EXHIBIT 99.128
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[ADVANTAGE LOGO]
Advantage Energy Income Fund - News Release
May 13, 2004
Advantage Announces 1st Quarter Results,
Conference Call & Webcast on May 14, 2004
Advantage Energy Income Fund (TSX: AVN.UN) ("Advantage" or "the Fund") is
pleased to announce its unaudited operating and financial results for the first
quarter ended March 31, 2004.
A conference call will be held on Friday, May 14, 2004 at 9:00 a.m. MDT (11:00
a.m. EDT). The conference call can be accessed toll-free at 1-877-407-9205.
A replay of the call will be available from approximately 5:00 p.m. on Monday,
May 17, 2004 until approximately midnight, May 25, 2004 and can be accessed by
dialing toll free 1-877-660-6853. The account number is 1628, conference ID
number 104995 (both are required for playback).
A live web cast of the conference call will be accessible via the Internet on
Advantage's website at www.advantageincome.com.
FINANCIAL AND OPERATING HIGHLIGHTS
For the three For the three
months ended months ended
(thousands of dollars except per Unit amounts) March 31, 2004 March 31, 2003
- --------------------------------------------------------------------------------------
Financial
Revenue before royalties $ 53,836 $ 42,079
per Unit(1) $ 1.42 $ 1.49
per boe $ 38.29 $ 38.87
Cash flow from operations $ 32,000 $ 25,141
per Unit(1) $ 0.84 $ 0.89
per boe $ 22.76 $ 23.22
Cash available for distribution(3) $ 29,900 $ 23,809
per Unit(2) $ 0.79 $ 0.84
per boe $ 21.27 $ 21.99
Net income $ 6,972 $ 15,578
per Unit $ 0.13 $ 0.50
Cash distributions $ 26,267 $ 18,228
per Unit(2) $ 0.69 $ 0.64
Working capital (deficit) $ 20,166 $ 9,064
Bank debt $ 136,155 $ 120,397
Convertible debentures $ 95,218 $ 47,312
Operating
Production
Natural gas (mcf/d) 75,649 54,497
Light oil and NGLs (bbls/d) 2,841 2,946
Total boe/d @ 6:1 15,449 12,029
Average prices (including hedging)
Natural gas ($/mcf) $ 6.28 $ 6.18
Light oil & NGLs ($/bbl) $ 40.93 $ 44.34
Supplemental
Trust Units outstanding at end of period 38,167 28,779
Trust Units issuable for Convertible Debentures 5,840 3,557
Trust Units outstanding and issuable for
Convertible Debentures at end of period 44,007 32,336
Weighted average Units outstanding during the period 37,981 28,322
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Advantage Energy Income Fund Page 2 of 15
(1) based on weighted average number of Trust Units outstanding
(2) based on number of Trust Units outstanding at each cash distribution date
(3) cash flow from operations less interest on convertible debentures
CASH DISTRIBUTIONS TO UNITHOLDERS
o The Fund declared three distributions during the quarter totalling $0.69
per Unit. The distributions amounted to $0.23 per Unit, payable on
February 17, March 15 and April 15 to Unitholders of record on January 30,
February 27 and March 31 respectively.
o Cash available for distribution for the first quarter was $29.9 million or
$0.79 per Unit compared to the amount reported in Q1 2003 of $0.84 per
Unit and represents a payout ratio of 88% of total cash available for
distribution.
OIL & NATURAL GAS PRODUCTION
o Production volumes increased by 28% to 15,449 boe/d in the first quarter
of 2004 from 12,029 boe/d in the first quarter of 2003.
NATURAL GAS
o Natural gas production for the first quarter of 2004 was 75.6 mmcf/d, a
39% increase over the 54.5 mmcf/d reported in the first quarter of 2003.
o The acquisition of MarkWest Resources, which closed December 2, 2003,
added approximately 20 mmcf/d of new natural gas production in the first
quarter of 2004.
o During the first quarter of 2004 Advantage drilled 34.4 net (38 gross)
wells resulting in 30.5 net (32 gross) natural gas wells, 1 net (1 gross)
dry hole and 2.9 net (5 gross) untested wells.
CRUDE OIL & NGLS
o Crude oil and natural gas liquids production averaged 2,841 bbls/d
compared to 2,946 bbls/d in the first quarter of 2003 representing a
decline of 4%. First quarter 2003 oil production included 240 bbls/d
related to a minor property disposition that occurred in the fourth
quarter of 2003.
o The acquisition of MarkWest Resources partially offset this decline adding
461 bbls/d of oil and NGL production in Q1 2004.
o During the first quarter the Fund drilled 3.7 net (6 gross) successful oil
wells.
DEVELOPMENT ACTIVITY
MEDICINE HAT
o A total of 57 net (57 gross) natural gas wells have been drilled during Q4
2003 and Q1 2004 (30 wells and 27 wells, respectively) with a 100% success
rate. Total costs incurred on these wells was $8.0 million ($2.0 million
in Q4 2003 and $6.0 million in Q1 2004).
o An additional 9 net (9 gross) wells will be drilled in the second quarter.
o Pipelines and compression facilities were installed during the first
quarter in order to process additional production from the new wells at a
cost of $3.7 million.
o As the result of an early spring break-up, completion and tie-in of these
wells has been delayed and it is expected that these wells will all be
on-stream by the end of the second quarter of 2004.
BANTRY
o During the first quarter the Fund drilled 3.9 net (7 gross) wells at
Bantry bringing the total number of wells drilled to 14.5 net (25 gross)
since the property was acquired in December 2003.
o A total of 11.3 net (19 gross) wells have been tested resulting in 8.8 net
(15 gross) natural gas wells. The remaining wells will be tested when
spring break-up is completed.
o It is anticipated that the successful wells will be tied-in and on
production by the end of the second quarter.
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Advantage Energy Income Fund Page 3 of 15
o In addition the Fund expended approximately $4.5 million on pipelines and
compression in the first quarter to expand the productive capacity of the
field.
o 25 additional well locations have been identified for drilling over the
balance of 2004.
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Advantage Energy Income Fund Page 4 of 15
OTHER AREAS
o At Shouldice, Alberta the Fund commenced a 38 well drilling program late
in the first quarter. New production from this program will be added in
the third quarter. In addition, the Fund expended $1.5 million to enhance
the productive capacity of the field for this program.
o At Nevis, Alberta the Fund drilled three successful 100% working interest
horizontal oil wells which came on-stream late March and early April.
o At Princess, Alberta a 50% working interest natural gas well was drilled
and is expected to be on production late in the second quarter.
MANAGEMENT'S DISCUSSION & ANALYSIS
The following MD&A provides a detailed explanation of the financial and
operating results of Advantage Energy Income Fund ("Advantage" or "the Fund")
for the quarter ended March 31, 2004 and should be read in conjunction with the
financial statements contained within this press release and the audited
financial statements and MD&A for the year ended December 31, 2003.
All per barrel of oil equivalent ("boe") numbers are stated at a 6:1 conversion
rate for natural gas to oil.
CASH DISTRIBUTIONS
Cash distributions per Unit for the three months ended March 31, 2004 were $0.69
per Unit, or $26.3 million, an increase of 8% over the $0.64 per Unit paid in
the first quarter of 2003. The first quarter 2004 distributions were comprised
of $0.23 per month for each of January, February and March. The amount
distributed for the quarter represents 88% of total cash available for
distribution. Cash available for distribution is defined as cash flow from
operations less interest on convertible debentures. The remaining cash withheld
of $3.6 million was used to partially finance the Fund's ongoing capital
expenditure program. Since its inception on May 23, 2001 the Fund has
distributed $178.7 million or $6.58 per Unit.
Cash distributions to Unitholders were paid as follows:
Period ended Record date Payment date Distribution Distribution per Unit
- -------------------------------------------------------------------------------------
Jan. 31, 2004 Jan. 30, 2004 Feb. 17, 2004 $ 8,734 $ 0.23
Feb. 29, 2004 Feb. 27, 2004 March 15, 2004 $ 8,755 0.23
Mar. 31, 2004 Mar. 31, 2004 Apr. 15, 2004 $ 8,778 0.23
- -------------------------------------------------------------------------------------
$ 26,267 $ 0.69
=====================================================================================
PRODUCTION
During the three months ended March 31, 2004 Advantage's natural gas production
increased by 39% to 75.6 mmcf/d compared to 54.5 mmcf/d for the quarter ended
March 31, 2003 and by 10.3 mmcf/d or 16% over the fourth quarter of 2003. The
increase in natural gas production is primarily due to the acquisition of
MarkWest Resources on December 2, 2003. MarkWest added approximately 20 mmcf/d
of new natural gas production to Advantage. Additional natural gas production
related to the Fund's active first quarter drilling program are expected to come
on-stream late in the second quarter.
Crude oil and natural gas liquids production averaged 2,841 bbls/d in the first
quarter of 2004 compared to 2,946 bbls/d for the quarter ending March 31, 2003.
The 4% decline in production from the first quarter of 2003 is due to a minor
property disposition of approximately 240 bbls/d and natural declines partially
offset by the acquisition of MarkWest Resources on December 2, 2003.
PRICES
During the three months ended March 31, 2004 Advantage's natural gas price
averaged $6.28 per mcf ($6.28 per mcf including hedging) compared to $7.65 per
mcf ($6.18 per mcf including hedging) in the first quarter of 2003. Advantage
did not have natural gas hedges in place during the first quarter of 2004. For
the three months ended March 31, 2004 AECO daily prices averaged $6.36 per mcf
compared to $7.95 per mcf in the same period in 2003.
Natural gas prices have remained relatively strong during the first quarter of
2004. Continued strength of natural gas has been attributed to (i) the strength
of crude oil prices which has eliminated the economic advantage of fuel
switching away from natural gas, (ii) the potential for a hotter than normal
summer and reduced coal inventories which may increase
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Advantage Energy Income Fund Page 5 of 15
demand for gas-fired power generation and (iii) the US economy is showing signs
of sustained growth which will add to non-weather demand for natural gas.
Advantage continues to believe the pricing fundamentals for natural gas remain
strong.
Crude oil and NGLs prices averaged $40.93 per barrel ($40.93 per barrel
including hedging) in the first quarter of 2004 compared to $45.74 per barrel
($44.34 per barrel including hedging) in the three months ended March 31, 2003.
Advantage had no crude oil hedges in place in the first quarter of 2004. First
quarter 2004 prices for WTI crude oil averaged US$35.15 per barrel, 4% higher
than the US$33.80 per barrel realized during the first quarter of 2003.
Partially offsetting the increase in WTI prices was a stronger Canadian dollar
which averaged $US/$Cdn $0.76 in the first quarter of 2004 compared to $0.66 in
the first quarter of 2003.
Crude oil prices continued to be strong during the first quarter of 2004.
Factors that affect the continued strength of crude oil include (i) continued
conflict in the middle east, (ii) low global inventory levels and (iii) strong
world oil demand. All of these factors are expected to keep crude oil prices
high for the remainder of the year.
HEDGING
Advantage had no hedging contracts related to first quarter 2004 production. The
Fund currently has the following hedge contracts in place:
Volume Effective Period Average Price
----------------------------------------------------------------------
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
At March 31, 2004 the mark to market valuation of Advantage's outstanding hedges
was a loss of $11.1 million. This amount has been included in the income
statement as an unrealized hedging loss with a corresponding hedging liability
recorded on the balance sheet. Advantage will continue to maintain a hedging
program in order to add stability to the level of cash distributions to
Unitholders.
ROYALTIES
During the first quarter of 2004 Advantage's royalties amounted to $10.6 million
(19.6% of pre-hedged revenue) compared to $8.2 million (16.5% of pre-hedged
revenue) in the first quarter of 2003. Total royalties in 2004 are higher as a
result of higher revenues. The increase in the royalty rate in 2004 is the
result of the acquisition of MarkWest Resources properties in December 2003
which attract higher royalty rates than other Advantage properties. Advantage
expects royalty rates to approximate 20% for the balance of 2004.
OPERATING COSTS
Operating costs for the three months ended March 31, 2004 amounted to $8.3
million or $5.92 per boe compared to $5.5 million or $5.09 per boe in the first
quarter of 2003. Operating costs steadily increased throughout 2003 due to
higher power costs and higher field costs associated with the shortage of
supplies, services and materials that have occurred as a result of very high
levels of industry activity. Advantage's increased operating costs over 2003 are
in line with overall industry trends.
GENERAL AND ADMINISTRATIVE AND MANAGEMENT FEES
General and administrative (G&A) expense in the first quarter of 2004 amounted
to $0.8 million or $0.60 per boe compared to $0.8 million or $0.76 per boe in
the first quarter of 2003. Total G&A expense in the first quarter was unchanged
from the prior year while G&A per boe declined by 21% as a result of increased
production.
Management fees for the three months ended March 31, 2004 amounted to $0.5
million or $0.37 per boe compared to $0.4 million or $0.39 per boe in the first
quarter of 2003. Management fees are calculated based on 1.5% of operating cash
flow which is defined as revenue less royalties and operating costs.
The Manager of the Fund is entitled to earn a performance incentive fee which is
calculated at the end of each year 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 performance for the first three months
of 2004 as the actual amount is calculated and paid on an annual basis only. 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
PRESS RELEASE May 13, 2004
Advantage Energy Income Fund Page 6 of 15
quarter of this amount or $1.4 million for the first quarter of 2004. There is
no certainty that the fee accrued in the financial statements will be paid at
year end. Any performance incentive fee paid to the Manager at year end is
expected to be settled in Advantage Trust Units.
INTEREST
Interest expense for the three months ended March 31, 2004 amounted to $1.3
million ($0.91 per boe) compared to $1.6 million ($1.47 per boe) for the first
quarter of 2003. Lower interest expense in the first quarter of 2004 is the
result of lower average bank debt balances in 2004 combined with lower interest
rates.
TAXES
Current taxes are comprised primarily of capital tax, which amounted to $0.3
million for the three months ended March 31, 2004 compared to $0.4 million for
the same period of 2003. Capital taxes are determined based on debt and equity
levels at the end of the year. As a result of new legislation in 2003, capital
taxes are to be gradually eliminated over the next five years.
For the three months ended March 31, 2004 a future income tax recovery of $7.8
million was included in income compared to a $3.1 million recovery for the
comparable period in 2003. On March 31, 2004, Bill 27 Alberta Corporate Tax
Amendment Act, 2004, which reduces the corporate provincial tax rate by 1%, was
tabled and received first reading in the Alberta Legislative Assembly. As a
result Bill 27 is substantively enacted and a non-recurring benefit of $2.2
million was recorded in the first quarter of 2004. There was no similar tax rate
adjustment to income tax expense in the first quarter of 2003.
CASH FLOW NETBACK
Three months ended Three months ended
March 31, 2004 March 31, 2003
Breakdown of cash flow per boe ($000) (per boe) ($000) (per boe)
-------------------------------------------------------------------------------------
Crude oil & natural gas sales $ 53,836 $ 38.29 $ 49,638 $ 45.84
Hedging gains (losses) - - (7,559) (6.98)
Government & other royalties (10,552) (7.51) (8,196) (7.57)
Operating costs (8,320) (5.92) (5,514) (5.09)
-------------------------------------------------------------------------------------
Operating netback 34,964 24.86 28,369 26.20
General and administrative (846) (0.60) (825) (0.76)
Management fees (525) (0.37) (425) (0.39)
Interest & taxes (1,593) (1.13) (1,978) (1.83)
-------------------------------------------------------------------------------------
Cash flow from operations $ 32,000 $ 22.76 $ 25,141 $ 23.22
Interest on convertible debentures (2,100) (1.49) (1,332) (1.23)
-------------------------------------------------------------------------------------
Cash available for distribution $ 29,900 $ 21.27 $ 23,809 $ 21.99
=====================================================================================
DEPLETION, DEPRECIATION AND ACCRETION OF ASSET RETIREMENT OBLIGATION
The depletion, depreciation and accretion (D,D&A) rate for the first quarter of
2004 was $14.24 per boe compared to $10.63 per boe for the first quarter of
2003. The D, D&A rate per boe increased in the first quarter of 2004 compared to
the first quarter of 2003 due the acquisition of MarkWest Resources and
revisions to the Fund's total proven reserves pursuant to National Instrument
51-101. Included in D,D&A is $0.2 million of accretion of the asset retirement
obligation. Costs subject to depletion include $7.1 million relating to the
capitalized portion of the asset retirement obligation in the first quarter of
2004. The retroactive application of the new accounting policy for asset
retirement obligations requires restatement of prior periods, which resulted in
the first quarter 2003 D,D&A rate to increase to $10.63 per boe compared to the
previously reported rate of $10.59 per boe and D,D&A expense to increase by $0.2
million.
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Advantage Energy Income Fund Page 7 of 15
FINANCIAL REPORTING UPDATE
Hedging Relationships
Effective in the Fund's first quarter of 2004, the new 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. Although the Fund believes that all of the hedges Advantage enters
into are effective economic hedges, Advantage has elected to not use hedge
accounting. The Fund will be using the fair value method to account for all of
its hedge transactions. This method requires Advantage to mark to market at the
balance sheet date the fair value of all outstanding hedges. At March 31, 2004
the mark to market valuation of Advantage's outstanding hedges was a loss of
$11.1 million. This amount has been included in the income statement as an
unrealized hedging loss with a corresponding hedging liability recorded on the
balance sheet.
Asset Retirement Obligations
In March 2003 the CICA issued handbook section 3110 "Asset Retirement
Obligations" which requires liability recognition for retirement obligations
associated with the Fund's property and equipment. The obligations are initially
measured at fair value, which is the discounted future value of the liability.
The fair value is capitalized as part of the cost of the related assets and
depleted to earnings over the assets useful life. The liability accretes until
the retirement obligations are settled. Advantage adopted the new standard in
the first quarter of 2004. The impact to the Trust of the implementation of this
policy is disclosed in note 1 (b) of the March 31, 2004 financial statements.
Full Cost Accounting
Effective January 1, 2004 the Trust adopted CICA accounting guideline 16 "Oil
and Gas Accounting - Full Cost". This accounting guideline replaced CICA
accounting guideline 5, "Full cost accounting in the oil and gas industry".
Accounting guideline 16 modifies how the ceiling test calculation is performed.
The recoverability of a cost centre is tested by comparing the carrying value of
the cost centre to the sum of the undiscounted cash flows expected from the cost
centre. If the carrying value is not recoverable the cost centre is written down
to its fair value. Adopting accounting guideline 16 had no effect on the Trust's
financial results.
CONTRACTUAL OBLIGATIONS AND COMMITTMENTS
The Trust has contractual obligations in the normal course of operations
including purchase of assets and services, operating agreements, transportation
commitments and sales contracts. These obligations are of a recurring and
consistent nature and impact cash flow in an ongoing manner. The following is a
summary of the Fund's contractual obligations and commitments:
Payments due by period
($millions) Total 2004 2005-2006 2007-2008 2009 & thereafter
- ---------------------------------------------------------------------------------------------
Building lease $ 3.5 $ 0.8 $ 1.6 $ 1.1 -
Capital lease $ 2.7 $ 0.4 $ 0.9 $ 1.4 -
Pipeline/transportation $ 4.3 $ 0.6 $ 2.1 $ 1.2 $ 0.4
- ---------------------------------------------------------------------------------------------
Total contractual obligations $ 10.5 $ 1.8 $ 4.6 $ 3.7 $ 0.4
=============================================================================================
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Advantage Energy Income Fund Page 8 of 15
LIQUIDITY AND CAPITAL RESOURCES
Advantage's capital expenditures on development activities for the quarter
ending March 31, 2004 were $29.4 million net of $0.8 million of minor property
dispositions. Expenditures were focused on drilling, completions, pipelines and
compression at Medicine Hat, Bantry, Nevis and Shouldice. A total of 44 (39.6
net) wells were drilled during the first quarter of 2004. Production from this
drilling program is anticipated to come on-stream late in the second quarter of
2004.
Sources and Uses of Funds ($ thousands)
Three months ended
March 31, 2004
- ---------------------------------------------------------------
Sources of funds
Cash flow from operations $ 32,000
Units issued, net of costs 116
Increase in bank debt 33,187
Property dispositions 791
- ---------------------------------------------------------------
$ 66,094
===============================================================
Uses of funds
Capital expenditures $ 30,202
Distributions paid to Unitholders 25,934
Interest paid to debenture holders 1,644
Increase in working capital 8,174
Other 140
- ---------------------------------------------------------------
$ 66,094
===============================================================
Total bank debt outstanding at March 31, 2004 was $136.2 million. Advantage has
an agreement with a syndicate of three Canadian chartered banks that provides
for a $180 million facility consisting of $170 million extendible revolving loan
facility and a $10 million operating loan facility both of which mature on May
29, 2004. The credit facilities are secured by a $250 million floating charge
demand debenture, a general security agreement and a subordination agreement for
the Trust covering all assets and cash flows. At March 31, 2004 Advantage also
had a working capital deficit of $20.2 million.
Non-GAAP Measures
Cash flow from operations and per Unit and cash available for distribution and
per Unit are not recognized measures under the Canadian generally accepted
accounting principles (GAAP). Management believes that cash flow and cash
available for distribution are useful supplemental measures to analyse operating
performance and provide an indication of the results generated by the Trust's
principal business activities prior to the consideration of how those activities
are financed or how the results are taxed. Investors should be cautioned,
however, that these measures should not be construed as an alternative to net
income determined in accordance with GAAP as an indication of Advantage's
performance. Advantage's method of calculating these measures may differ from
other companies, and accordingly, they may not be comparable to measures used by
other companies.
May 12, 2004
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Advantage Energy Income Fund Page 9 of 15
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(thousands of dollars) March 31, 2004 December 31, 2003
- -----------------------------------------------------------------------------------------------------------------
(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)
- -----------------------------------------------------------------------------------------------------------------
529,328 519,935
Goodwill 27,773 27,773
- -----------------------------------------------------------------------------------------------------------------
$ 589,571 $ 581,889
=================================================================================================================
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
- -----------------------------------------------------------------------------------------------------------------
199,848 164,700
=================================================================================================================
Capital lease obligation 1,965 2,043
Asset retirement obligations (note 2) 14,158 13,892
Future income taxes 70,224 77,999
- -----------------------------------------------------------------------------------------------------------------
286,195 258,634
=================================================================================================================
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)
- -----------------------------------------------------------------------------------------------------------------
303,376 323,255
- -----------------------------------------------------------------------------------------------------------------
$ 589,571 $ 581,889
=================================================================================================================
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Advantage Energy Income Fund Page 10 of 15
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED INCOME
Three Three
months ended months ended
(thousands of dollars) (unaudited) March 31, 2004 March 31, 2003
- -----------------------------------------------------------------------------------------------------------------
(restated - note 1)
Revenue
Petroleum and natural gas sales $ 53,836 $ 42,079
Royalties, net of Alberta Royalty Credit (10,552) (8,196)
- -----------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
43,772 21,024
=================================================================================================================
Income (loss) before taxes (488) 12,859
Future income tax recovery (7,775) (3,102)
Income and capital taxes 315 383
- -----------------------------------------------------------------------------------------------------------------
(7,460) (2,719)
=================================================================================================================
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
- -----------------------------------------------------------------------------------------------------------------
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) -
- -----------------------------------------------------------------------------------------------------------------
Accumulated income, end of period $ 77,957 $ 52,082
=================================================================================================================
Net income per Trust Unit
Basic $ 0.13 $ 0.50
Diluted $ 0.13 $ 0.48
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Advantage Energy Income Fund Page 11 of 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Three
months ended months ended
(thousands of dollars) (unaudited) March 31, 2004 March 31, 2003
- ---------------------------------------------------------------------------------------
(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
- ---------------------------------------------------------------------------------------
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)
- ---------------------------------------------------------------------------------------
Cash provided by operating activities 23,150 23,190
=======================================================================================
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)
- ---------------------------------------------------------------------------------------
Cash (used in) provided by financing activities 5,647 (10,386)
=======================================================================================
Investing Activities
Expenditures on property and equipment (30,202) (13,628)
Property dispositions 791 -
Changes in non-cash working capital 614 824
- ---------------------------------------------------------------------------------------
Cash used in investing activities (28,797) (12,804)
=======================================================================================
Net increase in cash - -
Cash, beginning of period - -
- ---------------------------------------------------------------------------------------
Cash, end of period $ - $ -
- ---------------------------------------------------------------------------------------
Cash taxes paid $ 316 $ 202
Cash interest paid $ 1,272 $ 1,635
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Advantage Energy Income Fund Page 12 of 15
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
- ----------------------------------------------------------------------------------------------------------------
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
PRESS RELEASE May 13, 2004
Advantage Energy Income Fund Page 13 of 15
Three months ended Year ended
Statements of Income March 31, 2003 December 31, 2003
- ----------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 13,892 $ 7,351
Accretion expense 231 515
Liabilities incurred 97 6,362
Liabilities settled (62) (336)
- ----------------------------------------------------------------------------------------------------------------
Balance, end of period $ 14,158 $ 13,892
================================================================================================================
3. UNITHOLDERS' EQUITY
(i) Unitholders' Capital
(a) Authorized
(i) Unlimited number of voting Trust Units
(b) Issued
Number of Units Amount
- ----------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004 38,166,885 $ 308,830
================================================================================================================
PRESS RELEASE May 13, 2004
Advantage Energy Income Fund Page 14 of 15
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
--------------------------------------------------------------------------
Balance at December 31, 2003 140,000 $ 7.87
Exercised (35,000) -
Reduction of exercise price - (0.69)
--------------------------------------------------------------------------
Balance at March 31, 2004 105,000 $ 7.18
==========================================================================
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
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 10,214 $ 30,000 $ 59,770 $ 99,984
Converted to Trust Units (1,849) (125) (2,792) (4,766)
- -----------------------------------------------------------------------------------------------------
Balance at March 31, 2004 $ 8,365 $ 29,875 $ 56,978 $ 95,218
=====================================================================================================
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
----------------------------------------------------------------------
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.
PRESS RELEASE May 13, 2004
Advantage Energy Income Fund Page 15 of 15
Forward Looking Information
The information in this release contains certain forward-looking statements that
involve substantial known and unknown risks and uncertainties, certain of which
are beyond Advantage's control, including: the impact of general economic
conditions, industry conditions, changes in laws and regulations including the
adoption of new environmental laws and regulations and changes in how they are
interpreted and enforced, increased competition, fluctuations in commodity
prices and foreign exchange and interest rates, stock market volatility and
obtaining required approvals of regulatory authorities. Advantage's actual
results, performance or achievement could differ materially from those expressed
in, or implied by, such forward-looking statements and, accordingly, no
assurances can be given that any of the events anticipated by the
forward-looking statements will transpire or occur or, if any of them do, what
benefits that Advantage will derive from them.
For further information contact:
Mr. Gary F. Bourgeois, VP Corporate Development
Phone: (416) 945-6636
Toll free: 1-866-393-0393
ADVANTAGE ENERGY INCOME FUND
3100, 150 - 6th Avenue SW
Calgary, AlbertaT2P 3Y7
Phone: (403) 261-8810
Fax: (403) 262-0723
Web Site: www.advantageincome.com
E-mail: advantage@advantageincome.com