2022 ANNUAL RESULTS
ADVISORIES
This letter to shareholders, 2022 annual highlights and Annual Results report refer to certain non-GAAP measures and metrics commonly used
in the oil and natural gas industry and provides forward-looking information and statements. Further detailed information regarding
these measures is provided in this Annual Results report in “Management’s Discussion and Analysis – NON-GAAP MEASURES” on pages 21
to 23, “Management’s Discussion and Analysis – FORWARD-LOOKING INFORMATION AND STATEMENTS” on page 25.
In addition to the disclosure set out in the Company’s Management's Discussion and Analysis for the period ended December 31, 2022, we
provide certain supplementary disclosure throughout this Annual Results report in respect of certain specified financial measures (as such term
is defined in National Instrument 51-112 – Non-GAAP and Other Financial Measures ) and in respect of certain oil and gas metrics.
TO SHAREHOLDERS
In 2022, Perpetual Energy Inc. (“Perpetual” or “the Company”) delivered strong operational and financial performance, largely propelled by the
improved liquidity and cost structure unlocked by the Rubellite transaction in 2021. Perpetual was well positioned to capitalize on the surge in
North American natural gas prices experienced in the second half of 2022 as natural gas shortages in Europe and energy security concerns
buoyed North American markets. By investing alongside its partner in the continued development of the Wilrich liquids-rich natural gas
resource play at Edson, production was restored to optimize the existing infrastructure. The Company also executed a very successful five well
drilling program at Mannville utilizing multi-lateral horizontal drilling technology, applying learnings from its operations in the Clearwater
play to the Sparky Formation. Strong performance combined with rising global oil prices that continued to rebound from their lows at the
start of the COVID pandemic in the spring of 2020 to deliver attractive economic returns from these heavy oil focused investments.
With a healthy balance sheet, Perpetual’s business plan remains focused on growing production, reserves, funds flow and value. The Company's
strategic priorities for 2023 are to:
1. Maximize Funds Flow and Value of Edson;
2. Maximize Funds Flow and Value of Mannville;
3.
4.
5.
Re-Ignite Active Exploration Program for Tight Oil and Gas;
Advance Technology-Driven Diversifying New Ventures; and
Further Strengthen Balance Sheet and Manage Risk
Perpetual is pleased to welcome Steve Spence to the Board of Directors. We look forward to the technical expertise and guidance that Steve
will bring to the Company’s exploration and development activities and strategic initiatives. The Board of Directors and Management truly
appreciate the commitment of our talented team and the support of our shareholders, service providers and many stakeholders.
SUE RIDDELL ROSE
President and Chief Executive Officer
March 13, 2023
2022 FINANCIAL AND OPERATING HIGHLIGHTS
•
•
•
•
•
•
•
•
(1)
Production for full year 2022 averaged 6,486 boe/d (20% heavy crude oil and NGL), an increase of 20% from 2021.
Production growth was driven by successful core area drilling programs. At East Edson, four (2.0 net) wells were drilled and placed on
production in the fourth quarter of 2021 and six (3.0 net) Wilrich wells were drilled and placed on production during the second half of
2022. Due to high gathering line pressures, one (0.5 net) Notikewin well drilled, completed and tied-in in 2022 was placed on production
in the first quarter of 2023. At Mannville, two (2.0 net) horizontal multi-lateral heavy oil wells were drilled and placed on production late
in the first quarter of 2022 and three (3.0 net) additional multi-lateral heavy oil wells were on production in the third quarter of 2022.
Full year 2022 exploration and development capital spending totaled $31.9 million. The Company also spent $1.6 million on Crown land
purchases at East Edson with its 50% joint interest partner. In addition, close to $1.5 million was spent on asset retirement obligations
("ARO") during the year to abandon wells that had reached their end of life and execute surface lease reclamation activities.
Revenue net of $4.6 million in realized losses on risk management contracts for 2022 was $105.1 million, close to double the $56.0 million
of revenue in 2021 due to the combined effect of higher production and stronger realized commodity prices.
Cash costs were $34.4 million ($14.55/boe), up 23% from 2021 ($2021 - $27.9 million; $14.19/boe) as inflationary pressures were
somewhat offset by efficiency gains related to higher production levels across a largely fixed operating cost base.
Adjusted funds flow recorded for 2022 was $48.5 million ($0.75 per share), up $31.7 million (189%) from $16.7 million ($0.27/share) in
2021. On a unit-of-production basis, adjusted funds flow per boe for 2022 was $20.48/boe, a 141% increase from the prior year period
of $8.51/boe. Net cash flows from operating activities for 2022 were $37.8 million while and net income of $44.4 million ($0.69/share)
was recorded for the year.
As year end 2022, net debt(1) was $56.3 million, down 4% from December 31, 2021, as adjusted funds flow exceeded capital expenditures
and payments related to the retained East Edson royalty obligation during 2022 which were in place until December 31, 2022. Perpetual’s
balance sheet was materially improved with the repayment of the majority of the second lien term loan and bank debt with proceeds from
the Rubellite Transaction in 2021. Strengthening commodity prices and production growth in 2022 drove further improvements to the
balance sheet at year end 2022, with a net debt to trailing twelve months adjusted funds flow ratio(1) of 1.2 times.
Perpetual had available liquidity(1) at December 31, 2022 of $13.9 million, comprised of the $30.0 million borrowing limit of Perpetual’s
first lien credit facility, less current borrowings and letters of credit of $14.9 million and $1.2 million, respectively.
Non-GAAP measure, capital measure, Non-GAAP ratio or supplementary financial measure that does not have any standardized meaning under IFRS and
therefore may not be comparable to similar measures presented by other entities. Refer to the section entitled "Non-GAAP and Other Financial Measures"
contained within these annual results.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 1
FINANCIAL AND OPERATING HIGHLIGHTS
($Cdn thousands except volume and per
share amounts)
Financial
Oil and natural gas revenue
Net income (loss)
Per share – basic(2)
Per share – diluted(2)
Cash flow from operating activities
Adjusted funds flow(1)
Per share(3)
Total assets
Revolving bank debt
Term loan, principal amount
Other liability (undiscounted)
Senior Notes, principal amount
Adjusted working capital (surplus) deficiency(1)
Net debt(1)
Capital expenditures
Exploration and development(1)
Net proceeds on dispositions
Net capital expenditures
Common shares outstanding (thousands)(4)
End of period
Weighted average – basic
Weighted average – diluted
Operating
Daily average production
Conventional natural gas (MMcf/d)
Heavy crude oil (bbl/d)
NGL (bbl/d)
Total (boe/d)(5)
Average realized prices
Realized natural gas price ($/Mcf)(1)
Realized oil price ($/bbl)(1)
Realized NGL price ($/bbl)(1)
Wells drilled – gross (net)
Conventional natural gas
Heavy crude oil
Total
(1)
Three Months Ended
December 31,
Twelve Months Ended
December 31,
2022
2021
Change
2022
2021
Change
28,579
9,264
0.14
0.12
8,749
14,207
0.22
218,273
14,909
2,671
3,342
35,647
21,449
5,669
0.09
0.08
1,624
8,585
0.13
178,851
2,487
2,671
1,387
36,582
33 %
63 %
56 %
50 %
439 %
65 %
66 %
22 %
499 %
— %
141 %
(3) %
109,687
28,503
0.69
0.59
37,830
48,471
0.74
218,273
14,909
2,671
3,342
35,647
60,814
81,121
1.29
1.16
12,815
16,746
0.27
178,851
2,487
2,671
1,387
36,582
(220)
16,143
(101) %
(220)
16,143
56,349
59,270
(5) %
56,349
59,270
115
—
115
65,944
65,883
75,090
33.0
1,126
508
7,138
5.78
71.14
78.36
7,558
53,407
60,965
63,567
63,853
70,873
31.5
714
395
6,359
4.80
73.96
73.44
(98) %
(100) %
(100) %
4 %
3 %
6 %
5 %
58 %
29 %
12 %
20 %
(4) %
7 %
31,909
—
31,909
65,944
64,448
74,798
31.0
898
416
6,486
5.90
90.15
88.05
19,062
49,549
68,611
63,567
62,969
69,989
24.6
963
331
5,389
3.15
57.36
63.24
-/-
-/-
-/-
4.0/2.0
- (-)
4.0/2.0
(100) %
7 (3.5)
5 (5.0)
12 (8.5)
9.0/4.5
5.0/4.0
14.0/8.5
80 %
(65) %
(47) %
(49) %
195 %
189 %
174 %
22 %
499 %
— %
141 %
(3) %
(101) %
(5) %
67 %
(100) %
(53) %
4 %
2 %
7 %
26 %
(7) %
26 %
20 %
87 %
57 %
39 %
(14) %
Non-GAAP measure, capital management measure, non-GAAP ratio or supplementary financial measure that does not have any standardized meaning under
IFRS and therefore may not be comparable to similar measures presented by other entities. Refer to the section entitled “Non-GAAP and Other Financial
Measures” contained within these annual results.
Based on weighted average basic common shares outstanding for the period.
Adjusted funds flows divided by the Company's shares outstanding.
Shares outstanding are net of shares held in trust (2022 – 1.3 million; 2021 – 0.5 million).
Please refer to “Glossary – Volume conversions” on page 23.
(2)
(3)
(4)
(5)
PERPETUAL ENERGY INC.
2022 Annual Results
Page 2
YEAR-END 2022 RESERVES
Reserve Highlights
Reserve additions offset production resulting in a nominal increase in total Company proved plus probable reserves year-over-year of 0.4 Mboe.
Perpetual’s proved plus probable reserves at year-end 2022 are 31.6 MMboe, comprised of 20% crude oil and NGL (2021 – 31.6 MMboe; 19%
crude oil and NGL).
The quality of Perpetual’s assets and positive momentum to drive operational and execution excellence in its core operating areas are
demonstrated by the highlights below:
•
•
•
•
•
•
•
Total proved reserves were 21.2 MMboe at year-end 2022, representing 67% of the Company’s proved plus probable reserves (2021 –
71%).
Proved plus probable producing reserves were 15.7 MMboe at December 31, 2022, representing 50% of total proved plus probable
reserves (2021 – 15.2 MMboe; 48%).
Total proved plus probable reserves in the Mannville area increased by 16% excluding production. Increases in reserves are largely due
to the 2022 Mannville Heavy Oil multi-lateral drill program, gas recompletions, and economic factors.
Perpetual's total exploration and development capital spending of $30.2 million (excluding $1.7 million of land and corporate capital),
resulted in proved developed producing reserves additions of 2.46 MMboe, for finding and development costs(1) of $12.28/boe. Based on
2022 operating netbacks of $29.11/boe, the proved developed producing recycle ratio(1) is 2.4 times. Additions on a proved plus probable
producing basis were 2.81 MMboe, for a finding and development cost(1) of $10.76/boe and a recycle ratio(1) of 2.7 times.
Based on the three consultant average price (McDaniel, GLJ, Sproule) forecasts (the “Consultant Average Price Forecast”) used by
McDaniel, the net present value (“NPV”) of Perpetual’s total proved plus probable reserves (discounted at 10%) before income tax, was
$302.0 million (2021 – $230.5 million). The increase related primarily to the material increase in the independent reserve evaluators’
forecast for natural gas, crude oil and NGL prices at year-end 2022 as compared to the prior year.
All abandonment, decommissioning and reclamation obligations are included in the reserve report, consistent with year-end 2021. All
reserve well decommissioning obligations as well as the additional costs expected to be incurred to abandon and reclaim non-reserve
wells, facilities and pipelines are included.
Based on the Consultant Average Price Forecast, Perpetual’s reserve-based net asset value ("NAV")(1) (discounted at 10%) at year-end
2022 is estimated at $250.1 million ($3.80 per share) as compared to $177.6 million ($2.79 per share) at year-end 2021.
(1)
Non-GAAP measure and ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within these annual results for an explanation
of composition.
Reserves Disclosure
Working interest reserves included herein refer to working interest reserves before royalty deductions. Reserves information is based on an
independent reserves evaluation report prepared by McDaniel & Associates Consultants Ltd. (“McDaniel”) with an effective date of December
31, 2022 (the “McDaniel Report”), and has been prepared in accordance with National Instrument 51-101 (“NI 51-101”) using the Consultant
Average Price Forecast. Complete NI 51-101 reserves disclosure including after-tax reserve values, reserves by major property and abandonment
costs will be included in Perpetual’s Annual Information Form (“AIF”), which, when filed, will be available on the Company’s website at
www.perpetualenergyinc.com and SEDAR at www.sedar.com. Perpetual’s reserves at December 31, 2022 are summarized below:
Working Interest Reserves at December 31, 2022(1)
Proved Producing
Proved Non-Producing
Proved Undeveloped
Total Proved
Probable Producing
Probable Non-Producing
Probable Undeveloped
Total Probable
Total Proved plus Probable
(1)
May not add due to rounding.
Light and Medium
Crude Oil (Mbbl)
Heavy Oil
(Mbbl)
Conventional
Natural Gas
(MMcf)
10
—
—
10
—
—
—
—
10
1,931
249
679
2,859
489
58
581
1,128
3,987
60,665
782
39,887
101,333
12,596
3,978
34,395
50,969
152,302
Natural Gas
Liquids
(Mbbl)
839
12
630
1,480
179
42
542
763
2,244
Oil
Equivalent
(Mboe)
12,891
391
7,957
21,238
2,767
763
6,856
10,386
31,625
PERPETUAL ENERGY INC.
2022 Annual Results
Page 3
Reserves Reconciliation
Working Interest Reserves(1)
Barrels of Oil Equivalent (Mboe)
Opening Balance, December 31, 2021
Extensions and Improved Recovery
Discoveries
Technical Revisions
Acquisitions
Dispositions
Production
Economic Factors
Closing Balance, December 31, 2022
(1)
May not add due to rounding.
Proved
Probable
Proved and
Probable
22,301
1,784
—
(2,383)
751
—
(2,365)
1,151
21,238
9,273
(243)
—
(1,407)
2,524
—
—
239
10,386
31,574
1,540
—
(3,790)
3,275
—
(2,365)
1,389
31,625
Extensions and improved recoveries relate to the booking of 2 (1.0 net) Wilrich undeveloped locations in the southern portion of the East Edson
property, 1 (0.5 net) 2022 Notikewin drill at East Edson, and development of 2 (2.0 net) unbooked Mannville Heavy Oil locations through the
2022 multi-lateral drilling program.
The East Edson property recorded a negative technical revision in the conventional natural gas and natural gas liquids categories due to a length
adjustment of the type curve for 9 (4.2 net) undeveloped locations and updated type curve analysis on an additional 12 (5.7 net) undeveloped
locations. The 2022 East Edson Wilrich drilling program delivered as expected on four of the six (2.0 net) previously booked Wilrich locations.
The remaining two (1.0 net) 2022 East Edson Wilrich locations have underperformed expectations and contributed to a negative technical
revision for the property. A review of the operational challenges and marginal economics of the Panny field in the Eastern District was conducted.
The review resulted in a de-recognition of proven non-producing reserves which contributed to the negative conventional natural gas technical
revision.
Lands acquired in East Edson area during 2022 added 7 (3.4 net) additional future drilling locations that were recognized as proved and probable
undeveloped reserves.
Economic factors restored a portion of the technical revision due to the current reconciliation methodology. When the year end 2022 forecasts
are evaluated at the Jan 1, 2022 Consultant Average price forecast, a portion of the forecast future production and reserves are terminated
prematurely. The truncated reserves are then assigned to economics factors when evaluated at the Jan 1, 2023 Consultant Average price
forecast.
The table below summarizes the future development capital ("FDC") estimated by McDaniel by play type to bring proved plus probable non-
producing and undeveloped reserves to production.
Future Development Capital(1)
($ millions)
Eastern Alberta Shallow Gas
Mannville Heavy Oil
East Edson Wilrich
Total
(1)
May not add due to rounding.
2023
0.0
2.3
17.7
20.0
2024
0.3
4.5
19.9
24.7
2025
0.3
5.2
17.2
22.8
2026
0.3
5.8
17.9
23.9
2027 Remainder
0.0
0.0
0.8
0.0
0.0
12.4
Total
0.9
17.8
85.9
12.4
0.8
104.6
The McDaniel Report estimates that FDC of $104.6 million will be required over the life of the Company's proved plus probable reserves. Proved
plus probable reserve forecast FDC increased by $29.3 million (39%) from $75.3 million at December 31, 2021.
FDC for the East Edson property increased by $16.0 million in the proved category and $31.8 million in the proved and probable category and
is attributable to the increased number of undeveloped locations as well as increased per well costs. At year end 2022, proved plus probable
locations for 30 (14.1 net) horizontal conventional natural gas wells targeting the Wilrich at East Edson is up from 27 (12.7 net) at year end
2021.
At the Mannville property, 13 (13.0 net) horizontal heavy crude oil wells are booked as undeveloped, down from 16 (16.0 net) at year end 2021.
Future capital costs also include recompletions of 14 (14.0 net) conventional natural gas wells included in Perpetual's proved plus probable
reserves.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 4
RESERVE LIFE INDEX
Perpetual’s proved plus probable reserves to production ratio, also referred to as reserve life index (“RLI”), was 12.5 years at year-end 2022,
while the proved RLI was 8.8 years, based upon the 2022 production estimates in the McDaniel Report. The following table summarizes
Perpetual’s historical calculated RLI.
Reserve Life Index(1)
Year-end
Total Proved
Total Proved plus Probable
(1)
2021
9.1
12.2
Calculated as year-end reserves divided by year one production estimate from the McDaniel Report.
2022
8.8
12.5
2020
10.9
14.5
2019
13.4
21.5
2018
13.1
19.9
NET PRESENT VALUE OF RESERVES SUMMARY
Perpetual’s heavy crude oil, conventional natural gas, and NGL reserves were evaluated by McDaniel using the Consultant Average Price Forecast
effective January 1, 2023 and include the forecasted impact of the Company’s market diversification contract, but prior to provision for financial
oil and natural gas price hedges, foreign exchange contracts, income taxes, interest, debt service charges and general and administrative
expenses. The following table summarizes the NPV of future revenue from reserves at December 31, 2022, assuming various discount rates:
NPV of Reserves, before income tax(1)(2)(3)
Discounted at
($ millions except as noted)
Undiscounted
5%
10%
15%
20%
174
11
132
317
61
11
154
227
543
152
9
91
251
40
6
95
141
392
132
7
66
206
28
4
64
96
302
118
6
50
174
21
3
46
71
245
107
5
39
151
17
2
35
55
206
Unit Value Discounted
at 10%/Year
($/boe)(4)
12.91
20.09
9.31
11.61
11.86
6.53
10.89
10.84
11.35
Proved Producing
Proved Non-Producing
Proved Undeveloped
Total Proved
Probable Producing
Probable Non-Producing
Probable Undeveloped
Total Probable
Total Proved plus Probable
(1)
(2)
(3)
(4)
January 1, 2023 Consultant Average price forecast.
Inclusive of the East Edson royalty obligation, carbon tax, asset retirement obligations for sites not assigned reserves, and natural gas market diversification
contracts.
May not add due to rounding.
The unit values are based on net reserve volumes.
McDaniel’s NPV10 estimate of Perpetual’s total proved plus probable reserves at year-end 2022 was $302.0 million, up 31% from $230.5 million
at year-end 2021. The increase related primarily to the material increase in the independent reserve evaluators’ forecast for crude oil prices at
year-end 2022 as compared to the prior year. At a 10% discount factor, total proved reserves account for 68% (2021 – 68%) of the proved
plus probable value. Proved plus probable producing reserves represent 53% (2021 – 47%) of the total proved plus probable value (discounted
at 10%) as obligations for non-producing wells, facilities and pipelines, cabon tax, and forecast corporate marketing adjustments reduce the
value of the developed producing reserves.
FAIR MARKET VALUE OF UNDEVELOPED LAND
Perpetual held 163,953 net undeveloped acres of land as at December 31, 2022, including 84,002 net undeveloped acres of oil sands leases.
Undeveloped acres refers to land where there are not any existing wells within the rights associated with those lands and includes 49,765 net
acres of undeveloped land assigned value by an independent third party at year end 2022. The estimate of the fair market value of the
Company’s undeveloped acreage was prepared by Seaton-Jordan & Associates Ltd. (“Seaton-Jordan”) and is based on past Crown land sale
activity, adjusted for tenure and other considerations. No undeveloped land value was assigned where proved and probable undeveloped
reserves have been booked. The fair market value of Perpetual’s undeveloped land at year-end 2022 is estimated by Seaton Jordan at $4.4
million.
NET ASSET VALUE
The following NAV table shows what is normally referred to as a “produce-out” NAV calculation under which the Company’s reserves would be
produced at forecast future prices and costs. The value is a snapshot in time and is based on various assumptions including commodity prices
and foreign exchange rates that vary over time. It should not be assumed that the NAV represents the fair market value of Perpetual’s shares.
The calculations below do not reflect the value of the Company’s prospect inventory to the extent that the prospects are not recognized within
the NI 51-101 compliant reserve assessment, except as they are valued through the estimate of the fair market value of undeveloped land.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 5
Pre-tax NAV at December 31, 2022(1)(5)
($ millions, except as noted)
Total Proved plus Probable Reserves(2)
Fair market value of undeveloped lands(3)
Net debt(5)
NAV
Common shares outstanding (million)(4)
NAV per share ($/share)(5)
Undiscounted
543.4
4.4
(56.3)
491.5
65.9
7.46
Financial information is per Perpetual’s 2022 audited consolidated financial statements.
Reserve values per McDaniel Report as at December 31, 2022, including adjustments for natural gas market diversification contracts and carbon tax. All
abandonment and reclamation obligations, including future abandonment and reclamation costs for pipelines and facilities and non-reserve wells, are included
in the McDaniel Report.
Independent third-party estimate; excludes undeveloped land in West Central Alberta with reserves assigned.
Shares outstanding are net of shares held in trust.
Non-GAAP measure, ratio or supplementary financial measure that does not have any standardized meaning under IFRS and therefore may not be comparable
to similar measures presented by other entities. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within these annual results.
10%
302.0
4.4
(56.3)
250.1
65.9
3.80
5%
392.2
4.4
(56.3)
340.3
65.9
5.16
15%
244.6
4.4
(56.3)
192.7
65.9
2.92
(1)
(2)
(3)
(4)
(5)
The above evaluation includes FDC expectations required to bring undeveloped reserves on production, as recognized by McDaniel, that meet
the criteria for booking under NI 51-101. The fair market value of undeveloped land does not reflect the value of the Company’s extensive
prospect inventory which is anticipated to be converted into reserves and production over time through future capital investment.
2023 OUTLOOK
Perpetual's Board of Directors has approved exploration and development capital spending(1) of $25 - $32 million for full year 2023, including
$8 to $10 million to be spent in the first quarter to drill two (1.0 net) wells at East Edson and related pipeline infrastructure. The remainder of
the 2023 capital program is expected to be concentrated in the third quarter of 2023 and focused primarily at East Edson. The 2023 capital
program is forecast to be fully funded from the Company's credit facility and adjusted funds flow(1)\.
Drilling commenced on a two well pad (1.0 net) at East Edson in late February, targeting development of the Wilrich formation. During the
second half of 2023, Perpetual is planning to participate at its 50% working interest in an East Edson drilling program to drill, complete, equip
and tie-in an additional four to six (2.0 to 3.0 net) horizontal wells in the Wilrich formation to fill the West Wolf gas plant in order to maximize
natural gas and NGL sales through next winter.
At Mannville in Eastern Alberta, Perpetual continues to monitor performance of the horizontal, multi-lateral wells drilled in 2022 targeting heavy
oil in the Sparky formation. Planning activities are underway to drill one follow-up multi-lateral well in the second half of 2023. Perpetual will
also continue to focus on waterflood optimization and battery consolidation projects as well as shallow gas recompletions and abandonment
and reclamation activities at the Mannville property.
Exploration and development capital spending for Perpetual for full year 2023 is expected to be $25 to $32 million, with $8 to $10 million to be
spent in the first quarter. The table below summarizes anticipated capital spending and drilling activities for Perpetual for the first quarter and
full year of 2023.
Q1 2023
# of wells
2023
# of wells
West Central(1)
Eastern Alberta
Total(2)
($ millions)
$22 - $28
$3 - 4
$25 - $32
Oil-based mud load fluid is recycled for future drilling operations to the extent possible, or sold and credited back to drilling capital.
Excludes abandonment and reclamation spending and acquisitions or land expenditures, if any.
(gross/net)
2 / 1.0
—
2 / 1.0
($ millions)
$8 - $10
$—
$8 - $10
(1)
(2)
(gross/net)
6 - 8 / 3.0 - 4.0
1 / 1.0
7 - 9 / 4.0 - 5.0
Total Company average production is expected to be stable year over year at 6,400 to 6,600 boe/d (22% oil and NGL) in 2023. Cash costs(1)
are expected to be similar to 2022 levels to average between $16 and $18 per boe for the calendar year.
2023 Guidance assumptions are as follows:
Exploration and development capital expenditures(1) ($ millions)
Cash costs(1) ($/boe)
Royalties (% of revenue)(1)
Average daily production (boe/d)
Production mix (%)
2023 Guidance
$25 - $32
$16 - $18
16 - 18%
6,400 - 6,600
22% oil and NGL
Non-GAAP measure, capital management measure, Non-GAAP ratio or supplementary financial measure that does not have any standardized meaning under
IFRS and therefore may not be comparable to similar measures presented by other entities. Refer to the section entitled “Non-GAAP and Other Financial
Measures” contained within these annual results.
(1)
Perpetual will continue addressing asset retirement obligations ("ARO"), with total abandonment and reclamation expenditures of approximately
$1.5 to 2.0 million planned for 2023. This exceeds the Company’s annual area-based closure Alberta Energy Regulatory ("AER") mandatory
spending requirement of $1.35 million.
(1)
Non-GAAP measure and ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within these annual results for an explanation of
composition
PERPETUAL ENERGY INC.
2022 Annual Results
Page 6
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following is management’s discussion and analysis (“MD&A”) of Perpetual Energy Inc.’s (“Perpetual”, the “Company” or the “Corporation”)
operating and financial results for the year ended December 31, 2022, as well as information and estimates concerning the Corporation’s
future outlook based on currently available information. This discussion should be read in conjunction with the Corporation’s audited
consolidated financial statements and accompanying notes for the years ended December 31, 2022 and 2021. The Corporation’s consolidated
financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") which require publicly
accountable enterprises to prepare their financial statements using International Financial Reporting Standards (“IFRS”). The date of this
MD&A is March 2, 2023.
This MD&A contains certain specified financial measures that are not recognized by GAAP and used by management to evaluate the
performance of the Corporation and its business. Since certain specified financial measures may not have a standardized meaning, securities
regulations require that specified financial measures are clearly defined, qualified and, where required, reconciled with their nearest GAAP
measure. See "Non-GAAP and Other Financial Measures" for further information on the definition, calculation and reconciliation of these
measures. This MD&A also contains forward-looking information. See "Forward-Looking Information". Readers are also referred to the other
advisory sections in this MD&A for additional information.
NATURE OF BUSINESS: Perpetual is an oil and natural gas exploration, production and marketing company headquartered in Calgary,
Alberta. Additional information on Perpetual, including the most recently filed Annual Information Form, can be accessed at www.sedar.com or
from the Corporation’s website at www.perpetualenergyinc.com.
FOURTH QUARTER AND ANNUAL 2022 OPERATIONAL AND FINANCIAL HIGHLIGHTS
•
•
•
•
•
•
•
•
Fourth quarter average production was 7,138 boe/d, up 12% from the comparative period of 2021 (Q4 2021 – 6,359 boe/d) and up
21% quarter over quarter (Q3 2022 – 5,882 boe/d) and within of the guidance to exceed 7,000 boe/d in the fourth quarter of 2022.
Production for full year 2022 averaged 6,486 boe/d (20% heavy crude oil and NGL), an increase of 20% from 5,389 boe/d (24%
heavy crude oil and NGL) in 2021. Production growth was driven by successful core area drilling programs. At East Edson, four (2.0
net) wells were drilled and placed on production in the fourth quarter of 2021 and six (3.0 net) Wilrich wells were drilled and placed
on production during the second half of 2022. Due to high gathering line pressures, one (0.5 net) Notikewin well drilled, completed,
and tied-in in 2022 was placed on production in the first quarter of 2023. At Mannville, two (2.0 net) horizontal multi-lateral heavy
oil wells were drilled and placed on production late in the first quarter of 2022 and three (3.0 net) new horizontal, multi-lateral
heavy oil wells were on production in the third quarter of 2022.
Perpetual’s exploration and development spending(2) in the fourth quarter of 2022 was minimal as both core areas completed a
majority of the capital programs in the third quarter of 2022. Spending at East Edson in the fourth quarter was $1.3 million and
included the remaining costs to test and place on production the seven (3.5 net) horizontal wells that were drilled during the third
quarter of 2022. At Mannville in Eastern Alberta, the $1.3 million of capital recovered during the fourth quarter was related to the
recovery of oil based mud ("OBM") load fluid from the three (3.0 net) wells drilled during the third quarter of 2022. Full year 2022
exploration and development capital spending totaled $31.9 million, up from $19.1 million in 2021. In 2022, the Company spent
$1.6 million on Crown land purchases at East Edson with its 50% joint interest partner. In addition, close to $1.5 million was spent
on asset retirement obligations ("ARO") during the year to abandon wells that had reached their end of life and execute surface
lease reclamation activities, including $1.2 million of ARO spending in the fourth quarter. Four reclamation certificates were received
in 2022.
Oil and natural gas revenue for the fourth quarter of 2022 was $28.6 million, 33% higher than revenue in the comparative period of
2021 due to significantly higher reference prices for all products and the 12% increase in production. Fourth quarter revenue
increased 25% from the third quarter of 2022 as production increased 21% and realized prices increased 3% on higher gas prices.
Realized prices after gains on risk management contracts(2) decreased 5% relative to the third quarter. During the period there were
$0.1 million of realized gains on risk management contracts, as compared to a realized gain of $2.1 million in third quarter. Revenue
net of $4.6 million in realized losses on risk management contracts for full year 2022 was $105.1 million, close to double the $56.0
million of revenue in 2021 (net of $4.8 million of realized losses on risk management contracts) due to the combined effect of
higher production and stronger realized commodity prices.
Adjusted funds flow(2) in the fourth quarter of 2022 was $14.2 million ($0.22/share), up $5.6 million (65%) from the prior year
period of $8.6 million ($0.13/share). Adjusted funds flow on a unit-of-production basis was $21.63/boe in the fourth quarter of
2022, a 47% increase from the prior year period of $14.67/boe, driven by the increase in commodity prices and higher production
volumes. Adjusted funds flow recorded for 2022 was $48.5 million ($0.75 per share), up $31.7 million (189%) from $16.7 million
($0.27/share) in 2021.
Net cash flows from operating activities in the fourth quarter of 2022 were $11.2 million, up $9.6 million (592%) from the
comparative period of 2021 (Q4 2021 – $1.6 million). The increase was due to higher realized prices for all products and the 12%
increase in production, partially offset by higher cash costs in all categories except general and administrative (“G&A”) costs which
were lower on higher recoveries related to overheads and costs recovered under the Management and Operating Services
Agreement (the “MSA”) with Rubellite. Net cash flows from operating activities for 2022 were $37.8 million (2021 - $12.8 million).
Net income for the fourth quarter of 2022 was $9.3 million (Q4 2021 – $5.7 million). Net income in the fourth quarter of 2022
increased due to the same reasons that impacted adjusted fund flows and the $2.0 million unrealized gain on risk management
contracts. Net income in 2022 was $44.4 million ($0.69/share) as compared to $81.1 million ($1.29/share) in 2021.
Cash costs(2) were $9.1 million or $13.86/boe in the fourth quarter of 2022, up 8% (down 4% on a unit-of-production basis) from
the comparative period (Q4 2021 – $8.4 million or $14.41/boe). The increase was due to the impact of higher production, partially
offset by lower G&A costs due to higher recoveries. Cash costs were $34.4 million ($14.55/boe) in 2022, up 23% from 2021 ($2021
- $27.9 million; $14.19/boe) as inflationary pressures were somewhat offset by efficiency gains related to higher production levels
across a largely fixed operating cost base.
As at December 31, 2022, net debt(2) was $56.3 million, a decrease of 4% from December 31, 2021, as adjusted funds flow
exceeded capital expenditures and payments related to the retained East Edson royalty obligations during 2022. As compared to the
third quarter of 2022, net debt decreased $9.8 million (15%) as adjusted funds flow exceeded capital expenditures during the
fourth quarter. The majority of Perpetual's 2022 capital spending at East Edson and Mannville was executed during the third
quarter, with production additions gradually contributing to sales volumes by late September. By December 31, 2022, higher sales
volumes combined with limited additional capital spending during the fourth quarter generated free funds flows(2) which was applied
to reduce bank debt.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 7
•
Perpetual had available liquidity (see “Capital Management”) at December 31, 2022 of $13.9 million, comprised of the $30.0 million
borrowing limit of Perpetual’s first lien credit facility (“Credit Facility Borrowing Limit”) Credit Facility Borrowing Limit, less current
borrowings and letters of credit of $14.9 million and $1.2 million, respectively.
(1)
(2)
See "Fourth Quarter Financial and Operating - Production” section of this MD&A for details of product components that comprise Perpetual’s boe production.
Non-GAAP measure and ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of composition.
2023 OUTLOOK
Perpetual's Board of Directors has approved exploration and development capital spending(1) of $25 - $32 million for full year 2023, including
$8 to $10 million to be spent in the first quarter to drill two (1.0 net) wells at East Edson and related pipeline infrastructure. The remainder of
the 2023 capital program is expected to be concentrated in the third quarter of 2023 and focused primarily at East Edson. The 2023 capital
program is forecast to be fully funded from the Company's credit facility and adjusted funds flow(1).
Drilling commenced on a two well pad (1.0 net) at East Edson in late February, targeting development of the Wilrich formation. During the
second half of 2023, Perpetual is planning to participate at its 50% working interest in an East Edson drilling program to drill, complete, equip
and tie-in an additional four to six (2.0 to 3.0 net) horizontal wells in the Wilrich formation to fill the West Wolf gas plant in order to maximize
natural gas and NGL sales through next winter.
At Mannville in Eastern Alberta, Perpetual continues to monitor performance of the horizontal, multi-lateral wells drilled in 2022 targeting
heavy oil in the Sparky formation. Planning activities are underway to drill one follow-up multi-lateral well in the second half of 2023.
Perpetual will also continue to focus on waterflood optimization and battery consolidation projects as well as shallow gas recompletions and
abandonment and reclamation activities at the Mannville property.
Exploration and development capital spending for Perpetual for full year 2023 is expected to be $25 to $32 million, with $8 to $10 million to
be spent in the first quarter. The table below summarizes anticipated capital spending and drilling activities for Perpetual for the first quarter
and full year of 2023.
West Central
Eastern Alberta(1)
Total(2)
Q1 2023
($ millions)
$8 - $10
$—
$8 - $10
# of wells
(gross/net)
2 / 1.0
—
2 / 1.0
2023
($ millions)
$22 - $28
$3 - 4
$25 - $32
# of wells
(gross/net)
6 - 8 / 3.0 - 4.0
1 / 1.0
7 - 9 / 4.0 - 5.0
(1)
(2)
Oil-based mud load fluid is recycled for future drilling operations to the extent possible, or sold and credited back to drilling capital.
Excludes abandonment and reclamation spending and acquisitions or land expenditures, if any.
Total Company average production is expected to be stable year over year at 6,400 to 6,600 boe/d (22% oil and NGL) in 2023. Cash costs
(see "Non-GAAP and Other Financial Measures") are expected to be similar to 2022 levels to average between $16 and $18 per boe for the
calendar year.
2023 Guidance assumptions are as follows:
Exploration and development expenditures(1)(2)($ millions)
Cash costs(1) ($/boe)
Royalties (% of revenue)(1)
Average daily production (boe/d)
Production mix (%)
2023 Guidance
$25 - $32
$16 - $18
16 - 18%
6,400 - 6,600
22% oil and NGL
(1)
(2)
Non-GAAP measure and ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of
composition.
Excludes abandonment and reclamation spending and acquisitions or land expenditures, if any.
Perpetual will continue addressing asset retirement obligations ("ARO"), with total abandonment and reclamation expenditures of
approximately $1.5 to 2.0 million planned for 2023. This exceeds the Company’s annual area-based closure Alberta Energy Regulatory
("AER") mandatory spending requirement of $1.4 million.
(1)
Non-GAAP measure and ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of
composition.
FOURTH QUARTER FINANCIAL AND OPERATING RESULTS
Cash Flow used in Investing Activities, Capital Expenditures, Acquisitions and Dispositions
Cash flow used in investing activities for the three and twelve months ended December 31, 2022 was $6.8 million (Q4 2021 - $49.2 million)
and $40.9 million (2021 - $43.7 million). In addition to cash flow used in investing activities, Perpetual uses capital expenditures to measure
its capital investments compared to the Company’s annual budgeted expenditures, which excludes acquisition and disposition activities.
“Capital expenditures” is not a standardized measure and, therefore, may not be comparable with the calculation of similar measures by other
entities.
For reconciliation of cash flow used in investing activities to capital expenditures, refer to the section entitled “Non-GAAP and Other Financial
Measures” contained within this MD&A.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 8
The following table summarizes capital spending for both property, plant and equipment assets and exploration and evaluation assets,
excluding non-cash items:
($ thousands)
Exploration and development
Corporate assets
Capital expenditures
Exploration and development spending by area
Three months ended December 31,
Twelve months ended December 31,
2022
8
107
115
2021
7,558
—
7,558
2022
31,772
137
31,909
2021
19,060
2
19,062
($ thousands)
West Central
Eastern Alberta
Total
Wells drilled by area
(gross/net)
West Central
Eastern Alberta
Total
Three months ended December 31,
Twelve months ended December 31,
2022
1,283
(1,275)
8
2021
7,382
176
7,558
2022
18,977
12,795
31,772
2021
15,522
3,538
19,060
Three months ended December 31,
Twelve months ended December 31,
2022
-/-
-/-
-/-
2021
4.0/2.0
-/-
4.0/2.0
2022
7/3.5
5/5.0
12/8.5
2021
9/4.5
5/4.0
14/8.5
Perpetual’s exploration and development capital spending in 2022 was $31.8 million, of which $19.0 million was attributable to the East Edson
drilling program, which restarted at the end of the second quarter and resulted in seven (3.5 net) wells drilled, completed, equipped, tied-in
and six (3.0 net) placed on production. Due to high line pressures, the remaining one (0.5 net) well was placed on production in the first
quarter of 2023. At Mannville in Eastern Alberta, the Company spent $12.8 million to drill, complete and place on production five (5.0 net)
horizontal, multi-lateral wells, targeting heavy oil in the Sparky formation during 2022. The Company also spent $1.6 million on Crown land
purchases at East Edson with its 50% joint interest partner during 2022.
Perpetual’s exploration and development spending in the fourth quarter of 2022 was minimal, of which $1.3 million was attributable to the
East Edson drilling program. Costs in the fourth quarter were remaining costs to complete, test and place on production the three (1.5 net)
horizontal wells that were drilled during the third quarter of 2022. At Mannville in Eastern Alberta, the $1.3 million of capital recovered during
the fourth quarter was related to the recovery of OBM load fluid from the three (3.0 net) wells drilled during the third quarter of 2022.
Recoveries of OBM are not recorded as sales production as the OBM is recycled for future drilling operations to the extent possible, or sold
and credited back to drilling capital. The Company also spent $0.3 million on Crown land purchases at East Edson with its 50% joint interest
partner in the fourth quarter of 2022.
Acquisitions and Dispositions
There were no acquisitions or dispositions during 2022.
During the first quarter of 2021, Perpetual participated for its 50% working interest in the acquisition of certain undeveloped lands, wells,
pipelines and gross overriding royalties from a third party in the East Edson core area, for net consideration of $0.6 million. Dispositions
during the first quarter of 2021 also included the sale of non-operated equipment for net proceeds to Perpetual of $0.2 million.
On September 3, 2021, the Company closed the sale of the Clearwater assets in Eastern Alberta (the “Clearwater Assets”) to Rubellite for total
consideration of $65.5 million, including $53.6 million in promissory notes, the assumption by Rubellite of $5.8 million in promissory notes due
to 197Co, the return to Perpetual of 8.2 million Perpetual common shares valued at $2.8 million, 0.7 million Rubellite common shares (“AIMCo
Bonus Shares”) valued at $1.4 million, and the issuance of Rubellite Share Purchase Warrants to purchase 4.0 million Rubellite common
shares valued at $2.0 million (the “Rubellite Transaction”). The promissory notes related to the Rubellite Transaction were repaid on October
5, 2021.
Expenditures on decommissioning obligations
During the fourth quarter of 2022, Perpetual executed $1.2 million (Q4 2021 – $0.6 million) of abandonment and reclamation projects, of
which $0.1 million (Q4 2021 - $0.2 million) was funded by SRP. SRP funding is presented on the consolidated statements of income and
comprehensive income as other income. There were 3 reclamation certificates received from the Alberta Energy Regulator (“AER”) during the
fourth quarter of 2022 and a total of 4 for the year (2021 – 15 reclamation certificates). Total abandonment and reclamation expenditures of
$1.5 million were completed in 2022, with $0.3 million funded through the SRP. Abandonment and reclamation spending eventually leads to
the cessation of associated property tax and surface lease expenses, reducing future operating costs. Subsequent to year-end, one additional
reclamation certificate was received from the AER.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 9
Production
Production
Conventional natural gas (Mcf/d)(1)
Conventional heavy crude oil (bbl/d)(2)
NGL (bbl/d)(3)
Total production (boe/d)
Three months ended December 31,
Twelve months ended December 31,
2022
33,024
1,126
508
7,138
2021
31,500
714
395
6,359
2022
31,033
898
416
6,486
2021
24,568
963
331
5,389
(1)
(2)
(3)
Conventional natural gas production yielded a heat content of 1.17 GJ/Mcf for the three months ended December 31, 2022 (Q4 2021 – 1.17), resulting in
higher realized natural gas prices on a $/Mcf basis.
Primarily from Eastern Alberta.
Primarily from West Central which produces liquids-rich conventional natural gas.
Production by core area
West Central
Eastern Alberta
Total production (boe/d)
Three months ended December 31,
Twelve months ended December 31,
2022
5,493
1,645
7,138
2021
5,178
1,181
6,359
2022
5,149
1,337
6,486
2021
4,008
1,381
5,389
Fourth quarter production averaged 7,138 boe/d, up 12% from 6,359 boe/d in the comparative period of 2021. In the fourth quarter of 2022,
the production mix was comprised of 77% conventional natural gas and 23% conventional heavy crude oil and NGL, as compared to 83% of
conventional natural gas and 17% conventional heavy crude oil and NGL in the fourth quarter of 2021. Production levels steadily increased
during the fourth quarter of 2022 as six (3.0 net) Edson wells were added late in the third quarter of 2022 and five (5.0 net) Mannville wells
were brought on production during the second and third quarters of 2022.
Fourth quarter conventional natural gas production averaged 33.0 MMcf/d, an increase of 5% from 31.5 MMcf/d in the comparative period of
2021 with production additions from six (3.0 net) of the new East Edson liquids-rich gas wells beginning to contribute to production midway
through the second half of 2022, partially offset by natural declines.
Conventional heavy crude oil production averaged 1,126 bbl/d which was 58% higher than the fourth quarter of 2021. The increase year-
over-year was primarily due to the five (5.0 net) new multi-lateral heavy oil wells drilled at Mannville and brought on production through the
second and third quarters of 2022.
Fourth quarter NGL production was 508 bbl/d, 29% higher than the comparative period of 2021. The increase in NGL production is closely tied
to higher conventional natural gas production at East Edson, where NGL yields were 17.0 bbl per MMcf in the fourth quarter of 2022 (Q4 2021
– 12.5 bbl per MMcf). Perpetual’s average NGL sales composition for the fourth quarter of 2022 consisted of 55% condensate, slightly higher
than the prior year period when condensate represented 53% of total NGL production as additional capital was spent during the second half
of 2022 on facility optimization to reduce emissions and increase NGL recoveries.
For the twelve months ended December 31, 2022, production increased 20% to 6,486 boe/d compared to 5,389 boe/d in the comparative
2021 period. Production levels steadily increased as new wells were brought on production in both core areas, partially offset by the
disposition of the Clearwater Assets in the third quarter of 2021 and natural declines.
Oil and Natural Gas Revenue
($ thousands, except as noted)
Oil and natural gas revenue
Natural gas
Oil
NGL
Oil and natural gas revenue
Three months ended December 31,
Twelve months ended December 31,
2022
17,546
7,368
3,665
28,579
2021
13,914
4,863
2,672
21,449
2022
66,781
29,538
13,368
109,687
2021
33,012
20,172
7,630
60,814
PERPETUAL ENERGY INC.
2022 Annual Results
Page 10
Average Benchmark Prices
NYMEX Daily Index (US$/MMBtu)
AECO 5A Daily Index ($/GJ)
AECO 5A Daily Index ($/Mcf)(1)
West Texas Intermediate (“WTI”) (US$/bbl)
Exchange rate (US$/CAD$)
West Texas Intermediate (“WTI”) (CAD$/bbl)
Western Canadian Select (“WCS”) (CAD$/bbl)
WCS differential to WTI (US$/bbl)
Perpetual Average Realized Prices(2)
Natural gas ($/Mcf)
Oil ($/bbl)
NGL ($/bbl)
Average realized price ($/boe)
Three months ended December 31,
Twelve months ended December 31,
2022
5.59
4.94
5.21
82.64
1.36
112.39
77.33
(25.70)
5.78
71.14
78.36
43.52
2021
5.83
4.18
4.41
77.13
1.26
97.18
78.65
(14.63)
4.80
73.96
73.44
36.66
2022
6.47
5.06
5.34
94.22
1.30
122.49
98.49
(18.23)
5.90
90.15
88.05
46.33
2021
3.84
3.26
3.44
67.90
1.25
84.88
68.76
(13.04)
3.15
57.36
63.24
30.92
(1)
(2)
Converted from $/GJ using a standard energy conversion rate of 1.06 GJ:1 Mcf.
Non-GAAP ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of composition.
Perpetual’s oil and natural gas revenue for the three months ended December 31, 2022 of $28.6 million was a 33% increase from $21.4
million in the comparative period due to the 12% increase in average production combined with the impact of higher reference prices for all
products. Oil and natural gas revenue for the twelve months ended December 31, 2022 of $109.7 million was 80% higher than 2021, due to
higher reference prices and the 20% increase in average production.
Natural gas revenue of $17.5 million in the fourth quarter of 2022 comprised 61% (Q4 2021 – 65%) of total revenue while natural gas
production was 77% (Q4 2021 – 83%) of total production. Natural gas revenue was 26% higher than the comparative period (Q4 2021 –
$13.9 million), reflecting the combined impact of higher AECO Daily Index prices and the 5% increase in conventional natural gas production
volumes driven by drilling activity at East Edson. For the twelve months ended December 31, 2022, natural gas revenue was 102% higher
than the prior year, as a result of the 26% increase in average production and higher AECO gas prices.
Oil revenue of $7.4 million represented 26% (Q4 2021 –23%) of total revenue while conventional heavy crude oil production was 16% (Q4
2021 – 11%) of total production. Oil revenue was 52% higher than the fourth quarter of 2021, as a result of the 58% increase in heavy crude
oil production. Compared to the fourth quarter of 2021, the WCS average price of $77.33/bbl (Q4 2021 - $78.65/bbl) was down slightly as the
increase in WTI coupled with the increase in the US$/CAD$ exchange rate was offset by the widening WCS differential on WTI oil prices.
Perpetual's realized oil prices further reflects a price offset for quality which averaged $6.19/bbl during the quarter (Q4 2021 - $8.34/bbl). For
the twelve months ended December 31, 2022, oil revenue was 46% higher compared to the prior year, as a result of higher reference prices,
partially offset by the widening differential between WCS and WTI oil prices and the 7% decline in average production as result of the sale of
the Clearwater Assets.
NGL revenue for the fourth quarter of 2022 of $3.7 million represented 13% (Q4 2021 – 12%) of total revenue while NGL production was 7%
(Q4 2021 – 6%) of total production. NGL revenue increased 37% from the comparative period, reflecting the 29% increase in NGL production
which was driven by both higher gas production and the 23% increase in NGL yield at East Edson as well as the increase in NGL component
prices compared to the prior year period, in step with the rise in WTI oil prices. For the twelve months ended December 31, 2022, NGL
revenue was 75% higher than the prior year, as a result of the 26% increase in average production and higher reference prices.
Risk Management Contracts
The Company uses financial derivatives, physical delivery contracts and market diversification strategies to manage commodity price risk.
Derivative contracts are put in place to manage fluctuations in commodity prices, protecting Perpetual's cash flows from potential volatility.
The Company's market diversification strategies balance pricing exposure over multiple markets and are put in place to mitigate market and
delivery point risks and dislocations. As a result, Perpetual's realized prices deviate from the index prices. The Company uses “average
realized prices after risk management contracts” which is not a standardized measure, and therefore may not be comparable with the
calculation of similar measures by other entities. The measure is used by management to calculate the Company’s net realized commodity
prices, taking into account the monthly settlements of physical and financial crude oil and natural gas forward sales, collars, basis differentials
and forward foreign exchange sales.
($ thousands, except as noted)
Unrealized gain (loss) on foreign exchange contracts
Unrealized gain (loss) on natural gas contracts
Unrealized gain (loss) on oil contracts
Unrealized gain (loss) on risk management contracts
Realized gain (loss) on natural gas contracts
Realized gain (loss) on oil contracts
Realized gain (loss) on risk management contracts
Change in fair value of risk management contracts
Three months ended December 31,
Twelve months ended December 31,
2022
218
1,412
337
1,967
374
(225)
149
2,116
2021
—
1,551
(249)
1,302
1
(62)
(61)
1,241
2022
30
2,159
1,298
3,487
(491)
(4,129)
(4,620)
(1,133)
2021
—
4,033
(300)
3,733
(4,748)
(62)
(4,810)
(1,077)
PERPETUAL ENERGY INC.
2022 Annual Results
Page 11
The following table calculates average realized prices after risk management contracts, which is not a standardized measure:
Realized gain (loss) on risk management contracts (1)
Realized gain (loss) on natural gas contracts ($/Mcf)
Realized loss on oil contracts ($/bbl)
Realized gain (loss) on risk management contracts ($/boe)
Average realized prices after risk management contracts(1)
Natural gas ($/Mcf)
Oil ($/bbl)
NGL ($/bbl)
Average realized price ($/boe)
Three months ended December 31,
Twelve months ended December 31,
2022
0.12
(2.17)
0.21
5.90
68.97
78.36
43.73
2021
(0.02)
—
(0.10)
4.80
73.96
73.44
36.56
2022
(0.04)
(12.60)
(1.96)
5.86
77.55
88.05
44.37
2021
(0.54)
—
(2.45)
3.15
57.36
63.24
28.47
(1)
Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of composition.
Realized gains on risk management contracts totaled $0.1 million for the fourth quarter of 2022, compared to losses of $0.1 million for the
comparative period of 2021. Realized losses on risk management contracts totaled $4.6 million for the twelve months of 2022 (2021 - $4.8
million realized loss).
Unrealized gains on risk management contracts were $2.0 million in the fourth quarter of 2022 (Q4 2021 – unrealized gains of $1.3 million)
and unrealized gains were $3.5 million for the year ended December 31, 2022 (2021 – unrealized gains of $3.7 million). Unrealized gains and
losses represent the change in mark-to-market value of derivative contracts as forward commodity prices and foreign exchange rates change.
Unrealized gains and losses on derivatives are excluded from the Company’s calculation of cash flow from operating activities as non-cash
items. Derivative gains and losses vary depending on the nature and extent of derivative contracts in place, which in turn, vary with the
Company’s assessment of commodity price risk, committed capital spending and other factors.
Royalties
($ thousands, except as noted)
Crown royalties
Natural gas
Oil
NGL
Total Crown royalties
Freehold and overriding royalties
Natural gas
Oil
NGL
Total freehold and overriding royalties
Total royalties
$/boe
Royalties as a percentage of revenue(1)
Crown
Freehold and overriding
Total (% of oil and natural gas revenue)
Natural gas royalties (% of natural gas revenue)
Oil royalties (% of oil revenue)
NGL royalties (% of NGL revenue)
Three months ended December 31,
Twelve months ended December 31,
2022
1,533
91
856
2,480
1,643
1,000
154
2,797
5,277
8.04
8.7
9.8
18.5
18.1
14.8
27.6
2021
460
595
203
1,257
1,753
378
397
2,528
3,786
6.47
5.9
11.8
17.7
15.9
20.0
22.5
2022
5,411
1,999
2,104
9,514
6,888
3,388
1,000
11,276
20,790
8.78
8.7
10.3
19.0
18.4
18.2
23.2
2021
126
1,116
860
2,102
4,849
1,607
1,364
7,820
9,920
5.04
3.5
12.9
16.4
15.1
13.5
29.1
(1)
Non-GAAP ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of composition.
Total royalties for the fourth quarter of 2022 were $5.3 million, 39% higher than the fourth quarter of 2021. On a unit-of-production basis,
royalties were up 24% to $8.04/boe (Q4 2021 – $6.47/boe). During the fourth quarter of 2022, royalties were significantly higher as a result
of increased production and higher reference prices. The combined average royalty rate increased from 2021 as royalty rates escalate with
price under the Crown royalty regime in Alberta. Freehold and overriding royalties increased to $2.8 million from $2.5 million in the fourth
quarter of 2021, due to the impact of higher AECO Daily Index and NGL prices.
For the twelve months ended December 31, 2022, royalties were $20.8 million (2021 – $9.9 million), 110% higher than 2021. On a unit-of-
production basis, royalties were up 74% to $8.78/boe (2021 – $5.04/boe). Royalties increased relative to 2021, as the Alberta Gas Reference
price and AECO Daily index prices, which are used to calculate Crown royalties and certain overriding royalties respectively, increased
significantly during 2022 along with oil and NGL prices. In addition, there was a $1.2 million one-time Gas Cost Allowance ("GCA") adjustment
on royalties in 2022 which increased royalties for the year ended December 31, 2022 by $0.51/boe.
As part of the sale of 50% of the East Edson property on April 1, 2020, Perpetual had agreed to retain its joint venture partner’s 50% working
interest in the existing gross overriding royalty obligation on the property, equivalent to 2.8 MMcf/d of natural gas and associated NGL
production, for the period April 1, 2020 to December 31, 2022. This obligation has been recorded in the consolidated statement of financial
position under the heading “Royalty obligations”. Prior to November 1, 2021, the retained East Edson royalty obligation was paid in-kind, and
PERPETUAL ENERGY INC.
2022 Annual Results
Page 12
settled through non-cash delivery of contractual natural gas and NGL volumes to the royalty holder. As of November 1, 2021, the royalty
obligation is settled through payment in cash. This obligation as of December 31, 2022 has been fully paid.
Production and operating expenses
($ thousands, except as noted)
Production and operating expenses
$/boe
Three months ended December 31,
Twelve months ended December
31,
2022
3,828
5.83
2021
2,862
4.89
2022
16,107
6.80
2021
12,859
6.54
Total production and operating expenses increased 19% on a unit-of-production basis to $5.83/boe for the fourth quarter of 2022, compared
to $4.89/boe for the fourth quarter of 2021. The increase was related to higher heavy crude oil production as a percentage of total volumes
as it has higher operating costs than the Company's conventional natural gas and NGL production at East Edson. Also contributing to higher
costs in the fourth quarter of 2022 was higher purchased energy costs at the non-operated East Edson gas processing facility.
For the twelve months ended December 31, 2022, production and operating expenses increased 4% on a unit-of-production basis to
$6.80/boe, compared to $6.54/boe for 2021. The increase was due to increased heavy crude oil production in the second half of 2022, along
with higher costs in all areas such as chemicals, taxes, purchased energy and well servicing costs. This increase was partially offset by
increased conventional natural gas and NGL production at East Edson which has a higher percentage of fixed operating costs and lower
overall operating costs than the Company’s conventional heavy crude oil production.
On an absolute dollar basis, production and operating costs increased on higher production volumes.
Transportation costs
($ thousands, except as noted)
Transportation costs
$/boe
Three months ended December 31,
Twelve months ended December
31,
2022
1,223
1.86
2021
871
1.49
2022
3,872
1.64
2021
2,993
1.52
Transportation costs include clean oil trucking and NGL transportation, as well as costs to transport natural gas from the plant gate to
commercial sales points. Transportation costs in the fourth quarter of 2022 were $1.2 million, a 40% increase from the comparative period of
2021, as a result of higher average production volumes. On a unit-of-production basis, transportation costs increased by 25% to $1.86/boe in
the fourth quarter of 2022 (Q4 2021 – $1.49/boe) due to increases in oil trucking costs primarily as a result of higher fuel costs and
surcharges and the increase in heavy crude oil production as a percentage of total volumes.
For the twelve months ended December 31, 2022, transportation costs were $3.9 million, an increase of 29% over 2021 on higher average
production volumes. On a unit-of-production basis, transportation costs increased by 8% to $1.64/boe (2021 – $1.52/boe) due to higher oil
trucking costs in the second half of 2022 and increased transportation rates on the Nova Gas Transportation Line ("NGTL') system.
Operating netbacks
“Operating netback” is a non-GAAP measure determined by deducting royalties, production and operating expenses, and transportation costs
from oil and natural gas revenue. Operating netback is also calculated on a per boe basis using total production sold in the period. Perpetual
considers operating netback to be an important performance measure to evaluate its operational performance as it demonstrates its
profitability relative to commodity prices. Operating netback is not a standardized measure and, therefore, may not be comparable with the
calculation of similar measures by other entities.
The following table highlights Perpetual’s operating netbacks for the three and twelve months ended December 31, 2022 and 2021:
($/boe) ($ thousands)
Production (boe/d)
Oil and natural gas revenue
Royalties
Production and operating expenses
Transportation costs
Operating netback(1)
Realized gain (loss) on risk management
contracts
Total operating netback, including risk
management contracts
Three months ended December 31,
Twelve months ended December 31,
2022
7,138
2021
6,359
2022
6,486
2021
5,389
43.52
28,579
(8.04)
(5,277)
(5.83)
(3,828)
(1.86)
(1,223)
27.79
18,251
36.66
21,449
(6.47)
(3,786)
(4.89)
(2,862)
(1.49)
(871)
23.81
13,930
46.33 109,687
(8.78) (20,790)
(6.80) (16,107)
(1.64)
(3,872)
29.11
68,918
30.92
60,814
(5.04)
(9,920)
(6.54)
(12,859)
(1.52)
(2,993)
17.82
35,042
0.21
149
(0.10)
(61)
(1.96)
(4,620)
(2.45)
(4,810)
28.00
18,400
23.71
13,869
27.15
64,298
15.37
30,232
(1)
Non-GAAP measure. Refer to the section entitled “Non-GAAP and Other Financial Measures” for an explanation of composition.
For the fourth quarter of 2022, Perpetual’s operating netback, including risk management contracts, was $18.4 million ($28.00/boe), up 33%
from $13.9 million ($23.71/boe) in the comparative period of 2021. The increase was due to higher oil and natural gas revenue driven by
increased pricing for all commodities being applied to higher average production volumes and a realized hedging gain. The increase in the
fourth quarter of 2022 was partially offset by higher royalties and higher costs in all areas.
For the twelve months ended December 31, 2022 the operating netback, including risk management contracts, was $64.3 million ($27.15/
boe) a 113% increase from $30.2 million ($15.37/boe) in 2021. On a unit-of-production basis, the operating netback increased 77% year-
over-year. The increase was due to higher oil and natural gas revenue, partially offset by increased costs in all areas and higher royalties
driven by higher pricing and the one-time GCA adjustment.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 13
General and administrative (“G&A”) expenses
($ thousands, except as noted)
G&A expense before overhead recoveries
MSA recoveries(1)
Overhead recoveries
Total G&A expense
$/boe
Three months ended December 31,
Twelve months ended December 31,
2022
4,542
(561)
(1,126)
2,855
4.35
2021
3,847
(303)
113
3,657
6.25
2022
14,688
(1,859)
(2,918)
9,911
4.19
2021
11,451
(438)
(256)
10,757
5.47
(1)
Concurrent with the sale of the Clearwater Assets to Rubellite on September 3, 2021, Perpetual entered into a Management and Operating Services
Agreement (the “MSA”) with Rubellite whereby Perpetual receives payment for certain technical and administrative services provided to Rubellite.
For the three and twelve months ended December 31, 2022, G&A expenses of $2.9 million and $9.9 million decreased 22% and 8%,
respectively over the comparative periods. Prior to overhead recoveries, G&A increased over the prior year due to higher employee salaries
and benefits, which had been reduced in the prior year in response to the collapse in commodity prices and were gradually re-instated over
the second half of 2021. Other increases were related to higher office and administrative costs, partially offset by lower professional fees.
Overhead recoveries were higher due to increased capital spending and higher absolute production and operating costs.
For the three and twelve months ended December 31, 2022, the costs billed under the MSA to Rubellite were $0.6 million and $1.9 million,
respectively. MSA recoveries in 2022 increased over the comparative period as a result of Rubellite's higher capital activity and increased
production. The MSA began in 2021 concurrent with the sale of the Clearwater Assets to Rubellite on September 3, 2021.
During 2021 Perpetual received payments from the Canada Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy
(“CERS”) programs which reduced general and administrative expenses by $0.1 million during the fourth quarter of 2021 and $0.8 million
during 2021. There were no payments received in 2022.
Share-based payments
($ thousands, except as noted)
Share-based payments (non-cash)
Share-based payments (cash)
Total share-based payments
Three months ended December 31,
Twelve months ended December 31,
2022
740
124
864
2021
149
319
468
2022
6,184
1,250
7,434
2021
360
1,684
2,044
Share-based payments expense for the three and twelve months ended December 31, 2022 increased to $0.9 million and $7.4 million,
respectively, from $0.5 million and $2.0 million in the comparative periods of 2021. The increase in non-cash share-based payments expense
is due to an increase in the fair value of grants issued in 2022, which is attributed to the increase in the Company's share price. This was
partially offset by a reduction in the cash share-based payments as this plan ended during the fourth quarter of 2022.
During the fourth quarter of 2022, 0.1 million deferred options, 0.1 million deferred shares and 0.1 million restricted rights were granted to
Officers, Directors, and employees of the Company. For the twelve months ended December 31, 2022, 1.5 million deferred options, 0.8 million
deferred shares, 1.3 million share options, 0.8 million performance share rights, and 3.1 million restricted rights were granted to Officers,
Directors and employees of the Company.
Depletion and depreciation
($ thousands, except as noted)
Depletion and depreciation
$/boe
Three months ended December 31,
Twelve months ended December 31,
2022
5,633
8.58
2021
4,182
7.15
2022
17,962
7.59
2021
14,020
7.13
The Company calculates depletion using the net book value of the asset, future development costs associated with proved and probable
reserves, salvage values on associated production equipment, as well as proved and probable reserves. As at December 31, 2022, depletion
was calculated on a $176.1 million depletable balance and $104.6 million in future development costs (2021 – $141.5 million depletable
balance and $75.3 million in future development costs). The depletable base excluded an estimated $3.8 million (2021 – $3.4 million) of
salvage value.
Depletion and depreciation expense for the fourth quarter of 2022 was $5.6 million or $8.58/boe (Q4 2021 – $4.2 million or $7.15/boe).
Depletion and depreciation expense for the twelve months ended December 31, 2022 was $18.0 million or $7.59/boe (2021 – $14.0 million or
$7.13/boe). The increases reflect higher average production volumes compared to the comparative periods. On a unit-of-production basis,
depletion and depreciation expense increased by 20% compared to the fourth quarter of 2021 and increased by 6% compared to 2021 due to
an increase in the depletion rate driven by higher production relative to reserve additions and reversals of impairment booked in 2021 and
2022. Depletion and depreciation expense will fluctuate from one period to the next depending on the amount of capital spent, the amount of
reserves added and volumes produced.
Impairment
There were no indicators of impairment for the Company’s cash generating units "CGU"s as of December 31, 2022 and therefore an
impairment test was not performed.
During the first quarter of 2022, the Company determined that indicators of impairment reversal existed and that the estimated recoverable
amounts of the Eastern Alberta CGU exceeded the carrying amounts of $44.8 million. Accordingly, a non-cash impairment reversal of $7.4
million was included in net income. All previous impairment charges that were eligible for reversal had all been reversed as at March 31, 2022
for property, plant and equipment.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 14
During the fourth quarter of 2021, the Company determined that indicators of impairment reversal existed and that the estimated recoverable
amounts of the Eastern Alberta CGU exceeded the carrying amounts of $42.2 million. Accordingly, a non-cash impairment reversal of $0.5
million was included in net income.
E&E assets are tested for impairment both at the time of any triggering facts and circumstances as well as upon their reclassification to oil and
gas properties in PP&E.
At December 31, 2022, the Company conducted an assessment of indicators of impairment and impairment reversal for the Company’s E&E
assets and no indicators were identified. The Company transferred undeveloped land to PP&E at a value of $0.2 million, which was equal to
the book value in E&E. As a result of the transfer, an impairment test was required on transfer to PP&E and there were no impairments
recorded to E&E as at December 31, 2022.
Finance expense
($ thousands)
Cash finance expense
Interest on revolving bank debt
Interest on term loan
Interest on 2025 Senior Notes(2)
Interest on 2022 Senior Notes(1)
Interest on lease liabilities
Total cash finance expense
Non-cash finance expense
Interest paid in-kind on term loan
Interest on 2022 Senior Notes(1)
Interest paid in-kind on 2025 Senior Notes(2)
Gain on senior note maturity extension
Gain on senior note extinguishment(3)
Gain on Term Loan substantive modification
Amortization of debt issue costs
Accretion on decommissioning obligations
Change in fair value of other liability
Change in fair value of royalty obligations
Total non-cash finance expense
Finance expense recognized in net income (loss)
Three months ended December 31,
Twelve months ended December 31,
2022
334
55
780
—
26
1,195
—
—
—
—
—
—
434
203
60
(363)
334
1,529
2021
150
53
1,408
(608)
36
1,039
—
—
—
—
—
—
235
165
131
(663)
(132)
907
2022
1,031
216
3,184
—
116
4,547
—
—
—
—
(101)
—
1,864
727
1,678
2,256
6,424
10,971
2021
953
53
1,408
(1,253)
148
1,309
2,743
1,469
1,533
(1,591)
(6,820)
—
962
531
1,159
4,101
4,087
5,396
(1)
(2)
(3)
During 2022, the Company settled semi-annual interest payments in cash, rather than payment-in-kind which was the method used in 2021.
On January 22, 2021, Perpetual’s 2022 Senior Notes were exchanged for 2025 Senior Notes, providing Perpetual the option to pay interest in-kind (“PIK”).
Perpetual elected to pay the January 23, 2021 semi-annual interest of $1.5 million by a PIK Interest Payment. As a result, the previously accrued 2022
Senior Notes cash interest of $1.3 million was reversed and replaced by $1.3 million of 2025 Senior Note non-cash interest expense. The Company satisfied
the semi-annual interest payment due July 23, 2021 by a PIK Interest Payment and accrued $0.8 million of non-cash interest expense for the three months
ended March 31, 2021.
During the twelve months ended December 31, 2022 the Company purchased and cancelled $0.9 million of Senior Notes outstanding for gross proceeds of
$0.8 million, resulting in a gain on extinguishment of $0.1 million.
Total cash finance expense was $1.2 million in the fourth quarter of 2022, 15% higher than the comparative 2021 period as a result of
increased interest rates and higher outstanding bank debt (Q4 2021 – $1.0 million). For the twelve months ended December 31, 2022, cash
finance expense was $4.5 million (2021 – $1.3 million) which reflected the payment of interest in cash in 2022 rather than in-kind, partially
offset by higher interest on revolving bank debt.
Total non-cash finance expense for the fourth quarter of 2022 was $0.3 million, higher than the comparative period (Q4 2021 – $0.1 million
income). For the twelve months ended December 31, 2022, non-cash finance expense was $6.4 million (2021 – $4.1 million). During 2022,
the increase was attributable to the payment of interest on the Senior Notes and Term Loan in cash rather than in-kind. Non-cash finance
expense is also driven by the change in the fair value of the royalty obligations which is sensitive to changing AECO natural gas and NGL
prices and the recognition of future contingent payments related to the Second Lien Loan Settlement which are recorded as other liability with
the change being recognized through finance expense. The increase in the fourth quarter was driven by the change in the fair value of the
royalty obligations. Perpetual's extra royalty obligation at East Edson terminated December 31, 2022.
LIQUIDITY AND CAPITAL RESOURCES
Perpetual’s strategy targets the maintenance of a strong capital base to retain investor, creditor and market confidence to support the
execution of its business plans. The Company manages its capital structure and adjusts its capital spending in light of changes in economic
conditions such as depressed commodity prices, available liquidity, and the risk characteristics of its underlying oil and natural gas assets. The
Company considers its capital structure to include share capital, senior notes, the Term Loan, revolving bank debt, and adjusted net working
capital. To manage its capital structure and available liquidity, the Company may from time to time issue equity or debt securities, sell assets,
and adjust its capital spending to manage current and projected debt levels. The Company will continue to regularly assess changes to its
capital structure and repayment alternatives, with considerations for both short-term liquidity and long-term financial sustainability.
Perpetual uses net debt, adjusted working capital, enterprise value, free funds flow and trailing twelve-months adjusted funds flow as
important indicators of capital resources, management and liquidity. These are not standardized measures, and therefore may not be
comparable with the calculation of similar measures by other entities, refer to the section entitled “Non-GAAP and Other Financial Measures”
contained within this MD&A.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 15
Capital management
($ thousands, except as noted)
Revolving bank debt
Term loan, principal amount
Senior notes, principal amount
Other liability, undiscounted amount
Adjusted working capital deficiency (surplus)(1)
Net debt(1)
Shares outstanding at end of period (thousands)(3)
Market price at end of period ($/share)
Market value of shares(1)
Enterprise value(1)
Net debt as a percentage of enterprise value(2)
Trailing twelve-months adjusted funds flow(1)
Net debt to adjusted funds flow(2)
December 31, 2022 December 31, 2021
2,487
14,909
2,671
35,647
3,342
(220)
56,349
65,944
0.71
46,820
112,764
50 %
48,471
116 %
2,671
36,852
1,387
16,143
59,270
63,567
0.70
44,496
103,767
57 %
16,746
354 %
(1)
(2)
(3)
Non-GAAP measure. Refer to the section entitled "Non-GAAP and Other Financial Measures" for an explanation of composition.
Non-GAAP ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" for an explanation of composition.
Shares outstanding are presented net of shares held in trust.
At December 31, 2022, Perpetual had total net debt of $56.3 million, down $2.9 million (5%) from December 31, 2021 as adjusted funds flow
exceeded capital expenditures during 2022. The majority of Perpetual's planned 2022 capital spending at East Edson and Mannville was
executed during the third quarter, with production additions gradually contributing to sales volumes by late September. By December 31,
2022, increased free funds flows related to increased sales volumes combined with limited additional capital spending during the fourth
quarter which reduced net debt.
Perpetual had available liquidity at December 31, 2022 of $13.9 million, comprised of the $30.0 million Credit Facility Borrowing Limit, less
current borrowings and letters of credit of $14.9 million and $1.2 million, respectively.
Revolving bank debt
The Company has a first lien credit facility of $30.0 million (December 31, 2021 - $17 million) with an initial term to May 31, 2023. The initial
term may be extended to May 31, 2024 subject to approval by the syndicate. If the facility is not extended all outstanding balances would be
repayable on May 31, 2024. The next semi-annual borrowing base redetermination is scheduled to be completed on or before May 31, 2023.
As at December 31, 2022, $14.9 million was drawn (December 31, 2021 – $2.5 million) and $1.2 million of letters of credit had been issued
(December 31, 2021 – $1.0 million) under the Company’s credit facility. Borrowings under the Credit Facility bear interest at its lenders’ prime
rate or Banker’s Acceptance rates, plus applicable margins and standby fees. The applicable Banker’s Acceptance margins range between
3.0% and 5.5%. The effective interest rate on the Credit Facility at December 31, 2022 was 7.9%. For the year ended December 31, 2022 if
interest rates changed by 1% with all other variables held constant, the impact on annual cash finance expense and net income would be $0.1
million.
The Credit Facility is secured by general first lien security agreements covering all present and future property of the Company and its
subsidiaries.
At December 31, 2022, the Credit Facility was not subject to any financial covenants and the Company was in compliance with all customary
non-financial covenants.
Term loan
($ thousands,
except as noted)
Maturity date
Interest rate
Principal
Carrying Amount
December 31, 2022
Term loan
December 31, 2024
8.1 %
2,671
2,524
December 31, 2021
Principal
Carrying amount
2,671
2,469
During the third quarter of 2021, Perpetual executed an agreement with its Term Loan lender for the settlement of principal and all interest
owing on the Term Loan. Perpetual substantively modified the previous Term Loan with Alberta Investment Management Corporation
(“AIMCo”) in exchange for the payment of approximately $38.5 million in cash, the delivery by Perpetual of the AIMCo Bonus Shares at a
value of $1.4 million, the issuance of a new $2.7 million second lien Term Loan (the “New Term Loan”), and up to an aggregate $4.5 million in
contingent payments over the three year period ended June 30, 2024 in the event that Perpetual’s annual average realized oil and natural gas
prices exceed certain thresholds (the “Second Lien Loan Settlement”). All amounts related to the Second Lien Loan Settlement were paid on
October 5, 2021. The New Term Loan bears interest at 8.1% annually, which Perpetual may elect to pay-in-kind and will mature on December
31, 2024. Perpetual has the ability to repay the Term Loan at any time without any repayment penalty.
The Company and the Term Loan lender agreed to allow $1.8 million of interest due December 31, 2020 to be paid-in-kind and added to the
outstanding principal amount of the loan and all other interest owing on the Term Loan to be settled as part of the Second Lien Loan
Settlement. Non-cash paid-in-kind interest of $0.8 million was recorded in the third quarter of 2021, which increased the principal amount of
the Term Loan owing upon settlement to $49.6 million. As a result of the Second Lien Loan Settlement, the carrying amount of $49.6 million
was in excess of the consideration received of $42.8 million, resulting in a gain of $6.8 million being recognized (note 20).
The New Term Loan has a cross-default provision with the Credit Facility and contains substantially similar provisions and covenants as the
Credit Facility. The Term Loan is secured by a general security agreement over all present and future property of the Company and its
subsidiaries on a second priority basis, subordinate only to liens securing loans under the Credit Facility.
At December 31, 2022, the Term Loan was not subject to any financial covenants and the Company was in compliance with all customary
non-financial covenants.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 16
Senior notes
($ thousands,
except as noted)
Maturity date
Interest rate
Principal
Carrying Amount
December 31, 2022
Senior notes
January 23, 2025
8.75 %
35,647
34,527
December 31, 2021
Principal
Carrying amount
36,583
34,189
On January 22, 2021, Perpetual announced the completion of a Court-approved plan of arrangement whereby the unsecured 2022 Senior
Notes were exchanged for new 8.75% secured third lien notes due January 23, 2025. The 2025 Senior Notes have been issued under a trust
indenture that contains substantially the same terms as the 2022 Senior Notes, other than the 2025 Senior Notes are secured on a third lien
basis and allow for the semi-annual interest payments to be paid at Perpetual’s option, in cash, or in additional 2025 Senior Notes (a “PIK
Interest Payment”). In 2021, the Company elected to pay the semi-annual interest payments by making PIK Interest Payments, increasing the
principal amount to $36.6 million.
The Company satisfied the January 23, 2022 and the July 23, 2022 semi-annual interest payment of $1.6 million by making cash payments.
Subsequent to December 31, 2022 the Company satisfied the January 23, 2023 semi-annual interest of $1.6 million by making a cash
payment.
At December 31, 2022, the senior notes are recorded at the present value of future cash flows, net of $1.1 million in issue and principal
discount costs which are amortized over the remaining term using a weighted average effective interest rate of 13.9%.
During the fourth quarter of 2022 the Company purchased and cancelled a portion of the 2025 Senior Notes balance with a carrying value of
$0.9 million (2021 - nil) for gross proceeds of $0.8 million. A gain on extinguishment of $0.1 million (2021 - nil) is included in non-cash finance
expense.
The senior notes are direct senior secured, third lien obligations of the Company. The Company may redeem the senior notes without any
repayment penalty. The senior notes have a cross-default provision with the Company’s Credit Facility. In addition, the senior notes indenture
contains restrictions on certain payments including dividends, retirement of subordinated debt, and stock repurchases.
At December 31, 2022, the senior notes were not subject to any financial covenants and the Company was in compliance with all customary
non-financial covenants.
Entities controlled by the Company’s CEO hold $15.9 million of the 2025 Senior Notes outstanding. An entity that is associated with the
Company’s CEO holds an additional $10.3 million of the 2025 Senior Notes outstanding.
Equity
At December 31, 2022, there were 65.9 million common shares outstanding, net of 1.3 million shares held in trust to resource employee
compensation programs. During the fourth quarter of 2022, 0.1 million shares were purchased by the independent trustee to be held in trust
(Q4 2021 – 0.2 million). Basic and diluted weighted average shares outstanding for the three months ended December 31, 2022 were 65.9
million and 75.1 million, respectively (Q4 2021 - 63.6 million basic and 70.0 million diluted). Basic and diluted weighted average shares
outstanding for the twelve months ended December 31, 2022 were 64.4 million and 74.8 million, respectively (2021 - 63.0 million basic and
70.0 million diluted).
At March 2, 2023, there were 65.9 million common shares outstanding which is net of 1.3 million shares held in trust for employee
compensation programs. In addition, the following potentially issuable common shares were outstanding as at the date of this MD&A:
(millions)
Share options
Performance share rights
Compensation awards
Total(1)
March 2, 2023
3.6
2.5
8.7
14.8
(1)
7.4 million compensation awards, 2.3 million share options, and 2.5 million performance share rights have an exercise price below the December 31, 2022
closing price of the Company’s common shares of $0.71 per share.
Commodity price risk management and sales obligations
Perpetual’s commodity price risk management strategy is focused on managing downside risk and increasing certainty in adjusted funds flow
by mitigating the effect of commodity price volatility. Physical forward sales contracts and financial derivatives are used to increase certainty in
adjusted funds flow (see “Non-GAAP and Other Financial Measures”), manage the balance sheet, lock in economics on capital programs, and
to take advantage of perceived anomalies in commodity markets. Perpetual also utilizes foreign exchange derivatives and physical or financial
derivatives related to the differential between natural gas prices at the AECO and NYMEX trading hubs and oil basis differentials between WTI
and WCS in order to mitigate the effects of fluctuations in foreign exchange rates and basis differentials on the Corporation’s revenue.
Diversification of markets is a further risk management strategy employed by the Company.
As at March 2, 2023, the Company had entered into the following swap commodity contracts:
Commodity
Volumes sold
Term
Reference/
Index
Contract Traded
Bought/sold
Market Price
Natural gas
Natural gas
Natural gas
Natural gas
Crude Oil
Natural gas
Crude oil
5,000 GJ/d
5,000 GJ/d
10,000 GJ/d
5,000 GJ/d
100 bbl/d
2,500 GJ/d
200 bbl/d
Jan 1 - Mar 31, 2023
AECO 5A (CAD$/GJ)
Jan 1 - Mar 31, 2023
AECO 7A (CAD$/GJ)
Jan 1 - Mar 31, 2023
AECO 7A (CAD$/GJ)
Swap - sold
Collar - sold
Collar - sold
Mar 1 - Mar 31, 2023
AECO 7A (CAD$/GJ)
Collar - bought
Jan 1 – Dec 31, 2023
WTI (USD$/bbl)
Mar 1 - Mar 31, 2023
AECO 7A (CAD$/GJ)
Apr 1 - Dec 31, 2023
WTI (USD$/bbl)
Swap – sold
Swap - bought
Swap – sold
PERPETUAL ENERGY INC.
2022 Annual Results
$4.62
$7.00-8.00
$7.00-8.10
$3.95
$89.15
$3.55
$77.40
Page 17
As at March 2, 2023, the Company had entered into the following swap WTI-WCS basis differential which settle in CAD$:
Commodity
Volumes sold
Term
Reference/
Index
Contract Traded
Bought/sold
Market Price
Crude oil
Crude oil
Crude oil
Crude oil
100 bbl/d
450 bbl/d
100 bbl/d
Jan 1 – Dec 31, 2023
Apr 1 - Dec 31, 2023
Jul 1 - Dec 31, 2023
250 bbl/d
Jan 1, 2024 - Dec 31, 2024
WCS (CAD$/bbl)
WCS (USD$/bbl)
WCS (USD$/bbl)
WCS (USD$/bbl)
Differential
Differential
Differential
Differential
($17.30)
($17.43)
($16.20)
($17.50)
As at March 2, 2023, the Company had entered the following CAD/USD foreign exchange swaps which settle in CAD$:
Contract
Average rate forward (US$/CAD$)
Average rate forward (US$/CAD$)
Average rate forward (US$/CAD$)
Average rate forward (US$/CAD$)
Notional amount
$316,444 US$/month
$500,000 US$/month
$200,000 US$/month
$250,000 US$/month
Term Price (US$/CAD$)
Jan 1 – Mar 31, 2023
Jan 1 – Dec 31, 2023
Jan 1 – Dec 31, 2023
Jan 1 – Dec 31, 2023
1.3740
1.3710
1.3029
1.3600
Conventional natural gas volumes sold pursuant to the Company’s market diversification contract are sold at fixed volume obligations and
priced at daily index prices at each of the market price points, less transportation costs from AECO to each market price point as detailed
below.
Market/Pricing Point
Malin
Dawn
Emerson
Total sales volume obligation
SEQUOIA LITIGATION UPDATE
January 1, 2023 to
October 31, 2023 Daily
sales volume
(MMBtu/d)
November 1, 2023 to
October 31, 2024 Daily
sales volume
(MMBtu/d)
—
15,000
10,000
25,000
15,000
15,000
10,000
40,000
On August 3, 2018, the Company received a Statement of Claim that was filed by PricewaterhouseCoopers Inc. LIT (“PwC”), in its capacity as
trustee in bankruptcy (the “Trustee”) of Sequoia Resources Corp. (“Sequoia”), with the Alberta Court of Queen’s Bench (the “Court”), against
Perpetual (the “Sequoia Litigation”). The claim relates to a six-year-old transaction when, on October 1, 2016, Perpetual closed the disposition
of shallow conventional natural gas assets in Eastern Alberta to an arm’s length third party at fair market value after an extensive and lengthy
marketing, due diligence, and negotiation process (the “Sequoia Disposition”). This transaction was one of several completed by Sequoia.
Sequoia assigned itself into bankruptcy on March 23, 2018. PwC is seeking an order from the Court to either set this transaction aside or
declare it void, or damages of approximately $217 million. On August 27, 2018, Perpetual filed a Statement of Defence and Application for
Summary Dismissal with the Court in response to the Statement of Claim. All allegations made by PwC have been denied and applications to
the Court to dismiss all claims has been made on the basis that there is no merit to any of them.
On January 13, 2020, a written decision related to the Application for Dismissal, dismissed and struck all claims against the Company’s CEO
and all but one of the claims filed against Perpetual. The Court did not find that the test for summary dismissal relating to whether the asset
transaction was an arm’s length transfer for purposes of section 96(1) of the Bankruptcy and Insolvency Act (the “BIA”) was met, on the
balance of probabilities. Accordingly, the BIA claim was not dismissed or struck and only that part of the claim could continue against
Perpetual. The Trustee filed a notice of appeal with the Court of Appeal of Alberta, challenging the entire decision, and Perpetual filed a
similar notice of appeal contesting the BIA claim portion of the decision (the “First Appeal”). The First Appeal proceedings were heard on
December 10, 2020. On January 25, 2021, the Court of Appeal of Alberta issued their judgement with respect to the First Appeal proceedings,
dismissing the appeal filed by Perpetual and granting certain aspects of the appeals filed by the Trustee, thereby reinstating certain elements
of the Sequoia Litigation for trial. On March 24, 2021, Perpetual applied for leave to appeal the First Appeal decision to the Supreme Court of
Canada (the “SCC”). On July 8, 2021, the SCC dismissed Perpetual’s application.
On February 25, 2020, Perpetual filed a second application to strike and summarily dismiss the BIA claim on the basis that there was no
transfer at undervalue, and Sequoia was not insolvent at the time of the asset transaction nor caused to be insolvent by the asset transaction
(the “Second Summary Dismissal Application”). In July 2020, the Orphan Well Association (“OWA”), certain oil and gas companies, and six
municipalities applied to intervene in the Second Summary Dismissal Application proceedings. The OWA and certain oil and gas companies
were permitted to intervene (the “Intervenors”) in the proceedings which took place on October 1 and 2, 2020. The Intervenors were also
permitted to intervene in the First Appeal proceedings. On January 14, 2021 the Court issued its decision, finding that the Trustee could not
establish a necessary element of the BIA Claim as Sequoia was not insolvent at the time of, nor rendered insolvent by, the Sequoia
Disposition. The Court therefore concluded there is “no merit” to the BIA Claim and it summarily dismissed the balance of the Statement of
Claim. The Trustee appealed this decision, and the Court of Appeal hearing took place on February 10, 2022, with the panel reserving
judgement. On March 25, 2022, the Court of Appeal issued their judgement with respect to this matter and allowed PwC’s appeal on the basis
that the Court of Queen’s Bench erred in law in its handling of the end-of-life obligations and that based on the record, it could not be
concluded the error was without consequence, and that the Court of Queen’s Bench also erred in agreeing to hear the Second Summary
Dismissal Application. On this basis, the BIA Claim has been directed to trial.
The Trustee filed its Amended Statement of Claim with the Court on October 14, 2022. Perpetual filed its Statement of Defence to Amended
Statement of Claim on December 12, 2022.
Management expects that the Company is more likely than not to be completely successful in defending against the Sequoia Litigation such
that no damages will be awarded against it, and therefore, no amounts have been accrued as a liability in these financial statements.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 18
ANNUAL FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except as noted)
2022
2021
2020
Financial
Oil and natural gas revenue
Net income
Per share – basic
Per share – diluted
Cash flow from operating activities
Adjusted funds flow(1)
Per share – basic(2)
Revolving bank debt
Senior notes, principal amount
Term loan, principal amount
Other Liability
Net working capital deficiency
Total Net Debt
Capital expenditures(1)
Net payments (proceeds) on acquisitions and dispositions(1)
Common shares (thousands)
Weighted average – basic
Weighted average – diluted
Operating
Daily average production
Natural gas (MMcf/d)
Oil (bbl/d)
NGL (bbl/d)
Total (boe/d)
Perpetual Average Realized Prices(2)
Natural gas ($/Mcf)
Oil ($/bbl)
NGL ($/bbl)
Wells drilled
Conventional natural gas - gross (net)
Heavy crude oil - gross (net)
Total - gross (net)
109,687
44,397
0.69
0.59
37,830
48,471
0.75
14,909
35,647
2,671
3,342
(220)
56,349
31,909
—
64,448
74,798
31.0
898
416
6,486
5.90
90.15
88.05
7 (3.5)
5 (5.0)
12 (8.5)
60,814
81,121
1.29
1.16
12,815
16,746
0.27
2,487
36,582
2,671
1,387
16,143
59,270
19,062
49,549
62,969
69,989
24.6
963
331
5,389
3.15
57.36
63.24
9 (4.5)
5 (4.0)
14 (8.5)
29,486
(61,597)
(1.01)
(1.01)
(9,533)
(7,787)
(0.13)
17,495
33,580
46,823
—
7,099
104,997
5,939
27,754
61,013
61,013
21.5
1,082
346
5,012
0.85
49.37
31.40
5 (2.5)
4 (4.0)
9 (6.5)
(1)
(2)
Non-GAAP measure. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of composition.
Non-GAAP ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of composition.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 19
SUMMARY OF QUARTERLY RESULTS
($ thousands, except as noted)
Q4 2022
Q3 2022
Q2 2022
Q1 2022
Financial
Oil and natural gas revenue
Net income
Per share – basic
Per share – diluted
Cash flow from operating activities
Adjusted funds flow(1)
Per share – basic(2)
Capital expenditures(1)
Net payments (proceeds) on acquisitions and dispositions(1)
Common shares (thousands)
Weighted average – basic
Weighted average – diluted
Operating
Daily average production
Natural gas (MMcf/d)
Oil (bbl/d)
NGL (bbl/d)
Total (boe/d)
Perpetual Average Realized Prices(2)
Natural gas ($/mcf)
Oil ($/bbl)
NGL ($/bbl)
28,579
9,264
0.14
0.12
8,749
14,207
0.22
115
—
65,883
75,090
33.0
1,126
508
7,138
5.78
71.14
78.36
22,856
8,234
0.13
0.11
8,749
9,642
0.15
22,596
—
65,016
74,607
26.9
1,002
390
5,882
4.74
87.24
85.48
33,299
4,470
0.07
0.06
11,571
10,505
0.16
4,361
—
63,641
74,721
29.9
775
364
6,123
7.92
117.20
104.71
24,953
7,162
0.11
0.10
6,272
14,117
0.22
4,837
—
63,216
74,348
34.3
682
400
6,804
5.16
95.55
87.86
($ thousands, except as noted)
Q4 2021
Q3 2021
Q2 2021
Q1 2021
Financial
Oil and natural gas revenue
Net income
Per share – basic
Per share – diluted
Cash flow from operating activities
Adjusted funds flow(1)
Per share – basic(2)
Capital expenditures(1)
Net payments (proceeds) on acquisitions and dispositions(1)
Common shares (thousands)
Weighted average – basic
Weighted average – diluted
Operating
Daily average production
Natural gas (MMcf/d)
Oil (bbl/d)
NGL (bbl/d)
Total (boe/d)
Perpetual Average Realized Prices(2)
Natural gas ($/Mcf)
Oil ($/bbl)
NGL ($/bbl)
21,449
5,669
0.09
0.08
1,624
8,585
0.13
7,558
14,603
51,151
0.80
0.72
6,655
3,315
0.05
9,947
53,407
(4,060)
63,853
70,873
63,801
71,266
31.5
714
395
6,359
4.80
73.93
73.44
21.6
972
300
4,876
2.59
65.19
65.37
13,226
27,017
0.43
0.38
2,854
2,302
0.04
1,554
46
62,574
70,461
22.2
1,074
331
5,099
2.25
55.75
55.48
11,536
(2,706)
(0.04)
(0.04)
1,682
2,544
0.04
3
469
61,603
61,603
22.9
1,097
294
5,211
2.25
40.85
56.03
(1)
(2)
Non-GAAP measure. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of composition.
Non-GAAP ratio. Refer to the section entitled "Non-GAAP and Other Financial Measures" contained within this MD&A for an explanation of composition.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 20
OFF BALANCE SHEET ARRANGEMENTS
Perpetual has no off balance sheet arrangements.
NON-GAAP AND OTHER FINANCIAL MEASURES
Throughout this MD&A and in other materials disclosed by the Company, Perpetual employs certain measures to analyze
financial performance, financial position and cash flow. These non-GAAP and other financial measures do not have any standardized
meaning prescribed under IFRS and therefore may not be comparable to similar measures presented by other entities. The non-GAAP
and other financial measures should not be considered to be more meaningful than GAAP measures which are determined in accordance with
IFRS, such as net income (loss), cash flow from operating activities, and cash flow from investing activities, as indicators of Perpetual’s
performance.
Non-GAAP Financial Measures
Capital expenditures or capital spending: Perpetual uses capital expenditures or capital spending related to exploration and development
to measure its capital investments compared to the Company’s annual capital budgeted expenditures. Perpetual’s capital budget excludes
acquisition and disposition activities.
The most directly comparable GAAP measure for capital expenditures or capital spending is cash flow used in investing activities. A
summary of the reconciliation of cash flow used in investing activities to capital expenditures or capital spending, is set forth below:
($ thousands)
Net cash flows used in investing activities
Acquisitions
Net proceeds on dispositions, net of cash disposed
Purchase of marketable securities
Change in non-cash working capital
Capital expenditures
Three months ended December 31,
Twelve months ended December
31,
2022
17,239
—
—
(2)
(17,122)
115
2021
(49,217)
(700)
53,407
—
4,068
7,558
2022
40,941
—
—
(39)
(8,993)
31,909
2021
(43,725)
(1,325)
49,549
—
14,563
19,062
Adjusted funds flow: Adjusted funds flow is calculated based on cash flows from (used in) operating activities, excluding changes in non-
cash working capital and expenditures on decommissioning obligations since Perpetual believes the timing of collection, payment or incurrence
of these items is variable. Expenditures on decommissioning obligations may vary from period to period depending on capital programs and
the maturity of the Company’s operating areas. Expenditures on decommissioning obligations are managed through the capital budgeting
process which considers available adjusted funds flow and regulatory requirements. The Company has added back non-cash oil and natural
gas revenue in-kind, equal to retained East Edson royalty obligation payments taken in-kind, to present the equivalent amount of cash
revenue generated. Management uses adjusted funds flow and adjusted funds flow per boe as key measures to assess the ability of the
Company to generate the funds necessary to finance capital expenditures, expenditures on decommissioning obligations, and meet its
financial obligations.
Adjusted funds flow is not intended to represent net cash flows from (used in) operating activities calculated in accordance with IFRS.
The following table reconciles net cash flows from (used in) operating activities as reported in the Company’s consolidated statements of cash
flows, to adjusted funds flow:
($ thousands, except per share and per boe amounts)
Net cash flows from operating activities
Change in non-cash working capital
Decommissioning obligations settled (cash)
Oil and natural gas revenue in-kind
Payment of restructuring costs
Adjusted funds flow
Adjusted funds flow per share
Adjusted funds flow per boe
Three months ended December 31,
Twelve months ended December 31,
2022
11,238
1,925
1,044
—
—
14,207
0.22
21.63
2021
1,624
4,197
1,382
1,382
—
8,585
0.13
14.67
2022
37,830
9,442
1,199
—
—
48,471
0.75
20.48
2021
12,815
(3,406)
1,759
4,995
583
16,746
0.27
8.51
Free funds flow: Free funds flow is an important measure that informs efficiency of capital spent and liquidity. Free funds flow is calculated
as adjusted funds flow generated during the period less capital expenditures. Adjusted funds flow and capital expenditures are non-GAAP
financial measures which have been reconciled to its most directly comparable GAAP measure previously in this document. By removing the
impact of current period capital expenditures from adjusted funds flow, Perpetual monitors its free funds flow to inform decisions such as
capital allocation and debt repayment.
The following table shows the calculation of the removal of capital expenditures from adjusted funds flows:
Three months ended December 31,
Twelve months ended December 31,
($ thousands, except per share and per boe amounts)
Adjusted funds flow
Capital Expenditures
Free funds flow
2022
14,207
(115)
14,092
2021
8,585
(7,558)
1,027
2022
48,471
(31,909)
16,562
PERPETUAL ENERGY INC.
2022 Annual Results
2021
16,746
(19,062)
(2,316)
Page 21
Cash costs: Cash costs are controllable costs comprised of production and operating, transportation, general and administrative, and cash
finance expense as detailed below. Cash costs per boe is calculated by dividing cash costs by total production sold in the period. Management
believes that cash costs assist management and investors in assessing Perpetual’s efficiency and overall cost structure.
($ thousands, except per boe amounts)
Production and operating
Transportation
General and administrative
Cash finance expense
Cash costs
Cash costs per boe
Three months ended December 31,
Twelve months ended December 31,
2022
3,828
1,223
2,855
1,195
9,101
13.86
2021
2,862
871
3,657
1,039
8,429
14.41
2022
16,107
3,872
9,911
4,547
34,437
14.55
2021
12,859
2,993
10,757
1,309
27,919
14.19
Operating netback: Operating netback is calculated by deducting royalties, production and operating expenses, and transportation costs
from oil and natural gas revenue. Operating netback is also calculated on a per boe basis using total production sold in the period and
presented before and after realized gains or losses from risk management contracts. Perpetual considers that netback is a key industry
performance indicator and one that provides investors with information that is also commonly presented by other crude oil and natural gas
producers. Perpetual considers operating netback to be an important performance measure to evaluate its operational performance as it
demonstrates its profitability relative to current commodity prices. Refer to reconciliations earlier in the MD&A under the “Operating netbacks”
section.
Net Debt: Perpetual uses net debt as an alternative measure of outstanding debt. Management considers net debt as an important measure
in assessing the liquidity of the Company. Net debt is used by management to assess the Company’s overall debt position and borrowing
capacity. Net debt is not a standardized measure and therefore may not be comparable to similar measures presented by other entities.
The following table details the composition of net debt:
($ thousands)
Cash and cash equivalents
Accounts and accrued receivable
Prepaid expenses and deposits
Marketable securities
Accounts payable and accrued liabilities
Adjusted working capital surplus (deficiency)(1)
Bank indebtedness
Term loan (principal)
Other liability (undiscounted amount)
Senior notes (principal)
Net debt
As of December 31, 2022
As of December 31, 2021
—
15,804
1,564
1,814
(18,962)
220
(14,909)
(2,671)
(3,342)
(35,647)
(56,349)
1,090
11,671
910
2,409
(32,223)
(16,143)
(2,487)
(2,671)
(1,387)
(36,582)
(59,270)
(1)
Alternative calculation of current assets less current liabilities adjusted for the removal of the current portion of risk management contracts.
Available Liquidity: Available Liquidity is defined as Perpetual’s Credit Facility Borrowing Limit, less current borrowings and letters of credit
issued under the Credit Facility. Management uses available liquidity to assess the ability of the Company to finance capital expenditures and
expenditures on decommissioning obligations, and to meet its financial obligations.
Enterprise value: Enterprise value is equal to net debt plus the market value of issued equity and is used by management to analyze
leverage. Enterprise value is calculated by multiplying the current shares outstanding by the market price at the end of the period and then
adjusting it by the net debt. The Company considers enterprise value as an important measure as it normalizes the market value of the
Company’s shares for its capital structure.
Non-GAAP Financial Ratios
Perpetual calculates certain non-GAAP measures per boe as the measure divided by weighted average daily production. Management believes
that per boe ratios are a key industry performance measure of operational efficiency and one that provides investors with information that is
also commonly presented by other crude oil and natural gas producers. Perpetual also calculates certain non-GAAP measures per share as the
measure divided by outstanding common shares.
Average realized prices after risk management contracts: are calculated as the average realized price by product type less the realized
gain or loss on risk management contracts by production type.
Net debt to adjusted funds flow ratio: Net debt to adjusted funds flow ratios are calculated on a trailing twelve-month basis.
Net debt as a percentage of enterprise value: Net debt as a percentage of enterprise value is calculated by dividing net debt by
enterprise value.
Adjusted funds flow per share: Adjusted funds flow ratios are calculated on a per share as the measure divided by basic shares
outstanding.
Adjusted funds flow per boe: Adjusted funds flow per boe is calculated as adjusted funds flow divided by total production sold in the
period.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 22
Supplementary Financial Measures
"Average realized price" is comprised of total commodity sales from production, as determined in accordance with IFRS, divided by the
Company's total sales producution on a boe basis.
"Realized oil price" is comprised of oil commodity sales from production, as determined in accordance with IFRS, divided by the Company's oil
sales production.
"Realized natural gas price" is comprised of natural gas commodity sales from production, as determined in accordance with IFRS, divided by
the Company's natural gas sales production.
"Realized NGL price" is comprised of NGL commodity sales from production, as determined in accordance with IFRS, divided by the
Company's NGL sales production.
"Realized gain (loss) on natural gas contracts per mcf" is comprised of the realized gain or loss on natural gas contracts, as determined in
accordance with IFRS, divided by the Company's total natural gas sales production.
"Realized gain (loss) on oil contracts per boe" is comprised of the realized gain or loss on oil contracts, as determined in accordance
with IFRS, divided by the Company's total oil sales production.
"Realized gain (loss) on risk management contracts per boe" is comprised of the realized gain or loss on risk management contracts,
as determined in accordance with IFRS, divided by the Company's total sales production.
"Depletion and depreciation expense per boe" is comprised of DD&A expense, as determined in accordance with IFRS, divided by the
Company's total sales production.
"G&A expense per boe" is comprised of G&A expense, as determined in accordance with IFRS, divided by the Company's total sales
production.
"Operating expense per boe" is comprised of operating expense, as determined in accordance with IFRS, divided by the Company's total
sales production.
"Realized gain or loss on risk management contract per boe" is comprised of realized gain on risk management contracts, as determined in
accordance with IFRS, divided by the Company's total sales production.
"Transportation expense per boe" is comprised of operating expense, as determined in accordance with IFRS, divided by the Company's total
sales production.
"Royalties as a percentage of revenue" is comprised of royalties, as determined in accordance with IFRS, divided by oil and natural gas
revenue from sales production as determined in accordance with IFRS.
"Royalties per boe" is comprised of royalties, as determined in accordance with IFRS, divided by the Company's total sales production.
“Market value of shares” is comprised of common shares outstanding multiplied by the market price of shares.
“Adjusted funds flow per share” is comprised of adjusted funds flow divided by the Company’s shares outstanding.
FUTURE ACCOUNTING PRONOUNCEMENTS
The International Accounting Standards Board (“IASB”) and the IFRS Interpretations Committee regularly issue new and revised accounting
pronouncements which have future effective dates and therefore are not reflected in Perpetual’s financial statements. Once adopted, these
new and amended pronouncements may have an impact on Perpetual’s consolidated financial statements. Perpetual’s analysis of
recent accounting pronouncements is included in the notes to the consolidated financial statements at December 31, 2022.
RISK FACTORS
The Corporation is exposed to business risks that are inherent in the oil and gas industry, as well as those governed by the individual nature
of Perpetual’s operations. Risks impacting the business which influence controls and management of the Corporation include, but are
not limited to, the following:
•
•
•
•
•
•
•
•
•
•
geological and engineering risks;
the uncertainty of discovering commercial quantities of new reserves;
commodity prices, interest rate and foreign exchange risks;
political and geopolitical risks;
competition
cybersecurity risks;
inflation and supply chain risks;
risks relating to pandemics (including COVID-19);
risks relating to litigation (including the Sequoia litigation); and
changes to government regulations including royalty regimes and tax legislation.
Perpetual manages these risks by:
•
•
•
•
•
•
attracting and retaining a team of highly qualified and motivated professionals who have a vested interest in the success of the
Corporation;
prudent operation of oil and natural gas properties;
employing risk management instruments and policies to manage exposure to volatility of commodity prices, interest rates and
foreign exchange rates;
maintaining a flexible financial position;
maintaining strict environmental, safety and health practices; and
active participation with industry organizations to monitor and influence changes in government regulations and policies.
A complete discussion of risk factors is included in the Corporation’s 2022 Annual Information Form (“AIF”) available on the Corporation’s
website at www.perpetualenergyinc.com or on SEDAR at www.sedar.com.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 23
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL
REPORTING
Perpetual’s CEO and Chief Financial Officer (“CFO”) have designed, or caused to be designed under their supervision, disclosure controls and
procedures (“DC&P”) and internal controls over financial reporting (“ICOFR”) as defined in National Instrument 52-109 Certification of
Disclosure in Issuer’s Annual and Interim Filings in order to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of the financial statements for external purposes in accordance with IFRS.
Disclosure controls and procedures
The DC&P have been designed to provide reasonable assurance that material information relating to Perpetual is made known to the CEO and
CFO by others, and that information required to be disclosed by Perpetual in its annual filings, interim filing or other reports is filed or
submitted by Perpetual under securities legislation.
Perpetual’s CEO and CFO have concluded, based on their evaluation at December 31, 2022, the DC&P are designed and operating effectively
to provide reasonable assurance that information required to be disclosed by the Corporation in its annual filings, interim filings or other
reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified
in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by the
Corporation in its annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and
communicated to the issuer’s management, including its certifying officers, as appropriate to allow timely decisions regarding required
disclosure.
Management’s annual report on internal controls over financial reporting
Management is responsible for establishing and maintaining adequate ICOFR, which is a process designed by, or under the supervision of, the
CEO and CFO, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
Under the supervision and with the participation of management, including the CEO and CFO, an evaluation of the effectiveness of the internal
controls over financial reporting was conducted as of December 31, 2022 based on criteria described in “Internal Control – Integrated
Framework” issued in 2013 by the Committee of Sponsoring Organization of the Treadway Commission. Based on this assessment,
management determined that, as of December 31, 2022, the internal controls over financial reporting were designed and operating
effectively.
INTERNAL CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
There were no changes in the Corporation’s internal control over financial reporting during the period beginning on October 1, 2022 and
ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
CEO and CFO certifications
Perpetual's CEO and CFO have filed with the Canadian securities regulators regarding the quality of Perpetual's public disclosures relating to
its fiscal 2022 filings with the Canadian securities regulators.
CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management reviews its estimates on a regular
basis. The emergence of new information and changed circumstances may result in actual results or changes to estimates that differ
materially from current estimates.
Perpetual’s financial and operational results incorporate certain estimates including:
•
•
•
•
•
•
•
•
•
estimated commodity sales from production at a specific reporting date for which actual revenues have not yet been received,
including associated estimated credit losses;
estimated royalty obligations, transportation, and operating expenses at a specific reporting date for which costs have been incurred
but have not yet been settled;
estimated capital expenditures on projects that are in progress;
estimated depletion charges and deferred tax assets that are based on estimates of reserves that Perpetual expects to recover in
the future;
estimated future recoverable value of PP&E and E&E and any associated impairment charges or reversals;
estimated fair values of financial instruments that are subject to fluctuation depending upon the underlying forward curves for
commodity prices, foreign exchange rates and interest rates, as well as volatility curves, and the risk of non-performance;
estimated value of ARO that is dependent upon estimates of future costs and timing of expenditures;
estimated compensation expense under Perpetual’s share-based compensation plans including the PSUs awarded under the PSU
Plans that are dependent on the final number of PSU awards that eventually vest based on a performance multiplier; and
estimated fair values of assets acquired and liabilities assumed in a business combination.
A change in a critical accounting estimate can have a significant effect on net loss, including their impact on the depletion rate, provisions,
impairments, and income taxes. A change in a critical accounting estimate can have a significant effect on the value of property, plant, and
equipment, provisions, derivative financial instruments and accounts payable. A complete discussion of critical accounting estimates is
included in the notes to the consolidated financial statements at December 31, 2022.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 24
FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain information in this MD&A including management's assessment of future plans and operations, and including the information contained
under the heading “2023 Outlook” may constitute forward-looking information or statements (together "forward-looking information") under
applicable securities laws. The forward-looking information includes, without limitation, statements with respect to: forecast production and
exploration and development capital expenditures for 2023 and the expectation that such expenditures will be funded from adjusted funds
flow; drilling activities for 2023 including the number of gross and net wells to be drilled; cash costs estimates; projected abandonment and
reclamation expenditures and the funding thereof; expectations as to drilling activity plans in various areas and the benefits to be
derived from such drilling including the production growth and expectations respecting Perpetual's future exploration, development
and drilling activities; and Perpetual's business plan.
Forward-looking information is based on current expectations, estimates and projections that involve a number of known and unknown risks,
which could cause actual results to vary and in some instances to differ materially from those anticipated by Perpetual and described in the
forward-looking information contained in this MD&A. In particular and without limitation of the foregoing, material factors or assumptions on
which the forward-looking information in this MD&A is based include: forecast commodity prices and other pricing assumptions;
forecast production volumes based on business and market conditions; foreign exchange and interest rates; near-term pricing and continued
volatility of the market including inflationary pressures; accounting estimates and judgments; future use and development of
technology and associated expected future results; the ability to obtain regulatory approvals; the successful and timely implementation of
capital projects; ability to generate sufficient cash flow to meet current and future obligations; the ability of Perpetual to obtain and retain
qualified staff and equipment in a timely and cost-efficient manner, as applicable; the retention of key properties; forecast inflation,
supply chain access and other assumptions inherent in Perpetual's current guidance and estimates; the continuance of existing tax,
royalty, and regulatory regimes; the accuracy of the estimates of reserves volumes; ability to access and implement technology necessary to
efficiently and effectively operate assets; and the ongoing and future impact of the coronavirus and the war in Ukraine and related
sanctions on commodity prices and the global economy, among others.
Undue reliance should not be placed on forward-looking information, which is not a guarantee of performance and is subject to a number of
risks or uncertainties, including without limitation those described herein and under "Risk Factors" in Perpetual’s Annual Information Form and
MD&A for the year ended December 31, 2022 and in other reports on file with Canadian securities regulatory authorities which may
be accessed through the SEDAR website (www.sedar.com) and at Perpetual's website (www.perpetualenergyinc.com). Readers are
cautioned that the foregoing list of risk factors is not exhaustive. Forward-looking information is based on the estimates and opinions of
Perpetual’s management at the time the information is released, and Perpetual disclaims any intent or obligation to update publicly any
such forward-looking information, whether as a result of new information, future events or otherwise, other than as expressly required
by applicable securities law.
GLOSSARY
The following is a list of abbreviations that may be used in this MD&A:
Measurement:
bbl
bbl/d
Mbbl
MMbbl
boe(1)
boe/d(1)
Mboe(1)
MMboe(1)
Mcf
Mcf/d
MMcf
MMcf/d
MMBtu
GJ
Volume Conversions:
barrel
barrels per day
thousand barrels
million barrels
barrels of oil equivalent
barrels of oil equivalent per day
thousands of barrels of oil equivalent
millions of barrels of oil equivalent
thousand cubic feet
thousand cubic feet per day
million cubic feet
million cubic feet per day
million British thermal units
gigajoule
Barrel of oil equivalent (“boe”) may be misleading, particularly if used in isolation. In accordance with National Instrument 51-101 (“NI
51-101”), a conversion ratio for conventional natural gas of 6 Mcf:1 bbl has been used, which is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, utilizing a conversion on
a 6 Mcf:1 bbl basis may be misleading as an indicator of value as the value ratio between conventional natural gas and heavy crude oil, based
on the current prices of natural gas and crude oil, differ significantly from the energy equivalency of 6 Mcf:1 bbl. A conversion ratio of 1 bbl of
heavy crude oil to 1 bbl of NGL has also been used throughout this MD&A. “ See "Fourth Quarter Financial and Operating Results” section in
this MD&A for details of constituent product components that comprise Perpetual’s boe production.
Financial and Business Environment:
AECO
DD&A
E&E
GAAP
G&A
IAS
IASB
IFRS
NGLs
NYMEX
PP&E
WTI
Alberta Energy Company
Depletion, depreciation and amortization
Exploration and evaluation
Generally accepted accounting principles
General and administrative
International Accounting Standard
International Accounting Standards Board
International Financial Reporting Standards
Natural gas liquids
New York Mercantile Exchange,
Property, plant and equipment
West Texas Intermediate
PERPETUAL ENERGY INC.
2022 Annual Results
Page 25
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S REPORT
The consolidated financial statements of Perpetual Energy Inc. (“Perpetual” or the “Company”) are the responsibility of Management and have
been approved by the Board of Directors of the Company. These consolidated financial statements have been prepared by Management
in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”)
and the Interpretations of the IFRS Interpretations Committee.
The consolidated financial statements are audited and have been prepared using accounting policies in accordance with IFRS. The preparation
of Management’s Discussion and Analysis is based on the Company’s financial results which have been prepared in accordance with IFRS. It
compares the Company’s financial performance in 2022 to 2021 and should be read in conjunction with the consolidated financial statements
and accompanying notes.
Management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting.
Management believes that the system of internal controls that have been designed and maintained at the Company provide reasonable
assurance that financial records are reliable and form a proper basis for preparation of financial statements. The internal accounting control
process includes Management’s communication to employees of policies which govern ethical business conduct.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The Board of Directors has appointed an Audit Committee consisting of unrelated, non-management directors which meets during the
year with Management and independently with the external auditors and as a group to review any significant accounting, internal
control and auditing matters in accordance with the terms of the charter of the Audit Committee as set out in the Annual Information
Form. The Audit Committee reviews the consolidated financial statements and Management’s Discussion and Analysis before the
consolidated financial statements are submitted to the Board of Directors for approval. The external auditors have free access to the
Audit Committee without obtaining prior Management approval.
With respect to the external auditors, the Audit Committee approves the terms of engagement and reviews the annual audit plan,
the Auditors’ Report and results of the audit. It also recommends to the Board of Directors the firm of external auditors to be appointed by the
shareholders.
The independent external auditors, KPMG LLP, have been appointed by the Board of Directors on behalf of the shareholders to express
an opinion as to whether the consolidated financial statements present fairly, in all material respects, the Company’s financial position,
financial performance and cash flows in accordance with IFRS. The report of KPMG LLP outlines the scope of their examination and their
opinion on the consolidated financial statements.
Susan L. Riddell Rose
President & Chief Executive Officer
Ryan A. Shay
Vice President, Finance & Chief Financial Officer
March 2, 2023
PERPETUAL ENERGY INC.
2022 Annual Results
Page 26
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Perpetual Energy Inc.
Opinion
We have audited the consolidated financial statements of Perpetual Energy Inc. (the "Company"), which
comprise:
• the consolidated statements of financial position as at December 31, 2022 and December 31, 2021
• the consolidated statements of income and comprehensive income for the years then ended
• the consolidated statements of changes in equity for the years then ended
• the consolidated statements of cash flows for the years then ended
• and notes to the consolidated financial statements, including a summary of significant accounting policies
Hereinafter referred to as the “financial statements”.
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated
financial position of the Company as at December 31, 2022 and December 31, 2021, and its consolidated
financial performance and its consolidated cash flows for the years then ended in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities
under those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial
Statements” section of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with
these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global
organization of independent member firms affiliated with KPMG International Limited, a private
English company limited by guarantee. KPMG Canada provides services to KPMG LLP.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 27
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of
the financial statements for the year ended December 31, 2022. These matters were addressed in the context
of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.
We have determined the matters described below to be the key audit matters to be communicated in our auditors’
report.
Assessment of the impact of estimated proved and probable oil and gas reserves on property, plant and
equipment (“PP&E”) and the deferred tax asset (“DTA”)
Description of the matter
We draw attention to note 2, note 3, note 5 and note 23 to the financial statements. The Company uses estimated
proved and probable oil and gas reserves to deplete its development and production assets included in PP&E,
to assess for indicators of impairment or impairment reversal on each of the Company’s cash generating units
(“CGU”) and if any such indicators exist, to perform an impairment test to estimate the recoverable amount of a
CGU and to determine if it is probable that future taxable profits will be sufficient to utilize the underlying
deductible temporary differences and unused tax losses associated with the DTA.
The Company has $170.6 million of PP&E as at December 31, 2022.
The Company identified an indicator of impairment reversal at March 31, 2022 for the Eastern Alberta CGU and
performed an impairment reversal test to estimate the recoverable amount of the CGU. It was determined the
recoverable amount of the Eastern Alberta CGU exceeded the CGU’s carrying value, resulting in all previous
Eastern Alberta CGU impairment, net of depletion, of $7.4 million being reversed.
The estimated recoverable amount of the Eastern Alberta CGU involves significant estimates including:
•
•
The estimate of proved and probable oil and gas reserves
The discount rates.
The Company depletes its net carrying value of development and production assets using the unit-of-production
method by reference to the ratio of production in the period to the related proved and probable oil and gas
reserves, taking into account estimated forecasted future development costs necessary to bring those reserves
into production. Depletion expense on development and production assets was $17.8 million for the year ended
December 31, 2022.
The Company recognized a DTA of $15.9 million at December 31, 2022. The determination of probable future
taxable profits involves significant estimates, including proved and probable oil and gas reserves.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 28
The estimated proved and probable oil and gas reserves includes significant assumptions related to:
•
•
•
•
•
Forecasted oil and gas commodity prices
Forecasted production volumes
Forecasted operating costs
Forecasted royalty costs
Forecasted future development costs.
The Company engages independent third party reserve evaluators to estimate proved and probable oil and gas
reserves. For purposes of the March 31, 2022 impairment test, the Company’s internal reserve evaluators
updated the significant assumptions from the independent third party reserve evaluators estimate of proved and
probable oil and gas reserves as at December 31, 2021.
Why the matter is a key audit matter
We identified the assessment of the impact of estimated proved and probable oil and gas reserves on PP&E
and the DTA as a key audit matter. Significant auditor judgment was required to evaluate the results of our audit
procedures regarding the estimate of proved and probable oil and gas reserves and discount rates. Additionally,
the assessment of the recoverable amounts of a CGU and the measurement of the DTA requires the use of
professionals with specialized skills and knowledge in valuation and tax.
How the matter was addressed in the audit
The following are the primary procedures we performed to address this key audit matter:
We examined management’s impairment reversal test for the Eastern Alberta CGU as at March 31, 2022 by
comparing amounts to the underlying source documents and performing recalculations.
With respect to the estimate of proved and probable oil and gas reserves as at December 31, 2021 for purposes
of the March 31, 2022 impairment test:
• We evaluated the competence, capabilities and objectivity of the independent third party reserve evaluators
engaged by the Company
• We compared forecasted oil and gas commodity prices to those published by other independent third party
reserve evaluators
• We compared the 2021 actual production, operating costs, royalty costs and development costs of the
Company to those estimates used in the prior year’s estimate of proved oil and gas reserves to assess the
Company’s ability to accurately forecast
• We evaluated the appropriateness of forecasted production and forecasted operating costs, royalty costs
and future development costs assumptions by comparing to 2021 historical results. We took into account
changes in conditions and events affecting the Company to assess the adjustments or lack of adjustments
made by the Company in arriving at the assumptions.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 29
With respect to the estimate of proved and probable oil and gas reserves as at March 31, 2022 for purposes of
the March 31, 2022 impairment test:
• We evaluated the competence, capabilities and objectivity of the internal reserve evaluators
• We compared forecasted oil and gas commodity prices to those published by other independent third party
reserve evaluators
• We evaluated the appropriateness of forecasted production and forecasted operating costs, royalty costs
and future development costs assumptions by comparing to corresponding amounts in the proved and
probable oil and gas reserves estimated by the independent third party reserve evaluators as at December
31, 2021 and by comparing to 2022 historical results. We took into account changes in conditions and events
affecting the Company to assess the adjustments or lack of adjustments made by the Company in arriving
at the assumptions.
We involved valuation professionals with specialized skills and knowledge, who assisted in:
• Evaluating the appropriateness of the Eastern Alberta CGU discount rate by comparing the discount rate to
market and other external data
• Assessing the reasonableness of the Company’s estimate of the recoverable amount of the Eastern Alberta
CGU by comparing the Company’s estimate to market metrics and other external data.
We assessed the depletion expense calculation and measurement of the DTA for compliance with IFRS as
issued by the IASB.
With respect to the estimate of proved and probable oil and gas reserves as at December 31, 2022 for purposes
of depletion and the DTA:
• We evaluated the competence, capabilities and objectivity of the independent third party reserve evaluators
engaged by the Company
• We compared forecasted oil and gas commodity prices to those published by other independent third party
reserve evaluators
• We compared the 2022 actual production, operating costs, royalty costs and development costs of the
Company to those estimates used in the prior year’s estimate of proved oil and gas reserves to assess the
Company’s ability to accurately forecast
• We evaluated the appropriateness of forecasted production and forecasted operating costs, royalty costs
and future development costs assumptions by comparing to 2022 historical results. We took into account
changes in conditions and events affecting the Company to assess the adjustments or lack of adjustments
made by the Company in arriving at the assumptions.
We involved income tax professionals with specialized skills and knowledge who assisted in evaluating the
application of relevant tax laws and regulations and the appropriateness of the Company’s estimate of future
taxable profits used in the measurement of the DTA.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 30
Other Information
Management is responsible for the other information. Other information comprises:
• the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities
Commissions.
• the information, other than the financial statements and the auditor’s report thereon, included in a document
likely to be entitled “2022 Annual Results”.
Our opinion on the financial statements does not cover the other information and we do not and will not express
any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit and remain alert for indications that the other
information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this
other information, we conclude that there is a material misstatement of this other information, we are required to
report that fact in the auditors’ report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditor’s report thereon, included in a document
likely to be entitled “2022 Annual Results” is expected to be made available to us after the date of this auditor’s
report. If, based on the work we will perform on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance
with IFRS as issued by the IASB, and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Company or to cease operations,
or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 31
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our
opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis of the financial
statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
judgment and maintain professional skepticism throughout the audit.
We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions
may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,
and whether the financial statements represent the underlying transactions and events in a manner that
achieves fair presentation.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 32
• Communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that
we identify during our audit.
• Provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where applicable, related safeguards.
• Determine, from the matters communicated with those charged with governance, those matters that were of
most significance in the audit of the financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure
about the matter or when, in extremely rare circumstances, we determine that a matter should not be
communicated in our auditors’ report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this auditors’ report is Gregory Ronald Caldwell.
Chartered Professional Accountants
Calgary, Canada
March 2, 2023
PERPETUAL ENERGY INC.
2022 Annual Results
Page 33
PERPETUAL ENERGY INC.
Consolidated Statements of Financial Position
As at
(Cdn$ thousands)
Assets
Current assets
Cash
Accounts receivable
Marketable securities (note 4, 25)
Prepaid expenses and deposits
Product inventory
Risk management contracts (note 22)
Property, plant and equipment (note 5)
Exploration and evaluation (note 6)
Right-of-use assets (note 7)
Deferred tax asset (note 23)
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Other liability (note 11)
Risk management contracts (note 22)
Royalty obligations (note 13)
Lease liabilities (note 14)
Decommissioning obligations (note 15)
Term loan (note 10)
Revolving bank debt (note 9)
Other liability (note 11)
Senior notes (note 12)
Lease liabilities (note 14)
Decommissioning obligations (note 15)
Total liabilities
Equity
Share capital (note 17)
Contributed surplus
Deficit
Total equity
Total liabilities and equity
December 31, 2022
December 31, 2021
$
— $
15,804
1,814
1,564
674
3,847
23,703
170,644
7,168
864
15,894
218,273 $
18,962 $
532
—
—
705
1,688
21,887
2,524
14,909
2,470
34,527
870
25,764
102,951
98,615
46,801
(30,094)
115,322
218,273 $
$
$
$
1,090
11,671
2,409
910
—
682
16,762
153,620
7,329
1,140
—
178,851
32,223
63
321
4,697
778
1,327
39,409
2,469
2,487
1,324
34,189
1,324
31,600
112,802
94,809
45,731
(74,491)
66,049
178,851
Contingencies (note 8) & contractual obligations (note 16)
See accompanying notes to the consolidated financial statements.
Linda A. Dietsche
Director
Geoffrey C. Merritt
Director
PERPETUAL ENERGY INC.
2022 Annual Results
Page 34
PERPETUAL ENERGY INC.
Consolidated Statements of Income and Comprehensive Income
December 31, 2022
December 31, 2021
(Cdn$ thousands, except per share amounts)
Revenue
Oil and natural gas (note 19)
Royalties
Unrealized gain risk management contracts (note 22)
Realized loss risk management contracts (note 22)
Gas over bitumen royalty credit
Other income (note 15)
Expenses
Production and operating
Transportation
Exploration and evaluation (note 6)
General and administrative
Share-based payments (note 18)
Gain on dispositions (note 5)
Depletion and depreciation (note 5 and 7)
Impairment reversal (note 5b)
Net income from operating activities
Finance expense (note 20)
Change in fair value of marketable securities (note 4)
Net income, before income tax
Deferred income tax recovery (expense) (note 23)
Net income and comprehensive income
Net income per share (note 17f)
Basic
Diluted
See accompanying notes to the consolidated financial statements.
$
109,687 $
(20,790)
88,897
3,487
(4,620)
—
348
88,112
16,107
3,872
118
9,911
7,434
—
17,962
(7,400)
40,108
(10,971)
(634)
28,503 $
15,894
44,397 $
0.69 $
0.59 $
$
$
$
$
60,814
(9,920)
50,894
3,733
(4,810)
385
704
50,906
12,859
2,993
120
10,757
2,044
(47,522)
14,020
(30,600)
86,235
(5,396)
282
81,121
—
81,121
1.29
1.16
PERPETUAL ENERGY INC.
2022 Annual Results
Page 35
PERPETUAL ENERGY INC.
Consolidated Statements of Changes in Equity
(Cdn$ thousands, except share amounts)
Share capital
(thousands)
($thousands)
Contributed
surplus
Deficit
Total equity
Balance at December 31, 2021
Net income
Common shares issued (note 17 and 18)
Change in shares held in trust (note 17 and 18)
Share-based payments (note 18)
Balance at December 31, 2022
63,567 $
—
3,174
(797)
—
65,944 $
94,809 $
—
4,611
(805)
—
98,615 $
45,731 $
—
(4,611)
(502)
6,183
46,801 $
(74,491) $
44,397 $
— $
— $
—
(30,094) $
66,049
44,397
—
(1,307)
6,183
115,322
(Cdn$ thousands, except share amounts)
Balance at December 31, 2020
Net income
Common shares issued (note 17 and 18)
Change in shares held in trust (note 17 and 18)
Common share split (note 17)
Common share cancellation (note 17)
Common share odd-lot cancellation (note 17)
Share-based payments (note 18)
Balance at December 31, 2021
Share capital
(thousands)
($thousands)
Contributed
surplus
Deficit
Total equity
61,305 $
—
97,333 $
—
45,217 $
—
(155,612) $
81,121
(13,062)
81,121
2,828
24
8,158
(8,158)
(590)
—
63,567 $
473
(14)
—
(2,779)
(204)
—
94,809 $
(284)
(49)
—
—
—
847
45,731 $
—
—
—
—
—
—
(74,491) $
189
(63)
—
(2,779)
(204)
847
66,049
See accompanying notes to the consolidated financial statements.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 36
PERPETUAL ENERGY INC.
Consolidated Statements of Cash Flows
(Cdn$ thousands)
Cash flows from operating activities
Net income
Adjustments to add (deduct) non-cash items:
Other income (note 15)
Depletion and depreciation (note 5 and 7)
Share-based payments (note 18)
Deferred income tax recovery (note 23)
Unrealized gain on risk management contracts (note 22)
Change in fair value of marketable securities (note 4)
Finance expense (note 20)
Gain on disposition (note 5)
Impairment reversal (note 5b)
Oil and natural gas revenue in-kind (note 13)
Transaction costs on disposition (note 5)
Decommissioning obligations settled (note 15)
Change in non-cash working capital (note 21)
Net cash flows from operating activities
Cash flows from (used in) financing activities
Change in revolving bank debt, net of issue costs (note 9)
Change in senior notes, net of issue costs (note 12)
Change in term loan, net of issue costs (note 10)
Payments of lease liabilities (note 14)
Payments of royalties (note 13)
Shares purchased and held in trust (note 17)
Other liability payments (note 11)
Common shares issues, net of issue costs
Net cash flows from (used in) financing activities
Cash flows from (used in) investing activities
Capital expenditures (note 5)
Acquisitions (note 5)
Net proceeds from dispositions (note 5(a))
Purchase of marketable securities (note 4)
Change in non-cash working capital (note 21)
Net cash flows from (used in) investing activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to the consolidated financial statements.
December 31, 2022
December 31, 2021
$
44,397 $
(348)
17,962
6,183
(15,894)
(3,487)
634
6,424
—
(7,400)
—
—
(1,199)
(9,442)
37,830
11,886
(834)
—
(708)
(6,953)
(1,307)
(63)
—
2,021
(31,909)
—
—
(39)
(8,993)
(40,941)
(1,090)
1,090
— $
$
81,121
(704)
14,020
360
—
(3,734)
(282)
4,087
(47,522)
(30,600)
(4,995)
(583)
(1,759)
3,406
12,815
(15,174)
(233)
(38,700)
(620)
(558)
(395)
—
230
(55,450)
(19,062)
(1,325)
49,549
—
14,563
43,725
1,090
—
1,090
PERPETUAL ENERGY INC.
2022 Annual Results
Page 37
PERPETUAL ENERGY INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(All tabular amounts are in thousands of Cdn$, except where otherwise noted)
1. REPORTING ENTITY
Perpetual Energy Inc. (“Perpetual” or the “Company”) is an oil and natural gas exploration, production, and marketing company
headquartered in Calgary, Alberta. Perpetual owns a diversified asset portfolio, including liquids-rich conventional natural gas assets in the
deep basin of West Central Alberta, heavy crude oil and shallow conventional natural gas in Eastern Alberta, and undeveloped bitumen leases
in Northern Alberta.
The address of the Company’s registered office is 3200, 605 – 5 Avenue S.W., Calgary, Alberta, T2P 3H5.
The consolidated financial statements of the Company are comprised of the accounts of Perpetual Energy Inc. and its wholly owned
subsidiaries: Perpetual Operating Corp., Perpetual Energy Partnership, and Perpetual Operating Trust, which are incorporated in Alberta.
2. BASIS OF PREPARATION
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued
by the International Accounting Standards Board (“IASB”).
The consolidated financial statements of the Company were approved and authorized for issue by the Board of Directors on March 2, 2023.
a)
Critical accounting judgments and significant estimates
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, revenue and expenses. These
judgments, estimates, and assumptions are continuously evaluated and are based on management’s experience and all relevant information
available to the Company at the time of financial statement preparation. As the effect of future events cannot be determined with certainty,
the actual results may differ from estimates. Revisions to accounting estimates are recognized in the period in which the estimates are revised
and in any future periods affected.
Information about the critical judgments and significant estimates made by management are described below and in the relevant notes to the
financial statements.
b)
Critical accounting judgments:
The following are the critical judgments that management has made in the process of applying the Company’s accounting policies. These
judgments have the most significant effect on the amounts reported in the consolidated financial statements.
i)
Cash-generating units (“CGUs”)
The Company allocates its development and production assets to CGUs, identified as the smallest group of assets that generate cash
inflows independent of the cash inflows of other assets or groups of assets. Determination of the CGUs is subject to management’s
judgement and is based on geographical proximity, shared infrastructure, and similar exposure to market risk.
ii)
Identification of impairment indicators
Significant judgment is required to assess when internal or external indicators of impairment or impairment reversal exist, and
impairment testing is required. Management considers internal and external sources of information including oil and gas commodity
prices, expected production volumes, estimated proved and probable oil and gas reserves and rates used to discount the related future
cash flow estimates. Judgement is required to assess these factors when determining if the carrying amount of an asset or CGU is
impaired, or in the case of a previously impaired asset or CGU, whether the carrying amount of the asset or CGU has been restored.
iii) Componentization
For the purposes of depletion, the Company allocates its development and production assets to components with similar useful lives and
depletion methods. The grouping of assets is subject to management’s judgment and is performed on the basis of geographical proximity
and similar reserve life. The Company’s oil and gas assets are depleted on a unit-of-production basis.
iv)
Exploration and evaluation (“E&E”) expenditures
Costs associated with acquiring oil and gas licenses and exploratory drilling are accumulated as exploration and evaluation assets
pending determination of technical feasibility and commercial viability. Establishment of technical feasibility and commercial viability is
subject to judgment and involves management’s review of project economics, resource quantities, expected production techniques,
production costs and required capital expenditures to develop and extract the underlying resources. Management uses the establishment
of commercial reserves within the exploration area as the basis for determining technical feasibility and commercial viability. Upon
determination of commercial reserves, E&E assets attributable to those reserves are tested for impairment and reclassified from E&E
assets to a separate category within property, plant and equipment referred to as development and production assets.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 38
v)
Joint arrangements
Judgment is required to determine when the Company has joint control over an arrangement. In establishing joint control, the Company
considers whether unanimous consent is required to direct the activities that significantly affect the returns of the arrangement, such as
the capital and operating activities of the arrangement.
Once joint control has been established, judgment is also required to classify a joint arrangement. The type of joint arrangement is
determined through analysis of the rights and obligations arising from the arrangement by considering its structure, legal form, and
terms agreed upon by the parties sharing control. An arrangement where the controlling parties have rights to the assets and revenues,
and obligations for the liabilities and expenses, is classified as a joint operation. Arrangements where the controlling parties have rights
to the net assets of the arrangement are classified as joint ventures.
vi) Deferred taxes
Deferred tax assets (if any) are recognized only to the extent it is considered probable that future taxable profits will be sufficient to
utilize the underlying deductible temporary differences and unused tax losses associated with the deferred tax asset. This involves an
assessment of when those deferred tax assets are likely to reverse and judgment as to whether there will be sufficient taxable profits
available to offset the tax assets when they do reverse. The determination of probable future taxable profits involves significant
estimates, including proved and probable oil and gas reserves. To the extent assumptions regarding future profitability change, there can
be an increase or decrease in the amounts recognized in respect of deferred tax assets as well as the amounts recognized in profit or
loss in the period in which the change occurs.
vii) Revenue – principal versus agent
When determining if the Company acted as a principal or as an agent in transactions, management determines if the Company obtains
control of the product. As part of this assessment, management considers if the Company obtained control of the goods or services more
than momentarily, in advance of transferring those goods or services to the customer. In this assessment, the Company considers
indicators that it controlled the goods or services, including whether the Company was primarily responsible for the goods and services,
whether the Company had inventory risk and whether the Company had discretion in establishing prices for the goods or services. Where
control was indicated, the Company has been determined to be the principal and has recorded revenue and the associated expenses on
a gross basis. In other cases, the Company has been determined to be the agent and has recorded revenue net of associated expenses.
c) Significant estimates:
The following assumptions represent the key sources of estimation uncertainty at the end of the reporting period. As future confirming events
occur, the actual results may differ from estimated amounts.
i)
Reserves
The Company uses estimates of proved and probable oil and gas reserves to deplete its development and production assets included in
PP&E, to assess for indicators of impairment or impairment reversal on each of the Company's CGUs and if any such indicators exist, to
perform an impairment test to estimate the recoverable amount of a CGU and to determine if it is probable that future taxable profits will
be sufficient to utilize the underlying deductible temporary differences and unused tax losses associated with the deferred tax asset.
Estimates of proved and probable oil and gas reserves are based upon a number of significant assumptions, such as forecasted
production volumes, oil and gas commodity prices, operating costs, royalty costs, and future development costs. Additional estimates are
made in relation to the marketability of oil and gas, and the assumed effects of regulation by government agencies. The geological,
economic and technical factors used to estimate reserves may change from period to period. Changes in the reported reserves could
have a material impact on the carrying values of the Company’s development and production assets, the calculation of depletion and
depreciation, and the timing of decommissioning expenditures.
The estimate of proved and probable oil and gas reserves are evaluated by independent third party reserve evaluators at least annually.
This evaluation of proved and proved plus probable oil and gas reserves is prepared in accordance with the reserve definitions contained
in National Instrument 51-101 and the COGE Handbook.
The Company is also required to estimate the recoverable amount of exploration and evaluation assets, which consists of undeveloped
lands, exploratory drilling assets and bitumen evaluation assets, for impairment testing. The recoverable amount is based on relevant
industry sales value data.
ii) Marketable securities
Rubellite Share Purchase Warrants are recorded at fair value using the Black Scholes option pricing model. In assessing the fair value of
the warrants, estimates have to be made regarding the expected volatility in share price, option life, dividend yield, and risk-free rate.
iii)
Provisions for decommissioning obligations
Decommissioning, abandonment, and site reclamation expenditures for production facilities, wells, and pipelines are expected to be
incurred by the Company over many years into the future. Amounts recorded for decommissioning obligations and the associated
accretion are calculated based on estimates of the extent and timing of decommissioning activities, future site remediation regulations
and technologies, inflation, liability specific discount rates and related cash flows. The provision represents management’s best estimate
of the present value of the future abandonment and reclamation costs required. Actual abandonment and reclamation costs could be
materially different from estimated amounts.
iv) Derivative financial instruments
Derivatives are measured at fair value on each reporting date. Fair value is the price that would be received or paid to exit the position
as of the measurement date. The Company uses estimated external forecasted market commodity and foreign exchange price curves
available at period end and the contracted volumes over the contracted term to determine the fair value of each contract. Changes in
market pricing between period end and settlement of the derivative contracts could have a material impact on financial results related to
the derivatives.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 39
v) Other liability
The other liability is measured at fair value on each reporting date. The fair value of the other liability is estimated by discounting future
cash payments based on Perpetual’s annual average realized oil and natural gas prices exceeding certain thresholds. Changes in market
pricing between period end and settlement could have a material impact on financial results related to the other liability.
vi) Royalty obligations
The retained East Edson royalty obligation and the gas over bitumen royalty financing are measured at fair value on each reporting date.
The fair value is estimated by discounting future cash payments based on the forecasted natural gas and NGL commodity prices
multiplied by the remaining royalty obligation volumes. Changes in market pricing between period end and settlement could have a
material impact on financial results related to the royalty obligations.
vii) Share-based payments
Share options, deferred share options, and long-term incentive awards issued by the Company are recorded at fair value using the Black
Scholes option pricing model. In assessing the fair value of share options and deferred share options, estimates have to be made
regarding the expected volatility in share price, option life, dividend yield, risk-free rate and estimated forfeitures at the initial grant date.
3.
SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these annual consolidated financial
statements and have been applied consistently by the Company and its subsidiaries.
a) Basis of consolidation
i)
Subsidiaries
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently
exercisable are considered. The financial statements of subsidiaries are included in the consolidated financial statements from the date
that control commences until the date that control ceases
ii)
Business combinations
The acquisition method of accounting is used to account for acquisitions of subsidiaries and assets that meet the definition of a business
under IFRS. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued, and liabilities incurred
or assumed at the date of acquisition of control. Identifiable assets acquired, and liabilities assumed in a business combination are
measured at their recognized amounts (generally fair value) at the acquisition date. The excess of the cost of acquisition over the
recognized amounts of the identifiable assets acquired and liabilities assumed is recorded as goodwill. If the cost of acquisition is less
than the recognized amount of the net assets acquired, the difference is recognized as a bargain purchase gain in net income (loss).
iii)
Jointly owned assets
Many of the Company’s oil and gas activities involve jointly owned assets which are not conducted through a separate entity. The
consolidated financial statements include the Company’s proportionate share of these jointly owned assets, liabilities, revenues and
expenses.
iv) Transactions eliminated on consolidation
Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are
eliminated in preparing the consolidated financial statements.
b)
Financial instrument
Financial instruments comprise cash, accounts receivable, marketable securities, deposits, fair value of derivative assets and liabilities,
accounts payable and accrued liabilities, revolving bank debt, Term Loan, other liability, royalty obligations, and senior notes. These financial
instruments are recognized initially at fair value, net of any directly attributable transaction costs.
i)
Classification and measurement of financial assets
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated at fair value through
profit or loss (“FVTPL”):
•
•
it is held within a business model whose objective is to hold assets to collect contractual cash flows; and
its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the
principal amount outstanding.
A debt investment is measured at fair value through other comprehensive income (“FVOCI”) if it meets both of the following conditions
and is not designated at FVTPL:
•
•
it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial
assets; and
its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the
principal amount outstanding.
On initial recognition of an equity investment that is not held for trading, the Company may irrevocably elect to present subsequent
changes in the investment’s fair value in other comprehensive income (“OCI”). This election is made on an investment-by-investment
basis.
All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. On initial
recognition, the Company may irrevocably designate a financial asset that otherwise meets the requirements to be measured at
amortized cost or at FVOCI at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 40
A financial asset (unless it is a trade receivable without a significant financing component that is initially measured at the transaction
price) is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition.
The following accounting policies apply to the subsequent measurement of financial assets:
a)
Financial assets at FVTPL
These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in
profit or loss.
b)
Financial assets at amortized cost
These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by
impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss
on derecognition is recognized in profit or loss.
ii)
Classification and measurement of financial liabilities
Financial liabilities are classified and measured at amortized cost or FVTPL. A financial liability is classified at FVTPL if it is a derivative or
it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including
any interest expense, are recognized in profit or loss. Other financial liabilities are subsequently measured at amortized cost using the
effective interest method. Interest expense and foreign exchange gains and losses are recognized in profit or loss. Any gain or loss on
derecognition is also recognized in profit or loss.
The Company has classified cash, accounts receivable, deposits, accounts payable and accrued liabilities, revolving bank debt, Term Loan
and senior notes as amortized cost. The marketable securities, other liability, and royalty obligations have been classified as FVTPL.
iii) Derivative assets and liabilities
The Company has entered into certain financial derivative contracts to manage the exposure to market risks from fluctuations in
commodity prices and currency rates. The Company has not designated its financial derivative contracts as effective accounting hedges,
and thus has not applied hedge accounting, even though the Company considers all commodity and currency contracts to be economic
hedges. As a result, all financial derivative contracts are designated as FVTPL and recorded as derivatives on the statement of financial
position at fair value. Changes in the fair value of the commodity price and currency rate derivatives are recognized in net income (loss).
The Company has accounted for its forward physical delivery fixed-price sales contracts as derivative financial instruments. Accordingly,
such forward physical delivery fixed-price sales contracts are designated as FVTPL and recorded as derivatives on the statement of
financial position at fair value.
Transaction costs on derivatives are recognized in net income (loss) when incurred.
Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the
host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative, and the combined instrument is not measured at FVTPL. Changes in the fair value of
separable embedded derivatives are recognized immediately in net income (loss).
iv)
Share capital and warrants
Incremental costs directly attributable to the issue of common shares, warrants and share options are recognized as a deduction from
equity, net of any tax effects.
c)
Inventory
Product inventory consists of the Company's unsold crude oil and is valued at the lower of cost or net realizable value. The cost of crude oil is
determined on a first-in first-out basis. Costs include the direct and indirect expenditures incurred in the normal course of business to bring
the product to its existing condition and location. Net realizable value is the estimated selling price less applicable expenditures required to sell
the product. If the carrying value exceeds the net realizable value, a write down is recognized. Write-downs may be reversed in a subsequent
period if the inventory is still on hand and the circumstances which caused the write-down no longer exist.
d) Property, plant and equipment (PP&E)
i)
Development and Production costs
Items of property, plant and equipment, which include development and production assets, are measured at cost less accumulated
depletion and depreciation and accumulated impairment losses. The initial cost of property, plant and equipment includes the purchase
price or construction costs, costs that are directly attributable to bringing the asset into commercial operations, the initial estimate of
decommissioning costs, and borrowing costs for qualifying assets.
Significant parts of an item of property, plant and equipment, including development and production assets, that have different useful
lives from the life of the area or facility in general, are accounted for as separate items.
Gains and losses on disposition of an item of property, plant and equipment, including development and production assets, are
determined by comparing the proceeds from disposition with the carrying amount of property, plant and equipment and are recognized
in net income (loss). Proceeds may include cash, or other non-cash consideration such as retained drilling rights which are fair valued at
the time of disposition. The carrying amount of any replaced or disposed item of property, plant and equipment is derecognized.
ii)
Subsequent costs
Costs incurred after the determination of technical feasibility and commercial viability and the costs of replacing parts of property, plant
and equipment are recognized as property, plant and equipment only when they increase the future economic benefits embodied in the
specific asset to which they relate. Such capitalized property, plant and equipment generally represent costs incurred in developing
proved and/or probable oil and gas reserves and bringing on or enhancing production from such reserves, and are accumulated on a
PERPETUAL ENERGY INC.
2022 Annual Results
Page 41
field or geotechnical area basis. All other expenditures including the costs of the day-to-day servicing of property, plant and equipment
are recognized as production and operating expense in net income (loss) as incurred.
iii) Depletion and depreciation
The Company depletes its net carrying value of development and production assets using the unit-of-production method by reference to
the ratio of production in the period to the related proved and probable oil and gas reserves, taking into account estimated forecasted
future development costs necessary to bring those reserves into production. The forecasted future development cost estimates are
reviewed by independent third-party reserve evaluators at least annually.
Costs associated with office furniture, information technology, and leasehold improvements are carried at cost and are depreciated on a
straight-line basis over a period ranging from one to three years.
Depreciation methods, useful lives and residual values are reviewed at each period end date for all classes of property, plant, and
equipment.
e) Exploration and evaluation expenditures (E&E)
Pre-license costs, geological and geophysical costs, and lease rentals of undeveloped properties are recognized in net income (loss) as
incurred.
E&E costs, consisting of the costs of acquiring oil and gas licenses, are capitalized initially as E&E assets according to the nature of the assets
acquired. Costs associated with drilling exploratory wells in an undeveloped area are capitalized as E&E costs. The costs are accumulated in
cost centers by well, field or exploration area pending determination of technical feasibility and commercial viability. When technical feasibility
and commercial viability are determined, the relevant expenditure is transferred to property, plant and equipment as development and
production assets, after impairment is assessed and any applicable impairment loss is recognized in net income (loss).
The Company’s E&E assets consist of undeveloped lands, exploratory drilling assets, and bitumen evaluation assets. Gains and losses on
disposition of E&E assets are determined by comparing the proceeds from disposition with the carrying amount and are recognized in net
income (loss).
f) Right-of-use assets
The Company recognizes right-of-use assets and lease liabilities at the lease commencement date. The assets are measured at the lease
liability initially recognized, which comprise the present value of the future lease payments adjusted for any lease payments made at or before
the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to
restore the underlying asset or the site on which it is located, less any lease incentives received.
The right-of-use assets are depreciated to the earlier of the end of the useful life of the asset or the lease term using the straight-line method
as this most closely reflects the expected pattern of consumption of the future economic benefits. The Company presents right-of-use assets
as its own line item on the consolidated statements of financial position. In determining the lease term, management considers the non-
cancellable period along with all facts and circumstances that create an economic incentive to exercise an extension option, or not to exercise
a termination option. In addition, the right-of-use assets are periodically reduced by impairment losses, if any, and adjusted for certain
remeasurements of the lease liabilities. The depreciation term of the right-of-use assets is between two and five years.
g)
Lease Liabilities
The lease liabilities are initially measured at the present value of the future lease payments, discounted using the interest rate implicit in the
lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental
borrowing rate as the discount rate, which is determined based on judgments about the economic environment in which the Company
operates and theoretical analyses about the security provided by the underlying leased asset, the amount of funds required to be borrowed in
order to meet the future lease payments associated with the leased asset, and the term for which these funds would be borrowed.
The lease liabilities are measured at amortized cost using the effective interest rate method. They are remeasured when there is a change in
future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be
payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or
termination option. When the lease liabilities are remeasured in this way, a corresponding adjustment is made to the carrying amount of the
right-of-use assets, or is recorded in profit or loss if the carrying amount of the right-of-use assets has been reduced to zero. Lease payments
are applied against the lease liabilities, with a portion allocated as cash finance expense using the effective interest rate method. The
Company presents lease liabilities as their own line item on the consolidated statements of financial position.
h) Assets held for sale
Non-current assets, or disposal groups consisting of assets and liabilities (“disposal groups”), are classified as held for sale if their carrying
amounts will be recovered principally through a sale transaction rather than through continuing use. Assets and liabilities qualifying as held for
sale must be available for immediate sale in their present condition subject to normal terms and conditions, and their sale must be highly
probable.
Non-current assets, or disposal groups, are measured at the lower of the carrying amount and FVLCD, with impairments recognized in net
income (loss). Non-current assets or disposal groups held for sale are presented in current assets and liabilities within the statement of
financial position. Assets held for sale are not subject to depletion and depreciation.
i)
Impairment
i)
Financial assets
The Company has elected to measure loss allowances for trade receivables and contract assets at an amount equal to lifetime expected
credit losses (“ECLs”). The maximum period considered when estimating ECLs is the maximum contractual period over which the
Company is exposed to credit risk.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 42
ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the
difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to
receive). ECLs are discounted at the effective interest rate of the financial asset.
Loss allowances for financial assets are deducted from the gross carrying amount of the assets. Impairment losses on financial assets are
presented under “other expenses” in the consolidated statements of income (loss) and comprehensive income (loss).
ii)
Non-financial assets
The carrying amounts of the Company’s property, plant and equipment, which includes development and production assets, are reviewed
at each period end date to determine whether there are any internal or external indicators of impairment or impairment reversal. If any
such indicator exists, then the recoverable amount is estimated.
For the purpose of impairment testing, assets are grouped together at a CGU level. The estimated recoverable amount of an asset or a
CGU is determined based on the higher of its FVLCD and its VIU. FVLCD is determined as the amount that would be obtained from the
sale of a CGU in an arm’s length transaction between knowledgeable and willing parties. The FVLCD of development and production
assets is generally determined as the net present value of estimated future cash flows expected to arise from the continued use of the
CGU and its eventual disposition, using assumptions that an independent market participant may take into account. These cash flows are
discounted by an appropriate discount rate which would be applied by such a market participant to arrive at a net present value of the
CGU. In determining VIU, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset. VIU is generally the future cash flows
expected to be derived from production of proved and probable oil and gas reserves estimated by the Company’s independent third-party
reserve evaluators.
An impairment is recognized if the carrying amount of a CGU exceeds the estimated recoverable amount for that CGU. The Company
determines the estimated recoverable amount by using the greater of FVLCD and the VIU. Impairment losses recognized in respect of
CGUs are allocated to reduce the carrying amount of assets in the unit (group of units) on a pro rata basis. Impairment losses are
recognized in net income or loss.
E&E assets are assessed for impairment at the time that any triggering facts and circumstances suggest that the carrying amount
exceeds the estimated recoverable amount as well as upon their eventual reclassification to development and production assets in
property, plant and equipment. If a test is required as a result of triggering facts and circumstances, the Company considers whether the
combined estimated recoverable amount of the CGUs and E&E assets at the total company level is sufficient to cover the combined
carrying value of the CGUs and E&E assets.
In respect of other assets, impairment losses recognized in prior years are assessed at each period end date for any indication that the
loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the
recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying
amount that would have been determined, net of depletion and depreciation, if no impairment loss had been recognized.
j)
Share-based payments
Fixed equity awards granted under the equity-settled share-based payment plans and agreements are measured at grant-date fair value. Fair
values are determined by means of an option pricing model using the exercise price of the equity instrument granted, the share price at the
grant date, the expected life of the grant based on the vesting date and expiry date, estimates of share price volatility, and interest rates over
the expected contractual life of the equity award. A forfeiture rate is estimated on the grant date and is subsequently adjusted to reflect the
actual number of options that vest.
The costs of the equity-settled share-based payments are recognized within general and administrative expense, production and operating
expense, or property, plant and equipment to the extent they are directly attributable, with a corresponding increase in contributed surplus
over the vesting period. Upon exercise or settlement of an equity-based instrument, consideration received, and associated amounts
previously recorded in contributed surplus are recorded to share capital.
Certain awards granted under the performance share rights plan may be settled in cash, in common shares of the Company, or a combination
thereof at the discretion of the Company’s Board of Directors. Fixed value, equity-settled awards are accounted for as cash-settled share-
based payment transactions and are expensed into profit and loss over the unit vesting period with an associated accumulation in accounts
payable and accrued liabilities, as a variable number of equity units will be required to settle the liability.
k) Shares held in trust
The Company has share-based payment plans whereby employees may be entitled to receive shares of the Company purchased on the open
market by a trustee controlled by the Company. Shares acquired and held by the trustee for the benefit of employees that have not yet been
issued to employees, are a separate category of equity that are presented net of common shares outstanding in share capital on the
consolidated statements of financial position (note 17(b)). The balance of shares held in trust represents the cumulative cost of shares held by
the trustee. Upon the issuance of shares to the employee, the amount attributable to an employee is deducted from the balance of shares
held in trust and removed from contributed surplus.
l)
Provisions
Provisions are recognized when the Company has a current legal or constructive obligation as a result of a past event, which can be reliably
estimated, and will require the outflow of economic resources to settle the obligation. A non-current provision is determined using the
estimated future cash flows discounted at a rate that reflects current market conditions and obligation specific risks.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 43
i)
Decommissioning obligations
The Company’s activities give rise to dismantling, decommissioning, and site disturbance remediation activities. A provision is recorded
for the estimated cost of site restoration and capitalized in the relevant asset category.
Decommissioning obligations are measured at the present value of management’s estimate of the extent and timing of expenditures
required to settle the obligation at the statement of financial position date, using a risk-free interest rate not adjusted for credit risk.
Subsequent to the initial measurement, the obligation is adjusted at the end of each reporting period to reflect the passage of time,
changes in the timing and estimate of future cash flows underlying the obligation, and changes in the risk-free rate. The accretion of the
provision due to the passage of time is recognized in net income (loss) whereas changes in the provision arising from changes in
estimated cash flows or changes in the risk-free rate are capitalized. Actual costs incurred upon settlement of the decommissioning
obligations are charged against the provision to the extent the provision was established.
m) Revenue
Revenue from the sale of heavy crude oil, conventional natural gas and NGL is recognized based on the consideration specified in contracts
with customers. The Company recognizes revenue when control of the product transfers to the buyer and collection is reasonably assured.
This is generally at the point in time when the customer obtains legal title to the product which is when it is physically transferred to the
pipelines or other transportation method agreed upon.
Revenues from processing activities are recognized over time as processing occurs and are generally billed monthly.
Royalty income is recognized monthly as it accrues in accordance with the terms of the royalty agreements.
When allocating the transaction price realized in contracts with multiple performance obligations, management is required to make estimates
of the prices at which the Company would sell the product separately to customers. The Company does not currently have any contracts with
multiple performance obligations.
If the consideration promised in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be
entitled in exchange for transferring the promised goods or services to a customer. Royalty obligations (note 13) are considered to be variable
consideration that will be remeasured at fair value at each reporting date.
The Company’s entitlement to gas over bitumen royalty adjustments under the Natural Gas Royalty Regulation (2004) with respect to
foregone production (deemed production) from natural gas wells shut-in for the benefit of bitumen producers in the Athabasca oil sands area,
is recognized as gas over bitumen royalty credit revenue in the period that deemed production occurs, to the extent that the revenue is
expected to be recovered through gas Crown royalties otherwise payable. The final payment related to the gas over bitumen royalty financing
was made on July 25, 2021.
n)
Income tax
Income tax expense comprises current and deferred components. Income tax expense is recognized in net income (loss) except to the extent
that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the period end
date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a
transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the
initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they
reverse, based on the laws that have been enacted or substantively enacted by the period end date. Deferred tax assets and liabilities are
offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable
entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will
be realized simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be sufficient to utilize the underlying
deductible temporary differences and unused tax losses associated with the deferred tax asset. The determination of probable future taxable
profits involves significant estimates, including proved and probable oil and gas reserves. Deferred tax assets are reviewed at each period end
date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
o)
Income (loss) per share amounts
Basic income or loss per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding
during the period. For the dilutive net income per share calculation, the weighted average number of shares outstanding is adjusted for the
potential number of shares which may have a dilutive effect on net income.
Diluted income per share is calculated giving effect to the potential dilution that would occur if outstanding warrants, share options, restricted
rights, performance share rights, or deferred compensation awards were exercised or converted into common shares. The weighted average
number of diluted shares is calculated in accordance with the treasury stock method for warrants, share options, restricted rights,
performance share rights and deferred compensation awards. The treasury stock method assumes that the proceeds received from the
exercise of all potentially dilutive instruments are used to repurchase common shares at the average market price.
p) Government Grants
Government grants are recognized when there is reasonable assurance that the grant will be received, and all attached conditions will be
complied with. When the grant relates to an expense item, it is recognized as an expense reduction in the period in which the costs are
PERPETUAL ENERGY INC.
2022 Annual Results
Page 44
incurred. Government grants related to income are recorded as other income in the period in which eligible expenses were incurred or when
the services have been performed. During the year ended December 31, 2021, the Company received government grants through the Canada
Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy (“CERS”) of $0.9 million. For the year ended December 31, 2021,
the grants were recognized as a reduction to general and administrative and production and operating expenses of $0.8 million and $0.1
million, respectively.
The Company also received government grant funding pursuant to Alberta’s Site Rehabilitation Program (“SRP”) with respect to approved
abandonment and reclamation expenditures incurred by the Company. SRP funding of $0.3 million was received in 2022 (2021 - $0.7 million)
and has been reported as other income (note 15).
q) Changing regulation
Regulations and government programs regarding emissions and climate-related matters are constantly evolving. With respect to
environmental, social and governance (“ESG”) and climate reporting, the IASB has issued an IFRS Disclosure Standard with the aim to
develop sustainability disclosure standards that are globally consistent, comparable and reliable. In addition, the Canadian Securities
Administrators have issued a proposed National Instrument 51-107 Disclosure of Climate-related Matters. The cost to comply with these
standards and others that may be developed over time has not yet been quantified.
4. MARKETABLE SECURITIES
December 31, 2020
Rubellite shares and warrants received (note 4)(1)
Warrants exercised (note 17(d))
AIMCo Bonus Shares received (note 10)(2)
AIMCo Bonus Shares delivered (note 10)(2)
Rubellite Share Purchase Warrants received
Change in fair value of marketable securities
December 31, 2021
Purchase
Change in fair value of marketable securities
December 31, 2022
Amount
($thousands)
—
9
118
1,361
(1,361)
2,000
282
2,409
39
(634)
1,814
$
$
$
(1)
(2)
On September 3, 2021, a Plan of Arrangement was completed involving Perpetual, the shareholders of Perpetual, and Rubellite Energy Inc. (“Rubellite”) (the
“Arrangement”). Under the terms of the Arrangement, for every 46 common shares of Perpetual held, shareholders received 1 common share of Rubellite
and 12 warrants to purchase Rubellite common shares ("Rubellite Warrants"). Each Rubellite Warrant entitled the holder to subscribe for one Rubellite
common share at a price of $2.00 per share until October 4, 2021. Through it’s employee trust, Perpetual received 4,500 Rubellite common shares and
54,000 Rubellite Warrants as part of the Arrangement.
Upon completion of the Arrangement, Perpetual executed its agreement with its Term Loan lender for the settlement of principal and all interest owing on
the Term Loan (“Second Line Loan Settlement”). As part of the Second Lien Loan Settlement, Perpetual delivered 680,485 Rubellite shares (the “AIMCo
Bonus Shares) to the second lien lender. The AIMCo Bonus Shares were valued at $1.4 million.
As at December 31, 2022 the Company holds 58,500 Rubellite shares on behalf of its employees valued at $0.1 million using the Rubellite
common share price of $1.85 per share.
Under the terms of the Arrangement, Perpetual also received 4.0 million Rubellite Share Purchase Warrants, with an exercise price of $3.00
per share, that were initially valued at $2.0 million when received and revalued to $1.4 million as at December 31, 2022. The Company used
the Black Scholes pricing model to calculate the estimated fair value of the Rubellite Share Purchase Warrants.
The following assumptions were used to arrive at the estimate of fair value of the Rubellite Share Purchase Warrants at the initial grant date
upon completion of the Arrangement and as at period end:
Dividend Yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Contractual life (years)
Share price
Exercise price
Fair value
December 31, 2022
Grant Date
—
40 %
3.28 %
3.7
$1.85
$3.00
$0.34
—
40 %
1.20 %
5.0
$2.00
$3.00
$0.50
PERPETUAL ENERGY INC.
2022 Annual Results
Page 45
5. PROPERTY, PLANT AND EQUIPMENT (“PP&E”)
Cost
December 31, 2020
Additions
Acquisitions
Change in decommissioning obligations related to PP&E (note 15)
Transfers from exploration and evaluation (note 6)
Dispositions (a)
December 31, 2021
Additions
Change in decommissioning obligations related to PP&E (note 15)
Transfers from exploration and evaluation (note 6)
December 31, 2022
Accumulated depletion and depreciation
December 31, 2020
Depletion and depreciation
Dispositions (a)
Impairment reversal (b)
December 31, 2021
Depletion and depreciation(1)
Impairment reversal (b)
December 31, 2022
Carrying amount
December 31, 2021
December 31, 2022
Development and
Production Assets
Corporate
Assets
564,959 $
19,060
1,325
2,689
2,943
(16,442)
574,534 $
31,772
(4,655)
161
601,812 $
(441,059) $
(13,500)
3,025
30,600
(420,934) $
(17,781)
7,400
(431,315) $
7,652 $
2
—
—
—
—
7,654 $
137
—
—
7,791 $
(7,567) $
(67)
—
—
(7,634) $
(10)
—
(7,644) $
Total
572,611
19,062
1,325
2,689
2,943
(16,442)
582,188
31,909
(4,655)
161
609,603
(448,626)
(13,567)
3,025
30,600
(428,568)
(17,791)
7,400
(438,959)
153,600 $
170,497 $
20
147
153,620
170,644
$
$
$
$
$
$
$
$
(1)
During the year ended December 31, 2022, depletion and depreciation expense includes $0.3 million which has been capitalized to inventory in accordance
with the Company's inventory policy (December 31, 2021 - nil).
For the year ended December 31, 2022, $2.2 million (December 31, 2021 – $0.4 million) of direct general and administrative expenses were
capitalized. Future development costs for the period ended December 31, 2022 of $104.6 million (December 31, 2021 – $75.3 million) were
included in the depletion calculation. Depletion was $17.8 million (December 31, 2021 - $13.5 million) on development and production assets
for the year ended December 31, 2022.
a) Clearwater Assets Disposition
On September 3, 2021, the Arrangement was completed involving Perpetual, the shareholders of Perpetual, and Rubellite. The Arrangement
resulted in the disposition of all of Perpetual’s Clearwater lands, wells, roads and facilities in northeast Alberta (the “Clearwater Assets”),
working capital and associated cash, and decommissioning obligations to Rubellite was accounted for as being effective for consideration of
$65.5 million.
Consideration included $53.6 million in promissory notes, paid in cash on October 5, 2021, and the assumption of $5.8 million of promissory
notes due to 1974918 Alberta Ltd. (a company controlled by the Company’s CEO (“CEO”) (“197Co”), the issuance of 680,485 Rubellite
common shares valued at $1.4 million (“AIMCo Bonus Shares”), the return of 8.2 million Perpetual common shares exchanged in the
Arrangement valued at $2.8 million and issuance of warrants to purchase 4.0 million Rubellite common shares at a price of $3.00 per share
for a period of five years, valued at $2.0 million.
The consideration received, and calculation of the gain recorded on disposition is summarized below:
($ thousands)
Proceeds from disposition (i)
Transaction costs and closing adjustments (ii)
Carrying amount of assets disposed (iii)
Carrying amount of net working capital disposed, including cash (iv)
Carrying amount of decommissioning obligations disposed (v)
Gain on disposition
$
65,514
(583)
(19,085)
823
853
$
47,522
PERPETUAL ENERGY INC.
2022 Annual Results
Page 46
i)
Total consideration
$65.5 million of consideration as outlined below:
($ thousands)
Promissory note issued by Rubellite to Perpetual(1)
PEI-197Co note assumed by Rubellite(2)
AIMCo Bonus Shares(3)
Perpetual common shares(4)
Rubellite Share Purchase Warrants(5)
Total consideration received
$
53,600
5,773
1,361
2,780
2,000
$65,514
(1)
(2)
(3)
(4)
(5)
Demand promissory note, secured by the Clearwater Assets, and settled on October 5, 2021.
On July 15, 2021, Perpetual exercised an option to acquire certain E&E lands located at Figure Lake in exchange for a demand promissory note secured
by the Figure Lake lands in the amount of $5.8 million owing to 197Co (note 6). The acquired Figure Lake lands comprised part of the Clearwater Assets
sold to Rubellite. The secured promissory note obligation owing to 197Co was assigned by Perpetual to Rubellite as part of the total consideration.
Rubellite shares issued to Perpetual on September 3, 2021 valued at $1.4 million.
Rubellite returned to Perpetual 8.2 million Perpetual common shares valued at $2.8 million. Pursuant to the Plan of Arrangement, Perpetual shareholders
exchanged 8.2 million Perpetual common shares with Rubellite for Rubellite common shares and warrants. The Perpetual shares received were
subsequently cancelled.
Represents the estimated value of 4.0 million Rubellite Share Purchase Warrants at $3.00 per share exercise price (note 4) valued at $2.0 million.
ii)
Transaction costs and closing
adjustments
iii) Carrying amount of assets disposed
$0.6 million of transaction costs and closing adjustments.
$19.1 million of assets including development and production assets ($16.1 million of costs
less $2.8 million of accumulated depletion) and exploration and evaluation assets ($5.8
million).
iv) Carrying amount of net working
capital disposed
$0.8 million of net working capital including cash ($4.1 million), accounts receivable ($0.7
million), and accounts payable ($5.6 million).
v)
Carrying amount of decommissioning
obligations disposed
$0.9 million of decommissioning obligations associated with development and production
assets disposed.
b)
Cash-generating units and impairment reversals
There were no indicators of impairment for the Company’s cash generating units ("CGUs") as at December 31, 2022 and therefore, an
impairment test was not performed.
The Company identified an indicator of impairment reversal at March 31, 2022 for the Eastern Alberta CGU and performed an impairment
reversal test to estimate the recoverable amount of the CGU. It was determined the recoverable amount of the Eastern Alberta CGU exceeded
the CGU’s carrying value, resulting in all previous Eastern Alberta CGU impairment, net of depletion, of $7.4 million being reversed. No
historical impairments remain for the Eastern Alberta CGU.
At March 31, 2022, indicators of impairment reversal for the Eastern Alberta CGU were primarily a result of increased forecasted benchmark
commodity prices which positively impacted operating cash flows. The estimated recoverable amount of the Eastern Alberta CGU was
determined using the value-in-use methodology, based on the estimates of proved and probable oil and gas reserves and the related cash
flows at March 31, 2022, as updated by internal reserve evaluators, along with forecasted oil and gas commodity prices based on an average
of three independent third party reserve evaluators, and an estimate of market discount rates between 10% and 20% to consider risks
specific to the Eastern Alberta CGU. For purposes of the March 31, 2022 impairment test, the Company's internal reserve evaluators updated
the significant assumptions from the independent third party reserve evaluators estimate of proved and probable oil and gas reserves as at
December 31, 2021.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 47
Forecasted oil and gas commodity prices based on an average of three independent third party reserve evaluators were used in the VIU
calculation as at March 31, 2022:
Year
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036(1)
West Texas
Intermediate
(“WTI”) Crude Oil
(US$/bbl)
USD/CDN exchange
rate
(US$/Cdn$)
Alberta Heavy Crude Oil
(Cdn$/bbl)
AECO Gas
(Cdn$/MMBtu)
NYMEX Gas
(Cdn$/MMBtu)
94.53
84.15
77.51
71.63
73.06
74.53
76.02
77.54
79.09
80.67
82.28
83.93
85.61
87.32
89.06
1.25
1.25
1.25
1.25
1.25
1.25
1.25
1.25
1.25
1.25
1.25
1.25
1.25
1.25
1.25
95.13
77.65
70.24
64.45
65.74
67.06
68.40
69.77
71.16
72.58
74.04
75.52
77.03
78.57
80.14
5.13
4.28
3.69
3.45
3.52
3.59
3.66
3.73
3.81
3.88
3.96
4.04
4.12
4.20
4.29
5.48
4.44
3.75
3.56
3.63
3.70
3.77
3.85
3.93
4.00
4.08
4.17
4.25
4.33
4.42
(1)
Forecasted oil and gas commodity prices escalate 2.0% per year thereafter.
As at March 31, 2022, if discount rates used in the calculation of impairment reversal changed by 1% with all other variables held constant,
the impairment reversal would be unchanged. As at March 31, 2022, if commodity price estimates changed by 5% with all other variables held
constant, the impairment reversal would be unchanged.
During the year ended December 31, 2021, the Company reversed $30.6 million of historical impairments, net of depletion.
The Company identified an indicator of impairment reversal at June 30, 2021 for the West Central and Eastern Alberta cash generating units
and additionally at December 31, 2021 for the Eastern Alberta CGU and performed impairment reversal tests to estimate the recoverable
amount of each CGU. It was determined the recoverable amount of the West Central and Eastern Alberta CGUs exceeded each CGU’s carrying
value, resulting in all previous West Central impairment, net of depletion, of $22.6 million and Eastern Alberta impairment of $8.0 million,
respectively, being reversed. No historical impairments remain for the West Central CGU.
At December 31, 2021, indicators of impairment reversal for the Eastern Alberta CGU included the recovery in global oil and gas commodity
prices, changing development plans, positive proved and probable oil and gas reserve revisions, and increasing economic stability and
certainty in the oil and gas industry, all of which positively impact operating cash flows. There were no internal or external indicators of
impairment for the West Central CGU as at December 31, 2021. The estimated recoverable amount of the Eastern Alberta CGU was
determined using the value-in-use methodology, based on the estimates of proved and probable oil and gas reserves and the related cash
flows as evaluated by the Company’s independent third party reserve evaluators at December 31, 2021, along with forecasted oil and gas
commodity prices based on an average of three independent third party reserve evaluators, and an estimate of market discount rates
between 10% and 20% to consider risks specific to the Eastern Alberta CGU.
At December 31, 2021, the Company determined that the estimated recoverable amount of the Eastern Alberta CGU exceeded the carrying
amount of $42.2 million. Accordingly, an impairment reversal of $0.5 million was included in net income.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 48
Forecasted oil and gas commodity prices based on an average of three independent third party reserve evaluators were used in the VIU
calculation as at December 31, 2021:
Year
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036(1)
West Texas
Intermediate
(“WTI”) Crude Oil
(US$/bbl)
USD/CDN exchange
rate
(US$/Cdn$)
Alberta Heavy Crude Oil
(Cdn$/bbl)
AECO Gas
(Cdn$/MMBtu)
NYMEX Gas
(Cdn$/MMBtu)
72.83
68.78
66.76
68.09
69.45
70.84
72.26
73.70
75.18
76.68
78.21
79.78
81.37
83.00
84.66
0.797
0.797
0.797
0.797
0.797
0.797
0.797
0.797
0.797
0.797
0.797
0.797
0.797
0.797
0.797
66.45
61.90
59.45
60.64
61.87
63.11
64.37
65.67
66.68
68.02
69.38
70.77
72.18
73.63
75.10
3.56
3.21
3.05
3.11
3.17
3.23
3.30
3.36
3.43
3.50
3.57
3.64
3.71
3.79
3.86
4.83
4.32
3.98
4.06
4.15
4.23
4.31
4.40
4.49
4.58
4.67
4.76
4.86
4.95
5.05
(1)
Forecasted oil and gas commodity prices escalate 2.0% per year thereafter.
As at December 31, 2021, if discount rates used in the calculation of impairment reversal changed by 1% with all other variables held
constant, the impairment reversal would change by approximately $1.5 million. As at December 31, 2021, if commodity price estimates
changed by 5% with all other variables held constant, the impairment reversal would change by approximately $5.8 million.
At June 30, 2021, indicators of impairment reversal for the West Central and Eastern Alberta CGUs related to the significant recovery in global
oil and natural gas prices, coupled with the increasing economic stability and certainty in the oil and natural gas industry which positively
impacts operating cash flows. The estimated recoverable amounts of the CGUs were determined using VIU based on the estimates of proved
and probable oil and gas reserves and the related cash flows as evaluated or reviewed by the Company’s independent third party reserves
evaluators and updated by internal reserve evaluators, along with forecasted oil and gas commodity prices based on an average of three
independent third party reserve evaluators as at July 1, 2021, and an estimate of market discount rates between 12% and 22% to consider
risks specific to the CGUs.
The Company determined that the estimated recoverable amounts of the West Central CGU and Eastern Alberta CGU exceeded their carrying
amounts of $89.6 million and $28.6 million, respectively. Accordingly, an impairment reversal of $30.1 million was included in net income in
the second quarter of 2021.
Forecasted oil and gas commodity prices based on an average of three independent third party reserve evaluators were used in the VIU
calculations as at June 30, 2021:
Year
WTI Crude Oil
(US$/bbl)
USD/CDN exchange rate
(US$/Cdn$)
Alberta Heavy Crude Oil
(Cdn$/bbl)
AECO Gas
(Cdn$/MMBtu)
NYMEX Gas
(Cdn$/MMBtu)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035(1)
66.59
67.20
63.95
63.23
64.50
65.79
67.10
68.44
69.81
71.21
72.63
74.09
75.57
77.08
78.62
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
61.66
61.13
55.88
54.95
56.06
57.19
58.34
59.51
60.71
61.92
63.16
64.43
65.71
67.03
68.37
3.18
3.13
2.72
2.71
2.76
2.82
2.88
2.94
2.99
3.05
3.12
3.18
3.24
3.31
3.37
4.16
3.98
3.65
3.70
3.78
3.85
3.93
4.01
4.09
4.17
4.26
4.34
4.43
4.52
4.61
(1)
Commodity price estimates escalate 2.0% per year thereafter.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 49
6.
EXPLORATION AND EVALUATION (“E&E”)
Balance, beginning of year
Acquisitions
Dispositions
Transfers to property, plant and equipment (note 5)
Balance, end of year
December 31, 2022
December 31, 2021
$
$
7,329 $
—
—
(161)
7,168 $
10,272
5,773
(5,773)
(2,943)
7,329
During the year ended December 31, 2022, $0.1 million (2021 - $0.1 million) in costs were charged directly to E&E expense in net income
(loss).
On July 15, 2021, Perpetual exercised an option to acquire lands located at Figure Lake in exchange for a demand promissory note secured by
the Figure Lake lands in the amount of $5.8 million owing to 197Co. The acquired Figure Lake lands comprised part of the Clearwater Assets
sold to Rubellite. The secured promissory note obligation owing to 197Co was assigned by Perpetual to Rubellite as part of the disposition of
the Clearwater Assets.
Impairment of E&E assets
E&E assets are tested for impairment both at the time of any triggering facts and circumstances as well as upon their eventual reclassification
to development and production assets in PP&E.
At December 31, 2022 and 2021, the Company conducted an assessment of indicators of impairment and impairment reversal for the
Company’s E&E assets. There were no triggers identified and therefore, an impairment test was not performed. The Company transferred
undeveloped land to PP&E in 2022 at a value of $0.2 million (2021 - $2.9 million), which was equal to the book value in E&E.
7. RIGHT-OF-USE ASSETS
The Company leases several assets including office space, vehicles, and other leases. Information about leases for which the Company is a
lessee is presented below:
Head office
Vehicles
Other leases
Total
Cost
January 1, 2021
Additions
December 31, 2021
Additions
December 31, 2022
Accumulated depreciation
January 1, 2021
Depreciation
December 31, 2021
Depreciation
December 31, 2022
Carrying amount
December 31, 2021
December 31, 2022
8. CONTINGENCIES
$
$
$
$
$
$
$
$
1,591 $
—
1,591 $
—
1,591 $
(497) $
(258)
(755) $
(258)
(1,013) $
389 $
221
610 $
181
791 $
(215) $
(134)
(349) $
(170)
(519) $
247 $
—
247 $
—
247 $
2,227
221
2,448
181
2,629
(143) $
(61)
(204) $
(29)
(233) $
(855)
(453)
(1,308)
(457)
(1,765)
836 $
578 $
261 $
272 $
43 $
14 $
1,140
864
On August 3, 2018, the Company received a Statement of Claim that was filed by PricewaterhouseCoopers Inc. LIT (“PwC”), in its capacity as
trustee in bankruptcy (the “Trustee”) of Sequoia Resources Corp. (“Sequoia”), with the Alberta Court of Queen’s Bench (the “Court”), against
Perpetual (the “Sequoia Litigation”). The claim relates to a six-year-old transaction when, on October 1, 2016, Perpetual closed the disposition
of shallow conventional natural gas assets in Eastern Alberta to an arm’s length third party at fair market value after an extensive and lengthy
marketing, due diligence, and negotiation process (the “Sequoia Disposition”). This transaction was one of several completed by Sequoia.
Sequoia assigned itself into bankruptcy on March 23, 2018. PwC is seeking an order from the Court to either set this transaction aside or
declare it void, or damages of approximately $217 million. On August 27, 2018, Perpetual filed a Statement of Defence and Application for
Summary Dismissal with the Court in response to the Statement of Claim. All allegations made by PwC have been denied and applications to
the Court to dismiss all claims has been made on the basis that there is no merit to any of them.
On January 13, 2020, a written decision related to the Application for Dismissal, dismissed and struck all claims against the Company’s CEO
and all but one of the claims filed against Perpetual. The Court did not find that the test for summary dismissal relating to whether the asset
transaction was an arm’s length transfer for purposes of section 96(1) of the Bankruptcy and Insolvency Act (the “BIA”) was met, on the
balance of probabilities. Accordingly, the BIA claim was not dismissed or struck and only that part of the claim could continue against
Perpetual. The Trustee filed a notice of appeal with the Court of Appeal of Alberta, challenging the entire decision, and Perpetual filed a
similar notice of appeal contesting the BIA claim portion of the decision (the “First Appeal”). The First Appeal proceedings were heard on
December 10, 2020. On January 25, 2021, the Court of Appeal of Alberta issued their judgement with respect to the First Appeal proceedings,
PERPETUAL ENERGY INC.
2022 Annual Results
Page 50
dismissing the appeal filed by Perpetual and granting certain aspects of the appeals filed by the Trustee, thereby reinstating certain elements
of the Sequoia Litigation for trial. On March 24, 2021, Perpetual applied for leave to appeal the First Appeal decision to the Supreme Court of
Canada (the “SCC”). On July 8, 2021, the SCC dismissed Perpetual’s application.
On February 25, 2020, Perpetual filed a second application to strike and summarily dismiss the BIA claim on the basis that there was no
transfer at undervalue, and Sequoia was not insolvent at the time of the asset transaction nor caused to be insolvent by the asset transaction
(the “Second Summary Dismissal Application”). In July 2020, the Orphan Well Association (“OWA”), certain oil and gas companies, and six
municipalities applied to intervene in the Second Summary Dismissal Application proceedings. The OWA and certain oil and gas companies
were permitted to intervene (the “Intervenors”) in the proceedings which took place on October 1 and 2, 2020. The Intervenors were also
permitted to intervene in the First Appeal proceedings. On January 14, 2021 the Court issued its decision, finding that the Trustee could not
establish a necessary element of the BIA Claim as Sequoia was not insolvent at the time of, nor rendered insolvent by, the Sequoia
Disposition. The Court therefore concluded there is “no merit” to the BIA Claim and it summarily dismissed the balance of the Statement of
Claim. The Trustee appealed this decision, and the Court of Appeal hearing took place on February 10, 2022, with the panel reserving
judgement. On March 25, 2022, the Court of Appeal issued their judgement with respect to this matter and allowed PwC’s appeal on the basis
that the Court of Queen’s Bench erred in law in its handling of the end-of-life obligations and that based on the record, it could not be
concluded the error was without consequence, and that the Court of Queen’s Bench also erred in agreeing to hear the Second Summary
Dismissal Application. On this basis, the BIA Claim has been directed to trial.
The Trustee filed its Amended Statement of Claim with the Court on October 14, 2022. Perpetual filed its Statement of Defence to Amended
Statement of Claim on December 12, 2022.
Management expects that the Company is more likely than not to be completely successful in defending against the Sequoia Litigation such
that no damages will be awarded against it, and therefore, no amounts have been accrued as a liability in these financial statements.
9. REVOLVING BANK DEBT
The Company has a first lien credit facility of $30.0 million (December 31, 2021 - $17 million) with an initial term to May 31, 2023. The initial
term may be extended to May 31, 2024 subject to approval by the syndicate. If the facility is not extended all outstanding balances would be
repayable on May 31, 2024. The next semi-annual borrowing base redetermination is scheduled to be completed on or before May 31, 2023.
As at December 31, 2022, $14.9 million was drawn (December 31, 2021 – $2.5 million) and $1.2 million of letters of credit had been issued
(December 31, 2021 – $1.0 million) under the Company’s credit facility. Borrowings under the Credit Facility bear interest at its lenders’ prime
rate or Banker’s Acceptance rates, plus applicable margins and standby fees. The applicable Banker’s Acceptance margins range between
3.0% and 5.5%. The effective interest rate on the Credit Facility at December 31, 2022 was 7.9%. For the year ended December 31, 2022 if
interest rates changed by 1% with all other variables held constant, the impact on annual cash finance expense and net income would be $0.1
million.
The Credit Facility is secured by general first lien security agreements covering all present and future property of the Company and its
subsidiaries.
At December 31, 2022, the Credit Facility was not subject to any financial covenants and the Company was in compliance with all customary
non-financial covenants.
10. TERM LOAN
Maturity date
Interest rate
Principal
Carrying Amount
December 31, 2022
December 31, 2021
Principal
Carrying amount
Term loan
December 31, 2024
8.1 % $
2,671 $
2,524 $
2,671 $
2,469
During the third quarter of 2021, Perpetual executed an agreement with its Term Loan lender for the settlement of principal and all interest
owing on the Term Loan. Perpetual substantively modified the previous Term Loan with Alberta Investment Management Corporation
(“AIMCo”) in exchange for the payment of approximately $38.5 million in cash, the delivery by Perpetual of the AIMCo Bonus Shares at a
value of $1.4 million, the issuance of a new $2.7 million second lien Term Loan (the “New Term Loan”), and up to an aggregate $4.5 million in
contingent payments over the three year period ended June 30, 2024 in the event that Perpetual’s annual average realized oil and natural gas
prices exceed certain thresholds (the “Second Lien Loan Settlement”) (note 11). All amounts related to the Second Lien Loan Settlement were
paid on October 5, 2021. The New Term Loan bears interest at 8.1% annually, which Perpetual may elect to pay-in-kind and will mature on
December 31, 2024. Perpetual has the ability to repay the Term Loan at any time without any repayment penalty.
The Company and the Term Loan lender agreed to allow $1.8 million of interest due December 31, 2020 to be paid-in-kind and added to the
outstanding principal amount of the loan and all other interest owing on the Term Loan to be settled as part of the Second Lien Loan
Settlement. Non-cash paid-in-kind interest of $0.8 million was recorded in the third quarter of 2021, which increased the principal amount of
the Term Loan owing upon settlement to $49.6 million. As a result of the Second Lien Loan Settlement, the carrying amount of $49.6 million
was in excess of the consideration received of $42.8 million, resulting in a gain of $6.8 million being recognized (note 20).
The New Term Loan has a cross-default provision with the Credit Facility and contains substantially similar provisions and covenants as the
Credit Facility (note 9). The Term Loan is secured by a general security agreement over all present and future property of the Company and
its subsidiaries on a second priority basis, subordinate only to liens securing loans under the Credit Facility.
At December 31, 2022, the Term Loan was not subject to any financial covenants and the Company was in compliance with all customary
non-financial covenants.
11. OTHER LIABILITY
Pursuant to the terms of the Second Lien Loan Settlement, Perpetual committed to pay up to $4.5 million in potential contingent payments in
the event that the Company’s annual average realized crude oil and natural gas prices exceed certain thresholds in each of the annual periods
ended December 31, 2023. The payment for 2021 was capped at $1.3 million; the payment for 2022 is capped at $1.3 million; and the
payment for 2023 is capped at $1.9 million. For 2021, $0.2 million was earned and $0.1 million was paid on June 30, 2022, with the remaining
$0.1 million to be paid on June 30, 2023. For 2022, $1.3 million was earned. This leaves a maximum remaining total obligation to be earned
for 2023 of $2.0 million. At December 31, 2022, the Company estimated the maximum total remaining obligation to be $3.3 million, and after
discounting the fair value of the contingent liability was recorded as $3.0 million. The change in fair value of this liability was recorded as a
non-cash finance expense in the statements of income and comprehensive income.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 51
The table below summarizes the change in fair value of the contingent payments:
Balance, beginning of year
Initial recognition
Cash payments
Change in fair value
Balance, end of year
Current
Non-current
Total other liability
December 31, 2022
December 31, 2021
1,387 $
—
(63)
1,678
3,002 $
—
228
—
1,159
1,387
December 31, 2022
December 31, 2021
532 $
2,470
3,002 $
63
1,324
1,387
$
$
$
$
The Company has designated the other liability as financial liabilities which are measured at fair value through profit and loss, estimated by
discounting potential contingent payments. For the year ended December 31, 2022, an unrealized loss of $1.7 million (2021 – $1.2 million) is
included in non-cash finance expense related to the change in fair value of other liability (note 20).
At December 31, 2022, if forecasted natural gas commodity prices changed by $0.25 per GJ with all other variables held constant, the fair
value of the total other liability and net income for the period would change by nil as the maximum remaining obligation has been met and
this movement would not reduce the remaining obligation to less than it’s maximum. If forecasted crude oil commodity prices changed by
$5.00 per bbl with all other variables held constant, the fair value of the other liability and net income for the period would also change by nil
for the same reason.
12. SENIOR NOTES
Maturity date
Interest rate
Principal
Carrying Amount
December 31, 2022
December 31, 2021
Principal
Carrying amount
Senior notes
January 23, 2025
8.75 % $
35,647 $
34,527 $
36,583 $
34,189
On January 22, 2021, Perpetual announced the completion of a Court-approved plan of arrangement whereby the unsecured 2022 Senior
Notes were exchanged for new 8.75% secured third lien notes due January 23, 2025. The 2025 Senior Notes have been issued under a trust
indenture that contains substantially the same terms as the 2022 Senior Notes, other than the 2025 Senior Notes are secured on a third lien
basis and allow for the semi-annual interest payments to be paid at Perpetual’s option, in cash, or in additional 2025 Senior Notes (a “PIK
Interest Payment”). In 2021, the Company elected to pay the semi-annual interest payments by making PIK Interest Payments, increasing the
principal amount to $36.6 million.
The Company satisfied the January 23, 2022 and the July 23, 2022 semi-annual interest payment of $1.6 million by making cash payments.
Subsequent to December 31, 2022 the Company satisfied the January 23, 2023 semi-annual interest of $1.6 million by making a cash
payment.
At December 31, 2022, the senior notes are recorded at the present value of future cash flows, net of $1.1 million in issue and principal
discount costs which are amortized over the remaining term using a weighted average effective interest rate of 13.9%.
During the third quarter of 2022 the Company purchased and cancelled a portion of the 2025 Senior Notes balance with a carrying value of
$0.9 million (2021 - nil) for gross proceeds of $0.8 million. A gain on extinguishment of $0.1 million (2021 - nil) is included in non-cash finance
expense (note 20).
The senior notes are direct senior secured, third lien obligations of the Company. The Company may redeem the senior notes without any
repayment penalty. The senior notes have a cross-default provision with the Company’s Credit Facility. In addition, the senior notes indenture
contains restrictions on certain payments including dividends, retirement of subordinated debt, and stock repurchases.
At December 31, 2022, the senior notes were not subject to any financial covenants and the Company was in compliance with all customary
non-financial covenants.
Entities controlled by the Company’s CEO hold $15.9 million of the 2025 Senior Notes outstanding. An entity that is associated with the
Company’s CEO holds an additional $10.3 million of the 2025 Senior Notes outstanding.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 52
13. ROYALTY OBLIGATIONS
December 31, 2020
Cash payments(1)
Non-cash payments in-kind
Change in fair value (note 20)
December 31, 2021
Cash payments(2)
Change in fair value (note 20)
December 31, 2022
Retained East Edson
royalty obligation
Gas over bitumen
royalty financing
5,714 $
435 $
—
(4,995)
3,978
4,697
(6,953)
2,256
(558)
—
123
—
—
—
— $
— $
$
$
Total
6,149
(558)
(4,995)
4,101
4,697
(6,953)
2,256
—
(1)
(2)
The final payment related to the gas over bitumen royalty financing was made on July 25, 2021.
The retained East Edson royalty obligation ended on December 31, 2022.
The retained East Edson royalty obligation formed part of the net consideration received by Perpetual following the disposition transaction in
2020, whereby Perpetual agreed to retain the purchaser’s 50% working interest in the existing gross overriding royalty obligation on the
property, equivalent to 2.8 MMcf/d of natural gas and associated NGL production for the period April 1, 2020 to December 31, 2022. Prior to
November 1, 2021, the retained East Edson royalty obligation was paid in-kind, and settled through non-cash delivery of contractual natural
gas and NGL volumes to the royalty holder. As of November 1, 2021, the royalty obligation is settled through payment in cash.
The Company has designated the retained East Edson royalty obligation and the gas over bitumen royalty financing as financial liabilities
which are measured at fair value through profit and loss, estimated by discounting future royalty obligations based on forecasted natural gas
and NGL commodity prices multiplied by the royalty obligation volumes. For the year ended December 31, 2022, an unrealized loss of $2.3
million (2021 – unrealized loss of $4.1 million) is included in non-cash finance expense related to the change in fair value of the retained East
Edson total royalty obligation (note 20).
14. LEASE LIABILITIES
Balance, beginning of year
Additions
Interest on lease liabilities (note 20)
Payments
Total lease liabilities
Current
Non-current
Total lease liabilities
December 31, 2022
December 31, 2021
$
$
$
$
2,102 $
181
116
(824)
1,575 $
705 $
870
1,575 $
2,501
221
148
(768)
2,102
778
1,324
2,102
Lease terms are negotiated on an individual basis and contain a wide range of terms and conditions. Incremental borrowing rates used to
measure the present value of the future lease payments at December 31, 2022 were between 4.3% and 6.6% (2021 – 4.3% and 6.6%).
PERPETUAL ENERGY INC.
2022 Annual Results
Page 53
15. DECOMMISSIONING OBLIGATIONS
The following significant assumptions were used to estimate decommissioning obligations:
Obligations incurred, including acquisitions
Change in risk free interest rate
Change in estimates
Change in decommissioning obligations related to PP&E (note 5)
Obligations settled (cash)
Obligations settled(1) (non-cash)
Obligations disposed (note 5(a)(v))
Accretion (note 20)
Change in decommissioning obligations
Balance, beginning of year
Balance, end of year
Decommissioning obligations – current(2)
Decommissioning obligations – non-current
Total decommissioning obligations
December 31, 2022
December 31, 2021
$
687 $
(5,325)
(17)
(4,655)
(1,199)
(348)
—
727
(5,475)
32,927
27,452 $
1,688 $
25,764
27,452 $
$
$
$
965
(1,309)
3,033
2,689
(1,760)
(704)
(853)
531
(97)
33,024
32,927
1,327
31,600
32,927
(1)
(2)
During the year ended December 31, 2022, obligations settled (non-cash) of $0.3 million (2021 – $0.7 million) respectively were funded by payments made
directly to Perpetual’s service providers from the Alberta Site Rehabilitation Program. These amounts have been recorded as other income.
Current decommissioning liabilities relate to obligations that the Company reasonably expects to be settled within the next 12 months.
Decommissioning obligations are estimated based on the Company’s net ownership interest in all wells and facilities, estimated costs to
reclaim and abandon these wells and facilities, and the estimated timing of the costs to be incurred in future periods. The Company's current
decommissioning obligation exceeds the Alberta Energy Regulator's ("AER") required spend over the next twelve months.
The increase in the provision due to the passage of time, which is referred to as accretion, is recognized as non-cash finance expense in the
condensed interim consolidated statements of income and comprehensive income. Decommissioning obligations are further adjusted at each
period end date for changes in the risk-free interest rate, after considering additions and dispositions of PP&E. Decommissioning obligations
are also adjusted for revisions to future cost estimates and the estimated timing of costs to be incurred in future periods.
The following significant assumptions were used to estimate the Company’s decommissioning obligations:
Undiscounted obligations
Average risk-free rate
Inflation rate
Expected timing of settling obligations
16. CONTRACTUAL OBLIGATIONS
December 31, 2022
December 31, 2021
$
32,664 $
3.3%
2.1%
32,254
1.7%
1.8%
1 to 25 years
1 to 25 years
As at December 31, 2022, the Company’s minimum contractual obligations and lease commitments over the next five years and thereafter,
excluding estimated interest payments, are as follows:
2023
2024
2025
2026
Total
Contractual obligations
Accounts payable and accrued liabilities
18,962
Revolving bank debt
Term loan, principal amount
Senior notes, principal amount
Lease liabilities
Pipeline transportation commitments
Total
–
–
–
705
1,924
21,591
–
14,909
2,671
–
680
1,659
19,919
–
–
–
35,647
190
1,293
37,130
–
–
–
–
–
319
319
18,962
14,909
2,671
35,647
1,575
5,195
78,959
PERPETUAL ENERGY INC.
2022 Annual Results
Page 54
17. SHARE CAPITAL
Balance, beginning of year
Issued pursuant to share-based payment plans
Shares held in trust purchased (b)
Shares held in trust issued (b)
Treasury shares issued (c)
Shares held in trust sold pursuant to the Plan of Arrangement (d)
Shares held in trust split pursuant to the Plan of Arrangement (d)
Common share split (d)
Common share cancellation (d)
Common share odd-lot consolidation (e)
Balance, end of year
a) Authorized
Authorized capital consists of an unlimited number of common shares.
b) Shares held in trust
December 31, 2022
December 31, 2021
Shares
(thousands)
Amount
($thousands)
Shares
(thousands)
Amount
($thousands)
63,567 $
3,174
(1,334)
537
94,809
4,611
(1,307)
502
—
—
—
—
—
—
—
—
—
—
—
—
65,944 $
98,615
61,305 $
97,333
1,828
(542)
566
1,000
189
(189)
8,158
(8,158)
(590)
63,567 $
243
(191)
168
230
9
—
—
(2,779)
(204)
94,809
The Company has compensation agreements in place with employees whereby they may be entitled to receive shares of the Company
purchased on the open market by a trustee (note 18). Share capital is presented net of the number and cumulative purchase cost of shares
held by the trustee that have not yet been issued to employees. As at December 31, 2022, 1.3 million shares were held in trust (December
31, 2021 – 0.5 million).
c)
Treasury shares issued
During the first quarter of 2021, 1.0 million common shares were issued to an Officer of the Company for $0.2 million of cash consideration at
a price of $0.23 per share, representing the volume weighted average trading price of the shares for the 5 day period immediately preceding
the issuance.
d) Common share split and common share cancellation
As part of the Plan of Arrangement, 8.2 million Perpetual common shares were received by Rubellite from Perpetual shareholders in exchange
for Rubellite common shares and warrants, and Perpetual split its shares by a ratio such that the number of Perpetual shares exchanged to
Rubellite was equal to the number of shares split. On September 3, 2021, Perpetual received 8.2 million Perpetual common shares held by
Rubellite as part of the consideration for the disposition of the Clearwater Assets and these shares were cancelled.
e) Common share odd-lot consolidation
Pursuant to steps in the Plan of Arrangement, Perpetual consolidated its common shares on the basis of 1,000 to 1 (the "Consolidation") and
subsequently split the Common Shares on the same ratio. Shareholders who owned a number of common shares less than 1 subsequent to
the consolidation and preceding the split (the "Consolidated Shareholders") were paid an amount in cash of $0.3419 per pre consolidated
common share, being the volume weighted average trading price of the common shares on the Toronto Stock Exchange for the 20-day period
prior to the effective date. Based on the ratio, 590,000 Common Shares were cancelled as a result of the Consolidation and Perpetual paid an
aggregate of $0.2 million to the Consolidated Shareholders.
f)
Per share information
(thousands, except per share amounts)
Net income – basic and diluted
Weighted average shares
Issued common shares
Effect of shares held in trust
December 31, 2022
December 31, 2021
$
44,397 $
81,121
65,213
(765)
64,448
74,798
0.69 $
0.59 $
63,377
(408)
62,969
69,989
1.29
1.16
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted(1)
Net income per share – basic
Net income per share – diluted
$
$
(1)
For the year ended December 31, 2022, 4.3 million potentially issuable common shares through the share-based compensation plan were excluded as they
were not dilutive (year ended December 31, 2021 - 8.8 million).
PERPETUAL ENERGY INC.
2022 Annual Results
Page 55
18. SHARE-BASED PAYMENTS
The components of share-based payment expense are as follows:
Compensation awards
Share options
Performance share rights
Share-based payments(1)
December 31, 2022
December 31, 2021
$
$
665 $
194
6,575
7,434 $
277
83
1,684
2,044
(1)
For the year ended December 31, 2022, the Company has recorded $1.3 million respectively, (year ended December 31, 2021 - $1.5 million) related to
equity settled transactions that are expected to settle in cash.
The following tables summarize information about options, rights, and awards outstanding:
(thousands)
December 31, 2020
Granted
Exercised for common shares
Exercised for shares held in trust
Exercised for restricted rights
Performance adjustment(4)
Cancelled/forfeited
Expired
December 31, 2021
Granted(2)
Exercised for common shares
Exercised for shares held in trust
Exercised for restricted rights
Performance adjustment(3)
Cancelled/forfeited
December 31, 2022
Compensation awards
Deferred
options
Deferred
shares
Share
options
Performance
share rights(1)
Restricted
rights
5,057
2,448
—
(198)
(303)
—
(1,090)
(438)
5,476
1,457
—
(780)
—
—
(267)
5,886
2,401
1,367
—
(161)
(278)
—
(151)
(20)
3,158
792
—
(280)
(760)
—
5,397
1,258
(398)
—
—
—
(455)
(1,725)
4,077
1,298
(49)
—
—
—
(42)
2,868
(1,725)
3,601
3,420
1,715
—
—
(855)
(855)
(360)
—
3,065
833
—
—
(2,365)
1,014
—
2,547
—
1,436
(1,428)
—
—
—
(8)
—
—
3,125
(3,125)
—
—
—
—
—
Total
16,275
8,224
(1,826)
(359)
(1,436)
(855)
(2,064)
(2,183)
15,776
7,505
(3,174)
(1,060)
(3,125)
1,014
(2,034)
14,902
(1)
(2)
(3)
Certain performance share rights contain monetary awards that may be settled in cash, in common shares of the Company, or a combination thereof at the
discretion of the Board of Directors, equal to the monetary amount at the time of vesting. These awards are accounted for as cash-settled share-based
payments in which the fair value of the amounts payable under the plan are recognized incrementally as an expense over the vesting period, with a
corresponding change in liabilities. As at December 31, 2022, nil has been accrued pursuant to cash-settled share-based payment awards (December 31,
2021 – $0.3 million).
During the year ended December 31, 2022, 1.5 million deferred options, 0.8 million deferred shares, 1.3 million share options, 0.8 million performance share
rights, and 3.1 million restricted rights were granted to Officers, Directors, and employees of the Company.
Performance share rights are subject to a performance multiplier of 0.5 to 2.0.
During the year ended December 31, 2022, the Company granted 4.4 million share-based payment awards, comprised of deferred options,
deferred shares, share options, and performance share rights (2021 – 6.8 million). The Company used the Black Scholes pricing model to
calculate the estimated fair value of the outstanding deferred options (note 18(a)) and share options (note 18(b)) at the date of grant. The
following assumptions were used to arrive at the estimate of fair value as at the date of grant:
Dividend yield (%)
Forfeiture rate (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life (years)
Vesting period (years)
Contractual life (years)
Weighted average share price at grant date
Weighted average fair value at grant date
2022
0.0
5.0-10.0
60.0
2.2-3.2
3.2-3.4
4.0
5.0
1.04
1.07-1.08
2021
0.0
5.0-10.0
60.0
0.6-0.9
3.2-3.4
4.0
5.0
0.31-0.35
0.13-0.14
During the year ended December 31, 2022, 2.4 million restricted rights were issued in exchange for the exercise of performance share rights
(2021 – 0.9 million), 0.8 million in exchange for the exercise of deferred shares (2021 – 0.3 million), and nil in exchange for deferred options
(2021 – 0.3 million).
PERPETUAL ENERGY INC.
2022 Annual Results
Page 56
a) Compensation awards
Deferred options
The Company has deferred option agreements in place with certain employees whereby they may be entitled to receive shares of the
Company purchased on the open market by an independent trustee if they remain employees of the Company during such time and exercise
their options. Deferred options generally vest one quarter on each year of the term, with expiry occurring five years after issuance. The shares
purchased by the independent trustee are reported as shares held in trust (note 18(b)).
The following table summarizes information about the deferred options and performance-based long-term incentive awards outstanding:
Deferred options outstanding
Deferred options exercisable
Range of exercise
prices
Number of deferred
options
(thousands)
Average
contractual life
(years)
Weighted average
exercise price
($/share)
Number of
deferred options
(thousands)
Weighted average
exercise price
($/share)
$0.00 to $0.29
$0.30 to $0.48
$0.49 to $1.33
Total
3,466
929
1,491
5,886
2.2
3.7
4.6
3.2
0.05
0.34
1.00
0.32
1,640
213
—
1,853
0.04
0.34
—
0.08
There were 1.5 million deferred options granted during 2022 (2021 - 2.4 million).
Deferred shares
The Company also has deferred share agreements in place with directors and certain employees whereby, in the case of directors, upon
retirement from the Board of Directors, or in the case of employees, over a period of two years if they remain employees of the Company
during such time, may be entitled to receive at the discretion of the Board of Directors, cash, a grant of restricted rights (note 18(d)), or
shares of the Company purchased on the open market by an independent trustee. The shares purchased by the independent trustee are
reported as shares held in trust (note 18(b)).
The fair value of these awards is assessed on the grant date by factoring in the weighted average common share trading price for the five
days preceding the grant date and is reduced by an estimated forfeiture rate of 5% (2021 – 5%). The fair value is recognized as share-based
payment expense over the vesting period with a corresponding increase to contributed surplus. Upon exercise of these agreements in
exchange for restricted rights, the value in contributed surplus pertaining to the exercise is recorded as share capital. Upon exercise of these
agreements in exchange for shares held in trust, the shares held in trust account is reduced by the number of shares issued using the average
cost base of purchased shares and offset to contributed surplus.
The estimated average value of deferred shares at the time of grant during the year ended December 31, 2022 was $1.07 per deferred share
(2021 – $0.34).
b) Share options
Perpetual’s share option plan provides a long-term incentive to executive officers and directors associated with the Company’s long-term
performance. The Board of Directors administers the share option plan and determines participants, number of share options and terms of
vesting. The exercise price of the share options granted shall not be less than the value of the weighted average trading price for the
Company’s common shares for the five trading days immediately preceding the date of grant. Share options granted vest evenly over four
years, with expiry occurring five years after issuance.
The following table summarizes information about share options outstanding:
Options outstanding
Options exercisable
Range of exercise
prices
Number of share
options
(thousands)
Average
contractual life
(years)
Weighted average
exercise price
($/share)
Number of share
options
(thousands)
Weighted average
exercise price
($/share)
$0.07 to $0.30
$0.31 to $0.75
$0.76 to $1.33
Total
1,436
867
1,298
3,601
2.0
3.6
4.6
3.3
0.17
0.34
1.04
0.53
827
217
—
1,044
0.19
0.34
—
0.22
There were 1.3 million share options granted during 2022 (2021 – 1.3 million)
c) Performance share rights
The Company has an equity-settled performance share rights plan for the Company’s executive officers. Performance rights granted under the
performance share rights plan vest two years after the date upon which the performance rights were granted. The performance rights that
vest and become redeemable are a multiple of the performance rights granted, dependent upon the achievement of certain performance
metrics over the vesting period. Vested performance rights can be settled in cash or restricted rights (note 18(d)), at the discretion of the
Board of Directors. Performance rights are forfeited if participants of the performance share rights plan leave the organization other than
through retirement or termination without cause prior to the vesting date.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 57
The fair value of a performance share rights award is determined at the date of grant by using the closing price of common shares and
multiplied by the estimated performance multiplier. As at December 31, 2022, performance multipliers of 2.0 and 1.2 have been assumed for
unvested awards granted in 2021 and 2022, respectively. Fluctuations in share-based payments may occur due to changes in estimates of
performance outcomes. The amount of share-based payment expense is reduced by an estimated forfeiture rate of 5% (2021 – 5%) for
outstanding awards. The estimated value of performance share rights granted during the year ended December 31, 2022 was $0.97 per
performance share right (2021 – $0.23).
In 2018, the Company introduced a performance-based long-term incentive awards plan (the “PLTI” plan) for the executive officers. The
awards granted pursuant to the plan are tied to specific individual-based performance metrics established by the Board which can be based
on "total shareholder return" or other metrics specifically designed to align with value creation for shareholders and to incentivize and retain
key executive officers. The awards vest evenly over four years, with expiry occurring five years after issuance. Upon vesting, award holders
may be entitled to receive, at the discretion of the Board of Directors, cash, a grant of restricted rights (note 18(d)), or a combination of cash
and restricted rights.
Certain awards granted under the PLTI plan contain monetary awards that may be settled in cash, in common shares of the Company, or a
combination thereof at the discretion of the Board of Directors, equal to the monetary amount at the time of vesting. These awards are
accounted for as cash-settled share-based compensation in which the fair value of the amounts payable under the plan are recognized
incrementally as an expense over the vesting period, with a corresponding change in liabilities. Upon exercise of these awards in exchange for
cash, the liability is reduced. Upon exercise of these awards in exchange for a variable number of shares, the value in liabilities pertaining to
the exercise is recorded as share capital. In 2022, the Company made payments of $1.3 million (2021 – $1.3 million) pursuant to cash-settled
share-based payment awards. As at December 31, 2022, nil had been accrued pursuant to cash-settled share-based compensation awards
(December 31, 2021 – $0.3 million).
d) Restricted rights
The Company has a restricted rights plan for certain officers, employees and consultants. Restricted rights granted under the restricted rights
plan may be exercised during a period (the “Exercise Period”) not exceeding five years from the date upon which the restricted rights were
granted. The restricted rights typically vest on a graded basis over two years. At the expiration of the Exercise Period, any restricted rights
which have not been exercised shall expire. Upon vesting, the plan participant is entitled to receive one common share for each right held at a
cost of $0.01 per share.
The fair value of an award granted under the restricted rights plan is assessed on the grant date by factoring in the weighted average
common share trading price for the five days preceding the grant date. This fair value is recognized as share-based payment expense over the
vesting period with a corresponding increase to contributed surplus. During the year ended December 31, 2022, the Company did not grant
any restricted rights to employees, other than to settle performance share rights and deferred shares.
Restricted rights granted upon the exercise of performance share rights (note 18(c)) vest on the grant date and have a 90-day exercise
period. Restricted rights granted upon the exercise of deferred compensation awards (note 18(a)) vest on the grant date and have a 30-day
exercise period. No value is assigned to restricted rights issued pursuant to those plans as the value and expense have been previously
recognized over the vesting period of the underlying performance share rights and deferred compensation awards.
19. REVENUE
The Company sells its production pursuant to fixed or variable price contracts. The transaction price for variable priced contracts is based on
the commodity price, adjusted for quality, location, or other factors, whereby each component of the pricing formula can be either fixed or
variable, depending on the contract terms. Under the contracts, the Company is required to deliver fixed or variable volumes of conventional
natural gas, heavy crude oil or NGL as may be applicable to the contract counterparty. Revenue is recognized when a unit of production is
delivered to the contract counterparty. The amount of revenue recognized is based on the agreed transaction price, whereby any variability in
revenue relates specifically to the Company’s efforts to transfer production, and therefore the resulting revenue is allocated to the production
delivered in the period during which the variability occurs. As a result, none of the variable revenue is considered constrained.
Conventional natural gas, heavy crude oil and NGL are mostly sold under contracts of varying price and volume terms of up to one year.
Revenues are typically collected on the 25th day of the month following production.
Natural gas volumes sold pursuant to the Company’s market diversification contract are sold at fixed volume obligations and priced at daily
index prices, less transportation costs from AECO, to each market price point as detailed in the table below.
Market/Pricing Point
Malin
Dawn
Emerson
Total sales volume obligation
January 1, 2023 to
October 31, 2023 Daily
sales volume
(MMBtu/d)
November 1, 2023 to
October 31, 2024 Daily
sales volume
(MMBtu/d)
—
15,000
10,000
25,000
15,000
15,000
10,000
40,000
The following table presents the Company’s oil and natural gas sales disaggregated by revenue source:
Oil and natural gas revenue
Natural gas
Oil
NGL
Total oil and natural gas revenue
PERPETUAL ENERGY INC.
2022 Annual Results
December 31, 2022
December 31, 2021
$
$
66,781 $
29,538
13,368
109,687 $
33,012
20,172
7,630
60,814
Page 58
Included in accounts receivable at December 31, 2022 is $10.0 million of accrued oil and natural gas revenue related to December 2022
production (December 31, 2021 – $7.0 million related to December 2021 production).
20. FINANCE EXPENSE
The components of finance expense are as follows:
Cash finance expense
Interest on revolving bank debt
Interest on term loan
Interest on 2025 Senior Notes(1)
Interest on 2022 Senior Notes(2)
Interest on lease liabilities (note 14)
Total cash finance expense
Non-cash finance expense
Interest paid in-kind on term loan (note 10)
Interest paid in-kind on 2022 Senior Notes (note 12)(1)
Interest paid in-kind on 2025 Senior Notes (note 12)(2)
Gain on senior note maturity extension (note 12)
Gain on senior note extinguishment (note 12)(3)
Gain on Second Lien Loan Settlement(4)
Amortization of debt issue costs
Accretion on decommissioning obligations (note 15)
Change in fair value of other liability (note 11)
Change in fair value of royalty obligations (note 13)
Total non-cash finance expense
Finance expense recognized in net income
December 31, 2022
December 31, 2021
$
$
1,031 $
216
3,184
—
116
4,547
—
—
—
—
(101)
—
1,864
727
1,678
2,256
6,424
10,971 $
953
53
1,408
(1,253)
148
1,309
2,743
1,469
1,533
(1,591)
—
(6,820)
962
531
1,159
4,101
4,087
5,396
(1)
(2)
(3)
(4)
(5)
The Company satisfied the January 23, 2022 and July 23, 2022 semi-annual interest payment of $1.6 million by making cash payments.
On January 22, 2021, Perpetual’s 2022 Senior Notes were exchanged for 2025 Senior Notes, providing Perpetual the option to pay interest in-kind. Perpetual
elected to pay the January 23, 2021 semi-annual interest of $1.5 million by a PIK Interest Payment. As a result, the previously accrued 2022 Senior Notes
cash interest of $1.3 million was reversed and replaced by $1.3 million of 2025 Senior Note non-cash interest expense.
During the year ended December 31, 2022 the Company extinguished $0.9 million of Senior Notes outstanding for a total cost of $0.8 million, resulting in a
gain on extinguishment of $0.1 million.
On September 3, 2021, upon completion of the Plan of Arrangement, Perpetual's Term Loam was substantively modified pursuant to the Second Lien Loan
Settlement which included payment of $38.5 million, delivery of 0.7 million Rubellite shares valued at $1.4 million, the entry into a new second lien term loan
of $2.7 million, and a contingent payment obligation valued at $0.2 million resulting in a gain of $6.8 million.
Pursuant to the terms of the Second Lien Loan Settlement, $0.2 million has been earned related to the 2021 payment cap and $1.3 million has been earned
related to the 2022 payment cap. Perpetual
is committed to pay up to an additional $1.9 million in potential contingent payments in the event that
Perpetual's annual average realized crude oil and natural gas prices exceed certain thresholds. The change in fair value of this liability was recorded in the
statement of comprehensive income as a non-cash finance expense.
21. CHANGES IN NON-CASH WORKING CAPITAL INFORMATION
Accounts receivable
Prepaid expenses and deposits
Change in non-cash working capital on disposition and other
Inventory
Accounts payable and accrued liabilities
Change in non-cash working capital
$
$
December 31, 2022
December 31, 2021
(4,133) $
(654)
—
(387)
(13,261)
(18,435) $
(7,718)
(38)
5,426
—
20,299
17,969
The change in non-cash working capital has been allocated to the following activities:
Operating
Investing
Change in non-cash working capital
22. FINANCIAL RISK MANAGEMENT
$
$
December 31, 2022
December 31, 2021
(9,442) $
(8,993)
(18,435) $
3,406
14,563
17,969
The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework and has
implemented and monitors compliance with risk management policies.
The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits
and controls, and to monitor risks and adherence to market conditions and the Company’s activities.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 59
a) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company’s receivables from joint venture partners, oil and natural gas marketers and derivative
contract counterparties.
Receivables from oil and natural gas marketers are normally collected on the 25th day of the month following sales. The Company’s policy to
mitigate credit risk associated with these balances is to establish marketing relationships with large, well established purchasers. The
Company historically has not experienced any significant collection issues with its oil and natural gas marketing receivables. Joint venture
receivables are typically collected within one to three months of the joint venture bill being issued to the partner. The Company attempts to
mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure. However,
the receivables are generally from participants in the oil and natural gas sector, and collection of the outstanding balances is dependent on
industry factors such as commodity price fluctuations, escalating costs, the risk of unsuccessful drilling, and oil and natural gas production; in
addition, further risk exists with joint venture partners as disagreements occasionally arise that increase the potential for non-collection. The
Company does not typically obtain collateral from oil and natural gas marketers or joint venture partners, however, the Company does have
the ability in some cases to withhold production or amounts payable to joint venture partners in the event of non-payment.
The Company manages the credit exposure related to derivatives by engaging in risk management transactions with credit worthy
counterparties, and periodically monitoring counterparty credit assessments.
The combined carrying amount of cash and cash equivalents, accounts receivable and fair value of derivative assets at December 31, 2022
was $19.7 million (December 31, 2021 – $13.4 million), representing the Company’s maximum credit exposure. The Company’s credit
provisions are represented by its loss allowance based on lifetime expected credit losses as at December 31, 2022 of $0.1 million (December
31, 2021 – $0.4 million). The amount of the loss allowance was determined based on historical credit loss experience, adjusted for forward-
looking factors specific to the debtors and the economic environment. The total amount of accounts receivables 90 days past due is nominal
as at December 31, 2022 (December 31, 2021 – nominal).
b)
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s approach to
managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and
stressed conditions, without incurring unacceptable losses or risking harm to the Company’s reputation.
c) Market risk
Market risk is the risk that changes in market prices such as foreign exchange rates, commodity prices and interest rates will affect the
Company’s net income (loss) or the value of financial instruments. The objective of market risk management is to manage and control market
risk exposures within acceptable limits, while maximizing returns.
The Company utilizes both financial derivatives and fixed price physical delivery sales contracts to manage market risks related to commodity
prices and foreign currency rates. All such transactions are conducted in accordance with the Company’s Risk Management Policy, which has
been approved by the Board of Directors.
i)
Commodity price risk
Commodity price risk is the risk that the fair value or future cash flow will fluctuate as a result of changes in commodity prices.
Commodity prices for oil and natural gas are impacted not only by the relationship between the Canadian and United States dollar, but
also by world economic events that dictate the levels of supply and demand. The Company manages commodity price risk using various
financial derivatives and fixed price physical delivery sales contracts.
Natural gas contracts
At December 31, 2022 the Company had entered into the following natural gas risk management contracts at AECO:
Commodity
Volumes sold
Term
Reference/Index
Bought/sold Market Price
Natural gas
Natural gas
Natural gas
5,000 GJ/d
5,000 GJ/d
10,000 GJ/d
Jan 1 - Mar 31, 2023
AECO 5A (CAD$/GJ)
Swap - sold
Jan 1 - Mar 31, 2023
AECO 7A (CAD$/GJ)
Jan 1 - Mar 31, 2023
AECO 7A (CAD$/GJ)
Collar
Collar
$4.62
$7.00-8.00
$7.00-8.10
Contract Traded
Subsequent to December 31, 2022, the Company has entered into the following natural gas risk management contracts::
Commodity
Volumes sold
Term
Reference/Index
Contract Traded
Bought/Sold
Market Price
Natural gas
Natural gas
5,000 GJ/d
2,500 GJ/d
Feb 1 - Feb 28, 2023
AECO 7A (CAD$/GJ)
Mar 1 - Mar 31, 2023
AECO 7A (CAD$/GJ)
Swap - sold
Swap - sold
$4.02
$3.55
Natural gas contracts - sensitivity analysis
As December 31, 2022, if future natural gas prices changed by $0.25 per GJ with all other variables held constant, net income for the period
would change by $0.1 million due to changes in the fair value of risk management contracts. Fair value sensitivity was based on published
forward AECO prices.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 60
Oil contracts
At December 31, 2022, the Company had entered the following oil risk management contracts which settle in CAD$:
Commodity
Volumes sold
Term
Reference/
Index
Contract Traded
Bought /sold
Market Price
Crude oil
Crude oil
100 bbl/d
100 bbl/d
Jan 1 - Dec 31, 2023
Jan 1 – Dec 31, 2023
WTI (USD$/bbl)
WCS (CAD$/bbl)
Swap - sold
Differential
$89.15
($17.30)
Subsequent to December 31, 2022, the Company has entered into the following natural gas risk management contracts:
Commodity
Volumes sold
Term
Reference/
Index
Contract Traded
Bought /sold
Market Price
Crude oil
Crude oil
Crude oil
200 bbl/d
200 bbl/d
250 bbl/d
Apr 1 - Dec 31, 2023
Apr 1 - Dec 31, 2023
Apr 1 – Dec 31, 2023
WTI (USD$/bbl)
WCS (USD$/bbl)
WCS (USD$/bbl)
Swap - sold
Differential
Differential
$77.40
($17.40)
($17.45)
Oil contracts - sensitivity analysis
As at December 31, 2022, if future WTI oil prices changed by CAD$5.00 per bbl with all other variables held constant, net income for the
period would change by $0.2 million due to changes in the fair value of risk management contracts.
Foreign exchange contracts
At December 31, 2022, the Company had entered the following CAD/USD foreign exchange swaps which settle in CAD$:
Contract
Average rate forward (US$/CAD$)
Average rate forward (US$/CAD$)
Average rate forward (US$/CAD$)
Average rate forward (US$/CAD$)
Notional amount
$316,444 US$/month
$250,000 US$/month
$200,000 US$/month
$500,000 US$/month
Term Price (US$/CAD$)
Jan 1 – Mar 31, 2023
Jan 1 – Dec 31, 2023
Jan 1 – Dec 31, 2023
Jan 1 – Dec 31, 2023
1.3740
1.3600
1.3029
1.3710
As at December 31, 2022, if future USD/CAD exchange rates changed by CAD$0.05 with all other variables held constant, net income for the
period would change by $0.7 million due to changes in the fair value of risk management contracts.
Foreign exchange contracts - sensitivity analysis
The following table summarizes the risk management contracts by type:
Natural gas contracts
Foreign exchange contracts
Oil contracts
Risk management contracts
Risk management contracts – current asset
Risk management contracts – current liability
Risk management contracts
The following table details the gains (losses) on risk management contracts:
Unrealized gain (loss) on foreign exchange contracts
Unrealized gain (loss) on natural gas contracts
Unrealized gain (loss) on oil contracts
Unrealized gain (loss) on fair value of derivatives
Realized gain (loss) on natural gas contracts
Realized gain (loss) on oil contracts
Realized gain (loss) on financial derivatives
Change in fair value of derivatives
December 31, 2022
December 31, 2021
2,841
30
976
3,847 $
3,847
—
3,847 $
682
—
(321)
361
682
(321)
361
December 31, 2022
December 31, 2021
30 $
2,159
1,298
3,487
(491)
(4,129)
(4,620)
(1,133) $
—
4,033
(300)
3,733
(4,748)
(62)
(4,810)
(1,077)
$
$
$
$
PERPETUAL ENERGY INC.
2022 Annual Results
Page 61
Fair value of financial assets and liabilities
The Company’s fair value measurements are classified into one of the following levels of the fair value hierarchy:
Level 1 – inputs represent unadjusted quoted prices in active markets for identical assets and liabilities. An active market is
characterized by a high volume of transactions that provides pricing information on an ongoing basis.
Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
These valuations are based on inputs that can be observed or corroborated in the marketplace, such as market interest rates or
forecasted commodity prices.
Level 3 – inputs for the asset or liability are not based on observable market data.
The Company aims to maximize the use of observable inputs when preparing calculations of fair value. Classification of each measurement
into the fair value hierarchy is based on the lowest level of input that is significant to the fair value calculation.
The fair value of cash and cash equivalents, accounts receivable, prepaid expenses and deposits, and accounts payable and accrued liabilities
approximate their carrying amounts due to their short terms to maturity. The Credit Facility bears interest at a floating market rate, and
accordingly, the fair market value approximates the carrying amount.
The fair value of the other liability is estimated by discounting future cash payments based on Perpetual’s annual average realized oil and
natural gas prices exceeding certain thresholds. This fair value measurement is classified as level 3 as significant unobservable inputs,
including the discount rate and Perpetual’s forecasted annual average realized oil and natural gas prices, are used in determination of the
carrying amount. A discount rate of 8.1% was determined on inception of the agreement based on the characteristics of the instrument.
The fair value of the royalty obligations is estimated by discounting future cash payments based on the forecasted natural gas and NGL
commodity prices multiplied by the royalty volumes. This fair value measurement is classified as level 3 as significant unobservable inputs,
including the discount rate and forecasted natural gas and NGL commodity prices, are used in determination of the carrying amount. Discount
rates of 12.0% to 12.2% were determined on inception of the agreements based on the characteristics of the instruments.
The fair value of financial assets and liabilities, excluding working capital, is attributable to the following fair value hierarchy levels:
(1)
Risk management contract assets and liabilities presented in the condensed interim consolidated statements of financial position are shown net of offsetting
assets or liabilities where the arrangement provides for the legal right, and intention for net settlement exists.
As at December 31, 2022
Financial assets
Fair value through profit and loss
Marketable securities
Risk management contracts
Financial liabilities
Financial liabilities at amortized cost
Revolving bank debt
Senior notes
Term loan
Fair value through profit and loss
Other liability
Risk management contracts
As at December 31, 2021
Financial assets
Fair value through profit and loss
Marketable securities
Risk management contracts
Financial liabilities
Financial liabilities at amortized cost
Revolving bank debt
Senior notes
Term loan
Fair value through profit and loss
Other liability
Risk management contracts
Royalty obligations
Gross
Netting(1)
Carrying
Amount
Fair value
Level 1
Level 2
Level 3
1,814
3,970
—
(123)
1,814
3,847
—
—
1,814
3,847
(14,909)
(34,527)
(2,524)
(3,002)
(123)
—
—
—
—
123
(14,909)
(14,909)
—
(34,527)
(34,527)
(2,524)
(3,002)
—
—
—
—
—
—
(2,524)
—
—
(3,002)
—
Gross
Netting(1)
Carrying
Amount
Fair value
Level 1
Level 2
Level 3
2,409
775
—
(93)
2,409
682
2,409
682
—
(2,487)
(34,189)
(2,469)
(1,387)
(414)
(4,697)
—
—
—
—
93
—
(2,487)
(2,487)
—
(34,189)
(34,189)
(2,469)
(1,387)
(321)
(4,697)
—
—
—
—
—
—
(2,469)
—
(1,387)
(321)
—
—
(4,697)
—
—
—
—
—
—
—
—
(1)
Risk management contract assets and liabilities presented in the condensed interim consolidated statements of financial position are shown net of offsetting
assets or liabilities where the arrangement provides for the legal right, and intention for net settlement exists.
PERPETUAL ENERGY INC.
2022 Annual Results
Page 62
d) Capital risk
The Company’s policy is to maintain a strong but flexible capital structure so as to maintain investor, creditor and market confidence and to
sustain its future development. The Company manages its capital structure and adjusts it in light of changes in economic conditions. The
Company’s capital structure consists of shareholders’ equity and working capital. The Company has access to its $30.0 million first lien credit
facility with a syndicate of lenders, under which $14.9 million was drawn (December 31, 2021 – $17.0 million) and $1.2 million of letters of
credit had been issued (December 31, 2021 – $1.0 million).
23. DEFERRED INCOME TAXES
The provision for income taxes in the consolidated financial statements differs from the result that would have been obtained by applying the
combined federal and provincial tax rate to the Company’s net income before income tax. This difference results from the following items:
Net income before income tax
Combined federal and provincial tax rate
Computed income tax expense
Increase (decrease) in income taxes resulting from:
Non-deductible expenses
Non-taxable capital (gain) loss
Other
Change in tax rates and unrecognized tax assets
Deferred tax (recovery)
December 31, 2022
December 31, 2021
$
$
28,503 $
23.0 %
6,556
1,422
73
(471)
(23,474)
(15,894) $
81,121
23.0 %
18,658
162
(952)
218
(18,086)
—
The following table summarizes the deferred tax liabilities of the Company and its subsidiaries, which are offset against certain deferred tax
assets:
December 31, 2022
December 31, 2021
Liabilities:
Property, plant and equipment
Senior notes
Term loan
Revolving bank debt
Share investment
Fair value of derivatives
Right-of-use-assets
Total deferred tax liabilities
Assets:
Decommissioning obligations
Lease liabilities
Royalty obligations
Share and debt issue costs
Fair value of derivatives
Other liabilities
Non-capital losses
Total deferred tax assets
Net deferred tax asset
$
$
$
(27,798) $
(257)
(34)
—
(194)
(884)
(199)
(28,187)
(550)
(46)
(118)
(262)
(157)
(262)
(29,366)
(29,582)
6,314 $
362
—
364
—
690
37,530
45,260
15,894 $
7,573
484
1,080
548
74
319
19,504
29,582
—
The unused tax losses and deductible temporary differences included in the Company’s unrecognized deferred tax assets are as follows:
For the years ended
Non-capital losses
Capital losses
December 31, 2022
December 31, 2021
$
$
— $
158,294
158,294 $
100,923
219,345
320,268
PERPETUAL ENERGY INC.
2022 Annual Results
Page 63
As at December 31, 2022, the Company had approximately $163.2 million (December 31, 2021 – $187.9 million) of non-capital losses
available for future use. The unused non-capital losses expire between 2036 and 2042, and unused capital losses have no expiry date. The
development and production assets and facilities owned by the Company and its subsidiaries have an approximate tax basis of $57.6 million
(December 31, 2021 – $38.0 million) available for future use as deductions from taxable income, as indicated below:
Resource Tax Pools
Canadian oil & gas property expense
Canadian development expense
Canadian exploration expense
Undepreciated capital cost
December 31, 2022
December 31, 2021
$
$
4,483 $
33,368
—
19,773
57,624 $
2,968
11,249
238
23,525
37,980
Deferred tax assets have not been recognized in respect of capital losses because it is not probable that future taxable capital gains will be
available against which the Company can utilize the benefits.
24. KEY MANAGEMENT PERSONNEL
The Company has defined key management personnel as executive officers, as well as the Board of Directors, as they have the collective
authority and responsibility for planning, directing and controlling the activities of the Company. The following table outlines the total
compensation expense for key management personnel:
For the years ended
Short-term compensation
Share-based payments
25. RELATED PARTIES
December 31, 2022
December 31, 2021
$
$
4,792 $
1,527
6,319 $
2,074
1,547
3,621
During the year ended December 31, 2022 Perpetual billed and/or incurred on behalf of Rubellite net transactions, which are considered to be
normal course of oil and gas operations, totaling $5.6 million (December 31, 2021 - $1.4 million). Included within this amount are $1.9 million
(December 31, 2021 - $0.4 million) of costs billed under the MSA. The Company recorded an accounts receivable of $0.6 million owing from
Rubellite as at December 31, 2022 (December 31, 2021 - accounts payable of $0.1 million).
Investments made in entities directed or controlled by the Company's CEO were revalued to $0.4 million at December 31, 2022 (December
31, 2021 - nominal). There were no amounts outstanding or receivable at December 31, 2022 (December 31, 2021 - nil).
26. SUPPLEMENTAL DISCLOSURE
The Company’s consolidated statements of income and comprehensive income are prepared primarily by nature of expense, except for
employee compensation costs which are included in both production and operating and general and administrative expenses.
The following table details the amount of total employee compensation costs included in production and operating and general and
administrative expenses in the consolidated statements of income and comprehensive income.
For the years ended
Production and operating
General and administrative
Share-based payments
December 31, 2022
December 31, 2021
$
$
1,335 $
8,523
7,434
17,292 $
1,198
5,145
2,044
8,387
PERPETUAL ENERGY INC.
2022 Annual Results
Page 64
DIRECTORS
Susan L. Riddell Rose
President, Chief Executive Officer and Director
Linda A. Dietsche
Independent Director(1)(2)(3)(4)
Geoffrey C. Merritt
Independent Director(1)(2)(3)(4)
Ryan A. Shay
Vice President, Finance and Chief Financial Officer and Director
Steven L. Spence
Independent Director(1)(2)(3)(4)
Howard R. Ward
Independent Director(1)(2)(3)(4)
(1) Member of Audit Committee
(2) Member of Reserves Committee
(3) Member of Compensation and Corporate Governance Committee
(4) Member of Environmental, Health & Safety Committee
OFFICERS
Susan L. Riddell Rose
President, Chief Executive Officer and Director
Ryan A. Shay
Vice President, Finance and Chief Financial Officer and Director
Ryan M. Goosen
Vice President, Business Development and Land
Jeffrey R. Green
Vice President, Corporate and Engineering Services
Linda L. McKean
Vice President, Production and Development
Marcello M. Rapini
Vice President, Marketing
Karl H. Rumpf
Vice President, Exploration and New Ventures
HEAD OFFICE
3200, 605 – 5 Avenue SW
Calgary, Alberta Canada T2P 3H5
403.269.4400 PHONE
800.811.5522 TOLL FREE
403.269.4444 FAX
info@perpetualenergyinc.com EMAIL
www.perpetualenergyinc.com WEB
STOCK EXCHANGE LISTING | TSX | PMT
AUDITORS
KPMG LLP
BANKERS
ATB Financial
Bank of Montreal
Bank of Nova Scotia
RESERVE EVALUATION CONSULTANTS
McDaniel & Associates Consultants Ltd.
REGISTRAR AND TRANSFER AGENT
Odyssey Trust Company
www.perpetualenergyinc.com
3200, 605 – 5 Avenue SW
Calgary, Alberta CANADA T2P 3H5
80 0.811.5522 TOLL FREE
403.269.4400 PHONE
info@perpetualenergyinc.com EMAIL
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