, 2008. iv) Interest rate risk Interest rate is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Trust is exposed to interest rate fluctuations on its bank debt which bears a floating rate of interest. If the interest rates applicable to Bonavista's bank debt were to change by 100 basis points and assuming that the changes in bank debt are consistent with what actually occurred in the period, we would estimate that net income for the three and nine months ended September 30, 2008 would have a $1.1 million and $3.9 million impact respectively. For the similar periods in 2007 net income would be impacted by approximately $1.3 and $3.2 million respectively. The sensitivity impact is lower for the third quarter of 2008 compared to the same period in 2007 because of both lower weighted average outstanding bank debt and lower average interest rates. The sensitivity impact is higher for the nine months ended in 2008 because of higher weighted average bank debt compared to the nine months ended September 30, 2007, notwithstanding that the weighted average interest rate is lower in the first nine months of 2008 compared to the same period in 2007. The Trust had no interest rate swap or financial contracts in place as at or during the period ended September 30, 2008. Fair value of financial instruments The Trust's financial instruments as at September 30, 2008 and December 31, 2007 include accounts receivable, derivative contracts, accounts payable and accrued liabilities, convertible debentures and bank debt. The fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to their short-terms to maturity. The Trust does not hold any financial assets or liabilities that are held for trading, nor does it have held to maturity investments or available for sale financial assets. The fair value of derivative contracts is determined by the financial intermediary to extinguish all rights or obligations of the financial instruments. As at September 30, 2008, the market deficit of these derivative financial instruments was approximately $18.3 million. Fair market value of the convertible debentures as at September 30, 2008 is $47.1 million, which has been determined by its most recent closing trading price during the quarter. Bank debt bears interest at a floating market rate and accordingly the fair market value approximates the carrying value. 8. Capital management: The Trust's objective when managing capital is to maintain a flexible capital structure which allows it to execute its growth strategy through strategic acquisitions and expenditures on exploration and development activities while maintaining a strong financial position that provides our unitholders with stable distributions and rates of return. The Trust considers its capital structure to include working capital (excluding unrealized gains and losses on financial instruments), convertible debentures, bank debt, and unitholders' equity. The Trust monitors capital based on the ratio of net debt to annualized funds from operations. The ratio represents the time period it would take to pay off the debt if no further capital expenditures were incurred and if funds from operations remained constant. This ratio is calculated as net debt, defined as outstanding bank debt plus or minus net working capital, divided by funds from operations for the most recent calendar quarter, annualized (multiplied by four). The Trust's strategy is to maintain a ratio of no more than 2.0 to 1. This strategy is more restrictive than the existing financial covenants on the Trust's credit facility. This ratio may increase at certain times as a result of acquisitions or low commodity prices. As at September 30, 2008, the Trust's ratio of net debt to annualized funds from operations was 0.9 to 1 (2007 - 1.4 to 1), which is within the acceptable range established by the Trust. In order to facilitate the management of this ratio, the Trust prepares annual funds from operations and capital expenditure budgets, which are updated as necessary, and are reviewed and periodically approved by the Trust's Board of Directors. The Trust manages its capital structure and makes adjustments by continually monitoring its business conditions, including; the current economic conditions; the risk characteristics of the Trust's crude oil and natural gas assets; the depth of its investment opportunities; current and forecasted net debt levels; current and forecasted commodity prices; and other facts that influence commodity prices and funds from operations, such as quality and basis differential, royalties, operating costs and transportation costs. In order to maintain or adjust the capital structure, the Trust will consider; its forecasted ratio of net debt to forecasted funds from operations while attempting to finance an acceptable capital expenditure program including acquisition opportunities; the current level of bank credit available from the Trust's lenders; the level of bank credit that may be attainable from its lenders as a result of crude oil and natural gas reserves; the availability of other sources of debt with different characteristics than the existing bank debt; the sale of assets; limiting the size of the capital expenditure program; issuance of new equity if available on favourable terms; and its level of distributions payable to its unitholders. The Trust's unitholder's capital is not subject to external restrictions, however the Trust's credit facility does contain financial covenants that are outlined in note 4 of the consolidated financial statements. There has been no change in the Trust's approach to capital management during the period ended September 30, 2008.
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