EXHIBIT 20.2
------------
COMPTON PETROLEUM CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Compton Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Compton
Petroleum Corporation as at December 31, 2005 and 2004 and the consolidated
statements of earnings, retained earnings, and cash flow in the three year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2005 and 2004 and the results of its operations and cash flow for the three
year period ended December 31, 2005 in accordance with Canadian generally
accepted accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences are
presented in Note 19 to the consolidated financial statements.
Calgary, Alberta (SIGNED) "GRANT THORNTON LLP"
Canada Chartered Accountants
March 13, 2006
=================================================================================================
COMPTON PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
As at December 31, 2005 2004
- -------------------------------------------------------------------------------------------------
(thousands of dollars)
ASSETS
Current
Cash $ 8,954 $ 10,068
Accounts receivable and other 132,484 115,113
Unrealized risk management gain (Note 16a (i)) -- 1,985
---------- ----------
141,438 127,166
Property and equipment (Note 4) 1,587,371 1,178,550
Goodwill (Note 2) 7,914 7,914
Deferred financing charges and other (Note 8) 13,156 9,729
Deferred risk management loss (Note 16a (ii)) 5,610 7,252
---------- ----------
$1,755,489 $1,330,611
========== ==========
LIABILITIES
Current
Bank debt (Note 5) $ -- $ 220,000
Accounts payable 203,869 125,483
Unrealized risk management loss (Note 16a (i)) 3,150 --
Income taxes payable -- 301
---------- ----------
207,019 345,784
Bank debt (Note 5) 177,900 --
Senior term notes (Note 6) 357,640 198,594
Asset retirement obligations (Note 10) 20,770 18,006
Unrealized risk management loss (Note 16a (iii)) 14,809 11,416
Future income taxes (Note 15b) 312,117 261,196
Non-controlling interest (Note 3) 68,898 71,537
---------- ----------
1,159,153 906,533
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock (Note 11b) 226,444 135,526
Contributed surplus (Note 12a) 9,173 3,840
Retained earnings 360,719 284,712
---------- ----------
596,336 424,078
---------- ----------
$1,755,489 $1,330,611
========== ==========
Commitments and contingent liabilities (Note 18)
On behalf of the Board
M.F. Belich (signed) J.A. Thomson (signed)
Director Director
See accompanying notes to the consolidated financial statements.
====================================================================================================================
COMPTON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------------
(thousands of dollars, except per share data)
REVENUE
Oil and natural gas revenues $ 557,879 $ 391,659 $ 346,565
Royalties (132,717) (93,416) (82,566)
--------- --------- ---------
425,162 298,243 263,999
--------- --------- ---------
EXPENSES
Operating 66,802 55,655 49,916
Transportation 10,858 8,595 8,447
General and administrative 21,223 15,215 12,206
Interest and finance charges (Note 7) 34,951 33,733 30,595
Tender costs (Note 8) 20,750 -- --
Depletion and depreciation 105,504 82,554 61,749
Foreign exchange gain (Note 9) (7,353) (14,631) (47,368)
Accretion of asset retirement obligations (Note 10) 1,975 1,670 1,436
Stock-based compensation (Note 12a) 5,903 3,410 793
Risk management loss (Note 16a (iv)) 19,302 8,808 4,132
--------- --------- ---------
279,915 195,009 121,906
--------- --------- ---------
EARNINGS BEFORE TAXES AND NON-CONTROLLING INTEREST 145,247 103,234 142,093
--------- --------- ---------
INCOME TAXES (Note 15a)
Current 5,071 2,751 3,282
Future 52,317 33,432 20,041
--------- --------- ---------
57,388 36,183 23,323
--------- --------- ---------
EARNINGS BEFORE NON-CONTROLLING INTEREST 87,859 67,051 118,770
Non-controlling interest (Note 3) 6,533 3,418 (110)
--------- --------- ---------
NET EARNINGS $ 81,326 $ 63,633 $ 118,880
========= ========= =========
NET EARNINGS PER SHARE (Note 13)
Basic $ 0.65 $ 0.54 $ 1.02
========= ========= =========
Diluted $ 0.62 $ 0.51 $ 0.97
========= ========= =========
===================================================================================================================
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years ended December 31, 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
RETAINED EARNINGS, beginning of year $ 284,712 $ 224,569 $ 112,039
Net earnings 81,326 63,633 118,880
Premium on redemption of shares (Note 11b) (5,319) (3,490) (6,350)
--------- --------- ---------
RETAINED EARNINGS, end of year $ 360,719 $ 284,712 $ 224,569
========= ========= =========
See accompanying notes to the consolidated financial statements.
=====================================================================================================================
COMPTON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended December 31, 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
OPERATING ACTIVITIES
Net earnings $ 81,326 $ 63,633 $ 118,880
Amortization of deferred charges and other 2,190 2,101 2,208
Tender costs 20,750 -- --
Depletion and depreciation 105,504 82,554 61,749
Accretion of asset retirement obligations 1,975 1,670 1,436
Unrealized foreign exchange gain (7,808) (14,652) (47,388)
Future income taxes 52,317 33,432 20,041
Unrealized risk management loss 10,171 2,179 --
Stock-based compensation 5,903 3,410 760
Asset retirement expenditures (749) (614) (2,683)
Non-controlling interest 6,533 3,418 (110)
--------- --------- ---------
278,112 177,131 154,893
Change in non-cash working capital (Note 17) 8,441 (12,594) 1,318
--------- --------- ---------
286,553 164,537 156,211
--------- --------- ---------
FINANCING ACTIVITIES
Issuance (repayment) of bank debt (42,100) 43,373 124,500
Issuance of senior notes 353,130 -- --
Issue costs on senior notes (12,670) -- (128)
Redemption of senior notes (199,973) -- --
Proceeds from share issuances, net 89,752 3,258 6,400
Proceeds from partnership unit issuance -- 74,343 --
Distributions to partner (9,172) (6,114) --
Redemption of common shares (6,118) (4,005) (7,942)
Change in non-cash working capital (Note 17) (1,829) 324 (1,387)
--------- --------- ---------
171,020 111,179 121,443
--------- --------- ---------
INVESTING ACTIVITIES
Property and equipment additions (484,213) (296,676) (222,055)
Corporate acquisitions (Note 2) -- (12,132) --
Property acquisitions (28,575) (20,830) (65,622)
Property dispositions -- 19,276 2,194
Change in non-cash working capital (Note 17) 54,101 29,166 8,652
--------- --------- ---------
(458,687) (281,196) (276,831)
--------- --------- ---------
CHANGE IN CASH (1,114) (5,480) 823
CASH, beginning of year 10,068 15,548 14,725
--------- --------- ---------
CASH, end of year $ 8,954 $ 10,068 $ 15,548
========= ========= =========
See accompanying notes to the consolidated financial statements.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Compton Petroleum Corporation (the "Company" or "Compton") is in the
business of the exploration for and production of petroleum and natural
gas reserves in the Western Canada Sedimentary Basin.
a) BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in Canada
within the framework of the accounting policies summarized below.
Information prepared in accordance with accounting principles generally
accepted in the United States is included in Note 19.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The consolidated financial statements
also include the accounts of Mazeppa Processing Partnership in accordance
with Accounting Guideline 15 ("AcG-15") "Consolidation of Variable
Interest Entities", as outlined in Note 3.
All amounts are presented in Canadian dollars unless otherwise stated.
b) MEASUREMENT UNCERTAINTY
The timely preparation of financial statements requires that Management
make estimates and assumptions and use judgment regarding assets,
liabilities, revenues, and expenses. Such estimates relate primarily to
transactions and events that have not settled as of the date of the
financial statements. Accordingly, actual results may differ from
estimated amounts as future confirming events occur.
Amounts recorded for depletion and depreciation, and amounts used in
impairment test calculations are based upon estimates of petroleum and
natural gas reserves and future costs to develop those reserves. By their
nature, these estimates of reserves, costs, and related future cash flows
are subject to uncertainty, and the impact on the consolidated financial
statements of future periods could be material.
The calculation of asset retirement obligations include estimates of the
ultimate settlement amounts, inflation factors, credit adjusted discount
rates, and timing of settlement. The impact of future revisions to these
assumptions on the consolidated financial statements of future periods
could be material.
The values of pension assets and obligations and the amount of pension
costs charged to net earnings depend on certain actuarial and economic
assumptions which by their nature are subject to measurement uncertainty.
c) PROPERTY AND EQUIPMENT
i) Capitalized costs
The Company follows the full cost method of accounting for its
petroleum and natural gas operations. Under this method all costs
related to the exploration for and development of petroleum and
natural gas reserves are capitalized. Costs include lease
acquisition costs, geological and geophysical expenses, costs of
drilling both producing and non-producing wells, production
facilities, asset retirement costs, and certain general and
administrative expenses directly related to exploration and
development activities.
Proceeds from the sale of properties are applied against
capitalized costs, without any gain or loss being realized, unless
such sale would significantly alter the rate of depletion and
depreciation.
- -------------------------------------------------------------------------------
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Expenditures related to renewals or betterments that improve the
productive capacity or extend the life of an asset are capitalized.
Maintenance and repairs, other than major turnaround costs, are
expensed as incurred. Major turnaround costs are included in
property and equipment when incurred and charged to depletion and
depreciation in the consolidated statement of earnings over the
estimated period of time to the next scheduled turnaround.
ii) Depletion and depreciation
Depletion and depreciation of property and equipment is provided
using the unit-of-production method based upon estimated proved
petroleum and natural gas reserves. The costs of significant
undeveloped properties are excluded from costs subject to depletion
until it is determined whether or not proved reserves are
attributable to the properties or impairment has occurred.
Estimated future costs to be incurred in developing proved reserves
are included in costs subject to depletion. For depletion and
depreciation purposes, relative volumes of natural gas production
and reserves are converted at the energy equivalent conversion rate
of six thousand cubic feet of natural gas to one barrel of crude
oil.
Depreciation of certain midstream facilities is provided for on a
straight line basis over 30 years and depreciation of office
equipment is provided for on a declining balance basis at 20% per
year.
iii) Impairment test
At each reporting period the Company performs an impairment test to
determine the recoverability of capitalized costs associated with
reserves. An impairment loss is recognized when the carrying amount
of a cost centre exceeds its fair value. The carrying amount of the
cost centre is not recoverable if the carrying amount exceeds the
sum of the undiscounted cash flows from proved reserves plus the
costs of unproved properties. If the sum of the cash flows is less
than the carrying amount, the impairment loss is limited to the
amount by which the carrying amount exceeds the sum of the fair
value of proved and probable reserves and the costs of unproved
properties that have been subject to a separate impairment test and
contain no probable reserves.
iv) Asset retirement obligations
The Company recognizes the fair value of estimated asset retirement
obligations on the consolidated balance sheet when a reasonable
estimate of fair value can be made. Asset retirement obligations
include those legal obligations where the Company will be required
to retire tangible long-lived assets such as well sites, pipelines,
and facilities. The asset retirement cost, equal to the initially
estimated fair value of the asset retirement obligation, is
capitalized as part of the cost of the related long-lived asset.
Changes in the estimated obligation resulting from revisions to
estimated timing or amount of undiscounted cash flows are
recognized as a change in the asset retirement obligation and the
related asset retirement cost.
Asset retirement costs are amortized using the unit-of-production
method and are included in depletion and depreciation in the
consolidated statement of earnings. Increases in the asset
retirement obligations resulting from the passage of time are
recorded as accretion of asset retirement obligations in the
consolidated statement of earnings.
Actual expenditures incurred are charged against the accumulated
obligation.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
v) Inventories
Physical inventory held for exploration, development, and operating
activities is included in property and equipment and is valued at
cost.
d) GOODWILL
Goodwill is recorded on a corporate acquisition when the purchase price
is in excess of the fair values assigned to assets acquired and
liabilities assumed. Goodwill is not amortized and an impairment test is
performed at least annually to evaluate the carrying value. To assess
impairment the fair value of the consolidated entity, excluding the
Mazeppa Processing Partnership, is determined and compared to the
carrying value. If fair value is less than the carrying value then a
second test is performed to determine the amount of the impairment. Any
loss recognized is equal to the difference between the implied fair value
and the carrying value of the goodwill.
e) FINANCIAL INSTRUMENTS
Financial instruments consist mainly of accounts receivable and other,
accounts payable, and long-term debt. The Company uses financial
instruments for non-trading purposes to manage fluctuations in commodity
prices, foreign currency exchange rates, and interest rates as described
in Note 16. The Company has elected not to designate any of its current
risk management activities as accounting hedges and accounts for all
derivative financial instruments using the mark-to-market accounting
method.
f) JOINT OPERATIONS
Certain petroleum and natural gas activities are conducted jointly with
others. These consolidated financial statements reflect only the
Company's proportionate interest in such activities.
g) FLOW-THROUGH SHARES
Resource expenditure deductions for income tax purposes related to
exploration and development activities funded by flow-through share
arrangements are renounced to investors in accordance with income tax
legislation. The liability for future income taxes is increased and
capital stock is reduced by the estimated tax benefits transferred to
shareholders at the time the resource expenditure deductions are
renounced.
h) EARNINGS PER SHARE AMOUNTS
The Company uses the treasury stock method to determine the dilutive
effect of stock options. This method assumes that proceeds received from
the exercise of in-the-money stock options are used to repurchase common
shares at the average market price for the period. Basic net earnings per
common share are determined by dividing net earnings by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share are computed by giving effect to the potential
dilution that would occur if stock options were exercised.
i) INCOME TAXES
Income taxes are recorded using the liability method of accounting.
Future income taxes are calculated based on the difference between the
accounting and income tax basis of an asset or liability, using the
substantively enacted income tax rates. Changes in income tax rates that
are substantively enacted are reflected in the accumulated future income
tax balances in the period the change occurs.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
j) REVENUE RECOGNITION
Revenue associated with the production and sale of crude oil, natural
gas, and natural gas liquids owned by the Company is recognized when the
purchaser takes possession of the commodity product. Other revenue is
recognized in the period that the service is provided to the customer.
k) STOCK-BASED COMPENSATION PLAN
The Company records compensation expense in the consolidated statements
of earnings for stock options granted to Directors, Officers, and
employees using the fair-value method. Compensation costs are recognized
over the vesting period and the fair values are determined using the
Black-Scholes option pricing model.
The Company also has an employee stock savings plan. The contributions
are recorded as compensation expense as incurred.
l) DEFERRED FINANCING CHARGES
Financing costs related to the issuance of senior term notes are deferred
and are amortized over the term of the notes on a straight-line basis. If
the notes are retired, in whole or in part, prior to maturity, a pro-rata
share of the unamortized balance is expensed in the consolidated
statement of earnings.
m) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities of the Company that are denominated in
foreign currencies are translated into Canadian dollars at the period-end
exchange rate, with any resulting gain or loss recorded in the
consolidated statement of earnings.
n) DIVIDEND POLICY
The Company has neither declared nor paid any dividends on its common
shares. The Company intends to retain its earnings to finance growth and
expand its operations and does not anticipate paying any dividends on its
common shares in the foreseeable future.
o) DEFINED BENEFIT PENSION PLAN
The Company accrues for obligations under a defined benefit pension plan
and the related costs, net of plan assets. The cost of the pension is
actuarially determined using the projected benefit method based on length
of service and reflects Management's best estimate of expected plan
investment performance, salary escalation, and retirement age of
employees.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
2. BUSINESS COMBINATIONS
On April 12, 2004 and November 15, 2004, respectively, the Company acquired
100% of the issued and outstanding shares of Redwood Energy, Ltd. and Mayfair
Energy Ltd. for total cash consideration of $12.1 million plus the assumption
of $12.1 million of debt. Both entities were independent exploration and
production companies with operations in the Company's core areas.
The business combinations have been accounted for using the purchase method
with results of operations included in the consolidated financial statements
from the date of acquisition. Goodwill recognized on these transactions
amounted to $7.9 million.
During the year ended December 31, 2004, both companies were wound up into
Compton Petroleum Corporation and dissolved.
3. NON-CONTROLLING INTEREST
Mazeppa Processing Partnership ("MPP" or "the Partnership") is a limited
partnership organized under the laws of the province of Alberta and owns
certain midstream facilities, including gas plants and pipelines in Southern
Alberta. The Company processes a significant portion of its production from the
area through these facilities pursuant to a processing agreement with MPP. The
Company does not have an ownership position in MPP, however, the Company,
through a management agreement, manages the activities of MPP and is considered
to be the primary beneficiary of MPP's operations. Pursuant to AcG-15, these
consolidated financial statements include the assets, liabilities, and
operations of the Partnership. Equity in the Partnership, attributable to the
partners of MPP, is recorded on consolidation as a non-controlling interest and
is comprised of the following:
As at December 31, 2005 2004
--------- ----------
Non-controlling interest, beginning of year $ 71,537 $ (110)
Proceeds from issue of Partnership units, net - 74,343
Earnings attributable to non-controlling interest 6,533 3,418
Distributions to limited partner (9,172) (6,114)
--------- ----------
Non-controlling interest, end of year $ 68,898 $ 71,537
========= ==========
Commencing May 1, 2004, pursuant to the terms of a processing agreement between
Compton and MPP, Compton pays a monthly fee to MPP for the transportation and
processing of natural gas through the MPP owned facilities. The fee is
comprised of a fixed base fee of $764 thousand per month plus MPP operating
costs, net of third party revenues. These amounts are eliminated from revenues
and expenses on consolidation.
The processing agreement has a five year term ending April 1, 2009, at which
time Compton may renew the agreement under terms determined at that time or
purchase the Partnership units for the predetermined amount of $55 million,
deemed to be fair value. In the event that the Company does not renew the
processing agreement nor exercise the purchase option, the Limited Partner may
dispose of the Partnership units to an independent third party.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
3. NON-CONTROLLING INTEREST (CONTINUED)
MPP has guaranteed payment of certain obligations of its limited partner under
a credit agreement between the limited partner and a syndicate of lenders. The
maximum liability of the Partnership under the guarantee is limited to amounts
due and payable to MPP by the Company pursuant to the processing agreement. The
maximum liability at December 31, 2005 was $30.6 million (2004 - $39.7 million)
payable over the remaining term of the processing agreement. The Company has
determined that its exposure to loss under these arrangements is minimal, if
any.
4. PROPERTY AND EQUIPMENT
ACCUMULATED
DEPLETION
AND
As at December 31, 2005 COST DEPRECIATION NET
----------- ------------ -----------
Exploration and development costs $ 1,553,543 $ (366,902) $ 1,186,641
Production equipment and processing facilities 436,948 (52,771) 384,177
Inventory 6,469 -- 6,469
Future asset retirement costs 10,365 (3,771) 6,594
Office equipment 7,641 (4,151) 3,490
----------- ----------- -----------
$ 2,014,966 $ (427,595) $ 1,587,371
=========== =========== ===========
Accumulated
Depletion
and
as At December 31, 2005 Cost Depreciation Net
----------- ------------ -----------
Exploration and development costs $ 1,161,396 $ (281,614) $ 879,782
Production equipment and processing facilities 317,477 (34,150) 283,327
Inventory 6,187 -- 6,187
Future asset retirement costs 9,576 (3,111) 6,465
Office equipment 6,005 (3,216) 2,789
----------- ----------- -----------
$ 1,500,641 $ (322,091) $ 1,178,550
=========== =========== ===========
Employee salaries and insurance costs of $4.7 million at December 31, 2005
(2004 - $4.6 million) directly related to exploration and development
activities were capitalized. No other general and administrative costs are
capitalized.
As at December 31, 2005 future capital expenditures of $192.9 million (2004 -
$89.1 million, 2003 - $62.4 million), as estimated by independent reserve
engineers, relating to the development of proved reserves have been included in
costs subject to depletion. Undeveloped properties with a cost at December 31,
2005 of $251.3 million (2004 - $187.8 million, 2003 - $161.9 million) included
in exploration and development costs, have not been subject to depletion.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT (CONTINUED)
The prices used in the evaluation of the carrying value of the Company's
reserves for the purposes of the impairment test are:
As at December 31, 2005 NATURAL GAS OIL NGL
------------- --------------- -------------
$ per mcf $ per bbl $ per bbl
2006 $11.86 $61.58 $61.87
2007 $10.76 $60.97 $61.64
2008 $9.16 $57.38 $58.19
2009 $8.33 $54.11 $55.05
2010 $8.09 $51.85 $52.58
Approximate % increase thereafter 2% 2% 2%
5. CREDIT FACILITIES
As at December 31, 2005 2004
------------- -----------
Authorized $ 289,000 $ 240,000
============= ===========
Prime rate $ 22,900 $ 3,000
Bankers' Acceptance 155,000 217,000
------------- -----------
Utilized $ 177,900 $ 220,000
============= ===========
As at December 31, 2005, the Company had arranged authorized senior credit
facilities with a syndicate of Canadian banks in the amount of $289 million.
Advances under the facilities can be drawn and currently bear interest as
follows:
Prime rate plus 0.15%
Bankers' Acceptance rate plus 1.15%
LIBOR rate plus 1.15%
Margins are determined based on the ratio of total consolidated debt to
consolidated cash flow. The facilities reach term on July 5, 2006 and, if not
renewed, will mature 366 days later on July 6, 2007. Accordingly, the 2005
facilities have been classified as a non-current liability.
The senior credit facilities are secured by a first fixed and floating charge
debenture in the amount of $600 million covering all the Company's assets and
undertakings.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
6. SENIOR TERM NOTES
As at December 31, 2005 2004
----------- ----------
Senior term notes
US$300 million, 7.625% due December 1, 2013 $ 349,770 $ -
US$6.75 million, 9.90% due May 15, 2009 (2004 - US$165 million) 7,870 198,594
----------- ----------
$ 357,640 $ 198,594
=========== ==========
In November 2005, a wholly owned subsidiary of the Company issued US$300
million senior term notes maturing December 1, 2013. The notes bear interest at
7.625% and are subordinate to the Company's bank credit facilities.
The 7.625% notes are not redeemable prior to December 1, 2009, except in
limited circumstances. After that time, they can be redeemed in whole or part,
at the rates indicated below:
December 1, 2009 103.813%
December 1, 2010 101.906%
December 1, 2011 and thereafter 100.000%
In November 2005, the Company and a wholly owned subsidiary of the Company
completed a tender offer and consent solicitation to amend the Indenture
relating to the 9.90% notes. The Company and a wholly owned subsidiary of the
Company paid 107.195% plus accrued and unpaid interest for the US$158.25
million 9.90% notes tendered by the note holders. Information related to the
tender costs is included in Note 8.
The remaining US$6.75 million of 9.90% notes are not redeemable prior to May
15, 2006. After that time, they can be redeemed in whole or part, at the rates
indicated below:
May 15, 2006 104.950%
May 15, 2007 102.475%
May 15, 2008 and thereafter 100.000%
7. INTEREST AND FINANCE CHARGES
Amounts charged to expense during the year ended are as follows:
Years ended December 31, 2005 2004 2003
------------ ------------ -----------
Interest on bank debt, net $ 11,520 $ 9,662 $ 6,611
Interest on senior term notes 20,912 21,281 21,711
Finance charges 2,519 2,790 2,273
------------ ------------ -----------
Total $ 34,951 $ 33,733 $ 30,595
============ ============ ===========
Finance charges include the amortization of deferred charges and other current
year expenses.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
8. DEFERRED FINANCING CHARGES AND OTHER
The following table presents the reconciliation of the beginning and ending
aggregate carrying amount of deferred financing charges associated with the
issue of senior term notes:
Years ended December 31, 2005 2004
------------ ------------
Deferred financing charges and other, beginning of year $ 9,729 $ 11,532
Issue costs on 7.625% Senior Notes 12,670 -
Pro-rata reduction on repayment of 9.90% Senior Notes (7,053) -
Amortization expense (2,119) (2,133)
Other (71) 330
------------ ------------
Deferred financing charges and other, end of year $ 13,156 $ 9,729
============ ============
Costs incurred on the tender for the 9.90% senior term notes in 2005 were as
follows:
Premium payment $ 7,814
Consent solicitation fee 5,883
Pro-rata reduction of deferred financing charges on repayment of
9.90% Senior Notes 7,053
------------
Total $ 20,750
============
9. FOREIGN EXCHANGE (GAIN) LOSS
Amounts charged to foreign exchange (gain) loss during the year ended were as
follows:
Years ended December 31, 2005 2004 2003
----------- ----------- -----------
Foreign exchange gain on translation of US$ debt $ (7,808) $ (14,652) $ (47,388)
Other foreign exchange loss 455 21 20
----------- ----------- -----------
Total $ (7,353) $ (14,631) $ (47,368)
=========== =========== ===========
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
10. ASSET RETIREMENT OBLIGATIONS
The following table presents the reconciliation of the beginning and ending
aggregate carrying amount of the obligations associated with the retirement of
oil and natural gas assets:
As at December 31, 2005 2004
---------- ---------
Asset retirement obligations, beginning of year $ 18,006 $ 7,329
Liabilities incurred 5,218 3,357
Liabilities settled and disposed (1,275) (4,350)
Accretion expense 1,975 1,670
Revision of estimates (3,154) --
---------- ---------
Asset retirement obligations, end of year $ 20,770 $ 18,006
========== =========
The total undiscounted amount of estimated cash flows required to settle the
obligations was $185.8 million (2004 - $148.9 million), which has been
discounted using a credit-adjusted risk free rate of 10.7% (2004 - 10.8%). The
majority of these obligations are not expected to be settled for several years
or decades into the future. Settlements will be funded from general Company
resources at the time of retirement and removal.
11. CAPITAL STOCK
a) AUTHORIZED
The Company is authorized to issue an unlimited number of common shares
and an unlimited number of preferred shares, issuable in series.
b) ISSUED AND OUTSTANDING
As at December 31, 2005 2004
------------------------------ -----------------------------
NUMBER Number
OF of
SHARES AMOUNT Shares Amount
----------- ------------ ------------ -----------
(000S) (000S)
Common shares outstanding,
beginning of year 117,354 $ 135,526 116,423 $ 131,577
Shares issued for cash, net 7,500 87,294 - -
Shares issued for property - - 110 875
Shares issued under stock
option plan 2,926 4,424 1,271 3,589
Shares repurchased (517) (800) (450) (515)
----------- ------------ ------------ -----------
Common shares outstanding,
end of year 127,263 $ 226,444 117,354 $ 135,526
=========== ============ ============ ===========
In February 2005, the Company issued 7,500,000 common shares for gross
proceeds of $90.0 million before underwriters' fees and issue expenses of
$4.1 million.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
11. CAPITAL STOCK (CONTINUED)
The Company maintains a Normal Course Issuer Bid program on an annual
basis. Under the current bid, the Company may purchase for cancellation
up to 6,000,000 of its common shares, representing approximately 5.0% of
the issued and outstanding common shares at the time the bid received
regulatory approval.
During the year, the Company purchased for cancellation 516,600 common
shares at an average price of $11.84 per share (2004 - 450,100 common
shares at an average price of $8.90 per share) pursuant to the normal
course issuer bid. The excess of the purchase price over book value has
been charged to retained earnings.
c) SHAREHOLDER RIGHTS PLAN
The Company has a shareholder rights plan (the "Plan") to ensure all
shareholders are treated fairly in the event of a take-over offer or
other acquisition of control of the Company.
Pursuant to the Plan, the Board of Directors authorized and declared the
distribution of one Right in respect of each common share outstanding. In
the event that an acquisition of 20% or more of the Company's shares is
completed and the acquisition is not a permitted bid, as defined by the
Plan, each Right will permit the holder to acquire common shares at a 50%
discount to the market price at that time.
12. STOCK-BASED COMPENSATION PLANS
a) STOCK OPTION PLAN
The Company has implemented a stock option plan for Directors, Officers,
and employees. The exercise price of each option approximates the market
price for the common shares on the date the option was granted. Options
granted under the plan before June 1, 2003 are generally fully
exercisable after four years and expire ten years after the grant date.
Options granted under the plan after June 1, 2003 are generally fully
exercisable after four years and expire five years after the grant date.
The following tables summarize the information relating to stock options:
As at December 31, 2005 2004
------------------------------ -----------------------------
WEIGHTED Weighted
AVERAGE average
STOCK EXERCISE Stock exercise
OPTIONS PRICE options price
------------- ----------- ------------ -----------
(000S) (000s)
Outstanding, beginning of year 11,655 $3.51 10,672 $2.54
Granted 2,930 $11.89 2,549 $7.34
Exercised (2,926) $1.32 (1,271) $2.56
Cancelled (213) $8.30 (295) $5.26
------------- ----------- ------------ -----------
Outstanding, end of year 11,446 $6.13 11,655 $3.51
============= =========== ============ ===========
Exercisable, end of year 6,219 $3.38 7,812 $2.19
============= =========== ============ ===========
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
12. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The range of exercise prices of stock options outstanding and exercisable
at December 31, 2005 were as follows:
Outstanding Options Exercisable Options
---------------------------------------------- ------------------------------
Weighted
average Weighted Weighted
Number of remaining average Number of average
options contractual exercise options exercise
Range of Exercise Prices outstanding life (years) price outstanding price
------------------------ ------------ ----------- ----------- ------------ ------------
(000s) (000s)
$0.80 - $2.99 2,644 2.7 $1.55 2,644 $1.55
$3.00 - $3.99 1,509 5.3 $3.47 1,279 $3.40
$4.00 - $4.99 1,598 6.1 $4.30 1,215 $4.24
$5.00 - $6.99 1,188 2.9 $5.87 597 $5.88
$7.00 - $9.99 1,485 3.4 $7.62 427 $7.62
$10.00 - $12.99 2,690 4.2 $11.58 42 $10.60
$13.00 - $17.38 332 4.7 $13.70 15 $13.44
------------ ----------- ----------- ------------ ------------
11,446 4.1 $6.13 6,219 $3.38
============ =========== =========== ============ ============
The Company has recorded stock-based compensation expense in the
consolidated statement of earnings for stock options granted to
Directors, Officers, and employees after January 1, 2003 using the fair
value method.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with weighted average
assumptions for grants as follows:
Years ended December 31, 2005 2004 2003
---------- ---------- ---------
Weighted average fair value of options granted $5.45 $3.70 $3.01
Risk-free interest rate 3.6% 3.9% 4.3%
Expected life (years) 5.0 5.0 6.1
Expected volatility 43.9% 49.6% 56.0%
The following table presents the reconciliation of contributed surplus
with respect to stock-based compensation:
As at December 31, 2005 2004
---------- ---------
Contributed surplus, beginning of year $ 3,840 $ 760
Stock-based compensation expense 5,903 3,410
Stock options exercised (570) (330)
---------- ---------
Contributed surplus, end of year $ 9,173 $ 3,840
========== =========
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
12. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The Company has not recorded stock-based compensation expense in the
consolidated statement of earnings related to stock options granted prior
to 2003. If the Company had applied the fair value method to options
granted prior to 2003, the effect would have been as follows:
Years ended December 31, 2005 2004 2003
---------- ----------- ---------
Reduction in net earnings $1,007 $1,545 $2,317
Reduction in net earnings per common share -
basic and diluted $0.01 $0.01 $0.02
b) SHARE APPRECIATION RIGHTS PLAN
CICA Handbook section 3870 requires recognition of compensation costs
with respect to changes in the intrinsic value for the variable component
of fixed share appreciation rights ("SARs"). During the years ended
December 31, 2005 and 2004, there were no significant compensation costs
related to the outstanding variable component of these SARs, (2003 -
$33,000). The liability related to the variable component of these SARs
amounts to $1.4 million, which is included in accounts payable as at
December 31, 2005 (2004 - $1.7 million). All outstanding SARs having a
variable component expire at various times through 2011.
13. PER SHARE AMOUNTS
The following table summarizes the common shares used in calculating net
earnings per common share:
Years ended December 31, 2005 2004 2003
---------- ---------- ----------
(000s) (000s) (000s)
Weighted average common shares
outstanding - basic 125,627 117,244 116,267
Effect of stock options 6,040 6,789 5,856
---------- ---------- ----------
Weighted average common shares
outstanding - diluted 131,667 124,033 122,123
========== ========== ==========
In calculating diluted earnings per common share for the year ended December
31, 2005, the Company excluded 331,800 options (2004 - 288,000, 2003 - 615,100)
as the exercise price was greater than the average market price of its common
shares in those years.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
14. DEFINED BENEFIT PENSION PLAN
Substantially all of the employees of MPP are enrolled in a co-sponsored,
defined benefit pension plan. The Company does not have a pension plan for
other employees. Information relating to the MPP retirement plan is outlined
below:
As at December 31, 2005 2004
------- -------
Accrued benefit obligation $ 7,562 $ 5,855
------- -------
Fair value of plan assets $ 5,839 $ 5,221
------- -------
Funded status
Plan assets less than benefit obligation $(1,723) $ (634)
Unamortized net actuarial loss (gain) 891 (269)
Unamortized past service costs 862 933
------- -------
Accrued benefit asset, included in deferred financing
charges and other $ 30 $ 30
======= =======
Economic assumptions used to determine benefit obligation and periodic expense
were:
Years ended December 31, 2005 2004
------- -------
Discount rate 5.0% 6.3%
Expected rate of return on assets 7.0% 7.0%
Rate of compensation increase 3.5% 4.5%
Average remaining service period of covered employees 15 YEARS 15 years
Actuarial evaluations are required every three years, the next evaluation being
January 1, 2006
Pension expense, included in MPP operating costs, is as follows:
Years ended December 31, 2005 2004
------- -------
Current service cost $ 232 $ 190
Interest on accrued benefit obligation 372 336
Interest on assets (364) (333)
Amortization on past service cost 69 67
------- -------
Pension expense, included in general and administrative expense $ 309 $ 260
======= =======
MPP expects to contribute $340 thousand to the plan in 2006. Contributions by
the participants to the pension plan were $75 thousand for the year ended
December 31, 2005.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
15. INCOME TAXES
a) The following table reconciles income taxes calculated at the Canadian
statutory rate with actual income taxes:
Years ended December 31, 2005 2004 2003
--------- --------- ---------
Earnings before taxes and non-controlling interest $ 145,247 $ 103,234 $ 142,093
--------- --------- ---------
Canadian statutory rate 37.6% 38.6% 40.6%
Expected income taxes $ 54,613 $ 39,848 $ 57,690
Effect on taxes resulting from:
Non-deductible Crown charges 15,061 17,611 23,922
Resource allowance (11,980) (13,535) (16,485)
Non-deductible stock-based compensation 2,221 1,316 309
Federal capital tax 1,896 2,526 2,497
Effect of tax rate changes (5,764) (8,359) (37,130)
Non-taxable portion of capital items -- (2,831) (8,202)
Other 1,341 (393) 722
--------- --------- ---------
Provision for income taxes $ 57,388 $ 36,183 $ 23,323
========= ========= =========
Current
Income taxes $ 3,175 $ 225 $ 785
Federal capital taxes 1,896 2,526 2,497
Future 52,317 33,432 20,041
--------- --------- ---------
$ 57,388 $ 36,183 $ 23,323
========= ========= =========
Effective tax rate 39.5% 35.0% 16.4%
========= ========= =========
A significant portion of the Company's taxable income is generated by a
partnership. Income taxes are incurred on the majority of the
partnership's taxable income in the year following its inclusion in the
Company's consolidated net earnings. Current income tax is dependent upon
the amount of capital expenditures incurred and the method of deployment.
b) The net future income tax liability is comprised of:
As at December 31, 2005 2004
----------- -----------
Future income tax liabilities
Property and equipment in excess of tax values $ 232,258 $ 199,931
Timing of partnership items 93,532 67,089
Foreign exchange gain on long-term debt 11,466 10,169
Future income tax assets
Attributed Canadian royalty income (8,830) (9,015)
Asset retirement obligations (6,984) (6,057)
Other (9,325) (921)
----------- -----------
Net future income tax liability $ 312,117 $ 261,196
=========== ===========
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
16. FINANCIAL INSTRUMENTS
a) DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
The Company is exposed to risks from fluctuations in commodity prices,
interest rates, and Canada/US currency exchange rates. The Company
utilizes various derivative financial instruments for non-trading
purposes to manage and mitigate its exposure to these risks. Effective
January 1, 2004, the Company elected to account for all derivative
financial instruments using the mark-to-market method.
Risk management activities during the periods, utilizing derivative
instruments, relate to commodity price hedges and cross currency interest
rate swap arrangements and are summarized below:
i) COMMODITY PRICE HEDGES
The Company enters into hedge transactions relating to crude oil and
natural gas prices to mitigate volatility in commodity prices and the
resulting impact on cash flow. The contracts entered into are forward
transactions providing the Company with a range of prices on the
commodities sold. Outstanding hedge contracts at December 31, 2005 are:
DAILY MARK-
NOTIONAL AVERAGE TO-MARKET
COMMODITY TERM VOLUME PRICE GAIN (LOSS)
--------- ---- ------ ----- -----------
Natural gas
Collar Nov. 1/05 - Mar. 31/06 38,095 mcf $8.70 - $12.74/mcf $ (929)
Fixed Nov. 1/05 - Mar. 31/06 9,524 mcf $9.03/mcf (1,735)
Collar Apr. 1/06 - Oct. 31/06 42,857 mcf $8.73/mcf - $12.87/mcf (929)
----------
(3,593)
Crude Oil
Collar Jan. 1 - Dec. 31/06 3,000 bbls US$55.00 - $75.17/bbl 443
----------
Unrealized risk management loss $ (3,150)
==========
The Company has not entered into any additional contracts subsequent to
December 31, 2005.
At December 31, 2004 the mark-to-market valuation of commodity contracts
resulted in a $2.0 million unrealized risk management asset.
ii) DEFERRED RISK MANAGEMENT LOSS
As at January 1, 2004, the Company elected not to designate any of its
risk management activities as accounting hedges and accordingly accounts
for all derivative instruments using the mark-to-market method. As a
result, on January 1, 2004, the Company recorded a liability and a
deferred risk management loss of $10.9 million relating to then
outstanding commodity hedges and the interest rate swap. During the year
ended December 31, 2005, $1.6 million (2004 - $3.6 million) of the
deferred loss was charged to earnings. The remaining balance of $5.6
million at December 31, 2005 (2004 - $7.3 million) relates to the
interest rate swap and will be charged to earnings in annual amounts of
$1.6 million until eliminated in 2009.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
16. FINANCIAL INSTRUMENTS (CONTINUED)
iii) CROSS CURRENCY INTEREST RATE SWAP
Concurrent with the closing of the 9.90% senior notes offering in 2002,
the Company entered into interest rate swap arrangements with its banking
syndicate that convert fixed rate U.S. dollar denominated interest
obligations into floating rate Canadian dollar denominated interest
obligations. This arrangement resulted in an effective interest rate of
7.63% during period ended December 31, 2005 (2004 - 7.24%, 2003 - 7.85%)
net of gains realized. On purchase of the majority of the 9.90% senior
notes in November 2005, the Company elected not to collapse the cross
currency interest rate swap and incur the associated costs of
approximately $12.2 million. Accordingly, the swap remains outstanding
and at December 31, 2005, the Company valued the liability relating to
future unrealized losses on the swap arrangements to be $14.8 million
(2004 - $11.4 million) on a mark-to-market basis.
iv) RISK MANAGEMENT (GAINS) LOSSES
Risk management (gains) and losses recognized during the periods relating
to the above are summarized below:
COMMODITY INTEREST
YEAR ENDED DECEMBER 31, 2005 CONTRACTS RATE SWAP TOTAL
--------- --------- --------
Unrealized
Amortization of deferred loss $ -- $ 1,642 $ 1,642
Change in fair value 5,136 3,393 8,529
-------- -------- --------
5,136 5,035 10,171
Realized
Cash settlements 9,663 (532) 9,131
-------- -------- --------
Total loss $ 14,799 $ 4,503 $ 19,302
======== ======== ========
Commodity Interest
Year ended December 31, 2004 Contracts Rate Swap Total
--------- --------- --------
Unrealized
Amortization of deferred loss $ 2,001 $ 1,642 $ 3,643
Change in fair value (3,986) 2,522 (1,464)
-------- -------- --------
(1,985) 4,164 2,179
Realized
Cash settlements 9,151 (2,522) 6,629
-------- -------- --------
Total loss $ 7,166 $ 1,642 $ 8,808
======== ======== ========
Risk management loss of $4.1 million for year ended December 31, 2003
reflects realized losses recognized under hedge accounting.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
16. FINANCIAL INSTRUMENTS (CONTINUED)
b) OTHER FINANCIAL INSTRUMENTS AND RISK
i) CREDIT RISK MANAGEMENT
Accounts receivable include amounts receivable for oil and natural gas
sales which are generally made to large credit worthy purchasers and
amounts receivable from joint venture partners which are recoverable from
production. Accordingly, the Company views credit risks on these amounts
as low.
The Company is exposed to losses in the event of non-performance by
counter-parties to financial instruments. The Company deals with major
institutions and believes these risks are minimal.
ii) FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Other than its senior term notes, the fair values of the Company's
financial assets and liabilities that are included in the Company's
consolidated balance sheet as at December 31, 2005, approximate their
carrying value. The estimated fair value of senior term notes was $361.1
million as at December 31, 2005 (2004 - $218.5 million) based upon market
information.
iii) FOREIGN CURRENCY RISK MANAGEMENT
The Company is exposed to fluctuations in the exchange rate between the
Canadian dollar and the U.S. dollar. Crude oil and to a certain extent
natural gas prices are based upon reference prices denominated in U.S.
dollars, while the majority of the Company's expenses are denominated in
Canadian dollars. When appropriate, the Company enters into agreements to
fix the exchange rate of Canadian dollars to U.S. dollars in order to
manage the risk. During 2003, a gain of $2.5 million was realized and
included in revenue. Subsequent to December 31, 2005 the Company entered
into the following forward contracts:
NOTIONAL EXCHANGE
FOREIGN CURRENCY TERM AMOUNT RATE
---------------- ---- ------ ----
Currency forward Jan. 1 - Dec. 31/06 US$55,000/day 1.1530
Currency forward Jan. 1 - Dec. 31/06 US$55,000/day 1.1630
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
17. CASH FLOW
Changes in non-cash working capital items increased (decreased) cash as
follows:
Years ended December 31, 2005 2004 2003
-------- -------- --------
Accounts receivable and other $(17,371) $(20,176) $(16,593)
Accounts payable 78,385 39,598 23,635
Taxes payable (301) (2,526) 1,541
-------- -------- --------
$ 60,713 $ 16,896 $ 8,583
======== ======== ========
Net change in non-cash working capital
Relating to:
Operating activities $ 8,441 $(12,594) $ 1,318
Financing activities (1,829) 324 (1,387)
Investing activities 54,101 29,166 8,652
-------- -------- --------
$ 60,713 $ 16,896 $ 8,583
======== ======== ========
Amounts paid during the year relating to interest expense and capital taxes
were as follows:
Years ended December 31, 2005 2004 2003
-------- -------- --------
Interest paid $ 31,444 $ 28,604 $ 26,923
======== ======== ========
Current income taxes paid $ 4,101 $ 4,952 $ 1,485
======== ======== ========
18. COMMITMENTS AND CONTINGENT LIABILITIES
a) COMMITMENTS
The Company has committed to certain payments over the next five years,
as follows:
2006 2007 2008 2009 2010
------- ------- ------- ------- -------
Operating leases $11,277 $ 4,809 $ 2,609 $ -- $ --
Office rent 1,356 249 -- -- --
MPP partnership distributions 9,172 9,172 9,172 3,057 --
9.90% senior notes -- -- -- 7,870 --
Other 52 -- -- -- --
------- ------- ------- ------- -------
$21,857 $14,230 $11,781 $10,927 $ --
======= ======= ======= ======= =======
b) LEGAL PROCEEDINGS
The Company is involved in various legal claims associated with normal
operations. These claims, although unresolved at the current time, in
management's opinion, are minor in nature and are not expected to have a
material impact on the financial position or results of operations of the
Company.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING
RECONCILIATION OF CONSOLIDATED FINANCIAL STATEMENTS TO UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP") which, in
most respects, conforms to accounting principles generally accepted in the
United States of America ("U.S. GAAP"). The significant differences in those
principles, as they apply to the Company's statements of earnings, balance
sheets, and statements of cash flows, are described below.
RECONCILIATION OF NET EARNINGS UNDER CANADIAN GAAP TO U.S. GAAP:
For the years ended December 31, 2005 2004 2003
--------- --------- ---------
Net earnings for year, as reported $ 81,326 $ 63,633 $ 118,880
Adjustments
Accounting for income taxes (Note d) -- -- (743)
Risk management gain (loss), net (Note f) 1,067 2,236 (14,425)
Depletion and depreciation, net (Note a) 650 -- --
--------- --------- ---------
Net earnings before change in
accounting principle - U.S. GAAP 83,043 65,869 103,712
Cumulative effect of change in
accounting principle, net (Note h) -- -- (5,681)
--------- --------- ---------
Net earnings - U.S. GAAP $ 83,043 $ 65,869 $ 98,031
========= ========= =========
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING (CONTINUED)
CONSOLIDATED STATEMENTS OF EARNINGS - U.S. GAAP
For the years ended December 31, 2005 2004 2003
--------- --------- ---------
Revenue, net of royalties $ 425,162 $ 298,243 $ 263,999
Expenses
Operating 66,802 55,655 49,916
Transportation 10,858 8,595 8,447
General and administrative 21,223 15,215 12,206
Interest and finance charges 55,701 33,733 30,595
Depletion and depreciation (Note a) 104,525 82,554 61,749
Foreign exchange (gain) loss (7,353) (14,631) (47,368)
Accretion of asset retirement
obligations (Note h) 1,975 1,670 1,436
Stock-based compensation 5,903 3,410 793
Guarantee (Note i) (375) -- --
Risk management loss (Note f) 17,660 5,165 28,428
--------- --------- ---------
Net earnings before taxes and
non-controlling interest 148,243 106,877 117,797
Income tax expense (Note a, f) 58,292 37,590 14,195
Non-controlling interest (Note i) 6,908 3,418 (110)
--------- --------- ---------
Net earnings before change in
accounting principle - U.S. GAAP 83,043 65,869 103,712
Cumulative effect of change in
accounting principle, net (Note h) -- -- (5,681)
--------- --------- ---------
Net earnings - U.S. GAAP $ 83,043 $ 65,869 $ 98,031
========= ========= =========
Net earnings per common share
before change in accounting principle
- U.S. GAAP
Basic $ 0.66 $ 0.56 $ 0.89
Diluted $ 0.63 $ 0.53 $ 0.85
Net earnings per common share
- U.S. GAAP
Basic $ 0.66 $ 0.56 $ 0.84
Diluted $ 0.63 $ 0.53 $ 0.80
STATEMENTS OF OTHER COMPREHENSIVE INCOME
For the years ended December 31, 2005 2004 2003
--------- --------- ---------
Net earnings for the year - U.S. GAAP $ 83,043 $ 65,869 $ 98,031
Accounting for hedging (Note f) -- -- 858
--------- --------- ---------
Comprehensive income (Note e) $ 83,043 $ 65,869 $ 98,889
========= ========= =========
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
As at December 31, 2005 2004
-------------------------- --------------------------
AS REPORTED U.S. GAAP As reported U.S. GAAP
----------- --------- ----------- ---------
Assets
Cash $ 8,954 $ 8,954 $ 10,068 $ 10,068
Other current assets 132,484 132,484 117,098 117,098
Property and equipment (Note a) 1,587,371 1,588,350 1,178,550 1,178,550
Goodwill 7,914 7,914 7,914 7,914
Deferred financing charges and
other (Note g) 13,156 10,489 9,729 6,944
Deferred risk management loss (Note f) 5,610 -- 7,252 --
---------- ---------- ---------- ----------
$1,755,489 $1,748,191 $1,330,611 $1,320,574
========== ========== ========== ==========
Liabilities and shareholders' equity
Current liabilities $ 207,019 $ 207,019 $ 345,784 $ 345,784
Long term debt (Note g) 535,540 532,873 198,594 195,809
Asset retirement obligations 20,770 20,770 18,006 18,006
Unrealized hedge loss (Note f) 14,809 14,809 11,416 11,416
Guarantee obligation (Note i) -- 1,248 -- 1,623
Future income taxes (Notes a, c, f) 312,117 310,182 261,196 258,357
Non-controlling interest (Note i) 68,898 67,650 71,537 69,914
---------- ---------- ---------- ----------
1,159,153 1,154,551 906,533 900,909
---------- ---------- ---------- ----------
Capital stock (Note d) 226,444 256,431 135,526 165,513
Contributed surplus 9,173 9,173 3,840 3,840
Retained earnings 360,719 328,036 284,712 250,312
---------- ---------- ---------- ----------
596,336 593,640 424,078 419,665
---------- ---------- ---------- ----------
$1,755,489 $1,748,191 $1,330,611 $1,320,574
========== ========== ========== ==========
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended December 31, 2005 2004 2003
--------- --------- ---------
Operating activities
Net earnings $ 83,043 $ 65,869 $ 98,031
Amortization of deferred charges
and other 22,940 2,101 2,208
Depletion and depreciation 104,525 82,554 61,749
Accretion of asset retirement obligations 1,975 1,670 7,117
Unrealized foreign exchange gain (7,808) (14,652) (47,388)
Future income taxes 53,221 34,839 10,913
Unrealized risk management (gain) loss 8,529 (1,464) 24,296
Other 11,687 6,214 (2,033)
Change in non-cash working capital 62,542 20,742 20,525
--------- --------- ---------
Cash from operating activities 340,654 197,873 175,418
--------- --------- ---------
Cash from financing activities 171,020 111,179 121,443
--------- --------- ---------
Cash used in investing activities (Note j) (512,788) (310,362) (285,483)
--------- --------- ---------
Change in cash (1,114) (1,310) 11,378
Cash, beginning of year 10,068 11,378 --
--------- --------- ---------
Cash, end of year $ 8,954 $ 10,068 $ 11,378
========= ========= =========
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
a) FULL COST ACCOUNTING
The full cost method of accounting for crude oil and natural gas
operations under Canadian and U.S. GAAP differ in the following respects.
Under U.S. GAAP, an impairment test is applied to ensure the unamortized
capitalized costs in each cost centre do not exceed the sum of the
present value, discounted at 10%, of the estimated constant dollar,
future net operating revenue from proved reserves plus unimpaired
unproved property costs less applicable taxes. Under Canadian GAAP, a
similar impairment test calculation is performed with the exception that
cash flows from proved reserves are undiscounted and utilize forecasted
pricing to determine whether impairments exist. If an impairment exists,
then the amount of the write down is determined using the fair value of
reserves. The Company has completed an impairment test calculation at
December 31, 2005 and for all prior years, with no write-downs required
under either Canadian or U.S. GAAP.
Depletion and depreciation on property and equipment is provided using
the unit-of-production method under Canadian and U.S. GAAP. Both methods
also use proved reserves to determine the rate however, for Canadian
GAAP, proved reserves are determined using forecasted prices whereas U.S.
GAAP applies constant prices. This reconciliation item resulted in a $979
thousand reduction to depletion and depreciation expense for U.S. GAAP
purposes during the year ended December 31, 2005 (2004 - $nil).
b) STOCK-BASED COMPENSATION
Under Canadian GAAP, compensation costs have been recognized in the
consolidated financial statements for stock options granted to employees
and directors on or after January 1, 2003. For the effect on periods
prior to 2003 of stock-based compensation on the Canadian GAAP
financials, which would be the same adjustment under U.S. GAAP, see Note
12.
c) FUTURE INCOME TAXES
Under U.S. GAAP enacted tax rates are used to calculate future taxes,
whereas Canadian GAAP uses substantively enacted tax rates. The future
income tax adjustments included in the reconciliation of net earnings
under Canadian GAAP to U.S. GAAP and the balance sheet effects include
the effect of such rate differences, if any, as well as the tax effect of
the other reconciling items noted.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING (CONTINUED)
The net future income tax liability is comprised of:
As at December 31, 2005 2004
---------- ----------
Future income tax liabilities
Property and equipment $ 232,908 $ 199,931
Timing of partnership items 93,532 67,089
Foreign exchange gain on long-term debt 11,466 10,169
Future income tax assets
Attributed Canadian royalty income (8,830) (9,015)
Asset retirement obligations (6,984) (6,057)
Other (11,910) (3,760)
---------- ----------
Future income taxes $ 310,182 $ 258,357
========== ==========
d) FLOW THROUGH SHARES
U.S. GAAP requires flow-through shares be recorded at their fair value
without any adjustment for the renouncement of the tax deductions and any
temporary difference resulting from the renouncement must be recognized
in the determination of tax expense in the year incurred.
There have been no flow-through shares issued subsequent to 2003. The
impact of recording flow-through shares at their fair value for the year
ended December 31, 2003, was to increase the future income tax provision
by $0.7 million and to increase capital stock by a corresponding amount.
During 2003, the Company received $4.2 million in proceeds from the
issuance of flow-through shares of which $4.2 million remained unspent as
at December 31, 2003. Accordingly, under U.S. GAAP, these proceeds would
be disclosed separately on the balance sheet as restricted cash and would
not be treated as cash or cash equivalents for statement of cash flow
reporting purposes.
e) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards 130, "Comprehensive Income",
requires the reporting of comprehensive income in addition to net
earnings. Comprehensive income includes net income plus other
comprehensive income. Management believes that it has no comprehensive
income other than as described under Note 19(f).
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING (CONTINUED)
f) DERIVATIVE INSTRUMENTS AND HEDGING
On January 1, 2004, the Company implemented under Canadian GAAP, EIC 128
which requires derivatives not designated as hedges to be recorded on the
balance sheet as either assets or liabilities at their fair value.
Changes in the derivative's fair value are recognized in current period
earnings. Under the transitional rules, any gain or loss at the
implementation date is deferred and recognized into revenue once
realized. At January 1, 2004, a deferred loss was recognized in the
amount of $10.9 million. During the year ended December 31, 2005, $1.6
million (2004 - $3.6 million) of the deferred loss was charged to
earnings. The remaining balance of $5.7 million (2004 - $7.3 million)
relates to the interest rate swap and will be recognized in annual
amounts of $1.6 million until eliminated in 2009. Currently, the Company
has not designated any of its financial instruments as hedges for
accounting purposes under U.S. or Canadian GAAP.
The deferred loss, recognized at January 1, 2004 under the Canadian GAAP
transitional provision of EIC 128, has already been recognized in
earnings for U.S. GAAP and became a reconciling item at December 31, 2005
and 2004.
Prior to January 1, 2004, the natural gas and crude oil futures contracts
were accounted for as cash flow hedges. These contracts were recorded at
fair value on the balance sheet as a $2.0 million liability at December
31, 2003. The effective portion of the change in fair value was recorded
in comprehensive income, net of tax. The ineffective portion of the
change in fair value was recorded in net earnings, net of tax. The
effective portion of these commodity contracts was a $0.9 million gain,
which was recorded in comprehensive income as at December 31, 2003. The
ineffective portion of these commodity contracts was $nil which was
recorded in net earnings as at December 31, 2003.
g) DEFERRED FINANCING CHARGES
Under U.S. GAAP, discounts on long-term debt are classified as a
reduction of long-term debt rather than as deferred financing charges. At
December 31, 2005 deferred financing charges and senior term notes were
reduced by $2.7 million (2004 - $2.8 million).
h) ASSET RETIREMENT OBLIGATIONS
In 2003, the Company early adopted the Canadian Accounting Standard for
asset retirement obligations, as outlined in the CICA handbook, section
3110. This standard is equivalent to U.S. SFAS 143, "Accounting for Asset
Retirement Obligations", which is effective for fiscal periods beginning
on or after January 1, 2003. Early adopting the Canadian standard
eliminated a U.S. GAAP reconciling item in respect to accounting for the
obligations. However, a difference was created in how the transition
amounts are disclosed. U.S. GAAP requires the cumulative impact of a
change in an accounting principle be presented in the current year
consolidated statement of earnings and prior periods not be restated.
Consequently, prior year comparative periods, under U.S. GAAP, have been
revised to eliminate the prior period restatement made under Canadian
GAAP.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING (CONTINUED)
i) GUARANTEE
As discussed in Note 3 to the consolidated financial statements, MPP has
guaranteed payment of certain obligations of its limited partner under a
credit agreement between the limited partner and a syndicate of lenders.
Only Canadian GAAP requires disclosure of this type of financial
arrangement. U.S. GAAP, under FIN 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", requires the fair valuation of the guarantee and
the inclusion of the liability in the consolidated balance sheets. The
offsetting adjustment is reflected as a charge to non-controlling
interest. In 2005, it was determined that the offsetting adjustment, as
previously disclosed as an unrealized loss on guarantee on the
consolidated balance sheet was not appropriate. Accordingly, the 2004
amount has been reclassified to conform with current year presentation.
The guarantee is amortized to earnings, net of the effect on
non-controlling interest, over the term of the guarantee.
j) STATEMENTS OF CASH FLOW
The consolidated statements of cash flow include under investing
activities, changes in working capital for items not affecting cash, such
as accounts payable and accounts receivable related to the non-cash
elements of property and equipment additions. This presentation is not
permitted under U.S. GAAP. The amount for the year ended December 31,
2005 of $54.1 million (2004 - $29.2 million, 2003 - $8.7 million) has
been reallocated to the change in non-cash operating working capital for
U.S. GAAP presentation purposes.
===============================================================================
COMPTON PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Tabular amounts in thousands of dollars, unless otherwise stated)
- -------------------------------------------------------------------------------
19. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING (CONTINUED)
k) RECEIVABLE AND PAYABLE AMOUNTS
As at December 31, 2005 2004
------------- -------------
(in thousands of Canadian
dollars)
Accounts receivable and other includes the following:
Revenue receivable $ 96,026 $ 72,510
------------- -------------
Joint interest receivable 26,172 32,077
Deposits, prepaids and other 10,286 12,511
------------- -------------
$ 132,484 $ 117,098
============= =============
As at December 31, 2005 2004
------------- -------------
(in thousands of Canadian
dollars)
Accounts payable includes the following:
Trade payables $ 161,607 $ 97,608
Royalties payable 32,001 18,488
Other payables 10,261 9,387
------------- -------------
$ 203,869 $ 125,483
============= =============
l) RECENT ACCOUNTING PRONOUNCEMENTS
In the year ended December 31, 2005, the Company adopted, for U.S. GAAP
purposes, FIN 47, "Accounting for Conditional Asset Retirement
Obligations" in order to address the diverse accounting practices which
have developed with regard to the timing or recognition for asset
retirement obligations. This interpretation did not have any impact on
the consolidated financial statements as an asset retirement obligation
has been provided for all the Company's long-lived assets.
The Company has assessed new and revised accounting pronouncements that
have been issued that are not yet effective and determined that the
following may have a significant impact on the Company:
i) As of January 1, 2006, the Company will be required to adopt, for
U.S. GAAP purposes, revised SFAS 123 "Share-Based Payment". This
amended statement will eliminate the alternative to use Accounting
Principles Board ("APB") Opinion No. 25's intrinsic value method of
accounting, as was provided in the originally issued Statement 123.
As a result, public entities will be required to use the grant-date
fair value of the award in measuring the cost of employee services
received in exchange for an equity award of equity instruments.
Compensation cost is required to be recognized over the requisite
service period. Changes in fair value of liability awards during the
requisite service period will be recognized as compensation cost
over the vesting period. Compensation cost will not be recognized
for equity instruments for which employees do not render the
requisite service. Although the Company is in the process of
assessing the impact of this amendment, the Company does not expect
the amendments to have a material impact on its consolidated
statements.
ii) As of January 1, 2006, the Company will be required to adopt, for
U.S. GAAP purposes, SFAS 154 "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and SFAS 3". Change
in the SFAS 154 will require retroactive application of voluntary
changes in accounting principles, unless it is impracticable. The
Company does not expect this standard to have a material impact on
its financial statements.
SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED)
A) NET PROVED OIL AND NATURAL GAS RESERVES
The net proved oil and natural gas reserve estimates as at December 31, 2005,
2004 and 2003 set forth below were prepared in accordance with guidelines
established by the Securities and Exchange Commission and accordingly were
based on existing economic and operating conditions. Oil and natural gas prices
in effect as of the respective year ends were used without any escalation
except in those instances where the sale was covered by contract, in which case
the applicable contract price was used. Operating costs, royalties, and future
development costs were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. Moreover, the present value should
not be construed as the current market value of the Company's oil and natural
gas reserves or the costs that would be incurred to obtain equivalent reserves.
All of the reserves are located in Canada.
Estimated Quantities of Reserves
Years ended December 31, 2005 2004 2003
-------------------- -------------------- --------------------
CRUDE OIL NATURAL Crude oil Natural Crude oil Natural
& NGL'S GAS & NGL's Gas & NGL's Gas
-------------------- -------------------- --------------------
(MBBLS) (MMCF) (mbbls) (mmcf) (mbbls) (mmcf)
Balance, beginning of year 18,771 359,975 14,542 326,573 10,723 314,501
Revisions of previous estimates 5,550 59,930 2,797 16,547 2,297 (12,821)
Extensions, discoveries and
other additions 6,498 66,940 3,026 47,713 2,869 54,128
Acquisitions of minerals in place 723 5,564 427 9,444 404 2,333
Dispositions of minerals in place -- (56) (440) (3,160) -- --
Production (2,026) (36,850) (1,581) (37,142) (1,751) (31,568)
-------------------- -------------------- --------------------
Balance, end of year 29,516 455,503 18,771 359,975 14,542 326,573
==================== ==================== ====================
Proved developed reserves
Balance, beginning of year 15,481 318,177 10,309 288,899 9,723 293,836
Balance, end of year 23,827 385,243 15,481 318,177 10,309 288,899
==================== ==================== ====================
b) CAPITALIZED COSTS RELATED TO OIL AND NATURAL GAS ACTIVITIES
The aggregate capitalized costs of oil and natural gas activities and costs
incurred in oil and natural gas property acquisitions, development, and
exploration activities were as follows (excluding MPP and parts inventory):
Capitalized costs
As at December 31, 2005 2004
----------- -----------
(in thousands of Canadian
dollars)
Proved properties $ 1,665,455 $ 1,218,826
Unproved properties:
Acquisition 129,490 117,194
Exploration 143,606 83,238
Accumulated depletion and depreciation (421,510) (318,583)
----------- -----------
$ 1,517,041 $ 1,100,675
=========== ===========
SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED) (CONTINUED)
Costs incurred on unproved properties
Includes costs incurred in
-------- --------------------------------------------------------
CUMM. Prior
As at December 31, 2005 2005 2004 2003 Years
-------- -------- -------- -------- --------
(in thousands of Canadian dollars)
Acquisition $129,490 $ 12,296 $ 13,217 $ 2,933 $101,044
Exploration 143,606 60,368 13,418 15,615 54,205
-------- -------- -------- -------- --------
$273,096 $ 72,664 $ 26,635 $ 18,548 $155,249
======== ======== ======== ======== ========
Costs incurred
Years ended December 31, 2005 2004 2003
-------- -------- --------
(in thousands of Canadian dollars)
Acquisition costs (net of disposition)
Proved properties $ 28,575 $ 12,686 $ 11,224
Unproved properties 12,296 13,217 2,933
Development costs
Development of proved undeveloped reserves 140,504 60,227 25,232
Other 283,667 136,198 115,612
Exploration costs 46,484 76,648 64,615
-------- -------- --------
Total costs incurred $511,526 $298,976 $219,616
======== ======== ========
Costs are transferred into the depletion base on an ongoing basis as the
undeveloped properties are evaluated and proved reserves are established or
impairment determined. Pending determination of proved reserves attributable to
the above costs, the Company cannot assess the future impact on the
amortization rate.
c) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES
THEREIN RELATING TO PROVED OIL AND NATURAL GAS RESERVES
The standardized measure of discounted future net cash flows and changes
therein relating to proved oil and natural gas reserves ("Standardized
Measure") does not purport to present the fair market value of the Company's
oil and natural gas properties. An estimate of such value should consider,
among other factors, anticipated future prices of oil and natural gas, the
probability of recoveries in excess of existing proved reserves and acreage
prospects, and perhaps different discount rates. It should be noted that
estimates of reserve quantities, especially from new discoveries, are
inherently imprecise and subject to substantial revisions. The computation also
excludes values attributable to the Company's midstream interests, referred to
in the Financial Statements as MPP.
Under the Standardized Measure, future cash inflows are estimated by applying
year end prices, adjusted for contracts currently in place to deliver
production to the estimated future production of year end proved reserves.
Future cash inflows are reduced by estimated future production and development
costs based on year end costs to determine pre-tax cash inflows. Future taxes
are computed by applying the statutory tax rate to the excess of pre-tax cash
inflows over the Company's tax basis in the associated proved oil and natural
gas properties. Tax credits and net operating loss carry forwards are also
considered in the future income tax calculation. Future net cash inflows after
income taxes are discounted using a 10 percent annual discount rate to arrive
at the Standardized Measure.
SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED) (CONTINUED)
Years ended December 31, 2005 2004 2003
----------- ----------- -----------
(in thousands of Canadian dollars)
Future cash inflows $ 6,571,858 $ 3,160,270 $ 2,467,604
Future production costs (1,718,793) (971,392) (785,187)
Future development costs (209,901) (102,557) (76,708)
----------- ----------- -----------
Future net cash flows 4,643,164 2,086,321 1,605,709
Income taxes (1,344,684) (539,539) (460,291)
----------- ----------- -----------
Total undiscounted future net cash flows 3,298,480 1,546,782 1,145,418
10 percent annual discount for estimated timing of
cash inflows (1,726,975) (793,904) (592,409)
----------- ----------- -----------
Standardized measure of discounted
future net cash flows $ 1,571,505 $ 752,878 $ 553,009
=========== =========== ===========
The Company estimates that it will incur $106.8 million in 2006, $44.6 million
in 2007 and $23.9 million in 2008 to develop proved undeveloped reserves.
The following table sets forth an analysis of changes in the standardized
measure of discounted future net cash flows from proved oil and natural gas
reserves:
Years ended December 31, 2005 2004 2003
----------- ----------- -----------
(in thousands of Canadian dollars)
Beginning of year $ 752,878 $ 553,009 $ 653,697
Sales of production, net of production costs (336,711) (226,408) (197,323)
Net change in sales prices, net of production costs 614,690 42,728 (64,509)
Extensions, discoveries and additions 354,186 161,106 144,565
Changes in estimated future development costs (135,499) (54,838) (39,965)
Development costs incurred during the period which
reduced future development costs 353,740 184,053 85,586
Revisions in quantity estimates 526,474 306,271 (69,386)
Accretion of discount 75,288 75,908 101,612
Purchase of reserves (7,749) (7,749) 6,328
Sales of reserves 87 4,416 --
Net change in income tax (331,850) (42,270) 156,350
Changes in production rates (timing) and other (294,029) (243,348) (223,946)
----------- ----------- -----------
Standardized measure, end of year $ 1,571,505 $ 752,878 $ 553,009
=========== =========== ===========