ANNUAL REPORT 2011 - Connacher Oil and Gas

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AR 2011 PG 30 ADJUSTED EBITDA, CASH FLOW AND NET LOSS Connacher realized improved operational performance in 2011 as a result of higher upstream and downstream sales volumes and higher product selling prices. This improved performance resulted in higher adjusted EBITDA. Adjusted EBITDA was $39.1 million in Q4 2011 compared to $31.9 million reported in Q4 2010; YTD 2011 was up 41 percent to $129.9 million, compared to $92.2 million in YTD 2010. Cash flow in Q4 2011 of $19.3 million was 114 percent higher than the $9.0 million reported in Q4 2010. YTD 2011 cash flow of $45.1 million was 26 percent higher than in YTD 2010 when it was $35.9 million. Increased cash flow in 2011 periods was primarily due to higher netbacks. The company realized net loss of $59.5 million in Q4 2011 compared to a net loss of $25.6 million in Q4 2010 and incurred a net loss of $114.1 million in YTD 2011 compared to a loss of $44.7 million in YTD 2010 primarily due to higher finance charges, the cost of refinancing long-term debt, higher depletion, depreciation, amortization and impairment charges and foreign exchange losses incurred in 2011. CAPITAL EXPENDITURES ACTUAL CAPITAL EXPENDITURES Year ended December 31 ($000) 2011 2010 Upstream $ 137,974 $ 191,740 Downstream 18,653 8,575 Cash-related capital expenditures 156,627 200,315 Non-cash related capital expenditures 6,801 58,850 Total capital expenditures $ 163,428 $ 259,165 YTD 2011 cash capital expenditures for maintenance and sustaining activities were $51 million, including $32 million at our oil sands operations; $6 million in our conventional operations and head office requirements; and $13 million at our Refinery related to boiler replacement and substation upgrades. YTD 2011 growth and special projects cash capital expenditures of $106 million included $63 million related to our conventional; $2 million at our oil sands producing operations; $6 million related to the Great Divide Environmental Impact Assessment; $30 million related to oil sands exploration activities; and $5 million at our Refinery related to the benzene removal project. Conventional outlays were entirely financed from proceeds of sales of non-core or mature conventional properties. YTD 2010 cash capital expenditures for maintenance and sustaining activities were $32 million, including $15 million at our oil sands operations; $9 million in our conventional operations and head office requirements; and $8 million at our Refinery related to boiler replacement and substation upgrades. YTD 2010 growth and special projects cash capital expenditures of $168 million included $153 million related to our oil sands operations; $13 million at our conventional operations and $1 million at our Refinery related to the benzene removal project. Non-cash related capital expenditures include revisions for changes in estimated costs and rates of discount relating to decommissioning liabilities. CAPITAL RESOURCES Connacher’s objectives in managing its cash, debt, equity, balance sheet and future capital expenditure programs are to safeguard its ability to meet its financial obligations, to maintain a flexible capital structure that allows financing options when a financing need arises and to optimize its use of short-term and long-term debt and equity at an appropriate level of risk. The company manages its capital structure and follows a financial strategy that considers economic and industry conditions, the risk characteristics and long-term nature of its underlying assets and its growth opportunities. It strives to continuously improve its credit rating and reduce its cost of capital. The company reported the following debt outstanding: ($000) December 31, 2011 December 31, 2010 Convertible Debentures, 4.75%, due June 30, 2012 $ 98,564 $ 96,548 First Lien Senior Notes, 11.75%, due July 15, 2014 - 184,176 Second Lien Senior Notes, 10.25%, due December 15, 2015 3,470 566,663 Second Lien Senior Notes, 8.75%, due August 1, 2018 343,138 - Second Lien Senior Notes, 8.5%, due August 1, 2019 512,930 - Total $ 958,102 $ 847,387 CONVERTIBLE DEBENTURES It is the present intention of the company to redeem the 4.75% $100 million Convertible Debentures when due on June 30, 2012.
AR 2011 PG 31 NEW NOTES We issued US$550 million face value 8.5% Senior Secured Second Lien Notes due August 1, 2019 and CAD$350 million face value 8.75% Senior Secured Second Lien Notes due August 1, 2018 at par and capitalized transaction costs of $17.6 million relating to their issuance. Interest is payable semi-annually on February 1 and August 1 each year the New Notes are outstanding. The New Notes are secured on a second priority basis by liens on all of the company’s existing and future property, excluding certain pipeline assets in the USA. Proceeds received from the sale of collateralized assets (excluding oil and gas properties for which no reserves have been assigned) are required to be re-invested in existing oil and gas properties, to acquire new oil and gas properties or to repay the Facility. If such proceeds are not used for these purposes within one year, the company is required to make an offer to repurchase the New Notes at par to the extent such proceeds exceed $25 million plus any re-invested and repaid amounts. Following an offer to purchase the New Notes in connection with an asset sale, the company may redeem all or part of the US-dollar denominated New Notes at 108.5 percent and Canadian-dollar denominated New Notes at 108.75 percent with any remaining asset sale proceeds. As of December 31, 2011, all asset sale proceeds have been re-invested in our oil and gas properties. Provisions in the indenture allow the company to redeem the New Notes as follows: • at any time prior to August 1, 2014, the company may redeem up to 35 percent of the US-dollar denominated New Notes at a price of 108.5 percent and up to 35 percent of the Canadian-dollar denominated New Notes at the price of 108.75 percent with proceeds of equity offerings of at least $10 million; • at any time prior to August 1, 2015, the company may redeem some or all of the New Notes at their principal amount plus a make whole premium plus applicable interest; • after August 1, 2015, the US-dollar denominated New Notes may be redeemed at redemption prices ranging from 104.25 percent, reducing to 100 percent on August 1, 2017 and thereafter; and • after August 1, 2015, the Canadian–dollar denominated New Notes may be redeemed at redemption prices ranging from 104.375 percent reducing to 100 percent on August 1, 2017 and thereafter. In the event of a Change of Control of the company, the holders of the New Notes have the right to require the company to purchase the New Notes at a price of not less than 101 percent of the principal amount to be repurchased. The company repurchased US$783.5 million face value of the outstanding 11 ¾% First Lien Senior Notes and 10 ¼% Second Lien Senior Notes (the “Old Notes”) (representing 99% of the Old Notes outstanding) for cash consideration of US$854.7 million (CAD$835.9 million). The company determined that this transaction resulted partially in a modification and partially as an extinguishment of debt. Accordingly, the company recorded $36.1 million as a discount on the New Notes and approximately $61.9 million was expensed in the consolidated statement of operations. The repayment of US-dollar denominated Senior Notes in 2011 also resulted in the realization of a foreign exchange gain of $11.6 million. The company redeemed remaining amounts outstanding relating to the Second Lien Senior Notes, 10 ¼% in January 2012. CREDIT FACILITY On May 31, 2011, the company entered into an Amended and Restated Senior Secured Revolving Credit Facility. The Facility provides for revolving credit financing of up to $100 million, subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans and borrowings in Canadian dollars and U.S. dollars. The Facility has an accordian feature whereby the Company can increase the Facility to $125 million. All outstanding loans under the new Facility are due and payable in full on May 31, 2014. In the case of Canadian dollar drawings, borrowings under the new Facility bear interest at a rate per annum equal to the Canadian Prime Rate plus the applicable margin; in the case of US dollar drawings at US Base Rate plus the applicable margin. The applicable margins for borrowings under the new Facility are subject to steps up and steps down based on average ratings of the company’s debt as published by Moody’s and Standard and Poors. In addition to paying interest on outstanding principal under the new Facility, the company is required to pay a standby fee in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the new Facility with rates established in the Facility in a similar manner to the interest margins. The company must also pay customary letter of credit fees equal to the applicable margin. As of December 31, 2011, the Company’s interest rate on the new Facility was approximately 6.5%. The new Facility contains a requirement to maintain a ratio of consolidated total debt to total capitalization of under 75% (with convertible debt treated as equity and with up to $120 million added to equity for IFRS conversion adjustments) and borrowings under the new Facility cannot exceed two times trailing adjusted EBITDA. All obligations under the new Facility are unconditionally guaranteed by the company, are secured by substantially all of the assets of the company, including a first priority security interest on all current and future property, with the exception of certain pipeline assets in the USA. As of December 31, 2011, the company had letters of credit outstanding under the Facility of $2.2 million. No other amounts were owed under the Facility.
Page 1 and 2: ANNUAL REPORT 2011 WELL POSITIONED
Page 3 and 4: AR 2011 PG 1 02 HIGHLIGHTS 05 LETTE
Page 5 and 6: AR 2011 PG 3 Years ended December 3
Page 7 and 8: AR 2011 PG 5 Volatility in the oil
Page 9 and 10: AR 2011 PG 7 “Thanks to our liqui
Page 11 and 12: AR 2011 PG 9 Review of Operations I
Page 13 and 14: AR 2011 PG 11 proposals helped to p
Page 15 and 16: AR 2011 PG 13 reservoir description
Page 17 and 18: AR 2011 PG 15 Connacher Oil and Gas
Page 19 and 20: AR 2011 PG 17 the movement of wildl
Page 21 and 22: AR 2011 PG 19 MANAGEMENT’S DISCUS
Page 23 and 24: AR 2011 PG 21 reduced interest rate
Page 25 and 26: AR 2011 PG 23 Connacher’s bitumen
Page 27 and 28: AR 2011 PG 25 OPERATING COSTS (1) T
Page 29 and 30: AR 2011 PG 27 SALES PRODUCT MIX (%)
Page 31: AR 2011 PG 29 Depletion expense is
Page 35 and 36: AR 2011 PG 33 Compensation of key m
Page 37 and 38: AR 2011 PG 35 ACCOUNTING POLICIES A
Page 39 and 40: AR 2011 PG 37 The company classifie
Page 41 and 42: AR 2011 PG 39 Management is respons
Page 43 and 44: AR 2011 PG 41 The production outloo
Page 45 and 46: AR 2011 PG 43 QUARTERLY HIGHLIGHTS
Page 47 and 48: AR 2011 PG 45 Independent Auditor
Page 49 and 50: AR 2011 PG 47 Consolidated Statemen
Page 51 and 52: AR 2011 PG 49 Consolidated Statemen
Page 53 and 54: AR 2011 PG 51 Impairment of assets
Page 55 and 56: AR 2011 PG 53 Goodwill is allocated
Page 57 and 58: AR 2011 PG 55 3.11 Leases Agreement
Page 59 and 60: AR 2011 PG 57 IAS 1 Presentation of
Page 61 and 62: AR 2011 PG 59 Reconciliation of seg
Page 63 and 64: AR 2011 PG 61 8.1 Petroleum and nat
Page 65 and 66: AR 2011 PG 63 10. PROPERTY, Plant a
Page 67 and 68: AR 2011 PG 65 Accounts receivable a
Page 69 and 70: AR 2011 PG 67 December 31, 2010 - C
Page 71 and 72: AR 2011 PG 69 13.3 Refinancing of l
Page 73 and 74: AR 2011 PG 71 Changes in present va
Page 75 and 76: AR 2011 PG 73 The provision for inc
Page 77 and 78: AR 2011 PG 75 The following table s
Page 79 and 80: AR 2011 PG 77 19. FINANCE Charges F
Page 81 and 82: AR 2011 PG 79 Compensation of key m
Page 83 and 84:
AR 2011 PG 81 Estimates Hindsight w
Page 85 and 86:
AR 2011 PG 83 Reconciliation of Con
Page 87 and 88:
AR 2011 PG 85 27.3 Asset and Liabil
Page 89 and 90:
AR 2011 PG 87 The following table s
Page 91 and 92:
CORPORATE INFORMATION Board of Dire
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ANNUAL REPORT 2011 - Connacher Oil and Gas

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