Petrofund Energy Trust Announces Results for the Third Quarter of 2004.CALGARY Calgary (kăl`gərē), city (1991 pop. 710,677), S Alta., Canada, at the confluence of the Bow and Elbow rivers. The largest city in Alberta and the fastest-growing major city in Canada, Calgary is a corporate, transportation, and financial , Alberta Alberta (ălbûr`tə), province (2001 pop. 2,974,807), 255,285 sq mi (661,188 sq km), including 6,485 sq mi (16,796 sq km) of water surface, W Canada. -- Petrofund Energy Trust (AMEX AMEX See: American Stock Exchange :PTF PTF - Program Temporary Fix ) (TSX TSX Toronto Stock Exchange (TSE before April, 2002) TSX Transfer from Stack Pointer to Index TSX True Space Extension :PTF.UN) is pleased to provide its results for the third quarter of 2004. Key items from the quarter include: - Cash flow of $65 million, up 63% over the third quarter last year, due primarily to additional production from the Ultima acquisition and higher commodity prices. - Average production of 34,950 boe per day, a 21% increase over Q3 of 2003. - A third quarter payout ratio Payout Ratio The percentage of earnings paid out in dividends. It is calculated by dividing dividends per share by earnings per share. Notes: The payout ratio indicates how well earnings support the dividend payments: the lower the ratio, the more secure the dividend. of 75%, and a 76% payout ratio for the 9 month period. - Operating costs operating costs npl → gastos mpl operacionales of $9.62 per boe, up 4% over last year. - Third quarter general and administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. down 6% from last year to $1.17 per boe. - A 0.8 debt to cash flow ratio. Petrofund's third quarter report is presented below:
Petrofund Energy Trust
3rd Quarter Report
for three & nine months ended September 30, 2004 & 2003
FINANCIAL HIGHLIGHTS
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(thousands of Canadian dollars and units, except per unit amounts)
3 months ended September 30,
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2004 2003(3) Variance
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INCOME STATEMENT
Revenues $ 147,489 $ 95,976 54 %
Cash flow (1) $ 65,075 $ 39,959 63 %
Per unit(2) $ 0.65 $ 0.60 8 %
Per boe $ 20.24 $ 15.08 34 %
Cash distributions paid per unit $ 0.48 $ 0.54 (11)%
Net income $ 15,147 $ 15,104 - %
Net income per unit
Basic $ 0.15 $ 0.23 (35)%
Diluted $ 0.15 $ 0.23 (35)%
UNITS AND EXCHANGEABLE SHARES
OUTSTANDING (2)
Weighted average 100,267 66,143 52 %
Diluted 100,353 66,281 51 %
At period end 100,344 66,716 50 %
TRUST UNIT TRADING (TSX: PTF.UN)
High $ 16.35 $ 16.70 (2)%
Low $ 14.62 $ 13.01 12 %
Close $ 15.90 $ 16.00 (1)%
Volume (units) 18,062 16,211 11 %
TRUST UNIT TRADING (AMEX: PTF)
High $ 12.83 $ 12.24 5 %
Low $ 11.10 $ 9.51 17 %
Close $ 12.60 $ 11.90 6 %
Volume (units) 27,123 28,370 (4)%
9 months ended September 30,
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2004 2003(3) Variance
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INCOME STATEMENT
Revenues $ 360,158 $ 310,583 16 %
Cash flow (1) $ 163,942 $ 144,339 14 %
Per unit(2) $ 1.95 $ 2.43 (20)%
Per boe $ 20.02 $ 18.78 7 %
Cash distributions paid per unit $ 1.44 $ 1.55 (7)%
Net income $ 23,593 $ 63,011 (63)%
Net income per unit
Basic $ 0.28 $ 1.06 (74)%
Diluted $ 0.28 $ 1.06 (74)%
UNITS AND EXCHANGEABLE SHARES
OUTSTANDING (2)
Weighted average 84,064 59,365 42 %
Diluted 84,211 59,491 42 %
At period end 100,344 66,716 50 %
BALANCE SHEET
Working capital (deficit) $ (55,784) $ (60,440) 8 %
Property, plant and equipment,
net $1,230,636 $ 932,361 32 %
Long-term debt $ 199,474 $ 196,160 (2)%
Unitholders' equity $1,031,226 $ 553,276 86 %
TRUST UNIT TRADING (TSX: PTF.UN)
High $ 19.24 $ 16.70 15 %
Low $ 14.56 $ 10.69 36 %
Close $ 15.90 $ 16.00 (1)%
Volume (units) 43,036 38,391 12 %
TRUST UNIT TRADING (AMEX: PTF)
High $ 14.96 $ 12.24 22 %
Low $ 10.95 $ 6.89 59 %
Close $ 12.60 $ 11.90 6 %
Volume (units) 87,726 56,425 55 %
(1) Cash flow before changes in non-cash operating working capital
balances. (Non-GAAP measure - see special notes in the
Management Discussion and Analysis.)
(2) See Notes 4 and 5 to Notes to the Interim Consolidated Financial
Statements for details.
(3) Certain numbers have been restated to conform to the 2004
presentation.
OPERATIONAL HIGHLIGHTS
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(thousands of Canadian dollars, except per unit amounts)
3 months ended September 30,
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2004 2003 Variance
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DAILY PRODUCTION
Oil (bbls) 17,504 12,518 40 %
Natural gas (mmcf) 90,119 84,734 6 %
Natural gas liquids (bbls) 2,427 2,160 12 %
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BOE (6:1) 34,950 28,801 21 %
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Total production (mboe) 3,215 2,650 21 %
PRODUCTION PROFILE
Oil 50 % 43 %
Natural gas 43 % 49 %
Natural gas liquids 7 % 8 %
PRICES
Oil (per bbl) (1) $ 52.02 $ 37.80 38 %
Natural gas (per mcf) (1) $ 6.50 $ 5.92 10 %
Natural gas liquids (per bbl)(1) $ 43.68 $ 31.23 40 %
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BOE (6:1) $ 45.85 $ 36.18 27 %
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Cash operating netback per BOE $ 22.57 $ 18.41 23 %
LEASE OPERATING COSTS $ 30,920 $ 24,482 (26)%
Cost per boe $ 9.62 $ 9.24 (4)%
GENERAL & ADMINISTRATIVE COSTS $ 3,764 $ 3,318 (13)%
Cost per boe $ 1.17 $ 1.25 6 %
9 months ended September 30,
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2004 2003 Variance
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DAILY PRODUCTION
Oil (bbls) 13,934 12,053 16 %
Natural gas (mmcf) 82,623 84,324 (2)%
Natural gas liquids (bbls) 2,181 2,043 7 %
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BOE (6:1) 29,886 28,150 7 %
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Total production (mboe) 8,189 7,685 7%
PRODUCTION PROFILE
Oil 47 % 43 %
Natural gas 46 % 50 %
Natural gas liquids 7 % 7 %
PRICES
Oil (per bbl) (1) $ 47.88 $ 40.33 19 %
Natural gas (per mcf) (1) $ 6.78 $ 6.87 (1)%
Natural gas liquids (per bbl)(1) $ 39.55 $ 35.12 13 %
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BOE (6:1) $ 43.97 $ 40.39 9 %
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Cash operating netback per BOE $ 22.46 $ 21.66 4 %
LEASE OPERATING COSTS $ 74,388 $ 66,474 (12)%
Cost per boe $ 9.08 $ 8.65 (5)%
GENERAL & ADMINISTRATIVE COSTS $ 10,218 $ 10,099 (1)%
Cost per boe $ 1.25 $ 1.31 5 %
(1) Prices are before realized gains/losses on hedging contracts and
before transportation costs which were previously deducted from
oil and natural gas prices and are now disclosed separately on
the income statement. Prices previously reported for 2003 have
been restated.
Management Discussion and Analysis three and nine months ended September September: see month. 30, 2004 SPECIAL NOTES The following discussion and analysis of financial results should be read in conjunction conjunction, in astronomy conjunction, in astronomy, alignment of two celestial bodies as seen from the earth. Conjunction of the moon and the planets is often determined by reference to the sun. with the unaudited consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge for the three and nine months ended September 30, 2004 and the December December: see month. 31, 2003 annual financial statements and management's discussion and analysis Management's discussion and analysis (MD&A) A report from management to shareholders that accompanies the firm's financial statements in the annual report. It explains the period's financial results and enables management to discuss topics that may not be apparent in the financial included in the Petrofund Energy Trust ("Petrofund" or the "Trust") 2003 annual report. The discussion and analysis included in this section is based on information available to October October: see month. 31, 2004. All amounts are stated in Canadian dollars Noun 1. Canadian dollar - the basic unit of money in Canada; "the Canadian dollar has the image of loon on one side of the coin" loonie dollar - the basic monetary unit in many countries; equal to 100 cents unless otherwise noted. Where amounts and volumes are expressed on a barrel of oil equivalent The barrel of oil equivalent (bboe, sometimes BOE) is a unit of energy based on the approximate energy released by burning one barrel of crude oil. The US Internal Revenue Service defines it as equal to 5.8 × 106 BTU [1]. 5. ("boe") basis, natural gas volumes have been converted to barrels of oil at 6 mcf/bbl. A boe may be misleading, particularly if used in isolation. A boe conversion of 6 mcf/bbl is based on an energy equivalency equivalency the combining power of an electrolyte. See also equivalent. conversion method primarily applicable at the burner A drive that writes write-once optical discs such as CD-Rs and DVD-Rs. A "burner" implies a one-time recording, but the term is erroneously used to refer to drives that "write" to re-recordable CD-RW and DVD-RW/+RW media as well. See burn, CD-R and DVD-R. tip and does not represent a value equivalency at the wellhead well·head n. 1. The source of a well or stream. 2. A principal source; a fountainhead. 3. The structure built over a well. wellhead Noun 1. . Management uses cash flow (before changes in non-cash working capital) to analyze an·a·lyze v. 1. To examine methodically by separating into parts and studying their interrelations. 2. To separate a chemical substance into its constituent elements to determine their nature or proportions. 3. operating performance and leverage. Cash flow as presented does not have any standardized standardized pertaining to data that have been submitted to standardization procedures. standardized morbidity rate see morbidity rate. standardized mortality rate see mortality rate. meaning prescribed pre·scribe v. pre·scribed, pre·scrib·ing, pre·scribes v.tr. 1. To set down as a rule or guide; enjoin. See Synonyms at dictate. 2. To order the use of (a medicine or other treatment). by Canadian Canadian (kənā`dēən), river, 906 mi (1,458 km) long, rising in NE New Mexico. and flowing E across N Texas and central Oklahoma into the Arkansas River in E Oklahoma. GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). and may not be comparable with the calculation of similar measures for other entities. Cash flow as presented is not intended to represent operating cash flows Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. or operating profits Operating profit (or loss) Revenue from a firm's regular activities less costs and expenses and before income deductions. operating profit See operating income. for the period, nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with Canadian GAAP. All references to cash flow throughout this report are based on cash flow before changes in non-cash working capital. Cash flow available for distribution is dependent on numerous factors including fluctuations in oil and natural gas prices; changes in the Canadian/U. S. dollar exchange rate; the size of the development drilling program including the portion funded from cash flow; and the level of debt within Petrofund Corp.("PC"), etc. A reconciliation of cash flow provided by operating activities on the Consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: Statement of Cash Flows to cash flow available for distribution is included in Note 7 of the Notes to the Interim Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. This discussion may include statements about expected future events and/or and/or conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. financial results that are forward-looking for·ward-look·ing adj. Concerned with or making provision for the future: forward-looking educators; a forward-looking corporate plan. Adj. 1. in nature and subject to risks and uncertainties. For those statements, Petrofund claims the protection of the safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. for forward-looking statements provisions contained in the U.S. Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. Petrofund cautions that actual performance will be affected by a number of factors, many of which are beyond its control. These include general economic conditions in Canada and the United States The United States and Canada share a unique legal relationship. U.S. law looks northward with a mixture of optimism and cooperation, viewing Canada as an integral part of U.S. economic and environmental policy. ; industry conditions including changes in laws and regulations; changes in income tax regulations; increased competition; and fluctuations in commodity prices, foreign exchange and interest rates. In addition, there are numerous risks and uncertainties associated with oil and natural gas operations and the evaluation of oil and natural gas reserves as discussed in detail in Petrofund's Annual Information Form. As a result, future events and results may vary substantially from what Petrofund currently foresees. RESULTS SUMMARY The results for the third quarter were impacted by a significant increase in production and a further increase in product prices. Production increased 6,149 boe/d from the third quarter of 2003 mainly due to the acquisition of Ultima Energy Trust on June June: see month. 16, 2004. The increase from Ultima was offset by normal production declines and a disposition Act of disposing; transferring to the care or possession of another. The parting with, alienation of, or giving up of property. The final settlement of a matter and, with reference to decisions announced by a court, a judge's ruling is commonly referred to as disposition, regardless of of properties effective December 31, 2003 which reduced volumes by approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 1,500 boe/d. Average prices on a boe basis were up $1.58 from the second quarter of 2004 and up $9.67 from the same period in 2003. Due to this increase in volumes and prices, revenue was up 31% from the second quarter of 2004 and up 54% for three months ended September 30, 2004 from the same period in 2003. The increased revenue was partially offset by losses on hedging hedging, in commerce, method by which traders use two counterbalancing investment strategies so as to minimize any losses caused by price fluctuations. It is generally used by traders on the commodities market. contracts mainly due to the strong oil prices. The cash loss on hedging contracts during the third quarter was $14.6 million. An additional non-cash loss of $15.3 million is recorded on the income statement reflecting the change in the fair value of the commodity contracts during the period. Royalties Not to be confused with Royal family. Royalties (sometimes, running royalties) are usage-based payments made by one party (the "licensee") to another (the "licensor") for ongoing use of an asset, most typically an intellectual property (IP) right. were 19% of revenue, a reduction of 2% from the same period in 2003, and operating costs increased by $0.38 per boe. General and administrative costs were $ 1.17 per boe, a decrease of $0.08 per boe from 2003. Net income for the three months ended September 30, 2004 was $15.1 million, the same as the corresponding amount in the prior year. Net income for the three months in 2004 was reduced by $15.3 million for the unrealized loss Unrealized Loss A loss that results from holding onto an asset rather than cashing it in and officially taking the loss. Notes: Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss. on commodity contracts (excluding the future income tax impact) versus nil in 2003 as a result of the adoption of the new policy on hedging relationships effective January January: see month. 1, 2004 and net income was increased by $4.6 million due to a higher future income tax recovery. Net income before income taxes for the nine months ended September 30, 2004 was $30.3 million as compared to $31.3 million for the same period in the prior year. Net income for 2004 was impacted by a non-cash loss of $32.6 million on commodity contracts and 2003 net income was reduced by $30.9 million for the cost of the internalization Internalization A decision by a brokerage to fill an order with the firm's own inventory of stock. Notes: When a brokerage receives an order they have numerous choices as to how it should be filled. of the management contract. Net income decreased $39.4 million in the nine months ended September 30, 2004 from 2003 due to a change in future income taxes of $38.9 million. A recovery of $32.6 million was recorded in 2003 reflecting income tax rate reductions enacted in that year, versus a future tax provision of $6.4 million recorded in 2004. HIGHLIGHTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 - Petrofund closed the acquisition of Ultima Energy Trust on June 16, 2004. - The Trust paid out cash distributions of $47.7 million or $0.48 per unit in the three months ended September 30, 2004. - The Trust's payout ratio for the nine months ended September 30, 2004 was 76% compared to 65% in 2003. The payout ratio in the third quarter of 2004 was 75% as compared to 92% in the same quarter of 2003. - Production on a boe basis increased 21% to 34,950 boe/d from 28,801 in the prior year and from 28,043 in the second quarter. - Third quarter Canadian product prices on a boe basis increased to $45.85/boe from $36.18/boe in the in the prior year and from $44.27 in the second quarter. - The Trust generated cash flow of $65.1 million in the third quarter of 2004 as compared to $40.0 million in the third quarter of 2003. PETROFUND ACQUISITION OF ULTIMA ENERGY TRUST On June 16, 2004 Petrofund acquired all the assets and assumed all liabilities of Ultima Energy Trust ("Ultima"). This report reflects the results of operations from Ultima's properties beginning June 17, 2004. Petrofund acquired Ultima for an aggregate cost of $567.4 million consisting of 26.4 million Petrofund Trust units valued at $17.12 per unit, the assumption of debt and negative working capital of $119.7 million and transaction costs Transaction Costs Costs incurred when buying or selling securities. These include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price they can sell it). incurred of $1.9 million. OPERATIONAL HIGHLIGHTS Despite being hampered by wet weather throughout much of the quarter, a total of 51 gross wells (11.6 net) and six farmout wells were drilled on Company lands during the quarter. This drilling resulted in 33 oil wells, 22 gas wells, one miscible miscible /mis·ci·ble/ (mis´i-b'l) able to be mixed. mis·ci·ble adj. Capable of being and remaining mixed in all proportions. Used of liquids. injector and one dry hole for an overall 98% success rate for the quarter. Year to date, a total of 129 gross wells (28.0 net) and 24 farmout wells were drilled on Company lands, resulting in 75 oil wells and 71 gas wells for a 95% success rate. In addition, the Trust also continued to optimize optimize - optimisation its base production during the quarter through a series of well workovers, well recompletions, production equipment upgrades and facility additions. Northern Alberta Norhern Alberta is a region located in the Canadian province of Alberta. Its primary industry is oil and gas, with large heavy oil reserves being exploited at the Athabasca Oil Sands and Wabasca Area in the east of the region. Fifteen wells (3.3 net) were drilled at Petrofund's Westerose, Pembina Pembina a Canadian French name for the high bush cranberry (viburnum trilobum) which has lent its a name to several places or features:
1. parallel to the plane of the horizon. 2. occupying or confined to a single level in a hierarchy. horizontal parallel to the plane of the horizon. Banff Banff, former county, Scotland Banff, former county, Scotland: see Banffshire. Banff (bămf, bănf), town (1991 pop. 5,688), SW Alta., Canada, in the Rocky Mts., on the Bow River and the Trans-Canada Highway. oil well at Cherhill Cherhill is a village in Wiltshire, England located on the A4 road between Calne and Marlborough and about 90 miles west of London. It is known for the white horse cut into the chalk hillside in 1780, the Landsdowne obelisk on the Cherhill Downs, and the crop circles that that is now producing 200 boe/d net. At Minehead, Petrofund participated in drilling three high working interest Cardium gas wells which are scheduled to come on-stream on-stream adv. & adj. In or into operation or production. early next quarter, netting the Company an incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. 1.75 mmcf/d of gas. At Brazeau, Petrofund participated in the drilling of an infill in·fill n. 1. The use of vacant land and property within a built-up area for further construction or development, especially as part of a neighborhood preservation or limited growth program. 2. Rock Creek Rock Creek may refer to:
Central Alberta Central Alberta (also named Alberta's Heartland) is a region located in the Canadian province of Alberta. Central Alberta is the most densely populated rural area in the province. Agriculture and energy make up an important part of the economy. Twenty six wells (3.8 net) were drilled at Bodo, Consort, Stanmore Coordinates: Stanmore is a place in the London Borough of Harrow, England. It is a suburban development situated 11 miles (18 km) north west of Charing Cross. , Eyehill, Three Hills Creek Hills Creek is a name found in several places in the United States. In Tioga County, Pennsylvania:
At Ferrier Fer´ri`er n. 1. A ferryman. , Petrofund as operator successfully recompleted two existing wells for Ellerlsie gas. These wells are expected to produce 600 mcf/d net next quarter once necessary facility additions are constructed. Southeastern south·east n. 1. Abbr. SE The direction or point on the mariner's compass halfway between due south and due east, or 135° east of due north. 2. An area or region lying in the southeast. 3. Saskatchewan Saskatchewan, province, Canada Saskatchewan (səskăch`əwən, –wän', săs'–), province (2001 pop. 978,933), 251,700 sq mi (651,903 sq km), W Canada. A total of fifteen oil wells (4.5 net) were successfully drilled on Petrofund's lands at Silverton Silverton has many uses:
CHANGES IN ACCOUNTING POLICIES Asset Retirement Obligations Asset Retirement Obligations provide for future disposal of assets as required by SFAS 143 [1]. Firms must recognize the ARO liability in the period it was acquired, generally acquisition. The Trust adopted the new Canadian New Canadian Noun Canad a recent immigrant to Canada accounting standard for accounting for asset retirement obligations ("ARO") effective January 1, 2004, as required by Canadian generally accepted accounting standards. The standard requires liability recognition for retirement obligations associated with our property, plant and equipment. The obligations are initially measured at fair value, which is the discounted future value of the liability. The fair value is capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. as part of the cost of the related assets and amortized to expense over their useful lives. The liability accretes until the retirement obligations are settled. Previously reclamation Reclamation A claim for the right to return or the right to demand the return of a security that has been previously accepted as a result of bad delivery or other irregularities in the delivery and settlement process. and abandonment abandonment, in law, voluntary, intentional, and absolute relinquishment of rights or property without conveying them to any other person. Abandonment also means willfully leaving one's spouse or children, intending not to return (see desertion). liabilities were calculated and recorded on a unit of production basis. The change is discussed in detail in Note 2(a) to the Notes to the Interim Consolidated Financial Statements. As a result of adopting this standard, previously reported amounts for 2003 have been restated. Net property, plant and equipment on the Consolidated Balance Sheet consolidated balance sheet A balance sheet in which assets and liabilities of a parent company and its controlled subsidiaries are combined, thereby presenting balance sheet items for the parent and its subsidiaries as if they were a single firm. as at December 31, 2003, increased by $18.6 million, future income taxes increased by $2.1 million and asset retirement obligations increased by $17.5 million with an offset of $1.0 million to Unitholders' Equity. Net income for the three and nine months ended September 30, 2003 increased by $170,000 and $785,000, respectively. Opening 2003 accumulated ac·cu·mu·late v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates v.tr. To gather or pile up; amass. See Synonyms at gather. v.intr. To mount up; increase. earnings decreased by $2.4 million ($700,000 after tax) to reflect the cumulative impact of accretion The act of adding portions of soil to the soil already in possession of the owner by gradual deposition through the operation of natural causes. The growth of the value of a particular item given to a person as a specific bequest under the provisions of a will between the and depletion depletion n. when a natural resource (particularly oil) is being used up. The annual amount of depletion may, ironically, provide a tax deduction for the company exploiting the resource because if the resource they are exploiting runs out, they will no longer be able expense, less the previously recorded cumulative site restoration provision. Net income before tax for the three and nine months ended September 30, 2004, increased by $1.1 million ($657,000 after tax) and $3.0 million ($1.8 million after tax) respectively, which reflects the impact of accretion and depletion expense. There was no impact on the Trust's cash flow as a result of adopting this new policy. See Notes 2(a) and 8 for additional information on the future liability and the impact on the financial statements. Financial Instruments Effective January 1, 2004, Petrofund adopted the new Canadian Accounting Guideline guideline Medtalk A series of recommendations by a body of experts in a particular discipline. See Cancer screening guidelines, Cardiac profile guidelines, Gatekeeper guidelines, Harvard guidelines, Transfusion guidelines. 13 ("AcG-13") pertaining per·tain intr.v. per·tained, per·tain·ing, per·tains 1. To have reference; relate: evidence that pertains to the accident. 2. to hedging relationships. AcG-13 established certain conditions for applying hedge accounting Why is hedge accounting necessary? Many financial institutions and corporate businesses (entities) use derivative financial instruments to hedge their exposure to different risks (eg interest rate risk, foreign exchange risk, commodity risk, etc). . If hedge accounting is not applied, the fair values of derivative derivative: see calculus. derivative In mathematics, a fundamental concept of differential calculus representing the instantaneous rate of change of a function. financial instruments are recorded as an asset or a liability on the balance sheet. Petrofund enters into numerous derivative financial instruments to reduce price volatility Volatility 1. A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time. 2. A variable in option pricing formulas that denotes the extent to which the return of the underlying asset will fluctuate between now and the and establish minimum prices for a portion of its oil and natural gas production. These contracts are effective economic hedges, however, a number do not qualify for hedge accounting due to the very detailed and complex rules outlined in AcG-13. Petrofund has elected e·lect v. e·lect·ed, e·lect·ing, e·lects v.tr. 1. To select by vote for an office or for membership. 2. To pick out; select: elect an art course. to use the fair value method of accounting for all derivative transactions as we believe it would be confusing con·fuse v. con·fused, con·fus·ing, con·fus·es v.tr. 1. a. To cause to be unable to think with clarity or act with intelligence or understanding; throw off. b. if the Trust were to use hedge accounting for some of its hedging contracts and fair value accounting for others. All outstanding derivative instruments Derivative instruments Contracts such as options and futures whose price is derived from the price of an underlying financial asset. as at January 1, 2004 have been recorded as assets or liabilities, as appropriate, at fair value. The net negative fair value of the contracts at January 1, 2004 of $6.8 million plus costs incurred on the acquisition of the derivative instruments in the amount of $0.8 million are being amortized to expense over the remaining term of the contracts. The total amount of $7.6 million plus $1.4 million relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc Ultima, less $6.9 million amortized to expense in the nine months ended September 30, 2004, has been recorded as a current asset or liability, as appropriate, on the balance sheet at September 30, 2004 as "deferred loss/gain on commodity contracts". The amortized portion of the fair value of the contracts at January 1, 2004 and the net change in fair value of all such instruments from January 1 to September 30, 2004 in the amount of $32.6 million are recorded in the income statement on a separate line as "gain/loss on commodity contracts". This is an increase of $15.3 million in the third quarter. This line item also includes realized losses Realized Loss A loss recognized when assets are sold for a price lower than the original purchase price. Notes: A portion of the realized loss may be applied against a capital gain or realized profit to reduce taxes. on commodity contracts, of $14.6 million in the third quarter of 2004 and $28.3 million for the nine month period which were previously deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. from oil and natural gas sales. The comparative numbers for 2003 represent realized losses on commodity contracts which were netted against sales. This policy is discussed in detail in Note 2(b) to the Notes to the Interim Consolidated Financial Statements. Transportation Costs CICA CICA Competition In Contracting Act of 1984 (USA) CICA Canadian Institute of Chartered Accountants CICA Competition In Contracting Act CICA Criminal Injuries Compensation Authority (UK) Handbook
This article is about reference works. For the subnotebook computer, see .
Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting ", is effective for fiscal years beginning on or after October 1, 2003. This standard focuses on what constitutes Canadian generally accepted accounting principles and its sources, including the primary sources of generally accepted accounting principles. In prior years, it had been industry practice to record revenue net of related transportation costs. In accordance with the new accounting standards, revenue is now reported before transportation costs with separate disclosure in the consolidated statement of operations See Income statement. of transportation costs. Petroleum and natural gas sales and transportation costs both increased $1.8 million in the third quarter of 2004 and $4.3 million for the nine months ended September 30, 2004. The comparative numbers for 2003 were $1.4 million and $4.1 million, respectively. This change in classification has no impact on cash flow or net income. Product Prices Product prices, unless otherwise noted, reflect actual prices received, excluding hedging and transportation costs. Prices for prior periods have been restated where applicable. CASH DISTRIBUTIONS Petrofund unitholders who held their units throughout the third quarter of 2004 received distributions of $0.48 in cash as compared to $0.54 in the third quarter of 2003. A cash distribution of $0.16 per unit was paid in October and $0.16 per unit has been announced for November November: see month. and indicated for December. The Trust generated cash flow available for distribution in the third quarter of $63.8 million before deducting $15.0 million for reinvestment Reinvestment Using dividends, interest and capital gains earned in an investment or mutual fund to purchase additional shares or units, rather than receiving the distributions in cash. 1. In terms of stocks, it is the reinvestment of dividends to purchase additional shares. in capital projects. Distributions of $47.7 million were paid out in the quarter representing a payout ratio of 75% (see Note 7). For the 12 months ended September 30, 2004, the Trust generated cash flow available for distribution of $201.9 million, allocated $72.4 million for reinvestment in development drilling and other projects, and the deferred capital obligation and paid out distributions of $158.0 million, resulting in a payout ratio of 78%. The Trust is continuing its policy of stabilizing stabilizing, v to hold a limb motionless in order to ground its energy; a standard isometric resistance technique, it releases tension and lengthens muscle fibers. monthly distributions and reinvesting a portion of its cash flow for the long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. benefit of the Trust. RESULTS OF OPERATIONS Revenue and Production Revenues increased 54% to $147.5 million in the third quarter of 2004 from $96.0 million in the third quarter of 2003. Production was up 21%, and prices were up 27% on a boe basis. For the nine month period ended September 30, 2004, revenue increased 16% to $360.2 million from $310.6 million in 2003 due to a 7% increase in production to 29,886 boe/d and a 9% increase in the average price per boe to $43.97 in 2004 from $40.39 in 2003. Crude oil sales increased 92% to $83.7 million in the third quarter of 2004 from $43.5 million in the third quarter of 2003. Oil production volumes increased 40% to 17,504 bbl/d as compared to 12,518 in the third quarter of 2003. The average price was up 38% to $52.02/bbl from $37.80/bbl. The WTI WTI West Texas Intermediate WTI Western Transportation Institute (Montana State University) WTI World Tribunal on Iraq WTI With The Idea (used in chess to point to the idea behind a specific move) benchmark A performance test of hardware and/or software. There are various programs that very accurately test the raw power of a single machine, the interaction in a single client/server system (one server/multiple clients) and the transactions per second in a transaction processing system. price increased 45% during the same period; however, the appreciation of the Canadian dollar offset part of the WTI increase. During the nine month period ended September 30, 2004, crude oil sales increased 38% to $182.8 million from $132.7 million in 2003. Oil production increased 16% to 13,934 bbl/d for the period as compared to 12,053 bbl/d for the same period in 2003. The average price increased from $40.33/bbl in 2003 to $47.88/bbl in 2004. Natural gas sales increased 17% from $46.1 million in the third quarter of 2003 to $53.9 million in the third quarter of 2004. Natural gas production was up 6% from 84.7 mmcf/d to 90.1 mmcf/d, and the average natural gas price was up 10% to $6.50/mcf from $5.92/mcf. Also, AECO AECO Aeromedical Evacuation Control Officer AECO Advance Engineering Change Order AECO Architecture, Engineering, Construction and Owner-operated monthly natural gas prices increased 10% in the third quarter of 2004 over the third quarter of 2003. During the nine month period ended September 30, 2004, natural gas sales decreased 3% to $153.6 million from $158.1 million in 2003. Natural gas production decreased 2% from 84.3 mmcf/d in 2003 to 82.6 mmcf/d in 2004. The average price was down 1% from $6.87/mcf in 2003 to $6.78/mcf in 2004. Sales of natural gas liquids increased 55% to $9.9 million in the third quarter of 2004, from $6.4 million in the third quarter of 2003. Production was up 12% to 2,427 bbl/d from 2,160 bbl/d; and the average price was up 40% to $43.68/bbl from $31.23/bbl. For the nine month period ended September 30, 2004, sales of natural gas liquids increased 20% to $23.8 million in 2004 from $19.8 million in 2003. Production volumes increased 7% from 2,043 bbl/d to 2,181 bbl/d and the average price increased 13% from $35.12/bbl in 2003 to $39.55/bbl in 2004.
Daily Production
3 months ended 9 months ended
September 30, September 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Oil (bbls) 17,504 12,518 13,934 12,053
Natural gas (mmcf) 90,119 84,734 82,623 84,324
Natural gas liquids (bbls) 2,427 2,160 2,181 2,043
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Total (boe 6:1) 34,950 28,801 29,886 28,150
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Sales Prices
Average prices 3 months ended 9 months ended
September 30, September 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Benchmark prices
WTI oil (U.S.$/bbl) $ 43.88 $ 30.20 $ 39.11 $ 30.99
U.S. $ exchange rate 0.77 0.72 0.75 0.70
WTI oil
(Cdn. equivalent/$/bbl) $ 56.99 $ 41.94 $ 52.15 $ 44.27
AECO natural gas ($/mmbtu) $ 6.66 $ 6.29 $ 6.69 $ 7.07
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Average Petrofund prices
Oil (per bbl) $ 52.02 $ 37.80 $ 47.88 $ 40.33
Natural gas (per mcf) 6.50 5.92 6.78 6.87
Natural gas liquids (per bbl) 43.68 31.23 39.55 35.12
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Weighted average (boe 6:1) $ 45.85 $ 36.18 $ 43.97 $ 40.39
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--------------------------------------------------------------------
Production Revenue (millions)
Revenue 3 months ended 9 months ended
September 30, September 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Oil $ 83.7 $ 43.5 $ 182.8 $ 132.7
Natural gas 53.9 46.1 153.6 158.1
Natural gas liquids/sulphur 9.9 6.4 23.8 19.8
--------------------------------------------------------------------
Total $ 147.5 $ 96.0 $ 360.2 $ 310.6
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Hedging and Risk Management The Trust has implemented a formal risk management policy which provides the Risk Management Committee with the ability to use specified spec·i·fy tr.v. spec·i·fied, spec·i·fy·ing, spec·i·fies 1. To state explicitly or in detail: specified the amount needed. 2. To include in a specification. 3. price risk management strategies for its crude, natural gas and NGL NGL - A dialect of IGL. production including: fixed price contracts; costless collars; the purchase of floor price options; and other derivative financial instruments to reduce price volatility and ensure minimum prices to a maximum of 40% of its annual production for up to eighteen months beyond the current date. As at September 30th, 2004 Petrofund has hedged hedge n. 1. A row of closely planted shrubs or low-growing trees forming a fence or boundary. 2. A line of people or objects forming a barrier: a hedge of spectators along the sidewalk. 31.3 mmcf/d of gas and 7,500 bbl/d of crude for the remainder of 2004. Crude oil hedges for 2004 were unchanged over the quarter while natural gas hedges decreased by 2.8 mmcf/d as contracts expired ex·pire v. ex·pired, ex·pir·ing, ex·pires v.intr. 1. To come to an end; terminate: My membership in the club has expired. 2. . The Trust's 2004 gas hedges include: 26.5 mmcf/d collared col·lar n. 1. The part of a garment that encircles the neck. 2. A necklace. 3. a. A restraining or identifying band of leather, metal, or plastic put around the neck of an animal. b. between $5.81/mcf-$10.23/mcf and 4.8 mmcf/d fixed at $6.15/mcf. The Trust will lose its floor protection on about 24% of the collared volumes if AECO drops below $4.74/mcf but will receive a premium of $1.06/mcf in this event. At the end of the quarter, Petrofund's 2004 crude hedges include 2,000 bbl/d fixed at $35.64/bbl and 5,500 bbl/d collared between $30.56/bbl-$35.99/bbl. The Trust will lose its floor protection on 64% of the collared volume in the event WTI averages less than $26.43/bbl. Under these transactions Petrofund will receive a premium of $4.33/bbl if WTI remains below the $26.43/bbl level. For the first quarter of 2005, the Trust has 28.4 mmcf/d of gas collared between $6.09/mcf-$11.49/mcf. The Trust will lose its floor protection on 33% of this volume should AECO average less than $4.74/mcf. The Trust collared the price at AECO on an additional 4.75 mmcf/d for the summer of 2005 between $6.33/mcf-$8.44/mcf. No gas has been hedged beyond October 31, 2005. Over the quarter Petrofund collared an additional 1,000 bbl/d for the first half of 2005 between $49.83/bbl and $62.45/bbl increasing hedge levels for the first half to 4,000 bbl/d (3,500 bbl/d annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. ). The trust has no oil fixed in 2005, as 100% of the hedges are WTI collars ranging between $35.08/bbl-$43.37/bbl. The trust will lose its floor protection on 93% of the collared volume if WTI averages less than $29.24/bbl. Under these transactions Petrofund will receive a premium of $4.76/bbl if WTI remains below the $29.24/bbl level. Petrofund has contracted to control a portion of its Alberta power costs by fixing the price on three (3) Megawatts/hour (MW/h) of its Alberta consumption at $46.65/MWh for 2004. In 2005, the Trust has two (2) Megawatts/hour (MW/h) fixed at $44.50/MWh. All foreign exchange calculations in this section of the report incorporate the Bank of Canada Bank of Canada Canada's central bank, established under the Bank of Canada Act (1934). It was founded during the Great Depression to regulate credit and currency. The Bank acts as the Canadian government's fiscal agent and has the sole right to issue paper money. US dollar rate closing on September 30, 2004 ($1.2616 C$:US$). For a complete listing of all hedge transaction details please see Note 10 to the Interim Consolidated Financial Statements.
Gain/ (loss) on commodity contracts
Revenue 3 months ended 9 months ended
September 30, September 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Realized gains/(losses) $ (14,559) $ (642) $(28,347) $ (7,514)
--------------------------------------------------------------------
Change in fair value
Fair value, beginning
of period (24,970) - (6,771) -
Fair value of Ultima
contracts acquired - - (5,584) -
Fair value September
30, 2004 (38,096) - (38,096) -
--------------------------------------------------------------------
Change in fair value
of financial instruments (13,126) - (25,741) -
Amortization of negative
fair value at
January 1, 2004 (1,540) - (6,168) -
Amortization of
Ultima contracts (678) - (678) -
--------------------------------------------------------------------
Total non-cash adjustments (15,344) - (32,587) -
--------------------------------------------------------------------
Total $ (29,903) $ (642) $(60,934) $ (7,514)
--------------------------------------------------------------------
--------------------------------------------------------------------
If oil and natural gas prices received by the Trust were adjusted for realized gains/(losses) in accordance with the 2003 presentation, the prices would have decreased as follows: Oil per bbl $ (8.62) $ (0.29) $ (6.93) $ (1.09) Gas per mcf $ (0.09) $ (0.04) $ (0.09) $ (0.17) The realized gain/(losses) on derivative instruments and the change in their fair value is dependent on future product prices, the volumes hedged, the exchange rate and the term of the contracts. As there has been significant variation in all these factors, which is unlikely to change, we can expect to see high volatility in these amounts and the changes could be significant.
ROYALTIES
Royalties, net 3 months ended 9 months ended
of incentives September 30, September 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Royalties (millions) $ 27.6 $ 20.6 $ 69.2 $ 65.8
Average royalty rate 19% 21% 19% 21%
$/boe $ 8.58 $ 7.77 $ 8.45 $ 8.56
--------------------------------------------------------------------
Royalties, net of the Alberta Royalty Compensation for the use of property, usually copyrighted works, patented inventions, or natural resources, expressed as a percentage of receipts from using the property or as a payment for each unit produced. Credit, were 19% of revenues for the three and nine months ending September 30, 2004, as compared to 21% for the same periods in the prior year. The decrease in mainly due to the increase in the relative percentage of oil production which has a lower royalty rate than gas.
Expenses (millions) 3 months ended 9 months ended
September 30, September 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Lease operating $ 30.9 $ 24.5 $ 74.4 $ 66.5
Transportation 1.8 1.4 4.3 4.1
General & administrative 3.8 3.3 10.2 10.1
Net interest 1.7 2.5 3.8 7.0
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Expenses per boe 3 months ended 9 months ended
September 30, September 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Lease operating $ 9.62 $ 9.24 $ 9.08 $ 8.65
Transportation 0.55 0.52 0.52 0.54
General & administrative 1.17 1.25 1.25 1.31
Net interest 0.53 0.95 0.46 0.91
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FIELD OPERATING COSTS Operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. , net of processing income, were $30.9 million in the third quarter of 2004 as compared to $24.5 million in the third quarter of 2003. Operating costs on a boe basis increased 4% to $9.62 in 2004, as compared to $9.24 for the same period in 2003. For the nine month period ended September 30, 2004, operating costs were up 6% to $9.08 per boe as from $8.65 in the prior year. Fixed costs fixed costs, n.pl the costs that do not change to meet fluctuations in enrollment or in use of services (e.g., salaries, rent, business license fees, and depreciation). , including lease rentals, property taxes, cost of field services and employees continue to increase. Repair and maintenance and workover expenditures are generally higher in the third quarter of the year. TRANSPORTATION COSTS Transportation costs which range from $0.52 per boe to $0.55 per boe were previously deducted from sales revenue. Due to the changes in the accounting policy, sales revenues have been increased by this amount and the costs disclosed dis·close tr.v. dis·closed, dis·clos·ing, dis·clos·es 1. To expose to view, as by removing a cover; uncover. 2. To make known (something heretofore kept secret). as a separate item. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative costs were $3.8 million in the third quarter of 2004 compared to $3.3 million in the third quarter of 2003. Costs were down 6% on a boe basis to $1.17 as compared to $1.25 in 2003 due to increased production. General and administrative costs for the third quarter include $251,000 with respect to the proposed reclassification Reclassification The process of changing the class of mutual funds once certain requirements have been met. These requirements are generally placed on load mutual funds. Reclassification is not considered to be a taxable event. of units and for activities undertaken to meet the requirements of Section 302 and Section 404 of the Sarbanes Oxley Oxley refers to several things: People
General and administrative costs for the nine month period ended September 30, 2004, were $10.2 million in 2004 compared to $10.1 million in 2003. Costs, on a per boe basis, were down 5% to $1.25 per boe compared to $1.31 per boe in 2003. Management was successful in maintaining its general and administrative costs at approximately the same level as the prior year while at the same time increasing production by 7%. INTEREST Interest expense decreased to $1.7 million in the third quarter of 2004 from $2.5 million for the same period as 2003 and to $3.8 million for the nine month period ended September 30, 2004, from $7.0 million in 2003. The decreases reflect lower average loan balances outstanding and a decrease in the average prime rate. DEPLETION, DEPRECIATION AND ACCRETION The provision for depletion, depreciation and accretion increased from $28.6 million in the third quarter of 2003 to $42.0 million in the third quarter of 2004 due to the increase in the depletion rate from $10.81/boe in 2003 to $13.06/boe in 2004. The increase in the depletion rate is due to the increased acquisition costs of properties and the negative adjustments to reserves at December 31, 2003. The provision for depletion, depreciation and accretion for the nine months ended in September 30, 2004, was $104.6 million or $12.78 per boe as compared to $85.6 million or $11.13 per boe for 2003. ASSET RETIREMENT RESERVE In the third quarter of 2004, Petrofund has set aside $482,000 in cash to fund future ARO costs. The total ARO reserve at September 30, 2004 was $6.6 million. Effective January 1, 2004, Petrofund increased the reserve to $0.15/boe of production as compared to $0.075 in prior periods. TAXABILITY tax·a·ble adj. Subject to taxation: taxable income. n. One that is subject to taxation: taxables such as cigarettes and liquor. OF DISTRIBUTIONS Proposed amendments to the Income Tax Act on December 20, 2002 clarify (company) Clarify - A software vendor, specialising in Customer Relationship Management software. Nortel Networks sold Clarify to Amdocs in 2002. http://amdocsclarify.com/. that taxpayers, including the Trust, should be accounting for royalty revenue on an accrual accrual, n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. rather than a cash basis. While these amendments are technically not effective until passed into law, in the view of the Department of Finance, the amendments are merely clarifying clar·i·fy v. clar·i·fied, clar·i·fy·ing, clar·i·fies v.tr. 1. To make clear or easier to understand; elucidate: clarified her intentions. 2. the correct method of accounting. The amendments are not controversial and accordingly are expected to be passed into law shortly. As a result, the Trust commenced to account for its royalty revenue on an accrual basis A method of accounting that reflects expenses incurred and income earned for Income Tax purposes for any one year. Taxpayers who use the accrual method must include in their taxable income any money that they have the right to receive as payment for services, once it . This change, along with the significant increase in cash flow due to the increase in production and product prices, will increase the taxable portion of distributions to unitholders which is expected to be in the 80% range for the year. NET INCOME Net income for the three months ended September 30, 2004 was $15.1 million, the same as the corresponding amount in the prior year. Net income for the three months in 2004 was reduced by $15.3 million for the unrealized loss on commodity contracts versus nil in 2003 as a result of the adoption of the new policy on hedging relationships effective January 1, 2004 and net income was increased by $4.6 million due to a higher future income tax recovery. Net income before income taxes for the nine months ended September 30, 2004 was $30.3 million as compared to $31.3 million for the same period in the prior year. Net income for 2004 was impacted by a non-cash loss of $32.6 million on commodity contracts and 2003 net income was reduced by $30.9 million for the cost of the internalization of the management contract. Net income decreased $39.4 million in the nine months ended September 30, 2004 from 2003 due to a change in future income taxes of $38.9 million. A recovery of $32.6 million was recorded in 2003 reflecting income tax rate reductions, enacted in that year, versus a future tax provision of $6.4 million recorded in 2004.
Netback 3 months ended 9 months ended
September 30, September 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Weighted average selling
price $ 45.85 $ 36.18 $ 43.97 $ 40.39
Cash cost of oil and
natural gas hedging (4.53) (0.24) (3.46) (0.98)
--------------------------------------------------------------------
Net weighted average
selling price 41.32 35.94 40.51 39.41
Royalties, net of ARTC 8.58 7.77 8.45 8.56
Operating costs 9.62 9.24 9.08 8.65
Transportation 0.55 0.52 0.52 0.54
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Operating Netback 22.57 18.41 22.46 21.66
Interest expense 0.53 0.95 0.46 0.91
General and administrative 1.17 1.25 1.25 1.31
Capital and current taxes 0.28 0.34 0.34 0.35
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Total cash netback per BOE
before the effects of the
internalization of the
management contract 20.59 15.87 20.41 19.09
Internalization of
management contract - 0.03 - 1.04
--------------------------------------------------------------------
Total cash netback per BOE
after the effects of the
internalization of the
management contract $ 20.59 $ 15.84 $ 20.41 $ 18.05
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QUARTERLY FINANCIAL DATA
Net Oil and
($millions, except Natural Gas Net Net income per unit (2)
per unit amounts) Sales (1) Income Basic Diluted
--------------------------------------------------------------------
2004
First quarter $ 81.1 $ 7.6 $ 0.10 $ 0.10
Second quarter 89.9 0.8 0.01 0.01
Third quarter 119.9 15.1 0.15 0.15
2003
First quarter $ 71.9 $ 32.6 $ 0.60 $ 0.60
Second quarter 55.5 15.3 0.26 0.26
Third quarter 50.9 15.1 0.23 0.23
Fourth quarter 52.0 24.3 0.35 0.35
2002
Fourth quarter $ 68.6 $ 5.4 $ 0.10 $ 0.10
(1) Net after royalties.
(2) Net income per unit numbers are calculated quarterly and annually
and therefore do not add.
GOODWILL The goodwill balance of $176.6 million was created as a result of the acquisition of Ultima and was determined based on the excess of total consideration paid plus the future income tax liability less the fair value assigned as·sign tr.v. as·signed, as·sign·ing, as·signs 1. To set apart for a particular purpose; designate: assigned a day for the inspection. 2. to Ultima's assets. Accounting standards require that the goodwill balance be assessed for impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. at least annually and if an impairment exists that it be charged to income in the period in which the impairment occurs. The Trust has determined that there was no goodwill impairment as of September 30, 2004. CAPITAL EXPENDITURES During the nine months ended September 30, 2004, $47.9 million was incurred for development drilling, production enhancement and other activities. Total expenditure for these activities for all of 2004 is expected to be in the $68.0 million range. During the third quarter of 2004, Petrofund drilled 51 gross wells and entered into farmout agreements with various industry partners, which resulted in 57 wells being drilled on Petrofund's undeveloped land base. The drilling activity resulted in 33 oil wells and 22 natural gas wells for an overall success rate of 98%. A summary of capital expenditures for the three and nine month periods appears below. Of the total amounts, $452 million was financed by the issue of 26.4 million Petrofund units with an assigned value of $17.12 per unit and the remainder was financed by cash and the assumption of debt on the Ultima acquisition.
Ending September 30, 2004
3 months 9 months
---------------------------------------------------------------------
Acquisitions / dispositions $ (6,117)(1) $ 563,292(1)
Finding and development cost:
Land and seismic 468 1,435
Drilling and completions 11,731 25,875
Well equipping 3,051 5,083
Tie-ins 1,085 3,334
Facilities 1,876 6,541
Other 2,275 5,663
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Total 20,486 47,931
---------------------------------------------------------------------
Total net capital expenditures $ 14,369 $ 611,223
---------------------------------------------------------------------
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(1) Includes goodwill of $176,585, which reflects a credit adjustment
for working capital and transaction costs on Ultima acquisition
of $5,855 in the third quarter.
DEBT As at September 30, 2004, the amount outstanding on the credit facility was $199.5 million as compared to the $325 million available. The facility will be utilized for acquisitions and for additional development activities which are expected to be in the $20.0 million range for the fourth quarter of 2004. The revolving period on the syndicated facility has been extended for an additional 364-day period ending May 28, 2005. The maximum on the facility was increased to $325 million on June 30, 2004 as a result of the Ultima acquisition. WORKING CAPITAL The working capital deficit was $55.8 million on September 30, 2004, an increase of $25.8 million from the $30.0 million deficit as at December 31, 2003. The decrease in distributions payable at September 30, 2004 of $26.3 million was due to the payout pay·out n. 1. The act or an instance of paying out. 2. A percentage of corporate earnings that is paid as dividends to shareholders. of the deferred capital obligation of $34.9 million with respect to the Weyburn unit interest acquired as part of the Ultima transaction. This decrease was offset by the net increase in liabilities of $31.3 million as a result of recording the unrealized losses on commodity contracts at fair value. In addition, current assets Current Assets Appearing on a company's balance sheet, it represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year. , at December 31, 2003 included $22.4 million due on the sale of properties which was collected in early 2004. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2004, the Trust generated cash flow of $163.9 million and paid out $121.8 million in distributions. The excess was used to fund the Trust's capital expenditure program. Total long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. and capital leases increased by $89.2 million to $199.5 million at September 30, 2004 from $110.3 million as at December 31, 2003 primarily due to the Ultima acquisition.
Details of all the changes to long-term debt are as follows:
$(thousands) 3 months 9 months
--------------------------------------------------------------------
Cash flow from operating activities $ 65,075 $ 163,942
Proceeds received from issuance
of Trust units 1,642 3,351
Net change in non-cash working
capital balances (2,395) 24,797
Distributions paid (47,684) (121,759)
Expenditures on oil & natural
properties, net (14,252) (151,971)
Asset retirement reserve (482) (1,228)
Redemption of exchangeable shares (450) (1,352)
Capital lease repayments (90) (264)
(Increase) decrease in cash 11,625 (5,283)
Miscellaneous 74 608
--------------------------------------------------------------------
$ 13,063 $ (89,159)
--------------------------------------------------------------------
--------------------------------------------------------------------
The ratio of long-term debt to annualized cash flow based on the three months ended September 30, 2004 was 0.8:1.0. Capitalization Analysis ($ thousands, except per unit & % amounts) 2004 ------------------------------------------------------------------ Working capital (deficiency) $ (55,784) Bank debt 199,474 ------------------------------------------------------------------ Net debt obligation $ 255,258 ------------------------------------------------------------------ Units outstanding & issuable for exchangeable shares 100,344 Market price at September 30, 2004 $ 15.90 Market capitalization $ 1,595,476 ------------------------------------------------------------------ Total capitalization $ 1,850,258 ------------------------------------------------------------------ Net debt as a percentage of total capitalization 14% ------------------------------------------------------------------ ------------------------------------------------------------------ Total capitalization Total capitalization The total long-term debt and all types of equity of a company that constitutes its capital structure. total capitalization See capitalization. as presented does not have any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculation of similar measures for other entities. Total capitalization is not intended to represent the total funds from equity and debt received by the Trust. UNITHOLDERS' EQUITY The Trust had 99,405,256 Trust units outstanding at September 30, 2004, compared to 72,688,577 Trust units at the end of 2003. An additional 26,449,102 Trust units were issued on June 16, 2004 to the former unitholders of Ultima. During this period no exchangeable shares were converted to Trust units, however, 71,377 shares were redeemed re·deem tr.v. re·deemed, re·deem·ing, re·deems 1. To recover ownership of by paying a specified sum. 2. To pay off (a promissory note, for example). 3. for cash during the quarter leaving 780,094 exchangeable shares outstanding at September 30, 2004, which can be converted, at the option of the unitholder into 939,147 Trust units. BUSINESS RISKS The success of the Trust in meeting its objective of stable distributions over the long term depends mainly on management's ability to: 1. Identify and acquire oil and gas properties and/or companies at prices that add value to the Trust. 2. Cost effectively add or extend reserves with internal development and drilling or farmouts. 3. Manage and control costs. There are numerous factors beyond management's control that have a major influence on distribution levels including product prices, unforeseen production declines and cost increases from major suppliers. (A detailed assessment of risk factors and offsetting strategies appears elsewhere in this report). Below is a table that shows sensitivities to pre-hedging cash flow as a result of product price and operational changes. The table is based on actual average prices received for the nine months ended September 30, 2004 and current production volumes. These sensitivities are approximations only and are not necessarily valid at other price and production levels. As well, hedging activities can significantly affect these sensitivities.
Sensitivity Analysis
$/unit
Change $000's per year
--------------------------------------------------------------------
Price per barrel of oil
and gas liquids(1) $ 1.00 U.S. $ 7,483 $ 0.0746
Price per mcf of natural gas(1) $ 0.25 Cdn. $ 6,283 $ 0.0626
US/Cdn exchange rate $ 0.01 $ 4,430 $ 0.0441
Interest rate on debt
($200 million) 1% $ 2,000 $ 0.0200
Oil production volumes(1) 100 bbl/day $ 1,399 $ 0.0139
Gas production volumes(1) 1 mmcf/day $ 1,893 $ 0.0189
--------------------------------------------------------------------
(1) After adjustment for estimated royalties.
OUTLOOK FOR 2004 As discussed in previous reports, the level of cash flow for 2004 will be affected by oil and gas prices, the Canadian/US dollar exchange rate and the Trust's ability to add reserves and production in a cost effective manner. Both product prices and the exchange rate continue to be volatile With regard to computer memory, it means "temporary" and not "highly changeable," which is the usual meaning of the word. See volatile memory. 1. (programming) volatile - volatile variable. 2. (storage) volatile - See non-volatile storage. . The acquisition market is expected to continue to be active. The supply of properties has increased recently; nevertheless, competition for these assets is expected to be fierce due to increased demand resulting from the increasing number of oil and gas companies that have converted to a trust structure. We expect prices for quality, long life assets to be at or above record levels. Petrofund expects to be an active participant Participant A party of a funding. It usually refers to the lowest rank or smallest level of funding. in this market but success will be tempered by a commitment to maintain historic discipline and bid only at levels consistent with the best long term interest of our unitholders. Acquisition activities will be complemented by an extensive drilling and farmout program that will be conducted on our existing land base. Activities for the third quarter were reviewed earlier in this report. CONTRACTUAL OBLIGATIONS During the second quarter, PC acquired an additional interest in the Weyburn Unit as part of the Ultima acquisition. This resulted in additional commitments for CO2 purchases. Subsequent to June 30, 2004 PC renewed re·new v. re·newed, re·new·ing, re·news v.tr. 1. To make new or as if new again; restore: renewed the antique chair. 2. its office lease and extended the term. As a result, PC has contractual obligations which range from $12.0 million to $14.8 million over the next five years. Full details are provided in Note 9 to the Interim Consolidated Financial Statements. OFF-BALANCE SHEET ARRANGEMENTS/ VARIABLE INTEREST ENTITIES The Trust has no off-balance sheet arrangements or variable interest entities. CRITICAL ACCOUNTING ESTIMATES The Trust has established procedures and internal control systems in place to ensure timely and accurate preparation of management, financial and other reports. Disclosure controls are in place to ensure all ongoing statutory reporting requirements are met and material information is disclosed on a timely basis. The Trust's financial and operating results incorporate a number of estimates including: (a) estimated revenues, royalties and operating costs on production as at a specific reporting date but for which actual revenues and costs have not yet been received; (b) estimated capital expenditures on projects that are in progress; (c) estimated depletion, depreciation and accretion that are based on estimates of oil and gas reserves that the Trust expects to recover in the future; (d) estimated fair values of derivative contracts that are subject to fluctuation Fluctuation A price or interest rate change. depending upon the underlying commodity prices and foreign exchange rates; (e) estimated value of asset retirement obligations that are dependent upon estimates of future costs and timing of expenditures. The estimates are prepared by qualified individuals who have knowledge of operations and related activities. Prior estimates are compared to actual results to confirm or improve accrual procedures and to make more informed decisions on future estimates. NON-RESIDENT OWNERSHIP Non-resident ownership levels of the Trust have been increasing by approximately 1% to 2% each month. Based on information provided by our transfer agent, Petrofund estimates that non-resident ownership was approximately 67% as of September 30, 2004. In response to this rate of increase and non-residency limitations outlined in the Draft changes to the Tax Act released by the Canadian Federal Government on September 16, 2004, Petrofund has proposed a reclassification of trust unit capital (press released on October 13, 2004). If approved at a meeting of unitholders on November 16, 2004, the reclassification will result in two classes of units: Class R Units, which can only be held by Canadian residents, and Class N Units, which will contain no residency A duration of stay required by state and local laws that entitles a person to the legal protection and benefits provided by applicable statutes. States have required state residency for a variety of rights, including the right to vote, the right to run for public office, the restriction restriction - A bug or design error that limits a program's capabilities, and which is sufficiently egregious that nobody can quite work up enough nerve to describe it as a feature. . These changes will allow the Trust flexibility in addressing the non-residency restrictions proposed by the government. Additional information regarding the proposed reclassification is detailed in an Information Circular Information Circular A document sent to shareholders outlining important matters to be discussed at the annual shareholders' meeting. Notes: Sent along with a proxy, the information circular may cover matters such as the election of the Board of Directors, possible which was mailed to unitholders in October, and which is also available on SEDAR SEDAR System for Electronic Document Analysis and Retrieval SEDAR Southeast Data, Assessment, and Review and Petrofund's website.
Consolidated Balance Sheet
(thousands of dollars) (unaudited)
As at September 30, 2004 and at December 31, 2003 2004 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
(Restated
Note 2)
Current assets
Cash $ 7,465 $ 2,182
Accounts receivable 35,620 48,268
Deferred hedging loss on commodity contracts
(Note 2(b)) 2,384 -
Commodity contracts (Notes 2(b) and 10) 449 -
Prepaid expenses 9,514 10,036
---------------------------------------------------------------------
Total current assets 55,432 60,486
Asset retirement reserve (Note 8(b)) 6,556 3,779
Goodwill (Notes 1(a) and (b)) 176,585 -
Oil and gas royalty and property interests,
at cost less accumulated depletion and
depreciation of $585,036 (2003 - $482,349) 1,230,636 898,263
---------------------------------------------------------------------
$1,469,209 $962,528
---------------------------------------------------------------------
---------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 48,969 $ 36,684
Current portion of capital lease obligations 700 356
Deferred hedging gain on commodity contracts
(Note 2(b)) 282 -
Commodity contracts (Notes 2(b) and 10) 34,106 -
Distributions payable to Unitholders (Note 7) 27,159 53,452
---------------------------------------------------------------------
Total current liabilities 111,216 90,492
Long-term debt (Note 6) 199,474 109,707
Capital lease obligations - 608
Commodity contracts (Notes 2(b) and 10) 4,439 -
Future income taxes 72,569 79,065
Asset retirement obligations
(Notes 2(a) and 8(a)) 50,285 34,363
---------------------------------------------------------------------
Total liabilities 437,983 314,235
Unitholders' equity
Unitholders' capital (Note 4) 1,476,835 1,020,677
Exchangeable shares (Note 5) 10,518 10,518
Accumulated earnings 221,846 198,253
Accumulated cash distributions (Note 7) (677,973) (581,155)
---------------------------------------------------------------------
Total unitholders' equity 1,031,226 648,293
---------------------------------------------------------------------
$1,469,209 $962,528
---------------------------------------------------------------------
---------------------------------------------------------------------
The accompanying notes to the interim consolidated financial
statements are an integral part of these consolidated statements.
Consolidated Statement of Operations and Accumulated Earnings
(thousands of dollars except per unit amounts) (unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
(Restated (Restated
Note 2) Note 2)
Revenues
Oil and gas sales $147,489 $ 95,976 $360,158 $310,583
Royalties, net of incentives (27,578) (20,582) (69,173) (65,816)
Gain(loss) on commodity
contracts (Note 2(b)) (29,903) (642) (60,934) (7,514)
---------------------------------------------------------------------
90,008 74,752 230,051 237,253
---------------------------------------------------------------------
Expenses
Lease operating 30,920 24,482 74,388 66,474
Transportation costs
(Note 2(c)) 1,753 1,377 4,264 4,130
Interest on long-term debt 1,703 2,511 3,792 7,012
General and administrative 3,764 3,318 10,218 10,099
Capital taxes 788 675 2,444 1,870
Depletion, depreciation and
accretion 41,982 28,635 104,619 85,563
Internalization of management
contract - 88 - 30,850
---------------------------------------------------------------------
80,910 61,086 199,725 205,998
---------------------------------------------------------------------
Income before provision for
income taxes 9,098 13,666 30,326 31,255
---------------------------------------------------------------------
Provision for (recovery of)
income taxes
Current 100 231 368 794
Future (6,149) (1,669) 6,365 (32,550)
---------------------------------------------------------------------
(6,049) (1,438) 6,733 (31,756)
---------------------------------------------------------------------
Net income 15,147 15,104 23,593 63,011
---------------------------------------------------------------------
Accumulated Earnings,
beginning of period 206,699 158,214 199,200 113,341
Retroactive application of
change in accounting policy
(Note 2(a)) - 615 (947) (2,419)
---------------------------------------------------------------------
Accumulated Earnings,
beginning of period
as restated 206,699 158,829 198,253 110,922
Accumulated Earnings,
end of period $221,846 $173,933 $221,846 $173,933
---------------------------------------------------------------------
---------------------------------------------------------------------
Net income per Trust unit
Basic $ 0.15 $ 0.23 $ 0.28 $ 1.06
Diluted $ 0.15 $ 0.23 $ 0.28 $ 1.06
---------------------------------------------------------------------
---------------------------------------------------------------------
The accompanying notes to the interim consolidated financial
statements are an integral part of these consolidated statements.
Consolidated Statement of Cash Flows
(thousands of dollars except per unit amounts) (unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
(Restated (Restated
Note 2) Note 2)
Cash provided by (used in)
operating activities
Net income $ 15,147 $ 15,104 $ 23,593 $ 63,011
Add items not affecting cash:
Depletion, depreciation
and accretion 41,982 28,635 104,619 85,563
Commodity contracts 15,344 - 32,587 -
Future income taxes (6,149) (1,669) 6,365 (32,550)
Actual abandonment costs
incurred (Note 8(a)) (1,249) (2,199) (3,222) (2,535)
Internalization of
management contract - 88 - 30,850
---------------------------------------------------------------------
Cash flow from operating
activities 65,075 39,959 163,942 144,339
Net change in non-cash working
capital balances (2,395) 15,397 24,797 34,885
---------------------------------------------------------------------
Cash provided by operating
activities 62,680 55,356 188,739 179,224
---------------------------------------------------------------------
Financing activities
Bank loan (12,989) 29,909 89,767 (22,793)
Distributions paid (Note7) (47,684) (34,650) (121,759) (91,077)
Redemption of exchangeable
shares (450) (1,047) (1,352) (1,745)
Capital lease repayments (90) (971) (264) (2,859)
Issuance of trust units
(Note 4) 1,642 12,439 3,351 108,151
---------------------------------------------------------------------
Cash provided by (used in)
financing activities (59,571) 5,680 (30,257) (10,323)
---------------------------------------------------------------------
Investing activities
Asset retirement reserve
(Note 8) (482) (198) (1,228) (576)
Acquisition of property
interests (14,252) (59,920) (151,971) (161,986)
Proceeds on disposition of
property interests - 5,397 - 6,013
Internalization of management
contract - (88) - (8,009)
---------------------------------------------------------------------
Cash used in investing
activities (14,734) (54,809) (153,199) (164,558)
---------------------------------------------------------------------
Net change in cash (11,625) 6,227 5,283 4,343
Cash (bank overdraft),
beginning of period 19,090 (3,456) 2,182 (1,572)
---------------------------------------------------------------------
Cash, end of period $ 7,465 $ 2,771 $ 7,465 $ 2,771
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest paid during the
period $ 2,504 $ 2,585 $ 3,671 $ 7,020
---------------------------------------------------------------------
---------------------------------------------------------------------
Income taxes paid during
the period $ 141 $ 212 $ 247 $ 587
---------------------------------------------------------------------
---------------------------------------------------------------------
The accompanying notes to the interim consolidated financial
statements are an integral part of these consolidated statements.
Notes to Interim Consolidated Financial Statements September 30, 2004 and 2003 (unaudited) (thousands of dollars except per unit amounts unless otherwise stated) 1. INTERIM FINANCIAL STATEMENTS These unaudited interim consolidated financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements except as disclosed in Note 2 below. The note disclosure requirements for annual statements provide additional disclosures to that required for interim statements. Accordingly, these statements should be read in conjunction with the audited consolidated financial statements of Petrofund Energy Trust ("Petrofund" or the "Trust") as at December 31, 2003 and 2002 and for each of the years in the three-year period ended December 31, 2003. (a) Acquisition of Ultima Energy Trust On June 16, 2004 Petrofund Energy Trust acquired Ultima Energy Trust ("Ultima") and its wholly owned subsidiaries Wholly Owned Subsidiary A subsidiary whose parent company owns 100% of its common stock. Notes: In other words, the parent company owns the company outright and there are no minority owners. . After the amalgamation amalgamation /amal·ga·ma·tion/ (ah-mal´gah-ma´shun) trituration (3). amalgamation ( of Ultima Energy Inc., a subsidiary of Ultima, into Petrofund Corp. ("PC") and the wind-up wind-up or wind·up n. 1. a. The act of bringing something to an end. b. A concluding part; a conclusion. 2. of the inactive in·ac·tive adj. 1. Not active or tending to be active. 2. a. Not functioning or operating; out of use: inactive machinery. b. subsidiaries, the only remaining Ultima entity is Ultima Ventures Trust. The name of this entity has been changed to Petrofund Ventures Trust. The consolidated financial statements of Petrofund Energy Trust include the results of the Ultima entities effective June 17, 2004. (b) Goodwill Under the terms of section 1581 of the CICA handbook, goodwill must be recorded upon a corporate acquisition when the total purchase price exceeds the fair value of the net identifiable assets and liabilities of the acquired company. The goodwill balance is not amortized but instead is assessed for impairment each reporting period. Impairment is determined based on the fair value of the reporting entity (the consolidated Trust) compared to the book value of the reporting entity. Any impairment will be charged to the earnings in the period in which the fair value of the reporting entity is below the book value. 2. RETROACTIVE Having reference to things that happened in the past, prior to the occurrence of the act in question. A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a CHANGE IN ACCOUNTING POLICIES (a) Asset Retirement Obligations Effective January 1, 2004, the Trust adopted the new Canadian accounting standard for accounting for Asset Retirement Obligations ("ARO"). This standard requires recognition of a liability for the future retirement obligations associated with property, plant and equipment. These obligations are initially measured at fair value, which is the discounted future value of the liability. The liability is accreted each period for the change in present value and the accretion expense In accounting, accretion expense is the expense created when updating the present value(PV) of a financial instrument. For example, if one originally recognizes the present value of a liability at $650, which has a future value (FV) of $1000, every year one must increase the is charged to income. The fair value of the liability is capitalized as part of the cost of the related asset and amortized to expense over its useful life. Previously, the Trust recognized a provision for future site reclamation and abandonment "SR&A" costs calculated on the unit-of-production method over the life of the petroleum and natural gas properties based on total estimated proved reserves proved reserves The quantity of minerals expected to be recoverable under current economic and operating conditions. The amount of proved reserves is important in valuing the stock of a company with significant holdings in natural resources. and an estimated future liability. The Trust has estimated the net present value of its total ARO to be $34.4 million as at December 31, 2003, based on a total future liability of $85.5 million. These payments are expected to be made over the next 35 years. The Trust's credit adjusted risk free rate of 6.5 per cent and an inflation rate of 1.5 per cent were used to calculate the present value of the ARO. Net income before income taxes for the three and nine months ended September 30, 2004 increased by $1.1 million ($657,000 after tax) and $3.0 million ($1.8 million after tax) respectively; as a result of adopting this policy, with negligible  This article or section is written like a personal reflection or and may require .Please [ improve this article] by rewriting this article or section in an . impact on net income per unit. The impact of this change on the balance sheet is as follows:
Net Future ARO
December 31, 2003 Restatement PP&E Tax Liability
---------------------------------------------------------------------
Balance, beginning of period $ 879,633 $ 77,005 $ 16,846
---------------------------------------------------------------------
Initial fair value of ARO
liability 32,771 - 32,771
Depletion expense (14,141) - -
Accretion expense - - 10,230
Previously recorded SR&A
provision expense - - (25,484)
Future income tax adjustment - 2,060 -
---------------------------------------------------------------------
Change in accounting policies 18,630 2,060 17,517
---------------------------------------------------------------------
Balance, beginning of period
as Restated $ 898,263 $ 79,065 $ 34,363
---------------------------------------------------------------------
---------------------------------------------------------------------
Change in Accumulated Earnings
December 31, 2003 Restatement Prior 2003 2003 Total
---------------------------------------------------------------------
Balance, beginning of period $ 199,200
---------------------------------------------------------------------
Initial fair value of ARO
liability -
Depletion expense $ (11,977) $ (2,164) (14,141)
Accretion expense (7,986) (2,244) (10,230)
Previously recorded SR&A
provision expense 19,284 6,200 25,484
Future income tax adjustment (1,740) (320) (2,060)
---------------------------------------------------------------------
Change in accounting policies (2,419) 1,472 (947)
---------------------------------------------------------------------
Balance, beginning of period
as Restated $ (2,419) $ 1,472 $ 198,253
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Financial Instruments In December 2001, the Canadian Institute of Chartered Accountants The Canadian Institute of Chartered Accountants (CICA) is the umbrella body for the Chartered Accountant profession in Canada and Bermuda. Membership of the CICA totals 70,000 Chartered Accountants and 8,500 students. ("CICA") issued Accounting Guideline 13, "Hedging Relationships" ("AcG-13"), effective for fiscal years commencing on or after July July: see month. 1, 2003. AcG-13 established certain conditions for when hedge accounting may be applied. If hedge accounting is not applied, the fair values of derivative financial instruments are recorded as an asset or a liability on the balance sheet. Petrofund adopted the guideline effective January 1, 2004. Petrofund enters into numerous derivative financial instruments to reduce price volatility and establish minimum prices for a portion of its oil and natural gas production. These contracts are effective economic hedges, however, a number do not qualify for hedge accounting due to the very detailed and complex rules outlined in AcG-13. Petrofund has elected to use the fair value method of accounting for all derivative transactions. All outstanding derivative instruments as of January 1, 2004, have been recorded as assets or liabilities, as appropriate, at fair value. The net negative fair value of the contracts at January 1, 2004 of $6.8 million plus costs incurred on the acquisition of the derivative instruments in the amount of $0.8 million are being amortized to expense over the remaining term of the contracts. The total amount of $7.6 million plus $1.4 million relating to Ultima, less $6.9 million amortized to expense in the nine months ended September 30, 2004 or $2.1 million, has been recorded as a current asset or liability on the balance sheet as deferred loss/gain on the commodity contracts at September 30, 2004. The negative fair value of the commodity contracts at September 30, 2004 of $38.1 million has been recorded on the balance sheet as "commodity contracts" under assets or liabilities, as appropriate. The change in the fair value of the contracts from January 1, 2004 to September 30, 2004 of $25.7 million plus the amortized amount of $6.8 million is recorded in the income statement on a separate line as "gain/loss on commodity contracts". The line item also includes realized losses on commodity contracts of $28.3 million which were previously deducted from oil and natural gas sales. The comparative numbers for 2003 represent realized losses on commodity contracts which were previously netted against sales.
Jan 1, Ultima Amortized Sept. 30,
Deferred Hedging 2004 Acquisition to Expense 2004
---------------------------------------------------------------------
Current Asset
Deferred hedging loss $ 8,075 $ 1,357 $ (7,167) $ 2,265
Cost of deferred hedging 820 - (701) 119
---------------------------------------------------------------------
8,895 1,357 (7,868) 2,384
Current Liability
Deferred hedging gain (1,304) - 1,022 (282)
---------------------------------------------------------------------
$ 7,591 $ 1,357 $ (6,846) $ 2,102
---------------------------------------------------------------------
---------------------------------------------------------------------
Jan 1, Ultima Change in Sept. 30,
Commodity Contracts 2004 Acquisition Fair Value 2004
---------------------------------------------------------------------
Current Asset
Commodity contracts $ 1,304 $ - $ (855) $ 449
Current Liability
Commodity contracts (8,075) (5,584) (20,447) (34,106)
Long-term Liability
Commodity contracts - - (4,439) (4,439)
---------------------------------------------------------------------
$(6,771) $(5,584) $ (25,741) $(38,096)
---------------------------------------------------------------------
---------------------------------------------------------------------
(c) Transportation Costs CICA Handbook Section 1100, "Generally Accepted Accounting Principles", is effective for fiscal years beginning on or after October 1, 2003. This standard focuses on what constitutes Canadian generally accepted accounting principles and its sources, including the primary sources of generally accepted accounting principles. In prior years, it had been industry practice to record revenue net of related transportation costs. In accordance with the new accounting standard, revenue is now reported before transportation costs with separate disclosure in the consolidated statement of operations of transportation costs. Petroleum and natural gas sales and transportation costs both increased $1.8 million in the third quarter of 2004 and $1.4 million in 2003 and $4.3 million and $4.1 million for the nine months ended September 30, 2004 and 2003 respectively. This change in classification has no impact on net income and the comparative figures have been restated to conform to Verb 1. conform to - satisfy a condition or restriction; "Does this paper meet the requirements for the degree?" fit, meet coordinate - be co-ordinated; "These activities coordinate well" the presentation adopted for the current period. 3. ACQUISITION Ultima Energy Trust On June 16, 2004, Petrofund Energy Trust acquired Ultima Energy Trust for 0.442 of a Petrofund unit on a tax-free tax-free adj. Not subject to taxation; tax-exempt. tax-free Adjective not needing to have tax paid on it: a tax-free lump sum Adj. 1. rollover A graphic element in an application or on a Web page that changes its color or shape when the pointer is moved (rolled) over it. See JavaScript rollover. See also n-key rollover. basis. The value assigned to each Petrofund unit was $17.12 based on the weighted average trading price Trading price The price at which a security is currently selling. of the Trust units for the period commencing five days before and ending five days after the acquisition was announced. Petrofund issued 26.4 million Trust units which were distributed to former unitholders of Ultima. The acquisition was accounted for using the purchase method. A summary of the estimated net assets Net assets The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand. net assets See owners' equity. acquired is as follows:
$000's
-------------------------------------------------------------------
Current assets $ 23,601
Asset retirement reserve 1,549
Goodwill 176,585
Oil and gas royalty and property interests 384,987
Current liabilities (17,791)
Long-term debt (110,407)
Asset retirement obligations (16,672)
Future income taxes 12,861
-------------------------------------------------------------------
$ 454,713
-------------------------------------------------------------------
-------------------------------------------------------------------
4. TRUST UNITS
Number
Authorized: unlimited number of Trust units of units $000's
---------------------------------------------------------------------
Issued
December 31, 2003 72,688,577 $ 1,020,677
Issued for Ultima Energy Trust
acquisition (Note 3) 26,449,102 452,817
Options exercised 226,799 2,644
Unit purchase plan 3,979 63
Unit incentive plans 36,799 634
---------------------------------------------------------------------
September 30, 2004 99,405,256 $ 1,476,835
---------------------------------------------------------------------
---------------------------------------------------------------------
The weighted average Trust units/Exchangeable Shares outstanding are
as follows:
3 months ended September 30, 9 months ended September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Basic 100,266,733 66,142,502 84,064,168 59,364,939
Diluted 100,353,257 66,280,745 84,210,974 59,491,134
---------------------------------------------------------------------
---------------------------------------------------------------------
Trust units/Exchangeable Shares, at end of period:
For the period ended September 30, 2004 2003
---------------------------------------------------------------------
Trust units outstanding 99,405,256 64,776,420
Trust units issuable on exchangeable shares 939,147 1,939,147
---------------------------------------------------------------------
100,344,403 66,715,567
---------------------------------------------------------------------
---------------------------------------------------------------------
5. EXCHANGEABLE SHARES The number of Exchangeable Shares to be issued in connection with the internalization of the management contract was determined based on a negotiated value of $12.17 per share as set out in the Information Circular dated March 10, 2003. For accounting purposes, the 1,939,147 Exchangeable Shares were deemed to be issued at a value of $11.20 per share, being the average trading value of the Trust units for the last ten days prior to the closing date. Initially, each Exchangeable Share was exchangeable into one Trust Unit. The exchange ratio is adjusted from time to time to reflect the per unit distributions paid to unitholders after the closing date. Under the terms of the Exchangeable Share Agreement, the holder of the Exchangeable Shares is entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: to redeem redeem v. to buy back, as when an owner who had mortgaged his/her real property pays off the debt. The term also refers to paying the amount due and all charges after a foreclosure (due to failure to make payments when due) has begun. for cash the number of shares equal to the cash distributions that would have been received had the Exchangeable Shares been converted to Trust units. As a result of the redemption The liberation of an estate in real property from a mortgage. Redemption is the process by which land that has been mortgaged or pledged is bought back or reclaimed. It is accomplished through a payment of the debt owed or a fulfillment of the other conditions. feature, the number of Trust units issuable upon conversion is expected to remain constant over time. As the substance of this feature is to allow the holder of the Exchangeable Shares to receive cash distributions, the redemption has been accounted for as a distribution of earnings rather than a return of capital. At September 30, 2004, 780,094 Exchangeable Shares were outstanding, at an exchange ratio of 1.20389 per Trust unit. Issued and Outstanding Number of Shares $000's --------------------------------------------------------------------- December 31, 2003 851,471 $ 10,518 Redemption of shares (71,377) - --------------------------------------------------------------------- Balance at end of period 780,094 10,518 Exchange ratio, end of period 1.20389 - --------------------------------------------------------------------- Trust units issuable upon conversion 939,147 $ 10,518 --------------------------------------------------------------------- --------------------------------------------------------------------- 6. BANK LOAN The revolving period on the bank loan has been extended for an additional 364 day period ending May 28, 2005 with all other terms and conditions remaining the same. The maximum on the credit facility was increased to $325 million on June 30, 2004. 7. DISTRIBUTIONS ACCRUING TO UNITHOLDERS Under the terms of the Trust Indenture An agreement declaring the benefits and obligations of two or more parties, often applicable in the context of Bankruptcy and bond trading. The term indenture primarily describes secured contracts and has several applications in U.S. law. , the Trust makes monthly distributions within a specified period following the end of each month ("Cash Distribution Date"). Distributions are equal to amounts received by the Trust on the Cash Distribution Date less permitted expenses. Distributions to Unitholders coincide with cash receipts of royalty income from the Trust. An overall analysis is as follows:
For the period ended Cash Distribution Date 2004 2003
-----------------------------------------------------------------
November 30 January 31 $ 0.16 $ 0.15
December 31 February 28 0.16 0.16
January 31 March 31 0.16 0.17
February 29 April 30 0.16 0.17
March 31 May 31 0.16 0.18
April 30 June 30 0.16 0.18
May 31 July 31 0.16 0.18
June 30 August 31 0.16 0.18
July 31 September 30 0.16 0.18
-----------------------------------------------------------------
Cash distributions per Trust unit $ 1.44 $ 1.55
-----------------------------------------------------------------
-----------------------------------------------------------------
Reconciliation of Distributions Accruing to Unitholders
3 months 9 months
ended September 30, ended September 30,
------------------- -------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Distributions payable,
beginning of period $ 26,029 $ 60,054 $ 53,452 $ 30,065
---------------------------------------------------------------------
Distributions accruing
during the period
Cash flow provided by
operating activities 62,680 55,356 188,739 179,224
Net change in non-cash
operating working
capital balance 2,395 (15,397) (24,797) (34,885)
Amortization of the cost
of commodity contracts (238) - (701) -
Redemption of
exchangeable shares (450) (1,047) (1,352) (1,745)
Asset retirement reserve (482) (198) (1,228) (576)
Capital lease repayment (90) (971) (264) (2,859)
---------------------------------------------------------------------
Cash flow before capital
reinvestment 63,815 37,743 160,397 139,159
Weyburn capital lease
obligations (1) - (34,931) -
Capital expenditures (15,000) (7,500) (30,000) (22,500)
---------------------------------------------------------------------
Total distributions accruing
during the period 48,814 30,243 95,466 116,659
Distributions paid (47,684) (34,650) (121,759) (91,077)
---------------------------------------------------------------------
Distributions payable, end
of period $ 27,159 $ 55,647 $ 27,159 $ 55,647
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Cash Distributions
3 months 9 months
ended September 30, ended September 30,
------------------- -------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Accumulated cash distributions,
Beginning of period $628,709 $514,765 $581,155 $427,651
Distributions accruing
during the period 48,814 30,243 95,466 116,659
Redemption of exchangeable
shares 450 1,047 1,352 1,745
---------------------------------------------------------------------
Accumulated cash distributions,
end of period $677,973 $546,055 $677,973 $546,055
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8. ASSET RETIREMENT OBLIGATIONS and RESERVE FUND (a) Asset Retirement Obligations The total future asset retirement obligation was estimated by management based on the Trust's net ownership interest in wells and facilities and the estimated timing of the costs to be incurred in future periods. The following reconciles the Trust's outstanding ARO for the periods indicated: For the period ended September 30, 2004 2003 --------------------------------------------------------------------- Balance at beginning of year $ 16,846 $ 15,298 Initial fair value of ARO liability 32,771 30,497 Accretion expense 10,230 7,986 Previous recorded SR&A provision (25,484) (19,284) --------------------------------------------------------------------- Balance as at January 1, 2004 and 2003, as restated 34,363 34,497 Increase in liabilities during the period 540 1,706 Accretion expense during the period 1,932 1,683 Actual costs incurred during the period (3,222) (2,535) Acquisition of Ultima properties 16,672 - --------------------------------------------------------------------- Balance at end of period $ 50,285 $ 35,351 --------------------------------------------------------------------- --------------------------------------------------------------------- (b) Asset Retirement Reserve Fund Previously this cash fund was being built up at a rate of $0.075 per boe produced. Effective January 1, 2004, this was increased to $0.15 per boe produced. The total amount of the reserve fund at September 30, 2004 is $6.6 million, which includes the addition of $1.5 million on the acquisition of Ultima. 9. LONG-TERM COMMITMENTS In the second quarter of 2004, PC acquired an additional interest in the Weyburn unit as a part of the Ultima acquisition which resulted in an increase in CO2 purchase commitments. Subsequent to end of the quarter, PC renewed its office lease and extended the term. The table below has been updated to reflect these changes.
(thousands of dollars) 2004 2005 2006 2007 2008
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Capital leases $ 0.4 $ 0.6 $ - $ - $ -
Office lease 1.6 1.8 2.1 2.2 2.3
Processing and
transportation agreement 1.8 1.8 2.0 2.1 2.2
CO2 purchases 8.8 10.6 9.3 7.9 7.5
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$ 12.6 $ 14.8 $ 13.4 $ 12.2 $ 12.0
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10. DERIVATIVE FINANCIAL INSTRUMENTS AND PHYSICAL CONTRACTS The Trust enters into various pricing mechanisms to reduce price volatility and establish minimum prices for a portion of its oil and gas production. These include fixed price contracts and the use of derivative financial instruments. The outstanding derivative financial instruments and related contracts as at September 30, 2004 and the related unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. or losses are summarized separately below:
Unrealized
Gain
Natural Volume Price Delivery (Loss)
Gas Term mcf/d $/mcf Point $000's
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Collar April 1, 2004 to 9,475 $5.17-$7.28 AECO $ -
October 31, 2004
Collar April 1, 2004 to 9,475 $5.07-$6.81 AECO -
October 31, 2004
Collar April 1, 2004 to 1,895 $5.28-$7.39 AECO -
October 31, 2004
Fixed April 1, 2004 to 4,737 $5.33 AECO (50)
October 31, 2004
Fixed April 1, 2004 to 4,737 $6.26 AECO 84
October 31, 2004
Collar April 1, 2004 to 1,895 $5.28-$7.65 AECO -
October 31, 2004
Fixed May 1, 2004 to 4,737 $6.86 AECO 166
October 31, 2004
Three Way November 1, 2004 to 9,475 $4.74-$5.80- AECO (1,040)
Collar March 31, 2005 $8.97
Collar November 1, 2004 to 9,475 $6.23-$10.82 AECO (406)
March 31, 2005
Collar November 1, 2004 to 9,475 $6.23-$14.67 AECO (32)
March 31, 2005 to
Collar April 1, 2005 to 4,737 $6.33-$8.44 AECO (39)
October 31, 2005
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Total $(1,317)
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Unrealized
Volume Price Delivery Loss
Oil Term bbl/d $/bbl Point $000's
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Fixed Price January 1, 2004 to 1,000 $35.01 Edmonton $ (2,469)
December 31, 2004
Fixed Price July 1, 2004 to 1,000 $36.27 Edmonton (2,339)
December 31, 2004
Three Way January 1, 2004 to 800 $25.23- Edmonton (1,986)
Collar December 31, 2004 $30.28-$34.57
Three Way January 1, 2004 to 700 $26.49- Edmonton (1,535)
Collar December 31, 2004 $31.54-$37.85
Three Way July 1, 2004 to 2,000 $26.83- Edmonton (5,824)
Collar December 31, 2004 $30.61-$36.59
Collar October 1, 2004 to 2,000 $30.28- Edmonton (4,851)
December 31, 2004 $35.32
Three Way January 1, 2005 to 1,000 $25.23- Edmonton (7,113)
Collar December 31, 2005 $30.28-$36.59
Three Way January 1, 2005 to 1,000 $30.04- Edmonton (5,076)
Collar December 31, 2005 $33.82-$42.65
Three Way January 1, 2005 to 1,000 $28.76- Edmonton (5,400)
Collar December 31, 2005 $33.81-$41.39
Collar January 1, 2005 to 1,000 $49.20- Edmonton (243)
March 31, 2005 $61.82
Three Way April 1, 2005 to 1,000 $44.15- Edmonton (141)
Collar June 30, 2005 $50.46
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Total $(36,977)
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The oil hedges are transacted in U.S. dollars. They have been
converted to Canadian dollars at the September 30, 2004 closing rate
of $1.2616 C$:US$.
Unrealized
Volume Price Delivery Gain
Electricity Term MW/h $/MWh Point $000's
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Fixed Price February 1, 2004 to 2.0 $44.5 Alberta Power $189
December 31, 2005 Pool
Fixed Price January 1, 2004 to 1.0 $51.0 Alberta Power 10
December 31, 2004 Pool
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Total $199
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Derivative financial instruments and physical hedge contracts involve a degree of credit risk, which the Trust controls through the use of financially sound counterparties Counterparties The parties on either side of an interest rate swap or a currency, equity or commodity swap, or to an options or futures position. . Market risk relating to changes in value or settlement cost of the Trust's derivative financial instruments is essentially offset by gains or losses on the underlying physical product sales. 11. SUBSEQUENT EVENT On October 13, 2004, Petrofund announced that it is holding a special meeting of unitholders to consider, and if thought fit, approve amendments to its trust indenture that would provide for a reclassification of its trust unit capital (the "Reclassification"). Under the Reclassification, existing units of the Trust will be reclassified into Class R Units, which can only be held by Canadian residents, and Class N Units, which will contain no residency restrictions. Unitholders will also be asked to consider other amendments to Petrofund's trust indenture at the special meeting. The Reclassification is aimed at enhancing the Trust's ability to regulate reg·u·late v. 1. To control or direct according to rule, principle, or law. 2. To adjust to a particular specification or requirement. 3. To adjust a mechanism for accurate and proper functioning. 4. non-resident ownership of units to ensure the Trust continues to qualify as a mutual fund trust under the Income Tax Act (Canada Canada (kăn`ədə), independent nation (2001 pop. 30,007,094), 3,851,787 sq mi (9,976,128 sq km), N North America. Canada occupies all of North America N of the United States (and E of Alaska) except for Greenland and the French islands of ) (the "Tax Act"), while maintaining active markets for the units and the ability to raise capital in Canada and the United States. Petrofund Energy Trust is a Calgary based royalty trust royalty trust An ownership interest in certain assets, generally crude oil or gas production and real estate. Unlike the usual corporate organization, a trust arrangement permits income and tax benefits to flow through to the individual owners. that acquires and manages producing oil and gas properties in Western Canada
Western Canada, commonly referred to as the West . The Trust makes monthly cash distributions to unitholders that are derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. from the Trust's cash flow from these properties. Petrofund Energy Trust was founded in 1988 and was one of the first oil and gas royalty trusts in Canada. This news release may include statements about expected future events and/or financial results that are forward-looking in nature and subject to risks and uncertainties. For those statements, we claim the protection of the safe harbor for forward-looking statements provisions contained in the U.S. Private Securities Litigation Reform Act of 1995. Petrofund Energy Trust cautions that actual performance will be affected by a number of factors, many of which are beyond its control. Future events and results may vary substantially from what Petrofund Energy Trust currently foresees. Discussion of the various factors that may affect future results is contained in Petrofund Energy Trust's recent filings with the Securities and Exchange Commission and Canadian securities regulatory authorities Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest regulatory agency administrative body, administrative unit - a unit with administrative responsibilities . In regards to barrels of oil equivalent (boe), boes may be misleading, particularly if used in isolation. A BOE conversion of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. PETROFUND ENERGY TRUST Jeffery E. Errico President and Chief Executive Officer |
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