EX-99.2 3 q22016financialsandnotes.htm INTERIM FINANCIAL STATEMENTS Exhibit
PENGROWTH ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Stated in millions of Canadian dollars)
(Unaudited)
 
 
 
As at

As at

 
Note

June 30, 2016

December 31, 2015

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
 
$
54.1

$
—

Accounts receivable
 
113.7

139.5

Fair value of risk management contracts
11

97.7

288.8

 
 
265.5

428.3

Fair value of risk management contracts
11

52.0

166.7

Other assets
 
109.3

89.1

Property, plant and equipment
2

3,302.1

3,346.8

Exploration and evaluation assets
 
495.9

494.8

Deferred income taxes
6

93.6

25.0

TOTAL ASSETS
 
$
4,318.4

$
4,550.7

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Bank indebtedness
4

$
—

$
3.7

Accounts payable
 
162.2

217.8

Fair value of risk management contracts
11

2.5

3.4

Convertible debentures
3

126.7

—

Current portion of provisions and other liabilities
5

23.3

21.8

 
 
314.7

246.7

Convertible debentures
3

—

137.0

Long term debt
4

1,504.4

1,715.8

Provisions and other liabilities
5

876.0

686.2

 
 
2,695.1

2,785.7

Shareholders' Equity
 
 
 
Shareholders' capital
7

4,813.4

4,797.0

Contributed surplus
 
17.6

27.3

Deficit
 
(3,207.7
)
(3,059.3
)
 
 
1,623.3

1,765.0

 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
4,318.4

$
4,550.7

See accompanying notes to the Consolidated Financial Statements.


PENGROWTH Second Quarter 2016 Financial Results
1

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


 
 
 
Three months ended June 30
Six months ended June 30
  
Note

2016

2015

2016

2015

REVENUES
 
 
 
 
 
     Oil and gas sales
 
$
137.2

$
249.9

$
251.4

$
449.8

     Royalties, net of incentives
 
(7.8
)
(26.5
)
(15.9
)
(51.3
)
 
 
129.4

223.4

235.5

398.5

     Realized gain (loss) on commodity risk management
11

77.1

59.1

204.1

144.8

     Change in fair value of commodity risk management contracts
11

(224.3
)
(139.6
)
(234.5
)
(206.4
)
 
 
(17.8
)
142.9

205.1

336.9

EXPENSES
 
 
 
 
 
     Operating
 
66.7

106.8

136.8

199.7

     Transportation
 
8.3

14.0

17.1

23.6

     General and administrative
 
21.8

26.7

44.3

56.0

     Depletion, depreciation and amortization
2

91.3

116.7

186.9

229.6

 
 
188.1

264.2

385.1

508.9

OPERATING INCOME (LOSS)
 
(205.9
)
(121.3
)
(180.0
)
(172.0
)
 
 
 
 
 
 
Other (income) expense items
 
 
 
 
 
     (Gain) loss on disposition of properties
 
14.0

27.0

17.7

26.5

     Unrealized foreign exchange (gain) loss
12

(5.8
)
(5.1
)
(37.9
)
168.9

     Realized foreign exchange (gain) loss
12

(0.7
)
(9.2
)
0.8

(91.8
)
     Interest and financing charges
 
26.4

27.8

52.9

47.5

     Accretion
5

3.9

4.3

7.9

8.8

     Other (income) expense
 
(3.9
)
(0.8
)
(4.4
)
(1.2
)
INCOME (LOSS) BEFORE TAXES
 
(239.8
)
(165.3
)
(217.0
)
(330.7
)
Deferred income tax (recovery) expense
6

(66.4
)
(30.9
)
(68.6
)
(35.8
)
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
 
$
(173.4
)
$
(134.4
)
$
(148.4
)
$
(294.9
)
NET INCOME (LOSS) PER SHARE
10

 
 
 
 
     Basic
 
$
(0.32
)
$
(0.25
)
$
(0.27
)
$
(0.55
)
     Diluted
 
$
(0.32
)
$
(0.25
)
$
(0.27
)
$
(0.55
)
See accompanying notes to the Consolidated Financial Statements.


PENGROWTH Second Quarter 2016 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

2016

2015

2016

2015

CASH PROVIDED BY (USED FOR):
 
 
 
 
 
OPERATING
 
 
 
 
 
Net income (loss) and comprehensive income (loss)
 
$
(173.4
)
$
(134.4
)
$
(148.4
)
$
(294.9
)
Non-cash items
 
 
 
 
 
Depletion, depreciation, amortization and accretion
 
95.2

121.0

194.8

238.4

Deferred income tax (recovery) expense
6

(66.4
)
(30.9
)
(68.6
)
(35.8
)
Unrealized foreign exchange (gain) loss
12

(5.8
)
(5.1
)
(37.9
)
168.9

     Change in fair value of commodity risk management contracts
11

224.3

139.6

234.5

206.4

Share based compensation
8

2.8

4.6

6.5

9.0

(Gain) loss on disposition of properties
 
14.0

27.0

17.7

26.5

Other items
 
(1.6
)
(0.5
)
(3.3
)
(0.1
)
Foreign exchange derivative settlements
 
—

(9.8
)
—

(93.9
)
Funds flow from operations
 
89.1

111.5

195.3

224.5

Interest and financing charges
 
26.4

27.8

52.9

47.5

Expenditures on remediation
5

(0.2
)
(3.8
)
(5.2
)
(7.0
)
Change in non-cash operating working capital
9

(14.0
)
(38.0
)
(25.3
)
(65.2
)
 
 
101.3

97.5

217.7

199.8

FINANCING
 
 
 
 
 
Dividends paid
 
—

(30.8
)
—

(84.2
)
Bank indebtedness (repayment)
4

(42.0
)
24.0

(3.7
)
16.5

Long term debt (repayment)
4

—

(39.6
)
(104.0
)
2.4

Convertible debentures repurchase
3

(0.5
)
—

(10.2
)
—

Foreign exchange derivative settlements
 
—

9.8

—

93.9

Interest and financing charges paid
 
(18.3
)
(22.2
)
(54.1
)
(58.1
)
Proceeds from DRIP
 
—

5.5

—

14.6

 
 
(60.8
)
(53.3
)
(172.0
)
(14.9
)
INVESTING
 
 
 
 
 
Capital expenditures
 
(12.0
)
(50.8
)
(20.7
)
(149.2
)
Proceeds on property dispositions
 
34.6

23.5

47.4

24.0

Contributions to remediation trust funds and other items
 
(8.4
)
(6.7
)
(16.1
)
(13.1
)
Change in non-cash investing working capital
9

(0.6
)
(10.2
)
(2.2
)
(46.6
)
 
 
13.6

(44.2
)
8.4

(184.9
)
CHANGE IN CASH AND CASH EQUIVALENTS
 
54.1

—

54.1

—

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
—

—

—

—

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
54.1

$
—

$
54.1

$
—

See accompanying notes to the Consolidated Financial Statements.


PENGROWTH Second Quarter 2016 Financial Results
3

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


 
 
Three months ended June 30
Six months ended June 30
  
Note

2016

2015

2016

2015

SHAREHOLDERS' CAPITAL
7

 
 
 
 
Balance, beginning of period
 
$
4,813.4

$
4,780.1

$
4,797.0

$
4,759.7

Share based compensation
 
—

7.2

16.4

18.5

Issued under DRIP
 
—

5.5

—

14.6

Balance, end of period
 
4,813.4

4,792.8

4,813.4

4,792.8

 
 
 
 
 
 
CONTRIBUTED SURPLUS
 
 
 
 
 
Balance, beginning of period
 
14.7

25.7

27.3

32.3

Share based compensation
8

2.9

5.0

6.7

9.7

Exercise of share based compensation awards
 
—

(7.2
)
(16.4
)
(18.5
)
Balance, end of period
 
17.6

23.5

17.6

23.5

 
 
 
 
 
 
DEFICIT
 
 
 
 
 
Balance, beginning of period
 
(3,034.3
)
(2,068.6
)
(3,059.3
)
(1,865.2
)
Net income (loss)
 
(173.4
)
(134.4
)
(148.4
)
(294.9
)
Dividends declared
 
—

(30.8
)
—

(73.7
)
Balance, end of period
 
(3,207.7
)
(2,233.8
)
(3,207.7
)
(2,233.8
)
 
 
 
 
 
 
TOTAL SHAREHOLDERS' EQUITY
 
$
1,623.3

$
2,582.5

$
1,623.3

$
2,582.5

See accompanying notes to the Consolidated Financial Statements.


PENGROWTH Second Quarter 2016 Financial Results
4

PENGROWTH ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE PERIOD ENDED JUNE 30, 2016 (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, 2016 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, 2015 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, 2015 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, 2015.
The Consolidated Financial Statements were authorized for release by the Audit and Risk Committee of the Board of Directors on August 4, 2016.

PENGROWTH Second Quarter 2016 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, 2014
$
7,497.8

$
84.9

$
7,582.7

Additions to PP&E
192.8

4.0

196.8

Property acquisitions
0.9

—

0.9

Change in asset retirement obligations
36.9

—

36.9

Divestitures
(754.9
)
—

(754.9
)
Balance, December 31, 2015
$
6,973.5

$
88.9

$
7,062.4

Additions to PP&E
45.9

0.8

46.7

Change in asset retirement obligations
161.5

—

161.5

Divestitures
(151.7
)
—

(151.7
)
Balance, June 30, 2016
$
7,029.2

$
89.7

$
7,118.9

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

Other
equipment

Total

Balance, December 31, 2014
$
2,725.6

$
70.3

$
2,795.9

Depletion and amortization for the period
449.5

5.8

455.3

Impairment
810.0

—

810.0

Divestitures
(345.6
)
—

(345.6
)
Balance, December 31, 2015
$
3,639.5

$
76.1

$
3,715.6

Depletion and amortization for the period
184.6

2.3

186.9

Divestitures
(85.7
)
—

(85.7
)
Balance, June 30, 2016
$
3,738.4

$
78.4

$
3,816.8

 
 
 
 
Net book value
Oil and natural
gas assets

Other
equipment

Total

As at June 30, 2016
$
3,290.8

$
11.3

$
3,302.1

As at December 31, 2015
$
3,334.0

$
12.8

$
3,346.8

During the six months ended June 30, 2016, $1.5 million (June 30, 2015 – $5.9 million) of directly attributable general and administrative costs were capitalized to PP&E.
At June 30, 2016, $5.8 million (June 30, 2015 - $5.6 million) of net book value relating to the Lindbergh project was excluded from the calculation of depletion as those amounts were considered a project in the construction phase.
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, 2016, $1.5 million (June 30, 2015 – $11.0 million) of interest was capitalized on the Lindbergh Project to PP&E using Pengrowth's weighted average cost of debt of 5.7 percent (June 30, 2015 – 5.4 percent).
3.
CONVERTIBLE DEBENTURES
In February 2016, Pengrowth commenced a Normal Course Issuer Bid ("NCIB") for a portion of its Series B 6.25 percent coupon convertible unsecured subordinated debentures, in accordance with TSX requirements. Pursuant to the NCIB, Pengrowth intends to acquire up to $13.7 million principal amount of convertible debentures in the 12 month period that commenced on February 29, 2016 and will end on February 28, 2017, of which the amount represents 10 percent of the public float of outstanding convertible debentures as of February 19, 2016. Purchases under the NCIB are made by Pengrowth through the facilities of the TSX. The price that Pengrowth pays for the convertible debentures is the market price at the time of acquisition and any gain or loss resulting from the transaction is recorded as part of interest expense.

PENGROWTH Second Quarter 2016 Financial Results
6

Through June 30, 2016, Pengrowth repurchased $10.2 million of principal amount of convertible debentures. Pengrowth paid $9.2 million, including $0.1 million of accrued interest, to repurchase the debentures resulting in a gain of $1.0 million which was credited against interest expense.
The following table summarizes the activity associated with the convertible debentures:
Series
Series B - 6.25 percent

Maturity date
March 31, 2017

Conversion price (per Pengrowth share)
$
11.51

Balance, December 31, 2014
$
137.2

Premium accretion
(0.2
)
Balance, December 31, 2015
$
137.0

Repurchase of convertible debentures
(10.2
)
Premium accretion
(0.1
)
Balance, June 30, 2016
$
126.7

Face value, June 30, 2016
$
126.6


4.
LONG TERM DEBT AND BANK INDEBTEDNESS

LONG TERM DEBT
 
As at
  
June 30, 2016

December 31, 2015

U.S. dollar denominated senior unsecured notes:
 
 
400 million at 6.35 percent due July 2017
$
516.4

$
553.2

265 million at 6.98 percent due August 2018
342.0

366.4

35 million at 3.49 percent due October 2019
45.1

48.3

115.5 million at 5.98 percent due May 2020
148.9

159.6

105 million at 4.07 percent due October 2022
135.3

144.9

195 million at 4.17 percent due October 2024
251.1

269.0

 
$
1,438.8

$
1,541.4

U.K. pound sterling denominated unsecured notes:
 
 
15 million at 3.45 percent due October 2019
$
25.7

$
30.5

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
$
—

$
104.0

Total long term debt
$
1,504.4

$
1,715.8

 
 
 
Current portion of long term debt
$
—

$
—

Non-current portion of long term debt
1,504.4

1,715.8

 
$
1,504.4

$
1,715.8

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 which is currently March 31, 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.

PENGROWTH Second Quarter 2016 Financial Results
7

At June 30, 2016, the facility had no drawings (December 31, 2015 – $104.0 million) and letters of credit in the amount of $34.9 million (December 31, 2015 – $21.6 million) were outstanding.
BANK INDEBTEDNESS
Pengrowth also maintains a $50 million demand operating facility with one Canadian bank. At June 30, 2016, the facility had no drawings (December 31, 2015 – $2.5 million) and reduced by $1.0 million of outstanding letters of credit (December 31, 2015 – $1.4 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, 2016. The covenants are substantially similar between the credit facilities and the senior unsecured notes.
Pengrowth anticipates it will remain in compliance with such covenants for the remainder of 2016; however, if commodity prices remain at July 1, 2016 GLJ forecast pricing for WTI and AECO assuming U.S.$0.75 per Cdn$1, Pengrowth may not remain in compliance with certain financial covenants in its senior unsecured notes and credit facilities during the second half of 2017. If the Company is unable to obtain a waiver or relaxation of such covenants and is not able to remain in compliance with them, the senior unsecured notes and credit facilities may become due on demand. There can be no assurance that Pengrowth would be able to obtain a relaxation or waiver of the covenants in its senior unsecured notes and credit facilities. Pengrowth intends to continue with its previously announced asset disposition efforts, the planned monetization of commodity and foreign exchange hedge contracts, and to apply the proceeds along with cash from operations to reduce its indebtedness.
The key financial covenants as at June 30, 2016 are summarized below:
Covenant
Limit
Actual at June 30, 2016 (1)
Total senior debt before working capital must not exceed 3.5 times EBITDA for the last four fiscal quarters
< 3.5 times
3.2 times
Total debt before working capital must not exceed 4.0 times EBITDA for the last four fiscal quarters
< 4.0 times
3.2 times
Total senior debt before working capital must be less than 55 percent of total book capitalization
< 55%
51%
EBITDA must not be less than four times interest expense for the last four fiscal quarters
> 4 times
4.9 times
(1) 
As senior unsecured notes and Credit Facilities have slightly different covenant calculations, the calculated covenants at June 30, 2016 represent those closest to the limits.

PENGROWTH Second Quarter 2016 Financial Results
8

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

Finance leases

Contract & Other
liabilities

                      Total

Balance, December 31, 2014
$
780.8

$
5.1

$
2.1

$
788.0

Incurred during the period
16.8

—

1.0

17.8

Property dispositions
(112.4
)
—

—

(112.4
)
Expenditures on remediation/provisions settled
(19.0
)
(0.8
)
—

(19.8
)
Other revisions
20.1

—

(1.2
)
18.9

Accretion (amortization)
17.1

—

(1.6
)
15.5

Balance, December 31, 2015
$
703.4

$
4.3

$
0.3

$
708.0

Incurred during the period
—

35.0

1.6

36.6

Property dispositions
(10.9
)
—

—

(10.9
)
Revisions due to discount rate changes (1)
161.5

—

—

161.5

Expenditures on remediation/provisions settled
(5.2
)
(0.7
)
—

(5.9
)
Other revisions
—

—

2.1

2.1

Accretion (amortization)
7.9

—

—

7.9

Balance, June 30, 2016
$
856.7

$
38.6

$
4.0

$
899.3

(1) 
Relates to the change in the risk free discount rate from 2.3 percent to 1.7 percent. The offset is recorded in PP&E.
As at June 30, 2016
Asset retirement
obligations

Finance leases

Contract & Other
liabilities

                      Total

Current 
$
20.9

$
1.5

$
0.9

$
23.3

Long term
835.8

37.1

3.1

876.0

 
$
856.7

$
38.6

$
4.0

$
899.3

 
As at December 31, 2015
  
  
  
  
Current
$
20.9

$
0.9

$
—

$
21.8

Long term
682.5

3.4

0.3

686.2

 
$
703.4

$
4.3

$
0.3

$
708.0


The following assumptions were used to estimate the ARO liability:
 
As at
  
June 30, 2016

December 31, 2015

Total escalated future costs
$
1,672.4

$
1,701.7

Discount rate, per annum
1.7
%
2.3
%
Inflation rate, per annum
1.5
%
1.5
%
The majority of the ARO costs are expected to be incurred between 2040 and 2080.

FINANCE LEASES
In April 2016, Pengrowth entered into a sale and leaseback of its co-generation facilities at Lindbergh. The arrangement was determined to be a lease and has been classified as a finance lease. Pengrowth received $35.0 million in proceeds for the disposition of the co-generation facilities and recorded a finance lease obligation and a corresponding asset in property, plant and equipment. As at June 30, 2016, the carrying amount of this finance lease obligation together with the rest of the finance leases, included in provisions and other liabilities, was $38.6 million.

PENGROWTH Second Quarter 2016 Financial Results
9

6.
DEFERRED INCOME TAXES
A reconciliation of the deferred income tax (recovery) expense calculated based on the income (loss) before taxes at the statutory tax rate to the actual provision for deferred income taxes is as follows: 
 
Six months ended
  
June 30, 2016

June 30, 2015

Income (loss) before taxes
$
(217.0
)
$
(330.7
)
Combined federal and provincial tax rate (1)
27.08
%
26.19
%
Expected income tax (recovery) expense (1)
$
(58.8
)
$
(86.6
)
Change in unrecognized deferred tax asset
(6.4
)
24.5

Foreign exchange (gain) loss (2)
(5.1
)
11.4

Effect of change in corporate tax rate
(0.6
)
11.6

Other including share based compensation
2.3

3.3

Deferred income tax (recovery) expense
$
(68.6
)
$
(35.8
)
(1) Expected income tax rate increased due to an increase in the corporate income tax rate in Alberta (from 10 percent to 12 percent).
(2) Reflects the 50 percent 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, 2016
December 31, 2015
(Common shares in 000's)
Number of
common shares

Amount

Number of
common shares

Amount

Balance, beginning of period
543,033

$
4,797.0

533,438

$
4,759.7

Share based compensation (non-cash exercised)
4,412

16.4

3,188

18.6

Issued for cash under Dividend Reinvestment Plan ("DRIP")
—

—

6,407

18.7

Balance, end of period
547,445

$
4,813.4

543,033

$
4,797.0


8.
LONG TERM INCENTIVE PLANS ("LTIP")
(i) SHARE-SETTLED LTIP
The following table provides a continuity of the share-settled LTIP:
(number of share units - 000's)
PSUs

RSUs

DSUs

Outstanding, December 31, 2014
5,945

5,168

308

Granted
2,783

3,548

—

Forfeited
(1,952
)
(1,587
)
—

Exercised
(871
)
(2,285
)
(31
)
Performance adjustment
(1,812
)
—

—

Deemed dividends
547

497

25

Outstanding, December 31, 2015
4,640

5,341

302

Granted
3,045

6,499

—

Forfeited
(174
)
(394
)
—

Exercised
(1,695
)
(2,717
)
—

Outstanding, June 30, 2016
5,816

8,729

302

Commencing with the 2015 grants, Pengrowth may determine, at its sole discretion, that any shares issuable pursuant to new grants could be paid in cash equal to the fair market value of the shares otherwise issuable.

PENGROWTH Second Quarter 2016 Financial Results
10

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-settled compensation plans in the aggregate, as approved by shareholders. As at June 30, 2016, the number of shares issuable under the share-settled compensation plans, in aggregate, represents 2.8 percent of the issued and outstanding common shares, which is within the limit.
PREVIOUS LTIP
As at June 30, 2016, 321,308 common shares (December 31, 2015 - 321,308 common shares) were reserved for issuance under the Deferred Entitlement Share Unit Plan ("DESU"). The DESUs are entitled to deemed dividends, as applicable.
(ii) CASH-SETTLED LTIP
CASH-SETTLED RESTRICTED SHARE UNITS ("CASH-SETTLED RSUs")
Commencing in 2016, certain employees receive cash-settled RSUs in place of previously received share-settled LTIP. Each cash-settled RSU entitles the holder to a cash payment equivalent to the value of a number of Common Shares (including the reinvestment of deemed dividends, as applicable) which vest evenly over a period of three years or less. Compensation expense associated with the cash-settled RSUs is determined based on the fair value of the share units at the grant date and is subsequently adjusted to reflect the fair value of the share units at each period end. This valuation incorporates the period end share price and the number of cash-settled RSUs outstanding at each period end. Compensation expense is recognized in the Statements of Income (Loss) with a corresponding increase or decrease in liabilities. Classification of the associated short term and long term liabilities is dependent on the expected payout dates. As at June 30, 2016, $0.7 million (December 31, 2015 - $nil) was included in non-current provisions and $0.9 million (December 31, 2015 - $nil) was included in accounts payable for the current provisions.
CASH-SETTLED PHANTOM DEFERRED SHARE UNITS ("PHANTOM DSUs")
As at June 30, 2016, Phantom DSUs, awarded to Directors, had a corresponding liability of $3.2 million (December 31, 2015 - $0.3 million) of which $0.9 million was included in current provisions due to the retirement of certain directors in the second quarter of 2016. For the six months ended June 30, 2016, Pengrowth recorded a $2.9 million (June 30, 2015 - $0.7 million) compensation expense related to the Phantom DSUs. Each Phantom DSU entitles the holder to a cash payment equivalent to the value of a number of Common Shares (including deemed dividends, as applicable) to be paid upon the individual ceasing to be a Director for any reason.
The following table provides a continuity of the cash-settled LTIP:
(number of share units - 000's)
Cash-settled RSUs

Phantom DSUs

Outstanding, December 31, 2014
—

134

Granted
—

239

Deemed dividends
—

24

Outstanding, December 31, 2015
—

397

Granted
4,503

982

Forfeited
(102
)
—

Outstanding, June 30, 2016
4,401

1,379


PENGROWTH Second Quarter 2016 Financial Results
11

(iii) TOTAL SHARE BASED COMPENSATION EXPENSE
Total share based compensation expenses are included in both general and administrative and operating expenses on the Consolidated Statements of Income (Loss) and are composed of the following:
 
Six months ended
  
June 30, 2016

June 30, 2015

Non-cash share based compensation
$
6.7

$
9.7

Amounts capitalized in the period
(0.2
)
(0.7
)
Non-cash share based compensation expense
$
6.5

$
9.0

 
 
 
Cash-settled restricted share units
$
1.6

$
—

 
 
 
Cash-settled phantom deferred share unit expense
$
2.9

$
0.7

Total share based compensation expense
$
11.0

$
9.7


9.
OTHER CASH FLOW DISCLOSURES
CHANGE IN NON-CASH OPERATING WORKING CAPITAL AND OTHER ASSETS
 
Three months ended
Six months ended
Cash provided by (used for):
June 30, 2016

June 30, 2015

June 30, 2016

June 30, 2015

Accounts receivable
$
7.6

$
(14.4
)
$
25.9

$
(19.5
)
Accounts payable
(18.9
)
(23.6
)
(48.5
)
(45.7
)
Prepaid tax assessment
(2.7
)
—

(2.7
)
—

 
$
(14.0
)
$
(38.0
)
$
(25.3
)
$
(65.2
)
CHANGE IN NON-CASH INVESTING WORKING CAPITAL 
 
Three months ended
Six months ended
Cash used for:
June 30, 2016

June 30, 2015

June 30, 2016

June 30, 2015

Accounts payable, including capital accruals
$
(0.6
)
$
(10.2
)
$
(2.2
)
$
(46.6
)

10.
AMOUNTS PER SHARE
The following table reconciles the weighted average number of shares used in the basic and diluted net income (loss) per share calculations:
 
Three months ended
Six months ended
(000's)
June 30, 2016

June 30, 2015

June 30, 2016

June 30, 2015

Weighted average number of shares - basic and diluted
547,444

539,725

545,481

537,476

For the three and six months ended June 30, 2016, 8.6 million shares and 8.5 million shares, respectively, (5.8 million and 5.2 million shares for the three and six months ended June 30, 2015) that are issuable on exercise of the share based compensation plans were excluded from the diluted net income (loss) per share calculation as their effect is anti-dilutive.
Further, for the three and six months ended June 30, 2016, 11.0 million shares (11.9 million shares for the three and six months ended June 30, 2015) that are issuable on potential conversion of the convertible debentures were excluded from the diluted net income (loss) per share calculation as their effect is anti-dilutive.

PENGROWTH Second Quarter 2016 Financial Results
12

11.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
COMMODITY PRICE CONTRACTS
As at June 30, 2016, Pengrowth had the following contracts outstanding:
Financial Crude Oil Contracts:
 
 
Swaps
  
  
  
 
Differentials
 
 
 
 
Reference point
Term
Volume (bbl/d)

Price per bbl (Cdn)

 
Edmonton Light Sweet
Q3 2016
7,000

Cdn WTI less $6.85

 
Edmonton Light Sweet
Q4 2016
7,000

Cdn WTI less $6.85

 
Western Canada Select
Q3 2016
8,000

Cdn WTI less $18.32

 
Western Canada Select
Q4 2016
8,000

Cdn WTI less $18.32

 
Commodity
 
 
 
 
Reference point
Term
Volume (bbl/d)

Cdn$/bbl unless otherwise noted

 
WTI
Q3 2016
23,500


$83.60

 
WTI
Q4 2016
23,000


$83.27

 
WTI
2017
11,500


$67.38

 
WTI - $U.S.
2017
3,500


$45.93

$U.S.
WTI
2018
5,500


$80.49

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

Price per MMBtu (Cdn)

 
AECO
Q3 2016
120,847


$3.22

 
AECO
Q4 2016
127,955


$3.30

 
AECO
Q1 2017
99,521


$3.52

 
AECO
Q2 2017
87,673


$3.45

 
AECO
Q3 2017
87,673


$3.45

 
AECO
Q4 2017
87,673


$3.45

 
AECO
2018
66,347


$3.59

 
AECO
2019
2,370


$3.52

 


Commodity Price Sensitivity on Risk Management Contracts as at June 30, 2016
Oil swaps
Cdn$1/bbl increase in future oil prices

Cdn$1/bbl decrease in future oil prices

Increase (decrease) to fair value of oil risk management contracts

($11.7
)

$11.7

Oil differentials
Cdn$1 decrease in future oil differential

Cdn$1 increase in future oil differential

Increase (decrease) to fair value of financial differential risk management contracts

($2.8
)

$2.8

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

Cdn$0.25/MMBtu decrease in future natural gas prices

Increase (decrease) to fair value of natural gas risk management contracts

($20.1
)

$20.1

As at close June 30, 2016, the AECO gas spot price was $1.35/MMBtu (June 30, 2015 – $2.63/MMBtu). The WTI prompt monthly price was Cdn$62.43/bbl (June 30, 2015 – Cdn$74.28/bbl).




PENGROWTH Second Quarter 2016 Financial Results
13

POWER PRICE CONTRACTS
As at June 30, 2016, 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 2016
20


$44.13

AESO
Q4 2016
20


$44.13

As at close June 30, 2016, the Alberta power pool spot price was $17.30/MWh (June 30, 2015 – $168.05/MWh). The average Alberta power pool price was $15.00/MWh for the three months ended June 30, 2016 (June 30, 2015 – $57.22/MWh).
Power Price Sensitivity on Risk Management Contracts as at June 30, 2016
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, 2016 of approximately $0.1 million.
FOREIGN EXCHANGE CONTRACTS
U.K. pound sterling Denominated Term Debt
Pengrowth entered into a foreign exchange risk management contract when it issued the U.K. pound sterling term note. This contract fixes 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
(Cdn$1 = U.K. pound sterling)

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
(Cdn$1 = U.S.$)

Swap
July 2017
400.0

400.0

100
%
0.79

Swap
August 2018
265.0

265.0

100
%
0.78

Swap
October 2019
35.0

35.0

100
%
0.78

Swap
May 2020
115.5

115.0

100
%
0.78

Swap
October 2022
105.0

105.0

100
%
0.77

No contracts
October 2024
195.0

—

—

—

 
 
1,115.5

920.0

82
%
 

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, 2016
Cdn - U.S.

Cdn - U.K.

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

$
0.2

Unrealized foreign exchange risk management gain or loss
9.2

0.2

Net pre-tax impact on Consolidated Statements of Income (Loss)
$
2.0

$
—



PENGROWTH Second Quarter 2016 Financial Results
14

Interest Rate Sensitivity
Bank Interest Cost
As at June 30, 2016, Pengrowth had approximately $1.5 billion of current and non-current long term debt outstanding (December 31, 2015 - $1.7 billion) of which $nil million was based on floating interest rates (December 31, 2015 - $104.0 million). Therefore, Pengrowth had no interest rate risk as at June 30, 2016 (June 30, 2015 - $1.4 million).

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, 2016
Commodity
contracts (1)

Power contracts (2)

Foreign exchange
contracts (3)

Total

Current portion of risk management assets
$
97.7

$
—

$
—

$
97.7

Non-current portion of risk management assets
39.8

—

12.2

52.0

Current portion of risk management liabilities
(1.5
)
(0.8
)
(0.2
)
(2.5
)
Risk management assets (liabilities), end of period
$
136.0

$
(0.8
)
$
12.0

$
147.2

Less: Risk management assets (liabilities) at beginning of period
370.5

(1.7
)
83.3

452.1

Unrealized gain (loss) on risk management contracts for the period
$
(234.5
)
$
0.9

$
(71.3
)
$
(304.9
)
Realized gain (loss) on risk management contracts for the period
204.1

(2.4
)
—

201.7

Total unrealized and realized gain (loss) on risk management contracts for the period
$
(30.4
)
$
(1.5
)
$
(71.3
)
$
(103.2
)
 
 
 
 
 
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
)
(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).









PENGROWTH Second Quarter 2016 Financial Results
15

FAIR VALUE
The fair value of cash and cash equivalents, accounts receivable, prepaid tax assessment, 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, as applicable, 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 values 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.
 
 
 
Fair value measurements using:
As at June 30, 2016
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
$
97.2

$
97.2

$
97.2

$
—

$
—

Fair value of risk management contracts
149.7

149.7

—

149.7

—

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Convertible debentures
126.7

121.5

121.5

—

—

U.S. dollar denominated senior unsecured notes
1,438.8

1,518.1

—

1,518.1

—

Cdn dollar senior unsecured notes
39.9

42.6

—

42.6

—

U.K. pound sterling denominated unsecured notes
25.7

26.6

—

26.6

—

Fair value of risk management contracts
2.5

2.5

—

2.5

—

 
 
 
 
 
 
 
 
 
Fair value measurements using:
As at December 31, 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
$
79.6

$
79.6

$
79.6

$
—

$
—

Fair value of risk management contracts
455.5

455.5

—

455.5

—

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Convertible debentures
137.0

98.5

98.5

—

—

U.S. dollar denominated senior unsecured notes
1,541.4

1,606.9

—

1,606.9

—

Cdn dollar senior unsecured notes
39.9

42.2

—

42.2

—

U.K. pound sterling denominated unsecured notes
30.5

30.6

—

30.6

—

Fair value of risk management contracts
3.4

3.4

—

3.4

—


PENGROWTH Second Quarter 2016 Financial Results
16

12.
FOREIGN EXCHANGE (GAIN) LOSS
 
Three months ended
Six months ended
  
June 30, 2016

June 30, 2015

June 30, 2016

June 30, 2015

Currency exchange rate (Cdn$1 = U.S.$) at period end
$
0.77

$
0.80

$
0.77

$
0.80

Unrealized foreign exchange (gain) loss on U.S. dollar denominated debt (1)
$
(7.3
)
$
(24.1
)
$
(104.4
)
$
102.3

Unrealized foreign exchange (gain) loss on U.K. pound sterling denominated debt (1)
(2.2
)
5.4

(4.8
)
10.1

Total unrealized foreign exchange (gain) loss from translation of foreign denominated debt
$
(9.5
)
$
(18.7
)
$
(109.2
)
$
112.4

Unrealized (gain) loss on U.S. foreign exchange risk management contracts
$
1.6

$
19.0

$
66.8

$
65.9

Unrealized (gain) loss on U.K. foreign exchange risk management contracts
2.1

(5.4
)
4.5

(9.4
)
Total unrealized (gain) loss on foreign exchange risk management contracts
$
3.7

$
13.6

$
71.3

$
56.5

Net unrealized foreign exchange (gain) loss
$
(5.8
)
$
(5.1
)
$
(37.9
)
$
168.9

Net realized foreign exchange (gain) loss (2)
$
(0.7
)
$
(9.2
)
$
0.8

$
(91.8
)
(1) 
Includes both principal and interest.
(2) 
Three and six months ended June 30, 2015 amounts include gains of $9.8 million and $93.9 million, respectively, from settlement of foreign exchange swap contracts.

PENGROWTH Second Quarter 2016 Financial Results
17