CALGARY, April 14, 2014 /CNW/ - (TSX:PMT) - Perpetual Energy Inc. ("Perpetual" or the "Company") is herein
providing additional information to further clarify the prior period
restatement related to gas over bitumen ("GOB") royalty adjustments
described in Perpetual's audited consolidated financial statements and
management's discussion and analysis for the year ended December 31,
2013.
The Company's consolidated financial statements for the year ended
December 31, 2013 included a restatement to prior period amounts
associated with the Company's accounting for GOB royalty adjustments.
This restatement resulted from a reduction in the carrying amount of
the future gas over bitumen obligation and had no effect on the
Company's cash flow from operating activities. Further clarification
on the restatement related to prior periods is provided below.
Background
Perpetual has working interests in a number of natural gas wells which
have been shut-in (pursuant to shut-in orders issued by the Government
of Alberta) as it was determined that production of natural gas in
certain areas posed a threat to the future recovery of underlying
bitumen.
In 2004, an amendment to the Natural Gas Royalty Regulation ("Amended
Regulation") was enacted by the Government of Alberta to help address
the financial impact on the working interest owners of shut-in gas
wells (the "GOB Program"). The Amended Regulation includes a mechanism
for the Minister of Energy to provide temporary assistance to impacted
owners based on prescribed quantities of foregone production from
eligible shut-in wells. The temporary assistance is provided by way of
monthly reductions in the gas crown royalty otherwise payable by the
operators of these shut-in wells (the "GOB Royalty Adjustments").
The GOB Royalty Adjustments are based on a deemed production volume at
the shut-in date, declining at 10% per year, and were to be provided
for a period of up to 10 years from the shut-in date. The GOB Royalty
Adjustments are paid to operators through a credit against their crown
royalty invoice (not paid in cash).
The Amended Regulation also provides for the repayment by impacted
owners of GOB Royalty Adjustments received should a well return to
production (the "GOB Obligation"). The repayment of the GOB Obligation
is structured as a gross overriding royalty ("GORR") of 1% for each
year that the GOB Royalty Adjustments were received for a well, up to a
maximum of 10% (the "Expected GORR") with a ceiling GOB Obligation
equal to the GOB Royalty Adjustments received for the well. The
measurement of the provision for the GOB Obligation, which represents
the discounted amount of the Company's best estimate of expected
repayments of the GOB Royalty Adjustments, will vary based on
significant inputs in the Company's independent reserve report for the
shut-in gas wells including the assumed dates of recommencement of
production, estimated future production forecasts and natural gas price
forecasts as well as discount rates.
Identification of the Prior Period Restatement
Since inception of the GOB Program, Perpetual had recognized the full
amount of the GOB Royalty Adjustments received as a GOB Obligation,
rather than the Expected GORR, as management initially expected that
the full amount of the GOB Royalty Adjustments received would be fully
repayable. Since the full amount of the GOB Royalty Adjustments
received were recorded as a GOB Obligation, Perpetual did not recognize
any of the GOB Royalty Adjustments as GOB revenue in earnings unless
the GOB Royalty Adjustments related to shut-in wells that had been
sold, where the related GOB Obligation was transferred to the purchaser
under the respective purchase and sale agreement.
In conjunction with the preparation of the Company's 2013 consolidated
financial statements, management reviewed its GOB Obligation relative
to the discounted amount of the Expected GORR in the Company's
independent reserve report and determined that the recognized GOB
Obligation (based on GOB Royalty Adjustments received) exceeded the
discounted amount of the Expected GORR as reflected in the independent
reserve report. Upon further investigation, the Company also
determined that the recognized GOB Obligation exceeded the discounted
amount of the Expected GORR in prior periods, which resulted in the
restatement of prior periods as disclosed in the Company's consolidated
financial statements for the year ended December 31, 2013. As part of
the detailed review, the Company determined that subsequent to the
commencement of the GOB Program, changes in significant inputs in the
Company's independent reserve report caused the discounted amount of
expected repayments of the GOB Royalty Adjustments based on the
Expected GORR to be significantly lower than the GOB Royalty
Adjustments received. The primary changes included reductions in
forecast natural gas prices and the change in classification of
reserves from proved to probable as well as the adjustment to extend
the projected production recommencement date from 10 to 15 years from
the date of shut-in, reflecting increased uncertainty over whether and
when the shut in wells would resume production.
GOB Royalty Adjustments are received in the form of reductions in gas
Crown royalties otherwise payable. In the more recent periods of lower
natural gas prices, Perpetual's total gas Crown royalties payable were
not sufficient to recover the full amount of the GOB Royalty
Adjustments and therefore a long term receivable of GOB Royalty
Adjustments has been recognized. This long term receivable was offset
against the full accumulated GOB Obligation on the Company's balance
sheet prior to the restatement of prior periods. In the fourth quarter
of 2013 Perpetual entered into an administrative agreement with a joint
venture partner to collect future GOB Royalty Adjustments for all
working interest owners of the shut-in wells, including Perpetual. As a
result of this agreement, Perpetual will accelerate the realization of
the accumulated long term Crown receivable as it will be directly
applied against Perpetual's crown royalties otherwise payable from
future natural gas production.
Summary of the Prior Period Restatement
The GOB Obligation at January 1 and December 31, 2012 was overstated
based on the discounted amount of expected repayments of the GOB
Royalty Adjustments. Accordingly, management determined that the
previous GOB revenue and the related GOB Obligation was not being
accounted for correctly given that the full undiscounted amount of the
GOB Royalty Adjustments were recognized as a provision (GOB Obligation)
even though the full amount was unlikely to be repaid based on the GOB
Program. As the most likely estimate of the repayment shifted from the
maximum possible amount (the cumulative GOB Royalty Adjustments
received) to the Expected GORR, management's best estimate of the GOB
Obligation should also have shifted to the discounted amount of the
Expected GORR estimated in the independent reserve report.
In summary;
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the GOB Obligation had been overstated at each period end since the
material reduction in the discounted amount of the Expected GORR;
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for most reporting periods, GOB revenue was understated as the full
amount of GOB Royalty Adjustments received were recorded in full as GOB
Obligation; and
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for periods when shut-in wells were sold (such as the third and fourth
quarters of 2012), GOB revenue was overstated as the cumulative GOB
Obligation for the sold wells was reversed and recognized as GOB
revenue.
As a result of the above factors, the comparative figures in Perpetual's
consolidated financial statements for the year ended December 31, 2013
were restated to reflect a significant reduction in the GOB Obligation
with offsetting changes in GOB revenue and accumulated deficit as
described in the Company's consolidated financial statements and
management's discussion and analysis for the year ended December 31,
2013. This adjustment had no effect on the Company's cash flow from
operating activities.
SOURCE Perpetual Energy Inc.
Perpetual Energy Inc.
Cameron R. Sebastian
Vice President, Finance and Chief Financial Officer