EXHIBIT 99.17
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CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(thousands of dollars) March 31, 2005 December 31, 2004
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(unaudited) (restated - note 1)
ASSETS
Current assets
Accounts receivable $ 48,241 $ 48,961
Fixed assets
Property and equipment 1,223,829 1,190,552
Accumulated depletion and depreciation (287,981) (253,506)
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935,848 937,046
Goodwill 47,728 47,244
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$ 1,031,817 $ 1,033,251
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LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 68,289 $ 91,165
Cash distributions payable to Unitholders 16,024 12,419
Current portion of capital lease obligations (note 2) 7,331 1,785
Hedging liability (note 6) 11,280 214
Bank indebtedness (note 3) - 267,054
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102,924 372,637
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Capital lease obligations (note 2) 1,616 7,606
Bank indebtedness (note 3) 196,362 -
Convertible debentures (notes 1 and 4) 133,297 136,433
Asset retirement obligations 17,955 17,503
Future income taxes 107,165 112,266
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559,319 646,445
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UNITHOLDERS' EQUITY
Unitholders' capital (note 5i) 670,797 515,544
Exchangeable shares (note 5ii) 3,728 30,842
Convertible debentures equity component (notes 1 and 4) 6,583 6,764
Contributed surplus 1,036 1,036
Accumulated income 106,710 102,637
Accumulated cash distributions (316,356) (270,017)
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472,498 386,806
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$1,031,817 $ 1,033,251
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see accompanying Notes to Consolidated Financial Statements
ADVANTAGE ENERGY INCOME FUND PAGE 2 OF 8
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED INCOME
Three Three
months ended months ended
(thousands of dollars, except for per Unit amounts) (unaudited) March 31, 2005 March 31, 2004
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(restated - note 1)
REVENUE
Petroleum and natural gas $ 83,209 $ 53,836
Unrealized hedging loss (note 6) (11,066) (11,057)
Royalties, net of Alberta Royalty Credit (16,365) (10,552)
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55,778 32,227
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EXPENSES
Operating 13,030 8,320
General and administrative 1,463 846
Management fee 807 525
Performance incentive (note 7) - 1,400
Interest 2,609 1,278
Interest and accretion on convertible debentures 3,401 2,524
Depletion, depreciation and accretion 34,766 20,346
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56,076 35,239
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Income (loss) before taxes (298) (3,012)
Future income tax recovery (5,101) (7,775)
Income and capital taxes 730 315
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(4,371) (7,460)
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Net income 4,073 4,448
Accumulated income, beginning of period as previously reported 93,451 73,137
Effect of change in accounting for convertible debentures (note 1) 9,186 5,530
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Accumulated income, beginning of period as restated 102,637 78,667
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Accumulated income, end of period $ 106,710 $ 83,115
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Net income per Trust Unit
Basic and diluted $ 0.07 $ 0.12
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see accompanying Notes to Consolidated Financial Statements
ADVANTAGE ENERGY INCOME FUND PAGE 3 OF 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Three
months ended months ended
(thousands of dollars) (unaudited) March 31, 2005 March 31, 2004
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(restated - note 1)
Operating Activities
Net income $ 4,073 $ 4,448
Add (deduct) items not requiring cash:
Non-cash performance incentive (note 7) - 1,400
Future income taxes (5,101) (7,775)
Unrealized hedging loss (note 6) 11,066 11,057
Accretion on convertible debentures 551 424
Depletion, depreciation and accretion 34,766 20,346
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Funds from operations 45,355 29,900
Expenditures on asset retirement (407) (62)
Changes in non-cash working capital (6,340) (8,332)
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Cash provided by operating activities 38,608 21,506
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Financing Activities
Units issued, net of costs (note 5i) 107,701 116
Increase (decrease) in bank debt (70,692) 33,187
Reduction of capital lease obligations (444) (78)
Cash distributions to Unitholders (42,734) (25,934)
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Cash provided by (used in) financing activities (6,169) 7,291
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Investing Activities
Expenditures on property and equipment (32,715) (30,202)
Property acquisitions (28) -
Property dispositions 34 791
Purchase adjustment of Defiant Energy acquisition (484) -
Changes in non-cash working capital 754 614
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Cash used in investing activities (32,439) (28,797)
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Net change in cash - -
Cash, beginning of period - -
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Cash, end of period $ - $ -
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Supplementary Cash Flow Information
Taxes paid $ 597 $ 316
Interest paid $ 6,085 $ 2,915
see accompanying Notes to Consolidated Financial Statements
ADVANTAGE ENERGY INCOME FUND PAGE 4 OF 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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.
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
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Current liabilities
Accounts payable and accrued liabilities $ 16,570 $ 19,592
Long-term liabilities
Convertible debentures $ 136,433 $ 91,304
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 $ 5,530
Three months ended Year ended
STATEMENTS OF INCOME March 31, 2004 December 31, 2004
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Interest and accretion on convertible debentures $ 2,524 $ 10,425
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Net income $ (2,524) $ (10,425)
Basic and diluted net income per Unit $ (0.01) $ (0.04)
ADVANTAGE ENERGY INCOME FUND PAGE 5 OF 8
(b) EXCHANGEABLE SHARES
The Canadian Institute of Chartered Accountants issued EIC-151
"Exchangeable Securities issued by Subsidiaries of Income Trusts" in
January 2005. The EIC detailed the conditions under which exchangeable
shares are classified as a component of equity. Exchangeable shares that do
not satisfy the given criteria are shown as non-controlling interest. The
Fund's interpretation is that the exchangeable shares issued complies with
the established criteria and is presented as a component of unitholders'
equity. In March 2005, the Emerging Issues Committee amended EIC-151 which
will be effective for periods ending on June 30, 2005. The revised standard
will result in the Fund reclassifying exchangeable shares from equity to
non-controlling interest given that the exchangeable shares are
transferable, although not publicly traded. An expense is recorded that
reflects the earnings attributable to the non-controlling interest. As
exchangeable shares are converted to Trust Units, the non-controlling
interest on the balance sheet is reclassified to unitholders' capital. The
Fund will retroactively implement the revised standard for the interim
period ending June 30, 2005.
2. CAPITAL LEASE OBLIGATIONS
The Fund has capital leases on a variety of property and equipment. Future
minimum lease payments at March 31, 2005 consist of the following:
2005 $ 7,415
2006 443
2007 1,364
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$ 9,222
Less amounts representing interest (275)
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8,947
Current portion (7,331)
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$ 1,616
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In May 2005, Advantage repaid two capital lease obligations for $6.8
million that were assumed from the acquisition of Defiant Energy
Corporation in 2004. As a result of this repayment, these two capital
leases have been classified as current liabilities as at March 31, 2005.
3. BANK INDEBTEDNESS
In May 2005, Advantage renewed 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. Given the change
in the maturity terms, the bank indebtedness has been classified as a
long-term liability. 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.
ADVANTAGE ENERGY INCOME FUND PAGE 6 OF 8
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
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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 $ 71,631 $ 47,444 $ 257,261
Equity component 2,278 1,338 3,198 3,369 2,556 12,739
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Gross proceeds 55,000 30,000 60,000 75,000 50,000 270,000
Issuance costs (2,495) (1,444) (2,588) (3,190) (2,190) (11,907)
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Net proceeds $ 52,505 $ 28,556 $ 57,412 $ 71,810 $ 47,810 $ 258,093
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The balance of debentures outstanding at March 31, 2005 and changes in the
liability and equity components during the three month period then ended
are as follows:
10.00% 9.00% 8.25% 7.75% 7.50% Total
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Debentures outstanding $ 3,476 $ 9,710 $ 11,623 $ 49,842 $ 69,853 $144,504
Liability component
Balance at Dec. 31, 2004 $ 3,923 $ 10,388 $ 12,237 $ 45,548 $ 64,337 $136,433
Accretion of discount 16 46 56 152 281 551
Converted to Trust Units (618) (1,312) (1,493) (144) (120) (3,687)
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Balance at Mar. 31, 2005 $ 3,321 $ 9,122 $ 10,800 $ 45,556 $ 64,498 $133,297
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Equity component
Balance at Dec. 31, 2004 $ 163 $ 472 $ 675 $ 2,444 $ 3,010 $ 6,764
Converted to Trust Units (26) (60) (82) (8) (5) (181)
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Balance at Mar. 31, 2005 $ 137 $ 412 $ 593 $ 2,436 $ 3,005 $ 6,583
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During the three months ended March 31, 2005 $3,946,000 debentures were
converted resulting in the issuance of 242,554 Advantage Trust Units.
5. UNITHOLDERS' EQUITY
(i) UNITHOLDERS' CAPITAL
(a) Authorized
Unlimited number of voting Trust Units
(b) Issued
Number of Units Amount
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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 242,554 3,868
Issued on conversion of exchangeable shares 1,297,926 27,114
Issued for cash, net of costs 5,250,000 107,701
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Balance at March 31, 2005 57,228,634 $ 670,797
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On January 19, 2005 Advantage issued 763,371 Trust Units to partially
satisfy the obligation related to the 2004 year end performance fee.
ADVANTAGE ENERGY INCOME FUND PAGE 7 OF 8
On February 9, 2005 Advantage issued 5,250,000 Trust Units at $21.65 per
Trust Unit for net proceeds of $107.7 million (net of Underwriters' fees
and other issue costs of $6.0 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
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Balance at December 31, 2004 85,000 $ 5.05 225,000 $ 16.75
Reduction of exercise price - (0.84) - (0.84)
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Balance at March 31, 2005 85,000 $ 4.21 225,000 $ 15.91
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(ii) EXCHANGEABLE SHARES
(a) Authorized
AOG is authorized to issue an unlimited number of non-voting Exchangeable
Shares.
(b) Issued
Number of Shares Amount
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Balance at December 31, 2004 1,450,030 $ 30,842
Converted to Trust Units (1,274,764) (27,114)
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Balance at March 31, 2005 175,266 $ 3,728
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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 1.03775 at March 31, 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 weighted average unit price preceding the record
date. 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 Trust 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. It is not anticipated that dividends will be declared
or paid on the Exchangeable Shares.
6. FINANCIAL INSTRUMENTS
As at March 31, 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
ADVANTAGE ENERGY INCOME FUND PAGE 8 OF 8
As at March 31, 2005 the settlement value of the hedges outstanding was
approximately $11.3 million and has been charged to income as an unrealized
hedging loss.
7. 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 three months ended March 31, 2005
amounted to $0.84 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.