/FIRST AND FINAL ADD - TO153 - PrimeWest Energy Trust Earnings
UNITHOLDERS' EQUITY The Trust had 48,751,883 Trust Units
outstanding at December 31, 2003 compared to 37,004,522 Trust Units
at the end of 2002. In addition, there are 3,041,123 exchangeable
shares (see below) outstanding at year end, exchangeable into a
total of 1,347,277 Trust Units. The weighted average number of
Trust Units, including those issuable by the exchange of
exchangeable shares, was 46,015,519 Trust Units for 2003 comparedto
34,135,576 for 2002. During the year, 360,608 Trust Units were
issued pursuant to the Unit Appreciation Rights Plan for employees.
During the year, PrimeWest completed 2 bought deal financings. The
first closed on February 13, 2003 raising net proceeds of $146.6
million on the issuance of 6 million Trust Units at $25.75 per
Trust Unit. Proceeds were used to reduce the indebtedness of
PrimeWest under its credit facility, including a portion incurred
in connection with the January 2003 acquisitionof two private
Canadian exploration and production companies with properties in
the Caroline and Peace River Arch areas of Alberta. The second
financing closed on September 26, 2003 raising net proceeds of
$76.1 million on the issuance of 3.1 million Trust Units at $25.90
per Trust Unit. Proceeds were used to reduce bank indebtedness and
pursue development opportunities in the Caroline, Valhalla and
Brant Farrow areas. PrimeWest issued 465,969 Trust Units for $11.4
million pursuant to the Distribution Reinvestment component
(476,106 Trust Units, $10.1 million in 2002), 134,629 Trust Units
for $3.4 million pursuant to the Premium Distribution component (0
Trust Units in 2002) and 721,209 Trust Units for $17.6 million
pursuant to the Optional Trust Unit Purchase Plan component (OTUPP)
in 2003 (503,103 Trust Units, $13.9 million in 2002). For the first
time in PrimeWest's history, the OTUPP sold out before the end of
the calendar year, demonstrating the strong support of existing
unitholders. During the fourth quarter, PrimeWest enhanced its
existing plan with the Premium Distribution (PREP) component. As an
alternative to the existing DRIP Component of the Plan, the new
PREP allows eligible Canadian unitholders to elect to receive a
premium cash distribution of up to 102% of the cash that the
unitholder would otherwise have received on the distribution date,
subject to proration in certain events. The DRIP gives Canadian
unitholders the chance to reinvest their monthly distributions at a
5%discount to the 20 day volume weighted average market price,
while the OTUPP gives Canadian unitholders an opportunity to
purchase additional Trust Units directly from PrimeWest at the same
5% discount to the 20 day volume weighted average market price. The
DRIP and PREP components are mutually exclusive, and participation
in the OTUPP requires enrollment in either the DRIP or PREP. These
plan components benefit the unitholders by offering alternatives to
maximize their investment in PrimeWest, while providing the Trust
with an inexpensive method to raise additional capital. The Trust
expects interest in these plans in 2004 to be similar to 2003.
Proceeds from these plans are used for debt reduction of
PrimeWest's credit facility and to help fund ongoing capital
development programs. In 2003 PrimeWest completed a review of the
requirements necessary for the establishment of a U.S. DRIP program
and concluded that such a program for U.S. resident unitholders is
not presently feasible. For additional information or to join these
plans, contact PrimeWest's Plan Agent, Computershare Trust Company
of Canada at 1-800-564-6253 or visit PrimeWest's website at
http://www.primewestenergy.com/. Exchangeable shares Exchangeable
shares were issued in connection with both the Venator Petroleum
Company Ltd. acquisition in April 2000 and the Cypress Energy Inc.
acquisition in March 2001. These shares were issued to provide a
tax-deferred rollover of the adjusted cost base from the shares
being exchanged to the exchangeable shares of PrimeWest. A tax
deferral is not permitted by Canadian tax law when shares are
exchanged for Trust Units. In 2002 1,363,714 exchangeable shares
were issued in connection with the management internalization
transaction. During 2003, 1,500,000 exchangeable shares were issued
in relation to the termination of the management incentive program
of PrimeWest Management Inc. (see Note 11 in the Consolidated
Financial Statements). The exchangeable shares do not receive cash
distributions. In lieu of receiving cash distributions, the number
of Trust Units that the exchangeable shareholder will receive upon
exchange increases each month based on the distribution amount
divided by the market price of the Trust Units on the 15th day of
each month. At December 31, 2003, there were 3,041,123 exchangeable
shares outstanding. The exchange ratio on these shares was 0.44302
Trust Units for each exchangeable share as at year-end. For
purposes of calculating basic per Trust Unit amounts, these
exchangeable shares have been assumed to be exchanged into Trust
Units at the current exchange ratio. CASH DISTRIBUTIONS Cash
distributions to unitholders are at the discretion of the Board of
Directors and can fluctuate depending on the cash flow generated
from operations. As discussed previously, the cash flow available
for distribution is dependent upon many factors including commodity
prices, production levels, debt levels, capital spending
requirements, and factors in the overall environment. In 2003, cash
distributions totaled $192.6 million, or $4.40 per Trust Unit,
compared to $158.0 million, or $4.80 per Trust Unit in 2002. Since
inception in October of 1996 to December 31, 2003, PrimeWest has
distributed $39.92 per Trust Unit;just under the initial public
offering price of $40.00 (through December 31, 2002 - $35.92 per
Trust Unit). In June, 2003 PrimeWest's Board of Directors announced
its intention to distribute 70-90% of cash flow, as opposed to the
Trust's historical 95%average annual payout ratio. Withholding some
internally generated cash increases PrimeWest's financial
flexibility. Payments to U.S. unitholders are subject to 15%
Canadian withholding tax, which applies to the taxable portion of
the distribution. CASH FLOW SENSITIVITIES The table below is
designed to provide the directional impact on 2004 annual cash
available for distribution per unit (increase/decrease) depending
on changes in the following: $ per Trust Unit(1)
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Crude oil price ($US 1.00/bbl WTI increase) 0.07 Natural gas price
($0.10/mcf increase) 0.06 Exchange rate ($US 0.01 decrease) 0.07
Interest rate (1% decrease) 0.01 Production (1,000 BOE/day
increase) 0.14
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(1) Without the effect of price protection The figures in this
table are provided for directional information only and are based
on the units outstanding as at December 31, 2003. Should changes to
commodity price, interest rate, exchange rate or production levels
noted above take place, it should not be assumed that a
corresponding change would be made to the distribution level.
CONTRACTUAL OBLIGATIONS PrimeWest enters into many contract
obligationsas part of conducting day- to-day business. Material
contract obligations that PrimeWest has currently in place are
lease rental commitments that run from 2004 through 2009 and
require annual payments after deducting sub-lease income of $1.2
million in2004, $1.1 million in 2005 and 2006, and $2.4 million in
2007 through 2009, the remaining term of the lease. In addition,
PrimeWest also has a pipeline transportation commitment that runs
to October 31, 2007 and has minimum annual payment requirements of
$U.S. 2.1 million. As part of PrimeWest's internalization
transaction (see Note 11 in the Notes to the Consolidated Financial
Statements), PrimeWest agreed to pay $3.5 million in exchangeable
shares pursuant to a special employee retention plan. Onequarter of
the exchangeable shares will be issuable to the Senior Managers of
PrimeWest on each of the second, third, fourth and fifth
anniversary of transaction closing, November 6, 2002. As at
December 31, 2003 $0.5 million has been accrued in non-cash general
and administrative expenses related to the special employee
retention plan. RECENT ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT
IMPLEMENTED During 2003, the following new or amended standards and
guidelines were issued: Hedging Transactions The CICA has issued
Accounting Guideline 13, "Hedging Relationships," (AcG 13) which
will be effective for fiscal years beginning on or after July 1,
2003. AcG 13 addresses the identification, designation,
documentation and effectiveness of hedging transactions for the
purposes of applying hedge accounting. It also establishes
conditions for applying or discontinuing hedge accounting. Under
the new guideline, hedging transactions must be documented and it
must be demonstrated that the hedges are sufficiently effective in
order to continue accrual accounting for positions hedged with
derivatives. The Trust does not anticipate applying hedge
accounting to its hedging relationships. Asset Retirement
Obligations In March 2003, the CICA issued a new section in the
CICA Handbook, section 3110, Asset Retirement Obligations. This
standard focuses on the recognition and measurement of liabilities
related to legal obligations associated with the retirement of
property, plant and equipment. Under this standard, these
obligations are initially measured at fair value and subsequently
adjusted for the accretion of discount and any changes in the
underlying cash flows. The asset retirement cost is to be
capitalized to the related asset and amortized into earnings over
time. This section comes into effect for the Trust in 2004. The
Trust is currently evaluating the impact of this standard on its
consolidated financial statements and does not anticipate it will
have a material impact. Oil and Gas Assets - Full Cost Accounting
In 2003, the CICA issued Accounting Guideline 16 impacting the
application of the cost centre impairment test (ceiling test). The
guideline is effective for fiscal years beginning on or after
January 1, 2004. The cost impairment testis now a two stage process
which is to be performed at least annually. The first stage of the
test determines if the cost pool is impaired. An impairment loss
exists when the carrying amount of an asset is not recoverable and
exceeds its fair value. The carrying amount is not recoverable if
it exceeds the sum of the undiscounted cash flows from Proved
reserves plus unproved costs using management's best estimate of
future prices. The second stage determines the amount of the
impairment loss to be recorded. The impairment is measured as the
amount by which the carrying amount of capitalized assets exceeds
the future discounted cash flows from Proved plus Probable
reserves. The discount rate used is the company's risk free rate.
The guideline requires disclosure of the prices used for purposes
of the impairment test. The impact of this new guideline on the
Trust would be an impairment to capital assets of $460 million
before tax or $300 million after tax. The after tax impairment of
$300 million will be booked to retained earnings in the first
quarter of 2004. Exchangeable Share Accounting In November 2003 the
CICA issued a draft EIC (D37) on "Income Trusts - Exchangeable
Units". The EIC proposes that the retained interest of the
exchangeable shareholders should be presented on the balance sheet
as a non-controlling interest separate and distinct from
unitholder's equity. This draft EIC is currently under review and
was not enacted in final form as of the time of publication of the
Trust's consolidated financial statements. Variable Interest
Entities In June 2003 the CICA issued Accounting Guideline 15
"Consolidation of Variable Interest Entities" which deals with the
consolidation of entities that are subject to control on a basis
otherthan ownership of voting interests. This guideline is
effective for annual and interim periods beginning on or after
November 1, 2004. The Trust has assessed that this new guideline is
not applicable based on the current structure of the Trust and
therefore will have no impact on the financial statements of the
Trust. BUSINESS RISKS PrimeWest's operations are affected by a
number of underlying risks, both internal and external to the
Trust. These risks are similar to those affecting others in both
the conventional oil and gas royalty trust sector and the
conventional oil and gas producers sector. The Trust's financial
position, results of operations, and cash available for
distribution to unitholders are directly impacted by these factors.
These factors are discussed under two broad categories - Commodity
Price, Foreign Exchange and Interest Rate Risk; and Operational and
Other Business Risks. Commodity Price, Foreign Exchange And
Interest Rate Risk The two most important factors affecting the
level of cash distributions available to unitholders are the level
of production achieved by PrimeWest, and the price received for its
products. These prices are influenced in varying degrees by factors
outside the Trust's control. Some of these factors include: - world
market forces, specifically the actions of OPEC and other large
crude oil producing countries including Russia, and their
implications on the supply of crude oil; - world and North American
economic conditions which influence the demand for both crude oil
and natural gas and the level of interest rates set by the
governments of Canada and the U.S.; - weather conditions that
influence the demand for natural gas and heating oil; - the
Canadian/U.S. exchange rate that affects the price received for
crude oil as the price of crude oil is referenced in U.S. dollars;
- transportation availability and costs; and - price differentials
among world and North American markets based on transportation
costs to major markets and quality of production. To mitigate these
risks, PrimeWest has an active hedging program in place based on an
established set of criteria that has been approved by the Board of
Directors. The results of the hedging program are reviewed against
these criteria and the results actively monitored by the Board.
Beyond our hedging strategy, PrimeWest also mitigates risk by
having a well-diversified marketing portfolio and by transacting
with a number of counter-parties and limiting exposure to each
counter-party. In 2003, approximately 25% of natural gas production
was sold to aggregators and 75% into the Alberta short-term or
export long-term markets. The contracts that PrimeWest has with
aggregators vary in length. They represent a blend of domestic and
U.S. markets and fixed and floating prices designed to provide
price diversification to our revenue stream. The primary objective
of our commodity risk management program is to reduce the
volatility of our cash distributions, to lock in the economics on
major acquisitions and to protect our capital structure when
commodity prices cycle downwards. In 2003, PrimeWest lost $30.5
million from commodity hedges ($0.66 per trust unit), while in
2002,PrimeWest added $28.1 million ($0.82 per Trust Unit) to our
cash flow through various physical and financial hedging
transactions. Over the three year period 2001 to 2003, PrimeWest's
hedging program has added $37.1 million to revenue. Operational
AndOther Business Risks PrimeWest is also exposed to a number of
risks related to its activities within the oil and gas industry
that also have an impact on the amount of cash available to
unitholders. These risks, and the ways in which PrimeWest seeks to
mitigate these risks include, but are not limited to: RISK:
Production ---------- Risk associated with the production of oil
and gas - includes well operations, processing and the physical
delivery of commodities to market. We mitigate by: Performing
regular and proactive protective well, facility and pipeline
maintenance supported by telemetry, physical inspection and
diagnostic tools. Commodity Price --------------- Fluctuations in
natural gas, crude oil and natural gas liquid prices. We mitigate
by: Hedging. See 2003 Hedging Results of this press release.
Transportation -------------- Market risk related to the
availability of transportation to market and potential disruption
in delivery systems. We mitigate by: Diversifying the
transportation systems on which we rely to get our product to
market. Natural decline --------------- Development risk associated
with capital enhancement activities undertaken - the risk that
capital spending on activities suchas drilling, well completions,
well workovers and other capital activities will not result in
reserve additions or in quantities sufficient to replace annual
production declines. We mitigate by: Diversifying our capital
spending program over a large number of projects so that too much
capital is not risked on any one activity. We also have a highly
skilled technical team of geologists, geophysicists and engineers
working to apply the latest technology in planning and executing
capital programs. Capital is spent only after strict economic
criteria for production and reserve additions are assessed.
Acquisitions ------------ Acquisition risk associated with
acquiring producing properties at low cost to renew our inventory
of assets. We mitigate by: Continually scanning the marketplace for
opportunities to acquire assets. Our technical acquisition
specialists evaluate potential corporate or property acquisitions
and identify areas for value enhancement through operational
efficiencies or capital investment. All prospects are subjected to
rigorous economic review against established acquisition and
economic hurdle rates. In some cases we may also hedge commodity
prices to protect the acquisition economics in the near term
period. Reserves -------- Reserve risk in respect of the quantity
and quality of recoverable reserves. We mitigate by: Contracting
our reserves evaluation to a reputable third party consultant, GLJ.
The work and independence of GLJ is reviewed by the Audit
andReserves Committee of the Board of Directors of PrimeWest. Our
strategy is to invest in mature, longer life properties having a
higher proved producing component where the reserve risk is
generally lower and cash flows are more stable and predictable.
Environmental Health and Safety (EH&S)
-------------------------------------- Environmental, health and
safety risks associated with oil and gas properties and facilities.
We mitigate by: Establishing and adhering to strict guidelines for
EH&S including training, proper reporting of incidents,
supervision and awareness. PrimeWest has active community
involvement in field locations including regular meetings with
stakeholders in the area. PrimeWest carries adequate insurance to
cover property losses, liability and business interruption. These
risks are reviewed regularly by the Corporate Governance and
Nominating Committee of the Board, which acts as PrimeWest's
Environmental, Health and Safety Committee. Regulation, Tax and
Royalties ----------------------------- Changes in government
regulations including reporting requirements, income tax laws,
operating practices and environmental protection requirements and
royalty rates. We mitigate by: Keeping informed of proposed changes
in regulations and laws to properly respond to and plan for the
effects that these changes may have on our operations. Liability to
unitholders ------------------------ There is no statutory
protection for unitholders from liabilities of the Trust. We
mitigate by: Limiting the business of the Trust to the right to
receive the net cash flow of PrimeWest Energy Inc. All of the oil
and gas business operations of PrimeWest are conducted by PrimeWest
Energy Inc. PrimeWest Energy Inc. has a vigorous EH&S program
as well as significant insurance protection. INCOME TAXES -
UNITHOLDERS - 2003 For the 2003 taxation year, Canadian unitholders
of PrimeWest were paid $4.40 Canadian per Trust Unit in
distributions. Of this distribution amount, 42% or $1.85 per Trust
Unit is deemed a tax deferred return of capital, and 58% or $2.55
per Trust Unit is taxable to unitholders as other income (taxed at
the same rate as interest income). For unitholders resident in the
United States, the taxability of distributions is calculated using
U.S. tax rules which allow for the deduction of crown royalties and
accounting based depletion. As a result of these deductions, none
of the 2003 distribution is taxable as dividends and 100% of the
2003 distributions are atax deferred return of capital. A 15%
withholding tax applies to distributions paid to U.S. unitholders.
Further details regarding the withholding tax is available on
PrimeWest's website at http://www.primewestenergy.com/. For both
Canadian and UnitedStates unitholders, the tax deferred return of
capital portion reduces the unitholder's adjusted cost base for
purposes of calculating a capital gain or loss upon ultimate
disposition of their Trust Units. Unitholders contemplating a
disposition may wish to consult the "Unitholder Info" section on
PrimeWest's website and use the adjusted cost base calculator.
QUARTERLY PERFORMANCE 2003 2002
------------------------------------------------------ ($ millions,
except per Trust Unit amounts) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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Net Revenues 94.0 85.6 77.273.1 69.4 62.3 63.8 68.8 Net Income 22.1
61.7 7.3 (0.7) 6.0 (6.2) 8.2 (7.4) Income Per Unit 0.52 1.35 0.16
(0.10) 0.20 (0.05) 0.24 (0.20)
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The above table highlights PrimeWest's quarterly performance for
the years ended 2003 and 2002. Net revenues were primarily impacted
by higher commodity prices and production volumes in 2003. Net
income was higher in 2003 as a result of foreign exchange gains
along with increased tax recoveries. FOURTH QUARTER AND YEAR END
2003 CONFERENCE CALL AND WEBCAST PrimeWest will be conducting a
conference call and Web cast for interested analysts, brokers,
investors and media representatives about its fourth quarter and
year end 2003 results at 9:00 a.m. Mountain time (11:00 a.m.
Eastern time) on February 20th, 2004. Callers may dial 800-814-3911
a few minutes prior to start and request the PrimeWest conference
call. The call also will be available for replay by dialing
1-877-289-8525, and entering pass code 21028779 followed by the
pound key. Webcast listeners are invited to go to
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal
sign)701580 for the live Web cast and/or replay or access the Web
cast at the PrimeWest website, http://www.primewestenergy.com/.
QUESTIONS PrimeWest Energy Trust welcomes questions from
unitholders and potential investors; call Investor Relations at
403-234-6600 or toll-free in Canada and the U.S. at 1-877-968-7878;
or visit us on the Internet at our website,
http://www.primewestenergy.com/. We make every effort to reply
within 2 business days, but during periods of heavy call volume,
our response time may increase. On behalf of the Board of
Directors: February 19, 2004 Don Garner President and Chief
Executive Officer CONSOLIDATED BALANCE SHEETS As at December 31
(millions of dollars) 2003 2002 2001
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ASSETS Current assets Cash and short term deposits $ 2.5 $ - $ -
Accounts receivable 65.4 71.6 60.6 Prepaid expenses 6.5 9.8 9.1
Inventory 2.1 2.2 3.2
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76.5 83.6 72.9 Cash reserved for site restoration and reclamation
(note 7) 8.2 - 0.7 Other assets (note 5) 0.2 14.4 - Deferred
charges 1.3 - - Property, plant and equipment (note 4) 1,537.6
1,404.5 1,448.7 Goodwill (note 3) 56.1 - -
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$ 1,679.9 $ 1,502.5 $ 1,522.3
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LIABILITIES AND UNITHOLDERS' EQUITY Current liabilities Bank
overdraft $ - $ 3.1 $ 14.6 Accounts payable 26.7 43.1 26.2 Accrued
liabilities 45.3 24.2 39.4 Accrued distributions to unitholders
10.3 13.9 12.0 Due to related company (note 11) - - 10.1
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82.3 84.3 102.3 Long-term debt (note 6) 250.1 225.0 195.0 Future
income taxes (note 12) 310.1 339.9 362.6 Site restoration and
reclamation provision 17.8 6.2 6.1
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660.3 655.4 666.0 UNITHOLDERS' EQUITY Net capital contributions
(note 8) 1,565.9 1,300.0 1,152.6 Capital issued but not distributed
5.2 0.9 1.0 Long-term incentive plan equity (note 9) 14.6 10.0 7.9
Accumulated income 213.5 123.2 122.6 Accumulated cash distributions
(771.5) (578.9) (421.0) Accumulated dividends (8.1) (8.1) (6.8)
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1,019.6 847.1 856.3
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$ 1,679.9 $ 1,502.5 $ 1,522.3
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Commitments and Contingencies (Note 14) The accompanying notes form
an integral part of these financial statements. CONSOLIDATED
STATEMENTS OF UNITHOLDERS' EQUITY For the years ended December 31
(millions of dollars) 2003 2002 2001
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Unitholders' equity, beginning of year $ 847.1 $ 856.3 $ 298.6 Net
income for the year 90.3 0.6 79.5 Net capital contributions 265.9
147.4 717.2 Capital issued but not distributed 4.3 (0.1) 0.4
Long-term incentive plan equity 4.6 2.1 (1.0) Cash distributions
(192.6) (158.0) (234.4) Dividends - (1.2) (4.0)
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Unitholders' equity, end of year $ 1,019.6 $ 847.1 $ 856.3
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CONSOLIDATED STATEMENTS OF CASH FLOW For the years ended December
31 (millions of dollars) 2003 2002 2001
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OPERATING ACTIVITIES Net income for the year $ 90.3 $ 0.6 $ 79.5
Add/(deduct): Items not involving cash from operations Depletion,
depreciation and amortization 207.3 182.0 159.3 Non-cash general
& administrative 14.4 6.1 4.2 Non-cash foreign exchange gain
(12.1) - - Non-cash management fees - 1.4 1.8 Non-cash
internalization - 13.1 - Future income taxes recovery (83.0) (32.3)
(30.3) Other non-cash items (0.3) - -
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Cash flow from operations 216.6 170.9 214.5 Expenditures on site
restoration and reclamation (2.2) (3.9) (3.7) Change in non-cash
working capital 5.3 (10.7) (20.5)
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$ 219.7 $ 156.3 $ 190.3
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FINANCING ACTIVITIES Proceeds from issue of Trust Units (net of
costs) $ 240.3 $ 118.3 $ 159.5 Net cash distributions to
unitholders (note 10) (172.5) (145.1) (222.7) Dividends - (1.2)
(0.6) Increase (decrease) in bank credit facilities (137.0) 29.9
(62.9) Increase in senior secured notes 174.0 - - Increase in
deferred charges (1.5) - - Change in non-cash working capital (3.6)
1.0 1.0
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$ 99.7 $ 2.9 $ (125.7)
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INVESTING ACTIVITIES Expenditures on property, plant &
equipment $ (105.8) $ (69.1) $ (84.2) Acquisition of capital /
corporate assets (210.1) (59.6) (84.1) Proceeds on disposal of
property, plant & equipment 2.3 4.5 78.1 (Increase) decrease in
cash reserved for future site restoration and reclamation (6.6) 0.7
(0.3) Expenditures on future acquisitions - (14.1) - Change in
non-cash working capital 6.4 (10.1) 12.1
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$ (313.8) $ (147.7) $ (78.4)
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INCREASE (DECREASE) IN CASH FOR THE YEAR $ 5.6 $ 11.5 $ (13.8) BANK
OVERDRAFT BEGINNING OF THE YEAR (3.1) (14.6) (0.8)
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CASH (BANK OVERDRAFT) END OF THE YEAR $ 2.5 $ (3.1) $ (14.6)
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CASH INTEREST PAID $ 13.1 $ 10.3 $ 13.2
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CASH TAXES PAID $ 3.9 $ 4.0 $ 0.5
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CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31
(millions of dollars, except for per Trust Unit amounts) 2003 2002
2001
-------------------------------------------------------------------------
-------------------------------------------------------------------------
REVENUES Sales of crude oil, natural gas and natural gas liquids $
434.6 $ 320.5 $ 378.2 Crown and other royalties, net of ARTC
(101.9) (56.5) (73.2) Other income (2.8) 0.3 1.5
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329.9 264.3 306.5
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EXPENSES Operating 79.4 60.8 59.0 Cash general and administrative
14.5 11.3 10.4 Non-cash general and administrative 14.4 6.1 4.2
Interest 15.1 10.8 13.8 Cash management fees (note 11) - 4.0 6.4
Cash internalization costs - 3.6 - Non-cash management fees (note
11) - 1.4 1.8 Non-cash internalization costs (note 11) - 13.1 -
Foreign exchange (gain)/loss (11.9) - - Depletion, depreciation and
amortization 207.3 182.0 159.3
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318.8 293.1 254.9
-------------------------------------------------------------------------
Income (loss) before taxes for the year 11.1 (28.8) 51.6
-------------------------------------------------------------------------
Income and capital taxes 3.8 2.9 2.4 Future income taxes recovery
(note 12) (83.0) (32.3) (30.3)
-------------------------------------------------------------------------
(79.2) (29.4) (27.9)
-------------------------------------------------------------------------
Net income for the year $ 90.3 $ 0.6 $ 79.5
-------------------------------------------------------------------------
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Net income per Trust Unit $ 1.96 $ 0.02 $ 3.12 Diluted net income
per Trust Unit $ 1.95 $ 0.02 $ 3.08
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (all amounts
areexpressed in millions of Canadian dollars unless otherwise
indicated) 1. Structure Of The Trust --------------------------
PrimeWest Energy Trust (the Trust) is an open-ended investment
trust formed under the laws of Alberta in accordancewith a
declaration of trust dated August 2, 1996, as Amended. The
beneficiaries of the Trust are the holders of Trust Units (the
unitholders). The principal undertaking of the Trust's operating
companies, PrimeWest Energy Inc. and PrimeWest Gas Corp.
(collectively referred to as PrimeWest), is to acquire and hold,
directly and indirectly, interests in oil and gas properties. One
of the Trust's primary assets is a royalty entitling it to receive
99% of the net cash flow generated by theoil and gas interests
owned by PrimeWest. The royalty acquired by the Trust effectively
transfers substantially all of the economic interest in the
properties to the Trust. The common shares of PrimeWest Energy Inc.
are 100% owned by the Trust. PrimeWest Gas Corp. is a wholly owned
subsidiary of PrimeWest Energy Inc. On November 4, 2002,
unitholders voted, by a 92% majority, to internalize management.
PrimeWest Management Inc. and its shareholders received a total of
$26.3 million in connection with that transaction. Approximately
$13.2 million related to the acquisition of the 1% retained royalty
and was recorded as an acquisition in property, plant and
equipment. The balance was charged to non-cash internalization
expense.In addition, retention provisions for senior management
totaling $3.5 million were agreed to and $1.5 million was accrued
relating to the termination of the management incentive program
(see Note 11). 2. Accounting Policies -----------------------
Consolidation These consolidated financial statements include the
accounts of the Trust and its wholly-owned subsidiaries, PrimeWest
Energy Inc and PrimeWest Gas Corp. The Trust, through the royalty,
obtains substantially all of the economic benefits of the
operations of PrimeWest. Cash And Short Term Investments Short term
investments, with maturities less than three months at the date of
acquisition, are considered to be cash equivalents and are recorded
at cost, which approximates market value. Inventory Inventory is
measured at lower of cost and net realizable value. Goodwill
Goodwill represents the excess of purchase price over fair value of
net assets acquired and liabilities assumed. Goodwill is assessed
for impairment at least annually. To assess impairment, the fair
value of each reporting unit is determined and compared to the book
value of the reporting unit. The amount of the impairment is
determined by deducting the fair value of the reporting unit's
assets and liabilities from the fair value of the reporting unit to
determine the implied fair value of goodwill and comparing that
amount to the book value of the reporting unit's goodwill. Any
excess of the book value of goodwill over the implied fair value of
goodwill is the impairment amount. Property, Plant And Equipment
PrimeWest follows the full cost method of accounting. All costs of
acquiring oil and gas properties and related development costs are
capitalized and accumulated in one cost centre. Maintenance and
repairs are charged against earnings. Renewals and enhancements
that extend the economic life of the capital asset are capitalized.
Gains and losses are not recognized on disposition of oil and gas
properties unless that disposition would alter the rate of
depletion by 20% or more. i) Ceiling test --------------- PrimeWest
places a limit on the aggregate cost of capital assets which may be
carried forward for depletion against netrevenues of future periods
(the ceiling test). The ceiling test is a cost recovery test
whereby; capitalized costs, less accumulated depletion and site
restoration, the lower of cost and market value of unproved land
and future income taxes, are limited to an amount equal to
estimated undiscounted future net revenues from Proved reserves,
less general and administrative expenses, site restoration, future
financing costs and applicable income taxes. Costs and prices at
the balance sheet date are used. Any costs carried on the balance
sheet in excess of the ceiling test limitation are charged to
income. ii) Site restoration and reclamation provision
---------------------------------------------- PrimeWest provides
for the cost of future site restoration and reclamation, based on
estimates by management, using the unit-of-production method.
Actual site restoration costs are charged against the accumulated
liability. PrimeWest places cash in reserve to fund actual
expenditures as they are incurred. iii) Depletion, depreciation and
amortization ---------------------------------------------
Provision for depletion and depreciation is calculated on the
unit-of-production method, based on Proved reserves
beforeroyalties. Reserves are estimated by independent petroleum
engineers. Reserves are converted to equivalent units on the basis
of approximate relative energy content. Depreciation and
amortization of head office furniture and equipment is provided for
at rates ranging from 10% to 30%. Joint Venture Accounting
PrimeWest conducts substantially all of its oil and gas production
activities through joint ventures, and the accounts reflect only
PrimeWest's proportionate interest in such activities. Long-Term
Incentive Plan Liabilities under the Trust's Long-term Incentive
Plan are estimated at each balance sheet date, based on the amount
of Unit Appreciation Rights that are in the money using the unit
price as at that date. Expenses are recorded through non-cash
general and administrative costs, with an offsetting amount in
long-term incentive plan equity. As Trust Units are issued under
the plan, the exercise value is recorded in net capital
contributions. Income Taxes The Trust is considered an inter-vivos
trust for income tax purposes. As such, the Trust is subject to tax
on any taxable income that is not allocated to the unitholders.
Periodically, current taxes may be payable by PrimeWest, depending
upon the timing of income tax deductions. Should these taxes prove
to be unrecoverable, they will be deducted from royalty income in
accordance with the royalty agreement. Future income taxes are
recorded for PrimeWest using the liability method of accounting.
Future income taxes are recorded to the extent that the carrying
value of PrimeWest's capital assets exceeds the available tax
pools. Financial Instruments PrimeWest uses financial instruments
to manage its exposure to fluctuations in commodity prices and
interest rates. PrimeWest does not use financial instruments for
speculative trading purposes and, accordingly, they are accounted
for as hedges. Gains and losses on hedging activity are reflected
in revenue, or in the case of interest rate hedges, in interest
expense, at the time of sale of the related hedged production, or
when the monthly exchange contracts expire. Measurement Uncertainty
Certain items recognized in the financial statements are subject to
measurement uncertainty. The recognized amounts of such items are
based on PrimeWest's best information and judgment. Such amounts
are not expected to change materially in the near term. They
include the amounts recorded for depletion, depreciation and future
site restoration costs which depend on estimates of oil and gas
reserves or the economic lives and future cash flows from related
assets. 3. Corporate Acquisitions -------------------------- a) On
January 23, 2003, PrimeWestGas Inc. completed the acquisition of
two private Canadian oil and gas companies. Subsequent to the
transaction, PrimeWest Gas Inc. was wound up into PrimeWest Energy
Inc. The acquired companies were amalgamated with PrimeWest Gas
Corp. The acquisition was accounted for using the purchase method
of accounting with net assets acquired and consideration paid as
follows: Net Assets Acquired at Consideration Assigned Values Paid
-------------------------------------------------------------------------
Petroleum and natural gas assets $ 220.9 Goodwill 56.1 Working
capital, including cash of $3.9 0.7 Site restoration provision
(5.4) Cash $ 212.7 Future income taxes (53.2) Costs associated with
acquisition 6.4
-------------------------------------------------------------------------
$ 219.1 $ 219.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) On March 29, 2001, PrimeWest Oil & Gas Corp. (Oil & Gas)
completed the acquisition of all of the issued and outstanding
shares of Cypress Energy Inc. (Cypress) pursuant to a takeover bid.
In aggregate, PrimeWest issued 50.2 million Trust Units and
PrimeWest issued 5.2 million exchangeable shares of Oil & Gas
and paid $59.2 million in exchange for the shares of Cypress.
Subsequent to the transaction, Cypress and Oil & Gas were
amalgamated. On January 1, 2002, PrimeWest Oil and Gas Corp. and
PrimeWest Energy Inc. were amalgamated. The acquisition was
accounted for using the purchase method of accounting with net
assets acquired and consideration paid as follows: Net Assets
Acquired at Consideration Assigned Values Paid
-------------------------------------------------------------------------
Petroleum and natural gas assets $ 1,201.5 Working capital deficit
assumed (19.2) Cash $ 59.2 Long-term debt assumed (179.0) Trust
Units issued 489.8 Site restoration provision (4.3) Exchangeable
shares issued 50.3 Futureincome taxes (376.3) Costs associated with
acquisition 23.4
-------------------------------------------------------------------------
$ 622.7 $ 622.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Property, Plant and Equipment ---------------------------------
2003 ----------------------------------------- Accumulated
depletion depreciation and Net book Cost amortization value
----------------------------------------- Property acquisition oil
and gas rights $ 1,917.4 $ (607.0) $ 1,310.4 Drilling and
completion 208.0 (52.1) 155.9 Production facilities and equipment
91.0 (23.1) 67.9 Head office furniture and equipment 8.0 (4.6) 3.4
-------------------------------------------------------------------------
$ 2,224.4 $ (686.8) $ 1,537.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2002 ----------------------------------------- Accumulated
depletion depreciation and Net book Cost amortization value
----------------------------------------- Property acquisition oil
and gas rights $ 1,682.6 $ (430.6) $ 1,252.0 Drilling and
completion 139.9 (34.7) 105.2 Production facilities and equipment
60.5 (15.4) 45.1 Head office furniture and equipment 5.2 (3.0) 2.2
-------------------------------------------------------------------------
$ 1,888.2 $ (483.7) $ 1,404.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2001 ----------------------------------------- Accumulated
depletion depreciation and Net book Cost amortization value
----------------------------------------- Property acquisition oil
and gas rights $ 1,608.4 $ (268.1) $ 1,340.3 Drilling and
completion 103.6 (24.1) 79.5 Production facilities and equipment
38.2 (11.5) 26.7 Head office furniture and equipment 4.2 (2.0) 2.2
-------------------------------------------------------------------------
$ 1,754.4 $ (305.7) $ 1,448.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unproved land costs of $ 36.0 million (2002 - $44.2 million, 2001 -
$55.7 million) are excluded from costs subject to depletion and
depreciation. PrimeWest capitalized $2.5 million of general and
administrative costs in 2003 ($2.5 million in 2002; $2.2 million in
2001). In accordance with stated accounting policies, PrimeWest has
performed a ceiling test using commodity prices as at the
measurement date of December 31, 2003. Using December 31, 2003
commodity prices of AECO $6.09 per mcf for natural gas and WTI $US
32.52 per barrel for crude oil, results in a ceiling test surplus.
A ceiling test surplus existed as at December 31, 2002. At December
31, 2001, PrimeWest performed its ceiling test using commodity
prices as at that measurement date of AECO $3.67 per mcf for
natural gas, and WTI $U.S. 19.84 per barrel for crude oil. The
ceiling test resulted in a deficiency of $150 million. PrimeWest
did not record a write-down at that time as the write-down occurred
within the first two years of the acquisition of Cypress Energy
Inc. 5. Other Assets ---------------- 2003 2002 2001
----------------------------------------- Deposit on acquisition $
- $ 10.9 $ - Expenditures incurred on acquisition - 3.3 - Other
assets 0.2 0.2 -
-------------------------------------------------------------------------
$ 0.2 $ 14.4 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. Long-Term Debt ------------------ 2003 2002 2001
----------------------------------------- Revolving credit facility
$ 88.0 $ 225.0 $ 195.0 Senior secured notes 162.1 - -
-------------------------------------------------------------------------
250.1 225.0 195.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PrimeWest and the Trust (as co-borrowers) have combined revolving
credit facilities in the amount of $213 million (2002 - $335
million; 2001 - $350 million), with a borrowing base at December
31, 2003 of $390 million (2002 - $335 million; 2001 - $350
million). The facilities consists of a revolving term loan of $188
million and an operating facility of $25 million. In addition to
amounts outstanding under the facilities as indicated in the table
above, PrimeWest has outstanding letters of credit in theamount of
$5.1 million (2002 - $3.8 million; 2001 - $2.8 million). Advances
under the facility are made in the form of Banker's Acceptances
(BA), prime rate loans or letters of credit. In the case of BA,
interest is a function of the BA rate plus a stamping fee based on
the Trust's current ratio of debt to cash flow. In the case of
prime rate loans, interest is charged at the bank's prime rate.
While any amounts are outstanding under the bridge facility, the
interest rates and stamping fees increase by 50 basis points. For
2003, the effective interest rate was 4.7% (2002 - 4.6%, 2001 -
5.6%). The credit facility revolves until June 30, 2004, by which
time the lenders will have conducted their annual borrowing base
review. The lender also has the right to re-determine the borrowing
base at one other time during the year. During the revolving phase,
the facility has no specific terms of repayment. At the end of the
revolving period, the lender has the right to extendthe revolving
period for a further 364-day period or to convert the facility to a
term facility. If the lender converts to a non-revolving facility,
60% of the aggregate principal amount of the loan shall be
repayable on the date which is 366 days after such conversion date
and the remaining 40% of the aggregate principal amount outstanding
shall be repayable on the date which is 365 days after the initial
term repayment date. On May 7, 2003, PrimeWest replaced a portion
of its bank debt with Senior Secured Notes (the "Notes") in the
amount of $U.S. 125 million. They have a final maturity of May 7,
2010, and bear interest at 4.19% per annum, with interest paid
semi-annually on November 7 and May 7 of each year. The Note
Purchase Agreement requires PrimeWest to make four annual principal
repayments of $U.S. 31,250,000 commencing May 7, 2007. Collateral
for the secured note and credit facility is a floating charge
debenture covering all existing and after acquired property in the
principal amount of $U.S. 1 billion. The secured parties for the
revolving credit facility and senior secured notes have agreed to
share the security interests on a pari passu basis. The costs
incurred in connection with the Notes, in the amount of $1.5
million, are classified as deferred charges on the balance sheet
and are being amortized over the term of the Notes. The Senior
Secured Notes are the legal obligation of PrimeWest Energy Inc. and
are guaranteed by PrimeWest Energy Trust. 7. Cash Reserve For Site
Restoration And Reclamation
----------------------------------------------------- Commencing in
1998, funding for the reserve was provided for by reducing
distributions otherwise payable based on an amount per BOE produced
($0.15 per BOE produced for 1998 and 1999, $0.24 per BOE produced
in 2000, $0.32 per BOE produced in 2001, $0.37 per BOE produced in
2002 and $0.50 per BOE produced in 2003). The cash amount
contributed, including interestearned, was $6.2 million in 2003
(2002 - $4.1 million; 2001 - $4.2 million). During 2003, an
additional contribution of $4.2 million was made to fund
reclamation expenditures associated with properties acquired in
2002. Actual costs of site restoration and abandonment totaling
$2.2 million were paid out of this cash reserve for the year ended
December 31, 2003 (2002 - $3.9 million; 2001 - $3.8 million). 8.
Unitholders' Equity ----------------------- PrimeWest Energy Trust
Theauthorized capital of the Trust consists of an unlimited number
of Trust Units. Trust Units Number of Units Amounts ($)
-------------------------------------------------------------------------
Balance, December 31, 2000 50,982,093 $ 428.0 Issued for cash
19,790,000 165.2 Issue expenses - (9.0) Issued to acquire Cypress
Energy Inc. 50,234,771 489.8 Issued for payment of management fees
199,841 1.7 Issued on exchange of exchangeable shares 2,415,363
20.3 Issued pursuant to Distribution Reinvestment Plan 1,623,171
10.8 Issued pursuant to Long-Term Incentive Plan 577,840 5.2 Issued
pursuant to Optional Trust Unit Purchase Plan 142,528 3.3
-------------------------------------------------------------------------
Balance, December 31, 2001 125,965,607 $ 1,115.3 Restated giving
effect for 4 to 1 Trust Unit consolidation on August 16, 2002
31,491,402 $ - Issued for cash 4,200,000 $ 110.0 Issue expenses -
(5.6) Issued for payment of management fees 66,853 1.8 Issued on
exchange of exchangeable shares 106,934 2.7 Issued pursuant to
Distribution Reinvestment Plan 476,106 10.1 Issued pursuant to
Long-Term Incentive Plan 153,749 4.0 Issue of units due to odd lot
program 111 - Issue of fractional units due to 4 to 1 consolidation
6,264 - Issued pursuant to Optional Trust Unit Purchase Plan
503,103 13.9
-------------------------------------------------------------------------
Balance, December 31, 2002 37,004,522 $ 1,252.2 Issued for cash
9,100,000 $ 234.8 Issue expenses - (12.1) Issued on exchange of
exchangeable shares 964,897 21.2 Issued pursuant to Distribution
Reinvestment Plan 600,598 14.8 Issued pursuant to Long-Term
Incentive Plan 360,608 9.4 Issue of units due to odd lot program 38
- Issue of fractional units due to 4 to 1 consolidation 11 - Issued
pursuant to Optional Trust Unit Purchase Plan 721,209 17.6
-------------------------------------------------------------------------
Balance, December 31, 2003 48,751,883 $ 1,537.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The number of units was restated giving effect of four for one
Trust Unit consolidation effective August 16, 2002. The weighted
average number of Trust Units and exchangeable shares outstanding
in 2003 was 46,015,519 (2002 - 34,135,576; 2001 - 25,633,271). For
purposes of calculating diluted net income per Trust Unit, 345,278
Trust Units (2002 - 341,315; 2001 - 311,789) issuable pursuant to
the long-term incentive plan were added to the weighted average
number. The per unit cash distribution amounts paid or declared
reflects distributions paid or declaredto Trust Units outstanding
on the record dates. PrimeWest Exchangeable Class A Shares In
connection with the Cypress transaction (see Note 3b), PrimeWest
Oil & Gas Corp. (now amalgamated with PrimeWest Energy Inc.)
amended its articles to create an unlimited number of exchangeable
shares. The exchangeable shares are exchangeable into PrimeWest
Trust Units at any time up to March 29, 2010, based on an exchange
ratio that adjusts each time the Trust makes distribution to its
unitholders. The exchange ratio, which was 1:1 on the date that the
transaction closed, is based on the total monthly distribution,
divided by the closing unit price on the distribution payment date.
The exchange ratio on December 31, 2003 was 0.44302:1 (2002 -
0.37454:1; 2001 - 0.3126:1, restated effecting 4 to 1 Trust Unit
consolidation). Exchangeable Shares No. of shares Amounts ($)
-------------------------------------------------------------------------
Balance,December 31, 2001 3,316,742 $ 32.3 Issued for
internalization 1,363,714 13.1 Conversion of Class B shares 710,795
4.3 Exchanged for Trust Units (211,973) (2.0)
-------------------------------------------------------------------------
Balance, December 31, 2002 5,179,278 47.7 Issued for management
incentive program 161,717 1.5 Exchanged for Trust Units (2,299,872)
$ (21.2)
-------------------------------------------------------------------------
Balance, December 31, 2003 3,041,123 $ 28.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PrimeWest Exchangeable Class B Shares In connection with a
transaction in 2000, PrimeWest Resources Ltd. (now amalgamated with
PrimeWest Energy Inc.) amended its articles to create an unlimited
number of exchangeable shares. At special meetings held in May and
June of 2002, holders of Class B Exchangeable Shares and Class A
Exchangeable shares voted to approve a special resolution amending
the articles of the Corporation to convert all Class B Exchangeable
shares to Class A Exchangeable Shares. As at June 14, 2002, 649,561
Class B Exchangeable shares were converted to Class A Exchangeable
Sharesusing an exchange ratio of 1.09427:1. Exchangeable Shares No.
of shares Amounts ($)
-------------------------------------------------------------------------
Balance, December 31, 2001 751,532 $ 5.0 Exchanged for Trust Units
(101,971) (0.7) Converted to Class A Exchangeable Shares (649,561)
(4.3)
-------------------------------------------------------------------------
Balance, December 31, 2002 - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Trust Units and Exchangeable Shares Issued & Outstanding(1)
2003 2002 2001 ----------------------------------------- Trust
Units issued & outstanding 48,751,883 37,004,522 31,491,402
Exchangeable shares Class A Shares (2003 - 3,041,123 shares
exchangeable at 0.44302; 2002 - 5,179,278 shares exchangeable at
0.37454; 2001 - 3,316,742 shares exchangeable at 0.3126) 1,347,277
1,939,864 1,036,648 Class B Shares (2001 - 751,532 shares
exchangeable at 0.34201) - - 257,035
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total units and exchangeable shares issued & outstanding
50,099,160 38,944,386 32,785,085 Unit Appreciation Rights 345,278
341,315 311,788
-------------------------------------------------------------------------
Total units and exchangeable shares issued & outstanding -
diluted 50,444,438 39,285,701 33,096,873
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Restated Trust Units to give effect to 4 for 1 unit
consolidation effective August 16, 2002. 9. Trust Unit Incentive
Plan ----------------------------- Under the terms of the Trust
Unit Incentive Plan, a maximum of 1,800,000 Trust Units are
reserved for issuance pursuant to the exercise of Unit Appreciation
Rights (UARs) granted to employees of PrimeWest. Payouts under the
plan are based on total unitholder return, calculated using both
the change in the Trust Unit price as well as cumulative
distributions paid. The plan requires that a hurdle return of 5%
per annum be achieved before payouts accrue. UARs have a term of up
to six years and vest equally over a three-year period, except for
the members of the Board, whose UARs vest immediately. The Board of
Directors has the option of settling payouts under the plan in
PrimeWest Trust Units or in cash. To date, all payouts under the
plan have been in the form of Trust Units. As at December 31, 2003
-------------------------------------------------------------------------
Current return Trust Year UARs issued per "in the Total Unit of
Grant & outstanding UARs vested money" UARs equity dilution
-------------------------------------------------------------------------
1998 10,391 10,391 $ 49.98 $ 0.5 18,844 1999 55,160 55,160 34.92
1.9 69,892 2000 120,137 119,387 16.40 2.0 71,007 2001 383,424
265,645 7.81 3.0 74,891 2002 961,405 447,562 6.09 4.7 86,694 2003
1,085,031 141,896 4.75 2.5 23,950
-------------------------------------------------------------------------
Total 2,615,548 1,040,041 $ 14.6 345,278
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2002
-------------------------------------------------------------------------
Current return Trust Year UARs issued per "in the Total Unit of
Grant & outstanding UARs vested money" UARs equity dilution
-------------------------------------------------------------------------
1997 52,927 52,927 $ 22.98 $ 1.2 47,883 1998 105,798 105,798 33.99
3.6 141,563 1999 115,215 114,667 22.38 2.6 101,076 2000 187,984
125,661 8.22 1.5 37,831 2001 515,634 185,780 2.12 0.6 12,861 2002
1,120,142 82,097 1.97 0.5 101
-------------------------------------------------------------------------
Total 2,097,700 666,930 $ 10.0 341,315
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2001
-------------------------------------------------------------------------
Current return Trust Year UARs issued per "in the Total Unit of
Grant & outstanding UARs vested money" UARs equity dilution
-------------------------------------------------------------------------
1996 131,719 131,719 $ 15.84 $ 2.1 82,010 1997 79,839 79,839 13.76
1.1 43,165 1998 127,956 127,957 24.80 3.2 124,654 1999 148,416
89,566 14.76 1.3 52,025 2000 240,914 86,951 2.92 0.2 9,935 2001
629,343 25,211 - - -
-------------------------------------------------------------------------
Total 1,358,187 541,243 $ 7.9 311,789
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cumulative to December 31, 2003, 1,030,850 UARs have been exercised
(Cumulative to December 31, 2002 - 640,503; Cumulative to December
31, 2001 - 399,199), resulting in the issuance of 719,374 Trust
Units from treasury (Cumulative to December 31, 2002 - 358,766;
Cumulative to December 31, 2001 - 205,017). 10. Cash Distributions
---------------------- 2003 2002 2001
-------------------------------------------------------------------------
Netincome for the year $ 90.3 $ 0.6 $ 79.5 Add back (deduct)
amounts to reconcile to distribution: Depletion, depreciation and
amortization 207.3 182.0 159.3 Cash (retained) / paid from cash
available for distribution (15.6) (7.3) 25.8 Contribution to
reclamation fund (8.7) (4.1) (3.5) Non-cash general and
administrative 14.4 6.14.2 Non-cash foreign exchange (12.1) - -
Internalization costs paid in trust units - 13.1 - Management fees
paid in Trust Units - 1.4 1.8 Future income taxes recovery (83.0)
(32.3) (30.3)
-------------------------------------------------------------------------
$ 192.6 $ 159.5 $ 236.8 Cash Distributions to Trust Unitholders $
192.6 $ 158.0 $ 234.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Distributions per Trust Unit $ 4.40 $ 4.80 $ 9.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. Related - Party Transactions --------------------------------
On September 26, 2002, the Trust announced the planned elimination,
effective October 1, 2002, of its external management structure and
all related management, acquisition and disposition fees, as well
as the acquisition of the right to mandatory quarterly dividends
commonly referred to as the "1% retained royalty". The transaction
was approved by the Unitholders and the holders of Exchangeable
Shares on November 4, 2002 and closed November 6, 2002. The
transaction resulted in the elimination of the 2.5% management fee
on net production revenue, quarterly incentive payments payable in
the form of Trust Units, the 1.5% acquisition fee and the 1.25%
disposition fee, which resulted in payments to PrimeWest Management
Inc. in 2002 totaling $5.8 million (2001 - $21.3 million). In
addition, the amount of the 1% retained royalty paid in 2002 was
$1.3 million (2001 - $3.4 million). As at December 31, 2002, the
Trust and PrimeWest owed $nil (2001 - $10.1 million) to PrimeWest
Management Inc. for unpaid management and other fees and
reimbursement of general and administrative costs. The
internalization transaction was achieved through the purchase by
PrimeWest of all of the issued and outstanding shares of PrimeWest
Management Inc. for a total consideration of approximately $26.3
million comprised of a cash payment of $13.2 million and the
issuance of Exchangeable Shares exchangeable, based on an agreed
exchange ratio, for approximately 491,000 Trust Units and valued at
approximately $13.1 million based on the closing price of the Trust
Units on the TSX on September 26, 2002. The $13.2 million that
related to the acquisition of the 1% retained royalty was
capitalized; an additional $9.5 million was capitalized with an
offset to future tax liability as a result of the property, plant
and equipment having no tax basis. In addition, PrimeWest agreed to
issue Exchangeable Shares valued at $1.5 million to certain senior
managers to terminate a management incentive program of PrimeWest
Management Inc. and to create a special employee retention plan for
those senior managers which provides for long term incentive
bonuses in the form of Exchangeable Shares valued, in the
aggregate, at $3.5 million. Exchangeable Shares will be issued
pursuant to the retention plan on each of the second, third, fourth
and fifth anniversaries of the completion of the internalization
transaction. As at December 31, 2003, $0.5 million has been accrued
in non-cash general and administrative expenses related to the
special employee retention plan. 12. Income Taxes ----------------
PrimeWest and its subsidiaries had no taxable income for 2003,
2002, and 2001, as tax-pool deductions and the royalty payable were
sufficient to reduce taxable income in these entities to nil. The
future tax provision results from temporary differences between the
financial statement carrying amounts of assets and liabilities and
their respective tax bases. 2003 2002 2001
-------------------------------------------------------------------------
Loss carry forwards $ - $ (5.0) $ (10.6) Capital assets 318.9 350.0
378.0 Foreign exchange gain on long term debt 2.1 - - Site
restoration provision (6.0) (1.9) (2.3) Long-term incentive
liability (4.9) (3.2) (2.5)
-------------------------------------------------------------------------
$ 310.1 $ 339.9 $ 362.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The provisions for income taxes varies from the amounts that would
be computed by applying the combined Canadian federal and
provincial income tax rates for the following reasons: 2003 2002
2001
-------------------------------------------------------------------------
Net income (loss) before taxes $ 11.1 $ (28.8) $ 51.6
-------------------------------------------------------------------------
Computed income tax expense (recovery) at the Canadian statutory
rate of 40.62% (2002 - 42.12%; 2001 - 43.12%) 4.5 (12.1) 22.3
Increase (decrease) resulting from: Non-deductible crown royalties
and other payments, net of ARTC 0.3 5.7 0.2 Federalresource
allowance (16.2) (3.5) (9.7) Change in income tax rate (43.1) (4.2)
- Amounts included in trust income and other (28.5) (18.2) (43.1)
-------------------------------------------------------------------------
Future income taxes $ (83.0) $ (32.3) $ (30.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Financial Instruments ------------------------- a) Commodity
Price Risk Management PrimeWest generally sells its oil and gas
under short-term market-based contracts. Derivative financial
instruments, options and swaps may be used to hedge the impact of
oil and gas price fluctuations. A summary of these contracts in
place at December 31, 2003 follows: CRUDE OIL Period Volume
(bbls/d) Type WTI Price ($U.S./bbl)
-------------------------------------------------------------------------
Jan - Jan 2004 500 Swap $ 33.30 Jan - Mar 2004 1000 Swap 27.29 Jan
- Mar 2004 500 Swap 28.87 Jan - Mar 2004 500 Swap 30.21 Jan - Mar
2004 500 Swap 31.60 Jan - Mar 2004 500 Costless Collar 22.00/26.70
Jan - Mar 2004 500 Costless Collar 23.00/33.30 Jan - Mar 2004 500
Costless Collar 24.00/31.20 Jan - Mar 2004 500 Costless Collar
25.00/28.16 Apr - Jun 2004 1000 Swap 27.13 Apr - Jun 2004 500 Swap
28.64 Apr - Jun 2004 500 Swap 30.06 Apr - Jun 2004 500 Costless
Collar 22.00/26.12 Apr - Jun 2004 500 Costless Collar 24.00/30.50
Apr - Jun 2004 500 Costless Collar 25.00/28.07 Apr - Jun 2004 500
Costless Collar 26.00/32.07 Jul - Sep 2004 500 Swap 26.07 Jul - Sep
2004 500 Swap 27.04 Jul - Sep 2004 500 Swap 28.51 Jul - Sep 2004
500 Costless Collar 24.00/30.75 Jul - Sep 2004 500 Costless Collar
25.00/28.30 Jul - Sep 2004 500 Costless Collar 26.00/32.05 Oct -
Dec 2004 500 Swap 26.00 Oct - Dec 2004 500 Swap 27.03 Oct - Dec
2004 500 Swap 28.53 Oct - Dec 2004 500 Costless Collar 24.00/30.00
Oct - Dec 2004 500 Costless Collar 25.00/28.30 Jan 2005 - Mar 2005
500 Swap 27.25 Apr 2005 - Jun 2005 500 Swap 27.07 Jul 2005 - Sep
2005 500 Swap 27.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NATURAL GAS (AECO) Period Volume (mmcf/day) Type AECO Price
(Cdn$/mcf)
-------------------------------------------------------------------------
Jan 2004 - Mar 2004 4.7 Swap $ 6.19 Jan 2004 - Mar 2004 4.7 3 Way
4.22/5.28/8.23 Jan 2004 - Mar 2004 4.7 3 Way 4.48/5.54/6.52 Jan
2004 - Mar 2004 4.7 Costless Collar 6.33/7.91 Jan 2004 - Mar 2004
4.7 Costless Collar 6.33/11.87 Jan 2004 - Mar 2004 4.7 Costless
Collar 5.80/8.23 Jan 2004 - Mar 2004 4.7 Costless Collar 5.80/8.33
Jan 2004 - Mar 2004 4.7 Costless Collar 6.33/8.58 Jan 2004 - Mar
2004 4.7 Costless Collar 4.75/7.91 Jan 2004 - Oct 2004 9.5 3 Way
3.17/4.22/6.09 Jan 2004 - Dec 2004 1.0 Swap 6.02 Apr 2004 - Oct
2004 4.7 Swap 5.45 Apr 2004 - Oct 2004 4.7 Swap 6.02 Apr 2004 - Oct
2004 4.7 Swap 6.06 Apr 2004 - Oct 2004 4.7 Costless Collar
5.01/6.06 Apr 2004 -Oct 2004 4.7 Costless Collar 5.28/7.39
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A 3-way option is like a traditional collar, except that PrimeWest
has resold the put at a lower price. Utilizing the first 3-way
natural gas contract above as an example, PrimeWest has sold a call
at $8.23, purchased a put at $5.28, and resold the put at $4.22.
Should the market price drop below $5.28 PrimeWest will receive
$5.28 until the price is less than $4.22, at which time PrimeWest
would then receive market price plus $1.06. However, should market
prices rise above $8.23, PrimeWest would receive a maximum of
$8.23. Should the market price remain between $5.28 and $8.23,
PrimeWest would receive the market price. NATURAL GAS (BASIS
DIFFERENTIAL $US / MCF) Period Volume (mmcf/day) Type Basis Price
($US/mcf)
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Jan - Mar 2004 10.0 Basis Swap $ 0.63 Apr - Oct 2004 5.0 Basis Swap
$ 0.71
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The AECO basis is the difference between the NYMEX gas price in
$U.S. per mcf and the AECO price in $U.S. per mcf. Using the first
basis swap above as an example, PrimeWest has fixed this price
difference between the two markets at $U.S. 0.63 per mcf from
January 2004 through March 2004. If the NYMEX price for the period
turned out to be $U.S. 4.00 per mcf, PrimeWest would receive an
AECO equivalent price of $U.S. 3.37 per mcf. In 2003, the financial
impact of contracts settling in the year was a decrease in sales
revenues of $30.5 million (2002 - $28.1 million increase in sales
revenues; 2001 - $39.5 million increase in sales revenues). The
mark-to-market value of the hedges in place as at December 31, 2003
is a $6.0 million loss of which $2.1 million is attributable to
natural gas and $3.9 million is attributable to crude oil.
Electrical Power Period Power Amount (MW) Type Price ($/MW-hr)
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Q1 2004 5 Fixed Price Swap $ 58.50 Q2 2004 7.5 Fixed Price Swap
40.25 Q3 2004 5 Fixed Price Swap 46.50 Q4 2004 5 Fixed Price Swap
44.00 Calendar 2004 5 Fixed Price Swap 45.65
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The mark to market value of the hedges at December 31, 2003 is a
$0.6 million gain. b) InterestRate Risk Management PrimeWest has
the following interest rate swaps outstanding at December 31, 2003.
Interest Rate Risk Management Notional amount Term ($ millions)
Fixed BA rate (%)
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May 24/98 - May 25/04 $25 6.48 Nov 26/01 - May 26/04 $25 3.85
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The mark to market value of the interest rate swaps is a $0.6
million loss at December 31, 2003. The effect of the interest rates
swaps was to increase interest paid in 2003 by $0.9 million (2002 -
$1.5 million; 2001 - $0.4 million). c) Fair Value Of Financial
Instruments Financial instruments include cash, accounts
receivable, accounts payable and accrued liabilities, accrued
distributions to unitholders, long-term debt and financial hedges.
As at December 31, 2003, 2002, and 2001, the fair market value of
the financial instruments, other than long-term debt and financial
hedges, approximate their carrying value, due to the short term
maturity of these instruments. The fair value of long-term debt
approximates its carrying value in all material respects, because
the cost of borrowing approximates the market rate for similar
borrowings. 14. Commitments And Contingencies
--------------------------------- a) PrimeWest has lease
commitments relating to office buildings. The estimated annual
minimum operating lease rental payments for the buildings, after
deducting sublease income will be $1.2 million in 2004, $1.1
million in 2005, $1.1 million in 2006 and $2.4 million in 2007 -
2009, the remaining term of the leases. b) As part of PrimeWest's
internalization transaction (see Note 11), PrimeWest agreed to pay
$3.5 million in exchangeable shares as a special employee retention
plan. One quarter of the exchangeable shares will be issuable to
the Senior Managers of PrimeWest on each of the second, third,
fourth and fifth anniversary of transaction closing, November 6,
2002. As at December 31, 2003 $0.5million has been accrued in
non-cash general and administrative expenses. c) PrimeWest is
engaged in a number of matters of litigation, none of which could
reasonably be expected to result in any material adverse
consequence. d) PrimeWest has a pipeline transportation commitment
that runs to October 31, 2007 and has a minimum annual payment
requirement of $U.S. 2.1 million. 15. Subsequent Event
-------------------- On January 27th, 2004, PrimeWest announced
that it had agreedto make an offer to acquire all of the shares of
Seventh Energy. Seventh Energy's Board and executive unanimously
approved the transaction and have agreed to tender their
approximately 24% ownership interest. The acquisition cost is
expected tobe $42.6 million comprised of the assumption of $8.3
million of debt and working capital and a cash payment of $34.3
million. To protect the transaction economics, PrimeWest hedged
approximately 70% of Seventh Energy's gas production at a price of
$6.18 per mcf for one year. PrimeWest's existing credit line will
be used to fund the cash portion of the acquisition. The offer is
currently set to expire on March 15, 2004. 16. Prior Years'
Comparative Numbers ------------------------------------ Certain
prior years' comparative numbers have been restated to conform with
the current year's presentation. 17. Differences Between Canadian
And United States Generally Accepted
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Accounting Principles --------------------- PrimeWest's financial
statements are prepared in accordance with accounting principles
generally accepted (GAAP) in Canada which, in some respects, differ
from those generally accepted in the United States (U.S.). Those
policies that result in measurement differences will be available
under the "Investor Relations - Financial Information" section of
PrimeWest's website at a later date. TRADING PERFORMANCE For the
quarter ended Dec 31/03 Sep 30/03 Jun 30/03 Mar 31/03 Dec 31/02
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TSX Trust Unit prices ($ per Trust Unit) High $ 28.15 $ 26.80 $
27.75 $ 27.34 $ 27.68 Low $ 25.06 $ 25.19 $ 23.40 $ 24.48 $ 24.23
Close $ 27.56 $ 25.19 $ 25.04 $ 24.51 $ 25.40
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Average daily traded volume 202,661 149,148 234,477 184,428 123,964
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For the quarter ended Dec 31/03 Sep 30/03 Jun 30/03 Mar 31/03 Dec
31/02
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NYSE Trust Unit prices ($U.S. per Trust Unit) High $ 21.48 $ 19.29
$ 20.60 $ 17.96 $ 16.69 Low $ 18.67 $ 18.08 $ 15.97 $ 16.05 $ 15.62
Close $ 21.27 $ 18.68 $ 18.53 $ 16.73 $ 16.16
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Average daily traded volume 243,921 151,813 166,722 111,605 39,276
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Number of TrustUnits outstanding including exchangeable shares
(millions of units) 50.44 49.52 45.99 45.43 39.29
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Distribution paid per Trust Unit $0.96 $1.04 $1.20 $1.20 $1.20
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TOTAL COMPOUND ANNUAL RETURN (%) (1)
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S&P TSX Cdn Energy S&P 500 S&P 500 Trust PrimeWest OGPI
TSX S&P $Cdn $US Index
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Five Year 30.3% 20.8% 6.3% (4.0)% (0.9)%
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Three Year 12.7% 12.7% (1.4)% (8.8)% (4.5)%
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One Year 28.0% 20.1% 26.7% 5.9% 28.5% 46.4%
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(1) Total return is equal to unit price plus
distributionsre-invested END FIRST AND FINAL ADD DATASOURCE:
PrimeWest Energy Trust CONTACT: PR NewsWire -- Feb. 20
Copyright