Perpetual Energy Inc. provides additional information on the prior period restatement of gas over bitumen royalty adjustments
CALGARY, April 14, 2014 /PRNewswire/ - (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.
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.
- the GOB Obligation had been overstated at each period end since the material reduction in the discounted amount of the Expected GORR;
- 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
- 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.