/FIRST AND FINAL ADD - TO043 - Pengrowth Energy Trust Earnings/
PENGROWTH ENERGY TRUST UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 PENGROWTH ENERGY TRUST CONSOLIDATED BALANCE
SHEETS (Stated in thousands of dollars) As at As at September 30
December 31 2004 2003
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ASSETS (unaudited) (audited) CURRENT ASSETS Cash and term deposits
$ - $ 64,154 Accounts receivable 108,369 65,570 Inventory 529 699
Marketable securities (Note 12) 2,680 -
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111,578 130,423 REMEDIATION TRUST FUND 8,341 7,392 DEFERRED CHARGES
(Note 9) 4,124 5,544 GOODWILL (Note 5) 168,508 - PROPERTY, PLANT
AND EQUIPMENT AND OTHER ASSETS 1,985,737 1,530,359
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$ 2,278,288 $ 1,673,718
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LIABILITIES AND UNITHOLDERS' EQUITY CURRENT LIABILITIES Bank
indebtedness $ 4,556 $ - Accounts payable and accrued liabilities
92,365 54,196 Distributions payable to unitholders 66,912 52,139
Due to Pengrowth Management Limited 6,286 1,122 Note payable 10,000
10,000 Current portion of contract liabilities (Note 5) 6,131 -
Current portion of long term debt (Note 4) 236,680 -
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422,930 117,457 NOTE PAYABLE 35,000 35,000 CONTRACT LIABILITIES
(Note 5) 19,665 - LONG-TERM DEBT (Note 4) 355,320 259,300 ASSET
RETIREMENT OBLIGATIONS (Note 7) 158,784 102,528 FUTURE INCOME TAXES
(Note 8) 51,014 - TRUST UNITHOLDERS' EQUITY Trust Unitholders'
capital (Note 6) 2,091,516 1,872,924 Contributed surplus (Note 6)
1,727 189 Accumulated earnings 695,919 573,312 Accumulated
distributable cash (1,553,587) (1,286,992)
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1,235,575 1,159,433 COMMITMENTS (Note 13) $ 2,278,288 $ 1,673,718
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See accompanying notes to the consolidated financial statements.
PENGROWTH ENERGY TRUST CONSOLIDATED STATEMENTS OF INCOME AND
ACCUMULATED EARNINGS (Stated in thousands of dollars) (Unaudited)
Three months ended Nine months ended September 30 September 30 2004
2003 2004 2003
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(restated (restated see Note 2) see Note 2) REVENUES Oil and gas
sales $ 222,848 $ 162,819 $ 582,365 $ 536,881 Processing and other
income 2,871 2,408 8,495 7,387 Crown royalties, net of incentives
(42,456) (26,114) (93,239) (88,890) Freehold royalties and mineral
taxes (3,085) (1,594) (7,831) (5,846)
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180,178 137,519 489,790 449,532 Interest and other income 78 364
1,204 419
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NET REVENUE 180,256 137,883 490,994 449,951 EXPENSES Operating
47,163 35,845 117,149 109,980 Transportation 2,423 2,124 5,797
6,163 Amortization of injectants for miscible floods 4,694 7,610
14,721 26,506 Interest 8,650 4,402 20,582 14,390 General and
administrative 6,142 3,901 17,538 11,908 Management fee 2,493 1,817
10,317 7,912 Foreign exchange loss (gain) (Note 10) (13,688) 24
(6,651) (19,452) Depletion and depreciation 69,323 45,436 177,923
134,652 Accretion (Note 7) 3,093 1,537 7,465 4,473
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130,293 102,696 364,841 296,532
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NET INCOME BEFORE TAXES 49,963 35,187 126,153 153,419 Income tax
expense (recovery) (Note 8) Capital 1,474 379 2,849 1,477 Future
(2,782) - 697 -
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(1,308) 379 3,546 1,477 NET INCOME $ 51,271 $ 34,808 $ 122,607 $
151,942
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Accumulated earnings, beginning of period 644,648 501,149 573,312
384,015
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ACCUMULATED EARNINGS, END OF PERIOD $ 695,919 $ 535,957 $ 695,919 $
535,957
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NET INCOME PER UNIT (Note 6) Basic $ 0.377 $ 0.293 $ 0.927 $ 1.336
Diluted $ 0.376 $ 0.291 $ 0.923 $ 1.330
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See accompanying notes to the consolidated financial statements.
PENGROWTH ENERGY TRUST CONSOLIDATED STATEMENTS OF CASH FLOW (Stated
in thousands of dollars) (Unaudited) Three months ended Nine months
ended September 30 September 30 2004 2003 2004 2003
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(restated (restated see Note 2) see Note 2) CASH PROVIDED BY (USED
FOR): OPERATING Net income $ 51,271 $ 34,808 $ 122,607 $ 151,942
Depletion, depreciation and accretion 72,416 46,973 185,388 139,125
Future income taxes (2,782) - 697 - Contract liability amortization
(1,555) - (2,379) - Amortization of injectants 4,694 7,610 14,721
26,506 Purchase of injectants (3,031) (2,231) (12,239) (17,077)
Expenditures on remediation (1,199) (778) (4,029) (1,615)
Unrealized foreign exchange loss (gain) (Note 10) (14,440) 480
(6,980) (20,260) Trust unit based compensation 554 39 1,925 105
Amortization of deferred charges 473 76 1,420 127 Loss on sale of
marketable securities - - - 94
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Funds generated from operations 106,401 86,977 301,131 278,947
Changes in non-cash operating working capital (Note 11) 9,857
13,137 9,749 (5,053)
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116,258 100,114 310,880 273,894
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FINANCING Distributions (88,293) (74,426) (251,822) (229,818)
Change in long-term debt, net 14,680 (64,780) 339,680 (26,261)
Proceeds from issue of trust units 13,036 143,850 218,205 168,218
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(60,577) 4,644 306,063 (87,861)
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INVESTING Expenditures on property acquisitions (20,852) (146)
(574,045) (61,488) Expenditures on property, plant and equipment
(43,455) (20,678) (107,020) (56,193) Proceeds on property
dispositions - 84 - 2,835 Deferred Charges - (3) - (2,141) Change
in Remediation Trust Fund (276) (277) (949) (457) Purchase of
marketable securities (2,680) - (2,680) - Proceeds from sale of
marketable securities - - - 1,812 Change in non-cash investing
working capital (Note 11) 1,385 (1,410) (959) (652)
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(65,878) (22,430) (685,653) (116,284)
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INCREASE (DECREASE) IN CASH AND TERM DEPOSITS (10,197) 82,328
(68,710) 69,749 CASH AND TERM DEPOSITS (BANK INDEBTEDNESS) AT
BEGINNING OF PERIOD 5,641 (4,287) 64,154 8,292
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CASH AND TERM DEPOSITS (BANK INDEBTEDNESS) AT END OF PERIOD $
(4,556) $ 78,041 $ (4,556) $ 78,041
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See accompanying notes to the consolidated financial statements.
PENGROWTH ENERGY TRUST NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS SEPTEMBER 30, 2004 (Tabular amounts are stated in
thousands of dollars except per unit amounts) 1. SIGNIFICANT
ACCOUNTING POLICIES The interim consolidated financial statements
of Pengrowth Energy Trust include the accounts of Pengrowth Energy
Trust, Pengrowth Corporation and its subsidiaries (collectively
referred to as "Pengrowth"). The financial statements have been
prepared by management in accordance with accounting principles
generally accepted in Canada. The interim consolidated financial
statements have been prepared following the same accounting
policies and methods of computation as the consolidated financial
statements for the fiscal year ended December 31, 2003. The
disclosures provided below are incremental to those included with
the annual consolidated financial statements. The interim
consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto in
Pengrowth's annual report for the year ended December 31, 2003.
GOODWILL Goodwill must be recorded upon a corporate acquisition
when the total purchase price exceeds 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 compared to the net book value of the reporting
entity. Any impairment will be charged to earnings in the period in
which the fair value of the reporting entity is below the book
value. 2. CHANGE IN ACCOUNTING POLICIES Prior period comparative
balances have been restated due to the changes in accounting
polices described in Note 3 of the consolidated financial
statements for the fiscal year ended December 31, 2003. As a result
of the changes in accounting policies, net income for the three
months and nine months ended September 30, 2003 increased by
$1,783,000 and $5,432,000, respectively. Net income per unit basic
and diluted for the three months and nine months ended September
30, 2003 increased by $0.015 per unit and $0.048 per unit,
respectively. 3. DISTRIBUTABLE CASH There is no standardized
measure of Distributable Cash and therefore Distributable Cash, as
presented below, may not be comparable to similar measures
presented by other trusts. Three months ended Nine months ended
September 30, September 30, 2004 2003 2004 2003
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Net income $ 51,271 $ 34,808 $ 122,607 $ 151,942 Add (Deduct):
Depletion, depreciation and accretion 72,416 46,973 185,388 139,125
Future income tax expense (recovery) (2,782) - 697 - Asset
retirement obligation expenses not covered by the trust funds and
contributions to Remediation Trust Funds (1,539) (1,118) (5,166)
(2,260) Unrealized foreign exchange loss (gain) (Note 10) (14,440)
480 (6,980) (20,260) Contract liability amortization (1,555) -
(2,379) - Non-cash compensation expense 554 39 1,925 105 Other 379
(125) 128 125 Distributable cash before withholding 104,304 81,057
296,220 268,777 Cash withheld to fund capital expenditures (10,434)
(8,106) (29,625) (26,831)
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Distributable cash 93,870 72,951 266,595 241,946 Less: Actual
distributions paid or declared (88,406) (66,493) (261,131)
(235,488)
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Balance to be distributed $ 5,464 $ 6,458 $ 5,464 $ 6,458
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Actual distributions paid or declared per unit $ 0.67 $ 0.63 $ 1.94
$ 2.05
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The per unit amount of distributions paid or declared reflect
actual distributions paid or declared based on units outstanding at
the time. Distributions are declared payable during the month
following the month in which the distributions were earned.
Distributions are paid to unitholders on the 15th day of the second
month after the distributions are earned. 4. LONG TERM DEBT As at
As at September 30, December 31, 2004 2003
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U.S. dollar denominated debt: U.S. $150 million senior unsecured
notes at 4.93% due April 2010 $ 189,240 $ 194,475 U.S. $50 million
senior unsecured notes at 5.47% due April 2013 63,080 64,825
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252,320 259,300
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Operating line of credit 16,680 - Canadian dollar revolving credit
borrowings 103,000 - Canadian dollar acquisition borrowing 220,000
-
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592,000 259,300 Less: Current portion of long-term debt (236,680) -
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$ 355,320 $ 259,300
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On September 30, 2004, Pengrowth had a $275 million revolving
unsecured credit facility syndicated among eight financial
institutions with an extendible 364 day revolving period and a two
year amortization term period. In addition, it has a $35 million
demand operating line of credit. The facilities are currently
reduced by outstanding letters of credit in the amount of
approximately $23 million. A $220 million unsecured acquisition
facility with a one year term was put in place May 31, 2004 to fund
the Murphy acquisition (see Note 5). Interest payable on amounts
drawn on any of these facilities is at the prevailing bankers'
acceptance rates plus stamping fees, lenders' prime lending rates,
or U.S. libor rates plus applicable margins, depending on the form
of borrowing by the Corporation. The margins and stamping fees on
the revolving credit facility vary from 0.25 percent to 1.50
percent depending on financial statement ratios and the form of
borrowing. The margins and stamping fees on the acquisition
facility for the first six month term vary from 1.50 percent to
2.50 percent and for the final six month term, the margins and
stamping fees vary from 4.0 percent to 5.0 percent depending on the
form of borrowing. In the event that the $220 million acquisition
facility is still outstanding on November 27, 2004, an additional
fee of $1.7 million will be payable to the banks providing this
facility. The revolving credit facility will revolve until May 30,
2005, whereupon it may be renewed for a further 364 days, subject
to satisfactory review by the lenders, or converted into a term
facility. One third of the amount outstanding would be repaid in
equal quarterly installments in each of the first two years with
the final one third owing to be repaid upon maturity of the term
period. Pengrowth can post, at its option, security suitable to the
banks in lieu of the first year's payments. In such an instance, no
principal payment would be made to the banks for one year following
the date of non-renewal. 5. CORPORATE ACQUISITION On May 31, 2004,
Pengrowth acquired all of the issued and outstanding shares of a
company which had interests in oil and natural gas assets in
Alberta and Saskatchewan (the "Murphy Assets"). The transaction was
accounted for using the purchase method of accounting with the
allocation of the purchase price and consideration as follows:
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Net assets acquired: Working capital $ 8,086 Property, plant, and
equipment 502,924 Goodwill 168,508 Asset retirement obligations
(50,345) Future income taxes (50,317) Contract liabilities (28,175)
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$ 550,681
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Financed by: Cash and term deposits $ 224,700 Acquisition facility
325,000 Acquisition costs 981
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$ 550,681 -------------
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Property, plant and equipment of $503 million represents the fair
value of the assets acquired determined in part by an independent
reserve evaluation, net of purchase price adjustments. Goodwill of
$169 million was determined based on the excess of the total
consideration paid less the value assigned to the identifiable
assets and liabilities including the future income tax liability.
The future income tax liability was determined based on the enacted
income tax rate of approximately 34 percent as at May 31, 2004.
Contract liabilities include a natural gas fixed price sales
contract (see Note 12) and firm pipeline demand charge contracts.
The fair value of these liabilities has been determined on the date
of acquisition and a liability of $21,824,000 has been recorded for
the natural gas fixed price sales contract and $6,351,000 has been
recorded for the firm pipeline demand charge contracts. The
liabilities will be reduced as the contracts are settled. Results
from operations of the acquired Murphy Assets subsequent to May 31,
2004 are included in the consolidated financial statements. 6.
TRUST UNITS The total authorized capital of Pengrowth is
500,000,000 trust units of which 251,250,000 are authorized as
Class B trust units and 248,750,000 are authorized as Class A trust
units. September 30, 2004 December 31, 2003
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Trust Units Number Number Issued of units Amount of units Amount
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Balance, beginning of period 123,873,651 $ 1,872,924 110,562,327 $
1,662,726 Issued for cash 10,900,000 200,560 8,500,000 144,075
Less: issue expenses - (10,710) - (7,820) Issued for cash on
exercise of trust unit options and rights 547,974 8,735 3,358,442
51,701 Issued for cash under Distribution Reinvestment Plan
("DRIP") 543,888 9,636 1,452,882 22,242 Trust unit rights incentive
plan (non-cash exercised) - 259 - - Royalty units exchanged for
trust units 700 - - -
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Balance, prior to conversion 135,866,213 $ 2,081,404 123,873,651 $
1,872,924 Converted to Class B trust units (135,866,213)
(2,081,404) - -
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Balance, end of period - $ - 123,873,651 $ 1,872,924
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Class A Trust Units Class B Trust Units
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For the period from July 27, 2004 to September 30, 2004
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Trust Units Number Number Issued of units Amount of units Amount
---------------------------------------------------------------------
Balance, beginning of period - $ - - $ - Trust units converted to
Class B trust units - - 135,866,213 2,081,404 Class B trust units
converted to Class A trust units 76,705,454 1,175,089 (76,705,454)
(1,175,089) Issued for cash on exercise of trust unit options and
rights - - 430,796 7,235 Issued for cash under Distribution
Reinvestment Plan ("DRIP") - - 152,403 2,749 Trust unit rights
incentive plan (non-cash exercised) - - - 128
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Balance, end of period 76,705,454 $ 1,175,089 59,743,958 $ 916,427
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On July 27, 2004 Pengrowth implemented a reclassification of its
trust units whereby the existing outstanding trust units were
reclassified into Class B trust units and the Class B trust units
held by non-residents of Canada were converted into Class A trust
units. The Class A trust units and the Class B trust units have the
same rights to vote, obtain distributions and obtain assets upon
the wind- up or dissolution of Pengrowth Energy Trust. The most
significant distinction between the two classes of units is in
respect of the residency of the persons entitled to hold and trade
the Class A trust units and Class B trust units. Class A trust
units are not subject to any residency restriction but are subject
to a restriction on the number to be issued such that the total
number of issued and outstanding Class A trust units will not
exceed 99% of the number of issued and outstanding Class B trust
units after an initial implementation period (the "Ownership
Threshold"). Class A trust units may be converted by a holder at
any time into Class B trust units provided that the holder is a
resident of Canada and provides a suitable residency declaration.
Class A trust units trade on both the TSX and NYSE. Class B trust
units may not be held by non-residents of Canada and trade only on
the TSX, may be converted by a holder into Class A trust units,
provided that the Ownership Threshold will not be exceeded. A
reservation system has been implemented by Pengrowth which will
require that a reservation number must be obtained for any proposed
conversion of Class B trust units into Class A trust units to
ensure that the Ownership Threshold will not be exceeded. If the
number of issued and outstanding Class A trust units exceeds the
Ownership Threshold, Pengrowth Energy Trust may make a public
announcement of the contravention and enforce one or several
available options to reduce the number of Class A trust units to
the Ownership Threshold. If it appears from the securities
registers, or if the Board of Directors of Pengrowth Corporation
determines that, a person that is a non-resident of Canada holds or
beneficially owns any Class B trust units, Pengrowth shall send a
notice to the registered holder(s) of the Class B trust units
requiring such holder(s) to dispose of the Class B trust units and
pending such disposition may suspend all rights of ownership
attached to such units (including the rights to receive
distributions). Following the reclassification, the number of
outstanding Class A trust units exceeded the Ownership Threshold.
The trust indenture provides that the Ownership Threshold will not
apply until December 31, 2004, provided that if the Board of
Directors of Pengrowth Corporation determines that the number of
outstanding Class A trust units on or after December 31, 2004 is
likely to exceed the Ownership Threshold, Pengrowth Corporation may
enforce any or all of the available provisions. Certain provisions
exist that could prevent exclusionary offers being made for only
one class of trust unit in existence at the time of the original
offer. In the event that an offer is made for only one class of
trust units; in certain circumstances the Ownership Threshold would
temporarily cease to apply. Class B unitholders are eligible to
participate in the Distribution Re-investment Plan ("DRIP"). DRIP
entitles the unitholder to reinvest cash distributions in
additional units of Pengrowth Energy Trust. The trust units under
the plan are issued from treasury at a 5 percent discount to the
weighted average closing price of all Class B trust units traded on
the Toronto Stock Exchange for the 20 trading days preceding a
distribution payment date. Class A unitholders are not eligible to
participate in DRIP. Trust units issued on the exercise of options
and rights under Pengrowth's unit based compensation plans are
Class B trust units. Per Unit Amounts The per unit amounts for net
income are based on the weighted average number of Class A and
Class B trust units outstanding for the period. The weighted
average units outstanding for the three months ended September 30,
2004 were 135,906,487 (September 30, 2003 - 118,928,247) and for
the nine months ended September 30, 2004 were 132,213,280
(September 30, 2003 - 113,751,004 units). In computing diluted net
income per unit, 633,751 units were added to the weighted average
number of units outstanding during the quarter ended September 30,
2004 (September 30, 2003 - 621,952 units) and 623,464 units were
added for the nine months ended September 30, 2004 (September 30,
2003 - 487,391 units) for the dilutive effect of trust unit options
and rights. Contributed Surplus September 30, December 31, 2004
2003
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Balance, beginning of period $ 189 $ - Trust unit rights incentive
plan (non-cash expensed) 1,925 189 Trust unit rights incentive plan
(non-cash exercised) (387) -
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Balance, end of period $ 1,727 $ 189
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Trust Unit Option Plan As at September 30, 2004, options to
purchase 1,260,463 Class B trust units were outstanding (December
31, 2003 - 2,014,903) that expire at various dates to June 28,
2009. September 30, 2004 December 31, 2003
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Weighted Weighted average average Trust Unit Number of exercise
Number of exercise Options options price options price
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Outstanding at beginning of period 2,014,903 $ 17.47 4,451,131 $
16.78 Exercised (748,900) 16.84 (2,374,182) 16.19 Cancelled (5,540)
16.53 (62,046) 17.17
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Outstanding at period-end 1,260,463 $ 17.84 2,014,903 $ 17.47
Exercisable at period-end 1,260,463 $ 17.84 1,999,436 $ 17.48
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Rights Incentive Plan As at September 30, 2004, rights to purchase
2,224,022 Class B trust units were outstanding (December 31, 2003 -
1,112,140) that expire at various dates to July 28, 2009. September
30, 2004 December 31, 2003
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Weighted Weighted Rights average average Incentive Number of
exercise Number of exercise Options rights price rights price
---------------------------------------------------------------------
Outstanding at beginning of period 1,112,140 $ 12.20 1,964,100 $
13.29 Granted(1) 1,379,058 17.32 165,000 16.35 Exercised (229,870)
14.61 (984,260) 13.49 Cancelled (37,306) 13.15 (32,700) 12.75
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Outstanding at period-end 2,224,022 $ 14.25 1,112,140 $ 12.20
Exercisable at period-end 634,237 $ 14.27 359,740 $ 11.92
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(1) Weighted average exercise price of rights granted is based on
the exercise price at the date of grant Fair Value of Unit Based
Compensation The fair value of rights incentive options granted
during the three months ended September 30, 2004 and the nine
months ended September 30, 2004 was estimated at 15 percent of the
exercise price at the date of grant using a modified Black-Scholes
option pricing model with the following assumptions: risk-free rate
of 3.9 percent, volatility of 22 percent, expected life of five
years and adjustments for the estimated distributions and
reductions in the exercise price over the life of the right
incentive option. For trust unit options and rights granted in
2002, Pengrowth has elected to disclose the pro forma effect on net
income had compensation expense been recorded using the fair value
method. The following is the pro forma effect on net income: Three
months ended Nine months ended September 30, September 30, 2004
2003 2004 2003
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Net income $ 51,271 $ 34,808 $ 122,607 $ 151,942 Compensation cost
related to options - (111) - (312) Compensation cost related to
rights (312) (279) (938) (942)
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Pro forma net income $ 50,959 $ 34,418 $ 121,669 $ 150,688
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Pro forma net income per unit: Basic $ 0.375 $ 0.289 $ 0.920 $
1.325 Diluted $ 0.373 $ 0.288 $ 0.916 $ 1.319
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7. ASSET RETIREMENT OBLIGATIONS For the nine For the months ended
year ended September 30, December 31, 2004 2003
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Asset Retirement Obligations, beginning of period $ 102,528 $
73,493 Increase in liabilities during the period related to:
Acquisitions 50,837 - Additions 1,983 11,086 Revisions - 15,153
Accretion expense 7,465 6,039 Liabilities settled during the period
(4,029) (3,243)
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Asset Retirement Obligations, end of period $ 158,784 $ 102,528
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8. INCOME TAXES The provision for income taxes in the financial
statements differs from the result which would have been obtained
by applying the combined federal and provincial tax rate to
Pengrowth's income before taxes. This difference results from the
following items: For the nine months ended September 30, 2004 2003
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Income before taxes $ 122,607 $ 153,419 Combined federal and
provincial tax rate 38.6% 40.6%
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Expected income tax 47,326 62,288 Income allocated to trust
unitholders (42,651) (56,057) Effect of resource allowance over
non-deductible crown royalties (3,556) (2,161) Unrealized foreign
exchange loss (gain) (1,173) (4,113) Trust unit based compensation
647 43 Other 104 -
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Future income taxes 697 - Capital taxes 2,849 1,477
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$ 3,546 $ 1,477
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The net future income tax liability is comprised of: As at As at
September 30, December 31, 2004 2003
---------------------------------------------------------------------
Future income tax liabilities: Property, plant and equipment and
other assets $ 54,009 $ - Unrealized foreign exchange gain 6,374
5,356 Other 34 27
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60,417 5,383 Future income tax assets: Property, plant and
equipment and other assets - (60,628) Alberta Canadian royalty
income (731) - Contract liabilities (8,672) -
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51,014 (55,245) Valuation allowance - 55,245
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$ 51,014 $ -
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During 2004, the Canadian Federal Government announced a number of
proposals relating to Subsection 132(7) of the Income Tax Act
(Canada) (the "Act"). Under existing Subsection 132(7) of the
Income Tax Act (Canada), (the "Act") Under existing Subsection
132(7) of the Income Tax Act, a Trust will be deemed to have
permanently lost its status as a Mutual Fund Trust if the Trust can
reasonably be considered, having regard to all the circumstances,
including the terms and conditions of its trust units, to have been
established or maintained primarily for the benefit of persons who
are not resident in Canada for the purposes of the Act (the
"Current Purpose Test") unless at all times from and after February
21, 1990 until the particular time "all or substantially all" of
the Trust's property consisted of property other than taxable
Canadian property (the "Current TCP Exception"). On March 23, 2004,
(the "Budget Date") the Federal Government proposed amendments to
Subsection 132(7) to the effect that those Trusts who would not be
Mutual Fund Trusts as of the Budget Date, but for their reliance
upon the Current TCP Exception would be able to rely upon that
Exception until 2007 and in all other cases the Current TCP
Exception would be unavailable. On September 16, 2004, the
Department of Finance announced legislative proposals relating to
Subsection 132(7) (the "Proposals"). The Proposals stipulate three
new tests that must be considered in determining the status of a
Trust as a Mutual Fund Trust after March 22, 2004: 1. a new fair
market value test (the "New FMV Test"); 2. a new taxable Canadian
property exception (the "New TCP Property Exception"); and 3. a new
specified property exception (the "New Specified Property
Exception"). Pengrowth sought and obtained a letter from the
Department of Finance dated October 5, 2004 (the "Finance Letter")
that the Department would recommend that the Current TCP Exception
be maintained for all periods through 2004 and an advance income
tax ruling (the "Advance Tax Ruling") dated July 26, 2004 in
respect to the implementation of Pengrowth's new A/B trust unit
structure. Reading the Proposals together with the Finance Letter
and Pengrowth's Advance Tax Ruling, Pengrowth Energy Trust can
preserve its Mutual Fund Trust status by either: 1. bringing its
foreign ownership percentage below 49.75% by December 31, 2004 in
accordance with the New FMV Test; or 2. elect to have the New FMV
Test apply as of the Budget Date and rely upon the Current TCP
Exception until December 31, 2006 to extend the time for Pengrowth
Energy Trust to comply with the New FMV Test until 2007. Both of
these alternatives are subject to certain risks. With respect to
the first alternative compliance with the New FMV Test would
require the issuance of a significant number of Class B trust
units. The second alternative requires that an amendment be made to
the Trust Indenture and that "all or substantially all" of
Pengrowth Energy Trust's property consist of property other than
taxable Canadian property at all times since February 20, 1990. The
interpretation and application of this test is uncertain. It has
been the administrative position of the Canada Revenue Agency that
the phrase "all or substantially all" should be interpreted to mean
90% or more. However, the Trust has been advised by its counsel
that the administrative position of the Canada Revenue Agency is
not determinative. In addition, the Act does not prescribe a
valuation methodology to determine compliance with the "all or
substantially all" test. There was a period of time that Pengrowth
Energy Trust did not satisfy the 90% threshold on all valuation
methodologies. 9. DEFERRED CHARGES As at As at September 30,
December 31, 2004 2003
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Imputed interest on note payable (net of accumulated amortization
of $1,191) $ 2,416 $ 3,607 U.S. debt issue costs (net of
accumulated amortization of $433) 1,708 1,937
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$ 4,124 $ 5,544
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10. FOREIGN EXCHANGE LOSS (GAIN) Three months ended Nine months
ended September 30, September 30, 2004 2003 2004 2003
---------------------------------------------------------------------
Unrealized foreign exchange loss (gain) on trans- lation of U.S.
dollar denominated debt $ (14,440) $ 480 $ (6,980) $ (20,260)
Realized foreign exchange losses (gains) 752 (456) 329 808
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$ (13,688) $ 24 $ (6,651) $ (19,452)
---------------------------------------------------------------------
The U.S. dollar denominated debt is translated into Canadian
dollars at the exchange rate in effect at the balance sheet date.
Foreign exchange gains and losses are included in income. 11. OTHER
CASH FLOW DISCLOSURES Change in Non-Cash Operating Working Capital
Three months ended Nine months ended September 30, September 30,
2004 2003 2004 2003
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Accounts receivable $ (11,157) $ 5,710 $ (34,713) $ 1,813 Inventory
(113) (139) 170 472 Accounts payable and accrued liabilities 19,701
7,825 39,128 (6,777) Due to Pengrowth Management Limited 1,426
(259) 5,164 (561)
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$ 9,857 $ 13,137 $ 9,749 $ (5,053)
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Change in Non-Cash Investing Working Capital Three months ended
Nine months ended September 30, September 30, 2004 2003 2004 2003
---------------------------------------------------------------------
Accounts payable for capital accruals $ 1,385 $ (1,410) $ (959) $
(652)
---------------------------------------------------------------------
Cash Payments Three months ended Nine months ended September 30,
September 30, 2004 2003 2004 2003
---------------------------------------------------------------------
Cash payments made for taxes $ 1,730 $ 366 $ 2,885 $ 1,363 Cash
payments made for interest $ 5,145 $ 2,065 $ 15,733 $ 9,346
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12. FINANCIAL INSTRUMENTS Foreign Exchange Risk Pengrowth entered
into a foreign exchange swap which fixed the Canadian to U.S.
dollar exchange rate at Cdn $1.55 per U.S. $1 on U.S. $750,000 per
month effective 2003 and 2004. This swap has mitigated a portion of
the exchange risk on U.S. dollar denominated gas sales. The
estimated fair value of the foreign exchange swap has been
determined based on the amount Pengrowth would receive or pay to
terminate the contract at period end. At September 30, 2004, the
amount Pengrowth would receive to terminate the foreign exchange
swap would be Cdn $644,000. Forward and Futures Contracts Pengrowth
has a price risk management program whereby the commodity price
associated with a portion of its future production is fixed.
Pengrowth sells forward a portion of its future production through
a combination of fixed price sales contracts with customers and
commodity swap agreements with financial counterparties. The
forward and futures contracts are subject to market risk from
fluctuating commodity prices and exchange rates. As at September
30, 2004, Pengrowth had fixed the price applicable to future
production as follows: Crude Oil: Volume Reference Price Remaining
Term (bbl/d) Point per bbl
---------------------------------------------------------------------
2004 ---- Financial: ---------- Oct 1, 2004 - Dec 31, 2004 10,500
WTI(1) $38.78 Cdn 2005 ---- Financial: ---------- Jan 1, 2005 - Dec
31, 2005 8,000 WTI(1) $51.66 Cdn
---------------------------------------------------------------------
Natural Gas: Volume Reference Price Remaining Term (mmbtu/d) Point
per mmbtu
---------------------------------------------------------------------
2004 ---- Financial: ---------- Oct 1, 2004 - Dec 31, 2004 12,500
Tetco M3(1) $8.33 Cdn Oct 1, 2004 - Dec 31, 2004 7,000 Transco Z6
$3.90 U.S. Oct 1, 2004 - Dec 31, 2004 3,317 AECO $7.58 Cdn 2005
---- Financial: ---------- Jan 1, 2005 - Dec 31, 2005 8,500 Tetco
M3(1) $9.08 Cdn
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(1) Associated Cdn$ / U.S.$ foreign exchange rate has been fixed.
The estimated fair value of the financial crude oil and natural gas
contracts has been determined based on the amounts Pengrowth would
receive or pay to terminate the contracts at period-end. At
September 30, 2004, the amount Pengrowth would pay to terminate the
financial crude oil and natural gas contracts would be $35,503,000
and $5,840,000, respectively. Pengrowth entered into an agreement
to purchase 5 megawatts of electricity at a price of $53.00 per
megawatt hour, effective February 1, 2004 to December 31, 2004.
Natural Gas Fixed Price Sales Contract: Pengrowth assumed a natural
gas fixed price sales contract in conjunction with the acquisition
of the Murphy Assets. The fair value of the liability associated
with the natural gas contract at the date of acquisition was
estimated to be $21,824,000 in respect thereof. The liability will
be reduced as the contract is settled. Details of the physical
fixed price sales contract are provided below: Volume Price
Remaining Term (mcf/d) per mcf(1)
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2004 ---- Oct 1, 2004 - Oct 31, 2004 3,886 $2.12 Cdn Nov 1, 2004 -
Dec 31, 2004 3,886 $2.18 Cdn 2005 to 2009 ------------ Jan 1, 2005
- Oct 31, 2005 3,886 $2.18 Cdn Nov 1, 2005 - Oct 31, 2006 3,886
$2.23 Cdn Nov 1, 2006 - Oct 31, 2007 3,886 $2.29 Cdn Nov 1, 2007 -
Oct 31, 2008 3,886 $2.34 Cdn Nov 1, 2008 - April 30, 2009 3,886
$2.40 Cdn
---------------------------------------------------------------------
(1) Reference price based on AECO Fair Value of Financial
Instruments The carrying value of financial instruments included in
the balance sheet, other than long term debt, the note payable and
remediation trust funds, approximates their fair value due to their
short maturity. The fair value of the remediation trust funds at
September 30, 2004 was approximately $8,356,000 (December 31, 2003
- $7,479,000). The fair market value of the marketable securities
at September 30, 2004 was approximately $3,100,000. The fair value
of the U.S. dollar denominated debt at September 30, 2004 was
approximately $252,563,000 based on the changes in the fair value
of the underlying U.S. Treasury Bill that was originally used as
the basis for determining the coupon rate for each of Pengrowth
Corporation's notes. The fair value of the note payable at
September 30, 2004, approximates its carrying value net of the
imputed interest included in deferred charges. 13. COMMITMENTS
Associated with the Murphy Assets acquired by Pengrowth are firm
pipeline demand charge commitments, payments of which are expected
to be, based on current toll rates, approximately $4,778,000 for
the balance of 2004, $19,003,000 in 2005, $18,684,000 in 2006,
$18,206,000 in 2007, and $15,278,000 in 2008 and are expected to
continue until 2015 with payments totalling approximately
$78,310,000 for the period from 2009 to 2015. END FIRST AND FINAL
ADD DATASOURCE: Pengrowth Energy Trust CONTACT: PR Newswire -- Oct.
29
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