All values are in Canadian dollars. CALGARY, March 6, 2012 /CNW/ -
Provident Energy Ltd. (Provident) today announced its 2011 fourth
quarter interim and audited 2011 annual financial and operating
results, updated hedging information and the March cash dividend.
"Provident delivered record fourth quarter and record 2011 Adjusted
EBITDA((1)), driven by very strong NGL market fundamentals and our
aggressive business development efforts," said President and Chief
Executive Officer, Doug Haughey. "Furthermore, with the significant
increase in growth capital deployment opportunities, we are well
positioned to drive new fee-for-service earnings in the future."
Fourth Quarter Summary -- Gross operating margin grew by seven
percent to $122 million in the fourth quarter of 2011, up from $113
million in the fourth quarter of 2010, reflecting higher operating
margins from both Redwater West and Empress East, which increased
contributions by 13 percent and three percent, respectively, due to
strong NGL per unit margins. This was partially offset by a five
percent decrease in contribution from Commercial Services. --
Adjusted EBITDA(1)was $100 million for the fourth quarter of 2011,
an increase of 14 percent from $88 million in the fourth quarter of
2010 reflecting higher gross operating margin combined with lower
realized losses on financial derivative instruments. -- Adjusted
funds flow from continuing operations(2) increased 22 percent to
$93 million ($0.34 per share) in the fourth quarter of 2011,
compared to $76 million ($0.28 per unit) in the fourth quarter of
2010, largely due to the seven percent increase in gross operating
margin, combined with lower realized losses on financial derivative
instruments and lower current tax expense. -- Dividends paid to
shareholders totaled $0.14 per share resulting in a payout ratio of
45 percent of adjusted funds flow from continuing operations(2) for
the fourth quarter of 2011, net of sustaining capital expenditures.
-- Capital expenditures were $59 million during the fourth quarter
of 2011 compared to $26 million in the fourth quarter of 2010.
During the fourth quarter of 2011, Provident completed several key
projects including the Septimus to Younger and Taylor to Boundary
Lake pipeline projects as well as construction of a significant
portion of the Cromer truck terminal. -- On October 3, 2011,
Provident completed the acquisition of a two-thirds interest in
Three Star Trucking Ltd., a Saskatchewan based oilfield hauling
company serving Bakken-area crude oil producers. The acquisition
expands Provident's footprint within the Bakken area, establishing
a strong crude oil presence and providing opportunities to enhance
its NGL and diluents logistics services businesses. 2011 Financial
Summary 2011 financial statements are reported under International
Financial Reporting Standards. -- Gross operating margin grew by 22
percent to $381 million in 2011, up from $313 million in 2010, due
to higher contributions from both Redwater West and Empress East,
which increased by 33 percent and 23 percent, respectively,
reflecting stronger year-over-year NGL per unit margins. --
Adjusted EBITDA(1) was a record $282 million for 2011, an increase
of 25 percent from $227 million in 2010. The increase reflects
higher gross operating margin, partially offset by higher realized
losses on financial derivative instruments under the market risk
management program. -- Adjusted funds flow from continuing
operations(2) increased 23 percent to $253 million ($0.93 per
share) in 2011, compared to $206 million ($0.77 per unit) in 2010,
largely due to the 22 percent increase in gross operating margin
partially offset by higher realized losses on financial derivative
instruments and a current income tax recovery in 2010. -- Dividends
paid to shareholders totaled $0.54 per share resulting in a payout
ratio of 63 percent of adjusted funds flow from continuing
operations(2) for 2011, net of sustaining capital expenditures. --
Total debt at December 31, 2011 was $510 million compared to $474
million at December 31, 2010. Provident continues to maintain its
financial flexibility with approximately $310 million of capacity
remaining under its $500 million revolving term credit facility. --
Total debt to Adjusted EBITDA(1) for year ended December 31, 2011
was a ratio of 1.8 to 1 compared to 2.1 to 1 for the year ended
December 31, 2010. -- Capital expenditures from continuing
operations were $134 million in 2011, an increase of 91 percent
from the $70 million spent in 2010. In 2011, Provident spent
approximately $113 million on growth projects and $21 million on
sustaining capital requirements. Capital expenditures were
primarily directed towards cavern development and terminalling
infrastructure at the Corunna facility, cavern and brine pond
development at the Redwater facility and Provident's pipeline
replacement/expansion projects in northeast British Columbia.
_________________________________________________ (1) Adjusted
EBITDA from continuing operations is earnings before interest,
taxes, depreciation, amortization, and other non-cash items - see
"Reconciliation of Non-GAAP measures" in the Management Discussion
and Analysis (MD&A). Adjusted EBITDA presented above is from
continuing operations and excludes the buyout of financial
derivative instruments and strategic review and restructuring costs
in 2010. (2) Adjusted funds flow from continuing operations
excludes realized loss on buyout of financial derivative
instruments and strategic review and restructuring costs in 2010 -
see "Reconciliation of Non-GAAP measures" in the MD&A. Updated
Hedging Disclosure Provident has released updated current hedging
disclosure including a volume and weighted average hedge price
summary for NGL frac spread volumes and a summary of all current
financial derivative positions on its website at
www.providentenergy.com/bus/riskmanagement/commodity.cfm. The
updated information reflects Provident's hedge positions and
forward-market indications at February 29, 2012. For 2012,
Provident has hedged approximately 66 percent of its estimated NGL
frac spread sales volumes and approximately 68 percent of its
estimated frac spread natural gas input volumes. Recent
Developments On January 16, 2012, Provident announced it had
entered into an agreement with Pembina Pipeline Corporation
(Pembina) for Pembina to acquire all of the issued and outstanding
common shares of Provident by way of a plan of arrangement under
the Business Corporations Act (Alberta). Under the terms of the
arrangement, Provident shareholders will receive 0.425 of a Pembina
share for each Provident share held. This transaction will
combine two organizations with complementary strategies and assets
that will be a leading player in the North American energy
infrastructure sector with an estimated enterprise value of
approximately $10 billion. Pending shareholder approval from both
Provident and Pembina shareholders and regulatory approval of the
acquisition, Pembina has announced its intention to increase its
monthly dividend from $0.13 per share per month ($1.56 annualized)
to $0.135 per share per month ($1.62 annualized). The
acquisition is expected to be completed on or about April 1, 2012.
March 2012 Cash Dividend The March cash dividend of $0.045 per
share is payable on April 13, 2012 and will be paid to shareholders
of record on March 19, 2012. The ex-dividend date will be March 16,
2012. Payment of the March cash dividend will not be affected by
the closing of the acquisition by Pembina on or about April 1,
2012. Provident's current 2012 annualized dividend rate is
$0.54 per common share. Based on the current annualized dividend
rate and the TSX closing price on March 5, 2012 of $11.55
Provident's yield is approximately 4.7 percent. For shareholders
receiving their dividends in U.S. funds, the March 2012 cash
dividend will be approximately US$0.045 per share based on an
exchange rate of 0.9936. The actual U.S. dollar dividend will
depend on the Canadian/U.S. dollar exchange rate on the payment
date and will be subject to applicable withholding taxes. 2011
Fourth Quarter Conference Call A conference call has been scheduled
for Wednesday, March 7, 2012 at 8:00 a.m. MT (10:00 a.m. Eastern)
to discuss Provident's results for the 2011 fourth quarter and year
ended December 31, 2011. To participate, please dial 647-427-7450
or 888-231-8191 approximately 10 minutes prior to the conference
call. An archived recording of the call will be available for
replay until March 14, 2012 by dialing 514-807-9274 or 855-859-2056
and entering passcode 43799676. Provident will also provide a
replay of the call on its website at www.providentenergy.com.
Provident Energy Ltd. is a Calgary-based corporation that owns and
manages a natural gas liquids midstream business. Provident's
Midstream facilities are strategically located in Western Canada
and in the premium NGL markets in Eastern Canada and the U.S.
Provident provides monthly cash dividends to its shareholders and
trades on the Toronto Stock Exchange and the New York Stock
Exchange under the symbols PVE and PVX, respectively. This news
release contains certain forward-looking statements concerning
Provident and the arrangement involving Pembina, as well as other
expectations, plans, goals, objectives, information or statements
about future events, conditions, results of operations or
performance that may constitute "forward-looking statements" or
"forward-looking information" under applicable securities
legislation. Such statements or information involve substantial
known and unknown risks and uncertainties, certain of which are
beyond Provident's control, including the impact of general
economic conditions in Canada and the United States, industry
conditions, changes in laws and regulations including the adoption
of new environmental laws and regulations and changes in how they
are interpreted and enforced, increased competition, the lack of
availability of qualified personnel or management, pipeline design
and construction, fluctuations in commodity prices, foreign
exchange or interest rates, stock market volatility, obtaining
required approvals of regulatory authorities and the failure to
complete the arrangement. Such forward-looking information is
provided for the purpose of providing information about
management's current expectations and plans relating to the
future. Readers are cautioned that reliance on such
information may not be appropriate for other purposes, such as
making investment decisions. Such forward-looking statements
or information are based on a number of assumptions which may prove
to be incorrect. In addition to other assumptions identified in
this news release, assumptions have been made regarding, among
other things, commodity prices, operating conditions, capital and
other expenditures, project development activities and certain
matters relating to the arrangement. Although Provident believes
that the expectations reflected in such forward-looking statements
or information are reasonable, undue reliance should not be placed
on forward-looking statements because Provident can give no
assurance that such expectations will prove to be correct.
Forward-looking statements or information are based on current
expectations, estimates and projections that involve a number of
risks and uncertainties which could cause actual results to differ
materially from those anticipated by Provident and described in the
forward-looking statements or information. The forward-looking
statements or information contained in this news release are made
as of the date hereof and Provident undertakes no obligation to
update publicly or revise any forward-looking statements or
information, whether as a result of new information, future events
or otherwise unless so required by applicable securities laws. The
forward-looking statements or information contained in this news
release are expressly qualified by this cautionary statement.
Consolidated financial and operational highlights ($ 000s except
per Three monthsended December share data) 31, Year ended December
31, % % 2011 2010 Change 2011 2010 Change Product sales and $ $
service revenue $ 569,547 543,725 5 1,955,878 $ 1,746,557 12 Funds
flow from continuing $ $ operations(1) $ 92,767 74,133 25 252,632 $
(6,720) - Funds flow from discontinued $ $ operations (1) $ - - - -
$ (2,436) (100) Funds flow from $ $ operations (1) $ 92,767 74,133
25 252,632 $ (9,156) - Adjusted EBITDA - continuing $ $ operations
(2) $ 100,360 86,342 16 282,428 $ 13,919 1,929 Adjusted funds flow
from continuing $ $ operations(3) $ 92,767 76,002 22 252,632 $
206,121 23 Per weighted average share - 0.34 basic $ $ 0.28 21 $
0.93 $ 0.77 21 Per weighted average share - 0.34 diluted(4) $ $
0.27 26 $ 0.93 $ 0.77 21 Percent of adjusted funds flow from
continuing operations, net of sustaining capital spending, paid out
as declared dividends 45% 67% (33) 63% 96% (34) Adjusted EBITDA
excluding buyout of financial derivative instruments and strategic
review and restructuring costs - continuing operations(2) $ 100,360
$ 88,211 14 $ 282,428 $ 226,760 25 Dividends to $ $ shareholders $
36,905 48,221 (23) 146,287 $ 191,639 (24) Per share $ 0.14 $ 0.18
(25) $ 0.54 $ 0.72 (25) Net income from continuing $ $ operations $
20,585 63,622 (68) 97,217 $ 112,217 (13) Per weighted average share
- 0.08 basic $ $ 0.24 (66) $ 0.36 $ 0.42 (14) Per weighted average
share - 0.08 diluted(4) $ $ 0.23 (65) $ 0.36 $ 0.42 (14) Net income
(loss) $ 20,585 $ 72,380 (72) $ 97,217 $ (10,506) - Per weighted
average share - 0.08 basic $ $ 0.27 (70) $ 0.36 $ (0.04) - Per
weighted average share - 0.08 diluted (4) $ $ 0.26 (69) $ 0.36 $
(0.04) - Capital expenditures from continuing operations: -- Growth
$ 49,063 $ 22,873 115 $ 113,014 $ 63,612 78 -- Sustaining $ 10,064
$ 3,510 187 $ 21,101 $ 6,606 219 Acquisitions - continuing $ $
operations $ 15,458 - 15,458 $ - Weighted average shares
outstanding (000s) -- basic 273,183 267,709 2 270,742 266,008 2 --
diluted (4) 273,183 297,743 (8) 270,742 266,008 2 Provident
Midstream NGL sales volumes (bpd) 115,714 121,627 (5) 104,759
106,075 (1) Consolidated As at As at December31, December 31, ($
000s) 2011 2010 % Change Capitalization Long-term debt (including
current $ 509,921 $ 473,754 8 portion) Shareholders' equity $
579,058 $ 588,207 (2) (1) Based on cash flow from operations before
changes in working capital and site restoration expenditures - see
"Reconciliation of Non-GAAP measures". (2) Adjusted EBITDA is
earnings before interest, taxes, depreciation, amortization, and
other non-cash items - see "Reconciliation of Non-GAAP measures".
(3) Adjusted funds flow from continuing operations excludes
realized loss on buyout of financial derivative instruments and
strategic review and restructuring costs. (4) Includes dilutive
impact of convertible debentures. Management's Discussion
& Analysis The following analysis provides a detailed
explanation of Provident's operating results for the quarter and
year ended December 31, 2011 compared to the quarter and year ended
December 31, 2010 and should be read in conjunction with the
accompanying consolidated financial statements of Provident. This
analysis has been prepared using information available up to March
6, 2012. Provident operates a midstream business in Canada and the
United States and extracts, processes, markets, transports and
offers storage of natural gas liquids (NGLs) within the integrated
facilities at Younger in British Columbia, Redwater and Empress in
Alberta, Kerrobert and Alida in Saskatchewan, Sarnia in Ontario,
Superior in Wisconsin and Lynchburg in Virginia. Effective in
the second quarter of 2010, Provident's Canadian oil and natural
gas production business ("Provident Upstream" or "COGP") was
accounted for as discontinued operations (see note 23 of the
consolidated financial statements). As a result of Provident's
conversion from an income trust to a corporation, effective January
1, 2011, references to "common shares", "shares", "share based
compensation", "shareholders", "performance share units", "PSUs",
"restricted share units", "RSUs", "premium dividend and dividend
reinvestment share purchase (DRIP) plan", and "dividends" should be
read as references to "trust units", "units", "unit based
compensation", "unitholders", "performance trust units", "PTUs",
"restricted trust units", "RTUs", "premium distribution,
distribution reinvestment (DRIP) and optional unit purchase plan",
and "distributions", respectively, for periods prior to January 1,
2011. The reporting focuses on the financial and operating
measurements management uses in making business decisions and
evaluating performance. This analysis contains
forward-looking information and statements. See "Forward-looking
information" at the end of the analysis for further discussion. The
Company prepares its financial statements in accordance with
Canadian generally accepted accounting principles as set out in the
Handbook of the Canadian Institute of Chartered Accountants ("CICA
Handbook"). In 2010, the CICA Handbook was revised to incorporate
International Financial Reporting Standards ("IFRS"), and requires
publicly accountable enterprises to apply such standards effective
for years beginning on or after January 1, 2011. This
adoption date requires the restatement, for comparative purposes,
of amounts reported by Provident for the annual and quarterly
periods within the year ended December 31, 2010, including the
opening consolidated statement of financial position as at January
1, 2010. Provident's quarterly and annual 2011 consolidated
financial statements reflect this change in accounting
standards. For more information see "Change in accounting
policies". The analysis refers to certain financial and operational
measures that are not defined in generally accepted accounting
principles (GAAP) in Canada. These non-GAAP measures include funds
flow from operations, adjusted funds flow from continuing
operations, adjusted EBITDA and further adjusted EBITDA to exclude
realized loss on buyout of financial derivative instruments and
strategic review and restructuring costs. Management uses funds
flow from operations to analyze operating performance. Funds flow
from operations is reviewed, along with debt repayments and capital
programs in setting monthly dividends. Funds flow from
operations as presented is not intended to represent cash flow from
operations or operating profits for the period nor should it be
viewed as an alternative to cash provided by operating activities,
net earnings or other measures of financial performance calculated
in accordance with IFRS. All references to funds flow from
operations throughout this report are based on cash provided by
operating activities before changes in non-cash working capital and
site restoration expenditures. See "Reconciliation of
non-GAAP measures". Management uses adjusted EBITDA to analyze the
operating performance of the business. Adjusted EBITDA as
presented does not have any standardized meaning prescribed by IFRS
and therefore it may not be comparable with the calculation of
similar measures for other entities. Adjusted EBITDA as
presented is not intended to represent cash provided by operating
activities, net earnings or other measures of financial performance
calculated in accordance with IFRS. All references to
adjusted EBITDA throughout this report are based on earnings before
interest, taxes, depreciation, amortization, and other non-cash
items ("adjusted EBITDA"). See "Reconciliation of non-GAAP
measures". Recent developments Arrangement agreement with Pembina
Pipeline Corporation On January 15, 2012, Provident and Pembina
Pipeline Corporation ("Pembina") entered into an agreement (the
"Arrangement Agreement") for Pembina to acquire all of the issued
and outstanding common shares of Provident by way of a plan of
arrangement (the "Pembina Arrangement") under the Business
Corporations Act (Alberta). Under the terms of the Arrangement
Agreement, Provident shareholders will receive 0.425 of a Pembina
share for each Provident share held (the "Provident Exchange
Ratio"). Pembina will also assume all of the rights and
obligations relating to Provident's convertible debentures.
The conversion price of each class of convertible debentures will
be adjusted based on the Provident Exchange Ratio. Following
closing of the Pembina Arrangement, Pembina will be required to
make an offer for the Provident convertible debentures at 100
percent of their principal values plus accrued and unpaid
interest. The repurchase offer will be made within 30 days of
closing of the Pembina Arrangement. Should a holder of the
Provident convertible debentures elect not to accept the repurchase
offer, the debentures will mature as originally set out in their
respective indentures. Holders who convert their Provident
convertible debentures following completion of the Pembina
Arrangement will receive common shares of Pembina. In
addition, Provident immediately suspended its DRIP plan following
the announcement of the Pembina Arrangement. The proposed
transaction will be carried out by way of a court-approved plan of
arrangement and will require the approval of at least 66 2/3% of
holders of Provident shares represented in person or by proxy at a
special meeting of Provident shareholders to be held on March 27,
2012 to consider the Pembina Arrangement. The Pembina
Arrangement is also subject to obtaining the approval of a majority
of the votes cast by the holders of Pembina shares at a special
meeting of Pembina shareholders to be held on March 27, 2012 to
consider the issuance of Pembina shares in connection with the
Pembina Arrangement. In addition to shareholder and court
approvals, the proposed transaction is subject to applicable
regulatory approvals and the satisfaction of certain other closing
conditions customary in transactions of this nature, including
compliance with the Competition Act (Canada) and the acceptance of
the Toronto Stock Exchange. Subject to receipt of all
required approvals, closing of the Pembina Arrangement is expected
to occur on or about April 1, 2012. Acquisition of Three Star
Trucking Ltd. On October 3, 2011, Provident announced that it had
completed the acquisition of a two-thirds interest in Three Star
Trucking Ltd. ("Three Star"), a Saskatchewan based oilfield hauling
company serving Bakken-area crude oil producers. The $15.5 million
acquisition was funded by approximately $7.9 million in cash and
944,828 Provident shares. Provident has the option to
purchase the remaining one-third interest in Three Star after three
years from the closing date. Long-term storage agreements On
September 15, 2011, Provident announced that it had entered into
agreements with Nova Chemicals Corporation to provide approximately
one million barrels of product storage and other services at the
Provident Redwater Facility with staged on-stream dates in the
third quarter of 2012 and first quarter of 2013. On September 30,
2011, Provident announced that it had entered into a 10 year
agreement with a major industrial company in the Sarnia area for
the contracting of 525,000 barrels of product storage at
Provident's Corunna Facility located near Sarnia, Ontario. The
storage services are anticipated to commence in the first half of
2012. On October 6, 2011, Provident announced that it had entered
into a 10 year crude oil storage agreement at its Redwater Facility
with a major producer and will be providing approximately one
million barrels of storage capacity on a fee-for-service
basis. The storage services are expected to commence on a
staged basis with 50 percent beginning in the second quarter of
2012 and the remainder in the second quarter of 2013. Revolving
term credit facility Provident completed an extension of its
existing credit agreement (the "Credit Facility") on October 14,
2011, with National Bank of Canada as administrative agent and a
syndicate of Canadian chartered banks and other Canadian and
foreign financial institutions (the "Lenders"). Pursuant to
the amended Credit Facility, the Lenders have agreed to continue to
provide Provident with a credit facility of $500 million which,
under an accordion feature, can be increased to $750 million at the
option of the Company, subject to obtaining additional
commitments. The amended Credit Facility also provides for a
separate Letter of Credit facility which was increased from $60
million to $75 million. The amended terms of the Credit
Facility provide for a revolving three year period expiring on
October 14, 2014, from the previous maturity date of June 28, 2013
(subject to customary extension provisions). Significant events in
2010 The second quarter of 2010 included two significant events
that impacted the comparative results related to earnings, adjusted
EBITDA and funds flow from operations significantly. First,
Provident sold the remainder of its Upstream business unit to move
forward as a pure-play infrastructure and logistics midstream
business. This transaction completed the sales process of the
Upstream business and the Upstream business unit is classified as
discontinued operations. Strategic review and restructuring
costs associated with the continued divestment of upstream
properties, the final sale of Provident's Upstream business and the
related separation of the business units were also incurred in the
second quarter of 2010. See "Discontinued operations (Provident
Upstream)". The second significant transaction was execution of a
buyout of the fixed price derivative contracts that related to the
Midstream business. In April, 2010, Provident completed a
buyout of its existing fixed price crude oil and natural gas swaps
for a total realized cost of $199.1 million. The carrying value of
the specific contracts at March 31, 2010 was a liability of $177.7
million, resulting in an offsetting unrealized gain in the second
quarter of 2010. The $199.1 million buyout represents a cash cost
and reduces funds flow from operations and adjusted EBITDA. The
offsetting unrealized gain of $177.7 million is not reflected in
Provident's funds flow from operations or adjusted EBITDA as it is
a non-cash recovery. Provident retained financial derivative option
structures on crude oil and natural gas products as well as
contracts relating to the management of physical contract exposure.
"Adjusted funds flow from continuing operations" and "Adjusted
EBITDA excluding buyout of financial derivative instruments and
strategic review and restructuring costs" Two additional non-GAAP
measures of "Adjusted funds flow from continuing operations" and
"Adjusted EBITDA excluding buyout of financial derivative
instruments and strategic review and restructuring costs" have been
provided and are also used in the calculation of certain
ratios. The adjusted non-GAAP measures are provided as an
additional measure to evaluate the performance of Provident's
pure-play Midstream infrastructure and logistics business and to
provide additional information to assess future funds flow and
earnings generating capability. See "Reconciliation of non-GAAP
measures". Fourth quarter highlights The fourth quarter highlights
section provides commentary on the fourth quarter of 2011 results
compared to the fourth quarter of 2010. Definitions of terms
used in this section, as appropriate, are defined in the year over
year section of Management's Discussion and Analysis ("MD&A").
Reconciliation of non-GAAP measures Provident calculates earnings
before interest, taxes, depreciation, amortization and other
non-cash items (adjusted EBITDA) and adjusted EBITDA excluding
buyout of financial derivative instruments and strategic review and
restructuring costs within its MD&A disclosure. These are
non-GAAP measures. A reconciliation between adjusted EBITDA
and income from continuing operations before taxes follows:
Continuing operations Three months ended December 31, ($ 000s) 2011
2010 % Change Income before taxes $ 31,216 $ 45,585 (32) Adjusted
for: Financing charges 9,364 10,509 (11) Unrealized loss on
financial derivative instruments 27,526 12,364 123 Depreciation and
amortization 11,916 11,644 2 Unrealized foreign exchange loss and
other 420 1,240 (66) Loss on revaluation of conversion feature of
convertible debentures and redemption liability 12,169 433 2710
Non-cash share based compensation expense 8,695 4,567 90 Adjusted
EBITDA attributable to non-controlling interest (946) - - Adjusted
EBITDA 100,360 86,342 16 Adjusted for: Strategic review and
restructuring costs - 1,869 (100) Adjusted EBITDA excluding buyout
of financial derivative instruments and strategic review and
restructuring costs $ 100,360 $ 88,211 14 The following table
reconciles funds flow from operations and adjusted funds flow from
continuing operations with cash provided by operating activities:
Reconciliation of funds flow from Three months ended December31,
operations ($ 000s) 2011 2010 % Change Cash provided by operating $
105,714 $ 127,031 (17) activities Change in non-cash operating
(12,195) (52,898) (77) working capital Funds flow from operations
attributable to non-controlling (752) - - interest Funds flow from
operations 92,767 74,133 25 Strategic review and restructuring -
1,869 (100) costs Adjusted funds flow from $ 92,767 $ 76,002 22
continuing operations Funds flow from continuing operations
and dividends Threemonths endedDecember31, ($ 000s, except per
share data) 2011 2010 % Change Funds flow from continuing
operations and dividends Funds flow from continuing operations $
92,767 $ 74,133 25 Adjusted funds flow from continuing $ $
operations(1) 92,767 76,002 22 Per weighted average share - basic $
0.34 $ 0.28 21 - diluted (2) $ 0.34 $ 0.27 26 Declared dividends $
36,905 $ 48,221 (23) Per share $ 0.14 $ 0.18 (25) Percent of
adjusted funds flow from continuing operations, net of sustaining
capital spending, paid out as declared dividends 45% 67% (33) ((1))
Adjusted funds flow from operations excludes realized loss on
buyout of derivative instruments and strategic review and
restructuring costs. ((2)) Includes dilutive impact of convertible
debentures. Fourth quarter 2011 adjusted funds flow from
continuing operations was $92.8 million, a 22 percent improvement
from the $76.0 million recorded in the fourth quarter of
2010. The increase is primarily due to a seven percent
increase in gross operating margin combined with lower realized
losses on financial derivative instruments and lower current tax
expense during the fourth quarter of 2011 compared to the fourth
quarter of 2010. Declared dividends in the fourth quarter of 2011
totaled $36.9 million, 45 percent of adjusted funds flow from
continuing operations, net of sustaining capital spending.
This compares to $48.2 million of declared distributions in the
fourth quarter of 2010, 67 percent of adjusted funds flow from
continuing operations, net of sustaining capital spending.
Provident Midstream operating results review Market environment
Provident's performance is closely tied to market prices for NGL
and natural gas, which can vary significantly from period to
period. The key reference prices impacting Midstream gross
operating margins are summarized in the following table: Midstream
business reference prices Three monthsended December31, 2011 2010 %
Change WTI crude oil (US$ per barrel) $ 94.06 $ 85.17 10 Exchange
rate (from US$ to Cdn$) 1.03 1.01 2 WTI crude oil expressed in Cdn$
per barrel $ 96.68 $ 86.26 12 AECO natural gas monthly index (Cdn$
per gj) $ 3.29 $ 3.39 (3) Frac Spread Ratio(1) 29.4 25.4 16 Mont
Belvieu Propane (US$ per US gallon) $ 1.44 $ 1.26 14 Mont Belvieu
Propane expressed as a percentage of WTI 64% 62% 3 Market Frac
Spread in Cdn$ per barrel(2) $ 58.41 $ 46.25 26 (1) Frac spread
ratio is the ratio of WTI expressed in Canadian dollars per barrel
to the AECO monthly index (Cdn$ per gj). (2) Market frac spread is
determined using average spot prices at Mont Belvieu, weighted
based on 65% propane, 25% butane, and 10% condensate, and the AECO
monthly index price for natural gas. The NGL pricing environment in
the fourth quarter of 2011 was significantly stronger than in the
fourth quarter of 2010. The average fourth quarter 2011 WTI crude
oil price was US$94.06 per barrel, representing an increase of 10
percent compared to the fourth quarter of 2010. Propane
prices were also stronger than in the prior year, tracking the
increase in crude oil prices and reflecting a strengthening of
propane prices relative to WTI. The Mont Belvieu propane price
averaged US$1.44 per U.S. gallon (64 percent of WTI) in the fourth
quarter of 2011, compared to US$1.26 per U.S. gallon (62 percent of
WTI) in the fourth quarter of 2010. Butane and condensate
sales prices were also much improved in the fourth quarter of 2011,
reflective of higher crude oil prices and steady petrochemical and
oilsands demand for these products. The fourth quarter 2011 AECO
natural gas price averaged $3.29 per gj compared to $3.39 per gj
during the fourth quarter of 2010, a decrease of three
percent. While low natural gas prices are generally favorable
to NGL extraction and fractionation economics, a sustained period
in a low priced gas environment may impact the availability and
overall cost of natural gas and NGL mix supply in western Canada,
as natural gas producers may curtail drilling activities. However,
strengthening NGL pricing in 2011 has resulted in improved netbacks
for producers drilling in natural gas plays with higher levels of
associated NGLs, such as the Montney area in British
Columbia. Increased focus on liquids-rich natural gas
drilling is beneficial to Provident supply, particularly at
Redwater. Continued softness in natural gas prices have
improved market frac spreads but have also caused increased
extraction premiums paid for natural gas supply in western Canada,
particularly at Empress. Market frac spreads averaged $58.41 per
barrel during the fourth quarter of 2011, representing a 26 percent
increase from $46.25 per barrel during the fourth quarter of
2010. Higher frac spreads were a result of higher NGL sales
prices combined with a lower AECO natural gas price. The
benefit to Provident of higher market frac spreads in the fourth
quarter of 2011 was offset by increased costs for natural gas
supply in the form of extraction premiums. Empress extraction
premiums have increased by approximately 10 percent in the fourth
quarter of 2011 relative to the prior year quarter. Higher premiums
are primarily a result of reduced volumes of natural gas flowing
past the Empress straddle plants and increased competition for NGLs
as a result of higher frac spreads. In the fourth quarter of
2011, natural gas throughput at the Empress Eastern border averaged
approximately 4.4 bcf per day, approximately 10 percent lower than
in the fourth quarter of 2010. Lower natural gas throughput
directly impacts production at the Empress facilities which in turn
reduces the supply of propane-plus available for sale in Sarnia and
in surrounding eastern markets. Tighter supply at Sarnia may
have a positive impact on eastern sales prices relative to other
major propane hubs during periods of high demand. Provident
Midstream business performance Provident Midstream results are
summarized as follows: Three months ended December31, (bpd) 2011
2010 % Change Redwater West NGL sales volumes 66,866 72,672 (8)
Empress East NGL sales volumes 48,848 48,955 - Provident Midstream
NGL sales volumes 115,714 121,627 (5) Threemonths ended December
31, ($ 000s) 2011 2010 % Change Redwater West margin $ 68,641 $
60,861 13 Empress East margin 37,282 36,055 3 Commercial Services
margin 15,623 16,428 (5) Gross operating margin 121,546 113,344 7
Realized loss on financial derivative instruments (11,406) (16,406)
(30) Cash general and administrative expenses (9,244) (7,284) 27
Other income and realized foreign exchange 410 (1,443) - EBITDA
attributable to non-controlling interest (946) - - Adjusted EBITDA
excluding buyout of financial derivative instruments and strategic
review and restructuring costs 100,360 88,211 14 Strategic review
and restructuring costs - (1,869) (100) Adjusted EBITDA $ 100,360 $
86,342 16 Gross operating margin Midstream gross operating
margin during the fourth quarter of 2011 totaled $121.5 million, an
increase of seven percent compared to the same period in the prior
year. The increase in operating margin is the result of a
higher contribution from both Redwater West and Empress East by 13
percent and three percent, respectively, partially offset by a five
percent decrease in operating margin from Commercial Services.
Redwater West The fourth quarter 2011 operating margin for Redwater
West was $68.6 million, an increase of 13 percent compared to $60.9
million in the fourth quarter of 2010. Strong fourth quarter
2011 results were primarily a result of stronger prices for NGLs
partially offset by a decrease in sales volumes. In addition,
the fourth quarter 2010 operating margin included $4.1 million
representing a product gain resulting from volume testing performed
at the NGL mix caverns. Overall, Redwater West NGL sales volumes
averaged 66,866 bpd in the fourth quarter of 2011, a decrease of
eight percent compared to the prior year quarter. Lower NGL
sales volumes can be largely attributed to a decrease in sales
volumes for condensate. Condensate sale volumes decreased
compared to the prior year quarter as Provident imported less
condensate via railcar from the U.S. Gulf Coast for sale into the
western Canadian market. Margins on imported condensate supply tend
to be lower than product supplied through western Canadian NGL mix
or product extracted at Younger due to the significant
transportation costs incurred on imported product. Decreases
in sales volumes were more than offset by significant improvements
in condensate market pricing, resulting in a higher product
operating margin despite the decrease in sales volumes. Product
operating margins for butane increased in the fourth quarter of
2011 as increased market prices more than offset a slight decrease
in sales volumes due to reduced demand from refiners and blenders
of crude oil as compared to the fourth quarter of 2010.
Product operating margins for propane were lower in the fourth
quarter of 2011 as warm weather in western Canada softened demand
compared to the prior year quarter, while costs increased as
inventories accumulated in the third quarter of 2011, at higher
market prices, were sold in the fourth quarter of 2011.
Ethane margins were comparable to the prior year quarter. Empress
East Empress East gross operating margin was $37.3 million in the
fourth quarter of 2011 compared to $36.1 million in the same
quarter of 2010. The three percent increase was primarily
associated with significant increases in the market price for
condensate as lower production and sales volumes of condensate in
Empress East were offset by significant market price increases
partially driven by a 10 percent increase in WTI in the fourth
quarter of 2011 compared to the prior year quarter. The
product operating margin increase for condensate was partially
offset by a slightly lower product operating margin for propane as
weaker demand, primarily driven by mild temperatures in central
Canada, led to lower sales volumes. Lower demand from
refiners for butane was offset by significant market price
increases resulting in a consistent product operating margin for
butane in the fourth quarter of 2011 compared to the fourth quarter
of 2010. Overall, Empress East sales volumes averaged 48,848
bpd, consistent with the sales volume in the fourth quarter of
2010. The positive impacts of higher sales prices and frac
spreads for Empress East were partially offset by increased
premiums paid to purchase natural gas in the Empress market.
Commercial Services Operating margin in the fourth quarter of 2011
was $15.6 million, representing a decrease of five percent compared
to the same period in 2010. The decrease in margin was
primarily associated with decreased condensate terminalling
revenues partly as a result of the termination of a multi-year
condensate storage and terminalling services agreement in 2010 as
well as the completion in mid-2010 of the Enbridge Southern Lights
pipeline, which transports condensate from the United States to the
Edmonton area. This decrease was partially offset by
increases in margin related to third party storage and the
acquisition of Three Star. Earnings before interest, taxes,
depreciation, amortization, and non-cash items ("adjusted EBITDA")
Fourth quarter 2011 adjusted EBITDA excluding buyout of financial
derivative instruments and strategic review and restructuring costs
increased to $100.4 million from $88.2 million in the fourth
quarter of 2010 reflecting higher gross operating margin combined
with lower realized losses on financial derivative instruments.
Capital expenditures Provident substantially increased its 2011
growth capital expenditures when compared to 2010. In the
fourth quarter of 2011, Provident incurred total capital
expenditures of $59.1 million compared to $26.4 million in the
prior year quarter. Driven by substantial demand for new
storage services at Redwater, Provident deployed $20.2 million
(2010 - $6.5 million) of capital on cavern and brine pond
development at the Redwater facility, $12.8 million (2010 - $1.7
million) was directed to the growth-related portions of the Taylor
to Boundary Lake and the Septimus to Younger pipeline projects, and
$3.7 million (2010 - $12.2 million) of expenditures were incurred
for storage and terminalling infrastructure development at the
Provident Corunna facility. An additional $7.5 million
(2010 - nil) was directed toward the construction of a truck
terminal in Cromer, Manitoba while $4.8 million (2010 - $2.5
million) was spent on various infrastructure improvements.
Finally, an additional $10.1 million (2010 - $3.5 million) was
directed towards sustaining capital activities and office related
capital, including $6.5 million (2010 - $1.7 million) related to
the sustaining portion of the Taylor to Boundary Lake pipeline. Net
income Consolidated Three months ended December31, ($ 000s, except
per share data) 2011 2010 % Change Net income from continuing
operations $ 20,585 $ 63,622 (68) Net income from discontinued
operations - 8,758 (100) Net income $ 20,585 $ 72,380 (72) Per
weighted average share (1) - basic $ 0.08 $ 0.27 (70) - diluted(2)
$ 0.08 $ 0.26 (69) ((1)) Based on weighted average number of shares
outstanding. ((2)) Includes the dilutive impact of convertible
debentures. Net income from continuing operations for the
fourth quarter of 2011 was $20.6 million, compared to $63.6 million
in the fourth quarter of 2010. Higher adjusted EBITDA was
more than offset by higher unrealized losses on financial
derivative instruments and higher income tax expense. Net
income in the fourth quarter of 2010 was impacted by net income
from discontinued operations of $8.8 million related to
post-closing adjustments attributed to the sale of the Upstream
business in the second quarter of 2010. Taxes Continuing operations
Three months ended December31, ($ 000s) 2011 2010 % Change Current
tax expense $ 446 $ 4,138 (89) Deferred income tax 10,185 (22,175)
- expense (recovery) $ 10,631 $ (18,037) - Current tax expense was
$0.4 million in the fourth quarter of 2011 compared to an expense
of $4.1 million in the fourth quarter of 2010. The fourth
quarter 2011 current tax expense was driven by earnings generated
in the Company's recently acquired subsidiary, Three Star, that is
in excess of allowable tax pool claims. The fourth quarter
2010 current tax expense was attributed to new IRS guidance that
restricted the application of a portion of the tax loss carryback
in the U.S. Midstream operations related to the recovery of income
taxes paid in prior periods. This provided for a deferred tax
benefit, thereby increasing the current income tax expense and
deferred income tax recovery in the fourth quarter of 2010.
The tax losses were generated primarily by the realized loss on
buyout of the financial derivative instruments incurred in the
second quarter of 2010. The 2011 fourth quarter future income tax
expense was $10.2 million compared to a deferred income tax
recovery of $22.2 million in the fourth quarter of 2010. The
deferred income tax expense in the fourth quarter of 2011 resulted
primarily from the use of existing tax pools to offset earnings
from Provident's Canadian midstream business. The deferred
income tax recovery in the fourth quarter of 2010 resulted in part
from the movement from current taxes to deferred income taxes due
to the new IRS guidance that restricted the application of a
portion of the tax loss carryback in the U.S. Midstream operations
related to the recovery of taxes paid in prior periods as discussed
above. The remaining change in the deferred income tax recovery
resulted from losses created by deductions at the incorporated
subsidiary level under the previous Trust structure. Financing
charges Continuing operations Threemonths ended December 31, ($
000s, except as noted) 2011 2010 % Change Interest on bank debt $
2,990 $ 2,631 14 Interest on convertible debentures 4,999 5,452 (8)
7,989 8,083 (1) Less: Capitalized borrowing costs (609) - - Total
cash financing charges $ 7,380 $ 8,083 (9) Weighted average
interest rate on all 4.9% 5.5% (11) long-term debt Accretion and
other non-cash financing 1,984 2,426 (18) charges Total financing
charges $ 9,364 $ 10,509 (11) Financing charges for the fourth
quarter of 2011 have decreased in comparison to the fourth quarter
of 2010. Interest on bank debt is higher in the fourth
quarter of 2011 as Provident had more debt drawn on its revolving
credit facility, partially offset by lower borrowing rates.
Interest on convertible debentures for the fourth quarter of 2011
was lower than in the comparable period in 2010 reflecting the
refinancing of the 6.5% convertible debentures with the issuance of
two new series of 5.75% convertible debentures in late 2010 and
2011, combined with a reduced average coupon rate on the
outstanding convertible debentures in 2011. In addition, in 2011
Provident has capitalized borrowing costs attributable to the
construction of assets, such as storage caverns and related
facilities, which take a substantial period of time to get ready
for their intended use. This reduced the Company's total
recognized financing charges in the fourth quarter of 2011 by $0.6
million (2010 - nil). Market risk management program A summary of
Provident's risk management contracts executed during the fourth
quarter of 2011 is contained in the following table. Activity in
the Fourth Quarter: Midstream Volume Year Product (Buy)/Sell Terms
Effective Period 2012 Crude Oil 1,224 Bpd US $97.40 per bbl April 1
- (3) (6) December 31 1,216 Bpd US $92.75 per bbl January 1 - (3)
(6) December 31 978 Bpd Cdn $101.82 per July 1 - December bbl (3)
(6) 31 Natural Gas (30,311) Gjpd Cdn $3.26 per gj January 1 - (2)
(6) December 31 Propane 2,083 Bpd US $1.4685 per January 1 - gallon
(4) (6) February 29 Normal Butane 2,445 Bpd US $1.7434 per January
1 - gallon (5) (6) December 31 Sell US Foreign Exchange $2,633,333
per January 1 - June month @ 1.016 30 (7) Sell US $5,785,714 per
January 1 - July month @ 0.996 31 (7) Sell US $5,144,444 per
January 1 - month @ 0.996 September 30 (7) Sell US $2,666,667 per
April 1 - month @ 1.042 December 31 (7) Sell US $2,875,000 per
January 1 - month @ 1.050 December 31 (7) 2013 Crude Oil 1,700 Bpd
US $96.65 per January 1 - March bbl (3) (6) 31 Sell US Foreign
Exchange $5,000,000 per January 1 - March month @ 1.050 31 (7)
Corporate Volume Year Product (Buy)/Sell Terms Effective
Period Notional Pay Average July 1 2013 - Interest Rate $
50,000,000 (Cdn$) Fixed rate of September 30, 1.124% (8) 2014
(1) The above table represents transactions entered into
over the fourth quarter of 2011. (2) Natural Gas contracts are
settled against AECO monthly index. (3) Crude Oil contracts are
settled against NYMEX WTI calendar average. (4) Propane contracts
are settled against Mont Belvieu C3 TET. (5) Normal Butane
contracts are settled against Belvieu NC4 NON TET and Belvieu NC4
TET. (6) Frac spread contracts. (7) US Dollar forward contracts are
settled against the Bank of Canada noon rate average. Selling
notional US dollars for Canadian dollars at a fixed exchange rate
results in a fixed Canadian dollar price for the underlying
commodity. (8) Interest rate forward contract settles monthly
against 1M CAD BA CDOR Settlement of market risk management
contracts The following table summarizes the impact of financial
derivative contracts settled during the fourth quarters of 2011 and
2010 that were included in realized loss on financial derivative
instruments. Three months ended December 31, Realized loss on
financial derivative 2011 2010 instruments ($ 000s except volumes)
Volume(1) Volume (1) Fracspread related Crude oil $ (809) 0.1 $
(2,929) 0.3 Natural gas (4,760) 6.4 (4,721) 6.4 Propane 2,409 1.1
(6,738) 1.1 Butane (851) 0.4 (4,301) 0.4 Condensate (967) 0.2 (596)
0.2 Foreign exchange (3,677) 1,135 Sub-total frac spread (8,655)
(18,150) related Corporate Electricity 680 (79) Interest rate (321)
(35) Management of exposure embedded in physicalcontracts (3,110)
1.0 1,858 0.2 Realized loss on financial derivative $ (11,406) $
(16,406) instruments The above table represents aggregate net
volumes that were (1) bought/sold over the periods. Crude oil and
NGL volumes are listed in millions of barrels and natural gas is
listed in millions of gigajoules. The realized loss for the fourth
quarter of 2011 was $11.4 million compared to $16.4 million in the
comparable 2010 quarter. The majority of the realized loss in
the fourth quarter of 2011 was driven by natural gas purchase
derivative contracts settling at a contracted price higher than the
market natural gas prices, foreign exchange contracts settling at a
contracted rate lower than the average market rates, as well as
crude oil derivative sales contracts settling at contracted crude
oil prices lower than the crude oil market prices during the
settlement period. The comparable 2010 realized loss was
driven mostly by NGL derivative sales contracts settling at a
contracted price lower than the market NGL prices during the
settlement period, natural gas purchase derivative contracts in the
Midstream business settling at a contracted price higher than the
market natural gas prices during the settlement period as well as
crude oil derivative sales contracts settling at contracted crude
oil prices lower than the crude oil market prices during the
settlement period. 2011 Year end results Reconciliation of non-GAAP
measures Provident calculates earnings before interest, taxes,
depreciation, amortization, and other non-cash items (adjusted
EBITDA) and adjusted EBITDA excluding buyout of financial
derivative instruments and strategic review and restructuring costs
within its MD&A disclosure. These are non-GAAP measures.
A reconciliation between these measures and income from continuing
operations before taxes follows: Continuing operations Year
endedDecember 31, ($ 000s) 2011 2010 % Change Income before taxes $
165,703 $ 64,390 157 Adjusted for: Financing charges 41,282 32,251
28 Unrealized gain offsetting buyout of - (177,723) (100) financial
derivative instruments Unrealized loss on financial 3,235 52,599
(94) derivative instruments Depreciation and amortization 43,630
44,475 (2) Unrealized foreign exchange gain and (414) (3,786) (89)
other Loss on revaluation of conversion feature of convertible
debentures and 17,469 433 3,934 redemption liability Non-cash share
based compensation 12,469 1,280 874 expense Adjusted EBITDA
attributable to (946) - - non-controlling interest Adjusted EBITDA
282,428 13,919 1,929 Adjusted for: Realized loss on buyout of
financial - 199,059 (100) derivative instruments Strategic review
and restructuring - 13,782 (100) costs Adjusted EBITDA excluding
buyout of financial derivative instruments and strategic review and
restructuring costs $ 282,428 $ 226,760 25 The following table
reconciles funds flow from operations and adjusted funds flow from
continuing operations with cash provided by (used in) operating
activities: Reconciliation of funds flow from Year ended December
31, operations ($ 000s) 2011 2010 % Change Cash provided by (used
in) operating $ 220,239 $ (39,669) - activities Change in non-cash
operating working 33,145 28,472 16 capital Site restoration
expenditures - - 2,041 (100) discontinued operations Funds flow
from operations attributable (752) - - to non-controlling interest
Funds flow from operations 252,632 (9,156) - Funds flow from
discontinued operations - 2,436 (100) Realized loss on buyout of
financial - 199,059 (100) derivative instruments Strategic review
and restructuring - 13,782 (100) costs Adjusted funds flow from
continuing $ 252,632 $ 206,121 23 operations Funds flow from
continuing operations and dividends Year ended December 31, ($
000s, except per share data) 2011 2010 % Change Funds flow from
continuing operations and dividends Funds flow from continuing
operations $ 252,632 $ (6,720) - Adjusted funds flow from
continuing $ 252,632 $ 206,121 23 operations(1) Per weighted
average share - basic and diluted (2) $ 0.93 $ 0.77 21 Declared
dividends $ 146,287 $ 191,639 (24) Per share $ 0.54 $ 0.72 (25)
Percent of adjusted funds flow from continuing operations, net of
sustaining capital spending, paid out as declared dividends 63% 96%
(34) (1)Adjusted funds flow from operations excludes realized loss
on buyout of financial derivative instruments and strategic review
and restructuring costs. (2)Includes dilutive impact of convertible
debentures. Funds flow from continuing operations includes the
impact of the Midstream financial derivative contract buyout, as
well as strategic review and restructuring costs associated with
the separation and divestment of Provident's Upstream business and
the corporate conversion. Adjusted funds flow from continuing
operations is presented as a measure to evaluate the performance of
Provident's pure-play Midstream infrastructure business and to
provide additional information to assess future funds flow
generating capability. For the year ended December 31, 2011,
adjusted funds flow from continuing operations was $252.6 million,
23 percent above the $206.1 million in 2010. The increase is
attributed to a significant increase in gross operating margin
partially offset by higher realized losses on financial derivative
instruments and a current income tax recovery in 2010. Declared
dividends in 2011 totaled $146.3 million, 63 percent of adjusted
funds flow from continuing operations, net of sustaining capital
spending. This compares to $191.6 million of declared
distributions in the comparable period of 2010, 96 percent of
adjusted funds flow from continuing operations, net of sustaining
capital spending. Outlook The following outlook contains
forward-looking information regarding possible events, conditions
or results of operations in respect of Provident that is based on
assumptions about future economic conditions and courses of
action. There are a number of risks and uncertainties, which
could cause actual events or results to differ materially from
those anticipated by Provident and described in the forward-looking
information. In addition, the following outlook for 2012,
including Provident's anticipated capital program, is provided by
Provident only and does not reflect the completion of the proposed
acquisition of Provident by Pembina as described in "Recent
developments" in this MD&A or the intentions of Pembina
following closing of the acquisition. See "Forward-looking
information" in this MD&A for additional information regarding
assumptions and risks in respect of Provident's forward-looking
information. Provident delivered record adjusted EBITDA in 2011 and
exceeded all of its key performance objectives: -- Provident
generated year-over-year adjusted EBITDA growth of 25 percent; --
Provident exited 2011 with a total debt to adjusted EBITDA ratio of
approximately 1.8 to 1, less than its target of 2.5 to 1; and --
Provident paid out $146 million in dividends and achieved a payout
ratio of adjusted funds flow from continuing operations, net of
sustaining capital spending, of 63 percent, well below its target
of 80 percent. Provident deployed approximately $134 million of
capital in 2011, comprised of $113 million of new growth capital
and $21 million of sustaining capital. 2011 growth capital spending
increased 78 percent over 2010 and reflects Provident's success in
developing new fee-for-service growth projects around its midstream
assets. Provident completed several key projects in the
fourth quarter including completion of the Septimus to Younger
pipeline, completion of the Taylor to Boundary Lake pipeline
replacement and is in the final stages of tie-in of its NGL truck
unloading terminal at Cromer, Manitoba. In addition, on
October 3, 2011, Provident completed the acquisition of a
two-thirds interest in Three Star, a Saskatchewan based oilfield
hauling company serving Bakken-area crude oil producers. The Taylor
to Boundary lake pipeline project included construction to upgrade
and replace an aging section of the Taylor to Boundary Lake
pipeline on the Liquids Gathering System. A significant portion of
the new pipeline segment was placed into service during the second
quarter of 2011 with the final leg of the pipeline completed in the
fourth quarter of 2011. The goal of replacing the aging
sections of this pipeline was to ensure continued safe operation
and to increase Younger throughput from growing Montney
development. For 2012, Provident announced a $135 million growth
capital program and approximately $10 million to $15 million of
sustaining capital. The growth capital for 2012 is
anticipated to be allocated as follows: -- Provident expects to
deploy approximately $95 million on the continued development of
underground storage caverns and related infrastructure at Redwater,
reflecting strong producer demand for storage of diluents and/or
crude oil to enhance operational efficiencies. Provident continues
to have more demand for storage services at Redwater than it can
currently provide, and indications are that demand for hydrocarbon
storage continues to grow. -- Provident expects to spend
approximately $6 million on projects around its Younger
fractionation facility and Liquids Gathering System to optimize
Younger plant operating capacity and further enhance Redwater West
supply. -- Approximately $18 million of capital has been allocated
to the initial phase of a planned debottlenecking and optimization
of the Redwater NGL facility, which is expected to increase
throughput capacity by approximately 7,500 bpd. -- For 2012,
Provident allocated approximately $10 million of capital for
projects associated with its storage and terminalling facilities at
Corunna, Ontario. -- Provident allocated approximately $6 million
of capital towards expanding Provident's crude oil and NGL
footprint in the Bakken area, including activities around its
Cromer truck terminal and projects completed through its
subsidiary, Three Star. In terms of the NGL market outlook: -- Warm
weather at the end of the fourth quarter 2011 reduced the demand
for propane, which is primarily used to meet winter heating demand.
The unseasonably warm trend has continued into the first quarter of
2012. This has resulted in lower propane sales and pricing so far
in the first quarter of 2012. Despite this short-term softness,
propane industry fundamentals for the future remain strong with
high propane exports from North America and strong petrochemical
margins where propane is used as feedstock. -- Spot Alberta natural
gas prices are currently about 40 percent lower than they were in
the fourth quarter of 2011, which has led to significantly lower
production costs for NGLs at Empress and Younger. -- Increasing
heavy oil production in Alberta continues to increase the demand
for condensate and butane as a diluent and butane as a solvent in
SAGD operations. Provident continues to see very strong demand for
fractionation, storage and ancillary services. -- Empress
extraction premiums are near the midpoint of a $6 to $9 per
gigajoule range. Based on current market conditions, Provident's
expectation is that first quarter 2012 adjusted EBITDA will be near
first quarter 2011 levels. For 2012, Provident has hedged
approximately 66 percent of its estimated NGL frac spread sales
volumes and approximately 68 percent of its estimated frac spread
natural gas input volumes. Provident has contracted with a third
party engineering firm to develop a detailed cost estimate on the
twinning of its ethane-plus Redwater NGL Facility. The
increasing production of NGL mix in the Western Canadian
Sedimentary Basin would be the primary source of volumes for the
65,000 bpd fractionation expansion. If there is a sufficient level
of customer commitment and Board of Director approval by mid-2012,
the facility could be in operation by mid-2014. Subsequent to the
end of the fourth quarter 2011, Pembina and Provident announced an
agreement whereby Pembina would acquire all of the issued and
outstanding shares of Provident. Under the terms of the
Arrangement Agreement, Provident shareholders will receive 0.425 of
a Pembina share for each Provident share held. The proposed
transaction will be carried out by a court-approved plan of
arrangement and require the approval of both Provident and Pembina
shareholders. Provident will hold its special meeting to
approve the transaction on March 27, 2012, at 9:00 a.m. (MT) in the
Ballroom at the Metropolitan Conference Center, 333 - 4
Avenue SW, Calgary, Alberta. The transaction is expected to
close on or about April 1, 2012, subject to receipt of all
shareholder and regulatory approvals and the satisfaction of all
other closing conditions. Dividends and distributions The following
table summarizes dividends and distributions paid as declared by
Provident since inception: Distribution / Dividend Amount Per share
/ unit (Cdn$) (US$)* 2001 Cash Distributions paid as declared $
2.54 $ 1.64 - March 2001 - December 2001 2002 Cash Distributions
paid 2.03 1.29 as declared 2003 Cash Distributions paid 2.06 1.47
as declared 2004 Cash Distributions paid 1.44 1.10 as declared 2005
Cash Distributions paid 1.44 1.20 as declared 2006 Cash
Distributions paid 1.44 1.26 as declared 2007 Cash Distributions
paid 1.44 1.35 as declared 2008 Cash Distributions paid 1.38 1.29
as declared 2009 Cash Distributions paid 0.75 0.67 as declared 2010
Cash Distributions paid 0.72 0.72 as declared Inception to December
31, 2010 - Cash Distributions $ 15.24 $ 11.99 paid as declared
Capital Distribution - June $ 1.16 $ 1.10 29, 2010 2011 Cash
Dividends paid as declared Record Date Payment Date January 20,
2011 February 15, 2011 $ 0.045 $ 0.046 February 24, 2011 March 15,
2011 0.045 0.046 March 22, 2011 April 15, 2011 0.045 0.047 April
20, 2011 May 13, 2011 0.045 0.046 May 26, 2011 June 15, 2011 0.045
0.046 June 22, 2011 July 15, 2011 0.045 0.047 July 20, 2011 August
15, 2011 0.045 0.046 August 24, 2011 September 15, 2011 0.045 0.046
September 21, 2011 October 14, 2011 0.045 0.044 October 24, 2011
November 15, 2011 0.045 0.044 November 23, 2011 December 15, 2011
0.045 0.044 December 21, 2011 January 13, 2012 0.045 0.044 Total
2011 Cash Dividends paid as declared $ 0.540 $ 0.546 Total
inception to December 31, 2011 Cash Distributions/Dividends and
Capital Distribution $ 16.940 $ 13.636 * Exchange rate based on the
Bank of Canada noon rate on the payment date. Provident
Midstream operating results review The Midstream business
Provident's Midstream business extracts, processes, stores,
transports and markets NGLs and offers these services to third
party customers. In order to aid in the understanding of the
business, this MD&A provides information about the associated
business activities of the Midstream operation comprising Redwater
West, Empress East and Commercial Services. The assets are
integrated across Canada and the U.S., and are also used to
generate fee-for-service income. The business is supported by
an integrated supply, marketing and distribution function that
contributes to the overall operating margin of the Company.
Redwater West is comprised of the following core assets: -- 100
percent ownership of the Redwater NGL facility, incorporating a
65,000 bpd fractionation, storage and transportation facility that
includes 12 pipeline receipt and delivery points, railcar loading
facilities with direct access to CN rail and indirect access to CP
rail, multi-product truck loading facilities, 7.8 million gross
barrels of salt cavern storage, and a 80,000 bpd condensate rail
offloading facility with a 500 railcar storage yard. The Redwater
facility is the only facility in western Canada that can
fractionate a high-sulphur ethane-plus mix. -- Approximately 7,000
bpd of contracted fractionation capacity at other facilities. --
43.3 percent direct ownership and 100 percent control of all
products from the nameplate capacity 750 mmcfd Younger NGL
extraction plant located at Taylor in northeastern British
Columbia. The Younger plant supplies local markets as well as
Provident's Redwater facility near Edmonton. -- 100 percent
ownership of the 565 kilometer proprietary Liquids Gathering System
("LGS") that runs along the Alberta-British Columbia border
providing access to a highly active basin for liquids-rich natural
gas exploration and exploitation. Provident also has long-term
shipping rights on the Pembina pipeline system that extends the
product delivery transportation network through to the Redwater
facility. -- A rail car fleet of approximately 500 rail cars under
long-term lease agreement. Empress East is comprised of the
following core assets: -- Approximately 2.0 Bcfd in extraction
capacity at Empress, Alberta. This is the combination of 67.5
percent ownership of the 1.2 Bcfd capacity Provident Empress NGL
extraction plant, 33.0 percent ownership in the 2.7 Bcfd capacity
BP Empress 1 Plant, 12.4 percent ownership in the 1.1 Bcfd capacity
ATCO Plant and 8.3 percent ownership in the 2.4 Bcfd capacity
Spectra Plant. -- 100 percent ownership of a 55,000 bpd debutanizer
at Empress, Alberta. -- 50 percent ownership in both the 150,000
bpd Kerrobert pipeline and 1.6 mmbbl underground storage facility
near Kerrobert, Saskatchewan which facilitates injection of NGLs
into the Enbridge pipeline system. Along the Enbridge pipeline
system in Superior, Wisconsin, Provident holds an 18.3 percent
ownership of a 300,000 barrel storage staging facility and 18.3
percent ownership of a 10,000 bpd depropanizer. -- In Sarnia,
Ontario, 16.5 percent ownership of a nameplate capacity 150,000 bpd
fractionators and 1.7 mmbbl of raw product storage capacity, as
well as 18.0 percent of 5.7 mmbbl of finished product storage and a
rail, truck and pipeline terminalling facility. An additional
150,000 bbls of specification product storage capacity is also
contracted in the Sarnia area. -- 100 percent ownership of the
Provident Corunna storage facility. The 1,000 acre site has an
active cavern storage capacity of 12.8 million barrels, consisting
of 4.8 million barrels of hydrocarbon storage and 8.0 million
barrels currently used for brine storage. The facility also
includes 13 pipeline connections and a rail offloading facility. --
A propane distribution terminal at Lynchburg, Virginia. -- A rail
car fleet of approximately 400 rail cars under long-term lease
agreement. Commercial Services includes services such as
fractionation, storage, NGL terminalling, loading and offloading
that are provided to third parties on a cost of service or a fee
basis utilizing assets at Provident's Redwater facility. In
addition, pipeline tariff income is generated from Provident's
ownership of the LGS in northwest Alberta which flows into
Pembina's pipeline from LaGlace to Redwater. Provident also
collects tariff income from its 50 percent ownership in the
Kerrobert Pipeline which transports NGLs from Empress to Kerrobert
for injection into the Enbridge pipeline for delivery to
Sarnia. Provident owns a debutanizer at its Empress facility,
which removes condensate from the NGL mix for sale as a diluent to
blend with heavy oil. This service is provided to a major
energy company on a long-term cost of service basis. Earnings
from these activities have little direct exposure to market price
volatility and are thus relatively stable. The assets used to
generate this fee-for-service income are also employed to generate
proprietary income in Redwater West and Empress East.
Commercial Services also includes operating results from Three
Star, a Saskatchewan based oilfield hauling company serving Bakken
area crude oil producers, of which a two-thirds interest was
acquired in October 2011. Provident's integrated marketing and
distribution arm has offices in Calgary, Alberta, Sarnia, Ontario,
and Houston, Texas and operates under the brand name Kinetic.
Rather than selling NGLs produced by the Redwater West and Empress
East facilities at the plant gate, the marketing and logistics
group utilizes Provident's integrated suite of transportation,
storage and logistics assets to access markets across North
America. Due to its broad marketing scope, Provident's NGL
products are priced based on multiple pricing indices. These
indices generally correspond with the four major NGL trading hubs
in North America which are located in Mont Belvieu, Texas, Conway,
Kansas, Edmonton, Alberta, and Sarnia, Ontario. Mont Belvieu,
the largest NGL trading center, serves as the reference point for
NGL pricing in North America. By strategically building inventories
of specification products during lower priced periods which can
then be distributed into premium-priced markets across North
America during periods of high seasonal demand, Provident is able
to optimize the margins it earns from its extraction and
fractionation operations. Provident's marketing group also
generates arbitrage trading margins by taking advantage of trading
opportunities created by locational price differentials. Long-term
contracts Provident has several long-term contracts in place to
help ensure product availability and to secure long-term revenue
streams. These contracts include: -- A long-term purchase
agreement for NGL mix at the Younger NGL extraction plant. -- A
significant portion of the available propane, butane and condensate
("propane-plus") fractionation capacity at the Redwater
fractionation facility is contracted through a long term
fee-for-service arrangement with third parties. -- The ethane
produced from Provident's facilities at Empress and Redwater is
largely sold under long-term contracts. -- A portion of Provident's
80,000 bpd capacity of condensate rail off-loading is under
long-term contracts. -- A significant portion of the condensate
storage capacity of 500,000 barrels at the Provident Redwater
facility is sold under long-term contracts to various third
parties. -- A long-term significant propane sales contract at the
Provident Redwater facility. -- A long-term contract on a cost of
service basis for the majority of its 50,000 bbl/d Empress
debutanizer facility with a major energy producer. -- Agreements
with Nova Chemicals Corporation for storage at the Provident
Redwater facility. -- A 10-year crude oil storage agreement,
totaling approximately one million barrels of storage capacity, at
the Provident Redwater facility with a major producer on a
fee-for-service basis. -- A 10-year agreement with a major
industrial company in the Sarnia area for storage and the use of
associated pipeline and drying facilities at the Provident Corunna
facility on a fee-for-service basis. Market environment Provident's
performance is closely tied to market prices for NGLs and natural
gas, which can vary significantly from period to period. The key
reference prices impacting Midstream gross operating margin are
summarized in the following table: Midstream business reference
prices Year ended December 31, 2011 2010 % Change WTI crude oil
(US$ per barrel) $ 95.12 $ 79.53 20 Exchange rate (from US$ to
Cdn$) 0.99 1.03 (4) WTI crude oil expressed in Cdn$ per barrel $
94.21 $ 81.92 15 AECO natural gas monthly index (Cdn$ per gj) $
3.48 $ 3.93 (11) Frac Spread Ratio (1) 27.0 20.9 29 Mont Belvieu
Propane (US$ per US gallon) $ 1.47 $ 1.17 26 Mont Belvieu Propane
expressed as a percentage of WTI 65% 62% 5 Market Frac Spread in
Cdn$ per barrel(2) $ 54.67 $ 40.30 36 (1) Frac spread ratio is the
ratio of WTI expressed in Canadian dollars per barrel to the AECO
monthly index (Cdn$ per gj). (2) Market frac spread is determined
using average spot prices at Mont Belvieu, weighted based on 65%
propane, 25% butane, and 10% condensate, and the AECO monthly index
price for natural gas. The pricing environment for NGLs in 2011 was
significantly stronger than in 2010. The average 2011 WTI
crude oil price was US$95.12 per barrel, representing an increase
of 20 percent compared to US$79.53 per barrel in 2010. The
impact of higher WTI crude oil prices was partially offset by the
strengthening of the Canadian dollar relative to the U.S. dollar in
2011 compared to 2010. Propane prices were also stronger than
in the comparative period, reflecting the increase in crude oil
prices combined with lower North American propane supply for much
of 2011 resulting from above average exports and stronger demand
from the petrochemical sector. The Mont Belvieu propane price
averaged US$1.47 per U.S. gallon (65 percent of WTI) in 2011,
compared to US$1.17 per U.S. gallon (62 percent of WTI) in
2010. Butane and condensate sales prices were also much
improved in 2011, also reflective of higher crude oil prices and
steady petrochemical and oilsands demand for these products. The
2011 AECO natural gas price averaged $3.48 per gj compared to $3.93
per gj during 2010, a decrease of 11 percent. While low natural gas
prices are generally favorable to NGL extraction and fractionation
economics, a sustained period in a low priced gas environment may
impact the availability and overall cost of natural gas and NGL mix
supply in western Canada, as natural gas producers may curtail
drilling activities. However, strengthening NGL pricing in 2011 has
resulted in improved netbacks for producers drilling in natural gas
plays with higher levels of associated NGLs, such as the Montney
area in British Columbia. Increased focus on liquids-rich
natural gas drilling is beneficial to Provident supply,
particularly at Redwater. Continued softness in natural gas
prices has improved market frac spreads but has also caused an
increase in extraction premiums paid for natural gas supply in
western Canada, particularly at Empress. The margins generated from
Provident's extraction operations at Empress, Alberta and Younger,
British Columbia are determined primarily by "frac spreads", which
represent the difference between the selling prices for
propane-plus and the input cost of the natural gas required to
produce the respective NGL products. Frac spreads can change
significantly from period to period depending on the relationship
between crude oil and natural gas prices (the "frac spread ratio"),
absolute commodity prices, and changes in the Canadian to U.S.
dollar foreign exchange rate. Traditionally, a higher frac spread
ratio and higher crude oil prices will result in stronger
extraction margins. Differentials between propane-plus and
crude oil prices, as well as location price differentials will also
impact frac spreads. Natural gas extraction premiums and
costs relating to transportation, fractionation, storage and
marketing are not included within frac spreads, however these costs
are included when determining operating margin. Market frac spreads
averaged $54.67 per barrel in 2011, representing a 36 percent
increase from $40.30 per barrel in 2010. Higher frac spreads
were a result of higher NGL prices combined with a lower AECO
natural gas price. While Provident benefits directly from
higher frac spreads at its Younger facility, the benefit of higher
market frac spreads in 2011 was offset at Empress by continued high
costs for natural gas supply in the form of extraction premiums.
Empress extraction premiums in 2011 increased approximately 30
percent when compared to 2010 and, are primarily a result of low
volumes of natural gas flowing past the Empress straddle plants and
increased competition for NGLs as a result of higher frac
spreads. Empress border flow was relatively flat in 2011
compared to 2010 at an average rate of approximately 4.8 bcf per
day. Lower natural gas throughput directly impacts production at
the Empress facilities which in turn reduces the supply of
propane-plus available for sale in Sarnia and in surrounding
eastern markets. Tighter supply at Sarnia may have a positive
impact on eastern sales prices relative to other major propane hubs
during periods of high demand. Provident partially mitigates the
impact of lower natural gas based NGL supply at Empress through the
purchase of NGL mix supply in western Canada. Provident
purchases NGL mix which is transported to the truck rack at the
Provident Empress facility. The NGL mix is then transported
to the premium-priced Sarnia market for fractionation and
sale. Provident also purchases NGL mix supply from other
Empress plant owners as well as in the Edmonton market. While gross
operating margins benefit from additional NGL mix supply, per unit
margins are impacted as margins earned on frac spread gas
extraction are typically higher than margins earned on NGLs
purchased on a mix basis. Industry propane inventories in the
United States were approximately 55.2 million barrels at the end of
2011, which is approximately 1.5 million barrels above the five
year historical average. Inventory levels are above the five year
historical average primarily due to the mild winter temperatures
across the United States in the fourth quarter of 2011 that has
reduced demand for propane. Year end 2011 Canadian industry
propane inventories were approximately 7.5 million barrels, 1.8
million barrels higher than the historic five year average.
Propane inventories in Canada are at high levels primarily due to
mild winter temperatures in central Canada in the fourth quarter of
2011 that has reduced demand for propane. Provident Midstream
business performance Provident Midstream results are summarized as
follows: Year ended December 31, (bpd) 2011 2010 % Change Redwater
West NGL sales volumes 58,969 63,006 (6) Empress East NGL sales
volumes 45,790 43,069 6 Provident Midstream NGL sales volumes
104,759 106,075 (1) Year ended December 31, ($ 000s) 2011 2010 %
Change Redwater West margin $ 213,256 $ 160,208 33 Empress East
margin 109,439 88,965 23 Commercial Services margin 58,680 63,803
(8) Gross operating margin 381,375 312,976 22 Realized loss on
financial derivative (66,521) (50,865) 31 instruments Cash general
and administrative (38,590) (35,391) 9 expenses Other income and
realized foreign 7,110 40 17,675 exchange Adjusted EBITDA
attributable to (946) - - non-controlling interest Adjusted EBITDA
excluding buyout of financial derivative instruments and strategic
review and restructuring costs 282,428 226,760 25 Realized loss on
buyout of financial - (199,059) (100) derivative instruments
Strategic review and restructuring - (13,782) (100) costs Adjusted
EBITDA $ 282,428 $ 13,919 1,929 Gross operating margin
Midstream gross operating margin was $381.4 million for the year
ended December 31, 2011 compared to $313.0 million in 2010.
The 22 percent increase was the result of a higher contribution
from both Redwater West and Empress East by 33 percent and 23
percent, respectively, partially offset by an eight percent
decrease in operating margin from Commercial Services. Redwater
West Provident purchases NGL mix from various natural gas producers
and fractionates it into finished products at the Redwater
fractionation facility near Edmonton, Alberta. Redwater West
also includes natural gas supply volumes from the Younger NGL
extraction plant located at Taylor in northeastern British
Columbia. The Younger plant supplies specification NGLs to
local markets as well as NGL mix supply to the Fort Saskatchewan
area for fractionation and sale. The feedstock for Redwater
West has a significant portion of NGL mix rather than natural gas,
therefore frac spreads have a smaller impact on operating margin
than in Empress East. Also located at the Redwater facility is
Provident's industry leading rail-based condensate terminal, which
serves the heavy oil industry and its need for diluent. Provident's
condensate terminal is the largest of its size in western
Canada. Income generated from the condensate terminal and
caverns which relates to third-party terminalling and storage is
included within Commercial Services, while income relating to
proprietary condensate marketing activities remains within Redwater
West. The operating margin for Redwater West in 2011 was $213.3
million, an increase of 33 percent compared to $160.2 million in
2010. Stronger 2011 results when compared to 2010 were
primarily due to stronger market prices for all NGL products as
well as higher frac spreads at Younger. Overall, Redwater
West NGL sales volumes averaged 58,969 barrels per day in 2011, a
six percent decrease compared to 2010. Lower NGL sales
volumes can be largely attributed to a decrease in sales volumes
for condensate in 2011 compared to 2010. Condensate sale
volumes decreased compared to the prior year as Provident imported
less condensate via railcar from the U.S. Gulf Coast for sale into
the western Canadian market. Margins on imported condensate supply
tend to be lower than product supplied through western Canadian NGL
mix or product extracted at Younger due to the significant
transportation costs incurred on imported product. Decreases in
sales volumes were more than offset by significant improvements in
condensate market pricing, resulting in a higher product operating
margin despite the decrease in sales volumes. Product operating
margins for propane and butane were higher in 2011 relative to the
comparative period primarily due to more favourable market
pricing. Mt. Belvieu pricing for propane and butane both
increased by 26 percent in 2011 compared to 2010. The ethane
product margin increased slightly in 2011 compared to 2010
primarily associated with increased sales volumes. Empress East
Provident extracts NGLs from natural gas at the Empress straddle
plants and sells ethane and condensate in the western Canadian
marketplace while transporting propane and butane to Sarnia,
Ontario for fractionation and sale into markets in central Canada
and the eastern United States. The margin in the business is
determined primarily by frac spreads. Demand for propane is
seasonal and results in inventory that generally builds over the
second and third quarters of the year and is sold in the fourth
quarter and the first quarter of the following year. Empress East
gross operating margin in 2011 was $109.4 million compared to $89.0
million in 2010. The 23 percent increase was due to increased
sales volumes primarily driven by strong demand for propane in 2011
when compared to 2010 as well as strong refinery demand for butane
in 2011. While condensate sales volumes were lower in 2011
compared to 2010 the decrease was more than offset by the
significant increase in condensate market prices, primarily driven
by the 20 percent increase in WTI. Overall, Empress East NGL
sales volumes averaged 45,790 barrels per day, a six percent
increase compared to 2010. Stronger market prices for
propane-plus products and consistently low gas prices resulted in
higher frac spreads which was also beneficial to gross operating
margin. The positive impacts of strong demand, higher NGL
sales prices and a lower AECO natural gas price were partially
offset by increased extraction premiums paid to purchase natural
gas in the Empress market. Commercial Services Provident also
utilizes its assets to generate income from fee-for-service
contracts to provide fractionation, storage, NGL terminalling,
loading and offloading services. Income from pipeline tariffs from
Provident's ownership in NGL pipelines is also included in this
activity. During the third quarter of 2011, Provident
announced long-term storage agreements at both the Redwater
facility and Provident's Corunna facility. In the fourth
quarter, Provident announced a long-term storage agreement for
crude oil storage at the Redwater facility. In addition, in
the fourth quarter of 2011 Provident completed the acquisition of a
two-thirds interest in Three Star, a Saskatchewan based oilfield
hauling company serving Bakken area crude oil producers. The gross
operating margin for commercial services in 2011 was $58.7 million,
a decrease of eight percent compared to $63.8 million in
2010. The decrease in margin was primarily associated with
decreased condensate terminalling revenues partly as a result of
the termination of a multi-year condensate storage and terminalling
services agreement in 2010 as well as the completion in mid-2010 of
the Enbridge Southern Lights pipeline, which transports condensate
from the United States to the Edmonton area. This decrease
was partially offset by increases in margin related to third party
storage as well as due to the acquisition of Three Star. Earnings
before interest, taxes, depreciation, amortization, accretion, and
non-cash items ("adjusted EBITDA") Adjusted EBITDA includes the
impact of the Midstream financial derivative contract buyout, as
well as strategic review and restructuring costs incurred in 2010,
associated with the separation of the business units.
Management has presented a metric excluding these items as an
additional measure to evaluate Provident's performance in the
period and to assess future earnings generating capability.
Adjusted EBITDA excluding buyout of financial derivative
instruments and strategic review and restructuring costs increased
to $282.4 million from $226.8 million in 2010. The increase
reflects higher gross operating margin from both Redwater West and
Empress East, partially offset by higher realized losses on
financial derivative instruments under the market risk management
program. In addition, 2011 includes other income of $6.4 million
related to payments received from third parties relating to certain
contractual volume commitments at the Empress facilities. Capital
expenditures Provident substantially increased its 2011 growth
capital expenditures when compared to 2010. In 2011,
Provident incurred total capital expenditures of $134.1 million
compared to $70.2 million in the prior year. Driven by
substantial demand for new storage services at Redwater, Provident
deployed $34.5 million (2010 - $17.8 million) of capital on cavern
and brine pond development at the Redwater facility, $22.1 million
(2010 - $2.0 million) was directed to the growth-related portions
of the Taylor to Boundary Lake and the Septimus to Younger pipeline
projects, and $39.3 million (2010 - $37.4 million) of expenditures
were directed towards storage and terminalling infrastructure
development at the Provident Corunna facility. An
additional $9.2 million (2010 - nil) was directed toward the
construction of a truck terminal in Cromer, Manitoba while $7.9
million (2010 - $6.4 million) was spent on various other
infrastructure improvements. Finally, an additional $21.1
million (2010 - $6.6 million) was directed towards sustaining
capital activities and office related capital, including $13.1
million (2010 - $2.0 million) related to the Taylor to Boundary
Lake pipeline. Net income (loss) Consolidated Year ended December
31, ($ 000s, except per share data) 2011 2010 % Change Net income
from continuing operations $ 97,217 $ 112,217 (13) Net loss from
discontinued operations - (122,723) (100) Net income $ 97,217 $
(10,506) - Per weighted average share - basic and diluted(1) $ 0.36
$ (0.04) - (1) Based on weighted average number of shares
outstanding and includes dilutive impact of convertible debentures.
In 2011, Provident recorded net income of $97.2 million. The
net loss of $10.5 million in 2010 includes a net loss from
discontinued operations of $122.7 million attributed to the sale of
the Upstream business in the second quarter of 2010. Net income
from continuing operations was $97.2 million in 2011, compared to
$112.2 million in 2010. Higher adjusted EBITDA, combined with the
impact of the two identified significant events in 2010 and the
change in unrealized financial derivative instruments, was more
than offset by higher financing, share based compensation and
income tax expenses. Taxes Continuing operations Year ended
December 31, ($ 000s) 2011 2010 % Change Current tax expense
(recovery) $ 654 $ (6,956) - Deferred income tax expense (recovery)
67,832 (40,871) - $ 68,486 $ (47,827) - The current tax expense in
2011 of $0.7 million (2010 - $7.0 million recovery) is mainly
attributed to earnings generated in the Company's recently acquired
subsidiary, Three Star, that is in excess of allowed tax pool
claims. The current tax recovery in 2010 was attributed to
applying tax loss carrybacks allowing the recovery of taxes paid in
prior periods. The tax losses in 2010 were generated
primarily by the realized loss on buyout of financial derivative
instruments in the second quarter of 2010. Deferred income tax
expense for 2011 was $67.8 million compared to a recovery of $40.9
million in 2010. As a result of Provident's adoption of IFRS,
the balance of deferred income taxes on the December 31, 2010
statement of financial position increased by $22.3 million when
compared to the previous Canadian GAAP amount (see note 5 of the
consolidated financial statements). This IFRS difference is
primarily due to the tax rate applied to temporary differences
associated with SIFT entities. Under previous Canadian GAAP,
Provident used the rate expected to be in effect when the timing
differences reverse. However, under IFRS, Provident is required to
use the highest rate applicable for undistributed earnings in these
entities. Upon conversion to a corporation on January 1, 2011,
these timing differences are now measured under IFRS using a
corporate tax rate and, as a result, the majority of the IFRS
difference at December 31, 2010 for deferred income taxes has
reversed through first quarter 2011 net earnings, resulting in
incremental deferred tax expense of approximately $24
million. The remaining deferred tax expense in 2011 relates
to the use of existing tax pools to offset earnings generated in
the year. The deferred tax recovery in 2010 was primarily
driven by losses created by deductions at the incorporated
subsidiary level under the previous Trust structure. At December
31, 2011 Provident has approximately $900 million of tax pools and
non-capital losses available to claim against taxable income in
future years. Financing charges Continuing operations Year ended
December31, ($ 000s, except as noted) 2011 2010 % Change Interest
on bank debt $ 9,798 $ 9,316 5 Interest on convertible debentures
21,035 17,538 20 30,833 26,854 15 Less: Capitalized borrowing costs
(1,348) - - Less: Discontinued operations portion - (2,501) (100)
Total cash financing charges $ 29,485 $ 24,353 21 Weighted average
interest rate on all 5.2% 4.8% 8 long-term debt Loss on purchase of
convertible debentures 3,342 - - Accretion and other non-cash
financing 8,455 9,392 (10) charges Less: Discontinued operations
portion - (1,494) (100) Total financing charges $ 41,282 $ 32,251
28 Financing charges for 2011 have increased relative to
2010. Interest on bank debt is higher in 2011 as average
borrowing rates on Provident's revolving credit facility were
higher than in 2010. Interest on convertible debentures for
2011 was also higher than in the prior year reflecting a higher
face value outstanding, partially offset by a reduced average
coupon rate on the convertible debentures outstanding.
Financing charges also increased in 2011 as a result of losses
recognized on the re-purchase of 6.5% convertible debentures in
February 2011 and the redemption of the remaining 6.5% convertible
debentures in May 2011. In addition, the prior year includes an
allocation of interest expense and associated financing charges to
discontinued operations. In 2011, Provident has capitalized
borrowing costs attributable to the construction of assets, such as
storage caverns and related facilities, which take a substantial
period of time to get ready for their intended use. This reduced
the Company's total recognized financing charges in 2011 by $1.3
million (2010 - nil). Market risk management program Provident's
market risk management program utilizes financial derivative
instruments to provide protection against commodity price
volatility and protect a base level of operating cash flow.
Provident has entered into financial derivative contracts through
March 2013 to protect the relationship between the purchase cost of
natural gas and the sales price of propane, butane and condensate
and to protect the relationship between NGLs and crude oil in
physical sales contracts. The program also reduces foreign exchange
risk due to the exposure arising from the conversion of U.S.
dollars into Canadian dollars, interest rate risk and fixes a
portion of Provident's input costs. The commodity price derivative
instruments Provident uses include put and call options,
participating swaps, and fixed price products that settle against
indexed referenced pricing. Provident's credit policy governs the
activities undertaken to mitigate non-performance risk by
counterparties to financial derivative instruments.
Activities undertaken include regular monitoring of counterparty
exposure to approved credit limits, financial reviews of all active
counterparties, utilizing International Swap Dealers Association
(ISDA) agreements and obtaining financial assurances where
warranted. In addition, Provident has a diversified base of
available counterparties. In April 2010, Provident completed the
buyout of all fixed price crude oil and natural gas swaps
associated with the Midstream business for a total cost of $199.1
million. The buyout of Provident's forward mark to market
positions allowed Provident to refocus its market risk management
program on protecting margins on a portion of its frac spread
production and managing physical contract exposure for a period of
up to two years. Management continues to actively monitor market
risk and continues to mitigate its impact through financial risk
management activities. Subject to market conditions including
adequate liquidity, Provident's intention is to hedge approximately
50 percent of its forecasted natural gas production volumes and
forecasted NGL sales volumes on a rolling 12 month basis. Subject
to market conditions, Provident may add additional positions as
appropriate for up to 24 months. Settlement of market risk
management contracts The following table summarizes the impact of
financial derivative contracts settled during the years ended
December 31, 2011 and 2010. The table excludes the impact of
the Midstream derivative contract buyout of financial derivative
instruments incurred in the second quarter of 2010 which is
presented separately on the consolidated statement of operations.
Year ended December 31, Realized loss on financial 2011 2010
derivative instruments ($ 000s except volumes) Volume(1) Volume (1)
Fracspread related Crude oil $ (6,186) 0.4 $ (17,315) 2.0 Natural
gas (12,695) 24.7 (29,849) 16.9 Propane (36,630) 3.9 (9,819) 1.6
Butane (7,909) 1.2 (4,889) 0.6 Condensate (4,833) 0.6 (504) 0.2
Foreign exchange (2,205) 3,766 Sub-total frac spread (70,458)
(58,610) related Corporate Electricity 2,627 367 Interest rate
(743) (847) Management of exposure embedded in physical 2,053 3.0
8,225 0.6 contracts Realized loss on financial $ (66,521) $
(50,865) derivative instruments (1) The above table represents
aggregate volumes that were bought/sold over the periods. Crude oil
and NGL volumes are listed in millions of barrels and natural gas
is listed in millions of gigajoules. The realized loss for the year
ended December 31, 2011 was $66.5 million compared to a realized
loss of $50.9 million in 2010. The majority of the realized
loss in 2011 was driven by NGL derivative sales contracts settling
at a contracted price lower than current NGL market prices, natural
gas derivative purchase contracts settling at a contracted price
higher than the market natural gas prices, as well as crude oil
derivative sales contracts settling at a contracted price lower
than the crude oil market prices during the settlement period. The
comparable 2010 realized loss was driven mostly by natural gas
derivative purchase contracts settling at a contracted price higher
than the market natural gas prices, crude oil derivative sales
contracts settling at contracted crude oil prices lower than the
crude oil market prices during the settlement period, as well as
NGL derivative sales contracts settling at a contracted price lower
than the current NGL market prices. The following table is a
summary of the net financial derivative instruments liability: As
at As at December31, December 31, ($ 000s) 2011 2010 Frac spread
related Crude oil $ 10,196 $ 16,733 Natural gas 30,579 19,113
Propane (4,784) 16,246 Butane 2,969 4,755 Condensate 3,100 2,099
Foreign exchange 3,747 (28) Sub-total frac spread related 45,807
58,918 Management ofexposure embedded in physical contracts 12,878
(1,168) Corporate Electricity (734) (421) Interest rate 2,246 (366)
Other financial derivatives Conversion feature of convertible
36,958 9,586 debentures Redemption liability related to 7,548 -
acquisition of Three Star Net financial derivative instruments $
104,703 $ 66,549 liability The net liability in both periods
represents unrealized "mark-to-market" opportunity costs related to
financial derivative instruments with contract settlements ranging
from January 1, 2011 through September 30, 2014 (with the exception
of the conversion feature of convertible debentures, which is
associated with long-term debt maturing in 2017 and 2018).
The balances are required to be recognized in the financial
statements under generally accepted accounting principles.
These financial derivative instruments were generally entered into
in order to manage commodity prices and protect future Midstream
product margins. Fluctuations in the market value of these
instruments impact earnings prior to their settlement dates but
have no impact on funds flow from operations until the instruments
are actually settled. For convertible debentures containing a cash
conversion option, the conversion feature is measured at fair value
through profit and loss at each reporting date, with any unrealized
gains or losses arising from fair value changes reported in the
consolidated statement of operations. This resulted in Provident
recording a loss of approximately $19.0 million (2010 - nil) on the
revaluation of the conversion feature of convertible debentures on
the consolidated statement of operations. Under IFRS, Provident is
required to value the put option on the shares held by the
non-controlling interest of its subsidiary, Three Star. This
resulted in the recognition on acquisition of approximately $9.1
million as a redemption liability with an offsetting debit to other
equity based on the present value of the redemption amount.
Provident is also required to measure the fair value of this put
option each reporting date. This resulted in Provident recording a
gain of approximately $1.5 million (2010 - nil) on the consolidated
statement of operations. Liquidity and capital resources As at As
at Consolidated December 31, December 31, ($ 000s) 2011 2010 %
Change Long-term debt - bank $ 194,135 $ 72,882 166 facilities and
other(1) Long-term debt - convertible 315,786 400,872 (21)
debentures(1) Working capital surplus (excluding financial (97,561)
(79,633) 23 derivative instruments) Net debt $ 412,360 $ 394,121 5
Shareholders' equity (at book 579,058 588,207 (2) value) Total
capitalization at book $ 991,418 $ 982,328 1 value Total net debt
as a percentage of total book value 42% 40% 5 capitalization (1)
Includes current portion of long-term debt. Midstream revenues are
received at various times throughout the month. Provident's
working capital position is affected by commodity price changes,
seasonal fluctuations that reflect changing inventory balances in
the Midstream business and by the timing of Provident's capital
expenditure program. Typically, Provident's inventory levels will
increase in the second and third quarters when product demand is
lower, and will decrease during the fourth and first quarters when
product demand is at its highest. Provident relies on funds
flow from operations, proceeds received under its Premium Dividend
and Dividend Reinvestment purchase ("DRIP") plan, external lines of
credit and access to capital markets to fund capital programs and
acquisitions. Substantially all of Provident's accounts receivable
are due from customers in the oil and gas, petrochemical and
refining and midstream services and marketing industries and are
subject to credit risk. Provident partially mitigates associated
credit risk by limiting transactions with certain counterparties to
limits imposed by Provident based on management's assessment of the
creditworthiness of such counterparties. In certain circumstances,
Provident will require the counterparties to provide payment prior
to delivery, letters of credit and/or parental guarantees.
The carrying value of accounts receivable reflects management's
assessment of the associated credit risks. Contractual obligations
Consolidated Payment due by period ($ 000s) Total Less than 1 to 3
3 to 5 Morethan 1 year years years 5 years Long-term debt - bank
facilities $ 214,552 $ 15,718 $ 198,834 $ - $ - and other (1) (2)
(3) Long-term debt - convertible 473,944 19,838 39,675 39,675
374,756 debentures (3) Operating lease 160,447 14,117 30,248 34,052
82,030 obligations Total $ 848,943 $ 49,673 $ 268,757 $ 73,727 $
456,786 (1) The terms of the Canadian credit facility have a
revolving three year period expiring on October 14, 2014. (2)
Includes current portion of long-term debt. (3) Includes associated
interest and principal payments. Long-term debt and working capital
Provident completed an extension of its existing credit agreement
(the "Credit Facility") on October 14, 2011, with National Bank of
Canada as administrative agent and a syndicate of Canadian
chartered banks and other Canadian and foreign financial
institutions (the "Lenders"). Pursuant to the amended Credit
Facility, the Lenders have agreed to continue to provide Provident
with a credit facility of $500 million which, under an accordion
feature, can be increased to $750 million at the option of the
Company, subject to obtaining additional commitments. The
amended Credit Facility also provides for a separate Letter of
Credit facility which was increased from $60 million to $75
million. The amended terms of the Credit Facility provide for a
revolving three year period expiring on October 14, 2014, from the
previous maturity date of June 28, 2013, (subject to customary
extension provisions) secured by substantially all of the assets of
Provident. Provident may draw on the facility by way of
Canadian prime rate loans, U.S. base rate loans, banker's
acceptances, LIBOR loans, or letters of credit. As at December 31,
2011, Provident had drawn $190.1 million (including $3.6 million
presented as a bank overdraft in accounts payable and accrued
liabilities) or 38 percent of its Credit Facility (December 31,
2010 - $75.5 million or 15 percent). At December 31, 2011 the
effective interest rate of the outstanding Credit Facility was 3.3
percent (December 31, 2010 - 4.1 percent). At December 31, 2011,
Provident had $60.1 million in letters of credit outstanding
(December 31, 2010 - $47.9 million) that guarantee Provident's
performance under certain commercial and other contracts. On
October 3, 2011, Provident completed the acquisition of a
two-thirds interest in Three Star. Three Star's long-term debt is
secured by the vehicles and trailers of the subsidiary and matures
over a period of between two to five years. In addition, Three Star
has an operating line of credit (presented in accounts payable and
accrued liabilities) which is secured by substantially all of the
assets of Three Star other than the vehicles and trailers which are
pledged as security for the subsidiary's long-term debt. As
at December 31, 2011, Three Star had drawn $18.0 million, including
$9.2 million, $0.9 million, and $7.9 million presented as current
portion of long-term debt, long-term debt - bank facilities and
other, and a bank overdraft in accounts payable and accrued
liabilities, respectively, on the consolidated statement of
financial position. At December 31, 2011, the effective
interest rate of the subsidiary's outstanding long-term debt was
4.9 percent. The following table shows the change in Provident's
working capital position. As at As at December31, December 31, ($
000s) 2011 2010 Change Current Assets Cash and cash equivalents $ -
$ 4,400 $ (4,400) Accounts receivable 230,457 206,631 23,826
Petroleum product inventory 147,378 106,653 40,725 Prepaid expenses
and other 4,559 2,539 2,020 current assets Financial derivative
4,571 487 4,084 instruments Current Liabilities Accounts payable
and accrued 276,480 227,944 (48,536) liabilities Cash distribution
payable 8,353 12,646 4,293 Current portion of long-term 9,199
148,981 139,782 debt Financial derivative 56,901 37,849 (19,052)
instruments Working capital surplus $ 36,032 $ (106,710) $ 142,742
(deficit) The ratio of long-term debt to adjusted EBITDA from
continuing operations for the year ended December 31, 2011 was 1.8
to one compared to annual 2010 long-term debt to adjusted EBITDA
from continuing operations excluding buyout of financial derivative
instruments and strategic review and restructuring costs of 2.1 to
one. Share capital On January 1, 2011, Provident Energy Trust (the
"Trust") completed a conversion from an income trust structure to a
corporate structure pursuant to a plan of arrangement on the basis
of one common share of Provident Energy Ltd. in exchange for each
unit held in the Trust (see notes 1 and 13 of the consolidated
financial statements). The conversion resulted in the
reorganization of the Trust into a publicly traded, dividend-paying
corporation under the name "Provident Energy Ltd." Under
Provident's Premium Distribution, Distribution Reinvestment
purchase (DRIP) plan, 4.5 million shares were issued or are to be
issued in 2011 representing proceeds of $37.1 million (2010 - 4.4
million units for proceeds of $32.1 million). At December 31, 2011
management and directors held less than one percent of the
outstanding common shares. Capital related expenditures and funding
Year ended December 31, ($ 000s) 2011 2010 % Change Capital related
expenditures Capital expenditures $ (134,115) $ (70,218) 91 Site
restoration expenditures - discontinued operations - (2,041) (100)
Buyout of financial derivative - (199,059) (100) instruments
Acquisitions (7,852) - - Net capital related expenditures $
(141,967) $ (271,318) (48) Funded by Funds flow from operations net
of declared dividends to shareholders and DRIP proceeds $ 144,198 $
30,355 375 Proceeds on sale of assets 3 3,300 (100) Proceeds on
sale of discontinued - 106,779 (100) operations Cash provided by
investing activities from discontinued - 170,710 (100) operations
Issuance of convertible debentures, 164,950 164,654 - net of issue
costs Repayment of debentures (249,784) - - Increase (decrease) in
long-term 109,893 (192,380) - debt Change in working capital,
including (27,293) (12,100) 126 cash Net capital related
expenditure $ 141,967 $ 271,318 (48) funding Provident has funded
its net capital expenditures with funds flow from operations, DRIP
proceeds and long-term debt. In 2010, cash provided by
investing activities from discontinued operations, which includes
proceeds on sale of assets from the first quarter sales of oil and
natural gas assets as well as cash proceeds from the second quarter
sale of the remaining Upstream business, were applied to
Provident's revolving term credit facility. Share based
compensation Share based compensation includes expenses or
recoveries associated with Provident's restricted and performance
share plan. Share based compensation is recorded at the estimated
fair value of the notional shares granted. Compensation
expense associated with the plan is recognized in earnings over the
vesting period of each grant. The expense or recovery associated
with each period is recorded as non-cash share based compensation
(a component of general and administrative expense). A portion
relating to operational employees at field and plant locations is
also allocated to operating expense. For the year ended December
31, 2011, Provident recorded share based compensation expense from
continuing operations of $20.7 million (2010 - $8.4 million) and
made related cash payments of $6.7 million (2010 - $6.9 million).
The expense was higher in 2011 as a result of an increase in
Provident's share trading price upon which the compensation is
based and due to recoveries in the second quarter of 2010 from
staff reductions resulting in cancelled and exercised units. The
cash cost was included as part of severance in strategic review and
restructuring costs in 2010. At December 31, 2011, the current
portion of the liability totaled $20.0 million (December 31, 2010 -
$7.4 million) and the long-term portion totaled $11.5 million
(December 31, 2010 - $10.4 million). Discontinued operations
(Provident Upstream) On June 29, 2010, Provident completed a
strategic transaction in which Provident combined the remaining
Provident Upstream business with Midnight Oil Exploration Ltd.
("Midnight") to form Pace Oil & Gas Ltd. pursuant to a plan of
arrangement under the Business Corporations Act (Alberta). Under
the arrangement, Midnight acquired all outstanding shares of
Provident Energy Resources Inc., a wholly-owned subsidiary of
Provident Energy Trust which held all of the producing oil and gas
properties and reserves associated with Provident's Upstream
business. Effective in the second quarter of 2010, Provident's
Upstream business was accounted for as discontinued operations (see
note 23 of the consolidated financial statements). Control
environment Internal control over financial reporting Management is
responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a - 15(f)
and 15d - 15(f) under the United States Exchange Act of 1934, as
amended (the "Exchange Act"). Management, including the Chief
Executive Officer ("CEO") and the Chief Financial Officer ("CFO"),
has conducted an evaluation of Provident's internal control over
financial reporting based on criteria established in Internal
Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based
on management's assessment as at December 31, 2011, management has
concluded that Provident's internal control over financial
reporting is effective. See "Management's Report on Internal
Control over Financial Reporting". Due to its inherent limitations,
internal control over financial reporting is not intended to
provide absolute assurance that a misstatement of Provident's
financial statements would be prevented or detected. Further, the
evaluation of the effectiveness of internal control over financial
reporting was made as of a specific date, and continued
effectiveness in future periods is subject to the risks that
controls may become inadequate. No changes were made in Provident's
internal control over financial reporting during the fiscal year
ended December 31, 2011 that have materially affected or are
reasonably likely to materially affect Provident's internal control
over financial reporting. Disclosure controls and procedures An
evaluation, as of December 31, 2011, of the effectiveness of the
design and operation of Provident's disclosure controls and
procedures, as defined in Rule 13a - 15(e) and 15d - 15(e) under
the Exchange Act, was carried out by management including the CEO
and the CFO. Based on that evaluation, the CEO and CFO have
concluded that the design and operation of Provident's disclosure
controls and procedures were effective to ensure that information
required to be disclosed by Provident in reports that it files or
submits to Canadian and United States security authorities are (i)
recorded, processed, summarized and reported within the time
periods specified by Canadian and United States securities laws and
(ii) accumulated and communicated to Provident's management,
including its principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure.
It should be noted that while the CEO and CFO believe that
Provident's disclosure controls and procedures provide a reasonable
level of assurance that they are effective, they do not expect that
Provident's disclosure controls and procedures will prevent all
errors and fraud. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Significant
accounting judgements, estimates and assumptions The preparation of
financial statements requires management to make judgments,
estimates and assumptions based on currently available information
that affect the reported amounts of assets, liabilities and
contingent liabilities at the date of the consolidated financial
statements and reported amounts of revenues and expenses during the
reporting period. Estimates and judgments are continuously
evaluated and are based on management's experience and other
factors, including expectations of future events that are believed
to be reasonable under the circumstances. However, actual
results could differ from those estimated. By their very
nature, these estimates are subject to measurement uncertainty and
the effect on the financial statements of future periods could be
material. In the process of applying the Company's accounting
policies, management has made the following judgments, estimates,
and assumptions which have the most significant effect on the
amounts recognized in the consolidated financial statements:
Inventory Due to the inherent limitations in metering and the
physical properties of storage caverns and pipelines, the
determination of precise volumes of natural gas liquids held in
inventory at such locations is subject to estimation. Actual
inventories of natural gas liquids within storage caverns can only
be determined by draining of the caverns. Impairment indicators The
recoverable amounts of cash generating units and individual assets
have been determined based on the higher of value in use
calculations and fair values less costs to sell. These
calculations require the use of estimates and assumptions. Goodwill
is tested for impairment annually and at other times when
impairment indicators exist. Impairment is determined for goodwill
by assessing the recoverable amount of the group of cash generating
units that comprise the Midstream business to which the goodwill
relates. In assessing goodwill for impairment, it is
reasonably possible that the commodity price assumptions, sales
volumes, supply costs, discount rates, and tax rates may change
which may then impact the recoverable amount of the group of cash
generating units which comprise the Midstream business and may then
require a material adjustment to the carrying value of goodwill.
For the Midstream business, it is also reasonably possible that
these assumptions may change which may then impact the recoverable
amounts of the cash generating units and may then require a
material adjustment to the carrying value of its tangible and
intangible assets. The Company monitors internal and external
indicators of impairment relating to its tangible and intangible
assets. Decommissioning and restoration costs Decommissioning and
restoration costs will be incurred by the Company at the end of the
operating life of certain of the Company's facilities and
properties. The ultimate decommissioning and restoration
costs are uncertain and cost estimates can vary in response to many
factors including changes to relevant legal and regulatory
requirements, the emergence of new restoration techniques or
experience at other production sites. The expected timing and
amount of expenditure can also change, for example, in response to
changes in laws and regulations or their interpretation. In
determining the amount of the provision, assumptions and estimates
are also required in relation to discount rates. The
decommissioning provisions have been created based on Provident's
internal estimates. Assumptions, based on the current
economic environment, have been made which management believe are a
reasonable basis upon which to estimate the future liability.
These estimates are reviewed regularly to take into account any
material changes to the assumptions. However, actual
decommissioning costs will ultimately depend upon future market
prices for the necessary decommissioning work required which will
reflect market conditions at the relevant time. Income taxes The
Company follows the liability method for calculating deferred
income taxes. Differences between the amounts reported in the
financial statements of the Company and its subsidiaries and their
respective tax bases are applied to tax rates in effect to
calculate the deferred tax liability. In addition, the
Company recognizes the future tax benefit related to deferred
income tax assets to the extent that it is probable that the
deductible temporary differences will reverse in the foreseeable
future. Assessing the recoverability of deferred income tax
assets requires the Company to make significant estimates related
to the expectations of future cash flows from operations and the
application of existing tax laws in each jurisdiction. To the
extent that future cash flows and taxable income differ
significantly from estimates, the ability of the Company to realize
the deferred tax assets and liabilities recorded at the balance
sheet date could be impacted. Additionally, future changes in
tax laws in the jurisdictions in which the Company operates could
limit the ability of the Company to obtain tax deductions in future
periods. Contingencies By their nature, contingencies will only be
resolved when one or more future events occur or fail to
occur. The assessment of contingencies inherently involves
the exercise of significant judgment and estimates of the outcome
of future events. Share based compensation The Company uses the
fair value method of valuing compensation expense associated with
the Company's share based compensation plan whereby notional shares
are granted to employees. Estimating fair value requires
determining the most appropriate valuation model for a grant of
equity instruments, which is dependent on the terms and conditions
of the grant. Financial derivative instruments The Company's
financial derivative instruments are initially recognized on the
statement of financial position at fair value based on management's
estimate of commodity prices, share price and associated
volatility, foreign exchange rates, interest rates, and the amounts
that would have been received or paid to settle these instruments
prior to maturity given future market prices and other relevant
factors. Property, plant and equipment and intangible assets
Midstream facilities, including natural gas liquids storage and
terminalling facilities and natural gas liquids processing and
extraction facilities are carried at cost and depreciated over the
estimated service lives of the assets. Intangible assets are
amortized over the estimated useful lives of the assets. Capital
assets related to pipelines and office equipment are carried at
cost and depreciated over their economic lives. Management
periodically reviews the estimated useful lives of property, plant
and equipment and intangible assets. These estimates are based on
management's experience and other factors, including expectations
of future events that are believed to be reasonable under the
circumstances. However, actual results could differ from those
estimated. Change in accounting policies (i) Recent accounting
pronouncements The International Accounting Standards Board
("IASB") issued a number of new accounting pronouncements including
IFRS 7 - Financial Instruments: Disclosures, IFRS 9 - Financial
Instruments, IFRS 10- Consolidated Financial Statements, IFRS 11-
Joint Arrangements, IFRS 12 - Disclosure of Interests in Other
Entities, and IFRS 13- Fair Value Measurement as well as related
amendments to IAS 1 - Presentation of Financial Statements, IAS 27
- Separate Financial Statements, IAS 28 - Investments in Associates
and IAS 32 - Financial Instruments: Presentation. These standards
are required to be applied for accounting periods beginning on or
after January 1, 2013, with earlier adoption permitted, with the
exception of IFRS 7, which is applicable for annual periods
beginning on or after July 1, 2011 with earlier adoption permitted,
IAS 1, which is effective for annual periods beginning on or after
July 1, 2012 with earlier adoption permitted, IFRS 9, which
requires application for annual periods beginning on or after
January 1, 2015, with earlier adoption permitted and IAS 32, which
is applicable for annual periods beginning on or after January 1,
2014, and is required to be applied retrospectively. The Company
has not yet assessed the impact of these standards (see note
3(xvii) of the consolidated financial statements). (ii)
International Financial Reporting Standards (IFRS) The Company
prepares its financial statements in accordance with Canadian
generally accepted accounting principles as set out in the Handbook
of the Canadian Institute of Chartered Accountants ("CICA
Handbook"). In 2010, the CICA Handbook was revised to incorporate
International Financial Reporting Standards ("IFRS"), and requires
publicly accountable enterprises to apply such standards effective
for years beginning on or after January 1, 2011. This adoption date
requires the restatement, for comparative purposes, of amounts
reported by Provident for the annual and quarterly periods within
the year ended December 31, 2010, including the opening
consolidated statement of financial position as at January 1, 2010.
Provident's quarterly and annual 2011 consolidated financial
statements reflect this change in accounting standards. Provident's
basis of preparation and adoption of IFRS is described in note 2 of
the consolidated financial statements. Significant accounting
policies and related accounting judgments, estimates, and
assumptions can be found in notes 3 and 4 of the consolidated
financial statements. The effect of the Company's transition to
IFRS, including transition elections, and reconciliations of the
statements of financial position and the statements of operations
between previous Canadian GAAP and IFRS is presented in note 5 to
the consolidated financial statements. Business risks The midstream
industry is subject to risks that can affect the amount of cash
flow from operations available for the payment of dividends to
shareholders, and the ability to grow. These risks include but are
not limited to: -- capital markets, credit and liquidity risks and
the ability to finance future growth; -- the impact of governmental
regulation on Provident; -- operational matters and hazards
including the breakdown or failure of equipment, information
systems or processes, the performance of equipment at levels below
those originally intended, operator error, labour disputes,
disputes with owners of interconnected facilities and carriers and
catastrophic events such as natural disasters, fires, explosions,
fractures, acts of eco-terrorists and saboteurs, and other similar
events, many of which are beyond the control of Provident; -- the
Midstream NGL assets are subject to competition from other gas
processing plants, and the pipelines and storage, terminal and
processing facilities are also subject to competition from other
pipelines and storage, terminal and processing facilities in the
areas they serve, and the marketing business is subject to
competition from other marketing firms; -- exposure to commodity
price, exchange rate and interest rate fluctuations; -- reduction
in the volume of throughput or the level of demand; -- the ability
to attract and retain employees; -- increasing operating and
capital costs; -- regulatory intervention in determining processing
fees and tariffs; -- reliance on significant customers; --
non-performance risk by counterparties; -- government, legislation
and regulatory risk; -- changes to environmental and other
regulations; and -- environmental, health and safety risks.
Provident strives to minimize these business risks by: -- employing
and empowering management and technical staff with extensive
industry experience and providing competitive remuneration; --
adhering to a disciplined market risk management program to
mitigate the impact that volatile commodity prices have on cash
flow available for the payment of dividends; -- marketing natural
gas liquids and related services to selected, credit worthy
customers at competitive rates; -- maintaining a competitive cost
structure to maximize cash flow and profitability; -- maintaining
prudent financial leverage and developing strong relationships with
the investment community and capital providers; -- adhering to
strict guidelines and reporting requirements with respect to
environmental, health and safety practices; and -- maintaining an
adequate level of property, casualty, comprehensive and directors'
and officers' insurance coverage. Readers should be aware that the
risks set forth herein are not exhaustive. Readers are
referred to Provident's annual information form, which is available
at www.sedar.com, for a detailed discussion of risks affecting
Provident. In addition, there are risks associated with the
Pembina Arrangement. Readers are referred to the joint
information circular of Provident and Pembina dated February 17,
2012 relating to the Pembina Arrangement, which is available at
www.sedar.com, for a detailed discussion of the risks relating to
the Pembina Arrangement. Share trading activity The following table
summarizes the share trading activity of Provident for each quarter
in the year ended December 31, 2011 on both the Toronto Stock
Exchange and the New York Stock Exchange: Q1 Q2 Q3 Q4 TSE - PVE
(Cdn$) High $ 9.03 $ 9.06 $ 8.84 $ 10.03 Low $ 7.62 $ 7.70 $ 6.84 $
7.92 Close $ 9.03 $ 8.62 $ 8.58 $ 9.85 Volume (000s) 31,800 29,039
27,238 27,275 NYSE - PVX (US$) High $ 9.30 $ 9.48 $ 9.19 $ 9.88 Low
$ 7.78 $ 7.85 $ 6.90 $ 7.42 Close $ 9.27 $ 8.93 $ 8.16 $ 9.69
Volume (000s) 75,349 83,855 85,031 80,146 Forward-looking
information This MD&A contains forward-looking information
under applicable securities legislation. Statements which
include forward-looking information relate to future events or
Provident's future performance. Such forward-looking information is
provided for the purpose of providing information about
management's current expectations and plans relating to the future.
Readers are cautioned that reliance on such information may not be
appropriate for other purposes, such as making investment
decisions. All statements other than statements of historical fact
are forward-looking information. In some cases, forward-looking
information can be identified by terminology such as "may", "will",
"should", "expect", "plan", "anticipate", "believe", "estimate",
"predict", "potential", "continue", or the negative of these terms
or other comparable terminology. Forward-looking information in
this MD&A includes, but is not limited to, business strategy
and objectives, capital expenditures, acquisition and disposition
plans and the timing thereof, operating and other costs, budgeted
levels of cash dividends and the performance associated with
Provident's natural gas midstream, NGL processing and marketing
business. Specifically, the "Outlook" section in this MD&A may
contain forward-looking information about prospective results of
operations, financial position or cash flows of Provident.
Forward-looking information is based on current expectations,
estimates and projections that involve a number of risks and
uncertainties which could cause actual events or results to differ
materially from those anticipated by Provident and described in the
forward-looking information. In addition, this MD&A may contain
forward-looking information attributed to third party industry
sources. Undue reliance should not be placed on forward-looking
information, as there can be no assurance that the plans,
intentions or expectations upon which they are based will occur. By
its nature, forward-looking information involves numerous
assumptions, known and unknown risks and uncertainties, both
general and specific, that contribute to the possibility that the
predictions, forecasts, projections and other forward-looking
information will not occur. Forward-looking information in this
MD&A includes, but is not limited to, statements with respect
to: -- Provident's ability to benefit from the combination of
growth opportunities and the ability to grow through the capital
markets; -- Provident's acquisition strategy, the criteria to be
considered in connection therewith and the benefits to be derived
therefrom; -- the special meeting dates in respect of the Pembina
Arrangement; -- the anticipated closing date of the Pembina
Arrangement; -- the offer by Pembina for Provident's convertible
debentures following the Pembina Arrangement; -- the emergence of
accretive growth opportunities; -- the ability to achieve an
appropriate level of monthly cash dividends; -- the impact of
Canadian governmental regulation on Provident; -- the existence,
operation and strategy of the market risk management program; --
the approximate and maximum amount of forward sales and hedging to
be employed; -- changes in oil, natural gas and NGL prices and the
impact of such changes on cash flow after financial derivative
instruments; -- the level of capital expenditures; -- currency,
exchange and interest rates; -- the performance characteristics of
Provident's business; -- the growth opportunities associated with
the Provident's business; -- the availability and amount of tax
pools available to offset Provident's cash taxes; and -- the nature
of contractual arrangements with third parties in respect of
Provident's business. Although Provident believes that the
expectations reflected in the forward-looking information are
reasonable, there can be no assurance that such expectations will
prove to be correct. Provident cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither
Provident nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking information. Some
of the risks and other factors, some of which are beyond
Provident's control, which could cause results to differ materially
from those expressed in the forward-looking information contained
in this MD&A include, but are not limited to: -- general
economic and credit conditions in Canada, the United States and
globally; -- industry conditions associated with the NGL services,
processing and marketing business; -- fluctuations in the price of
crude oil, natural gas and natural gas liquids; -- interest payable
on notes issued in connection with acquisitions; -- governmental
regulation in North America of the energy industry, including
income tax and environmental regulation; -- fluctuation in foreign
exchange or interest rates; -- stock market volatility and market
valuations; -- the impact of environmental events; -- the need to
obtain required approvals from regulatory authorities; --
unanticipated operating events; -- failure to realize the
anticipated benefits of acquisitions; -- competition for, among
other things, capital reserves and skilled personnel; -- failure to
obtain industry partner and other third party consents and
approvals, when required; -- risks associated with foreign
ownership; -- third party performance of obligations under
contractual arrangements; -- failure to complete the Pembina
Arrangement; and -- the other factors set forth under "Business
risks" in this MD&A. Readers are cautioned that the foregoing
list is not exhaustive of all possible risks and uncertainties.
With respect to developing forward-looking information contained in
this MD&A, Provident has made assumptions regarding, among
other things: -- future natural gas, crude oil and NGL prices; --
the ability of Provident to obtain qualified staff and equipment in
a timely and cost-efficient manner to meet demand; -- the
regulatory framework regarding royalties, taxes and environmental
matters in which Provident conducts its business; -- the impact of
increasing competition; -- Provident's ability to obtain financing
on acceptable terms; -- the general stability of the economic and
political environment in which Provident operates; -- the timely
receipt of any required regulatory approvals; -- the timing and
costs of pipeline, storage and facility construction and expansion
and the ability of Provident to secure adequate product
transportation; -- currency, exchange and interest rates; --
certain matters relating to the Pembina Arrangement; -- timely
receipt of required regulatory and court approvals in respect of
the Pembina Arrangement; -- the satisfaction of closing conditions
in respect of the Pembina Arrangement; and -- the ability of
Provident to successfully market its NGL products. Readers are
cautioned that the foregoing list is not exhaustive of all factors
and assumptions which have been used. Forward-looking
information contained in this MD&A is made as of the date
hereof and Provident undertakes no obligation to update publicly or
revise any forward-looking information, whether as a result of new
information, future events or otherwise, unless required by
applicable securities laws. The forward-looking information
contained in this MD&A is expressly qualified by this
cautionary statement. Additional information Additional information
concerning Provident can be accessed under Provident's public
filings at www.sedar.com and www.sec.gov/edgar.shtml, as well
as on Provident's website at www.providentenergy.com. Selected
annual financial measures ($ 000s except per share data) 2011 2010
2009(3) Product sales and service revenue $ 1,955,878 $ 1,746,557 $
1,630,491 Net income (loss) 97,217 (10,506) (89,020) Per share -
basic and diluted(1) 0.36 (0.04) (0.34) Total assets 1,588,692
1,446,453 2,548,015 Long-term financial liabilities (2) 662,846
430,826 682,625 Declared dividends per share $ 0.54 $ 0.72 $ 0.75
(1) Includes dilutive impact of convertible debentures. (2)
Includes long-term debt, decommissioning liabilities, long-term
financial derivative instruments and other long-term liabilities.
(3) The financial information for 2009 is presented in previous
Canadian GAAP as this period is prior to the January 1, 2010
transition date for IFRS. Quarterly table Financial
information by quarter (IFRS) ($ 000s except for per share and 2011
operating amounts) First Second Third Fourth Annual Quarter Quarter
Quarter Quarter Total Product sales and $ 519,100 $ 416,382 $
450,849 $ 569,547 $ 1,955,878 service revenue Funds flow from
continuing $ 53,585 $ 43,490 $ 62,790 $ 92,767 $ 252,632 operations
(1) Funds flow from continuing operations per share - basic and $
0.20 $ 0.16 $ 0.23 0.34 $ 0.93 diluted (4) Adjusted EBITDA -
continuing $ 61,242 $ 51,298 $ 69,528 $ 100,360 $ 282,428
operations (2) Adjusted funds flow from $ 53,585 $ 43,490 $ 62,790
$ 92,767 $ 252,632 continuing operations(3) Adjusted funds flow
from continuing operations per share - basic and $ 0.20 $ 0.16 $
0.23 $ 0.34 $ 0.93 diluted(4) Adjusted EBITDA excluding buyout of
financial derivative instruments and strategic review and
restructuring costs - continuing $ 61,242 $ 51,298 $ 69,528 $
100,360 $ 282,428 operations(2) Net (loss) income $ (11,985) $
40,219 $ 48,398 $ 20,585 $ 97,217 Net (loss) income per share -
basic and $ (0.04) $ 0.15 $ 0.18 $ 0.08 $ 0.36 diluted (4)
Shareholder $ 36,324 $ 36,449 $ 36,609 $ 36,905 $ 146,287 dividends
Dividends per $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.54 share Provident
Midstream NGL 116,864 91,872 94,709 115,714 104,759 sales volumes
(bpd) (1)Based on cash flow from operations before changes in
working capital - see "Reconciliation of Non-GAAP measures".
(2)Adjusted EBITDA is earnings before interest, taxes,
depreciation, amortization, and other non-cash items - see
"Reconciliation of Non-GAAP measures". (3)Adjusted funds flow from
continuing operations excludes realized loss on buyout of financial
derivative instruments and strategic review and restructuring
costs. (4)Includes dilutive impact of convertible debentures.
Quarterly table Financial information by quarter (IFRS) ($
000s except for per unit and 2010 operating amounts) First Second
Third Fourth Annual Quarter Quarter Quarter Quarter Total Product
sales and $ 472,940 $ 366,125 $ 363,767 $ 543,725 $ 1,746,557
service revenue Funds flow from continuing $ 46,839 $ (171,334) $
43,642 $ 74,133 $ (6,720) operations (1) Funds flow from continuing
operations per unit - basic $ 0.18 $ (0.65) $ 0.16 0.28 $ (0.03) -
diluted $ 0.18 $ (0.65) $ 0.16 0.27 $ (0.03) Adjusted EBITDA -
continuing $ 51,442 $ (176,403) $ 52,538 $ 86,342 $ 13,919
operations (2) Adjusted funds flow from continuing $ 47,325 $
39,152 $ 43,642 $ 76,002 $ 206,121 operations(3) Adjusted funds
flow from continuing operations per unit - basic $ 0.18 $ 0.15 $
0.16 0.28 $ 0.77 - diluted(4) $ 0.18 $ 0.15 $ 0.16 0.27 $ 0.77
Adjusted EBITDA excluding buyout of financialderivative
instrumentsand strategic reviewand restructuring costs - continuing
$ 51,928 $ 34,083 $ 52,538 $ 88,211 $ 226,760 operations(2) Net
(loss) income $ (50,921) $ (40,944) $ 8,979 $ 72,380 $ (10,506) Net
(loss) income per unit - basic $ (0.19) $ (0.15) $ 0.03 0.27 $
(0.04) - diluted (4) $ (0.19) $ (0.15) $ 0.03 0.26 $ (0.04)
Unitholder $ 47,634 $ 47,794 $ 47,990 $ 48,221 $ 191,639
distributions Distributions per $ 0.18 $ 0.18 $ 0.18 0.18 $ 0.72
unit Provident Midstream NGL sales volumes 113,279 94,030 95,388
121,627 106,075 (bpd) (1)Based on cash flow from operations before
changes in working capital and site restoration expenditures - see
"Reconciliation of Non-GAAP measures". (2)Adjusted EBITDA is
earnings before interest, taxes, depreciation, amortization, and
other non-cash items - see "Reconciliation of Non-GAAP measures".
(3)Adjusted funds flow from continuing operations excludes realized
loss on buyout of financial derivative instruments and strategic
review and restructuring costs. (4)Includes dilutive impact of
convertible debentures. MANAGEMENT'S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING The management of Provident is
responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Under the
supervision of our Chief Executive Officer and our Chief Financial
Officer we have conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our
assessment, we have concluded that as of December 31, 2011, our
internal control over financial reporting was effective. Because of
its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate. The effectiveness of the Company's
internal control over financial reporting as of December 31, 2011,
has been audited by PricewaterhouseCoopers LLP, independent
auditors, as stated in their report which appears herein. "Signed"
"Signed" Douglas J. Haughey Brent C. Heagy Chief Executive Officer
Chief Financial Officer Calgary, Alberta March 6, 2012 MANAGEMENT'S
RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Provident
is responsible for the information included in the consolidated
financial statements and Management's Discussion and
Analysis. The financial statements have been prepared in
accordance with accounting principles generally accepted in Canada
and in accordance with accounting policies detailed in the notes to
the financial statements. Where necessary, the statements
include amounts based on management's informed judgments and
estimates. Financial information in Management's Discussion
and Analysis is consistent with that presented in the financial
statements. PricewaterhouseCoopers LLP, Chartered Accountants,
appointed by the shareholders, have audited the financial
statements and conducted a review of internal accounting policies
and procedures to the extent required by generally accepted
auditing standards, and performed such tests as they deemed
necessary to enable them to express an opinion on the financial
statements. The Board of Directors, through its Audit Committee, is
responsible for ensuring that management fulfills its
responsibility for financial reporting and internal control.
The Audit Committee is composed of three independent
directors. The Audit Committee reviews the financial
statements and Management's Discussion and Analysis and reports its
findings to the Board of Directors for its consideration in
approving the financial statements. "Signed" "Signed" Douglas J.
Haughey Brent C. Heagy Chief Executive Officer Chief Financial
Officer Calgary, Alberta March 6, 2012 PROVIDENT ENERGY LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Canadian dollars
(000s) As at As at As at December 31, December 31, January 1, 2011
2010 2010 Assets Current assets Cash and cash equivalents $ - $
4,400 $ 7,187 Accounts receivable 230,457 206,631 216,786 Petroleum
product 147,378 106,653 58,779 inventory (note 7) Prepaid expenses
and 4,559 2,539 4,803 other current assets Financial derivative
4,571 487 5,314 instruments (note 16) Assets held for sale - -
186,411 (note 23) 386,965 320,710 479,280 Non-current assets
Investments - - 18,733 Exploration and evaluation assets (note - -
24,739 23) Property, plant and 984,217 833,790 1,422,156 equipment
(note 8) Intangible assets (note 107,118 118,845 132,478 9)
Goodwill (note 10) 107,430 100,409 100,409 Deferred income taxes
2,962 72,699 - (note 15) $ 1,588,692 $ 1,446,453 $ 2,177,795
Liabilities Current liabilities Accounts payable and $ 276,480 $
227,944 $ 221,417 accrued liabilities Cash dividends payable 8,353
12,646 13,468 Current portion of 9,199 148,981 - long-term debt
(note 11) Financial derivative 56,901 37,849 86,441 instruments
(note 16) Liabilities held for sale - - 2,792 (note 23) 350,933
427,420 324,118 Non-current liabilities Long-term debt - bank
facilities and other 184,936 72,882 264,776 (note 11) Long-term
debt - convertible debentures 315,786 251,891 240,486 (note 11)
Decommissioning 85,055 57,232 127,800 liabilities (note 12)
Long-term financial derivative instruments 52,373 29,187 103,403
(notes 11 and 16) Other long-term liabilities (notes 12 and 20,551
19,634 12,496 14) Deferred income taxes - - 37,765 (note 15)
Commitments (note 21) 1,009,634 858,246 1,110,844 Shareholders'
equity Equity attributable to owners of the parent Share capital
(note 13) 2,911,024 - - Unitholders' - 2,866,268 2,834,177
contributions (note 13) Other equity (8,370) 684 684 Accumulated
deficit (2,328,241) (2,278,745) (1,767,910) 574,413 588,207
1,066,951 Non-controlling interest 4,645 - - (note 6) 579,058
588,207 1,066,951 $ 1,588,692 $ 1,446,453 $ 2,177,795 The
accompanying notes are an integral part of these consolidated
financial statements. On behalf of the Board of Directors: "Signed"
"Signed" John B. Zaozirny, Q.C. Grant D. Billing, CA Director
Director PROVIDENT ENERGY LTD. CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS) Canadian dollars (000s
except per share amounts) Year ended December 31, 2011 2010 Product
sales and service revenue (note 18) $ 1,955,878 $ 1,746,557
Realized loss on buyout of financial derivative instruments (note
16) - (199,059) Unrealized gain offsetting buyout of financial
derivative instruments (note 16) - 177,723 Loss on financial
derivative instruments (note 16) (69,756) (103,464) 1,886,122
1,621,757 Expenses Cost of goods sold (note 7) 1,517,070 1,396,635
Production, operating and maintenance 37,432 18,504 Transportation
20,001 18,442 Depreciation and amortization 43,630 44,475 General
and administrative (note 14) 51,059 36,671 Strategic review and
restructuring (note 22) - 13,782 Financing charges 41,282 32,251
Loss on revaluation of conversion feature of convertible debentures
and redemption liability (note 16) 17,469 433 Other income and
foreign exchange (note 20) (7,524) (3,826) 1,720,419 1,557,367
Income from continuing operations before taxes 165,703 64,390
Current tax expense (recovery) (note 15) 654 (6,956) Deferred tax
expense (recovery) (note 15) 67,832 (40,871) 68,486 (47,827) Net
income and comprehensive income from continuing operations 97,217
112,217 Net income (loss) and comprehensive income (loss) from
discontinued operations (note 23) - (122,723) Net income (loss) and
comprehensive income (loss) $ 97,217 $ (10,506) Net income (loss)
and comprehensive income (loss) attributable to: Owners of the
parent $ 96,791 $ (10,506) Non-controlling interest 426 - $ 97,217
$ (10,506) Per share amounts attributable to the equity holders of
the Company: Net income per share from continuing operations -
basic and diluted $ 0.36 $ 0.42 Net income (loss) per share - basic
and diluted $ 0.36 $ (0.04) The accompanying notes are an integral
part of these consolidated financial statements. PROVIDENT
ENERGYLTD. CONSOLIDATED STATEMENTS OF CASH FLOWS Canadian dollars
(000s) Year ended December 31, 2011 2010 Cash provided by (used in)
operatingactivities Net income for the year from continuing $
97,217 $ 112,217 operations Add (deduct) non-cash items:
Depreciation and amortization 43,630 44,475 Non-cash financing
charges and other 8,603 7,956 Loss on purchase of convertible
debentures 3,342 - (note 11) Non-cash share based compensation
expense 12,469 1,280 Unrealized gain offsetting buyout of financial
derivative instruments - (177,723) (note 16) Unrealized loss on
financial derivative 3,235 52,599 instruments (note 16) Loss on
revaluation of conversion feature of convertible debentures 17,469
433 and redemption liability (note 16) Unrealized foreign exchange
gain and other (414) (3,786) (note 20) Loss (gain) on sale of
assets (note 20) 1 (3,300) Deferred tax expense (recovery) 67,832
(40,871) Continuing operations 253,384 (6,720) Discontinued
operations - (2,436) 253,384 (9,156) Site restoration expenditures
related to - (2,041) discontinued operations Change in non-cash
operating working capital (33,145) (28,472) 220,239 (39,669) Cash
used for financing activities Issuance of convertible debentures,
net of 164,950 164,654 issue costs (note 11) Repayment of
debentures (note 11) (249,784) - Increase (decrease) in long-term
debt 109,893 (192,380) Declared dividends to shareholders (146,287)
(191,639) Issue of shares, net of issue costs (note 13) 37,101
32,091 Change in non-cash financing working capital (4,293) (822)
(88,420) (188,096) Cash (used for) provided by investing activities
Capital expenditures (134,115) (70,218) Acquisition (note 6)
(7,852) - Proceeds on sale of assets 3 3,300 Proceeds on sale of
discontinued operations - 106,779 (note 23) Change in non-cash
investing working capital 5,745 14,407 Investing activities from
discontinued - 170,710 operations (136,219) 224,978 Decrease in
cash and cashequivalents (4,400) (2,787) Cash and cash equivalents,
beginning of year 4,400 7,187 Cash and cash equivalents, end ofyear
$ - $ 4,400 Supplemental disclosure of cash flow information Cash
interest paid including debenture $ 35,307 $ 25,448 interest Cash
taxes received $ (1,465) $ (2,576) The accompanying notes are an
integral part of these consolidated financial statements. PROVIDENT
ENERGY LTD. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Canadian
Dollars (000s) Share Unitholders' Other Accumulated Non-controlling
Total capital contributions equity deficit Subtotal interest equity
Balance - December 31, $ - $ 2,866,268 $ 684 $ (2,278,745) $
588,207 $ - $ 588,207 2010 Cancelled on conversion to a corporation
(2,866,268) (2,866,268) (2,866,268) effective January 1, 2011 (note
13) Issued on conversion to a corporation 2,866,268 2,866,268
2,866,268 effective January 1, 2011 (note 13) Equity associated
with redemption liability of (9,054) (9,054) (9,054) non
wholly-owned subsidiary (note 6) Non-controlling interest on 4,219
4,219 acquisition (note 6) Net income and comprehensive 96,791
96,791 426 97,217 income for the year Proceeds on issuance of
37,124 37,124 37,124 shares (note 13) Shares issued on acquisition
of subsidiary 7,606 7,606 7,606 (notes 6 and 13) Debenture
conversions 49 49 49 (notes 11 and 13) Dividends (146,287)
(146,287) (146,287) Share issue (23) (23) (23) costs Balance -
December 31, $ 2,911,024 $ - $ (8,370) $ (2,328,241) $ 574,413 $
4,645 $ 579,058 2011 Balance - $ - $ 2,834,177 $ 684 $ (1,767,910)
$ 1,066,951 $ - $ 1,066,951 January 1, 2010 Net loss and
comprehensive (10,506) (10,506) (10,506) loss for the period
Proceeds on issuance of 32,091 32,091 32,091 trust units Cash
(191,639) (191,639) (191,639) distributions Capital distribution in
connection with the sale (308,690) (308,690) (308,690) of the
Upstream business (note 23) Balance - December 31, $ - $ 2,866,268
$ 684 $ (2,278,745) $ 588,207 $ - $ 588,207 2010 The accompanying
notes are an integral part of these consolidated financial
statements. Notes to the Consolidated Financial Statements (Tabular
amounts in Cdn $ 000s, except share and per share amounts) December
31, 2011 1. Structure of the Company Provident Energy Ltd. (the
"Company" or "Provident") is incorporated under the Business
Corporations Act (Alberta) and domiciled in Canada. The address of
its registered office is 2100, 250 - 2nd Street S.W. Calgary,
Alberta. Provident owns and manages a natural gas liquids
("NGL") midstream business and was established as a result of the
conversion from an income trust structure, Provident Energy Trust
(the "Trust"), to a corporate structure pursuant to a plan of
arrangement. The conversion resulted in the reorganization of the
Trust into a publicly traded, dividend-paying corporation under the
name "Provident Energy Ltd." effective January 1, 2011. Under the
plan of arrangement, former holders of trust units of the Trust
received one common share in Provident Energy Ltd. in exchange for
each trust unit held in the Trust. Pursuant to the conversion, the
Company acquired, directly and indirectly, the same assets and
business that the Trust owned immediately prior to the effective
time of the conversion and assumed all of the obligations of the
Trust. In accordance with the conversion, the Trust was
dissolved effective January 1, 2011 and thereafter ceased to
exist. The principal undertakings of Provident Energy Ltd.
and its predecessor Provident Energy Trust are collectively
referred to as "the Company" or "Provident" and include the
accounts of Provident and its subsidiaries and partnerships. The
conversion was accounted for on a continuity of interests
basis. Accordingly, the consolidated financial statements
reflect the financial position, results of operations and cash
flows as if Provident Energy Ltd. had always carried on the
business formerly carried on by the Trust. As a result of
Provident's conversion from an income trust to a corporation,
effective January 1, 2011, references to "common shares", "shares",
"share based compensation", "shareholders", "performance share
units", "PSUs", "restricted share units", "RSUs", "premium dividend
and dividend reinvestment share purchase (DRIP) plan", and
"dividends" were formerly referred to as "trust units", "units",
"unit based compensation", "unitholders", "performance trust
units", "PTUs", "restricted trust units", "RTUs", "premium
distribution, distribution reinvestment (DRIP) and optional unit
purchase plan", and "distributions", respectively, for periods
prior to January 1, 2011. 2. Basis of preparation and adoption of
IFRS The Company prepares its financial statements in accordance
with Canadian generally accepted accounting principles as set out
in the Handbook of the Canadian Institute of Chartered Accountants
("CICA Handbook"). In 2010, the CICA Handbook was revised to
incorporate International Financial Reporting Standards as issued
by the International Accounting Standards Board ("IFRS"), and
requires publicly accountable enterprises to apply such standards
effective for years beginning on or after January 1, 2011.
Accordingly, the Company commenced reporting on this basis in the
March 31, 2011 interim consolidated financial statements and for
periods thereafter. In the financial statements, the term
"Canadian GAAP" refers to Canadian GAAP before the adoption of
IFRS. These consolidated financial statements have been prepared in
accordance with IFRS. Subject to certain transition elections
disclosed in note 5, the Company has consistently applied the same
accounting policies in its opening IFRS statement of financial
position at January 1, 2010 and throughout all of the periods
presented, as if these policies had always been in effect. Note 5
discloses the impact of the transition to IFRS on the Company's
reported financial position and financial performance, including
the nature and effect of significant changes in accounting policies
from those used in the Company's consolidated financial statements
for the year ended December 31, 2010. The policies applied in these
consolidated financial statements are based on IFRS issued and
outstanding as of March 6, 2012, the date the Board of Directors
approved the statements. 3. Significant accounting policies The
following accounting policies apply to the continuing operations of
the Company. Policies applicable to the former Upstream oil and gas
operations are disclosed in note 23 - Discontinued operations. i)
Principlesof consolidation The consolidated financial statements
include the accounts of Provident Energy Ltd. and all direct and
indirect subsidiaries and partnerships which Provident controls by
having the power to govern the financial and operating policies.
These entities are fully consolidated from the date on which
control is obtained by Provident. All intercompany transactions,
balances, income and expenses, profits and losses and unrealized
gains and losses from intercompany transactions are eliminated on
consolidation. Non-controlling interests represent equity interests
in subsidiaries owned by outside parties. The share of net assets
of subsidiaries attributable to non-controlling interests is
presented as a separate component of equity. Their share of net
income and comprehensive income is also recognized in this separate
component of equity. Changes in the Company's ownership interest in
subsidiaries that do not result in a loss of control are accounted
for as equity transactions. ii) Financial instruments Financial
assets and liabilities are classified as financial assets or
liabilities at fair value through profit or loss, loans and
receivables, held to maturity investments, available for sale
financial assets, or other financial liabilities, as appropriate.
When financial assets and liabilities are initially recognized,
they are measured at fair value. Provident determines the
classification of its financial assets at initial recognition. The
Company's financial assets include cash and cash equivalents,
accounts receivable, financial derivative instruments and
investments. Financial Assets a) Financialassetsat fairvalue
through profit or loss Financial assets at fair value through
profit or loss includes financial assets held for trading and
financial assets designated upon initial recognition at fair value
through profit or loss. Financial assets are classified as held for
trading if they are acquired for the purpose of selling in the near
term. The Company's financial derivative instruments, including
embedded derivatives, are also classified as held for trading.
Gains or losses on financial derivative instruments are recognized
in profit or loss. b) Loans and receivables Loans and receivables
are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. After initial
measurement, loans and receivables are subsequently carried at
amortized cost using the effective interest method less any
allowance for impairment. Amortized cost is calculated taking into
account any discount or premium on acquisition and includes fees
that are an integral part of the effective interest rate and
transaction costs. Gains and losses are recognized in the income
statements when the loans and receivables are derecognized or
impaired, as well as through the amortization process. The
Company's cash and cash equivalents and accounts receivables are
included in this financial asset category. Financial Liabilities a)
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value include financial liabilities
held for trading and financial liabilities designated upon initial
recognition at fair value through profit or loss. Financial
liabilities are classified as held for trading if they are acquired
for the purpose of selling in the near term. Financial derivative
instruments, including embedded derivatives, are also classified as
held for trading. Gains and losses on liabilities held for trading
are recognized in profit and loss. b) Other financial liabilities
Other liabilities are recorded initially at fair value of the
consideration received less any related transaction costs.
Subsequent to initial recognition, the balances are measured at
amortized cost using the effective interest method. Gains and
losses are recognized in the income statement when the liabilities
are derecognized and through amortization expense recorded as
financing charges. The Company's accounts payable, accrued
liabilities other than share based compensation, cash dividends
payable, long-term debt and convertible debentures are included
within this financial liability category (also see item xiv). iii)
Property, plant & equipment The initial cost of an asset
comprises its purchase price or construction costs directly
attributable to bringing the asset into operation, the initial
estimate of the decommissioning obligation, and for qualifying
assets, borrowing costs. The purchase price or construction cost is
the aggregate amount paid and the fair value of any other
consideration given to acquire the asset. Gains and losses on
disposal of an item of property, plant and equipment are determined
by comparing the proceeds from disposal with the carrying amount of
property, plant and equipment and are recognized net in profit or
loss. Midstream assets Midstream facilities, including natural gas
liquids storage facilities and natural gas liquids processing and
extraction facilities are carried at cost less accumulated
depreciation and accumulated impairment losses and are depreciated
at a component level on a straight-line basis over the estimated
service lives of the assets, which range from 25 to 35 years.
Capital assets related to pipelines are carried at cost less
accumulated depreciation and accumulated impairment losses and are
depreciated at a component level using the straight-line method
over their economic lives of approximately 35 years. Vehicles and
equipment of the Company's subsidiary, Three Star Trucking Ltd. are
carried at cost less accumulated depreciation and accumulated
impairment losses, and are depreciated on a 20 percent declining
balance basis over their estimated useful lives. Minimum NGL
product and cavern bottoms The minimum NGL product is the minimum
volume of NGL product needed as a permanent inventory to maintain
adequate reservoir pressures and deliverability rates throughout
the withdrawal season within the Company's owned assets. All tanks,
caverns or other storage reservoirs require a minimum level of
product to maintain a minimum pressure. Below this minimum
pressure, products cannot be readily extracted for sale. Minimum
NGL product and cavern bottoms within the Company's owned assets
are presented as part of Midstream assets within property, plant
and equipment and are not depreciated. Pipeline fills Pipeline
fills represent the petroleum based product purchased for the
purpose of charging the pipeline system and partially filling the
petroleum product storage tanks with an appropriate volume of
petroleum products to enable the commercial operation of the
facilities and pipeline for all Company owned pipelines and tanks.
Pipeline fills within Provident's pipelines are presented as part
of Midstream assets within property, plant and equipment and are
not depreciated. Holdings of pipeline fills in third party carriers
are recorded as product inventory. Office equipment and other
Office equipment and other assets are carried at cost less
accumulated depreciation and accumulated impairment losses and are
generally depreciated on a straight-line basis over their estimated
useful lives. The estimated useful lives for office equipment and
other assets are as follows: Office equipment 5 - 6 years Computer
hardware & software 3 - 4 years Leasehold improvement &
other 10 years Major maintenance and repairs,
inspection,turnarounds and derecognition Major maintenance and
turnarounds are tracked on a project basis and reviewed by
management for potential capitalization. These costs are
depreciated on a straight-line basis over a period which represents
the estimated period before the next planned maintenance or
turnaround. All other maintenance costs are expensed as incurred.
Expenditures on major maintenance or repairs comprise the cost of
replacement parts of assets, inspection costs and overhaul costs.
Where an asset or part of an asset that was separately depreciated
and is now written off is replaced and it is probable that future
economic benefits associated with the item will flow to the
Company, the expenditure is capitalized. In instances where an
asset part is not separately considered a component, the
replacement value is used to estimate the carrying amount of the
replaced assets, and the previous carrying amount is immediately
expensed. Impairment of property, plant and equipment For operating
assets, the impairment test is performed at the cash generating
unit level and for office equipment and other assets, the
impairment test is performed at the individual asset level. A cash
generating unit is determined to be the smallest identifiable group
of assets that generates cash inflows that are largely independent
of the cash inflows from other assets or groups of assets. Values
of assets are reviewed for impairment when indicators of such
impairment exist. If any indication of impairment exists, an
estimate of the asset's recoverable amount is calculated. The
recoverable amount is determined as the higher of the fair value
less costs to sell for the asset and the asset's value in use. If
the carrying amount of the asset exceeds its recoverable amount,
the asset is deemed impaired and an impairment loss is recognized
in profit or loss so as to reduce the carrying amount of the asset
to its recoverable amount. For assets excluding goodwill, an
assessment is made at each reporting date as to whether there is
any indication that previously recognized impairment losses may no
longer exist or may have decreased. If such indication exists, the
Company makes an estimate of the recoverable amount. A previously
recognized impairment loss is reversed only if there has been a
change in the estimates used to determine the asset's recoverable
amount since the last impairment loss was recognized. If that is
the case, the carrying amount of the asset is increased to its
recoverable amount. That increased amount cannot exceed the
carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognized for the asset
in prior years. Such reversal is recognized in profit or loss. iv)
Intangible assets Intangible assets acquired separately are
recognized at cost upon initial recognition. The cost of intangible
assets acquired in a business combination is fair value as at the
date of acquisition. Following initial recognition, the cost model
is applied requiring the intangible asset to be carried at cost
less any accumulated amortization and accumulated impairment
losses. Provident will assess whether the useful lives of
intangible assets are finite or indefinite. Intangible assets with
finite useful lives are assessed for impairment whenever there is
an indication that the intangible asset may be impaired and
amortized on a straight-line basis over the estimated useful lives
of the assets, which range from a period of 12 to 15 years. The
amortization expense of intangible assets with finite lives is
recognized in depreciation and amortization expense in profit or
loss. Gains or losses arising from derecognition of an intangible
asset are measured as the difference between the net disposal
proceeds, if any, and the carrying amount of the asset and are
recognized in profit or loss when the asset is derecognized. v)
Joint arrangements A joint arrangement exists when a contractual
arrangement exists that establishes shared decision making over the
joint activities. Joint control is defined as the contractually
agreed sharing of the power to govern the financial and operating
policies of a venture so as to obtain benefits from its activities.
Joint operations A joint operation involves the use of assets and
other resources of the Company and other venturers rather than the
establishment of a corporation, partnership, or other entity. The
Company recognizes in its financial statements the assets it
controls and the liabilities it incurs and its share of the revenue
and expenses from the sale of goods or services by the joint
operation arrangement. Joint assets A joint asset involves joint
control and offers joint ownership by the Company and other
venturers of assets contributed to or acquired for the purpose of
the joint arrangement, without the formation of a corporation,
partnership, or other entity. The Company accounts for its share of
the joint assets, its share of jointly incurred liabilities with
other venturers, any revenue from the sale or use of its share of
the output of the joint asset, and any expenses incurred in
relation to its interest in the joint asset from the sale of goods
or services by the joint asset. vi) Leases Operating lease payments
are recognized as an expense in the statement of operations on a
straight-line basis over the lease term. vii) Borrowing costs
Borrowing costs directly attributable to the construction of assets
that take a substantial period of time to get ready for their
intended use are capitalized as part of the cost of the respective
assets. All other borrowing costs are expensed in the period they
occur. Borrowing costs consist of interest and other costs that the
Company incurs in connection with the borrowing of funds. The
capitalization rate used to determine the amount of borrowing costs
to be capitalized is the weighted average interest rate applicable
to the Company's outstanding borrowings during the period. viii)
Product inventory Inventories of product are valued at the lower of
cost and net realizable value based on market prices. Cost is
determined using the weighted average costing method and comprises
direct purchase costs, costs of production, extraction and
fractionation costs, and transportation costs. The amount of any
write-down of inventories to net realizable value and all losses of
inventories are recognized as an expense and included in cost of
goods sold in the period the write-down or loss occurs. Any
reversals of write-downs are also included in cost of goods sold.
ix) Goodwill Goodwill is initially measured at cost which
represents the excess of the cost of an acquired enterprise over
the net of the amounts assigned to assets acquired and liabilities
assumed. After initial recognition, goodwill is measured at cost
less any accumulated impairment losses. Goodwill does not generate
cash flows independently of other assets or groups of assets, and
often contributes to the cash flows of multiple cash generating
units. As a result, for the purpose of impairment testing, goodwill
is monitored at the operating business level. When a cash
generating unit is disposed of, goodwill associated with the
operation is included in the carrying amount of the operation when
determining the gain or loss on disposal of the operation. Goodwill
disposed of in this circumstance is measured based on the relative
values of the disposed operation. Goodwill is not amortized.
Rather, Provident assesses goodwill for impairment at least
annually and when circumstances indicate that the carrying value
may be impaired. Impairment is determined for goodwill by assessing
the recoverable amount of the group of cash generating units that
comprise the Midstream business to which the goodwill relates. The
recoverable amount is determined based on a fair value less cost to
sell calculation using cash flow projections from financial
forecasts. If the carrying amount exceeds the recoverable amount of
the group of cash generating units that comprise the Midstream
business, an impairment loss is recognized. Impairment losses
relating to goodwill cannot be reversed in future periods.
Provident performs its annual impairment test of goodwill as at
December 31. x) Decommissioning liabilities A decommissioning
liability is recognized when the Company has a present legal or
constructive obligation to dismantle and remove a facility or an
item of property, plant and equipment and restore the site on which
it is located, and when a reliable estimate of that liability can
be made. Normally an obligation arises for a new facility upon
construction or installation. An obligation for decommissioning may
also crystallize during the period of operation of a facility
through a change in legislation or a decision to terminate
operations. When a liability for decommissioning cost is
recognized, a corresponding amount equivalent to the provision is
also recognized as part of the cost of the related property, plant
and equipment. The amount recognized represents management's
estimate of the present value of the estimated future expenditures
of dismantling, demolition and disposal of the facilities,
remediation and restoration of the surface land as well as an
estimate of the future timing of the costs to be incurred. These
costs are subsequently depreciated as part of the costs of the
facility or item of property, plant and equipment. Any changes in
the estimated timing of the decommissioning or decommissioning cost
estimates are accounted for prospectively by recording an
adjustment to the provision, and a corresponding adjustment to
property, plant and equipment. The Company uses a nominal risk free
discount rate. The accretion of the decommissioning liability is
included as a financing charge. xi) Share based compensation
Provident uses the fair value method of valuing the compensation
plans whereby notional shares are granted to employees. The fair
value of these notional shares is estimated and recorded as share
based compensation (a component of general and administrative
expenses). A portion relating to operational employees at field and
plant locations is allocated to operating expense. The offsetting
amount is recorded as accrued liabilities or other long-term
liabilities. A realization of the expense and a resulting reduction
in cash provided by operating activities occurs when a cash payment
is made. The fair value measurement is determined at each reporting
date using information available at that date. xii) Share dilution
The dilutive effect of convertible debentures is determined using
the "if-converted" method whereby the outstanding debentures at the
end of the period are assumed to have been converted at the
beginning of the period or at the time of issue if issued during
the year. Amounts charged to income or loss relating to the
outstanding debentures are added back to net income for the
dilution calculation. xiii) Income taxes Current income tax Current
income tax assets and liabilities for the current and prior periods
are measured at the amount expected to be recovered from or paid to
the taxation authorities. The tax rates and tax laws used to
compute the amount are those that are enacted or substantively
enacted at the end of the reporting period, and include any
adjustment to tax payable in respect of previous years. Deferred
income tax Provident follows the liability method for calculating
deferred income taxes. Differences between the amounts reported in
the financial statements of the Company and its corporate
subsidiaries and their respective tax bases are applied to tax
rates in effect to calculate the deferred tax asset or liability.
The effect of any change in income tax rates is recognized in the
current period income or equity, as appropriate. Deferred tax
assets are recognized for deductible temporary differences and the
carry-forward of unused tax losses and unused tax credits to the
extent that it is probable that taxable profits will be available
against which the unused tax losses/credits can be utilized.
Deferred income tax liabilities are provided in full for all
taxable temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the financial
statements. Deferred income tax assets and liabilities are measured
at the tax rates that are expected to apply to the period when the
asset is realized or the liability is settled, based on tax rates
and tax laws that have been enacted or substantively enacted by the
balance sheet date. Discounting of deferred tax assets and
liabilities is not permitted. Deferred income tax relating to items
recognized directly in equity is recognized in equity and not in
the consolidated statement of operations. xiv) Convertible
debentures The Company's convertible debentures are compound
financial instruments consisting of a financial liability and an
embedded conversion feature. In accordance with IAS 39, the
embedded derivatives are required to be separated from the host
contracts and accounted for as stand-alone instruments. Debentures
containing a cash conversion option allow Provident to pay cash to
the converting holder of the debentures, at the option of the
Company. As such, the conversion feature is presented as a
financial derivative liability within long-term financial
derivative instruments. Debentures without a cash conversion option
are settled in shares on conversion, and therefore the conversion
feature is presented within equity, in accordance with its
contractual substance. On initial recognition and at each reporting
date, the embedded conversion feature is measured using a method
whereby the fair value is measured using an option pricing model.
Subsequent to initial recognition, any unrealized gains or losses
arising from fair value changes are recognized through profit or
loss in the statement of operations at each reporting date. On
initial recognition, the debt component, net of issue costs, is
recorded as a financial liability and accounted for at amortized
cost. Subsequent to initial recognition, the debt component is
accreted to the face value of the debentures using the effective
interest rate method. Upon conversion, the corresponding portions
of the debt and equity are removed from those captions and
transferred to share capital. xv) Revenue recognition Revenue
associated with the sale of product owned by Provident is
recognized when title passes from Provident to its customer.
Revenues associated with the services provided where Provident acts
as agent are recorded on a net basis when the services are
provided. Revenues associated with the sale of natural gas liquids
storage services are recognized when the services are provided.
xvi) Foreign currency translation The consolidated financial
statements are presented in Canadian dollars, which is Provident's
functional and presentation currency. Provident's subsidiaries with
foreign operations have a functional currency of Canadian dollars.
Transactions in foreign currencies are initially recorded at the
functional currency rate at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies are
retranslated at the functional currency rate of exchange at the
balance sheet date, non-monetary items measured in terms of
historical cost in a foreign currency are translated using the
exchange rates as at the dates of the initial transactions, and
revenues and expenses are translated using the exchange rates as at
the dates of the initial transactions, with the exception of
depreciation and amortization which is translated on the same basis
as the related assets. Translation gains and losses are included in
income in the period in which they arise. xvii) Accounting
standards and amendments issued but notyet applied International
FinancialReporting Standards Unless otherwise noted, the following
revised standards and amendments are effective for annual periods
beginning on or after January 1, 2013 with earlier application
permitted. The Company has not yet assessed the impact of these
standards and amendments or determined whether it will early adopt
them. a) IFRS 9 - Financial Instruments,was issued in November 2009
and addresses classification and measurement of financial assets.
It replaces the multiple category and measurement models in IAS 39
for debt instruments with a new mixed measurement model having only
two categories: amortized cost and fair value through profit or
loss. IFRS 9 also replaces the models for measuring equity
instruments. Such instruments are either recognized at fair value
through profit or loss or at fair value through other comprehensive
income. Where equity instruments are measured at fair value through
other comprehensive income, dividends are recognized in profit or
loss to the extent that they do not clearly represent a return of
investment; however, other gains and losses (including impairments)
associated with such instruments remain in accumulated
comprehensive income indefinitely. Requirements for financial
liabilities were added to IFRS 9 in October 2010 and they largely
carried forward existing requirements in IAS 39 - Financial
Instruments - Recognition and Measurement,except that fair value
changes due to credit risk for liabilities designated at fair value
through profit and loss are generally recorded in other
comprehensive income. IFRS 9 requires application for annual
periods beginning on or after January 1, 2015, with earlier
adoption permitted. b) IFRS 10 - Consolidated Financial Statements,
requires an entity to consolidate an investee when it has power
over the investee, is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to
affect those returns through its power over the investee. Under
existing IFRS, consolidation is required when an entity has the
power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities. IFRS 10 replaces
SIC-12, Consolidation - Special Purpose Entitiesand parts of IAS 27
- Consolidated and Separate Financial Statements. c) IFRS 11 -
Joint Arrangements, requires a venturer to classify its interest in
a joint arrangement as a joint venture or joint operation. Joint
ventures will be accounted for using the equity method of
accounting whereas for a joint operation the venturer will
recognize its share of the assets, liabilities, revenue and
expenses of the joint operation. Under existing IFRS, entities have
the choice to proportionately consolidate or equity account for
jointly controlled entities. IFRS 11 supersedes IAS 31 - Interests
in Joint Ventures, and SIC-13, Jointly Controlled
Entities—Non-monetary Contributions by Venturers. d) IFRS 12 -
Disclosure of Interests in Other Entities, establishes disclosure
requirements for interests in other entities, such as subsidiaries,
joint arrangements, associates, and unconsolidated structured
entities. The standard carries forward existing disclosures and
also introduces significant additional disclosure that address the
nature of, and risks associated with, an entity's interests in
other entities. e) IFRS 13 - Fair Value Measurement, is a
comprehensive standard for fair value measurement and disclosure
for use across all IFRS standards. The new standard clarifies that
fair value is the price that would be received to sell an asset, or
paid to transfer a liability in an orderly transaction between
market participants, at the measurement date. Under existing IFRS,
guidance on measuring and disclosing fair value is dispersed among
the specific standards requiring fair value measurements and does
not always reflect a clear measurement basis or consistent
disclosures. f) There have been amendments to existing standards,
including IAS 27 - Separate Financial Statements ("IAS 27"), and
IAS 28 - Investments in Associates and Joint Ventures("IAS 28").
IAS 27 addresses accounting for subsidiaries, jointly controlled
entities and associates in non-consolidated financial statements.
IAS 28 has been amended to include joint ventures in its scope and
to address the changes in IFRS 10 - 13. g) IAS 1 - Presentation of
Financial Statements, has been amended to require entities to
separate items presented in Other Comprehensive Income ("OCI") into
two groups, based on whether or not items may be recycled in the
future. Entities that choose to present OCI items before tax will
be required to show the amount of tax related to the two groups
separately. The amendment is effective for annual periods beginning
on or after July 1, 2012, with earlier application permitted. h)
IFRS 7 - Financial Instruments: Disclosures,has been amended to
include additional disclosure requirements in the reporting of
transfer transactions and risk exposures relating to transfers of
financial assets and the effect of those risks on an entity's
financial position, particularly those involving securitization of
financial assets. The amendment is applicable for annual periods
beginning on or after July 1, 2011, with earlier application
permitted. i) IAS 32 - Financial Instruments: Presentation, has
been amended to clarify requirements for offsetting of financial
assets and financial liabilities. The amendment is applicable for
annual periods beginning on or after January 1, 2014, and is
required to be applied retrospectively. 4. Significant accounting
judgments, estimates and assumptions The preparation of financial
statements requires management to make judgments, estimates and
assumptions based on currently available information that affect
the reported amounts of assets, liabilities and contingent
liabilities at the date of the consolidated financial statements
and reported amounts of revenues and expenses during the reporting
period. Estimates and judgments are continuously evaluated
and are based on management's experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. However, actual results could
differ from those estimated. By their very nature, these estimates
are subject to measurement uncertainty and the effect on the
financial statements of future periods could be material. In the
process of applying the Company's accounting policies, management
has made the following judgments, estimates, and assumptions which
have the most significant effect on the amounts recognized in the
consolidated financial statements: Inventory Due to the inherent
limitations in metering and the physical properties of storage
caverns and pipelines, the determination of precise volumes of
natural gas liquids held in inventory at such locations is subject
to estimation. Actual inventories of natural gas liquids within
storage caverns can only be determined by draining of the caverns.
Impairment indicators The recoverable amounts of cash generating
units and individual assets have been determined based on the
higher of value in use calculations and fair values less costs to
sell. These calculations require the use of estimates and
assumptions. Goodwill is tested for impairment annually and at
other times when impairment indicators exist. Impairment is
determined for goodwill by assessing the recoverable amount of the
group of cash generating units that comprise the Midstream business
to which the goodwill relates. In assessing goodwill for
impairment, it is reasonably possible that the commodity price
assumptions, sales volumes, supply costs, discount rates, and tax
rates may change which may then impact the recoverable amount of
the group of cash generating units which comprise the Midstream
business and may then require a material adjustment to the carrying
value of goodwill. For the Midstream business, it is also
reasonably possible that these assumptions may change which may
then impact the recoverable amounts of the cash generating units
and may then require a material adjustment to the carrying value of
its tangible and intangible assets. The Company monitors
internal and external indicators of impairment relating to its
tangible and intangible assets. Decommissioning and restoration
costs Decommissioning and restoration costs will be incurred by the
Company at the end of the operating life of certain of the
Company's facilities and properties. The ultimate
decommissioning and restoration costs are uncertain and cost
estimates can vary in response to many factors including changes to
relevant legal and regulatory requirements, the emergence of new
restoration techniques or experience at other production sites. The
expected timing and amount of expenditure can also change, for
example, in response to changes in laws and regulations or their
interpretation. In determining the amount of the provision,
assumptions and estimates are also required in relation to discount
rates. The decommissioning provisions have been created based on
Provident's internal estimates. Assumptions, based on the
current economic environment, have been made which management
believe are a reasonable basis upon which to estimate the future
liability. These estimates are reviewed regularly to take
into account any material changes to the assumptions.
However, actual decommissioning costs will ultimately depend upon
future market prices for the necessary decommissioning work
required which will reflect market conditions at the relevant time.
Income taxes The Company follows the liability method for
calculating deferred income taxes. Differences between the
amounts reported in the financial statements of the Company and its
subsidiaries and their respective tax bases are applied to tax
rates in effect to calculate the deferred tax liability. In
addition, the Company recognizes the future tax benefit related to
deferred income tax assets to the extent that it is probable that
the deductible temporary differences will reverse in the
foreseeable future. Assessing the recoverability of deferred
income tax assets requires the Company to make significant
estimates related to the expectations of future cash flows from
operations and the application of existing tax laws in each
jurisdiction. To the extent that future cash flows and
taxable income differ significantly from estimates, the ability of
the Company to realize the deferred tax assets and liabilities
recorded at the balance sheet date could be impacted.
Additionally, future changes in tax laws in the jurisdictions in
which the Company operates could limit the ability of the Company
to obtain tax deductions in future periods. Contingencies By their
nature, contingencies will only be resolved when one or more future
events occur or fail to occur. The assessment of
contingencies inherently involves the exercise of significant
judgment and estimates of the outcome of future events. Share based
compensation The Company uses the fair value method of valuing
compensation expense associated with the Company's share based
compensation plan whereby notional shares are granted to
employees. Estimating fair value requires determining the
most appropriate valuation model for a grant of equity instruments,
which is dependent on the terms and conditions of the grant.
The assumptions are discussed in note 14. Financial derivative
instruments The Company's financial derivative instruments are
initially recognized on the statement of financial position at fair
value based on management's estimate of commodity prices, share
price and associated volatility, foreign exchange rates, interest
rates, and the amounts that would have been received or paid to
settle these instruments prior to maturity given future market
prices and other relevant factors. Property, plant and equipment
and intangible assets Midstream facilities, including natural gas
liquids storage and terminalling facilities and natural gas liquids
processing and extraction facilities are carried at cost and
depreciated over the estimated service lives of the assets.
Intangible assets are amortized over the estimated useful lives of
the assets. Capital assets related to pipelines and office
equipment are carried at cost and depreciated over their economic
lives. Management periodically reviews the estimated useful lives
of property, plant and equipment and intangible assets. These
estimates are based on management's experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. However, actual results
could differ from those estimated. 5. Transition to IFRS Provident
has prepared its financial statements in accordance with Canadian
GAAP for all periods up to and including the year ended December
31, 2010. These financial statements for the year ended
December 31, 2011 comply with IFRS applicable for periods beginning
on or after January 1, 2011 and the significant accounting policies
meeting those requirements are described in note 3. The effect of
the Company's transition to IFRS are summarized in this note as
follows: i) Transition elections; Reconciliation of the
consolidated statements of financial ii) position, including
shareholders' equity, as previously reported under Canadian GAAP to
IFRS; and iii) Reconciliation of the consolidated statements of
operations as previously reported under Canadian GAAP to IFRS. i)
Transition elections Provident has prepared its IFRS opening
consolidated statement of financial position as at January 1, 2010,
its date of transition to IFRS. In the preparation of this opening
statement of financial position, IFRS 1 allows first-time adopters
certain exemptions from the general requirement to apply IFRS
retrospectively. Provident has applied the following transition
exceptions and exemptions to full retrospective application of
IFRS: a) Business combinations - Provident has elected not to apply
IFRS 3 retrospectively to business combinations that occurred prior
to transition to IFRS on January 1, 2010. Rather, the Company has
elected to apply IFRS 3 relating to business combinations
prospectively from January 1, 2010. As such previous Canadian GAAP
balances relating to business combinations entered into before that
date, including goodwill, have been carried forward without
adjustment. b) Changes in decommissioning, restoration and similar
liabilities - IFRIC 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities requires specified changes in a
decommissioning, restoration or similar liabilities to be added to
or deducted from the cost of the asset to which it relates. The
adjusted depreciable amount of the asset is then depreciated
prospectively over its remaining useful life. However, IFRS 1
allows Provident to measure decommissioning, restoration and
similar liabilities as at the date of transition to IFRS in
accordance with IAS 37 rather than reflecting the impact of changes
in such liabilities that occurred before the date of transition to
IFRS. c) Property, plant and equipment - The deemed cost of oil and
natural gas properties at January 1, 2010, the date of transition
to IFRS, was determined by reference to IFRS 1 - First-time
Adoption of International Financial Reporting Standards. Upon
adoption, the Company has elected to apply the full cost exemption
to measure oil and gas assets in the development or production
phases by allocating the carrying value determined under Canadian
GAAP to cash generating units pro rata using proved and probable
reserve values on the date of transition. In addition, any
differences arising from the adoption of IFRS from previous
Canadian GAAP for decommissioning liabilities related to the
Upstream business have been recognized in accumulated deficit on
the transition date in accordance with IFRS 1. d) Arrangements
containing leases - IFRS 1 allows a first-time adopter to apply the
transitional provisions in IFRIC 4 - Determining whether an
Arrangement contains a Lease, which allows a first-time adopter to
determine whether an arrangement existing at the date of transition
to IFRS contains a lease on the basis of facts and circumstances
existing at that date. As a first-time adopter, Provident made the
same determination of whether an arrangement contained a lease in
accordance with previous Canadian GAAP as that required by IFRIC 4
but at a date other than that required by IFRIC 4. ii) The
following is a reconciliation of the consolidated statements of
financial position, includingShareholders' equity, as previously
reported under Canadian GAAP to IFRS: ($ 000s) December 31,2010
January 1, 2010 Note CDN GAAP Adj IFRS CDN GAAP Adj IFRS Assets
Current assets Cash and cash 4,400 - 4,400 7,187 - 7,187
equivalents Accounts 206,631 - 206,631 216,786 - 216,786 receivable
Petroleum A product 83,868 22,785 106,653 37,261 21,518 58,779
inventory Prepaid expenses and 2,539 - 2,539 4,803 - 4,803 other
current assets Financial derivative 487 - 487 5,314 - 5,314
instruments Assets held I - - - - 186,411 186,411 for sale 297,925
22,785 320,710 271,351 207,929 479,280 Investments - - - 18,733 -
18,733 Exploration and I evaluation - - - - 24,739 24,739 assets
Property, plant A, and equipment B, 832,250 1,540 833,790 2,025,044
(602,888) 1,422,156 D, I Intangible 118,845 - 118,845 132,478 -
132,478 assets Goodwill 100,409 - 100,409 100,409 - 100,409
Deferred income G 50,375 22,324 72,699 - - - taxes 1,399,804 46,649
1,446,453 2,548,015 (370,220) 2,177,795 Liabilities Current
liabilities Accounts payable and 227,944 - 227,944 221,417 -
221,417 accrued liabilities Cash dividends 12,646 - 12,646 13,468 -
13,468 payable Current portion of 148,981 - 148,981 - - - long-term
debt Financial derivative 37,849 - 37,849 86,441 - 86,441
instruments Liabilities I - - - - 2,792 2,792 held for sale 427,420
- 427,420 321,326 2,792 324,118 Long-term debt - bank 72,882 -
72,882 264,776 - 264,776 facilities and other Long-term debt -
convertible 251,891 - 251,891 240,486 - 240,486 debentures
Decommissioning B, I 22,057 35,175 57,232 61,464 66,336 127,800
liabilities Long-term C financial 19,601 9,586 29,187 103,403 -
103,403 derivative instruments Other long-term F 18,735 899 19,634
12,496 - 12,496 liabilities Deferred income G, I - - - 162,665
(124,900) 37,765 taxes 812,586 45,660 858,246 1,166,616 (55,772)
1,110,844 Shareholders' equity Unitholders' 2,866,268 - 2,866,268
2,834,177 - 2,834,177 contributions Convertible C debentures 25,092
(25,092) - 15,940 (15,940) - equity component Other equity C 2,953
(2,269) 684 2,953 (2,269) 684 Accumulated H (2,307,095) 28,350
(2,278,745) (1,471,671) (296,239) (1,767,910) deficit 587,218 989
588,207 1,381,399 (314,448) 1,066,951 1,399,804 46,649 1,446,453
2,548,015 (370,220) 2,177,795 iii) The
following is a reconciliation of the consolidated statement of
operations as previously reported under Canadian GAAP to IFRS: Year
ended ($ 000s) December31, 2010 Notes CDN GAAP Adj IFRS Product
sales and service revenue 1,746,557 - 1,746,557 Realized loss on
buyout of financial (199,059) - (199,059) derivative instruments
Unrealized gain offsetting buyout of 177,723 - 177,723 financial
derivative instruments Loss on financial derivative (103,464) -
(103,464) instruments 1,621,757 - 1,621,757 Expenses Cost of goods
sold A 1,397,901 (1,266) 1,396,635 Production, operating and 18,504
- 18,504 maintenance Transportation 18,442 - 18,442 Depreciation
and amortization D, E 45,718 (1,243) 44,475 General and
administrative 36,671 - 36,671 Strategic review and restructuring
13,782 - 13,782 Financing charges B, E 29,723 2,528 32,251 Loss on
revaluation of conversion C - 433 433 feature of convertible
debentures Other income and foreign exchange (3,826) - (3,826)
1,556,915 452 1,557,367 Income from continuing operations 64,842
(452) 64,390 before taxes Current tax recovery (6,956) - (6,956)
Deferred income tax recovery G (31,694) (9,177) (40,871) (38,650)
(9,177) (47,827) Net income for the year from 103,492 8,725 112,217
continuing operations Net loss from discontinued operations I
(438,587) 315,864 (122,723) Net loss and comprehensive lossfor
(335,095) 324,589 (10,506) the year Explanatory notes to the
IFRS 1 transition adjustments: Note: The following items address
the transition adjustments applicable to continuing operations. For
a description of the transition adjustments applicable to
discontinued operations, see item I. A. Petroleum product inventory
- Product inventory required to be stored in third party pipelines
as pipeline fill was recorded in property, plant and equipment
("PP&E") under previous Canadian GAAP. Under IFRS, these
amounts are recorded as part of petroleum product inventory. Upon
transition to IFRS, $21.5 million has been transferred from
PP&E to petroleum product inventory. The additional inventory
has been processed through the inventory costing calculations with
a corresponding reduction on cost of goods sold of $1.3 million for
the year ended December 31, 2010. Inventory required for linefill
and cavern bottoms in assets owned by Provident remains capitalized
in PP&E. B. Decommissioning liabilities - The amounts recorded
under previous Canadian GAAP were the estimated future cash flows
discounted at the Company's average credit-adjusted risk free rate
of seven percent. Under IFRS, the amounts are discounted using a
risk free rate of four percent at January 1, 2010 and December 31,
2010. Provident recorded an adjustment to increase the
decommissioning liabilities for continuing operations by $34.4
million with an offsetting increase in PP&E of $23.3 million
and accumulated deficit of $11.1 million representing the pre-2010
earnings impact of this adjustment. The impact of this adjustment
on 2010 annual earnings was additional accretion expense $0.7
million. C. Convertible debentures equity component - Under
previous Canadian GAAP, the portion of initial value associated
with the conversion feature of a convertible debenture is
classified as a separate component of equity. As a consequence of
Provident's status as an income Trust in 2010, IFRS requires the
conversion feature of convertible debentures to be classified as a
financial instrument on transition and marked-to-market each
reporting period. Since the conversion feature of the debentures
outstanding on January 1, 2010 was sufficiently out-of-the-money,
the fair value of this feature was determined to be nil. As a
result, the Canadian GAAP balance of the equity component of
convertible debentures at January 1, 2010 of $15.9 million, as well
as $2.3 million of related balances in other equity, have been
reclassified to accumulated deficit on the transition date. In
addition, in the fourth quarter of 2010, a new convertible
debenture was issued by Provident. Under previous Canadian GAAP,
the portion of the initial value of the debenture associated with
the conversion feature of $9.2 million was recorded as a separate
component of equity. Under IFRS, the value of this conversion
feature has been reclassified to long-term financial derivative
instruments in the statement of financial position. Under IFRS,
Provident is also required to mark-to-market this conversion
feature at each reporting period, which resulted in the Company
recording an unrealized loss of approximately $0.4 million in the
fourth quarter of 2010 in loss on revaluation of conversion feature
of convertible debentures in the statement of operations with a
corresponding offset to long-term financial derivative instruments.
D. Depreciation and amortization - IFRS requires that depreciation
be calculated at a component level, which resulted in additional
depreciation expense from continuing operations of $0.7 million for
the year ended December 31, 2010. E. Financing charges - Under
IFRS, accretion expense associated with decommissioning liabilities
is recorded as a financing charge. Under previous Canadian GAAP,
accretion expense from continuing operations of $1.9 million for
the year ended December 31, 2010 related to asset retirement
obligations was recorded under depletion, depreciation and
accretion expense. Accordingly, these amounts have been
reclassified from depletion, depreciation and accretion expense to
financing charges. As a result of this change, the caption
depletion, depreciation and accretion expense has been changed to
be depreciation and amortization expense. The balances recorded
under previous Canadian GAAP as interest on bank debt and interest
and accretion on convertible debentures are now included under
financing charges under IFRS. F. Other long-term liabilities -
Included in other long-term liabilities are obligations associated
with residual Upstream properties. Under previous Canadian GAAP,
these obligations were calculated using an average credit-adjusted
risk free rate of seven percent. Under IFRS, the obligations are
discounted using a risk free rate which resulted in Provident
recording an adjustment of $0.9 million as at December 31, 2010. G.
Deferred income taxes - The transition adjustment associated with
continuing operations was $13.1 million. This IFRS difference is
primarily due to the tax rate applied to temporary differences
associated with SIFT entities. Under previous Canadian GAAP,
Provident used the rate expected to be in effect when the timing
differences reverse. However, under IFRS, Provident is required to
use the highest rate applicable for undistributed earnings in these
entities. In addition, IFRS requires the calculation of deferred
taxes related to foreign exchange differences on balances
denominated in foreign currencies. The 2010 annual net income from
continuing operations impact of IFRS differences on deferred taxes
was an additional recovery of $9.2 million, resulting in a total
adjustment of $22.3 million at December 31, 2010. Upon conversion
to a corporation on January 1, 2011, all timing differences are now
measured under IFRS using a corporate tax rate and, as a result,
the majority of the IFRS differences at December 31, 2010 for
deferred income taxes has reversed through first quarter 2011 net
earnings as a deferred tax expense. H. Accumulated deficit - The
following is a summary of transition adjustments to the Company's
accumulated deficit from Canadian GAAP to IFRS: 2010 ($ millions)
Note December31 January 1 Accumulated deficit as reported under $
(2,307.1) $ (1,471.7) Canadian GAAP IFRS transition adjustments
increase (decrease) on opening statement of financial position
related to continuing operations: Petroleum product inventory A 0.4
0.4 Decommissioning liabilities B (11.1) (11.1) Convertible
debentures C 18.2 18.2 Other long-term liabilities F (0.9) (0.9)
Deferred income taxes G 13.1 13.1 19.7 19.7 IFRS transition
adjustments increase (decrease) on opening statement of financial
position related to discontinued operations: Impairment on Upstream
oil and gas I (391.5) (391.5) properties Decommissioning
liabilities I (36.1) (36.1) Deferred income taxes I 111.7 111.7
(315.9) (315.9) Total net impact on opening statement $ (296.2) $
(296.2) of financial position IFRS transition adjustments increase
(decrease) net income from continuing operations: Cost of goods
sold A $ 1.3 $ - Loss on financial derivative C (0.4) - instruments
Depreciation and amortization D, E 1.2 - Financing charges B, E
(2.5) - Deferred income taxes G 9.1 - 8.7 - IFRS transition
adjustments increase (decrease) net income from discontinued
operations: Depletion expense I 40.2 - Loss on sale of oil and gas
I (8.1) - properties Loss on sale of discontinued I 296.0 -
operations Deferred income taxes I (12.2) - 315.9 - Total net
impact on statement of $ 324.6 $ - operations Accumulated deficit
as reported under $ (2,278.7) $ (1,76 IFRS I. Discontinued
operations - There are a number of IFRS adjustments associated with
the Upstream business impacting both the statement of financial
position on the date of transition, January 1, 2010 and 2010 net
earnings from discontinued operations. However, the total impact of
the combined differences related to the Upstream business on
Provident's equity balance at December 31, 2010 was nil.
Explanatory notes to the IFRS 1 transition reconciliations for
discontinued operations are summarized in the following table: 2010
Discontinued operations ($ millions) Note December 31 January 1
IFRS transition adjustments increase (decrease) on opening
statement of financial position: Impairment on Upstream oil and gas
1 $ (391.5) $ (391.5) properties Decommissioning liabilities 2
(36.1) (36.1) Deferred income taxes 5 111.7 111.7 (315.9) (315.9)
IFRS adjustments increase (decrease) net income on statement of
operations: Depletion expense 1 40.2 - Loss on sale of oil and gas
3 (8.1) - properties Loss on sale of discontinued 6 296.0 -
operations Deferred income taxes 5 (12.2) - 315.9 - Net impact on
accumulated deficit $ - $ (315.9) 1) Property, plant and
equipment -On transition to IFRS, Provident elected to use the IFRS
1 exemption for its Upstream oil & gas assets, allowing for the
allocation of historical book values as reported under previous
Canadian GAAP to the individual cash generating units on a pro rata
basis. If this election is made, each of the cash generating units
is required to be tested for impairment. Any impairment loss is
recorded in accumulated deficit on the transition date.
Accordingly, Provident recorded a $391.5 million impairment loss on
transition to IFRS. The lower carrying value for the Upstream
assets on transition resulted in a lower loss on sale of the
business in the second quarter of 2010 compared to previous
Canadian GAAP. In addition, upon transition to IFRS, Provident had
the option to continue to calculate depletion similar to previous
Canadian GAAP using a reserve base of only proved reserves or to
use proved plus probable reserves. Provident has elected to use
proved plus probable reserves under IFRS. The combination of a
lower carrying value due to the impairment loss on transition and
the larger depletion base resulted in lower depletion charges
related to the Upstream business under IFRS of $40.2 million for
the year ended December 31, 2010. This difference is also offset in
the loss on sale of the Upstream business in the second quarter of
2010. 2) Decommissioning liabilities - The amounts recorded under
previous Canadian GAAP were the estimated future cash flows
discounted at the Company's average credit-adjusted risk free rate
of seven percent. Under IFRS, the amounts are discounted using a
risk free rate of four percent. The adjustment related to the
Upstream business, was an increase of the decommissioning
liabilities by $36.1 million with the offset to accumulated
deficit. 3) Assets held for sale - IFRS requires that assets held
for sale, be presented separately on the statement of financial
position. Previous Canadian GAAP made an exception to this rule for
certain upstream oil and gas related transactions. The sale of West
Central Alberta assets held in the Upstream business was announced
in December 2009. Therefore, assets and associated decommissioning
liabilities of $186.4 million and $2.8 million, respectively,
related to this transaction have been presented separately on the
statement of financial position, at their fair value, determined
with reference to the negotiated sales price adjusted for earnings
between December 31, 2009 and the date of closing on March 1, 2010.
This transaction resulted in a loss on sale of $8.1 million in the
first quarter of 2010. 4) Exploration and evaluation ("E&E")
expenditures - IFRS requires that E&E expenditures be presented
separately from PP&E on the statement of financial position.
Provident has segregated approximately $24.7 million of its
PP&E in accordance with the IFRS 1 full cost exemption as at
January 1, 2010. In the first and second quarters of 2010, an
additional $0.8 million and $0.2 million was incurred,
respectively, which also was classified as E&E. The costs
consist primarily of land that relates to Upstream undeveloped
properties which has not been depleted but rather is assessed for
impairment when indicators suggest the possibility of impairment.
5) Taxes - The transition adjustment for deferred income taxes on
transition to IFRS is primarily due to changes in the carrying
amount of Upstream assets on the January 1, 2010 statement of
financial position and the corresponding impact on temporary
differences used to determine the deferred income tax balance. As a
result, an adjustment of $111.7 million was recorded with an offset
amount recorded in accumulated deficit. Additionally, a reduction
in deferred income tax recoveries of $12.2 million was incurred for
the year ended December 31, 2010 primarily as a result of lower
depletion expense under IFRS. 6) Loss on sale of discontinued
operations - The loss on sale of discontinued operations was
impacted by each of the IFRS adjustments 1 through 5 listed above,
resulting in an IFRS adjustment to the loss on sale of discontinued
operations of $296.0 million, net of tax, for the year ended
December 31, 2010. 6. Acquisition Acquisition of Three Star
Trucking Ltd. On October 3, 2011, Provident acquired a two-thirds
ownership interest in Three Star Trucking Ltd. ("Three Star") for
consideration of 944,828 Provident common shares with an ascribed
value of $7.6 million and cash consideration of $7.9 million. Three
Star is a Saskatchewan based oilfield hauling company serving
Bakken-area crude oil producers. Provident retains the option
to purchase the remaining one-third interest in Three Star after
three years from the closing date. The following table summarizes
the consideration paid for Three Star, the fair value of assets
acquired, liabilities assumed and the non-controlling interest at
the acquisition date. Consideration Cash $ 7,852 Shares 7,606 Total
consideration $ 15,458 Recognized amounts of identifiable assets
acquired and liabilities assumed Working capital $ 2,350 Property,
plant and equipment 22,530 Deferred income taxes (1,879) Long-term
debt (10,345) Redemption liability (9,054) Other equity 9,054 Total
identifiable net assets 12,656 Non-controlling interest (4,219)
Goodwill 7,021 Total $ 15,458 Acquisition-related costs of $0.1
million have been charged to general and administrative expenses in
the consolidated statement of operations. The fair value of the
944,828 common shares issued as part of the consideration paid for
Three Star was based on the closing share price on October 3, 2011.
On acquisition, the non-controlling interest was measured at the
proportionate interest in the identifiable net assets. No
goodwill was attributed to non-controlling interest on acquisition.
Provident has the option to purchase (and the non-controlling
interest has the right to sell) the remaining one-third interest in
Three Star after the third anniversary of the acquisition date
(October 3, 2014). The put price to be paid by Provident for
the residual interest upon exercise is based on a multiple of Three
Star's earnings during the three-year period prior to exercise,
adjusted for associated capital expenditures and debt. On
acquisition, Provident recorded a $9.1 million redemption liability
associated with this put option with an offset to other
equity. The redemption liability will be accreted and
subsequently fair valued at each reporting date with changes in the
value flowing through profit and loss. At December 31, 2011
the fair value of the redemption liability was determined to be
$7.5 million, resulting in an unrealized gain of $1.5 million for
the year ended December 31, 2011 recorded in loss on revaluation of
conversion feature of convertible debentures and redemption
liability on the consolidated statement of operations. The revenue
included in the consolidated statement of operations since October
3, 2011 contributed by Three Star was $19.8 million, of which $13.2
million and $6.6 million were attributable to the owners of the
parent and non-controlling interest, respectively. In addition, net
income included in the consolidated statement of operations since
October 3, 2011 contributed by Three Star was $1.3 million, of
which $0.9 million and $0.4 million were attributable to the owners
of the parent and non-controlling interest, respectively. 7.
Petroleum product inventory When inventories are sold, the carrying
amount of those inventories is recognized as an expense in the
period in which the related revenue is recognized. For the
year ended December 31, 2011, the Company recognized $1,517 million
(2010 - $1,397 million) of product inventory as an expense in cost
of goods sold. 8. Property, plant and equipment Office Oil&
Midstream equipment naturalgas ($ 000s) assets & other Subtotal
properties Total Cost: Balance as at $ 886,442 $ 47,174 $ 933,616 $
2,682,180 $ 3,615,796 January 1, 2010 Additions 74,445 673 75,118
31,152 106,270 Acquisitions - - - 5,117 5,117 Change in
decommissioning 3,902 - 3,902 7,292 11,194 provision Disposals
& (123) (2,356) (2,479) (2,725,741) (2,728,220) Other Balance
as at December 31, 964,666 45,491 1,010,157 - 1,010,157 2010
Additions 131,954 813 132,767 - 132,767 Acquisitions 22,530 -
22,530 - 22,530 Capitalized 1,348 - 1,348 - 1,348 interest Change
in decommissioning 25,494 - 25,494 - 25,494 provision Removal of
fully (1,765) (23,601) (25,366) - (25,366) depreciated assets
Disposals & (13) 193 180 - 180 Other Balance as at December 31,
$ 1,144,214 $ 22,896 $ 1,167,110 $ - $ 1,167,110 2011 Accumulated
depletion and depreciation: Balance as at $ 116,656 $ 27,786 $
144,442 $ 2,049,198 $ 2,193,640 January 1, 2010 Depletion and
depreciation 25,729 7,056 32,785 123,940 156,725 for the period
Disposals - (860) (860) (2,173,138) (2,173,998) Balance as at
December 31, 142,385 33,982 176,367 - 176,367 2010 Depreciation
26,522 5,381 31,903 - 31,903 for the period Removal of fully
(1,765) (23,601) (25,366) - (25,366) depreciated assets Disposals
& (11) - (11) - (11) Other Balance as at December 31, $ 167,131
$ 15,762 $ 182,893 $ - $ 182,893 2011 Net book value: Net book
value as at January $ 769,786 $ 19,388 $ 789,174 $ 632,982 $
1,422,156 1, 2010 Net book value as at December $ 822,281 $ 11,509
$ 833,790 $ - $ 833,790 31, 2010 Net book value as at December $
977,083 $ 7,134 $ 984,217 $ - $ 984,217 31, 2011 As at December 31,
2011, Midstream assets include land of $4.9 million (December 31,
2010 - $4.9 million) and products required for line-fill and cavern
bottoms of $22.8 million (2010 - $22.8 million) which are excluded
from costs subject to depreciation. Capitalized borrowing costs The
amount of borrowing costs directly attributable to the construction
of assets, such as storage caverns and related facilities, which
take a substantial period of time to get ready for their intended
use capitalized during the period ended December 31, 2011 was $1.3
million (2010 - nil). The rate used to calculate the amount of
borrowing costs capitalized was the weighted average interest rate
applicable to the Company's outstanding borrowings during the
period. 9. Intangible assets Midstream contracts and Other customer
intangible ($ 000s) relationships assets Total Cost: Balance as at
January 1, $ 183,100 $ 16,308 $ 199,408 2010 Balance as at December
31, 183,100 16,308 199,408 2010 Removal of fully amortized (21,100)
- (21,100) assets Balance as at December 31, $ 162,000 $ 16,308 $
178,308 2011 Accumulated amortization: Balance as at January 1, $
61,862 $ 5,068 $ 66,930 2010 2010 amortization 13,200 433 13,633
Balance as at December 31, 75,062 5,501 80,563 2010 Amortization
for the 11,298 429 11,727 period Removal of fully amortized
(21,100) - (21,100) assets Balance as at December 31, $ 65,260 $
5,930 $ 71,190 2011 Net book value: Net book value as at $ 121,238
$ 11,240 $ 132,478 January 1, 2010 Net book value as at $ 108,038 $
10,807 $ 118,845 December 31, 2010 Net book value as at $ 96,740 $
10,378 $ 107,118 December31, 2011 Useful life (years) 15 12 -15
Remaining amortization 9 9 period (years) 10. Goodwill During the
year ended December 31, 2011, goodwill increased by $7.0 million
related to the acquisition of Three Star (see note 6). Provident
performed goodwill impairment tests at December 31, 2011 and 2010,
as well as at January 1, 2010, which determined that the
recoverable amount of the group of cash generating units that
comprise the Midstream business was in excess of the respective
carrying value. Accordingly, no write-down of goodwill was
required. The recoverable amount was determined based on a fair
value less costs to sell calculation using cash flow projections
from financial forecasts approved by management covering a 15 year
period with a terminal growth rate of 2% thereafter. Key
assumptions upon which management based its determinations of the
recoverable amount for the goodwill in 2011 include operating
margins which are projected to increase by approximately 2% per
annum, on average, attributable to capital expenditures and
expected growth in the fee-for-service business, combined with a
weighted average discount rate of 9%. The forecast included
future commodity price assumptions based on independent third party
estimates effective at December 31, 2011 of US$100.05/bbl for WTI
crude oil in 2012 with an average escalation rate of 2% per annum
until 2026 and $3.60/mcf for AECO natural gas in 2012 with an
average escalation rate of 6% per annum until 2026. 11. Long-term
debt As at As at December 31, December 31, ($ 000s) 2011 2010
Current portion of convertible $ - $ 148,981 debentures Current
portion of long-term debt of 9,199 - subsidiary Current portion of
long-term debt 9,199 148,981 Revolving term credit facility 184,019
72,882 Long-term debt of subsidiary 917 - Long-term debt - bank
facilities and 184,936 72,882 other Long-term debt - convertible
debentures 315,786 251,891 Total $ 509,921 $ 473,754 i) Revolving
term credit facility Provident completed an extension of its
existing credit agreement (the "Credit Facility") on October 14,
2011, with National Bank of Canada as administrative agent and a
syndicate of Canadian chartered banks and other Canadian and
foreign financial institutions (the "Lenders"). Pursuant to the
amended Credit Facility, the Lenders have agreed to continue to
provide Provident with a credit facility of $500 million which,
under an accordion feature, can be increased to $750 million at the
option of the Company, subject to obtaining additional commitments.
The amended Credit Facility also provides for a separate Letter of
Credit facility which has been increased from $60 million to $75
million. The amended terms of the Credit Facility provide for a
revolving three year period expiring on October 14, 2014 (subject
to customary extension provisions), secured by substantially all of
the assets of Provident. Provident may draw on the facility by way
of Canadian prime rate loans, U.S. base rate loans, banker's
acceptances, LIBOR loans, or letters of credit. As at December 31,
2011, Provident had drawn $190.1 million (including $3.6 million
presented as a bank overdraft in accounts payable and accrued
liabilities) or 38 percent of its Credit Facility (December 31,
2010 - $75.5 million or 15 percent). Included in the carrying value
at December 31, 2011 were financing costs of $2.2 million (December
31, 2010 - $2.4 million). At December 31, 2011, the effective
interest rate of the outstanding Credit Facility was 3.3 percent
(December 31, 2010 - 4.1 percent). At December 31, 2011, Provident
had $60.1 million in letters of credit outstanding (December 31,
2010 - $47.9 million) that guarantee Provident's performance under
certain commercial and other contracts. ii) Long-term debt of
subsidiary On October 3, 2011, Provident completed the acquisition
of a two-thirds interest in Three Star. Three Star's long-term debt
is secured by the vehicles and trailers owned by the subsidiary and
matures over a period of between two to five years. In addition,
Three Star has an operating line of credit (presented in accounts
payable and accrued liabilities) which is secured by substantially
all of the assets of Three Star other than the vehicles and
trailers which are pledged as security for the subsidiary's
long-term debt. As at December 31, 2011, Three Star had drawn $18.0
million, including $9.2 million, $0.9 million, and $7.9 million
presented as current portion of long-term debt, long-term debt -
bank facilities and other, and a bank overdraft in accounts payable
and accrued liabilities, respectively, on the consolidated
statement of financial position.At December 31, 2011, the effective
interest rate of the subsidiary's outstanding long-term debt was
4.9 percent. iii) Convertible debentures In November 2010,
Provident issued $172.5 million aggregate principal amount of
convertible unsecured subordinated debentures ($164.7 million, net
of issue costs). The debentures bear interest at 5.75% per annum,
payable semi-annually in arrears on June 30 and December 31 each
year commencing June 30, 2011 and mature on December 31, 2017. The
debentures may be converted into equity at the option of the holder
at a conversion price of $10.60 per share prior to the earlier of
December 31, 2017 and the date of redemption, and may be redeemed
by Provident under certain circumstances. Upon conversion of the
5.75% debentures, Provident may elect to pay the holder cash at the
option of Provident. At issuance, $163.3 million was recorded
related to the debt component of the debentures ($155.5 million,
net of issue of costs) and the conversion feature of the debentures
was valued at $9.2 million and was recorded as a long-term
financial derivative instrument. On January 13, 2011, in connection
with the corporate conversion, Provident Energy Ltd. announced an
offer to purchase for cash its 6.5% convertible debentures maturing
on August 31, 2012 (the "C series") and its 6.5% convertible
debentures maturing on April 30, 2011 (the "D series") at a price
equal to 101 percent of their principal amounts plus accrued
interest. The offer was completed on February 21, 2011 and resulted
in Provident taking up and cancelling $4.1 million principal amount
of C series debentures and $81.3 million principal amount of D
series debentures. The transaction resulted in Provident
recognizing a loss on repurchase of $1.2 million in financing
charges in the consolidated statement of operations. The total
offer price, including accrued interest, was funded by Provident
Energy Ltd.'s existing revolving term credit facility. On April 30,
2011 the remaining D series debentures, with a principal amount of
$68.6 million matured as scheduled. Provident funded the maturity
through the revolving term credit facility. In May 2011, Provident
issued $172.5 million aggregate principal amount of convertible
unsecured subordinated debentures ($165.0 million, net of issue
costs). The debentures bear interest at 5.75% per annum, payable
semi-annually in arrears on June 30 and December 31 each year
commencing December 31, 2011 and mature on December 31, 2018. The
debentures may be converted into equity at the option of the holder
at a conversion price of $12.55 per share prior to the earlier of
December 31, 2018 and the date of redemption, and may be redeemed
by Provident under certain circumstances. Upon conversion of the
5.75% debentures, Provident may elect to pay the holder cash at the
option of Provident. At issuance, $164.1 million was recorded
related to the debt component of the debentures ($156.6 million,
net of issue costs) and the conversion feature of the debentures
was valued at $8.4 million and was recorded as a long-term
financial derivative instrument. On May 25, 2011, Provident
redeemed all of the outstanding aggregate principal amount of the C
series 6.5% convertible debentures at a redemption price equal to
$1,000 in cash per $1,000 principal amount, plus accrued interest.
The redemption resulted in Provident taking up and cancelling the
remaining outstanding $94.9 million principal amount of C series
debentures. Provident recognized a loss on the redemption of $2.1
million in financing charges in the consolidated statement of
operations. The total redemption, including accrued interest, was
funded by Provident Energy Ltd.'s existing revolving term credit
facility. Provident may elect to satisfy interest and principal
obligations on the convertible debentures by the issuance of
shares. For the year ended December 31, 2011, $50 thousand of the
face value of debentures were converted to shares at the election
of debenture holders (2010 - nil). Included in the carrying value
at December 31, 2011 were financing costs of $13.4 million
(December 31, 2010 - $9.0 million). At December 31, 2011, the fair
value of convertible debentures, including the conversion feature,
was approximately $357 million (December 31, 2010 - $424 million).
The following table details each outstanding convertible debenture.
As at As at Convertible December 31, 2011 December 31, 2010
Debentures ($ 000s except Carrying Conversion conversion Carrying
Face value Face Maturity price per pricing) value(1) value (1)
value date share(2) 6.5% April Convertible $ - $ - 148,981 $
149,980 30, 2011 $ 12.40 Debentures 6.5% Aug. 31, Convertible - -
96,084 98,999 2012 11.56 Debentures 5.75% Dec. 31, Convertible
157,914 172,500 155,807 172,500 2017 10.60 Debentures 5.75% Dec.
31, Convertible 157,872 172,500 - - 2018 12.55 Debentures $ 315,786
$ 345,000 $ 400,872 $ 421,479 (1) Excluding the conversion feature
of convertible debentures. (2) The debentures may be converted into
shares at the option of the holder of the debenture at the
conversion price per share. The conversion feature of
convertible debentures is presented at fair value as a long-term
financial derivative instrument on the consolidated statement of
financial position (see note 16). 12. Decommissioning liabilities
Provident's decommissioning liabilities are based on its net
ownership in property, plant and equipment and represents
management's estimate of the costs to abandon and reclaim those
assets as well as an estimate of the future timing of the costs to
be incurred. Estimated cash flows have been discounted at
Provident's nominal risk free rate and an inflation rate of two
percent has been estimated for future years. In the third quarter
of 2011, Provident adjusted the nominal risk free rate from four
percent down to three percent, to reflect recent interest rate
changes in long-term benchmark bond yields. The resulting
adjustment of $21.2 million is presented as a change in
estimate. In 2011, decommissioning liabilities increased by
$4.3 million (2010 - $0.2 million) related to future obligations
associated with capital expenditures incurred during the year. The
total undiscounted amount of future cash flows required to settle
the decommissioning liabilities is estimated to be $218.9 million
(2010 - $207.3 million). The estimated costs include such
activities as dismantling, demolition and disposal of the
facilities as well as remediation and restoration of the surface
land. Payments to settle the decommissioning liabilities are
expected to occur subsequent to the closure of the facilities and
related assets. Settlement of these liabilities is expected
to occur in 23 to 35 years. As at As at December 31, December 31,
($ 000s) 2011 2010 Carrying amount, beginning of year $ 57,232 $
127,800 Acquisitions - 3,902 Dispositions - discountinued -
(65,184) operations Increase in liabilities incurred 4,335 220
during the year Settlement of liabilities during the - (2,041) year
- discontinued operations Transfer to other long-term - (18,194)
liabilities (1) Accretion of liability - continuing 2,329 2,163
operations Accretion of liability - discontinued - 1,494 operations
Change in estimate 21,159 7,072 Carrying amount, end of year $
85,055 $ 57,232 (1) Commencing on June 30, 2010, obligations
associated with residual Upstream properties have been classified
as other long-term liabilities on the statement of financial
position. 13. Share capital On January 1, 2011, the Trust
completed a conversion from an income trust structure to a
corporate structure pursuant to a plan of arrangement on the basis
of one common share in Provident Energy Ltd. in exchange for each
trust unit held in the Trust. The conversion resulted in the
reorganization of the Trust into a publicly traded, dividend-paying
corporation under the name "Provident Energy Ltd." Provident's
Premium Dividend and Dividend Reinvestment purchase ("DRIP") plan
provides shareholders with a means to automatically reinvest sums
received on account of dividends on shares. Pursuant to
the corporate conversion, the company assigned the DRIP to
Provident Energy Ltd. ("PEL DRIP"). As a result, all existing
participants in the DRIP were deemed to be participants in the PEL
DRIP without any further action on their part and holders of common
shares may participate in the PEL DRIP with respect to any cash
dividends declared and paid by Provident Energy Ltd. on the common
shares. On October 3, 2011, Provident completed the acquisition of
a two-thirds interest in Three Star. The acquisition was
partially funded by issuing 944,828 common shares at a price of
$8.05. i) Share capital Common Shares
Numberof shares Amount (000s) Issued on conversion to a corporation
effective 268,765,492 $ 2,866,268 January 1, 2011 Issued to acquire
Three Star 944,828 7,606 Issued pursuant to the 4,070,265 33,157
dividend reinvestment plan To be issued pursuant to the 407,724
3,967 dividend reinvestment plan Debenture conversions 4,325 49
Share issue costs - (23) Balance atDecember 31, 2011 274,192,634 $
2,911,024 Provident has an unlimited number of common shares
authorized for issuance.
ii) Unitholders' contributions Trust
Units Numberof units Amount (000s) Balance at January 1, 2010
264,336,636 $ 2,834,177 Issued pursuant to the distribution
reinvestment 4,002,565 28,635 plan To be issued pursuant to the
distribution reinvestment 426,291 3,456 plan Balance at December
31, 2010 268,765,492 $ 2,866,268 Cancelled on conversion to a
corporation effective (268,765,492) (2,866,268) January 1, 2011
Balance at December 31, 2011 - $ - The basic and diluted per share
amounts for the year ended December 31, 2011 were calculated based
on the weighted average number of shares outstanding of 270,741,572
(2010 - 266,008,193). 14. Share based compensation
Restricted/Performance share units Certain employees of Provident
are granted restricted share units (RSUs) and/or performance share
units (PSUs), both of which entitle the employee to receive cash
compensation in relation to the value of a specific number of
underlying notional share units. The grants are based on criteria
designed to recognize the long-term value of the employee to the
organization. RSUs typically vest evenly over a period of three
years commencing at the grant date. Payments are made on the
anniversary dates of the RSU to the employees entitled to receive
them on the basis of a cash payment equal to the value of the
underlying notional share units. PSUs vest three years from the
date of grant and can be increased to a maximum of double the PSUs
granted or a minimum of nil PSUs depending on the Company's
performance based on certain benchmarks. The fair value estimate
associated with the RSUs and PSUs is expensed in the statement of
operations over the vesting period. At December 31, 2011, $20.0
million (December 31, 2010 - $7.4 million) is included in accounts
payable and accrued liabilities for this plan and $11.5 million
(December 31, 2010 - $10.4 million) is included in other long-term
liabilities. The following table reconciles the expense recorded
for RSUs and PSUs. Year ended December 31, 2011 2010 General and
administrative $ 19,162 $ 8,160 Production, operating and
maintenance 1,491 288 $ 20,653 $ 8,448 The following table provides
a continuity of the Company's RSU and PSU plans: Units outstanding
RSUs PSUs Opening balance January 1, 2010 1,576,123 3,959,122
Grants 672,155 1,385,636 Reinvested through notional dividends
105,956 328,868 Exercised (857,751) (2,873,270) Forfeited (321,475)
(356,775) Ending balance December 31, 2010 1,175,008 2,443,581
Grants 550,065 470,069 Reinvested through notional dividends 77,378
147,227 Exercised (562,028) (722,082) Forfeited (16,579) (21,039)
Ending balance December 31, 2011 1,223,844 2,317,756 At December
31, 2011, all RSUs and PSUs have been valued using Provident's
share price and each PSU has been valued using a multiplier of
1.25, 1.40, and 1.20, for the 2009, 2010, and 2011 grants,
respectively. 15. Income taxes Income tax expense (recovery)
Yearended December 31, ($ 000s) 2011 2010 Current tax expense
(recovery): Current tax on profits for the year $ 654 $ (6,956)
Total current tax expense (recovery) 654 (6,956) Deferred tax
expense (recovery): Origination and reversal of timing differences
67,832 (40,871) Total deferred tax expense (recovery) 67,832
(40,871) Income tax expense (recovery) $ 68,486 $ (47,827)
The income tax provision differs from the expected amount
calculated by applying the Company's combined federal and
provincial/state income tax rate of 26.83 percent (2010 - 33.35
percent) as follows: Reconciliation between provision for income
Year ended December 31, taxes and pre-tax income ($ 000s) 2011 2010
Income from continuing operations before tax $ 165,703 $ 64,390 Tax
rate 26.83% 33.35% 44,458 21,474 Tax effects: True up - - Foreign
rate differences - - Rate change due to corporate conversion 24,030
- Income not subject to tax - income of the - (74,056) Trust Other
(2) 4,755 Income tax expense (recovery) $ 68,486 $ (47,827) The
analysis of deferred tax assets and deferred tax liabilities is as
follows: As at As at December 31, December 31, ($ 000s) 2011 2010
Deferred tax assets: Deferred tax asset to be recovered after $
131,872 $ 153,900 more than 12 months Deferred tax asset to be
recovered within 32,000 51,050 12 months Deferred tax liabilities:
Deferred tax liability to be recovered (160,444) (130,662) after
more than 12 months Deferred tax liability to be recovered (466)
(1,589) within 12 months Deferred income taxes $ 2,962 $ 72,699 The
components of the deferred tax assets and deferred tax liabilities
are as follows: As at As at December 31, December 31, ($ 000s) 2011
2010 Deferred tax asset: Decomissioning liabilities $ 23,052 $
16,447 Loss carryforward 114,808 144,587 Tax credits 177 16,452
Financial derivative instruments 18,752 23,526 Other deductible
temporary differences 9,666 14,081 Gross deferred tax asset 166,455
215,093 Valuation allowance (2,583) (10,143) Total deferred tax
asset $ 163,872 $ 204,950 Deferred tax liability: Property, plant
and equipment $ (157,105) $ (125,873) Other taxable temporary
differences (3,805) (6,378) Total deferred tax liability $
(160,910) $ (132,251) Deferred income taxes $ 2,962 $ 72,699 The
movement of the deferred income tax account is as follows: Year
ended December31, ($ 000s) 2011 2010 Deferred income tax asset
(liability) Opening balance, beginning of year $ 72,699 $ (37,765)
(Expense) recovery from the statement of (67,832) 40,871 operations
Change related to discontinued operations - 69,770 Foreign exchange
differences (26) (177) Acquisition of subsidiary, Three Star
(1,879) - Deferred income taxes, end of year $ 2,962 $ 72,699
Included in the future income tax asset is estimated
non-capital loss carry forwards that expire in 2026 through
2030. Provident's valuation allowance applies to other
temporary differences that reduce the amount recorded to the
expected amount to be realized. As at December 31, 2011, the
aggregate temporary differences associated with investments in
subsidiaries for which no deferred tax liabilities have been
recognized is $244.3 million (December 31, 2010 - $242.6
million). The amount and timing of reversals of temporary
differences depends on Provident's future operating results,
acquisitions and dispositions of assets and liabilities, and
dividend policy. A significant change in any of the preceding
assumptions could materially affect Provident's estimate of the
deferred tax balance. Prior to conversion to a corporation
effective January 1, 2011, IFRS required temporary
differences at the Trust level to be reflected at the highest rate
at which individuals would be taxed on undistributed profits. Upon
corporate conversion, deferred tax balances are determined using
the applicable statutory rate for corporations. 16. Financial
instruments Risk Management overview Provident has a comprehensive
Enterprise Risk Management program that is designed to identify and
manage risks that could negatively affect its business, operations
or results. The program's activities include risk
identification, assessment, response, control, monitoring and
communication. Provident's Risk Management Committee ("RMC")
oversees execution of the program and regular reports are provided
to the Audit Committee and Board of Directors. Provident has
established and implemented market risk management strategies,
policies and limits that are monitored by Provident's Risk
Management group. The derivative instruments Provident uses
include put and call options, costless collars, participating
swaps, and fixed price products that settle against indexed
referenced pricing. The purchase of put option contracts
effectively create a floor price for the commodity, while allowing
for full participation if prices increase. The purchase of call
options allow for a commodity to be purchased at a fixed price at
the option of the contract holder. Costless collars are contracts
that provide a floor and a ceiling price and allowing participation
within a set range. Participating swaps are contracts that provide
a floor and also provide a ceiling for a certain percentage of the
volume of the contract. Fixed price swaps are contracts that
specify a fixed price at which a certain volume of product will be
bought or sold at in the future. The Risk Management group monitors
risk exposure by generating and reviewing mark-to-market reports
and counterparty credit exposure of Provident's outstanding
derivative contracts. Additional monitoring activities
include reviewing available derivative positions, regulatory
changes and bank and analyst reports. The market risk management
program is designed to protect a base level of operating cash flow
in order to support cash dividends and capital programs. The
market risk management program manages commodity price volatility,
as well as fluctuating interest and foreign exchange rates.
Provident utilizes a variety of financial instruments to protect
margins on a portion of its frac spread production and sales, and
to manage physical contract exposure for periods of up to two
years. As well, the Provident market risk management strategy
reduces foreign exchange risk due to the exposure arising from the
conversion of U.S. dollars into Canadian dollars. Fair Values Fair
value measurement of assets and liabilities recognized on the
consolidated statement of financial position are categorized into
levels within a fair value hierarchy based on the nature of
valuation inputs. The three levels of the fair value
hierarchy are: -- Level 1 - Unadjusted quoted prices in active
markets for identical assets or liabilities; -- Level 2 - Inputs
other than quoted prices that are observable for the asset or
liability either directly or indirectly; and -- Level 3 - Inputs
that are not based on observable market data. Provident's financial
derivative instruments have been classified as Level 2 instruments
with the exception of the redemption liability related to the
acquisition of the Company's subsidiary, Three Star, which is
classified as a Level 3 instrument. The financial instruments
are carried at fair value as at December 31, 2011 and 2010.
The fair values of Level 2 financial derivative instruments are
determined by reference to independent monthly forward settlement
prices, interest rate yield curves, currency rates, quoted market
prices for Provident's shares, and volatility rates at the
period-end dates. The redemption liability related to Three Star is
classified as a Level 3 instrument, as the fair value is determined
by using inputs that are not based on observable market data.
The liability represents a put option, held by the non-controlling
interest of Three Star, to sell the remaining one-third of the
business to Provident after the third anniversary of the
acquisition date (October 3, 2014). The put price to be paid
by Provident for the residual interest upon exercise is based on a
multiple of Three Star's earnings during the three year period
prior to exercise, adjusted for associated capital expenditures and
debt based on management estimates. These estimates are
subject to measurement uncertainty and the effect on the financial
statements of future periods could be material. Financial
instruments classified as Level 3 Year ended December31, ($ 000s)
2011 2010 Redemption liability, beginning of year $ - $ -
Acquisition of Three Star (note 6) 9,054 - Accretion of liability
26 - Gain on revaluation (1,532) - Redemption liability, end of
year $ 7,548 $ - Provident has also reflected management's
assessment of nonperformance risk, including credit risk, into the
fair value measurement. In evaluating the credit risk component of
nonperformance risk, Provident has considered prevailing market
credit spreads. As at Total December 31, Held for Loans and Other
Carrying 2011 ($ Trading Receivables Liabilities Value 000s) Assets
Accounts $ - $ 230,457 $ - $ 230,457 receivable Financial
derivative instruments - current assets 4,571 - - 4,571 $ 4,571 $
230,457 $ - $ 235,028 Liabilities Accounts payable and $ - $ - $
276,480 $ 276,480 accrued liabilities Cash dividends - - 8,353
8,353 payable Current portion of - - 9,199 9,199 long-term debt
Financial derivative instruments - current liabilities 56,901 - -
56,901 Long-term debt - bank - - 184,936 184,936 facilities and
other Long-term debt - - - 315,786 315,786 convertible debentures
Financial derivative instruments - long-term liabilities 52,373 - -
52,373 Other long-term - - 20,551 20,551 liabilities $ 109,274 $ -
$ 815,305 $ 924,579 As at Held for Loans and Other Total
December 31, Trading Receivables Liabilities Carrying 2010 ($ 000s)
Value Assets Cash and cash $ - $ 4,400 $ - $ 4,400 equivalents
Accounts - 206,631 - 206,631 receivable Financial derivative
instruments - current assets 487 - - 487 $ 487 $ 211,031 $ - $
211,518 Liabilities Accounts payable and $ - $ - $ 227,944 $
227,944 accrued liabilities Cash dividends - - 12,646 12,646
payable Current portion of - - 148,981 148,981 long-term debt
Financial derivative instruments - current liabilities 37,849 - -
37,849 Long-term debt - bank - - 72,882 72,882 facilities and other
Long-term debt - - - 251,891 251,891 convertible debentures
Financial derivative instruments - long-term liabilities 29,187 - -
29,187 Other long-term - - 19,634 19,634 liabilities $ 67,036 $ - $
733,978 $ 801,014 Except as disclosed in note 11 in connection with
the convertible debentures, there were no significant differences
between the carrying value of these financial instruments and their
estimated fair value as at December 31, 2011. The following table
is a summary of the net financial derivative instruments liability:
As at As at December 31, December 31, ($ 000s) 2011 2010 Frac
spread related Crude oil $ 10,196 $ 16,733 Natural gas 30,579
19,113 Propane (4,784) 16,246 Butane 2,969 4,755 Condensate 3,100
2,099 Foreign exchange 3,747 (28) Sub-total frac spread related
45,807 58,918 Management of exposure embedded in 12,878 (1,168)
physical contracts Corporate Electricity (734) (421) Interest rate
2,246 (366) Other financial derivatives Conversion feature of
convertible 36,958 9,586 debentures Redemption liability related to
7,548 - acquisition of Three Star Net financialderivative
instruments $ 104,703 $ 66,549 liability For convertible debentures
containing a cash conversion option, the conversion feature is
measured at fair value through profit and loss at each reporting
date, with any unrealized gains or losses arising from fair value
changes reported in the consolidated statement of
operations. This resulted in Provident recording a loss
of approximately $19.0 million (2010 - $0.4 million) on the
revaluation on the conversion feature of convertible debentures on
the consolidated statement of operations. Market Risk Market risk
is the risk that the fair value of a financial instrument will
fluctuate because of changes in market prices. Market risk is
generally comprised of price risk, currency risk and interest rate
risk. a) Price risk The decisions to
enter into financial derivative positions and to execute the market
risk management strategy are made by senior officers of Provident
who are also members of the RMC. The RMC receives input and
commodity expertise from the business managers in the decision
making process. Strategies are selected based on their
ability to help Provident provide stable cash flow and dividends
per share rather than to simply lock in a specific commodity price.
Commodity price volatility and market location differentials affect
the Midstream business. In addition, Midstream is exposed to
possible price declines between the time Provident purchases
natural gas liquid (NGL) feedstock and sells NGL products, and to
narrowing frac spreads. Frac spreads are the difference
between the selling prices for propane-plus and the input cost of
the natural gas required to produce the respective NGL products.
Provident responds to these risks using a market risk management
program to protect margins on a portion of its frac spreads
production and sales, and to manage physical contract exposure for
periods of up to two years while retaining some ability to
participate in a widening margin environment. Subject to
market conditions, Provident's intention is to hedge approximately
50 percent of its production and sales volumes exposed to frac
spreads on a rolling 12 month basis. Also, subject to market
conditions, Provident may add additional positions as appropriate
for up to 24 months. b) Currency risk
Provident's commodity sales are exposed to both positive and
negative effects of fluctuations in the Canadian/U.S. exchange
rate. Provident manages this exposure by matching a
significant portion of the cash costs that it expects with revenues
in the same currency. As well, Provident uses derivative
instruments to manage the U.S. cash requirements of its business.
Provident regularly sells or purchases forward a portion of
expected U.S. cashflows. Provident's strategy also manages
the exposure it has to fluctuations in the U.S./Canadian dollar
exchange rate when the underlying commodity price is based upon a
U.S. index price. Provident may also use derivative products
that provide for protection against a stronger Canadian dollar,
while allowing it to participate if the currency weakens relative
to the U.S. dollar. c) Interest rate
risk Provident's revolving term credit facilities bear interest at
a floating rate. Using debt levels as at December 31, 2011,
an increase/decrease of 50 basis points in the lender's base rate
would result in an increase/decrease of annual interest expense of
approximately $1.0 million (2010 - $0.4 million). Provident has
mitigated this risk by entering into interest rate financial
derivative contracts for a portion of the outstanding long-term
debt. The contracts settle against Canadian Bankers
Acceptance CDOR rates. Financial derivative sensitivity analysis
The following tables show the impact on (loss) gain on financial
derivative instruments if the underlying risk variables of the
financial derivative instruments changed by a specified amount,
with other variables held constant. As at December 31, 2011 +
Change - Change ($ 000s) Frac spread related Crude oil (WTI +/-
$5.00 per $ (7,255) $ 7,333 bbl) Natural gas (AECO +/- $1.00 per
20,349 (20,346) gj) NGLs (includes (Belvieu +/- US $0.10 (10,033)
10,033 propane, butane) per gal) Foreign exchange (FX rate +/- $
0.05) (14,217) 14,217 ($U.S. vs $Cdn) Management of exposure
embedded in physical contracts Crude oil (WTI +/- $5.00 per (5,647)
5,647 bbl) NGLs (includes (Belvieu +/- US $0.10 propane, butane and
per gal) 4,908 (4,908) condensate) Corporate Interest rate (Rate
+/- 50 basis 1,599 (1,599) points) Electricity (AESO +/- $5.00 per
218 (218) MW/h) Conversion feature of (Provident share price $
(7,077) $ 6,487 convertible debentures +/- $0.50 per share)
As at December 31, 2010 + Change - Change ($ 000s) Frac spread
related Crude oil (WTI +/- $5.00 per $ (9,964) $ 9,892 bbl) Natural
gas (AECO +/- $1.00 per 22,264 (22,272) gj) NGLs (includes (Belvieu
+/- US $0.10 (9,160) 9,330 propane, butane) per gal) Foreign
exchange (FX rate +/- $ 0.05) (2,839) 2,840 ($U.S. vs $Cdn)
Management of exposure embedded in physical contracts Crude oil
(WTI +/- $5.00 per (5,506) 5,509 bbl) NGLs (includes (Belvieu +/-
US $0.10 propane, butane and per gal) 2,480 (2,482) condensate)
Corporate Interest rate (Rate +/- 50 basis 2,392 (2,392) points)
Electricity (AESO +/- $5.00 per 435 (435) MW/h) Conversion feature
of (Provident share price $ (1,827) $ 1,654 convertible debentures
+/- $0.50 per share) Liquidity Risk Liquidity risk is the risk
Provident will not be able to meet its financial obligations as
they come due. Provident's approach to managing liquidity risk is
to ensure that it always has sufficient cash and credit facilities
to meet its obligations when due, without incurring unacceptable
losses or damage to Provident's reputation. Management typically
forecasts cash flows for a period of twelve months to identify
financing requirements. These requirements are then addressed
through a combination of committed and demand credit facilities and
access to capital markets, as discussed in note 17. The following
table outlines the timing of the cash outflows relating to
financial liabilities. As at December 31, Payment due by period
2011 Less More than 1 to 3 3 to 5 than 5 ($ 000s) Total 1 year
years years years Accounts payable and $ 276,480 $ 276,480 $ - $ -
$ - accrued liabilities Cash dividends 8,353 8,353 - - - payable
Financial derivative 56,901 56,901 - - - instruments - current
Long-term debt - bank facilities 214,552 15,718 198,834 - - and
other (1) (2) (3) Long-term debt - convertible 473,944 19,838
39,675 39,675 374,756 debentures (2) Long-term financial 52,373 -
15,415 - 36,958 derivative instruments Other long-term 21,917 2,205
14,357 2,327 3,028 liabilities (2) Total $ 1,104,520 $ 379,495 $
268,281 $ 42,002 $ 414,742 (1) The terms of the credit facility
have a revolving three year period expiring on October 14, 2014.
(2) Includes associated interest or accretion and principal
payments. (3) Includes current portion of long-term debt. Credit
Risk Provident's Credit Policy governs the activities undertaken to
mitigate the risks associated with counterparty (customer)
non-payment. The Policy requires a formal credit review for
counterparties entering into a commodity contract with
Provident. This review determines an approved credit
limit. Activities undertaken include regular monitoring of
counterparty exposure to approved credit limits, financial review
of all active counterparties, utilizing master netting arrangements
and International Swap Dealers Association (ISDA) agreements and
obtaining financial assurances where warranted. Financial
assurances include guarantees, letters of credit and cash. In
addition, Provident has a diversified base of creditors.
Substantially all of Provident's accounts receivable are due from
customers and joint venture partners in the oil and gas and
midstream services and marketing industries and are subject to
credit risk. Provident partially mitigates associated credit
risk by limiting transactions with certain counterparties to limits
imposed by Provident based on management's assessment of the
creditworthiness of such counterparties. The carrying value
of accounts receivable reflects management's assessment of the
associated credit risks. As at December 31, 2011 amounts past
due and not impaired included in accounts receivable is $7.2
million (December 31, 2010 - nil). Settlement of financial
derivative contracts Midstream financial derivative contract buyout
In April 2010, Provident completed the buyout of all fixed price
crude oil and natural gas swaps associated with the Midstream
business for a total realized loss of $199.1 million. The carrying
value of these specific contracts at March 31, 2010 was a liability
of $177.7 million resulting in an offsetting unrealized gain in the
second quarter of 2010. The buyout of Provident's forward
mark-to-market positions allows Provident to refocus its market
risk management program on protecting margins on a portion of its
frac spread production and managing physical contract exposure for
a period of up to two years. The following table summarizes the
impact of the loss on financial derivative instruments during the
years ended December 31, 2011 and 2010. The loss on
revaluation of conversion feature of convertible debentures and
redemption liability, realized loss on buyout of financial
derivative instruments and unrealized gain offsetting buyout of
financial derivative instruments are not included in the table as
these items are separately disclosed on the consolidated statement
of operations. Year ended December 31, Losson financial 2011 2010
derivative instruments ($ 000s except volumes) Volume(1) Volume (1)
Realized loss on financial derivative instruments Frac spread
related Crude oil $ (6,186) 0.4 $ (17,315) 2.0 Natural gas (12,695)
24.7 (29,849) 16.9 Propane (36,630) 3.9 (9,819) 1.6 Butane (7,909)
1.2 (4,889) 0.6 Condensate (4,833) 0.6 (504) 0.2 Foreign exchange
(2,205) 3,766 Sub-total frac spread (70,458) (58,610) related
Corporate Electricity 2,627 367 Interest rate (743) (847)
Management of exposure embedded in physical contracts 2,053 3.0
8,225 0.6 (66,521) (50,865) Unrealized loss on financial derivative
instruments (3,235) (52,599) Loss on financial $ (69,756) $
(103,464) derivative instruments (1) The above table represents
aggregate volumes that were bought/sold over the periods. Crude oil
and NGL volumes are listed in millions of barrels and natural gas
is listed in millions of gigajoules. The financial derivative
contracts in place at December 31, 2011 are summarized in the
following tables: Midstream Volume Year Product (Buy)/Sell Terms
Effective Period 2012 Crude Oil 1,507 Bpd US $97.57 per bbl January
1 - (3) (10) December 31 5,548 Bpd US $95.43 per bbl January 1 -
March (3) (11) 31 2,217 Bpd US $86.71 per bbl January 1 - (3) (12)
September 30 1,421 Bpd US $93.95 per bbl January 1 - (3) (10)
December 31 978 Bpd Cdn $101.82 per July 1 - December bbl (3) (10)
31 1,445 Bpd Participating Swap February 1 - Cdn $85.19 per bbl
December 31 (Average Participation 27% above the floor price) 1,352
Bpd Participating Swap March 1 - December US $72.22 per bbl 31
(Average Participation 51% above the floor price) Natural Gas
(44,057) Gjpd Cdn $3.53 per gj January 1 - (2) (10) December 31
(9,578) Gjpd Participating Swap February 1 - Cdn $8.55 per gj
December 31 (Average Participation 28% below the ceiling price)
Propane 7,473 Bpd US $1.55 per January 1 - March gallon (4) (10) 31
(3,297) Bpd US $1.0094 per January 1 - March gallon (4) (11) 31
(989) Bpd US $1.3375 per January 1 - March gallon (5) (11) 31
Normal Butane (2,654) Bpd US $1.7352 per January 1 - March gallon
(6) (11) 31 2,445 Bpd US $1.7434 per January 1 - gallon (6) (10)
December 31 ISO Butane (1,454) Bpd US $1.7807 per January 1 - March
gallon (7) (11) 31 Condensate (2,217) Bpd US $2.225 per January 1 -
gallon (8) (12) September 30 Sell US January 1 - March Foreign
Exchange $24,641,529 per 31 month @ 0.9862 (13) Sell US $2,633,333
January 1 - June 30 per month @ 1.016 (13) Sell US $5,785,714
January 1 - July 31 per month @ 0.996 (13) Sell US $5,144,444
January 1 - per month @ 0.996 September 30 (13) Sell US $2,875,000
January 1 - per month @ 1.050 December 31 (13) Sell US $2,016,783
March 1 - March 31 per month @ 1.0119 (13) Sell US $1,041,721 April
1 - October per month @ 31 0.9413 (13) Sell US $2,666,667 April 1 -
December per month @ 1.042 31 (13) Sell US $681,260 May 1 - October
31 per month @ 0.9850 (13) Sell US $1,437,986 July 1 - December per
month @ 0.9659 31 (13) Sell US $1,634,227 October 1 - per month @
December 31 0.9829 (13) Sell US $1,420,538 November 1 - per month @
December 31 0.9995 (13) 2013 Crude Oil 1,700 Bpd US $96.65 per bbl
January 1 - March (3) (10) 31 1,250 Bpd Participating Swap January
1 - March Cdn $84.90 per bbl 31 (Average Participation 25% above
the floor price) 758 Bpd Participating Swap January 1 - March US
$85.62 per bbl 31 (Average Participation 30% above the floor price)
Natural Gas (15,000) Gjpd Cdn $4.58 per gj January 1 - March (2)
(10) 31 (9,524) Gjpd Participating Swap January 1 - March Cdn $8.87
per gj 31 (Average Participation 22% below the ceiling price) Sell
US $1,651,990 January 1 - January Foreign Exchange per month @
0.9829 31 (13) Sell US $1,397,250 January 1 - March per month @
0.9995 31 (13) Sell US $5,000,000 January 1 - March per month @
1.050 31 (13) Corporate Volume Year Product (Buy)/Sell Terms
EffectivePeriod Cdn $62.00 January 1 2012 Electricity (5) MW/h per
MW/h (9) - December 31 2012 Interest Notional Pay Average October 1
2011 Rate $ 180,000,000 (Cdn$) Fixed rate of - June 30 2013 1.877%
(14) Notional Pay Average July 1 2013 - $ 50,000,000 (Cdn$) Fixed
rate of September 30 1.124% (14) 2014 (1) The above table
represents a number of transactions entered into over an extended
period of time. (2) Natural gas contracts are settled against AECO
monthly index. (3) Crude Oil contracts are settled against NYMEX
WTI Calendar Average. (4) Propane contracts are settled against
Belvieu C3 TET. (5) Propane contracts are settled against Conway
C3. (6) Normal Butane contracts are settled against Belvieu NC4 NON
TET & Belvieu NC4 TET. (7) ISO Butane contracts are settled
against Belvieu IC4 NON TET. (8) Condensate contracts are settled
against Belvieu NON-TET Natural Gasoline. (9) Electricity contracts
are settled against the hourly price of Electricity as published by
the AESO in $/MWh. (10) FRAC spread contracts. (11) Management of
physical contract exposure - NGL Product contracts. (12) Management
of physical contract exposure - Rail contracts. (13) US Dollar
forward contracts are settled against the Bank of Canada noon rate
average. Selling notional US dollars for Canadian dollars at a
fixed exchange rate results in a fixed Canadian dollar price for
the underlying commodity. (14) Interest rate forward contract
settles monthly against 1M CAD BA CDOR. 17. Capital
management Provident considers its total capital to be comprised of
net debt and shareholders' equity. Net debt is comprised of
long-term debt and working capital surplus, excluding balances for
the current portion of financial derivative instruments. The
balance of these items at December 31, 2011 and December 31, 2010
were as follows: As at As at December 31, December 31, ($ 000s)
2011 2010 Working capital surplus (1) $ (97,561) $ (79,633)
Long-term debt (including current 509,921 473,754 portion) Net debt
412,360 394,121 Shareholders' equity 579,058 588,207 Total
capitalization $ 991,418 $ 982,328 Net debt to total capitalization
42% 40% (1) The working capital surplus excludes balances for the
current portion of financial derivative instruments. Provident's
primary objective for managing capital is to maximize long-term
shareholder value by: -- providing an appropriate return to
shareholders relative to the risk of Provident's underlying assets;
and -- ensuring financing capacity for Provident's internal
development opportunities and acquisitions that are expected to add
value to shareholders. Provident makes adjustments to its capital
structure based on economic conditions and Provident's planned
capital requirements. Provident has the ability to adjust its
capital structure by issuing new equity or debt, controlling the
amount it returns to shareholders, and making adjustments to its
capital expenditure program. Provident relies on cash flow
from operations, proceeds received from the DRIP program, external
lines of credit and access to capital markets to fund capital
programs and acquisitions. On January 1, 2011, the Trust completed
a conversion from an income trust structure to a corporate
structure pursuant to a plan of arrangement. The conversion
resulted in the reorganization of the Trust into a publicly traded,
dividend-paying corporation under the name "Provident Energy Ltd."
18. Product sales and service revenue For the year ended December
31, 2011, included in product sales and service revenue is $259.6
million (2010 - $202.7 million) associated with U.S. midstream
sales. 19. Supplemental disclosures Consolidated statements of
operations presentation The following table details the amount of
total employee compensation costs included in the cost of goods
sold, production, operating and maintenance, and general and
administrative line items in the consolidated statements of
operations for the years ended December 31, 2011 and 2010: Employee
compensation costs Year ended December 31, ($ 000s) 2011 2010
Salaries and short-term benefits(1) $ 29,657 $ 27,065 Share based
compensation(1) 20,653 8,448 Total $ 50,310 $ 35,513 (1) Excludes
amounts classified as strategic review and restructuring in 2010.
Compensation of key management Compensation awarded to key
management included: Remuneration of directors and senior
management Year endedDecember 31, ($ 000s) 2011 2010(1) Salaries
and short-term benefits $ 4,744 $ 4,589 Termination benefits 336
18,781 Share based compensation 5,783 2,943 Total $ 10,863 $ 26,313
(1) For the year ended December 31, 2010, a portion of the expenses
were included in discontinued operations. Key management includes
the Company's officers and directors. 20. Other income and foreign
exchange Other income and foreign exchange is comprised of: Other
income and foreign exchange Year ended December 31, ($ 000s) 2011
2010 Realized (gain) loss on foreign exchange $ (669) $ 3,425 Loss
(gain) on sale of assets 1 (3,300) Other (6,442) (165) (7,110) (40)
Unrealized (gain) loss on foreign exchange (473) 808 Gain on
termination of agreement - (4,900) Other 59 306 (414) (3,786) Total
$ (7,524) $ (3,826) For the year ended December 31, 2011, Provident
recognized other income of $6.4 million from third parties relating
to payments received for certain contractual volume commitments at
the Empress facilities. During the third quarter of 2010, Provident
agreed to terminate a multi-year condensate storage and
terminalling services agreement with a third party in exchange for
a parcel of land valued at $4.9 million. The transaction was
accounted for as a non-monetary transaction and included in
property, plant and equipment on the consolidated statement of
financial position with a corresponding gain included in "Other
income and foreign exchange" on the consolidated statement of
operations. In the third quarter of 2010, Provident received
proceeds of $3.3 million from the sale of certain asset-backed
commercial paper investments that had previously been written off.
Provident recorded a gain on sale in "Other income and foreign
exchange" on the consolidated statement of operations. 21.
Commitments Provident has entered into operating leases for offices
that extend through June 2022. However, a significant portion will
be recovered through subleases with third parties. In relation to
the Midstream business, Provident is committed to minimum lease
payments under the terms of various tank car leases for five years.
Additionally, under an arrangement to use a third party
interest in the Younger Plant, Provident has a commitment to make
payments calculated with reference to a number of variables
including return on capital. Future minimum lease payments under
non-cancelable operating leases are as follows: As at December
Payment due by period 31, 2011 Less than ($ 000s) Total 1 year 1 to
3 years 3 to 5 years Operating Leases Office leases $ 60,781 $
12,003 $ 24,234 $ 24,544 Sublease (39,751) (9,647) (18,365)
(11,739) recovery 21,030 2,356 5,869 12,805 Rail tank cars 35,809
6,953 15,487 13,369 Younger plant 21,578 4,808 8,892 7,878 Total $
78,417 $ 14,117 $ 30,248 $ 34,052 22. Strategic review and
restructuring In 2010, Provident completed a strategic transaction
to separate its Upstream and Midstream businesses. An agreement was
reached with Midnight Oil Exploration Ltd. ("Midnight") to combine
the remaining Provident Upstream business with Midnight in a $416
million transaction. Closing of this arrangement occurred on
June 29, 2010. In conjunction with this transaction and other
initiatives, Provident completed an internal reorganization to
continue as a pure play, cash distributing natural gas liquids
(NGL) infrastructure and logistics business which resulted in staff
reductions at all levels of the organization, including senior
management. On January 1, 2011, the Trust completed a conversion
from an income trust structure to a corporate structure pursuant to
a plan of arrangement. The conversion resulted in the
reorganization of the Trust into a publicly traded, dividend-paying
corporation under the name "Provident Energy Ltd." For the year
ended December 31, 2011, no strategic review and restructuring
costs were incurred (2010 - $31.7 million, of which $13.8 million
were attributable to continuing operations). The costs were
comprised primarily of severance, consulting and legal costs
related to the sale of the Upstream business. In the fourth quarter
of 2010, $1.9 million in costs were incurred related to Provident's
reorganization into a dividend paying corporation effective January
1, 2011. 23. Discontinued operations (Provident Upstream) On June
29, 2010, Provident completed a strategic transaction in which
Provident combined the remaining Provident Upstream business with
Midnight to form Pace Oil & Gas Ltd. ("Pace") pursuant to a
plan of arrangement under the Business Corporations Act (Alberta)
(the "Midnight Arrangement"). Under the Midnight Arrangement,
Midnight acquired all outstanding shares of Provident Energy
Resources Inc., a wholly-owned subsidiary of Provident Energy Trust
which held all of the producing oil and gas properties and reserves
associated with Provident's Upstream business. Total
consideration from the transaction was $423.7 million, consisting
of $115 million in cash and approximately 32.5 million shares of
Pace valued at $308.7 million at the time of the closing.
Associated transaction costs were $8.1 million. Under the
terms of the Midnight Arrangement, Provident unitholders divested a
portion of each of their Provident units to receive 0.12225 shares
of Pace, which was recorded as a non-cash distribution by the
Trust, valued at $308.7 million. Provident recorded a loss on
sale of $79.8 million and $58.1 million in deferred tax recovery
related to this transaction. This transaction completed the sale of
the Provident Upstream business in a series of transactions between
September 2009 to June 2010. The following table presents
information on the net loss from discontinued operations. Year
endedDecember 31, Net loss from discontinued operations ($ 2011
2010 000s) Production revenue, net of royalties $ - $ 76,581 Loss
from discontinued operations before taxes and impact of sale of
discontinued - (112,702) operations(1) Loss on sale of discontinued
operations - (79,790) Current tax expense - (1) Deferred income tax
recovery - 69,770 Net loss from discontinued operations for $ - $
(122,723) the year Per unit - basic and diluted $ - $ (0.46) (1)
For the year ended December 31, 2010 interest expense of $2.5
million was allocated to discontinued operations on a prorata basis
calculated as the proportion of net assets of the Upstream business
to the sum of total net assets of the Trust plus long-term debt.
The carrying amounts of major classes of assets and liabilities
included as part of the Upstream business as at the date of the
sale were as follows: Canadian dollars (000s) Property, plant and
equipment $ 568,880 Decommissioning liabilities (65,184) Other
(8,340) $ 495,356 Assets held for sale IFRS requires that assets
held for sale be presented separately on the statement of financial
position. Previous Canadian GAAP made an exception to this rule for
certain upstream oil and gas related transactions. The sale of West
Central Alberta assets held in the Upstream business was announced
in December 2009. Therefore, assets and associated decommissioning
liabilities of $186.4 million and $2.8 million, respectively,
related to this transaction have been presented separately on the
January 1, 2010 statement of financial position, at their fair
value, determined with reference to the negotiated sales price
adjusted for earnings between December 31, 2009 and the date of
closing on March 1, 2010. This transaction resulted in a loss on
sale of $8.1 million in the first quarter of 2010. Additional
accounting policies Accounting policies solely related to
Provident's Upstream business are as follows: i) Financial
instruments Financial Assets a) Available for sale The Company's
investments are classified as available for sale financial assets.
A gain or loss on an available for sale financial asset shall be
recognized directly in other comprehensive income, except for
impairment losses and foreign exchange gains and losses. When the
investment is derecognized or determined to be impaired, the
cumulative gain or loss previously recorded in equity is recognized
in profit or loss. ii) Property, plant & equipment Oil and
natural gas properties Oil and natural gas properties are stated at
cost, less accumulated depletion and depreciation and accumulated
impairment losses. Costs incurred subsequent to the determination
of technical feasibility and commercial viability and the costs of
replacing parts of property, plant and equipment are recognized as
oil and natural gas properties only when they increase the future
economic benefits embodied in the specific properties to which they
relate. All other expenditures are recognized in profit or loss as
incurred. Such capitalized oil and natural gas properties represent
costs incurred in developing proved and probable reserves and
bringing in or enhancing production from such reserves and are
accumulated on a cost centre basis. Development costs Expenditures
on the construction, installation or completion of infrastructure
facilities such as platforms, pipelines and the drilling of
development wells, including unsuccessful development or
delineation wells, are capitalized within property, plant and
equipment. Depletion The provision for depletion and depreciation
for oil and natural gas assets is calculated, at a component level
using the unit-of-production method based on current period
production divided by the related share of estimated total proved
and probable oil and natural gas reserve volumes, before royalties.
Production and reserves of natural gas and associated liquids are
converted at the energy equivalent ratio of 6,000 cubic feet of
natural gas to one barrel of oil. In determining its depletion
base, the Company includes estimated future costs for developing
proved and probable reserves, and excludes estimated salvage values
of tangible equipment and the cost of exploration and evaluation
assets. iii) Exploration and Evaluation assets Pre-license costs
General prospecting and evaluation costs incurred prior to having
obtained the legal rights to explore an area are expensed directly
to the statement of operations in the period in which they are
incurred. Exploration and evaluation costs Once the legal right to
explore has been acquired, all costs incurred to assess the
technical feasibility and commercial viability of resources are
capitalized as exploration and evaluation ("E&E") intangible
assets until the drilling of the well is complete and the results
have been evaluated. These costs may include costs of license
acquisition, technical services and studies, seismic acquisition,
exploration drilling and testing, directly attributable overhead
and administration expenses, including remuneration of production
personnel and supervisory management, the projected costs of
retiring the assets (if any), and any activities in relation to
evaluating the technical feasibility and commercial viability of
extracting mineral resources. Such items are initially measured at
cost. After initial recognition, the Company measures E&E costs
using the cost model whereby the asset is carried at cost less
accumulated impairment losses. Intangible exploration assets are
not depleted and carried forward until the Company has determined
the technical feasibility and commercial viability of extracting a
mineral resource. If no reserves are found and management
determines that the Company no longer intends to develop or
otherwise extract value from the discovery, the costs are written
off to profit or loss. Upon determination of proven and probable
reserves, E&E assets attributable to those reserves are first
tested for impairment at the cash generating unit level, and then
reclassified to oil and natural gas properties, a separate category
within property, plant and equipment. Once these costs have been
transferred to property, plant and equipment, they are subject to
impairment testing at the cash generating unit level similar to
other oil and natural gas assets within property, plant and
equipment. iv) Joint arrangements Certain of the Company's
activities in the Upstream business were conducted through
interests in jointly controlled assets and operations, where the
Company has a direct ownership interest in and jointly control the
assets and/or operations of the venture. Accordingly, the income,
expenses, assets, and liabilities of these jointly controlled
assets and operations are included in the consolidated financial
statements of the Company in proportion to the Company's interest.
v) Decommissioning liabilities For upstream operations, the amount
recognized represents management's estimate of the present value of
the estimated future expenditures to abandon and reclaim the
Company's net ownership in wells and facilities determined in
accordance with local conditions and requirements as well as an
estimate of the future timing of the costs to be incurred.
Decommissioning is likely to occur when the fields are no longer
economically viable. This in turn depends on future oil and gas
prices, which are inherently uncertain. vi) Significant accounting
judgments, estimates and assumptions Reserves base The Company's
reserves have been evaluated in accordance with the Canadian Oil
and Gas Evaluation Handbook Volumes 1 and 2 ("COGEH") and comply
with the standards that govern all aspects of reserves as
prescribed in National Instrument 51-101 (NI 51-101). Under NI
51-101, proved reserves are defined as having a high degree of
certainty to be recoverable. Probable reserves are defined as those
reserves that are less certain to be recovered than proved
reserves. The targeted levels of certainty, in aggregate, are at
least 90 percent probability that the quantities recovered will
equal or exceed the estimated proved reserves and at least 50
percent probability that the quantities recovered will equal or
exceed the sum of the estimated proved plus probable reserves.
Under NI 51-101 standards, proved plus probable are considered a
"best estimate" of future recoverable reserves. The estimation of
oil and gas reserves is a subjective process. Forecasts are based
on engineering data, projected future rates of production,
estimated commodity prices, and the timing of future expenditures.
The Company expects reserve estimates to be revised based on the
results of future drilling activity, testing, production levels,
and economics of recovery based on cash flow forecasts. Future
development costs are estimated using assumptions as to number of
wells required to produce the reserves, the cost of such wells and
associated production facilities, and other capital costs. Carrying
value of oil and gas assets Oil and gas development and production
properties are depreciated on a unit-of-production basis at a rate
calculated by reference to proved plus probable reserves and
incorporate the estimated future costs of developing and extracting
those reserves. The calculation of unit-of production rate of
amortization could be impacted to the extent that actual production
in the future is different from current forecast production based
on proved plus probable reserves. This would generally result from
significant changes in any of the factors or assumptions used in
estimating reserves and could include: -- Changes in proved plus
probable reserves; -- The effect on proved plus probable reserves
of differences between actual commodity prices and commodity price
assumptions; or -- Unforeseen operational issues. Impairment
indicators The recoverable amounts of cash generating units and
individual assets have been determined based on the higher of value
in use calculations and fair values less costs to sell. These
calculations require the use of estimates and assumptions. For the
Upstream business, it is reasonably possible that the commodity
price assumptions may change which may then impact the estimated
life of the field and may then require a material adjustment to the
carrying value of its tangible and intangible assets. The Company
monitors internal and external indicators of impairment relating to
its tangible and intangible assets. Impairment of available for
sale financial assets The Company classifies certain assets as
available for sale and recognizes movements in their fair value in
equity. Subsequent to initial recognition, when the fair value
declines, management makes assumptions about the decline in value
whether it is an impairment that should be recognized in profit or
loss. 24. Subsequent event Arrangement agreement
with Pembina Pipeline Corporation On January 15, 2012, Provident
and Pembina Pipeline Corporation ("Pembina") entered into an
agreement (the "Arrangement Agreement") for Pembina to acquire all
of the issued and outstanding common shares of Provident by way of
a plan of arrangement (the "Pembina Arrangement") under the
Business Corporations Act (Alberta). Under the terms of the
Arrangement Agreement, Provident shareholders will receive 0.425 of
a Pembina share for each Provident share held (the "Provident
Exchange Ratio"). Pembina will also assume all of the rights
and obligations relating to Provident's convertible
debentures. The conversion price of each class of convertible
debentures will be adjusted based on the Provident Exchange
Ratio. Following closing of the Pembina Arrangement, Pembina
will be required to make an offer for the Provident convertible
debentures at 100 percent of their principal values plus accrued
and unpaid interest. The repurchase offer will be made within 30
days of closing of the Pembina Arrangement. Should a holder
of the Provident convertible debentures elect not to accept the
repurchase offer, the debentures will mature as originally set out
in their respective indentures. Holders who convert their Provident
convertible debentures following completion of the Pembina
Arrangement will receive common shares of Pembina. In
addition, Provident immediately suspended its DRIP plan following
the announcement of the Pembina Arrangement. The proposed
transaction will be carried out by way of a court-approved plan of
arrangement and will require the approval of at least 66 2/3% of
holders of Provident shares represented in person or by proxy at a
special meeting of Provident shareholders to be held on March 27,
2012 to consider the Pembina Arrangement. The Pembina
Arrangement is also subject to obtaining the approval of a majority
of the votes cast by the holders of Pembina shares at a special
meeting of Pembina shareholders to be held on March 27, 2012 to
consider the issuance of Pembina shares in connection with the
Pembina Arrangement. In addition to shareholder and court
approvals, the proposed transaction is subject to applicable
regulatory approvals and the satisfaction of certain other closing
conditions customary in transactions of this nature, including
compliance with the Competition Act (Canada) and the acceptance of
the Toronto Stock Exchange. Subject to receipt of all
required approvals, closing of the Pembina Arrangement is expected
to occur on or about April 1, 2012.
Provident Energy Ltd. CONTACT: Investor and Media Contact: Raina
VitanovManager, Investor RelationsAshley NuellInvestor Relations
& Communications AnalystPhone (403) 231-6710Email:
info@providentenergy.comCorporate Head Office:2100, 250 - 2nd
Street SWCalgary, Alberta T2P 0C1Phone: (403) 296-2233Toll Free:
1-800-587-6299Fax: (403) 264-5820www.providentenergy.com
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