Form 6-K ARC RESOURCES LTD. For: Sep 30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Section 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
For the month of November 2016
Commission File Number: 000-30514
ARC RESOURCES LTD.
______________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Suite 1200, 308 - 4th Avenue S.W., Calgary, Alberta T2P 0H7
______________________________________________________________________________________________________
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F o | Form 40-F x |
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1). o
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes o | No x |
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 10, 2016 | ARC Resources Ltd. | |
(Registrant) | ||
By: | /s/“P. Van R. Dafoe” | |
P. Van R. Dafoe | ||
Senior Vice President and Chief Financial Officer |
INDEX TO EXHIBITS
EXHIBIT NUMBER | TITLE | |
99.1 | Third Quarter Report which includes Financial Statements and MD&A | |
99.2 | Form 52-109F2 - Certificate of Interim Filings - Chief Executive Officer | |
99.3 | Form 52-109F2 - Certificate of Interim Filings - Chief Financial Officer |
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MD&A”) of ARC Resources Ltd. (“ARC” or the “Company”) is Management’s analysis of the financial performance and significant trends or external factors that may affect future performance. It is dated November 10, 2016 and should be read in conjunction with the unaudited condensed interim consolidated financial statements (the "financial statements") as at and for the three and nine months ended September 30, 2016, and the MD&A and audited consolidated financial statements as at and for the year ended December 31, 2015, as well as ARC’s Annual Information Form that is filed on SEDAR at www.sedar.com. All financial information is reported in Canadian dollars and all per share information is based on diluted weighted average common shares, unless otherwise noted.
This MD&A contains non-GAAP measures and forward-looking statements. Readers are cautioned that the MD&A should be read in conjunction with ARC’s disclosure under the headings “Non-GAAP Measures,” “Forward-looking Information and Statements,” and "Glossary" included at the end of this MD&A.
ABOUT ARC RESOURCES LTD.
ARC is a dividend-paying Canadian crude oil and natural gas company headquartered in Calgary, Alberta. ARC’s activities relate to the exploration, development and production of conventional crude oil and natural gas in Canada with an emphasis on the development of properties with a large volume of hydrocarbons in place commonly referred to as “resource plays.”
ARC’s vision is to be a leading energy producer, focused on delivering results through its strategy of risk-managed value creation. ARC is committed to providing superior long-term financial returns for its shareholders, creating a culture where respect for the individual is paramount and action and passion are rewarded. ARC runs its business in a manner that protects the safety of employees, communities and the environment. ARC’s vision is realized through the four pillars of its strategy:
(1) | High quality, long-life assets – ARC’s unique suite of assets includes both Montney and other assets. ARC’s Montney assets consist of world-class resource play properties, concentrated in the Montney geological formation in northeast British Columbia and northern Alberta. The Montney assets provide substantial growth opportunities, which ARC will pursue to create value through long-term profitable development. Other assets are located in Alberta and Saskatchewan and include core assets in the Cardium formation in the Pembina area of Alberta. These assets deliver stable production and contribute cash flow to fund future development and support ARC's dividend. |
(2) | Operational excellence – ARC is focused on capital discipline and cost management to extract the maximum return on its investments while operating in a safe and environmentally responsible manner. Production from individual crude oil and natural gas wells naturally declines over time. In any one year, ARC approves a budget to drill new wells with the intent to first replace production declines and second to potentially increase production volumes. At times, ARC may also acquire strategic producing or undeveloped properties to enhance current production and reserves or to provide potential future drilling locations. Alternatively, it may strategically dispose of non-core assets that no longer meet its investment criteria. |
(3) | Financial flexibility – ARC provides returns to shareholders through a combination of a monthly dividend, currently $0.05 per share outstanding per month, and the potential for capital appreciation. ARC’s long-term goal is to fund dividend payments and capital expenditures necessary for the replacement of production declines using funds from operations (1). ARC will finance value-creating activities through a combination of sources including funds from operations, proceeds from ARC’s Dividend Reinvestment Program (“DRIP”), reduced funding required under the Stock Dividend Program ("SDP"), proceeds from property dispositions, debt capacity, and when appropriate, equity issuance. ARC chooses to maintain prudent debt levels, targeting a maximum net debt to annualized funds from operations of less than two times for temporary periods with a long-term target for net debt to be one to 1.5 times annualized funds from operations and less than 20 per cent of total capitalization over the long-term(1). |
(4) | Top talent and strong leadership culture – ARC is committed to the attraction, retention and development of the best and brightest people in the industry. ARC’s employees conduct business every day in a culture of trust, respect, integrity and accountability. Building leadership talent at all levels of the organization is a key focus. ARC is also committed to corporate leadership through community investment, environmental reporting practices and open communication with all stakeholders. As of November 10, 2016, ARC had 493 employees with 265 professional, technical and support staff in the Calgary office, and 228 individuals located across ARC’s operating areas in western Canada. |
(1) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the sections entitled "Funds from Operations" and "Capitalization, Financial Resources and Liquidity" contained within this MD&A. |
ARC Resources Ltd. | 1 |
Total Return to Shareholders
ARC's business plan has resulted in significant operational success and helped mitigate the headwinds of a challenging commodity price environment, resulting in a trailing three and five year annualized total return that exceeds the Standard & Poor's ("S&P")/Toronto Stock Exchange ("TSX") Exploration & Producers Index (Table 1). Total return includes both capital appreciation and dividend payments and represents the sum of the change in the market price of the common shares or the index in the period assuming dividends are reinvested in the security or the index. Total return is not a standardized measure and therefore may not be comparable with the calculation of similar measures for other entities. This measure is used to assist Management and investors in evaluating the Company's performance and rate of return on a per share basis, to facilitate comparison over time and to its peers.
Table 1
Total Returns (1) | Trailing One Year | Trailing Three Year | Trailing Five Year | |||
Dividends per share outstanding ($) | 0.80 | 3.20 | 5.60 | |||
Capital appreciation (depreciation) per share outstanding ($) | 6.09 | (2.54 | ) | 1.17 | ||
Total return per share outstanding (%) | 40.1 | 3.3 | 32.5 | |||
Annualized total return per share outstanding (%) | 40.1 | 1.1 | 5.8 | |||
S&P/TSX Exploration & Producers Index annualized total return (%) | 47.3 | (12.3 | ) | (0.5 | ) |
(1) | Calculated as at September 30, 2016. |
Since 2012, ARC’s production has grown by 25,481 boe per day, or 27 per cent, while its proved plus probable reserves have grown by 79.9 MMboe, or 13 per cent. Table 2 highlights ARC’s production and reserves for the first nine months of 2016 and over the past four years:
Table 2
2016 YTD | 2015 | 2014 | 2013 | 2012 | ||||||
Production (boe/d) (1) | 119,027 | 114,167 | 112,387 | 96,087 | 93,546 | |||||
Daily production per thousand shares (2) | 0.34 | 0.34 | 0.35 | 0.31 | 0.31 | |||||
Proved plus probable reserves (MMboe) (3)(4) | n/a | 686.9 | 672.7 | 633.9 | 607.0 | |||||
Proved plus probable reserves per share (boe) | n/a | 2.0 | 2.1 | 2.0 | 2.0 |
(1) | Reported production amount is based on company interest before royalty burdens. |
(2) | Daily production per thousand shares represents average daily production for the nine months ended September 30, 2016 and annual average daily production for the full years ended December 31, 2015, 2014, 2013 and 2012 divided by the diluted weighted average common shares for the respective periods. |
(3) | As determined by ARC’s independent reserve evaluator with an effective date of December 31 for the years shown in accordance with the COGE Handbook. |
(4) | Company gross reserves are the gross interest reserves before deduction of royalties and without including any royalty interests. For more information, see ARC’s Annual Information Form as filed on SEDAR at www.sedar.com and the news release entitled “ARC Resources Ltd. Announces the 8th Consecutive Year of ~200% Reserves Replacement, 2015 Finding and Development Costs for 2P Reserves of $6.97 and a Significant Increase in Montney Resource Estimates in 2015” dated February 10, 2016. |
ARC Resources Ltd. | 2 |
Exhibit 1
Exhibit 1a
ARC Resources Ltd. | 3 |
ECONOMIC ENVIRONMENT
ARC’s third quarter 2016 financial and operating results were impacted by commodity prices and foreign exchange rates which are outlined in Table 3 below:
Table 3
Selected Benchmark Prices and Exchange Rates (1) | Three Months Ended | Nine Months Ended | ||||||||||
September 30 | September 30 | |||||||||||
2016 | 2015 | % Change | 2016 | 2015 | % Change | |||||||
Brent crude oil (US$/bbl) | 46.99 | 51.30 | (8 | ) | 43.17 | 56.60 | (24 | ) | ||||
WTI crude oil (US$/bbl) | 44.94 | 46.50 | (3 | ) | 41.53 | 51.01 | (19 | ) | ||||
Edmonton Par (Cdn$/bbl) | 54.80 | 56.27 | (3 | ) | 50.18 | 58.63 | (14 | ) | ||||
NYMEX Henry Hub Last Day Settlement (US$/MMBtu) | 2.81 | 2.77 | 1 | 2.29 | 2.80 | (18 | ) | |||||
AECO natural gas (Cdn$/Mcf) | 2.20 | 2.80 | (21 | ) | 1.85 | 2.81 | (34 | ) | ||||
Cdn$/US$ exchange rate | 1.31 | 1.31 | — | 1.32 | 1.26 | 5 |
(1) | The benchmark prices do not reflect ARC's realized sales prices. For average realized sales prices, refer to Table 13 in this MD&A. Prices and exchange rates presented above represent averages for the respective periods. |
Global crude oil prices experienced volatility throughout the third quarter of 2016 as expectations for the timing of a supply/demand re-balancing continually shifted; however, the WTI benchmark price averaged only two per cent lower than the second quarter of 2016 and three per cent lower than the third quarter of 2015. Record output from Middle Eastern-producing countries and the return of Canadian production lost due to spring wildfires was largely offset by outages in Libya and Nigeria due to political unrest. Global inventories still remain at significantly elevated levels. Global crude oil prices saw improvement at the end of the third quarter of 2016 and into the fourth quarter following OPEC's proposal to cut back production, signaling a possible acceleration of the global supply/demand re-balancing. ARC's crude oil price is primarily referenced to the Edmonton Par benchmark price, which increased slightly in the third quarter of 2016 compared to the second quarter of 2016, and decreased three per cent compared to the third quarter of 2015. The differential between WTI and Edmonton Par narrowed slightly in the third quarter of 2016 to average a discount of US$2.95, six per cent less than the second quarter of 2016 and 16 per cent less than the third quarter of 2015.
Exhibit 2
US natural gas prices, referenced by the average NYMEX Henry Hub Last Day Settlement price, increased 44 per cent relative to the second quarter of 2016 and one per cent compared to the third quarter of 2015. ARC's realized natural gas price is primarily referenced to the AECO hub, which increased 76 per cent in the third quarter of 2016 relative to the second quarter of 2016 and was 21 per cent lower compared to the third quarter of 2015. Prices were up substantially in the quarter with warm seasonal weather driving up the demand for natural gas-fired power generation, and with more US liquefied natural gas exports and higher exports into Mexico. AECO natural gas prices largely followed the movement
ARC Resources Ltd. | 4 |
in Henry Hub prices in the period. However, relative to Henry Hub, AECO continues to trade at an increasingly wide discount due to oversupply in the Western Canadian Sedimentary Basin relative to local demand and given the marginal export pipeline economics.
Exhibit 2a
The Canadian dollar remained range-bound relative to the US dollar during the third quarter of 2016, averaging US$0.76 (Cdn$/US$1.31).
Exhibit 2b
ARC Resources Ltd. | 5 |
ANNUAL GUIDANCE AND FINANCIAL HIGHLIGHTS
ARC has made significant progress in the execution of its $450 million capital program for 2016, with a continued focus on low-cost Montney development and creating value throughout its asset base. Full-year 2016 annual average production is expected to be in the range of 118,000 to 122,000 boe per day, resulting in modest year-over-year growth.
Ongoing commodity price volatility may affect ARC's funds from operations and profitability on capital programs. As continued volatility is expected, ARC will continue to take steps to mitigate these risks, including managing an active hedging program, focusing on capital and operating efficiencies, and protecting its strong financial position. ARC will continue to screen projects for profitability in a disciplined manner and will adjust spending and the pace of development, if required, to ensure balance sheet strength is protected.
Table 4 is a summary of ARC’s 2016 annual guidance and a review of 2016 year-to-date actual results.
Table 4
2016 Guidance | 2016 Revised Guidance (1) | 2016 YTD | % Variance from Guidance | ||||
Production | |||||||
Crude oil (bbl/d) | 32,000 - 34,000 | 32,000 - 34,000 | 32,056 | — | |||
Condensate (bbl/d) | 3,000 - 3,400 | 3,400 - 3,800 | 3,579 | — | |||
Natural gas (MMcf/d) | 460 - 470 | 470 - 480 | 474.6 | — | |||
NGLs (bbl/d) | 3,800 - 4,200 | 4,100 - 4,500 | 4,292 | — | |||
Total (boe/d) | 116,000 - 120,000 | 118,000 - 122,000 | 119,027 | — | |||
Expenses ($/boe) | |||||||
Operating | 7.40 - 7.80 | 6.90 - 7.20 | 6.61 | (4 | ) | ||
Transportation | 2.40 - 2.70 | 2.40 - 2.70 | 2.15 | (10 | ) | ||
G&A expenses before share-based compensation plans | 1.55 - 1.65 | 1.55 - 1.65 | 1.64 | — | |||
G&A - share-based compensation plans (2) | 0.45 - 0.65 | 0.45 - 0.65 | 0.94 | 45 | |||
Interest | 1.10 - 1.30 | 1.10 - 1.30 | 1.16 | — | |||
Current income tax (per cent of funds from operations) (3) | 0 - 5 | 0 - 3 | — | — | |||
Capital expenditures before land purchases and net property acquisitions (dispositions) ($ millions) | 390 | 450 | 294.2 | N/A | |||
Land purchases and net property acquisitions (dispositions) ($ millions) | N/A | N/A | 155.0 | N/A | |||
Weighted average shares, diluted (millions) | 351 | 351 | 351 | N/A |
(1) | Incorporates the impact of approximately 3,000 boe per day of light, high-netback crude oil production in Pembina acquired in the second and third quarters of 2016 which will result in an annual volume increase of approximately 1,400 boe per day of production. |
(2) | Comprises expenses recognized under the RSU and PSU, Share Option and LTRSA Plans. In periods where substantial share price fluctuation occurs, ARC’s G&A expenses are subject to greater volatility. |
(3) | The 2016 corporate tax estimate varies depending on the level of commodity prices. |
ARC Resources Ltd. | 6 |
ARC's 2016 guidance is based on full-year 2016 estimates; certain variances between 2016 year-to-date actual results and 2016 full-year guidance estimates are due to the cyclical and seasonal nature of operations. ARC expects full-year 2016 actual results to closely approximate guidance as the year progresses. 2016 year-to-date production was within the 2016 guided production range; ARC expects that full-year 2016 production will closely approximate the guided range, with fourth quarter production expected to modestly rebound from third quarter levels despite the potential impact of major third-party infrastructure maintenance scheduled to take place in the period.
Exhibit 3
2016 Revised Production Guidance
On a per boe basis, ARC's 2016 year-to-date operating expenses were below the 2016 guidance range due to the addition of new Montney production at lower relative costs to operate, lower power prices throughout the period, and diligent cost control efforts. On a per boe basis, ARC's 2016 year-to-date transportation expenses were below the 2016 guidance range as a result of minimal pipeline disruptions in the period. ARC expects full-year 2016 actual transportation expenses to closely approximate guidance as the year progresses, with an expected increase in the fourth quarter resulting from alternate transportation arrangements being made to mitigate the potential impact of major third-party infrastructure maintenance. ARC's 2016 year-to-date G&A expenses were above the 2016 guidance range due primarily to increased costs associated with ARC's share-based compensation plans due to the increase in ARC's share price and improved total return relative to its peers; ARC expects full-year 2016 G&A expenses before share-based compensation to closely approximate guidance by year-end.
ARC Resources Ltd. | 7 |
Exhibit 3a
2016 Revised Expenses Guidance
The guidance information presented is intended to provide shareholders with information on Management’s expectations for results from operations. Readers are cautioned that the guidance may not be appropriate for other purposes.
ARC Resources Ltd. | 8 |
2016 THIRD QUARTER FINANCIAL AND OPERATING RESULTS
Financial Highlights
Table 5
Three Months Ended | Nine Months Ended | |||||||||||
September 30 | September 30 | |||||||||||
($ millions, except per share and volume data) | 2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||
Funds from operations (1) | 153.0 | 174.9 | (13 | ) | 444.8 | 572.7 | (22 | ) | ||||
Funds from operations per share (1) | 0.44 | 0.51 | (14 | ) | 1.27 | 1.69 | (25 | ) | ||||
Net income (loss) | 28.3 | (235.0 | ) | (112 | ) | 34.3 | (287.7 | ) | (112 | ) | ||
Net income (loss) per share | 0.08 | (0.69 | ) | (112 | ) | 0.10 | (0.85 | ) | (112 | ) | ||
Dividends per share (2) | 0.15 | 0.30 | (50 | ) | 0.50 | 0.90 | (44 | ) | ||||
Average daily production (boe/d) | 115,205 | 107,261 | 7 | 119,027 | 112,457 | 6 |
(1) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the section entitled "Funds from Operations" contained within this MD&A. |
(2) | Dividends per share are based on the number of shares outstanding at each dividend record date. |
Funds from Operations
ARC considers funds from operations to be a key measure of operating performance as it demonstrates ARC’s ability to generate the necessary funds to fund sustaining capital and future growth through capital investment and to repay debt. Management believes that such a measure provides an insightful assessment of ARC’s operations on a continuing basis by eliminating certain non-cash charges and charges that are nonrecurring. Funds from operations is not a standardized measure and therefore may not be comparable with the calculation of similar measures for other entities.
ARC reports funds from operations in total and on a per share basis. Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016. Table 6 is a reconciliation of ARC’s net income (loss) to funds from operations and cash flow from operating activities:
Table 6
Three Months Ended | Nine Months Ended | |||||||
September 30 | September 30 | |||||||
($ millions) | 2016 | 2015 | 2016 | 2015 | ||||
Net income (loss) | 28.3 | (235.0 | ) | 34.3 | (287.7 | ) | ||
Adjusted for the following non-cash items: | ||||||||
DD&A and impairment | 124.0 | 472.9 | 384.2 | 802.4 | ||||
Accretion of ARO | 3.0 | 3.3 | 9.1 | 10.1 | ||||
E&E expenses | — | 2.5 | 1.7 | 46.9 | ||||
Deferred tax expense (recovery) | 6.8 | (48.1 | ) | (27.5 | ) | (10.0 | ) | |
Unrealized loss (gain) on risk management contracts | (3.3 | ) | (93.9 | ) | 153.4 | (110.4 | ) | |
Unrealized loss (gain) on foreign exchange | 7.7 | 72.2 | (57.6 | ) | 143.6 | |||
Gain on business combinations | (13.7 | ) | — | (53.9 | ) | — | ||
Gain on disposal of petroleum and natural gas properties | — | — | — | (23.3 | ) | |||
Other | 0.2 | 1.0 | 1.1 | 1.1 | ||||
Funds from operations | 153.0 | 174.9 | 444.8 | 572.7 | ||||
Net change in other liabilities | (3.9 | ) | (8.1 | ) | 2.8 | (18.0 | ) | |
Change in non-cash operating working capital | 8.6 | (1.4 | ) | 23.8 | (41.5 | ) | ||
Cash flow from operating activities | 157.7 | 165.4 | 471.4 | 513.2 |
ARC Resources Ltd. | 9 |
Details of the change in funds from operations from the three and nine months ended September 30, 2015 to the three and nine months ended September 30, 2016 are included in Table 7 below:
Table 7
Three Months Ended | Nine Months Ended | |||||||
September 30 | September 30 | |||||||
$ millions | $/Share | $ millions | $/Share | |||||
Funds from operations – 2015 | 174.9 | 0.51 | 572.7 | 1.69 | ||||
Volume variance | ||||||||
Crude oil and liquids | 2.5 | 0.01 | 1.5 | — | ||||
Natural gas | 11.6 | 0.03 | 32.3 | 0.10 | ||||
Price variance | ||||||||
Crude oil and liquids | 2.0 | 0.01 | (71.6 | ) | (0.22 | ) | ||
Natural gas | (29.3 | ) | (0.09 | ) | (137.2 | ) | (0.40 | ) |
Other revenue | (0.7 | ) | — | (1.1 | ) | — | ||
Realized gain on risk management contracts | 10.8 | 0.03 | 49.1 | 0.14 | ||||
Royalties | 2.7 | 0.01 | 18.7 | 0.06 | ||||
Expenses | ||||||||
Transportation | 2.0 | 0.01 | 2.7 | 0.01 | ||||
Operating | (7.2 | ) | (0.02 | ) | 14.1 | 0.04 | ||
G&A | (3.4 | ) | (0.01 | ) | (28.5 | ) | (0.08 | ) |
Interest | 0.2 | — | (0.2 | ) | — | |||
Current tax | (12.1 | ) | (0.04 | ) | (7.0 | ) | (0.02 | ) |
Realized loss on foreign exchange | (1.0 | ) | — | (0.7 | ) | — | ||
Weighted average shares, diluted | — | (0.01 | ) | — | (0.05 | ) | ||
Funds from operations – 2016 | 153.0 | 0.44 | 444.8 | 1.27 |
Funds from operations decreased by 13 per cent in the third quarter of 2016 to $153.0 million from $174.9 million generated in the third quarter of 2015. The decrease reflects lower revenue due primarily to lower realized natural gas prices and an increase in current tax expenses, operating expenses and G&A in the third quarter of 2016 as compared to the third quarter of 2015. Increased production and realized gains on risk management contracts relative to the third quarter of the prior year along with lower royalties and transportation costs partially offset the impact of the reduction in commodity prices.
For the nine months ended September 30, 2016, funds from operations decreased by $127.9 million to $444.8 million from $572.7 million in the same period of 2015. This decrease reflects lower revenue net of royalties primarily associated with lower realized commodity prices and an increase in G&A and current taxes, partially offset by increased realized gains on risk management contracts and production along with decreased operating costs.
ARC Resources Ltd. | 10 |
Exhibit 4
Exhibit 4a
ARC Resources Ltd. | 11 |
2016 Funds from Operations Sensitivity
Table 8 illustrates sensitivities of pre-hedged operating items to operational and business environment changes and the resulting impact on funds from operations per share:
Table 8
Impact on Annual Funds from Operations (6) | |||||
Assumption | Change | $/Share | |||
Business Environment (1) | |||||
Crude oil price (US$ WTI/bbl) (2)(3) | 41.53 | 1.00 | 0.033 | ||
Natural gas price (Cdn$ AECO/Mcf) (2)(3) | 1.85 | 0.10 | 0.031 | ||
Cdn$/US$ exchange rate (2)(3)(4) | 1.32 | 0.01 | 0.009 | ||
Operational (5) | |||||
Crude oil and liquids production volumes (bbl/d) | 39,927 | 1.0 | % | 0.012 | |
Natural gas production volumes (MMcf/d) | 474.6 | 1.0 | % | 0.007 | |
Operating expenses ($/boe) | 6.61 | 1.0 | % | 0.006 | |
G&A expenses ($/boe) | 2.58 | 10.0 | % | 0.018 |
(1) | Calculations are performed independently and may not be indicative of actual results that would occur when multiple variables change at the same time. |
(2) | Prices and rates are indicative of published prices for the first nine months of 2016. See Table 13 of this MD&A for additional details. The calculated impact on funds from operations would only be applicable within a limited range of these amounts. |
(3) | Analysis does not include the effect of risk management contracts. |
(4) | Includes impact of foreign exchange on crude oil, condensate, and NGLs prices that are presented in US dollars. |
(5) | Operational assumptions are based upon results for the nine months ended September 30, 2016. |
(6) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the section entitled "Funds from Operations" contained within this MD&A. |
Exhibit 5
(1) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the section entitled "Funds from Operations" contained within this MD&A. |
ARC Resources Ltd. | 12 |
Net Income (Loss)
Net income of $28.3 million (income of $0.08 per share) was earned in the third quarter of 2016, a $263.3 million ($0.77 per share) increase compared to a net loss of $235.0 million (loss of $0.69 per share) in the third quarter of 2015. Lower DD&A and impairment charges, reduced loss on foreign exchange as well as a gain on business combination increased net income. These increases were partially offset by lower gains on risk management contracts and an increase in income tax expense.
Exhibit 6
(1) | Includes gain or loss on short-term investments, accretion of ARO, and interest and financing charges. |
During the nine months ended September 30, 2016, ARC earned net income of $34.3 million (income of $0.10 per share), compared to a net loss of $287.7 million (loss of $0.85 per share) earned during the nine months ended September 30, 2015. Lower E&E, DD&A and impairment charges, increased foreign exchange gains, and higher gains on business combinations increased net income. These increases were partially offset by lower revenue net of royalties due to lower commodity prices, reduced gains on risk management contracts, an increase in G&A expenses, and a reduced gain on disposal of petroleum and natural gas properties.
ARC Resources Ltd. | 13 |
Exhibit 6a
(1) | Includes gain or loss on short-term investments, accretion of ARO, and interest and financing charges. |
Production
Table 9
Three Months Ended | Nine Months Ended | |||||||||||
September 30 | September 30 | |||||||||||
Production | 2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||
Light and medium crude oil (bbl/d) | 28,908 | 28,516 | 1 | 31,484 | 31,390 | — | ||||||
Heavy crude oil (bbl/d) | 734 | 881 | (17 | ) | 572 | 989 | (42 | ) | ||||
Condensate (bbl/d) | 3,562 | 3,361 | 6 | 3,579 | 3,363 | 6 | ||||||
Natural gas (MMcf/d) | 466.7 | 425.1 | 10 | 474.6 | 436.7 | 9 | ||||||
NGLs (bbl/d) | 4,221 | 3,653 | 16 | 4,292 | 3,918 | 10 | ||||||
Total production (boe/d) | 115,205 | 107,261 | 7 | 119,027 | 112,457 | 6 | ||||||
% Natural gas production | 68 | 66 | 3 | 66 | 65 | 2 | ||||||
% Crude oil and liquids production | 32 | 34 | (6 | ) | 34 | 35 | (3 | ) |
During the three and nine months ended September 30, 2016, crude oil and liquids production remained relatively unchanged from the same periods in the prior year and reflects additional production at Tower following the crude oil battery expansion that was completed during the fourth quarter of 2015, as well as the acquisition of certain properties in the Pembina area of Alberta producing approximately 3,000 boe per day in the second and third quarters of 2016. The increase in crude oil and liquids production was partially offset by natural declines associated with reduced drilling activity, as well as the disposition of certain non-core assets in southwest Saskatchewan in the third quarter of 2015 and in Manitoba in the fourth quarter of 2015 which had been producing approximately 500 boe per day and 1,300 boe per day prior to disposal, respectively.
ARC Resources Ltd. | 14 |
Natural gas production was 466.7 MMcf per day in the third quarter of 2016, an increase of ten per cent from the 425.1 MMcf per day produced in the third quarter of 2015. For the nine months ended September 30, 2016, natural gas production was 474.6 MMcf per day, an increase of nine per cent from the 436.7 MMcf per day for the same period in the prior year. The increase in both periods is mainly attributed to production from new wells flowing through the Sunrise gas plant which was commissioned during the third quarter of 2015. The increase in natural gas production was partially offset by the disposition of certain non-core assets in South Central Alberta in the second quarter of 2015 and in the second quarter of 2016 which had been producing approximately 14.4 MMcf per day and 3.9 MMcf prior to disposal, respectively.
Exhibit 7
ARC Resources Ltd. | 15 |
During the third quarter of 2016, ARC drilled 16 gross (15.5 net) wells on operated properties consisting of 14 crude oil wells and two (1.5 net) liquids-rich natural gas wells. For the nine months ended September 30, 2016, ARC drilled 34 gross (33.5 net) wells on operated properties consisting of 20 crude oil wells, nine natural gas wells, four (3.5 net) liquids-rich natural gas wells and one injection well.
Table 10 summarizes ARC’s production by core area for the third quarter of 2016 and 2015:
Table 10
Three Months Ended September 30, 2016 | ||||||||||
Production | Total | Crude Oil | Condensate | Natural Gas | NGLs | |||||
Core Area (1) | (boe/d) | (bbl/d) | (bbl/d) | (MMcf/d) | (bbl/d) | |||||
Northeast BC | 74,495 | 5,332 | 2,678 | 386.6 | 2,056 | |||||
Northern AB | 18,957 | 6,194 | 663 | 63.7 | 1,476 | |||||
Pembina | 11,161 | 8,256 | 184 | 13.5 | 475 | |||||
South Central AB (2) | 3,044 | 2,564 | 1 | 2.1 | 132 | |||||
Southeast SK (3) | 7,548 | 7,296 | 36 | 0.8 | 82 | |||||
Total | 115,205 | 29,642 | 3,562 | 466.7 | 4,221 |
Three Months Ended September 30, 2015 | ||||||||||
Production | Total | Crude Oil | Condensate | Natural Gas | NGLs | |||||
Core Area (1) | (boe/d) | (bbl/d) | (bbl/d) | (MMcf/d) | (bbl/d) | |||||
Northeast BC | 62,265 | 1,587 | 2,375 | 340.1 | 1,611 | |||||
Northern AB | 19,591 | 6,679 | 749 | 64.8 | 1,358 | |||||
Pembina | 10,547 | 7,848 | 173 | 12.6 | 433 | |||||
South Central AB (2) | 5,253 | 3,978 | 7 | 6.6 | 164 | |||||
Southeast SK & MB (3) | 9,605 | 9,305 | 57 | 1.0 | 87 | |||||
Total | 107,261 | 29,397 | 3,361 | 425.1 | 3,653 |
(1) | Provincial references: "AB" is Alberta, "BC" is British Columbia, "SK" is Saskatchewan, "MB" is Manitoba. |
(2) | During the second and third quarters of 2015, ARC disposed of certain non-core assets in this district. These assets had been producing approximately 2,900 boe per day prior to disposal. An additional 700 boe per day of non-core assets were disposed from this district toward the end of the second quarter of 2016. |
(3) | During the fourth quarter of 2015, ARC disposed of certain non-core assets in this district that had been producing approximately 1,300 boe per day prior to disposal. |
Exhibit 8
ARC Resources Ltd. | 16 |
Table 10a summarizes ARC’s production by core area for the nine months ended September 30, 2016 and 2015:
Table 10a
Nine Months Ended September 30, 2016 | ||||||||||
Production | Total | Crude Oil | Condensate | Natural Gas | NGLs | |||||
Core Area (1) | (boe/d) | (bbl/d) | (bbl/d) | (MMcf/d) | (bbl/d) | |||||
Northeast BC | 77,460 | 7,485 | 2,692 | 390.6 | 2,191 | |||||
Northern AB | 19,654 | 6,614 | 643 | 66.0 | 1,406 | |||||
Pembina | 10,038 | 7,252 | 179 | 12.9 | 459 | |||||
South Central AB (2) | 4,071 | 3,174 | 19 | 4.2 | 156 | |||||
Southeast SK (3) | 7,804 | 7,531 | 46 | 0.9 | 80 | |||||
Total | 119,027 | 32,056 | 3,579 | 474.6 | 4,292 |
Nine Months Ended September 30, 2015 | ||||||||||
Production | Total | Crude Oil | Condensate | Natural Gas | NGLs | |||||
Core Area (1) | (boe/d) | (bbl/d) | (bbl/d) | (MMcf/d) | (bbl/d) | |||||
Northeast BC | 63,347 | 2,416 | 2,389 | 341.0 | 1,704 | |||||
Northern AB | 21,120 | 7,532 | 712 | 68.4 | 1,473 | |||||
Pembina | 11,203 | 8,432 | 169 | 12.9 | 450 | |||||
South Central AB (2) | 6,619 | 4,131 | 42 | 13.4 | 211 | |||||
Southeast SK & MB (3) | 10,168 | 9,868 | 51 | 1.0 | 80 | |||||
Total | 112,457 | 32,379 | 3,363 | 436.7 | 3,918 |
(1) | Provincial references: "AB" is Alberta, "BC" is British Columbia, "SK" is Saskatchewan, "MB" is Manitoba. |
(2) | During the second and third quarters of 2015, ARC disposed of certain non-core assets in this district. These assets had been producing approximately 2,900 boe per day prior to disposal. An additional 700 boe per day of non-core assets were disposed from this district toward the end of the second quarter of 2016. |
(3) | During the fourth quarter of 2015, ARC disposed of certain non-core assets in this district that had been producing approximately 1,300 boe per day prior to disposal. |
Exhibit 8a
ARC Resources Ltd. | 17 |
Sales of Crude Oil, Natural Gas, Condensate, NGLs and Other Income
Sales revenue from crude oil, natural gas, condensate, NGLs and other income decreased by 5 per cent in the third quarter of 2016 compared to the same period in 2015. The decrease primarily reflects lower average realized natural gas prices in the third quarter of 2016 compared to the third quarter of 2015 and was partially offset by increased production volumes.
For the nine months ended September 30, 2016, sales revenue from crude oil, natural gas, condensate, NGLs and other income decreased by 19 per cent compared to the same period in 2015. The decrease reflects lower average realized commodity prices for all products excluding NGLs in the nine months ended September 30, 2016 as compared to the same period in 2015 and was partially offset by increased natural gas, condensate and NGL production volumes.
A breakdown of sales revenue by product is outlined in Table 11:
Table 11
Three Months Ended | Nine Months Ended | |||||||||||
September 30 | September 30 | |||||||||||
Sales revenue by product ($ millions) | 2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||
Crude oil | 143.0 | 141.8 | 1 | 417.9 | 486.6 | (14 | ) | |||||
Condensate | 16.7 | 16.4 | 2 | 47.2 | 50.8 | (7 | ) | |||||
Natural gas | 100.7 | 118.4 | (15 | ) | 251.3 | 356.2 | (29 | ) | ||||
NGLs | 4.9 | 1.9 | 158 | 13.6 | 11.4 | 19 | ||||||
Total sales revenue from crude oil, natural gas, condensate and NGLs | 265.3 | 278.5 | (5 | ) | 730.0 | 905.0 | (19 | ) | ||||
Other income | 0.3 | 1.0 | (70 | ) | 1.7 | 2.8 | (39 | ) | ||||
Total sales revenue | 265.6 | 279.5 | (5 | ) | 731.7 | 907.8 | (19 | ) |
While ARC’s production mix on a per boe basis is weighted more heavily to natural gas than to crude oil and liquids, ARC's revenue contribution is more heavily weighted to crude oil and liquids production as shown by the table below:
Table 12
Three Months Ended | Nine Months Ended | |||
September 30 | September 30 | |||
Revenue by Product Type | 2016 | 2015 | 2016 | 2015 |
% of Total Revenue | % of Total Revenue | % of Total Revenue | % of Total Revenue | |
Crude oil and liquids | 62 | 58 | 66 | 60 |
Natural gas | 38 | 42 | 34 | 40 |
Total sales revenue | 100 | 100 | 100 | 100 |
ARC Resources Ltd. | 18 |
Exhibit 9
Commodity Prices Prior to Hedging
Table 13
Three Months Ended | Nine Months Ended | |||||||||||
September 30 | September 30 | |||||||||||
2016 | 2015 | % Change | 2016 | 2015 | % Change | |||||||
Average Benchmark Prices | ||||||||||||
AECO natural gas (Cdn$/Mcf) | 2.20 | 2.80 | (21 | ) | 1.85 | 2.81 | (34 | ) | ||||
WTI crude oil (US$/bbl) | 44.94 | 46.50 | (3 | ) | 41.53 | 51.01 | (19 | ) | ||||
Cdn$/US$ exchange rate | 1.31 | 1.31 | — | 1.32 | 1.26 | 5 | ||||||
WTI crude oil (Cdn$/bbl) | 58.87 | 60.92 | (3 | ) | 54.82 | 64.27 | (15 | ) | ||||
Edmonton Par (Cdn$/bbl) | 54.80 | 56.27 | (3 | ) | 50.18 | 58.63 | (14 | ) | ||||
ARC Average Realized Prices Prior to Hedging | ||||||||||||
Crude oil ($/bbl) | 52.43 | 52.43 | — | 47.57 | 55.05 | (14 | ) | |||||
Condensate ($/bbl) | 50.81 | 53.00 | (4 | ) | 48.16 | 55.32 | (13 | ) | ||||
Natural gas ($/Mcf) | 2.35 | 3.03 | (22 | ) | 1.93 | 2.99 | (35 | ) | ||||
NGLs ($/bbl) | 12.67 | 5.68 | 123 | 11.56 | 10.69 | 8 | ||||||
Total average realized commodity price prior to other income and hedging ($/boe) | 25.03 | 28.22 | (11 | ) | 22.38 | 29.48 | (24 | ) | ||||
Other income ($/boe) | 0.02 | 0.09 | (78 | ) | 0.05 | 0.09 | (44 | ) | ||||
Total average realized price prior to hedging ($/boe) | 25.05 | 28.31 | (12 | ) | 22.43 | 29.57 | (24 | ) |
In the third quarter of 2016, WTI decreased three per cent to US$44.94 per barrel as compared to US$46.50 per barrel in the same period in 2015. ARC’s realized crude oil price remained unchanged over the same time period, averaging $52.43 per barrel. During the third quarter of 2016, the differential between WTI and Edmonton posted prices narrowed to an average discount of US$2.95 per barrel compared to US$3.55 per barrel in the same period in 2015, while the average exchange rate for the Canadian dollar as compared to the US dollar was flat at $1.31. The narrowing of the differential between WTI and Edmonton Par crude oil prices served to mitigate the impact of the decrease in WTI on ARC's average realized price.
For the nine months ended September 30, 2016, ARC's realized crude oil price was 14 per cent lower as compared to the same period in 2015. This price decrease is primarily attributed to the 19 per cent decrease in WTI over the same time period, partially offset by the effect of a narrowed differential between WTI and Edmonton Par crude oil prices and a weaker Canadian dollar.
ARC's realized natural gas price decreased by 22 per cent during the third quarter of 2016 as compared to the same period in 2015, averaging $2.35 per Mcf. For the nine months ended September 30, 2016, ARC's realized natural gas
ARC Resources Ltd. | 19 |
price decreased by 35 per cent as compared to the same period in 2015. ARC's realized natural gas price is primarily benchmarked against the AECO monthly index, which was 21 and 34 per cent lower for the three and nine months ended September 30, 2016 compared to the same periods in 2015, respectively. ARC's realized natural gas price was higher than the AECO monthly index price for the three and nine months ended September 30, 2016 as a portion of ARC's production is sold at the AECO daily index and US Midwest pricing points which settled on average above the AECO monthly index.
Risk Management
ARC maintains a risk management program to reduce the volatility of revenues, increase the certainty of funds from operations, and to protect acquisition and development economics. ARC’s risk management program is governed by certain guidelines approved by the Board of Directors (the "Board"). These guidelines currently restrict risk management contracts to a maximum of 55 per cent of production guidance over the next two years and 25 per cent of production guidance beyond two years and up to five years where a specific commodity (crude oil or natural gas) cannot exceed a maximum of 70 per cent. ARC’s risk management program guidelines allow for further risk management contracts on anticipated volumes associated with new production arising from specific capital projects and acquisitions or to further protect cash flows for a specific period with approval of the Board.
Gains and losses on risk management contracts are composed of both realized gains and losses, representing the portion of risk management contracts that have settled in cash during the period, and unrealized gains or losses that represent the change in the mark-to-market position of those contracts throughout the period. ARC does not employ hedge accounting for any of its risk management contracts currently in place. ARC considers all of its risk management contracts to be effective economic hedges of its underlying business transactions.
Table 14 summarizes the total gain or loss on risk management contracts for the third quarter of 2016 compared to the same period in 2015:
Table 14
Risk Management Contracts ($ millions) | Crude Oil & Liquids | Natural Gas | Power | Q3 2016 Total | Q3 2015 Total | |||||
Realized gain (loss) on contracts (1) | 13.7 | 36.7 | (0.9 | ) | 49.5 | 38.7 | ||||
Unrealized gain (loss) on contracts (2) | (5.9 | ) | 10.1 | (0.9 | ) | 3.3 | 93.9 | |||
Gain (loss) on risk management contracts | 7.8 | 46.8 | (1.8 | ) | 52.8 | 132.6 |
(1) | Represents actual cash settlements under the respective contracts. |
(2) | Represents the change in fair value of the contracts during the period. |
Table 14a summarizes the total gain or loss on risk management contracts for the nine months ended September 30, 2016 compared to the same period in 2015:
Table 14a
Risk Management Contracts ($ millions) | Crude Oil & Liquids | Natural Gas | Power | 2016 YTD Total | 2015 YTD Total | |||||
Realized gain (loss) on contracts (1) | 53.7 | 131.5 | (2.0 | ) | 183.2 | 134.1 | ||||
Unrealized gain (loss) on contracts (2) | (73.4 | ) | (78.3 | ) | (1.7 | ) | (153.4 | ) | 110.4 | |
Gain (loss) on risk management contracts | (19.7 | ) | 53.2 | (3.7 | ) | 29.8 | 244.5 |
(1) | Represents actual cash settlements under the respective contracts. |
(2) | Represents the change in fair value of the contracts during the period. |
During the three and nine months ended September 30, 2016, ARC recorded gains of $52.8 million and $29.8 million, respectively, on its risk management contracts. These gains comprised realized gains of $49.5 million and unrealized gains of $3.3 million for the third quarter and realized gains of $183.2 million and unrealized losses of $153.4 million for the nine months ended September 30, 2016. The realized gains primarily reflect positive cash settlements received on crude oil swaps with an average price of $77.20 and crude oil collars with a floor of $70.00, on Henry Hub natural gas contracts with an average floor price of US$4.00/MMBtu, and on AECO basis swaps at an average ratio of 90.3 per cent.
ARC's third quarter 2016 unrealized losses on crude oil contracts are due to the settlement of positions during the period partially offset by a decrease in the forward curve. During the same period, net unrealized gains on natural gas contracts reflected a lower forward curve for both NYMEX Henry Hub and AECO prices as well as a wider AECO basis, offset by settled positions.
ARC Resources Ltd. | 20 |
ARC’s risk management contracts provide protection from natural gas prices for 2016 to 2020 and for crude oil for 2016 to 2018. Table 15 summarizes ARC’s average crude oil and natural gas hedged volumes as at the date of this MD&A. For a complete listing and terms of ARC’s risk management contracts at September 30, 2016, see Note 10 “Financial Instruments and Market Risk Management” in the financial statements as at and for the three and nine months ended September 30, 2016.
Table 15
Hedge Positions Summary (1) | ||||||||||||||||||||||||
As at November 10, 2016 | Q4 2016 | H1 2017 | H2 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||
Crude Oil – WTI (2) | US$/bbl | bbl/day | US$/bbl | bbl/day | US$/bbl | bbl/day | US$/bbl | bbl/day | US$/bbl | bbl/day | US$/bbl | bbl/day | ||||||||||||
Ceiling | 50.00 | 3,000 | 54.33 | 9,000 | 55.43 | 12,000 | 65.39 | 4,000 | — | — | — | — | ||||||||||||
Floor | 40.00 | 3,000 | 43.33 | 9,000 | 45.00 | 12,000 | 50.00 | 4,000 | — | — | — | — | ||||||||||||
Sold Floor | — | — | 32.50 | 6,000 | 34.17 | 9,000 | 40.00 | 4,000 | — | — | — | — | ||||||||||||
Swap | 42.10 | 2,000 | — | — | — | — | — | — | — | — | — | — | ||||||||||||
Crude Oil – Cdn$ WTI (3) | Cdn$/bbl | bbl/day | Cdn$/bbl | bbl/day | Cdn$/bbl | bbl/day | Cdn$/bbl | bbl/day | Cdn$/bbl | bbl/day | Cdn$/bbl | bbl/day | ||||||||||||
Ceiling | 83.38 | 3,000 | 83.38 | 3,000 | — | — | 80.00 | 500 | — | — | — | — | ||||||||||||
Floor | 70.00 | 3,000 | 70.00 | 3,000 | — | — | 65.00 | 500 | — | — | — | — | ||||||||||||
Swap | 77.20 | 7,000 | — | — | — | — | — | — | — | — | — | — | ||||||||||||
Total Crude Oil Volumes Hedged (bbl/day) | 15,000 | 12,000 | 12,000 | 4,500 | — | — | ||||||||||||||||||
Crude Oil – MSW (Differential to WTI) (4) | US$/bbl | bbl/day | US$/bbl | bbl/day | US$/bbl | bbl/day | US$/bbl | bbl/day | US$/bbl | bbl/day | US$/bbl | bbl/day | ||||||||||||
Swap | (3.72 | ) | 10,000 | (3.22 | ) | 10,000 | (3.22 | ) | 10,000 | — | — | — | — | — | — | |||||||||
Natural Gas – NYMEX Henry Hub (5) | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | ||||||||||||
Ceiling | 4.79 | 105,000 | 3.37 | 20,000 | 3.37 | 20,000 | 4.69 | 110,000 | 5.00 | 40,000 | — | — | ||||||||||||
Floor | 4.00 | 105,000 | 3.00 | 20,000 | 3.00 | 20,000 | 3.82 | 110,000 | 4.00 | 40,000 | — | — | ||||||||||||
Sold Floor | — | — | — | — | — | — | 2.50 | 20,000 | — | — | — | — | ||||||||||||
Swap | 4.00 | 40,000 | 4.00 | 145,000 | 4.00 | 145,000 | — | — | — | — | — | — | ||||||||||||
Natural Gas – AECO (6) | Cdn$/GJ | GJ/day | Cdn$/GJ | GJ/day | Cdn$/GJ | GJ/day | Cdn$/GJ | GJ/day | Cdn$/GJ | GJ/day | Cdn$/GJ | GJ/day | ||||||||||||
Ceiling | 2.93 | 19,891 | — | — | — | — | — | — | 3.30 | 10,000 | 3.60 | 30,000 | ||||||||||||
Floor | 2.50 | 19,891 | — | — | — | — | — | — | 3.00 | 10,000 | 3.08 | 30,000 | ||||||||||||
Swap | 2.99 | 30,000 | 2.64 | 60,000 | 2.64 | 60,000 | 2.96 | 40,000 | 3.16 | 20,000 | 3.35 | 30,000 | ||||||||||||
Total Natural Gas Volumes Hedged (MMBtu/day) | 192,288 | 221,869 | 221,869 | 147,913 | 68,435 | 56,869 | ||||||||||||||||||
Natural Gas – AECO Basis | AECO/NYMEX | MMBtu/day | AECO/NYMEX | MMBtu/day | AECO/NYMEX | MMBtu/day | AECO/NYMEX | MMBtu/day | AECO/NYMEX | MMBtu/day | AECO/NYMEX | MMBtu/day | ||||||||||||
Swap (percentage of NYMEX) | 90.3 | 140,000 | 89.7 | 145,000 | 89.7 | 145,000 | 84.9 | 90,000 | 83.7 | 40,000 | — | — | ||||||||||||
Natural Gas – AECO Basis | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | US$/MMBtu | MMBtu/day | ||||||||||||
Swap (differential to NYMEX) | — | — | (0.81 | ) | 70,000 | (0.81 | ) | 70,000 | (0.70 | ) | 50,000 | (0.62 | ) | 40,000 | (0.60 | ) | 40,000 | |||||||
Total AECO Basis Volumes Hedged (MMBtu/day) | 140,000 | 215,000 | 215,000 | 140,000 | 80,000 | 40,000 |
(1) | The prices and volumes in this table represent averages for several contracts representing different periods. The average price for the portfolio of options listed above does not have the same payoff profile as the individual option contracts. Viewing the average price of a group of options is purely for indicative purposes. All positions are financially settled against the benchmark prices disclosed in Note 10 “Financial Instruments and Market Risk Management” in the financial statements as at and for the three and nine months ended September 30, 2016. |
(2) | Crude oil prices referenced to WTI. |
(3) | Crude oil prices referenced to WTI, multiplied by the Bank of Canada monthly average noon day rate. |
(4) | MSW differential refers to the discount between WTI and the mixed sweet crude grade at Edmonton, calculated on a monthly weighted average basis in US$. |
(5) | Natural gas prices referenced to NYMEX Henry Hub last day settlement. |
(6) | Natural gas prices referenced to AECO 7(a) index. |
ARC Resources Ltd. | 21 |
The fair value of ARC’s risk management contracts at September 30, 2016 was a net asset of $253.2 million, representing the expected market price to settle ARC’s contracts at the balance sheet date after any adjustments for credit risk. This may differ from what will eventually be settled in future periods.
Exhibit 10
Operating Netbacks
ARC’s 2016 third quarter and year-to-date operating netbacks prior to hedging were $13.44 per boe and $11.76 per boe representing decreases of 17 per cent and 31 per cent as compared to the same periods in 2015, respectively.
ARC’s 2016 third quarter and year-to-date operating netbacks including realized hedging gains and losses, were $18.11 per boe and $17.38 per boe representing decreases of 10 per cent and 19 per cent as compared to the same period in 2015, respectively.
ARC Resources Ltd. | 22 |
The components of operating netbacks for the third quarter of 2016 compared to the same period in 2015 are summarized in Table 16:
Table 16
Netbacks (1) | Light and Medium Crude Oil | Heavy Crude Oil | Condensate | Natural Gas | NGLs | Q3 2016 Total | Q3 2015 Total | |||||||
($/bbl) | ($/bbl) | ($/bbl) | ($/Mcf) | ($/bbl) | ($/boe) | ($/boe) | ||||||||
Average sales price | 52.90 | 33.79 | 50.81 | 2.35 | 12.67 | 25.03 | 28.22 | |||||||
Other income | — | — | — | — | — | 0.02 | 0.09 | |||||||
Total sales | 52.90 | 33.79 | 50.81 | 2.35 | 12.67 | 25.05 | 28.31 | |||||||
Royalties | (5.42 | ) | (1.07 | ) | (9.24 | ) | (0.10 | ) | (2.41 | ) | (2.16 | ) | (2.59 | ) |
Transportation | (2.50 | ) | (0.51 | ) | (2.20 | ) | (0.28 | ) | (7.02 | ) | (2.08 | ) | (2.44 | ) |
Operating expenses (2) | (14.47 | ) | (11.74 | ) | (7.09 | ) | (0.78 | ) | (7.54 | ) | (7.37 | ) | (7.18 | ) |
Netback prior to hedging | 30.51 | 20.47 | 32.28 | 1.19 | (4.30 | ) | 13.44 | 16.10 | ||||||
Realized hedging gain | 4.80 | — | — | 0.86 | — | 4.67 | 3.93 | |||||||
Netback after hedging | 35.31 | 20.47 | 32.28 | 2.05 | (4.30 | ) | 18.11 | 20.03 | ||||||
% of total netback | 49 | 1 | 5 | 46 | (1 | ) | 100 | 100 |
(1) | Non-GAAP measure which may not be comparable to similar non-GAAP measures used by other entities. Refer to the section entitled "Non-GAAP Measures" contained within this MD&A. |
(2) | Composed of direct costs incurred to operate crude oil and natural gas wells. A number of assumptions have been made in allocating these costs between light and medium crude oil, heavy crude oil, condensate, natural gas and NGLs production. |
The components of operating netbacks for the nine months ended September 30, 2016 compared to the same period in 2015 are summarized in Table 16a:
Table 16a
Netbacks (1) | Light and Medium Crude Oil | Heavy Crude Oil | Condensate | Natural Gas | NGLs | 2016 YTD Total | 2015 YTD Total | |||||||
($/bbl) | ($/bbl) | ($/bbl) | ($/Mcf) | ($/bbl) | ($/boe) | ($/boe) | ||||||||
Average sales price | 47.92 | 28.40 | 48.16 | 1.93 | 11.56 | 22.38 | 29.48 | |||||||
Other income | — | — | — | — | — | 0.05 | 0.09 | |||||||
Total sales | 47.92 | 28.40 | 48.16 | 1.93 | 11.56 | 22.43 | 29.57 | |||||||
Royalties | (5.23 | ) | (1.17 | ) | (8.72 | ) | (0.05 | ) | (2.18 | ) | (1.91 | ) | (2.64 | ) |
Transportation | (2.71 | ) | (0.66 | ) | (2.22 | ) | (0.28 | ) | (6.69 | ) | (2.15 | ) | (2.38 | ) |
Operating expenses (2) | (12.61 | ) | (13.06 | ) | (7.90 | ) | (0.68 | ) | (7.03 | ) | (6.61 | ) | (7.49 | ) |
Netback prior to hedging | 27.37 | 13.51 | 29.32 | 0.92 | (4.34 | ) | 11.76 | 17.06 | ||||||
Realized hedging gain | 5.98 | — | — | 1.01 | — | 5.62 | 4.37 | |||||||
Netback after hedging | 33.35 | 13.51 | 29.32 | 1.93 | (4.34 | ) | 17.38 | 21.43 | ||||||
% of total netback | 51 | — | 5 | 45 | (1 | ) | 100 | 100 |
(1) | Non-GAAP measure which may not be comparable to similar non-GAAP measures used by other entities. Refer to the section entitled "Non-GAAP Measures" contained within this MD&A. |
(2) | Composed of direct costs incurred to operate crude oil and natural gas wells. A number of assumptions have been made in allocating these costs between light and medium crude oil, heavy crude oil, condensate, natural gas and NGLs production. |
ARC Resources Ltd. | 23 |
Exhibit 11
(1) | Non-GAAP measure which may not be comparable to similar non-GAAP measures used by other entities. Refer to the section entitled "Non-GAAP Measures" contained within this MD&A. |
(2) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the section entitled "Funds from Operations" contained within this MD&A. |
Royalties
ARC pays royalties to the respective provincial governments and landowners of the three western Canadian provinces in which it operates. Approximately 84 per cent of these royalties are Crown royalties. Each province that ARC operates in has established a separate and distinct royalty regime which impacts ARC’s average corporate royalty rate.
In British Columbia, two thirds of ARC’s royalty expense stems from production of crude oil. This has changed significantly from periods prior to 2016 when the majority of ARC’s royalty expense was attributed to the production of natural gas. This change in the composition of royalty expense is due to lower natural gas prices which have reduced ARC's natural gas royalties, combined with increased crude oil production from ARC's Tower field. Royalty rates for crude oil are based on commodity prices, well royalty classification and well productivity.
In Alberta, the majority of ARC’s royalties are related to crude oil production where royalty rates are based on reference prices, production levels and well depths. Similarly, most royalties remitted in Saskatchewan relate to crude oil production and royalty calculations are based on commodity prices, the classification of the product and well productivity.
Each province has various incentive programs in place to promote drilling by reducing the overall royalty expense for producers and offsetting gathering and processing costs. In most cases, the incentive period lasts for a finite period after which point the royalty rate usually increases depending on the production rate of the well and prevailing market commodity prices.
In 2016, the provincial government of Alberta announced the key highlights of the Modernized Royalty Framework ("MRF") that will be effective on January 1, 2017. These highlights include the replacement of royalty credits and holidays on conventional wells through a Drilling and Completion Cost Allowance to emulate a revenue minus cost framework,
ARC Resources Ltd. | 24 |
a post-payout royalty rate based on commodity prices, and the reduction of royalty rates for mature wells, with the intent of delivering a neutral internal rate of return for any given play compared to the current royalty framework. No changes will be made to the royalty structure of wells drilled prior to January 2017 for a ten year period from the royalty program's implementation date unless a producer applies to opt in to the MRF for wells that otherwise would have not been drilled. Details of the MRF calibration formulas have been released and more specific information can be found on the provincial government's website.
For ARC, the economics of drilling in Ante Creek, Montney and Pembina Cardium, within expected price ranges, are relatively consistent with those under the previous Alberta Royalty Framework. In Pouce Coupe, economics of drilling are improved as a result of the MRF. ARC has opted in to the MRF for the drilling of Pouce Coupe wells that have been added to ARC's fourth quarter 2016 development program.
Total royalties as a percentage of pre-hedged commodity product sales revenue decreased from 9.2 per cent ($2.59 per boe) in the third quarter of 2015 to 8.6 per cent ($2.16 per boe) in the third quarter of 2016. Total royalties decreased from $25.6 million in the third quarter of 2015 to $22.9 million in the third quarter of 2016. For the nine months ended September 30, 2016 total royalties represented 8.5 per cent of pre-hedged commodity product sales ($1.91 per boe) as compared to 8.9 per cent ($2.64 per boe) for the same period in 2015. The decrease reflects the sliding scale effect of decreased commodity prices on royalty rates, as well as the increase in natural gas production volumes which have lower royalty rates as compared to the rates applied to crude oil and liquids production volumes.
Exhibit 12
Operating and Transportation Expenses
Operating expenses increased $0.19 per boe to $7.37 per boe in the third quarter of 2016 compared to $7.18 per boe in the third quarter of 2015. On an absolute dollar basis, operating expenses have also increased by $7.2 million or 10 per cent in the third quarter of 2016 as compared to the third quarter of 2015. The increase in operating expenses for this period primarily relates to additional electricity costs associated with properties acquired in the second and third quarters of 2016 and increased maintenance activities.
For the nine months ended September 30, 2016, operating expenses decreased by $14.1 million or $0.88 per boe compared to the prior year. The decrease in operating costs for the nine months ended September 30, 2016 is mainly a result of the disposition of certain non-core assets in 2015 having higher average operating costs, increased production volumes from new wells with relatively lower average operating costs, and diligent cost control efforts, including negotiating service cost decreases with many of ARC's suppliers throughout 2015 and into 2016. Additionally, electricity costs were lower in the nine months ended September 30, 2016 at an average Alberta Power Pool Rate of $16.89 per megawatt hour compared to an average of $37.48 per megawatt hour in the nine months ended September 30, 2015, further reducing operating costs year-over-year.
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Exhibit 13
Transportation expenses decreased $0.36 per boe to $2.08 per boe during the third quarter of 2016 compared to $2.44 per boe in the third quarter of 2015. On an absolute dollar basis, transportation costs have also decreased by $2.0 million or 8 per cent in the third quarter of 2016 as compared to the third quarter of 2015. For the nine months ended September 30, 2016, transportation expenses decreased by $2.7 million or $0.23 per boe compared to the prior year. Transportation per boe was fifteen per cent lower for the third quarter of 2016 and ten per cent lower for the nine months ended September 30, 2016 compared to same periods in 2015. The decrease in transportation expenses is a result of reduced trucking costs at Parkland/Tower area, which became pipeline-connected for its crude oil and liquids volumes over the course of 2015 and early 2016, as well as increased volumes for the three and nine months ended September 30, 2016 compared to the same periods in the prior year.
Exhibit 14
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G&A Expenses and Share-Based Compensation
Table 17 is a breakdown of G&A and share-based compensation expenses:
Table 17
Three Months Ended | Nine Months Ended | |||||||||||
September 30 | September 30 | |||||||||||
G&A and Share-Based Compensation | 2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||
($ millions, except per boe) | ||||||||||||
G&A expenses before share-based compensation expenses and recoveries (1) | 21.7 | 23.2 | (6 | ) | 71.3 | 75.4 | (5 | ) | ||||
Capitalized G&A and overhead recoveries | (6.3 | ) | (9.1 | ) | (31 | ) | (17.8 | ) | (27.1 | ) | (34 | ) |
G&A expenses before share-based compensation expenses | 15.4 | 14.1 | 9 | 53.5 | 48.3 | 11 | ||||||
G&A – share-based compensation expenses (2) | 9.0 | 6.6 | 36 | 30.6 | 6.3 | 100 | ||||||
Total G&A | 24.4 | 20.7 | 18 | 84.1 | 54.6 | 54 | ||||||
Total G&A per boe | 2.30 | 2.10 | 10 | 2.58 | 1.78 | 45 |
(1) | Includes expenses recognized under the DSU Plan. |
(2) | Comprises expenses recognized under the RSU and PSU, Share Option and LTRSA Plans. |
Exhibit 15
G&A expenses before share-based compensation expenses increased by nine per cent to $15.4 million in the third quarter of 2016 from $14.1 million in the third quarter of 2015. For the nine months ended September 30, 2016, ARC's G&A expenses before share-based compensation expenses increased to $53.5 million from $48.3 million in the same period of 2015. While base G&A decreased with lower compensation expenses associated with a smaller workforce and reduced administrative spending, ARC realized lower capitalized G&A as a result of reduced capital spending in 2016.
Share-Based Compensation Plans – Restricted Share Unit and Performance Share Unit Plan, Share Option Plan, Deferred Share Unit Plan, and Long-term Restricted Share Award Plan
Restricted Share Unit and Performance Share Unit Plan
The RSU and PSU Plan is designed to offer each eligible employee and officer (the “plan participants”) cash compensation in relation to the underlying value of a specified number of share units. The RSU and PSU Plan consists of RSUs for which the number of units is fixed and will vest over a period of three years and PSUs for which the number of units is variable and will vest at the end of three years.
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Upon vesting, the plan participant is entitled to receive a cash payment based on the underlying value of the share units plus accrued dividends. The cash compensation issued upon vesting of the PSUs is dependent upon the total return performance of ARC compared to its peers. Total return is calculated as a sum of the change in the market price of the common shares in the period plus the amount of dividends in the period. A performance multiplier is applied to the PSUs based on the percentile rank of ARC’s total shareholder return compared to its peers. The performance multiplier ranges from zero if ARC’s performance ranks in the bottom quartile, to two for top quartile performance.
ARC recorded G&A expenses of $7.7 million during the third quarter of 2016 in accordance with the RSU and PSU Plan, as compared to expenses of $5.6 million during the third quarter of 2015. For the nine months ended September 30, 2016, ARC recorded an expense related to the RSU and PSU Plan of $26.4 million, an increase of $23.3 million from nine months ended September 30, 2015. Compensation charges for both the third quarter of 2016 and the nine months ended September 30, 2016 as compared to the same periods of the prior year increased due to the valuation of awards at September 30, 2016 as ARC's share price increased from $16.70 per share outstanding at December 31, 2015 and $22.11 per share outstanding at June 30, 2016 to $23.73 at September 30, 2016. By comparison, in early 2015, a recovery was recognized in accordance with the RSU and PSU Plan due to negative pressure on ARC's share price.
During the nine months ended September 30, 2016, ARC made cash payments of $14.0 million in respect of the RSU and PSU Plan ($10.9 million for the nine months ended September 30, 2015). Of these payments, $11.0 million were in respect of amounts recorded to G&A expenses ($8.4 million for the nine months ended September 30, 2015) and $3.0 million were in respect of amounts recorded to operating expenses and capitalized as PP&E and E&E assets ($2.5 million for the nine months ended September 30, 2015). These amounts were accrued in prior periods.
Table 18 shows the changes to the RSU and PSU Plan during 2016:
Table 18
RSU and PSU Plan (number of units, thousands) | RSUs | PSUs (1) | Total RSUs and PSUs |
Balance, December 31, 2015 | 730 | 1,577 | 2,307 |
Granted | 387 | 676 | 1,063 |
Distributed | (297) | (454) | (751) |
Forfeited | (99) | (86) | (185) |
Balance, September 30, 2016 | 721 | 1,713 | 2,434 |
(1) | Based on underlying units before any effect of the performance multiplier. |
The liability associated with the RSUs and PSUs granted is recognized in the consolidated statements of income over the vesting period while being adjusted each period for changes in the underlying share price, accrued dividends and the number of PSUs expected to be issued on vesting. In periods where substantial share price fluctuation occurs, ARC’s G&A expenses are subject to greater volatility.
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Due to the variability in the future payments under the plan, ARC estimates that between $17.5 million and $101.5 million will be paid out in 2017 through 2019 based on the current share price, accrued dividends, and ARC’s market performance relative to its peers. Table 19 is a summary of the range of future expected payments under the RSU and PSU Plan based on variability of the performance multiplier and units outstanding under the RSU and PSU Plan as at September 30, 2016:
Table 19
Value of RSU and PSU Plan as at | ||||||
September 30, 2016 | Performance multiplier | |||||
(units thousands and $ millions, except per share) | — | 1.0 | 2.0 | |||
Estimated units to vest | ||||||
RSUs | 737 | 737 | 737 | |||
PSUs | — | 1,770 | 3,540 | |||
Total units (1) | 737 | 2,507 | 4,277 | |||
Share price (2) | 23.73 | 23.73 | 23.73 | |||
Value of RSU and PSU Plan upon vesting | 17.5 | 59.5 | 101.5 | |||
2017 | 8.3 | 19.1 | 29.8 | |||
2018 | 6.2 | 21.3 | 36.5 | |||
2019 | 3.0 | 19.1 | 35.2 |
(1) | Includes additional estimated units to be issued under the RSU and PSU Plan for dividends accrued to date. |
(2) | Per share outstanding. Values will fluctuate over the vesting period based on the volatility of the underlying share price. Assumes a future share price of $23.73, which is based on the closing share price at September 30, 2016. |
Share Option Plan
Share options are granted to employees and consultants of ARC, vesting evenly on the fourth and fifth anniversaries of their respective grant dates, and have a maximum term of seven years. The option holder has the right to exercise the options at the original exercise price or at a reduced exercise price, equal to the exercise price at grant date less all dividends paid subsequent to the grant date and prior to the exercise date.
At September 30, 2016, ARC had four million share options outstanding under this plan, representing 1.1 per cent of outstanding shares, with a weighted average exercise price of $21.35 per share. At September 30, 2016, approximately 0.7 million share options were exercisable with a weighted average exercise price of $17.89 per share. Compensation expense related to share options of $1.1 million has been recorded during the third quarter of 2016 ($3.2 million for the nine months ended September 30, 2016) compared to $1.0 million for the third quarter of 2015 ($2.5 million for the nine months ended September 30, 2015) and is included within G&A expenses.
Deferred Share Unit Plan
ARC has a DSU Plan for its non-employee directors under which each director receives a minimum of 60 per cent of their total annual remuneration in the form of DSUs. Each DSU fully vests on the date of grant but is settled in cash only when the director has ceased to be a member of the Board. For the three and nine months ended September 30, 2016, G&A expenses of $1.1 million and $4.0 million, respectively, were recorded in relation to the DSU Plan (G&A recoveries of $0.4 million for the same periods in 2015).
Long-term Restricted Share Award Plan
ARC's LTRSA Plan awards shares of ARC to qualifying officers and employees and is intended to further align participant compensation with the interests of the Company and its shareholders over the long-term. LTRSA grants consist of restricted common shares that are awarded at the date of grant and a cash payment made equal to the estimated personal tax obligation associated with the total award. The restricted shares issued on the grant date of the award are held in trust until the vesting conditions have been met.
While in trust, the restricted shares earn dividends which are reinvested into ARC common shares via the stock dividend program and these stock dividends are also held in trust until vested. Each LTRSA has a 10 year term and vests evenly on the eighth, ninth, and tenth anniversaries of the grant date of the award. Restricted shares and any accrued dividends that are subject to forfeiture will be redeemed and cancelled by ARC.
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Compensation expense associated with the cash payment is recognized at the fair value on the grant date, while expense associated with the restricted common shares is estimated as the fair value of the award equal to the previous five-day weighted average trading price of ARC shares on the grant date and is recognized over the vesting period.
At September 30, 2016, ARC had 0.2 million restricted shares outstanding under this plan. ARC recorded G&A expenses of $0.2 million and $1.0 million relating to the LTRSA Plan during the three and nine months ended September 30, 2016 ($nil and $0.7 million for the three and nine months ended September 30, 2015), respectively.
Interest and Financing Charges
Interest and financing charges decreased two per cent to $12.5 million in the third quarter of 2016 from $12.7 million in the third quarter of 2015. For the nine months ended September 30, 2016, interest and financing charges were $37.9 million as compared to $37.7 million for the same period in 2015, an increase of one per cent.
At September 30, 2016, ARC had $1.0 billion of long-term debt outstanding, including a current portion of $50.3 million that is due for repayment within the next 12 months. ARC's debt balance is fixed at a weighted average interest rate of 4.36 per cent. 96 per cent (US$743.8 million) of ARC’s debt outstanding is denominated in US dollars.
Foreign Exchange Gains and Losses
ARC recorded a foreign exchange loss of $8.7 million in the third quarter of 2016 compared to a loss of $72.2 million in the third quarter of 2015. During the three months ended September 30, 2015, the value of the US dollar relative to the Canadian dollar increased to $1.34 at September 30, 2015 from $1.25 at June 30, 2015, resulting in an unrealized loss on the revaluation of ARC's US dollar denominated debt. For the three months ended September 30, 2016, the value of the US dollar relative to the Canadian dollar increased only slightly, to $1.31 at September 30, 2016 from $1.30 at June 30, 2016.
For the nine months ended September 30, 2016, ARC recorded a foreign exchange gain of $56.6 million compared to a loss of $143.9 million for the same period in the prior year. During the nine months ended September 30, 2015, the value of the US dollar relative to the Canadian dollar increased to $1.34 at September 30, 2015 from $1.16 at December 31, 2014, resulting in an unrealized loss on the revaluation of ARC's US dollar denominated debt. During the nine months ended September 30, 2016, the value of the US dollar relative to the Canadian dollar decreased to $1.31 at September 30, 2016 from $1.38 at December 31, 2015, resulting in an unrealized gain on the revaluation of ARC's US dollar denominated debt.
Table 20 shows the various components of foreign exchange gains and losses:
Table 20
Three Months Ended | Nine Months Ended | |||||||||||
September 30 | September 30 | |||||||||||
Foreign Exchange Gains and Losses ($ millions) | 2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||
Unrealized gain (loss) on US denominated debt | (7.7 | ) | (72.2 | ) | (89 | ) | 57.6 | (143.6 | ) | (140 | ) | |
Realized gain on US denominated transactions | (1.0 | ) | — | (100 | ) | (1.0 | ) | (0.3 | ) | 100 | ||
Total foreign exchange gain (loss) | (8.7 | ) | (72.2 | ) | (88 | ) | 56.6 | (143.9 | ) | (139 | ) |
Taxes
ARC recorded a current income tax expense of $2 million in the third quarter of 2016 ($1 million expense for the nine months ended September 30, 2016) compared to a recovery of $10.1 million during the third quarter of 2015 ($6.0 million recovery for the nine months ended September 30, 2015). The increase in current tax expense for the three and nine months ended September 30, 2016 as compared to the same periods in 2015 reflects a recovery in commodity prices since the beginning of 2016.
During the third quarter of 2016, a deferred income tax expense of $6.8 million was recorded compared to a deferred income tax recovery of $48.1 million in the third quarter of 2015. ARC recorded a deferred income tax recovery in 2015 as a result of impairment charges recorded on its assets. No such charges or related recoveries were recognized in 2016.
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During the nine months ended September 30, 2016, a deferred income tax recovery of $27.5 million was recorded compared to a $10.0 million deferred income tax recovery for the nine months ended September 30, 2015. ARC’s increase in deferred tax recovery primarily relates to unrealized losses recorded on risk management contracts in 2016 and a net increase to ARO as compared to the 2015 period, offset by the impact of the 2015 impairment charge.
The income tax pools (detailed in Table 21) are deductible at various rates and annual deductions associated with the initial tax pools will decline over time.
Table 21
Income Tax Pool Type ($ millions) | September 30, 2016 | Annual Deductibility | ||
Canadian oil and gas property expense | 684.4 | 10% declining balance | ||
Canadian development expense | 798.1 | 30% declining balance | ||
Canadian exploration expense | — | 100 | % | |
Undepreciated capital cost | 784.6 | Primarily 25% declining balance | ||
Other | 16.0 | Various rates, 7% declining balance to 20% | ||
Total federal tax pools | 2,283.1 | |||
Additional Alberta tax pools | 6.5 | Various rates, 25% declining balance to 100% |
DD&A Expense and Impairment Charges
ARC records DD&A expense on its PP&E over the individual useful lives of the assets employing the unit of production method using proved plus probable reserves and associated estimated future development capital required for its crude oil and natural gas assets, and a straight-line method for its corporate administrative assets. Assets in the E&E phase are not amortized. For the three and nine months ended September 30, 2016, ARC recorded DD&A expense of $124.3 million and $384.1 million as compared to $146.3 million and $464.1 million for the three and nine months ended September 30, 2015, respectively. The decrease in DD&A per boe before impairment for the three and nine months ended September 30, 2016 reflects the effect of a lower depletable base as result of reduced costs of finding and development of reserves and $469.6 million of impairment charges recorded during the year ended December 31, 2015.
Impairment is recognized when the carrying value of an asset or group of assets exceeds its recoverable amount, defined as the higher of its value in use or fair value less costs of disposal. Any asset impairment that is recorded is recoverable to its original value less any associated DD&A expense should there be indicators that the recoverable amount of the asset has increased in value since the time of recording the initial impairment. For the nine months ended September 30, 2016, an impairment charge of $0.1 million was recognized associated with the disposition of non-core assets in the southern Alberta district. This was partially offset by a recovery of impairment recognized on the re-measurement of a pre-acquisition working interest as a result of the acquisition of assets in the Pembina district and a recovery related to the final statement of adjustments related to a prior year disposition. For the nine months ended September 30, 2015, an impairment charge of $338.3 million was recognized; $320.0 million due to a decline in expected future commodity prices and $18.3 million associated with the disposition of non-core assets located in the southern Alberta district. As future commodity prices remain volatile, impairment charges or recoveries could be recorded in future periods.
A breakdown of DD&A expense and impairment charges is summarized in Table 22:
Table 22
Three Months Ended | Nine Months Ended | |||||||||||
September 30 | September 30 | |||||||||||
DD&A Expense and Impairment Charges ($ millions, except per boe amounts) | 2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||
Depletion of crude oil and natural gas assets | 122.9 | 144.8 | (15 | ) | 380.0 | 459.4 | (17 | ) | ||||
Depreciation of administrative assets | 1.4 | 1.5 | (7 | ) | 4.1 | 4.7 | (13 | ) | ||||
Impairment (recovery) charges | (0.3 | ) | 326.6 | (100 | ) | 0.1 | 338.3 | (100 | ) | |||
Total DD&A expense and impairment charges | 124.0 | 472.9 | (74 | ) | 384.2 | 802.4 | (52 | ) | ||||
DD&A per boe before impairment | 11.73 | 14.83 | (21 | ) | 11.78 | 15.12 | (22 | ) |
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Capital Expenditures, Acquisitions and Dispositions
Capital expenditures before acquisitions, dispositions or purchases of undeveloped land totaled $122.5 million in the third quarter of 2016 as compared to $164.2 million during the third quarter of 2015. This total includes development and production additions to PP&E of $120.5 million and additions to E&E assets of $2.0 million. PP&E expenditures include additions to crude oil and natural gas development and production assets and administrative assets. E&E expenditures include asset additions in areas that have been determined by Management to be in the E&E stage.
A breakdown of capital expenditures, acquisitions and dispositions is shown in Table 23:
Table 23
Three Months Ended September 30 | ||||||||||||||
2016 | 2015 | |||||||||||||
Capital Expenditures ($ millions) | E&E | PP&E | Total | E&E | PP&E | Total | % Change | |||||||
Geological and geophysical | 0.2 | 3.3 | 3.5 | 5.1 | 2.9 | 8.0 | (56 | ) | ||||||
Drilling and completions | 0.8 | 58.2 | 59.0 | 14.4 | 103.5 | 117.9 | (50 | ) | ||||||
Plant and facilities | 1.0 | 58.8 | 59.8 | — | 37.8 | 37.8 | 58 | |||||||
Administrative assets | — | 0.2 | 0.2 | — | 0.5 | 0.5 | (60 | ) | ||||||
Total capital expenditures | 2.0 | 120.5 | 122.5 | 19.5 | 144.7 | 164.2 | (25 | ) | ||||||
Undeveloped land | — | — | — | — | 0.6 | 0.6 | (100 | ) | ||||||
Total capital expenditures including undeveloped land purchases | 2.0 | 120.5 | 122.5 | 19.5 | 145.3 | 164.8 | (26 | ) | ||||||
Acquisitions (1) | — | 31.6 | 31.6 | — | — | — | 100 | |||||||
Dispositions (2) | — | (0.3 | ) | (0.3 | ) | (7.6 | ) | (13.1 | ) | (20.7 | ) | (99 | ) | |
Total capital expenditures, land purchases and net acquisitions and dispositions | 2.0 | 151.8 | 153.8 | 11.9 | 132.2 | 144.1 | 7 |
(1) | Excludes $nil million of non-cash petroleum and natural gas property transactions in the third quarter of 2016 and 2015, respectively. |
(2) | Represents proceeds and adjustments to proceeds from divestitures. |
ARC Resources Ltd. | 32 |
For the nine months ended September 30, 2016, capital expenditures before property acquisitions, dispositions or purchases of undeveloped land totaled $294.2 million as compared to $392.1 million during the same period of 2015. This total includes development and production additions to PP&E of $267.7 million and additions to E&E assets of $26.5 million.
Table 23a
Nine Months Ended September 30 | ||||||||||||||
2016 | 2015 | |||||||||||||
Capital Expenditures ($ millions) | E&E | PP&E | Total | E&E | PP&E | Total | % Change | |||||||
Geological and geophysical | 0.5 | 10.1 | 10.6 | 5.1 | 8.3 | 13.4 | (21 | ) | ||||||
Drilling and completions | 16.6 | 121.3 | 137.9 | 14.9 | 237.8 | 252.7 | (45 | ) | ||||||
Plant and facilities | 9.4 | 135.3 | 144.7 | 0.3 | 124.4 | 124.7 | 16 | |||||||
Administrative assets | — | 1.0 | 1.0 | — | 1.3 | 1.3 | (23 | ) | ||||||
Total capital expenditures | 26.5 | 267.7 | 294.2 | 20.3 | 371.8 | 392.1 | (25 | ) | ||||||
Undeveloped land | — | — | — | — | 2.1 | 2.1 | (100 | ) | ||||||
Total capital expenditures including undeveloped land purchases | 26.5 | 267.7 | 294.2 | 20.3 | 373.9 | 394.2 | (25 | ) | ||||||
Acquisitions (1) | — | 158.3 | 158.3 | 14.1 | — | 14.1 | 100 | |||||||
Dispositions (2) | — | (3.3 | ) | (3.3 | ) | (7.6 | ) | (39.0 | ) | (46.6 | ) | (93 | ) | |
Total capital expenditures, land purchases and net acquisitions and dispositions | 26.5 | 422.7 | 449.2 | 26.8 | 334.9 | 361.7 | 24 |
(1) | Excludes $nil and $28.7 million of non-cash petroleum and natural gas property transactions in the nine months ended September 30, 2016 and 2015, respectively. |
(2) | Represents proceeds and adjustments to proceeds from divestitures. |
During the second quarter of 2016, ARC divested of certain non-core shallow natural gas assets located in southern Alberta. The divested properties had associated natural gas production of approximately 3.9 MMcf per day.
At the end of the second quarter of 2016, ARC closed the acquisition of certain properties producing approximately 2,200 boe per day of mainly light, sweet crude oil in the Pembina area of Alberta for cash consideration of $111.5 million, subject to final adjustments. The major assets acquired consisted of additional working interest in properties where ARC already held a significant interest. In the third quarter of 2016, ARC closed another acquisition of certain properties producing approximately 800 boe per day of mainly light, sweet crude oil in the Pembina area of Alberta for cash consideration of $31.6 million, subject to final adjustments. The major asset acquired consisted of an additional working interest in a property where ARC already held a significant interest. The transactions were recorded as a business combination under IFRS. Refer to Note 4 "Business Combinations" in the financial statements as at and for the three and nine months ended September 30, 2016.
Subsequent to September 30, 2016, ARC closed the acquisition of the remaining working interest in a certain property producing mainly light, sweet crude oil in the Pembina area of Alberta. As of September 30, 2016, ARC held over 99 per cent working interest in this property. The acquisition gives ARC full control over the operation of the asset.
Asset Retirement Obligations and Reclamation Fund
At September 30, 2016, ARC has recorded ARO of $746.3 million ($573.2 million at December 31, 2015) for the future abandonment and reclamation of ARC’s properties. The estimated ARO includes assumptions in respect of actual costs to abandon wells or reclaim the property, the time frame in which such costs will be incurred, as well as annual inflation factors in order to calculate the undiscounted total future liability. The future liability has been discounted at a liability-specific risk-free interest rate of 1.7 per cent (2.2 per cent at December 31, 2015).
At the end of the third quarter of 2016, ARC recognized ARO of $16.4 million associated with the acquisition of certain properties in the Pembina area of Alberta. The acquired obligations were recognized on the date of acquisition at fair value and then discounted at a liability-specific risk-free interest rate of 1.7 per cent at September 30, 2016. The ARO revaluation of $52.8 million from the change in the discount rate was recorded as an increase to the liability, with a corresponding increase to the carrying amount of the related asset in PP&E.
Accretion charges of $3 million and $9.1 million for the three and nine months ended September 30, 2016 ($3.3 million and $10.1 million for the same period in 2015), respectively, have been recognized in the unaudited condensed interim consolidated statements of income (the "statements of income") to reflect the increase in ARO associated with the
ARC Resources Ltd. | 33 |
passage of time. Actual spending under ARC’s abandonment and reclamation program for the three and nine months ended September 30, 2016 was $4.6 million and $8.5 million ($4.5 million and $8.1 million for the same period in 2015), respectively. For the three and nine months ended September 30, 2016, acquisitions increased ARO by $2.5 million and $16.4 million ($nil for same periods in 2015), respectively.
In 2005, ARC established a restricted reclamation fund to finance obligations specifically associated with its Redwater property. Minimum contributions to this fund will be approximately $59 million in total over the next 39 years. The balance of this fund totaled $35.7 million at September 30, 2016 compared to $34.3 million at December 31, 2015. Under the terms of ARC’s investment policy, cash in the reclamation fund can only be invested in certain securities and require a minimum credit rating for investments of A or higher.
Environmental stewardship is a core value at ARC and abandonment and reclamation activities continue to be made in a prudent, responsible manner with the oversight of the Health, Safety and Environment Committee of the Board. Ongoing abandonment expenditures for all of ARC’s assets are funded entirely out of cash flow from operating activities. ARC’s Liability Management Rating is well within the Alberta Energy Regulator’s guidelines at this date.
Exhibit 16
Capitalization, Financial Resources and Liquidity
ARC’s long-term goal is to fund current period reclamation expenditures, dividend payments and capital expenditures necessary for the replacement of production declines using funds from operations. Value-creating activities will be financed with a combination of funds from operations and other sources of capital.
ARC typically uses three markets to raise capital: equity, bank debt and long-term notes. Long-term notes are issued to large institutional investors normally with an average term of five to 12 years. The cost of this debt is based upon two factors: the current rate of long-term government bonds and ARC’s credit spread. ARC’s weighted average interest rate on its outstanding long-term notes is currently 4.36 per cent.
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A breakdown of ARC’s capital structure as at September 30, 2016 and December 31, 2015 is outlined in Table 24:
Table 24
Capital Structure and Liquidity ($ millions, except per cent and ratio amounts) | September 30, 2016 | December 31, 2015 | ||
Long-term debt (1) | 1,015.5 | 1,114.3 | ||
Working capital surplus (2) | (6.1 | ) | (129.2 | ) |
Net debt | 1,009.4 | 985.1 | ||
Market capitalization (3) | 8,357.7 | 5,796.6 | ||
Total capitalization | 9,367.1 | 6,781.7 | ||
Net debt as a percentage of total capitalization (%) | 10.8 | 14.5 | ||
Net debt to annualized funds from operations (ratio) | 1.7 | 1.3 |
(1) | Includes a current portion of long-term debt of $50.3 million at September 30, 2016 and $57.9 million at December 31, 2015. |
(2) | Working capital surplus or deficit is calculated as current assets less current liabilities as they appear on the unaudited condensed interim consolidated balance sheets (the "balance sheets"), and excludes current unrealized amounts pertaining to risk management contracts, assets held for sale and ARO contained within liabilities associated with assets held for sale, as well as the current portion of long-term debt and current portion of ARO. |
(3) | Calculated using the total common shares outstanding at September 30, 2016 multiplied by the closing share price of $23.73 at September 30, 2016 (closing share price of $16.70 at December 31, 2015). |
Management intends to keep its net debt balance to a ratio of less than two times annualized funds from operations for temporary periods with a long-term strategy to keep its net debt balance to a ratio of between one to 1.5 times annualized funds from operations and less than 20 per cent of total market capitalization. This strategy has resulted in manageable debt levels to date and has positioned ARC to remain well within its debt covenants. Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016.
ARC closed the quarter with a strong balance sheet with $1,009.4 million of net debt outstanding. With the acquisition of Pembina assets closing in the second and third quarters of 2016, the net debt to 2016 annualized funds from operations ratio was 1.7 times and net debt was approximately 11 per cent of ARC's total capitalization at the end of the third quarter. Management expects the ratio to return to target levels of approximately 1.5 times by year-end as cash flows associated with the acquisitions are realized throughout the second half of 2016.
Exhibit 17
(1) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the section entitled "Funds from Operations” contained within this MD&A. |
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The following exhibits the balance of cash inflows and outflows over the past four years and for the year-to-date. In any period when cash outflows exceed inflows, ARC’s net debt balance will increase to cover the shortfall and will decrease in any period when inflows exceed outflows.
Exhibit 18
Table 25
2016 YTD | 2015 | 2014 | 2013 | 2012 | ||||||
Cash Inflows | ||||||||||
Funds from operations (1) | 444.8 | 773.4 | 1,124.0 | 861.8 | 719.8 | |||||
DRIP & SDP | 94.1 | 195.5 | 151.0 | 130.1 | 116.3 | |||||
Equity issuance (net proceeds) | — | 386.1 | — | — | 330.7 | |||||
Dispositions (2) | 3.3 | 88.8 | 39.3 | 89.8 | 4.1 | |||||
Total | 542.2 | 1,443.8 | 1,314.3 | 1,081.7 | 1,170.9 | |||||
Cash Outflows | ||||||||||
Dividends declared | 175.3 | 410.5 | 380.2 | 374.0 | 357.4 | |||||
Capital expenditures (3) | 293.8 | 547.9 | 1,007.6 | 874.2 | 607.7 | |||||
Acquisitions (2) | 158.3 | 14.4 | 73.5 | 36.4 | 36.5 | |||||
Total | 627.4 | 972.8 | 1,461.3 | 1,284.6 | 1,001.6 |
(1) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the section entitled "Funds from Operations" contained within this MD&A. |
(2) | Excludes non-cash property transactions. |
(3) | Excludes capital expenditures attributable to non-cash share options and asset retirement expenditures. |
At September 30, 2016, ARC had total available credit facilities of approximately $2.3 billion with debt of $1.0 billion currently outstanding. ARC’s long-term debt balance includes a current portion of $50.3 million at September 30, 2016 ($57.9 million at December 31, 2015), reflecting principal payments that are due to be paid within the next 12 months.
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ARC intends to finance these obligations by using cash on hand or drawing on its syndicated credit facility at the time the payments are due.
ARC’s debt agreements contain a number of covenants, all of which were met as at September 30, 2016. These agreements are available at www.sedar.com. ARC calculates its covenants four times annually. The major financial covenants of the syndicated credit facility are described below:
Table 26
Covenant Description | Estimated Position at September 30, 2016 (1) | |
Long-term debt and letters of credit not to exceed three and a quarter times trailing twelve month net income before non-cash items, income taxes and interest expense | 1.5 | |
Long-term debt, letters of credit, and subordinated debt not to exceed four times trailing twelve month net income before non-cash items, income taxes and interest expense | 1.5 | |
Long-term debt and letters of credit not to exceed 50 per cent of the book value of shareholders’ equity and long-term debt, letters of credit and subordinated debt | 20 | % |
(1) | Estimated position, subject to final approval. |
Shareholders’ Equity
At September 30, 2016, there were 352.2 million shares outstanding, an increase of five million shares compared to December 31, 2015. The five million shares issued are attributable to those issued to participants in the DRIP and SDP.
At September 30, 2016, ARC had four million share options outstanding under its Share Option Plan, representing 1.1 per cent of outstanding shares, with a weighted average exercise price of $21.35 per share. These options vest in equal parts on the fourth and fifth anniversaries of the grant date. At September 30, 2016, approximately 0.7 million share options were exercisable with a weighted average exercise price of $17.89 per share. For more information on the Share Option Plan, refer to the section entitled "Share Option Plan” contained within this MD&A.
At September 30, 2016, ARC had 0.2 million restricted shares outstanding under its LTRSA Plan. These awards vest evenly on the eighth, ninth and tenth anniversaries of the grant date. For more information on the restricted shares outstanding and held in trust under ARC's LTRSA Plan, refer to the section entitled "Long-term Restricted Share Award Plan” contained within this MD&A.
Dividends
In the third quarter of 2016, ARC declared dividends totaling $52.9 million ($0.15 per share outstanding) compared to $103.0 million ($0.30 per share outstanding) during the third quarter of 2015. ARC reduced its monthly dividend to $0.05 per share outstanding commencing with the February dividend payable March 15, 2016.
As a dividend-paying corporation, ARC declares monthly dividends to its shareholders. ARC continually assesses dividend levels in light of commodity prices, capital expenditure programs, and production volumes to ensure that dividends are in line with the long-term strategy and objectives of ARC as per the following guidelines:
• | To maintain a dividend policy that, in normal times, in the opinion of Management and the Board, is sustainable after factoring in the impact of current commodity prices on funds from operations. ARC’s objective is to normalize the effect of volatility of commodity prices rather than to pass that volatility onto shareholders in the form of fluctuating monthly dividends. |
• | To maintain ARC’s financial flexibility, by reviewing ARC’s level of debt to equity and debt to funds from operations. The use of funds from operations and proceeds from equity offerings to fund capital development activities reduces the need to use debt to finance these expenditures. |
ARC is focused on value creation and long term returns to shareholders, with the dividend being a key component of its business strategy. As a result of the reduction of the monthly dividend to $0.05 per share outstanding, ARC’s dividend as a percent of funds from operations has decreased from an average of 59 per cent in the third quarter of 2015 to an average of 35 per cent in the third quarter of 2016. ARC believes that it is currently positioned to sustain current dividend levels despite the volatile commodity price environment.
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Exhibit 19
The actual amount of future monthly dividends is proposed by Management and is subject to the approval and discretion of the Board. The Board reviews future dividends in conjunction with their review of quarterly financial and operating results. Dividends are taxable to the shareholder irrespective of whether payment is received in cash or shares via the DRIP. In the case of shares issued via the SDP, dividends received are converted to a future capital gain to the recipient. Shareholders should consult their own tax advisors with respect to tax implications of dividends received in cash or via the DRIP or SDP in their particular circumstances.
On October 17, 2016, ARC confirmed that a dividend of $0.05 per common share designated as an eligible dividend will be paid on November 15, 2016 to shareholders of record on October 31, 2016 with an ex-dividend date of October 27, 2016.
Please refer to ARC’s website at www.arcresources.com for details of the estimated monthly dividend amounts and dividend dates for 2016.
Environmental Initiatives Impacting ARC
In the fourth quarter of 2015, the provincial government of Alberta released its Climate Leadership Plan which will impact all consumers and businesses that contribute to carbon emissions in Alberta. This plan includes imposing carbon pricing that is applied across all sectors, starting at $20 per tonne on January 1, 2017 and moving to $30 per tonne on January 1, 2018, the phase-out of coal-fired power generation by 2030, a cap on oil sands emissions production of 100 megatonnes, and a 45 per cent reduction in methane emissions by the crude oil and natural gas sector by 2025. The provincial government of Alberta included the proposed carbon pricing measures in the release of its 2016 budget in the second quarter of 2016.
ARC expects the Climate Leadership Plan to increase the cost of operating its properties located in Alberta and is currently evaluating the expected impact of this plan on its results of operations.
In the third quarter of 2016, the Government of Canada announced its proposed plan for all Canadian jurisdictions to impose a price on carbon pollution, beginning at a minimum of $10 per tonne in 2018 and rising by $10 per tonne each year to $50 per tonne in 2022. Provinces and territories have the option to put a direct price on carbon pollution or adopt a cap-and-trade system that meets or exceeds the federal benchmark. If provinces and territories fail to implement a price or cap-and-trade plan by 2018, the Government of Canada will implement a price in that jurisdiction.
ARC will continue to monitor developments in the federal minimum carbon tax plan and will evaluate the expected impact of this plan on its results of operations.
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Contractual Obligations and Commitments
The following is a summary of ARC’s contractual obligations and commitments as at September 30, 2016:
Table 27
Payments Due by Period | ||||||||||
1 Year | 2-3 Years | 4-5 Years | Beyond 5 Years | Total | ||||||
Debt repayments (1) | 50.3 | 167.0 | 302.0 | 496.2 | 1,015.5 | |||||
Interest payments (2) | 43.5 | 77.6 | 59.2 | 44.2 | 224.5 | |||||
Reclamation fund contributions (3) | 3.2 | 6.1 | 5.6 | 43.6 | 58.5 | |||||
Purchase commitments | 34.0 | 16.6 | 6.7 | 4.3 | 61.6 | |||||
Transportation commitments | 75.7 | 130.4 | 87.8 | 228.9 | 522.8 | |||||
Operating leases | 15.7 | 29.2 | 27.2 | 34.2 | 106.3 | |||||
Risk management contract premiums (4) | 5.7 | 2.0 | 0.1 | — | 7.8 | |||||
Total contractual obligations and commitments | 228.1 | 428.9 | 488.6 | 851.4 | 1,997.0 |
(1) | Long-term and current portion of long-term debt. |
(2) | Fixed interest payments on senior notes. |
(3) | Contribution commitments to a restricted reclamation fund associated with the Redwater property. |
(4) | Fixed premiums to be paid in future periods on certain commodity price risk management contracts. |
Subsequent to September 30, 2016, ARC entered into an additional gas transportation commitment for 8 years totaling approximately $74.0 million.
Off-Balance Sheet Arrangements
ARC has certain lease agreements, all of which are reflected in the Contractual Obligations and Commitments table (Table 27), which were entered into in the normal course of operations. All leases have been treated as operating leases whereby the lease payments are included in operating expenses or G&A expenses depending on the nature of the lease. No asset or liability value has been assigned to these leases on the balance sheet as of September 30, 2016.
Critical Accounting Estimates
ARC has continuously refined and documented its management and internal reporting systems to ensure that accurate, timely, internal and external information is gathered and disseminated.
ARC’s financial and operating results incorporate certain estimates including:
• | estimated revenues, royalties and operating expenses on production as at a specific reporting date but for which actual revenues and costs have not yet been received; |
• | estimated capital expenditures on projects that are in progress; |
• | estimated DD&A charges that are based on estimates of crude oil and natural gas reserves that ARC expects to recover in the future; |
• | estimated fair values of financial instruments that are subject to fluctuation depending upon the underlying commodity prices, foreign exchange rates and interest rates, volatility curves and the risk of non-performance; |
• | estimated value of ARO that is dependent upon estimates of future costs and timing of expenditures; |
• | estimated fair value of business combinations; |
• | estimated future recoverable value of PP&E, E&E and goodwill and any associated impairment charges or recoveries; and |
• | estimated compensation expense under ARC’s share-based compensation plans including the PSUs awarded under the RSU and PSU Plan that is based on an adjustment to the final number of PSU awards that eventually vest based on a performance multiplier, the Share Option Plan and the LTRSA Plan. |
ARC has hired individuals and consultants who have the skills required to make such estimates and ensures that individuals or departments with the most knowledge of the activity are responsible for the estimates. Further, past
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estimates are reviewed and compared to actual results, and actual results are compared to budgets in order to make more informed decisions on future estimates. For further information on the determination of certain estimates inherent in the financial statements, refer to Note 5 “Management Judgments and Estimation Uncertainty” and Note 11 "Impairment" in the audited consolidated financial statements as at and for the year ended December 31, 2015.
ARC’s leadership team’s mandate includes ongoing development of procedures, standards and systems to allow ARC staff to make the best decisions possible and ensuring those decisions are in compliance with ARC’s environmental, health and safety policies.
ASSESSMENT OF BUSINESS RISKS
The ARC management team is focused on long-term strategic planning and has identified the key risks, uncertainties and opportunities associated with ARC’s business that can impact the financial results. They include, but are not limited to:
• | volatility of crude oil, natural gas, condensate and NGL prices; |
• | refinancing and debt service; |
• | access to capital markets; |
• | retention of key personnel; |
• | operational matters; |
• | reserves and resources estimates; |
• | depletion of reserves; |
• | counterparty risk; |
• | variations in interest rates and foreign exchange rates; |
• | changes in income tax legislation; |
• | changes in government royalty legislation; |
• | environmental regulation and related impact on operations; |
• | physical security of assets; |
• | acquisitions; and |
• | regulation of the crude oil and natural gas industry by various levels of government and governmental agencies. |
Additional information is available in ARC’s Annual Information Form that is filed on SEDAR at www.sedar.com.
PROJECT RISKS
ARC manages a variety of small and large projects and plans to continue with the development of several capital projects throughout 2016. Project delays may impact expected revenues from operations. Significant project cost overruns could make a project uneconomic. ARC's ability to execute projects and market crude oil and natural gas depends upon numerous factors beyond its control, including:
• | availability of processing capacity; |
• | availability and proximity of pipeline capacity; |
• | availability of storage capacity; |
• | supply of and demand for crude oil and natural gas; |
• | availability of alternative fuel sources; |
• | effects of inclement weather; |
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• | availability of drilling and related equipment; |
• | unexpected cost increases; |
• | accidental events; |
• | changes in regulations; and |
• | availability and productivity of skilled labour. |
Because of these factors, ARC could be unable to execute projects on time, on budget or at all, and may not be able to effectively market the crude oil and natural gas that ARC produces.
Internal Controls over Financial Reporting
ARC is required to comply with National Instrument 52-109 “Certification of Disclosure in Issuers’ Annual and Interim Filings.” The certification of interim filings for the interim period ended September 30, 2016 requires that ARC disclose in the interim MD&A any changes in ARC’s internal controls over financial reporting that occurred during the period that have materially affected, or are reasonably likely to materially affect, ARC’s internal controls over financial reporting. ARC confirms that no such changes were made to its internal controls over financial reporting during the three months ended September 30, 2016.
FINANCIAL REPORTING UPDATE
Newly Applied Accounting Policies
Business combinations are accounted for using the acquisition method under IFRS 3 Business Combinations. Management's determination of whether a transaction constitutes a business combination or an asset acquisition is determined based on the criteria in IFRS 3. The identifiable assets acquired and liabilities assumed in a business combination are measured at their fair values at the acquisition date. The ARO associated with the acquired property is subsequently re-measured at the end of the reporting period using a risk-free discount rate, with any changes recognized in ARO and PP&E on the balance sheet. 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. The excess of the acquisition cost over the fair value of the net assets acquired is recognized as goodwill. If the cost of the acquisition is less than the fair value of the net assets acquired, a gain on business combination is recognized immediately in the statements of income. A deferred tax asset or liability arising from the acquired net assets is also recognized in a business combination. Any resulting goodwill or a gain resulting from a bargain purchase is not considered to be taxable income. Transaction costs associated with a business combination are expensed as incurred.
In a business combination achieved in stages whereby joint control does not exist or is not retained, any previously held equity interest by ARC in the acquiree is re-measured at its acquisition date fair value and any resulting gain or loss is recognized immediately in the statements of income. Obtaining control of a business that is a joint operation for which ARC previously held an interest immediately before the acquisition date (either as a joint operator or as a party to a joint arrangement) is considered to be a business combination achieved in stages whereby joint control is not retained.
Future Accounting Policy Changes
In April 2016, the IASB issued its final amendments to IFRS 15 Revenue from Contracts with Customers, which replaces IAS 18 Revenue, IAS 11 Construction Contracts, and related interpretations. The standard is required to be adopted either retrospectively or using a modified retrospective approach for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 15 will be applied by ARC on January 1, 2018 and the Company is currently evaluating the impact of the standard on ARC's financial statements.
In July 2014, the IASB completed the final elements of IFRS 9 Financial Instruments. The standard supersedes earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9, as amended, includes a principle-based approach for classification and measurement of financial assets, a single 'expected loss’ impairment model and a substantially-reformed approach to hedge accounting. The standard will come into effect for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 9 will be applied on a retrospective basis by ARC on January 1, 2018 and the Company is currently evaluating the impact of the standard on ARC's financial statements.
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In January 2016, the IASB issued IFRS 16 Leases, which replaces IAS 17 Leases. For lessees applying IFRS 16, a single recognition and measurement model for leases would apply, with required recognition of assets and liabilities for most leases. The standard will come into effect for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if the entity is also applying IFRS 15 Revenue from Contracts with Customers. The standard is required to be adopted either retrospectively or using a modified retrospective approach. IFRS 16 will be applied by ARC on January 1, 2019 and the Company is currently evaluating the impact of the standard on ARC's financial statements.
Non-GAAP Measures
Throughout this MD&A, the company uses the term operating netback (“netback”) to analyze operating performance. This non-GAAP measure does not have any standardized meaning prescribed by GAAP and therefore may not be comparable with the calculation of similar measures for other entities. ARC discloses netback both prior to realized hedging gains or losses and after the impacts of hedging are included. Realized gains or losses represent the portion of risk management contracts that have settled in cash during the period and disclosing this impact provides Management and investors with transparent measures that reflect how ARC's risk management program can impact netback metrics. Management feels that netback is a key industry benchmark and a measure of performance for ARC that provides investors with information that is commonly used by other crude oil and natural gas companies. This measurement assists Management and investors in evaluating operating results on a per boe basis to better analyze performance on a comparable basis. Netback is disclosed in Table 16 within this MD&A.
Forward-looking Information and Statements
This MD&A contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect," "anticipate," "continue," "estimate," "objective," "ongoing," "may," "will," "project," "should," "believe," "plans," "intends," "strategy," and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this MD&A contains forward-looking information and statements pertaining to the following: ARC’s financial goals under the heading “About ARC Resources Ltd.," ARC’s view of future crude oil, natural gas, condensate and NGLs pricing under the heading “Economic Environment,” ARC’s guidance for 2016 under the heading “Annual Guidance and Financial Highlights,” ARC’s risk management plans for 2016 and beyond under the heading “Risk Management,” ARC's view on the impact of the government of Alberta's recently announced Modernized Royalty Framework ("MRF") on ARC's results of operations under the heading "Royalties," ARC’s view as to the estimated future payments under the RSU and PSU Plan under the heading “Share-Based Compensation Plans – Restricted Share Unit and Performance Share Unit Plan, Share Option Plan, Deferred Share Unit Plan, and Long-term Restricted Share Award Plan,” the financing information relating to raising capital under the heading "Capitalization, Financial Resources and Liquidity," ARC's plans in relation to future dividend levels under the heading "Dividends," ARC’s estimates of normal course obligations under the heading “Contractual Obligations and Commitments,” and a number of other matters, including the amount of future asset retirement obligations, future liquidity and financial capacity, future results from operations and operating metrics, future costs, expenses and royalty rates, future interest costs, and future development, exploration, acquisition and development activities (including drilling plans) and related capital expenditures.
The forward-looking information and statements contained in this MD&A reflect several material factors and expectations and assumptions of ARC including, without limitation: that ARC will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; the accuracy of the estimates of ARC's reserves and resource volumes; certain commodity price and other cost assumptions; and the continued availability of adequate debt and equity financing and funds from operations to fund its planned expenditures. ARC believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable, but no assurance can be given that these factors, expectations and assumptions will prove to be correct.
The forward-looking information and statements included in this MD&A are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of ARC's products; unanticipated operating results or production declines; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in development plans of ARC or by third-party operators of ARC's properties, increased debt levels or debt service requirements; inaccurate estimation of ARC's crude oil and natural gas reserve and resource volumes; limited, unfavorable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; and certain other risks detailed from time to time in ARC's
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public disclosure documents (including, without limitation, those risks identified in this MD&A and in ARC's Annual Information Form).
The forward-looking information and statements contained in this MD&A speak only as of the date of this MD&A, and none of ARC or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.
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GLOSSARY
The following is a list of abbreviations that may be used in this MD&A:
Measurement
bbl barrel
bbl/d barrels per day
Mbbls thousand barrels
MMbbls million barrels
boe (1) barrels of oil equivalent
boe/d (1) barrels of oil equivalent per day
Mboe (1) thousands of barrels of oil equivalent
MMboe (1) millions of barrels of oil equivalent
Mcf thousand cubic feet
Mcf/d thousand cubic feet per day
MMcf million cubic feet
MMcf/d million cubic feet per day
Bcf billion cubic feet
MMBtu million British Thermal Units
GJ gigajoule
(1) | ARC has adopted the standard of 6 Mcf:1 bbl when converting natural gas to boe. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of six Mcf per barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different than the energy equivalency of the 6:1 conversion ratio, utilizing the 6:1 conversion ratio may be misleading as an indication of value. |
Financial and Business Environment
ARO asset retirement obligations
CGU cash-generating unit
COGE Handbook The Canadian Oil and Gas Evaluation Handbook prepared jointly by the Society of Petroleum
Evaluation Engineers (Calgary chapter) and the Canadian Institute of Mining, Metallurgy &
Petroleum
DD&A depletion, depreciation and amortization
DRIP Dividend Reinvestment Program
DSU Deferred Share Unit
E&E exploration and evaluation
GAAP generally accepted accounting principles
G&A general and administrative
IAS International Accounting Standard
IASB International Accounting Standards Board
IFRS International Financial Reporting Standards
LTRSA Long-term Restricted Share Award
MSW Mixed Sweet Blend
NGLs natural gas liquids
NYMEX New York Mercantile Exchange
PP&E property, plant and equipment
PSU Performance Share Unit
RSU Restricted Share Unit
SDP Stock Dividend Program
WTI West Texas Intermediate
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QUARTERLY HISTORICAL REVIEW
($ millions, except per share amounts) | 2016 | 2015 | 2014 | |||||||||||||
FINANCIAL | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | ||||||||
Sales of crude oil, natural gas, condensate, NGLs and other income | 265.6 | 234.9 | 231.2 | 285.9 | 279.5 | 321.7 | 306.6 | 454.1 | ||||||||
Per share, basic | 0.76 | 0.67 | 0.66 | 0.83 | 0.82 | 0.95 | 0.92 | 1.43 | ||||||||
Per share, diluted | 0.75 | 0.67 | 0.66 | 0.83 | 0.82 | 0.94 | 0.92 | 1.42 | ||||||||
Funds from operations (1) | 153.0 | 141.7 | 150.1 | 200.7 | 174.9 | 206.3 | 191.5 | 251.7 | ||||||||
Per share, basic | 0.44 | 0.40 | 0.43 | 0.58 | 0.51 | 0.61 | 0.57 | 0.79 | ||||||||
Per share, diluted | 0.44 | 0.40 | 0.43 | 0.58 | 0.51 | 0.61 | 0.57 | 0.79 | ||||||||
Net income (loss) | 28.3 | (58.1 | ) | 64.1 | (55.0 | ) | (235.0 | ) | (51.0 | ) | (1.7 | ) | 113.7 | |||
Per share, basic | 0.08 | (0.17 | ) | 0.18 | (0.16 | ) | (0.69 | ) | (0.15 | ) | (0.01 | ) | 0.36 | |||
Per share, diluted | 0.08 | (0.17 | ) | 0.18 | (0.16 | ) | (0.69 | ) | (0.15 | ) | (0.01 | ) | 0.36 | |||
Dividends declared | 52.9 | 52.5 | 69.9 | 103.8 | 103.0 | 102.1 | 101.6 | 95.7 | ||||||||
Per share (2) | 0.15 | 0.15 | 0.20 | 0.30 | 0.30 | 0.30 | 0.30 | 0.30 | ||||||||
Total assets | 5,968.4 | 5,891.1 | 5,893.7 | 5,932.2 | 6,072.4 | 6,346.0 | 6,588.8 | 6,325.5 | ||||||||
Total liabilities | 2,622.3 | 2,547.0 | 2,466.1 | 2,543.7 | 2,578.3 | 2,565.7 | 2,704.2 | 2,773.7 | ||||||||
Net debt outstanding (3) | 1,009.4 | 969.3 | 868.4 | 985.1 | 981.1 | 878.1 | 950.5 | 1,255.9 | ||||||||
Weighted average shares | 351.7 | 350.5 | 348.7 | 345.6 | 342.8 | 340.4 | 333.2 | 318.6 | ||||||||
Weighted average shares, diluted | 352.3 | 350.5 | 348.9 | 345.6 | 342.8 | 340.4 | 333.2 | 319.1 | ||||||||
Shares outstanding, end of period | 352.2 | 351.1 | 349.8 | 347.1 | 344.2 | 341.5 | 339.3 | 319.4 | ||||||||
CAPITAL EXPENDITURES | ||||||||||||||||
Geological and geophysical | 3.5 | 4.3 | 2.8 | 2.5 | 8.0 | 3.1 | 2.3 | 4.7 | ||||||||
Drilling and completions | 59.0 | 55.7 | 23.2 | 108.5 | 117.9 | 51.8 | 83.0 | 164.4 | ||||||||
Plant and facilities | 59.8 | 52.2 | 32.7 | 37.3 | 37.8 | 43.2 | 43.7 | 78.2 | ||||||||
Administrative assets | 0.2 | 0.4 | 0.4 | 1.2 | 0.5 | 0.3 | 0.5 | 2.0 | ||||||||
Total capital expenditures | 122.5 | 112.6 | 59.1 | 149.5 | 164.2 | 98.4 | 129.5 | 249.3 | ||||||||
Undeveloped land | — | — | — | 4.6 | 0.6 | 0.1 | 1.4 | 18.0 | ||||||||
Total capital expenditures, including undeveloped land purchases | 122.5 | 112.6 | 59.1 | 154.1 | 164.8 | 98.5 | 130.9 | 267.3 | ||||||||
Acquisitions | 31.6 | 111.6 | 15.1 | 0.3 | — | 14.1 | — | — | ||||||||
Dispositions | (0.3 | ) | (3.0 | ) | — | (42.2 | ) | (20.7 | ) | (14.9 | ) | (11.0 | ) | (2.4 | ) | |
Total capital expenditures, land purchases and net acquisitions and dispositions | 153.8 | 221.2 | 74.2 | 112.2 | 144.1 | 97.7 | 119.9 | 264.9 | ||||||||
OPERATING | ||||||||||||||||
Production | ||||||||||||||||
Crude oil (bbl/d) | 29,642 | 31,702 | 34,852 | 33,899 | 29,397 | 31,958 | 35,851 | 37,442 | ||||||||
Condensate (bbl/d) | 3,562 | 3,733 | 3,442 | 3,631 | 3,361 | 3,139 | 3,591 | 3,448 | ||||||||
Natural gas (MMcf/d) | 466.7 | 467.5 | 489.7 | 469.1 | 425.1 | 426.0 | 459.6 | 432.1 | ||||||||
NGLs (bbl/d) | 4,221 | 4,336 | 4,319 | 3,523 | 3,653 | 3,795 | 4,314 | 5,075 | ||||||||
Total (boe/d) | 115,205 | 117,695 | 124,224 | 119,243 | 107,261 | 109,900 | 120,354 | 117,986 | ||||||||
Average realized prices, prior to hedging | ||||||||||||||||
Crude oil ($/bbl) | 52.43 | 52.80 | 38.64 | 49.24 | 52.43 | 64.49 | 48.73 | 72.49 | ||||||||
Condensate ($/bbl) | 50.81 | 51.20 | 42.07 | 49.80 | 53.00 | 64.84 | 49.12 | 74.04 | ||||||||
Natural gas ($/Mcf) | 2.35 | 1.39 | 2.05 | 2.59 | 3.03 | 2.88 | 3.05 | 4.15 | ||||||||
NGLs ($/bbl) | 12.67 | 13.60 | 8.42 | 10.73 | 5.68 | 9.53 | 16.07 | 32.69 | ||||||||
Oil equivalent ($/boe) | 25.03 | 21.87 | 20.39 | 26.01 | 28.22 | 32.10 | 28.20 | 41.78 | ||||||||
TRADING STATISTICS | ||||||||||||||||
($, based on intra-day trading) | ||||||||||||||||
High | 24.08 | 23.35 | 20.16 | 22.49 | 21.98 | 25.60 | 25.87 | 29.85 | ||||||||
Low | 20.87 | 17.43 | 14.43 | 15.39 | 15.57 | 21.01 | 20.75 | 22.70 | ||||||||
Close | 23.73 | 22.11 | 18.89 | 16.70 | 17.64 | 21.40 | 21.76 | 25.16 | ||||||||
Average daily volume (thousands) | 1,288 | 1,869 | 2,394 | 2,224 | 1,736 | 1,424 | 1,944 | 1,886 |
(1) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the section entitled "Funds from Operations" contained within this MD&A. |
(2) | Dividends per share are based on the number of shares outstanding at each dividend record date. |
(3) | Refer to Note 9 "Capital Management" in the financial statements as at and for the three and nine months ended September 30, 2016 and to the section entitled "Capitalization, Financial Resources and Liquidity" contained within this MD&A. |
ARC Resources Ltd. | 45 |
ARC RESOURCES LTD. | |||||
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS (unaudited) | |||||
As at | |||||
(Cdn$ millions) | September 30, 2016 | December 31, 2015 | |||
ASSETS | |||||
Current assets | |||||
Cash and cash equivalents | 44.2 | 167.3 | |||
Short-term investment | 4.3 | 3.2 | |||
Accounts receivable | 112.2 | 116.6 | |||
Prepaid expenses | 14.1 | 14.3 | |||
Risk management contracts (Note 10) | 113.9 | 207.5 | |||
288.7 | 508.9 | ||||
Reclamation fund | 35.7 | 34.3 | |||
Risk management contracts (Note 10) | 150.0 | 204.7 | |||
Exploration and evaluation assets (Note 5) | 302.0 | 276.4 | |||
Property, plant and equipment (Note 6) | 4,943.8 | 4,659.7 | |||
Goodwill | 248.2 | 248.2 | |||
Total assets | 5,968.4 | 5,932.2 | |||
LIABILITIES | |||||
Current liabilities | |||||
Accounts payable and accrued liabilities | 151.0 | 137.5 | |||
Current portion of long-term debt (Note 7) | 50.3 | 57.9 | |||
Current portion of asset retirement obligations (Note 8) | 18.0 | 18.0 | |||
Dividends payable (Note 11) | 17.7 | 34.7 | |||
Risk management contracts (Note 10) | 7.9 | 1.6 | |||
244.9 | 249.7 | ||||
Risk management contracts (Note 10) | 2.8 | 0.7 | |||
Long-term debt (Note 7) | 965.2 | 1,056.4 | |||
Long-term incentive compensation liability (Note 12) | 27.5 | 19.5 | |||
Other deferred liabilities | 12.8 | 14.1 | |||
Asset retirement obligations (Note 8) | 728.3 | 555.2 | |||
Deferred taxes | 640.8 | 648.1 | |||
Total liabilities | 2,622.3 | 2,543.7 | |||
Commitments and contingencies (Note 13) | |||||
SHAREHOLDERS’ EQUITY | |||||
Shareholders’ capital | 4,631.5 | 4,536.9 | |||
Contributed surplus | 16.3 | 12.6 | |||
Deficit | (1,302.1 | ) | (1,161.1 | ) | |
Accumulated other comprehensive income | 0.4 | 0.1 | |||
Total shareholders’ equity | 3,346.1 | 3,388.5 | |||
Total liabilities and shareholders’ equity | 5,968.4 | 5,932.2 |
See accompanying notes to the unaudited condensed interim consolidated financial statements.
ARC Resources Ltd. | 46 |
ARC RESOURCES LTD. | |||||||||||
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF INCOME (unaudited) | |||||||||||
For the three and nine months ended September 30 | |||||||||||
Three Months Ended | Nine Months Ended | ||||||||||
(Cdn$ millions, except per share amounts) | 2016 | 2015 | 2016 | 2015 | |||||||
REVENUE | |||||||||||
Sales of crude oil, natural gas, condensate, natural gas liquids and other income | 265.6 | 279.5 | 731.7 | 907.8 | |||||||
Royalties | (22.9 | ) | (25.6 | ) | (62.3 | ) | (81.0 | ) | |||
242.7 | 253.9 | 669.4 | 826.8 | ||||||||
Gain on risk management contracts (Note 10) | 52.8 | 132.6 | 29.8 | 244.5 | |||||||
295.5 | 386.5 | 699.2 | 1,071.3 | ||||||||
EXPENSES | |||||||||||
Transportation | 22.1 | 24.1 | 70.3 | 73.0 | |||||||
Operating | 78.1 | 70.9 | 215.7 | 229.8 | |||||||
Exploration and evaluation expenses (Note 5) | — | 2.5 | 1.7 | 46.9 | |||||||
General and administrative | 24.4 | 20.7 | 84.1 | 54.6 | |||||||
Interest and financing charges | 12.5 | 12.7 | 37.9 | 37.7 | |||||||
Accretion of asset retirement obligations (Note 8) | 3.0 | 3.3 | 9.1 | 10.1 | |||||||
Depletion, depreciation, amortization and impairment (Note 6) | 124.0 | 472.9 | 384.2 | 802.4 | |||||||
Loss (gain) on foreign exchange | 8.7 | 72.2 | (56.6 | ) | 143.9 | ||||||
Loss (gain) on short-term investment | (0.7 | ) | 0.4 | (1.1 | ) | (0.1 | ) | ||||
Gain on business combinations (Note 4) | (13.7 | ) | — | (53.9 | ) | — | |||||
Gain on disposal of petroleum and natural gas properties | — | — | — | (23.3 | ) | ||||||
258.4 | 679.7 | 691.4 | 1,375.0 | ||||||||
Provision for (recovery of) income taxes | |||||||||||
Current | 2.0 | (10.1 | ) | 1.0 | (6.0 | ) | |||||
Deferred | 6.8 | (48.1 | ) | (27.5 | ) | (10.0 | ) | ||||
8.8 | (58.2 | ) | (26.5 | ) | (16.0 | ) | |||||
Net income (loss) | 28.3 | (235.0 | ) | 34.3 | (287.7 | ) | |||||
Net income (loss) per share (Note 11) | |||||||||||
Basic | 0.08 | (0.69 | ) | 0.10 | (0.85 | ) | |||||
Diluted | 0.08 | (0.69 | ) | 0.10 | (0.85 | ) |
See accompanying notes to the unaudited condensed interim consolidated financial statements.
ARC Resources Ltd. | 47 |
ARC RESOURCES LTD. | |||||||||||
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) | |||||||||||
For the three and nine months ended September 30 | |||||||||||
Three Months Ended | Nine Months Ended | ||||||||||
(Cdn$ millions) | 2016 | 2015 | 2016 | 2015 | |||||||
Net income (loss) | 28.3 | (235.0 | ) | 34.3 | (287.7 | ) | |||||
Other comprehensive income (loss) | |||||||||||
Items that may be reclassified into earnings, net of tax: | |||||||||||
Net unrealized gain (loss) on reclamation fund investments | — | (0.1 | ) | 0.3 | 0.1 | ||||||
Other comprehensive income (loss) | — | (0.1 | ) | 0.3 | 0.1 | ||||||
Comprehensive income (loss) | 28.3 | (235.1 | ) | 34.6 | (287.6 | ) |
See accompanying notes to the unaudited condensed interim consolidated financial statements.
ARC Resources Ltd. | 48 |
ARC RESOURCES LTD. | ||||||||||||||
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) | ||||||||||||||
For the nine months ended September 30 | ||||||||||||||
(Cdn$ millions) | Shareholders’ Capital (Note 11) | Contributed Surplus | Deficit | Accumulated other comprehensive income | Total Shareholders’ Equity | |||||||||
December 31, 2014 | 3,951.1 | 8.6 | (407.9 | ) | — | 3,551.8 | ||||||||
Net loss | — | — | (287.7 | ) | — | (287.7 | ) | |||||||
Other comprehensive income | — | — | — | 0.1 | 0.1 | |||||||||
Total comprehensive income (loss) | — | — | (287.7 | ) | 0.1 | (287.6 | ) | |||||||
Shares issued for cash | 402.7 | — | — | — | 402.7 | |||||||||
Shares issued pursuant to the dividend reinvestment program | 109.8 | — | — | — | 109.8 | |||||||||
Shares issued pursuant to the stock dividend program | 33.9 | — | — | — | 33.9 | |||||||||
Cancellation of shares and return of accrued dividends | (0.1 | ) | 0.1 | — | — | — | ||||||||
Share issue costs (1) | (12.5 | ) | — | — | — | (12.5 | ) | |||||||
Recognized under share-based compensation plans (Note 12) | — | 2.7 | — | — | 2.7 | |||||||||
Dividends declared | — | — | (306.7 | ) | — | (306.7 | ) | |||||||
September 30, 2015 | 4,484.9 | 11.4 | (1,002.3 | ) | 0.1 | 3,494.1 | ||||||||
December 31, 2015 | 4,536.9 | 12.6 | (1,161.1 | ) | 0.1 | 3,388.5 | ||||||||
Net income | — | — | 34.3 | — | 34.3 | |||||||||
Other comprehensive income | — | — | — | 0.3 | 0.3 | |||||||||
Total comprehensive income | — | — | 34.3 | 0.3 | 34.6 | |||||||||
Shares issued for cash on exercise of stock options | 0.5 | — | — | — | 0.5 | |||||||||
Shares issued pursuant to the dividend reinvestment program | 72.3 | — | — | — | 72.3 | |||||||||
Shares issued pursuant to the stock dividend program | 21.8 | — | — | — | 21.8 | |||||||||
Share issuance costs | (0.2 | ) | — | — | — | (0.2 | ) | |||||||
Recognized under share-based compensation plans (Note 12) | — | 3.9 | — | — | 3.9 | |||||||||
Contributed surplus transferred on exercise of share options (Note 11, 12) | 0.2 | (0.2 | ) | — | — | — | ||||||||
Dividends declared | — | — | (175.3 | ) | — | (175.3 | ) | |||||||
September 30, 2016 | 4,631.5 | 16.3 | (1,302.1 | ) | 0.4 | 3,346.1 |
(1) | Amount is net of deferred tax of $4.2 million. |
See accompanying notes to the unaudited condensed interim consolidated financial statements.
ARC Resources Ltd. | 49 |
ARC RESOURCES LTD. | |||||||||||
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | |||||||||||
For the three and nine months ended September 30 | |||||||||||
Three Months Ended | Nine Months Ended | ||||||||||
(Cdn$ millions) | 2016 | 2015 | 2016 | 2015 | |||||||
CASH FLOW FROM OPERATING ACTIVITIES | |||||||||||
Net income (loss) | 28.3 | (235.0 | ) | 34.3 | (287.7 | ) | |||||
Add items not involving cash: | |||||||||||
Unrealized loss (gain) on risk management contracts | (3.3 | ) | (93.9 | ) | 153.4 | (110.4 | ) | ||||
Accretion of asset retirement obligations (Note 8) | 3.0 | 3.3 | 9.1 | 10.1 | |||||||
Depletion, depreciation, amortization and impairment (Note 6) | 124.0 | 472.9 | 384.2 | 802.4 | |||||||
Exploration and evaluation expenses (Note 5) | — | 2.5 | 1.7 | 46.9 | |||||||
Unrealized loss (gain) on foreign exchange | 7.7 | 72.2 | (57.6 | ) | 143.6 | ||||||
Gain on business combinations (Note 4) | (13.7 | ) | — | (53.9 | ) | — | |||||
Gain on disposal of petroleum and natural gas properties | — | — | — | (23.3 | ) | ||||||
Deferred tax expense (recovery) | 6.8 | (48.1 | ) | (27.5 | ) | (10.0 | ) | ||||
Other (Note 14) | 0.2 | 1.0 | 1.1 | 1.1 | |||||||
Net change in other liabilities (Note 14) | (3.9 | ) | (8.1 | ) | 2.8 | (18.0 | ) | ||||
Change in non-cash working capital (Note 14) | 8.6 | (1.4 | ) | 23.8 | (41.5 | ) | |||||
157.7 | 165.4 | 471.4 | 513.2 | ||||||||
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES | |||||||||||
Repayment of long-term debt under revolving credit facilities, net | — | — | — | (83.8 | ) | ||||||
Repayment of senior notes | — | — | (42.5 | ) | (40.9 | ) | |||||
Issuance of common shares | 0.3 | — | 0.5 | 402.7 | |||||||
Share issuance costs | (0.1 | ) | — | (0.2 | ) | (16.7 | ) | ||||
Cash dividends paid | (27.9 | ) | (51.8 | ) | (98.2 | ) | (160.6 | ) | |||
(27.7 | ) | (51.8 | ) | (140.4 | ) | 100.7 | |||||
CASH FLOW USED IN INVESTING ACTIVITIES | |||||||||||
Acquisition of petroleum and natural gas properties (Note 4, 6) | (31.6 | ) | — | (158.3 | ) | (14.1 | ) | ||||
Disposal of petroleum and natural gas properties | 0.3 | 20.7 | 3.3 | 46.6 | |||||||
Property, plant and equipment development expenditures (Note 6) | (120.3 | ) | (145.2 | ) | (267.3 | ) | (373.7 | ) | |||
Exploration and evaluation asset expenditures (Note 5) | (2.0 | ) | (19.5 | ) | (26.5 | ) | (20.3 | ) | |||
Net reclamation fund withdrawals (contributions) | (0.9 | ) | (1.0 | ) | (1.0 | ) | 2.0 | ||||
Change in non-cash working capital (Note 14) | 10.1 | 14.4 | (4.3 | ) | (56.5 | ) | |||||
(144.4 | ) | (130.6 | ) | (454.1 | ) | (416.0 | ) | ||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (14.4 | ) | (17.0 | ) | (123.1 | ) | 197.9 | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 58.6 | 222.0 | 167.3 | 7.1 | |||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | 44.2 | 205.0 | 44.2 | 205.0 | |||||||
The following are included in cash flow from operating activities: | |||||||||||
Income taxes paid (received) in cash | (4.7 | ) | 0.7 | (4.7 | ) | 42.8 | |||||
Interest paid in cash | 15.5 | 16.1 | 41.1 | 41.9 |
ARC Resources Ltd. | 50 |
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2016 and 2015
1. | STRUCTURE OF THE BUSINESS |
The principal undertakings of ARC Resources Ltd. and its subsidiaries (collectively, the “Company” or “ARC”) are to carry on the business of acquiring, developing and holding interests in petroleum and natural gas properties and assets.
ARC was incorporated in Alberta, Canada and the Company’s registered office and principal place of business is located at 1200, 308 – 4th Avenue SW, Calgary, Alberta, Canada T2P 0H7.
2. | BASIS OF PREPARATION |
These unaudited condensed interim consolidated financial statements (the “financial statements”) have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board ("IASB"). These financial statements are condensed as they do not include all of the information required by IFRS for annual financial statements and therefore should be read in conjunction with ARC's audited consolidated financial statements for the year ended December 31, 2015. All financial information is reported in millions of Canadian dollars ("Cdn$"), unless otherwise noted. References to “US$” are to United States dollars.
The financial statements have been prepared on a historical cost basis, except as detailed in the accounting policies disclosed in Note 3 "Summary of Accounting Policies" of ARC's audited consolidated financial statements for the year ended December 31, 2015. All accounting policies and methods of computation followed in the preparation of these financial statements are consistent with those of the previous financial year, except as noted in Note 3 "Accounting Policies." There have been no significant changes to the use of estimates or judgments since December 31, 2015.
At December 31, 2015, the audited consolidated financial statements included the accounts of ARC and its wholly owned subsidiaries, including ARC Resources General Partnership (the "partnership") and 1504793 Alberta Ltd. Effective March 1, 2016, ARC wound up 1504793 Alberta Ltd. resulting in the dissolution of the partnership. All transactions were executed on a tax deferred basis.
All inter-entity transactions have been eliminated upon consolidation between ARC and its subsidiaries in these financial statements. ARC's operations are viewed as a single operating segment by the chief operating decision maker of the Company for the purpose of resource allocation and assessing performance.
These financial statements were authorized for issue by the Board of Directors on November 10, 2016.
ARC Resources Ltd. | 51 |
3. | ACCOUNTING POLICIES |
Newly Applied Accounting Policies
Business combinations are accounted for using the acquisition method under IFRS 3 Business Combinations. Management's determination of whether a transaction constitutes a business combination or an asset acquisition is determined based on the criteria in IFRS 3. The identifiable assets acquired and liabilities assumed in a business combination are measured at their fair values at the acquisition date. The asset retirement obligation ("ARO") associated with the acquired property is subsequently re-measured at the end of the reporting period using a risk-free discount rate, with any changes recognized in ARO and property, plant and equipment ("PP&E") on the balance sheet. 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. The excess of the acquisition cost over the fair value of the net assets acquired is recognized as goodwill. If the cost of the acquisition is less than the fair value of the net assets acquired, a gain on business combination is recognized immediately in the statements of income. A deferred tax asset or liability arising from the acquired net assets is also recognized in a business combination. Any resulting goodwill or a gain resulting from a bargain purchase is not considered to be taxable income. Transaction costs associated with a business combination are expensed as incurred.
In a business combination achieved in stages whereby joint control does not exist or is not retained, any previously held equity interest by ARC in the acquiree is re-measured at its acquisition date fair value and any resulting gain or loss is recognized immediately in the statements of income. Obtaining control of a business that is a joint operation for which ARC previously held an interest immediately before the acquisition date (either as a joint operator or as a party to a joint arrangement) is considered to be a business combination achieved in stages whereby joint control is not retained.
Future Accounting Policy Changes
In April 2016, the IASB issued its final amendments to IFRS 15 Revenue from Contracts with Customers, which replaces IAS 18 Revenue, IAS 11 Construction Contracts, and related interpretations. The standard is required to be adopted either retrospectively or using a modified retrospective approach for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 15 will be applied by ARC on January 1, 2018 and the Company is currently evaluating the impact of the standard on ARC's financial statements.
In July 2014, the IASB completed the final elements of IFRS 9 Financial Instruments. The standard supersedes earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9, as amended, includes a principle-based approach for classification and measurement of financial assets, a single 'expected loss’ impairment model and a substantially-reformed approach to hedge accounting. The standard will come into effect for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 9 will be applied on a retrospective basis by ARC on January 1, 2018 and the Company is currently evaluating the impact of the standard on ARC's financial statements.
In January 2016, the IASB issued IFRS 16 Leases, which replaces IAS 17 Leases. For lessees applying IFRS 16, a single recognition and measurement model for leases would apply, with required recognition of assets and liabilities for most leases. The standard will come into effect for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if the entity is also applying IFRS 15 Revenue from Contracts with Customers. The standard is required to be adopted either retrospectively or using a modified retrospective approach. IFRS 16 will be applied by ARC on January 1, 2019 and the Company is currently evaluating the impact of the standard on ARC's financial statements.
4. | BUSINESS COMBINATIONS |
The acquisitions listed below have been recorded as business combinations under IFRS 3. Refer to the section entitled "Newly Applied Accounting Policies" in Note 3 "Accounting Policies."
Determination of the fair value of PP&E acquired in a business combination requires Management to make assumptions and estimates about future events. The fair value of crude oil and natural gas interests is estimated with reference to the discounted cash flows expected to be derived from crude oil and natural gas production. These assumptions and estimates generally require judgment and include estimates of reserves acquired, liabilities assumed, forecast benchmark commodity prices, and discount rates. Changes in any of the assumptions or estimates used in determining the fair value of acquired assets and liabilities could impact the amounts assigned to the net assets acquired, goodwill or gain on business combination.
ARC Resources Ltd. | 52 |
The preliminary estimates of the net assets acquired and gains on business combinations disclosed below are based on information that existed at the time of the preparation of these financial statements. Subsequent amendments may be made to these amounts as the estimates are finalized. The pro forma information provided below is not necessarily indicative of the actual results that would have been achieved if the acquisition date for the business combinations had been as of the beginning of the annual reporting period.
On June 28, 2016, ARC closed the acquisition of certain properties producing mainly light, sweet crude oil in the Pembina area of Alberta. The major assets acquired consisted of additional working interest in properties where ARC already held a significant interest.
Net assets acquired | ||
Development and production assets | 174.2 | |
Asset retirement obligations | (12.7 | ) |
Deferred income tax liability | (13.3 | ) |
Total identifiable net assets | 148.2 | |
Gain on business combination | (36.7 | ) |
Total net assets acquired, net of gain on business combination | 111.5 | |
Consideration paid | ||
Cash consideration | 111.5 |
The results of operations from the acquired properties have been recognized since the acquisition date in the unaudited condensed interim consolidated statements of income (the "statements of income") for the three and nine months ended September 30, 2016. Since June 28, 2016, these properties have contributed revenues net of royalties of $7.9 million and net income of $1.5 million. If the transaction had taken place on January 1, 2016, it is estimated that the assets acquired would have contributed incremental revenues net of royalties and net income of $23.3 million and $2.9 million, respectively, for the nine months ended September 30, 2016.
For the assets that ARC held a prior working interest in and acquired control of as a result of the transaction, the pre-acquisition working interest was re-measured to a fair value of $127.8 million, resulting in an increase in PP&E of $7.0 million, which was composed of a recovery of impairment of $1.6 million, an additional gain on business combination of $3.5 million, and a deferred income tax liability of $1.9 million.
On August 18, 2016, ARC closed another acquisition of certain properties producing mainly light, sweet crude oil in the Pembina area of Alberta. The major asset acquired consisted of an additional working interest in a property where ARC already held a significant interest.
Net assets acquired | ||
Development and production assets | 52.8 | |
Asset retirement obligations | (2.5 | ) |
Deferred income tax liability | (5.0 | ) |
Total identifiable net assets | 45.3 | |
Gain on business combination | (13.7 | ) |
Total net assets acquired, net of gain on business combination | 31.6 | |
Consideration paid | ||
Cash consideration | 31.6 |
The results of operations from the acquired properties have been recognized since the acquisition date in the statements of income for the three and nine months ended September 30, 2016. Since August 18, 2016, these properties have contributed revenues net of royalties of $1.7 million and net income of $0.5 million. If the transaction had taken place on January 1, 2016, it is estimated that the assets acquired would have contributed incremental revenues net of royalties and net income of $9.6 million and $1.4 million, respectively, for the nine months ended September 30, 2016.
The gain on business combination in both transactions arose as a result of the strategic nature of the divestiture by the sellers combined with ARC's established leadership position in the acquired assets.
ARC Resources Ltd. | 53 |
Subsequent to September 30, 2016, ARC closed the acquisition of the remaining working interest in a certain property producing mainly light, sweet crude oil in the Pembina area of Alberta. As of September 30, 2016, ARC held over 99 per cent working interest in this property. The acquisition gives ARC full control over the operation of the asset.
5. | EXPLORATION AND EVALUATION ("E&E") ASSETS |
Carrying amount | ||
Balance, December 31, 2015 | 276.4 | |
Additions | 26.5 | |
E&E expenses | (1.7 | ) |
Change in asset retirement cost | 0.8 | |
Balance, September 30, 2016 | 302.0 |
ARC has certain E&E properties that have sales of petroleum products associated with production from test wells.
For the three months ended September 30, 2016 and 2015, these operating results have been recognized in the statements of income and comprised sales of crude oil, natural gas, condensate and natural gas liquids of $2.1 million and $1.5 million, royalty recovery of $0.3 million and expense of $0.1 million, operating expenses of $1.3 million and $0.7 million, and transportation expenses of $0.2 million and $0.1 million, respectively.
For the nine months ended September 30, 2016 and 2015, these operating results have been recognized in the statements of income and comprised sales of crude oil, natural gas, condensate and natural gas liquids of $6.3 million and $5.6 million, royalties of $0.1 million and $0.2 million, operating expenses of $3.3 million and $3.5 million, and transportation expenses of $0.6 million and $0.8 million, respectively. All operating cash flows associated with E&E assets for the three and nine months ended September 30, 2016 and 2015 are reflected in cash flow from operating activities.
6. | PROPERTY, PLANT AND EQUIPMENT |
Cost | Development and Production Assets | Administrative Assets | Total | |||||
Balance, December 31, 2015 | 7,981.2 | 63.9 | 8,045.1 | |||||
Additions | 266.7 | 1.0 | 267.7 | |||||
Acquisitions | 232.2 | — | 232.2 | |||||
Change in asset retirement cost | 182.1 | — | 182.1 | |||||
Dispositions | (61.5 | ) | — | (61.5 | ) | |||
Balance, September 30, 2016 | 8,600.7 | 64.9 | 8,665.6 | |||||
Accumulated depletion, depreciation, amortization ("DD&A") and impairment | ||||||||
Balance, December 31, 2015 | (3,351.2 | ) | (34.2 | ) | (3,385.4 | ) | ||
DD&A and impairment | (380.1 | ) | (4.1 | ) | (384.2 | ) | ||
Accumulated depletion and impairment associated with dispositions | 47.6 | — | 47.6 | |||||
Inventory depletion | 0.2 | — | 0.2 | |||||
Balance, September 30, 2016 | (3,683.5 | ) | (38.3 | ) | (3,721.8 | ) | ||
Carrying amounts | ||||||||
Balance, December 31, 2015 | 4,630.0 | 29.7 | 4,659.7 | |||||
Balance, September 30, 2016 | 4,917.2 | 26.6 | 4,943.8 |
For the three and nine months ended September 30, 2016, $5.9 million and $16.0 million of direct and incremental general and administrative ("G&A") expenses were capitalized to PP&E ($7.5 million and $20.3 million for the three and nine months ended September 30, 2015), respectively.
ARC Resources Ltd. | 54 |
7. | LONG-TERM DEBT |
U.S. $ Denominated | Canadian $ Amount | ||||||||||
September 30, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | ||||||||
Senior notes | |||||||||||
Master Shelf Agreement | |||||||||||
5.42% US$ note | 18.8 | 18.8 | 24.6 | 26.0 | |||||||
4.98% US$ note | 30.0 | 40.0 | 39.4 | 55.4 | |||||||
3.72% US$ note | 150.0 | 150.0 | 196.7 | 207.6 | |||||||
2004 note issuance | |||||||||||
5.10% US$ note | — | 4.8 | — | 6.6 | |||||||
2009 note issuance | |||||||||||
7.19% US$ note | — | 13.5 | — | 18.7 | |||||||
8.21% US$ note | 35.0 | 35.0 | 45.9 | 48.4 | |||||||
6.50% Cdn$ note | N/A | N/A | — | 5.8 | |||||||
2010 note issuance | |||||||||||
5.36% US$ note | 150.0 | 150.0 | 196.7 | 207.6 | |||||||
2012 note issuance | |||||||||||
3.31% US$ note | 60.0 | 60.0 | 78.7 | 83.0 | |||||||
3.81% US$ note | 300.0 | 300.0 | 393.5 | 415.2 | |||||||
4.49% Cdn$ note | N/A | N/A | 40.0 | 40.0 | |||||||
Total long-term debt outstanding | 743.8 | 772.1 | 1,015.5 | 1,114.3 | |||||||
Long-term debt due within one year | 50.3 | 57.9 | |||||||||
Long-term debt due beyond one year | 965.2 | 1,056.4 |
At September 30, 2016, the fair value of all senior notes is $1,042.8 million ($1,086.4 million as at December 31, 2015), compared to a carrying value of $1,015.5 million ($1,114.3 million as at December 31, 2015).
ARC Resources Ltd. | 55 |
8. | ASSET RETIREMENT OBLIGATIONS ("ARO") |
ARC has estimated the net present value of its total ARO to be $746.3 million as at September 30, 2016 ($573.2 million at December 31, 2015) based on a total future undiscounted liability of $1.3 billion ($1.2 billion at December 31, 2015).
Nine Months Ended September 30, 2016 | Year Ended December 31, 2015 | ||||
Balance, beginning of period | 573.2 | 616.1 | |||
Increase in liabilities relating to development activities | 2.9 | 5.3 | |||
Increase in liabilities relating to change in estimates and discount rate (1) | 110.8 | 32.4 | |||
Settlement of obligations | (8.5 | ) | (12.3 | ) | |
Accretion | 9.1 | 13.4 | |||
Acquisitions | 16.4 | — | |||
Revaluation of obligations acquired in business combination (2) | 52.8 | — | |||
Dispositions | (10.4 | ) | (81.7 | ) | |
Balance, end of period | 746.3 | 573.2 | |||
Expected to be incurred within one year | 18.0 | 18.0 | |||
Expected to be incurred beyond one year | 728.3 | 555.2 |
(1) | Relates to changes in discount rate and anticipated settlement dates of ARO. |
(2) | Relates to the revaluation of obligations acquired in business combinations at the end of the period using the risk-free discount rate. At the date of acquisition, acquired ARO is recognized at fair value. |
The Bank of Canada's long-term risk-free bond rate of 1.7 per cent (2.2 per cent at December 31, 2015) and an inflation rate of 2.0 per cent (2.0 per cent at December 31, 2015) were used to calculate the present value of ARO at September 30, 2016.
9. | CAPITAL MANAGEMENT |
ARC manages its capital structure and makes adjustments to it in response to changes in economic conditions and the risk characteristics of the underlying assets. ARC is able to change its capital structure by issuing new shares, new debt or changing its dividend policy.
ARC’s objective when managing its capital is to maintain a conservative structure that will allow it to:
• | fund its development and exploration program; |
• | provide financial flexibility to execute on strategic opportunities; and |
• | maintain a dividend policy that, in normal times, in the opinion of Management and the Board of Directors, is sustainable. |
ARC manages the following capital:
• | common shares; and |
• | net debt. |
When evaluating ARC’s capital structure, Management intends to keep its net debt balance to a ratio of less than two times annualized funds from operations for temporary periods with a long-term strategy to keep its net debt balance to a ratio of between one to 1.5 times annualized funds from operations and less than 20 per cent of total market capitalization.
ARC Resources Ltd. | 56 |
Funds from Operations
ARC considers funds from operations to be a key measure of operating performance as it demonstrates ARC’s ability to generate the necessary funds to fund sustaining capital and future growth through capital investment and to repay debt. Management believes that such a measure provides an insightful assessment of ARC’s operations on a continuing basis by eliminating certain non-cash charges and charges that are nonrecurring. Funds from operations is not a standardized measure and therefore may not be comparable with the calculation of similar measures for other entities.
Funds from operations for the three and nine months ended September 30, 2016 and 2015 is calculated as follows:
Three Months Ended | Nine Months Ended | ||||||||
September 30 | September 30 | ||||||||
2016 | 2015 | 2016 | 2015 | ||||||
Cash flow from operating activities | 157.7 | 165.4 | 471.4 | 513.2 | |||||
Net change in other liabilities (Note 14) | 3.9 | 8.1 | (2.8 | ) | 18.0 | ||||
Change in non-cash operating working capital (Note 14) | (8.6 | ) | 1.4 | (23.8 | ) | 41.5 | |||
Funds from operations (1) | 153.0 | 174.9 | 444.8 | 572.7 |
(1) | When applicable, funds from operations is further adjusted to include any portion of unrealized gains and losses on risk management contracts settled annually that relate to current period production. This adjustment was not applicable for the three and nine months ended September 30, 2016 and 2015. |
Net Debt and Total Capitalization
Net debt is used by Management as a key measure to assess the Company's liquidity. Total capitalization is used by Management and ARC's investors in analyzing the Company's balance sheet strength and liquidity.
September 30, 2016 | September 30, 2015 | ||||
Long-term debt (1) | 1,015.5 | 1,092.5 | |||
Accounts payable and accrued liabilities | 151.0 | 188.2 | |||
Dividends payable | 17.7 | 34.4 | |||
Cash and cash equivalents, accounts receivable, prepaid expenses and short-term investment | (174.8 | ) | (334.0 | ) | |
Net debt | 1,009.4 | 981.1 | |||
Shares outstanding (millions) (2) | 352.2 | 344.2 | |||
Share price ($) (3) | 23.73 | 17.64 | |||
Market capitalization | 8,357.7 | 6,071.7 | |||
Net debt obligations | 1,009.4 | 981.1 | |||
Total capitalization | 9,367.1 | 7,052.8 | |||
Net debt as a percentage of total capitalization (%) | 10.8 | 13.9 | |||
Net debt to annualized funds from operations (ratio) (4) | 1.7 | 1.3 |
(1) | Includes current portion of long-term debt at September 30, 2016 and 2015 of $50.3 million and $56.3 million, respectively. |
(2) | Basic shares outstanding as at September 30, 2016 and 2015, respectively. |
(3) | TSX closing price as at September 30, 2016 and 2015, respectively. |
(4) | Annualized funds from operations is calculated by dividing year-to-date funds from operations by the number of days in the same period and then multiplying the quotient by the number of days in the year. Annualized funds from operations is $594.1 million and $765.7 million for the nine months ended September 30, 2016 and 2015, respectively. |
ARC Resources Ltd. | 57 |
10. | FINANCIAL INSTRUMENTS AND MARKET RISK MANAGEMENT |
Financial Instruments
ARC's financial instruments include cash and cash equivalents, short-term investment, accounts receivable, risk management contracts, reclamation fund assets, accounts payable and accrued liabilities, dividends payable, and long-term debt.
ARC’s financial instruments that are carried at fair value on the unaudited condensed interim consolidated balance sheets (the "balance sheets") include cash and cash equivalents, short-term investment, risk management contracts, and reclamation fund assets. The fair value of long-term debt is disclosed in Note 7. To estimate the fair value of these instruments, ARC uses quoted market prices when available, or third-party models and valuation methodologies that use observable market data. Fair value is measured using the assumptions that market participants would use, including transaction-specific details and non-performance risk.
All financial assets and liabilities for which fair value is measured or disclosed in the financial statements are further categorized using a three-level hierarchy that reflects the significance of the lowest level of inputs used in determining fair value:
• | Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
• | Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace. |
• | Level 3 – Valuations in this level are those with inputs for the asset or liability that are not based on observable market data. |
All of ARC’s financial instruments carried at fair value are transacted in active markets. ARC’s cash and cash equivalents, short-term investment, and reclamation fund assets are classified as Level 1 measurements and its risk management contracts and fair value disclosure for its long-term debt are classified as Level 2 measurements. ARC does not have any financial instruments classified as Level 3.
ARC determines whether transfers have occurred between levels in the hierarchy by reassessing its hierarchy classifications at each reporting date based on the lowest level input that is significant to the fair value measurement as a whole. There were no transfers between levels in the hierarchy in the nine months ended September 30, 2016 or 2015.
The carrying values of ARC's accounts receivable, accounts payable and accrued liabilities, and dividends payable liability approximate their fair values.
Financial Assets and Financial Liabilities Subject to Offsetting
ARC's risk management contracts are subject to master netting agreements that create a legally enforceable right to offset by counterparty the related financial assets and financial liabilities on the Company's balance sheets in all circumstances. ARC manages these contracts on the basis of its net exposure to market risks and therefore measures their fair value consistently with how market participants would price the net risk exposure at the reporting date under current market conditions.
ARC Resources Ltd. | 58 |
The following is a summary of ARC's financial assets and financial liabilities that are subject to offsetting as at September 30, 2016 and December 31, 2015:
Gross Amounts of Recognized Financial Assets (Liabilities) | Gross Amounts of Recognized Financial Assets (Liabilities) Offset in Balance Sheet | Net Amounts of Financial Assets (Liabilities) Recognized in Balance Sheet Prior to Credit Risk Adjustment | Credit Risk Adjustment | Net Amounts of Financial Assets (Liabilities) Recognized in Balance Sheet | ||||||
As at September 30, 2016 | ||||||||||
Risk management contracts | ||||||||||
Current asset | 134.3 | (19.5 | ) | 114.8 | (0.9 | ) | 113.9 | |||
Long-term asset | 162.8 | (11.7 | ) | 151.1 | (1.1 | ) | 150.0 | |||
Current liability | (27.5 | ) | 19.5 | (8.0 | ) | 0.1 | (7.9 | ) | ||
Long-term liability | (14.5 | ) | 11.7 | (2.8 | ) | — | (2.8 | ) | ||
Net position | 255.1 | — | 255.1 | (1.9 | ) | 253.2 | ||||
As at December 31, 2015 | ||||||||||
Risk management contracts | ||||||||||
Current asset | 214.3 | (5.0 | ) | 209.3 | (1.8 | ) | 207.5 | |||
Long-term asset | 210.0 | (3.5 | ) | 206.5 | (1.8 | ) | 204.7 | |||
Current liability | (6.6 | ) | 5.0 | (1.6 | ) | — | (1.6 | ) | ||
Long-term liability | (4.2 | ) | 3.5 | (0.7 | ) | — | (0.7 | ) | ||
Net position | 413.5 | — | 413.5 | (3.6 | ) | 409.9 |
Risk Management Contracts
The following is a summary of all risk management contracts in place, excluding premiums, as at September 30, 2016. Risk management contract premiums have been disclosed as commitments in Note 13.
Financial WTI Crude Oil Contracts (1) (2) | |||||||||||
Volume | Sold Swap | Bought Put | Sold Call | Sold Put | |||||||
Term | Contract | bbl/d | US$/bbl | US$/bbl | US$/bbl | US$/bbl | |||||
1-Oct-16 | 31-Dec-16 | Swap | 2,000 | 42.10 | — | — | — | ||||
1-Oct-16 | 31-Dec-16 | Collar | 3,000 | — | 40.00 | 50.00 | — | ||||
1-Jan-17 | 31-Dec-17 | Collar | 3,000 | — | 40.00 | 50.00 | — | ||||
1-Jan-17 | 31-Dec-17 | 3-Way | 6,000 | — | 45.00 | 56.50 | 32.50 | ||||
1-Jul-17 | 31-Dec-17 | 3-Way | 3,000 | — | 50.00 | 58.73 | 37.50 | ||||
1-Jan-18 | 31-Dec-18 | 3-Way | 4,000 | — | 50.00 | 65.39 | 40.00 |
(1) | Settled on the monthly average price. |
(2) | The prices and volumes in this table represent averages for several contracts. The average price for the portfolio of options listed above does not have the same payoff profile as the individual option contracts. |
Financial Cdn$ WTI Crude Oil Contracts (3) | |||||||||
Volume | Sold Swap | Bought Put | Sold Call | ||||||
Term | Contract | bbl/d | Cdn$/bbl | Cdn$/bbl | Cdn$/bbl | ||||
1-Oct-16 | 31-Dec-16 | Swap | 7,000 | 77.20 | — | — | |||
1-Oct-16 | 30-Jun-17 | Collar | 3,000 | — | 70.00 | 83.38 |
(3) | Settled on the monthly average price (monthly average US$/bbl multiplied by the Bank of Canada monthly average noon day rate). |
ARC Resources Ltd. | 59 |
Financial MSW Crude Oil Contracts (4) | |||||
Volume | Sold Swap | ||||
Term | Contract | bbl/d | US$/bbl | ||
1-Oct-16 | 31-Dec-16 | Swap | 10,000 | (3.72 | ) |
1-Jan-17 | 31-Dec-17 | Swap | 9,000 | (3.24 | ) |
(4) | Settled on the monthly average Mixed Sweet Blend ("MSW") Differential to WTI. The MSW differential refers to the discount between WTI and the mixed sweet crude grade at Edmonton, calculated on a monthly weighted average basis. |
Financial NYMEX Henry Hub Natural Gas Contracts (5) | |||||||||
Volume | Sold Swap | Bought Put | Sold Call | ||||||
Term | Contract | MMBtu/d | US$/MMBtu | US$/MMBtu | US$/MMBtu | ||||
1-Oct-16 | 31-Dec-16 | Swap | 40,000 | 4.00 | — | — | |||
1-Oct-16 | 31-Dec-16 | Collar | 105,000 | — | 4.00 | 4.79 | |||
1-Jan-17 | 31-Dec-17 | Swap | 145,000 | 4.00 | — | — | |||
1-Jan-17 | 31-Dec-17 | Collar | 20,000 | — | 3.00 | 3.37 | |||
1-Jan-18 | 31-Dec-18 | Collar | 80,000 | — | 4.00 | 4.91 | |||
1-Jan-18 | 31-Dec-19 | Collar | 10,000 | — | 4.00 | 5.00 | |||
1-Jan-19 | 31-Dec-19 | Collar | 30,000 | — | 4.00 | 5.00 |
(5) | NYMEX Henry Hub "Last Day" Settlement. |
Financial AECO Natural Gas Contracts (6) | |||||||||
Volume | Sold Swap | Bought Put | Sold Call | ||||||
Term | Contract | GJ/d | Cdn$/GJ | Cdn$/GJ | Cdn$/GJ | ||||
1-Oct-16 | 31-Dec-16 | Swap | 30,000 | 2.99 | — | — | |||
1-Nov-16 | 31-Dec-16 | Collar | 30,000 | — | 2.50 | 2.93 | |||
1-Jan-17 | 31-Dec-17 | Swap | 60,000 | 2.64 | — | — | |||
1-Jan-18 | 31-Dec-18 | Swap | 40,000 | 2.96 | — | — | |||
1-Jan-19 | 31-Dec-19 | Swap | 20,000 | 3.16 | — | — | |||
1-Jan-19 | 31-Dec-19 | Collar | 10,000 | — | 3.00 | 3.30 | |||
1-Jan-20 | 31-Dec-20 | Swap | 30,000 | 3.35 | — | — | |||
1-Jan-20 | 31-Dec-20 | Collar | 30,000 | — | 3.08 | 3.60 |
(6) | AECO Monthly (7a) index Cdn$/GJ. |
Financial AECO Basis Ratio Swap Contracts (7) | ||||
Volume | Sold Swap | |||
Term | Contract | MMBtu/d | AECO/NYMEX % | |
1-Oct-16 | 31-Dec-16 | Swap | 10,000 | 88.4 |
1-Oct-16 | 31-Dec-17 | Swap | 110,000 | 90.6 |
1-Oct-16 | 30-Jun-18 | Swap | 20,000 | 89.9 |
1-Jan-17 | 31-Dec-17 | Swap | 10,000 | 86.1 |
1-Jan-17 | 31-Dec-18 | Swap | 5,000 | 77.0 |
1-Jan-18 | 31-Dec-18 | Swap | 45,000 | 81.9 |
1-Jan-18 | 30-Jun-19 | Swap | 20,000 | 90.8 |
1-Jul-18 | 31-Dec-18 | Swap | 20,000 | 85.4 |
1-Jan-19 | 31-Dec-19 | Swap | 20,000 | 81.7 |
1-Jul-19 | 31-Dec-19 | Swap | 20,000 | 80.7 |
(7) | ARC receives NYMEX price based on Last Day settlement multiplied by AECO/NYMEX US$/MMBtu ratio; ARC pays AECO Monthly (7a) index US$/MMBtu. |
ARC Resources Ltd. | 60 |
Financial AECO Basis Fixed Price Swap Contracts (8) | ||||
Volume | Sold Swap | |||
Term | Contract | MMBtu/d | US$/MMBtu | |
1-Jan-17 | 31-Dec-17 | Swap | 65,000 | (0.83) |
1-Jan-17 | 31-Dec-18 | Swap | 5,000 | (0.64) |
1-Jan-18 | 31-Dec-18 | Swap | 45,000 | (0.71) |
1-Jan-19 | 31-Dec-19 | Swap | 40,000 | (0.62) |
1-Jan-20 | 31-Dec-20 | Swap | 40,000 | (0.60) |
(8) | ARC receives NYMEX price based on Last Day settlement less AECO fixed price differential; ARC pays AECO (7a) monthly index US$/MMBtu. |
Financial Electricity Heat Rate Contracts (9) | ||||
Volume | Heat Rate | |||
Term | Contract | MWh | GJ/MWh | |
1-Oct-16 | 31-Dec-17 | Heat Rate Swap | 20 | 13.71 |
(9) | ARC pays AECO Monthly (5a) x Heat Rate; ARC receives floating AESO Power Price (monthly average 24x7) Cdn$/MWh. |
Financial Electricity Contracts (10) | ||||
Volume | Bought Swap | |||
Term | Contract | MWh | Cdn$/MWh | |
1-Oct-16 | 31-Dec-16 | Fixed Rate Swap | 5 | 51.00 |
(10) | AESO Power Price (monthly average 24x7) Cdn$/MWh. |
11. | SHAREHOLDERS’ CAPITAL |
(thousands of shares) | Nine Months Ended September 30, 2016 | Year Ended December 31, 2015 | |||
Common shares, beginning of period | 347,084 | 319,439 | |||
Equity offering | — | 17,859 | |||
Restricted shares issued pursuant to the LTRSA (1) Plan | 97 | 103 | |||
Forfeited restricted shares pursuant to the LTRSA Plan | (3 | ) | (7 | ) | |
Unvested restricted shares held in trust pursuant to the LTRSA Plan | (94 | ) | (96 | ) | |
Dividend reinvestment program | 3,929 | 7,563 | |||
Stock dividend program | 1,207 | 2,224 | |||
Issued on exercise of share options | 28 | — | |||
Cancelled shares | — | (1 | ) | ||
Common shares, end of period | 352,248 | 347,084 |
(1) | Long-term Restricted Share Award ("LTRSA"), includes restricted shares granted and associated stock dividends. |
Net income (loss) per common share has been determined based on the following:
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||
(thousands of shares) | 2016 | 2015 | 2016 | 2015 | ||||||
Weighted average common shares | 351,692 | 342,794 | 350,283 | 338,853 | ||||||
Dilutive impact of share-based compensation (1) | 619 | — | 328 | — | ||||||
Weighted average common shares, diluted | 352,311 | 342,794 | 350,611 | 338,853 |
(1) | For the three and nine months ended September 30, 2016 $1.0 million and $3.2 million share options were excluded from the diluted weighted average shares calculation as they were anti-dilutive ($2.5 million and $1.1 million for the three and nine months ended September 30, 2015), respectively. |
ARC Resources Ltd. | 61 |
Dividends declared for the three and nine months ended September 30, 2016 were $0.15 and $0.50 per common share, respectively ($0.30 and $0.90 for the three and nine months ended September 30, 2015).
On October 17, 2016, the Board of Directors declared a dividend of $0.05 per common share, payable in cash or common shares under the Stock Dividend Program, to shareholders of record on October 31, 2016. The dividend payment date is November 15, 2016. Of the $17.7 million in dividends payable at September 30, 2016 ($34.7 million at December 31, 2015), $1.4 million is payable in common shares under the Stock Dividend Program ($4.5 million at December 31, 2015).
12. | SHARE-BASED COMPENSATION PLANS |
Long-term Incentive Plans
The following table summarizes the Restricted Share Unit ("RSU"), Performance Share Unit ("PSU") and Deferred Share Unit ("DSU") movement for the nine months ended September 30, 2016:
(number of units, thousands) | RSUs | PSUs (1) | DSUs | |||||
Balance, December 31, 2015 | 730 | 1,577 | 317 | |||||
Granted | 387 | 676 | 74 | |||||
Distributed | (297 | ) | (454 | ) | — | |||
Forfeited | (99 | ) | (86 | ) | — | |||
Balance, September 30, 2016 | 721 | 1,713 | 391 |
(1) | Based on underlying units before any effect of the performance multiplier. |
Compensation charges (recoveries) relating to the RSU and PSU Plan and DSU Plan are reconciled as follows:
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||
2016 | 2015 | 2016 | 2015 | ||||||
G&A expenses (recoveries) | 8.8 | (6.1 | ) | 30.4 | (8.4 | ) | |||
Operating expenses (recoveries) | 1.4 | (1.0 | ) | 4.1 | (0.5 | ) | |||
PP&E (recoveries) | 1.3 | (0.8 | ) | 3.4 | (0.7 | ) | |||
Total compensation charges (recoveries) | 11.5 | (7.9 | ) | 37.9 | (9.6 | ) | |||
Cash payments | 14.1 | (25.3 | ) | 25.8 | (10.9 | ) |
At September 30, 2016, $24.2 million of compensation amounts payable were included in accounts payable and accrued liabilities on the balance sheet ($20.0 million at December 31, 2015) and $27.5 million was included in the long-term incentive compensation liability ($19.5 million at December 31, 2015). A recoverable amount of $0.5 million was included in accounts receivable at September 30, 2016 ($0.3 million at December 31, 2015).
Share Option Plan
The changes in total share options outstanding and related weighted average exercise prices for the nine months ended September 30, 2016 were as follows:
Share Options (number of units, thousands) | Weighted Average Exercise Price ($) | ||||
Balance, December 31, 2015 | 3,221 | 21.95 | |||
Granted | 955 | 21.13 | |||
Exercised | (28 | ) | 16.10 | ||
Forfeited | (155 | ) | 21.62 | ||
Balance, September 30, 2016 | 3,993 | 21.35 | |||
Exercisable, September 30, 2016 | 688 | 17.89 |
ARC Resources Ltd. | 62 |
The following table summarizes information regarding share options outstanding at September 30, 2016:
Range of exercise price per common share ($) | Number of share options outstanding (thousands) | Weighted average exercise price per share for options outstanding ($) | Weighted average remaining term (years) | Number of share options exercisable (thousands) | Weighted average exercise price per share for options exercisable ($) | |||||
15.60 - 20.00 | 781 | 15.45 | 2.72 | 377 | 15.45 | |||||
20.01 - 25.00 | 2,730 | 21.4 | 5.2 | 311 | 20.86 | |||||
25.01 - 30.74 | 482 | 30.59 | 4.72 | — | — | |||||
Total | 3,993 | 21.35 | 4.66 | 688 | 17.89 |
ARC estimates the fair value of share options granted on the date of grant using a binomial-lattice option pricing model. The following assumptions were used to arrive at the estimated fair value of the share options at their grant date:
Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 2015 | |||
Grant date share price ($) | 21.13 | 21.86 | ||
Exercise price ($) (1) | 21.13 | 21.86 | ||
Expected annual dividends ($) | 0.60 | 1.20 | ||
Expected volatility (%) (2) | 33.00 | 37.00 | ||
Risk-free interest rate (%) | 0.88 | 1.40 | ||
Expected life of share option (3) | 5.5 to 6 years | 5.5 to 6 years | ||
Fair value per share option ($) | 3.70 | 5.68 |
(1) | Exercise price is reduced monthly by the amount of dividend declared. |
(2) | Expected volatility is determined by the average price volatility of the common shares/trust units over the past seven years. |
(3) | Expected life of the share option is calculated as the mid-point between vesting date and expiry. |
ARC recorded compensation expense of $1.1 million and $3.2 million relating to the share option plan for the three and nine months ended September 30, 2016 ($1.0 million and $2.5 million for the three and nine months ended September 30, 2015), respectively. During the three and nine months ended September 30, 2016, $0.2 million and $0.4 million of share option compensation charges were capitalized to PP&E ($0.1 million and $0.2 million for the three and nine months ended September 30, 2015), respectively.
LTRSA Plan
The changes in total LTRSA outstanding and related fair value per restricted share for the nine months ended September 30, 2016 were as follows:
LTRSA (number of units, thousands) | Fair Value per Restricted Share ($) | ||||
Balance, December 31, 2015 | 93 | 21.54 | |||
Granted | 94 | 21.13 | |||
Forfeited | (3 | ) | 21.86 | ||
Balance, September 30, 2016 | 184 | 21.33 |
ARC recorded G&A expenses of $0.2 million and $1.0 million relating to the LTRSA Plan during the three and nine months ended September 30, 2016 ($nil and $0.7 million for the three and nine months ended September 30, 2015), respectively. At September 30, 2016, $nil compensation amounts payable were included in accounts payable and accrued liabilities on the balance sheet ($nil at December 31, 2015).
ARC Resources Ltd. | 63 |
13. | COMMITMENTS AND CONTINGENCIES |
The following is a summary of ARC’s contractual obligations and commitments as at September 30, 2016:
Payments Due by Period | ||||||||||
1 Year | 2-3 Years | 4-5 Years | Beyond 5 Years | Total | ||||||
Debt repayments (1) | 50.3 | 167.0 | 302.0 | 496.2 | 1,015.5 | |||||
Interest payments (2) | 43.5 | 77.6 | 59.2 | 44.2 | 224.5 | |||||
Reclamation fund contributions (3) | 3.2 | 6.1 | 5.6 | 43.6 | 58.5 | |||||
Purchase commitments | 34.0 | 16.6 | 6.7 | 4.3 | 61.6 | |||||
Transportation commitments | 75.7 | 130.4 | 87.8 | 228.9 | 522.8 | |||||
Operating leases | 15.7 | 29.2 | 27.2 | 34.2 | 106.3 | |||||
Risk management contract premiums (4) | 5.7 | 2.0 | 0.1 | — | 7.8 | |||||
Total contractual obligations and commitments | 228.1 | 428.9 | 488.6 | 851.4 | 1,997.0 |
(1) | Long-term and current portion of long-term debt. |
(2) | Fixed interest payments on senior notes. |
(3) | Contribution commitments to a restricted reclamation fund associated with the Redwater property. |
(4) | Fixed premiums to be paid in future periods on certain commodity price risk management contracts. |
Subsequent to September 30, 2016, ARC entered into an additional gas transportation commitment for 8 years totaling approximately $74.0 million.
ARC Resources Ltd. | 64 |
14. | SUPPLEMENTAL DISCLOSURES |
Presentation in the Statements of Income
ARC’s statements of income are prepared primarily by nature of item, with the exception of employee compensation expenses which are included in both operating and G&A expense line items.
The following table details the amount of total employee compensation expenses included in operating and G&A expense line items in the statements of income:
Three Months Ended | Nine Months Ended | ||||||||
September 30 | September 30 | ||||||||
2016 | 2015 | 2016 | 2015 | ||||||
Operating | 9.3 | 9.6 | 27.5 | 28.1 | |||||
G&A | 19.6 | 19.9 | 67.5 | 48.4 | |||||
Total employee compensation expenses | 28.9 | 29.5 | 95.0 | 76.5 |
Cash Flow Statement Presentation
The following tables provide a detailed breakdown of certain line items contained within cash flow from operating activities:
Three Months Ended | Nine Months Ended | ||||||||
September 30 | September 30 | ||||||||
Change in Non-Cash Working Capital | 2016 | 2015 | 2016 | 2015 | |||||
Accounts receivable | 10.9 | 25.8 | 4.4 | 55.5 | |||||
Accounts payable and accrued liabilities | 6.7 | (16.2 | ) | 14.9 | (152.0 | ) | |||
Prepaid expenses | 1.1 | 3.4 | 0.2 | (1.5 | ) | ||||
Total | 18.7 | 13.0 | 19.5 | (98.0 | ) | ||||
Relating to: | |||||||||
Operating activities | 8.6 | (1.4 | ) | 23.8 | (41.5 | ) | |||
Investing activities | 10.1 | 14.4 | (4.3 | ) | (56.5 | ) | |||
Total change in non-cash working capital | 18.7 | 13.0 | 19.5 | (98.0 | ) |
Three Months Ended | Nine Months Ended | ||||||||
September 30 | September 30 | ||||||||
Other Non-Cash Items | 2016 | 2015 | 2016 | 2015 | |||||
Non-cash lease inducement | (0.4 | ) | (0.4 | ) | (1.3 | ) | (1.3 | ) | |
Loss (gain) on short-term investment | (0.7 | ) | 0.4 | (1.1 | ) | (0.1 | ) | ||
Share-based compensation expense | 1.3 | 1.0 | 3.5 | 2.5 | |||||
Total other non-cash items | 0.2 | 1.0 | 1.1 | 1.1 |
Three Months Ended | Nine Months Ended | ||||||||
September 30 | September 30 | ||||||||
Net Change in Other Liabilities | 2016 | 2015 | 2016 | 2015 | |||||
Long-term incentive compensation liability | 0.7 | (3.6 | ) | 8.0 | (9.7 | ) | |||
Risk management contracts | — | — | 3.3 | (0.2 | ) | ||||
ARO | (4.6 | ) | (4.5 | ) | (8.5 | ) | (8.1 | ) | |
Total net change in other liabilities | (3.9 | ) | (8.1 | ) | 2.8 | (18.0 | ) |
ARC Resources Ltd. | 65 |
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, MYRON M. STADNYK, President and Chief Executive Officer of ARC Resources Ltd. certify the following:
1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of ARC Resources Ltd. (the “issuer”) for the interim period ended September 30, 2016. |
2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
4. | Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
A. | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
I. | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
II. | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
B. | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
5.1 | Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. |
5.2 | N/A |
5.3 | N/A |
6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2016 and ended on September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: November 10, 2016
/s/ Myron M. Stadnyk |
MYRON M. STADNYK |
President and Chief Executive Officer |
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, P. Van R. Dafoe, Senior Vice President and Chief Financial Officer of ARC Resources Ltd. certify the following:
1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of ARC Resources Ltd. (the “issuer”) for the interim period ended September 30, 2016. |
2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
4. | Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
A. | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
I. | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
II. | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
B. | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
5.1 | Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. |
5.2 | N/A |
5.3 | N/A |
6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2016 and ended on September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: November 10, 2016
/s/ P. Van R. Dafoe |
P. VAN R. DAFOE |
Senior Vice President and Chief Financial Officer |
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