ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 69
13.3 Refinancing of long–term debt and realized foreign exchange gain
As a result of the issuance of the New Notes and the purchase and redemption of the Old Notes in 2011, the company performed an analysis
to determine whether the transaction was to be accounted for as a modification or an extinguishment of debt. The company determined that this
transaction resulted partially in a modification and partially as an extinguishment. Accordingly, the company recorded costs of refinancing of $36.1
million as a discount on the New Notes and approximately $61.9 million was expensed. The company also realized a foreign exchange gain of $11.6
million upon redemption of this debt.
13.4 Revolving Credit Facility
As at December 31, 2010, the company had a revolving credit facility of US$50 million. In 2011, the company entered into an Amended and Restated
Senior Secured Revolving Credit Facility (the “Facility”). The company incurred and capitalized transaction costs of approximately $817,000 on
amendment of the Facility (2010 : $251,000).
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 accordion feature whereby the Company can increase
the Facility to $125.0 million. All outstanding loans under the Facility are due and payable in full on May 31, 2014.
In the case of Canadian dollar drawings, borrowings under the 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 margin for borrowings under the
Facility are subject to steps up and steps down based on average ratings the company’s debt as published by Moody’s and Standard and Poors.
In addition to paying interest on outstanding principal under the Facility, the company is required to pay a standby fee in respect of the unutilized
commitments thereunder, which fee is determined based on utilization of the 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 at December 31, 2011, the
Company’s interest rate on the Facility was approximately 6.5% per annum. The 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 Facility cannot exceed two times trailing adjusted EBITDA. The company has been in compliance with all
covenants throughout 2010 and 2011.
All obligations under the 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 of the current and future property, with the exception of certain pipeline assets in the USA.
In 2011, the company borrowed and repaid $62.9 million under the Facility. As at December 31, 2011, the company had letters of credit outstanding
under the Facility of $2.2 million. No other amounts were outstanding under the Facility.
13.5 Convertible Debentures, Due June 30, 2012
In May 2007, Connacher issued subordinated unsecured Convertible Debentures with a face value of $100,050,000. Interest is payable semi–
annually on June 30 and December 31 at the rate of 4.75 percent. The Convertible Debentures mature on June 30, 2012, unless converted prior to
that date. The Convertible Debentures are convertible at any time into common shares, at the option of the holder, at a conversion price of $5.00 per
share. The Convertible Debentures are traded on Toronto Stock Exchange.
The Convertible Debentures are redeemable on or after June 30, 2010 by the company, in whole or in part, at a redemption price equal to 100
percent of the principal amount of the Convertible Debentures to be redeemed, plus accrued and unpaid interest, provided that the market price of the
company’s common shares is at least 120 percent of the conversion price of the Convertible Debentures.
The Convertible Debenture is considered a hybrid instrument for accounting purposes with a liability and a conversion option. The conversion option
is considered an embedded derivative as the company has a choice to settle in cash in lieu of issuing shares in the event the debenture holders
exercise their option to convert the debentures. The company elected not to bifurcate this embedded derivative and designated the entire Convertible
Debentures as “fair value through profit and loss” and accordingly, recorded Convertible Debentures at fair value at each reporting period end with
changes reported within net earnings (loss).
In 2011, the company recorded unrealized loss of $2.0 million (2010: $4.5 million) on remeasurement of the Convertible Debentures to fair value. The
changes in the fair value of Convertible Debentures attributable to movements in the company’s credit risk are detailed in the table below:
For the year ended December 31
2011 2010
(Canadian dollar in thousands)
Cumulative change in the fair value $ 2,235 $ 7,671
Annual change in the fair value $ 5,436 $ 7,083
The movement in fair value due to credit risk is calculated as the amount of change in fair value that is not attributable to changes in market
conditions that give risk to market risk.