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Penn West Provides Results of Internal Review of Accounting Practices, Files Restated Financial Statements and Confirms No Impact on Strategic... [Global Data Point](Global Data Point Via Acquire Media NewsEdge) Penn West Provides Results of Internal Review of Accounting Practices, Files Restated Financial Statements and Confirms No Impact on Strategic Direction STATEMENT FROM THE CHAIRMAN OF THE BOARD "Speaking on behalf of the Board, we are resolute in our effort to move the company past the difficult period of the Review and into a new era of enhanced corporate governance and ethics to address our past. We are confident that Penn West's thorough and timely action has identified the accounting practices under review and that we are improving our procedures to prevent reoccurrences," said Rick George, Chairman of the Board. "Further, we are proud of the courage, integrity and ethics demonstrated by Penn West's current management in bringing this matter to light. We are acting on the findings of this Review, and as stated in this release, there is no impact on our strategic direction going forward." This release presents information related to the Review in the following order: Background and Scope of the Review, Accounting Practices Reviewed, and Actions Initiated Restatement Documents No Impact on Strategic Direction, Fundamentals Remain Strong, Key Financial Metrics and 2014 Capital Budget Regulatory Matters BACKGROUND AND SCOPE OF THE REVIEW On July 29, 2014, the Company publicly announced that the Review arose from certain accounting practices that came to the attention of the Company's new Senior Vice President and Chief Financial Officer, David Dyck, after he assumed that position on May 1, 2014. The Company's senior management then recommended to the Board that the Audit Committee conduct an independent review of these practices. The Company promptly informed its external auditors, KPMG LLP ("KPMG"), of the Review and has kept KPMG informed as the Review has progressed. In its July 29, 2014 release, Penn West disclosed that certain transactions appear to have been made to reduce operating expenses and increase the Company's reported capital expenditures and royalties and appear to have been made without adequate supporting documentation. The accounting practices reviewed involved the capitalization of certain operating expenses as property, plant and equipment, the income statement classification of certain costs and credits, the timing of certain accruals relating to production, operating expenses and capital and the timing for the recording of certain production volumes. At the same time, the Company publicly announced that based on the results of the Review to that date, the Board, acting on the recommendation of the Audit Committee, had made a decision to restate the Company's audited annual financial statements for at least the years ended December 31, 2012 and 2013 and its unaudited interim financial statements for the three months ended March 31, 2014 and 2013 and all related MD%7EA. The Company also announced that there could be a delay in filing its unaudited comparative interim financial statements for the three and six month periods ended June 30, 2014 and the related MD%7EA and management certifications, which ultimately proved to be the case. At that time, the Company also announced that it had voluntarily informed the Alberta Securities Commission (the "ASC") and the United States Securities and Exchange Commission (the "SEC") about the Review. The Audit Committee thoroughly reviewed the facts and circumstances surrounding the accounting practices in question, which included a review of an extensive volume of paper and electronic records and a series of interviews of numerous current and former employees. Throughout this process, Penn West has had regular communications with the staff of each of the ASC and the SEC and intends to continue cooperating with both agencies. DETAILS OF ACCOUNTING PRACTICES REVIEWED To fully complete its Review, the Audit Committee determined that a review of prior periods going back to and including 2007 was necessary, including establishing the relevant January 1, 2012 opening balances for the restatement. The review, including the analysis of electronic and paper records, together with data-analytics and interviews performed by the Audit Committee, did not identify any other accounting practices that were required to be addressed by the Company in the restatement. The following is a more detailed description of the matters corrected in the restatement adjustments i) Reclassification of Operating Expenses and Property, Plant and Equipment The Review identified that certain operating expenses were reclassified to property, plant and equipment without adequate support and were determined to be incorrectly recorded as property, plant and equipment. Reversing the capitalization of operating expenses results in adjustments of $11 million in the first quarter of 2014 ("Q1 2014"), $85 million in 2013 and $94 million in 2012 decreasing reported property, plant and equipment and increasing operating expenses. As a result of these adjustments, depletion and depreciation expense, impairment charges, gains (losses) on dispositions and deferred income tax expense (recovery) have also been restated in Q1 2014, 2013 and 2012, together with the effect of these items from prior periods on opening retained earnings as at January 1, 2012, as further described in our restated financial statements and restated MD%7EA for the year ended December 31, 2013. Throughout all periods under review, the reclassification of certain expenditures from operating expense to property, plant and equipment occurred at the corporate level. Some aspects of the reclassification process changed over time. For certain periods, attempts were made at the time of the entries to analyze supporting documentation to determine which items were properly reclassified as property, plant and equipment. For other periods, and more recently, it appears that little if any analysis was performed at the time of the entries to determine which items ought to be capitalized. In some cases, there appeared to be no contemporaneous support for the decision to reclassify operating expenses as property, plant and equipment. As a result, capitalization of operating expenses decreased reported operating expenses while correspondingly increasing the reported capital assets of the Company. Further analysis within property, plant and equipment and operating expenses was undertaken to determine if supported amounts had been appropriately classified within these two categories. The Review determined that $2 million in Q1 2014, $17 million in 2013 and $40 million in 2012 were incorrectly classified as operating expenses. These amounts were adjusted and correctly reclassified as property, plant and equipment. In addition, it was determined that none in Q1 2014, $3 million in 2013 and $12 million in 2012 were incorrectly classified as property, plant and equipment. These amounts were adjusted and correctly reclassified as operating expenses. Net impact of reversing these reclassifications increases operating expenses and decreases property, plant, and equipment by the following amounts: 2012: $66 million 2013: $71 million Q1 2014: $9 million (ii) Reclassification of Operating Expenses to Royalties The Review identified a practice of incorrectly reclassifying a portion of operating expenses as royalties in the consolidated statement of income (loss). This practice reflected the fact that the Company incurs certain expenses producing royalty holders' share of production, and the view developed that expenses so incurred are not properly Penn West's operating expenses, but rather, are more appropriately attributed to the royalty holders' share of the expenses (and thus booked as royalties). The Review determined that this practice was not appropriate and that the Company had incorrectly classified operating expenses as royalties. The reclassification reduced reported operating expenses. The practice did not impact the amount of royalties paid to third parties. Accordingly, these amounts have been restated and reclassified from royalties to operating expenses. These adjustments resulted in $19 million in Q1 2014, $101 million in 2013 and $101 million in 2012 reclassified from royalties to operating expenses. As both royalties and operating expenses are included in the consolidated statements of income (loss), there is neither an effect on net income for Q1 2014, 2013 and 2012 nor on retained earnings in prior periods. Impact of reversing these reclassifications increases operating expenses and decreases royalties (no effect on net income) by the following amounts: 2012: $101 million 2013: $101 million Q1 2014: $19 million (iii) Capital Expenditure Over-Accruals The Review identified that in recent years, the Company accrued its capital expenditures in excess of the amounts expended in the relevant year. Unused accruals should have been reversed to zero at year end. In recent years, unused accruals were not reversed, but were carried over the year-end. This occurred from 2012 into 2013 and from 2013 into 2014. The Review identified an accrual at December 31, 2012 of $36 million that was not reversed at March 31, 2013 ($12 million) and at June 30, 2013 ($24 million) despite information being available that indicated that the provision was no longer required. Further to this, it was also identified that on December 31, 2013 the accrual for capital expenditures was increased by $20 million with insufficient support. The effect of these over-accruals of capital expenditures was to overstate property, plant and equipment in 2013 and Q1 2014 by $56 million. These amounts have been adjusted and restated in the restated financial statements as at December 31, 2013. The Review did not identify any adjustments related to Penn West's accrual practices for fiscal year 2012. These adjustments do not have an impact on net income or retained earnings. Impact of reversing capital expenditure over-accruals: 2012: $0 2013 %7E Q1 2014: $56 million (iv) Revenue and Volume Reporting The Review identified certain oil and natural gas sales and associated volumes related primarily to closing adjustments on asset divestments and equalizations adjustments that were not recorded in the quarter they were realized. As a result, oil and gas sales were under-stated by $2 million with associated volumes of approximately 190 boe per day on an annual basis for 2013 and under-stated by $0.1 million with associated volumes of approximately 670 boe per day on a quarterly basis in the first quarter of 2014. These amounts have been corrected in the restated financial statements. The revenue and volume amounts identified were not material in volumes or dollars. Impact of revenue and volume accrual (no material impact on volumes or dollars): 2013: $2 million and approximately 190 boe per day on an annual basis. Q1 2014: $0.1 million and approximately 670 boe per day on a quarterly basis. (c) 2014 GlobalData Provided by SyndiGate Media Inc. (Syndigate.info). |