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EXHIBIT 99.2
REPORTS
Management's Report on
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. 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 theInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we have concluded that as of December 31, 2014, our internal control over financial reporting is effective.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even those systems determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2014, has been audited by Deloitte LLP, the Independent Registered Public Accounting Firm, who also audited the Company's Consolidated Financial Statements for the year ended December 31, 2014.
| | |
Ian C. Dundas President and Chief Executive Officer | | Robert J. Waters Senior Vice President and Chief Financial Officer |
Calgary, Alberta
February 19, 2015
34 ENERPLUS2014 FINANCIAL SUMMARY
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Enerplus Corporation
We have audited the internal control over financial reporting of Enerplus Corporation and subsidiaries (the "Company") as of December 31, 2014, based on the criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying the management's report. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as at and for the year ended December 31, 2014 of the Company and our report dated February 19, 2015 expressed an unqualified opinion on those consolidated financial statements.
Chartered Accountants
February 19, 2015
Calgary, Canada
ENERPLUS2014 FINANCIAL SUMMARY 35
Management's Responsibility for Financial Statements
In management's opinion, the accompanying consolidated financial statements of Enerplus Corporation have been prepared within reasonable limits of materiality and in accordance with accounting principles generally accepted in the United States of America. Since a precise determination of many assets and liabilities is dependent on future events, the preparation of financial statements necessarily involves the use of estimates and approximations. These have been made using careful judgment and with all information available up to February 19, 2015. Management is responsible for all information in the annual report and for the consistency, therewith, of all other financial and operating data presented in this report.
To meet its responsibility for reliable and accurate financial statements, management has established and monitors systems of internal control which are designed to provide reasonable assurance that financial information is relevant, reliable and accurate, and that assets are safeguarded and transactions are executed in accordance with management's authorization.
The consolidated financial statements have been examined by Deloitte LLP, Chartered Accountants. Their responsibility is to express a professional opinion on the fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The Report of the Independent Registered Public Accounting Firm outlines the scope of their examination and sets forth their opinion.
The Audit Committee, consisting exclusively of independent directors, has reviewed these statements with management and the Independent Registered Public Accounting Firm and has recommended their approval to the Board of Directors. The Board of Directors has approved the consolidated financial statements of the Company.
| | |
Ian C. Dundas President and Chief Executive Officer | | Robert J. Waters Senior Vice President and Chief Financial Officer |
Calgary, Alberta
February 19, 2015
36 ENERPLUS2014 FINANCIAL SUMMARY
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Enerplus Corporation
We have audited the accompanying consolidated financial statements of Enerplus Corporation and subsidiaries (the "Company"), which comprise the consolidated balance sheets as at December 31, 2014 and December 31, 2013, and the consolidated statements of income / (loss) and comprehensive income / (loss), consolidated statements of changes in shareholders' equity, and consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2014, and notes to the consolidated financial statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Enerplus Corporation and subsidiaries as at December 31, 2014 and December 31, 2013, and their financial performance and their cash flows for each of the years in the three-year period ended December 31, 2014 in accordance with accounting principles generally accepted in the United States of America.
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014, based on the criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
Chartered Accountants
February 19, 2015
Calgary, Canada
ENERPLUS2014 FINANCIAL SUMMARY 37
STATEMENTS
Consolidated Balance Sheets
(CDN$ thousands) | | Note | | | | December 31, 2014 | | | | | December 31, 2013 | | |
| |
|
Assets | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | |
| Cash | | | | | $ | 2,036 | | | | $ | 2,990 | | |
| Accounts receivable | | 3 | | | | 199,745 | | | | | 165,091 | | |
| Deferred income tax asset | | 14 | | | | – | | | | | 48,476 | | |
| Deferred financial assets | | 16 | | | | 215,706 | | | | | 9,198 | | |
| Other current assets | | | | | | 8,241 | | | | | 7,641 | | |
| |
|
| | | | | | 425,728 | | | | | 233,396 | | |
| |
|
Property, plant and equipment: | | | | | | | | | | | | | |
| Oil and natural gas properties (full cost method) | | 4 | | | | 2,632,474 | | | | | 2,420,144 | | |
| Other capital assets, net | | 4 | | | | 20,591 | | | | | 21,210 | | |
| |
|
| Property, plant and equipment | | | | | | 2,653,065 | | | | | 2,441,354 | | |
| |
|
Goodwill | | | | | | 624,390 | | | | | 609,975 | | |
Deferred income tax asset | | 14 | | | | 348,117 | | | | | 364,411 | | |
Deferred financial assets | | 16 | | | | 30,997 | | | | | 19,274 | | |
Marketable securities | | 6 | | | | – | | | | | 13,389 | | |
| |
|
Total Assets | | | | | $ | 4,082,297 | | | | $ | 3,681,799 | | |
| |
|
Liabilities | | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | |
| Accounts payable | | 7 | | | $ | 351,006 | | | | $ | 377,157 | | |
| Dividends payable | | | | | | 18,516 | | | | | 18,250 | | |
| Current portion of long-term debt | | 8 | | | | 98,933 | | | | | 48,713 | | |
| Deferred income tax liability | | 14 | | | | 50,805 | | | | | – | | |
| Deferred financial credits | | 16 | | | | 10,826 | | | | | 37,031 | | |
| |
|
| | | | | | 530,086 | | | | | 481,151 | | |
| |
|
Deferred financial credits | | 16 | | | | 2,396 | | | | | – | | |
Long-term debt | | 8 | | | | 1,037,997 | | | | | 976,585 | | |
Asset retirement obligation | | 9 | | | | 288,692 | | | | | 291,761 | | |
| |
|
| | | | | | 1,329,085 | | | | | 1,268,346 | | |
| |
|
Total Liabilities | | | | | | 1,859,171 | | | | | 1,749,497 | | |
| |
|
Shareholders' Equity | | | | | | | | | | | | | |
Share capital – authorized unlimited common shares, no par value Issued and outstanding: December 31, 2014 – 206 million shares | | | | | | | | | | | | | |
| | | | December 31, 2013 – 203 million shares | | 15 | | | | 3,120,002 | | | | | 3,061,839 | | |
Paid-in capital | | 15 | | | | 46,906 | | | | | 38,398 | | |
Accumulated deficit | | | | | | (1,039,260 | ) | | | | (1,117,238 | ) | |
Accumulated other comprehensive income/(loss) | | | | | | 95,478 | | | | | (50,697 | ) | |
| |
|
| | | | | | 2,223,126 | | | | | 1,932,302 | | |
| |
|
Total Liabilities & Equity | | | | | $ | 4,082,297 | | | | $ | 3,681,799 | | |
| |
|
Commitments, Contingencies and Guarantees | | 17 | | | | | | | | | | | |
See accompanying notes to the Consolidated Financial Statements
Approved on behalf of the Board of Directors:
| | |
Elliott Pew Director | | Robert B. Hodgins Director |
38 ENERPLUS2014 FINANCIAL SUMMARY
Consolidated Statements of Income/(Loss) and
Comprehensive Income/(Loss)
For the year ended December 31(CDN$ thousands) | | Note | | | | 2014 | | | | | 2013 | | | | | 2012 | | |
| |
| | |
Revenues | | | | | | | | | | | | | | | | | | |
Oil and natural gas sales, net of royalties | | 10 | | | $ | 1,526,194 | | | | $ | 1,352,472 | | | | $ | 1,153,334 | | |
Commodity derivative instruments gain/(loss) | | 16 | | | | 234,373 | | | | | (41,870 | ) | | | | 91,995 | | |
| |
| | |
| | | | | | 1,760,567 | | | | | 1,310,602 | | | | | 1,245,329 | | |
| |
| | |
Expenses | | | | | | | | | | | | | | | | | | |
Operating | | | | | | 392,564 | | | | | 343,433 | | | | | 319,031 | | |
Production taxes | | | | | | 81,522 | | | | | 70,388 | | | | | 56,624 | | |
Transportation | | | | | | 57,215 | | | | | 39,918 | | | | | 26,569 | | |
General and administrative | | 11 | | | | 105,041 | | | | | 110,260 | | | | | 93,844 | | |
Depletion, depreciation, amortization and accretion | | | | | | 566,674 | | | | | 593,203 | | | | | 560,293 | | |
Asset impairment | | 5 | | | | – | | | | | – | | | | | 781,099 | | |
Interest | | 12 | | | | 63,788 | | | | | 58,337 | | | | | 54,907 | | |
Foreign exchange(gain)/loss | | 13 | | | | 57,090 | | | | | 9,313 | | | | | (17,204 | ) | |
Other expense/(income) | | | | | | (231 | ) | | | | (868 | ) | | | | (86,146 | ) | |
| |
| | |
| | | | | | 1,323,663 | | | | | 1,223,984 | | | | | 1,789,017 | | |
| |
| | |
Income/(Loss) Before Taxes | | | | | | 436,904 | | | | | 86,618 | | | | | (543,688 | ) | |
Current income tax expense/(recovery) | | 14 | | | | 4,998 | | | | | 7,889 | | | | | 1,648 | | |
Deferred income tax expense/(recovery) | | 14 | | | | 132,830 | | | | | 30,753 | | | | | (274,639 | ) | |
| |
| | |
Net Income/(Loss) | | | | | $ | 299,076 | | | | $ | 47,976 | | | | $ | (270,697 | ) | |
| |
| | |
Other Comprehensive Income/(Loss) | | | | | | | | | | | | | | | | | | |
Changes due to marketable securities (net of tax) | | | | | | | | | | | | | | | | | | |
| Unrealized gain/(loss) | | 6 | | | | (145 | ) | | | | 7,136 | | | | | (10,115 | ) | |
| Realized (gain)/loss reclassified to net income | | 6 | | | | 2,503 | | | | | (315 | ) | | | | – | | |
Change in cumulative translation adjustment | | | | | | 143,817 | | | | | 72,867 | | | | | (32,255 | ) | |
| |
| | |
Other Comprehensive Income/(Loss) | | | | | | 146,175 | | | | | 79,688 | | | | | (42,370 | ) | |
| |
| | |
Total Comprehensive Income/(Loss) | | | | | $ | 445,251 | | | | $ | 127,664 | | | | $ | (313,067 | ) | |
| |
| | |
Net Income/(Loss) per Share | | | | | | | | | | | | | | | | | | |
Basic | | 15 | | | $ | 1.46 | | | | $ | 0.24 | | | | $ | (1.38 | ) | |
Diluted | | 15 | | | $ | 1.44 | | | | $ | 0.24 | | | | $ | (1.38 | ) | |
| |
| | |
See accompanying notes to the Consolidated Financial Statements
ENERPLUS2014 FINANCIAL SUMMARY 39
Consolidated Statements of Changes in Shareholders' Equity
For the year ended December 31(CDN$ thousands) | | | 2014 | | | | | 2013 | | | | | 2012 | | |
| |
| | |
Share Capital | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 3,061,839 | | | | $ | 2,997,682 | | | | $ | 2,622,003 | | |
Public offering | | | – | | | | | – | | | | | 330,618 | | |
Stock Option Plan – cash | | | 31,350 | | | | | 14,838 | | | | | 1,180 | | |
Stock Option Plan – non cash | | | 4,978 | | | | | 3,108 | | | | | 1,119 | | |
Dividend Reinvestment Plan | | | – | | | | | – | | | | | 19,150 | | |
Stock Dividend Plan | | | 21,835 | | | | | 46,211 | | | | | 23,612 | | |
| |
| | |
Balance, end of year | | $ | 3,120,002 | | | | $ | 3,061,839 | | | | $ | 2,997,682 | | |
| |
| | |
Paid-in Capital | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 38,398 | | | | $ | 32,293 | | | | $ | 23,115 | | |
Share-based compensation – exercised/settled | | | (4,978 | ) | | | | (3,108 | ) | | | | (1,119 | ) | |
Share-based compensation – expensed | | | 13,486 | | | | | 9,213 | | | | | 10,297 | | |
| |
| | |
Balance, end of year | | $ | 46,906 | | | | $ | 38,398 | | | | $ | 32,293 | | |
| |
| | |
Accumulated Deficit | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | (1,117,238 | ) | | | $ | (948,350 | ) | | | $ | (376,093 | ) | |
Net income/(loss) | | | 299,076 | | | | | 47,976 | | | | | (270,697 | ) | |
Dividends | | | (221,098 | ) | | | | (216,864 | ) | | | | (301,560 | ) | |
| |
| | |
Balance, end of year | | $ | (1,039,260 | ) | | | $ | (1,117,238 | ) | | | $ | (948,350 | ) | |
| |
| | |
Accumulated Other Comprehensive Income/(Loss) | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | (50,697 | ) | | | $ | (130,385 | ) | | | $ | (88,015 | ) | |
Changes due to marketable securities (net of tax) | | | | | | | | | | | | | | | |
| Unrealized gain/(loss) | | | (145 | ) | | | | 7,136 | | | | | (10,115 | ) | |
| Realized (gain)/loss reclassified to net income | | | 2,503 | | | | | (315 | ) | | | | – | | |
Change in cumulative translation adjustment | | | 143,817 | | | | | 72,867 | | | | | (32,255 | ) | |
| |
| | |
Balance, end of year | | $ | 95,478 | | | | $ | (50,697 | ) | | | $ | (130,385 | ) | |
| |
| | |
Total Shareholders' Equity | | $ | 2,223,126 | | | | $ | 1,932,302 | | | | $ | 1,951,240 | | |
| |
| | |
See accompanying notes to the Consolidated Financial Statements
40 ENERPLUS2014 FINANCIAL SUMMARY
Consolidated Statements of Cash Flows
For the year ended December 31(CDN$ thousands) | | Note | | | | 2014 | | | | | 2013 | | | | | 2012 | | |
| |
|
Operating Activities | | | | | | | | | | | | | | | | | | |
Net income/(loss) | | | | | $ | 299,076 | | | | $ | 47,976 | | | | $ | (270,697 | ) | |
Non-cash items add/(deduct): | | | | | | | | | | | | | | | | | | |
| Depletion, depreciation, amortization and accretion | | | | | | 566,674 | | | | | 593,203 | | | | | 560,293 | | |
| Asset impairment | | 5 | | | | – | | | | | – | | | | | 781,099 | | |
| Changes in fair value of derivative instruments | | 16 | | | | (242,038 | ) | | | | 35,088 | | | | | (85,163 | ) | |
| Deferred income tax expense/(recovery) | | 14 | | | | 132,830 | | | | | 30,753 | | | | | (274,639 | ) | |
| Foreign exchange (gain)/loss on debt and working capital | | 13 | | | | 68,202 | | | | | 19,747 | | | | | (7,647 | ) | |
| Share-based compensation | | 15 | | | | 13,486 | | | | | 9,213 | | | | | 10,297 | | |
| Amortization of debt issue costs | | | | | | 968 | | | | | 793 | | | | | (5 | ) | |
Derivative settlement on senior notes | | | | | | 17,024 | | | | | 17,827 | | | | | 18,406 | | |
Asset disposition (gain)/loss | | | | | | 2,798 | | | | | (367 | ) | | | | (87,421 | ) | |
Asset retirement obligation expenditures | | 9 | | | | (19,409 | ) | | | | (16,606 | ) | | | | (19,905 | ) | |
Changes in non-cash operating working capital | | 19 | | | | (52,414 | ) | | | | 28,851 | | | | | (88,929 | ) | |
| |
|
Cash flow from operating activities | | | | | | 787,197 | | | | | 766,478 | | | | | 535,689 | | |
| |
|
Financing Activities | | | | | | | | | | | | | | | | | | |
Proceeds from the issuance of shares | | 15 | | | | 31,350 | | | | | 14,838 | | | | | 350,948 | | |
Cash dividends | | 15 | | | | (199,263 | ) | | | | (170,653 | ) | | | | (277,948 | ) | |
Change in bank credit facility | | | | | | (136,918 | ) | | | | (45,556 | ) | | | | (189,251 | ) | |
Proceeds/(repayment) of senior notes | | | | | | 167,497 | | | | | (46,814 | ) | | | | 359,852 | | |
Derivative settlement on senior notes | | | | | | (17,024 | ) | | | | (17,827 | ) | | | | (18,406 | ) | |
Changes in non-cash financing working capital | | | | | | 263 | | | | | 368 | | | | | (14,727 | ) | |
| |
|
Cash flow from financing activities | | | | | | (154,095 | ) | | | | (265,644 | ) | | | | 210,468 | | |
| |
|
Investing Activities | | | | | | | | | | | | | | | | | | |
Capital and office expenditures | | | | | | (817,968 | ) | | | | (687,905 | ) | | | | (865,296 | ) | |
Property and land acquisitions | | | | | | (18,491 | ) | | | | (244,837 | ) | | | | (185,337 | ) | |
Property dispositions | | | | | | 203,576 | | | | | 365,135 | | | | | 245,771 | | |
Sale of marketable securities | | 6 | | | | 13,300 | | | | | 2,482 | | | | | 146,898 | | |
Changes in non-cash investing working capital | | | | | | (17,449 | ) | | | | 60,604 | | | | | (90,252 | ) | |
| |
|
Cash flow from investing activities | | | | | | (637,032 | ) | | | | (504,521 | ) | | | | (748,216 | ) | |
| |
|
Effect of exchange rate changes on cash | | | | | | 2,976 | | | | | 1,477 | | | | | 1,630 | | |
| |
|
Change in cash | | | | | | (954 | ) | | | | (2,210 | ) | | | | (429 | ) | |
Cash, beginning of year | | | | | | 2,990 | | | | | 5,200 | | | | | 5,629 | | |
| |
|
Cash, end of year | | | | | $ | 2,036 | | | | $ | 2,990 | | | | $ | 5,200 | | |
| |
|
See accompanying notes to the Consolidated Financial Statements
ENERPLUS2014 FINANCIAL SUMMARY 41
NOTES
Notes to Consolidated Financial Statements
1) REPORTING ENTITY
These annual audited Consolidated Financial Statements ("Consolidated Financial Statements") and notes present the financial position and results of Enerplus Corporation (the "Company" or "Enerplus") including its Canadian and U.S. subsidiaries. Enerplus is a North American crude oil and natural gas exploration and development company. Enerplus is publicly traded on the Toronto and New York stock exchanges under the ticker symbol ERF. Enerplus' head office is located in Calgary, Alberta, Canada. The Consolidated Financial Statements were authorized for issue by the Board of Directors on February 19, 2015.
2) SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are presented to assist the reader in evaluating these Consolidated Financial Statements and, together with the following notes, are an integral part of the Consolidated Financial Statements.
a) Basis of Preparation
Enerplus' Consolidated Financial Statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). These Consolidated Financial Statements present Enerplus' financial position as at December 31, 2014 and 2013 and results of operations for the years ended December 31, 2014, and the 2013 and 2012 comparative years.
i. Functional and Reporting Currency
These Consolidated Financial Statements are presented in Canadian dollars, which is Enerplus' functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand unless otherwise indicated.
ii. Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues and expenses since the determination of these items may be dependent on future events. Significant estimates made by management include: oil and natural gas reserves and related present value of future cash flows, depreciation, depletion, amortization and accretion ("DDA&A"), impairment, asset retirement obligations, income taxes, contingent assets and liabilities, impairment assessments of goodwill, share-based compensation and the fair value of derivative instruments. Enerplus uses the most current information available and exercises judgment in making these estimates and assumptions. In the opinion of management, these Consolidated Financial Statements have been properly prepared within reasonable limits of materiality and within the framework of the Company's significant accounting policies.
iii. Basis of Consolidation
These Consolidated Financial Statements include the accounts of Enerplus and its subsidiaries. Intercompany balances and transactions are eliminated on consolidation. Interests in jointly controlled oil and natural gas assets are accounted for following the concept of undivided interest, whereby Enerplus' proportionate share of revenues, expenses, assets and liabilities are included in the accounts.
The acquisition method of accounting is used to account for acquisitions of companies and assets that meet the definition of a business under U.S. GAAP. The cost of an acquisition is measured as the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the acquisition date. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.
b) Revenue
Revenue associated with the sale of oil and natural gas is recognized when title passes from the Company to its customers if collectability is reasonably certain and the sales price is determinable. Revenue is measured at the fair value of the consideration received or receivable based on
42 ENERPLUS2014 FINANCIAL SUMMARY
price, volumes delivered and contractual delivery points. Realized gains and losses from commodity price risk management activities are recognized in revenue when the contract is settled. Unrealized gains and losses on commodity price risk management activities are recognized in revenue based on the changes in fair value of the contracts at the end of the respective reporting period.
c) Oil and Natural Gas Properties
Enerplus uses the full cost method of accounting for its oil and natural gas properties. Under this method, all acquisition, exploration and development costs incurred in finding oil and natural gas reserves are capitalized, including general and administrative costs directly attributable to these activities. These costs are recorded on a country-by-country cost centre basis as oil and natural gas properties subject to depletion ("full cost pool"). Costs associated with production and general corporate activities are expensed as incurred.
The net carrying value of both proved and unproved oil and natural gas properties is depleted using the unit of production method, as determined using a constant price assumption of the simple average of the preceding twelve months' first-day-of-the-month commodity prices ("SEC prices"). The depletion calculation takes into account estimated future development costs necessary to bring those reserves into production.
Under full cost accounting, a ceiling test is performed on a cost centre basis. Enerplus limits capitalized costs of proved and unproved oil and natural gas properties, net of accumulated depletion and deferred income taxes, to the estimated future net cash flows from proved oil and natural gas reserves discounted at 10%, net of related tax effects, plus the lower of cost or fair value of unproved properties. If such capitalized costs exceed the ceiling, a write-down equal to that excess is recorded as a non-cash charge to net income. A write-down is not reversed in future periods even if higher oil and natural gas prices subsequently increase the ceiling.
Proceeds on property dispositions are accounted for as a reduction to the full cost pool without recognition of a gain or loss, unless the deduction significantly alters the relationship between capitalized costs and proved reserves in the cost centre.
d) Other Capital Assets
Other capital assets are recorded at historical cost, net of depreciation, and include furniture, fixtures, leasehold improvements and computer equipment. Depreciation is calculated on a straight-line basis over the estimated useful life of the respective asset. The cost of repairs and maintenance is expensed as incurred.
e) Goodwill
Enerplus recognizes goodwill relating to corporate acquisitions when the total purchase price exceeds the fair value of the net identifiable assets and liabilities acquired. The portion of goodwill that relates to U.S. operations fluctuates due to changes in foreign exchange rates. During the 2014 and 2013 years there were no additions to goodwill. Goodwill is stated at cost less impairment and is not amortized. Goodwill is not deductible for income tax purposes.
Impairment testing is performed on an annual basis or more frequently if events or changes in circumstances indicate that goodwill may be impaired. If the fair value of the consolidated reporting unit is less than its book value (including goodwill), then goodwill is reduced to its implied fair value and the amount of the impairment is charged against earnings.
f) Asset Retirement Obligations
Enerplus' oil and natural gas operating activities give rise to dismantling, decommissioning and site remediation activities. Enerplus recognizes a liability for the estimated present value of the future asset retirement obligation liability at each balance sheet date. The associated asset retirement cost is capitalized and amortized over the same period as the underlying asset. Changes in the estimated liability and related asset retirement cost can arise as a result of revisions in the estimated amount or timing of cash flows.
Amortization of asset retirement costs and increases in asset retirement obligations resulting from the passage of time are recorded as amortization and accretion, respectively, which are included in depreciation, depletion, amortization and accretion and charged against net income in the Consolidated Statements of Income/(Loss).
ENERPLUS2014 FINANCIAL SUMMARY 43
g) Income Tax
Enerplus uses the liability method of accounting for income taxes. Deferred income tax assets and liabilities are recorded on the temporary differences between the accounting and income tax basis of assets and liabilities, using the enacted tax rates expected to apply when the temporary differences are expected to reverse. Deferred tax assets are routinely reviewed and a valuation allowance is provided if, after considering available evidence, it is more likely than not that a deferred tax asset will not be realized. The financial statement effects of an uncertain tax position is recognized when it is more likely than not, based on technical merits, that the position will be sustained upon examination by a taxation authority. Penalties and interest related to income tax is recognized in income tax expense.
h) Financial Instruments
i. Fair Value Measurements
Financial instruments are initially recorded at fair value, defined as 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. For financial instruments carried at fair value, inputs used in determining the fair value are characterized according to the following fair value hierarchy:
Level 1 – Inputs represent quoted market prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted market prices for similar assets or liabilities in active markets or other market corroborated inputs.
Level 3 – Inputs that are not observable from objective sources, such as forward prices supported by little or no market activity or internally developed estimates of future cash flows used in a present value model.
Subsequent measurement is based on classification of the financial instrument into one of the following five categories: held-for-trading, held-to-maturity, available-for-sale, loans and receivables or other financial liabilities.
ii. Non-derivative financial instruments
Non-derivative financial instruments are comprised of cash, accounts receivable, accounts payable, dividends payable and long-term debt. The carrying amount of cash, accounts receivable, accounts payable and dividends payable approximate fair value. The fair value of long-term debt is disclosed in Note 16.
From time-to-time Enerplus may hold certain marketable securities in entities involved in the oil and gas industry which would be included in other assets on the Consolidated Balance Sheets. These investments may include both publicly traded and unlisted marketable securities. Publicly traded investments are classified as available-for-sale and carried at fair value based on a Level 1 designation, with changes in fair value recorded in other comprehensive income. Fair values are determined by reference to quoted market bid prices at the close of business on the balance sheet date. Unlisted marketable securities are carried at cost. When investments are ultimately sold any gains or losses are recognized in net income and any unrealized gains or losses previously recognized in other comprehensive income are reversed.
Enerplus capitalizes transaction costs and premiums on long-term debt. These costs are amortized using the effective interest method.
iii. Derivative financial instruments
Enerplus enters into financial derivative contracts in order to manage its exposure to market risks from fluctuations in commodity prices, foreign exchange rates and interest rates in the normal course of operations. Enerplus has not designated its financial derivative contracts as effective accounting hedges, and thus has not applied hedge accounting, even though it considers most of these contracts to be economic hedges. As a result, all financial derivative contracts are classified as held-for-trading and are recorded at fair value based on a Level 2 designation, with changes in fair value recorded in net income. The fair values of these derivative instruments are generally based on an estimate of the amounts that would be paid or received to settle these instruments at the balance sheet date. Enerplus' accounting policy is to not offset the fair values of its financial derivative assets and liabilities.
Enerplus' crude oil, natural gas and natural gas liquids physical delivery purchase and sales contracts qualify as normal purchases and sales as they are entered into and held for the purpose of receipt or delivery of products in accordance with the Company's expected purchase, sale or usage requirements. As such, these contracts are not considered derivative financial instruments. Settlements on these physical contracts are recognized in net income over the term of the contracts as they occur.
44 ENERPLUS2014 FINANCIAL SUMMARY
i) Foreign Currency
i. Foreign currency transactions
Transactions denominated in foreign currencies are translated to Canadian dollars using the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars using the rate of exchange in effect at the balance sheet date whereas non-monetary assets and liabilities are translated at the historical rate of exchange in effect on the date of the transaction. Foreign currency differences arising on translation are recognized in net income in the period in which they arise.
ii. Foreign operations
Assets and liabilities of Enerplus' U.S. operations are translated into Canadian dollars at period end exchange rates while revenues and expenses are translated using average rates for the period. Gains and losses from the translation are deferred and included in the cumulative translation adjustment ("CTA") which is recorded in accumulated other comprehensive income ("AOCI").
j) Share-Based Compensation
Enerplus' share-based compensation plans include its cash-settled Restricted Share Unit ("RSU"), Performance Share Unit ("PSU") and Director Share Unit ("DSU") plans, its equity-settled RSU and PSU plans, as well as Enerplus' Stock Option Plan.
i. RSU, PSU, and DSU plans
Under Enerplus' RSU plan, employees receive compensation in relation to the value of a specified number of underlying notional shares. The number of notional shares awarded varies by individual and vests one-third each year for three years. The value upon vesting is based on the value of the underlying notional shares plus notional accrued dividends over the vesting period.
Under Enerplus' PSU plan, executives and management receive compensation in relation to the value of a specified number of underlying notional shares. The number of notional shares awarded varies by individual and they vest at the end of three years. The value upon vesting is based on value of the underlying shares plus notional accrued dividends along with a multiplier that ranges from 0 to 2 depending on Enerplus' performance compared to the TSX oil and gas index over the vesting period.
Under Enerplus' DSU plan, directors receive compensation in relation to the value of a specified number of underlying notional shares. The number of notional shares awarded is based on the annual retainer value and they vest upon the director leaving the Board. The value upon vesting is based on the value of the underlying notional shares plus notional accrued dividends over the vesting period.
RSU and PSU grants made prior to 2014 are settled in cash. RSU and PSU grants made from 2014 onwards are settled through the issuance of treasury shares. All DSU grants are settled in cash.
Enerplus recognizes a liability in respect of its cash-settled long-term incentive plans based on their estimated fair value. The liability is re-measured at each reporting date and at settlement date with any changes in the fair value recorded as share-based compensation, included in general and administrative expense.
Enerplus recognizes non-cash share-based compensation expense over the vesting period of the equity-settled long-term incentive plans, based on the estimated grant date fair value of the respective awards. Share-based compensation charges are recorded on the Consolidated Statements of Income/(Loss) with an offset to paid-in capital. Each period, management performs an estimate of the PSU plan multiplier. Any differences that arise between the actual multiplier on plan settlement and management's estimate is recorded to share-based compensation. On settlement of these plans, amounts previously recorded to paid-in capital are reclassified to share capital.
ii. Stock options
Under Enerplus' Stock Option Plan, employees are granted options to purchase common shares of the Company at an exercise price equal to the market value of the common shares on the date the options are granted. Options granted are exercisable in thirds over the three year vesting schedule and expire seven years after the date the options are granted. Enerplus uses the Black-Scholes option pricing model to calculate the grant date fair value of stock options granted under the Company's Stock Option Plan. This amount is charged to earnings as share-based compensation over the vesting period of the options, with a corresponding increase in paid-in capital. When options are exercised, the proceeds, together with the amount recorded in paid-in capital, are recorded to share capital.
ENERPLUS2014 FINANCIAL SUMMARY 45
The Company is authorized to issue up to 10% of outstanding common shares from treasury in relation to its Stock Option Plan and equity-settled RSU and PSU plans. The Company suspended the issuance of stock options effective in 2014.
k) Net Income Per Share
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.
For the diluted net income per common share calculation, the weighted average number of shares outstanding is adjusted for the potential number of shares which may have a dilutive effect on net income. The weighted average number of diluted shares is calculated in accordance with the treasury stock method which assumes that the proceeds received from the exercise of all stock options would be used to repurchase common shares at the average market price.
l) Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, environmental and other sources are recognized when it is probable that a liability has been incurred and the amount can be reasonably estimated. Contingencies are adjusted as additional information becomes available or circumstances change.
m) Accounting Changes and Recent Pronouncements Issued
i. Changes in accounting policies for 2014
Effective January 1, 2014, Enerplus adopted the following Accounting Standards Updates ("ASU") issued by the Financial Accounting Standards Board ("FASB"), which did not have a material impact on Enerplus' financial statements:
- •
- ASU 2013-04,Obligations resulting from Joint and Several Liability Arrangements
- •
- ASU 2013-05,Parent's Accounting for Cumulative Translation Adjustments upon Derecognition of Subsidiaries
- •
- ASU 2013-11,Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
ii. Future accounting changes
Enerplus will adopt the following ASU's issued by the FASB, which have been issued but are not yet effective. The adoption of these standards is not expected to have a material impact on Enerplus' financial statements.
- •
- ASU 2014-08,Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity – effective January 1, 2015
- •
- ASU 2014-09,Revenue from Contracts with Customers – effective January 1, 2017
- •
- ASU 2014-12,Compensation – Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period – effective January 1, 2016
3) ACCOUNTS RECEIVABLE
($ thousands) | | | December 31, 2014 | | | | | December 31, 2013 | | |
| |
|
Accrued receivables | | $ | 136,949 | | | | $ | 122,482 | | |
Accounts receivable – trade | | | 41,618 | | | | | 36,034 | | |
Current income tax receivable | | | 23,900 | | | | | 9,371 | | |
Allowance for doubtful accounts | | | (2,722 | ) | | | | (2,796 | ) | |
| |
|
Total accounts receivable | | $ | 199,745 | | | | $ | 165,091 | | |
| |
|
46 ENERPLUS2014 FINANCIAL SUMMARY
4) PROPERTY, PLANT AND EQUIPMENT ("PP&E")
As at December 31, 2014 ($ thousands) | | | Cost | | | Accumulated Depletion and Depreciation | | | Net Book Value | |
|
Oil and natural gas properties | | $ | 12,478,953 | | $ | 9,846,479 | | $ | 2,632,474 | |
Other capital assets | | | 97,893 | | | 77,302 | | | 20,591 | |
|
Total PP&E | | $ | 12,576,846 | | $ | 9,923,781 | | $ | 2,653,065 | |
|
As at December 31, 2013 ($ thousands) | | | Cost | | | Accumulated Depletion and Depreciation | | | Net Book Value | |
|
Oil and natural gas properties | | $ | 11,481,207 | | $ | 9,061,063 | | $ | 2,420,144 | |
Other capital assets | | | 89,818 | | | 68,608 | | | 21,210 | |
|
Total PP&E | | $ | 11,571,025 | | $ | 9,129,671 | | $ | 2,441,354 | |
|
5) IMPAIRMENT
($ thousands) | | | 2014 | | | | 2013 | | | 2012 | |
| |
|
Oil and natural gas properties | | $ | – | | | $ | – | | $ | 781,099 | |
| |
|
Impairment expense | | $ | – | | | $ | – | | $ | 781,099 | |
| |
|
Enerplus did not record any ceiling test impairments on its oil and natural gas properties in 2014 or 2013. During 2012, a non-cash impairment totaling $781.1 million was recorded in the United States cost centre due to high capital spending and a lower 12-month average trailing natural gas price during 2012. No impairments were recorded to the Canadian cost centre in 2012.
The following table outlines the 12-month average trailing benchmark prices and exchange rates used in Enerplus' ceiling test as at December 31, 2014, 2013 and 2012:
Year | | | WTI Crude Oil US$/bbl | | | Exchange Rate US$/CDN$ | | | Edm Light Crude CDN$/bbl | | | U.S. Henry Hub Gas US$/Mcf | | | AECO Natural Gas Spot CDN$/Mcf | |
|
2014 | | $ | 94.99 | | $ | 1.09 | | $ | 94.84 | | $ | 4.30 | | $ | 4.60 | |
2013 | | | 96.94 | | | 1.03 | | | 93.19 | | | 3.67 | | | 3.16 | |
2012 | | | 94.71 | | | 1.00 | | | 88.33 | | | 2.83 | | | 2.35 | |
|
6) MARKETABLE SECURITIES
During the years ended December 31, 2014 and 2013, Enerplus sold certain publicly traded securities for proceeds of $13.3 million and $2.5 million, recognizing a loss of $2.8 million and a gain of $0.4 million, respectively. In connection with these sales, realized losses of $2.5 million and a gain of $0.3 million net of tax, respectively were reclassified from accumulated other comprehensive income to net income.
During the year ended December 31, 2012 Enerplus sold the majority of its unlisted securities for proceeds of $146.9 million and a gain of $86.5 million.
For the years ended December 31, 2014, 2013, and 2012 the change in fair value of publicly listed investments represented unrealized losses of $0.1 million, unrealized gains of $7.1 million, and unrealized losses of $10.1 million net of tax, respectively ($0.2 million loss, $8.2 million gain and $11.9 million loss before tax, respectively).
Realized gains are included in Other Income/(Expense) on the Consolidated Statements of Income/(Loss).
ENERPLUS2014 FINANCIAL SUMMARY 47
7) ACCOUNTS PAYABLE
($ thousands) | | | December 31, 2014 | | | | December 31, 2013 | |
| |
|
Accrued payables | | $ | 239,773 | | | $ | 262,117 | |
Accounts payable – trade | | | 111,233 | | | | 115,040 | |
| |
|
Total accounts payable | | $ | 351,006 | | | $ | 377,157 | |
| |
|
8) DEBT
($ thousands) | | | December 31, 2014 | | | | December 31, 2013 | |
| |
|
Current: | | | | | | | | |
| Senior notes | | $ | 98,933 | | | $ | 48,713 | |
| |
|
| | | 98,933 | | | | 48,713 | |
| |
|
Long-term: | | | | | | | | |
| Bank credit facility | | $ | 79,917 | | | $ | 214,394 | |
| Senior notes | | | 958,080 | | | | 762,191 | |
| |
|
| | | 1,037,997 | | | | 976,585 | |
| |
|
Total debt | | $ | 1,136,930 | | | $ | 1,025,298 | |
| |
|
Bank Credit Facility
Enerplus has a senior unsecured, covenant-based, $1 billion bank credit facility that matures on October 31, 2017. Drawn fees range between 150 and 315 basis points over bankers' acceptance rates, with current drawn fees of 170 basis points. Standby fees on the undrawn portion of the facility are based on 20% of the drawn pricing. The Company has the ability to request an extension of the facility each year or repay the entire balance at the end of the term. At December 31, 2014 Enerplus had $79.9 million (December 31, 2013 – $214.4 million) drawn and was in compliance with all financial covenants under the facility. During 2014 a fee of $0.6 million (2013 – $0.7 million, 2012 – $0.7 million) was paid to extend the facility. These fees are considered debt issue costs and are capitalized on the Consolidated Balance Sheets. The weighted average interest rate on the facility for the year ended December 31, 2014 was 2.8% (December 31, 2013 – 2.6%).
Senior Notes
On September 3, 2014 Enerplus closed a private placement of senior unsecured notes raising gross proceeds of US$200.0 million. The notes rank equally with the bank credit facility and other outstanding senior notes. The notes have a twelve year amortizing term and ten year average life with a fixed coupon rate of 3.79%.
On June 19, 2014 Enerplus made its fifth and final principal repayment on the US$175.0 million senior notes and associated cross currency interest rate swap principal settlement for a total of $53.7 million.
48 ENERPLUS2014 FINANCIAL SUMMARY
The terms and rates of the Company's outstanding senior notes are detailed below:
Issue Date | | Interest Payment Dates | | Principal Repayment | | Coupon Rate | | Original Principal ($ thousands) | | Remaining Principal ($ thousands) | | | | CDN$ Carrying Value ($ thousands) | |
|
September 3, 2014 | | March 3 and Sept 3 | | 5 equal annual installments beginning September 3, 2022 | | 3.79% | | US$200,000 | | US$200,000 | | | $ | 232,020 | |
May 15, 2012 | | May 15 and Nov 15 | | Bullet payment on May 15, 2019 | | 4.34% | | CDN$30,000 | | CDN$30,000 | | | | 30,000 | |
May 15, 2012 | | May 15 and Nov 15 | | Bullet payment on May 15, 2022 | | 4.40% | | US$20,000 | | US$20,000 | | | | 23,202 | |
May 15, 2012 | | May 15 and Nov 15 | | 5 equal annual installments beginning May 15, 2020 | | 4.40% | | US$355,000 | | US$355,000 | | | | 411,836 | |
June 18, 2009 | | June 18 and Dec 18 | | Bullet payment on June 18, 2015 | | 6.37% | | CDN$40,000 | | CDN$40,000 | | | | 40,000 | |
June 18, 2009 | | June 18 and Dec 18 | | Bullet payment on June 18, 2015 | | 6.82% | | US$40,000 | | US$40,000 | | | | 46,403 | |
June 18, 2009 | | June 18 and Dec 18 | | 5 equal annual installments beginning June 18, 2017 | | 7.97% | | US$225,000 | | US$225,000 | | | | 261,023 | |
Oct 1, 2003 | | April 1 and Oct 1 | | 5 equal annual installments beginning Oct 1, 2011 | | 5.46% | | US$54,000 | | US$10,800 | | | | 12,529 | |
|
| | | | | | | | Total carrying value | | | $ | 1,057,013 | |
|
| | | | | | | | Current portion | | | $ | 98,933 | |
|
| | | | | | | | Long-term portion | | | $ | 958,080 | |
|
9) ASSET RETIREMENT OBLIGATION
At December 31, 2014 Enerplus estimated the present value of its asset retirement obligation to be $288.7 million (December 31, 2013 – $291.8 million) based on a total undiscounted liability of $730.9 million (December 31, 2013 – $720.6 million). The asset retirement obligation was calculated using a weighted credit-adjusted risk-free rate of 5.92% at December 31, 2014 (December 31, 2013 – 5.96%). Enerplus' asset retirement obligation expenditures are expected to be incurred over the next 65 years with the majority between 2029 and 2054. For the year-ended December 31, 2013, changes in estimate related to increases in estimated future abandonment and reclamation costs.
($ thousands) | | | December 31, 2014 | | | | | December 31, 2013 | | |
| |
|
Balance, beginning of year | | $ | 291,761 | | | | $ | 256,102 | | |
Change in estimates | | | 4,378 | | | | | 44,217 | | |
Property acquisition and development activity | | | 1,778 | | | | | 1,454 | | |
Divestments | | | (4,313 | ) | | | | (8,362 | ) | |
Settlements | | | (19,409 | ) | | | | (16,606 | ) | |
Accretion expense | | | 14,497 | | | | | 14,956 | | |
| |
|
Balance, end of year | | $ | 288,692 | | | | $ | 291,761 | | |
| |
|
10) OIL AND NATURAL GAS SALES
($ thousands) | | | 2014 | | | | | 2013 | | | 2012 | | |
| |
|
Oil and natural gas sales | | $ | 1,849,312 | | | | $ | 1,616,798 | | $ | 1,365,542 | | |
Royalties(1) | | | (323,118 | ) | | | | (264,326 | ) | | (212,208 | ) | |
| |
|
Oil and natural gas sales, net of royalties | | $ | 1,526,194 | | | | $ | 1,352,472 | | $ | 1,153,334 | | |
| |
|
- (1)
- Royalties above do not include production taxes which are reported separately on the Consolidated Statements of Income/(Loss).
11) GENERAL AND ADMINISTRATIVE EXPENSE
($ thousands) | | | 2014 | | | | 2013 | | | 2012 | |
| |
|
General and administrative expense | | $ | 83,493 | | | $ | 83,235 | | $ | 78,341 | |
Share-based compensation expense | | | 21,548 | | | | 27,025 | | | 15,503 | |
| |
|
General and administrative expense | | $ | 105,041 | | | $ | 110,260 | | $ | 93,844 | |
| |
|
ENERPLUS2014 FINANCIAL SUMMARY 49
12) INTEREST EXPENSE
($ thousands) | | | 2014 | | | | 2013 | | | 2012 | | |
| |
|
Realized: | | | | | | | | | | | | |
| Interest on bank debt and senior notes | | $ | 62,240 | | | $ | 56,716 | | $ | 53,074 | | |
Unrealized: | | | | | | | | | | | | |
| Cross currency interest rate swap (gain)/loss | | | 580 | | | | 1,306 | | | 2,963 | | |
| Interest rate swap (gain)/loss | | | – | | | | (478 | ) | | (1,125 | ) | |
| Amortization of debt issue costs and senior note premium | | | 968 | | | | 793 | | | (5 | ) | |
| |
|
Interest expense | | $ | 63,788 | | | $ | 58,337 | | $ | 54,907 | | |
| |
|
13) FOREIGN EXCHANGE
($ thousands) | | | 2014 | | | | | 2013 | | | 2012 | | |
| |
|
Realized: | | | | | | | | | | | | | |
| Foreign exchange (gain)/loss | | $ | 11,165 | | | | $ | 17,596 | | $ | 6,508 | | |
Unrealized: | | | | | | | | | | | | | |
| Translation of U.S. dollar debt and working capital (gain)/loss | | | 68,202 | | | | | 19,747 | | | (7,647 | ) | |
| Cross currency interest rate swap (gain)/loss | | | (16,128 | ) | | | | (19,920 | ) | | (15,118 | ) | |
| Foreign exchange swap (gain)/loss | | | (6,149 | ) | | | | (8,110 | ) | | (947 | ) | |
| |
|
Foreign exchange (gain)/loss | | $ | 57,090 | | | | $ | 9,313 | | $ | (17,204 | ) | |
| |
|
14) INCOME TAXES
Enerplus' provision for income tax is a follows:
($ thousands) | | | 2014 | | | | | 2013 | | | 2012 | | |
| |
|
Current Tax expense/(recovery) | | | | | | | | | | | | | |
| Canada | | $ | (543 | ) | | | $ | (621 | ) | $ | (2,074 | ) | |
| United States | | | 5,541 | | | | | 8,510 | | | 3,722 | | |
| |
|
Current tax expense/(recovery) | | | 4,998 | | | | | 7,889 | | | 1,648 | | |
| |
|
Deferred Tax expense/(recovery) | | | | | | | | | | | | | |
| Canada | | $ | 64,746 | | | | $ | (21,166 | ) | $ | 17,720 | | |
| United States | | | 68,084 | | | | | 51,919 | | | (292,359 | ) | |
| |
|
Deferred tax expense/(recovery) | | | 132,830 | | | | | 30,753 | | | (274,639 | ) | |
| |
|
Income tax expense/(recovery) | | $ | 137,828 | | | | $ | 38,642 | | $ | (272,991 | ) | |
| |
|
The deferred income tax recovery recognized in Other Comprehensive Income totaled $0.3 million for 2014 ($1.0 million expense in 2013, and $3.0 million recovery in 2012) related to marketable securities.
50 ENERPLUS2014 FINANCIAL SUMMARY
The following provides a reconciliation of income taxes calculated at the Canadian statutory rate to the actual income taxes:
($ thousands) | | | 2014 | | | | | 2013 | | | 2012 | | |
| |
|
Income/(loss) before taxes | | | | | | | | | | | | | |
| Canada | | $ | 247,856 | | | | $ | (74,946 | ) | $ | 220,259 | | |
| United States | | | 189,048 | | | | | 161,564 | | | (763,947 | ) | |
| |
|
Total income/(loss) before taxes | | $ | 436,904 | | | | $ | 86,618 | | $ | (543,688 | ) | |
Canadian statutory rate | | | 25.35% | | | | | 25.35% | | | 25.32% | | |
| |
|
Expected income tax expense/(recovery) | | $ | 110,755 | | | | $ | 21,958 | | $ | (137,662 | ) | |
Impact on taxes resulting from: | | | | | | | | | | | | | |
| Foreign tax rate differential | | $ | 11,242 | | | | $ | 10,407 | | $ | (106,858 | ) | |
| Statutory and other rate differences | | | (38 | ) | | | | (1,976 | ) | | (7,828 | ) | |
| Change in valuation allowance | | | 8,007 | | | | | (690 | ) | | (11,082 | ) | |
| Non-taxable capital (gains)/losses | | | 8,318 | | | | | 4,884 | | | (12,248 | ) | |
| Share-based compensation | | | 2,636 | | | | | 2,335 | | | 2,574 | | |
| Other | | | (3,092 | ) | | | | 1,724 | | | 113 | | |
| |
|
Income tax expense/(recovery) | | $ | 137,828 | | | | $ | 38,642 | | $ | (272,991 | ) | |
| |
|
Deferred income tax asset (liability) consists of the following temporary differences:
($ thousands) | | | 2014 | | | | | 2013 | | |
| |
|
Deferred income tax liabilities | | | | | | | | | | |
| Property, plant and equipment | | $ | (187,080 | ) | | | $ | (62,565 | ) | |
| Deferred financial assets and credits | | | (55,348 | ) | | | | – | | |
| Other liabilities | | | – | | | | | (9,343 | ) | |
| |
|
Total deferred income tax liabilities | | | (242,428 | ) | | | | (71,908 | ) | |
| |
|
Deferred income tax assets | | | | | | | | | | |
| Tax loss carry-forwards and other credits | | $ | 610,177 | | | | $ | 551,331 | | |
| Asset retirement obligation | | | 74,335 | | | | | 75,677 | | |
| Deferred financial assets and credits | | | – | | | | | 2,114 | | |
| Other assets | | | 15,879 | | | | | 8,317 | | |
| |
|
Total deferred income tax assets | | | 700,391 | | | | | 637,439 | | |
Less valuation allowance | | | (160,651 | ) | | | | (152,644 | ) | |
| |
|
Total deferred income tax assets, net | | | 539,740 | | | | | 484,795 | | |
| |
|
Net deferred income tax asset/(liability) | | $ | 297,312 | | | | $ | 412,887 | | |
| |
|
The net deferred income tax asset includes a current deferred income tax liability of $50.8 million (December 31, 2013 – asset of $48.5 million) and a long-term deferred income tax asset of $348.1 million (December 31, 2013 – $364.4 million).
Loss carry-forwards and tax credits that can be utilized in future years are as follows:
As at December 31 ($ thousands) | | | 2014 | | | Expiration Date | |
| |
|
Canada | | | | | | | |
| Capital losses | | $ | 1,207,000 | | | Indefinite | |
| Non-capital losses | | | 422,000 | | | 2028-2034 | |
United States | | | | | | | |
| Net operating losses | | | 592,000 | | | 2030-2034 | |
| Alternative minimum tax credits | | | 113,000 | | | Indefinite | |
| |
|
ENERPLUS2014 FINANCIAL SUMMARY 51
Changes in the balance of Enerplus' unrecognized tax benefits are as follows:
For the years ended December 31 ($ thousands) | | | 2014 | | | | | 2013 | | | 2012 | |
| |
|
Balance, beginning of year | | $ | 18,000 | | | | $ | 18,500 | | $ | 13,600 | |
Increase/(decrease) for tax positions of prior years | | | 2,700 | | | | | (500 | ) | | 4,900 | |
Settlements | | | (3,700 | ) | | | | – | | | – | |
| |
|
Balance, end of year | | $ | 17,000 | | | | $ | 18,000 | | $ | 18,500 | |
| |
|
If recognized, all of Enerplus' unrecognized tax benefits as at December 31, 2014 would affect Enerplus' effective income tax rate. It is not anticipated that the amount of unrecognized tax benefits will significantly change during the next 12 months.
A summary of the taxation years, by jurisdiction, that remain subject to examination by the taxation authorities are as follows:
Jurisdiction | | Taxation Years | |
|
Canada – Federal & Provincial | | 2004-2014 | |
United States – Federal & State | | 2008-2014 | |
|
Enerplus and its subsidiaries file income tax returns primarily in Canada and the United States. Matters in dispute with the taxation authorities are ongoing and in various stages of completion.
15) SHAREHOLDERS' EQUITY
a) Share Capital
| | 2014 | | | 2013 | | 2012 | |
| |
|
Authorized unlimited number of common shares Issued: (thousands) | | Shares | | | Amount | | | Shares | | | Amount | | Shares | | | Amount | |
| |
|
Balance, beginning of year | | 202,758 | | $ | 3,061,839 | | | 198,684 | | $ | 2,997,682 | | 181,159 | | $ | 2,622,003 | |
Issued for cash: | | | | | | | | | | | | | | | | | |
| Public offerings | | – | | | – | | | – | | | – | | 14,709 | | | 330,618 | |
| Dividend Reinvestment Plan | | – | | | – | | | – | | | – | | 955 | | | 19,150 | |
| Stock Option Plan | | 1,944 | | | 31,350 | | | 1,042 | | | 14,838 | | 68 | | | 1,180 | |
Non-cash: | | | | | | | | | | | | | | | | | |
| Stock Dividend Plan | | 1,030 | | | 21,835 | | | 3,032 | | | 46,211 | | 1,793 | | | 23,612 | |
| Stock Option Plan | | – | | | 4,978 | | | – | | | 3,108 | | – | | | 1,119 | |
| |
|
Balance, end of year | | 205,732 | | $ | 3,120,002 | | | 202,758 | | $ | 3,061,839 | | 198,684 | | $ | 2,997,682 | |
| |
|
The Company is authorized to issue an unlimited number of common shares without par value.
b) Dividends
($ thousands) | | | 2014 | | | | 2013 | | | 2012 | |
| |
|
Cash dividends(1) | | $ | 199,263 | | | $ | 170,653 | | $ | 277,948 | |
Stock dividends | | | 21,835 | | | | 46,211 | | | 23,612 | |
| |
|
Dividends to shareholders | | $ | 221,098 | | | $ | 216,864 | | $ | 301,560 | |
| |
|
- (1)
- Includes DRIP of $19.2 million in 2012. The DRIP was discontinued in 2012 and has no impact on 2014 or 2013 cash dividends.
For the year ended December 31, 2014 Enerplus paid dividends of $1.08 per common share totaling $221.1 million (December 31, 2013 – $1.08 per share and $216.9 million, December 31, 2012 – $1.54 per share and $301.6 million).
52 ENERPLUS2014 FINANCIAL SUMMARY
c) Share-Based Compensation
The following table summarizes Enerplus' share-based compensation expense, which is included in General and Administrative expense on the Consolidated Statements of Income/(Loss):
($ thousands) | | | 2014 | | | | | 2013 | | | 2012 | | |
| |
|
Cash: | | | | | | | | | | | | | |
| Long-term incentive plans (recovery)/expense | | $ | (1,220 | ) | | | $ | 23,262 | | $ | 5,618 | | |
Non-Cash: | | | | | | | | | | | | | |
| Long-term incentive plans expense | | | 9,349 | | | | | – | | | – | | |
| Stock Option Plan expense | | | 4,137 | | | | | 9,213 | | | 10,297 | | |
| Equity swap (gain)/loss | | | 9,282 | | | | | (5,450 | ) | | (412 | ) | |
| |
|
Share-based compensation expense | | $ | 21,548 | | | | $ | 27,025 | | $ | 15,503 | | |
| |
|
(i) Long-term Incentive ("LTI") Plans
In 2014, the Performance Share Unit and Restricted Share Unit plans were amended such that grants under the plans are settled through the issuance of treasury shares. The amendment was effective beginning with our grant in March of 2014 and any prior grants will continue to be settled in cash.
The following table summarizes the Performance Share Unit ("PSU"), Restricted Share Unit ("RSU") and Director Share Unit ("DSU") activity for the twelve months ended December 31, 2014:
| | Cash-settled LTI Plans | | Equity-settled LTI Plans | | | | |
For the year ended December 31, 2014(thousands of units) | | PSU | | RSU | | DSU | | PSU | | RSU | | Total | | |
|
Balance, beginning of year | | 650 | | 821 | | 99 | | – | | – | | 1,570 | | |
Granted | | – | | 8 | | 47 | | 560 | | 849 | | 1,464 | | |
Vested | | (224 | ) | (376 | ) | (24 | ) | – | | – | | (624 | ) | |
Forfeited | | (20 | ) | (55 | ) | – | | (50 | ) | (74 | ) | (199 | ) | |
|
Balance, end of year | | 406 | | 398 | | 122 | | 510 | | 775 | | 2,211 | | |
|
Cash-settled LTI Plans
For the year ended December 31, 2014 the Company recorded a recovery for cash share-based compensation expense of $1.2 million (2013 – charges of $23.3 million, 2012 – charges of $5.6 million). For the year ended December 31, 2014, the Company made cash payments of $14.1 million related to its cash-settled plans (2013 – $11.1 million, 2012 – $14.0 million).
The following table summarizes the cumulative share-based compensation expense recognized to-date, which has been recorded to Accounts Payable on the Consolidated Balance Sheets. Unrecognized amounts will be recorded to cash share-based compensation expense over the remaining vesting terms.
At December 31, 2014($ thousands, except for years) | | | PSU(1) | | | RSU | | | DSU | | | Total | |
|
Cumulative recognized share-based compensation expense | | $ | 8,051 | | $ | 5,098 | | $ | 1,953 | | $ | 15,102 | |
Unrecognized share-based compensation expense | | | 2,698 | | | 987 | | | – | | | 3,685 | |
|
Intrinsic value | | $ | 10,749 | | $ | 6,085 | | $ | 1,953 | | $ | 18,787 | |
|
Weighted-average remaining contractual term (years) | | | 0.8 | | | 0.5 | | | – | | | | |
|
- (1)
- Includes estimated performance multipliers.
ENERPLUS2014 FINANCIAL SUMMARY 53
Equity-settled LTI Plans
For the year ended December 31, 2014 the Company recorded non-cash share-based compensation expense of $9.3 million. No non-cash amounts were recognized for the twelve months ended December 31, 2013 or December 31, 2012 with respect to equity-settled grants, as the ability to treasury settle was only effective as of March 2014.
The following table summarizes the cumulative share-based compensation expense recognized to-date which is recorded to Paid-in Capital on the Consolidated Balance Sheets. Unrecognized amounts will be recorded to non-cash share-based compensation expense over the remaining vesting terms.
At December 31, 2014($ thousands, except for years) | | | PSU(1) | | | RSU | | | Total | |
|
Cumulative recognized share-based compensation expense | | $ | 2,239 | | $ | 6,963 | | $ | 9,202 | |
Unrecognized share-based compensation expense | | | 5,273 | | | 6,350 | | | 11,623 | |
|
Fair value | | $ | 7,512 | | $ | 13,313 | | $ | 20,825 | |
|
Weighted-average remaining contractual term (years) | | | 2.0 | | | 1.5 | | | | |
|
- (1)
- Includes estimated performance multipliers.
(ii) Stock Option Plan
The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under the Stock Option Plan. The Company did not grant any stock options for the year ended December 31, 2014. The following assumptions were used to arrive at the estimates of fair value during each of the respective reporting years:
Weighted average for the year | | December 31, 2014(2) | | | December 31, 2013 | | December 31, 2012 | |
|
Dividend yield(1) | | N/A | | | 8.0% | | 8.2% | |
Volatility(1) | | N/A | | | 27.80% | | 28.35% | |
Risk-free interest rate | | N/A | | | 1.51% | | 1.35% | |
Forfeiture rate | | N/A | | | 10.0% | | 10.0% | |
Expected life | | N/A | | | 4.5 years | | 4.5 years | |
|
- (1)
- Reflects the expected dividend yield and volatility of Enerplus shares over the expected life of the option.
- (2)
- The Company suspended stock option grants in 2014.
The following table summarizes the stock option plan activity for the year ended December 31, 2014:
Year ended December 31, 2014 | | Number of Options (thousands) | | | Weighted Average Exercise Price | |
|
Options outstanding, beginning of year | | 13,414 | | $ | 18.65 | |
| Granted | | – | | | – | |
| Exercised | | (1,944 | ) | | 16.12 | |
| Forfeited | | (641 | ) | | 19.60 | |
| Expired | | (461 | ) | | 27.84 | |
|
Options outstanding, end of year | | 10,368 | | $ | 18.65 | |
|
Options exercisable, end of year | | 5,748 | | $ | 20.99 | |
|
At December 31, 2014, 5,748,000 options were exercisable at a weighted average reduced exercise price of $20.99 with a weighted average remaining contractual term of 3.94 years, giving an aggregate intrinsic value of nil (December 31, 2013 – $5.2 million, December 31, 2012 – nil). The intrinsic value of options exercised during the year ended December 31, 2014 was $13.4 million (December 31, 2013 – $2.7 million, December 31, 2012 – $0.3 million).
At December 31, 2014 the total share-based compensation expense related to non-vested options not yet recognized was $1.1 million. The expense is expected to be recognized in net income over a weighted-average period of 0.8 years.
54 ENERPLUS2014 FINANCIAL SUMMARY
d) Paid-in Capital
The following tables summarize the Paid-in Capital activity for the year and the ending balances as at December 31:
($ thousands) | | | 2014 | | | | | 2013 | | | 2012 | | |
| |
|
Balance, beginning of year | | $ | 38,398 | | | | $ | 32,293 | | $ | 23,115 | | |
Stock Option Plan – exercised | | | (4,978 | ) | | | | (3,108 | ) | | (1,119 | ) | |
Stock Option Plan – expensed | | | 13,486 | | | | | 9,213 | | | 10,297 | | |
| |
|
Balance, end of year | | $ | 46,906 | | | | $ | 38,398 | | $ | 32,293 | | |
| |
|
e) Basic and Diluted Net Income/(Loss) Per Share
Net income/(loss) per share has been determined as follows:
(thousands, except per share amounts) | | | 2014 | | | | 2013 | | | 2012 | | |
| |
|
Net income/(loss) | | $ | 299,076 | | | $ | 47,976 | | $ | (270,697 | ) | |
Weighted average shares outstanding – Basic | | | 204,510 | | | | 200,567 | | | 195,633 | | |
Dilutive impact of share-based compensation(1) | | | 2,914 | | | | 837 | | | – | | |
| |
|
Weighted average shares outstanding – Diluted | | | 207,424 | | | | 201,404 | | | 195,633 | | |
| |
|
Net income/(loss) per share | | | | | | | | | | | | |
| Basic | | | 1.46 | | | | 0.24 | | | (1.38 | ) | |
| Diluted | | | 1.44 | | | | 0.24 | | | (1.38 | ) | |
| |
|
- (1)
- For the year ended December 31, 2012 the impact of share-based compensation was anti-dilutive as a conversion to shares would not increase the loss per share.
16) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a) Fair Value Measurements
At December 31, 2014, the carrying value of cash, accounts receivable, accounts payable, dividends payable and bank credit facilities approximated their fair value due to the short-term maturity of the instruments.
Enerplus' portfolio of marketable securities consists of publicly traded investments. At December 31, 2014 the fair value of marketable securities was nil (December 31, 2013 – $13.4 million).
At December 31, 2014 senior notes included in long-term debt had a carrying value of $1,057.0 million and a fair value of $1,150.0 million (December 31, 2013 – $810.9 million and $837.8 million, respectively).
There were no transfers between fair value hierarchy levels during the year.
ENERPLUS2014 FINANCIAL SUMMARY 55
b) Derivative Financial Instruments
The deferred financial assets and credits on the Consolidated Balance Sheets result from recording derivative financial instruments at fair value.
The following tables summarize the change in fair value for the respective years:
Gain/(Loss)($ thousands) | | | December 31, 2014 | | | | | December 31, 2013 | | | December 31, 2012 | | Consolidated Statements of Income/(Loss) Presentation | |
|
Interest Rate Swaps | | $ | – | | | | $ | 478 | | $ | 1,125 | | Interest expense | |
Cross Currency Interest Rate Swap: | | | | | | | | | | | | | | |
| Interest | | | (580 | ) | | | | (1,306 | ) | | (2,963 | ) | Interest expense | |
| Foreign Exchange | | | 16,128 | | | | | 19,920 | | | 15,118 | | Foreign exchange | |
Foreign Exchange Derivatives | | | 6,149 | | | | | 8,110 | | | 947 | | Foreign exchange | |
Electricity Swaps | | | (1,275 | ) | | | | 758 | | | (3,108 | ) | Operating expense | |
Equity Swaps | | | (9,282 | ) | | | | 5,450 | | | 412 | | General and administrative expense | |
Commodity Derivative Instruments: | | | | | | | | | | | | | | |
| Oil | | | 182,019 | | | | | (65,504 | ) | | 70,283 | | Commodity derivative | |
| Gas | | | 48,879 | | | | | (2,994 | ) | | 3,349 | | instruments | |
|
Total Gain/(Loss) | | $ | 242,038 | | | | $ | (35,088 | ) | $ | 85,163 | | | |
|
The following table summarizes the effect of Enerplus' commodity derivative instruments on the Consolidated Statements of Income/(Loss):
($ thousands) | | | 2014 | | | | 2013 | | | 2012 | |
| |
|
Change in fair value gain/(loss) | | $ | 230,898 | | | $ | (68,498 | ) | $ | 73,632 | |
Net realized cash gain/(loss) | | | 3,475 | | | | 26,628 | | | 18,363 | |
| |
|
Commodity derivative instruments gain/(loss) | | $ | 234,373 | | | $ | (41,870 | ) | $ | 91,995 | |
| |
|
The following table summarizes the fair values at the respective year ends:
| | December 31, 2014
| | December 31, 2013
| |
| | Assets
| | Liabilities
| | Assets
| | Liabilities
| |
($ thousands) | | | Current | | | Long-term | | | Current | | | Long-term | | | | Current | | | Long-term | | | Current | |
| |
|
Cross Currency Interest Rate Swap: | | $ | – | | $ | – | | $ | – | | $ | – | | | $ | – | | $ | – | | $ | 15,548 | |
Foreign Exchange Derivatives | | | 1,616 | | | 28,665 | | | 8,434 | | | – | | | | 564 | | | 15,135 | | | – | |
Electricity Swaps | | | – | | | – | | | 1,368 | | | – | | | | – | | | – | | | 95 | |
Equity Swaps | | | – | | | – | | | 1,024 | | | 2,396 | | | | 1,723 | | | 4,139 | | | – | |
Commodity Derivative Instruments: | | | | | | | | | | | | | | | | | | | | | | | |
| Oil | | | 167,187 | | | – | | | – | | | – | | | | 4,138 | | | – | | | 18,970 | |
| Gas | | | 46,903 | | | 2,332 | | | – | | | – | | | | 2,773 | | | – | | | 2,418 | |
| |
|
Total | | $ | 215,706 | | $ | 30,997 | | $ | 10,826 | | $ | 2,396 | | | $ | 9,198 | | $ | 19,274 | | $ | 37,031 | |
| |
|
c) Risk Management
In the normal course of operations, Enerplus is exposed to various market risks, including commodity prices, foreign exchange, interest rates and equity prices, credit risk and liquidity risk.
(i) Market Risk
Market risk is comprised of commodity price, foreign exchange, interest rate and equity price risk.
56 ENERPLUS2014 FINANCIAL SUMMARY
Commodity Price Risk:
Enerplus manages a portion of commodity price risk through a combination of financial derivative and physical delivery sales contracts. Enerplus' policy is to enter into commodity contracts subject to a maximum of 80% of forecasted production volumes net of royalties and production taxes.
The following tables summarize Enerplus' price risk management positions at February 5, 2015:
Crude Oil Instruments:
Instrument Type | | bbls/day | | US$/bbl(1) | | |
|
Jan 1, 2015 – Feb 28, 2015 | | | | | | |
WTI Swap | | 15,500 | | 93.58 | | |
WCS Differential Swap | | 4,000 | | (18.24 | ) | |
WTI Purchased Call | | 4,000 | | 93.00 | | |
WTI Sold Put | | 4,000 | | 62.23 | | |
Mar 1, 2015 – Apr 30, 2015 | | | | | | |
WTI Swap | | 17,500 | | 88.85 | | |
WCS Differential Swap | | 4,000 | | (18.24 | ) | |
WTI Purchased Call | | 4,000 | | 93.00 | | |
WTI Sold Put | | 4,000 | | 62.23 | | |
May 1, 2015 – Jun 30, 2015 | | | | | | |
WTI Swap | | 15,500 | | 93.58 | | |
WCS Differential Swap | | 4,000 | | (18.24 | ) | |
WTI Purchased Call | | 4,000 | | 93.00 | | |
WTI Sold Put | | 4,000 | | 62.23 | | |
Jul 1, 2015 – Dec 31, 2015 | | | | | | |
WTI Swap | | 8,000 | | 93.86 | | |
WCS Differential Swap | | 3,000 | | (17.85 | ) | |
WTI Purchased Call | | 4,000 | | 93.00 | | |
WTI Sold Put | | 4,000 | | 62.23 | | |
|
- (1)
- Transactions with a common term have been aggregated and presented as the weighted average price/bbl.
Natural Gas Instruments:
Instrument Type | | MMcf/day | | CDN$/Mcf | |
|
Jan 1, 2015 – Mar 31, 2015 | | | | | |
NYMEX Swap | | 80.0 | | 4.25 | |
NYMEX Collar – Purchased Put | | 30.0 | | 4.53 | |
NYMEX Collar – Sold Call | | 30.0 | | 5.53 | |
NYMEX Purchased Call | | 5.0 | | 4.29 | |
NYMEX Sold Put | | 5.0 | | 3.25 | |
NYMEX Sold Call | | 5.0 | | 5.00 | |
Apr 1, 2015 – Jun 30, 2015 | | | | | |
NYMEX Swap | | 90.0 | | 4.21 | |
NYMEX Purchased Call | | 5.0 | | 4.29 | |
NYMEX Sold Put | | 5.0 | | 3.25 | |
NYMEX Sold Call | | 5.0 | | 5.00 | |
Jul 1, 2015 – Sep 30, 2015 | | | | | |
NYMEX Swap | | 115.0 | | 3.98 | |
NYMEX Purchased Call | | 5.0 | | 4.29 | |
NYMEX Sold Put | | 5.0 | | 3.25 | |
NYMEX Sold Call | | 5.0 | | 5.00 | |
Oct 1, 2015 – Dec 31, 2015 | | | | | |
NYMEX Swap | | 95.0 | | 4.04 | |
NYMEX Purchased Call | | 5.0 | | 4.29 | |
NYMEX Sold Put | | 5.0 | | 3.25 | |
NYMEX Sold Call | | 5.0 | | 5.00 | |
Jan 1, 2016 – Dec 31, 2016 | | | | | |
NYMEX Swap | | 10.0 | | 4.03 | |
|
ENERPLUS2014 FINANCIAL SUMMARY 57
Electricity:
Instrument Type | | MWh | | CDN$/MWh | |
|
Jan 1, 2015 – Dec 31, 2015 | | | | | |
AESO Power Swap(1) | | 16.0 | | 50.79 | |
Jan 1, 2016 – Dec 31, 2016 | | | | | |
AESO Power Swap(1) | | 6.0 | | 50.25 | |
|
- (1)
- Alberta Electrical System Operator ("AESO") fixed pricing.
Foreign Exchange Risk:
Enerplus is exposed to foreign exchange risk in relation to its U.S. operations and U.S. dollar senior notes and working capital. Additionally, Enerplus' crude oil sales and a portion of its natural gas sales are based on U.S. dollar indices. Enerplus manages the currency risk relating to its senior notes through the derivative instruments detailed below.
Cross Currency Interest Rate Swap ("CCIRS"):
On June 19, 2014 the final US$35.0 million principal repayment was made on the US$175.0 million senior notes, which corresponded with the final CCIRS settlement. This resulted in a $15.8 million realized foreign exchange loss.
Foreign Exchange Derivatives:
During 2014, Enerplus entered into foreign exchange collars to hedge a portion of its foreign exchange exposure on U.S. dollar denominated oil and gas sales. The following contracts are outstanding at February 5, 2015:
Instrument Type(1) | | Monthly Notional Amount (US$ millions) | | Floor | | Ceiling | | Conditional Ceiling(2) | |
|
Jan 1, 2015 – Dec 31, 2015 | | 24.0 | | 1.1088 | | 1.1845 | | 1.1263 | |
|
- (1)
- Transactions with a common term have been aggregated and presented at average USD/CDN foreign exchange rates.
- (2)
- If the USD/CDN average monthly rate settles above the ceiling rate the settlement amount is determined based on the conditional ceiling.
During 2007 Enerplus entered into foreign exchange swaps on US$54.0 million of notional debt at an average US$/CDN$ exchange rate of 1.02. The remaining $10.8 million notional amount under the swap matures in October 2015 in conjunction with the final principal repayment on the US$54.0 million senior notes.
During 2011 Enerplus entered into foreign exchange swaps on US$175.0 million of notional debt at approximately par. These foreign exchange swaps mature between June 2017 and June 2021 in conjunction with the principal repayments on the US$225.0 million senior notes.
Interest Rate Risk:
At December 31, 2014, approximately 93% of Enerplus' debt was based on fixed interest rates and 7% was based on floating interest rates. At December 31, 2014 Enerplus did not have any interest rate derivatives outstanding.
Equity Price Risk:
Enerplus is exposed to equity price risk in relation to its long-term incentive plans detailed in Note 15. Enerplus has entered into various equity swaps maturing between 2015 and 2016 and has effectively fixed the future settlement cost on 950,000 shares at a weighted average price of $14.92 per share.
(ii) Credit Risk
Credit risk represents the financial loss Enerplus would experience due to the potential non-performance of counterparties to its financial instruments. Enerplus is exposed to credit risk mainly through its joint venture, marketing and financial counterparty receivables.
Enerplus mitigates credit risk through credit management techniques, including conducting financial assessments to establish and monitor counterparties' credit worthiness, setting exposure limits, monitoring exposures against these limits and obtaining financial assurances such as
58 ENERPLUS2014 FINANCIAL SUMMARY
letters of credit, parental guarantees, or third party credit insurance where warranted. Enerplus monitors and manages its concentration of counterparty credit risk on an ongoing basis.
Enerplus' maximum credit exposure at the balance sheet date consists of the carrying amount of its non-derivative financial assets and the fair value of its derivative financial assets. At December 31, 2014 approximately 71% of Enerplus' marketing receivables were with companies considered investment grade.
At December 31, 2014 approximately $3.2 million or 2% of Enerplus' total accounts receivable were aged over 120 days and considered past due. The majority of these accounts are due from various joint venture partners. Enerplus actively monitors past due accounts and takes the necessary actions to expedite collection, which can include withholding production, netting amounts off future payments or seeking other remedies including legal action. Should Enerplus determine that the ultimate collection of a receivable is in doubt, it will provide the necessary provision in its allowance for doubtful accounts with a corresponding charge to earnings. If Enerplus subsequently determines an account is uncollectible the account is written off with a corresponding charge to the allowance account. Enerplus' allowance for doubtful accounts balance at December 31, 2014 was $2.7 million (December 31, 2013 – $2.8 million).
(iii) Liquidity Risk & Capital Management
Liquidity risk represents the risk that Enerplus will be unable to meet its financial obligations as they become due. Enerplus mitigates liquidity risk through actively managing its capital, which it defines as debt (net of cash) and shareholders' capital. Enerplus' objective is to provide adequate short and longer term liquidity while maintaining a flexible capital structure to sustain the future development of its business. Enerplus strives to balance the portion of debt and equity in its capital structure given its current oil and natural gas assets and planned investment opportunities.
Management monitors a number of key variables with respect to its capital structure, including debt levels, capital spending plans, dividends, access to capital markets, as well as acquisition and divestment activity.
17) COMMITMENTS, CONTINGENCIES AND GUARANTEES
a) Commitments
Enerplus has the following minimum annual commitments at December 31, 2014:
| | | | | | Minimum Annual Commitment Each Year
| | | | |
($ thousands) | | | Total | | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | Thereafter | |
| |
|
Bank credit facility | | $ | 79,917 | | | $ | – | | $ | – | | $ | 79,917 | | $ | – | | $ | – | | $ | – | |
Senior notes(3) | | | 1,057,013 | | | | 98,933 | | | – | | | 52,205 | | | 52,205 | | | 82,204 | | | 771,466 | |
Transportation commitments | | | 165,455 | | | | 39,721 | | | 29,617 | | | 18,765 | | | 9,377 | | | 7,451 | | | 60,524 | |
Processing commitments | | | 58,830 | | | | 11,388 | | | 11,309 | | | 10,788 | | | 9,300 | | | 5,713 | | | 10,332 | |
Drilling and completions | | | 19,309 | | | | 19,309 | | | – | | | – | | | – | | | – | | | – | |
Office leases | | | 121,882 | | | | 12,075 | | | 12,351 | | | 12,449 | | | 12,413 | | | 11,302 | | | 61,292 | |
| |
|
Total commitments(1)(2) | | $ | 1,502,406 | | | $ | 181,426 | | $ | 53,277 | | $ | 174,124 | | $ | 83,295 | | $ | 106,670 | | $ | 903,614 | |
| |
|
- (1)
- Crown and surface royalties, lease rentals and mineral taxes (hydrocarbon production rights) have not been included as amounts paid depend on future ownership, production, prices and the legislative environment.
- (2)
- US$ commitments have been converted to CDN$ using the December 31, 2014 foreign exchange rate of 1.1601.
- (3)
- Interest payments have not been included.
b) Contingencies
Enerplus is subject to various legal claims and actions arising in the normal course of business. Although the outcome of such claims and actions cannot be predicted with certainty, the Company does not expect these matters to have a material impact on the Consolidated Financial Statements. In instances where the Company determines that a loss is probable and the amount can be reasonably estimated, an accrual is recorded.
c) Guarantees
- (i)
- Corporate indemnities have been provided by Enerplus to all directors and officers for various items including costs to settle suits or actions due to their association with Enerplus. Enerplus has purchased directors' and officers' liability insurance to mitigate the cost of any potential
ENERPLUS2014 FINANCIAL SUMMARY 59
future suits or actions. Each indemnity, subject to certain exceptions, applies for so long as the indemnified person is a director or officer of Enerplus.
- (ii)
- Enerplus may provide indemnifications in the normal course of business that are often standard contractual terms to counterparties in certain transactions such as purchase and sale agreements. The terms of these indemnifications will vary based upon the contract, the nature of which prevents Enerplus from making a reasonable estimate of the maximum potential amounts that may be required to be paid.
18) GEOGRAPHICAL INFORMATION
As at and for the year ended December 31, 2014($ thousands) | | | Canada | | | U.S. | | | Total | |
|
Oil and natural gas sales | | $ | 689,135 | | $ | 837,059 | | $ | 1,526,194 | |
Property, plant and equipment | | | 1,028,436 | | | 1,624,629 | | | 2,653,065 | |
Goodwill | | | 451,121 | | | 173,269 | | | 624,390 | |
|
As at and for the year ended December 31, 2013($ thousands) | | | Canada | | | U.S. | | | Total | |
|
Oil and natural gas sales | | $ | 676,502 | | $ | 675,970 | | $ | 1,352,472 | |
Property, plant and equipment | | | 1,081,259 | | | 1,360,095 | | | 2,441,354 | |
Goodwill | | | 451,121 | | | 158,854 | | | 609,975 | |
|
As at and for the year ended December 31, 2012($ thousands) | | | Canada | | | U.S. | | | Total | |
|
Oil and natural gas sales | | $ | 707,985 | | $ | 445,349 | | $ | 1,153,334 | |
Property, plant and equipment | | | 1,323,850 | | | 1,013,945 | | | 2,337,795 | |
Goodwill | | | 451,121 | | | 148,595 | | | 599,716 | |
|
19) SUPPLEMENTAL INFORMATION
a) Change in Non-Cash Operating Working Capital
($ thousands) | | | December 31, 2014 | | | | | December 31, 2013 | | | December 31, 2012 | | |
|
Accounts receivable | | $ | (8,392 | ) | | | $ | (6,935 | ) | $ | (34,384 | ) | |
Other current assets | | | (6,777 | ) | | | | (1,156 | ) | | 4,007 | | |
Accounts payable | | | (37,245 | ) | | | | 36,942 | | | (58,552 | ) | |
|
| | $ | (52,414 | ) | | | $ | 28,851 | | $ | (88,929 | ) | |
|
b) Supplementary Cash Flow Information
($ thousands) | | | December 31, 2014 | | | | December 31, 2013 | | | December 31, 2012 | |
|
Income taxes paid | | $ | 18,087 | | | $ | 4,448 | | $ | 17,946 | |
Interest paid | | $ | 58,416 | | | $ | 55,957 | | $ | 49,826 | |
|
20) SUBSEQUENT EVENT
Subsequent to December 31, 2014 Enerplus entered into agreements to dispose of Canadian crude oil properties for proceeds (before closing adjustments) of approximately $182 million, subject to customary closing conditions.
Subsequent to December 31, 2014 Enerplus' Board of Directors approved a reduction in its monthly dividend from $0.09 per share to $0.05 per share, effective with the April dividend.
60 ENERPLUS2014 FINANCIAL SUMMARY
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