Exhibit 1
CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2002
Management’s Report
Management, in accordance with Canadian generally accepted accounting principles, has prepared the accompanying consolidated financial statements of Baytex Energy Ltd. Financial and operating information presented throughout this Annual Report is consistent with that shown in the consolidated financial statements.
Management is responsible for the integrity of the financial information. Internal control systems are designed and maintained to provide reasonable
assurance that assets are safeguarded from loss or unauthorized use and to produce reliable accounting records for financial reporting purposes.
Deloitte & Touche LLP were appointed by the Company’s shareholders to perform an examination of the corporate and accounting records so as to express an opinion on the consolidated financial statements. Their examination included a review and evaluation of Baytex’s internal control systems and included such tests and procedures, as they considered necessary, to provide a reasonable assurance that the consolidated financial statements are presented fairly in accordance with Canadian generally accepted accounting principles.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board exercises this responsibility through the Audit Committee, with assistance from the Reserves Committee regarding the annual review of our petroleum and natural gas reserves. The Audit Committee meets regularly with management and the independent auditors to ensure that management’s responsibilities are properly discharged, to review the consolidated financial statements and recommend that the consolidated financial statements be presented to the Board of Directors for approval. The Audit Committee also considers the independence of the external auditors and reviews their fees. The external auditors have access to the Audit Committee without the presence of management.
(signed) | (signed) |
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Dale O. Shwed | Raymond T. Chan, CA |
President and Chief Executive Officer | Senior Vice President and Chief Financial Officer |
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March 3, 2003 |
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2
Independent Auditors’ Report
To the Shareholders of Baytex Energy Ltd.
We have audited the consolidated balance sheets of Baytex Energy Ltd. as at December 31, 2002 and 2001 and the consolidated statements of operations and deficit and of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December31, 2002 and 2001 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
On March 3, 2003, we reported separately to the Board of Directors and shareholders of Baytex Energy Ltd. on the consolidated financial statements for the same period, prepared in accordance with Canadian generally accepted accounting principles but which included Note 17, United States Accounting Principles and Reporting and Note 18, Condensed Consolidated Financial Information.
| (signed) |
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Calgary, Alberta | Deloitte &Touche LLP |
March 3, 2003 | Chartered Accountants |
3
Consolidated Balance Sheets
As at December 31 (thousands) |
| 2002 |
| 2001 |
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| (restated - see |
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Assets |
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Current assets |
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Cash |
| $ | 4,098 |
| $ | — |
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Accounts receivable |
| 52,667 |
| 44,300 |
| ||
Properties held for sale |
| — |
| 46,895 |
| ||
|
| 56,765 |
| 91,195 |
| ||
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Deferred charges and other assets |
| 8,679 |
| 8,674 |
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Petroleum and natural gas properties (note 3) |
| 932,316 |
| 867,177 |
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| $ | 997,760 |
| $ | 967,046 |
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Liabilities |
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Current liabilities |
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Accounts payable and accrued liabilities |
| $ | 92,563 |
| $ | 64,334 |
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Bank loan (note 4) |
| — |
| 73,820 |
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Current portion of long-term debt (note 5) |
| — |
| 2,000 |
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| 92,563 |
| 140,154 |
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Long-term debt (note 5) |
| 326,977 |
| 330,102 |
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Deferred credits (note 6) |
| 12,181 |
| 18,694 |
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Provision for future site restoration costs |
| 21,950 |
| 20,541 |
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Future income taxes (note 9) |
| 184,402 |
| 146,446 |
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| 638,073 |
| 655,937 |
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Shareholders’ Equity |
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Share capital (note 7) |
| 398,176 |
| 394,734 |
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Deficit |
| (38,489 | ) | (83,625 | ) | ||
|
| 359,687 |
| 311,109 |
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| $ | 997,760 |
| $ | 967,046 |
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See accompanying notes to the consolidated financial statements.
On behalf of the Board |
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(signed) | (signed) |
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John A. Brussa | W. A. Blake Cassidy |
Director | Director |
4
Consolidated Statements of Operations and Deficit
Years ended December 31 (thousands, except per share data) |
| 2002 |
| 2001 |
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| (restated - |
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Revenue |
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Petroleum and natural gas sales |
| $ | 365,860 |
| $ | 329,700 |
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Royalties |
| (58,922 | ) | (57,805 | ) | ||
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| 306,938 |
| 271,895 |
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Expenses |
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Operating |
| 75,228 |
| 83,439 |
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General and administrative |
| 6,743 |
| 5,262 |
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Interest (note 5) |
| 25,217 |
| 32,942 |
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Foreign exchange (gain) loss (note 2) |
| (2,691 | ) | 16,262 |
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Depletion and depreciation (note 3) |
| 106,834 |
| 367,384 |
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Site restoration costs |
| 2,799 |
| 3,912 |
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| 214,130 |
| 509,201 |
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Income (loss) before income taxes |
| 92,808 |
| (237,306 | ) | ||
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Income taxes (recovery) (note 9) |
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Current |
| 9,716 |
| 7,128 |
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Future |
| 37,956 |
| (107,327 | ) | ||
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| 47,672 |
| (100,199 | ) | ||
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Net income (loss) |
| 45,136 |
| (137,107 | ) | ||
Retained earnings (deficit), beginning of year, as previously reported |
| (75,954 | ) | 52,555 |
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Accounting policy change (note 2) |
| (7,671 | ) | 927 |
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Retained earnings (deficit), beginning of year, as restated |
| (83,625 | ) | 53,482 |
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Deficit, end of year |
| $ | (38,489 | ) | $ | (83,625 | ) |
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Net income (loss) per common share (note 8) |
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Basic |
| $ | 0.86 |
| $ | (2.77 | ) |
Diluted |
| $ | 0.85 |
| $ | (2.77 | ) |
See accompanying notes to the consolidated financial statements.
5
Consolidated Statements of Cash Flows
Years ended December 31 (thousands, except per share data) |
| 2002 |
| 2001 |
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| (restated - |
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Cash provided by (used in): |
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Operating activities |
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Net income (loss) |
| $ | 45,136 |
| $ | (137,107 | ) |
Items not affecting cash: |
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Site restoration costs |
| 2,799 |
| 3,912 |
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Amortization of deferred charges |
| 1,052 |
| 946 |
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Foreign exchange (gain) loss |
| (2,691 | ) | 16,262 |
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Depletion and depreciation |
| 106,834 |
| 367,384 |
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Future income taxes (recovery) |
| 37,956 |
| (107,327 | ) | ||
Cash flow from operations |
| 191,086 |
| 144,070 |
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Change in non-cash working capital (note 10) |
| 1,272 |
| 5,682 |
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Increase in deferred charges |
| (1,057 | ) | — |
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Increase (decrease) in deferred credits (note 6) |
| (18,694 | ) | 18,694 |
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| 172,607 |
| 168,446 |
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Financing activities |
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Issue of senior subordinated term notes |
| — |
| 227,895 |
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Decrease in bank loan and other debt |
| (76,254 | ) | (88,474 | ) | ||
Increase in deferred charges |
| — |
| (9,037 | ) | ||
Increase in deferred credits (note 6) |
| 12,181 |
| — |
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Repurchase of common shares (note 7) |
| (55 | ) | (860 | ) | ||
Issue of common shares |
| 3,497 |
| 1,444 |
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| (60,631 | ) | 130,968 |
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Investing activities |
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Corporate acquisitions (note 14) |
| — |
| (249,152 | ) | ||
Items not affecting cash |
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Shares issued on acquisition |
| — |
| 68,104 |
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Assumption of long-term debt |
| — |
| 36,356 |
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Assumption of working capital |
| — |
| (2,734 | ) | ||
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| — |
| (147,426 | ) | ||
Petroleum and natural gas property expenditures |
| (182,048 | ) | (189,283 | ) | ||
Disposal of petroleum and natural gas properties |
| 55,580 |
| 62,582 |
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Properties held for sale |
| (46,895 | ) | 46,895 |
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Change in non-cash working capital (note 10) |
| 65,485 |
| (72,182 | ) | ||
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| (107,878 | ) | (299,414 | ) | ||
Change in cash during the year |
| 4,098 |
| — |
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Cash, beginning of year |
| — |
| — |
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Cash, end of year |
| $ | 4,098 |
| $ | — |
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Cash flow from operations per common share (note 8) |
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Basic |
| $ | 3.65 |
| $ | 2.91 |
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Diluted |
| $ | 3.59 |
| $ | 2.87 |
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See accompanying notes to the consolidated financial statements.
6
Notes to the Consolidated Financial Statements
Years ended December 31, 2002 and 2001 (all tabular amounts in thousands, except per unit amounts)
1. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles within the framework of the accounting policies summarized below:
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and partnership from the respective dates of acquisition of the subsidiary companies. Inter-company transactions and balances are eliminated upon consolidation.
Measurement Uncertainty
Amounts recorded for depreciation and depletion and amounts used for ceiling test calculations are based on estimates of petroleum and natural gas reserves and future costs required to develop those reserves. The Company’s reserve estimates are reviewed annually by an independent engineering firm. By their nature, these estimates of reserves and the related future cash flows are subject to measurement uncertainty, and the impact on the financial statements of future periods could be material.
Cash and Cash Equivalents
Cash and cash equivalents include monies on deposit and short-term investments accounted for at cost that have a maturity date of not more than 90 days.
Petroleum and Natural Gas Operations
The Company follows the full-cost method of accounting for its petroleum and natural gas operations whereby all costs relating to the exploration for and development of petroleum and natural gas reserves are capitalized in one Canadian cost centre and charged against income, as set out below. Such costs include land acquisition, drilling of productive and non-productive wells, geological and geophysical, production facilities, carrying costs directly related to unproved properties and corporate expenses directly related to acquisition, exploration and development activities and do not include any costs related to production or general overhead expenses. These costs, along with estimated future costs that are based on current costs and that are incurred in developing proved reserves, are depleted and depreciated on a unit-of-production basis using estimated gross proved petroleum and natural gas reserves. For purposes of this calculation, petroleum and natural gas reserves are converted to a common unit of measurement on the basis of their relative energy content where six thousand cubic feet of gas equates to one barrel of oil. Costs of acquiring and evaluating unproved properties are excluded from costs subject to depletion and depreciation until it is determined whether proved reserves are attributable to the properties or impairment occurs. Unproved properties are evaluated for impairment on an annual basis.
Gains or losses on sales of properties are recognized only when crediting the proceeds to costs would result in a change of 20 percent or more in the depletion rate.
The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the “ceiling test”). Under this test, an estimate is made of the ultimate recoverable amount from future net revenues using proved reserves and period end prices, plus the net costs of major development projects and unproved properties, less future removal and site restoration costs, overhead, financing costs and income taxes. If the net carrying costs exceed the ultimate recoverable amount, additional depletion and depreciation is provided.
7
Provision for Future Site Restoration Costs
Estimates are made of the future site restoration costs relating to the Company’s petroleum and natural gas properties at the end of their economic life, based on year-end values, in accordance with current legislative requirements and industry practice. Annual charges are provided for on a unit-of-production method. Actual expenditures incurred are applied against the provision for future site restoration costs.
Joint Interests
A portion of the Company’s exploration, development and production activities is conducted jointly with others. These consolidated financial statements reflect only the Company’s proportionate interest in such activities.
Foreign Currency Translation
Foreign currency denominated monetary items are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. Effective January 1, 2002, the Company retroactively adopted the Canadian Institute of Chartered Accountants (“CICA”) amended accounting standard with respect to accounting for foreign currency translation. As a result of the amendments, all exchange gains and losses on long-term monetary items that do not qualify for hedge accounting are recognized in income.
Foreign denominated revenue and expenses are translated at the monthly average rate of exchange. Translation gains and losses are included in net income.
Deferred Charges
Financing costs related to the issuance of the senior secured term notes and the senior subordinated term notes have been deferred and are amortized over the term of the respective notes on a straight-line basis.
Financial Instruments
The Company formally documents its risk management objectives and strategies, including the permitted use of derivative financial instruments. The Company utilizes derivative financial instruments to manage exposures to fluctuations in commodity prices, interest rates and foreign currency exchange rates. All transactions of this nature entered into by the Company are related to an underlying financial position or to future petroleum and natural gas production. The Company does not use derivative financial instruments for trading purposes. Costs and gains on derivative contracts are recognized in income in the same period that the transactions are settled. The fair values of derivative instruments are not recorded in the balance sheet.
Gains and losses related to derivative financial instruments that have been closed prior to the settlement dates are deferred and recognized in the statement of operations over the original settlement period.
Future Income Taxes
Income taxes are accounted for under the liability method of tax allocation, which determines future income taxes based on the differences between assets and liabilities reported for financial accounting purposes and those reported for tax purposes. Future income taxes are calculated using tax rates anticipated to apply in periods that temporary differences are expected to reverse.
8
Flow-through Shares
The Company has financed a portion of its exploration and development activities through the issue of flow-through shares. Under the terms of the flow-through share agreements, the tax attributes of the related expenditure are renounced to the subscribers. Accordingly, the carrying value of the expenditures incurred and the shares issued are recorded net of tax benefits renounced to the subscribers. The Company records the gross carrying value of the expenditures and records a future tax liability for the tax benefits renounced to subscribers.
Stock-based Compensation
The Company’s stock-based compensation plans are described in note 7. The Company accounts for employee stock options based on intrinsic values. No compensation expense is recognized when stock options are issued. The consideration paid on the exercise of stock options is credited to share capital. Benefits paid under the stock appreciation rights plan are charged to net income.
Per Share Amounts
Basic net income per share and basic cash flow from operations per share are computed by dividing net income and cash flow from operations by the weighted average number of common shares outstanding during the year. Diluted per share amounts reflect the potential dilution that could occur if options or warrants to purchase common shares were exercised. The treasury stock method is used to determine the dilutive effect of stock options and warrants, whereby any proceeds from the exercise of stock options or other dilutive instruments are assumed to be used to purchase common shares at the average market price during the period.
2. CHANGES IN ACCOUNTING POLICY
Foreign Currency
Effective January 1, 2002, the Company retroactively adopted the CICA amended accounting standard with respect to accounting for foreign currency translation. As a result of the amendments, all exchange gains and losses on long-term monetary items that do not qualify for hedge accounting are recognized in income. Previously, these exchange gains and losses were deferred and amortized over the remaining life of the monetary item. The impact of the amended standard on the year ended December 31, 2002 was to increase net income by $1.8 million (2001 - decrease of $8.6 million). The effect of this change on the December 31, 2001 Consolidated Balance Sheet is an elimination of the unrealized foreign exchange loss of $13.7 million, a decrease in future income taxes of $6.0 million, and an increase in the deficit of $7.7 million.
Stock-based Compensation
Effective January 1, 2002, the Company adopted the new recommendations of the CICA with respect to stock-based compensation. In accordance with the new standard, the Company has elected to continue its policy of accounting for employee stock options based on intrinsic values and will disclose the pro forma results of using the fair value based method. The new recommendations apply to options granted after December31, 2001.
9
3. PETROLEUM AND NATURAL GAS PROPERTIES
As at December 31 |
| 2002 |
| 2001 |
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Petroleum and natural gas properties |
| $ | 1,989,246 |
| $ | 1,817,273 |
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Accumulated depletion and depreciation |
| (1,056,930 | ) | (950,096 | ) | ||
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| $ | 932,316 |
| $ | 867,177 |
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During 2002, $6.7 million (2001 - $5.3 million) of corporate expenses relating to exploration and development activities were capitalized. In calculating the depletion and depreciation provision for 2002, $80.3 million (2001 - $85.3 million) of costs relating to undeveloped properties and materials and supplies of $5.5 million (2001 - $7.1 million) were excluded from costs subject to depletion and depreciation.
As a result of the ceiling test performed at December 31, 2001, the Company recorded additional depletion and depreciation on its petroleum and natural gas properties of $234.5 million ($131.3 million net of income tax).
At December 31, 2002, the estimated future site restoration costs to be accrued over the life of the remaining proved reserves are $26.2 million (2001 - $30.0 million).
4. BANK LOAN
As at December 31 |
| 2002 |
| 2001 |
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Bank loan |
| $ | — |
| $ | 73,820 |
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The bank loan facilities consist of an operating loan and a 364-day revolving loan, which are provided by a syndicate of chartered banks. The facilities can be drawn in either Canadian or US funds and bear interest at the agent bank’s prime lending rate, bankers’ acceptance rates plus applicable margins or LIBOR rates plus applicable margins. The facilities are subject to periodic review and are secured by a charge over all of the Company’s assets. The security is shared pari passu with the senior secured term notes. At December 31, 2002, the facilities are limited to total commitment under the facilities of $77 million and a $165 million borrowing base of total senior funded debt, which is defined to include the senior secured term notes.
Effective January 1, 2002, the Company has classified borrowing under its bank facilities as a current liability as required by new CICA guidance. The bank loan at December 31, 2001 has been restated to conform to the current presentation.
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5. LONG-TERM DEBT
As at December 31 |
| 2002 |
| 2001 |
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Senior secured term notes (US$57 million) |
| $ | 90,037 |
| $ | 90,778 |
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Senior subordinated term notes (US$150 million) |
| 236,940 |
| 238,890 |
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Other long-term debt |
| — |
| 2,434 |
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|
| 326,977 |
| 332,102 |
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Less: current portion |
| — |
| 2,000 |
| ||
|
| $ | 326,977 |
| $ | 330,102 |
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Senior Secured Term Notes
On November 13, 1998, the Company issued US$57 million of senior secured term notes, bearing interest at 7.23 percent payable quarterly with principal repayable on November 13, 2004. These notes are governed by financial and other corporate covenants and are secured by a charge over all of the Company’s assets, which security is shared pari passu with the bank loan facilities. During 2002, the Company terminated an outstanding interest rate swap agreement associated with these notes. The gain from the settlement of this contract has been deferred and is being amortized as a reduction of interest expense over the original term of the agreement (note 6).
Senior Subordinated Term Notes
On February 12, 2001, the Company issued US$150 million of senior subordinated term notes bearing interest at 10.5 percent payable semiannually with principal repayable on February 15, 2011. These notes are unsecured and are subordinate to the Company’s bank facilities and senior secured term notes. During 2002, the Company terminated outstanding interest rate swap agreements associated with these notes. The gain from the settlement of these contracts has been deferred and is being amortized as a reduction of interest expense over the original term of the agreements (note 6).
Interest Expense
The Company has incurred interest expense on its outstanding debt as follows:
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| 2002 |
| 2001 |
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Bank loan |
| $ | 760 |
| $ | 4,620 |
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Amortization of deferred charges |
| 1,052 |
| 946 |
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Long-term debt |
| 23,405 |
| 27,376 |
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Total interest |
| $ | 25,217 |
| $ | 32,942 |
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6. DEFERRED CREDITS
As at December 31 |
| 2002 |
| 2001 |
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Deferred interest rate swap settlement (note 5) |
| $ | 12,181 |
| $ | — |
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Deferred commodity contract gain |
| — |
| 18,694 |
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| $ | 12,181 |
| $ | 18,694 |
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In August 2002, the Company terminated all outstanding interest rate swap agreements for total proceeds of $14.1 million. This amount has been deferred and is being amortized as a reduction of interest expense over the original terms of the agreements.
During 2001, the Company renegotiated certain derivative contracts related to 2002 commodity prices and received a net payment of $18.7million. This amount was recognized in income during 2002.
7. SHARE CAPITAL
Authorized
The Company has an unlimited number of common shares in its authorized share capital.
Issued
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| 2002 |
| 2001 |
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| Number of |
| Amount |
| Number of |
| Amount |
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Balance, beginning of year |
| 52,008 |
| $ | 394,734 |
| 45,797 |
| $ | 326,767 |
|
Shares issued for corporate acquisitions (note 14) |
| — |
| — |
| 6,119 |
| 68,104 |
| ||
Stock options exercised |
| 820 |
| 3,497 |
| 314 |
| 1,444 |
| ||
Normal course issuer bid |
| (9 | ) | (55 | ) | (222 | ) | (860 | ) | ||
Future tax related to flow-through shares |
| — |
| — |
| — |
| (721 | ) | ||
Balance, end of year |
| 52,819 |
| $ | 398,176 |
| 52,008 |
| $ | 394,734 |
|
12
Stock Options and Stock Appreciation Rights
The Company grants stock options to its employees and directors at the market price of the common shares at the time of the grant. The options vest over three years and have a term of four years. At December 31, 2002, 3.7million common shares (2001 - 4.6 million common shares) of the Company are reserved under the stock option plan for issuance. Of the 5.1 million options outstanding as of December 31, 2002, 1.4million options are subject to shareholder ratification.
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| Number |
| Price Range |
| Weighted Average |
| |
Outstanding December 31, 2000 |
| 4,042 |
| $3.30 to $15.50 |
| $ | 8.26 |
|
Granted |
| 2,478 |
| $3.51 to $13.30 |
| $ | 6.17 |
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Exercised |
| (314 | ) | $3.30 to $12.25 |
| $ | 4.84 |
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Cancelled |
| (1,738 | ) | $3.80 to $15.50 |
| $ | 11.25 |
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Outstanding December 31, 2001 |
| 4,468 |
| $3.30 to $10.75 |
| $ | 6.19 |
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Granted |
| 1,682 |
| $4.40 to $7.97 |
| $ | 7.61 |
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Exercised |
| (820 | ) | $3.30 to $6.10 |
| $ | 4.27 |
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Cancelled |
| (204 | ) | $4.72 to $7.67 |
| $ | 5.78 |
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Outstanding December 31, 2002 |
| 5,126 |
| $3.51 to $10.75 |
| $ | 6.98 |
|
The following table summarizes information about the stock options outstanding at December 31, 2002:
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| Number |
| Weighted Average |
| Weighted Average |
| Number |
| Weighted Average |
| ||
$3.51 to $5.00 |
| 2,029 |
| 2.2 |
| $ | 4.52 |
| 901 |
| $ | 4.27 |
|
$5.01 to $7.00 |
| 315 |
| 2.8 |
| $ | 6.61 |
| 77 |
| $ | 6.35 |
|
$7.01 to $9.00 |
| 1,712 |
| 3.4 |
| $ | 7.87 |
| 214 |
| $ | 8.76 |
|
$9.01 to $10.75 |
| 1,070 |
| 1.8 |
| $ | 10.32 |
| 713 |
| $ | 10.32 |
|
Total |
| 5,126 |
| 2.5 |
| $ | 6.98 |
| 1,905 |
| $ | 7.12 |
|
The Company accounts for its stock options using intrinsic values. On this basis, compensation costs are not required to be recognized in the financial statements for stock options granted at market value. Had compensation costs for the Company’s stock option plan been determined based on the fair-value method at the dates of grants under the plan after January 1, 2002, the Company’s pro-forma net income for the year ended December 31, 2002 would have been reduced by $0.6 million and net income per share would be $0.85. The weighted average fair market value of options granted in 2002 was $3.65 per option. The fair value of the stock options granted is estimated on the grant date using the Black-Scholes option-pricing model using the following assumptions: risk-free interest rate of four percent; expected life of four years; and expected volatility of 57 percent.
The Company had granted stock appreciation rights (“Rights”) to certain employees. Holders of the Rights were entitled to receive incentive payments based on the difference between market price of the Company’s common shares and exercise price of the Rights. The exercise price of the Rights was determined based on the market price of the Company’s common shares at the time the Rights were granted. The Rights vested over three years and had a term of four years. During 2002, all 202,334 remaining Rights (2001 - 6,666) were exercised. The related compensation expense has been included in general and administrative expenses.
13
Normal Course Issuer Bid
During the year ended December 31, 2002, the Company acquired 9,200 (2001 - 222,400) of its common shares through a normal course issuer bid program at an average cost of $6.03 per share (2001 - $3.87 per share). The shares purchased under the normal course issuer bid were cancelled. In January 2003, the Company renewed the normal course issuer bid to purchase up to 5.2 million common shares of the Company during the 12-month period beginning January 7, 2003 and ending January5, 2004.
Flow-through Shares
In accordance with the terms of flow-through share offerings entered into by the Company, and pursuant to certain provisions of the Income Tax Act (Canada), the Company fulfilled its commitment to renounce, for income tax purposes, exploration expenditures of $1.6 million in 2001 to the subscribers of the flow-through shares.
8. NET INCOME AND CASH FLOW FROM OPERATIONS PER SHARE
The Company applies the treasury-stock method to assess the dilutive effect of outstanding stock options on net income and cash flow from operations per share. The number of shares used in the calculation of diluted net income and cash flow from operations per share is determined as follows:
|
| 2002 |
| 2001 |
|
Weighted average number of shares outstanding, basic |
| 52,298 |
| 49,503 |
|
Dilutive effect of stock options |
| 939 |
| 701 |
|
Weighted average number of shares outstanding, diluted |
| 53,237 |
| 50,204 |
|
The diluted net income and cash flow from operations per share discussed above did not include 2.8 million (2001 - 1.3 million) of stock options because the respective exercise prices exceeded the average market price of the common shares during the year.
9. INCOME TAXES
The provision for income taxes has been computed as follows:
|
| 2002 |
| 2001 |
| ||
Income (loss) before income taxes |
| $ | 92,808 |
| $ | (237,306 | ) |
Expected income taxes (recovery) at the statutory rate of 43.9% (2001 - 44.0%) |
| $ | 40,743 |
| $ | (104,415 | ) |
Increase (decrease) in taxes resulting from: |
|
|
|
|
| ||
Crown royalties |
| 21,153 |
| 19,870 |
| ||
Resource allowance |
| (26,308 | ) | (22,560 | ) | ||
Alberta royalty tax credit |
| (219 | ) | (224 | ) | ||
Rate change |
| (138 | ) | 183 |
| ||
Other |
| 2,725 |
| (181 | ) | ||
Large Corporation Tax and provincial capital tax |
| 9,716 |
| 7,128 |
| ||
Provision for income taxes |
| $ | 47,672 |
| $ | (100,199 | ) |
14
The components of future income taxes are as follows:
As at December 31 |
| 2002 |
| 2001 |
| ||
Future income tax liabilities: |
|
|
|
|
| ||
Capital assets |
| $ | 202,429 |
| $ | 173,430 |
|
Future income tax assets: |
|
|
|
|
| ||
Abandonment costs |
| (9,638 | ) | (9,038 | ) | ||
Attributed Canadian Royalty Income |
| (4,475 | ) | (5,263 | ) | ||
Share issue costs |
| (2,833 | ) | (4,398 | ) | ||
Loss carry-forward |
| (323 | ) | (7,528 | ) | ||
Other |
| (758 | ) | (757 | ) | ||
Future income taxes |
| $ | 184,402 |
| $ | 146,446 |
|
10. CASH FLOW INFORMATION
Increase (Decrease) in Non-cash Working Capital Items
|
| 2002 |
| 2001 |
| ||
Current assets |
| $ | 38,528 |
| $ | (23,440 | ) |
Current liabilities |
| 28,229 |
| (43,060 | ) | ||
|
| $ | 66,757 |
| $ | (66,500 | ) |
|
|
|
|
|
| ||
|
| 2002 |
| 2001 |
| ||
Changes in non-cash working capital related to: |
|
|
|
|
| ||
Operating activities |
| $ | 1,272 |
| $ | 5,682 |
|
Investing activities |
| 65,485 |
| (72,182 | ) | ||
|
| $ | 66,757 |
| $ | (66,500 | ) |
During the year, the Company made the following cash outlays in respect of interest expense and current income taxes.
|
| 2002 |
| 2001 |
| ||
Interest |
| $ | 25,482 |
| $ | 22,889 |
|
Current income taxes (refund) |
| $ | (3,298 | ) | $ | 15,459 |
|
15
11. FINANCIAL INSTRUMENTS
The Company’s financial instruments recognized in the balance sheet consist of accounts receivable, current liabilities and long-term borrowings. The estimated fair values of financial instruments have been determined based on the Company’s assessment of available market information and appropriate valuation methodologies; however, these estimates may not necessarily be indicative of the amounts that could be realized or settled in a current market transaction.
The fair values of financial instruments other than long-term borrowings approximate their carrying amounts due to the short-term maturity of these instruments. At December 31, 2002 and 2001, the reported values of the Company’s senior secured term notes, bank loan and other long-term debt approximate their fair values. At December 31, 2002, the trading value of the Company’s senior subordinated term notes was 105 percent in relation to par (2001 - 95 percent).
12. DERIVATIVE CONTRACTS
The nature of the Company’s operations results in exposure to fluctuations in commodity prices, exchange rates and interest rates. The Company monitors and, when appropriate, utilizes derivative contracts to manage its exposure to these risks. The Company is exposed to credit-related losses in the event of non-performance by counter-parties to these contracts. In 2002, petroleum and natural gas sales were reduced by $8.3million (2001 - $9.5 million) due to derivative contracts.
At December 31, 2002, the Company had derivative contracts for the following:
|
| Period |
| Volume |
| Price |
| Index |
|
Oil |
|
|
|
|
|
|
|
|
|
Price collar |
| Calendar 2003 |
| 2,500 bbls/d |
| US$20.00 — $26.05 |
| WTI |
|
Price collar |
| Calendar 2003 |
| 5,000 bbls/d |
| US$20.00 — $26.60 |
| WTI |
|
Price collar |
| Calendar 2003 |
| 2,500 bbls/d |
| US$20.00 — $27.00 |
| WTI |
|
The fair value of the oil derivative contracts at December 31, 2002 is an unrecognized liability of $12.3 million.
|
| Period |
| Amount |
| Exchange Rate |
| Unrecognized loss at |
|
Foreign currency swap |
| January 1998 to |
| US$315,000 |
| CAD/USD $1.4228 |
| $2,008 |
|
|
| December 2005 |
| per month |
|
|
|
|
|
16
13. COMMITMENTS
In October 2002, the Company entered into a long-term crude oil supply contract with a third party that requires the delivery of 20,000 barrels per day of Lloydminster Blend crude oil at a price fixed at 71 percent of NYMEX WTI oil price. The contract is for an initial term of five years commencing January 1, 2003. The volumes contracted under this contract will increase from 9,000 barrels per day in January 2003 to 20,000barrels per day in October 2003 and thereafter.
For the period November 1, 2002 to October 31, 2003, the Company has entered into natural gas sales contracts with third parties for 15,000GJ per day for fixed prices averaging $5.35/GJ and 10,000 GJ per day of collar contracts with prices between $4.20/GJ and $7.22/GJ.
14. CORPORATE ACQUISITIONS
Effective May 1, 2001, the Company acquired all of the issued and outstanding shares of OGY Petroleums Ltd. (“OGY”), a public company involved in the exploration, development and production of oil and natural gas in Western Canada. The acquisition has been accounted for by the purchase method of accounting as follows:
Consideration
Cash |
| $ | 50,683 |
|
Transaction costs |
| 3,100 |
| |
|
| 53,783 |
| |
Issue of 1,169,481 common shares |
| 14,057 |
| |
|
| $ | 67,840 |
|
|
|
|
| |
Net Assets Acquired |
|
|
| |
Petroleum and natural gas properties |
| $ | 116,607 |
|
Future income taxes |
| (36,127 | ) | |
Future site restoration costs |
| (1,844 | ) | |
|
| 78,636 |
| |
Working capital deficiency |
| (4,809 | ) | |
Long-term debt |
| (5,987 | ) | |
|
| $ | 67,840 |
|
17
Effective June 1, 2001, the Company acquired all of the issued and outstanding shares of Triumph Energy Corporation (“Triumph”), a public company involved in the exploration, development and production of oil and natural gas in Western Canada. The acquisition has been accounted for by the purchase method of accounting as follows:
Consideration
Cash |
| $ | 82,337 |
|
Transaction costs |
| 11,306 |
| |
|
| 93,643 |
| |
Issue of 4,949,245 common shares |
| 54,047 |
| |
|
| $ | 147,690 |
|
|
|
|
| |
Net Assets Acquired |
|
|
| |
Petroleum and natural gas properties |
| $ | 248,480 |
|
Future income taxes |
| (77,751 | ) | |
Future site restoration costs |
| (213 | ) | |
|
| 170,516 |
| |
Working capital |
| 7,543 |
| |
Long-term debt |
| (30,369 | ) | |
|
| $ | 147,690 |
|
15. SUBSEQUENT EVENT
On March 3, 2003, the Company signed an agreement to sell certain crude oil and natural gas assets for total cash consideration of $133.3million. The sale is subject to certain conditions and is scheduled to close by the end of March 2003. Upon closing of this transaction, the Company intends to use the proceeds for debt reduction and general corporate purposes.
16. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the current year’s presentation.
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”), which differ in some respects from GAAP in the United States. The significant differences in GAAP, as applicable to these consolidated financial statements and notes, are described in the Company’s Form 40-F, which is filed with the United States Securities and Exchange Commission.
18