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Press release from Marketwire

Peyto Energy Trust Announces First Quarter 2010 Results and Increased Capital Program

Wednesday, May 12, 2010

Peyto Energy Trust Announces First Quarter 2010 Results and Increased Capital Program16:30 EDT Wednesday, May 12, 2010CALGARY, ALBERTA--(Marketwire - May 12, 2010) - Peyto Energy Trust ("Peyto" or the "Trust") (TSX:PEY.UN) is pleased to present the operating and financial results for the first quarter of the 2010 fiscal year. The Trust generated industry leading operating margins of 73%(1) and profit margins of 46%(2) in the quarter, along with 9% growth in production. First quarter 2010 highlights were as follows:- Production grew from 114 MMcfe/d in Q1 2009 to 124 MMcfe/d (20,653 boe/d) in Q1 2010, largely as a result of horizontal drilling success in Peyto's Cardium, Notikewin and Wilrich Deep Basin plays. This equates to a 9% year over year increase or a 22% increase in production per unit, debt adjusted(3).- Funds from operations ("FFO") were unchanged from Q1 2009 at $58.6 million with increased production volumes contributing to offset the 17% decline in realized natural gas prices. FFO per unit were down 7% to $0.51/unit due to an increase in trust units outstanding.- Operating costs, including transportation, were maintained at $0.54/Mcfe ($3.22/boe) which contributed to corporate netbacks of $5.25/Mcfe ($31.50/boe) or 73% of revenue.- Capital of $49.4 million (net of $8.4 million in Drilling Royalty Credits) was invested in the drilling of 6 net vertical and 7.6 net horizontal wells.- Earnings of $36.9 million ($0.32/unit) were generated in the quarter and $41.5 million ($0.36/unit) was distributed to unitholders.First Quarter 2010 in ReviewPeyto finished three pilot projects in the first quarter which helped to prove the application of horizontal multi-stage fracture technology in the Alberta Deep Basin. Since Q3 2009, five Cardium, four Notikewin and four Wilrich horizontal wells have now been drilled, completed and put on production. Over the next several months, the performance of these wells will help the Trust determine which exploitation strategies will be most profitable in the ongoing development of its many Deep Basin resource plays. Approximately 27 MMcfe/d (4,500 boe/d) of new production was brought on in the quarter with horizontal wells contributing 70% of this increase. Alberta spot natural gas prices, which averaged $4.70/GJ, declined throughout the quarter, similar to the same period last year. Peyto's low cost structure, combined with liquids rich, high heat content natural gas production, ensures profitability is achieved even during the lowest part of the gas price cycle with positive funds flow generated at AECO prices above $1.50/GJ and positive earnings at prices above $3.00/GJ. Although Alberta drilling activity is up from this time last year, service and material costs are still low, and when combined with Alberta royalty incentives, create an attractive environment for continued natural gas investment. As a result, the capital program for 2010 has been increased to range from $225 to $250 million (before drilling royalty credits). (1) Operating Margin is defined as Funds from Operations divided by Revenue before Royalties but including realized hedging gains (losses). (2) Profit Margin is defined as Net Earnings for the quarter divided by Revenue before Royalties but including realized hedging gains (losses). (3) Per unit results are adjusted for changes in net debt and equity. Net debt is converted to equity using the Mar 31 unit price of $13.51 for 2010 and $7.79 for 2009. Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead. ---------------------------------------------------------------------------- 3 Months Ended Mar. 31 % 2010 2009 Change ---------------------------------------------------------------------------- Operations Production Natural gas (mcf/d) 103,934 95,998 8% Oil & NGLs (bbl/d) 3,330 3,022 10% Thousand cubic feet equivalent (mcfe/d @ 1:6) 123,916 114,128 9% Barrels of oil equivalent (boe/d @ 6:1) 20,653 19,021 9% Product prices Natural gas ($/mcf) 6.34 7.68 (17)% Oil & NGLs ($/bbl) 68.93 44.46 55% Operating expenses ($/mcfe) 0.41 0.44 (7)% Transportation ($/mcfe) 0.13 0.11 18% Field netback ($/mcfe) 5.81 6.27 (7)% General & administrative expenses ($/mcfe) 0.16 0.22 (27)% Interest expense ($/mcfe) 0.40 0.35 14% Financial ($000, except per unit) Revenue 79,974 78,423 2% Royalties 9,173 8,290 11% Funds from operations 58,559 58,607 - Funds from operations per unit 0.51 0.55 (7)% Total distributions 41,470 41,309 - Total distributions per unit 0.36 0.39 (8)% Payout ratio 71 70 1% Earnings 36,874 63,574 (42)% Earnings per diluted unit 0.32 0.60 (47)% Capital expenditures 49,361 13,036 279% Weighted average trust units outstanding 115,153,667 105,920,194 9% As at March 31 Net debt (before future compensation expense and unrealized hedging gains) 467,368 490,570 (5)% Unitholders' equity 643,798 580,221 11% Total assets 1,320,721 1,271,770 4% ---------------------------------------------------------------------------- Three Months ended Mar. 31 ($000) 2010 2009 ---------------------------------------------------------------------------- Cash flows from operating activities 52,384 52,101 Change in non-cash working capital 4,041 5,356 Change in provision for performance based compensation 2,134 1,150 ---------------------------------------------------------------------------- Funds from operations 58,559 58,607 ---------------------------------------------------------------------------- Funds from operations per unit 0.51 0.55 ---------------------------------------------------------------------------- (1) Funds from operations - Management uses funds from operations to analyze the operating performance of its energy assets. In order to facilitate comparative analysis, funds from operations is defined throughout this report as earnings before performance based compensation, non-cash and non-recurring expenses. Management believes that funds from operations is an important parameter to measure the value of an asset when combined with reserve life. Funds from operations is not a measure recognized by Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. Therefore, funds from operations, as defined by Peyto, may not be comparable to similar measures presented by other issuers, and investors are cautioned that funds from operations should not be construed as an alternative to net earnings, cash flow from operating activities or other measures of financial performance calculated in accordance with GAAP. Funds from operations cannot be assured and future distributions may vary. Capital ExpendituresPeyto invested $57.8 million in the first quarter of 2010 and recovered $8.4 million in drilling royalty credits for net capital spending of $49.4 million. Drilling and completions accounted for $47.5 million or 82% of the total before credits, with wellsite equipment, pipelines and facilities accounting for $10 million. Land and seismic accounted for $0.3 million.14 gross (13.6 net) wells were spud in the quarter, with 6 drilled vertically and 8 horizontally, while 14 gross (13.6 net) zones were completed and 13 gross (12.6 net) zones brought on stream. Also during the quarter, Peyto expanded its Nosehill gas plant from 20 MMcf/d to 30 MMcf/d of processing capacity with the installation of a third compressor unit.Financial ResultsThe Trust realized natural gas prices of $6.34/mcf in Q1 2010, benefiting from its high heat content natural gas and a $0.63/mcf hedging gain. Oil and natural gas liquids combined for a realized liquids price of $68.93/bbl. On a blended basis, Peyto's natural gas and liquid sales effectively realized a price of $6.64/mcfe, before hedging, compared to AECO daily spot prices that averaged $4.70/GJ and Edmonton par oil prices of $80/bbl.Cash costs, which include royalties, operating costs, transportation, G&A, and interest, were $1.92/mcfe ($11.52/boe) in Q1 2010, essentially unchanged from the $1.93/mcfe in Q1 2009. When combined with total revenues of $7.17/mcfe ($43.02/boe), a cash netback of $5.25/mcfe ($31.50/boe) was realized which equates to a 73% operating margin. Depletion, depreciation and accretion as well as a provision for future performance based compensation and future income tax reduced the 73% operating margin to a 46% profit margin or earnings of $3.31/mcfe ($19.84/boe).Subsequent to the quarter, Peyto's financial flexibility and balance sheet were strengthened by the April 1, 2010 expansion of the Trust's credit facility from $550 to $625 million and the April 27, 2010 issuance of 5.566 million units at $13.45/unit, for net proceeds of $71 million. Net debt of $467 million at the end of Q1 2010 was further reduced to $396 million, leaving $229 million in available bank lines.MarketingAlberta natural gas prices fell throughout the quarter, similar to Q1 2009, amid fears the North American market is oversupplied. Peyto's marketing strategy of layering in forward sales continued to smooth out much of this volatility. A first quarter 2010 hedging gain of $5.9 million was realized, as compared to a $13.3 million gain for the first quarter 2009.As at March 31, 2010, the Trust had committed to the future sale of 29,535,000 gigajoules (GJ) of natural gas at an average price of $5.71 per GJ or $6.68 per mcf. Had these contracts been closed on March 31, 2010, the Trust would have realized a gain in the amount of $45.0 million. A detailed summary of contracts outstanding in respect of the hedging activity is available in the MD&A.Activity UpdateThe last wells of the winter drilling program are now tied-in and current production stands at 141 MMcfe/d (23,500 boe/d). Field operations are anticipated to recommence mid-May with 5 drilling rigs capable of either vertical or horizontal drilling. Initially the program will focus on the greater Sundance area following up on the success of the existing horizontal wells in the Cardium, Notikewin and Wilrich formations along with a number of vertical wells targeting the various formations. The Trust plans to initiate two additional horizontal pilot projects later in the year testing other prospective zones, as well as branching out along trend in the Cardium formation. A turnaround of the Oldman gas plant in the Sundance field is planned during the second quarter, as well as facility modifications and expansion of the Kakwa and Nosehill gas plants that will ultimately see the doubling of capacity at Nosehill to 60 mmcf/d.Corporate ConversionPeyto remains on track with plans for the conversion of the Trust into a corporate form on December 31, 2010. The new corporate structure will retain the ability to return profits to shareholders in the form of monthly dividends rather than monthly distributions. Details of the conversion will be communicated in the coming months and a unitholder meeting is planned for December 8, 2010. For the remainder of 2010, the Trust plans on maintaining distributions at $0.12/unit/month.2010 OutlookWith the successful horizontal pilot projects now complete, the stage is set for an exciting year of growth in 2010. Since Peyto's first horizontal well came on production in August 2009, production has grown from 105 MMcfe/d (17,600 boe/d) to 141 MMcfe/d (23,500 boe/d). This 34% increase in the past ten months has all come from internally generated drilling ideas. With Peyto's low cost structure, these and future drilling ideas will continue to rank at the top of the industry in profitability, much as they have over the past 11 years. The success of recent activity has led to a 25% expansion of the 2010 capital program. This capital program, ranging from $225 to $250 million, will be three times greater than what was invested in 2009.Peyto has now begun the transition from a sustainable energy trust model back to a growth oriented exploration and production company; one that continues to deliver superior total returns to its unitholders. The focus on profitability, as the fundamental driver of investment decisions, remains firmly intact.Conference Call and WebcastA conference call will be held with the senior management of Peyto to answer questions with respect to the 2010 first quarter and full year financial results on Thursday, May 13th, 2010, at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). To participate, please call 1-416-340-8018 (Toronto area) or 1-866-223-7781 for all other participants. The conference call will also be available on replay by calling 1-416-695-5800 (Toronto area) or 1-800-408-3053 for all other parties, using passcode 8462514. The replay will be available at 11:00 a.m. MDT, 1:00 p.m. EDT Thursday, May 13th, 2010 until midnight EDT on Thursday, May 20th, 2010. The conference call can also be accessed through the internet at http://events.digitalmedia.telus.com/peyto/051310/index.php. After this time the conference call will be archived on the Peyto Energy Trust website at www.peyto.com.Management's Discussion and AnalysisA copy of the first quarter report to Unitholders, including the Management's Discussion and Analysis, and financial statements and related notes is available at http://www.peyto.com/news/Q12010MDandA.pdf and will be filed at SEDAR, www.sedar.com , at a later date.Annual General MeetingThe Trust's Annual General Meeting of Unitholders is scheduled for 3:00 p.m. on Wednesday, May 19, 2010 at Livingston Place Conference Centre, +15 level, 222-3rd Avenue SW, Calgary, Alberta. A webcast of the AGM, questions and presentation will be made live at http://www.gowebcasting.com/1672 and later archived on the Peyto website at www.peyto.com.Darren Gee, President and CEOMay 12, 2010Certain information set forth in this document and Management's Discussion and Analysis, including management's assessment of Peyto's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond these parties' control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, 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. Peyto's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits Peyto will derive therefrom. Peyto Energy Trust Consolidated Balance Sheets ($000) (unaudited) March 31, December 31, 2010 2009 ---------------------------------------------------------------------------- Assets Current Accounts receivable (Note 3) 64,910 58,305 Due from private placement (Note 6) - 2,728 Financial derivative instruments (Note 10) 40,039 8,683 Prepaid expenses and deposits 3,064 3,787 ---------------------------------------------------------------------------- 108,013 73,503 ---------------------------------------------------------------------------- Financial derivative instruments (Note 10) 4,974 1,253 Prepaid capital - 955 Property, plant and equipment (Note 4) 1,207,734 1,178,402 ---------------------------------------------------------------------------- 1,212,708 1,180,610 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1,320,721 1,254,113 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities and Unitholders' Equity Current Accounts payable and accrued liabilities 72,222 55,890 Distributions payable 13,120 13,790 Provision for future performance based compensation 3,882 2,001 ---------------------------------------------------------------------------- 89,224 71,681 ---------------------------------------------------------------------------- Long-term debt (Note 5) 450,000 435,000 Provision for future performance based compensation 1,294 1,041 Asset retirement obligations 10,806 10,487 Future income taxes 125,598 123,421 ---------------------------------------------------------------------------- 587,698 569,949 ---------------------------------------------------------------------------- Unitholders' equity Unitholders' capital (Note 6) 505,512 500,407 Units to be issued (Note 6) 1,498 2,728 Accumulated earnings (Note 7) 95,153 99,749 Accumulated other comprehensive income 41,636 9,599 ---------------------------------------------------------------------------- 136,789 109,348 ---------------------------------------------------------------------------- 643,799 612,483 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1,320,721 1,254,113 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes On behalf of the Board: (signed) "Michael MacBean" (signed) "Darren Gee" Director Director Peyto Energy Trust Consolidated Statements of Earnings ($000 except per unit amounts) (unaudited) For the three months ended March 31, 2010 2009 ---------------------------------------------------------------------------- Revenue Oil and gas sales 74,090 65,163 Realized gain on hedges 5,884 13,260 Royalties (9,173) (8,290) ---------------------------------------------------------------------------- Petroleum and natural gas sales, net 70,801 70,133 ---------------------------------------------------------------------------- Expenses Operating (Note 8) 4,559 4,560 Transportation 1,435 1,178 General and administrative(Note 9) 1,836 2,238 Future performance based compensation 2,134 1,150 Interest on long term debt 4,412 3,550 Depletion, depreciation and accretion (Note 4) 20,414 18,577 ---------------------------------------------------------------------------- 34,790 31,253 ---------------------------------------------------------------------------- Earnings before taxes 36,011 38,880 ---------------------------------------------------------------------------- Taxes Future income tax (recovery) expense (863) (24,694) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings for the period 36,874 63,574 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings per unit (Note 6) Basic and diluted 0.32 0.60 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes Peyto Energy Trust Consolidated Statements of Comprehensive Income ($000 except per unit amounts) (unaudited) For the three months ended March 31, 2010 2009 ---------------------------------------------------------------------------- Earnings for the period 36,874 63,574 Other comprehensive income (loss) Change in unrealized gain on cash flow hedges 37,921 20,499 Realized (gain) on cash flow hedges (5,884) (13,260) ---------------------------------------------------------------------------- Comprehensive income 68,911 70,813 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes Peyto Energy Trust Consolidated Statements of Accumulated Earnings and Accumulated Other Comprehensive Income ($000) (unaudited) For the three months ended March 31, 2010 2009 ---------------------------------------------------------------------------- Accumulated earnings, beginning of period 99,749 110,238 Earnings for the period 36,874 63,574 Distributions (Note 7) (41,470) (41,309) ---------------------------------------------------------------------------- Accumulated earnings, end of period 95,153 132,503 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Accumulated other comprehensive income, beginning of period 9,599 30,246 Other comprehensive income 32,037 7,239 ---------------------------------------------------------------------------- Accumulated other comprehensive income, end of period 41,636 37,485 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes Peyto Energy Trust Consolidated Statements of Cash Flows ($000) (unaudited) For the three months ended March 31, 2010 2009 ---------------------------------------------------------------------------- Cash provided by (used in) Operating Activities Earnings for the period 36,874 63,574 Items not requiring cash: Future income tax (recovery) expense (863) (24,694) Depletion, depreciation and accretion 20,414 18,577 Change in non-cash working capital related to operating activities (4,041) (5,355) ---------------------------------------------------------------------------- 52,384 52,102 ---------------------------------------------------------------------------- Financing Activities Issue of trust units, net of costs (Note 6) 872 - Cash distribution paid (net of DRIP) (39,250) (41,309) Increase in bank debt 15,000 10,000 Change in non-cash working capital related to financing activities 2,124 (3,178) ---------------------------------------------------------------------------- (21,254) (34,487) ---------------------------------------------------------------------------- Investing Activities Additions to property, plant and equipment (48,473) (13,036) Change in non-cash working capital related to investing activities 16,628 (4,579) ---------------------------------------------------------------------------- (31,845) (17,615) ---------------------------------------------------------------------------- Net decrease in cash - - Cash, beginning of period - - ---------------------------------------------------------------------------- Cash, end of period - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes Peyto Energy TrustNotes to Consolidated Financial Statements(unaudited)March 31, 2010 and 20091. Summary of Significant Accounting PoliciesThe unaudited interim consolidated financial statements of Peyto Energy Trust (the "Trust" or "Peyto") follow the same accounting policies as the most recent annual audited consolidated financial statements. The interim consolidated financial statement note disclosures do not include all of those required by Canadian generally accepted accounting principles ("GAAP") applicable for annual financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the 2009 audited consolidated financial statements. These consolidated financial statements include the accounts of Peyto Energy Trust and its wholly owned subsidiaries, Peyto Exploration & Development Corp., Peyto Operating Trust, Peyto Energy Limited Partnership and Peyto Energy Administration Corp.2. Accounting PronouncementsPending Accounting PronouncementsInternational Financial Reporting Standards ("IFRS")In January 2006, the CICA Accounting Standards Board ("ASCB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") by 2011. 3. Accounts Receivable March 31, December 31, ($000) 2010 2009 ---------------------------------------------------------------------------- Accounts receivable - general 57,755 51,150 Accounts receivable - income taxes 7,155 7,155 ---------------------------------------------------------------------------- 64,910 58,305 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Canada Revenue Agency ("CRA") has conducted an audit of restructuring costs claimed as a result of the trust conversion in 2003 that has resulted in the reclassification of $41.0 million dollars in employment related costs as eligible capital. In October, 2008, the Trust has received a notice of reassessment from the CRA and paid an amount of $7.2 million related to this audit. Based upon consultation with legal counsel, management's view is that CRA's position has no merit. A notice of appeal was filed May 19, 2009 and the appeal has been denied. Examinations for discovery have been scheduled for June 2010. 4. Property, Plant and Equipment March 31, December 31, 2010 2009 ($000) $ $ ---------------------------------------------------------------------------- Property, plant and equipment 1,674,220 1,624,655 Accumulated depletion and depreciation (466,486) (446,253) ---------------------------------------------------------------------------- 1,207,734 1,178,402 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- At March 31, 2010, costs of $25.9 million (December 31, 2009 - $26.6 million) related to undeveloped land have been excluded from the depletion and depreciation calculation. 5. Long-Term DebtThe Trust has a syndicated $550 million extendible revolving credit facility with a stated term date of April 30, 2010. The facility is made up of a $20 million working capital sub-tranche and a $530 million production line. The facilities are available on a revolving basis for a period of at least 364 days and upon the term out date may be extended for a further 364 day period at the request of the Trust, subject to approval by the lenders. In the event that the revolving period is not extended, the facility is available on a non-revolving basis for a one year term, at the end of which time the facility would be due and payable. Outstanding amounts on this facility bear interest at rates determined by the Trust's debt to cash flow ratio that range from prime plus 1.50% to prime plus 3.00% for debt to earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) ratios ranging from less than 1:1 to greater than 2.5:1. A General Security Agreement with a floating charge on land registered in Alberta is held as collateral by the bank. The Trust's revolving credit facility is not subject to any external financial covenants. The average borrowing rate for the three months ended March 31, 2010 was 4.0% (2009 - 2.8%). See Note 14 - Subsequent Events. 6. Unitholders' Capital Authorized: Unlimited number of voting trust units Issued and Outstanding Trust Units (no par value) ($000) Number of Units Amount ---------------------------------------------------------------------------- Balance, December 31, 2008 105,920,194 410,233 ---------------------------------------------------------------------------- Trust units issued by private placement - - Trust units issued 9,000,000 94,500 Trust unit issuance costs (net of tax) - (4,326) ---------------------------------------------------------------------------- Balance, December 31, 2009 114,920,194 500,407 ---------------------------------------------------------------------------- Trust units issued by private placement 196,420 2,728 Trust units issued pursuant to DRIP 115,139 1,505 Trust units issued pursuant to OTUPP 68,922 872 ---------------------------------------------------------------------------- Balance, March 31, 2010 115,300,675 505,512 ---------------------------------------------------------------------------- Units IssuedOn June 26, 2009, Peyto closed an offering of 9,000,000 trust units at a price of $10.50 per trust unit, receiving net proceeds of $89.4 million (net of issuance costs). On December 31, 2009 the Trust completed a private placement of 196,420 trust units to employees and consultants for net proceeds of $2.7 million ($13.89 per unit). These trust units were issued on January 6, 2010. Peyto reinstated its amended distribution reinvestment and optional trust unit purchase plan (the "Amended DRIP Plan") effective with the January 2010 distribution whereby eligible unitholders may elect to reinvest their monthly cash distributions in additional trust units at a 5% discount to market price. The DRIP plan incorporates an Optional Trust Unit Purchase Plan ("OTUPP") which provides unitholders enrolled in the DRIP with the opportunity to purchase additional trust units from treasury using the same pricing as the DRIP. Units to be IssuedSubsequent to March 31, 2010 115,927 trust units (55,371 pursuant to the DRIP and 60,556 pursuant to the OTUPP) were issued for net proceeds of $1.5 million. Subsequent to the issuance of these units, 115,416,602 trust units were outstanding. Per Unit AmountsEarnings per unit have been calculated based upon the weighted average number of units outstanding for the three months ended March 31, 2010 of 115,153,667 (2009 - 105,920,194). There are no dilutive instruments outstanding.7. Accumulated DistributionsThe Trust paid total distributions to the unitholders in the aggregate amount of $41.5 million in the three months ended March 31, 2010 of which all was settled in cash (2009 - total $41.3 million) in accordance with the following schedule: Production Period Record Date Distribution Date Per Unit (1) ---------------------------------------------------------------------------- January 2010 January 31, 2010 February 15, 2010 $0.12 February 2010 February 28, 2010 March 15, 2010 $0.12 March 2010 March 31, 2010 April 15, 2010 $0.12 ---------------------------------------------------------------------------- (1) Distributions per trust unit reflect the sum of the per trust unit amounts declared monthly to unitholders. Accumulated Earnings and Distributions March 31, December 31, ($000) 2009 2009 ---------------------------------------------------------------------------- Accumulated earnings, beginning of period 1,072,209 919,435 Earnings for the period 36,874 152,774 ---------------------------------------------------------------------------- Total accumulated earnings 1,109,083 1,072,209 Total accumulated distributions (1,013,930) (972,460) ---------------------------------------------------------------------------- Accumulated earnings, end of period 95,153 99,749 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 8. Operating ExpensesThe Trust's operating expenses include all costs with respect to day-to-day well and facility operations. Processing and gathering income related to joint venture and third party natural gas reduces operating expenses. Three Months Ended March 31 2010 2009 ($000) $ $ ---------------------------------------------------------------------------- Field expenses 7,132 7,395 Processing and gathering income (2,573) (2,835) ---------------------------------------------------------------------------- Operating expenses 4,559 4,560 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 9. General and Administrative Expenses (G & A)General and administrative expenses are reduced by operating and capital overhead recoveries on operated properties. Three Months Ended March 31 2010 2009 ($000) $ $ ---------------------------------------------------------------------------- General and administrative expenses 2,718 2,739 Overhead recoveries (882) (501) ---------------------------------------------------------------------------- Net general and administrative expenses 1,836 2,238 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 10. Financial Instruments and Risk ManagementFinancial Instrument Classification and MeasurementFinancial instruments of the Trust carried on the Consolidated Balance Sheet are carried at amortized cost with the exception of cash and cash equivalents and financial derivative instruments, specifically fixed price contracts, which are carried at fair value. There are no significant differences between the carrying value of financial instruments and their estimated fair values as at March 31, 2010.The fair value of the Trust's cash and cash equivalents and financial derivative instruments are quoted in active markets. The Trust classifies the fair value of these transactions according to the following hierarchy.- Level 1 - quoted prices in active markets for identical financial instruments.- Level 2 - quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.- Level 3 - valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.The Trust's cash and cash equivalents and financial derivative instruments have been assessed on the fair value hierarchy described above and classified as Level 1. Fair Values of Financial Assets and LiabilitiesThe Trust's financial instruments include cash and cash equivalents, accounts receivable, financial derivative instruments, due from private placement, current liabilities (excluding future income tax), provision for future performance based compensation and long term debt. At March 31, 2010, the carrying value of cash and cash equivalents and financial derivative instruments are carried at fair value. Accounts receivable, due from private placement, current liabilities (excluding future income tax) and provision for future performance based compensation approximate their fair value due to their short term nature. The carrying value of the long term debt approximates its fair value due to the floating rate of interest charged under the credit facility.Market RiskMarket risk is the risk that changes in market prices will affect the Trust's earnings or the value of its financial instruments. Market risk is comprised of commodity price risk, currency risk and interest rate risk. The objective of market risk management is to manage and control exposures within acceptable limits, while maximizing returns. The Trust's objectives, processes and policies for managing market risks have not changed from the previous year. Commodity Price Risk Management The Trust is a party to certain derivative financial instruments, including fixed price contracts. The Trust enters into these contracts with companies the Trust considers to be well established counterparties for the purpose of protecting a portion of its future earnings and cash flows from operations from the volatility of commodity prices. The Trust believes the derivative financial instruments are effective as hedges, both at inception and over the term of the instrument, as the term and notional amount do not exceed the Trust's firm commitment or forecasted transaction and the underlying basis of the instrument correlates highly with the Trust's exposure. A summary of contracts outstanding in respect of the hedging activities at March 31, 2010 are as follows: Asset Asset (Liability) (Liability) Fair as at as at Term Effective Value March 31, December Description Notional (1) Rate Level 2010 31, 2009 ---------------------------------------------------------------------------- Natural gas financial swaps - AECO 29.54GJ (2) 2010-2012 $ 5.71/GJ Level 1 45,013 9,936 ---------------------------------------------------------------------------- (1) Notional values as at March 31, 2010 (2) Millions of gigajoules ---------------------------------------------------------------------------- Natural Gas Price Period Hedged Type Daily Volume (CAD) ---------------------------------------------------------------------------- November 1, 2009 to October 31, 2010 Fixed Price 5,000 GJ $ 5.20/GJ November 1, 2009 to October 31, 2010 Fixed Price 5,000 GJ $ 5.00/GJ November 1, 2009 to March 31, 2011 Fixed Price 5,000 GJ $ 6.20/GJ November 1, 2009 to March 31, 2011 Fixed Price 5,000 GJ $ 5.81/GJ April 1, 2010 to October 31, 2010 Fixed Price 5,000 GJ $ 6.10/GJ April 1, 2010 to October 31, 2010 Fixed Price 5,000 GJ $ 5.50/GJ April 1, 2010 to October 31, 2010 Fixed Price 5,000 GJ $ 4.50/GJ April 1, 2010 to March 31, 2011 Fixed Price 5,000 GJ $ 5.28/GJ April 1, 2010 to March 31, 2011 Fixed Price 5,000 GJ $ 5.29/GJ April 1, 2010 to March 31, 2011 Fixed Price 5,000 GJ $ 5.555/GJ April 1, 2010 to March 31, 2011 Fixed Price 5,000 GJ $ 5.70/GJ April 1, 2010 to March 31, 2011 Fixed Price 5,000 GJ $ 4.55/GJ April 1, 2010 to March 31, 2012 Fixed Price 5,000 GJ $ 5.67/GJ April 1, 2010 to March 31, 2012 Fixed Price 5,000 GJ $ 5.82/GJ November 1, 2010 to March 31, 2011 Fixed Price 5,000 GJ $ 8.91/GJ November 1, 2010 to March 31, 2011 Fixed Price 5,000 GJ $ 9.15/GJ April 1, 2011 to March 31, 2012 Fixed Price 5,000 GJ $ 6.20/GJ November 1, 2011 to March 31, 2012 Fixed Price 5,000 GJ $ 4.50/GJ ---------------------------------------------------------------------------- As at March 31, 2010, the Trust had committed to the future sale of 29,535,000 gigajoules (GJ) of natural gas at an average price of $5.71 per GJ or $6.68 per mcf based on the historical heating value of the Trust's natural gas. Had these contracts been closed on March 31, 2010, the Trust would have realized a gain in the amount of $45.0 million. If the AECO gas price on March 31, 2010 were to increase by $1/GJ, the unrealized gain on these closed contracts would change by approximately $29.5 million. An opposite change in commodity prices rates will result in an opposite impact on earnings which would have been reflected in the other comprehensive income of the Trust. Subsequent to March 31, 2010 the Trust entered into the following contracts: Natural Gas Price Period Hedged Type Daily Volume (CAD) ---------------------------------------------------------------------------- April 1, 2011 to March 31, 2012 Fixed Price 5,000 GJ $ 5.00/GJ April 1, 2011 to March 31, 2012 Fixed Price 5,000 GJ $ 5.12/GJ ---------------------------------------------------------------------------- Interest rate riskThe Trust is exposed to interest rate risk in relation to interest expense on its revolving credit facility. Currently, the Trust has not entered into any agreements to manage this risk. If interest rates applicable to floating rate debt were to have increased by 100 bps (1%) it is estimated that the Trust's earnings for the period ended March 31, 2010 would decrease by $1.1 million. An opposite change in interest rates will result in an opposite impact on earnings. Credit RiskA substantial portion of the Trust's accounts receivable is with petroleum and natural gas marketing entities. Industry standards dictate that commodity sales are settled on the 25th day of the month following the month of production. The Trust generally extends unsecured credit to these companies, and therefore, the collection of accounts receivable may be affected by changes in economic or other conditions and may accordingly impact the Trust's overall credit risk. Management believes the risk is mitigated by the size, reputation and diversified nature of the companies to which they extend credit. The Trust has not previously experienced any material credit losses on the collection of accounts receivable. Of the Trust's revenue for the period ended March 31, 2010, approximately 87% was received from six companies (23%, 17%, 14%, 11%, 11%, 11%) (March 31, 2009 - 82%, four companies (30%, 24%, 14%, 14%)). The maximum exposure to credit risk is represented by the carrying amount on the balance sheet. There are no material financial assets that the Trust considers past due and no accounts have been written off.The Trust may be exposed to certain losses in the event of non-performance by counterparties to commodity price contracts. The Trust mitigates this risk by entering into transactions with counter-parties that have investment grade credit ratings, in accordance with policy as established by the Board of Directors. Counterparties for derivative instrument transactions are limited to financial institutions which are all members of the syndicated credit facility.The Trust assesses quarterly if there should be any impairment of financial assets. At March 31, 2010, there was no impairment of any of the financial assets of the Trust.Liquidity RiskLiquidity risk includes the risk that, as a result of operational liquidity requirements:- The Trust will not have sufficient funds to settle a transaction on the due date;- The Trust will be forced to sell financial assets at a value which is less than what they are worth; or- The Trust may be unable to settle or recover a financial asset at all.The Trust's operating cash requirements, including amounts projected to complete our existing capital expenditure program, are continuously monitored and adjusted as input variables change. These variables include, but are not limited to, available bank lines, oil and natural gas production from existing wells, results from new wells drilled, commodity prices, cost overruns on capital projects and changes to government regulations relating to prices, taxes, royalties, land tenure, allowable production and availability of markets. As these variables change, liquidity risks may necessitate the need for the Trust to conduct equity issues or obtain project debt financing. The following are the contractual maturities of financial liabilities as at March 31, 2010: less than ($000s) 1 Year 1-2 Years 2-5 Years Thereafter ---------------------------------------------------------------------------- Accounts payable and accrued liabilities 72,222 Provision for future performance based compensation 3,882 1,294 Distributions payable 13,120 Long-term debt(1) 450,000 ---------------------------------------------------------------------------- (1) Revolving credit facility renewed annually (see Note 5) 11. Capital DisclosuresThe Trust's objectives when managing capital are: (i) to maintain a flexible capital structure, which optimizes the cost of capital at acceptable risk; and (ii) to maintain investor, creditor and market confidence to sustain the future development of the business.The Trust manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its underlying assets. The Trust considers its capital structure to include unitholders' equity, debt and working capital. To maintain or adjust the capital structure, the Trust may from time to time, issue trust units, raise debt and/or adjust its capital spending to manage its current and projected debt levels. The Trust monitors capital based on the following non-GAAP measures: current and projected debt to earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") ratios, payout ratios and net debt levels. To facilitate the management of these ratios, the Trust prepares annual budgets, which are updated depending on varying factors such as general market conditions and successful capital deployment. Currently, all ratios are within acceptable parameters. The annual budget is approved by the Board of Directors. The Trust's unitholders' capital is not subject to any external financial covenants.There were no changes in the Trust's approach to capital management from the previous year. March 31, December 31, ($000s) 2010 2009 ---------------------------------------------------------------------------- Unitholders' equity 643,799 612,483 Long-term debt 450,000 435,000 Working capital (surplus) deficit (1) (18,789) (1,822) ---------------------------------------------------------------------------- 1,075,010 1,045,661 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Current liabilities less current assets (includes unrealized financial derivative instrument assets of $40.0 million (2009 - $8.7 million)) 12. Supplemental Cash Flow Information Changes in non-cash working capital balances Three Months Ended March 31 ($000) 2010 2009 ---------------------------------------------------------------------------- Cash interest paid during the period 4,412 3,550 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 13. Contingencies and CommitmentsFollowing is a summary of the Trust's commitments related to operating leases as at March 31, 2010. The Trust has no other contractual obligations or commitments as at March 31, 2010. ($000) March 31, 2010 ---------------------------------------------------------------------------- 2010 777 2011 1,036 2012 1,036 2013 1,036 2014 1,036 ---------------------------------------------------------------------------- 4,921 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Contingent LiabilityFrom time to time, Peyto is the subject of litigation arising out of its day-to-day operations. Damages claimed pursuant to such litigation, may be material or may be indeterminate and the outcome of such litigation may materially impact Peyto's financial position or results of operations in the period of settlement. While Peyto assesses the merits of each lawsuit and defends itself accordingly, Peyto may be required to incur significant expenses or devote significant resources to defending itself against such litigation. These claims are not currently expected to have a material impact on Peyto's financial position or results of operations. 14. Subsequent EventsLong-Term DebtOn April 1, 2010, an amendment to the Trust's credit agreement was signed increasing the credit facilities to $625 million. Outstanding amounts on this facility will bear interest at rates determined by the Trust's debt to cash flow ratio that range from prime plus 1.25% to prime plus 2.75% for debt to earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) ratios ranging from less than 1:1 to greater than 2.5:1. Effective April 1, 2010, the extendible revolving credit facility has a stated term date of April 30, 2011.Unitholders' Capital On April 27, 2010, Peyto closed an offering of 5,566,000 trust units at a price of $13.45 per trust unit, receiving proceeds of $71 million (net of issuance costs). Peyto Energy Trust Information Officers Darren Gee Glenn Booth President and Chief Executive Officer Vice President, Land Scott Robinson Stephen Chetner Executive Vice-President and Chief Operating Officer Corporate Secretary Kathy Turgeon Vice President, Finance and Chief Financial Officer Directors Don Gray, Chairman Rick Braund Stephen Chetner Brian Davis Michael MacBean, Lead Independent Director Darren Gee Gregory Fletcher Auditors Deloitte & Touche LLP Solicitors Burnet, Duckworth & Palmer LLP Bankers Bank of Montreal Union Bank, Canada Branch BNP Paribas (Canada) Royal Bank of Canada Canadian Imperial Bank of Commerce Alberta Treasury Branches Societe Generale (Canada Branch) HSBC Bank Canada Canadian Western Bank Transfer Agent Valiant Trust Company Head Office 1500, 250 - 2(nd) Street SW Calgary, AB T2P 0C1 Phone: 403.261.6081 Fax: 403.451.4100 Web: www.peyto.com Stock Listing Symbol: PEY.un Toronto Stock Exchange FOR FURTHER INFORMATION PLEASE CONTACT: Peyto Energy Trust Darren Gee President and CEO 403.261.6081 403.451.4100 (FAX)