CALGARY, ALBERTA--(Marketwire - Aug. 13, 2009) -
All values are in Canadian dollars and conversion of natural gas volumes to barrels of oil equivalent (boe) are at 6:1 unless otherwise indicated.
Provident Energy Trust (Provident) PVE PVX today announced its 2009 second quarter interim financial and operating results, the acquisition of additional fractionation capacity at Sarnia, its decision to sell 6,320 boed of non-strategic oil-weighted assets (primarily in Saskatchewan) and the August cash distribution of $0.06 per unit.
"Provident's second quarter results were as expected given weak commodity prices and the challenging economic climate," said Provident President and Chief Executive Officer, Tom Buchanan. "During the quarter, the Trust announced the conclusion of the strategic review process and its decision to remain structured as a cash-distributing, diversified energy enterprise and implemented a cost-saving internal reorganization to better position Provident to enhance value in both the Upstream and Midstream business units."
Second Quarter Summary
- Consolidated funds flow from operations during the second quarter of 2009 was $49 million ($0.19 per unit), a decrease of 71 percent when compared to $165 million ($0.65 per unit) in the second quarter of 2008, primarily attributable to the sharp year-over-year decline in commodity prices.
- Unitholder distributions in the second quarter of 2009 were $0.18 per unit resulting in a payout ratio of 97 percent, compared to the 55 percent payout in the second quarter of 2008 when Provident distributed $0.36 per unit. For the six months ended June 30, 2009, Provident had a payout ratio of 76 percent compared to 62 percent for the first half of 2008.
- Provident Midstream sold approximately 102,800 barrels per day (bpd) of natural gas liquids (NGL) during the quarter, a decrease of 7 percent from approximately 110,800 bpd in the second quarter of 2008 caused by weaker petrochemical demand for natural gas liquids and the impact of reduced fractionation at Sarnia due to the recent expiry of leased capacity.
- Provident Midstream continues to achieve growth in stable fee-for-service margin, primarily related to condensate storage and handling activities at its Redwater condensate hub. Gross operating margin from the commercial services business line for the six months ended June 30, 2009 was $30 million, an increase of 37 percent from $22 million in the first half of 2008.
- Provident Midstream generated earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA) of $24 million in the second quarter, down 60 percent from $62 million in the second quarter of 2008 due to lower propane-plus sale prices and product margins, lower sales volumes, non-recurring restructuring costs and a $19 million realized loss from the commodity price risk management program.
- Provident Upstream produced approximately 23,800 barrels of oil equivalent per day (boed) in the second quarter of 2009, down 15 percent from approximately 28,000 boed in the second quarter of 2008. This decrease is due to the reduced 2009 capital program (compared to prior years) and the focus of capital spending in both 2008 and the first half of 2009 on the Dixonville and Pekisko plays where production gains will not be immediately realized.
- Provident Upstream generated funds flow from operations of $30 million in the second quarter of 2009, down 73 percent from $113 million in the same quarter of 2008. This decline reflects substantially lower oil and natural gas prices, lower production volumes and non-recurring restructuring costs, partially offset by a $3 million realized gain from the commodity price risk management program.
- Provident Upstream has received conditional approval from the Alberta Energy Resources Conservation Board (ERCB) to proceed with pilot project expansion and the first phase of the waterflood enhanced oil recovery program in the Dixonville area.
- Provident maintained its financial flexibility during the second quarter with senior bank debt of $511 million, while total net debt was $770 million including subordinated convertible debentures and net working capital (excluding current portion of financial derivative instruments). Provident has a revolving term credit facility with a total borrowing base of $1.125 billion of which approximately $1.0 billion is expected to be accessible in the third quarter due to terms of the facility that limit potential borrowings to a multiple of trailing twelve month Midstream EBITDA, calculated on a quarterly basis.
- Provident concluded its strategic review process and determined that in the context of the current environment, it is in the best interest of unitholders for Provident to remain a cash-distributing, diversified energy enterprise. In conjunction with the conclusion of the review, Provident completed an internal reorganization intended to improve the efficiency and competitiveness of the businesses by streamlining the structure of the organization and reducing costs by approximately $12 million per year. A charge of $9.5 million ($0.04 per unit) occurred during the second quarter as a result of this internal reorganization.
Acquisition of Sarnia Fractionation Capacity
Provident is pleased to announce it has reached an agreement with BP Canada (BP) under which Provident Midstream has agreed to purchase an additional 6.15 percent interest in the Sarnia fractionation facility operated by BP for an immediate payment of $14.8 million and a deferred payment of $3.7 million for a facility enhancement planned for 2010. This agreement is effective August 1, 2009 and will increase Provident's ownership in the Sarnia fractionator to approximately 16.5 percent, enhancing propane-plus fractionation capacity in the Empress East System by approximately 7,400 bpd to approximately 20,000 bpd in total. The outright purchase of this fractionation capacity immediately replaces the 6,000 bpd of formerly leased capacity at Sarnia that expired on April 1, 2009. As a result of this transaction, Provident will defer construction of its previously announced depropanizer facility in Michigan. The opportunity remains to construct this facility at a later date if circumstances warrant.
The purchase of additional Sarnia fractionation capacity is of substantial benefit to Provident and its unitholders. This acquisition results in the immediate addition of incremental sales volume and operating margin in the Empress East business line, several months earlier than the originally scheduled commissioning of the Michigan depropanizer. As a direct result of this transaction, Provident is increasing its EBITDA guidance for 2009.
Sale of Saskatchewan Upstream Assets
Provident intends to sell up to 6,320 boed of non-strategic oil and natural gas production assets, primarily located in Saskatchewan.
"The decision to sell our assets in Saskatchewan is an important step towards repositioning Provident Upstream for long term sustainability and growth," said Tom Buchanan. "We believe now is the right time to crystallize the value we have created in these legacy properties and refocus our capital and technical resources on high-impact growth initiatives in both business units."
During the second quarter of 2009 these assets produced 6,320 boed, consisting of approximately 84 percent crude oil and 16 percent natural gas. Proved plus probable (P+P) oil and gas reserves included in this disposition package totaled 15 million barrels of oil equivalent (mmboe) as of June 30, 2009. The disposition package will include the following operating areas:
- Southeast Saskatchewan: Primarily light oil assets that produced approximately 2,680 boed in the second quarter of 2009 with 7.4 mmboe P+P reserves and a P+P reserve life index (RLI) of approximately 7.5 years.
- Southwest Saskatchewan: Primarily shallow natural gas assets that produced approximately 966 boed in the second quarter of 2009 with 2.8 mmboe P+P reserves and a P+P RLI of approximately 7.9 years.
- Lloydminster (Saskatchewan and Alberta): Primarily conventional heavy crude oil assets that produced approximately 2,674 boed in the second quarter of 2009 with 4.8 mmboe P+P reserves and a P+P RLI of approximately 5.0 years.
Net disposition proceeds will be reinvested in high-impact long term growth initiatives such as Provident's Pekisko and Dixonville oil plays as well as growth projects in the Midstream business unit. In the short term, the sale proceeds will be applied to Provident's revolving term credit facility.
2009 Guidance Update
Management is increasing its 2009 EBITDA guidance for Provident Midstream to a range of $190 to $215 million (from $180 to $205 million previously), subject to market conditions. This increase is a result of the acquisition of additional Sarnia fractionation capacity effective August 1, 2009.
Management is making a slight adjustment to 2009 production guidance for Provident Upstream to a range of 23,000 to 24,000 boed from the previous range of 23,500 to 25,000 boed. This reduction in expected production volumes is primarily a result of unplanned downtime related to weather and third-party gas pipeline outages. This guidance incorporates a full year of production and does not include any adjustments for asset sales. Provident Upstream plans to spend the remaining $27 million of its $88 million capital budget, primarily in the Dixonville area.
August Cash Distribution
The August cash distribution of $0.06 per unit is payable on September 15, 2009 and will be paid to unitholders of record as of August 24, 2009. The ex-distribution date will be August 20, 2009. The Trust's current annualized cash distribution rate is $0.72 per trust unit. Based on the current annualized cash distribution rate and the closing price on August 12, 2009 of $5.60, Provident's yield is approximately 13 percent.
For unitholders receiving their cash distribution in U.S. funds, the August 2009 cash distribution will be approximately US$0.06 per unit based on an exchange rate of 0.9195. The actual U.S. dollar cash distribution will depend on the Canadian/U.S. dollar exchange rate on the payment date and will be subject to applicable withholding taxes.
Provident Energy Trust is a Calgary-based, open-ended energy income trust that owns and manages an oil and gas exploitation and production business and a natural gas liquids midstream services and marketing business. Provident's energy portfolio is located in some of the most stable and predictable producing regions in Western Canada. Provident provides monthly cash distributions to its unitholders and trades on the Toronto Stock Exchange and the New York Stock Exchange under the symbols PVE.UN and PVX, respectively.
This document contains certain forward-looking statements concerning Provident, 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 and obtaining required approvals of regulatory authorities.
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, and project development activities.
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.
/T/
Consolidated financial highlights
Consolidated
($ 000s except per Three months ended Six months ended
unit data) June 30, June 30,
----------------------------------------------------------------------------
% %
2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Revenue (net of
royalties and
financial derivative
instruments) from
continuing
operations $305,923 $ 420,220 (27)$ 776,692 $1,122,435 (31)
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Funds flow from
Provident
Upstream
operations(1) $ 30,022 $ 112,869 (73)$ 52,849 $ 184,011 (71)
Funds flow
from Provident
Midstream
operations(1) 18,494 52,601 (65) 79,948 111,853 (29)
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Funds flow
from
continuing
operations(1) $ 48,516 $ 165,470 (71)$ 132,797 $ 295,864 (55)
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Per weighted
average unit
- basic and
diluted (2) $ 0.19 $ 0.65 (71)$ 0.51 $ 1.17 (56)
Distributions
to unitholders $ 47,012 $ 91,662 (49)$ 101,523 $ 182,779 (44)
Per unit $ 0.18 $ 0.36 (50)$ 0.39 $ 0.72 (46)
Percent of
funds flow
from continuing
operations
paid out as
declared
distributions 97% 55% 76 76% 62% 23
Net loss $(80,061)$(184,081) (57)$(120,345) $ (150,465) (20)
Per weighted
average unit
- basic and
diluted (2) $ (0.31)$ (0.72) (57)$ (0.46) $ (0.59) (22)
Capital
expenditures
(continuing
operations) $ 26,548 $ 34,210 (22)$ 83,054 $ 118,792 (30)
Oil and gas
property
acquisitions,
net (continuing
operations) $ 119 $ 10,432 (99)$ 493 $ 19,451 (97)
Weighted
average trust
units
outstanding
(000s)
- basic 261,003 254,404 3 260,199 253,659 3
- diluted (2) 261,003 254,468 3 260,199 253,723 3
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Consolidated
----------------------------------------------------------------------------
As at As at
June 30, December 31,
($ 000s) 2009 2008 % Change
----------------------------------------------------------------------------
Capitalization
Long-term debt (including current
portion) $ 774,632 $ 765,679 1
Unitholders' equity $ 1,428,557 $ 1,636,347 (13)
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----------------------------------------------------------------------------
(1) Represents cash flow from continuing operations before changes in
working capital and site restoration expenditures. Effective in the
first quarter of 2008, Provident's USOGP business was accounted for as
discontinued operations.
(2) Includes dilutive impact of unit options and convertible debentures.
Operational highlights
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
% %
2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Oil and Gas
Production -
continuing
operations
Daily production -
Provident Upstream
Crude oil (bpd) 10,035 12,494 (20) 10,371 12,390 (16)
Natural gas
liquids (bpd) 1,105 1,178 (6) 1,121 1,243 (10)
Natural gas (mcfd) 75,735 86,130 (12) 75,996 85,050 (11)
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Provident Upstream
oil equivalent
(boed) (1) 23,763 28,027 (15) 24,158 27,808 (13)
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Average realized
price from
continuing
operations
(before realized
financial
derivative
instruments)
Crude oil blend
($/bbl) $ 59.03 $ 105.13 (44) $ 47.33 $ 90.22 (48)
Natural gas
liquids ($/bbl) $ 38.14 $ 94.59 (60) $ 39.65 $ 83.15 (52)
Natural gas
($/mcf) $ 3.40 $ 9.98 (66) $ 4.08 $ 8.81 (54)
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Oil equivalent
($/boe) (1) $ 37.55 $ 81.50 (54) $ 34.98 $ 70.86 (51)
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Field netback from
continuing
operations (before
realized financial
derivative
instruments)
($/boe) $ 18.88 $ 52.39 (64) $ 15.71 $ 44.54 (65)
Field netback from
continuing
operations
(including
realized financial
derivative
instruments)
($/boe) $ 20.25 $ 48.76 (58) $ 18.52 $ 42.12 (56)
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Midstream
Provident
Midstream NGL
sales volumes
(bpd) 102,799 110,826 (7) 122,126 123,573 (1)
EBITDA (000s) (2) $ 24,416 $ 61,769 (60) $ 94,343 $ 137,756 (32)
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(1) Provident reports oil equivalent production converting natural gas to
oil on a 6:1 basis.
(2) EBITDA is earnings before interest, taxes, depletion, depreciation,
accretion and other non-cash items - see "Reconciliation of non-GAAP
measures".
/T/
Management's discussion and analysis
The following analysis dated August 12, 2009 provides a detailed explanation of Provident Energy Trust's ("Provident's") operating results for the three and six months ended June 30, 2009 compared to the same time period in 2008 and should be read in conjunction with the consolidated financial statements of Provident, found later in the interim report.
Provident Energy Trust has diversified investments in certain segments of the energy value chain. Provident currently operates in two key business segments: Canadian crude oil and natural gas production ("COGP" or "Provident Upstream"), and Provident Midstream. Provident's Upstream business produces crude oil and natural gas from seven core areas in the western Canadian sedimentary basin. The Midstream business unit operates in Canada and the U.S.A. and extracts, processes, markets, transports and offers storage of natural gas liquids within the integrated facilities at Younger in British Columbia, Redwater and Empress in Alberta, Kerrobert in Saskatchewan, Sarnia in Ontario, Superior in Wisconsin and Lynchburg in Virginia. Effective in the first quarter of 2008, Provident's United States oil and natural gas production ("USOGP") business was accounted for as discontinued operations. The USOGP business was sold in two transactions, the first in June and the second in August, 2008.
This analysis commences with a summary of the consolidated financial and operating results followed by segmented reporting on the Upstream business unit and the Midstream business unit. 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.
Second quarter and six months ended June 30, 2009 highlights
The second quarter highlights section provides commentary for the second quarter and for the six months ended June 30, 2009 and for corresponding periods in 2008.
/T/
Consolidated funds flow from operations and cash distributions
Three months ended Six months ended
Consolidated June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except per % %
unit data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Funds Flow from
Operations and
Distributions
Funds flow from
continuing
operations $ 48,516 $165,470 (71) $132,797 $ 295,864 (55)
Funds flow from
discontinued
operations (1) - 76,017 (100) - 125,853 (100)
----------------------------------------------------------------------------
Total funds flow
from operations $ 48,516 $241,487 (80) $132,797 $ 421,717 (69)
Per weighted
average unit from
continuing
operations
- basic and
diluted (2) $ 0.19 $ 0.65 (71) $ 0.51 $ 1.17 (56)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Declared
distributions $ 47,012 $ 91,662 (49) $101,523 $ 182,779 (44)
Per unit $ 0.18 $ 0.36 (50) $ 0.39 $ 0.72 (46)
Percent of funds
flow from
continuing
operations paid out
as declared
distributions 97% 55% 76 76% 62% 23
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(1) Effective in the first quarter of 2008, Provident's USOGP business was
accounted for as discontinued operations.
(2) Includes dilutive impact of unit options and convertible debentures.
/T/
Management uses funds flow from operations to analyze operating performance. Funds flow from operations represents cash flow from operations before changes in non-cash working capital and site restoration expenditures. Provident also reviews funds flow from operations in setting monthly distributions and takes into account cash required for debt repayment and/or capital programs in establishing the amount to be distributed.
Funds flow from operations as presented does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and therefore it may not be comparable with the calculations of similar measures for other entities. Funds flow from operations as presented is not intended to represent operating 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 Canadian GAAP. 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.
Second quarter 2009 funds flow from continuing operations was $48.5 million, 71 percent below the $165.5 million recorded in the second quarter of 2008. For the six months ended June 30, 2009 funds flow from continuing operations was $132.8 million, 55 percent below the $295.9 million in the same period of 2008. Provident Upstream provided 62 percent of second quarter 2009 funds flow from continuing operations and Provident Midstream added 38 percent. For the six months ended June 30, 2009, Provident Upstream provided 40 percent of funds flow from continuing operations and Provident Midstream added 60 percent.
Provident Upstream second quarter 2009 funds flow from operations was $30.0 million, a 73 percent decrease from the $112.9 million recorded in the comparable 2008 quarter. For the six months ended June 30, 2009 Provident Upstream funds flow from operations was $52.8 million, a 71 percent decrease from the $184.0 million recorded in the comparable 2008 period. For the quarter and six months ended June 30, 2009, the decrease was a result of significantly lower realized commodity prices combined with reduced production. The lower production is primarily due to natural production declines. Provident Upstream's capital spending in 2008 and the first half of 2009 has been concentrated on long term development initiatives in Northwest Alberta with spending on facilities and pipeline assets as well as the waterflood program in Dixonville. These expenditures will not have immediate production gains to offset the natural production declines, but are intended to position Provident Upstream for future growth. Compared to the first quarter of 2009, Provident Upstream's funds flow from operations increased by $7.2 million or 32 percent primarily driven by improved crude oil pricing.
The Provident Midstream business unit contributed $18.5 million to the second quarter of 2009 funds flow from operations, down from the $52.6 million recorded in the comparable 2008 quarter. For the six months ended June 30, 2009, Provident Midstream contributed $80.0 million to funds flow from operations, a 29 percent decrease from the $111.9 million in the comparable 2008 period. For the quarter and six months ended June 30, 2009, lower operating margins in Empress East and Redwater West primarily driven by weak NGL market prices.
Declared distributions in the second quarter of 2009 totaled $47.0 million, or $0.18 per unit, compared to $91.7 million, or $0.36 per unit, of declared distributions in the same period in 2008. This represented 97 percent of funds flow from continuing operations in the second quarter of 2009 and 55 percent in 2008. Declared distributions for the six months ended June 30, 2009 totaled $101.5 million, or $0.39 per unit, compared to $182.8 million, or $0.72 per unit.
Outlook
Forward-looking information:
Provident has reached an agreement effective August 1, 2009 to purchase an additional 6.15 percent interest in the Sarnia fractionation facility, increasing Provident's ownership in the Sarnia fractionator to 16.5 percent and enhancing propane-plus fractionation capacity in the Empress East System by approximately 7,400 barrels per day (bpd). This acquisition immediately replaces the 6,000 bpd of formerly leased capacity at Sarnia that expired on April 1, 2009. As a result of this transaction, Provident will defer construction of its previously announced depropanizer facility in Michigan, however the opportunity remains to construct this facility at a later date if circumstances warrant. This acquisition results in the immediate addition of incremental sales volume and operating margin in the Empress East business line, several months earlier than the originally scheduled commissioning of the Michigan depropanizer.
At the Provident Empress extraction plant, truck loading facilities have been installed to provide an additional local alternative for take-away of propane-plus volumes. In addition, the first of three new 500,000 barrel storage caverns at Redwater entered condensate service in July. The second cavern is expected to be commissioned during the third quarter of 2009 and the third is slated for completion in 2011.
In Provident Midstream, the 2009 second quarter results reflect lower NGL product margins resulting from substantially lower NGL prices. However, year to date results are inline with internal expectations. As a result of the acquisition of additional Sarnia fractionation capacity, management is increasing its 2009 EBITDA guidance for Provident Midstream to a range of $190 to $215 million (from $180 to $205 million previously), subject to market conditions. Provident is very well-positioned to benefit from the strong outlook for condensate demand, through delivery of fee-based services from the NGL infrastructure assets at its Redwater condensate hub coupled with its marketing and logistics capability.
Provident Upstream is working to advance the Dixonville waterflood program after receiving key regulatory approval from the Alberta Energy Resources Conservation Board for pilot project expansion and the first phase of the full-field waterflood. Management believes the waterflood program has the potential to increase total recovery rates to between 15 and 20 percent of the estimated 228 million barrels of original oil in place on Provident lands. If successful, waterflood response is expected within 12 to 18 months. Provident Upstream plans to spend the remaining $27 million of its $88 million capital budget, primarily in the Dixonville area.
Management is making a slight adjustment to 2009 production guidance for Provident Upstream to a range of 23,000 to 24,000 boed from the previous range of 23,500 to 25,000 boed. This reduction in expected production volumes is primarily a result of unplanned downtime related to weather and third-party facility outages. This guidance incorporates a full year of production and does not include any adjustments for asset sales.
Provident intends to sell certain non-strategic oil and natural gas production assets, primarily located in Saskatchewan. The disposition is a key step toward repositioning Provident Upstream for long term sustainability and growth. These assets produced 6,320 barrels of oil equivalent per day (boed) during the second quarter of 2009, consisting of approximately 84 percent crude oil and 16 percent natural gas. The disposition package will include the operating areas of Southeast Saskatchewan, Southwest Saskatchewan and Lloydminster. Net proceeds from any disposition will be reinvested in high-impact long term growth initiatives such as Provident's Pekisko and Dixonville oil plays as well as key growth projects in the Midstream business unit. In the short term, sale proceeds will be applied to Provident's revolving term credit facility.
/T/
Net loss
Three months ended Six months ended
Consolidated June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except % %
per unit data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Net loss $(80,061) $(184,081) (57) $(120,345) $(150,465) (20)
Per weighted
average unit
- basic (1) and
diluted (2) $ (0.31) $ (0.72) (57) $ (0.46) $ (0.59) (22)
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----------------------------------------------------------------------------
(1) Based on weighted average number of trust units outstanding.
(2) Based on weighted average number of trust units outstanding including
the dilutive impact of the unit option plan and convertible debentures.
/T/
Net loss for the second quarter of 2009 was $80.1 million compared to $184.1 million in the comparable 2008 quarter. The improvement in net loss is primarily due to a $319.0 million decrease in the unrealized loss on financial derivative instruments and lower interest expense. The impact of the net loss also incorporates a $121.4 million, or 68 percent, decrease in earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA), a reduction in future tax recoveries and income from discontinued operations in 2008 of $77.2 million.
The Upstream business reported a net loss of $29.9 million for the second quarter of 2009, compared to the 2008 second quarter net income of $28.9 million. The decrease in net income was mainly due to lower EBITDA primarily driven by a 44 percent decrease in realized crude oil prices and a 66 percent decrease in realized natural gas prices as well as a 15 percent decline in production. Compared to the first quarter of 2009, Provident Upstream EBITDA has improved by $8.0 million or 32 percent as crude oil prices have recovered.
The Midstream business reported a net loss of $50.2 million in the second quarter of 2009 compared to a $290.2 million net loss in the second quarter of 2008. The improvement over the prior period was primarily due to a $304.2 million decrease in the unrealized loss on financial derivative instruments and lower interest expense. The impact of the net loss also includes a $37.4 million decrease in EBITDA and a reduction in tax recoveries.
Provident's net income figures are impacted by the requirement to "mark-to-market" all unrealized gains and losses associated with financial derivative instruments at a point in time and report these against current period income. Because Provident's commodity price risk management program extends up to five years into the future in the Midstream segment, net earnings can show substantial quarterly variation that is not necessarily related to current operations.
Reconciliation of non-GAAP measures
The Trust calculates earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA) within its segment disclosure. EBITDA is a non-GAAP measure. A reconciliation between EBITDA and loss from continuing operations before taxes follows:
/T/
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
% %
($ 000s) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
EBITDA $ 57,530 $178,901 (68) $152,576 $ 330,236 (54)
Adjusted for:
Cash interest (6,760) (13,727) (51) (15,130) (29,176) (48)
Unrealized loss
on financial
derivative
instruments (87,497) (406,537) (78) (176,790) (468,810) (62)
Depletion,
depreciation and
accretion and
other non-cash
expenses (86,605) (91,487) (5) (159,023) (166,477) (4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss from
continuing
operations
before
taxes $(123,332) $(332,850) (63)$(198,367) $ (334,227) (41)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table reconciles funds flow from operations with cash provided
by operating activities and distributions to unitholders:
Reconciliation of
funds flow from
operations Three months ended Six months ended
to distributions June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except per % %
unit data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Cash provided by
operating
activities $ 54,107 $ 46,473 16 $186,775 $ 347,326 (46)
Change in non-cash
operating working
capital (6,801) 193,913 - (58,162) 71,753 -
Site restoration
expenditures 1,210 1,101 10 4,184 2,638 59
----------------------------------------------------------------------------
Funds flow from
operations 48,516 241,487 (80) 132,797 421,717 (69)
Distributions to
non-controlling
interests - (26,568) (100) - (51,433) (100)
Cash retained for
financing and
investing
activities (1,504) (123,257) (99) (31,274) (187,505) (83)
----------------------------------------------------------------------------
Distributions to
unitholders 47,012 91,662 (49) 101,523 182,779 (44)
Accumulated cash
distributions,
beginning of
period 1,666,979 1,351,294 23 1,612,468 1,260,177 28
----------------------------------------------------------------------------
Accumulated cash
distributions,
end of
period $1,713,991 $1,442,956 19 $1,713,991 $1,442,956 19
----------------------------------------------------------------------------
Cash
distributions
per unit $ 0.18 $ 0.36 (50) $ 0.39 $ 0.72 (46)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Taxes
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
% %
($ 000s) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Capital tax
expense $ 1,374 $ 1,210 14 $ 1,692 $ 1,692 -
Current tax expense
(recovery) 926 (1,211) - 3,047 3,824 (20)
Future income tax
recovery (45,571) (71,554) (36) (82,761) (103,555) (20)
----------------------------------------------------------------------------
$(43,271) $(71,555) (40) $(78,022) $ (98,039) (20)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
The current tax expense of $0.9 million in the second quarter of 2009 compares to a recovery of $1.2 million in the second quarter of 2008. The increase in current taxes was due to higher income subject to tax in the midstream operations. For the six months ended June 30, 2009, current tax expense was a $3.0 million, compared to $3.8 million in 2008.
The 2009 second quarter future income tax recovery of $45.6 million compares to $71.6 million in the second quarter of 2008. For the six months ended June 30, 2009, future income tax recovery was $82.8 million compared to $103.5 million in 2008. The recoveries are primarily a result of unrealized losses on financial derivative instruments and non-capital losses created in the Trust's subsidiaries as a result of interest and royalties charged by the Trust to its subsidiaries.
/T/
Interest expense
Three months ended Six months ended
Continuing operations June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except % %
as noted) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Interest on bank
debt $ 2,212 $ 10,834 (80) $ 6,034 $ 23,393 (74)
Interest on
convertible
debentures 4,548 4,984 (9) 9,096 9,968 (9)
Discontinued
operations portion - (2,091) (100) - (4,185) (100)
----------------------------------------------------------------------------
Total cash interest $ 6,760 $ 13,727 (51) $ 15,130 $ 29,176 (48)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average
interest rate on
all long-term debt 3.4% 5.1% (33) 3.8% 5.4% (30)
Debenture accretion
and other non-cash
interest expense 1,287 1,106 16 2,621 2,312 13
----------------------------------------------------------------------------
Total interest
expense $ 8,047 $ 14,833 (46) $ 17,751 $ 31,488 (44)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
Interest on bank debt decreased in 2009 compared to 2008 due to significantly lower debt levels and lower market interest rates.
During the second quarter of 2009, Provident executed interest rate swap agreements to May, 2011 that effectively fix the underlying component of the interest rate that is based on Canadian Bankers Acceptance (BA) CDOR rate on $250 million of outstanding bank debt (see "Commodity price risk management program").
Commodity price risk management program
Provident's commodity price risk management program utilizes derivative instruments to provide protection against lower commodity prices and margins. The program reduces exposure to downside commodity price volatility and provides support for cash distributions, bank lending capacity, capital programs and acquisition and project economics. The program protects a percentage of Provident's oil and natural gas production against a decline in commodity prices while, with some products, allowing the Trust to participate in a rising commodity price environment. For the Midstream business unit the program provides price stabilization and protection of a percentage of inventory values and fractionation spread margin. 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 the Trust uses include puts, calls, costless collars, 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 the Midstream business, production margins are affected by the spread between the purchase cost of natural gas and sales price of propane, butane and condensate. Market conditions have not provided sufficient or adequate opportunity to directly manage propane, butane and condensate prices over the longer term. Prices for propane, butane and condensate historically have correlated with prices for crude oil. As a consequence, Provident has entered into natural gas, crude oil and foreign exchange financial derivative contracts through March 2013 in order to protect operating margins in the Midstream business. Short term financial derivative instruments directly fixing propane, butane, natural gasoline and electricity prices have also been executed.
Activity in the Second Quarter
A summary of Provident's risk management contracts executed during the second quarter of 2009 is contained in the following tables:
/T/
COGP
Volume
Year Product (Buy)/Sell Terms Effective Period
----------------------------------------------------------------------------
2009 Natural 9,500 Gjpd Puts Cdn $5.00 per November 1 - December 31
Gas gj (3)
2010 Natural 9,500 Gjpd Puts Cdn $5.00 per January 1 - December 31
Gas gj (3)
Crude 1,200 Bpd Puts US $60.00 per January 1 - December 31
Oil bbl (5)
Foreign Sell US $1,691,667 January 1 - December 31
Exchange per month @ 1.115 (11)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Midstream
Volume
Year Product (Buy)/Sell Terms Effective Period
----------------------------------------------------------------------------
2009 Natural (4,600) Gjpd Cdn $5.13 per gj July 1 - December 31
Gas
Crude (1,182) Bpd US $66.31 per bbl (9) July 1 - September 30
Oil
135 Bpd Cdn $72.55 per bbl July 1 - December 31
Propane 1,288 Bpd US $0.75 per gallon July 1 - September 30
(6)(9)
978 Bpd US $0.80 per gallon July 1 - September 30
(6)(10)
1,304 Bpd US $0.90 per gallon October 1 - December 31
(6) (10)
875 Bpd US $0.75 per gallon July 1 - December 31
(7)
Normal 489 Bpd US $1.126 per gallon July 1 - September 30
Butane (8) (9)
Foreign Sell US $842,625 per July 1 - December 31
Exchange month @ 1.1578(11)
2010 Natural (4,600) Gjpd Cdn $5.13 per gj January 1 - March 31
Gas
Crude 135 Bpd Cdn $72.55 per bbl January 1 - March 31
Oil
Propane 875 Bpd US $0.75 per gallon January 1 - March 31
(7)
Foreign Sell US $826,875 per January 1 - March 31
Exchange month @ 1.1578(11)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate
Volume
Year Product (Buy)/Sell Terms Effective Period
----------------------------------------------------------------------------
Interest
Rate $200,000,000 Pay Average May 8, 2009 - May 31, 2011
Notional (Cdn$) Fixed rate of
1.1885%(12)
$ 50,000,000 Pay Average June 8, 2009 - May 31, 2011
Notional (Cdn$) Fixed rate of
1.1950%(13)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The above table represents a number of transactions entered into over
the second quarter 2009.
(2) Natural gas contracts are settled agains AECO monthly index.
(3) Natural gas put options provide a "floor" price for the gas quantites
contracted. Floor price is strike less premium. Provident receives
market price above the "floor".
(4) Crude Oil contracts are settled against NYMEX WTI calendar average.
(5) Crude Oil put options provide a "floor" price for the oil quantites
contracted. Floor price is strike less premium. Provident receives
market price above the "floor".
(6) Propane contracts are settled against Belvieu C3 TET.
(7) Propane contracts are settled against Conway In-Well C3.
(8) Normal Butane contracts are settled against Belvieu NC4 TET.
(9) Conversion of Crude Oil BTU contracts to liquids.
(10) Midstream inventory price stabilization contracts.
(11) 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 WTI price.
(12) Interest rate forward contract settles quarterly against 1M CAD BA CDOR
interest rate.
(13) Interest rate forward contract settles quarterly against 3M CAD BA CDOR
interest rate.
/T/
A summary of all of Provident's derivative contracts in place at June 30, 2009 is available on Provident's website at www.providentenergy.com/bus/riskmanagement/commodity.cfm.
Settlement of financial derivative contracts
The following is a summary of the net funds flow from operations to settle financial derivative contracts during the second quarter and first six months of 2009. For comparative purposes the 2008 amounts are also summarized.
(i) Provident Upstream
a) Crude oil
For the quarter ended June 30, 2009, Provident received $1.5 million (2008 - paid $7.3 million) to settle various crude oil market based contracts and related foreign exchange contracts, with an aggregate volume of 0.2 million barrels (2008 - 0.4 million barrels).
For the six months ended June 30, 2009, Provident received $7.3 million (2008 - paid $11.2 million) to settle various crude oil market based contracts and related foreign exchange contracts, with an aggregate volume of 0.5 million barrels (2008 - 0.8 million barrels).
It is estimated that if all contracts in place had been settled at June 30, 2009 an opportunity cost of $2.2 million (June 30, 2008 - $41.3 million) would have been realized.
b) Natural Gas
For the quarter ended June 30, 2009, Provident received $1.5 million (2008 - paid $2.0 million) to settle various natural gas market based contracts on an aggregate volume of 1.2 million gj's (2008 - 2.7 million gj's).
For the six months ended June 30, 2009, Provident received $5.0 million (2008 - paid $1.0 million) to settle various natural gas market based contracts on an aggregate volume of 2.7 million gj's (2008 - 6.3 million gj's).
It is estimated that if contracts in place had been settled at June 30, 2009 a gain of $1.4 million (June 30, 2008 - opportunity cost $10.0 million) would have been realized.
(ii) Provident Midstream
For the quarter ended June 30, 2009 Provident received $9.9 million (2008 - paid $55.4 million) to settle Midstream crude oil market based contracts on net volume of 1.0 million barrels (2008 - 1.2 million barrels) and paid $26.6 million (2008 - received $3.3 million) to settle Midstream natural gas market based contracts on net volume of 5.7 million gj's (2008 - 6.6 million gj's). In addition, for the second quarter of 2009, Provident paid $0.3 million (2008 - $3.2 million) to settle Midstream NGL market based contracts on net volume of 0.1 barrels (2008 - 0.1 million barrels).
For the six months ended June 30, 2009, Provident received $35.4 million (2008 - paid $69.8 million) to settle Midstream crude oil market based contracts on net volume of 2.2 million barrels (2008 - 1.4 million barrels) and paid $43.9 million (2008 - $7.7 million) to settle Midstream natural gas market based contracts on an aggregate volume of 11.4 million gj's (2008 - 13.4 million gj's). In addition, Provident received $5.5 million (2008 - paid $8.6 million) to settle Midstream NGL market based contracts on net volume of 0.2 million barrels (2008 - 2.0 million barrels).
For the quarter ended June 30, 2009, Provident also paid $1.3 million (2008 - received $2.7 million) to settle midstream-related foreign exchange contracts, and paid $0.5 million (2008 - received $1.4 million) to settle various electricity-based contracts. For the six months ended June 30, 2009, Provident paid $4.3 million (2008 - received $5.5 million) to settle midstream-related foreign exchange contracts, and paid $0.7 million (2008 - received $1.4 million) to settle various electricity-based contracts.
It is estimated that if contracts in place had been settled at June 30, 2009 an opportunity cost of $230.2 million (June 30, 2008 - $692.7 million) would have been incurred. These unrealized "mark-to-market" opportunity costs relate to positions with effective periods ranging from July 1, 2009 through, March 31, 2013 and are required to be recognized in the financial statements under generally accepted accounting principles. These unrealized opportunity costs relate to financial derivative instruments which were entered into in order to manage commodity prices and protect future Midstream product margins. Fluctuations in the market value of these instruments have no impact on funds flow from operations until the instrument is settled.
(iii) Corporate
a) Foreign exchange contracts
For the quarter and six months ended June 30, 2009 Provident received $0.1 million to settle various corporate-related foreign exchange contracts (2008 - nil). Realized gains and losses on corporate-related foreign exchange contracts are included in foreign exchange loss (gain) and other on the consolidated statement of operations and are allocated to the reporting segments for segmented reporting purposes. The estimated value of contracts in place if settled at foreign exchange rates at June 30, 2009 would have resulted in an opportunity gain of nil (June 30, 2008 - $0.1 million).
b) Interest rate swaps
For the quarter and six months ended June 30, 2009 Provident paid $0.1 million (2008 - $0.1 million) to settle various interest rate based contracts. Realized gains and losses on corporate-related interest rate contracts are included in realized (loss) gain on financial derivative instruments on the consolidated statement of operations and are allocated to the reporting segments for segmented reporting purposes. The estimated value of contracts in place if settled at June 30, 2009 would have resulted in an opportunity cost of $0.5 million (June 30, 2008 - nil).
/T/
Liquidity and capital resources
Consolidated
----------------------------------------------------------------------------
($ 000s) June 30, 2009 December 31, 2008 %Change
----------------------------------------------------------------------------
Long-term debt - revolving term
credit facility $ 511,244 $ 504,685 1
Long-term debt - convertible
debentures (including current
portion) 263,388 260,994 1
Working capital surplus (1) (4,976) (39,041) (87)
----------------------------------------------------------------------------
Net debt $ 769,656 $ 726,638 6
----------------------------------------------------------------------------
Unitholders' equity (at book
value) 1,428,557 1,636,347 (13)
----------------------------------------------------------------------------
Total capitalization at book
value $ 2,198,213 $ 2,362,985 (7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total net debt as a percentage
of total book value capitalization 35% 31% 13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The working capital surplus excludes balances for the current portion
of financial derivative instruments.
/T/
Provident operates two business units with similar but not identical monthly cash settlement cycles. Midstream revenues are received at various times throughout the month. Provident's working capital position is affected by seasonal fluctuations that reflect commodity price changes, drilling cycles in its oil and gas operations and inventory balances in its Midstream business unit. Provident relies on funds flow from operations, external lines of credit and access to equity markets to fund capital programs and acquisitions.
As a result of the weakening of the global economy, oil and gas industry participants, including Provident, are experiencing more restricted access to capital and anticipate increased borrowing costs. Although Provident's business and asset base have not changed, risk premiums have increased. Management believes that cash flows from operating activities and availability under existing bank facilities will be adequate to allow Provident to continue with its 2009 capital program. However, these issues will affect Provident as it reviews financing alternatives for future capital expenditures and potential acquisition opportunities in the current lower commodity price environment.
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. 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.
Long-term debt and working capital
As at June 30, 2009 Provident had drawn on 45 percent of its Canadian term credit facility of $1.125 billion. This compares to 45 percent drawn as at December 31, 2008.
At June 30, 2009 Provident had $24.7 million in letters of credit outstanding (December 31, 2008 - $35.2 million) that guarantee Provident's performance under certain commercial and other contracts, increasing bank line utilization to 48 percent.
Based on the terms and conditions of the credit facility, Provident will have access to approximately $1.0 billion of the total facility in the third quarter of 2009. The borrowing potential of the facility is limited to a multiple of trailing twelve month midstream EBITDA. The borrowing capacity of the term credit facility is re-measured quarterly.
Provident's working capital from continuing operations decreased by $142.6 million as at June 30, 2009 relative to December 31, 2008. This amount includes a $3.7 million decrease in cash, a $77.4 million decrease in accounts receivable, a $7.4 million decrease in inventory, and a $108.4 million increase in the current portion of financial derivative instruments, partially offset by a $48.5 million decrease in accounts payable and accrued liabilities and a $6.4 million decrease in cash distribution payable.
The ratio of net debt (as calculated under "Liquidity and capital resources") to funds flow from continuing operations for the twelve months ended June 30, 2009 was 2.2 to one, as compared to annual 2008 net debt to funds flow from continuing operations of 1.4 to one. On a segmented basis, using allocated debt balances as disclosed in note 11 to the interim consolidated financial statements, the Provident Upstream business had a ratio of net debt to funds flow from operations for the twelve months ended June 30, 2009 of 1.1 to one (2008 - 0.7 to one). The ratio for the Provident Midstream business unit was 3.7 to one, compared to 2.7 to one in 2008.
Trust units
Under Provident's Premium Distribution, Distribution Reinvestment (DRIP) and Optional Unit Purchase Plan program 1.2 million units were elected in the second quarter and were issued or are to be issued representing proceeds of $6.4 million (2008 - 1.3 million units for proceeds of $14.5 million).
At June 30, 2009, management and directors held less than one percent of the outstanding units.
/T/
Capital related expenditures and funding
Continuing Three months ended Six months ended
operations June 30, June 30,
----------------------------------------------------------------------------
% %
($ 000s) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Capital related
expenditures
Capital
expenditures $(26,548) $(34,210) (22) $(83,054) $(118,792) (30)
Site restoration
expenditures (1,210) (1,101) 10 (4,184) (2,638) 59
Property
acquisitions, net (119) (10,432) (99) (493) (19,451) (97)
----------------------------------------------------------------------------
Net capital
related
expenditures $ (27,877) $(45,743) (39) $(87,731) $(140,881) (38)
----------------------------------------------------------------------------
Funded by
Funds flow from
continuing
operations net of
declared
distributions to
unitholders $ 1,504 $ 73,808 (98) $ 31,274 $ 113,085 (72)
Increase
(decrease) in
long-term debt 15,194 (264,011) - 6,333 (298,576) -
Issue of trust
units, net of
cost; excluding DRIP - 1,197 (100) - 1,204 (100)
DRIP proceeds 6,394 14,484 (56) 14,034 28,674 (51)
Change in working
capital, including
cash, sale of assets
and change in
investments 4,785 220,265 (98) 36,090 296,494 (88)
----------------------------------------------------------------------------
Net capital
related
expenditure
funding $ 27,877 $ 45,743 (39) $ 87,731 $ 140,881 (38)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
Provident has funded its net capital expenditures with cash flow from operations and long-term debt.
Unit based compensation
Provident made payments in respect of unit based compensation of $3.0 million in the second quarter of 2009 (2008 - nil), of which $0.1 million is included in cash general and administrative expense and $2.9 million is included in strategic review and restructuring expenses. Typically, cash payments are made annually for these programs in the first quarter of each year, however due to the conclusion of Provident's strategic review, a payment was made relating to staff reductions. At June 30, 2009, the current portion of the liability totaled $7.6 million (December 31, 2008 - $9.4 million) and the long-term portion totaled $6.4 million (December 31, 2008 - $8.6 million).
Unit based compensation includes expenses associated with Provident's restricted and performance unit plan. Unit based compensation is recorded at the estimated fair value of the notional units granted. Compensation expense associated with the plans is recognized in earnings over the vesting period of each plan. Provident recorded unit based compensation expense of $6.9 million for the quarter ended June 30, 2009 (2008 - $4.9 million), $2.9 million included in strategic review and restructuring expenses, $3.8 million in general and administrative expense and $0.2 million included in production, operating and maintenance expense. The expense is higher in the second quarter of 2009 compared to the second quarter of 2008 due to an increase in the trading price of Provident trust units from March 31, 2009 to June 30, 2009. In the second quarter of 2009, the number of outstanding units was reduced due to staff reductions, however the comparable 2008 period has a similar reduction due to a reduction in the multiplier of one of the PTU grants. For the six months ended June 30, 2009, Provident recorded unit based compensation expense of $7.6 million (2008 - $10.2 million) and related cash payments of $11.2 million (2008 - $8.3 million), of which $2.9 million is included in strategic review and restructuring expenses.
Strategic review and restructuring expenses
The strategic review process was announced in February of 2008 with the objectives of optimizing business performance, facilitating business growth, improving overall access to and cost of capital, enhancing the valuation of Provident's component businesses and optimizing structure in response to the federal government decision to tax income trusts beginning in 2011. During this review, it was determined that the sale of the United States oil and natural gas production (USOGP) business was an important step in the process. Following the sale of USOGP, management and the board of directors evaluated the complete spectrum of strategic options available for Provident's remaining Canadian oil and gas production (Provident Upstream) and midstream (Provident Midstream) business units. After an extensive review, it was determined that in the context of the current macroeconomic environment (characterized by low commodity prices and volatility in both equity and debt markets), it is in the best interest of unitholders that Provident remain structured as a cash-distributing, diversified energy enterprise.
In the second quarter of 2009, Provident completed an internal reorganization to improve the efficiency and competitiveness of the businesses. The internal reorganization is designed to improve the focus of each business unit, improve management's line of sight to the key performance measures in each business, and reduce general and administrative costs. The reorganization resulted in staff reductions at all levels of the organization, including senior management. In the second quarter of 2009, costs of $9.5 million (2008 - $0.3 million) were incurred as a result of the strategic review and this reorganization. For the six months ended June 30, 2009, strategic review and restructuring costs were $9.7 million (2008 - $0.7 million). The costs are comprised primarily of severance, consulting and legal costs.
Subsequent events
Upstream asset disposition
In August of 2009, Provident has initiated a process to sell certain oil and natural gas production assets represented by the operating areas of Southeast Saskatchewan, Southwest Saskatchewan and Lloydminster. During the second quarter of 2009 these assets produced 6,320 boed, consisting of approximately 84 percent crude oil and 16 percent natural gas. Proved plus probable oil and natural gas reserves included in this disposition package totalled 15 million barrels of oil equivalent as of June 30, 2009. Net disposition proceeds will be reinvested in high-impact long term growth initiatives such as Provident's Pekisko and Dixonville oil plays as well as growth projects in the Midstream business unit. In the short term, the sale proceeds will be applied to Provident's revolving term credit facility.
Midstream asset acquisition
On August 12, 2009, Provident reached an agreement to purchase an additional 6.15 percent interest in the Sarnia fractionation and storage facility for an immediate cash payment of $14.8 million and a deferred payment of $3.7 million for a facility enhancement planned for 2010. This will increase Provident's ownership in the Sarnia fractionator, effective August 1, 2009, to approximately 16.5 percent, enhancing propane-plus fractionation capacity in the Empress East system by approximately 7,400 bpd. This acquisition immediately replaces the 6,000 bpd of formerly leased capacity at Sarnia that expired on April 1, 2009. As a result of this transaction, Provident will defer construction of its previously announced depropanizer facility in Michigan.
/T/
Provident Upstream segment review
Crude oil and natural gas liquids price
The following prices are net of transportation expense.
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
% %
($ per bbl) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Oil per barrel
WTI (US$) $ 59.62 $ 123.98 (52) $ 51.35 $ 110.94 (54)
Exchange rate (from
US$ to Cdn$) $ 1.17 $ 1.01 16 $ 1.21 $ 1.01 20
WTI expressed in
Cdn$ $ 69.58 $ 125.22 (44) $ 61.94 $ 111.72 (45)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Realized pricing
before financial
derivative
instruments
Crude oil $ 59.03 $ 105.13 (44) $ 47.33 $ 90.22 (48)
Natural gas liquids $ 38.14 $ 94.59 (60) $ 39.65 $ 83.15 (52)
----------------------------------------------------------------------------
Crude oil and
natural gas liquids $ 56.96 $ 104.22 (45) $ 46.58 $ 89.57 (48)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
In the second quarter of 2009, Provident Upstream's realized crude oil and natural gas liquids price, prior to the impact of financial derivative instruments, decreased by 45 percent to $56.96 per barrel compared to $104.22 in the second quarter of 2008. The 2009 decrease reflects a 52 percent decrease in $US WTI crude oil price, partially offset by a stronger U.S. dollar. When compared to the first quarter of 2009, Provident Upstream's realized crude oil and natural gas liquids price has increased by 55 percent due to an improvement in $US WTI crude oil price.
/T/
Natural gas price
The following prices are net of transportation expense.
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
% %
($ per mcf) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
AECO monthly index
(Cdn$ per mcf) $ 3.66 $ 9.35 (61) $ 4.64 $ 8.24 (44)
Corporate natural gas
price per mcf before
financial derivative
instruments (Cdn$) $ 3.40 $ 9.98 (66) $ 4.08 $ 8.81 (54)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
Provident Upstream's second quarter 2009 realized natural gas price, before financial derivative instruments, decreased 66 percent as compared to the second quarter of 2008. Provident sells to the market on daily and monthly indices and markets to aggregators, receiving prices which are based on the heat content of the natural gas. Provident's realized prices and changes in prices will therefore differ from benchmark indices.
/T/
Production
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
% %
2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Daily production
Crude oil (bpd) 10,035 12,494 (20) 10,371 12,390 (16)
Natural gas liquids
(bpd) 1,105 1,178 (6) 1,121 1,243 (10)
Natural gas (mcfd) 75,735 86,130 (12) 75,996 85,050 (11)
----------------------------------------------------------------------------
Oil equivalent
(boed) (1) 23,763 28,027 (15) 24,158 27,808 (13)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Provident reports equivalent production converting natural gas to oil
on a 6:1 basis.
/T/
Second quarter 2009 production decreased 15 percent to 23,763 boed compared to 28,027 boed in the comparable 2008 quarter. Production is lower compared to the second quarter of 2008 primarily due to natural declines. In Southeast Saskatchewan, declines on a quarter over quarter basis reflect the horizontal drilling success in 2008 on the Triwest acquired lands. As is typical with horizontal oil wells the early stage production declines at a much higher rate than the longer term producing wells in the area. This combined with reduced capital spending has resulted in production being 20 percent less than the same period in 2008.
Production for the six months ended June 30, 2009 reflects first quarter turnarounds that resulted in production downtime, and constrained production related to a third-party gas pipeline outage at the end of December, 2008. In addition, a significant portion of capital incurred in the last year was spent on Northwest Alberta facilities and pipelines for the emerging Pekisko resource play and on Dixonville's field waterflood program. These longer term plays do not result in immediate production gains to offset the natural production declines but are key to position Provident Upstream for future growth. Production for the second quarter of 2009 was weighted 53 percent natural gas and 47 percent crude oil and natural gas liquids, compared to the second quarter of 2008 weighted 51 percent natural gas and 49 percent crude oil and natural gas liquids reflecting Provident's continued balanced production mix.
/T/
Provident's Upstream production summarized by core areas is as follows:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
% %
Provident Upstream 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Daily Production - by
area (boed) (1)
West Central Alberta 5,511 6,275 (12) 5,581 6,433 (13)
Southern Alberta 4,604 4,868 (5) 4,623 4,805 (4)
Northwest Alberta 4,290 4,925 (13) 4,269 4,783 (11)
Dixonville 3,038 3,548 (14) 3,251 3,725 (13)
Southeast
Saskatchewan 2,680 3,345 (20) 2,695 3,226 (16)
Southwest
Saskatchewan 966 1,353 (29) 982 1,408 (30)
Lloydminster 2,674 3,713 (28) 2,757 3,428 (20)
----------------------------------------------------------------------------
23,763 28,027 (15) 24,158 27,808 (13)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Provident reports equivalent production converting natural gas to oil on
a 6:1 basis.
Revenue and royalties
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
($ 000s except per % %
boe and mcf data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Oil
Revenue $ 53,911 $119,525 (55) $ 88,837 $ 203,448 (56)
Realized (loss)
gain on financial
derivative
instruments 1,434 (7,333) - 7,293 (11,262) -
Royalties (8,488) (22,721) (63) (14,984) (37,794) (60)
----------------------------------------------------------------------------
Net revenue $ 46,857 $ 89,471 (48) $ 81,146 $ 154,392 (47)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net revenue (per
barrel) $ 51.31 $ 78.69 (35) $ 43.23 $ 68.47 (37)
Royalties as a
percentage of
revenue 15.7% 19.0% 16.9% 18.6%
Natural gas
Revenue $ 23,448 $ 78,198 (70) $ 56,078 $ 136,350 (59)
Realized (loss)
gain on financial
derivative
instruments 1,533 (1,921) - 5,014 (966) -
Royalties 1,456 (13,506) - (3,378) (24,790) (86)
----------------------------------------------------------------------------
Net revenue $ 26,437 $ 62,771 (58) $ 57,714 $ 110,594 (48)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net revenue (per
mcf) $ 3.84 $ 8.01 (52) $ 4.20 $ 7.14 (41)
Royalties as a
percentage of
revenue (6.2%) 17.3% 6.0% 18.2%
Natural gas liquids
Revenue $ 3,835 $ 10,139 (62) $ 8,046 $ 18,806 (57)
Royalties (1,431) (2,459) (42) (2,458) (4,699) (48)
----------------------------------------------------------------------------
Net revenue $ 2,404 $ 7,680 (69) $ 5,588 $ 14,107 (60)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net revenue (per
barrel) $ 23.91 $ 71.64 (67) $ 27.54 $ 62.38 (56)
Royalties as a
percentage of
revenue 37.3% 24.2% 30.5% 25.0%
Total
Revenue $ 81,194 $207,862 (61) $152,961 $ 358,604 (57)
Realized (loss)
gain on financial
derivative
instruments 2,967 (9,254) - 12,307 (12,228) -
Royalties (8,463) (38,686) (78) (20,820) (67,283) (69)
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Net revenue $ 75,698 $159,922 (53) $144,448 $ 279,093 (48)
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Net revenue (per
boe) $ 35.01 $ 62.70 (44) $ 33.03 $ 55.15 (40)
Royalties as a
percentage of
revenue 10.4% 18.6% 13.6% 18.8%
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Note: the above revenue, net revenue and net revenue per boe figures are
presented net of transportation expenses and the realized gain (loss)
on financial derivative instruments excludes the impact of interest
rate swap gains/losses allocated to Provident Upstream.
/T/
Quarter over quarter, 2009 Provident Upstream net revenue decreased by 53 percent to $75.7 million and, on a per barrel oil equivalent basis, decreased by 44 percent to $35.01. The net revenue decrease reflects significantly lower realized commodity prices and a decrease in production partially offset by a $3.0 million realized gain related to the commodity price risk management program. On a boe basis, this program contributed $1.37 per boe in the second quarter of 2009 ($2.81 per boe year-to-date). Royalties, which are price sensitive and affected by production levels, decreased as a percentage of revenue in the second quarter of 2009, compared to the second quarter in 2008 due to significantly lower prices, lower production and adjustments to reductions allowed in computing natural gas crown royalties in Alberta. The adjustments to the natural gas crown royalties recognized the 2008 capital spending on natural gas facilities in Alberta and resulted in a recovery of $3.0 million of gas crown royalties in the second quarter of 2009, and will benefit the effective Alberta natural gas crown royalty rate going forward. For the six months ended June 30, 2009, net revenue per boe was $33.03 or 40 percent below $55.15 in the same period of 2008. These results reflect the lower commodity price environment.
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Production expenses
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except per % %
boe data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Production expenses $ 31,909 $ 35,558 (10) $ 63,430 $ 65,934 (4)
Production expenses
(per boe) $ 14.76 $ 13.94 6 $ 14.51 $ 13.03 11
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/T/
Second quarter 2009 production expenses decreased 10 percent to $31.9 million from $35.6 million in the comparable 2008 quarter. The decrease was primarily due to a 15 percent decrease in production, lower turnaround, maintenance and hauling costs from reduced activities and realized lower fuel and power costs in a lower commodity price environment. On a per boe basis, production expenses increased six percent to $14.76 per boe compared to $13.94 per boe in the second quarter of 2008. The per boe increase was mainly due to fixed production costs allocated over less production.
Year-to-date production expenses decreased four percent to $63.4 million from $65.9 million in 2008. On a boe basis the 11 percent increase in costs to $14.51 per boe also reflects fixed production costs allocated over less production.
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Operating netback
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
% %
($ per boe) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Netback per boe
Gross production
revenue $ 37.55 $ 81.50 (54) $ 34.98 $ 70.86 (51)
Royalties (3.91) (15.17) (74) (4.76) (13.29) (64)
Operating costs (14.76) (13.94) 6 (14.51) (13.03) 11
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Field operating
netback 18.88 52.39 (64) 15.71 44.54 (65)
Realized (loss)
gain on financial
derivative
instruments 1.37 (3.63) - 2.81 (2.42) -
----------------------------------------------------------------------------
Operating netback
after realized
financial
derivative
instruments $ 20.25 $ 48.76 (58) $ 18.52 $ 42.12 (56)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
Provident Upstream operating netbacks have transportation expense netted against gross production revenue.
Second quarter 2009 field operating netback decreased 64 percent to $18.88 per boe from $52.39 per boe in the comparable 2008 quarter. On a year-to-date basis, field operating netbacks have decreased significantly by 65 percent to $15.71 per boe from $44.54 per boe reflecting the decrease in realized commodity prices for all products.
Realized financial derivative instruments contributed $1.37 per boe to operating netbacks in the quarter and $2.81 per boe in the first six months of 2009. This compared to a 2008 second quarter loss of $3.63 per boe and a loss of $2.42 per boe for the six months ended June 30, 2008. The realized gains in 2009 and the losses in 2008 reflect the significant change in the commodity price environment over the respective periods.
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General and administrative
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except per % %
boe data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Cash general and
administrative $ 6,860 $ 7,664 (10) $ 19,725 $ 19,421 2
Non-cash unit based
compensation 1,816 2,550 (29) (1,702) 805 -
----------------------------------------------------------------------------
$ 8,676 $ 10,214 (15) $ 18,023 $ 20,226 (11)
Cash general and
administrative (per
boe) $ 3.17 $ 3.00 6 $ 4.51 $ 3.84 17
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----------------------------------------------------------------------------
/T/
Second quarter 2009 Provident Upstream cash general and administrative expenses decreased 10 percent to $6.9 million compared to $7.7 million in the second quarter of 2008. The decrease in cash general and administrative expenses reflects staff reductions and cost cutting measures implemented within the organization.
For the six months ended June 30, 2009 Provident Upstream cash general and administrative expenses increased two percent to $19.7 million (2008 - $19.4 million). The increase was due to higher office related expenses, particularly rent, offset by staff reductions and cost cutting measures implemented within the organization.
For the six months ended for both years, cash general and administrative expense is also burdened with the annual Provident Upstream long term incentive plan payment that is paid in cash typically in the first quarter of each year (2009 -$3.9 million; 2008 - $4.5 million).
Non-cash unit based compensation for Provident Upstream was an expense of $1.8 million in the second quarter of 2009 compared to $2.6 million in the second quarter of 2008. The decrease in the second quarter of 2009 reflected a reduced expense associated with staff reductions. For the six months ended June 30, 2009 non-cash unit based compensation was a recovery of $1.7 million compared to an expense of $0.8 million for the same period in 2008. Payment of unit based compensation is recorded as cash general and administrative expense with an offsetting reduction in non-cash unit based compensation. Excluding this payment, Provident Upstream non-cash unit based compensation was $2.2 million for the six months ended June 30, 2009 (2008 - $5.3 million). Non-cash unit based compensation to date in 2009 has been lower as a result of the reduced trading price of Provident trust units, upon which the compensation is based as well as the impact of staff reductions.
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Capital expenditures
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
($ 000s) 2009 2008 2009 2008
----------------------------------------------------------------------------
Capital expenditures - by category
Geological, geophysical and land $ 418 $ 721 $ 3,193 $ 3,703
Drilling and recompletions 9,770 19,596 38,662 80,284
Facilities and equipment 3,884 6,296 18,300 18,107
Office and other 35 1,878 468 5,555
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Total additions $14,107 $28,491 $ 60,623 $107,649
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----------------------------------------------------------------------------
Capital expenditures - by area
West central Alberta $ 1,366 $ 1,718 $ 3,560 $ 5,160
Southern Alberta 1,577 3,150 4,740 6,873
Northwest Alberta 1,051 5,420 32,679 40,961
Dixonville 6,815 11,046 9,770 30,741
Southeast Saskatchewan 2,097 1,990 6,952 9,328
Southwest Saskatchewan 113 851 690 2,892
Lloydminster 917 2,563 1,614 5,307
Other 171 1,753 618 6,387
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Total additions $14,107 $28,491 $ 60,623 $107,649
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Property acquisitions, net $ 119 $10,432 $ 493 $ 19,451
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/T/
During the quarter Provident Upstream successfully executed its capital program throughout its core areas. The Provident Upstream business unit spent $9.8 million relating to drilling and recompletion activities, with 100 percent success. Capital activity was focused in Dixonville and Southeast Saskatchewan combining for 63 percent of the quarter's capital program. In Dixonville, Provident received regulatory approval to proceed with pilot project expansion and the first phase of the waterflood enhanced oil recovery program. Provident's capital spending in Dixonville in the second quarter of 2009 was primarily on converting existing wells for water injection and related facilities expansion and upgrades. In Southeast Saskatchewan, $2.1 million was spent on light oil drilling and tie-in activities (1.6 net wells). In Southern Alberta, $1.6 million was spent on successful joint venture optimization activities. The $3.4 million of capital spent in the remaining core areas included drilling, completion, tie-ins, recompletions, facility upgrades and production optimization activities.
For the six months ended June 30, 2009, Provident Upstream has spent $60.6 million on capital activities. The focus of the 2009 capital program has been on long term development initiatives in Northwest Alberta and the waterflood program in Dixonville. In the first half of 2009, $32.7 million has been spent in Northwest Alberta on facilities and equipment for the emerging Pekisko opportunity along with drilling 3.0 net wells. The majority of these costs were incurred in the first quarter as part of the winter drilling program. In the Dixonville core area, $9.8 million has been spent in the first half of 2009, the majority on converting existing wells for water injection and related facility expansion and upgrades. In Southeast Saskatchewan, $7.0 million was spent on drilling and related tie-in costs resulting in the addition of 4.6 net wells. The remaining $11.1 million was spent throughout the remaining core areas on drilling, completions, tie-ins, recompletions, facility upgrades and production optimization activities.
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Depletion, depreciation and accretion (DD&A)
Three months ended Six months ended
Provident Upstream June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except per % %
boe data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
DD&A $ 70,073 $ 75,423 (7) $140,825 $ 147,925 (5)
DD&A (per boe) $ 32.40 $ 29.57 10 $ 32.21 $ 29.23 10
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/T/
Second quarter 2009 DD&A was down seven percent to $70.1 million compared to $75.4 million in the comparable 2008 quarter and on a year to date basis 2009 DD&A totaled $140.8 million down five percent from the $147.9 million in the comparable 2008 period. The lower 2009 DD&A reflected reduced production volumes compared to the 2008 comparable periods partially offset by an increase in the per boe DD&A rate. The per boe increase was primarily as a result of 2008 and 2009 expenditures on geological, geophysical, land and facilities on longer term projects at Dixonville and the Pekisko play in Northwest Alberta. In the short term these expenditures add costs to depletable asset base without the addition of proved reserves. The addition of proved reserves associated with these projects would have a favourable impact on the DD&A per boe rate.
In the second quarter of 2009 accretion expense associated with asset retirement obligations was $0.7 million compared to $0.8 million in the comparable period of 2008. Year-to-date accretion expense was $1.5 million (2008 - $1.7 million).
Midstream business segment review
The Midstream business
The Midstream business unit extracts, processes, stores, transports and markets natural gas liquids (NGL) for Provident and offers these services to third party customers. The Provident Midstream segment contains three business lines:
/T/
Empress East
Redwater West
Commercial Services
Midstream business unit results can be summarized as follows:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
% %
($ 000s) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Empress East
margin $ 20,558 $ 48,059 (57) $42,881 $ 114,539 (63)
Redwater West
margin 21,182 60,063 (65) 52,936 100,351 (47)
Commercial
Services margin 14,403 11,624 24 30,427 22,182 37
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Gross operating
margin 56,143 119,746 (53) 126,244 237,072 (47)
Realized (loss)
gain on financial
derivative
instruments (18,817) (51,317) (63) (8,053) (79,280) (90)
Cash general and
administrative
expenses (6,965) (7,463) (7) (18,833) (19,156) (2)
Strategic review
and restructuring
expenses (4,270) (164) 2,504 (4,407) (330) 1,235
Foreign exchange
(loss) gain and
other (1,675) 967 - (608) (550) 11
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Provident
Midstream EBITDA $ 24,416 $ 61,769 (60) $94,343 $ 137,756 (32)
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/T/
The performance of the Midstream business unit is closely tied to market prices for NGL products and natural gas, which can vary significantly from period to period. The key reference prices impacting Midstream operating margins are summarized in the following table:
/T/
Midstream business Three months ended Six months ended
reference prices June 30, June 30,
----------------------------------------------------------------------------
% %
($ 000s) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
WTI (US$ per barrel) $ 59.62 $123.98 (52) $ 51.35 $ 110.94 (54)
Exchange rate (from
US$ to Cdn$) $ 1.17 $ 1.01 16 $ 1.21 $ 1.01 20
WTI expressed in
Cdn$ per barrel $ 69.58 $125.22 (44) $ 61.94 $ 111.72 (45)
AECO monthly index
(Cdn$ per gj) $ 3.47 $ 8.86 (61) $ 4.40 $ 7.81 (44)
Frac Spread Ratio(1) 20.1 14.1 43 14.1 14.3 (1)
Mont Belvieu Propane
(US$ per US gallon) $ 0.73 $ 1.70 (57) $ 0.70 $ 1.58 (56)
Mont Belvieu Propane
expressed as a
percentage of WTI 51% 58% (12) 57% 60% (5)
Market Frac Spread
in Cdn$ per barrel
(2) $ 26.29 $ 42.13 (38) $ 21.80 $ 40.98 (47)
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----------------------------------------------------------------------------
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 a per barrel margin which represents the difference
between the selling prices of propane-plus and the input cost of the
natural gas required to produce the respective NGL products. The market
frac spread is determined using weighted average spot prices at Mont
Belvieu for propane, butane, and condensate and the AECO monthly index
price for natural gas.
/T/
Gross operating margin
Midstream gross operating margin was $56.1 million in the second quarter of 2009. The 53 percent decrease in margin compared to the second quarter of 2008 is primarily due to lower realized propane-plus selling prices and per unit margins which reflect the significant reduction in WTI crude oil prices and weaker petrochemical demand for NGL products. Reduced demand in the second quarter of 2009 has widened pricing differentials between NGL products and crude oil. Mont Belvieu propane prices as a percent of WTI are trading at historically low levels, and averaged 51 percent during the second quarter of 2009 with a much lower WTI price compared to 58 percent in the second quarter of 2008 with a much higher WTI price. The year-to-date margin was $126.2 million in 2009 compared to the year-to-date margin of $237.1 million in 2008.
The Empress East business line:
The Empress East business line extracts NGLs from natural gas at the Empress straddle plants and sells finished products into markets in Central Canada and the Eastern United States. 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. The margin in this business is determined primarily by the "frac spread", which represents the difference between the selling prices for propane, butane and condensate (collectively, these products are referred to as "propane-plus") and the input cost of the natural gas required to produce the respective NGL products. The frac spread 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 US dollar foreign exchange rate. Traditionally a higher frac spread ratio and higher crude oil prices will result in stronger business line margins. Differentials between propane-plus and crude oil prices, as well as locational price differentials will also impact the frac spread. Natural gas extraction premiums and costs relating to transportation, fractionation, storage and marketing are not included within the frac spread, however these costs are included in the business line operating margin.
In the second quarter of 2009, the gross operating margin for Empress East was $20.5 million (2008 - $48.1 million), a reduction of 57 percent. Despite an increase in the frac spread ratio during the second quarter of 2009, per unit frac spreads narrowed relative to the prior year, highlighting the impacts of a lower commodity price environment and wider NGL product differentials to WTI. Operating margins were also negatively impacted by a 19 percent reduction in propane-plus sales volumes for the second quarter of 2009 compared to the same quarter in 2008. Effective April 1, 2009, Provident's lease for fractionation capacity at Sarnia expired, reducing processing capacity by 6,000 bpd and resulting in lower production and sales volumes. The impact of the reduced Sarnia capacity has been partially mitigated through the installation of truck loading facilities at the outlet of the Provident Empress extraction plant which allows Empress production to be sold locally. In August 2009, Provident reached an agreement to purchase approximately 7,400 bpd of additional fractionation capacity at Sarnia. This purchase replaces the 6,000 bpd of expired leased fractionation capacity (see "Subsequent events"). The year-to-date margin was $42.9 million in 2009 compared to year-to-date margin of $114.5 million in 2008.
The Redwater West business line:
The Redwater West business line purchases an NGL mix from various producers and fractionates it into finished products at the Redwater fractionation facility near Edmonton, Alberta. Because the feedstock for this business line is primarily NGL mix rather than natural gas, the frac spread has a smaller impact on margin than in the Empress East business line. This facility also has the largest and industry-leading rail-based condensate terminal in Western Canada which serves the heavy oil industry and its need for diluent. Year over year, Provident has considerably increased its market presence through condensate marketing and third-party terminalling at Redwater, and has recently placed its first of three new 500,000 barrel storage caverns at Redwater into condensate service. Income generated from the condensate terminal which relates to third-party terminalling and storage is included within the commercial services business line.
In the second quarter of 2009, the operating margin for Redwater West was $21.2 million (2008 - $60.1 million) a decrease of 65 percent. The decrease in margin is primarily due to 51 percent lower selling prices resulting from the significant drop in crude oil prices and the decrease in propane-plus prices as a percentage of WTI. Per unit margins generated by the condensate business were also lower reflecting timing delays in oilsands diluent demand, however condensate volumes at Redwater continued to be strong and are comparable to the prior year. Cost of goods sold, on a per unit basis, for Redwater West was 51 percent lower than the second quarter of 2008 reflecting the market based pricing for the majority of this product. Propane-plus volumes decreased by six percent compared to the second quarter of 2008 reflecting lower market demand for NGLs. Year-to-date margin decreased to $52.9 million from $100.4 million in 2008.
The Commercial Services business line:
The Commercial Services business line generates income from fee-for-service contracts to provide fractionation, storage, loading and unloading, and marketing services to upstream producers. Income from pipeline tariffs from Provident's ownership in NGL pipelines is also included in this business line. In the second quarter of 2009, the margin for this business line was $14.4 million (2008 - $11.6 million). The 2009 second quarter operating margin is 24 percent higher than the second quarter of 2008 mostly due to increased fees associated with the offloading facility, specifically relating to the condensate business. Year-to-date 2009, the commercial services margin was $30.4 million (2008 - $22.2 million).
Operations - Midstream NGL sales volumes
Midstream sold 102,799 bpd in the second quarter of 2009, down seven percent when compared with 110,826 bpd in the second quarter of 2008. Year-to-date Midstream sold 122,126 bpd in 2009, down one percent when compared to sales of 123,573 bpd in 2008. The reduction in volumes primarily represents the decrease in propane-plus volumes in both Empress East and Redwater West.
Earnings before interest, taxes, depletion, depreciation, accretion, and other non-cash items ("EBITDA") and funds flow from operations
Second quarter 2009 EBITDA decreased 60 percent to $24.4 million from $61.8 million in 2008 reflecting lower operating margins for the Empress East and Redwater West business lines, partially offset by a lower realized loss on financial derivative instruments. The realized loss on financial derivative instruments was recognized in the second quarter of 2009 as a result of a widening of the frac spread ratio, compared to that originally contracted. The reduction in the realized loss from the second quarter of 2008 reflects a lower market frac spread in the second quarter of 2009. Year-to-date EBITDA decreased to $94.3 million from $137.8 million in 2008. Funds flow from operations for the second quarter of 2009 was $18.5 million, a decrease of $34.1 million or 65 percent in comparison to the $52.6 million in the second quarter of 2008. Year-to-date funds flow from operations decreased to $80.0 million from $111.9 million in 2008. The decrease in funds flow from operations reflects the lower EBITDA, partially offset by a lower interest expense.
Management uses EBITDA to analyze the operating performance of the Midstream business unit. EBITDA as presented does not have any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculation of similar measures for other entities. EBITDA as presented is not intended to represent operating funds flow from operations or operating profits for the period nor should it be viewed as an alternative to funds flow from operations from operating activities, net earnings or other measures of financial performance calculated in accordance with Canadian GAAP. All references to EBITDA throughout this report are based on earnings before interest, taxes, depletion, depreciation, accretion, and other non-cash items ("EBITDA").
Capital expenditures
Midstream capital expenditures for the second quarter of 2009 totaled $12.4 million, and $22.4 million year-to-date. In 2009, $19.2 million was spent primarily on continued development of cavern storage, the condensate offloading and terminalling facility and development of the Michigan depropanizer, $0.9 million was spent on sustaining capital requirements, $2.1 million was added to capitalized linefill and $0.2 million was spent on office related capital.
/T/
Distributions
The following table summarizes distributions paid or declared by the Trust
since inception:
Distribution Amount
Record Date Payment Date (Cdn$) (US$)(1)
----------------------------------------------------------------------------
2009
January 23, 2009 February 13, 2009 $ 0.09 0.07
February 23, 2009 March 13, 2009 0.06 0.05
March 24, 2009 April 15, 2009 0.06 0.05
April 22, 2009 May 15, 2009 0.06 0.05
May 21, 2009 June 15, 2009 0.06 0.05
June 22, 2009 July 15, 2009 0.06 0.05
----------------------------------------------------------------------------
2009 Cash Distributions paid as
declared $ 0.39 0.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 Cash Distributions paid as
declared 1.38 1.29
2007 Cash Distributions paid as
declared 1.44 1.35
2006 Cash Distributions paid as
declared 1.44 1.26
2005 Cash Distributions paid as
declared 1.44 1.20
2004 Cash Distributions paid as
declared 1.44 1.10
2003 Cash Distributions paid as
declared 2.06 1.47
2002 Cash Distributions paid as
declared 2.03 1.29
2001 Cash Distributions paid as
declared - March 2001 - December
2001 2.54 1.64
----------------------------------------------------------------------------
Inception to June 30, 2009 -
Distributions paid as declared $ 14.16 10.92
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(1) Exchange rate based on the Bank of Canada noon rate on the payment
date.
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Foreign ownership
As at June 30, 2009, based on information received from the transfer agent and financial intermediaries, an estimated 85 percent of Provident's outstanding trust units are held by non-residents. However, this estimate may not be accurate as it is based on certain assumptions and data from the security industry that does not have a well-defined methodology to determine the residency of beneficial holders of securities.
The Trust qualifies as a Mutual Fund Trust under the Canadian Income Tax Act because substantially all the value of its asset portfolio is derived from non-taxable Canadian properties, comprised principally of royalties and inter-company debt. Provident monitors on an ongoing basis the value of its asset portfolio to confirm that substantially all of the value of its assets is derived from non-taxable Canadian properties.
On September 17, 2003 Canadian unitholders approved an amendment to the Trust's Trust Indenture providing that residency restriction provisions need not be enforced while the Trust continues to qualify as a Mutual Fund Trust under Canadian tax legislation. To allow Provident to remain a Mutual Fund Trust and to execute a business plan that maximizes unitholder returns without regard to the types of assets the Trust may hold, the approved amendment provides for Provident's board of directors to have sole discretion to determine whether and when it is appropriate to reduce or limit the number of trust units held by non-residents of Canada.
Change in accounting policies
International Financial Reporting Standards (IFRS)
During 2008, the Canadian Accounting Standards Board (AcSB) confirmed that publicly accountable enterprises will be required to adopt International Financial Reporting Standards (IFRS) in place of Canadian GAAP for interim and annual reporting purposes. The required changeover date is for fiscal years beginning on or after January 1, 2011.
Provident has commenced the process to transition from current Canadian GAAP to IFRS. It has established a project plan and a project team. The project team is led by finance management and includes representatives from various areas of the organization as necessary to plan for a smooth transition to IFRS.
The project plan consists of three phases: initiation, detailed assessment and design and implementation. Provident has completed the first phase, which involved the development of a detailed timeline for assessing resources and training and the completion of a high level review of the major differences between current Canadian GAAP and IFRS. Education and training sessions for employees throughout the organization and discussions with Provident's external auditors have commenced and will continue throughout the subsequent phases. Regular reporting is provided to Provident's senior management and to the Audit Committee of the Board of Directors.
Provident is currently engaged in the detailed assessment and design phase of the project. The detailed assessment and design phase involves established work teams to complete a comprehensive analysis of the impact of the IFRS differences identified in the initial scoping assessment. In addition, an initial evaluation of IFRS 1 transition exemptions and an analysis of financial systems has commenced.
During the implementation phase, Provident will execute the required changes to business processes, financial systems, accounting policies, disclosure controls and internal controls over financial reporting. At this time, the impact on the consolidated financial statements is not reasonably determinable.
For recent accounting pronouncements, see note 2 to interim consolidated financial statements.
Business risks
The trust industry is subject to risks that can affect the amount of funds flow from operations available for distribution to unitholders, and the ability to grow. These risks include but are not limited to:
- capital markets risk and the ability to finance future growth; and
- the impact of Canadian governmental regulation on Provident, including the effect of the new tax on trust distributions;
The oil and natural gas industry is subject to numerous risks that can affect the amount of funds flow from operations available for distribution to unitholders and the ability to grow. These risks include but are not limited to:
- fluctuations in commodity price, exchange rates and interest rates;
- government and regulatory risk in respect of royalty and income tax regimes;
- changes in environmental regulations;
- operational risks that may affect the quality and recoverability of reserves;
- geological risk associated with accessing and recovering new quantities of reserves;
- transportation risk in respect of the ability to transport oil and natural gas to market;
- marketability of oil and natural gas;
- the ability to attract and retain employees; and
- environmental, health and safety risks.
The midstream industry is also subject to risks that can affect the amount of funds flow from operations available for distribution to unitholders and the ability to grow. These risks include but are not limited to:
- 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 the Trust or 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 gas products marketing business is subject to competition from other marketing firms;
- exposure to commodity price fluctuations;
- the ability to attract and retain employees;
- regulatory intervention in determining processing fees and tariffs; and
- reliance on significant customers.
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 strategy of acquiring, developing and optimizing quality, low-risk reserves in areas where we have technical and operational expertise;
- developing a diversified, balanced asset portfolio that generally offers developed operational infrastructure, year-round access and close proximity to markets;
- adhering to a consistent and disciplined Commodity Price Risk Management Program to mitigate the impact that volatile commodity prices have on funds flow from operations available for distribution;
- marketing crude oil and natural gas to a diverse group of customers, including aggregators, industrial users, well-capitalized third-party marketers and spot market buyers;
- marketing natural gas liquids and related services to selected, credit worthy customers at competitive rates;
- maintaining a low cost structure to maximize funds flow from operations 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.
Unit trading activity
The following table summarizes the unit trading activity of the Provident units each quarter in the six months ended June 30, 2009 on both the Toronto Stock Exchange and the New York Stock Exchange:
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Q1 Q2
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TSE - PVE.UN (Cdn$)
High $ 6.61 $ 6.50
Low $ 2.90 $ 4.50
Close $ 4.81 $ 5.82
Volume (000s) 21,878 22,810
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NYSE - PVX (US$)
High $ 5.60 $ 5.70
Low $ 2.23 $ 3.55
Close $ 3.72 $ 4.92
Volume (000s) 92,576 83,525
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/T/
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 the Trust'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. Statements relating to "reserves" or "resources" are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future. Forward looking information in this MD&A includes, but is not limited to, business strategy and objectives, reserve quantities and the discounted present value of future net cash flows from such reserves, net revenue, future production levels, capital expenditures, exploration plans, development plans, acquisition and disposition plans and the timing thereof, operating and other costs, royalty rates, budgeted levels of cash distributions and the performance associated with Provident's natural gas midstream, NGL processing and marketing business. Specifically, the "Outlook" section may contain forward-looking information which will be identified as such. 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 the Trust 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:
- the Trust's ability to benefit from the combination of growth opportunities and the ability to grow through the capital markets;
- the Trust's acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived therefrom;
- sustainability and growth of production and reserves through prudent management and acquisitions;
- the emergence of accretive growth opportunities;
- the ability to achieve an appropriate level of monthly cash distributions;
- the impact of Canadian governmental regulation on the Trust;
- the existence, operation and strategy of the commodity price risk management program;
- the approximate and maximum amount of forward sales and hedging to be employed;
- changes in oil and natural gas prices and the impact of such changes on cash flow after financial derivative instruments;
- the level of capital expenditures devoted to development activity rather than exploration;
- the sale, farming out or development using third party resources to exploit or produce certain exploration properties;
- the use of development activity and acquisitions to replace and add to reserves;
- the quantity of oil and natural gas reserves and oil and natural gas production levels;
- currency, exchange and interest rates;
- the performance characteristics of Provident's midstream, NGL processing and marketing business;
- the growth opportunities associated with the midstream, NGL processing and marketing business; and
- the nature of contractual arrangements with third parties in respect of Provident's midstream, NGL processing and marketing business.
Although the Trust 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. The Trust can not guarantee future results, levels of activity, performance, or achievements. Moreover, neither the Trust 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 the Trust'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;
- uncertainties associated with estimating reserves;
- royalties payable in respect of oil and gas production;
- interest payable on notes issued in connection with acquisitions;
- income tax legislation relating to income trusts, including the effect of legislation taxing trust income;
- governmental regulation in North America of the oil and gas 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 which can reduce production or cause production to be shut-in or delayed;
- failure to realize the anticipated benefits of acquisitions;
- competition for, among other things, capital reserves, undeveloped lands 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; 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, the Trust has made assumptions regarding, among other things:
- future natural gas and crude oil prices;
- the ability of the Trust 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 the Trust conducts its business;
- the impact of increasing competition;
- the Trust's ability to obtain financing on acceptable terms;
- the general stability of the economic and political environment in which the Trust operates;
- the timely receipt of any required regulatory approvals;
- the ability of the operator of the projects which the Trust has an interest in to operate the field in a safe, efficient and effective manner;
- field production rates and decline rates;
- the ability to replace and expand oil and natural gas reserves through acquisition, development of exploration;
- the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Trust to secure adequate product transportation;
- currency, exchange and interest rates; and
- the ability of the Trust to successfully market its oil and natural gas 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 the Trust 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.
/T/
Segmented information by quarter
----------------------------------------------------------------------------
($ 000s except for per unit and operating amounts) 2009
----------------------------------------------------------------------------
First Second Year-to-
Quarter Quarter Date
----------------------------------------------------------------------------
Financial - consolidated
Revenue $ 470,769 $ 305,923 $ 776,692
Funds flow from continuing operations $ 84,281 $ 48,516 $ 132,797
Funds flow from continuing operations
per unit - basic and diluted $ 0.32 $ 0.19 $ 0.51
Funds flow from discontinued operations $ - $ - $ -
Net loss $ (40,284) $ (80,061) $ (120,345)
Net loss per unit - basic and diluted $ (0.16) $ (0.31) $ (0.46)
Unitholder distributions $ 54,511 $ 47,012 $ 101,523
Distributions per unit $ 0.21 $ 0.18 $ 0.39
----------------------------------------------------------------------------
Provident Upstream
Cash revenue $ 72,242 $ 78,883 $ 151,125
Earnings before interest, DD&A, taxes
and other non-cash items $ 25,119 $ 33,114 $ 58,233
Funds flow from operations $ 22,827 $ 30,022 $ 52,849
Net loss $ (38,154) $ (29,885) $ (68,039)
----------------------------------------------------------------------------
Provident Midstream
Cash revenue $ 487,820 $ 314,537 $ 802,357
Earnings before interest, DD&A, taxes
and other non-cash items $ 69,927 $ 24,416 $ 94,343
Funds flow from operations $ 61,454 $ 18,494 $ 79,948
Net loss $ (2,130) $ (50,176) $ (52,306)
----------------------------------------------------------------------------
Operating
Oil and gas production
Crude oil (bpd) 10,710 10,035 10,371
Natural gas liquids (bpd) 1,138 1,105 1,121
Natural gas (mcfd) 76,260 75,735 75,996
Oil equivalent (boed) 24,558 23,763 24,158
----------------------------------------------------------------------------
Average selling price net of
transportation expense (Cdn$)
Crude oil per bbl $ 36.23 $ 59.03 $ 47.33
(before realized financial derivative
instruments)
Crude oil per bbl $ 42.31 $ 60.61 $ 51.21
(including realized financial
derivative instruments)
Natural gas liquids per barrel $ 41.13 $ 38.14 $ 39.65
Natural gas per mcf $ 4.75 $ 3.40 $ 4.08
(before realized financial derivative
instruments)
Natural gas per mcf $ 5.26 $ 3.62 $ 4.44
(including realized financial
derivative instruments)
----------------------------------------------------------------------------
Provident Midstream
Provident Midstream NGL sales volumes
(bpd) 141,669 102,799 122,126
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segmented information by quarter
----------------------------------------------------------------------------
($ 000s except for per unit and
operating amounts) 2008
----------------------------------------------------------------------------
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Total
----------------------------------------------------------------------------
Financial - consolidated
Revenue (continuing
operations) $ 702,215 $ 420,220 $1,097,408 $1,019,320 $3,239,163
Funds flow from
continuing
operations $ 130,394 $ 165,470 $ 139,979 $ 81,779 $ 517,622
Funds flow from
continuing
operations per unit
- basic $ 0.52 $ 0.65 $ 0.55 $ 0.32 $ 2.03
Funds flow from
continuing
operations per
unit - diluted $ 0.52 $ 0.65 $ 0.51 $ 0.32 $ 2.03
Funds flow from
discontinued
operations $ 49,836 $ 76,017 $ 11,682 $ - $ 137,535
Net income (loss) $ 33,616 $ (184,081)$ 351,105 $ (43,248)$ 157,392
Net income (loss)
per unit - basic $ 0.13 $ (0.72)$ 1.37 $ (0.17)$ 0.62
Net income (loss) per
unit - diluted $ 0.13 $ (0.72)$ 1.29 $ (0.17)$ 0.62
Unitholder
distributions $ 91,117 $ 91,662 $ 92,188 $ 77,324 $ 352,291
Distributions per
unit $ 0.36 $ 0.36 $ 0.36 $ 0.30 $ 1.38
----------------------------------------------------------------------------
Oil and gas production
(continuing operations)
Cash revenue $ 122,815 $ 164,442 $ 158,400 $ 101,437 $ 547,094
Earnings before
interest, DD&A, taxes
and other non-cash
items $ 75,348 $ 117,132 $ 111,256 $ 49,757 $ 353,493
Funds flow from
operations $ 71,142 $ 112,869 $ 107,442 $ 47,187 $ 338,640
Net income (loss) $ 9,591 $ 28,935 $ 76,881 $ (421,457)$ (306,050)
----------------------------------------------------------------------------
Provident Midstream
Cash revenue $ 641,673 $ 662,315 $ 652,753 $ 513,860 $2,470,601
Earnings before interest,
DD&A, taxes and other
non-cash items $ 75,987 $ 61,769 $ 37,339 $ 37,666 $ 212,761
Funds flow from
operations $ 59,252 $ 52,601 $ 32,537 $ 34,592 $ 178,982
Net income (loss) $ 15,516 $ (290,230)$ 232,966 $ 359,166 $ 317,418
----------------------------------------------------------------------------
Operating
Oil and gas production
(continuing operations)
Crude oil (bpd) 12,287 12,494 12,805 12,307 12,473
Natural gas liquids
(bpd) 1,307 1,178 1,195 1,134 1,203
Natural gas (mcfd) 83,970 86,130 85,628 80,450 84,039
Oil equivalent (boed) 27,589 28,027 28,271 26,849 27,683
----------------------------------------------------------------------------
Average selling price
net of transportation
expense (continuing
operations)(Cdn$)
Crude oil per bbl $ 75.06 $ 105.13 $ 102.66 $ 47.33 $ 82.79
(before realized
financial derivative
instruments)
Crude oil per bbl $ 71.54 $ 98.68 $ 97.61 $ 52.71 $ 80.36
(including realized
financial derivative
instruments)
Natural gas liquids
per barrel $ 72.85 $ 94.59 $ 91.72 $ 47.64 $ 76.88
Natural gas per mcf $ 7.61 $ 9.98 $ 8.60 $ 6.63 $ 8.23
(before realized
financial derivative
instruments)
Natural gas per mcf $ 7.74 $ 9.73 $ 8.45 $ 6.92 $ 8.23
(including realized
financial derivative
instruments)
----------------------------------------------------------------------------
Provident Midstream
Provident Midstream NGL
sales volumes (bpd) 136,320 110,826 111,313 120,222 119,649
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segmented information by quarter
----------------------------------------------------------------------------
($ 000s except for per unit
and operating amounts) 2007
----------------------------------------------------------------------------
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Total
----------------------------------------------------------------------------
Financial - consolidated
Revenue (continuing
operations) $ 558,807 $ 463,995 $ 494,065 $ 521,648 $2,038,515
Funds flow from
continuing
operations $ 85,814 $ 81,601 $ 79,493 $ 135,776 $ 382,684
Funds flow from
continuing
operations per
unit - basic $ 0.41 $ 0.38 $ 0.33 $ 0.55 $ 1.66
Funds flow from
continuing
operations per
unit - diluted $ 0.40 $ 0.38 $ 0.33 $ 0.55 $ 1.66
Funds flow from
discontinued
operations $ 1,226 $ 16,902 $ 25,656 $ 41,787 $ 85,571
Net income (loss) $ 43,093 $ (46,199)$ (35,005)$ 68,545 $ 30,434
Net income (loss)
per unit - basic
and diluted $ 0.20 $ (0.21)$ (0.14)$ 0.28 $ 0.13
Unitholder
distributions $ 76,271 $ 80,236 $ 87,782 $ 89,063 $ 333,352
Distributions per
unit $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 1.44
----------------------------------------------------------------------------
Oil and gas production
(continuing operations)
Cash revenue $ 84,668 $ 90,028 $ 92,419 $ 101,746 $ 368,861
Earnings before interest,
DD&A, taxes and other
non-cash items $ 49,756 $ 55,457 $ 53,530 $ 63,009 $ 221,752
Funds flow from
operations $ 46,410 $ 52,032 $ 47,143 $ 58,667 $ 204,252
Net (loss) income $ (4,510)$ 50,429 $ (17,807)$ 16,953 $ 45,065
----------------------------------------------------------------------------
Provident Midstream
Cash revenue $ 453,272 $ 397,713 $ 433,950 $ 598,963 $1,883,898
Earnings before interest,
DD&A, taxes and other
non-cash items $ 52,853 $ 35,974 $ 47,425 $ 89,423 $ 225,675
Funds flow from
operations $ 39,404 $ 29,569 $ 32,350 $ 77,109 $ 178,432
Net income (loss) $ 51,838 $ (142,191)$ (8,630)$ (62,037)$ (161,020)
----------------------------------------------------------------------------
Operating
Oil and gas production
(continuing operations)
Crude oil (bpd) 8,097 8,610 11,182 11,252 9,797
Natural gas liquids
(bpd) 1,422 1,311 1,255 1,277 1,316
Natural gas (mcfd) 88,928 94,437 93,511 92,584 92,378
Oil equivalent (boed) 24,340 25,660 28,022 27,960 26,509
----------------------------------------------------------------------------
Average selling price
net of transportation
expense (continuing
operations)(Cdn$)
Crude oil per bbl $ 51.23 $ 53.75 $ 57.88 $ 61.75 $ 56.74
(before realized
financial derivative
instruments)
Crude oil per bbl $ 51.25 $ 52.77 $ 55.47 $ 57.23 $ 54.53
(including realized
financial derivative
instruments)
Natural gas liquids
per barrel $ 49.02 $ 52.79 $ 55.47 $ 63.63 $ 55.07
Natural gas per mcf $ 7.48 $ 7.27 $ 4.94 $ 6.08 $ 6.42
(before realized
financial derivative
instruments)
Natural gas per mcf $ 7.37 $ 7.20 $ 5.63 $ 6.68 $ 6.71
(including realized
financial derivative
instruments)
----------------------------------------------------------------------------
Provident Midstream
Provident Midstream NGL
sales volumes (bpd) 125,033 109,713 112,386 135,981 120,785
----------------------------------------------------------------------------
----------------------------------------------------------------------------
PROVIDENT ENERGY TRUST
CONSOLIDATED BALANCE SHEETS
Canadian dollars (000s)
(unaudited)
As at As at
June 30, December 31,
2009 2008
--------------------------
Assets
Current assets
Cash and cash equivalents $ 973 $ 4,629
Accounts receivable 167,044 244,485
Petroleum product inventory 38,720 46,160
Prepaid expenses and other current assets 7,465 7,886
Financial derivative instruments (note 7) 6,726 16,708
----------------------------------------------------------------------------
220,928 319,868
Investments and other long term assets 13,647 14,218
Long-term financial derivative
instruments (note 7) - 735
Property, plant and equipment 2,413,530 2,480,503
Intangible assets 151,607 158,336
Goodwill 100,409 100,409
----------------------------------------------------------------------------
$ 2,900,121 $ 3,074,069
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 195,553 $ 244,031
Cash distributions payable 13,673 20,088
Current portion of convertible
debentures (note 3) 25,084 24,871
Financial derivative instruments (note 7) 112,069 13,693
----------------------------------------------------------------------------
346,379 302,683
Long-term debt - revolving term credit
facility (note 3) 511,244 504,685
Long-term debt - convertible debentures
(note 3) 238,304 236,123
Asset retirement obligation (note 4) 57,479 59,432
Long-term financial derivative
instruments (note 7) 126,117 58,420
Other long-term liabilities (note 6) 6,412 8,572
Future income taxes 185,629 267,807
Unitholders' equity
Unitholders' contributions (note 5) 2,820,105 2,806,071
Convertible debentures equity component 17,198 17,198
Contributed surplus 1,695 1,695
Accumulated other comprehensive loss (2,139) (2,183)
Accumulated income 305,689 426,034
Accumulated cash distributions (1,713,991) (1,612,468)
----------------------------------------------------------------------------
1,428,557 1,636,347
----------------------------------------------------------------------------
$ 2,900,121 $ 3,074,069
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
PROVIDENT ENERGY TRUST
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED INCOME
Canadian dollars (000s except per unit amounts)
(unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------------------------
2009 2008 2009 2008
-------------------------------------------
Revenue
Revenue $ 409,307 $ 887,328 $ 949,265 $1,682,753
Realized (loss) gain on
financial derivative
instruments (15,887) (60,571) 4,217 (91,508)
Unrealized loss on financial
derivative instruments (87,497) (406,537) (176,790) (468,810)
----------------------------------------------------------------------------
305,923 420,220 776,692 1,122,435
Expenses
Cost of goods sold 269,262 586,469 664,864 1,130,546
Production, operating
and maintenance 35,263 39,479 70,456 73,205
Transportation 7,817 8,016 18,990 16,543
Depletion, depreciation
and accretion 79,558 84,547 159,722 166,163
General and administrative
(note 6) 17,581 19,524 34,766 39,454
Strategic review and
restructuring (note 8) 9,453 328 9,727 660
Interest on bank debt 2,301 11,170 6,260 24,165
Interest and accretion on
convertible debentures 5,746 3,663 11,491 7,323
Foreign exchange loss (gain)
and other 2,274 (126) (1,217) (1,397)
----------------------------------------------------------------------------
429,255 753,070 975,059 1,456,662
----------------------------------------------------------------------------
Loss from continuing operations
before taxes (123,332) (332,850) (198,367) (334,227)
----------------------------------------------------------------------------
Capital tax expense 1,374 1,210 1,692 1,692
Current tax expense (recovery) 926 (1,211) 3,047 3,824
Future income tax recovery (45,571) (71,554) (82,761) (103,555)
----------------------------------------------------------------------------
(43,271) (71,555) (78,022) (98,039)
----------------------------------------------------------------------------
Net loss from continuing
operations (80,061) (261,295) (120,345) (236,188)
----------------------------------------------------------------------------
Net income from discontinued
operations (note 9) - 77,214 - 85,723
----------------------------------------------------------------------------
Net loss for the period (80,061) (184,081) (120,345) (150,465)
----------------------------------------------------------------------------
Accumulated income, beginning
of period $ 385,750 $ 302,258 $ 426,034 $ 268,642
----------------------------------------------------------------------------
Accumulated income, end of
period $ 305,689 $ 118,177 $ 305,689 $ 118,177
----------------------------------------------------------------------------
Net loss from continuing
operations per unit
- basic and diluted $ (0.31)$ (1.03) $ (0.46)$ (0.93)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per unit
- basic and diluted $ (0.31)$ (0.72) $ (0.46)$ (0.59)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
PROVIDENT ENERGY TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
Canadian dollars (000s)
(unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------------------------
2009 2008 2009 2008
-------------------------------------------
Cash provided by operating
activities
Net loss for the period from
continuing operations $ (80,061) $(261,295) $(120,345) $(236,188)
Add (deduct) non-cash items:
Depletion, depreciation and
accretion 79,558 84,547 159,722 166,163
Non-cash interest expense
and other 1,333 1,107 2,711 1,991
Non-cash unit based
compensation expense (recovery)
(note 6) 3,756 4,691 (3,792) 1,518
Unrealized loss on financial
derivative instruments 87,497 406,537 176,790 468,810
Unrealized foreign exchange
loss (gain) and other 2,004 1,437 472 (2,875)
Future income tax recovery (45,571) (71,554) (82,761) (103,555)
----------------------------------------------------------------------------
Funds flow from continuing
operations 48,516 165,470 132,797 295,864
Funds flow from discontinued
operations - 76,017 - 125,853
----------------------------------------------------------------------------
Funds flow from operations 48,516 241,487 132,797 421,717
----------------------------------------------------------------------------
Site restoration expenditures (1,210) (1,101) (4,184) (2,638)
Change in non-cash operating
working capital from continuing
operations 6,801 (117,856) 58,162 (45,122)
Change in non-cash operating
working capital from discontinued
operations - (76,057) - (26,631)
----------------------------------------------------------------------------
54,107 46,473 186,775 347,326
----------------------------------------------------------------------------
Cash (used for) provided by
financing activities
Increase (decrease) in long-term
debt 15,194 (264,011) 6,333 (298,576)
Declared distributions to
unitholders (47,012) (91,662) (101,523) (182,779)
Issue of trust units, net of
issue costs 6,394 15,681 14,034 29,878
Change in non-cash financing
working capital 174 56 (6,415) 770
Financing activities from
discontinued operations - 20,525 - (42,630)
----------------------------------------------------------------------------
(25,250) (319,411) (87,571) (493,337)
----------------------------------------------------------------------------
Cash (used for) provided by
investing activities
Capital expenditures (26,548) (34,210) (83,054) (118,792)
Oil and gas property
acquisitions (119) (10,432) (493) (19,451)
Increase in investments - - - (1,007)
Proceeds on sale of assets - 206,349 - 206,349
Change in non-cash investing
working capital (5,347) 133,319 (19,313) 137,125
Investing activities from
discontinued operations - (33,826) - (62,553)
----------------------------------------------------------------------------
(32,014) 261,200 (102,860) 141,671
----------------------------------------------------------------------------
Decrease in cash and cash
equivalents (3,157) (11,738) (3,656) (4,340)
Cash and cash equivalents,
beginning of period 4,130 14,218 4,629 6,820
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 973 $ 2,480 $ 973 $ 2,480
Cash and cash equivalents, end
of period from discontinued
operations $ - $ 859 $ - $ 859
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period from continuing
operations $ 973 $ 1,621 $ 973 $ 1,621
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental disclosure of cash
flow information
Cash interest paid including
debenture interest $ 7,086 $ 19,688 $ 15,130 $ 41,767
Cash taxes paid $ 2,743 $ 8,772 $ 1,960 $ 10,872
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
PROVIDENT ENERGY TRUST
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
Canadian dollars (000s)
(unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------------------------
2009 2008 2009 2008
----------------------------------------------
Net loss $ (80,061) $ (184,081) $ (120,345) $ (150,465)
----------------------------------------------------------------------------
Other comprehensive income,
net of taxes
Foreign currency translation
adjustments - (4,593) - 7,943
Reclassification adjustment for
foreign currency losses
included in net income - 30,302 - 30,302
Unrealized gain on
available-for-sale
investments (net of taxes) 120 252 44 186
----------------------------------------------------------------------------
120 25,961 44 38,431
----------------------------------------------------------------------------
Comprehensive loss $ (79,941) $ (158,120) $ (120,301) $ (112,034)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other comprehensive
loss, beginning of period (2,259) (56,718) (2,183) (69,188)
Other comprehensive income 120 25,961 44 38,431
----------------------------------------------------------------------------
Accumulated other comprehensive
loss, end of period $ (2,139) $ (30,757) $ (2,139) $ (30,757)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated income, end of
period 305,689 118,177 305,689 118,177
Accumulated cash distributions,
end of period (1,713,991) (1,442,956) (1,713,991) (1,442,956)
----------------------------------------------------------------------------
Retained earnings (deficit),
end of period (1,408,302) (1,324,779) (1,408,302) (1,324,779)
Accumulated other comprehensive
loss, end of period (2,139) (30,757) (2,139) (30,757)
----------------------------------------------------------------------------
Total retained earnings (deficit)
and accumulated other
comprehensive loss, end of
period $(1,410,441)$(1,355,536)$(1,410,441)$(1,355,536)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in Cdn$000's, except unit and per unit amounts)
(unaudited)
June 30, 2009
/T/
1. Significant accounting policies
The Interim Consolidated Financial Statements have been prepared based on the consistent application of the accounting policies as set out in the Consolidated Financial Statements of the Trust for the year ended December 31, 2008 and are consistent with policies adopted in the second quarter of 2008, except as described in note 2. Certain information and disclosures normally required in the notes to the annual financial statements have been condensed or omitted. These Interim Consolidated Financial Statements should be read in conjunction with the Trust's audited Financial Statements and notes for the year ended December 31, 2008. Certain comparative numbers have been reclassified to conform with the current period's presentation.
2. Changes in accounting policies and practices
Goodwill and intangible assets
In the first quarter of 2009, the Trust adopted CICA Handbook section 3064 "Goodwill and Intangible assets" which supersedes section 3062 "Goodwill and other Intangible assets" and section 3450 "Research and Development". This new section established standards for the recognition, measurement and disclosure of goodwill and intangible assets. The adoption of this standard has not had a material impact on the Trust's consolidated financial statements.
/T/
3. Long-term debt
As at As at
June 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Revolving term credit facility $ 511,244 $ 504,685
----------------------------------------------------------------------------
Convertible debentures 263,388 260,994
Current portion of convertible debentures (25,084) (24,871)
----------------------------------------------------------------------------
238,304 236,123
----------------------------------------------------------------------------
Total $ 749,548 $ 740,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
(i) Revolving term credit facility
At June 30, 2009 the Trust had a $1,125 million term credit facility (December 31, 2008 - $1,125 million). Based on the terms and conditions of the credit facility, Provident will have access to $1.0 billion of the total facility in the third quarter of 2009. The borrowing capacity of the term credit facility is re-measured quarterly.
At June 30, 2009 the Trust had $24.7 million in letters of credit outstanding (December 31, 2008 - $35.2 million) that guarantee Provident's performance under certain commercial and other contracts.
(ii) Convertible debentures
The Trust may elect to satisfy interest and principal obligations by the issue of trust units. For the six months ended June 30, 2009, no debentures were converted to trust units at the election of debenture holders (2008 - $25,000). Included in the carrying value at June 30, 2009 were financing costs of $3.8 million. The following table details each convertible debenture:
/T/
Convertible As at As at
Debentures June 30, 2009 December 31, 2008
----------------------------------------------------------------------------
($000s except Conversion
conversion Carrying Face Carrying Face Maturity Price per
pricing) Value (1) Value Value (1) Value Date unit (2)
----------------------------------------------------------------------------
6.5% Convertible April 30,
Debentures $144,620 $149,980 143,212 $149,980 2011 14.75
6.5% Convertible Aug. 31,
Debentures 93,684 98,999 92,911 98,999 2012 13.75
8.0% Convertible July 31,
Debentures 25,084 25,109 24,871 25,109 2009 12.00
----------------------------------------------------------------------------
$263,388 $274,088 $260,994 $274,088
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Excluding equity component of convertible debentures
(2) The debentures may be converted into trust units at the option of the
holder of the debenture at the conversion price per unit
/T/
4. Asset retirement obligation
The Trust's asset retirement obligation is based on the Trust's net ownership in wells, facilities and the midstream assets and represents management's estimate of the costs to abandon and reclaim those wells, facilities and midstream assets as well as an estimate of the future timing of the costs to be incurred. Estimated cash flows have been discounted at the Trust's credit-adjusted risk free rate of seven percent and an inflation rate of two percent.
/T/
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
($000s) 2009 2008 2009 2008
----------------------------------------------------------------------------
Carrying amount, beginning of
period $ 57,612 $ 44,112 $ 59,432 $ 43,886
Increase in liabilities incurred
during the period 22 336 138 1,022
Settlement of liabilities during
the period (1,210) (1,101) (4,184) (2,638)
Accretion of liability 1,055 1,098 2,093 2,175
----------------------------------------------------------------------------
Carrying amount, end of period $ 57,479 $ 44,445 $ 57,479 $ 44,445
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Unitholders' contributions
The Trust has authorized capital of an unlimited number of common voting
trust units.
Six months ended June 30,
----------------------------------------------------------------------------
2009 2008
----------------------------------------------------------------------------
Number of Amount Number of Amount
Trust Units units (000s) units (000s)
----------------------------------------------------------------------------
Balance at beginning of
period 259,087,789 $2,806,071 252,634,773 $2,750,374
Issued pursuant to unit
option plan - - 142,940 1,292
Issued pursuant to the
distribution reinvestment
plan 2,505,648 12,011 2,326,646 23,828
To be issued pursuant to the
distribution reinvestment
plan 365,871 2,023 419,776 4,846
Debenture conversions - - 1,818 26
----------------------------------------------------------------------------
Balance at end of period 261,959,308 $2,820,105 255,525,953 $2,780,366
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
The per trust unit amounts for the three months ended June 30, 2009 were calculated based on the weighted average number of units outstanding of 261,003,339 (2008 - 254,404,362). The diluted per trust unit amounts for 2009 are calculated including no additional trust units (2008 - 64,075) for the dilutive effect of the unit option plan and convertible debentures.
The per trust units amounts for the six months ended June 30, 2009 were calculated based on the weighted average number of units outstanding of 260,199,185 (2008 - 253,659,326). The diluted per trust unit amounts for 2009 are calculated including no additional trust units (2008 - 64,075) for the dilutive effect of the unit option plan and convertible debentures.
6. Unit based compensation
Restricted/Performance units
As of June 30, 2009 there were 1,631,563 RTUs and 3,806,429 PTUs outstanding (December 31, 2008 - 1,139,835 RTUs and 3,400,330 PTUs). The fair value estimate associated with the RTUs and PTUs is expensed in the statement of operations over the vesting period. At June 30, 2009, $7.6 million (December 31, 2008 - $9.4 million) is included in accounts payable and accrued liabilities for this plan and $6.4 million (December 31, 2008 - $8.6 million) is included in other long-term liabilities. The following table summarizes the expense recorded for RTUs and PTUs.
/T/
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
2009 2008 2009 2008
----------------------------------------------------------------------------
Cash general and administrative $ 78 $ - $ 8,213 $ 8,287
Non-cash unit based compensation
(included in general and
administrative) 3,756 4,691 (3,792) 1,518
Strategic review and restructuring
expenses (note 8) 2,954 - 2,954 -
Production, operating and
maintenance expense 168 192 227 423
----------------------------------------------------------------------------
$ 6,956 $ 4,883 $ 7,602 $ 10,228
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Financial instruments
The following table is a summary of the net financial derivative
instruments liability:
As at As at
June 30, December 31,
----------------------------------------------------------------------------
($000s) 2009 2008
----------------------------------------------------------------------------
Provident Upstream
Crude Oil $ 2,200 $ (12,521)
Natural Gas (1,373) (3,285)
Provident Midstream 230,157 70,476
Corporate 476 -
----------------------------------------------------------------------------
Total $ 231,460 $ 54,670
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
Interest rate risk
The Trust's revolving term credit facilities bear interest at a floating rate. Using debt levels as at June 30, 2009, 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 $2.6 million. The Trust 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. Refer to sensitivity analysis below.
Financial derivative sensitivity analysis
The following table shows the impact on unrealized (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.
/T/
Cdn (000's) + Change - Change
----------------------------------------------------------------------------
Provident Upstream
Crude Oil (WTI +/- $10.00 per bbl) $ (1,810) $ 3,565
Natural Gas (AECO +/- $1.00 per gj) (2,581) 3,839
Foreign exchange (FX rate +/- $0.01) (365) 365
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Provident Midstream
Frac spread related
Crude Oil (WTI +/- $10.00 per bbl) $(91,062) $ 92,381
Natural Gas (AECO +/- $1.00 per gj) 57,336 (57,069)
NGL's (includes propane, (Belvieu +/- US $0.15 per
butane) gal) (1,194) 1,194
Foreign Exchange ($U.S. vs
$Cdn) (FX rate +/- $ 0.01) (1,941) 1,925
Inventory/margin related
Crude Oil (WTI +/- $10.00 per bbl) (6,425) 6,424
NGL's (includes propane, (Belvieu +/- US $0.15 per
butane, natural gasoline) gal) 4,293 (4,290)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate
Interest Rate (Rate +/- 50 basis points) $ 2,395 $ (2,395)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
8. Strategic review and restructuring expenses
The strategic review process was announced in February of 2008 with the objectives of optimizing business performance, facilitating business growth, improving overall access to and cost of capital, enhancing the valuation of Provident's component businesses and optimizing structure in response to the federal government decision to tax income trusts beginning in 2011. During this review, it was determined that the sale of the United States oil and natural gas production (USOGP) business was an important step in the process (see note 9). Following the sale of USOGP, management and the board of directors evaluated the complete spectrum of strategic options available for Provident's remaining Canadian oil and gas production (Provident Upstream) and midstream (Provident Midstream) business units. After an extensive review, it was determined that in the context of the current macroeconomic environment (characterized by low commodity prices and volatility in both equity and debt markets), it is in the best interest of unitholders that Provident remain structured as a cash-distributing, diversified energy enterprise.
In the second quarter of 2009, Provident completed an internal reorganization to improve the efficiency and competitiveness of the businesses. The internal reorganization is designed to improve the focus of each business unit, improve management's line of sight to the key performance measures in each business, and reduce general and administrative costs. The reorganization resulted in staff reductions at all levels of the organization, including senior management. In the second quarter of 2009, costs of $9.5 million (2008 - $0.3 million) were incurred as a result of the strategic review and this reorganization. For the six months ended June 30, 2009, strategic review and restructuring costs were $9.7 million (2008 - $0.7 million). The costs are comprised primarily of severance, consulting and legal costs.
9. Discontinued operations (USOGP)
In February, 2008 the Trust announced a strategic process respecting the decision to dispose of the operations that comprise the United States oil and natural gas production (USOGP) business. Effective in the first quarter of 2008, Provident's USOGP business was accounted for as discontinued operations. The USOGP business was sold in June and August of 2008.
Quicksilver Resources Inc. ("Quicksilver") filed a lawsuit on October 31, 2008 against BreitBurn Energy Partners, L.P. (the MLP), certain of its directors (including three Provident nominees), and Provident. The MLP was part of USOGP. The claim relates to a transaction between the MLP and Quicksilver and certain other MLP matters. Quicksilver alleges, among other things, that it was induced to enter into a contribution agreement pursuant to which it contributed assets to the MLP by false representations as to Provident's relationship with the MLP. The transaction involved the issuance by the MLP to Quicksilver of approximately U.S. $700 million of units of the MLP. The litigation is currently in an extensive pre-trial discovery process, and it is not possible at this time to assess the potential exposure of Provident in the event of an adverse verdict. Provident believes the claims made against it in the lawsuit are without merit and will vigorously defend itself and its named director nominees against these claims.
/T/
The following table shows information about net income from USOGP.
Net income from discontinued Three months ended Six months ended
operations June 30, June 30,
----------------------------------------------------------------------------
Canadian dollars (000's) 2009 2008 2009 2008
----------------------------------------------------------------------------
Revenue $ - $ 146,888 $ - $ 284,294
----------------------------------------------------------------------------
Loss from discontinued operations
before taxes, non-controlling
interests and impact if sale of
discontinued operations - (242,126) - (256,572)
Gain on sale of discontinued
operations - 187,920 - 187,920
Foreign exchange loss related to
sale of discontinued operations - (30,302) - (30,302)
Current tax expense - (128,551) - (128,565)
Future income tax recovery - 99,266 - 109,086
Non-controlling interests - 191,007 - 204,156
----------------------------------------------------------------------------
Net income from discontinued
operations for the period $ - $ 77,214 $ - $ 85,723
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
10. Subsequent events
Upstream asset disposition
In August of 2009, the Trust has initiated a process to sell certain oil and natural gas production assets, primarily located in Saskatchewan. The disposition package has estimated proved plus probable reserves of 15 million barrels of oil equivalent as of June 30, 2009. Net disposition proceeds will be reinvested in other growth initiatives of the Trust and, in the short term, will be applied to the Trust's revolving term credit facility.
Midstream asset acquisition
On August 12, 2009, the Trust reached an agreement to purchase an additional 6.15 percent interest in the Sarnia fractionation and storage facility for an immediate cash payment of $14.8 million and a deferred payment of $3.7 million for a facility enhancement planned for 2010. This will increase the Trust's ownership in the Sarnia fractionator, effective August 1, 2009, to approximately 16.5 percent, enhancing propane-plus fractionation capacity in the Empress East system by approximately 7,400 barrels per day. As a result of this transaction, the Trust will defer construction of its previously announced depropanizer facility in Michigan.
11. Segmented information
The Trust's business activities are conducted through two business segments: Canadian oil and natural gas production ("COGP" or "Provident Upstream") and Provident Midstream.
Provident Upstream includes exploration, exploitation, development and production of crude oil and natural gas reserves. Provident Midstream includes processing, extraction, transportation, loading and storage of natural gas liquids, and marketing of natural gas liquids.
Geographically the Trust operates in Canada in the oil and natural gas production business segment and in Canada and the USA in the Midstream business.
/T/
Three months ended June 30, 2009
-------------------------------------------
Provident Provident
Upstream Midstream (1) Total
----------------------------------------------------------------------------
Revenue
Gross production revenue $ 84,416 $ - $ 84,416
Royalties (8,463) - (8,463)
Product sales and service
revenue - 333,354 333,354
Realized (loss) gain on
financial derivative instruments 2,930 (18,817) (15,887)
----------------------------------------------------------------------------
78,883 314,537 393,420
----------------------------------------------------------------------------
Expenses
Cost of goods sold - 269,262 269,262
Production, operating and
maintenance 31,909 3,354 35,263
Transportation 3,222 4,595 7,817
Foreign exchange loss (gain) and
other (1,405) 1,675 270
General and administrative 6,860 6,965 13,825
Strategic review and
restructuring 5,183 4,270 9,453
----------------------------------------------------------------------------
45,769 290,121 335,890
----------------------------------------------------------------------------
Earnings before interest, taxes,
depletion, depreciation,
accretion and other non-cash
items 33,114 24,416 57,530
Other revenue
Unrealized loss on financial
derivative instruments (8,629) (78,868) (87,497)
----------------------------------------------------------------------------
Other expenses
Depletion, depreciation and
accretion 70,073 9,485 79,558
Interest on bank debt 575 1,726 2,301
Interest and accretion on
convertible debentures 1,437 4,309 5,746
Unrealized foreign exchange loss
(gain) and other 7 1,997 2,004
Non-cash unit based compensation
expense (recovery) 1,816 1,940 3,756
Capital tax expense 1,374 - 1,374
Current tax expense (recovery) 72 854 926
Future income tax recovery (20,984) (24,587) (45,571)
----------------------------------------------------------------------------
54,370 (4,276) 50,094
----------------------------------------------------------------------------
Net loss for the period $ (29,885) $ (50,176) $ (80,061)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Included in the Provident Midstream segment is product sales and service
revenue of $28.7 million associated with U.S. midstream operations.
As at and for the three months ended
June 30, 2009
-------------------------------------------
Provident
Upstream Midstream Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Selected balance sheet items
Capital assets
Property, plant and equipment
net $ 1,654,557 $ 758,973 $ 2,413,530
Intangible assets - 151,607 151,607
Goodwill - 100,409 100,409
Capital expenditures
Capital Expenditures 14,107 12,441 26,548
Oil and gas property
acquisitions, net 119 - 119
Working capital
Accounts receivable 41,704 125,340 167,044
Petroleum product inventory - 38,720 38,720
Accounts payable and accrued
liabilities 74,137 121,416 195,553
Long-term debt - revolving term
credit facilities 127,811 383,433 511,244
Long-term debt - convertible
debentures 59,576 178,728 238,304
Financial derivative instruments
liability $ 946 $ 230,514 $ 231,460
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended June 30, 2008
-------------------------------------------
Provident Provident
Upstream Midstream (1) Total
----------------------------------------------------------------------------
Revenue
Gross production revenue $ 212,382 $ - $ 212,382
Royalties (38,686) - (38,686)
Product sales and service
revenue - 713,632 713,632
Realized (loss) gain on
financial derivative instruments (9,254) (51,317) (60,571)
----------------------------------------------------------------------------
164,442 662,315 826,757
----------------------------------------------------------------------------
Expenses
Cost of goods sold - 586,469 586,469
Production, operating and
maintenance 35,558 3,921 39,479
Transportation 4,520 3,496 8,016
Foreign exchange loss (gain) and
other (596) (967) (1,563)
General and administrative 7,664 7,463 15,127
Strategic review and
restructuring 164 164 328
----------------------------------------------------------------------------
47,310 600,546 647,856
----------------------------------------------------------------------------
Earnings before interest, taxes,
depletion, depreciation,
accretion and other non-cash
items 117,132 61,769 178,901
Other revenue
Unrealized loss on financial
derivative instruments (23,421) (383,116) (406,537)
----------------------------------------------------------------------------
Other expenses
Depletion, depreciation and
accretion 75,423 9,124 84,547
Interest on bank debt 2,792 8,378 11,170
Interest and accretion on
convertible debentures 916 2,747 3,663
Unrealized foreign exchange loss
(gain) and other 44 1,393 1,437
Non-cash unit based compensation
expense (recovery) 2,550 2,141 4,691
Management charge - discontinued
operations (294) - (294)
Capital tax expense 1,210 - 1,210
Current tax expense (recovery) (86) (1,125) (1,211)
Future income tax recovery (17,779) (53,775) (71,554)
----------------------------------------------------------------------------
64,776 (31,117) 33,659
----------------------------------------------------------------------------
Net income (loss) for the period
from continuing operations $ 28,935 $ (290,230) $ (261,295)
Net income from discontinued
operations (note 9) 77,214
----------------------------------------------------------------------------
Net loss for the period $ (184,081)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Included in the Provident Midstream segment is product sales and service
revenue of $43.7 million associated with U.S. midstream operations.
As at and for the three months ended
June 30, 2008
-------------------------------------------
Provident Provident
Upstream Midstream Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Selected balance sheet items
Capital assets
Property, plant and equipment
net $ 1,762,527 $ 736,422 $ 2,498,949
Intangible assets - 165,064 165,064
Goodwill 416,890 100,409 517,299
Capital expenditures
Capital Expenditures 28,491 5,719 34,210
Oil and gas property
acquisitions, net 10,432 - 10,432
Working capital
Accounts receivable 106,612 278,011 384,623
Petroleum product inventory - 111,776 111,776
Accounts payable and accrued
liabilities 144,294 236,042 380,336
Long-term debt - revolving term
credit facilities 156,548 469,644 626,192
Long-term debt - convertible
debentures 64,676 194,029 258,705
Financial derivative instruments
liability $ 51,210 $ 692,736 $ 743,946
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six months ended June 30, 2009
-------------------------------------------
Provident Provident
Upstream Midstream (1) Total
----------------------------------------------------------------------------
Revenue
Gross production revenue $ 159,675 $ - $ 159,675
Royalties (20,820) - (20,820)
Product sales and service
revenue - 810,410 810,410
Realized (loss) gain on
financial derivative instruments 12,270 (8,053) 4,217
----------------------------------------------------------------------------
151,125 802,357 953,482
----------------------------------------------------------------------------
Expenses
Cost of goods sold - 664,864 664,864
Production, operating and
maintenance 63,430 7,026 70,456
Transportation 6,714 12,276 18,990
Foreign exchange loss (gain) and
other (2,297) 608 (1,689)
General and administrative 19,725 18,833 38,558
Strategic review and
restructuring 5,320 4,407 9,727
----------------------------------------------------------------------------
92,892 708,014 800,906
----------------------------------------------------------------------------
Earnings before interest, taxes,
depletion, depreciation,
accretion and other non-cash
items 58,233 94,343 152,576
Other revenue
Unrealized loss on financial
derivative instruments (16,752) (160,038) (176,790)
----------------------------------------------------------------------------
Other expenses
Depletion, depreciation and
accretion 140,825 18,897 159,722
Interest on bank debt 1,565 4,695 6,260
Interest and accretion on
convertible debentures 2,873 8,618 11,491
Unrealized foreign exchange loss
(gain) and other 65 407 472
Non-cash unit based compensation
expense (recovery) (1,702) (2,090) (3,792)
Capital tax expense 1,692 - 1,692
Current tax expense (recovery) (1) 3,048 3,047
Future income tax recovery (35,797) (46,964) (82,761)
----------------------------------------------------------------------------
109,520 (13,389) 96,131
----------------------------------------------------------------------------
Net loss for the period $ (68,039) $ (52,306) $ (120,345)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Included in the Provident Midstream segment is product sales and service
revenue of $109.8 million associated with U.S. midstream operations.
As at and for the six months ended
June 30, 2009
-------------------------------------------
Provident Provident
Upstream Midstream Total
----------------------------------------------------------------------------
Selected balance sheet items
Capital assets
Property, plant and equipment
net $ 1,654,557 $ 758,973 $ 2,413,530
Intangible assets - 151,607 151,607
Goodwill - 100,409 100,409
Capital expenditures
Capital Expenditures 60,623 22,431 83,054
Oil and gas property
acquisitions, net 493 - 493
Working capital
Accounts receivable 41,704 125,340 167,044
Petroleum product inventory - 38,720 38,720
Accounts payable and accrued
liabilities 74,137 121,416 195,553
Long-term debt - revolving term
credit facilities 127,811 383,433 511,244
Long-term debt - convertible
debentures 59,576 178,728 238,304
Financial derivative instruments
liability $ 946 $ 230,514 $ 231,460
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six months ended June 30, 2008
-------------------------------------------
Provident Provident
Upstream Midstream (1) Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue
Gross production revenue $ 366,768 $ - $ 366,768
Royalties (67,283) - (67,283)
Product sales and service
revenue - 1,383,268 1,383,268
Realized (loss) gain on
financial derivative instruments (12,228) (79,280) (91,508)
----------------------------------------------------------------------------
287,257 1,303,988 1,591,245
----------------------------------------------------------------------------
Expenses
Cost of goods sold - 1,130,546 1,130,546
Production, operating and
maintenance 65,934 7,271 73,205
Transportation 8,164 8,379 16,543
Foreign exchange loss (gain) and
other 928 550 1,478
General and administrative 19,421 19,156 38,577
Strategic review and
restructuring 330 330 660
----------------------------------------------------------------------------
94,777 1,166,232 1,261,009
----------------------------------------------------------------------------
Earnings before interest, taxes,
depletion, depreciation,
accretion and other non-cash
items 192,480 137,756 330,236
Other revenue
Unrealized loss on financial
derivative instruments (37,789) (431,021) (468,810)
----------------------------------------------------------------------------
Other expenses
Depletion, depreciation and
accretion 147,925 18,238 166,163
Interest on bank debt 6,041 18,124 24,165
Interest and accretion on
convertible debentures 1,831 5,492 7,323
Unrealized foreign exchange loss
(gain) and other 45 (2,920) (2,875)
Non-cash unit based compensation
expense (recovery) 805 713 1,518
Internal management charge (641) - (641)
Capital tax expense 1,692 - 1,692
Current tax expense (recovery) (199) 4,023 3,824
Future income tax recovery (41,334) (62,221) (103,555)
----------------------------------------------------------------------------
116,165 (18,551) 97,614
----------------------------------------------------------------------------
Net income (loss) for the period
from continuing operations $ 38,526 $ (274,714) $ (236,188)
Net income from discontinued
operations (note 9) 85,723
----------------------------------------------------------------------------
Net loss for the period $ (150,465)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Included in the Provident Midstream segment is product sales and service
revenue of $164.3 million associated with U.S. midstream operations.
As at and for the six months ended
June 30, 2008
-------------------------------------------
Provident Provident
Upstream Midstream Total
----------------------------------------------------------------------------
Selected balance sheet items
Capital assets
Property, plant and equipment
net $ 1,762,527 $ 736,422 $ 2,498,949
Intangible assets - 165,064 165,064
Goodwill 416,890 100,409 517,299
Capital expenditures
Capital Expenditures 107,649 11,143 118,792
Oil and gas property
acquisitions, net 19,451 - 19,451
Working capital
Accounts receivable 106,612 278,011 384,623
Petroleum product inventory - 111,776 111,776
Accounts payable and accrued
liabilities 144,294 236,042 380,336
Long-term debt - revolving term
credit facilities 156,548 469,644 626,192
Long-term debt - convertible
debentures 64,676 194,029 258,705
Financial derivative instruments
liability $ 51,210 $ 692,736 $ 743,946
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
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