EXHIBIT 99.126
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[ADVANTAGE LOGO]
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(thousands of dollars) March 31, 2004 December 31, 2003
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(unaudited) (restated - note 1)
Assets
Current assets
Accounts receivable $ 32,470 $ 34,181
Fixed assets
Property and equipment 704,598 675,090
Accumulated depletion & depreciation (175,270) (155,155)
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529,328 519,935
Goodwill 27,773 27,773
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$ 589,571 $ 581,889
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Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 43,858 $ 53,287
Cash distributions payable to Unitholders 8,778 8,445
Hedging liability (note 4) 11,057 -
Bank indebtedness 136,155 102,968
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199,848 164,700
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Capital lease obligation 1,965 2,043
Asset retirement obligations (note 2) 14,158 13,892
Future income taxes 70,224 77,999
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286,195 258,634
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Unitholders' equity
Unitholders' capital (note 3i) 308,830 302,496
Convertible debentures (note 3ii) 95,218 99,984
Accumulated income 77,957 73,137
Accumulated cash distributions (178,629) (152,362)
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303,376 323,255
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$ 589,571 $ 581,889
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Advantage Energy Income Fund Page 2 of 6
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED INCOME
Three Three
months ended months ended
(thousands of dollars) (unaudited) March 31, 2004 March 31, 2003
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(restated - note 1)
Revenue
Petroleum and natural gas sales $ 53,836 $ 42,079
Royalties, net of Alberta Royalty Credit (10,552) (8,196)
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43,284 33,883
Expenses
Operating 8,320 5,514
General and administrative 846 825
Management fee 525 425
Non-cash performance incentive (note 5) 1,400 1,055
Interest 1,278 1,595
Unrealized hedging loss (note 4) 11,057 -
Depletion, depreciation and accretion 20,346 11,610
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43,772 21,024
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Income (loss) before taxes (488) 12,859
Future income tax recovery (7,775) (3,102)
Income and capital taxes 315 383
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(7,460) (2,719)
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Net income 6,972 15,578
Accumulated income, beginning of period as previously reported 72,022 36,581
Effect of change in accounting for asset retirement obligations (note 1) 1,115 1,255
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Accumulated income, beginning of period as restated 73,137 37,836
Interest on convertible debentures (2,100) (1,332)
Costs on issuance of convertible debentures (52) -
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Accumulated income, end of period $ 77,957 $ 52,082
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Net income per Trust Unit
Basic $ 0.13 $ 0.50
Diluted $ 0.13 $ 0.48
Advantage Energy Income Fund Page 3 of 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Three
months ended months ended
(thousands of dollars) (unaudited) March 31, 2004 March 31, 2003
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(restated - note 1)
Operating Activities
Net income $ 6,972 $ 15,578
Add (deduct) items not requiring cash:
Non-cash performance incentive (note 5) 1,400 1,055
Future income taxes (7,775) (3,102)
Unrealized hedging loss (note 4) 11,057 -
Depletion, depreciation and accretion 20,346 11,610
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Funds from operations 32,000 25,141
Expenditures on asset retirement (note 2) (62) (58)
Changes in non-cash working capital (8,788) (1,893)
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Cash provided by operating activities 23,150 23,190
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Financing Activities
Units issued, net of costs (note 3) 116 (74)
Increase in bank debt 33,187 6,175
Interest on convertible debentures (1,644) -
Reduction of capital lease obligation (78) -
Cash distributions to Unitholders (25,934) (16,487)
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Cash (used in) provided by financing activities 5,647 (10,386)
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Investing Activities
Expenditures on property and equipment (30,202) (13,628)
Property dispositions 791 -
Changes in non-cash working capital 614 824
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Cash used in investing activities (28,797) (12,804)
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Net increase in cash - -
Cash, beginning of period - -
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Cash, end of period $ - $ -
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Cash taxes paid $ 316 $ 202
Cash interest paid $ 1,272 $ 1,635
Advantage Energy Income Fund Page 4 of 6
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
All tabular amounts in thousands, except for per Unit amounts (unaudited)
The interim consolidated financial statements of Advantage Energy Income Fund
("Advantage") have been prepared by management in accordance with Canadian
generally accepted accounting principles using the same accounting policies as
those set out in note 2 to the consolidated financial statements for the period
ended December 31, 2003 except as described below. The interim consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements of Advantage for the year ended December 31, 2003 as set
out in Advantage's Annual Report.
1. CHANGE IN ACCOUNTING POLICIES
(a) Petroleum and Natural Gas Properties and Related Equipment
Petroleum and natural gas assets are evaluated in each reporting period to
determine that the carrying amount in a cost centre is recoverable and
does not exceed the fair value of the properties in the cost centre.
The carrying amounts are assessed to be recoverable when the sum of the
undiscounted cash flows expected from the production of proved reserves,
the lower of cost and market of unproved properties and the cost of major
development projects exceeds the carrying amount of the cost centre. When
the carrying amount is not assessed to be recoverable, an impairment loss
is recognized to the extent that the carrying amount of the cost centre
exceeds the sum of the discounted cash flows expected from the production
of proved and probable reserves, the lower of cost and market of unproved
properties and the cost of major development projects of the cost centre.
The cash flows are estimated using expected future product prices and
costs and are discounted using a risk-free interest rate.
The Trust adopted the new accounting standard relating to full cost
accounting effective January 1, 2004 and as at January 1, 2004 and March
31, 2004 no write-down to the carrying value of petroleum and natural gas
assets was required. Prior to January 1, 2004 the ceiling test amount was
the sum of the undiscounted cash flows expected from the production of
proved reserves, the lower of cost or market of unproved properties and
the cost of major development projects less estimated future costs for
administration, financing, site restoration and income taxes. The cash
flows were estimated using period end prices and costs.
(b) Asset Retirement Obligations
The Trust has adopted the asset retirement obligation method of recording
the future cost associated with removal, site restoration and asset
retirement costs. The fair value of the liability for the Trust's asset
retirement obligation is recorded in the period in which it is incurred,
discounted to its present value using the Trust's credit adjusted
risk-free interest rate and the corresponding amount recognized by
increasing the carrying amount of property, plant and equipment. The asset
recorded is depleted on a unit of production basis over the life of the
reserves. The liability amount is increased each reporting period due to
the passage of time and the amount of accretion is charged to earnings in
the period. Revisions to the estimated timing of cash flows or to the
original estimated undiscounted cost could also result in an increase or
decrease to the obligation. Actual costs incurred upon settlement of the
retirement obligation are charged against the obligation to the extent of
the liability recorded.
Previously, the Trust recognized a provision for estimated future removal
and site restoration costs calculated on the unit-of-production method
over the remaining proved reserves.
The effect of this change in accounting policy has been recorded
retroactively with restatement of prior periods. The effect of the
adoption is presented below as increases (decreases):
Balance Sheets December 31, 2003 December 31, 2002
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Asset retirement costs, included in property and equipment $ 7,137 $ 3,856
Asset retirement obligations $ 13,892 $ 7,351
Provision for future site restoration $ (8,451) $ (5,396)
Future income taxes $ 581 $ 646
Accumulated income $ 1,115 $ 1,255
Advantage Energy Income Fund Page 5 of 6
Three months ended Year ended
Statements of Income March 31, 2003 December 31, 2003
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Accretion expense $ 129 $ 515
Depletion and depreciation on asset retirement costs $ 239 $ 997
Amortization of estimated future removal and site restoration liability $ (292) $ (1,307)
Future taxes (24) (65)
Net income (loss) impact $ (52) $ (140)
Basic net income (loss) per Unit $ (0.00) $ (0.00)
Diluted net income (loss) per Unit $ (0.00) $ (0.00)
(c) Hedging Relationships
Effective January 1, 2004, CICA Accounting Guideline 13 "Hedging
Relationships" requires that hedging relationships be identified,
designated, documented and measured in order for the Fund to apply hedge
accounting. Advantage has chosen not to apply hedge accounting and will
instead use the fair value method. This method requires the fair value of
the derivative financial instruments be recorded at each balance sheet
date. In accordance with this method, the Fund has recorded an unrealized
hedging loss of $11.1 million at March 31, 2004.
2. ASSET RETIREMENT OBLIGATIONS
The Trust's asset retirement obligations result from net ownership
interests in petroleum and natural gas assets including well sites,
gathering systems and processing facilities. The Trust estimates the total
undiscounted and inflated amount of cash flows required to settle its
asset retirement obligations is approximately $39.7 million which will be
incurred between 2004 to 2054. A credit-adjusted risk-free rate of 7.0
percent was used to calculate the fair value of the asset retirement
obligations.
A reconciliation of the asset retirement obligations is provided below:
Three month period ended Year ended
March 31, 2004 December 31, 2003
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Balance, beginning of period $ 13,892 $ 7,351
Accretion expense 231 515
Liabilities incurred 97 6,362
Liabilities settled (62) (336)
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Balance, end of period $ 14,158 $ 13,892
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3. UNITHOLDERS' EQUITY
(i) Unitholders' Capital
(a) Authorized
(i) Unlimited number of voting Trust Units
(b) Issued
Number of Units Amount
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Balance at December 31, 2003 36,717,206 $ 282,904
2003 non-cash performance incentive 1,099,104 19,592
Issued on conversion of debentures 315,575 4,766
Issued on exercise of options, net of costs 35,000 168
Non-cash performance incentive estimated (see note 5) - 1,400
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Balance at March 31, 2004 38,166,885 $ 308,830
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Advantage Energy Income Fund Page 6 of 6
On January 27, 2004 Advantage issued 1,099,104 Trust Units to satisfy the
obligation related to the 2003 year end performance incentive fee.
(c) Trust Units Rights Incentive Plan
Number Price
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Balance at December 31, 2003 140,000 $ 7.87
Exercised (35,000) -
Reduction of exercise price - (0.69)
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Balance at March 31, 2004 105,000 $ 7.18
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Due to the exercise price features in the Unit rights, management believes
the fair value is not reliably determinable. Based on a March 31, 2004
unit price of $18.97, the decrease in the intrinsic value of the Trust
Unit Rights during first quarter of 2004 is approximately $172,000.
(ii) Convertible Debentures
10% debentures 9% debentures 8.25% debentures Total debentures
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Balance at December 31, 2003 $ 10,214 $ 30,000 $ 59,770 $ 99,984
Converted to Trust Units (1,849) (125) (2,792) (4,766)
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Balance at March 31, 2004 $ 8,365 $ 29,875 $ 56,978 $ 95,218
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The convertible debentures and the related interest obligations are
classified as equity on the consolidated balance sheet as the Trust may
elect to satisfy the debenture interest and principle obligations by the
issuance of Trust Units. During the three months ended March 31, 2004
$4,766,000 debentures were converted resulting in the issuance of 315,575
Advantage Units.
4. FINANCIAL INSTRUMENTS
As at March 31, 2004 the Fund has the following hedges in place:
Volume Effective Period Price
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Natural gas - AECO
50,350 mcf/d April 1, 2004 - December 31, 2004 $ 6.12/mcf
10,450 mcf/d January 1, 2005 - March 31, 2005 $ 6.30/mcf
As at March 31, 2004 the settlement value of the hedges outstanding was
approximately $11.1 million and has been charged to income as an
unrealized hedging loss.
5. NON-CASH PERFORMANCE INCENTIVE
The Manager of the Fund is entitled to earn an annual performance
incentive fee which is calculated based on the total return of the Fund.
At March 31, 2004 no amount was paid to the Manager, nor is the Manager
entitled to receive any payment related to the Fund's first three months
performance as the actual amount is only calculated and paid on an annual
basis.
The Manager earns the performance incentive fee when the Fund's total
annual return exceeds 8%. The total annual return is calculated at the end
of each year by dividing the year over year change in Unit price plus cash
distributions by the opening Unit price. The 2004 opening Unit Price was
$18.03. Ten percent of the amount of the total annual return in excess of
8% is multiplied by the market capitalization (defined as the opening Unit
price multiplied by the average number of Units outstanding during the
year) to determine the performance incentive. If the performance fee was
paid at March 31, 2004 based on the performance of the Trust in the first
quarter the total fee payable would be $5.6 million. The Trust has accrued
one quarter of this amount or $1.4 million for the first quarter of 2004.
It is expected that any fee earned be paid to the Manager in Advantage
Trust Units and therefore the accrued fee to March 31, 2004 has been
classified as Unitholders' Capital. The Manager does not receive any form
of compensation in respect of acquisition or divestiture activities.