CONDENSED INTERIM BALANCE SHEET (UNAUDITED) As at, (Canadian dollar in thousands) Notes March 31, 2018 December 31, 2017 ASSETS CURRENT ASSETS Cash and cash equivalents $47,160 $36,228 Restricted cash 4 7,100 7,100 Trade and accrued receivables 10,330 21,156 Inventory 7,356 7,331 Other assets 5 12,349 10,595 Assets held for sale 6-43,750 84,295 126,160 NON-CURRENT ASSETS Property, plant, and equipment 7 265,145 279,000 265,145 279,000 $349,440 $405,160 LIABILITIES AND SHAREHOLDERS EQUITY CURRENT LIABILITIES Trade and accrued payables $20,524 $18,589 Risk management contract 9 1,010 - Interim Financing Credit Facility 10-20,681 Liabilities subject to compromise 2, 8 354,590 333,886 376,124 373,156 NON-CURRENT LIABILITIES Decommissioning liabilities 11 67,344 68,866 67,344 68,866 SHAREHOLDERS EQUITY Share capital 12 1,177,556 1,177,556 Contributed surplus 41,623 41,623 Deficit (1,313,207) (1,256,041) (94,028) (36,862) $349,440 $405,160 Going concern (note 2) Contractual obligations and commitments (note 18) The accompanying notes to the condensed interim financial statements are an integral part of the statements. Approved by the Board: Signed, Eugene Davis Director Signed, Daryl Gilbert Director
CONDENSED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) For the three months ended March 31, (Canadian dollars in thousands) Notes 2018 2017 INCOME Revenue, net of royalties 13 $33,855 $46,900 Interest and other income 33 20 33,888 46,920 EXPENSES Blending of products sold 16,169 14,100 Production and operating 19,227 19,875 Transportation and handling 9,979 7,303 Restructuring 5 2,203 713 General and administrative 2,664 3,008 Depletion and depreciation 7 17,313 16,310 Foreign exchange loss (gain) 8,457 (1,975) Loss on disposition and derecognition of property, plant, and equipment 261 438 Finance charges 15 12,771 11,756 Loss on risk management contract 9 1,010 - Unrealized loss on Convertible Notes 1,000-91,054 71,528 NET LOSS AND TOTAL COMPREHENSIVE LOSS $(57,166) $(24,608) NET LOSS PER SHARE (1) 12.1 Basic $(2.02) $(0.87) Diluted $(2.02) $(0.87) (1) The Company is in a net loss position; any effect of stock options and Convertible Note conversion are anti-dilutive The accompanying notes to the condensed interim financial statements are an integral part of the statements. 2
CONDENSED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED) Three months ended March 31, (Canadian dollars in thousands) Notes 2018 2017 SHARE CAPITAL Balance, beginning of period 12 $1,177,556 $1,177,556 Balance, end of period 1,177,556 1,177,556 CONTRIBUTED SURPLUS Balance, beginning of period 41,623 41,623 Balance, end of period 41,623 41,623 DEFICIT Balance, beginning of period (1,256,041) (740,995) Net loss and total comprehensive loss (57,166) (24,608) Balance, end of period (1,313,207) (765,603) Total shareholders equity (deficit) $(94,028) $453,576 The accompanying notes to the condensed interim financial statements are an integral part of the statements. 3
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the three months ended March 31, (Canadian dollars in thousands) Notes 2018 2017 OPERATING Net loss and total comprehensive loss $(57,166) $(24,608) Adjustments for: Depletion and depreciation 7 17,313 16,310 Finance charges - non-cash portion 11, 15 351 317 Interest expense on long-term debt 15 12,381 11,434 Unrealized foreign exchange loss (gain) 8,456 (1,957) Unrealized loss on risk management contract 9 1,010 - Unrealized loss on Convertible Notes 1,000 - Loss on disposition and derecognition of property, plant, and equipment 7 261 438 Decommissioning liabilities settled 11 - (6) Changes in non-cash working capital 17 10,071 (688) Cash flow from (used in) operating activities (6,323) $1,240 INVESTING Expenditures on property, plant, and equipment 7 (5,313) (1,708) Proceeds on disposition of assets - 335 Proceeds on Royalty interest sale 2, 6 43,750 - Changes in non-cash working capital 17 1,217 240 Cash flow from (used in) investing activities 39,654 (1,133) FINANCING Repayment of the Interim Financing Credit Facility 10 (20,367) - Interest paid on long-term debt (1,796) (1,076) Cash flow used in financing activities (22,163) (1,076) 11,168 (969) Foreign exchange loss on cash balances held in foreign currency (236) (11) Cash and cash equivalents (including restricted cash), beginning of period 43,328 17,814 Cash and cash equivalents (including restricted cash), end of period $54,260 $16,834 The accompanying notes to the condensed interim financial statements are an integral part of the statements. 4
NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Connacher Oil and Gas Limited ( Connacher or the Company ) is an in situ oil sands developer, producer, and marketer of bitumen. The address of the Company s principal office is Suite 1040, 640-5th Avenue S.W., Calgary, Alberta. Following the commencement on May 17, 2016 of a proceeding by Connacher under the CCAA (defined below), on June 17, 2016, the Toronto Stock Exchange delisted Connacher s common shares as the continued listing requirement could not be met. 2. COMPANIES CREDITORS ARRANGEMENT ACT ( CCAA ) STATUS AND GOING CONCERN On March 31, 2016, the Company entered into a forbearance agreement (the Forbearance Agreement ) with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and certain lenders constituting the Required Lenders in respect of US$153.8 million of loans made by the lenders (the Lenders ) under the credit agreement dated as of May 23, 2014 (as amended, restated, supplemented, or otherwise modified from time to time, including as amended pursuant to Amendment No. 1 dated May 8, 2015) (the Amended Term Loan Facility ). Under the terms of the Forbearance Agreement, the Lenders agreed to, among other things, forbear from exercising enforcement rights and remedies arising from the Company s failure to pay the cash interest and principal payments due on March 31, 2016 until the earlier of April 30, 2016; the occurrence of an event of default under the Amended Term Loan Facility, unrelated to the failure to pay principal and interest due on March 31, 2016; or the occurrence of a default or breach of representation by the Company under the Forbearance Agreement. On April 30, 2016, the Company entered into a second forbearance agreement (the Second Forbearance Agreement ) which extended the forbearance period until May 16, 2016. On May 17, 2016, the Company sought and obtained creditor protection under the Companies Creditors Arrangement Act ( CCAA ) pursuant to an order (the Initial Order ) granted by the Court of Queen s Bench of Alberta, Judicial Centre of Calgary (the Court ). The Court granted CCAA stay protection for an initial period expiring on June 16, 2016. Since the Initial Order, seven Court-ordered stay extensions have been obtained, with the most recent extending the stay of proceedings until and including June 29, 2018 (the CCAA Stay Period ). Under the Initial Order, Ernst & Young Inc. was appointed by the Court as the monitor (the Monitor ). The CCAA is a federal insolvency statute that allows an insolvent company which owes creditors in excess of $5 million to restructure its business and financial affairs and stays creditors and others from enforcing rights against the insolvent company. The Initial Order also approved and authorized the Company and the Monitor to conduct a sale and investment solicitation process (the SISP ), as set out in Schedule A to the Initial Order, to identify one or more purchasers and/or investors in the Company s business and/or property. As authorized and approved by the Initial Order, the Company secured interim financing in the form of a senior secured debtor-in-possession credit facility (the DIP ) pursuant to a credit agreement dated as of May 15, 2016 with certain existing lenders (certain of which are or were also significant shareholders of the Company) (the Interim Lenders ) for up to US$20 million (collectively, the Total DIP Commitments ), with initial commitments of up to US$11.5 million (the Initial Commitments ). On October 26, 2016, the Company entered into a Waiver, Approval, and Modification Agreement (the First DIP Amendment Agreement ) with its Interim Lenders related to the DIP. Pursuant to the First DIP Amendment Agreement, the Interim Lenders agreed to waive certain limited defaults under the DIP related to the CCAA SISP timelines and advanced to the Company an additional amount of approximately US$5.0 million of the Total DIP Commitments initially authorized by the Court to support the Company s continuing operations. On December 16, 2016, the Company entered into a further Approval and Modification Agreement (the Second DIP Amendment Agreement ) with the Interim Lenders related to the DIP. The Second DIP Amendment Agreement extended the maturity date under the DIP from May 17, 2017 to December 31, 2017 and amended certain provisions of the DIP in order to provide the Company with greater flexibility to enter into hedging agreements and other long-term contracts. On June 27, 2017, the Company entered into Approval and Modification Agreement #3 (the Third DIP Amendment Agreement ) with the Interim Lenders with respect to the DIP. The Third DIP Amendment Agreement extended the maturity date of the DIP from December 31, 2017 to January 31, 2018. On January 30, 2018, the Company received approval from the Court in its proceeding under the CCAA to grant a royalty to Burgess Energy Holdings, L.L.C ( Burgess ) on all of the lands (the Royalty Lands ) containing bitumen together with the oil sands rights and interests owned by the Company (the Royalty ) for cash consideration of $43.75 million. Concurrent with the closing of the Royalty transaction, the Company used a portion of the consideration to repay, in full, the US$16.5 million owing under the DIP. Furthermore, the Company obtained an extension of the CCAA stay of proceeding to June 29, 2018. 5
On March 28, 2018, the Court approved the Company s entry into a Support Agreement (the Support Agreement ) with certain first lien lenders holding in excess of 75% of the principal amount of debt outstanding under the Amended Term Loan Facility and commencement of a new SISP. The Support Agreement provides the foundation for the Company s exit from CCAA protection by securing majority first lien lender support for the commencement of a new SISP and the implementation of either a: (i) Superior Transaction identified during the new SISP (being a transaction that provides greater than $90 million of cash consideration, excluding existing cash on hand, plus payment of all priority claims and assumption of certain liabilities); or, (ii) pre-negotiated credit bid transaction pursuant to which a newly formed entity on behalf of the first lien lenders ( Newco ) will acquire the assets of the Company (the Credit Bid Transaction ) in the event a Superior Transaction is not identified during the new SISP. The Support Agreement also contains a number of financial and non-financial covenants and restrictions on the Company. The key features of the Credit Bid Transaction include: (i) formation of Newco to acquire all or substantially all of the Company s assets (ii) assumption by Newco of the Company s post-ccaa filing trade payables; (iii) offers of employment being made by Newco to all of the Company s employees; (iv) entry by Newco into a new senior secured facility (the Newco Senior Secured Facility ); and, (v) distribution of the shares of Newco and the obligation under the Newco Senior Secured Facility to the existing first lien lenders on the terms set out in the Support Agreement and related exhibits. The Credit Bid Transaction, if implemented, would not provide a recovery to the Company s stakeholders beyond the existing first lien lenders and creditors with claims that rank in priority to the first lien lenders. The Company continues to proceed with the new SISP and the pre-determined milestones as approved by the Court. The Credit Bid Transaction or any Superior Transaction identified pursuant to the new SISP will be subject to approval of the Court. Further information on the new SISP and the Credit Bid Transaction can be found on the CCAA Monitor s website at www.ey.com/ca/connacheroilandgas. As at March 31, 2018, in connection with the CCAA proceeding, the Company identified the following obligations subject to potential compromise: (Canadian dollars in thousands) Current and long-term portions of Amended Term Loan Facility $210,438 Interest payable on Amended Term Loan Facility 59,737 Convertible Notes 45,000 Interest payable on Convertible Notes 20,762 Trade and accrued liabilities 18,653 Total liabilities subject to compromise $354,590 The aforementioned obligations, subject to potential compromise, represent the amounts expected to be resolved through the CCAA proceeding and remain subject to future, potentially material, adjustments. On August 24, 2016, the Court granted a claims procedure order establishing a process for the filing of claims against the Company and its directors and officers by September 26, 2016 (the Claims Bar Date ). The Company received 89 claims by the Claims Bar Date. The liabilities that are not subject to the CCAA proceeding are excluded from the liabilities subject to potential compromise and include certain non-restructuring liabilities incurred subsequent to May 17, 2016. In light of the CCAA proceeding, the Credit Bid Transaction and the new SISP, the Company is uncertain what value could be ascribed to the Company s outstanding equity securities in any asset sale, corporate sale, and/or implementation of a balance sheet restructuring that is undertaken pursuant to the CCAA proceeding. Accordingly, caution should be exercised with respect to any existing or future investment in any of the Company s outstanding equity securities. The decision to file for CCAA protection was due to the continued deterioration of crude oil pricing and the restrictive provisions of the Company s long-term debt arrangements, as both factors constrained the Company s ability to generate positive cash flow from operations and to access additional financing. The Company continues to move forward with the CCAA proceeding and the new SISP. Future operations are dependent on the outcome of the new SISP and cause significant doubt about the Company s ability to continue as a going concern. The condensed interim financial statements have been prepared on a basis which asserts that the Company will continue to have the ability to realize its assets and discharge its liabilities and commitments in a planned manner with consideration to expected possible outcomes. Conversely, if the assumption made by management is not appropriate, adjustments to the carrying amounts of the Company s assets, liabilities, revenues, expenses, and balance sheet classifications may be necessary and such adjustments could be material. 6
3. BASIS OF PREPARATION The condensed interim financial statements were approved and authorized for issuance by the Board of Directors on May 29, 2018. 3.1 Statement of compliance The condensed interim financial statements have been prepared in accordance with International Accounting Standards ( IAS ) 34 Interim Financial Reporting and follow the same accounting policies and methods of computation as the most recent annual financial statements, except as noted in financial statement note 3.2. Certain information and disclosures normally required to be included in notes to the financial statements have been condensed or omitted. Accordingly, the condensed financial statements should be read in conjunction with the annual financial statements for the year-ended December 31, 2017, which were prepared in accordance with International Financial Reporting Standards ( IFRS ). 3.2 Accounting pronouncements adopted IFRS 9 - Financial Instruments ( IFRS 9 ) Effective January 1, 2018, the Company adopted IFRS 9 using the retrospective method. The adoption of IFRS 9 did not yield any adjustments to the amounts recognized in the Company s annual financial statement for the year-ended December 31, 2017. IFRS 9 includes three initial classification categories for financial assets: amortized cost, fair value through other comprehensive income ( FVTOCI ), and fair value through profit or loss ( FVTPL ). Previously, IAS 39 included held-to-maturity, loans and receivables, and available for sale classifications all of which have been eliminated. Classification is dependent on the Company s objective for the financial asset and the contractual cash flow characteristics of the financial asset. A financial asset is classified as amortized cost if the asset is held with the objective to collect contractual cash flows that are solely payments of principal and interest on principal amounts outstanding. A financial asset is classified as FVTOCI if the financial asset is held with the objective to both collect contractual cash flows and sell the financial asset. All other financial assets are classified as FVTPL. IFRS 9 includes a new model for impairment of financial assets based on an expected credit loss model. Under the new model, adopted as a practical expedient, the Company s trade and accrued receivables are considered collectible within one year or less; therefore, these financial assets are not deemed to have a significant financing component and a lifetime expected credit loss is measured at the date of initial recognition of trade receivables. Financial liabilities are measured at amortized cost or FVTPL. A financial liability is measured at FVTPL if it is considered held-for-trading, a derivative, or designated as FVTPL at initial recognition. For financial liabilities measured at FVTPL, any change in value resulting from a change in the Company s credit-risk is recorded through other comprehensive income or loss, rather than net earnings (loss). Classifications of the Company s financial assets and liabilities under IAS 39 and IFRS 9 are as follows: Financial Assets IAS 39 IFRS 9 Cash and cash equivalents Loans and receivables (amortized cost) Amortized cost Restricted cash Loans and receivables (amortized cost) Amortized cost Trade and accrued receivables Loans and receivables (amortized cost) Amortized cost Financial Liabilities IAS 39 IFRS 9 Risk management contract(s) Held-for-trading (FVTPL) FVTPL DIP Amortized cost Amortized cost Convertible Notes FVTPL FVTPL Amended Term Loan Facility Amortized cost Amortized cost Liabilities subject to compromise Amortized cost Amortized cost There were no material adjustments to the carrying value of any of the Company s financial instruments due to the adoption of IFRS 9. IFRS 15 - Revenue from Contract with Customers ( IFRS 15 ) The International Accounting Standards Board ( IASB ) issued IFRS 15 in May 2014 and replaces IAS 18 - Revenue, IAS 11 - Construction Contracts, and related interpretations. IFRS 15 establishes a single revenue recognition framework which requires an entity to recognize revenue to reflect the transfer of goods and services for the amount it expects to receive, when control is transferred to the customer. 7
Effective January 1, 2018, the Company adopted IFRS 15 using the modified retrospective approach. The Company generates revenue from the sale of diluted bitumen ( dilbit ) and represents the Company s share of commodity sales, net of royalties. Revenue is recognized when control of the commodity is transferred to the customer and collection is reasonably assured. Generally, control is deemed to have transferred when the Company transfers title and physical possession of the commodity to the customer and the significant risks and rewards of ownership of the commodity to the customer. The amount of revenue recognized is based on the consideration specified in the contract with the customer. The Company s dilbit contracts include fixed- and variable-priced contractual components. For variable-priced contracts, the transaction price is based on the commodity price, adjusted for quality, location, or other factors, depending on the contract terms. Payment is received on the 25 th of the month following delivery. The Company is not subject to arrangements whereby the period between the transfer of control and payment by the customer exceeds one year. The adoption of IFRS 15 did not yield any adjustments to the amounts recognized in the Company s annual financial statements for the year-ended December 31, 2017 or the condensed interim financial statements for the period-ended March 31, 2018. Additional disclosures required by IFRS are included in financial statement note 13. Effective January 1, 2018, the Company s accounting policy for revenue is as follows: Revenue from the sale of dilbit is recognized at the fair value of the consideration received or receivable, after deducting royalties, when title passes to the customer and collection is reasonably assured. For sales, this generally occurs when the product is accepted by the customer or arrives at the delivery point. The Company accounts for its forward physical delivery sales and purchase contracts that are entered into and continue to be held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements, as executory contracts. As such, these contracts are not considered derivative financial instruments; thus, have not been recorded on the balance sheet. Settlements of these physical sales and purchase contracts are recognized in related revenues and expenses at the time of settlement. 3.3 Significant accounting policies In Q1 2018, the Company entered into a risk management contract as discussed in financial statement note 9. The Company had not entered into any risk management contracts since the recapitalization transaction in Q2 2015. Risk management contract(s) The Company may enter into certain risk management contracts in order to reduce its exposure to market risks from fluctuations in commodity prices. The instruments are not used for speculative or trading purposes. As such, the Company has not designated its risk management contract(s) as effective accounting hedges. Risk management contract(s) are classified and measured at FVTPL and recorded on the balance sheet at fair value at each reporting period. Realized gains and losses are recognized in net earnings (loss) at each reporting period as the contracts are settled. Unrealized gains and losses are recognized in net earnings (loss) at each reporting period based on the changes in fair value of the contracts. The estimated fair value of risk management contract(s) is derived from third-party market indications and factors. 3.4 Measurement uncertainty and judgments Risk management contract(s) The Company measures its risk management contracts at fair value on each reporting date. The fair value at each reporting date is subject to measurement uncertainty. For risk management contracts, external forward market curves and contracted volumes are used to determine the fair value. The fair values of the Company s risk management contracts are derived and affected by market pricing between maturity and period-end dates. 4. RESTRICTED CASH At March 31, 2018, $7.1 million (Q4 2017: $7.1 million) was restricted under the Initial Order and related to costs associated with any potential cessation of the Company s operations. 8
5. OTHER ASSETS AND RESTRUCTURING EXPENSES As at, (Canadian dollar in thousands) March 31, 2018 December 31, 2017 Prepayments and others $11,027 $9,120 Retainers related to CCAA proceeding 1,150 1,303 Deposits 172 172 $12,349 $10,595 For the three months ended March 31, 2018, the Company incurred restructuring expenses of $2.2 million (Q1 2017: $713 thousand), which included legal fees, the Monitor s fees, and professional advisory fees associated with the CCAA proceeding. 6. ASSETS HELD FOR SALE ( AHFS ) AND ROYALTY SALE As at, (Canadian dollar in thousands) December 31, 2017 $43,750 Disposal (43,750) March 31, 2018 $- During the fourth quarter of 2017, the Company executed a term sheet which resulted in selling the Royalty to Burgess. At December 31, 2017, the Company recorded $43.75 million as assets held for sale related to the Royalty sale. On January 30, 2018, the Company completed the Royalty disposition and received proceeds of $43.75 million. The Company did not record a gain or loss on the transaction. No liabilities were transferred as part of the Royalty transaction. All decommissioning obligations remained with the Company. Under the terms of the Royalty, the Company will pay Burgess a sliding-scale royalty ranging from 0% to 15%. The sliding scale royalty rate, with respect to a particular month, is as follows: Producing Royalty Lands If the Benchmark Reference Price ( BRP ) is: <US$60, the sliding scale royalty rate is 0%; US$60<BRP<US$140, the sliding scale royalty is equal to 2.50% + (0.156%*(BRP $60)); or >US$140, the sliding scale royalty is 15%. Non-Producing Royalty Lands If the BRP is: <US$70, the sliding scale royalty rate is 0%; US$70<BRP<US$150, the sliding scale royalty is equal to 2.50% + (0.156%*(BRP $70)); or >US$150, the sliding scale royalty is 15%. The BRP is the sum of: (i) the monthly average daily settlement (US$/bbl) for prompt month NYMEX light sweet crude; and, (ii) the final price at which the prompt month future contract for the Canadian Heavy Crude Oil Index (US$/bbl) as quoted by the CME Group is settled for such applicable month. Burgess retains the ability to receive the Royalty in cash or in-kind. The Royalty does not contain any associated commitments for future development or projects. At March 31, 2018, no amounts were paid nor are currently payable to Burgess in respect of the Royalty. 9
7. PROPERTY, PLANT, AND EQUIPMENT ( PP&E ) As at (Canadian dollar in thousands) Cost Petroleum and natural gas properties Corporate Total Balance, December 31, 2017 $1,452,999 $16,276 $1,469,275 Additions 5,071 242 5,313 Derecognition and dispositions (579) - (579) Change in decommissioning liabilities (note 11) (1,873) - (1,873) Balance, March 31, 2018 $1,455,618 $16,518 $1,472,136 Accumulated depletion, depreciation, and impairment Petroleum and natural gas properties Corporate Total Balance, December 31, 2017 $1,178,521 $11,754 $1,190,275 Depletion and depreciation 16,884 150 17,034 Derecognition and dispositions (318) - (318) Balance, March 31, 2018 $1,195,087 $11,904 $1,206,991 Carrying amount of PP&E As at December 31, 2017 $274,478 $4,522 $279,000 As at March 31, 2018 $260,531 $4,614 $265,145 At March 31, 2018, property, plant, and equipment with a carrying cost of $265.1 million (Q4 2017: $279.0 million) was collateralized to secure long-term debt. At March 31, 2018, the recoverable amount approximated the carrying value of the Company s assets (2017 impairment of $428.9 million). To determine the recoverable amount, the Company utilized the reserve volumes and values in the 2017 year-end reserve report as evaluated by the Company s independent reserve evaluators and considered Q1 2018 economic activity, which included the change in forecasted benchmark pricing. The recoverable amount was calculated as fair value less costs of disposal ( FVLCD ), which was determined using a discounted cash flow approach based on the year-end 2017 proved plus probable reserves and a risk adjusted discount rate before tax of 20.0%. The risk adjusted discount rate contemplated multiple market participant assessments specific to the Company and its assets. The FVLCD are classified as a Level 3 fair value measurement as certain key assumptions are not based on observable market data. The following table reflects the additional impairment (or reversal) of a one percent change in the before tax discount rate and a five percent change in the bitumen wellhead price realized by the Company: (Canadian dollar in thousands) One percent increase in before tax discount rate One percent decrease in before tax discount rate Five percent increase in bitumen wellhead price Five percent decrease in bitumen wellhead price Impairment (reversal) 21,000 (24,000) (61,000) 61,000 The following benchmark reference prices were used by the Company s independent reserve evaluators as a basis for the impairment test at March 31, 2018: 2018 2019 2020 2021 2022 2023 2024 2025 2026 WTI crude oil (US$/bbl) 64.00 64.00 65.00 66.50 69.00 71.50 74.00 76.50 79.09 WCS (Western Canadian Select) (C$/bbl) 55.89 58.86 61.25 63.58 65.85 68.07 71.08 74.10 77.22 Edmonton C5 (C$/bbl) 82.96 81.52 81.25 82.10 84.15 86.14 89.16 92.17 95.29 Exchange rate (C$/US$) 0.790 0.790 0.800 0.810 0.820 0.830 0.830 0.830 0.830 10
8. FAIR VALUE MEASUREMENTS The Company s financial instruments include: cash and cash equivalents, restricted cash, trade and accrued receivables, Convertible Notes, trade and accrued payables, risk management contract, DIP, and liabilities subject to compromise. Information relating to these financial instruments including fair values is provided below. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. The estimates cannot be determined with exact precision as they are subjective in nature and involve uncertainties and matters of judgment. All assets and liabilities for which fair value is measured or disclosed in the condensed interim financial statements are categorized within the fair value hierarchy: Level 1 quoted (unadjusted) market prices in active markets for identical assets or liabilities; Level 2 valuation techniques for which the lowest-level input that is significant to the fair value measurement is directly or indirectly observable; or Level 3 valuation techniques for which the lowest-level input that is significant to the fair value measurement is unobservable. The following table shows the comparison of the carrying and fair values of the Company s financial instruments by classification: As at March 31, 2018 December 31, 2017 (Canadian dollar in thousands) Carrying Value Fair Value Carrying Value Fair Value Amortized cost Cash and cash equivalents (1) $47,160 $47,160 $36,228 $36,228 Restricted cash (1) 7,100 7,100 7,100 7,100 Trade and accrued receivables (1) 10,330 10,330 21,156 21,156 Fair value through profit and loss Convertible Notes (2)(3) 45,000 4 44,000 4 Risk management contract 1,010 1,010 - - Amortized cost Trade and accrued payables (1) 20,524 20,524 18,589 18,589 Trade and accrued payables - subject to compromise (3) 18,653 18,653 18,653 18,653 Interim Financing Credit Facility (1) - - 20,681 20,681 Amended Term Loan Facility (2)(3) 210,438 69,202 202,419 67,147 Amended Term Loan Facility interest payable (3) 59,737 59,737 50,831 50,831 Convertible Notes interest payable (3) 20,762 20,762 17,983 17,983 (1) The fair values of cash and cash equivalents, trade and accrued receivables, trade and accrued payables, and interim financing credit facility approximate the carrying amounts due to the short-term maturity of the instruments (2) The fair values of long-term debt are based on market information, a Level 2 measurement (3) Balance is subject to the CCAA proceeding (financial statement note 2) 11
9. RISK MANAGEMENT CONTRACTS The following table summarizes the net position of the Company s risk management contract: As at, (Canadian dollars in thousands) March 31, 2018 December 31, 2017 Current: Crude oil contract $1,010 $- Current liabilities $1,010 $- The following table summarizes the details of the risk management contract position: Term Notional Volume Weighted Average Price ($/bbl) Liability WCS swap - sell: (bbl/d) Min Price Max Price (Canadian dollar in thousands) March 31, 2018 December 31, 2017 Jul Sep 2018 1,750 C$48.75 C$48.75 $1,010 $- Current liabilities $1,010 $- The following table summarizes the risk management contract amounts recorded in the statements of operations and comprehensive loss: For the three months ended March 31, (Canadian dollar in thousands) 2018 2017 Unrealized loss $1,010 $- Loss on risk management contract $1,010 $- At March 31, 2018, the Company s risk management contract was held with a reputable financial institution. As a result, the credit risk associated with the Company s risk management activity is low. Subsequent to March 31, 2018, the Company purchased a WCS fixed price swap for Q3 2018 at $65.25/bbl for 1,750 bbl/d. 10. SENIOR SECURED DEBTOR-IN-POSSESSION CREDIT FACILITY ( INTERIM FINANCING CREDIT FACILITY or DIP ) The Company secured interim financing in the form of a senior secured debtor-in-possession credit facility from certain existing lenders (certain of which are or were also significant shareholders of the Company) for up to US$20 million, with initial commitments of US$11.5 million. On October 26, 2016, the Interim Lenders increased their commitment under the Interim Financing Credit Facility by approximately US$5 million. The usage of the DIP proceeds was subject to an agreed budget, which was approved by the existing lenders. The DIP bore interest, as selected by the Company, at an alternative base rate ( ABR and ABR Loans ) or LIBOR ( Eurodollar Loans ), plus an applicable margin as follows: ABR Loans - ABR plus 9.00% per annum cash interest Eurodollar Loans - LIBOR (floor of 1.00%) plus 10.00% per annum cash interest For loans advanced as ABR Loans, interest payments occur on March 31, June 30, September 30, and December 31. For loans advanced as Eurodollar Loans, the Company had the option to select an interest period of 1, 2, 3, or 6-months. The DIP was payable, in full, on the earlier of: Acceleration of the DIP as a result of the occurrence of any event of default which is continuing and has not been cured; The implementation of a plan of compromise or arrangement within the CCAA proceeding; The closing of a sale within the CCAA proceeding; Conversion of the CCAA proceeding into a proceeding under the Bankruptcy and Insolvency Act (Canada); and, January 31, 2018. At December 31, 2017, the Company had drawn US$16.5 million of the Interim Credit Facility. On January 30, 2018, the Company repaid the DIP in full and terminated the facility. 12
11. DECOMMISSIONING LIABILITIES The following table summarizes the details of decommissioning liabilities: As at, (Canadian dollars in thousands) March 31, 2018 December 31, 2017 Balance, beginning of period $68,866 $68,195 Liabilities settled Change in estimates - (10) (1,873) (628) Unwinding of discount 351 1,309 Balance, end of period $67,344 $68,866 12. SHARE CAPITAL Authorized: unlimited number of common voting shares with no par value Authorized: unlimited number of first preferred shares with no par value of which none are outstanding Authorized: unlimited number of second preferred shares with no par value of which none are outstanding 12.1 Issued and outstanding common share capital March 31, 2018 December 31, 2017 Canadian dollars Canadian dollars Number Number in thousands in thousands Balance, beginning of period 28,328,658 $1,177,556 28,328,658 $1,177,556 Balance, end of period 28,328,658 $1,177,556 28,328,658 $1,177,556 Weighted average common shares outstanding basic and diluted 13. REVENUE 28,328,658 28,328,658 The Company generates revenue from contracts with customers through the transfer of dilbit at a point-in-time: For the three months ended, (Canadian dollars in thousands) March 31, 2018 March 31, 2017 Dilbit revenue $33,855 $46,900 Total revenue $33,855 $46,900 At March 31, 2018, accrued revenue related to March 2018 production included in trade and accrued receivables totaled $10.0 million (Q1 2017: $17.3 million). 14. STOCK OPTION PLAN 14.1 Stock option plan The following table shows the changes in stock options and the related weighted average exercise prices: For the three months ended March 31, 2018 2017 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Outstanding, beginning of period 1,337,768 $1.21 1,337,768 $1.21 Outstanding, end of period 1,337,768 $1.21 1,337,768 $1.21 Exercisable, end of period 891,845 $1.21 445,923 $1.21 For the three months ended March 31, 2018 and 2017, no additional stock options were granted. 13
15. FINANCE CHARGES For the three months ended March 31, (Canadian dollar in thousands) 2018 2017 Interest expense on long-term debt: Amended Term Loan Facility $8,998 $8,827 Convertible Notes 2,186 1,992 Interim Financing Credit Facility 1,197 615 Bank charges and other fees 39 5 Unwinding of discount on decommissioning liabilities (note 11) 351 317 Total finance charges $12,771 $11,756 16. CAPITAL MANAGEMENT In managing capital, the Company seeks to safeguard its ability to operate as a going concern while continuing to maintain and pursue the development of its in situ oil sands properties. On May 17, 2016, the Company sought and obtained creditor protection under the CCAA. The decision to file for CCAA protection was a result of among other things, depressed crude oil prices and the Company s limited ability to access capital markets. On January 30, 2018, the Company granted Royalty for cash consideration. Concurrent with the Royalty transaction, the Company used a portion of the proceeds to repay the DIP. The Court-approved Support Agreement, which was approved on March 28, 2018, provides the foundation for the Company s exit from CCAA protection via either: (i) Superior Transaction identified during the new SISP; or, (ii) pre-negotiated Credit Bid Transaction pursuant to which Newco will acquire the assets of the Company in the event a Superior Transaction is not identified during the new SISP. The Company continues to proceed with the new SISP and the pre-determined milestones as approved by the Court. In the current low price commodity environment, the Company will continue to actively monitor its working capital balances and deploy capital prudently to maximize its liquidity position. Refer to financial statement note 2 for CCAA status and going concern discussion and financial statement note 18 for summary of commitments. 17. CASH FLOW INFORMATION Changes in non-cash working capital For the three months ended March 31, (Canadian dollar in thousands) 2018 2017 Trade and accrued receivables $10,469 $(5,114) Inventories (297) 78 Other assets (1,754) 1,090 Trade and accrued payables 2,870 3,498 Total $11,288 $(448) Relating to: Operations $10,071 $(688) Investing 1,217 240 Total $11,288 $(448) 14
18. CONTRACTUAL OBLIGATIONS AND COMMITMENTS At March 31, 2018, the Company is subject to the following commitments: As at (Canadian dollar in thousands) 2019 2020 2021 2022 2023 > 2024 Total Operating (1) $223 $8 $- $- $- $- $231 Service and Maintenance (2) 2,400 2,400 2,400 2,400 2,000-11,600 Long-term debt - interest payments (3)(4) 10,070 - - - - - 10,070 Long-term debt - principal (3)(4) 276,339 - - - - - 276,339 Total commitments $289,032 $2,408 $2,400 $2,400 $2,000 $- $298,240 (1) Operating commitments relate to information technology (2) Service and maintenance commitments pertain to the Company s facilities and equipment (3) Interest and principal repayments on US dollar-denominated Convertible Notes and Amended Term Loan Facility, which are subject to the Company s CCAA proceeding (4) Balances are translated at US$1 = $1.2901 15