All values are in Canadian dollars.
CALGARY,
March 6, 2012 /PRNewswire/ -
Provident Energy Ltd. (Provident) (TSX: PVE) (NYSE: PVX) today
announced its 2011 fourth quarter interim and audited 2011 annual
financial and operating results, updated hedging information and
the March cash dividend.
"Provident delivered record fourth quarter
and record 2011 Adjusted
EBITDA(1), driven by very
strong NGL market fundamentals and our aggressive business
development efforts," said President and Chief Executive Officer,
Doug Haughey. "Furthermore, with the
significant increase in growth capital deployment opportunities, we
are well positioned to drive new fee-for-service earnings in the
future."
Fourth Quarter Summary
- Gross operating margin grew by seven percent to $122 million in the fourth quarter of 2011, up
from $113 million in the fourth
quarter of 2010, reflecting higher operating margins from both
Redwater West and Empress East, which increased contributions by 13
percent and three percent, respectively, due to strong NGL per unit
margins. This was partially offset by a five percent decrease in
contribution from Commercial Services.
- Adjusted EBITDA(1) was $100
million for the fourth quarter of 2011, an increase of 14
percent from $88 million in the
fourth quarter of 2010 reflecting higher gross operating margin
combined with lower realized losses on financial derivative
instruments.
- Adjusted funds flow from continuing operations(2)
increased 22 percent to $93 million
($0.34 per share) in the fourth
quarter of 2011, compared to $76
million ($0.28 per unit) in
the fourth quarter of 2010, largely due to the seven percent
increase in gross operating margin, combined with lower realized
losses on financial derivative instruments and lower current tax
expense.
- Dividends paid to shareholders totaled $0.14 per share resulting in a payout ratio of 45
percent of adjusted funds flow from continuing
operations(2) for the fourth quarter of 2011, net of
sustaining capital expenditures.
- Capital expenditures were $59
million during the fourth quarter of 2011 compared to
$26 million in the fourth quarter of
2010. During the fourth quarter of 2011, Provident completed
several key projects including the Septimus to Younger and
Taylor to Boundary Lake pipeline
projects as well as construction of a significant portion of the
Cromer truck terminal.
- On October 3, 2011, Provident
completed the acquisition of a two-thirds interest in Three Star
Trucking Ltd., a Saskatchewan
based oilfield hauling company serving Bakken-area crude oil
producers. The acquisition expands Provident's footprint within the
Bakken area, establishing a strong crude oil presence and providing
opportunities to enhance its NGL and diluents logistics services
businesses.
2011 Financial Summary
2011 financial statements are reported under
International Financial Reporting Standards.
- Gross operating margin grew by 22 percent to $381 million in 2011, up from $313 million in 2010, due to higher contributions
from both Redwater West and Empress East, which increased by 33
percent and 23 percent, respectively, reflecting stronger
year-over-year NGL per unit margins.
- Adjusted EBITDA(1) was a record $282 million for 2011, an increase of 25 percent
from $227 million in 2010. The
increase reflects higher gross operating margin, partially offset
by higher realized losses on financial derivative instruments under
the market risk management program.
- Adjusted funds flow from continuing operations(2)
increased 23 percent to $253 million
($0.93 per share) in 2011, compared
to $206 million ($0.77 per unit) in 2010, largely due to the 22
percent increase in gross operating margin partially offset by
higher realized losses on financial derivative instruments and a
current income tax recovery in 2010.
- Dividends paid to shareholders totaled $0.54 per share resulting in a payout ratio of 63
percent of adjusted funds flow from continuing
operations(2) for 2011, net of sustaining capital
expenditures.
- Total debt at December 31, 2011
was $510 million compared to
$474 million at December 31, 2010. Provident continues to
maintain its financial flexibility with approximately $310 million of capacity remaining under its
$500 million revolving term credit
facility.
- Total debt to Adjusted EBITDA(1) for year ended
December 31, 2011 was a ratio of 1.8
to 1 compared to 2.1 to 1 for the year ended December 31, 2010.
- Capital expenditures from continuing operations were
$134 million in 2011, an increase of
91 percent from the $70 million spent
in 2010. In 2011, Provident spent approximately $113 million on growth projects and $21 million on sustaining capital
requirements. Capital expenditures were primarily directed
towards cavern development and terminalling infrastructure at the
Corunna facility, cavern and brine
pond development at the Redwater
facility and Provident's pipeline replacement/expansion projects in
northeast British Columbia.
_________________________________________________
(1) |
Adjusted EBITDA from continuing operations is earnings before
interest, taxes, depreciation, amortization, and other non-cash
items - see "Reconciliation of Non-GAAP measures" in the Management
Discussion and Analysis (MD&A). Adjusted EBITDA presented above
is from continuing operations and excludes the buyout of financial
derivative instruments and strategic review and restructuring costs
in 2010. |
(2) |
Adjusted funds flow from continuing operations excludes
realized loss on buyout of financial derivative instruments and
strategic review and restructuring costs in 2010 - see
"Reconciliation of Non-GAAP measures" in the MD&A. |
Updated Hedging Disclosure
Provident has released updated current hedging
disclosure including a volume and weighted average hedge price
summary for NGL frac spread volumes and a summary of all current
financial derivative positions on its website at
www.providentenergy.com/bus/riskmanagement/commodity.cfm. The
updated information reflects Provident's hedge positions and
forward-market indications at February 29,
2012. For 2012, Provident has hedged approximately 66
percent of its estimated NGL frac spread sales volumes and
approximately 68 percent of its estimated frac spread natural gas
input volumes.
Recent Developments
On January 16, 2012,
Provident announced it had entered into an agreement with Pembina
Pipeline Corporation (Pembina) for Pembina to acquire all of the
issued and outstanding common shares of Provident by way of a plan
of arrangement under the Business Corporations Act (Alberta). Under the terms of the arrangement,
Provident shareholders will receive 0.425 of a Pembina share for
each Provident share held. This transaction will combine two
organizations with complementary strategies and assets that will be
a leading player in the North American energy infrastructure sector
with an estimated enterprise value of approximately $10 billion. Pending shareholder approval from
both Provident and Pembina shareholders and regulatory approval of
the acquisition, Pembina has announced its intention to increase
its monthly dividend from $0.13 per
share per month ($1.56 annualized) to
$0.135 per share per month
($1.62 annualized). The
acquisition is expected to be completed on or about April 1, 2012.
March 2012 Cash
Dividend
The March cash dividend of $0.045 per share is payable on April 13, 2012 and will be paid to shareholders
of record on March 19, 2012. The
ex-dividend date will be March 16,
2012. Payment of the March cash dividend will not be
affected by the closing of the acquisition by Pembina on or about
April 1, 2012. Provident's
current 2012 annualized dividend rate is $0.54 per common share. Based on the current
annualized dividend rate and the TSX closing price on March 5, 2012 of $11.55 Provident's yield is approximately 4.7
percent.
For shareholders receiving their dividends in U.S. funds, the
March 2012 cash dividend will be
approximately US$0.045 per share
based on an exchange rate of 0.9936. The actual U.S. dollar
dividend will depend on the Canadian/U.S. dollar exchange rate on
the payment date and will be subject to applicable withholding
taxes.
2011 Fourth Quarter Conference Call
A conference call has been scheduled for
Wednesday, March 7, 2012 at
8:00 a.m. MT (10:00 a.m. Eastern) to discuss Provident's
results for the 2011 fourth quarter and year ended December 31, 2011. To participate, please dial
647-427-7450 or 888-231-8191 approximately 10 minutes prior to the
conference call. An archived recording of the call will be
available for replay until March 14,
2012 by dialing 514-807-9274 or 855-859-2056 and entering
passcode 43799676. Provident will also provide a replay of the call
on its website at www.providentenergy.com.
Provident Energy Ltd. is a Calgary-based corporation that owns and
manages a natural gas liquids midstream business. Provident's
Midstream facilities are strategically located in Western Canada and in the premium NGL markets
in Eastern Canada and the U.S.
Provident provides monthly cash dividends to its shareholders and
trades on the Toronto Stock
Exchange and the New York Stock Exchange under the symbols PVE and
PVX, respectively.
This news release contains certain
forward-looking statements concerning Provident and the arrangement
involving Pembina, as well as other expectations, plans, goals,
objectives, information or statements about future events,
conditions, results of operations or performance that may
constitute "forward-looking statements" or "forward-looking
information" under applicable securities legislation. Such
statements or information involve substantial known and unknown
risks and uncertainties, certain of which are beyond Provident's
control, including the impact of general economic conditions in
Canada and the United States, industry conditions,
changes in laws and regulations including the adoption of new
environmental laws and regulations and changes in how they are
interpreted and enforced, increased competition, the lack of
availability of qualified personnel or management, pipeline design
and construction, fluctuations in commodity prices, foreign
exchange or interest rates, stock market volatility, obtaining
required approvals of regulatory authorities and the failure to
complete the arrangement. Such forward-looking information is
provided for the purpose of providing information about
management's current expectations and plans relating to the
future. Readers are cautioned that reliance on such
information may not be appropriate for other purposes, such as
making investment decisions.
Such forward-looking statements or information
are based on a number of assumptions which may prove to be
incorrect. In addition to other assumptions identified in this news
release, assumptions have been made regarding, among other things,
commodity prices, operating conditions, capital and other
expenditures, project development activities and certain matters
relating to the arrangement.
Although Provident believes that the
expectations reflected in such forward-looking statements or
information are reasonable, undue reliance should not be placed on
forward-looking statements because Provident can give no assurance
that such expectations will prove to be correct. Forward-looking
statements or information are based on current expectations,
estimates and projections that involve a number of risks and
uncertainties which could cause actual results to differ materially
from those anticipated by Provident and described in the
forward-looking statements or information.
The forward-looking statements or information
contained in this news release are made as of the date hereof and
Provident undertakes no obligation to update publicly or revise any
forward-looking statements or information, whether as a result of
new information, future events or otherwise unless so required by
applicable securities laws. The forward-looking statements or
information contained in this news release are expressly qualified
by this cautionary statement.
Consolidated financial and operational
highlights |
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|
|
|
($ 000s except per share data) |
|
Three months ended December
31, |
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
% Change |
|
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales and service revenue |
|
$ |
569,547 |
|
$ |
543,725 |
5 |
|
$ |
1,955,878 |
$ |
1,746,557 |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds flow from continuing operations
(1) |
|
$ |
92,767 |
|
$ |
74,133 |
25 |
|
$ |
252,632 |
$ |
(6,720) |
- |
Funds flow from discontinued
operations (1) |
|
$ |
- |
|
$ |
- |
- |
|
$ |
- |
$ |
(2,436) |
(100) |
Funds flow from operations
(1) |
|
$ |
92,767 |
|
$ |
74,133 |
25 |
|
$ |
252,632 |
$ |
(9,156) |
- |
Adjusted EBITDA - continuing
operations (2) |
|
$ |
100,360 |
|
$ |
86,342 |
16 |
|
$ |
282,428 |
$ |
13,919 |
1,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted funds flow from continuing
operations (3) |
|
$ |
92,767 |
|
$ |
76,002 |
22 |
|
$ |
252,632 |
$ |
206,121 |
23 |
|
Per weighted average share - basic |
|
$ |
0.34 |
|
$ |
0.28 |
21 |
|
$ |
0.93 |
$ |
0.77 |
21 |
|
Per weighted average share -
diluted (4) |
|
$ |
0.34 |
|
$ |
0.27 |
26 |
|
$ |
0.93 |
$ |
0.77 |
21 |
Percent of adjusted funds flow from
continuing
operations, net of sustaining capital spending,
paid out as declared dividends |
|
|
45% |
|
|
67% |
(33) |
|
|
63% |
|
96% |
(34) |
Adjusted EBITDA excluding buyout of
financial
derivative instruments and strategic review and
restructuring costs - continuing operations
(2) |
|
$ |
100,360 |
|
$ |
88,211 |
14 |
|
$ |
282,428 |
$ |
226,760 |
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to shareholders |
|
$ |
36,905 |
|
$ |
48,221 |
(23) |
|
$ |
146,287 |
$ |
191,639 |
(24) |
|
Per share |
|
$ |
0.14 |
|
$ |
0.18 |
(25) |
|
$ |
0.54 |
$ |
0.72 |
(25) |
Net income from continuing
operations |
|
$ |
20,585 |
|
$ |
63,622 |
(68) |
|
$ |
97,217 |
$ |
112,217 |
(13) |
|
Per weighted average share -
basic |
|
$ |
0.08 |
|
$ |
0.24 |
(66) |
|
$ |
0.36 |
$ |
0.42 |
(14) |
|
Per weighted average share - diluted
(4) |
|
$ |
0.08 |
|
$ |
0.23 |
(65) |
|
$ |
0.36 |
$ |
0.42 |
(14) |
Net income (loss) |
|
$ |
20,585 |
|
$ |
72,380 |
(72) |
|
$ |
97,217 |
$ |
(10,506) |
- |
|
Per weighted average share - basic |
|
$ |
0.08 |
|
$ |
0.27 |
(70) |
|
$ |
0.36 |
$ |
(0.04) |
- |
|
Per weighted average share - diluted
(4) |
|
$ |
0.08 |
|
$ |
0.26 |
(69) |
|
$ |
0.36 |
$ |
(0.04) |
- |
Capital expenditures from continuing
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
49,063 |
|
$ |
22,873 |
115 |
|
$ |
113,014 |
$ |
63,612 |
78 |
|
|
|
$ |
10,064 |
|
$ |
3,510 |
187 |
|
$ |
21,101 |
$ |
6,606 |
219 |
Acquisitions - continuing
operations |
|
$ |
15,458 |
|
$ |
- |
|
|
$ |
15,458 |
$ |
- |
|
Weighted average shares outstanding
(000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273,183 |
|
|
267,709 |
2 |
|
|
270,742 |
|
266,008 |
2 |
|
|
|
|
273,183 |
|
|
297,743 |
(8) |
|
|
270,742 |
|
266,008 |
2 |
Provident Midstream NGL sales volumes
(bpd) |
|
|
115,714 |
|
|
121,627 |
(5) |
|
|
104,759 |
|
106,075 |
(1) |
Consolidated |
|
|
|
|
|
|
|
As at
December 31, |
|
As at
December 31, |
|
($ 000s) |
2011 |
|
2010 |
% Change |
Capitalization |
|
|
|
|
|
|
|
Long-term debt (including current portion) |
$ |
509,921 |
|
$ |
473,754 |
8 |
|
Shareholders' equity |
$ |
579,058 |
|
$ |
588,207 |
(2) |
(1) |
Based on cash flow from operations before changes in working
capital and site restoration expenditures - see "Reconciliation of
Non-GAAP measures". |
(2) |
Adjusted EBITDA is earnings before interest, taxes,
depreciation, amortization, and other non-cash items - see
"Reconciliation of Non-GAAP measures". |
(3) |
Adjusted funds flow from continuing operations excludes
realized loss on buyout of financial derivative instruments and
strategic review and restructuring costs. |
(4) |
Includes dilutive impact of convertible debentures. |
Management's Discussion & Analysis
The following analysis provides a detailed
explanation of Provident's operating results for the quarter and
year ended December 31, 2011 compared
to the quarter and year ended December 31,
2010 and should be read in conjunction with the accompanying
consolidated financial statements of Provident. This analysis has
been prepared using information available up to March 6, 2012.
Provident operates a midstream business in
Canada and the United States and extracts, processes,
markets, transports and offers storage of natural gas liquids
(NGLs) within the integrated facilities at Younger in British Columbia, Redwater and Empress in Alberta, Kerrobert and Alida in Saskatchewan, Sarnia in Ontario, Superior in Wisconsin and Lynchburg in Virginia. Effective in the second
quarter of 2010, Provident's Canadian oil and natural gas
production business ("Provident Upstream" or "COGP") was accounted
for as discontinued operations (see note 23 of the consolidated
financial statements). As a result of Provident's conversion from
an income trust to a corporation, effective January 1, 2011, references to "common shares",
"shares", "share based compensation", "shareholders", "performance
share units", "PSUs", "restricted share units", "RSUs", "premium
dividend and dividend reinvestment share purchase (DRIP) plan", and
"dividends" should be read as references to "trust units", "units",
"unit based compensation", "unitholders", "performance trust
units", "PTUs", "restricted trust units", "RTUs", "premium
distribution, distribution reinvestment (DRIP) and optional unit
purchase plan", and "distributions", respectively, for periods
prior to January 1, 2011.
The reporting focuses on the financial and
operating measurements management uses in making business decisions
and evaluating performance. This analysis contains
forward-looking information and statements. See "Forward-looking information" at the end of
the analysis for further discussion.
The Company prepares its financial statements in
accordance with Canadian generally accepted accounting principles
as set out in the Handbook of the Canadian Institute of Chartered
Accountants ("CICA Handbook"). In 2010, the CICA Handbook was
revised to incorporate International Financial Reporting Standards
("IFRS"), and requires publicly accountable enterprises to apply
such standards effective for years beginning on or after
January 1, 2011. This adoption
date requires the restatement, for comparative purposes, of amounts
reported by Provident for the annual and quarterly periods within
the year ended December 31, 2010,
including the opening consolidated statement of financial position
as at January 1, 2010. Provident's
quarterly and annual 2011 consolidated financial statements reflect
this change in accounting standards. For more information see
"Change in accounting policies".
The analysis refers to certain financial and
operational measures that are not defined in generally accepted
accounting principles (GAAP) in Canada. These non-GAAP measures include funds
flow from operations, adjusted funds flow from continuing
operations, adjusted EBITDA and further adjusted EBITDA to exclude
realized loss on buyout of financial derivative instruments and
strategic review and restructuring costs.
Management uses funds flow from operations to
analyze operating performance. Funds flow from operations is
reviewed, along with debt repayments and capital programs in
setting monthly dividends. Funds flow from operations as
presented is not intended to represent cash flow from operations or
operating profits for the period nor should it be viewed as an
alternative to cash provided by operating activities, net earnings
or other measures of financial performance calculated in accordance
with IFRS. All references to funds flow from operations throughout
this report are based on cash provided by operating activities
before changes in non-cash working capital and site restoration
expenditures. See "Reconciliation of non-GAAP measures".
Management uses adjusted EBITDA to analyze the
operating performance of the business. Adjusted EBITDA as
presented does not have any standardized meaning prescribed by IFRS
and therefore it may not be comparable with the calculation of
similar measures for other entities. Adjusted EBITDA as
presented is not intended to represent cash provided by operating
activities, net earnings or other measures of financial performance
calculated in accordance with IFRS. All references to
adjusted EBITDA throughout this report are based on earnings before
interest, taxes, depreciation, amortization, and other non-cash
items ("adjusted EBITDA"). See "Reconciliation of non-GAAP
measures".
Recent developments
Arrangement agreement with Pembina Pipeline
Corporation
On January 15, 2012,
Provident and Pembina Pipeline Corporation ("Pembina") entered into
an agreement (the "Arrangement Agreement") for Pembina to acquire
all of the issued and outstanding common shares of Provident by way
of a plan of arrangement (the "Pembina Arrangement") under the
Business Corporations Act (Alberta).
Under the terms of the Arrangement Agreement,
Provident shareholders will receive 0.425 of a Pembina share for
each Provident share held (the "Provident Exchange Ratio").
Pembina will also assume all of the rights and obligations relating
to Provident's convertible debentures. The conversion price
of each class of convertible debentures will be adjusted based on
the Provident Exchange Ratio. Following closing of the
Pembina Arrangement, Pembina will be required to make an offer for
the Provident convertible debentures at 100 percent of their
principal values plus accrued and unpaid interest. The
repurchase offer will be made within 30 days of closing of the
Pembina Arrangement. Should a holder of the Provident
convertible debentures elect not to accept the repurchase offer,
the debentures will mature as originally set out in their
respective indentures. Holders who convert their Provident
convertible debentures following completion of the Pembina
Arrangement will receive common shares of Pembina. In
addition, Provident immediately suspended its DRIP plan following
the announcement of the Pembina Arrangement.
The proposed transaction will be carried out by way
of a court-approved plan of arrangement and will require the
approval of at least 66 2/3% of holders of Provident shares
represented in person or by proxy at a special meeting of Provident
shareholders to be held on March 27,
2012 to consider the Pembina Arrangement. The Pembina
Arrangement is also subject to obtaining the approval of a majority
of the votes cast by the holders of Pembina shares at a special
meeting of Pembina shareholders to be held on March 27, 2012 to consider the issuance of
Pembina shares in connection with the Pembina Arrangement. In
addition to shareholder and court approvals, the proposed
transaction is subject to applicable regulatory approvals and the
satisfaction of certain other closing conditions customary in
transactions of this nature, including compliance with the
Competition Act (Canada) and the
acceptance of the Toronto Stock Exchange. Subject to receipt
of all required approvals, closing of the Pembina Arrangement is
expected to occur on or about April 1,
2012.
Acquisition of Three Star Trucking Ltd.
On October 3, 2011,
Provident announced that it had completed the acquisition of a
two-thirds interest in Three Star Trucking Ltd. ("Three Star"), a
Saskatchewan based oilfield
hauling company serving Bakken-area crude oil producers. The
$15.5 million acquisition was funded
by approximately $7.9 million in cash
and 944,828 Provident shares. Provident has the option to
purchase the remaining one-third interest in Three Star after three
years from the closing date.
Long-term storage agreements
On September 15,
2011, Provident announced that it had entered into
agreements with Nova Chemicals Corporation to provide approximately
one million barrels of product storage and other services at the
Provident Redwater Facility with staged on-stream dates in the
third quarter of 2012 and first quarter of 2013.
On September 30,
2011, Provident announced that it had entered into a 10 year
agreement with a major industrial company in the Sarnia area for the contracting of 525,000
barrels of product storage at Provident's Corunna Facility located
near Sarnia, Ontario. The storage
services are anticipated to commence in the first half of 2012.
On October 6, 2011,
Provident announced that it had entered into a 10 year crude oil
storage agreement at its Redwater Facility with a major producer
and will be providing approximately one million barrels of storage
capacity on a fee-for-service basis. The storage services are
expected to commence on a staged basis with 50 percent beginning in
the second quarter of 2012 and the remainder in the second quarter
of 2013.
Revolving term credit facility
Provident completed an extension of its existing
credit agreement (the "Credit Facility") on October 14, 2011, with National Bank of
Canada as administrative agent and
a syndicate of Canadian chartered banks and other Canadian and
foreign financial institutions (the "Lenders"). Pursuant to
the amended Credit Facility, the Lenders have agreed to continue to
provide Provident with a credit facility of $500 million which, under an accordion feature,
can be increased to $750 million at
the option of the Company, subject to obtaining additional
commitments. The amended Credit Facility also provides for a
separate Letter of Credit facility which was increased from
$60 million to $75 million. The amended terms of the
Credit Facility provide for a revolving three year period expiring
on October 14, 2014, from the
previous maturity date of June 28,
2013 (subject to customary extension provisions).
Significant events in 2010
The second quarter of 2010 included two significant
events that impacted the comparative results related to earnings,
adjusted EBITDA and funds flow from operations significantly.
First, Provident sold the remainder of its Upstream business unit
to move forward as a pure-play infrastructure and logistics
midstream business. This transaction completed the sales
process of the Upstream business and the Upstream business unit is
classified as discontinued operations. Strategic review and
restructuring costs associated with the continued divestment of
upstream properties, the final sale of Provident's Upstream
business and the related separation of the business units were also
incurred in the second quarter of 2010. See "Discontinued
operations (Provident Upstream)".
The second significant transaction was execution of
a buyout of the fixed price derivative contracts that related to
the Midstream business. In April, 2010, Provident completed a
buyout of its existing fixed price crude oil and natural gas swaps
for a total realized cost of $199.1
million. The carrying value of the specific contracts at
March 31, 2010 was a liability of
$177.7 million, resulting in an
offsetting unrealized gain in the second quarter of 2010. The
$199.1 million buyout represents a
cash cost and reduces funds flow from operations and adjusted
EBITDA. The offsetting unrealized gain of $177.7 million is not reflected in Provident's
funds flow from operations or adjusted EBITDA as it is a non-cash
recovery. Provident retained financial derivative option structures
on crude oil and natural gas products as well as contracts relating
to the management of physical contract exposure.
"Adjusted funds flow from continuing operations"
and "Adjusted EBITDA excluding buyout of financial derivative
instruments and strategic review and restructuring costs"
Two additional non-GAAP measures of "Adjusted funds
flow from continuing operations" and "Adjusted EBITDA excluding
buyout of financial derivative instruments and strategic review and
restructuring costs" have been provided and are also used in the
calculation of certain ratios. The adjusted non-GAAP measures
are provided as an additional measure to evaluate the performance
of Provident's pure-play Midstream infrastructure and logistics
business and to provide additional information to assess future
funds flow and earnings generating capability. See "Reconciliation
of non-GAAP measures".
Fourth quarter highlights
The fourth quarter highlights section provides
commentary on the fourth quarter of 2011 results compared to the
fourth quarter of 2010. Definitions of terms used in this
section, as appropriate, are defined in the year over year section
of Management's Discussion and Analysis ("MD&A").
Reconciliation of non-GAAP measures
Provident calculates earnings before interest,
taxes, depreciation, amortization and other non-cash items
(adjusted EBITDA) and adjusted EBITDA excluding buyout of financial
derivative instruments and strategic review and restructuring costs
within its MD&A disclosure. These are non-GAAP measures.
A reconciliation between adjusted EBITDA and income from continuing
operations before taxes follows:
Continuing operations |
Three months ended December 31, |
($ 000s) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Income before taxes |
$ |
31,216 |
$ |
45,585 |
(32) |
Adjusted for: |
|
|
|
|
|
Financing charges |
|
9,364 |
|
10,509 |
(11) |
Unrealized loss on financial derivative
instruments |
|
27,526 |
|
12,364 |
123 |
Depreciation and amortization |
|
11,916 |
|
11,644 |
2 |
Unrealized foreign exchange loss and other |
|
420 |
|
1,240 |
(66) |
Loss on revaluation of conversion
feature of convertible debentures
and redemption liability |
|
12,169 |
|
433 |
2710 |
Non-cash share based compensation
expense |
|
8,695 |
|
4,567 |
90 |
Adjusted EBITDA attributable to non-controlling
interest |
|
(946) |
|
- |
- |
Adjusted EBITDA |
|
100,360 |
|
86,342 |
16 |
|
|
|
|
|
|
Adjusted for: |
|
|
|
|
|
Strategic review and restructuring costs |
|
- |
|
1,869 |
(100) |
Adjusted EBITDA excluding buyout of financial
derivative instruments and
strategic review and restructuring costs |
$ |
100,360 |
$ |
88,211 |
14 |
The following table reconciles funds flow from operations and
adjusted funds flow from continuing operations with cash provided
by operating activities:
Reconciliation of funds flow from operations |
|
Three months ended
December 31, |
($ 000s) |
|
|
2011 |
|
|
2010 |
|
% Change |
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
105,714 |
|
$ |
127,031 |
|
(17) |
Change in non-cash operating working capital |
|
|
(12,195) |
|
|
(52,898) |
|
(77) |
Funds flow from operations attributable to non-controlling
interest |
|
|
(752) |
|
|
- |
|
- |
Funds flow from operations |
|
|
92,767 |
|
|
74,133 |
|
25 |
|
|
|
|
|
|
|
|
|
Strategic review and restructuring costs |
|
|
- |
|
|
1,869 |
|
(100) |
Adjusted funds flow from continuing operations |
|
$ |
92,767 |
|
$ |
76,002 |
|
22 |
Funds flow from continuing operations and
dividends
|
|
Three months ended December
31, |
($ 000s, except per share data) |
|
|
2011 |
|
|
2010 |
|
% Change |
Funds flow from continuing operations and
dividends |
|
|
|
|
|
|
|
|
Funds flow from continuing
operations |
|
$ |
92,767 |
|
$ |
74,133 |
|
25 |
Adjusted funds flow from continuing
operations(1) |
|
$ |
92,767 |
|
$ |
76,002 |
|
22 |
|
Per weighted average share |
|
|
|
|
|
|
|
|
|
- basic |
|
$ |
0.34 |
|
$ |
0.28 |
|
21 |
|
- diluted (2) |
|
$ |
0.34 |
|
$ |
0.27 |
|
26 |
Declared dividends |
|
$ |
36,905 |
|
$ |
48,221 |
|
(23) |
|
Per share |
|
$ |
0.14 |
|
$ |
0.18 |
|
(25) |
Percent of adjusted funds flow from
continuing operations,
net of sustaining capital spending, paid out as declared
dividends |
|
|
45% |
|
|
67% |
|
(33) |
(1) Adjusted funds flow from operations excludes
realized loss on buyout of derivative instruments and strategic
review and restructuring costs.
(2) Includes dilutive impact of convertible
debentures.
Fourth quarter 2011 adjusted funds flow from
continuing operations was $92.8
million, a 22 percent improvement from the $76.0 million recorded in the fourth quarter of
2010. The increase is primarily due to a seven percent
increase in gross operating margin combined with lower realized
losses on financial derivative instruments and lower current tax
expense during the fourth quarter of 2011 compared to the fourth
quarter of 2010.
Declared dividends in the fourth quarter of 2011
totaled $36.9 million, 45 percent of
adjusted funds flow from continuing operations, net of sustaining
capital spending. This compares to $48.2 million of declared distributions in the
fourth quarter of 2010, 67 percent of adjusted funds flow from
continuing operations, net of sustaining capital spending.
Provident Midstream operating results
review
Market environment
Provident's performance is closely tied to market
prices for NGL and natural gas, which can vary significantly from
period to period. The key reference prices impacting
Midstream gross operating margins are summarized in the following
table:
Midstream business
reference prices |
Three months ended December
31, |
|
|
|
2011 |
|
|
2010 |
|
% Change |
|
|
|
|
|
|
|
|
|
WTI crude oil (US$ per barrel) |
|
$ |
94.06 |
|
$ |
85.17 |
|
10 |
Exchange rate (from US$ to Cdn$) |
|
|
1.03 |
|
|
1.01 |
|
2 |
WTI crude oil expressed in Cdn$ per
barrel |
|
$ |
96.68 |
|
$ |
86.26 |
|
12 |
|
|
|
|
|
|
|
|
|
AECO natural gas monthly index (Cdn$
per gj) |
|
$ |
3.29 |
|
$ |
3.39 |
|
(3) |
|
|
|
|
|
|
|
|
|
Frac Spread Ratio(1) |
|
|
29.4 |
|
|
25.4 |
|
16 |
|
|
|
|
|
|
|
|
|
Mont Belvieu Propane (US$ per US
gallon) |
|
$ |
1.44 |
|
$ |
1.26 |
|
14 |
Mont Belvieu Propane expressed as a
percentage of WTI |
|
|
64% |
|
|
62% |
|
3 |
|
|
|
|
|
|
|
|
|
Market Frac Spread in Cdn$ per
barrel(2) |
|
$ |
58.41 |
|
$ |
46.25 |
|
26 |
(1) |
Frac spread ratio is the ratio of WTI expressed in Canadian
dollars per barrel to the AECO monthly index (Cdn$ per gj). |
(2) |
Market frac spread is determined
using average spot prices at Mont Belvieu, weighted based on 65%
propane, 25% butane, and 10% condensate, and the AECO monthly index
price for natural gas. |
The NGL pricing environment in the fourth quarter
of 2011 was significantly stronger than in the fourth quarter of
2010. The average fourth quarter 2011 WTI crude oil price was
US$94.06 per barrel, representing an
increase of 10 percent compared to the fourth quarter of
2010. Propane prices were also stronger than in the prior
year, tracking the increase in crude oil prices and reflecting a
strengthening of propane prices relative to WTI. The Mont Belvieu propane price averaged
US$1.44 per U.S. gallon (64 percent
of WTI) in the fourth quarter of 2011, compared to US$1.26 per U.S. gallon (62 percent of WTI) in
the fourth quarter of 2010. Butane and condensate sales
prices were also much improved in the fourth quarter of 2011,
reflective of higher crude oil prices and steady petrochemical and
oilsands demand for these products.
The fourth quarter 2011 AECO natural gas price
averaged $3.29 per gj compared to
$3.39 per gj during the fourth
quarter of 2010, a decrease of three percent. While low
natural gas prices are generally favorable to NGL extraction and
fractionation economics, a sustained period in a low priced gas
environment may impact the availability and overall cost of natural
gas and NGL mix supply in western Canada, as natural gas producers may curtail
drilling activities. However, strengthening NGL pricing in 2011 has
resulted in improved netbacks for producers drilling in natural gas
plays with higher levels of associated NGLs, such as the
Montney area in British Columbia. Increased focus on
liquids-rich natural gas drilling is beneficial to Provident
supply, particularly at Redwater. Continued softness in natural
gas prices have improved market frac spreads but have also caused
increased extraction premiums paid for natural gas supply in
western Canada, particularly at
Empress.
Market frac spreads averaged $58.41 per barrel during the fourth quarter of
2011, representing a 26 percent increase from $46.25 per barrel during the fourth quarter of
2010. Higher frac spreads were a result of higher NGL sales
prices combined with a lower AECO natural gas price. The
benefit to Provident of higher market frac spreads in the fourth
quarter of 2011 was offset by increased costs for natural gas
supply in the form of extraction premiums. Empress extraction premiums have increased by
approximately 10 percent in the fourth quarter of 2011 relative to
the prior year quarter. Higher premiums are primarily a result of
reduced volumes of natural gas flowing past the Empress straddle plants and increased
competition for NGLs as a result of higher frac spreads. In
the fourth quarter of 2011, natural gas throughput at the Empress
Eastern border averaged approximately 4.4 bcf per day,
approximately 10 percent lower than in the fourth quarter of
2010. Lower natural gas throughput directly impacts
production at the Empress
facilities which in turn reduces the supply of propane-plus
available for sale in Sarnia and
in surrounding eastern markets. Tighter supply at
Sarnia may have a positive impact
on eastern sales prices relative to other major propane hubs during
periods of high demand.
Provident Midstream business performance
Provident Midstream results are summarized as
follows:
|
Three months ended December 31, |
(bpd) |
|
2011 |
|
|
2010 |
|
% Change |
|
|
|
|
|
|
|
|
Redwater West NGL sales volumes |
|
66,866 |
|
|
72,672 |
|
(8) |
Empress East NGL sales volumes |
|
48,848 |
|
|
48,955 |
|
- |
Provident Midstream NGL sales
volumes |
|
115,714 |
|
|
121,627 |
|
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, |
($ 000s) |
|
2011 |
|
|
2010 |
|
% Change |
|
|
|
|
|
|
|
|
Redwater West margin |
$ |
68,641 |
|
$ |
60,861 |
|
13 |
Empress East margin |
|
37,282 |
|
|
36,055 |
|
3 |
Commercial Services margin |
|
15,623 |
|
|
16,428 |
|
(5) |
Gross operating margin |
|
121,546 |
|
|
113,344 |
|
7 |
Realized loss on financial derivative
instruments |
|
(11,406) |
|
|
(16,406) |
|
(30) |
Cash general and administrative
expenses |
|
(9,244) |
|
|
(7,284) |
|
27 |
Other income and realized foreign
exchange |
|
410 |
|
|
(1,443) |
|
- |
EBITDA attributable to
non-controlling interest |
|
(946) |
|
|
- |
|
- |
Adjusted EBITDA excluding buyout of
financial derivative instruments
and strategic review and restructuring costs |
|
100,360 |
|
|
88,211 |
|
14 |
Strategic review and restructuring
costs |
|
- |
|
|
(1,869) |
|
(100) |
Adjusted EBITDA |
$ |
100,360 |
|
$ |
86,342 |
|
16 |
Gross operating margin
Midstream gross operating margin during the fourth
quarter of 2011 totaled $121.5
million, an increase of seven percent compared to the same
period in the prior year. The increase in operating margin is
the result of a higher contribution from both Redwater West and
Empress East by 13 percent and
three percent, respectively, partially offset by a five percent
decrease in operating margin from Commercial Services.
Redwater West
The fourth quarter 2011 operating margin for
Redwater West was $68.6 million, an
increase of 13 percent compared to $60.9
million in the fourth quarter of 2010. Strong fourth
quarter 2011 results were primarily a result of stronger prices for
NGLs partially offset by a decrease in sales volumes. In
addition, the fourth quarter 2010 operating margin included
$4.1 million representing a product
gain resulting from volume testing performed at the NGL mix
caverns. Overall, Redwater West NGL sales volumes averaged 66,866
bpd in the fourth quarter of 2011, a decrease of eight percent
compared to the prior year quarter. Lower NGL sales volumes
can be largely attributed to a decrease in sales volumes for
condensate. Condensate sale volumes decreased compared to the
prior year quarter as Provident imported less condensate via
railcar from the U.S. Gulf Coast for sale into the western Canadian
market. Margins on imported condensate supply tend to be lower than
product supplied through western Canadian NGL mix or product
extracted at Younger due to the significant transportation costs
incurred on imported product. Decreases in sales volumes were
more than offset by significant improvements in condensate market
pricing, resulting in a higher product operating margin despite the
decrease in sales volumes.
Product operating margins for butane increased in
the fourth quarter of 2011 as increased market prices more than
offset a slight decrease in sales volumes due to reduced demand
from refiners and blenders of crude oil as compared to the fourth
quarter of 2010. Product operating margins for propane were
lower in the fourth quarter of 2011 as warm weather in western
Canada softened demand compared to
the prior year quarter, while costs increased as inventories
accumulated in the third quarter of 2011, at higher market prices,
were sold in the fourth quarter of 2011. Ethane margins were
comparable to the prior year quarter.
Empress East
Empress East gross operating margin was
$37.3 million in the fourth quarter
of 2011 compared to $36.1 million in
the same quarter of 2010. The three percent increase was
primarily associated with significant increases in the market price
for condensate as lower production and sales volumes of condensate
in Empress East were offset by significant market price increases
partially driven by a 10 percent increase in WTI in the fourth
quarter of 2011 compared to the prior year quarter. The
product operating margin increase for condensate was partially
offset by a slightly lower product operating margin for propane as
weaker demand, primarily driven by mild temperatures in central
Canada, led to lower sales
volumes. Lower demand from refiners for butane was offset by
significant market price increases resulting in a consistent
product operating margin for butane in the fourth quarter of 2011
compared to the fourth quarter of 2010. Overall, Empress East
sales volumes averaged 48,848 bpd, consistent with the sales volume
in the fourth quarter of 2010. The positive impacts of higher
sales prices and frac spreads for Empress East were partially
offset by increased premiums paid to purchase natural gas in the
Empress market.
Commercial Services
Operating margin in the fourth quarter of 2011 was
$15.6 million, representing a
decrease of five percent compared to the same period in 2010.
The decrease in margin was primarily associated with decreased
condensate terminalling revenues partly as a result of the
termination of a multi-year condensate storage and terminalling
services agreement in 2010 as well as the completion in mid-2010 of
the Enbridge Southern Lights pipeline, which transports condensate
from the United States to the
Edmonton area. This decrease
was partially offset by increases in margin related to third party
storage and the acquisition of Three Star.
Earnings before interest, taxes, depreciation,
amortization, and non-cash items ("adjusted EBITDA")
Fourth quarter 2011 adjusted EBITDA excluding
buyout of financial derivative instruments and strategic review and
restructuring costs increased to $100.4
million from $88.2 million in
the fourth quarter of 2010 reflecting higher gross operating margin
combined with lower realized losses on financial derivative
instruments.
Capital expenditures
Provident substantially increased its 2011 growth
capital expenditures when compared to 2010. In the fourth
quarter of 2011, Provident incurred total capital expenditures of
$59.1 million compared to
$26.4 million in the prior year
quarter. Driven by substantial demand for new storage
services at Redwater, Provident
deployed $20.2 million (2010 -
$6.5 million) of capital on cavern
and brine pond development at the Redwater facility, $12.8 million (2010 - $1.7
million) was directed to the growth-related portions of the
Taylor to Boundary Lake and the
Septimus to Younger pipeline projects, and $3.7 million (2010 - $12.2
million) of expenditures were incurred for storage and
terminalling infrastructure development at the Provident Corunna
facility. An additional $7.5
million (2010 - nil) was directed toward the construction of
a truck terminal in Cromer,
Manitoba while $4.8 million
(2010 - $2.5 million) was spent on
various infrastructure improvements. Finally, an additional
$10.1 million (2010 - $3.5 million) was directed towards sustaining
capital activities and office related capital, including
$6.5 million (2010 - $1.7 million) related to the sustaining portion
of the Taylor to Boundary Lake
pipeline.
Net income
Consolidated |
Three months ended December 31, |
($ 000s, except per share data) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Net income from continuing operations |
$ |
20,585 |
$ |
63,622 |
(68) |
Net income from discontinued
operations |
|
- |
|
8,758 |
(100) |
Net income |
$ |
20,585 |
$ |
72,380 |
(72) |
Per weighted average
share (1) |
|
|
|
|
|
|
- basic |
$ |
0.08 |
$ |
0.27 |
(70) |
|
- diluted (2) |
$ |
0.08 |
$ |
0.26 |
(69) |
(1) Based on weighted average number of shares
outstanding.
(2) Includes the dilutive impact of convertible
debentures.
Net income from continuing operations for the
fourth quarter of 2011 was $20.6
million, compared to $63.6
million in the fourth quarter of 2010. Higher adjusted
EBITDA was more than offset by higher unrealized losses on
financial derivative instruments and higher income tax
expense. Net income in the fourth quarter of 2010 was
impacted by net income from discontinued operations of $8.8 million related to post-closing adjustments
attributed to the sale of the Upstream business in the second
quarter of 2010.
Taxes
Continuing operations |
|
|
|
|
|
|
|
Three months ended December
31, |
($ 000s) |
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
|
|
|
|
|
|
$ |
446 |
|
$ |
4,138 |
|
(89) |
Deferred income tax expense (recovery) |
|
|
|
|
|
|
|
|
10,185 |
|
|
(22,175) |
|
- |
|
|
|
|
|
|
|
|
$ |
10,631 |
|
$ |
(18,037) |
|
- |
Current tax expense was $0.4
million in the fourth quarter of 2011 compared to an expense
of $4.1 million in the fourth quarter
of 2010. The fourth quarter 2011 current tax expense was
driven by earnings generated in the Company's recently acquired
subsidiary, Three Star, that is in excess of allowable tax pool
claims. The fourth quarter 2010 current tax expense was
attributed to new IRS guidance that restricted the application of a
portion of the tax loss carryback in the U.S. Midstream operations
related to the recovery of income taxes paid in prior
periods. This provided for a deferred tax benefit, thereby
increasing the current income tax expense and deferred income tax
recovery in the fourth quarter of 2010. The tax losses were
generated primarily by the realized loss on buyout of the financial
derivative instruments incurred in the second quarter of 2010.
The 2011 fourth quarter future income tax expense
was $10.2 million compared to a
deferred income tax recovery of $22.2
million in the fourth quarter of 2010. The deferred
income tax expense in the fourth quarter of 2011 resulted primarily
from the use of existing tax pools to offset earnings from
Provident's Canadian midstream business. The deferred income
tax recovery in the fourth quarter of 2010 resulted in part from
the movement from current taxes to deferred income taxes due to the
new IRS guidance that restricted the application of a portion of
the tax loss carryback in the U.S. Midstream operations related to
the recovery of taxes paid in prior periods as discussed above. The
remaining change in the deferred income tax recovery resulted from
losses created by deductions at the incorporated subsidiary level
under the previous Trust structure.
Financing charges
Continuing operations |
Three
months ended December 31, |
($ 000s, except as noted) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Interest on bank debt |
$ |
2,990 |
$ |
2,631 |
14 |
Interest on convertible debentures |
|
4,999 |
|
5,452 |
(8) |
|
|
7,989 |
|
8,083 |
(1) |
Less: Capitalized borrowing costs |
|
(609) |
|
- |
- |
Total cash financing charges |
$ |
7,380 |
$ |
8,083 |
(9) |
|
|
|
|
|
|
Weighted average interest rate on all long-term
debt |
|
4.9% |
|
5.5% |
(11) |
Accretion and other non-cash financing
charges |
|
1,984 |
|
2,426 |
(18) |
Total financing charges |
$ |
9,364 |
$ |
10,509 |
(11) |
Financing charges for the fourth quarter of 2011 have decreased
in comparison to the fourth quarter of 2010. Interest on bank
debt is higher in the fourth quarter of 2011 as Provident had more
debt drawn on its revolving credit facility, partially offset by
lower borrowing rates. Interest on convertible debentures for
the fourth quarter of 2011 was lower than in the comparable period
in 2010 reflecting the refinancing of the 6.5% convertible
debentures with the issuance of two new series of 5.75% convertible
debentures in late 2010 and 2011, combined with a reduced average
coupon rate on the outstanding convertible debentures in 2011.
In addition, in 2011 Provident has capitalized
borrowing costs attributable to the construction of assets, such as
storage caverns and related facilities, which take a substantial
period of time to get ready for their intended use. This
reduced the Company's total recognized financing charges in the
fourth quarter of 2011 by $0.6
million (2010 - nil).
Market risk management program
A summary of Provident's risk management contracts
executed during the fourth quarter of 2011 is contained in the
following table.
Activity in the Fourth Quarter:
Midstream |
|
|
|
|
|
|
Volume |
|
|
Year |
Product |
(Buy)/Sell |
Terms |
Effective Period |
|
|
|
|
|
|
2012 |
Crude Oil |
1,224 |
Bpd |
US $97.40 per bbl (3) (6) |
April 1 - December 31 |
|
|
1,216 |
Bpd |
US $92.75 per bbl (3) (6) |
January 1 - December 31 |
|
|
978 |
Bpd |
Cdn $101.82 per bbl (3) (6) |
July 1 - December 31 |
|
Natural Gas |
(30,311) |
Gjpd |
Cdn $3.26 per gj (2) (6) |
January 1 - December 31 |
|
Propane |
2,083 |
Bpd |
US $1.4685 per gallon (4)
(6) |
January 1 - February 29 |
|
Normal Butane |
2,445 |
Bpd |
US $1.7434 per gallon (5)
(6) |
January 1 - December 31 |
|
Foreign Exchange |
|
|
Sell US $2,633,333 per month @ 1.016
(7) |
January 1 - June 30 |
|
|
|
|
Sell US $5,785,714 per month @ 0.996
(7) |
January 1 - July 31 |
|
|
|
|
Sell US $5,144,444 per month @ 0.996
(7) |
January 1 - September 30 |
|
|
|
|
Sell US $2,666,667 per month @ 1.042
(7) |
April 1 - December 31 |
|
|
|
|
Sell US $2,875,000 per month @ 1.050
(7) |
January 1 - December 31 |
|
|
|
|
|
|
2013 |
Crude Oil |
1,700 |
Bpd |
US $96.65 per bbl (3) (6) |
January 1 - March 31 |
|
Foreign Exchange |
|
|
Sell US $5,000,000 per month @ 1.050
(7) |
January 1 - March 31 |
|
|
|
|
|
|
Corporate |
|
|
Volume |
|
|
Year |
Product |
(Buy)/Sell |
Terms |
Effective Period |
|
|
|
|
|
|
|
Interest Rate |
$ 50,000,000 |
Notional (Cdn$) |
Pay Average Fixed rate of 1.124%
(8) |
July 1 2013 - September 30, 2014 |
|
|
|
|
|
|
(1) |
The above table represents
transactions entered into over the fourth quarter of 2011. |
(2) |
Natural Gas contracts are settled
against AECO monthly index. |
(3) |
Crude Oil contracts are settled
against NYMEX WTI calendar average. |
(4) |
Propane contracts are settled against
Mont Belvieu C3 TET. |
(5) |
Normal Butane contracts are settled
against Belvieu NC4 NON TET and Belvieu NC4 TET. |
(6) |
Frac spread contracts. |
(7) |
US Dollar forward contracts are
settled against the Bank of Canada noon rate average. Selling
notional US dollars for Canadian dollars at a fixed exchange rate
results in a fixed Canadian dollar price for the underlying
commodity. |
(8) |
Interest rate forward contract
settles monthly against 1M CAD BA CDOR |
Settlement of market risk management contracts
The following table summarizes the impact of
financial derivative contracts settled during the fourth quarters
of 2011 and 2010 that were included in realized loss on financial
derivative instruments.
|
|
|
Three months ended
December 31, |
Realized loss on financial derivative
instruments |
|
|
2011 |
|
2010 |
($ 000s except volumes) |
|
|
|
Volume (1) |
|
|
Volume (1) |
|
|
|
|
|
|
|
|
Frac spread related |
|
|
|
|
|
|
|
|
Crude oil |
|
$ |
(809) |
0.1 |
$ |
(2,929) |
0.3 |
|
Natural gas |
|
|
(4,760) |
6.4 |
|
(4,721) |
6.4 |
|
Propane |
|
|
2,409 |
1.1 |
|
(6,738) |
1.1 |
|
Butane |
|
|
(851) |
0.4 |
|
(4,301) |
0.4 |
|
Condensate |
|
|
(967) |
0.2 |
|
(596) |
0.2 |
|
Foreign exchange |
|
|
(3,677) |
|
|
1,135 |
|
|
Sub-total frac spread related |
|
|
(8,655) |
|
|
(18,150) |
|
Corporate |
|
|
|
|
|
|
|
|
Electricity |
|
|
680 |
|
|
(79) |
|
|
Interest rate |
|
|
(321) |
|
|
(35) |
|
Management
of exposure embedded in physical contracts |
|
|
(3,110) |
1.0 |
|
1,858 |
0.2 |
Realized loss on financial derivative
instruments |
|
$ |
(11,406) |
|
$ |
(16,406) |
|
(1) |
The above table represents aggregate net volumes
that were bought/sold over the periods. Crude oil and NGL
volumes are listed in millions of barrels and natural gas is listed
in millions of gigajoules. |
The realized loss for the fourth quarter of 2011 was
$11.4 million compared to
$16.4 million in the comparable 2010
quarter. The majority of the realized loss in the fourth
quarter of 2011 was driven by natural gas purchase derivative
contracts settling at a contracted price higher than the market
natural gas prices, foreign exchange contracts settling at a
contracted rate lower than the average market rates, as well as
crude oil derivative sales contracts settling at contracted crude
oil prices lower than the crude oil market prices during the
settlement period. The comparable 2010 realized loss was
driven mostly by NGL derivative sales contracts settling at a
contracted price lower than the market NGL prices during the
settlement period, natural gas purchase derivative contracts in the
Midstream business settling at a contracted price higher than the
market natural gas prices during the settlement period as well as
crude oil derivative sales contracts settling at contracted crude
oil prices lower than the crude oil market prices during the
settlement period.
2011 Year end results
Reconciliation of non-GAAP measures
Provident calculates earnings before interest,
taxes, depreciation, amortization, and other non-cash items
(adjusted EBITDA) and adjusted EBITDA excluding buyout of financial
derivative instruments and strategic review and restructuring costs
within its MD&A disclosure. These are non-GAAP measures.
A reconciliation between these measures and income from continuing
operations before taxes follows:
Continuing operations |
Year ended December
31, |
($ 000s) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Income before taxes |
$ |
165,703 |
$ |
64,390 |
157 |
Adjusted for: |
|
|
|
|
|
Financing charges |
|
41,282 |
|
32,251 |
28 |
Unrealized gain offsetting buyout of financial
derivative instruments |
|
- |
|
(177,723) |
(100) |
Unrealized loss on financial derivative
instruments |
|
3,235 |
|
52,599 |
(94) |
Depreciation and amortization |
|
43,630 |
|
44,475 |
(2) |
Unrealized foreign exchange gain and other |
|
(414) |
|
(3,786) |
(89) |
Loss on revaluation of conversion feature of
convertible debentures and
redemption liability |
|
17,469 |
|
433 |
3,934 |
Non-cash share based compensation expense |
|
12,469 |
|
1,280 |
874 |
Adjusted EBITDA attributable to non-controlling
interest |
|
(946) |
|
- |
- |
Adjusted EBITDA |
|
282,428 |
|
13,919 |
1,929 |
|
|
|
|
|
|
Adjusted for: |
|
|
|
|
|
Realized loss on buyout of financial derivative
instruments |
|
- |
|
199,059 |
(100) |
Strategic review and restructuring costs |
|
- |
|
13,782 |
(100) |
Adjusted EBITDA excluding buyout
of financial derivative instruments and
strategic review and restructuring costs |
$ |
282,428 |
$ |
226,760 |
25 |
The following table reconciles funds flow from operations and
adjusted funds flow from continuing operations with cash provided
by (used in) operating activities:
Reconciliation of funds flow from operations |
Year ended December
31, |
($ 000s) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Cash provided by (used in) operating
activities |
$ |
220,239 |
$ |
(39,669) |
- |
Change in non-cash operating working capital |
|
33,145 |
|
28,472 |
16 |
Site restoration expenditures - discontinued
operations |
|
- |
|
2,041 |
(100) |
Funds flow from operations attributable to
non-controlling interest |
|
(752) |
|
- |
- |
Funds flow from operations |
|
252,632 |
|
(9,156) |
- |
Funds flow from discontinued operations |
|
- |
|
2,436 |
(100) |
Realized loss on buyout of financial derivative
instruments |
|
- |
|
199,059 |
(100) |
Strategic review and restructuring costs |
|
- |
|
13,782 |
(100) |
Adjusted funds flow from continuing
operations |
$ |
252,632 |
$ |
206,121 |
23 |
Funds flow from continuing operations and
dividends
|
Year ended December 31, |
($ 000s, except per share data) |
|
2011 |
|
2010 |
% Change |
Funds flow from continuing operations and
dividends |
|
|
|
|
|
Funds flow from continuing
operations |
$ |
252,632 |
$ |
(6,720) |
- |
Adjusted funds flow from continuing
operations(1) |
$ |
252,632 |
$ |
206,121 |
23 |
|
Per weighted average share |
|
|
|
|
|
|
- basic and diluted (2) |
$ |
0.93 |
$ |
0.77 |
21 |
Declared dividends |
$ |
146,287 |
$ |
191,639 |
(24) |
|
Per share |
$ |
0.54 |
$ |
0.72 |
(25) |
Percent of adjusted funds flow from continuing
operations,
net of sustaining capital spending, paid out as declared
dividends |
|
63% |
|
96% |
(34) |
(1) Adjusted funds flow from operations
excludes realized loss on buyout of financial derivative
instruments and strategic review and restructuring costs. |
(2) Includes dilutive impact of
convertible debentures. |
Funds flow from continuing operations includes the impact of the
Midstream financial derivative contract buyout, as well as
strategic review and restructuring costs associated with the
separation and divestment of Provident's Upstream business and the
corporate conversion. Adjusted funds flow from continuing
operations is presented as a measure to evaluate the performance of
Provident's pure-play Midstream infrastructure business and to
provide additional information to assess future funds flow
generating capability.
For the year ended December
31, 2011, adjusted funds flow from continuing operations was
$252.6 million, 23 percent above the
$206.1 million in 2010. The increase
is attributed to a significant increase in gross operating margin
partially offset by higher realized losses on financial derivative
instruments and a current income tax recovery in 2010.
Declared dividends in 2011 totaled $146.3 million, 63 percent of adjusted funds flow
from continuing operations, net of sustaining capital
spending. This compares to $191.6
million of declared distributions in the comparable period
of 2010, 96 percent of adjusted funds flow from continuing
operations, net of sustaining capital spending.
Outlook
The following outlook contains forward-looking
information regarding possible events, conditions or results of
operations in respect of Provident that is based on assumptions
about future economic conditions and courses of action. There
are a number of risks and uncertainties, which could cause actual
events or results to differ materially from those anticipated by
Provident and described in the forward-looking information.
In addition, the following outlook for 2012, including Provident's
anticipated capital program, is provided by Provident only and does
not reflect the completion of the proposed acquisition of Provident
by Pembina as described in "Recent developments" in this MD&A
or the intentions of Pembina following closing of the
acquisition. See
"Forward-looking information" in this MD&A for
additional information regarding assumptions and risks in respect
of Provident's forward-looking information.
Provident delivered record adjusted EBITDA in 2011
and exceeded all of its key performance objectives:
- Provident generated year-over-year adjusted EBITDA growth of 25
percent;
- Provident exited 2011 with a total debt to adjusted EBITDA
ratio of approximately 1.8 to 1, less than its target of 2.5 to 1;
and
- Provident paid out $146 million
in dividends and achieved a payout ratio of adjusted funds flow
from continuing operations, net of sustaining capital spending, of
63 percent, well below its target of 80 percent.
Provident deployed approximately $134 million of capital in 2011, comprised of
$113 million of new growth capital
and $21 million of sustaining
capital. 2011 growth capital spending increased 78 percent over
2010 and reflects Provident's success in developing new
fee-for-service growth projects around its midstream assets.
Provident completed several key projects in the fourth
quarter including completion of the Septimus to Younger pipeline,
completion of the Taylor to
Boundary Lake pipeline replacement and is in the final stages of
tie-in of its NGL truck unloading terminal at Cromer, Manitoba. In addition, on
October 3, 2011, Provident completed
the acquisition of a two-thirds interest in Three Star, a
Saskatchewan based oilfield
hauling company serving Bakken-area crude oil producers.
The Taylor to
Boundary lake pipeline project included construction to upgrade and
replace an aging section of the Taylor to Boundary Lake pipeline on the
Liquids Gathering System. A significant portion of the new pipeline
segment was placed into service during the second quarter of 2011
with the final leg of the pipeline completed in the fourth quarter
of 2011. The goal of replacing the aging sections of this
pipeline was to ensure continued safe operation and to increase
Younger throughput from growing Montney development.
For 2012, Provident announced a $135 million growth capital program and
approximately $10 million to $15
million of sustaining capital. The growth capital for
2012 is anticipated to be allocated as follows:
- Provident expects to deploy approximately $95 million on the continued development of
underground storage caverns and related infrastructure at
Redwater, reflecting strong
producer demand for storage of diluents and/or crude oil to enhance
operational efficiencies. Provident continues to have more demand
for storage services at Redwater
than it can currently provide, and indications are that demand for
hydrocarbon storage continues to grow.
- Provident expects to spend approximately $6 million on projects around its Younger
fractionation facility and Liquids Gathering System to optimize
Younger plant operating capacity and further enhance Redwater West supply.
- Approximately $18 million of
capital has been allocated to the initial phase of a planned
debottlenecking and optimization of the Redwater NGL facility,
which is expected to increase throughput capacity by approximately
7,500 bpd.
- For 2012, Provident allocated approximately $10 million of capital for projects associated
with its storage and terminalling facilities at Corunna, Ontario.
- Provident allocated approximately $6
million of capital towards expanding Provident's crude oil
and NGL footprint in the Bakken area, including activities around
its Cromer truck terminal and
projects completed through its subsidiary, Three Star.
In terms of the NGL market outlook:
- Warm weather at the end of the fourth quarter 2011 reduced the
demand for propane, which is primarily used to meet winter heating
demand. The unseasonably warm trend has continued into the
first quarter of 2012. This has resulted in lower propane
sales and pricing so far in the first quarter of 2012.
Despite this short-term softness, propane industry
fundamentals for the future remain strong with high propane exports
from North America and strong
petrochemical margins where propane is used as feedstock.
- Spot Alberta natural gas
prices are currently about 40 percent lower than they were in the
fourth quarter of 2011, which has led to significantly lower
production costs for NGLs at Empress and Younger.
- Increasing heavy oil production in Alberta continues to increase the demand for
condensate and butane as a diluent and butane as a solvent in SAGD
operations. Provident continues to see very strong demand for
fractionation, storage and ancillary services.
- Empress extraction premiums
are near the midpoint of a $6 to $9
per gigajoule range.
Based on current market conditions, Provident's
expectation is that first quarter 2012 adjusted EBITDA will be near
first quarter 2011 levels. For 2012, Provident has hedged
approximately 66 percent of its estimated NGL frac spread sales
volumes and approximately 68 percent of its estimated frac spread
natural gas input volumes.
Provident has contracted with a third party
engineering firm to develop a detailed cost estimate on the
twinning of its ethane-plus Redwater NGL Facility. The increasing
production of NGL mix in the Western Canadian Sedimentary Basin
would be the primary source of volumes for the 65,000 bpd
fractionation expansion. If there is a sufficient level of customer
commitment and Board of Director approval by mid-2012, the facility
could be in operation by mid-2014.
Subsequent to the end of the fourth quarter 2011,
Pembina and Provident announced an agreement whereby Pembina would
acquire all of the issued and outstanding shares of
Provident. Under the terms of the Arrangement Agreement,
Provident shareholders will receive 0.425 of a Pembina share for
each Provident share held. The proposed transaction will be carried
out by a court-approved plan of arrangement and require the
approval of both Provident and Pembina shareholders.
Provident will hold its special meeting to approve the transaction
on March 27, 2012, at 9:00 a.m. (MT) in the Ballroom at the
Metropolitan Conference Center, 333 - 4 Avenue SW,
Calgary, Alberta. The
transaction is expected to close on or about April 1, 2012, subject to receipt of all
shareholder and regulatory approvals and the satisfaction of all
other closing conditions.
Dividends and distributions
The following table summarizes dividends and
distributions paid as declared by Provident since inception:
|
|
Distribution / Dividend
Amount |
Per share / unit |
|
|
|
(Cdn$) |
|
(US$)* |
2001 Cash Distributions paid as declared
- March 2001 - December 2001 |
|
|
$ |
2.54 |
$ |
1.64 |
2002 Cash Distributions paid as declared |
|
|
|
2.03 |
|
1.29 |
2003 Cash Distributions paid as declared |
|
|
|
2.06 |
|
1.47 |
2004 Cash Distributions paid as declared |
|
|
|
1.44 |
|
1.10 |
2005 Cash Distributions paid as declared |
|
|
|
1.44 |
|
1.20 |
2006 Cash Distributions paid as declared |
|
|
|
1.44 |
|
1.26 |
2007 Cash Distributions paid as declared |
|
|
|
1.44 |
|
1.35 |
2008 Cash Distributions paid as declared |
|
|
|
1.38 |
|
1.29 |
2009 Cash Distributions paid as declared |
|
|
|
0.75 |
|
0.67 |
2010 Cash Distributions paid as declared |
|
|
|
0.72 |
|
0.72 |
Inception to December 31, 2010 - Cash
Distributions paid as declared |
$ |
15.24 |
$ |
11.99 |
Capital Distribution - June 29, 2010 |
|
|
$ |
1.16 |
$ |
1.10 |
|
|
|
|
|
|
|
2011 Cash Dividends paid as declared |
|
|
|
|
|
|
Record Date |
|
Payment Date |
|
|
|
|
January 20, 2011 |
|
February 15, 2011 |
$ |
0.045 |
$ |
0.046 |
February 24, 2011 |
|
March 15, 2011 |
|
0.045 |
|
0.046 |
March 22, 2011 |
|
April 15, 2011 |
|
0.045 |
|
0.047 |
April 20, 2011 |
|
May 13, 2011 |
|
0.045 |
|
0.046 |
May 26, 2011 |
|
June 15, 2011 |
|
0.045 |
|
0.046 |
June 22, 2011 |
|
July 15, 2011 |
|
0.045 |
|
0.047 |
July 20, 2011 |
|
August 15, 2011 |
|
0.045 |
|
0.046 |
August 24, 2011 |
|
September 15, 2011 |
|
0.045 |
|
0.046 |
September 21, 2011 |
|
October 14, 2011 |
|
0.045 |
|
0.044 |
October 24, 2011 |
|
November 15, 2011 |
|
0.045 |
|
0.044 |
November 23, 2011 |
|
December 15, 2011 |
|
0.045 |
|
0.044 |
December 21, 2011 |
|
January 13, 2012 |
|
0.045 |
|
0.044 |
Total 2011 Cash Dividends paid as
declared |
$ |
0.540 |
$ |
0.546 |
Total inception to December 31, 2011
Cash Distributions/Dividends and Capital Distribution |
$ |
16.940 |
$ |
13.636 |
* Exchange rate based on the Bank of
Canada noon rate on the payment date. |
Provident Midstream operating results
review
The Midstream business
Provident's Midstream business extracts, processes,
stores, transports and markets NGLs and offers these services to
third party customers. In order to aid in the understanding
of the business, this MD&A provides information about the
associated business activities of the Midstream operation
comprising Redwater West, Empress East and Commercial
Services. The assets are integrated across Canada and the U.S., and are also used to
generate fee-for-service income. The business is supported by
an integrated supply, marketing and distribution function that
contributes to the overall operating margin of the Company.
Redwater West is comprised of the following core
assets:
- 100 percent ownership of the Redwater NGL facility,
incorporating a 65,000 bpd fractionation, storage and
transportation facility that includes 12 pipeline receipt and
delivery points, railcar loading facilities with direct access to
CN rail and indirect access to CP rail, multi-product truck loading
facilities, 7.8 million gross barrels of salt cavern storage, and a
80,000 bpd condensate rail offloading facility with a 500 railcar
storage yard. The Redwater
facility is the only facility in western Canada that can fractionate a high-sulphur
ethane-plus mix.
- Approximately 7,000 bpd of contracted fractionation capacity at
other facilities.
- 43.3 percent direct ownership and 100 percent control of all
products from the nameplate capacity 750 mmcfd Younger NGL
extraction plant located at Taylor
in northeastern British Columbia.
The Younger plant supplies local markets as well as Provident's
Redwater facility near
Edmonton.
- 100 percent ownership of the 565 kilometer proprietary Liquids
Gathering System ("LGS") that runs along the Alberta-British
Columbia border providing access to a highly active basin
for liquids-rich natural gas exploration and exploitation.
Provident also has long-term shipping rights on the Pembina
pipeline system that extends the product delivery transportation
network through to the Redwater
facility.
- A rail car fleet of approximately 500 rail cars under long-term
lease agreement.
Empress East is comprised of the following core
assets:
- Approximately 2.0 Bcfd in extraction capacity at Empress, Alberta. This is the combination of
67.5 percent ownership of the 1.2 Bcfd capacity Provident Empress
NGL extraction plant, 33.0 percent ownership in the 2.7 Bcfd
capacity BP Empress 1 Plant, 12.4 percent ownership in the 1.1 Bcfd
capacity ATCO Plant and 8.3 percent ownership in the 2.4 Bcfd
capacity Spectra Plant.
- 100 percent ownership of a 55,000 bpd debutanizer at
Empress, Alberta.
- 50 percent ownership in both the 150,000 bpd Kerrobert pipeline and 1.6 mmbbl underground
storage facility near Kerrobert,
Saskatchewan which facilitates injection of NGLs into the
Enbridge pipeline system. Along the Enbridge pipeline system in
Superior, Wisconsin, Provident
holds an 18.3 percent ownership of a 300,000 barrel storage staging
facility and 18.3 percent ownership of a 10,000 bpd
depropanizer.
- In Sarnia, Ontario, 16.5
percent ownership of a nameplate capacity 150,000 bpd fractionators
and 1.7 mmbbl of raw product storage capacity, as well as 18.0
percent of 5.7 mmbbl of finished product storage and a rail, truck
and pipeline terminalling facility. An additional 150,000 bbls of
specification product storage capacity is also contracted in the
Sarnia area.
- 100 percent ownership of the Provident Corunna storage
facility. The 1,000 acre site has an active cavern storage capacity
of 12.8 million barrels, consisting of 4.8 million barrels of
hydrocarbon storage and 8.0 million barrels currently used for
brine storage. The facility also includes 13 pipeline connections
and a rail offloading facility.
- A propane distribution terminal at Lynchburg, Virginia.
- A rail car fleet of approximately 400 rail cars under long-term
lease agreement.
Commercial Services includes services such as
fractionation, storage, NGL terminalling, loading and offloading
that are provided to third parties on a cost of service or a fee
basis utilizing assets at Provident's Redwater facility. In addition, pipeline
tariff income is generated from Provident's ownership of the LGS in
northwest Alberta which flows into
Pembina's pipeline from LaGlace to Redwater. Provident also collects tariff
income from its 50 percent ownership in the Kerrobert Pipeline
which transports NGLs from Empress
to Kerrobert for injection into
the Enbridge pipeline for delivery to Sarnia. Provident owns a debutanizer at
its Empress facility, which
removes condensate from the NGL mix for sale as a diluent to blend
with heavy oil. This service is provided to a major energy
company on a long-term cost of service basis. Earnings from
these activities have little direct exposure to market price
volatility and are thus relatively stable. The assets used to
generate this fee-for-service income are also employed to generate
proprietary income in Redwater West and Empress East.
Commercial Services also includes operating results from Three
Star, a Saskatchewan based
oilfield hauling company serving Bakken area crude oil producers,
of which a two-thirds interest was acquired in October 2011.
Provident's integrated marketing and distribution
arm has offices in Calgary,
Alberta, Sarnia, Ontario,
and Houston, Texas and operates
under the brand name Kinetic. Rather than selling NGLs
produced by the Redwater West and Empress East facilities at the
plant gate, the marketing and logistics group utilizes Provident's
integrated suite of transportation, storage and logistics assets to
access markets across North
America. Due to its broad marketing scope, Provident's
NGL products are priced based on multiple pricing indices.
These indices generally correspond with the four major NGL trading
hubs in North America which are
located in Mont Belvieu, Texas,
Conway, Kansas, Edmonton, Alberta, and Sarnia, Ontario. Mont Belvieu, the largest NGL trading center,
serves as the reference point for NGL pricing in North America. By strategically building
inventories of specification products during lower priced periods
which can then be distributed into premium-priced markets across
North America during periods of
high seasonal demand, Provident is able to optimize the margins it
earns from its extraction and fractionation operations. Provident's
marketing group also generates arbitrage trading margins by taking
advantage of trading opportunities created by locational price
differentials.
Long-term contracts
Provident has several long-term contracts in place
to help ensure product availability and to secure long-term revenue
streams. These contracts include:
- A long-term purchase agreement for NGL mix at the Younger NGL
extraction plant.
- A significant portion of the available propane, butane and
condensate ("propane-plus") fractionation capacity at the
Redwater fractionation facility is
contracted through a long term fee-for-service arrangement with
third parties.
- The ethane produced from Provident's facilities at Empress and Redwater is largely sold under long-term
contracts.
- A portion of Provident's 80,000 bpd capacity of condensate rail
off-loading is under long-term contracts.
- A significant portion of the condensate storage capacity of
500,000 barrels at the Provident Redwater facility is sold under
long-term contracts to various third parties.
- A long-term significant propane sales contract at the Provident
Redwater facility.
- A long-term contract on a cost of service basis for the
majority of its 50,000 bbl/d Empress debutanizer facility with a major
energy producer.
- Agreements with Nova Chemicals Corporation for storage at the
Provident Redwater facility.
- A 10-year crude oil storage agreement, totaling approximately
one million barrels of storage capacity, at the Provident Redwater
facility with a major producer on a fee-for-service basis.
- A 10-year agreement with a major industrial company in the
Sarnia area for storage and the
use of associated pipeline and drying facilities at the Provident
Corunna facility on a fee-for-service basis.
Market environment
Provident's performance is closely tied to market
prices for NGLs and natural gas, which can vary significantly from
period to period. The key reference prices impacting Midstream
gross operating margin are summarized in the following table:
Midstream business reference
prices |
Year ended December 31, |
|
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
WTI crude oil (US$ per barrel) |
$ |
95.12 |
$ |
79.53 |
20 |
Exchange rate (from US$ to Cdn$) |
|
0.99 |
|
1.03 |
(4) |
WTI crude oil expressed in Cdn$ per
barrel |
$ |
94.21 |
$ |
81.92 |
15 |
|
|
|
|
|
|
AECO natural gas monthly index (Cdn$
per gj) |
$ |
3.48 |
$ |
3.93 |
(11) |
|
|
|
|
|
|
Frac Spread Ratio (1) |
|
27.0 |
|
20.9 |
29 |
|
|
|
|
|
|
Mont Belvieu Propane (US$ per US
gallon) |
$ |
1.47 |
$ |
1.17 |
26 |
Mont Belvieu Propane expressed as a
percentage of WTI |
|
65% |
|
62% |
5 |
|
|
|
|
|
|
Market Frac Spread in Cdn$ per barrel
(2) |
$ |
54.67 |
$ |
40.30 |
36 |
(1)
|
Frac spread ratio is the ratio of WTI
expressed in Canadian dollars per barrel to the AECO monthly index
(Cdn$ per gj). |
(2) |
Market frac spread is determined
using average spot prices at Mont Belvieu, weighted based on 65%
propane, 25% butane, and 10% condensate, and the AECO monthly index
price for natural gas. |
The pricing environment for NGLs in 2011 was significantly
stronger than in 2010. The average 2011 WTI crude oil price
was US$95.12 per barrel, representing
an increase of 20 percent compared to US$79.53 per barrel in 2010. The impact of
higher WTI crude oil prices was partially offset by the
strengthening of the Canadian dollar relative to the U.S. dollar in
2011 compared to 2010. Propane prices were also stronger than
in the comparative period, reflecting the increase in crude oil
prices combined with lower North American propane supply for much
of 2011 resulting from above average exports and stronger demand
from the petrochemical sector. The Mont
Belvieu propane price averaged US$1.47 per U.S. gallon (65 percent of WTI) in
2011, compared to US$1.17 per U.S.
gallon (62 percent of WTI) in 2010. Butane and condensate
sales prices were also much improved in 2011, also reflective of
higher crude oil prices and steady petrochemical and oilsands
demand for these products.
The 2011 AECO natural gas price averaged
$3.48 per gj compared to $3.93 per gj during 2010, a decrease of 11
percent. While low natural gas prices are generally favorable to
NGL extraction and fractionation economics, a sustained period in a
low priced gas environment may impact the availability and overall
cost of natural gas and NGL mix supply in western Canada, as natural gas producers may curtail
drilling activities. However, strengthening NGL pricing in 2011 has
resulted in improved netbacks for producers drilling in natural gas
plays with higher levels of associated NGLs, such as the
Montney area in British Columbia. Increased focus on
liquids-rich natural gas drilling is beneficial to Provident
supply, particularly at Redwater. Continued softness in natural
gas prices has improved market frac spreads but has also caused an
increase in extraction premiums paid for natural gas supply in
western Canada, particularly at
Empress.
The margins generated from Provident's extraction
operations at Empress, Alberta and
Younger, British Columbia are
determined primarily by "frac spreads", which represent the
difference between the selling prices for propane-plus and the
input cost of the natural gas required to produce the respective
NGL products. Frac spreads can change significantly from
period to period depending on the relationship between crude oil
and natural gas prices (the "frac spread ratio"), absolute
commodity prices, and changes in the Canadian to U.S. dollar
foreign exchange rate. Traditionally, a higher frac spread ratio
and higher crude oil prices will result in stronger extraction
margins. Differentials between propane-plus and crude oil
prices, as well as location price differentials will also impact
frac spreads. Natural gas extraction premiums and costs
relating to transportation, fractionation, storage and marketing
are not included within frac spreads, however these costs are
included when determining operating margin.
Market frac spreads averaged $54.67 per barrel in 2011, representing a 36
percent increase from $40.30 per
barrel in 2010. Higher frac spreads were a result of higher
NGL prices combined with a lower AECO natural gas price.
While Provident benefits directly from higher frac spreads at its
Younger facility, the benefit of higher market frac spreads in 2011
was offset at Empress by continued
high costs for natural gas supply in the form of extraction
premiums. Empress extraction
premiums in 2011 increased approximately 30 percent when compared
to 2010 and, are primarily a result of low volumes of natural gas
flowing past the Empress straddle
plants and increased competition for NGLs as a result of higher
frac spreads. Empress border
flow was relatively flat in 2011 compared to 2010 at an average
rate of approximately 4.8 bcf per day. Lower natural gas throughput
directly impacts production at the Empress facilities which in turn reduces the
supply of propane-plus available for sale in Sarnia and in surrounding eastern markets.
Tighter supply at Sarnia may have
a positive impact on eastern sales prices relative to other major
propane hubs during periods of high demand.
Provident partially mitigates the impact of lower
natural gas based NGL supply at Empress through the purchase of NGL mix supply
in western Canada. Provident
purchases NGL mix which is transported to the truck rack at the
Provident Empress facility. The NGL mix is then transported
to the premium-priced Sarnia
market for fractionation and sale. Provident also purchases
NGL mix supply from other Empress
plant owners as well as in the Edmonton market. While gross operating margins
benefit from additional NGL mix supply, per unit margins are
impacted as margins earned on frac spread gas extraction are
typically higher than margins earned on NGLs purchased on a mix
basis.
Industry propane inventories in the United States were approximately 55.2
million barrels at the end of 2011, which is approximately 1.5
million barrels above the five year historical average. Inventory
levels are above the five year historical average primarily due to
the mild winter temperatures across the
United States in the fourth quarter of 2011 that has reduced
demand for propane. Year end 2011 Canadian industry propane
inventories were approximately 7.5 million barrels, 1.8 million
barrels higher than the historic five year average. Propane
inventories in Canada are at high
levels primarily due to mild winter temperatures in central
Canada in the fourth quarter of
2011 that has reduced demand for propane.
Provident Midstream business performance
Provident Midstream results are summarized as
follows:
|
Year ended December
31, |
(bpd) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Redwater West NGL sales volumes |
|
58,969 |
|
63,006 |
(6) |
Empress East NGL sales volumes |
|
45,790 |
|
43,069 |
6 |
Provident Midstream NGL sales
volumes |
|
104,759 |
|
106,075 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December
31, |
($ 000s) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Redwater West margin |
$ |
213,256 |
$ |
160,208 |
33 |
Empress East margin |
|
109,439 |
|
88,965 |
23 |
Commercial Services margin |
|
58,680 |
|
63,803 |
(8) |
Gross operating margin |
|
381,375 |
|
312,976 |
22 |
Realized loss on financial derivative
instruments |
|
(66,521) |
|
(50,865) |
31 |
Cash general and administrative
expenses |
|
(38,590) |
|
(35,391) |
9 |
Other income and realized foreign
exchange |
|
7,110 |
|
40 |
17,675 |
Adjusted EBITDA attributable to
non-controlling interest |
|
(946) |
|
- |
- |
Adjusted EBITDA excluding buyout of
financial derivative instruments
and strategic review and restructuring costs |
|
282,428 |
|
226,760 |
25 |
Realized loss on buyout of financial
derivative instruments |
|
- |
|
(199,059) |
(100) |
Strategic review and restructuring
costs |
|
- |
|
(13,782) |
(100) |
Adjusted EBITDA |
$ |
282,428 |
$ |
13,919 |
1,929 |
Gross operating margin
Midstream gross operating margin was $381.4 million for the year ended December 31, 2011 compared to $313.0 million in 2010. The 22 percent
increase was the result of a higher contribution from both
Redwater West and Empress East by
33 percent and 23 percent, respectively, partially offset by an
eight percent decrease in operating margin from Commercial
Services.
Redwater West
Provident purchases NGL mix from various natural
gas producers and fractionates it into finished products at the
Redwater fractionation facility
near Edmonton, Alberta.
Redwater West also includes natural gas supply volumes from the
Younger NGL extraction plant located at Taylor in northeastern British Columbia. The Younger plant
supplies specification NGLs to local markets as well as NGL mix
supply to the Fort Saskatchewan
area for fractionation and sale. The feedstock for Redwater
West has a significant portion of NGL mix rather than natural gas,
therefore frac spreads have a smaller impact on operating margin
than in Empress East.
Also located at the Redwater facility is Provident's industry
leading rail-based condensate terminal, which serves the heavy oil
industry and its need for diluent. Provident's condensate terminal
is the largest of its size in western Canada. Income generated from the
condensate terminal and caverns which relates to third-party
terminalling and storage is included within Commercial Services,
while income relating to proprietary condensate marketing
activities remains within Redwater
West.
The operating margin for Redwater West in 2011 was
$213.3 million, an increase of 33
percent compared to $160.2 million in
2010. Stronger 2011 results when compared to 2010 were
primarily due to stronger market prices for all NGL products as
well as higher frac spreads at Younger. Overall, Redwater
West NGL sales volumes averaged 58,969 barrels per day in 2011, a
six percent decrease compared to 2010. Lower NGL sales
volumes can be largely attributed to a decrease in sales volumes
for condensate in 2011 compared to 2010. Condensate sale
volumes decreased compared to the prior year as Provident imported
less condensate via railcar from the U.S. Gulf Coast for sale into
the western Canadian market. Margins on imported condensate supply
tend to be lower than product supplied through western Canadian NGL
mix or product extracted at Younger due to the significant
transportation costs incurred on imported product. Decreases in
sales volumes were more than offset by significant improvements in
condensate market pricing, resulting in a higher product operating
margin despite the decrease in sales volumes.
Product operating margins for propane and butane
were higher in 2011 relative to the comparative period primarily
due to more favourable market pricing. Mt. Belvieu pricing
for propane and butane both increased by 26 percent in 2011
compared to 2010. The ethane product margin increased
slightly in 2011 compared to 2010 primarily associated with
increased sales volumes.
Empress East
Provident extracts NGLs from natural gas at the
Empress straddle plants and sells
ethane and condensate in the western Canadian marketplace while
transporting propane and butane to Sarnia, Ontario for fractionation and sale
into markets in central Canada and
the eastern United States.
The margin in the business is determined primarily by frac
spreads. Demand for propane is seasonal and results in
inventory that generally builds over the second and third quarters
of the year and is sold in the fourth quarter and the first quarter
of the following year.
Empress East gross operating margin in 2011 was
$109.4 million compared to
$89.0 million in 2010. The 23
percent increase was due to increased sales volumes primarily
driven by strong demand for propane in 2011 when compared to 2010
as well as strong refinery demand for butane in 2011. While
condensate sales volumes were lower in 2011 compared to 2010 the
decrease was more than offset by the significant increase in
condensate market prices, primarily driven by the 20 percent
increase in WTI. Overall, Empress East NGL sales volumes
averaged 45,790 barrels per day, a six percent increase compared to
2010. Stronger market prices for propane-plus products and
consistently low gas prices resulted in higher frac spreads which
was also beneficial to gross operating margin. The positive
impacts of strong demand, higher NGL sales prices and a lower AECO
natural gas price were partially offset by increased extraction
premiums paid to purchase natural gas in the Empress market.
Commercial Services
Provident also utilizes its assets to generate
income from fee-for-service contracts to provide fractionation,
storage, NGL terminalling, loading and offloading services. Income
from pipeline tariffs from Provident's ownership in NGL pipelines
is also included in this activity. During the third quarter
of 2011, Provident announced long-term storage agreements at both
the Redwater facility and
Provident's Corunna
facility. In the fourth quarter, Provident announced a
long-term storage agreement for crude oil storage at the
Redwater facility. In
addition, in the fourth quarter of 2011 Provident completed the
acquisition of a two-thirds interest in Three Star, a Saskatchewan based oilfield hauling company
serving Bakken area crude oil producers.
The gross operating margin for commercial services
in 2011 was $58.7 million, a decrease
of eight percent compared to $63.8
million in 2010. The decrease in margin was primarily
associated with decreased condensate terminalling revenues partly
as a result of the termination of a multi-year condensate storage
and terminalling services agreement in 2010 as well as the
completion in mid-2010 of the Enbridge Southern Lights pipeline,
which transports condensate from the
United States to the Edmonton area. This decrease was
partially offset by increases in margin related to third party
storage as well as due to the acquisition of Three Star.
Earnings before interest, taxes, depreciation,
amortization, accretion, and non-cash items ("adjusted
EBITDA")
Adjusted EBITDA includes the impact of the
Midstream financial derivative contract buyout, as well as
strategic review and restructuring costs incurred in 2010,
associated with the separation of the business units.
Management has presented a metric excluding these items as an
additional measure to evaluate Provident's performance in the
period and to assess future earnings generating capability.
Adjusted EBITDA excluding buyout of financial
derivative instruments and strategic review and restructuring costs
increased to $282.4 million from
$226.8 million in 2010. The
increase reflects higher gross operating margin from both Redwater
West and Empress East, partially offset by higher realized losses
on financial derivative instruments under the market risk
management program. In addition, 2011 includes other income of
$6.4 million related to payments
received from third parties relating to certain contractual volume
commitments at the Empress
facilities.
Capital expenditures
Provident substantially increased its 2011 growth
capital expenditures when compared to 2010. In 2011,
Provident incurred total capital expenditures of $134.1 million compared to $70.2 million in the prior year. Driven by
substantial demand for new storage services at Redwater, Provident deployed $34.5 million (2010 - $17.8 million) of capital on cavern and brine
pond development at the Redwater
facility, $22.1 million (2010 -
$2.0 million) was directed to the
growth-related portions of the Taylor to Boundary Lake and the Septimus to
Younger pipeline projects, and $39.3
million (2010 - $37.4 million)
of expenditures were directed towards storage and terminalling
infrastructure development at the Provident Corunna
facility. An additional $9.2
million (2010 - nil) was directed toward the construction of
a truck terminal in Cromer,
Manitoba while $7.9 million
(2010 - $6.4 million) was spent on
various other infrastructure improvements. Finally, an
additional $21.1 million (2010 -
$6.6 million) was directed towards
sustaining capital activities and office related capital, including
$13.1 million (2010 - $2.0 million) related to the Taylor to Boundary Lake pipeline.
Net income (loss)
Consolidated |
Year ended December
31, |
($ 000s, except per share data) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Net income from continuing operations |
$ |
97,217 |
$ |
112,217 |
(13) |
Net loss from discontinued operations |
|
- |
|
(122,723) |
(100) |
Net income |
$ |
97,217 |
$ |
(10,506) |
- |
Per weighted average share |
|
|
|
|
|
|
- basic and diluted (1) |
$ |
0.36 |
$ |
(0.04) |
- |
(1) Based on weighted
average number of shares outstanding and includes dilutive impact
of convertible debentures. |
In 2011, Provident recorded net income of $97.2 million. The net loss of $10.5 million in 2010 includes a net loss from
discontinued operations of $122.7
million attributed to the sale of the Upstream business in
the second quarter of 2010.
Net income from continuing operations was
$97.2 million in 2011, compared to
$112.2 million in 2010. Higher
adjusted EBITDA, combined with the impact of the two identified
significant events in 2010 and the change in unrealized financial
derivative instruments, was more than offset by higher financing,
share based compensation and income tax expenses.
Taxes
Continuing operations |
Year ended December 31, |
($ 000s) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Current tax expense (recovery) |
$ |
654 |
$ |
(6,956) |
- |
Deferred income tax expense (recovery) |
|
67,832 |
|
(40,871) |
- |
|
$ |
68,486 |
$ |
(47,827) |
- |
The current tax expense in 2011 of $0.7
million (2010 - $7.0 million
recovery) is mainly attributed to earnings generated in the
Company's recently acquired subsidiary, Three Star, that is in
excess of allowed tax pool claims. The current tax recovery
in 2010 was attributed to applying tax loss carrybacks allowing the
recovery of taxes paid in prior periods. The tax losses in
2010 were generated primarily by the realized loss on buyout of
financial derivative instruments in the second quarter of 2010.
Deferred income tax expense for 2011 was
$67.8 million compared to a recovery
of $40.9 million in 2010. As a
result of Provident's adoption of IFRS, the balance of deferred
income taxes on the December 31, 2010
statement of financial position increased by $22.3 million when compared to the previous
Canadian GAAP amount (see note 5 of the consolidated financial
statements). This IFRS difference is primarily due to the tax rate
applied to temporary differences associated with SIFT entities.
Under previous Canadian GAAP, Provident used the rate expected to
be in effect when the timing differences reverse. However, under
IFRS, Provident is required to use the highest rate applicable for
undistributed earnings in these entities. Upon conversion to a
corporation on January 1, 2011, these
timing differences are now measured under IFRS using a corporate
tax rate and, as a result, the majority of the IFRS difference at
December 31, 2010 for deferred income
taxes has reversed through first quarter 2011 net earnings,
resulting in incremental deferred tax expense of approximately
$24 million. The remaining
deferred tax expense in 2011 relates to the use of existing tax
pools to offset earnings generated in the year. The deferred
tax recovery in 2010 was primarily driven by losses created by
deductions at the incorporated subsidiary level under the previous
Trust structure.
At December 31, 2011
Provident has approximately $900
million of tax pools and non-capital losses available to
claim against taxable income in future years.
Financing charges
Continuing operations |
Year ended December
31, |
($ 000s, except as noted) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Interest on bank debt |
$ |
9,798 |
$ |
9,316 |
5 |
Interest on convertible debentures |
|
21,035 |
|
17,538 |
20 |
|
|
30,833 |
|
26,854 |
15 |
Less: Capitalized borrowing costs |
|
(1,348) |
|
- |
- |
Less: Discontinued operations portion |
|
- |
|
(2,501) |
(100) |
Total cash financing charges |
$ |
29,485 |
$ |
24,353 |
21 |
|
|
|
|
|
|
Weighted average interest rate on all long-term
debt |
|
5.2% |
|
4.8% |
8 |
Loss on purchase of convertible debentures |
|
3,342 |
|
- |
- |
Accretion and other non-cash financing
charges |
|
8,455 |
|
9,392 |
(10) |
Less: Discontinued operations portion |
|
- |
|
(1,494) |
(100) |
Total financing charges |
$ |
41,282 |
$ |
32,251 |
28 |
Financing charges for 2011 have increased relative to
2010. Interest on bank debt is higher in 2011 as average
borrowing rates on Provident's revolving credit facility were
higher than in 2010. Interest on convertible debentures for
2011 was also higher than in the prior year reflecting a higher
face value outstanding, partially offset by a reduced average
coupon rate on the convertible debentures outstanding.
Financing charges also increased in 2011 as a result of losses
recognized on the re-purchase of 6.5% convertible debentures in
February 2011 and the redemption of
the remaining 6.5% convertible debentures in May 2011. In addition, the prior year includes an
allocation of interest expense and associated financing charges to
discontinued operations.
In 2011, Provident has capitalized borrowing costs
attributable to the construction of assets, such as storage caverns
and related facilities, which take a substantial period of time to
get ready for their intended use. This reduced the Company's total
recognized financing charges in 2011 by $1.3
million (2010 - nil).
Market risk management program
Provident's market risk management program utilizes
financial derivative instruments to provide protection against
commodity price volatility and protect a base level of operating
cash flow. Provident has entered into financial derivative
contracts through March 2013 to
protect the relationship between the purchase cost of natural gas
and the sales price of propane, butane and condensate and to
protect the relationship between NGLs and crude oil in physical
sales contracts. The program also reduces foreign exchange risk due
to the exposure arising from the conversion of U.S. dollars into
Canadian dollars, interest rate risk and fixes a portion of
Provident's input costs.
The commodity price derivative instruments
Provident uses include put and call options, participating swaps,
and fixed price products that settle against indexed referenced
pricing.
Provident's credit policy governs the activities
undertaken to mitigate non-performance risk by counterparties to
financial derivative instruments. Activities undertaken
include regular monitoring of counterparty exposure to approved
credit limits, financial reviews of all active counterparties,
utilizing International Swap Dealers Association (ISDA) agreements
and obtaining financial assurances where warranted. In
addition, Provident has a diversified base of available
counterparties.
In April 2010,
Provident completed the buyout of all fixed price crude oil and
natural gas swaps associated with the Midstream business for a
total cost of $199.1 million.
The buyout of Provident's forward mark to market positions allowed
Provident to refocus its market risk management program on
protecting margins on a portion of its frac spread production and
managing physical contract exposure for a period of up to two
years.
Management continues to actively monitor market
risk and continues to mitigate its impact through financial risk
management activities. Subject to market conditions including
adequate liquidity, Provident's intention is to hedge approximately
50 percent of its forecasted natural gas production volumes and
forecasted NGL sales volumes on a rolling 12 month basis. Subject
to market conditions, Provident may add additional positions as
appropriate for up to 24 months.
Settlement of market risk management
contracts
The following table summarizes the impact of
financial derivative contracts settled during the years ended
December 31, 2011 and 2010. The
table excludes the impact of the Midstream derivative contract
buyout of financial derivative instruments incurred in the second
quarter of 2010 which is presented separately on the consolidated
statement of operations.
|
|
Year ended December
31, |
Realized loss on financial derivative
instruments |
|
2011 |
|
2010 |
($ 000s except volumes) |
|
|
Volume (1) |
|
|
Volume (1) |
|
|
|
|
|
|
|
Frac spread related |
|
|
|
|
|
|
|
Crude oil |
$ |
(6,186) |
0.4 |
$ |
(17,315) |
2.0 |
|
Natural gas |
|
(12,695) |
24.7 |
|
(29,849) |
16.9 |
|
Propane |
|
(36,630) |
3.9 |
|
(9,819) |
1.6 |
|
Butane |
|
(7,909) |
1.2 |
|
(4,889) |
0.6 |
|
Condensate |
|
(4,833) |
0.6 |
|
(504) |
0.2 |
|
Foreign exchange |
|
(2,205) |
|
|
3,766 |
|
|
Sub-total frac spread related |
|
(70,458) |
|
|
(58,610) |
|
Corporate |
|
|
|
|
|
|
|
Electricity |
|
2,627 |
|
|
367 |
|
|
Interest rate |
|
(743) |
|
|
(847) |
|
Management of exposure embedded in
physical contracts |
|
2,053 |
3.0 |
|
8,225 |
0.6 |
Realized loss on financial derivative
instruments |
$ |
(66,521) |
|
$ |
(50,865) |
|
(1) |
The above table represents aggregate volumes that were
bought/sold over the periods. Crude oil and NGL volumes are
listed in millions of barrels and natural gas is listed in millions
of gigajoules. |
The realized loss for the year ended December 31, 2011 was $66.5 million compared to a realized loss of
$50.9 million in 2010. The
majority of the realized loss in 2011 was driven by NGL derivative
sales contracts settling at a contracted price lower than current
NGL market prices, natural gas derivative purchase contracts
settling at a contracted price higher than the market natural gas
prices, as well as crude oil derivative sales contracts settling at
a contracted price lower than the crude oil market prices during
the settlement period. The comparable 2010 realized loss was driven
mostly by natural gas derivative purchase contracts settling at a
contracted price higher than the market natural gas prices, crude
oil derivative sales contracts settling at contracted crude oil
prices lower than the crude oil market prices during the settlement
period, as well as NGL derivative sales contracts settling at a
contracted price lower than the current NGL market prices.
The following table is a summary of the net
financial derivative instruments liability:
|
|
As at |
|
|
As at |
|
|
December 31, |
|
|
December 31, |
($ 000s) |
|
2011 |
|
|
2010 |
Frac spread related |
|
|
|
|
|
|
Crude oil |
$ |
10,196 |
|
$ |
16,733 |
|
Natural gas |
|
30,579 |
|
|
19,113 |
|
Propane |
|
(4,784) |
|
|
16,246 |
|
Butane |
|
2,969 |
|
|
4,755 |
|
Condensate |
|
3,100 |
|
|
2,099 |
|
Foreign exchange |
|
3,747 |
|
|
(28) |
|
Sub-total frac spread related |
|
45,807 |
|
|
58,918 |
Management of
exposure embedded in physical contracts |
|
12,878 |
|
|
(1,168) |
Corporate |
|
|
|
|
|
|
Electricity |
|
(734) |
|
|
(421) |
|
Interest rate |
|
2,246 |
|
|
(366) |
Other financial
derivatives |
|
|
|
|
|
|
Conversion feature of convertible debentures |
|
36,958 |
|
|
9,586 |
|
Redemption liability related to acquisition of
Three Star |
|
7,548 |
|
|
- |
Net financial derivative instruments
liability |
$ |
104,703 |
|
$ |
66,549 |
The net liability in both periods represents unrealized
"mark-to-market" opportunity costs related to financial derivative
instruments with contract settlements ranging from January 1, 2011 through September 30, 2014 (with the exception of the
conversion feature of convertible debentures, which is associated
with long-term debt maturing in 2017 and 2018). The balances
are required to be recognized in the financial statements under
generally accepted accounting principles. These financial
derivative instruments were generally entered into in order to
manage commodity prices and protect future Midstream product
margins. Fluctuations in the market value of these
instruments impact earnings prior to their settlement dates but
have no impact on funds flow from operations until the instruments
are actually settled.
For convertible debentures containing a cash
conversion option, the conversion feature is measured at fair value
through profit and loss at each reporting date, with any unrealized
gains or losses arising from fair value changes reported in the
consolidated statement of operations. This resulted in Provident
recording a loss of approximately $19.0
million (2010 - nil) on the revaluation of the conversion
feature of convertible debentures on the consolidated statement of
operations.
Under IFRS, Provident is required to value the put
option on the shares held by the non-controlling interest of its
subsidiary, Three Star. This resulted in the recognition on
acquisition of approximately $9.1
million as a redemption liability with an offsetting debit
to other equity based on the present value of the redemption
amount. Provident is also required to measure the fair value of
this put option each reporting date. This resulted in Provident
recording a gain of approximately $1.5
million (2010 - nil) on the consolidated statement of
operations.
Liquidity and capital resources
|
|
As at |
|
|
As at |
|
Consolidated |
|
December 31, |
|
|
December 31, |
|
($ 000s) |
|
2011 |
|
|
2010 |
% Change |
|
|
|
|
|
|
|
Long-term debt - bank facilities and other (1) |
$ |
194,135 |
|
$ |
72,882 |
166 |
Long-term debt - convertible debentures (1) |
|
315,786 |
|
|
400,872 |
(21) |
Working capital surplus (excluding financial
derivative instruments) |
|
(97,561) |
|
|
(79,633) |
23 |
Net debt |
$ |
412,360 |
|
$ |
394,121 |
5 |
|
|
|
|
|
|
|
Shareholders' equity (at book value) |
|
579,058 |
|
|
588,207 |
(2) |
Total capitalization at book value |
$ |
991,418 |
|
$ |
982,328 |
1 |
|
|
|
|
|
|
|
Total net debt as a percentage of total book value
capitalization |
|
42% |
|
|
40% |
5 |
(1) Includes current portion of long-term
debt. |
|
|
|
|
|
|
Midstream revenues are received at various times throughout the
month. Provident's working capital position is affected by
commodity price changes, seasonal fluctuations that reflect
changing inventory balances in the Midstream business and by the
timing of Provident's capital expenditure program. Typically,
Provident's inventory levels will increase in the second and third
quarters when product demand is lower, and will decrease during the
fourth and first quarters when product demand is at its
highest. Provident relies on funds flow from operations,
proceeds received under its Premium Dividend and Dividend
Reinvestment purchase ("DRIP") plan, external lines of credit and
access to capital markets to fund capital programs and
acquisitions.
Substantially all of Provident's accounts
receivable are due from customers in the oil and gas, petrochemical
and refining and midstream services and marketing industries and
are subject to credit risk. Provident partially mitigates
associated credit risk by limiting transactions with certain
counterparties to limits imposed by Provident based on management's
assessment of the creditworthiness of such counterparties. In
certain circumstances, Provident will require the counterparties to
provide payment prior to delivery, letters of credit and/or
parental guarantees. The carrying value of accounts
receivable reflects management's assessment of the associated
credit risks.
Contractual obligations
Consolidated |
|
Payment due by period |
|
|
($ 000s) |
|
Total |
|
Less than 1 year |
|
1 to 3 years |
|
3 to 5 years |
|
More than 5 years |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt - bank facilities and
other (1) (2) (3) |
$ |
214,552 |
$ |
15,718 |
$ |
198,834 |
$ |
- |
$ |
- |
Long-term debt - convertible debentures
(3) |
|
473,944 |
|
19,838 |
|
39,675 |
|
39,675 |
|
374,756 |
Operating lease obligations |
|
160,447 |
|
14,117 |
|
30,248 |
|
34,052 |
|
82,030 |
Total |
$ |
848,943 |
$ |
49,673 |
$ |
268,757 |
$ |
73,727 |
$ |
456,786 |
(1) The terms of the
Canadian credit facility have a revolving three year period
expiring on October 14, 2014. |
(2) Includes current
portion of long-term debt. |
(3) Includes associated
interest and principal payments. |
Long-term debt and working capital
Provident completed an extension of its existing
credit agreement (the "Credit Facility") on October 14, 2011, with National Bank of
Canada as administrative agent and
a syndicate of Canadian chartered banks and other Canadian and
foreign financial institutions (the "Lenders"). Pursuant to
the amended Credit Facility, the Lenders have agreed to continue to
provide Provident with a credit facility of $500 million which, under an accordion feature,
can be increased to $750 million at
the option of the Company, subject to obtaining additional
commitments. The amended Credit Facility also provides for a
separate Letter of Credit facility which was increased from
$60 million to $75 million.
The amended terms of the Credit Facility provide
for a revolving three year period expiring on October 14, 2014, from the previous maturity date
of June 28, 2013, (subject to
customary extension provisions) secured by substantially all of the
assets of Provident. Provident may draw on the facility by
way of Canadian prime rate loans, U.S. base rate loans, banker's
acceptances, LIBOR loans, or letters of credit.
As at December 31,
2011, Provident had drawn $190.1
million (including $3.6
million presented as a bank overdraft in accounts payable
and accrued liabilities) or 38 percent of its Credit Facility
(December 31, 2010 - $75.5 million or 15 percent). At December 31, 2011 the effective interest rate of
the outstanding Credit Facility was 3.3 percent (December 31, 2010 - 4.1 percent). At December 31, 2011, Provident had $60.1 million in letters of credit outstanding
(December 31, 2010 - $47.9 million) that guarantee Provident's
performance under certain commercial and other contracts.
On October 3, 2011,
Provident completed the acquisition of a two-thirds interest in
Three Star. Three Star's long-term debt is secured by the vehicles
and trailers of the subsidiary and matures over a period of between
two to five years. In addition, Three Star has an operating line of
credit (presented in accounts payable and accrued liabilities)
which is secured by substantially all of the assets of Three Star
other than the vehicles and trailers which are pledged as security
for the subsidiary's long-term debt. As at December 31, 2011, Three Star had drawn
$18.0 million, including $9.2 million, $0.9
million, and $7.9 million
presented as current portion of long-term debt, long-term debt -
bank facilities and other, and a bank overdraft in accounts payable
and accrued liabilities, respectively, on the consolidated
statement of financial position. At December 31, 2011, the effective interest rate of
the subsidiary's outstanding long-term debt was 4.9 percent.
The following table shows the change in Provident's
working capital position.
|
|
As at |
|
As at |
|
|
|
|
December 31, |
|
December 31, |
|
|
($ 000s) |
|
2011 |
|
2010 |
|
Change |
Current Assets |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
- |
$ |
4,400 |
$ |
(4,400) |
Accounts receivable |
|
230,457 |
|
206,631 |
|
23,826 |
Petroleum product inventory |
|
147,378 |
|
106,653 |
|
40,725 |
Prepaid expenses and other current assets |
|
4,559 |
|
2,539 |
|
2,020 |
Financial derivative instruments |
|
4,571 |
|
487 |
|
4,084 |
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
276,480 |
|
227,944 |
|
(48,536) |
Cash distribution payable |
|
8,353 |
|
12,646 |
|
4,293 |
Current portion of long-term debt |
|
9,199 |
|
148,981 |
|
139,782 |
Financial derivative instruments |
|
56,901 |
|
37,849 |
|
(19,052) |
Working capital surplus (deficit) |
$ |
36,032 |
$ |
(106,710) |
$ |
142,742 |
The ratio of long-term debt to adjusted EBITDA from continuing
operations for the year ended December 31,
2011 was 1.8 to one compared to annual 2010 long-term debt
to adjusted EBITDA from continuing operations excluding buyout of
financial derivative instruments and strategic review and
restructuring costs of 2.1 to one.
Share capital
On January 1, 2011,
Provident Energy Trust (the "Trust") completed a conversion from an
income trust structure to a corporate structure pursuant to a plan
of arrangement on the basis of one common share of Provident Energy
Ltd. in exchange for each unit held in the Trust (see notes 1 and
13 of the consolidated financial statements). The conversion
resulted in the reorganization of the Trust into a publicly traded,
dividend-paying corporation under the name "Provident Energy
Ltd."
Under Provident's Premium Distribution,
Distribution Reinvestment purchase (DRIP) plan, 4.5 million shares
were issued or are to be issued in 2011 representing proceeds of
$37.1 million (2010 - 4.4 million
units for proceeds of $32.1
million).
At December 31, 2011
management and directors held less than one percent of the
outstanding common shares.
Capital related expenditures and funding
|
Year ended December
31, |
($ 000s) |
|
2011 |
|
2010 |
% Change |
|
|
|
|
|
|
Capital related expenditures |
|
|
|
|
|
Capital expenditures |
$ |
(134,115) |
$ |
(70,218) |
91 |
Site restoration expenditures
- discontinued operations |
|
- |
|
(2,041) |
(100) |
Buyout of financial derivative instruments |
|
- |
|
(199,059) |
(100) |
Acquisitions |
|
(7,852) |
|
- |
- |
Net capital related expenditures |
$ |
(141,967) |
$ |
(271,318) |
(48) |
|
|
|
|
|
|
Funded by |
|
|
|
|
|
Funds flow from operations net of
declared dividends to shareholders
and DRIP proceeds |
$ |
144,198 |
$ |
30,355 |
375 |
Proceeds on sale of assets |
|
3 |
|
3,300 |
(100) |
Proceeds on sale of discontinued operations |
|
- |
|
106,779 |
(100) |
Cash provided by investing activities from
discontinued operations |
|
- |
|
170,710 |
(100) |
Issuance of convertible debentures, net of issue
costs |
|
164,950 |
|
164,654 |
- |
Repayment of debentures |
|
(249,784) |
|
- |
- |
Increase (decrease) in long-term debt |
|
109,893 |
|
(192,380) |
- |
Change in working capital, including cash |
|
(27,293) |
|
(12,100) |
126 |
Net capital related expenditure funding |
$ |
141,967 |
$ |
271,318 |
(48) |
Provident has funded its net capital expenditures with funds
flow from operations, DRIP proceeds and long-term debt. In
2010, cash provided by investing activities from discontinued
operations, which includes proceeds on sale of assets from the
first quarter sales of oil and natural gas assets as well as cash
proceeds from the second quarter sale of the remaining Upstream
business, were applied to Provident's revolving term credit
facility.
Share based compensation
Share based compensation includes expenses or
recoveries associated with Provident's restricted and performance
share plan. Share based compensation is recorded at the estimated
fair value of the notional shares granted. Compensation
expense associated with the plan is recognized in earnings over the
vesting period of each grant. The expense or recovery associated
with each period is recorded as non-cash share based compensation
(a component of general and administrative expense). A portion
relating to operational employees at field and plant locations is
also allocated to operating expense. For the year ended
December 31, 2011, Provident recorded
share based compensation expense from continuing operations of
$20.7 million (2010 - $8.4 million) and made related cash payments of
$6.7 million (2010 - $6.9 million). The expense was higher in 2011 as
a result of an increase in Provident's share trading price upon
which the compensation is based and due to recoveries in the second
quarter of 2010 from staff reductions resulting in cancelled and
exercised units. The cash cost was included as part of severance in
strategic review and restructuring costs in 2010. At December 31, 2011, the current portion of the
liability totaled $20.0 million
(December 31, 2010 - $7.4 million) and the long-term portion totaled
$11.5 million (December 31, 2010 - $10.4
million).
Discontinued operations (Provident
Upstream)
On June 29, 2010,
Provident completed a strategic transaction in which Provident
combined the remaining Provident Upstream business with Midnight
Oil Exploration Ltd. ("Midnight") to form Pace Oil & Gas Ltd.
pursuant to a plan of arrangement under the Business Corporations
Act (Alberta). Under the
arrangement, Midnight acquired all outstanding shares of Provident
Energy Resources Inc., a wholly-owned subsidiary of Provident
Energy Trust which held all of the producing oil and gas properties
and reserves associated with Provident's Upstream business.
Effective in the second quarter of 2010, Provident's Upstream
business was accounted for as discontinued operations (see note 23
of the consolidated financial statements).
Control environment
Internal control over financial
reporting
Management is responsible for establishing and
maintaining adequate internal control over financial reporting, as
defined in Rules 13a - 15(f) and 15d - 15(f) under the United
States Exchange Act of 1934, as amended (the "Exchange Act").
Management, including the Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"), has conducted an
evaluation of Provident's internal control over financial reporting
based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
Based on management's assessment as at December 31, 2011, management has concluded that
Provident's internal control over financial reporting is effective.
See "Management's Report on Internal Control over Financial
Reporting".
Due to its inherent limitations, internal control
over financial reporting is not intended to provide absolute
assurance that a misstatement of Provident's financial statements
would be prevented or detected. Further, the evaluation of the
effectiveness of internal control over financial reporting was made
as of a specific date, and continued effectiveness in future
periods is subject to the risks that controls may become
inadequate.
No changes were made in Provident's internal
control over financial reporting during the fiscal year ended
December 31, 2011 that have
materially affected or are reasonably likely to materially affect
Provident's internal control over financial reporting.
Disclosure controls and procedures
An evaluation, as of December 31, 2011, of the effectiveness of the
design and operation of Provident's disclosure controls and
procedures, as defined in Rule 13a - 15(e) and 15d - 15(e) under
the Exchange Act, was carried out by management including the CEO
and the CFO. Based on that evaluation, the CEO and CFO have
concluded that the design and operation of Provident's disclosure
controls and procedures were effective to ensure that information
required to be disclosed by Provident in reports that it files or
submits to Canadian and United
States security authorities are (i) recorded, processed,
summarized and reported within the time periods specified by
Canadian and United States
securities laws and (ii) accumulated and communicated to
Provident's management, including its principal executive officer
and principal financial officer, to allow timely decisions
regarding required disclosure.
It should be noted that while the CEO and CFO
believe that Provident's disclosure controls and procedures provide
a reasonable level of assurance that they are effective, they do
not expect that Provident's disclosure controls and procedures will
prevent all errors and fraud. A control system, no matter how well
conceived or operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Significant accounting judgements, estimates and
assumptions
The preparation of financial statements requires
management to make judgments, estimates and assumptions based on
currently available information that affect the reported amounts of
assets, liabilities and contingent liabilities at the date of the
consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. Estimates and
judgments are continuously evaluated and are based on management's
experience and other factors, including expectations of future
events that are believed to be reasonable under the
circumstances. However, actual results could differ from
those estimated. By their very nature, these estimates are
subject to measurement uncertainty and the effect on the financial
statements of future periods could be material.
In the process of applying the Company's accounting
policies, management has made the following judgments, estimates,
and assumptions which have the most significant effect on the
amounts recognized in the consolidated financial statements:
Inventory
Due to the inherent limitations in metering and the
physical properties of storage caverns and pipelines, the
determination of precise volumes of natural gas liquids held in
inventory at such locations is subject to estimation. Actual
inventories of natural gas liquids within storage caverns can only
be determined by draining of the caverns.
Impairment indicators
The recoverable amounts of cash generating units
and individual assets have been determined based on the higher of
value in use calculations and fair values less costs to sell.
These calculations require the use of estimates and
assumptions.
Goodwill is tested for impairment annually and at
other times when impairment indicators exist. Impairment is
determined for goodwill by assessing the recoverable amount of the
group of cash generating units that comprise the Midstream business
to which the goodwill relates. In assessing goodwill for
impairment, it is reasonably possible that the commodity price
assumptions, sales volumes, supply costs, discount rates, and tax
rates may change which may then impact the recoverable amount of
the group of cash generating units which comprise the Midstream
business and may then require a material adjustment to the carrying
value of goodwill.
For the Midstream business, it is also reasonably
possible that these assumptions may change which may then impact
the recoverable amounts of the cash generating units and may then
require a material adjustment to the carrying value of its tangible
and intangible assets. The Company monitors internal and
external indicators of impairment relating to its tangible and
intangible assets.
Decommissioning and restoration costs
Decommissioning and restoration costs will be
incurred by the Company at the end of the operating life of certain
of the Company's facilities and properties. The ultimate
decommissioning and restoration costs are uncertain and cost
estimates can vary in response to many factors including changes to
relevant legal and regulatory requirements, the emergence of new
restoration techniques or experience at other production sites. The
expected timing and amount of expenditure can also change, for
example, in response to changes in laws and regulations or their
interpretation. In determining the amount of the provision,
assumptions and estimates are also required in relation to discount
rates.
The decommissioning provisions have been created
based on Provident's internal estimates. Assumptions, based
on the current economic environment, have been made which
management believe are a reasonable basis upon which to estimate
the future liability. These estimates are reviewed regularly
to take into account any material changes to the assumptions.
However, actual decommissioning costs will ultimately depend upon
future market prices for the necessary decommissioning work
required which will reflect market conditions at the relevant
time.
Income taxes
The Company follows the liability method for
calculating deferred income taxes. Differences between the
amounts reported in the financial statements of the Company and its
subsidiaries and their respective tax bases are applied to tax
rates in effect to calculate the deferred tax liability. In
addition, the Company recognizes the future tax benefit related to
deferred income tax assets to the extent that it is probable that
the deductible temporary differences will reverse in the
foreseeable future. Assessing the recoverability of deferred
income tax assets requires the Company to make significant
estimates related to the expectations of future cash flows from
operations and the application of existing tax laws in each
jurisdiction. To the extent that future cash flows and
taxable income differ significantly from estimates, the ability of
the Company to realize the deferred tax assets and liabilities
recorded at the balance sheet date could be impacted.
Additionally, future changes in tax laws in the jurisdictions in
which the Company operates could limit the ability of the Company
to obtain tax deductions in future periods.
Contingencies
By their nature, contingencies will only be
resolved when one or more future events occur or fail to
occur. The assessment of contingencies inherently involves
the exercise of significant judgment and estimates of the outcome
of future events.
Share based compensation
The Company uses the fair value method of valuing
compensation expense associated with the Company's share based
compensation plan whereby notional shares are granted to
employees. Estimating fair value requires determining the
most appropriate valuation model for a grant of equity instruments,
which is dependent on the terms and conditions of the grant.
Financial derivative instruments
The Company's financial derivative instruments are
initially recognized on the statement of financial position at fair
value based on management's estimate of commodity prices, share
price and associated volatility, foreign exchange rates, interest
rates, and the amounts that would have been received or paid to
settle these instruments prior to maturity given future market
prices and other relevant factors.
Property, plant and equipment and intangible
assets
Midstream facilities, including natural gas liquids
storage and terminalling facilities and natural gas liquids
processing and extraction facilities are carried at cost and
depreciated over the estimated service lives of the assets.
Intangible assets are amortized over the estimated useful lives of
the assets. Capital assets related to pipelines and office
equipment are carried at cost and depreciated over their economic
lives.
Management periodically reviews the estimated
useful lives of property, plant and equipment and intangible
assets. These estimates are based on management's experience and
other factors, including expectations of future events that are
believed to be reasonable under the circumstances. However, actual
results could differ from those estimated.
Change in accounting policies
(i) |
Recent accounting pronouncements |
|
|
|
The International Accounting Standards Board ("IASB") issued a
number of new accounting pronouncements including IFRS 7 -
Financial Instruments: Disclosures, IFRS 9 - Financial
Instruments, IFRS 10 - Consolidated Financial
Statements, IFRS 11 - Joint Arrangements, IFRS 12 -
Disclosure of Interests in Other Entities, and IFRS 13 -
Fair Value Measurement as well as related amendments to IAS 1 -
Presentation of Financial Statements, IAS 27 - Separate
Financial Statements, IAS 28 - Investments in Associates
and IAS 32 - Financial Instruments: Presentation.
These standards are required to be applied for accounting periods
beginning on or after January 1, 2013, with earlier adoption
permitted, with the exception of IFRS 7, which is applicable for
annual periods beginning on or after July 1, 2011 with earlier
adoption permitted, IAS 1, which is effective for annual periods
beginning on or after July 1, 2012 with earlier adoption permitted,
IFRS 9, which requires application for annual periods beginning on
or after January 1, 2015, with earlier adoption permitted and IAS
32, which is applicable for annual periods beginning on or after
January 1, 2014, and is required to be applied
retrospectively. The Company has not yet assessed the impact
of these standards (see note 3(xvii) of the consolidated financial
statements). |
|
|
(ii) |
International Financial Reporting Standards
(IFRS) |
|
|
|
The Company prepares its financial statements in accordance
with Canadian generally accepted accounting principles as set out
in the Handbook of the Canadian Institute of Chartered Accountants
("CICA Handbook"). In 2010, the CICA Handbook was revised to
incorporate International Financial Reporting Standards ("IFRS"),
and requires publicly accountable enterprises to apply such
standards effective for years beginning on or after January 1,
2011. This adoption date requires the restatement, for comparative
purposes, of amounts reported by Provident for the annual and
quarterly periods within the year ended December 31, 2010,
including the opening consolidated statement of financial position
as at January 1, 2010. |
|
|
|
Provident's quarterly and annual 2011 consolidated financial
statements reflect this change in accounting standards.
Provident's basis of preparation and adoption of IFRS is described
in note 2 of the consolidated financial statements. Significant
accounting policies and related accounting judgments, estimates,
and assumptions can be found in notes 3 and 4 of the consolidated
financial statements. The effect of the Company's transition to
IFRS, including transition elections, and reconciliations of the
statements of financial position and the statements of operations
between previous Canadian GAAP and IFRS is presented in note 5 to
the consolidated financial statements. |
Business risks
The midstream industry is subject to risks that can
affect the amount of cash flow from operations available for the
payment of dividends to shareholders, and the ability to grow.
These risks include but are not limited to:
- capital markets, credit and liquidity risks and the ability to
finance future growth;
- the impact of governmental regulation on Provident;
- operational matters and hazards including the breakdown or
failure of equipment, information systems or processes, the
performance of equipment at levels below those originally intended,
operator error, labour disputes, disputes with owners of
interconnected facilities and carriers and catastrophic events such
as natural disasters, fires, explosions, fractures, acts of
eco-terrorists and saboteurs, and other similar events, many of
which are beyond the control of Provident;
- the Midstream NGL assets are subject to competition from other
gas processing plants, and the pipelines and storage, terminal and
processing facilities are also subject to competition from other
pipelines and storage, terminal and processing facilities in the
areas they serve, and the marketing business is subject to
competition from other marketing firms;
- exposure to commodity price, exchange rate and interest rate
fluctuations;
- reduction in the volume of throughput or the level of
demand;
- the ability to attract and retain employees;
- increasing operating and capital costs;
- regulatory intervention in determining processing fees and
tariffs;
- reliance on significant customers;
- non-performance risk by counterparties;
- government, legislation and regulatory risk;
- changes to environmental and other regulations; and
- environmental, health and safety risks.
Provident strives to minimize these business risks
by:
- employing and empowering management and technical staff with
extensive industry experience and providing competitive
remuneration;
- adhering to a disciplined market risk management program to
mitigate the impact that volatile commodity prices have on cash
flow available for the payment of dividends;
- marketing natural gas liquids and related services to selected,
credit worthy customers at competitive rates;
- maintaining a competitive cost structure to maximize cash flow
and profitability;
- maintaining prudent financial leverage and developing strong
relationships with the investment community and capital
providers;
- adhering to strict guidelines and reporting requirements with
respect to environmental, health and safety practices; and
- maintaining an adequate level of property, casualty,
comprehensive and directors' and officers' insurance coverage.
Readers should be aware that the risks set forth
herein are not exhaustive. Readers are referred to
Provident's annual information form, which is available at
www.sedar.com, for a detailed discussion of risks affecting
Provident. In addition, there are risks associated with the
Pembina Arrangement. Readers are referred to the joint
information circular of Provident and Pembina dated February 17, 2012 relating to the Pembina
Arrangement, which is available at www.sedar.com, for a detailed
discussion of the risks relating to the Pembina Arrangement.
Share trading activity
The following table summarizes the share trading
activity of Provident for each quarter in the year ended
December 31, 2011 on both the Toronto
Stock Exchange and the New York Stock Exchange:
|
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
TSE - PVE (Cdn$) |
|
|
|
|
|
|
|
|
High |
$ |
9.03 |
$ |
9.06 |
$ |
8.84 |
$ |
10.03 |
Low |
$ |
7.62 |
$ |
7.70 |
$ |
6.84 |
$ |
7.92 |
Close |
$ |
9.03 |
$ |
8.62 |
$ |
8.58 |
$ |
9.85 |
Volume (000s) |
|
31,800 |
|
29,039 |
|
27,238 |
|
27,275 |
NYSE - PVX (US$) |
|
|
|
|
|
|
|
|
High |
$ |
9.30 |
$ |
9.48 |
$ |
9.19 |
$ |
9.88 |
Low |
$ |
7.78 |
$ |
7.85 |
$ |
6.90 |
$ |
7.42 |
Close |
$ |
9.27 |
$ |
8.93 |
$ |
8.16 |
$ |
9.69 |
Volume (000s) |
|
75,349 |
|
83,855 |
|
85,031 |
|
80,146 |
Forward-looking information
This MD&A contains forward-looking information
under applicable securities legislation. Statements which
include forward-looking information relate to future events or
Provident's future performance. Such forward-looking information is
provided for the purpose of providing information about
management's current expectations and plans relating to the future.
Readers are cautioned that reliance on such information may not be
appropriate for other purposes, such as making investment
decisions. All statements other than statements of historical fact
are forward-looking information. In some cases, forward-looking
information can be identified by terminology such as "may", "will",
"should", "expect", "plan", "anticipate", "believe", "estimate",
"predict", "potential", "continue", or the negative of these terms
or other comparable terminology. Forward-looking information in
this MD&A includes, but is not limited to, business strategy
and objectives, capital expenditures, acquisition and disposition
plans and the timing thereof, operating and other costs, budgeted
levels of cash dividends and the performance associated with
Provident's natural gas midstream, NGL processing and marketing
business. Specifically, the "Outlook" section in this MD&A may
contain forward-looking information about prospective results of
operations, financial position or cash flows of Provident.
Forward-looking information is based on current expectations,
estimates and projections that involve a number of risks and
uncertainties which could cause actual events or results to differ
materially from those anticipated by Provident and described in the
forward-looking information. In addition, this MD&A may contain
forward-looking information attributed to third party industry
sources. Undue reliance should not be placed on forward-looking
information, as there can be no assurance that the plans,
intentions or expectations upon which they are based will occur. By
its nature, forward-looking information involves numerous
assumptions, known and unknown risks and uncertainties, both
general and specific, that contribute to the possibility that the
predictions, forecasts, projections and other forward-looking
information will not occur. Forward-looking information in this
MD&A includes, but is not limited to, statements with respect
to:
- Provident's ability to benefit from the combination of growth
opportunities and the ability to grow through the capital
markets;
- Provident's acquisition strategy, the criteria to be considered
in connection therewith and the benefits to be derived
therefrom;
- the special meeting dates in respect of the Pembina
Arrangement;
- the anticipated closing date of the Pembina Arrangement;
- the offer by Pembina for Provident's convertible debentures
following the Pembina Arrangement;
- the emergence of accretive growth opportunities;
- the ability to achieve an appropriate level of monthly cash
dividends;
- the impact of Canadian governmental regulation on
Provident;
- the existence, operation and strategy of the market risk
management program;
- the approximate and maximum amount of forward sales and hedging
to be employed;
- changes in oil, natural gas and NGL prices and the impact of
such changes on cash flow after financial derivative
instruments;
- the level of capital expenditures;
- currency, exchange and interest rates;
- the performance characteristics of Provident's business;
- the growth opportunities associated with the Provident's
business;
- the availability and amount of tax pools available to offset
Provident's cash taxes; and
- the nature of contractual arrangements with third parties in
respect of Provident's business.
Although Provident believes that the expectations
reflected in the forward-looking information are reasonable, there
can be no assurance that such expectations will prove to be
correct. Provident cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither Provident
nor any other person assumes responsibility for the accuracy and
completeness of the forward-looking information. Some of the risks
and other factors, some of which are beyond Provident's control,
which could cause results to differ materially from those expressed
in the forward-looking information contained in this MD&A
include, but are not limited to:
- general economic and credit conditions in Canada, the United
States and globally;
- industry conditions associated with the NGL services,
processing and marketing business;
- fluctuations in the price of crude oil, natural gas and natural
gas liquids;
- interest payable on notes issued in connection with
acquisitions;
- governmental regulation in North
America of the energy industry, including income tax and
environmental regulation;
- fluctuation in foreign exchange or interest rates;
- stock market volatility and market valuations;
- the impact of environmental events;
- the need to obtain required approvals from regulatory
authorities;
- unanticipated operating events;
- failure to realize the anticipated benefits of
acquisitions;
- competition for, among other things, capital reserves and
skilled personnel;
- failure to obtain industry partner and other third party
consents and approvals, when required;
- risks associated with foreign ownership;
- third party performance of obligations under contractual
arrangements;
- failure to complete the Pembina Arrangement; and
- the other factors set forth under "Business risks" in this
MD&A.
Readers are cautioned that the foregoing list is
not exhaustive of all possible risks and uncertainties. With
respect to developing forward-looking information contained in this
MD&A, Provident has made assumptions regarding, among other
things:
- future natural gas, crude oil and NGL prices;
- the ability of Provident to obtain qualified staff and
equipment in a timely and cost-efficient manner to meet
demand;
- the regulatory framework regarding royalties, taxes and
environmental matters in which Provident conducts its
business;
- the impact of increasing competition;
- Provident's ability to obtain financing on acceptable
terms;
- the general stability of the economic and political environment
in which Provident operates;
- the timely receipt of any required regulatory approvals;
- the timing and costs of pipeline, storage and facility
construction and expansion and the ability of Provident to secure
adequate product transportation;
- currency, exchange and interest rates;
- certain matters relating to the Pembina Arrangement;
- timely receipt of required regulatory and court approvals in
respect of the Pembina Arrangement;
- the satisfaction of closing conditions in respect of the
Pembina Arrangement; and
- the ability of Provident to successfully market its NGL
products.
Readers are cautioned that the foregoing list is
not exhaustive of all factors and assumptions which have been
used. Forward-looking information contained in this MD&A
is made as of the date hereof and Provident undertakes no
obligation to update publicly or revise any forward-looking
information, whether as a result of new information, future events
or otherwise, unless required by applicable securities laws. The
forward-looking information contained in this MD&A is expressly
qualified by this cautionary statement.
Additional information
Additional information concerning Provident can be
accessed under Provident's public filings at www.sedar.com
and www.sec.gov/edgar.shtml, as well as on Provident's website at
www.providentenergy.com.
Selected annual financial measures
($ 000s except per share data) |
|
2011 |
|
2010 |
|
2009 (3) |
Product sales and service revenue |
$ |
1,955,878 |
$ |
1,746,557 |
$ |
1,630,491 |
Net income (loss) |
|
97,217 |
|
(10,506) |
|
(89,020) |
|
Per share - basic and diluted (1) |
|
0.36 |
|
(0.04) |
|
(0.34) |
Total assets |
|
1,588,692 |
|
1,446,453 |
|
2,548,015 |
Long-term financial liabilities (2) |
|
662,846 |
|
430,826 |
|
682,625 |
Declared dividends per share |
$ |
0.54 |
$ |
0.72 |
$ |
0.75 |
(1) Includes dilutive impact of
convertible debentures. |
|
|
|
|
|
|
(2) Includes long-term debt,
decommissioning liabilities, long-term financial derivative
instruments and other long-term liabilities. |
(3) The financial information for 2009
is presented in previous Canadian GAAP as this period is prior to
the January 1, 2010 transition date for IFRS. |
Quarterly table
Financial information by quarter
(IFRS) |
|
|
|
|
|
|
|
|
|
|
($ 000s except for per share and
operating amounts) |
2011 |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Annual |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Product sales and service revenue |
$ |
519,100 |
$ |
416,382 |
$ |
450,849 |
$ |
569,547 |
$ |
1,955,878 |
Funds flow from continuing operations
(1) |
$ |
53,585 |
$ |
43,490 |
$ |
62,790 |
$ |
92,767 |
$ |
252,632 |
Funds flow from continuing operations
per share |
|
|
|
|
|
|
|
|
|
|
|
- basic and diluted (4) |
$ |
0.20 |
$ |
0.16 |
$ |
0.23 |
|
0.34 |
$ |
0.93 |
Adjusted EBITDA - continuing
operations (2) |
$ |
61,242 |
$ |
51,298 |
$ |
69,528 |
$ |
100,360 |
$ |
282,428 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted funds flow from
continuing operations (3) |
$ |
53,585 |
$ |
43,490 |
$ |
62,790 |
$ |
92,767 |
$ |
252,632 |
Adjusted funds flow from
continuing operations per share |
|
|
|
|
|
|
|
|
|
|
|
- basic and diluted (4) |
$ |
0.20 |
$ |
0.16 |
$ |
0.23 |
$ |
0.34 |
$ |
0.93 |
Adjusted EBITDA excluding buyout of
financial derivative
instruments and strategic review and restructuring
costs |
|
|
|
|
|
|
|
|
|
|
|
- continuing operations (2) |
$ |
61,242 |
$ |
51,298 |
$ |
69,528 |
$ |
100,360 |
$ |
282,428 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
$ |
(11,985) |
$ |
40,219 |
$ |
48,398 |
$ |
20,585 |
$ |
97,217 |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
- basic and diluted (4) |
$ |
(0.04) |
$ |
0.15 |
$ |
0.18 |
$ |
0.08 |
$ |
0.36 |
Shareholder dividends |
$ |
36,324 |
$ |
36,449 |
$ |
36,609 |
$ |
36,905 |
$ |
146,287 |
Dividends per share |
$ |
0.14 |
$ |
0.14 |
$ |
0.14 |
$ |
0.14 |
$ |
0.54 |
Provident Midstream NGL sales volumes
(bpd) |
|
116,864 |
|
91,872 |
|
94,709 |
|
115,714 |
|
104,759 |
(1) Based on cash flow
from operations before changes in working capital - see
"Reconciliation of Non-GAAP measures".
|
(2) Adjusted EBITDA is
earnings before interest, taxes, depreciation, amortization, and
other non-cash items - see "Reconciliation of Non-GAAP
measures". |
(3) Adjusted funds flow
from continuing operations excludes realized loss on buyout of
financial derivative instruments and strategic review and
restructuring costs. |
(4) Includes dilutive
impact of convertible debentures. |
Quarterly table
Financial information by quarter
(IFRS) |
|
|
|
|
|
|
|
|
|
|
($ 000s except for per unit and
operating amounts) |
2010 |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Annual |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Product sales and service revenue |
$ |
472,940 |
$ |
366,125 |
$ |
363,767 |
$ |
543,725 |
$ |
1,746,557 |
Funds flow from continuing operations
(1) |
$ |
46,839 |
$ |
(171,334) |
$ |
43,642 |
$ |
74,133 |
$ |
(6,720) |
Funds flow from continuing operations
per unit |
|
|
|
|
|
|
|
|
|
|
|
- basic |
$ |
0.18 |
$ |
(0.65) |
$ |
0.16 |
|
0.28 |
$ |
(0.03) |
|
- diluted |
$ |
0.18 |
$ |
(0.65) |
$ |
0.16 |
|
0.27 |
$ |
(0.03) |
Adjusted EBITDA - continuing
operations (2) |
$ |
51,442 |
$ |
(176,403) |
$ |
52,538 |
$ |
86,342 |
$ |
13,919 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted funds flow from
continuing operations (3) |
$ |
47,325 |
$ |
39,152 |
$ |
43,642 |
$ |
76,002 |
$ |
206,121 |
Adjusted funds flow from continuing
operations per unit |
|
|
|
|
|
|
|
|
|
|
|
- basic |
$ |
0.18 |
$ |
0.15 |
$ |
0.16 |
|
0.28 |
$ |
0.77 |
|
- diluted (4) |
$ |
0.18 |
$ |
0.15 |
$ |
0.16 |
|
0.27 |
$ |
0.77 |
Adjusted EBITDA excluding buyout of
financial derivative instruments and strategic
review and restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
- continuing operations (2) |
$ |
51,928 |
$ |
34,083 |
$ |
52,538 |
$ |
88,211 |
$ |
226,760 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
$ |
(50,921) |
$ |
(40,944) |
$ |
8,979 |
$ |
72,380 |
$ |
(10,506) |
Net (loss) income per unit |
|
|
|
|
|
|
|
|
|
|
|
- basic |
$ |
(0.19) |
$ |
(0.15) |
$ |
0.03 |
|
0.27 |
$ |
(0.04) |
|
- diluted (4) |
$ |
(0.19) |
$ |
(0.15) |
$ |
0.03 |
|
0.26 |
$ |
(0.04) |
Unitholder distributions |
$ |
47,634 |
$ |
47,794 |
$ |
47,990 |
$ |
48,221 |
$ |
191,639 |
Distributions per unit |
$ |
0.18 |
$ |
0.18 |
$ |
0.18 |
|
0.18 |
$ |
0.72 |
Provident Midstream NGL sales volumes
(bpd) |
|
113,279 |
|
94,030 |
|
95,388 |
|
121,627 |
|
106,075 |
(1) Based on cash flow
from operations before changes in working capital and site
restoration expenditures - see "Reconciliation of Non-GAAP
measures". |
(2) Adjusted EBITDA is
earnings before interest, taxes, depreciation, amortization, and
other non-cash items - see "Reconciliation of Non-GAAP
measures". |
(3) Adjusted funds flow
from continuing operations excludes realized loss on buyout of
financial derivative instruments and strategic review and
restructuring costs. |
(4) Includes dilutive
impact of convertible debentures. |
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The management of Provident is responsible for
establishing and maintaining adequate internal control over
financial reporting for the Company. Under the supervision of
our Chief Executive Officer and our Chief Financial Officer we have
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our
assessment, we have concluded that as of December 31, 2011, our internal control over
financial reporting was effective.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
The effectiveness of the Company's internal control
over financial reporting as of December 31,
2011, has been audited by PricewaterhouseCoopers LLP,
independent auditors, as stated in their report which appears
herein.
"Signed" |
|
|
|
|
|
"Signed" |
|
|
|
|
|
|
|
Douglas J. Haughey
Chief Executive Officer |
|
|
|
|
|
Brent C. Heagy
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calgary, Alberta
March 6, 2012 |
|
|
|
|
|
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL
STATEMENTS
The management of Provident is responsible for the
information included in the consolidated financial statements and
Management's Discussion and Analysis. The financial
statements have been prepared in accordance with accounting
principles generally accepted in Canada and in accordance with accounting
policies detailed in the notes to the financial statements.
Where necessary, the statements include amounts based on
management's informed judgments and estimates. Financial
information in Management's Discussion and Analysis is consistent
with that presented in the financial statements.
PricewaterhouseCoopers LLP, Chartered Accountants,
appointed by the shareholders, have audited the financial
statements and conducted a review of internal accounting policies
and procedures to the extent required by generally accepted
auditing standards, and performed such tests as they deemed
necessary to enable them to express an opinion on the financial
statements.
The Board of Directors, through its Audit
Committee, is responsible for ensuring that management fulfills its
responsibility for financial reporting and internal control.
The Audit Committee is composed of three independent
directors. The Audit Committee reviews the financial
statements and Management's Discussion and Analysis and reports its
findings to the Board of Directors for its consideration in
approving the financial statements.
"Signed" |
|
|
|
|
|
"Signed" |
|
|
|
|
|
|
|
Douglas J. Haughey
Chief Executive Officer |
|
|
|
|
|
Brent C. Heagy
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calgary, Alberta
March 6, 2012 |
|
|
|
|
|
|
PROVIDENT ENERGY LTD. |
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION |
|
|
|
|
|
Canadian dollars (000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at |
|
As at |
|
As at |
|
|
December 31, |
|
December 31, |
|
January 1, |
|
|
2011 |
|
2010 |
|
2010 |
Assets |
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
- |
$ |
4,400 |
$ |
7,187 |
|
Accounts receivable |
|
230,457 |
|
206,631 |
|
216,786 |
|
Petroleum product inventory (note 7) |
|
147,378 |
|
106,653 |
|
58,779 |
|
Prepaid expenses and other current
assets |
|
4,559 |
|
2,539 |
|
4,803 |
|
Financial derivative instruments (note 16) |
|
4,571 |
|
487 |
|
5,314 |
|
Assets held for sale (note 23) |
|
- |
|
- |
|
186,411 |
|
|
386,965 |
|
320,710 |
|
479,280 |
Non-current assets |
|
|
|
|
|
|
|
Investments |
|
- |
|
- |
|
18,733 |
|
Exploration and evaluation assets (note 23) |
|
- |
|
- |
|
24,739 |
|
Property, plant and equipment (note 8) |
|
984,217 |
|
833,790 |
|
1,422,156 |
|
Intangible assets (note 9) |
|
107,118 |
|
118,845 |
|
132,478 |
|
Goodwill (note 10) |
|
107,430 |
|
100,409 |
|
100,409 |
|
Deferred income taxes (note 15) |
|
2,962 |
|
72,699 |
|
- |
|
$ |
1,588,692 |
$ |
1,446,453 |
$ |
2,177,795 |
Liabilities |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
$ |
276,480 |
$ |
227,944 |
$ |
221,417 |
|
Cash dividends payable |
|
8,353 |
|
12,646 |
|
13,468 |
|
Current portion of long-term debt (note 11) |
|
9,199 |
|
148,981 |
|
- |
|
Financial derivative instruments (note 16) |
|
56,901 |
|
37,849 |
|
86,441 |
|
Liabilities held for sale (note 23) |
|
- |
|
- |
|
2,792 |
|
|
350,933 |
|
427,420 |
|
324,118 |
Non-current liabilities |
|
|
|
|
|
|
|
Long-term debt - bank facilities and other (note
11) |
|
184,936 |
|
72,882 |
|
264,776 |
|
Long-term debt - convertible debentures (note
11) |
|
315,786 |
|
251,891 |
|
240,486 |
|
Decommissioning liabilities (note 12) |
|
85,055 |
|
57,232 |
|
127,800 |
|
Long-term financial derivative instruments (notes
11 and 16) |
|
52,373 |
|
29,187 |
|
103,403 |
|
Other long-term liabilities (notes 12 and 14) |
|
20,551 |
|
19,634 |
|
12,496 |
|
Deferred income taxes (note 15) |
|
- |
|
- |
|
37,765 |
|
Commitments (note 21) |
|
|
|
|
|
|
|
|
1,009,634 |
|
858,246 |
|
1,110,844 |
|
|
|
|
|
|
|
Shareholders' equity |
|
|
|
|
|
|
Equity attributable to owners of the
parent |
|
|
|
|
|
|
|
Share capital (note 13) |
|
2,911,024 |
|
- |
|
- |
|
Unitholders' contributions (note 13) |
|
- |
|
2,866,268 |
|
2,834,177 |
|
Other equity |
|
(8,370) |
|
684 |
|
684 |
|
Accumulated deficit |
|
(2,328,241) |
|
(2,278,745) |
|
(1,767,910) |
|
|
574,413 |
|
588,207 |
|
1,066,951 |
|
Non-controlling interest (note 6) |
|
4,645 |
|
- |
|
- |
|
|
579,058 |
|
588,207 |
|
1,066,951 |
|
$ |
1,588,692 |
$ |
1,446,453 |
$ |
2,177,795 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
On behalf of the Board of Directors:
"Signed" |
"Signed" |
|
John B. Zaozirny, Q.C. |
Grant D. Billing, CA |
Director |
Director |
PROVIDENT ENERGY LTD. |
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) |
|
Canadian dollars (000s except per share
amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended |
|
|
December 31, |
|
|
2011 |
|
2010 |
|
|
|
Product sales and service revenue
(note 18) |
$ |
1,955,878 |
$ |
1,746,557 |
Realized loss on buyout of financial
derivative instruments (note 16) |
|
- |
|
(199,059) |
Unrealized gain offsetting buyout of
financial derivative instruments (note 16) |
|
- |
|
177,723 |
Loss on financial derivative
instruments (note 16) |
|
(69,756) |
|
(103,464) |
|
|
1,886,122 |
|
1,621,757 |
|
|
|
|
|
Expenses |
|
|
|
|
|
Cost of goods sold (note 7) |
|
1,517,070 |
|
1,396,635 |
|
Production, operating and maintenance |
|
37,432 |
|
18,504 |
|
Transportation |
|
20,001 |
|
18,442 |
|
Depreciation and amortization |
|
43,630 |
|
44,475 |
|
General and administrative (note 14) |
|
51,059 |
|
36,671 |
|
Strategic review and restructuring (note 22) |
|
- |
|
13,782 |
|
Financing charges |
|
41,282 |
|
32,251 |
|
Loss on revaluation of conversion feature of
convertible debentures
and redemption liability (note 16) |
|
17,469 |
|
433 |
|
Other income and foreign exchange (note 20) |
|
(7,524) |
|
(3,826) |
|
|
1,720,419 |
|
1,557,367 |
|
|
|
|
|
Income from continuing operations
before taxes |
|
165,703 |
|
64,390 |
|
|
|
|
|
Current tax expense (recovery) (note
15) |
|
654 |
|
(6,956) |
Deferred tax expense (recovery) (note
15) |
|
67,832 |
|
(40,871) |
|
|
68,486 |
|
(47,827) |
Net income and comprehensive income
from continuing operations |
|
97,217 |
|
112,217 |
Net income (loss) and comprehensive
income (loss) from discontinued
operations (note 23) |
|
- |
|
(122,723) |
Net income (loss) and
comprehensive income (loss) |
$ |
97,217 |
$ |
(10,506) |
|
|
|
|
|
Net income (loss) and
comprehensive income (loss) attributable to: |
|
|
|
|
|
Owners of the parent |
$ |
96,791 |
$ |
(10,506) |
|
Non-controlling interest |
|
426 |
|
- |
|
$ |
97,217 |
$ |
(10,506) |
|
|
|
|
|
Per share amounts attributable to
the equity holders of the Company:
Net income per share from continuing operations |
|
|
|
|
|
- basic and diluted |
$ |
0.36 |
$ |
0.42 |
Net income (loss) per share |
|
|
|
|
|
- basic and diluted |
$ |
0.36 |
$ |
(0.04) |
The accompanying notes are an integral part of these
consolidated financial statements.
PROVIDENT ENERGY LTD. |
|
|
|
|
CONSOLIDATED STATEMENTS OF
CASH FLOWS |
|
|
|
|
Canadian dollars (000s) |
|
|
|
|
|
|
|
|
|
Year ended |
|
|
December 31, |
|
|
2011 |
|
2010 |
Cash provided by (used in) operating
activities |
|
|
|
|
|
Net income for the year from
continuing operations |
$ |
97,217 |
$ |
112,217 |
|
Add (deduct) non-cash items: |
|
|
|
|
|
|
Depreciation and amortization |
|
43,630 |
|
44,475 |
|
|
Non-cash financing charges and other |
|
8,603 |
|
7,956 |
|
|
Loss on purchase of convertible debentures (note
11) |
|
3,342 |
|
- |
|
|
Non-cash share based compensation expense |
|
12,469 |
|
1,280 |
|
|
Unrealized gain offsetting buyout
of financial derivative instruments
(note 16) |
|
- |
|
(177,723) |
|
|
Unrealized loss on financial derivative
instruments (note 16) |
|
3,235 |
|
52,599 |
|
|
Loss on revaluation of conversion
feature of convertible debentures
and redemption liability (note 16) |
|
17,469 |
|
433 |
|
|
Unrealized foreign exchange gain and other (note
20) |
|
(414) |
|
(3,786) |
|
|
Loss (gain) on sale of assets (note 20) |
|
1 |
|
(3,300) |
|
|
Deferred tax expense (recovery) |
|
67,832 |
|
(40,871) |
|
Continuing operations |
|
253,384 |
|
(6,720) |
|
Discontinued operations |
|
- |
|
(2,436) |
|
|
253,384 |
|
(9,156) |
|
Site restoration expenditures related
to discontinued operations |
|
- |
|
(2,041) |
|
Change in non-cash operating working
capital |
|
(33,145) |
|
(28,472) |
|
|
220,239 |
|
(39,669) |
|
|
|
|
|
Cash used for financing
activities |
|
|
|
|
|
Issuance of convertible debentures,
net of issue costs (note 11) |
|
164,950 |
|
164,654 |
|
Repayment of debentures (note 11) |
|
(249,784) |
|
- |
|
Increase (decrease) in long-term
debt |
|
109,893 |
|
(192,380) |
|
Declared dividends to
shareholders |
|
(146,287) |
|
(191,639) |
|
Issue of shares, net of issue costs
(note 13) |
|
37,101 |
|
32,091 |
|
Change in non-cash financing working
capital |
|
(4,293) |
|
(822) |
|
|
(88,420) |
|
(188,096) |
|
|
|
|
|
Cash (used for) provided by
investing activities |
|
|
|
|
|
Capital expenditures |
|
(134,115) |
|
(70,218) |
|
Acquisition (note 6) |
|
(7,852) |
|
- |
|
Proceeds on sale of assets |
|
3 |
|
3,300 |
|
Proceeds on sale of discontinued
operations (note 23) |
|
- |
|
106,779 |
|
Change in non-cash investing working
capital |
|
5,745 |
|
14,407 |
|
Investing activities from discontinued
operations |
|
- |
|
170,710 |
|
|
(136,219) |
|
224,978 |
|
|
|
|
|
Decrease in cash and cash
equivalents |
|
(4,400) |
|
(2,787) |
Cash and cash equivalents,
beginning of year |
|
4,400 |
|
7,187 |
Cash and cash equivalents, end
of year |
$ |
- |
$ |
4,400 |
|
|
|
|
|
|
Supplemental disclosure of cash flow
information |
|
|
|
|
|
Cash interest paid including debenture
interest |
$ |
35,307 |
$ |
25,448 |
|
Cash taxes received |
$ |
(1,465) |
$ |
(2,576) |
The accompanying notes are an integral part of these
consolidated financial statements.
PROVIDENT ENERGY LTD. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CHANGES
IN EQUITY |
|
|
|
|
|
|
|
|
Canadian Dollars (000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
capital |
|
Unitholders'
contributions |
|
Other
equity |
|
Accumulated
deficit |
|
Subtotal |
|
Non-controlling
interest |
|
Total
equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2010 |
$ |
- |
$ |
2,866,268 |
$ |
684 |
$ |
(2,278,745) |
$ |
588,207 |
$ |
- |
$ |
588,207 |
Cancelled on conversion to a corporation
effective January 1, 2011 (note 13) |
|
|
|
(2,866,268) |
|
|
|
|
|
(2,866,268) |
|
|
|
(2,866,268) |
Issued on conversion to a corporation
effective January 1, 2011 (note 13) |
|
2,866,268 |
|
|
|
|
|
|
|
2,866,268 |
|
|
|
2,866,268 |
Equity associated with redemption liability
of
non wholly-owned subsidiary (note 6) |
|
|
|
|
|
(9,054) |
|
|
|
(9,054) |
|
|
|
(9,054) |
Non-controlling interest on acquisition (note
6) |
|
|
|
|
|
|
|
|
|
|
|
4,219 |
|
4,219 |
Net income and comprehensive income for the
year |
|
|
|
|
|
|
96,791 |
|
96,791 |
|
426 |
|
97,217 |
Proceeds on issuance of shares (note 13) |
|
37,124 |
|
|
|
|
|
|
|
37,124 |
|
|
|
37,124 |
Shares issued on acquisition of subsidiary
(notes 6 and 13) |
|
7,606 |
|
|
|
|
|
|
|
7,606 |
|
|
|
7,606 |
Debenture conversions (notes 11 and 13) |
|
49 |
|
|
|
|
|
|
|
49 |
|
|
|
49 |
Dividends |
|
|
|
|
|
|
|
(146,287) |
|
(146,287) |
|
|
|
(146,287) |
Share issue costs |
|
(23) |
|
|
|
|
|
|
|
(23) |
|
|
|
(23) |
Balance - December 31, 2011 |
$ |
2,911,024 |
$ |
- |
$ |
(8,370) |
$ |
(2,328,241) |
$ |
574,413 |
$ |
4,645 |
$ |
579,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2010 |
$ |
- |
$ |
2,834,177 |
$ |
684 |
$ |
(1,767,910) |
$ |
1,066,951 |
$ |
- |
$ |
1,066,951 |
Net loss and comprehensive loss for the period |
|
|
|
|
|
|
|
(10,506) |
|
(10,506) |
|
|
|
(10,506) |
Proceeds on issuance of trust units |
|
|
|
32,091 |
|
|
|
|
|
32,091 |
|
|
|
32,091 |
Cash distributions |
|
|
|
|
|
|
|
(191,639) |
|
(191,639) |
|
|
|
(191,639) |
Capital distribution in connection with the sale
of the Upstream business (note 23) |
|
|
|
|
|
|
|
(308,690) |
|
(308,690) |
|
|
|
(308,690) |
Balance - December 31, 2010 |
$ |
- |
$ |
2,866,268 |
$ |
684 |
$ |
(2,278,745) |
$ |
588,207 |
$ |
- |
$ |
588,207 |
The accompanying notes are an integral part of these
consolidated financial statements.
Notes to the Consolidated
Financial Statements
(Tabular amounts in Cdn $ 000s, except
share and per share amounts)
December 31,
2011
1. Structure of the Company
Provident Energy Ltd. (the "Company" or
"Provident") is incorporated under the Business Corporations Act
(Alberta) and domiciled in
Canada. The address of its
registered office is 2100, 250 - 2nd Street S.W. Calgary, Alberta. Provident owns and
manages a natural gas liquids ("NGL") midstream business and was
established as a result of the conversion from an income trust
structure, Provident Energy Trust (the "Trust"), to a corporate
structure pursuant to a plan of arrangement. The conversion
resulted in the reorganization of the Trust into a publicly traded,
dividend-paying corporation under the name "Provident Energy Ltd."
effective January 1, 2011. Under the
plan of arrangement, former holders of trust units of the Trust
received one common share in Provident Energy Ltd. in exchange for
each trust unit held in the Trust.
Pursuant to the conversion, the Company acquired,
directly and indirectly, the same assets and business that the
Trust owned immediately prior to the effective time of the
conversion and assumed all of the obligations of the Trust.
In accordance with the conversion, the Trust was dissolved
effective January 1, 2011 and
thereafter ceased to exist. The principal undertakings of
Provident Energy Ltd. and its predecessor Provident Energy Trust
are collectively referred to as "the Company" or "Provident" and
include the accounts of Provident and its subsidiaries and
partnerships.
The conversion was accounted for on a continuity of
interests basis. Accordingly, the consolidated financial
statements reflect the financial position, results of operations
and cash flows as if Provident Energy Ltd. had always carried on
the business formerly carried on by the Trust. As a result of
Provident's conversion from an income trust to a corporation,
effective January 1, 2011, references
to "common shares", "shares", "share based compensation",
"shareholders", "performance share units", "PSUs", "restricted
share units", "RSUs", "premium dividend and dividend reinvestment
share purchase (DRIP) plan", and "dividends" were formerly referred
to as "trust units", "units", "unit based compensation",
"unitholders", "performance trust units", "PTUs", "restricted trust
units", "RTUs", "premium distribution, distribution reinvestment
(DRIP) and optional unit purchase plan", and "distributions",
respectively, for periods prior to January
1, 2011.
2. Basis of preparation and adoption of IFRS
The Company prepares its financial statements in
accordance with Canadian generally accepted accounting principles
as set out in the Handbook of the Canadian Institute of Chartered
Accountants ("CICA Handbook"). In 2010, the CICA Handbook was
revised to incorporate International Financial Reporting Standards
as issued by the International Accounting Standards Board ("IFRS"),
and requires publicly accountable enterprises to apply such
standards effective for years beginning on or after January 1, 2011. Accordingly, the Company
commenced reporting on this basis in the March 31, 2011 interim consolidated financial
statements and for periods thereafter. In the financial
statements, the term "Canadian GAAP" refers to Canadian GAAP before
the adoption of IFRS.
These consolidated financial statements have been
prepared in accordance with IFRS. Subject to certain transition
elections disclosed in note 5, the Company has consistently applied
the same accounting policies in its opening IFRS statement of
financial position at January 1, 2010
and throughout all of the periods presented, as if these policies
had always been in effect. Note 5 discloses the impact of the
transition to IFRS on the Company's reported financial position and
financial performance, including the nature and effect of
significant changes in accounting policies from those used in the
Company's consolidated financial statements for the year ended
December 31, 2010.
The policies applied in these consolidated
financial statements are based on IFRS issued and outstanding as of
March 6, 2012, the date the Board of
Directors approved the statements.
3. Significant accounting policies
The following accounting policies apply to the
continuing operations of the Company. Policies applicable to the
former Upstream oil and gas operations are disclosed in note 23 -
Discontinued operations.
i) |
Principles of
consolidation |
|
|
The consolidated
financial statements include the accounts of Provident Energy Ltd.
and all direct and indirect subsidiaries and partnerships which
Provident controls by having the power to govern the financial and
operating policies. These entities are fully consolidated
from the date on which control is obtained by Provident. All
intercompany transactions, balances, income and expenses, profits
and losses and unrealized gains and losses from intercompany
transactions are eliminated on consolidation. |
|
|
Non-controlling interests
represent equity interests in subsidiaries owned by outside
parties. The share of net assets of subsidiaries attributable to
non-controlling interests is presented as a separate component of
equity. Their share of net income and comprehensive income is also
recognized in this separate component of equity. Changes in the
Company's ownership interest in subsidiaries that do not result in
a loss of control are accounted for as equity transactions. |
|
ii) |
Financial
instruments |
|
|
Financial assets and
liabilities are classified as financial assets or liabilities at
fair value through profit or loss, loans and receivables, held to
maturity investments, available for sale financial assets, or other
financial liabilities, as appropriate. When financial assets
and liabilities are initially recognized, they are measured at fair
value. |
|
|
Provident determines the
classification of its financial assets at initial recognition. The
Company's financial assets include cash and cash equivalents,
accounts receivable, financial derivative instruments and
investments. |
|
|
Financial
Assets |
|
|
a) |
Financial
assets at fair value through profit
or loss |
|
|
|
Financial assets at fair value through profit or
loss includes financial assets held for trading and financial
assets designated upon initial recognition at fair value through
profit or loss. Financial assets are classified as held for
trading if they are acquired for the purpose of selling in the near
term. The Company's financial derivative instruments,
including embedded derivatives, are also classified as held for
trading. Gains or losses on financial derivative instruments
are recognized in profit or loss. |
|
|
b) |
Loans and receivables |
|
|
|
Loans and receivables are non-derivative financial
assets with fixed or determinable payments that are not quoted in
an active market. After initial measurement, loans and
receivables are subsequently carried at amortized cost using the
effective interest method less any allowance for impairment.
Amortized cost is calculated taking into account any discount or
premium on acquisition and includes fees that are an integral part
of the effective interest rate and transaction costs. Gains
and losses are recognized in the income statements when the loans
and receivables are derecognized or impaired, as well as through
the amortization process. The Company's cash and cash
equivalents and accounts receivables are included in this financial
asset category. |
|
|
|
|
Financial
Liabilities |
|
|
a) |
Financial liabilities at fair value
through profit or loss |
|
|
|
Financial liabilities at fair value include
financial liabilities held for trading and financial liabilities
designated upon initial recognition at fair value through profit or
loss. Financial liabilities are classified as held for trading if
they are acquired for the purpose of selling in the near
term. Financial derivative instruments, including embedded
derivatives, are also classified as held for trading. Gains
and losses on liabilities held for trading are recognized in profit
and loss. |
|
|
b) |
Other financial liabilities |
|
|
|
Other liabilities are recorded initially at fair
value of the consideration received less any related transaction
costs. Subsequent to initial recognition, the balances are
measured at amortized cost using the effective interest
method. Gains and losses are recognized in the income
statement when the liabilities are derecognized and through
amortization expense recorded as financing charges. The
Company's accounts payable, accrued liabilities other than share
based compensation, cash dividends payable, long-term debt and
convertible debentures are included within this financial liability
category (also see item xiv). |
|
iii) |
Property, plant &
equipment |
|
|
The initial cost of an
asset comprises its purchase price or construction costs directly
attributable to bringing the asset into operation, the initial
estimate of the decommissioning obligation, and for qualifying
assets, borrowing costs. The purchase price or construction cost is
the aggregate amount paid and the fair value of any other
consideration given to acquire the asset. Gains and losses on
disposal of an item of property, plant and equipment are determined
by comparing the proceeds from disposal with the carrying amount of
property, plant and equipment and are recognized net in profit or
loss. |
|
|
Midstream
assets |
|
|
Midstream facilities,
including natural gas liquids storage facilities and natural gas
liquids processing and extraction facilities are carried at cost
less accumulated depreciation and accumulated impairment losses and
are depreciated at a component level on a straight-line basis over
the estimated service lives of the assets, which range from 25 to
35 years. Capital assets related to pipelines are carried at
cost less accumulated depreciation and accumulated impairment
losses and are depreciated at a component level using the
straight-line method over their economic lives of approximately 35
years. Vehicles and equipment of the Company's subsidiary,
Three Star Trucking Ltd. are carried at cost less accumulated
depreciation and accumulated impairment losses, and are depreciated
on a 20 percent declining balance basis over their estimated useful
lives. |
|
|
Minimum NGL product
and cavern bottoms |
|
|
The minimum NGL product
is the minimum volume of NGL product needed as a permanent
inventory to maintain adequate reservoir pressures and
deliverability rates throughout the withdrawal season within the
Company's owned assets. All tanks, caverns or other storage
reservoirs require a minimum level of product to maintain a minimum
pressure. Below this minimum pressure, products cannot be
readily extracted for sale. Minimum NGL product and cavern bottoms
within the Company's owned assets are presented as part of
Midstream assets within property, plant and equipment and are not
depreciated. |
|
|
Pipeline
fills |
|
|
Pipeline fills represent
the petroleum based product purchased for the purpose of charging
the pipeline system and partially filling the petroleum product
storage tanks with an appropriate volume of petroleum products to
enable the commercial operation of the facilities and pipeline for
all Company owned pipelines and tanks. Pipeline fills within
Provident's pipelines are presented as part of Midstream assets
within property, plant and equipment and are not depreciated.
Holdings of pipeline fills in third party carriers are recorded as
product inventory. |
|
|
Office equipment
and other |
|
|
Office equipment and
other assets are carried at cost less accumulated depreciation and
accumulated impairment losses and are generally depreciated on a
straight-line basis over their estimated useful lives. The
estimated useful lives for office equipment and other assets are as
follows: |
|
|
Office
equipment 5
- 6 years
Computer hardware & software 3 - 4
years
Leasehold improvement & other 10
years |
|
|
|
Major maintenance
and repairs, inspection, turnarounds
and derecognition |
|
|
Major maintenance and
turnarounds are tracked on a project basis and reviewed by
management for potential capitalization. These costs are
depreciated on a straight-line basis over a period which represents
the estimated period before the next planned maintenance or
turnaround. All other maintenance costs are expensed as incurred.
Expenditures on major maintenance or repairs comprise the cost of
replacement parts of assets, inspection costs and overhaul costs.
Where an asset or part of an asset that was separately depreciated
and is now written off is replaced and it is probable that future
economic benefits associated with the item will flow to the
Company, the expenditure is capitalized. In instances where
an asset part is not separately considered a component, the
replacement value is used to estimate the carrying amount of the
replaced assets, and the previous carrying amount is immediately
expensed. |
|
|
Impairment of
property, plant and equipment |
|
|
For operating assets, the
impairment test is performed at the cash generating unit level and
for office equipment and other assets, the impairment test is
performed at the individual asset level. A cash generating
unit is determined to be the smallest identifiable group of assets
that generates cash inflows that are largely independent of the
cash inflows from other assets or groups of assets. |
|
|
Values of assets are
reviewed for impairment when indicators of such impairment
exist. If any indication of impairment exists, an estimate of
the asset's recoverable amount is calculated. The recoverable
amount is determined as the higher of the fair value less costs to
sell for the asset and the asset's value in use. If the
carrying amount of the asset exceeds its recoverable amount, the
asset is deemed impaired and an impairment loss is recognized in
profit or loss so as to reduce the carrying amount of the asset to
its recoverable amount. |
|
|
For assets excluding
goodwill, an assessment is made at each reporting date as to
whether there is any indication that previously recognized
impairment losses may no longer exist or may have decreased.
If such indication exists, the Company makes an estimate of the
recoverable amount. A previously recognized impairment loss
is reversed only if there has been a change in the estimates used
to determine the asset's recoverable amount since the last
impairment loss was recognized. If that is the case, the
carrying amount of the asset is increased to its recoverable
amount. That increased amount cannot exceed the carrying
amount that would have been determined, net of depreciation, had no
impairment loss been recognized for the asset in prior years. Such
reversal is recognized in profit or loss. |
|
iv) |
Intangible
assets |
|
|
Intangible assets
acquired separately are recognized at cost upon initial
recognition. The cost of intangible assets acquired in a
business combination is fair value as at the date of
acquisition. Following initial recognition, the cost model is
applied requiring the intangible asset to be carried at cost less
any accumulated amortization and accumulated impairment
losses. Provident will assess whether the useful lives of
intangible assets are finite or indefinite. Intangible assets with
finite useful lives are assessed for impairment whenever there is
an indication that the intangible asset may be impaired and
amortized on a straight-line basis over the estimated useful lives
of the assets, which range from a period of 12 to 15 years. The
amortization expense of intangible assets with finite lives is
recognized in depreciation and amortization expense in profit or
loss. |
|
|
Gains or losses arising
from derecognition of an intangible asset are measured as the
difference between the net disposal proceeds, if any, and the
carrying amount of the asset and are recognized in profit or loss
when the asset is derecognized. |
|
v) |
Joint
arrangements |
|
|
A joint arrangement
exists when a contractual arrangement exists that establishes
shared decision making over the joint activities. Joint
control is defined as the contractually agreed sharing of the power
to govern the financial and operating policies of a venture so as
to obtain benefits from its activities. |
|
|
Joint
operations |
|
|
A joint operation
involves the use of assets and other resources of the Company and
other venturers rather than the establishment of a corporation,
partnership, or other entity. The Company recognizes in its
financial statements the assets it controls and the liabilities it
incurs and its share of the revenue and expenses from the sale of
goods or services by the joint operation arrangement. |
|
|
Joint
assets |
|
|
A joint asset involves
joint control and offers joint ownership by the Company and other
venturers of assets contributed to or acquired for the purpose of
the joint arrangement, without the formation of a corporation,
partnership, or other entity. The Company accounts for its
share of the joint assets, its share of jointly incurred
liabilities with other venturers, any revenue from the sale or use
of its share of the output of the joint asset, and any expenses
incurred in relation to its interest in the joint asset from the
sale of goods or services by the joint asset. |
|
|
vi) |
Leases |
|
|
Operating lease payments
are recognized as an expense in the statement of operations on a
straight-line basis over the lease term. |
|
vii) |
Borrowing
costs |
|
|
Borrowing costs directly
attributable to the construction of assets that take a substantial
period of time to get ready for their intended use are capitalized
as part of the cost of the respective assets. All other
borrowing costs are expensed in the period they occur. Borrowing
costs consist of interest and other costs that the Company incurs
in connection with the borrowing of funds. The capitalization
rate used to determine the amount of borrowing costs to be
capitalized is the weighted average interest rate applicable to the
Company's outstanding borrowings during the period. |
|
viii) |
Product
inventory |
|
|
Inventories of product
are valued at the lower of cost and net realizable value based on
market prices. Cost is determined using the weighted average
costing method and comprises direct purchase costs, costs of
production, extraction and fractionation costs, and transportation
costs. The amount of any write-down of inventories to net
realizable value and all losses of inventories are recognized as an
expense and included in cost of goods sold in the period the
write-down or loss occurs. Any reversals of write-downs are
also included in cost of goods sold. |
|
ix) |
Goodwill |
|
|
Goodwill is initially
measured at cost which represents the excess of the cost of an
acquired enterprise over the net of the amounts assigned to assets
acquired and liabilities assumed. After initial recognition,
goodwill is measured at cost less any accumulated impairment
losses. |
|
|
Goodwill does not
generate cash flows independently of other assets or groups of
assets, and often contributes to the cash flows of multiple cash
generating units. As a result, for the purpose of impairment
testing, goodwill is monitored at the operating business
level. |
|
|
When a cash generating
unit is disposed of, goodwill associated with the operation is
included in the carrying amount of the operation when determining
the gain or loss on disposal of the operation. Goodwill
disposed of in this circumstance is measured based on the relative
values of the disposed operation. |
|
|
Goodwill is not
amortized. Rather, Provident assesses goodwill for impairment
at least annually and when circumstances indicate that the carrying
value may be impaired. Impairment is determined for goodwill by
assessing the recoverable amount of the group of cash generating
units that comprise the Midstream business to which the goodwill
relates. The recoverable amount is determined based on a fair
value less cost to sell calculation using cash flow projections
from financial forecasts. If the carrying amount exceeds the
recoverable amount of the group of cash generating units that
comprise the Midstream business, an impairment loss is
recognized. Impairment losses relating to goodwill cannot be
reversed in future periods. Provident performs its annual
impairment test of goodwill as at December 31. |
|
x) |
Decommissioning
liabilities |
|
|
A decommissioning
liability is recognized when the Company has a present legal or
constructive obligation to dismantle and remove a facility or an
item of property, plant and equipment and restore the site on which
it is located, and when a reliable estimate of that liability can
be made. Normally an obligation arises for a new facility
upon construction or installation. An obligation for
decommissioning may also crystallize during the period of operation
of a facility through a change in legislation or a decision to
terminate operations. |
|
|
When a liability for
decommissioning cost is recognized, a corresponding amount
equivalent to the provision is also recognized as part of the cost
of the related property, plant and equipment. The amount
recognized represents management's estimate of the present value of
the estimated future expenditures of dismantling, demolition and
disposal of the facilities, remediation and restoration of the
surface land as well as an estimate of the future timing of the
costs to be incurred. These costs are subsequently
depreciated as part of the costs of the facility or item of
property, plant and equipment. Any changes in the estimated timing
of the decommissioning or decommissioning cost estimates are
accounted for prospectively by recording an adjustment to the
provision, and a corresponding adjustment to property, plant and
equipment. |
|
|
The Company uses a
nominal risk free discount rate. The accretion of the
decommissioning liability is included as a financing charge. |
|
xi) |
Share based
compensation |
|
|
Provident uses the fair
value method of valuing the compensation plans whereby notional
shares are granted to employees. The fair value of these
notional shares is estimated and recorded as share based
compensation (a component of general and administrative
expenses). A portion relating to operational employees at
field and plant locations is allocated to operating expense. The
offsetting amount is recorded as accrued liabilities or other
long-term liabilities. A realization of the expense and a resulting
reduction in cash provided by operating activities occurs when a
cash payment is made. The fair value measurement is determined at
each reporting date using information available at that date. |
|
xii) |
Share
dilution |
|
|
The dilutive effect of
convertible debentures is determined using the "if-converted"
method whereby the outstanding debentures at the end of the period
are assumed to have been converted at the beginning of the period
or at the time of issue if issued during the year. Amounts
charged to income or loss relating to the outstanding debentures
are added back to net income for the dilution calculation. |
|
xiii) |
Income taxes |
|
|
Current income
tax |
|
|
Current income tax assets
and liabilities for the current and prior periods are measured at
the amount expected to be recovered from or paid to the taxation
authorities. The tax rates and tax laws used to compute the
amount are those that are enacted or substantively enacted at the
end of the reporting period, and include any adjustment to tax
payable in respect of previous years. |
|
|
Deferred income
tax |
|
|
Provident follows the
liability method for calculating deferred income taxes.
Differences between the amounts reported in the financial
statements of the Company and its corporate subsidiaries and their
respective tax bases are applied to tax rates in effect to
calculate the deferred tax asset or liability. The effect of
any change in income tax rates is recognized in the current period
income or equity, as appropriate. |
|
|
Deferred tax assets are
recognized for deductible temporary differences and the
carry-forward of unused tax losses and unused tax credits to the
extent that it is probable that taxable profits will be available
against which the unused tax losses/credits can be utilized. |
|
|
Deferred income tax
liabilities are provided in full for all taxable temporary
differences arising between the tax bases of assets and liabilities
and their carrying amounts in the financial statements. |
|
|
Deferred income tax
assets and liabilities are measured at the tax rates that are
expected to apply to the period when the asset is realized or the
liability is settled, based on tax rates and tax laws that have
been enacted or substantively enacted by the balance sheet date.
Discounting of deferred tax assets and liabilities is not
permitted. |
|
|
Deferred income tax
relating to items recognized directly in equity is recognized in
equity and not in the consolidated statement of operations. |
|
xiv) |
Convertible
debentures |
|
|
The Company's convertible
debentures are compound financial instruments consisting of a
financial liability and an embedded conversion feature.
In accordance with IAS 39, the embedded derivatives are required to
be separated from the host contracts and accounted for as
stand-alone instruments. |
|
|
Debentures containing a
cash conversion option allow Provident to pay cash to the
converting holder of the debentures, at the option of the Company.
As such, the conversion feature is presented as a financial
derivative liability within long-term financial derivative
instruments. Debentures without a cash conversion option are
settled in shares on conversion, and therefore the conversion
feature is presented within equity, in accordance with its
contractual substance. |
|
|
On initial recognition
and at each reporting date, the embedded conversion feature is
measured using a method whereby the fair value is measured using an
option pricing model. Subsequent to initial recognition, any
unrealized gains or losses arising from fair value changes are
recognized through profit or loss in the statement of operations at
each reporting date. On initial recognition, the debt
component, net of issue costs, is recorded as a financial liability
and accounted for at amortized cost. Subsequent to initial
recognition, the debt component is accreted to the face value of
the debentures using the effective interest rate method. Upon
conversion, the corresponding portions of the debt and equity are
removed from those captions and transferred to share capital. |
|
|
xv) |
Revenue
recognition |
|
|
Revenue associated with
the sale of product owned by Provident is recognized when title
passes from Provident to its customer. |
|
|
Revenues associated with
the services provided where Provident acts as agent are recorded on
a net basis when the services are provided. Revenues associated
with the sale of natural gas liquids storage services are
recognized when the services are provided. |
|
xvi) |
Foreign currency
translation |
|
|
The consolidated
financial statements are presented in Canadian dollars, which is
Provident's functional and presentation currency. Provident's
subsidiaries with foreign operations have a functional currency of
Canadian dollars. Transactions in foreign currencies are
initially recorded at the functional currency rate at the date of
the transaction. Monetary assets and liabilities denominated in
foreign currencies are retranslated at the functional currency rate
of exchange at the balance sheet date, non-monetary items measured
in terms of historical cost in a foreign currency are translated
using the exchange rates as at the dates of the initial
transactions, and revenues and expenses are translated using the
exchange rates as at the dates of the initial transactions, with
the exception of depreciation and amortization which is translated
on the same basis as the related assets. Translation gains
and losses are included in income in the period in which they
arise. |
|
xvii) |
Accounting standards
and amendments issued but not yet applied |
|
|
International
Financial Reporting Standards |
|
|
Unless otherwise noted,
the following revised standards and amendments are effective for
annual periods beginning on or after January 1, 2013 with earlier
application permitted. The Company has not yet assessed the impact
of these standards and amendments or determined whether it will
early adopt them. |
|
|
a) |
IFRS 9 - Financial Instruments, was
issued in November 2009 and addresses classification and
measurement of financial assets. It replaces the multiple
category and measurement models in IAS 39 for debt instruments with
a new mixed measurement model having only two categories: amortized
cost and fair value through profit or loss. IFRS 9 also replaces
the models for measuring equity instruments. Such instruments are
either recognized at fair value through profit or loss or at fair
value through other comprehensive income. Where equity instruments
are measured at fair value through other comprehensive income,
dividends are recognized in profit or loss to the extent that they
do not clearly represent a return of investment; however, other
gains and losses (including impairments) associated with such
instruments remain in accumulated comprehensive income
indefinitely. |
|
|
|
Requirements for financial liabilities were added
to IFRS 9 in October 2010 and they largely carried forward existing
requirements in IAS 39 - Financial Instruments - Recognition and
Measurement, except that fair value changes due to credit risk
for liabilities designated at fair value through profit and loss
are generally recorded in other comprehensive income. IFRS 9
requires application for annual periods beginning on or after
January 1, 2015, with earlier adoption permitted. |
|
|
b) |
IFRS 10 - Consolidated Financial
Statements, requires an entity to consolidate an investee when
it has power over the investee, is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. Under existing IFRS, consolidation is required when an
entity has the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities. IFRS 10
replaces SIC-12, Consolidation - Special Purpose Entities
and parts of IAS 27 - Consolidated and Separate Financial
Statements. |
|
|
c) |
IFRS 11 - Joint Arrangements,
requires a venturer to classify its interest in a joint arrangement
as a joint venture or joint operation. Joint ventures will be
accounted for using the equity method of accounting whereas for a
joint operation the venturer will recognize its share of the
assets, liabilities, revenue and expenses of the joint operation.
Under existing IFRS, entities have the choice to proportionately
consolidate or equity account for jointly controlled entities. IFRS
11 supersedes IAS 31 - Interests in Joint Ventures, and
SIC-13, Jointly Controlled Entities—Non-monetary Contributions
by Venturers. |
|
|
d) |
IFRS 12 - Disclosure of Interests in
Other Entities, establishes disclosure requirements for
interests in other entities, such as subsidiaries, joint
arrangements, associates, and unconsolidated structured
entities. The standard carries forward existing disclosures
and also introduces significant additional disclosure that address
the nature of, and risks associated with, an entity's interests in
other entities. |
|
|
e) |
IFRS 13 - Fair Value Measurement, is
a comprehensive standard for fair value measurement and disclosure
for use across all IFRS standards. The new standard clarifies that
fair value is the price that would be received to sell an asset, or
paid to transfer a liability in an orderly transaction between
market participants, at the measurement date. Under existing IFRS,
guidance on measuring and disclosing fair value is dispersed among
the specific standards requiring fair value measurements and does
not always reflect a clear measurement basis or consistent
disclosures. |
|
|
f) |
There have been amendments to existing standards,
including IAS 27 - Separate Financial Statements
("IAS 27"), and IAS 28 - Investments in Associates and
Joint Ventures ("IAS 28"). IAS 27 addresses accounting for
subsidiaries, jointly controlled entities and associates in
non-consolidated financial statements. IAS 28 has been amended to
include joint ventures in its scope and to address the changes in
IFRS 10 - 13. |
|
|
g) |
IAS 1 - Presentation of Financial
Statements, has been amended to require entities to
separate items presented in Other Comprehensive Income ("OCI") into
two groups, based on whether or not items may be recycled in the
future. Entities that choose to present OCI items before tax
will be required to show the amount of tax related to the two
groups separately. The amendment is effective for annual
periods beginning on or after July 1, 2012, with earlier
application permitted. |
|
|
h) |
IFRS 7 - Financial Instruments: Disclosures,
has been amended to include additional disclosure requirements in
the reporting of transfer transactions and risk exposures relating
to transfers of financial assets and the effect of those risks on
an entity's financial position, particularly those involving
securitization of financial assets. The amendment is
applicable for annual periods beginning on or after July 1, 2011,
with earlier application permitted. |
|
|
i) |
IAS 32 - Financial Instruments:
Presentation, has been amended to clarify requirements for
offsetting of financial assets and financial liabilities. The
amendment is applicable for annual periods beginning on or after
January 1, 2014, and is required to be applied
retrospectively. |
4. Significant accounting judgments, estimates and
assumptions
The preparation of financial statements requires
management to make judgments, estimates and assumptions based on
currently available information that affect the reported amounts of
assets, liabilities and contingent liabilities at the date of the
consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. Estimates and
judgments are continuously evaluated and are based on management's
experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
However, actual results could differ from those estimated. By their
very nature, these estimates are subject to measurement uncertainty
and the effect on the financial statements of future periods could
be material.
In the process of applying the Company's accounting
policies, management has made the following judgments, estimates,
and assumptions which have the most significant effect on the
amounts recognized in the consolidated financial statements:
Inventory
Due to the inherent limitations in metering and the
physical properties of storage caverns and pipelines, the
determination of precise volumes of natural gas liquids held in
inventory at such locations is subject to estimation. Actual
inventories of natural gas liquids within storage caverns can only
be determined by draining of the caverns.
Impairment indicators
The recoverable amounts of cash generating units
and individual assets have been determined based on the higher of
value in use calculations and fair values less costs to sell.
These calculations require the use of estimates and
assumptions.
Goodwill is tested for impairment annually and at
other times when impairment indicators exist. Impairment is
determined for goodwill by assessing the recoverable amount of the
group of cash generating units that comprise the Midstream business
to which the goodwill relates. In assessing goodwill for
impairment, it is reasonably possible that the commodity price
assumptions, sales volumes, supply costs, discount rates, and tax
rates may change which may then impact the recoverable amount of
the group of cash generating units which comprise the Midstream
business and may then require a material adjustment to the carrying
value of goodwill.
For the Midstream business, it is also reasonably
possible that these assumptions may change which may then impact
the recoverable amounts of the cash generating units and may then
require a material adjustment to the carrying value of its tangible
and intangible assets. The Company monitors internal and
external indicators of impairment relating to its tangible and
intangible assets.
Decommissioning and restoration costs
Decommissioning and restoration costs will be
incurred by the Company at the end of the operating life of certain
of the Company's facilities and properties. The ultimate
decommissioning and restoration costs are uncertain and cost
estimates can vary in response to many factors including changes to
relevant legal and regulatory requirements, the emergence of new
restoration techniques or experience at other production sites. The
expected timing and amount of expenditure can also change, for
example, in response to changes in laws and regulations or their
interpretation. In determining the amount of the provision,
assumptions and estimates are also required in relation to discount
rates.
The decommissioning provisions have been created
based on Provident's internal estimates. Assumptions, based
on the current economic environment, have been made which
management believe are a reasonable basis upon which to estimate
the future liability. These estimates are reviewed regularly
to take into account any material changes to the assumptions.
However, actual decommissioning costs will ultimately depend upon
future market prices for the necessary decommissioning work
required which will reflect market conditions at the relevant
time.
Income taxes
The Company follows the liability method for
calculating deferred income taxes. Differences between the
amounts reported in the financial statements of the Company and its
subsidiaries and their respective tax bases are applied to tax
rates in effect to calculate the deferred tax liability. In
addition, the Company recognizes the future tax benefit related to
deferred income tax assets to the extent that it is probable that
the deductible temporary differences will reverse in the
foreseeable future. Assessing the recoverability of deferred
income tax assets requires the Company to make significant
estimates related to the expectations of future cash flows from
operations and the application of existing tax laws in each
jurisdiction. To the extent that future cash flows and
taxable income differ significantly from estimates, the ability of
the Company to realize the deferred tax assets and liabilities
recorded at the balance sheet date could be impacted.
Additionally, future changes in tax laws in the jurisdictions in
which the Company operates could limit the ability of the Company
to obtain tax deductions in future periods.
Contingencies
By their nature, contingencies will only be
resolved when one or more future events occur or fail to
occur. The assessment of contingencies inherently involves
the exercise of significant judgment and estimates of the outcome
of future events.
Share based compensation
The Company uses the fair value method of valuing
compensation expense associated with the Company's share based
compensation plan whereby notional shares are granted to
employees. Estimating fair value requires determining the
most appropriate valuation model for a grant of equity instruments,
which is dependent on the terms and conditions of the grant.
The assumptions are discussed in note 14.
Financial derivative instruments
The Company's financial derivative instruments are
initially recognized on the statement of financial position at fair
value based on management's estimate of commodity prices, share
price and associated volatility, foreign exchange rates, interest
rates, and the amounts that would have been received or paid to
settle these instruments prior to maturity given future market
prices and other relevant factors.
Property, plant and equipment and intangible
assets
Midstream facilities, including natural gas liquids
storage and terminalling facilities and natural gas liquids
processing and extraction facilities are carried at cost and
depreciated over the estimated service lives of the assets.
Intangible assets are amortized over the estimated useful lives of
the assets. Capital assets related to pipelines and office
equipment are carried at cost and depreciated over their economic
lives.
Management periodically reviews the estimated
useful lives of property, plant and equipment and intangible
assets. These estimates are based on management's experience and
other factors, including expectations of future events that are
believed to be reasonable under the circumstances. However,
actual results could differ from those estimated.
5. Transition to IFRS
Provident has prepared its financial statements in
accordance with Canadian GAAP for all periods up to and including
the year ended December 31,
2010. These financial statements for the year ended
December 31, 2011 comply with IFRS
applicable for periods beginning on or after January 1, 2011 and the significant accounting
policies meeting those requirements are described in note 3.
The effect of the Company's transition to IFRS are
summarized in this note as follows:
i)
|
Transition
elections; |
ii) |
Reconciliation of the
consolidated statements of financial position, including
shareholders' equity, as previously reported under Canadian GAAP to
IFRS; and
|
iii) |
Reconciliation of the
consolidated statements of operations as previously reported under
Canadian GAAP to IFRS. |
|
i) |
Transition
elections |
|
|
Provident has prepared
its IFRS opening consolidated statement of financial position as at
January 1, 2010, its date of transition to IFRS. In the
preparation of this opening statement of financial position, IFRS 1
allows first-time adopters certain exemptions from the general
requirement to apply IFRS retrospectively. Provident has
applied the following transition exceptions and exemptions to full
retrospective application of IFRS: |
|
|
a) |
Business combinations - Provident has elected not to apply IFRS
3 retrospectively to business combinations that occurred prior to
transition to IFRS on January 1, 2010. Rather, the Company
has elected to apply IFRS 3 relating to business combinations
prospectively from January 1, 2010. As such previous Canadian GAAP
balances relating to business combinations entered into before that
date, including goodwill, have been carried forward without
adjustment. |
|
|
b) |
Changes in decommissioning, restoration and similar liabilities
- IFRIC 1 Changes in Existing Decommissioning, Restoration and
Similar Liabilities requires specified changes in a
decommissioning, restoration or similar liabilities to be added to
or deducted from the cost of the asset to which it relates.
The adjusted depreciable amount of the asset is then depreciated
prospectively over its remaining useful life. However, IFRS 1
allows Provident to measure decommissioning, restoration and
similar liabilities as at the date of transition to IFRS in
accordance with IAS 37 rather than reflecting the impact of changes
in such liabilities that occurred before the date of transition to
IFRS. |
|
|
c) |
Property, plant and equipment - The deemed cost of oil and
natural gas properties at January 1, 2010, the date of transition
to IFRS, was determined by reference to IFRS 1 - First-time
Adoption of International Financial Reporting Standards.
Upon adoption, the Company has elected to apply the full cost
exemption to measure oil and gas assets in the development or
production phases by allocating the carrying value determined under
Canadian GAAP to cash generating units pro rata using proved and
probable reserve values on the date of transition. In
addition, any differences arising from the adoption of IFRS from
previous Canadian GAAP for decommissioning liabilities related to
the Upstream business have been recognized in accumulated deficit
on the transition date in accordance with IFRS 1. |
|
|
d) |
Arrangements containing leases - IFRS 1 allows a first-time
adopter to apply the transitional provisions in IFRIC 4 -
Determining whether an Arrangement contains a Lease, which
allows a first-time adopter to determine whether an arrangement
existing at the date of transition to IFRS contains a lease on the
basis of facts and circumstances existing at that date. As a
first-time adopter, Provident made the same determination of
whether an arrangement contained a lease in accordance with
previous Canadian GAAP as that required by IFRIC 4 but at a date
other than that required by IFRIC 4. |
|
ii) |
The following is a
reconciliation of the consolidated statements of financial
position, including Shareholders' equity, as
previously reported under Canadian GAAP to IFRS: |
|
|
|
|
|
|
|
|
($ 000s) |
|
December 31, 2010 |
January 1, 2010 |
|
Note |
CDN GAAP |
Adj |
IFRS |
CDN GAAP |
Adj |
IFRS |
Assets |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
4,400 |
- |
4,400 |
7,187 |
- |
7,187 |
|
Accounts receivable |
|
206,631 |
- |
206,631 |
216,786 |
- |
216,786 |
|
Petroleum product inventory |
A |
83,868 |
22,785 |
106,653 |
37,261 |
21,518 |
58,779 |
|
Prepaid expenses and other current
assets |
|
2,539 |
- |
2,539 |
4,803 |
- |
4,803 |
|
Financial derivative instruments |
|
487 |
- |
487 |
5,314 |
- |
5,314 |
|
Assets held for sale |
I |
- |
- |
- |
- |
186,411 |
186,411 |
|
|
297,925 |
22,785 |
320,710 |
271,351 |
207,929 |
479,280 |
|
|
|
|
|
|
|
|
Investments |
|
- |
- |
- |
18,733 |
- |
18,733 |
Exploration and evaluation assets |
I |
- |
- |
- |
- |
24,739 |
24,739 |
Property, plant and
equipment |
A, B, D, I |
832,250 |
1,540 |
833,790 |
2,025,044 |
(602,888) |
1,422,156 |
Intangible assets |
|
118,845 |
- |
118,845 |
132,478 |
- |
132,478 |
Goodwill |
|
100,409 |
- |
100,409 |
100,409 |
- |
100,409 |
Deferred income taxes |
G |
50,375 |
22,324 |
72,699 |
- |
- |
- |
|
|
1,399,804 |
46,649 |
1,446,453 |
2,548,015 |
(370,220) |
2,177,795 |
Liabilities |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
227,944 |
- |
227,944 |
221,417 |
- |
221,417 |
|
Cash dividends payable |
|
12,646 |
- |
12,646 |
13,468 |
- |
13,468 |
|
Current portion of long-term debt |
|
148,981 |
- |
148,981 |
- |
- |
- |
|
Financial derivative instruments |
|
37,849 |
- |
37,849 |
86,441 |
- |
86,441 |
|
Liabilities held for sale |
I |
- |
- |
- |
- |
2,792 |
2,792 |
|
|
427,420 |
- |
427,420 |
321,326 |
2,792 |
324,118 |
|
|
|
|
|
|
|
|
Long-term debt - bank facilities and
other |
|
72,882 |
- |
72,882 |
264,776 |
- |
264,776 |
Long-term debt - convertible
debentures |
|
251,891 |
- |
251,891 |
240,486 |
- |
240,486 |
Decommissioning liabilities |
B, I |
22,057 |
35,175 |
57,232 |
61,464 |
66,336 |
127,800 |
Long-term financial derivative
instruments |
C |
19,601 |
9,586 |
29,187 |
103,403 |
- |
103,403 |
Other long-term liabilities |
F |
18,735 |
899 |
19,634 |
12,496 |
- |
12,496 |
Deferred income taxes |
G, I |
- |
- |
- |
162,665 |
(124,900) |
37,765 |
|
|
812,586 |
45,660 |
858,246 |
1,166,616 |
(55,772) |
1,110,844 |
|
|
|
|
|
|
|
|
Shareholders' equity |
|
|
|
|
|
|
|
Unitholders' contributions |
|
2,866,268 |
- |
2,866,268 |
2,834,177 |
- |
2,834,177 |
Convertible debentures equity
component |
C |
25,092 |
(25,092) |
- |
15,940 |
(15,940) |
- |
Other equity |
C |
2,953 |
(2,269) |
684 |
2,953 |
(2,269) |
684 |
Accumulated deficit |
H |
(2,307,095) |
28,350 |
(2,278,745) |
(1,471,671) |
(296,239) |
(1,767,910) |
|
|
587,218 |
989 |
588,207 |
1,381,399 |
(314,448) |
1,066,951 |
|
|
1,399,804 |
46,649 |
1,446,453 |
2,548,015 |
(370,220) |
2,177,795 |
iii) The following is a
reconciliation of the consolidated statement of operations as
previously reported under Canadian GAAP to IFRS:
|
|
|
|
|
|
|
Year
ended |
($ 000s) |
|
December 31, 2010 |
|
Notes |
CDN GAAP |
Adj |
IFRS |
|
|
|
|
|
Product sales and service revenue |
|
1,746,557 |
- |
1,746,557 |
Realized loss on buyout of financial
derivative instruments |
|
(199,059) |
- |
(199,059) |
Unrealized gain offsetting buyout of
financial derivative instruments |
|
177,723 |
- |
177,723 |
Loss on financial derivative
instruments |
|
(103,464) |
- |
(103,464) |
|
|
1,621,757 |
- |
1,621,757 |
|
|
|
|
|
Expenses |
|
|
|
|
|
Cost of goods sold |
A |
1,397,901 |
(1,266) |
1,396,635 |
|
Production, operating and maintenance |
|
18,504 |
- |
18,504 |
|
Transportation |
|
18,442 |
- |
18,442 |
|
Depreciation and amortization |
D, E |
45,718 |
(1,243) |
44,475 |
|
General and administrative |
|
36,671 |
- |
36,671 |
|
Strategic review and restructuring |
|
13,782 |
- |
13,782 |
|
Financing charges |
B, E |
29,723 |
2,528 |
32,251 |
|
Loss on revaluation of conversion feature of
convertible debentures |
C |
- |
433 |
433 |
|
Other income and foreign exchange |
|
(3,826) |
- |
(3,826) |
|
|
1,556,915 |
452 |
1,557,367 |
Income from continuing operations
before taxes |
|
64,842 |
(452) |
64,390 |
|
Current tax recovery |
|
(6,956) |
- |
(6,956) |
|
Deferred income tax recovery |
G |
(31,694) |
(9,177) |
(40,871) |
|
|
(38,650) |
(9,177) |
(47,827) |
Net income for the year from
continuing operations |
|
103,492 |
8,725 |
112,217 |
Net loss from discontinued
operations |
I |
(438,587) |
315,864 |
(122,723) |
Net loss and comprehensive loss
for the year |
|
(335,095) |
324,589 |
(10,506) |
Explanatory notes to the IFRS 1 transition
adjustments:
Note: The following items address the transition
adjustments applicable to continuing operations. For a description
of the transition adjustments applicable to discontinued
operations, see item I.
A. |
Petroleum product inventory - Product inventory required
to be stored in third party pipelines as pipeline fill was recorded
in property, plant and equipment ("PP&E") under previous
Canadian GAAP. Under IFRS, these amounts are recorded as part of
petroleum product inventory. Upon transition to IFRS, $21.5
million has been transferred from PP&E to petroleum product
inventory. The additional inventory has been processed
through the inventory costing calculations with a corresponding
reduction on cost of goods sold of $1.3 million for the year ended
December 31, 2010. Inventory required for linefill and cavern
bottoms in assets owned by Provident remains capitalized in
PP&E. |
|
B. |
Decommissioning liabilities - The amounts recorded under
previous Canadian GAAP were the estimated future cash flows
discounted at the Company's average credit-adjusted risk free rate
of seven percent. Under IFRS, the amounts are discounted using a
risk free rate of four percent at January 1, 2010 and December 31,
2010. Provident recorded an adjustment to increase the
decommissioning liabilities for continuing operations by $34.4
million with an offsetting increase in PP&E of $23.3 million
and accumulated deficit of $11.1 million representing the pre-2010
earnings impact of this adjustment. The impact of this adjustment
on 2010 annual earnings was additional accretion expense $0.7
million. |
|
C. |
Convertible debentures equity component - Under previous
Canadian GAAP, the portion of initial value associated with the
conversion feature of a convertible debenture is classified as a
separate component of equity. As a consequence of Provident's
status as an income Trust in 2010, IFRS requires the conversion
feature of convertible debentures to be classified as a financial
instrument on transition and marked-to-market each reporting
period. Since the conversion feature of the debentures outstanding
on January 1, 2010 was sufficiently out-of-the-money, the fair
value of this feature was determined to be nil. As a result, the
Canadian GAAP balance of the equity component of convertible
debentures at January 1, 2010 of $15.9 million, as well as $2.3
million of related balances in other equity, have been reclassified
to accumulated deficit on the transition date. |
|
|
In addition, in the fourth quarter of 2010, a new convertible
debenture was issued by Provident. Under previous Canadian GAAP,
the portion of the initial value of the debenture associated with
the conversion feature of $9.2 million was recorded as a separate
component of equity. Under IFRS, the value of this conversion
feature has been reclassified to long-term financial derivative
instruments in the statement of financial position. Under IFRS,
Provident is also required to mark-to-market this conversion
feature at each reporting period, which resulted in the Company
recording an unrealized loss of approximately $0.4 million in the
fourth quarter of 2010 in loss on revaluation of conversion feature
of convertible debentures in the statement of operations with a
corresponding offset to long-term financial derivative
instruments. |
|
D. |
Depreciation and amortization - IFRS requires that depreciation
be calculated at a component level, which resulted in additional
depreciation expense from continuing operations of $0.7 million for
the year ended December 31, 2010. |
|
E. |
Financing charges - Under IFRS, accretion expense associated
with decommissioning liabilities is recorded as a financing charge.
Under previous Canadian GAAP, accretion expense from continuing
operations of $1.9 million for the year ended December 31, 2010
related to asset retirement obligations was recorded under
depletion, depreciation and accretion expense. Accordingly, these
amounts have been reclassified from depletion, depreciation and
accretion expense to financing charges. As a result of this change,
the caption depletion, depreciation and accretion expense has been
changed to be depreciation and amortization expense. |
|
|
The balances recorded under previous Canadian GAAP as interest
on bank debt and interest and accretion on convertible debentures
are now included under financing charges under IFRS. |
|
F. |
Other long-term liabilities - Included in other long-term
liabilities are obligations associated with residual Upstream
properties. Under previous Canadian GAAP, these obligations
were calculated using an average credit-adjusted risk free rate of
seven percent. Under IFRS, the obligations are discounted using a
risk free rate which resulted in Provident recording an adjustment
of $0.9 million as at December 31, 2010. |
|
G. |
Deferred income taxes - The transition adjustment associated
with continuing operations was $13.1 million. This IFRS difference
is primarily due to the tax rate applied to temporary differences
associated with SIFT entities. Under previous Canadian GAAP,
Provident used the rate expected to be in effect when the timing
differences reverse. However, under IFRS, Provident is required to
use the highest rate applicable for undistributed earnings in these
entities. In addition, IFRS requires the calculation of deferred
taxes related to foreign exchange differences on balances
denominated in foreign currencies. The 2010 annual net income
from continuing operations impact of IFRS differences on deferred
taxes was an additional recovery of $9.2 million, resulting in a
total adjustment of $22.3 million at December 31, 2010. |
|
|
Upon conversion to a corporation on January 1, 2011, all timing
differences are now measured under IFRS using a corporate tax rate
and, as a result, the majority of the IFRS differences at December
31, 2010 for deferred income taxes has reversed through first
quarter 2011 net earnings as a deferred tax expense. |
|
H. |
Accumulated deficit - The following is a summary of transition
adjustments to the Company's accumulated deficit from Canadian GAAP
to IFRS: |
|
|
|
|
|
2010 |
($ millions) |
Note |
|
December 31 |
|
January 1 |
|
|
|
|
|
|
Accumulated deficit as reported under
Canadian GAAP |
|
$ |
(2,307.1) |
$ |
(1,471.7) |
IFRS transition adjustments increase
(decrease) on opening statement of financial position related to
continuing operations: |
|
|
|
|
|
|
Petroleum product inventory |
A |
|
0.4 |
|
0.4 |
|
Decommissioning liabilities |
B |
|
(11.1) |
|
(11.1) |
|
Convertible debentures |
C |
|
18.2 |
|
18.2 |
|
Other long-term liabilities |
F |
|
(0.9) |
|
(0.9) |
|
Deferred income taxes |
G |
|
13.1 |
|
13.1 |
|
|
|
19.7 |
|
19.7 |
|
|
|
|
|
|
IFRS transition adjustments increase
(decrease) on opening statement of financial position related to
discontinued operations: |
|
|
|
|
|
|
Impairment on Upstream oil and gas properties |
I |
|
(391.5) |
|
(391.5) |
|
Decommissioning liabilities |
I |
|
(36.1) |
|
(36.1) |
|
Deferred income taxes |
I |
|
111.7 |
|
111.7 |
|
|
|
(315.9) |
|
(315.9) |
Total net impact on opening statement
of financial position |
|
$ |
(296.2) |
$ |
(296.2) |
|
|
|
|
|
|
IFRS transition adjustments increase
(decrease) net income from continuing operations: |
|
|
|
|
|
|
Cost of goods sold |
A |
$ |
1.3 |
$ |
- |
|
Loss on financial derivative instruments |
C |
|
(0.4) |
|
- |
|
Depreciation and amortization |
D, E |
|
1.2 |
|
- |
|
Financing charges |
B, E |
|
(2.5) |
|
- |
|
Deferred income taxes |
G |
|
9.1 |
|
- |
|
|
|
8.7 |
|
- |
IFRS transition adjustments increase
(decrease) net income from discontinued operations: |
|
|
|
|
|
|
Depletion expense |
I |
|
40.2 |
|
- |
|
Loss on sale of oil and gas properties |
I |
|
(8.1) |
|
- |
|
Loss on sale of discontinued operations |
I |
|
296.0 |
|
- |
|
Deferred income taxes |
I |
|
(12.2) |
|
- |
|
|
|
315.9 |
|
- |
Total net impact on statement of
operations |
|
$ |
324.6 |
$ |
- |
Accumulated deficit as reported
under IFRS |
|
$ |
(2,278.7) |
$ |
(1,76 |
I.
|
Discontinued operations - There are a number of IFRS
adjustments associated with the Upstream business impacting both
the statement of financial position on the date of transition,
January 1, 2010 and 2010 net earnings from discontinued
operations. However, the total impact of the combined
differences related to the Upstream business on Provident's equity
balance at December 31, 2010 was nil. Explanatory notes to
the IFRS 1 transition reconciliations for discontinued operations
are summarized in the following table: |
|
|
|
|
|
|
|
|
2010 |
Discontinued operations ($
millions) |
Note |
|
December 31 |
|
January 1 |
IFRS transition adjustments increase
(decrease) on opening statement
of financial position: |
|
|
|
|
|
|
Impairment on Upstream oil and gas properties |
1 |
$ |
(391.5) |
$ |
(391.5) |
|
Decommissioning liabilities |
2 |
|
(36.1) |
|
(36.1) |
|
Deferred income taxes |
5 |
|
111.7 |
|
111.7 |
|
|
|
(315.9) |
|
(315.9) |
IFRS adjustments increase (decrease)
net income on statement
of operations: |
|
|
|
|
|
|
Depletion expense |
1 |
|
40.2 |
|
- |
|
Loss on sale of oil and gas properties |
3 |
|
(8.1) |
|
- |
|
Loss on sale of discontinued operations |
6 |
|
296.0 |
|
- |
|
Deferred income taxes |
5 |
|
(12.2) |
|
- |
|
|
|
315.9 |
|
- |
Net impact on accumulated
deficit |
|
$ |
- |
$ |
(315.9) |
1) |
Property, plant and equipment - On transition to IFRS,
Provident elected to use the IFRS 1 exemption for its Upstream oil
& gas assets, allowing for the allocation of historical book
values as reported under previous Canadian GAAP to the individual
cash generating units on a pro rata basis. If this election is
made, each of the cash generating units is required to be tested
for impairment. Any impairment loss is recorded in accumulated
deficit on the transition date. Accordingly, Provident
recorded a $391.5 million impairment loss on transition to IFRS.
The lower carrying value for the Upstream assets on transition
resulted in a lower loss on sale of the business in the second
quarter of 2010 compared to previous Canadian GAAP. |
|
|
In addition, upon transition to IFRS, Provident had the option
to continue to calculate depletion similar to previous Canadian
GAAP using a reserve base of only proved reserves or to use proved
plus probable reserves. Provident has elected to use proved
plus probable reserves under IFRS. The combination of a lower
carrying value due to the impairment loss on transition and the
larger depletion base resulted in lower depletion charges related
to the Upstream business under IFRS of $40.2 million for the year
ended December 31, 2010. This difference is also offset in the loss
on sale of the Upstream business in the second quarter of
2010. |
|
2) |
Decommissioning liabilities - The amounts recorded under
previous Canadian GAAP were the estimated future cash flows
discounted at the Company's average credit-adjusted risk free rate
of seven percent. Under IFRS, the amounts are discounted
using a risk free rate of four percent. The adjustment related to
the Upstream business, was an increase of the decommissioning
liabilities by $36.1 million with the offset to accumulated
deficit. |
|
3) |
Assets held for sale - IFRS requires that assets held for sale,
be presented separately on the statement of financial position.
Previous Canadian GAAP made an exception to this rule for certain
upstream oil and gas related transactions. The sale of West
Central Alberta assets held in the Upstream business was announced
in December 2009. Therefore, assets and associated
decommissioning liabilities of $186.4 million and $2.8 million,
respectively, related to this transaction have been presented
separately on the statement of financial position, at their fair
value, determined with reference to the negotiated sales price
adjusted for earnings between December 31, 2009 and the date of
closing on March 1, 2010. This transaction resulted in a loss on
sale of $8.1 million in the first quarter of 2010. |
|
4) |
Exploration and evaluation ("E&E") expenditures - IFRS
requires that E&E expenditures be presented separately from
PP&E on the statement of financial position. Provident has
segregated approximately $24.7 million of its PP&E in
accordance with the IFRS 1 full cost exemption as at January 1,
2010. In the first and second quarters of 2010, an additional $0.8
million and $0.2 million was incurred, respectively, which also was
classified as E&E. The costs consist primarily of land that
relates to Upstream undeveloped properties which has not been
depleted but rather is assessed for impairment when indicators
suggest the possibility of impairment. |
|
5) |
Taxes - The transition adjustment for deferred income taxes on
transition to IFRS is primarily due to changes in the carrying
amount of Upstream assets on the January 1, 2010 statement of
financial position and the corresponding impact on temporary
differences used to determine the deferred income tax balance. As a
result, an adjustment of $111.7 million was recorded with an offset
amount recorded in accumulated deficit. Additionally, a reduction
in deferred income tax recoveries of $12.2 million was incurred for
the year ended December 31, 2010 primarily as a result of lower
depletion expense under IFRS. |
|
6) |
Loss on sale of discontinued operations - The loss on sale of
discontinued operations was impacted by each of the IFRS
adjustments 1 through 5 listed above, resulting in an IFRS
adjustment to the loss on sale of discontinued operations of $296.0
million, net of tax, for the year ended December 31, 2010. |
6. Acquisition
Acquisition of Three Star Trucking Ltd.
On October 3, 2011,
Provident acquired a two-thirds ownership interest in Three Star
Trucking Ltd. ("Three Star") for consideration of 944,828 Provident
common shares with an ascribed value of $7.6
million and cash consideration of $7.9 million. Three Star is a Saskatchewan based oilfield hauling company
serving Bakken-area crude oil producers. Provident retains
the option to purchase the remaining one-third interest in Three
Star after three years from the closing date.
The following table summarizes the consideration
paid for Three Star, the fair value of assets acquired, liabilities
assumed and the non-controlling interest at the acquisition
date.
Consideration |
|
|
|
Cash |
$ |
7,852 |
|
Shares |
|
7,606 |
Total consideration |
$ |
15,458 |
|
|
|
Recognized amounts of identifiable
assets acquired and liabilities assumed |
|
|
|
Working capital |
$ |
2,350 |
|
Property, plant and equipment |
|
22,530 |
|
Deferred income taxes |
|
(1,879) |
|
Long-term debt |
|
(10,345) |
|
Redemption liability |
|
(9,054) |
|
Other equity |
|
9,054 |
Total identifiable net assets |
|
12,656 |
|
|
|
Non-controlling interest |
|
(4,219) |
Goodwill |
|
7,021 |
Total |
$ |
15,458 |
Acquisition-related costs of $0.1
million have been charged to general and administrative
expenses in the consolidated statement of operations.
The fair value of the 944,828 common shares issued
as part of the consideration paid for Three Star was based on the
closing share price on October 3,
2011.
On acquisition, the non-controlling interest was
measured at the proportionate interest in the identifiable net
assets. No goodwill was attributed to non-controlling
interest on acquisition.
Provident has the option to purchase (and the
non-controlling interest has the right to sell) the remaining
one-third interest in Three Star after the third anniversary of the
acquisition date (October 3,
2014). The put price to be paid by Provident for the
residual interest upon exercise is based on a multiple of Three
Star's earnings during the three-year period prior to exercise,
adjusted for associated capital expenditures and debt. On
acquisition, Provident recorded a $9.1
million redemption liability associated with this put option
with an offset to other equity. The redemption liability will
be accreted and subsequently fair valued at each reporting date
with changes in the value flowing through profit and loss. At
December 31, 2011 the fair value of
the redemption liability was determined to be $7.5 million, resulting in an unrealized gain of
$1.5 million for the year ended
December 31, 2011 recorded in loss on
revaluation of conversion feature of convertible debentures and
redemption liability on the consolidated statement of
operations.
The revenue included in the consolidated statement
of operations since October 3, 2011
contributed by Three Star was $19.8
million, of which $13.2
million and $6.6 million were
attributable to the owners of the parent and non-controlling
interest, respectively. In addition, net income included in the
consolidated statement of operations since October 3, 2011 contributed by Three Star was
$1.3 million, of which $0.9 million and $0.4
million were attributable to the owners of the parent and
non-controlling interest, respectively.
7. Petroleum product inventory
When inventories are sold, the carrying amount of
those inventories is recognized as an expense in the period in
which the related revenue is recognized. For the year ended
December 31, 2011, the Company
recognized $1,517 million (2010 -
$1,397 million) of product inventory
as an expense in cost of goods sold.
8. Property, plant and equipment
($ 000s) |
|
Midstream
assets |
|
Office
equipment
& other |
|
Subtotal |
|
Oil
&
natural gas
properties |
|
Total |
Cost: |
|
|
|
|
|
|
|
|
|
|
Balance as at January 1, 2010 |
$ |
886,442 |
$ |
47,174 |
$ |
933,616 |
$ |
2,682,180 |
$ |
3,615,796 |
Additions |
|
74,445 |
|
673 |
|
75,118 |
|
31,152 |
|
106,270 |
Acquisitions |
|
- |
|
- |
|
- |
|
5,117 |
|
5,117 |
Change in decommissioning provision |
|
3,902 |
|
- |
|
3,902 |
|
7,292 |
|
11,194 |
Disposals & Other |
|
(123) |
|
(2,356) |
|
(2,479) |
|
(2,725,741) |
|
(2,728,220) |
Balance as at December 31, 2010 |
|
964,666 |
|
45,491 |
|
1,010,157 |
|
- |
|
1,010,157 |
Additions |
|
131,954 |
|
813 |
|
132,767 |
|
- |
|
132,767 |
Acquisitions |
|
22,530 |
|
- |
|
22,530 |
|
- |
|
22,530 |
Capitalized interest |
|
1,348 |
|
- |
|
1,348 |
|
- |
|
1,348 |
Change in decommissioning provision |
|
25,494 |
|
- |
|
25,494 |
|
- |
|
25,494 |
Removal of fully depreciated assets |
|
(1,765) |
|
(23,601) |
|
(25,366) |
|
- |
|
(25,366) |
Disposals & Other |
|
(13) |
|
193 |
|
180 |
|
- |
|
180 |
Balance as at December 31, 2011 |
$ |
1,144,214 |
$ |
22,896 |
$ |
1,167,110 |
$ |
- |
$ |
1,167,110 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated depletion and depreciation: |
|
|
|
|
|
|
|
|
|
|
Balance as at January 1, 2010 |
$ |
116,656 |
$ |
27,786 |
$ |
144,442 |
$ |
2,049,198 |
$ |
2,193,640 |
Depletion and depreciation for the period |
|
25,729 |
|
7,056 |
|
32,785 |
|
123,940 |
|
156,725 |
Disposals |
|
- |
|
(860) |
|
(860) |
|
(2,173,138) |
|
(2,173,998) |
Balance as at December 31, 2010 |
|
142,385 |
|
33,982 |
|
176,367 |
|
- |
|
176,367 |
Depreciation for the period |
|
26,522 |
|
5,381 |
|
31,903 |
|
- |
|
31,903 |
Removal of fully depreciated assets |
|
(1,765) |
|
(23,601) |
|
(25,366) |
|
- |
|
(25,366) |
Disposals & Other |
|
(11) |
|
- |
|
(11) |
|
- |
|
(11) |
Balance as at December 31, 2011 |
$ |
167,131 |
$ |
15,762 |
$ |
182,893 |
$ |
- |
$ |
182,893 |
|
|
|
|
|
|
|
|
|
|
|
Net book value: |
|
|
|
|
|
|
|
|
|
|
Net book value as at January 1, 2010 |
$ |
769,786 |
$ |
19,388 |
$ |
789,174 |
$ |
632,982 |
$ |
1,422,156 |
Net book value as at December 31, 2010 |
$ |
822,281 |
$ |
11,509 |
$ |
833,790 |
$ |
- |
$ |
833,790 |
Net book value as at December 31,
2011 |
$ |
977,083 |
$ |
7,134 |
$ |
984,217 |
$ |
- |
$ |
984,217 |
As at December 31, 2011, Midstream
assets include land of $4.9 million
(December 31, 2010 - $4.9 million) and products required for line-fill
and cavern bottoms of $22.8 million
(2010 - $22.8 million) which are
excluded from costs subject to depreciation.
Capitalized borrowing costs
The amount of borrowing costs directly attributable
to the construction of assets, such as storage caverns and related
facilities, which take a substantial period of time to get ready
for their intended use capitalized during the period ended
December 31, 2011 was $1.3 million (2010 - nil). The rate used to
calculate the amount of borrowing costs capitalized was the
weighted average interest rate applicable to the Company's
outstanding borrowings during the period.
9. Intangible assets
($ 000s) |
|
Midstream
contracts and
customer
relationships |
|
Other
intangible
assets |
|
Total |
Cost: |
|
|
|
|
|
|
Balance as at January 1, 2010 |
$ |
183,100 |
$ |
16,308 |
$ |
199,408 |
Balance as at December 31, 2010 |
|
183,100 |
|
16,308 |
|
199,408 |
Removal of fully amortized assets |
|
(21,100) |
|
- |
|
(21,100) |
Balance as at December 31, 2011 |
$ |
162,000 |
$ |
16,308 |
$ |
178,308 |
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
Balance as at January 1, 2010 |
$ |
61,862 |
$ |
5,068 |
$ |
66,930 |
2010 amortization |
|
13,200 |
|
433 |
|
13,633 |
Balance as at December 31, 2010 |
|
75,062 |
|
5,501 |
|
80,563 |
Amortization for the period |
|
11,298 |
|
429 |
|
11,727 |
Removal of fully amortized assets |
|
(21,100) |
|
- |
|
(21,100) |
Balance as at December 31, 2011 |
$ |
65,260 |
$ |
5,930 |
$ |
71,190 |
|
|
|
|
|
|
|
Net book value: |
|
|
|
|
|
|
Net book value as at January 1, 2010 |
$ |
121,238 |
$ |
11,240 |
$ |
132,478 |
Net book value as at December 31, 2010 |
$ |
108,038 |
$ |
10,807 |
$ |
118,845 |
Net book value as at December 31,
2011 |
$ |
96,740 |
$ |
10,378 |
$ |
107,118 |
|
|
|
|
|
|
|
Useful life (years) |
|
15 |
|
12 -15 |
|
|
Remaining amortization period (years) |
|
9 |
|
9 |
|
|
10. Goodwill
During the year ended December 31, 2011, goodwill increased by
$7.0 million related to the
acquisition of Three Star (see note 6).
Provident performed goodwill impairment tests at
December 31, 2011 and 2010, as well
as at January 1, 2010, which
determined that the recoverable amount of the group of cash
generating units that comprise the Midstream business was in excess
of the respective carrying value. Accordingly, no write-down of
goodwill was required. The recoverable amount was determined based
on a fair value less costs to sell calculation using cash flow
projections from financial forecasts approved by management
covering a 15 year period with a terminal growth rate of 2%
thereafter. Key assumptions upon which management based its
determinations of the recoverable amount for the goodwill in 2011
include operating margins which are projected to increase by
approximately 2% per annum, on average, attributable to capital
expenditures and expected growth in the fee-for-service business,
combined with a weighted average discount rate of 9%. The
forecast included future commodity price assumptions based on
independent third party estimates effective at December 31, 2011 of US$100.05/bbl for WTI crude oil in 2012 with an
average escalation rate of 2% per annum until 2026 and $3.60/mcf for AECO natural gas in 2012 with an
average escalation rate of 6% per annum until 2026.
11. Long-term debt
|
|
As at |
|
|
As at |
|
|
December 31, |
|
|
December 31, |
($ 000s) |
|
2011 |
|
|
2010 |
Current portion of convertible debentures |
$ |
- |
|
$ |
148,981 |
Current portion of long-term debt of
subsidiary |
|
9,199 |
|
|
- |
Current portion of long-term debt |
|
9,199 |
|
|
148,981 |
|
|
|
|
|
|
Revolving term credit facility |
|
184,019 |
|
|
72,882 |
Long-term debt of subsidiary |
|
917 |
|
|
- |
Long-term debt - bank facilities and other |
|
184,936 |
|
|
72,882 |
|
|
|
|
|
|
Long-term debt - convertible debentures |
|
315,786 |
|
|
251,891 |
Total |
$ |
509,921 |
|
$ |
473,754 |
i) |
Revolving term credit facility |
|
|
Provident completed an extension of its existing credit
agreement (the "Credit Facility") on October 14, 2011, with
National Bank of Canada as administrative agent and a syndicate of
Canadian chartered banks and other Canadian and foreign financial
institutions (the "Lenders"). Pursuant to the amended Credit
Facility, the Lenders have agreed to continue to provide Provident
with a credit facility of $500 million which, under an accordion
feature, can be increased to $750 million at the option of the
Company, subject to obtaining additional commitments. The
amended Credit Facility also provides for a separate Letter of
Credit facility which has been increased from $60 million to $75
million. |
|
|
The amended terms of the Credit Facility provide for a
revolving three year period expiring on October 14, 2014 (subject
to customary extension provisions), secured by substantially all of
the assets of Provident. Provident may draw on the facility by way
of Canadian prime rate loans, U.S. base rate loans, banker's
acceptances, LIBOR loans, or letters of credit. As at December 31,
2011, Provident had drawn $190.1 million (including $3.6 million
presented as a bank overdraft in accounts payable and accrued
liabilities) or 38 percent of its Credit Facility (December 31,
2010 - $75.5 million or 15 percent). Included in the carrying value
at December 31, 2011 were financing costs of $2.2 million (December
31, 2010 - $2.4 million). At December 31, 2011, the effective
interest rate of the outstanding Credit Facility was 3.3 percent
(December 31, 2010 - 4.1 percent). At December 31, 2011, Provident
had $60.1 million in letters of credit outstanding (December 31,
2010 - $47.9 million) that guarantee Provident's performance under
certain commercial and other contracts. |
|
ii) |
Long-term debt of subsidiary |
|
|
On October 3, 2011, Provident completed the acquisition of a
two-thirds interest in Three Star. Three Star's long-term debt is
secured by the vehicles and trailers owned by the subsidiary and
matures over a period of between two to five years. In addition,
Three Star has an operating line of credit (presented in accounts
payable and accrued liabilities) which is secured by substantially
all of the assets of Three Star other than the vehicles and
trailers which are pledged as security for the subsidiary's
long-term debt. As at December 31, 2011, Three Star had drawn $18.0
million, including $9.2 million, $0.9 million, and $7.9 million
presented as current portion of long-term debt, long-term debt -
bank facilities and other, and a bank overdraft in accounts payable
and accrued liabilities, respectively, on the consolidated
statement of financial position. At December 31, 2011, the
effective interest rate of the subsidiary's outstanding long-term
debt was 4.9 percent. |
|
iii) |
Convertible debentures |
|
|
In November 2010, Provident issued $172.5 million aggregate
principal amount of convertible unsecured subordinated debentures
($164.7 million, net of issue costs). The debentures bear interest
at 5.75% per annum, payable semi-annually in arrears on June 30 and
December 31 each year commencing June 30, 2011 and mature on
December 31, 2017. The debentures may be converted into
equity at the option of the holder at a conversion price of $10.60
per share prior to the earlier of December 31, 2017 and the date of
redemption, and may be redeemed by Provident under certain
circumstances. Upon conversion of the 5.75% debentures,
Provident may elect to pay the holder cash at the option of
Provident. At issuance, $163.3 million was recorded related
to the debt component of the debentures ($155.5 million, net of
issue of costs) and the conversion feature of the debentures was
valued at $9.2 million and was recorded as a long-term financial
derivative instrument. |
|
|
On January 13, 2011, in connection with the corporate
conversion, Provident Energy Ltd. announced an offer to purchase
for cash its 6.5% convertible debentures maturing on August 31,
2012 (the "C series") and its 6.5% convertible debentures maturing
on April 30, 2011 (the "D series") at a price equal to 101 percent
of their principal amounts plus accrued interest. The offer was
completed on February 21, 2011 and resulted in Provident taking up
and cancelling $4.1 million principal amount of C series debentures
and $81.3 million principal amount of D series debentures. The
transaction resulted in Provident recognizing a loss on repurchase
of $1.2 million in financing charges in the consolidated statement
of operations. The total offer price, including accrued
interest, was funded by Provident Energy Ltd.'s existing revolving
term credit facility. |
|
|
On April 30, 2011 the remaining D series debentures, with a
principal amount of $68.6 million matured as scheduled. Provident
funded the maturity through the revolving term credit
facility. |
|
|
In May 2011, Provident issued $172.5 million aggregate
principal amount of convertible unsecured subordinated debentures
($165.0 million, net of issue costs). The debentures bear interest
at 5.75% per annum, payable semi-annually in arrears on June 30 and
December 31 each year commencing December 31, 2011 and mature on
December 31, 2018. The debentures may be converted into equity at
the option of the holder at a conversion price of $12.55 per share
prior to the earlier of December 31, 2018 and the date of
redemption, and may be redeemed by Provident under certain
circumstances. Upon conversion of the 5.75% debentures,
Provident may elect to pay the holder cash at the option of
Provident. At issuance, $164.1 million was recorded related
to the debt component of the debentures ($156.6 million, net of
issue costs) and the conversion feature of the debentures was
valued at $8.4 million and was recorded as a long-term financial
derivative instrument. |
|
|
On May 25, 2011, Provident redeemed all of the outstanding
aggregate principal amount of the C series 6.5% convertible
debentures at a redemption price equal to $1,000 in cash per $1,000
principal amount, plus accrued interest. The redemption
resulted in Provident taking up and cancelling the remaining
outstanding $94.9 million principal amount of C series
debentures. Provident recognized a loss on the redemption of
$2.1 million in financing charges in the consolidated statement of
operations. The total redemption, including accrued interest,
was funded by Provident Energy Ltd.'s existing revolving term
credit facility. |
|
|
Provident may elect to satisfy interest and principal
obligations on the convertible debentures by the issuance of
shares. For the year ended December 31, 2011, $50 thousand of
the face value of debentures were converted to shares at the
election of debenture holders (2010 - nil). Included in the
carrying value at December 31, 2011 were financing costs of $13.4
million (December 31, 2010 - $9.0 million). At December 31,
2011, the fair value of convertible debentures, including the
conversion feature, was approximately $357 million (December 31,
2010 - $424 million). The following table details each
outstanding convertible debenture. |
|
|
|
As at |
|
As at |
|
|
|
|
|
Convertible Debentures |
|
December 31, 2011 |
|
December 31, 2010 |
|
|
|
|
|
($ 000s except
conversion pricing) |
|
Carrying
value (1) |
|
Face
value |
|
Carrying value
(1) |
|
Face value |
|
Maturity date |
|
Conversion
price per
share (2) |
|
6.5% Convertible Debentures |
$ |
- |
$ |
- |
|
148,981 |
$ |
149,980 |
|
April 30, 2011 |
$ |
12.40 |
|
6.5% Convertible Debentures |
|
- |
|
- |
|
96,084 |
|
98,999 |
|
Aug. 31, 2012 |
|
11.56 |
|
5.75% Convertible Debentures |
|
157,914 |
|
172,500 |
|
155,807 |
|
172,500 |
|
Dec. 31, 2017 |
|
10.60 |
|
5.75% Convertible Debentures |
|
157,872 |
|
172,500 |
|
- |
|
- |
|
Dec. 31, 2018 |
|
12.55 |
|
|
$ |
315,786 |
$ |
345,000 |
$ |
400,872 |
$ |
421,479 |
|
|
|
|
|
(1) Excluding the conversion feature of
convertible debentures. |
|
|
|
|
|
|
|
|
|
(2) The debentures may be converted
into shares at the option of the holder of the debenture at the
conversion price per share. |
|
|
|
|
|
The conversion feature of convertible debentures is presented
at fair value as a long-term financial derivative instrument on the
consolidated statement of financial position (see note 16). |
12. Decommissioning liabilities
Provident's decommissioning liabilities are based
on its net ownership in property, plant and equipment and
represents management's estimate of the costs to abandon and
reclaim those assets as well as an estimate of the future timing of
the costs to be incurred. Estimated cash flows have been discounted
at Provident's nominal risk free rate and an inflation rate of two
percent has been estimated for future years. In the third quarter
of 2011, Provident adjusted the nominal risk free rate from four
percent down to three percent, to reflect recent interest rate
changes in long-term benchmark bond yields. The resulting
adjustment of $21.2 million is
presented as a change in estimate. In 2011, decommissioning
liabilities increased by $4.3 million
(2010 - $0.2 million) related to
future obligations associated with capital expenditures incurred
during the year.
The total undiscounted amount of future cash flows
required to settle the decommissioning liabilities is estimated to
be $218.9 million (2010 -
$207.3 million). The estimated
costs include such activities as dismantling, demolition and
disposal of the facilities as well as remediation and restoration
of the surface land. Payments to settle the decommissioning
liabilities are expected to occur subsequent to the closure of the
facilities and related assets. Settlement of these
liabilities is expected to occur in 23 to 35 years.
|
|
As at |
|
|
As at |
|
|
December 31, |
|
|
December 31, |
($ 000s) |
|
2011 |
|
|
2010 |
Carrying amount, beginning of year |
$ |
57,232 |
|
$ |
127,800 |
Acquisitions |
|
- |
|
|
3,902 |
Dispositions - discountinued operations |
|
- |
|
|
(65,184) |
Increase in liabilities incurred during the year |
|
4,335 |
|
|
220 |
Settlement of liabilities during the year - discontinued
operations |
|
- |
|
|
(2,041) |
Transfer to other long-term liabilities (1) |
|
- |
|
|
(18,194) |
Accretion of liability - continuing operations |
|
2,329 |
|
|
2,163 |
Accretion of liability - discontinued operations |
|
- |
|
|
1,494 |
Change in estimate |
|
21,159 |
|
|
7,072 |
Carrying amount, end of year |
$ |
85,055 |
|
$ |
57,232 |
(1)
Commencing on June 30, 2010, obligations associated with residual
Upstream properties have been classified as other long-term
liabilities on the statement of financial position. |
13. Share capital
On January 1, 2011,
the Trust completed a conversion from an income trust structure to
a corporate structure pursuant to a plan of arrangement on the
basis of one common share in Provident Energy Ltd. in exchange for
each trust unit held in the Trust. The conversion resulted in
the reorganization of the Trust into a publicly traded,
dividend-paying corporation under the name "Provident Energy
Ltd."
Provident's Premium Dividend and Dividend
Reinvestment purchase ("DRIP") plan provides shareholders with a
means to automatically reinvest sums received on account of
dividends on shares. Pursuant to the corporate
conversion, the company assigned the DRIP to Provident Energy Ltd.
("PEL DRIP"). As a result, all existing participants in the
DRIP were deemed to be participants in the PEL DRIP without any
further action on their part and holders of common shares may
participate in the PEL DRIP with respect to any cash dividends
declared and paid by Provident Energy Ltd. on the common
shares.
On October 3, 2011,
Provident completed the acquisition of a two-thirds interest in
Three Star. The acquisition was partially funded by issuing
944,828 common shares at a price of $8.05.
i) Share
capital
|
Common Shares |
|
Number
of shares |
|
Amount
(000s) |
|
Issued on conversion to a corporation effective January 1,
2011 |
|
268,765,492 |
$ |
2,866,268 |
|
Issued to acquire Three Star |
|
944,828 |
|
7,606 |
|
Issued pursuant to the dividend reinvestment plan |
|
4,070,265 |
|
33,157 |
|
To be issued pursuant to the dividend reinvestment
plan |
|
407,724 |
|
3,967 |
|
Debenture conversions |
|
4,325 |
|
49 |
|
Share issue costs |
|
- |
|
(23) |
|
Balance at December
31, 2011 |
|
274,192,634 |
$ |
2,911,024 |
Provident has an unlimited number of common shares authorized
for issuance. |
ii) Unitholders'
contributions
|
Trust Units |
|
Number of units |
|
Amount
(000s) |
|
Balance at January 1, 2010 |
|
264,336,636 |
$ |
2,834,177 |
|
Issued pursuant to the distribution reinvestment plan |
|
4,002,565 |
|
28,635 |
|
To be issued pursuant to the distribution
reinvestment plan |
|
426,291 |
|
3,456 |
|
Balance at December 31, 2010 |
|
268,765,492 |
$ |
2,866,268 |
|
Cancelled on conversion to a
corporation effective January 1, 2011 |
|
(268,765,492) |
|
(2,866,268) |
|
Balance at
December 31, 2011 |
|
- |
$ |
- |
The basic and diluted per share amounts for the year ended December
31, 2011 were calculated based on the weighted average number of
shares outstanding of 270,741,572 (2010 - 266,008,193). |
14. Share based compensation
Restricted/Performance share units |
|
|
Certain employees of Provident are granted restricted share
units (RSUs) and/or performance share units (PSUs), both of which
entitle the employee to receive cash compensation in relation to
the value of a specific number of underlying notional share
units. The grants are based on criteria designed to recognize
the long-term value of the employee to the organization. RSUs
typically vest evenly over a period of three years commencing at
the grant date. Payments are made on the anniversary dates of
the RSU to the employees entitled to receive them on the basis of a
cash payment equal to the value of the underlying notional share
units. PSUs vest three years from the date of grant and can
be increased to a maximum of double the PSUs granted or a minimum
of nil PSUs depending on the Company's performance based on certain
benchmarks. |
|
|
The fair value estimate associated with the RSUs and PSUs is
expensed in the statement of operations over the vesting
period. At December 31, 2011, $20.0 million (December 31,
2010 - $7.4 million) is included in accounts payable and accrued
liabilities for this plan and $11.5 million (December 31, 2010 -
$10.4 million) is included in other long-term liabilities.
The following table reconciles the expense recorded for RSUs and
PSUs. |
|
Year ended December
31, |
|
|
2011 |
|
2010 |
General and administrative |
$ |
19,162 |
$ |
8,160 |
Production, operating and maintenance |
|
1,491 |
|
288 |
|
$ |
20,653 |
$ |
8,448 |
The following table provides a continuity of the Company's RSU
and PSU plans: |
Units outstanding |
|
RSUs |
|
|
PSUs |
Opening balance January 1, 2010 |
|
1,576,123 |
|
|
3,959,122 |
Grants |
|
672,155 |
|
|
1,385,636 |
Reinvested through notional dividends |
|
105,956 |
|
|
328,868 |
Exercised |
|
(857,751) |
|
|
(2,873,270) |
Forfeited |
|
(321,475) |
|
|
(356,775) |
Ending balance December 31, 2010 |
|
1,175,008 |
|
|
2,443,581 |
Grants |
|
550,065 |
|
|
470,069 |
Reinvested through notional dividends |
|
77,378 |
|
|
147,227 |
Exercised |
|
(562,028) |
|
|
(722,082) |
Forfeited |
|
(16,579) |
|
|
(21,039) |
Ending balance December 31, 2011 |
|
1,223,844 |
|
|
2,317,756 |
At December 31, 2011, all RSUs and PSUs have been valued using
Provident's share price and each PSU has been valued using a
multiplier of 1.25, 1.40, and 1.20, for the 2009, 2010, and 2011
grants, respectively. |
15. Income taxes
Income tax expense (recovery) |
|
Year
ended December 31, |
($ 000s) |
|
2011 |
|
2010 |
|
|
|
|
|
Current tax expense (recovery): |
|
|
|
|
Current tax on profits for the year |
$ |
654 |
$ |
(6,956) |
Total current tax expense (recovery) |
|
654 |
|
(6,956) |
|
|
|
|
|
Deferred tax expense (recovery): |
|
|
|
|
Origination and reversal of timing
differences |
|
67,832 |
|
(40,871) |
Total deferred tax expense (recovery) |
|
67,832 |
|
(40,871) |
Income tax expense (recovery) |
$ |
68,486 |
$ |
(47,827) |
The income tax provision differs from the expected
amount calculated by applying the Company's combined federal and
provincial/state income tax rate of 26.83 percent (2010 - 33.35
percent) as follows:
Reconciliation between provision for
income taxes and pre-tax income |
|
Year
ended December 31, |
($ 000s) |
|
2011 |
|
2010 |
|
|
|
|
|
Income from continuing operations before tax |
$ |
165,703 |
$ |
64,390 |
Tax rate |
|
26.83% |
|
33.35% |
|
|
44,458 |
|
21,474 |
Tax effects: |
|
|
|
|
|
True up |
|
- |
|
- |
|
Foreign rate differences |
|
- |
|
- |
|
Rate change due to corporate conversion |
|
24,030 |
|
- |
|
Income not subject to tax - income of the
Trust |
|
- |
|
(74,056) |
|
Other |
|
(2) |
|
4,755 |
Income tax expense (recovery) |
$ |
68,486 |
$ |
(47,827) |
The analysis of deferred tax assets and deferred tax liabilities
is as follows:
|
As at |
As at |
|
December 31, |
December 31, |
($ 000s) |
|
2011 |
|
2010 |
Deferred tax assets: |
|
|
|
|
|
Deferred tax asset to be recovered after more than
12 months |
$ |
131,872 |
$ |
153,900 |
|
Deferred tax asset to be recovered within 12
months |
|
32,000 |
|
51,050 |
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
Deferred tax liability to be recovered after more
than 12 months |
|
(160,444) |
|
(130,662) |
|
Deferred tax liability to be recovered within 12
months |
|
(466) |
|
(1,589) |
Deferred income taxes |
$ |
2,962 |
$ |
72,699 |
The components of the deferred tax assets and deferred tax
liabilities are as follows:
|
|
As at |
|
As at |
|
|
December
31, |
|
December 31, |
($ 000s) |
|
2011 |
|
2010 |
Deferred tax asset: |
|
|
|
|
|
Decomissioning liabilities |
$ |
23,052 |
$ |
16,447 |
|
Loss carryforward |
|
114,808 |
|
144,587 |
|
Tax credits |
|
177 |
|
16,452 |
|
Financial derivative instruments |
|
18,752 |
|
23,526 |
|
Other deductible temporary differences |
|
9,666 |
|
14,081 |
Gross deferred tax asset |
|
166,455 |
|
215,093 |
Valuation allowance |
|
(2,583) |
|
(10,143) |
Total deferred tax asset |
$ |
163,872 |
$ |
204,950 |
|
|
|
|
|
Deferred tax liability: |
|
|
|
|
|
Property, plant and equipment |
$ |
(157,105) |
$ |
(125,873) |
|
Other taxable temporary differences |
|
(3,805) |
|
(6,378) |
Total deferred tax liability |
$ |
(160,910) |
$ |
(132,251) |
Deferred income taxes |
$ |
2,962 |
$ |
72,699 |
The movement of the deferred income tax account is as
follows:
|
|
Year ended
December 31, |
($ 000s) |
|
2011 |
|
2010 |
Deferred income tax asset (liability) |
|
|
|
|
|
Opening balance, beginning of year |
$ |
72,699 |
$ |
(37,765) |
|
(Expense) recovery from the statement of
operations |
|
(67,832) |
|
40,871 |
|
Change related to discontinued operations |
|
- |
|
69,770 |
|
Foreign exchange differences |
|
(26) |
|
(177) |
|
Acquisition of subsidiary, Three Star |
|
(1,879) |
|
- |
Deferred income taxes, end of
year |
$ |
2,962 |
$ |
72,699 |
Included in the future income tax asset is
estimated non-capital loss carry forwards that expire in 2026
through 2030. Provident's valuation allowance applies to
other temporary differences that reduce the amount recorded to the
expected amount to be realized.
As at December 31,
2011, the aggregate temporary differences associated with
investments in subsidiaries for which no deferred tax liabilities
have been recognized is $244.3
million (December 31, 2010 -
$242.6 million). The amount and
timing of reversals of temporary differences depends on Provident's
future operating results, acquisitions and dispositions of assets
and liabilities, and dividend policy. A significant change in
any of the preceding assumptions could materially affect
Provident's estimate of the deferred tax balance.
Prior to conversion to a corporation effective
January 1, 2011, IFRS required
temporary differences at the Trust level to be reflected at the
highest rate at which individuals would be taxed on undistributed
profits. Upon corporate conversion, deferred tax balances are
determined using the applicable statutory rate for
corporations.
16. Financial instruments
Risk Management overview
Provident has a comprehensive Enterprise Risk
Management program that is designed to identify and manage risks
that could negatively affect its business, operations or
results. The program's activities include risk
identification, assessment, response, control, monitoring and
communication.
Provident's Risk Management Committee ("RMC")
oversees execution of the program and regular reports are provided
to the Audit Committee and Board of Directors.
Provident has established and implemented market
risk management strategies, policies and limits that are monitored
by Provident's Risk Management group. The derivative
instruments Provident uses include put and call options, costless
collars, participating swaps, and fixed price products that settle
against indexed referenced pricing. The purchase of put option
contracts effectively create a floor price for the commodity, while
allowing for full participation if prices increase. The purchase of
call options allow for a commodity to be purchased at a fixed price
at the option of the contract holder. Costless collars are
contracts that provide a floor and a ceiling price and allowing
participation within a set range. Participating swaps are contracts
that provide a floor and also provide a ceiling for a certain
percentage of the volume of the contract. Fixed price swaps are
contracts that specify a fixed price at which a certain volume of
product will be bought or sold at in the future.
The Risk Management group monitors risk exposure by
generating and reviewing mark-to-market reports and counterparty
credit exposure of Provident's outstanding derivative
contracts. Additional monitoring activities include reviewing
available derivative positions, regulatory changes and bank and
analyst reports.
The market risk management program is designed to
protect a base level of operating cash flow in order to support
cash dividends and capital programs. The market risk
management program manages commodity price volatility, as well as
fluctuating interest and foreign exchange rates. Provident
utilizes a variety of financial instruments to protect margins on a
portion of its frac spread production and sales, and to manage
physical contract exposure for periods of up to two years. As
well, the Provident market risk management strategy reduces foreign
exchange risk due to the exposure arising from the conversion of
U.S. dollars into Canadian dollars.
Fair Values
Fair value measurement of assets and liabilities
recognized on the consolidated statement of financial position are
categorized into levels within a fair value hierarchy based on the
nature of valuation inputs. The three levels of the fair
value hierarchy are:
- Level 1 - Unadjusted quoted prices in active markets for
identical assets or liabilities;
- Level 2 - Inputs other than quoted prices that are observable
for the asset or liability either directly or indirectly; and
- Level 3 - Inputs that are not based on observable market
data.
Provident's financial derivative instruments have
been classified as Level 2 instruments with the exception of the
redemption liability related to the acquisition of the Company's
subsidiary, Three Star, which is classified as a Level 3
instrument. The financial instruments are carried at fair
value as at December 31, 2011 and
2010. The fair values of Level 2 financial derivative
instruments are determined by reference to independent monthly
forward settlement prices, interest rate yield curves, currency
rates, quoted market prices for Provident's shares, and volatility
rates at the period-end dates.
The redemption liability related to Three Star is
classified as a Level 3 instrument, as the fair value is determined
by using inputs that are not based on observable market data.
The liability represents a put option, held by the non-controlling
interest of Three Star, to sell the remaining one-third of the
business to Provident after the third anniversary of the
acquisition date (October 3,
2014). The put price to be paid by Provident for the
residual interest upon exercise is based on a multiple of Three
Star's earnings during the three year period prior to exercise,
adjusted for associated capital expenditures and debt based on
management estimates. These estimates are subject to
measurement uncertainty and the effect on the financial statements
of future periods could be material.
Financial instruments classified as
Level 3 |
Year ended
December 31, |
($ 000s) |
|
2011 |
|
2010 |
Redemption liability, beginning of year |
$ |
- |
$ |
- |
Acquisition of Three Star (note 6) |
|
9,054 |
|
- |
Accretion of liability |
|
26 |
|
- |
Gain on revaluation |
|
(1,532) |
|
- |
Redemption liability, end of year |
$ |
7,548 |
$ |
- |
Provident has also reflected management's assessment of
nonperformance risk, including credit risk, into the fair value
measurement. In evaluating the credit risk component of
nonperformance risk, Provident has considered prevailing market
credit spreads.
As at December 31, 2011 ($ 000s) |
|
Held for Trading |
|
Loans and Receivables |
|
Other Liabilities |
|
Total Carrying Value |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Accounts receivable |
$ |
- |
$ |
230,457 |
$ |
- |
$ |
230,457 |
Financial derivative
instruments
- current assets |
|
4,571 |
|
- |
|
- |
|
4,571 |
|
$ |
4,571 |
$ |
230,457 |
$ |
- |
$ |
235,028 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
$ |
- |
$ |
- |
$ |
276,480 |
$ |
276,480 |
Cash dividends payable |
|
- |
|
- |
|
8,353 |
|
8,353 |
Current portion of long-term debt |
|
- |
|
- |
|
9,199 |
|
9,199 |
Financial derivative
instruments
- current liabilities |
|
56,901 |
|
- |
|
- |
|
56,901 |
Long-term debt - bank facilities and other |
|
- |
|
- |
|
184,936 |
|
184,936 |
Long-term debt - convertible debentures |
|
- |
|
- |
|
315,786 |
|
315,786 |
Financial derivative
instruments
- long-term liabilities |
|
52,373 |
|
- |
|
- |
|
52,373 |
Other long-term liabilities |
|
- |
|
- |
|
20,551 |
|
20,551 |
|
$ |
109,274 |
$ |
- |
$ |
815,305 |
$ |
924,579 |
As at December 31, 2010 ($ 000s) |
|
Held for Trading |
|
Loans and Receivables |
|
Other Liabilities |
|
Total Carrying Value |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
- |
$ |
4,400 |
$ |
- |
$ |
4,400 |
Accounts receivable |
|
- |
|
206,631 |
|
- |
|
206,631 |
Financial derivative
instruments
- current assets |
|
487 |
|
- |
|
- |
|
487 |
|
$ |
487 |
$ |
211,031 |
$ |
- |
$ |
211,518 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
$ |
- |
$ |
- |
$ |
227,944 |
$ |
227,944 |
Cash dividends payable |
|
- |
|
- |
|
12,646 |
|
12,646 |
Current portion of long-term debt |
|
- |
|
- |
|
148,981 |
|
148,981 |
Financial derivative
instruments
- current liabilities |
|
37,849 |
|
- |
|
- |
|
37,849 |
Long-term debt - bank facilities and other |
|
- |
|
- |
|
72,882 |
|
72,882 |
Long-term debt - convertible debentures |
|
- |
|
- |
|
251,891 |
|
251,891 |
Financial derivative
instruments
- long-term liabilities |
|
29,187 |
|
- |
|
- |
|
29,187 |
Other long-term liabilities |
|
- |
|
- |
|
19,634 |
|
19,634 |
|
$ |
67,036 |
$ |
- |
$ |
733,978 |
$ |
801,014 |
Except as disclosed in note 11 in connection with the
convertible debentures, there were no significant differences
between the carrying value of these financial instruments and their
estimated fair value as at December 31,
2011.
The following table is a summary of the net
financial derivative instruments liability:
|
|
As at |
|
As at |
|
|
December 31, |
|
December 31, |
($ 000s) |
|
2011 |
|
2010 |
|
|
|
|
|
Frac spread related |
|
|
|
|
|
Crude oil |
$ |
10,196 |
$ |
16,733 |
|
Natural gas |
|
30,579 |
|
19,113 |
|
Propane |
|
(4,784) |
|
16,246 |
|
Butane |
|
2,969 |
|
4,755 |
|
Condensate |
|
3,100 |
|
2,099 |
|
Foreign exchange |
|
3,747 |
|
(28) |
|
Sub-total frac spread related |
|
45,807 |
|
58,918 |
Management
of exposure embedded in physical contracts |
|
12,878 |
|
(1,168) |
Corporate |
|
|
|
|
|
Electricity |
|
(734) |
|
(421) |
|
Interest rate |
|
2,246 |
|
(366) |
Other financial
derivatives |
|
|
|
|
|
Conversion feature of convertible debentures |
|
36,958 |
|
9,586 |
|
Redemption liability related to acquisition of
Three Star |
|
7,548 |
|
- |
Net financial derivative instruments
liability |
$ |
104,703 |
$ |
66,549 |
For convertible debentures containing a cash conversion option,
the conversion feature is measured at fair value through profit and
loss at each reporting date, with any unrealized gains or losses
arising from fair value changes reported in the consolidated
statement of operations. This resulted in Provident
recording a loss of approximately $19.0
million (2010 - $0.4 million)
on the revaluation on the conversion feature of convertible
debentures on the consolidated statement of operations.
Market Risk
Market risk is the risk that the fair value of a
financial instrument will fluctuate because of changes in market
prices. Market risk is generally comprised of price risk, currency
risk and interest rate risk.
a) Price risk
The decisions to enter into financial derivative
positions and to execute the market risk management strategy are
made by senior officers of Provident who are also members of the
RMC. The RMC receives input and commodity expertise from the
business managers in the decision making process. Strategies
are selected based on their ability to help Provident provide
stable cash flow and dividends per share rather than to simply lock
in a specific commodity price.
Commodity price volatility and market location
differentials affect the Midstream business. In addition, Midstream
is exposed to possible price declines between the time Provident
purchases natural gas liquid (NGL) feedstock and sells NGL
products, and to narrowing frac spreads. Frac spreads are the
difference between the selling prices for propane-plus and the
input cost of the natural gas required to produce the respective
NGL products.
Provident responds to these risks using a market
risk management program to protect margins on a portion of its frac
spreads production and sales, and to manage physical contract
exposure for periods of up to two years while retaining some
ability to participate in a widening margin environment.
Subject to market conditions, Provident's intention is to hedge
approximately 50 percent of its production and sales volumes
exposed to frac spreads on a rolling 12 month basis. Also,
subject to market conditions, Provident may add additional
positions as appropriate for up to 24 months.
b) Currency risk
Provident's commodity sales are exposed to both
positive and negative effects of fluctuations in the Canadian/U.S.
exchange rate. Provident manages this exposure by matching a
significant portion of the cash costs that it expects with revenues
in the same currency. As well, Provident uses derivative
instruments to manage the U.S. cash requirements of its
business.
Provident regularly sells or purchases forward a
portion of expected U.S. cashflows. Provident's strategy also
manages the exposure it has to fluctuations in the U.S./Canadian
dollar exchange rate when the underlying commodity price is based
upon a U.S. index price. Provident may also use derivative
products that provide for protection against a stronger Canadian
dollar, while allowing it to participate if the currency weakens
relative to the U.S. dollar.
c) Interest rate
risk
Provident's revolving term credit facilities bear
interest at a floating rate. Using debt levels as at
December 31, 2011, an
increase/decrease of 50 basis points in the lender's base rate
would result in an increase/decrease of annual interest expense of
approximately $1.0 million (2010 - $0.4
million). Provident has mitigated this risk by entering into
interest rate financial derivative contracts for a portion of the
outstanding long-term debt. The contracts settle against
Canadian Bankers Acceptance CDOR rates.
Financial derivative sensitivity
analysis
The following tables show the impact on (loss) gain
on financial derivative instruments if the underlying risk
variables of the financial derivative instruments changed by a
specified amount, with other variables held constant.
As at December 31, 2011 ($ 000s) |
|
|
+ Change |
|
- Change |
|
|
|
|
|
|
Frac spread related |
|
|
|
|
|
|
Crude oil |
(WTI +/- $5.00 per bbl) |
$ |
(7,255) |
$ |
7,333 |
|
Natural gas |
(AECO +/- $1.00 per gj) |
|
20,349 |
|
(20,346) |
|
NGLs (includes propane, butane) |
(Belvieu +/- US $0.10 per gal) |
|
(10,033) |
|
10,033 |
|
Foreign exchange ($U.S. vs $Cdn) |
(FX rate +/- $ 0.05) |
|
(14,217) |
|
14,217 |
|
|
|
|
|
|
Management of exposure embedded in
physical contracts |
|
|
|
|
|
|
Crude oil |
(WTI +/- $5.00 per bbl) |
|
(5,647) |
|
5,647 |
|
NGLs (includes propane, butane and
condensate) |
(Belvieu +/- US $0.10 per gal) |
|
4,908 |
|
(4,908) |
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
Interest rate |
(Rate +/- 50 basis points) |
|
1,599 |
|
(1,599) |
|
Electricity |
(AESO +/- $5.00 per MW/h) |
|
218 |
|
(218) |
|
|
|
|
|
|
Conversion feature of convertible debentures |
(Provident share price +/- $0.50 per share) |
$ |
(7,077) |
$ |
6,487 |
|
|
|
|
|
|
As at December 31, 2010 ($ 000s) |
|
|
+ Change |
|
- Change |
|
|
|
|
|
|
Frac spread related |
|
|
|
|
|
|
Crude oil |
(WTI +/- $5.00 per bbl) |
$ |
(9,964) |
$ |
9,892 |
|
Natural gas |
(AECO +/- $1.00 per gj) |
|
22,264 |
|
(22,272) |
|
NGLs (includes propane, butane) |
(Belvieu +/- US $0.10 per gal) |
|
(9,160) |
|
9,330 |
|
Foreign exchange ($U.S. vs $Cdn) |
(FX rate +/- $ 0.05) |
|
(2,839) |
|
2,840 |
|
|
|
|
|
|
Management of exposure embedded in
physical contracts |
|
|
|
|
|
|
Crude oil |
(WTI +/- $5.00 per bbl) |
|
(5,506) |
|
5,509 |
|
NGLs (includes propane, butane and
condensate) |
(Belvieu +/- US $0.10 per gal) |
|
2,480 |
|
(2,482) |
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
Interest rate |
(Rate +/- 50 basis points) |
|
2,392 |
|
(2,392) |
|
Electricity |
(AESO +/- $5.00 per MW/h) |
|
435 |
|
(435) |
|
|
|
|
|
|
Conversion feature of convertible debentures |
(Provident share price +/- $0.50 per share) |
$ |
(1,827) |
$ |
1,654 |
|
|
|
|
|
|
Liquidity Risk
Liquidity risk is the risk Provident will not be
able to meet its financial obligations as they come due.
Provident's approach to managing liquidity risk is to ensure that
it always has sufficient cash and credit facilities to meet its
obligations when due, without incurring unacceptable losses or
damage to Provident's reputation.
Management typically forecasts cash flows for a
period of twelve months to identify financing requirements. These
requirements are then addressed through a combination of committed
and demand credit facilities and access to capital markets, as
discussed in note 17.
The following table outlines the timing of the cash
outflows relating to financial liabilities.
As at December 31, 2011 |
|
Payment due by period |
|
($ 000s) |
|
Total |
|
Less than
1 year |
|
1 to 3 years |
|
3 to 5 years |
|
More than 5
years |
Accounts payable and accrued liabilities |
$ |
276,480 |
$ |
276,480 |
$ |
- |
$ |
- |
$ |
- |
Cash dividends payable |
|
8,353 |
|
8,353 |
|
- |
|
- |
|
- |
Financial derivative instruments - current |
|
56,901 |
|
56,901 |
|
- |
|
- |
|
- |
Long-term debt - bank facilities and other
(1) (2) (3) |
|
214,552 |
|
15,718 |
|
198,834 |
|
- |
|
- |
Long-term debt - convertible debentures
(2) |
|
473,944 |
|
19,838 |
|
39,675 |
|
39,675 |
|
374,756 |
Long-term financial derivative
instruments |
|
52,373 |
|
- |
|
15,415 |
|
- |
|
36,958 |
Other long-term liabilities (2) |
|
21,917 |
|
2,205 |
|
14,357 |
|
2,327 |
|
3,028 |
Total |
$ |
1,104,520 |
$ |
379,495 |
$ |
268,281 |
$ |
42,002 |
$ |
414,742 |
(1) The terms of the
credit facility have a revolving three year period expiring on
October 14, 2014. |
(2) Includes
associated interest or accretion and principal payments.
|
(3) Includes current
portion of long-term debt. |
Credit Risk
Provident's Credit Policy governs the activities
undertaken to mitigate the risks associated with counterparty
(customer) non-payment. The Policy requires a formal credit
review for counterparties entering into a commodity contract with
Provident. This review determines an approved credit
limit. Activities undertaken include regular monitoring of
counterparty exposure to approved credit limits, financial review
of all active counterparties, utilizing master netting arrangements
and International Swap Dealers Association (ISDA) agreements and
obtaining financial assurances where warranted. Financial
assurances include guarantees, letters of credit and cash. In
addition, Provident has a diversified base of creditors.
Substantially all of Provident's accounts
receivable are due from customers and joint venture partners in the
oil and gas and midstream services and marketing industries and are
subject to credit risk. Provident partially mitigates
associated credit risk by limiting transactions with certain
counterparties to limits imposed by Provident based on management's
assessment of the creditworthiness of such counterparties.
The carrying value of accounts receivable reflects management's
assessment of the associated credit risks. As at December 31, 2011 amounts past due and not
impaired included in accounts receivable is $7.2 million (December 31,
2010 - nil).
Settlement of financial derivative
contracts
Midstream financial derivative contract
buyout
In April 2010,
Provident completed the buyout of all fixed price crude oil and
natural gas swaps associated with the Midstream business for a
total realized loss of $199.1
million. The carrying value of these specific contracts at
March 31, 2010 was a liability of
$177.7 million resulting in an
offsetting unrealized gain in the second quarter of 2010. The
buyout of Provident's forward mark-to-market positions allows
Provident to refocus its market risk management program on
protecting margins on a portion of its frac spread production and
managing physical contract exposure for a period of up to two
years.
The following table summarizes the impact of the
loss on financial derivative instruments during the years ended
December 31, 2011 and 2010. The
loss on revaluation of conversion feature of convertible debentures
and redemption liability, realized loss on buyout of financial
derivative instruments and unrealized gain offsetting buyout of
financial derivative instruments are not included in the table as
these items are separately disclosed on the consolidated statement
of operations.
|
|
Year ended December 31, |
Loss on financial derivative
instruments |
|
2011 |
2010 |
($ 000s except volumes) |
|
|
|
Volume (1) |
|
|
Volume (1) |
Realized loss on financial derivative
instruments |
|
|
|
|
|
|
|
Frac spread related |
|
|
|
|
|
|
|
|
Crude oil |
|
$ |
(6,186) |
0.4 |
$ |
(17,315) |
2.0 |
|
Natural gas |
|
|
(12,695) |
24.7 |
|
(29,849) |
16.9 |
|
Propane |
|
|
(36,630) |
3.9 |
|
(9,819) |
1.6 |
|
Butane |
|
|
(7,909) |
1.2 |
|
(4,889) |
0.6 |
|
Condensate |
|
|
(4,833) |
0.6 |
|
(504) |
0.2 |
|
Foreign exchange |
|
|
(2,205) |
|
|
3,766 |
|
|
Sub-total frac spread related |
|
|
(70,458) |
|
|
(58,610) |
|
Corporate |
|
|
|
|
|
|
|
|
Electricity |
|
|
2,627 |
|
|
367 |
|
|
Interest rate |
|
|
(743) |
|
|
(847) |
|
Management of exposure
embedded in physical contracts |
|
|
2,053 |
3.0 |
|
8,225 |
0.6 |
|
|
|
(66,521) |
|
|
(50,865) |
|
Unrealized
loss on financial derivative instruments |
|
|
(3,235) |
|
|
(52,599) |
|
Loss on financial derivative
instruments |
|
$ |
(69,756) |
|
$ |
(103,464) |
|
(1) The above table represents aggregate
volumes that were bought/sold over the periods. Crude oil and
NGL volumes are listed in millions of barrels and natural gas is
listed in millions of gigajoules. |
The financial derivative contracts in place at December 31, 2011 are summarized in the following
tables:
Midstream |
|
|
|
|
|
|
Volume |
|
|
Year |
Product |
(Buy)/Sell |
Terms |
Effective Period |
2012 |
Crude Oil |
1,507 |
Bpd |
US $97.57 per bbl (3) (10) |
January 1 - December 31 |
|
|
5,548 |
Bpd |
US $95.43 per bbl (3) (11) |
January 1 - March 31 |
|
|
2,217 |
Bpd |
US $86.71 per bbl (3) (12) |
January 1 - September 30 |
|
|
1,421 |
Bpd |
US $93.95 per bbl (3) (10) |
January 1 - December 31 |
|
|
978 |
Bpd |
Cdn $101.82 per bbl (3) (10) |
July 1 - December 31 |
|
|
1,445 |
Bpd |
Participating Swap Cdn $85.19 per bbl (Average
Participation 27% above the floor price) |
February 1 - December 31 |
|
|
1,352 |
Bpd |
Participating Swap US $72.22 per bbl (Average Participation 51%
above the floor price) |
March 1 - December 31 |
|
Natural Gas |
(44,057) |
Gjpd |
Cdn $3.53 per gj (2) (10) |
January 1 - December 31 |
|
|
(9,578) |
Gjpd |
Participating Swap Cdn $8.55 per gj (Average Participation 28%
below the ceiling price) |
February 1 - December 31 |
|
Propane |
7,473 |
Bpd |
US $1.55 per gallon (4) (10) |
January 1 - March 31 |
|
|
(3,297) |
Bpd |
US $1.0094 per gallon (4) (11) |
January 1 - March 31 |
|
|
(989) |
Bpd |
US $1.3375 per gallon (5) (11) |
January 1 - March 31 |
|
Normal Butane |
(2,654) |
Bpd |
US $1.7352 per gallon (6) (11) |
January 1 - March 31 |
|
|
2,445 |
Bpd |
US $1.7434 per gallon (6)
(10) |
January 1 - December 31 |
|
ISO Butane |
(1,454) |
Bpd |
US $1.7807 per gallon (7) (11) |
January 1 - March 31 |
|
Condensate |
(2,217) |
Bpd |
US $2.225 per gallon (8) (12) |
January 1 - September 30 |
|
Foreign Exchange |
|
Sell US $24,641,529 per month @
0.9862 (13) |
January 1 - March 31 |
|
|
|
|
Sell US $2,633,333 per month @ 1.016
(13) |
January 1 - June 30 |
|
|
|
|
Sell US $5,785,714 per month @ 0.996
(13) |
January 1 - July 31 |
|
|
|
|
Sell US $5,144,444 per month @ 0.996
(13) |
January 1 - September 30 |
|
|
|
|
Sell US $2,875,000 per month @ 1.050
(13) |
January 1 - December 31 |
|
|
|
|
Sell US $2,016,783 per month @ 1.0119
(13) |
March 1 - March 31 |
|
|
|
|
Sell US $1,041,721 per month @ 0.9413
(13) |
April 1 - October 31 |
|
|
|
|
Sell US $2,666,667 per month @ 1.042
(13) |
April 1 - December 31 |
|
|
|
|
Sell US $681,260 per month @ 0.9850 (13) |
May 1 - October 31 |
|
|
|
|
Sell US $1,437,986 per month @ 0.9659
(13) |
July 1 - December 31 |
|
|
|
|
Sell US $1,634,227 per month @ 0.9829
(13) |
October 1 - December 31 |
|
|
|
|
Sell US $1,420,538 per month @ 0.9995
(13) |
November 1 - December 31 |
2013 |
Crude Oil |
1,700 |
Bpd |
US $96.65 per bbl (3) (10) |
January 1 - March 31 |
|
|
1,250 |
Bpd |
Participating Swap Cdn $84.90 per bbl (Average Participation
25% above the floor price) |
January 1 - March 31 |
|
|
758 |
Bpd |
Participating Swap US $85.62 per bbl (Average Participation 30%
above the floor price) |
January 1 - March 31 |
|
Natural Gas |
(15,000) |
Gjpd |
Cdn $4.58 per gj (2) (10) |
January 1 - March 31 |
|
|
(9,524) |
Gjpd |
Participating Swap Cdn $8.87 per gj (Average Participation 22%
below the ceiling price) |
January 1 - March 31 |
|
Foreign Exchange |
|
Sell US $1,651,990 per month @ 0.9829
(13) |
January 1 - January 31 |
|
|
|
|
Sell US $1,397,250 per month @ 0.9995
(13) |
January 1 - March 31 |
|
|
|
|
Sell US $5,000,000 per month @ 1.050
(13) |
January 1 - March 31 |
Corporate |
|
|
|
|
|
|
|
|
Volume |
|
|
Year |
Product |
|
(Buy)/Sell |
Terms |
Effective Period |
|
Electricity |
|
(5) |
MW/h |
Cdn $62.00 per MW/h (9) |
January 1 2012 - December 31 2012 |
|
Interest Rate |
$ |
180,000,000 |
Notional (Cdn$) |
Pay Average Fixed rate of 1.877%
(14) |
October 1 2011 - June 30 2013 |
|
|
$ |
50,000,000 |
Notional (Cdn$) |
Pay Average Fixed rate of 1.124%
(14) |
July 1 2013 - September 30 2014 |
|
|
|
|
|
|
|
(1) |
The above table represents a number
of transactions entered into over an extended period of time. |
(2) |
Natural gas contracts are settled
against AECO monthly index. |
(3) |
Crude Oil contracts are settled
against NYMEX WTI Calendar Average. |
(4) |
Propane contracts are settled against
Belvieu C3 TET. |
(5) |
Propane contracts are settled against
Conway C3. |
(6) |
Normal Butane contracts are settled
against Belvieu NC4 NON TET & Belvieu NC4 TET. |
(7) |
ISO Butane contracts are settled
against Belvieu IC4 NON TET. |
(8) |
Condensate contracts are settled
against Belvieu NON-TET Natural Gasoline. |
(9) |
Electricity contracts are settled
against the hourly price of Electricity as published by the AESO in
$/MWh. |
(10) |
FRAC spread contracts. |
(11) |
Management of physical contract
exposure - NGL Product contracts. |
(12) |
Management of physical contract
exposure - Rail contracts. |
(13) |
US Dollar forward contracts are
settled against the Bank of Canada noon rate average. Selling
notional US dollars for Canadian dollars at a fixed exchange rate
results in a fixed Canadian dollar price for the underlying
commodity. |
(14) |
Interest rate forward contract
settles monthly against 1M CAD BA CDOR. |
17. Capital management
Provident considers its total capital to be
comprised of net debt and shareholders' equity. Net debt is
comprised of long-term debt and working capital surplus, excluding
balances for the current portion of financial derivative
instruments. The balance of these items at December 31, 2011 and December 31, 2010 were as follows:
|
|
As at |
|
As at |
|
|
December 31, |
|
December 31, |
($ 000s) |
|
2011 |
|
2010 |
Working capital surplus (1) |
$ |
(97,561) |
$ |
(79,633) |
Long-term debt (including current portion) |
|
509,921 |
|
473,754 |
Net debt |
|
412,360 |
|
394,121 |
Shareholders' equity |
|
579,058 |
|
588,207 |
Total capitalization |
$ |
991,418 |
$ |
982,328 |
|
|
|
|
|
Net debt to total capitalization |
|
42% |
|
40% |
(1) The working capital surplus excludes
balances for the current portion of financial derivative
instruments. |
Provident's primary objective for managing capital is to
maximize long-term shareholder value by:
- providing an appropriate return to shareholders relative to the
risk of Provident's underlying assets; and
- ensuring financing capacity for Provident's internal
development opportunities and acquisitions that are expected to add
value to shareholders.
Provident makes adjustments to its capital
structure based on economic conditions and Provident's planned
capital requirements. Provident has the ability to adjust its
capital structure by issuing new equity or debt, controlling the
amount it returns to shareholders, and making adjustments to its
capital expenditure program. Provident relies on cash flow
from operations, proceeds received from the DRIP program, external
lines of credit and access to capital markets to fund capital
programs and acquisitions.
On January 1, 2011,
the Trust completed a conversion from an income trust structure to
a corporate structure pursuant to a plan of arrangement. The
conversion resulted in the reorganization of the Trust into a
publicly traded, dividend-paying corporation under the name
"Provident Energy Ltd."
18. Product sales and service revenue
For the year ended December
31, 2011, included in product sales and service revenue is
$259.6 million (2010 - $202.7 million) associated with U.S. midstream
sales.
19. Supplemental disclosures
Consolidated statements of operations
presentation
The following table details the amount of total
employee compensation costs included in the cost of goods sold,
production, operating and maintenance, and general and
administrative line items in the consolidated statements of
operations for the years ended December 31,
2011 and 2010:
Employee compensation costs |
Year ended
December 31, |
($ 000s) |
|
2011 |
|
2010 |
Salaries and short-term benefits (1) |
$ |
29,657 |
$ |
27,065 |
Share based compensation (1) |
|
20,653 |
|
8,448 |
Total |
$ |
50,310 |
$ |
35,513 |
(1) Excludes amounts classified as strategic
review and restructuring in 2010. |
|
|
|
|
Compensation of key management
Compensation awarded to key management
included:
Remuneration of directors and senior management |
Year ended
December 31, |
($ 000s) |
|
2011 |
|
2010 (1) |
Salaries and short-term benefits |
$ |
4,744 |
$ |
4,589 |
Termination benefits |
|
336 |
|
18,781 |
Share based compensation |
|
5,783 |
|
2,943 |
Total |
$ |
10,863 |
$ |
26,313 |
(1) For the year ended
December 31, 2010, a portion of the expenses were included in
discontinued operations. |
Key management includes the Company's officers and
directors.
20. Other income and foreign exchange
Other income and foreign exchange is comprised
of:
Other income and foreign
exchange |
Year ended
December 31, |
($ 000s) |
|
2011 |
|
2010 |
Realized (gain) loss on foreign exchange |
$ |
(669) |
$ |
3,425 |
Loss (gain) on sale of assets |
|
1 |
|
(3,300) |
Other |
|
(6,442) |
|
(165) |
|
|
(7,110) |
|
(40) |
Unrealized (gain) loss on foreign exchange |
|
(473) |
|
808 |
Gain on termination of agreement |
|
- |
|
(4,900) |
Other |
|
59 |
|
306 |
|
|
(414) |
|
(3,786) |
Total |
$ |
(7,524) |
$ |
(3,826) |
For the year ended December 31,
2011, Provident recognized other income of $6.4 million from third parties relating to
payments received for certain contractual volume commitments at the
Empress facilities.
During the third quarter of 2010, Provident agreed
to terminate a multi-year condensate storage and terminalling
services agreement with a third party in exchange for a parcel of
land valued at $4.9 million. The
transaction was accounted for as a non-monetary transaction and
included in property, plant and equipment on the consolidated
statement of financial position with a corresponding gain included
in "Other income and foreign exchange" on the consolidated
statement of operations.
In the third quarter of 2010, Provident received
proceeds of $3.3 million from the
sale of certain asset-backed commercial paper investments that had
previously been written off. Provident recorded a gain on sale in
"Other income and foreign exchange" on the consolidated statement
of operations.
21. Commitments
Provident has entered into operating leases for
offices that extend through June
2022. However, a significant portion will be recovered
through subleases with third parties. In relation to the Midstream
business, Provident is committed to minimum lease payments under
the terms of various tank car leases for five years.
Additionally, under an arrangement to use a third party interest in
the Younger Plant, Provident has a commitment to make payments
calculated with reference to a number of variables including return
on capital.
Future minimum lease payments under non-cancelable
operating leases are as follows:
As at December 31, 2011 |
|
Payment due by period |
($ 000s) |
|
Total |
|
Less
than
1 year |
|
1 to 3 years |
|
3 to 5 years |
Operating Leases |
|
|
|
|
|
|
|
|
Office leases |
$ |
60,781 |
$ |
12,003 |
$ |
24,234 |
$ |
24,544 |
Sublease recovery |
|
(39,751) |
|
(9,647) |
|
(18,365) |
|
(11,739) |
|
|
21,030 |
|
2,356 |
|
5,869 |
|
12,805 |
Rail tank cars |
|
35,809 |
|
6,953 |
|
15,487 |
|
13,369 |
Younger plant |
|
21,578 |
|
4,808 |
|
8,892 |
|
7,878 |
Total |
$ |
78,417 |
$ |
14,117 |
$ |
30,248 |
$ |
34,052 |
22. Strategic review and restructuring
In 2010, Provident completed a strategic
transaction to separate its Upstream and Midstream businesses. An
agreement was reached with Midnight Oil Exploration Ltd.
("Midnight") to combine the remaining Provident Upstream business
with Midnight in a $416 million
transaction. Closing of this arrangement occurred on
June 29, 2010. In conjunction with
this transaction and other initiatives, Provident completed an
internal reorganization to continue as a pure play, cash
distributing natural gas liquids (NGL) infrastructure and logistics
business which resulted in staff reductions at all levels of the
organization, including senior management.
On January 1, 2011,
the Trust completed a conversion from an income trust structure to
a corporate structure pursuant to a plan of arrangement. The
conversion resulted in the reorganization of the Trust into a
publicly traded, dividend-paying corporation under the name
"Provident Energy Ltd."
For the year ended December
31, 2011, no strategic review and restructuring costs were
incurred (2010 - $31.7 million, of
which $13.8 million were attributable
to continuing operations). The costs were comprised primarily of
severance, consulting and legal costs related to the sale of the
Upstream business. In the fourth quarter of 2010, $1.9 million in costs were incurred related to
Provident's reorganization into a dividend paying corporation
effective January 1, 2011.
23. Discontinued operations (Provident Upstream)
On June 29, 2010,
Provident completed a strategic transaction in which Provident
combined the remaining Provident Upstream business with Midnight to
form Pace Oil & Gas Ltd. ("Pace") pursuant to a plan of
arrangement under the Business Corporations Act (Alberta) (the "Midnight Arrangement"). Under
the Midnight Arrangement, Midnight acquired all outstanding shares
of Provident Energy Resources Inc., a wholly-owned subsidiary of
Provident Energy Trust which held all of the producing oil and gas
properties and reserves associated with Provident's Upstream
business. Total consideration from the transaction was
$423.7 million, consisting of
$115 million in cash and
approximately 32.5 million shares of Pace valued at $308.7 million at the time of the closing.
Associated transaction costs were $8.1
million. Under the terms of the Midnight Arrangement,
Provident unitholders divested a portion of each of their Provident
units to receive 0.12225 shares of Pace, which was recorded as a
non-cash distribution by the Trust, valued at $308.7 million. Provident recorded a loss
on sale of $79.8 million and
$58.1 million in deferred tax
recovery related to this transaction. This transaction completed
the sale of the Provident Upstream business in a series of
transactions between September 2009
to June 2010.
The following table presents information on the net
loss from discontinued operations.
|
|
Year
ended December 31, |
Net loss from discontinued operations ($
000s) |
|
2011 |
|
2010 |
Production revenue, net of royalties |
|
$ |
|
|
|
- |
|
$ |
76,581 |
Loss from discontinued operations
before taxes and impact of sale of discontinued operations
(1) |
|
|
|
|
|
- |
|
|
(112,702) |
Loss on sale of discontinued operations |
|
|
|
|
|
- |
|
|
(79,790) |
Current tax expense |
|
|
|
|
|
- |
|
|
(1) |
Deferred income tax recovery |
|
|
|
|
|
- |
|
|
69,770 |
Net loss from discontinued operations for the
year |
|
$ |
|
|
|
- |
|
$ |
(122,723) |
Per unit |
|
|
|
|
|
|
|
|
|
- basic and diluted |
|
$ |
|
|
|
- |
|
$ |
(0.46) |
(1) |
For the year ended December 31,
2010 interest expense of $2.5 million was allocated to discontinued
operations on a prorata basis calculated as the proportion of net
assets of the Upstream business to the sum of total net assets of
the Trust plus long-term debt. |
The carrying amounts of major classes of assets and liabilities
included as part of the Upstream business as at the date of the
sale were as follows:
Canadian dollars (000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
$ |
|
568,880 |
Decommissioning liabilities |
|
|
|
|
|
|
|
|
(65,184) |
Other |
|
|
|
|
|
|
|
|
(8,340) |
|
|
|
|
|
|
|
$ |
|
495,356 |
Assets held for sale
IFRS requires that assets held for sale be
presented separately on the statement of financial position.
Previous Canadian GAAP made an exception to this rule for certain
upstream oil and gas related transactions. The sale of West Central
Alberta assets held in the Upstream business was announced in
December 2009. Therefore, assets and
associated decommissioning liabilities of $186.4 million and $2.8
million, respectively, related to this transaction have been
presented separately on the January 1,
2010 statement of financial position, at their fair value,
determined with reference to the negotiated sales price adjusted
for earnings between December 31,
2009 and the date of closing on March
1, 2010. This transaction resulted in a loss on sale of
$8.1 million in the first quarter of
2010.
Additional accounting policies
Accounting policies solely related to Provident's
Upstream business are as follows:
i) |
Financial instruments |
|
Financial Assets |
|
a) |
Available for sale |
|
|
The Company's investments are classified as available for sale
financial assets. A gain or loss on an available for sale
financial asset shall be recognized directly in other comprehensive
income, except for impairment losses and foreign exchange gains and
losses. When the investment is derecognized or determined to
be impaired, the cumulative gain or loss previously recorded in
equity is recognized in profit or loss. |
ii) |
Property, plant & equipment |
|
Oil and natural gas properties |
|
Oil and natural gas properties are stated at cost, less
accumulated depletion and depreciation and accumulated impairment
losses. Costs incurred subsequent to the determination of technical
feasibility and commercial viability and the costs of replacing
parts of property, plant and equipment are recognized as oil and
natural gas properties only when they increase the future economic
benefits embodied in the specific properties to which they relate.
All other expenditures are recognized in profit or loss as
incurred. Such capitalized oil and natural gas properties represent
costs incurred in developing proved and probable reserves and
bringing in or enhancing production from such reserves and are
accumulated on a cost centre basis. |
|
Development costs |
|
Expenditures on the construction, installation or completion of
infrastructure facilities such as platforms, pipelines and the
drilling of development wells, including unsuccessful development
or delineation wells, are capitalized within property, plant and
equipment. |
|
|
|
Depletion |
|
The provision for depletion and depreciation for oil and
natural gas assets is calculated, at a component level using the
unit-of-production method based on current period production
divided by the related share of estimated total proved and probable
oil and natural gas reserve volumes, before royalties.
Production and reserves of natural gas and associated liquids are
converted at the energy equivalent ratio of 6,000 cubic feet of
natural gas to one barrel of oil. In determining its
depletion base, the Company includes estimated future costs for
developing proved and probable reserves, and excludes estimated
salvage values of tangible equipment and the cost of exploration
and evaluation assets. |
iii) |
Exploration and Evaluation assets |
|
Pre-license costs |
|
General prospecting and evaluation costs incurred prior to
having obtained the legal rights to explore an area are expensed
directly to the statement of operations in the period in which they
are incurred. |
|
Exploration and evaluation costs |
|
Once the legal right to explore has been acquired, all costs
incurred to assess the technical feasibility and commercial
viability of resources are capitalized as exploration and
evaluation ("E&E") intangible assets until the drilling of the
well is complete and the results have been evaluated. These costs
may include costs of license acquisition, technical services and
studies, seismic acquisition, exploration drilling and testing,
directly attributable overhead and administration expenses,
including remuneration of production personnel and supervisory
management, the projected costs of retiring the assets (if any),
and any activities in relation to evaluating the technical
feasibility and commercial viability of extracting mineral
resources. Such items are initially measured at cost. After initial
recognition, the Company measures E&E costs using the cost
model whereby the asset is carried at cost less accumulated
impairment losses. |
|
Intangible exploration assets are not depleted and carried
forward until the Company has determined the technical feasibility
and commercial viability of extracting a mineral resource. If no
reserves are found and management determines that the Company no
longer intends to develop or otherwise extract value from the
discovery, the costs are written off to profit or loss. Upon
determination of proven and probable reserves, E&E assets
attributable to those reserves are first tested for impairment at
the cash generating unit level, and then reclassified to oil and
natural gas properties, a separate category within property, plant
and equipment. Once these costs have been transferred to property,
plant and equipment, they are subject to impairment testing at the
cash generating unit level similar to other oil and natural gas
assets within property, plant and equipment. |
iv) |
Joint arrangements |
|
Certain of the Company's activities in the Upstream business
were conducted through interests in jointly controlled assets and
operations, where the Company has a direct ownership interest in
and jointly control the assets and/or operations of the venture.
Accordingly, the income, expenses, assets, and liabilities of these
jointly controlled assets and operations are included in the
consolidated financial statements of the Company in proportion to
the Company's interest. |
v) |
Decommissioning liabilities |
|
For upstream operations, the amount recognized represents
management's estimate of the present value of the estimated future
expenditures to abandon and reclaim the Company's net ownership in
wells and facilities determined in accordance with local conditions
and requirements as well as an estimate of the future timing of the
costs to be incurred. |
|
Decommissioning is likely to occur when the fields are no
longer economically viable. This in turn depends on future oil and
gas prices, which are inherently uncertain. |
vi) |
Significant accounting judgments, estimates and
assumptions |
|
Reserves base |
|
The Company's reserves have been evaluated in accordance with
the Canadian Oil and Gas Evaluation Handbook Volumes 1 and 2
("COGEH") and comply with the standards that govern all aspects of
reserves as prescribed in National Instrument 51-101 (NI 51-101).
Under NI 51-101, proved reserves are defined as having a high
degree of certainty to be recoverable. Probable reserves are
defined as those reserves that are less certain to be recovered
than proved reserves. The targeted levels of certainty, in
aggregate, are at least 90 percent probability that the quantities
recovered will equal or exceed the estimated proved reserves and at
least 50 percent probability that the quantities recovered will
equal or exceed the sum of the estimated proved plus probable
reserves. Under NI 51-101 standards, proved plus probable are
considered a "best estimate" of future recoverable reserves. |
|
The estimation of oil and gas reserves is a subjective
process. Forecasts are based on engineering data, projected
future rates of production, estimated commodity prices, and the
timing of future expenditures. The Company expects reserve
estimates to be revised based on the results of future drilling
activity, testing, production levels, and economics of recovery
based on cash flow forecasts. Future development costs are
estimated using assumptions as to number of wells required to
produce the reserves, the cost of such wells and associated
production facilities, and other capital costs. |
|
Carrying value of oil and gas assets |
|
Oil and gas development and production properties are
depreciated on a unit-of-production basis at a rate calculated by
reference to proved plus probable reserves and incorporate the
estimated future costs of developing and extracting those
reserves. |
|
The calculation of unit-of production rate of amortization
could be impacted to the extent that actual production in the
future is different from current forecast production based on
proved plus probable reserves. This would generally result from
significant changes in any of the factors or assumptions used in
estimating reserves and could include: |
- Changes in proved plus probable reserves;
- The effect on proved plus probable reserves of differences
between actual commodity prices and commodity price assumptions;
or
- Unforeseen operational issues.
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Impairment indicators |
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The recoverable amounts of cash generating units and individual
assets have been determined based on the higher of value in use
calculations and fair values less costs to sell. These calculations
require the use of estimates and assumptions. |
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For the Upstream business, it is reasonably possible that the
commodity price assumptions may change which may then impact the
estimated life of the field and may then require a material
adjustment to the carrying value of its tangible and intangible
assets. The Company monitors internal and external indicators of
impairment relating to its tangible and intangible assets. |
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Impairment of available for sale financial
assets |
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The Company classifies certain assets as available for sale and
recognizes movements in their fair value in equity. Subsequent to
initial recognition, when the fair value declines, management makes
assumptions about the decline in value whether it is an impairment
that should be recognized in profit or loss. |
24. Subsequent
event
Arrangement agreement with Pembina Pipeline
Corporation
On January 15, 2012,
Provident and Pembina Pipeline Corporation ("Pembina") entered into
an agreement (the "Arrangement Agreement") for Pembina to acquire
all of the issued and outstanding common shares of Provident by way
of a plan of arrangement (the "Pembina Arrangement") under the
Business Corporations Act (Alberta).
Under the terms of the Arrangement Agreement,
Provident shareholders will receive 0.425 of a Pembina share for
each Provident share held (the "Provident Exchange Ratio").
Pembina will also assume all of the rights and obligations relating
to Provident's convertible debentures. The conversion price
of each class of convertible debentures will be adjusted based on
the Provident Exchange Ratio. Following closing of the
Pembina Arrangement, Pembina will be required to make an offer for
the Provident convertible debentures at 100 percent of their
principal values plus accrued and unpaid interest. The repurchase
offer will be made within 30 days of closing of the Pembina
Arrangement. Should a holder of the Provident convertible
debentures elect not to accept the repurchase offer, the debentures
will mature as originally set out in their respective indentures.
Holders who convert their Provident convertible debentures
following completion of the Pembina Arrangement will receive common
shares of Pembina. In addition, Provident immediately
suspended its DRIP plan following the announcement of the Pembina
Arrangement.
The proposed transaction will be carried out by way
of a court-approved plan of arrangement and will require the
approval of at least 66 2/3% of holders of Provident shares
represented in person or by proxy at a special meeting of Provident
shareholders to be held on March 27,
2012 to consider the Pembina Arrangement. The Pembina
Arrangement is also subject to obtaining the approval of a majority
of the votes cast by the holders of Pembina shares at a special
meeting of Pembina shareholders to be held on March 27, 2012 to consider the issuance of
Pembina shares in connection with the Pembina Arrangement. In
addition to shareholder and court approvals, the proposed
transaction is subject to applicable regulatory approvals and the
satisfaction of certain other closing conditions customary in
transactions of this nature, including compliance with the
Competition Act (Canada) and the
acceptance of the Toronto Stock Exchange. Subject to receipt
of all required approvals, closing of the Pembina Arrangement is
expected to occur on or about April 1,
2012.
SOURCE Provident Energy Ltd.