EXHIBIT 99.141
--------------
[ADVANTAGE LOGO]
3100 150 - 6th Avenue SW
Calgary, AB T2P 3Y7
T: 403-261-8810 F: 403-262-0723
Advantage Energy Income Fund - News Release
Advantage Announces Year Ended December 31, 2003
Results and Reserve Information
April 13, 2004
CALGARY, ALBERTA, April 13, 2004 - Advantage Energy Income Fund ("Advantage" or
"the Fund") is pleased to announce its operating and financial results and
reserves for the year ended December 31, 2003.
2003 HIGHLIGHTS
o Advantage replaced 144% of 2003 production through drilling and
acquisitions.
o The Fund drilled 173.8 net wells (192 gross) during 2003 achieving a
success rate of 97%.
o Natural gas production volumes increased by 21% during the year averaging
57.6 mmcf/d with light oil and NGLs production rising by 22% to 2,756
bbls/d as compared to 2002.
o The Fund closed the acquisition of MarkWest Resources Canada Corp. for
$102.5 million on December 2, 2003. Highlights of this purchase include
the following:
o Added production of approximately 4,500 boe/d comprised of 24.2
mmcf/d of natural gas and 415 bbls/d of oil and NGLs.
o Valuation of $23,000 per daily boe of production.
o Significant inventory of low risk drilling and recompletion
opportunities.
o A total of 30 new wells (20.5 net wells) have been drilled on the MarkWest
properties to March 31, 2004. Production from this activity is anticipated
to commence in the second quarter of 2004.
CASH DISTRIBUTIONS
o Cash available for distribution for the year ended December 31, 2003
increased by 59% to $3.09 per Unit. Cash distributions paid to Unitholders
were $2.71 per Unit representing an increase of 57% and a payout ratio of
88%. The balance, or $11.4 million was retained to fund capital
expenditures.
o Advantage has distributed $0.23 per Unit per month for 14 consecutive
months.
o The Fund has hedged 60% of natural gas production for the balance of 2004
at an average price of $6.12 per mcf which will enhance cash flow
stability and support cash distributions throughout 2004.
SUMMARY SINCE INCEPTION
o Since the initial equity issue in October 2001, Advantage has generated a
total return to Unitholders of 227%.
o Since its inception, the Fund has increased production by 154% to
approximately 16,000 boe/d comprised of 79.2 mmcf/d of natural gas and
2,800 bbls/d of light oil and NGLs. Growth has been accomplished through
the completion of four corporate acquisitions combined with an active
drilling program. As a result of these activities reserves have increased
219% to 53.3 million boe at a cost of $8.83 per boe.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 2 of 28
FINANCIAL AND OPERATING HIGHLIGHTS
(thousands of dollars except per Unit amounts)
Three Three Year Year
months ended months ended ended ended
Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002
------------- ------------- ------------- -------------
Financial
Revenue before royalties $ 43,479 $ 35,289 $ 166,075 $ 97,837
per Unit(1) $ 1.31 $ 1.30 $ 5.44 $ 3.64
per boe $ 34.76 $ 30.63 $ 36.81 $ 24.85
Cash flow from operations $ 25,523 $ 21,472 $ 99,440 $ 53,652
per Unit(1) $ 0.77 $ 0.79 $ 3.26 $ 1.99
per boe $ 20.41 $ 18.64 $ 22.05 $ 13.63
Cash available for distribution(3) $ 24,126 $ 20,357 $ 94,735 $ 52,537
per Unit(2) $ 0.72 $ 0.75 $ 3.09 $ 1.94
Net income (loss) $ (1,880) $ 2,810 $ 44,164 $ 12,095
per Unit(1) $ (0.10) $ 0.10 $ 1.29 $ 0.41
Cash distributions $ 22,905 $ 14,634 $ 83,382 $ 46,883
per Unit(2) $ 0.69 $ 0.54 $ 2.71 $ 1.73
Working capital deficit $ 27,551 $ 7,057
Bank debt $ 102,968 $ 114,222
Convertible debentures $ 99,984 $ 55,000
Operating
Production
Natural gas (mcf/d) 65,280 59,444 57,631 47,753
Light oil and NGLs (bbls/d) 2,714 2,617 2,756 2,255
Heavy oil (bbls/d) - - - 573
boe (6:1) 13,594 12,524 12,361 10,787
Average prices (including hedging)
Natural gas ($/mcf) $ 5.76 $ 4.87 $ 6.07 $ 3.71
Light oil & NGLs ($/bbl) $ 35.67 $ 36.05 $ 38.14 $ 33.68
Heavy oil ($/bbl) $ - $ - - $ 25.71
Proved plus probable reserves (mboe)(4)
Natural gas (bcf) 237.4 223.1
Crude oil & NGLs (mbbls) 13,697 13,995
Total mboe 53,271 51,180
Supplemental (000s)
Trust Units outstanding - end of period 36,717 27,099
Trust Units issuable for
Convertible Debentures 6,155 4,135
Trust Units outstanding and issuable for
Convertible Debentures - end of period 42,872 31,234
Weighted average Units 33,089 27,099 30,536 26,900
(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
(4) December 31, 2002 represents established reserves
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 3 of 28
RESERVES
Advantage's year end 2003 reserves were evaluated in accordance with National
Instrument 51-101, the new standards of disclosure for oil and gas activities as
mandated by the Canadian Securities Administrators. This new reporting
requirement is intended to be more stringent and is designed to improve
consistency and reliability of oil and gas reserve disclosure. The emphasis is
placed on a conservative approach in assigning proved reserves. With NI 51-101,
proved reserves are defined to have a 90% probability that actual reserves
recovered will equal or exceed the assigned estimate. Probable reserves are less
certain than proved reserves and it is equally likely that the actual reserves
recovered will be greater or less than the sum of the estimated proved plus
probable reserves. Therefore, under NI 51-101, proved plus probable reserves are
considered to represent the most realistic estimate of company reserves.
Sproule Associates Limited evaluated 85% of the total proved plus probable value
of year end reserves and audited all internally evaluated reserves in accordance
with NI 51-101. The following table summarizes the Fund's working interest
reserves, excluding royalty interest reserves of approximately 400 mboe.
Reserves Summary
Crude Oil & NGLs Natural Gas Total Present Value ($000)
mbbl bcf mboe 5% 10%
- ------------------------------------------------------------------------------------------------------------------------
Proven producing 7,194 155.0 33,027 450.0 366.8
Total proved 8,261 184.4 38,998 516.2 422.2
Total probable 5,436 53.0 14,273 143.3 97.9
- ------------------------------------------------------------------------------------------------------------------------
Total proved and probable 13,697 237.4 53,271 $ 659.5 $ 520.1
========================================================================================================================
In Bantry, 19 wells were drilled and cased late in 2003, but were not fully
tested by year end. As a result, only six tested wells were assigned reserves by
Sproule. The remaining 13 wells will be evaluated in the 2004 reserve study.
Reserves Reconciliation
Crude Oil NGLs Natural Gas Proved
mbbl mbbl bcf plus probable
proved probable proved probable proved probable mboe
- ------------------------------------------------------------------------------------------------------------------------
Reserves at December 31, 2002(1) 9,164 2,545 1,545 741 178.4 44.7 51,180
Acquisitions 474 75 348 72 33.7 7.6 7,851
Divestments (533) (129) (23) - (0.7) (0.1) (821)
Production (837) - (198) - (22.5) - (4,789)
Capital development 357 659 - - 17.1 5.9 4,849
Revisions under NI 51-101
Technical (2,001) 2,220 177 28 (21.6) (4.8) (3,955)
50 year cut-off(2) (203) (731) (8) (43) - (0.3) (1,044)
----------------------------------------------------------------------------------------------------------------------
Reserves at December 31, 2003 6,421 4,639 1,841 798 184.4 53.0 53,271
========================================================================================================================
(1) The evaluation as at December 31, 2002 was prepared using Canadian
National Policy 2-B reserves definitions. Under those definitions,
probable reserves were assigned a risk factor of 50%.
(2) Under the new NI 51-101 guidelines, all reserves exceeding 50 years are
not assigned. This cut-off has no material impact on current net asset
value.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 4 of 28
Net Asset Value
($000, except per Unit amounts) 5% 10%
- --------------------------------------------------------------------------------
Present value proved and probable reserves $ 659,477 $ 520,050
Undeveloped acreage and seismic(1) 19,000 19,000
Working capital (deficit) net of
Cash distributions payable to Unitholders (19,106) (19,106)
Bank debt (102,968) (102,968)
- --------------------------------------------------------------------------------
Net asset value $ 556,403 $ 416,976
================================================================================
Net asset value per Unit(2) $ 12.94 $ 9.69
================================================================================
(1) Land at $50 per acre
(2) Based on fully diluted Units and conversion of all outstanding debentures
Pricing Assumptions
The present value of future cash flow at December 31, 2003 was based upon crude
oil and natural gas pricing assumptions prepared by Sproule Associates Limited
effective January 1, 2004. These forecasts are adjusted for reserve quality,
transportation charges and the provision of any applicable sales contracts. The
price assumptions used over the next five years are summarized in the table
below:
WTI Edmonton Light Alberta Plantgate Henry Hub
Crude Oil Crude Oil Natural Gas Natural Gas
Year $US/bbl $Cdn/bbl $Cdn/mmbtu $US/mmbtu
- -------------------------------------------------------------------------------
2004 $ 29.63 $ 37.99 $ 5.81 $ 5.32
2005 $ 26.80 $ 34.24 $ 5.15 $ 4.81
2006 $ 25.76 $ 32.87 $ 4.59 $ 4.39
2007 $ 26.14 $ 33.37 $ 4.71 $ 4.46
2008 $ 26.53 $ 33.87 $ 4.80 $ 4.52
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD & A") provides a
detailed explanation of the financial and operating results of Advantage Energy
Income Fund ("Advantage", "the Trust" or "the Fund") for the year ended December
31, 2003 and should be read in conjunction with the audited consolidated
financial statements. All per barrel of oil equivalent ("boe") amounts are
stated at 6:1 conversion rate for natural gas to oil.
Advantage was formed on May 23, 2001 as a result of the conversion of Search
Energy Corp. into an income fund. The purpose of the conversion was to create a
trust entity which distributes substantially all of its cash flow to Unitholders
on a monthly basis. The Fund's strategy is to focus on growth through the
acquisition and development of producing oil and natural gas properties while
minimizing exposure to exploration risk.
CASH DISTRIBUTIONS
Total cash distributions to Unitholders for the year ended December 31, 2003
amounted to $83.4 million or $2.71 per Unit. This represents a 78% increase over
2002 cash distributions which amounted to $46.9 million or $1.73 per Unit. Since
inception, the Fund has distributed $152.4 million or $5.89 per Unit. Cash
distributions are dependent on the Fund's current level of production and
prevailing commodity prices and are announced monthly based on cash flow
available after retaining a portion for capital expenditures and debt repayment.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 5 of 28
2003 Monthly Distributions
Cash distributions to Unitholders were declared as follows:
Distribution Taxable amount Return of capital
Period ended Payment date per Unit per Unit per Unit
- -------------------------------------------------------------------------------
Jan. 31, 2003 Feb. 18, 2003 $ 0.18 $ 0.072 $ 0.108
Feb. 28, 2003 Mar. 17, 2003 $ 0.23 $ 0.092 $ 0.138
Mar. 31, 2003 Apr. 15, 2003 $ 0.23 $ 0.092 $ 0.138
Apr. 30, 2003 May 15, 2003 $ 0.23 $ 0.092 $ 0.138
May 31, 2003 June 16, 2003 $ 0.23 $ 0.092 $ 0.138
June 30, 2003 July 15, 2003 $ 0.23 $ 0.092 $ 0.138
July 31, 2003 Aug. 15, 2003 $ 0.23 $ 0.092 $ 0.138
Aug. 31, 2003 Sept. 15, 2003 $ 0.23 $ 0.092 $ 0.138
Sept. 30, 2003 Oct. 15, 2003 $ 0.23 $ 0.092 $ 0.138
Oct. 31, 2003 Nov. 17, 2003 $ 0.23 $ 0.092 $ 0.138
Nov. 30, 2003 Dec. 15, 2003 $ 0.23 $ 0.092 $ 0.138
Dec. 31, 2003 Jan. 15, 2004 $ 0.23 $ 0.092 $ 0.138
- -------------------------------------------------------------------------------
$ 2.71 $ 1.084 $ 1.626
===============================================================================
For US holders of Advantage Units the distributions paid in 2003 were 56%
non-taxable return of capital and 44% taxable. Unitholders should consult their
tax advisors as to the proper treatment of Advantage distributions for income
tax purposes.
PRODUCTION
Natural gas production for the year ended December 31, 2003 averaged 57.6
mmcf/d, an improvement of 21% over the 47.8 mmcf/d produced in 2002. The
increase in gas production over 2002 was the result of a successful drilling
program at Medicine Hat and Shouldice, Alberta and the acquisition of Best
Pacific Resources on November 18, 2002. Advantage's drilling program at Medicine
Hat and Shouldice added new production of approximately 13.0 mmcf/d in the later
half of 2003, while the Best Pacific acquisition added approximately 5.8 mmcf/d.
On December 2, 2003 Advantage acquired MarkWest Resources Canada Corp. This
acquisition did not contribute significantly to 2003 average volumes but will
add approximately 20 mmcf/d of new natural gas production to the Fund in the
first quarter of 2004. Advantage exited 2003 producing approximately 79.2 mmcf/d
of natural gas.
Oil and NGLs production in 2003 averaged 2,756 bbls/d compared with 2,828 bbls/d
produced in 2002. Light oil and NGLs production in 2003 averaged 2,756 bbls/d,
an increase of 22% over the 2,255 bbls/d produced in 2002. Increases in light
oil and NGLs production in 2003 was the result of the acquisition of Best
Pacific Resources in November of 2002. The 3% decline in total oil and NGLs
production in 2003 was the result of the disposition of substantially all of the
Fund's heavy oil production on September 1, 2002. The Fund's heavy oil
production was exchanged for increased production and working interests in the
Fund's Vermilion natural gas property. Heavy oil production in 2002 amounted to
573 bbls/d.
Daily Production
2003 2002 % Change
-----------------------------------------------------------------
Natural gas (mcf/d) 57,631 47,753 21 %
Light oil & NGLs (bbls/d) 2,756 2,255 22 %
Heavy oil (bbls/d) - 573 - %
-----------------------------------------------------------------
Total (boe/d) 12,361 10,787 15 %
=================================================================
COMMODITY PRICES & MARKETING
Natural Gas
Natural gas prices for the year ended December 31, 2003 averaged $6.30/mcf
($6.07/mcf including hedging), compared to $3.85/mcf ($3.71/mcf including
hedging) in the year ended December 31, 2002. Advantage's natural gas hedging
program
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 6 of 28
resulted in losses of $4.8 million in 2003 or $0.23/mcf. All of the Fund's
natural gas hedging losses were incurred in the first quarter of 2003 and
related to hedges entered into in the fall of 2002. Natural gas prices were
considerably stronger in 2003 compared to 2002 but have softened from the near
record highs attained in the first quarter of 2003. Prices have weakened since
the first quarter due to higher than normal injections into natural gas storage
caused by (i) below normal summer temperatures that cut cooling demand, reducing
the need for natural gas as fuel for electricity generation to run air
conditioning, (ii) switching away from natural gas to lower cost fuels and (iii)
expectations for increased supply that has resulted from the active winter
drilling season. Natural gas storage levels are now within the normal five year
range entering into the shoulder season where strong demand for heating has
declined and the summer cooling season has not yet begun. Advantage continues to
believe that the pricing fundamentals for natural gas remains strong. Advantage
will continue to mitigate the price risk associated with the fluctuations in
natural gas prices by hedging a portion of its production. Advantage has hedged
approximately 60% of it's anticipated natural gas production for 2004. The price
the Fund receives on natural gas is primarily based on the AECO benchmark price
with approximately 25% of production sold to aggregators and the remainder sold
on the spot market. Advantage's current production is weighted approximately 83%
towards natural gas.
Average Prices - Natural Gas ($/mcf)
2003 2002 % Change
-----------------------------------------------------------------------
Advantage wellhead price $ 6.30 $ 3.85 64%
Advantage hedged price $ 6.07 $ 3.71 64%
AECO monthly index $ 6.67 $ 4.26 57%
Crude Oil
Crude oil and NGLs prices averaged $38.58/bbl ($38.14/bbl including hedging) in
2003 compared with $34.46/bbl ($32.07/bbl including hedging) in 2002. Included
in crude oil sales is $0.4 million of oil hedging losses or $0.44/bbl.
Advantage's crude oil prices are based on the benchmark pricing of West Texas
Intermediate Crude ("WTI") adjusted for quality, transportation costs and
Canadian/US exchange rate. The price of WTI fluctuates based on worldwide supply
and demand fundamentals. Crude oil prices were extremely volatile in 2003 and
remain strong due to (i) record low storage levels in the US, (ii) supply
management by the OPEC cartel, (iii) ongoing civil unrest in the middle east,
Venezuela and Nigeria and (iv) increased world wide demand particularly in
China. The price of WTI averaged $US31.06/bbl in 2003 compared to $US26.10/bbl
in the period ending December 31, 2002.
Average Prices - Crude Oil
2003 2002 % Change
-----------------------------------------------------------------------
Light oil & NGLs ($/bbl) $ 38.58 $ 35.83 8 %
Heavy oil ($/bbl) - $ 29.03 -
Oil & NGLs - including hedging
($/bbl) $ 38.14 $ 32.07 19 %
WTI (US$/bbl) $ 31.06 $ 26.10 19 %
HEDGING
During 2003 the Fund's hedging losses amounted to $5.2 million ($4.8 million on
natural gas hedges and $0.4 million on crude oil hedges). All of the Funds
hedging losses were the result of contracts entered into in the fall of 2002
prior to the increase in winter natural gas prices and due to hedging contracts
acquired as part of the Best Pacific acquisition. Contracts entered into in
early 2003 resulted in hedging gains of $2.4 million in 2003. On February 24,
2004 the Fund announced that it had entered the following natural gas hedge
transactions for 2004 and 2005:
Natural Gas - April to December 2004
Volume 50.4 mmcf/d
Fixed price (average) $6.12/mcf
Natural Gas - January to March 2005
Volume 10.5 mmcf/d
Fixed price (average) $6.30/mcf
Advantage currently has no crude oil hedges in place.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 7 of 28
ROYALTIES
Total royalties amounted to $28.5 million for the year ended December 31, 2003
or 16.6% of pre-hedged revenue compared with $17.3 million or 16.9% of
pre-hedged revenue for the year ended December 31, 2002. Total royalties are
significantly higher in 2003 as a result of higher revenues. Advantage's low
royalty rate reflects the Fund's significant proportion of production that comes
from low rate natural gas wells at properties such as Medicine Hat, Wainwright
and Shouldice which attract lower royalty rates. The slight decline in the
Fund's royalty rate in 2003 compared to 2002 reflects a higher proportion of
Advantage's production coming from these lower rate properties. Advantage
anticipates that its royalty rate in 2004 will increase to approximately 20% as
a result of the acquisition of MarkWest Resources in December 2003. MarkWest
properties attract higher royalty rates than Advantage properties.
Royalties
2003 2002 % Change
-------------------------------------------------------------------------
Total royalties, net of ARC ($000) $ 28,491 $ 17,344 64 %
per boe $ 6.31 $ 4.41 43 %
As a percentage of pre-hedging revenue 16.6% 16.9% -
OPERATING COSTS
Operating costs for the year ended December 31, 2003 amounted to $25.6 million
or $5.68/boe compared with $18.5 million or $4.70/boe for the year ended
December 31, 2002. The increase in operating cost amounts reflects the Best
Pacific acquisition completed in late 2003. Per boe operating costs increased
due to higher power costs and higher field costs associated with the shortage of
supplies, services and materials that has resulted from the high level of
industry activity. The Fund expects per boe operating costs in 2004 to be
similar to 2003.
Operating Costs
2003 2002 % Change
-----------------------------------------------------------------------
Operating costs ($000) $ 25,618 $ 18,486 39 %
per boe $ 5.68 $ 4.70 21 %
GENERAL AND ADMINISTRATIVE AND MANAGEMENT FEES
General and administrative ("G&A") expense for the year ended December 31, 2003
amounted to $3.2 million or $0.71/boe compared with $2.6 million or $0.67/boe
for the year ended December 31, 2002. G&A expense was higher in 2003 due to
increased staff levels that resulted from the growth of the Fund.
Management fees for the year ended December 31, 2003 amounted to $1.7 million
compared to $0.9 million for the year ended December 31, 2002. On a boe basis,
management fees were $0.37/boe compared to $0.24/boe in 2002. Management fees
are calculated based on 1.5% of operating cash flow, which is defined as
revenues less royalties and operating expenses.
The Fund Manager is entitled to earn a performance fee to the extent that the
total annual return of the Fund 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. One tenth (10%) of the
amount of the total annual return in excess of 8% is multiplied by the market
capitalization (defined as the opening Unit price times the weighted average
number of Units outstanding during the year) to determine the performance fee.
For the year ending December 31, 2003 the total return of the Fund was 57% (84%
return in 2002) based on an opening unit price of $13.07 per unit ($8.02 per
unit in 2002), a closing unit price of $17.83 per unit ($13.07 per unit in 2002)
and cash distributions of $2.71 per unit for the year ($1.73 per unit in 2002).
This 57% return for Unitholders resulted in a performance fee of $19.6 million
($16.5 million in 2002) based on a total annual return to Unitholders of $227.9
million ($179.4 million in 2002). On January 21, 2003 the Fund issued 1,099,104
Advantage Trust Units to Advantage Investment Management Ltd. and the employees
of the Fund to satisfy the performance fee obligation. The Manager does not
receive any form of compensation in respect of acquisition or divestiture fees
nor is there any form of stock option plan for the Manager or the employees of
Advantage.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 8 of 28
General and Administrative Expenses
2003 2002 % Change
-----------------------------------------------------------------------
General and administrative expense ($000) $ 3,216 $ 2,624 23 %
per boe $ 0.71 $ 0.67 6 %
Management fees ($000) $ 1,679 $ 930 81 %
per boe $ 0.37 $ 0.24 54 %
Employees at December 31 49 31 58 %
INTEREST
Interest expense on bank debt for the year ended December 31, 2003 amounted to
$6.4 million compared with $4.3 million for the year ended December 31, 2002.
Higher interest expense in 2003 was the result of a higher average debt balance
during the year partially offset by lower interest rates. The Fund's interest
rates are primarily based on short term Bankers Acceptance rates plus a stamping
fee. The average rate of interest on Advantage's bank debt at December 31, 2003
was approximately 4.3%.
NETBACKS
Netbacks ($/boe)
2003 2002
($000s) ($/boe) ($000s) ($/boe)
- ----------------------------------------------------------------------------------------------------
Revenue $ 171,277 $ 37.96 $ 102,717 $ 26.09
Hedging (5,202) (1.15) (4,880) (1.24)
Royalties (28,491) (6.31) (17,344) (4.41)
Operating costs (25,618) (5.68) (18,486) (4.70)
- ----------------------------------------------------------------------------------------------------
Operating $ 111,966 $ 24.82 $ 62,007 $ 15.74
General and administrative (3,216) (0.71) (2,624) (0.67)
Management fees (1,679) (0.37) (930) (0.24)
Interest expense (6,378) (1.41) (4,272) (1.09)
Taxes (1,253) (0.28) (529) (0.13)
- ----------------------------------------------------------------------------------------------------
Cash flow from operations $ 99,440 $ 22.05 $ 53,652 $ 13.61
Interest on convertible debentures (4,705) (1.04) (1,115) (0.28)
- ----------------------------------------------------------------------------------------------------
Cash available for distribution $ 94,735 $ 21.01 $ 52,537 $ 13.33
====================================================================================================
DEPLETION, DEPRECIATION AND SITE RESTORATION
Depletion and depreciation of property and equipment is provided on the unit of
production method based on total proved reserves. The depletion, depreciation
and site restoration provision for 2003 increased to $53.8 million from $41.1
million in 2002. The increased provision in 2003 is the result of higher
production volumes in 2002 and a higher per boe rate. The depletion,
depreciation and amortization rate (DD&A) for the year ended December 31, 2003
was $11.86/boe compared with $10.43/boe in 2002. DD&A includes a provision for
future site restoration and abandonments of $0.29/boe ($0.24/boe in 2002).
TAXES
Current taxes paid or payable for the period ending December 31, 2003 primarily
represent capital tax and amounted to $1.3 million, compared to $0.5 million
expensed in 2002. Capital taxes are based on debt and equity levels at the end
of the year and are higher in 2003 due to Advantage's growth during the year. As
a result of new legislation in 2003, capital taxes are to be gradually
eliminated over the next five years.
Future income taxes arise from differences between the accounting and tax bases
of the operating company's assets and liabilities. For the year ended December
31, 2003 the Fund recognized an income tax recovery of $18.1 million compared to
a $16.0 million recovery in 2002. In the Fund's structure, payments are made
between the operating company and the Trust transferring both income and future
income tax liability to the Unitholders. Therefore, it is expected, based on
current
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 9 of 28
legislation that no cash income taxes are to be paid by the operating company in
the future, and as such, the future income tax liability recorded on the balance
sheet will be recovered through earnings over time. As at December 31, 2003 the
operating company had a future income tax liability balance of $77.4 million.
Canadian generally accepted accounting principles require that a future income
tax liability be recorded when the book value of assets exceeds the balance of
tax pools. It further requires that a future tax liability be recorded on an
acquisition when a corporation acquires assets with associated tax pools that
are less than the purchase price. As a result of the MarkWest acquisition,
Advantage recorded a future tax liability of $18.5 million.
CAPITAL EXPENDITURES
Capital expenditures including acquisitions for the year ended December 31, 2003
totalled $169.0 million net of property dispositions of $6.1 million compared to
$167.8 million net of property dispositions of $0.8 million in 2002.
Expenditures on property and equipment in 2003 amounted to $76.2 million. The
majority of the capital expenditures were incurred on natural gas development
drilling, completions and tie-ins at Medicine Hat, Shouldice, Wainwright and
Vermilion.
Capital Expenditures ($ thousands)
2003 2002
---------------------------------------------------------------------------
Land and seismic $ 7,502 $ 1,359
Drilling, completions and workovers 47,123 30,719
Well equipping and facilities 21,094 10,456
Other 493 118
---------------------------------------------------------------------------
$ 76,212 $ 42,652
Acquisition of Best Pacific Resources Ltd. - 53,448
Acquisition of Gascan Resources Ltd. - 63,799
Acquisition of MarkWest Canada Resources Corp. 97,025 -
Property acquisitions 1,848 8,698
Property dispositions (6,112) (800)
---------------------------------------------------------------------------
Total capital expenditures $ 168,973 $ 167,797
===========================================================================
ACQUISITIONS
MarkWest Resources Canada Corp.
On December 2, 2003 Advantage acquired all of the issued and outstanding shares
of MarkWest Resources Canada Corp. for cash consideration of $97.0 million. The
acquisition was financed through the issuance of 5.1 million Advantage Trust
Units at a price of $15.75 per Unit and the issuance of $60 million of 8.25%
unsecured subordinated convertible debentures. The debentures are convertible
into Advantage Trust units at a conversion price of $16.50 per Trust Unit.
The Fund recorded goodwill on the acquisition of $27.8 million as the result of
purchasing tax pool deficient oil and gas reserves. The goodwill value was
determined based on the excess of total consideration plus the future income tax
liability recorded upon acquisition less the deemed fair value for accounting
purposes of the MarkWest assets. The fair value for accounting purposes of the
MarkWest assets of $105.6 million was determined based on a 10% discounted value
of established reserves as per an independent reserve evaluation. Result of
operations of MarkWest have been included in the Fund's consolidated financial
statements effective December 2, 2003, the closing date of the transaction.
LIQUIDITY AND CAPITAL RESOURCES
On July 8, 2003 Advantage issued $30 million principle amount of 9% unsecured
subordinated convertible debentures. The debentures mature on August 1, 2008,
pay interest semi-annually and are convertible at the option of the holder into
Trust Units of Advantage at $17.00 per Unit plus accrued and unpaid interest.
Proceeds of the debenture offering were used to fund drilling and exploitation
activities in the Trust's core areas. On December 2, 2003 the Fund issued 5.1
million Trust Units at a price of $15.75 per Trust Unit generating net proceeds
of $76.1 million. Also on December 2, 2003 the Fund issued $60 million principle
amount of 8.25% unsecured subordinated convertible debentures. The debentures
mature on February 1, 2009, pay interest semi-annually and are convertible at
the option of the holder into Trust Units of Advantage at $16.50 per Unit plus
accrued and unpaid interest. A portion of the proceeds of the December 2, 2003
offering were used to fund the acquisition of MarkWest Resources Canada Corp.
with the balance of net proceeds used to reduce outstanding bank debt and to
fund drilling and
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 10 of 28
exploitation capital expenditures in the Fund's core areas. As at December 31,
2003 the Fund had 36.7 million Trust Units outstanding. On January 27, 2004
Advantage issued 1,099,104 Units to the Fund's Manager and Advantage employees
to satisfy the obligation related to the 2003 performance incentive fee.
At December 31, 2003 Advantage had bank debt outstanding of $103.0 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 28, 2004. The credit facilities are secured by a $250 million
floating charge demand debenture, a general security agreement and a
subordination agreement from the Trust covering all assets and cash flows. At
December 31, 2003 Advantage also had a working capital deficiency of $24.9
million. The following table outlines Advantage's sources and uses of funds
during 2003:
Sources and Uses of Funds ($ thousands)
Sources of funds
Cash flow from operations $ 99,440
Units issued, net of costs 76,436
Debentures issued, net of costs 85,982
Decrease in working capital 2,119
Property dispositions, net of acquisitions 4,264
----------
$ 268,241
----------
Uses of funds
Capital expenditures $ 76,212
Acquisition of MarkWest Resources 97,025
Distributions paid to Unitholders 79,815
Interest paid to debenture holders 3,935
Decrease in bank debt 11,254
----------
$ 268,241
----------
ANNUAL FINANCIAL INFORMATION
The following is a summary of selected financial information of the Fund for the
periods indicated.
For the For the For the period
year ended year ended from May 24
Dec. 31, 2003 Dec. 31, 2002 to Dec. 31, 2001(1)
- ------------------------------------------------------------------------------------------------------
Total revenue (before royalties) ($000) 166,075 97,837 38,595
Cash flow from operations ($000) 99,440 53,652 20,342
Per unit - basic 3.26 1.99 1.31
Per unit - diluted 2.92 1.93 1.31
Net income ($000) 44,164 12,095 9,567
Per unit - basic and diluted 1.29 0.41 0.62
Total assets ($000) 574,752 411,849 234,324
Cash distributions per unit 2.71 1.73 1.45
(1) The Reorganization of Advantage Oil and Gas Ltd. (formerly Search Energy
Corp.) into an income trust structure occurred effective May 24, 2001. The
data presented for the period ended December 31, 2001 represents data from
Advantage's first financial year of May 24, 2001 to December 31, 2001.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 11 of 28
QUARTERLY FINANCIAL INFORMATION
The following is a summary of selected financial information of Advantage for
the periods indicated.
Total Net Net Cash flow from Cash flow from
Revenues Net Income Income Cash flow operations operations
(before Income (loss) per per Unit from per Unit per Unit
royalties) (loss) Unit basic diluted operations basic diluted
- ---------------------------------------------------------------------------------------------------------------
($000) ($000) ($000)
2003
1st quarter 42,079 15,630 0.50 0.48 25,141 0.89 0.78
2nd quarter 39,654 20,805 0.67 0.64 24,210 0.82 0.75
3rd quarter 40,863 9,609 0.28 0.28 24,567 0.79 0.76
4th quarter 43,479 (1,880) (0.10) (0.10) 25,522 0.77 0.65
2002
1st quarter 18,625 3,223 0.12 0.12 9,889 0.36 0.36
2nd quarter 22,474 705 0.03 0.03 11,691 0.43 0.43
3rd quarter 21,449 5,357 0.20 0.20 10,600 0.39 0.39
4th quarter 35,289 2,810 0.10 0.10 21,472 0.79 0.79
RISK FACTORS
The following is a summary of certain risk factors relating to the business of
the Trust.
Exploitation and Development
Exploitation and development risks are due to the uncertain results of searching
for and producing oil and natural gas using imperfect scientific methods. These
risks are mitigated by using highly skilled staff, focusing exploitation efforts
in areas in which Advantage has existing knowledge and expertise or access to
such expertise, using up to date technology to enhance methods, and controlling
costs to maximize returns. Advanced oil and natural gas related technologies
such as three-dimensional seismography, reservoir simulation studies and
horizontal drilling have been used by Advantage and will be used by Advantage to
improve its ability to find, develop and produce oil and natural gas.
Operations
Advantage's operations are subject to all of the risks normally incident to the
operation and development of oil and natural gas properties and the drilling of
oil and natural gas wells, including encountering unexpected formations or
pressures, blowouts, craterings and fires, all of which could result in personal
injuries, loss of life and damage to the property of the Fund and others.
Advantage has both safety and environmental policies in place to protect its
operators and employees, as well as to meet the regulatory requirements in those
areas where it operates. In addition, the Fund has liability insurance policies
in place, in such amounts as it considers adequate, however, it will not be
fully insured against all of these risks, nor are all such risks insurable.
Continuing production from non-operated properties, and, to some extent the
marketing of production therefrom, are largely dependent upon the ability of the
operator of the property. To the extent the operator fails to perform these
functions properly, revenue may be reduced. Payments from production generally
flow through the operator and there is a risk of delay and additional expense in
receiving such revenues if the operator becomes insolvent. Although satisfactory
title reviews are generally conducted in accordance with industry standards,
such reviews do not guarantee or certify that a defect in the chain of title may
not arise to defeat the claim of Advantage to certain properties. A reduction of
cash flow could result in such circumstances. Advantage mitigates this risk by
operating a high percentage of its properties.
Oil and Natural Gas Prices
The price of oil and natural gas will fluctuate and price and demand are factors
beyond Advantage's control. Such fluctuations will have a positive or negative
effect on the revenue to be received by it. Such fluctuations will also have an
effect on the acquisition costs of any future oil and natural gas properties
that Advantage may acquire. As well, cash distributions from the
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 12 of 28
Trust will be highly sensitive to the prevailing price of crude oil and natural
gas. Advantage mitigates this risk by maintaining a hedging program.
Marketing
The marketability and price of oil and natural gas that may be acquired or
discovered by Advantage will be affected by numerous factors beyond its control.
These factors include demand for oil and natural gas, market fluctuations, the
proximity and capacity of oil and natural gas pipelines and processing equipment
and government regulations, including regulations relating to environmental
protection, royalties, allowable production, pricing, importing and exporting of
oil and natural gas. Advantage mitigates this risk by maintaining a portfolio of
assets that are geographically diversified.
Capital Investment
The timing and amount of capital expenditures will directly affect the amount of
income for distribution to Trust Unitholders. Distributions may be reduced, or
even eliminated, at times when significant capital or other expenditures are
made.
Debt Service
Advantage has credit facilities in the amount of $180,000,000. Variations in
interest rates and scheduled principal repayments could result in significant
changes in the amount required to be applied to debt service before payment of
any amounts to Unitholders. Although it is believed that the bank line of credit
is sufficient, there can be no assurance that the amount will be adequate for
the financial obligations of Advantage or that additional funds can be obtained.
The lenders have been provided with security over substantially all of the
assets of Advantage. If Advantage becomes unable to pay its debt service charges
or otherwise commits an event of default such as bankruptcy, the lenders may
foreclose on or sell the properties of the Fund.
Reserves
Although Sproule Associates Limited and the Trust have carefully prepared the
reserve figures included herein and believe that the methods of estimating
reserves have been verified by operating experience, such figures are estimates
and no assurance can be given that the indicated levels of reserves will be
produced. Probable reserves estimated for properties may require revision based
on the actual development strategies employed to prove such reserves. Declines
in the reserves of Advantage which are not offset by the acquisition or
development of additional reserves may reduce the underlying value of Trust
Units to Trust Unitholders. Trust Units will have no value once all of the oil
and natural gas reserves of Advantage have been produced. As a result, holders
of Trust Units will have to obtain the return of capital invested out of cash
flow derived from their investment in such Trust Units.
Environmental Concerns
The oil and natural gas industry is subject to environmental regulation pursuant
to local, provincial and federal legislation. A breach of such legislation may
result in the imposition of fines or issuance of clean-up orders in respect of
Advantage or the properties. Such legislation may be changed to impose higher
standards and potentially more costly obligations on Advantage. There can be no
assurance that the Trust will be able to satisfy its actual future environmental
and reclamation obligations.
Depletion of Reserves
The Trust has certain unique attributes that differentiate it from other oil and
gas industry participants. Distributions of cash flow in respect of the oil and
gas properties, absent commodity price increases or cost effective acquisition
and development activities will decline over time in a manner consistent with
declining production from typical oil, natural gas and natural gas liquids
reserves. Advantage will not be reinvesting cash flow in the same manner as
other industry participants. Accordingly, absent capital injections, Advantage's
initial production levels and reserves will decline.
Advantage's future oil and natural gas reserves and production, and therefore
its cash flows, will be highly dependent on Advantage's success in exploiting
its reserve base and acquiring additional reserves. Without reserve additions
through acquisition or development activities, Advantage's reserves and
production will decline over time as reserves are exploited.
To the extent that external sources of capital, including the issuance of
additional Trust Units, become limited or unavailable, Advantage's ability to
make the necessary capital investments to maintain or expand its oil and natural
gas reserves will be impaired. To the extent that Advantage is required to use
cash flow to finance capital expenditures or property acquisitions, the level of
cash available for distribution will be reduced.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 13 of 28
There can be no assurance that Advantage will be successful in developing or
acquiring additional reserves on terms that meet the Trust's investment
objectives.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 14 of 28
Changes in Legislation
New legislation has been proposed that restricts levels of non-resident
ownership for the Trust to be able to maintain its status under the Tax Act as a
"mutual fund trust". If the Trust ceases to qualify as a "mutual fund trust"
under the Tax Act, the Trust Units will cease to be qualified investments for
registered retirement savings plans, registered education savings plans,
deferred profit sharing plans and registered retirement income funds.
Regulatory Matters
The Corporation's operations are subject to a variety of federal and provincial
laws and regulations, including laws and regulations relating to the protection
of the environment.
CORPORATE GOVERNANCE
Advantage Investment Management Ltd. has been retained by the Trustee of the
Fund and by Advantage Oil & Gas ("AOG") to provide advisory and management
services to the Fund and to AOG. The Board of Directors' mandate is to supervise
the management of the business and affairs of the Fund including the business
and affairs of the Fund delegated to AOG. In particular, all decisions relating
to: (i) the acquisition and disposition of properties for a purchase price or
proceeds in excess of $2 million; (ii) the approval of annual operating and
capital expenditure budgets; and (iii) the establishment of credit facilities,
will be made by the Board.
Computershare Trust Company of Canada, the Trustee of the Fund, has delegated
certain matters to the Board of Directors. These include all decisions relating
to issuance of additional Trust Units and the determination of the amount of
distributions. Any amendment to any material contract to which the Fund is a
party will require the approval of the Board of Directors and, in some cases,
Unitholder approval.
The Board of Directors meets regularly to review the business and affairs of the
Fund and AOG and to make any required decisions.
The Board of Directors consists of seven members, five of whom are unrelated to
the Fund. The Audit Committee and the Independent Reserve Evaluation Committee
each have three members, all of whom are independent. The Human Resources,
Compensation and Corporate Governance Committee has two members, all of whom are
independent. In addition, the Chairman of the Board is not related and is not an
executive officer of the Fund.
A further discussion of the Fund's corporate governance practices can be found
in the Management Proxy Circular.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires
management to make certain judgments and estimates. Changes in these judgments
and estimates could have a material impact on the Trust's financial results and
financial condition. The process of estimating reserves is critical to several
accounting estimates. The process of estimating reserves is complex and requires
significant judgments and decisions based on available geological, geophysical,
engineering and economic data. These estimates may change substantially as
additional data from ongoing development and production activities becomes
available, and as economic conditions impact oil and natural gas prices,
operating costs, and royalty burdens change. Reserve estimates impact net income
through depletion, the provision for site reclamation and abandonment and in the
application of the ceiling test, whereby the value of the oil and natural gas
assets are subjected to an impairment test. The reserve estimates are also used
to assess the borrowing base for the Trust's credit facilities. Revision or
changes in the reserve estimates can have either a positive or a negative impact
on net income or the borrowing base of the Trust.
FINANCIAL REPORTING AND REGULATORY UPDATE
During 2003 there were a number of changes to financial reporting and regulatory
requirements. The changes that will impact Advantage are noted below.
Full Cost Accounting Guideline
In September 2003 the CICA issued Accounting Guideline 16, "Oil and Gas
Accounting - Full Cost" which is effective for fiscal years beginning on or
after January 1, 2004. The new Guideline limits the carrying value of oil and
natural gas properties to their fair value. The fair value is equal to estimated
future cash flows from proved plus probable reserves using future price
forecasts and costs discounted at a risk-free rate. This differs from the
current cost recovery ceiling test that uses undiscounted
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 15 of 28
cash flows and constant prices and costs less general and administrative and
financing costs. There is no write-down of the Fund's oil and gas assets under
either method at December 31, 2003.
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 will adopt the new standard in
the first quarter of 2004. The accrued site restoration liability on the balance
sheet at December 31, 2003 has been calculated on a unit of production basis and
will be reversed in the first quarter of 2004. Property and equipment will be
increased and a liability set up for the amount calculated under the new
standard. The comparative numbers for 2003 will be restated to reflect the new
standard.
Hedging Relationships
Effective for the Fund's 2004 fiscal year, the new CICA Accounting Guideline 13
"Hedging Relationships" requires that hedging relationship be identified,
designated, documented and measured in order for the Fund to apply hedge
accounting. All of the hedges Advantage enters into are effective economic
hedges and Advantage has elected to use the fair value method of accounting for
all derivative transactions as the Fund believes this method provides better
information to readers of the Fund's financial statements. Effective the first
quarter of 2004 Advantage will record the fair value of the derivative financial
instruments at each balance sheet date. The change in fair value from period to
period will be recorded in the income statement on a separate line as unrealized
gains/losses.
Stock Based Compensation
In September 2003 the CICA issued an amendment to section 3870 "Stock Based
compensation and other stock based payments". The amended section is effective
for years beginning on or after January 1, 2004 and requires that companies
measure all stock based payments using the fair value method of accounting and
recognize the compensation expense in their financial statements. The Trust
implemented this standard in 2003.
Continuous Disclosure Obligations
Commencing in the first quarter of 2004 Advantage will be subject to new
disclosure requirements as per National Instrument 51-102 "Continuous Disclosure
Obligations". This new instrument requires shorter reporting periods for filing
annual and interim financial statements, MD&A and Annual Information Form (AIF).
The Instrument also proposes enhanced disclosure in the annual and interim
financial statements, MD&A and AIF.
OUTLOOK
Advantage's objective is to become the leading choice among investors in the oil
and gas trust sector. This will be accomplished through the acquisition,
development and management of long life, low cost reserves with an emphasis on
natural gas and light oil. Significant strides have been made since the
inception of the Fund in May 2001 in accomplishing this objective. The
acquisition of Due West, Gascan, Best Pacific and MarkWest combined with
development drilling has increased established reserves by 46.7 mmboe at a cost
of $8.83 per boe. Since inception of the Fund on May 24, 2001 daily production
has grown by 154% from 6,300 boe/d to the 2003 exit rate of approximately 16,000
boe/d.
In 2004, Advantage will continue to follow its strategy of acquiring properties
that provide low risk development opportunities and enhance long-term cash flow.
Production will also be added through low risk exploitation and development
drilling. To ensure stability of cash distributions and return to Unitholders,
the Fund will maintain a hedging plan to guard against the downward volatility
of commodity prices.
There are a number of trends that have been developing in the oil and gas
royalty trust sector that appear to be shaping the near future of the business
and will have an impact on Advantage's cash available for distribution
including:
o Strong crude oil and natural gas prices which will have a positive
impact for Unitholders.
o Low interest rates which has increased the demand for yield-based
investments.
o An active, but extremely competitive market for the acquisition of
oil and gas properties.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 16 of 28
o A structural advantage for income trusts and a lower cost of capital
when competing with E & P companies for these acquisitions.
With the continued strength of natural gas prices and the anticipated increases
in natural gas production from the 2004 drilling program, Advantage is well
positioned for strong growth in 2004. The level of cash flow available to
Unitholders will be affected by oil and natural gas prices, the $Cdn/US exchange
rate and the Fund's ability to continue to add production and reserves in a cost
effective manner. The following table indicates the Fund's cash flow sensitivity
to changes in prices and production of natural gas, crude oil and NGLs, exchange
rates and interest rates for 2004 based on production of 79,200 mcf/d of natural
gas and 2,800 bbls/d of crude oil and NGLs and before hedging. Advantage is
considerably more sensitive to changes in natural gas prices as compared to oil
due to the Fund's higher natural gas weighting.
Sensitivities
Annual Annual
Cash flow Cash flow per Unit
($000) ($/Unit)
-------------------------------------------------------------------------
Natural gas
AECO price change of $0.25/mcf $ 5,600 $ 0.15
Production change of 1,000 mcf/d $ 1,200 $ 0.03
Crude oil
WTI price change of US$1.00/bbl $ 1,100 $ 0.03
Production change of 200 bbl/d $ 1,800 $ 0.04
Cdn$0.01 change in the Cdn$/US$ exchange
rate $ 2,000 $ 0.05
1% change in interest rate $ 1,300 $ 0.03
Non-GAAP Measures
Cash flow from operations and per Unit cash flow from operations and cash
available for distribution and per Unit cash available for distribution are not
recognized measures under the Canadian generally accepted accounting principles
(GAAP). Management believes that cash flow from operations 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.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 17 of 28
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
December 31, 2003 December 31, 2002
- ---------------------------------------------------------------------------------------
Assets
Current assets
Accounts receivable $ 34,181 $ 24,057
Fixed assets (note 4)
Property and equipment 666,202 488,681
Accumulated depletion and depreciation (153,404) (100,889)
- ---------------------------------------------------------------------------------------
512,798 387,792
Goodwill 27,773 -
- ---------------------------------------------------------------------------------------
$ 574,752 $ 411,849
=======================================================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 53,287 $ 26,236
Cash distributions payable to Unitholders 8,445 4,878
Bank indebtedness (note 5) 102,968 114,222
- ---------------------------------------------------------------------------------------
164,700 145,336
=======================================================================================
Capital lease obligation (note 6) 2,043 -
Provision for future site restoration 8,451 5,396
Future income taxes (note 8) 77,418 77,064
- ---------------------------------------------------------------------------------------
252,612 227,796
=======================================================================================
Unitholders' equity
Unitholders' capital (note 7 and 10) 302,496 161,452
Convertible debentures (note 7) 99,984 55,000
Accumulated income 72,022 36,581
Accumulated cash distributions (152,362) (68,980)
- ---------------------------------------------------------------------------------------
322,140 184,053
- ---------------------------------------------------------------------------------------
$ 574,752 $ 411,849
=======================================================================================
Commitments (note 11)
see accompanying Notes to Consolidated Financial Statements
On behalf of the Board of Directors:
Rodger A. Tourigny Kelly I. Drader
Director Director
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 18 of 28
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED INCOME
(thousands of dollars)
For the year ended For the year ended
December 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------
Revenue
Petroleum and natural gas sales $166,075 $ 97,837
Royalties, net of Alberta Royalty Credit (28,491) (17,344)
- --------------------------------------------------------------------------------------------
137,584 80,493
- --------------------------------------------------------------------------------------------
Expenses
Operating 25,618 18,486
General and administrative 3,216 2,624
Management fee (note 1) 1,679 930
Non-cash performance incentive (note 10) 19,592 16,475
Interest 6,378 4,272
Depletion, depreciation and site restoration 53,822 41,074
- --------------------------------------------------------------------------------------------
110,305 83,861
- --------------------------------------------------------------------------------------------
Income (loss) before taxes 27,279 (3,368)
Future income tax recovery (note 8) (18,138) (15,992)
Income and capital taxes (note 8) 1,253 529
- --------------------------------------------------------------------------------------------
(16,885) (15,463)
- --------------------------------------------------------------------------------------------
Net income 44,164 12,095
Accumulated income, beginning of year 36,581 28,044
Costs on issuance of convertible debentures (4,018) (2,443)
Interest on convertible debentures (4,705) (1,115)
- --------------------------------------------------------------------------------------------
Accumulated income, end of year $ 72,022 $ 36,581
============================================================================================
Net income per Trust Unit (note 7)
Basic and diluted $ 1.29 $ 0.41
============================================================================================
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 19 of 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
For the year ended For the year ended
December 31, 2003 December 31, 2002
- -----------------------------------------------------------------------------------------------
Operating Activities
Net income $ 44,164 $ 12,095
Add (deduct) items not requiring cash:
Non-cash performance incentive 19,592 16,475
Future income taxes (18,138) (15,992)
Depletion, depreciation and site restoration 53,822 41,074
- -----------------------------------------------------------------------------------------------
Funds from operations 99,440 53,652
Changes in non-cash working capital (975) (788)
- -----------------------------------------------------------------------------------------------
Cash provided by operating activities 98,465 52,864
- -----------------------------------------------------------------------------------------------
Financing Activities
Units issued, net of costs 76,436 18,430
Convertible debentures issued, net of costs 85,982 52,557
Interest on convertible debentures (3,935) -
Increase (decrease) in bank debt (11,254) 91,055
Cash distributions to Unitholders (79,815) (45,693)
- -----------------------------------------------------------------------------------------------
Cash provided by financing activities 67,414 116,349
- -----------------------------------------------------------------------------------------------
Investing Activities
Expenditures on property and equipment (76,212) (42,652)
Property acquisitions (1,848) (8,698)
Property dispositions 6,112 800
Acquisition of MarkWest Resources Canada Corp. (note 3i) (97,025) -
Acquisition of Best Pacific Resources Inc. (note 3ii) - (53,448)
Acquisition of Gascan Resources Inc. (note 3iii) - (63,799)
Changes in non-cash working capital 3,094 (527)
- -----------------------------------------------------------------------------------------------
Cash used in investing activities (165,879) (168,324)
- -----------------------------------------------------------------------------------------------
Net increase in cash - 889
Cash (bank indebtedness), beginning of year - (889)
- -----------------------------------------------------------------------------------------------
Cash, end of year $ - $ -
===============================================================================================
Supplementary cash flow information
Interest paid $ 6,414 $ 4,560
Income and capital taxes paid $ 858 $ 1,104
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 20 of 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
All tabular amounts in thousands except for per share amounts
1. STRUCTURE OF THE TRUST
Advantage Energy Income Fund ("Advantage", the "Trust" or the "Fund") was
formed on May 23, 2001 as a result of the conversion of Advantage Oil &
Gas Ltd. ("AOG") (formerly Search Energy Corp.) into a royalty trust. The
purpose of the conversion was to create a trust entity which distributes
substantially all of its cash flow to Unitholders on a monthly basis. The
Fund's strategy is to minimize exposure to exploration risk while focusing
on growth through acquisition and development of producing crude oil and
natural gas properties.
Advantage is an open-ended mutual fund trust created under the laws of the
Province of Alberta pursuant to a Trust Indenture dated April 17, 2001
between AOG and Computershare Investor Services Inc. (formerly the
Montreal Trust Company) as trustee. The Trust commenced operations on May
24, 2001. The beneficiaries of the Trust are the holders of the Trust
Units (the "Unitholders").
The principal undertaking of the Trust is to indirectly acquire and hold,
through its wholly-owned subsidiary, AOG, interests in petroleum and
natural gas properties and assets related thereto. The Trust's primary
assets are currently the common shares of AOG, a royalty in the producing
properties of AOG (the "AOG Royalty") and notes of AOG (the "AOG Notes").
In accordance with the terms of the Trust Indenture, the Trust will make
cash distributions to Unitholders of the interest income earned from the
AOG Notes and royalty income earned from the AOG Royalty. The AOG Royalty
and the AOG Notes result in the effective transfer of the economic
interest in the properties of AOG to the Trust. However, while the royalty
is a contractual interest in the properties owned by AOG, it does not
confer ownership in the underlying resource properties.
The Trust is managed by Advantage Investment Management Ltd. (the
"Manager"). The Manager receives a management fee and an incentive fee
pursuant to a Management Agreement as approved by the Board of Directors.
Management fees are calculated based on 1.5% of operating cash flow which
is defined as revenues less royalties and operating costs. Management fees
also include an incentive fee equal to 10% of the amount by which the
total return to investors exceeds 8% (see note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The management of Advantage Energy Income Fund prepares its consolidated
financial statements in accordance with Canadian generally accepted
accounting principles. The preparation of consolidated financial
statements requires management to make estimates and assumptions that
effect the reported amount of assets and liabilities and disclosures of
contingencies at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period. The following
significant accounting policies are presented to assist the reader in
evaluating these consolidated financial statements and, together with the
notes, should be considered an integral part of the consolidated financial
statements.
AOG is an oil and natural gas exploitation and development company
operating in Western Canada that is a wholly-owned subsidiary of the
Trust. These financial statements include the accounts of the Trust and
AOG on a consolidated basis. All intercompany balances and transactions
have been eliminated.
Property and equipment
(a) Petroleum and natural gas properties and related equipment
The Fund follows the full cost method of accounting in accordance with the
guideline issued by the Canadian Institute of Chartered Accountants
whereby all costs associated with the acquisition of and the exploration
for and development of petroleum and natural gas reserves, whether
productive or unproductive are capitalized in a Canadian cost centre and
charged to income as set out below. Such costs include lease acquisition,
drilling, geological and geophysical costs and overhead expenses related
to exploration and development activities. Costs of acquiring and
evaluating unproved properties are excluded from depletion calculations
until it is determined whether or not proven reserves are attributable to
the properties or impairment occurs.
Gains or losses are not recognized upon disposition of petroleum and
natural gas properties unless crediting the proceeds against accumulated
costs would result in a change in the rate of depletion of 20% or more.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 21 of 28
Depletion of petroleum and natural gas properties and depreciation of
lease and well equipment is provided on accumulated costs using the unit
of production method based on estimated proved petroleum and natural gas
reserves, before royalties, as determined by independent engineers. For
purposes of the depletion calculation, proven petroleum and natural gas
reserves are converted to a common unit of measure on the basis of one
barrel of oil or liquids being equal to six mcf of natural gas.
The depletion and depreciation cost base includes total capitalized costs,
less costs of unproved properties, plus a provision for future development
costs of proven undeveloped reserves.
The net carrying value of the Trust's petroleum and natural gas properties
and production equipment is limited to an ultimate recoverable amount.
This amount is the aggregate of estimated future net revenues from proved
reserves and the costs of unproved properties, net of impairment
allowances, less future estimated production costs, general and
administrative costs, financing costs, site restoration and abandonment
costs, and income taxes. Future net revenues are estimated using prices
and costs without escalation or discounting, and the income tax and
Alberta Royalty Credit legislation in effect at the year-end.
(b) Furniture and equipment
The Fund records furniture and equipment at cost and provides depreciation
on the declining balance method at a rate of 20% per annum which is
designed to amortize the cost of the assets over their estimated useful
lives.
Future site restoration
The estimated cost of future site restoration and abandonment is based on
the current cost and the anticipated method and extent of site restoration
in accordance with existing legislation and industry practice. The annual
charge, provided for on a unit of production basis, is accounted for as
part of depletion, depreciation and site restoration expense. Actual site
restoration expenditures are charged to the accumulated provision account
as incurred.
Measurement uncertainty
The amounts recorded for depletion and depreciation of property and
equipment and the provision for future site restoration costs are based on
estimates. The ceiling test calculation is based on estimates of proved
reserves, production rates, oil and natural gas prices, future costs and
other relevant assumptions. By their nature, these estimates are subject
to measurement uncertainty and the effect on the consolidated financial
statements of changes in such estimates in future years could be
significant.
Joint operations
The accounts of the Trust reflect its proportionate interest in
exploration and production activities conducted jointly with others.
Cash distributions
Cash distributions are calculated on an accrual basis and are paid to
Unitholders monthly based on cash available for distributions.
Income taxes
The Fund is a taxable trust under the Income Tax Act (Canada). Any taxable
income is allocated to the Unitholders and therefore no provision for
income taxes relating to the Fund is included in these financial
statements.
The Corporation follows the liability method of accounting for income
taxes. Under this method future tax assets and liabilities are determined
based on differences between financial reporting and income tax bases of
assets and liabilities, and are measured using substantially enacted tax
rates and laws expected to apply when the differences reverse. The effect
on future tax assets and liabilities of a change in tax rates is
recognized in net income in the period in which the change is
substantially enacted.
Financial instruments
From time to time, the Fund uses various financial instruments to manage
risk associated with crude oil and natural gas price fluctuations. These
instruments are not used for trading or speculative purposes. Proceeds and
costs realized from holding the related contracts all of which constitute
effective hedges, are recognized in oil and gas revenues at the time that
each transaction under a contract is settled (see note 9).
Goodwill
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 22 of 28
Goodwill is the excess purchase price over the fair value of identifiable
assets and liabilities acquired. Goodwill is not amortized. Goodwill
impairment is assessed annually at December 31, or as economic events
dictate, by comparing the fair value of the reporting unit to its carrying
value, including goodwill. If the fair value of the reporting unit is less
than its carrying value, a goodwill impairment loss is recognized as the
excess of the carrying value of the goodwill over the fair value of the
goodwill.
Unit-based compensation
The Trust has a unit-based compensation plan (the "Plan") for external
directors of the Trust, which is described in Note 7. The exercise price
of the rights granted under the Plan may be reduced in future periods in
accordance with the terms of the Plan. The amount of the reduction cannot
be reasonably estimated as it is dependent upon a number of factors
including, but not limited to, future prices received on the sale of oil
and natural gas, future production of oil and natural gas, determination
of amounts to be withheld from future distributions to Unitholders to fund
capital expenditures and the purchase and sale of property, plant and
equipment. Therefore, it is not possible to determine a fair value for the
rights granted under the Plan using a traditional option pricing model and
compensation expense has been determined based on the intrinsic value of
the rights at the date of exercise or at the date of the financial
statement for unexercised rights. Compensation expense associated with
rights granted under the Plan is deferred and recognized in earnings over
the vesting period of the Plan with a corresponding increase or decrease
in contributed surplus. Changes in the intrinsic value of unexercised
rights after the vesting period are recognized in earnings in the period
of change with a corresponding increased or decrease in contributed
surplus. This method of determining compensation expense may result in
large fluctuations, even recoveries, in compensation expense due to
changes in the underlying Trust unit price. Recoveries of compensation
expense will only be recognized to the extent of previously recorded
cumulative compensation expense associated with rights exercised or
outstanding at the date of the financial statements. Consideration paid
upon the exercise of the rights together with the amount previously
recognized in contributed surplus is recorded as an increase in
Unitholders' capital.
The Trust has not incorporated an estimated forfeiture rate for rights
that will not vest, rather, the Trust accounts for actual forfeitures as
they occur.
Per unit amounts
Net income per unit is calculated using the weighted average number of
Units outstanding during the year. Diluted net income per unit is
calculated using the treasury stock method to determine the dilutive
effect of unit-based compensation.
Revenue recognition
Petroleum and natural gas revenues are recognized when the title and risks
pass to the purchaser.
3. ACQUISITIONS
(i) MarkWest Resources Canada Corp.
On December 2, 2003 Advantage acquired all of the issued and outstanding
shares of MarkWest Resources Canada Corp. ("MarkWest") for cash
consideration of $97.0 million. The acquisition is being accounted for
using the purchase method with the results of operations included in the
consolidated financial statements as of the closing date of the
acquisition. The purchase price has been allocated as follows:
Net assets acquired and liabilities
assumed: Consideration:
Property and equipment $ 105,573 Cash $ 96,769
Goodwill 27,773 Acquisition costs incurred 256
--------
Net working capital (14,027) $ 97,025
--------
Capital lease obligation (2,054)
Future income taxes (18,492)
Future site restoration (1,748)
---------
$ 97,025
---------
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 23 of 28
(ii) Best Pacific Resources Ltd.
On November 18, 2002 Advantage acquired all of the issued and outstanding
shares of Best Pacific Resources Ltd. ("Best Pacific"), an oil and natural
gas company, for cash consideration of $53.4 million. The acquisition has
been accounted for using the purchase method with the results of
operations included in the consolidated financial statements from the date
of acquisition. The purchase price was allocated as follows:
Net assets acquired and liabilities
assumed: Consideration:
Property and equipment $ 46,852 Cash $ 51,849
Future income taxes 7,737 Acquisition costs incurred 1,599
--------
Net working capital 212
$ 53,448
Future site restoration (1,353) --------
--------
$ 53,448
--------
(iii) Gascan Resources Ltd.
On January 4, 2002 Advantage acquired the crude oil and natural gas assets
of Gascan Resources Ltd. ("Gascan") for cash consideration of $70.7
million. Results from operations are included in the Fund's consolidated
financial statements from the date of acquisition. The acquisition has
been accounted for as a purchase as of the closing date of the
acquisition. The purchase price has been allocated as follows:
Net assets acquired and liabilities
assumed: Consideration:
Property and equipment $ 108,592 Cash $ 69,000
Future income taxes (37,893) Acquisition costs incurred 1,699
--------- --------
$ 70,699 $ 70,699
--------- --------
4. FIXED ASSETS
During the year ended December 31, 2003, Advantage capitalized general and
administrative expenditures directly related to exploration and
development activities of $1,804,000 ( 2002 - $1,319,000).
Costs of $22,300,000 (2002 - $18,010,000) for unproven properties have
been excluded from the calculation of depletion expense, and future
development costs of $43,152,000 (2002 - $10,030,000) have been included
in costs subject to depletion.
As at December 31, 2003, the estimated future site restoration costs to be
accrued over the life of the remaining proved reserves was $21,099,000
(2002 - $16,350,000). Included in depletion and depreciation expense is
$1,307,000 (2002 - $947,000) of site restoration expense for the year
ended December 31, 2003.
5. BANK INDEBTEDNESS
Advantage has an agreement with a Canadian chartered bank which provides
for a $170 million extendible revolving loan facility and a $10 million
operating loan facility both of which mature on May 28, 2004. The loan's
interest rate is based on either prime or bankers acceptance rates at the
Trust's option subject to certain basis point or stamping fee adjustments
ranging from 0% to 2% depending on the Trust's debt to cash flow ratio.
The credit facilities are secured by a $250 million floating charge demand
debenture, a general security agreement and a subordination agreement from
the Trust covering all assets and cash flows. For the purpose of the cash
flow statement the bank overdraft amount is considered cash equivalents.
At December 31, 2003, the effective interest rate on the outstanding
amounts under the facility was approximately 4.3%.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 24 of 28
6. CAPITAL LEASE OBLIGATIONS
The Trust has capital leases on compressors. Future minimum lease payments
at December 31, 2003 consist of the following:
2004 $ 443
2005 443
2006 443
2007 1,364
--------------------------------------------------------------------------
$ 2,693
Less amounts representing interest @ 5.5% (329)
--------------------------------------------------------------------------
2,364
Current portion (321)
--------------------------------------------------------------------------
$ 2,043
==========================================================================
7. UNITHOLDERS' EQUITY
(i) Unitholders' Capital
(a) Authorized
(i) Unlimited number of voting Trust Units
(b) Issued
Number of Units Amount
--------------------------------------------------------------------------
Balance at December 31, 2001 24,598,782 $ 128,616
Issued for cash, net of costs 2,500,000 18,430
Non-cash performance incentive 1,102,163 14,406
--------------------------------------------------------------------------
Balance at December 31, 2002 28,200,945 161,452
Issued for cash, net of costs 5,100,000 76,136
Units issued on exercise of options 35,000 300
Issued on conversion of debentures 3,381,261 45,016
--------------------------------------------------------------------------
Balance at December 31, 2003 36,717,206 $ 282,904
Non-cash performance incentive 1,099,104 19,592
--------------------------------------------------------------------------
37,816,310 $ 302,496
==========================================================================
On January 29, 2002 Advantage issued 2,500,000 Trust Units at $7.90 per
Trust Unit. Total net proceeds were $18.4 million (net of issue costs of
$1.3 million).
On January 27, 2003 Advantage issued 1,102,163 Trust Units to satisfy the
obligation related to the performance incentive (see note 10).
On December 2, 2003 Advantage issued 5,100,000 Trust Units at $15.75 per
Trust Unit. Total net proceeds were $76.1 million (net of issue costs of
$4.2 million).
On January 27, 2004 the Trust issued 1,099,104 Trust Units to satisfy the
obligation related to the 2003 performance incentive fee (see note 10).
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 25 of 28
(ii) Convertible Debentures
10% debentures 9% debentures 8.25% debentures Total debentures
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2002 55,000 - - 55,000
Issued - 30,000 60,000 90,000
Converted to Trust Units (44,786) - (230) (45,016)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2003 10,214 30,000 59,770 99,984
====================================================================================================
On October 18, 2002 Advantage issued $55 million principal amount of 10%
convertible unsecured subordinated debentures. The debentures mature on
November 1, 2007, pay interest semi-annually and are convertible at the
option of the holder into Trust Units of Advantage at $13.30 per Unit plus
accrued and unpaid interest. The debentures and the related interest
obligations will be 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. Issue costs associated with
the convertible debenture approximated $2.4 million.
On July 8, 2003 Advantage issued $30 million principal amount of 9%
convertible unsecured subordinated debentures. The debentures mature on
August 1, 2008, pay interest semi-annually and are convertible at the
option of the holder into Trust Units of Advantage at $17.00 per Unit plus
accrued and unpaid interest. Issue costs associated with the convertible
debentures approximated $1.5 million and have been charged to accumulated
income.
On December 2, 2003 Advantage issued $60 million principal amount of 8.25%
convertible unsecured subordinated debentures. The debentures mature on
February 1, 2009, pay interest semi-annually and are convertible at the
option of the holder into Trust Units of Advantage at $16.50 per Unit plus
accrued and unpaid interest. Issue costs associated with the convertible
debentures approximated $2.5 million and have been charged to accumulated
income.
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 year ended December 31, 2003
$45,016,000 debentures were converted resulting in the issuance of
3,381,261 Advantage Units.
(iii) Trust Units Rights Incentive Plan
Effective June 25, 2002 a Trust Units Rights Incentive Plan for external
Directors of the Fund was established and approved by the Unitholders of
Advantage. A total of 250,000 Units have been reserved for issuance under
the plan. The initial exercise price of rights granted under the plan may
not be less than the current market price of the Trust Units as of the
date of the grant and the maximum term of each right is not to exceed ten
years. At the option of the rights holder the exercise price of the rights
can be adjusted downwards over time based upon distributions made by the
Trust to Unitholders. No compensation expense is recognized for the rights
plan when the rights are issued. Any consideration received on exercise of
the Unit right is credited to share capital.
Number Price
-------------------------------------------------------------------------
Balance at December 31, 2002 175,000 $ 10.58
Exercised (35,000)
Reduction of exercise price - (2.71)
-------------------------------------------------------------------------
Balance at December 31, 2003 140,000 $ 7.87
=========================================================================
The Trust has elected to prospectively adopt amendments to CICA Handbook
Section 3870, "Stock-based Compensation and Other Stock-based Payments"
pursuant to the transitional provisions contained therein. Under this
amended standard, the Trust must account for compensation expense based on
the fair value of rights granted under its unit-based compensation plan.
As the Trust is unable to determine the fair value of the rights granted,
compensations expense has been determined based on the intrinsic value of
the rights at the exercise date or at the date of the financial statements
for unexercised rights. As there were no Trust Unit Rights issued in 2003,
there was no impact on net income.
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 26 of 28
Had the Trust adopted this standard for rights granted since January 1,
2002 pro forma net income would have decreased by $1.0 million (2002 -
$0.4 million).
Pro Forma Results 2003 2002
- --------------------------------------------------------------------------------
Net income as reported $ 44,164 $ 12,095
Less: compensation expense for rights issued in 2002 1,000 410
- --------------------------------------------------------------------------------
Pro forma net income $ 43,164 $ 11,685
Net income per Trust Unit - basic and diluted
As reported $ 1.29 $ 0.41
Pro forma $ 1.26 $ 0.39
================================================================================
(iv) Per Unit Amounts
The calculation of net income per Trust Unit is based on the basic and
diluted weighted average number of Trust Units outstanding during the year
ended December 31, 2003 of 30,536,236 and 34,040,645 respectively and
basic and diluted Trust Units outstanding of 26,900,152 and 27,829,645
respectively for the year ending December 31, 2002.
8. INCOME TAXES
The taxable income of the Fund is comprised of interest income related to
the AOG Notes and royalty income from the AOG Royalty less deductions for
Canadian Oil and Gas Property Expense (COGPE) and unit issue costs.
The provision for income taxes varies from the amount that would be
computed by applying the combined Canadian federal and provincial income
tax rates for the following reasons:
For the year For the year
ended ended
Dec. 31, 2003 Dec. 31, 2002
- ------------------------------------------------------------------------------------------
Income (loss) before taxes $ 27,279 $ (3,368)
- ------------------------------------------------------------------------------------------
Expected income tax expense (recovery) at statutory rates 11,131 (1,424)
Increase (decrease) in income taxes resulting from:
Non-deductible Crown charges 7,029 6,044
Resource allowance (8,798) (6,458)
Amounts included in trust income and other (27,500) (14,154)
- ------------------------------------------------------------------------------------------
Future income tax recovery (18,138) (15,992)
Income and capital taxes 1,253 529
- ------------------------------------------------------------------------------------------
$ (16,885) $ (15,463)
==========================================================================================
The components of the future income tax liability at December 31 are as
follows:
2003 2002
- ------------------------------------------------------------------------------------------
Property and equipment in excess of tax basis $ 88,236 $ 80,402
Future site restoration deductions (2,872) (1,711)
Non-capital tax loss carry forward (8,327) (1,877)
Other 381 250
- ------------------------------------------------------------------------------------------
Future income tax liability $ 77,418 $ 77,064
==========================================================================================
The Fund has non-capital tax loss carry forward of approximately $21.0
million of which $0.3 million expires in 2006, $12.5 million in 2009 and
$8.2 million in 2010.
9. FINANCIAL INSTRUMENTS
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 27 of 28
Financial instruments of the Fund consist of current assets, current
liabilities and bank indebtedness. As at December 31, 2003, there are no
significant differences between the carrying amounts reported on the
balance sheet and the estimated fair values of the financial instruments
due to the short terms to maturity and the floating interest rate on the
bank debt. Substantially all of the Fund's accounts receivable are due
from customers in the oil and gas industry and are subject to normal
industry credit risks. The Trust is also exposed to interest rate risks to
the extent that bank debt is at a floating rate of interest
The Fund uses various types of derivative financial instruments to reduce
its exposure to fluctuations in commodity prices. The fair value of these
derivative instruments are based on an estimate of the amounts that would
have been paid to or received from counterparties to settle these
instruments. The Fund is exposed to losses in the event of default by the
counterparties to these instruments. The Fund manages this risk by dealing
with financially sound counterparties.
As at December 31, 2003 the Fund had no outstanding hedge contracts.
10. 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.
The Manager earns the performance incentive fee when the Fund's total
annual return exceeds 8%. The total annual return was calculated at the
end of the year by dividing the year over year change in Unit price plus
cash distributions by the opening Unit price. The 2003 opening and closing
Unit prices were $13.07 and $17.83 respectively (2002 opening and closing
Unit prices of $8.02 and $13.07 respectively). Cash distribution for the
year amounted to $2.71 per Trust Unit (2002 distribution of $1.73). 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. On January 21, 2004 the Fund issued
1,099,104 Advantage Trust Units to satisfy the performance fee obligation.
The Manager does not receive any form of compensation in respect of
acquisition or divestiture activities.
11. COMMITMENTS
Advantage has lease commitments relating to office buildings. The
estimated annual minimum operating lease rental payments for the
buildings, after deducting sublease income are as follows:
2004 $ 804
2005 737
2006 737
2007 704
2008 283
--------
$ 3,265
--------
On February 24, 2004 the Fund announced that it had entered the following
natural gas hedge transactions for 2004 and 2005:
Natural Gas - April to December 2004
Volume 50.4 mmcf/d
Fixed price (average) $6.12/mcf
Natural Gas - January to March 2005
Volume 10.5 mmcf/d
Fixed price (average) $6.30/mcf
PRESS RELEASE April 13, 2004
ADVANTAGE ENERGY INCOME FUND Page 28 of 28
The information in this news 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
Ph: (416) 945-6636
Toll free: 1-866-393-0393
ADVANTAGE ENERGY INCOME FUND
3100, 150 - 6th Avenue SW
Calgary, Alberta
T2P 3Y7
Phone: (403) 261-8810
Fax: (403) 262-0723
Web Site: www.advantageincome.com E-mail: advantage@advantageincome.com