ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 65
Accounts receivable are due primarily from crude oil and natural gas purchasers in the petroleum and natural gas industry and Government and
large wholesale and retail purchasers of refined products. Accounts receivable are subject to normal industry credit risks. The company periodically
assesses the financial strength of its purchasers and will adjust its marketing plan to mitigate credit risks. This assessment involves a review of
external credit ratings and an internal credit review, based on the purchaser’s past financial performance. The company considers all amounts due over
90 days as past due. As at December 31, 2011, approximately $1.5 million (2010 : $1.1 million) of accounts receivable were past due primarily from
taxation authorities, all of which were considered to be collectible.
The company is also exposed to credit risk from counterparties to risk management contracts. This risk is managed by limiting counterparties to
investment grade banking institutions; there has been no history of impairment with these counterparties.
The maximum exposure to credit risk relating to the above classes of financial assets at December 31, 2011 and 2010 is the carrying amount of
these assets.
Liquidity risk
Liquidity risk is the risk that the company will not have sufficient funds to repay its debts and fulfill its financial obligations. To manage this risk,
the company pre–funds major development projects, monitors expenditures against pre–approved budgets to control costs, regularly monitors its
operating cash flow, working capital and bank balances against its business plan, maintains accessible revolving banking lines of credit and maintains
prudent insurance programs to minimize exposure to insurable losses. Additionally, the long term nature of the company’s debt repayment obligations
is aligned to the long term nature of its assets. Principal repayments are not required on the Second Lien Senior Notes until their maturity in 2018 and
2019. The company also has a revolving credit facility of $100 million (note 13.4), which gives Connacher additional short–term financial flexibility for
its working capital requirements. The following table shows the maturities of Connacher’s financial liabilities:
As at December 31, 2011
Total Within 1 year 2–5 years 6–7 years
(Canadian dollar in thousands)
Non–derivative liabilities:
Accounts payable and accrued liabilities $ 126,367 $ 126,367 $ – $ –
Long–term debt and interest payment obligations (1) 1,556,982 180,559 312,679 1,063,744
Derivative–based liabilities:
Risk management contracts $ 7,610 $ 7,610 $ – $ –
(1) USD denominated principal and interested payments are converted into Canadian dollars using exchange rate prevailing on December 31, 2011.
Market risk and sensitivity analysis
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The objective
of market risk management is to manage and control market price exposures within acceptable limits, while maximizing returns. Market risk is
comprised of commodity price risk, interest rate risk and foreign currency risk.
Commodity price risk
The company is exposed to commodity price risk as a result of potential changes in the market prices of its bitumen and refined product sales and
its crude oil and natural gas sales and purchases. In accordance with policies approved by the Board of Directors, derivative contracts, including
commodity futures contracts, price swaps and collars may be utilized to reduce exposure to price fluctuations associated with a portion of these sales
or purchases. The following table summarizes the net position of the company’s risk management contracts:
As at December 31
2011 2010
(Canadian dollar in thousands)
Current liabilities (assets)
Crude oil contracts $ 11,001 $ 8,241
Refined products contracts (5,593) –
Natural gas contracts 2,202 743
Current liabilities 7,610 8,984
Non–current liabilities
Crude oil contracts – 9,879
Non–current liabilities – 9,879
Risk management contract liabilities $ 7,610 $ 18,863