EX-99 20 ex99-17form40_f.txt EXHIBIT 99.17 EXHIBIT 99.17 ------------- -------------------------------------------------------------------------------- [GRAPHIC OMITTED] [ADVANTAGE LOGO OMITTED] -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (thousands of dollars) March 31, 2005 December 31, 2004 --------------------------------------------------------------------------------------------------------- (unaudited) (restated - note 1) ASSETS Current assets Accounts receivable $ 48,241 $ 48,961 Fixed assets Property and equipment 1,223,829 1,190,552 Accumulated depletion and depreciation (287,981) (253,506) --------------------------------------------------------------------------------------------------------- 935,848 937,046 Goodwill 47,728 47,244 --------------------------------------------------------------------------------------------------------- $ 1,031,817 $ 1,033,251 ========================================================================================================= LIABILITIES Current liabilities Accounts payable and accrued liabilities $ 68,289 $ 91,165 Cash distributions payable to Unitholders 16,024 12,419 Current portion of capital lease obligations (note 2) 7,331 1,785 Hedging liability (note 6) 11,280 214 Bank indebtedness (note 3) - 267,054 --------------------------------------------------------------------------------------------------------- 102,924 372,637 --------------------------------------------------------------------------------------------------------- Capital lease obligations (note 2) 1,616 7,606 Bank indebtedness (note 3) 196,362 - Convertible debentures (notes 1 and 4) 133,297 136,433 Asset retirement obligations 17,955 17,503 Future income taxes 107,165 112,266 --------------------------------------------------------------------------------------------------------- 559,319 646,445 ========================================================================================================= UNITHOLDERS' EQUITY Unitholders' capital (note 5i) 670,797 515,544 Exchangeable shares (note 5ii) 3,728 30,842 Convertible debentures equity component (notes 1 and 4) 6,583 6,764 Contributed surplus 1,036 1,036 Accumulated income 106,710 102,637 Accumulated cash distributions (316,356) (270,017) --------------------------------------------------------------------------------------------------------- 472,498 386,806 --------------------------------------------------------------------------------------------------------- $1,031,817 $ 1,033,251 =========================================================================================================
see accompanying Notes to Consolidated Financial Statements ADVANTAGE ENERGY INCOME FUND PAGE 2 OF 8
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED INCOME Three Three months ended months ended (thousands of dollars, except for per Unit amounts) (unaudited) March 31, 2005 March 31, 2004 ------------------------------------------------------------------------------------------------------------- (restated - note 1) REVENUE Petroleum and natural gas $ 83,209 $ 53,836 Unrealized hedging loss (note 6) (11,066) (11,057) Royalties, net of Alberta Royalty Credit (16,365) (10,552) ------------------------------------------------------------------------------------------------------------- 55,778 32,227 ============================================================================================================= EXPENSES Operating 13,030 8,320 General and administrative 1,463 846 Management fee 807 525 Performance incentive (note 7) - 1,400 Interest 2,609 1,278 Interest and accretion on convertible debentures 3,401 2,524 Depletion, depreciation and accretion 34,766 20,346 ------------------------------------------------------------------------------------------------------------- 56,076 35,239 ------------------------------------------------------------------------------------------------------------- Income (loss) before taxes (298) (3,012) Future income tax recovery (5,101) (7,775) Income and capital taxes 730 315 ------------------------------------------------------------------------------------------------------------- (4,371) (7,460) ------------------------------------------------------------------------------------------------------------- Net income 4,073 4,448 Accumulated income, beginning of period as previously reported 93,451 73,137 Effect of change in accounting for convertible debentures (note 1) 9,186 5,530 ------------------------------------------------------------------------------------------------------------- Accumulated income, beginning of period as restated 102,637 78,667 ------------------------------------------------------------------------------------------------------------- Accumulated income, end of period $ 106,710 $ 83,115 ============================================================================================================= Net income per Trust Unit Basic and diluted $ 0.07 $ 0.12 =============================================================================================================
see accompanying Notes to Consolidated Financial Statements ADVANTAGE ENERGY INCOME FUND PAGE 3 OF 8
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Three months ended months ended (thousands of dollars) (unaudited) March 31, 2005 March 31, 2004 ------------------------------------------------------------------------------------------------------------- (restated - note 1) Operating Activities Net income $ 4,073 $ 4,448 Add (deduct) items not requiring cash: Non-cash performance incentive (note 7) - 1,400 Future income taxes (5,101) (7,775) Unrealized hedging loss (note 6) 11,066 11,057 Accretion on convertible debentures 551 424 Depletion, depreciation and accretion 34,766 20,346 ------------------------------------------------------------------------------------------------------------- Funds from operations 45,355 29,900 Expenditures on asset retirement (407) (62) Changes in non-cash working capital (6,340) (8,332) ------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 38,608 21,506 ============================================================================================================= Financing Activities Units issued, net of costs (note 5i) 107,701 116 Increase (decrease) in bank debt (70,692) 33,187 Reduction of capital lease obligations (444) (78) Cash distributions to Unitholders (42,734) (25,934) ------------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities (6,169) 7,291 ============================================================================================================= Investing Activities Expenditures on property and equipment (32,715) (30,202) Property acquisitions (28) - Property dispositions 34 791 Purchase adjustment of Defiant Energy acquisition (484) - Changes in non-cash working capital 754 614 ------------------------------------------------------------------------------------------------------------- Cash used in investing activities (32,439) (28,797) ============================================================================================================= Net change in cash - - Cash, beginning of period - - ------------------------------------------------------------------------------------------------------------- Cash, end of period $ - $ - ============================================================================================================= Supplementary Cash Flow Information Taxes paid $ 597 $ 316 Interest paid $ 6,085 $ 2,915
see accompanying Notes to Consolidated Financial Statements ADVANTAGE ENERGY INCOME FUND PAGE 4 OF 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2005 (unaudited) All tabular amounts in thousands except for Units and per Unit amounts The interim consolidated financial statements of Advantage Energy Income Fund ("Advantage" or the "Fund") have been prepared by management in accordance with Canadian generally accepted accounting principles using the same accounting policies as those set out in note 2 to the consolidated financial statements for the year ended December 31, 2004 except as described below. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Advantage for the year ended December 31, 2004 as set out in Advantage's Annual Report. 1. CHANGE IN ACCOUNTING POLICIES (a) FINANCIAL INSTRUMENTS - PRESENTATION AND DISCLOSURE Effective January 1, 2005, the Fund retroactively adopted the revised accounting standard Section 3860 "Financial Instruments - Presentation and Disclosure" as issued by the Canadian Institute of Chartered Accountants. The revised standard applies to financial instruments that may be settled at the issuer's option in cash or its own equity instruments and impacts the Fund's prior accounting for convertible debentures and the performance incentive fee. The Fund previously classified the issuance of convertible debentures and the performance fee obligation as components of equity on the basis that the obligations could be settled with the issuance of Trust Units. Interest expense and issuance costs related to the debentures were charged to accumulated income as a component of equity. Based on the revised standard, a financial instrument is presented based on the substance of the contractual arrangement regardless of the means of settlement. This results in the reclassification of convertible debentures to long-term liabilities and the performance fee to current liabilities. Additionally, a financial instrument with an embedded conversion feature must be segregated between liabilities and equity based on the relative fair market value of the liability and equity portions. Therefore, the debenture liabilities are presented at less than their eventual maturity values. The liability and equity components are further reduced for issuance costs initially incurred. The discount of the liability component as compared to maturity value is accreted by the effective interest method over the debenture term. As debentures are converted to Trust Units, an appropriate portion of the liability and equity components are transferred to unitholders' capital. Interest and accretion expense on the convertible debentures are shown on the Consolidated Statement of Income. The effect of this change in accounting policy has been recorded retroactively with restatement of prior periods. The effect of the adoption is presented below as increases (decreases):
BALANCE SHEETS December 31, 2004 December 31, 2003 -------------------------------------------------------------------------------------------------------------- Current liabilities Accounts payable and accrued liabilities $ 16,570 $ 19,592 Long-term liabilities Convertible debentures $ 136,433 $ 91,304 Unitholders' equity Convertible debentures $ (148,450) $ (99,984) Convertible debentures equity component $ 6,764 $ 4,726 Unitholders' capital $ (20,503) $ (21,168) Accumulated income $ 9,186 $ 5,530 Three months ended Year ended STATEMENTS OF INCOME March 31, 2004 December 31, 2004 -------------------------------------------------------------------------------------------------------------- Interest and accretion on convertible debentures $ 2,524 $ 10,425 -------------------------------------------------------------------------------------------------------------- Net income $ (2,524) $ (10,425) Basic and diluted net income per Unit $ (0.01) $ (0.04)
ADVANTAGE ENERGY INCOME FUND PAGE 5 OF 8 (b) EXCHANGEABLE SHARES The Canadian Institute of Chartered Accountants issued EIC-151 "Exchangeable Securities issued by Subsidiaries of Income Trusts" in January 2005. The EIC detailed the conditions under which exchangeable shares are classified as a component of equity. Exchangeable shares that do not satisfy the given criteria are shown as non-controlling interest. The Fund's interpretation is that the exchangeable shares issued complies with the established criteria and is presented as a component of unitholders' equity. In March 2005, the Emerging Issues Committee amended EIC-151 which will be effective for periods ending on June 30, 2005. The revised standard will result in the Fund reclassifying exchangeable shares from equity to non-controlling interest given that the exchangeable shares are transferable, although not publicly traded. An expense is recorded that reflects the earnings attributable to the non-controlling interest. As exchangeable shares are converted to Trust Units, the non-controlling interest on the balance sheet is reclassified to unitholders' capital. The Fund will retroactively implement the revised standard for the interim period ending June 30, 2005. 2. CAPITAL LEASE OBLIGATIONS The Fund has capital leases on a variety of property and equipment. Future minimum lease payments at March 31, 2005 consist of the following: 2005 $ 7,415 2006 443 2007 1,364 -------------------------------------------------------- $ 9,222 Less amounts representing interest (275) -------------------------------------------------------- 8,947 Current portion (7,331) -------------------------------------------------------- $ 1,616 ======================================================== In May 2005, Advantage repaid two capital lease obligations for $6.8 million that were assumed from the acquisition of Defiant Energy Corporation in 2004. As a result of this repayment, these two capital leases have been classified as current liabilities as at March 31, 2005. 3. BANK INDEBTEDNESS In May 2005, Advantage renewed a credit facility agreement with a syndicate of Canadian chartered banks which provides for a $325 million extendible revolving loan facility and a $10 million operating loan facility. The loan's interest rate is based on either prime or bankers' acceptance rates at the Fund's option subject to certain basis point or stamping fee adjustments ranging from 0% to 1.4% depending on the Fund's debt to cash flow ratio. The credit facilities are secured by a $500 million floating charge demand debenture, a general security agreement and a subordination agreement from the Fund covering all assets and cash flows. The credit facilities are subject to review on an annual basis, with the next review anticipated to take place in May 2006. Various borrowing options are available under the credit facilities, including prime rate-based advances and bankers' acceptances loans. The credit facilities constitute a revolving facility for a 364 day term which is extendible annually for a further 364 day revolving period. If not extended, the revolving credit facility is converted to a two year term facility with the first payment due one year and one day after commencement of the term. Given the change in the maturity terms, the bank indebtedness has been classified as a long-term liability. The credit facilities contain standard commercial covenants for facilities of this nature, and distributions by AOG to the Fund (and effectively by the Fund to Unitholders) are subordinated to the repayment of any amounts owing under the credit facilities. Distributions to Unitholders are not permitted if the Fund is in default of such credit facilities or if the amount of the Fund's outstanding indebtedness under such facilities exceeds the then existing current borrowing base. Interest payments under the debentures are also subordinated to indebtedness under the credit facilities and payments under the debentures are similarly restricted. ADVANTAGE ENERGY INCOME FUND PAGE 6 OF 8 4. CONVERTIBLE DEBENTURES The convertible unsecured subordinated debentures pay interest semi-annually and are convertible at the option of the holder into Trust Units of Advantage at the applicable conversion price per Unit plus accrued and unpaid interest. Based on revised accounting standards (note 1), Advantage initially records the proceeds as a liability and equity component, net of issue costs, based on their relative fair market values. The details of the convertible debentures including fair market values initially assigned and issuance costs are as follows:
10.00% 9.00% 8.25% 7.75% 7.50% Total ------------------------------------------------------------------------------------------------------------------ Issue Date Oct. 18, 2002 Jul. 8, 2003 Dec. 2, 2003 Sept. 15, 2004 Sept. 15, 2004 Maturity Date Nov. 1, 2007 Aug. 1, 2008 Feb. 1, 2009 Dec. 1, 2011 Oct. 1, 2009 Conversion Price $ 13.30 $ 17.00 $ 16.50 $ 21.00 $ 20.25 Liability component $ 52,722 $ 28,662 $ 56,802 $ 71,631 $ 47,444 $ 257,261 Equity component 2,278 1,338 3,198 3,369 2,556 12,739 ------------------------------------------------------------------------------------------------------------------ Gross proceeds 55,000 30,000 60,000 75,000 50,000 270,000 Issuance costs (2,495) (1,444) (2,588) (3,190) (2,190) (11,907) ------------------------------------------------------------------------------------------------------------------ Net proceeds $ 52,505 $ 28,556 $ 57,412 $ 71,810 $ 47,810 $ 258,093 ==================================================================================================================
The balance of debentures outstanding at March 31, 2005 and changes in the liability and equity components during the three month period then ended are as follows:
10.00% 9.00% 8.25% 7.75% 7.50% Total ------------------------------------------------------------------------------------------------------------------ Debentures outstanding $ 3,476 $ 9,710 $ 11,623 $ 49,842 $ 69,853 $144,504 Liability component Balance at Dec. 31, 2004 $ 3,923 $ 10,388 $ 12,237 $ 45,548 $ 64,337 $136,433 Accretion of discount 16 46 56 152 281 551 Converted to Trust Units (618) (1,312) (1,493) (144) (120) (3,687) ------------------------------------------------------------------------------------------------------------------ Balance at Mar. 31, 2005 $ 3,321 $ 9,122 $ 10,800 $ 45,556 $ 64,498 $133,297 ------------------------------------------------------------------------------------------------------------------ Equity component Balance at Dec. 31, 2004 $ 163 $ 472 $ 675 $ 2,444 $ 3,010 $ 6,764 Converted to Trust Units (26) (60) (82) (8) (5) (181) ------------------------------------------------------------------------------------------------------------------ Balance at Mar. 31, 2005 $ 137 $ 412 $ 593 $ 2,436 $ 3,005 $ 6,583 ==================================================================================================================
During the three months ended March 31, 2005 $3,946,000 debentures were converted resulting in the issuance of 242,554 Advantage Trust Units. 5. UNITHOLDERS' EQUITY (i) UNITHOLDERS' CAPITAL (a) Authorized Unlimited number of voting Trust Units (b) Issued
Number of Units Amount ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2004 (restated - note 1) 49,674,783 $ 515,544 2004 non-cash performance incentive 763,371 16,570 Issued on conversion of debentures 242,554 3,868 Issued on conversion of exchangeable shares 1,297,926 27,114 Issued for cash, net of costs 5,250,000 107,701 ------------------------------------------------------------------------------------------------------------------ Balance at March 31, 2005 57,228,634 $ 670,797 ==================================================================================================================
On January 19, 2005 Advantage issued 763,371 Trust Units to partially satisfy the obligation related to the 2004 year end performance fee. ADVANTAGE ENERGY INCOME FUND PAGE 7 OF 8 On February 9, 2005 Advantage issued 5,250,000 Trust Units at $21.65 per Trust Unit for net proceeds of $107.7 million (net of Underwriters' fees and other issue costs of $6.0 million). The net proceeds of the offering were used to pay down debt incurred in the acquisition of Defiant, for 2005 capital expenditures and for general corporate purposes. (c) Trust Units Rights Incentive Plan
Series A Series B Number Price Number Price ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2004 85,000 $ 5.05 225,000 $ 16.75 Reduction of exercise price - (0.84) - (0.84) ------------------------------------------------------------------------------------------------------------------ Balance at March 31, 2005 85,000 $ 4.21 225,000 $ 15.91 ==================================================================================================================
(ii) EXCHANGEABLE SHARES (a) Authorized AOG is authorized to issue an unlimited number of non-voting Exchangeable Shares. (b) Issued
Number of Shares Amount ---------------------------------------------------------------------------------------------------------------- Balance at December 31, 2004 1,450,030 $ 30,842 Converted to Trust Units (1,274,764) (27,114) ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 2005 175,266 $ 3,728 ================================================================================================================
Each Exchangeable Share issued by AOG is exchangeable for Advantage Trust Units at any time (subject to the provisions of the Voting and Exchange Trust Agreement), on the basis of the applicable exchange ratio in effect at that time. The exchange ratio was equal to 1.03775 at March 31, 2005 and will be increased on each date that a distribution is paid by Advantage on the Advantage Trust Units by an amount equal to the cash distribution paid divided by the five day weighted average unit price preceding the record date. The Exchangeable Shares are not publicly traded. However, holders of AOG Exchangeable Shares can exchange all or a portion of their holdings at any time by giving notice to their investment advisor or AOG's transfer agent, Computershare Trust Company of Canada. The Exchangeable Shares will not be entitled to any vote at meetings of shareholders of AOG but will, through a Special Voting Unit of Advantage held by the Trustee as trustee under the Voting and Exchange Trust Agreement, be entitled to vote (on the basis of the number of votes equal to the number of Advantage Trust Units into which the Exchangeable Shares are then exchangeable) with the holders of Advantage Trust Units as a class. The Exchangeable Shares will be redeemable by AOG, in certain circumstances, and will be retractable by holders of Exchangeable Shares, in certain circumstances. Exchangeable Shares not previously redeemed or retracted will be redeemed by AOG or purchased by Advantage on January 15, 2008. If the number of Exchangeable Shares outstanding is less than 100,000, the Trust can elect to redeem the Exchangeable Shares for Trust Units or an amount in cash equal to the amount determined by multiplying the exchange ratio on the last business day prior to the redemption date by the current market price of a trust unit on the last business day prior to such redemption date. It is not anticipated that dividends will be declared or paid on the Exchangeable Shares. 6. FINANCIAL INSTRUMENTS As at March 31, 2005 the Fund has the following hedges in place:
Description of Hedge Term Volume Average Price ------------------------------------------------------------------------------------------------- Natural gas - AECO Fixed price April to October 2005 34,123 mcf/d Cdn$7.45/mcf Collar April to October 2005 11,374 mcf/d Floor Cdn$6.86/mcf Ceiling Cdn$8.18/mcf Collar April to October 2005 11,374 mcf/d Floor Cdn$7.02/mcf Ceiling Cdn$8.02/mcf Crude oil - WTI Fixed price April to September 2005 1,750 bbls/d US$52.11/bbl Collar April to October 2005 1,750 bbls/d Floor US$47.00/bbl Ceiling US$56.75/bbl
ADVANTAGE ENERGY INCOME FUND PAGE 8 OF 8 As at March 31, 2005 the settlement value of the hedges outstanding was approximately $11.3 million and has been charged to income as an unrealized hedging loss. 7. PERFORMANCE INCENTIVE The Manager of the Fund is entitled to earn an annual performance incentive fee which is calculated based on the total return of the Fund. During interim periods no amount is paid to the Manager, nor is the Manager entitled to receive any payment related to the Fund's performance as the actual amount is only calculated and paid on an annual basis. The Manager earns the performance incentive fee when the Fund's total annual return exceeds 8%. The total annual return is calculated at the end of the year by dividing the year over year change in Unit price plus cash distributions by the opening Unit price. The 2005 opening Unit price was $21.71 and cash distributions for the three months ended March 31, 2005 amounted to $0.84 per Trust Unit. Ten percent of the amount of the total annual return in excess of 8% is multiplied by the market capitalization (defined as the opening Unit price multiplied by the average number of Units outstanding during the year) to determine the performance incentive. No performance fee has been accrued for the period as the total annual return was less than the 8% prorated threshold. The Manager does not receive any form of compensation in respect of acquisition or divestiture activities.