UTS ENERGY CORPORATION 2003 ANNUAL REPORT Message to Our Shareholders 03 Throughout 2003, the management of UTS Energy Corporation has been actively seeking a resolution to the indefinite deferral of the Fort Hills oil sands project in which our Company holds a 22 percent working interest. In addition to our ongoing discussions with the Flint Hills organization to acquire some or all of their 78 percent interest, we have recently completed our base reassessment of the Project. To support a timely development of Fort Hills upon the potential acquisition of control, UTS has continued its proactive pursuit in examining the various options to redefine the development scope of the Project by undertaking a series of technical and market studies to address issues associated with the development, upgrading and marketing of the crudes produced. After carefully considering our options, the Company offered to acquire TrueNorth's 78 percent interest in Fort Hills at an appropriate price on the usual commercial terms including limited due diligence, representations, warranties, financing and approval of the regulatory authorities. Several commercial terms other than price remain outstanding between UTS Energy and TrueNorth at the time of this message. However, TrueNorth advised UTS that they wish to open a data room to facilitate a competitive process for the potential sale of its interest in Fort Hills. UTS is very supportive of current development of the Project, whether as operator through increasing our interest or in partnership with a new participant, as we strongly believe that Fort Hills represents an important and timely contributor to the future growth of Alberta's oil sands. The Fort Hills oil sands project represents an excellent commercial opportunity to further the interests of all stakeholders including the Province of Alberta. We are of the view that it is in the best interests of all concerned that a commitment be made by the owners for the current development of the Project. Such a commitment would assist the Alberta Department of Energy in its consideration of amending the regulatory milestone of the production of 30,000 barrels of bitumen per day by October 31, 2005 from Fort Hills' leases 5 and 52. The purpose of Fort Hills is to develop, mine, extract and sell bitumen in a clean form from certain oil sands deposits underlying approximately 46,170 acres of the contiguous oil sands leases 5, 8 and 52 in Alberta's Athabasca oil sands region, approximately 90 kilometres north of Fort McMurray. The Fort Hills oil sands leases rank as one of the highest quality resources demonstrating operational and mining advantages when compared to current and proposed oil sands operations. The Fort Hills mineable reserves can support a commercial project of more than 200,000 barrels per day for in excess of 40 years with in-place resources to facilitate future expansions. Government regulators have granted the Fort Hills Project the major permits and approvals required to proceed with construction and development of a 190,000 barrels of bitumen per day project. The proposed development was to occur in two phases, each with production of 95,000 barrels of bitumen per day, at an estimated total capital cost of $3.3 billion. Fort Hills contains 4.9 billion barrels of bitumen in place, of which 2.8 billion barrels are recoverable under the mine plan. To date, approximately $175 million has been invested in the Project, $50 million by the Company and $125 million by TrueNorth. We are disappointed that we are not further advanced in resolving the outstanding issues related to the Fort Hills Project, but we remain confident and determined to move the Fort Hills Project forward. Your continued support is most appreciated. On behalf of the Board of Directors, Dennis A. Sharp, P. Eng. Chairman and Chief Executive Officer Calgary, Alberta February 25, 2004 Management's Discussion and Analysis As at February 25, 2004 Management's Discussion and Analysis ("MD&A") should be read in conjunction with the audited consolidated financial statements. Additional information concerning the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com. The strategic focus of UTS Energy Corporation ("UTS" or the "Company") is the creation of shareholder value through its participation in the development stage Fort Hills oil sands project ("Fort Hills" or "Project"), the development of which is currently deferred indefinitely. The purpose of Fort Hills is to develop, mine, extract and sell bitumen in a clean form from certain oil sands deposits underlying approximately 46,170 acres of the contiguous oil sands leases 5, 8 and 52 in Alberta's Athabasca oil sands region, approximately 90 kilometres north of Fort McMurray. Government regulators have granted the Fort Hills Project the major permits and approvals required to proceed with construction and development of a 190,000 barrels of bitumen per day project. The proposed development was to occur in two phases, each with production of 95,000 barrels of bitumen per day, at an estimated total capital cost of $3.3 billion. The Fort Hills Project is a joint venture between the Company, with its 22% interest, and TrueNorth Energy L.P. ("TrueNorth" or "Operator"), with its 78% interest. TrueNorth is an affiliate of Flint Hills Resources LLC, which is owned by Koch Industries, Inc., of Wichita, Kansas. The Operator is responsible for all activities related to the development of the Fort Hills Project, which is governed by a Joint Venture Agreement ("JVA"). The JVA provides for the exploration, development, operation and maintenance of the Project, and the transportation and marketing of its bitumen production. In January 2003, after completing the resource definition, mine planning, extraction process refinement, froth treatment development, initial engineering, project execution planning and obtaining the necessary regulatory approval at a total cost of approximately $175 million, the Operator decided to indefinitely defer development of the Fort Hills Project, closed its offices and terminated its staff. TrueNorth cited as contributing factors in its decision the escalating costs experienced by other established oil sands developers, challenging capital markets, and general uncertainty regarding the potential impacts of the Kyoto Accord. Both the Company and the Operator expressed their respective intentions to preserve the value of the Project's assets as well as the option to proceed with development at a future date. The Alberta Department of Energy has requested the Operator clarify the timeline for development under authority of the Oil Sands Tenure Regulations; refer to the discussion concerning the Development Plan under the title "Outlook" below. Under the terms of the JVA, TrueNorth may make decisions in respect of the development and operation of the Fort Hills Project. Thus, future development of the Fort Hills Project depends on a decision by TrueNorth to proceed with development or to enable the Company or third parties to proceed with development. Additionally, the concurrence of government regulatory authorities for any amendment to the existing regulatory approvals would be necessary and additional government regulatory approvals may be required for the Project to proceed under a revised scope of development. As a result of TrueNorth's decision and the Company's view that shareholder value is created by the current development of the Fort Hills Project, UTS initiated a strategic review to redefine the scope of the Fort Hills Project. During 2003, the Company evaluated a number of alternatives for the development of the Project under an alternate business plan, including the potential upgrading of bitumen production to synthetic crude oil and the potential acquisition of some or all of TrueNorth's interest in the Fort Hills Project. CURRENT OPERATIONS UTS' net loss for the year ended December 31, 2003, was $1,755,665 or $0.02 per share, compared with $2,386,305 or $0.03 per share for the year ended December 30, 2002. UTS' net loss for the quarter ended December 31, 2003, was $332,057 or $0.004 per share, compared with $738,967 or $0.009 per share for the comparable period in 2002. The Company's financial results are reported in Canadian dollars based on Canadian Generally Accepted Accounting Principles. Interest income declined in 2003 compared with 2002 because of a decline in average cash and short-term deposit balances. General and administrative expenses ("G&A") pertain solely to the Company's operating overhead expenses. G&A expense amounted to $1,136,081 for 2003, a decrease of $281,646 from the 2002 expenditure level of $1,417,727. The decrease occurred due to the deferral of development of the Fort Hills Project, resulting in a reduced level of activities focused on reactivation of the Project under an alternate plan of development. The higher expenditure level in 2002 supported a broader and higher level of activity to facilitate the expected financing of the Company's share of the capital costs of the Fort Hills Project as envisioned prior to deferral of the Project. G&A expenses for the quarter ended December 31, 2003 declined to $214,820 from $324,371 from the same period in 2002 due to a decrease in legal costs and a $59,000 deferral of insurance expenses. 2 UTS ENERGY CORPORATION 2003 ANNUAL REPORT The Fort Hills scoping and consulting costs consist of the Company's expenses directly related to the Project. In 2003, subsequent to the deferral of the Project, costs of $563,525 were incurred to assess options for reactivating the Project under an alternate plan of development, including revisions to the mine plan, consideration of alternate extraction technology, options for upgrading of bitumen to synthetic crude, enhanced tailings management approaches, product market studies, scaling of the TrueNorth project plan and consideration of UTS' acquisition of TrueNorth's interest in the Project. In 2002, costs totalling $683,592 included engineering and consulting costs incurred to review the engineering design specification for the Fort Hills Project, assess market and transportation options for Fort Hills' bitumen production including upgrading to synthetic crude, and seeking of equity and debt financing commitments for the Company's share of the Project's capital costs, estimated at $440 million. The Fort Hills scoping and consulting expense for the quarter ended December 31, 2003 totalled $182,084 compared to $138,590 for the same period in 2002. These activities were substantially concluded by December 31, 2003. The Fort Hills operations expense in 2003 totalling $122,320 represents the Company's share of post deferral costs for the care and custody of the Fort Hills leases and the fulfilment of administrative requirements for the Project's regulatory approvals. The comparative expense of $649,938 for 2002 included the costs of discontinuing development of the Fort Hills Project, including UTS' share of the cost of closing the Operator's offices and terminating its staff. The Fort Hills operations expense for the quarter ended December 31, 2003 totalled $36,300 compared to $582,808 for the same period in 2002 for the reasons noted above. The Company's share of the estimated Project operating expenditures for 2004 is approximately $300,000 pertaining to lease rentals, royalty payments, industry research initiatives, site care and custody, maintenance of approvals and general management. The current portion of the provision for income taxes pertains to Federal Large Corporations Tax. The future portion of the provision for income taxes results from the recognition of a change in the contingent future income tax liability on the difference between the financial statement value of the investment in Fort Hills' assets and respective tax values. CAPITAL ASSET EXPENDITURES Capital asset expenditures totalled $348,594 and $9,456,431 in 2003 and 2002, respectively. The significant component of these expenditures was UTS' share of capital expenditures for the Fort Hills Project, which totalled $346,202 and $9,433,197 in 2003 and 2002, respectively. Capital expenditures for the Fort Hills Project were comprised of bitumen resource definition, mine planning, engineering design, technology licence payments, environmental assessments and Fort Hills Project regulatory permitting. Included in these figures are capitalized estimated site restoration accruals totalling $190,370 and $206,290 at December 31, 2003 and December 30, 2002 respectively. During the period of deferral of the Fort Hills Project, capital expenditures are expected to be negligible; refer to "Outlook" below. Should the Project be reactivated, the Company's share of the cost of development would significantly exceed its financial resources. Thus, the Company would need to seek additional funding to satisfy its share of such costs. UTS' corporate capital expenditures were $2,392 and $23,234 in 2003 and 2002, respectively. Selected Financial Data Total assets Total long term debt Total revenues1 Cash dividends declared Net loss from continuing operations: Total Per share basis Diluted per share basis Net loss: Total Per share basis Diluted per share basis Note: 1. Interest income. No revenues will be realized until commencement of operations. 2003 2002 2001 $52,102,465 Nil 99,777 Nil 1,755,665 0.02 0.02 1,755,665 0.02 0.02 $ 54,849,388 Nil 214,230 Nil 2,386,305 0.03 0.03 2,386,305 0.03 0.03 $ 58,856,557 Nil 369,310 Nil 969,620 0.02 0.02 969,620 0.02 0.02 3 Over the prior three noted years, total assets have declined as cash and short term deposits have been used to fund the net loss and a reduction in the amount of current liabilities in each of the three years. Total interest revenue has declined as the short term deposits earning this interest have been used for the foregoing purposes and investment in capital assets. The net loss has fluctuated in 2003 and 2002 for the reasons noted in "Current Operations". The net loss in 2001 was lower than the two subsequent years as there were no expenses for stock based compensation, Fort Hills scoping and consulting, and Fort Hills operations. The issuance of 13,929,121 common shares in 2002 and 2003 combined with the changes in net income caused the fluctuation in per share amounts. Quarter ended Dec 31 2003 Sept 30 2003 Jun 30 2003 Mar 31 2003 Dec 30 2002 Sept 30 2002 Jun 30 2002 Mar 31 2002 Total revenue1 Loss from continuing operations: Total Per share basis Diluted per share basis Net loss: Total Per share basis Diluted per share basis $ 17,625 $ 23,329 $ 28,327 $ 30,496 332,057 0.004 0.004 332,057 0.004 0.004 526,474 0.007 0.007 526,474 0.007 0.007 548,018 0.007 0.007 548,018 0.007 0.007 349,116 0.006 0.006 349,116 0.006 0.006 $ 37,352 $ 51,782 $ 53,745 $ 71,351 738,967 0.009 0.009 738,967 0.009 0.009 763,546 0.010 0.010 763,546 0.010 0.010 427,737 0.005 0.005 427,737 0.005 0.005 456,055 0.006 0.006 456,055 0.006 0.006 Note: 1. Interest income. No revenues will be realized until commencement of operations. The 2002 fourth quarter net loss of $739,000 was greater than the loss for the comparable period in 2003 due to the expense of Fort Hills operations increasing to include the one time costs of deferring the Fort Hills Project. Other fluctuations in the net loss arose from the variation in expenditures for Fort Hills scoping and consulting, which wound down in the fourth quarter of 2003. SUMMARY OF CONTRACTUAL OBLIGATIONS The long term obligations comprise long term liabilities of the Company with indeterminate settlement dates. Payments Due By Period Contractual Obligations Total under 1 year 1 - 3 years 4 - 5 years after 5 years Long term debt Capital lease obligations Operating leases Purchase obligations Other long term obligations 1, 2 and 3 $ Nil Nil 241,238 Nil 4,084,000 $ Nil Nil 107,992 Nil Nil $ Nil Nil 133,246 Nil Nil $ Nil Nil Nil Nil Nil $ Nil Nil Nil Nil 4,084,000 Total contractual obligations $ 4,325,238 $ 107,992 $ 133,246 $ Nil $ 4,084,000 Notes: 1. The Company is responsible for its share of the estimated future site restoration costs. Such costs are being recognized for financial statement purposes on a present value basis over the life of the project. The undiscounted amount of $1,100,000 is included in the table; refer to "Critical Accounting Estimate" for further detail. 2. Future income taxes of $2,984,000 are included, the timing of payment of which, if ever, is uncertain. 3. The Company is responsible for its proportionate share of capital and operating costs of the Fort Hills Project. As a result of the deferral of the Project, the amount and timing of such costs is uncertain. 4 UTS ENERGY CORPORATION 2003 ANNUAL REPORT CONTINGENT LIABILITIES The Company has entered into employment contracts with its two senior officers. In the event of a change of control, involuntary termination or constructive dismissal the aggregate payment to these officers would approximate $1.1 million, which is included in the $1,300,000 cost of closing the Company's office and terminating its staff described under "Outlook" below. OUTSTANDING SHARE DATA The following shares were outstanding at February 25, 2004: Number Issued Consideration Common Shares without nominal or par value The following equity awards were outstanding at February 25, 2004: Range of Exercise Price Weighted Average Exercise Price 75,545,421 $ 56,947,420 Number Outstanding Number Exercisable Stock Appreciation Rights Incentive Stock Options $ 0.30 - 1.25 $ 0.30 - 1.25 $ $ 0.79 0.91 1,733,333 3,750,000 1,399,998 2,825,000 The shareholders have authorized the Directors of the Company to complete, if considered appropriate, a consolidation of the share capital on a basis of up to 1:10. The authorization is effective until June 26, 2004. A consolidation would only occur if the share price is expected to be sustainable. CRITICAL ACCOUNTING ESTIMATE The Company has estimated the future site restoration cost for the disturbance to the Fort Hills leases, generally in the area of a historic plant and mine site. The estimates of these costs have been prepared by third party contractors and the Operator. The estimate has been based on the assumption of development of the Fort Hills Project. However, should a decision be made not to proceed with development, the Company is obligated within 6 months of such a decision to reclaim the disturbance on the Fort Hills leases. The costs of such reclamation would significantly exceed the liability accrued in the financial statements. Refer to the section entitled "Site Restoration" below for additional information regarding the method and assumptions utilized in the calculation of the obligation and a continuity of the amount accrued to date. RECENTLY ISSUED ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING POLICIES Site Restoration The Company adopted the Canadian accounting standards relating to asset retirement obligations effective in 2002 in respect of the oil sands leases comprising the Fort Hills Project. The standard applies to obligations associated with the retirement of long-lived assets that result from the acquisition, development and use of the asset. The standard requires that the future value of the liability for an asset retirement obligation be recognized, if a reasonable estimate of fair value can be made, with its present value being recorded as a long-term site restoration liability and an increase in capital assets. The amount reported in 2002 was $206,290. During 2003, the Company's share of the estimated future site restoration costs was re-examined and adjusted upward from $572,000 to $1,100,000. Using an estimated life of the Fort Hills Project of 43 years, an inflation factor of 4% and a risk-free interest rate discount factor of 7%, the estimated present value of the site restoration costs is as follows: Balance, December 30, 2002 Accretion during the year Adjustment arising from change in cost estimate Balance, December 31, 2003 $ 206,290 14,440 175,930 $ 396,660 5 Stock Based Compensation In 2002, the Company adopted prospectively the new Canadian accounting standard relating to stock-based compensation and other stock-based payments using the fair value method to calculate the value of the stock granted and record this value as an expense over the expected life of the award. The standard, while permitting the Company to continue the policy that no expense be recorded on the grant of stock options to directors and employees, required note disclosure of the impact on earnings per share had an expense been recorded. In 2003, the Company changed its policy to recognize the expense on a retroactive basis for all grants awarded from January 1, 2002. The value of awards granted since January 1, 2002 under the Option Plan and the SAR Plan have been estimated on the date of grant based on the Black-Scholes option pricing model using the following assumptions: risk free interest rates ranging from 3.5% to 4.75%, expected lives of 5 years, and volatility ranging from 98% to 101%. The undernoted amounts have been recognized as an expense and credited to shareholders' equity as contributed surplus. The expense pertaining to the 2002 fiscal year has been added to the current year's opening deficit, as permitted by the standard. 2003 2002 Total Option Plan SAR Plan $ $ 100,000 16,300 116,300 $ $ 43,400 4,700 48,100 $ $ 143,400 21,000 164,400 FINANCIAL INSTRUMENTS The carrying value of the Company's financial instruments including cash, accounts receivable and accounts payable approximates their fair value because of their short-term nature. LIQUIDITY AND FINANCIAL RESOURCES The only source of additional funds presently available to UTS to finance its share of costs of the Fort Hills Project and its working capital needs is the sale of additional equity capital or borrowings. During 2003, UTS had no net proceeds from the sale of additional equity capital compared to net proceeds of $396,500 in 2002, all from the exercise of stock options. A Canadian chartered bank has extended to the Company an unsecured demand credit facility of up to $2,000,000. This facility, while intended to fund general operations, is effectively not available for that purpose given the current status of the Fort Hills Project. OUTLOOK The Company estimates it has sufficient financial resources, represented by cash and short-term deposits, to fund its working capital requirements throughout 2004 estimated at $1,500,000, assuming its current operating status continues. The composition of this amount is as follows: $1,200,000 for general and administrative expenses and $300,000 for the Company's share of the estimated operating expenditures of the Fort Hills Project. If the Company elected to scale back operations to a minimum level, the cost of closing its office and terminating its staff is estimated at $1,300,000. The Company does not expect to incur any significant capital expenditures either corporately or in the respect of the Project in 2004 assuming its current operating status continues. During any period of deferral of the Fort Hills Project beyond 2004, the Company will need to continue to fund its working capital requirements, including its proportionate share of the capital and operating costs of the Fort Hills Project. It is difficult to accurately determine the annual working capital requirements during the deferral period given the difficulty in determining the level of activity of the Company and the Project. However, if the level of activity is negligible, the estimated annual working capital requirements of the Company, including its proportionate share of the costs of the Fort Hills Project, beyond 2004 are estimated to be $750,000 annually. Considering the expected level of expenditure in 2004 and 2005, the Company will need to seek additional interim funding over the next year to satisfy the Company's working capital needs. 6 UTS ENERGY CORPORATION 2003 ANNUAL REPORT The Company's share of the cost of any future development of the Fort Hills Project significantly exceeds its financial resources. The only source of additional funds presently available to the Company is the sale of additional equity capital or borrowings. If financing is unavailable, the Fort Hills Project may be further delayed, development may be indefinitely postponed, future value of the Company's investment therein may be impaired, or the Company may lose its interest. As previously reported, the continued ownership of the Fort Hills leases 5 and 52 is subject to fulfilment of the terms of a Development Plan approved under the Oil Sands Tenure Regulations (Alberta). The Development Plan sets out various development milestones to be achieved to maintain ownership of the oil sands leases. The current outstanding milestone to be achieved is the production of 30,000 barrels of bitumen per day by October 31, 2005. The Operator has proposed an extension of this milestone to the Alberta Department of Energy ("Alberta Energy"). Alberta Energy advised TrueNorth, that any amendment to the production milestone must be supported by an active, aggressive development plan that would proceed to execution without interruption while meeting the full intent of the current lease conditions. Any extension is subject to negotiation with and the approval of Alberta Energy. Should this issue not be resolved satisfactorily to Alberta Energy, part or all of two of three Fort Hills oil sands leases may be cancelled on October 31, 2005 or earlier; refer to Risk Factors below. Given the uncertainty of the timeline for development and the outstanding production milestone, UTS expects a reclassification of its probable bitumen reserves to the contingent resource category. RISK FACTORS UTS is a single-purpose company as the Company's only asset is its investment in the Fort Hills Project. As such, all operating and capital expenditures are directly or indirectly related to oil sands development and construction, and 100% of the Company's revenues will be, on commencement of production, derived from oil sands operations. The business of the Company is a development-stage oil sands mining and extraction project. Accordingly, UTS faces inherent risks in the achievement of its objectives--resource exploration risk, technological risk and financial risk--over which the Company has little or no control. In addition to these inherent risks, UTS faces risks associated with commodity prices, exchange rates, political factors, government regulation and general economic conditions. The future development of the Fort Hills Project depends on decisions made by others. TrueNorth is the Operator of the Fort Hills Project and, under the terms of the JVA, can make decisions about the timing, development and operation of the Fort Hills Project. TrueNorth, as Operator, has decided to indefinitely defer development of the Fort Hills Project. Thus, future development of the Fort Hills Project depends on a decision by TrueNorth to proceed with development or to enable the Company or third parties to proceed with development. Furthermore, future development of the Fort Hills Project depends on satisfying the conditions of the regulatory approvals, and amendments to the regulatory approvals may be necessary to facilitate a revised scope of future development. Additionally, future development of the Fort Hills Project depends on the availability of financing. There can be no assurance given that TrueNorth will facilitate future development, that satisfactory amendments to the regulatory approvals to facilitate a revised scope of development will be obtained, or that the financing of the Fort Hills Project will be successful. To finance its working capital needs including its proportionate share of the operating and capital costs of the Fort Hills Project, the only source of additional funds presently available to the Company is the sale of equity capital or borrowings. The timing and amount of such financing is uncertain given the indefinite deferral of the Fort Hills Project and that any future development of the Fort Hills Project depends on decisions made by others. Depending on the length of the deferral of future development of the Fort Hills Project, UTS may need to seek additional interim funding to satisfy the Company's working capital needs, including its proportionate share of the operating and capital costs of the Fort Hills Project. If such financing is unavailable, the Fort Hills Project may be further delayed, development may be indefinitely postponed, the future value of the Company's investment may be impaired, or the Company may lose its interest. In the event of non-payment of the Company's proportionate share of the capital and operating costs of the Fort Hills Project, TrueNorth may, in certain circumstances, choose to (i) purchase the Company's interests at a discount to the Company's investment in Fort Hills, or (ii) pursue other remedies common in the petroleum industry. 7 The oil sands leases of the Fort Hills Project are subject to the Oil Sands Tenure Regulation (Alberta). This legislation deems leases 5 and 52 to be designated as producing and continued beyond their primary terms unless there is a failure to comply with or meet the milestones set out in the Development Plan for the Fort Hills Project in respect of such leases or if there is an alteration or reduction in the Development Plan without the prior written consent of the Minister of Energy. The current outstanding milestone is the production of 30,000 barrels of bitumen per day by October 31, 2005. There can be no assurance of the ability to comply with or meet the milestones set out in the Development Plan, or that the Minister of Energy will consent to any necessary deferral of the milestone date or any amended Development Plan. In addition, the Minister of Energy can, in certain circumstances, change the designation of any lease subject to the legislation and provide notice requiring the commencement or recovery of production, or the increase of existing production, or recovery of bitumen within the time specified in such notice. If such notice is given, there can be no assurance that TrueNorth and the Company will be able to comply with its terms to maintain the leases, which could lead to the leases being amended or cancelled. FORWARD-LOOKING STATEMENTS: This report contains certain "forward-looking statements" within the meaning of such statements under applicable securities law. Except for statements of historical fact relating to the Company, certain information contained herein constitutes forward-looking statements. Forward-looking statements are frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur. Forwardlooking statements are based on the opinions and estimates of management at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include the inherent risks involved in a development stage oil sands mining and extraction enterprise; the Company faces uncertainties, including those associated with resource definition, the timeline to production, the possibility of project cost overruns or unanticipated costs and expenses, regulatory approvals, fluctuating oil prices, and the ability to access sufficient capital from external sources to finance future development. Certain information regarding the Company in this report including forecast working capital, operating and capital expenditures, and future development plans constitute forward-looking statements and are dependent upon decisions made by TrueNorth in connection with the development of the Project, over which UTS has no control. As a consequence, actual results will differ, and may differ materially from those anticipated in the forward-looking statements. The reader is cautioned not to place undue reliance on forward-looking statements. 8 UTS ENERGY CORPORATION 2003 ANNUAL REPORT Management's Responsibility for Financial Reporting Management is responsible for all information contained in this annual report. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include amounts based on management's informed judgements and estimates. The financial and operational information included in this annual report is consistent with that contained in the consolidated financial statements in all material respects. External auditors, appointed by the shareholders, have independently examined the consolidated financial statements in accordance with Canadian generally accepted auditing standards. They have performed such tests, as they deemed necessary to enable them to express an opinion on the consolidated financial statements. The Board of Directors has appointed an Audit Committee, consisting of three directors who are neither employees nor officers of the Company. It meets regularly with management and the external auditors to discuss the financial reporting process, auditing and other financial reporting matters. In addition, the Audit Committee recommends the appointment of the Company's external auditors, who are elected annually by the Company's shareholders. The Audit Committee has reviewed the consolidated financial statements with management and the external auditors. The Board of Directors has approved the consolidated financial statements on the recommendation of the Audit Committee and the contents of the annual report. Dennis A. Sharp, P. Eng. Chairman and Chief Executive Officer Calgary, Canada February 25, 2004 C. W. Leigh Cassidy, C. A. Vice President, Chief Financial Officer and Secretary Auditors' Report to the Shareholders We have audited the consolidated balance sheets of UTS Energy Corporation as at December 31, 2003 and December 30, 2002 and the consolidated statements of operations and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2003 and December 30, 2002 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Calgary, Canada February 11, 2004 9 Consolidated Balance Sheets December 31 2003 December 30 2002 ASSETS Current Assets Cash and short-term deposits Accounts receivable Capital Assets (note 3) $ $ 2,575,374 126,007 2,701,381 49,401,084 52,102,465 $ $ 5,669,807 74,080 5,743,887 49,105,501 54,849,388 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities Future Income Taxes (note 4) Site Restoration (note 5) $ 258,914 2,984,000 396,660 3,639,574 $ 1,317,842 3,223,000 206,290 4,747,132 56,947,420 - (6,845,164) 50,102,256 Shareholders' Equity Share capital issued (note 6) Contributed surplus (note 7) Deficit Commitments (note 9) Contingency (note 10) $ See accompanying notes to consolidated financial statements. 56,947,420 164,400 (8,648,929) 48,462,891 52,102,465 $ 54,849,388 On behalf of the Board: Bruce C. Galloway, Director D. Campbell Deacon, Director 10 UTS ENERGY CORPORATION 2003 ANNUAL REPORT Consolidated Statements of Operations and Deficit Year Ended December 31 2003 Year Ended December 30 2002 Cumulative INCOME Interest $ 99,777 $ 214,230 $ 1,433,040 EXPENSES General and administrative Stock-based compensation cost Fort Hills scoping and consulting Fort Hills operations Loss on sale of capital assets Depreciation and amortization Loss before income taxes Provision for income taxes (note 4) Current Future 103,204 (239,000) (135,796) Net loss Retained earnings (deficit), beginning of year Change in accounting policy (note 7) Deficit, end of year Net Loss per share - basic - diluted Weighted average common shares outstanding - basic - diluted See accompanying notes to consolidated financial statements. 1,136,081 116,300 563,525 122,320 - 53,012 1,991,238 (1,891,461) 1,417,727 - 683,592 649,938 - 53,400 2,804,657 (2,590,427) 7,992,886 116,300 1,247,117 718,899 46,226 206,186 10,327,614 (8,894,574) 96,878 (301,000) (204,122) (2,386,305) (4,458,859) - $ $ $ (6,845,164) (0.03) (0.03) 75,049,992 76,361,406 $ 542,829 (176,000) 366,829 (9,261,403) 660,574 (48,100) (8,648,929) (1,755,665) (6,845,164) (48,100) $ $ $ (8,648,929) (0.02) (0.02) 75,545,421 75,896,099 11 Consolidated Statements of Cash Flows Year Ended December 31 2003 Year Ended December 30 2002 Cumulative CASH PROVIDED BY (USED IN): Operations Net loss Items not involving cash: Future income taxes Loss on sale of capital assets Stock-based compensation cost Depreciation and amortization Change in non-cash working capital (239,000) - 116,300 53,012 (1,825,353) (191,085) (2,016,438) (301,000) - - 53,400 (2,633,905) (48,658) (2,682,563) (176,000) 46,226 116,300 206,186 (9,068,691) (140,351) (9,209,042) $ (1,755,665) $ (2,386,305) $ (9,261,403) Investing Additions to capital assets Acquisition of additional Fort Hills interests Proceeds from sale of capital assets Change in non-cash working capital (158,224) - - (919,771) (1,077,995) (9,250,141) - 3,000 (1,662,661) (10,909,802) (27,717,522) (4,400,000) 580,849 67,197 (31,469,476) Financing Issue of common shares Decrease in cash and short-term deposits Cash and short-term deposits, beginning of year Cash and short-term deposits, end of year Income taxes paid See accompanying notes to consolidated financial statements. - (3,094,433) 5,669,807 $ $ 2,575,374 103,204 $ $ 396,500 (13,195,865) 18,865,672 5,669,807 116,977 $ $ 35,613,976 (5,064,542) 7,639,916 2,575,374 520,876 12 UTS ENERGY CORPORATION 2003 ANNUAL REPORT Notes to Consolidated Financial Statements Years Ended December 31, 2003 and December 30, 2002 UTS Energy Corporation (the "Company") is a development stage enterprise whose sole activity is the development of its interests in the Fort Hills Oil Sands Project ("Fort Hills Project"), which began operations in May 1998. UTS does not have any production revenue and will not until bitumen production begins at the Fort Hills Project. The purpose of the Fort Hills Project is to develop, mine, extract and sell the recoverable clean bitumen from certain oil sands deposits underlying approximately 46,170 acres of the contiguous oil sands leases 5, 8 and 52 in Alberta's Athabasca oil sands region approximately 90 kilometres north of Fort McMurray. The government has granted the Fort Hills Project the major permits and approvals necessary for construction to commence and development to proceed. The Fort Hills Project is a joint venture between the Company with its 22% interest and TrueNorth Energy L.P. ("TrueNorth" or "Operator"), with its 78% interest. TrueNorth is an affiliate of Flint Hills Resources LLC, which is owned by Koch Industries, Inc., of Wichita, Kansas. The Operator is responsible for all activities related to the development of the Fort Hills Project, which is governed by a Joint Venture Agreement ("JVA"). The JVA provides for the exploration, development, operation and maintenance of the Fort Hills Project. In January 2003, the Operator decided to indefinitely defer development of the Fort Hills Project, closed its offices and terminated its staff. Under the terms of the Joint Venture Agreement, TrueNorth may make decisions in respect of the development and operation of the Fort Hills Project. Thus, future development of the Fort Hills Project depends on a decision by TrueNorth to proceed with development or to enable the Company or third parties to proceed with development. Additionally, the concurrence of government regulatory authorities for any amendment to the current major permits and approvals for the Fort Hills Project would be required to facilitate a revised scope of development. As future development of the Fort Hills Project depends on decisions made by others and by UTS, the indefinite deferral of the Fort Hills Project may impair its future value. Refer to note 9(a) concerning the Company's commitment to fund its proportionate costs for the Fort Hills Project and note 10 concerning the tenure of the underlying leases. 1. Significant accounting policies (a) Principles of consolidation These consolidated financial statements include the accounts of the Company, its interests in a limited partnership and a joint venture. The financial statements of the interests in the limited partnership and joint venture are accounted for using the proportionate consolidation method. (b) Investment--Fort Hills Project The Company's investment in the Fort Hills Project is accounted for using the proportionate consolidation method. The amounts recorded represent the Company's share of the assets and liabilities of the joint venture. The joint venture has adopted the Canadian Accounting Standard for Enterprises in the Development Stage. All direct costs relating to the development of the Fort Hills Project to date are considered preoperating and are capitalized, including the cost of the acquisition of leases, exploration, and development except for administrative costs that are not directly related to development activities. When production begins, these capitalized costs will be amortized following the unitof-production method based on proven reserves. Capital assets are assessed in each reporting period to determine if there are events or circumstances that would indicate it is unlikely such costs will be recovered in the future. If there are costs that are considered unlikely to be recovered, they are charged to earnings. The Company's share of the assets and liabilities of the joint venture are not intended to reflect the future value of the Fort Hills Project. The future value of the Fort Hills Project depends on the start-up of commercial production, the ability of the Company to obtain financing and the future profitability of the Fort Hills Project. (c) Site restoration In 2002, the joint venture adopted prospectively the new Canadian accounting standards for financial accounting and reporting for obligations associated with the retirement of long-lived assets and the related asset retirement costs. In accordance with the Company's accounting policy of proportionate consolidation of the joint venture, UTS accounted for its share of the asset retirement obligation under the new standard. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction and development and use of the asset. The standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value is added to the carrying value of the associated asset. The liability is accreted at the end of each period through charges to the carrying value of the associated asset if in a preoperating stage, or operating expenses after the property has been developed and put into production. 13 (d) Income taxes The Company applies the asset and liability method of accounting for income taxes. Under the asset and liability method of accounting for income taxes, future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying value and tax basis of assets and liabilities. Future 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 future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (e) Stock-based compensation In 2002, the Company adopted prospectively the new Canadian accounting standard relating to stock-based compensation and other stockbased payments using the fair value method to calculate a fair value of the stock granted and record that fair value as an expense over the expected life of the award. The standard, while permitting the Company to continue the policy that no expense be recorded on the grant of stock options to directors and employees, required note disclosure of the impact on earnings per share had an expense been recorded. In 2003, the Company changed its policy to recognize the expense on a retroactive basis for grants awarded from January 1, 2002. The expense pertaining to the 2002 fiscal year has been added to the current year's opening deficit, as permitted by the standard. (f) Per share amounts The Company reports per share amounts using the treasury stock method to determine the dilutive effect of stock options and other dilutive instruments. Under the treasury stock method, dilutive instruments create an impact on the dilution calculation where the current value of the dilutive instrument exceeds its exercise price. (g) Amortization and depreciation Amortization of the capital assets of the Fort Hills Project will be provided following the unit-of-production method based on proven reserves when production begins. Office equipment and leaseholds are depreciated on a straight-line basis over the estimated service life of the capital assets. (h) General The preparation of financial statements, in conformity with generally accepted accounting principles, 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 year. Actual results could differ from these estimates. 2. Consolidation of Fort Hills Project The Company's proportionate consolidation of its interests in the Fort Hills Project is as follows: Consolidated Balance Sheets Cash Accounts receivable Accounts payable Site restoration obligation Capital assets Deficiency Investment in joint venture 2003 2002 $ 439,803 30,892 (1,017,858) (206,290) 48,979,973 596,578 $ 48,823,098 $ 28,820 13,860 (81,056) (396,660) 49,326,176 718,898 $ 49,610,038 Consolidated Statements of Operations and Deficit Fort Hills operations Net income (loss) 2003 2002 $ $ (649,938) (649,938) $ $ Cumulative (718,898) (718,898) $ $ (122,320) (122,320) Consolidated Statements of Cash Flows Operating activities Investing activities Decrease in cash position 2003 2002 $ (649,938) (10,398,595) $ (11,048,533) $ Cumulative (718,898) (25,529,938) $ (26,248,836) $ $ (122,320) (288,663) (410,983) 14 UTS ENERGY CORPORATION 2003 ANNUAL REPORT 3. Capital assets 2003 Fort Hills Project Office equipment and leaseholds Less: Accumulated depreciation and amortization Net book value 2002 $ 48,979,973 249,377 49,229,350 123,849 $ 49,105,501 $ 49,326,176 251,769 49,577,945 176,861 $ 49,401,084 4. Income taxes (a) The provision for income tax expense differs from that which would be expected by applying the combined statutory rates. A reconciliation of the difference is as follows: 2003 Basic rate Computed income tax (recovery) at basic rate Increase (decrease) resulting from: Non-deductible charges Resource allowance Share issue costs deducted for tax purposes Loss not recognized Additional valuation allowance Origination and reversal of funding differences Adjustment to reflect change in tax rate Large corporations' tax 2002 42% $ (1,091,000) 31,600 221,300 (254,300) 809,400 - 55,200 (73,200) 96,878 $ (204,122) $ 40% (749,400) 68,700 156,800 (173,000) 523,900 177,500 (55,500) (188,000) 103,204 (135,796) $ (b) The tax effects of temporary differences that give rise to significant portions of the future tax assets and liabilities are as follows: 2003 Future tax assets: Net operating loss carryforwards Other Total gross future tax assets Less valuation allowance Net future tax assets Future tax liabilities: Fort Hills oil sands investment Total gross future tax liabilities Net future tax liability 2002 $ 3,145,000 246,000 3,391,000 3,391,000 - 2,984,000 2,984,000 2,984,000 $ 2,339,200 543,800 2,883,000 2,883,000 - 3,223,000 3,223,000 $ $ 3,223,000 (c) The Company's non-capital losses will expire in the following years: 2005 2006 2007 2008 2009 2010 $ $ 118,070 1,154,256 1,163,450 1,231,087 2,512,649 1,759,027 7,938,539 15 5. Site restoration During 2003, the Company's share of the estimated future site restoration costs were re-examined and adjusted upward from $572,000 to $1,100,000. Using assumptions that estimate the life of the Fort Hills Project to be 43 years, an inflation factor of 4% and a risk-free interest rate discount factor of 7%, the estimated fair value of the site restoration costs has been estimated as follows: Balance, December 30, 2002 Accretion during the year Adjustment arising from change in cost estimate Balance, December 31, 2003 $ 206,290 14,440 175,930 $ 396,660 6. Share capital (a) Authorized: Unlimited number of common shares without nominal or par value. (b) Issued: Changes in capital stock are as follows: Number of Shares Issued, December 30, 1997 Issued by private placement, net of issue costs Issued for 12% interest in Fort Hills Project Issued for acquisition of International Reef Resources Stated capital reduction Issued, December 30, 1998 and 1999 Issue by private placement, net of issue costs Issue of flow-through shares, net of issue costs Issued on exercise of share purchase option Issued on settlement of litigation Issued, December 30, 2000 Issued by prospectus, net of issue costs Issue of flow-through shares, net of issue costs Issued on exercise of share purchase option Tax effect of flow-through shares Issued, December 30, 2001 Issued on exercise of share purchase options Issued, December 30, 2002 and December 31, 2003 24,506,204 7,398,250 5,000,000 6,604,787 - 43,509,241 16,647,060 960,000 299,999 200,000 61,616,300 12,307,692 666,667 214,762 - 74,805,421 740,000 75,545,421 $ $ $ $ $ Consideration 25,648,638 5,163,872 3,217,500 3,755,711 (10,708,932) 27,076,789 13,185,561 945,467 149,250 160,000 41,517,067 14,774,893 1,087,624 101,336 (930,000) 56,550,920 396,500 56,947,420 (c) Incentive Stock Option Plan The Company has an Incentive Stock Option Plan ("Option Plan") under which it may grant stock options ("options") to officers and employees for up to 5.4 million common shares. The exercise price of each option is not less than the market price of the Company's common shares on the last trading day preceding the grant, and an option's maximum term is 10 years. The options may be surrendered by the holder with the consent of the Company for common shares with a value equal to the capital appreciation inherent in the option surrendered. The following activity occurred during the year ended December 31, 2003: 16 UTS ENERGY CORPORATION 2003 ANNUAL REPORT Range of Exercise Price Outstanding, December 30, 1999 Granted Cancelled or expired Outstanding, December 30, 2000 Granted Exercised Cancelled or expired Outstanding, December 30, 2001 Granted Exercised Cancelled or expired Outstanding, December 30, 2002 Cancelled or expired Conversion to SARs Issued Outstanding, December 31, 2003 $ 0.45 - 2.90 0.85 1.30 0.45 - 2.90 1.25 0.75 - 0.85 0.85 - 2.90 0.45 - 1.25 1.12 0.45 - 0.75 0.75 - 1.25 0.45 - 1.25 0.50 - 0.60 0.48 - 1.25 0.30 $ 0.30 - 1.25 Weighted Average Exercise Price $ 0.79 0.85 1.30 0.70 1.25 0.76 2.77 0.91 1.12 0.54 0.96 0.98 0.55 0.90 0.30 $ 0.91 Options Outstanding 3,197,000 610,000 (610,000) 3,197,000 2,505,000 (43,334) (106,666) 5,552,000 465,000 (740,000) (460,000) 4,817,000 (642,000) (1,350,000) 925,000 3,750,000 Options Exercisable 2,480,335 2,540,336 2,663,668 1,942,000 2,825,000 The following table summarizes information concerning options outstanding at December 31, 2003: Total Options Outstanding Weighted Average Remaining Contractual Life (years) 9.0 0.8 3.9 4.3 5.3 $ Exercisable Options Range of Exercise Prices Less than $0.51 $0.51 - $0.75 $0.76 - $1.00 Greater than $1.00 Number 975,000 250,000 350,000 2,175,000 3,750,000 Weighted Average Exercise Price $ 0.31 0.66 0.85 1.22 0.91 Number 50,000 250,000 350,000 2,175,000 2,825,000 Weighted Average Exercise Price $ 0.48 0.66 0.85 1.22 $ 1.11 (d) Stock Appreciation Rights Plan The Company has a Stock Appreciation Rights Plan ("SAR Plan") under which it may grant stock appreciation rights ("SARs") to non-executive directors to purchase up to 2.0 million common shares. The exercise price of each right is not to be less than the market price of the Company's common shares on the last trading day preceding the grant and a right's maximum term is 10 years. The rights may be surrendered or exchanged by the holder with the consent of the Company for either cash or common shares with a value equal to the capital appreciation inherent in the right surrendered or exchanged. The following activity occurred during the year ended December 31, 2003: Range of Exercise Price Outstanding, December 30, 2001 Granted Outstanding, December 30, 2002 Conversion of Stock Options Issued Outstanding, December 31, 2003 $ - 1.12 1.12 0.48 - 1.25 0.30 $ 0.30 - 1.25 $ Weighted Average Exercise Price $ - 1.12 1.12 0.90 0.30 0.79 SARs Outstanding - 49,998 49,998 1,350,000 333,335 1,733,333 1,399,998 SARs Exercisable - - - 17 The following table summarizes information concerning stock appreciation rights outstanding at December 31, 2003: Total SARs Outstanding Weighted Average Remaining Contractual Life (years) 5.0 0.8 1.8 7.3 5.0 $ Exercisable SARs Range of Exercise Prices Less than $0.51 $0.51 - $0.75 $0.76 - $1.00 Greater than $1.00 Number 683,335 200,000 200,000 649,998 1,733,333 Weighted Average Exercise Price $ 0.39 0.66 0.85 1.24 0.79 Number 350,000 200,000 200,000 649,998 1,399,998 Weighted Average Exercise Price $ 0.48 0.66 0.85 1.24 $ 0.91 (e) Consolidation of Share Capital The shareholders have authorized the Directors of the Company to complete, if considered appropriate, a consolidation of the share capital on a basis of up to 1:10. The authorization is effective until June 26, 2004. 7. Change in accounting policy - Stock-based compensation In 2003, the Company retroactively changed its accounting policy regarding stock-based compensation as described in note 1(e). The fair value of each award granted since January 1, 2002 under the Option Plan and the SAR Plan is estimated on the date of grant using the Black-Scholes option pricing model and assumptions as follows; risk free interest rates ranging from 3.5% to 4.75%, expected lives of 5 years and estimated volatility ranging from 98% to 101%. This fair value is amortized over the expected lives of 5 years. The following amounts have been recognized as an expense and credited to contributed surplus: 2003 Option Plan SAR Plan 2002 $ $ 43,400 4,700 48,100 $ $ Total 143,400 21,000 164,400 $ $ 100,000 16,300 116,300 8. Credit facility The Company has an unsecured credit facility of up to $2 million with a Canadian chartered bank. The facility is repayable on demand, and bears interest at bank prime rate plus 2.0%. The credit facility has not been drawn upon. 9. Commitments (a) The Company is responsible for its proportionate share of capital and operating costs of the Fort Hills Project. Depending on the length of the deferral of the Fort Hills Project, the Company may need to seek additional interim funding to satisfy both its carrying costs of the Fort Hills Project and the Company's working capital needs. The Company's share of the cost of development of the Fort Hills Project significantly exceeds its financial resources. The only source of additional funds presently available to the Company is the sale of additional equity capital or borrowings. If additional financing is unavailable, the Fort Hills Project may be further delayed, development may be indefinitely postponed, its future value may be impaired, or the Company may lose its interest in the venture. In the event of non-payment of the Company's share of costs, TrueNorth may, in certain circumstances, choose to (i) purchase the Company's interests at a discount to the Company's investment in Fort Hills, or (ii) pursue other remedies common in the petroleum industry. (b) The Company has entered into employment contracts with its two senior officers. In the event of a change of control, involuntary termination or constructive dismissal the aggregate payment to these officers would approximate $1.1 million. (c) The Company has committed to $241,238 of operating lease arrangements. Payments of $107,992 are required over each of the next two years and $25,254 in the third year. 18 UTS ENERGY CORPORATION 2003 ANNUAL REPORT 10. Contingency The development of oil sands leases 5 and 52 of the Fort Hills Project are subject to a Development Plan approved under the Oil Sands Tenure Regulation (Alberta). The Development Plan sets as a milestone for development, the production of 30,000 barrels of bitumen per day by October 31, 2005. Failure to meet this milestone or extend the date by which it is to be achieved may result in the leases reverting to the Province of Alberta. Reversion of these leases to the Province of Alberta would impair or eliminate the value of the Company's investment in the Fort Hills Project. The Operator of the Fort Hills Project has proposed an extension of this milestone to the Alberta Department of Energy ("Alberta Energy"). Alberta Energy advised TrueNorth that any amendment to the production milestone must be supported by an active, aggressive development plan that would proceed to execution without interruption while meeting the full intent of the current lease conditions. Any extension is subject to negotiation with and the approval of Alberta Energy. The timing and outcome of these negotiations are indeterminate at this time. Oil sands lease 8 of the Fort Hills Project is in its initial term extending into 2015. This lease is subject to alternate regulation. 11. Financial instruments The carrying value of the Company's financial instruments including cash, accounts receivable and accounts payable approximates their fair value because of their short-term nature. 12. Cumulative amounts The cumulative amounts are from the inception of the Fort Hills Project in May 1998 to the date of these financial statements. 13. Comparative figures Certain comparative figures have been reclassified to conform to the current year's presentation. 19 Company Information Directors Douglas D. Baldwin Independent Corporate Director Calgary, Alberta, Canada D. Campbell Deacon Deputy Chairman and Chief Executive Officer Azure Dynamics Corporation Toronto, Ontario, Canada Bruce C. Galloway Independent Corporate Director Oakville, Ontario, Canada Douglas H. Mitchell Co-Chairman & Managing Partner Borden Ladner Gervais LLP Calgary, Alberta, Canada Manfred Roth Chairman and Chief Executive Officer Roth Werke GmbH Buchenau, Germany Dennis A. Sharp Chairman and Chief Executive Officer UTS Energy Corporation Calgary, Alberta, Canada Officers Dennis A. Sharp, P. Eng. Chairman and Chief Executive Officer C. W. Leigh Cassidy, C.A. Vice President, Chief Financial Officer and Secretary Subsidiary UTS Oil Sands Limited Partnership Shares Listed The Toronto Stock Exchange Trading Symbol: UTS Legal Counsel Macleod Dixon LLP Auditors KPMG LLP UTS Energy Corporation 705, 440 - 2 Avenue S. W. Calgary, Alberta T2P 5E9 T 403-531-7599 F 403-531-7588 mail@uts.ca www.uts.ca Registrar and Transfer Agent CIBC Mellon Trust Company 1-800-387-0825 416-643-5500 inquiries@cibcmellon.com 20 UTS ENERGY CORPORATION 2003 ANNUAL REPORT