UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 6-K
 
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
Under the Securities Exchange Act of 1934
For the month of October, 2014.
Commission File Number: 1-31253
 
 
PENGROWTH ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
 
 
2100, 222 Third Avenue S.W.
Calgary, Alberta T2P 0B4 Canada
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F  o              Form 40-F  þ
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):



INCORPORATION BY REFERENCE
Exhibits 99.2 and 99.3 to this report on Form 6-K are hereby incorporated by reference into the registration statement on Form F-3D (File No. 333-180888) of Pengrowth Energy Corporation.











DOCUMENTS FILED AS PART OF THIS FORM 6-K
See the Exhibit Index to this Form 6-K.




SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
PENGROWTH ENERGY CORPORATION
 
 
 
 
October 30, 2014
 
 
By:
 
/s/ Christopher G. Webster
 
 
 
Name:
 
Christopher G. Webster
 
 
 
Title:
 
Chief Financial Officer
 
 
EXHIBIT INDEX
 
Exhibit No.
 
 
99.1

 
Third Quarter 2014 Report
 
 
 
99.2

 
Interim Financial Statements for the period ended September 30, 2014
 
  
 
99.3

 
Management's Discussion & Analysis for the period ended September 30, 2014
 
 
 
99.4

  
Certification of Interim Filings – CEO
 
 
99.5

  
Certification of Interim Filings – CFO


Q3 2014 FULL Report


SUMMARY OF FINANCIAL & OPERATING RESULTS
 
Three months ended
Nine months ended
(monetary amounts in millions except per boe and per share amounts)
Sept 30, 2014

Sept 30, 2013

% Change

Sept 30, 2014

Sept 30, 2013

% Change

PRODUCTION
 
 
 
 
 
 
Average daily production (boe/d)
72,472

83,275

(13
)
73,789

86,938

(15
)
FINANCIAL
 
 
 
 
 

Funds flow from operations (1)
$
129.0

$
161.5

(20
)
$
389.9

$
455.0

(14
)
Funds flow from operations per share
$
0.24

$
0.31

(23
)
$
0.74

$
0.88

(16
)
Oil and gas sales
$
369.1

$
439.6

(16
)
$
1,205.4

$
1,249.7

(4
)
Oil and gas sales per boe
$
55.36

$
57.38

(4
)
$
59.84

$
52.66

14

Realized commodity risk management gains (losses)
$
(28.6
)
$
(25.4
)
13

$
(117.8
)
$
(39.3
)
200

Realized commodity risk management gains (losses) per boe
$
(4.29
)
$
(3.32
)
29

$
(5.85
)
$
(1.66
)
252

Operating expenses
$
102.4

$
125.6

(18
)
$
320.9

$
373.3

(14
)
Operating expenses per boe
$
15.36

$
16.39

(6
)
$
15.93

$
15.73

1

Royalty expenses
$
65.5

$
72.6

(10
)
$
217.4

$
212.3

2

Royalty expenses per boe
$
9.83

$
9.47

4

$
10.79

$
8.95

21

Royalty expenses as a percent of sales
17.7
%
16.5
%
 
18.0
%
17.0
%

Operating netback per boe (1)
$
24.91

$
27.10

(8
)
$
26.17

$
25.41

3

Cash G&A expenses (1)
$
20.6

$
20.0

3

$
63.1

$
66.1

(5
)
Cash G&A expenses per boe
$
3.09

$
2.61

18

$
3.13

$
2.79

12

Capital expenditures
$
191.9

$
176.2

9

$
645.2

$
456.1

41

Capital expenditures per share
$
0.36

$
0.34

6

$
1.23

$
0.88

40

Net cash acquisitions (dispositions)
$
(29.3
)
$
(623.4
)
(95
)
$
(47.7
)
$
(948.5
)
(95
)
Net cash acquisitions (dispositions) per share
$
(0.06
)
$
(1.20
)
(95
)
$
(0.09
)
$
(1.84
)
(95
)
Dividends paid
$
63.5

$
62.2

2

$
189.4

$
185.7

2

Dividends paid per share
$
0.12

$
0.12

—

$
0.36

$
0.36

—

Number of shares outstanding at period end (000's)
530,148

519,803

2

530,148

519,803

2

Weighted average number of shares outstanding (000's)
529,105

518,802

2

526,570

516,170

2

STATEMENT OF INCOME (LOSS)
 
 
 
 
 


Adjusted net income (loss) (1)
$
3.4

$
(108.2
)
(103
)
$
(24.2
)
$
(146.5
)
(83
)
Net income (loss)
$
52.2

$
(107.3
)
(149
)
$
(72.8
)
$
(225.8
)
(68
)
Net income (loss) per share
$
0.10

$
(0.21
)
(148
)
$
(0.14
)
$
(0.44
)
(68
)
CASH AND CASH EQUIVALENTS
$
42.0

$
583.0

(93
)
$
42.0

$
583.0

(93
)
DEBT
 
 
 
 
 

Senior debt (2)
 
 
 
$
1,483.7

$
1,366.8

9

Convertible debentures (2)
 
 
 
$
235.3

$
236.3

—

Total debt before working capital
 
 
 
$
1,719.0

$
1,603.1

7

Total debt including working capital
 
 
 
$
1,933.2

$
1,235.7

56

CONTRIBUTION BASED ON OPERATING NETBACKS (1)
 
 
 
 
 
 
Light oil
58
%
67
%
 
56
%
67
%
 
Heavy oil
19
%
19
%
 
17
%
14
%
 
Natural gas liquids
10
%
10
%
 
11
%
11
%
 
Natural gas
13
%
4
%
 
16
%
8
%
 
(1)
See definition under sections "Additional GAAP Measures" and "Non-GAAP Financial Measures".
(2) 
Debt includes the current and long term portions.











Note regarding currency: all figures contained within this report are quoted in Canadian dollars unless otherwise indicated.
Note regarding oil production: references to light oil contained within this report include light and medium oil.

PENGROWTH Third Quarter 2014 Summary of Financial & Operating Results
1


MANAGEMENT’S DISCUSSION & ANALYSIS
The following Management’s Discussion and Analysis ("MD&A") of financial results should be read in conjunction with the unaudited Financial Statements for the three and nine months ended September 30, 2014 of Pengrowth Energy Corporation ("Pengrowth" or the "Corporation"). This MD&A is based on information available to October 30, 2014.
Pengrowth’s third quarter and year to date results for 2014 are contained within this MD&A.
BUSINESS OF THE CORPORATION
Pengrowth is a Canadian resource company that is engaged in the production, development, exploration and acquisition of oil and natural gas assets.
FREQUENTLY RECURRING TERMS
Pengrowth uses the following frequently recurring industry terms in this MD&A: "bbls" refers to barrels, "bbl/d" refers to barrels per day, "Mbbls" refers to thousands of barrels, "boe" refers to barrels of oil equivalent, "boe/d" refers to barrels of oil equivalent per day, "Mboe" refers to thousand boe, "MMboe" refers to million boe, "Mcf" refers to thousand cubic feet, "Mcf/d" refers to thousand cubic feet per day, "MMcf" refers to million cubic feet, "Bcf" refers to billion cubic feet, "MMBtu" refers to million British thermal units, "MMBtu/d" refers to million British thermal units per day, "MW" refers to megawatt, "MWh" refers to megawatt hour, "WTI" refers to West Texas Intermediate crude oil price, "WCS" refers to Western Canadian Select crude oil price, "AECO" refers to Alberta natural gas price point, "NYMEX" refers to New York Mercantile Exchange, "NGI Chicago" refers to Chicago natural gas price point and "AESO" refers to Alberta power price point. Bitumen is reported as heavy oil throughout this document. Disclosure provided herein in respect of a boe may be misleading, particularly if used in isolation. A boe conversion ratio of six Mcf of natural gas to one barrel of crude oil equivalent is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements within the meaning of securities laws, including the "safe harbour" provisions of Canadian securities legislation and the United States Private Securities Litigation Reform Act of 1995. Forward-looking information is often, but not always, identified by the use of words such as "anticipate", "believe", "expect", "plan", "intend", "forecast", "target", "project", "guidance", "may", "will", "should", "could", "estimate", "predict" or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to: reserves, production, the proportion of production of each product type, production additions from Pengrowth's development program, royalty expenses, operating expenses, tax horizon, deferred income taxes, goodwill, Asset Retirement Obligations ("ARO"), remediation, reclamation and abandonment expenses, clean-up and remediation costs, capital expenditures, development activities, General and Administrative Expenses ("G&A") and proceeds from the disposal of properties. Statements relating to "reserves" are forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the reserves described exist in the quantities predicted or estimated and can profitably be produced in the future.
Forward-looking statements and information are based on Pengrowth's current beliefs as well as assumptions made by, and information currently available to, Pengrowth concerning general economic and financial market conditions, anticipated financial performance, business prospects, strategies, regulatory developments, including in respect of taxation, royalty rates and environmental protection, future capital expenditures and the timing thereof, future oil and natural gas commodity prices and differentials between light, medium and heavy oil prices, future oil and natural gas production levels, future exchange rates and interest rates, the amount of future cash dividends paid by Pengrowth, the cost of expanding our property holdings, our ability to obtain labour and equipment in a timely manner to carry out development activities, our ability to market our oil and natural gas successfully to current and new customers including transportation availability, the impact of increasing competition, our ability to obtain financing on acceptable terms and meet financial covenants, our ability to add production and reserves through our development, exploitation and exploration activities. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
2
                                                                


results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: the volatility of oil and gas prices; Canadian light and heavy oil differentials; production and development costs and capital expenditures; the imprecision of reserve estimates and estimates of recoverable quantities of oil, natural gas and liquids; Pengrowth's ability to replace and expand oil and gas reserves, ability to produce those reserves; production may be impacted by unforeseen events such as equipment and transportation failures and weather related issues; environmental claims and liabilities; incorrect assessments of value when making acquisitions; increases in debt service charges; the loss of key personnel; the marketability of production; defaults by third party operators; unforeseen title defects; fluctuations in foreign currency and exchange rates; inadequate insurance coverage; counterparty risk; compliance with environmental laws and regulations; changes in tax and royalty laws; Pengrowth's ability to access external sources of debt and equity capital; the implementation of new International Financial Reporting Standards ("IFRS"); and the implementation of greenhouse gas emissions legislation. Further information regarding these factors may be found under the heading "Business Risks" herein and under "Risk Factors" in Pengrowth's most recent Annual Information Form ("AIF"), and in Pengrowth’s most recent audited Financial Statements, management information circular, quarterly reports, material change reports and news releases. Copies of Pengrowth’s Canadian public filings are available on SEDAR at www.sedar.com. Pengrowth’s U.S. public filings, including the most recent annual report form 40-F as supplemented by its filings on form 6-K, are available at www.sec.gov.
Pengrowth cautions that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Pengrowth, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Furthermore, the forward-looking statements contained in this MD&A are made as of the date of this MD&A and Pengrowth does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, except as required by law. The forward-looking statements in this document are provided for the limited purpose of enabling current and potential investors to evaluate an investment in Pengrowth. Readers are cautioned that such statements may not be appropriate, and should not be used for other purposes.
The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
CRITICAL ACCOUNTING ESTIMATES
The unaudited Financial Statements are prepared in accordance with IFRS. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Financial Statements and revenues and expenses for the period ended. Certain of these estimates may change from period to period resulting in a material impact on Pengrowth’s results. Pengrowth's ARO risk free discount rate changed from 3.25 percent to 2.7 percent (3.0 percent at June 30, 2014) during the first nine months of 2014 due to a decrease in the 30 year Canadian Government long term bond rate which drives Pengrowth's estimate of the ARO discount rate. There were no other changes to Pengrowth's critical accounting estimates in the nine months ended September 30, 2014. For more information refer to the December 31, 2013 annual report.
COMPARATIVE FIGURES
Certain comparative figures have been restated to conform to the current period presentation.
ADDITIONAL GAAP MEASURE
Funds Flow from Operations
Pengrowth uses funds flow from operations, a Generally Accepted Accounting Principles ("GAAP") measure that is not defined under IFRS. Management believes that in addition to cash provided by operations, funds flow from operations, as reported in the Statements of Cash Flow is a useful supplemental measure as it provides an indication of the funds generated by Pengrowth’s principal business activities prior to consideration of changes in working capital and remediation expenditures. Pengrowth considers this to be a key measure of performance as it demonstrates its ability to generate cash flow necessary to fund dividends and capital investments.
NON-GAAP FINANCIAL MEASURES
This MD&A refers to certain financial measures that are not determined in accordance with IFRS. These measures do not have standardized meanings and may not be comparable to similar measures presented by other oil and gas companies. Measures such as operating netbacks do not have standardized meanings prescribed by GAAP. See the section of this MD&A entitled Operating Netbacks for a discussion of the calculation.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
3
                                                                


The current level of capital expenditures funded through retained cash flow, as compared to debt or equity, can be determined when it is compared to the difference in funds flow from operations and dividends paid as shown on the Statements of Cash Flow.
Management monitors Pengrowth’s capital structure using non-GAAP financial metrics. The two metrics are total debt to the trailing twelve months Earnings Before Interest, Taxes, Depletion, Depreciation, Amortization, Accretion, and other non-cash items ("Adjusted EBITDA") and total debt to total capitalization. Total debt is the sum of working capital and long term debt including convertible debentures as shown on the Balance Sheets, and total capitalization is the sum of total debt and shareholders’ equity.
Payout ratio and net payout ratio are terms used to evaluate financial flexibility and the capacity to fund dividends. Payout ratio is defined on a percentage basis as dividends declared divided by funds flow from operations. Net payout ratio is calculated as dividends declared net of proceeds from the Dividend Reinvestment Plan ("DRIP") divided by funds flow from operations. Management believes that, in addition to net income (loss), adjusted net income (loss) is a useful supplemental measure as it reflects the underlying performance of Pengrowth’s business activities by excluding the after tax effect of non-cash commodity, power and interest mark to market gains and losses, non-cash mark to market gains and losses on investments, unrealized foreign exchange gains and losses and gains on acquisitions, as applicable, that may significantly impact net income (loss) from period to period. Management believes that segregating G&A expenses into cash and non-cash expenses is useful to the reader, as non-cash expenses only affect net income (loss) but not funds flow from operations.
OPERATIONAL MEASURES
The reserves and production in this MD&A refer to company-interest reserves or production that is Pengrowth’s working interest share of production or reserves prior to the deduction of Crown and other royalties plus any Pengrowth-owned royalty interest in production or reserves at the wellhead, in accordance with Canadian industry practice. Company-interest is more fully described in the AIF.
When converting natural gas to equivalent barrels of oil within this MD&A, Pengrowth uses the industry standard of six Mcf to one boe. Barrels of oil equivalent may be misleading, particularly if used in isolation; a conversion ratio of six Mcf of natural gas to one boe is based on an energy equivalency conversion and does not represent a value equivalency at the wellhead.
CURRENCY
All amounts are stated in Canadian dollars unless otherwise specified.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
4
                                                                


2014 GUIDANCE
The following table provides a summary of full year 2014 Guidance and actual results for the nine months ended September 30, 2014.
 
Actual

 
  
Year to date September 30, 2014

Full year 2014 Guidance
Production (boe/d)
73,789

71,000 - 73,000
Capital expenditures ($ millions)
645.2

740 - 770
Royalty expenses (% of sales)
18.0

16 - 18
Operating expenses ($/boe) (1)
15.93

15.20 - 15.80
Cash G&A expenses ($/boe) (1)
3.13

3.15 - 3.25
(1) 
Per boe estimates based on high and low ends of production Guidance.
Year to date 2014 average production of 73,789 boe/d exceeds 2014 Guidance driven by performance of the new Cardium development wells partly offset by third party capacity constraints at Pine Creek, downtime at Sable Island and a minor property divestiture in Northern Alberta completed in the third quarter. Pengrowth is on plan to deliver near the top end of full-year production Guidance of 71,000 - 73,000 boe/d.
Year to date 2014 capital expenditures amounted to $645.2 million, including $361.9 million invested at Lindbergh. Pengrowth is on track to achieve the full year 2014 capital expenditures Guidance of $740 - $770 million.
Year to date 2014 royalty expenses as a percentage of sales were at the higher end of 2014 Guidance mainly due to prior year Gas Cost Allowance ("GCA") adjustments. Full year 2014 royalty expenses as a percentage of sales are expected to be within 2014 Guidance.
Year to date 2014 operating expenses of $15.93/boe exceeds 2014 Guidance due to planned turnaround activities in the second quarter of 2014. Pengrowth anticipates full year 2014 operating expenses per boe to be within 2014 Guidance.
Year to date 2014 cash G&A expenses of $3.13/boe are at the low end of 2014 Guidance of $3.15/boe - $3.25/boe.
FINANCIAL HIGHLIGHTS
 
Three months ended
Nine months ended
($ millions except per boe amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Production (boe/d)
72,472

73,823

83,275

73,789

86,938

Capital expenditures
191.9

219.6

176.2

645.2

456.1

Funds flow from operations
129.0

121.4

161.5

389.9

455.0

Operating netback ($/boe) (1)
24.91

23.86

27.10

26.17

25.41

Adjusted net income (loss)
3.4

(24.8
)
(108.2
)
(24.2
)
(146.5
)
Net income (loss)
52.2

(8.8
)
(107.3
)
(72.8
)
(225.8
)
(1) 
Including realized commodity risk management.


PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
5
                                                                



Funds Flow from Operations
($ millions)
Q2/14 vs. Q3/14
 
% Change

 
Q3/13 vs. Q3/14
 
% Change

 
YTD 2013 vs. 2014
 
% Change

Funds flow from operations for comparative period
Q2/14
121.4

 
 
Q3/13
161.5

 
 
YTD 2013
455.0

 
Increase (decrease) due to:
 
 
 
 
 
 
 
 
 
 
 
Volumes
 
(5.8
)
(5
)
 
 
(66.6
)
(41
)
 
 
(204.3
)
(45
)
Prices including differentials
 
(32.9
)
(27
)
 
 
(2.4
)
(1
)
 
 
163.2

36

Realized commodity risk management
 
18.3

15

 
 
(3.2
)
(2
)
 
 
(78.5
)
(17
)
Other income including sulphur
 
0.7

1

 
 
(1.5
)
(1
)
 
 
(3.2
)
(1
)
Royalties
 
12.7

10

 
 
7.1

4

 
 
(5.1
)
(1
)
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Operating
 
12.1

10

 
 
23.2

14

 
 
52.4

12

Cash G&A
 
(1.2
)
(1
)
 
 
(0.6
)
—

 
 
3.0

1

Interest & financing
 
1.9

2

 
 
6.5

4

 
 
15.9

3

Other expenses including transportation
 
1.8

1

 
 
5.0

3

 
 
(8.5
)
(2
)
Net change
 
7.6

6

 
 
(32.5
)
(20
)
 
 
(65.1
)
(14
)
Funds flow from operations
Q3/14
129.0

 
 
Q3/14
129.0

 
 
YTD 2014
389.9

 
Third quarter of 2014 funds flow from operations increased 6 percent compared to the second quarter of 2014 despite decreases in commodity prices in the third quarter of 2014. The increase is a result of lower realized commodity risk management losses, lower royalties and operating expenses.
Third quarter of 2014 funds flow from operations decreased 20 percent compared to the same period last year largely due to a decrease in volumes associated with the 2013 property dispositions partly offset by lower operating expenses and royalties.
Year to date 2014 funds flow from operations decreased 14 percent compared to the same period in 2013 mainly due to lower volumes from 2013 property dispositions and an increase in realized commodity risk management losses partly offset by higher commodity prices and lower operating expenses year over year.
Net Income (Loss)
Pengrowth recorded net income of $52.2 million in the third quarter of 2014 representing a $61.0 million improvement compared to a net loss of $8.8 million in the second quarter of 2014.This was a result of higher funds flow from operations and an unrealized gain on commodity risk management partly offset by an unrealized foreign exchange loss in the third quarter of 2014. Third quarter of 2014 net income of $52.2 million improved $159.5 million compared to a net loss of $107.3 million in the third quarter of 2013 resulting from an unrealized gain on commodity risk management and a gain on disposition of properties versus losses recorded in the third quarter of 2013 partly offset by an unrealized foreign exchange loss in the current quarter, deferred income tax expense versus a recovery and a decrease in funds flow from operations.
Year to date 2014 net loss of $72.8 million decreased $153.0 million compared to a net loss of $225.8 million for the same period last year predominantly due to a gain on disposition of properties year to date 2014 versus a loss in 2013 and reduced current year DD&A partly offset by a decrease in funds flow from operations.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
6
                                                                


Adjusted Net Income (Loss)
Pengrowth reports adjusted net income (loss) to remove the effect of unrealized gains and losses. The following table provides a reconciliation of net income (loss) to adjusted net income (loss):
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Net income (loss)
52.2

(8.8
)
(107.3
)
(72.8
)
(225.8
)
Excluded non-cash items in net income (loss):





Unrealized gain (loss) on commodity, power and interest risk management
121.1

(12.6
)
(17.9
)
(1.7
)
(47.9
)
Unrealized foreign exchange gain (loss) (1)
(42.7
)
29.1

16.4

(49.2
)
(34.8
)
Unrealized loss on investments
(5.0
)
—

—

(5.0
)
(15.0
)
Tax effect on non-cash items above
(24.6
)
(0.5
)
2.4

7.3

18.4

Total excluded
48.8

16.0

0.9

(48.6
)
(79.3
)
Adjusted net income (loss)
3.4

(24.8
)
(108.2
)
(24.2
)
(146.5
)
(1) 
Net of associated foreign exchange risk management contracts.
The following table represents a continuity of adjusted net income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
($ millions)
Q2/14 vs. Q3/14
 
 
Q3/13 vs. Q3/14
 
 
YTD 2013 vs. 2014
 
Adjusted net loss for comparative period
Q2/14
(24.8
)
 
Q3/13
(108.2
)
 
YTD 2013
(146.5
)
Funds flow from operations increase (decrease)
 
7.6

 
 
(32.5
)
 
 
(65.1
)
DD&A and accretion expense decrease
 
2.6

 
 
7.6

 
 
55.8

Loss on property dispositions decrease
 
30.9

 
 
173.7

 
 
169.6

Other
 
0.4

 
 
0.7

 
 
(0.5
)
Estimated tax on above
 
(13.3
)
 
 
(37.9
)
 
 
(37.5
)
Net change
 
28.2

 
 
111.6

 
 
122.3

Adjusted net income (loss)
Q3/14
3.4

 
Q3/14
3.4

 
YTD 2014
(24.2
)
Pengrowth posted adjusted net income of $3.4 million in the third quarter of 2014 representing an improvement of $28.2 million compared to the second quarter of 2014 primarily due to reduced losses on disposition of properties. Third quarter of 2014 adjusted net income of $3.4 million represents an improvement of $111.6 million compared to the third quarter of 2013 also due to reduced losses on disposition of properties partly offset by a decrease in funds flow from operations.
Year to date 2014 adjusted net loss of $24.2 million represents an improvement of $122.3 million compared to the same period in 2013 due to reduced losses on disposition of properties and lower DD&A partly offset by a decrease in funds flow from operations.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
7
                                                                


Price Sensitivity
The following table illustrates the sensitivity of funds flow from operations to changes in commodity prices after taking into account Pengrowth’s risk management contracts and outlook on oil differentials:
 
 
 
 
Estimated Impact on
12 Month Funds Flow

COMMODITY PRICE ENVIRONMENT (1)
  
Assumption

Change

(Cdn$ millions)

West Texas Intermediate Oil (2) (3)
U.S.$/bbl
$
80.28

$
1.00

 
Light oil
 
 
 
6.5

Heavy oil
 
 
 
5.1

Oil risk management (4)
 
 
 
(10.2
)
NGLs
 
 
 
2.4

Net impact of U.S.$1/bbl increase in WTI
 
 
 
3.8

Oil differentials (5)
 
 
 
 
Light oil
U.S.$/bbl
$
6.78

$
1.00

(6.5
)
Heavy oil
U.S.$/bbl
$
23.99

$
1.00

(5.1
)
Net impact of U.S.$1/bbl increase in differentials
 
 
 
(11.6
)
AECO Natural Gas (2) (3)
Cdn$/Mcf
$
3.90

$
0.10

 
Natural gas
 
 
 
5.6

Natural gas risk management (4)
 
 
 
(3.1
)
Net impact of Cdn$0.10/Mcf increase in AECO
 
 
 
2.5

(1) 
Calculations are performed independently and are not indicative of actual results when multiple variables change at the same time.
(2) 
Commodity price is based on an estimation of the 12 month forward price curve at October 15, 2014 and does not include the impact of risk management contracts.
(3) 
The calculated impact on revenue/cash flow is only applicable within a limited range of the change indicated and is based on production guidance levels contained herein.
(4) 
Includes risk management contracts as at October 15, 2014.
(5) 
Includes a light oil differential of approximately 8% of WTI per bbl and a heavy oil differential of approximately 30% of WTI per bbl.


PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
8
                                                                


RESULTS OF OPERATIONS
All volumes, wells and spending amounts stated below reflect Pengrowth’s net working interest for both operated and non-operated properties unless otherwise stated.
CAPITAL EXPENDITURES
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Drilling, completions and facilities
 
 
 
 
 
Lindbergh
110.5

124.1

93.9

361.9

170.4

 Non-thermal
61.5

73.4

62.7

221.6

227.0

Total drilling, completions and facilities
172.0

197.5

156.6

583.5

397.4

Land & seismic acquisitions (1) 
0.3

0.5

(0.1
)
5.4

1.8

Maintenance capital
19.1

21.6

19.6

55.0

55.3

Development capital
191.4

219.6

176.1

643.9

454.5

Other capital
0.5

—

0.1

1.3

1.6

Capital expenditures
191.9

219.6

176.2

645.2

456.1

(1) 
Seismic acquisitions are net of seismic sales revenue.
Third quarter of 2014 capital expenditures were $191.9 million following the strategy of selecting and executing projects that maximize cash flow and provide the highest rates of return while continuing to invest in the first commercial phase of the Lindbergh thermal project. Approximately 90 percent of the third quarter of 2014 capital expenditures were invested in drilling, completions and facilities, with the majority of the remaining 10 percent spent on maintenance capital. Year to date 2014 capital spending amounted to $645.2 million of which approximately 90 percent was invested in drilling, completions and facilities with the remaining 10 percent invested in maintenance, land, seismic and other capital.
Pengrowth invested 58 percent of the third quarter of 2014 capital expenditures in the Lindbergh commercial project.
Also in the quarter, Pengrowth participated in the drilling of 23 (15.0 net) non-thermal wells in other areas, all of which were successful.
Focus Areas
Lindbergh
Pengrowth’s 100 percent owned and operated Lindbergh thermal project is located in the Cold Lake area of Alberta and encompasses 42.5 sections of land. Cost advantages of the Lindbergh resource include enhanced bitumen quality and flow characteristics which result in higher netbacks compared to many thermal projects. A two well pair pilot project at Lindbergh was brought on stream in February 2012 and the results continue to exceed type curve expectations. The 12,500 bbl/d first commercial phase of Lindbergh was sanctioned by Pengrowth’s Board of Directors in January 2013 and Alberta Environmental Protection and Enhancement Act approval was received for the first commercial phase in July 2013. The Environmental Impact Assessment ("EIA") application for the Lindbergh expansion to 30,000 bbl/d was submitted to the regulators in December 2013.
Lindbergh is expected to provide Pengrowth with the potential to develop annual production of up to 50,000 bbl/d of bitumen within five years. This is expected to be strong netback production, low cost, with low decline rates, long reserve life and low sustaining capital requirements, resulting in a sustainable total return model that supports growth in cash flow per share and the ability to fund an attractive dividend.
Pengrowth has entered into a transportation agreement with Husky Energy for delivery of production from the initial commercial phase of Lindbergh to Hardisty, Alberta, with options to nominate future volumes as Lindbergh expands. Pengrowth will retain maximum flexibility in regards to transportation options at Lindbergh and will be able to utilize both rail and pipeline to move production to markets and maximize netbacks.
During the third quarter of 2014, $110.5 million was invested at Lindbergh, bringing the year to date spending to $361.9 million.  In October, commissioning and start-up activities commenced at the 12,500 bbl/d Lindbergh commercial facility. It is anticipated that steam will be circulated through the well pairs starting in early December. Using the pilot ramp up

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
9
                                                                


as an analog, first oil is expected in January of 2015, but revenue and associated costs will continue to be capitalized until commerciality is declared, currently anticipated to be late in the first quarter of 2015.
Operations at the pilot project continued to show strong results during the third quarter of 2014 with combined field production from the two well pairs averaging 1,626 bbl/d of bitumen. The average Instantaneous Steam Oil Ratio ("ISOR") for the third quarter of 2014 was 2.4. Since steaming commenced in February 2012, cumulative production from the two well pairs has exceeded 1.4 million bbls of bitumen by September 30, 2014 with a Cumulative Steam Oil Ratio ("CSOR") of 2.1. After 32 months to September 30, 2014, of higher than expected production rates and reserves recovered to date, the pilot well pairs are expected to continue their natural decline in 2014 and, as expected, the ISOR will increase.
Non-Thermal Oil and Gas
Pengrowth’s significant non-thermal oil and gas portfolio includes a large contiguous land base in the Greater Olds/Garrington area encompassing over 500 gross (250 net) sections of land with stacked opportunities in the Cardium, Viking and Mannville sands as well as in the Mississippian carbonate section. An extensive gathering and processing infrastructure provides an efficient platform for continued development in this area. Pengrowth also controls large light oil accumulations in the Swan Hills area of Northern Alberta providing ongoing development projects with low decline production and strong cash flow.
During the third quarter of 2014, development continued in the Greater Olds/Garrington area with an additional 10 (5.2 net) wells drilled in the Cardium and an additional 5 (1.8 net) wells drilled in the Elkton, Ellerslie and Glauconite formations, all with 100% success. Based on initial test data and early production results, the Cardium wells appear to be meeting or exceeding type curve expectations.
Pengrowth’s third quarter of 2014 development program also included 2 (2.0 net) injection wells and 1 (1.0 net) well in the Lloydminster formation at Bodo as well as 2 (2.0 net) wells at Groundbirch in the Montney. The Groundbirch wells are expected to be completed and on stream before year-end. In addition, Pengrowth drilled 2 (2.0 net) injection wells and 1 (1.0 net) well at Judy Creek supporting incremental production and reserves in the miscible flood.
PRODUCTION
 
Three months ended
Nine months ended
Daily production
Sept 30, 2014

% of total
Jun 30, 2014

% of total
Sept 30, 2013

% of total
Sept 30, 2014

% of
total
Sept 30, 2013

% of
total
Light oil (bbls)
21,359

30
21,780

30
27,102

32
21,857

30
28,602

33
Heavy oil (bbls)
8,246

11
8,203

11
8,812

11
8,235

11
8,351

10
Natural gas liquids (bbls)
9,403

13
11,008

15
9,847

12
10,382

14
10,476

12
Natural gas (Mcf)
200,786

46
196,989

44
225,081

45
199,890

45
237,063

45
Total boe per day
72,472


73,823


83,275

 
73,789

 
86,938

 

Third quarter of 2014 average daily production decreased 2 percent compared to the second quarter of 2014 as expected, mainly due to the absence of the second quarter Sable Island condensate shipment, a small property disposition and natural declines, partly offset by continued strong performance from the Cardium development program. Third quarter and year to date 2014 production decreased 13 percent and 15 percent, respectively, when compared to the same periods last year due to significant property dispositions in late 2013 and natural production declines, partly offset by production additions from the Cardium development program.
Light Oil
Third quarter of 2014 light oil production decreased 2 percent compared to the second quarter of 2014 primarily due to a minor property disposition in Northern Alberta. Third quarter and year to date 2014 light oil production decreased 21 percent and 24 percent when compared to the same periods last year, respectively, due to the late 2013 dispositions partly offset by new production from the Cardium development program.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
10
                                                                


Heavy Oil
Third quarter of 2014 heavy oil production increased 1 percent compared to the second quarter of 2014 due to slightly higher production from non-operated properties. Third quarter and year to date 2014 heavy oil production decreased 6 percent and 1 percent compared to the same periods last year, respectively. These decreases were due to anticipated natural declines at the Lindbergh pilot project partly offset by the new production from the development drilling at Jenner and higher production from the Bodo area.
NGLs
Third quarter of 2014 NGL production decreased 15 percent compared to the second quarter of 2014 mainly due to the absence of the second quarter Sable Island condensate shipment. Third quarter and year to date 2014 NGL production decreased 5 percent and 1 percent compared to the same periods last year, respectively, due to the late 2013 dispositions and natural declines, partly offset by new Cardium production.
Natural Gas
Third quarter of 2014 natural gas production increased 2 percent compared to the second quarter of 2014 as new Cardium production and a decrease in turnaround activity more than offset natural declines. Third quarter and year to date 2014 natural gas production decreased 11 percent and 16 percent compared to the same periods last year, respectively, as a result of the late 2013 property dispositions and natural declines, partly offset by new Cardium production.
COMMODITY PRICES
Oil and Liquids Prices Excluding Realized Commodity Risk Management
 
Three months ended
Nine months ended
(Cdn$/bbl)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Average Benchmark Prices
 
 
 
 
 
WTI oil
105.83

112.29

107.97

108.97

102.28

Edmonton par light oil
97.20

105.62

104.89

100.80

95.64

WCS heavy oil
83.84

90.46

88.92

85.82

78.89

Average Differentials to WTI
 
 
 
 
 
Edmonton par
(8.63
)
(6.67
)
(3.08
)
(8.17
)
(6.64
)
WCS heavy oil
(21.99
)
(21.83
)
(19.05
)
(23.15
)
(23.39
)
Average Sales Prices
 
 
 
 
 
Light oil
94.04

102.37

101.11

97.82

91.39

Heavy oil
78.43

84.00

88.19

79.84

70.18

Natural gas liquids
52.94

55.70

57.18

56.03

54.23

Third quarter of 2014 WTI crude oil price averaged Cdn$105.83/bbl, a decrease of 6 percent compared to the second quarter of 2014 and a decrease of 2 percent compared to the third quarter of 2013. Year to date 2014 WTI crude oil price averaged Cdn$108.97/bbl, an increase of 7 percent compared to the same period in 2013.
Third quarter of 2014 light oil differential increased 29 percent and 180 percent compared to the second quarter of 2014 and third quarter of 2013, respectively. Furthermore, year to date 2014 light oil differential increased 23 percent compared to the same period in 2013.
Third quarter of 2014 heavy oil differential was essentially unchanged from the second quarter of 2014, however it increased 15 percent compared to the third quarter of 2013. Year to date 2014, heavy oil differential narrowed 1 percent compared to the same period in 2013.
Location and quality differentials, growing U.S. crude oil production as well as transportation bottlenecks are the primary drivers behind the differentials. When differentials widen significantly, Pengrowth takes proactive steps to improve realizations, including transporting some crude oil by rail.
Pengrowth's third quarter and year to date 2014 average oil and liquids sales prices moved in conjunction with the above benchmark prices.


PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
11
                                                                


Natural Gas Prices Excluding Realized Commodity Risk Management
 
Three months ended
Nine months ended
(Cdn$)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Average Benchmark Prices
 
 
 
 
 
NYMEX gas (per MMBtu)
4.30

4.99

3.63

4.83

3.84

AECO monthly gas (per MMBtu)
4.22

4.69

2.82

4.55

3.16

Average Differential to NYMEX
 
 
 
 
 
AECO differential (per MMBtu)
(0.08
)
(0.30
)
(0.81
)
(0.28
)
(0.68
)
Average Sales Prices
 
 
 
 
 
Natural gas (per Mcf) (1)
4.05

4.59

2.83

4.99

3.19

(1) 
Average sales prices are recorded in Mcf to reflect the volumetric reporting standard for Pengrowth's natural gas.
The NYMEX natural gas benchmark price averaged Cdn$4.30/MMBtu in the third quarter of 2014, a decline of 14 percent compared to the second quarter of 2014 largely due to lower natural gas demand across much of North America during the summer months. Third quarter and year to date 2014 NYMEX prices increased 18 percent and 26 percent compared to the same periods last year, respectively, driven by low natural gas storage in the key consuming regions of North America.
Third quarter of 2014 AECO gas prices averaged Cdn$4.22/MMBtu, representing a decline of 10 percent compared to the second quarter of 2014. A lower decline in AECO prices resulted from a narrowing of the basis spread between NYMEX and AECO. Third quarter and year to date 2014 AECO prices increased 50 percent and 44 percent compared to the same periods last year, respectively, due to higher benchmark prices and a narrowing of the basis spread between AECO and NYMEX.
Third quarter of 2014 natural gas sales price of Cdn$4.05/Mcf decreased 12 percent compared to the second quarter of 2014 due to the decrease in the natural gas benchmark prices. Third quarter and year to date 2014 natural gas sales prices increased 43 percent and 56 percent compared to the same periods last year, respectively, due to higher natural gas benchmark prices.
Total Average Sales Prices Excluding Realized Commodity Risk Management
 
Three months ended
Nine months ended
($/boe)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Average sales prices
54.73

60.08

56.64

59.29

52.05

Other production income including sulphur
0.63

0.52

0.74

0.55

0.61

Total oil and gas sales
55.36

60.60

57.38

59.84

52.66

Third quarter of 2014 average sales price of Cdn$54.73/boe decreased 9 percent compared to the second quarter of 2014 due to lower pricing for all products led by declines in crude oil and natural gas pricing. Compared to the third quarter of 2013, the third quarter of 2014 sales price declined 3 percent as higher prices for natural gas were offset by lower crude oil pricing.
Year to date 2014 average sales prices increased 14 percent compared to the same period last year in response to higher sales prices for all products.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
12
                                                                


Commodity Risk Management Gains (Losses)
 
Three months ended
Nine months ended
($ millions except per unit amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Realized
 
 
 
 
 
Oil risk management
(23.9
)
(37.3
)
(31.3
)
(90.8
)
(43.0
)
$/bbl (1)
(8.77
)
(13.67
)
(9.47
)
(11.05
)
(4.26
)
Natural gas risk management
(4.7
)
(9.6
)
5.9

(27.0
)
3.7

$/Mcf
(0.25
)
(0.54
)
0.28

(0.49
)
0.06

Total realized loss
(28.6
)
(46.9
)
(25.4
)
(117.8
)
(39.3
)
$/boe
(4.29
)
(6.98
)
(3.32
)
(5.85
)
(1.66
)
Unrealized
 
 
 
 
 
Unrealized commodity risk management liabilities at period end
(84.2
)
(205.8
)
(40.9
)
(84.2
)
(40.9
)
Less: Unrealized commodity risk management assets (liabilities) at beginning of period
(205.8
)
(192.2
)
(23.0
)
(80.0
)
7.0

Unrealized gain (loss) on commodity risk management contracts for the period
121.6

(13.6
)
(17.9
)
(4.2
)
(47.9
)
(1) 
Includes light and heavy oil.
Pengrowth has an active commodity risk management program which primarily uses forward price swaps and puts to manage the exposure to commodity price fluctuations and provide a measure of stability to cash flow in order to maintain its dividend and ensure capital expenditures are funded, including Lindbergh. Changes in the business environment are regularly monitored by management and the Board of Directors to ensure that Pengrowth's active risk management program is adequate and aligned with the long term strategic goals of the Corporation. Managing cash flow is of particular importance in 2014 as significant cash is required to complete the first commercial phase of Lindbergh. In addition to forward price swaps and puts, Pengrowth also engages in oil price differential swaps using a combination of financial and physical contracts.
Realized commodity risk management gains and losses vary from period to period and are a function of the volumes under risk management contracts, the fixed prices of those risk management contracts and the benchmark pricing for the commodities under risk management contracts. Realized losses result when the average fixed risk management contracted price is lower than the benchmark prices, while realized gains are recorded when the average fixed risk management contracted price is higher than the benchmark prices at settlement. Realized gains and losses are settled monthly and directly impact cash flow for the period.
Realized commodity risk management losses decreased in the third quarter of 2014 compared to the second quarter of 2014 resulting from declines in both oil and natural gas benchmark prices. In contrast, third quarter of 2014 realized losses increased compared to the same period last year driven by higher natural gas benchmark prices partly offset by the effect of lower WTI. Year to date 2014 realized commodity risk management losses increased compared to the same period last year due to a rise in both oil and natural gas benchmark prices.
Unrealized gains and losses also vary period to period and are a function of the volumes under risk management contracts, the fixed prices of those risk management contracts and the forward curve pricing for the commodities under risk management contracts at the end of the period. Unrealized losses result when the forward price curve moves higher than the fixed price, with the magnitude of the loss being proportional to the movement in the forward price curve while unrealized gains result when the forward price curve moves lower than the fixed price, with the magnitude of the gain being proportional to the movement in the forward price curve. Unrealized commodity risk management gains and losses do not impact cash flow for the period.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
13
                                                                


Forward Contracts - Commodity and Power Risk Management
The following table provides a summary of the fixed prices of the commodity and power risk management contracts in place at September 30, 2014 (see Note 13 to the unaudited Financial Statements for more information on Pengrowth's risk management contracts):
Crude Oil Swaps and Puts
  
  
  
  
Reference point
Volume (bbl/d)
Remaining term
% of total oil
production Guidance (1)
Price/bbl ($Cdn)
WTI
23,000
Oct 1, 2014 - Dec 31, 2014
77%
94.51
WTI
26,000
2015
63%
93.99
WTI
14,982
2016
33%
94.96
Natural Gas Swaps and Puts
 
 
 
 
Reference point
Volume (MMBtu/d)
Remaining term
% natural gas production
Guidance
Price/MMBtu ($Cdn)
AECO & NGI Chicago Index
118,738
Oct 1, 2014 - Dec 31, 2014
59%
3.81
AECO & NGI Chicago Index
83,909
2015
47%
3.85
AECO
28,402
2016
18%
3.85
AECO
7,109
2017
5%
4.22
Power
 
 
 
 
Reference point
Volume (MW)
Remaining term
% of estimated
power purchases
Price/MWh ($Cdn)
AESO
55
Oct 1, 2014 - Dec 31, 2014
78%
55.63
AESO
40
2015
79%
49.53
AESO
10
2016
15%
50.00
(1) 
Includes light and heavy crude oil. After the successful 2013 divestment program, oil risk management contracts represent over 65 percent of 2014 production Guidance for remaining 2014. Pengrowth's Board of Directors has approved the retention of the risk management contracts already in place.
In addition to the above table, Pengrowth has financial and physical contracts to manage oil price differentials. See Note 13 to the unaudited Financial Statements for more information.
Commodity and Power Price Sensitivity on Risk Management Contracts as at September 30, 2014
($ millions)
 
 
Oil
Cdn$1/bbl increase in future oil prices
Cdn$1/bbl decrease in future oil prices
Unrealized pre-tax gain (loss) on oil risk management
(17.0
)
17.0

 
 
 
Natural gas
Cdn$0.25/MMBtu increase in future natural gas prices
Cdn$0.25/MMBtu decrease in future natural gas prices
Unrealized pre-tax gain (loss) on natural gas risk management
(13.3
)
13.3

 
 
 
Power
Cdn$1/MWh increase in future power prices
Cdn$1/MWh decrease in future power prices
Unrealized pre-tax gain (loss) on power risk management
0.6

(0.6
)
The changes in fair value of the forward risk management contracts directly affect reported net income (loss) through the unrealized amounts recorded in the Statements of Income (Loss) during the period. The effect on cash flow will be recognized separately only upon settlement of the risk management contracts, which could vary significantly from the unrealized amount recorded due to timing and prices when each contract is settled.
If each commodity risk management contract were to have settled at September 30, 2014, revenue and cash flow would have been $84.2 million lower than if the risk management contracts were not in place based on the estimated fair value of the risk management contracts at period end. The $84.2 million is composed of liabilities of $60.4 million relating to risk management contracts expiring within one year and liabilities of $23.8 million relating to risk management contracts expiring beyond one year.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
14
                                                                


Pengrowth has not designated any outstanding commodity risk management contracts as hedges for accounting purposes and therefore records these risk management contracts on the Balance Sheets at their fair value and recognizes changes in fair value on the Statements of Income (Loss) as unrealized commodity risk management gains (losses). The volatility in net income (loss) will continue to the extent that the fair value of the commodity risk management contracts fluctuates. However, these non-cash amounts do not affect Pengrowth’s cash flow until realized.
Realized commodity risk management gains (losses) on crude oil and natural gas contracts are recorded separately on the Statements of Income (Loss) and impact cash flow at that time. Realized risk management gains (losses) on power contracts are recorded in operating expenses and the unrealized amounts are recorded in other (income) expense.
In accordance with policies approved by its Board of Directors, Pengrowth may sell forward its production and purchase risk management contracts by product volume or power purchases as follows:
Forward Period
Percent of Estimated Production
Percent of Estimated Power Purchases
1 - 24 Months
Up to 65%
Up to 80%
25 - 36 Months
Up to 30%
Up to 50%
37 - 60 Months
Up to 25%
Up to 25%
After the successful 2013 divestment program, oil risk management contracts represent over 65 percent of 2014 production Guidance for remaining 2014. Pengrowth's Board of Directors has approved the retention of the risk management contracts already in place.
OIL AND GAS SALES EXCLUDING REALIZED COMMODITY RISK MANAGEMENT
Contribution Analysis
The following table shows the contribution of each product category to the oil and gas sales:
 
Three months ended
Nine months ended
($ millions except percentages)
Sept 30, 2014

% of total
Jun 30, 2014

% of total
Sept 30, 2013

% of total
Sept 30, 2014

% of
total
Sept 30, 2013

% of
total
Light oil
184.8

50
202.9

50
252.1

58
583.7

48
713.6

57
Heavy oil
59.5

16
62.7

15
71.5

16
179.5

15
160.0

13
Natural gas liquids
45.8

13
55.8

14
51.8

12
158.8

13
155.1

12
Natural gas
74.8

20
82.2

20
58.5

13
272.3

23
206.7

17
Other income including sulphur
4.2

1
3.5

1
5.7

1
11.1

1
14.3

1
Total oil and gas sales (1)
369.1


407.1


439.6


1,205.4

 
1,249.7


(1) 
Excluding realized commodity risk management.
Price and Volume Analysis
Quarter ended September 30, 2014 versus Quarter ended June 30, 2014
The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales:
 
($ millions)
Light oil

Heavy oil

NGLs

Natural gas

Other (2)

Total

Quarter ended June 30, 2014 (1)
202.9

62.7

55.8

82.2

3.5

407.1

Effect of change in product prices and differentials
(16.4
)
(4.2
)
(2.4
)
(9.9
)
—

(32.9
)
Effect of change in sales volumes
(1.7
)
1.0

(7.6
)
2.5

—

(5.8
)
Other
—

—

—

—

0.7

0.7

Quarter ended September 30, 2014 (1)
184.8

59.5

45.8

74.8

4.2

369.1

(1) 
Excluding realized commodity risk management.
(2) 
Primarily sulphur sales.
Light oil sales decreased 9 percent in the third quarter of 2014 compared to the second quarter of 2014 resulting from a decrease in the Edmonton par light oil benchmark price combined with lower sales volumes resulting from a minor property disposition and pipeline outages in the third quarter of 2014. Heavy oil sales decreased 5 percent in response to a decrease in the WCS benchmark price partly offset by an increase in volumes. NGL sales decreased 18 percent due to the absence of the Sable Island condensate shipment combined with lower pentane prices in the third quarter

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
15
                                                                


of 2014. Natural gas sales decreased 9 percent due to lower natural gas benchmark prices partly offset by higher sales volumes.
Quarter ended September 30, 2014 versus Quarter ended September 30, 2013
The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales:
($ millions)
Light oil

Heavy oil

NGLs

Natural gas

Other (2)

Total

Quarter ended September 30, 2013 (1)
252.1

71.5

51.8

58.5

5.7

439.6

Effect of change in product prices and differentials
(13.9
)
(7.4
)
(3.7
)
22.6

—

(2.4
)
Effect of change in sales volumes
(53.4
)
(4.6
)
(2.3
)
(6.3
)
—

(66.6
)
Other
—

—

—

—

(1.5
)
(1.5
)
Quarter ended September 30, 2014 (1)
184.8

59.5

45.8

74.8

4.2

369.1

(1) 
Excluding realized commodity risk management.
(2) 
Primarily sulphur sales.
Light oil sales decreased 27 percent in the third quarter of 2014 compared to the same period in 2013 due to lower sales volumes from the 2013 disposition program coupled with a decrease in the Edmonton par light oil price. Heavy oil sales decreased 17 percent resulting from both a lower WCS benchmark price and lower production volumes. NGL sales decreased 12 percent impacted by the 2013 dispositions and lower pentane prices compared to the same period last year. Natural gas sales increased 28 percent due to higher natural gas benchmark prices partly offset by lower sales volumes from the 2013 property dispositions as well as natural declines.
Nine Months ended September 30, 2014 versus Nine Months ended September 30, 2013
The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales:
($ millions)
Light oil

Heavy oil

NGLs

Natural gas

Other (2)

Total

Nine months ended September 30, 2013 (1)
713.6

160.0

155.1

206.7

14.3

1,249.7

Effect of change in product prices and differentials
38.4

21.7

5.1

98.0

—

163.2

Effect of change in sales volumes
(168.3
)
(2.2
)
(1.4
)
(32.4
)
—

(204.3
)
Other
—

—

—

—

(3.2
)
(3.2
)
Nine months ended September 30, 2014 (1)
583.7

179.5

158.8

272.3

11.1

1,205.4

(1) 
Excluding realized commodity risk management.
(2) 
Primarily sulphur sales.
Year to date 2014 light oil sales decreased 18 percent compared to the same period in 2013 due to lower sales volumes from the 2013 disposition program partly offset by an increase in the Edmonton par light oil price year over year. Heavy oil sales increased 12 percent resulting from an improvement in the WCS benchmark price. Similarly, NGL sales increased 2 percent impacted by higher benchmark prices. Natural gas sales increased 32 percent due to higher natural gas benchmark prices partly offset by lower sales volumes from the 2013 property dispositions and natural declines.
ROYALTY EXPENSES
($ millions except per boe amounts and percentages)
Three months ended
Nine months ended
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Royalty expenses
65.5

78.2

72.6

217.4

212.3

$/boe
9.83

11.64

9.47

10.79

8.95

Royalties as a percent of oil and gas sales (%) (1)
17.7

19.2

16.5

18.0

17.0

(1) 
Excluding realized commodity risk management.
Royalties include Crown, freehold, overriding royalties and mineral taxes.
Third quarter of 2014 royalties as a percentage of sales decreased to 17.7 percent from 19.2 percent in the the second quarter of 2014 due to a decrease in commodity prices and the absence of an unfavourable GCA adjustment recorded in the second quarter of 2014. Third quarter of 2014 royalties as a percentage of sales increased to 17.7 percent from 16.5 percent in the the third quarter of 2013 primarily due to the absence of a favourable freehold mineral tax adjustment recorded in the third quarter of last year.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
16
                                                                


Year to date 2014 royalties as a percentage of sales increased to 18.0 percent from 17.0 percent for the same period last year driven by an increase in commodity prices coupled with unfavourable GCA adjustments recorded in 2014.
OPERATING EXPENSES
($ millions except per boe amounts)
Three months ended
Nine months ended
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Operating expenses
102.4

114.5

125.6

320.9

373.3

$/boe
15.36

17.05

16.39

15.93

15.73

Third quarter of 2014 operating expenses decreased $12.1 million or 11 percent compared to the second quarter of 2014 primarily due to the absence of turnaround costs incurred in the second quarter of 2014. On a per boe basis, third quarter of 2014 operating expenses decreased $1.69/boe as a result of the lower expenses, as mentioned above.
Third quarter of 2014 operating expenses decreased $23.2 million or 18 percent compared to the third quarter of 2013 due to the absence of operating expenses from properties divested in 2013 combined with lower power costs in 2014. On a per boe basis, third quarter of 2014 operating expenses decreased $1.03/boe compared to the third quarter of 2013 due to the above mentioned cost decreases partly offset by reduced production primarily resulting from the 2013 dispositions.
Year to date 2014 operating expenses decreased $52.4 million or 14 percent due to the absence of operating expenses from divested properties and lower power costs partly offset by increased turnaround costs in 2014. On a per boe basis, 2014 year to date operating expenses increased $0.20/boe compared to the same period last year primarily due to the increased turnaround costs in 2014 combined with reduced production resulting mainly from the 2013 dispositions.
TRANSPORTATION EXPENSES
($ millions except per boe amounts)
Three months ended
Nine months ended
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Transportation expenses
6.5

7.2

8.4

22.1

21.6

$/boe
0.97

1.07

1.10

1.10

0.91

Third quarter of 2014 transportation expenses decreased $0.7 million or 10 percent compared to the second quarter of 2014 mainly as a result of lower sales product trucking costs due to oil pipeline infrastructure development at Lochend. On a per boe basis, third quarter of 2014 transportation expenses decreased $0.10/boe compared to the second quarter of 2014 due to the decrease in sales product trucking costs. Third quarter of 2014 transportation expenses decreased $1.9 million or 23 percent compared to the third quarter of 2013 also resulting from the lower sales product trucking costs due to oil pipeline infrastructure development at Lochend. On a per boe basis, third quarter of 2014 transportation expenses decreased $0.13/boe compared to the same period last year due to lower sales product trucking costs partly offset by lower production volumes.
Year to date 2014 transportation expenses increased $0.5 million or 2 percent compared to the same period in 2013 mainly due to higher sales product trucking costs partly offset by lower oil pipeline transportation costs due to an increase in sales volumes at the wellhead. On a per boe basis, 2014 year to date transportation costs increased $0.19/boe compared to the same period in 2013 due to the increase in sales product trucking costs combined with a decrease in production volumes.
Pengrowth incurs transportation expenses for its natural gas production once the product enters a pipeline at a title transfer point. Pengrowth has the option to sell some of its natural gas directly to markets outside of Alberta by incurring additional transportation costs. Pengrowth sells most of its natural gas without incurring significant additional transportation costs. Pengrowth also incurs transportation expenses on its oil and NGL production including sales product trucking costs and pipeline costs up to the custody transfer point. Pengrowth has elected to sell approximately 55 percent of its crude oil at market points beyond the wellhead incurring transportation costs to the first major trading point. The transportation expenses are dependent upon third party rates and distance the product travels prior to changing ownership or custody.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
17
                                                                


OPERATING NETBACKS
Pengrowth’s operating netbacks have been calculated by taking balances directly from the Statements of Income (Loss) and dividing by production. Certain assumptions have been made in allocating operating expenses and royalty injection credits between products. Operating netbacks as presented below may not be comparable to similar measures presented by other companies, as there are no standardized measures.
 
Three months ended
Nine months ended
Combined Netback ($/boe)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Oil & gas sales (includes other income)
55.36

60.60

57.38

59.84

52.66

Royalties
(9.83
)
(11.64
)
(9.47
)
(10.79
)
(8.95
)
Operating expenses
(15.36
)
(17.05
)
(16.39
)
(15.93
)
(15.73
)
Transportation expenses
(0.97
)
(1.07
)
(1.10
)
(1.10
)
(0.91
)
Operating netback before realized commodity risk management
29.20

30.84

30.42

32.02

27.07

Realized commodity risk management
(4.29
)
(6.98
)
(3.32
)
(5.85
)
(1.66
)
Operating netback
24.91

23.86

27.10

26.17

25.41

 
 
 
 
 
 
Light Oil Netback Excluding Realized Commodity Risk Management ($/bbl)
Sales
94.04

102.37

101.11

97.82

91.39

Royalties
(19.91
)
(22.22
)
(20.76
)
(20.64
)
(18.14
)
Operating expenses
(15.99
)
(15.64
)
(17.38
)
(15.88
)
(17.42
)
Transportation expenses
(1.65
)
(1.99
)
(1.93
)
(2.07
)
(1.49
)
Light oil operating netback
56.49

62.52

61.04

59.23

54.34

Heavy Oil Netback Excluding Realized Commodity Risk Management ($/bbl)
Sales
78.43

84.00

88.19

79.84

70.18

Royalties
(13.09
)
(13.40
)
(12.79
)
(12.10
)
(9.76
)
Operating expenses
(16.80
)
(20.65
)
(19.91
)
(18.11
)
(19.52
)
Transportation expenses
(1.67
)
(1.80
)
(1.93
)
(1.78
)
(1.71
)
Heavy oil operating netback
46.87

48.15

53.56

47.85

39.19

NGLs Netback Excluding Realized Commodity Risk Management ($/bbl)
Sales
52.94

55.70

57.18

56.03

54.23

Royalties
(14.38
)
(16.92
)
(15.43
)
(16.27
)
(15.29
)
Operating expenses
(15.53
)
(16.69
)
(15.79
)
(15.74
)
(15.14
)
Transportation expenses
—

—

(0.04
)
—

(0.06
)
NGLs operating netback
23.03

22.09

25.92

24.02

23.74

Natural Gas Netback Excluding Realized Commodity Risk Management ($/Mcf)
Sales
4.05

4.59

2.83

4.99

3.19

Royalties (1)
(0.22
)
(0.40
)
0.17

(0.38
)
(0.04
)
Operating expenses
(2.43
)
(2.87
)
(2.51
)
(2.58
)
(2.31
)
Transportation expenses
(0.11
)
(0.11
)
(0.09
)
(0.10
)
(0.09
)
Natural gas operating netback ($/Mcf)
1.29

1.21

0.40

1.93

0.75

Natural gas operating netback ($/boe)
7.74

7.26

2.40

11.58

4.50

CONTRIBUTION BASED ON OPERATING NETBACKS
Light oil
58
%
61
%
67
%
56
%
67
%
Heavy oil
19
%
17
%
19
%
17
%
14
%
Natural gas liquids
10
%
11
%
10
%
11
%
11
%
Natural gas
13
%
11
%
4
%
16
%
8
%
(1) 
Third quarter of 2013 contains a favourable freehold mineral tax adjustment.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
18
                                                                


Pengrowth realized a weighted average operating netback of $24.91/boe in the third quarter of 2014 representing a 4 percent increase compared to the second quarter of 2014 primarily due to lower expenses and royalties partly offset by the effect of lower benchmark prices. When comparing the third quarter of 2014 to the same period last year, the operating netback decreased 8 percent primarily driven by lower oil benchmark prices.
Year to date 2014 operating netback increased 3 percent compared to the same period last year as the effect of the higher benchmark prices was partly offset by higher expenses and royalties.
GENERAL AND ADMINISTRATIVE EXPENSES
 
Three months ended
Nine months ended
($ millions except per boe amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Cash G&A expenses
20.6

19.4

20.0

63.1

66.1

$/boe
3.09

2.89

2.61

3.13

2.79

Non-cash G&A expenses
5.0

4.9

4.4

13.4

12.5

$/boe
0.75

0.73

0.57

0.67

0.52

Total G&A
25.6

24.3

24.4

76.5

78.6

$/boe
3.84

3.62

3.18

3.80

3.31

Third quarter of 2014 cash G&A expenses were $1.2 million higher compared to the second quarter of 2014 mainly due to higher professional fees and severance costs. On a per boe basis, third quarter of 2014 cash G&A expenses increased $0.20/boe compared to the second quarter of 2014 due to the increase in costs, discussed above.
Third quarter of 2014 cash G&A expenses remained relatively unchanged compared to the same period last year. On a per boe basis, third quarter of 2014 cash G&A expenses increased $0.48/boe compared to the same period last year primarily due to the impact of lower production volumes in 2014.
Year to date 2014 cash G&A expenses were $3.0 million lower compared to 2013 due to staffing decreases associated with the 2013 dispositions as well as lower office rent. On a per boe basis, year to date 2014 cash G&A expenses increased $0.34/boe due to lower production volumes partly offset by lower expenses, as discussed above.
The non-cash component of G&A represents the compensation expenses associated with Pengrowth’s Long Term Incentive Plans ("LTIP"). See Note 10 to the unaudited Financial Statements for additional information. The compensation costs associated with these plans are expensed over the applicable vesting period.
Third quarter of 2014 non-cash G&A expenses remained relatively unchanged compared to the second quarter of 2014. Third quarter and year to date 2014 non-cash G&A expenses increased $0.6 million and $0.9 million compared to the same periods in 2013, respectively, due to slightly higher long term incentive plan grants in 2014.
During the nine months ended September 30, 2014, $11.7 million (September 30, 2013 - $12.1 million) of directly attributable G&A costs were capitalized to Property, Plant and Equipment ("PP&E").
DEPLETION, DEPRECIATION, AMORTIZATION AND ACCRETION
 
Three months ended
Nine months ended
($ millions except per boe amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Depletion, depreciation and amortization
128.5

130.7

135.7

389.3

443.9

$/boe
19.27

19.46

17.71

19.33

18.70

Accretion
4.5

4.9

4.9

14.4

15.6

$/boe
0.67

0.73

0.64

0.71

0.66

Third quarter of 2014 DD&A expense decreased $2.2 million compared to the second quarter of 2014, and decreased $7.2 million compared to the third quarter of 2013 mainly due to the decrease in production volumes. This is the same reason why year to date 2014 DD&A expense decreased $54.6 million or 12 percent.
Third quarter of 2014 accretion expense remained relatively unchanged compared to the second quarter of 2014 and the third quarter of 2013. Year to date 2014 accretion expense decreased $1.2 million mainly due to decreases in the ARO liability resulting from property dispositions and discount rate changes.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
19
                                                                


INTEREST AND FINANCING CHARGES
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Interest and financing charges
26.0

26.1

25.5

78.0

75.6

Capitalized interest
(8.8
)
(7.0
)
(1.8
)
(21.1
)
(2.8
)
Total interest and financing charges
17.2

19.1

23.7

56.9

72.8

At September 30, 2014, Pengrowth had approximately $1.7 billion in total long term debt composed of $1.5 billion of fixed rate debt and $0.2 billion in convertible debentures, including the current portions. Total long term debt consists primarily of U.S. dollar denominated fixed rate notes at a weighted average interest rate of 5.7 percent and convertible debentures with a 6.25 percent coupon. At September 30, 2014, Pengrowth had no drawings on its syndicated bank facility.
Third quarter of 2014 interest and financing charges, before capitalized interest, remained relatively unchanged compared to the second quarter of 2014. Third quarter and year to date 2014 interest and financing charges, before capitalized interest, increased $0.5 million and $2.4 million compared to the same periods last year, respectively, mainly due to higher interest on the U.S. term debt as a result of the weaker Canadian dollar.
In accordance with IFRS, interest is capitalized for qualifying assets in the construction phase based on costs incurred on the project and the average cost of borrowing. During the nine months ended September 30, 2014, $21.1 million (September 30, 2013 - $2.8 million) of interest was capitalized on the Lindbergh thermal project to PP&E using a capitalization rate of 5.7 percent (September 30, 2013 - 5.7 percent).
OTHER (INCOME) EXPENSE
Year to date 2014 other expense of $11.7 million includes a $20 million provision for clean-up and remediation costs on a Northern Alberta oil property incurred in the first quarter of 2014 partly offset by gains on remediation trust funds and interest income.
TAXES
Deferred income tax is a non-cash item relating to temporary differences between the accounting and tax basis of Pengrowth’s assets and liabilities and has no immediate impact on Pengrowth’s cash flows. Pengrowth recorded a deferred tax expense of $32.6 million in the third quarter of 2014 compared to deferred tax reductions of $4.8 million and $32.3 million in the second quarter of 2014 and third quarter of 2013, respectively. Year to date 2014 deferred tax reduction amounted to $6.0 million compared to $54.6 million recorded during the same period last year.
No current income taxes were paid by Pengrowth in 2014 or 2013. See Note 8 to the unaudited Financial Statements for additional information. 

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
20
                                                                


FOREIGN CURRENCY GAINS (LOSSES)
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Currency exchange rate ($1Cdn = $U.S.) at period end
0.89

0.94

0.97

0.89

0.97

Unrealized foreign exchange gain (loss) on U.S. dollar denominated debt
(63.9
)
46.5

26.1

(67.0
)
(43.5
)
Unrealized foreign exchange gain (loss) on U.K. pound sterling denominated debt
0.7

1.2

(4.5
)
(3.4
)
(3.3
)
Total unrealized foreign exchange gain (loss) from translation of foreign denominated debt
(63.2
)
47.7

21.6

(70.4
)
(46.8
)
Unrealized gain (loss) on U.S. foreign exchange risk management contracts
20.8

(16.9
)
(9.8
)
17.6

9.0

Unrealized gain (loss) on U.K. foreign exchange risk management contracts
(0.3
)
(1.7
)
4.6

3.6

3.0

Total unrealized gain (loss) on foreign exchange risk management contracts
20.5

(18.6
)
(5.2
)
21.2

12.0

Total unrealized foreign exchange gain (loss)
(42.7
)
29.1

16.4

(49.2
)
(34.8
)
Total realized foreign exchange gain (loss)
0.8

(1.4
)
(0.1
)
(0.7
)
1.3

Pengrowth’s unrealized foreign exchange gains and losses are primarily attributable to the translation of the foreign denominated long term debt and the related foreign exchange risk management contracts. The gains or losses on principal restatement are calculated by comparing the translated Canadian dollar balance of foreign denominated long term debt from one period to another. The magnitude of the gains and losses is proportionate to the magnitude of the exchange rate fluctuation between the opening and closing rates for the respective periods and any new foreign debt issued.
Pengrowth holds a series of swap contracts which were transacted in order to fix the foreign exchange rate on a portion of Pengrowth’s U.S. dollar denominated term debt. The swaps partially offset foreign exchange gains/losses on U.S. denominated debt. Each swap requires Pengrowth to buy U.S. dollars at a predetermined rate and time, based upon maturity dates of the U.S. dollar term debt. At September 30, 2014, the fair value of these foreign exchange derivative contracts was an asset of $40.7 million included on the Balance Sheets with changes in the fair value between Balance Sheet dates reported on the Statements of Income (Loss) as an unrealized foreign exchange (gain) loss.
Contract type
Settlement date
Principal amount
(U.S.$ millions)

Swapped amount
(U.S.$ millions)

% of
principal swapped

Fixed rate
($1Cdn = $U.S.)

Swap
May 2015
71.5

50

70
%
0.98

Swap
July 2017
400

250

63
%
0.97

Swap
August 2018
265

125

47
%
0.96

Swap
October 2019
35

15

43
%
0.94

Swap
May 2020
115.5

20

17
%
0.95

No contracts
October 2022
105

—

—

—

No contracts
October 2024
195

—

—

—

 
 
1,187

460

39
%
 
To mitigate the fluctuations in the U.K. pound sterling denominated long term debt Pengrowth entered into foreign exchange risk management contracts when it issued the U.K. pound sterling term notes. These contracts fix the Canadian dollar to the U.K. pound sterling exchange rate on the interest and principal of the U.K. pound sterling denominated debt as follows:
 
 
 
Amount (U.K. pound sterling millions)
Settlement date
Fixed rate
($1Cdn = U.K. pound sterling)

50
December 2015
0.50

15
October 2019
0.63


PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
21
                                                                


At September 30, 2014, each Cdn$0.01 exchange rate change would result in approximately a $4.6 million pre-tax change in the fair value of the U.S. risk management contracts and a $0.7 million pre-tax change in the fair value of the U.K. risk management contracts.
ASSET RETIREMENT OBLIGATIONS
For the nine months ended September 30, 2014, Pengrowth's ARO liability increased $54.7 million relative to December 31, 2013 mainly due to a change in the risk free discount rate from 3.25 percent to 2.7 percent. The rate decrease reflects a decrease in the 30 year Canadian Government long term bond rate which drives Pengrowth’s estimate of the ARO discount rate. This resulted in an upward ARO liability revision of $107.9 million with the offset recorded in PP&E. Partly offsetting this upward revision were property dispositions which decreased the ARO liability by $59.6 million.
Pengrowth has estimated the net present value of its total ARO to be $660.9 million as at September 30, 2014 (December 31, 2013 – $606.2 million), based on a total escalated future liability of $2.0 billion (December 31, 2013 – $2.1 billion). These costs are expected to be incurred over 65 years with the majority of the costs to be incurred between 2038 and 2078. A risk free discount rate of 2.7 percent per annum and an inflation rate of 1.5 percent were used to calculate the net present value of the ARO at September 30, 2014.
ACQUISITIONS AND DISPOSITIONS
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Property acquisitions
13.7

0.1

3.0

15.8

3.9

Proceeds on property dispositions
(43.0
)
(21.1
)
(626.4
)
(63.5
)
(952.4
)
Net cash acquisitions (dispositions)
(29.3
)
(21.0
)
(623.4
)
(47.7
)
(948.5
)
Year to date 2014 Pengrowth has successfully closed a number of minor non-core property dispositions for aggregate net proceeds of $63.5 million.
WORKING CAPITAL
Working capital (surplus) deficiency is calculated as current liabilities less current assets per the Balance Sheets, excluding the current portions of long term debt and convertible debentures.
At September 30, 2014, Pengrowth had a working capital deficiency due to current liabilities exceeding current assets by $214.2 million as the cash balance decreased due to spending at Lindbergh. In comparison, Pengrowth had working capital surpluses of $179.3 million and $367.4 million at December 31, 2013 and September 30, 2013, respectively, as current assets exceeded current liabilities at those times primarily from higher cash balances following the 2013 property dispositions.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
22
                                                                


FINANCIAL RESOURCES AND LIQUIDITY
As at:
Sept 30, 2014

Dec 31, 2013

Sept 30, 2013

($ millions)
 

 

 

Term credit facilities
—

—

—

Senior unsecured notes (1)
1,483.7

1,412.7

1,366.8

Senior debt
1,483.7

1,412.7

1,366.8

Convertible debentures (1)
235.3

236.0

236.3

Total debt before working capital
1,719.0

1,648.7

1,603.1

Working capital (surplus) deficiency (2)
214.2

(179.3
)
(367.4
)
Total debt
1,933.2

1,469.4

1,235.7

Twelve months trailing:
Sept 30, 2014

Dec 31, 2013

Sept 30, 2013

($ millions, except ratios and percentages)
 
 
 
Net loss
(163.9
)
(316.9
)
(226.8
)
Add (deduct):
 

 

 

Interest & financing charges and accretion expense
97.5

114.6

119.8

Deferred income tax reduction
(24.6
)
(73.2
)
(64.7
)
Depletion, depreciation and amortization
520.0

574.6

609.0

EBITDA
429.0

299.1

437.3

Add other items:
 
 
 
 Loss on disposition of properties
6.1

175.7

167.7

Other non-cash items
138.9

180.2

138.2

Adjusted EBITDA
574.0

655.0

743.2

Senior debt before working capital to Adjusted EBITDA (3)
2.6

2.2

1.8

Total debt before working capital to Adjusted EBITDA (4)
3.0

2.5

2.2

Total debt to Adjusted EBITDA (5)
3.4

2.2

1.7

Total capitalization (6)
5,414.7

5,157.7

5,061.1

Total debt as a percentage of total capitalization
35.7
%
28.5
%
24.4
%
(1) 
Includes current and long term portions.
(2) 
Working capital (surplus) deficiency is calculated as current liabilities less current assets per the Balance Sheets, excluding the current portions of long term debt and convertible debentures.
(3) 
Indicative of debt covenant for senior debt before working capital to EBITDA of 3.5 times.
(4) 
Indicative of debt covenant for total debt before working capital to EBITDA of 4.0 times.
(5) 
Not indicative of the actual debt covenants. See the Financial Covenants section for more information.
(6) 
Total capitalization includes total debt plus Shareholders' Equity per the Balance Sheets.

At September 30, 2014, total debt increased $463.8 million from December 31, 2013 and $697.5 million from September 30, 2013 primarily due to a lower cash balance, as spending ramped up at Lindbergh, and an increase in the U.S. senior unsecured notes due to the weakening of the Canadian dollar.
The trailing twelve months total debt to Adjusted EBITDA ratio increased to 3.4x at September 30, 2014, compared to 2.2x at December 31, 2013 and 1.7x at September 30, 2013 mainly due to the increase in total debt and a decrease in Adjusted EBITDA as a result of 2013 property dispositions. This increase was expected and will continue until the first phase of Lingbergh is contributing to Adjusted EBITDA.
Term Credit Facilities
Pengrowth maintains a $1 billion revolving credit facility which was undrawn at September 30, 2014 (December 31, 2013 - $nil) and had $33.3 million (December 31, 2013 - $35.8 million) in outstanding letters of credit. The credit facility includes an expansion feature of $250 million providing Pengrowth with up to $1.25 billion of credit capacity from a syndicate of seven Canadian and four foreign banks, and can be extended at Pengrowth’s discretion any time prior to maturity, subject to syndicate approval. The facility has a maturity date of July 26, 2017.
Pengrowth also maintains a $50 million demand operating facility with one Canadian bank. At September 30, 2014, this facility was undrawn (December 31, 2013 - $nil) and had $0.8 million (December 31, 2013 - $0.8 million) of

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
23
                                                                


outstanding letters of credit. When utilized together with any overdraft amounts, this facility would appear on the Balance Sheets as a current liability in bank indebtedness, as applicable.
Together, these two facilities and the cash balance of $42.0 million provided Pengrowth with approximately $1.1 billion of combined credit capacity and cash at September 30, 2014, with the ability to expand the facilities by an additional $250 million.
Financial Covenants
Pengrowth’s senior unsecured notes and credit facilities are subject to a number of covenants, all of which were met at all times during the preceding twelve months, and at September 30, 2014.
On January 24, 2014, Pengrowth amended the credit facility by increasing the maximum permitted senior debt before working capital to EBITDA (as calculated in accordance with the debt agreements) ratio from 3.0 to 3.5 times and the total debt before working capital to EBITDA ratio from 3.5 to 4.0 times until December 31, 2015. As at September 30, 2014, Pengrowth's actual ratios pursuant to these two covenants were at 2.7 times and 3.1 times, respectively. The financial covenants are now substantially similar between the credit facilities and the senior unsecured notes. The ratios on the credit facility will revert back to their prior levels of 3.0 and 3.5 times, respectively, after December 31, 2015. The covenant amendments were obtained as a proactive step while Pengrowth completes construction of the first 12,500 bbl/d commercial phase of Lindbergh and a full year of Lindbergh production can contribute to the EBITDA calculation.
All loan agreements can be found on SEDAR at www.sedar.com filed under "Other" or "Material Document" and on EDGAR at www.sec.gov.
The calculation for each financial covenant is based on specific definitions, is not in accordance with IFRS, is similar to Adjusted EBITDA, and cannot be readily replicated by referring to Pengrowth’s Financial Statements.
The key financial covenants as at September 30, 2014 are summarized below:
1.Total senior debt before working capital must not exceed 3.5 times EBITDA for the last four fiscal quarters (credit facility - 3.0 times after December 31, 2015);
2.Total debt before working capital must not exceed 4.0 times EBITDA for the last four fiscal quarters (credit facility - 3.5 times after December 31, 2015);
3.Total senior debt before working capital must be less than 50 percent of total book capitalization; and
4.EBITDA must not be less than four times interest expense for the last four fiscal quarters.
There may be instances, such as when financing an acquisition, where it would be acceptable for total debt to trailing EBITDA to be temporarily offside. In the event of a significant acquisition, certain credit facility financial covenants are relaxed for two fiscal quarters after the close of the acquisition. Pengrowth may prepare pro forma financial statements for debt covenant purposes and has additional flexibility under its debt covenants for a set period of time. This would be a strategic decision recommended by management and approved by the Board of Directors with steps taken in the subsequent period to restore Pengrowth’s capital structure based on its capital management objectives.
Failing a financial covenant may result in one or more of Pengrowth’s loans being in default. In certain circumstances, being in default of one loan will, absent a cure, result in other loans also being in default. In the event that non-compliance continued, Pengrowth would have to repay, refinance or re-negotiate the terms and conditions of the debt and may have to suspend dividends to shareholders.
If certain financial ratios reach or exceed certain levels, management may consider steps to improve these ratios. These steps may include, but are not limited to property dispositions, reducing capital expenditures or dividends as well as issuing equity.
Dividend Reinvestment Plan
Pengrowth's DRIP allows shareholders to reinvest cash dividends in additional shares of the Corporation. Under the DRIP, the shares are issued from treasury at a 5 percent discount to the weighted average closing price of Pengrowth’s common shares as determined by the plan.
During the nine months ended September 30, 2014, 5.9 million shares were issued under the DRIP program for cash proceeds of $39.5 million compared to 6.7 million shares for total proceeds of $33.2 million in the same period last year.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
24
                                                                


Pengrowth does not have any off balance sheet financing arrangements.
FINANCIAL INSTRUMENTS
Pengrowth uses financial instruments to manage its exposure to commodity and power price fluctuations and foreign currency exposure. Pengrowth’s policy is not to utilize financial instruments for trading or speculative purposes. See Note 2 to the most recent audited Financial Statements for a description of the accounting policies for financial instruments and Note 13 to the unaudited Financial Statements for additional information regarding the fair value of Pengrowth’s financial instruments.
FUNDS FLOW FROM OPERATIONS AND DIVIDENDS
The following table provides funds flow from operations, dividends declared, the excess of funds flow from operations over dividends, and payout ratio:
 
Three months ended
Nine months ended
($ millions, except per share amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Funds flow from operations
129.0

121.4

161.5

389.9

455.0

Dividends declared
63.6

63.3

62.3

189.7

186.0

Funds flow from operations less dividends declared
65.4

58.1

99.2

200.2

269.0

Per share
0.12

0.11

0.19

0.38

0.52

Payout ratio (1)
49
%
52
%
39
%
49
%
41
%
(1) 
Payout ratio is calculated as dividends declared divided by funds flow from operations.
As a result of the depleting nature of Pengrowth's oil and gas assets, capital expenditures are required to offset production declines while other capital is required to maintain facilities, acquire prospective lands and prepare future projects. Capital spending and acquisitions may be funded by the excess of funds flow from operations less dividends declared, through the sale of existing properties, additional debt or the issuance of equity. Pengrowth does not deduct capital expenditures when calculating funds flow from operations.
Funds flow from operations is derived from producing and selling oil, natural gas and related products and is therefore highly dependent on commodity prices. Pengrowth enters into forward commodity risk management contracts to mitigate price volatility and to provide a measure of stability to monthly cash flow. Details of commodity risk management contracts are contained in Note 13 to the unaudited Financial Statements.
The following table provides the net payout ratio when the proceeds of the DRIP are netted against dividends declared to reflect Pengrowth’s net cash outlay:
 
Three months ended
Nine months ended
($ millions, except per share amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Proceeds from DRIP
13.1

13.3

11.0

39.5

33.2

Per share
0.02

0.03

0.02

0.08

0.06

Net payout ratio (%) (1)
39
%
41
%
32
%
39
%
34
%
(1) 
Net payout ratio is calculated as dividends declared net of proceeds from the DRIP divided by funds flow from operations.
DRIP participation was equivalent to approximately 21 percent of the total dividend during both the third quarter and year to date 2014.
DIVIDENDS
The Board of Directors and management regularly review the level of dividends. The board considers a number of factors, including expectations of future commodity prices, capital expenditure requirements, and the availability of debt and equity capital. Although the Corporation is committed to maintaining the dividend, there can be no certainty that Pengrowth will be able to maintain current levels of dividends and dividends can and may fluctuate in the future as a result of the volatility in commodity prices, changes in production levels and capital expenditure requirements. Pengrowth has no restrictions on the payment of its dividends other than maintaining its financial covenants in its borrowings and restrictions in the Business Corporations Act (Alberta).
Dividends are generally paid to shareholders on the fifteenth day or next business day of the month. Pengrowth paid $0.04 per share in each of the nine months January through September 30, 2014 for an aggregate cash dividend of

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
25
                                                                


$0.36 per share. For the same period in 2013, Pengrowth also paid $0.04 per share in each of the months January through September for an aggregate cash dividend of $0.36 per share.
SUMMARY OF QUARTERLY RESULTS
The following table is a summary of quarterly information for 2014, 2013 and 2012:
2014
Q1

Q2

Q3

 
Oil and gas sales ($ millions) (1)
429.2

407.1

369.1

 
Net income (loss) ($ millions)
(116.2
)
(8.8
)
52.2

 
Net income (loss) per share ($)
(0.22
)
(0.02
)
0.10

 
Net income (loss) per share - diluted ($)
(0.22
)
(0.02
)
0.10

 
Adjusted net income (loss) ($ millions)
(2.8
)
(24.8
)
3.4

 
Funds flow from operations ($ millions)
139.5

121.4

129.0

 
Dividends declared ($ millions)
62.8

63.3

63.6

 
Dividends declared per share ($)
0.12

0.12

0.12

 
Daily production (boe/d)
75,102

73,823

72,472

 
Total production (Mboe)
6,759

6,718

6,667

 
Average sales price ($/boe) (1)
63.00

60.08

54.73

 
Operating netback ($/boe) (2)
29.71

23.86

24.91

 
2013
Q1

Q2

Q3

Q4

Oil and gas sales ($ millions) (1)
393.5

416.6

439.6

343.7

Net loss ($ millions)
(65.1
)
(53.4
)
(107.3
)
(91.1
)
Net loss per share ($)
(0.13
)
(0.10
)
(0.21
)
(0.17
)
Net loss per share - diluted ($)
(0.13
)
(0.10
)
(0.21
)
(0.17
)
Adjusted net loss ($ millions)
(1.1
)
(37.2
)
(108.2
)
(37.3
)
Funds flow from operations ($ millions)
147.5

146.0

161.5

105.9

Dividends declared ($ millions)
61.6

62.1

62.3

62.5

Dividends declared per share ($)
0.12

0.12

0.12

0.12

Daily production (boe/d)
89,702

87,909

83,275

77,371

Total production (Mboe)
8,073

8,000

7,661

7,118

Average sales price ($/boe) (1)
48.18

51.55

56.64

47.92

Operating netback ($/boe) (2)
24.79

24.44

27.10

20.82

2012
Q1

Q2

Q3

Q4

Oil and gas sales ($ millions) (1)
341.2

321.5

381.5

414.0

Net income (loss) ($ millions) (3)
0.7

36.8

(23.8
)
(1.0
)
Net income (loss) per share ($) (3)
—

0.09

(0.05
)
—

Net income (loss) per share - diluted ($) (3)
—

0.09

(0.05
)
—

Adjusted net income (loss) ($ millions)
(5.4
)
(89.6
)
(18.8
)
24.1

Funds flow from operations ($ millions)
113.6

94.4

141.1

189.7

Dividends declared ($ millions)
76.1

86.4

60.6

61.3

Dividends declared per share ($)
0.21

0.21

0.12

0.12

Daily production (boe/d)
75,618

78,870

94,284

94,039

Total production (Mboe)
6,881

7,177

8,674

8,652

Average sales price ($/boe) (1)
48.99

44.05

43.53

47.31

Operating netback ($/boe) (2) (4)
22.48

21.47

22.25

27.87

(1) 
Excluding realized commodity risk management.
(2) 
Including realized commodity risk management.
(3) 
As required under IFRS, changes in accounting for the NAL Acquisition that arose in the fourth quarter of 2012 were adjusted retrospective to the second quarter of 2012.
(4) 
As of January 1, 2013 certain technical support costs, previously included in operating expenses, are included in G&A. 2012 operating netbacks have been adjusted accordingly to conform to presentation in the current period.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
26
                                                                


Third quarter of 2014 average sales price decreased compared to both the first and second quarters of 2014 driven by a decline in the benchmark prices. Quarterly production in 2014 is lower than the preceding quarters mainly due to 2013 property dispositions, lower natural gas production resulting from natural declines as a result of capital investment being directed mainly to oil development programs, in addition to a few fields with third party capacity constraints. Production increases in the second and third quarters of 2012 were primarily a result of the NAL Energy Corporation acquisition on May 31, 2012.
First quarter of 2014 posted the highest operating netback since the fourth quarter of 2011 resulting from higher natural gas prices and an increase in light and heavy oil benchmark prices. Pengrowth's first and second quarter of 2014 average sales prices were the highest posted average prices since the fourth quarter of 2008 driven by an increase in the benchmark prices.
Quarterly net income (loss) has also been affected by non-cash charges, in particular depletion, depreciation and amortization, impairment charges, gain on acquisition, unrealized gain (loss) on investments, accretion of ARO, unrealized risk management gains (losses), unrealized foreign exchange gains (losses), gains (losses) on property divestments, and deferred taxes. Funds flow from operations was also impacted by changes in royalty expense, operating and G&A costs.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Pengrowth entered into a lease amendment and extension agreement with respect to its Calgary head office lease effective March 31, 2014. The agreement saw two floors returned to the landlord in 2014 and extended the existing lease term for the remaining floors from 2018 to 2025, resulting in an additional operating lease commitment over the extended term of approximately $57 million.
Pengrowth entered into a transportation agreement in the third quarter of 2014 with Husky Energy in preparation for the anticipated Lindbergh production growth resulting in an additional commitment of approximately $161 million from 2015 to 2025.
BUSINESS RISKS
Pengrowth is exposed to normal market risks inherent in the oil and natural gas business, the details of which are set out in the AIF of the Corporation dated February 28, 2014 available on SEDAR at www.sedar.com.
ACCOUNTING PRONOUNCEMENTS ADOPTED
On January 1, 2014, Pengrowth adopted amendments to IAS 32 Financial Instruments: Presentation (“IAS 32”) relating to offsetting financial assets and financial liabilities. The amendments clarify when an entity has a legally enforceable right to offset and certain other requirements that are necessary to present a net financial asset or liability. The retrospective adoption of this standard had no impact on the amounts recorded in the Financial Statements.
On January 1, 2014, Pengrowth adopted IFRIC 21 Levies ("IFRIC 21"). IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation also clarifies that no liability should be recognized before the specified minimum threshold to trigger that levy is reached. The retrospective adoption of this interpretation had no impact on the amounts recorded in the Financial Statements.
DISCLOSURE AND INTERNAL CONTROLS
As a Canadian reporting issuer with securities listed on both the TSX and the NYSE, Pengrowth is required to comply with Multilateral Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, as well as the Sarbanes Oxley Act ("SOX") enacted in the United States.
At the end of the interim period ended September 30, 2014, Pengrowth did not have any material weakness relating to design of its internal control over financial reporting. Pengrowth has not limited the scope of its design of disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of (i) a proportionately consolidated entity in which Pengrowth has an interest; (ii) a variable interest entity in which Pengrowth has an interest; or (iii) a business that Pengrowth acquired not more than 365 days before September 30, 2014 and summary financial information about these items has been proportionately consolidated or consolidated in Pengrowth's Financial Statements. During the interim period ended September 30, 2014, no change occurred to Pengrowth's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Pengrowth's internal control over financial reporting.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
27
                                                                


It should be noted that while Pengrowth’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") believe that Pengrowth’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that Pengrowth’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
28
                                                                

PENGROWTH ENERGY CORPORATION
BALANCE SHEETS
(Stated in millions of Canadian dollars)
(Unaudited)
 
 
 
As at

As at

 
Note

September 30, 2014

December 31, 2013

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
 
$
42.0

$
448.5

Accounts receivable
 
161.2

192.3

Fair value of risk management contracts
13

6.5

—

 
 
209.7

640.8

Fair value of risk management contracts
13

35.3

23.1

Other assets
13

58.2

59.7

Property, plant and equipment
3

5,130.7

4,817.6

Exploration and evaluation assets
4

423.4

419.3

Goodwill
5

654.2

672.7

TOTAL ASSETS
 
$
6,511.5

$
6,633.2

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
 
$
317.0

$
353.2

Dividends payable
 
21.2

20.9

Fair value of risk management contracts
13

61.1

70.3

Current portion of long term debt
6

80.0

—

Current portion of convertible debentures
 
98.1

98.7

Current portion of provisions
7

24.6

17.1

 
 
602.0

560.2

Fair value of risk management contracts
13

30.6

22.2

Convertible debentures
 
137.2

137.3

Long term debt
6

1,403.7

1,412.7

Provisions
7

644.4

594.4

Deferred income taxes
8

212.1

218.1

 
 
3,030.0

2,944.9

Shareholders' Equity
 
 
 
Shareholders' capital
9

4,747.4

4,693.1

Contributed surplus
 
29.4

28.0

Deficit
 
(1,295.3
)
(1,032.8
)
 
 
3,481.5

3,688.3

Commitments
15

 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
6,511.5

$
6,633.2

See accompanying notes to the Financial Statements.


PENGROWTH Third Quarter 2014 Financial Results
29

PENGROWTH ENERGY CORPORATION
STATEMENTS OF INCOME (LOSS)
(Stated in millions of Canadian dollars, except per share amounts)
(Unaudited)

 
 
 
Three months ended September 30
Nine months ended September 30
  
Note

2014

2013

2014

2013

REVENUES
 
 
 
 
 
     Oil and gas sales
 
$
369.1

$
439.6

$
1,205.4

$
1,249.7

     Royalties, net of incentives
 
(65.5
)
(72.6
)
(217.4
)
(212.3
)
 
 
303.6

367.0

988.0

1,037.4

     Realized loss on commodity risk management
13

(28.6
)
(25.4
)
(117.8
)
(39.3
)
     Unrealized gain (loss) on commodity risk management
13

121.6

(17.9
)
(4.2
)
(47.9
)
 
 
396.6

323.7

866.0

950.2

EXPENSES
 
 
 
 
 
     Operating
 
102.4

125.6

320.9

373.3

     Transportation
 
6.5

8.4

22.1

21.6

     General and administrative
 
25.6

24.4

76.5

78.6

     Depletion, depreciation and amortization
3

128.5

135.7

389.3

443.9

 
 
263.0

294.1

808.8

917.4

OPERATING INCOME
 
133.6

29.6

57.2

32.8

 
 
 
 
 
 
Other (income) expense items
 
 
 
 
 
     Unrealized loss on investment
 
5.0

—

5.0

15.0

     (Gain) loss on disposition of properties
 
(19.7
)
154.0

(1.9
)
167.7

     Unrealized foreign exchange (gain) loss
14

42.7

(16.4
)
49.2

34.8

     Realized foreign exchange (gain) loss
14

(0.8
)
0.1

0.7

(1.3
)
     Interest and financing charges
 
17.2

23.7

56.9

72.8

     Accretion
7

4.5

4.9

14.4

15.6

     Other (income) expense
 
(0.1
)
2.9

11.7

8.6

INCOME (LOSS) BEFORE TAXES
 
84.8

(139.6
)
(78.8
)
(280.4
)
Deferred income tax (reduction) expense
8

32.6

(32.3
)
(6.0
)
(54.6
)
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
 
$
52.2

$
(107.3
)
$
(72.8
)
$
(225.8
)
NET INCOME (LOSS) PER SHARE
12

 
 
 
 
     Basic
 
$
0.10

$
(0.21
)
$
(0.14
)
$
(0.44
)
     Diluted
 
$
0.10

$
(0.21
)
$
(0.14
)
$
(0.44
)
See accompanying notes to the Financial Statements.


PENGROWTH Third Quarter 2014 Financial Results
30

PENGROWTH ENERGY CORPORATION
STATEMENTS OF CASH FLOW
(Stated in millions of Canadian dollars)
(Unaudited)

 
 
 
Three months ended September 30
Nine months ended September 30
  
Note

2014

2013

2014

2013

CASH PROVIDED BY (USED FOR):
 
 
 
 
 
OPERATING
 
 
 
 
 
Net income (loss) and comprehensive income (loss)
 
$
52.2

$
(107.3
)
$
(72.8
)
$
(225.8
)
Non-cash items
 
 
 
 
 
Depletion, depreciation, amortization and accretion
 
133.0

140.6

403.7

459.5

Deferred income tax (reduction) expense
8

32.6

(32.3
)
(6.0
)
(54.6
)
Unrealized foreign exchange (gain) loss
14

42.7

(16.4
)
49.2

34.8

Unrealized (gain) loss on commodity risk management
13

(121.6
)
17.9

4.2

47.9

Share based compensation
 
5.0

4.4

13.4

12.5

Unrealized loss on investment
 
5.0

—

5.0

15.0

(Gain) loss on disposition of properties
 
(19.7
)
154.0

(1.9
)
167.7

Other items
 
(0.2
)
0.6

(4.9
)
(0.3
)
Derivative settlement on senior note repayment
 
—

—

—

(1.7
)
Funds flow from operations
 
129.0

161.5

389.9

455.0

Interest and financing charges
 
17.2

23.7

56.9

72.8

Expenditures on remediation
7

(4.9
)
(7.6
)
(17.4
)
(21.9
)
Change in non-cash operating working capital
11

24.9

(17.2
)
29.3

4.6

 
 
166.2

160.4

458.7

510.5

FINANCING
 
 
 
 
 
Dividends paid
 
(63.5
)
(62.2
)
(189.4
)
(185.7
)
Long term debt (repayment) and related derivative settlement
 
—

—

—

(209.6
)
Interest paid
 
(30.9
)
(31.9
)
(82.4
)
(79.5
)
Other financing cost
 
—

(1.1
)
—

(1.1
)
Proceeds from equity issues, including DRIP
 
13.1

11.0

41.1

33.2

 
 
(81.3
)
(84.2
)
(230.7
)
(442.7
)
INVESTING
 
 
 
 
 
Capital expenditures
 
(191.9
)
(176.2
)
(645.2
)
(456.1
)
Property acquisitions
 
(13.7
)
(3.0
)
(15.8
)
(3.9
)
Proceeds on property dispositions
 
43.0

626.4

63.5

952.4

Other items
 
(1.5
)
(1.9
)
(6.6
)
(6.0
)
Change in non-cash investing working capital
11

(12.0
)
25.1

(30.4
)
26.1

 
 
(176.1
)
470.4

(634.5
)
512.5

CHANGE IN CASH AND CASH EQUIVALENTS
 
(91.2
)
546.6

(406.5
)
580.3

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
133.2

36.4

448.5

2.7

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
42.0

$
583.0

$
42.0

$
583.0

See accompanying notes to the Financial Statements.



PENGROWTH Third Quarter 2014 Financial Results
31

PENGROWTH ENERGY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Stated in millions of Canadian dollars)
(Unaudited)

 
 
 
Three months ended September 30
Nine months ended September 30
  
Note

2014

2013

2014

2013

SHAREHOLDERS' CAPITAL
9

 
 
 
 
Balance, beginning of period
 
$
4,734.3

$
4,667.5

$
4,693.1

$
4,634.8

Share based compensation
 
—

0.5

14.8

11.0

Issued under DRIP
 
13.1

11.0

39.5

33.2

Balance, end of period
 
4,747.4

4,679.0

4,747.4

4,679.0

 
 
 
 
 
 
CONTRIBUTED SURPLUS
 
 
 
 
 
Balance, beginning of period
 
24.0

21.3

28.0

22.9

Share based compensation
 
5.4

4.8

14.6

13.7

Exercise of share based compensation awards
 
—

(0.5
)
(13.2
)
(11.0
)
Balance, end of period
 
29.4

25.6

29.4

25.6

 
 
 
 
 
 
DEFICIT
 
 
 
 
 
Balance, beginning of period
 
(1,283.9
)
(709.6
)
(1,032.8
)
(467.4
)
Net income (loss)
 
52.2

(107.3
)
(72.8
)
(225.8
)
Dividends declared
 
(63.6
)
(62.3
)
(189.7
)
(186.0
)
Balance, end of period
 
(1,295.3
)
(879.2
)
(1,295.3
)
(879.2
)
 
 
 
 
 
 
TOTAL SHAREHOLDERS' EQUITY
 
$
3,481.5

$
3,825.4

$
3,481.5

$
3,825.4

See accompanying notes to the Financial Statements.


PENGROWTH Third Quarter 2014 Financial Results
32


PENGROWTH ENERGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
AS AT AND FOR THE PERIOD ENDED SEPTEMBER 30, 2014 (Unaudited)
(Tabular amounts are stated in millions of Canadian dollars except per share amounts and as otherwise stated)

1.
BUSINESS OF THE CORPORATION
Pengrowth Energy Corporation ("Pengrowth" or the "Corporation") is a Canadian resource company that is engaged in the production, development, exploration and acquisition of oil and natural gas assets.
The Financial Statements for the three and nine months ended September 30, 2014 are unaudited and have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") using accounting policies consistent with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and International Financial Reporting Interpretations Committee ("IFRIC"). The disclosures provided below are incremental to those included with the December 31, 2013 annual Financial Statements. All accounting policies and methods of computation followed in the preparation of these Financial Statements are consistent with the December 31, 2013 annual Financial Statements, except as noted in Note 2 to these Financial Statements.
The Financial Statements should be read in conjunction with the audited Financial Statements and the notes thereto in Pengrowth’s annual report for the year ended December 31, 2013.
The Financial Statements were authorized for release by the Audit and Risk Committee of the Board of Directors on October 30, 2014.
2.
ACCOUNTING PRONOUNCEMENTS ADOPTED
On January 1, 2014, Pengrowth adopted amendments to IAS 32 Financial Instruments: Presentation (“IAS 32”) relating to offsetting financial assets and financial liabilities. The amendments clarify when an entity has a legally enforceable right to offset and certain other requirements that are necessary to present a net financial asset or liability. The retrospective adoption of this standard had no impact on the amounts recorded in the Financial Statements.
On January 1, 2014, Pengrowth adopted IFRIC 21 Levies ("IFRIC 21"). IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation also clarifies that no liability should be recognized before the specified minimum threshold to trigger that levy is reached. The retrospective adoption of this interpretation had no impact on the amounts recorded in the Financial Statements.


PENGROWTH Third Quarter 2014 Financial Results
33

3.
PROPERTY, PLANT AND EQUIPMENT ("PP&E")
Cost or deemed cost
Oil and natural
gas assets

Other
equipment

Total

Balance, December 31, 2012
$
7,349.4

$
74.2

$
7,423.6

Additions to PP&E
705.4

4.6

710.0

Property acquisitions
16.0

—

16.0

Transfer from E&E assets (note 4)
144.3

—

144.3

Change in asset retirement obligations
(169.6
)
—

(169.6
)
Divestitures
(1,457.8
)
—

(1,457.8
)
Balance, December 31, 2013
$
6,587.7

$
78.8

$
6,666.5

Additions to PP&E
668.1

3.9

672.0

Property acquisitions
15.8

—

15.8

Change in asset retirement obligations
117.3

—

117.3

Divestitures
(153.4
)
—

(153.4
)
Balance, September 30, 2014
$
7,235.5

$
82.7

$
7,318.2

 
 
 
 
Accumulated depletion, amortization and impairment losses
Oil and natural
gas assets

Other
equipment

Total

Balance, December 31, 2012
$
1,450.9

$
56.5

$
1,507.4

Depletion and amortization for the period
567.6

7.0

574.6

Divestitures
(233.1
)
—

(233.1
)
Balance, December 31, 2013
$
1,785.4

$
63.5

$
1,848.9

Depletion and amortization for the period
384.0

5.3

389.3

Divestitures
(50.7
)
—

(50.7
)
Balance, September 30, 2014
$
2,118.7

$
68.8

$
2,187.5

 
 
 
 
Net book value
Oil and natural
gas assets

Other
equipment

Total

As at September 30, 2014
$
5,116.8

$
13.9

$
5,130.7

As at December 31, 2013
$
4,802.3

$
15.3

$
4,817.6

During the nine months ended September 30, 2014, $11.7 million (September 30, 2013 – $12.1 million) of directly attributable general and administrative costs were capitalized to PP&E.
The calculation of depletion for the nine months ended September 30, 2014 excluded certain capital from the construction phase of the Lindbergh thermal project ("Lindbergh Project") of $788.3 million (September 30, 2013 – $244.8 million).
Pengrowth capitalizes interest for qualifying assets in the construction phase based on costs incurred on the project and the average cost of borrowing. During the nine months ended September 30, 2014, $21.1 million (September 30, 2013 – $2.8 million) of interest was capitalized on the Lindbergh Project to PP&E using a capitalization rate of 5.7 percent (September 30, 2013 – 5.7 percent).

4.
EXPLORATION AND EVALUATION ASSETS ("E&E")
Cost or deemed cost
  
Balance, December 31, 2012
$
563.6

Transfer to PP&E
(144.3
)
Balance, December 31, 2013
$
419.3

Additions
4.1

Balance, September 30, 2014
$
423.4


PENGROWTH Third Quarter 2014 Financial Results
34

5.
GOODWILL
Cost or deemed cost
  
Balance, December 31, 2012
$
700.7

Divestitures
(28.0
)
Balance, December 31, 2013
$
672.7

Divestitures
(18.5
)
Balance, September 30, 2014
$
654.2


6.
LONG TERM DEBT AND BANK INDEBTEDNESS

LONG TERM DEBT
 
As at
  
September 30, 2014

December 31, 2013

U.S. dollar denominated senior unsecured notes:
 
 
71.5 million at 4.67 percent due May 2015
$
80.0

$
75.9

400 million at 6.35 percent due July 2017
447.3

424.6

265 million at 6.98 percent due August 2018
296.2

281.1

35 million at 3.49 percent due October 2019
39.0

37.1

115.5 million at 5.98 percent due May 2020
129.0

122.4

105 million at 4.07 percent due October 2022
117.1

111.1

195 million at 4.17 percent due October 2024
217.4

206.3

 
$
1,326.0

$
1,258.5

U.K. pound sterling denominated unsecured notes:
 
 
50 million at 5.46 percent due December 2015
$
90.7

$
88.0

15 million at 3.45 percent due October 2019
27.1

26.3

 
$
117.8

$
114.3

Canadian dollar senior unsecured notes:
 
 
15 million at 6.61 percent due August 2018
$
15.0

$
15.0

25 million at 4.74 percent due October 2022
24.9

24.9

 
$
39.9

$
39.9

Total long term debt
$
1,483.7

$
1,412.7

 
 
 
Current portion of long term debt
$
80.0

$
—

Non-current portion of long term debt
1,403.7

1,412.7

 
$
1,483.7

$
1,412.7

Pengrowth’s unsecured covenant based revolving credit facility includes a committed value of $1 billion and a $250 million expansion feature, providing $1.25 billion of credit capacity from a syndicate of seven Canadian and four foreign banks. The facility can be extended at Pengrowth’s discretion any time prior to maturity, subject to syndicate approval. In the event that the lenders do not agree to a renewal, the outstanding balance is due upon maturity which is currently July 26, 2017.
This facility carries floating interest rates that are expected to range between 1.6 percent and 3.25 percent over bankers’ acceptance rates, depending on Pengrowth’s ratio of senior debt to earnings before interest, taxes and non-cash items. At September 30, 2014, the available facility was undrawn (December 31, 2013 – $nil) and letters of credit in the amount of $33.3 million (December 31, 2013 – $35.8 million) were outstanding.

PENGROWTH Third Quarter 2014 Financial Results
35

BANK INDEBTEDNESS
Pengrowth also maintains a $50 million demand operating facility with one Canadian bank. At September 30, 2014, this facility was undrawn (December 31, 2013 – $nil) and reduced by $0.8 million of outstanding letters of credit (December 31, 2013 – $0.8 million). When utilized together with any overdraft amounts, this facility would appear on the Balance Sheets as a current liability in bank indebtedness, as applicable.
FINANCIAL COVENANTS
Pengrowth’s senior unsecured notes and credit facilities are subject to a number of covenants, all of which were met at all times during the preceding twelve months, and at September 30, 2014. On January 24, 2014, certain of the credit facility covenants were amended until December 31, 2015. The financial covenants are now substantially similar between the credit facilities and the senior unsecured notes. The covenant amendments were obtained as a proactive step while Pengrowth completes construction of the first 12,500 bbl/d commercial phase of Lindbergh.

7.
PROVISIONS
Provisions are composed of Asset Retirement Obligations ("ARO") and contract & other liabilities. The following provides a continuity of the balances for the following periods:
 
Asset retirement
obligations

Contract & Other
liabilities

                      Total
Balance, December 31, 2012
$
868.9

$
6.7

$
875.6

Incurred during the period
4.2

—

4.2

Property acquisitions
3.1

—

3.1

Property dispositions
(84.0
)
—

(84.0
)
Revisions due to discount rate changes (1)
(195.0
)
—

(195.0
)
Provisions settled
(29.6
)
—

(29.6
)
Other revisions
18.1

—

18.1

Accretion (amortization)
20.5

(1.4
)
19.1

Balance, December 31, 2013
$
606.2

$
5.3

$
611.5

Incurred during the period
6.4

4.3

10.7

Property acquisitions
3.0

—

3.0

Property dispositions
(59.6
)
—

(59.6
)
Revisions due to discount rate changes (2)
107.9

—

107.9

Provisions settled
(17.4
)
(0.2
)
(17.6
)
Other revisions
—

(0.1
)
(0.1
)
Accretion (amortization)
14.4

(1.2
)
13.2

Balance, September 30, 2014
$
660.9

$
8.1

$
669.0

(1)
Relates to the change in the risk free discount rate from 2.5 percent to 3.25 percent. The offset is recorded in PP&E.
(2) 
Relates to the change in the risk free discount rate from 3.25 percent to 2.7 percent. The offset is recorded in PP&E.
As at September 30, 2014
  
  
  
Current 
$
22.0

$
2.6

$
24.6

Long term
638.9

5.5

644.4

 
$
660.9

$
8.1

$
669.0

 
As at December 31, 2013
  
  
  
Current
$
15.0

$
2.1

$
17.1

Long term
591.2

3.2

594.4

 
$
606.2

$
5.3

$
611.5





PENGROWTH Third Quarter 2014 Financial Results
36

The following assumptions were used to estimate the ARO liability:
 
As at
  
September 30, 2014

December 31, 2013

Total escalated future costs
2,007.8

2,122.5

Discount rate, per annum
2.7
%
3.25
%
Inflation rate, per annum
1.5
%
1.5
%

8.
DEFERRED INCOME TAXES
A reconciliation of the deferred income tax reduction calculated based on the loss before taxes at the statutory tax rate to the actual provision for deferred income taxes is as follows: 
 
Nine months ended
  
September 30, 2014

September 30, 2013

Loss before taxes
$
(78.8
)
$
(280.4
)
Combined federal and provincial tax rate
25.30
%
25.31
%
Expected income tax reduction
$
(19.9
)
$
(71.0
)
Foreign exchange loss (1)
4.7

5.9

Loss on investments (2)
0.6

1.9

Other including share based compensation and goodwill
8.6

8.6

Deferred income tax reduction
$
(6.0
)
$
(54.6
)
(1) 
Reflects the 50% non-taxable portion of foreign exchange gains and losses and related risk management contracts.
(2) 
Reflects the 50% non-taxable portion of investment gains and losses.
 
9.
SHAREHOLDERS’ CAPITAL
Pengrowth is authorized to issue an unlimited number of common shares and up to 10 million preferred shares. No preferred shares have been issued.
 
Nine months ended
Year ended
 
September 30, 2014
December 31, 2013
(Common shares - 000's)
Number of
common shares

Amount

Number of
common shares

Amount

Balance, beginning of period
522,031

$
4,693.1

511,804

$
4,634.8

Share based compensation (cash exercised)
257

1.6

336

2.1

Share based compensation (non-cash exercised)
1,985

13.2

1,260

11.3

Issued for cash under Dividend Reinvestment Plan ("DRIP")
5,875

39.5

8,631

44.9

Balance, end of period
530,148

$
4,747.4

522,031

$
4,693.1


10.
SHARE BASED COMPENSATION PLANS
A rolling maximum of 3.2 percent of the issued and outstanding common shares may be reserved for issuance under all share based compensation plans in the aggregate, as approved by shareholders. As at September 30, 2014, the number of shares issuable under the share based compensation plans, in aggregate, represents 2.2 percent of the issued and outstanding common shares, which is within the limit.




PENGROWTH Third Quarter 2014 Financial Results
37


Share based compensation expense is composed of the following:
 
Nine months ended
  
September 30, 2014

September 30, 2013

Share based compensation
$
15.3

$
13.7

Amounts capitalized in the period
(1.2
)
(1.2
)
Share based compensation expense included in net income (loss)
$
14.1

$
12.5

 
LONG TERM INCENTIVE PLAN ("LTIP")
The following provides a continuity of the share settled LTIP:
(number of share units - 000's)
PSUs

RSUs

DSUs

Outstanding, December 31, 2012
1,724

1,958

136

Granted
2,611

3,299

161

Forfeited
(439
)
(483
)
—

Exercised
(2
)
(689
)
(34
)
Performance adjustment
(163
)
—

—

Deemed DRIP
303

328

21

Outstanding, December 31, 2013
4,034

4,413

284

Granted
1,897

2,330

—

Forfeited
(229
)
(239
)
—

Exercised
(275
)
(1,706
)
—

Performance adjustment
108

—

—

Deemed DRIP
261

246

15

Outstanding, September 30, 2014
5,796

5,044

299


PREVIOUS LONG TERM INCENTIVE PLANS
As at September 30, 2014, the number of share units outstanding under the Deferred Entitlement Share Units Plan was 287,438 share units (December 31, 2013 - 275,409 share units) and the number of share unit options outstanding under the Common Share Rights Incentive Plan was 52,251 share unit options (December 31, 2013 - 496,918 share unit options).
CASH SETTLED DEFERRED SHARE UNITS ("DSUs")
Commencing in 2014, the Board of Directors receive cash-settled DSUs in place of the previous share-settled DSUs. Each cash-settled DSU entitles the holder to a cash payment equivalent to the value of a number of Common Shares (including the reinvestment of notional dividends) to be paid upon the individual ceasing to be a Director for any reason. Compensation expense associated with the cash-settled DSUs is determined based on the fair value of the share units at the grant date and is subsequently adjusted to reflect the fair value of the share units at each period end. This valuation incorporates the period end share price and the number of cash-settled DSUs outstanding at each period end. Compensation expense is recognized in the Statements of Income (Loss) with a corresponding increase or decrease in liabilities. Classification of the associated short term and long term liabilities is dependent on the expected payout dates. As at September 30, 2014, the number of cash-settled DSUs outstanding are 124,222 units (December 31, 2013 - nil) with a corresponding long term liability of $0.7 million (December 31, 2013 - $nil).


PENGROWTH Third Quarter 2014 Financial Results
38

11.
OTHER CASH FLOW DISCLOSURES
CHANGE IN NON-CASH OPERATING WORKING CAPITAL
 
Three months ended
Nine months ended
 
September 30
September 30
Cash provided by (used for):
2014

2013

2014

2013

Accounts receivable
$
47.5

$
15.4

$
31.1

$
14.0

Accounts payable
(22.6
)
(32.6
)
(1.8
)
(9.4
)
 
$
24.9

$
(17.2
)
$
29.3

$
4.6

CHANGE IN NON-CASH INVESTING WORKING CAPITAL 
 
Three months ended
Nine months ended
 
September 30
September 30
Cash provided by (used for):
2014

2013

2014

2013

Accounts receivable
$
—

$
(8.8
)
$
—

$
(8.8
)
Accounts payable, including capital accruals
(12.0
)
33.9

(30.4
)
34.9

 
$
(12.0
)
$
25.1

$
(30.4
)
$
26.1

12.
AMOUNTS PER SHARE
The following reconciles the weighted average number of shares used in the basic and diluted net income (loss) per share calculations:
 
Three months ended
Nine months ended
 
September 30
September 30
(000's)
2014

2013

2014

2013

Weighted average number of shares – basic
529,105

518,802

526,570

516,170

Dilutive effect of share based compensation plans
7,651

—

—

—

Weighted average number of shares – diluted
536,756

518,802

526,570

516,170

For the three and nine months ended September 30, 2014, 0.1 million shares and 7.4 million shares, respectively, (6.2 million and 5.0 million shares for the three and nine months ended September 30, 2013) that are issuable on exercise of the share based compensation plans were excluded from the diluted net income (loss) per share calculation as their effect is anti-dilutive.

Further, for the three and nine months ended September 30, 2014, 23.0 million shares (23.0 million shares for the three and nine months ended September 30, 2013) that are issuable on potential conversion of the convertible debentures were excluded from the diluted net income (loss) per share calculation as their effect is anti-dilutive.


PENGROWTH Third Quarter 2014 Financial Results
39

13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
COMMODITY PRICE CONTRACTS
As at September 30, 2014, Pengrowth had fixed the price applicable to future production as follows:
Crude Oil:
 
 
 
 
 
Swaps
  
  
  
 
  
Reference point
Volume  (bbl/d)

Remaining term
Price per bbl

 
Settlement
currency
Financial:
 
 
 
 
 
Edmonton Light Sweet
2,500

Oct 1, 2014 - Dec 31, 2014
Cdn WTI less $8.87

 
Cdn
Edmonton Light Sweet
500

Oct 1, 2014 - Mar 31, 2015
Cdn WTI less $8.90

 
Cdn
Edmonton Light Sweet
1,000

Jan 1, 2015 - Mar 31, 2015
Cdn WTI less $8.70

 
Cdn
WTI
23,000

Oct 1, 2014 - Dec 31, 2014
$
94.51

 
Cdn
WTI
13,000

Jan 1, 2015 - Dec 31, 2015
$
92.77

 
Cdn
WTI
12,500

Jan 1, 2015 - Jun 30, 2015
$
95.76

 
Cdn
WTI
13,000

Jul 1, 2015 - Dec 31, 2015
$
94.60

 
Cdn
WTI
18,500

Jan 1, 2016 - Mar 31, 2016
$
95.56

 
Cdn
WTI
14,000

Apr 1, 2016 - Jun 30, 2016
$
95.04

 
Cdn
WTI
12,000

Jul 1, 2016 - Sep 30, 2016
$
95.37

 
Cdn
WTI
11,500

Oct 1, 2016 - Dec 31, 2016
$
95.20

 
Cdn
Puts
 
 
 
 
 
Reference point
Volume  (bbl/d)

Remaining term
Price per bbl

Premium payable per bbl

Settlement
currency
Financial:
 
 
 
 
 
WTI
500

Jan 1, 2015 - Mar 31, 2015
$
97.25

$
3.25

Cdn
WTI
500

Apr 1, 2015 - Jun 30, 2015
$
97.25

$
3.18

Cdn
WTI
4,000

Jan 1, 2016 - Mar 31, 2016
$
90.00

$
3.30

Cdn
Natural Gas:
 
 
 
 
 
Swaps
  
  
  
 
  
Reference point
Volume  (MMBtu/d)

Remaining term
Price per MMBtu

 
Settlement
currency
Financial:
 
 
 
 
 
AECO
113,738

Oct 1, 2014 - Dec 31, 2014
$
3.79

 
Cdn
NGI Chicago Index
5,000

Oct 1, 2014 - Dec 31, 2014
$
4.27

 
Cdn
AECO
75,825

Jan 1, 2015 - Dec 31, 2015
$
3.79

 
Cdn
AECO
2,370

Jan 1, 2015 - Mar 31, 2015
$
3.85

 
Cdn
NGI Chicago Index
7,500

Jan 1, 2015 - Dec 31, 2015
$
4.50

 
Cdn
AECO
14,217

Jan 1, 2016 - Dec 31, 2016
$
3.82

 
Cdn
AECO
21,326

Jan 1, 2016 - Mar 31, 2016
$
4.10

 
Cdn
AECO
4,739

Apr 1, 2016 - Jun 30, 2016
$
3.72

 
Cdn
AECO
4,739

Jul 1, 2016 - Sep 30, 2016
$
3.70

 
Cdn
AECO
11,848

Oct 1, 2016 - Dec 31, 2016
$
3.79

 
Cdn
AECO
7,109

Jan 1, 2017 - Dec 31, 2017
$
4.22

 
Cdn
Puts
 
 
 
 
 
Reference point
Volume  (MMBtu/d)

Remaining term
Price per MMBtu

Premium payable per MMBtu

Settlement
currency
Financial:
 
 
 
 
 
AECO
4,739

Jan 1, 2016 - Mar 31, 2016
$
3.93

$
0.43

Cdn
AECO
4,739

Jan 1, 2016 - Jun 30, 2016
$
3.59

$
0.25

Cdn

PENGROWTH Third Quarter 2014 Financial Results
40


Commodity Price Sensitivity on Risk Management Contracts as at September 30, 2014
Oil
Cdn$1/bbl increase in future oil prices

Cdn$1/bbl decrease in future oil prices

Unrealized pre-tax gain (loss) on oil risk management
$
(17.0
)
$
17.0

Natural gas
Cdn$0.25/MMBtu increase in future natural gas prices

Cdn$0.25/MMBtu decrease in future natural gas prices

Unrealized pre-tax gain (loss) on natural gas risk management
$
(13.3
)
$
13.3

As at close September 30, 2014, the AECO gas spot price was $4.12/MMBtu (September 30, 2013 – $1.92/MMBtu). The WTI prompt monthly price was Cdn$102.10/bbl (September 30, 2013 – Cdn$105.43/bbl).

Physical Delivery Contracts
As at September 30, 2014, the following physical delivery contracts were held for the purpose of delivery of non-financial items in accordance with Pengrowth's expected sales requirements. Physical delivery contracts are not considered financial instruments and therefore, no asset or liability has been recognized in the Financial Statements.
Crude Oil:
 
 
 
Reference point
Volume (bbl/d)

Remaining term
Price per bbl
Edmonton Light Sweet
3,039

Oct 1, 2014 - Dec 31, 2014
Cdn WTI less $8.72
Edmonton Light Sweet
2,098

Oct 1, 2014 - Mar 31, 2015
Cdn WTI less $8.83
Edmonton Light Sweet
1,000

Jan 1, 2015 - Mar 31, 2015
Cdn WTI less $8.70

POWER PRICE CONTRACTS
As at September 30, 2014, Pengrowth had fixed the price applicable to future power costs as follows: 
Power:
  
  
  
  
Reference point
Volume (MW)

Remaining term
Price per MWh

Settlement
currency
Financial:
 
 
 
 
AESO
55

Oct 1, 2014 - Dec 31, 2014
$
55.63

Cdn
AESO
40

Jan 1, 2015 - Dec 31, 2015
$
49.53

Cdn
AESO
10

Jan 1, 2016 - Dec 31, 2016
$
50.00

Cdn
As at close September 30, 2014, the Alberta power pool spot price was $25.05/MWh (September 30, 2013 – $52.92/MWh). The average Alberta power pool price was $64.34/MWh for the three months ended September 30, 2014 (September 30, 2013 – $83.61/MWh).
Power Price Sensitivity on Risk Management Contracts as at September 30, 2014
Each Cdn$1/MWh change in future power prices would result in a pre-tax change in the unrealized gain (loss) on power risk management contracts outstanding as at September 30, 2014 of approximately $0.6 million.
FOREIGN EXCHANGE CONTRACTS
U.K. pound sterling Denominated Term Debt
Pengrowth entered into foreign exchange risk management contracts when it issued the U.K. pound sterling term notes. These contracts fix the Canadian dollar to the U.K. pound sterling exchange rate on the interest and principal of the U.K. pound sterling denominated debt as follows: 
Amount (U.K. pound sterling millions)
Settlement date
Fixed rate
($1Cdn = U.K. pound sterling)

50
December 2015
0.50

15
October 2019
0.63



PENGROWTH Third Quarter 2014 Financial Results
41

U.S. Denominated Term Debt
A series of swap contracts were transacted in order to fix the foreign exchange rate on a portion of Pengrowth’s U.S. dollar denominated term debt. Each swap requires Pengrowth to buy U.S. dollars at a predetermined rate and time based upon the maturity dates of the U.S. denominated term debt. 
Contract type
Settlement date
Principal amount  (U.S.$ millions)

Swapped amount  (U.S.$ millions)

     % of principal swapped

Fixed rate
($1Cdn = $U.S.)

Swap
May 2015
71.5

50

70
%
0.98

Swap
July 2017
400

250

63
%
0.97

Swap
August 2018
265

125

47
%
0.96

Swap
October 2019
35

15

43
%
0.94

Swap
May 2020
115.5

20

17
%
0.95

No contracts
October 2022
105

—

—

—

No contracts
October 2024
195

—

—

—

 
 
1,187

460

39
%
 
 
Foreign Exchange Rate Sensitivity
Foreign Exchange on Foreign Denominated Term Debt
The following summarizes the sensitivity on a pre-tax basis, of a change in the foreign exchange rate related to the translation of the foreign denominated term debt and the offsetting change in the fair value of the foreign exchange risk management contracts relating to that debt, holding all other variables constant:
 
Cdn$0.01 Exchange rate change
Foreign exchange sensitivity as at September 30, 2014
Cdn - U.S.

Cdn - U.K.

Unrealized foreign exchange gain or loss on foreign denominated debt
$
11.9

$
0.7

Unrealized foreign exchange risk management gain or loss
4.6

0.7

Net pre-tax impact on Statements of Income (Loss)
$
7.3

$
—

 
 
 
 
Cdn$0.01 Exchange rate change
Foreign exchange sensitivity as at September 30, 2013
Cdn - U.S.

Cdn - U.K.

Unrealized foreign exchange gain or loss on foreign denominated debt
$
11.9

$
0.7

Unrealized foreign exchange risk management gain or loss
4.6

0.7

Net pre-tax impact on Statements of Income (Loss)
$
7.3

$
—

Interest Rate Sensitivity
Bank Interest Cost
As at September 30, 2014 and 2013, Pengrowth had no floating rate debt outstanding, therefore Pengrowth had no interest rate risk.

PENGROWTH Third Quarter 2014 Financial Results
42

Summary of Gains and Losses on Risk Management Contracts
The following tables provide details of the fair value of risk management contracts that appear on the Balance Sheets and the unrealized and realized gains and losses on risk management recorded in the Statements of Income (Loss).
As at and for the nine month period ended September 30, 2014
Commodity
contracts (1)

Power and Interest
contracts (2)

Foreign exchange
contracts (3)

Total

Current portion of risk management assets
$
—

$
1.1

$
5.4

$
6.5

Non-current portion of risk management assets
—

—

35.3

35.3

Current portion of risk management liabilities
(60.4
)
—

(0.7
)
(61.1
)
Non-current portion of risk management liabilities
(23.8
)
—

(6.8
)
(30.6
)
Risk management assets (liabilities), end of period
$
(84.2
)
$
1.1

$
33.2

$
(49.9
)
Less: Risk management assets (liabilities) at beginning of period
(80.0
)
(1.4
)
12.0

(69.4
)
Unrealized gain (loss) on risk management contracts for the period
$
(4.2
)
$
2.5

$
21.2

$
19.5

Realized gain (loss) on risk management contracts for the period
(117.8
)
0.1

(0.9
)
(118.6
)
Total unrealized and realized gain (loss) on risk management contracts for the period
$
(122.0
)
$
2.6

$
20.3

$
(99.1
)
 
 
 
 
 
As at and for the nine month period ended September 30, 2013
Commodity
contracts (1)

Power and Interest
contracts (2)

Foreign exchange
contracts (3)

Total

Current portion of risk management assets
$
0.3

$
0.6

$
—

$
0.9

Non-current portion of risk management assets
4.0

0.1

11.1

15.2

Current portion of risk management liabilities
(45.0
)
(0.3
)
(1.2
)
(46.5
)
Non-current portion of risk management liabilities
(0.2
)
—

(15.7
)
(15.9
)
Risk management assets (liabilities), end of period
$
(40.9
)
$
0.4

$
(5.8
)
$
(46.3
)
Less: Risk management assets (liabilities) at beginning of period
7.0

(0.8
)
(17.8
)
(11.6
)
Unrealized gain (loss) on risk management contracts for the period
$
(47.9
)
$
1.2

$
12.0

$
(34.7
)
Realized gain (loss) on risk management contracts for the period
(39.3
)
3.6

1.5

(34.2
)
Total unrealized and realized gain (loss) on risk management contracts for the period
$
(87.2
)
$
4.8

$
13.5

$
(68.9
)
(1) 
Unrealized and realized gains and losses are presented as separate line items in the Statements of Income (Loss).
(2) 
Unrealized gains and losses are included in other (income) expense and interest expense, respectively. Realized gains and losses are included in operating expense and interest expense, respectively.
(3) 
Unrealized and realized gains and losses are included as part of separate line items in the Statements of Income (Loss).

PENGROWTH Third Quarter 2014 Financial Results
43

FAIR VALUE
The fair value of cash and cash equivalents, accounts receivable, accounts payable, and dividends payable approximate their carrying amount due to the short-term nature of those instruments. The fair value of the Canadian dollar revolving credit facility is equal to its carrying amount as the facility bears interest at floating rates and credit spreads within the facility are indicative of market rates. The fair value of the remediation trust funds and minority investment in a private company are equal to their carrying amount as these assets are carried at their estimated fair value.

The following tables provide fair value measurement information for financial assets and liabilities:
 
 
 
Fair value measurements using:
As at September 30, 2014
Carrying amount

Fair value

Quoted prices in
active markets
(Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Financial Assets
 
 
 
 
 
Remediation trust funds
$
58.2

$
58.2

$
58.2

$
—

$
—

Fair value of risk management contracts
41.8

41.8

—

41.8

—

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Convertible debentures
235.3

241.1

241.1

—

—

U.S. dollar denominated senior unsecured notes
1,326.0

1,403.3

—

1,403.3

—

Cdn dollar senior unsecured notes
39.9

40.9

—

40.9

—

U.K. pound sterling denominated unsecured notes
117.8

121.0

—

121.0

—

Fair value of risk management contracts
91.7

91.7

—

91.7

—

 
 
 
 
 
 
 
 
 
Fair value measurements using:
As at December 31, 2013
Carrying amount

Fair value

Quoted prices in
active markets
(Level 1)

Significant other
observable inputs
(Level 2)

Significant unobservable inputs (Level 3)

Financial Assets
 
 
 
 
 
Remediation trust funds
$
54.7

$
54.7

$
54.7

$
—

$
—

Fair value of risk management contracts
23.1

23.1

—

23.1

—

Investment in private corporation
5.0

5.0

—

—

5.0

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Convertible debentures
236.0

240.0

240.0

—

—

U.S. dollar denominated senior unsecured notes
1,258.5

1,333.2

—

1,333.2

—

Cdn dollar senior unsecured notes
39.9

39.6

—

39.6

—

U.K. pound sterling denominated unsecured notes
114.3

118.6

—

118.6

—

Fair value of risk management contracts
92.5

92.5

—

92.5

—




PENGROWTH Third Quarter 2014 Financial Results
44

14.
FOREIGN EXCHANGE (GAIN) LOSS
 
Three months ended
Nine months ended
 
September 30
September 30
  
2014

2013

2014

2013

Currency exchange rate ($1Cdn = $U.S.) at period end
$
0.89

$
0.97

$
0.89

$
0.97

Unrealized foreign exchange (gain) loss on U.S. dollar denominated debt
$
63.9

$
(26.1
)
$
67.0

$
43.5

Unrealized foreign exchange (gain) loss on U.K. pound sterling denominated debt
(0.7
)
4.5

3.4

3.3

Total unrealized foreign exchange (gain) loss from translation of foreign denominated debt
$
63.2

$
(21.6
)
$
70.4

$
46.8

Unrealized (gain) loss on U.S. foreign exchange risk management contracts
$
(20.8
)
$
9.8

$
(17.6
)
$
(9.0
)
Unrealized (gain) loss on U.K. foreign exchange risk management contracts
0.3

(4.6
)
(3.6
)
(3.0
)
Total unrealized (gain) loss on foreign exchange risk management contracts
$
(20.5
)
$
5.2

$
(21.2
)
$
(12.0
)
Total unrealized foreign exchange (gain) loss
$
42.7

$
(16.4
)
$
49.2

$
34.8

Total realized foreign exchange (gain) loss
$
(0.8
)
$
0.1

$
0.7

$
(1.3
)

15.
COMMITMENTS
Pengrowth entered into a lease amendment and extension agreement with respect to its Calgary head office lease effective March 31, 2014. The agreement saw two floors returned to the landlord in 2014 and extended the existing lease term for the remaining floors from 2018 to 2025, resulting in an additional operating lease commitment over the extended term of approximately $57 million.
Pengrowth entered into a transportation agreement in the third quarter of 2014 with Husky Energy in preparation for the anticipated Lindbergh production growth resulting in an additional commitment of approximately $161 million from 2015 to 2025.












PENGROWTH Third Quarter 2014 Financial Results
45






Q3 2014 Financial Statements and Notes
PENGROWTH ENERGY CORPORATION
BALANCE SHEETS
(Stated in millions of Canadian dollars)
(Unaudited)
 
 
 
As at

As at

 
Note

September 30, 2014

December 31, 2013

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
 
$
42.0

$
448.5

Accounts receivable
 
161.2

192.3

Fair value of risk management contracts
13

6.5

—

 
 
209.7

640.8

Fair value of risk management contracts
13

35.3

23.1

Other assets
13

58.2

59.7

Property, plant and equipment
3

5,130.7

4,817.6

Exploration and evaluation assets
4

423.4

419.3

Goodwill
5

654.2

672.7

TOTAL ASSETS
 
$
6,511.5

$
6,633.2

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
 
$
317.0

$
353.2

Dividends payable
 
21.2

20.9

Fair value of risk management contracts
13

61.1

70.3

Current portion of long term debt
6

80.0

—

Current portion of convertible debentures
 
98.1

98.7

Current portion of provisions
7

24.6

17.1

 
 
602.0

560.2

Fair value of risk management contracts
13

30.6

22.2

Convertible debentures
 
137.2

137.3

Long term debt
6

1,403.7

1,412.7

Provisions
7

644.4

594.4

Deferred income taxes
8

212.1

218.1

 
 
3,030.0

2,944.9

Shareholders' Equity
 
 
 
Shareholders' capital
9

4,747.4

4,693.1

Contributed surplus
 
29.4

28.0

Deficit
 
(1,295.3
)
(1,032.8
)
 
 
3,481.5

3,688.3

Commitments
15

 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
6,511.5

$
6,633.2

See accompanying notes to the Financial Statements.


PENGROWTH Third Quarter 2014 Financial Results
1

PENGROWTH ENERGY CORPORATION
STATEMENTS OF INCOME (LOSS)
(Stated in millions of Canadian dollars, except per share amounts)
(Unaudited)

 
 
 
Three months ended September 30
Nine months ended September 30
  
Note

2014

2013

2014

2013

REVENUES
 
 
 
 
 
     Oil and gas sales
 
$
369.1

$
439.6

$
1,205.4

$
1,249.7

     Royalties, net of incentives
 
(65.5
)
(72.6
)
(217.4
)
(212.3
)
 
 
303.6

367.0

988.0

1,037.4

     Realized loss on commodity risk management
13

(28.6
)
(25.4
)
(117.8
)
(39.3
)
     Unrealized gain (loss) on commodity risk management
13

121.6

(17.9
)
(4.2
)
(47.9
)
 
 
396.6

323.7

866.0

950.2

EXPENSES
 
 
 
 
 
     Operating
 
102.4

125.6

320.9

373.3

     Transportation
 
6.5

8.4

22.1

21.6

     General and administrative
 
25.6

24.4

76.5

78.6

     Depletion, depreciation and amortization
3

128.5

135.7

389.3

443.9

 
 
263.0

294.1

808.8

917.4

OPERATING INCOME
 
133.6

29.6

57.2

32.8

 
 
 
 
 
 
Other (income) expense items
 
 
 
 
 
     Unrealized loss on investment
 
5.0

—

5.0

15.0

     (Gain) loss on disposition of properties
 
(19.7
)
154.0

(1.9
)
167.7

     Unrealized foreign exchange (gain) loss
14

42.7

(16.4
)
49.2

34.8

     Realized foreign exchange (gain) loss
14

(0.8
)
0.1

0.7

(1.3
)
     Interest and financing charges
 
17.2

23.7

56.9

72.8

     Accretion
7

4.5

4.9

14.4

15.6

     Other (income) expense
 
(0.1
)
2.9

11.7

8.6

INCOME (LOSS) BEFORE TAXES
 
84.8

(139.6
)
(78.8
)
(280.4
)
Deferred income tax (reduction) expense
8

32.6

(32.3
)
(6.0
)
(54.6
)
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
 
$
52.2

$
(107.3
)
$
(72.8
)
$
(225.8
)
NET INCOME (LOSS) PER SHARE
12

 
 
 
 
     Basic
 
$
0.10

$
(0.21
)
$
(0.14
)
$
(0.44
)
     Diluted
 
$
0.10

$
(0.21
)
$
(0.14
)
$
(0.44
)
See accompanying notes to the Financial Statements.


PENGROWTH Third Quarter 2014 Financial Results
2

PENGROWTH ENERGY CORPORATION
STATEMENTS OF CASH FLOW
(Stated in millions of Canadian dollars)
(Unaudited)

 
 
 
Three months ended September 30
Nine months ended September 30
  
Note

2014

2013

2014

2013

CASH PROVIDED BY (USED FOR):
 
 
 
 
 
OPERATING
 
 
 
 
 
Net income (loss) and comprehensive income (loss)
 
$
52.2

$
(107.3
)
$
(72.8
)
$
(225.8
)
Non-cash items
 
 
 
 
 
Depletion, depreciation, amortization and accretion
 
133.0

140.6

403.7

459.5

Deferred income tax (reduction) expense
8

32.6

(32.3
)
(6.0
)
(54.6
)
Unrealized foreign exchange (gain) loss
14

42.7

(16.4
)
49.2

34.8

Unrealized (gain) loss on commodity risk management
13

(121.6
)
17.9

4.2

47.9

Share based compensation
 
5.0

4.4

13.4

12.5

Unrealized loss on investment
 
5.0

—

5.0

15.0

(Gain) loss on disposition of properties
 
(19.7
)
154.0

(1.9
)
167.7

Other items
 
(0.2
)
0.6

(4.9
)
(0.3
)
Derivative settlement on senior note repayment
 
—

—

—

(1.7
)
Funds flow from operations
 
129.0

161.5

389.9

455.0

Interest and financing charges
 
17.2

23.7

56.9

72.8

Expenditures on remediation
7

(4.9
)
(7.6
)
(17.4
)
(21.9
)
Change in non-cash operating working capital
11

24.9

(17.2
)
29.3

4.6

 
 
166.2

160.4

458.7

510.5

FINANCING
 
 
 
 
 
Dividends paid
 
(63.5
)
(62.2
)
(189.4
)
(185.7
)
Long term debt (repayment) and related derivative settlement
 
—

—

—

(209.6
)
Interest paid
 
(30.9
)
(31.9
)
(82.4
)
(79.5
)
Other financing cost
 
—

(1.1
)
—

(1.1
)
Proceeds from equity issues, including DRIP
 
13.1

11.0

41.1

33.2

 
 
(81.3
)
(84.2
)
(230.7
)
(442.7
)
INVESTING
 
 
 
 
 
Capital expenditures
 
(191.9
)
(176.2
)
(645.2
)
(456.1
)
Property acquisitions
 
(13.7
)
(3.0
)
(15.8
)
(3.9
)
Proceeds on property dispositions
 
43.0

626.4

63.5

952.4

Other items
 
(1.5
)
(1.9
)
(6.6
)
(6.0
)
Change in non-cash investing working capital
11

(12.0
)
25.1

(30.4
)
26.1

 
 
(176.1
)
470.4

(634.5
)
512.5

CHANGE IN CASH AND CASH EQUIVALENTS
 
(91.2
)
546.6

(406.5
)
580.3

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
133.2

36.4

448.5

2.7

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
42.0

$
583.0

$
42.0

$
583.0

See accompanying notes to the Financial Statements.



PENGROWTH Third Quarter 2014 Financial Results
3

PENGROWTH ENERGY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Stated in millions of Canadian dollars)
(Unaudited)

 
 
 
Three months ended September 30
Nine months ended September 30
  
Note

2014

2013

2014

2013

SHAREHOLDERS' CAPITAL
9

 
 
 
 
Balance, beginning of period
 
$
4,734.3

$
4,667.5

$
4,693.1

$
4,634.8

Share based compensation
 
—

0.5

14.8

11.0

Issued under DRIP
 
13.1

11.0

39.5

33.2

Balance, end of period
 
4,747.4

4,679.0

4,747.4

4,679.0

 
 
 
 
 
 
CONTRIBUTED SURPLUS
 
 
 
 
 
Balance, beginning of period
 
24.0

21.3

28.0

22.9

Share based compensation
 
5.4

4.8

14.6

13.7

Exercise of share based compensation awards
 
—

(0.5
)
(13.2
)
(11.0
)
Balance, end of period
 
29.4

25.6

29.4

25.6

 
 
 
 
 
 
DEFICIT
 
 
 
 
 
Balance, beginning of period
 
(1,283.9
)
(709.6
)
(1,032.8
)
(467.4
)
Net income (loss)
 
52.2

(107.3
)
(72.8
)
(225.8
)
Dividends declared
 
(63.6
)
(62.3
)
(189.7
)
(186.0
)
Balance, end of period
 
(1,295.3
)
(879.2
)
(1,295.3
)
(879.2
)
 
 
 
 
 
 
TOTAL SHAREHOLDERS' EQUITY
 
$
3,481.5

$
3,825.4

$
3,481.5

$
3,825.4

See accompanying notes to the Financial Statements.


PENGROWTH Third Quarter 2014 Financial Results
4


PENGROWTH ENERGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
AS AT AND FOR THE PERIOD ENDED SEPTEMBER 30, 2014 (Unaudited)
(Tabular amounts are stated in millions of Canadian dollars except per share amounts and as otherwise stated)

1.
BUSINESS OF THE CORPORATION
Pengrowth Energy Corporation ("Pengrowth" or the "Corporation") is a Canadian resource company that is engaged in the production, development, exploration and acquisition of oil and natural gas assets.
The Financial Statements for the three and nine months ended September 30, 2014 are unaudited and have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") using accounting policies consistent with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and International Financial Reporting Interpretations Committee ("IFRIC"). The disclosures provided below are incremental to those included with the December 31, 2013 annual Financial Statements. All accounting policies and methods of computation followed in the preparation of these Financial Statements are consistent with the December 31, 2013 annual Financial Statements, except as noted in Note 2 to these Financial Statements.
The Financial Statements should be read in conjunction with the audited Financial Statements and the notes thereto in Pengrowth’s annual report for the year ended December 31, 2013.
The Financial Statements were authorized for release by the Audit and Risk Committee of the Board of Directors on October 30, 2014.
2.
ACCOUNTING PRONOUNCEMENTS ADOPTED
On January 1, 2014, Pengrowth adopted amendments to IAS 32 Financial Instruments: Presentation (“IAS 32”) relating to offsetting financial assets and financial liabilities. The amendments clarify when an entity has a legally enforceable right to offset and certain other requirements that are necessary to present a net financial asset or liability. The retrospective adoption of this standard had no impact on the amounts recorded in the Financial Statements.
On January 1, 2014, Pengrowth adopted IFRIC 21 Levies ("IFRIC 21"). IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation also clarifies that no liability should be recognized before the specified minimum threshold to trigger that levy is reached. The retrospective adoption of this interpretation had no impact on the amounts recorded in the Financial Statements.

PENGROWTH Third Quarter 2014 Financial Results
5

3.
PROPERTY, PLANT AND EQUIPMENT ("PP&E")
Cost or deemed cost
Oil and natural
gas assets

Other
equipment

Total

Balance, December 31, 2012
$
7,349.4

$
74.2

$
7,423.6

Additions to PP&E
705.4

4.6

710.0

Property acquisitions
16.0

—

16.0

Transfer from E&E assets (note 4)
144.3

—

144.3

Change in asset retirement obligations
(169.6
)
—

(169.6
)
Divestitures
(1,457.8
)
—

(1,457.8
)
Balance, December 31, 2013
$
6,587.7

$
78.8

$
6,666.5

Additions to PP&E
668.1

3.9

672.0

Property acquisitions
15.8

—

15.8

Change in asset retirement obligations
117.3

—

117.3

Divestitures
(153.4
)
—

(153.4
)
Balance, September 30, 2014
$
7,235.5

$
82.7

$
7,318.2

 
 
 
 
Accumulated depletion, amortization and impairment losses
Oil and natural
gas assets

Other
equipment

Total

Balance, December 31, 2012
$
1,450.9

$
56.5

$
1,507.4

Depletion and amortization for the period
567.6

7.0

574.6

Divestitures
(233.1
)
—

(233.1
)
Balance, December 31, 2013
$
1,785.4

$
63.5

$
1,848.9

Depletion and amortization for the period
384.0

5.3

389.3

Divestitures
(50.7
)
—

(50.7
)
Balance, September 30, 2014
$
2,118.7

$
68.8

$
2,187.5

 
 
 
 
Net book value
Oil and natural
gas assets

Other
equipment

Total

As at September 30, 2014
$
5,116.8

$
13.9

$
5,130.7

As at December 31, 2013
$
4,802.3

$
15.3

$
4,817.6

During the nine months ended September 30, 2014, $11.7 million (September 30, 2013 – $12.1 million) of directly attributable general and administrative costs were capitalized to PP&E.
The calculation of depletion for the nine months ended September 30, 2014 excluded certain capital from the construction phase of the Lindbergh thermal project ("Lindbergh Project") of $788.3 million (September 30, 2013 – $244.8 million).
Pengrowth capitalizes interest for qualifying assets in the construction phase based on costs incurred on the project and the average cost of borrowing. During the nine months ended September 30, 2014, $21.1 million (September 30, 2013 – $2.8 million) of interest was capitalized on the Lindbergh Project to PP&E using a capitalization rate of 5.7 percent (September 30, 2013 – 5.7 percent).

4.
EXPLORATION AND EVALUATION ASSETS ("E&E")
Cost or deemed cost
  
Balance, December 31, 2012
$
563.6

Transfer to PP&E
(144.3
)
Balance, December 31, 2013
$
419.3

Additions
4.1

Balance, September 30, 2014
$
423.4


PENGROWTH Third Quarter 2014 Financial Results
6

5.
GOODWILL
Cost or deemed cost
  
Balance, December 31, 2012
$
700.7

Divestitures
(28.0
)
Balance, December 31, 2013
$
672.7

Divestitures
(18.5
)
Balance, September 30, 2014
$
654.2


6.
LONG TERM DEBT AND BANK INDEBTEDNESS

LONG TERM DEBT
 
As at
  
September 30, 2014

December 31, 2013

U.S. dollar denominated senior unsecured notes:
 
 
71.5 million at 4.67 percent due May 2015
$
80.0

$
75.9

400 million at 6.35 percent due July 2017
447.3

424.6

265 million at 6.98 percent due August 2018
296.2

281.1

35 million at 3.49 percent due October 2019
39.0

37.1

115.5 million at 5.98 percent due May 2020
129.0

122.4

105 million at 4.07 percent due October 2022
117.1

111.1

195 million at 4.17 percent due October 2024
217.4

206.3

 
$
1,326.0

$
1,258.5

U.K. pound sterling denominated unsecured notes:
 
 
50 million at 5.46 percent due December 2015
$
90.7

$
88.0

15 million at 3.45 percent due October 2019
27.1

26.3

 
$
117.8

$
114.3

Canadian dollar senior unsecured notes:
 
 
15 million at 6.61 percent due August 2018
$
15.0

$
15.0

25 million at 4.74 percent due October 2022
24.9

24.9

 
$
39.9

$
39.9

Total long term debt
$
1,483.7

$
1,412.7

 
 
 
Current portion of long term debt
$
80.0

$
—

Non-current portion of long term debt
1,403.7

1,412.7

 
$
1,483.7

$
1,412.7

Pengrowth’s unsecured covenant based revolving credit facility includes a committed value of $1 billion and a $250 million expansion feature, providing $1.25 billion of credit capacity from a syndicate of seven Canadian and four foreign banks. The facility can be extended at Pengrowth’s discretion any time prior to maturity, subject to syndicate approval. In the event that the lenders do not agree to a renewal, the outstanding balance is due upon maturity which is currently July 26, 2017.
This facility carries floating interest rates that are expected to range between 1.6 percent and 3.25 percent over bankers’ acceptance rates, depending on Pengrowth’s ratio of senior debt to earnings before interest, taxes and non-cash items. At September 30, 2014, the available facility was undrawn (December 31, 2013 – $nil) and letters of credit in the amount of $33.3 million (December 31, 2013 – $35.8 million) were outstanding.

PENGROWTH Third Quarter 2014 Financial Results
7

BANK INDEBTEDNESS
Pengrowth also maintains a $50 million demand operating facility with one Canadian bank. At September 30, 2014, this facility was undrawn (December 31, 2013 – $nil) and reduced by $0.8 million of outstanding letters of credit (December 31, 2013 – $0.8 million). When utilized together with any overdraft amounts, this facility would appear on the Balance Sheets as a current liability in bank indebtedness, as applicable.
FINANCIAL COVENANTS
Pengrowth’s senior unsecured notes and credit facilities are subject to a number of covenants, all of which were met at all times during the preceding twelve months, and at September 30, 2014. On January 24, 2014, certain of the credit facility covenants were amended until December 31, 2015. The financial covenants are now substantially similar between the credit facilities and the senior unsecured notes. The covenant amendments were obtained as a proactive step while Pengrowth completes construction of the first 12,500 bbl/d commercial phase of Lindbergh.

7.
PROVISIONS
Provisions are composed of Asset Retirement Obligations ("ARO") and contract & other liabilities. The following provides a continuity of the balances for the following periods:
 
Asset retirement
obligations

Contract & Other
liabilities

                      Total
Balance, December 31, 2012
$
868.9

$
6.7

$
875.6

Incurred during the period
4.2

—

4.2

Property acquisitions
3.1

—

3.1

Property dispositions
(84.0
)
—

(84.0
)
Revisions due to discount rate changes (1)
(195.0
)
—

(195.0
)
Provisions settled
(29.6
)
—

(29.6
)
Other revisions
18.1

—

18.1

Accretion (amortization)
20.5

(1.4
)
19.1

Balance, December 31, 2013
$
606.2

$
5.3

$
611.5

Incurred during the period
6.4

4.3

10.7

Property acquisitions
3.0

—

3.0

Property dispositions
(59.6
)
—

(59.6
)
Revisions due to discount rate changes (2)
107.9

—

107.9

Provisions settled
(17.4
)
(0.2
)
(17.6
)
Other revisions
—

(0.1
)
(0.1
)
Accretion (amortization)
14.4

(1.2
)
13.2

Balance, September 30, 2014
$
660.9

$
8.1

$
669.0

(1)
Relates to the change in the risk free discount rate from 2.5 percent to 3.25 percent. The offset is recorded in PP&E.
(2) 
Relates to the change in the risk free discount rate from 3.25 percent to 2.7 percent. The offset is recorded in PP&E.
As at September 30, 2014
  
  
  
Current 
$
22.0

$
2.6

$
24.6

Long term
638.9

5.5

644.4

 
$
660.9

$
8.1

$
669.0

 
As at December 31, 2013
  
  
  
Current
$
15.0

$
2.1

$
17.1

Long term
591.2

3.2

594.4

 
$
606.2

$
5.3

$
611.5





PENGROWTH Third Quarter 2014 Financial Results
8

The following assumptions were used to estimate the ARO liability:
 
As at
  
September 30, 2014

December 31, 2013

Total escalated future costs
2,007.8

2,122.5

Discount rate, per annum
2.7
%
3.25
%
Inflation rate, per annum
1.5
%
1.5
%

8.
DEFERRED INCOME TAXES
A reconciliation of the deferred income tax reduction calculated based on the loss before taxes at the statutory tax rate to the actual provision for deferred income taxes is as follows: 
 
Nine months ended
  
September 30, 2014

September 30, 2013

Loss before taxes
$
(78.8
)
$
(280.4
)
Combined federal and provincial tax rate
25.30
%
25.31
%
Expected income tax reduction
$
(19.9
)
$
(71.0
)
Foreign exchange loss (1)
4.7

5.9

Loss on investments (2)
0.6

1.9

Other including share based compensation and goodwill
8.6

8.6

Deferred income tax reduction
$
(6.0
)
$
(54.6
)
(1) 
Reflects the 50% non-taxable portion of foreign exchange gains and losses and related risk management contracts.
(2) 
Reflects the 50% non-taxable portion of investment gains and losses.
 
9.
SHAREHOLDERS’ CAPITAL
Pengrowth is authorized to issue an unlimited number of common shares and up to 10 million preferred shares. No preferred shares have been issued.
 
Nine months ended
Year ended
 
September 30, 2014
December 31, 2013
(Common shares - 000's)
Number of
common shares

Amount

Number of
common shares

Amount

Balance, beginning of period
522,031

$
4,693.1

511,804

$
4,634.8

Share based compensation (cash exercised)
257

1.6

336

2.1

Share based compensation (non-cash exercised)
1,985

13.2

1,260

11.3

Issued for cash under Dividend Reinvestment Plan ("DRIP")
5,875

39.5

8,631

44.9

Balance, end of period
530,148

$
4,747.4

522,031

$
4,693.1


10.
SHARE BASED COMPENSATION PLANS
A rolling maximum of 3.2 percent of the issued and outstanding common shares may be reserved for issuance under all share based compensation plans in the aggregate, as approved by shareholders. As at September 30, 2014, the number of shares issuable under the share based compensation plans, in aggregate, represents 2.2 percent of the issued and outstanding common shares, which is within the limit.




PENGROWTH Third Quarter 2014 Financial Results
9


Share based compensation expense is composed of the following:
 
Nine months ended
  
September 30, 2014

September 30, 2013

Share based compensation
$
15.3

$
13.7

Amounts capitalized in the period
(1.2
)
(1.2
)
Share based compensation expense included in net income (loss)
$
14.1

$
12.5

 
LONG TERM INCENTIVE PLAN ("LTIP")
The following provides a continuity of the share settled LTIP:
(number of share units - 000's)
PSUs

RSUs

DSUs

Outstanding, December 31, 2012
1,724

1,958

136

Granted
2,611

3,299

161

Forfeited
(439
)
(483
)
—

Exercised
(2
)
(689
)
(34
)
Performance adjustment
(163
)
—

—

Deemed DRIP
303

328

21

Outstanding, December 31, 2013
4,034

4,413

284

Granted
1,897

2,330

—

Forfeited
(229
)
(239
)
—

Exercised
(275
)
(1,706
)
—

Performance adjustment
108

—

—

Deemed DRIP
261

246

15

Outstanding, September 30, 2014
5,796

5,044

299


PREVIOUS LONG TERM INCENTIVE PLANS
As at September 30, 2014, the number of share units outstanding under the Deferred Entitlement Share Units Plan was 287,438 share units (December 31, 2013 - 275,409 share units) and the number of share unit options outstanding under the Common Share Rights Incentive Plan was 52,251 share unit options (December 31, 2013 - 496,918 share unit options).
CASH SETTLED DEFERRED SHARE UNITS ("DSUs")
Commencing in 2014, the Board of Directors receive cash-settled DSUs in place of the previous share-settled DSUs. Each cash-settled DSU entitles the holder to a cash payment equivalent to the value of a number of Common Shares (including the reinvestment of notional dividends) to be paid upon the individual ceasing to be a Director for any reason. Compensation expense associated with the cash-settled DSUs is determined based on the fair value of the share units at the grant date and is subsequently adjusted to reflect the fair value of the share units at each period end. This valuation incorporates the period end share price and the number of cash-settled DSUs outstanding at each period end. Compensation expense is recognized in the Statements of Income (Loss) with a corresponding increase or decrease in liabilities. Classification of the associated short term and long term liabilities is dependent on the expected payout dates. As at September 30, 2014, the number of cash-settled DSUs outstanding are 124,222 units (December 31, 2013 - nil) with a corresponding long term liability of $0.7 million (December 31, 2013 - $nil).


PENGROWTH Third Quarter 2014 Financial Results
10

11.
OTHER CASH FLOW DISCLOSURES
CHANGE IN NON-CASH OPERATING WORKING CAPITAL
 
Three months ended
Nine months ended
 
September 30
September 30
Cash provided by (used for):
2014

2013

2014

2013

Accounts receivable
$
47.5

$
15.4

$
31.1

$
14.0

Accounts payable
(22.6
)
(32.6
)
(1.8
)
(9.4
)
 
$
24.9

$
(17.2
)
$
29.3

$
4.6

CHANGE IN NON-CASH INVESTING WORKING CAPITAL 
 
Three months ended
Nine months ended
 
September 30
September 30
Cash provided by (used for):
2014

2013

2014

2013

Accounts receivable
$
—

$
(8.8
)
$
—

$
(8.8
)
Accounts payable, including capital accruals
(12.0
)
33.9

(30.4
)
34.9

 
$
(12.0
)
$
25.1

$
(30.4
)
$
26.1

12.
AMOUNTS PER SHARE
The following reconciles the weighted average number of shares used in the basic and diluted net income (loss) per share calculations:
 
Three months ended
Nine months ended
 
September 30
September 30
(000's)
2014

2013

2014

2013

Weighted average number of shares – basic
529,105

518,802

526,570

516,170

Dilutive effect of share based compensation plans
7,651

—

—

—

Weighted average number of shares – diluted
536,756

518,802

526,570

516,170

For the three and nine months ended September 30, 2014, 0.1 million shares and 7.4 million shares, respectively, (6.2 million and 5.0 million shares for the three and nine months ended September 30, 2013) that are issuable on exercise of the share based compensation plans were excluded from the diluted net income (loss) per share calculation as their effect is anti-dilutive.

Further, for the three and nine months ended September 30, 2014, 23.0 million shares (23.0 million shares for the three and nine months ended September 30, 2013) that are issuable on potential conversion of the convertible debentures were excluded from the diluted net income (loss) per share calculation as their effect is anti-dilutive.


PENGROWTH Third Quarter 2014 Financial Results
11

13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
COMMODITY PRICE CONTRACTS
As at September 30, 2014, Pengrowth had fixed the price applicable to future production as follows:
Crude Oil:
 
 
 
 
 
Swaps
  
  
  
 
  
Reference point
Volume  (bbl/d)

Remaining term
Price per bbl

 
Settlement
currency
Financial:
 
 
 
 
 
Edmonton Light Sweet
2,500

Oct 1, 2014 - Dec 31, 2014
Cdn WTI less $8.87

 
Cdn
Edmonton Light Sweet
500

Oct 1, 2014 - Mar 31, 2015
Cdn WTI less $8.90

 
Cdn
Edmonton Light Sweet
1,000

Jan 1, 2015 - Mar 31, 2015
Cdn WTI less $8.70

 
Cdn
WTI
23,000

Oct 1, 2014 - Dec 31, 2014
$
94.51

 
Cdn
WTI
13,000

Jan 1, 2015 - Dec 31, 2015
$
92.77

 
Cdn
WTI
12,500

Jan 1, 2015 - Jun 30, 2015
$
95.76

 
Cdn
WTI
13,000

Jul 1, 2015 - Dec 31, 2015
$
94.60

 
Cdn
WTI
18,500

Jan 1, 2016 - Mar 31, 2016
$
95.56

 
Cdn
WTI
14,000

Apr 1, 2016 - Jun 30, 2016
$
95.04

 
Cdn
WTI
12,000

Jul 1, 2016 - Sep 30, 2016
$
95.37

 
Cdn
WTI
11,500

Oct 1, 2016 - Dec 31, 2016
$
95.20

 
Cdn
Puts
 
 
 
 
 
Reference point
Volume  (bbl/d)

Remaining term
Price per bbl

Premium payable per bbl

Settlement
currency
Financial:
 
 
 
 
 
WTI
500

Jan 1, 2015 - Mar 31, 2015
$
97.25

$
3.25

Cdn
WTI
500

Apr 1, 2015 - Jun 30, 2015
$
97.25

$
3.18

Cdn
WTI
4,000

Jan 1, 2016 - Mar 31, 2016
$
90.00

$
3.30

Cdn
Natural Gas:
 
 
 
 
 
Swaps
  
  
  
 
  
Reference point
Volume  (MMBtu/d)

Remaining term
Price per MMBtu

 
Settlement
currency
Financial:
 
 
 
 
 
AECO
113,738

Oct 1, 2014 - Dec 31, 2014
$
3.79

 
Cdn
NGI Chicago Index
5,000

Oct 1, 2014 - Dec 31, 2014
$
4.27

 
Cdn
AECO
75,825

Jan 1, 2015 - Dec 31, 2015
$
3.79

 
Cdn
AECO
2,370

Jan 1, 2015 - Mar 31, 2015
$
3.85

 
Cdn
NGI Chicago Index
7,500

Jan 1, 2015 - Dec 31, 2015
$
4.50

 
Cdn
AECO
14,217

Jan 1, 2016 - Dec 31, 2016
$
3.82

 
Cdn
AECO
21,326

Jan 1, 2016 - Mar 31, 2016
$
4.10

 
Cdn
AECO
4,739

Apr 1, 2016 - Jun 30, 2016
$
3.72

 
Cdn
AECO
4,739

Jul 1, 2016 - Sep 30, 2016
$
3.70

 
Cdn
AECO
11,848

Oct 1, 2016 - Dec 31, 2016
$
3.79

 
Cdn
AECO
7,109

Jan 1, 2017 - Dec 31, 2017
$
4.22

 
Cdn
Puts
 
 
 
 
 
Reference point
Volume  (MMBtu/d)

Remaining term
Price per MMBtu

Premium payable per MMBtu

Settlement
currency
Financial:
 
 
 
 
 
AECO
4,739

Jan 1, 2016 - Mar 31, 2016
$
3.93

$
0.43

Cdn
AECO
4,739

Jan 1, 2016 - Jun 30, 2016
$
3.59

$
0.25

Cdn

PENGROWTH Third Quarter 2014 Financial Results
12


Commodity Price Sensitivity on Risk Management Contracts as at September 30, 2014
Oil
Cdn$1/bbl increase in future oil prices

Cdn$1/bbl decrease in future oil prices

Unrealized pre-tax gain (loss) on oil risk management
$
(17.0
)
$
17.0

Natural gas
Cdn$0.25/MMBtu increase in future natural gas prices

Cdn$0.25/MMBtu decrease in future natural gas prices

Unrealized pre-tax gain (loss) on natural gas risk management
$
(13.3
)
$
13.3

As at close September 30, 2014, the AECO gas spot price was $4.12/MMBtu (September 30, 2013 – $1.92/MMBtu). The WTI prompt monthly price was Cdn$102.10/bbl (September 30, 2013 – Cdn$105.43/bbl).

Physical Delivery Contracts
As at September 30, 2014, the following physical delivery contracts were held for the purpose of delivery of non-financial items in accordance with Pengrowth's expected sales requirements. Physical delivery contracts are not considered financial instruments and therefore, no asset or liability has been recognized in the Financial Statements.
Crude Oil:
 
 
 
Reference point
Volume (bbl/d)

Remaining term
Price per bbl
Edmonton Light Sweet
3,039

Oct 1, 2014 - Dec 31, 2014
Cdn WTI less $8.72
Edmonton Light Sweet
2,098

Oct 1, 2014 - Mar 31, 2015
Cdn WTI less $8.83
Edmonton Light Sweet
1,000

Jan 1, 2015 - Mar 31, 2015
Cdn WTI less $8.70

POWER PRICE CONTRACTS
As at September 30, 2014, Pengrowth had fixed the price applicable to future power costs as follows: 
Power:
  
  
  
  
Reference point
Volume (MW)

Remaining term
Price per MWh

Settlement
currency
Financial:
 
 
 
 
AESO
55

Oct 1, 2014 - Dec 31, 2014
$
55.63

Cdn
AESO
40

Jan 1, 2015 - Dec 31, 2015
$
49.53

Cdn
AESO
10

Jan 1, 2016 - Dec 31, 2016
$
50.00

Cdn
As at close September 30, 2014, the Alberta power pool spot price was $25.05/MWh (September 30, 2013 – $52.92/MWh). The average Alberta power pool price was $64.34/MWh for the three months ended September 30, 2014 (September 30, 2013 – $83.61/MWh).
Power Price Sensitivity on Risk Management Contracts as at September 30, 2014
Each Cdn$1/MWh change in future power prices would result in a pre-tax change in the unrealized gain (loss) on power risk management contracts outstanding as at September 30, 2014 of approximately $0.6 million.
FOREIGN EXCHANGE CONTRACTS
U.K. pound sterling Denominated Term Debt
Pengrowth entered into foreign exchange risk management contracts when it issued the U.K. pound sterling term notes. These contracts fix the Canadian dollar to the U.K. pound sterling exchange rate on the interest and principal of the U.K. pound sterling denominated debt as follows: 
Amount (U.K. pound sterling millions)
Settlement date
Fixed rate
($1Cdn = U.K. pound sterling)

50
December 2015
0.50

15
October 2019
0.63



PENGROWTH Third Quarter 2014 Financial Results
13

U.S. Denominated Term Debt
A series of swap contracts were transacted in order to fix the foreign exchange rate on a portion of Pengrowth’s U.S. dollar denominated term debt. Each swap requires Pengrowth to buy U.S. dollars at a predetermined rate and time based upon the maturity dates of the U.S. denominated term debt. 
Contract type
Settlement date
Principal amount  (U.S.$ millions)

Swapped amount  (U.S.$ millions)

     % of principal swapped

Fixed rate
($1Cdn = $U.S.)

Swap
May 2015
71.5

50

70
%
0.98

Swap
July 2017
400

250

63
%
0.97

Swap
August 2018
265

125

47
%
0.96

Swap
October 2019
35

15

43
%
0.94

Swap
May 2020
115.5

20

17
%
0.95

No contracts
October 2022
105

—

—

—

No contracts
October 2024
195

—

—

—

 
 
1,187

460

39
%
 
 
Foreign Exchange Rate Sensitivity
Foreign Exchange on Foreign Denominated Term Debt
The following summarizes the sensitivity on a pre-tax basis, of a change in the foreign exchange rate related to the translation of the foreign denominated term debt and the offsetting change in the fair value of the foreign exchange risk management contracts relating to that debt, holding all other variables constant:
 
Cdn$0.01 Exchange rate change
Foreign exchange sensitivity as at September 30, 2014
Cdn - U.S.

Cdn - U.K.

Unrealized foreign exchange gain or loss on foreign denominated debt
$
11.9

$
0.7

Unrealized foreign exchange risk management gain or loss
4.6

0.7

Net pre-tax impact on Statements of Income (Loss)
$
7.3

$
—

 
 
 
 
Cdn$0.01 Exchange rate change
Foreign exchange sensitivity as at September 30, 2013
Cdn - U.S.

Cdn - U.K.

Unrealized foreign exchange gain or loss on foreign denominated debt
$
11.9

$
0.7

Unrealized foreign exchange risk management gain or loss
4.6

0.7

Net pre-tax impact on Statements of Income (Loss)
$
7.3

$
—

Interest Rate Sensitivity
Bank Interest Cost
As at September 30, 2014 and 2013, Pengrowth had no floating rate debt outstanding, therefore Pengrowth had no interest rate risk.

PENGROWTH Third Quarter 2014 Financial Results
14

Summary of Gains and Losses on Risk Management Contracts
The following tables provide details of the fair value of risk management contracts that appear on the Balance Sheets and the unrealized and realized gains and losses on risk management recorded in the Statements of Income (Loss).
As at and for the nine month period ended September 30, 2014
Commodity
contracts (1)

Power and Interest
contracts (2)

Foreign exchange
contracts (3)

Total

Current portion of risk management assets
$
—

$
1.1

$
5.4

$
6.5

Non-current portion of risk management assets
—

—

35.3

35.3

Current portion of risk management liabilities
(60.4
)
—

(0.7
)
(61.1
)
Non-current portion of risk management liabilities
(23.8
)
—

(6.8
)
(30.6
)
Risk management assets (liabilities), end of period
$
(84.2
)
$
1.1

$
33.2

$
(49.9
)
Less: Risk management assets (liabilities) at beginning of period
(80.0
)
(1.4
)
12.0

(69.4
)
Unrealized gain (loss) on risk management contracts for the period
$
(4.2
)
$
2.5

$
21.2

$
19.5

Realized gain (loss) on risk management contracts for the period
(117.8
)
0.1

(0.9
)
(118.6
)
Total unrealized and realized gain (loss) on risk management contracts for the period
$
(122.0
)
$
2.6

$
20.3

$
(99.1
)
 
 
 
 
 
As at and for the nine month period ended September 30, 2013
Commodity
contracts (1)

Power and Interest
contracts (2)

Foreign exchange
contracts (3)

Total

Current portion of risk management assets
$
0.3

$
0.6

$
—

$
0.9

Non-current portion of risk management assets
4.0

0.1

11.1

15.2

Current portion of risk management liabilities
(45.0
)
(0.3
)
(1.2
)
(46.5
)
Non-current portion of risk management liabilities
(0.2
)
—

(15.7
)
(15.9
)
Risk management assets (liabilities), end of period
$
(40.9
)
$
0.4

$
(5.8
)
$
(46.3
)
Less: Risk management assets (liabilities) at beginning of period
7.0

(0.8
)
(17.8
)
(11.6
)
Unrealized gain (loss) on risk management contracts for the period
$
(47.9
)
$
1.2

$
12.0

$
(34.7
)
Realized gain (loss) on risk management contracts for the period
(39.3
)
3.6

1.5

(34.2
)
Total unrealized and realized gain (loss) on risk management contracts for the period
$
(87.2
)
$
4.8

$
13.5

$
(68.9
)
(1) 
Unrealized and realized gains and losses are presented as separate line items in the Statements of Income (Loss).
(2) 
Unrealized gains and losses are included in other (income) expense and interest expense, respectively. Realized gains and losses are included in operating expense and interest expense, respectively.
(3) 
Unrealized and realized gains and losses are included as part of separate line items in the Statements of Income (Loss).

PENGROWTH Third Quarter 2014 Financial Results
15

FAIR VALUE
The fair value of cash and cash equivalents, accounts receivable, accounts payable, and dividends payable approximate their carrying amount due to the short-term nature of those instruments. The fair value of the Canadian dollar revolving credit facility is equal to its carrying amount as the facility bears interest at floating rates and credit spreads within the facility are indicative of market rates. The fair value of the remediation trust funds and minority investment in a private company are equal to their carrying amount as these assets are carried at their estimated fair value.

The following tables provide fair value measurement information for financial assets and liabilities:
 
 
 
Fair value measurements using:
As at September 30, 2014
Carrying amount

Fair value

Quoted prices in
active markets
(Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Financial Assets
 
 
 
 
 
Remediation trust funds
$
58.2

$
58.2

$
58.2

$
—

$
—

Fair value of risk management contracts
41.8

41.8

—

41.8

—

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Convertible debentures
235.3

241.1

241.1

—

—

U.S. dollar denominated senior unsecured notes
1,326.0

1,403.3

—

1,403.3

—

Cdn dollar senior unsecured notes
39.9

40.9

—

40.9

—

U.K. pound sterling denominated unsecured notes
117.8

121.0

—

121.0

—

Fair value of risk management contracts
91.7

91.7

—

91.7

—

 
 
 
 
 
 
 
 
 
Fair value measurements using:
As at December 31, 2013
Carrying amount

Fair value

Quoted prices in
active markets
(Level 1)

Significant other
observable inputs
(Level 2)

Significant unobservable inputs (Level 3)

Financial Assets
 
 
 
 
 
Remediation trust funds
$
54.7

$
54.7

$
54.7

$
—

$
—

Fair value of risk management contracts
23.1

23.1

—

23.1

—

Investment in private corporation
5.0

5.0

—

—

5.0

 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Convertible debentures
236.0

240.0

240.0

—

—

U.S. dollar denominated senior unsecured notes
1,258.5

1,333.2

—

1,333.2

—

Cdn dollar senior unsecured notes
39.9

39.6

—

39.6

—

U.K. pound sterling denominated unsecured notes
114.3

118.6

—

118.6

—

Fair value of risk management contracts
92.5

92.5

—

92.5

—




PENGROWTH Third Quarter 2014 Financial Results
16

14.
FOREIGN EXCHANGE (GAIN) LOSS
 
Three months ended
Nine months ended
 
September 30
September 30
  
2014

2013

2014

2013

Currency exchange rate ($1Cdn = $U.S.) at period end
$
0.89

$
0.97

$
0.89

$
0.97

Unrealized foreign exchange (gain) loss on U.S. dollar denominated debt
$
63.9

$
(26.1
)
$
67.0

$
43.5

Unrealized foreign exchange (gain) loss on U.K. pound sterling denominated debt
(0.7
)
4.5

3.4

3.3

Total unrealized foreign exchange (gain) loss from translation of foreign denominated debt
$
63.2

$
(21.6
)
$
70.4

$
46.8

Unrealized (gain) loss on U.S. foreign exchange risk management contracts
$
(20.8
)
$
9.8

$
(17.6
)
$
(9.0
)
Unrealized (gain) loss on U.K. foreign exchange risk management contracts
0.3

(4.6
)
(3.6
)
(3.0
)
Total unrealized (gain) loss on foreign exchange risk management contracts
$
(20.5
)
$
5.2

$
(21.2
)
$
(12.0
)
Total unrealized foreign exchange (gain) loss
$
42.7

$
(16.4
)
$
49.2

$
34.8

Total realized foreign exchange (gain) loss
$
(0.8
)
$
0.1

$
0.7

$
(1.3
)

15.
COMMITMENTS
Pengrowth entered into a lease amendment and extension agreement with respect to its Calgary head office lease effective March 31, 2014. The agreement saw two floors returned to the landlord in 2014 and extended the existing lease term for the remaining floors from 2018 to 2025, resulting in an additional operating lease commitment over the extended term of approximately $57 million.
Pengrowth entered into a transportation agreement in the third quarter of 2014 with Husky Energy in preparation for the anticipated Lindbergh production growth resulting in an additional commitment of approximately $161 million from 2015 to 2025.


PENGROWTH Third Quarter 2014 Financial Results
17
Q3 2014 MD&A


MANAGEMENT’S DISCUSSION & ANALYSIS
The following Management’s Discussion and Analysis ("MD&A") of financial results should be read in conjunction with the unaudited Financial Statements for the three and nine months ended September 30, 2014 of Pengrowth Energy Corporation ("Pengrowth" or the "Corporation"). This MD&A is based on information available to October 30, 2014.
Pengrowth’s third quarter and year to date results for 2014 are contained within this MD&A.
BUSINESS OF THE CORPORATION
Pengrowth is a Canadian resource company that is engaged in the production, development, exploration and acquisition of oil and natural gas assets.
FREQUENTLY RECURRING TERMS
Pengrowth uses the following frequently recurring industry terms in this MD&A: "bbls" refers to barrels, "bbl/d" refers to barrels per day, "Mbbls" refers to thousands of barrels, "boe" refers to barrels of oil equivalent, "boe/d" refers to barrels of oil equivalent per day, "Mboe" refers to thousand boe, "MMboe" refers to million boe, "Mcf" refers to thousand cubic feet, "Mcf/d" refers to thousand cubic feet per day, "MMcf" refers to million cubic feet, "Bcf" refers to billion cubic feet, "MMBtu" refers to million British thermal units, "MMBtu/d" refers to million British thermal units per day, "MW" refers to megawatt, "MWh" refers to megawatt hour, "WTI" refers to West Texas Intermediate crude oil price, "WCS" refers to Western Canadian Select crude oil price, "AECO" refers to Alberta natural gas price point, "NYMEX" refers to New York Mercantile Exchange, "NGI Chicago" refers to Chicago natural gas price point and "AESO" refers to Alberta power price point. Bitumen is reported as heavy oil throughout this document. Disclosure provided herein in respect of a boe may be misleading, particularly if used in isolation. A boe conversion ratio of six Mcf of natural gas to one barrel of crude oil equivalent is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements within the meaning of securities laws, including the "safe harbour" provisions of Canadian securities legislation and the United States Private Securities Litigation Reform Act of 1995. Forward-looking information is often, but not always, identified by the use of words such as "anticipate", "believe", "expect", "plan", "intend", "forecast", "target", "project", "guidance", "may", "will", "should", "could", "estimate", "predict" or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to: reserves, production, the proportion of production of each product type, production additions from Pengrowth's development program, royalty expenses, operating expenses, tax horizon, deferred income taxes, goodwill, Asset Retirement Obligations ("ARO"), remediation, reclamation and abandonment expenses, clean-up and remediation costs, capital expenditures, development activities, General and Administrative Expenses ("G&A") and proceeds from the disposal of properties. Statements relating to "reserves" are forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the reserves described exist in the quantities predicted or estimated and can profitably be produced in the future.
Forward-looking statements and information are based on Pengrowth's current beliefs as well as assumptions made by, and information currently available to, Pengrowth concerning general economic and financial market conditions, anticipated financial performance, business prospects, strategies, regulatory developments, including in respect of taxation, royalty rates and environmental protection, future capital expenditures and the timing thereof, future oil and natural gas commodity prices and differentials between light, medium and heavy oil prices, future oil and natural gas production levels, future exchange rates and interest rates, the amount of future cash dividends paid by Pengrowth, the cost of expanding our property holdings, our ability to obtain labour and equipment in a timely manner to carry out development activities, our ability to market our oil and natural gas successfully to current and new customers including transportation availability, the impact of increasing competition, our ability to obtain financing on acceptable terms and meet financial covenants, our ability to add production and reserves through our development, exploitation and exploration activities. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
1
                                                                


results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: the volatility of oil and gas prices; Canadian light and heavy oil differentials; production and development costs and capital expenditures; the imprecision of reserve estimates and estimates of recoverable quantities of oil, natural gas and liquids; Pengrowth's ability to replace and expand oil and gas reserves, ability to produce those reserves; production may be impacted by unforeseen events such as equipment and transportation failures and weather related issues; environmental claims and liabilities; incorrect assessments of value when making acquisitions; increases in debt service charges; the loss of key personnel; the marketability of production; defaults by third party operators; unforeseen title defects; fluctuations in foreign currency and exchange rates; inadequate insurance coverage; counterparty risk; compliance with environmental laws and regulations; changes in tax and royalty laws; Pengrowth's ability to access external sources of debt and equity capital; the implementation of new International Financial Reporting Standards ("IFRS"); and the implementation of greenhouse gas emissions legislation. Further information regarding these factors may be found under the heading "Business Risks" herein and under "Risk Factors" in Pengrowth's most recent Annual Information Form ("AIF"), and in Pengrowth’s most recent audited Financial Statements, management information circular, quarterly reports, material change reports and news releases. Copies of Pengrowth’s Canadian public filings are available on SEDAR at www.sedar.com. Pengrowth’s U.S. public filings, including the most recent annual report form 40-F as supplemented by its filings on form 6-K, are available at www.sec.gov.
Pengrowth cautions that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Pengrowth, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Furthermore, the forward-looking statements contained in this MD&A are made as of the date of this MD&A and Pengrowth does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, except as required by law. The forward-looking statements in this document are provided for the limited purpose of enabling current and potential investors to evaluate an investment in Pengrowth. Readers are cautioned that such statements may not be appropriate, and should not be used for other purposes.
The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
CRITICAL ACCOUNTING ESTIMATES
The unaudited Financial Statements are prepared in accordance with IFRS. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Financial Statements and revenues and expenses for the period ended. Certain of these estimates may change from period to period resulting in a material impact on Pengrowth’s results. Pengrowth's ARO risk free discount rate changed from 3.25 percent to 2.7 percent (3.0 percent at June 30, 2014) during the first nine months of 2014 due to a decrease in the 30 year Canadian Government long term bond rate which drives Pengrowth's estimate of the ARO discount rate. There were no other changes to Pengrowth's critical accounting estimates in the nine months ended September 30, 2014. For more information refer to the December 31, 2013 annual report.
COMPARATIVE FIGURES
Certain comparative figures have been restated to conform to the current period presentation.
ADDITIONAL GAAP MEASURE
Funds Flow from Operations
Pengrowth uses funds flow from operations, a Generally Accepted Accounting Principles ("GAAP") measure that is not defined under IFRS. Management believes that in addition to cash provided by operations, funds flow from operations, as reported in the Statements of Cash Flow is a useful supplemental measure as it provides an indication of the funds generated by Pengrowth’s principal business activities prior to consideration of changes in working capital and remediation expenditures. Pengrowth considers this to be a key measure of performance as it demonstrates its ability to generate cash flow necessary to fund dividends and capital investments.
NON-GAAP FINANCIAL MEASURES
This MD&A refers to certain financial measures that are not determined in accordance with IFRS. These measures do not have standardized meanings and may not be comparable to similar measures presented by other oil and gas companies. Measures such as operating netbacks do not have standardized meanings prescribed by GAAP. See the section of this MD&A entitled Operating Netbacks for a discussion of the calculation.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
2
                                                                


The current level of capital expenditures funded through retained cash flow, as compared to debt or equity, can be determined when it is compared to the difference in funds flow from operations and dividends paid as shown on the Statements of Cash Flow.
Management monitors Pengrowth’s capital structure using non-GAAP financial metrics. The two metrics are total debt to the trailing twelve months Earnings Before Interest, Taxes, Depletion, Depreciation, Amortization, Accretion, and other non-cash items ("Adjusted EBITDA") and total debt to total capitalization. Total debt is the sum of working capital and long term debt including convertible debentures as shown on the Balance Sheets, and total capitalization is the sum of total debt and shareholders’ equity.
Payout ratio and net payout ratio are terms used to evaluate financial flexibility and the capacity to fund dividends. Payout ratio is defined on a percentage basis as dividends declared divided by funds flow from operations. Net payout ratio is calculated as dividends declared net of proceeds from the Dividend Reinvestment Plan ("DRIP") divided by funds flow from operations. Management believes that, in addition to net income (loss), adjusted net income (loss) is a useful supplemental measure as it reflects the underlying performance of Pengrowth’s business activities by excluding the after tax effect of non-cash commodity, power and interest mark to market gains and losses, non-cash mark to market gains and losses on investments, unrealized foreign exchange gains and losses and gains on acquisitions, as applicable, that may significantly impact net income (loss) from period to period. Management believes that segregating G&A expenses into cash and non-cash expenses is useful to the reader, as non-cash expenses only affect net income (loss) but not funds flow from operations.
OPERATIONAL MEASURES
The reserves and production in this MD&A refer to company-interest reserves or production that is Pengrowth’s working interest share of production or reserves prior to the deduction of Crown and other royalties plus any Pengrowth-owned royalty interest in production or reserves at the wellhead, in accordance with Canadian industry practice. Company-interest is more fully described in the AIF.
When converting natural gas to equivalent barrels of oil within this MD&A, Pengrowth uses the industry standard of six Mcf to one boe. Barrels of oil equivalent may be misleading, particularly if used in isolation; a conversion ratio of six Mcf of natural gas to one boe is based on an energy equivalency conversion and does not represent a value equivalency at the wellhead.
CURRENCY
All amounts are stated in Canadian dollars unless otherwise specified.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
3
                                                                


2014 GUIDANCE
The following table provides a summary of full year 2014 Guidance and actual results for the nine months ended September 30, 2014.
 
Actual

 
  
Year to date September 30, 2014

Full year 2014 Guidance
Production (boe/d)
73,789

71,000 - 73,000
Capital expenditures ($ millions)
645.2

740 - 770
Royalty expenses (% of sales)
18.0

16 - 18
Operating expenses ($/boe) (1)
15.93

15.20 - 15.80
Cash G&A expenses ($/boe) (1)
3.13

3.15 - 3.25
(1) 
Per boe estimates based on high and low ends of production Guidance.
Year to date 2014 average production of 73,789 boe/d exceeds 2014 Guidance driven by performance of the new Cardium development wells partly offset by third party capacity constraints at Pine Creek, downtime at Sable Island and a minor property divestiture in Northern Alberta completed in the third quarter. Pengrowth is on plan to deliver near the top end of full-year production Guidance of 71,000 - 73,000 boe/d.
Year to date 2014 capital expenditures amounted to $645.2 million, including $361.9 million invested at Lindbergh. Pengrowth is on track to achieve the full year 2014 capital expenditures Guidance of $740 - $770 million.
Year to date 2014 royalty expenses as a percentage of sales were at the higher end of 2014 Guidance mainly due to prior year Gas Cost Allowance ("GCA") adjustments. Full year 2014 royalty expenses as a percentage of sales are expected to be within 2014 Guidance.
Year to date 2014 operating expenses of $15.93/boe exceeds 2014 Guidance due to planned turnaround activities in the second quarter of 2014. Pengrowth anticipates full year 2014 operating expenses per boe to be within 2014 Guidance.
Year to date 2014 cash G&A expenses of $3.13/boe are at the low end of 2014 Guidance of $3.15/boe - $3.25/boe.
FINANCIAL HIGHLIGHTS
 
Three months ended
Nine months ended
($ millions except per boe amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Production (boe/d)
72,472

73,823

83,275

73,789

86,938

Capital expenditures
191.9

219.6

176.2

645.2

456.1

Funds flow from operations
129.0

121.4

161.5

389.9

455.0

Operating netback ($/boe) (1)
24.91

23.86

27.10

26.17

25.41

Adjusted net income (loss)
3.4

(24.8
)
(108.2
)
(24.2
)
(146.5
)
Net income (loss)
52.2

(8.8
)
(107.3
)
(72.8
)
(225.8
)
(1) 
Including realized commodity risk management.


PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
4
                                                                



Funds Flow from Operations
($ millions)
Q2/14 vs. Q3/14
 
% Change

 
Q3/13 vs. Q3/14
 
% Change

 
YTD 2013 vs. 2014
 
% Change

Funds flow from operations for comparative period
Q2/14
121.4

 
 
Q3/13
161.5

 
 
YTD 2013
455.0

 
Increase (decrease) due to:
 
 
 
 
 
 
 
 
 
 
 
Volumes
 
(5.8
)
(5
)
 
 
(66.6
)
(41
)
 
 
(204.3
)
(45
)
Prices including differentials
 
(32.9
)
(27
)
 
 
(2.4
)
(1
)
 
 
163.2

36

Realized commodity risk management
 
18.3

15

 
 
(3.2
)
(2
)
 
 
(78.5
)
(17
)
Other income including sulphur
 
0.7

1

 
 
(1.5
)
(1
)
 
 
(3.2
)
(1
)
Royalties
 
12.7

10

 
 
7.1

4

 
 
(5.1
)
(1
)
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Operating
 
12.1

10

 
 
23.2

14

 
 
52.4

12

Cash G&A
 
(1.2
)
(1
)
 
 
(0.6
)
—

 
 
3.0

1

Interest & financing
 
1.9

2

 
 
6.5

4

 
 
15.9

3

Other expenses including transportation
 
1.8

1

 
 
5.0

3

 
 
(8.5
)
(2
)
Net change
 
7.6

6

 
 
(32.5
)
(20
)
 
 
(65.1
)
(14
)
Funds flow from operations
Q3/14
129.0

 
 
Q3/14
129.0

 
 
YTD 2014
389.9

 
Third quarter of 2014 funds flow from operations increased 6 percent compared to the second quarter of 2014 despite decreases in commodity prices in the third quarter of 2014. The increase is a result of lower realized commodity risk management losses, lower royalties and operating expenses.
Third quarter of 2014 funds flow from operations decreased 20 percent compared to the same period last year largely due to a decrease in volumes associated with the 2013 property dispositions partly offset by lower operating expenses and royalties.
Year to date 2014 funds flow from operations decreased 14 percent compared to the same period in 2013 mainly due to lower volumes from 2013 property dispositions and an increase in realized commodity risk management losses partly offset by higher commodity prices and lower operating expenses year over year.
Net Income (Loss)
Pengrowth recorded net income of $52.2 million in the third quarter of 2014 representing a $61.0 million improvement compared to a net loss of $8.8 million in the second quarter of 2014.This was a result of higher funds flow from operations and an unrealized gain on commodity risk management partly offset by an unrealized foreign exchange loss in the third quarter of 2014. Third quarter of 2014 net income of $52.2 million improved $159.5 million compared to a net loss of $107.3 million in the third quarter of 2013 resulting from an unrealized gain on commodity risk management and a gain on disposition of properties versus losses recorded in the third quarter of 2013 partly offset by an unrealized foreign exchange loss in the current quarter, deferred income tax expense versus a recovery and a decrease in funds flow from operations.
Year to date 2014 net loss of $72.8 million decreased $153.0 million compared to a net loss of $225.8 million for the same period last year predominantly due to a gain on disposition of properties year to date 2014 versus a loss in 2013 and reduced current year DD&A partly offset by a decrease in funds flow from operations.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
5
                                                                


Adjusted Net Income (Loss)
Pengrowth reports adjusted net income (loss) to remove the effect of unrealized gains and losses. The following table provides a reconciliation of net income (loss) to adjusted net income (loss):
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Net income (loss)
52.2

(8.8
)
(107.3
)
(72.8
)
(225.8
)
Excluded non-cash items in net income (loss):





Unrealized gain (loss) on commodity, power and interest risk management
121.1

(12.6
)
(17.9
)
(1.7
)
(47.9
)
Unrealized foreign exchange gain (loss) (1)
(42.7
)
29.1

16.4

(49.2
)
(34.8
)
Unrealized loss on investments
(5.0
)
—

—

(5.0
)
(15.0
)
Tax effect on non-cash items above
(24.6
)
(0.5
)
2.4

7.3

18.4

Total excluded
48.8

16.0

0.9

(48.6
)
(79.3
)
Adjusted net income (loss)
3.4

(24.8
)
(108.2
)
(24.2
)
(146.5
)
(1) 
Net of associated foreign exchange risk management contracts.
The following table represents a continuity of adjusted net income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
($ millions)
Q2/14 vs. Q3/14
 
 
Q3/13 vs. Q3/14
 
 
YTD 2013 vs. 2014
 
Adjusted net loss for comparative period
Q2/14
(24.8
)
 
Q3/13
(108.2
)
 
YTD 2013
(146.5
)
Funds flow from operations increase (decrease)
 
7.6

 
 
(32.5
)
 
 
(65.1
)
DD&A and accretion expense decrease
 
2.6

 
 
7.6

 
 
55.8

Loss on property dispositions decrease
 
30.9

 
 
173.7

 
 
169.6

Other
 
0.4

 
 
0.7

 
 
(0.5
)
Estimated tax on above
 
(13.3
)
 
 
(37.9
)
 
 
(37.5
)
Net change
 
28.2

 
 
111.6

 
 
122.3

Adjusted net income (loss)
Q3/14
3.4

 
Q3/14
3.4

 
YTD 2014
(24.2
)
Pengrowth posted adjusted net income of $3.4 million in the third quarter of 2014 representing an improvement of $28.2 million compared to the second quarter of 2014 primarily due to reduced losses on disposition of properties. Third quarter of 2014 adjusted net income of $3.4 million represents an improvement of $111.6 million compared to the third quarter of 2013 also due to reduced losses on disposition of properties partly offset by a decrease in funds flow from operations.
Year to date 2014 adjusted net loss of $24.2 million represents an improvement of $122.3 million compared to the same period in 2013 due to reduced losses on disposition of properties and lower DD&A partly offset by a decrease in funds flow from operations.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
6
                                                                


Price Sensitivity
The following table illustrates the sensitivity of funds flow from operations to changes in commodity prices after taking into account Pengrowth’s risk management contracts and outlook on oil differentials:
 
 
 
 
Estimated Impact on
12 Month Funds Flow

COMMODITY PRICE ENVIRONMENT (1)
  
Assumption

Change

(Cdn$ millions)

West Texas Intermediate Oil (2) (3)
U.S.$/bbl
$
80.28

$
1.00

 
Light oil
 
 
 
6.5

Heavy oil
 
 
 
5.1

Oil risk management (4)
 
 
 
(10.2
)
NGLs
 
 
 
2.4

Net impact of U.S.$1/bbl increase in WTI
 
 
 
3.8

Oil differentials (5)
 
 
 
 
Light oil
U.S.$/bbl
$
6.78

$
1.00

(6.5
)
Heavy oil
U.S.$/bbl
$
23.99

$
1.00

(5.1
)
Net impact of U.S.$1/bbl increase in differentials
 
 
 
(11.6
)
AECO Natural Gas (2) (3)
Cdn$/Mcf
$
3.90

$
0.10

 
Natural gas
 
 
 
5.6

Natural gas risk management (4)
 
 
 
(3.1
)
Net impact of Cdn$0.10/Mcf increase in AECO
 
 
 
2.5

(1) 
Calculations are performed independently and are not indicative of actual results when multiple variables change at the same time.
(2) 
Commodity price is based on an estimation of the 12 month forward price curve at October 15, 2014 and does not include the impact of risk management contracts.
(3) 
The calculated impact on revenue/cash flow is only applicable within a limited range of the change indicated and is based on production guidance levels contained herein.
(4) 
Includes risk management contracts as at October 15, 2014.
(5) 
Includes a light oil differential of approximately 8% of WTI per bbl and a heavy oil differential of approximately 30% of WTI per bbl.


PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
7
                                                                


RESULTS OF OPERATIONS
All volumes, wells and spending amounts stated below reflect Pengrowth’s net working interest for both operated and non-operated properties unless otherwise stated.
CAPITAL EXPENDITURES
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Drilling, completions and facilities
 
 
 
 
 
Lindbergh
110.5

124.1

93.9

361.9

170.4

 Non-thermal
61.5

73.4

62.7

221.6

227.0

Total drilling, completions and facilities
172.0

197.5

156.6

583.5

397.4

Land & seismic acquisitions (1) 
0.3

0.5

(0.1
)
5.4

1.8

Maintenance capital
19.1

21.6

19.6

55.0

55.3

Development capital
191.4

219.6

176.1

643.9

454.5

Other capital
0.5

—

0.1

1.3

1.6

Capital expenditures
191.9

219.6

176.2

645.2

456.1

(1) 
Seismic acquisitions are net of seismic sales revenue.
Third quarter of 2014 capital expenditures were $191.9 million following the strategy of selecting and executing projects that maximize cash flow and provide the highest rates of return while continuing to invest in the first commercial phase of the Lindbergh thermal project. Approximately 90 percent of the third quarter of 2014 capital expenditures were invested in drilling, completions and facilities, with the majority of the remaining 10 percent spent on maintenance capital. Year to date 2014 capital spending amounted to $645.2 million of which approximately 90 percent was invested in drilling, completions and facilities with the remaining 10 percent invested in maintenance, land, seismic and other capital.
Pengrowth invested 58 percent of the third quarter of 2014 capital expenditures in the Lindbergh commercial project.
Also in the quarter, Pengrowth participated in the drilling of 23 (15.0 net) non-thermal wells in other areas, all of which were successful.
Focus Areas
Lindbergh
Pengrowth’s 100 percent owned and operated Lindbergh thermal project is located in the Cold Lake area of Alberta and encompasses 42.5 sections of land. Cost advantages of the Lindbergh resource include enhanced bitumen quality and flow characteristics which result in higher netbacks compared to many thermal projects. A two well pair pilot project at Lindbergh was brought on stream in February 2012 and the results continue to exceed type curve expectations. The 12,500 bbl/d first commercial phase of Lindbergh was sanctioned by Pengrowth’s Board of Directors in January 2013 and Alberta Environmental Protection and Enhancement Act approval was received for the first commercial phase in July 2013. The Environmental Impact Assessment ("EIA") application for the Lindbergh expansion to 30,000 bbl/d was submitted to the regulators in December 2013.
Lindbergh is expected to provide Pengrowth with the potential to develop annual production of up to 50,000 bbl/d of bitumen within five years. This is expected to be strong netback production, low cost, with low decline rates, long reserve life and low sustaining capital requirements, resulting in a sustainable total return model that supports growth in cash flow per share and the ability to fund an attractive dividend.
Pengrowth has entered into a transportation agreement with Husky Energy for delivery of production from the initial commercial phase of Lindbergh to Hardisty, Alberta, with options to nominate future volumes as Lindbergh expands. Pengrowth will retain maximum flexibility in regards to transportation options at Lindbergh and will be able to utilize both rail and pipeline to move production to markets and maximize netbacks.
During the third quarter of 2014, $110.5 million was invested at Lindbergh, bringing the year to date spending to $361.9 million.  In October, commissioning and start-up activities commenced at the 12,500 bbl/d Lindbergh commercial facility. It is anticipated that steam will be circulated through the well pairs starting in early December. Using the pilot ramp up

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
8
                                                                


as an analog, first oil is expected in January of 2015, but revenue and associated costs will continue to be capitalized until commerciality is declared, currently anticipated to be late in the first quarter of 2015.
Operations at the pilot project continued to show strong results during the third quarter of 2014 with combined field production from the two well pairs averaging 1,626 bbl/d of bitumen. The average Instantaneous Steam Oil Ratio ("ISOR") for the third quarter of 2014 was 2.4. Since steaming commenced in February 2012, cumulative production from the two well pairs has exceeded 1.4 million bbls of bitumen by September 30, 2014 with a Cumulative Steam Oil Ratio ("CSOR") of 2.1. After 32 months to September 30, 2014, of higher than expected production rates and reserves recovered to date, the pilot well pairs are expected to continue their natural decline in 2014 and, as expected, the ISOR will increase.
Non-Thermal Oil and Gas
Pengrowth’s significant non-thermal oil and gas portfolio includes a large contiguous land base in the Greater Olds/Garrington area encompassing over 500 gross (250 net) sections of land with stacked opportunities in the Cardium, Viking and Mannville sands as well as in the Mississippian carbonate section. An extensive gathering and processing infrastructure provides an efficient platform for continued development in this area. Pengrowth also controls large light oil accumulations in the Swan Hills area of Northern Alberta providing ongoing development projects with low decline production and strong cash flow.
During the third quarter of 2014, development continued in the Greater Olds/Garrington area with an additional 10 (5.2 net) wells drilled in the Cardium and an additional 5 (1.8 net) wells drilled in the Elkton, Ellerslie and Glauconite formations, all with 100% success. Based on initial test data and early production results, the Cardium wells appear to be meeting or exceeding type curve expectations.
Pengrowth’s third quarter of 2014 development program also included 2 (2.0 net) injection wells and 1 (1.0 net) well in the Lloydminster formation at Bodo as well as 2 (2.0 net) wells at Groundbirch in the Montney. The Groundbirch wells are expected to be completed and on stream before year-end. In addition, Pengrowth drilled 2 (2.0 net) injection wells and 1 (1.0 net) well at Judy Creek supporting incremental production and reserves in the miscible flood.
PRODUCTION
 
Three months ended
Nine months ended
Daily production
Sept 30, 2014

% of total
Jun 30, 2014

% of total
Sept 30, 2013

% of total
Sept 30, 2014

% of
total
Sept 30, 2013

% of
total
Light oil (bbls)
21,359

30
21,780

30
27,102

32
21,857

30
28,602

33
Heavy oil (bbls)
8,246

11
8,203

11
8,812

11
8,235

11
8,351

10
Natural gas liquids (bbls)
9,403

13
11,008

15
9,847

12
10,382

14
10,476

12
Natural gas (Mcf)
200,786

46
196,989

44
225,081

45
199,890

45
237,063

45
Total boe per day
72,472


73,823


83,275

 
73,789

 
86,938

 

Third quarter of 2014 average daily production decreased 2 percent compared to the second quarter of 2014 as expected, mainly due to the absence of the second quarter Sable Island condensate shipment, a small property disposition and natural declines, partly offset by continued strong performance from the Cardium development program. Third quarter and year to date 2014 production decreased 13 percent and 15 percent, respectively, when compared to the same periods last year due to significant property dispositions in late 2013 and natural production declines, partly offset by production additions from the Cardium development program.
Light Oil
Third quarter of 2014 light oil production decreased 2 percent compared to the second quarter of 2014 primarily due to a minor property disposition in Northern Alberta. Third quarter and year to date 2014 light oil production decreased 21 percent and 24 percent when compared to the same periods last year, respectively, due to the late 2013 dispositions partly offset by new production from the Cardium development program.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
9
                                                                


Heavy Oil
Third quarter of 2014 heavy oil production increased 1 percent compared to the second quarter of 2014 due to slightly higher production from non-operated properties. Third quarter and year to date 2014 heavy oil production decreased 6 percent and 1 percent compared to the same periods last year, respectively. These decreases were due to anticipated natural declines at the Lindbergh pilot project partly offset by the new production from the development drilling at Jenner and higher production from the Bodo area.
NGLs
Third quarter of 2014 NGL production decreased 15 percent compared to the second quarter of 2014 mainly due to the absence of the second quarter Sable Island condensate shipment. Third quarter and year to date 2014 NGL production decreased 5 percent and 1 percent compared to the same periods last year, respectively, due to the late 2013 dispositions and natural declines, partly offset by new Cardium production.
Natural Gas
Third quarter of 2014 natural gas production increased 2 percent compared to the second quarter of 2014 as new Cardium production and a decrease in turnaround activity more than offset natural declines. Third quarter and year to date 2014 natural gas production decreased 11 percent and 16 percent compared to the same periods last year, respectively, as a result of the late 2013 property dispositions and natural declines, partly offset by new Cardium production.
COMMODITY PRICES
Oil and Liquids Prices Excluding Realized Commodity Risk Management
 
Three months ended
Nine months ended
(Cdn$/bbl)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Average Benchmark Prices
 
 
 
 
 
WTI oil
105.83

112.29

107.97

108.97

102.28

Edmonton par light oil
97.20

105.62

104.89

100.80

95.64

WCS heavy oil
83.84

90.46

88.92

85.82

78.89

Average Differentials to WTI
 
 
 
 
 
Edmonton par
(8.63
)
(6.67
)
(3.08
)
(8.17
)
(6.64
)
WCS heavy oil
(21.99
)
(21.83
)
(19.05
)
(23.15
)
(23.39
)
Average Sales Prices
 
 
 
 
 
Light oil
94.04

102.37

101.11

97.82

91.39

Heavy oil
78.43

84.00

88.19

79.84

70.18

Natural gas liquids
52.94

55.70

57.18

56.03

54.23

Third quarter of 2014 WTI crude oil price averaged Cdn$105.83/bbl, a decrease of 6 percent compared to the second quarter of 2014 and a decrease of 2 percent compared to the third quarter of 2013. Year to date 2014 WTI crude oil price averaged Cdn$108.97/bbl, an increase of 7 percent compared to the same period in 2013.
Third quarter of 2014 light oil differential increased 29 percent and 180 percent compared to the second quarter of 2014 and third quarter of 2013, respectively. Furthermore, year to date 2014 light oil differential increased 23 percent compared to the same period in 2013.
Third quarter of 2014 heavy oil differential was essentially unchanged from the second quarter of 2014, however it increased 15 percent compared to the third quarter of 2013. Year to date 2014, heavy oil differential narrowed 1 percent compared to the same period in 2013.
Location and quality differentials, growing U.S. crude oil production as well as transportation bottlenecks are the primary drivers behind the differentials. When differentials widen significantly, Pengrowth takes proactive steps to improve realizations, including transporting some crude oil by rail.
Pengrowth's third quarter and year to date 2014 average oil and liquids sales prices moved in conjunction with the above benchmark prices.


PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
10
                                                                


Natural Gas Prices Excluding Realized Commodity Risk Management
 
Three months ended
Nine months ended
(Cdn$)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Average Benchmark Prices
 
 
 
 
 
NYMEX gas (per MMBtu)
4.30

4.99

3.63

4.83

3.84

AECO monthly gas (per MMBtu)
4.22

4.69

2.82

4.55

3.16

Average Differential to NYMEX
 
 
 
 
 
AECO differential (per MMBtu)
(0.08
)
(0.30
)
(0.81
)
(0.28
)
(0.68
)
Average Sales Prices
 
 
 
 
 
Natural gas (per Mcf) (1)
4.05

4.59

2.83

4.99

3.19

(1) 
Average sales prices are recorded in Mcf to reflect the volumetric reporting standard for Pengrowth's natural gas.
The NYMEX natural gas benchmark price averaged Cdn$4.30/MMBtu in the third quarter of 2014, a decline of 14 percent compared to the second quarter of 2014 largely due to lower natural gas demand across much of North America during the summer months. Third quarter and year to date 2014 NYMEX prices increased 18 percent and 26 percent compared to the same periods last year, respectively, driven by low natural gas storage in the key consuming regions of North America.
Third quarter of 2014 AECO gas prices averaged Cdn$4.22/MMBtu, representing a decline of 10 percent compared to the second quarter of 2014. A lower decline in AECO prices resulted from a narrowing of the basis spread between NYMEX and AECO. Third quarter and year to date 2014 AECO prices increased 50 percent and 44 percent compared to the same periods last year, respectively, due to higher benchmark prices and a narrowing of the basis spread between AECO and NYMEX.
Third quarter of 2014 natural gas sales price of Cdn$4.05/Mcf decreased 12 percent compared to the second quarter of 2014 due to the decrease in the natural gas benchmark prices. Third quarter and year to date 2014 natural gas sales prices increased 43 percent and 56 percent compared to the same periods last year, respectively, due to higher natural gas benchmark prices.
Total Average Sales Prices Excluding Realized Commodity Risk Management
 
Three months ended
Nine months ended
($/boe)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Average sales prices
54.73

60.08

56.64

59.29

52.05

Other production income including sulphur
0.63

0.52

0.74

0.55

0.61

Total oil and gas sales
55.36

60.60

57.38

59.84

52.66

Third quarter of 2014 average sales price of Cdn$54.73/boe decreased 9 percent compared to the second quarter of 2014 due to lower pricing for all products led by declines in crude oil and natural gas pricing. Compared to the third quarter of 2013, the third quarter of 2014 sales price declined 3 percent as higher prices for natural gas were offset by lower crude oil pricing.
Year to date 2014 average sales prices increased 14 percent compared to the same period last year in response to higher sales prices for all products.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
11
                                                                


Commodity Risk Management Gains (Losses)
 
Three months ended
Nine months ended
($ millions except per unit amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Realized
 
 
 
 
 
Oil risk management
(23.9
)
(37.3
)
(31.3
)
(90.8
)
(43.0
)
$/bbl (1)
(8.77
)
(13.67
)
(9.47
)
(11.05
)
(4.26
)
Natural gas risk management
(4.7
)
(9.6
)
5.9

(27.0
)
3.7

$/Mcf
(0.25
)
(0.54
)
0.28

(0.49
)
0.06

Total realized loss
(28.6
)
(46.9
)
(25.4
)
(117.8
)
(39.3
)
$/boe
(4.29
)
(6.98
)
(3.32
)
(5.85
)
(1.66
)
Unrealized
 
 
 
 
 
Unrealized commodity risk management liabilities at period end
(84.2
)
(205.8
)
(40.9
)
(84.2
)
(40.9
)
Less: Unrealized commodity risk management assets (liabilities) at beginning of period
(205.8
)
(192.2
)
(23.0
)
(80.0
)
7.0

Unrealized gain (loss) on commodity risk management contracts for the period
121.6

(13.6
)
(17.9
)
(4.2
)
(47.9
)
(1) 
Includes light and heavy oil.
Pengrowth has an active commodity risk management program which primarily uses forward price swaps and puts to manage the exposure to commodity price fluctuations and provide a measure of stability to cash flow in order to maintain its dividend and ensure capital expenditures are funded, including Lindbergh. Changes in the business environment are regularly monitored by management and the Board of Directors to ensure that Pengrowth's active risk management program is adequate and aligned with the long term strategic goals of the Corporation. Managing cash flow is of particular importance in 2014 as significant cash is required to complete the first commercial phase of Lindbergh. In addition to forward price swaps and puts, Pengrowth also engages in oil price differential swaps using a combination of financial and physical contracts.
Realized commodity risk management gains and losses vary from period to period and are a function of the volumes under risk management contracts, the fixed prices of those risk management contracts and the benchmark pricing for the commodities under risk management contracts. Realized losses result when the average fixed risk management contracted price is lower than the benchmark prices, while realized gains are recorded when the average fixed risk management contracted price is higher than the benchmark prices at settlement. Realized gains and losses are settled monthly and directly impact cash flow for the period.
Realized commodity risk management losses decreased in the third quarter of 2014 compared to the second quarter of 2014 resulting from declines in both oil and natural gas benchmark prices. In contrast, third quarter of 2014 realized losses increased compared to the same period last year driven by higher natural gas benchmark prices partly offset by the effect of lower WTI. Year to date 2014 realized commodity risk management losses increased compared to the same period last year due to a rise in both oil and natural gas benchmark prices.
Unrealized gains and losses also vary period to period and are a function of the volumes under risk management contracts, the fixed prices of those risk management contracts and the forward curve pricing for the commodities under risk management contracts at the end of the period. Unrealized losses result when the forward price curve moves higher than the fixed price, with the magnitude of the loss being proportional to the movement in the forward price curve while unrealized gains result when the forward price curve moves lower than the fixed price, with the magnitude of the gain being proportional to the movement in the forward price curve. Unrealized commodity risk management gains and losses do not impact cash flow for the period.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
12
                                                                


Forward Contracts - Commodity and Power Risk Management
The following table provides a summary of the fixed prices of the commodity and power risk management contracts in place at September 30, 2014 (see Note 13 to the unaudited Financial Statements for more information on Pengrowth's risk management contracts):
Crude Oil Swaps and Puts
  
  
  
  
Reference point
Volume (bbl/d)
Remaining term
% of total oil
production Guidance (1)
Price/bbl ($Cdn)
WTI
23,000
Oct 1, 2014 - Dec 31, 2014
77%
94.51
WTI
26,000
2015
63%
93.99
WTI
14,982
2016
33%
94.96
Natural Gas Swaps and Puts
 
 
 
 
Reference point
Volume (MMBtu/d)
Remaining term
% natural gas production
Guidance
Price/MMBtu ($Cdn)
AECO & NGI Chicago Index
118,738
Oct 1, 2014 - Dec 31, 2014
59%
3.81
AECO & NGI Chicago Index
83,909
2015
47%
3.85
AECO
28,402
2016
18%
3.85
AECO
7,109
2017
5%
4.22
Power
 
 
 
 
Reference point
Volume (MW)
Remaining term
% of estimated
power purchases
Price/MWh ($Cdn)
AESO
55
Oct 1, 2014 - Dec 31, 2014
78%
55.63
AESO
40
2015
79%
49.53
AESO
10
2016
15%
50.00
(1) 
Includes light and heavy crude oil. After the successful 2013 divestment program, oil risk management contracts represent over 65 percent of 2014 production Guidance for remaining 2014. Pengrowth's Board of Directors has approved the retention of the risk management contracts already in place.
In addition to the above table, Pengrowth has financial and physical contracts to manage oil price differentials. See Note 13 to the unaudited Financial Statements for more information.
Commodity and Power Price Sensitivity on Risk Management Contracts as at September 30, 2014
($ millions)
 
 
Oil
Cdn$1/bbl increase in future oil prices
Cdn$1/bbl decrease in future oil prices
Unrealized pre-tax gain (loss) on oil risk management
(17.0
)
17.0

 
 
 
Natural gas
Cdn$0.25/MMBtu increase in future natural gas prices
Cdn$0.25/MMBtu decrease in future natural gas prices
Unrealized pre-tax gain (loss) on natural gas risk management
(13.3
)
13.3

 
 
 
Power
Cdn$1/MWh increase in future power prices
Cdn$1/MWh decrease in future power prices
Unrealized pre-tax gain (loss) on power risk management
0.6

(0.6
)
The changes in fair value of the forward risk management contracts directly affect reported net income (loss) through the unrealized amounts recorded in the Statements of Income (Loss) during the period. The effect on cash flow will be recognized separately only upon settlement of the risk management contracts, which could vary significantly from the unrealized amount recorded due to timing and prices when each contract is settled.
If each commodity risk management contract were to have settled at September 30, 2014, revenue and cash flow would have been $84.2 million lower than if the risk management contracts were not in place based on the estimated fair value of the risk management contracts at period end. The $84.2 million is composed of liabilities of $60.4 million relating to risk management contracts expiring within one year and liabilities of $23.8 million relating to risk management contracts expiring beyond one year.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
13
                                                                


Pengrowth has not designated any outstanding commodity risk management contracts as hedges for accounting purposes and therefore records these risk management contracts on the Balance Sheets at their fair value and recognizes changes in fair value on the Statements of Income (Loss) as unrealized commodity risk management gains (losses). The volatility in net income (loss) will continue to the extent that the fair value of the commodity risk management contracts fluctuates. However, these non-cash amounts do not affect Pengrowth’s cash flow until realized.
Realized commodity risk management gains (losses) on crude oil and natural gas contracts are recorded separately on the Statements of Income (Loss) and impact cash flow at that time. Realized risk management gains (losses) on power contracts are recorded in operating expenses and the unrealized amounts are recorded in other (income) expense.
In accordance with policies approved by its Board of Directors, Pengrowth may sell forward its production and purchase risk management contracts by product volume or power purchases as follows:
Forward Period
Percent of Estimated Production
Percent of Estimated Power Purchases
1 - 24 Months
Up to 65%
Up to 80%
25 - 36 Months
Up to 30%
Up to 50%
37 - 60 Months
Up to 25%
Up to 25%
After the successful 2013 divestment program, oil risk management contracts represent over 65 percent of 2014 production Guidance for remaining 2014. Pengrowth's Board of Directors has approved the retention of the risk management contracts already in place.
OIL AND GAS SALES EXCLUDING REALIZED COMMODITY RISK MANAGEMENT
Contribution Analysis
The following table shows the contribution of each product category to the oil and gas sales:
 
Three months ended
Nine months ended
($ millions except percentages)
Sept 30, 2014

% of total
Jun 30, 2014

% of total
Sept 30, 2013

% of total
Sept 30, 2014

% of
total
Sept 30, 2013

% of
total
Light oil
184.8

50
202.9

50
252.1

58
583.7

48
713.6

57
Heavy oil
59.5

16
62.7

15
71.5

16
179.5

15
160.0

13
Natural gas liquids
45.8

13
55.8

14
51.8

12
158.8

13
155.1

12
Natural gas
74.8

20
82.2

20
58.5

13
272.3

23
206.7

17
Other income including sulphur
4.2

1
3.5

1
5.7

1
11.1

1
14.3

1
Total oil and gas sales (1)
369.1


407.1


439.6


1,205.4

 
1,249.7


(1) 
Excluding realized commodity risk management.
Price and Volume Analysis
Quarter ended September 30, 2014 versus Quarter ended June 30, 2014
The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales:
 
($ millions)
Light oil

Heavy oil

NGLs

Natural gas

Other (2)

Total

Quarter ended June 30, 2014 (1)
202.9

62.7

55.8

82.2

3.5

407.1

Effect of change in product prices and differentials
(16.4
)
(4.2
)
(2.4
)
(9.9
)
—

(32.9
)
Effect of change in sales volumes
(1.7
)
1.0

(7.6
)
2.5

—

(5.8
)
Other
—

—

—

—

0.7

0.7

Quarter ended September 30, 2014 (1)
184.8

59.5

45.8

74.8

4.2

369.1

(1) 
Excluding realized commodity risk management.
(2) 
Primarily sulphur sales.
Light oil sales decreased 9 percent in the third quarter of 2014 compared to the second quarter of 2014 resulting from a decrease in the Edmonton par light oil benchmark price combined with lower sales volumes resulting from a minor property disposition and pipeline outages in the third quarter of 2014. Heavy oil sales decreased 5 percent in response to a decrease in the WCS benchmark price partly offset by an increase in volumes. NGL sales decreased 18 percent due to the absence of the Sable Island condensate shipment combined with lower pentane prices in the third quarter

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
14
                                                                


of 2014. Natural gas sales decreased 9 percent due to lower natural gas benchmark prices partly offset by higher sales volumes.
Quarter ended September 30, 2014 versus Quarter ended September 30, 2013
The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales:
($ millions)
Light oil

Heavy oil

NGLs

Natural gas

Other (2)

Total

Quarter ended September 30, 2013 (1)
252.1

71.5

51.8

58.5

5.7

439.6

Effect of change in product prices and differentials
(13.9
)
(7.4
)
(3.7
)
22.6

—

(2.4
)
Effect of change in sales volumes
(53.4
)
(4.6
)
(2.3
)
(6.3
)
—

(66.6
)
Other
—

—

—

—

(1.5
)
(1.5
)
Quarter ended September 30, 2014 (1)
184.8

59.5

45.8

74.8

4.2

369.1

(1) 
Excluding realized commodity risk management.
(2) 
Primarily sulphur sales.
Light oil sales decreased 27 percent in the third quarter of 2014 compared to the same period in 2013 due to lower sales volumes from the 2013 disposition program coupled with a decrease in the Edmonton par light oil price. Heavy oil sales decreased 17 percent resulting from both a lower WCS benchmark price and lower production volumes. NGL sales decreased 12 percent impacted by the 2013 dispositions and lower pentane prices compared to the same period last year. Natural gas sales increased 28 percent due to higher natural gas benchmark prices partly offset by lower sales volumes from the 2013 property dispositions as well as natural declines.
Nine Months ended September 30, 2014 versus Nine Months ended September 30, 2013
The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales:
($ millions)
Light oil

Heavy oil

NGLs

Natural gas

Other (2)

Total

Nine months ended September 30, 2013 (1)
713.6

160.0

155.1

206.7

14.3

1,249.7

Effect of change in product prices and differentials
38.4

21.7

5.1

98.0

—

163.2

Effect of change in sales volumes
(168.3
)
(2.2
)
(1.4
)
(32.4
)
—

(204.3
)
Other
—

—

—

—

(3.2
)
(3.2
)
Nine months ended September 30, 2014 (1)
583.7

179.5

158.8

272.3

11.1

1,205.4

(1) 
Excluding realized commodity risk management.
(2) 
Primarily sulphur sales.
Year to date 2014 light oil sales decreased 18 percent compared to the same period in 2013 due to lower sales volumes from the 2013 disposition program partly offset by an increase in the Edmonton par light oil price year over year. Heavy oil sales increased 12 percent resulting from an improvement in the WCS benchmark price. Similarly, NGL sales increased 2 percent impacted by higher benchmark prices. Natural gas sales increased 32 percent due to higher natural gas benchmark prices partly offset by lower sales volumes from the 2013 property dispositions and natural declines.
ROYALTY EXPENSES
($ millions except per boe amounts and percentages)
Three months ended
Nine months ended
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Royalty expenses
65.5

78.2

72.6

217.4

212.3

$/boe
9.83

11.64

9.47

10.79

8.95

Royalties as a percent of oil and gas sales (%) (1)
17.7

19.2

16.5

18.0

17.0

(1) 
Excluding realized commodity risk management.
Royalties include Crown, freehold, overriding royalties and mineral taxes.
Third quarter of 2014 royalties as a percentage of sales decreased to 17.7 percent from 19.2 percent in the the second quarter of 2014 due to a decrease in commodity prices and the absence of an unfavourable GCA adjustment recorded in the second quarter of 2014. Third quarter of 2014 royalties as a percentage of sales increased to 17.7 percent from 16.5 percent in the the third quarter of 2013 primarily due to the absence of a favourable freehold mineral tax adjustment recorded in the third quarter of last year.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
15
                                                                


Year to date 2014 royalties as a percentage of sales increased to 18.0 percent from 17.0 percent for the same period last year driven by an increase in commodity prices coupled with unfavourable GCA adjustments recorded in 2014.
OPERATING EXPENSES
($ millions except per boe amounts)
Three months ended
Nine months ended
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Operating expenses
102.4

114.5

125.6

320.9

373.3

$/boe
15.36

17.05

16.39

15.93

15.73

Third quarter of 2014 operating expenses decreased $12.1 million or 11 percent compared to the second quarter of 2014 primarily due to the absence of turnaround costs incurred in the second quarter of 2014. On a per boe basis, third quarter of 2014 operating expenses decreased $1.69/boe as a result of the lower expenses, as mentioned above.
Third quarter of 2014 operating expenses decreased $23.2 million or 18 percent compared to the third quarter of 2013 due to the absence of operating expenses from properties divested in 2013 combined with lower power costs in 2014. On a per boe basis, third quarter of 2014 operating expenses decreased $1.03/boe compared to the third quarter of 2013 due to the above mentioned cost decreases partly offset by reduced production primarily resulting from the 2013 dispositions.
Year to date 2014 operating expenses decreased $52.4 million or 14 percent due to the absence of operating expenses from divested properties and lower power costs partly offset by increased turnaround costs in 2014. On a per boe basis, 2014 year to date operating expenses increased $0.20/boe compared to the same period last year primarily due to the increased turnaround costs in 2014 combined with reduced production resulting mainly from the 2013 dispositions.
TRANSPORTATION EXPENSES
($ millions except per boe amounts)
Three months ended
Nine months ended
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Transportation expenses
6.5

7.2

8.4

22.1

21.6

$/boe
0.97

1.07

1.10

1.10

0.91

Third quarter of 2014 transportation expenses decreased $0.7 million or 10 percent compared to the second quarter of 2014 mainly as a result of lower sales product trucking costs due to oil pipeline infrastructure development at Lochend. On a per boe basis, third quarter of 2014 transportation expenses decreased $0.10/boe compared to the second quarter of 2014 due to the decrease in sales product trucking costs. Third quarter of 2014 transportation expenses decreased $1.9 million or 23 percent compared to the third quarter of 2013 also resulting from the lower sales product trucking costs due to oil pipeline infrastructure development at Lochend. On a per boe basis, third quarter of 2014 transportation expenses decreased $0.13/boe compared to the same period last year due to lower sales product trucking costs partly offset by lower production volumes.
Year to date 2014 transportation expenses increased $0.5 million or 2 percent compared to the same period in 2013 mainly due to higher sales product trucking costs partly offset by lower oil pipeline transportation costs due to an increase in sales volumes at the wellhead. On a per boe basis, 2014 year to date transportation costs increased $0.19/boe compared to the same period in 2013 due to the increase in sales product trucking costs combined with a decrease in production volumes.
Pengrowth incurs transportation expenses for its natural gas production once the product enters a pipeline at a title transfer point. Pengrowth has the option to sell some of its natural gas directly to markets outside of Alberta by incurring additional transportation costs. Pengrowth sells most of its natural gas without incurring significant additional transportation costs. Pengrowth also incurs transportation expenses on its oil and NGL production including sales product trucking costs and pipeline costs up to the custody transfer point. Pengrowth has elected to sell approximately 55 percent of its crude oil at market points beyond the wellhead incurring transportation costs to the first major trading point. The transportation expenses are dependent upon third party rates and distance the product travels prior to changing ownership or custody.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
16
                                                                


OPERATING NETBACKS
Pengrowth’s operating netbacks have been calculated by taking balances directly from the Statements of Income (Loss) and dividing by production. Certain assumptions have been made in allocating operating expenses and royalty injection credits between products. Operating netbacks as presented below may not be comparable to similar measures presented by other companies, as there are no standardized measures.
 
Three months ended
Nine months ended
Combined Netback ($/boe)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Oil & gas sales (includes other income)
55.36

60.60

57.38

59.84

52.66

Royalties
(9.83
)
(11.64
)
(9.47
)
(10.79
)
(8.95
)
Operating expenses
(15.36
)
(17.05
)
(16.39
)
(15.93
)
(15.73
)
Transportation expenses
(0.97
)
(1.07
)
(1.10
)
(1.10
)
(0.91
)
Operating netback before realized commodity risk management
29.20

30.84

30.42

32.02

27.07

Realized commodity risk management
(4.29
)
(6.98
)
(3.32
)
(5.85
)
(1.66
)
Operating netback
24.91

23.86

27.10

26.17

25.41

 
 
 
 
 
 
Light Oil Netback Excluding Realized Commodity Risk Management ($/bbl)
Sales
94.04

102.37

101.11

97.82

91.39

Royalties
(19.91
)
(22.22
)
(20.76
)
(20.64
)
(18.14
)
Operating expenses
(15.99
)
(15.64
)
(17.38
)
(15.88
)
(17.42
)
Transportation expenses
(1.65
)
(1.99
)
(1.93
)
(2.07
)
(1.49
)
Light oil operating netback
56.49

62.52

61.04

59.23

54.34

Heavy Oil Netback Excluding Realized Commodity Risk Management ($/bbl)
Sales
78.43

84.00

88.19

79.84

70.18

Royalties
(13.09
)
(13.40
)
(12.79
)
(12.10
)
(9.76
)
Operating expenses
(16.80
)
(20.65
)
(19.91
)
(18.11
)
(19.52
)
Transportation expenses
(1.67
)
(1.80
)
(1.93
)
(1.78
)
(1.71
)
Heavy oil operating netback
46.87

48.15

53.56

47.85

39.19

NGLs Netback Excluding Realized Commodity Risk Management ($/bbl)
Sales
52.94

55.70

57.18

56.03

54.23

Royalties
(14.38
)
(16.92
)
(15.43
)
(16.27
)
(15.29
)
Operating expenses
(15.53
)
(16.69
)
(15.79
)
(15.74
)
(15.14
)
Transportation expenses
—

—

(0.04
)
—

(0.06
)
NGLs operating netback
23.03

22.09

25.92

24.02

23.74

Natural Gas Netback Excluding Realized Commodity Risk Management ($/Mcf)
Sales
4.05

4.59

2.83

4.99

3.19

Royalties (1)
(0.22
)
(0.40
)
0.17

(0.38
)
(0.04
)
Operating expenses
(2.43
)
(2.87
)
(2.51
)
(2.58
)
(2.31
)
Transportation expenses
(0.11
)
(0.11
)
(0.09
)
(0.10
)
(0.09
)
Natural gas operating netback ($/Mcf)
1.29

1.21

0.40

1.93

0.75

Natural gas operating netback ($/boe)
7.74

7.26

2.40

11.58

4.50

CONTRIBUTION BASED ON OPERATING NETBACKS
Light oil
58
%
61
%
67
%
56
%
67
%
Heavy oil
19
%
17
%
19
%
17
%
14
%
Natural gas liquids
10
%
11
%
10
%
11
%
11
%
Natural gas
13
%
11
%
4
%
16
%
8
%
(1) 
Third quarter of 2013 contains a favourable freehold mineral tax adjustment.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
17
                                                                


Pengrowth realized a weighted average operating netback of $24.91/boe in the third quarter of 2014 representing a 4 percent increase compared to the second quarter of 2014 primarily due to lower expenses and royalties partly offset by the effect of lower benchmark prices. When comparing the third quarter of 2014 to the same period last year, the operating netback decreased 8 percent primarily driven by lower oil benchmark prices.
Year to date 2014 operating netback increased 3 percent compared to the same period last year as the effect of the higher benchmark prices was partly offset by higher expenses and royalties.
GENERAL AND ADMINISTRATIVE EXPENSES
 
Three months ended
Nine months ended
($ millions except per boe amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Cash G&A expenses
20.6

19.4

20.0

63.1

66.1

$/boe
3.09

2.89

2.61

3.13

2.79

Non-cash G&A expenses
5.0

4.9

4.4

13.4

12.5

$/boe
0.75

0.73

0.57

0.67

0.52

Total G&A
25.6

24.3

24.4

76.5

78.6

$/boe
3.84

3.62

3.18

3.80

3.31

Third quarter of 2014 cash G&A expenses were $1.2 million higher compared to the second quarter of 2014 mainly due to higher professional fees and severance costs. On a per boe basis, third quarter of 2014 cash G&A expenses increased $0.20/boe compared to the second quarter of 2014 due to the increase in costs, discussed above.
Third quarter of 2014 cash G&A expenses remained relatively unchanged compared to the same period last year. On a per boe basis, third quarter of 2014 cash G&A expenses increased $0.48/boe compared to the same period last year primarily due to the impact of lower production volumes in 2014.
Year to date 2014 cash G&A expenses were $3.0 million lower compared to 2013 due to staffing decreases associated with the 2013 dispositions as well as lower office rent. On a per boe basis, year to date 2014 cash G&A expenses increased $0.34/boe due to lower production volumes partly offset by lower expenses, as discussed above.
The non-cash component of G&A represents the compensation expenses associated with Pengrowth’s Long Term Incentive Plans ("LTIP"). See Note 10 to the unaudited Financial Statements for additional information. The compensation costs associated with these plans are expensed over the applicable vesting period.
Third quarter of 2014 non-cash G&A expenses remained relatively unchanged compared to the second quarter of 2014. Third quarter and year to date 2014 non-cash G&A expenses increased $0.6 million and $0.9 million compared to the same periods in 2013, respectively, due to slightly higher long term incentive plan grants in 2014.
During the nine months ended September 30, 2014, $11.7 million (September 30, 2013 - $12.1 million) of directly attributable G&A costs were capitalized to Property, Plant and Equipment ("PP&E").
DEPLETION, DEPRECIATION, AMORTIZATION AND ACCRETION
 
Three months ended
Nine months ended
($ millions except per boe amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Depletion, depreciation and amortization
128.5

130.7

135.7

389.3

443.9

$/boe
19.27

19.46

17.71

19.33

18.70

Accretion
4.5

4.9

4.9

14.4

15.6

$/boe
0.67

0.73

0.64

0.71

0.66

Third quarter of 2014 DD&A expense decreased $2.2 million compared to the second quarter of 2014, and decreased $7.2 million compared to the third quarter of 2013 mainly due to the decrease in production volumes. This is the same reason why year to date 2014 DD&A expense decreased $54.6 million or 12 percent.
Third quarter of 2014 accretion expense remained relatively unchanged compared to the second quarter of 2014 and the third quarter of 2013. Year to date 2014 accretion expense decreased $1.2 million mainly due to decreases in the ARO liability resulting from property dispositions and discount rate changes.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
18
                                                                


INTEREST AND FINANCING CHARGES
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Interest and financing charges
26.0

26.1

25.5

78.0

75.6

Capitalized interest
(8.8
)
(7.0
)
(1.8
)
(21.1
)
(2.8
)
Total interest and financing charges
17.2

19.1

23.7

56.9

72.8

At September 30, 2014, Pengrowth had approximately $1.7 billion in total long term debt composed of $1.5 billion of fixed rate debt and $0.2 billion in convertible debentures, including the current portions. Total long term debt consists primarily of U.S. dollar denominated fixed rate notes at a weighted average interest rate of 5.7 percent and convertible debentures with a 6.25 percent coupon. At September 30, 2014, Pengrowth had no drawings on its syndicated bank facility.
Third quarter of 2014 interest and financing charges, before capitalized interest, remained relatively unchanged compared to the second quarter of 2014. Third quarter and year to date 2014 interest and financing charges, before capitalized interest, increased $0.5 million and $2.4 million compared to the same periods last year, respectively, mainly due to higher interest on the U.S. term debt as a result of the weaker Canadian dollar.
In accordance with IFRS, interest is capitalized for qualifying assets in the construction phase based on costs incurred on the project and the average cost of borrowing. During the nine months ended September 30, 2014, $21.1 million (September 30, 2013 - $2.8 million) of interest was capitalized on the Lindbergh thermal project to PP&E using a capitalization rate of 5.7 percent (September 30, 2013 - 5.7 percent).
OTHER (INCOME) EXPENSE
Year to date 2014 other expense of $11.7 million includes a $20 million provision for clean-up and remediation costs on a Northern Alberta oil property incurred in the first quarter of 2014 partly offset by gains on remediation trust funds and interest income.
TAXES
Deferred income tax is a non-cash item relating to temporary differences between the accounting and tax basis of Pengrowth’s assets and liabilities and has no immediate impact on Pengrowth’s cash flows. Pengrowth recorded a deferred tax expense of $32.6 million in the third quarter of 2014 compared to deferred tax reductions of $4.8 million and $32.3 million in the second quarter of 2014 and third quarter of 2013, respectively. Year to date 2014 deferred tax reduction amounted to $6.0 million compared to $54.6 million recorded during the same period last year.
No current income taxes were paid by Pengrowth in 2014 or 2013. See Note 8 to the unaudited Financial Statements for additional information. 

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
19
                                                                



FOREIGN CURRENCY GAINS (LOSSES)
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Currency exchange rate ($1Cdn = $U.S.) at period end
0.89

0.94

0.97

0.89

0.97

Unrealized foreign exchange gain (loss) on U.S. dollar denominated debt
(63.9
)
46.5

26.1

(67.0
)
(43.5
)
Unrealized foreign exchange gain (loss) on U.K. pound sterling denominated debt
0.7

1.2

(4.5
)
(3.4
)
(3.3
)
Total unrealized foreign exchange gain (loss) from translation of foreign denominated debt
(63.2
)
47.7

21.6

(70.4
)
(46.8
)
Unrealized gain (loss) on U.S. foreign exchange risk management contracts
20.8

(16.9
)
(9.8
)
17.6

9.0

Unrealized gain (loss) on U.K. foreign exchange risk management contracts
(0.3
)
(1.7
)
4.6

3.6

3.0

Total unrealized gain (loss) on foreign exchange risk management contracts
20.5

(18.6
)
(5.2
)
21.2

12.0

Total unrealized foreign exchange gain (loss)
(42.7
)
29.1

16.4

(49.2
)
(34.8
)
Total realized foreign exchange gain (loss)
0.8

(1.4
)
(0.1
)
(0.7
)
1.3

Pengrowth’s unrealized foreign exchange gains and losses are primarily attributable to the translation of the foreign denominated long term debt and the related foreign exchange risk management contracts. The gains or losses on principal restatement are calculated by comparing the translated Canadian dollar balance of foreign denominated long term debt from one period to another. The magnitude of the gains and losses is proportionate to the magnitude of the exchange rate fluctuation between the opening and closing rates for the respective periods and any new foreign debt issued.
Pengrowth holds a series of swap contracts which were transacted in order to fix the foreign exchange rate on a portion of Pengrowth’s U.S. dollar denominated term debt. The swaps partially offset foreign exchange gains/losses on U.S. denominated debt. Each swap requires Pengrowth to buy U.S. dollars at a predetermined rate and time, based upon maturity dates of the U.S. dollar term debt. At September 30, 2014, the fair value of these foreign exchange derivative contracts was an asset of $40.7 million included on the Balance Sheets with changes in the fair value between Balance Sheet dates reported on the Statements of Income (Loss) as an unrealized foreign exchange (gain) loss.
Contract type
Settlement date
Principal amount
(U.S.$ millions)

Swapped amount
(U.S.$ millions)

% of
principal swapped

Fixed rate
($1Cdn = $U.S.)

Swap
May 2015
71.5

50

70
%
0.98

Swap
July 2017
400

250

63
%
0.97

Swap
August 2018
265

125

47
%
0.96

Swap
October 2019
35

15

43
%
0.94

Swap
May 2020
115.5

20

17
%
0.95

No contracts
October 2022
105

—

—

—

No contracts
October 2024
195

—

—

—

 
 
1,187

460

39
%
 
To mitigate the fluctuations in the U.K. pound sterling denominated long term debt Pengrowth entered into foreign exchange risk management contracts when it issued the U.K. pound sterling term notes. These contracts fix the Canadian dollar to the U.K. pound sterling exchange rate on the interest and principal of the U.K. pound sterling denominated debt as follows:
 
 
 
Amount (U.K. pound sterling millions)
Settlement date
Fixed rate
($1Cdn = U.K. pound sterling)

50
December 2015
0.50

15
October 2019
0.63


PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
20
                                                                


At September 30, 2014, each Cdn$0.01 exchange rate change would result in approximately a $4.6 million pre-tax change in the fair value of the U.S. risk management contracts and a $0.7 million pre-tax change in the fair value of the U.K. risk management contracts.
ASSET RETIREMENT OBLIGATIONS
For the nine months ended September 30, 2014, Pengrowth's ARO liability increased $54.7 million relative to December 31, 2013 mainly due to a change in the risk free discount rate from 3.25 percent to 2.7 percent. The rate decrease reflects a decrease in the 30 year Canadian Government long term bond rate which drives Pengrowth’s estimate of the ARO discount rate. This resulted in an upward ARO liability revision of $107.9 million with the offset recorded in PP&E. Partly offsetting this upward revision were property dispositions which decreased the ARO liability by $59.6 million.
Pengrowth has estimated the net present value of its total ARO to be $660.9 million as at September 30, 2014 (December 31, 2013 – $606.2 million), based on a total escalated future liability of $2.0 billion (December 31, 2013 – $2.1 billion). These costs are expected to be incurred over 65 years with the majority of the costs to be incurred between 2038 and 2078. A risk free discount rate of 2.7 percent per annum and an inflation rate of 1.5 percent were used to calculate the net present value of the ARO at September 30, 2014.
ACQUISITIONS AND DISPOSITIONS
 
Three months ended
Nine months ended
($ millions)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Property acquisitions
13.7

0.1

3.0

15.8

3.9

Proceeds on property dispositions
(43.0
)
(21.1
)
(626.4
)
(63.5
)
(952.4
)
Net cash acquisitions (dispositions)
(29.3
)
(21.0
)
(623.4
)
(47.7
)
(948.5
)
Year to date 2014 Pengrowth has successfully closed a number of minor non-core property dispositions for aggregate net proceeds of $63.5 million.
WORKING CAPITAL
Working capital (surplus) deficiency is calculated as current liabilities less current assets per the Balance Sheets, excluding the current portions of long term debt and convertible debentures.
At September 30, 2014, Pengrowth had a working capital deficiency due to current liabilities exceeding current assets by $214.2 million as the cash balance decreased due to spending at Lindbergh. In comparison, Pengrowth had working capital surpluses of $179.3 million and $367.4 million at December 31, 2013 and September 30, 2013, respectively, as current assets exceeded current liabilities at those times primarily from higher cash balances following the 2013 property dispositions.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
21
                                                                


FINANCIAL RESOURCES AND LIQUIDITY
As at:
Sept 30, 2014

Dec 31, 2013

Sept 30, 2013

($ millions)
 

 

 

Term credit facilities
—

—

—

Senior unsecured notes (1)
1,483.7

1,412.7

1,366.8

Senior debt
1,483.7

1,412.7

1,366.8

Convertible debentures (1)
235.3

236.0

236.3

Total debt before working capital
1,719.0

1,648.7

1,603.1

Working capital (surplus) deficiency (2)
214.2

(179.3
)
(367.4
)
Total debt
1,933.2

1,469.4

1,235.7

Twelve months trailing:
Sept 30, 2014

Dec 31, 2013

Sept 30, 2013

($ millions, except ratios and percentages)
 
 
 
Net loss
(163.9
)
(316.9
)
(226.8
)
Add (deduct):
 

 

 

Interest & financing charges and accretion expense
97.5

114.6

119.8

Deferred income tax reduction
(24.6
)
(73.2
)
(64.7
)
Depletion, depreciation and amortization
520.0

574.6

609.0

EBITDA
429.0

299.1

437.3

Add other items:
 
 
 
 Loss on disposition of properties
6.1

175.7

167.7

Other non-cash items
138.9

180.2

138.2

Adjusted EBITDA
574.0

655.0

743.2

Senior debt before working capital to Adjusted EBITDA (3)
2.6

2.2

1.8

Total debt before working capital to Adjusted EBITDA (4)
3.0

2.5

2.2

Total debt to Adjusted EBITDA (5)
3.4

2.2

1.7

Total capitalization (6)
5,414.7

5,157.7

5,061.1

Total debt as a percentage of total capitalization
35.7
%
28.5
%
24.4
%
(1) 
Includes current and long term portions.
(2) 
Working capital (surplus) deficiency is calculated as current liabilities less current assets per the Balance Sheets, excluding the current portions of long term debt and convertible debentures.
(3) 
Indicative of debt covenant for senior debt before working capital to EBITDA of 3.5 times.
(4) 
Indicative of debt covenant for total debt before working capital to EBITDA of 4.0 times.
(5) 
Not indicative of the actual debt covenants. See the Financial Covenants section for more information.
(6) 
Total capitalization includes total debt plus Shareholders' Equity per the Balance Sheets.

At September 30, 2014, total debt increased $463.8 million from December 31, 2013 and $697.5 million from September 30, 2013 primarily due to a lower cash balance, as spending ramped up at Lindbergh, and an increase in the U.S. senior unsecured notes due to the weakening of the Canadian dollar.
The trailing twelve months total debt to Adjusted EBITDA ratio increased to 3.4x at September 30, 2014, compared to 2.2x at December 31, 2013 and 1.7x at September 30, 2013 mainly due to the increase in total debt and a decrease in Adjusted EBITDA as a result of 2013 property dispositions. This increase was expected and will continue until the first phase of Lingbergh is contributing to Adjusted EBITDA.
Term Credit Facilities
Pengrowth maintains a $1 billion revolving credit facility which was undrawn at September 30, 2014 (December 31, 2013 - $nil) and had $33.3 million (December 31, 2013 - $35.8 million) in outstanding letters of credit. The credit facility includes an expansion feature of $250 million providing Pengrowth with up to $1.25 billion of credit capacity from a syndicate of seven Canadian and four foreign banks, and can be extended at Pengrowth’s discretion any time prior to maturity, subject to syndicate approval. The facility has a maturity date of July 26, 2017.
Pengrowth also maintains a $50 million demand operating facility with one Canadian bank. At September 30, 2014, this facility was undrawn (December 31, 2013 - $nil) and had $0.8 million (December 31, 2013 - $0.8 million) of

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
22
                                                                


outstanding letters of credit. When utilized together with any overdraft amounts, this facility would appear on the Balance Sheets as a current liability in bank indebtedness, as applicable.
Together, these two facilities and the cash balance of $42.0 million provided Pengrowth with approximately $1.1 billion of combined credit capacity and cash at September 30, 2014, with the ability to expand the facilities by an additional $250 million.
Financial Covenants
Pengrowth’s senior unsecured notes and credit facilities are subject to a number of covenants, all of which were met at all times during the preceding twelve months, and at September 30, 2014.
On January 24, 2014, Pengrowth amended the credit facility by increasing the maximum permitted senior debt before working capital to EBITDA (as calculated in accordance with the debt agreements) ratio from 3.0 to 3.5 times and the total debt before working capital to EBITDA ratio from 3.5 to 4.0 times until December 31, 2015. As at September 30, 2014, Pengrowth's actual ratios pursuant to these two covenants were at 2.7 times and 3.1 times, respectively. The financial covenants are now substantially similar between the credit facilities and the senior unsecured notes. The ratios on the credit facility will revert back to their prior levels of 3.0 and 3.5 times, respectively, after December 31, 2015. The covenant amendments were obtained as a proactive step while Pengrowth completes construction of the first 12,500 bbl/d commercial phase of Lindbergh and a full year of Lindbergh production can contribute to the EBITDA calculation.
All loan agreements can be found on SEDAR at www.sedar.com filed under "Other" or "Material Document" and on EDGAR at www.sec.gov.
The calculation for each financial covenant is based on specific definitions, is not in accordance with IFRS, is similar to Adjusted EBITDA, and cannot be readily replicated by referring to Pengrowth’s Financial Statements.
The key financial covenants as at September 30, 2014 are summarized below:
1.Total senior debt before working capital must not exceed 3.5 times EBITDA for the last four fiscal quarters (credit facility - 3.0 times after December 31, 2015);
2.Total debt before working capital must not exceed 4.0 times EBITDA for the last four fiscal quarters (credit facility - 3.5 times after December 31, 2015);
3.Total senior debt before working capital must be less than 50 percent of total book capitalization; and
4.EBITDA must not be less than four times interest expense for the last four fiscal quarters.
There may be instances, such as when financing an acquisition, where it would be acceptable for total debt to trailing EBITDA to be temporarily offside. In the event of a significant acquisition, certain credit facility financial covenants are relaxed for two fiscal quarters after the close of the acquisition. Pengrowth may prepare pro forma financial statements for debt covenant purposes and has additional flexibility under its debt covenants for a set period of time. This would be a strategic decision recommended by management and approved by the Board of Directors with steps taken in the subsequent period to restore Pengrowth’s capital structure based on its capital management objectives.
Failing a financial covenant may result in one or more of Pengrowth’s loans being in default. In certain circumstances, being in default of one loan will, absent a cure, result in other loans also being in default. In the event that non-compliance continued, Pengrowth would have to repay, refinance or re-negotiate the terms and conditions of the debt and may have to suspend dividends to shareholders.
If certain financial ratios reach or exceed certain levels, management may consider steps to improve these ratios. These steps may include, but are not limited to property dispositions, reducing capital expenditures or dividends as well as issuing equity.
Dividend Reinvestment Plan
Pengrowth's DRIP allows shareholders to reinvest cash dividends in additional shares of the Corporation. Under the DRIP, the shares are issued from treasury at a 5 percent discount to the weighted average closing price of Pengrowth’s common shares as determined by the plan.
During the nine months ended September 30, 2014, 5.9 million shares were issued under the DRIP program for cash proceeds of $39.5 million compared to 6.7 million shares for total proceeds of $33.2 million in the same period last year.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
23
                                                                


Pengrowth does not have any off balance sheet financing arrangements.
FINANCIAL INSTRUMENTS
Pengrowth uses financial instruments to manage its exposure to commodity and power price fluctuations and foreign currency exposure. Pengrowth’s policy is not to utilize financial instruments for trading or speculative purposes. See Note 2 to the most recent audited Financial Statements for a description of the accounting policies for financial instruments and Note 13 to the unaudited Financial Statements for additional information regarding the fair value of Pengrowth’s financial instruments.
FUNDS FLOW FROM OPERATIONS AND DIVIDENDS
The following table provides funds flow from operations, dividends declared, the excess of funds flow from operations over dividends, and payout ratio:
 
Three months ended
Nine months ended
($ millions, except per share amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Funds flow from operations
129.0

121.4

161.5

389.9

455.0

Dividends declared
63.6

63.3

62.3

189.7

186.0

Funds flow from operations less dividends declared
65.4

58.1

99.2

200.2

269.0

Per share
0.12

0.11

0.19

0.38

0.52

Payout ratio (1)
49
%
52
%
39
%
49
%
41
%
(1) 
Payout ratio is calculated as dividends declared divided by funds flow from operations.
As a result of the depleting nature of Pengrowth's oil and gas assets, capital expenditures are required to offset production declines while other capital is required to maintain facilities, acquire prospective lands and prepare future projects. Capital spending and acquisitions may be funded by the excess of funds flow from operations less dividends declared, through the sale of existing properties, additional debt or the issuance of equity. Pengrowth does not deduct capital expenditures when calculating funds flow from operations.
Funds flow from operations is derived from producing and selling oil, natural gas and related products and is therefore highly dependent on commodity prices. Pengrowth enters into forward commodity risk management contracts to mitigate price volatility and to provide a measure of stability to monthly cash flow. Details of commodity risk management contracts are contained in Note 13 to the unaudited Financial Statements.
The following table provides the net payout ratio when the proceeds of the DRIP are netted against dividends declared to reflect Pengrowth’s net cash outlay:
 
Three months ended
Nine months ended
($ millions, except per share amounts)
Sept 30, 2014

Jun 30, 2014

Sept 30, 2013

Sept 30, 2014

Sept 30, 2013

Proceeds from DRIP
13.1

13.3

11.0

39.5

33.2

Per share
0.02

0.03

0.02

0.08

0.06

Net payout ratio (%) (1)
39
%
41
%
32
%
39
%
34
%
(1) 
Net payout ratio is calculated as dividends declared net of proceeds from the DRIP divided by funds flow from operations.
DRIP participation was equivalent to approximately 21 percent of the total dividend during both the third quarter and year to date 2014.
DIVIDENDS
The Board of Directors and management regularly review the level of dividends. The board considers a number of factors, including expectations of future commodity prices, capital expenditure requirements, and the availability of debt and equity capital. Although the Corporation is committed to maintaining the dividend, there can be no certainty that Pengrowth will be able to maintain current levels of dividends and dividends can and may fluctuate in the future as a result of the volatility in commodity prices, changes in production levels and capital expenditure requirements. Pengrowth has no restrictions on the payment of its dividends other than maintaining its financial covenants in its borrowings and restrictions in the Business Corporations Act (Alberta).
Dividends are generally paid to shareholders on the fifteenth day or next business day of the month. Pengrowth paid $0.04 per share in each of the nine months January through September 30, 2014 for an aggregate cash dividend of

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
24
                                                                


$0.36 per share. For the same period in 2013, Pengrowth also paid $0.04 per share in each of the months January through September for an aggregate cash dividend of $0.36 per share.
SUMMARY OF QUARTERLY RESULTS
The following table is a summary of quarterly information for 2014, 2013 and 2012:
2014
Q1

Q2

Q3

 
Oil and gas sales ($ millions) (1)
429.2

407.1

369.1

 
Net income (loss) ($ millions)
(116.2
)
(8.8
)
52.2

 
Net income (loss) per share ($)
(0.22
)
(0.02
)
0.10

 
Net income (loss) per share - diluted ($)
(0.22
)
(0.02
)
0.10

 
Adjusted net income (loss) ($ millions)
(2.8
)
(24.8
)
3.4

 
Funds flow from operations ($ millions)
139.5

121.4

129.0

 
Dividends declared ($ millions)
62.8

63.3

63.6

 
Dividends declared per share ($)
0.12

0.12

0.12

 
Daily production (boe/d)
75,102

73,823

72,472

 
Total production (Mboe)
6,759

6,718

6,667

 
Average sales price ($/boe) (1)
63.00

60.08

54.73

 
Operating netback ($/boe) (2)
29.71

23.86

24.91

 
2013
Q1

Q2

Q3

Q4

Oil and gas sales ($ millions) (1)
393.5

416.6

439.6

343.7

Net loss ($ millions)
(65.1
)
(53.4
)
(107.3
)
(91.1
)
Net loss per share ($)
(0.13
)
(0.10
)
(0.21
)
(0.17
)
Net loss per share - diluted ($)
(0.13
)
(0.10
)
(0.21
)
(0.17
)
Adjusted net loss ($ millions)
(1.1
)
(37.2
)
(108.2
)
(37.3
)
Funds flow from operations ($ millions)
147.5

146.0

161.5

105.9

Dividends declared ($ millions)
61.6

62.1

62.3

62.5

Dividends declared per share ($)
0.12

0.12

0.12

0.12

Daily production (boe/d)
89,702

87,909

83,275

77,371

Total production (Mboe)
8,073

8,000

7,661

7,118

Average sales price ($/boe) (1)
48.18

51.55

56.64

47.92

Operating netback ($/boe) (2)
24.79

24.44

27.10

20.82

2012
Q1

Q2

Q3

Q4

Oil and gas sales ($ millions) (1)
341.2

321.5

381.5

414.0

Net income (loss) ($ millions) (3)
0.7

36.8

(23.8
)
(1.0
)
Net income (loss) per share ($) (3)
—

0.09

(0.05
)
—

Net income (loss) per share - diluted ($) (3)
—

0.09

(0.05
)
—

Adjusted net income (loss) ($ millions)
(5.4
)
(89.6
)
(18.8
)
24.1

Funds flow from operations ($ millions)
113.6

94.4

141.1

189.7

Dividends declared ($ millions)
76.1

86.4

60.6

61.3

Dividends declared per share ($)
0.21

0.21

0.12

0.12

Daily production (boe/d)
75,618

78,870

94,284

94,039

Total production (Mboe)
6,881

7,177

8,674

8,652

Average sales price ($/boe) (1)
48.99

44.05

43.53

47.31

Operating netback ($/boe) (2) (4)
22.48

21.47

22.25

27.87

(1) 
Excluding realized commodity risk management.
(2) 
Including realized commodity risk management.
(3) 
As required under IFRS, changes in accounting for the NAL Acquisition that arose in the fourth quarter of 2012 were adjusted retrospective to the second quarter of 2012.
(4) 
As of January 1, 2013 certain technical support costs, previously included in operating expenses, are included in G&A. 2012 operating netbacks have been adjusted accordingly to conform to presentation in the current period.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
25
                                                                


Third quarter of 2014 average sales price decreased compared to both the first and second quarters of 2014 driven by a decline in the benchmark prices. Quarterly production in 2014 is lower than the preceding quarters mainly due to 2013 property dispositions, lower natural gas production resulting from natural declines as a result of capital investment being directed mainly to oil development programs, in addition to a few fields with third party capacity constraints. Production increases in the second and third quarters of 2012 were primarily a result of the NAL Energy Corporation acquisition on May 31, 2012.
First quarter of 2014 posted the highest operating netback since the fourth quarter of 2011 resulting from higher natural gas prices and an increase in light and heavy oil benchmark prices. Pengrowth's first and second quarter of 2014 average sales prices were the highest posted average prices since the fourth quarter of 2008 driven by an increase in the benchmark prices.
Quarterly net income (loss) has also been affected by non-cash charges, in particular depletion, depreciation and amortization, impairment charges, gain on acquisition, unrealized gain (loss) on investments, accretion of ARO, unrealized risk management gains (losses), unrealized foreign exchange gains (losses), gains (losses) on property divestments, and deferred taxes. Funds flow from operations was also impacted by changes in royalty expense, operating and G&A costs.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Pengrowth entered into a lease amendment and extension agreement with respect to its Calgary head office lease effective March 31, 2014. The agreement saw two floors returned to the landlord in 2014 and extended the existing lease term for the remaining floors from 2018 to 2025, resulting in an additional operating lease commitment over the extended term of approximately $57 million.
Pengrowth entered into a transportation agreement in the third quarter of 2014 with Husky Energy in preparation for the anticipated Lindbergh production growth resulting in an additional commitment of approximately $161 million from 2015 to 2025.
BUSINESS RISKS
Pengrowth is exposed to normal market risks inherent in the oil and natural gas business, the details of which are set out in the AIF of the Corporation dated February 28, 2014 available on SEDAR at www.sedar.com.
ACCOUNTING PRONOUNCEMENTS ADOPTED
On January 1, 2014, Pengrowth adopted amendments to IAS 32 Financial Instruments: Presentation (“IAS 32”) relating to offsetting financial assets and financial liabilities. The amendments clarify when an entity has a legally enforceable right to offset and certain other requirements that are necessary to present a net financial asset or liability. The retrospective adoption of this standard had no impact on the amounts recorded in the Financial Statements.
On January 1, 2014, Pengrowth adopted IFRIC 21 Levies ("IFRIC 21"). IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation also clarifies that no liability should be recognized before the specified minimum threshold to trigger that levy is reached. The retrospective adoption of this interpretation had no impact on the amounts recorded in the Financial Statements.
DISCLOSURE AND INTERNAL CONTROLS
As a Canadian reporting issuer with securities listed on both the TSX and the NYSE, Pengrowth is required to comply with Multilateral Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, as well as the Sarbanes Oxley Act ("SOX") enacted in the United States.
At the end of the interim period ended September 30, 2014, Pengrowth did not have any material weakness relating to design of its internal control over financial reporting. Pengrowth has not limited the scope of its design of disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of (i) a proportionately consolidated entity in which Pengrowth has an interest; (ii) a variable interest entity in which Pengrowth has an interest; or (iii) a business that Pengrowth acquired not more than 365 days before September 30, 2014 and summary financial information about these items has been proportionately consolidated or consolidated in Pengrowth's Financial Statements. During the interim period ended September 30, 2014, no change occurred to Pengrowth's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Pengrowth's internal control over financial reporting.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
26
                                                                


It should be noted that while Pengrowth’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") believe that Pengrowth’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that Pengrowth’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

PENGROWTH Third Quarter 2014 Management's Discussion and Analysis
27
                                                                
Certification of Interim Filings CEO Q3 2014



FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Derek W. Evans, President and Chief Executive Officer of Pengrowth Energy Corporation, certify the following:
1.
Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Pengrowth Energy Corporation (the “issuer”) for the interim period ended September 30, 2014.
2.
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.
Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
a.
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
i.
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
ii.
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
b.
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1
Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992).
5.2
N/A
5.3
N/A
6.
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2014 and ended on September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: October 30, 2014
 
 
/s/ Derek W. Evans
Derek W. Evans
President and Chief Executive Officer


Certification of Interim Filings CFO Q3 2014



FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Christopher G. Webster, Chief Financial Officer of Pengrowth Energy Corporation, certify the following:
1.
Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Pengrowth Energy Corporation (the “issuer”) for the interim period ended September 30, 2014.
2.
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.
Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
a.
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
i.
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
ii.
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
b.
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1
Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992).
5.2
N/A
5.3
N/A
6.
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2014 and ended on September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: October 30, 2014
 
 
/s/ Christopher G. Webster
Christopher G. Webster
Chief Financial Officer