MILLENNIUM STIMULATION SERVICES LTD. SECOND REPORT TO THE COURT SUBMITTED BY

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1 COURT FILE NUMBER COURT OF QUEEN'S BENCH OF ALBERTA JUDICIAL CENTRE CALGARY PLAINTIFF ALBERTA TREASURY BRANCHES DEFENDANT MILLENNIUM STIMULATION SERVICES LTD. APPLICANT KPMG INC., IN ITS CAPACITY AS COURT-APPOINTED RECEIVER AND MANAGER OF MILLENNIUM STIMULATION SERVICES LTD. DOCUMENT SECOND REPORT TO THE COURT SUBMITTED BY KPMG INC., IN ITS CAPACITY AS COURT-APPOINTED RECEIVER AND MANAGER OF MILLENNIUM STIMULATION SERVICES LTD. DATED APRIL 13, 2017 ADDRESS FOR SERVICE AND CONTACT INFORMATION OF PARTY FILING THIS DOCUMENT KPMG INC. 3100, Ave. S.W. Calgary, AB T2P 4B9 Attn: Neil Honess/Ryan Adlington Telephone: / Facsimile: neilhoness@kpmg.ca radlington@kpmg.ca MCCARTHY TÉTRAULT LLP Suite 4000, th Avenue SW Attn: Sean Collins/Walker MacLeod Telephone: / Facsimile: scollins@mccarthy.ca wmacleod@mccarthy.ca

2 Table of Contents Page 1. INTRODUCTION AND PURPOSE OF REPORT THE RECEIVER S ACTIVITIES SINCE THE FIRST REPORT SASKATCHEWAN PROPERTIES ANALYSIS OF PRIORITY CLAIMS RECEIPTS AND DISBURSEMENTS RECOMMENDATIONS

3 Listing of Appendices Appendix A - Receivership Order dated March 24, 2016 Appendix B - Sales and Vesting Approval Order dated June 6, 2016 Appendix C - Title search Estevan Yard as of April 4, 2017 Appendix D - Interim Statement of Receipts and Disbursements from March 24, 2016 to March 31, 2017 Appendix E - Receivership Professional Fees from March 24, 2016 to March 31, 2017 Page 1

4 1. INTRODUCTION AND PURPOSE OF REPORT Introduction 1. Millennium Stimulation Services Ltd. ( Millennium or the Company ) is a private oilfield services company. The Company s principal assets include pressure pumping equipment, and patented waterless energized natural gas stimulation process fracturing technology ( ENG ). All assets are located in Alberta and Saskatchewan. 2. The Company s primary secured lender is Alberta Treasury Branches ( ATB ) who has advanced funds of approximately $17.15 million (plus interest and fees) to Millennium. These amounts were borrowed by Millennium pursuant to the amended facility agreements between ATB and Millennium dated September 1, 2015 and January 8, 2016 (the Facility Agreements ). 3. As a result of the sharp reduction in oil prices and the associated reduction in hydraulic fracturing ( Fracking ) the Company experienced significant cash flow difficulties and was unable to make loan payments due or successfully restructure its financing arrangement with ATB. Accordingly, the Company is and remains in default of the Facility Agreement. 4. On March 11, 2016, ATB issued a demand for payment and notice of intention to enforce security (the ATB Notice ) pursuant to Section 244 of the Bankruptcy and Insolvency Act ( BIA ). 5. Shortly after the ATB Notice, ATB commenced an application to appoint KPMG Inc. ( KPMG ) as receiver and manager of Millennium (the Receiver ) pursuant to section 243 of the BIA and section 13(2) of the Judicature Act, RSA 2000, c J-2 to, inter alia, take possession of and exercise control over the assets of the Company (including the shares of the Company) and any and all proceeds, receipts and disbursements arising out of or from the assets (the Property ). 6. On March 24, 2016, the Court of Queen s Bench of Alberta ( Court ) issued an order appointing KPMG as the Receiver over all of the Property and undertakings of Millennium (the Order ). A copy of the Order is attached hereto as Appendix A. 7. Further background to the receivership, including a summary of assets and primary liabilities, as was previously provided in the Receiver s first report dated May 30, 2016 (the First Report ). Page 2

5 8. The Receiver developed a sales process (the SP ) detailed in the First Report. The results of the SP can be found in the Receiver s first supplemental confidential report to the Court dated May 30, 2016 (the First Supplemental Confidential Report ). 9. A sale approval and vesting order (the Sale Approval and Vesting Order ) with respect to the Company s hydraulic fracturing units, ENG pumping unit, coiled tubing unit and intellectual property successfully sold through the SP (together, the Fracturing Equipment and IP ), attached as Appendix B, was granted by the Court on June 6, Subsequently, the sales of these assets were closed. 10. For further background information on Millennium and these receivership proceedings please refer to the Receiver s website In preparing this report, the Receiver has been provided with, and has relied upon, unaudited and other financial information, books and records (collectively, the Information ) prepared by the Company and/or their representatives, and discussions with the Company s management and/or representatives. The Receiver has reviewed the Information for reasonableness, internal consistency and use in the context in which it was provided and in consideration of the nature of evidence provided to this Honourable Court. However, the Receiver has not audited or otherwise attempted to verify the accuracy or completeness of the Information in a manner that would wholly or partially comply with Canadian Auditing Standards ( CAS ) pursuant to the Chartered Professional Accountants Canada Handbook and, accordingly, the Receiver expresses no opinion or other form of assurance contemplated under the CAS in respect of the Information. 12. The information contained in this report is not intended to be relied upon by any prospective purchaser or investor in any transaction with the Receiver. 13. Defined terms not defined herein have the same meaning as defined in the First Report and First Supplemental Confidential Report. 14. All references to monetary amounts in this report are in Canadian dollars unless otherwise specified. Page 3

6 Purpose of the Receiver s Second Report 15. This is the Receiver s second report (the Second Report ) and is filed to provide this Honourable Court with: a) An update on the actions of the Receiver since the date of receivership; b) A request to approve the proposed distribution of priority claims to other parties; c) The interim statement of receipts and disbursements for the receivership period March 24, 2016 to March 31, 2017; d) The Receiver s fees and disbursements for the period from May 21, 2016 to March 31, 2017 and the Receiver s legal counsel s fees and disbursements for the period from May 1, 2016 to March 31, 2017; e) Sealing the supplemental, confidential report (the Second Supplemental Confidential Report ); and f) The Receiver s recommendations. 16. The Second Supplemental Confidential Report has been prepared by the Receiver which details the sales process undertaken in respect of the Company s office, warehouse and land in Estevan, Saskatchewan and the proposed transaction pursuant to that process and the Receiver s recommendations in connection thereto. Page 4

7 2. THE RECEIVER S ACTIVITIES SINCE THE FIRST REPORT The Medicine Hat Premises 17. At the date of the receivership, Millennium had certain assets located in two leased locations in Medicine Hat (the Medicine Hat Premises ). 18. Subsequent to the completion of the SP, the Receiver vacated the Medicine Hat Premises on September 16, The Receiver performed the following before vacating the Medicine Hat Premises: a) Removed and disposed of various chemical totes; b) Removed all necessary records and forwarded the files to a third-party external document storage; and c) Paid all rent and related expenses due from the date of filing to the date the Receiver vacated the Medicine Hat Premises. Sand Facility 19. Millennium owns a sand storage facility that is located on leased property in Estevan, Saskatchewan (the Sand Facility ). The Sand Facility is a special use, purpose-built facility to upload silica sand from an adjacent rail car siding. Estevan Yard 20. Millennium is the registered owner of an eight acre site with office and warehouse facilities located in an industrial area in Estevan, Saskatchewan, legally described as Lot 1 Block D Plan No (the Estevan Yard ). 21. Attached as Appendix C is a copy of the title search for the Estevan Yard as of April 4, Insurance 22. The Receiver did not renew certain insurance coverages as the sale of the Fracturing Equipment and IP was completed in August Page 5

8 23. The Receiver worked with the insurers and brokers to extend property and commercial general liability insurance coverages until May 31, 2017 and October 16, 2017, respectively. Environmental Assessment 24. The Receiver has engaged commercial agents to market and sell both the Sand Facility and the Estevan Yard (together, the Saskatchewan Properties ) as detailed below. 25. In June 2016 the Receiver engaged Pinchin West Ltd. ( PWL ) to perform a Phase I Environmental Site Assessment (the Phase I ESA Report ) for the Saskatchewan Properties. 26. At the Estevan Yard, an issue with stained soil and the former aboveground waste oil storage tank (the Stain ) was the only issue identified. In the Phase I ESA Report PWL recommended that the Stain was remediated. No items were identified at the Sand Facility. PWL advised that no further subsurface investigation work or a Phase II Environmental Site Assessment was required for the Saskatchewan Properties. 27. Accordingly in September 2016 the Receiver engaged PWL to remediate the Stain. In October 2016, PWL reported that the remedial activities had successfully removed the effected soil. 28. Upon request, the Receiver provided the Phase I ESA Report to parties interested in either of the Saskatchewan Properties. Asset Maintenance 29. The Receiver hired a former employee of Millennium, residing in Estevan, as a consultant to undertake periodic inspections of the Saskatchewan Properties. Additionally, repairs and maintenance, including the repair of a burnt out beacon and the emptying of a sump tank were carried out at the Sand Facility. Page 6

9 3. SASKATCHEWAN PROPERTIES Sand Facility 30. The Receiver listed the Sand Facility with CBRE Limited ( CBRE ) at $4.9 million in June CBRE focussed its marketing efforts on primarily oil and gas companies in the surrounding area. To date, 14 parties have expressed interest. Site plans and the Phase I ESA Report were provided to four of these parties and one site visit has been conducted. 32. CBRE advised that interest in the Sand Facility is limited due to its highly specialized nature, which is very dependent on the local economic conditions. The Sand Facility is designed to supply sand to companies that perform Fracking locally. Low commodity prices have significantly reduced the level of Fracking activity in the area. 33. The Receiver continues to market the Sand Facility. Estevan Yard 34. In May 2016 the Receiver listed the Estevan Yard with CIR Commercial Realty Inc. o/a Colliers International ( Colliers ) at $3.355 million. 35. The Receiver was advised that Colliers undertook the following marketing activities: a) Contacting other local commercial agents; b) Distributing sales brochures to approximately 80 commercial agents and 40 prospective clients; and c) Advertising on the Colliers website. 36. Site plans and the Phase I ESA Report were provided to various interested parties upon request. 37. Ten interested parties viewed the Estevan Yard. 38. On or about September 15, 2016, an offer that was considerably below the listing price of $3.355 million was submitted. The Receiver rejected the offer and requested an offer to be closer to the listing price. No offer was re-submitted. Page 7

10 39. Colliers advised that interest in the Estevan Yard was initially limited in 2016 principally due to: a) The depressed commodity prices impact on the local oil and gas activities; and b) A surplus of similar properties in the local market. 40. Accordingly, in December 2016 the Receiver in discussions with ATB and Colliers reduced the listing price to $2.95 million. 41. In mid-february 2017, two offers were submitted to the Receiver. The Receiver counter-offered to the parties with a deadline to submit revised offers on March 10, A draft asset purchase agreement (the APA ) was provided to the parties at this time. 42. Subsequently, the parties submitted an amended APA that included revised offers and certain conditions that were unacceptable to the Receiver. 43. On March 13, 2017, the Receiver requested that all these conditions be waived and for the parties to re-submit a final offer and APA by 5pm (MST) on March 15, Final APAs were received from the parties which waived all the conditions as requested. 45. Subsequent to the marketing process and negotiations with the parties, an offer was accepted by the Receiver. 46. The Receiver has provided further detailed information on the marketing process and the accepted bid in the Second Supplemental Confidential Report. The Receiver is of the view that the marketing of the Estevan Yard was fair, reasonable and transparent and provided the highest and best value for the Estevan Property in the circumstances. 47. The Receiver will seek a sealing order in connection with the Second Supplemental Confidential Report, as disclosure of the information contained in the Second Supplemental Confidential Report would cause irreparable prejudice to creditors and other stakeholders. In the event that the transactions contemplated therein do not close, the assets would be subject to further marketing and the Receiver s ability to obtain the highest and best price would be severely compromised due to the purchase price information being in the public domain. As such, the Receiver seeks a limited sealing order in connection with the Second Supplemental Confidential Report. Page 8

11 4. ANALYSIS OF PRIORITY CLAIMS 48. As described in the First Report, ATB s security was reviewed by the Receiver s legal counsel and the Receiver was advised that ATB has a valid security interest in the right, title and interest of Millennium in its real and personal property, subject to certain standard assumptions and qualifications. Other Priority Claims 49. The confirmed priority claims received are summarized below. The Receiver has reviewed and concluded these all rank in priority to ATB ( Other Priority Claims ): Summary of Other Priority Claims Amount Creditor (in CAD $) Notes Employment and Social Development Canada 37,848 Eligible wages pursuant to "WEPPA" Canada Revenue Agency 28,600 Re-assessed GST Alberta Workers' Compensation Board 5,359 Oustanding premiums Total 71, Accordingly the Receiver proposes to distribute up to $71,807 to the creditors listed above (the Proposed Distribution ). 51. The Receiver is to make an interim distribution to ATB subject to the approval of the sale and vesting order as described in the Second Supplemental Confidential Report. Page 9

12 5. RECEIPTS AND DISBURSEMENTS 52. The Receiver s disbursements during the receivership have primarily related to the preservation of Millennium s Property and include costs such as site security, insurance, rent and asset maintenance. 53. Below is a summary of receipts and disbursements from March 24, 2016 to March 31, 2017 (the R&D ). The complete interim statement of receipts and disbursements is attached as Appendix D : Interim Statement of Receipts and Disbursements - March 24, March 31, 2017 Amount Total Cash Receipts 10,762,505 Cash Disbursements Payment to secured creditor 7,250,000 GST remitted 432,605 Operating costs 409,576 Equipment leases - Jim Peplinski Leasing Inc. pay out 365,101 Professional fees 198,006 Repayment of receiver certificate 150,000 GST paid on disbursements 45,370 Commission re auction 11,629 Miscellaneous other costs 7,656 Total Cash Disbursements 8,869,943 Excess Receipts Over Disbursements 1,892, The R&D reflects disbursements of $8.9 million. The Receiver highlights the following: a) Interim distribution of approximately $7.25 million representing repayments to the secured creditor as authorized in the Sale Approval and Vesting Order; b) Distribution of $365,100 to Jim Peplinski Leasing Inc. ( JP ) for various motor vehicles that were secured by JP. These motor vehicles were included in the SP as detailed in the First Report and the First Supplemental Confidential Report; c) The Receiver s fees and disbursements of $180,200 plus GST for the period up to May 20, 2016 as authorized in the Sale Approval and Vesting Order; and d) The Receiver s legal counsel s fees and disbursements of $18,700 plus GST for the period up to April 30, 2016 as authorized in the Sale Approval and Vesting Order. Page 10

13 55. The Receiver and its legal counsel have billed and/or accrued fees of $272,737 and $80,868 from May 1, 2016 to March 31, These fees, in addition to the professional fees already paid, are collectively referred to as the Receivership Professional Fees. A list of invoices are attached as Appendix E. Summary of Professional Fees Period May 21, March 31, 2017 in CAD $ Period Total KPMG Inc. Amount disbursed March 24, May 20, ,758 Amount to be disbursed May 21, March 31, ,737 Subtotal 466,495 McCarthy Tétrault LLP Amount disbursed March 24, April 30, ,741 Amount to be disbursed May 1, March 31, ,868 Subtotal 99,609 Total amount to be disbursed 353,605 Total Professional Fees 566,104 Accordingly the Receiver seeks approval of the Receivership Professional Fees. Copies of the invoices described therein, including detailed time analysis, will be made available to the Court at the April 24, 2017 hearing upon request. Page 11

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15 Appendix A Receivership Order dated March 24, 2016

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29 Appendix B Sales and Vesting Approval Order dated June 6, 2016

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47 Appendix C Title search Estevan Yard as of April 4, 2017

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51 Appendix D Interim Statement of Receipts and Disbursements from March 24, 2016 to March 31, 2017

52 In the Matter of the Receivership of Millennium Stimulation Services Ltd. Receiver's Interim Statement of Receipts and Disbursements for the Period March 24, March 31, 2017 Combined (CAD) Cash Receipts Notes Sale of assets 8,699, Sale of patents 1,216, GST collected 465, Advance from secured creditor 150, Saskatchewan WCB surplus distribution 82, Tax refund re Enfrac Inc. 55, Sale of trucks (pre-receivership) 44, Insurance refund 30, Miscellaneous refund 1 17, Total Cash Receipts 10,762, Cash Disbursements Payment to secured creditor 7,250, GST remitted 432, Equipment leases - Jim Peplinski Leasing Inc. pay out 365, Occupation rent 194, Receiver's fee 180, Repayment of receiver certificate 150, Utilities 52, Outside counsulting 48, GST paid on disbursements 36, Environment costs 34, IT services 20, Insurance 17, Legal fees 17, Security 14, Commission re auction 11, GST paid on receiver's fees 9, Repairs and maintenance 7, Trucking and transport 5, Storage 4, Lien payment - Micron Industries Inc. 3, Loan interest 2, Travel 2, Garbage removal and clean up 2, US Exchange re return of bid deposit 2 2, Redirection of mail 1, Miscellaneous other costs 3 1, Total Cash Disbursements 8,869, Excess Receipts Over Disbursements $ 1,892, Notes: 1 Includes corporate tax, Co-op membership, Jim Peplinksi lease and Federal Express Canada refunds. 2 Exchange rate loss on bid deposits originally received in US dollars, converted to Canadian dollars for deposit then converted back to US dollars for return to the unsuccessful bidders. 3 Includes payroll services, bank charges, locksmith and filing fees.

53 Appendix E Receivership Professional Fees from March 24, 2016 to March 31, 2017

54 Receivership Professional Fees Period May 21, March 31, 2017 in CAD $ Service Period Fees and Disbursements GST Subtotal Total KPMG Inc. Amount disbursed March 24, May 20, , , , Subtotal 193, Amount to be disbursed May 21, September 30, , , , October 1, December 31, , , , January 1, March 31, , , , Subtotal 272, Total KPMG Inc. 466, McCarthy Tétrault LLP Amount disbursed March 24, March 31, , , April 1, April 30, , , Subtotal 18, Amount to be disbursed May 1, May 31, , , , June 1, June 30, , , July 1, July 31, , , August 1, August 31, , , September 1, October 31, , , November 1, November 30, December 1, December 31, , , Subtotal February 1, March 31, , , , Total McCarthy Tétrault LLP 99, Total Amount to be disbursed 353, Total Professional Fees $ 566,103.51