/FIRST AND FINAL ADD - TO140 - Pengrowth Energy Trust Earnings/
PENGROWTH ENERGY TRUST NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 (Tabular amounts
are stated in thousands of dollars except per unit amounts.) 1.
STRUCTURE OF THE TRUST Pengrowth Energy Trust ("EnergyTrust") is a
closed-end investment trust created under the laws of the Province
of Alberta pursuant to a Trust Indenture dated December 2, 1988 (as
amended) between Pengrowth Corporation ("Corporation") and
Computershare Investor Services Inc. ("Computershare"). Operations
commenced on December 30, 1988. The beneficiaries of EnergyTrust
are the holders of trust units (the "unitholders"). EnergyTrust
acquires and holds royalty units and notes issued by the
Corporation, which entitles EnergyTrust to the net income generated
by the Corporation and its subsidiaries' petroleum and natural gas
properties less certain charges, as defined in the Royalty
Indenture. In addition, unitholders are entitled to receive the net
income from other investments that are held directly by
EnergyTrust. EnergyTrust owns approximately 99.9 percent of the
royalty units issued by the Corporation. Pengrowth Management
Limited (the "Manager") is responsible for the management of the
business affairs of the Corporation and the administration of
EnergyTrust. The Manager owns 9 percent of the common shares of
Corporation, and the Manager is controlled by an officer and a
director of the Corporation. The remaining 91 percent of the common
shares of the Corporation are owned by EnergyTrust. Under the terms
of the Royalty Indenture, the Corporation is entitled to retain a 1
percent share of royalty income and all miscellaneous income (the
"Residual Interest") to the extent this amount exceeds the
aggregate of debt service charges, general and administrative
expenses, and management fees. In 2004 and 2003, this Residual
Interest, as computed, did not result in any income retained by
Pengrowth Corporation. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of
Presentation EnergyTrust's consolidated financial statements have
been prepared in accordance with Generally Accepted Accounting
Principles ("GAAP")in Canada and they include the accounts of
EnergyTrust, the Corporation and its subsidiaries (collectively
referred to as "Pengrowth"). All inter-entity transactions have
been eliminated. These financial statements do not contain the
accounts of the Manager. EnergyTrust owns 91 percent of the shares
of Corporation and, through the royalty, obtains substantially all
the economic benefits of Corporation. In addition, the unitholders
of EnergyTrust have the right to elect the majority of the board of
directors of Corporation. Joint Interest Operations A significant
proportion of Pengrowth's petroleum and natural gas development and
production activities are conducted with others and accordingly the
accounts reflect only Pengrowth's proportionate interest in such
activities. Property Plant and Equipment Pengrowth follows the full
cost method of accounting for oil and gas properties and facilities
whereby all costs of developing and acquiring oil and gas
properties are capitalized and depleted on the unit of production
method based on proved reserves before royalties as estimated by
independent engineers. The fair value of future estimated asset
retirement obligations associated with properties and facilities
are also capitalized and depleted on the unit of production method.
The associated asset retirement obligations on future development
capital costs are also included in the cost base subject to
depletion. Natural gas production and reserves are converted to
equivalent units of crude oil using their relative energy content.
General and administrative costs are not capitalized other than to
the extent they are directly related to a successful acquisition,
or to the extent of Pengrowth's working interest in capital
expenditure programs to which overhead fees can be recovered from
partners. Overhead fees are not charged on 100 percent owned
projects. Proceeds from disposals of oil and gas properties and
equipment are credited against capitalized costs unless the
disposal would alter the rate of depletion and depreciation by more
than 20 percent, in which case a gain or loss on disposal is
recorded. Pengrowth places a limit on the carrying value of
property, plant and equipment and other assets, which may be
depleted against revenues of future periods (the "ceiling test").
The carrying value is assessed to be recoverable when the sum of
the undiscounted cash flows expected from the production of proved
reserves, the lower of cost and market of unproved properties and
the cost of major development projects exceeds the carrying value.
When the carrying value is not assessed to be recoverable, an
impairment loss is recognized to the extent that the carrying value
of assets exceeds the sum of the discounted cash flows expected
from the production of proved and probable reserves, the lower of
cost and market of unproved properties and the cost of major
development projects. The cash flows are estimated using expected
future product prices and costs and are discounted using a
risk-free interest rate. The carrying value of property, plant and
equipment and other assets subject to the ceiling test includes
asset retirement costs. Repairs and maintenance costs are expensed
as incurred. Goodwill Goodwill, which represents the excess of the
total purchase price over the estimated fair value of the net
identifiable assets and liabilities acquired, is not amortized but
instead is assessed for impairment annually or as events occur that
could result in impairment. Impairment is assessed by determining
the fair value of the reporting entity (consolidated EnergyTrust)
and comparing this fair value to the book value of the reporting
entity. If the fair value of the reporting entity is less than the
book value, impairment is measured by allocating the fair value of
the reporting entity to the identifiable assets and liabilities of
the reporting entity as if the reporting entity had been acquired
in a business combination for a purchase price equal to its fair
value. The excess of the fair value of the reporting entity over
the assigned values of the identifiable assets and liabilities is
the fair value of the goodwill. Any excess of the book value of
goodwill over this implied fair value is the impairment amount.
Impairment is charged to earnings in the period in which it occurs.
Goodwill is stated at cost less impairment. Injectant Costs
Injectants (mostly ethane and methane) are used in miscible flood
programs to stimulate incremental oil recovery. The cost of
injectants purchased from third parties for miscible flood projects
is deferred and amortized over the period of expected future
economic benefit which is estimated as 24 to 30 months. Inventory
Inventories of crude oil, natural gas and natural gas liquids are
stated at the lower of average cost and net realizable value. Asset
Retirement Obligations Pengrowth recognizes the fair value of an
Asset Retirement Obligation ("ARO") in the period in which it is
incurred when a reasonable estimate of the fair value can be made.
The fair value of the estimated ARO is recorded as a liability,
with a corresponding increase in the carrying amount of the related
asset. The capitalized amount is depleted on the unit of production
method based on proved reserves. The liability amount is increased
each reporting period due to the passage of time and the amount of
accretion is expensed to income in the period. Actual costs
incurred upon the settlement of the ARO are charged against the
ARO. Pengrowth has placed cash in segregated remediation trust
accounts to fund certain ARO for the Judy Creek and Swan Hills
properties, and the Sable Offshore Energy Project ("SOEP").
Contributions to these remediation trust accounts and expenditures
on ARO not funded by the trust accounts are charged against actual
cash distributions in the period incurred. Income Taxes EnergyTrust
is a taxable trust under the Canadian Income Tax Act. As income
taxes are the responsibility of the individual unitholders and
EnergyTrust distributes all of its taxable income to its
unitholders, no provision has been made for income taxes by
EnergyTrust in these financial statements. The Corporation follows
the tax liability method of accounting for income taxes. Under this
method, income tax liabilities and assets are recognized for the
estimated tax consequences attributable to differences between the
amounts reported in the financial statements of the Corporation and
its subsidiaries and their respective tax bases, using enacted
income tax rates. The effect of a change in income tax rates on
future income tax liabilities and assets is recognized in income in
the period that the change occurs. Trust Unit Compensation Plans
Pengrowth has unit based compensation plans, which are described in
Note 10. Compensation expense associated with unit based
compensation plans is recognized in income over the vesting period
of the plan with a corresponding increase in contributed surplus.
The amount of compensation expense and contributed surplus is
reduced for options and rights that are cancelled prior to vesting.
Any consideration received upon the exercise of the unit based
compensation together with the amount of non-cash compensation
expense recognized in contributed surplus is recorded as an
increase in trust unitholders' capital. Compensation expense is
based on the fair value of the unit based compensation at the date
of grant using a modified Black- Scholes option pricing model.
Pengrowth does not have any outstanding unit compensation plans
that call for settlement in cash or other assets. Grants of such
items, if any, will be recorded as expenses and liabilities based
on the intrinsic value. Risk Management Financial instruments are
utilized by Pengrowth to manage its exposure to commodity price
fluctuations, foreign currency and interest rate exposures.
Pengrowth's practice is not to utilize financial instruments for
trading or speculative purposes. Pengrowth formally documents
relationships between hedging instruments and hedged items, as well
as its risk management objective and strategy for undertaking
various hedge transactions. This process includes linking
derivatives to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions.
Pengrowth also formally assesses, both at the hedge's inception and
on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in
fair value or cash flows of hedged items. Pengrowth uses forward,
futures and swap contracts to manage its exposure to commodity
price fluctuations. The net receipts or payments arising from these
contracts are recognized in income as a component of oil and gas
sales during the same period as the corresponding hedged position.
Foreign exchange gains and losses on foreign currency exchange
swaps used to hedge U.S. dollar denominated gas sales are
recognized in income as a component of natural gas sales during the
same period as the corresponding hedged position. Interest rate
swap agreements are used as part of Pengrowth's program to manage
the fixed and floating interest rate mix of Pengrowth's total debt
portfolio and related overall cost of borrowing. The interest rate
swap agreements involve the periodic exchange of payments without
the exchange of the notional principal amount upon which the
payments are based, and are recorded as an adjustment of interest
expense on the hedged debt instrument. Measurement Uncertainty The
preparation of financial statements in conformity with Canadian
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date
of the financial statements and revenues and expenses for the
period then ended. The amounts recorded for depletion,
depreciation, amortization of injectants and the ARO are based on
estimates. The ceiling test calculation is based on estimates of
proved reserves, production rates, oil and natural gas prices,
future costs and other relevant assumptions. By their nature, these
estimates are subject to measurement uncertainty and may impact the
consolidated financial statements of future periods. Earnings per
unit In calculating diluted net income per unit, Pengrowth follows
the treasury stock method to determine the dilutive effect of trust
unit options and other dilutive instruments. Under the treasury
stock method, only "in the money" dilutive instruments impact the
diluted calculations. Cash and term deposits Pengrowth considers
term deposits with an original maturity of three months or less to
be cash equivalents. Revenue recognition Revenue from the sale of
oil and natural gas is recognized when the product is delivered.
Revenue from processing and other miscellaneous sources is
recognized upon completion of the relevant service. Comparative
figures Certain comparative figures have been reclassified to
conform to the presentation adopted in the current year. 3. CHANGES
IN ACCOUNTING POLICIES Full Cost Accounting Guideline Effective
January 1, 2003, Pengrowth adopted a new Canadian accounting
standard relating to full cost accounting for oil and gas entities,
as outlined in Note 2. Prior to adopting the new standard, the
limit on the aggregate carrying value of the property, plant and
equipment and other assets that may be carried forward for
depletion against future revenues was based on the sum of the
undiscounted cash flows expected from the production of proved
reserves, the lower of cost or market of unproved reserves and the
cost of major development projects less the estimated future costs
for administration, financing, ARO and income taxes. Asset
Retirement Obligations Effective January 1, 2002, Pengrowth
retroactively adopted, with restatement of prior periods, a new
accounting standard relating to ARO, as outlined in Note 2. Prior
to adopting the standard, Pengrowth recognized a provision for
future site restoration costs over the life of the oil and gas
properties and facilities using a unit of production method. Trust
Unit Based Compensation Plan Effective January 1, 2003, Pengrowth
prospectively adopted amendments to a Canadian accounting standard
relating to recognizing the compensation expense associated with
unit based compensation plans, as outlined in Note 2. Under the
amended standards, Pengrowth must recognize compensation expense
based on the fair value of the trust unit options and rights
granted under Pengrowth's unit based compensation plans. Pengrowth
uses a modified Black-Scholes option pricing model to determine the
fair value of trust unit based compensation plans at the date of
grant. For trust unit options and rights granted in 2002, Pengrowth
elected not to recognize compensation expense but provide pro forma
disclosure as if the amended accounting standards were adopted
retroactively. 4. REMEDIATION TRUST FUNDS Pengrowth is required to
make contributions to a remediation trust fund that is used to
cover certain ARO of the Judy Creek properties. Pengrowth makes
monthly contributions to the fund of $0.10 per boe of production
from the Judy Creek properties and an annual lump sum contribution
of $250,000. Every five years Pengrowth must evaluate the assets in
the trust fund and the outstanding ARO, and make recommendations to
the former owner of the Judy Creek properties as to whether
contribution levels should be changed. In 2004 an evaluation was
completed with the results of the evaluation determining that
current funding levels would remain unchanged until the next
evaluation in 2007. Pengrowth may be required to increase
contributions to the Judy Creek remediation trust fund based on
future evaluations of the fund. Pengrowth is required, pursuant to
various agreements with the SOEP partners, to make contributions to
a remediation trust fund that will be used to fund the ARO of the
SOEP properties and facilities. Pengrowth makes monthly
contributions to the fund of $0.04 per mcf of natural gas
production and $0.08 per boe of natural gas liquids production from
SOEP. The following summarizes Pengrowth's trust fund contributions
for 2004 and 2003 and Pengrowth's expenditures on ARO not covered
by the trust funds: 2004 2003
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Contributions to Judy Creek Remediation Trust Fund $ 906 $ 910
Contributions to Sable Environmental Restoration Fund 548 181
Expenditures related to Judy Creek Remediation Trust Fund (537)
(378)
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917 713
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Expenditures on ARO not covered by the trust funds 3,903 2,865
Expenditures on ARO covered by the trust funds 537 378
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4,440 3,243
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Total trust fund contributions and ARO expenditures not covered by
the trust funds $ 5,357 $ 3,956
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5. ACQUISITIONS 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 paid as follows: Allocation of
purchase price: Working capital $ 9,310 Property, plant, and
equipment 502,924 Goodwill (with no tax base) 170,619 Asset
retirement obligations (43,876) Future income taxes (60,012)
Contract liabilities (28,175)
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$ 550,790
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Cost of acquisition: Cash and term deposits $ 224,700 Acquisition
facility 325,000 Acquisition costs 1,090
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$ 550,790
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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
$171 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 17) 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. The
following unaudited pro forma information provides an indication of
what Pengrowth's results of operations might have been had the
acquisition of the Murphy Assets taken place on January 1 of each
of the following years: 2004 2003 (unaudited) (unaudited)
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Oil and gas sales $ 882,846 $ 899,770 Net income $ 180,101 $
236,500 Net income per unit: Basic $ 1.206 $ 1.793 Diluted $ 1.201
$ 1.785 Property Acquisitions In August 2004, Pengrowth acquired an
additional 34.35 percent working interest in Kaybob Notikewin Unit
No.1 for a purchase price of $20.0 million before adjustments. The
acquisition increased Pengrowth's working interest in the Kaybob
Notikewin Unit No.1 to approximately 99 percent. In December 2003,
Pengrowth acquired an 8.4 percent working interest in the SOEP
offshore production platforms and associated sub-sea field
gathering lines from Emera Offshore Incorporated ("Emera") for $65
million. The consideration for this acquisition included cash of
$20 million and a $45 million note payable over three years (see
Note 8). In conjunction with the December 2003 acquisition,
Pengrowth exchanged its royalty interest in SOEP for a direct
working interest in SOEP. In May 2003, Pengrowth acquired an 8.4
percent working interest in the SOEP processing facilities,
downstream of the Thebaud central processing platform, for
approximately $57 million. In June 2003, Pengrowth acquired
interests in eleven significant discovery licenses from Nova Scotia
Resources (Ventures) Limited ("NSRVL") for $4.5 million plus a ten
percent Net Profits Interest to NSRVL. 6. PROPERTY, PLANT AND
EQUIPMENT AND OTHER ASSETS 2004 2003
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Property, Plant and Equipment Property, Plant and Equipment, at
cost $ 2,986,681 $ 2,281,166 Accumulated depletion and depreciation
(1,022,435) (775,103)
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Net book value of property, plant and equipment 1,964,246 1,506,063
Other Assets Deferred injectant costs 25,042 24,296
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Net book value of property, plant and equipment and other assets $
1,989,288 $ 1,530,359
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Property, plant and equipment includes $81.1 million (2003 - $69.5
million) related to ARO, net of accumulated depletion. Pengrowth
performed a ceiling test calculation at December 31, 2004 to assess
the recoverable value of the property, plant and equipment and
other assets. The oil and gas future prices are based on the
January 1, 2005 commodity price forecast of our independent reserve
evaluators. These prices have been adjusted for commodity price
differentials specific to Pengrowth. The following table summarizes
the benchmark prices used in the ceiling test calculation. Based on
these assumptions, the undiscounted value of future net revenues
from Pengrowth's proved reserves exceeded the carrying value of
property, plant and equipment and other assets at December 31,
2004. Foreign Edmonton Light WTI Oil Exchange Crude Oil AECO Gas
Year ($U.S./bbl) Rate ($Cdn/bbl) ($Cdn/mmbtu)
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2005 42.00 0.82 50.25 6.60 2006 40.00 0.82 47.75 6.35 2007 38.00
0.82 45.50 6.15 2008 36.00 0.82 43.25 6.00 2009 34.00 0.82 40.75
6.00 2010-2015 33.50 0.82 40.08 6.10
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Escalate 2.0% 2.0% 2.0% thereafter per year per year per year 7.
ASSET RETIREMENT OBLIGATIONS The total future ARO were estimated by
management based on Pengrowth's working interest in wells and
facilities, estimated costs to remediate, reclaim and abandon the
wells and facilities and the estimated timing of the costs to be
incurred in future periods. Pengrowth has estimated the net present
value of its total ARO to be $172 million as at December 31, 2004
(2003 - $103 million), based on a total future liability of $551
million (2003 - $352 million). These costs are expected to be made
over 50 years with the majority of the costs incurred between 2014
and 2037. Pengrowth's credit adjusted risk free rate of 8 percent
(2003 - 8 percent) and an inflation rate of 1.5 percent (2003 - 1.5
percent) were used to calculate the net present value of the ARO.
The following reconciles Pengrowth's ARO: 2004 2003
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Asset retirement obligations, beginning of year $ 102,528 $ 73,493
Increase in liabilities during the year related to: Acquisitions
44,368 9,865 Additions 2,681 1,221 Revisions 16,087 15,153
Accretion expense 10,642 6,039 Liabilities settled during the year
(4,440) (3,243)
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Asset retirement obligations, end of year $ 171,866 $ 102,528
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8. NOTE PAYABLE The note payable is due to Emera, in respect of the
acquisition of the SOEP facility (Note 5). The note payable is
secured by Pengrowth's working interest in SOEP. The note payable
is non-interest bearing with payments due as follows: $15 million
on December 29, 2005, and $20 million on December 31, 2006. At
December 31, 2004, $2.0 million has been recorded as a deferred
charge representing the imputed interest on the non-interest
bearing note. This amount will be recognized as interest expense
over the period outstanding for each individual instalment. 9.
LONG-TERM DEBT 2004 2003
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U.S. dollar denominated debt: U.S. $150 million senior unsecured
notes at 4.93 percent due April 2010 $ 180,300 $ 194,475 U.S. $50
million senior unsecured notes at 5.47 percent due April 2013
60,100 64,825
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240,400 259,300 Canadian dollar revolving credit borrowings 105,000
-
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$ 345,400 $ 259,300
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On April 23, 2003, Pengrowth closed a U.S. $200 million private
placement of senior unsecured notes to a group of U.S. investors.
The notes were offered in two tranches of U.S. $150 million at 4.93
percent due April 2010 and U.S. $50 million at 5.47 percent due in
April 2013. The notes contain certain financial maintenance
covenants and interest is paid semi-annually. Costs incurred in
connection with issuing the notes, in the amount of $2,141,000, are
being amortized straight line over the term of the notes (see Note
11). The Corporation has a $375 million revolving unsecured credit
facility syndicated among eight financial institutions with an
extendible 364 day revolving period and a two year amortization
term period. The facilities are currently reduced by outstanding
letters of credit in the amount of approximately $23 million. In
addition, it has a $35 million demand operating line of credit.
Interest payable on amounts drawn 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 vary
from 0.25 percent to 1.50 percent depending on financial statement
ratios and the form of borrowing. 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 instalments in each of the first
two years with the final one third to be repaid upon maturity of
the term period. The Corporation 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. 10. TRUST UNITS The
total authorized capital of Pengrowth is 500,000,000 trust units.
2004 2003
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Number Number Trust Units Issued of units Amount of units Amount
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Balance, beginning of year 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 units 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 A or Class B trust units (135,792,888)
(2,080,281) - -
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Balance, end of year 73,325 $ 1,123 123,873,651 $ 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 December 31, 2004
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Number Number Trust Units Issued of units Amount of units Amount
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Balance, beginning of period - $ - - $ - Trust units converted
76,792,759 1,176,427 59,000,129 903,854 Issued for cash - -
15,985,000 298,920 Less: issue expenses - - - (15,577) Issued for
cash on exercise of trust units options and rights - - 746,864
11,516 Issued for cash under Distribution Reinvestment Plan
("DRIP") - - 374,478 6,750 Trust unit rights incentive plan
(non-cash exercised) - - - 271
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Balance, end of period 76,792,759 $ 1,176,427 76,106,471 $
1,205,734
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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 A or Class B trust units depending on the
residency of the unitholder. Of the original trust units, 73,325
are undeclared trust units that have not been classified as Class A
or Class B trust units as the unitholders of these trust units have
not submitted a declaration of residency certificate. The Class A
trust units and the Class B trust units have the same rights to
vote, obtain distributions upon wind-up or dissolution of
EnergyTrust. The most significant distinction between the two
classes of units is in respect of 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 percent of the number of issued and outstanding
Class B trustunits 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 Toronto Stock
Exchange ("TSX") and the New York Stock Exchange ("NYSE"). Class B
trust units may not be held by non-residents of Canada and trade
only on the TSX. Class B trust units may be converted by a holder
into Class A trust units, provided that the Ownership Threshold
will not be exceeded. If the number of issued and outstanding Class
A trust units exceeds the Ownership Threshold, EnergyTrust 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, as outlined in the Trust
Indenture. If it appears from the securities registers, or if the
Board of Directors of 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 provisions of the Ownership Threshold will not apply until
December 31, 2004 or such later date by which Pengrowth must comply
with the Ownership Threshold as may be specified in the Advance Tax
Ruling; however, if the Board of Directors of Pengrowth Corporation
determines that the number of outstanding Class A trust units on or
after that date is likely to exceed the Ownership Threshold,
Pengrowth Corporation may enforce any or all of the available
provisions. On December 1, 2004, Pengrowth received a letter from
the Canada Revenue Agency that amended the Advance Tax Ruling to
extend the date by which Pengrowth must comply with the Ownership
Threshold in order to be able to rely on the ruling from December
31, 2004 to June 1, 2005. The number of Class A trust units
exceeded the Ownership Threshold by 0.45 percent on December 31,
2004. Certain provisions exist that could prevent exclusionary
offers being made for only one class of trust units 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. Pursuant to
the terms of the Royalty Indenture and the Trust Indenture, there
is attached to each royalty unit granted by the Corporation, to
royalty unitholders other than EnergyTrust, the right to exchange
such royalty units for an equivalent number of trust units.
Accordingly Computershare, as Trustee, has reserved 18,240 trust
units for such future conversion. Distribution Reinvestment Plan
Class B unitholders are eligible to participate in the DRIP. DRIP
entitles the unitholder to reinvest cash distributions in
additional units of EnergyTrust. 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 TSX
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.
Contributed Surplus 2004 2003
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Balance, beginning of year $ 189 $ - Trust unit rights incentive
plan (non-cash expensed) 2,264 189 Trust unit rights incentive plan
(non-cash exercised) (530) -
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Balance, end of year $ 1,923 $ 189
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Trust Unit Option Plan Pengrowth has a trust unit option plan under
which directors, officers, employees and special consultants of the
Corporation and the Manager are eligible to receive options to
purchase Class B trust units. Under the terms of the plan, up to 10
percent of the issued and outstanding trust units to a maximum of
10 million trust units may be reserved for option and right grants.
The options expire seven years from the date of grant. One third of
the options vest on the grant date, one third on the first
anniversary of the date of grant, and the remaining third on the
second anniversary. As at December 31, 2004, options to purchase
845,374 Class B trust units were outstanding (2003 - 2,014,903)
that expire at various dates to June 28, 2009. 2004 2003 Trust Unit
Options Number Weighted Number Weighted of options Average of
options Average Exercise Exercise price price
---------------------------------------------------------------------
Outstanding at beginning of year 2,014,903 $17.47 4,451,131 $16.78
Exercised (838,789) $16.82 (2,374,182) $16.19 Expired (325,200)
$20.44 - $ - Cancelled (5,540) $16.53 (62,046) $17.17
---------------------------------------------------------------------
Outstanding at year-end 845,374 $16.97 2,014,903 $17.47 Exercisable
at year-end 845,374 $16.97 1,999,436 $17.48
---------------------------------------------------------------------
The following table summarizes information about trust unit options
outstanding and exercisable at December 31, 2004: Options
Outstanding and Exercisable
--------------------------------------------------------------------
Number Weighted- Outstanding Average Weighted- Range of and
Remaining Average Exercise Exercisable Contractual Exercise Prices
at Life(years) Price
--------------------------------------------------------------------
$12.00 to $14.99 150,105 3.6 $13.05 $15.00 to $16.99 130,244 3.7
$15.04 $17.00 to $17.99 207,782 3.5 $17.48 $18.00 to $20.50 357,243
2.9 $19.02
---------------------------------------------------------------------
$12.00 to $20.50 845,374 3.3 $16.97 Employee Trust Unit Rights
Incentive Plan Pengrowth has an Employee Trust Unit Rights
Incentive Plan ("Rights Incentive Plan"), pursuant to which rights
to acquire Class B trust units may be granted to the directors,
officers, employees, and special consultants of the Corporation and
the Manager. Under the Rights Incentive Plan, distributions per
trust unit to trust unitholders in a calendar quarter which
represent a return of more than 2.5 percent of the net book value
of property, plant and equipment at the beginning of such calendar
quarter result in a reduction in the exercise price. Total price
reductions calculated for 2004 were $1.30 per trust unit right
(2003 - $1.47 per trust unit right). One third of the rights
granted under the Rights Incentive Plan vest on the grant date, one
third on the first anniversary date of the grant and the remaining
on the second anniversary. The rights have an expiry date of five
years from the date of grant. As at December 31, 2004, rights to
purchase 2,011,451 Class B trust units were outstanding (2003 -
1,112,140) that expire at various dates to October 28, 2009. 2004
2003 Rights Incentive Number Weighted Number Weighted Options of
rights Average of rights Average Exercise Exercise price price
---------------------------------------------------------------------
Outstanding at beginning of year 1,112,140 $12.20 1,964,100 $13.29
Granted(1) 1,409,856 $17.35 165,000 $16.35 Exercised (456,049)
$13.47 (984,260) $13.49 Cancelled (54,496) $14.19 (32,700) $12.75
---------------------------------------------------------------------
Outstanding at year-end 2,011,451 $14.23 1,112,140 $12.20
Exercisable at year-end 1,037,078 $12.48 359,740 $11.92
---------------------------------------------------------------------
(1) Weighted average exercise price of rights granted are based on
the exercise price at the date of grant. The following table
summarizes information about rights incentive options outstanding
and exercisable at December 31, 2004: Rights Outstanding Rights
Exercisable -----------------------------------------------------
Number Weighted- Weighted- Number Weighted- Outstanding Average
Average Exercisable Average Range of At Remaining Exercise At
Exercise Exercise 12/31/04 Contractual Price 12/31/04 Price Prices
Life(years) -----------------------------------------------------
$10.00 to $11.99 685,500 2.9 $10.46 685,500 $10.46 $12.00 to $13.99
32,900 3.3 $13.08 2,867 $12.73 $14.00 to $15.99 994,773 4.1 $15.50
249,285 $15.51 $17.00 to $18.99 298,278 4.6 $18.78 99,426 $18.78
---------------------------------------------------------------------
$10.00 to $18.99 2,011,451 3.7 $14.23 1,037,078 $12.48 Fair Value
of Unit Based Compensation Pengrowth records compensation expense
on rights incentive options granted on or after January 1, 2003.
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: 2004 2003
---------------------------------------------------------------------
Net income $ 153,745 $ 189,297 Compensation expense related to
trust unit options granted in 2002 - (367) Compensation expense
related to rights incentive options granted in 2002 (1,067) (1,279)
---------------------------------------------------------------------
Pro forma net income $ 152,678 $ 187,651
---------------------------------------------------------------------
---------------------------------------------------------------------
Pro forma net income per unit: Basic $ 1.145 $ 1.619
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted $ 1.139 $ 1.611
---------------------------------------------------------------------
---------------------------------------------------------------------
The fair value of rights incentive options granted in 2004 and 2003
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 rights incentive option. Long-Term Incentive
Program On November 29, 2004, the Board of Directors approved a new
Long-Term Incentive Program effective, January 1, 2005. Under the
new Long-Term Incentive Program, Restricted Share Units ("Phantom
trust units") will be allocated to employees, officers, directors
and certain consultants of the Corporation and the Manager. The
number of Phantom trust units granted will be based on a grant
value as a percentage of an individual's base salary and an
established weighting of Phantom trust units and/or rights
incentive options that is dependent on an individual's position.
The Phantom trust units will fully vest on the third anniversary
year from the date of grant. The Phantom trust units will receive
distributions in the form of additional Phantom trust units. The
number of Phantom trust units, including any additional units from
re-invested distributions at the end of the three year vesting
period will be subject to a relative performance test which
compares Pengrowth's three-year average total return on the Phantom
trust units to the three-year average total return of a peer group
of other Energy Trusts. Upon vesting, the number of trust units
issued from treasury may range from zero to one and one-half times
the number of Phantom trust units granted. Employee Savings Plans
Pengrowth has a trust unit savings plan whereby qualifying
employees may contribute from one to ten percent of their basic
annual salary. Employee contributions are invested in trust units
purchased on the open market. Pengrowth matches the employees'
contribution, investing in additional trust units purchased on the
open market. Pengrowth's share of contributions is recorded as an
expense and amounted to $1,301,314 in 2004 (2003 - $1,037,063). In
addition, Pengrowth has a plan whereby it will match zero to five
percent of an employee's contribution to their Group Registered
Retirement Savings Plan. Pengrowth's share of contributions under
this plan is recorded as an expense and amounted to $425,371 in
2004 (2003 - $358,245). Pengrowth's total matching contributions
under both Employee Savings Plans cannot exceed ten percent of
their basic annual salary. Trust Unit Margin Purchase Plan
Pengrowth has a plan whereby the employees and certain consultants
of Corporation and the Manager can purchase trust units and finance
up to 75 percent of the purchase price through an investment
dealer, subject to certain participation limits and restrictions.
Certain officers and directors hold trust units under the Trust
Unit Margin Purchase Plan; however, they are prohibited from
increasing the number of trust units they can hold under the plan.
Participants maintain personal margin accounts with the investment
dealer and are responsible for all interest costs and obligations
with respect to their margin loans. The Corporation has provided a
$5 million letter of credit to the investment dealer to guarantee
amounts owing with respect to the plan. The amount of the letter of
credit may fluctuate depending on the amounts financed pursuant to
the plan. At December 31, 2004, 848,022 trust units were deposited
under the plan (2003 - 2,471,120) with a market value of $15.7
million (2003 - $52.5 million) and a corresponding margin loan of
$3.1 million (2003 - $4.8 million). The investment dealer has
limited the total margin loan available under the plan to the
lesser of $15 million or 35 percent of the market value of the
units held under the plan. If the market value of the trust units
under the plan declines, the Corporation may be required to make
payments or post additional letters of credit to the investment
dealer. Any payments to be made by the Corporation are to be
reduced by proceeds of liquidating the individual's trust units
held under the plan. The maximum amount of the guarantee at
December 31, 2004 was $3.1 million (2003 - $4.8 million), the fair
value of which is estimated to be a nominal amount. Redemption
Rights Trust units are redeemable at the request of a unitholder.
The redemption right permits unitholders in the aggregate to redeem
a maximum of $25,000 of trust units in a month. 11. DEFERRED
CHARGES 2004 2003
---------------------------------------------------------------------
Imputed interest on note payable (net of accumulated amortization
of $1,587, (2003 - nil) $ 2,020 $ 3,607 U.S. debt issue costs (net
of accumulated amortization of $510, (2003 - $204) 1,631 1,937
---------------------------------------------------------------------
$ 3,651 $ 5,544
---------------------------------------------------------------------
---------------------------------------------------------------------
12. FOREIGN EXCHANGE LOSS (GAIN) 2004 2003
---------------------------------------------------------------------
Unrealized foreign exchange gain on translation of U.S. dollar
denominated debt $ (18,900) $ (30,940) Realized foreign exchange
losses 1,600 1,029
---------------------------------------------------------------------
$ (17,300) $ (29,911)
---------------------------------------------------------------------
---------------------------------------------------------------------
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. 13. OTHER
CASH FLOW DISCLOSURES Change in Non-Cash Operating Working Capital
2004 2003
---------------------------------------------------------------------
Accounts receivable $ (22,515) $ (24,144) Inventory 260 602
Accounts payable and accrued liabilities 17,225 13,643 Due to
Pengrowth Management Limited 6,203 36
---------------------------------------------------------------------
$ 1,173 $ (9,863)
---------------------------------------------------------------------
---------------------------------------------------------------------
Change in Non-Cash Investing Working Capital 2004 2003
---------------------------------------------------------------------
Accounts payable for capital accruals $ 2,169 $ (2,539)
---------------------------------------------------------------------
---------------------------------------------------------------------
Cash payments 2004 2003
---------------------------------------------------------------------
Cash payments made for taxes $ 4,729 $ 1,834 Cash payments made for
interest $ 28,119 $ 16,657 14. 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. 2004 2003
---------------------------------------------------------------------
Net Income before taxes $ 173,955 $ 191,154 Combined federal and
provincial tax rate 38.6% 40.6%
---------------------------------------------------------------------
Expected income tax 67,147 77,609 Income allocated to trust
unitholders (59,346) (78,893) Resource allowance (8,807) (462)
Non-deductible crown charges 16,476 413 Unrealized foreign exchange
gain (3,648) (6,281) Attributed Canadian royalty income (3,113)
(1,073) Effect of proposed tax changes 3,850 - Rate reductions -
14,089 Change in valuation allowance 3,035 (4,947) Other 22 (455)
---------------------------------------------------------------------
Future income taxes 15,616 - Capital taxes 4,594 1,857
---------------------------------------------------------------------
$ 20,210 $ 1,857
---------------------------------------------------------------------
---------------------------------------------------------------------
The net future income tax liability is comprised of: 2004 2003
---------------------------------------------------------------------
Future income tax liabilities: Property, plant, equipment and other
assets $ 79,774 $ - Unrealized foreign exchange gain 8,378 5,356
Other (34) 27
---------------------------------------------------------------------
88,118 5,383 Future income tax assets: Property, plant, equipment
and other assets - (60,628) Attributed Canadian royalty income
(4,418) - Contract liabilities (8,072) -
---------------------------------------------------------------------
75,628 (55,245) Valuation allowance - 55,245
---------------------------------------------------------------------
$ 75,628 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Resident Ownership and Mutual Fund Trust Status The Federal
budget tabled on March 23, 2004 proposed several changes to
subsection 132(7) of the Income Tax Act (Canada) (the "Act"), that
would have affected the mutual fund status of royalty trusts. On
December 5, 2004, the Minister of Finance tabled a Notice of Ways
and Means Motion in the House of Commons to implement the measures
proposed in the March 23, 2004 Federal budget. However, the changes
to the mutual fund trust provisions proposed in both the March 23,
2004 Federal budget and in the draft legislation published on
September 16, 2004 were not included. The Minister of Finance
indicated that further discussions would be pursued with the
private sector concerning the appropriate Canadian tax treatment of
non-residents investing in resource property through mutual fund
trusts. Therefore, the uncertainty remains as to whether or not the
taxable Canadian property exception will be available to royalty
trusts, such as Pengrowth Energy Trust, indefinitely. 15. RELATED
PARTY TRANSACTIONS Pengrowth Management Limited provides certain
services pursuant to a Management Agreement for which Pengrowth was
charged $6,135,000 (2003 - $520,000) for performance fees and
$6,739,000 (2003 - $9,660,749) for a management fee. In 2003,
Pengrowth was charged $695,000 for acquisition fees. In 2004, no
acquisition fee was charged. In addition, Pengrowth was charged
$800,000 for estimated reimbursement of general and administrative
expenses incurred by the Manager pursuant to the Management
Agreement. The law firm controlled by the corporate secretary
charged $841,457 (2003 - $675,692) for legal and advisory services
provided to Pengrowth by the corporate secretary. The transactions
have been recorded at the exchange amount. 16. AMOUNTS PER UNIT The
per unit amounts for net income are based on the weighted average
units outstanding for the year. The weighted average units
outstanding for 2004 were 133,395,485 units (2003 - 115,912,374
units). In computing diluted net income per unit, 611,086 units
were added to the weighted average number of units outstanding
during the year ended December 31, 2004 (2003 - 567,335) for the
dilutive effect of trust unit options and rights. In 2004, 624,723
(2003 - 14,820) trust unit options and rights were excluded from
the diluted net income per unit calculation as their effect is
anti-dilutive. 17. FINANCIAL INSTRUMENTS Interest Rate Risk On
April 23, 2003, Pengrowth completed a U.S. $200 million private
placement of fixed rate seven and ten year term notes. The interest
and principal payments on the term notes are payable in U.S.
dollars. Pengrowth had previously fixed the interest rates on $125
million of Canadian bank debt using interest rate swaps. In 2003,
Pengrowth terminated these interest rate swaps at a total cost
including accrued interest of approximately $2,229,000. There were
no interest rate swaps outstanding in 2004. Foreign Currency
Exchange Risk Pengrowth is exposed to foreign currency fluctuations
as crude oil and natural gas prices received are referenced to U.S.
dollar denominated prices. Pengrowth has mitigated some of this
exchange risk by entering into fixed Canadian dollar crude oil and
natural gas price swaps as outlined in the forward and futures
contracts section below. Pengrowth entered into a foreign exchange
swap which fixed the Canadian to U.S. dollar exchange rate at Cdn
$1.55 per U.S. $1.00 on U.S. $750,000 per month effective 2003 and
2004. At December 31, 2004, there were no foreign exchange swaps
outstanding. Credit Risk Pengrowth sells a significant portion of
its oil and gas to commodity marketers, and the accounts receivable
are subject to normal industry credit risks. The use of financial
swap agreements involves a degree of credit risk that Pengrowth
manages through its credit policies which are designed to limit
eligible counterparties to those with "A" credit ratings or better.
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 December 31, 2004, Pengrowth had fixed the
price applicable to future production as follows: Crude Oil: Volume
Reference Price Remaining Term (bbl/d) Point per bbl
---------------------------------------------------------------------
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
---------------------------------------------------------------------
Financial: ---------- Jan 1, 2005 - Mar 31, 2005 2,500 Transco
Z6(1) $ 12.62 Cdn Jan 1, 2005 - Dec 31, 2005 11,000 Tetco M3(1) $
9.27 Cdn Jan 1, 2005 - Dec 31, 2005 2,500 Transco Z6(1) $ 10.01 Cdn
Jan 1, 2005 - Dec 31, 2005 2,500 NGI Chicago(1) $ 9.41 Cdn
--------------------------------------------------------------------
(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 year end. At December
31, 2004, the amount Pengrowth would receive to terminate the
financial crude oil and natural gas contracts would be $1,360,000
and $5,957,000 respectively. 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)
---------------------------------------------------------------------
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 approximate their fair value due to their
short maturity. The fair value of the remediation trust funds at
December 31, 2004, was $8,366,000 (2003 - $7,479,000). The fair
value of the U.S. dollar denominated debt at December 31, 2004 was
approximately $238,726,000 based on 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 the Corporation's
notes. The fair value of the U.S. dollar denominated debt
approximated its fair value at December 31, 2003, as the rate on
the debt did not vary significantly from market rates. The fair
value of the note payable at December 31, 2004 and 2003
approximated its carrying value net of the imputed interest
included in deferred charges. 18. COMMITMENTS Pengrowth has future
commitments under various agreements for oil and natural gas
pipeline transportation, the purchase of carbon dioxide and
operating leases. The commitment to purchase carbon dioxide arises
as a result of Pengrowth's working interest in the Weyburn CO2
miscible flood project(1). There- 2005 2006 2007 2008 2009 after
Total
---------------------------------------------------------------------
Pipeline transport- ation $41,475 $41,281 $40,192 $33,420 $29,728
$63,894 $249,990 Capital expendi- tures 36,900 34,800 6,600 - - -
78,300 CO2 purchases 5,976 5,236 4,418 4,254 4,289 23,513 47,686
Other commitments 1,980 1,169 567 342 95 - 4,153
---------------------------------------------------------------------
$86,331 $82,486 $51,777 $38,016 $34,112 $87,407 $380,129
---------------------------------------------------------------------
(1) Contract prices for CO2 are denominated in U.S. dollars and
have been translated at the year end foreign exchange rate. 19.
SUBSEQUENT EVENTS On January 21, 2005, Pengrowth announced it had
entered into an agreement to purchase an additional 12.5 percent
working interest in Swan Hills Unit No. 1 for a purchase price of
$90 million, before adjustments. The transaction, which is subject
to Rights of First Refusal, is effective October 1, 2004 and is
anticipated to close on February 28, 2005. The acquisition would
increase Pengrowth's working interest in Swan Hills Unit No. 1 to
22.7 percent. On February 17, 2005, Pengrowth announced an
Arrangement Agreement (the "Arrangement") with Crispin Energy Inc.
("Crispin") under which Pengrowth will acquire all of the issued
and outstanding shares of Crispin on the basis of 0.0725 Class B
trust units of EnergyTrust for each share held by Canadian resident
shareholders of Crispin and 0.0512 Class A trust units of
EnergyTrust for each share held by non-Canadian resident
shareholders of Crispin. The Board of Directors of Crispin will
call a Special Meeting of Shareholders in mid to late April 2005
for approval of the Arrangement. The Arrangement will require the
approval of 66 2/3 percent of the votes cast by shareholders and
optionholders of Crispin voting as a single class, the approval of
the majority of shareholders excluding certain management personnel
and the approval of the Court of Queen's Bench of Alberta and
certain regulatory agencies. Completion of the Arrangement is
expected to close prior to the end of April 2005. END FIRST AND
FINAL ADD DATASOURCE: Pengrowth Energy Trust; Pengrowth Corporation
CONTACT: PRNewswire -- Feb. 28
Copyright