EXHIBIT 992.
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CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Management of Advantage Energy Income Fund (the "Fund") is responsible for
the preparation and presentation of the consolidated financial statements
together with all operational and other financial information contained in the
annual report. The financial statements have been prepared by Management in
accordance with Canadian generally accepted accounting principles and utilize
the best estimates and careful judgments of Management, where appropriate.
Operational and other financial information contained throughout the annual
report is consistent with that provided in the consolidated financial
statements.
Management has developed and maintains a system of internal controls designed
to provide reasonable assurance that all transactions are accurately and
reliably recorded, that the consolidated financial statements accurately report
the Fund's operating and financial results within acceptable limits of
materiality, that all other operational and financial information presented is
accurate, and that the Fund's assets are properly safeguarded.
The Audit Committee, comprised of non-management directors, acts on behalf of
the Board of Directors to ensure that Management fulfils its financial
reporting and internal control responsibilities. The Audit Committee is
responsible for meeting regularly with Management, the external auditors, and
the internal auditors to discuss internal controls over financial reporting
processes, auditing matters and various aspects of financial reporting. The
Audit Committee reviewed the consolidated financial statements with Management
and the external auditors, and recommended approval to the Board of Directors.
The Board of Directors has approved these consolidated financial statements.
KPMG LLP, an independent firm of Chartered Accountants, appointed by the
Unitholders as the external auditor of the Fund, has audited the consolidated
financial statements in accordance with Canadian generally accepted auditing
standards. KPMG LLP have unlimited and unrestricted access to the Audit
Committee.
/s/ Kelly I. Drader /s/ Peter A. Hanrahan
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Kelly I. Drader Peter A. Hanrahan
CEO VP Finance & CFO
March 21, 2007
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Management of Advantage Energy Income Fund (the "Fund") is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Fund. Under the supervision of our Chief Executive Officer and Chief
Financial Officer, we have conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Based on our assessment, we
have concluded that as of December 31, 2006, our internal control over
financial reporting was effective.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements and even those systems determined to be
effective can provide only reasonable assurance with respect to the financial
statement preparation and presentation. Further, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management's assessment of the effectiveness of the Fund's internal control
over financial reporting as of December 31, 2006, has been audited by KPMG LLP,
the Fund's independent firm of Chartered Accountants, who have also audited the
Fund's Consolidated Financial Statements for the years ended December 31, 2006
and 2005.
/s/ Kelly I. Drader /s/ Peter A. Hanrahan
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Kelly I. Drader Peter A. Hanrahan
CEO VP Finance & CFO
March 21, 2007
Advantage Energy Income Fund - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unitholders of Advantage Energy Income Fund
We have audited the consolidated balance sheets of Advantage Energy Income Fund
(the "Trust") as at December 31, 2006 and 2005 and the consolidated statements
of income and accumulated deficit and cash flows for the years then ended.
These financial statements are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. With respect to the consolidated financial statements for the year
ended December 31, 2006, we also conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Trust as at December 31, 2006
and 2005 and the results of its operations and its cash flow for the years then
ended in accordance with Canadian generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Trust's
internal control over financial reporting as of December 31, 2006, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 21, 2007 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
Chartered Accountants
Calgary, Canada
March 21, 2007
Advantage Energy Income Fund - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Advantage Energy Income Fund on behalf of
Advantage Energy Income Fund and the Unitholders of Advantage Energy Income
Fund
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Advantage Energy Income Fund ("the Fund") maintained effective internal control
over financial reporting as of December 31, 2006, based on the criteria
established in Internal Control--Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Fund's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on management's assessment and an opinion on the effectiveness of the Fund's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
An entity's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. An entity's internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
entity; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the entity are being made only in accordance with authorizations of management
and directors of the entity; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the entity's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Fund maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the Fund
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have conducted our audits on the consolidated financial statements in
accordance with Canadian generally accepted auditing standards. With respect to
the year ended December 31, 2006, we also have conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our report dated March 21, 2007, expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Chartered Accountants
Calgary, Canada
March 21, 2007
Advantage Energy Income Fund - 3
CONSOLIDATED BALANCE SHEETS
(thousands of dollars) DECEMBER 31, 2006 DECEMBER 31, 2005
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ASSETS
Current assets
Accounts receivable $ 79,537 $ 51,788
Prepaid expenses and deposits 16,878 7,791
Derivative asset (note 13) 9,840 --
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106,255 59,579
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Deposit on property acquisition 1,410 --
Derivative asset (note 13) 593 --
Fixed assets (note 4) 1,753,058 907,795
Goodwill (note 3) 120,271 45,473
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$ 1,981,587 $ 1,012,847
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LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 116,109 $ 76,371
Distributions payable to Unitholders 18,970 14,462
Current portion of capital lease obligations (note 5) 2,527 358
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Current portion of convertible debentures (note 7) 1,464 --
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139,070 91,191
Capital lease obligations (note 5) 305 1,346
Bank indebtedness (note 6) 410,574 252,476
Convertible debentures (note 7) 170,819 126,081
Asset retirement obligations (note 8) 34,324 21,263
Future income taxes (note 11) 61,939 99,026
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817,031 591,383
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NON-CONTROLLING INTEREST
Exchangeable shares (note 9) -- 2,369
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UNITHOLDERS' EQUITY
Unitholders' capital (note 10) 1,592,758 681,574
Convertible debentures equity component (note 7) 8,041 6,159
Contributed surplus (note 10) 863 1,036
Accumulated deficit (note 12) (437,106) (269,674)
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1,164,556 419,095
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$ 1,981,587 $ 1,012,847
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COMMITMENTS (note 15)
SUBSEQUENT EVENT (note 16)
see accompanying Notes to Consolidated Financial Statements
On behalf of the Board of Directors of Advantage Oil & Gas Limited:
Rodger A. Tourigny, Director Kelly I. Drader, Director
Advantage Energy Income Fund - 5
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
YEAR ENDED YEAR ENDED
(thousands of dollars, except for per Trust Unit amounts) DECEMBER 31, 2006 DECEMBER 31, 2005
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REVENUE
Petroleum and natural gas $ 419,727 $ 376,572
Unrealized gain on derivatives (note 13) 10,242 214
Royalties, net of Alberta Royalty Credit (76,456) (74,290)
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353,513 302,496
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EXPENSES
Operating 82,911 57,941
General and administrative 13,738 5,452
Management fee (note 14) 887 3,665
Performance incentive (note 14) 2,380 10,544
Management internalization (note 14) 13,449 -
Interest 18,258 10,275
Interest and accretion on convertible debentures 13,316 13,392
Depletion, depreciation and accretion 194,309 135,096
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339,248 236,365
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Income before taxes and non-controlling interest 14,265 66,131
Future income tax reduction (note 11) (37,087) (11,371)
Income and capital taxes (note 11) 1,509 2,198
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(35,578) (9,173)
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Net income before non-controlling interest 49,843 75,304
Non-controlling interest (note 9) 29 232
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NET INCOME 49,814 75,072
Accumulated deficit, beginning of year (269,674) (167,380)
Distributions declared (217,246) (177,366)
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ACCUMULATED DEFICIT, END OF YEAR $ (437,106) $ (269,674)
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Net income per Trust Unit (note 10)
Basic $ 0.62 $ 1.33
Diluted $ 0.61 $ 1.32
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see accompanying Notes to Consolidated Financial Statements
Advantage Energy Income Fund - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED
(thousands of dollars) DECEMBER 31, 2006 DECEMBER 31, 2005
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OPERATING ACTIVITIES
Net income $ 49,814 $ 75,072
Add (deduct) items not requiring cash:
Unrealized gain on derivatives (10,242) (214)
Performance incentive 2,380 10,544
Management internalization 13,449 -
Accretion on convertible debentures 2,106 2,182
Depletion, depreciation and accretion 194,309 135,096
Future income taxes (37,087) (11,371)
Non-controlling interest 29 232
Expenditures on asset retirement (5,974) (2,025)
Changes in non-cash working capital 20,303 (22,910)
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Cash provided by operating activities 229,087 186,606
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FINANCING ACTIVITIES
Units issued, net of costs (note 10) 169,631 107,616
Decrease in bank indebtedness (30,767) (14,578)
Reduction of capital lease obligations (1,019) (7,687)
Cash distributions to Unitholders (212,738) (175,323)
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Cash used in financing activities (74,893) (89,972)
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INVESTING ACTIVITIES
Expenditures on property and equipment (159,487) (103,229)
Property acquisitions (244) (210)
Property dispositions 8,727 3,379
Acquisition costs of Ketch Resources Trust (note 3) (10,109) -
Purchase adjustment of Defiant acquisition - (98)
Changes in non-cash working capital 6,919 3,524
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Cash used in investing activities (154,194) (96,634)
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Net change in cash - -
Cash, beginning of year - -
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Cash, end of year $ - $ -
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SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 34,680 $ 23,358
Taxes paid $ 1,783 $ 2,605
see accompanying Notes to Consolidated Financial Statements
Advantage Energy Income Fund - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
All tabular amounts in thousands except for Units and per Unit amounts
1. BUSINESS AND STRUCTURE OF THE FUND
Advantage Energy Income Fund ("Advantage" or the "Fund") was formed on May
23, 2001 as a result of a plan of arrangement. For Canadian tax purposes,
Advantage is an open-ended unincorporated mutual fund trust created under
the laws of the Province of Alberta pursuant to a Trust Indenture
originally dated April 17, 2001, and as occasionally amended, between
Advantage Oil & Gas Ltd. ("AOG") and Computershare Trust Company of
Canada, as trustee. The Fund commenced operations on May 24, 2001. The
beneficiaries of the Fund are the holders of the Trust Units (the
"Unitholders").
The principal undertaking of the Fund is to indirectly acquire and hold
interests in petroleum and natural gas properties and assets related
thereto. The business of the Fund is carried on by its wholly-owned
subsidiary, AOG. The Fund's primary assets are currently the common shares
of AOG, a royalty in the producing properties of AOG (the "AOG Royalty")
and notes of AOG (the "AOG Notes"). The Fund's strategy, through AOG, is
to minimize exposure to exploration risk while focusing on growth through
acquisition and development of producing crude oil and natural gas
properties.
The purpose of the Fund is to distribute available cash flow to
Unitholders on a monthly basis in accordance with the terms of the Trust
Indenture. The Fund's available cash flow includes principal repayments
and interest income earned from the AOG Notes, royalty income earned from
the AOG Royalty, and any dividends declared on the common shares of AOG
less any expenses of the Fund including interest on convertible
debentures. Cash received on the AOG Notes, AOG Royalty and common shares
of AOG result in the effective transfer of the economic interest in the
properties of AOG to the Fund. However, while the royalty is a contractual
interest in the properties owned by AOG, it does not confer ownership in
the underlying resource properties. Cash distributions are determined by
Management and the Board of Directors. We closely monitor our distribution
policy considering forecasted cash flows, optimal debt levels, capital
spending activity, taxability to Unitholders, working capital
requirements, and other potential cash expenditures. Cash distributions
are announced monthly and are based on the cash available after retaining
a portion to meet such spending requirements. The level of cash
distributions are primarily determined by cash flows received from the
production of oil and natural gas from existing Canadian resource
properties and are highly dependent upon our success in exploiting the
current reserve base and acquiring additional reserves. Furthermore,
monthly cash distributions we pay to Unitholders are highly dependent upon
the prices received for such oil and natural gas production. It is our
long-term objective to provide stable and sustainable cash distributions
to the Unitholders, while continuing to grow the Fund.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Management of the Fund prepares its consolidated financial statements
in accordance with Canadian generally accepted accounting principles
("Canadian GAAP") and all amounts are stated in Canadian dollars. The
preparation of consolidated financial statements requires Management to
make estimates and assumptions that effect the reported amount of assets,
liabilities and equity and disclosures of contingencies at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the period. The following significant accounting policies
are presented to assist the reader in evaluating these consolidated
financial statements and, together with the notes, should be considered an
integral part of the consolidated financial statements.
(a) CONSOLIDATION AND JOINT OPERATIONS
These consolidated financial statements include the accounts of the Fund
and all subsidiaries, including AOG. All intercompany balances and
transactions have been eliminated.
The Fund conducts exploration and production activities jointly with other
participants. The accounts of the Fund reflect its proportionate interest
in such joint operations.
Advantage Energy Income Fund - 8
(b) PROPERTY AND EQUIPMENT
(i) PETROLEUM AND NATURAL GAS PROPERTIES AND RELATED EQUIPMENT
The Fund follows the "full cost" method of accounting in accordance
with the guideline issued by the Canadian Institute of Chartered
Accountants ("CICA") whereby all costs associated with the
acquisition of and the exploration for and development of petroleum
and natural gas reserves, whether productive or unproductive, are
capitalized in a Canadian cost centre and charged to income as set
out below. Such costs include lease acquisition, drilling and
completion, production facilities, asset retirement costs,
geological and geophysical costs and overhead expenses related to
exploration and development activities.
Gains or losses are not recognized upon disposition of petroleum and
natural gas properties unless crediting the proceeds against
accumulated costs would result in a change in the rate of depletion
and depreciation of 20% or more.
Depletion of petroleum and natural gas properties and depreciation
of lease, well equipment and production facilities is provided on
accumulated costs using the "unit-of-production" method based on
estimated net proved petroleum and natural gas reserves, before
royalties, as determined by independent engineers. For purposes of
the depletion and depreciation calculation, proved petroleum and
natural gas reserves are converted to a common unit-of-measure on
the basis of one barrel of oil or liquids being equal to six
thousand cubic feet of natural gas.
The depletion and depreciation cost base includes total capitalized
costs, less costs of unproved properties, plus a provision for
future development costs of proved undeveloped reserves. Costs of
acquiring and evaluating unproved properties are excluded from
depletion calculations until it is determined whether or not proved
reserves are attributable to the properties or impairment occurs.
Petroleum and natural gas assets are evaluated in each reporting
period to determine that the carrying amount in a cost centre is
recoverable and does not exceed the fair value of the properties in
the cost centre (the "ceiling test"). The carrying amounts are
assessed to be recoverable when the sum of the undiscounted net cash
flows expected from the production of proved reserves, the lower of
cost and market of unproved properties and the cost of major
development projects exceeds the carrying amount of the cost centre.
When the carrying amount is not assessed to be recoverable, an
impairment loss is recognized to the extent that the carrying amount
of the cost centre exceeds the sum of the discounted net cash flows
expected from the production of proved and probable reserves, the
lower of cost and market of unproved properties and the cost of
major development projects of the cost centre. The net cash flows
are estimated using expected future product prices and costs and are
discounted using a risk-free interest rate.
(ii) FURNITURE AND EQUIPMENT
The Fund records furniture and equipment at cost and provides
depreciation on the declining balance method at a rate of 20% per
annum which is designed to amortize the cost of the assets over
their estimated useful lives.
(c) GOODWILL
Goodwill is the excess purchase price of a business over the fair value of
identifiable assets and liabilities acquired. Goodwill is stated at cost
less impairment and is not amortized. Goodwill impairment is assessed at
year-end, or as economic events dictate, by comparing the fair value of
the reporting unit (the Fund) to its carrying value, including goodwill.
If the fair value of the Fund is less than its carrying value, a goodwill
impairment loss is recognized by allocating the fair value of the Fund to
the identifiable assets and liabilities as if the Fund had been acquired
in a business acquisition for a purchase price equal to the fair value.
The excess of the fair value of the Fund over the values assigned to the
identifiable assets and liabilities is the implied fair value of the
goodwill. Any excess of the carrying value of the goodwill over the
implied fair value is the impairment amount and is charged to income in
the period incurred. There has been no impairment of the Fund's goodwill.
(d) CASH DISTRIBUTIONS
Cash distributions are calculated on an accrual basis and are paid to
Unitholders monthly.
(e) FINANCIAL INSTRUMENTS
The Fund occasionally uses various types of derivative financial
instruments to manage risk associated with commodity price fluctuations.
These instruments are not used for trading or speculative purposes.
Proceeds and costs realized from holding the related contracts are
recognized in the appropriate revenue and expense categories of the income
Advantage Energy Income Fund - 9
statement at the time that each transaction under a contract is settled.
For the unrealized portion of such contracts, Advantage has chosen not to
apply "hedge accounting" and alternatively utilizes the "fair value"
method of accounting. The fair value is based on an estimate of the
amounts that would have been paid to or received from counterparties to
settle these instruments given future market prices and other relevant
factors. The Fund records changes in the fair value in the income
statement as an unrealized derivative gain or loss with a corresponding
derivative asset or liability recorded on the balance sheet.
(f) CONVERTIBLE DEBENTURES
The Fund's convertible debentures are financial liabilities consisting of
a liability with an embedded conversion feature. As such, the debentures
are 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 and expensed accordingly. As debentures are
converted to Trust Units, an appropriate portion of the liability and
equity components are transferred to Unitholders' capital.
(g) ASSET RETIREMENT OBLIGATIONS
The Fund follows the "asset retirement obligation" method of recording the
future cost associated with removal, site restoration and asset retirement
costs. The fair value of the liability for the Fund's asset retirement
obligations is recorded in the period in which it is incurred, discounted
to its present value using the Fund's credit adjusted risk-free interest
rate and the corresponding amount recognized by increasing the carrying
amount of property and equipment. The asset recorded is depleted on a
"unit-of-production" basis over the life of the reserves consistent with
the Fund's depletion and depreciation policy for petroleum and natural gas
properties and related equipment. The liability amount is increased each
reporting period due to the passage of time and the amount of accretion is
charged to income in the period. Revisions to the estimated timing of cash
flows or to the original estimated undiscounted cost could also result in
an increase or decrease to the obligation. Actual costs incurred upon
settlement of the retirement obligations are charged against the
obligation to the extent of the liability recorded.
(h) INCOME TAXES
The Fund is considered an open-ended unincorporated mutual fund trust
under the Income Tax Act (Canada). Any taxable income is allocated to the
Unitholders and therefore no provision for current income taxes relating
to the Fund is included in these financial statements.
The Fund and its subsidiaries follow the "liability" method of accounting
for income taxes. Under this method future tax assets and liabilities are
determined based on differences between financial reporting and income tax
bases of assets and liabilities, and are measured using substantively
enacted tax rates and laws expected to apply when the differences reverse.
The effect on future tax assets and liabilities of a change in tax rates
is recognized in net income in the period in which the change is
substantially enacted.
(i) EXCHANGEABLE SHARES
The Fund's Exchangeable Shares are classified as non-controlling interest,
outside of Unitholders' equity, as they are transferable, although not
publicly traded. The Exchangeable Shares and Trust Units are considered
economically equivalent since the exchange ratio is increased on each date
that a distribution is paid on the Trust Units and all shares must be
exchanged for either Trust Units or cash, based on the current market
price of the Trust Units. Since the Exchangeable Shares are required to be
exchanged, there is no permanent non-controlling interest. Non-controlling
interest expense is recorded that reflects the earnings attributable to
the non-controlling interest. When Exchangeable Shares are converted to
Trust Units, the carrying value of non-controlling interest on the balance
sheet is reclassified to Unitholders' capital.
(j) UNIT-BASED COMPENSATION
The Fund has a unit-based compensation plan for external directors of the
Fund (note 10) as well as Trust Units held in escrow relating to the
management internalization (note 14). Advantage elected to prospectively
adopt amendments to CICA Handbook Section 3870 "Stock-based Compensation
and Other Stock-based Payments" pursuant to the transitional provisions
contained therein. Under this amended standard, the Fund must account for
compensation expense based on the "fair value" of rights granted under its
unit-based compensation plans.
Advantage Energy Income Fund - 10
Since awards under the external directors' unit-based compensation plan
are vested immediately, associated compensation expense is recognized in
the current period earnings and estimated forfeiture rates for such rights
are not incorporated within the determination of fair value. The
compensation expense results in the creation of contributed surplus until
the rights are exercised. Consideration paid upon the exercise of the
rights together with the amount previously recognized in contributed
surplus is recorded as an increase in Unitholders' capital.
The escrowed Trust Units relating to the management internalization vest
equally over three years, the period during which employees are required
to provide service to receive the Trust Units. Therefore, the associated
compensation expense is recognized equally over the appropriate service
period and incorporates estimated forfeitures.
(k) REVENUE RECOGNITION
Revenue associated with the sale of crude oil, natural gas and natural gas
liquids is recognized when the title and risks pass to the purchaser,
normally at the pipeline delivery point for natural gas and at the
wellhead for crude oil.
(l) PER TRUST UNIT AMOUNTS
Net income per Trust Unit is calculated using the weighted average number
of Trust Units outstanding during the year. Diluted net income per Trust
Unit is calculated using the "if-converted" method to determine the
dilutive effect of convertible debentures and exchangeable shares and the
"treasury stock" method for trust unit rights granted to directors and the
management internalization escrowed Trust Units.
(m) MEASUREMENT UNCERTAINTY
The amounts recorded for depletion and depreciation of property and
equipment, the provision for asset retirement obligation costs and related
accretion expense, and impairment calculations for property and equipment
and goodwill are based on estimates. These estimates are significant and
include proved and probable reserves, future production rates, future
crude oil and natural gas prices, future costs, future interest rates,
relevant fair value assessments, and other relevant assumptions. By their
nature, these estimates are subject to measurement uncertainty and the
effect on the consolidated financial statements of changes in such
estimates in future years could be material.
(n) COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
current year's presentation.
3. ACQUISITION OF KETCH RESOURCES TRUST
On June 23, 2006, Advantage acquired all of the issued and outstanding
Trust Units of Ketch Resources Trust ("Ketch") in return for 32,870,465
Advantage Trust Units, utilizing an exchange ratio of 0.565 Advantage
Trust Units for each Ketch Trust Unit outstanding. Ketch was an energy
trust engaged in the development, acquisition and production of natural
gas and crude oil in western Canada. The acquisition is being accounted
for using the "purchase method" with the results of operations included in
the consolidated financial statements as of the closing date of the
acquisition. The purchase price has been allocated as follows:
NET ASSETS ACQUIRED AND LIABILITIES ASSUMED: CONSIDERATION:
Property and equipment $ 877,463 32,870,465 Trust Units issued $ 688,636
Goodwill 74,798 Acquisition costs incurred 10,109
Net working capital * 5,368 ------------
Bank indebtedness (180,000) $ 698,745
Convertible debetures (66,981) ------------
Convertible debentures equity component (2,971)
Asset retirement obligations (7,930)
Capital lease obligation (1,002)
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$ 698,745
* Includes cash of $2,713, accounts receivable of $55,806, prepaid
expenses of $6,406, accounts payable of $46,834, current bank
indebtedness of $11,578 and current portion of capital lease obligation
$1,145.
The value of $20.95 per Trust Unit issued as consideration was determined
based on the weighted average trading value of Advantage Trust Units
during the two-day period before and after the terms of the acquisition
were agreed to and announced.
Advantage Energy Income Fund - 11
4. FIXED ASSETS
ACCUMULATED NET BOOK
DECEMBER 31, 2006 COST DEPLETION AND DEPRECIATION VALUE
- -------------------------------------------------------------------------------------------------------------------------------
Petroleum and natural gas properties $ 2,324,948 $ 576,707 $1,748,241
Furniture and equipment 8,175 3,358 4,817
- -------------------------------------------------------------------------------------------------------------------------------
$ 2,333,123 $ 580,065 $1,753,058
- -------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED NET BOOK
DECEMBER 31, 2005 COST DEPLETION AND DEPRECIATION VALUE
- -------------------------------------------------------------------------------------------------------------------------------
Petroleum and natural gas properties $ 1,290,588 $ 385,140 $ 905,448
Furniture and equipment 4,647 2,300 2,347
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,295,235 $ 387,440 $ 907,795
- -------------------------------------------------------------------------------------------------------------------------------
During the year ended December 31, 2006, Advantage capitalized general and
administrative expenditures directly related to exploration and
development activities of $6,444,000 (2005 - $3,293,000).
Costs of $43,467,000 (2005 - $17,805,000) for unproved properties have
been excluded from the calculation of depletion expense, and future
development costs of $123,464,000 (2005 - $87,843,000) have been included
in costs subject to depletion.
The Fund performed a ceiling test calculation at December 31, 2006 to
assess the recoverable value of property and equipment. Based on the
calculation, the carrying amounts are recoverable as compared to the sum
of the undiscounted net cash flows expected from the production of proved
reserves based on the following benchmark prices:
WTI CRUDE OIL EXCHANGE RATE AECO GAS
YEAR ($US/BBL) ($US/$CDN) ($CDN/MMBTU)
- -------------------------------------------------------------------------------------------------------------------------
2007 $ 65.73 $ 0.87 $ 7.72
2008 $ 68.82 $ 0.87 $ 8.59
2009 $ 62.42 $ 0.87 $ 7.74
2010 $ 58.37 $ 0.87 $ 7.55
2011 $ 55.20 $ 0.87 $ 7.72
- -------------------------------------------------------------------------------------------------------------------------
Percentage increase each year after 2011 2.0% - 2.0%
- -------------------------------------------------------------------------------------------------------------------------
Benchmark prices are adjusted for a variety of factors such as quality
differentials to determine the expected price to be realized by the Fund
when performing the ceiling test calculation.
5. CAPITAL LEASE OBLIGATIONS
The Fund has capital leases on a variety of property and equipment. Future
minimum lease payments at December 31, 2006 consist of the following:
2007 $ 2,577
2008 308
----------------------------------------------------------
2,885
Less amounts representing interest (53)
----------------------------------------------------------
2,832
Current portion (2,527)
----------------------------------------------------------
$ 305
----------------------------------------------------------
On June 23, 2006, Advantage assumed a total capital lease obligation of
$2.1 million in the acquisition of Ketch (note 3). The lease ends in March
2008 and interest expense is recognized at 5.3%.
Advantage Energy Income Fund - 12
6. BANK INDEBTEDNESS
Advantage has a credit facility agreement with a syndicate of financial
institutions which provides for a $580 million extendible revolving loan
facility and a $20 million operating loan facility. The loan's interest
rate is based on either prime, US base rate, LIBOR or bankers' acceptance
rates, at the Fund's option, subject to certain basis point or stamping
fee adjustments ranging from 0.00% to 1.25% depending on the Fund's debt
to cash flow ratio. The credit facilities are secured by a $1 billion
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. Various
borrowing options are available under the credit facilities, including
prime rate-based advances, US base rate advances, US dollar LIBOR 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 at the option of the syndicate. If not
extended, the revolving credit facility is converted to a two year term
facility with the first payment due one year and one day after
commencement of the term. The credit facilities contain standard
commercial covenants for facilities of this nature. The only financial
covenant is a requirement for AOG to maintain a minimum cash flow to
interest expense ratio of 3 1/2:1, determined on a rolling four quarter
basis. Breach of any covenant will result in an event of default in which
case AOG has 20 days to remedy such default. If the default is not
remedied or waived, and if required by the majority of lenders, the
administrative agent of the lenders has the option to declare all
obligations of AOG under the credit facilities to be immediately due and
payable without further demand, presentation, protest, or notice of any
kind. 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. For the year ended
December 31, 2006, the effective interest rate on the outstanding amounts
under the facility was approximately 5.1%.
7. 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 Trust Unit plus
accrued and unpaid interest. 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% 6.50% TOTAL
-----------------------------------------------------------------------------------------------------------------------------
Issue date Oct. 18, 2002 July 8, 2003 Dec. 2, 2003 Sep. 15, 2004 Sep. 15, 2004 May 18, 2005
Maturity date Nov. 1, 2007 Aug. 1, 2008 Feb. 1, 2009 Dec. 1, 2011 Oct. 1, 2009 June 30, 2010
Conversion price $ 13.30 $ 17.00 $ 16.50 $ 21.00 $ 20.25 $ 24.96
Liability component $ 52,722 $ 28,662 $ 56,802 $ 47,444 $ 71,631 $ 66,981 $ 324,242
Equity component 2,278 1,338 3,198 2,556 3,369 2,971 15,710
-----------------------------------------------------------------------------------------------------------------------------
Gross proceeds 55,000 30,000 60,000 50,000 75,000 69,952 339,952
Issuance costs (2,495) (1,444) (2,588) (2,190) (3,190) - (11,907)
-----------------------------------------------------------------------------------------------------------------------------
Net proceeds $ 52,505 $ 28,556 $ 57,412 $ 47,810 $ 71,810 $ 69,952 $ 328,045
-----------------------------------------------------------------------------------------------------------------------------
Advantage Energy Income Fund - 13
The convertible debentures are redeemable prior to their maturity dates,
at the option of the Fund, upon providing 30 to 60 days advance
notification. The redemption prices for the various debentures, plus
accrued and unpaid interest, is dependent on the redemption periods and
are as follows:
----------------------------------------------------------------------------------------------------------
CONVERTIBLE REDEMPTION
DEBENTURE REDEMPTION PERIODS PRICE
----------------------------------------------------------------------------------------------------------
10.00% After November 1, 2005 and on or before November 1, 2006 $1,050
After November 1, 2006 and before November 1, 2007 $1,025
----------------------------------------------------------------------------------------------------------
9.00% After August 1, 2006 and on or before August 1, 2007 $1,050
After August 1, 2007 and before August 1, 2008 $1,025
----------------------------------------------------------------------------------------------------------
8.25% After February 1, 2007 and on or before February 1, 2008 $1,050
After February 1, 2008 and before February 1, 2009 $1,025
----------------------------------------------------------------------------------------------------------
7.75% After December 1, 2007 and on or before December 1, 2008 $1,050
After December 1, 2008 and on or before December 1, 2009 $1,025
After December 1, 2009 and before December 1, 2011 $1,000
----------------------------------------------------------------------------------------------------------
7.50% After October 1, 2007 and on or before October 1, 2008 $1,050
After October 1, 2008 and before October 1, 2009 $1,025
----------------------------------------------------------------------------------------------------------
6.50% After June 30, 2008 and on or before June 30, 2009 $1,050
After June 30, 2009 and before June 30, 2010 $1,025
----------------------------------------------------------------------------------------------------------
The balance of debentures outstanding at December 31, 2006 and changes in
the liability and equity components during the years ended December 31,
2006 and 2005 are as follows:
--------------------------------------------------------------------------------------------------------------------------
10.00% 9.00% 8.25% 7.75% 7.50% 6.50% TOTAL
--------------------------------------------------------------------------------------------------------------------------
Debentures outstanding $ 1,485 $ 5,392 $ 4,867 $ 46,766 $ 52,268 $ 69,952 $ 180,730
--------------------------------------------------------------------------------------------------------------------------
Liability component:
Balance at Dec. 31, 2004 $ 3,923 $ 10,388 $ 12,237 $ 45,548 $ 64,337 $ - $ 136,433
Accretion of discount 55 168 198 616 1,145 - 2,182
Converted to Trust Units (1,525) (3,297) (4,285) (266) (3,161) - (12,534)
----------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2005 2,453 7,259 8,150 45,898 62,321 - 126,081
Assumed on Ketch acquisition - - - - - 66,981 66,981
Accretion of discount 30 107 103 589 897 380 2,106
Converted to Trust Units (1,019) (2,131) (3,577) (2,722) (13,436) - (22,885)
--------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2006 $ 1,464 $ 5,235 $ 4,676 $ 43,765 $ 49,782 $ 67,361 $ 172,283
--------------------------------------------------------------------------------------------------------------------------
Equity component:
Balance at Dec. 31, 2004 $ 163 $ 472 $ 675 $ 2,444 $ 3,010 $ - $ 6,764
Converted to Trust Units (63) (149) (234) (14) (145) - (605)
--------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2005 100 323 441 2,430 2,865 - 6,159
Assumed on Ketch acquisition - - - - - 2,971 2,971
Converted to Trust Units (41) (94) (193) (144) (617) - (1,089)
--------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2006 $ 59 $ 229 $ 248 $ 2,286 $ 2,248 $ 2,971 $ 8,041
--------------------------------------------------------------------------------------------------------------------------
As part of the acquisition of Ketch, the 6.50% convertible debentures,
originally issued May 18, 2005, were assumed by Advantage on June 23,
2006.
During the year ended December 31, 2006, $24,333,000 (2005 - $13,339,000)
debentures were converted resulting in the issuance of 1,286,901 Trust
Units (2005 - 783,870 Trust Units).
Advantage Energy Income Fund - 14
8. ASSET RETIREMENT OBLIGATIONS
The Fund's asset retirement obligations result from net ownership
interests in petroleum and natural gas assets including well sites,
gathering systems and processing facilities. The Fund estimates the total
undiscounted and inflated amount of cash flows required to settle its
asset retirement obligations is approximately $157.2 million which will be
incurred between 2007 to 2057. A credit-adjusted risk-free rate of 7% was
used to calculate the fair value of the asset retirement obligations.
A reconciliation of the asset retirement obligations is provided below:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005
-----------------------------------------------------------------------------------------
Balance, beginning of year $ 21,263 $ 17,503
Accretion expense 1,684 1,162
Assumed in Ketch acquisition (note 3) 7,930 -
Liabilities incurred 9,421 4,623
Liabilities settled (5,974) (2,025)
-----------------------------------------------------------------------------------------
Balance, end of year $ 34,324 $ 21,263
-----------------------------------------------------------------------------------------
9. EXCHANGEABLE SHARES
NUMBER OF SHARES AMOUNT
-----------------------------------------------------------------------------------------
Balance at December 31, 2004 1,450,030 $ 30,842
Converted to Trust Units (1,345,358) (28,705)
Non-controlling interest in net income - 232
-----------------------------------------------------------------------------------------
Balance at December 31, 2005 104,672 2,369
Converted to Trust Units (104,672) (2,398)
Non-controlling interest in net income - 29
-----------------------------------------------------------------------------------------
Balance at December 31, 2006 - $ -
-----------------------------------------------------------------------------------------
Trust Units issuable - -
-----------------------------------------------------------------------------------------
AOG is authorized to issue an unlimited number of non-voting Exchangeable
Shares. As partial consideration for the acquisition of Defiant which
closed on December 21, 2004, AOG issued 1,450,030 Exchangeable Shares. The
value of the Exchangeable Shares issued was determined based on the
weighted average trading value of Advantage Trust Units during the two-day
period before and after the terms of the acquisition were agreed to and
announced. Each Exchangeable Share previously issued by AOG was
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. Dividends were not
declared or paid on the Exchangeable Shares and the Exchangeable Shares
were not publicly traded.
On March 8, 2006 AOG elected to exercise its redemption right to redeem
all of the Exchangeable Shares outstanding. The redemption price per
Exchangeable Share was satisfied by delivering that number of Advantage
Trust Units equal to the Exchange Ratio of 1.22138 in effect on May 9,
2006.
Advantage Energy Income Fund - 15
10. UNITHOLDERS' EQUITY
(a) UNITHOLDERS' CAPITAL
(i) AUTHORIZED
Unlimited number of voting Trust Units
(ii) ISSUED
NUMBER OF UNITS AMOUNT
---------------------------------------------------------------------------------------------------
Balance at December 31, 2004 49,674,783 $ 515,544
2004 non-cash performance incentive 763,371 16,570
Issued for cash, net of costs 5,250,000 107,616
Issued on conversion of debentures 783,870 13,139
Issued on conversion of exchangeable shares 1,374,300 28,705
---------------------------------------------------------------------------------------------------
Balance at December 31, 2005 57,846,324 681,574
2005 non-cash performance incentive 475,263 10,544
Issued on conversion of debentures 1,286,901 23,974
Issued on conversion of exchangeable shares 127,014 2,398
Issued on exercise of Trust Unit rights 122,500 682
Ketch acquisition (note 3) 32,870,465 688,636
Management internalization 1,913,842 38,716
2006 non-cash performance incentive 117,662 2,380
Distribution reinvestment plan 2,005,499 27,722
Issued for cash, net of costs 8,625,000 141,399
---------------------------------------------------------------------------------------------------
105,390,470 $ 1,618,025
---------------------------------------------------------------------------------------------------
Management internalization escrowed Trust Units (25,267)
---------------------------------------------------------------------------------------------------
Balance at December 31, 2006 $ 1,592,758
---------------------------------------------------------------------------------------------------
On January 19, 2005, Advantage issued 763,371 Trust Units to partially
satisfy the obligation related to the 2004 year end performance incentive
fee.
On February 9, 2005, Advantage issued 5,250,000 Trust Units at $21.65 per
Trust Unit for net proceeds of $107.6 million (net of Underwriters' fees
and other issue costs of $6.1 million). The net proceeds of the offering
were used to pay down debt incurred in the acquisition of Defiant, for
2005 capital expenditures and for general corporate purposes.
On January 20, 2006, Advantage issued 475,263 Trust Units to satisfy the
obligation related to the 2005 year end performance incentive fee.
On June 23, 2006, Advantage issued 32,870,465 Trust Units as consideration
for the acquisition of Ketch (note 3). Concurrent with the Ketch
acquisition, Advantage internalized the external management contract
structure and eliminated all related fees for total original consideration
of 1,933,208 Advantage Trust Units initially valued at $39.1 million and
subject to escrow provisions (note 14). A total of 19,366 Trust Units
related to the internalization have been forfeited since issuance. The
Fund also issued 177,662 Trust Units, valued at $2.4 million, to satisfy
the final obligation related to the 2006 first quarter performance fee.
On July 24, 2006, Advantage announced that it adopted a Premium
Distribution(TM), Distribution Reinvestment and Optional Trust Unit
Purchase Plan (the "Plan"). The Plan commenced with the monthly cash
distribution payable on August 15, 2006 to Unitholders of record on July
31, 2006. For eligible Unitholders that elect to participate in the Plan,
Advantage will settle the monthly distribution obligation through the
issuance of additional Trust Units at 95% of the Average Market Price (as
defined in the Plan). Unitholder enrollment in the Premium
Distribution(TM) component of the Plan effectively authorizes the
subsequent disposal of the issued Trust Units in exchange for a cash
payment equal to 102% of the cash distributions that the Unitholder would
otherwise have received if they did not participate in the Plan. During
the year ended December 31, 2006, 2,005,499 Trust Units were issued under
the Plan, generating $27.7 million reinvested in the Fund.
Advantage Energy Income Fund - 16
On August 1, 2006, Advantage issued 7,500,000 Trust Units, plus an
additional 1,125,000 Trust Units upon full exercise of the Underwriters'
over-allotment option on August 4, 2006, at $17.30 per Trust Unit for net
proceeds of $141.4 million (net of Underwriters' fees and other issue
costs of $7.8 million). The net proceeds of the offering were used to pay
down bank indebtedness and to subsequently fund capital and general
corporate expenditures.
(b) TRUST UNITS RIGHTS INCENTIVE PLAN
Effective June 25, 2002, a Trust Units Rights Incentive Plan for external
directors of the Fund was established and approved by the Unitholders of
Advantage. A total of 500,000 Trust Units have been reserved for issuance
under the plan with an aggregate of 400,000 rights granted since
inception. The initial exercise price of rights granted under the plan may
not be less than the current market price of the Trust Units as of the
date of the grant and the maximum term of each right is not to exceed ten
years with all rights vesting immediately upon grant. At the option of the
rights holder, the exercise price of the rights can be adjusted downwards
over time based upon distributions paid by the Fund to Unitholders.
SERIES A SERIES B
NUMBER PRICE NUMBER PRICE
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 85,000 $ 5.05 225,000 $ 16.75
Reduction of exercise price - (3.12) - (3.12)
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 85,000 1.93 225,000 13.63
Exercised (85,000) - (37,500) -
Reduction of exercise price - (1.93) - (2.66)
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 - $ - 187,500 $ 10.97
--------------------------------------------------------------------------------------------------------------------------
Expiration date August 16, 2006 June 17, 2008
--------------------------------------------------------------------------------------------------------------------------
The Series A Trust Unit rights were issued in 2002 and the Fund was unable
to determine the fair value for the rights granted under the Plan at that
time. Several essential factors required to value such rights include
expected future exercise price, distributions, exercise timeframe,
volatility and risk-free interest rates. In determining these assumptions,
both historical data and future expectations are considered. However, when
the Series A Trust Unit rights were originally granted, Advantage had only
been established during the prior year and there was little historical
information available that may suggest future expectations concerning such
assumptions. Therefore, it was concluded that a fair value determination
at that time was not possible. The Fund has disclosed pro forma results as
if the Fund followed the intrinsic value methodology in accounting for
such rights. The intrinsic value methodology would result in recording
compensation expense for the rights based on the underlying Trust Unit
price at the date of exercise or at the date of the financial statements
for unexercised rights as compared to the exercise price. All of the
remaining 85,000 Series A Trust Units Rights were exercised July 7, 2006
in exchange for an equivalent number of Trust Units.
YEAR ENDED YEAR ENDED
PRO FORMA RESULTS DECEMBER 31, 2006 DECEMBER 31, 2005
---------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 49,814 $ 75,072
Less compensation expense
for rights issued in 2002 (234) 300
---------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 50,048 $ 74,772
---------------------------------------------------------------------------------------------------------------------
Net income per Trust Unit, as reported
Basic $ 0.62 $ 1.33
Diluted $ 0.61 $ 1.32
---------------------------------------------------------------------------------------------------------------------
Net income per Trust Unit, pro forma
Basic $ 0.62 $ 1.32
Diluted $ 0.62 $ 1.31
---------------------------------------------------------------------------------------------------------------------
Advantage Energy Income Fund - 17
(c) NET INCOME PER TRUST UNIT
The calculation of basic and diluted net income per Trust Unit are derived
from both income available to Unitholders and weighted average Trust Units
outstanding calculated as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005
---------------------------------------------------------------------------------------------------------------------
Income available to Unitholders
Basic $ 49,814 $ 75,072
Exchangeable shares - 232
---------------------------------------------------------------------------------------------------------------------
Diluted $ 49,814 $ 75,304
---------------------------------------------------------------------------------------------------------------------
Weighted average Trust Units outstanding
Basic 80,958,455 56,593,303
Trust Units Rights Incentive Plan - Series A 43,548 76,698
Trust Units Rights Incentive Plan - Series B 78,287 69,800
Exchangeable Shares - 298,341
Management Internalization 113,556 -
---------------------------------------------------------------------------------------------------------------------
Diluted 81,193,846 57,038,142
---------------------------------------------------------------------------------------------------------------------
The calculation of diluted net income per Trust Unit excludes all series
of convertible debentures as the impact would be anti-dilutive.
Exchangeable Shares have been excluded for the year ended December 31,
2006 as the impact would have been anti-dilutive. Total weighted average
Trust Units issuable in exchange for the convertible debentures and
excluded from the diluted net income per Trust Unit calculation for the
year ended December 31, 2006 were 7,182,276 (2005 - 7,288,894). As at
December 31, 2006, the total convertible debentures outstanding were
immediately convertible to 8,334,453 Trust Units (2005 - 6,818,833).
11. INCOME TAXES
The taxable income of the Fund is comprised of interest income related to
the AOG Notes and royalty income from the AOG Royalty less deductions for
Canadian Oil and Gas Property Expense, Trust Unit issue costs, and
interest on convertible debentures. Given that taxable income of the Fund
is allocated to the Unitholders, no provision for current income taxes
relating to the Fund is included in these financial statements. On October
31, 2006, the Federal Government proposed changes to Canada's tax system
that include altering the tax treatment of income trusts. The government
proposed a two-tier tax structure, similar to that of corporations,
whereby distributions paid by trusts will be subject to tax at the trust
level in addition to personal tax as if they were dividends from a taxable
Canadian corporation. The changes are proposed to take effect in 2011 for
existing publicly-traded trusts. As the proposal was not considered
substantially enacted at December 31, 2006, these changes are not
reflected in the current financial statements. As at December 31, 2006,
the Fund had unrecognized non-deductible temporary differences of $601
million.
Advantage Energy Income Fund - 18
The provision for income taxes varies from the amount that would be
computed by applying the combined Canadian federal and provincial income
tax rates for the following reasons:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005
------------------------------------------------------------------------------------------------------------------
Income before taxes $ 14,265 $ 66,131
------------------------------------------------------------------------------------------------------------------
Canadian combined federal and provincial income tax rates 34.78% 37.98%
Expected income tax expense at statutory rates 4,961 25,080
Increase (decrease) in income taxes resulting from:
Non-deductible Crown charges 6,925 12,406
Resource allowance (8,108) (15,390)
Management internalization 4,678 -
Change in enacted tax rates (5,692) (3,230)
Amounts included in trust income and other (39,851) (30,237)
------------------------------------------------------------------------------------------------------------------
Future income tax reduction (37,087) (11,371)
Income and capital taxes 1,509 2,198
------------------------------------------------------------------------------------------------------------------
$ (35,578) $ (9,173)
------------------------------------------------------------------------------------------------------------------
The components of the future income tax liability are as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005
------------------------------------------------------------------------------------------------------------------
Property and equipment in excess of tax basis $ 85,648 $ 119,065
Asset retirement obligations (10,141) (7,230)
Non-capital tax loss carry forward (8,851) (11,228)
Other (4,717) (1,581)
------------------------------------------------------------------------------------------------------------------
Future income tax liability $ 61,939 $ 99,026
------------------------------------------------------------------------------------------------------------------
AOG has a non-capital tax loss carry forward of approximately $29.3
million of which $1.2 million expires in 2010, $27.4 million in 2011, and
$0.7 million in 2021.
12. ACCUMULATED DEFICIT
Accumulated deficit consists of accumulated income and accumulated
distributions for the Fund since inception as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005
------------------------------------------------------------------------------------------------------------------
Accumulated Income $ 227,523 $ 177,709
Accumulated Distributions (664,629) (447,383)
------------------------------------------------------------------------------------------------------------------
Accumulated Deficit $ (437,106) $ (269,674)
------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2006 the Fund declared $217.2 million in
distributions, representing $2.66 per distributable Trust Unit (2005 -
$177.4 million representing $3.12 per distributable Trust Unit).
Advantage Energy Income Fund - 19
13. FINANCIAL INSTRUMENTS
Financial instruments of the Fund include accounts receivable, deposits,
accounts payable and accrued liabilities, distributions payable, and bank
indebtedness. As at December 31, 2006, there were no significant
differences between the carrying amounts reported on the balance sheet and
the estimated fair values of these financial instruments due to the short
terms to maturity and the floating interest rate on the bank indebtedness.
Substantially all of the Fund's accounts receivable are due from customers
and joint venture partners in the oil and gas industry and are subject to
normal industry credit risks. Credit risk is mitigated by entering into
sales contracts with only stable, creditworthy parties and through
frequent reviews of exposures to individual entities. The carrying value
of accounts receivable reflects Management's assessment of the associated
credit risks. The Fund is further exposed to interest rate risk to the
extent that bank indebtedness is at a floating rate of interest.
In addition, the Fund has outstanding convertible debenture obligations
that are financial liabilities. The convertible debentures have different
fixed terms and interest rates (note 7) resulting in fair values that will
vary over time as market conditions change. As at December 31, 2006, the
estimated fair value of the total outstanding convertible debenture
obligation was $180.0 million (2005 - $137.5 million).
As current and future practice, Advantage has established a financial
hedging strategy and may manage the risk associated with changes in
commodity prices by entering into financial derivatives. To the extent
that Advantage engages in risk management activities related to commodity
prices, it will be subject to credit risk associated with counterparties
with which it contracts. Credit risk is mitigated by entering into
contracts with only stable, creditworthy parties and through frequent
reviews of exposure to individual entities. As the fair value of the
contracts varies with commodity prices, they give rise to financial assets
or liabilities. As at December 31, 2006 the Fund had the following
financial derivatives in place:
DESCRIPTION OF
FINANCIAL DERIVATIVE TERM VOLUME AVERAGE PRICE
------------------------------------------------------------------------------------------------------------------
NATURAL GAS - AECO
Fixed price November 2006 to March 2007 5,687 mcf/d Cdn$8.70/mcf
Fixed price November 2006 to March 2007 3,791 mcf/d Cdn$10.02/mcf
Collar November 2006 to March 2007 9,478 mcf/d Floor Cdn$8.18/mcf
Ceiling Cdn$11.24/mcf
Collar November 2006 to March 2007 4,739 mcf/d Floor Cdn$8.44/mcf
Ceiling Cdn$12.40/mcf
Collar November 2006 to March 2007 4,739 mcf/d Floor Cdn$8.18/mcf
Ceiling Cdn$11.66/mcf
Collar November 2006 to March 2007 4,739 mcf/d Floor Cdn$8.44/mcf
Ceiling Cdn$12.29/mcf
Collar November 2006 to March 2007 5,687 mcf/d Floor Cdn$7.91/mcf
Ceiling Cdn$9.81/mcf
Collar November 2006 to March 2007 9,478 mcf/d Floor Cdn$8.44/mcf
Ceiling Cdn$13.82/mcf
CRUDE OIL - WTI
Collar October 2006 to March 2007 1,250 bbls/d Floor US$65.00/bbl
Ceiling US$87.40/bbl
Collar October 2006 to September 2007 1,000 bbls/d Floor US$65.00/bbl
Ceiling US$90.00/bbl
ELECTRICITY - ALBERTA POOL PRICE
Fixed price April 2006 to December 2007 0.5 MW Cdn$60.79/MWh
Fixed price January 2007 to December 2007 3.0 MW Cdn$56.00/MWh
Fixed price January 2008 to December 2008 3.0 MW Cdn$54.00/MWh
Advantage Energy Income Fund - 20
As at December 31, 2006 the settlement amount of the financial derivatives
outstanding was an asset of approximately $10,433,000. For the year ended
December 31, 2006, $10,242,000 was recognized in income as an unrealized
derivative gain. As a result of the Ketch merger, the Fund assumed several
contracts which had an estimated fair market value of $191,000 on closing.
14. MANAGEMENT FEE, PERFORMANCE INCENTIVE, AND MANAGEMENT INTERNALIZATION
Concurrent with the Ketch acquisition (note 3), Advantage internalized the
external management contract structure and eliminated all related fees.
The Fund reached an agreement with Advantage Investment Management Ltd.
("AIM" or the "Manager") to purchase all of the outstanding shares of AIM
pursuant to the terms of the Plan of Arrangement for total original
consideration of 1,933,208 Advantage Trust Units. The Trust Units were
initially valued at $39.1 million using the weighted average trading value
for Advantage Trust Units on the Unitholder approval date of June 22, 2006
and are subject to escrow provisions over a 3-year period, vesting
one-third each year beginning in 2007. The management internalization
consideration is being deferred and amortized into income as management
internalization expense over the specific vesting periods during which
employee services are provided, including an estimate of future Trust Unit
forfeitures. A total of $13.4 million has been included as management
internalization expense for the year ended December 31, 2006 with 19,366
Trust Units forfeited since issuance. The Fund also issued 117,662 Trust
Units to satisfy the final obligation related to the 2006 first quarter
performance fee along with $0.9 million in cash to settle the first
quarter management fee. AIM agreed to forego fees from the period April 1,
2006 to the closing of the Arrangement.
Prior to the internalization, the Manager received both a management fee
and a performance incentive fee as compensation pursuant to the Management
Agreement approved by the Board of Directors. Management fees were
calculated based on 1.5% of operating cash flow defined as revenues less
royalties and operating costs. Management fees were paid quarterly and
$1.0 million was payable and included in accrued liabilities at December
31, 2005.
The Manager was entitled to earn an annual performance incentive fee when
the Fund's total annual return exceeded 8%. The total annual return was
calculated at the end of the year by dividing the year-over-year change in
Unit price plus cash distributions by the opening Unit price, as defined
in the Management Agreement. The 2005 opening and closing Unit prices were
$21.71 and $22.19, respectively. Cash distributions for the 2005 year
amounted to $3.12 per Trust Unit. Ten percent of the amount of the total
annual return in excess of 8% was multiplied by the market capitalization
(defined as the opening Unit price multiplied by the weighted average
number of Trust Units outstanding during the year) to determine the
performance incentive fee. The performance incentive fee payable and
included in accrued liabilities at December 31, 2005 was $10.5 million.
The Management Agreement provided an option to the Manager to receive the
performance incentive fee in equivalent Trust Units. The Manager exercised
the option and on January 20, 2006, the Fund issued 475,263 Advantage
Trust Units at the closing Unit price of $22.19 to satisfy the 2005
performance fee obligation. The Manager did not receive any form of
compensation in respect of acquisition or divestiture activities nor was
there any form of stock option or bonus plan for the Manager or the
employees of Advantage outside of the management and performance fees
prior to the internalization. The management fees and performance fees
were shared amongst all management and employees.
15. COMMITMENTS
Advantage has lease commitments relating to office buildings. The
estimated annual minimum operating lease rental payments for the
buildings, after deducting sublease income, are as follows:
2007 $ 2,256
2008 1,385
2009 779
2010 779
2011 195
------------------------------------------------------------------
$ 5,394
------------------------------------------------------------------
Advantage Energy Income Fund - 21
16. SUBSEQUENT EVENT
On February 14, 2007 Advantage issued 7,800,000 Trust Units, plus an
additional 800,000 Trust Units upon exercise of the Underwriters'
over-allotment option on March 7, 2007, at $12.80 per Trust Unit for
approximate net proceeds of $104.2 million (net of Underwriters' fees and
other issue costs of $5.9 million).
17. RECONCILIATION OF FINANCIAL STATEMENTS TO UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The consolidated financial statements of Advantage have been prepared in
accordance with accounting principles generally accepted in Canada.
Canadian GAAP, in most respects, conforms to generally accepted accounting
principles in the United States. Any differences in accounting principles
between Canadian GAAP and US GAAP, as they apply to Advantage, are not
material, except as described below.
(a) UNIT-BASED COMPENSATION
Effective January 1, 2003, the Fund prospectively adopted amendments to
CICA 3870 "Stock-based Compensation and Other Stock-based Payments". Under
this revised standard, the Fund must account for compensation expense
based on the fair value of the equity awards on the grant date and the
initial fair value is not subsequently remeasured. Advantage's unit-based
compensation consists of a Trust Units Rights Incentive Plan and Trust
Units held in escrow subject to service requirement provisions. The
initial fair value is expensed over the vesting period of the rights
granted or escrowed Trust Units. Under US GAAP, the Fund adopted SFAS
123(R) "Share-Based Payment" on January 1, 2006 using the modified
prospective approach and applies the fair value method of accounting for
all unit-based compensation granted after January 1, 2006. A US GAAP
difference exists as unit-based compensation grants are considered
liability awards for US GAAP and equity awards for Canadian GAAP. Under US
GAAP, the fair value of a liability award is measured at the grant date
and is subsequently remeasured at each reporting period. When the rights
are exercised and the escrowed Trust Units vested, the amount recorded as
a liability is transferred to temporary equity. With regards to the Trust
Units Rights Incentive Plan, the difference in the value originally
recognized as equity and the fair value at adoption of the new standard
has been charged to income as the cumulative effect of a change in
accounting principle.
For rights granted prior to January 1, 2003, no compensation cost was
recognized at the grant date given that the options were issued at market
value. As options were subsequently exercised under the unit-based
compensation plan, the consideration received was recorded as unitholders'
capital. However, the Fund does calculate compensation expense based on
the intrinsic value of the rights which is disclosed in the notes to the
consolidated financial statements along with the associated impact on net
income and net income per Trust Unit. Intrinsic value is calculated as the
difference between the quoted market price and the exercise price. Under
US GAAP, as the Trust Units Rights Incentive Plan was a variable
compensation plan, grants prior to January 1, 2003 were accounted for in
accordance with Accounting Principles Board ("APB") Opinion No. 25, with
compensation expense recorded each period-end using the intrinsic value
methodology. This different accounting treatment has resulted in
additional unit-based compensation expense for the Fund related to options
granted during 2002.
(b) CONVERTIBLE DEBENTURES
The Fund applies CICA 3860 "Financial Instruments - Presentation and
Disclosure" in accounting for convertible debentures which results in
their classification as liabilities. The convertible debentures also have
an embedded conversion feature which 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, net of issuance costs,
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 Statements of Income.
Under US GAAP, the entire convertible debenture balance would be shown as
a liability. The embedded conversion feature would not be accounted for
separately as a component of equity. Additionally, under US GAAP, issuance
costs are generally shown as a deferred charge rather than netted from the
convertible debenture balance. As a result of these US GAAP differences,
the convertible debenture balance in liabilities represents the actual
maturity value of the outstanding debentures. Issuance costs are shown
separately as a deferred charge and are amortized to interest expense over
the term of the debenture. Given that the convertible debentures are
carried at maturity value, it is not necessary to accrete the balance over
the term of the debentures which results in an expense reduction. Interest
and accretion on convertible debentures represents interest expense on the
convertible debentures and amortization of the associated deferred
issuance costs.
Advantage Energy Income Fund - 22
(c) DEPLETION AND DEPRECIATION
For Canadian GAAP, depletion of petroleum and natural gas properties and
depreciation of lease and well equipment is provided on accumulated costs
using the unit-of-production method based on estimated net proved
petroleum and natural gas reserves, before royalties, based on forecast
prices and costs.
US GAAP provides for a similar accounting methodology except that
estimated net proved petroleum and natural gas reserves are net of
royalties and based on constant prices and costs. Therefore, depletion and
depreciation under US GAAP will be different since changes to royalty
rates will impact both proved reserves and production and differences
between constant prices and costs as compared to forecast prices and costs
will impact proved reserve volumes. Additionally, differences in depletion
and depreciation will result in divergence of net book value for Canadian
GAAP and US GAAP from year-to-year and impact future depletion and
depreciation expense as well as the net book value utilized for future
ceiling test calculations.
(d) CEILING TEST
Under Canadian GAAP, petroleum and natural gas assets are evaluated each
reporting period to determine that the carrying amount is recoverable and
does not exceed the fair value of the properties in the cost centre (the
"ceiling test"). The carrying amounts are assessed to be recoverable when
the sum of the undiscounted net cash flows expected from the production of
proved reserves, the lower of cost and market of unproved properties and
the cost of major development projects exceeds the carrying amount of the
cost centre. When the carrying amount is not assessed to be recoverable,
an impairment loss is recognized to the extent that the carrying amount of
the cost centre exceeds the sum of the discounted net cash flows expected
from the production of proved and probable reserves, the lower of cost and
market of unproved properties and the cost of major development projects
of the cost centre. The cash flows are estimated using expected future
product prices and costs and are discounted using a risk-free interest
rate. For Canadian GAAP purposes, Advantage has not recognized an
impairment loss since inception.
Under US GAAP, the carrying amounts of petroleum and natural gas assets,
net of deferred income taxes, shall not exceed an amount equal to the sum
of the present value of estimated net future after-tax cash flows of
proved reserves (at current prices and costs as of the balance sheet date)
computed using a discount factor of ten percent plus the lower of cost or
estimated fair value of unproved properties. Any excess is charged to
expense as an impairment loss. Under US GAAP, Advantage recognized an
impairment loss of $49.5 million in 2001, $28.3 million net of tax, and an
impairment loss of $535.4 million in 2006, $477.8 million net of tax. The
impairment loss decreases net book value of property and equipment which
reduces depletion and depreciation expense subsequently recorded as well
as future ceiling test calculations.
(e) INCOME TAX
The future income tax accounting standard under Canadian GAAP is
substantially similar to the deferred income tax approach as required by
US GAAP. Pursuant to Canadian GAAP, substantively enacted tax rates are
used to calculate future income tax, whereas US GAAP applies enacted tax
rates. However, there were no tax rate differences for the years ended
December 31, 2006 and 2005. The differences between Canadian GAAP and US
GAAP relate to future income tax impact on GAAP differences for depletion
and depreciation, and impairments from ceiling test calculations.
Under US GAAP, an entity that is subject to income tax in multiple
jurisdictions is required to disclose income tax expense in each
jurisdiction. The total amount of income taxes in 2006 is entirely at the
provincial level and in 2005, income tax expense consisted of $1.2 million
at the Federal level and $1.0 million at the provincial level.
(f) UNITHOLDERS' EQUITY
Unitholders' equity of Advantage consists primarily of Trust Units. The
Trust Units are redeemable at any time on demand by the holders, which is
required for the Fund to retain its Canadian mutual fund trust status. The
holders are entitled to receive a price per Trust Unit equal to the lesser
of: (i) 85% of the simple average of the closing market prices of the
Trust Units, on the principal market on which the Trust Units are quoted
for trading, during the 10 trading-day period commencing immediately after
the date on which the Trust Units are surrendered for redemption; and (ii)
the closing market price on the principal market on which the Trust Units
are quoted for trading on the redemption date. For Canadian GAAP purposes,
the Trust Units are considered permanent equity and are presented as a
component of unitholders' equity.
Under US GAAP, it is required that equity with a redemption feature be
presented as temporary equity between the liability and equity sections of
the balance sheet. The temporary equity is shown at an amount equal to the
redemption value based on the terms of the Trust Units. The same
accounting treatment would be applicable to the Exchangeable Shares.
Advantage Energy Income Fund - 23
Changes in the redemption value from year-to-year are charged to deficit.
All components of unitholders' equity related to Trust Units and
Exchangeable Shares are eliminated. When calculating net income per Trust
Unit, increases in the redemption value during a period results in a
reduction of net income available to Unitholders while decreases in the
redemption value increases net income available to Unitholders. For the
years ended December 31, 2006 and 2005, net income available to
Unitholders was increased by $898.0 million and $3.7 million corresponding
to changes in the Trust Units redemption value for the respective periods.
A continuity schedule of significant equity accounts for each reporting
period is required disclosure under US GAAP. The following table is a
continuity of deficit, the Fund's only significant equity account:
DEFICIT YEAR ENDED YEAR ENDED
(thousands of Canadian dollars) DECEMBER 31, 2006 DECEMBER 31, 2005
--------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ (665,627) $ (574,060)
Net income (loss) and comprehensive income (loss) (417,274) 82,078
Distributions declared (217,246) (177,366)
Change in redemption value of temporary equity 897,989 3,721
--------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (402,158) $ (665,627)
--------------------------------------------------------------------------------------------------------------------------
(g) BALANCE SHEET DISCLOSURE
US GAAP requires disclosure of certain line items for balances that would
be aggregated in the Canadian GAAP financials. The following are the
additional disclosures for accounts receivable and accounts payable:
(thousands of Canadian dollars) DECEMBER 31, 2006 DECEMBER 31, 2005
--------------------------------------------------------------------------------------------------------------------------
Accounts receivable:
Trade receivables $ 78,698 $ 51,652
Other receivables 839 136
--------------------------------------------------------------------------------------------------------------------------
Total accounts receivable $ 79,537 $ 51,788
--------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accounts payable $ 75,500 $ 37,252
Accrued liabilities 39,999 38,016
Other payables 610 1,103
--------------------------------------------------------------------------------------------------------------------------
Total accounts payable and accrued liabilities $ 116,109 $ 76,371
--------------------------------------------------------------------------------------------------------------------------
(h) COMPREHENSIVE INCOME
US GAAP requires the presentation of net income and comprehensive income.
Comprehensive income includes net income plus other comprehensive income
items as specifically identified by US GAAP. The Fund currently has no
financial items that qualify as other comprehensive income, and therefore,
net income and comprehensive income are equivalent.
(i) STATEMENTS OF CASH FLOW
The differences between Canadian GAAP and US GAAP have not resulted in any
significant variances concerning the statements of cash flows as reported.
Advantage Energy Income Fund - 25
(j) KETCH ACQUISITION
On June 23, 2006, Advantage acquired all of the issued and outstanding
Trust Units of Ketch to benefit from an increase in property
diversification, the ability to pursue a greater range of high impact
growth opportunities available to a larger entity and complimentary
summer/winter drilling programs. The merger provides increased liquidity
and presence in the Canadian markets as well as greater exposure to the
United States capital markets for previous Ketch Unitholders through
Advantage's NYSE listing.
The purchase price for the acquisition and resulting goodwill is due to
both US and Canadian GAAP requiring the purchase price to be determined
using Trust Unit prices at the announcement date, while the fair value of
the assets and liabilities is determined at the closing date of the
acquisition. As commodity prices decreased significantly between the
announcement and closing dates, the fair value of the assets acquired also
decreased and as a result, goodwill was recorded.
(k) RECENT US ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT IMPLEMENTED
SFAS 155 ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS - AN
AMENDMENT OF FASB STATEMENTS NO. 133 AND 140: This Statement amends FASB
Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement
establishes a requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation. This statement also permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. The implementation effective date for
this standard is for all instruments acquired, issued or subject to a
re-measurement event occurring in fiscal years beginning after September
15, 2006. The Fund has not yet assessed the full impact, if any, of this
standard on the consolidated financial statements.
SFAS 157 FAIR VALUE MEASUREMENTS: This Statement defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value
measurements. Accordingly, this Statement does not require any new fair
value measurements. The implementation effective date for this standard is
as of the beginning of the first interim or annual reporting period that
begins after November 15, 2007. The Fund has not yet assessed the full
impact, if any, of this standard on the consolidated financial statements.
FIN 48 ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES: This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No.
109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The implementation effective
date for this Interpretation is for fiscal years beginning after December
15, 2006. The Fund has assessed the impact of this interpretation and does
not anticipate any significant impact on the consolidated financial
statements.
Advantage Energy Income Fund - 26
The application of US GAAP would have the following effect on net income
as reported:
CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED YEAR ENDED
(thousands of Canadian dollars, except for per Trust Unit amounts) DECEMBER 31, 2006 DECEMBER 31, 2005
--------------------------------------------------------------------------------------------------------------------------
Net income - Canadian GAAP, as reported $ 49,814 $ 75,072
US GAAP Adjustments:
Unit-based compensation - note 17(a) 1,453 (301)
Management internalization - note 17(a) 4,684 -
Interest and accretion on convertible debentures - note 17(b) 1,254 1,095
Depletion, depreciation and accretion - notes 17(c) and (d) (528,734) 9,886
Future income tax reduction - note 17(e) 55,526 (3,652)
Non-controlling interest - (22)
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect of a
change in accounting principle (416,003) 82,078
Cumulative effect of a change in accounting principle - note 17(a) (1,271) -
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) - US GAAP $(417,274) $ 82,078
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) per Trust Unit before cumulative
effect of a change in accounting principle - US GAAP:
Basic $ (5.14) $ 1.45
Diluted $ (5.14) $ 1.44
Net income (loss) per Trust Unit before change in
redemption value of Trust Units - US GAAP:
Basic $ (5.15) $ 1.45
Diluted $ (5.15) $ 1.44
Net income (loss) per Trust Unit - US GAAP:
Basic $ 5.94 $ 1.52
Diluted $ 5.59 $ 1.51
--------------------------------------------------------------------------------------------------------------------------
Advantage Energy Income Fund - 27
The application of US GAAP would have the following effect on the balance
sheets as reported:
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------- -----------------
CONSOLIDATED BALANCE SHEETS CANADIAN US CANADIAN US
(thousands of Canadian dollars) GAAP GAAP GAAP GAAP
--------------------------------------------------------------------------------------------------------------------------
ASSETS
Deferred charge - note 17(b) $ - $ 2,810 $ - $ 4,368
Fixed assets, net notes 17(c) and (d) 1,753,058 1,205,465 907,795 888,936
LIABILITIES AND UNITHOLDERS' EQUITY
Current portion of convertible debentures $ 1,464 $ 1,485 $ - $ -
- note 17(b)
Trust Unit liability - note 17(a) - 7,633 - -
Convertible debentures - note 17(b) 170,819 179,245 126,081 135,111
Future income taxes - note 17(e) 61,939 - 99,026 92,613
Temporary equity - note 17(f) - 1,067,790 - 1,067,204
Exchangeable shares - note 17(f) - - 2,369 -
Unitholders' capital - note 17(f) 1,592,758 - 681,574 -
Convertible debentures equity component 8,041 - 6,159 -
- note 17(b)
Contributed surplus - note 17(a) 863 - 1,036 2,779
Accumulated deficit - note 17(f) (437,106) (402,158) (269,674) (665,627)
Advantage Energy Income Fund - 28
DIRECTORS
Gary F. Bourgeois
Kelly I. Drader
Grant B. Fagerheim (3)
John A. Howard (2)
Andy J. Mah
Ronald A. McIntosh (1)(2)
Roderick M. Myers (1)(2)
Carol D. Pennycook (1)(3)
Steven Sharpe (3)
Rodger A. Tourigny (1)(3)
(1) Member of Audit Committee
(2) Member of Reserve Evaluation Committee
(3) Member of Human Resources, Compensation & Corporate Governance Committee
OFFICERS
Kelly I. Drader, CEO
Andy J. Mah, President and COO
Patrick J. Cairns, Senior Vice President
Gary F. Bourgeois, Vice President, Corporate Development
Peter A. Hanrahan, Vice President, Finance & CFO
David Cronkhite, Vice President, Operations
Weldon M. Kary, Vice President, Geosciences and Land
Neil Bokenfohr, Vice President, Exploitation
CORPORATE SECRETARY
Jay P. Reid, Partner
Burnet, Duckworth and Palmer LLP
OPERATING COMPANY
Advantage Oil & Gas Ltd.
AUDITORS
KPMG LLP
BANKERS
The Bank of Nova Scotia
National Bank of Canada
Bank of Montreal
Royal Bank of Canada
Canadian Imperial Bank of Commerce
Union Bank of California, Canada Branch
Societe Generale, Canada Branch
Alberta Treasury Branches
INDEPENDENT RESERVE EVALUATORS
Sproule Associates Limited
LEGAL COUNSEL
Burnet, Duckworth and Palmer LLP
ABBREVIATIONS
bbls - barrels
bbls/d - barrels per day
boe - barrels of oil equivalent (6 mcf = 1 bbl)
boe/d - barrels of oil equivalent per day
bcf - billion cubic feet
mcf - thousand cubic feet
mcf/d - thousand cubic feet per day
mmcf - million cubic feet
mmcf/d - million cubic feet per day
gj - gigajoules
NGLs - natural gas liquids
WTI - West Texas Intermediate
TM - denotes trademark of Canaccord Capital Corporation
CORPORATE OFFICES
Petro-Canada Centre
Suite 3100,
150 - 6 Avenue SW
Calgary, Alberta T2P 3Y7
(403) 261-8810
800, 2 St. Clair Avenue East
Toronto, Ontario M4T 2T5
(416) 945-6636
TRANSFER AGENT
Computershare Trust Company of Canada
CONTACT US
Toll free: 1-866-393-0393
Visit our website at www.advantageincome.com
TORONTO STOCK EXCHANGE TRADING SYMBOLS
Trust Units: AVN.UN
10% Convertible Debentures: AVN.DB
9% Convertible Debentures: AVN.DBA
8.25% Convertible Debentures: AVN.DBB
7.5% Convertible Debentures: AVN.DBC
7.75% Convertible Debentures: AVN.DBD
6.50% Convertible Debentures: AVN.DBE
NEW YORK STOCK EXCHANGE TRADING SYMBOL
Trust Units: AAV
Advantage Energy Income Fund - 29