EX-99.2 3 q22015financialsandnotes.htm INTERIM FINANCIAL STATEMENTS Q2 2015 Financials and Notes
PENGROWTH ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Stated in millions of Canadian dollars)
(Unaudited)
 
 
 
As at

As at

 
Note

June 30, 2015

December 31, 2014

ASSETS
 
 
 
Current Assets
 
 
 
Accounts receivable
 
$
167.6

$
148.1

Fair value of risk management contracts
11

163.4

299.6

 
 
331.0

447.7

Fair value of risk management contracts
11

58.7

182.6

Other assets
 
71.2

60.4

Property, plant and equipment
2

4,660.1

4,786.8

Exploration and evaluation assets
3

494.8

490.1

Goodwill
 
199.0

202.2

TOTAL ASSETS
 
$
5,814.8

$
6,169.8

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Bank indebtedness
4

$
27.2

$
10.7

Accounts payable
 
261.4

352.9

Dividends payable
 
10.8

21.3

Fair value of risk management contracts
11

7.1

12.8

Current portion of long term debt
4

98.1

173.2

Current portion of provisions
5

15.7

27.3

 
 
420.3

598.2

Fair value of risk management contracts
11

8.3

0.4

Convertible debentures
 
137.1

137.2

Long term debt
4

1,739.7

1,548.8

Provisions
5

765.0

760.7

Deferred income taxes
6

161.9

197.7

 
 
3,232.3

3,243.0

Shareholders' Equity
 
 
 
Shareholders' capital
7

4,792.8

4,759.7

Contributed surplus
 
23.5

32.3

Deficit
 
(2,233.8
)
(1,865.2
)
 
 
2,582.5

2,926.8

 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
5,814.8

$
6,169.8

See accompanying notes to the Consolidated Financial Statements.



PENGROWTH Second Quarter 2015 Financial Results
1

PENGROWTH ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
(Stated in millions of Canadian dollars, except per share amounts)
(Unaudited)

 
 
 
Three months ended June 30
Six months ended June 30
  
Note

2015

2014

2015

2014

REVENUES
 
 
 
 
 
     Oil and gas sales
 
$
249.9

$
407.1

$
449.8

$
836.3

     Royalties, net of incentives
 
(26.5
)
(78.2
)
(51.3
)
(151.9
)
 
 
223.4

328.9

398.5

684.4

     Realized gain (loss) on commodity risk management
11

59.1

(46.9
)
144.8

(89.2
)
     Unrealized loss on commodity risk management
11

(139.6
)
(13.6
)
(206.4
)
(125.8
)
 
 
142.9

268.4

336.9

469.4

EXPENSES
 
 
 
 
 
     Operating
 
106.8

114.5

199.7

218.5

     Transportation
 
14.0

7.2

23.6

15.6

     General and administrative
 
26.7

24.3

56.0

50.9

     Depletion, depreciation and amortization
2

116.7

130.7

229.6

260.8

 
 
264.2

276.7

508.9

545.8

OPERATING LOSS
 
(121.3
)
(8.3
)
(172.0
)
(76.4
)
 
 
 
 
 
 
Other (income) expense items
 
 
 
 
 
     Loss on disposition of properties
 
27.0

11.2

26.5

17.8

     Unrealized foreign exchange (gain) loss
12

(5.1
)
(29.1
)
168.9

6.5

     Realized foreign exchange (gain) loss
11,12

(9.2
)
1.4

(91.8
)
1.5

     Interest and financing charges
 
27.8

19.1

47.5

39.7

     Accretion
5

4.3

4.9

8.8

9.9

     Other (income) expense
 
(0.8
)
(2.2
)
(1.2
)
11.8

LOSS BEFORE TAXES
 
(165.3
)
(13.6
)
(330.7
)
(163.6
)
Deferred income tax recovery
6

(30.9
)
(4.8
)
(35.8
)
(38.6
)
NET LOSS AND COMPREHENSIVE LOSS
 
$
(134.4
)
$
(8.8
)
$
(294.9
)
$
(125.0
)
NET LOSS PER SHARE
10

 
 
 
 
     Basic
 
$
(0.25
)
$
(0.02
)
$
(0.55
)
$
(0.24
)
     Diluted
 
$
(0.25
)
$
(0.02
)
$
(0.55
)
$
(0.24
)
See accompanying notes to the Consolidated Financial Statements.


PENGROWTH Second Quarter 2015 Financial Results
2

PENGROWTH ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(Stated in millions of Canadian dollars)
(Unaudited)
 
 
Three months ended June 30
Six months ended June 30
  
Note

2015

2014

2015

2014

CASH PROVIDED BY (USED FOR):
 
 
 
 
 
OPERATING
 
 
 
 
 
Net loss and comprehensive loss
 
$
(134.4
)
$
(8.8
)
$
(294.9
)
$
(125.0
)
Non-cash items
 
 
 
 
 
Depletion, depreciation, amortization and accretion
 
121.0

135.6

238.4

270.7

Deferred income tax recovery
6

(30.9
)
(4.8
)
(35.8
)
(38.6
)
Unrealized foreign exchange (gain) loss
12

(5.1
)
(29.1
)
168.9

6.5

Unrealized loss on commodity risk management
11

139.6

13.6

206.4

125.8

Share based compensation
8

4.6

4.9

9.0

8.4

Loss on disposition of properties
 
27.0

11.2

26.5

17.8

Other items
 
(0.5
)
(1.2
)
(0.1
)
(4.7
)
Foreign exchange derivative settlement
11

(9.8
)
—

(93.9
)
—

Funds flow from operations
 
111.5

121.4

224.5

260.9

Interest and financing charges
 
27.8

19.1

47.5

39.7

Expenditures on remediation
5

(3.8
)
(5.8
)
(7.0
)
(12.5
)
Change in non-cash operating working capital
9

(38.0
)
(25.3
)
(65.2
)
4.4

 
 
97.5

109.4

199.8

292.5

FINANCING
 
 
 
 
 
Dividends paid
 
(30.8
)
(63.2
)
(84.2
)
(125.9
)
Bank indebtedness
4

24.0

—

16.5

—

Long term debt (repayment)
4

(39.6
)
—

2.4

—

Foreign exchange derivative settlement
11

9.8

—

93.9

—

Interest and financing charges paid
 
(22.2
)
(21.8
)
(58.1
)
(51.5
)
Proceeds from DRIP and stock option exercises
 
5.5

13.3

14.6

28.0

 
 
(53.3
)
(71.7
)
(14.9
)
(149.4
)
INVESTING
 
 
 
 
 
Capital expenditures
 
(50.8
)
(219.6
)
(149.2
)
(453.3
)
Property acquisitions
 
—

(0.1
)
—

(2.1
)
Proceeds on property dispositions
 
23.5

21.1

24.0

20.5

Contributions to remediation trust funds and other items
 
(6.7
)
(3.1
)
(13.1
)
(5.1
)
Change in non-cash investing working capital
9

(10.2
)
(17.7
)
(46.6
)
(18.4
)
 
 
(44.2
)
(219.4
)
(184.9
)
(458.4
)
CHANGE IN CASH AND CASH EQUIVALENTS
 
—

(181.7
)
—

(315.3
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
—

314.9

—

448.5

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
—

$
133.2

$
—

$
133.2

See accompanying notes to the Consolidated Financial Statements.


PENGROWTH Second Quarter 2015 Financial Results
3

PENGROWTH ENERGY CORPORATION
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Stated in millions of Canadian dollars)
(Unaudited)

 
 
Three months ended June 30
Six months ended June 30
  
Note

2015

2014

2015

2014

SHAREHOLDERS' CAPITAL
7

 
 
 
 
Balance, beginning of period
 
$
4,780.1

$
4,721.0

$
4,759.7

$
4,693.1

Share based compensation
 
7.2

—

18.5

14.8

Issued under DRIP
 
5.5

13.3

14.6

26.4

Balance, end of period
 
4,792.8

4,734.3

4,792.8

4,734.3

 
 
 
 
 
 
CONTRIBUTED SURPLUS
 
 
 
 
 
Balance, beginning of period
 
25.7

18.6

32.3

28.0

Share based compensation
8

5.0

5.4

9.7

9.2

Exercise of share based compensation awards
 
(7.2
)
—

(18.5
)
(13.2
)
Balance, end of period
 
23.5

24.0

23.5

24.0

 
 
 
 
 
 
DEFICIT
 
 
 
 
 
Balance, beginning of period
 
(2,068.6
)
(1,211.8
)
(1,865.2
)
(1,032.8
)
Net loss
 
(134.4
)
(8.8
)
(294.9
)
(125.0
)
Dividends declared
 
(30.8
)
(63.3
)
(73.7
)
(126.1
)
Balance, end of period
 
(2,233.8
)
(1,283.9
)
(2,233.8
)
(1,283.9
)
 
 
 
 
 
 
TOTAL SHAREHOLDERS' EQUITY
 
$
2,582.5

$
3,474.4

$
2,582.5

$
3,474.4

See accompanying notes to the Consolidated Financial Statements.


PENGROWTH Second Quarter 2015 Financial Results
4

PENGROWTH ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE PERIOD ENDED JUNE 30, 2015 (Unaudited)
(Tabular amounts are stated in millions of Canadian dollars except per share amounts and as otherwise stated)

1.
BUSINESS OF THE CORPORATION
Pengrowth Energy Corporation ("Pengrowth" or the "Corporation") is a Canadian resource company that is engaged in the production, development, exploration and acquisition of oil and natural gas assets. The Consolidated Financial Statements include the accounts of the Corporation, and its subsidiary, collectively referred to as Pengrowth. All inter-entity transactions have been eliminated.
The Consolidated Financial Statements for the three and six months ended June 30, 2015 are unaudited and have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") using accounting policies consistent with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and International Financial Reporting Interpretations Committee ("IFRIC"). The disclosures provided below are incremental to those included with the December 31, 2014 annual Consolidated Financial Statements. All accounting policies and methods of computation followed in the preparation of these Consolidated Financial Statements are consistent with the December 31, 2014 annual Consolidated Financial Statements.
The Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto in Pengrowth’s annual report for the year ended December 31, 2014.
The Consolidated Financial Statements were authorized for release by the Audit and Risk Committee of the Board of Directors on August 6, 2015.






PENGROWTH Second Quarter 2015 Financial Results
5

2.
PROPERTY, PLANT AND EQUIPMENT ("PP&E")
Cost or deemed cost
Oil and natural
gas assets

Other
equipment

Total

Balance, December 31, 2013
$
6,587.7

$
78.8

$
6,666.5

Additions to PP&E
812.7

6.1

818.8

Property acquisitions
17.0

—

17.0

Change in asset retirement obligations
245.2

—

245.2

Divestitures
(164.8
)
—

(164.8
)
Balance, December 31, 2014
$
7,497.8

$
84.9

$
7,582.7

Additions to PP&E
156.5

2.3

158.8

Change in asset retirement obligations
1.8

—

1.8

Divestitures
(92.2
)
—

(92.2
)
Balance, June 30, 2015
$
7,563.9

$
87.2

$
7,651.1

 
 
 
 
Accumulated depletion, amortization and impairment losses
Oil and natural
gas assets

Other
equipment

Total

Balance, December 31, 2013
$
1,785.4

$
63.5

$
1,848.9

Depletion and amortization for the period
510.2

6.8

517.0

Impairment
486.3

—

486.3

Divestitures
(56.3
)
—

(56.3
)
Balance, December 31, 2014
$
2,725.6

$
70.3

$
2,795.9

Depletion and amortization for the period
226.6

3.0

229.6

Divestitures
(34.5
)
—

(34.5
)
Balance, June 30, 2015
$
2,917.7

$
73.3

$
2,991.0

 
 
 
 
Net book value
Oil and natural
gas assets

Other
equipment

Total

As at June 30, 2015
$
4,646.2

$
13.9

$
4,660.1

As at December 31, 2014
$
4,772.2

$
14.6

$
4,786.8

During the six months ended June 30, 2015, $5.9 million (June 30, 2014 – $8.0 million) of directly attributable general and administrative costs were capitalized to PP&E.
At June 30, 2015, certain capital related to the Lindbergh thermal project ("Lindbergh Project") of $5.6 million (June 30, 2014 – $667.1 million) was excluded from the calculation of depletion.
Pengrowth capitalizes interest for qualifying assets in the construction phase based on costs incurred on the project and the average cost of borrowing. During the six months ended June 30, 2015, $11.0 million (June 30, 2014 – $12.3 million) of interest was capitalized on the Lindbergh Project to PP&E using a capitalization rate of 5.4 percent (June 30, 2014 – 5.7 percent).

3.
EXPLORATION AND EVALUATION ASSETS ("E&E")
Cost or deemed cost
  
Balance, December 31, 2013
$
419.3

Additions
127.8

Impairment
(57.0
)
Balance, December 31, 2014
$
490.1

Additions
4.7

Balance, June 30, 2015
$
494.8



PENGROWTH Second Quarter 2015 Financial Results
6

4.
LONG TERM DEBT AND BANK INDEBTEDNESS

LONG TERM DEBT
 
As at
  
June 30, 2015

December 31, 2014

U.S. dollar denominated senior unsecured notes:
 
 
71.5 million at 4.67 percent due May 2015
$
—

$
82.9

400 million at 6.35 percent due July 2017
499.1

463.4

265 million at 6.98 percent due August 2018
330.5

306.8

35 million at 3.49 percent due October 2019
43.6

40.5

115.5 million at 5.98 percent due May 2020
143.9

133.6

105 million at 4.07 percent due October 2022
130.7

121.3

195 million at 4.17 percent due October 2024
242.6

225.3

 
$
1,390.4

$
1,373.8

U.K. pound sterling denominated unsecured notes:
 
 
50 million at 5.46 percent due December 2015
$
98.1

$
90.3

15 million at 3.45 percent due October 2019
29.4

27.0

 
$
127.5

$
117.3

Canadian dollar senior unsecured notes:
 
 
15 million at 6.61 percent due August 2018
$
15.0

$
15.0

25 million at 4.74 percent due October 2022
24.9

24.9

 
$
39.9

$
39.9

Canadian dollar term credit facility borrowings
$
280.0

$
191.0

Total long term debt
$
1,837.8

$
1,722.0

 
 
 
Current portion of long term debt
$
98.1

$
173.2

Non-current portion of long term debt
1,739.7

1,548.8

 
$
1,837.8

$
1,722.0

Pengrowth’s unsecured covenant based term credit facility includes a committed value of $1 billion and a $250 million expansion feature, providing $1.25 billion of notional credit capacity from a syndicate of seven Canadian and four foreign banks. The facility can be extended at Pengrowth’s discretion any time prior to maturity, subject to syndicate approval. In the event that the lenders do not agree to a renewal, the outstanding balance is due upon maturity. The facility was renewed on March 30, 2015 and has a maturity date of March 30, 2019.
This facility carries floating interest rates that are expected to range between 1.6 percent and 3.25 percent over bankers’ acceptance rates, depending on Pengrowth’s ratio of senior debt to earnings before interest, taxes and non-cash items. At June 30, 2015, the available facility was reduced by drawings of $280.0 million (December 31, 2014 – $191.0 million) and letters of credit in the amount of $21.8 million (December 31, 2014 – $25.0 million) were outstanding.
BANK INDEBTEDNESS
Pengrowth also maintains a $50 million demand operating facility with one Canadian bank. At June 30, 2015, this facility was reduced by drawings of $25.0 million (December 31, 2014 – $9.0 million) and reduced by $1.0 million of outstanding letters of credit (December 31, 2014 – $0.9 million). When utilized together with any overdraft amounts, this facility appears on the Consolidated Balance Sheets as a current liability in bank indebtedness, as applicable.
FINANCIAL COVENANTS
Pengrowth’s senior unsecured notes and credit facilities are subject to a number of covenants, all of which were met at all times during the preceding twelve months, and at June 30, 2015. The covenants are substantially similar between the credit facilities and the senior unsecured notes.

PENGROWTH Second Quarter 2015 Financial Results
7

5.
PROVISIONS
Provisions are composed of Asset Retirement Obligations ("ARO") and contract & other liabilities. The following provides a continuity of the balances for the following periods:
 
Asset retirement
obligations

Contract & Other
liabilities

                      Total
Balance, December 31, 2013
$
606.2

$
5.3

$
611.5

Incurred during the period
6.8

4.4

11.2

Property acquisitions
3.5

—

3.5

Property dispositions
(66.5
)
—

(66.5
)
Revisions due to discount rate changes (1)
211.5

—

211.5

Expenditures on remediation/provisions settled
(22.9
)
(0.5
)
(23.4
)
Other revisions
23.4

(0.4
)
23.0

Accretion (amortization)
18.8

(1.6
)
17.2

Balance, December 31, 2014
$
780.8

$
7.2

$
788.0

Incurred during the period
0.4

1.0

1.4

Property dispositions
(10.4
)
—

(10.4
)
Expenditures on remediation/provisions settled
(7.0
)
(0.4
)
(7.4
)
Other revisions
1.4

(0.3
)
1.1

Accretion (amortization)
8.8

(0.8
)
8.0

Balance, June 30, 2015
$
774.0

$
6.7

$
780.7

(1) 
Relates to the change in the risk free discount rate from 3.25 percent to 2.3 percent. The offset is recorded in PP&E.
As at June 30, 2015
  
  
  
Current 
$
14.0

$
1.7

$
15.7

Long term
760.0

5.0

765.0

 
$
774.0

$
6.7

$
780.7

 
As at December 31, 2014
  
  
  
Current
$
24.9

$
2.4

$
27.3

Long term
755.9

4.8

760.7

 
$
780.8

$
7.2

$
788.0


The following assumptions were used to estimate the ARO liability:
 
As at
  
June 30, 2015

December 31, 2014

Total escalated future costs
$
1,974.7

$
2,007.0

Discount rate, per annum
2.3
%
2.3
%
Inflation rate, per annum
1.5
%
1.5
%
The majority of the costs are expected to be incurred between 2038 and 2079.

PENGROWTH Second Quarter 2015 Financial Results
8

6.
DEFERRED INCOME TAXES
A reconciliation of the deferred income tax recovery calculated based on the loss before taxes at the statutory tax rate to the actual provision for deferred income taxes is as follows: 
 
Six months ended
  
June 30, 2015

June 30, 2014

Loss before taxes
$
(330.7
)
$
(163.6
)
Combined federal and provincial tax rate
26.19
%
25.30
%
Expected income tax recovery
$
(86.6
)
$
(41.4
)
Foreign exchange (gain) loss (1)
11.4

(0.7
)
Effect of change in corporate tax rate
11.6

—

Change in unrecognized deferred tax asset
24.5

—

Other including share based compensation
3.3

3.5

Deferred income tax recovery
$
(35.8
)
$
(38.6
)
(1) 
Reflects the 50% non-taxable portion of foreign exchange gains and losses and related risk management contracts.

7.
SHAREHOLDERS’ CAPITAL
Pengrowth is authorized to issue an unlimited number of common shares and up to 10 million preferred shares. No preferred shares have been issued.
 
Six months ended
Year ended
 
June 30, 2015
December 31, 2014
(Common shares in 000's)
Number of
common shares

Amount

Number of
common shares

Amount

Balance, beginning of period
533,438

$
4,759.7

522,031

$
4,693.1

Share based compensation (cash exercised)
—

—

257

1.6

Share based compensation (non-cash exercised)
3,156

18.5

1,985

13.2

Issued for cash under Dividend Reinvestment Plan ("DRIP")
4,100

14.6

9,165

51.8

Balance, end of period
540,694

$
4,792.8

533,438

$
4,759.7


8.
SHARE BASED COMPENSATION PLANS
A rolling and reloading plan with a maximum of 3.2 percent of the issued and outstanding common shares may be reserved for issuance under all share based compensation plans in the aggregate, as approved by shareholders. As at June 30, 2015, the number of shares issuable under the share based compensation plans, in aggregate, represents 2.5 percent of the issued and outstanding common shares, which is within the limit.
Share based compensation expense is composed of the following:
 
Six months ended
  
June 30, 2015

June 30, 2014

Non-cash share based compensation
$
9.7

$
9.2

Amounts capitalized in the period
(0.7
)
(0.8
)
Non-cash share based compensation expense
$
9.0

$
8.4

Cash-settled phantom deferred share unit expense
0.7

0.9

Total share based compensation expense
$
9.7

$
9.3

 

PENGROWTH Second Quarter 2015 Financial Results
9

LONG TERM INCENTIVE PLAN ("LTIP")
The following provides a continuity of the share settled LTIP:
(number of share units - 000's)
PSUs

RSUs

DSUs

Outstanding, December 31, 2013
4,034

4,413

284

Granted
1,916

2,361

—

Forfeited
(259
)
(285
)
—

Exercised
(275
)
(1,706
)
—

Performance adjustment
108

—

—

Deemed dividends
421

385

24

Outstanding, December 31, 2014
5,945

5,168

308

Granted
2,765

3,519

—

Forfeited
(426
)
(442
)
—

Exercised
(871
)
(2,285
)
—

Performance adjustment
(968
)
—

—

Deemed dividends
271

244

13

Outstanding, June 30, 2015
6,716

6,204

321

For the 2015 grants, Pengrowth may determine, at its sole discretion, that any shares issuable pursuant to the 2015 grants could be paid in cash equal to the fair market value of the shares otherwise issuable.
PREVIOUS LONG TERM INCENTIVE PLAN
As at June 30, 2015, 308,230 common shares (December 31, 2014 - 295,374 common shares) were reserved for issuance under the Deferred Entitlement Share Unit Plan ("DESU"). The DESUs are entitled to deemed dividends.
CASH-SETTLED PHANTOM DEFERRED SHARE UNITS ("PHANTOM DSUs")
As at June 30, 2015, Phantom DSUs, awarded to Directors, outstanding were 382,351 units (December 31, 2014 - 133,621 units) with a corresponding liability of $1.2 million (December 31, 2014 - $0.5 million). For the six months ended June 30, 2015, Pengrowth recorded a $0.7 million compensation expense related to the Phantom DSUs (June 30, 2014 - $0.9 million). Each Phantom DSU entitles the holder to a cash payment equivalent to the value of a number of Common Shares (including deemed dividends) to be paid upon the individual ceasing to be a Director for any reason.









PENGROWTH Second Quarter 2015 Financial Results
10


9.
OTHER CASH FLOW DISCLOSURES
CHANGE IN NON-CASH OPERATING WORKING CAPITAL
 
Three months ended
Six months ended
Cash provided by (used for):
June 30, 2015

June 30, 2014

June 30, 2015

June 30, 2014

Accounts receivable
$
(14.4
)
$
11.7

$
(19.5
)
$
(16.4
)
Accounts payable
(23.6
)
(37.0
)
(45.7
)
20.8

 
$
(38.0
)
$
(25.3
)
$
(65.2
)
$
4.4

CHANGE IN NON-CASH INVESTING WORKING CAPITAL 
 
Three months ended
Six months ended
Cash used for:
June 30, 2015

June 30, 2014

June 30, 2015

June 30, 2014

Accounts payable, including capital accruals
$
(10.2
)
$
(17.7
)
$
(46.6
)
$
(18.4
)

10.
AMOUNTS PER SHARE
The following reconciles the weighted average number of shares used in the basic and diluted net loss per share calculations:
 
Three months ended
Six months ended
(000's)
June 30, 2015

June 30, 2014

June 30, 2015

June 30, 2014

Weighted average number of shares – basic and diluted
539,725

527,141

537,476

525,281

For the three and six months ended June 30, 2015, 5.8 million shares and 5.2 million shares, respectively, (7.3 million and 6.7 million shares for the three and six months ended June 30, 2014) that are issuable on exercise of the share based compensation plans were excluded from the diluted net loss per share calculation as their effect is anti-dilutive.

Further, for the three and six months ended June 30, 2015, 16.1 million shares (23.0 million shares for the three and six months ended June 30, 2014) that are issuable on potential conversion of the convertible debentures were excluded from the diluted net loss per share calculation as their effect is anti-dilutive.

PENGROWTH Second Quarter 2015 Financial Results
11

11.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
COMMODITY PRICE CONTRACTS
As at June 30, 2015, Pengrowth had fixed the price applicable to future production as follows:
Financial Crude Oil Contracts:
 
 
Swaps
  
  
  
 
 
 
 
Price per bbl

 
Reference point
Term
Volume (bbl/d)

(Cdn unless otherwise noted)

 
Edmonton Light Sweet
Q3 2015
4,000

Cdn WTI less $7.44

 
Edmonton Light Sweet
Q4 2015
3,000

Cdn WTI less $7.80

 
Western Canada Select
Q3 2015
7,000

Cdn WTI less $18.86

 
Western Canada Select
Q4 2015
13,000

Cdn WTI less $18.61

 
WTI
Q3 2015
26,000


$93.68

 
WTI
Q4 2015
26,000


$93.68

 
WTI
Q1 2016
23,000


$91.58

 
WTI - $U.S.
Q1 2016
500


$63.29

$U.S.
WTI
Q2 2016
20,500


$88.97

 
WTI - $U.S.
Q2 2016
500


$63.29

$U.S.
WTI
Q3 2016
18,500


$88.53

 
WTI - $U.S.
Q3 2016
500


$63.29

$U.S.
WTI
Q4 2016
18,000


$88.25

 
WTI - $U.S.
Q4 2016
500


$63.29

$U.S.
WTI
2017
3,500


$79.85

 
WTI
2018
5,500


$80.49

 
Puts
 
 
 
 
Reference point
Term
Volume (bbl/d)

Price per bbl (Cdn)

Premium payable per bbl (Cdn)

WTI
Q1 2016
4,000


$90.00


$3.30

Financial Natural Gas Contracts:
 
 
Swaps
  
  
  
 
Reference point
Term
Volume (MMBtu/d)

Price per MMBtu (Cdn)

 
AECO
Q3 2015
94,782


$3.63

 
NGI Chicago Index
Q3 2015
12,500


$4.10

 
AECO
Q4 2015
94,782


$3.63

 
NGI Chicago Index
Q4 2015
10,815


$4.20

 
AECO
Q1 2016
97,151


$3.53

 
AECO
Q2 2016
85,304


$3.34

 
AECO
Q3 2016
85,304


$3.34

 
AECO
Q4 2016
92,412


$3.45

 
AECO
Q1 2017
85,304


$3.60

 
AECO
Q2 2017
73,456


$3.53

 
AECO
Q3 2017
73,456


$3.53

 
AECO
Q4 2017
73,456


$3.53

 
AECO
2018
66,347


$3.59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

PENGROWTH Second Quarter 2015 Financial Results
12

 
 
 
 
 
Puts
 
 
 
 
Reference point
Term
Volume (MMBtu/d)

Price per MMBtu (Cdn)

Premium payable per MMBtu (Cdn)

AECO
Q1 2016
2,370


$3.48


$0.21

AECO
Q1 2016
2,370


$3.69


$0.29

AECO
Q1 2016
2,370


$3.94


$0.44

AECO
Q1 2016
2,370


$3.92


$0.41

AECO
Q2 2016
2,370


$3.48


$0.21

AECO
Q2 2016
2,370


$3.69


$0.29


Commodity Price Sensitivity on Risk Management Contracts as at June 30, 2015
Oil
Cdn$1/bbl increase in future oil prices (1)

Cdn$1/bbl decrease in future oil prices (1)

Unrealized pre-tax gain (loss) on oil risk management

($17.9
)

$17.9

Natural gas
Cdn$0.25/MMBtu increase in future natural gas prices

Cdn$0.25/MMBtu decrease in future natural gas prices

Unrealized pre-tax gain (loss) on natural gas risk management

($26.3
)

$26.3

(1) Includes a Cdn$1 change in financial differential risk management contracts.
As at close June 30, 2015, the AECO gas spot price was $2.63/MMBtu (June 30, 2014 – $4.41/MMBtu). The WTI prompt monthly price was Cdn$74.28/bbl (June 30, 2014 – Cdn$112.43/bbl).

Physical Delivery Contracts
As at June 30, 2015, the following physical delivery contracts were held for the purpose of delivery of non-financial items in accordance with Pengrowth's expected sales requirements. Physical delivery contracts are not considered financial instruments and therefore, no asset or liability has been recognized in the Consolidated Financial Statements.
Physical Crude Oil Contracts:
 
 
 
Reference point
Term
Volume (bbl/d)

Price per bbl (Cdn)
Edmonton Light Sweet
Q3 2015
5,119

Cdn WTI less $7.78
Edmonton Light Sweet
Q4 2015
5,119

Cdn WTI less $7.78

POWER PRICE CONTRACTS
As at June 30, 2015, Pengrowth had fixed the price applicable to future power costs as follows: 
Financial Power Contracts:
  
  
  
Reference point
Term
Volume (MW)

Price per MWh (Cdn)

AESO
Q3 2015
40


$49.53

AESO
Q4 2015
40


$49.53

AESO
2016
20


$44.13

As at close June 30, 2015, the Alberta power pool spot price was $168.05/MWh (June 30, 2014 – $29.62/MWh). The average Alberta power pool price was $57.22/MWh for the three months ended June 30, 2015 (June 30, 2014 – $42.43/MWh).
Power Price Sensitivity on Risk Management Contracts as at June 30, 2015
Each $1/MWh change in future power prices would result in a pre-tax change in the unrealized gain (loss) on power risk management contracts outstanding as at June 30, 2015 of approximately $0.4 million.



PENGROWTH Second Quarter 2015 Financial Results
13


FOREIGN EXCHANGE CONTRACTS
U.K. pound sterling Denominated Term Debt
Pengrowth entered into foreign exchange risk management contracts when it issued the U.K. pound sterling term notes. These contracts fix the Canadian dollar to the U.K. pound sterling exchange rate on the interest and principal of the U.K. pound sterling denominated debt as follows: 
Amount (U.K. pound sterling millions)
Settlement date
Fixed rate
($1Cdn = U.K. pound sterling)

50.0
December 2015
0.50

15.0
October 2019
0.63

U.S. Denominated Term Debt
A series of swap contracts were transacted in order to fix the foreign exchange rate on a portion of Pengrowth’s U.S. dollar denominated term debt. Each swap requires Pengrowth to buy U.S. dollars at a predetermined rate and time based upon the maturity dates of the U.S. denominated term debt. 
Contract type
Settlement date
Principal amount  (U.S.$ millions)

Swapped amount  (U.S.$ millions)

     % of principal swapped

Fixed rate
($1Cdn = $U.S.)

Swap
July 2017
400.0

400.0

100
%
0.79

Swap
August 2018
265.0

20.0

8
%
0.81

No contracts
October 2019
35.0

—

—

—

No contracts
May 2020
115.5

—

—

—

No contracts
October 2022
105.0

—

—

—

No contracts
October 2024
195.0

—

—

—

 
 
1,115.5

420.0

38
%
 
During the first quarter of 2015, Pengrowth monetized all of its U.S. swap contracts that fixed the foreign exchange rate on Pengrowth’s U.S. dollar denominated term debt, except for contracts related to the May 2015 term debt settlement. This resulted in a Cdn$84.1 million realized foreign exchange gain in the first quarter of 2015 and the cash proceeds were used to pay down a portion of the credit facilities. Subsequent to the monetization, U.S.$400 million of new foreign exchange swap contracts were entered into. The foreign exchange swap contracts associated with the May 2015 term debt series settled in tandem with its maturity, resulting in a Cdn$9.8 million realized foreign exchange gain in the second quarter of 2015. Together, these transactions brought year to date 2015 realized foreign exchange gains from settlement of swap contracts to Cdn$93.9 million. At June 30, 2015, Pengrowth held a total of U.S.$420 million in foreign exchange swap contracts compared to U.S.$460 million at December 31, 2014.

Foreign Exchange Rate Sensitivity
Foreign Exchange on Foreign Denominated Term Debt
The following summarizes the sensitivity on a pre-tax basis, of a change in the foreign exchange rate related to the translation of the foreign denominated term debt and the offsetting change in the fair value of the foreign exchange risk management contracts relating to that debt, holding all other variables constant:
 
Cdn$0.01 Exchange rate change
Foreign exchange sensitivity as at June 30, 2015
Cdn - U.S.

Cdn - U.K.

Unrealized foreign exchange gain or loss on foreign denominated debt
$
11.2

$
0.7

Unrealized foreign exchange risk management gain or loss
4.2

0.7

Net pre-tax impact on Consolidated Statements of Loss
$
7.0

$
—

 
 
 
 
Cdn$0.01 Exchange rate change
Foreign exchange sensitivity as at June 30, 2014
Cdn - U.S.

Cdn - U.K.

Unrealized foreign exchange gain or loss on foreign denominated debt
$
11.9

$
0.7

Unrealized foreign exchange risk management gain or loss
4.6

0.7

Net pre-tax impact on Consolidated Statements of Loss
$
7.3

$
—


PENGROWTH Second Quarter 2015 Financial Results
14


Interest Rate Sensitivity
Bank Interest Cost
As at June 30, 2015, Pengrowth had approximately $1.8 billion of current and non-current long term debt outstanding (December 31, 2014 - $1.7 billion) of which $280.0 million was based on floating interest rates (December 31, 2014 - $191.0 million). A 1 percent increase in interest rates would increase pre-tax interest expense by approximately $1.4 million for the six months ended June 30, 2015 (June 30, 2014 - $nil), assuming the amount was outstanding for the entire period.

Summary of Gains and Losses on Risk Management Contracts
The following tables provide details of the fair value of risk management contracts that appear on the Consolidated Balance Sheets and the unrealized and realized gains and losses on risk management recorded in the Consolidated Statements of Income (Loss).
As at and for the six month period ended June 30, 2015
Commodity
contracts (1)

Power contracts (2)

Foreign exchange
contracts (3)

Total

Current portion of risk management assets
$
163.4

$
—

$
—

$
163.4

Non-current portion of risk management assets
53.7

0.2

4.8

58.7

Current portion of risk management liabilities
(2.4
)
(2.2
)
(2.5
)
(7.1
)
Non-current portion of risk management liabilities
—

(0.3
)
(8.0
)
(8.3
)
Risk management assets (liabilities), end of period
$
214.7

$
(2.3
)
$
(5.7
)
$
206.7

Less: Risk management assets (liabilities) at beginning of period
421.1

(2.9
)
50.8

469.0

Unrealized gain (loss) on risk management contracts for the period
$
(206.4
)
$
0.6

$
(56.5
)
$
(262.3
)
Realized gain (loss) on risk management contracts for the period
144.8

(1.3
)
93.9

237.4

Total unrealized and realized gain (loss) on risk management contracts for the period
$
(61.6
)
$
(0.7
)
$
37.4

$
(24.9
)
 
 
 
 
 
As at and for the six month period ended June 30, 2014
Commodity
contracts (1)

Power and Interest contracts (4)

Foreign exchange
contracts (3)

Total

Current portion of risk management assets
$
—

$
2.0

$
2.9

$
4.9

Non-current portion of risk management assets
—

—

17.0

17.0

Current portion of risk management liabilities
(142.4
)
—

(0.6
)
(143.0
)
Non-current portion of risk management liabilities
(63.4
)
(0.4
)
(6.6
)
(70.4
)
Risk management assets (liabilities), end of period
$
(205.8
)
$
1.6

$
12.7

$
(191.5
)
Less: Risk management assets (liabilities) at beginning of period
(80.0
)
(1.4
)
12.0

(69.4
)
Unrealized gain (loss) on risk management contracts for the period
$
(125.8
)
$
3.0

$
0.7

$
(122.1
)
Realized loss on risk management contracts for the period
(89.2
)
(1.0
)
(1.3
)
(91.5
)
Total unrealized and realized gain (loss) on risk management contracts for the period
$
(215.0
)
$
2.0

$
(0.6
)
$
(213.6
)
(1) 
Unrealized and realized gains and losses are presented as separate line items in the Consolidated Statements of Income (Loss).
(2) 
Unrealized gains and losses are included in other (income) expense. Realized gains and losses are included in operating expense.
(3) 
Unrealized and realized gains and losses are included as part of separate line items in the Consolidated Statements of Income (Loss).
(4) 
Unrealized gains and losses are included in other (income) expense and interest expense, respectively. Realized gains and losses are included in operating expense and interest expense, respectively.

FAIR VALUE
The fair value of cash and cash equivalents, accounts receivable, accounts payable, bank indebtedness and dividends payable approximate their carrying amount due to the short-term nature of those instruments. The fair value of the Canadian dollar term credit facility is equal to its carrying amount as the facility bears interest at floating rates and credit spreads within the facility are indicative of market rates. The fair value of the remediation trust funds are equal to their carrying amount as these assets are carried at their estimated fair value. The following tables provide fair value measurement information for financial assets and liabilities.

PENGROWTH Second Quarter 2015 Financial Results
15

 
 
 
Fair value measurements using:
As at June 30, 2015
Carrying amount

Fair value

Quoted prices in
active markets
(Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Financial Assets
 
 
 
 
 
Remediation trust funds
$
71.2

$
71.2

$
71.2

$
—

$
—

Fair value of risk management contracts
222.1

222.1

—

222.1

—

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Convertible debentures
137.1

135.8

135.8

—

—

U.S. dollar denominated senior unsecured notes
1,390.4

1,468.3

—

1,468.3

—

Cdn dollar senior unsecured notes
39.9

42.1

—

42.1

—

U.K. pound sterling denominated unsecured notes
127.5

128.9

—

128.9

—

Fair value of risk management contracts
15.4

15.4

—

15.4

—

 
 
 
 
 
 
 
 
 
Fair value measurements using:
As at December 31, 2014
Carrying amount

Fair value

Quoted prices in
active markets
(Level 1)

Significant other
observable inputs
(Level 2)

Significant unobservable inputs (Level 3)

Financial Assets
 
 
 
 
 
Remediation trust funds
$
60.4

$
60.4

$
60.4

$
—

$
—

Fair value of risk management contracts
482.2

482.2

—

482.2

—

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Convertible debentures
137.2

135.3

135.3

—

—

U.S. dollar denominated senior unsecured notes
1,373.8

1,457.7

—

1,457.7

—

Cdn dollar senior unsecured notes
39.9

41.5

—

41.5

—

U.K. pound sterling denominated unsecured notes
117.3

120.6

—

120.6

—

Fair value of risk management contracts
13.2

13.2

—

13.2

—

12.
FOREIGN EXCHANGE (GAIN) LOSS
 
Three months ended
Six months ended
  
June 30, 2015

June 30, 2014

June 30, 2015

June 30, 2014

Currency exchange rate ($1Cdn = $U.S.) at period end
$
0.80

$
0.94

$
0.80

$
0.94

Unrealized foreign exchange (gain) loss on U.S. dollar denominated debt
$
(24.1
)
$
(46.5
)
$
102.3

$
3.1

Unrealized foreign exchange (gain) loss on U.K. pound sterling denominated debt
5.4

(1.2
)
10.1

4.1

Total unrealized foreign exchange (gain) loss from translation of foreign denominated debt
$
(18.7
)
$
(47.7
)
$
112.4

$
7.2

Unrealized (gain) loss on U.S. foreign exchange risk management contracts
$
19.0

$
16.9

$
65.9

$
3.2

Unrealized (gain) loss on U.K. foreign exchange risk management contracts
(5.4
)
1.7

(9.4
)
(3.9
)
Total unrealized (gain) loss on foreign exchange risk management contracts
$
13.6

$
18.6

$
56.5

$
(0.7
)
Total unrealized foreign exchange (gain) loss
$
(5.1
)
$
(29.1
)
$
168.9

$
6.5

Total realized foreign exchange (gain) loss
$
(9.2
)
$
1.4

$
(91.8
)
$
1.5


PENGROWTH Second Quarter 2015 Financial Results
16