REPORTS
.2
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 the Internal 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, 2019, 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, 2019, has been audited by KPMG LLP, the Independent Registered Public Accounting Firm, who also audited the Company’s Consolidated Financial Statements for the year ended December 31, 2019.
/s/ Ian C. Dundas | /s/ Jodine J. Jenson Labrie |
President and | Senior Vice President and |
Calgary, Alberta
February 20, 2020
ENERPLUS 2019 FINANCIAL SUMMARY 1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Enerplus Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Enerplus Corporation’s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income (loss) and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 20, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 Management’s Report on Internal Control and Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. 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 generally accepted accounting principles, 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chartered Professional Accountants
Calgary, Canada
February 20, 2020
2 ENERPLUS 2019 FINANCIAL SUMMARY
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 20, 2020. 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 KPMG LLP, Independent Registered Public 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 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.
/s/ Ian C. Dundas | /s/ Jodine J. Jenson Labrie |
President and | Senior Vice President and |
Calgary, Alberta
February 20, 2020
ENERPLUS 2019 FINANCIAL SUMMARY 3
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Enerplus Corporation
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Enerplus Corporation (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income (loss) and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Corporation Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the carrying value of goodwill for the Canadian reporting unit
As discussed in note 5(b) to the consolidated financial statements, the Company recorded goodwill impairment of $451,121 thousand related to the Canadian reporting unit. The Company assesses goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value of the reporting unit likely exceeds the fair value. If it is more likely than not that the fair value of the reporting unit is less than its carrying value, quantitative impairment tests are performed. If the carrying value of the reporting unit exceeds its fair value, goodwill is written down to its implied fair value. The estimated fair value of the Canadian reporting unit involves a number of estimates, including the cash flows associated with the estimated proved and probable oil and gas reserves of the Canadian reporting unit (“Canadian reserves”) and the discount rate. The estimation of the Canadian reserves require the expertise of independent reservoir engineering specialists, who take into consideration assumptions related to its forecasted production, forecasted operating, royalty and capital cost assumptions and forecasted oil and gas prices (“reserve assumptions”). The Company engages independent reservoir engineering specialists to estimate the Canadian reserves.
We identified the assessment of the carrying value of goodwill for the Canadian reporting unit as a critical audit matter. Complex auditor judgment was required in evaluating the Company’s estimate of the Canadian reserves and the discount rate, which were inputs to the calculation of the fair value of the Canadian reporting unit. Auditor judgment was also required to evaluate the reserve assumptions used in the Canadian reserves.
4 ENERPLUS 2019 FINANCIAL SUMMARY
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s determination of the fair value of the Canadian reporting unit, including controls related to the development of the discount rate and the estimation of the Canadian reserves. We performed sensitivity analyses over the discount rate used to estimate the fair value of the Canadian reporting unit to assess the impact of a change in the discount rate on the goodwill impairment charge. We evaluated the competence, capabilities and objectivity of the independent reservoir engineering specialists engaged by the Company, who estimated the Canadian reserves. We evaluated the methodology used by the independent reservoir engineering specialists to estimate the Canadian reserves for compliance with regulatory standards. We compared the 2019 actual production, operating, royalty and capital costs of the Canadian reporting unit to those estimates used in the prior year’s estimate of the proved reserves associated with the Canadian reporting unit to assess the Company’s ability to accurately forecast. We compared the forecasted commodity prices used in the estimate of the Canadian reserves to those published by other reserve engineering firms. We compared estimates of forecasted production and forecasted operating, royalty and capital cost assumptions used in the Canadian reserves to historical results.
Evaluation of the realizability of the deferred income tax asset associated with the Company’s Canadian operation.
As discussed in note 17 to the consolidated financial statements, as of December 31, 2019, the Company had recognized a deferred income tax asset of $372,502 thousand of which $185,880 thousand relates to the Company’s Canadian operations. The Company estimated that there is a greater than 50 percent likelihood that the deferred income tax asset will be realized. The determination of the deferred income tax asset associated with the Canadian operation involves a number of estimates, including the future cash flows associated with the estimated Canadian reserves. Changes in assumptions regarding future cash flows, which are based on the estimate of the Canadian reserves, could have a significant impact on the determination on the Company’s ability to realize the Canadian operation’s deferred income tax asset and the amount of a valuation allowance, if any. The estimation of the Canadian reserves requires the expertise of independent reservoir engineering specialists, who take into consideration reserve assumptions. The Company engages independent reservoir engineering specialists to estimate the Canadian reserves.
We identified the evaluation of the realizability of the Canadian operation’s deferred income tax asset as a critical audit matter. Complex auditor judgment was required in evaluating the Canadian reserves which were an input to derive the recognized deferred income tax asset. Auditor judgment was also required to evaluate the reserve assumptions used in the Canadian reserves.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to evaluate the realizability of the Canadian deferred income tax assets, including controls related to the estimation of the Canadian reserves. We evaluated the competence, capabilities and objectivity of the independent reservoir engineering specialists engaged by the Company, who estimated the Canadian reserves. We evaluated the methodology used by independent reservoir engineering specialists to estimate the Canadian reserves for compliance with regulatory standards. We compared the 2019 actual production, operating, royalty and capital costs of the Canadian operations to those estimates used in the prior year’s estimate of the proved reserves associated with the Canadian operations to assess the Company’s ability to accurately forecast. We compared the forecasted commodity prices used in the Canadian reserves to those published by other reserve engineering firms. We compared estimates of forecasted production and forecasted operating, royalty and capital cost assumptions used in the Canadian reserves to historical results. We involved Canadian income tax professionals with specialized skills and knowledge who assisted in evaluating the application of relevant tax laws and regulations used in the determination of the recorded deferred tax asset.
Assessment of the impact of estimated proved oil and gas reserves on the calculations of depletion expense and the ceiling test related to oil and gas properties
As discussed in Note 2(d) to the consolidated financial statements, the Company depletes its oil and gas properties using the unit-of-production method on a country-by-country basis for Canada and the United States of America. Under such method, capitalized costs by country are depleted over the estimated proved oil and gas reserves by for each of Canada and the United States of America (“country proved reserves”). For the year ended December 31, 2019, the Company recorded depletion, depreciation and accretion expense of $356,830 thousand. Additionally, as discussed in Note 2(d) to the consolidated financial statements, the Company is required to perform a ceiling test calculation on a country-by-country basis for Canada and the United States of America. The Company limits the capitalized costs of proved and unproved oil and natural gas properties, net of accumulated depletion and the related deferred income tax effects, by country, to the estimated future net cash flows from country proved reserves discounted at 10 percent, net of related tax effects, plus the lower of cost or fair value of unproved oil and gas properties. The estimated future net cash flows are calculated using the simple average of the preceding twelve months’ first-day-of-the-month commodity prices. The estimation of country proved reserves, which are used in the calculations of depletion and the ceiling test, requires the expertise of independent reservoir engineering specialists, who take into consideration reserve assumptions. The Company engages independent reservoir engineering specialists to estimate country proved reserves.
ENERPLUS 2019 FINANCIAL SUMMARY 5
We identified the assessment of the impact of estimated country proved reserves on the calculations of depletion expense and the ceiling test related to oil and gas properties as a critical audit matter. Complex auditor judgment was required in evaluating the country proved reserves, which were an input to the calculations of depletion expense and the ceiling test. Auditor judgment was also required to evaluate the reserve assumptions used to estimate the country proved reserves.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the calculations of depletion expense and the ceiling test, including controls over the estimation of the country proved reserves. We analyzed and assessed the calculations of depletion expense and the ceiling test for compliance with regulatory standards. We evaluated the competence, capabilities and objectivity of the independent reservoir engineering specialists engaged by the Company, who estimated the country proved reserves. We evaluated the methodology used by the independent reservoir engineering specialists to estimate country proved reserves for compliance with regulatory standards. We compared the Company’s 2019 actual production, operating, royalty and capital costs by country to those estimates used in the prior year estimate of country proved reserves to assess the Company’s ability to accurately forecast. We compared estimates of forecasted production and forecasted operating, royalty and capital cost assumptions used in the country proved reserves to historical results.
/s/ KPMG LLP
We have served as the Company’s auditor since 2017.
Chartered Professional Accountants
Calgary, Canada
February 20, 2020
6 ENERPLUS 2019 FINANCIAL SUMMARY
STATEMENTS
Consolidated Balance Sheets
(CDN$ thousands) |
| Note |
| December 31, 2019 |
| December 31, 2018 | ||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | | $ | | ||||
Accounts receivable |
| 3 |
| |
| | ||
Income tax receivable | 13 | | | |||||
Derivative financial assets |
| 15(b) |
| |
| | ||
Other current assets |
| |
| | ||||
| |
| | |||||
Property, plant and equipment: | ||||||||
Oil and natural gas properties (full cost method) |
| 4 |
| |
| | ||
Other capital assets, net |
| 4 |
| |
| | ||
Property, plant and equipment |
| |
| | ||||
Right-of-use assets | 9 | | — | |||||
Goodwill | 5(b) |
| | | ||||
Derivative financial assets | 15(b) | — | | |||||
Deferred income tax asset |
| 13 |
| |
| | ||
Income tax receivable | 13 | | | |||||
Total Assets | $ | | $ | | ||||
Liabilities | ||||||||
Current liabilities | ||||||||
Accounts payable |
| 6 | $ | | $ | | ||
Dividends payable |
| |
| | ||||
Current portion of long-term debt |
| 7 |
| |
| | ||
Derivative financial liabilities |
| 15(b) |
| |
| | ||
Current portion of lease liabilities | 9 | | — | |||||
| |
| | |||||
Long-term debt |
| 7 |
| |
| | ||
Asset retirement obligation |
| 8 |
| |
| | ||
Lease liabilities | 9 | | — | |||||
| |
| | |||||
Total Liabilities |
| |
| | ||||
Shareholders’ Equity | ||||||||
Share capital – unlimited common shares, |
| |||||||
and December 31, 2019 – |
|
| ||||||
December 31, 2018 – | 14(a) | | | |||||
Paid-in capital |
|
| |
| | |||
Accumulated deficit |
| ( |
| ( | ||||
Accumulated other comprehensive income |
| |
| | ||||
| |
| | |||||
Total Liabilities & Shareholders' Equity | $ | | $ | | ||||
Commitments and Contingencies |
| 16 | ||||||
Subsequent Event | 14(a) | |||||||
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
Approved on behalf of the Board of Directors:
/s/ Elliott Pew | /s/ Robert B. Hodgins |
Director | Director |
ENERPLUS 2019 FINANCIAL SUMMARY 7
Consolidated Statements of Income/(Loss) and Comprehensive Income/(Loss)
For the year ended December 31 (CDN$ thousands) |
| Note |
| 2019 |
| 2018 |
| 2017 | |||
Revenues | |||||||||||
Oil and natural gas sales, net of royalties |
| 10 | $ | | $ | | $ | | |||
Commodity derivative instruments gain/(loss) |
| 15(b) |
| ( |
| |
| | |||
| |
| |
| | ||||||
Expenses | |||||||||||
Operating |
| |
| |
| | |||||
Transportation |
| |
| |
| | |||||
Production taxes |
| |
| |
| | |||||
General and administrative |
| 11 |
| |
| |
| | |||
Depletion, depreciation and accretion |
| |
| |
| | |||||
Goodwill impairment |
| 5(b) |
| |
| — |
| — | |||
Interest |
|
| |
| |
| | ||||
Foreign exchange (gain)/loss |
| 12 |
| ( |
| |
| ( | |||
Gain on divestment of assets | 4 | — | — | ( | |||||||
Other expense/(income) |
|
| ( |
| ( |
| ( | ||||
| |
| |
| | ||||||
Income/(Loss) Before Taxes |
| ( |
| |
| | |||||
Current income tax expense/(recovery) |
| 13 |
| ( |
| ( |
| ( | |||
Deferred income tax expense/(recovery) |
| 13 |
| |
| |
| | |||
Net Income/(Loss) | $ | ( | $ | | $ | | |||||
Other Comprehensive Income/(Loss) | |||||||||||
Unrealized gain/(loss) on foreign currency translation |
| ( |
| |
| ( | |||||
Total Comprehensive Income/(Loss) | $ | ( | $ | | $ | | |||||
Net Income/(Loss) per Share | |||||||||||
Basic |
| 14(c) | $ | ( | $ | | $ | | |||
Diluted |
| 14(c) | $ | ( | $ | | $ | | |||
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
8 ENERPLUS 2019 FINANCIAL SUMMARY
Consolidated Statements of Changes in Shareholders’ Equity
For the year ended December 31 (CDN$ thousands) |
| 2019 |
| 2018 |
| 2017 | |||
Share Capital | |||||||||
Balance, beginning of year | $ | | $ | | $ | | |||
Purchase of common shares under Normal Course Issuer Bid | ( | ( |
| — | |||||
Share-based compensation – treasury settled |
| |
| |
| | |||
Stock Option Plan – cash |
| — |
| |
| — | |||
Stock Option Plan – exercised |
| — |
| |
| — | |||
Balance, end of year | $ | | $ | | $ | | |||
Paid-in Capital | |||||||||
Balance, beginning of year | $ | | $ | | $ | | |||
Share-based compensation – cash settled (tax withholding) | ( | — | — | ||||||
Share-based compensation – cash settled | — | ( | — | ||||||
Share-based compensation – treasury settled |
| ( |
| ( |
| ( | |||
Share-based compensation – non-cash |
| |
| |
| | |||
Stock Option Plan – exercised | — | ( | — | ||||||
Balance, end of year | $ | | $ | | $ | | |||
Accumulated Deficit | |||||||||
Balance, beginning of year | $ | ( | $ | ( | $ | ( | |||
Purchase of common shares under Normal Course Issuer Bid | | |
| — | |||||
Net income/(loss) |
| ( |
| |
| | |||
Dividends declared ($ |
| ( |
| ( |
| ( | |||
Balance, end of year | $ | ( | $ | ( | $ | ( | |||
Accumulated Other Comprehensive Income | |||||||||
Balance, beginning of year | $ | | $ | | $ | | |||
Unrealized gain/(loss) on foreign currency translation |
| ( |
| |
| ( | |||
Balance, end of year | $ | | $ | | $ | | |||
Total Shareholders’ Equity | $ | | $ | | $ | | |||
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
ENERPLUS 2019 FINANCIAL SUMMARY 9
Consolidated Statements of Cash Flows
For the year ended December 31 (CDN$ thousands) |
| Note |
| 2019 |
| 2018 |
| 2017 | |||
Operating Activities | |||||||||||
Net income/(loss) | $ | ( | $ | | $ | | |||||
Non-cash items add/(deduct): | |||||||||||
Depletion, depreciation and accretion |
| |
| |
| | |||||
Goodwill impairment |
| 5(b) |
| |
| — |
| — | |||
Changes in fair value of derivative instruments |
| 15(b) |
| |
| ( |
| ( | |||
Deferred income tax expense/(recovery) |
| 13 |
| |
| |
| | |||
Foreign exchange (gain)/loss on debt and working capital |
| 12 |
| ( |
| |
| ( | |||
Share-based compensation and general and administrative |
| 11, 14(b) |
| |
| |
| | |||
Translation of U.S. dollar cash held in Canada (gain)/loss | 12 | | ( | | |||||||
Gain on the divestment of assets |
| 4 |
| — |
| — |
| ( | |||
Asset retirement obligation expenditures |
| 8 |
| ( |
| ( |
| ( | |||
Changes in non-cash operating working capital |
| 18(a) |
| |
| ( |
| ( | |||
Cash flow from operating activities |
| |
| |
| | |||||
Financing Activities | |||||||||||
Proceeds from the issuance of shares (net of issue costs) |
| 14(a) |
| — |
| |
| — | |||
Dividends |
| 14(a),18(b) |
| ( |
| ( |
| ( | |||
Bank credit facility | 7 |
| — |
| — |
| ( | ||||
Senior notes | 7 |
| ( |
| ( |
| ( | ||||
Purchase of common shares under Normal Course Issuer Bid | 14(a) | ( | ( |
| — | ||||||
Share-based compensation – cash settled (tax withholding) | 14(b) | ( | — | — | |||||||
Cash flow from/(used in) financing activities |
| ( |
| ( |
| ( | |||||
Investing Activities | |||||||||||
Capital and office expenditures | 18(b) |
| ( |
| ( |
| ( | ||||
Property and land acquisitions | 4 |
| ( |
| ( |
| ( | ||||
Property divestments | 4 |
| |
| ( |
| | ||||
Cash flow from/(used in) investing activities |
| ( |
| ( |
| ( | |||||
Effect of exchange rate changes on cash and cash equivalents |
| ( |
| |
| ( | |||||
Change in cash and cash equivalents |
| ( |
| |
| ( | |||||
Cash and cash equivalents, beginning of year |
| |
| |
| | |||||
Cash and cash equivalents, end of year | $ | | $ | | $ | | |||||
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
10 ENERPLUS 2019 FINANCIAL SUMMARY
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.
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”). Certain prior period amounts have been restated to conform with current period presentation.
i. Reporting Currency
These Consolidated Financial Statements are presented in Canadian dollars, which is Enerplus’ reporting 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. Actual results could differ from these estimates, and changes in estimates are recorded when known. Significant estimates made by management include: oil and natural gas reserves and related present value of future cash flows, depreciation, depletion and accretion (“DD&A”), impairment of property, plant and equipment, asset retirement obligations, income taxes, ability to realize deferred income tax assets, impairment assessments of goodwill 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 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 from the sale of crude oil, natural gas and natural gas liquids is measured based on the consideration specified in contracts with customers, net of sales taxes. Enerplus recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. This is generally at the time the customer obtains legal title to the product and when it is physically transferred to the contractual delivery points.
Enerplus evaluates its arrangements with third parties and partners to determine if the Company acts as the principal or as an agent. In making this evaluation, management considers if Enerplus retains control of the product being delivered to the end customer. As part of this assessment, management considers whether the Company retains the economic benefits associated with the good being delivered to the end customer. Management also considers whether the Company has the primary responsibility for the delivery of the product, the ability to establish prices or the inventory risk. If Enerplus acts in the capacity of an agent rather than as a principal in a transaction, then the revenue is recognized on a net basis, only reflecting the fee, if any, realized by the Company from the transaction.
ENERPLUS 2019 FINANCIAL SUMMARY 11
c) Transportation
Enerplus generally sells oil and natural gas under
Under the other arrangement, Enerplus sells crude oil or natural gas at a specific delivery point, pays transportation to a third party and receives proceeds from the purchaser with no transportation deduction. In this case, transportation costs are recorded as transportation expense on the Consolidated Statements of Income/(Loss). Due to these two distinct selling arrangements, Enerplus’ computed realized prices, before the impact of derivative instruments, include revenues which are reported under two separate bases.
d) 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 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 using proved reserves, 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 the related deferred income tax effects, to the estimated future net cash flows from proved oil and natural gas reserves discounted at
Under full cost accounting rules, divestitures of oil and natural gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of a gain or loss. However, if not recognizing a gain or loss on the transaction would have otherwise significantly altered the relationship between a cost centre’s capitalized costs and proved reserves, then a gain or loss must be recognized.
e) Other Capital Assets
Other capital assets are recorded at historical cost, net of depreciation, and include furniture, fixtures, leasehold improvements, computer equipment and Company owned line-fill in third party pipelines. Line fill is recorded at lower of cost and net realizable value. 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.
f) Cash and Cash Equivalents
Cash and cash equivalents includes cash and highly liquid investments with maturities of less than 90 days.
g) Goodwill
Enerplus recognizes goodwill relating to business 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. Goodwill is stated at cost less impairment and is not amortized. Goodwill is not deductible for income tax purposes.
Goodwill is assessed for impairment annually or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Enerplus first performs a qualitative assessment to determine whether events or changes in circumstances indicate that goodwill may be impaired. If it is more likely than not that the fair value of the reporting unit is less than its carrying value, quantitative impairment tests are performed. If the carrying value of the reporting unit exceeds its fair value, goodwill is written down to its implied fair value with an offsetting charge to earnings in the Consolidated Statements of Income/(Loss). The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. For the purposes of goodwill impairment testing, Enerplus has
12 ENERPLUS 2019 FINANCIAL SUMMARY
h) 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. Upon recognition, the liability is recorded at its estimated fair value. 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.
Depletion of asset retirement costs and increases in asset retirement obligations resulting from the passage of time are recorded to depreciation, depletion and accretion and charged against net income in the Consolidated Statements of Income/(Loss).
i) Leases
Enerplus determines if an arrangement is a lease at inception. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Operating and finance leases are included in right-of-use (“ROU”) assets and the associated lease liability in the Consolidated Balance Sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease liabilities are recognized at lease commencement date based on the present value of remaining lease payments over the lease term. A corresponding ROU asset is recognized at the amount of the lease liability, adjusted for lease incentives received. Enerplus uses the implicit rate when readily available, or uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Enerplus’ lease terms may have options to extend or terminate the lease which are included in the calculation of lease liabilities when it is reasonably certain that it will exercise those options. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
Lease agreements contain both lease and non-lease components which are accounted for separately. For certain equipment leases, a portfolio approach is applied to effectively account for the ROU assets and liabilities. Prior to January 1, 2019, the Company applied lease accounting in accordance with ASC 840.
j) 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 reviewed each period 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. Enerplus considers both positive and negative evidence including historic and expected future taxable income, reversing existing temporary differences and tax basis carry forward periods in making this assessment. A valuation allowance is removed in any period where available evidence indicates all or a portion of the valuation allowance is no longer required. The financial statement effect 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 expense related to income tax are recognized in income tax expense.
k) 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, and when disclosing the fair value of financial instruments on certain non-financial items, 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
ENERPLUS 2019 FINANCIAL SUMMARY 13
ii. Non-derivative financial instruments
The carrying amount of cash, accounts receivable, income tax receivable, accounts payable, dividends payable and bank credit facilities reported on the Consolidated Balance Sheets approximates fair value. The fair value of the senior notes are considered a level 2 fair value measurement. The fair value of debt has been disclosed in Note 15.
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.
Realized gains and losses from commodity price risk management activities are recognized in income when the contract is settled. Unrealized gains and losses on commodity price risk management activities are recognized in income based on the changes in fair value of the contracts at the end of the respective reporting period.
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.
l) Foreign Currency
i. Foreign currency transactions
Transactions denominated in foreign currencies are translated to the functional currency of the entity (Canadian dollars) using the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency of the entity 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, which has a U.S. dollar functional currency, 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 which is recorded in accumulated other comprehensive income.
m) Share-Based Compensation
Enerplus’ share-based compensation plans include equity-settled Restricted Share Unit (“RSU”) and Performance Share Unit (“PSU”) awards made pursuant to its Share Award Incentive Plan (“SAIP”). The Company is authorized to issue up to
i. Long-term Incentive (“LTI”) Plans
For RSU awards granted under the SAIP, 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 each year for
For PSU awards granted under the SAIP, 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
14 ENERPLUS 2019 FINANCIAL SUMMARY
Under Enerplus’ Director DSU Plan and Director RSU 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 equity retainer value. Directors may elect to receive all or a portion of their notional shares under either plan. Under the Director DSU Plan, units vest and are paid at a specified date following the director leaving the Board. Under the Director RSU Plan, units vest each year for
Enerplus recognizes non-cash share-based compensation expense over the vesting period of the equity-settled long-term incentive plans, net of realized forfeitures, based on the estimated grant date fair value of the respective awards. The grant date fair value is based on the Company’s
Enerplus recognizes a liability with respect to 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.
ii. Stock options
Enerplus’ Stock Option Plan was suspended in 2014 and is now closed. All options outstanding under the plan are fully vested and the expense has been fully recognized. The remaining outstanding stock options will expire in 2020.
n) Net Income/(Loss) Per Share
Basic net income/(loss) per common share is computed by dividing net income/(loss) 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 and outstanding RSU’s and PSU’s would be used to repurchase common shares at the average market price.
o) 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.
p) Accounting Changes and Recent Pronouncements Issued
i. Recently adopted accounting standards
Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these Consolidated Financial Statements.
Enerplus
Enerplus
The impacts of the adoption of ASC 842 as at
As reported as at | Balance as at | ||||||||
($ thousands) | December 31, 2018 | Adjustments | January 1, 2019 | ||||||
Right-of-use assets |
| $ | — | $ | |
| $ | | |
Current portion of lease liabilities | — | ( | ( | ||||||
Lease liabilities |
| — | ( |
| ( | ||||
Total | $ | — | $ | — | $ | — |
ENERPLUS 2019 FINANCIAL SUMMARY 15
The standard did not materially impact the Company’s Consolidated Statement of Income/(Loss) or Consolidated Statements of Cash Flows.
ii. Future accounting changes
In future accounting periods, the Company will adopt the following Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):
In
In
3) ACCOUNTS RECEIVABLE
($ thousands) |
| December 31, 2019 |
| December 31, 2018 | ||
Accrued revenue | $ | | $ | | ||
Accounts receivable – trade |
| |
| | ||
Allowance for doubtful accounts |
| ( |
| ( | ||
Total accounts receivable, net of allowance for doubtful accounts | $ | | $ | | ||
4) PROPERTY, PLANT AND EQUIPMENT (“PP&E”)
|
| Accumulated Depletion, |
| ||||||
As at December 31, 2019 | Depreciation, | ||||||||
($ thousands) | Cost | and Impairment | Net Book Value | ||||||
Oil and natural gas properties(1) | $ | | $ | ( | $ | | |||
Other capital assets |
| |
| ( |
| | |||
Total PP&E | $ | | $ | ( | $ | | |||
|
| Accumulated Depletion, |
| ||||||
As at December 31, 2018 | Depreciation, | ||||||||
($ thousands) | Cost |
| and Impairment | Net Book Value | |||||
Oil and natural gas properties(1) | $ | | $ | ( | $ | | |||
Other capital assets |
| |
| ( |
| | |||
Total PP&E | $ | | $ | ( | $ | | |||
| (1) | All of the Company’s unproved properties are included in the full cost pool. |
Acquisitions:
For the years ended December 31, 2019 and 2018, Enerplus acquired property and land totaling $
Divestments:
For the years ended December 31, 2019 and 2018, Enerplus disposed of properties for proceeds of $
16 ENERPLUS 2019 FINANCIAL SUMMARY
5) IMPAIRMENT
a) Impairment of PP&E
There was
The following table outlines the 12-month average trailing benchmark prices and exchange rates used in Enerplus’ ceiling test as at December 31, 2019, 2018 and 2017:
|
|
| U.S. Henry |
| ||||||||
WTI Crude Oil | Edm Light Crude | Hub Gas | Exchange Rate | |||||||||
Period | US$/bbl | CDN$/bbl | US$/Mcf | US$/CDN | ||||||||
2019 | $ | | $ | | $ | | | |||||
2018 |
| | | | | |||||||
2017 |
| | | | | |||||||
b) Impairment of Goodwill
Enerplus recorded goodwill impairment of $
6) ACCOUNTS PAYABLE
($ thousands) |
| December 31, 2019 |
| December 31, 2018 | ||
Accrued payables | $ | | $ | | ||
Accounts payable – trade |
| |
| | ||
Total accounts payable | $ | | $ | | ||
7) DEBT
($ thousands) |
| December 31, 2019 |
| December 31, 2018 | ||
Current: | ||||||
Senior notes | $ | | $ | | ||
Long-term: | ||||||
Bank credit facility | $ | | $ | | ||
Senior notes |
| |
| | ||
Total debt | $ | | $ | | ||
Bank Credit Facility
Enerplus has a senior unsecured, covenant-based, US$
Senior Notes
During 2019 and 2018, Enerplus made its second and third US$
ENERPLUS 2019 FINANCIAL SUMMARY 17
The terms and rates of the Company’s outstanding senior notes are detailed below:
|
|
| Original | Remaining |
| CDN$ Carrying | |||||||
Coupon | Principal | Principal | Value | ||||||||||
Issue Date | Interest Payment Dates | Principal Repayment | Rate | ($ thousands) | ($ thousands) | ($ thousands) | |||||||
September 3, 2014 | March 3 and Sept 3 | 5 equal annual installments beginning September 3, 2022 | US$ | US$ | $ | | |||||||
May 15, 2012 |
| May 15 and Nov 15 |
| Bullet payment on May 15, 2022 |
| US$ |
| US$ |
| | |||
May 15, 2012 |
| May 15 and Nov 15 |
| 5 equal annual installments beginning May 15, 2020 |
| US$ |
| US$ |
| | |||
June 18, 2009 |
| June 18 and Dec 18 |
| 2 equal annual installments on June 18, 2020 and 2021 |
| US$ |
| US$ |
| | |||
Total carrying value | $ | | |||||||||||
8) ASSET RETIREMENT OBLIGATION
($ thousands) |
| December 31, 2019 |
| December 31, 2018 | ||
Balance, beginning of year | $ | | $ | | ||
Change in estimates |
| |
| | ||
Property acquisition and development activity |
| |
| | ||
Divestments |
| ( |
| ( | ||
Settlements |
| ( |
| ( | ||
Accretion expense |
| |
| | ||
Balance, end of year | $ | | $ | | ||
Enerplus has estimated the present value of its asset retirement obligation to be $
9) LEASES
The Company incurs lease payments related to office space, drilling rig commitments, vehicles and other equipment. Leases are entered into and exited in coordination with specific business requirements which include the assessment of the appropriate durations for the related leased assets. Short-term leases with a lease term of 12 months or less are not recorded on the Consolidated Balance Sheet. Such items are charged to operating expenses and general and administrative expenses in the Consolidated Statement of Income/(Loss), unless the costs are included in the carrying amount of another asset in accordance with other U.S. GAAP.
($ thousands) | At December 31, 2019 | ||
Assets | |||
Operating right-of-use assets | $ | | |
Liabilities | |||
Current operating lease liabilities | $ | | |
Non-current operating lease liabilities | | ||
Total lease liabilities | $ | | |
Weighted average remaining lease term (years) | |||
Operating leases | |||
Weighted average discount rate | |||
Operating leases | |||
18 ENERPLUS 2019 FINANCIAL SUMMARY
The components of lease expense for the year ended December 31, 2019 are as follows:
($ thousands) | 2019 | |
Operating lease cost | $ | |
Short-term lease cost |
| |
Sublease income | ( | |
Total | $ | |
Maturities of lease liabilities, all of which are classified as operating leases at December 31, 2019, are as follows:
Maturity of Lease Liabilities |
| ||
($ thousands) | Operating Leases | ||
2020 | $ | | |
2021 |
| | |
2022 |
| | |
2023 |
| | |
2024 | | ||
After 2024 |
| | |
Total lease payments | $ | | |
Less imputed interest | ( | ||
Total discounted lease payments | $ | | |
Current portion of lease liabilities | $ | | |
Non-current portion of lease liabilities | $ | | |
Supplemental information related to leases are as follows:
($ thousands) | December 31, 2019 | ||
Cash amounts paid to settle lease liabilities: | |||
Operating cash flow used for operating leases | $ | | |
Right-of-use assets obtained in exchange for lease obligations: |
| ||
Operating leases | $ | |
10) OIL AND NATURAL GAS SALES
($ thousands) |
|
|
| ||||||
Oil and natural gas sales | $ | | $ | | $ | | |||
Royalties(1) |
| ( |
| ( |
| ( | |||
Oil and natural gas sales, net of royalties | $ | | $ | | $ | | |||
(1) | Royalties above do not include production taxes which are reported separately on the Consolidated Statements of Income/(Loss). |
Oil and natural gas revenue by country and by product for the years ended December 31, 2019 and 2018 are as follows:
2019 | Total revenue, net | Natural | Natural gas | ||||||||||||
($ thousands) | of royalties(1) | Crude oil(2) | gas(2) | liquids(2) | Other(3) | ||||||||||
Canada |
| $ | | $ | |
| $ | |
| $ | |
| $ | | |
United States |
| | |
| |
| |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | |
2018 | Total revenue, net | Natural | Natural gas | ||||||||||||
($ thousands) | of royalties(1) | Crude oil(2) | gas(2) | liquids(2) | Other(3) | ||||||||||
Canada |
| $ | | $ | |
| $ | |
| $ | |
| $ | | |
United States |
| | |
|
| |
| — | |||||||
Total | $ | | $ | | $ | $ | | $ | |
| (1) | Royalties above do not include production taxes which are reported separately on the Consolidated Statements of Income/(Loss). |
| (2) | U.S. sales of crude oil and natural gas relate primarily to the Company’s North Dakota and Marcellus properties, respectively. Canadian crude oil sales relate primarily to the Company’s waterflood properties. |
ENERPLUS 2019 FINANCIAL SUMMARY 19
| (3) | Includes third party processing income. |
Enerplus sells the majority of its production pursuant to variable-price contracts. The transaction price for variable priced contracts is based on the commodity price, adjusted for quality, location or other factors, whereby each component of the pricing formula can be either fixed or variable, depending on the contract terms. Under the contracts, the Company is required to deliver a fixed or variable volume of crude oil, natural gas liquids or natural gas to the contract counterparty.
Crude oil, natural gas and natural gas liquids are sold under contracts of varying terms, including multi-year contracts. Revenues are typically collected in the month following production.
11) GENERAL AND ADMINISTRATIVE EXPENSE
($ thousands) |
| 2019 |
| 2018 |
| 2017 | |||
General and administrative expense |
| $ | | $ | | $ | | ||
Share-based compensation expense |
| |
| |
| | |||
General and administrative expense(1) |
| $ | | $ | | $ | | ||
| (1) | Includes cash and non-cash amounts. |
12) FOREIGN EXCHANGE
($ thousands) |
| 2019 |
| 2018 |
| 2017 | |||
Realized: | |||||||||
Foreign exchange (gain)/loss | $ | ( | $ | | $ | | |||
Translation of U.S. dollar cash held in Canada (gain)/loss | | ( | | ||||||
Unrealized: | |||||||||
Translation of U.S. dollar debt and working capital (gain)/loss |
| ( |
| |
| ( | |||
Foreign exchange (gain)/loss | $ | ( | $ | | $ | ( | |||
13) INCOME TAXES
Enerplus’ provision for income tax is as follows:
($ thousands) |
| 2019 |
| 2018 |
| 2017 | |||
Current tax | |||||||||
Canada | $ | ( | $ | ( | $ | ( | |||
United States |
| ( |
| ( |
| ( | |||
Current tax expense/(recovery) | ( | ( | ( | ||||||
Deferred tax | |||||||||
Canada | $ | | $ | | $ | ( | |||
United States |
| |
| |
| | |||
Deferred tax expense/(recovery) | | | | ||||||
Income tax expense/(recovery) | $ | | $ | | $ | | |||
The following provides a reconciliation of income taxes calculated at the Canadian statutory rate to the actual income taxes:
($ thousands) |
| 2019 |
| 2018 |
| 2017 | |||
Income/(loss) before taxes | |||||||||
Canada | $ | ( | $ | | $ | | |||
United States | |
| |
| | ||||
Total income/(loss) before taxes | ( | | | ||||||
Canadian statutory rate |
|
| |||||||
Expected income tax expense/(recovery) | $ | ( | $ | | $ | | |||
Impact on taxes resulting from: | |||||||||
Foreign and statutory rate differences | $ | | $ | ( | $ | | |||
Share-based compensation | ( | ( | | ||||||
Capital gains and losses | |
| |
| ( | ||||
Change in valuation allowance | ( |
| |
| ( | ||||
Amounts in respect of prior periods | ( | — | — | ||||||
Non-deductible goodwill impairment | | — | — | ||||||
Other | ( |
| |
| | ||||
20 ENERPLUS 2019 FINANCIAL SUMMARY
Income tax expense/(recovery) | $ | | $ | | $ | |
During the year, the Alberta corporate income tax rate change resulted in a decrease to the Canadian statutory rate by 0.5% for 2019.
The deferred income tax asset consists of the following:
As at December 31 ($ thousands) |
| 2019 |
| 2018 | ||
Deferred income tax assets | ||||||
Property, plant and equipment | $ | | $ | | ||
Tax loss carry-forwards and other credits |
| |
| | ||
Capital loss carryforwards and other capital items | | | ||||
Asset retirement obligation |
| |
| | ||
Other assets |
| |
| | ||
Deferred income tax assets before valuation allowance | | | ||||
Valuation allowance | ( | ( | ||||
Deferred income tax assets, net | | | ||||
Deferred income tax liabilities | ||||||
Property, plant and equipment | $ | ( | $ | ( | ||
Derivative financial instruments | ( | ( | ||||
Total deferred income tax liabilities | ( | ( | ||||
Total deferred income tax asset | $ | | $ | | ||
As of December 31, 2019, $
Loss carry-forwards and tax credits available for tax reporting purposes:
As at December 31 ($ thousands) |
| 2019 |
| Expiration Date | |
Canada | |||||
Capital losses | $ | |
| Indefinite | |
Non-capital losses |
| |
| 2028-2039 | |
United States | |||||
Net operating losses – prior to 2018 | $ | | 2030-2039 | ||
Net operating losses – 2018 and thereafter | |
| Indefinite | ||
Changes in the balance of Enerplus' unrecognized tax benefits are as follows:
($ thousands) |
| 2019 |
| 2018 | 2017 | ||||
Balance, beginning of year | $ | | $ | | $ | | |||
Settlements |
| ( |
| |
| | |||
Balance, end of year | $ | | $ | | $ | | |||
Enerplus settled an outstanding dispute with the Canadian tax authorities in the Company's favor reducing the balance of its unrecognized tax benefit to
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 |
| 2014-2019 |
United States – Federal |
| 2016-2019 |
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.
ENERPLUS 2019 FINANCIAL SUMMARY 21
14) SHAREHOLDERS’ EQUITY
a) Share Capital
2019 | 2018 | 2017 | |||||||||||||
Authorized: unlimited number of common shares Issued: (thousands) |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount | |||
Balance, beginning of year |
| $ | |
| $ | |
| $ | | ||||||
Issued for cash: | |||||||||||||||
Purchase of common shares under Normal Course Issuer Bid | ( | ( | ( | ( | — |
| — | ||||||||
Stock Option Plan |
| — | — |
| |
| |
| — |
| — | ||||
Non-cash: | |||||||||||||||
Share-based compensation – settled(1) |
| |
| |
| |
| |
| |
| | |||
Stock Option Plan – exercised | — | — | — | | — | — | |||||||||
Balance, end of year |
| $ | |
| $ | |
| $ | | ||||||
| (1) | The amount of shares issued on LTI settlement is net of employee withholding taxes in 2019. |
The Company is to issue an unlimited number of common shares without value.
For the year ended December 31, 2019, Enerplus declared dividends of $
On March 21, 2019, Enerplus renewed its Normal Course Issuer Bid (“NCIB”) to continue to repurchase shares through the facilities of the Toronto Stock Exchange (the “TSX”), New York Stock Exchange and/or alternative Canadian trading systems. Pursuant to the NCIB, the Company was permitted to repurchase for cancellation up to
For the year ended December 31, 2019, the Company repurchased
For the year ended December 31, 2018, the Company repurchased
Subsequent to the year, and up to February 20, 2020, the Company repurchased approximately
b) 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) |
| 2019 |
| 2018 |
| 2017 | |||
Cash: | |||||||||
Long-term incentive plans expense | $ | | $ | | $ | | |||
Non-Cash: | |||||||||
Long-term incentive plans expense | | | | ||||||
Equity swap (gain)/loss |
| |
| ( |
| | |||
Share-based compensation expense | $ | | $ | | $ | | |||
22 ENERPLUS 2019 FINANCIAL SUMMARY
i) LTI Plans
The following table summarizes the PSU, RSU and DSU activity for the twelve months ended December 31, 2019:
For the year ended December 31, 2019 | Cash-settled LTI Plans | Equity-settled LTI Plans | Total | |||||
(thousands of units) |
| DSU |
| PSU(1) |
| RSU |
| |
Balance, beginning of year |
| | | | | |||
Granted |
| | | | | |||
Vested |
| ( | — | ( | ( | |||
Forfeited |
| — | ( | ( | ( | |||
Balance, end of year | | | | | ||||
| (1) | Based on underlying awards before any effect of the performance multiplier. |
Cash-settled LTI Plans
For the year ended December 31, 2019, the Company made cash payments of $
As of December 31, 2019, a liability of $
Equity-settled LTI Plans
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, 2019 ($ thousands, except for years) |
| PSU(1) |
| RSU |
| Total | |||
Cumulative recognized share-based compensation expense | $ | | $ | | $ | | |||
Unrecognized share-based compensation expense |
| |
| |
| | |||
Fair value | $ | | $ | | $ | | |||
Weighted-average remaining contractual term (years) |
| ||||||||
(1) | Includes estimated performance multipliers. |
The Company directly withholds shares on PSU and RSU settlements for tax-withholding purposes. For the year ended December 31, 2019, $
ii) Stock Option Plan
At December 31, 2019, all stock options are fully vested and all non-cash share-based compensation expense has been fully recognized.
The following table summarizes the stock option plan activity for the year ended December 31, 2019:
| Number of Options |
| Weighted Average | ||
Year ended December 31, 2019 | (thousands) | Exercise Price | |||
Options outstanding, beginning of year |
| | $ | | |
Exercised |
| |
| | |
Forfeited |
| ( |
| | |
Expired |
| ( |
| | |
Options outstanding and exercisable, end of year |
| | $ | | |
At December 31, 2019,
ENERPLUS 2019 FINANCIAL SUMMARY 23
c) Basic and Diluted Net Income/(Loss) Per Share
Net income/(loss) per share has been determined as follows:
(thousands, except per share amounts) |
| 2019 |
| 2018 |
| 2017 | |||
Net income/(loss) | $ | ( | $ | | $ | | |||
Weighted average shares outstanding – Basic |
| |
| |
| | |||
Dilutive impact of share-based compensation(1) |
| — |
| |
| | |||
Weighted average shares outstanding – Diluted | | | | ||||||
Net income/(loss) per share | |||||||||
Basic | $ | ( | $ | | $ | | |||
Diluted | $ | ( | $ | | $ | | |||
| (1) | For the year ended December 31, 2019, the impact of share-based compensation was anti-dilutive as a conversion to shares would not increase the loss per share. |
15) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a) Fair Value Measurements
At December 31, 2019, senior notes had a carrying value of $
There were
b) Derivative Financial Instruments
The derivative financial assets and liabilities 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:
|
|
|
| Income | |||||||
Gain/(Loss) ($ thousands) | 2019 | 2018 | 2017 | Statement Presentation | |||||||
Equity Swaps | $ | ( | $ | | $ | ( |
| G&A expense | |||
Electricity Swaps |
| — |
| — |
| |
| Operating expense | |||
Commodity Derivative Instruments: | |||||||||||
Oil |
| ( |
| |
| ( |
| Commodity derivative | |||
Gas |
| ( |
| |
| |
| instruments | |||
Total Unrealized Gain/(Loss) | $ | ( | $ | | $ | | |||||
The following table summarizes the effect of Enerplus’ commodity derivative instruments on the Consolidated Statements of Income/(Loss):
($ thousands) |
| 2019 |
| 2018 |
| 2017 | |||
Change in fair value gain/(loss) | $ | ( | $ | | $ | | |||
Net realized cash gain/(loss) |
| |
| ( |
| | |||
Commodity derivative instruments gain/(loss) | $ | ( | $ | | $ | | |||
The following table summarizes the fair values at the respective year ends:
December 31, 2019 | December 31, 2018 | ||||||||||||||
Assets | Liabilities | Assets | Liabilities | ||||||||||||
($ thousands) |
| Current |
| Current |
| Current | Long-term |
| Current | ||||||
Equity Swaps | $ | — | $ | | $ | — | $ | — | $ | | |||||
Commodity Derivative Instruments: | |||||||||||||||
Oil |
| |
| |
| |
| |
| — | |||||
Gas |
| — |
| — |
| |
| — |
| — | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
24 ENERPLUS 2019 FINANCIAL SUMMARY
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.
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
The following tables summarize Enerplus’ price risk management positions at February 20, 2020:
Crude Oil Instruments:
Instrument Type(1)(2) |
| bbls/day |
| US$/bbl |
Jan 1, 2020 – Jan 31, 2020 | ||||
WTI Swap | | | ||
WTI Purchased Put | | | ||
WTI Sold Put | | | ||
WTI – Brent Swap (Purchase) | | ( | ||
WTI – Brent Swap (Sale) | | ( | ||
WCS Differential Swap | | ( | ||
Feb 1, 2020 – Mar 31, 2020 | ||||
WTI Swap | | | ||
WTI Purchased Put | | | ||
WTI Sold Put | | | ||
WTI – Brent Swap (Purchase) | | ( | ||
WTI – Brent Swap (Sale) | | ( | ||
WCS Differential Swap | | ( | ||
Apr 1, 2020 – Jun 30, 2020 | ||||
WTI Swap | | | ||
WTI Purchased Put | | | ||
WTI Sold Put | | | ||
WTI – Brent Swap (Purchase) | | ( | ||
WTI – Brent Swap (Sale) | | ( | ||
Jul 1, 2020 – Sep 30, 2020 | ||||
WTI Swap | | | ||
WTI Purchased Put | | | ||
WTI Sold Put | | | ||
WTI Sold Call | | | ||
WTI – Brent Swap (Purchase) | | ( | ||
Oct 1, 2020 – Dec 31, 2020 | ||||
WTI Purchased Put | | | ||
WTI Sold Put | | | ||
WTI Sold Call | | | ||
WTI – Brent Swap (Purchase) | | ( |
| (1) | Transactions with a common term have been aggregated and presented as the weighted average price/bbl before premiums. |
| (2) | The total average deferred premium on outstanding hedges is US$ |
Foreign Exchange Risk:
Enerplus is exposed to foreign exchange risk in relation to its U.S. operations, U.S. dollar denominated senior notes, cash deposits and working capital. Additionally, Enerplus’ crude oil sales and a significant portion of its natural gas sales are based on U.S. dollar indices. To mitigate exposure to fluctuations in foreign exchange, Enerplus may enter into foreign exchange derivatives. At December 31, 2019, Enerplus did not have any foreign exchange derivatives outstanding.
ENERPLUS 2019 FINANCIAL SUMMARY 25
Interest Rate Risk:
At December 31, 2019, all of Enerplus’ debt was based on fixed interest rates, and 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 14. Enerplus has entered into various equity swaps maturing in 2020 and has effectively fixed the future settlement cost on
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 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, 2019, approximately
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, 2019 was $
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 cash equivalents) 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, share repurchases, access to capital markets, as well as acquisition and divestment activity.
At December 31, 2019, Enerplus was in full compliance with all covenants under the bank credit facility and outstanding senior notes.
16) COMMITMENTS AND CONTINGENCIES
a) Commitments
Enerplus has the following minimum annual commitments, excluding operating leases which are recorded in the lease liability (see Note 9):
Minimum Annual Commitment Each Year | |||||||||||||||||||||
($ thousands) | Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||
Senior notes(1) | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Transportation commitments | |
| | | | | | | |||||||||||||
Processing commitments |
| |
| | | | | | | ||||||||||||
Total commitments(2)(3) | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
| (1) | Interest payments have not been included. |
| (2) | Crown and surface royalties, production taxes, 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. |
| (3) | US$ commitments have been converted to CDN$ using the December 31, 2019 foreign exchange rate of |
26 ENERPLUS 2019 FINANCIAL SUMMARY
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.
17) GEOGRAPHICAL INFORMATION
As at and for the year ended December 31, 2019 ($ thousands) |
| Canada |
| U.S. |
| Total | |||
Oil and natural gas sales, net of royalties | $ | | $ | | $ | | |||
Depletion, depreciation and accretion | | | | ||||||
Property, plant and equipment |
| |
| |
| | |||
Deferred income tax asset | | | | ||||||
Goodwill | — | | | ||||||
Long term income tax receivable |
| — |
| |
| | |||
As at and for the year ended December 31, 2018 ($ thousands) |
| Canada |
| U.S. |
| Total | |||
Oil and natural gas sales, net of royalties | $ | | $ | | $ | | |||
Depletion, depreciation and accretion | | | | ||||||
Property, plant and equipment |
| |
| |
| | |||
Deferred income tax asset | | | | ||||||
Goodwill |
| | | | |||||
Long term income tax receivable |
| — |
| |
| | |||
As at and for the year ended December 31, 2017 ($ thousands) |
| Canada |
| U.S. |
| Total | |||
Oil and natural gas sales, net of royalties | $ | | $ | | $ | | |||
Depletion, depreciation and accretion | | | | ||||||
Property, plant and equipment |
| |
| |
| | |||
Deferred income tax asset | | | | ||||||
Goodwill |
| |
| |
| | |||
Long term income tax receivable |
| — |
| |
| | |||
18) SUPPLEMENTAL CASH FLOW INFORMATION
a) Changes in Non-Cash Operating Working Capital
($ thousands) | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||
Accounts receivable | $ | | $ | ( | $ | ( | |||
Other assets |
| |
| ( |
| ( | |||
Accounts payable |
| ( |
| |
| | |||
$ | | $ | ( | $ | ( | ||||
b) Changes in Other Non-Cash Working Capital
($ thousands) |
| December 31, 2019 |
| December 31, 2018 |
| December 31, 2017 | |||
Non-cash financing activities(1) | $ | ( | $ | ( | $ | | |||
Non-cash investing activities(2) | $ | | $ | ( | $ | | |||
| (1) | Relates to changes in dividends payable and included in dividends on the Consolidated Statements of Cash Flows. |
| (2) | Relates to changes in accounts payable for capital and office expenditures and included in capital and office expenditures on the Consolidated Statements of Cash Flows. |
c) Other
($ thousands) |
| December 31, 2019 | December 31, 2018 |
| December 31, 2017 | ||||
Income taxes paid/(received) | $ | ( | $ | ( | $ | | |||
Interest paid | $ | | $ | | $ | | |||
ENERPLUS 2019 FINANCIAL SUMMARY 27