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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2005
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ________________
 Commission file number 0-29370 ULTRA PETROLEUM CORP.  Yukon Territory, Canada
(State or other jurisdiction of
incorporation or organization)
    
    N/A
(I.R.S. employer
identification number)
 363 North Sam Houston Parkway, Suite 1200, Houston, Texas
(Address of principal executive offices)
    
    77060
(Zip code)
 (281) 876-0120
(Registrants telephone number,
including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES     X     NO Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act)
YES     X     NO  The number of common shares, without par value, of Ultra Petroleum Corp., outstanding as of
April 28, 2005 was 76,433,868.




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TABLE OF CONTENTS  PART 1  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED BALANCE SHEETSITEM 2  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4  CONTROLS AND PROCEDURESPART 2  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESCertification of CEO and PFO pursuant to Rule 13(a)-14(a)Certification of CEO and PFO pursuant to Rule 13(a)-14(b)    Table of Contents  
 PART 1  FINANCIAL INFORMATION 
 ITEM 1  FINANCIAL STATEMENTS (Expressed in U.S. Dollars) 
 ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Three Months EndedMarch 31,2005
    
    
    2004Revenues:Natural gas sales
    
    $
    73,950,973
    
    
    $
    46,077,223Oil sales
    
    
    14,890,367
    
    
    
    2,541,55088,841,340
    
    
    
    48,618,773Expenses:Production expenses and taxes
    
    
    16,091,912
    
    
    
    9,724,897Depletion and depreciation
    
    
    11,239,509
    
    
    
    5,480,720General and administrative
    
    
    2,561,785
    
    
    
    1,554,039General and administrative  stock compensation
    
    
    614,576
    
    
    
    100,02330,507,782
    
    
    
    16,859,679Operating income
    
    
    58,333,558
    
    
    
    31,759,094Other income:Interest expense
    
    
    (900,643
    )
    
    
    (1,100,170
    )Interest income
    
    
    74,865
    
    
    
    12,734(825,778
    )
    
    
    (1,087,436
    )Income for the period, before income tax provision
    
    
    57,507,780
    
    
    
    30,671,658Income tax expense
    
    
    20,185,231
    
    
    
    10,888,440Net income for the period
    
    
    37,322,549
    
    
    
    19,783,218Retained earnings, beginning of period
    
    
    165,288,311
    
    
    
    56,138,516Retained earnings, end of period
    
    $
    202,610,860
    
    
    $
    75,921,734Income per common share  basic
    
    $
    0.49
    
    
    $
    0.27Income per common share   diluted
    
    $
    0.46
    
    
    $
    0.25Weighted average common shares outstanding  basic
    
    
    75,431,107
    
    
    
    74,624,845Weighted average common shares outstanding  diluted
    
    
    80,475,273
    
    
    
    79,617,333
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ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Expressed in U.S. Dollars) Three Months EndedMarch 31,2005
    
    
    2004Cash provided by (used in):Operating activities:Net income for the period
    
    $
    37,322,549
    
    
    $
    19,783,218Add (deduct)Items not involving cash:Depletion and depreciation
    
    
    11,239,509
    
    
    
    5,480,720Income taxes
    
    
    20,185,231
    
    
    
    10,888,440Stock compensation
    
    
    614,576
    
    
    
    100,023Net changes in non-cash working capital:Restricted cash
    
    
    (412
    )
    
    
    (314
    )Accounts receivable
    
    
    10,339,753
    
    
    
    618,011Inventory
    
    
    (675,463
    )
    
    
    Prepaid expenses and other current assets
    
    
    (2,560,819
    )
    
    
    1,253,614Accounts payable and accrued liabilities
    
    
    15,528,963
    
    
    
    (16,106,026
    )Other long-term obligations
    
    
    248,147
    
    
    
    3,716,42992,242,034
    
    
    
    25,734,115Investing activities:Oil and gas property expenditures
    
    
    (53,816,245
    )
    
    
    (34,988,848
    )Change in capital cost accrual
    
    
    (18,726,012
    )
    
    
    (7,077,620
    )Inventory
    
    
    (9,512,988
    )
    
    
    1,127,989Purchase of capital assets
    
    
    (74,059
    )
    
    
    (109,644
    )(82,129,304
    )
    
    
    (41,048,123
    )Financing activities:Borrowings on long-term debt, gross
    
    
    13,000,000
    
    
    
    24,000,000Payments on long-term debt, gross
    
    
    (28,000,000
    )
    
    
    (9,000,000
    )Proceeds from exercise of options
    
    
    5,568,316
    
    
    
    403,406(9,431,684
    )
    
    
    15,403,406Increase in cash during the period
    
    
    681,046
    
    
    
    89,398Cash and cash equivalents, beginning of period
    
    
    16,932,661
    
    
    
    1,834,112Cash and cash equivalents, end of period
    
    $
    17,613,707
    
    
    $
    1,923,510
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ULTRA PETROLEUM CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Expressed in U.S. Dollars) March 31,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    $
    17,613,707
    
    
    $
    16,932,661Restricted cash
    
    
    212,373
    
    
    
    211,961Accounts receivable
    
    
    25,409,534
    
    
    
    35,749,287Deferred tax asset
    
    
    2,594,825
    
    
    
    1,327,489Inventory
    
    
    16,038,068
    
    
    
    5,180,024Prepaid expenses and other current assets
    
    
    4,286,662
    
    
    
    1,725,843Total current assets
    
    
    66,155,169
    
    
    
    61,127,265Oil and gas properties, net, using the full cost method of
accountingProved
    
    
    426,535,542
    
    
    
    385,794,926Unproved
    
    
    90,516,756
    
    
    
    88,839,460Capital assets
    
    
    1,312,384
    
    
    
    1,424,367Total assets
    
    $
    584,519,851
    
    
    $
    537,186,018Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    29,095,179
    
    
    $
    14,238,836Fair value of derivative instruments
    
    
    7,309,364
    
    
    
    3,739,406Capital cost accrual
    
    
    34,372,373
    
    
    
    53,118,385Total current liabilities
    
    
    70,776,916
    
    
    
    71,096,627Long-term debt
    
    
    87,000,000
    
    
    
    102,000,000Deferred income taxes
    
    
    90,434,797
    
    
    
    86,362,741Other long-term obligations
    
    
    10,307,778
    
    
    
    9,734,904Shareholders equityShare capital
    
    
    129,297,690
    
    
    
    106,513,852Treasury stock
    
    
    (1,193,650
    )
    
    
    (1,193,650
    )Other comprehensive loss  fair value of derivative instruments
    
    
    (4,714,540
    )
    
    
    (2,616,767
    )Retained earnings
    
    
    202,610,860
    
    
    
    165,288,311Total shareholders equity
    
    
    326,000,360
    
    
    
    267,991,746Total liabilities and shareholders equity
    
    $
    584,519,851
    
    
    $
    537,186,018
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ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in this Quarterly Report on Form 10-Q are expressed in U.S. dollars unless
otherwise noted) DESCRIPTION OF THE BUSINESS: Ultra Petroleum Corp. (the Company) is an independent oil and gas company engaged in the
acquisition, exploration, development, and production of oil and gas properties. The Company is
incorporated under the laws of the Yukon Territory, Canada. The Companys principal business
activities are in the Green River Basin of Southwest Wyoming and Bohai Bay, China. 1. SIGNIFICANT ACCOUNTING POLICIES: The accompanying financial statements, other than the balance sheet data as of December 31, 2004,
are unaudited and were prepared from the Companys records. Balance sheet data as of December 31,
2004 was derived from the Companys audited financial statements, but does not include all
disclosures required by U.S. generally accepted accounting principles
(GAAP). The Companys management
believes that these financial statements include all adjustments necessary for a fair presentation
of the Companys financial position and results of operations. All adjustments are of a normal and
recurring nature unless specifically noted. The Company prepared these statements on a basis
consistent with the Companys annual audited statements and Regulation S-X. Regulation S-X allows
the Company to omit some of the footnote and policy disclosures required by generally accepted
accounting principles and normally included in annual reports on Form 10-K. You should read these
interim financial statements together with the financial statements, summary of significant
accounting policies and notes to the Companys most recent annual report on Form 10-K. (a) Basis of presentation and principles of consolidation: The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries UP Energy
Corporation, Ultra Resources, Inc. and Sino-American Energy Corporation. The Company presents its
financial statements in accordance with U.S. GAAP. All material inter-company transactions and
balances have been eliminated upon consolidation. (b) Accounting principles: The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. (c) Cash and cash equivalents: We consider all highly liquid investments with an original maturity
of three months or less to be cash equivalents. (d) Restricted cash: Restricted cash represents cash received by the Company from production sold
where the final division of ownership of the production is unknown or in dispute. Wyoming law
requires that these funds be held in a federally insured bank in Wyoming. (e) Capital assets: Capital assets are recorded at cost and depreciated using the declining-balance
method based on a seven-year useful life. (f) Oil and gas properties: The Company uses the full cost method of accounting for exploration and
development activities as defined by the Securities and Exchange Commission (SEC). Under this
method of accounting, the costs of unsuccessful, as well as successful, exploration and development
activities are capitalized as properties and equipment. This includes any internal costs that are
directly related to exploration and development activities but does not include any costs related
to production, general corporate overhead or similar activities. Effective with the adoption of
SFAS No. 143 in 2003, the carrying amount of oil and gas properties also includes estimated asset
retirement costs recorded based on the fair value of the asset retirement obligation when incurred.
Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless
the gain or loss would significantly alter the relationship between capitalized costs and proved
reserves of oil and natural gas attributable to a country. The sum of net capitalized costs and estimated future development costs of oil and gas properties
are amortized using the unit-of-production method based on the proven reserves as determined by
independent petroleum engineers. Oil and gas reserves and production are converted into equivalent
units based on relative energy content. Operating fees received related to the properties in which
the Company owns an interest are netted against expenses. Fees received in excess of costs incurred
are recorded as a reduction to the full cost pool. Effective with the adoption of SFAS 143 asset
retirement obligations are included in the base costs for calculating depletion. Oil and gas properties
include unproved costs that are excluded from capitalized costs being amortized.
These amounts represent investments in unproved properties and major development projects. The
Company excludes these costs on a country-by-country basis until proved reserves are found or until
it is determined that the costs are impaired. All unproved costs excluded are reviewed at least quarterly to
determine if impairment has occurred. The amount of any impairment is transferred to the
capitalized costs being amortized (the depreciation, depletion and amortization (DD&A) pool) or a
charge is made against earnings for those international operations where a reserve base has not yet
been established. For international operations where a reserve base has not yet been established,
an impairment requiring a charge to earnings may be indicated through evaluation of drilling
results, relinquishing drilling rights or other information. Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost
ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test
determines a limit, on a country-by-country basis, on the book value of oil and gas properties. The
capitalized costs of proved oil and gas properties, net of accumulated DD&A and the related
deferred income taxes, may not exceed the estimated future net cash flows from proved oil and gas
reserves, generally using prices in effect at the end of the period held flat for the life of
production excluding the estimated abandonment cost for properties with asset retirement
obligations recorded on the balance sheet and including the effect of derivative contracts that
qualify as cash flow hedges, discounted at 10%, net of related tax effects, plus the cost of
unevaluated properties and major development. The effect of implementing SFAS 143 has no effect on
the ceiling test calculation as the future cash outflows associated with settling asset retirement
obligations are excluded from this calculation. (g) Inventories: Crude oil products and merchandise inventories are carried at the lower of current
market value or cost. Inventory costs include expenditures and other charges directly and
indirectly incurred in bringing the inventory to its existing condition and location. Selling
expenses and general and administrative expenses are reported as period costs and excluded from
inventory cost. Inventories of materials 5




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and supplies are valued at cost or less. Inventory at March 31, 2005 includes depletion and
lease operating expenses of $1,973,367, associated with the Companys crude oil production
in China. (h) Derivative transactions: The Company has entered into commodity price risk management
transactions to manage its exposure to gas price volatility. These transactions are in the
form of price swaps with financial institutions and other credit worthy counterparties.
These transactions have been designated by the Company as cash flow hedges. As such,
unrealized gains and losses related to the change in fair market value of the derivative
contracts are recorded in other comprehensive income in the balance sheet to the extent the
hedges are effective. (i) Income taxes: Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. (j) Earnings per share: Basic earnings per share is computed by dividing net earnings
attributable to common stock by the weighted average number of common shares outstanding
during each period. Diluted earnings per share is computed by adjusting the average number
of common shares outstanding for the dilutive effect, if any, of common stock equivalents.
The Company uses the treasury stock method to determine the dilutive effect. The following table provides a reconciliation of the components of basic and diluted net
income per common share: Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Net income
    
    $
    37,322,549
    
    
    $
    19,783,218Weighted average common shares outstanding
during the period
    
    
    75,431,107
    
    
    
    74,624,845Effect of dilutive instruments
    
    
    5,044,166
    
    
    
    4,992,488Weighted average common shares outstanding
during the period including the effects of dilutive
Instruments
    
    
    80,475,273
    
    
    
    79,617,333Basic earnings per share
    
    $
    0.49
    
    
    $
    0.27Diluted earnings per share
    
    $
    0.46
    
    
    $
    0.25
 (k) Use of estimates: Preparation of consolidated financial statements in accordance
with accounting principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. (l) Reclassifications:
Certain amounts in the financial statements of the prior year have
been reclassified to conform to the current year financial statement presentation. (m) Accounting for stock-based compensation: SFAS No. 123 defines a fair value method of
accounting for employee stock options and similar equity instruments. SFAS No. 123 allows
for the continued measurement of compensation cost for such plans using the intrinsic value
based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB No. 25), provided that pro forma results of operations are disclosed for those
options granted. The Company accounts for stock options granted to employees and directors
of the Company under the intrinsic value method. Had the Company reported compensation costs
as determined by the fair value method of accounting for option grants to employees and
directors, net income and net income per common share would approximate the following pro
forma amounts: Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Net income:As reported
    
    $
    37,322,549
    
    
    $
    19,783,218Add: Stock
based employee compensation, net of tax
    
    
    
    
    
    
    Deduct: Fair value of stock options issued, net of tax
    
    
    (1,844,100
    )
    
    
    (557,777
    )Pro forma
    
    $
    35,478,449
    
    
    $
    19,225,441Basic earnings per share:As reported
    
    $
    0.49
    
    
    $
    0.27Pro forma
    
    $
    0.47
    
    
    $
    0.26Diluted earnings per share:As reported
    
    $
    0.46
    
    
    $
    0.25Pro forma
    
    $
    0.44
    
    
    $
    0.24
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For purposes of pro forma disclosures, the estimated fair value of options is amortized to
expense over the options vesting period. The weighted-average fair value of each option granted is
estimated on the date of grant using the Black Scholes option pricing model with the following
assumptions: at March 31, 2005, expected volatility of 38.4% and
a risk free rate of 3.570%; and at
March 31, 2004, expected volatility of 25.0% and a risk free rate of 4.35%. At March 31, 2005
options have expected lives of 6.5 years, and at March 31, 2004 options had expected lives of ten
years. (n) Revenue Recognition. Natural gas revenues are recorded on the entitlement method. Under the
entitlement method, revenue is recorded when title passes based on the Companys net interest. The
Company records its entitled share of revenues based on estimated production volumes. Subsequently,
these estimated volumes are adjusted to reflect actual volumes that are supported by third party
pipeline statements or cash receipts. Since there is a ready market for natural gas, the Company
sells the majority of its products soon after production at various locations at which time title
and risk of loss pass to the buyer. Gas imbalances occur when the Company sells more or less than
its entitled ownership percentage of total gas production. Any amount received in excess of the
Companys share is treated as a liability. If the Company receives less than its entitled share,
the underproduction is recorded as a receivable. Oil revenues are recognized when production is sold to a purchaser at a fixed or determinable
price, when delivery has occurred and title is transferred. (o) Impact of recently issued accounting pronouncements: In December 2004, the Financial Accounting
Standards Board (FASB) issued a revised Statement of Financial Accounting Standards No. 123 (FAS
123R), Share-based Payment. FAS 123R requires compensation costs related to share-based payments
to be recognized in the income statement over the vesting period. The amount of the compensation
cost will be measured based on the grant-date fair value of the instrument issued. FAS 123R is
effective as of January 1, 2006, for all awards granted or modified after that date and for those
awards granted prior to that date that have not vested. Beginning after January 1, 2006 the Company
will begin expensing share based compensation. All outstanding awards issued prior to this date
will have fully vested. 2. ASSET RETIREMENT OBLIGATIONS: In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS
No. 143). SFAS No. 143 requires the Company to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. The Company has recorded a liability of $1,069,239
($646,232 U.S. and $423,007 China) to account for future obligations associated with its assets in
both the United States and China. 3. OIL AND GAS PROPERTIES: March 31,
    
    
    December 31,2005
    
    
    2004Developed Properties:Acquisition, equipment, exploration, drilling and environmental
costs  Domestic
    
    
    475,864,061
    
    
    $
    429,597,822Acquisition, equipment, exploration, drilling and environmental
costs  China
    
    
    30,701,286
    
    
    
    24,552,316Less accumulated depletion, depreciation and amortization  Domestic
    
    
    (74,534,326
    )
    
    
    (65,099,325
    )Less accumulated depletion, depreciation and amortization  China
    
    
    (5,495,479
    )
    
    
    (3,255,887
    )426,535,542
    
    
    
    385,794,926Unproven Properties:Acquisition and exploration costs  Domestic
    
    
    17,522,178
    
    
    
    16,910,010Acquisition and exploration costs  China
    
    
    72,994,578
    
    
    
    71,929,450$
    517,052,298
    
    
    $
    474,634,386
 4. LONG-TERM LIABILITIES: March 31,
    
    
    December 31,2005
    
    
    2004Bank indebtedness
    
    $
    87,000,000
    
    
    $
    102,000,000Other long-term obligations
    
    
    10,307,778
    
    
    
    9,734,904$
    97,307,778
    
    
    $
    111,734,904
 Bank indebtedness: The Company (through its subsidiary) participates in a revolving
credit facility with a group of banks led by JP Morgan Chase Bank. The agreement
specifies a maximum loan amount of $500 million and an aggregate borrowing base of
$400 million and a commitment amount of $200 million at November 1, 2004. The
commitment amount may be increased up to the lesser of the borrowing base amount or
$500 million at any time at the request of the Company. Each bank shall have the
right, but not the obligation, to increase the amount of their commitment as requested
by the Company. In the event that the existing banks increase their commitment to an
amount less than the requested commitment amount, then it would be necessary to bring
additional banks into the facility. At March 31, 2005, the Company had $87 million
outstanding and $113 million unused and available under the current committed amount. The credit facility matures on May 1, 2008. The note bears interest at either the
banks prime rate plus a margin of one-quarter of one percent (0.25%) to seven-eighths
of one percent (0.875%) based on the percentage of available credit drawn or at LIBOR
plus a margin of one and one-quarter percent (1.25%) to one and seven-eighths of one
percent (1.875%) based on the percentage of available credit drawn. For the purposes
of calculating interest, the available credit is equal to the borrowing base. An
average annual commitment fee of 0.30% to 0.50%, depending on the percentage of
available credit drawn, is charged quarterly for any unused portion of the commitment
amount. 7




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The borrowing base is subject to periodic (at least semi-annual) review and
re-determination by the banks and may be decreased or increased depending on a number
of factors, including the Companys proved reserves and the banks forecast of future
oil and gas prices. If the borrowing base is reduced to an amount less than the
balance outstanding, the Company has sixty days from the date of written notice of the
reduction in the borrowing base to pay the difference. Additionally, the Company is
subject to quarterly reviews of compliance with the covenants under the bank facility
including minimum coverage ratios relating to interest, working capital and advances
to Sino-American Energy Corporation, the Companys U.S. subsidiary in which the China
assets are held. In the event of a default under the
covenants, the Company may not be able to access funds otherwise available under the
facility and may, in certain circumstances including reduction in borrowing base, be
required to repay the credit facilities. The notes are collateralized by a majority of
the Companys proved domestic oil and gas properties. At March 31, 2005, the Company
had $87.0 million of outstanding borrowings under this credit facility, with a current
average interest rate of approximately 4%. The Company was in compliance with all loan
covenants at March 31, 2005. Other long-term obligations: These costs relate to the long-term portion of production
taxes payable, a liability associated with imbalanced production, the long-term
portion of the fair value estimate of our hedging liability and our asset retirement
obligations mentioned in Note 2. 5. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED
STATES: In September 2003, the
AcSB (Accounting Standards Board) released revised transitional provisions for Stock-Based
Compensation and Other Stock-Based Payments, Section 3870, to provide the same alternative
methods of transition as is provided in the US for voluntary adoption of the fair value
based method of accounting. These provisions permit either retroactive (with or without
restatement) or prospective application of the recognition provisions to awards not
previously accounted for at fair value. Prospective application is only available to
enterprises that elect to apply the fair value based method of accounting to that type of
award for fiscal years beginning before January 1, 2004. The AcSB has also amended Section 3870 to require that all transactions whereby goods and
services are received in exchange for stock-based compensation and other payments result
in expenses that should be recognized in financial statements, and that this requirement
would be applicable for financial periods beginning on or after January 1, 2004. Section
3870 requires that share-based transactions should be measured on a fair value basis. As described in Note 1, had the Company expensed the fair value of options granted
during the period, net income would have been reported as $35,478,449. Recorded in other comprehensive income in the equity section of the Companys balance
sheet is an offset of $4,714,540 to a liability that measures a future effect of the
fixed price to index price swap agreements that the Company currently has in place.
The Company has recorded this in compliance with FASB No. 133 which addresses
accounting impacts of derivative instruments. The AcSB issued a new Accounting Guideline (Guideline), AcG-13, Hedging Relationships,
in December 2001 in connection with amendments to CICA Handbook Section 1650, Foreign
Currency Translation. The Guideline is applicable to hedging relationships in effect in
fiscal years beginning on or after July 1, 2003 (the AcSB changed the original effective
date of January 1, 2002 in its December 2001 meeting, and further deferred the effective
date in its September 2002 meeting). The Guideline is not applicable to prior periods, but
requires the discontinuance of hedge accounting for hedging relationships established in
prior periods that do not meet the conditions for hedge accounting at the date it is first
applied. The Guideline supplements some of the requirements on accounting for hedges of foreign
currency items in Section 1650, but is equally applicable to accounting for hedges of
other types of risk exposure. The Guideline deals with the identification, documentation,
designation and effectiveness of hedges and also the discontinuance of hedge accounting,
but does not specify hedge accounting methods. The Guideline is intended to improve the quality and consistency of hedge accounting under
Canadian GAAP. The Guideline incorporates certain features of the U.S. hedge accounting
standards as requirements. The AcSB has attempted to avoid creating any additional GAAP
differences, i.e., requirements that prevent an entity from adopting a U.S. requirement.
However, Canadian hedge accounting remains inconsistent with U.S. GAAP in some fundamental
ways. 6. SEGMENT INFORMATION The Company has two reportable operating segments, one domestic and one foreign, which are
in the business of natural gas and crude oil exploration and production. The accounting
policies of the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on profit or loss from oil
and gas operations before price-risk management and other, general and administrative
expenses and interest expense. The Companys reportable operating segments are managed
separately based on their geographic locations. Financial information by operating
segment is presented below: 8




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##### Table of Contents



Three Months Ended March 31,2005
    
    
    2004Domestic
    
    
    China
    
    
    Total
    
    
    Domestic
    
    
    China
    
    
    TotalOil and gas sales
    
    $
    78,910,389
    
    
    $
    9,930,951
    
    
    $
    88,841,340
    
    
    $
    48,618,773
    
    
    
    
    
    
    $
    48,618,773Costs and Expenses:Depletion and depreciation
    
    
    9,669,509
    
    
    
    1,570,000
    
    
    
    11,239,509
    
    
    
    5,480,720
    
    
    
    
    
    
    
    5,480,720Lease operating expenses
    
    
    1,985,306
    
    
    
    1,454,000
    
    
    
    3,439,306
    
    
    
    1,282,924
    
    
    
    
    
    
    
    1,282,924Production taxes
    
    
    9,022,063
    
    
    
    
    
    
    
    9,022,063
    
    
    
    5,669,776
    
    
    
    
    
    
    
    5,669,776Gathering
    
    
    3,630,543
    
    
    
    
    
    
    
    3,630,543
    
    
    
    2,772,197
    
    
    
    
    
    
    
    2,772,197Operating income
    
    
    54,602,968
    
    
    
    6,906,951
    
    
    
    61,509,919
    
    
    
    33,413,156
    
    
    
    
    
    
    
    33,413,156General and administrative
    
    
    
    
    
    
    
    
    
    
    3,176,361
    
    
    
    
    
    
    
    
    
    
    
    1,654,062Other expense
    
    
    
    
    
    
    
    
    
    
    825,778
    
    
    
    
    
    
    
    
    
    
    
    1,087,436Income before income taxes
    
    
    
    
    
    
    
    
    
    $
    57,507,780
    
    
    
    
    
    
    
    
    
    
    $
    30,671,658
 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS The following discussion of the financial condition and operating results of the
Company should be read in conjunction with the consolidated financial statements and
related notes of the Company. Except as otherwise indicated all amounts are expressed
in U.S. dollars. We operate in one business segment, natural gas and oil exploration and
development with two geographical segments; the United States and China. The Company currently generates the majority of its revenue, earnings and cash from
the production and sales of natural gas and oil from its property in southwestern
Wyoming. The price of natural gas in the southwest Wyoming region is a critical
factor to the Companys business. The price of gas in southwest Wyoming historically
has been volatile. The average annual realizations for the period 2003-2005 have
ranged from $3.84 to $5.58 per Mcf. This volatility could be very detrimental to the
Companys financial performance. The Company seeks to limit the impact of this
volatility on its results by entering into derivative and forward sales contracts for
gas in southwest Wyoming. The average realization for the Companys gas during the
first quarter of 2005 was $5.58 per Mcf, basis Opal, Wyoming, including the effect of
hedge transactions. The Company continued producing from the first of the nine fields discovered
on its oil properties in offshore Bohai Bay, China. The Companys average realized crude
oil price was $33.66 USD per barrel for the quarter ended March 31, 2005. The Company has grown its natural gas and oil production significantly over the past
three years and management believes it has the ability to continue growing production
by drilling already identified locations on its leases in Wyoming and by bringing into
production the already discovered oilfields in China. The Company delivered 61%
production growth on an Mcfe basis during the quarter ended March 31, 2005 as compared
to the same quarter in 2004. The Company uses the full cost method of accounting for oil and gas operations whereby
all costs associated with the exploration for and development of oil and gas reserves
are capitalized to the Companys cost centers. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells and overhead
charges directly related to acquisition, exploration and development activities. The
Company conducts operations in both the United States and China. Separate cost
centers are maintained for each country in which the Company has operations.
Substantially all of the oil and gas activities are conducted jointly with others and,
accordingly, the amounts reflect only the Companys proportionate interest in such
activities. Inflation has not had a material impact on the Companys results of
operations and is not expected to have a material impact on the Companys results of
operations in the future. RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2005 VS. QUARTER ENDED MARCH 31, 2004 During the current quarter, production increased 61% on an equivalent basis to 15.6 Bcfe from
9.7 Bcfe for the same quarter in 2004 attributable to the Companys successful
drilling activities during 2004 and in the first quarter of 2005 along with continued
production in China. Average realized price for natural gas increased 13% to $5.58
per Mcf combined with the production increase, resulted in an 83% increase in revenues to $88.8 million. In Wyoming, production costs increased to $14.6 million at March 31, 2005 compared to $9.7
million at March 31, 2004 due to increased production. On a unit of production basis, LOE
costs increased slightly to $0.14 per Mcfe at March 31, 2005 compared to $0.13 per Mcfe at
March 31, 2004. During the first quarter of 2005 production taxes were $9.0 million
compared to $5.7 million during the first quarter of 2004, or $0.65 per Mcfe, compared to
$0.58 per Mcfe. Production taxes are calculated based on a percentage of revenue from
production. Therefore, higher prices received increased the costs on a per unit basis.
Gathering fees increased 31% to $3.6 million at March 31, 2005 compared to $2.8 million at
March 31, 2004 attributable to higher production volumes. In Wyoming, depletion, depreciation and amortization (DD&A) expenses increased to $9.7
million during the quarter ended March 31, 2005 from $5.5 million for the same period in
2004, attributable to increased production volumes and a higher depletion rate,
attributable to forecasted increased future development costs. On a unit basis, DD&A
increased to $0.70 per Mcfe at March 31, 2005 from $0.56 at March 31, 2004. 9




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##### Table of Contents



In China, production costs were $1.5 million at March 31, 2005 ($0.82 per Mcfe or
$4.93 per BOE). DD&A was $1.6 million ($0.89 per Mcfe or $5.34 per BOE). Net income before income
taxes increased 87% to $57.5 million and income tax
expense increased 85% to $20.2 million. Net income increased 89%
to $37.3
million or $0.46 per diluted share. General and administrative expenses increased 65% to $2.6 million at March 31, 2005
compared to $1.6 million for the same period in 2004. This increase was primarily
attributable to increased audit fees associated with the implementation of an internal
audit function implemented by the Company to support its compliance with the
Sarbanes-Oxley Act coupled with increased external audit fees. Total income tax expense for
the period was $20.2 million during the first quarter of
2005 compared to $10.9 million during the first quarter of 2004. This increase was
attributable to an increase in net income from continuing operations. The Companys
effective tax rate was 35.1% at March 31, 2005 compared to 35.5% at March 31, 2004. The discussion and analysis of the Companys financial condition and results of
operations is based upon consolidated financial statements, which have been prepared
in accordance with U.S. GAAP. In addition, application of generally accepted
accounting principles requires the use of estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities as of the date of the financial
statements as well as the revenues and expenses reported during the period. Changes in
these estimates, judgments and assumptions will occur as a result of future events,
and, accordingly, actual results could differ from amounts estimated. LIQUIDITY AND CAPITAL RESOURCES During the three month period ended March 31, 2005, the Company relied on cash
provided by operations to finance its capital expenditures. The Company participated
in the drilling of 18 wells in Wyoming and continued to participate in the
exploration and development processes in the China blocks including the ongoing batch
drilling program for the development wells. For the three-month period ended March
31, 2005, net capital expenditures were $54 million. At March 31, 2005, the Company
reported a cash position of $17.6 million compared to $1.9 million at March 31, 2004.
Working capital deficit at March 31, 2005 was $(4.6) million as
compared to $(10.0)
million at December 31, 2004. As of March 31, 2005, the Company had incurred bank
indebtedness of $87.0 million and other long-term obligations of $10.3 million
comprised of items payable in more than one year, primarily related to production
taxes. The Companys positive cash provided by operating activities, along with the
availability under the senior credit facility, are projected to be sufficient to fund
the Companys budgeted capital expenditures for 2005, which are currently projected
to be $290 million. Of the $290 million budget, the Company plans to spend
approximately $270 million of its 2005 budget in Wyoming and approximately $20
million in China. Of the $270
million for Wyoming, the Company plans to drill or participate in an estimated 105
gross wells in 2005, of which approximately 18% will be for exploration wells and the
remaining will be for development wells. Of the $20 million budgeted for China,
approximately $15 million will be for development activity and the balance will be
for exploratory/appraisal activity. The Company currently has no budget for
acquisitions in 2005. The Company (through its subsidiary) participates in a revolving credit facility with
a group of banks led by JP Morgan Chase Bank. The agreement specifies a maximum loan
amount of $500 million and an aggregate borrowing base of $400 million and a
commitment amount of $200 million at November 1, 2004. The commitment amount may be
increased up to the lesser of the borrowing base amount or $500 million at any time at
the request of the Company. Each bank shall have the right, but not the obligation, to
increase the amount of their commitment as requested by the Company. In the event that
the existing banks increase their commitment to an amount less than the requested
commitment amount, then it would be necessary to bring additional banks into the
facility. The credit facility matures on May 1, 2008. The note bears interest at
either the banks prime rate plus a margin of one-quarter of one percent (0.25%) to
seven-eighths of one percent (0.875%) based on the percentage of available credit
drawn or at LIBOR plus a margin of one and one-quarter percent (1.25%) to one and
seven-eighths of one percent (1.875%) based on the percentage of available credit
drawn. For the purposes of calculating interest, the available credit is equal to the
borrowing base. An average annual commitment fee of 0.30% to 0.50%, depending on the
percentage of available credit drawn, is charged quarterly for any unused portion of
the commitment amount. The borrowing base is subject to periodic (at least
semi-annual) review and re-determination by the banks and may be increased or
decreased depending on a number of factors including the Companys proved reserves and
the banks forecast of future oil and gas prices. Additionally, the Company is
subject to quarterly reviews of compliance with the covenants under the bank facility
including minimum coverage ratios relating to interest, working capital and advances
to Sino-American Energy Corporation, the Companys U.S. subsidiary in which the China
assets are held. In the event of a default under the covenants, the Company may not be
able to access funds otherwise available under the facility and may, in certain
circumstances including a reduction in the borrowing base, be required to repay the
credit facilities. The notes are collateralized by a majority of the Companys proved
domestic oil and gas properties. At March 31, 2005, the Company had $87.0 million of
outstanding borrowings under this credit facility, with a current average interest
rate of approximately 4%. The Company was in compliance with all loan covenants at
March 31, 2005. During the three-months ended March 31, 2005, net cash provided by operating
activities was $92.2 million as compared to $25.7 million for the three-months ended
March 31, 2004. The increase in cash provided by operating activities was
attributable to the increase in net income. During the three-months ended March 31, 2005, cash used in investing activities was
$82.1 million as compared to $41.0 million for the three-months ended March 31, 2004.
The change is primarily attributable to increased activity for drilling and
completion activity in Wyoming and China. During the three-months ended March 31, 2005, cash used in financing
activities was $9.4 million as compared to cash provided of $15.4 million for the three-months ended
March 31, 2004. The change is primarily attributable to decreased borrowings under
the senior credit facility. OFF BALANCE SHEET ARRANGEMENTS The Company did not have any off-balance sheet arrangements as of March 31, 2005. 10




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##### Table of Contents



CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 This report contains or incorporates by reference forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of
the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical facts included in this
document, including without limitation, statements in Managements Discussion and
Analysis of Financial Condition and Results of Operations regarding our financial
position, estimated quantities and net present values of reserves, business strategy,
plans and objectives of the Companys management for future operations, covenant
compliance and those statements preceded by, followed by or that otherwise include
the words believe, expects, anticipates, intends, estimates, projects,
target, goal, plans, objective, should, or similar expressions or
variations on such expressions are forward-looking statements. The Company can give
no assurances that the assumptions upon which such forward-looking statements are
based will prove to be correct nor can the Company assure adequate funding will be
available to execute the Companys planned future capital program. Other risks and uncertainties include, but are not limited to, fluctuations in the
price the Company receives for oil and gas production, reductions in the quantity of
oil and gas sold due to increased industry-wide demand and/or curtailments in
production from specific properties due to mechanical, marketing or other problems,
operating and capital expenditures that are either significantly higher or lower than
anticipated because the actual cost of identified projects varied from original
estimates and/or from the number of exploration and development opportunities being
greater or fewer than currently anticipated and increased financing costs due to a
significant increase in interest rates. See the Companys annual report on Form 10-K
for the year ended December 31, 2004 for additional risks related to the Companys
business. 
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys major market risk exposure is in the pricing applicable to its gas and oil
production. Realized pricing is primarily driven by the prevailing price for crude oil and
spot prices applicable to the Companys U.S. natural gas production, which contributed 89%
of the Companys oil and gas revenue. Historically, prices received for gas production
have been volatile and unpredictable. Pricing volatility is expected to continue. Gas
price realizations averaged $5.58 per Mcf during the three months ended March 31, 2005.
This average price includes the effects of hedging and gas balancing between working
interest owners. The average realized price for oil in China was
$33.66 per barrel. The Company currently does not hedge any of its
oil production. The Company periodically enters into commodity derivative contracts and fixed-price
physical contracts to manage its exposure to oil and natural gas price volatility. The
Company primarily utilizes fixed price physical contracts as well as price swaps, which are
placed with major financial institutions or with counter-parties of high credit quality
that it believes are minimal credit risks. The oil and natural gas reference prices of
these commodity derivatives contracts are based upon crude oil and natural gas futures,
which have a high degree of historical correlation with actual prices the Company receives.
Under SFAS No. 133, all derivative instruments are recorded on the balance sheet at fair
value. Changes in the derivatives fair value are recognized currently in earnings unless
specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or
loss on the derivative is deferred in accumulated other comprehensive income (loss) to the
extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the
derivative is offset by related results of the hedged item in the
consolidated statement of income. Gains
and losses on hedging instruments included in accumulated other comprehensive income (loss)
are reclassified to oil and natural gas sales revenue in the period that the related
production is delivered. Derivative contracts that do not qualify for hedge accounting
treatment are recorded as derivative assets and liabilities at market value in the
consolidated balance sheet, and the associated unrealized gains and losses are recorded as
current expense or income in the consolidated statement of income. The Company
currently does not have any derivative contracts in place that do not qualify as a cash
flow hedge. During the first three months of 2005, the total impact of the Companys price swaps was
a reduction in gas revenues of $1 million. The effect of fixed price physical contracts
is not included in this amount. The Company does not currently hedge its oil production. At March 31, 2005, the Company had the following open derivative contracts to manage
price risk on a portion of its natural gas production whereby the Company receives the
fixed price and pays the variable price (all prices southwest Wyoming basis). (The
Companys gas contains approximately 1.06 MMBtu per Mcf upon delivery at the sales
point.) Average
    
    
    Unrealized loss atType
    
    Remaining Contract Period
    
    
    Volume-MMBTU/day
    
    
    Price/MMBTU
    
    
    3/31/05*Swap
    
    Apr 2005 - Dec 2005
    
    
    10,000
    
    
    $
    4.42
    
    
    $
    7,309,366
 * Unrealized losses are not adjusted for income tax effect The Company also utilizes fixed price forward gas sales contracts at southwest Wyoming
delivery points to hedge its commodity exposure. In addition to the derivative
contracts discussed above, the Company had the following fixed price physical delivery
contracts in place on behalf of its interest and those of other parties at March 31,
2005. (The Companys approximate average net interest in physical gas sales is 80%.) Volume -
    
    AverageRemaining Contract Period
    
    MMBTU / day
    
    Price / MMBTUApr
 Dec 2005
    
    
    70,000
    
    
    $
    5.03Apr  Oct 2005
    
    
    10,000
    
    
    $
    6.03Calendar 2006
    
    
    50,000
    
    
    $
    5.30
 The above derivative and forward gas sales contracts represent approximately 45% of the
Companys currently forecasted gas production for the balance of 2005, and 19% for
calendar year 2006. 11




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##### Table of Contents



ITEM 4  CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Companys
management, including the Companys principal executive officer and principal
financial officer has evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based upon that evaluation, the Companys principal
executive officer and the principal financial officer have concluded that the
disclosure controls and procedures were effective to ensure that information required
to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission as of the end of the period covered by this Quarterly Report on
Form 10-Q. (b) Changes in Internal Controls. There were no changes in the Companys
internal control over financial reporting that occurred during the Companys last
fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. 
 PART 2  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The Company is currently involved in various routine disputes and allegations
incidental to its business operations. While it is not possible to determine the
ultimate disposition of these matters, the Company believes that the resolution of
all such pending or threatened litigation is not likely to have a material adverse
effect on the Companys financial position, or results of operations. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS None 
 ITEM 5. OTHER INFORMATION None 
 ITEM 6. EXHIBITS Exhibits 3.1 Articles of Incorporation of Ultra Petroleum Corp.  (incorporated by reference to
Exhibit 3.1 of the Companys Quarterly Report on Form 10Q for the period ended June 30,
2001.) 3.2 By-Laws of Ultra Petroleum Corp  (incorporated by reference to Exhibit 3.2 of the
Companys Quarterly Report on Form 10Q for the period ended June 30, 2001.) 4.1 Specimen Common Share Certificate  (incorporated by reference to Exhibit 4.1 of the
Companys Quarterly Report on Form 10Q for the period ended June 30, 2001.) 31.1 Certification of Chief Executive Officer and Principle Financial Officer pursuant to
Rule 13(a)  14(a) 32.1 Certification of Chief Executive Officer and Principle Financial Officer pursuant to
Rule 13(a)  14(b) 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. ULTRA PETROLEUM CORP.Date April 30, 2005
    By:
    (Signature)Name:
    Michael D. WatfordTitle:
    Chief Executive Officer
(on behalf of the registrant and as the
Principal Financial Officer) 12