Asset Retirement Obligation
In connection with our operations, we incur abandonment, reclamation and remediation costs related to assets, such as surface leases, wells, facilities and pipelines. Total asset retirement obligations included on the Condensed Consolidated Balance Sheet are based on management’s estimate of our net ownership interest, costs to abandon, reclaim and remediate and the timing of the costs to be incurred in future periods. We have estimated the net present value of our asset retirement obligation, using a weighted average credit-adjusted risk-free rate of 5.35%, to be $146.2 million at June 30, 2020, compared to $138.0 million at December 31, 2019, using a weighted average credit-adjusted risk-free rate of 5.50%. For the three and six months ended June 30, 2020, asset retirement obligation settlements were $0.3 million and $11.1 million, respectively, compared to $0.5 million and $5.9 million during the same periods in 2019. See Note 9 to the Interim Financial Statements for further details.
Leases
Enerplus recognizes right-of-use (“ROU”) assets and lease liabilities on the Condensed Consolidated Balance Sheet for qualifying leases with a term greater than 12 months. We incur lease payments related to office space, drilling rig commitments, vehicles and other equipment. Total lease liabilities are based on the present value of lease payments over the lease term. Total ROU assets represent our right to use an underlying asset for the lease term. At June 30, 2020, our total lease liability was $43.6 million. In addition, ROU assets of $39.1 million were recorded, which equate to our lease liabilities less lease incentives. See Note 10 to the Interim Financial Statements for further details.
Income Taxes
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
($ millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Current tax expense/(recovery) | | $ | (14.4) | | $ | (13.9) | | $ | (14.4) | | $ | (19.5) |
Deferred tax expense/(recovery) | | | (98.9) | | | 48.8 | | | 10.4 | | | 30.9 |
Total tax expense/(recovery) | | $ | (113.3) | | $ | 34.9 | | $ | (4.0) | | $ | 11.4 |
For the three and six months ended June 30, 2020, we recorded a current tax recovery of $14.4 million, compared to a recovery of $13.9 and $19.5 million, respectively, for the same periods in 2019. The recovery in the second quarter of 2020 relates to the recognition of our final U.S. Alternative Minimum Tax (“AMT”) refund.
For the three and six months ended June 30, 2020, we recorded a deferred income tax recovery of $98.9 million and an expense of $10.4 million respectively, compared to an expense of $48.8 million and $30.9 million, for the same periods in 2019. The deferred tax recovery in the second quarter was primarily due to lower net income and non-cash PP&E impairments recorded in both Canada and the U.S.
We assess the recoverability of our deferred income tax assets each period to determine whether it is more likely than not all or a portion of our deferred income tax assets will not be realized. We have considered available positive and negative evidence including future taxable income and reversing existing temporary differences in making this assessment. This assessment is primarily the result of projecting future taxable income using total proved and probable reserves at forecast average prices and costs. For the six months ended June 30, 2020, a valuation allowance of $93.6 million was recorded during the first quarter of 2020 related entirely to our Canadian deferred income tax assets. No valuation allowance was recorded for the six months ended June 30, 2019. Our overall net deferred income tax asset was $367.3 million at June 30, 2020 (December 31, 2019 - $372.5 million).
LIQUIDITY AND CAPITAL RESOURCES
There are numerous factors that influence how we assess liquidity and leverage, including commodity price cycles, capital spending levels, acquisition and divestment plans, hedging, share repurchases and dividend levels. We also assess our leverage relative to our most restrictive debt covenant under our bank credit facility and senior notes, which is a maximum senior debt to earnings before interest, taxes, depreciation, amortization, impairment and other non-cash charges (“adjusted EBITDA”) ratio of 3.5x for a period of up to six months, after which it drops to 3.0x. At June 30, 2020, our senior debt to adjusted EBITDA ratio was 1.0x and our net debt to adjusted funds flow ratio was 1.0x. Although it is not included in our debt covenants, the net debt to adjusted funds flow ratio is often used by investors and analysts to evaluate liquidity.
At June 30, 2020, we had $6.2 million of cash on hand. Total debt net of cash at June 30, 2020, was $518.1 million, an increase of 14% compared to $455.0 million at December 31, 2019. The increase when compared to December 31, 2019 was primarily due to the impact of a weaker Canadian dollar on our U.S. dollar denominated debt and a decrease in cash from $151.6 million at December 31, 2019. During the second quarter, we made scheduled principal repayments of US$81.6 million on our 2009 and 2012 senior notes using our cash on hand, which resulted in a $114.0 million decrease to our outstanding senior notes at June 30, 2020, compared to December 31, 2019.