EX-99 17 ex99-14form40_f.txt EXHIBIT 99.14 EXHIBIT 99.14 ------------- -------------------------------------------------------------------------------- [GRAPHIC OMITTED] [LOGO - ADVANTAGE ENERGY INCOME FUND] -------------------------------------------------------------------------------- ADVANTAGE ENERGY INCOME FUND - NEWS RELEASE AUGUST 11, 2005 ADVANTAGE ANNOUNCES 2ND QUARTER RESULTS, CONFERENCE CALL & WEBCAST ON AUGUST 12, 2005 Advantage Energy Income Fund (TSX: AVN.UN) ("Advantage" or the "Fund") is pleased to announce its unaudited operating and financial results for the second quarter ended June 30, 2005. A conference call will be held on Friday, August 12, 2005 at 9:00 a.m. (11:00 a.m. Eastern time) and can be accessed toll-free at 1-877-407-9205. A replay of the call will be available from approximately 5:00 p.m. on Friday, August 12, 2005 until approximately midnight, August 19, 2005 and can be accessed by dialing toll free 1-877-660-6853. The account number is 286, conference ID number 162510 (both are required for playback). A live web cast of the conference call will be accessible via the Internet on Advantage's website at www.advantageincome.com.
FINANCIAL AND OPERATING HIGHLIGHTS Three Three Six Six months ended months ended months ended months ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 -------------------------------------------------------------------------------------------------------------------------- FINANCIAL ($000) Revenue before royalties $ 87,476 $ 54,181 $ 170,685 $ 108,017 per Unit (1) $ 1.53 $ 1.38 $ 3.06 $ 2.79 per boe $ 48.01 $ 38.87 $ 45.67 $ 38.58 Funds from operations $ 49,705 $ 30,693 $ 95,060 $ 60,593 per Unit (2) $ 0.87 $ 0.77 $ 1.69 $ 1.56 per boe $ 27.28 $ 22.02 $ 25.43 $ 21.64 Net income $ 26,537 $ 9,770 $ 30,552 $ 14,218 per Unit (1) $ 0.46 $ 0.25 $ 0.55 $ 0.37 Cash distributions $ 44,693 $ 27,450 $ 91,032 $ 53,717 per Unit (2) $ 0.78 $ 0.69 $ 1.62 $ 1.38 Payout ratio 90% 89% 96% 89% Working capital deficit (3) $ 17,283 $ 17,349 $ 17,283 $ 17,349 Bank debt $ 237,302 $ 161,707 $ 237,302 $ 161,707 Convertible debentures (face value) $ 143,881 $ 66,396 $ 143,881 $ 66,396 OPERATING Daily Production Natural gas (mcf/d) 79,492 73,283 82,902 74,466 Crude oil and NGLs (bbls/d) 6,772 3,106 6,832 2,974 Total boe/d @ 6:1 20,021 15,320 20,649 15,385 Average prices (including hedging) Natural gas ($/mcf) $ 7.30 $ 6.20 $ 6.87 $ 6.24 Crude oil & NGLs ($/bbl) $ 56.24 $ 45.36 $ 54.63 $ 43.24 SUPPLEMENTAL (000) Trust Units outstanding at end of period 57,340 39,952 57,340 39,952 Trust Units issuable Convertible Debentures 7,318 4,074 7,318 4,074 Exchangeable Shares 120 - 120 - Trust Units Rights Incentive Plan 310 310 310 310 Trust Units outstanding and issuable at end of period 65,088 44,336 65,088 44,336 Weighted average Units 57,274 39,326 55,741 38,653
(1) based on weighted average number of Trust Units outstanding (2) based on number of Trust Units outstanding at each cash distribution date (3) working capital deficit excludes hedging liability PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 2 OF 20 CASH DISTRIBUTIONS TO UNITHOLDERS o The Fund declared three distributions during the quarter totalling $0.78 per Unit. The distributions amounted to $0.28 per Unit, payable on May 16 and $0.25 per Unit payable on June 15 and July 15 to Unitholders of record on April 29, May 31 and June 30, respectively. o Funds from operations for the second quarter was $49.7 million or $0.87 per Unit compared to $30.7 million or $0.77 per Unit for the same period of 2004. This represents a payout ratio of 90% of funds from operations for the three months ended June 30, 2005. OIL & NATURAL GAS PRODUCTION o Production volumes increased by 31% to 20,021 boe/d in the second quarter of 2005 from 15,320 boe/d in the second quarter of 2004. Second quarter production declined by approximately 6% from the first quarter of 2005 due to the shut-in of approximately 520 boe/d from plant turnarounds and delays in bringing new wells on-stream as a result of early spring breakup and extremely wet weather conditions. NATURAL GAS o Natural gas production for the second quarter of 2005 was 79.5 mmcf/d, an 8% increase over the 73.3 mmcf/d reported in the second quarter of 2004. o Increased production in 2005 is primarily the result of the acquisitions of the Anadarko assets in September 2004 and Defiant Energy in December 2004. Partially offsetting the increased production was lower volumes related to flush production declines from the company's active natural gas drilling program. CRUDE OIL & NGLS o Crude oil and natural gas liquids production averaged 6,772 bbls/d compared to 3,106 bbls/d in the second quarter of 2004 representing an increase of 118%. o Increased liquids production is primarily the result of the Anadarko asset acquisition in September 2004, the Defiant Energy acquisition in December 2004 and successful drilling on the Fund's Nevis property. Advantage's crude oil production is mainly comprised of long life assets that exhibit low rates of decline. DEVELOPMENT ACTIVITY NEVIS, ALBERTA o During the second quarter of 2005 Advantage drilled three 100% working interest horizontal oil wells bringing the total for 2005 to ten wells. At the time of writing, all but two of the wells have been completed and tied-in. The remaining eight wells were brought on-stream late in the second quarter and during the third quarter and as such did not make a significant contribution to the second quarter production volumes. Also at Nevis, the Fund constructed a central battery and added incremental compression in order to handle additional production volumes from the Fund's successful drilling program. STEELMAN, SASKATCHEWAN o During the second quarter the Fund drilled two successful 100% working interest horizontal oil wells at Steelman. These two wells were brought on-stream early in the third quarter. OTHER AREAS o The Fund drilled a 100% working interest well at Gadsby, Alberta which was tied-in during the third quarter. o At Chain, Alberta a five well multi-zone shallow gas program was completed in the second quarter and will be tied-in during the third quarter. o At Sweetgrass, Alberta the Fund drilled a 50% working interest gas well and is following up with a second location in the third quarter to further define the pool boundary. o At Sunset, Alberta the Fund drilled two 70% working interest oil wells. These wells will be brought on-stream in the third quarter. PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 3 OF 20 MANAGEMENT'S DISCUSSION & ANALYSIS The following Management's Discussion and Analysis ("MD&A"), dated as of August 11, 2005, provides a detailed explanation of the financial and operating results of Advantage Energy Income Fund ("Advantage" or the "Fund") for the three months ended June 30, 2005 and should be read in conjunction with the financial statements contained within this interim report and the audited financial statements and MD&A for the year ended December 31, 2004. All per barrel of oil equivalent ("boe") amounts are stated at 6:1 conversion rate for natural gas to oil. CASH DISTRIBUTIONS Cash distributions to Unitholders for the three months ended June 30, 2005 were $0.78 per Unit, or $44.7 million and $1.62 per Unit, or $91.0 million for the six months ended June 30, 2005. The second quarter 2005 distributions were comprised of $0.28 per Unit for April and $0.25 per Unit for each of May and June. The amount distributed for the quarter represents 90% of total funds from operations during the period, compared to 89% in the second quarter of 2004. Since inception, the Fund has distributed $361 million or $10.33 per Unit which represents a total payout ratio of 93%.
Cash distributions to Unitholders were paid as follows: Period ended Record date Payment date Distribution Distribution per Unit ------------------------------------------------------------------------------------------------------- April 30, 2005 April 29, 2005 May 16, 2005 $ 16,036 $ 0.28 May 31, 2005 May 31, 2005 June 15, 2005 $ 14,322 $ 0.25 June 30, 2005 June 30, 2005 July 15, 2005 $ 14,335 $ 0.25 ------------------------------------------------------------------------------------------------------- $ 44,693 $ 0.78 =======================================================================================================
PRODUCTION Natural gas production for the three months ended June 30, 2005 averaged 79.5 mmcf/d, an increase of 8% over the 73.3 mmcf/d produced during the same period of 2004. For the six months ended June 30, 2005, natural gas production averaged 82.9 mmcf/d, an increase of 11% from the 74.5 mmcf/d produced during the first six months of 2004. The growth in gas production over 2004 was the result of the property acquisition from Anadarko Canada Corporation on September 15, 2004 and the acquisition of Defiant Energy Corporation on December 21, 2004 partially offset by flush production declines that resulted from the Fund's capital program. Crude oil and natural gas liquids ("NGLs") production for the three months ended June 30, 2005 averaged 6,772 bbls/d, an increase of 118% as compared with 3,106 bbls/d produced in the second quarter of 2004. Crude oil and NGLs production for the first six months of 2005 averaged 6,832 bbls/d, an increase of 130% as compared to 2,974 bbls/d for the same period of 2004. The significant increase in liquids production was primarily the result of the acquisition of the Anadarko assets, Defiant Energy and production additions as a result of the ongoing success of the Fund's drilling program at Nevis, Alberta. Declines in production for the second quarter of 2005 compared to the first quarter of 2005 were primarily the result of flush production declines on the 2004 capital expenditure program combined with delays in production additions from the Fund's 2005 capital program due to extremely wet field conditions. In addition, plant turnarounds and maintenance during the second quarter of 2005 caused the shut-in of approximately 520 boe/d during the quarter. COMMODITY PRICES & MARKETING NATURAL GAS Natural gas prices for the three months ended June 30, 2005 averaged $7.27/mcf ($7.30/mcf including hedging), compared to $6.65/mcf ($6.20/mcf including hedging) for the three months ended June 30, 2004. For the three months ended June 30, 2005 AECO daily prices averaged $7.35/mcf as compared to $6.64/mcf for the second quarter of 2004. For the six months ended June 30, 2005, natural gas prices averaged $6.88/mcf ($6.87/mcf including hedging), compared to $6.46/mcf ($6.24/mcf including hedging) realized in the same period of 2004. Natural gas prices continue to strengthen as a result of summer heat in North America which has increased gas fueled air conditioning demand which has also continued to erode North American natural gas storage levels. Advantage continues to believe that the short and long term pricing fundamentals for natural gas remain strong. These fundamentals include (i) the continued strength of crude oil prices which has eliminated the economic advantage of fuel switching away from natural gas, (ii) continued tightness in supply that has resulted from increased demand and the decline in North American natural gas PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 4 OF 20 production levels and (iii) ongoing weather related factors such as hot summers, cold winters and annual hurricane season in the Gulf of Mexico all of which have an impact on the delicate supply/demand balance that exists. In the second quarter of 2005 Advantage's production was weighted 66% to natural gas. CRUDE OIL Crude oil and NGLs prices averaged $56.57/bbl ($56.24/bbl including hedging) for the three months ended June 30, 2005, a 25% increase as compared with $45.36/bbl ($45.36/bbl including hedging) for the same period of 2004. For the six months ended June 30, 2005, crude oil and NGLs prices averaged $54.79/bbl ($54.63/bbl including hedging) compared to $43.24/bbl ($43.24/bbl including hedging) for the same period of 2004. Advantage's crude oil prices are based on the benchmark pricing of West Texas Intermediate Crude ("WTI") adjusted for quality, transportation costs and Canadian/US exchange rate. The price of WTI fluctuates based on worldwide supply and demand fundamentals. Crude oil prices continue to be strong with many factors affecting the continued strength including (i) supply management and supply restrictions by the OPEC cartel, (ii) ongoing civil unrest in the Middle East, Venezuela and Nigeria, (iii) increased world wide demand, particularly in China and India and (iv) North American refinery capacity constraints. The price of WTI averaged $US53.13/bbl during the second quarter of 2005 compared to $US38.31/bbl in 2004. Partially offsetting the strength of WTI oil prices has been the strength of the Canadian dollar relative to the U.S. dollar. PRICE RISK MANAGEMENT Advantage's natural gas hedging program resulted in gains of $0.2 million during the second quarter of 2005 or $0.03/mcf compared to hedging losses of $3.0 million or $0.45/mcf for the same period of 2004. For 2005 the Fund has currently hedged 56.9 mmcf/d for the period April to October at a variety of prices through both fixed price contracts and price collars. Advantage's crude oil hedging program resulted in losses of $0.2 million or $0.33/bbl during the second quarter of 2005. Advantage did not have any crude oil hedges in place for the same period of 2004. The Fund has currently hedged 3,500 bbls/d for the period April to October at a variety of prices through both fixed price contracts and price collars.
As at June 30, 2005 the Fund has the following hedges in place: DESCRIPTION OF HEDGE TERM VOLUME AVERAGE PRICE ------------------------------------------------------------------------------------------------------- NATURAL GAS - AECO Fixed price April to October 2005 34,123 mcf/d Cdn$7.45/mcf Collar April to October 2005 11,374 mcf/d Floor Cdn$6.86/mcf Ceiling Cdn$8.18/mcf Collar April to October 2005 11,374 mcf/d Floor Cdn$7.02/mcf Ceiling Cdn$8.02/mcf CRUDE OIL - WTI Fixed price April to September 2005 1,750 bbls/d US$52.11/bbl Collar April to October 2005 1,750 bbls/d Floor US$47.00/bbl Ceiling US$56.75/bbl
At June 30, 2005, the mark-to-market valuation of Advantage's outstanding hedges was a loss of $1.3 million. This amount has been included in the income statement as an unrealized hedging loss with a corresponding hedging liability recorded on the balance sheet. The Fund continues to monitor the commodity markets with a view to provide cash flow stability. ROYALTIES Total royalties amounted to $16.3 million for the three months ended June 30, 2005 or 18.6% of pre-hedged revenue compared with $10.6 million or 18.5% of pre-hedged revenue for same period of 2004. For the six months ended June 30, 2005, total royalties were $32.7 million or 19.1% of pre-hedged revenue compared with $21.1 million or 19.0% for the similar period of 2004. Advantage expects royalty rates will average approximately 20% based on the current portfolio of properties. The royalty rate for the three months ended June 30, 2005 was below the 20% anticipated royalty rate due to royalty adjustments and refunds received during the second quarter related to prior periods. PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 5 OF 20 OPERATING COSTS Operating costs for the second quarter of 2005 amounted to $13.3 million or $7.31/boe compared with $8.2 million or $5.90/boe for the three months ended June 30, 2004. Operating costs for the six months ended June 30, 2005 were $26.4 million or $7.05/boe as compared to $16.5 million or $5.91/boe for the same period of 2004. The increase in operating cost amounts reflects the significant increase in overall production. Higher per boe operating costs are partially due to the higher costs associated with properties acquired from Anadarko and Defiant during the second half of 2004. In addition, operating costs have steadily increased over the past several years due to higher power costs and higher field costs associated with the shortage of supplies and services that has resulted from the high level of industry activity. GENERAL AND ADMINISTRATIVE AND MANAGEMENT FEES General and administrative ("G&A") expense for the three months ended June 30, 2005 amounted to $1.6 million or $0.86/boe compared with $0.8 million or $0.56/boe for the three months ended June 30, 2004. For the six months ended June 30, 2005, G&A expense was $3.0 million or $0.81/boe, compared to $1.6 million or $0.58/boe for the same period of 2004. G&A expense increased due to higher staff levels that resulted from the growth of the Fund from production additions and acquisitions. Management fees for the three months ended June 30, 2005 amounted to $0.9 million compared to $0.5 million for the second quarter of 2004. On a boe basis, management fees were $0.48/boe compared to $0.38/boe in 2004. For the six months ended June 30, 2005 management fees were $1.7 million or $0.45/boe compared to $1.1 million or $0.38/boe for the similar period of 2004. Management fees are calculated based on 1.5% of operating cash flow, which is defined as revenues less royalties and operating expenses. The 26% increase in management fees in the second quarter on a boe basis is primarily due to increased operating netbacks resulting from higher commodity prices. The Fund Manager is entitled to earn a performance fee to the extent that the total annual return of the Fund exceeds 8%. The total annual return is calculated at the end of each year by dividing the year over year change in Unit price plus cash distributions by the opening Unit price. One tenth (10%) of the amount of the total annual return in excess of 8% is multiplied by the market capitalization (defined as the opening Unit price times the weighted average number of Trust Units outstanding during the year) to determine the performance fee. For the three months and six months ending June 30, 2005 no performance fee incentive has been accrued given that the total annualized return of the Fund is currently less than the 8% threshold. The Manager does not receive any form of compensation in respect of acquisition or divestiture fees nor is there any form of stock option plan for the Manager or the employees of Advantage. INTEREST Interest expense on bank debt for the second quarter of 2005 amounted to $2.3 million compared to the $1.4 million for the same period of 2004. For the six months ended June 30, 2005 interest expense was $4.9 million as compared to $2.7 million for the six months ended June 30, 2004. Average debt levels were higher during the three months ended June 30, 2005 but were offset by lower interest rates. The Fund's interest rates are primarily based on short term Bankers Acceptance rates plus a stamping fee. INTEREST AND ACCRETION ON CONVERTIBLE DEBENTURES Interest and accretion on convertible debentures was $3.4 million for the three months ended June 30, 2005 as compared to $2.0 million for the second quarter of 2004. For the first six months of 2005 interest and accretion expense was $6.8 million as compared to $4.5 million for the six months ended June 30, 2004. Interest and accretion expense increased primarily due to the issuance of $75 million 7.75% and $50 million 7.5% convertible debentures in September 2004 to partially finance the Anadarko asset acquisition. The increased interest from the additional debentures is partially offset by a general reduction of the other outstanding debenture balances resulting from holders exercising the conversion option. Accretion expense for the quarter ended June 30, 2005 was $0.5 million compared to $0.3 million for the three months ended June 30, 2004. PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 6 OF 20
CASH NETBACKS (PER BOE) Three months ended Six months ended June 30 June 30 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------- Revenue $ 47.99 $ 41.02 $ 45.75 $ 39.65 Hedging 0.02 (2.15) (0.08) (1.07) Royalties (8.94) (7.59) (8.74) (7.55) Operating costs (7.31) (5.90) (7.05) (5.91) ------------------------------------------------------------------------------------------------- Operating $ 31.76 $ 25.38 $ 29.88 $ 25.12 General and administrative (0.86) (0.56) (0.81) (0.58) Management fees (0.48) (0.38) (0.45) (0.38) Interest expense (1.28) (1.00) (1.32) (0.96) Interest on convertible debentures (1.55) (1.19) (1.52) (1.34) Taxes (0.31) (0.23) (0.35) (0.22) ------------------------------------------------------------------------------------------------- FUNDS FROM OPERATIONS $ 27.28 $ 22.02 $ 25.43 $ 21.64 =================================================================================================
DEPLETION, DEPRECIATION AND ACCRETION Depletion and depreciation of property and equipment is provided on the unit of production method based on total proved reserves. The depletion, depreciation and accretion ("DD&A") provision for three months ended June 30, 2005 increased to $33.5 million from $20.7 million for the same period of 2004. The increased provision is the result of higher production volumes and a higher per boe rate. The DD&A rate for the second quarter of 2005 was $18.39/boe compared with $14.58/boe in 2004. The DD&A provision for the six months ended June 30, 2005 was $68.3 million or $18.27/boe compared to $41.0 million or $14.64/boe for the same period of 2004. TAXES Current taxes paid or payable for the three months ended June 30, 2005 primarily represents capital tax and amounted to $0.6 million, compared to $0.3 million expensed in the three months ended June 30, 2004. Current taxes for the six months ended June 30, 2005 was $1.3 million, an increase from $0.6 million for the same period of 2004. Capital taxes are based on debt and equity levels of the Fund at the end of the year and have increased due to Advantage's significant growth. As a result of new legislation, capital taxes are to be gradually eliminated over the next several years. Future income taxes arise from differences between the accounting and tax bases of the operating company's assets and liabilities. For the three months ended June 30, 2005, the Fund recognized an income tax recovery of $1.0 million compared to a $1.8 million recovery for the second quarter of 2004. The future income tax recovery for the six months ended June 30, 2005 was $6.1 million compared to $9.5 million for the similar period ended June 30, 2004. In the Fund's structure, payments are made between the operating company and the Fund transferring income tax obligations to the Unitholders. Therefore, it is expected, based on current legislation that no cash income taxes are to be paid by the operating company or the Fund in the future, and as such, the future income tax liability recorded on the balance sheet will be recovered through earnings over time. As at June 30, 2005 the operating company had a future income tax liability balance of $104.3 million. Canadian generally accepted accounting principles require that a future income tax liability be recorded when the book value of assets exceeds the balance of tax pools. NON-CONTROLLING INTEREST Non-controlling interest expense for the three month period ended March 31, 2005 was $0.1 million. Non-controlling interest expense represents the net income attributable to Exchangeable Share ownership interests. The non-controlling interest was created when Advantage Oil & Gas Ltd. ("AOG") issued Exchangeable Shares as partial consideration for the acquisition of Defiant that occurred at the end of 2004. The Exchangeable Shares and Trust Units are considered economically equivalent since all shares must be exchanged for either Trust Units or cash over time, based on the current market price of the Trust PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 7 OF 20 Units. Since the Exchangeable Shares are required to be exchanged, there is no permanent non-controlling interest. At June 30, 2005, only 110,416 Exchangeable Shares were outstanding and non-controlling interest expense will continue to be minor. PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 8 OF 20 CONTRACTUAL OBLIGATIONS AND COMMITMENTS The Fund has contractual obligations in the normal course of operations including purchases of assets and services, operating agreements, transportation commitments and sales contracts. These obligations are of a recurring and consistent nature and impact cash flow in an ongoing manner. The following is a summary of the Fund's remaining contractual obligations and commitments:
PAYMENTS DUE BY PERIOD ($ millions) TOTAL 2005 2006 2007 2008 -------------------------------------------------------------------------------------------------------------- Building lease $ 3.9 $ 0.7 $ 1.4 $ 1.3 $ 0.5 Capital lease $ 2.0 $ 0.2 $ 0.4 $ 1.4 - Pipeline/transportation $ 3.6 $ 1.2 $ 1.8 $ 0.5 $ 0.1 -------------------------------------------------------------------------------------------------------------- TOTAL CONTRACTUAL OBLIGATIONS $ 9.5 $ 2.1 $ 3.6 $ 3.2 $ 0.6 ==============================================================================================================
LIQUIDITY AND CAPITAL RESOURCES On February 9, 2005 Advantage issued 5,250,000 Advantage Trust Units at $21.65 per Unit for gross proceeds of $113.7 million, $107.6 million net of related issuance costs. The net proceeds of the offering were used to pay down debt incurred in the acquisition of Defiant Energy Corporation, for 2005 capital expenditures and for general corporate purposes. As at June 30, 2005 the Fund had 57.3 million Trust Units outstanding. As at August 11, 2005, Advantage has 57.3 million Trust Units and 110,296 Exchangeable Shares issued and outstanding. The exchange ratio of the Exchangeable Shares adjusts each month on the distribution payment date and the number of Trust Units ultimately issuable will increase over time. The Exchangeable Shares are currently exchangeable for the issuance of 121,184 Trust Units. The Fund also had $143.8 million convertible debentures outstanding at August 11, 2005 that can be converted to 7.3 million Trust Units. At June 30, 2005 Advantage had bank debt outstanding of $237.3 million. Advantage has an agreement with a syndicate of four Canadian chartered banks and finalized the renewal of the facility in May 2005. The agreement provides for a $335 million facility consisting of a $325 million extendible revolving loan facility and a $10 million operating loan facility, both of which are due for renewal in May 2006. The credit facilities are secured by a $500 million floating charge demand debenture, a general security agreement and a subordination agreement from the Fund covering all assets and cash flows. Given amendments made in 2005 to the repayment terms, the debt is classified as a long-term liability on the consolidated balance sheet. At June 30, 2005 Advantage also had a working capital deficiency of $17.3 million. In December 2004, Advantage assumed two capital lease obligations as a result of the Defiant acquisition. These two capital leases were repaid in May 2005 for $6.8 million. For the three month period ended June 30, 2005, the Fund spent $21.8 million on capital expenditures. Approximately $17.2 million was expended on drilling and completion operations where the Fund drilled a total of 7.4 net (12 gross) wells and recompleted an additional eight wells primarily at Open Lake and in southeast Saskatchewan. Three 100% working interest horizontal wells were drilled and completed at Nevis, Alberta and two 100% working interest horizontal wells were drilled at Steelman, Saskatchewan. Approximately $4.3 million was expended during the quarter on facilities and equipping primarily related to the construction of a central oil battery and additional compression facilities at Nevis and to install two three stage compressors at Wainwright and Manville, Alberta. Capital expenditures for the six months ended June 30, 2005 amounted to $54.5 million. PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 9 OF 20 SOURCES AND USES OF FUNDS ($ THOUSANDS) SIX MONTHS ENDED JUNE 30, 2005 --------------------------------------------------------------------------- SOURCES OF FUNDS Funds from operations $ 95,060 Units issued, net of costs 107,616 Property dispositions 2,581 --------------------------------------------------------------------------- $ 205,257 =========================================================================== USES OF FUNDS Capital expenditures $ 54,537 Asset retirement expenditures 737 Purchase adjustment of Defiant acquisition 352 Property acquisitions 213 Distributions paid to Unitholders 89,116 Decrease in bank debt 29,752 Reduction of capital lease obligations 7,515 Increase in working capital and other 23,035 --------------------------------------------------------------------------- $ 205,257 ===========================================================================
QUARTERLY PERFORMANCE ($ thousands, except per Unit amounts) 2005 2004 2003 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 ------------------------------------------------------------------------------------------------------------------- Net revenues $ 81,144 $ 55,778 $ 68,521 $ 48,255 $ 44,436 $ 32,227 $ 36,074 $34,483 Net income (loss) (1) $ 26,537 $ 4,015 $ 4,855 $ 4,965 $ 9,770 $ 4,448 $ (3,527) $ 8,386 Net income (loss) per Unit, basic $ 0.46 $ 0.07 $ 0.11 $ 0.12 $ 0.25 $ 0.12 $ (0.11) $ 0.27 Net income (loss) per Unit, diluted $ 0.46 $ 0.07 $ 0.11 $ 0.12 $ 0.25 $ 0.12 $ (0.11) $ 0.27
(1) Net income (loss) has been restated to reflect changes in accounting policies as disclosed in the Notes to the Consolidated Financial Statements. The table above highlights the Fund's performance for the second quarter of 2005 and also for the preceding seven quarters. Net revenues are primarily impacted by commodity prices, production volumes and royalties. Significant increases in net revenues occurred in the second quarter of 2004 through the second quarter of 2005 due to considerably higher crude oil prices and the acquisition of the Anadarko assets in September 2004 and Defiant in December 2004. FINANCIAL REPORTING UPDATE During 2005 there were several changes to financial reporting requirements. The changes impacting Advantage are noted below. FINANCIAL INSTRUMENTS - PRESENTATION AND DISCLOSURE Effective January 1, 2005, the Fund retroactively adopted the revised accounting standard Section 3860 "Financial Instruments - Presentation and Disclosure" as issued by the Canadian Institute of Chartered Accountants. The revised standard applies to financial instruments that may be settled at the issuer's option in cash or its own equity instruments and impacts the Fund's prior accounting for convertible debentures and the performance incentive fee. The Fund previously classified the issuance of convertible debentures and the performance fee obligation as components of equity on the basis that the obligations could be settled with the issuance of Trust Units. Interest expense and issuance costs related to the debentures were charged to accumulated income as a component of equity. Based on the revised standard, a financial instrument is presented based on the substance of the contractual arrangement regardless of the means of settlement. This results in the reclassification of convertible debentures to long-term liabilities and the performance fee to current liabilities. Additionally, a financial instrument with an embedded conversion feature must be segregated between liabilities and equity PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 10 OF 20 based on the relative fair market value of the liability and equity portions. Therefore, the debenture liabilities are presented at less than their eventual maturity values. The liability and equity components are further reduced for issuance costs initially incurred. The discount of the liability component as compared to maturity value is accreted by the effective interest method over the debenture term. As debentures are converted to Trust Units, an appropriate portion of the liability and equity components are transferred to Unitholders' capital. Interest and accretion expense on the convertible debentures are shown on the Consolidated Statement of Income. EXCHANGEABLE SHARES In March 2005, the CICA's Emerging Issues Committee ("EIC") amended EIC-151 "Exchangeable Securities Issued by Subsidiaries of Income Trusts" which is effective for periods ending on June 30, 2005. The EIC specifies the required criteria to present exchangeable shares as a component of Unitholders' equity. Exchangeable shares that do not meet both criteria are classified as either debt or non-controlling interest depending on the nature of the instrument. Prior to the amendment, Exchangeable Shares of Advantage Oil & Gas Ltd. ("AOG"), a subsidiary of Advantage, were shown as a component of Unitholders' equity. However, the Exchangeable Shares do not meet the requirements of the amended standard given that the shares are transferable, although not publicly traded. Therefore, Exchangeable Shares are now classified as non-controlling interest, outside of Unitholders' equity. The Exchangeable Shares and Trust Units are considered economically equivalent since all shares must be exchanged for either Trust Units or cash, based on the current market price of the Trust Units. Since the Exchangeable Shares are required to be exchanged, there is no permanent non-controlling interest. As a consequence of presenting Exchangeable Shares as non-controlling interest, a corresponding expense is recorded that reflects the earnings attributable to the non-controlling interest. When Exchangeable Shares are converted to Trust Units, the carrying value of non-controlling interest on the balance sheet is reclassified to Unitholders' capital. The Fund retroactively implemented the revised standard but there was no impact on periods prior to 2005 given that the Exchangeable Shares were issued at the end of 2004. NON-GAAP MEASURES Funds from operations and per Unit and payout ratio are not recognized measures under the Canadian generally accepted accounting principles ("GAAP"). Management believes that funds from operations and payout ratio are useful supplemental measures to analyse operating performance and provide an indication of the results generated by the Fund's principal business activities prior to the consideration of how those activities are financed or how the results are taxed. Investors should be cautioned, however, that these measures should not be construed as an alternative to net income determined in accordance with GAAP as an indication of Advantage's performance. Advantage's method of calculating these measures may differ from other companies, and accordingly, they may not be comparable to measures used by other companies. ADDITIONAL INFORMATION Additional information relating to Advantage, including the annual information form, can be found on SEDAR at www.sedar.com August 11, 2005 PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 11 OF 20 CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (thousands of dollars) June 30, 2005 December 31, 2004 ----------------------------------------------------------------------------------------------------------- (unaudited) (restated - note 1) ASSETS Current assets Accounts receivable $ 49,928 $ 48,961 Fixed assets Property and equipment 1,243,417 1,190,552 Accumulated depletion and depreciation (321,190) (253,506) ----------------------------------------------------------------------------------------------------------- 922,227 937,046 Goodwill 45,726 47,244 ----------------------------------------------------------------------------------------------------------- $ 1,017,881 $ 1,033,251 =========================================================================================================== LIABILITIES Current liabilities Accounts payable and accrued liabilities $ 52,527 $ 91,165 Cash distributions payable to Unitholders 14,335 12,419 Current portion of capital lease obligations (note 2) 349 1,785 Hedging liability (note 7) 1,323 214 Bank indebtedness (note 3) - 267,054 ----------------------------------------------------------------------------------------------------------- 68,534 372,637 Capital lease obligations (note 2) 1,527 7,606 Bank indebtedness (note 3) 237,302 - Convertible debentures (notes 1 and 4) 133,255 136,433 Asset retirement obligations 18,043 17,503 Future income taxes 104,295 112,266 ----------------------------------------------------------------------------------------------------------- 562,956 646,445 =========================================================================================================== NON-CONTROLLING INTEREST Exchangeable shares (note 5) 2,401 30,842 ----------------------------------------------------------------------------------------------------------- UNITHOLDERS' EQUITY Unitholders' capital (note 6i) 672,792 515,544 Convertible debentures equity component (notes 1 and 4) 6,556 6,764 Contributed surplus 1,036 1,036 Accumulated income 133,189 102,637 Accumulated cash distributions (361,049) (270,017) ----------------------------------------------------------------------------------------------------------- 452,524 355,964 ----------------------------------------------------------------------------------------------------------- $ 1,017,881 $ 1,033,251 ===========================================================================================================
see accompanying Notes to Consolidated Financial Statements PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 12 OF 20
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED INCOME Three Three Six Six (thousands of dollars, except for months ended months ended months ended months ended per Unit amounts) (unaudited) June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ------------------------------------------------------------------------------------------------------------------------------- (restated - note 1) (restated - note 1) REVENUE Petroleum and natural gas $ 87,476 $ 54,181 $ 170,685 $ 108,017 Unrealized hedging gain (loss) (note 7) 9,957 833 (1,109) (10,224) Royalties, net of Alberta Royalty Credit (16,289) (10,578) (32,654) (21,130) ------------------------------------------------------------------------------------------------------------------------------- 81,144 44,436 136,922 76,663 =============================================================================================================================== EXPENSES Operating 13,327 8,218 26,357 16,538 General and administrative 1,567 788 3,030 1,634 Unit-based compensation - 1,036 - 1,036 Management fee 868 530 1,675 1,055 Performance incentive (note 8) - 1,500 - 2,900 Interest 2,332 1,399 4,941 2,677 Interest and accretion on convertible debentures 3,364 1,992 6,765 4,516 Depletion, depreciation and accretion 33,499 20,655 68,265 41,001 ------------------------------------------------------------------------------------------------------------------------------- 54,957 36,118 111,033 71,357 =============================================================================================================================== Income before taxes and non-controlling interest 26,187 8,318 25,889 5,306 Future income tax recovery (1,000) (1,767) (6,101) (9,542) Income and capital taxes 573 315 1,303 630 ------------------------------------------------------------------------------------------------------------------------------- (427) (1,452) (4,798) (8,912) =============================================================================================================================== Net income before non-controlling interest 26,614 9,770 30,687 14,218 Non-controlling interest (note 5) 77 - 135 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME 26,537 9,770 30,552 14,218 Accumulated income, beginning of period as previously reported 106,710 77,957 93,451 73,137 Effect of change in accounting policies (note 1) (58) 5,090 9,186 5,462 ------------------------------------------------------------------------------------------------------------------------------- Accumulated income, beginning of period as restated 106,652 83,047 102,637 78,599 ------------------------------------------------------------------------------------------------------------------------------- Accumulated income, end of period $ 133,189 $ 92,817 $ 133,189 $ 92,817 =============================================================================================================================== Net income per Trust Unit Basic and diluted $ 0.46 $ 0.25 $ 0.55 $ 0.37
see accompanying Notes to Consolidated Financial Statements PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 13 OF 20
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Three Six Six months ended months ended months ended months ended (thousands of dollars) (unaudited) June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ------------------------------------------------------------------------------------------------------------------------------ (restated - note 1) (restated - note 1) OPERATING ACTIVITIES Net income $ 26,537 $ 9,770 $ 30,552 $ 14,218 Add (deduct) items not requiring cash: Unit-based compensation - 1,036 - 1,036 Non-cash performance incentive (note 8) - 1,500 - 2,900 Future income taxes (1,000) (1,767) (6,101) (9,542) Unrealized hedging (note 7) (9,957) (833) 1,109 10,224 Accretion on convertible debentures 549 332 1,100 756 Depletion, depreciation and accretion 33,499 20,655 68,265 41,001 Non-controlling interest 77 - 135 - ------------------------------------------------------------------------------------------------------------------------------ Funds from operations 49,705 30,693 95,060 60,593 Expenditures on asset retirement (330) (86) (737) (148) Changes in non-cash working capital (17,006) (4,959) (23,346) (13,291) ------------------------------------------------------------------------------------------------------------------------------ Cash provided by operating activities 32,369 25,648 70,977 47,154 ============================================================================================================================== FINANCING ACTIVITIES Units issued, net of costs (note 6i) (85) 112 107,616 228 Increase (decrease) in bank debt 40,940 25,552 (29,752) 58,739 Reduction of capital lease obligations (7,071) (80) (7,515) (158) Cash distributions to Unitholders (46,382) (27,040) (89,116) (52,974) ------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used in) financing activities (12,598) (1,456) (18,767) 5,835 ============================================================================================================================== INVESTING ACTIVITIES Expenditures on property and equipment (21,822) (23,023) (54,537) (53,225) Property acquisitions (185) - (213) - Property dispositions 2,547 - 2,581 791 Purchase adjustment of Defiant Energy acquisition 132 - (352) - Changes in non-cash working capital (443) (1,169) 311 (555) ------------------------------------------------------------------------------------------------------------------------------ Cash used in investing activities (19,771) (24,192) (52,210) (52,989) ============================================================================================================================== Net change in cash - - - - Cash, beginning of period - - - - ------------------------------------------------------------------------------------------------------------------------------ Cash, end of period $ - $ - $ - $ - ============================================================================================================================== SUPPLEMENTARY CASH FLOW INFORMATION Taxes paid $ 864 $ 315 $ 1,461 $ 631 Interest paid $ 5,472 $ 4,166 $ 11,557 $ 7,081
see accompanying Notes to Consolidated Financial Statements PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 14 OF 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 (unaudited) All tabular amounts in thousands, except for Units and per Unit amounts The interim consolidated financial statements of Advantage Energy Income Fund ("Advantage" or the "Fund") have been prepared by management in accordance with Canadian generally accepted accounting principles using the same accounting policies as those set out in note 2 to the consolidated financial statements for the year ended December 31, 2004 except as described below. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Advantage for the year ended December 31, 2004 as set out in Advantage's Annual Report. 1. CHANGE IN ACCOUNTING POLICIES (a) FINANCIAL INSTRUMENTS - PRESENTATION AND DISCLOSURE Effective January 1, 2005, the Fund retroactively adopted the revised accounting standard Section 3860 "Financial Instruments - Presentation and Disclosure" as issued by the Canadian Institute of Chartered Accountants ("CICA"). The revised standard applies to financial instruments that may be settled at the issuer's option in cash or its own equity instruments and impacts the Fund's prior accounting for convertible debentures and the performance incentive fee. The Fund previously classified the issuance of convertible debentures and the performance fee obligation as components of equity on the basis that the obligations could be settled with the issuance of Trust Units. Interest expense and issuance costs related to the debentures were charged to accumulated income as a component of equity. Based on the revised standard, a financial instrument is presented based on the substance of the contractual arrangement regardless of the means of settlement. This results in the reclassification of convertible debentures to long-term liabilities and the performance fee to current liabilities. Additionally, a financial instrument with an embedded conversion feature must be segregated between liabilities and equity based on the relative fair market value of the liability and equity portions. Therefore, the debenture liabilities are presented at less than their eventual maturity values. The liability and equity components are further reduced for issuance costs initially incurred. The discount of the liability component as compared to maturity value is accreted by the effective interest method over the debenture term. As debentures are converted to Trust Units, an appropriate portion of the liability and equity components are transferred to Unitholders' capital. Interest and accretion expense on the convertible debentures are shown on the Consolidated Statement of Income. The effect of this change in accounting policy has been recorded retroactively with restatement of prior periods. The effect of the adoption is presented below as increases (decreases):
BALANCE SHEETS DECEMBER 31, 2004 DECEMBER 31, 2003 ---------------------------------------------------------------------------------------------- Current liabilities Accounts payable and accrued liabilities $ 16,570 $ 19,592 Long-term liabilities Convertible debentures $ 136,433 $ 91,372 Unitholders' equity Convertible debentures $ (148,450) $ (99,984) Convertible debentures equity component $ 6,764 $ 4,726 Unitholders' capital $ (20,503) $ (21,168) Accumulated income $ 9,186 $ 5,462
THREE MONTHS SIX MONTHS ENDED ENDED YEAR ENDED STATEMENTS OF INCOME JUNE 30, 2004 JUNE 30, 2004 DECEMBER 31, 2004 ------------------------------------------------------------------------------------------------------------------ Interest and accretion on convertible debentures $ 1,992 $ 4,516 $ 10,425 ------------------------------------------------------------------------------------------------------------------
PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 15 OF 20
Net income $ (1,992) $ (4,516) $ (10,425) ------------------------------------------------------------------------------------------------------------------ Net income per Trust Unit (basic and diluted) $ (0.01) $ (0.02) $ (0.04)
PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 16 OF 20 (b) EXCHANGEABLE SHARES In March 2005, the CICA's Emerging Issues Committee amended EIC-151 "Exchangeable Securities Issued by Subsidiaries of Income Trusts". The EIC specifies the required criteria to present exchangeable shares as a component of Unitholders' equity. Exchangeable shares that do not meet both criteria are classified as either debt or non-controlling interest depending on the nature of the instrument. Prior to the amendment, Exchangeable Shares of Advantage Oil & Gas Ltd. ("AOG"), a subsidiary of Advantage, were shown as a component of Unitholders' equity. However, the Exchangeable Shares do not meet the requirements of the amended standard given that the shares are transferable, although not publicly traded. Therefore, Exchangeable Shares are now classified as non-controlling interest, outside of Unitholders' equity. The Exchangeable Shares and Trust Units are considered economically equivalent since the exchange ratio is increased on each date that a distribution is paid on the Trust Units and all shares must be exchanged for either Trust Units or cash, based on the current market price of the Trust Units. Since the Exchangeable Shares are required to be exchanged, there is no permanent non-controlling interest. As a consequence of presenting Exchangeable Shares as non-controlling interest, a corresponding expense is recorded that reflects the earnings attributable to the non-controlling interest. When Exchangeable Shares are converted to Trust Units, the carrying value of non-controlling interest on the balance sheet is reclassified to Unitholders' capital. The Fund retroactively implemented the revised standard but there was no income impact on periods prior to 2005 given that the Exchangeable Shares were issued at the end of 2004. Non-controlling interest expense of $58,000 was recorded for the three month period ended March 31, 2005, with a corresponding decrease in net income. 2. CAPITAL LEASE OBLIGATIONS The Fund has capital leases on a variety of property and equipment. Future minimum lease payments at June 30, 2005 consist of the following: 2005 $ 221 2006 443 2007 1,364 ------------------------------------------------------- $ 2,028 Less amounts representing interest (152) ------------------------------------------------------- 1,876 Current portion (349) ------------------------------------------------------- $ 1,527 ======================================================= 3. BANK INDEBTEDNESS Advantage has a credit facility agreement with a syndicate of Canadian chartered banks which provides for a $325 million extendible revolving loan facility and a $10 million operating loan facility. The loan's interest rate is based on either prime or bankers' acceptance rates at the Fund's option subject to certain basis point or stamping fee adjustments ranging from 0% to 1.4% depending on the Fund's debt to cash flow ratio. The credit facilities are secured by a $500 million floating charge demand debenture, a general security agreement and a subordination agreement from the Fund covering all assets and cash flows. The credit facilities are subject to review on an annual basis, with the next review anticipated to take place in May 2006. Various borrowing options are available under the credit facilities, including prime rate-based advances and bankers' acceptances loans. The credit facilities constitute a revolving facility for a 364 day term which is extendible annually for a further 364 day revolving period. If not extended, the revolving credit facility is converted to a two year term facility with the first payment due one year and one day after commencement of the term. The credit facilities contain standard commercial covenants for facilities of this nature, and distributions by AOG to the Fund (and effectively by the Fund to Unitholders) are subordinated to the repayment of any amounts owing under the credit facilities. Distributions to Unitholders are not permitted if the Fund is in default of such credit facilities or if the amount of the Fund's outstanding indebtedness under such facilities exceeds the then existing current borrowing base. Interest payments under the debentures are also subordinated to indebtedness under the credit facilities and payments under the debentures are similarly restricted. At June 30, 2005, the effective interest rate on the outstanding amounts under the facility was approximately 4.4%. PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 17 OF 20 4. CONVERTIBLE DEBENTURES The convertible unsecured subordinated debentures pay interest semi-annually and are convertible at the option of the holder into Trust Units of Advantage at the applicable conversion price per Unit plus accrued and unpaid interest. Based on revised accounting standards (note 1), Advantage initially records the proceeds as a liability and equity component, net of issue costs, based on their relative fair market values. The details of the convertible debentures including fair market values initially assigned and issuance costs are as follows:
10.00% 9.00% 8.25% 7.75% 7.50% TOTAL ---------------------------------------------------------------------------------------------------------------------- Issue Date Oct. 18, 2002 Jul. 8, 2003 Dec. 2, 2003 Sept. 15, 2004 Sept. 15, 2004 Maturity Date Nov. 1, 2007 Aug. 1, 2008 Feb. 1, 2009 Dec. 1, 2011 Oct. 1, 2009 Conversion Price $ 13.30 $ 17.00 $ 16.50 $ 21.00 $ 20.25 Liability component $ 52,722 $ 28,662 $ 56,802 $ 47,444 $ 71,631 $ 257,261 Equity component 2,278 1,338 3,198 2,556 3,369 12,739 ---------------------------------------------------------------------------------------------------------------------- Gross proceeds 55,000 30,000 60,000 50,000 75,000 270,000 Issuance costs (2,495) (1,444) (2,588) (2,190) (3,190) (11,907) ---------------------------------------------------------------------------------------------------------------------- NET PROCEEDS $ 52,505 $ 28,556 $ 57,412 $ 47,810 $ 71,810 $ 258,093 ======================================================================================================================
The balance of debentures outstanding at June 30, 2005 and changes in the liability and equity components during the six month period then ended are as follows:
10.00% 9.00% 8.25% 7.75% 7.50% TOTAL ---------------------------------------------------------------------------------------------------------------------- Debentures outstanding $ 3,169 $ 9,579 $ 11,445 $ 49,835 $ 69,853 $ 143,881 Liability component Balance at Dec. 31, 2004 $ 3,923 $ 10,388 $ 12,237 $ 45,548 $ 64,337 $ 136,433 Accretion of discount 30 88 107 306 569 1,100 Converted to Trust Units (912) (1,435) (1,658) (151) (122) (4,278) ---------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2005 $ 3,041 $ 9,041 $ 10,686 $ 45,703 $ 64,784 $ 133,255 ====================================================================================================================== Equity component Balance at Dec. 31, 2004 $ 163 $ 472 $ 675 $ 2,444 $ 3,010 $ 6,764 Converted to Trust Units (38) (65) (91) (8) (6) (208) ---------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2005 $ 125 $ 407 $ 584 $ 2,436 $ 3,004 $ 6,556 ======================================================================================================================
During the six months ended June 30, 2005 $4,569,000 debentures were converted resulting in the issuance of 284,727 Advantage Trust Units.
5. EXCHANGEABLE SHARES NUMBER OF SHARES AMOUNT ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2004 1,450,030 $ 30,842 Converted to Trust Units (1,339,614) (28,576) Non-controlling interest in net income - 135 ---------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2005 110,416 $ 2,401 ======================================================================================================================
AOG is authorized to issue an unlimited number of non-voting Exchangeable Shares. As partial consideration for the acquisition of Defiant which closed on December 21, 2004, AOG issued 1,450,030 Exchangeable Shares. The value of the Exchangeable Shares issued was determined based on the weighted average trading value of Advantage Trust Units during the two-day period before and after the terms of the acquisition were agreed to and announced. Each Exchangeable Share issued by AOG is exchangeable for Advantage Trust Units at any time (subject to the provisions of the Voting and Exchange Trust Agreement), on the basis of the applicable exchange ratio in effect at that time. The exchange ratio was equal to 1.08317 at June 30, 2005 and will be increased on each date that a distribution is paid by Advantage on the Advantage Trust Units by an amount equal to the cash distribution paid divided by the five-day PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 18 OF 20 weighted average unit price preceding the record date. It is not anticipated that dividends will be declared or paid on the Exchangeable Shares. The Exchangeable Shares are not publicly traded. However, holders of AOG Exchangeable Shares can exchange all or a portion of their holdings at any time by giving notice to their investment advisor or AOG's transfer agent, Computershare Trust Company of Canada. The Exchangeable Shares will not be entitled to any vote at meetings of shareholders of AOG but will, through a Special Voting Unit of Advantage held by the Trustee as trustee under the Voting and Exchange Trust Agreement, be entitled to vote (on the basis of the number of votes equal to the number of Advantage Trust Units into which the Exchangeable Shares are then exchangeable) with the holders of Advantage Trust Units as a class. The Exchangeable Shares will be redeemable by AOG, in certain circumstances, and will be retractable by holders of Exchangeable Shares, in certain circumstances. Exchangeable Shares not previously redeemed or retracted will be redeemed by AOG or purchased by Advantage on January 15, 2008. If the number of Exchangeable Shares outstanding is less than 100,000, the Fund can elect to redeem the Exchangeable Shares for Trust Units or an amount in cash equal to the amount determined by multiplying the exchange ratio on the last business day prior to the redemption date by the current market price of a trust unit on the last business day prior to such redemption date. 6. UNITHOLDERS' EQUITY (i) UNITHOLDERS' CAPITAL (a) Authorized Unlimited number of voting Trust Units (b) Issued
NUMBER OF UNITS AMOUNT --------------------------------------------------------------------------------------- Balance at December 31, 2004 (restated - note 1) 49,674,783 $ 515,544 2004 non-cash performance incentive 763,371 16,570 Issued on conversion of debentures 284,727 4,486 Issued on conversion of exchangeable shares 1,367,604 28,576 Issued for cash, net of costs 5,250,000 107,616 --------------------------------------------------------------------------------------- Balance at June 30, 2005 57,340,485 $ 672,792 =======================================================================================
On January 19, 2005 Advantage issued 763,371 Trust Units to partially satisfy the obligation related to the 2004 year end performance fee. On February 9, 2005 Advantage issued 5,250,000 Trust Units at $21.65 per Trust Unit for net proceeds of $107.6 million (net of Underwriters' fees and other issue costs of $6.1 million). The net proceeds of the offering were used to pay down debt incurred in the acquisition of Defiant, for 2005 capital expenditures and for general corporate purposes.
(c) Trust Units Rights Incentive Plan SERIES A SERIES B NUMBER PRICE NUMBER PRICE ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2004 85,000 $ 5.05 225,000 $ 16.75 Reduction of exercise price - (1.62) - (1.62) ------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2005 85,000 $ 3.43 225,000 $ 15.13 ==================================================================================================================
The Series A Trust Unit rights were issued in 2002 and the Fund was unable to determine the fair value for the rights granted under the Plan at that time. The Fund has disclosed pro forma results as if the Fund followed the intrinsic value methodology in accounting for such rights. The intrinsic value methodology would result in recording compensation expense for the rights based on the underlying Trust Unit price at the date of exercise or at the date of the financial statements for unexercised rights as compared to the exercise price. PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 19 OF 20
THREE THREE SIX SIX MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED PRO FORMA RESULTS JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004 -------------------------------------------------------------------------------------------------------------------- (restated - note 1) (restated - note 1) Net income as reported $ 26,537 $ 9,770 $ 30,552 $ 14,218 Less compensation expense (recovery) for rights issued in 2002 (145) 42 (292) 233 -------------------------------------------------------------------------------------------------------------------- Pro Forma net income $ 26,682 $ 9,728 $ 30,844 $ 13,985 ==================================================================================================================== Net income per Trust Unit - basic and diluted As reported $ 0.46 $ 0.25 $ 0.55 $ 0.37 Pro Forma $ 0.46 $ 0.25 $ 0.55 $ 0.36 --------------------------------------------------------------------------------------------------------------------
7. FINANCIAL INSTRUMENTS
As at June 30, 2005 the Fund has the following hedges in place: DESCRIPTION OF HEDGE TERM VOLUME AVERAGE PRICE ------------------------------------------------------------------------------------------------- NATURAL GAS - AECO Fixed price April to October 2005 34,123 mcf/d Cdn$7.45/mcf Collar April to October 2005 11,374 mcf/d Floor Cdn$6.86/mcf Ceiling Cdn$8.18/mcf Collar April to October 2005 11,374 mcf/d Floor Cdn$7.02/mcf Ceiling Cdn$8.02/mcf CRUDE OIL - WTI Fixed price April to September 2005 1,750 bbls/d US$52.11/bbl Collar April to October 2005 1,750 bbls/d Floor US$47.00/bbl Ceiling US$56.75/bbl
As at June 30, 2005 the settlement value of the hedges outstanding was approximately $1.3 million and has been charged to income as an unrealized hedging loss. 8. PERFORMANCE INCENTIVE The Manager of the Fund is entitled to earn an annual performance incentive fee which is calculated based on the total return of the Fund. During interim periods no amount is paid to the Manager, nor is the Manager entitled to receive any payment related to the Fund's performance as the actual amount is only calculated and paid on an annual basis. The Manager earns the performance incentive fee when the Fund's total annual return exceeds 8%. The total annual return is calculated at the end of the year by dividing the year over year change in Unit price plus cash distributions by the opening Unit price. The 2005 opening Unit price was $21.71 and cash distributions for the six months ended June 30, 2005 amounted to $1.62 per Trust Unit. Ten percent of the amount of the total annual return in excess of 8% is multiplied by the market capitalization (defined as the opening Unit price multiplied by the average number of Units outstanding during the year) to determine the performance incentive. No performance fee has been accrued for the period as the total annual return was less than the 8% prorated threshold. The Manager does not receive any form of compensation in respect of acquisition or divestiture activities. PRESS RELEASE AUGUST 11, 2005 ADVANTAGE ENERGY INCOME FUND PAGE 20 OF 20 FORWARD-LOOKING INFORMATION The information in this release contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond Advantage's control, including: the impact of general economic conditions, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, fluctuations in commodity prices and foreign exchange and interest rates, stock market volatility and obtaining required approvals of regulatory authorities. Advantage's actual results, performance or achievement could differ materially from those expressed in, or implied by, such forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do, what benefits that Advantage will derive from them. For further information contact: Mr. Gary F. Bourgeois, VP Corporate Development Phone: (416) 945-6636 TOLL FREE: 1-866-393-0393 ADVANTAGE ENERGY INCOME FUND 3100, 150 - 6th Avenue SW Calgary, Alberta T2P 3Y7 Phone: (403) 261-8810 Fax: (403) 262-0723 Web Site: www.advantageincome.com E-mail: advantage@advantageincome.com