EXHIBIT 99.14
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ADVANTAGE ENERGY INCOME FUND - NEWS RELEASE
AUGUST 11, 2005
ADVANTAGE ANNOUNCES 2ND QUARTER RESULTS,
CONFERENCE CALL & WEBCAST ON AUGUST 12, 2005
Advantage Energy Income Fund (TSX: AVN.UN) ("Advantage" or the "Fund") is
pleased to announce its unaudited operating and financial results for the second
quarter ended June 30, 2005.
A conference call will be held on Friday, August 12, 2005 at 9:00 a.m. (11:00
a.m. Eastern time) and 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 Friday, August 12,
2005 until approximately midnight, August 19, 2005 and can be accessed by
dialing toll free 1-877-660-6853. The account number is 286, conference ID
number 162510 (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
Three Three Six Six
months ended months ended months ended months ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
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FINANCIAL ($000)
Revenue before royalties $ 87,476 $ 54,181 $ 170,685 $ 108,017
per Unit (1) $ 1.53 $ 1.38 $ 3.06 $ 2.79
per boe $ 48.01 $ 38.87 $ 45.67 $ 38.58
Funds from operations $ 49,705 $ 30,693 $ 95,060 $ 60,593
per Unit (2) $ 0.87 $ 0.77 $ 1.69 $ 1.56
per boe $ 27.28 $ 22.02 $ 25.43 $ 21.64
Net income $ 26,537 $ 9,770 $ 30,552 $ 14,218
per Unit (1) $ 0.46 $ 0.25 $ 0.55 $ 0.37
Cash distributions $ 44,693 $ 27,450 $ 91,032 $ 53,717
per Unit (2) $ 0.78 $ 0.69 $ 1.62 $ 1.38
Payout ratio 90% 89% 96% 89%
Working capital deficit (3) $ 17,283 $ 17,349 $ 17,283 $ 17,349
Bank debt $ 237,302 $ 161,707 $ 237,302 $ 161,707
Convertible debentures (face value) $ 143,881 $ 66,396 $ 143,881 $ 66,396
OPERATING
Daily Production
Natural gas (mcf/d) 79,492 73,283 82,902 74,466
Crude oil and NGLs (bbls/d) 6,772 3,106 6,832 2,974
Total boe/d @ 6:1 20,021 15,320 20,649 15,385
Average prices (including hedging)
Natural gas ($/mcf) $ 7.30 $ 6.20 $ 6.87 $ 6.24
Crude oil & NGLs ($/bbl) $ 56.24 $ 45.36 $ 54.63 $ 43.24
SUPPLEMENTAL (000)
Trust Units outstanding at end of period 57,340 39,952 57,340 39,952
Trust Units issuable
Convertible Debentures 7,318 4,074 7,318 4,074
Exchangeable Shares 120 - 120 -
Trust Units Rights Incentive Plan 310 310 310 310
Trust Units outstanding
and issuable at end of period 65,088 44,336 65,088 44,336
Weighted average Units 57,274 39,326 55,741 38,653
(1) based on weighted average number of Trust Units outstanding
(2) based on number of Trust Units outstanding at each cash distribution date
(3) working capital deficit excludes hedging liability
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 2 OF 20
CASH DISTRIBUTIONS TO UNITHOLDERS
o The Fund declared three distributions during the quarter totalling $0.78 per
Unit. The distributions amounted to $0.28 per Unit, payable on May 16 and
$0.25 per Unit payable on June 15 and July 15 to Unitholders of record on
April 29, May 31 and June 30, respectively.
o Funds from operations for the second quarter was $49.7 million or $0.87 per
Unit compared to $30.7 million or $0.77 per Unit for the same period of
2004. This represents a payout ratio of 90% of funds from operations for the
three months ended June 30, 2005.
OIL & NATURAL GAS PRODUCTION
o Production volumes increased by 31% to 20,021 boe/d in the second quarter
of 2005 from 15,320 boe/d in the second quarter of 2004. Second quarter
production declined by approximately 6% from the first quarter of 2005 due
to the shut-in of approximately 520 boe/d from plant turnarounds and delays
in bringing new wells on-stream as a result of early spring breakup and
extremely wet weather conditions.
NATURAL GAS
o Natural gas production for the second quarter of 2005 was 79.5 mmcf/d, an
8% increase over the 73.3 mmcf/d reported in the second quarter of 2004.
o Increased production in 2005 is primarily the result of the acquisitions of
the Anadarko assets in September 2004 and Defiant Energy in December 2004.
Partially offsetting the increased production was lower volumes related to
flush production declines from the company's active natural gas drilling
program.
CRUDE OIL & NGLS
o Crude oil and natural gas liquids production averaged 6,772 bbls/d compared
to 3,106 bbls/d in the second quarter of 2004 representing an increase of
118%.
o Increased liquids production is primarily the result of the Anadarko asset
acquisition in September 2004, the Defiant Energy acquisition in December
2004 and successful drilling on the Fund's Nevis property. Advantage's
crude oil production is mainly comprised of long life assets that exhibit
low rates of decline.
DEVELOPMENT ACTIVITY
NEVIS, ALBERTA
o During the second quarter of 2005 Advantage drilled three 100% working
interest horizontal oil wells bringing the total for 2005 to ten wells. At
the time of writing, all but two of the wells have been completed and
tied-in. The remaining eight wells were brought on-stream late in the
second quarter and during the third quarter and as such did not make a
significant contribution to the second quarter production volumes. Also at
Nevis, the Fund constructed a central battery and added incremental
compression in order to handle additional production volumes from the
Fund's successful drilling program.
STEELMAN, SASKATCHEWAN
o During the second quarter the Fund drilled two successful 100% working
interest horizontal oil wells at Steelman. These two wells were brought
on-stream early in the third quarter.
OTHER AREAS
o The Fund drilled a 100% working interest well at Gadsby, Alberta which was
tied-in during the third quarter.
o At Chain, Alberta a five well multi-zone shallow gas program was completed
in the second quarter and will be tied-in during the third quarter.
o At Sweetgrass, Alberta the Fund drilled a 50% working interest gas well and
is following up with a second location in the third quarter to further
define the pool boundary.
o At Sunset, Alberta the Fund drilled two 70% working interest oil wells.
These wells will be brought on-stream in the third quarter.
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 3 OF 20
MANAGEMENT'S DISCUSSION & ANALYSIS
The following Management's Discussion and Analysis ("MD&A"), dated as of August
11, 2005, provides a detailed explanation of the financial and operating results
of Advantage Energy Income Fund ("Advantage" or the "Fund") for the three months
ended June 30, 2005 and should be read in conjunction with the financial
statements contained within this interim report and the audited financial
statements and MD&A for the year ended December 31, 2004. All per barrel of oil
equivalent ("boe") amounts are stated at 6:1 conversion rate for natural gas to
oil.
CASH DISTRIBUTIONS
Cash distributions to Unitholders for the three months ended June 30, 2005 were
$0.78 per Unit, or $44.7 million and $1.62 per Unit, or $91.0 million for the
six months ended June 30, 2005. The second quarter 2005 distributions were
comprised of $0.28 per Unit for April and $0.25 per Unit for each of May and
June. The amount distributed for the quarter represents 90% of total funds from
operations during the period, compared to 89% in the second quarter of 2004.
Since inception, the Fund has distributed $361 million or $10.33 per Unit which
represents a total payout ratio of 93%.
Cash distributions to Unitholders were paid as follows:
Period ended Record date Payment date Distribution Distribution per Unit
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April 30, 2005 April 29, 2005 May 16, 2005 $ 16,036 $ 0.28
May 31, 2005 May 31, 2005 June 15, 2005 $ 14,322 $ 0.25
June 30, 2005 June 30, 2005 July 15, 2005 $ 14,335 $ 0.25
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$ 44,693 $ 0.78
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PRODUCTION
Natural gas production for the three months ended June 30, 2005 averaged 79.5
mmcf/d, an increase of 8% over the 73.3 mmcf/d produced during the same period
of 2004. For the six months ended June 30, 2005, natural gas production averaged
82.9 mmcf/d, an increase of 11% from the 74.5 mmcf/d produced during the first
six months of 2004. The growth in gas production over 2004 was the result of the
property acquisition from Anadarko Canada Corporation on September 15, 2004 and
the acquisition of Defiant Energy Corporation on December 21, 2004 partially
offset by flush production declines that resulted from the Fund's capital
program.
Crude oil and natural gas liquids ("NGLs") production for the three months ended
June 30, 2005 averaged 6,772 bbls/d, an increase of 118% as compared with 3,106
bbls/d produced in the second quarter of 2004. Crude oil and NGLs production for
the first six months of 2005 averaged 6,832 bbls/d, an increase of 130% as
compared to 2,974 bbls/d for the same period of 2004. The significant increase
in liquids production was primarily the result of the acquisition of the
Anadarko assets, Defiant Energy and production additions as a result of the
ongoing success of the Fund's drilling program at Nevis, Alberta.
Declines in production for the second quarter of 2005 compared to the first
quarter of 2005 were primarily the result of flush production declines on the
2004 capital expenditure program combined with delays in production additions
from the Fund's 2005 capital program due to extremely wet field conditions. In
addition, plant turnarounds and maintenance during the second quarter of 2005
caused the shut-in of approximately 520 boe/d during the quarter.
COMMODITY PRICES & MARKETING
NATURAL GAS
Natural gas prices for the three months ended June 30, 2005 averaged $7.27/mcf
($7.30/mcf including hedging), compared to $6.65/mcf ($6.20/mcf including
hedging) for the three months ended June 30, 2004. For the three months ended
June 30, 2005 AECO daily prices averaged $7.35/mcf as compared to $6.64/mcf for
the second quarter of 2004. For the six months ended June 30, 2005, natural gas
prices averaged $6.88/mcf ($6.87/mcf including hedging), compared to $6.46/mcf
($6.24/mcf including hedging) realized in the same period of 2004.
Natural gas prices continue to strengthen as a result of summer heat in North
America which has increased gas fueled air conditioning demand which has also
continued to erode North American natural gas storage levels. Advantage
continues to believe that the short and long term pricing fundamentals for
natural gas remain strong. These fundamentals include (i) the continued strength
of crude oil prices which has eliminated the economic advantage of fuel
switching away from natural gas, (ii) continued tightness in supply that has
resulted from increased demand and the decline in North American natural gas
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 4 OF 20
production levels and (iii) ongoing weather related factors such as hot summers,
cold winters and annual hurricane season in the Gulf of Mexico all of which have
an impact on the delicate supply/demand balance that exists. In the second
quarter of 2005 Advantage's production was weighted 66% to natural gas.
CRUDE OIL
Crude oil and NGLs prices averaged $56.57/bbl ($56.24/bbl including hedging) for
the three months ended June 30, 2005, a 25% increase as compared with $45.36/bbl
($45.36/bbl including hedging) for the same period of 2004. For the six months
ended June 30, 2005, crude oil and NGLs prices averaged $54.79/bbl ($54.63/bbl
including hedging) compared to $43.24/bbl ($43.24/bbl including hedging) for the
same period of 2004. 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 continue to
be strong with many factors affecting the continued strength including (i)
supply management and supply restrictions by the OPEC cartel, (ii) ongoing civil
unrest in the Middle East, Venezuela and Nigeria, (iii) increased world wide
demand, particularly in China and India and (iv) North American refinery
capacity constraints. The price of WTI averaged $US53.13/bbl during the second
quarter of 2005 compared to $US38.31/bbl in 2004. Partially offsetting the
strength of WTI oil prices has been the strength of the Canadian dollar relative
to the U.S. dollar.
PRICE RISK MANAGEMENT
Advantage's natural gas hedging program resulted in gains of $0.2 million during
the second quarter of 2005 or $0.03/mcf compared to hedging losses of $3.0
million or $0.45/mcf for the same period of 2004. For 2005 the Fund has
currently hedged 56.9 mmcf/d for the period April to October at a variety of
prices through both fixed price contracts and price collars.
Advantage's crude oil hedging program resulted in losses of $0.2 million or
$0.33/bbl during the second quarter of 2005. Advantage did not have any crude
oil hedges in place for the same period of 2004. The Fund has currently hedged
3,500 bbls/d for the period April to October at a variety of prices through both
fixed price contracts and price collars.
As at June 30, 2005 the Fund has the following hedges in place:
DESCRIPTION OF HEDGE TERM VOLUME AVERAGE PRICE
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NATURAL GAS - AECO
Fixed price April to October 2005 34,123 mcf/d Cdn$7.45/mcf
Collar April to October 2005 11,374 mcf/d Floor Cdn$6.86/mcf
Ceiling Cdn$8.18/mcf
Collar April to October 2005 11,374 mcf/d Floor Cdn$7.02/mcf
Ceiling Cdn$8.02/mcf
CRUDE OIL - WTI
Fixed price April to September 2005 1,750 bbls/d US$52.11/bbl
Collar April to October 2005 1,750 bbls/d Floor US$47.00/bbl
Ceiling US$56.75/bbl
At June 30, 2005, the mark-to-market valuation of Advantage's outstanding hedges
was a loss of $1.3 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. The Fund continues to monitor the commodity
markets with a view to provide cash flow stability.
ROYALTIES
Total royalties amounted to $16.3 million for the three months ended June 30,
2005 or 18.6% of pre-hedged revenue compared with $10.6 million or 18.5% of
pre-hedged revenue for same period of 2004. For the six months ended June 30,
2005, total royalties were $32.7 million or 19.1% of pre-hedged revenue compared
with $21.1 million or 19.0% for the similar period of 2004. Advantage expects
royalty rates will average approximately 20% based on the current portfolio of
properties. The royalty rate for the three months ended June 30, 2005 was below
the 20% anticipated royalty rate due to royalty adjustments and refunds received
during the second quarter related to prior periods.
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 5 OF 20
OPERATING COSTS
Operating costs for the second quarter of 2005 amounted to $13.3 million or
$7.31/boe compared with $8.2 million or $5.90/boe for the three months ended
June 30, 2004. Operating costs for the six months ended June 30, 2005 were $26.4
million or $7.05/boe as compared to $16.5 million or $5.91/boe for the same
period of 2004. The increase in operating cost amounts reflects the significant
increase in overall production. Higher per boe operating costs are partially due
to the higher costs associated with properties acquired from Anadarko and
Defiant during the second half of 2004. In addition, operating costs have
steadily increased over the past several years due to higher power costs and
higher field costs associated with the shortage of supplies and services that
has resulted from the high level of industry activity.
GENERAL AND ADMINISTRATIVE AND MANAGEMENT FEES
General and administrative ("G&A") expense for the three months ended June 30,
2005 amounted to $1.6 million or $0.86/boe compared with $0.8 million or
$0.56/boe for the three months ended June 30, 2004. For the six months ended
June 30, 2005, G&A expense was $3.0 million or $0.81/boe, compared to $1.6
million or $0.58/boe for the same period of 2004. G&A expense increased due to
higher staff levels that resulted from the growth of the Fund from production
additions and acquisitions.
Management fees for the three months ended June 30, 2005 amounted to $0.9
million compared to $0.5 million for the second quarter of 2004. On a boe basis,
management fees were $0.48/boe compared to $0.38/boe in 2004. For the six months
ended June 30, 2005 management fees were $1.7 million or $0.45/boe compared to
$1.1 million or $0.38/boe for the similar period of 2004. Management fees are
calculated based on 1.5% of operating cash flow, which is defined as revenues
less royalties and operating expenses. The 26% increase in management fees in
the second quarter on a boe basis is primarily due to increased operating
netbacks resulting from higher commodity prices.
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 Trust Units outstanding during the year) to determine the performance
fee. For the three months and six months ending June 30, 2005 no performance fee
incentive has been accrued given that the total annualized return of the Fund is
currently less than the 8% threshold. 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.
INTEREST
Interest expense on bank debt for the second quarter of 2005 amounted to $2.3
million compared to the $1.4 million for the same period of 2004. For the six
months ended June 30, 2005 interest expense was $4.9 million as compared to $2.7
million for the six months ended June 30, 2004. Average debt levels were higher
during the three months ended June 30, 2005 but were offset by lower interest
rates. The Fund's interest rates are primarily based on short term Bankers
Acceptance rates plus a stamping fee.
INTEREST AND ACCRETION ON CONVERTIBLE DEBENTURES
Interest and accretion on convertible debentures was $3.4 million for the three
months ended June 30, 2005 as compared to $2.0 million for the second quarter of
2004. For the first six months of 2005 interest and accretion expense was $6.8
million as compared to $4.5 million for the six months ended June 30, 2004.
Interest and accretion expense increased primarily due to the issuance of $75
million 7.75% and $50 million 7.5% convertible debentures in September 2004 to
partially finance the Anadarko asset acquisition. The increased interest from
the additional debentures is partially offset by a general reduction of the
other outstanding debenture balances resulting from holders exercising the
conversion option. Accretion expense for the quarter ended June 30, 2005 was
$0.5 million compared to $0.3 million for the three months ended June 30, 2004.
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 6 OF 20
CASH NETBACKS (PER BOE)
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
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Revenue $ 47.99 $ 41.02 $ 45.75 $ 39.65
Hedging 0.02 (2.15) (0.08) (1.07)
Royalties (8.94) (7.59) (8.74) (7.55)
Operating costs (7.31) (5.90) (7.05) (5.91)
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Operating $ 31.76 $ 25.38 $ 29.88 $ 25.12
General and administrative (0.86) (0.56) (0.81) (0.58)
Management fees (0.48) (0.38) (0.45) (0.38)
Interest expense (1.28) (1.00) (1.32) (0.96)
Interest on convertible debentures (1.55) (1.19) (1.52) (1.34)
Taxes (0.31) (0.23) (0.35) (0.22)
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FUNDS FROM OPERATIONS $ 27.28 $ 22.02 $ 25.43 $ 21.64
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DEPLETION, DEPRECIATION AND ACCRETION
Depletion and depreciation of property and equipment is provided on the unit of
production method based on total proved reserves. The depletion, depreciation
and accretion ("DD&A") provision for three months ended June 30, 2005 increased
to $33.5 million from $20.7 million for the same period of 2004. The increased
provision is the result of higher production volumes and a higher per boe rate.
The DD&A rate for the second quarter of 2005 was $18.39/boe compared with
$14.58/boe in 2004. The DD&A provision for the six months ended June 30, 2005
was $68.3 million or $18.27/boe compared to $41.0 million or $14.64/boe for the
same period of 2004.
TAXES
Current taxes paid or payable for the three months ended June 30, 2005 primarily
represents capital tax and amounted to $0.6 million, compared to $0.3 million
expensed in the three months ended June 30, 2004. Current taxes for the six
months ended June 30, 2005 was $1.3 million, an increase from $0.6 million for
the same period of 2004. Capital taxes are based on debt and equity levels of
the Fund at the end of the year and have increased due to Advantage's
significant growth. As a result of new legislation, capital taxes are to be
gradually eliminated over the next several years.
Future income taxes arise from differences between the accounting and tax bases
of the operating company's assets and liabilities. For the three months ended
June 30, 2005, the Fund recognized an income tax recovery of $1.0 million
compared to a $1.8 million recovery for the second quarter of 2004. The future
income tax recovery for the six months ended June 30, 2005 was $6.1 million
compared to $9.5 million for the similar period ended June 30, 2004.
In the Fund's structure, payments are made between the operating company and the
Fund transferring income tax obligations to the Unitholders. Therefore, it is
expected, based on current legislation that no cash income taxes are to be paid
by the operating company or the Fund 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 June 30, 2005 the operating company had a future
income tax liability balance of $104.3 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.
NON-CONTROLLING INTEREST
Non-controlling interest expense for the three month period ended March 31, 2005
was $0.1 million. Non-controlling interest expense represents the net income
attributable to Exchangeable Share ownership interests. The non-controlling
interest was created when Advantage Oil & Gas Ltd. ("AOG") issued Exchangeable
Shares as partial consideration for the acquisition of Defiant that occurred at
the end of 2004. The Exchangeable Shares and Trust Units are considered
economically equivalent since all shares must be exchanged for either Trust
Units or cash over time, based on the current market price of the Trust
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 7 OF 20
Units. Since the Exchangeable Shares are required to be exchanged, there is no
permanent non-controlling interest. At June 30, 2005, only 110,416 Exchangeable
Shares were outstanding and non-controlling interest expense will continue to be
minor.
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 8 OF 20
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Fund has contractual obligations in the normal course of operations
including purchases of assets and services, operating agreements, transportation
commitments and sales contracts. These obligations are of a recurring and
consistent nature and impact cash flow in an ongoing manner. The following is a
summary of the Fund's remaining contractual obligations and commitments:
PAYMENTS DUE BY PERIOD
($ millions) TOTAL 2005 2006 2007 2008
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Building lease $ 3.9 $ 0.7 $ 1.4 $ 1.3 $ 0.5
Capital lease $ 2.0 $ 0.2 $ 0.4 $ 1.4 -
Pipeline/transportation $ 3.6 $ 1.2 $ 1.8 $ 0.5 $ 0.1
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TOTAL CONTRACTUAL OBLIGATIONS $ 9.5 $ 2.1 $ 3.6 $ 3.2 $ 0.6
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LIQUIDITY AND CAPITAL RESOURCES
On February 9, 2005 Advantage issued 5,250,000 Advantage Trust Units at $21.65
per Unit for gross proceeds of $113.7 million, $107.6 million net of related
issuance costs. The net proceeds of the offering were used to pay down debt
incurred in the acquisition of Defiant Energy Corporation, for 2005 capital
expenditures and for general corporate purposes. As at June 30, 2005 the Fund
had 57.3 million Trust Units outstanding.
As at August 11, 2005, Advantage has 57.3 million Trust Units and 110,296
Exchangeable Shares issued and outstanding. The exchange ratio of the
Exchangeable Shares adjusts each month on the distribution payment date and the
number of Trust Units ultimately issuable will increase over time. The
Exchangeable Shares are currently exchangeable for the issuance of 121,184 Trust
Units. The Fund also had $143.8 million convertible debentures outstanding at
August 11, 2005 that can be converted to 7.3 million Trust Units.
At June 30, 2005 Advantage had bank debt outstanding of $237.3 million.
Advantage has an agreement with a syndicate of four Canadian chartered banks and
finalized the renewal of the facility in May 2005. The agreement provides for a
$335 million facility consisting of a $325 million extendible revolving loan
facility and a $10 million operating loan facility, both of which are due for
renewal in May 2006. The credit facilities are secured by a $500 million
floating charge demand debenture, a general security agreement and a
subordination agreement from the Fund covering all assets and cash flows. Given
amendments made in 2005 to the repayment terms, the debt is classified as a
long-term liability on the consolidated balance sheet. At June 30, 2005
Advantage also had a working capital deficiency of $17.3 million.
In December 2004, Advantage assumed two capital lease obligations as a result of
the Defiant acquisition. These two capital leases were repaid in May 2005 for
$6.8 million.
For the three month period ended June 30, 2005, the Fund spent $21.8 million on
capital expenditures. Approximately $17.2 million was expended on drilling and
completion operations where the Fund drilled a total of 7.4 net (12 gross) wells
and recompleted an additional eight wells primarily at Open Lake and in
southeast Saskatchewan. Three 100% working interest horizontal wells were
drilled and completed at Nevis, Alberta and two 100% working interest horizontal
wells were drilled at Steelman, Saskatchewan. Approximately $4.3 million was
expended during the quarter on facilities and equipping primarily related to the
construction of a central oil battery and additional compression facilities at
Nevis and to install two three stage compressors at Wainwright and Manville,
Alberta. Capital expenditures for the six months ended June 30, 2005 amounted to
$54.5 million.
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 9 OF 20
SOURCES AND USES OF FUNDS ($ THOUSANDS)
SIX MONTHS ENDED
JUNE 30, 2005
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SOURCES OF FUNDS
Funds from operations $ 95,060
Units issued, net of costs 107,616
Property dispositions 2,581
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$ 205,257
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USES OF FUNDS
Capital expenditures $ 54,537
Asset retirement expenditures 737
Purchase adjustment of Defiant acquisition 352
Property acquisitions 213
Distributions paid to Unitholders 89,116
Decrease in bank debt 29,752
Reduction of capital lease obligations 7,515
Increase in working capital and other 23,035
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$ 205,257
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QUARTERLY PERFORMANCE
($ thousands, except per Unit amounts)
2005 2004 2003
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
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Net revenues $ 81,144 $ 55,778 $ 68,521 $ 48,255 $ 44,436 $ 32,227 $ 36,074 $34,483
Net income (loss) (1) $ 26,537 $ 4,015 $ 4,855 $ 4,965 $ 9,770 $ 4,448 $ (3,527) $ 8,386
Net income (loss) per Unit, basic $ 0.46 $ 0.07 $ 0.11 $ 0.12 $ 0.25 $ 0.12 $ (0.11) $ 0.27
Net income (loss) per Unit, diluted $ 0.46 $ 0.07 $ 0.11 $ 0.12 $ 0.25 $ 0.12 $ (0.11) $ 0.27
(1) Net income (loss) has been restated to reflect changes in accounting
policies as disclosed in the Notes to the Consolidated Financial
Statements.
The table above highlights the Fund's performance for the second quarter of 2005
and also for the preceding seven quarters. Net revenues are primarily impacted
by commodity prices, production volumes and royalties. Significant increases in
net revenues occurred in the second quarter of 2004 through the second quarter
of 2005 due to considerably higher crude oil prices and the acquisition of the
Anadarko assets in September 2004 and Defiant in December 2004.
FINANCIAL REPORTING UPDATE
During 2005 there were several changes to financial reporting requirements. The
changes impacting Advantage are noted below. FINANCIAL INSTRUMENTS -
PRESENTATION AND DISCLOSURE Effective January 1, 2005, the Fund retroactively
adopted the revised accounting standard Section 3860 "Financial Instruments -
Presentation and Disclosure" as issued by the Canadian Institute of Chartered
Accountants. The revised standard applies to financial instruments that may be
settled at the issuer's option in cash or its own equity instruments and impacts
the Fund's prior accounting for convertible debentures and the performance
incentive fee. The Fund previously classified the issuance of convertible
debentures and the performance fee obligation as components of equity on the
basis that the obligations could be settled with the issuance of Trust Units.
Interest expense and issuance costs related to the debentures were charged to
accumulated income as a component of equity. Based on the revised standard, a
financial instrument is presented based on the substance of the contractual
arrangement regardless of the means of settlement. This results in the
reclassification of convertible debentures to long-term liabilities and the
performance fee to current liabilities. Additionally, a financial instrument
with an embedded conversion feature must be segregated between liabilities and
equity
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 10 OF 20
based on the relative fair market value of the liability and equity
portions. Therefore, the debenture liabilities are presented at less than their
eventual maturity values. The liability and equity components are further
reduced for issuance costs initially incurred. The discount of the liability
component as compared to maturity value is accreted by the effective interest
method over the debenture term. As debentures are converted to Trust Units, an
appropriate portion of the liability and equity components are transferred to
Unitholders' capital. Interest and accretion expense on the convertible
debentures are shown on the Consolidated Statement of Income.
EXCHANGEABLE SHARES
In March 2005, the CICA's Emerging Issues Committee ("EIC") amended EIC-151
"Exchangeable Securities Issued by Subsidiaries of Income Trusts" which is
effective for periods ending on June 30, 2005. The EIC specifies the required
criteria to present exchangeable shares as a component of Unitholders' equity.
Exchangeable shares that do not meet both criteria are classified as either debt
or non-controlling interest depending on the nature of the instrument. Prior to
the amendment, Exchangeable Shares of Advantage Oil & Gas Ltd. ("AOG"), a
subsidiary of Advantage, were shown as a component of Unitholders' equity.
However, the Exchangeable Shares do not meet the requirements of the amended
standard given that the shares are transferable, although not publicly traded.
Therefore, Exchangeable Shares are now classified as non-controlling interest,
outside of Unitholders' equity. The Exchangeable Shares and Trust Units are
considered economically equivalent since all shares must be exchanged for either
Trust Units or cash, based on the current market price of the Trust Units. Since
the Exchangeable Shares are required to be exchanged, there is no permanent
non-controlling interest. As a consequence of presenting Exchangeable Shares as
non-controlling interest, a corresponding expense is recorded that reflects the
earnings attributable to the non-controlling interest. When Exchangeable Shares
are converted to Trust Units, the carrying value of non-controlling interest on
the balance sheet is reclassified to Unitholders' capital. The Fund
retroactively implemented the revised standard but there was no impact on
periods prior to 2005 given that the Exchangeable Shares were issued at the end
of 2004.
NON-GAAP MEASURES
Funds from operations and per Unit and payout ratio are not recognized measures
under the Canadian generally accepted accounting principles ("GAAP"). Management
believes that funds from operations and payout ratio are useful supplemental
measures to analyse operating performance and provide an indication of the
results generated by the Fund'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.
ADDITIONAL INFORMATION
Additional information relating to Advantage, including the annual information
form, can be found on SEDAR at www.sedar.com
August 11, 2005
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 11 OF 20
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(thousands of dollars) June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------
(unaudited) (restated - note 1)
ASSETS
Current assets
Accounts receivable $ 49,928 $ 48,961
Fixed assets
Property and equipment 1,243,417 1,190,552
Accumulated depletion and depreciation (321,190) (253,506)
- -----------------------------------------------------------------------------------------------------------
922,227 937,046
Goodwill 45,726 47,244
- -----------------------------------------------------------------------------------------------------------
$ 1,017,881 $ 1,033,251
===========================================================================================================
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 52,527 $ 91,165
Cash distributions payable to Unitholders 14,335 12,419
Current portion of capital lease obligations (note 2) 349 1,785
Hedging liability (note 7) 1,323 214
Bank indebtedness (note 3) - 267,054
- -----------------------------------------------------------------------------------------------------------
68,534 372,637
Capital lease obligations (note 2) 1,527 7,606
Bank indebtedness (note 3) 237,302 -
Convertible debentures (notes 1 and 4) 133,255 136,433
Asset retirement obligations 18,043 17,503
Future income taxes 104,295 112,266
- -----------------------------------------------------------------------------------------------------------
562,956 646,445
===========================================================================================================
NON-CONTROLLING INTEREST
Exchangeable shares (note 5) 2,401 30,842
- -----------------------------------------------------------------------------------------------------------
UNITHOLDERS' EQUITY
Unitholders' capital (note 6i) 672,792 515,544
Convertible debentures equity component (notes 1 and 4) 6,556 6,764
Contributed surplus 1,036 1,036
Accumulated income 133,189 102,637
Accumulated cash distributions (361,049) (270,017)
- -----------------------------------------------------------------------------------------------------------
452,524 355,964
- -----------------------------------------------------------------------------------------------------------
$ 1,017,881 $ 1,033,251
===========================================================================================================
see accompanying Notes to Consolidated Financial Statements
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 12 OF 20
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED INCOME
Three Three Six Six
(thousands of dollars, except for months ended months ended months ended months ended
per Unit amounts) (unaudited) June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
- -------------------------------------------------------------------------------------------------------------------------------
(restated - note 1) (restated - note 1)
REVENUE
Petroleum and natural gas $ 87,476 $ 54,181 $ 170,685 $ 108,017
Unrealized hedging gain (loss) (note 7) 9,957 833 (1,109) (10,224)
Royalties, net of Alberta Royalty Credit (16,289) (10,578) (32,654) (21,130)
- -------------------------------------------------------------------------------------------------------------------------------
81,144 44,436 136,922 76,663
===============================================================================================================================
EXPENSES
Operating 13,327 8,218 26,357 16,538
General and administrative 1,567 788 3,030 1,634
Unit-based compensation - 1,036 - 1,036
Management fee 868 530 1,675 1,055
Performance incentive (note 8) - 1,500 - 2,900
Interest 2,332 1,399 4,941 2,677
Interest and accretion on convertible debentures 3,364 1,992 6,765 4,516
Depletion, depreciation and accretion 33,499 20,655 68,265 41,001
- -------------------------------------------------------------------------------------------------------------------------------
54,957 36,118 111,033 71,357
===============================================================================================================================
Income before taxes and non-controlling interest 26,187 8,318 25,889 5,306
Future income tax recovery (1,000) (1,767) (6,101) (9,542)
Income and capital taxes 573 315 1,303 630
- -------------------------------------------------------------------------------------------------------------------------------
(427) (1,452) (4,798) (8,912)
===============================================================================================================================
Net income before non-controlling interest 26,614 9,770 30,687 14,218
Non-controlling interest (note 5) 77 - 135 -
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME 26,537 9,770 30,552 14,218
Accumulated income, beginning of period
as previously reported 106,710 77,957 93,451 73,137
Effect of change in accounting policies (note 1) (58) 5,090 9,186 5,462
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated income, beginning of period as restated 106,652 83,047 102,637 78,599
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated income, end of period $ 133,189 $ 92,817 $ 133,189 $ 92,817
===============================================================================================================================
Net income per Trust Unit
Basic and diluted $ 0.46 $ 0.25 $ 0.55 $ 0.37
see accompanying Notes to Consolidated Financial Statements
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 13 OF 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Three Six Six
months ended months ended months ended months ended
(thousands of dollars) (unaudited) June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------
(restated - note 1) (restated - note 1)
OPERATING ACTIVITIES
Net income $ 26,537 $ 9,770 $ 30,552 $ 14,218
Add (deduct) items not requiring cash:
Unit-based compensation - 1,036 - 1,036
Non-cash performance incentive (note 8) - 1,500 - 2,900
Future income taxes (1,000) (1,767) (6,101) (9,542)
Unrealized hedging (note 7) (9,957) (833) 1,109 10,224
Accretion on convertible debentures 549 332 1,100 756
Depletion, depreciation and accretion 33,499 20,655 68,265 41,001
Non-controlling interest 77 - 135 -
- ------------------------------------------------------------------------------------------------------------------------------
Funds from operations 49,705 30,693 95,060 60,593
Expenditures on asset retirement (330) (86) (737) (148)
Changes in non-cash working capital (17,006) (4,959) (23,346) (13,291)
- ------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 32,369 25,648 70,977 47,154
==============================================================================================================================
FINANCING ACTIVITIES
Units issued, net of costs (note 6i) (85) 112 107,616 228
Increase (decrease) in bank debt 40,940 25,552 (29,752) 58,739
Reduction of capital lease obligations (7,071) (80) (7,515) (158)
Cash distributions to Unitholders (46,382) (27,040) (89,116) (52,974)
- ------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (12,598) (1,456) (18,767) 5,835
==============================================================================================================================
INVESTING ACTIVITIES
Expenditures on property and equipment (21,822) (23,023) (54,537) (53,225)
Property acquisitions (185) - (213) -
Property dispositions 2,547 - 2,581 791
Purchase adjustment of Defiant Energy acquisition 132 - (352) -
Changes in non-cash working capital (443) (1,169) 311 (555)
- ------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (19,771) (24,192) (52,210) (52,989)
==============================================================================================================================
Net change in cash - - - -
Cash, beginning of period - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
==============================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Taxes paid $ 864 $ 315 $ 1,461 $ 631
Interest paid $ 5,472 $ 4,166 $ 11,557 $ 7,081
see accompanying Notes to Consolidated Financial Statements
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 14 OF 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 (unaudited)
All tabular amounts in thousands, except for Units and per Unit amounts
The interim consolidated financial statements of Advantage Energy Income Fund
("Advantage" or the "Fund") 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 year ended December 31, 2004 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,
2004 as set out in Advantage's Annual Report.
1. CHANGE IN ACCOUNTING POLICIES
(a) FINANCIAL INSTRUMENTS - PRESENTATION AND DISCLOSURE
Effective January 1, 2005, the Fund retroactively adopted the revised
accounting standard Section 3860 "Financial Instruments - Presentation and
Disclosure" as issued by the Canadian Institute of Chartered Accountants
("CICA"). The revised standard applies to financial instruments that may be
settled at the issuer's option in cash or its own equity instruments and
impacts the Fund's prior accounting for convertible debentures and the
performance incentive fee. The Fund previously classified the issuance of
convertible debentures and the performance fee obligation as components of
equity on the basis that the obligations could be settled with the issuance
of Trust Units. Interest expense and issuance costs related to the
debentures were charged to accumulated income as a component of equity.
Based on the revised standard, a financial instrument is presented based on
the substance of the contractual arrangement regardless of the means of
settlement. This results in the reclassification of convertible debentures
to long-term liabilities and the performance fee to current liabilities.
Additionally, a financial instrument with an embedded conversion feature
must be segregated between liabilities and equity based on the relative
fair market value of the liability and equity portions. Therefore, the
debenture liabilities are presented at less than their eventual maturity
values. The liability and equity components are further reduced for
issuance costs initially incurred. The discount of the liability component
as compared to maturity value is accreted by the effective interest method
over the debenture term. As debentures are converted to Trust Units, an
appropriate portion of the liability and equity components are transferred
to Unitholders' capital. Interest and accretion expense on the convertible
debentures are shown on the Consolidated Statement of Income.
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, 2004 DECEMBER 31, 2003
----------------------------------------------------------------------------------------------
Current liabilities
Accounts payable and accrued liabilities $ 16,570 $ 19,592
Long-term liabilities
Convertible debentures $ 136,433 $ 91,372
Unitholders' equity
Convertible debentures $ (148,450) $ (99,984)
Convertible debentures equity component $ 6,764 $ 4,726
Unitholders' capital $ (20,503) $ (21,168)
Accumulated income $ 9,186 $ 5,462
THREE MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED
STATEMENTS OF INCOME JUNE 30, 2004 JUNE 30, 2004 DECEMBER 31, 2004
------------------------------------------------------------------------------------------------------------------
Interest and accretion on convertible debentures $ 1,992 $ 4,516 $ 10,425
------------------------------------------------------------------------------------------------------------------
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 15 OF 20
Net income $ (1,992) $ (4,516) $ (10,425)
------------------------------------------------------------------------------------------------------------------
Net income per Trust Unit (basic and diluted) $ (0.01) $ (0.02) $ (0.04)
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 16 OF 20
(b) EXCHANGEABLE SHARES
In March 2005, the CICA's Emerging Issues Committee amended EIC-151
"Exchangeable Securities Issued by Subsidiaries of Income Trusts". The EIC
specifies the required criteria to present exchangeable shares as a
component of Unitholders' equity. Exchangeable shares that do not meet both
criteria are classified as either debt or non-controlling interest
depending on the nature of the instrument. Prior to the amendment,
Exchangeable Shares of Advantage Oil & Gas Ltd. ("AOG"), a subsidiary of
Advantage, were shown as a component of Unitholders' equity. However, the
Exchangeable Shares do not meet the requirements of the amended standard
given that the shares are transferable, although not publicly traded.
Therefore, Exchangeable Shares are now classified as non-controlling
interest, outside of Unitholders' equity. The Exchangeable Shares and Trust
Units are considered economically equivalent since the exchange ratio is
increased on each date that a distribution is paid on the Trust Units and
all shares must be exchanged for either Trust Units or cash, based on the
current market price of the Trust Units. Since the Exchangeable Shares are
required to be exchanged, there is no permanent non-controlling interest.
As a consequence of presenting Exchangeable Shares as non-controlling
interest, a corresponding expense is recorded that reflects the earnings
attributable to the non-controlling interest. When Exchangeable Shares are
converted to Trust Units, the carrying value of non-controlling interest on
the balance sheet is reclassified to Unitholders' capital. The Fund
retroactively implemented the revised standard but there was no income
impact on periods prior to 2005 given that the Exchangeable Shares were
issued at the end of 2004. Non-controlling interest expense of $58,000 was
recorded for the three month period ended March 31, 2005, with a
corresponding decrease in net income.
2. CAPITAL LEASE OBLIGATIONS
The Fund has capital leases on a variety of property and equipment. Future
minimum lease payments at June 30, 2005 consist of the following:
2005 $ 221
2006 443
2007 1,364
-------------------------------------------------------
$ 2,028
Less amounts representing interest (152)
-------------------------------------------------------
1,876
Current portion (349)
-------------------------------------------------------
$ 1,527
=======================================================
3. BANK INDEBTEDNESS
Advantage has a credit facility agreement with a syndicate of Canadian
chartered banks which provides for a $325 million extendible revolving loan
facility and a $10 million operating loan facility. The loan's interest
rate is based on either prime or bankers' acceptance rates at the Fund's
option subject to certain basis point or stamping fee adjustments ranging
from 0% to 1.4% depending on the Fund's debt to cash flow ratio. The credit
facilities are secured by a $500 million floating charge demand debenture,
a general security agreement and a subordination agreement from the Fund
covering all assets and cash flows. The credit facilities are subject to
review on an annual basis, with the next review anticipated to take place
in May 2006. Various borrowing options are available under the credit
facilities, including prime rate-based advances and bankers' acceptances
loans. The credit facilities constitute a revolving facility for a 364 day
term which is extendible annually for a further 364 day revolving period.
If not extended, the revolving credit facility is converted to a two year
term facility with the first payment due one year and one day after
commencement of the term. The credit facilities contain standard commercial
covenants for facilities of this nature, and distributions by AOG to the
Fund (and effectively by the Fund to Unitholders) are subordinated to the
repayment of any amounts owing under the credit facilities. Distributions
to Unitholders are not permitted if the Fund is in default of such credit
facilities or if the amount of the Fund's outstanding indebtedness under
such facilities exceeds the then existing current borrowing base. Interest
payments under the debentures are also subordinated to indebtedness under
the credit facilities and payments under the debentures are similarly
restricted.
At June 30, 2005, the effective interest rate on the outstanding amounts
under the facility was approximately 4.4%.
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 17 OF 20
4. CONVERTIBLE DEBENTURES
The convertible unsecured subordinated debentures pay interest
semi-annually and are convertible at the option of the holder into Trust
Units of Advantage at the applicable conversion price per Unit plus accrued
and unpaid interest. Based on revised accounting standards (note 1),
Advantage initially records the proceeds as a liability and equity
component, net of issue costs, based on their relative fair market values.
The details of the convertible debentures including fair market values
initially assigned and issuance costs are as follows:
10.00% 9.00% 8.25% 7.75% 7.50% TOTAL
----------------------------------------------------------------------------------------------------------------------
Issue Date Oct. 18, 2002 Jul. 8, 2003 Dec. 2, 2003 Sept. 15, 2004 Sept. 15, 2004
Maturity Date Nov. 1, 2007 Aug. 1, 2008 Feb. 1, 2009 Dec. 1, 2011 Oct. 1, 2009
Conversion Price $ 13.30 $ 17.00 $ 16.50 $ 21.00 $ 20.25
Liability component $ 52,722 $ 28,662 $ 56,802 $ 47,444 $ 71,631 $ 257,261
Equity component 2,278 1,338 3,198 2,556 3,369 12,739
----------------------------------------------------------------------------------------------------------------------
Gross proceeds 55,000 30,000 60,000 50,000 75,000 270,000
Issuance costs (2,495) (1,444) (2,588) (2,190) (3,190) (11,907)
----------------------------------------------------------------------------------------------------------------------
NET PROCEEDS $ 52,505 $ 28,556 $ 57,412 $ 47,810 $ 71,810 $ 258,093
======================================================================================================================
The balance of debentures outstanding at June 30, 2005 and changes in the
liability and equity components during the six month period then ended are
as follows:
10.00% 9.00% 8.25% 7.75% 7.50% TOTAL
----------------------------------------------------------------------------------------------------------------------
Debentures outstanding $ 3,169 $ 9,579 $ 11,445 $ 49,835 $ 69,853 $ 143,881
Liability component
Balance at Dec. 31, 2004 $ 3,923 $ 10,388 $ 12,237 $ 45,548 $ 64,337 $ 136,433
Accretion of discount 30 88 107 306 569 1,100
Converted to Trust Units (912) (1,435) (1,658) (151) (122) (4,278)
----------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2005 $ 3,041 $ 9,041 $ 10,686 $ 45,703 $ 64,784 $ 133,255
======================================================================================================================
Equity component
Balance at Dec. 31, 2004 $ 163 $ 472 $ 675 $ 2,444 $ 3,010 $ 6,764
Converted to Trust Units (38) (65) (91) (8) (6) (208)
----------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2005 $ 125 $ 407 $ 584 $ 2,436 $ 3,004 $ 6,556
======================================================================================================================
During the six months ended June 30, 2005 $4,569,000 debentures were
converted resulting in the issuance of 284,727 Advantage Trust Units.
5. EXCHANGEABLE SHARES
NUMBER OF SHARES AMOUNT
----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1,450,030 $ 30,842
Converted to Trust Units (1,339,614) (28,576)
Non-controlling interest in net income - 135
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2005 110,416 $ 2,401
======================================================================================================================
AOG is authorized to issue an unlimited number of non-voting Exchangeable
Shares. As partial consideration for the acquisition of Defiant which
closed on December 21, 2004, AOG issued 1,450,030 Exchangeable Shares. The
value of the Exchangeable Shares issued was determined based on the
weighted average trading value of Advantage Trust Units during the two-day
period before and after the terms of the acquisition were agreed to and
announced. Each Exchangeable Share issued by AOG is exchangeable for
Advantage Trust Units at any time (subject to the provisions of the Voting
and Exchange Trust Agreement), on the basis of the applicable exchange
ratio in effect at that time. The exchange ratio was equal to 1.08317 at
June 30, 2005 and will be increased on each date that a distribution is
paid by Advantage on the Advantage Trust Units by an amount equal to the
cash distribution paid divided by the five-day
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 18 OF 20
weighted average unit price preceding the record date. It is not
anticipated that dividends will be declared or paid on the Exchangeable
Shares. The Exchangeable Shares are not publicly traded. However, holders
of AOG Exchangeable Shares can exchange all or a portion of their holdings
at any time by giving notice to their investment advisor or AOG's transfer
agent, Computershare Trust Company of Canada.
The Exchangeable Shares will not be entitled to any vote at meetings of
shareholders of AOG but will, through a Special Voting Unit of Advantage
held by the Trustee as trustee under the Voting and Exchange Trust
Agreement, be entitled to vote (on the basis of the number of votes equal
to the number of Advantage Trust Units into which the Exchangeable Shares
are then exchangeable) with the holders of Advantage Trust Units as a
class. The Exchangeable Shares will be redeemable by AOG, in certain
circumstances, and will be retractable by holders of Exchangeable Shares,
in certain circumstances.
Exchangeable Shares not previously redeemed or retracted will be redeemed
by AOG or purchased by Advantage on January 15, 2008. If the number of
Exchangeable Shares outstanding is less than 100,000, the Fund can elect to
redeem the Exchangeable Shares for Trust Units or an amount in cash equal
to the amount determined by multiplying the exchange ratio on the last
business day prior to the redemption date by the current market price of a
trust unit on the last business day prior to such redemption date.
6. UNITHOLDERS' EQUITY
(i) UNITHOLDERS' CAPITAL
(a) Authorized
Unlimited number of voting Trust Units
(b) Issued
NUMBER OF UNITS AMOUNT
---------------------------------------------------------------------------------------
Balance at December 31, 2004 (restated - note 1) 49,674,783 $ 515,544
2004 non-cash performance incentive 763,371 16,570
Issued on conversion of debentures 284,727 4,486
Issued on conversion of exchangeable shares 1,367,604 28,576
Issued for cash, net of costs 5,250,000 107,616
---------------------------------------------------------------------------------------
Balance at June 30, 2005 57,340,485 $ 672,792
=======================================================================================
On January 19, 2005 Advantage issued 763,371 Trust Units to partially
satisfy the obligation related to the 2004 year end performance fee.
On February 9, 2005 Advantage issued 5,250,000 Trust Units at $21.65 per
Trust Unit for net proceeds of $107.6 million (net of Underwriters' fees
and other issue costs of $6.1 million). The net proceeds of the offering
were used to pay down debt incurred in the acquisition of Defiant, for 2005
capital expenditures and for general corporate purposes.
(c) Trust Units Rights Incentive Plan
SERIES A SERIES B
NUMBER PRICE NUMBER PRICE
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 85,000 $ 5.05 225,000 $ 16.75
Reduction of exercise price - (1.62) - (1.62)
------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2005 85,000 $ 3.43 225,000 $ 15.13
==================================================================================================================
The Series A Trust Unit rights were issued in 2002 and the Fund was unable
to determine the fair value for the rights granted under the Plan at that
time. The Fund has disclosed pro forma results as if the Fund followed the
intrinsic value methodology in accounting for such rights. The intrinsic
value methodology would result in recording compensation expense for the
rights based on the underlying Trust Unit price at the date of exercise or
at the date of the financial statements for unexercised rights as compared
to the exercise price.
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 19 OF 20
THREE THREE SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
PRO FORMA RESULTS JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
--------------------------------------------------------------------------------------------------------------------
(restated - note 1) (restated - note 1)
Net income as reported $ 26,537 $ 9,770 $ 30,552 $ 14,218
Less compensation expense (recovery)
for rights issued in 2002 (145) 42 (292) 233
--------------------------------------------------------------------------------------------------------------------
Pro Forma net income $ 26,682 $ 9,728 $ 30,844 $ 13,985
====================================================================================================================
Net income per Trust Unit - basic and diluted
As reported $ 0.46 $ 0.25 $ 0.55 $ 0.37
Pro Forma $ 0.46 $ 0.25 $ 0.55 $ 0.36
--------------------------------------------------------------------------------------------------------------------
7. FINANCIAL INSTRUMENTS
As at June 30, 2005 the Fund has the following hedges in place:
DESCRIPTION OF HEDGE TERM VOLUME AVERAGE PRICE
-------------------------------------------------------------------------------------------------
NATURAL GAS - AECO
Fixed price April to October 2005 34,123 mcf/d Cdn$7.45/mcf
Collar April to October 2005 11,374 mcf/d Floor Cdn$6.86/mcf
Ceiling Cdn$8.18/mcf
Collar April to October 2005 11,374 mcf/d Floor Cdn$7.02/mcf
Ceiling Cdn$8.02/mcf
CRUDE OIL - WTI
Fixed price April to September 2005 1,750 bbls/d US$52.11/bbl
Collar April to October 2005 1,750 bbls/d Floor US$47.00/bbl
Ceiling US$56.75/bbl
As at June 30, 2005 the settlement value of the hedges outstanding was
approximately $1.3 million and has been charged to income as an unrealized
hedging loss.
8. 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. During
interim periods no amount is paid to the Manager, nor is the Manager
entitled to receive any payment related to the Fund's 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 the year by dividing the year over year change in Unit price plus cash
distributions by the opening Unit price. The 2005 opening Unit price was
$21.71 and cash distributions for the six months ended June 30, 2005
amounted to $1.62 per Trust Unit. 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.
No performance fee has been accrued for the period as the total annual
return was less than the 8% prorated threshold. The Manager does not
receive any form of compensation in respect of acquisition or divestiture
activities.
PRESS RELEASE AUGUST 11, 2005
ADVANTAGE ENERGY INCOME FUND PAGE 20 OF 20
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, Alberta T2P 3Y7
Phone: (403) 261-8810
Fax: (403) 262-0723
Web Site: www.advantageincome.com
E-mail: advantage@advantageincome.com