Qwest 2014 Oil & Gas Exploration and Development Flow-Through Limited Financial Statements
March 30, 2015 Independent Auditor s Report To the Directors of Qwest 2014 Oil & Gas Exploration and Development Flow-Through Management Corp. in its capacity as the General Partner of Qwest 2014 Oil & Gas Exploration and Development Flow-Through Limited (the ), of CEE Class CDE Class (collectively the Funds) We have audited the accompanying financial statements of each of the Funds, which comprise the schedule of investment portfolio and the statement of financial position as at and the statements of comprehensive loss, changes in net assets attributable to partners and cash flows for the period ended December 31, 2014, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the financial statements of each of the Funds in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on the financial statements of each of the Funds based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7 T: +1 604 806 7000, F: +1 604 806 7806 PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion In our opinion, the financial statements of each of the Funds present fairly, in all material respects, the financial position of each of the Funds as at and the financial performance and cash flows of each of the Funds for the period ended in accordance with International Financial Reporting Standards. Chartered Accountants
CEE Class Statement of Financial Position As at Assets Current assets Cash 221,417 Due from related parties (note 5) 3,057 Investments - at fair value (note 6) 3,618,979 Liabilities 3,843,453 Current liabilities Accounts payable and accrued liabilities 30,209 Due to a related party (note 5) 7,920 Management fee payable (note 3) 12,948 51,077 Net assets attributable to partners 3,792,376 Net assets attributable to partners Class A CEE Units 2,552,387 Class B CEE Units 358,051 Class F CEE Units 881,928 General Partner 10 3,792,376 units outstanding (note 4) Class A CEE Units 379,380 Class B CEE Units 50,279 Class F CEE Units 120,050 Net assets per unit attributable to Limited Partners Class A CEE Units 6.73 Class B CEE Units 7.12 Class F CEE Units 7.35 Approved on behalf of the Board of Directors of Qwest 2014 Oil & Gas Exploration and Development Flow-Through Management Corp., as General Partner Maurice Levesque Director Don Short Director The accompanying notes are an integral part of these financial statements.
CEE Class Statement of Comprehensive Loss For the period from commencement of operations on June 16, 2014 to Income Interest income 172 Other changes in fair value of investments Unrealized depreciation of investments (371,467) Loss on forward purchase of flow-through shares (147,126) Total income - net (518,421) Expenses Management fee (note 3) 22,562 Accounting and audit 18,250 Administrative fee (note 5) 17,026 Sales taxes 5,157 Custodial fees 4,827 Unitholder recordkeeping fees 2,716 Legal 2,319 Independent review committee fees 1,238 Bank charges 453 Total expenses 74,548 Decrease in net assets attributable to partners from operations (592,969) Decrease in net assets attributable to partners from operations - Class A (note 9) (400,912) Decrease in net assets attributable to partners from operations - Class B (note 9) (51,677) Decrease in net assets attributable to partners from operations - Class F (note 9) (140,380) Decrease in net assets attributable to partners from operations per Class A Unit (note 9) (1.06) Decrease in net assets attributable to partners from operations per Class B Unit (note 9) (1.03) Decrease in net assets attributable to partners from operations Class F Unit (note 9) (1.17) The accompanying notes are an integral part of these financial statements.
CEE Class Statement of Changes in Net Assets Attributable to Partners For the period from commencement of operations on June 16, 2014 to Decrease in net assets attributable to partners from operations Class A (400,912) Class B (51,677) Class F (140,380) (592,969) Partners transactions Proceeds from issuance of Class A 3,793,800 Proceeds from issuance of Class B 502,790 Proceeds from issuance of Class F 1,200,500 Issue costs associated with issuance of Class A (369,212) Issue costs associated with issuance of Class B (33,759) Issue costs associated with issuance of Class F (26,583) General Partner s contribution 10 Distribution to partners - flow-through shares tax benefits (682,201) 4,385,345 Net assets attributable to partners - End of period 3,792,376 Net assets attributable to partners - End of period Class A 2,552,387 Net assets attributable to partners - End of period Class B 358,051 Net assets attributable to partners - End of period Class F 881,928 Net assets attributable to partners - End of period General Partner 10 The accompanying notes are an integral part of these financial statements.
CEE Class Statement of Cash Flows For the period from commencement of operations on June 16, 2014 to Cash flows from operating activities Decrease in net assets attributable to partners from operations (592,969) Adjustments to determine net cash used in operating activities: Unrealized depreciation of investments 371,467 Loss on forward purchase of flow-through shares 147,126 Interest income (172) Due from related parties (3,057) Accounts payable and accrued liabilities 30,209 Due to a related party 7,920 Management fee payable 12,948 Purchases of investment securities (4,819,773) Interest received 172 Net cash from operating activities (4,846,129) Cash flows from financing activities General Partner s contribution 10 Proceeds from issuance of units 5,497,090 Issue costs (429,554) Net cash from financing activities 5,067,546 Increase in cash 221,417 Cash - Beginning of period - Cash - End of period 221,417 The accompanying notes are an integral part of these financial statements.
CEE Class Schedule of Investment Portfolio As at Number of shares Average cost Fair value Net assets % Canadian equities Energy Toro Oil & Gas Ltd. 650,000 650,000 650,000 17.14 Tourmaline Oil Corp. 15,544 590,672 601,553 15.86 Point Loma Energy Inc. (1) 769,200 499,980 499,980 13.18 Blackbird Energy Inc. 2,225,000 768,500 445,000 11.73 Tuscany Energy Ltd. 1,140,000 307,800 364,800 9.62 Arsenal Energy Inc. 50,300 305,824 340,531 8.98 Artisan Energy Corporation 1,000,000 320,000 320,000 8.44 Stonehaven Exploration Ltd. 167,000 268,870 274,715 7.25 Strategic Oil & Gas Ltd. 680,000 278,800 122,400 3.23 Total portfolio of investments 3,990,446 3,618,979 95.43 Cash 221,417 5.84 Other net liabilities (48,020) (1.27) Net assets attributable to partners 3,792,376 100.00 (1) Private corporation The accompanying notes are an integral part of these financial statements.
CDE Class Statement of Financial Position As at Assets Current assets Cash 33,125 Due from related parties (note 5) 12,892 Investments - at fair value (note 6) 366,520 Liabilities 412,537 Current liabilities Accounts payable and accrued liabilities 3,719 Management fee payable (note 3) 1,397 Net assets attributable to partners 407,421 Net assets attributable to partners Class A CDE Units 243,681 Class B CDE Units 87,125 Class F CDE Units 76,605 General Partner 10 5,116 407,421 units outstanding (note 4) Class A CDE Units 35,450 Class B CDE Units 12,500 Class F CDE Units 10,500 Net assets per unit attributable to Limited Partners Class A CDE Units 6.87 Class B CDE Units 6.97 Class F CDE Units 7.30 Approved on behalf of the Board of Directors of Qwest 2014 Oil & Gas Exploration and Development Flow-Through Management Corp., as General Partner Maurice Levesque Director Don Short Director The accompanying notes are an integral part of these financial statements.
CDE Class Statement of Comprehensive Loss For the period from commencement of operations on June 16, 2014 to Income Interest income 39 Other changes in fair value of investments Unrealized depreciation of investments (88,160) Gain on forward purchase of flow-through shares 31,730 Total income - net (56,391) Expenses Management fee (note 3) 4,115 Administrative fee (note 5) 3,629 Accounting and audit 2,150 Custodial fees 1,482 Unitholder recordkeeping fees 722 Bank charges 566 Sales taxes 548 Legal 481 Independent review committee fees 210 Total expenses 13,903 Decrease in net assets attributable to partners from operations (70,294) Decrease in net assets attributable to partners from operations - Class A (note 9) (38,114) Decrease in net assets attributable to partners from operations - Class B (note 9) (17,106) Decrease in net assets attributable to partners from operations - Class F (note 9) (15,074) Decrease in net assets attributable to partners from operations per Class A Unit (note 9) (1.08) Decrease in net assets attributable to partners from operations per Class B Unit (note 9) (1.37) Decrease in net assets attributable to partners from operations per Class F Unit (note 9) (1.44) The accompanying notes are an integral part of these financial statements.
CDE Class Statement of Changes in Net Assets Attributable to Partners For the period from commencement of operations on June 16, 2014 to Decrease in net assets attributable to partners from operations Class A (38,114) Class B (17,106) Class F (15,074) (70,294) Partners transactions Proceeds from issuance of Class A 354,500 Proceeds from issuance of Class B 125,000 Proceeds from issuance of Class F 105,000 Issue costs associated with issuance of Class A (35,187) Issue costs associated with issuance of Class B (8,393) Issue costs associated with issuance of Class F (2,325) General Partner s contribution 10 Distribution to partners - flow-through shares tax benefits (60,890) 477,715 Net assets attributable to partners - End of period 407,421 Net assets attributable to partners - End of period Class A 243,681 Net assets attributable to partners - End of period Class B 87,125 Net assets attributable to partners - End of period Class F 76,605 Net assets attributable to partners - End of period General Partner 10 The accompanying notes are an integral part of these financial statements.
CDE Class Statement of Cash Flows For the period from commencement of operations on June 16, 2014 to Cash flows from operating activities Decrease in net assets attributable to partners from operations (70,294) Adjustments to determine net cash used in operating activities: Unrealized depreciation of investments 88,160 Gain on forward purchase of flow-through shares (31,730) Interest income (39) Due from related parties (12,892) Accounts payable and accrued liabilities 3,719 Management fee payable 1,397 Purchases of investment securities (483,840) Interest received 39 Net cash from operating activities (505,480) Cash flows from financing activities General Partner s contribution 10 Proceeds from issuance of units 584,500 Issue costs (45,905) Net cash from financing activities 538,605 Increase in cash 33,125 Cash - Beginning of period - Cash - End of period 33,125 The accompanying notes are an integral part of these financial statements.
CDE Class Schedule of Investment Portfolio As at Number of shares Average cost Fair value Net assets % Canadian equities Energy Artisan Energy Corporation 400,000 128,000 128,000 31.41 Tuscany Energy Ltd. 261,000 99,180 83,520 20.50 Tourmaline Oil Corp. 2,000 76,000 77,400 19.00 Blackbird Energy Inc. 225,000 85,500 45,000 11.05 Tamarack Valley Energy Ltd. 10,000 66,000 32,600 8.00 Total portfolio of investments 454,680 366,520 89.96 Cash 33,125 8.13 Other net assets 7,776 1.91 Net assets attributable to partners 407,421 100.00 The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements 1 Formation and purpose of the Qwest 2014 Oil & Gas Exploration and Development Flow-Through Limited (the ) was formed on January 21, 2014 as a limited partnership under the laws of the Province of British Columbia and commenced operations on June 16, 2014. The address of the s registered office is Suite 310, 650 West Georgia Street, Vancouver, British Columbia. The consists of two classes of limited partnership units with three subclasses of limited partnership units within each class: the Class A CEE Units, Class B CEE Units and Class F CEE Units (collectively, the CEE Class ) and the Class A CDE Units, Class B CDE Units and Class F CDE Units (collectively, the CDE Class ). Each class has its own investment portfolio. The Class A Units, Class B Units and the Class F Units are identical, other than the agents' fees applicable to each class. The principal purpose of the is to provide Limited Partners with a tax-assisted investment in a diversified portfolio of flow-through shares of resource issuers for capital appreciation and profits. Management s intention is that an investment in CEE Units will provide Limited Partners exposure to a diversified portfolio (the CEE Portfolio ) comprising primarily shares of resource issuers that qualify as flow-through shares for the purposes of the Income Tax Act (Canada) (the ITA ) pursuant to which the resource issuer agrees to incur and renounce to the Canadian exploration expense (as defined in the ITA) ( CEE ) or certain types of Canadian development expense (as defined in the ITA) ( CDE ) that can be renounced to the as CEE. An investment in CDE Units will provide Limited Partners exposure to a diversified portfolio (the CDE Portfolio, and together with the CEE Portfolio, the Investment Portfolios ) comprising primarily shares of resource issuers that qualify as flow-through shares for the purposes of the ITA pursuant to which the resource issuer agrees to incur and renounce to the CDE or certain types of CEE (together with CDE, Eligible Expenditures ) that can be renounced to the as CDE. The general partner of the is Qwest 2014 Oil & Gas Exploration and Development Flow-Through Management Corp. (the General Partner ) whose ultimate parent is Qwest Investment Management Corp. The General Partner delegates certain investment advisory responsibilities to Qwest Investment Fund Management Ltd. (the Manager ), a company under common control. Under the limited partnership agreement (the Agreement ) between the General Partner and each of the Limited Partners, dated January 20, 2014, for each Investment Portfolio, 99.99% of the net income or 100% of the net loss of the and 100% of any resource expenditures which qualify as CDE and/or CEE, as applicable, which are renounced to the ( Eligible Expenditures ), will be allocated pro rata to the Limited Partners holding CEE Units or CDE Units, as applicable, and the General Partner is to be allocated 0.01% of net income of the. Upon dissolution, Limited Partners are entitled to 99.99% of the net assets of the Investment Portfolio of the class in which they hold units of the and the General Partner is entitled to 0.01% of net assets of each Investment Portfolio. (1)
Notes to Financial Statements The Agreement has provisions for capital gains and ordinary income such that if both the CEE and CDE Portfolios have any capital gains or ordinary income, such income will only be allocated to the portfolio that received the income. In circumstances where one class has a capital gain and the other class has a capital loss, the Agreement has provisions that allow for capital losses of one class to be applied against the capital gains of the other class. Taxable dividends for each respective portfolio are tracked separately and allocated to each respective portfolio that received the dividends. These financial statements present the carve out financial statements of the CEE and CDE portfolios as separate reporting entities. It is management s view that cross class liability is remote. In order to provide Limited Partners with enhanced liquidity, the General Partner intends to implement a liquidity alternative between June 30, 2015 and June 30, 2016. The General Partner currently intends that the liquidity alternative will be an exchange transaction, pursuant to which the will transfer its net assets to the Qwest Funds Corp., Qwest Energy Canadian Resource Class mutual fund (the Mutual Fund ) on a tax deferred basis, in exchange for redeemable shares of the Mutual Fund, and within 60 days thereafter, the shares of the Mutual Fund will be distributed to the Limited Partners, pro rata, on a tax deferred basis upon the dissolution of the. In the event a liquidity alternative is not implemented by June 30, 2016, the is expected to be dissolved by September 30, 2016. These financial statements were authorized for issue by the General Partner on March 11, 2015. 2 Summary of significant accounting policies Basis of preparation and statement of compliance These financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). The following is a summary of significant accounting policies used by the : Financial instruments The recognizes financial instruments at fair value upon initial recognition, plus transaction costs in the case of financial instruments not measured at fair value through profit or loss ( FVTPL ). The s investments have been designated at FVTPL except for derivatives which are held for trading. Investments designated at FVTPL and derivatives are measured at fair value with gains and losses recognized in profit or loss. Net assets attributable to partners are presented at the redemption amount. All other financial assets and liabilities are measured at amortized cost. Under this method, financial assets and liabilities reflect the amount expected to be received or required to be paid, discounted, when appropriate, at the contract s original effective interest rate. The calculation includes all fees and amounts paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. (2)
Notes to Financial Statements Dividend income is recognized at the ex-dividend date. Realized gains and losses on disposal of investments and unrealized gains and losses in the value of investments are reflected in the statement of comprehensive loss and calculated on an average cost basis. Upon disposal of an investment, previously recognized unrealized gains and losses are reversed, so as to recognize the full realized gain or loss in the period of disposition. Interest is recorded on an accrual basis. All costs directly attributable to operating activities are expensed as incurred. Regular way purchases and sales of financial assets are accounted for on a trade date basis. Financial assets and liabilities are offset and the net amount reported in the statement of net assets attributable to partners when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The fair value of equity securities that are traded in an active market is measured using the last traded price at the period-end date where such price falls within the bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, the Manager determines the point within the bid-ask spread which is most representative of fair value based on specific facts and circumstances. When current prices or quotations are not readily available, valuations are established based upon a valuation technique in order to estimate what the fair value would be in an arm s length transaction motivated by normal business considerations. These may include use of the most recent publicly traded price or a price established by the Manager in accordance with its valuation policy. The amounts at which publicly traded investments could be disposed of currently may differ from the carrying value based on the last traded price, as the value at which significant ownership positions are sold is often different than the quoted price due to a variety of factors, such as premiums paid for large blocks or discounts due to illiquidity. The s policy is to recognize transfers within, into and out of the fair value hierarchy as of the beginning of the period of the transfer. Gain or loss on forward purchase of flow-through shares The gain or loss on forward purchase of flow-through shares is the incremental change in the fair value of the investment between the date when the commits to the purchase (the trade date) and the date of settlement (the settlement date). (3)
Notes to Financial Statements Distribution to Limited Partners attributable to tax benefit of Eligible Expenditures Eligible Expenditures which are renounced to the through its subscriptions to flow-through share offerings are allocated 100% to the Limited Partners. The tax benefit associated with the Eligible Expenditures allocated to the Limited Partners is presented on the statement of changes in net assets attributable to partners as a distribution to the Limited Partners. This tax benefit is measured as the difference between the transaction price of the associated flow-through shares and the fair value of flow-through shares excluding the tax benefit on the date of the subscription, which is estimated using trading information of similar shares of the issuer. Cash Cash consists of cash and deposits with original maturities of three months or less and is held with a Canadian chartered bank. Income taxes Since the is an unincorporated business, the liability for income taxes is that of the partners and not the. Accordingly, no provision for income taxes for the has been made in these financial statements. These financial statements do not include the Limited Partners information. For income tax purposes, the adjusted cost base of flow-through shares is reduced by the amount of expenditures renounced to the. Upon disposition of such shares, a capital gain will result and be allocated to the Limited Partners based upon their proportionate share of the. Performance bonus Under the terms of the Agreement, as partial consideration for the services of the General Partner, including using its commercially reasonable efforts to structure and implement a liquidity alternative, the General Partner is entitled to a performance bonus in respect of each Class. In the case of the Class A CEE Units, Class A CDE Units, Class F CEE Units and Class F CDE Units, the performance bonus will be equal to 20% of the product of: a) the number of the applicable class of units outstanding on the performance bonus date; and b) the amount by which the applicable net asset value ( NAV ) per CEE Unit or the NAV per CDE Unit on the performance bonus date (prior to giving effect to the performance bonus) plus the aggregate value of all distributions on the applicable class during the performance bonus term exceeds 100% of the Class A CEE available funds per unit (where available funds are gross proceeds of the class, less the amount of issue costs and operating reserve of the applicable class), Class A CDE available funds per unit, Class F CEE available funds per unit, or Class F CDE available funds per unit. (4)
Notes to Financial Statements In the case of Class B CEE Units and Class B CDE Units, the performance bonus will be equal to 20% of the product of: a) the number of the applicable class of units outstanding on the performance bonus date; and b) the amount by which the applicable NAV per Class B CEE Unit or the NAV per Class B CDE Unit on the performance bonus date (prior to giving effect to the performance bonus) plus the aggregate value of all distributions on the applicable class during the performance bonus term exceeds 110% of the issue price of such unit. The performance bonus will be calculated on the day immediately prior to the earlier of the liquidity alternative or the dissolution of the. The performance bonus is accrued in the financial statements once the threshold (the Threshold ) has been achieved. Increase (decrease) in net assets attributable to partners from operations per partnership unit Increase (decrease) in net assets attributable to limited partners from operations per partnership unit is determined by dividing the net increase (decrease) in net assets attributable to limited partners from operations by the weighted average number of limited partnership units outstanding during the reporting period (note 9). Critical accounting estimates and judgments The preparation of financial statements requires management to use judgment in applying its accounting policies and to make estimates and assumptions about the future. The most significant accounting estimates and judgments that the has made in preparing its financial statements are as follows: Financial statements reporting entity The consists of six classes of limited partnership units; the CEE Class and the CDE Class each operate autonomously as separate portfolios and make investment decisions separately from each other. Each of the CEE Class and CDE Class has Class A, B, and F units within them. Significant judgment has been used to establish that the possibility of cross class liability risk is remote. As a result, it is determined that each class is its own reporting entity and thus the financial statements present the financial information of the CEE Class and CDE Class separately. (5)
Notes to Financial Statements Future accounting changes IFRS 9, Financial Instruments The final version of IFRS 9, Financial Instruments, was issued by the IASB in July 2014 and will replace International Accounting Standards ( IAS ) 39, Financial Instruments: Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018; however, it is available for early adoption. In addition, the own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 3 Expenses of the Initial expenses Initial expenses are expenses of the offering of the units of the which include the costs of creating and organizing the (the issue costs ). Issue costs include certain costs as outlined in the offering memorandum such as agents fee, legal, audit, regulatory filing and printing. Issue costs are presented gross in the statement of changes in net assets attributable to partners. Operating expenses The pays all of the expenses of the operations and carrying on of its business, including legal and audit fees, interest, administrative costs relating to the cost of financial and other reports, and compliance with all applicable laws, regulations and policies. The General Partner is reimbursed for all reasonable out-of-pocket costs and expenses that are incurred by the General Partner on behalf of the in the ordinary course of business or other costs and expenses incidental to acting as general partner so long as the General Partner is not in default of its obligations. Such costs and expenses include administrative fees charged by Heritage Bancorp Ltd. ( Heritage ), a company related to the General Partner by common ownership and directors, for the provision of financial, record-keeping, reporting and general administrative services. Such expenses incurred with respect to a particular class shall be charged against the applicable Investment Portfolio. Remaining (common) expenses of the will be allocated between each Investment Portfolio pro rata, based on the then-current CDE Portfolio NAV and CEE Portfolio NAV. (6)
Notes to Financial Statements General Partner s fee Pursuant to the Agreement, the General Partner is entitled to an annual management fee of 2% of the NAV of the, calculated and paid monthly in arrears, plus applicable sales tax. For the period ended, the incurred 26,677 (22,562 CEE Class; 4,115 CDE Class) in management fees, of which 14,345 (12,948 CEE Class; 1,397 CDE Class) was payable at. Performance bonus As at, the Threshold had not been achieved. Accordingly, no performance bonus was accrued in the financial statements for the period ended. 4 Partners interest The interest of the Limited Partners in the is divided into an unlimited number of units. The is authorized to issue a maximum of 4,000,000 units (2,000,000 CEE Units; 2,000,000 CDE Units). All the limited partnership units within each class are of the same class with equal rights and privileges, including equal participation in any distribution made by each respective class and the right to one vote at any meeting of the Limited Partners. The Agreement between the General Partner and each of the Limited Partners dated January 20, 2014 imposes a contractual obligation for the to deliver a pro rata share of its net assets to the partners on termination of the. Based on the terms of the Agreement, the General Partner and Limited Partners are both considered to have an interest in residual net assets of the ; however, they are not considered to have identical contractual obligations. Consequently, the net assets attributable to Limited Partners and General Partner are classified as liabilities as they are equally subordinate and do not have identical features. Issued and outstanding The completed its offering on December 17, 2014 and issued 608,159 partnership units (549,709 CEE Class; 58,450 CDE Class) at a subscription price of 10 per unit for a total of 6,081,590 (5,497,090 CEE Class; 584,500 CDE Class). All units issued were outstanding as at. Pursuant to the Agreement, the General Partner contributed 20 (10 CEE Class; 10 CDE Class) to the capital of the. (7)
Notes to Financial Statements 5 Related party balances and transactions The General Partner has retained Heritage to perform certain accounting, reporting and administrative functions on behalf of the General Partner. During the period ended, administration fees of 20,655 (17,026 CEE Class; 3,629 CDE Class) were charged to the by Heritage, of which 2,779 (433 CEE Class; 2,346 CDE Class) was payable to the as the result of an overcharge of administrative fees during the period ended December 31, 2014. Issue costs are allocated to each subclass based on the units issued. As at, the CEE Class had a payable to the CDE Class of 7,920 for adjustments to the issue cost allocation for the aggregate units issued after the final closing on December 17, 2014. As at, the had a receivable of 5,250 (2,625 CEE Class; 2,625 CDE Class) from Qwest 2013 Oil & Gas Flow-Through Limited. Balances and transactions with related parties occur at the exchange amount and are unsecured, bear no interest and are due on demand. See also note 3 for the basis and the amount of management fees charged by the General Partner. Qwest Investment Management Corp., the parent of the General Partner is considered to be the ultimate controlling party of the. The Manager also provides key management personnel to the. 6 Fair value measurement The following table illustrates the classification of the s investments within the fair value hierarchy as at. The three levels of fair value hierarchy are: Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and Level 3 - Inputs that are not based on observable market data. There were no financial instruments that were transferred between levels of the fair value hierarchy during the period ended. Level 1 Financial assets at fair value at Level 2 Level 3 Total CEE Class Equities 2,524,284 594,715 499,980 3,618,979 CDE Class Equities 238,520 128,000-366,520 (8)
Notes to Financial Statements All fair value measurements above are recurring. The carrying values of other financial instruments approximate their fair values due to their short-term nature. The Manager is responsible for performing the fair value measurements included in the financial statements of the, including Level 3 measurements. The s equity positions are classified as Level 1 when the security is actively traded and reliable prices are observable. Certain equities do not trade frequently and therefore observable prices may not be available. In such cases, fair value is determined using an observable market date (e.g., transactions for similar securities of the same issuer) and the fair value is classified as Level 2, unless the determination of fair value requires significant unobservable data, in which case the measurement is classified as Level 3. The CEE Class holds a private equity investment in Point Loma Energy Inc. which has been classified as Level 3. The Level 2 financial assets of 594,715 in the CEE Class comprise two holdings - Artisan Energy Corporation and Stonehaven Exploration Ltd. Both holdings did not trade on. The fair value of Artisan Energy Corporation was determined by using the close price on December 23, 2014. The fair value of Stonehaven Exploration Ltd. was determined by using the average of the last closing bid price and the last closing ask price on. The Level 2 financial asset of 128,000 in the CDE Class comprises Artisan Energy Corporation. The Manager applied the same fair value measurement as in the CEE Class. The fair value of the Level 3 financial asset of 499,980 in the CEE Class was determined by using the most recent financing on December 23, 2014, which is the date the acquired the Level 3 financial asset. During the valuation process, the Manager considered the date, the parties involved and the size of the financing. 7 Financial instrument risk management The s activities expose it to a variety of financial instrument risks including market risk (price risk, interest rate risk and currency risk), credit risk, concentration risk and liquidity risk. The s overall risk management strategy focuses on the unpredictability of performance of early stage public and private resource investments and seeks to minimize potential adverse effects on the s financial performance. The uses diversification to moderate risk exposures associated with a concentration of investments. The s investment objective is to provide Limited Partners with a tax-assisted investment in a diversified portfolio of flow-through shares of resource issuers with a view to achieving capital appreciation. The principal business of the resource issuers is mineral, oil or gas exploration, development or production and projects in renewable energy and the development of energy efficient technologies. (9)
Notes to Financial Statements The s investment strategy is to invest in flow-through shares of resource companies that are considered to: a) have experienced and reputable management with a defined track record in the energy, mining or alternative energy industries; b) have a knowledgeable board of directors; c) have exploration programs or exploration and development programs in place; d) have securities that are suitably priced and offer capital appreciation potential; and e) meet certain market capitalization and other investment criteria. Market risk a) Price risk The s investments are exposed to market price risk due to changing market conditions for equities as well as specific industry changes in the energy sector, such as changes in commodity prices and the level of market demand as well as any changes to the tax environment in which the investee entities operate. All investments in equity securities have an inherent risk of loss of capital. The maximum risk resulting from investments is determined by the fair value of the financial instruments. The Manager seeks to manage market risks by careful selection of securities prior to making an investment in an early stage company and by regular ongoing monitoring of the investment performance of the individual investee companies. The Manager also sets thresholds on individual investments to mitigate the risk of exposure to any one investment. The s overall market positions are monitored on a daily basis by the s Manager and are reviewed on a quarterly basis by the board of directors of the General Partner. The s overall exposure is managed by investment restrictions which include a requirement for at least 90% of investments to be invested in publicly traded resource investments. At, the s market risk is impacted directly by changes in equity prices and indirectly by changes in oil and gas and other commodity prices. The immediate impact on equities of a 5% increase or decrease in the fair value of investments would be approximately 199,300 (181,000 CEE Class; 18,300 CDE Class). Individual investments in early stage investments may be a significant percentage of the underlying company, which may result in a value on disposal that if it were to be sold in its entirety might result in a different transaction price than if it were a smaller holding. b) Interest rate risk The monetary financial assets and liabilities of the are non-interest bearing. Consequently, the has no significant direct exposure to interest rate risk. (10)
Notes to Financial Statements c) Currency risk The monetary financial assets and liabilities of the are all denominated in Canadian dollars. Consequently, the has no significant direct exposure to currency risk. Credit risk The has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Credit risk associated with cash is minimized by ensuring that these balances are held by high-quality financial institutions. When the trades in listed or unlisted securities which are settled upon delivery, the risk of default is considered minimal since delivery of securities is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The only transacts with reputable brokers with a high credit rating. The Manager monitors the s credit position regularly, and the board of directors of the General Partner reviews it on a periodic basis. Concentration risk Concentration risk arises as a result of the concentration of exposures within the same category, whether it is geographical location, product type, industry sector or counterparty type. The s investments are entirely in Canadian companies involved in the energy sector, and as a result, the is exposed to a concentration of risk related to these holdings. Liquidity risk The is a closed-end partnership and therefore it does not have exposure to early redemptions of partnership units. There is no market for units of the and it is unlikely that any public market will develop through which units may be sold. At the time of dissolution, the General Partner intends to transfer the assets of the to Qwest Funds Corp., Qwest Energy Canadian Resource Class (the Mutual Fund Rollover Transaction ). However, there is no assurance that the Mutual Fund Rollover Transaction will be implemented and the Limited Partners may receive securities upon dissolution of the for which there may be an illiquid market or which may be subject to resale restrictions. (11)
Notes to Financial Statements The invests in early stage energy resource companies that may be publicly listed securities but thinly traded or in privately held companies. Investments in privately held companies may not be able to be liquidated quickly at an amount close to their fair value to meet the s liquidity requirements or to respond to specific events such as deterioration in the creditworthiness of any particular issuer. Securities purchased by the may be subject to resale restrictions such as hold periods. During periods when resale restrictions apply, the may dispose of such securities only pursuant to certain statutory exemptions. The resulting values for non-publicly held securities may differ from values that would be realized had a ready market existed. Owing to the liquidity risks, the s investment guidelines allow a maximum investment of 10% of invested assets of the in securities that may be considered illiquid in the market. As at, the held 12.5% of its invested assets in securities that may be considered illiquid in the market. As of the date of investment of each of the securities held in the, the held 9.4% of its invested assets in securities that may be considered illiquid in the market. In accordance with the Agreement, the proceeds of any securities sold during the period where the percentage of invested assets is above 10% will only be used to purchase high quality money market instruments and securities of issuers in the resource sector which will result in the being in compliance or closer to compliance with the investment guidelines. At, all of the s financial liabilities were due within 30 days of the statement of financial position date, with the exception of net assets attributable to partners which mature at the end of the life of the or at the liquidation date. The manages liquidity risk by maintaining sufficient liquid cash resources and publicly listed resource companies to ensure the s liquidity requirements are met. 8 Net assets attributable to partners Units issued and outstanding represent the capital of the. The issued 608,159 units (549,709 CEE Class; 58,450 CDE Class) for 6,081,590 (5,497,090 CEE Class; 584,500 CDE Class) before issue costs. Issue costs incurred during the period were 429,554 in respect of the CEE Class and 45,905 in respect of the CDE Class. The is a closed-end partnership and no additional units can be issued after the completion of the offering on December 17, 2014. In addition, no partnership units will be redeemed until the time of dissolution of the. The Manager manages the capital of the in accordance with the s investment objectives. There are no externally imposed restrictions on the s capital, other than certain minimum subscription requirements. (12)
Notes to Financial Statements 9 Decrease in net assets attributable to partners per partnership unit Decrease in net assets attributable to limited partners per partnership unit for the year ended is as follows: Class A CEE Class Decrease in net assets attributable to partners from operations (400,912) Weighted average units outstanding during the period 379,380 Decrease in net assets attributable to partners from operations per unit (1.06) Class B CEE Class Decrease in net assets attributable to partners from operations (51,677) Weighted average units outstanding during the period 50,279 Decrease in net assets attributable to partners from operations per unit (1.03) Class F CEE Class Decrease in net assets attributable to partners from operations (140,380) Weighted average units outstanding during the period 120,050 Decrease in net assets attributable to partners from operations per unit (1.17) Class A CDE Class Decrease in net assets attributable to partners from operations (38,114) Weighted average units outstanding during the period 35,450 Decrease in net assets attributable to partners from operations per unit (1.08) Class B CDE Class Decrease in net assets attributable to partners from operations (17,106) Weighted average units outstanding during the period 12,500 Decrease in net assets attributable to partners from operations per unit (1.37) Class F CDE Class Decrease in net assets attributable to partners from operations (15,074) Weighted average units outstanding during the period 10,500 Decrease in net assets attributable to partners from operations per unit (1.44) (13)